SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
June 30, 1999 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.
7,262,753 shares of Common Stock, $.01 par value as of July 21, 1999.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Included herein is the following unaudited financial information:
Consolidated Balance Sheets as of June 30, 1999 and March 31, 1999.
Consolidated Statements of Operations for the three month periods
ended June 30, 1999 and 1998.
Consolidated Statements of Cash Flows for the three month periods
ended June 30, 1999 and 1998.
Notes to Consolidated Financial Statements.
<PAGE>
SUNRISE INTERNATIONAL LEASING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
--------------- ----------------
ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 479,000 $ 963,000
Accounts receivable, less allowance for doubtful accounts
of $556,000 and $368,000, respectively 1,895,000 1,306,000
Loans receivable 2,314,000 2,556,000
Investment in leasing operations:
Operating leases - Equipment 133,977,000 111,953,000
Less: Operating leases - Accumulated depreciation 43,382,000 36,518,000
--------------- ----------------
Operating leases - Net book value 90,595,000 75,435,000
Direct financing leases 17,001,000 14,880,000
Equipment held for lease 2,478,000 4,914,000
Inventory held for sale 119,000 57,000
Initial direct costs 162,000 205,000
--------------- ----------------
Total investment in leasing operations 110,355,000 95,491,000
--------------- ----------------
Furniture and fixtures, less accumulated depreciation of
$696,000 and $652,000, respectively 256,000 242,000
Deferred tax asset 1,430,000 1,364,000
Other assets 1,064,000 1,093,000
--------------- ----------------
Total Assets $ 117,793,000 $ 103,015,000
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Financing arrangements
Borrowings under lines of credit $ 18,875,000 $ 4,156,000
Discounted lease rentals 10,857,000 13,589,000
Term notes 19,072,000 22,011,000
Notes payable to King Management Corporation 15,608,000 8,476,000
--------------- ----------------
Total financing arrangements 64,412,000 48,232,000
--------------- ----------------
Accounts payable 4,309,000 8,988,000
Accrued liabilities 2,990,000 1,821,000
Customer deposits 5,294,000 4,804,000
Income taxes payable 7,386,000 6,764,000
--------------- ----------------
Total Liabilities 84,391,000 70,609,000
--------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 17,500,000 shares authorized,
7,829,000 shares issued and outstanding 78,000 78,000
Preferred stock, undesignated, par value $.01 per share,
2,500,000 shares authorized, none issued or outstanding
Additional paid-in capital 27,829,000 27,810,000
Retained earnings 7,690,000 6,713,000
--------------- ----------------
35,597,000 34,601,000
Common stock in treasury at cost - 566,000 shares (2,195,000) (2,195,000)
--------------- ----------------
Total Stockholders' Equity 33,402,000 32,406,000
--------------- ----------------
Total Liabilities and Stockholders' Equity $ 117,793,000 $ 103,015,000
=============== ================
</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 OPERATIONS (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months
Ended June 30,
1999 1998
--------------- ---------------
REVENUES
<S> <C> <C>
Operating leases 14,042,000 $ 8,735,000
Direct financing leases 876,000 845,000
Equipment sales 1,942,000 1,699,000
Fee income 70,000 114,000
--------------- ---------------
Total Revenues 16,930,000 11,393,000
--------------- ---------------
COSTS AND EXPENSES
Depreciation 9,940,000 5,466,000
Interest 1,079,000 1,039,000
Provision for lease and loan losses 742,000 413,000
Cost of equipment sold 1,730,000 1,718,000
Compensation expense 937,000 785,000
Other operating expenses 815,000 701,000
--------------- ---------------
Total Costs and Expenses 15,243,000 10,122,000
--------------- ---------------
INCOME FROM OPERATIONS
BEFORE PROVISION
FOR INCOME TAXES 1,687,000 1,271,000
PROVISION FOR INCOME TAXES 710,000 572,000
--------------- ---------------
NET INCOME $ 977,000 $ 699,000
=============== ===============
NET INCOME PER COMMON SHARE
BASIC $ 0.13 $ 0.09
=============== ===============
DILUTED $ 0.13 $ 0.09
=============== ===============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - BASIC 7,262,000 7,804,000
=============== ===============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - DILUTED 7,526,000 7,840,000
=============== ===============
</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>
Three Months
Ended June 30,
1999 1998
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Income $ 977,000 $ 699,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for lease and loan losses 742,000 413,000
Depreciation and amortization 10,039,000 5,949,000
Stock options issued to non-employees 12,000 12,000
Change in operating assets and liabilities:
Accounts receivable (754,000) 2,822,000
Income taxes 556,000 550,000
Other assets 16,000 (217,000)
Inventory held for sale (61,000) 75,000
Accounts payable/Accrued liabilities (3,511,000) (285,000)
Customer Deposits 490,000 695,000
--------------- ---------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 8,506,000 10,713,000
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment for lease, net cost of equipment sold (29,603,000) (8,131,000)
Principal portion of direct financing leases collected 4,240,000 4,518,000
Principal portion of loans receivable collected 242,000 366,000
Purchase of furniture and fixtures (58,000) (6,000)
--------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (25,179,000) (3,253,000)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on lines of credit 29,296,000 9,050,000
Payments on lines of credit (14,576,000) (7,672,000)
Payments on term notes (2,938,000) (3,454,000)
Proceeds from discounted lease financing 909,000 834,000
Payments on discounted lease financing (3,641,000) (4,493,000)
Proceeds from notes payable to related party 9,998,000 --
Payments on notes payable to related party (2,867,000) (2,011,000)
Stock options exercised 8,000 58,000
--------------- ---------------
NET CASH PROVIDED BY/ (USED IN)
FINANCING ACTIVITIES 16,189,000 (7,688,000)
--------------- ----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (484,000) (228,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 963,000 2,140,000
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 479,000 $ 1,912,000
=============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid 829,000 551,000
Income taxes paid (received) 219,000 21,000
</TABLE>
See notes to consolidated financial statements.
<PAGE>
SUNRISE INTERNATIONAL LEASING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED JUNE 30, 1999 and 1998 (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 June 30, 1999 and
March 31, 1999 and the results of operations and cash flows for the three
months ended June 30, 1999 and 1998. All such adjustments are of a normal
and recurring nature.
These statements should be read in conjunction with the Consolidated
Financial Statements and the notes thereto, and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" contained in
the Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1999, 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.
Certain amounts in the financial statements and notes thereto have been
reclassified to conform to fiscal 2000 classifications. These changes had
no impact on previously reported results of operations or shareholders'
equity.
Comprehensive income, as defined by SFAS No. 130, Reporting Comprehensive
Income, for the periods presented are equivalent to net income.
2. INCOME TAXES
Income tax expense has been provided based on management's estimate of the
annualized effective tax rate of 42% for the three months ended June 30,
1999, and 45% for the three months ended June 30, 1998.
3. LOANS RECEIVABLE
The Company discontinued its loan activities in fiscal 1997. As of June 30,
1999 and March 31, 1999, the loan receivable portfolio was primarily
comprised of a single loan.
4. FINANCING ARRANGEMENTS
Line of Credit
The Company has a $25,000,000 line of credit facility with US Bank for use
in its normal operations. The balance outstanding on this line of credit at
June 30, 1999 and March 31, 1999 was $18,875,000 and $4,156,000
respectively. Advances are at prime (7.75% at June 30, 1999) and are
collateralized by substantially all unsecured assets of the Company. This
line of credit facility matures on October 31, 1999. The Company believes
this credit facility will be renewed on terms similar to the current
facility.
This credit facility requires compliance with financial covenants,
including the maintenance of certain liquidity and net worth ratios,
prohibits the payment of dividends and requires compliance with other
non-financial covenants. As of June 30, 1999, the Company is in compliance
with the terms of this agreement.
<PAGE>
<TABLE>
<CAPTION>
Term Debt Summary
Financial Loan Balance Interest Rate
Institution Date of Loan Amount of Loan @ 6/30/99 @ 6/30/99
------------ ------------ -------------- ------------ -------------
<S> <C> <C> <C> <C>
A Subsidiary of 10/96 $20,000,000 $ 0 --
Dougherty Summit
National City Bank 5/97 5,500,000 477,000 9.53%
of Minneapolis
King Management 1/98 10,608,000 1,104,000 7.50%
Corporation
King Management 3/98 4,864,000 2,234,000 7.50%
Corporation
King Management 9/98 4,295,000 2,272,000 7.50%
Corporation
National City Bank 2/99 6,500,000 5,505,000 7.75%
of Minneapolis
U.S. Bank Leasing 3/99 5,000,000 4,458,000 8.15%
Community First Financial 3/99 10,000,000 8,632,000 7.75%
of Fargo
King Management 6/99 5,001,000 5,001,000 7.50%
Corporation
King Management 6/99 4,997,000 4,997,000 7.50%
--------- ---------
Corporation
Total $76,765,000 $34,680,000
</TABLE>
All of the facilities outlined above are secured by specific leases and
equipment and require compliance with certain liquidity and net worth
ratios. As of June 30, 1999, the Company is in compliance with the terms
of these agreements.
Financing Arrangement with King Management Corporation - On June 16, 1997,
the Company entered into a financing arrangement with The King Management
Corporation (KMC), an affiliate of Peter King, Chairman of the Board and
CEO. Under the financing arrangement as amended, for the period from July
1, 1997 through June 30, 2000, KMC has committed to assist the Company in
financing its vendor business including providing subordinated debt to
cover any net worth covenant deficiencies, utilizing its balance sheet and
<PAGE>
borrowing capacity to provide funding for approved vendor programs
including making direct loans to the Company. From June 16, 1997 through
June 30, 1999, King Management has provided term note financing to the
Company totaling $29.8 million, with a balance outstanding of $15.6
million at June 30, 1999. The notes bear interest at prime minus 0.25%
(7.50% at June 30, 1999), and are secured by specific leases and
equipment.
Discounted Lease Rentals
Discounted lease rentals consist of the following:
June 30 March 31
1999 1999
Nonrecourse borrowings $10,540,000 $13,164,000
Recourse borrowings 317,000 425,000
----------- -----------
$10,857,000 $13,589,000
=========== ===========
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 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 recourse 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.
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 June 30,
1999, the Company was in compliance with such covenants.
5. RELATED PARTY
Management Agreement
Pursuant to an agreement by and among the Company, Mr. Peter King and KMC,
a corporation which is controlled by Mr. King, dated June 16, 1997, as
amended on June 23, 1998 (the "Management Agreement"), it was agreed that
Mr. King or KMC would provide certain management services to the Company
through June 30, 2000. Pursuant to the Management Agreement, Mr. King is an
employee of the Company and will serve as Chairman of the Board and Chief
Executive Officer until June 30, 2000 at a salary of $200,000 per year.
Pursuant to the management agreement, Mr. King was granted stock options to
purchase an aggregate of 541,506 shares at $3.375 per share, on June 23,
1998, Mr. King was granted (i) a fully vested seven-year nonqualified stock
option to purchase 250,000 shares at $3.25 per share under the Company's
1991 Stock Option Plan and (ii) a seven-year nonqualified cliff vesting
stock option to purchase 400,000 shares at $3.25 per share outside of the
Company's 1991 Stock Option Plan. The cliff vesting options vest after six
years if Mr. King continues to be an employee of the Company. Vesting is
accelerated if the Company's Common Stock attains certain agreed closing
average stock prices, as reflected in the Nasdaq Market System, for a
period of ten consecutive business days, as follows: 125,000 shares at
$5.00, 125,000 shares of $6.00 and 150,000 shares at $7.00. The Management
Agreement provides that Mr. King and/or KMC will provide certain services
to the Company, including but not limited to working with management on
current and prospective vendor relationships, monitoring problem leases and
loans, assisting the Company on meeting financing requirements and working
with the Company's bankers.
6. SEGMENT INFORMATION
In evaluating Company financial performance, management focuses on two
segments. The first segment is ILC or the vendor generated business. The
second segment is SLC or the business generated by Sunrise through direct
sales contact with end user customers. The remaining portfolio of assets
from the Company's former asset based lending activities are also included
in this segment.
<PAGE>
Management focuses on revenue and margins generated from two major
categories, leasing revenue (including interest and fee income) and sale of
equipment revenue. Management defines leasing gross margins as leasing
income (as defined above) less depreciation and interest. Management
defines leasing net margin as leasing gross margin less provisions for
losses. Equipment sale gross margin is sale proceeds less the cost of the
equipment sold (book value of the equipment at the time of sale).
<TABLE>
<CAPTION>
ILC/Vendor SLC/Direct Total
For The Quarter Ended June 30, 1999
<S> <C> <C> <C>
Leasing Revenue 12,555,000 2,433,000 14,988,000
Less: Depreciation 8,560,000 1,380,000 9,940,000
Interest Expense 849,000 230,000 1,079,000
-------------- ------------- --------------
Leasing Gross Margin 3,146,000 823,000 3,969,000
Less: Provision 652,000 90,000 742,000
-------------- ------------- --------------
Leasing Net Margin 2,494,000 733,000 3,227,000
Equipment Sales Revenue 1,201,000 741,000 1,942,000
Less: Cost of Equipment sold 1,146,000 584,000 1,730,000
-------------- ------------- --------------
Equipment Gross Margin 55,000 157,000 212,000
ILC/Vendor SLC/Direct Total
For The Quarter Ended June 30, 1998
Leasing Revenue 6,986,000 2,708,000 9,694,000
Less: Depreciation 4,171,000 1,295,000 5,466,000
Interest Expense 430,000 609,000 1,039,000
-------------- ------------- --------------
Leasing Gross Margin 2,385,000 804,000 3,189,000
Less: Provision 278,000 135,000 413,000
-------------- ------------- --------------
Leasing Net Margin 2,107,000 669,000 2,776,000
Equipment Sales Revenue 1,077,000 622,000 1,699,000
Less: Cost of Equipment sold 1,048,000 670,000 1,718,000
-------------- ------------- --------------
Equipment Gross Margin 29,000 (48,000) (19,000)
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Consolidated Results of Operations for the Three Months Ended June 30, 1999
and 1998
For the three months ended June 30, 1999, total revenue increased $5.5
million, or 48.6%, compared to the previous year. For the same periods, net
income increased $278,000, or 39.8%.
<PAGE>
For the three months ended June 30, 1999, consolidated leasing net margins
increased $451,000, or 16.2%. See discussion by segment below for
explanations of this increase.
Revenue from equipment sales increased $152,000, or 19.4%, and gross
margins on equipment sales increased $231,000 over the loss of $19,000 for
the previous year.
Compensation expenses increased $152,000, or 19.4%, due to increased salary
expenses for former King Management personnel who are now employees of
Sunrise, a greater number of employees, and the increased cost of employer
funded health care benefits.
Other operating expenses increased $114,000, or 16.3%.
The income tax provision as a percentage of income before taxes was 42.0%
in fiscal 2000 as compared to 45.0% in fiscal 1999.
Segmented Results of Operations for the Three Months Ended June 30, 1999
and 1998
ILC/Vendor
Vendor leasing revenues increased $5.6 million, or 79.7%, over the
previous fiscal year. Vendor leasing gross and net margins increased
$761,000, or 31.9%, and $387,000, or 18.4%, respectively over the same
period. Leasing gross margins did not increase at the same rate as revenues
due to the acceleration of depreciation made necessary by lower expected
residual values for leased equipment and increases in the number of leases
with lower margins. Net leasing margins increased at a slower rate due to
increased loss provisions made necessary by increased exposure due to
portfolio growth and increased credit risks.
For the three months ended June 30, 1999, equipment sales revenue increased
$124,000, or 11.5%. Gross margins from equipment sales increased to
$26,000, or 89.7%, compared to the prior year, primarily as a result of the
lower book values due to accelerated depreciation charges in prior periods.
SLC/Direct
For the three months ended June 30, 1999, SLC leasing revenue decreased
$275,000, or 10.2%, compared to the previous year as new operating lease
revenue was not adequate to offset the decline in direct finance lease
revenue. SLC leasing gross margins increased $19,000, or 2.4%. SLC net
leasing margins increased $64,000 or 9.6%. Net leasing margin increased
while revenue and gross margins decreased over the previous year due to
lower provisions for losses compared to the previous year.
For the three months ended June 30, 1999, equipment sales revenue increased
$119,000, or 19.1%, and gross margins from equipment sales increased to
$157,000 compared to a loss of $48,000 in the prior year.
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, the acquisition of revenue
generating equipment. Generally, upon commencement of an SLC original
equipment lease, the Company attempts to assign the remaining lease payment
stream to a financial institution on a discounted, nonrecourse basis. If
successful, the Company 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 (primarily in the ILC/vendor business), the Company assumes
the entire risk on its investment in the loan or equipment. The Company's
reliance on recourse debt has continued to increase because the types of
leases generated by its vendor business are riskier than those generated by
its direct business and do not lend themselves to non-recourse financing.
The Company expects this trend to continue.
<PAGE>
At June 30, 1999, the Company had total borrowings outstanding of $64.4
million, of which 16.4 % were nonrecourse. These borrowings consisted of
$10.8 million of discounted lease rentals (2.9% of which were recourse and
97.1% of which were non-recourse), $18.9 million of borrowings under bank
lines of credit, $19.1million notes payable to several banks, and a total
of $15.6 million of notes payable to King Management Corporation.
As of June 30, 1999, the Company had a total investment in leasing
operations of $110.5 million, which compares to $95.5 million at March 31,
1999. 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. The increase in investment in
leasing operations is a result of an increase in the vendor leasing
business.
Net cash flow of $8.5 million was generated from operating activities for
the three months ended June 30, 1999. The Company also collected $4.5
million in loans and direct financing leases in addition to net cash
provided by financing activities of $16.2 million. This cash flow was used
to purchase $29.3 million of leasing equipment.
The Company recently discovered that certain errors had been made in prior
year tax returns. These errors impact the timing of taxable income and
accordingly the timing of income tax payments. The errors have no effect on
reported income tax expense in the current year or any previous year;
however, $3.6 million which was reflected as deferred tax liabilities at
March 31, 1998 have been reclassified to a current liability. The Company
expects to amend prior period tax returns during the second quarter of
fiscal 2000 requiring the payment of approximately $2.2 million in federal
and state taxes plus interest.
At June 30, 1999, the Company had issued purchase orders for, and thereby
committed to buy, $23.0 million of equipment to be leased to various
customers. The Company does not have any other material commitments for
capital expenditures.
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 with US Bank. Of this
amount, $18.9 million had been utilized as of June 30, 1999. Advances under
the line bear interest at prime and are collateralized by substantially all
of the Company's unencumbered assets. The Company's line of credit matures
on October 31, 1999. The Company believes this credit facility will be
renewed on terms similar to the current facility. 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. The Company is in
compliance with the terms of these agreements.
As summarized in Footnote 4 of the financial statements included in this
Quarterly Report on Form 10-Q, in addition to the line of credit discussed
above, the Company utilizes a variety of term funding sources to finance
its investment in leasing assets.
The Company was informed that Heller Financial, Inc. (Heller) has obtained
credit committee approval to provide a $40 million term note facility to
the Company. The Company and Heller are in the process of finalizing the
related documents and have scheduled a closing for early August 1999.
The Company's reliance on additional financing has increased as a direct
result of the increased volume of equipment purchases in the ILC/Vendor
business. The Company believes the availability of additional financing
will be sufficient to meet the Company's working capital needs.
<PAGE>
Financing Arrangement with King Management Corporation
On June 16, 1997, the Company entered into a financing arrangement with The
King Management Corporation (KMC), an affiliate of Peter King, Chairman of
the Board and CEO. Under the financing arrangement, as amended, for the
period from July 1, 1997 through June 30, 2000. KMC has committed to assist
the Company in financing its vendor business including providing
subordinated debt to cover any net worth covenant deficiencies, utilizing
its balance sheet and borrowing capacity to provide funding for approved
vendor programs including making direct loans to the Company. From June 16,
1997 through June 30, 1999, King Management has provided term note
financing totaling $29.8 million, with a balance outstanding of $15.6
million, at June 30, 1999. The notes bear interest at prime minus 0.25%
(7.50% at June 30, 1999), and are secured by specific leases and equipment.
In consideration for the commitment described above and other services, the
Company agreed to allow KMC to participate in specific percentages of
vendor leasing transactions consummated during the period from July 1, 1997
through June 30, 2000. Specific leases are identified as the property of
KMC and are not included in the Company's portfolio. For the quarter ended
June 30, 1999 and 1998, KMC purchased leases in the amount of $11,627,000
and $1,915,000, respectively. Total leases purchased from the inception of
the agreement through June 30, 1999 are $30,903,000.
Interest expense paid to KMC related to the financing arrangements
described above was $122,000 and $281,000, for the three months ended June
30, 1999 and 1998, respectively.
The Company continues to monitor several problem leases and loans. While
there are leases and 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 would be material.
Stock Repurchase
On October 13, 1998, the Company announced that its Board of Directors had
approved a stock repurchase program under which the Company had allocated
up to $5 million to purchase its common stock at suitable market prices.
During the quarter ended December 31, 1998, the Company repurchased 566,400
shares at a total cost of $2,195,000. There have been no additional stock
repurchases to date. The repurchased shares are being held as treasury
stock on the Company's balance sheet. The Company has an option to purchase
630,000 shares of Sunrise stock acquired in February 1999 by KMC at the
request of Sunrise. The option to purchase, dated February 24, 1999, has a
one-year term and allows the Company to acquire the shares at KMC's cost of
$4.40 per share, plus accrued interest. On April 23, 1999, the Board of
Directors increased the stock repurchase program from $5 million to $7
million and granted management the authority to exercise its option to
purchase the shares from KMC or make other purchases, either directly or
through KMC as long as its ability to fund pending and future lease
equipment purchases is not jeopardized.
Year 2000 Compliance
The Company is continuing to review its internal use computer systems in
order to identify and modify those systems that are not Year 2000
compliant. The cost associated with this effort is not incremental to the
Company, but represents a reallocation of existing resources. The Company
believes any modifications deemed necessary will be made on a timely basis
and does not believe that the cost of such modifications will have a
material effect on the Company's operating results.
In addition, the Company faces risks to the extent that suppliers of leased
equipment purchased by the Company and others with whom the Company
transacts business do not have business systems or products that comply
with the Year 2000 requirements. The Company is in the process of obtaining
assurances from such vendors that their systems and products are Year 2000
compliant. The Company has advised the Company's customers that they should
seek certification for equipment under lease from the vendor to assure that
their equipment is Year 2000 compliant.
<PAGE>
Additionally, the Company is in the process of evaluating the need for
contingency plans with respect to Year 2000 requirements. The necessity of
any contingency plan must be evaluated on a case-by-case basis and will
vary considerably in nature depending on the Year 2000 issue it may need to
address.
Although the Company believes that the cost of Year 2000 modifications for
internal-use systems are not material, there can be no assurance that the
various factors relating to the Year 2000 compliance issues, including the
ability of the Company's suppliers to provide the Company with products
that are Year 2000 compliant, will not have a material adverse effect on
the Company's business, operating results, or financial position.
Outlook
Certain statements contained in this Outlook section and other sections of
this document are forward looking, based on current expectations, and
actual results may differ materially. The forward looking statements, 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 including the Company's
reliance on a few large vendors for its business, its ability to cope with
accelerating obsolescence, and to remarket its off-lease equipment at
prices that are equal to or better than its book value. In addition to the
factors discussed above which could cause actual results to differ from
those projected other factors which could cause actual results to differ
from expected include the following:
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
business. The Company's ability to expand its vendor business is dependent
upon successfully servicing existing vendor accounts and attracting new
vendor accounts. As of June 30, 1999, the Company had only two significant
vendor leasing programs and had signed agreements for other vendor leasing
programs which are not significant. While the Company believes it has the
ability and capacity to develop large vendor leasing programs, other than
the two it is currently servicing there is no assurance that it will be
successful in this regard or that it will be able to generate acceptable
revenue growth.
In order to broaden the base of potential lessees the Company has redefined
its underwriting policies. These policy changes result in a greater focus
on very short-term leases, expanding the business with customers that
traditionally are of lower credit quality, and accepting significantly
larger transactions from credit-worthy customers at gross margins which are
lower than its business to date. These changes will result in a
substantially increased level of transaction and portfolio risk for the
Company and an increased reliance on recourse financing. These changes will
continue to impact the Company's gross and net leasing margins into the
future.
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. 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.
Financing. The Company's growth and profitability are dependent to a great
extent on the Company's ability to finance revenue producing assets.
Company financial performance, as well as continued reduction in the amount
of non-performing assets, have enhanced the Company's ability to obtain
required financing. However, the recent increases in vendor operating
leases have resulted in an increased reliance on recourse debt to finance
the Company. While the Company has been successful in obtaining required
recourse and non-recourse financing to date, there is no assurance that all
required financing will be available in the future and that would limit its
growth and jeopardize its relationship with its two largest vendors.
Major Customers/Vendors. At June 30, 1999 and March 31,1998, no leases
outstanding to any individual lessee exceeded 5% of the total lease
portfolio, except in cases where the leases had been discounted without
recourse to a financial institution.
<PAGE>
However, 56.5% and 32.1% of the Company's total leasing revenue for the
three months ended June 30, 1999, and 70.1 % and 18.8% of the Company's
total leasing revenue for the three months ended June 30, 1998, were
generated through two vendor leasing programs. During the second quarter of
fiscal year 1999, the largest vendor informed the Company that the vendor
intended to enter the leasing business and write leases on its own behalf.
The vendor has advised the Company that it would continue to utilize the
Company in the vendor's niche markets. Subsequent to the notice, the
Company's volume of new leases from this vendor has increased. However, as
in any vendor program, there is no assurance how long this increased
utilization will continue. If the relationship with either of its two large
vendors were to change resulting in a reduction in the volume of new
leases, the Company would continue to realize declining revenues
attributable to this vendor's existing equipment under lease for a period
of one to three years. To the extent that the Company would be unable to
replace that declining volume and revenue with increased leasing business
from other vendors, the Company's future financial results would be
materially and adversely affected.
Residual Values of Leased Equipment. The value of the high technology
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, the high
technology equipment which comprises the bulk of the Company's lease
portfolio is subject to rapid technological obsolescence typical of the
computer industry.
The Company continues to assess its depreciation methods and projected book
values against market projections of used equipment values. The result has
been continued acceleration of depreciation on revenue producing assets.
This trend towards shortened product life cycles and accelerated rates of
depreciation will continue to adversely affect the Company's leasing
margins.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
<PAGE>
PART II-OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. Legal Proceedings - None.
ITEM 2. Changes in Securities - None
ITEM 3. Defaults on Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None.
ITEM 5. Other Information - None.
ITEM 6. Exhibits and Report on Form 8-K
A. Exhibits
See Exhibit index immediately following signature page
B. Form 8-K
There have been no current reports on Form 8-K filed on
behalf of the Company during the quarter ended June 30, 1999.
<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: August 03, 1999 By: /s/ Peter J. King
Peter J King, Chairman of the Board,
Chief Executive Officer and Director
(principal executive officer)
By: /s/ Jeffrey G. Jacobsen
Jeffrey G. Jacobsen, Executive Vice President
and Chief Financial Officer (principal
financial officer)
By: /s/ James C. Teal
James C. Teal, Corporate Controller
(principal accounting officer)
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT INDEX TO FORM 10-Q
Commission File No.: 0-19516
For the quarter ended
June 30, 1999
SUNRISE INTERNATIONAL LEASING CORPORATION
Exhibit
Number Description
3.1 Certificate of Incorporation, -- incorporated by reference to Exhibit
3.1 to the Company's Quarterly Report Form 10-Q for the quarter ended
September 30, 1997
3.2 Bylaws--incorporated by reference 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 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 INTERANATIONAL LEASING CORPORATION AND SUBSIDIARIES
PER SHARE EARNINGS COMPUTATIONS
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1999
1999 1998
----------- -----------
<S> <C> <C>
Basic Earnings Per Share:
Weighted average number of
common shares outstanding 7,262,000 7,804,000
=========== ===========
Net income $ 977,000 $ 699,000
=========== ===========
Net income per common and
common equivalent share $ 0.13 $ 0.09
========== ===========
Fully Dilutive Earnings Per Share:
Weighted average number of 7,262,000 7,804,000
Common stock equivalents
from assumed exercise of
options and warrants 264,000 36,000
----------- ----------
Total shares 7,526,000 7,840,000
=========== ===========
Net income $ 977,000 $ 699,000
=========== ===========
Net income per common
and common equivalent share $ 0.13 $ 0.09
========== ===========
</TABLE>
Net income per common and common equivalent share is computed using the weighted
average number of shares outstanding during each period.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 479,000
<SECURITIES> 0
<RECEIVABLES> 4,765,000
<ALLOWANCES> 556,000
<INVENTORY> 119,000
<CURRENT-ASSETS> 110,355,000
<PP&E> 952,000
<DEPRECIATION> 696,000
<TOTAL-ASSETS> 117,793,000
<CURRENT-LIABILITIES> 84,391,000
<BONDS> 0
0
0
<COMMON> 78,000
<OTHER-SE> (2,195,000)
<TOTAL-LIABILITY-AND-EQUITY> 117,793,000
<SALES> 16,930,000
<TOTAL-REVENUES> 16,930,000
<CGS> 15,243,000
<TOTAL-COSTS> 15,243,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,687,000
<INCOME-TAX> 710,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 977,000
<EPS-BASIC> .13
<EPS-DILUTED> .13
</TABLE>
