SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended: Commission File No.:
March 31, 1997 0-19516
SUNRISE RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1632858
(State or other jurisdiction of (IRS Employer Identification Number)
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
-
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [x]
---------------------------------------------
The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant as of June 27, 1997 was approximately $13,554,817 based upon the
closing sale price of the Registrant's Common Stock on such date.
Shares of $.01 par value Common Stock outstanding at June 27, 1997:
7,188,721 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1997 Annual Meeting are
incorporated by reference into Part III.
<PAGE>
PART I
ITEM 1. Business.
Organization
Sunrise Resources, Inc. ("Sunrise Resources") was incorporated in Minnesota
in February 1989 as Sunrise Leasing Corporation ("SLC") to lease new and used
data processing and other equipment and to sell used data processing equipment
(referred to as the "SLC business"). In March 1994, Sunrise Resources formed
Sunrise Financial Resources, Inc. ("SFR") as a wholly-owned subsidiary to engage
in commercial and asset-based lending. Sunrise subsequently decided to dispose
of the assets of SFR and withdraw from the asset-based lending business. In
February 1995, Sunrise Resources changed its name from Sunrise Leasing
Corporation to Sunrise Resources, Inc. and merged with The P.J. King Companies,
Inc. d/b/a International Leasing Corporation ("ILC"), whose business involves
leasing a wide range of capital equipment through close relationships with the
manufacturers of such equipment. This vendor leasing business is referred to as
the "ILC business." On March 31, 1995 (the end of fiscal 1995), Sunrise
Resources transferred the SLC and the ILC businesses into a newly created
wholly-owned subsidiary named Sunrise Leasing Corporation. In November 1996,
Sunrise Resources formed a wholly-owned subsidiary of Sunrise Leasing
Corporation called Sunrise Funding Corporation I. Sunrise Funding Corporation I
is intended to be used as a facility for the securitization of leases with third
parties. References to the "Company" refer to Sunrise Resources, Inc. and its
subsidiaries.
For the fiscal year ended March 31, 1997, the Company's revenues were
derived from the following activities: (i) 32% from the SLC business' leasing of
data processing and other equipment, (ii) 9% from the SLC business' sales as a
dealer of used data processing and other equipment, (iii) 47% from the ILC
business' leasing of computer and other equipment, (iv) 11% from the ILC
business' sales as a dealer of used data processing and other equipment, and (v)
1% as a carryover from the discontinued financing activities of SFR.
SLC Business
The SLC business provides its customers with lease financing for a full
range of data processing, telecommunications and other capital equipment. The
Company's strategy is to establish close working relationships with its
customers by providing quality service throughout the term of its leases and
offering flexibility in structuring transactions, and by utilizing its resources
to remarket the customers' used equipment. SLC business customers, representing
a variety of industry segments, are located throughout the United States.
Under noncancelable master lease agreements with its customers, equipment
is leased under numerous lease schedules, each of which has its own lease term
and constitutes a separate lease agreement . In the event an SLC customer would
decide to lease no additional equipment from the Company, the Company would
continue to receive lease payments and recognize revenue for periods of up to
five years until the existing lease schedules terminate, though the majority of
leases have three year terms.
ILC Business
General
ILC's business consists primarily of the development of market-oriented
vendor programs emphasizing the formulation of customized lease and rental
programs for vendors of computers and other equipment. ILC's lease and rental
programs are targeted to respond to a vendor's specific marketing objectives. In
most instances, ILC will participate in the development of a vendor's marketing
plan, including developing the sales literature which emphasizes leasing as an
alternative to cash purchases.
ILC offers a wide range of leasing and rental products and programs for
both new and used equipment. The lease options offered by ILC generally focus on
one- to three-year lease terms. In some instances, shorter lease terms are
included in order to shorten the vendor's selling cycle and accelerate its
penetration into new markets and introduce new products. Most of ILC's vendors
have entered into purchase and remarketing agreements with the Company.
<PAGE>
ILC Business (continued)
The ILC business establishes leasing programs with a variety of individual
vendors and manufacturers whose sales representatives are provided with a
leasing alternative to present to their customers during the selling process.
This approach allows the Company to leverage the sales force of the vendor
to generate leases for the Company, eliminating the need of the Company to seek
out such lessees directly. It currently has twelve vendor relationships, two of
which currently generate the bulk of its business. The Company is attempting to
expand its smaller active programs with its other vendors and to generate new
vendor programs. Most ILC vendor programs have initial terms of one to three
years and can be renewed at the end of the term.
Revenues of $21,121,000, or 49.1% of total revenues, were generated through
ILC's relationship with one vendor. Should this relationship cease, revenues and
cash flows would continue with individual lessees through the scheduled
expiration of such leases, but the longer term effect would be a substantial
reduction of both revenue and profit.
Merger and Related Matters
On February 13, 1995, the Company issued approximately 3,000,000 shares of
its common stock in connection with the merger with The P.J. King Companies,
Inc. d/b/a International Leasing Corporation ("ILC").
In the fourth quarter of fiscal 1995, the Company recorded significant
adjustments to earnings. Peter King, a member of the Company's Board and former
principal shareholder of ILC, advised the Company in June 1995 that he was
reserving all legal rights relating to the merger on the basis that, in his
view, materially adverse matters regarding the Company arose prior to the merger
and were not disclosed. During fiscal 1997, the former ILC shareholders
commenced arbitration proceedings against the Company relating to the merger,
seeking a rescission of the merger or monetary damages. On June 17, 1997, the
arbitrator found that the Company had breached its contract with respect to
certain of its warranties and representations and awarded the former ILC
shareholders 560,257 additional shares of Sunrise Resources, Inc. common stock.
In addition, the arbitrator awarded 38,818 additional shares for the former ILC
shareholders' attorneys' fees and costs related solely to the breach of warranty
claims. (See "Legal Proceedings", "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Outlook" and "Notes to
Consolidated Financial Statements--Notes 2 and 10").
SFR Business
In March 1994, the Company formed Sunrise Financial Resources, Inc. ("SFR")
as a wholly-owned subsidiary. This subsidiary delivered commercial and
asset-based credit services to businesses largely referred by a network of banks
and other financial intermediaries. These credit services included, but were not
limited to, lines of credit and term loans for financing inventory, receivables,
equipment, real estate and other specialized borrowing needs. SFR's customers
included businesses that were generally not sufficiently creditworthy to obtain
credit from commercial banks. Credit concentrations with specific customers
ranged in amount from approximately $100,000 to in excess of $5.0 million. The
Company terminated the SFR business in fiscal 1996 and began divesting itself of
the SFR loan portfolio, which divestiture is continuing. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Industry
The growth in the equipment leasing industry has occurred principally
because users have determined that the benefits of higher productivity and
profit can be obtained from the use of capital equipment, not necessarily from
its ownership, and that leasing can be significantly more flexible than other
methods of acquiring equipment. Leases can be structured to fit the lessee's
particular economic circumstances, cash flow requirements, equipment needs, and
tax situation, and to avoid the risk of obsolescence at the end of the lease
term. The benefits of leasing are especially applicable to those companies using
high technology products because those products are characterized by rapid and
continuous technological advances. Computer equipment users frequently replace
their existing equipment as it becomes inadequate for their needs, as increased
capacity is required, or as new technological innovations become available. The
flexibility of equipment leasing helps these users meet their changing equipment
requirements in a cost effective manner.
<PAGE>
Industry (continued)
In the past, a majority of the data processing equipment leased by the SLC
business was manufactured by IBM Corporation. The Company believes that the
profile of data processing equipment on lease to its customers is similar to the
data processing equipment currently installed in the U.S. marketplace as a
whole. However, based on demands by its customers and prospects to utilize
equipment from manufacturers other than IBM, the SLC business now leases a
variety of other data processing equipment including such manufacturers as
Digital Equipment, Hewlett Packard, Sun Microsystems and Compaq.
Leasing and Sales Activities
The Company generally leases data processing systems and other equipment
for terms ranging from six months to five years, though the bulk of it is in the
one- to three-year category. All of the Company's leases are noncancelable "net"
leases which contain provisions under which the customer must make all lease
payments regardless of any defects in the equipment and which require the
customer to insure the equipment against casualty loss, and pay all related
property, sales and other taxes. SLC business customers are also required to
maintain and service the leased equipment, whereas certain ILC business lease
programs coordinate such maintenance and service for an additional fee. The
Company's leases are occasionally restructured during the term of the lease to
upgrade a customer's equipment configuration. The Company retains ownership of
the equipment it leases, and in the event of default by the customer, the
Company (or the financial institution to whom the lease payments have been
assigned) may declare the customer in default, accelerate all lease payments due
under the lease, and pursue other available remedies, including the repossession
of the equipment. At completion of the initial term of the lease, the customer
may return the equipment to the Company, renew the lease for an additional term,
or purchase the equipment. If the equipment is returned to the Company, it is
either re-leased to another customer or sold in the secondary market as used
equipment. The ILC business usually has a remarketing arrangement with the
equipment manufacturer, where in the manufacturer may assist in remarketing the
equipment.
With respect to the SLC business, the Company structures its leases to meet
the special requirements of individual customers and to allow customers to add
equipment with a minimum of paperwork and effort. The Company enters into a
master lease agreement with each customer, to which specific equipment schedules
are appended as equipment is added. Once negotiated and in place, the master
lease provides the customer with a simple and effective way to add system
components or to upgrade from one system to another as the customer's needs
change. This provides minimum delays and legal expenses which would otherwise be
incurred by the customer if a new lease agreement were entered into each time a
piece of equipment is added. Having a master lease in place provides the
customer with an incentive to enter into future lease transactions with the
Company rather than one of the Company's competitors.
As part of its efforts to provide enhanced services to its customers, the
Company assists its current and prospective customers in disposing of leased
equipment. The Company is also able to acquire new or used equipment for lease
or sale. Other than its interest in the equipment it leases, the Company does
not maintain any significant inventory of equipment.
Competition
As a whole, the Company competes with a large number of firms in the lease
and sale of data processing equipment, most of which are substantially larger
and have greater capital and other resources. The Company's principal
competitors are manufacturers, such as IBM and Digital Equipment Corporation,
and other leasing companies, such as IBM Credit Corporation, Comdisco Inc. and
LDI Corporation. Commercial banks, investment banking firms and other financial
institutions also compete with the Company.
SLC competes on the basis of personalized customer service, flexibility in
structuring transactions and the ability to remarket the customer's used
equipment. SLC's competitive position is dependent on its ability to attract and
retain qualified sales representatives and on its continued ability to obtain
working capital and discounted lease financing on satisfactory terms.
ILC has a number of competitors which offer operating leases to end users.
ILC believes that its experience in offering marketing-oriented lease programs
to vendors and its "back room" administrative capability to support and respond
to vendors' specific needs provides ILC with a significant competitive
advantage.
<PAGE>
Residual Values
Residual values, representing the estimated value of the equipment at the
termination of the lease, are recorded on the consolidated balance sheet as a
component of the investment in leasing operations. The estimated residual values
will vary, both in amount and as a percentage of the original equipment cost,
depending on several factors, including the type of equipment, the prior history
of the lessee, the amount of the monthly rent, and the term of the lease. The
Company's policy is to evaluate residual values on an ongoing basis and record
any downward cumulative "catch-up" adjustments in the period identified.
Residual values are affected by equipment supply and demand, and new
product introductions and prices charged by manufacturers.
The Company seeks to realize the estimated residual value at lease
termination through (i) renewal or extension of the original lease, (ii) sale of
the equipment to the lessee or a new user, or (iii) leasing of the equipment to
a new user. The difference between the sale proceeds and the remaining estimated
residual value is recorded as a gain or loss.
Equipment whose related leases have expired ("off-lease equipment") is
placed in inventory at the lower of cost or market. The value of off-lease
equipment is analyzed periodically for any additional adjustments to carrying
value. The Company does not hold inventory for sale for significant periods of
time. The Company attempts to sell or re-lease off-lease equipment as soon as
possible in order to obtain the highest possible return for such equipment.
Customers and Marketing
In addition to the Company's Minneapolis office, the Company has sales
offices in Denver, Los Angeles, St. Louis, Pittsburgh, Dallas and New York.
However, the Company does not intend to restrict its sales activities to any
given territory. The Company believes that future market concentration and
expansion will depend on its ability to establish new vendor leasing
relationships and on its ability to hire qualified sales representatives with
pre-existing customer bases. Depending on the location of these customer bases,
the Company may open new sales offices to service such customers.
There were no customers individually accounting for more than 10% of total
consolidated revenues in fiscal 1997, 1996 or 1995.
Fluctuating Operating Results
Operating results are subject to fluctuations resulting from a variety of
factors, including variations in the relative percentages of the Company's
leases entered into during the period which are classified as direct financing
leases, operating leases or as fee income as required by Statement of Financial
Accounting Standards No. 13. This relative mixture of leases is a result of a
combination of factors, including, but not limited to, changes in customer
demands and/or requirements, new product announcements, price changes, changes
in installation dates, pricing policies of equipment manufacturers and vendors,
maturation of existing leases, and competition from other lessors. Operating
results are also affected by changes in the Company's receivable and residual
reserves resulting from changes in the creditworthiness of lease customers and
the estimated residual values of equipment, respectively.
Financing
The Company utilizes recourse and nonrecourse discounting to fund lease
transactions. Discounted lease financing generally cannot be completed until the
equipment to be leased has been purchased and installed. The Company uses
internally generated funds, existing lines of credit, or other borrowings to
finance the equipment acquisitions on an interim basis.
Under nonrecourse financing arrangements, the Company assigns the future
rental payments and a security interest in the underlying equipment to a
financial institution in exchange for a loan equal to the present value of the
rental payments, without incurring liability for repayment of the loan.
Ownership of the leased equipment is retained by the Company, subject to a
financial institution's security interest.
<PAGE>
Financing (continued)
Recourse loans are generally collateralized by specific leases or loans, as
well as all unencumbered assets of the Company. In these arrangements, the
Company retains the entire risk of loss of its investment in the lease or loan.
In fiscal 1997, SLC has continued the trend reestablished in fiscal 1996,
of not accepting leasing customers whose credit history required lease
transactions to be financed primarily through recourse debt and concentrating on
leases with customers whose transactions can be financed at reasonable rates
with nonrecourse funding.
ILC lease transactions are generally funded via internally generated cash
flows or with full-recourse bank lines of credit.
As of March 31, 1997 and 1996, the Company's total borrowings were
$69,443,000 and $83,527,000, respectively, of which 44% and 53%, respectively,
were nonrecourse.
In addition to the finance arrangements described above, the Company had
previously entered into certain SFR lending transactions for which nonrecourse
financing was available. As of March 31, 1997, these loans and the related
nonrecourse participations totaled approximately $867,000. Since the Company's
only obligation with respect to these loans is to service the equipment for a
fee, the loans and related nonrecourse participations have been eliminated from
the Company's consolidated balance sheets.
Significant Credit Concentrations
As of March 31, 1997, the Company had individual investments in excess of
$500,000 in leasing operations and loans receivable, funded internally or with
recourse obligations, with 11 customers totaling $15,350,000. Total investments
in leases and loans receivable to customers considered highly leveraged or with
cash flows from operations inadequate to service existing obligations were
$21,512,000, or 20% of the portfolio. Customer payments on these leases and
loans are expected to be funded by customer operations, external sources, or
sale of selected assets. Collateral on these leases and loans is generally
equipment, receivables, real estate, inventory, or a combination thereof. Real
estate collateralized approximately 34% of the Company's gross loan portfolio at
March 31, 1997.
Proprietary Rights
The Company has no patents or registered trademarks. The Company utilizes
software licensed from third parties for certain of its leasing and financing
operations, including the administration of some outstanding equipment leases.
The Company has developed proprietary software to handle certain aspects of its
operations.
Government Contracts
The Company has no government contracts.
Research and Development
The Company had no material research and development expenses for
Company-sponsored research activities relating to the development of new
products, services or techniques or for the improvement of existing products,
services or techniques in fiscal 1997, 1996 or 1995.
Effect of Environmental Regulations
To the extent that the Company's management can determine, there are no
federal, state or local provisions regulating the discharge of materials into
the environment or otherwise relating to the protection of the environment, with
which compliance by the Company has had or is expected to have a material effect
upon the capital expenditures, earnings, or competitive position of the Company.
<PAGE>
Foreign Operations and Export Sales
Almost all of the Company's leasing and sales activities have been to
customers within the United States. Sales, leases and loans to other countries
have been immaterial through March 31, 1997.
Employees
As of June 27, 1997, the Company had 53 full-time employees. The Company
believes that its future operating results will be dependent in a significant
part upon recruiting and retaining well qualified personnel. The Company
considers its current employee relations to be good.
ITEM 2. Properties.
The Company's headquarters are currently located in approximately 13,600
square feet of office space in Golden Valley, Minnesota, a suburb of
Minneapolis. The lease for the Company's headquarters expires in September 2000
and has a current gross monthly rental of $11,625 plus operating expenses. The
Company currently sub-leases approximately 3,200 square feet of this office
space on a month-to-month basis for a gross monthly rental of $2,939 plus
operating expenses.
The Company also has short-term leases for sales offices in the Denver,
Colorado; Pittsburgh, Pennsylvania; Los Angeles, California; and Dallas, Texas
metropolitan areas.
ITEM 3. Legal Proceedings.
The Company has several suits filed against lessees for non-payment of
their obligations under certain lease agreements.
During fiscal 1997, the 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 Common
Stock, the 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 claim of breach of contract and awarded 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, the former ILC
shareholders were awarded repayment of attorneys' fees relating to the breach of
warranty claims 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 binding
arbitration and therefore no further disputes or settlements with the Company
are expected to arise in connection with the merger agreement.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth the names and ages of current executive officers of the
Company in addition to information regarding their positions with the Company,
their periods of service in such positions and their business experience for the
past five years. Executive officers generally serve in office for terms of
approximately one year.
Name and Age of Current Positions with Company and
Executive Officer Principal Occupations for the Past Five Years
Errol F. Carlstrom Errol F. Carlstrom has served as President since
56 January 1996 and as Chief Executive Officer since July
1996. Mr. Carlstrom served as Chief Operating Officer
from January 1996 until July 1996. He was appointed
to the Board of Directors on June 23, 1997. Prior to
joining the Company in January 1996, Mr. Carlstrom
was President and Chief Operating Officer of CCX
Worldwide, Ltd., an international computer equipment
trading company, from January 1992 to January 1996.
Mr. Carlstrom was also President and a principal of
Connectivity Systems Credit Corporation, from October
1994 to December 1995, which provided lease financing
for local area and wide area networks (LAN and WAN
systems). From 1982 to 1991, Mr. Carlstrom was the
Executive Vice President of Centron DPL Company,
Inc., an international leasing and trading company
of IBM Equipment; and from 1976 to 1982, Mr. Carlstrom
was employed by Gelco Corporation, serving his last
three years with the company as President of the
Equipment Leasing Division.
Dana C. Prescott Dana C. Prescott has served as Executive Vice
49 President and National Sales Manager of the Company
since June 1994. Mr. Prescott served as a Company Vice
President from November 1990 to December 1993 and as
Senior Vice President from December 1993 to June 1994.
Prior to joining the Company in November 1990, Mr.
Prescott was employed by Chrysler Systems Leasing, Inc
as a Regional Sales Manager from June 1988 to November
1990, and as a marketing representative from
September 1986 to June 1988.
Barry J. Schwach Barry J. Schwach became Vice President and Chief
43 Financial Officer of the Company in February 1995 and
and Executive Vice President of Finance and
Administration effective July 1, 1995. He served as
interim Chief Operating Officer from July 1, 1995
through January 1, 1996. Mr. Schwach joined ILC in
July 1983 and has served as Executive Vice President
and Chief Operating Officer of ILC from September 1989
to February 1995 when ILC merged into the Company.
R. Bradley Pike R. Bradley Pike became Vice President - Asset
44 Management of the Company on March 1, 1996. Prior to
joining the Company in March 1996, Mr. Pike was
employed by Prime Capital Corporation as Vice
President of Operations from August 1995 to February
1996. Mr. Pike, a principal of Connectivity Systems
Credit Corporation, acted as Executive Vice President
and Treasurer from October 1994 to August 1995. From
June 1988 to October 1994, he was Director of Debt
Placement at Meridian Leasing Corporation.
<PAGE>
PART II
ITEM 5. Market for Company's Common Equity and Related Stockholder Matters.
(a) Market Information
The Company's shares are traded on the Nasdaq National Stock Market
("NASDAQ") under the symbol SUNL. The table below sets forth the range of high
and low sale prices per share as reported by NASDAQ. These prices do not include
adjustments for retail markups, markdowns or commissions.
Price
High Low
Fiscal year ended March 31, 1997
First Quarter $4.125 $2.625
Second Quarter 5.250 3.125
Third Quarter 4.500 3.375
Fourth Quarter 4.125 3.500
Fiscal year ended March 31, 1996
First Quarter $6.00 $4.875
Second Quarter 5.00 2.625
Third Quarter 3.75 2.531
Fourth Quarter 3.75 2.875
As of June 27, 1997, there were in excess of approximately 1,600 beneficial
owners of the Common Stock. The quotations reflect inter-dealer prices, without
mark-up, mark-down or commission and may not necessarily represent actual
transactions. On June 20, 1997, the high and low bid quotations were $3.6875 and
$3.3125, respectively.
(b) Dividends
The Company has never paid a cash dividend on its common stock. The Board
of Directors presently intends to retain all earnings for use in the Company's
business and does not anticipate paying cash dividends in the near term. Any
payment of dividends in the future is dependent upon the financial condition and
capital requirements of the Company, and such other factors as the Board of
Directors may deem relevant. The Company's bank line of credit prohibits the
Company from paying dividends without the bank's consent. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations.")
<PAGE>
ITEM 6. Selected Financial Data
The selected financial data presented below under the captions "Statement
of Operations Data" and "Balance Sheet Data" for, and as of the end of, each of
the years in the five-year period ended March 31, 1997, are derived from the
Company's financial statements, which have been audited by Arthur Andersen LLP,
independent public accountants for the years ended March 31, 1994 through 1997
and Deloitte and Touche LLP for the year ended March 31, 1993. The financial
statements as of March 31, 1997 and 1996 and for the three years in the period
ended March 31, 1997, and the reports thereon, are included elsewhere in this
Annual Report on Form 10-K. The data set forth in the following tables should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and notes to the consolidated financial statements appearing
elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Years Ended March 31,
1997 1996 1995 1994 1993
--------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Revenues
Operating $ 26,483,000 $ 21,998,000 $ 10,722,000 $ 8,628,000 $ 5,995,000
Direct financing 7,528,000 9,625,000 5,613,000 3,837,000 2,199,000
Equipment sales 8,394,000 10,049,000 3,141,000 3,831,000 2,410,000
Interest income 304,000 1,447,000 869,000 -- --
Fee income 269,000 369,000 1,710,000 165,000 339,000
--------------- --------------- ------------- ------------- ------------
Total 42,978,000 43,488,000 22,055,000 16,461,000 10,943,000
Costs and expenses
Depreciation 15,297,000 13,777,000 7,518,000 4,924,000 3,303,000
Interest 6,541,000 7,559,000 3,865,000 1,718,000 1,496,000
Provision for lease and loan losses 7,512,000 1,853,000 9,502,000 70,000 30,000
Cost of equipment sold 7,418,000 9,145,000 2,495,000 3,107,000 1,605,000
Compensation expense 3,729,000 3,596,000 2,151,000 1,392,000 941,000
Other operating expenses 2,815,000 2,671,000 1,861,000 1,268,000 715,000
Arbitration settlement 2,022,000 -- -- -- --
--------------- --------------- ------------- ------------- -------------
Total 45,334,000 38,601,000 27,392,000 12,479,000 8,090,000
--------------- --------------- ------------- ------------- -------------
Income (loss) before income taxes (2,356,000) 4,887,000 (5,337,000) 3,982,000 2,853,000
Provision(benefit) for income taxes 191,000 2,384,000 (1,085,000) 1,593,000 1,129,000
--------------- --------------- ------------- ------------- -------------
Net income (loss) $ (2,547,000) $ 2,503,000 $ (4,252,000) $ 2,389,000 $ 1,724,000
=============== =============== ============ ============= =============
Net income (loss) per common
and common equivalent share $ (0.35) $ 0.35 $ (0.93) $ 0.59 $ 0.66
=============== =============== ============ ============= =============
Weighted average common
and common equivalent
shares outstanding 7,189,000 7,189,000 4,558,000 4,079,000 2,623,000
=============== =============== ============= ============= =============
March 31,
1997 1996 1995 1994 1993
--------------- --------------- ------------- ------------- -------------
Balance Sheet Data
Investment in leasing operations $95,995,000 $101,271,000 $ 95,936,000 $ 56,328,000 $ 33,685,000
Loans receivable 7,503,000 14,074,000 18,638,000 2,096,000 --
Total assets 111,159,000 123,085,000 120,147,000 60,374,000 35,578,000
Borrowings under lines of credit 13,329,000 18,298,000 15,608,000 -- 3,749,000
Note payable to The
King Management Corporation -- 4,127,000 11,733,000 -- --
Participations in loans receivable 435,000 4,582,000 7,585,000 1,596,000 --
Discounted lease rentals 40,198,000 56,520,000 50,435,000 31,468,000 20,628,000
Retained earnings 1,084,000 3,631,000 1,128,000 5,380,000 2,991,000
Shareholders' equity 26,757,000 29,304,000 26,800,000 22,134,000 8,431,000
</TABLE>
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Revenues
The Company classifies its lease transactions, as required by 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. During fiscal 1995, 1996 and 1997, the Company earned 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.
During fiscal 1995, the Company also generated fee income from origination
fees on loans to SFR customers. Origination fees are deferred and amortized to
fee income over the term of the related loan, except to the extent the loan is
funded with a nonrecourse participation.
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
Prior to fiscal 1995, the Company traditionally funded its revenue
producing assets principally with nonrecourse financing. In this type of
financing, the Company assigns the future rental payments and security interest
in the underlying equipment to the financial institution in exchange for a loan
equal to the present value of the rental payments, without incurring liability
for repayment of the loan. Ownership of the leased equipment is retained by the
Company, subject to the financial institutions' security interest. The Company
also entered into certain lease transactions which presented a higher level of
credit risk and which were financed on a recourse basis.
During fiscal 1995, in a departure from its traditional business, the
Company, through its wholly owned SFR subsidiary, began lending to companies and
individuals who generally did not meet the credit standards of commercial banks.
These loans, as well as an increasing percentage of leases originated by SLC
during fiscal 1995, which also presented an increased credit risk, were
generally funded with recourse loans from financial institutions. Recourse loans
are generally collateralized by specific leases or loans, as well as all
unencumbered assets of the Company. In these arrangements, the Company retains
the entire risk of loss of its investment in the lease or loan. As of March 31,
1995, the Company's total borrowings of $85,361,000 were comprised of
nonrecourse discounted lease rentals totaling $38,517,000 and recourse
borrowings totaling $46,844,000, representing 45% and 55%, respectively, of
total funds borrowed. The fiscal 1995 growth in revenue earning assets funded by
recourse debt included significant credit concentrations with certain customers.
This change in direction during fiscal 1995 increased the Company's exposure to
credit loss, made the Company more vulnerable to potential events of
noncompliance under its lending arrangements, and increased the number of
arrangements in which all the unencumbered assets of the Company were pledged to
collateralize recourse obligations.
During fiscal 1997 and 1996, the Company returned to its previous funding
strategy, and as of March 31, 1997, the Company's total borrowings of
$69,443,000 were comprised of $30,761,000 and $38,682,000 in nonrecourse and
recourse debt, or 44% and 56%, respectively.
In addition to the finance arrangements described above, the Company had
entered into certain SFR lending transactions, for which nonrecourse financing
was available. As of March 31, 1997 and 1996, these loans and the related
nonrecourse participations totaled $867,000 and $4.2 million, respectively.
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.
During fiscal 1997, the Company entered into an agreement with a subsidiary
of Dougherty Dawkins, Inc. to place up to $20 million of notes issued by a
subsidiary of the Company to private institutional investors. This
Securitization Facility was closed on November 8, 1996, with an initial funding
of $13 million. The funds were primarily used to repay the $3.1 million of loans
outstanding from The King Management Corporation and to pay down the Company's
bank line of credit. On January 31, 1997, the Company completed the final phase
of this funding for $7.0 million and used the proceeds to pay down its line of
credit. However, the Company believes that if its business grows as anticipated,
additional financing will be required, and it is currently discussing such
financing with several sources.
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>
Results of Operations for the Years Ended March 31, 1997 and 1996
Total revenue for the fiscal year ended March 31, 1997 decreased slightly
with a drop of $509,000 (1.2%) compared to the previous fiscal year. Operating
lease revenue continued to show sustained growth with an increase of $4.5
million (20.4%) compared to the same period in fiscal 1996, which was due to the
increase in activity in the Company's vendor leasing programs. Direct financing
lease revenues decreased $2.1 million (21.8%) from the previous fiscal year due
to fewer new leases being added to the end-user portfolio as compared to the
run-off of existing leases, and the focusing of sales efforts on the vendor
leasing programs which are typically not recorded as direct finance leases.
Equipment sales decreased $1.66 million (16.5%) as compared to the same period
in fiscal 1996. This decrease is primarily a result of lower off-lease sales
coming from the vendor leasing business. Interest income and fee income continue
to decline as the Company continues to wind down the SFR business.
Total leasing revenues were as follows:
<TABLE>
<CAPTION>
Year ended March 31,
--------------------------------------------------------------
1997 1996
------------------------------- -----------------------------
Amount % Amount %
---------------- ---- -------------- ----
<S> <C> <C> <C> <C>
Leasing Revenues
Vendor $ 20,352,000 60% $ 13,899,000 44%
Direct 13,659,000 40 17,724,000 56
---------------- -- -------------- --
Total $ 34,011,000 100% $ 31,623,000 100%
================ ==== ============== ===
As a percent of total revenues 79.1% 72.7%
===== =====
</TABLE>
Margins from leasing activities (leasing revenue, less depreciation and
interest expense) were 35.8%, 34.7% and 31.7% for the periods ended March 31,
1997, 1996 and 1995, respectively. Margins will fluctuate from period to period
based upon the mix of direct financing and operating leases. Margins will also
be affected by the age of direct finance and operating leases in the current
portfolio. Margins are increasing over the prior periods due to a significant
increase of operating leases from the vendor leasing business which typically
have higher margins.
Revenue from equipment sales for the period ended March 31, 1997 decreased
$1.66 million as compared to the corresponding period in fiscal 1996. This
decrease is primarily the result of lower off-lease sales coming from the vendor
leasing business. The gross margin of this activity was 11.6% for the current
period ended March 31, 1997 as compared to 9.0% for the same period in fiscal
1996. This gross margin increase was due to a few loss transactions that
occurred in the fourth quarter of fiscal 1996. Gross margins will also 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 $1.1 million (78.9%) and fee income decreased
$100,000 (27.1%) in fiscal 1997 as compared to the same period in fiscal 1996.
Both of these decreased due to the cessation of SFR lending activities.
Total costs and expenses increased $6.7 million (17.4%) in fiscal 1997
compared to the same period in fiscal 1996. This increase reflects the
additional amounts recorded as reserves on certain lease and loan transactions
and the cost of additional shares issued as part of the arbitration settlement.
Interest expense decreased $1.0 million (13.5%) in fiscal 1997 compared to
the same period in fiscal 1996. This decrease in interest expense reflects lower
average borrowings during the period.
<PAGE>
During fiscal 1997, the Company provided $7,512,000 for losses on lease and
loan receivables, including $6,641,000 during the fourth quarter. The fourth
quarter provision was made after considering the deteriorating financial
condition of one leasing and three loan customers. The Company wrote off or
established reserves to reduce the carrying values of these underlying leases
and loans to their net estimated realizable values as of March 31, 1997. The
collateral underlying these leases and loans consists primarily of casino
equipment, a minority share in three limited liability corporations, cash
surrender value of three life insurance policies and a golf course and
surrounding residential lots. Compensation expense increased slightly with a
$133,000 (3.7%) change in fiscal 1997 versus the same period in fiscal 1996.
This increase was due to a slight increase in average personnel as well as
increases in certain compensation accruals.
Other operating expenses increased $144,000 (5.4%) in fiscal 1997 compared
to the same period in fiscal 1996. This increase was attributed to a significant
increase in legal fees relating to the Company's dispute with King Management
Corporation. The company anticipates that its legal costs should decrease
significantly in fiscal 1998.
During fiscal 1997, the former shareholders of ILC commenced arbitration
proceedings against the Company related to the February 1995 merger of the
Company with ILC. On June 17, 1997, the former ILC shareholders were awarded
560,257 additional shares of Sunrise Resources common stock for the breach of
warranty and 38,818 additional shares of Sunrise Resources common stock for
repayment of attorneys' fees. See Item 3 "Legal Proceedings" above.
Income tax provision as a percentage of income (loss) before taxes was 8.1%
in fiscal 1997 as compared to 48.8% in fiscal 1996. The tax provision versus a
tax benefit from the pre-tax loss in fiscal 1997 was due principally to the
non-deductibility of the settlement from the arbitration award.
Results of Operations for the Years Ended March 31, 1996 and 1995
Total revenue increased $21.4 million (97.2%) for the fiscal year ended
March 31, 1996 as compared to fiscal 1995. This revenue growth was primarily the
result of the inclusion of twelve months of ILC business operations in fiscal
1996 versus only six weeks in fiscal 1995.
Operating and direct financing lease revenues increased $15.3 million
(93.6%) in fiscal 1996 as compared to fiscal 1995, and accounted for 72.7% of
total revenues for fiscal 1996 compared to 74.1% for fiscal 1995. The slight
decrease in leasing revenue as a percentage of total revenue was due primarily
to the addition of the ILC business and an increase in equipment sales during
1996 as compared with the prior year.
Margins from leasing activities (leasing revenue less depreciation and
related interest expense) were 34.7% and 31.7% for fiscal 1996 and 1995,
respectively. The increase in margins from leasing activities resulted primarily
from the significant write-offs which occurred in the fourth quarter of fiscal
1995. Margins will fluctuate between periods based upon the mix of direct
financing and operating leases and to the extent to which the Company finances
leases with internally versus externally generated funds. Margins are also
affected by the mix and ages 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 changes in interest rates
on borrowed funds supporting the related transactions.
Revenue from equipment sales increased $6.9 million (219.9%) in fiscal 1996
compared to fiscal 1995, while gross margin from this activity increased in
fiscal 1996 to $904,000 from $646,000 in fiscal 1995. Although revenues from
sales of equipment increased significantly, gross margins were 9.0% in fiscal
1996 as compared with 20.6% in fiscal 1995, 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 equipment being
sold, as well as the Company's ability to effectively manage its portfolio prior
to and after the expiration of its leases.
Interest income increased $578,000 (66.5%) in fiscal 1996 as compared to
fiscal 1995, from the recognition of interest income from SFR transactions.
Fee income decreased $1.3 million (78.4%) in fiscal 1996 versus fiscal
1995, primarily as a result of the 1996 cessation of SFR lending activities.
<PAGE>
Total costs and expenses increased $11.2 million (40.9%) in fiscal 1996
over fiscal 1995, which resulted from, among other factors, the addition of
twelve months of ILC business costs and expenses, as well as the higher cost
from sales of equipment and which were partially off-set by a reduction in the
provision for lease and loan losses as further discussed below.
Depreciation expense increased $6.3 million (83.3%) in fiscal 1996 versus
fiscal 1995, as a result of the additional ILC operating lease business
reflected for a full 12 months during fiscal 1996.
Interest expense increased $3.7 million (95.6%) in 1996 as compared to 1995
primarily due to the inclusion of twelve months interest on ILC business leases
as compared with the prior year's results reflecting only approximately one and
one half months of activity.
Cost of equipment sold increased $6.7 million (266.5%) in fiscal 1996 over
fiscal 1995, primarily due to increased sales activities of ILC as well as to
several large SLC lease terminations in fiscal 1996.
Compensation expense increased $1.5 million (67.2%) in fiscal 1996 as
compared to fiscal 1995 due to the inclusion of ILC's staff for an entire 12
month period, as well as severance payments paid or accrued during fiscal 1996
as a result of several changes in executive management.
Provision for loan and lease losses decreased $7.6 million (80.5%) in
fiscal 1996 versus fiscal 1995. This decrease is a result principally of
write-offs in fiscal 1995 of the Company's investment in a significant lease
relationship and provisions to cover exposures on certain SFR loans.
Other operating expenses increased $810,000 (43.5%) in fiscal 1996 over
fiscal 1995 primarily from the overhead associated with ILC administrative
operations.
In fiscal 1996, the Company incurred a $2.4 million (48.8%) provision for
income taxes versus a $1.1 million (20.3%) benefit in fiscal 1995. The increase
in the effective rate above the statutory rate is due to the effect on the
provision from the alternative minimum tax and the inability to recognize a
benefit for alternative minimum tax credit carryforwards.
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 an
equipment 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 limits 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 Company's credit lines. Where the Company
finances the equipment cost either internally or on a recourse basis, the
Company assumes the entire risk on its investment in the loan or equipment.
Recently, Sunrise Leasing Corporation's wholly-owned subsidiary, Sunrise Funding
Corporation I, securitized its lease receivables and related residuals (the
"Securitized Facility"). The Company anticipates that it may attempt to enter
into similar transactions to finance a portion of its vendor program leases in
the future.
<PAGE>
At March 31, 1997, the Company had total borrowings outstanding of $69.4
million, of which 44.3% were nonrecourse. These borrowings consisted of $40.2
million of discounted lease rentals (23.5% of which were recourse and 76.5% of
which were non-recourse), $13.3 million of borrowings under bank lines of
credit, $15.5 million under the Securitized Facility and $435,000 in recourse
participations in SFR loans receivable.
As of March 31, 1997, the Company had a total investment in leasing
operations of $96.0 million. The Company's investment in leasing operations was
financed through $30.1 million on non-recourse discount lease financing, $9.4
million of recourse discount lease financing, and $56.5 million generated by
internal funds and recourse bank lines of credit. The Company's vendor leasing
business is funded exclusively with internal funds and recourse bank lines of
credit. The decrease in investment in leasing operations was largely due to the
additional reserves recorded for potential lease losses. 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 $25.1 million for the year
ended March 31, 1997. Accounts payable increased $2.0 million due to a general
increase in the Company's lease portfolio and other business activities. The
Company expects to fund similar requirements through internally generated funds,
as well as borrowing under its lines of credit. The Company expects to realize
additional cash from the future remarketing of leased equipment.
Equipment expenditures of $40.6 million for fiscal 1997 were financed
through $25.1 million of cash flows provided by operating activities and through
the discounting of $12.3 million of noncancelable lease rentals to various
financial institutions at fixed rates, through the securitization of leases for
$20 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.
Investments in loans receivable were $1.4 million for fiscal 1997 and were
financed 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.
Liquidity and Financing Sources
The Company maintains a $25 million line of credit. Of this amount, $13.3
million had been utilized as of March 31, 1997. Advances under the line bear
interest at prime and are collateralized by substantially all of the Company's
assets. The Company's line of credit matures on September 30, 1997.
The line of credit 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 the fourth quarter charge 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 June 27, 1997, the Company is in compliance with the
revised terms of these agreements.
During fiscal 1997, the Company entered into an agreement with a subsidiary
of Dougherty Dawkins, Inc. to place up to $20 million of notes issued by a
subsidiary of the Company to private institutional investors. This Securitized
Facility was closed on November 8, 1996, with an initial funding of $13 million.
The funds were primarily used to repay the $3.1 million of loans outstanding
from The King Management Corporation and to pay down the Company's bank line of
credit. On January 31, 1997, the Company completed the final phase of this
funding for $7.0 million and used the proceeds to pay down its line of credit.
However, the Company believes that if its business grows as anticipated,
additional financing will be required, and it is currently discussing such
financing with several sources.
<PAGE>
Subsequent to fiscal 1997, 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, 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. See Note 4 to Consolidated Financial Statements under
Item 8 below for information on significant lessee bankruptcy and default. 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 recent request to restructure its payments,
management has decided to record a reserve of $3,161,000 against this
transaction. 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 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.
Outlook
The Company's strategy is to continue to focus on and expand its vendor
leasing business while maintaining its equipment leasing business. Since January
1, 1996, the Company has been primarily engaged in pursuing leasing business
with five new vendors. The Company is also in various stages of negotiations
with several other vendors, but there is no assurance that the Company will ever
do any leasing business with such vendors or that agreements will be entered
into with them. Management believes that the Company's vendor leasing business
will continue to grow. The Company's ability to continue to expand its vendor
business is dependent on its success in obtaining the necessary financing to
fund its current vendors and new vendors.
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:
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.
<PAGE>
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 March 31, 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
restricted 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 $21,512,000 or 20.0% of the
portfolio as of March 31, 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, 49.1% of the Company's total leasing revenue for the year
ended March 31,1997 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.
<PAGE>
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>
ITEM 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sunrise Resources, Inc.:
We have audited the accompanying consolidated balance sheets of Sunrise
Resources, Inc. (a Minnesota corporation) and subsidiaries as of March 31, 1997
and 1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended March 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sunrise Resources, Inc. and
subsidiaries as of March 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota, /s/ Arthur Andersen LLP
June 27, 1997
<PAGE>
SUNRISE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
---------------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,191,000 $ 1,629,000
Accounts receivable, less allowance for doubtful accounts
of $494,000 and $626,000 1,928,000 3,537,000
Income taxes receivable 1,245,000 1,157,000
Inventory held for sale 388,000 123,000
Loans receivable, less allowance for possible losses of $3,401,000
and $2,773,000 7,503,000 14,074,000
Investment in leasing operations
Direct financing leases 46,759,000 65,165,000
Operating leases, less accumulated depreciation of
$22,973,000 and $19,927,000 42,211,000 28,962,000
Equipment held for lease 6,435,000 6,474,000
Initial direct costs 590,000 670,000
---------------- ----------------
Total investment in leasing operations 95,995,000 101,271,000
---------------- ----------------
Furniture and fixtures, less accumulated depreciation
of $535,000 and $396,000 411,000 515,000
Other assets 1,498,000 779,000
---------------- ----------------
Total Assets $ 111,159,000 $ 123,085,000
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Financing arrangements
Borrowings under lines of credit $ 13,329,000 $ 18,298,000
Discounted lease rentals 40,198,000 56,520,000
Securitized borrowings 15,481,000 --
Recourse participations in loans receivable 435,000 4,582,000
Note payable to King Management Corporation -- 4,127,000
---------------- ----------------
Total financing arrangements 69,443,000 83,527,000
---------------- ----------------
Accounts payable 6,808,000 4,837,000
Accrued liabilities 6,252,000 3,919,000
Deferred tax liability 1,899,000 1,498,000
---------------- ----------------
Total Liabilities 84,402,000 93,781,000
---------------- ----------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 17,500,000 shares
authorized, 7,189,000 shares issued and outstanding 72,000 72,000
Capital stock, undesignated, par value $.01 per share,
2,500,000 shares authorized, none issued or outstanding -- --
Additional paid-in capital 25,601,000 25,601,000
Retained earnings 1,084,000 3,631,000
---------------- ----------------
Total Shareholders' Equity 26,757,000 29,304,000
---------------- ----------------
Total Liabilities and Shareholders' Equity $111,159,000 $ 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 OPERATIONS
<TABLE>
<CAPTION>
Years Ended March 31,
1997 1996 1995
--------------- --------------- ----------------
<S> <C> <C> <C>
REVENUES
Operating leases $ 26,483,000 $ 21,998,000 $ 10,722,000
Direct financing leases 7,528,000 9,625,000 5,613,000
Equipment sales 8,394,000 10,049,000 3,141,000
Interest income 304,000 1,447,000 869,000
Fee income 269,000 369,000 1,710,000
---------------- ----------- ----------------
Total Revenues 42,978,000 43,488,000 22,055,000
---------------- --------------- ----------------
COSTS AND EXPENSES
Depreciation 15,297,000 13,777,000 7,518,000
Interest 6,541,000 7,559,000 3,865,000
Provision for lease and loan losses 7,512,000 1,853,000 9,502,000
Cost of equipment sold 7,418,000 9,145,000 2,495,000
Compensation expense 3,729,000 3,596,000 2,151,000
Other operating expenses 2,815,000 2,671,000 1,861,000
Arbitration settlement 2,022,000 -- --
---------------- --------------- ----------------
Total Costs and Expenses 45,334,000 38,601,000 27,392,000
---------------- --------------- ----------------
INCOME(LOSS) FROM OPERATIONS BEFORE
PROVISION (BENEFIT) FOR INCOME TAXES (2,356,000) 4,887,000 (5,337,000)
PROVISION (BENEFIT) FOR INCOME TAXES ` 191,000 2,384,000 (1,085,000)
---------------- --------------- ----------------
NET INCOME (LOSS) $ (2,547,000) $ 2,503,000 $ (4,252,000)
================ =============== ================
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ (0.35) $ 0.35 $ (0.93)
================ =============== ================
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 7,189,000 7,189,000 4,558,000
================ =============== ================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
SUNRISE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
------------------------------ Paid-in Retained
Shares Amount Capital Earnings Total
------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1994 4,156,000 $ 42,000 $ 16,712,000 $ 5,380,000 $ 22,134,000
------------ ------------- ------------- -------------- -------------
Employee stock options exercised 12,000 -- 54,000 -- 54,000
Employee stock purchases 21,000 -- 89,000 -- 89,000
Issuance of common stock in
connection with merger 3,000,000 30,000 8,745,000 -- 8,775,000
Net loss (4,252,000) (4,252,000
------------ ------------- ------------- ------------- ------------
BALANCE AT MARCH 31, 1995 7,189,000 72,000 25,600,000 1,128,000 26,800,000
------------ ------------- ------------- -------------- ------------
Employee stock purchases -- -- 1,000 -- 1,000
Net income -- -- -- 2,503,000 2,503,000
------------ ------------- ------------- -------------- ------------
BALANCE AT MARCH 31, 1996 7,189,000 72,000 25,601,000 3,631,000 9,304,000
------------ ------------- ------------- -------------- ------------
Net loss -- -- -- (2,547,000) (2,547,000)
------------ ------------- ------------- ---------- ------------
BALANCE AT MARCH 31, 1997 7,189,000 $ 72,000 $ 25,601,000 $ 1,084,000 $ 26,757,000
============ ============= ============= ============== ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
SUNRISE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------------------------------------
1997 1996 1995
----------------- --------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (2,547,000) $ 2,503,000 $ (4,252,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Provision for lease and loan losses 7,512,000 1,853,000 9,502,000
Depreciation and amortization 15,409,000 13,834,000 7,655,000
Deferred income taxes 401,000 1,941,000 (2,473,000)
Change in operating assets and liabilities:
Accounts receivable 1,236,000 (2,941,000) 982,000
Income tax receivable (88,000) (1,157,000) --
Other assets (831,000) 4,000 (123,000)
Inventory held for sale (265,000) 51,000 (172,000)
Accounts payable 1,971,000 (145,000) 1,941,000
Accrued liabilities 2,333,000 1,321,000 1,649,000
Income taxes -- (406,000) 395,000
---------------- --------------- ---------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 25,131,000 16,858,000 15,104,000
---------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in loans receivable (1,417,000) (39,297,000) (44,115,000)
Principal portion of loans receivable collected 5,503,000 42,773,000 29,714,000
Purchase of equipment for lease (40,646,000) (43,341,000) (58,903,000)
Principal portion of direct financing leases collected 26,115,000 24,203,000 18,333,000
Cash acquired in acquisition, net of transaction costs -- -- 1,196,000
Purchase of furniture and fixtures (40,000) (132,000) (414,000)
----------------- --------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (10,845,000) (15,794,000) (54,189,000)
----------------- --------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on lines of credit 22,600,000 35,320,000 42,583,000
Payments on lines of credit (27,569,000) (32,630,000) (26,975,000)
Proceeds from discounted lease financing 12,298,000 32,522,000 35,998,000
Payments on discounted lease financing (28,620,000) (26,437,000) (17,031,000)
Proceeds from note payable to King Management Corporation 1,955,000 -- 219,000
Payments on note payable to King Management Corporation (6,082,000) (7,606,000) --
Proceeds from participations in loans receivable -- 714,000 24,556,000
Payments on participations in loans receivable (4,147,000) (3,717,000) (18,567,000)
Proceeds from securitized borrowings 20,000,000
Payments on securitized borrowings (4,519,000)
Issuance of common stock -- 1,000 143,000
---------------- -------------- ---------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (14,084,000) (1,833,000) 40,926,000
---------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 562,000 (769,000) 1,841,000
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 1,629,000 2,398,000 557,000
---------------- -------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,191,000 $ 1,629,000 $ 2,398,000
================ ============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 3,823,000 $ 4,246,000 $ 4,248,000
Income taxes paid 423,000 1,392,000 1,133,000
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
SUNRISE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business--Sunrise Resources, Inc. ("Sunrise" or the
"Company") was incorporated in Minnesota in February 1989. The Company,
through its wholly-owned subsidiary Sunrise Leasing Corporation (also d/b/a
International Leasing Corporation (ILC)), is primarily in the business of
leasing data processing and other equipment. The Company has also
established Sunrise Funding Corporation I, a wholly-owned subsidiary of
Sunrise Leasing, as a facility for securitization of leases. The Company
has in the past engaged in commercial and asset-based lending through its
wholly-owned subsidiary Sunrise Financial Resources, Inc. (SFR) (See Note
3).
Principles of consolidation--The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform
with the current year's presentation.
Cash and cash equivalents--The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Inventory held for sale--Inventory is valued at the lower of specific unit
cost or net realizable value.
Loan accounting--Loans are stated at the amount of unpaid principal, net of
unearned fees from loan origination, and are reduced by an allowance for
possible loan losses. Interest is accrued on the unpaid principal balances.
Unearned fees from loan origination are deferred and recognized over the
loan term as fee income. 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.
Lease accounting--The Company's lease transactions are classified as either
direct financing or operating leases. The Company classifies each lease at
its inception in accordance with Statement of Financial Accounting
Standards No. 13, "Accounting for Leases". Direct financing leases are
defined as those leases which transfer substantially all of the costs and
risks of ownership of the equipment to the lessee. The Company classifies a
lease as 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: (a) the lease term is at least 75% of
the estimated economic life of the leased equipment at lease inception; (b)
the present value of the rental payments is at least 90 percent of the fair
market value of the leased equipment at lease inception; (c) the lease
contains a bargain purchase option; or (d) the lease transfers ownership of
the equipment to the lessee by the end of the lease term. Operating leases
are defined as those leases in which substantially all the benefits and
risks of ownership of the equipment are retained by the Company.
The lease accounting methods used by the Company are:
Operating leases--Monthly payments are recorded as operating
lease revenues. The cost of the equipment, less an estimated
residual value, is recorded as investment in leasing operations -
operating leases in the consolidated balance sheet and is
depreciated using the straight-line method over the term of the
lease.
Direct financing leases--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 of the leased equipment at lease
termination. The difference between the gross investment in the
lease and the cost (or carrying amount, if different) of the
leased property is recorded as unearned revenue. The net
investment in the lease is the gross investment less unearned
revenue and is recorded as investment in leasing operations -
direct financing leases in the consolidated balance sheet. The
unearned revenue is amortized to direct financing lease revenues
over the lease term to produce a constant percentage return on
the net investment, regardless of whether the lease is
discounted.
<PAGE>
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Residual values--Residual values represent management's estimate
of value of the leased equipment when the lease on such equipment
terminates. The estimates are made based on management's
experience and judgment, and are recorded at the inception of the
lease. The Company evaluates residual values on an ongoing basis.
In accordance with generally accepted accounting principles, no
upward revision of residual value is made subsequent to the
period of inception of the lease. The residual values are
included in investment in leasing operations.
Initial direct costs--Initial direct costs, primarily sales
commissions relating to direct financing and operating leases,
are capitalized and amortized over the lease term.
Allowance for lease and loan losses--The allowance for possible lease and
loan losses is established through a provision for lease and loan losses
charged to expense and is estimated based upon the Company's past loss
experience, current economic conditions and an evaluation of the lease and
loan portfolio. The allowance for possible losses is reduced by net lease
and loan charge-offs. Current and future economic developments or other
factors may have a significant impact on the market value of real estate
and other collateral. Accordingly, ultimate losses may vary from current
estimates. These estimates are reviewed periodically and adjustments, as
they become necessary, are reported in the results of operations in the
periods in which they become known. In management's opinion, the allowance
for possible lease and loan losses is sufficient to adequately provide for
potential losses.
Equipment held for lease--Equipment held for lease is valued at the lower
of specific unit cost or net realizable value. Equipment consists primarily
of those items assigned to lease contracts that have not yet commenced.
Depreciation--Furniture and fixtures are depreciated using the
straight-line method over the expected useful lives of the assets (3-5
years). Rental equipment is depreciated using the straight-line method over
the term of the lease and is depreciated to its estimated residual value.
Other assets--Other assets primarily includes goodwill of $657,000,
representing the excess of cost over the fair value of identifiable net
assets at the date of the ILC merger and is being amortized over a 15-year
period.
Income taxes--Deferred income taxes are provided for differences between
the financial reporting basis and tax basis of the Company's assets and
liabilities at currently enacted tax rates.
Accounting for equipment sales--Revenues and cost of sales of equipment are
recognized when title to the equipment is transferred to the sales
customer. In addition, leases that entitle the lessee to purchase the
equipment for a nominal amount 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 as sales of
equipment.
Fee income--The Company earns fees 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 fees
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 income at the time of the subsequent lease or sale of the
equipment.
<PAGE>
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Net income (loss) per common and common equivalent share--Net income (loss)
per common and common equivalent share is computed by dividing net income
(loss) by the weighted average number of shares of common and common stock
equivalents outstanding during the period. Common equivalent shares
represent the dilutive effects of outstanding stock options and warrants.
Net income (loss) per share assuming full dilution would be substantially
the same.
Use of estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company uses significant
estimates to record lease and loan loss reserves and estimated residual
values. Ultimate results could differ from those estimates.
Recent accounting pronouncements--In fiscal 1996, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan" (as amended by SFAS No. 118). SFAS No.
114 establishes the accounting for creditors for impairment of certain
loans. The adoption of SFAS No. 114 did not have a material impact on the
Company's financial position or results of operations.
In fiscal 1997, the Company adopted SFAS No. 121, "Accounting for the
Impairment of long-lived assets and long-lived assets to be disposed of,"
which establishes new accounting standards for the impairment of long-lived
assets. The adoption of SFAS No. 121 did not have a material impact on the
Company's financial position or results of operations.
In fiscal 1997, the Company also adopted SFAS No. 125, "Accounting for
Transfer and Servicing of Financial Assets and Extinguishments of
liabilities". SFAS No. 125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are
secured borrowings. The adoption of SFAS No. 125 did not have a material
impact on the Company's financial position or results of equations.
2. MERGER WITH ILC
On February 13, 1995, the Company issued approximately 3,000,000 shares of
its common stock for all of the outstanding Common Stock of The P.J. King
Companies, Inc. d/b/a International Leasing Corporation ("ILC"). This
merger has been accounted for as a purchase, accordingly, the assets
acquired and liabilities assumed have been recorded at their estimated fair
values at the date of the merger. The purchase price was $8,775,000
(calculated at a per share price of $2.925), plus transaction expenses of
approximately $405,000, which exceeded the fair value of the net assets
acquired by approximately $657,000. The excess is being amortized using the
straight line method over a 15-year period.
The following summarized unaudited pro forma financial information assumes
the merger had occurred on April 1, 1994 and includes the results from the
Company's fiscal year ended March 31, and ILC's results for the immediately
preceding year ended December 31:
Year Ended
March 31,1995
(unaudited)
Total revenues $ 36,228,000
Net loss (2,951,000)
Net loss per common share (0.39)
The above amounts are based on certain assumptions and estimates which the
Company believes are reasonable and do not reflect any benefit from
economies which might be achieved from combined operations. The pro forma
results do not necessarily represent results which would have occurred had
the acquisition taken place on the basis assumed above, nor are they
indicative of the results of future combined operations.
<PAGE>
2.MERGER WITH ILC (continued)
In fiscal 1995, non-cash investing activities included the issuance of
common stock for the acquisition of ILC. Assets acquired and liabilities
assumed in connection with the 1995 ILC merger were as follows:
Fair value of assets acquired $ 21,194,000
Liabilities assumed (12,419,000)
-----------------
Issuance of common stock $ (8,775,000)
==================
As part of the merger agreement, Peter King is being paid a consultant fee
totaling $335,000 payable in monthly installments from February 13, 1995
through January 1998. Annual payments are as follows:
Year ended March 31, 1996 $ 167,500
Year ended March 31, 1997 107,500
Year ended March 31, 1998 60,000
-----------------
$ 335,000
The Company also agreed to pay Peter King $25,000 pursuant to a noncompete
agreement payable in two annual installments of $12,500.
3. LOANS RECEIVABLE
Loans by Collateral Type
The composition of the loans receivable portfolio by collateral type was as
follows at March 31:
<TABLE>
<CAPTION>
March 31,
-----------------------------------
1997 1996
---------------- --------------
<S> <C> <C>
Commercial loans, collateralized primarily by receivables $ 161,000 $ 1,282,000
Commercial loans, collateralized by equipment, marketable
securities and other 5,163,000 7,563,000
Real estate loans 1,038,000 4,205,000
Non-accrual loans 5,475,000 8,150,000
Nonrecourse participations (867,000) (4,216,000)
---------------- -------------
10,970,000 16,984,000
Less -
Allowance for possible loan losses (3,401,000) (2,773,000)
Unearned fees from loan origination (66,000) (137,000)
---------------- ---------------
$ 7,503,000 $ 14,074,000
================ ===============
</TABLE>
Loan Portfolio Activity and Allowance for Possible Loan Losses
In fiscal 1996, management commenced a comprehensive review of the
Company's major loans. Based on the results of the review, management
concluded that developments during the fourth quarter of fiscal 1995 and
thereafter suggested that certain loans were permanently impaired as of
March 31, 1995. Management provided for potential losses on two loans of
$2,125,000 and reversed recognition of fee and interest income related to
these loans of $600,000. During the second quarter of fiscal 1996,
management made the determination to wind down the commercial and
asset-based lending business. In the fourth quarter of fiscal 1997,
management further concluded that additional provisions for potential
losses were needed and provided for potential losses on three loans in the
amount of $2,365,000.
<PAGE>
3. LOANS RECEIVABLE (CONTINUED)
In December 1995, the Company sold, to an affiliate of a director of the
Company, loans with a net value of approximately $3,600,000, realizing
proceeds which approximated the carrying value of those loans.
As of March 31, 1997 and 1996, the Company's recorded investment in
impaired and other loans and the related valuation allowances are as
follows:
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996
----------------------------------- --------------------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
---------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Impaired loans:
Non-accrual $ 5,250,000 $ 3,176,000 $ 7,925,000 $ 2,514,000
Other 225,000 225,000 225,000 225,000
Performing loans 6,362,000 -- 13,050,000 34,000
Nonrecourse participations (867,000) -- (4,216,000) --
---------------- -------------- --------------- ----------------
Totals $ 10,970,000 $ 3,401,000 $ 16,984,000 $ 2,773,000
================ ============== =============== ================
</TABLE>
The activity in the allowance for possible loan losses was as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at beginning of year $ 2,773,000 $ 2,125,000 $ --
Provision for loan losses 2,485,000 1,239,000 2,125,000
Loans written off (1,857,000) (591,000) --
-------------- --------------- ---------------
Balance at end of year $ 3,401,000 $ 2,773,000 $ 2,125,000
=============== =============== ===============
</TABLE>
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 a reduction of the recorded
investment. The Company recognized interest income on impaired loans for
the years ended March 31, 1997 and 1996 of $50,000 and $414,000,
respectively.
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
years ended March 31, 1997 and 1996, the Company did not recognize fee and
interest income totaling $771,000 and $1,064,000, respectively, related to
impaired loans.
<PAGE>
4. INVESTMENT IN LEASING OPERATIONS
Direct Financing Leases
The components of assets leased under direct financing leases consist of
the following:
<TABLE>
<CAPTION>
March 31,
-----------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Future minimum lease rentals $ 56,282,000 $ 71,234,000
Estimated residual values of leased equipment 4,021,000 4,879,000
--------------- ---------------
60,303,000 76,113,000
Less unearned revenue on lease rentals (8,282,000) (9,932,000)
Less reserves for direct financing leases (5,262,000) (1,016,000)
--------------- ---------------
Net investment in direct financing leases $ 46,759,000 $ 65,165,000
=============== ===============
</TABLE>
During fiscal 1997, a lessee under a significant loan and equipment lease
with the Company who previously agreed to increase its monthly payments
from $159,000 to $199,000 beginning in November 1996, did not pay the
additional incremental monthly rent of $40,000, despite demand. As a result
of this default, and the lessee's recent request to restructure its
payments, management has decided to record a reserve of $3,161,000 against
this transaction. The Company believes the lessee will continue to make the
$159,000 monthly payments, but if the lessee ceases making any payments,
the Company would be required to write off the remaining lease balance
which would have a materially adverse effect on the Company's financial
statements and cash flows.
On August 15, 1996, a lessee of the Company filed for protection under
Chapter 11 of the Bankruptcy Code. The Bankruptcy court has approved the
lessee's motion to reject its lease with the Company. After having made a
$6.8 million provision for loss on the lease receivables pertaining to this
customer in fiscal 1995, the Company's net investment in the lease is
approximately $169,000 as of March 31, 1997. The Company believes the value
of the leased equipment will be adequate to cover the Company's net
investment.
Value at Lease Termination
The estimated net book value at lease termination for direct financing and
operating leases is as follows:
<TABLE>
<CAPTION>
Direct
Financing Operating
Leases Leases Total
------------- -------------- ---------------
<S> <C> <C> <C>
Years ending March 31:
1998 $ 1,443,000 $ 911,000 $ 2,354,000
1999 1,740,000 797,000 2,537,000
2000 689,000 642,000 1,331,000
2001 149,000 -- 149,000
------------- -------------- ---------------
4,021,000 2,350,000 6,371,000
Less residual reserve (863,000) -- (863,000)
------------- ------------- ---------------
$ 3,158,000 $ 2,350,000 $ 5,508,000
============= ============== ===============
</TABLE>
<PAGE>
4. INVESTMENT IN LEASING OPERATIONS (continued)
Future Minimum Lease Payments
Future minimum lease payments on direct financing and operating leases are
due as follows:
Direct
Financing Operating
Leases Leases
--------------- ----------------
Years ending March 31:
1998 $ 26,452,000 $ 25,546,000
1999 17,895,000 10,147,000
2000 9,905,000 3,401,000
2001 1,978,000 57,000
2002 and thereafter 52,000 --
--------------- ----------------
$ 56,282,000 $ 39,151,000
=============== ================
5.SIGNIFICANT CREDIT CONCENTRATIONS IN LOANS AND LEASES:
The Company had individual investments in excess of $500,000 in leasing
operations and loans receivable, funded internally or with recourse
obligations, with 11 customers totaling $15,350,000 at March 31, 1997 and
with 15 customers totaling $29,851,000 at March 31, 1996. Total investments
in leases and loans receivable to customers considered highly leveraged or
with cash flows from operations inadequate to service existing obligations
were $21,512,000 (20% of the portfolio) at March 31, 1997 and $38,898,000
(34% of the portfolio) at March 31, 1996.
Customer payments on these leases and loans are expected to be funded by
customer operations, external sources, or sale of selected assets.
Collateral on these leases and loans is generally either equipment,
receivables, real estate, inventory, or a combination thereof.
Real estate collateralized approximately 34.4% and 40.9% of the gross loan
portfolio at March 31, 1997 and 1996, respectively.
Total revenues of ILC for the year ended March 31, 1997 included
$21,121,000 or 49.1% of the Company's total revenues generated through its
relationship with a single vendor. Should this relationship cease, revenues
and cash flows would continue with individual lessees through the scheduled
expiration of such leases.
6. FINANCING ARRANGEMENTS
Lines of Credit
The Company has a $25,000,000 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 $24,880,000 at March 31, 1997. The balance
outstanding on this line of credit at March 31, 1997 and 1996 was
$13,329,000 and $18,298,000, respectively. Advances are at prime (8.5% at
March 31, 1997) and are collateralized by substantially all 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>
6. FINANCING ARRANGEMENTS (continued)
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
non-financial covenants. As a result of the fourth quarter charge 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 June 27,
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.
Interest expense related to these credit facilities was $2,290,000,
$1,474,000 and $583,000 for the years ended March 31, 1997, 1996 and 1995,
respectively.
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.
Note payable to King Management Corporation
The Company had an outstanding note payable to King Management Corporation,
an affiliate of Peter King, former Chairman and existing member of the
Board. This note was collateralized by certain lease and rental equipment.
The note was due in semi-monthly installments and bears interest at prime
(8.25% at March 31, 1996 and 9.0% at March 31, 1995). The note was paid in
full on November 8, 1996.
Interest expense related to this note was $145,000, $753,000 and $138,000,
for the years ended March 31, 1997, 1996 and 1995, respectively.
Recourse participations in loans receivable
The Company funds certain loans receivable with recourse participations.
Such participations are collateralized by loans receivable as well as other
assets of the Company. As of March 31, 1996, the total outstanding
participations with recourse on loans receivable were $435,000 of which
$322,000 matures in fiscal 1998 and $113,000 matures in fiscal 1999.
Interest expense related to recourse and nonrecourse participations in
loans receivable was $343,000, $1,280,000 and $743,000 for the years ended
March 31, 1997, 1996 and 1995, respectively, and is shown as a component of
revenues net of interest income in the accompanying statements of
operations.
<PAGE>
6. FINANCING ARRANGEMENTS (continued)
Discounted lease rentals
Discounted lease rentals consist of the following:
March 31,
-----------------------------------
1997 1996
--------------- ---------------
Nonrecourse borrowings $ 30,761,000 $ 43,969,000
Recourse borrowings 9,437,000 12,551,000
--------------- ---------------
$ 40,198,000 $ 56,520,000
=============== ===============
The Company utilizes certain of its lease rentals receivable and underlying
equipment in lease transactions as collateral to borrow from financial
institutions at fixed rates primarily on a nonrecourse basis. In the event
of a default by a lessee on a nonrecourse borrowing, the financial
institutions have a first lien on the underlying leased equipment with no
further recourse against the Company. For recourse borrowings, the
financial institution can seek resource from the Company in addition to
having a first lien on the asset. The liability associated with the
proceeds from discounting are recorded on the consolidated balance sheet as
discounted lease rentals. Discounted lease rentals are reduced by the
interest method.
Future minimum lease payments and interest expense on leases that have been
discounted are as follows:
<TABLE>
<CAPTION>
Minimum Lease
Payments to be
Received by Discounted Future
Financial Lease Interest
Institution Rentals Expense
----------------- -------------- ---------------
<S> <C> <C> <C>
Years ending March 31:
1998 $ 23,582,000 $ 20,996,000 $ 2,586,000
1999 14,315,000 13,233,000 1,082,000
2000 5,040,000 4,739,000 301,000
2001 1,227,000 1,186,000 41,000
2002 and thereafter 45,000 44,000 1,000
----------------- -------------- ---------------
$ 44,209,000 $ 40,198,000 $ 4,011,000
================= ============== ===============
</TABLE>
Certain recourse discounted lease rental agreements require the Company to
maintain financial ratios and to comply with other covenants similar to
those required in the Company's credit facility agreements. As of March 31,
1997, the Company was is compliance or had obtained waivers and amendments
for such covenants.
Effective interest rates on the discounted lease rentals ranged from 6.0%
to 10.5% at March 31, 1997. Interest expense on discounted lease rentals
was $4,043,000, $4,648,000 and $2,921,000 for the years ended March 31,
1997, 1996 and 1995, respectively.
<PAGE>
7. INCOME TAXES:
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------------------
1997 1996 1995
---------------- -------------- --------------
<S> <C> <C> <C>
Current
Federal $ (197,000) $ 372,000 $ 966,000
State and other (13,000) 71,000 422,000
---------------- -------------- --------------
(210,000) 443,000 1,388,000
---------------- -------------- --------------
Deferred
Income taxes 457,000 1,658,000 (3,513,000)
Valuation allowance (56,000) 283,000 1,040,000
---------------- -------------- --------------
401,000 1,941,000 (2,473,000)
---------------- -------------- --------------
Total $ 191,000 $ 2,384,000 $ (1,085,000)
================ ============== ==============
</TABLE>
A reconciliation of the income tax provision (benefit) at the federal
statutory rates to the income tax provision (benefit) at the effective tax
rate is as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
-------------------------------------------------------
1997 1996 1995
--------------- ----------------- ----------------
<S> <C> <C> <C>
Federal income tax
provision (benefit) at statutory rates $ (801,000) $ 1,662,000 $ (1,807,000)
State income taxes, net of federal tax effect (141,000) 290,000 (316,000)
AMT valuation allowance and other 324,000 432,000 1,038,000
Arbitration settlement 809,000 -- --
---------------- ---------------- ---------------
$ 191,000 $ 2,384,000 $ (1,085,000)
================ ================ ===============
</TABLE>
The components of deferred taxes consist of the following:
<TABLE>
<CAPTION>
March 31,
----------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Deferred tax assets
Lease revenue $ 21,476,000 $ 14,121,000
Allowances for doubtful accounts and lease and loan losses 3,564,000 4,015,000
Net operating loss 1,736,000
Alternative minimum tax credits 1,267,000 1,323,000
Deferred revenue 186,000 121,000
Other 100,000 442,000
-------------- --------------
Total deferred tax assets 28,329,000 20,022,000
-------------- --------------
Deferred tax liabilities
Depreciation (28,954,000) (20,188,000)
Prepaid assets (7,000) (9,000)
--------------- --------------
Total deferred tax liabilities (28,961,000) (20,197,000)
Valuation allowance (1,267,000) (1,323,000)
--------------- --------------
Net deferred tax asset (liability) $ (1,899,000) $ (1,498,000)
=============== ==============
</TABLE>
For tax reporting purposes at March 31, 1997, the Company has a net
operating loss carryforward of approximately $4.3 million as well as
approximately $1,267,000 in federal and state alternative minimum tax (AMT)
credits which may be utilized in the future to offset future regular
corporate income tax liability. Management has concluded that realization
of the AMT credit is not assured and a 100% valuation allowance has been
provided.
<PAGE>
8. SHAREHOLDERS' EQUITY
Stock option plan
The Company has a Stock Option Plan (the "Plan") pursuant to which
incentive stock options and nonqualified stock options for up to 750,000
shares of common stock may be granted to officers, directors, key
employees, or certain advisors or consultants. Incentive stock options are
granted at exercise prices not less than the market price on the date of
grant and are exercisable no later than 10 years from such date. Incentive
stock options generally vest and become exercisable at 25% per year
beginning one year from the date of grant, although some grants are
exercisable immediately. Nonqualified stock options are granted at exercise
prices determined by the Stock Option Committee of the Board of Directors
on the date of grant and are exercisable as established by such committee.
A summary of the status of the Company's stock option plan at March 31,
1995, 1996 and 1997 and changes during the years ended is presented in the
table and narrative below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- -------------------- ----------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 555,625 $4.65 449,500 $5.98 243,000 $7.01
Granted 101,500 2.66 299,125 3.28 244,000 4.92
Exercised -- -- (12,000) 4.50
Canceled (178,000) 5.01 (193,000) 5.63 (25,500) 6.39
--------- ---- -------- ---- --------- ----
Outstanding at end of year 479,125 4.09 555,625 4.65 449,500 5.98
-------- ---- --------- ---- ------- ----
Exercisable at end of year 177,375 $4.58 172,750 $5.23 112,125 $5.93
Weighted average fair value
per share of options granted $1.17 $1.34
</TABLE>
The 479,125 options outstanding at March 31, 1997 have exercise prices
between $2.63 and $8.50, with a weighted average exercise price of $4.09
and a weighted average remaining contractual life of 6.5 years.
The fair value of each option grant is estimated on the date of grant using
the Black Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1997, respectively: risk-free
interest rates of 5.5 and 5.7 percent for the options; expected lives of 5
years for both years; expected volatility of 36 and 38 percent.
<PAGE>
8. SHAREHOLDERS' EQUITY (continued)
The Company accounts for its stock option plan under APB opinion No. 25,
under which no compensation cost has been recognized. Had compensation cost
for these plans been determined consistent with SFAS No. 123, the Company's
net income (loss) and earnings per share would have been reduced to the
following pro forma amounts:
Year ended March 31,
----------------------------
1997 1996
------------ -----------
Net (loss) income
As reported $(2,547,000) $2,503,000
SFAS No. 123 expense (90,000) (23,000)
-------------- ------------
Proforma net income $(2,637,000) $2,480,000
-------------- ----------
Weighted Average Shares Outstanding 7,189,000 7,189,000
-------------- -----------
Net income (loss) per share
As reported $(0.35) $0.35
Proforma (0.37) 0.34
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in
future years.
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.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan under the terms of which
150,000 shares of authorized but unissued common stock were reserved. This
plan provides that employees may authorize payroll deductions to be made
for the purpose of acquiring shares at 85% of market price. A total of
39,235 shares of common stock have been purchased under the plan as of
March 31, 1997. There are 110,765 shares of common stock available for
purchase in the future.
Warrants
At March 31, 1997, warrants were outstanding for the purchase of 135,000
shares of the Company's common stock at $9.45 per share which were issued
in connection with the Company's secondary offering in April 1993. These
warrants may be exercised at any time during a four-year period ending on
April 21, 1998. Warrants to purchase 110,000 shares at $5.40 per share
issued in connection with the Company's initial public offering in October
1991 expired on October 9, 1996.
<PAGE>
9. PROFIT SHARING 401(k) PLAN
The Company has a profit sharing plan (the "401(k) Plan") which was
implemented in February 1994. The 401(k) Plan is a salary reduction cash or
deferred profit sharing plan intended to meet the requirements of Section
401(k) of the Internal Revenue Code. All employees who have completed at
least three months of service and have attained the age of 21 are eligible
to participate in the 401(k) Plan. The 401(k) Plan allows eligible
employees to contribute up to 15% of their gross compensation into the
401(k) Plan each year. The Company may make discretionary contributions to
the 401(k) Plan on behalf of eligible participants in an amount determined
by the Board of Directors. The Company's contributions to the 401(k) Plan
were $24,000, $20,000 and $12,000 for the years ended March 31, 1997, 1996
and 1995, respectively.
10. COMMITMENTS AND CONTINGENCIES
Future Lease Commitments
The Company rents office facilities at five locations. Total rent expense
incurred for the office facilities for the years ended March 31, 1997, 1996
and 1995 was $309,000, $344,000 and $202,000, respectively. Future minimum
lease commitments (net of subleases) are as follows:
Years ending March 31:
1998 $ 183,000
1999 181,000
2000 170,000
2001 99,000
---------------
$ 633,000
===============
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 and awarded a settlement 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, they were
awarded repayment of attorneys' fees relating to breach of warranty to this
arbitration payable by 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>
11. RELATED-PARTY TRANSACTIONS:
The Company has adopted a policy of not entering into transactions in which
any officer, director, shareholder or affiliate of the Company has a
partial financial interest unless the transaction has been approved by a
majority of the disinterested directors of the Company based on a
determination that the terms of such transactions are no less favorable to
the Company than those which could be obtained from unaffiliated third
parties. In addition to the transactions described in Notes 3 and 6, the
following summarizes significant transactions with related parties:
a. In fiscal 1994, the Company entered into a $2,000,000 line of credit at
12.5% with a company having common board membership (the "Borrower").
As of March 31, 1997, 1996 and 1995, $1,355,000, $1,630,000 and
$1,812,000, respectively, was outstanding. The line is used by the
Borrower to fund the expansion of business operations and is
collateralized by certain assets of the Borrower. This line of credit
expires June 1, 1999.
b. In addition, the Company has entered into other transactions with
corporations, minority shares of which are owned by a Company board
member. Balances outstanding under leases and loans to the related
entities totaled $130,000 as of March 31, 1997 and $1,277,000 as of
March 31, 1996.
c. During fiscal 1997, the Company paid $338,000 to a corporation
affiliated with a former member of the Company's Board of Directors for
assistance in arranging a securitization of $20 million for the
Company.
The Company believes the transactions described above were on terms similar
to those with unrelated parties.
<PAGE>
12. QUARTERLY FINANCIAL DATA (Unaudited)
The following is a summary of quarterly financial data for fiscal years
1997 and 1996:
<TABLE>
<CAPTION>
Fiscal 1997 June 30 September 30 December 31 March 31 Total
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ 10,670,000 $ 10,738,000 $ 11,294,000 $ 10,276,000 $ 42,978,000
Net income (loss) 1,093,000 926,000 851,000 (5,417,000) (2,547,000)
============== ============== ============== ============== ==============
Net income (loss)
per common and
common equivalent
share $ 0.15 $ 0.13 $ 0.12 $ (0.75) $ (0.35)
============== ============== ============== =============== ===============
Fiscal 1996 June 30 September 30 December 31 March 31 Total
-------------- -------------- -------------- --------------- ---------------
Revenues $ 10,278,000 $ 13,352,000 $ 10,027,000 $ 9,831,000 $ 43,488,000
Net income (loss) 891,000 832,000 789,000 (9,000) 2,503,000
============== ============== ============== =============== ==============
Net income
per common and
common equivalent
share $ 0.12 $ 0.12 $ 0.11 $ -- $ 0.35
============== ============== ============== =============== ==============
</TABLE>
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Company.
Other than "Executive Officers of the Company," which is set forth at the
end of Part I of this Form 10-K, the information required by Item 10 is
incorporated herein by reference to the sections labeled "Election of Directors"
and "Compliance With Section 16(a) of the Exchange Act," which appear in the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A not
later than 120 days after the close of fiscal 1997 in connection with the
Company's 1997 Annual Meeting of Shareholders.
ITEM 11. Executive Compensation
The information required by Item 11 is incorporated herein by reference to
the sections labeled "Management Compensation" and "Election of Directors,"
which appear in the Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A not later than 120 days after the close of fiscal 1997 in
connection with the Company's 1997 Annual Meeting of Shareholders.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is incorporated herein by reference to
the section labeled "Principal Shareholders and Management Shareholdings," which
appears in the Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A not later than 120 days after the close of fiscal 1997 in
connection with the Company's 1997 Annual Meeting of Shareholders.
ITEM 13. Certain Relationships and Related Transactions.
The information required by Item 13 is incorporated herein by reference to
the section labeled "Management Compensation," which appears in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A not later than
120 days after the close of fiscal 1997 in connection with the Company's 1997
Annual Meeting of Shareholders.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of this report.
(1) Financial Statements.The following financial statements are included
in Part II, Item 8 of this Annual Report on Form 10-K:
Report of Independent Public Accountants
Consolidated Balance Sheets as of March 31, 1997 and 1996
Consolidated Statements of Operations for the years ended March 31,
1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity for the years ended
March 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended March 31, 1997
1996 and 1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. All schedules are omitted as the
required information is inapplicable or the information is presented in
the financial statements or related notes.
(3) Exhibits. See Exhibit Index immediately following the signature page
of this Annual Report on Form 10-K.
(b) Reports on Form 8-K.
During the quarter ended March 31, 1997, there were no reports on Form
8-K filed by the Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SUNRISE RESOURCES, INC.
Date: June 27, 1997 By: /s/ Errol F. Carlstrom
Errol F. Carlstrom, President & Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
(Power of Attorney)
Each person whose signature appears below constitutes ERROL F. CARLSTROM
AND BARRY J. SCHWACH the undersigned's true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign any or all amendments to this Annual Report on Form 10-K
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue thereof.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C> <C>
/s/ Errol F. Carlstrom President, Chief Executive Officer and June 27, 1997
Errol F. Carlstrom Director (principal executive officer)
/s/ Barry J. Schwach Chief Financial Officer (principal financial June 27, 1997
Barry J. Schwach officer)
/s/ Paul R. Wotta Controller (principal accounting officer) June 27, 1997
Paul R. Wotta
/s/ Peter J. King Chairman of the Board and Director June 27, 1997
Peter J. King
/s/ Thomas R. King Secretary and Director June 27, 1997
Thomas R. King
/s/ Donald R. Brattain Director June 27, 1997
Donald R. Brattain
/s/ Andrew G. Sall Director June 27, 1997
Andrew G. Sall
/s/ Jeffrey G. Jacobsen Director June 27, 1997
Jeffrey G. Jacobsen
</TABLE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT INDEX TO FORM 10-K
Commission File No.: 0-19516
For the Fiscal Year Ended
March 31, 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
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 and restated
through November 1992 incorporated by reference to Exhibit
10.6 to the Company's Annual Report on Form 10-K for the
year ended March 31, 1993.
10.2* The Company's 1992 Employee Stock Purchase Plan--incorporated
by reference to Exhibit 10.10 to the Company's Annual
Report on Form 10-K for the year ended March 31, 1992.
10.3 Credit Agreement between First Bank National Association and
the Company--incorporated by reference to Exhibit 10.13 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1992.
10.4 Standard Office Lease between Minnesota CC Properties, Inc.
and the Company regarding the Company's offices at Golden
Valley, Minnesota -- incorporated by reference to Exhibit
10.14 to the Company's Registration Statement on Form S-1,
Reg. No. 33-59694.
10.5 Amendment No. 1 to Credit Agreement between First Bank
National Association and the Company -- incorporated by
reference to Exhibit 10.15 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1993.
10.6 Amendment No. 2 to Credit Agreement between First Bank
National Association and the Company -- incorporated by
reference to Exhibit 10.16 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1993.
10.7 Extension letter for Credit Agreement between Firstar Bank of
Minnesota, N.A. and the Company--incorporated by reference
to Exhibit 10.17 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993.
10.8 Credit Agreement between American Bank and Trust Company N.A.
and the Company--incorporated by reference to Exhibit 10.18
to the Company's Quarterly Report ended September 30, 1993.
10.9 Amendment No. 1 to Standard Office Lease between Minnesota CC
Properties, Inc. and the Company regarding the Company's
offices at Golden Valley, Minnesota, incorporated by
reference to Exhibit 10.16 to the Company's Annual Report
on Form 10-K for the year ended March 31, 1994.
10.10 Amendment No. 3 to Credit Agreement between First Bank
National Association and the Company -- incorporated by
reference to Exhibit 10.17 to the Company's Quarterly
Report ended September 30, 1994.
<PAGE>
Exhibit
Number Description
10.11 Amendment No. 4 to Credit Agreement between First Bank
National Association and the Company--incorporated by
reference to Exhibit 10.18 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1994.
10.12 Amendment No. 5 to Credit Agreement between First Bank
National Association and the Company-incorporated by
reference to Exhibit 10.19 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1994.
10.13 Amendment No. 6 to Credit Agreement between First Bank
National Association and the Company -- incorporated by
reference to Exhibit 10.21 to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31,
1994.
10.14 Credit Agreement between Pullman Bank and Trust. Company and
the Company--incorporated by reference to Exhibit 10.22 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1994.
10.15 Agreement and Plan of Reorganization dated October 14, 1994
by and among the Company, The P.J. King Companies, Inc.
d/b/a International Leasing Corporation, King Management
Corporation, Peter J. King, Stephen D. Higgins, as Trustee
under the William B. King Stock Trust dated November 21,
1989 for the benefit of William B. King, and Stephen D.
Higgins, as Trustee under the Russell S. King Stock
Trust dated November 11, 1989 for the benefit of Russell
S. King--incorporated by reference to Exhibit 2.1 to
Company's Current Report on Form 8-K dated February 13,
1995.
10.16 Shareholders Agreement dated as of February 13, 1995 among
the Company, Peter J. King, Stephen D. Higgins, as Trustee
under the William B. King Stock Trust dated November 21,
1989 for the Benefit of William B. King, and Stephen D.
Higgins, as Trustee under the Russell S. King Stock Trust
dated November 11, 1989 for the benefit of Russell S.
King, and each of the other ILC shareholders listed on
Schedule 1 thereto -- incorporated by reference to Exhibit
2.2 to Company's Current Report on Form 8-K dated February
13, 1995.
10.17* Consulting and Noncompetition Agreement dated as of February
13, 1995 between the Company and Peter J. King --
incorporated by reference to Exhibit 2.3 to Company's
Current Report on Form 8-K dated February 13, 1995.
10.18 Amendment No. 7 to Credit Agreement between First Bank
National Association and the Company - incorporated by
reference to Exhibit 10.20 to the Company's Annual Report
on Form 10-K for the year ended March 31, 1995.
10.19 Amendment No. 8 to Credit Agreement between First Bank
National Association and the Company - incorporated by
reference to Exhibit 10.21 to the Company's Annual Report
on Form 10-K for the year ended March 31, 1995.
10.20 Amendment to Credit Agreement between American Bank and
Trust Company, N.A. and the Company - incorporated
by reference to Exhibit 10.22 to the Company's Annual
Report on Form 10-K for the year ended March 31, 1995.
10.21 Amendment No. 2 to Standard Office Lease between Minnesota
CC Properties, Inc.and the Company regarding the Company's
offices at Golden Valley, Minnesota - incorporated by
reference to Exhibit 10.23 to the Company's Annual Report
on Form 10-K for the year ended March 31, 1995.
<PAGE>
Exhibit
Number Description
10.22 Amendment No. 3 to Standard Office Lease between Minnesota CC
Properties, Inc. and the Company regarding the Company's
offices at Golden Valley, Minnesota - incorporated by
reference to Exhibit 10.24 to the Company's Annual Report
on Form 10-K for the year ended March 31, 1995.
10.23* Amendment to the Company's 1991 Stock Option Plan dated
October 4, 1994- incorporated by reference to Exhibit 10.25
to the Company's Annual Report on Form 10-K for the year
ended March 31, 1995.
10.24 Security Agreement -- Amendment No. 9 to Credit Agreement
between First Bank National Association and the Company -
incorporated by reference to Exhibit 10.26 to the Company's
Annual Report on Form 10-K for the year ended March 31,
1995.
10.25* Severance Agreement and Release dated as of July 31, 1995
between the Company and Craig H. Forsman - incorporated by
reference to Exhibit 10.27 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995.
10.26 Amendment No. 10 to Credit Agreement between First Bank
National Association and the Company - incorporated by
reference to Exhibit 10.28 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1995.
10.27 Amendment No. 11 to Credit Agreement between First Bank
National Association and the Company -- incorporated by
reference to Exhibit 10.27 to the Company's Annual Report
on Form 10-K for the year ended March 31, 1996.
10.28 Amendment No 12 to Credit Agreement between First Bank
National Association and the Company -- incorporated by
reference to Exhibit 10.28 to the Company's Annual Report
on Form 10-K for the year ended March 31, 1996.
10.29 Amended and Restated Credit Agreement between First Bank
National Association and the Company -- incorporated by
reference to Exhibit 10.29 to the Company's Annual Report
on Form 10-K for the year ended March 31, 1996.
10.30 Sublease Agreement between Network Management Services, Inc.
and The Company--incorporated by reference to Exhibit 10.30
to the Company's Annual Report on Form 10-K for the year
ended March 31, 1996.
10.31 Amendment to Security Agreement dated June 22, 1995 between
the Company and King Holding Corporation -- incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996.
10.32 First Amendment to Amended and Restated Credit Agreement
dated October 1, 1996 between the Company and First Bank
National Association --incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
10.33 Promissory Note Extension Agreement dated October 1, 1996
between the Company and First National Bank Association --
incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.
10.34* Employment Agreement dated October 14, 1994 between the
Company and Barry J. Schwach--incorporated by reference to
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.
10.35 Employment Agreement dated October 14, 1994 between the
Company and William B. King--incorporated by reference to
Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.
<PAGE>
Exhibit
Number Description
10.36* Incentive Compensation Plan for Fiscal Year 1997--incorporated
by reference to Exhibit 10.6 to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1996.
10.37 Replacement promissory note dated November 7, 1996 between the
Company and Daiwa Bank, Limited at the Sumitomo Bank,
Limited -- incorporated by reference to Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1996.
10.38 Amended and Restated Loan and Security Agreement dated
November 7, 1996 between the Company and Daiwa Bank, Limited
--incorporated by reference to Exhibit 10.8 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December
31, 1996.
10.39 Purchase Agreement Dated October 31, 1996 by and among
the Company, Sunrise Funding Corporation I, Sunrise Leasing
Corporation and Dougherty Funding, Inc.--incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1996.
10.40 Lease Receivables-Backed Note, Series 1996-1 dated November 8,
1996 in the principal amount of $20,000,000 by Sunrise
Funding Corporation I in favor of Dougherty Funding, Inc. --
incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December
31, 1996.
10.41 Indenture amount Sunrise Funding Corporation I, Sunrise
Leasing Corporation and Norwest Bank Minnesota, National
Association dated November 1, 1996-incorporated by reference
to Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1996.
10.42 Contribution Agreement dated November 1, 1996 between Sunrise
Leasing Corporation and Sunrise Funding Corporation I --
incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December
31, 1996.
10.43 Servicing Agreement dated November 1, 1996 between Sunrise
Funding Corporation I and Sunrise Leasing Corporation--
incorporated by reference to Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December
31, 1996.
10.44 Severance Agreement and Release dated November 12, 1996
between the Company and William B. King -- incorporated by
reference to Exhibit 10.6 to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1996.
10.45 Portfolio Purchase Agreement and Guaranty dated November 27,
1996 between Sunrise Leasing Corporation and The CIT Group--
incorporated by reference to Exhibit 10.7 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December
31, 1996.
10.46 Discretionary Revolving Credit Agreement dated May 15, 1997
between Sunrise Leasing Corporation and National City Bank
of Minneapolis.
10.47 Security Agreement dated May 15, 1997 between Sunrise Leasing
Corporation and National City Bank of Minneapolis.
10.48 Promissory Note in the principal amount of $5,498,960.57 dated
May 15, 1997 in favor of National City Bank of Minneapolis
11.1 Per Share Earnings Computations
21.1 List of Subsidiaries
23.1 Consent of Independent Public Accountants
24.1 Power of Attorney for certain directors (included on signature
page of Form 10-K)
27.0 Financial Data Schedule (filed with electronic version only)
* Management contract or other compensatory plan.
DISCRETIONARY REVOLVING CREDIT AGREEMENT
Dated as of May 15, 1997
Sunrise Leasing Corporation, a Minnesota corporation (the "Borrower"),
located at 5500 Wayzata Boulevard, Suite 725, Golden Valley, Minnesota 55416 and
National City Bank of Minneapolis, a national banking association (the "Bank"),
located at 651 Nicollet Mall, Minneapolis, Minnesota 55402-1611, agree as
follows:
ARTICLE I.
DEFINITIONS Section 1.1. Definitions. As used in this Agreement the
following terms shall have the following meanings (such meanings to be equally
applicable to singular and plural forms of the terms defined):
(a) "Affiliate" means any of the following Persons:
(i) any director, officer or employee of the Borrower or the
Guarantor;
(ii) any person who, individually or with his immediate family,
beneficially owns or holds 5% or more of voting interest of the
Borrower or the Guarantor; or
(iii)any company in which any Person described above owns a 5% or
greater equity interest.
(b) "Borrowing Base" with respect to any Note means an amount equal to the
sum of the following:
<PAGE>
(i) 100% of the Present Value of the Eligible Equipment Leases
designated by the Borrower on the most recent Borrowing Base
Certificate for that Note; and
(ii) 100% of the Residual Value of the inventory under Eligible
Equipment Leases designated by the Borrower on the most recent
Borrowing Base Certificate for that Note;
provided, however, that the portion of the Borrowing Base attributable to any
Eligible Equipment Lease shall not, at any time, exceed the Net Book Value of
that lease.
(c) "Borrowing Base Certificate" with respect to any Note means a
certificate signed by the chief financial officer of the Borrower
which is delivered to the Bank pursuant to Section 5.1(a) and which
shows as of the date of determination (A) the Eligible Equipment
Leases for that Note, (B) the Net Book Value, Present Value and
Residual Value for such Eligible Equipment Leases, (C) the original
cost and the accumulated depreciation of the inventory subject to such
Eligible Equipment Leases, and (D) a payment aging for such Eligible
Equipment Leases.
(d) "Borrowing Base Value" for any Eligible Equipment Lease means the
portion of the Borrowing Base attributable to such lease.
(e) "Business Day" means any day other than a Saturday, Sunday or a public
holiday or the equivalent under the laws of the State of Minnesota or
the United States of America.
(f) "Cash Expense Coverage Ratio" for any time period means a ratio the
numerator of which is the sum of the consolidated cash receipts from
continuing operations of the Borrower and the Guarantor during that
period and the denominator of which is the sum of all of their cash
expenses during that period.
<PAGE>
(g) "Debt" means (i) indebtedness for borrowed money or for the deferred
purchase price of property or services, (ii) obligations as lessee
under leases which shall have been or should be, in accordance with
generally accepted accounting principles, recorded as capital leases,
(iii) obligations under direct or indirect guaranties in respect of,
and obligations (contingent or otherwise) to purchase or otherwise
acquire, or otherwise to assure a creditor against loss in respect of,
indebtedness or obligations of others of the kinds referred to in
clause (i) or (ii) above, and (iv) liabilities in respect of unfunded
vested benefits under plans covered by Title IV of ERISA.
(h) "Eligible Equipment Lease" means a lease (i) for which the Borrower is
the lessor and holds all financial servicing rights; (ii) which has an
original term of not more than 36 months or such longer term as the
Bank has approved in writing; (iii) all originals of which have been
delivered to the Bank and have been approved by the Bank in its sole
discretion as to form and content; (iv) which is subject to a
perfected security interest in favor of only the Bank as required by
this Agreement; (v) which relates to inventory which is (A) owned by
the Borrower and (B) subject to a perfected security interest in favor
of only the Bank as required by this Agreement; (vi) with respect to
which the Borrower has directed that all contract payments be made to
a lockbox under the control of State Street Bank and Trust Company, or
other depository acceptable to the Bank; (vii) with respect to which
the Borrower has filed a UCC-1 Financing Statement, or equivalent
document under applicable law, to give public notice of the Borrower's
interest in the inventory under the lease (provided that any lease
entered into prior to January 1, 1997 with respect to inventory with
an original cost of not more than $15,000 shall not be subject to this
subsection); and (viii) with respect to which the Bank has been
provided evidence of casualty insurance, including casualty insurance
obtained by the Borrower, showing the Bank as a loss payee; provided,
however, that (A) no lease may be added as an Eligible Equipment Lease
at a time when the lease is in default, (B) no lease may remain as an
Eligible Equipment Lease if it has been in default for more than 90
days, (C) no lease may be added as an Eligible Equipment Lease at a
time when the lessee of the lease is the lessee on other Eligible
Equipment Leases which have a Borrowing Base Value, which when added
to the Borrowing Base Value of the proposed lease, would exceed
$750,000.00 and (D) if the lease is subject to a Permitted
Encumbrance, the Borrower has obtained and delivered to the Bank a
recordable release of that lease from that Permitted Encumbrance. A
lease can be an Eligible Equipment Lease for only one Note at any
time.
<PAGE>
(i) "Event of Default" means one of the events specified in Section 6.1.
(j) "Loan Documents" means this Agreement, the Notes, the Security
Agreement, the Guaranty and all other documents to be executed in
connection with this Agreement.
(k) "Loan Party" means any Person obligated under any Loan Document.
(l) "Net Book Value" means, at any time, with respect to any Eligible
Equipment Lease, the original cost of the inventory subject to that
lease minus depreciation that has been, or under generally accepted
accounting principles should have been, accumulated with respect to
that inventory
(m) "Notes" means all of the Notes described in Section 2.2
(n) "Permitted Encumbrances" means all security interests and other
encumbrances on any of the Borrower's assets as of the date hereof as
disclosed in writing to the Bank contemporaneously with this
Agreement.
(o) "Person" means an individual, corporation, partnership, joint venture,
trust or unincorporated organization or governmental agency or
political subdivision thereof.
(p) "Present Value" means, as to any Eligible Equipment Lease, the
remaining contractual payments due on that lease discounted to present
value using a discount rate equal to the stated rate of interest on
the Note for which that lease constitutes a part of the Borrowing
Base.
(q) "Residual Value" means, as to any Eligible Equipment Lease, the Net
Book Value of that lease minus the Present Value of that lease.
(r) "Senior Recourse Debt" means the aggregate of the consolidated Debt
for borrowed money of the Borrower and the Guarantor, determined and
computed in accordance with generally accepted accounting principles
consistently applied from year to year, provided that Debt shall be
included in this calculation only to the extent the Debt provides for
recourse to the Borrower or the Guarantor.
<PAGE>
(s) "Subsidiary" means any corporation of which more than 50% of the
outstanding capital stock having ordinary voting power to elect a
majority of the Board of Directors of such corporation (irrespective
of whether or not at the time capital stock or any other class or
classes of stock of such corporation shall or might have voting power
upon the occurrence of any contingency) is at the time directly or
indirectly owned by the Borrower, by the Borrower and one or more
other Subsidiaries, or by one or more other Subsidiaries.
(t) "Tangible Net Worth" means the aggregate of the consolidated capital
stock, paid in surplus and retained earnings of the Borrower and the
Guarantor (excluding stock of the Borrower or the Guarantor held by
the Borrower or the Guarantor), determined and computed in accordance
with generally accepted accounting principles consistently applied
from year to year, less the book value of all assets of the Borrower
and the Guarantor that would be treated as intangibles under generally
accepted accounting principles including without limitation, such
items as goodwill, trademarks, tradenames, service marks, copyrights,
patents and licenses and less the book value of all obligations owed
to the Borrower or the Guarantor by any of their Affiliates.
(u) "Treasury Yield" means with respect to any Note, the yield, as
determined by the Bank, on the United States Treasury instrument with
a maturity date closest to the average payment date of the payments to
be made under the Note as estimated by the Bank.
(v) "UCC Filing Event" means any event which is, or which with the giving
of notice or the elapse of time will become, a default under any of
the provisions of Sections 5.1(f), 5.1(g) and 5.1(h).
Section 1.2. Accounting and Other Terms. All accounting terms not
specifically defined in this Agreement shall be construed in accordance with
generally accepted accounting principles consistently applied as such principles
may change from time to time. Other terms defined herein shall have the meanings
ascribed to them herein.
<PAGE>
ARTICLE II.
REVOLVING LOAN
Section 2.1. Discretionary Revolving Loan. The Borrower has requested that
the Bank make advances to the Borrower from time to time to permit the Borrower
to carry leases on inventory that it leases. THE BANK HAS NOT COMMITTED TO
PROVIDING ANY SUCH ADVANCES AND MAY, IN ITS DISCRETION, DECIDE NOT TO MAKE ANY
SUCH ADVANCES. If the Bank, in its discretion, agrees to make any such advances
requested by the Borrower, such advances (the "Advances") shall (A) not exceed
an aggregate principal amount outstanding of $5,500,000.00; (B) be made in
accordance with the terms of this Agreement; and (C) be made on or before May
31, 1998 (the "Termination Date"). Each Advance shall be in an amount of not
less than $1,000,000.00 and of not more than the Borrowing Base for the Note
evidencing that Advance.
Section 2.2. The Notes. Each Advance made by the Bank shall be evidenced by
a separate promissory note (each a "Note" and collectively the "Notes") which is
in substantially the form of Exhibit A attached hereto (appropriately completed)
and is delivered to the Bank pursuant to Article III. Each Note shall (A) have a
final maturity date not later than 48 months after the issue date of the Note
and (B) bear an interest rate equal to 3.25% above the Treasury Yield on the
date two Business Days before the Advance evidenced by the Note.
Section 2.3. Making of Advances. The Borrower may request Advances under
this Agreement by giving notice to the Bank, specifying the date of the
requested Advance and the amount thereof. Each request for an Advance shall be
accompanied by an executed Borrowing Base Certificate showing a Borrowing Base
for that Advance in an amount not less than that Advance. Any request for an
Advance shall be deemed to be a representation that the Borrower's
representations and warranties contained in Section 4.1 are true and correct as
of the date of the Advance as though made on and as of such date and that no
event has occurred and is continuing, or will result from such Advance, which
constitutes an Event of Default or would constitute an Event of Default but for
the requirement that notice be given or time elapse or both. If the Bank
approves a requested Advance in it sole discretion, the Bank may disburse such
Advance by crediting immediately available funds in the amount of the Advance to
the Borrower's demand deposit account maintained with the Bank.
<PAGE>
Section 2.4. Interest and Payments. The Borrower shall repay, and shall pay
interest on, the aggregate unpaid principal amount of all Advances in accordance
with the Notes. All payments of principal, interest and fees under this
Agreement shall be made when due to the Bank in immediately available funds. All
computations of interest shall be made by the Bank on the basis of the actual
number of days elapsed in a year of 360 days. Whenever any such payment shall be
due on a non-Business Day, such payment shall be made on the next succeeding
Business Day, and such extension of time shall be included in the computation of
interest. The Bank is expressly authorized to charge any principal or interest
payment, when due, to the Borrower's demand deposit account maintained at the
Bank, or, if that account shall not contain sufficient funds, to any other
account maintained by the Borrower at the Bank.
Section 2.5. Voluntary Prepayment. The Borrower may prepay any Note in
whole or in part ; provided, however, that each voluntary prepayment shall be
made as of a principal payment date on the Note and shall be accompanied by all
interest accrued to the date of prepayment and that a prepayment in full of any
Note shall be accompanied by a prepayment fee equal to 5.0% of all principal
amounts prepaid on that Note during the entire term of that Note.
Section 2.6. Mandatory Prepayment. In the event that (A) a default,
including, without limitation, any payment default, occurs under an Eligible
Equipment Lease and is not cured within 90 days or (B) the inventory subject to
the Eligible Equipment Lease ceases for any reason to be under that lease, the
Borrower will, within 30 days of that event, provide a substitute Eligible
Equipment Lease acceptable to the Bank or prepay on the Note to which that
Eligible Equipment Lease relates an amount equal to the Borrowing Base Value of
that Eligible Equipment Lease. In the event that the lessee of an Eligible
Equipment Lease prepays any amount on that Eligible Equipment Lease, whether
through insurance proceeds, voluntary payments or otherwise, all such
prepayments shall immediately be paid to the Bank to be applied to the Note to
which that Eligible Equipment Lease relates.
Section 2.7. Use of Proceeds. The proceeds of the Advances from the Bank
shall be used to refinance existing Debt owed to First Bank National
Association.
<PAGE>
ARTICLE III.
CONDITIONS OF LENDING
Section 3.1. Conditions Precedent to Initial Advance. If the Bank
determines to make any Advances in its discretion, the Borrower shall deliver to
the Bank prior to that Advance:
(a) The Note for that Advance, properly completed, executed and delivered
on behalf of the Borrower.
(b) A security agreement (the "Security Agreement"), in a form acceptable
to the Bank properly executed and delivered on behalf of the Borrower,
granting to the Bank a security interest in all of the Eligible
Equipment Leases which are part of the Borrowing Base for that
Advance, the inventory subject to such Eligible Equipment Leases and
other property described therein as security for the performance of
the Borrower's obligations under this Agreement and the Notes,
together with any UCC-1 Financing Statement or other document deemed
necessary or desirable by the Bank to perfect the security interest
granted by the Security Agreement.
(c) A certified copy of the resolutions of the Board of Directors of the
Borrower, approving the execution and delivery of the Loan Documents
to which it is a party and approving all other matters contemplated by
this Agreement.
(d) A certificate by the Secretary or any Assistant Secretary of the
Borrower certifying the names of the officer or officers of the
Borrower authorized to sign the Loan Documents to which it is a party,
together with a sample of the true signature of such officer.
(e) Favorable opinion of counsel to the Borrower and the Guarantor in a
form and as to such matters as the Bank may request.
(f) A guaranty (the "Guaranty") of Sunrise Resources, Inc. (the
"Guarantor"), in a form satisfactory to the Bank, securing the
Borrower's obligations under this Agreement and the Notes.
<PAGE>
Section 3.2. Conditions Precedent to Each Advance. If the Bank determines
to make any Advances in its discretion, each Advance (including the initial
Advance) shall be subject to the further conditions precedent, that on the date
of such Advance:
(a) The representations and warranties contained in Section 4.1 of this
Agreement are correct on and as of the date of such Advance as though
made on such date; and
(b) No event has occurred and is continuing, or will result from such
Advance, which constitutes an Event of Default or would constitute an
Event of Default but for the requirement that notice be given or time
elapse or both.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
Section 4.1. Representations and Warranties of the Borrower. To induce the
Bank to make Advances, the Borrower represents and warrants as follows:
(a) Existence of Borrower. The Borrower is a corporation duly
incorporated, validly existing and in good standing under the laws of
the state indicated at the beginning of this Agreement.
(b) Authority to Execute. The execution, delivery and performance by the
Borrower of the Loan Documents to which it is a party are within the
Borrower's corporate powers, have been duly authorized by all
necessary corporate action, do not and will not conflict with any
provision of law or of the charter or bylaws of the Borrower or of any
agreement or contractual restriction binding upon or affecting the
Borrower or any of its property, and need no further shareholder or
creditor consent.
(c) Binding Obligation. This Agreement is, and the other Loan Documents
when delivered hereunder will be, legal, valid and binding obligations
of the Loan Parties enforceable against such Persons in accordance
with their respective terms.
(d) Governmental Approval. No consent of, or filing with, any governmental
authority is required on the part of any Loan Party in connection with
the execution, delivery or performance of any Loan Documents, except
for Uniform Commercial Code financing statements required to be filed
to perfect the security interests granted under the Security
Agreement.
<PAGE>
(e) Financial Statements. The audited financial statements of the Borrower
as of March 31, 1996 and the unaudited financial statements as of
December 31, 1996, copies of which have been furnished to the Bank,
have been prepared in conformity with generally accepted accounting
principles consistently applied and present fairly the financial
condition of the Borrower as of such dates, and the results of the
operations of the Borrower for the financial periods then ended, and
since such dates, there has been no materially adverse change in such
financial condition.
(f) Litigation. Except as listed in Schedule 4.1(f), no litigation or
governmental proceeding is pending or threatened against the Borrower
which may have a materially adverse effect on the financial condition
or operations of the Borrower.
(g) Title to Assets. The Borrower has good and marketable title to all
assets used in connection with its trades or businesses, and none of
such assets is subject to any mortgage, pledge, lien, security
interest or encumbrance of any kind, except for current taxes not
delinquent, and except as has been disclosed in writing to the Bank
contemporaneously with this Agreement.
(h) Taxes. The Borrower has filed all federal and state income and excess
profits tax returns which are required to be filed, and has paid all
taxes shown on such returns to be due and all other tax assessments
received by it to the extent that such assessments have become due.
(i) ERISA. No plan (as that term is defined in the Employee Retirement
Income Security Act of 1974 ("ERISA")) of the Borrower (a "Plan")
which is subject to Part 3 of Subtitle B of Title 1 of ERISA had an
accumulated funding deficiency (as such term is defined in ERISA) as
of the last day of the most recent fiscal year of such Plan ended
prior to the date hereof, or would have had such an accumulated
funding deficiency on such date if such year were the first year of
such Plan, and no material liability to the Pension Benefit Guaranty
Corporation has been, or is expected by the Borrower to be, incurred
with respect to any such Plan. No Reportable Event (as defined in
ERISA) has occurred and is continuing in respect to any such Plan.
(j) Defaults. The Borrower is not in default in the payment of principal
or interest on any indebtedness for borrowed money and is not in
default under any instrument or agreement under or subject to which
any indebtedness for borrowed money has been issued, and no event has
occurred and is continuing which, with or without the lapse of time or
the giving of notice, or both, constitutes or would constitute an
event of default under any such instrument or agreement or an Event of
Default hereunder.
(k) Subsidiaries. The Borrower has no Subsidiaries other than Sunrise
Funding Corporation I, a Minnesota corporation.
<PAGE>
(l) Patents, Trademarks, Etc. The Borrower has good and marketable title
to all patents, trademarks, processes, copyrights, franchises and
licenses title to which is necessary for the operation of the
Borrower's businesses.
(m) Use of Proceeds For Securities Transactions. No proceeds of any
Advance will be used to acquire any security in any transaction which
is subject to Sections 13 and 14 of the Securities Exchange Act of
1934.
(n) Regulation U. The Borrower is not engaged in the business of extending
credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation U issued by the Board of Governors of the
Federal Reserve System), and no proceeds of any Advance will be used
to purchase or carry any margin stock or to extend credit to others
for the purpose of purchasing or carrying any margin stock.
ARTICLE V.
COVENANTS OF THE BORROWER
Section 5.1 Affirmative Covenants. So long as any Note shall remain unpaid, or,
if no Note remains unpaid, until the Termination Date, the Borrower will, unless
the Bank shall give its prior written consent:
(a) Financial Reporting. Furnish to the Bank: (i) as soon as available and
in any event within 45 days after the end of each quarter of each
fiscal year of the Borrower, balance sheets of the Borrower as of the
end of such quarter and statements of income and retained earnings of
the Borrower for the period commencing at the end of the previous
fiscal year and ending with the end of such quarter, certified by the
chief financial officer of the Borrower; (ii) as soon as available and
in any event within 90 days after the end of each fiscal year of the
Borrower, (A) a copy of the Form 10-K for such year for the Borrower,
containing financial statements for such year certified in a manner
acceptable to the Bank by independent public accountants acceptable to
the Bank and (B) if available, a budget and projections prepared by
the Borrower in a form acceptable to the Bank for the following fiscal
year; (iii) promptly upon the sending or filing thereof copies of all
public reports issued by the Borrower to any of its security holders,
to the Securities and Exchange Commission or to any national
securities exchange; (iv) promptly upon the filing or receiving
thereof, copies of all reports which the Borrower files under ERISA or
which the Borrower receives from the Pension Benefit Guaranty
Corporation if such report shows any material violation or potential
violation by the Borrower of its obligations under ERISA; (v) such
other information concerning the conditions or operations, financial
or otherwise, of the Borrower as the Bank from time to time may
reasonably request; (vi) within 30 days after the end of each month, a
Borrowing Base Certificate (in the form of Exhibit C) for each Note, a
Cash Settlement Certificate (in the form of Exhibit D) and a payments
aging on all Eligible Equipment Leases.
<PAGE>
(b) Visitation Rights. At any reasonable time and from time to time,
permit the Bank or any agents or representatives thereof, to examine
and make copies of and abstracts from the records and books of account
of, and visit the properties of, the Borrower, and to discuss the
affairs, finances and accounts of the Borrower with any of its
officers or directors. The Borrower will reimburse the Bank for its
reasonable costs and expenses of conducting such periodic
examinations, provided that, in the absence of an Event of Default,
the Borrower will be required to compensate the Bank for the costs of
no more than two examinations at a cost of $500.00 each in any
calendar year.
(c) Notification of Default, Etc. Notify the Bank as promptly as
practicable (but in any event not later than 5 Business Days) after
the Borrower obtains knowledge of: (i) the occurrence of any event
which constitutes an Event of Default or which would constitute an
Event of Default with the passage of time or the giving of notice or
both; or (ii) the commencement of any litigation or governmental
proceedings of any type which could materially adversely affect the
financial condition or business operations of the Borrower.
(d) Compliance Certificate. At the time each quarterly financial statement
is required to be provided to Bank under this Agreement, the Borrower
will provide to Bank a certificate of the chief financial officer of
the Borrower substantially in the form of Exhibit B attached hereto
(appropriately completed). If that certificate shows that an Event of
Default or any event which would constitute an Event of Default with
the passage of time or the giving of notice or both, has occurred, the
certificate shall state in reasonable detail the circumstances
surrounding such event and action proposed by the Borrower to cure
such event.
(e) Keeping of Financial Records and Books of Account. Maintain proper
financial records in accordance with generally accepted accounting
principles consistently applied which fully and correctly reflect all
financial transactions and all assets and liabilities of the Borrower.
(f) Tangible Net Worth. Maintain at all times Tangible Net Worth of not
less than $25,000,000.00 plus 75% of positive net income earned by the
Borrower and the Guarantor in each fiscal year starting after March
31, 1995, calculated on a cumulative basis.
<PAGE>
(g) Debt Ratio. Maintain at all times a ratio of Senior Recourse Debt to
Tangible Net Worth of not more than 4.50 to 1.
(h) Cash Expense Coverage Ratio. Maintain as of the end of each fiscal
quarter a Cash Expense Coverage Ratio of not less than 1.25 to 1 as
calculated on a rolling four-quarter basis.
(i) Maintenance of Insurance. Maintain such insurance with reputable
insurance carriers as is normally carried by companies engaged in
similar businesses and owning similar property, and name the Bank as
loss payee on all policies insuring personal property in which the
Bank has a security interest and provide the Bank with certificates of
insurance evidencing its status as a loss payee. The loss payee
endorsement shall provide for payment to the Bank notwithstanding any
acts or omissions of the Borrower and shall require notice to the Bank
30 days prior to the expiration or cancellation of the insurance.
(j) Maintenance of Properties, Etc. Maintain and preserve all of its
properties, necessary or useful in the proper conduct of its business,
in good working order and condition, ordinary wear and tear excepted.
(k) Payment of Taxes. Pay all taxes, assessments and governmental charges
of any kind payable by it as such taxes, assessments and charges
become due and before any penalty shall be imposed, except as the
Borrower shall contest in good faith and by appropriate proceedings
providing such reserves as are required by generally accepted
accounting principles.
(l) Compliance with ERISA. Cause each Plan to comply and be administered
in accordance with those provisions of ERISA which are applicable to
such Plan.
(m) Preservation of Corporate Existence, Etc. Preserve and maintain its
corporate existence, rights, franchises and privileges in the
jurisdiction of its incorporation, and qualify and remain qualified,
as a foreign corporation in each jurisdiction in which such
qualification is necessary or desirable in view of its business and
operations or the ownership of its properties.
(n) UCC Filing Event. Within five Business Days after the Bank notifies
the Borrower of a UCC Filing Event, the Borrower will provide to the
Bank executed and recordable UCC-3 assignments (or equivalent
documents under applicable law) assigning to the Bank all of the UCC-1
Financing Statements or equivalent documents held by the Borrower with
respect to Eligible Equipment Leases as described in Section
1.1(g)(vii).
<PAGE>
Section 5.2. Negative Covenants. So long as any Note shall remain unpaid,
or, if no Note remains unpaid, until the Termination Date, the Borrower will
not, unless the Bank shall give its prior written consent:
(a) Liens. Create or suffer to exist any mortgage, pledge, lien, security
interest or other encumbrance with respect to any Collateral under the
Security Agreement except Permitted Encumbrances.
(b) Merger, Etc. Merge or consolidate with any other Person; sell, divest,
transfer, convey, lease or otherwise dispose of (whether in one
transaction or in a series of transactions) all or a substantial
portion of its assets (whether now owned or hereafter acquired) to any
other Person.
(c) Transactions with Affiliates. Engage in any transaction (including,
without limitation, loans or financial accommodations of any kind)
with any Affiliate provided that such transactions are permitted if
they are on terms no less favorable to the Borrower than would be
obtainable if no such relationship existed.
(d) Change in Nature of Business. Make any material change in the nature
of the business of the Borrower, taken as a whole, as carried on at
the date hereof, or sell or divest any line or division of its
business.
ARTICLE VI.
DEFAULT
Section 6.1. Events of Default. "Events of Default" in this Agreement means
any of the following events:
(a) Failure of the Borrower to pay the principal of any Note when due or,
if payable on demand, upon demand, provided that the Borrower may use
a five day grace period with respect to such a failure not more
frequently than twice in each calendar year;
<PAGE>
(b) Failure of the Borrower to pay any interest or fees required to be
paid hereunder or under any Note when due, provided that the Borrower
may use a five day grace period with respect to such a failure not
more frequently than twice in each calendar year;
(c) Any representation or warranty made by, or on behalf of, any Loan
Party in, or pursuant to, any Loan Document shall prove to have been
incorrect in any material respect when made;
(d) Default in performance of any other covenant or agreement of any Loan
Party in, or pursuant to, any Loan Document and continuance of such
default or breach for a period of 30 days after written notice thereof
to such Person by the Bank;
(e) Any Loan Party shall generally not pay its or his debts as such debts
become due, or shall admit in writing its or his inability to pay its
or his debts generally, or shall make a general assignment for the
benefit of creditors; or any proceeding shall be instituted by or
against any Loan Party seeking to adjudicate it or him a bankrupt or
insolvent, or seeking liquidation, winding up, reorganization,
arrangement, adjustment, custodianship, protection, relief, or
composition of it or him or its or his debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors, or
seeking the entry of an order for relief, or the appointment of a
receiver, custodian, trustee, or other similar official for it or him
or for any substantial part of its or his property; or any Loan Party
shall take any corporate action to authorize any of the actions set
forth above in this subsection; and in the case of a proceeding of the
type described in this paragraph commenced against any Loan Party,
that proceeding shall not be dismissed within 60 days or that Loan
Party shall consent to that proceeding;
(f) The Borrower shall fail to pay any Debt (but excluding Debt evidenced
by any Note) of the Borrower or any interest or premium thereon, when
due (whether by scheduled maturity, required prepayment, acceleration,
demand or otherwise) and such failure shall continue after the
applicable grace period, if any, specified in the agreement or
instrument relating to such Debt; or any other default under any
agreement or instrument relating to any such Debt, or any other event,
shall occur and shall continue after the applicable grace period, if
any, specified in such agreement or instrument, if the effect of such
default or event is to cause the automatic acceleration of the
maturity of such Debt; or any such Debt shall be declared to be due
and payable, or required to be prepaid (other than by a regularly
scheduled required prepayment), prior to the stated maturity thereof;
<PAGE>
(g) Any guaranty or any third party security interest securing any
indebtedness of the Borrower to the Bank shall be repudiated or
revoked, or purported to be repudiated or revoked;
(h) The entry against any Loan Party of a final judgment, decree or order
for the payment of money in excess of $100,000.00 and the continuance
of such judgment, decree or order unsatisfied for a period of 30 days
without a stay of execution;
(i) Any Reportable Event (as defined in ERISA) shall have occurred and
continue for 30 days; or any Plan shall have been terminated by the
Borrower not in compliance with ERISA, or a trustee shall have been
appointed by a court to administer any Plan, or the Pension Benefit
Guaranty Corporation shall have instituted proceedings to terminate
any Plan or to appoint a trustee to administer any Plan.
Section 6.2 Rights and Remedies. If any Event of Default shall occur and be
continuing, the Bank may exercise any or all of the following rights and
remedies:
(a) Declare the Notes, all interest thereon, and all other obligations
under, or pursuant to, any Loan Document to be immediately due and
payable, and upon such declaration such Notes, interest and other
obligations shall immediately be due and payable, without presentment,
demand, protest or any notice of any kind, all of which are expressly
waived;
(b) Exercise any right or remedy under the Security Agreement, or any
other right or remedy of a secured party under the Uniform Commercial
Code as in effect in Minnesota;
(c) Exercise any other right or remedy available to the Bank at law or in
equity.
<PAGE>
ARTICLE VII.
MISCELLANEOUS
Section 7.1. No Waiver; Cumulative Remedies. No failure or delay on the
part of the Bank in exercising any right or remedy under, or pursuant to, any
Loan Document shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right, remedy or power preclude other or further exercise
thereof, or the exercise of any other right, remedy or power. The remedies in
the Loan Documents are cumulative and are not exclusive of any remedies provided
by law.
Section 7.2. Amendments and Waivers. No amendment or waiver of any
provision of any Loan Document shall be effective unless such amendment or
waiver is in writing and is signed by the Bank, and such amendment or waiver
shall be effective only in the specific instance and for the specific purpose
for which it was given.
Section 7.3. Notices, Etc. All notices and other communications provided
for hereunder shall be in writing (including telecopier communication) and
mailed or telecopied or delivered, if to the Borrower, at its address stated in
the preamble hereof, Attention: R. Bradley Pike; and if to the Bank, at its
address stated in the preamble hereof, Attention: Thomas M. Tracy; or, as to
each party, at such other address as shall be designated by such party in a
written notice to the other party. All such notices and communications shall,
when mailed or telecopied, be effective when deposited in the mails or
transmitted by telecopier, respectively, addressed as aforesaid, except that
notices to the Bank pursuant to the provisions of Article II shall not be
effective until received by the Bank.
Section 7.4. Costs and Expenses. The Borrower agrees to pay on demand all
costs and expenses of the Bank in connection with the preparation of the Loan
Documents, including reasonable attorneys fees and legal expenses, as well as
all costs and expenses of the Bank, including reasonable attorneys fees and
expenses, in connection with the administration and enforcement of the Loan
Documents (whether suit is commenced or not).
Section 7.5. Right of Set-off. Upon the occurrence and during the
continuance of any Event of Default the Bank is hereby authorized at any time
and from time to time, to the fullest extent permitted by law, to set off and
apply any and all deposits (general or special, time or demand, provisional or
final) at any time held and other indebtedness at any time owing by the Bank to
or for the credit or the account of the Borrower or the Guarantor against any
and all of the obligations of the Borrower now or hereafter existing under any
Loan Document, irrespective of whether or not the Bank shall have made any
demand under any Loan Document and although such obligations may be unmatured.
The Bank agrees promptly to notify the Borrower after any such set-off and
application, provided that the failure to give such notice shall not affect the
validity of such set-off and application. The rights of the Bank under this
Section are in addition to other rights and remedies (including, without
limitation, other rights of set-off) which the Bank may have.
<PAGE>
Section 7.6. Governing Law. All Loan Documents shall be governed by the
laws of the State of Minnesota. Any term used in this Agreement and not
otherwise defined shall have the definition given that term in the Uniform
Commercial Code as in effect in the State of Minnesota from time to time. If any
term in this Agreement shall be held to be illegal or unenforceable, the
remaining portions of this Agreement shall not be affected, and this Agreement
shall be construed and enforced as if this Agreement did not contain the term
held to be illegal or unenforceable. The Borrower hereby irrevocably submits to
the jurisdiction of the Minnesota District Court, Fourth District, and the
Federal District Court, District of Minnesota, Fourth Division, over any action
or proceeding arising out of or relating to this Agreement and agrees that all
claims in respect of such action or proceeding may be heard and determined in
any such court.
Section 7.7. Binding Effect; Assignment. All Loan Documents shall be
binding upon and inure to the benefit of the Loan Parties and the Bank and their
respective successors and assigns. No Loan Party shall have the right to assign
its rights or interest under any such agreement without the prior written
consent of the Bank.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers as of the date first above written.
Sunrise Leasing Corporation
By /s/ R. Bradley Pike
Its Vice President
National City Bank of Minneapolis
By /s/ Thomas M. Tracy
Its Vice President
<PAGE>
A-2
EXHIBIT A
PROMISSORY NOTE
$____________ Dated: ____________, 199___
For value received, Sunrise Leasing Corporation , a Minnesota corporation
(the "Borrower") promises to pay to the order of National City Bank of
Minneapolis (the "Bank"), at its offices in Minneapolis, Minnesota, in lawful
money of the United States of America, the principal amount of
______________________________________________________ Dollars
($____________________) together with interest on any and all principal amounts
remaining unpaid hereon from the date of this Note until said principal amounts
are fully paid at a fixed annual rate equal to ____%.
Principal and interest shall be paid in monthly installments on the last
day of each month, starting on the last day of the first full month after the
date hereof and ending on the last day of the 48th full month after the date
hereof. Each monthly installment shall be equal to the aggregate amount of all
payments due during that month under each Eligible Equipment Lease then included
in the Borrowing Base for this Note under the Loan Agreement; provided, however,
that the last such installment shall be in the amount necessary to repay in full
the unpaid principal amount hereof together with all accrued but unpaid
interest. Each installment shall be applied first to interest then due and then
to principal. The monthly installment due under this Note shall be calculated
each month without regard to whether the Borrower actually receives all payments
due under each Eligible Equipment Lease during that month.
<PAGE>
This Note is one of the Notes referred to in, and is entitled to the
benefits of, the Discretionary Revolving Credit Agreement dated as of May 15,
1997 (the "Loan Agreement") between the Borrower and the Bank, which Loan
Agreement, among other things, contains provisions for the acceleration of the
maturity of this Note upon the happening of certain stated events and also for
mandatory and voluntary prepayments of the principal amount due under this Note
upon stated terms and conditions.
Sunrise Leasing Corporation
By________________________________________
Its_____________________________________
<PAGE>
B-1
EXHIBIT B
FORM OF COMPLIANCE CERTIFICATE
I, the _________________________ of Sunrise Leasing Corporation (the
"Borrower"), hereby provide this Compliance Certificate in accordance with
Section 5.1(d) of the Discretionary Revolving Credit Agreement (the "Agreement")
dated as of May 15, 1997 between the Borrower and National City Bank of
Minneapolis.
I certify that as of the date hereof:
(1) The representations and warranties of the Borrower contained in
Article IV of the Agreement are correct as though made on the date
hereof.
(2) No event has occurred and is continuing which constitutes an Event of
Default under the Agreement or would constitute an Event of Default
but for the requirement that notice be given or time elapse or both.
I further certify that as of _____________________, 19__:
(1) Tangible Net Worth as defined in the Agreement was $______________
compared to a minimum in the Agreement of $25,000,000.00 plus 75% of
positive net income earned by the Borrower in each fiscal year
starting after March 31, 1995, calculated on a cumulative basis.
(2) The ratio of Senior Recourse Debt to Tangible Net Worth as defined in
the Agreement was _______________________ compared to a maximum in the
Agreement of 4.50 to 1.
(3) The Cash Expense Coverage Ratio as defined in the Agreement was ____
to 1 compared to a minimum in the Agreement of 1.25 to 1.
Dated: _______________________________ _________________________________
Title: ___________________________
<PAGE>
C-1
EXHIBIT C
BORROWING BASE CERTIFICATE
For Note No. ___________________
(Or Proposed New Advance In the Principal Amount of $_________________)
A. Present Value of Eligible Equipment Leases Payments ________________
B. Residual Value of Eligible Equipment Leases ________________
C. Subtotal (A+B) ________________
D. Original Cost of Equipment ________________
E. Less Accumulated Depreciation ________________
F. Subtotal (D-E) (Net Book Value) ________________
G. Total Borrowing Base (Lesser of C or F) ________________
H. Note Balance (or Proposed Advance Amount) ________________
I Total (G-H) (Must be zero or positive at all times) ________________
Dated: _______________________________ _________________________________
Title: __________________________
<PAGE>
Exhibit D
Cash Settlement Certificate
Sunrise Leasing Corporation
Monthly Cash Settlement Certificate
For the Month Ending _____________
Dated _____________
I. Lease Receivables
a) Monthly payments paid by the lessees during the month:
__________________________
b) Monthly payments paid by SLC during the month:
______________________________
c) Total monthly payments due during the month on Eligible Equipment Leases:
________
II. Residuals
d) Proceeds from sale of equipment coming off lease during the month:
________________
e) Proceeds from insurance on equipment damaged during the
month:__________________
f) Residual amount of equipment subject to release during the
month:__________________
g) Total residual amount of equipment coming off lease during the
month:______________
III Case Settlement
h) Total cash due (c+d+e): _______________________________
i) Interest due on the Note: _______________________________
j) Principal payment on the Note (h minus i) _______________________________
k) Beginning principal balance _______________________________
l) Ending principal balance _______________________________
<PAGE>
Schedule 4.1(f)
List of Litigation
An arbitration claim was filed against Sunrise Resources, Inc. (the "Company")
by the former shareholders of The P.J. King Companies, Inc. (d/b/a International
Leasing Corporation) ("ILC") seeking rescission of the merger between the
Company and ILC or, in the alternative, for reformation of the merger agreement
to give such former ILC shareholders additional shares of Company Common Stock,
and attorneys' fees and costs, to compensate them for what they consider
inadequate disclosure regarding the Company. The arbitration hearing has been
completed, and the decision of the arbitrators is expected to be announced soon.
Following the merger, and prior to the arbitration hearing, the (merged) Company
transferred certain (merged) assets to the Borrower. In the event that the
arbitrator rescinds the merger transaction, a portion of the Borrower's assets
may have to be transferred to ILC.
SECURITY AGREEMENT
DATED: May 15, 1997
DEBTOR: SECURED PARTY:
Sunrise Leasing Corporation National City Bank of
5500 Wayzata Boulevard Minneapolis
Suite 725 651 Nicollet Mall
Golden Valley, MN 55416 Minneapolis, MN 55402-1611
1. Security Interest and Collateral. To secure the payment and performance
of each and every debt, liability and obligation of every type and description
which Debtor may now or at any time hereafter owe to Secured Party (whether such
debt, liability or obligation now exists or is hereafter created or incurred,
and whether it is or may be direct or indirect, due or to become due, absolute
or contingent, primary or secondary, liquidated or unliquidated, or joint,
several or joint and several; all such debts, liabilities and obligations
collectively referred to as the "Obligations"), Debtor hereby grants Secured
Party a security interest (the "Security Interest") in the following property
(the "Collateral"):
(a) INVENTORY:
The inventory of Debtor, whether now owned or hereafter acquired and
wherever located which is subject to the leases described on Exhibit A
attached hereto, as Exhibit A shall be supplemented or amended from time to
time;
(b) LEASES AND INSTALLMENT SALES CONTRACTS:
All leases and installment sales contracts of Debtor now or hereafter
included within the definition of "Eligible Equipment Lease" under the
Discretionary Revolving Credit Agreement (the "Loan Agreement") between
Debtor and Secured Party dated as of the date hereof as such Loan Agreement
may be amended from time to time;
<PAGE>
(c) GENERAL INTANGIBLES:
All general intangibles of Debtor, whether now owned or hereafter acquired,
arising out of or relating to any of the Collateral described in subsection
(a) or (b) above;
together with all substitutions and replacements for and products of any of the
foregoing property and together with proceeds of any and all of the foregoing
property and, in the case of all tangible Collateral, together with all
accessions and together with (i) all accessories, attachments, parts, equipment
and repairs now or hereafter attached or affixed to or used in connection with
any such goods, and (ii) all warehouse receipts, bills of lading and other
documents of title now or hereafter covering such goods.
2. Representations, Warranties and Agreements. Debtor represents, warrants
and agrees that:
(a) Debtor is a corporation.
(b) The Collateral will be used primarily for business purposes.
(c) Debtor's chief executive office is located at the address of Debtor shown
at the beginning of this Agreement.
3. Additional Representations, Warranties and Agreements. Debtor
represents, warrants and agrees that:
(a) Debtor has (or will have at the time Debtor acquires rights in Collateral
hereafter arising) absolute title to each item of Collateral free and clear
of all security interests, liens and encumbrances, except the Security
Interest and the rights of quiet enjoyment of lessees under leases
constituting Collateral, and will defend the Collateral against all claims
or demands of all persons other than Secured Party. Debtor will not sell or
otherwise dispose of the Collateral or any interest therein without the
prior written consent of Secured Party. This Agreement has been duly and
validly authorized by all necessary corporate action.
<PAGE>
(b) Debtor will not permit any tangible Collateral to be located in any state
(and, if county filing is required, in any county) in which a financing
statement covering such Collateral is required to be, but has not in fact
been, filed in order to perfect the Security Interest.
(c) Each right to payment and each instrument, document, chattel paper and
other agreement constituting or evidencing Collateral is (or will be when
arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, set-off or counterclaim (other than those arising in
the ordinary course of business) of the account debtor or other obligor
named therein or in Debtor's records pertaining thereto as being obligated
to pay such obligation. Debtor will neither agree to any material
modification or amendment nor agree to any cancellation (other then a
cancellation available as of right to a lessee under a lease constituting
Collateral) of any such obligation without Secured Party's prior written
consent, and will not subordinate any such right to claims of other
creditors of such account debtor or other obligor.
(d) Debtor will:
(i) keep, or cause lessees to keep, all tangible Collateral in good
repair, working order and condition, normal depreciation excepted,
and, from time to time, replace, or cause lessees to replace, any
worn, broken or defective parts thereof;
<PAGE>
(ii) promptly pay all taxes and other governmental charges levied or
assessed upon or against any Collateral or upon or against the
creation, perfection or continuance of the Security Interest;
(iii)keep all Collateral free and clear of all security interests, liens
and encumbrances except the Security Interest and the rights of quiet
enjoyment of lessees under leases constituting Collateral;
(iv) at all reasonable times, permit Secured Party or its representatives
to examine or inspect any Collateral, wherever located, and to
examine, inspect and copy Debtor's books and records pertaining to the
Collateral and its business and financial condition and to send and
discuss with account debtors and other obligors requests for
verifications of amounts owed to Debtor;
(v) keep accurate and complete records pertaining to the Collateral and
pertaining to Debtor's business and financial condition and submit to
Secured Party such periodic reports concerning the Collateral and
Debtor's business and financial condition as Secured Party may from
time to time reasonably request;
(vi) promptly notify Secured Party of any material loss of, or damage to,
any Collateral or of any adverse change, known to Debtor, in the
prospect of payment of any sums due on or under any instrument,
chattel paper, or account constituting Collateral;
(vii)if Secured Party at any time so requests (whether the request is made
before or after the occurrence of an Event of Default), promptly
deliver to Secured Party any instrument, document or chattel paper
constituting Collateral, duly endorsed or assigned by Debtor;
(viii) at all times keep, or cause lessees to keep, all tangible Collateral
insured against risks of fire (including so-called extended coverage),
theft, collision (in case of Collateral consisting of motor vehicles)
and such other risks and in such amounts as Secured Party may
reasonably request with any loss payable to Secured Party to the
extent of its interest;
<PAGE>
(ix) from time to time execute such financing statements as Secured Party
may reasonably require in order to perfect the Security Interest and,
if any Collateral consists of an asset subject to a certificate of
title, execute such documents as may be required to have the Security
Interest properly noted on a certificate of title;
(x) pay when due or reimburse Secured Party on demand for all costs of
collection of any of the Obligations and all other out-of-pocket
expenses (including in each case all reasonable attorneys' fees)
incurred by Secured Party in connection with the creation, perfection,
satisfaction, protection, defense or enforcement of the Security
Interest or the creation, continuance, protection, defense or
enforcement of this Agreement or any or all of the Obligations,
including expenses incurred in any litigation or bankruptcy or
insolvency proceedings;
(xi) execute, deliver or endorse any and all instruments, documents,
assignments, security agreements and other agreements and writings
which Secured Party may at any time reasonably request in order to
secure, protect, perfect or enforce the Security Interest and Secured
Party's rights under this Agreement;
(xii)not use or keep any Collateral, or permit it to be used or kept, for
any unlawful purpose or in violation of any federal, state or local
law, statute or ordinance; and
(xiii) not permit any tangible Collateral to become part of or to be
affixed to any real property without first assuring to the reasonable
satisfaction of Secured Party that the Security Interest will be prior
and senior to any interest, or lien then held or thereafter acquired
by any mortgagee of such real property or the owner or purchaser of
any interest therein.
<PAGE>
If Debtor at any time fails to perform or observe any agreement contained in
this Section 3(d), and if such failure shall continue for a period of ten
calendar days after Secured Party gives Debtor written notice thereof (or, in
the case of the agreements contained in clauses (viii) and (ix) of this Section
3(d), immediately upon the occurrence of such failure, without notice or lapse
of time), Secured Party may (but need not) perform or observe such agreement on
behalf and in the name, place and stead of Debtor (or, at Secured Party's
Option, in Secured Party's own name) and may (but need not) take any and all
other actions which Secured Party may reasonably deem necessary to cure or
correct such failure (including, without limitation, the payment of taxes, the
satisfaction of security interests, liens, or encumbrances, the performance of
obligations under contracts or agreements with account debtors or other
obligors, the procurement and maintenance of insurance, the execution of
financing statements, the endorsement of instruments, and the procurement of
repairs, transportation or insurance); and, except to the extent that the effect
of such payment would be to render any loan or forbearance of money usurious or
otherwise illegal under any applicable law, Debtor shall thereupon pay Secured
Party on demand the amount of all moneys expended and all costs and expenses
(including reasonable attorneys' fees) incurred by Secured Party in connection
with or as a result of Secured Party's performing or observing such agreements
or taking such actions, together with interest thereon from the date expended or
incurred by Secured Party at the highest rate then applicable to any of the
obligations. To facilitate the performance or observance by Secured Party of
such agreements of Debtor, Debtor hereby irrevocably appoints (which appointment
is coupled with an interest) Secured Party, or its delegate, as the
attorney-in-fact of Debtor with the right (but not the duty) from time to time
to create, prepare, complete, execute, deliver, endorse or file, in the name and
on behalf of Debtor, any and all instruments, documents, financing statements,
applications for insurance and other agreements and writings required to be
obtained, executed, delivered or endorsed by Debtor under this Section 3 and
Section 4.
<PAGE>
4. Lock Box, Collateral Account. If Secured Party so requests at any time
after the occurrence and during the continuance of an Event of Default, Debtor
will direct the obligor on any Collateral to make payments due under the
relevant Collateral directly to a special lockbox to be under the control of
Secured Party. Prior to such a request by Secured Party, Debtor will maintain
the lockbox arrangements required under the terms of the Loan Agreement. Debtor
hereby authorizes and directs Secured Party to deposit into a special collateral
account to be established and maintained with Secured Party all checks, drafts
and cash payments, received in the lockbox, if any, established under this
Section. All deposits in said collateral account shall constitute proceeds of
Collateral and shall not constitute payment of any Obligations. Secured Party
shall either (i) apply finally collected funds on deposit in said collateral
account to the payment of the Obligations in such order of application as
Secured Party may determine, or (ii) permit Debtor to withdraw all or any part
of the balance on deposit in said collateral account. Debtor agrees that it will
promptly deposit into the collateral account, if any, established under this
Section or, if no collateral account is established under this Agreement, into
the lockbox established under the Loan Agreement, all payments on Collateral
received by it. All such payments shall be delivered to Secured Party in the
form received (except for Debtor's endorsement where necessary). Until so
deposited, all payments on Collateral received by Debtor shall be held in trust
by Debtor for and as the property of Secured Party and shall not be commingled
with any funds or property of Debtor.
5. Account Verification and Collection Rights of Secured Party. Secured
Party shall have the right to verify any Collateral in the name of Debtor or in
its own name; and Debtor, whenever requested, shall furnish Secured Party with
duplicate statements of accounts with respect to Collateral, which statements
may be mailed or delivered by Secured Party for that purpose. Notwithstanding
Secured Party's rights under Section 4 with respect to any and all debt
instruments, chattel papers, accounts, and other rights to payment constituting
Collateral (including proceeds), Secured Party may at any time after the
occurrence of an Event of Default notify any account debtor, or any other person
obligated to pay any amount due, that such chattel paper, account, or other
right to payment has been assigned or transferred to Secured Party for security
and shall be paid directly to Secured Party. If Secured Party so requests at any
such time, Debtor will so notify obligors under Collateral in writing and will
indicate on all invoices to such obligors that the amount due is payable
directly to Secured Party. At any time after Secured Party or Debtor gives such
notice to an obligor, Secured Party may (but need not), in its own name or in
Debtor's name, demand, sue for, collect or receive any money or property at any
time payable or receivable on account of, or securing, any such chattel paper,
account, or other right to payment, or grant any extension to, make any
compromise or settlement with or otherwise agree to waive, modify, amend or
change the obligations (including collateral obligations) of any such obligor.
<PAGE>
6. Assignment of Insurance. Debtor hereby assigns to Secured Party, as
additional security for the payment of the Obligations, any and all moneys
(including but not limited to proceeds of insurance and refunds of unearned
premiums) due or to become due under and all other rights of Debtor under or
with respect to, any and all policies of insurance covering the Collateral, and
Debtor hereby directs the issuer of any such policy to pay any such moneys
directly to Secured Party. In a case where a lease constituting Collateral
grants the lessee the right to apply insurance proceeds to the repair or
replacement of equipment, insurance proceeds may be paid to the lessee for such
purpose so long as the lease is not in default. Both before and after the
occurrence of an Event of Default, Secured Party may (but need not), in its own
name or in Debtor's name, execute and deliver proofs of claim, receive all such
moneys, endorse checks and other instruments representing payment of such
moneys, and adjust, litigate, compromise or release any claim against the issuer
of such policy.
7. Events of Default. An Event of Default under the Loan Agreement shall be
an Event of Default hereunder.
8. Remedies upon Event of Default. Upon and during the continuance of an
Event of Default under Section 7, Secured Party may exercise any one or more of
the following rights and remedies: (i) declare all unmatured Obligations to be
immediately due and payable, and the same shall thereupon be immediately due and
payable, without presentment of other notice or demand; (ii) exercise and
enforce any or all rights and remedies available upon default to a secured party
under the Uniform Commercial Code, including but not limited to the right to
take possession of any Collateral, proceeding without judicial process or by
judicial process (without a prior hearing or notice thereof, which Debtor hereby
expressly waives), and the right to sell, lease or otherwise dispose of any or
all of the Collateral, and in connection therewith, Secured Party may require
Debtor to make the Collateral available to Secured Party at a place to be
designated by Secured Party which is reasonably convenient to both parties, and
if notice to Debtor of any intended disposition of Collateral or any other
intended action is required by law in a particular instance, such notice shall
be deemed commercially reasonable if given (in the manner specified in Section
10) at least 10 calendar days prior to the date of intended disposition or other
action; (iii) exercise or enforce any or all other rights or remedies available
to Secured Party by law or agreement against the Collateral, against Debtor or
against any other person or property. In exercising any right under this
Section, Secured Party will recognize the rights of quiet enjoyment of lessees
under leases constituting Collateral.
<PAGE>
9. Other Personal Property. Unless at the time Secured Party takes
possession of any tangible Collateral, or within seven days thereafter, Debtor
gives written notice to Secured Party of the existence of any goods, papers or
other property of Debtor, not affixed to or constituting a part of such
Collateral, but which are located or found upon or within such Collateral,
describing such property, Secured Party shall not be responsible or liable to
Debtor for any action taken or omitted by or on behalf of Secured Party with
respect to such property without actual knowledge of the existence of any such
property or without actual knowledge that it was located or to be found upon or
within such Collateral.
10. Miscellaneous. This Agreement does not contemplate a sale of accounts,
or chattel paper. This Agreement can be waived, modified, amended, terminated or
discharged and the Security Interest can be released, only explicitly in a
writing signed by Secured Party. A waiver signed by Secured Party shall be
effective only in a specific instance and for the specific purpose given. Mere
delay or failure to act shall not preclude the exercise or enforcement of any of
Secured Party's rights or remedies. All rights and remedies of Secured Party
shall be cumulative and may be exercised singularly or concurrently, at Secured
Party's option, and the exercise or enforcement of any one such right or remedy
shall neither be a condition to nor bar the exercise or enforcement of any
other. All notices to be given to Debtor shall be deemed sufficiently given if
delivered or mailed by registered or certified mail, postage prepaid, to Debtor
at its address set forth above or at the most recent address shown on Secured
Party's records. Secured Party's duty of care with respect to Collateral in its
possession (as imposed by law) shall be deemed fulfilled if Secured Party
exercises reasonable care in physically safekeeping such Collateral or, in the
case of Collateral in the custody or possession of a bailee or other third
person, exercises reasonable care in the selection of the bailee or other third
person, and Secured Party need not otherwise preserve, protect, insure or care
for any Collateral. Secured Party shall not be obligated to preserve any rights
Debtor may have against prior parties, to realize on the Collateral at all or in
any particular manner or order, or to apply any cash proceeds of Collateral in
<PAGE>
any particular order of application. This Agreement shall be binding upon and
inure to the benefit of Debtor and Secured Party and their respective heirs,
representatives, successors and assigns and shall take effect when signed by
Debtor and delivered to Secured Party, and Debtor waives notice of Secured
Party's acceptance hereof. Secured Party may execute this Agreement if
appropriate for the purpose of filing, but the failure of Secured Party to
execute this Agreement shall not affect or impair the validity or effectiveness
of this Agreement. A carbon, photographic or other reproduction of this
Agreement or of any financing statement signed by Debtor shall have the same
force and effects as the original for all purposes of a financing statement.
This Agreement shall be governed by the internal laws of the State of Minnesota.
If any provision or application of this Agreement is held unlawful or
unenforceable in any respect, such illegality or unenforceability shall not
affect other provisions or applications which can be given effect and this
Agreement shall be construed as if the unlawful or unenforceable provision or
application had never been contained herein or prescribed hereby. All
representations and warranties contained in this Agreement shall survive the
execution, delivery and performance of this Agreement and the creation and
payment of the Obligations. Debtor hereby irrevocably submits to the
jurisdiction of the Minnesota District Court, Fourth District, and the Federal
District Court, District of Minnesota, Fourth Division, over any action or
proceeding arising out of or relating to this Agreement and agrees that all
claims in respect of such action or proceeding may be heard and determined in
any such court.
National City Bank of Sunrise Leasing Corporation
Minneapolis
By /s/ Thomas M. Tracy By /s/ R. Bradley Pike
Its Vice President Its Vice President
<PAGE>
Exhibit A
Description of Inventory Collateral
PROMISSORY NOTE
$5,498,960.57 Dated as of May 15, 1997
For value received, Sunrise Leasing Corporation , a Minnesota corporation
(the "Borrower") promises to pay to the order of National City Bank of
Minneapolis (the "Bank"), at its offices in Minneapolis, Minnesota, in lawful
money of the United States of America, the principal amount of Five Million Four
Hundred Ninety-Eight Thousand Nine Hundred Sixty and 57/100 Dollars
($5,498,960.57) together with interest on any and all principal amounts
remaining unpaid hereon from the date of this Note until said principal amounts
are fully paid at a fixed annual rate equal to 9.53%.
Principal and interest shall be paid in monthly installments on the last
day of each month, starting on the last day of the first full month after the
date hereof and ending on the last day of the 48th full month after the date
hereof. Each monthly installment shall be equal to the aggregate amount of all
payments due during that month under each Eligible Equipment Lease then included
in the Borrowing Base for this Note under the Loan Agreement; provided, however,
that the last such installment shall be in the amount necessary to repay in full
the unpaid principal amount hereof together with all accrued but unpaid
interest. Each installment shall be applied first to interest then due and then
to principal. The monthly installment due under this Note shall be calculated
each month without regard to whether the Borrower actually receives all payments
due under each Eligible Equipment Lease during that month.
<PAGE>
This Note is one of the Notes referred to in, and is entitled to the
benefits of, the Discretionary Revolving Credit Agreement dated as of May 15,
1997 (the "Loan Agreement") between the Borrower and the Bank, which Loan
Agreement, among other things, contains provisions for the acceleration of the
maturity of this Note upon the happening of certain stated events and also for
mandatory and voluntary prepayments of the principal amount due under this Note
upon stated terms and conditions.
Sunrise Leasing Corporation
By /s/ R. Bradley Pike
Its Vice President
Exhibit 11.1
SUNRISE RESOURCES, INC.
PER SHARE EARNINGS (LOSS) COMPUTATIONS
<TABLE>
<CAPTION>
Years Ended March 31,
-------------------------------------------------
1997 1996 1995
------------- ------------ ---------------
<S> <C> <C> <C>
Primary Earnings (Loss) Per Share
Weighted average number of common shares
outstanding 7,189,000 7,189,000 4,558,000
Common share equivalents from assumed
exercise of options and warrants -- -- --
Total shares 7,189,000 7,189,000 4,558,000
============= ============== ==============
Net income (loss) $(2,547,000) $ 2,503,000 $ (4,252,000)
============= ============== =============
Net income (loss) per common and common
equivalent share $ (0.35) $ 0.35 $ (0.93)
============= ============== ==============
Fully Dilutive Earnings (Loss) Per Share
Weighted average number of common shares
outstanding 7,189,000 7,189,000 4,558,000
Common share equivalents from assumed
exercise of options and warrants -- -- --
Total shares 7,189,000 7,189,000 4,558,000
============= ============== ==============
Net income (loss) $(2,547,000) $ 2,503,000 $ (4,252,000)
============= ============== =============
Net income (loss) per common and common
equivalent share $ (0.35) $ 0.35 $ (0.93)
============= ============== ==============
</TABLE>
Net income per common and common equivalent share is computed using the
weighted average number of shares outstanding during each period.
The impact of common equivalent shares has been excluded from the above
computations of net income (loss) per common share as such impact would be
antidilutive.
Exhibit 21.1
SUNRISE RESOURCES, INC.
LIST OF SUBSIDIARIES
Sunrise Financial Resources, Inc. (Incorporated on March 24, 1994)
Sunrise Leasing Corporation (Incorporated on February 14, 1995, became a
subsidiary of the Company as of March 31, 1995)--No business activity as of
March 31, 1995.
Sunrise Funding Corporation I (Incorporated on November 1, 1996)
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into the Company's previously
filed Registration Statements File No. 33-52364 and No. 33-52366.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
Minneapolis, Minnesota
June 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 2,191,000
<SECURITIES> 0
<RECEIVABLES> 13,326,000
<ALLOWANCES> 3,895,000
<INVENTORY> 388,000
<CURRENT-ASSETS> 109,250,000
<PP&E> 946,000
<DEPRECIATION> 535,000
<TOTAL-ASSETS> 111,159,000
<CURRENT-LIABILITIES> 84,402,000
<BONDS> 0
0
0
<COMMON> 72,000
<OTHER-SE> 26,685,000
<TOTAL-LIABILITY-AND-EQUITY> 111,159,000
<SALES> 42,978,000
<TOTAL-REVENUES> 42,978,000
<CGS> 45,334,000
<TOTAL-COSTS> 45,334,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,356,000)
<INCOME-TAX> 191,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,547,000)
<EPS-PRIMARY> (.035)
<EPS-DILUTED> (.035)
</TABLE>
