SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
December 31, 1999 0-19516
SUNRISE INTERNATIONAL LEASING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 41-1632858
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5500 Wayzata Boulevard, Suite 725
Golden Valley, Minnesota 55416
(Address of principal executive offices)
Registrant's telephone number, including area code
(612) 593-1904
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
6,636,253 shares of Common Stock, $.01 par value as of January 25, 2000.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Included herein is the following unaudited financial information:
Consolidated Balance Sheets as of December 31, 1999 and March 31,
1999.
Consolidated Statements of Income for the three and nine month periods
ended December 31, 1999 and 1998.
Consolidated Statements of Cash Flows for the nine month periods ended
December 31, 1999 and 1998.
Notes to Consolidated Financial Statements.
<PAGE>
SUNRISE INTERNATIONAL LEASING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
--------------- ----------------
ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 1,179,000 $ 963,000
Accounts receivable, less allowance for doubtful accounts
of $305,000 and $368,000, respectively 2,143,000 1,306,000
Loans receivable 1,961,000 2,556,000
Investment in leasing operations:
Operating leases - Equipment 186,186,000 111,953,000
Less: Operating leases - Accumulated depreciation 57,867,000 36,518,000
--------------- ----------------
Operating leases - Net book value 128,319,000 75,435,000
Direct financing leases 20,235,000 14,880,000
Equipment held for lease 3,945,000 4,914,000
Inventory held for sale 109,000 57,000
Initial direct costs 128,000 205,000
--------------- ----------------
Total investment in leasing operations 152,971,000 95,491,000
--------------- ----------------
Furniture and fixtures, less accumulated depreciation of
$744,000 and $652,000, respectively 241,000 242,000
Deferred tax asset 1,364,000 1,364,000
Other assets 1,730,000 1,093,000
--------------- ----------------
Total Assets $ 161,354,000 $ 103,015,000
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Financing arrangements
Borrowings under lines of credit $ 27,028,000 $ 4,156,000
Discounted lease rentals 9,019,000 13,589,000
Term notes 65,239,000 22,011,000
Notes payable to King Management Corporation 5,433,000 8,476,000
--------------- ----------------
Total financing arrangements 106,719,000 48,232,000
--------------- ----------------
Accounts payable 3,744,000 8,988,000
Accrued liabilities 5,905,000 1,821,000
Customer deposits 12,705,000 4,804,000
Income taxes payable 453,000 6,764,000
------------------ ----------------
Total Liabilities 129,526,000 70,609,000
------------------ ----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 17,500,000 shares authorized,
7,832,000 shares issued 78,000 78,000
Preferred stock, undesignated, par value $.01 per share,
2,500,000 shares authorized, none issued or outstanding
Additional paid-in capital 27,840,000 27,810,000
Retained earnings 8,989,000 6,713,000
------------------ ----------------
36,907,000 34,601,000
Common stock in treasury at cost - 1,196,000 and 566,000
shares, respectively (5,079,000) (2,195,000)
----------------- ---------------
Total Stockholders' Equity 31,828,000 32,406,000
----------------- ---------------
Total Liabilities and Stockholders' Equity $ 161,354,000 $ 103,015,000
================= ===============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
<PAGE>
SUNRISE INTERNATIONAL LEASING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Nine Months
Ended December 31, Ended December 31,
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Operating leases $18,887,000 $10,548,000 $49,723,000 $28,705,000
Direct financing leases 926,000 679,000 2,631,000 2,228,000
Equipment sales 3,220,000 1,865,000 7,235,000 5,435,000
Interest Income 15,000
Fee income 80,000 61,000 181,000 235,000
----------- ----------- ----------- -----------
Total Revenues 23,113,000 13,153,000 59,770,000 36,618,000
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Depreciation 14,202,000 6,967,000 36,178,000 18,344,000
Interest 2,081,000 926,000 4,629,000 2,897,000
Provision for lease and loan losses 1,054,000 726,000 2,512,000 1,555,000
Cost of equipment sold 3,213,000 1,679,000 6,993,000 5,101,000
Compensation expense 873,000 806,000 2,761,000 2,403,000
Other operating expenses 1,076,000 568,000 2,774,000 2,105,000
----------- ----------- ----------- -----------
Total Costs and Expenses 22,499,000 11,672,000 55,847,000 32,405,000
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS
BEFORE PROVISION
FOR INCOME TAXES 614,000 1,481,000 3,923,000 4,213,000
PROVISION FOR INCOME TAXES 258,000 540,000 1,648,000 1,769,000
----------- ----------- ----------- -----------
NET INCOME $ 356,000 $ 941,000 $ 2,275,000 $ 2,444,000
=========== =========== =========== ===========
NET INCOME PER COMMON
Basic $ 0.05 $ 0.12 $ 0.32 $ 0.32
=========== =========== =========== ===========
Diluted $ 0.05 $ 0.12 $ 0.31 $ 0.31
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING
Basic 6,634,000 7,585,000 7,050,000 7,736,000
=========== =========== =========== ===========
Diluted 7,141,000 7,625,000 7,453,000 7,767,000
=========== =========== =========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
<PAGE>
SUNRISE INTERNATIONAL LEASING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Ended December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,275,000 $ 2,444,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for lease and loan losses 2,512,000 1,555,000
Depreciation and amortization 36,287,000 18,609,000
Stock options issued to non-employees 15,000 40,000
Change in operating assets and liabilities:
Accounts receivable (1,392,000) 370,000
Income taxes (6,311,000) 1,625,000
Other assets (672,000) 1,271,000
Inventory held for sale (52,000) (7,000)
Accounts payable/Accrued liabilities (1,160,000) 513,000
Customer Deposits 7,900,000 2,224,000
--------------- ---------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 39,402,000 27,618,000
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment for lease, net cost of equipment sold (105,809,000) (31,788,000)
Principal portion of direct financing leases collected 10,543,000 10,850,000
Principal portion of loans receivable collected 595,000 938,000
Purchase of furniture and fixtures (138,000) (18,000)
---------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (94,809,000) (20,018,000)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on lines of credit 126,872,000 34,380,000
Payments on lines of credit (103,998,000) (23,316,000)
Proceeds from term notes 56,640,000 ---
Payments on term notes (13,411,000) (5,850,000)
Proceeds from discounted lease financing 4,327,000 4,192,000
Payments on discounted lease financing (8,896,000) (13,367,000)
Proceeds from notes payable to related party 9,998,000 4,295,000
Payments on notes payable to related party (13,041,000) (7,321,000)
Stock options exercised 16,000 99,000
Purchase of treasury stock (2,884,000) (2,195,000)
---------------- ----------------
NET CASH PROVIDED BY/ (USED IN)
FINANCING ACTIVITIES 55,623,000 (9,083,000)
--------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 216,000 (1,483,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 963,000 2,140,000
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,179,000 $ 657,000
=============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 3,998,000 $ 1,646,000
Income taxes paid $ 8,054,000 $ 28,000
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
<PAGE>
SUNRISE INTERNATIONAL LEASING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIOD ENDED DECEMBER 31, 1999 and 1998 (Unaudited)
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES
In the opinion of management, the accompanying financial statements contain all
adjustments necessary to present fairly the financial position of Sunrise
International Leasing Corporation (formerly known as Sunrise Resources, Inc.)
and Subsidiaries (the Company) as of December 31, 1999 and March 31, 1999 and
the results of operations and cash flows for the nine months ended December 31,
1999 and 1998. All such adjustments are of a normal and recurring nature.
These statements should be read in conjunction with the Consolidated Financial
Statements and the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1999, filed with the
Securities and Exchange Commission, and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing in this
quarterly report. Results for the interim periods are not necessarily indicative
of sales trends or future results and performance.
Certain amounts in the financial statements and notes thereto have been
reclassified to conform to fiscal 2000 classifications. These changes had no
impact on previously reported results of operations or shareholders' equity.
Comprehensive income, as defined by SFAS No. 130, Reporting Comprehensive
Income, for the periods presented are equivalent to net income.
2. INCOME TAXES
Income tax expense has been provided based on management's estimate of the
annualized effective tax rate of 42% for the nine months ended December 31, 1999
and 1998.
3. LOANS RECEIVABLE
The Company discontinued its loan activities in fiscal 1997. As of December 31,
1999 and March 31, 1999, the loan receivable portfolio was comprised of a single
loan.
4. FINANCING ARRANGEMENTS
Lines of Credit
The Company has a $25,000,000 line of credit facility with US Bank for use in
its operations. The balance outstanding on this line of credit at December 31,
1999 and March 31, 1999 was $12,028,000 and $4,156,000 respectively. Advances
are at prime (8.5% at December 31, 1999) and are collateralized by substantially
all unsecured assets of the Company. This line of credit facility matures on
February 28, 2000, and the Company anticipates that it will be extended on
similar terms.
The Company has a $15,000,000 line of credit facility with Firstar Bank for use
in its operations. The balance outstanding on this line of credit at December
31, 1999 was $15,000,000. Advances under this line are at prime minus .5% (8.0%
at December 31, 1999) and are collateralized by specific leases and equipment.
This line of credit facility matures on September 30, 2000.
These credit facilities require compliance with financial covenants, including
the maintenance of certain liquidity and net worth ratios, prohibits the payment
of dividends and require compliance with other non-financial covenants. As of
December 31, 1999, the Company is in compliance with the terms of these
agreements.
<PAGE>
Term Debt Summary
<TABLE>
<CAPTION>
Loan and
Financial Interest Balance Interest Rate
Institution Date of Loan Amount of Loan @ 12/31/99 @ 12/31/99
- ------------ ------------ -------------- ----------- ------------
<S> <C> <C> <C> <C>
King Management 3/98 4,864,000 1,247,000 8.25%
Corporation
National City Bank 2/99 6,500,000 3,929,000 8.50%
of Minneapolis
U.S. Bank Leasing 3/99 5,000,000 3,434,000 8.15%
Community First Financial 3/99 10,000,000 5,777,000 7.75%
of Fargo
King Management 6/99 4,997,000 4,186,000 8.25%
Corporation
U.S. Bank Leasing 7/99 5,004,000 4,433,000 8.25%
Heller Financial 8/99 10,348,000 8,845,000 8.78%
Heller Financial 8/99 10,022,000 8,753,000 8.78%
Heller Financial 9/99 10,128,000 9,136,000 8.78%
US Bank Leasing 12/99 5,000,000 5,003,000 8.50%
Heller Financial 11/99 9,496,000 9,265,000 8.80%
Heller Financial 12/99 6,641,000 6,664,000 8.82%
----------- -----------
Total $88,000,000 $70,672,000
</TABLE>
All of the facilities outlined above are secured by specific leases and
equipment and require compliance with certain liquidity and net worth ratios. As
of December 31, 1999, the Company is in compliance with the terms of these
agreements.
Financing Arrangement with King Management Corporation - On June 16, 1997, the
Company entered into a financing arrangement with The King Management
Corporation (KMC), an affiliate of Peter King, Chairman of the Board and CEO.
Under the financing arrangement as amended, for the period from July 1, 1997
through June 30, 2000, KMC has committed to assist the Company in financing its
vendor business including providing subordinated debt to cover any net worth
covenant deficiencies and utilizing its balance sheet and borrowing capacity to
provide funding for approved vendor programs, including making direct loans to
the Company. From June 16, 1997 through December 31, 1999, KMC has provided term
note financing to the Company totaling $29.8 million, with balances totaling
$5.4 million at December 31, 1999. The notes bear interest at prime minus 0.25%
(8.25% at December 31, 1999), and are secured by specific leases and equipment.
<PAGE>
Discounted Lease Rentals
Discounted lease rentals consist of the following:
December 31 March 31
1999 1999
Non-recourse borrowings $ 8,851,000 $13,164,000
Recourse borrowings 168,000 425,000
------------ -----------
$ 9,019,000 $13,589,000
============ ===========
The Company utilizes certain of its lease rentals receivable and underlying
equipment in lease transactions as collateral to borrow from financial
institutions at fixed rates primarily on a non-recourse basis. In the event of
default by a lessee on a non-recourse borrowing, the financial institutions have
a first lien on the underlying leased equipment with no further recourse against
the Company. For recourse borrowings, the financial institution can seek
recourse from the Company in addition to having a first lien on the asset. Most
of the Company's current borrowings are recourse borrowings. The liability
associated with the proceeds from discounting are recorded on the consolidated
balance sheet as discounted lease rentals. Discounted lease rentals are reduced
by the interest method.
Certain recourse discounted lease rental agreements require the Company to
maintain financial ratios and to comply with other covenants similar to those
required in the Company's credit facility agreements. As of December 31, 1999,
the Company was in compliance with such covenants.
5. RELATED PARTY
Management Agreement
Pursuant to an agreement by and among the Company, Mr. Peter King and KMC, an
affiliate of Mr. King, dated June 16, 1997, as amended on June 23, 1998 (the
"Management Agreement"), it was agreed that Mr. King or KMC would provide
certain management services to the Company through June 30, 2000. Pursuant to
the Management Agreement, Mr. King will serve as an employee of the Company in
the capacity of Chairman of the Board and Chief Executive Officer until June 30,
2000, at a salary of $200,000 per year. Pursuant to the Management Agreement,
Mr. King was granted stock options to purchase an aggregate of 541,506 shares at
$3.375 per share. On June 23, 1998, Mr. King was granted (i) a fully vested
seven-year nonqualified stock option to purchase 250,000 shares at $3.25 per
share under the Company's 1991 Stock Option Plan and (ii) a seven-year
nonqualified cliff vesting stock option to purchase 400,000 shares at $3.25 per
share outside of the Company's 1991 Stock Option Plan. The cliff vesting options
vest after six years if Mr. King continues to be an employee of the Company.
Vesting is accelerated if the Company's Common Stock attains certain agreed
closing average stock prices, as reflected in the Nasdaq Market System, for a
period of ten consecutive business days, as follows: 125,000 shares at $5.00,
125,000 shares of $6.00 and 150,000 shares at $7.00. The Management Agreement
provides that Mr. King and/or KMC will provide certain services to the Company,
including but not limited to working with management on current and prospective
vendor relationships, monitoring problem leases and loans, assisting the Company
on meeting financing requirements and working with the Company's bankers.
<PAGE>
Management Proposal
As previously reported, the Company has signed a definitive merger agreement
with The King Management Corporation (an affiliate of Peter King) for the
acquisition of all of the outstanding shares of Sunrise common stock not held by
King Management and affiliates.
Under the terms of the merger agreement, which was unanimously approved by a
special committee of the Board of Directors, as well as the full Board of
Directors, Sunrise will merge into King Management and Sunrise shareholders, who
are not affiliated with King Management, will receive consideration of $5.25 per
share in cash.
Consummation of the merger is subject to satisfaction of various conditions,
including the ability of King Management to obtain the necessary financing to
fund the costs of the acquisition. It is expected that a meeting of shareholders
to vote on the merger will take place in the second quarter of this calendar
year and, if approved, the closing of the transaction will occur shortly
thereafter.
6. SEGMENT INFORMATION
In evaluating Company financial performance, management focuses on two segments.
The first segment is ILC or the vendor generated business. The second segment is
SLC or the business generated by Sunrise through direct sales contact with end
user customers. The remaining portfolio of assets from the Company's former
asset based lending activities are also included in this segment.
Management focuses on revenue and margins generated from two major categories,
leasing revenue (including interest and fee income) and sale of equipment
revenue. Management defines leasing gross margins as leasing income (as defined
above) less depreciation and interest. Management defines leasing net margin as
leasing gross margin less provisions for losses. Equipment sale gross margin is
sale proceeds less the cost of the equipment sold (book value of the equipment
at the time of sale).
<TABLE>
<CAPTION>
For The Quarter Ended
December 31, 1999 ILC/Vendor SLC/Direct Total
----------------- ---------- ---------- -------------
<S> <C> <C> <C>
Leasing Revenue $ 17,725,000 $ 2,168,000 $ 19,893,000
Less: Depreciation 12,864,000 1,338,000 14,202,000
Interest Expense 1,895,000 186,000 2,081,000
-------------- ------------- --------------
Leasing Gross Margin 2,966,000 644,000 3,610,000
Less: Provision 719,000 335,000 1,054,000
-------------- ------------- --------------
Leasing Net Margin $ 2,247,000 $ 309,000 $ 2,556,000
============= ============ =============
Equipment Sales Revenue $ 3,066,000 $ 154,000 $ 3,220,000
Less: Cost of Equipment sold 3,028,000 185,000 3,213,000
-------------- ------------- --------------
Equipment Gross Margin $ 38,000 $ (31,000) $ 7,000
============== ============== =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For The Quarter Ended
December 31, 1998 ILC/Vendor SLC/Direct Total
----------------- ---------- ---------- --------------
<S> <C> <C> <C>
Leasing Revenue $ 8,898,000 $ 2,390,000 $ 11,288,000
Less: Depreciation 5,580,000 1,387,000 6,967,000
Interest Expense 526,000 400,000 926,000
-------------- ------------- --------------
Leasing Gross Margin 2,792,000 603,000 3,395,000
Less: Provision 451,000 275,000 726,000
-------------- ------------- --------------
Leasing Net Margin $ 2,341,000 $ 328,000 $ 2,669,000
============= ============= =============
Equipment Sales Revenue $ 1,154,000 $ 711,000 $ 1,865,000
Less: Cost of Equipment sold 1,180,000 499,000 1,679,000
-------------- ------------- --------------
Equipment Gross Margin $ (26,000) $ 212,000 $ 186,000
================ ============= ==============
<CAPTION>
For The Nine Months Ended
December 31, 1999 ILC/Vendor SLC/Direct Total
----------------- ---------- ---------- --------------
<S> <C> <C> <C>
Leasing Revenue $ 45,536,000 $ 6,999,000 $ 52,535,000
Less: Depreciation 32,035,000 4,143,000 36,178,000
Interest Expense 3,999,000 630,000 4,629,000
-------------- ------------- --------------
Leasing Gross Margin 9,502,000 2,226,000 11,728,000
Less: Provision 1,847,000 665,000 2,512,000
-------------- ------------- --------------
Leasing Net Margin $ 7,655,000 $ 1,561,000 $ 9,216,000
============ ============ ============
Equipment Sales Revenue $ 6,174,000 $ 1,061,000 $ 7,235,000
Less: Cost of Equipment sold 6,003,000 990,000 6,993,000
-------------- ------------- --------------
Equipment Gross Margin $ 171,000 $ 71,000 $ 242,000
============= ============= =============
<CAPTION>
For The Nine Months Ended
December 31, 1998 ILC/Vendor SLC/Direct Total
----------------- ---------- ---------- --------------
<S> <C> <C> <C>
Leasing Revenue $ 23,918,000 $ 7,265,000 $ 31,183,000
Less: Depreciation 14,373,000 3,971,000 18,344,000
Interest Expense 1,420,000 1,477,000 2,897,000
-------------- ------------- --------------
Leasing Gross Margin 8,125,000 1,817,000 9,942,000
Less: Provision 1,010,000 545,000 1,555,000
-------------- ------------- --------------
Leasing Net Margin $ 7,115,000 $ 1,272,000 $ 8,387,000
============ ============ ============
Equipment Sales Revenue $ 3,617,000 $ 1,818,000 $ 5,435,000
Less: Cost of Equipment sold 3,619,000 1,482,000 5,101,000
-------------- ------------- --------------
Equipment Gross Margin $ (2,000) $ 336,000 $ 334,000
================ ============ =============
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Consolidated Results of Operations for the Three and Nine Months Ended December
31, 1999 and 1998.
For the three and nine months ended December 31, 1999, total revenue increased
$10.0 and $23.2 million, or 75.7% and 63.2%, respectively, compared to the
previous year. For the same periods, net income decreased $585,000 and $169,000,
or 62.2% and 6.9%, respectively.
For the three months ended December 31, 1999, consolidated leasing net margins
decreased $113,000, or 4.2%, and increased $829,000, or 9.9%, for the nine month
period ended December 31, 1999. See discussion by segment below for explanations
of these variations.
Revenue from equipment sales increased $1,355,000 and $1,800,000, or 72.7% and
33.1% for the three and nine month periods, respectively, and gross margins on
equipment sales decreased $179,000 and $92,000 for the three and nine month
periods compared to the prior year.
For the three and nine month periods, compensation expenses increased $67,000
and $358,000, or 8.3% and 14.9%, respectively, due to increased salary expense
for former KMC personnel who are now employees of Sunrise, a greater number of
employees, and the increased cost of employer funded health care benefits.
For the three and nine month periods, other operating expenses increased
$508,000 and $669,000, or 89.4% and 31.8%, respectively. For the three months
and nine months periods respectively, other operating expenses included $313,000
and $445,000 of fees paid or accrued to be paid to financial advisors engaged by
the Special Committee of the Board relating to the management proposal discussed
in the Related Party section in footnote 5.
The income tax provision as a percentage of income before taxes was 42% in
fiscal 2000 and fiscal 1999.
Segmented Results of Operations for the Three and Nine Months Ended December 31,
1999 and 1998.
ILC/Vendor
Vendor leasing revenues increased $8.8 and $21.6 million for the three and nine
month periods, or 99.2% and 90.4%, respectively, over the corresponding periods
in the previous fiscal year. Vendor leasing net margins decreased $94,000, or
4.0%, for the three month period, and increased $540,000, or 7.6%, for the nine
month 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, increases in interest expenses,
and increases in the number of leases with lower margins. Net leasing margins
were adversely affected by increased loss provisions made necessary by increased
exposure due to portfolio growth and increased credit risks.
For the three and nine months ended December 31, 1999, equipment sales revenue
increased $1.9 million and $2.6 million, or 165.7% and 70.7%, respectively.
Gross margins from equipment sales increased to $38,000 and $171,000 for the
same periods compared to negative margins of $26,000 and $2,000 for the prior
year, primarily as a result of the lower book values due to accelerated
depreciation charges in prior periods.
<PAGE>
SLC/Direct
During the quarter ended September 30, 1999, the Company discontinued its
efforts to expand this segment of the business. As a result, the Company's
direct sales force was eliminated. The Company will continue to manage the SLC
portfolio and expects to experience modest losses as the portfolio liquidates.
Direct leasing revenues decreased $222,000 and $266,000 for the three and nine
month periods ended December 31, 1999, compared to the previous year, as new
operating lease revenue was not adequate to offset the decline in direct finance
lease revenue. SLC net leasing margins decreased $19,000, or 5.8% for the three
month period ended December 31, 1999, primarily due to increased provisions for
losses, and increased $289,000, or 22.7% for the nine month period ended
December 31, 1999, primarily due to decreases in interest expenses.
For the three and nine months ended December 31, 1999, equipment sales revenue
decreased $557,000, or 78.3%, and $757,000, or 41.6%, respectively. For the
three and nine month periods gross margins decreased to a loss of $31,000 and a
gain of $71,000 compared to positive gross margins of $212,000 and $336,000 for
similar periods in the previous year.
Liquidity and Capital Resources
General
The Company uses a combination of its credit lines and internally generated cash
flows to finance the acquisition of revenue generating equipment. At some point,
after commencement of a lease, the Company includes the lease in a pool of many
leases which are funded under amortizing term notes or assigns the remaining
lease payment stream to a financial institution on a discounted, non-recourse
basis. The proceeds received by the Company are used to reduce borrowings under
the Company's credit lines. Where the Company finances the equipment cost either
internally or on a recourse basis, the Company assumes the entire risk on its
investment in the loan or equipment.
At December 31, 1999, the Company had total borrowings outstanding of $106.7
million. These borrowings consisted of $9.0 million of discounted lease rentals
(of which $8.9 million were non-recourse), $27.0 million of borrowings under
bank lines of credit, $65.2 million notes payable to financial institutions and
$5.4 million of notes payable to KMC.
As of December 31, 1999, the Company had a total investment in leasing
operations of $153.0 million, which compares to $95.5 million at March 31, 1999.
The Company's investment in leasing operations includes equipment held for
lease, which consists of equipment for which a lease has been signed but which
has not yet commenced. The amount of equipment held for lease fluctuates
significantly depending on the dollar amounts and commencement dates of the
Company's leases. The increase in investment in leasing operations is a direct
result of an increase in the vendor leasing business.
Net cash flow of $39.4 million was generated from operating activities for the
nine months ended December 31, 1999. The Company also collected $11.1 million in
direct financing leases and loans in addition to net cash provided by financing
activities of $55.6 million. This cash flow was used to purchase $105.8 million
of leasing equipment.
As previously reported, the Company discovered that certain errors had been made
in prior year tax returns. These errors impact the timing of taxable income and
accordingly the timing of income tax payments. The errors have no effect on
reported income tax expense in the current year or any previous year; however,
$3.6 million which was reflected as deferred tax liabilities at March 31, 1998
were reclassified to income taxes payable. The Company amended prior period tax
returns during the quarter ended December 31, 1999, requiring payment of
approximately $2.2 million in federal and state taxes plus interest.
<PAGE>
At December 31, 1999, the Company had issued purchase orders for, and thereby
committed to buy, $42.5 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,
$12.0 million had been utilized as of December 31, 1999. Advances under the line
bear interest at prime and are collateralized by substantially all of the
Company's unencumbered assets. This line of credit matures on February 28, 2000.
The line of credit requires compliance with financial covenants, including the
maintenance of certain liquidity and net worth ratios, prohibits the payment of
dividends, and requires compliance with other financial covenants. The Company
is in compliance with the terms of this agreement.
On December 31, 1999, the Company established a $15 million revolving line of
credit with Firstar Bank. As of December 31, 1999, $15 million was outstanding.
Advances under the line will bear interest prime minus .5% and are
collateralized by specific leases and equipment. This line of credit matures on
September 30, 2000, and requires compliance with financial covenants, including
the maintenance of certain liquidity and net worth ratios, prohibits the payment
of dividends, and requires compliance with other financial covenants. The
Company is in compliance with the terms of this agreement.
As summarized in Footnote 4 of the financial statements included in this
Quarterly Report on Form 10-Q, in addition to the line of credit discussed
above, the Company utilizes a variety of term funding sources to finance its
investment in leasing assets.
The Company's reliance on additional financing has increased as a direct result
of the increased volume of equipment purchases in the ILC/Vendor business. The
Company believes that the proceeds of additional financing and/or sale of assets
will be adequate to meet the Company's working capital needs.
Financing Arrangement with The King Management Corporation
On June 16, 1997, the Company entered into a financing arrangement with The King
Management Corporation (KMC), an affiliate of Peter King, Chairman of the Board
and CEO. Under the financing arrangement, as amended, for the period from July
1, 1997 through June 30, 2000, KMC committed to assist the Company in financing
its vendor business including providing subordinated debt to cover any net worth
covenant deficiencies and utilizing its balance sheet and borrowing capacity to
provide funding for approved vendor programs, including making direct loans to
the Company. From June 16, 1997 through December 31, 1999, KMC has provided term
note financing totaling $29.8 million, with balances totaling $5.4 million at
December 31, 1999. The notes bear interest at prime minus 0.25% (8.25% at
December 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. For the quarter ended December 31, 1999 and
1998, KMC purchased leases in the amount of $12,649,000 and $3,616,000,
respectively.
Interest expense paid to KMC related to the financing arrangements described
above was $122,000 and $258,000, for the three months ended December 31, 1999
and 1998, respectively.
<PAGE>
Stock Repurchase
On October 13, 1998, the Company announced that its Board of Directors had
approved a stock repurchase program under which the Company had allocated up to
$5 million to purchase its common stock at suitable market prices. On April 23,
1999, the Board of Directors increased the stock repurchase program from $5
million to $7 million and granted management the authority to exercise its
option to purchase the shares from KMC or make other purchases, either directly
or through KMC as long as its ability to fund pending and future lease equipment
purchases is not jeopardized. During the quarter ended December 31, 1998, the
Company repurchased 566,400 shares from the public markets at a total cost of
$2,195,000. On September 30, 1999, the Company repurchased 630,000 shares for a
total cost of $2,884,000. These shares were purchased via exercise of an option
held by Sunrise to purchase shares from KMC at KMC's cost plus interest. KMC
originally purchased the shares of Sunrise in March of 1999, subject to the
Sunrise purchase option. The repurchased shares are being held as treasury stock
on the Company's balance sheet.
Year 2000 Compliance
The Company has reviewed its internal use computer systems in order to identify
and modify those systems that were not Year 2000 compliant. The cost associated
with this effort was not incremental to the Company, but represented a
reallocation of existing resources. The Company believes that its internal use
computer systems are fully Year 2000 compliant with no further modifications
necessary.
The Company faces risks to the extent that suppliers of leased equipment
purchased by the Company and others with whom the Company transacts business do
not have business systems or products that comply with the Year 2000
requirements. To the extent possible, the Company has obtained assurances from
such vendors that their systems and products are Year 2000 compliant. The
Company has advised the Company's customers that they should seek certification
for equipment under lease from the vendor to assure that their equipment is Year
2000 compliant.
Although the Company believes that internal-use systems are fully compliant,
there can be no assurance that the various factors relating to the Year 2000
compliance issues, including the ability of the Company's suppliers to provide
the Company with products that are Year 2000 compliant, will not have a material
adverse effect on the Company's business, operating results, or financial
position.
Outlook
Certain statements contained in this Outlook section and other sections of this
document are forward looking, based on current expectations, and actual results
may differ materially from those projected. The forward looking statements, in
particular the statements regarding growth of the company's vendor leasing
business, the Company's ability to finance its business, and management's belief
that any future loan or lease write-off will not be material, involve a number
of risks and uncertainties including the Company's reliance on a few large
vendors for its business, its ability to cope with accelerating obsolescence,
and to remarket its off-lease equipment at prices that are equal to or greater
than its book value. In addition to the factors discussed above which could
cause actual results to differ from those projected, other factors which could
cause actual results to differ from expected include the following:
Future Growth. The Company's ability to grow at an acceptable rate is dependent
to a great extent on the expansion of its vendor leasing business. The Company's
ability to expand its vendor business is dependent upon successfully servicing
existing vendor accounts and attracting new vendor accounts. As of December 31,
1999, the Company had only two significant vendor leasing programs and had
signed agreements for other vendor leasing programs which are not significant.
While the Company believes it has the ability and capacity to develop large
vendor leasing programs, other than the two it is currently servicing there is
no assurance that it will be successful in this regard or that it will be able
to generate acceptable revenue growth.
<PAGE>
During the last quarter of Fiscal Year 1998 the Company redefined its
underwriting policies in order to broaden the base of potential lessees. These
policy changes resulted in a greater focus on very short-term leases, expanding
the business with customers that traditionally are of lower credit quality, and
accepting significantly larger transactions from credit-worthy customers at
gross margins which are lower than had been accepted in the past. These changes
resulted in an increased level of transaction and portfolio risk for the Company
and an increased reliance on recourse financing. These changes will continue to
impact the Company's gross and net leasing margins into the future.
The Company continues to monitor problem accounts as well as its reserves and
provisions for losses. While the Company believes its reserves are currently
adequate to cover current exposures, any increase in delinquencies and defaults
would result in a requirement to increase provisions for losses which would
further reduce net leasing margins.
Highly Competitive Industry. The equipment leasing business is highly
competitive. The Company competes with numerous companies, including leasing
companies, commercial banks, and financial institutions, some of which the
Company relies on to obtain capital to finance its leases. Most of the Company's
competitors are significantly larger and have substantially greater resources
than the Company. The Company typically chooses not to compete with large
leasing companies for those leases in which the cost of the equipment greatly
exceeds the amount of non-recourse financing available.
Financing. The Company's growth and profitability are dependent to a great
extent on the Company's ability to finance revenue producing assets. The recent
increases in vendor operating leases have resulted in an increased reliance on
recourse debt to finance the Company. While the Company has been successful in
obtaining required recourse and non-recourse financing to date, there is no
assurance that all required financing will be available in the future and the
Company's failure to obtain required financing would limit its growth and
jeopardize its relationship with its two largest vendors.
Major Customers/Vendors. At December 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.
However, 48.3% and 29.7% of the Company's total leasing revenue for the nine
months ended December 31, 1999, and 46.9% and 16.9% of the Company's total
leasing revenue for the nine months ended December 31, 1998, were generated
through two vendor leasing programs. During the second quarter of fiscal year
1999, the largest vendor informed the Company that the vendor intended to enter
the leasing business and write leases on its own behalf. The vendor has advised
the Company that it would continue to utilize the Company in the vendor's niche
markets. Subsequent to the notice, the Company's volume of new leases from this
vendor has increased. However, as in any vendor program, there is no assurance
how long this increased utilization will continue. If the relationship with
either of its two large vendors were to change resulting in a reduction in the
volume of new leases, the Company would continue to realize declining revenues
attributable to this vendor's existing equipment under lease for a period of one
to three years. To the extent that the Company would be unable to replace that
declining volume and revenue with increased leasing business from other vendors,
the Company's future financial results would be materially and adversely
affected.
<PAGE>
Residual Values of Leased Equipment. The value of the high technology equipment
leased by the Company to its customers represents a substantial portion of the
Company's capital. At the inception of each lease, the Company estimates the
residual value of the leased equipment, which is the estimated market value of
the equipment at the end of the initial lease term. The actual realized residual
value of leased equipment may differ from its estimated residual value,
resulting in profit or loss when the leased equipment is sold or leased again at
the end of the initial lease term. If a lessee defaults on a lease which has
been discounted by the Company to a financial institution, the financial
institution may foreclose on its security interest in the leased equipment and
the Company may not realize any portion of such residual value. In addition, the
high technology equipment which comprises the bulk of the Company's lease
portfolio is subject to rapid technological obsolescence typical of the computer
industry.
The Company continues to assess its depreciation methods and projected book
values against market projections of used equipment values. The Company's review
of depreciation methods is specific to individual vendor programs with changes
made based upon each program's performance of book values relative to market
values. The result to date has been continued acceleration of depreciation on
revenue producing assets. If the trends towards shortened product life cycles
continue, accelerated rates of depreciation will continue to adversely affect
the Company's leasing margins.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
<PAGE>
PART II-OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. Legal Proceedings - None.
ITEM 2. Changes in Securities - None
ITEM 3. Defaults on Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None.
ITEM 6. Exhibits and Report on Form 8-K
A. Exhibits
See Exhibit index immediately following signature page
B. Form 8-K
There were no current reports on Form 8-K filed on behalf
of the Company during the quarter ended December 31, 1999;
however, a Form 8-K dated as of January 31, 2000 was filed
to report the proposed merger of the Company with and into
The King Management Corporation.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNRISE INTERNATIONAL LEASING CORPORATION
Date: February 8, 2000 By: /s/ Peter J. King
Peter J King, Chairman of the Board, Chief
Executive Officer and Director (principal
executive officer)
By: /s/ Jeffrey G. Jacobsen
Jeffrey G. Jacobsen, Executive Vice President
and Chief Financial Officer (principal
financial officer)
By: /s/ James C. Teal
James C. Teal, Corporate Controller
(principal accounting officer)
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT INDEX TO FORM 10-Q
Commission File No.: 0-19516
For the quarter ended
December 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
11.1 Per Share Earnings Computations
27.0 Financial Data Schedule (filed with electronic version only)
EXHIBIT 11.1
SUNRISE INTERNATIONAL LEASING CORPORATION AND SUBSIDIARIES
PER SHARE EARNINGS COMPUTATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, 1999 December 31, 1999
-------------------------- --------------------------
1999 1998 1999 1998
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Weighted average number of
common shares outstanding 6,634,000 7,585,000 7,050,000 7,736,000
========== ========== ========== ==========
Net income $ 356,000 $ 941,000 $2,275,000 $2,444,000
========== ========== ========== ==========
Net income per common and
common equivalent share $ 0.05 $ 0.12 $ 0.32 $ 0.32
========== ========== ========== ==========
Diluted Earnings Per Share:
Weighted average number of 6,634,000 7,585,000 7,050,000 7,736,000
Common stock equivalents
from assumed exercise of
options and warrants 507,000 40,000 403,000 31,000
---------- ---------- ---------- ----------
Total shares 7,141,000 7,625,000 7,453,000 7,767,000
========== ========== ========== ==========
Net income $ 356,000 $ 941,000 $2,275,000 $2,444,000
========== ========== ========== ==========
Net income per common
and common equivalent share $ 0.05 $ 0.12 $ 0.31 $ 0.31
========== ========== ========== ==========
</TABLE>
Net income per common and common equivalent share is computed using the weighted
average number of shares outstanding during each period.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Currency
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,179,000
<SECURITIES> 0
<RECEIVABLES> 2,448,000
<ALLOWANCES> 305,000
<INVENTORY> 109,000
<CURRENT-ASSETS> 152,971,000
<PP&E> 985,000
<DEPRECIATION> 744,000
<TOTAL-ASSETS> 161,354,000
<CURRENT-LIABILITIES> 129,526,000
<BONDS> 0
0
0
<COMMON> 78,000
<OTHER-SE> 31,750,000
<TOTAL-LIABILITY-AND-EQUITY> 161,354,000
<SALES> 59,770,000
<TOTAL-REVENUES> 59,770,000
<CGS> 55,847,000
<TOTAL-COSTS> 55,847,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,923,000
<INCOME-TAX> 1,648,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,275,000
<EPS-BASIC> .32
<EPS-DILUTED> .31
</TABLE>
