SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
December 31, 1997 0-19516
SUNRISE INTERNATIONAL LEASING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 41-1632858
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5500 Wayzata Boulevard, Suite 725
Golden Valley, Minnesota 55416
(Address of principal executive offices)
Registrant's telephone number, including area code
(612) 593-1904
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
7,787,796 shares of Common Stock, $.01 par value as of January 30, 1998.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Included herein is the following unaudited financial information:
Consolidated Balance Sheets as of December 31, 1997 and March 31,
1997.
Consolidated Statements of Operations for three month and nine month
periods ended December 31, 1997 and 1996.
Consolidated Statements of Cash Flows for the nine month periods ended
December 31, 1997 and 1996.
Notes to Consolidated Financial Statements.
<PAGE>
SUNRISE INTERNATIONAL LEASING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,748,000 $ 2,191,000
Accounts receivable, less
allowance for doubtful accounts
of $286,000 and $494,000 2,282,000 1,928,000
Income taxes receivable -- 1,245,000
Inventory held for sale 239,000 388,000
Loans receivable, less allowance
for possible losses of $995,000
and $3,401,000 4,520,000 7,503,000
Investment in leasing operations:
Direct financing leases 32,294,000 46,759,000
Operating leases, less accumulated depreciation of
$25,822,000 and $22,973,000 51,297,000 42,211,000
Equipment held for lease 3,879,000 6,435,000
Initial direct costs 549,000 590,000
------------ ------------
Total investment in leasing operations 88,019,000 95,995,000
------------ ------------
Furniture and fixtures, less accumulated
depreciation of $662,000 and $535,000 381,000 411,000
Other assets 3,270,000 1,498,000
------------ ------------
Total Assets $100,459,000 $111,159,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Financing arrangements:
Notes payable $ 20,270,000 $ 13,329,000
Securitized borrowings 6,217,000 15,481,000
Recourse participations in loans receivable -- 435,000
Discounted lease rentals 31,215,000 40,198,000
------------ ------------
Total financing arrangements 57,702,000 69,443,000
------------ ------------
Accounts payable 4,199,000 6,808,000
Accrued liabilities 3,334,000 6,252,000
Accrued income taxes 1,849,000 --
Deferred tax liability 1,899,000 1,899,000
------------ ------------
Total Liabilities 68,983,000 84,402,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 17,500,000
shares authorized, 7,788,000 and 7,189,000
shares issued and outstanding, respectively 78,000 72,000
Capital stock, undesignated, $.01 par value,
2,500,000 shares authorized, none issued or outstanding -- --
Additional paid-in capital 27,643,000 25,601,000
Retained earnings 3,755,000 1,084,000
------------ ------------
Total Shareholders' Equity 31,476,000 26,757,000
------------ ------------
Total Liabilities and Shareholders' Equity $100,459,000 $111,159,000
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
<PAGE>
SUNRISE INTERNATIONAL LEASING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Nine Months
Ended December 31, Ended December 31,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Operating leases $ 8,826,000 $ 7,205,000 $25,062,000 $19,071,000
Direct financing leases 1,134,000 1,790,000 3,811,000 6,011,000
Equipment sales 3,338,000 2,067,000 6,759,000 6,868,000
Interest income 46,000 168,000 183,000 565,000
Fee income 168,000 64,000 450,000 187,000
----------- ----------- ----------- -----------
Total Revenues 13,512,000 11,294,000 36,265,000 32,702,000
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Depreciation 5,246,000 4,066,000 14,199,000 10,904,000
Interest expense 1,350,000 1,797,000 4,236,000 5,110,000
Provision for lease and loan losses 280,000 206,000 895,000 632,000
Cost of equipment sold 3,142,000 1,924,000 6,599,000 5,990,000
Compensation expense 1,160,000 876,000 2,995,000 2,659,000
Other operating expenses 733,000 785,000 2,212,000 1,886,000
----------- ----------- ----------- -----------
Total Costs and Expenses 11,911,000 9,654,000 31,136,000 27,181,000
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS
BEFORE PROVISION
FOR INCOME TAXES 1,601,000 1,640,000 5,128,000 5,521,000
PROVISION FOR INCOME TAXES 766,000 789,000 2,459,000 2,651,000
----------- ----------- ----------- -----------
NET INCOME $ 835,000 $ 851,000 $ 2,669,000 $ 2,870,000
=========== =========== =========== ===========
NET INCOME PER COMMON
AND COMMON
EQUIVALENT SHARE:
Basic $ 0.11 $ 0.12 $ 0.35 $ 0.40
=========== =========== =========== ===========
Fully Diluted $ 0.11 $ 0.12 $ 0.35 $ 0.40
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF COMMON AND
COMMON EQUIVALENT
SHARES OUTSTANDING 7,794,000 7,220,000 7,631,000 7,198,000
=========== =========== =========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
<PAGE>
SUNRISE INTERNATIONAL LEASING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Ended December 31,
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,669,000 $ 2,870,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for lease and loan losses 895,000 632,000
Depreciation and amortization 15,044,000 10,947,000
Change in operating assets and liabilities:
Accounts receivable (710,000) --
Income taxes receivable 1,245,000 1,157,000
Other assets 57,000 (368,000)
Inventory held for sale 149,000 (55,000)
Accounts payable (2,609,000) 1,780,000
Accrued liabilities (867,000) 113,000
Accrued income taxes 1,849,000 1,484,000
------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 17,722,000 19,476,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment for lease (25,866,000) (32,262,000)
Principal portion of direct financing leases collected 18,754,000 19,970,000
Investment in loans receivable -- (1,381,000)
Principal portion of loans receivable collected 784,000 4,476,000
Purchase of furniture and fixtures (96,000) (21,000)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (6,424,000) (9,218,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on notes payable 31,649,000 16,250,000
Payments on notes payable (24,708,000) (17,274,000)
Proceeds from securitized borrowings -- 13,000,000
Payments on securitized borrowings (9,264,000) (1,685,000)
Proceeds from discounted lease financing 10,327,000 8,363,000
Payments on discounted lease financing (19,310,000) (20,506,000)
Payments on participations in loans receivable (435,000) (3,527,000)
Proceeds from note payable to King Holding Corporation -- 1,955,000
Payments on note payable to King Holding Corporation -- (6,082,000)
------------ ------------
NET CASH USED IN FINANCING
ACTIVITIES (11,741,000) (9,506,000)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (443,000) 752,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,191,000 1,629,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,748,000 $ 2,381,000
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid 2,368,000 2,900,000
Income taxes paid (received) (655,000) 51,000
Stock issued in arbitration settlement (See Note 6) 2,022,000 --
Commercial property acquired (see note 3) 2,109,000 --
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements
<PAGE>
SUNRISE INTERNATIONAL LEASING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 1997 and 1996 (Unaudited)
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES
In the opinion of management, the accompanying financial statements contain
all adjustments necessary to present fairly the financial position of
Sunrise International Leasing Corporation (formerly known as Sunrise
Resources, Inc.) and Subsidiaries (the Company) as of December 31, 1997 and
March 31, 1997 and the results of operations and cash flows for the three
and nine months ended December 31, 1997 and 1996. All such adjustments are
of a normal and recurring nature.
These statements should be read in conjunction with the Notes to the
Financial Statements and Management's Discussion and Analysis contained in
the Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1997, filed with the Securities and Exchange Commission, and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing in this quarterly report. Results for the interim
periods are not necessarily indicative of sales trends or future results
and performance.
During March 1997, the Financial Accounting Standards Board released SFAS
No. 128, Earnings per Share, which requires the disclosure of basic
earnings per share and fully diluted earnings per share. The Company
adopted SFAS No. 128 as of December 31, 1997, and it has had no material
impact on the financial position or the results of operations of the
Company.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
will be effective for the Company beginning April 1, 1998. SFAS No. 131
redefines how operating segments are determined and requires disclosure of
certain financial and descriptive information about a company's operating
segments. The Company has not yet completed its analysis and final
determination of future reporting segments.
2. INCOME TAXES
Income tax expense has been provided based on management's estimate of the
annualized effective tax rate of 48% for the three and nine month periods
ended December 31, 1997 and 1996.
3. LOANS RECEIVABLE
During the quarter ended December 31, 1997, the Company exercised its
redemption rights and acquired title to commercial property serving as
collateral on a loan with a net book value of $2.1 million. As a result,
the asset (and related reserve of $2.5 million) has been transferred from
loans receivable to other assets. The commercial property has been recorded
at its estimated fair market value of $2.1 million. There was no additional
provision for loan loss required as a result of this event.
<PAGE>
Loans by Collateral Type
The composition of the loans receivable portfolio by collateral type was as
follows:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
------------ ------------
<S> <C> <C>
Commercial loans, collateralized primarily by receivables $ -- $ 161,000
Commercial loans, collateralized by equipment, marketable
securities and other 1,180,000 5,163,000
Real estate loans 350,000 1,038,000
Non-accrual loans 4,044,000 5,475,000
Non-recourse participations -- (867,000)
------------ ------------
5,574,000 10,970,000
Less:
Allowance for possible loan losses (995,000) (3,401,000)
Unearned fees from loan origination (59,000) (66,000)
------------ ------------
$ 4,520,000 $ 7,503,000
============ ============
</TABLE>
Loan Portfolio Activity and Allowance for Possible Loan Losses
As of December 31, 1997 and March 31, 1997, the Company's recorded
investment in impaired and other loans and the related valuation allowances
was as follows:
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1997
---------------- -------------- ------------ ------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
<S> <C> <C> <C> <C>
Impaired loans -
Nonaccrual $ 3,820,000 $ 770,000 $ 5,250,000 $ 3,176,000
Other 225,000 225,000 225,000 225,000
Performing loans 1,529,000 -- 6,362,000 --
Nonrecourse participations -- -- (867,000) --
---------------- -------------- ------------ ------------
$ 5,574,000 $ 995,000 $ 10,970,000 $ 3,401,000
================ ============== ============ ============
</TABLE>
The activity in the allowance for possible loan losses during the three and
nine months ended December 31, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended December 31, Ended December 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Balance, beginning of period $ 3,461,000 $ 2,837,000 $ 3,401,000 $ 2,773,000
Provisions for loan losses 30,000 30,000 90,000 94,000
Reserve associated
with reclassified property (2,496,000) -- (2,496,000) --
----------- ----------- ----------- -----------
Balance, end of period $ 995,000 $ 2,867,000 $ 995,000 $ 2,867,000
=========== =========== =========== ===========
</TABLE>
4. DISCOUNTED LEASE RENTALS
Discounted lease rentals consist of the following:
December 31, March 31,
1997 1997
--------------- ---------------
Non-recourse $ 26,621,000 $ 30,761,000
Recourse 4,594,000 9,437,000
--------------- ---------------
$ 31,215,000 $ 40,198,000
=============== ===============
<PAGE>
5. FINANCING ARRANGEMENTS
Lines of Credit
The Company has a $25 million line of credit facility with a bank for use
in its normal operations. Advances under this line of credit are subject to
a borrowing base limitation of $25.0 million at December 31, 1997. The loan
balance outstanding as of December 31, 1997, was $16.0 million. Advances
under the line bear interest at prime, and are collateralized by
substantially all otherwise unsecured assets of the Company. This line of
credit facility matured on September 30, 1997 and was renewed under
identical terms for another twelve-month period ending September 30, 1998.
This credit facility requires compliance with financial covenants,
including the maintenance of certain liquidity and net worth ratios,
prohibits the payment of dividends and requires compliance with other
financial covenants. As a result of charges taken in the fourth quarter of
fiscal year 1997 for lease and loan losses and related events, as of March
31, 1997, the Company did not meet certain financial and other covenants
contained in credit agreements with certain lenders. With the assistance of
King Management Corporation, a related party, the lenders have subsequently
modified the financial covenants or waived the events of noncompliance. As
of December 31, 1997, the Company is in compliance with the revised terms
of these agreements.
Term Loan
On May 16, 1997, Sunrise Leasing Corporation completed a $5,500,000 funding
on a term loan with National City Bank of Minneapolis. This term loan is
secured by certain leases of the Company. These funds were used to reduce
the debt outstanding under the Company's bank line of credit. As of
December 31, 1997 the outstanding balance on this loan was $4.2 million.
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 and a subsequent advance of $7.0 million funded on
January 31, 1997.
6. COMMITMENTS AND CONTINGENCIES
Litigation
On June 17, 1997, a decision was released by the arbitrator on 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"). ILC shareholders were denied rescission and
reformation of the merger agreement as well as relief on five other claims.
They were however granted relief on one count of breach of warranty and
awarded damages of 560,257 additional shares of Sunrise International
Leasing Corporation common stock. This award, valued at $1,891,000, was
charged as an expense for fiscal 1997. Additionally, certain ILC
shareholders were awarded repayment of attorneys' fees payable in the form
of 38,818 additional shares of Sunrise International Leasing Corporation
common stock. This award valued at $131,000 was also charged as an expense
for fiscal 1997. These proceedings were conducted under an 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>
7. RELATED PARTY
As of December 31, 1997 King Management, a corporation which is controlled
by Peter J. King, Chairman of the Board, had pursuant to an agreement
entered into with the Company on June 16, 1997, purchased 113 leases with a
cost of $2,864,000.
8. SUBSEQUENT EVENT
In early January 1998, a vendor program lessee with leases having a book
value of approximately $4.6 million as of December 31, 1997 was placed in
default because the lessee had failed to make payments when due. The
Company is currently negotiating with the lessee and the vendor to
restructure the lease transactions. The Company anticipates these
negotiations will be completed during the fourth quarter of fiscal 1998. At
this point in time, it is not possible to determine what, if any, impact
the ultimate resolution of this matter will have on the financial
statements.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Revenues
The Company classifies its lease transactions, as required by the Statement of
Financial Accounting Standards No. 13 ("FASB 13"), as either direct financing or
operating leases. Revenue, costs and resulting income are recognized during each
of the accounting periods during the term of the lease. The allocation of income
among the accounting periods within a lease term will vary depending upon the
lease classification.
The Company segregates the sources of its revenue into five categories for
financial statement purposes: (i) operating leases; (ii) direct financing
leases; (iii) sales of new and used equipment; (iv) fee income; and (v) interest
income.
Operating Leases. All leases that are not classified as direct financing leases
are treated as operating leases. Monthly payments from these leases are
recognized as leasing revenue. The Company's cost of the leased equipment is
recorded on the balance sheet and is depreciated on a straight-line basis over
the lease term to the Company's estimate of residual value. Revenue and
depreciation expense for operating leases are recorded evenly over the term of
the lease. If the lease is discounted to a financial institution, the related
interest expense declines over the term of the lease as the principal is
reduced, with the resultant net margin being lower in the early periods of the
lease and higher in the later periods.
Direct Financing Leases. These leases transfer substantially all benefits and
risks of equipment ownership to the lessee. A lease is a direct financing lease
if the creditworthiness of the customer and the collectibility of lease payments
are reasonably certain and it meets one of the following criteria: (i) the lease
transfers ownership of the equipment to the customer by the end of the lease
term; (ii) the lease contains a bargain purchase option; (iii) the lease term at
inception is at least 75% of the estimated economic life of the leased
equipment; or (iv) the present value of the minimum lease payments is at least
90% of the fair value of the leased equipment at inception of the lease.
Direct financing leases consist of future lease payments plus the residual value
(collectively referred to as the "gross investment"). Residual value is the
estimated fair market value at the time of lease termination. The difference
between the gross investment in the lease and the cost (or carrying amount, if
different) of the leased equipment is recorded as unearned revenue. The "net
investment" in the lease is the gross investment less unearned revenue. The
unearned revenue is amortized to leasing revenue over the lease term to produce
a constant percentage return on the net investment whether or not the lease is
discounted to a financial institution.
Equipment Sales. Revenue from equipment sales transactions is recognized by the
Company at the time title to the equipment passes to the customer. Leases that
entitle the customer to purchase the leased equipment for a nominal sum at the
end of the lease term and which are discounted on a nonrecourse basis at the
lease commencement date, leaving the Company with no interest in the
transaction, are treated by the Company as a sale of equipment.
Fee Income. Fee income consists principally of late fees charged on rental lease
payments received after the due date and service fees received for the
administration of transactions for the securitization that began on November 1,
1996.
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.
Sunrise Financial Resources, Inc.
The Board of Directors made the determination in fiscal 1996 to discontinue the
SFR business. The Company has sold the SFR asset-based lending accounts and
one-half of its SFR commercial accounts. Management believes the loan portfolio
is reflected at its estimated liquidation value as of December 31, 1997.
<PAGE>
Results of Operations for the Three and Nine Months Ended December 31, 1997 and
1996
Total revenue increased approximately $2.2 million (19.6%) and $3.6 million
(10.9%) for the three and nine-month periods ended December 31, 1997,
respectively, as compared to the corresponding periods in fiscal 1997. The
majority of the revenue increase resulted from a $1.6 million (22.5%) and a $6.0
million (31.4%) increase in operating lease revenue for the three and nine-month
periods ended December 31, 1997, respectively, as compared to the previous
fiscal year. The increase in operating lease revenues was offset by a decrease
in direct financing lease revenue of $656,000 (36.7%) and $2.2 million (36.6%)
for the three and nine-month periods ended December 31, 1997, respectively, as
compared to the corresponding periods in fiscal 1997. The increase in operating
lease revenue and the decrease in direct financing lease revenue are a result of
the Company's continuing effort to expand and focus on the vendor leasing
business. Operating lease revenue was, and will continue to be, affected by King
Management's right to participate as lessor in the Company's vendor lease
programs. See Note 7 to Consolidated Financial Statements.
Total leasing revenues were as follows (dollar amounts in millions):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended December 31, Ended December 31,
1997 1996 1997 1996
Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Leasing Revenues:
Vendor $ 7.0 70% $ 5.5 61% $ 20.2 70% $ 14.3 57%
Direct 3.0 30 3.5 39 8.7 30 10.7 43
------- ---- ------ ---- ------- ---- ------- ----
Total $ 10.0 100% $ 9.0 100% $ 28.9 100% $ 25.0 100%
======= ==== ====== ==== ======= ==== ======= ====
As a percent of total revenues 73.7% 79.6% 79.6% 76.7%
===== ===== ===== =====
</TABLE>
Margins from leasing activities (leasing revenue less depreciation and interest
expense) were 33.8% and 34.8% and 36.2% and 36.2% for the three and nine month
periods of fiscal 1998 and fiscal 1997, respectively. Margins will fluctuate
from period to period based upon the mix of direct financing and operating
leases and the extent to which the Company finances leases with internally
generated funds. Margins will also be affected by the mix and age of direct
finance and operating leases in the current portfolio.
In order to limit the impact of any interest rate fluctuations on its leasing
transactions, the Company continually monitors its lease rate factors relative
to interest rates on borrowed funds. The lease rate factors are adjusted
periodically on new leases to correspond to any change in interest rates on
borrowed funds supporting the related transactions.
Revenue from equipment sales increased $1.3 million for the three-month period
ended December 31, 1997 and decreased $109,000 for the nine-month period
December 31, 1997, as compared to the corresponding periods in fiscal 1997. This
overall decrease is primarily a result of lower off-lease sales from the direct
customer leasing business. The gross margins on equipment sales were 5.9% and
2.4% of sales revenue for the three and nine month periods of fiscal 1998,
compared to 6.9% and 12.8% for the corresponding periods in fiscal 1997. This
decrease in gross margins was specifically due to losses experienced on the sale
of off-lease equipment from the vendor business. While the Company is taking
steps to reduce these losses, it is expected that gross margins on equipment
sales will continue to be depressed for the foreseeable future.
Interest income decreased $122,000 (72.7%) and $382,000 (67.7%) for the three
and nine month periods of fiscal 1998, respectively, as compared to the
corresponding periods in fiscal 1997. This decrease was caused by the continuing
liquidation of the SFR loan portfolio which coincided with the Company's
decision to discontinue its commercial and asset-based lending services.
Fee income increased $104,000 (163.6%) and $263,000 (140.3%) for the three and
nine month periods of fiscal 1998 as compared to the same period in fiscal 1997.
This increase is due to the additional servicing fees received on the
securitization that began on November 1, 1996 and additional late fees.
Total costs and expenses increased $2.2 million (23.4%) and $4.0 million (14.6%)
for the three and nine month periods of fiscal 1998 as compared to the
corresponding periods in fiscal 1997.
<PAGE>
Depreciation expense for the three and nine month period ended December 31, 1997
increased $1.2 million (29.0%) and $3.3 million (30.2%), respectively, over the
same periods in fiscal 1997. These increases were due to an increase in vendor
equipment leases as depicted in the above table, the majority of which are
operating leases.
Interest expense decreased $447,000 (24.9%) and $874,000 (17.1%) for the three
and nine month periods of fiscal 1998, respectively, as compared to the
corresponding periods in fiscal 1997. This decrease in interest expense is due
to the reduction in outstanding principal balances on financing arrangements.
Cost of equipment sold increased $1.2 million (63.3%) and $609,000 (10.2%) for
the three and nine month periods of fiscal 1998, respectively, as compared to
the corresponding periods in fiscal 1997. These increases were primarily due to
increased sale activity in the direct leasing business during the first nine
months of fiscal 1998.
Compensation expense increased $284,000 (32.5%) and $336,000 (12.6%) for the
three and nine month periods ended December 31, 1997, respectively, as compared
to the same periods in fiscal 1997. These fluctuations are due to slightly
higher compensation for the nine-month period in fiscal 1998, certain severance
amounts and some additional commission expense on off-lease equipment sales and
month-to-month leases.
Other operating expense increased $326,000 (17.3%) for the nine month period
ended December 31, 1997, as compared to the previous periods in fiscal 1997. The
majority of this increase was due to the acceleration of amortization of some
capitalized funding expenses.
Income tax provision as a percentage of income before taxes was 48.0% for both
the three and nine month periods ended December 31, 1997 and 1996.
Liquidity and Capital Resources
General
The Company uses a combination of its credit lines, other financing sources and
internally generated cash flows to finance the acquisition of equipment for
lease. Generally, upon commencement of an end-user lease, the Company attempts
to assign the remaining lease payment stream to a financial institution on a
discounted, nonrecourse basis. In this manner, the Company finances a
substantial portion of the equipment cost on a long-term basis and attempts to
limit its risk, if any, to its equity investment in the loan or equipment. The
discounted lease proceeds received by the Company are used to reduce borrowings
under the credit lines.
At December 31, 1997, the Company had total borrowings outstanding of $57.7
million, of which 46.1% were nonrecourse. At March 31, 1997, the Company had
total borrowings outstanding of $69.4 million, of which 44.3% were nonrecourse.
As of December 31, 1997, the Company had a total investment in leasing
operations of $88.0 million, as compared to $96.0 million at March 31, 1997. The
decrease in investment in leasing operations is due to the decrease in direct
finance leases as a result of the reduction of the direct customer leases. 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 $17.7 million for the nine-month
period of fiscal 1998. Increases in depreciation and amortization, which were
due to increases in the Company's operating lease portfolio, offset decreases of
$2.6 million in accounts payable and $867,000 in accrued liabilities. The
Company expects to fund future requirements through internally generated funds,
as well as borrowings under its lines of credit. The Company also expects to
realize additional cash from the future remarketing of leased equipment.
Equipment expenditures (net of disposals) of $25.9 million for the nine month
period of fiscal 1998 were financed through $15.6 million of cash flows from
operations, through the discounting of $10.3 million of noncancelable lease
rentals to various financial institutions at fixed rates and through the use of
the Company's lines of credit. The Company does not have any material
commitments for capital expenditures, other than equipment held for lease.
Inflation has not been a significant factor in the Company's business in any of
the periods presented.
<PAGE>
Liquidity and Financing Sources
As of December 31, 1997, the Company had available a $25 million line of credit.
Of this amount, $16.0 million had been utilized as of December 31, 1997.
Advances under the line are collateralized by substantially all of the Company's
assets. The interest rate is at prime, and the Company is subject to certain
financial and other covenants relating to net worth ratios and liquidity
requirements. The Company's line of credit matured as of September 30, 1997 and
was renewed under identical terms for another twelve month period ending
September 30, 1998.
This credit facility requires compliance with financial covenants, including the
maintenance of certain liquidity and net worth ratios, prohibits the payment of
dividends and requires compliance with other financial covenants. As a result of
fourth quarter charges for lease and loans losses and related events, as of
March 31, 1997, the Company did not meet certain financial and other covenants
contained in credit agreements with certain lenders. The lenders have
subsequently modified the financial covenants or waived the events of
noncompliance. As of January 30, 1998, the Company is in compliance with the
revised terms of these agreements.
During the first quarter of fiscal 1998, the Company's Sunrise Leasing
Corporation subsidiary entered into a Discretionary Revolving Credit Agreement
with National City Bank of Minneapolis. The agreement provides for discretionary
loan advances up to $5.5 million based on eligible equipment leases. Advances
under the agreement are secured by the eligible equipment leases and are repaid
over the term, up to 48 months, of such eligible equipment leases with interest
at 3.25% above the yield on U.S. Treasury securities of equivalent term. The
credit facility is also guaranteed by Sunrise International Leasing Corporation.
In May 1997, the Company borrowed $5.5 million under this credit facility, and
$4.2 million remains outstanding as of December 31, 1997.
Based on its projected cash flow from operations, completion of the Securitized
Facility and its recent success in obtaining additional discount financing and
the commitment of King Management Corporation to assist the Company in meeting
its financing requirements, the Company believes that it will be able to finance
its anticipated equipment purchasing commitments in fiscal 1998.
The Company continues to monitor several problem leases and loans. While there
are several leases and loans which could result in additional write-offs,
management does not currently believe that any such write-offs, other than the
accounts described below, would be material, or that they would create covenant
violations on current credit facilities or otherwise limit or reduce the
Company's access to credit.
During fiscal 1997, a lessee, operating under a previously restructured lease
and loan agreement had not fulfilled its commitment to increase its monthly
payments from $159,000 to $199,000. As a result of this continuing default and
the lessee's requests to further restructure its payments, the Company recorded
a reserve of $3,161,000 against this transaction in the fourth quarter of fiscal
1997. Due to jurisdictional issues, the Company's claims against the assets and
collateral, may be subject to prior claims of the federal government and any
restructuring is subject to the approval of a federal government agency. As a
result, the remaining loan balance of $9.2 million and the net book value of
$4.5 million continue to be significantly under collateralized. During the third
quarter the lessee stopped making its $159,000 monthly payments for November and
December, and after discussions with management has resumed making further
reduced payments of $150,000 per month. As of January 30, the lessee has made
payments totaling $450,000. While the Company believes that the lessee intends
to continue making the further reduced monthly payments of $150,000, were the
lessee to cease making payments and were the Company unsuccessful in realizing
its collateral and asserting its claims under guarantees, the Company would be
required to write off some or all of the remaining book value ($4.5 million as
of December 31, 1997). This would have a materially adverse affect on the
Company's financial statements, with impact to the Company's ability to comply
with certain loan covenants and would impact the Company's future cash flow by
the amount of the remaining payments for the total remaining loan and lease
balance of $9.2 million.
As described above in Paragraph 8 in the Company's Notes to Consolidated
Financial Statements, the Company is negotiating with a lessee and a vendor to
restructure $4.6 million of lease transactions which the Company has placed in
default. The Company is not currently in a position to determine the impact, if
any, a resolution of this matter would have on its financial statements. There
is a risk, however, that the current nogiations will not be successful, in which
case the Company financial statements and liquidity could be materially and
adversely affected.
<PAGE>
Outlook
The statements contained in this Outlook section are based on current
expectations and are subject to certain risks and uncertainties. Certain of
these statements are forward looking and actual results may differ materially
from these. 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, other than the two accounts described,
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 significant leasing companies for those leases in
which the cost of the equipment greatly exceeds the amount of nonrecourse
financing available.
Future Growth. The Company's ability to grow at an acceptable rate is dependent
to a great extent on the expansion of its vendor leasing programs. As of
December 31, 1997, the Company has a total of 12 vendor leasing programs, two of
which are significant. While the Company believes it has the ability and
capacity to develop other large vendor leasing programs, there is no assurance
that it will be successful in this regard or that it will be able to generate
acceptable revenue growth.
Risk of Additional Loan and Lease Write-Offs. While the Company believes that
its current reserves are adequate, it continues to monitor closely several loans
and leases, including a significant loan and lease currently in default, as to
which the Company has a book value of $4.5 million as of December 31, 1997.
There is no assurance that such loans or leases 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. See "Liquidity and 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 end user leases 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. Pursuant to the
agreement dated June 16, 1997 with Peter J. King, King Management has provided
assurances that funding will be made available for all approved vendor programs
for the two year period ending June 15, 1999. If necessary King Management will
provide subordinated debt financing, direct financing and/or other financial
assistance to the Company to assure this financing availability.
Credit Risk. A significant portion of the Company's total investments in leases
and loans receivables are with customers who are considered highly leveraged or
with cash flows from operations inadequate to service existing obligations.
Defaults by such customers could 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.
<PAGE>
Significant Vendor Concentration. 51.0% of the Company's total leasing revenue
for the period ended December 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. However, if the
Company were unable to replace this lost business, the Company's future
financial results could be materially and adversely affected.
Residual Values of Leased Equipment. 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. This
estimated residual value represents a significant portion of the investment in
operating leases. 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. Historically the
Company's experience has generally resulted in actual residual values in excess
of estimated residual values. However during the current fiscal year operating
results have been lower due to losses experienced on the sale of off-lease
equipment from its vendor business. While the company is taking steps to reduce
those losses, it is expected that gross margins on equipment sales will continue
to be depressed for the foreseeable future. Also, a greater than expected
decrease in the market value of data processing or other equipment leased by the
Company could materially and adversely affect the Company's financial condition
and profitability.
<PAGE>
PART II-OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. Legal Proceedings - None.
ITEM 2. Changes in Securities - None.
ITEM 3. Defaults on Senior Securities - See Note 5 to Financial
Statements at Part I, Item 1, above.
ITEM 4. Submission of Matters to a Vote of Security Holders - None.
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K.
a. Exhibits
See Exhibit Index immediately following the signature
page.
b. Form 8-K
There have been no Current Reports on Form 8-K filed
on behalf of the Company during the quarter ended
December 31, 1997.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNRISE INTERNATIONAL LEASING CORPORATION
Date: January 30, 1997 By: /s/ Errol Carlstrom
Errol Carlstrom, President, Chief Executive
Officer and Chief Financial Officer
(principal executive officer and principal
financial officer)
By: /s/ Paul R. Wotta
Paul R. Wotta
Controller (principal accounting officer)
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT INDEX TO FORM 10-Q
Commission File No.: 0-19516
For the quarter ended
December 31, 1997
- -------------------------------------------------------------------------------
SUNRISE INTERNATIONAL LEASING CORPORATION
Exhibit
Number Description
3.1 Certificate of Incorporation - incorporated by references to Exhibit
3.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997
3.2 Bylaws - incorporated by references to Exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997
4.1 Specimen of Common Stock Certificate - incorporated by reference to
Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997
11.1 Per Share Earnings Computations
27.0 Financial Data Schedule (filed with electronic version only)
EXHIBIT 11.1
SUNRISE INTERNATIONAL LEASING CORPORATION AND SUBSIDIARIES
PER SHARE EARNINGS COMPUTATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
----------------------------------- -----------------------------
1997 1996 1997 1996
----------------- --------------- --------------- ----------
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Weighted average number of
common shares outstanding 7,788,000 7,189,000 7,616,000 7,189,000
================= =============== ================ ==========
Net income $ 835,000 $ 851,000 $ 2,669,000 $2,870,000
================= =============== ================ ==========
Net income per common
share $ 0.11 $ 0.12 $ 0.35 $ 0.40
================= =============== ================ ==========
Fully Dilutive Earnings Per Share:
Weighted average number of
common shares outstanding 7,788,000 7,189,000 7,616,000 7,189,000
Common stock equivalents
from assumed exercise of
options and warrants 6,000 31,000 15,000 9,000
----------------- --------------- ---------------- ----------
Total shares 7,794,000 7,220,000 7,631,000 7,198,000
================= =============== ================ ==========
Net income $ 835,000 $ 851,000 $ 2,669,000 $2,870,000
================= =============== ================ ==========
Net income per common
and common equivalent share $ 0.11 $ 0.12 $ 0.35 $ 0.40
================= =============== ================ ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U. S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,748,000
<SECURITIES> 0
<RECEIVABLES> 8,083,000
<ALLOWANCES> 1,281,000
<INVENTORY> 239,000
<CURRENT-ASSETS> 96,808,000
<PP&E> 1,043,000
<DEPRECIATION> 662,000
<TOTAL-ASSETS> 100,459,000
<CURRENT-LIABILITIES> 68,983,000
<BONDS> 0
0
0
<COMMON> 78,000
<OTHER-SE> 31,398,000
<TOTAL-LIABILITY-AND-EQUITY> 100,459,000
<SALES> 36,265,000
<TOTAL-REVENUES> 36,265,000
<CGS> 31,136,000
<TOTAL-COSTS> 31,136,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,128,000
<INCOME-TAX> 2,459,000
<INCOME-CONTINUING> 2,669,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,669,000
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
</TABLE>
