SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended: Commission File No.:
March 31, 1999 0-19516
SUNRISE INTERNATIONAL LEASING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 41-1632858
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation )
5500 Wayzata Boulevard, Suite 725
Golden Valley, Minnesota 55416
(Address of principal executive offices)
Registrant's telephone number, including area code:
(612) 593-1904
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. Yes x No
---------------------------------------------
The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant as of June 2, 1999 was approximately $9,868,648 based upon the
closing sale price of the Registrant's Common Stock on such date.
Shares of $.01 par value Common Stock outstanding at June 2, 1999: 7,262,646
shares.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1999 Annual Meeting are
incorporated by reference into Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
Organization
Sunrise International Leasing Corporation ("Sunrise") was originally
incorporated in Minnesota in February 1989 as Sunrise Leasing Corporation to
lease and sell new and used high technology and other equipment. This leasing
business is referred to as the "SLC" or "Direct" business and any references to
"SLC" or "Direct" refer to the Company with respect to the SLC business. In
February 1995, Sunrise changed its name from Sunrise Leasing Corporation to
Sunrise Resources, Inc. and merged with The P.J. King Companies, Inc. d/b/a
International Leasing Corporation ("ILC"), whose business involves leasing a
wide range of equipment through close relationships with the manufacturers of
such equipment. This vendor leasing business is referred to as the "ILC" or
"Vendor" business, and any references to "ILC" refer to the Company with respect
to the "ILC" or "Vendor" business. On March 31, 1995, Sunrise transferred the
SLC and the ILC businesses into a newly created wholly owned subsidiary named
Sunrise Leasing Corporation. In October 1997, Sunrise Resources was merged into
and with Sunrise International Leasing Corporation, a Delaware corporation.
References to the "Company" refer to Sunrise International Leasing Corporation
and its subsidiaries.
Business
The ILC business consists primarily of the development of market-oriented vendor
programs emphasizing the formulation of customized lease and rental programs for
vendors of high technology and other equipment. The lease options offered by ILC
generally focus on one- to three-year lease terms.
The SLC business provides its customers with lease financing for high
technology, telecommunications, and other capital equipment. SLC customers,
representing a variety of industry segments, are located throughout the United
States. The Company uses master lease agreements with its customers, under which
equipment is leased through lease schedules, each of which has its own lease
term and constitutes a separate lease agreement
Industry
The growth in the equipment leasing industry has occurred principally because
users have determined that the benefits of higher productivity and profit can be
obtained from the use of capital equipment, not necessarily from its ownership,
and that leasing can be significantly more flexible than other methods of
acquiring equipment. Leases can be structured to fit the lessee's particular
economic circumstances, cash flow requirements, equipment needs, and tax
situation, and to avoid the risk of obsolescence at the end of the lease term.
The benefits of leasing are especially applicable to those companies using high
technology products, because those products are characterized by rapid and
continuous technological advances. Computer equipment users frequently replace
their existing equipment as it becomes inadequate for their needs, as increased
capacity is required, or as new technological innovations become available. The
flexibility of equipment leasing assists these users to meet their changing
equipment requirements in a cost-effective manner.
Leasing and Sales Activities
The Company generally leases equipment for terms ranging from six months to five
years, though the vast majority of such leases are in the one-to-three-year
category. All of the Company's leases are noncancelable "net" leases which
contain provisions under which the customer must make all lease payments
regardless of any defects in the equipment and which require the customer to
insure the equipment against casualty loss, and pay all related property, sales,
and other taxes. SLC business customers are also required to maintain and
service the leased equipment, whereas certain ILC business lease programs
coordinate such maintenance and service for an additional fee. The Company's
leases are occasionally restructured during the term of the lease to upgrade a
customer's equipment configuration. The Company retains legal ownership of the
equipment it leases, and in the event of default by the customer, the Company
(or the financial institution to whom the lease payments have been assigned) may
declare the customer in default, accelerate all lease payments due under the
lease, and pursue other available remedies, including repossession of the
equipment. At completion of the initial term of the lease, the customer may
return the equipment to the Company, renew the lease for an additional term, or
purchase the equipment. If the equipment is returned to the Company, it is
either re-leased to another customer or sold in the secondary market as used
equipment. The ILC business usually has an informal remarketing arrangement with
the equipment manufacturer, wherein the manufacturer in some instances may
assist in remarketing the equipment. Other than its interest in the equipment it
leases, the Company does not maintain any significant inventory of equipment.
<PAGE>
Competition
The Company generally competes with a large number of firms in equipment
leasing, most of which are substantially larger and have greater capital and
other resources. The Company's principal competitors are primarily large leasing
companies, such as GE Capital, Comdisco Inc., and Leasetec. Commercial banks,
investment banking firms, and other financial institutions also compete with the
Company.
The Company's competitive position is dependent on its ability to attract and
retain vendor programs and qualified sales representatives and on its continued
ability to obtain financing on satisfactory terms.
Residual Values
Residual values, representing the estimated value of the equipment at the
termination of the lease, are recorded on the consolidated balance sheet as a
component of the investment in leasing operations. The estimated residual values
will vary, both in amount and as a percentage of the original equipment cost,
depending on several factors, including the type of equipment, the prior history
of the lessee, the amount of the monthly rent, and the term of the lease.
Residual values are also affected by equipment supply and demand and new product
introductions and prices charged by manufacturers. The Company's policy is to
evaluate residual values on an ongoing basis and record any downward adjustments
in the period identified.
The Company seeks to realize the estimated residual value at lease termination
through (i) renewal or extension of the original lease; (ii) sale of the
equipment to the lessee or a new user; or (iii) leasing of the equipment to a
new user. Equipment whose related leases have expired ("off-lease equipment") is
placed in inventory at its depreciated book value. The Company does not hold
inventory for sale for significant periods of time. The Company attempts to sell
or re-lease off-lease equipment as soon as possible in order to obtain the
highest possible return on such equipment.
Customers and Marketing
In addition to the Company's Minneapolis office, the Company has sales offices
in San Ramon, CA; Denver, CO; Cincinnati, OH; and Kansas City, MO. However, the
Company does not intend to restrict its sales activities to any given territory.
The Company believes that future market expansion will depend on its ability to
establish new vendor leasing relationships and on its ability to hire qualified
sales representatives with experience in selected markets.
Fluctuating Operating Results
Operating results are subject to fluctuations resulting from a variety of
factors, including variations in the relative percentages of the Company's
leases entered into during the period which are classified as direct financing
leases or operating leases as required by Statement of Financial Accounting
Standards No. 13. This relative mixture of leases is a result of a combination
of factors, including, but not limited to, changes in customer demands and/or
requirements, new product announcements, price changes, changes in installation
dates, pricing policies of equipment manufacturers and vendors, maturation of
existing leases, and competition from other lessors. Operating results are also
affected by changes in the Company's receivable and residual reserves resulting
from changes in the credit-worthiness of lease customers and the estimated
residual values of equipment, respectively.
Financing
The Company utilizes recourse and nonrecourse loans to fund lease transactions.
Such financing generally cannot be completed until the equipment to be leased
has been purchased and installed. The Company uses internally generated funds,
existing lines of credit and other borrowings to finance the equipment
acquisitions on an interim basis.
Under nonrecourse financing arrangements, the Company assigns the future rental
payments and a security interest in the underlying equipment to a financial
institution in exchange for a loan equal to the present value of the rental
payments, without incurring liability for repayment of the loan. Ownership of
the leased equipment is retained by the Company, subject to a financial
institution's security interest. During fiscal year 1999, SLC lease transactions
were financed primarily through nonrecourse debt. Specific recourse loans are
<PAGE>
generally collateralized by specific leases and the underlying equipment. The
Company's credit line is secured by all unencumbered assets of the Company. In
these arrangements, the Company retains the entire risk of loss of its
investment in the lease or loan. ILC lease transactions are generally funded via
internally generated cash flows or with full-recourse loans or lines of credit.
As of March 31, 1999 and 1998, the Company's total borrowings were $48,232,000
and $54,655,000, respectively, of which 27% and 43%, respectively, were
nonrecourse.
Significant Credit Concentrations
At March 31, 1999 and 1998, no leases outstanding to any individual lessee
exceeded 5% of the Company's total assets except in cases where the leases had
been discounted without recourse to a financial institution.
The Company has ten active vendor relationships. However, two relationships
generate 47.5% and 18.1% of the Company's total leasing revenue for fiscal year
1999. Should either of these relationships cease, revenues and cash flows would
continue through the scheduled terms of the individual leases, but the long-term
effect would be a substantial reduction of both revenue and profit.
Proprietary Rights
The Company has no patents or registered trademarks. The Company utilizes
software licensed from third parties for certain of its leasing and financing
operations. The Company has developed proprietary software to handle certain
aspects of its operations including the administration of some outstanding
equipment leases.
Foreign Operations and Export Sales
Almost all of the Company's leasing and sales activities are with customers
within the United States. Sales, leases and loans to customers in other
countries have been immaterial through March 31, 1999.
Employees
As of March 31, 1999, the Company had 53 full-time employees, none of which is
employed under a collective bargaining agreement. The Company considers its
current employee relations to be good. The Company believes that its future
operating results will be dependent in a significant part upon recruiting and
retaining well-qualified personnel.
ITEM 2. PROPERTIES
The Company's headquarters are currently located in approximately 13,600 square
feet of office space in Golden Valley, Minnesota, a suburb of Minneapolis. The
lease for the Company's headquarters expires in September 2000 and has a current
gross monthly rental of $11,625 plus operating expenses. Beginning in April
1998, the Company sub-leases approximately 3,200 square feet of this office
space to The King Management Corporation for a gross monthly rental of $2,939
plus operating expenses. The sublease is coterminous with the Company's lease.
The Company also has short-term leases for sales offices in the metropolitan
areas of Kansas City, Missouri; Denver, Colorado; Cincinnati, Ohio; and San
Ramon, California.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal actions in the normal course of
business. Management is of the opinion that the outcome of such actions will not
have a significant effect on the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth the names and ages of current executive officers of the
Company in addition to information regarding their positions with the Company,
their periods of service in such positions, and their business experience for
the past five years. Executive officers generally serve in office for terms of
approximately one year.
Name and Age of Current Positions with Company and
Executive Officer Principal Occupations for the Past Five Years
Peter J. King
71 Peter J. King became Chairman of the Board and Chief
Executive Officer on April 1, 1998, after serving as
Chairman of the Board since June 1997 and as a Board
member since April 1, 1997. Mr. King also served as
the Chief Financial Officer from April to June, 1998.
Mr. King had previously served as Chairman of the
Board from February 1995 to February 1996 and as a
Director from February 1995 to July of 1996. Mr. King
also previously served as a member of the Company's
Interim CEO Committee from July 1995 until July 1996.
Mr. King founded International Leasing Corporation in
1974 and served as its President until it was merged
into the Company in February 1995. Mr. King also
serves as Chairman and CEO of The King Management
Corporation.
Jeffrey G. Jacobsen
51 Jeffrey G. Jacobsen became Executive Vice President
and Chief Financial Officer of the Company in June of
1998. Mr. Jacobsen has been a Director since April
1997 and the Secretary since July 1997. Mr. Jacobsen
held the position of President of King Management
from April 1997 to June 1998, when he joined Sunrise
and has been a Director of The King Management
Corporation since 1990. Prior to April, 1997, Mr.
Jacobsen was Vice President of Network Systems
Corporation, a Minneapolis based, publicly traded
computer networking company, currently owned by
Storage Technology Corporation.
James C. Teal
35 James C. Teal became Corporate Controller of the
Company in June of 1998, which position was elevated
to executive officer status on June 14, 1999. Mr.
Teal is currently the Corporate Controller of the
King Management Corporation and has held that
position since 1993. Prior to joining King Management
and Sunrise, Mr. Teal was Assistant Controller for
the Space Center Company, St. Paul, MN from
1990-1993. Mr. Teal is a Certified Public Accountant
and was an Auditor for the Minneapolis office of
Arthur Andersen LLP from 1986 to 1990.
<PAGE>
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's shares are traded on the Nasdaq National Market ("NASDAQ") under
the symbol SUNL. The table below sets forth the range of high and low sale
prices per share as reported by NASDAQ.
Price
High Low
Fiscal year ended March 31, 1999
First Quarter $3.875 $3.000
Second Quarter 4.375 2.500
Third Quarter 3.875 2.625
Fourth Quarter 3.437 3.000
Fiscal year ended March 31, 1998
First Quarter $3.375 $3.125
Second Quarter 4.234 2.875
Third Quarter 3.250 2.625
Fourth Quarter 3.875 2.625
As of June 2, 1999, there were approximately 1,314 beneficial owners of the
Common Stock. On June 2, 1999, the closing share price was $4.00.
(b) Dividends
The Company has never paid a cash dividend on its common stock. The Board of
Directors does not anticipate paying cash dividends in the near term. The
Company's bank line of credit prohibits the Company from paying dividends
without the bank's consent.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" as of and for each of the years in the
five-year period ended March 31, 1999, are derived from the Company's audited
consolidated financial statements. The consolidated financial statements as of
March 31, 1999 and 1998 and for the three years in the period ended March 31,
1999, and the Independent Auditors' reports thereon, are included elsewhere in
this Annual Report on Form 10-K. The data set forth in the following tables
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's consolidated
financial statements and notes to the consolidated financial statements
appearing elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Years Ended March 31,
1999 1998 1997 1996 1995
--------------- --------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Revenues
Operating leases $ 40,481,000 $ 33,714,000 $ 26,483,000 $ 21,998,000 $ 10,722,000
Direct financing leases 3,134,000 4,792,000 7,528,000 9,625,000 5,613,000
Equipment sales 7,701,000 9,971,000 8,394,000 10,049,000 3,141,000
Interest income 15,000 202,000 304,000 1,447,000 869,000
Fee income 317,000 413,000 254,000 369,000 1,710,000
--------------- --------------- ------------- ------------- --------------
Total 51,648,000 49,092,000 42,963,000 43,488,000 22,055,000
Costs and expenses
Depreciation 26,680,000 19,974,000 15,297,000 13,777,000 7,518,000
Interest 3,791,000 5,424,000 6,541,000 7,559,000 3,865,000
Provision for lease and loan losses 1,925,000 2,790,000 7,512,000 1,853,000 9,502,000
Cost of equipment sold 7,209,000 9,966,000 7,418,000 9,145,000 2,495,000
Compensation expense 3,330,000 4,010,000 3,729,000 3,596,000 2,151,000
Other operating expenses 2,786,000 2,945,000 2,800,000 2,671,000 1,861,000
Arbitration settlement -- -- 2,022,000 -- --
--------------- --------------- ------------- ------------- -------------
Total 45,721,000 45,109,000 45,319,000 38,601,000 27,392,000
--------------- --------------- ------------- ------------- -------------
Income (loss) before income taxes 5,927,000 3,983,000 (2,356,000) 4,887,000 (5,337,000)
Provision (benefit) for income taxes 2,489,000 1,792,000 191,000 2,384,000 (1,085,000)
--------------- --------------- ------------- ------------- ----------
Net income (loss) $ 3,438,000 $ 2,191,000 $ (2,547,000) $ 2,503,000 $ (4,252,000)
=============== =============== ============= ============= ============
Net income (loss) per common
share-basic $ .45 $ .29 $ (0.35) $ 0.35 $ (0.93)
=============== =============== ============= ============= ============
Net income (loss) per
common share-diluted $ .45 $ .29 $ (0.35) $ 0.35 $ (0.93)
=============== =============== ============= ============= ============
March 31,
1999 1998 1997 1996 1995
--------------- --------------- ------------- ------------- --------------
Balance Sheet Data
Investment in leasing operations $95,491,000 $81,472,000 $94,972,000 $101,394,000 $ 96,188,000
Loans receivable 2,556,000 3,328,000 7,503,000 14,074,000 18,638,000
Total assets 103,015,000 92,933,000 109,489,000 123,085,000 120,147,000
Borrowings under lines of credit 4,156,000 6,661,000 13,329,000 18,298,000 15,608,000
Notes payable to The
King Management Corporation 8,476,000 14,986,000 -- 4,127,000 11,733,000
Notes payable to others 22,011,000 7,532,000 15,481,000 -- --
Participations in loans receivable -- -- 435,000 4,582,000 7,585,000
Total liabilities 70,609,000 61,925,000 84,143,000 93,781,000 93,347,000
Retained earnings 6,713,000 3,275,000 1,084,000 3,631,000 1,128,000
Shareholders' equity 32,406,000 31,008,000 26,757,000 29,304,000 26,800,000
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Revenues
The Company classifies its lease transactions, as required by Statement of
Financial Accounting Standards No. 13 ("FASB 13"), as either direct financing or
operating leases. Revenue, costs and resulting income are recognized during each
of the accounting periods during the term of the lease. The allocation of income
among the accounting periods within a lease term will vary depending upon the
lease classification.
The Company segregates the sources of its revenue into five categories for
financial statement purposes: (i) operating leases; (ii) direct financing
leases; (iii) sales of equipment; (iv) fee income; and (v) interest income.
Operating Leases. Monthly billings from these leases are recognized as leasing
revenue. The Company's cost of the leased equipment is recorded on the balance
sheet and is depreciated on a straight-line basis over the lease term to the
Company's estimate of residual value. Revenue, depreciation expense, and the
resultant gross margin for operating leases are recorded evenly over the term of
the lease. If the lease is discounted to a financial institution, the related
interest expense declines over the term of the lease as the principal is
reduced, with the resultant margin being lower in the early periods of the lease
and higher in the later periods.
Direct Financing Leases. Direct financing leases consist of future lease
payments plus the residual value (collectively referred to as the "gross
investment"). Residual value is the estimated fair market value at the time of
lease termination. At the inception of a direct finance lease, 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.
Fee Income. Fee income primarily consists of late fees collected on past due
accounts.
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.
Consolidated Results of Operations for the Years Ended March 31, 1999 and 1998
For the year ended March 31, 1999, total revenue increased $2.6 million, or
5.2%, compared to the previous year. For the same periods, net income increased
$1.2 million or 56.9%.
For the year ended March 31, 1999, consolidated leasing net margins increased
$618,000, or 5.7%. See discussion by segment below for explanations of this
increase.
Revenue from equipment sales decreased $2.3 million, or 22.8%, and gross margins
on equipment sales increased $0.5 million over the breakeven margins for the
previous year.
Compensation expenses decreased $680,000 or 17.0% as a result of decreases in
employee headcount as well as decreases in severance payments which were
included in fiscal 1998 expenses.
Other operating expenses decreased $0.2 million, or 5.4%.
The income tax provision as a percentage of income before taxes was 42.0% in
fiscal 1999 as compared to 45.0% in fiscal 1998. Fiscal 1998 income before taxes
included certain expenses which were not deductible for tax resulting in an
abnormally high tax rate.
<PAGE>
Segment Information
In evaluating Company's 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
within each segment, 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
sales gross margin is sale proceeds less the net book value of the equipment
sold at the time of sale.
Segmented Results of Operations for the Years Ended March 31, 1999 and 1998
ILC/Vendor
Vendor leasing revenues increased $6.9 million, or 25.0%, over the previous
fiscal year. Vendor leasing gross margins increased $898,000 or 9.0% while
vendor leasing net margins decreased $307,000, or 3.3%, 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 decreased while revenue and gross margins increased,
reflecting increased loss provisions made necessary by increased exposure due to
portfolio growth and increased credit risks.
For the year ended March 31, 1999, equipment sales revenue decreased $1.4
million, or 20.2%. Gross margins from equipment sales increased to $100,000,
compared to a gross margin loss of $488,000 for the previous year.
SLC/Direct
For the year ended March 31, 1999, SLC leasing revenue decreased $2.0 million,
or 17.5%, 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 decreased $1.1 million, or 30.3%. SLC net leasing margins
increased $925,000 or 53.7%. 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 as well as recoveries on items previously
written off resulting in a net recovery for the year.
For the year ended March 31, 1999, equipment sales revenue decreased $862,000 or
28.6% and gross margins from equipment sales decreased $101,000 or 20.5%.
Consolidated Results of Operations for the Years Ended March 31, 1998 and 1997
For the year ended March 31, 1998, total revenue increased $6.1 million, or
14.3%, compared to the previous fiscal year. For the same periods net income was
$2.2 million, compared to a net loss of $2.5 million.
For the year ended March 31, 1998, consolidated leasing net margins increased
$5.7 million, or 109.5%. See discussion by segment below for explanation of this
increase.
Revenue from equipment sales increased $1.6 million, or 18.8%. Gross margins on
equipment sales decreased $1.0 million to breakeven. This gross margin decrease
was due to losses on sales related to a specific vendor program.
Compensation expenses increased $0.3 million, or 7.5%, primarily due to
severance accruals.
<PAGE>
Other operating expenses increased $0.2 million or 5.2%.
Charges totaling $2.0 million relating to an arbitration award were included in
results for fiscal year 1997.
The income tax provision as a percentage of income (loss) before taxes was 45.0%
in fiscal 1998. In fiscal 1997, the Company recorded an income tax provision of
$191,000 in spite of a pre-tax loss. The primary reason for the effective tax
rates differences is the lack of deductibility of the arbitration award and
related legal expenses, which were much larger in fiscal 1997 than in fiscal
1998.
Segmented Results of Operations for the Years Ended March 31, 1998 and 1997
ILC/Vendor
For the year ended March 31, 1998, vendor leasing revenues increased $6.9
million, or 33.6% over the previous year which is directly attributable to
increases in new lease purchases. Vendor leasing gross margins increased $1.6
million, or 19.0% and leasing net margins increased $1.2 million, or 15.1% over
the same periods. Leasing gross margins and net margins did not increase as fast
as leasing revenue due to accelerated rates of depreciation and increases in the
provisions for losses.
For the year ended March 31, 1998, equipment sale revenue increased $2.3
million, or 48.2% over the previous fiscal year. Gross margins from equipment
sales decreased to a loss of $488,000, compared to a gross profit of $565,000 in
the previous year. This gross margin decrease was due to losses on sales related
to a specific vendor program.
SLC/Direct
For the year ended March 31, 1998, direct leasing revenue decreased $2.4
million, or 16.8%, 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 decreased $598,000, or 13.7%. SLC leasing net margins
increased to $1.7 million, compared to a loss of $2.8 million for the previous
year, which was caused by the large write-offs and provisions for losses taken
in the fourth quarter of fiscal year 1997.
For the year ended March 31 1998, equipment sales revenue decreased $684,000 or
18.5% and gross margins from equipment sales increased $82,000 or 20.0%.
<PAGE>
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. In this manner, 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 will continue 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.
At March 31, 1999, the Company had total borrowings outstanding of $48.2
million, of which 27.3 % were nonrecourse. These borrowings consisted of $13.6
million of discounted lease rentals (3.1% of which were recourse and 96.9% of
which were non-recourse), $4.2 million of borrowings under bank lines of credit,
$22.0 million notes payable to several banks, and a total of $8.4 million of
notes payable to King Management Corporation.
As of March 31, 1999, the Company had a total investment in leasing operations
of $95.5 million, which compares to $81.5 million in fiscal 1998. 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 $49.1 million was generated from operating activities for the
year ended March 31, 1999, of which $11.4 million resulted from increases in
accounts payable and customer deposits. The Company also collected $17.3 million
in loans and direct financing leases in fiscal 1999. This cash flow was used to
purchase $59.0 million of leasing equipment and resulted in a net reduction in
borrowings of $8.6 million. The Company also used $2.2 million to repurchase its
common stock under a stock repurchase program.
The Company has discovered that certain errors have 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 has 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 March 31, 1999, the Company had issued purchase orders for, and thereby
committed to buy, $21.9 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,
$4.2 million had been utilized as of March 31, 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 described in Footnote 5 of the financial statements included in this Annual
Report on Form 10-K, 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.
<PAGE>
All of these facilities are secured by specific leases and
equipment and require compliance with certain liquidity and net worth ratios.
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 borrowing capacity to
provide funding for approved vendor programs including making direct loans to
the Company. From June 16, 1997 through March 31, 1999, King Management has
provided term note financing totaling $19,767,000, with a balance outstanding of
$8.5 million, at March 31, 1999. The notes bear interest at prime minus 0.25%
(7.50% at March 31, 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. During fiscal 1999 and 1998, KMC purchased
leases in the amount of $14,307,000 and $4,969,000, respectively.
Interest expense paid to KMC related to the financing arrangements described
above was $969,000, $161,000 and $145,000, for the years ended March 31, 1999,
1998, and 1997, respectively.
Based on the financing commitments from King Management, the borrowing capacity
under the bank line, and its recent success in obtaining additional term note
discount financing, the Company believes that it will be able to finance its
anticipated equipment purchasing commitments in fiscal 2000.
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.
<PAGE>
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.
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 March 31,
1999, the Company had only two significant vendor leasing programs and had
signed agreements for eight 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.
Major Customers/Vendors. At March 31, 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, 47.5% and 18.1% and 50.6 % and 8.2% of the Company's total leasing
revenue for the years ended March 31, 1999 and 1998 respectively, were generated
through two vendor leasing programs. During the second quarter 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
have 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.
During the past fiscal year, the Company has experienced losses on the sale of
equipment under specific vendor programs and established reserves to cover
anticipated future losses relating to the programs. In addition, the Company
will be depreciating future equipment acquisitions relating to these vendor
programs more quickly. The trend towards shortened product life cycles and
accelerated rates of depreciation will continue to adversely affect the
Company's ability to maintain historical leasing margins.
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedule listed below are included herein
on the pages set forth:
Page
Current Independent Auditor's Report on Consolidated Financial
Statements and Schedule as of and for the years ended March 31, 1999
and 1998.................................................................... 16
Former Independent Public Accountants' Report on Consolidated Financial
Statements for the year ended March 31, 1997................................ 17
Consolidated Balance Sheets as of March 31, 1999 and 1998................ ...18
Consolidated Statements of Operations for the years ended March 31,
1999, 1998, and 1997.........................................................19
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 1999, 1998 and 1997................................................20
Consolidated Statements of Cash Flows for the years ended March 31,
1999, 1998 and 1997..........................................................21
Notes to Consolidated Financial Statements...................................22
Schedule II- Valuation and Qualifying Accounts................................*
All other schedules are omitted, as the required information is inapplicable or
the information is presented in the financial statements or related notes.
* Immediately follows signature page of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On November 12, 1997, Arthur Andersen LLP was dismissed and Deloitte &
Touche LLP was appointed as the Company's independent public accountants. Such
change in accountants was reported in the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997.
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Sunrise International Leasing Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Sunrise
International Leasing Corporation (formerly Sunrise Resources, Inc.) and
Subsidiaries as of March 31, 1999 and 1998 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. Our audits also included the financial statement schedule as of and
for the years ended March 31, 1999 and 1998 listed in the index at Item
14(a)(2). These financial statements and the financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 1999 and 1998 financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provides a reasonable basis for
our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sunrise International Leasing
Corporation and Subsidiaries as of March 31, 1999 and 1998 and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles. Also, in our opinion, such
financial statement schedule when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
June 4, 1999
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sunrise International Leasing Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Sunrise International Leasing Corporation
(a Delaware corporation) (formerly Sunrise Resources, Inc.) and Subsidiaries
(the Company) for the year ended March 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Sunrise
International Leasing Corporation and Subsidiaries for the year ended March 31,
1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
June 27, 1997
<PAGE>
SUNRISE INTERNATIONAL LEASING CORPORATION
(FORMERLY SUNRISE RESOURCES, INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 963,000 $ 2,140,000
Accounts receivable, less allowance for doubtful accounts
of $368,000 and $260,000, respectively 1,306,000 3,413,000
Loans receivable, less allowance for possible losses of
$1,105,000 in 1998 2,556,000 3,328,000
Investment in leasing operations:
Operating leases - Equipment 111,953,000 74,833,000
Less: Operating leases - Accumulated depreciation 36,518,000 25,146,000
----------------- ----------------
Operating leases - Net book value 75,435,000 49,687,000
Direct financing leases 14,880,000 26,865,000
Equipment held for lease 4,914,000 4,262,000
Inventory held for sale 57,000 207,000
Initial direct costs 205,000 451,000
----------------- ----------------
Total investment in leasing operations 95,491,000 81,472,000
----------------- ----------------
Furniture and fixtures, less accumulated depreciation of
$652,000 and $658,000, respectively 242,000 326,000
Deferred tax asset 1,364,000
Other assets 1,093,000 2,254,000
----------------- ----------------
Total Assets $ 103,015,000 $ 92,933,000
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Financing arrangements
Borrowings under lines of credit $ 4,156,000 $ 6,661,000
Discounted lease rentals 13,589,000 25,476,000
Term notes 22,011,000 7,532,000
Notes payable to King Management Corporation 8,476,000 14,986,000
----------------- ----------------
Total financing arrangements 48,232,000 54,655,000
----------------- ----------------
Accounts payable 8,988,000 1,457,000
Accrued liabilities 1,821,000 1,052,000
Customer deposits 4,804,000 1,698,000
Income taxes payable 6,764,000 2,881,000
Deferred tax liability 182,000
----------------- ----------------
Total Liabilities 70,609,000 61,925,000
----------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 17,500,000 shares authorized,
7,826,000 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 27,810,000 27,655,000
Retained earnings 6,713,000 3,275,000
----------------- ----------------
34,601,000 31,008,000
Common stock in treasury at cost - 566,000 shares (2,195,000)
----------------- ----------------
Total Stockholders' Equity 32,406,000 31,008,000
----------------- ----------------
Total Liabilities and Stockholders' Equity $ 103,015,000 $ 92,933,000
================= ================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
SUNRISE INTERNATIONAL LEASING CORPORATION
(FORMERLY SUNRISE RESOURCES, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended March 31,
1999 1998 1997
-------------- --------------- ---------------
REVENUES:
<S> <C> <C> <C>
Operating leases $ 40,481,000 $ 33,714,000 $ 26,483,000
Direct financing leases 3,134,000 4,792,000 7,528,000
Equipment sales 7,701,000 9,971,000 8,394,000
Interest income 15,000 202,000 304,000
Fee income 317,000 413,000 254,000
-------------- --------------- ---------------
Total revenues 51,648,000 49,092,000 42,963,000
-------------- --------------- ---------------
COSTS AND EXPENSES:
Depreciation 26,680,000 19,974,000 15,297,000
Interest (including $969,000, $161,000, and
$145,000, respectively, paid to a related party) 3,791,000 5,424,000 6,541,000
Provision for lease and loan losses 1,925,000 2,790,000 7,512,000
Cost of equipment sold 7,209,000 9,966,000 7,418,000
Compensation expense 3,330,000 4,010,000 3,729,000
Other operating expenses 2,786,000 2,945,000 2,800,000
Arbitration settlement 2,022,000
-------------- --------------- ---------------
Total costs and expenses 45,721,000 45,109,000 45,319,000
-------------- --------------- ---------------
INCOME (LOSS) FROM OPERATIONS BEFORE
PROVISION FOR INCOME TAXES 5,927,000 3,983,000 (2,356,000)
PROVISION FOR INCOME TAXES 2,489,000 1,792,000 191,000
-------------- --------------- ---------------
NET INCOME (LOSS) $ 3,438,000 $ 2,191,000 $ (2,547,000)
============== =============== ===============
NET INCOME (LOSS) PER COMMON SHARE
BASIC $ .45 $ 0.29 $ (0.35)
============== =============== ===============
DILUTED $ .45 $ 0.29 $ (0.35)
============== =============== ===============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC 7,618,000 7,658,000 7,189,000
============== =============== ===============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - DILUTED 7,642,000 7,676,000 7,245,000
============== =============== ===============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
SUNRISE INTERNATIONAL LEASING CORPORATION
(FORMERLY SUNRISE RESOURCES, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
Common Stock in Treasury Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
--------- ------- --------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
MARCH 31, 1996 7,189,000 $72,000 $25,601,000 $3,631,000 $29,304,000
Net loss (2,547,000) (2,547,000)
--------- ------- ----------- ---------- -----------
BALANCE AT
MARCH 31, 1997 7,189,000 72,000 25,601,000 $1,084,000 26,757,000
Stock issued as a result of
arbitration settlement 599,000 6,000 2,016,000 2,022,000
Stock options issued to
non-employees 38,000 38,000
Net income 2,191,000 2,191,000
--------- ------- ---------- --------- ----------
BALANCE AT
MARCH 31, 1998 7,788,000 78,000 27,655,000 3,275,000 31,008,000
Stock repurchases (566,000) $(2,195,000) (2,195,000)
Stock option exercises 38,000 101,000 101,000
Stock options issued to
non-employees 54,000 54,000
Net income 3,438,000 3,438,000
--------- ------- --------- ----------- ---------- --------- ----------
BALANCE AT
MARCH 31, 1999 7,826,000 $78,000 (566,000) $(2,195,000) $27,810,000 $6,713,000 $32,406,000
========= ======= ======== =========== =========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
SUNRISE INTERNATIONAL LEASING CORPORATION
(FORMERLY SUNRISE RESOURCES, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,438,000 $ 2,191,000 $ (2,547,000)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Provision for lease and loan losses 1,925,000 2,790,000 7,512,000
Depreciation and amortization 27,011,000 20,947,000 15,409,000
Deferred income taxes (1,546,000) 1,792,000 401,000
Stock issued for arbitration settlement -- 2,022,000 --
Stock options issued to non-employees 54,000 38,000 --
Change in operating assets and liabilities:
Accounts receivable 1,748,000 (2,081,000) 1,236,000
Income taxes 3,883,000 617,000 (88,000)
Other assets 1,077,000 (1,195,000) (831,000)
Inventory held for sale 150,000 181,000 (265,000)
Accounts payable/accrued liabilities 8,300,000 (5,351,000) 1,971,000
Customer deposits 3,106,000 (1,756,000) 2,333,000
----------- ----------- -----------
Net cash provided by operating activities 49,146,000 20,195,000 25,131,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in loans receivable -- -- (1,417,000)
Principal portion of loans receivable collected 772,000 3,975,000 5,503,000
Purchase of equipment for lease, net of cost of
equipment sold (59,037,000) (30,364,000) (40,646,000)
Principal portion of direct financing leases collected 16,534,000 21,016,000 26,115,000
Purchase of furniture and fixtures (75,000) (85,000) (40,000)
----------- ----------- -----------
Net cash used in investing activities (41,806,000) (5,458,000) (10,485,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on lines of credit 45,411,000 36,100,000 22,600,000
Payments on lines of credit (47,916,000) (42,768,000) (27,569,000)
Proceeds from discounted lease financing 5,106,000 11,342,000 12,298,000
Payments on discounted lease financing (16,993,000) (26,064,000) (28,620,000)
Proceeds from notes payable related party 4,295,000 15,472,000 1,955,000
Payments on notes payable to related party (10,805,000) (486,000) (6,082,000)
Payments on participations in loans receivable -- (435,000) (4,147,000)
Proceeds from term notes 21,282,000 5,499,000 20,000,000
Payments on term notes (6,803,000) (13,448,000) (4,519,000)
Stock option exercised 101,000 -- --
Purchase of treasury stock (2,195,000) -- --
----------- ----------- -----------
Net cash used in financing activities (8,517,000) (14,788,000) (14,084,000)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,177,000) (51,000) 562,000
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 2,140,000 2,191,000 1,629,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 963,000 $ 2,140,000 $ 2,191,000
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 2,232,000 $ 3,004,000 $ 3,823,000
Income taxes paid 152,000 (617,000) 423,000
</TABLE>
See notes to consolidated financial statements.
<PAGE>
SUNRISE INTERNATIONAL LEASING CORPORATION
(FORMERLY SUNRISE RESOURCES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
- -------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Sunrise International Leasing Corporation
(formerly Sunrise Resources, Inc.) (Sunrise or the Company) was
incorporated in Minnesota in February 1989. In 1997 the Company was
reincorporated under Delaware State law. The Company, through its wholly
owned subsidiary Sunrise Leasing Corporation (also d/b/a International
Leasing Corporation (ILC)), is primarily in the business of leasing data
processing and other equipment. The Company has in the past engaged in
commercial and asset-based lending through its wholly owned subsidiary
Sunrise Financial Resources, Inc. (SFR).
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Reclassifications - Certain amounts in the financial statements and notes
thereto have been reclassified to conform to fiscal 1999 classifications.
These changes had no impact on previously reported results of operations
or stockholders' equity.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. At March 31, 1999 and 1998, the Company had restricted cash
balances of $319,000 and $891,000, respectively, associated with a
compensating debt balance.
Inventory Held for Sale - Inventory is valued at the lower of specific
unit cost or net realizable value.
Loan Accounting - Loans are stated at the amount of unpaid principal, net
of unearned fees from loan origination, and are reduced by an allowance
for possible loan losses, if necessary. Interest is accrued on the unpaid
principal balances.
Lease Accounting - The Company's lease transactions are classified as
either direct financing or operating leases. The Company classifies each
lease at its inception in accordance with Statement of Financial
Accounting Standards (SFAS) No. 13, Accounting for Leases.
The lease accounting methods used by the Company are:
Operating Leases - Monthly payments are recorded as operating lease
revenues. The cost of the equipment is recorded as investment in leasing
operations - operating leases in the consolidated balance sheet and this
cost, less an estimated residual value, is depreciated using the
straight-line method over the term of the lease.
Direct Financing Leases - Direct financing leases consist of future lease
payments plus the residual value (collectively referred to as the "gross
investment"). The difference between the gross investment in the lease and
the cost (or carrying amount, if different) of the leased property is
recorded as unearned revenue. The net investment in the lease is the gross
investment less unearned revenue and is recorded as investment in leasing
operations - direct financing leases in the consolidated balance sheet.
The unearned revenue is amortized to direct financing lease revenues over
the lease term to produce a constant percentage return on the net
investment.
<PAGE>
Allowance for Lease and Loan Losses - The allowance for possible losses is
established through a provision for losses charged to expense and is
estimated based upon the Company's past loss experience, current economic
conditions, and an evaluation of the lease and loan portfolio. The
allowance for possible losses is reduced by net charge-offs. Current and
future economic developments or other factors may have a significant
impact on the market value of leased equipment and other collateral.
Accordingly, ultimate losses may vary from current estimates. These
estimates are reviewed periodically and adjustments, as they become
necessary, are reported in the results of operations in the periods in
which they become known. In management's opinion, the allowance for
possible lease and loan losses is sufficient to adequately provide for
potential losses.
Equipment Held for Lease - Equipment held for lease is valued at the lower
of specific unit cost or net realizable value. Equipment consists
primarily of those items assigned to lease contracts that have not yet
commenced.
Depreciation - Operating lease equipment is depreciated using the
straight-line method to an estimated residual value. Furniture and
fixtures are depreciated using the straight-line method over the expected
useful lives of the assets (3-5 years).
Other Assets - Other assets include goodwill, net of accumulated
amortization of $474,000 and $519,000 at March 31, 1999 and 1998,
respectively, representing the excess of cost over the fair value of
identifiable net assets at the date of the ILC merger and is being
amortized over a 15-year period. At each balance sheet date, management
assesses whether there has been a permanent impairment in the value of
goodwill by comparing anticipated undiscounted future cash flows from the
acquired business unit with the carrying value of the related goodwill.
The factors considered by management in performing this assessment include
current operating results, trends, and prospects, as well as the effects
of demand, competition, and other economic factors. Also included in other
assets is the carrying value of certain assets which the Company has taken
ownership of in settlement of outstanding loans and leases.
Income Taxes - Deferred income taxes are provided for differences between
the financial reporting basis and tax basis of the Company's assets and
liabilities at currently enacted tax rates.
Accounting for Equipment Sales - Equipment sales and cost of equipment
sold are recognized when title to the equipment is transferred to the
customer.
Fee Income - Fee income primarily consists of late fees collected on past
due accounts.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company uses significant
estimates to record loss reserves and estimated residual values. Ultimate
results could differ from those estimates.
Accounting for Stock Options - Measurement and recognition of stock based
transactions with employees are accounted for under Accounting Principle
Board Opinion No. 25 (APB No. 25). See Note 7 for the required disclosures
under SFAS No. 123, Accounting for Stock Based Compensation.
In fiscal 1997, the Company adopted SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of;
SFAS No. 123, Accounting for Stock Based Compensation; and SFAS No. 125,
Accounting for Transfer and Servicing of Financial Assets and
Extinguishments of Liabilities. The adoption of these statements did not
have a material impact on the Company's financial position or results of
operations.
Earnings per Share - During 1998, the Company adopted SFAS No. 128,
Earnings Per Share. SFAS No. 128 requires the disclosure of Basic and
Diluted Earnings per share (EPS). Basic EPS is computed using income
available to common shareholders divided by the weighted average number of
shares outstanding during the year. Diluted EPS is similar to Basic EPS
except that the weighted average number of common shares outstanding is
increased to give effect to all dilutive potential common shares that were
outstanding during the period.
<PAGE>
Comprehensive Income - In 1999, the Company also adopted SFAS No. 130,
Reporting Comprehensive Income, which establishes standards for the
reporting of comprehensive income and its components. Comprehensive income
is defined as the change in equity during the period of a business
enterprise resulting from transactions and other events and circumstances
from non-owner sources. Implementation of SFAS No. 130 did not have an
effect on the Company's financial statements because comprehensive income
is the same as the Company's net income.
Segment Information - During 1999, the Company adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS
No. 131 establishes standards for reporting operating segment information
based upon how the Company manages its operations. The Company manages its
business in two distinct operating groups, which are International Leasing
Corporation (ILC) and Sunrise Leasing Corporation (SLC). See also Note 12.
Prior year financial statements have been restated accordingly.
In June 1998, the Financial Accounting Standards Board released SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, which
will be effective for the Company beginning April 1, 2001. SFAS No. 133
establishes new accounting and reporting standards for the derivative
instruments embedded in other contracts, and for hedging activities. The
Company has not completed its analysis of the effects of this standard;
however adoption of this standard is not expected to have a material
impact on the financial position or the results of operations of the
Company.
2. LOANS RECEIVABLE
The Company discontinued its loan activities in fiscal 1997. As of March
31, 1999, the loan receivable portfolio was primarily comprised of a
single loan.
The activity in the allowance for possible loan losses was as follows:
Years Ended March 31,
1999 1998 1997
----------- ----------- -----------
Balance at beginning of year $ 1,105,000 $ 3,401,000 $ 2,773,000
Provision for loan losses -- 200,000 2,485,000
Loans written off (1,105,000) (2,496,000) (1,857,000)
----------- ----------- -----------
Balance at end of year $ -- $ 1,105,000 $ 3,401,000
=========== =========== ===========
When, in the opinion of management, a reasonable doubt exists as to the
collectibility of interest or fee income, the accrual of such income is
discontinued, and uncollected income accruals are reversed. During the
years ended March 31, 1999, 1998 and 1997, the Company did not recognize
fee and interest income totaling $175,000, $850,000 and $771,000,
respectively, related to impaired loans.
While the Company believes that no reserves are currently necessary, it
continues to monitor the significant loan, and a related lease. The
Company has an aggregate book value of $2.7 million and an aggregate
remaining contractual balance of $8.4 million relating to this loan and
lease. Payments are being received on a monthly basis and the Company
believes that its collateral and related guaranty adequately secure the
remaining book balance.
<PAGE>
3. INVESTMENT IN LEASING OPERATIONS
Direct Financing Leases - The components of assets leased under direct
financing leases consist of the following:
<TABLE>
<CAPTION>
March 31,
1999 1998
--------------- ----------------
<S> <C> <C>
Future minimum lease rentals $ 24,151,000 $ 35,653,000
Estimated residual values of leased equipment 1,522,000 2,888,000
--------------- ----------------
25,673,000 38,541,000
Less unearned revenue on lease rentals (3,972,000) (5,749,000)
Less reserves for direct financing leases (6,821,000) (5,927,000)
---------------- -----------------
Net investment in direct financing leases $ 14,880,000 $ 26,865,000
=============== ================
</TABLE>
Future Minimum Lease Payments - Future minimum lease payments on direct
financing and operating leases are due as follows:
Direct
Financing Operating
Leases Leases
Years ending March 31:
2000 $13,315,000 $35,844,000
2001 6,630,000 14,823,000
2002 2,174,000 2,775,000
2003 1,122,000
2004 and thereafter 910,000
--------------- -------------
$24,151,000 $53,442,000
=============== =============
As described in Note 5, a substantial portion of the Company's direct
financing and operating leases are pledged as collateral on term debt
arrangements or are discounted to financial institutions. Accordingly, a
substantial portion of the future minimum lease payments shown above are
committed to the repayment of those financing arrangements.
4. SIGNIFICANT CONCENTRATIONS IN LEASES
At March 31, 1999 and 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, 49.5% and 18.1% and 50.6 % and 8.2% of the Company's total
leasing revenue for the years ended March 31, 1999 and 1998 respectively,
were generated through two vendor leasing programs. During the second
quarter, 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 will continue to utilize the
Company in the vendor's niche markets. Subsequent to the notice, the
Company's volume of new lease purchases from this vendor have increased.
However, as in any vendor program, there is no assurance how long this
increased utilization will continue. If the relationship were to change
resulting in a reduction in the volume of new leases, the Company would
continue to realize declining revenues attributable to 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.
<PAGE>
5. 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 March 31, 1999 and 1998 was $4,156,000 and $6,661,000, respectively.
Advances are at prime (7.75% at March 31, 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 March 31, 1999, the Company is in
compliance with the terms of these agreements.
Term Debt Arrangements
On October 31, 1996, the Company entered into an agreement with a
subsidiary of Dougherty Dawkins, Inc. to place up to $20 million of notes.
The remaining balances of $1,528,000 were paid in full on July 31, 1998.
The notes were secured by certain leases of the Company.
On May 16, 1997, Sunrise International Leasing Corporation completed a
$5,500,000 funding on a term note facility with National City Bank of
Minneapolis. These notes are secured by certain leases of the Company.
These funds were used to reduce the debt outstanding under the Company's
line of credit. The balance outstanding on this facility was $945,000 at
March 31, 1999, with interest accruing at 9.53%.
On February 22, 1999, Sunrise International Leasing Company executed a
$6.5 million term note facility with National City Bank of Minneapolis.
These notes are secured by certain leases of the Company. $5.15 million
was funded on February 22, 1999 and $1.35 million was funded on March 31,
1999, with proceeds used to reduce debt outstanding under the Company's
line of credit. The balance under this facility was $6,284,000 as of March
31, 1999. Interest on this facility is tied to National City Bank's prime
rate (7.75% at March 31, 1999).
On March 29, 1999, Sunrise International Leasing Company executed a $5
million term note with US Bank Leasing. This note is secured by certain
leases of the Company. The proceeds were used to reduce debt outstanding
under the Company's line of credit. The balance under this facility was
$4,797,000 as of March 31, 1999. Interest on the note is fixed at 8.15%.
On March 31, 1999, Sunrise International Leasing Company executed a $10
million term note facility with Community First Financial Incorporated of
Fargo North Dakota. These notes are secured by certain leases of the
Company. $10 million was funded on March 31, 1999, with the proceeds used
to reduce the Company's line of credit. The balance under this facility
was $9,985,000 as of March 31, 1999. Interest on this facility is fixed at
7.75%.
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 March 31, 1999, the Company is in compliance with the terms
of these agreements. Interest expense related to the above described
credit facilities was $1,324,000, $1,303,000, and $2,290,000 for the years
ended March 31, 1999, 1998, and 1997, respectively.
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
<PAGE>
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
March 31, 1999, King Management has provided term note financing totaling
$19,767,000, with a balance outstanding of $8,476,000 at March 31, 1999.
The notes bear interest at prime minus 0.25% (7.50% at March 31, 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 and to provide lease portfolio administration
services for those leases. Specific leases are identified as the property
of KMC and are not included in the Company's portfolio. During fiscal 1999
and 1998, KMC purchased leases in the amount of $14,307,000 and
$4,969,000, respectively.
Interest expense paid to KMC related to the financing arrangements
described above were $969,000, $161,000, and $145,000, for the years ended
March 31, 1999, 1998, and 1997, respectively.
The term debt agreements classified above require principal and interest
payments equivalent to the net cash proceeds from the leases which secure
the individual agreement. Expected future minimum lease payments of the
Company's lease portfolio are presented in Note 3.
Discounted Lease Rentals
Discounted lease rentals consist of the following:
March 31,
1999 1998
Nonrecourse borrowings $13,164,000 $23,697,000
Recourse borrowings 425,000 1,779,000
----------- -----------
$13,589,000 $25,476,000
=========== ===========
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.
Future minimum lease payments and interest expense on leases that have
been discounted are as follows:
Minimum Lease
Payments to be
Received by Discounted Future
Financial Lease Interest
Institution Rentals Expense
Years ending March 31:
2000 $10,282,000 $ 9,585,000 $ 697,000
2001 3,864,000 3,731,000 133,000
2002 262,000 256,000 6,000
2003 17,000 17,000
----------- ----------- -----------
$14,425,000 $13,589,000 $ 836,000
=========== =========== ===========
<PAGE>
Certain recourse discounted lease rental agreements require the Company to
maintain financial ratios and to comply with other covenants similar to
those required in the Company's credit facility agreements. As of March
31, 1999, the Company was in compliance with such covenants.
Effective interest rates on the discounted lease rentals ranged from 6.56%
to 10.5% at March 31, 1999. Interest expense on discounted lease rentals
was $1,657,000, $2,833,000, and $4,043,000 for the years ended March 31,
1999, 1998, and 1997, respectively.
6. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Years Ended March 31,
1999 1998 1997
-------------- ------------- ----------
<S> <C> <C>
Current payable (refundable)
Federal $ 3,166,000 $(197,000)
State and other 869,000 (13,000)
-------------- ----------
4,035,000 (210,000)
-------------- ----------
Deferred
Income taxes (1,546,000) 1,792,000 457,000
Valuation allowance (56,000)
-------------- ------------- ----------
(1,546,000) 1,792,000 401,000
-------------- -------------- ----------
Total $ 2,489,000 $ 1,792,000 $ 191,000
============== ============== ==========
</TABLE>
A reconciliation of income tax provision (benefit) at the federal
statutory rates to the income tax provision at the effective rate is as
follows:
<TABLE>
<CAPTION>
Years Ended March 31,
1999 1998 1997
---------- ---------- ---------
<S> <C> <C> <C>
Federal income tax provision (benefit)
at statutory rates $2,015,000 $1,354,000 $(801,000)
State income taxes, net of federal tax effect 355,000 245,000 (141,000)
Settlement and legal costs associated with
the shareholder arbitration 172,000 809,000
Other 119,000 21,000 324,000
---------- ---------- ---------
$2,489,000 $1,792,000 $ 191,000
========== ========== =========
</TABLE>
The components of deferred taxes consist of the following:
<TABLE>
<CAPTION>
March 31,
1999 1998
--------------- ----------------
Deferred tax assets
<S> <C> <C>
Lease revenue $ 7,863,000 $ 11,666,000
Allowances for doubtful accounts and lease and loan losses 2,854,000 2,889,000
Deferred revenue 468,000 139,000
Accruals and other 334,000 137,000
Other assets 420,000
--------------- ----------------
Total deferred tax assets 11,519,000 15,251,000
--------------- ----------------
Deferred tax liabilities
Depreciation (10,102,000) (15,377,000)
Prepaid assets (53,000) (56,000)
---------------- -----------------
Total deferred tax liabilities (10,155,000) (15,433,000)
---------------- -----------------
Net deferred tax asset (liability) $ 1,364,000 $ (182,000)
=============== =================
</TABLE>
<PAGE>
7. STOCKHOLDERS' EQUITY
Stock Option Plan - The Company has a Stock Option Plan (the Plan)
pursuant to which incentive stock options and nonqualified stock options
for up to 1,000,000 shares of common stock may be granted to officers,
directors, key employees, or certain advisors or consultants. Incentive
stock options are granted at exercise prices not less than the market
price on the date of grant and are exercisable no later than ten years
from such date. Incentive stock options generally vest and become
exercisable at 25% per year beginning one year from the date of grant,
although some grants are exercisable immediately. Nonqualified stock
options are granted at exercise prices determined by the Stock Option
Committee of the Board of Directors on the date of grant and are
exercisable as established by such committee.
A summary of the status of the Company's stock option plan at March 31,
1999, 1998, and 1997 and changes during the years then ended is presented
in the table and narrative below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ----------------------- -----------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 985,006 3.67 479,125 $ 4.09 555,625 $ 4.65
Granted 856,100 3.25 553,506 3.38 101,500 2.66
Exercised (38,500) 2.63 -- --
Canceled (343,750) 3.60 (47,625) 4.52 (178,000) 5.01
--------- -------- --------
Outstanding at end
end of year 1,458,856 3.34 985,006 3.67 479,125 4.09
Exercisable at end of year 608,378 3.41 513,378 3.59 177,375 4.58
Weighted average fair value
per share of options granted $ 1.56 $ 1.69 $ 1.17
</TABLE>
The following table summarizes information about stock options outstanding
at March 31, 1999.
<TABLE>
<CAPTION>
Range of Number Weighted Weighted Average Number Weighted
Exercise of Shares Average Remaining of Shares Average
Prices Outstanding Exercise Price Contractual Life Exercisable Exercise Price
-------- ----------- -------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.625 - 3.380 1,422,856 $ 3.29 7.1 579,503 $ 3.30
$3.750 - 7.250 36,000 5.20 5.7 28,875 5.53
------------ -------- --- ---------- -------
1,458,856 $ 3.34 7.1 608,378 $ 3.41
============ ======= === ========== =======
</TABLE>
Of the 856,100 options granted during fiscal 1999, 650,000 of the options
were issued pursuant to two June 23, 1998 agreements between the Company
and Mr. King. In conjunction with the first agreement, Mr. King was issued
an option to purchase 400,000 shares of common stock of the Company for
future services as the Company's Chief Executive Officer and other
significant considerations. This option is not exercisable until June 23,
2004 unless any of the following occurs: 1) if the closing price of the
Company's stock averages $5.00 for ten consecutive business days, this
option shall immediately become exercisable as to 125,000 shares; 2) if
the closing price of the Company's stock averages $6.00 for ten
consecutive business days, this option shall become immediately
exercisable as to another 125,000 shares; 3) if the closing price of the
Company's stock averages $7.00 for ten consecutive business days, this
option shall become immediately exercisable as to the remaining 150,000
shares. In conjunction with the second agreement, Mr. King was issued an
<PAGE>
option to purchase 250,000 shares of common stock of the Company, which
became exercisable on the date of grant. Both of these options were
accounted for as employee options under ABP No. 25 and SFAS No. 123. Of
the 553,506 options granted during fiscal 1998, 541,506 of the options
were issued pursuant to a June 16, 1997 agreement between the Company,
Peter J. King (Mr. King), and The King Management Corporation (KMC). In
conjunction with this agreement, Mr. King was issued two options to
purchase common stock of the Company. Each option entitled Mr. King to
purchase 270,753 shares of common stock at the fair value of the Company
stock on June 16, 1997. The first option was granted for past services by
Mr. King as Director and Chairman to the Company and became exercisable on
the date of grant. This option was accounted for as an employee option
under APB No. 25 and SFAS No. 123. The second option was granted for Mr.
King's future services as Chairman and for financing commitments made by
KMC (which is controlled by Mr. King) to the Company for the period of
July 1, 1997 through June 30, 2000. The exercisability of this option is
reduced from four years to two years in the event that Sunrise has an
uninterrupted supply of financing (Note 5) for approved vendor programs.
Due to this impact on vesting and other provisions of the agreement, the
Company has determined that 25% of the option will be treated as a
non-employee option. The remaining 75% of this option will be accounted
for as an employee option under APB No. 25 and SFAS No. 123. Based on the
Black-Scholes Valuation Model, the portion of this option relating to the
financing commitment from KMC was $97,000, which will be charged to the
Company's operations over the two-year accelerated vesting period assuming
KMC will provide Sunrise an uninterrupted supply of financing.
Compensation expense of $54,000 has been recognized for this stock option
grant in fiscal 1999.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1999, 1998, and 1997,
respectively: risk-free interest rates of 5.1, 6.1 and 5.7 percent for the
options; expected lives of 5 years for all years; expected volatility of
47, 46, and 38 percent.
The Company accounts for employee option grants under APB No. 25, and,
accordingly, no compensation cost has been recognized. Had compensation
cost for these plans been determined consistent with SFAS No. 123, the
Company's net income (loss) and earnings per share would have been reduced
to the following pro forma amounts:
<TABLE>
<CAPTION>
March 31,
-----------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Net income (loss):
As reported $ 3,438,000 $ 2,191,000 $(2,547,000)
SFAS No. 123 expense (355,000) (800,000) (90,000)
----------- ----------- -----------
Pro forma net income (loss) $ 3,083,000 $ 1,391,000 $(2,637,000)
=========== =========== ===========
Net income (loss) per share basic and diluted
As reported $ .45 $ 0.29 $ (0.35)
Pro forma $ .39 0.18 (0.36)
</TABLE>
Employee Stock Purchase Plan - The Company had an Employee Stock Purchase
Plan under the terms of which 150,000 shares of authorized but unissued
common stock were reserved. This plan was terminated in fiscal 1999. This
plan provided that employees could authorize payroll deductions to be made
for the purpose of acquiring shares at 85% of market price. A total of
39,235 shares of common stock were purchased under the plan as of the
termination date.
Warrants - Warrants were outstanding for the purchase of 135,000 shares of
the Company's common stock at $9.45 per share, which were issued in
connection with the Company's secondary offering in April 1993. These
warrants expired unexercised on April 21, 1998.
<PAGE>
8. PROFIT SHARING 401(k) PLAN
The Company has a profit sharing plan (the 401(k) Plan) which was
implemented in February 1994. The 401(k) Plan is a salary reduction cash
or deferred profit sharing plan intended to meet the requirements of
Section 401(k) of the Internal Revenue Code. All employees who have
completed at least three months of service and have attained the age of 21
are eligible to participate in the 401(k) Plan. The 401(k) Plan allows
eligible employees to contribute up to 18% of their gross compensation
into the 401(k) Plan each year. The Company may make discretionary
contributions to the 401(k) Plan on behalf of eligible participants in an
amount determined by the Board of Directors. The Company's contributions
to the 401(k) Plan were $18,000, $32,000, and $24,000 for the years ended
March 31, 1999, 1998, and 1997, respectively.
9. COMMITMENTS AND CONTINGENCIES
Future Lease Commitment - The Company rents office facilities at three
locations. Total rent expense incurred for the office facilities for the
years ended March 31, 1999, 1998, and 1997 was $306,000, $332,000, and
$309,000, respectively. Future minimum lease commitments (net of
subleases) are as follows:
Years ending March 31:
2000 $ 179,000
2001 103,000
-------------
$ 282,000
=============
The Company is involved in various legal actions in the normal course of
business. Management is of the opinion that the outcome of such actions
will not have a significant effect on the Company's financial position or
results of operations.
10. RELATED-PARTY TRANSACTONS
The Company has adopted a policy of not entering into transactions in
which any officer, director, stockholder, or affiliate of the Company has
a partial financial interest unless the transaction has been approved by a
majority of the disinterested directors of the Company based on a
determination that the terms of such transactions are no less favorable to
the Company than those which could be obtained from unaffiliated third
parties. In addition to the transactions described in Notes 5 and 7, the
following summarizes significant transactions with related parties:
a. During fiscal 1999 and 1998, certain employees of KMC dedicated a
significant amount of time to management of the Company. During
1999, the Company reimbursed KMC $175,000 for services provided by
KMC employees. No such reimbursement was made in 1998.
b. During fiscal 1997, the Company paid $338,000 to a corporation
affiliated with a former member of the Company's Board of Directors
for assistance in arranging a securitization of $20 million for the
Company.
<PAGE>
11. QUARTERLY FINANCIAL DATA (Unaudited)
The following is a summary of quarterly financial data for fiscal years
1999 and 1998:
<TABLE>
<CAPTION>
Fiscal 1999 June 30 September 30 December 31 March 31 Total
<S> <C> <C> <C> <C> <C>
Revenues $11,393,000 $12,071,000 $13,153,000 $15,031,000 $51,648,000
Net income 699,000 803,000 941,000 995,000 3,438,000
=========== =========== =========== =========== ===========
Net income
per share-basic $ 0.09 $ 0.10 $ 0.12 $ .14 $ .45
=========== =========== ========== =========== ===========
Net income
per share-diluted $ 0.09 $ 0.10 $ 0.12 $ .14 $ .45
Fiscal 1998 June 30 September 30 December 31 March 31 Total
Revenues $11,094,000 $11,570,000 $13,460,000 $12,968,000 $49,092,000
Net income (loss) 877,000 958,000 835,000 (479,000) 2,191,000
=========== =========== =========== ============ ===========
Net income (loss)
per share-basic $ 0.12 $ 0.12 $ 0.11 $ (0.06) $ 0.29
=========== =========== ========== ============ ===========
Net income (loss)
per share-diluted $ 0.12 $ 0.12 $ 0.11 $ (0.06) $ 0.29
=========== =========== ========== ============ ===========
</TABLE>
12. 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).
<PAGE>
<TABLE>
<CAPTION>
Segment Information
ILC/Vendor SLC/Direct Total
-------------- ------------- -------------
Fiscal 1999
------------
<S> <C> <C> <C>
Assets $78,075,000 $24,940,000 $103,015,000
Leasing Revenue 34,310,000 9,637,000 43,947,000
Less: Depreciation 21,425,000 5,255,000 26,680,000
Interest Expense 2,037,000 1,754,000 3,791,000
-------------- ------------- -------------
Leasing Gross Margin 10,848,000 2,628,000 13,476,000
Less: Provision 1,946,000 (21,000) 1,925,000
-------------- ------------- -------------
Leasing Net Margin 8,902,000 2,649,000 11,551,000
Equipment Sales Revenue 5,546,000 2,155,000 7,701,000
Less: Cost of Equipment sold 5,446,000 1,763,000 7,209,000
-------------- ------------- -------------
Equipment Gross Margin 100,000 392,000 492,000
ILC/Vendor SLC/Direct Total
-------------- ------------- -------------
Fiscal 1998
-----------
Assets $47,708,000 $45,225,000 $92,933,000
Leasing Revenue 27,445,000 11,676,000 39,121,000
Less: Depreciation 15,405,000 4,569,000 19,974,000
Interest Expense 2,090,000 3,334,000 5,424,000
-------------- ------------- -------------
Leasing Gross Margin 9,950,000 3,773,000 13,723,000
Less: Provision 741,000 2,049,000 2,790,000
-------------- ------------- -------------
Leasing Net Margin 9,209,000 1,724,000 10,933,000
Equipment Sales Revenue 6,954,000 3,017,000 9,971,000
Less: Cost of Equipment sold 7,442,000 2,524,000 9,966,000
-------------- ------------- -------------
Equipment Gross Margin (488,000) 493,000 5,000
ILC/Vendor SLC/Direct Total
-------------- ------------- -------------
Fiscal 1997
-----------
Assets $49,610,000 $59,879,000 $109,489,000
Leasing Revenue 20,536,000 14,033,000 34,569,000
Less: Depreciation 10,533,000 4,764,000 15,297,000
Interest Expense 1,643,000 4,898,000 6,541,000
-------------- ------------- -------------
Leasing Gross Margin 8,360,000 4,371,000 12,731,000
Less: Provision 361,000 7,151,000 7,512,000
-------------- ------------- -------------
Leasing Net Margin 7,999,000 (2,780,000) 5,219,000
Equipment Sales Revenue 4,693,000 3,701,000 8,394,000
Less: Cost of Equipment sold 4,128,000 3,290,000 7,418,000
-------------- ------------- -------------
Equipment Gross Margin 565,000 411,000 976,000
</TABLE>
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Other than "Executive Officers of the Company," which is set forth at the
end of Part I of this Form 10-K, the information required by Item 10 is
incorporated herein by reference to the sections labeled "Election of Directors"
and "Compliance With Section 16(a) of the Exchange Act," which appear in the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A not
later than 120 days after the close of fiscal 1999 in connection with the
Company's 1999 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the
sections labeled "Management Compensation" and "Election of Directors," which
appear in the Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A not later than 120 days after the close of fiscal 1999 in
connection with the Company's 1999 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to the
section labeled "Principal Shareholders and Management Shareholdings," which
appears in the Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A not later than 120 days after the close of fiscal 1999 in
connection with the Company's 1999 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to the
section labeled "Management Compensation," which appears in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A not later than
120 days after the close of fiscal 1999 in connection with the Company's 1999
Annual Meeting of Shareholders.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report.
(1) Consolidated Financial Statements. The following financial statements
are included in Part II, Item 8 of this Annual Report on Form 10-K:
Current Independent Auditors' Report for the years ended March 31, 1999
and March 31, 1998.
Former Independent Public Accountants' Report for the year ended March 31,
1997
Consolidated Balance Sheets as of March 31, 1999 and 1998
Consolidated Statements of Operations for the years ended March 31, 1999,
1998, and 1997
Consolidated Statements of Stockholders' Equity for the years ended March
31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the years ended March 31, 1999,
1998, and 1997
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedules. The following schedule
immediately follows the signature page of this Annual Report on Form 10-K:
Schedule II. Valuation and Qualifying Accounts
All other schedules are omitted as the required information is
inapplicable or the information is presented in the financial statements
or related notes.
(3) Exhibits. See Exhibit Index immediately following schedules which
follows the signature page of this Annual Report on Form 10-K.
(b) Reports on Form 8-K.
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SUNRISE INTERNATIONAL LEASING CORPORATION
Date: June 28, 1999 By: /s/ Peter J. King
Peter J. King, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
(Power of Attorney)
Each person whose signature appears below constitutes Peter J. King and
Jeffrey G. Jacobsen, the undersigned's true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign any or all amendments to this Annual Report on Form 10-K
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue thereof.
Signatures Title Date
/s/ Peter J. King Chairman of the Board, Chief June 28, 1999
Peter J. King Executive Officer and Director
(principal executive officer)
/s/ Jeffrey G. Jacobsen Executive Vice President, Chief June 28, 1999
Jeffrey G. Jacobsen Financial Officer (principal
financial officer)
/s/ James C. Teal Corporate Controller (principal June 28, 1999
James C. Teal accounting officer)
/s/ Donald R. Brattain Director June 28, 1999
Donald R. Brattain
/s/ Thomas R. King Director June 28, 1999
Thomas R. King
<PAGE>
Sunrise International Leasing Corporation
Schedule II
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Charged to Deductions Balance
Beginning costs and net of at end
of period expenses recoveries of period
---------- ---------- ---------- ---------
Description
Allowance for doubtful accounts:
<S> <C> <C> <C> <C>
Year ended March 31, 1999 $260,000 $359,000 $251,000 $368,000
Year ended March 31, 1998 494,000 596,000 830,000 260,000
Residual Value Reserve:
Year ended March 31, 1999 $5,592,000 $1,566,000 $956,000 $6,202,000
Year ended March 31, 1998 5,262,000 1,994,000 1,664,000 5,592,000
</TABLE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT INDEX TO FORM 10-K
Commission File No.: 0-19516
For the Fiscal Year Ended
March 31, 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.
10.1* The Company's 1991 Stock Option Plan - As amended and restated through
June 23, 1998 incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998.
10.2 Standard Office Lease between Minnesota CC Properties, Inc. and the
Company regarding the Company's offices at Golden Valley, Minnesota -
incorporated by reference to Exhibit 10.14 to the Company's
Registration Statement on Form S-1, Reg. No. 33-59694.
10.3 Credit Agreement between American Bank and Trust Company N.A. and the
Company - incorporated by reference to Exhibit 10.18 to the Company's
Quarterly Report ended September 30, 1993.
10.4 Amendment No. 1 to Standard Office Lease between Minnesota CC
Properties, Inc. and the Company regarding the Company's offices at
Golden Valley, Minnesota - incorporated by reference to Exhibit 10.16
to the Company's Annual Report on Form 10-K for the year ended March
31, 1994.
10.5 Agreement and Plan of Reorganization dated October 14, 1994 by and
among the Company; The P.J. King Companies, Inc. d/b/a International
Leasing Corporation; King Management Corporation; Peter J. King;
Stephen D. Higgins, as Trustee under the William B. King Stock Trust
dated November 21, 1989 for the benefit of William B. King; and Stephen
D. Higgins, as Trustee under the Russell S. King Stock Trust dated
November 11, 1989 for the benefit of Russell S. King - incorporated by
reference to Exhibit 2.1 to Company's Current Report on Form 8-K dated
February 13, 1995.
10.6 Shareholders Agreement dated as of February 13, 1995 among the Company;
Peter J. King; Stephen D. Higgins, as Trustee under the William B. King
Stock Trust dated November 21, 1989 for the Benefit of William B. King;
and Stephen D. Higgins, as Trustee under the Russell S. King Stock
Trust dated November 11, 1989 for the benefit of Russell S. King, and
each of the other ILC shareholders listed on Schedule 1 thereto -
incorporated by reference to Exhibit 2.2 to Company's Current Report on
Form 8-K dated February 13, 1995.
10.7 Amendment No. 2 to Standard Office Lease between Minnesota CC
Properties, Inc. and the Company regarding the Company's offices at
Golden Valley, Minnesota - incorporated by reference to Exhibit 10.23
to the Company's Annual Report on Form 10-K for the year ended March
31, 1995
10.8 Amendment No. 3 to Standard Office Lease between Minnesota CC
Properties, Inc. and the Company regarding the Company's offices at
Golden Valley, Minnesota - incorporated by reference to Exhibit 10.24
to the Company's Annual Report on Form 10-K for the year ended March
31, 1995.
<PAGE>
10.9* Amendment to the Company's 1991 Stock Option Plan dated October 4, 1994
- incorporated by reference to Exhibit 10.25 to the Company's Annual
Report on Form 10-K for the year ended March 31, 1995.
10.10 Amended and Restated Credit Agreement between First Bank National
Association and the Company - incorporated by reference to Exhibit
10.29 to the Company's Annual Report on Form 10-K for the year ended
March 31, 1996.
10.11 Amendment to Security Agreement dated June 22, 1995 between the Company
and King Holding Corporation - incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996.
10.12 First Amendment to Amended and Restated Credit Agreement dated October
1, 1996 between the Company and First Bank National Association -
incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996.
10.13 Promissory Note Extension Agreement dated October 1, 1996 between the
Company and First National Bank Association - incorporated by reference
to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
10.14* Incentive Compensation Plan for Fiscal Year 1997 - incorporated by
reference to Exhibit 10.6 to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1996.
10.15 Replacement promissory note dated November 7, 1996 between the Company
and Daiwa Bank, Limited at the Sumitomo Bank, Limited - incorporated by
reference to Exhibit 10.7 to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1996.
10.16 Amended and Restated Loan and Security Agreement dated November 7, 1996
between the Company and Daiwa Bank, Limited - incorporated by reference
to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1996.
10.17 Purchase Agreement Dated October 31, 1996 by and among the Company;
Sunrise Funding Corporation I; Sunrise Leasing Corporation; and
Dougherty Funding, Inc. - incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996.
10.18 Lease Receivables-Backed Note, Series 1996-1 dated November 8, 1996 in
the principal amount of $20,000,000 by Sunrise Funding Corporation I in
favor of Dougherty Funding, Inc. - incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1996.
10.19 Indenture amount Sunrise Funding Corporation I; Sunrise Leasing
Corporation; and Norwest Bank Minnesota, National Association dated
November 1, 1996 - incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended December
31, 1996.
10.20 Contribution Agreement dated November 1, 1996 between Sunrise Leasing
Corporation and Sunrise Funding Corporation I - incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1996.
10.21 Servicing Agreement dated November 1, 1996 between Sunrise Funding
Corporation I and Sunrise Leasing Corporation - incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1996.
10.22 Severance Agreement and Release dated November 12, 1996 between the
Company and William B. King - incorporated by reference to Exhibit 10.6
to the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996.
10.23 Portfolio Purchase Agreement and Guaranty dated November 27, 1996
between Sunrise Leasing Corporation and The CIT Group - incorporated by
reference to Exhibit 10.7 to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1996.
<PAGE>
10.24 Discretionary Revolving Credit Agreement dated May 15, 1997 between
Sunrise Leasing Corporation and National City Bank of Minneapolis -
incorporated by reference to Exhibit 10.46 to the Company's Annual
Report on Form 10-K for the year ended March 31, 1998.
10.25 Security Agreement dated May 15, 1997 between Sunrise Leasing
Corporation and National City Bank of Minneapolis - incorporated by
reference to Exhibit 10.47 to the Company's Annual Report on Form 10-K
for the year ended March 31, 1998.
10.26 Promissory Note in the principal amount of $5,498,960.57 dated May 15,
1997 in favor of National City Bank of Minneapolis - incorporated by
reference to Exhibit 10.48 to the Company's Annual Report on Form 10-K
for the year ended March 31, 1998.
10.27 Agreement dated June 16, 1997 among the Company, Peter J. King and The
King Management Corporation - incorporated by the reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997.
10.28 Nonqualified Stock Option Agreement dated June 18, 1997 between the
Company and Peter J. King (accelerated vesting upon performance -
incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997.
10.29 Nonqualified Stock Option Agreement dated June 18, 1997 between the
Company and Peter J. King (fully vested) - incorporated by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the
Quarter ended September 30, 1997.
10.30 Separation Agreement and Release of Claims dated November 13, 1997
between the and Barry J. Schwach - incorporated by reference to Exhibit
10.31 to the Company's Annual Report on Form 10-K for the year ended
March 31, 1998.
10.31 Agreement dated June 23, 1998 among the Company, Peter J King and The
King Management Corporation - incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998.
10.32 Second Amendment to Amended and Restated Credit Agreement dated
November 26, 1997 by and between Sunrise Leasing Corporation, the
Company, and First Bank National Association (now known as U.S. Bank
National Association) - incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998.
10.33 Third Amendment to Amended and Restated Credit Agreement dated October
30, 1998 by and between Sunrise Leasing Corporation, the Company, and
U.S. Bank National Association - incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998.
10.34 Amended and Restated Revolving Credit Note dated October 30, 1998 in
the principal amount of $25,000,000 by Sunrise Leasing Corporation and
the Company in favor of U.S. Bank National Association - incorporated
by reference to Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1998.
10.35 Discretionary Revolving Credit Agreement dated February 22, 1999 by and
between the Company and National City Bank of Minneapolis.
10.36 Security Agreement dated February 22, 1999 by and between the Company
and National City Bank of Minneapolis.
10.37 Promissory Note dated February 22, 199 in the principal amount of
$5,150,000 by the Company in favor of National City Bank of
Minneapolis.
11.1 Per Share Earnings Computations.
21.1 List of Subsidiaries - incorporated by reference to Exhibit 21.1 to the
Company's Annual Report on Form 10-K for the year ended March 31, 1997.
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Arthur Andersen LLP
24.1 Power of Attorney for certain directors (included on signature page of
Form 10-K)
27.0 Financial Data Schedule (filed with electronic version only)
- --------------
* Management contract or other compensatory plan.
DISCRETIONARY REVOLVING CREDIT AGREEMENT
Dated as of February 22, 1999
Sunrise International Leasing Corporation, a Delaware corporation (the
"Borrower"), located at 5500 Wayzata Boulevard, Suite 725, Golden Valley,
Minnesota 55416 and National City Bank of Minneapolis, a national banking
association (the "Bank"), located at 651 Nicollet Mall, Minneapolis, Minnesota
55402-1611, agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.1. Definitions. As used in this Agreement the following terms
shall have the following meanings (such meanings to be equally applicable to
singular and plural forms of the terms defined):
(a) "Affiliate" means any of the following Persons:
(i) any director, officer or employee of the
Borrower;
(ii) any person who, individually or with his
immediate family, beneficially owns or holds 5% or more of
voting interest of the Borrower; or
(iii)any company in which any Person described above
owns a 5% or greater equity interest.
(b) "Base Rate" means the rate established by the Bank from
time to time as its base rate.
(c) "Borrowing Base" with respect to any Note means an amount
equal to the sum of the following:
(i) 100% of the Present Value of the Eligible
Equipment Leases designated by the Borrower on the most recent
Borrowing Base Certificate for that Note; and
(ii) 100% of the Residual Value of the inventory
under Eligible Equipment Leases designated by the Borrower on
the most recent Borrowing Base Certificate for that Note;
provided, however, that the portion of the Borrowing Base attributable
to any Eligible Equipment Lease shall not, at any time, exceed the Net
Book Value of that lease.
(d) "Borrowing Base Certificate" with respect to any Note
means a certificate signed by the chief financial officer or corporate
controller of the Borrower which is delivered to the Bank pursuant to
Section 5.1(a) and which shows as of the date of determination (A) the
Eligible Equipment Leases for that Note, (B) the Net Book Value,
Present Value and Residual Value for such Eligible Equipment Leases,
(C) the original cost and the accumulated depreciation of the inventory
subject to such Eligible Equipment Leases, and (D) a payment aging for
such Eligible Equipment Leases.
(e) "Borrowing Base Value" for any Eligible Equipment Lease
means the portion of the Borrowing Base attributable to such lease.
(f) "Business Day" means any day other than a Saturday, Sunday
or a public holiday or the equivalent under the laws of the State of
Minnesota or the United States of America.
(g) "Debt" means (i) indebtedness for borrowed money or for
the deferred purchase price of property or services, (ii) obligations
as lessee under leases which shall have been or should be, in
accordance with generally accepted accounting principles, recorded as
capital leases, (iii) obligations under direct or indirect guaranties
in respect of, and obligations (contingent or otherwise) to purchase or
otherwise acquire, or otherwise to assure a creditor against loss in
respect of, indebtedness or obligations of others of the kinds referred
to in clause (i) or (ii) above, and (iv) liabilities in respect of
unfunded vested benefits under plans covered by Title IV of ERISA.
(h) "Eligible Equipment Lease" means a lease (i) for which the
Borrower is the lessor and holds all financial servicing rights; (ii)
which has an original term of not more than 36 months or such longer
term as the Bank has approved in writing; (iii) all originals of which
have either been delivered to the Bank, or, prior to a UCC Filing Event
only, have been marked or otherwise segregated to show the Bank's
security interest; (iv) which has been approved by the Bank in its sole
discretion as to form and content; (v) which is subject to a perfected
security interest in favor of only the Bank as required by this
Agreement; (vi) which relates to inventory which is (A) owned by the
Borrower and (B) subject to a perfected security interest in favor of
only the Bank as required by this Agreement; (vii) with respect to
which the Borrower has directed that all contract payments be made to a
lockbox under the control of State Street Bank and Trust Company, or
other depository acceptable to the Bank; (viii) with respect to which
the Borrower has filed a UCC-1 Financing Statement, or equivalent
document under applicable law, to give public notice of the Borrower's
interest in the inventory under the lease; and (ix) under which the
lessee in required to obtain casualty insurance on the related
inventory; provided, however, that (A) no lease may be added as an
Eligible Equipment Lease at a time when the lease is in default, (B) no
lease may remain as an Eligible Equipment Lease if it has been in
default for more than 90 days, (C) no lease may be added as an Eligible
Equipment Lease at a time when the lessee of the lease is the lessee on
other Eligible Equipment Leases which have a Borrowing Base Value,
which when added to the Borrowing Base Value of the proposed lease,
would exceed $750,000.00 and (D) if the lease is subject to a Permitted
Encumbrance, the Borrower has obtained and delivered to the Bank a
recordable release of that lease from that Permitted Encumbrance. A
lease can be an Eligible Equipment Lease for only one Note at any time.
(i) "Event of Default" means one of the events specified in
Section 6.1.
(j) "Interest Coverage Ratio" for any time period means a
ratio the numerator of which is the sum of the Borrower's net income
during that period plus interest, depreciation, amortization and income
tax expense during that period and the denominator of which is interest
expense during that period.
(k) "Loan Documents" means this Agreement, the Notes, the
Security Agreement and all other documents to be executed in connection
with this Agreement.
(l) "Loan Party" means any Person obligated under any Loan
Document.
(m) "Net Book Value" means, at any time, with respect to any
Eligible Equipment Lease, the original cost of the inventory subject to
that lease minus depreciation that has been, or under generally
accepted accounting principles should have been, accumulated with
respect to that inventory
(n) "Notes" means all of the Notes described in Section 2.2
(o) "Permitted Encumbrances" means all security interests and
other encumbrances on any of the Borrower's assets as of the date
hereof as disclosed in writing to the Bank contemporaneously with this
Agreement.
(p) "Person" means an individual, corporation, partnership,
joint venture, trust or unincorporated organization or governmental
agency or political subdivision thereof.
(q) "Present Value" means at any time, as to any Eligible
Equipment Lease, the remaining contractual payments then owing on that
lease discounted to present value using a discount rate equal to the
rate of interest then applicable to the Note for which that lease
constitutes a part of the Borrowing Base.
(r) "Residual Value" means, as to any Eligible Equipment
Lease, the Net Book Value of that lease minus the Present Value of that
lease.
(s) "Senior Recourse Debt" means the aggregate of the
consolidated Debt for borrowed money of the Borrower, determined and
computed in accordance with generally accepted accounting principles
consistently applied from year to year, provided that Debt shall be
included in this calculation only to the extent the Debt provides for
recourse to the Borrower.
(t) "Subsidiary" means any corporation of which more than 50%
of the outstanding capital stock having ordinary voting power to elect
a majority of the Board of Directors of such corporation (irrespective
of whether or not at the time capital stock or any other class or
classes of stock of such corporation shall or might have voting power
upon the occurrence of any contingency) is at the time directly or
indirectly owned by the Borrower, by the Borrower and one or more other
Subsidiaries, or by one or more other Subsidiaries.
(u) "Tangible Net Worth" means the aggregate of the
consolidated capital stock, paid in surplus and retained earnings of
the Borrower (excluding stock of the Borrower held by the Borrower),
determined and computed in accordance with generally accepted
accounting principles consistently applied from year to year, less the
book value of all assets of the Borrower that would be treated as
intangibles under generally accepted accounting principles including
without limitation, such items as goodwill, trademarks, tradenames,
service marks, copyrights, patents and licenses and less the book value
of all obligations owed to the Borrower by any of its Affiliates.
(v) "UCC Filing Event" means either an Event of Default or any
event which is, or which with the giving of notice or the elapse of
time will become, a default under any of the provisions of Sections
5.1(f), 5.1(g) and 5.1(h).
Section 1.2. Accounting and Other Terms. All accounting terms not
specifically defined in this Agreement shall be construed in accordance with
generally accepted accounting principles consistently applied as such principles
may change from time to time. Other terms defined herein shall have the meanings
ascribed to them herein.
ARTICLE II.
REVOLVING LOAN
Section 2.1. Discretionary Revolving Loan. The Borrower has requested
that the Bank make advances to the Borrower from time to time to permit the
Borrower to carry leases on inventory that it leases. THE BANK HAS NOT COMMITTED
TO PROVIDING ANY SUCH ADVANCES AND MAY, IN ITS DISCRETION, DECIDE NOT TO MAKE
ANY SUCH ADVANCES. If the Bank, in its discretion, agrees to make any such
advances requested by the Borrower, such advances (the "Advances") shall (A) not
exceed an aggregate principal amount outstanding of $6,500,000.00; (B) be made
in accordance with the terms of this Agreement; and (C) be made on or before
February 29, 2000 (the "Termination Date"). Each Advance shall be in an amount
of not less than $1,000,000.00 and of not more than the Borrowing Base for the
Note evidencing that Advance.
Section 2.2. The Notes. Each Advance made by the Bank shall be
evidenced by a separate promissory note (each a "Note" and collectively the
"Notes") which is in substantially the form of Exhibit A attached hereto
(appropriately completed) and is delivered to the Bank pursuant to Article III.
Each Note shall (A) have a final maturity date not later than 48 months after
the issue date of the Note and (B) bear a fluctuating interest rate equal to the
Base Rate.
Section 2.3. Making of Advances. The Borrower may request Advances
under this Agreement by giving notice to the Bank, specifying the date of the
requested Advance and the amount thereof. Each request for an Advance shall be
accompanied by an executed Borrowing Base Certificate showing a Borrowing Base
for that Advance in an amount not less than that Advance. Any request for an
Advance shall be deemed to be a representation that the Borrower's
representations and warranties contained in Section 4.1 are true and correct as
of the date of the Advance as though made on and as of such date and that no
event has occurred and is continuing, or will result from such Advance, which
constitutes an Event of Default or would constitute an Event of Default but for
the requirement that notice be given or time elapse or both. If the Bank
approves a requested Advance in it sole discretion, the Bank may disburse such
Advance by crediting immediately available funds in the amount of the Advance to
the Borrower's demand deposit account maintained with the Bank.
Section 2.4. Interest and Payments. The Borrower shall repay, and shall
pay interest on, the aggregate unpaid principal amount of all Advances in
accordance with the Notes, except that after and during the continuance of an
Event of Default the Borrower shall pay interest on the Notes at an annual rate
equal to 2.0% in excess of the rate of interest otherwise provided under the
Notes. All payments of principal, interest and fees under this Agreement shall
be made when due to the Bank in immediately available funds even if the Borrower
has not received payment from one or more lessees under an Eligible Equipment
Lease. All computations of interest shall be made by the Bank on the basis of
the actual number of days elapsed in a year of 360 days. Whenever any such
payment shall be due on a non-Business Day, such payment shall be made on the
next succeeding Business Day, and such extension of time shall be included in
the computation of interest. Each change to the fluctuating interest rate under
the Notes shall take effect on the same day as the related change to the Base
Rate. The Bank is expressly authorized to charge any principal or interest
payment, when due, to the Borrower's demand deposit account maintained at the
Bank, or, if that account shall not contain sufficient funds, to any other
account maintained by the Borrower at the Bank.
Section 2.5. Voluntary Prepayment. The Borrower may prepay any Note in
whole but not in part; provided, however, that a prepayment shall be made as of
a principal payment date on the Note and shall be accompanied by all interest
accrued to the date of prepayment and shall, if the amount prepaid is in excess
of 25% of the original principal amount of the Note, be accompanied by a
prepayment fee equal to 5.0% of the principal amount prepaid. Upon any
prepayment in full of a Note in accordance with this Section, the Bank will
release its security interest in all inventory and all Eligible Equipment Leases
that relate to that Note.
Section 2.6. Mandatory Prepayment. In the event that (A) a default,
including, without limitation, any payment default, occurs under an Eligible
Equipment Lease and is not cured within 90 days or (B) the inventory subject to
the Eligible Equipment Lease ceases for any reason to be under that lease, the
Borrower will, within 30 days of that event, provide a substitute Eligible
Equipment Lease acceptable to the Bank or prepay on the Note to which that
Eligible Equipment Lease relates an amount equal to the Borrowing Base Value of
that Eligible Equipment Lease. In the event that the lessee of an Eligible
Equipment Lease prepays any amount on that Eligible Equipment Lease, whether
through insurance proceeds, voluntary payments or otherwise, all such
prepayments shall immediately be paid to the Bank to be applied to the Note to
which that Eligible Equipment Lease relates. Any prepayments made under this
Section shall not be subject to the prepayment fee provided under Section 2.5.
Upon any partial prepayment or lease substitution under this Section, the Bank
will release its security interest in the related Eligible Equipment Lease and
inventory subject to that lease.
Section 2.7. Use of Proceeds. The proceeds of the Advances from the
Bank shall be used to refinance existing Debt owed to U.S. Bank National
Association.
ARTICLE III.
CONDITIONS OF LENDING
Section 3.1. Conditions Precedent to Initial Advance. If the Bank
determines to make any Advances in its discretion, the Borrower shall deliver to
the Bank prior to that Advance:
(a) The Note for that Advance, properly completed, executed
and delivered on behalf of the Borrower.
(b) A security agreement (the "Security Agreement"), in a form
acceptable to the Bank properly executed and delivered on behalf of the
Borrower, granting to the Bank a security interest in all of the
Eligible Equipment Leases which are part of the Borrowing Base for that
Advance, the inventory subject to such Eligible Equipment Leases and
other property described therein as security for the performance of the
Borrower's obligations under this Agreement and the Notes, together
with any UCC-1 Financing Statement or other document deemed necessary
or desirable by the Bank to perfect the security interest granted by
the Security Agreement.
(c) A certified copy of the resolutions of the Board of
Directors of the Borrower, approving the execution and delivery of the
Loan Documents to which it is a party and approving all other matters
contemplated by this Agreement.
(d) A certificate by the Secretary or any Assistant Secretary
of the Borrower certifying the names of the officer or officers of the
Borrower authorized to sign the Loan Documents to which it is a party,
together with a sample of the true signature of such officer.
(e) Favorable opinion of counsel to the Borrower in a form and
as to such matters as the Bank may request.
Section 3.2. Conditions Precedent to Each Advance. If the Bank
determines to make any Advances in its discretion, each Advance (including the
initial Advance) shall be subject to the further conditions precedent, that on
the date of such Advance:
(a) The representations and warranties contained in Section
4.1 of this Agreement are correct on and as of the date of such Advance
as though made on such date; and
(b) No event has occurred and is continuing, or will result
from such Advance, which constitutes an Event of Default or would
constitute an Event of Default but for the requirement that notice be
given or time elapse or both.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
Section 4.1. Representations and Warranties of the Borrower. To induce
the Bank to make Advances, the Borrower represents and warrants as follows:
(a) Existence of Borrower. The Borrower is a corporation duly
incorporated, validly existing and in good standing under the laws of
the state indicated at the beginning of this Agreement. The Borrower
has not, in the past five years, operated under any name, including any
trade name or assumed name, other than the name indicated at the
beginning of this Agreement, the names of the Subsidiaries listed in
Section 4.1(k) and the following names, (i) International Leasing
Corporation, (ii) Cisco Systems Capital Corporation, (iii) Sun
Microsystems Finance, (iv) Internet Finance & Equipment Capital
Corporation, (v) Symmetricom Capital Corporation, (vi) Sonic Solutions
Capital Corporation, (vii) Digital Telecommunications Capital
Corporation and (viii) Sunrise Funding Corporation.
(b) Authority to Execute. The execution, delivery and
performance by the Borrower of the Loan Documents to which it is a
party are within the Borrower's corporate powers, have been duly
authorized by all necessary corporate action, do not and will not
conflict with any provision of law or of the charter or bylaws of the
Borrower or of any agreement or contractual restriction binding upon or
affecting the Borrower or any of its property, and need no further
shareholder or creditor consent.
(c) Binding Obligation. This Agreement is, and the other Loan
Documents when delivered hereunder will be, legal, valid and binding
obligations of the Loan Parties enforceable against such Persons in
accordance with their respective terms.
(d) Governmental Approval. No consent of, or filing with, any
governmental authority is required on the part of any Loan Party in
connection with the execution, delivery or performance of any Loan
Documents, except for Uniform Commercial Code financing statements
required to be filed to perfect the security interests granted under
the Security Agreement.
(e) Financial Statements. The audited financial statements of
the Borrower as of March 31, 1998 and the unaudited financial
statements as of December 31, 1998, copies of which have been furnished
to the Bank, have been prepared in conformity with generally accepted
accounting principles consistently applied and present fairly the
financial condition of the Borrower as of such dates, and the results
of the operations of the Borrower for the financial periods then ended,
and since such dates, there has been no materially adverse change in
such financial condition.
(f) Litigation. Except for claims asserted by former
salespersons as disclosed to the Bank in connection with this
Agreement, no litigation or governmental proceeding is pending or
threatened against the Borrower which may have a materially adverse
effect on the financial condition or operations of the Borrower.
(g) Taxes. The Borrower has filed all federal and state income
and excess profits tax returns which are required to be filed, and has
paid all taxes shown on such returns to be due and all other tax
assessments received by it to the extent that such assessments have
become due.
(h) ERISA. No plan (as that term is defined in the Employee
Retirement Income Security Act of 1974 ("ERISA")) of the Borrower (a
"Plan") which is subject to Part 3 of Subtitle B of Title 1 of ERISA
had an accumulated funding deficiency (as such term is defined in
ERISA) as of the last day of the most recent fiscal year of such Plan
ended prior to the date hereof, or would have had such an accumulated
funding deficiency on such date if such year were the first year of
such Plan, and no material liability to the Pension Benefit Guaranty
Corporation has been, or is expected by the Borrower to be, incurred
with respect to any such Plan. No Reportable Event (as defined in
ERISA) has occurred and is continuing in respect to any such Plan.
(i) Defaults. The Borrower is not in default in the payment of
principal or interest on any indebtedness for borrowed money and is not
in default under any instrument or agreement under or subject to which
any indebtedness for borrowed money has been issued, and no event has
occurred and is continuing which, with or without the lapse of time or
the giving of notice, or both, constitutes or would constitute an event
of default under any such instrument or agreement or an Event of
Default hereunder.
(j) Subsidiaries. The Borrower has no Subsidiaries other than
Sunrise Leasing Corporation and Sunrise Financial Resources, Inc.
(k) Patents, Trademarks, Etc. The Borrower has good and
marketable title to all patents, trademarks, processes, copyrights,
franchises and licenses title to which is necessary for the operation
of the Borrower's businesses.
(l) Use of Proceeds For Securities Transactions. No proceeds
of any Advance will be used to acquire any security in any transaction
which is subject to Sections 13 and 14 of the Securities Exchange Act
of 1934.
(m) Regulation U. The Borrower is not engaged in the business
of extending credit for the purpose of purchasing or carrying margin
stock (within the meaning of Regulation U issued by the Board of
Governors of the Federal Reserve System), and no proceeds of any
Advance will be used to purchase or carry any margin stock or to extend
credit to others for the purpose of purchasing or carrying any margin
stock.
(n) Year 2000 Planning. The Borrower has undertaken a formal
review of its recordkeeping systems and its operations to determine the
Borrower's vulnerability to recordkeeping and operational difficulties
attributable to the need to change computer coding after 1999. Except
as has been disclosed to the Bank in writing contemporaneously with the
execution of this Agreement, the Borrower does not anticipate that it
will face any substantial recordkeeping or operational difficulties
attributable to the need to change such computer coding.
ARTICLE V.
COVENANTS OF THE BORROWER
Section 5.1 Affirmative Covenants. So long as any Note shall remain
unpaid, or, if no Note remains unpaid, until the Termination Date, the Borrower
will, unless the Bank shall give its prior written consent:
(a) Financial Reporting. Furnish to the Bank: (i) as soon as
available and in any event within 45 days after the end of each quarter
of each fiscal year of the Borrower, balance sheets of the Borrower as
of the end of such quarter and statements of income and retained
earnings of the Borrower for the period commencing at the end of the
previous fiscal year and ending with the end of such quarter, certified
by the chief financial officer or corporate controller of the Borrower;
(ii) as soon as available and in any event within 90 days after the end
of each fiscal year of the Borrower, (A) a copy of the Form 10-K for
such year for the Borrower, containing financial statements for such
year certified in a manner acceptable to the Bank by independent public
accountants acceptable to the Bank and (B) if available, a budget and
projections prepared by the Borrower in a form acceptable to the Bank
for the following fiscal year; (iii) promptly upon the sending or
filing thereof copies of all public reports issued by the Borrower to
any of its security holders, to the Securities and Exchange Commission
or to any national securities exchange; (iv) promptly upon the filing
or receiving thereof, copies of all reports which the Borrower files
under ERISA or which the Borrower receives from the Pension Benefit
Guaranty Corporation if such report shows any material violation or
potential violation by the Borrower of its obligations under ERISA; (v)
such other information concerning the conditions or operations,
financial or otherwise, of the Borrower as the Bank from time to time
may reasonably request; (vi) within 30 days after the end of each
month, a Borrowing Base Certificate (in the form of Exhibit C) for each
Note, a Cash Settlement Certificate (in the form of Exhibit D) and a
payments aging on all Eligible Equipment Leases.
(b) Visitation Rights. At any reasonable time and from time to
time, permit the Bank or any agents or representatives thereof, to
examine and make copies of and abstracts from the records and books of
account of, and visit the properties of, the Borrower, and to discuss
the affairs, finances and accounts of the Borrower with any of its
officers or directors. The Borrower will reimburse the Bank for its
reasonable costs and expenses of conducting such periodic examinations,
provided that, in the absence of an Event of Default, the Borrower will
be required to compensate the Bank for the costs of no more than two
examinations at a cost of $500.00 each in any calendar year.
(c) Notification of Default, Etc. Notify the Bank as promptly
as practicable (but in any event not later than 5 Business Days) after
the Borrower obtains knowledge of: (i) the occurrence of any event
which constitutes an Event of Default or which would constitute an
Event of Default with the passage of time or the giving of notice or
both; or (ii) the commencement of any litigation or governmental
proceedings of any type which could materially adversely affect the
financial condition or business operations of the Borrower.
(d) Compliance Certificate. At the time each quarterly
financial statement is required to be provided to Bank under this
Agreement, the Borrower will provide to Bank a certificate of the chief
financial officer or corporate controller of the Borrower substantially
in the form of Exhibit B attached hereto (appropriately completed). If
that certificate shows that an Event of Default or any event which
would constitute an Event of Default with the passage of time or the
giving of notice or both, has occurred, the certificate shall state in
reasonable detail the circumstances surrounding such event and action
proposed by the Borrower to cure such event.
(e) Keeping of Financial Records and Books of Account.
Maintain proper financial records in accordance with generally accepted
accounting principles consistently applied which fully and correctly
reflect all financial transactions and all assets and liabilities of
the Borrower. The Borrower will take all steps necessary to avoid
recordkeeping and operational difficulties attributable to the need to
change computer coding after 1999.
(f) Tangible Net Worth. Maintain at all times Tangible Net
Worth of not less than $27,000,000.00 plus 75% of positive net income
earned by the Borrower in each fiscal year starting after March 31,
1999, calculated on a cumulative basis.
(g) Debt Ratio. Maintain at all times a ratio of Senior
Recourse Debt to Tangible Net Worth of not more than 4.0 to 1.
(h) Interest Coverage Ratio. Maintain as of the end of each
fiscal quarter an Interest Coverage Ratio of not less than 4.50 to 1 as
calculated on a rolling four-quarter basis.
(i) Maintenance of Insurance. Maintain such insurance with
reputable insurance carriers as is normally carried by companies
engaged in similar businesses and owning similar property, including a
blanket casualty insurance policy insuring personal property in which
the Bank has a security interest.
(j) Maintenance of Properties, Etc. Maintain and preserve all
of its properties, necessary or useful in the proper conduct of its
business, in good working order and condition, ordinary wear and tear
excepted.
(k) Payment of Taxes. Pay all taxes, assessments and
governmental charges of any kind payable by it as such taxes,
assessments and charges become due and before any penalty shall be
imposed, except as the Borrower shall contest in good faith and by
appropriate proceedings providing such reserves as are required by
generally accepted accounting principles.
(l) Compliance with ERISA. Cause each Plan to comply and be
administered in accordance with those provisions of ERISA which are
applicable to such Plan.
(m) Preservation of Corporate Existence, Etc. Preserve and
maintain its corporate existence, rights, franchises and privileges in
the jurisdiction of its incorporation, and qualify and remain
qualified, as a foreign corporation in each jurisdiction in which such
qualification is necessary or desirable in view of its business and
operations or the ownership of its properties.
(n) UCC Filing Event. Within five Business Days after the Bank
notifies the Borrower of a UCC Filing Event, the Borrower will deliver
to the Bank (A) executed and recordable UCC-3 assignments (or
equivalent documents under applicable law) assigning to the Bank all of
the UCC-1 Financing Statements or equivalent documents held by the
Borrower with respect to Eligible Equipment Leases as described in
Section 1.1(i)(viii) and (B) all originals of all Eligible Equipment
Leases.
Section 5.2. Negative Covenants. So long as any Note shall remain
unpaid, or, if no Note remains unpaid, until the Termination Date, the Borrower
will not, unless the Bank shall give its prior written consent:
(a) Liens. Create or suffer to exist any mortgage, pledge,
lien, security interest or other encumbrance with respect to any
Collateral under the Security Agreement except Permitted Encumbrances.
(b) Merger, Etc. Merge or consolidate with any other Person;
sell, divest, transfer, convey, lease or otherwise dispose of (whether
in one transaction or in a series of transactions) all or a substantial
portion of its assets (whether now owned or hereafter acquired) to any
other Person.
(c) Transactions with Affiliates. Engage in any transaction
(including, without limitation, loans or financial accommodations of
any kind) with any Affiliate provided that such transactions are
permitted if they are on terms no less favorable to the Borrower than
would be obtainable if no such relationship existed.
(d) Change in Nature of Business. Make any material change in
the nature of the business of the Borrower, taken as a whole, as
carried on at the date hereof, or sell or divest any line or division
of its business.
ARTICLE VI.
DEFAULT
Section 6.1. Events of Default. "Events of Default" in this Agreement
means any of the following events:
(a) Failure of the Borrower to pay the principal of any Note
when due or, if payable on demand, upon demand, provided that the
Borrower may use a five day grace period with respect to such a failure
not more frequently than twice in each calendar year;
(b) Failure of the Borrower to pay any interest or fees
required to be paid hereunder or under any Note when due, provided that
the Borrower may use a five day grace period with respect to such a
failure not more frequently than twice in each calendar year;
(c) Any representation or warranty made by, or on behalf of,
any Loan Party in, or pursuant to, any Loan Document shall prove to
have been incorrect in any material respect when made;
(d) Default in performance of any other covenant or agreement
of any Loan Party in, or pursuant to, any Loan Document and continuance
of such default or breach for a period of 30 days after written notice
thereof to such Person by the Bank;
(e) Any Loan Party shall generally not pay its or his debts as
such debts become due, or shall admit in writing its or his inability
to pay its or his debts generally, or shall make a general assignment
for the benefit of creditors; or any proceeding shall be instituted by
or against any Loan Party seeking to adjudicate it or him a bankrupt or
insolvent, or seeking liquidation, winding up, reorganization,
arrangement, adjustment, custodianship, protection, relief, or
composition of it or him or its or his debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors, or
seeking the entry of an order for relief, or the appointment of a
receiver, custodian, trustee, or other similar official for it or him
or for any substantial part of its or his property; or any Loan Party
shall take any corporate action to authorize any of the actions set
forth above in this
subsection; and in the case of a proceeding of the type described in
this paragraph commenced against any Loan Party, that proceeding shall
not be dismissed within 60 days or that Loan Party shall consent to
that proceeding;
(f) The Borrower shall fail to pay any Debt (but excluding
Debt evidenced by any Note) of the Borrower or any interest or premium
thereon, when due (whether by scheduled maturity, required prepayment,
acceleration, demand or otherwise) and such failure shall continue
after the applicable grace period, if any, specified in the agreement
or instrument relating to such Debt; or any other default under any
agreement or instrument relating to any such Debt, or any other event,
shall occur and shall continue after the applicable grace period, if
any, specified in such agreement or instrument, if the effect of such
default or event is to cause the automatic acceleration of the maturity
of such Debt; or any such Debt shall be declared to be due and payable,
or required to be prepaid (other than by a regularly scheduled required
prepayment), prior to the stated maturity thereof;
(g) The entry against any Loan Party of a final judgment,
decree or order for the payment of money in excess of $100,000.00 and
the continuance of such judgment, decree or order unsatisfied for a
period of 30 days without a stay of execution;
(h) Any Reportable Event (as defined in ERISA) shall have
occurred and continue for 30 days; or any Plan shall have been
terminated by the Borrower not in compliance with ERISA, or a trustee
shall have been appointed by a court to administer any Plan, or the
Pension Benefit Guaranty Corporation shall have instituted proceedings
to terminate any Plan or to appoint a trustee to administer any Plan.
Section 6.2 Rights and Remedies. If any Event of Default shall occur
and be continuing, the Bank may exercise any or all of the following rights and
remedies:
(a) Declare the Notes, all interest thereon, and all other
obligations under, or pursuant to, any Loan Document to be immediately
due and payable, and upon such declaration such Notes, interest and
other obligations shall immediately be due and payable, without
presentment, demand, protest or any notice of any kind, all of which
are expressly waived;
(b) Exercise any right or remedy under the Security Agreement,
or any other right or remedy of a secured party under the Uniform
Commercial Code as in effect in Minnesota;
(c) Exercise any other right or remedy available to the Bank
at law or in equity.
ARTICLE VII.
MISCELLANEOUS
Section 7.1. No Waiver; Cumulative Remedies. No failure or delay on the
part of the Bank in exercising any right or remedy under, or pursuant to, any
Loan Document shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right, remedy or power preclude other or further exercise
thereof, or the exercise of any other right, remedy or power. The remedies in
the Loan Documents are cumulative and are not exclusive of any remedies provided
by law.
Section 7.2. Amendments and Waivers. No amendment or waiver of any
provision of any Loan Document shall be effective unless such amendment or
waiver is in writing and is signed by the Bank, and such amendment or waiver
shall be effective only in the specific instance and for the specific purpose
for which it was given.
Section 7.3. Notices, Etc. All notices and other communications
provided for hereunder shall be in writing (including telecopier communication)
and mailed or telecopied or delivered, if to the Borrower, at its address stated
in the preamble hereof, Attention: Jeffrey G. Jacobsen; and if to the Bank, at
its address stated in the preamble hereof, Attention: Gene Bygd; or, as to each
party, at such other address as shall be designated by such party in a written
notice to the other party. All such notices and communications shall, when
mailed or telecopied, be effective when deposited in the mails or transmitted by
telecopier, respectively, addressed as aforesaid, except that notices to the
Bank pursuant to the provisions of Article II shall not be effective until
received by the Bank.
Section 7.4. Costs and Expenses. The Borrower agrees to pay on demand
all costs and expenses of the Bank in connection with the preparation of the
Loan Documents, including reasonable attorneys fees and legal expenses, as well
as all costs and expenses of the Bank, including reasonable attorneys fees and
expenses, in connection with the administration and enforcement of the Loan
Documents (whether suit is commenced or not).
Section 7.5. Right of Set-off. Upon the occurrence and during the
continuance of any Event of Default the Bank is hereby authorized at any time
and from time to time, to the fullest extent permitted by law, to set off and
apply any and all deposits (general or special, time or demand, provisional or
final) at any time held and other indebtedness at any time owing by the Bank to
or for the credit or the account of the Borrower against any and all of the
obligations of the Borrower now or hereafter existing under any Loan Document,
irrespective of whether or not the Bank shall have made any demand under any
Loan Document and although such obligations may be unmatured. The Bank agrees
promptly to notify the Borrower after any such set-off and application, provided
that the failure to give such notice shall not affect the validity of such
set-off and application. The rights of the Bank under this Section are in
addition to other rights and remedies (including, without limitation, other
rights of set-off) which the Bank may have.
Section 7.6. Governing Law. All Loan Documents shall be governed by the
laws of the State of Minnesota. Any term used in this Agreement and not
otherwise defined shall have the definition given that term in the Uniform
Commercial Code as in effect in the State of Minnesota from time to time. If any
term in this Agreement shall be held to be illegal or unenforceable, the
remaining portions of this Agreement shall not be affected, and this Agreement
shall be construed and enforced as if this Agreement did not contain the term
held to be illegal or unenforceable. The Borrower hereby irrevocably submits to
the jurisdiction of the Minnesota District Court, Fourth District, and the
Federal District Court, District of Minnesota, Fourth Division, over any action
or proceeding arising out of or relating to this Agreement and agrees that all
claims in respect of such action or proceeding may be heard and determined in
any such court.
Section 7.7. Binding Effect; Assignment. All Loan Documents shall be
binding upon and inure to the benefit of the Loan Parties and the Bank and their
respective successors and assigns. No Loan Party shall have the right to assign
its rights or interest under any such agreement without the prior written
consent of the Bank.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the date first above written.
Sunrise International Leasing Corporation
By /s/ Jeffrey G. Jacobson
Its Executive Vice President
National City Bank of Minneapolis
By /s/ Gene Bygd
Its Vice President
<PAGE>
EXHIBIT A
PROMISSORY NOTE
$____________ Dated: ____________, ______
For value received, Sunrise International Leasing Corporation, a
Delaware corporation (the "Borrower") promises to pay to the order of National
City Bank of Minneapolis (the "Bank"), at its offices in Minneapolis, Minnesota,
in lawful money of the United States of America, the principal amount of
______________________________________________________ Dollars
($____________________) together with interest on any and all principal amounts
remaining unpaid hereon from the date of this Note until said principal amounts
are fully paid at a fluctuating annual rate equal to the rate of interest
established by the Bank from time to time as its base rate (the "Base Rate").
Each change in the fluctuating interest rate shall take effect simultaneously
with the corresponding change in the Base Rate.
Principal and interest shall be paid in monthly installments on the
last day of each month, starting on the last day of the first full month after
the date hereof and ending on the last day of the 48th full month after the date
hereof. Each monthly installment shall be equal to the aggregate amount of all
payments due during that month under each Eligible Equipment Lease then included
in the Borrowing Base for this Note under the Loan Agreement; provided, however,
that the last such installment shall be in the amount necessary to repay in full
the unpaid principal amount hereof together with all accrued but unpaid
interest. Each installment shall be applied first to interest then due and then
to principal. The monthly installment due under this Note shall be calculated
each month without regard to whether the Borrower actually receives all payments
due under each Eligible Equipment Lease during that month.
This Note is one of the Notes referred to in, and is entitled to the
benefits of, the Discretionary Revolving Credit Agreement dated as of February
22, 1999 (the "Loan Agreement") between the Borrower and the Bank, which Loan
Agreement, among other things, contains provisions for the acceleration of the
maturity of this Note upon the happening of certain stated events, for an
increase to the interest rate upon the happening of certain stated events, and
also for mandatory and voluntary prepayments of the principal amount due under
this Note upon stated terms and conditions.
Sunrise International Leasing Corporation
By______________________________________
Its________________________________
<PAGE>
EXHIBIT B
FORM OF COMPLIANCE CERTIFICATE
I, the _________________________ of Sunrise International Leasing
Corporation (the "Borrower"), hereby provide this Compliance Certificate in
accordance with Section 5.1(d) of the Discretionary Revolving Credit Agreement
(the "Agreement") dated as of February 22, 1999 between the Borrower and
National City Bank of Minneapolis.
I certify that as of the date hereof:
(1) The representations and warranties of the Borrower contained
in Article IV of the Agreement are correct as though made on
the date hereof.
(2) No event has occurred and is continuing which constitutes an
Event of Default under the Agreement or would constitute an
Event of Default but for the requirement that notice be given
or time elapse or both.
I further certify that as of _____________________, ____:
(1) Tangible Net Worth as defined in the Agreement was
$______________ compared to a minimum in the Agreement of
$27,000,000.00 plus 75% of positive net income earned by the
Borrower in each fiscal year starting after March 31, 1999,
calculated on a cumulative basis.
(2) The ratio of Senior Recourse Debt to Tangible Net Worth as
defined in the Agreement was _______________________ compared
to a maximum in the Agreement of 4.0 to 1.
(3) The Interest Coverage Ratio as defined in the Agreement was
____ to 1 compared to a minimum in the Agreement of 4.50 to 1.
Dated: ____________________________ ____________________________________
Title: ____________________________
<PAGE>
EXHIBIT C
BORROWING BASE CERTIFICATE
For Note No. ___________________
(Or Proposed New Advance In the Principal Amount of $_________________)
A. Present Value of Eligible Equipment Leases Payments ________________
B. Residual Value of Eligible Equipment Leases ________________
C. Subtotal (A+B) ________________
D. Original Cost of Equipment ________________
E. Less Accumulated Depreciation ________________
F. Subtotal (D-E) (Net Book Value) ________________
G. Total Borrowing Base (Lesser of C or F) ________________
H. Note Balance (or Proposed Advance Amount) ________________
I Total (G-H) (Must be zero or positive at all times) ________________
Dated: ____________________________ ____________________________________
Title: _______________________________
<PAGE>
Exhibit D
Cash Settlement Certificate
Sunrise International Leasing Corporation
Monthly Cash Settlement Certificate
For the Month Ending _____________
Dated _____________
I. Lease Receivables
a) Monthly payments paid by the lessees during the month:________________
b) Monthly payments paid by SILC during the month:_______________________
c) Total monthly payments due during the month on Eligible Equipment
Leases: ________
II. Residuals
d) Proceeds from sale of equipment coming off lease during the month:
________________
e) Proceeds from insurance on equipment damaged during the month:
________________
f) Residual amount of equipment subject to release during the month:
________________
g) Total residual amount of equipment coming off lease during the month:
________________
III Cash Settlement
h) Total cash due (c+d+e): __________________________
i) Interest due on the Note: __________________________
j) Principal payment on the Note (h minus i) __________________________
k) Beginning principal balance __________________________
l) Ending principal balance __________________________
SECURITY AGREEMENT
DATED: February 22, 1999
DEBTOR: SECURED PARTY:
Sunrise International Leasing Corporation National City Bank of
5500 Wayzata Boulevard Minneapolis
Suite 725 651 Nicollet Mall
Golden Valley, MN 55416 Minneapolis, MN 55402-1611
1. Security Interest and Collateral. To secure the payment and
performance of each and every debt, liability and obligation of every type and
description which Debtor may now or at any time hereafter owe to Secured Party
(whether such debt, liability or obligation now exists or is hereafter created
or incurred, and whether it is or may be direct or indirect, due or to become
due, absolute or contingent, primary or secondary, liquidated or unliquidated,
or joint, several or joint and several; all such debts, liabilities and
obligations collectively referred to as the "Obligations"), Debtor hereby grants
Secured Party a security interest (the "Security Interest") in the following
property (the "Collateral"):
(a) INVENTORY:
The inventory of Debtor, whether now owned or hereafter
acquired and wherever located which is subject to the leases described
on Exhibit A attached hereto, as Exhibit A shall be supplemented or
amended from time to time;
(b) LEASES AND INSTALLMENT SALES CONTRACTS:
All leases and installment sales contracts of Debtor now or
hereafter included within the definition of "Eligible Equipment Lease"
under the Discretionary Revolving Credit Agreement (the "Loan
Agreement") between Debtor and Secured Party dated as of the date
hereof as such Loan Agreement may be amended from time to time;
(c) GENERAL INTANGIBLES:
All general intangibles of Debtor, whether now owned or
hereafter acquired, arising out of or relating to any of the Collateral
described in subsection (a) or (b) above;
together with all substitutions and replacements for and products of any of the
foregoing property and together with proceeds of any and all of the foregoing
property and, in the case of all tangible Collateral, together with all
accessions and together with (i) all accessories, attachments, parts, equipment
and repairs now or hereafter attached or affixed to or used in connection with
any such goods, and (ii) all warehouse receipts, bills of lading and other
documents of title now or hereafter covering such goods.
2. Representations, Warranties and Agreements. Debtor represents,
warrants and agrees that:
(a) Debtor is a corporation.
(b) The Collateral will be used primarily for business
purposes.
(c) Debtor's chief executive office is located at the address
of Debtor shown at the beginning of this Agreement.
3. Additional Representations, Warranties and Agreements. Debtor
represents, warrants and agrees that:
(a) Debtor has (or will have at the time Debtor acquires
rights in Collateral hereafter arising) absolute title to each item of
Collateral free and clear of all security interests, liens and
encumbrances, except the Security Interest and the rights of quiet
enjoyment of lessees under leases constituting Collateral, and will
defend the Collateral against all claims or demands of all persons
other than Secured Party. Debtor will not sell or otherwise dispose of
the Collateral or any interest therein without the prior written
consent of Secured Party. This Agreement has been duly and validly
authorized by all necessary corporate action.
(b) Debtor will not permit any tangible Collateral to be
located in any state (and, if county filing is required, in any county)
in which a financing statement covering such Collateral is required to
be, but has not in fact been, filed in order to perfect the Security
Interest.
(c) Each right to payment and each instrument, document,
chattel paper and other agreement constituting or evidencing Collateral
is (or will be when arising or issued) the valid, genuine and legally
enforceable obligation, subject to no defense, set-off or counterclaim
(other than those arising in the ordinary course of business) of the
account debtor or other obligor named therein or in Debtor's records
pertaining thereto as being obligated to pay such obligation. Debtor
will neither agree to any material modification or amendment nor agree
to any cancellation (other then a cancellation available as of right to
a lessee under a lease constituting Collateral) of any such obligation
without Secured Party's prior written consent, and will not subordinate
any such right to claims of other creditors of such account debtor or
other obligor.
(d) Debtor will:
(i) keep, or cause lessees to keep, all tangible
Collateral in good repair, working order and
condition, normal depreciation excepted,
and, from time to time, replace, or cause
lessees to replace, any worn, broken or
defective parts thereof;
(ii) promptly pay all taxes and other
governmental charges levied or assessed upon
or against any Collateral or upon or against
the creation, perfection or continuance of
the Security Interest;
(iii) keep all Collateral free and clear of all
security interests, liens and encumbrances
except the Security Interest and the rights
of quiet enjoyment of lessees under leases
constituting Collateral;
(iv) at all reasonable times, permit Secured
Party or its representatives to examine or
inspect any Collateral, wherever located,
and to examine, inspect and copy Debtor's
books and records pertaining to the
Collateral and its business and financial
condition and to send and discuss with
account debtors and other obligors requests
for verifications of amounts owed to Debtor;
(v) keep accurate and complete records
pertaining to the Collateral and pertaining
to Debtor's business and financial condition
and submit to Secured Party such periodic
reports concerning the Collateral and
Debtor's business and financial condition as
Secured Party may from time to time
reasonably request;
(vi) promptly notify Secured Party of any
material loss of, or damage to, any
Collateral or of any adverse change, known
to Debtor, in the prospect of payment of any
sums due on or under any instrument, chattel
paper, or account constituting Collateral;
(vii) if Secured Party at any time so requests
(whether the request is made before or after
the occurrence of an Event of Default),
promptly deliver to Secured Party any
instrument, document or chattel paper
constituting Collateral, duly endorsed or
assigned by Debtor;
(viii) at all times keep, or cause lessees to keep,
all tangible Collateral insured against
risks of fire (including so-called extended
coverage), theft, collision (in case of
Collateral consisting of motor vehicles) and
such other risks and in such amounts as
Secured Party may reasonably request with
any loss payable to Secured Party to the
extent of its interest;
(ix) from time to time execute such financing
statements as Secured Party may reasonably
require in order to perfect the Security
Interest and, if any Collateral consists of
an asset subject to a certificate of title,
execute such documents as may be required to
have the Security Interest properly noted on
a certificate of title;
(x) pay when due or reimburse Secured Party on
demand for all costs of collection of any of
the Obligations and all other out-of-pocket
expenses (including in each case all
reasonable attorneys' fees) incurred by
Secured Party in connection with the
creation, perfection, satisfaction,
protection, defense or enforcement of the
Security Interest or the creation,
continuance, protection, defense or
enforcement of this Agreement or any or all
of the Obligations, including expenses
incurred in any litigation or bankruptcy or
insolvency proceedings;
(xi) execute, deliver or endorse any and all
instruments, documents, assignments,
security agreements and other agreements and
writings which Secured Party may at any time
reasonably request in order to secure,
protect, perfect or enforce the Security
Interest and Secured Party's rights under
this Agreement;
(xii) not use or keep any Collateral, or permit it
to be used or kept, for any unlawful purpose
or in violation of any federal, state or
local law, statute or ordinance; and
(xiii) not permit any tangible Collateral to become
part of or to be affixed to any real
property without first assuring to the
reasonable satisfaction of Secured Party
that the Security Interest will be prior and
senior to any interest, or lien then held or
thereafter acquired by any mortgagee of such
real property or the owner or purchaser of
any interest therein.
If Debtor at any time fails to perform or observe any agreement
contained in this Section 3(d), and if such failure shall continue for
a period of ten calendar days after Secured Party gives Debtor written
notice thereof (or, in the case of the agreements contained in clauses
(viii) and (ix) of this Section 3(d), immediately upon the occurrence
of such failure, without notice or lapse of time), Secured Party may
(but need not) perform or observe such agreement on behalf and in the
name, place and stead of Debtor (or, at Secured Party's Option, in
Secured Party's own name) and may (but need not) take any and all other
actions which Secured Party may reasonably deem necessary to cure or
correct such failure (including, without limitation, the payment of
taxes, the satisfaction of security interests, liens, or encumbrances,
the performance of obligations under contracts or agreements with
account debtors or other obligors, the procurement and maintenance of
insurance, the execution of financing statements, the endorsement of
instruments, and the procurement of repairs, transportation or
insurance); and, except to the extent that the effect of such payment
would be to render any loan or forbearance of money usurious or
otherwise illegal under any applicable law, Debtor shall thereupon pay
Secured Party on demand the amount of all moneys expended and all costs
and expenses (including reasonable attorneys' fees) incurred by Secured
Party in connection with or as a result of Secured Party's performing
or observing such agreements or taking such actions, together with
interest thereon from the date expended or incurred by Secured Party at
the highest rate then applicable to any of the obligations. To
facilitate the performance or observance by Secured Party of such
agreements of Debtor, Debtor hereby irrevocably appoints (which
appointment is coupled with an interest) Secured Party, or its
delegate, as the attorney-in-fact of Debtor with the right (but not the
duty) from time to time to create, prepare, complete, execute, deliver,
endorse or file, in the name and on behalf of Debtor, any and all
instruments, documents, financing statements, applications for
insurance and other agreements and writings required to be obtained,
executed, delivered or endorsed by Debtor under this Section 3 and
Section 4.
4. Lock Box, Collateral Account. If Secured Party so requests at any
time after the occurrence and during the continuance of an Event of Default,
Debtor will direct the obligor on any Collateral to make payments due under the
relevant Collateral directly to a special lockbox to be under the control of
Secured Party. Prior to such a request by Secured Party, Debtor will maintain
the lockbox arrangements required under the terms of the Loan Agreement. Debtor
hereby authorizes and directs Secured Party to deposit into a special collateral
account to be established and maintained with Secured Party all checks, drafts
and cash payments, received in the lockbox, if any, established under this
Section. All deposits in said collateral account shall constitute proceeds of
Collateral and shall not constitute payment of any Obligations. Secured Party
shall either (i) apply finally collected funds on deposit in said collateral
account to the payment of the Obligations in such order of application as
Secured Party may determine, or (ii) permit Debtor to withdraw all or any part
of the balance on deposit in said collateral account. Debtor agrees that it will
promptly deposit into the collateral account, if any, established under this
Section or, if no collateral account is established under this Agreement, into
the lockbox established under the Loan Agreement, all payments on Collateral
received by it. All such payments shall be delivered to Secured Party in the
form received (except for Debtor's endorsement where necessary). Until so
deposited, all payments on Collateral received by Debtor shall be held in trust
by Debtor for and as the property of Secured Party and shall not be commingled
with any funds or property of Debtor.
5. Account Verification and Collection Rights of Secured Party. Secured
Party shall have the right to verify any Collateral in the name of Debtor or in
its own name; and Debtor, whenever requested, shall furnish Secured Party with
duplicate statements of accounts with respect to Collateral, which statements
may be mailed or delivered by Secured Party for that purpose. Notwithstanding
Secured Party's rights under Section 4 with respect to any and all debt
instruments, chattel papers, accounts, and other rights to payment constituting
Collateral (including proceeds), Secured Party may at any time after the
occurrence of an Event of Default notify any account debtor, or any other person
obligated to pay any amount due, that such chattel paper, account, or other
right to payment has been assigned or transferred to Secured Party for security
and shall be paid directly to Secured Party. If Secured Party so requests at any
such time, Debtor will so notify obligors under Collateral in writing and will
indicate on all invoices to such obligors that the amount due is payable
directly to Secured Party. At any time after Secured Party or Debtor gives such
notice to an obligor, Secured Party may (but need not), in its own name or in
Debtor's name, demand, sue for, collect or receive any money or property at any
time payable or receivable on account of, or securing, any such chattel paper,
account, or other right to payment, or grant any extension to, make any
compromise or settlement with or otherwise agree to waive, modify, amend or
change the obligations (including collateral obligations) of any such obligor.
6. Assignment of Insurance. Debtor hereby assigns to Secured Party, as
additional security for the payment of the Obligations, any and all moneys
(including but not limited to proceeds of insurance and refunds of unearned
premiums) due or to become due under and all other rights of Debtor under or
with respect to, any and all policies of insurance covering the Collateral, and
Debtor hereby directs the issuer of any such policy to pay any such moneys
directly to Secured Party. In a case where a lease constituting Collateral
grants the lessee the right to apply insurance proceeds to the repair or
replacement of equipment, insurance proceeds may be paid to the lessee for such
purpose so long as the lease is not in default. Both before and after the
occurrence of an Event of Default, Secured Party may (but need not), in its own
name or in Debtor's name, execute and deliver proofs of claim, receive all such
moneys, endorse checks and other instruments representing payment of such
moneys, and adjust, litigate, compromise or release any claim against the issuer
of such policy.
7. Events of Default. An Event of Default under the Loan Agreement
shall be an Event of Default hereunder.
8. Remedies upon Event of Default. Upon and during the continuance of
an Event of Default under Section 7, Secured Party may exercise any one or more
of the following rights and remedies: (i) declare all unmatured Obligations to
be immediately due and payable, and the same shall thereupon be immediately due
and payable, without presentment of other notice or demand; (ii) exercise and
enforce any or all rights and remedies available upon default to a secured party
under the Uniform Commercial Code, including but not limited to the right to
take possession of any Collateral, proceeding without judicial process or by
judicial process (without a prior hearing or notice thereof, which Debtor hereby
expressly waives), and the right to sell, lease or otherwise dispose of any or
all of the Collateral, and in connection therewith, Secured Party may require
Debtor to make the Collateral available to Secured Party at a place to be
designated by Secured Party which is reasonably convenient to both parties, and
if notice to Debtor of any intended disposition of Collateral or any other
intended action is required by law in a particular instance, such notice shall
be deemed commercially reasonable if given (in the manner specified in Section
10) at least 10 calendar days prior to the date of intended disposition or other
action; (iii) exercise or enforce any or all other rights or remedies available
to Secured Party by law or agreement against the Collateral, against Debtor or
against any other person or property. In exercising any right under this
Section, Secured Party will recognize the rights of quiet enjoyment of lessees
under leases constituting Collateral.
9. Other Personal Property. Unless at the time Secured Party takes
possession of any tangible Collateral, or within seven days thereafter, Debtor
gives written notice to Secured Party of the existence of any goods, papers or
other property of Debtor, not affixed to or constituting a part of such
Collateral, but which are located or found upon or within such Collateral,
describing such property, Secured Party shall not be responsible or liable to
Debtor for any action taken or omitted by or on behalf of Secured Party with
respect to such property without actual knowledge of the existence of any such
property or without actual knowledge that it was located or to be found upon or
within such Collateral.
10. Miscellaneous. This Agreement does not contemplate a sale of
accounts, or chattel paper. This Agreement can be waived, modified, amended,
terminated or discharged and the Security Interest can be released, only
explicitly in a writing signed by Secured Party. A waiver signed by Secured
Party shall be effective only in a specific instance and for the specific
purpose given. Mere delay or failure to act shall not preclude the exercise or
enforcement of any of Secured Party's rights or remedies. All rights and
remedies of Secured Party shall be cumulative and may be exercised singularly or
concurrently, at Secured Party's option, and the exercise or enforcement of any
one such right or remedy shall neither be a condition to nor bar the exercise or
enforcement of any other. All notices to be given to Debtor shall be deemed
sufficiently given if delivered or mailed by registered or certified mail,
postage prepaid, to Debtor at its address set forth above or at the most recent
address shown on Secured Party's records. Secured Party's duty of care with
respect to Collateral in its possession (as imposed by law) shall be deemed
fulfilled if Secured Party exercises reasonable care in physically safekeeping
such Collateral or, in the case of Collateral in the custody or possession of a
bailee or other third person, exercises reasonable care in the selection of the
bailee or other third person, and Secured Party need not otherwise preserve,
protect, insure or care for any Collateral. Secured Party shall not be obligated
to preserve any rights Debtor may have against prior parties, to realize on the
Collateral at all or in any particular manner or order, or to apply any cash
proceeds of Collateral in any particular order of application. This Agreement
shall be binding upon and inure to the benefit of Debtor and Secured Party and
their respective heirs, representatives, successors and assigns and shall take
effect when signed by Debtor and delivered to Secured Party, and Debtor waives
notice of Secured Party's acceptance hereof. Secured Party may execute this
Agreement if appropriate for the purpose of filing, but the failure of Secured
Party to execute this Agreement shall not affect or impair the validity or
effectiveness of this Agreement. A carbon, photographic or other reproduction of
this Agreement or of any financing statement signed by Debtor shall have the
same force and effects as the original for all purposes of a financing
statement. This Agreement shall be governed by the internal laws of the State of
Minnesota. If any provision or application of this Agreement is held unlawful or
unenforceable in any respect, such illegality or unenforceability shall not
affect other provisions or applications which can be given effect and this
Agreement shall be construed as if the unlawful or unenforceable provision or
application had never been contained herein or prescribed hereby. All
representations and warranties contained in this Agreement shall survive the
execution, delivery and performance of this Agreement and the creation and
payment of the Obligations. Debtor hereby irrevocably submits to the
jurisdiction of the Minnesota District Court, Fourth District, and the Federal
District Court, District of Minnesota, Fourth Division, over any action or
proceeding arising out of or relating to this Agreement and agrees that all
claims in respect of such action or proceeding may be heard and determined in
any such court.
National City Bank of Sunrise International Leasing Corporation
Minneapolis
By /s/ Gene Bygd By /s/ Jeffrey G. Jacobson
Its Vice President Its Executive Vice President
PROMISSORY NOTE
$5,150,000.00 Dated: February 22, 1999
For value received, Sunrise International Leasing Corporation, a
Delaware corporation (the "Borrower") promises to pay to the order of National
City Bank of Minneapolis (the "Bank"), at its offices in Minneapolis, Minnesota,
in lawful money of the United States of America, the principal amount of Five
Million One Hundred Fifty Thousand and no/100 Dollars ($5,150,000.00) together
with interest on any and all principal amounts remaining unpaid hereon from the
date of this Note until said principal amounts are fully paid at a fluctuating
annual rate equal to the rate of interest established by the Bank from time to
time as its base rate (the "Base Rate"). Each change in the fluctuating interest
rate shall take effect simultaneously with the corresponding change in the Base
Rate.
Principal and interest shall be paid in monthly installments on the
last day of each month, starting on the last day of the first full month after
the date hereof and ending on the last day of the 48th full month after the date
hereof. Each monthly installment shall be equal to the aggregate amount of all
payments due during that month under each Eligible Equipment Lease then included
in the Borrowing Base for this Note under the Loan Agreement; provided, however,
that the last such installment shall be in the amount necessary to repay in full
the unpaid principal amount hereof together with all accrued but unpaid
interest. Each installment shall be applied first to interest then due and then
to principal. The monthly installment due under this Note shall be calculated
each month without regard to whether the Borrower actually receives all payments
due under each Eligible Equipment Lease during that month.
This Note is one of the Notes referred to in, and is entitled to the
benefits of, the Discretionary Revolving Credit Agreement dated as of February
22, 1999 (the "Loan Agreement") between the Borrower and the Bank, which Loan
Agreement, among other things, contains provisions for the acceleration of the
maturity of this Note upon the happening of certain stated events, for an
increase to the interest rate upon the happening of certain stated events, and
also for mandatory and voluntary prepayments of the principal amount due under
this Note upon stated terms and conditions.
Sunrise International Leasing Corporation
By /s/ Jeffrey G. Jacobson
Its Executive Vice President
Exhibit 11.1
SUNRISE INTERNATIONAL LEASING CORPORATION
PER SHARE EARNINGS (LOSS) COMPUTATIONS
<TABLE>
<CAPTION>
Years Ended March 31,
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Basic Earnings Per Share:
Weighted average number of common shares
outstanding $ 7,618,000 $ 7,658,000 $ 7,189,000
Net income (loss) 3,438,000 2,191,000 (2,547,000)
=========== =========== ===========
Basic Earnings Per Share $ .45 $ 0.29 $ (0.35)
=========== =========== ===========
Diluted Earnings (Loss) Per Share
Weighted average number of common shares
outstanding $ 7,618,000 $ 7,658,000 $ 7,189,000
Common share equivalents from assumed
exercise of options and warrants 24,000 18,000 56,000
----------- ----------- ----------
Total shares 7,642,000 7,676,000 7,245,000
=========== =========== ==========
Net income (loss) $ 3,438,000 $ 2,191,000 $(2,547,000)
=========== ========== ===========
Diluted Earnings Per Share $ .45 $ 0.29 $ (0.35)
=========== =========== ===========
</TABLE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement File No.
33-52364 of Sunrise International Leasing Corporation on Form S-8 of our report
dated June 4, 1999 appearing in this Annual Report on Form 10-K of Sunrise
International Leasing Corporation for the year ended March 31, 1999.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota,
June 28, 1999
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated June 27, 1997 included in this Form 10-K, into the Company's
previously filed Registration Statement File No. 33-52364.
/s/ ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
June 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 963,000
<SECURITIES> 0
<RECEIVABLES> 4,230,000
<ALLOWANCES> 368,000
<INVENTORY> 57,000
<CURRENT-ASSETS> 95,491,000
<PP&E> 894,000
<DEPRECIATION> 652,000
<TOTAL-ASSETS> 103,015,000
<CURRENT-LIABILITIES> 70,609,000
<BONDS> 0
0
0
<COMMON> 78,000
<OTHER-SE> (2,195,000)
<TOTAL-LIABILITY-AND-EQUITY> 103,015,000
<SALES> 51,648,000
<TOTAL-REVENUES> 51,648,000
<CGS> 45,721,000
<TOTAL-COSTS> 45,721,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,927,000
<INCOME-TAX> 2,489,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,438,000
<EPS-BASIC> .45
<EPS-DILUTED> .45
</TABLE>
