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
September 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.
6,633,003 shares of Common Stock, $.01 par value as of October 26, 1999.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Included herein is the following unaudited financial information:
Consolidated Balance Sheets as of September 30, 1999 and March 31,
1999.
Consolidated Statements of Operations for the three and six month
periods ended September 30, 1999 and 1998.
Consolidated Statements of Cash Flows for the six month periods ended
September 30, 1999 and 1998.
Notes to Consolidated Financial Statements.
<PAGE>
SUNRISE INTERNATIONAL LEASING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
------------- -------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 2,355,000 $ 963,000
Accounts receivable, less allowance for doubtful accounts
of $685,000 and $368,000, respectively 1,450,000 1,306,000
Loans receivable 2,198,000 2,556,000
Investment in leasing operations:
Operating leases - Equipment 154,471,000 111,953,000
Less: Operating leases - Accumulated depreciation 48,805,000 36,518,000
------------- -------------
Operating leases - Net book value 105,666,000 75,435,000
Direct financing leases 16,684,000 14,880,000
Equipment held for lease 1,646,000 4,914,000
Inventory held for sale 141,000 57,000
Initial direct costs 116,000 205,000
------------- -------------
Total investment in leasing operations 124,253,000 95,491,000
------------- -------------
Furniture and fixtures, less accumulated depreciation of
$744,000 and $652,000, respectively 267,000 242,000
Deferred tax asset 1,364,000 1,364,000
Other assets 1,937,000 1,093,000
------------- -------------
Total Assets $ 133,824,000 $ 103,015,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Financing arrangements
Borrowings under lines of credit $ 19,603,000 $ 4,156,000
Discounted lease rentals 8,461,000 13,589,000
Term notes 50,744,000 22,011,000
Notes payable to King Management Corporation 6,449,000 8,476,000
------------- -------------
Total financing arrangements 85,257,000 48,232,000
------------- -------------
Accounts payable 5,248,000 8,988,000
Accrued liabilities 2,193,000 1,821,000
Customer deposits 7,413,000 4,804,000
Income taxes payable 2,248,000 6,764,000
------------- -------------
Total Liabilities 102,359,000 70,609,000
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 17,500,000 shares authorized,
7,829,000 shares issued 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 27,834,000 27,810,000
Retained earnings 8,632,000 6,713,000
------------- -------------
36,544,000 34,601,000
Common stock in treasury at cost - 1,196,000 and 566,000
shares, respectively (5,079,000) (2,195,000)
Total Stockholders' Equity 31,465,000 32,406,000
------------- -------------
Total Liabilities and Stockholders' Equity $ 133,824,000 $ 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 INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended September 30, Ended September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Operating leases $16,795,000 $ 9,420,000 $30,836,000 $18,156,000
Direct financing leases 829,000 704,000 1,705,000 1,549,000
Equipment sales 2,073,000 1,872,000 4,015,000 3,571,000
Interest Income 14,000 14,000
Fee income 30,000 61,000 101,000 175,000
----------- ----------- ----------- -----------
Total Revenues 19,727,000 12,071,000 36,657,000 23,465,000
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Depreciation 12,036,000 5,911,000 21,975,000 11,377,000
Interest 1,469,000 931,000 2,548,000 1,971,000
Provision for lease and loan losses 716,000 416,000 1,458,000 829,000
Cost of equipment sold 2,050,000 1,704,000 3,780,000 3,423,000
Compensation expense 951,000 812,000 1,888,000 1,597,000
Other operating expenses 883,000 836,000 1,699,000 1,537,000
----------- ----------- ----------- -----------
Total Costs and Expenses 18,105,000 10,610,000 33,348,000 20,734,000
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS
BEFORE PROVISION
FOR INCOME TAXES 1,622,000 1,461,000 3,309,000 2,731,000
PROVISION FOR INCOME TAXES 680,000 658,000 1,390,000 1,229,000
----------- ----------- ----------- -----------
NET INCOME $ 942,000 $ 803,000 $ 1,919,000 $ 1,502,000
=========== =========== =========== ===========
NET INCOME PER COMMON
Basic $ 0.13 $ 0.10 $ 0.26 $ 0.19
=========== =========== =========== ===========
Diluted $ 0.12 $ 0.10 $ 0.25 $ 0.19
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING
Basic 7,256,000 7,820,000 7,259,000 7,812,000
=========== =========== =========== ===========
Diluted 7,656,000 7,846,000 7,599,000 7,839,000
=========== =========== =========== ===========
</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>
Six Months
Ended September 30,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,919,000 $ 1,502,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for lease and loan losses 1,458,000 829,000
Depreciation and amortization 22,086,000 11,565,000
Stock options issued to non-employees 13,000 26,000
Change in operating assets and liabilities:
Accounts receivable (473,000) 2,014,000
Income taxes (4,516,000) 1,110,000
Other assets (868,000) (22,000)
Inventory held for sale (84,000) 23,000
Accounts payable/Accrued liabilities (3,369,000) (243,000)
Customer Deposits 2,608,000 1,307,000
------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 18,774,000 18,111,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment for lease, net cost of equipment sold (59,280,000) (21,363,000)
Principal portion of direct financing leases collected 7,502,000 10,334,000
Principal portion of loans receivable collected 358,000 1,011,000
Purchase of furniture and fixtures (116,000) (7,000)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (51,536,000) (10,025,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on lines of credit 63,051,000 19,130,000
Payments on lines of credit (47,604,000) (17,194,000)
Proceeds from term notes 35,503,000 --
Payments on term notes (6,769,000) (5,341,000)
Proceeds from discounted lease financing 1,018,000 2,813,000
Payments on discounted lease financing (6,145,000) (8,717,000)
Proceeds from notes payable to related party 9,998,000 4,295,000
Payments on notes payable to related party (12,025,000) (4,238,000)
Stock options exercised 11,000 92,000
Purchase of treasury stock (2,884,000) --
------------ ------------
NET CASH PROVIDED BY/ (USED IN)
FINANCING ACTIVITIES 34,154,000 (9,160,000)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,392,000 (1,074,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 963,000 2,140,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,355,000 $ 1,066,000
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 2,107,000 $ 1,083,000
Income taxes paid $ 6,001,000 $ 28,000
</TABLE>
See notes to consolidated financial statements
<PAGE>
SUNRISE INTERNATIONAL LEASING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTH PERIOD ENDED SEPTEMBER 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 September 30, 1999
and March 31, 1999 and the results of operations and cash flows for the six
months ended September 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 six months ended September 30,
1999, and 45% for the six months ended September 30, 1998.
3. LOANS RECEIVABLE
The Company discontinued its loan activities in fiscal 1997. As of
September 30, 1999 and March 31, 1999, the loan receivable portfolio was
primarily comprised of a single loan.
4. FINANCING ARRANGEMENTS
Lines of Credit
The Company has a $25,000,000 line of credit facility with US Bank for use
in its operations. The balance outstanding on this line of credit at
September 30, 1999 and March 31, 1999 was $19,603,000 and $4,156,000
respectively. Advances are at prime (8.25% at September 30, 1999) and are
collateralized by substantially all unsecured assets of the Company. This
line of credit facility matures on February 28, 2000.
The Company has a $15,000,000 line of credit facility with Firstar Bank for
use in its operations. No amounts were outstanding on this line at
September 30, 1999. Advances under this line will be at prime minus .5% and
will be collateralized by specific leases and equipment. This line of
credit facility matures on September 30, 2000.
These credit facilities require compliance with financial covenants,
including the maintenance of certain liquidity and net worth ratios,
prohibits the payment of dividends and require compliance with other
non-financial covenants. As of September 30, 1999, the Company is in
compliance with the terms of these agreements.
<PAGE>
Term Debt Summary
<TABLE>
<CAPTION>
Financial Loan Balance Interest Rate
Institution Date of Loan Amount of Loan @ 9/30/99 @ 9/30/99
- ------------ ------------ -------------- ------------ -----------
<S> <C> <C> <C> <C>
National City Bank 5/97 5,500,000 22,000 9.53%
of Minneapolis
King Management 3/98 4,864,000 1,730,000 8.00%
Corporation
National City Bank 2/99 6,500,000 4,646,000 8.25%
of Minneapolis
U.S. Bank Leasing 3/99 5,000,000 3,967,000 8.15%
Community First Financial 3/99 10,000,000 7,054,000 7.75%
of Fargo
King Management 6/99 4,997,000 4,719,000 8.00%
Corporation
U.S. Bank Leasing 7/99 5,004,000 4,892,000 8.25%
Heller Financial 8/99 10,348,000 10,244,000 8.07%
Heller Financial 8/99 10,022,000 9,774,000 8.07%
Heller Financial 9/99 10,128,000 10,145,000 8.21%
----------- -----------
Total $72,363,000 $57,193,000
</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 September 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 and 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
September 30, 1999, KMC has provided term note financing to the Company
totaling $29.8 million, with a balance outstanding of $6.4 million at
September 30, 1999. The notes bear interest at prime minus 0.25% (8.0% at
September 30, 1999), and are secured by specific leases and equipment.
<PAGE>
Discounted Lease Rentals
Discounted lease rentals consist of the following:
September 30 March 31
------------ -----------
1999 1999
Non-recourse borrowings $ 8,226,000 $13,164,000
Recourse borrowings 235,000 425,000
------------ -----------
$ 8,461,000 $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 non-recourse basis.
In the event of default by a lessee on a non-recourse 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
September 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.
<PAGE>
Management Proposal
As previously reported, Peter J. King, Chairman and Chief Executive Officer
of the Company, has made an offer to purchase all of the Company shares not
owned or controlled by him. A Special Committee of the Board of Directors,
consisting of Thomas King (no relation) and Donald Brattain, has been
appointed to consider this proposal.
The structure and terms of any proposed transaction between Mr. King and
the Company are expected to be determined through negotiations between Mr.
King and the Special Committee. The proposal is subject to, among other
things, the determination of the price and structure of the transaction and
the execution of a definitive acquisition agreement. The Special Committee,
with the assistance of its investment advisor and counsel, is in the
process of responding to the proposal. Until execution of a definitive
agreement, and there is no assurance that a definitive agreement will be
reached, Mr. King retains the right to terminate negotiations for any
reason.
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.
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>
For The Quarter Ended
September 30, 1999 ILC/Vendor SLC/Direct Total
------------------ ---------- ---------- -------------
<S> <C> <C> <C>
Leasing Revenue $ 15,256,000 $ 2,398,000 $ 17,654,000
Less: Depreciation 10,610,000 1,426,000 12,036,000
Interest Expense 1,254,000 215,000 1,469,000
-------------- ------------- --------------
Leasing Gross Margin 3,392,000 757,000 4,149,000
Less: Provision 476,000 240,000 716,000
-------------- ------------- --------------
Leasing Net Margin $ 2,916,000 $ 517,000 $ 3,433,000
============= ============ =============
Equipment Sales Revenue $ 1,907,000 $ 166,000 $ 2,073,000
Less: Cost of Equipment sold 1,829,000 221,000 2,050,000
-------------- ------------- --------------
Equipment Gross Margin $ 78,000 $ (55,000) $ 23,000
============== ============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For The Quarter Ended
September 30, 1998 ILC/Vendor SLC/Direct Total
------------------ ---------- ---------- --------------
<S> <C> <C> <C>
Leasing Revenue $ 7,799,000 $ 2,400,000 $ 10,199,000
Less: Depreciation 4,622,000 1,289,000 5,911,000
Interest Expense 465,000 466,000 931,000
-------------- ------------- --------------
Leasing Gross Margin 2,712,000 645,000 3,357,000
Less: Provision 281,000 135,000 416,000
-------------- ------------- --------------
Leasing Net Margin $ 2,431,000 $ 510,000 $ 2,941,000
============= ============= =============
Equipment Sales Revenue $ 1,386,000 $ 486,000 $ 1,872,000
Less: Cost of Equipment sold 1,391,000 313,000 1,704,000
-------------- ------------- --------------
Equipment Gross Margin $ (5,000) $ 173,000 $ 68,000
================ ============= ==============
For The Six Months Ended
September 30, 1999 ILC/Vendor SLC/Direct Total
------------------ ---------- ---------- --------------
Leasing Revenue $ 27,811,000 $ 4,831,000 $ 32,642,000
Less: Depreciation 19,171,000 2,804,000 21,975,000
Interest Expense 2,104,000 444,000 2,548,000
-------------- ------------- --------------
Leasing Gross Margin 6,536,000 1,583,000 8,119,000
Less: Provision 1,128,000 330,000 1,458,000
-------------- ------------- --------------
Leasing Net Margin $ 5,408,000 $ 1,253,000 $ 6,661,000
============ ============ ============
Equipment Sales Revenue $ 3,108,000 $ 907,000 $ 4,015,000
Less: Cost of Equipment sold 2,975,000 805,000 3,780,000
-------------- ------------- --------------
Equipment Gross Margin $ 133,000 $ 102,000 $ 235,000
============= ============ =============
For The Six Months Ended
September 30, 1998 ILC/Vendor SLC/Direct Total
------------------ ---------- ---------- --------------
Leasing Revenue $ 15,020,000 $ 4,874,000 $ 19,894,000
Less: Depreciation 8,793,000 2,584,000 11,377,000
Interest Expense 895,000 1,076,000 1,971,000
-------------- ------------- --------------
Leasing Gross Margin 5,332,000 1,214,000 6,546,000
Less: Provision 559,000 270,000 829,000
-------------- ------------- --------------
Leasing Net Margin $ 4,773,000 $ 944,000 $ 5,717,000
============ ============ ============
Equipment Sales Revenue $ 2,463,000 $ 1,108,000 $ 3,571,000
Less: Cost of Equipment sold 2,439,000 984,000 3,423,000
-------------- ------------- --------------
Equipment Gross Margin $ 4,000 $ 124,000 $ 148,000
============== ============ =============
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Consolidated Results of Operations for the Three and Six Months Ended
September 30, 1999 and 1998.
For the three and six months ended September 30, 1999, total revenue
increased $7.7 and $13.2 million, or 63.4% and 56.2%, respectively,
compared to the previous year. For the same periods, net income increased
$139,000 and $417,000, or 17.3% and 27.8%, respectively.
For the three and six months ended September 30, 1999, consolidated leasing
net margins increased $492,000 and $944,000, or 16.7% and 16.5%,
respectively. See discussion by segment below for explanations of this
increase.
Revenue from equipment sales increased $201,000 and $444,000, or 10.7% and
12.4% for the three and six month periods, respectively, and gross margins
on equipment sales decreased $145,000 for the three month period and
increased $87,000 for the six month period compared to the prior year.
For the three and six month periods, compensation expenses increased
$139,000 and $291,000, or 17.1% and 18.2%, respectively, due to increased
salary expense for former KMC personnel who are now employees of Sunrise, a
greater number of employees, and the increased cost of employer funded
health care benefits.
For the three and six month periods, other operating expenses increased
$47,000 and $162,000, or 5.6% and 10.5%, respectively. For the three month
period other operating expenses included $125,000 of fees paid to financial
advisors engaged by the Special Committee of the Board relating to the
management proposal discussed in the Related Party section in footnote 5.
The income tax provision as a percentage of income before taxes was 42% in
fiscal 2000 as compared to 45% in fiscal 1999.
Segmented Results of Operations for the Three and Six Months Ended
September 30, 1999 and 1998.
ILC/Vendor
Vendor leasing revenues increased $7.5 and $12.8 million for the three and
six month periods, or 95.6% and 85.2%, respectively, over the previous
fiscal year. Vendor leasing net margins increased $485,000, or 20.0%, and
$635,000, or 13.3%, respectively, over the same periods. 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, increases in interest expenses, 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 and six months ended September 30, 1999, equipment sales
revenue increased $521,000 and $645,000, or 37.6% and 26.2%, respectively.
Gross margins from equipment sales increased to $78,000 and $133,000 for
the same periods compared to a negative margin of $5,000 and a positive
margin of $24,000 for the prior year, primarily as a result of the lower
book values due to accelerated depreciation charges in prior periods.
<PAGE>
SLC/Direct
During the quarter ended September 30, 1999, the Company decided to
discontinue its efforts to expand this segment of the business. As a
result, the Company's direct sales force was eliminated. The Company will
continue to manage the SLC portfolio and expects to experience modest
losses as the portfolio liquidates.
Direct leasing revenues decreased $2,000 and $43,000 for the three and six
month periods ended September 30, 1999, compared to the previous year, as
new operating lease revenue was not adequate to offset the decline in
direct finance lease revenue. SLC net leasing margins increased $7,000, or
1.4%, and $309,000, or 32.7%, for the same periods, primarily due to
decreases in interest expenses.
For the three and six months ended September 30, 1999, equipment sales
revenue decreased $320,000, or 65.8%, and $201,000, or 18.1%, respectively.
For the three and six month periods gross margins decreased to a loss of
$55,000 and a gain of $102,000 compared to positive gross margins of
$173,000 and $124,000 for similar periods in the previous year.
Liquidity and Capital Resources
General
The Company uses a combination of its credit lines and internally generated
cash flows to finance the acquisition of revenue generating equipment.
Generally, after commencement of a lease, the Company assigns the remaining
lease payment stream to a financial institution on a discounted,
non-recourse basis or includes the lease in a pool of many leases which are
funded under amortizing term notes. The 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.
At September 30, 1999, the Company had total borrowings outstanding of
$85.3 million. These borrowings consisted of $8.5 million of discounted
lease rentals (of which $8.2 million were non-recourse), $19.6 million of
borrowings under bank lines of credit, $50.8 million notes payable to
financial institutions and $6.4 million of notes payable to KMC.
As of September 30, 1999, the Company had a total investment in leasing
operations of $124.3 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 $18.8 million was generated from operating activities for
the six months ended September 30, 1999. The Company also collected $7.9
million in direct financing leases and loans in addition to net cash
provided by financing activities of $34.2 million. This cash flow was used
to purchase $59.3 million of leasing equipment.
As previously reported, 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 were reclassified to a income taxes
payable. The Company expects to amend prior period tax returns during the
third quarter of fiscal 2000 requiring payment of approximately $2.2
million in federal and state taxes plus interest.
At September 30, 1999, the Company had issued purchase orders for, and
thereby committed to buy, $32.0 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.
<PAGE>
Liquidity and Financing Sources
The Company maintains a $25 million line of credit with US Bank. Of this
amount, $19.6 million had been utilized as of September 30, 1999. Advances
under the line bear interest at prime and are collateralized by
substantially all of the Company's unencumbered assets. This line of credit
matures on February 28, 2000. 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 this agreement.
On September 30, 1999, the Company established a $15 million revolving line
of credit with Firstar Bank. No amounts were outstanding under this line of
credit as of September 30, 1999. Advances under the line will bear interest
prime minus .5% and are collateralized by specific leases and equipment.
This line of credit matures on September 30, 2000, and 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 this agreement.
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'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.
Financing Arrangement with The 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 and
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 September 30, 1999, KMC has provided term note
financing totaling $29.8 million, with a balance outstanding of $6.4
million, at September 30, 1999. The notes bear interest at prime minus
0.25% (8.0% at September 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
September 30, 1999 and 1998, KMC purchased leases in the amount of
$10,214,000 and $2,819,000, respectively.
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 accounts. While these
accounts could force the Company to take additional write-offs, management
does not currently believe that any such write-offs would be material.
<PAGE>
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. 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. During the
quarter ended December 31, 1998, the Company repurchased 566,400 shares
from the public markets at a total cost of $2,195,000. During the quarter
ended September 30, 1999, the Company repurchased 630,000 shares for a
total cost of $2,884,000. These shares were purchased via exercise of an
option held by Sunrise to purchase shares from KMC at KMC's cost plus
interest. KMC originally purchased the shares on behalf of Sunrise, subject
to the Sunrise purchase option. The repurchased shares are being held as
treasury stock on the Company's balance sheet.
Year 2000 Compliance
The Company has reviewed its internal use computer systems in order to
identify and modify those systems that were not Year 2000 compliant. The
cost associated with this effort was not incremental to the Company, but
represented a reallocation of existing resources. The Company believes that
its internal use computer systems are fully Year 2000 compliant with no
further modifications necessary.
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. To the extent possible, the Company has
obtained 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.
Although the Company believes that internal-use systems are fully
compliant, 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 greater 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 September 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.
<PAGE>
During the last quarter of Fiscal Year 1998 the Company redefined its
underwriting policies in order to broaden the base of potential lessees.
These policy changes resulted 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 had been
accepted in the past. These changes resulted in an 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 non-recourse
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 the Company's
failure to obtain required financing would limit its growth and jeopardize
its relationship with its two largest vendors.
Major Customers/Vendors. At September 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.
However, 46.3% and 30.0% of the Company's total leasing revenue for the six
months ended September 30, 1999, and 47.2% and 15.0% of the Company's total
leasing revenue for the six months ended September 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
(a) The Company held its Annual Meeting on September 8, 1999.
(b) Proxies for the Annual Meeting were solicited pursuant to
Regulation 14A under the Securities Exchange Act of 1934. There
was no solicitation in opposition to management's nominees as
listed in the proxy statement, and all of such nominees were
elected.
The shareholders set the number of directors at four (4) by a
vote of 6,975,076 shares in favor, with 4,700 shares voted
against and 25,250 shares abstaining. The following persons were
elected to serve as directors of the Company until the next
annual meeting of shareholders with the following votes:
Number of Number of
Nominee Votes For Votes Against
Peter J. King 6,997,226 7,800
Donald R. Brattain 6,997,226 7,800
Thomas R. King 6,997,226 7,800
Jeffrey G. Jacobsen 6,997,226 7,800
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 September 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: November 5, 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
September 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
Six Months Ended
September 30, 1999
1999 1998
---------- ----------
Basic Earnings Per Share:
Weighted average number of
common shares outstanding 7,259,000 7,812,000
========== ==========
Net income $1,919,000 $1,502,000
========== ==========
Net income per common and
common equivalent share $ 0.26 $ 0.19
========== ==========
Diluted Earnings Per Share:
Weighted average number of 7,259,000 7,812,000
Common stock equivalents
from assumed exercise of
options and warrants 340,000 27,000
---------- ----------
Total shares 7,599,000 7,839,000
========== ==========
Net income $1,919,000 $1,502,000
========== ==========
Net income per common
and common equivalent share $ 0.25 $ 0.19
========== ==========
Net income per common and common equivalent share is computed using the weighted
average number of shares outstanding during each period.
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 2,355,000
<SECURITIES> 0
<RECEIVABLES> 4,333,000
<ALLOWANCES> 685,000
<INVENTORY> 141,000
<CURRENT-ASSETS> 124,253,000
<PP&E> 1,011,000
<DEPRECIATION> 744,000
<TOTAL-ASSETS> 133,824,000
<CURRENT-LIABILITIES> 102,359,000
<BONDS> 0
0
0
<COMMON> 78,000
<OTHER-SE> 31,387,000
<TOTAL-LIABILITY-AND-EQUITY> 133,824,000
<SALES> 36,657,000
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<CGS> 33,348,000
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<INCOME-PRETAX> 3,309,000
<INCOME-TAX> 1,390,000
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