UNITED STATES SECURITIES AND EXCHANGE COMMISSION
--------------
Washington, D.C. 20549
FORM 10-KSB
__X__ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997 Commission File Number 0-12593
PHOENIX LEASING INCOME FUND VII
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
California 68-0001202
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2401 Kerner Boulevard, San Rafael, California 94901-5527
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 485-4500
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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: Units of Limited
Partnership Interest
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B 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-KSB or any amendment to
this Form 10-KSB. _____
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 _____
The Registrant's revenue for its most recent fiscal year was $831,000.
As of December 31, 1997, 345,496 Units of Limited Partnership interest were
outstanding. No market exists for the Units of Partnership interest and
therefore there exists no aggregate market value at December 31, 1997.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Transitional Small Business Disclosure Format:
Yes _____ No __X__
Page 1 of 30
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PHOENIX LEASING INCOME FUND VII
1997 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 5
Item 3. Legal Proceedings............................................. 5
Item 4. Submission of Matters to a Vote of Security Holders........... 5
PART II
Item 5. Market for the Registrant's Securities and Related Security
Holder Matters................................................ 6
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 7
Item 7. Financial Statements and Supplementary Data................... 10
Item 8. Disagreements on Accounting and Financial Disclosure Matters.. 27
PART III
Item 9. Directors and Executive Officers of the Registrant............ 27
Item 10. Executive Compensation........................................ 28
Item 11. Security Ownership of Certain Beneficial Owners and Management 29
Item 12. Certain Relationships and Related Transactions................ 29
PART IV
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K 29
Signatures............................................................... 30
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PART I
Item 1. Business.
General Development of Business.
Phoenix Leasing Income Fund VII, a California limited partnership (the
"Partnership"), was organized on October 29, 1981. The Partnership was
registered with the Securities and Exchange Commission with an effective date of
February 2, 1984 and shall continue to operate until its termination date unless
dissolved sooner due to the sale of substantially all of the assets of the
Partnership or a vote of the Limited Partners. The Partnership will terminate on
December 31, 1998. The General Partner is Phoenix Leasing Incorporated, a
California corporation. The General Partner or its affiliates also is or has
been a general partner in several other limited partnerships formed to invest in
capital equipment and other assets.
The Partnership's initial public offering was for 480,000 units of
limited partnership interest at a price of $250 per unit with an option of
increasing the public offering up to a maximum of 552,000. The Partnership
completed the offering on November 21, 1986, having sold 366,432 units for a
total capitalization of $91,608,000. Of the proceeds received through the
offering, the Partnership has incurred $11,288,000 in organizational and
offering expenses.
Phoenix Cablevision of Oregon, Inc. (the "Subsidiary") is a wholly-owned
subsidiary of the Partnership (hereinafter, both entities are collectively
referred to as the "Consolidated Partnership"). The Subsidiary was formed under
the laws of Nevada on July 22, 1993 to own and operate a cable television system
in the state of Oregon.
Narrative Description of Business.
The Consolidated Partnership conducts its business in two business
segments: Equipment Leasing and Financing Operations, and Cable Television
System Operations. A discussion of these two segments follows.
Equipment Leasing and Financing Operations.
From the initial formation of the Partnership through December 31, 1997,
the total investments in equipment leases and financing transactions (loans),
including the Partnership's pro-rata interest in investments made by joint
ventures, approximate $183,814,000. The average initial firm term of contractual
payments from equipment subject to lease was 36.27 months, and the average
initial net monthly payment rate as a percentage of the original purchase price
was 2.99%. The average initial firm term of contractual payments from loans was
70.52 months.
The Partnership's principal objective is to produce current income and
to build and maintain a balanced portfolio of assets through the acquisition and
financing of various types of capital equipment including computer peripherals,
terminal systems, small computer systems, communications equipment, IBM-software
compatible mainframes, office systems and telecommunications equipment, and to
lease such equipment and products to third parties pursuant to either Operating
Leases or Full Payout Leases.
The principal markets for the types of equipment in which the
Partnership has invested in are (1) major corporations and other large
organizations seeking to reduce the cost of their peripheral equipment and large
computer systems, (2) major corporations with numerous operating locations
seeking to improve the timeliness and responsiveness of their data processing
systems, and (3) small organizations interested in improving the efficiency of
their overall operations by moving from manually operated to small
computer-based management systems.
In addition to acquiring equipment for lease to third parties, the
Partnership either directly or through the investment in joint ventures, has
provided limited financing to certain emerging growth companies, cable
television system operators, manufacturers and their lessees with respect to
equipment leased directly by such manufacturers to third parties. The
Partnership maintains a security interest in the equipment financed and in the
receivables due under any lease or rental agreement relating to such assets.
Such security interests will give the Partnership the right, upon a default, to
obtain possession of the assets.
The Partnership will not incur debt to finance the purchase of
equipment. However, the Partnership can enter into joint venture agreements with
certain other partnerships managed by the General Partner which would finance
the acquisition of equipment through the use of indebtedness which would be
nonrecourse to the Partnership.
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Competition. The equipment leasing industry is highly competitive.
Leases are offered on a wide variety of equipment ranging from construction
equipment to entire manufacturing facilities. The equipment leasing industry
offers to users an alternative to the purchase of nearly every type of
equipment. The General Partner intends to concentrate the Partnership's
activities, however, in markets in which the General Partner has expertise. The
computer equipment industry is extremely competitive. Competitive factors
include pricing, technological innovation and methods of financing (including
use of various short-term and long-term financing plans, as well as the outright
purchase of equipment). Generally, the impact of these factors to the
Partnership would be the realization of increased equipment remarketing and
storage costs, as well as lower residuals received from the sale or remarketing
of such equipment.
There is strong competition in non-computer related equipment markets in
which the Partnership will engage as well. There is, however, no single dominant
company or factor in those other markets.
Cable Television System Operations.
Phoenix Cablevision of Oregon, Inc. (the Subsidiary), a wholly-owned
subsidiary of the Partnership, owns a cable television system in the state of
Oregon that was acquired through foreclosure on a defaulted note receivable to
the Partnership on October 28, 1993. The net carrying value of this defaulted
note receivable was approximately $544,000. Phoenix Cable Management Inc.
(PCMI), an affiliate of the General Partner, provides day to day management
services in connection with the operation of the system.
Phoenix Cablevision of Oregon, Inc. has accepted and agreed to the terms
stated on a Letter of Intent dated February 11, 1998 to sell all or
substantially all of its assets with a net carrying value of $1.5 million at
December 31, 1997 for $2 million. Cash, accounts receivable, marketable
securities and similar investments will be excluded from the sale. This Letter
of Intent is subject to a definitive asset purchase agreement which is currently
being negotiated with the potential buyer.
The cable television system owned by Phoenix Cablevision of Oregon, Inc.
is located in the counties of Douglas and Jackson in the State of Oregon and
consists of headend equipment in four locations and 66 miles of plant passing
approximately 2,007 homes and has approximately 1,761 cable subscribers. The
Subsidiary's cable television system serves the communities of Prospect, Butte
Falls, Shady Cove, Trail and other nearby areas in Jackson and Douglas counties.
The Subsidiary operates under three non-exclusive franchise agreements with the
cities of Glendale, Butte Falls and Shady Cove. These cable franchise agreements
expire between the years 2000 and 2002.
Cable television systems receive signals transmitted by nearby radio and
television broadcast stations, microwave relay systems and communications
satellites and distribute the signals to subscribers via coaxial cable. The
subscribers pay a monthly fee to the cable television system for such services.
Cable television companies operate under a non-exclusive franchise agreement
granted by each local government authority. As part of the franchise agreement,
the franchisee typically pays a portion of the gross revenues of the system to
the local government.
The Partnership intends to own and operate the cable system until such
time it can be sold. Any excess cash generated from operations of the cable
system will be used for upgrades and improvements to the system in order to
maximize the value of the system.
Competition. The Partnership's cable operations competes with numerous
other companies with far greater financial resources. In addition, cable
television franchises are typically non-exclusive and the Partnership could be
directly competing with other cable television systems. Cable television also
competes with conventional over-the-air broadcast television and direct
broadcast satellite transmission. Future technological developments may also
provide additional competitive factors.
The Telecommunications Bill allowed telephone companies to enter into
the cable television business and vice-versa. Large cable television systems
that have upgraded their systems with fiber and two way capabilities may find
themselves getting a piece of the much larger telephone revenue. For the smaller
rural cable systems, such as those owned by the Partnership or through
investments in joint ventures, it is unlikely that the Partnership will enter
into telephone services nor will the telephone companies try to seek our
customers in the near future. The systems owned by the Partnership are too small
and not dense enough to pay for the large amount of capital expenditures needed
for these services.
A favorable part of the bill is that small cable systems were
immediately deregulated from most regulations and that the definition of a small
cable operator is under 600,000 subscribers. This allowed small operators to
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raise rates if needed, and eliminate the need to provide franchise authorities
with costly rate filings and justifications. The bill also allowed the local
telephone companies to buy out small cable operators in their own region as well
as to joint venture with small cable operators.
Please see Note 13 in the Partnership's financial statements for
financial information about the Partnership's business segments.
Other.
A brief description of the type of assets in which the Partnership has
invested as of December 31, 1997, together with information concerning the uses
of assets is set forth in Item 2.
Item 2. Properties.
Equipment Leasing and Financing Operations.
The Partnership is engaged in the equipment leasing and financing
industry and as such, does not own or operate any principal plants, mines or
real property. The primary assets held by the Partnership, either directly or
through its investment in joint ventures, are its investments in leases and
loans to businesses located throughout the United States.
As of December 31, 1997, the Partnership owns equipment and has
outstanding loans to borrowers with an aggregate original cost of $4,513,000.
The following table summarizes the type of equipment owned or financed by the
Partnership, including its pro rata interest in joint ventures, at December 31,
1997.
Percentage of
Asset Types Purchase Price(1) Total Assets
- --------------------------------------- ---------------- -------------
(Amounts in Thousands)
Financing of Solar Systems $ 1,978 44%
Small Computer Systems 1,071 24
Reproduction Equipment 761 17
Financing Related to Cable TV Systems 489 11
Telecommunications 107 2
Capital Equipment Leased to Emerging
Growth Companies 91 2
Financing of Security Monitoring Systems
Companies 16 -
-------- ---
TOTAL $ 4,513 100%
======== ===
(1) These amounts include the Partnership's pro rata interest in equipment joint
ventures of $959,000, financing joint ventures of $1,978,000, and original
cost of outstanding loans of $506,000 at December 31, 1997.
Cable Television System Operations.
The Subsidiary's principal property consists of electronic headend
equipment, its plant (cable) and two parcels of land. The Subsidiary's cable
office is located on one parcel and one of the headends is located on the other.
The other three headends are located on land that is leased by the Subsidiary.
Item 3. Legal Proceedings.
The Partnership is not a party to any pending legal proceedings which
would have a material adverse impact on its financial position.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of Limited Partners, through the
solicitation of proxies or otherwise, during the year covered by this report.
5
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PART II
Item 5. Market for the Registrant's Securities and Related Security Holder
Matters.
(a)The Registrant's limited partnership interests are not publicly
traded. There is no market for the Registrant's limited partnership
interests and it is unlikely that any will develop.
(b)Approximate Number of Equity Security Investments:
Number of Unit Holders
Title of Class as of December 31, 1997
----------------------- -----------------------
Limited Partners 16,625
General Partner 1
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Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Phoenix Leasing Income Fund VII and Subsidiary (the Partnership)
reported net income of $175,000 for the year ended December 31, 1997, compared
to net income of $399,000 for the year ended December 31, 1996. The decreased
earnings during 1997, as compared to 1996, is attributable to a decline in total
revenues.
Total revenues decreased by $513,000 during the year ended December 31,
1997 when compared to the same period in the previous year. This decrease is
primarily the result of a decrease in rental income, equity in earnings from
joint ventures and other income. The decrease in earnings from joint ventures
will be discussed under "Joint Ventures". The decline in rental income of
$133,000 for the year ended December 31, 1997, compared to the same period in
the prior year, as well as the decrease in depreciation expense, is the result
of an overall reduction in the size of the equipment portfolio due to ongoing
sales. The aggregate original cost of equipment owned directly by the
Partnership is $1 million at December 31, 1997, as compared to $2.1 million at
December 31, 1996.
The decrease in other income of $121,000 for the year ended December 31,
1997, compared to the same period in the prior year, also contributed to the
reduction in total revenues. The decline in other income is a result of a
decrease in interest income generated from the Partnership's cash account. This
decrease is due to a reduction in the amount of cash held at December 31, 1997
compared to the prior year.
The Partnership holds notes receivable from cable television system
operators and security monitoring companies with a carrying value of
approximately $656,000. These notes are considered to be impaired at December
31, 1997. The Partnership has suspended the accrual of interest on these notes
and has provided an allowance for losses on notes receivable. The General
Partner is currently working with the borrowers, other creditors and the
bankruptcy court in order to seek remedies that will maximize the recovery of
the Partnership's investment in these notes.
In January 1998 settlement proceeds of $752,000 were received from one
of the impaired notes receivable with a net carrying value of $601,000 at
December 31, 1997. As a result, the Partnership recorded a recovery of losses on
receivables of $212,000 during the year ended December 31, 1997.
Total expenses decreased by $323,000 during the year ended December 31,
1997, as compared to the same period in the previous year. The decline in total
expenses for 1997 is primarily attributable to a recovery of losses on notes
receivable, and decreases in depreciation and amortization expense of $133,000,
compared to the same period in the previous year. In addition to the declining
equipment portfolio, as previously discussed, the decrease in depreciation
expense is also due to an increasing portion of the equipment portfolio being
fully depreciated.
Because Phoenix Leasing Income Fund VII is in its liquidation stage, it
is not expected that the Partnership will acquire any additional equipment for
its leasing activities. As a result, revenues from leasing activities are
expected to continue to decline as the portfolio is liquidated.
Inflation affects the Partnership in relation to the current cost of
equipment placed on lease and the residual values realized when the equipment
comes off-lease and is sold. During the last several years inflation has been
low, thereby having very little impact upon the investments of the Partnership.
Cable System
The Partnership acquired a cable system in satisfaction of a defaulted
note receivable held by the Partnership. The Partnership assumed ownership of
this cable television system on October 28, 1993. Both cable subscriber revenue
and program services expense remained relatively the same for the year ended
December 31, 1997 as compared to the same period in 1996.
Joint Ventures
The Partnership has made investments in various equipment and financing
joint ventures along with other affiliated partnerships managed by the General
Partner for the purpose of spreading the risk of investing in certain equipment
leasing and financing transactions. These joint ventures are not currently
making any significant additional investments in new equipment leasing or
financing transactions. As a result, the earnings and cash flow from such
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investments are anticipated to continue to decline as the portfolios are
re-leased at lower rental rates and eventually liquidated.
Earnings from equipment and financing joint ventures decreased by
$287,000 for the year ended December 31, 1997, as compared to the previous year.
The decrease in earnings from equipment joint ventures is a result of the
closure of several equipment joint ventures during the fourth quarter of 1996,
as well as one equipment joint venture recording provisions for additional
depreciation and losses for notes receivable during the year ended December 31,
1997. The decrease in earnings from financing joint ventures is due to the
decline in interest income from notes receivable.
Liquidity and Capital Resources
The Partnership's primary source of liquidity comes from equipment
leasing and financing activities. The Partnership has contractual obligations
with lessees for fixed lease terms at fixed rental amounts and will also receive
payments on its outstanding notes receivable. The Partnership's future liquidity
is dependent upon its receiving payment of such contractual obligations. As the
initial lease terms expire, the Partnership will continue to renew, remarket or
sell the equipment. The future liquidity in excess of the remaining contractual
obligations will depend upon the General Partner's success in re-leasing and
selling the Partnership's equipment as it comes off lease. The Partnership also
owns a cable television system and has investments in equipment leasing and
foreclosed cable television system joint ventures.
Net cash provided by leasing, financing and cable television activities
was $165,000 and $299,000 during the years ended December 31, 1997 and 1996,
respectively. The decrease in net cash provided during 1997, compared to 1996,
is attributable to the decrease in rental income and finance leases.
Distributions from joint ventures has become one of the primary sources
of cash generated by the Partnership. The Partnership received $314,000 and
$526,000 as distributions from joint ventures for the years ended December 31,
1997 and 1996, respectively. Distributions from equipment joint ventures
decreased $190,000 for the year ended December 31, 1997, compared to the same
period in the previous year, due to the closure of several joint ventures, as
well as one equipment joint venture experiencing a decline in cash available for
distributions as a result of a reduction in rental income and sales proceeds
received. Distributions from financing joint ventures remained relatively the
same for both years ended December 31, 1997 and 1996. Distributions from
foreclosed cable television system joint ventures decreased $22,000 for the year
ended December 31, 1997, compared to the same period in the previous year, due
to a decrease in cash available for distribution.
As of December 31, 1997, the Partnership owned equipment held for lease
with an original cost of $1,033,000 and a net book value of $0 , compared to
equipment being held for lease with an original cost of $993,000 and a net book
value of $0 at December 31, 1996. The General Partner is actively engaged, on
behalf of the Partnership, in remarketing and selling the Partnership's
off-lease equipment portfolio.
The Limited Partners received distributions of $2,163,000 and $2,600,000
during the years ended December 31, 1997 and 1996, respectively. As a result,
the cumulative cash distributions to the Limited Partners are $84,744,000 and
$82,581,000 at December 31, 1997 and 1996, respectively. The General Partner did
not receive distributions during the years ended December 31, 1997 and 1996.
As the Partnership's asset portfolio continues to decline as a result of
the ongoing liquidation of assets, it is expected that the cash generated from
leasing operations will also decline. Due to the decrease in cash generated by
leasing and financing activities, the Partnership is no longer making quarterly
distributions to partners. Distributions were made semi-annually in January and
July of 1997. The Partnership will not make any future distributions until the
termination of the Partnership. The Partnership will reach the end of its term
on December 31, 1998.
Cash on hand and cash generated from cable television, equipment leasing
and financing operations has been and is anticipated to continue to be
sufficient to meet the Consolidated Partnership's ongoing operational expenses.
Forward-looking statements in this report are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Actual results could differ from those anticipated by some of the statements
made above. Limited Partners are cautioned that such forward-looking statements
involve risks and uncertainties including without limitation the following: (I)
the Partnership's plans are subject to change at any time at the discretion of
the General Partner of the Partnership, (ii) future technological developments
in the industry in which the Partnership operates, (iii) competitive pressure
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on pricing or services, (iv) substantial customer defaults or cancellations, (v)
changes in business conditions and the general economy, (vi) changes in
government regulations affecting the Partnership's core businesses and (vii) the
ability of the Partnership to sell its remaining assets .
9
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Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PHOENIX LEASING INCOME FUND VII AND SUBSIDIARY
YEAR ENDED DECEMBER 31, 1997
10
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Phoenix Leasing Income Fund VII:
We have audited the accompanying consolidated balance sheet of Phoenix Leasing
Income Fund VII (a California limited partnership) and Subsidiary as of December
31, 1997, and the related consolidated statements of operations, partners'
capital and cash flows for the years ended December 31, 1997 and 1996. These
financial statements are the responsibility of the Partnership'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 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Phoenix Leasing
Income Fund VII and Subsidiary as of December 31, 1997, and the results of their
operations and their cash flows for the year ended December 31, 1997 and 1996,
in conformity with generally accepted accounting principles.
San Francisco, California, ARTHUR ANDERSEN LLP
January 23, 1998
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PHOENIX LEASING INCOME FUND VII AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Amounts in Thousands Except for Unit Amounts)
December 31, 1997
-----------------
ASSETS
Cash and cash equivalents $ 333
Accounts receivable (net of allowance for
losses on accounts receivable of $37) 33
Notes receivable (net of allowance for losses
on notes receivable of $55) 601
Equipment on operating leases and held for lease
(net of accumulated depreciation of $715) --
Property, cable systems and equipment (net of
accumulated depreciation of $472) 774
Cable subscriber lists and franchise rights (net
of accumulated amortization of $660) 632
Investment in joint ventures 410
Other assets 179
--------
Total Assets $ 2,962
========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 352
Liquidation fees payable to General Partner 953
--------
Total Liabilities 1,305
--------
Partners' Capital:
General Partner 348
Limited Partners, 480,000 units authorized, 366,432
units issued and 345,496 units outstanding 1,298
Unrealized gains on available-for-sale securities 11
--------
Total Partners' Capital 1,657
--------
Total Liabilities and Partners' Capital $ 2,962
========
The accompanying notes are an integral part of
these statements.
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PHOENIX LEASING INCOME FUND VII AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands Except for Per Unit Amounts)
For the Years Ended
December 31,
1997 1996
---- ----
INCOME
Rental income $ 162 $ 295
Equity in earnings (losses) from joint
ventures, net (6) 281
Interest income, notes receivable 17 16
Cable subscriber revenue 609 582
Other income 49 170
-------- --------
Total Income 831 1,344
-------- --------
EXPENSES
Depreciation and amortization 264 397
Lease related operating expenses 1 16
Program service, cable system 155 136
Other operating expenses, cable system 145 147
Management fees to General Partner 47 57
Recovery of losses on receivables (212) (2)
Legal expense 150 95
General and administrative expenses 115 142
-------- --------
Total Expenses 665 988
-------- --------
NET INCOME BEFORE INCOME TAXES 166 356
Income tax benefit 9 43
-------- --------
NET INCOME $ 175 $ 399
======== ========
NET INCOME PER LIMITED PARTNERSHIP UNIT $ .43 $ .98
======== ========
ALLOCATION OF NET INCOME:
General Partner $ 26 $ 60
Limited Partners 149 339
-------- --------
$ 175 $ 399
======== ========
The accompanying notes are an integral part of
these statements.
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PHOENIX LEASING INCOME FUND VII AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(Amounts in Thousands Except for Unit Amounts)
General Unrealized
Partner's Limited Partners' Gains Total
Amount Units Amount (Losses) Amount
--------- ------------------ --------- ------
Balance, December 31, 1995 $ 262 345,974 $ 5,573 $ (1) $ 5,834
Distributions to partners
($7.52 per limited
partnership unit) -- -- (2,600) -- (2,600)
Change in unrealized gains
on available-for-sale
securities -- -- -- 8 8
Net income 60 -- 339 -- 399
-------- -------- -------- -------- --------
Balance, December 31, 1996 322 345,974 3,312 7 3,641
Distributions to partners
($6.26 per limited
partnership unit) -- -- (2,163) -- (2,163)
Redemptions of capital -- (478) -- -- --
Change in unrealized gains
on available-for-sale
securities -- -- -- 4 4
Net income 26 -- 149 -- 175
-------- -------- -------- -------- --------
Balance, December 31, 1997 $ 348 345,496 $ 1,298 $ 11 $ 1,657
======== ======== ======== ======== ========
The accompanying notes are an integral part of
these statements.
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PHOENIX LEASING INCOME FUND VII AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
For the Years Ended
December 31,
1997 1996
---- ----
Operating Activities:
Net income $ 175 $ 399
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 264 397
Loss (gain) on sale of equipment (15) 25
Equity in losses (earnings) from joint
ventures, net 6 (281)
Gain on sale of marketable securities (1) (5)
Recovery of early termination, financing leases -- (34)
Recovery of losses on notes receivable (221) --
Provision for losses on accounts receivable 9 32
Increase (decrease) in accounts receivable (12) 3
Decrease in accounts payable and accrued expenses (45) (243)
Increase in other assets (25) (43)
-------- --------
Net cash provided by operating activities 135 250
-------- --------
Investing Activities:
Principal payments, financing leases -- 34
Principal payments, notes receivable 30 15
Proceeds from sale of equipment 15 27
Proceeds from sale of marketable securities 1 11
Distributions from joint ventures 314 526
Investments in notes receivable (107) --
Property, cable systems and equipment (47) (48)
-------- --------
Net cash provided by investing activities 206 565
-------- --------
Financing Activities:
Distributions to partners (2,163) (2,600)
-------- --------
Net cash used by financing activities (2,163) (2,600)
-------- --------
Decrease in cash and cash equivalents (1,822) (1,785)
Cash and cash equivalents, beginning of period 2,155 3,940
-------- --------
Cash and cash equivalents, end of period $ 333 $ 2,155
======== ========
The accompanying notes are an integral part of
these statements.
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PHOENIX LEASING INCOME FUND VII AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
Note 1. Organization and Partnership Matters.
Phoenix Leasing Income Fund VII, a California limited partnership (the
"Partnership"), was formed on October 29, 1981, to invest in capital equipment
of various types and to lease such equipment to third parties on either a
long-term or short-term basis. Minimum investment requirements were met February
28, 1984, at which time the Partnership commenced operations. The Partnership's
termination date is December 31, 1998.
The Partnership has also made investments in joint ventures with
affiliated partnerships managed by the General Partner for the purpose of
spreading the risks of financing or acquiring certain capital equipment leased
to third parties. (See Note 8.)
On October 28, 1993, the Partnership foreclosed upon a cable television
system in Oregon that was in default on a subordinated loan payable to the
Partnership with a carrying amount of approximately $544,000. As part of the
settlement between the Partnership, the senior lender and the borrower, the
borrower transferred ownership of all of its assets and liabilities to the
Partnership. Included in the outstanding liabilities assumed was outstanding
senior debt in an amount of $1.7 million, which has subsequently been paid off.
Phoenix Cablevision of Oregon, Inc. (the Subsidiary) was formed under
the laws of Nevada on July 22, 1993 to own and operate the foreclosed cable
television system. Phoenix Cablevision of Oregon, Inc. is a wholly-owned
subsidiary of the Partnership (hereinafter, both entities are collectively
referred to as the Consolidated Partnership).
The acquisition of the Subsidiary by the Partnership was accounted for
using the "purchase method" of accounting. The purchase price was allocated in
accordance with the fair market value of the assets (including intangible
assets) and liabilities.
For financial reporting purposes, as more specifically described in the
Partnership Agreement, consolidated income in any quarter will be allocated,
before liquidation and redemption fees, 15% to Phoenix Leasing Incorporated (the
"General Partner") and 85% to the Limited Partners subject to the following
limitations. To the extent that consolidated income for any quarter, when added
to consolidated income for all prior accounting periods, does not exceed
consolidated losses for all prior accounting periods, such consolidated income
shall be allocated, before liquidation and redemption fees, 1% to the General
Partner and 99% to the Limited Partners. Consolidated income shall be allocated,
before liquidation and redemption fees, 1% to the General Partner and 99% to the
Limited Partners in any quarter subsequent to a quarter in which the General
Partner was allocated, before liquidation and redemption fees, 1% of
consolidated losses, to the extent of previously allocated Consolidated
Partnership losses. A consolidated loss in any quarter shall be allocated,
before liquidation and redemption fees, 1% to the General partner and 99% to the
Limited Partners.
In the event the General Partner has a deficit balance in its capital
account at the time of partnership liquidation, it will be required to
contribute the amount of such deficit to the Partnership.
As compensation for management services the General Partner receives a
fee, payable quarterly, in an amount equal to 6% of the Partnership's gross
revenues for the quarter from which such payment is being made, which revenues
shall include rental and note receipts, maintenance fees, proceeds from the sale
of equipment and other income.
Phoenix Cable Management Inc. (PCMI), an affiliate of the General
Partner, provides day to day management services in connection with the
operation of the Subsidiary. The Subsidiary pays a management fee equal to four
and one-half percent of the System's monthly gross revenue for these services.
Management fees paid or due PCMI totaled $28,000 for the year ended December 31,
1997. Revenues subject to a management fee at the Subsidiary level are not
subject to management fees at the Partnership level.
In consideration for the services and activities performed by the
General Partner in connection with the disposition of the Partnership's
equipment, the General Partner shall receive liquidation fees equal to 15% of
16
<PAGE>
the "Net Capital Contribution" of the Limited Partners with respect to all
Partnership interests other than those interests which have been previously
redeemed and accordingly were subject to the 15% redemption fee.
For financial reporting purposes, the Partnership began to recognize the
liquidation fee in the second year of operations when the General Partner began
its activities of liquidating portions of the equipment portfolio. The original
firm terms of the initial leases (generally 24 months) began to expire at this
point in time. The present value of the liquidation fee is recognized using an
interest method and accreted to the face amount over a period of approximately
eight years in order to properly match the liquidation fee expense with the
activities of the General Partner in connection with ongoing portfolio
liquidation. The liquidation fees have been fully accrued as of December 31,
1993. The Partnership began to pay the liquidation fees to the General Partner
in 1991.
Redemptions of Limited Partner units will only be made to the extent
permitted by applicable laws and regulations, the Partnership Agreement and if,
in the opinion of the General Partner, it is in the best interest of the
Partnership. In addition, redemptions will not be made if such redemptions would
cause the Partnership to be categorized as a publicly traded partnership for
federal income tax purposes.
The Partnership will acquire such limited partnership interest for an
amount equal to the book value of such Partnership interest, determined in
accordance with generally accepted accounting principles. Out of such amount,
the General Partner will be paid a Redemption Fee equal to 15% of the net
capital contribution with respect to the redeemed interest, and the balance will
be distributed to the Limited Partners.
Note 2. Summary of Significant Accounting Policies.
Principles of Consolidation. The 1997 and 1996 financial statements
include the accounts of the Partnership and its wholly-owned subsidiary, Phoenix
Cablevision of Oregon, Inc. The Partnership has complete authority in, and
responsibility for, the overall management and control of the Subsidiary. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Leasing Operations. The Partnership's leasing operations consist of both
financing and operating leases. The financing method of accounting for leases
records as unearned income at the inception of the lease the excess of net
rentals receivable and estimated residual value at the end of the lease term
over the cost of equipment leased. Unearned income is credited to income monthly
over the term of the lease on a declining basis to provide an approximate level
rate of return on the unrecovered cost of the investment. Initial direct costs
of consummating new leases are capitalized and included in the cost of
equipment.
Under the operating method of accounting for leases, the leased
equipment is recorded as an asset at cost and depreciated using an accelerated
depreciation method over the estimated useful life of six years, except for
equipment leased under vendor agreements, which is depreciated on a
straight-line basis over the estimated useful life, ranging up to six years.
The Partnership's policy is to review periodically the expected
economic life of its rental equipment in order to determine the probability of
recovering its undepreciated cost. Such reviews consider, among other things,
recent and anticipated technological developments affecting computer equipment
and competitive factors within the computer marketplace. Should subsequent
reviews of the equipment portfolio indicate that rentals plus anticipated sales
proceeds will not exceed expenses in any future period, the Partnership will
revise its depreciation policy and may accelerate depreciation as appropriate.
As a result of such review, the Partnership recognized additional depreciation
expense of $0 and $6,000 ($0 and $.02 per limited partnership unit) for the year
ended December 31, 1997 and 1996, respectively.
Rental income for the year is determined on the basis of rental
payments due for the period under the terms of the lease. Maintenance, repairs
and minor renewals of the leased equipment are charged to expense.
Cable Television System Operations. The consolidated statements of
operations include the operating activity of the Subsidiary for the years ended
December 31, 1997 and 1996. The Subsidiary's cable operations consist of a cable
system located in the State of Oregon, which currently provides cable television
services to approximately 1,761 subscribers out of four headend locations.
17
<PAGE>
Property, cable systems and equipment are depreciated using the
straight-line method over the estimated service lives ranging from five to 10
years. Replacements, renewals and improvements are capitalized and maintenance
and repairs are charged to expense as incurred.
Costs assigned to intangible assets are amortized using the
straight-line method over estimated lives of eight years.
Cable television services are billed monthly in advance. Revenue is
deferred and recognized as the services are provided.
Cash and Cash Equivalents. Cash and cash equivalents includes deposits
at banks, investments in money market funds and other highly liquid short-term
investments with original maturities of less than 90 days.
Credit and Collateral. The Partnership's activities have been
concentrated in the equipment leasing and financing industry. A credit
evaluation is performed by the General Partner for all leases and loans made,
with the collateral requirements determined on a case-by-case basis. The
Partnership's loans are generally secured by the equipment or assets financed
and, in some cases, other collateral of the borrower. In the event of default,
the Partnership has the right to foreclose upon the collateral used to secure
such loans.
Notes Receivable. Notes receivable generally are stated at their
outstanding unpaid principal balances, which includes accrued interest. Interest
income is accrued on the unpaid principal balance.
Impaired Notes Receivable. Generally, notes receivable are classified as
impaired and the accrual of interest on such notes are discontinued when the
contractual payment of principal or interest has become 90 days past due or
management has serious doubts about further collectibility of the contractual
payments, even though the loan may currently be performing. Any payments
received subsequent to the placement of the note receivable on to impaired
status will generally be applied towards the reduction of the outstanding note
receivable balance, which may include previously accrued interest as well as
principal. Once the principal and accrued interest balance has been reduced to
zero, the remaining payments will be applied to interest income. Generally,
notes receivable are restored to accrual status when the obligation is brought
current, has performed in accordance with the contractual terms for a reasonable
period of time and the ultimate collectibility of the total contractual
principal and interest is no longer in doubt.
Allowance for Losses. An allowance for losses is established through
provisions for losses charged against income. Notes receivable deemed to be
uncollectible are charged against the allowance for losses, and subsequent
recoveries, if any, are credited to the allowance.
Portfolio Valuation Methodology. The Partnership uses the portfolio
method of accounting for the net realizable value of the Partnership's equipment
portfolio.
Investment in Joint Ventures. Investments in net assets of the
equipment, financing and foreclosed cable systems joint ventures reflect the
Consolidated Partnership's equity basis in the ventures. Under the equity method
of accounting, the original investment is recorded at cost and is adjusted
periodically to recognize the Consolidated Partnership's share of earnings,
losses, cash contributions and cash distributions after the date of acquisition.
Investment in Available-for-Sale Securities. The Partnership has
investments in stock in public companies that have been determined to be
available for sale. Available-for-sale securities are stated at their fair
market value, with the unrealized gains and losses reported in a separate
component of partners' capital.
Reclassification. Certain 1996 amounts have been reclassified to conform
to the 1997 presentation.
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. Actual results could differ from those estimates.
18
<PAGE>
Note 3. Accounts Receivable.
Accounts receivable consist of the following at December 31:
1997
----
(Amounts in Thousands)
Lease payments $ 33
Cable system service 31
Property taxes 4
General Partner and affiliates 2
------
70
Less: allowance for losses on accounts receivable (37)
------
Total $ 33
======
Note 4. Notes Receivable.
Notes receivable consist of the following at December 31:
1997
----
(Amounts in Thousands)
Notes receivable from cable television
system operators with interest ranging from
15% to 21%, per annum, receivable in install-
ments ranging from 39 to 96 months through
January 1996, collateralized by a security
interest in the cable system assets. $ 656
Less: allowance for losses on notes receivable (55)
------
Total $ 601
======
The Partnership's notes receivable from cable television system
operators provide for a monthly payment rate in an amount that is less than the
contractual interest rate. The difference between the payment rate and the
contractual interest rate are added to the principal and therefore deferred
until the maturity date of the note. Upon maturity of the note, the original
principal and deferred interest is due and payable in full. Although the
contractual interest rates may be higher, due to a high degree of uncertainty
relating to the collection of the entire amount of contractual owed interest,
the Partnership limited the amount of interest being recognized on its
performing notes receivable to the amount of the payments received, thereby
deferring the recognition of a portion of the deferred interest until such time
as management believes it will be realized.
At December 31, 1997, the recorded investment in notes that are
considered to be impaired was $656,000, for which the related allowance for
losses is $55,000. The average recorded investment in impaired loans during the
years ended December 31, 1997 and 1996 was approximately $632,000 and $623,000,
respectively. The Partnership recognized $0 and $16,000 of interest income on
impaired notes receivable during the years ended December 31, 1997 and 1996,
respectively.
The activity in the allowance for losses on notes receivable during the
year ended December 31, is as follows:
1997
----
(Amounts in Thousands)
Beginning balance $ 359
Recovery of losses (221)
Write downs (83)
------
Ending balance $ 55
======
19
<PAGE>
Note 5. Equipment on Operating Leases.
Equipment on lease consists primarily of small computer systems,
reproduction and telecommunication systems subject to operating leases. The
Partnership's equipment on operating leases is fully depreciated. The
Partnership's operating leases are for initial lease terms of approximately 12
to 36 months.
The Partnership has agreements with some of the manufacturers of certain
of its equipment whereby such manufacturers undertake to remarket off-lease
equipment on a best-efforts basis. These agreements permit the Partnership to
assume the remarketing function directly if certain conditions contained in the
agreements are not met. For their remarketing services, the manufacturers are
paid a percentage of net monthly rentals. Certain manufacturers are entitled to
additional fees after the Partnership has recovered certain amounts. Generally,
these manufacturers provide maintenance of the leased equipment for a fee based
on net monthly rentals.
The Partnership has entered into direct lease arrangements with certain
lessees. Generally, it is the responsibility of the lessee to provide
maintenance on leased equipment. The General Partner administers the equipment
portfolio of leases acquired through the direct leasing program. Administration
includes the collection of rents from the lessees and remarketing of the
equipment.
Note 6. Property, Cable Systems and Equipment.
The cost of property, cable systems and equipment and the related
accumulated depreciation consist of the following at December 31:
1997
----
(Amounts in Thousands)
Distributions systems $ 910
Headend equipment 212
Building 63
Land 23
Automobiles 38
-----
1,246
Less: accumulated depreciation (472)
-----
Net property, cable systems and equipment $ 774
=====
Depreciation expense totaled approximately $114,000 and $119,000 for the
years ended December 31, 1997 and December 31, 1996, respectively.
Note 7. Cable Subscriber Lists and Franchise Rights.
Cable subscriber lists and franchise rights include the following at
December 31:
1997
----
(Amounts in Thousands)
Subscriber lists $ 1,111
Franchise rights 181
-------
1,292
Less: accumulated amortization (660)
-------
Net cable subscriber lists and franchise rights $ 632
=======
Amortization expense totaled approximately $148,000 and $161,000 for the
years ended December 31, 1997 and December 31, 1996.
20
<PAGE>
Note 8. Investment in Joint Ventures.
Equipment Joint Ventures
The Partnership owns a limited or general partnership interest in
equipment joint ventures. These investments are accounted for using the equity
method of accounting. The other partners of the ventures are entities organized
and managed by the General Partner.
The purpose of the joint ventures is the acquisition and leasing of
various types of equipment. During the term of the Partnership, Phoenix Leasing
Income Fund VII is participating in the following equipment joint ventures:
Weighted
Joint Venture Percentage Interest
------------- -------------------
Arroyo Joint Venture XVI(1) 32.14%
Acro Joint Venture, Residential(1) 31.30
Leveraged Joint Venture 1987-2(2) 32.23
Leveraged Joint Venture 1987-3 39.60
Phoenix Joint Venture 1994-1 19.89
(1) Closed during 1996
(2) Closed during 1997
An analysis of the Partnership's investment in equipment joint ventures
is as follows:
Net
Net Investment Equity in Investment
at Beginning Earnings at End
Date of Period Contributions (Losses) Distributions of Period
- ---- -------------- ------------- --------- ------------- ---------
(Amounts in Thousands)
Year Ended
December 31, 1996 $ 651 $ 0 $ 272 $ 464 $ 459
===== ===== ===== ===== =====
Year Ended
December 31, 1997 $ 459 $ 0 $ (6) $ 274 $ 179
===== ===== ===== ===== =====
The aggregate combined financial information of the equipment joint
ventures is presented as follows:
December 31, 1997
-----------------
(Amounts in Thousands)
Assets $ 988
Liabilities 58
Partners' Capital 930
For the Years Ended December 31,
1997 1996
---- ----
(Amounts in Thousands)
Revenue $ 1,091 $ 2,435
Expenses 1,169 1,154
Net Income (Loss) (78) 1,281
As of December 31, 1997 the Partnership's pro rata interest in the
equipment joint ventures' net book value of off-lease equipment was $0.
The General Partner earns a management fee of 6% of the Partnership's
respective interest in gross revenues of each equipment joint venture. Revenues
subject to management fees at the joint venture level are not subject to
management fees at the Partnership level.
21
<PAGE>
Financing Joint Ventures
The Partnership has invested in financing joint ventures which are
combined for reporting purposes into Phoenix Funding Partnership (PFP). The
Partnership has a 17.38% interest in PFP. The Partnership's current investment
in PFP consists of two financing joint ventures. The purpose of the financing
joint ventures is to provide, on a limited basis, financing to manufacturers and
their lessees for equipment leased directly by manufacturers to third parties.
All loans to manufacturers are secured by equipment. The Partnership uses the
equity method of accounting to account for its investment in the PFP.
PFP periodically reviews the probability of recovering the outstanding
note balances. Such reviews address, among other things, current cash receipts,
costs of collection efforts, the current economic situation and potential
uncollectible receivables. If the review indicates that future cash receipts,
net of anticipated future expenses, does not exceed the outstanding note
balances, PFP provides a reserve for any anticipated loan loss as appropriate.
Due to a high degree of uncertainty relating to the collection of the
entire amount of contractually owed principal and interest over the lives of the
notes receivable, the PFP loan portfolios apply all cash receipts (principal and
interest) to the outstanding note balances. Under this method, interest income
will not be recognized until the outstanding note balances are recovered.
An analysis of the Partnership's investment account in financing joint
ventures is as follows:
Net
Net Investment Investment
at Beginning Equity in at End
Date of Period Contributions Earnings Distributions of Period
- ---- -------------- ------------- --------- ------------- ---------
(Amounts in Thousands)
Year Ended
December 31, 1996 $ 3 $ 0 $ 8 $ 7 $ 4
===== ===== ===== ===== =====
Year Ended
December 31, 1997 $ 4 $ 0 $ 6 $ 6 $ 4
===== ===== ===== ===== =====
The aggregate combined financial information of the financing joint
ventures is presented as follows:
December 31, 1997
-----------------
(Amounts in Thousands)
Assets $ 39
Liabilities 11
Partners' Capital 28
For the Years Ended December 31,
1997 1996
---- ----
(Amounts in Thousands)
Revenue $ 48 $ 76
Expenses 6 13
Net Income 42 63
The General Partner earns a management fee of 6% of the Partnership's
respective interest in gross payments received for each financing joint venture.
Revenues subject to a management fee at the joint venture level are not subject
to management fees at the Partnership level.
Foreclosed Cable Systems Joint Ventures
The Partnership owns an interest in foreclosed cable systems joint
ventures, along with other partnerships managed by the General Partner and its
affiliates. The Partnership foreclosed upon nonperforming outstanding notes
receivable to cable television operators to whom the Partnership, along with
other affiliated partnerships managed by the General Partner, had extended
credit. The Partnerships' notes receivables were exchanged for interests (their
capital contribution), on a pro rata basis, in newly formed joint ventures owned
by the partnerships and managed by the General Partner. Title to the cable
22
<PAGE>
television systems is held by the joint ventures. These investments are
accounted for using the equity method of accounting.
The joint ventures owned by the Partnership, along with their percentage
ownership is as follows:
Percentage
Joint Venture Ownership
------------- ----------
Phoenix Pacific Northwest J.V. 5.24%
Phoenix Concept Cablevision, Inc. 22.32
An analysis of the Partnership's net investment in foreclosed cable
systems joint ventures is as follows:
Net
Net Investment Investment
at Beginning Equity in at End
Date of Period Contributions Earnings Distributions of Period
- ---- -------------- ------------- --------- ------------- ---------
(Amounts in Thousands)
Year Ended
December 31, 1996 $ 321 $ 0 $ 3 $ 55 $ 267
===== ===== ===== ===== =====
Year Ended
December 31, 1997 $ 267 $ 0 $ (6) $ 34 $ 227
===== ===== ===== ===== =====
The aggregate combined financial information of the foreclosed cable
systems joint ventures is presented as follows:
December 31, 1997
-----------------
(Amounts in Thousands)
Assets $ 1,809
Liabilities 358
Partners' Capital 1,451
For the Years Ended December 31,
1997 1996
---- ----
(Amounts in Thousands)
Revenue $ 876 $ 873
Expenses 917 851
Net Income (Loss) (41) 22
Phoenix Cable Management Inc. (PCMI), an affiliate of the General
Partner, provides day to day management services in connection with the
operation of the foreclosed cable systems joint ventures. The foreclosed cable
systems joint ventures will pay a management fee equal to four and one-half
percent of the System's monthly gross revenue for these services. Revenues
subject to a management fee at the joint venture level will not be subject to
management fees at the Partnership level.
Phoenix Concept Cablevision of South Carolina, Inc., which is wholly
owned by Phoenix Concept Cablevision, Inc., has accepted and agreed to the terms
stated on a Letter of Intent dated December 23, 1997 to sell all or
substantially all of its assets, with a carrying value of $1.0 million at
December 31, 1997, for approximately $1.8 million. Cash, accounts receivable,
marketable securities and similar investments are excluded from this sale. This
Letter of Intent is subject to a definitive asset purchase agreement which is
currently being negotiated with the potential buyer.
Note 9. Accounts Payable and Accrued Expenses.
Accounts payable and accrued expenses consist of the following at
December 31:
23
<PAGE>
1997
----
(Amounts in Thousands)
General Partner and affiliates $ 73
Security deposits 43
Equipment lease operations 18
Other 218
-------
Total $ 352
=======
Note 10. Income Taxes.
Federal and state income tax regulations provide that taxes on the
income or loss of the Partnership are reportable by the partners in their
individual income tax returns. Accordingly, no provision for such taxes has been
made in the accompanying financial statements.
The net difference between the tax basis and the reported amounts of the
Partnership's assets and liabilities are as follows at December 31, 1997:
Reported Amounts Tax Basis Net Difference
---------------- --------- --------------
(Amounts in Thousands)
Assets $ 2,787 $ 3,289 $ (498)
Liabilities 1,130 974 156
The Subsidiary is a corporation subject to state and federal tax
regulations. The Subsidiary reports to the taxing authority on the accrual
basis. When income and expenses are recognized in different periods for
financial reporting purposes than for income tax purposes, deferred taxes are
provided for such differences using the liability method. The subsidiary was
formed in July 1993.
The Subsidiary's income tax benefit includes the following components
for the years ended December 31:
1997 1996
---- ----
(Amounts in Thousands)
Current tax benefit $ - $ 13
Deferred tax asset related to
future taxable income, net 9 30
------ ------
Income tax benefit, net $ 9 $ 43
====== ======
The income tax benefit differed from the statutory federal rate because
of the following:
1997 1996
---- ----
(Amounts in Thousands)
Federal income tax benefit, based
on statutory federal income tax
rate of 34% $ 8 $ 39
State income tax benefit, net of
federal provision 1 4
------ ------
Total Income tax benefit $ 9 $ 43
====== ======
The Subsidiary's net deferred tax asset as of December 31, resulted from
the following temporary differences:
24
<PAGE>
1997
----
(Amounts in Thousands)
Depreciation and amortization $ 110
Bad debt expense 7
Interest expense (32)
Net operating loss carryforward 58
--------
Subtotal 143
Valuation allowance (10)
-------
Deferred tax asset $ 133
=======
The Partnership has provided a valuation allowance for the deferred tax
asset of $10,000 as of December 31, 1997 based on the General Partner's
evaluation of the likelihood that such benefit will ultimately be realized.
As of December 31, 1997 the Subsidiary's net operating loss carryforward
of $58,000 for federal and state tax reporting purposes expires December 31,
2011.
Note 11. Related Entities.
The General Partner serves in the capacity of general partner in other
partnerships, all of which are engaged in the equipment leasing and financing
business.
The General Partner incurs certain expenses, such as data processing,
equipment storage and equipment remarketing costs, for which it is reimbursed by
the Partnership. Equipment remarketing costs are incurred as the General Partner
remarkets certain equipment on behalf of the Partnership. These expenses
incurred by the General Partner are reimbursed at the lower of the actual costs
or an amount equal to 90% of the fair market value for such services. The
equipment remarketing costs reimbursed to the General Partner were $0 and $3,000
for the year ended December 31, 1997 and 1996, respectively.
Note 12. Net Income (Loss) and Distributions per Limited Partnership Unit.
Net income and distributions per limited partnership unit were based on
the limited partner's share of consolidated net income and distributions, and
the weighted average number of units outstanding of 345,496 and 345,974 for the
years ended December 31, 1997 and 1996, respectively. For purposes of allocating
consolidated income (loss) and distributions to each individual limited partner,
the Partnership allocates consolidated net income (loss) and distributions based
upon each respective limited partner's ending capital account balance. The use
of this method accurately reflects each limited partner's participation in the
Partnership including reinvestment through the Capital Accumulation Plan. As a
result, the calculation of consolidated net income (loss) and distributions per
limited partnership unit is not indicative of per unit consolidated income
(loss) and distributions due to reinvestments through the Capital Accumulation
Plan.
Note 13. Business Segments.
The Consolidated Partnership currently operates in two business
segments: the equipment leasing and financing industry and the cable TV
industry. Information about the Consolidated Partnership's operations in these
two segments are as follows:
For the Years Ended December 31,
1997 1996
---- ----
(Amounts in Thousands)
Total Revenues
Equipment leasing and financing $ 212 $ 861
Cable TV operations 619 483
------- -------
Total $ 831 $ 1,344
======= =======
25
<PAGE>
Net Income (Loss)
Equipment leasing and financing $ 188 $ 469
Cable TV operations (13) (70)
------- -------
Total $ 175 $ 399
======= =======
Identifiable Assets
Equipment leasing and financing $ 1,252 $ 3,121
Cable TV operations 1,710 1,870
------- -------
Total $ 2,962 $ 4,991
======= =======
Depreciation and Amortization Expense
Equipment leasing and financing $ 2 $ 116
Cable TV operations 262 281
------- -------
Total $ 264 $ 397
======= =======
Capital Expenditures
Equipment leasing and financing $ 107 $ -
Cable TV operations 47 48
------- -------
Total $ 154 $ 48
======= =======
Note 14. Fair Value of Financial Instruments.
The carrying amounts reported on the balance sheet for cash and cash
equivalents, available-for-sale securities and notes receivable approximate the
fair values.
Note 15. Subsequent Events.
In January 1998, settlement proceeds of $752,000 were received for a
note receivable with a net carrying value of $601,000, that was considered to be
impaired at December 31, 1997.
Phoenix Cablevision of Oregon, Inc. has accepted and agreed to the terms
stated on a Letter of Intent dated February 11, 1998 to sell all or
substantially all of its assets, with a net carrying value of $1.5 million at
December 31, 1997 for $2 million. Cash, accounts receivable, marketable
securities and similar investments will be excluded from the sale. This Letter
of Intent is subject to a definitive asset purchase agreement which is currently
being negotiated with the potential buyer.
26
<PAGE>
Item 8. Disagreements on Accounting and Financial Disclosure Matters.
None.
PART III
Item 9. Directors and Executive Officers of the Registrant.
The registrant is a limited partnership and, therefore, has no executive
officers or directors. The general partner of the registrant is Phoenix Leasing
Incorporated, a California corporation. The directors and executive officers of
Phoenix Leasing Incorporated (PLI) are as follows:
GUS CONSTANTIN, age 60, is President, Chief Executive Officer and a Director
of PLI. Mr. Constantin received a B.S. degree in Engineering from the University
of Michigan and a Master's Degree in Management Science from Columbia
University. From 1969 to 1972, he served as Director, Computer and Technical
Equipment of DCL Incorporated (formerly Diebold Computer Leasing Incorporated),
a corporation formerly listed on the American Stock Exchange, and as Vice
President and General Manager of DCL Capital Corporation, a wholly-owned
subsidiary of DCL Incorporated. Mr. Constantin was actively engaged in marketing
manufacturer leasing programs to computer and medical equipment manufacturers
and in directing DCL Incorporated's IBM System/370 marketing activities. Prior
to 1969, Mr. Constantin was employed by IBM as a data processing systems
engineer for four years. Mr. Constantin is an individual general partner in four
active partnerships and is an NASD registered principal. Mr. Constantin is the
founder of PLI and the beneficial owner of all of the common stock of Phoenix
American Incorporated.
GARY W. MARTINEZ, age 47, is Executive Vice President, Chief Operating
Officer and a Director of PLI. He has been associated with PLI since 1976. He
manages the Asset Management Department, which is responsible for lease and loan
portfolio management. This includes credit analysis, contract terms,
documentation and funding; remittance application, change processing and
maintenance of customer accounts; customer service, invoicing, collection,
settlements and litigation; negotiating lease renewals, extensions, sales and
buyouts; and management information reporting. From 1973 to 1976, Mr. Martinez
was a Loan Officer with Crocker National Bank, San Francisco. Prior to 1973, he
was an Area Manager with Pennsylvania Life Insurance Company. Mr. Martinez is a
graduate of California State University, Chico.
HOWARD SOLOVEI, age 36, is the Chief Financial Officer, Treasurer and a
Director of PLI. He has been associated with PLI since 1984. Mr. Solovei
oversees the Finance Department. He is responsible for the structuring,
planning, and monitoring of the partnerships sponsored by the General Partner
and its affiliates, as well as maintaining the banking relationships. Mr.
Solovei graduated with a B.S. in Business Administration from the University of
California, Berkeley.
BRYANT J. TONG, age 43, is Senior Vice President, Financial Operations and a
Director of PLI. He has been with PLI since 1982. Mr. Tong is responsible for
investor services and overall company financial operations. He is also
responsible for the technical and administrative operations of the cash
management, corporate accounting, partnership accounting, accounting systems,
internal controls and tax departments, in addition to Securities and Exchange
Commission and other regulatory agency reporting. Prior to his association with
PLI, Mr. Tong was Controller-Partnership Accounting with the Robert A. McNeil
Corporation for two years and was an auditor with Ernst & Whinney (succeeded by
Ernst & Young) from 1977 through 1980. Mr. Tong holds a B.S. in Accounting from
the University of California, Berkeley, and is a Certified Public Accountant.
CYNTHIA E. PARKS, age 42, is Senior Vice President, General Counsel and
Assistant Secretary of PLI. Prior to joining PLI in 1984, she was with GATX
Leasing Corporation, and had previously been Corporate Counsel for Stone
Financial Companies, and an Assistant Vice President of the Bank of America,
Bank Amerilease Group. She has a Bachelor's degree from Santa Clara University,
and earned her J.D. from the University of San Francisco School of Law.
Neither the General Partner nor any Executive Officer of the General Partner
has any family relationship with the others.
Phoenix Leasing Incorporated or its affiliates and the executive officers of
the General Partner serve in a similar capacity to the following affiliated
limited partnerships:
27
<PAGE>
Phoenix Leasing American Business Fund, L.P.
Phoenix Leasing Cash Distribution Fund V, L.P.
Phoenix Income Fund, L.P.
Phoenix Leasing Cash Distribution Fund IV
Phoenix High Tech/High Yield Fund and
Phoenix Leasing Cash Distribution Fund III
Disclosure Pursuant to Section 16, Item 405 of Regulation S-K:
The General Partner (and any corporate general partner of the General
Partner) of the Registrant, and the executive officers of the General Partner
(or any corporate general partner of the General Partner) of the Registrant,
file reports pursuant to Section 16(a) of the Securities Exchange Act of 1934,
as amended. Based solely on the Registrant's review of the copies of such forms
received by the Registrant, the Registrant believes that, during 1997, all such
required reports were filed on a timely basis, except for reports on Form 3
(Initial Statement of Beneficial Ownership of Securities) filed late by Howard
Solovei and Cynthia E. Parks, each an executive officer of the General Partner
(or any corporate general partner of the General Partner) of the Registrant. No
units of limited partnership interest are held by such executive officers.
Certain Legal Proceedings.
On October 28, 1997 a Class Action Complaint was filed against Phoenix
Leasing Incorporated, Phoenix Leasing Associates, II and III L.P., Phoenix
Securities Inc. and Phoenix American Incorporated (the "Companies") in
California Superior Court for the County of Sacramento by eleven individuals on
behalf of investors in Phoenix Leasing Cash Distribution Funds I through V (the
"Partnerships"). The Companies were served with the Complaint on December 9,
1997. The Complaint seeks declaratory and other relief including accounting,
receivership, imposition of constructive trust and judicial dissolution and
winding up of the Partnerships, and damages based on fraud, breach of fiduciary
duty and breach of contract by the Companies as general partners of the
Partnerships. The Companies received an extension of time to answer the
Complaint and formal discovery has not commenced. The Companies intend to
vigorously defend the Complaint.
Item 10. Executive Compensation.
Set forth is the information relating to all direct remuneration paid or
accrued by the Registrant during the last year to the General Partner.
<TABLE>
<CAPTION>
(A) (B) (C) (D)
Cash and cash- Aggregate of
Name of Individual Capacities in equivalent forms contingent forms
or persons in group which served of remuneration of remuneration
- ------------------- ------------- ----------------------------------------- ----------------
(C1) (C2)
Securities or property
Salaries, fees, directors' insurance benefits or
fees, commissions, and reimbursement, personal
bonuses benefits
------------------------- -----------------------
(Amounts in Thousands)
<S> <C> <C> <C> <C>
Phoenix Leasing
Incorporated General Partner $ 19(1) $ 0 $ 0
Phoenix Cable
Management, Inc. Manager 28(1) 0 0
------ ---- ----
$ 47 $ 0 $ 0
====== ==== ====
(1) consists of management fees.
</TABLE>
28
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
(a)No person owns of record, or is known by the Registrant to own
beneficially, more than five percent of any class of voting
securities of the Registrant.
(b)The General Partner of the Registrant owns the equity securities of
the Registrant set forth in the following table:
<TABLE>
<CAPTION>
(1) (2) (3)
Title of Class Amount Beneficially Owned Percent of Class
-------------- ------------------------- ----------------
<S> <C> <C>
General Partner Interest Represents a 15% interest in the 100%
Registrant's profits and distributions
Limited Partner Interest 4 units -
</TABLE>
Item 12. Certain Relationships and Related Transactions.
None.
PART IV
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Page No.
--------
(a) 1. Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 12
Consolidated Statements of Operations for the years
ended December 31, 1997 and 1996 13
Consolidated Statements of Partners' Capital for the
years ended December 31, 1997 and 1996 14
Consolidated Statements of Cash Flows for the years
ended December 31, 1997 and 1996 15
Notes to the Consolidated Financial Statements 16-26
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the financial
statements or notes thereto.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed for the quarter ended December 31,
1997.
(c) Exhibits:
21.Additional Exhibits.
a) Balance Sheet of Phoenix Leasing Incorporated E21 1-14
b) Listing of all Subsidiaries of the Registrant:
Phoenix Cablevision of Oregon, Inc., a Nevada
corporation and wholly owned subsidiary
27.Financial Data Schedule.
29
<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.
PHOENIX LEASING INCOME FUND VII
(Registrant)
BY: PHOENIX LEASING INCORPORATED,
A CALIFORNIA CORPORATION
GENERAL PARTNER
Date: March 24, 1998 By: /S/ GUS CONSTANTIN
-------------- --------------------------
Gus Constantin, President
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.
Signature Title Date
--------- ----- ----
/S/ GUS CONSTANTIN President, Chief Executive Officer March 24, 1998
- -------------------- and a Director of --------------
(Gus Constantin) Phoenix Leasing Incorporated
General Partner
/S/ GARY W. MARTINEZ Executive Vice President, March 24, 1998
- -------------------- Chief Operating Officer --------------
(Gary W. Martinez) and a Director of
Phoenix Leasing Incorporated
General Partner
/S/ HOWARD SOLOVEI Chief Financial Officer, March 24, 1998
- -------------------- Treasurer and a Director of --------------
(Howard Solovei) Phoenix Leasing Incorporated
General Partner
/S/ BRYANT J. TONG Senior Vice President, March 24, 1998
- -------------------- Financial Operations --------------
(Bryant J. Tong) (Principal Accounting Officer)
and a Director of
Phoenix Leasing Incorporated
General Partner
30
Exhibit 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Phoenix Leasing Incorporated:
We have audited the accompanying consolidated balance sheets of Phoenix Leasing
Incorporated (a California corporation) and Subsidiaries as of June 30, 1997 and
1996. 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 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 balance sheets are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheets. 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 audits provide a reasonable basis for our opinion.
In our opinion, the balance sheets referred to above present fairly, in all
material respects, the financial position of Phoenix Leasing Incorporated and
Subsidiaries as of June 30, 1997 and 1996, in conformity with generally accepted
accounting principles.
San Francisco, California, ARTHUR ANDERSEN LLP
September 5, 1997
Page 1 of 14
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, June 30,
1997 1996
----------- -----------
Cash and cash equivalents $11,409,747 $ 3,767,098
Investments in securities 5,105,289 1,287,323
Trade accounts receivable, net of allowance
for doubtful accounts of $121,944 and $31,246
at June 30, 1997 and 1996, respectively 289,284 989,030
Receivables from Phoenix Leasing Partnerships and
other affiliates 4,796,513 3,955,935
Notes receivable from related party 710,598 8,767,694
Equipment inventory -- 2,240,448
Equipment subject to lease 4,320,755 14,232,017
Notes receivable 5,825,842 3,560,830
Investments in Phoenix Leasing Partnerships 1,678,239 1,773,887
Property and equipment, net of accumulated
depreciation of $10,881,577 and $11,398,438 at
June 30, 1997 and 1996, respectively 6,009,049 6,933,608
Other assets 3,087,741 3,011,229
----------- -----------
TOTAL ASSETS $43,233,057 $50,519,099
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Short-term lines of credit $ -- $ 1,750,000
Warehouse lines of credit 10,310,568 16,930,044
Payables to affiliates 2,950,748 2,155,626
Accounts payable and accrued expenses 2,564,226 3,205,932
Deferred revenue -- 328,676
Long-term debt 147,532 620,899
Deficit in investments in Phoenix Leasing
Partnerships 738,297 761,214
----------- -----------
TOTAL LIABILITIES 16,711,371 25,752,391
----------- -----------
Minority Interests in Consolidated Subsidiaries 105,901 27,615
----------- -----------
Commitments and Contingencies (Note 15)
SHAREHOLDER'S EQUITY:
Common stock, without par value, 30,000,000 shares
authorized, 5,433,600 issued and outstanding at
June 30, 1997 and 1996, respectively 20,369 20,369
Additional paid-in capital 11,466,920 11,466,920
Unrealized gains on investments in securities,
available for sale 243,311 --
Retained earnings 14,685,185 13,251,804
----------- -----------
TOTAL SHAREHOLDER'S EQUITY 26,415,785 24,739,093
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $43,233,057 $50,519,099
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 1. Summary of Significant Accounting Policies:
a. Organization - Phoenix Leasing Incorporated and subsidiaries (the
Company), a wholly owned subsidiary of Phoenix American Incorporated (PAI), is
engaged in the organization and management of partnerships which specialize in
the purchase and lease of primarily high-technology and data processing
equipment. The partnerships purchase equipment directly from equipment vendors
for lease to financial, commercial and industrial businesses and governmental
agencies. The partnerships also finance transactions in the areas of
microcomputers and emerging growth companies. The Company has also engaged in
similar leasing activities for its own account. The Company also provides
ongoing equipment maintenance services for end-users of high-technology data
processing equipment and graphic plotters.
b. Principles of Consolidation - The consolidated financial statements
include the accounts of Phoenix Leasing Incorporated and its wholly or
majority-owned subsidiaries and subsidiaries over which the Company exerts
control. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Except as otherwise explained below, minority interests in the net
assets and net income or loss of majority-owned subsidiaries are allocated on
the basis of the proportionate ownership interests of the minority owners.
Three of the consolidated subsidiaries are California limited
partnerships (the Partnerships) which are general partners of three of the
Phoenix Leasing Partnerships. As of June 30, 1997, the Company held a 50%
general partner ownership interest in two of the Partnerships and a 62.5%
interest in one. Under the terms of the partnership agreements, profits and
losses attributable to acquisition fees paid to the Partnerships from Phoenix
Leasing Partnerships are allocated to the limited partner (the minority owner in
the Partnerships) in proportion to the limited partner's ownership interest. All
remaining profits and losses are allocated to the Company. Distributions to the
partners are made in accordance with the terms of the partnership agreement. The
limited partner of each of the Partnerships is Lease Management Associates,
Inc., a Nevada corporation controlled by an officer of the Company, who is the
owner of PAI.
c. Management, Acquisition and Incentive Fee Income - As of June 30, 1997,
the Company is the corporate general partner in 11 actively operating limited
partnerships and manager of 7 actively operating joint ventures, all of which
own and lease equipment. Seven of the partnership agreements provide for payment
of management fees based on partnership revenues and acquisition fees when the
partnerships' assets are acquired. Five of the limited partnership agreements
provide for payment of management fees and liquidation fees (see discussion
later in this footnote). One of the partnership agreements provides for a fee to
be paid to the Company based on a percentage of equity proceeds received by the
partnership and a percentage of net income. Most of the joint venture agreements
provide for payment of management fees based on joint venture revenues.
These partnerships and the joint ventures are collectively referred to as
the "Phoenix Leasing Partnerships."
d. Investments - Investments in Phoenix Leasing Partnerships reflect the
Company's equity basis in the Phoenix Leasing Partnerships. Under the equity
method of accounting the original investment is recorded at cost and is adjusted
periodically to recognize the Company's share of earnings, losses and
distributions after the date of acquisition. The Company has adopted the equity
method of accounting on the basis of its control and significant influence over
the Phoenix Leasing Partnerships.
3
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 1. Summary of Significant Accounting Policies (continued):
e. Liquidation Fee Income - The Company earned liquidation fees from five
of the Phoenix Leasing Partnerships in consideration for the services and
activities performed in connection with the disposition of the partnerships'
assets. Management of the Company concluded that the total liquidation fees to
be earned over the life of these partnerships may not be fully realizable.
Accordingly, the Company recognized liquidation fee income when the fees were
paid by the partnerships. During the year ended June 30, 1996, the Company
recognized the remaining $1,062,046 in liquidation fees from these partnerships.
In two other partnerships, cash distributions received in excess of
the allocated cumulative net profits represent a liquidation fee which cannot
exceed, in the aggregate, 7.792% of the net contributed capital.
f. Lease Accounting - The Company's leasing operations consist of both
financing and operating leases. The method of accounting for finance leases
recognizes unearned income at the inception of the lease calculated as the
excess of net rentals receivable and estimated residual value at the end of the
lease term over the cost of the equipment leased. Unearned income is amortized
monthly over the term of the lease on a declining basis to provide an
approximate level rate of return on the unrecovered cost of the investment.
Initial direct costs of originating new leases are capitalized and amortized
over the initial lease term.
When accounting for operating leases, the leased equipment is recorded
as an asset, at cost, and is depreciated on a straight-line basis over its
estimated useful life, ranging up to six years. Rental income represents the
rental payments due during the period under the terms of the lease.
The Company is the lessor in leveraged lease agreements under which
computer equipment having an estimated useful life of 5 years was leased for
periods from 4-5 years. The Company is the equity participant and equipment
owner. A portion of the purchase price was furnished by third-party financing in
the form of long-term debt that provides no recourse to the Company and is
secured by a first lien on the financed equipment.
g. Property and Equipment - Property and equipment which the Company holds
for its own use are recorded at cost and depreciated on a straight-line basis
over estimated useful lives ranging up to 45 years.
h. Income Taxes - The Company is included in consolidated and combined tax
returns filed by PAI. See Note 14 for further information.
i. Deferred Revenue - Deferred revenue is the result of selling
maintenance contracts which provide service over a specific period of time.
Deferred revenue is amortized on a straight-line basis over the service period
not to exceed 5 years. During the year ended June 30, 1997, the Company
discontinued sales of such contracts and all deferred revenue was fully
amortized.
j. Investments in Securities - Investments in securities, available for
sale, are stated at fair value or amortized cost, as specified by SFAS 115.
Interest is recognized when earned.
4
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 1. Summary of significant Accounting Policies (continued):
k. 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 amounts 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. Actual results could differ from those
estimates.
l. Reclassification - Certain 1996 balances have been reclassified to
conform to the 1997 presentation.
Note 2. Receivables from Phoenix Leasing Partnerships and Other Affiliates:
Receivables from Phoenix Leasing Partnerships and other affiliates consist
of the following for the years ended June 30:
1997 1996
---- ----
Management Fees $ 156,668 $ 416,149
Acquisition fees 283,133 74,099
Other receivables from Phoenix Leasing Partnerships, net 2,668,081 3,458,687
Other receivables from corporate affiliates 1,688,631 7,000
---------- ---------
$4,796,513 $3,955,935
========== ==========
The Company collected $2,155,543 of these other receivables from the
Phoenix Leasing Partnerships on September 2, 1997.
Note 3. Investments in Phoenix Leasing Partnerships:
The Company records its investments in Phoenix Leasing Partnerships under
the equity method of accounting. The ownership interest percentages vary,
ranging from .5% up to 25%. As general partner, the Company has complete
authority in, and responsibility for, the overall management and control of each
partnership, which includes responsibility for supervising partnership
acquisition, leasing, remarketing and sale of equipment. Distributions of cash
from the partnerships are made at the discretion of the general partner;
historically, a significant portion of the partnerships' earnings has been
distributed annually.
A shareholder of PAI and officers of the Company also have general and
limited partner interests in several of the partnerships.
5
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 3. Investments in Phoenix Leasing Partnerships (continued):
The activity in the investments in Phoenix Leasing Partnerships for the
years ended June 30 are as follows:
1997 1996
---- ----
Balance, beginning of year $1,012,673 $ 412,974
Additional investments 178,243 830,085
Equity in earnings 2,933,649 2,093,488
Cash distributions (3,184,621) (2,323,874)
---------- ----------
Balance, end of year $ 939,942 $1,012,673
========== ==========
The Company's total investments in Phoenix Leasing Partnerships are
comprised of investments in certain partnerships which are subject to
fluctuations due to partnerships' performances and timing of cash distributions.
At times the investment in those partnerships will be a deficit.
Certain of the partnership agreements require the Company to restore any
deficit in its capital account to zero at the dissolution of the partnership.
This deficit is a result of cash distributions received and losses allocated to
the Company. The Company has determined that in certain partnerships it will be
unlikely that the deficit investment will reverse and as a result during the
year ended June 30, 1993 the Company elected to make capital contributions prior
to partnership dissolution totaling $2,028,733. As of April 1, 1992, the Company
elected to forgo any future cash distributions from, and will not record its
share of future earnings generated from the operations of, one of these
partnerships. The Company has deferred any future cash distributions from two
other partnerships. The Company believes that it would be likely that any future
cash distributions received from these partnerships would have to be paid back
at the dissolution of the partnerships. The Company will continue to record fee
income earned from the management of, and acquisition of equipment for these
partnerships.
The aggregate positive investment and aggregate deficit investment
balances are presented separately on the balance sheets as of June 30, 1997 and
1996.
The partnerships own and lease equipment. All debt of the partnerships is
secured by the equipment and is without recourse to the general partners. The
unaudited financial statements of the partnerships reflect the following
combined, summarized financial information as of June 30, 1997 and for the
twelve months then ended:
Assets $ 120,259,000
Liabilities 19,520,000
Partners' Capital 100,739,000
Revenue 33,479,000
Net Income 13,994,000
6
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 4. Equipment Subject to Lease and Notes Receivable:
Equipment subject to lease includes the Company's investments in leveraged
leases, investments in financing leases, operating leases and notes receivable.
Equipment subject to lease consists of the following at June 30:
1997 1996
---- ----
Equipment on lease, net of accumulated
depreciation of $47,177 and $258,102 at
June 30, 1997 and 1996, respectively $ 83,057 $ 92,008
Leverage leases 1,913,392 1,589,772
Equipment held for resale 225,084 305,840
Investment in financing leases 1,863,214 12,036,604
Operating leases 236,008 207,793
----------- -----------
Total equipment subject to lease $ 4,320,755 $14,232,017
=========== ===========
Notes receivable 5,825,842 3,560,830
Leverage Leases:
The Company's net investment in leveraged leases is composed of the
following elements at June 30:
1997 1996
---- ----
Rental receivable (net of principal and
interest on the nonrecourse debt) $ - $ -
Estimated residual value of leased assets 2,602,636 2,498,233
Less: Unearned and deferred income (689,244) (908,461)
----------- -----------
Net investment in leveraged leases $ 1,913,392 $ 1,589,772
=========== ===========
Investment in Financing Leases:
The Company has entered into direct lease arrangements with companies
engaged in the development of technologies and other growth industry businesses
operating in different industries located throughout the United States.
Generally, it is the responsibility of the lessee to provide maintenance on
leased equipment.
The Company's net investment in financing leases consists of the following
at June 30:
1997 1996
---- ----
Minimum lease payments to be received $ 2,420,101 $ 16,089,868
Less:unearned income (542,155) (4,053,264)
allowance for early termination (14,732) -
----------- ------------
Net investment in financing leases $ 1,863,214 $ 12,036,604
=========== ============
7
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 4. Equipment Subject to Lease and Notes Receivable (continued):
Minimum rentals to be received on non-cancelable financing leases for the
years ended June 30, are as follows:
1998 $ 751,632
1999 704,531
2000 467,636
2001 401,409
2002 94,893
-----------
Total $ 2,420,101
===========
Notes Receivable:
Notes receivable for the years ended June 30, are as follows:
1997 1996
---- ----
Notes receivable from emerging growth and
other companies with stated interest ranging
from 13.8% to 19.8% per annum receivable in
installments ranging from 35 to 85 months
collateralized by the equipment financed $ 5,825,842 $ 3,560,830
=========== ===========
Minimum payments to be received on non-cancelable notes receivable for the
years ended June 30, are as follows:
1998 $ 1,838,665
1999 1,793,111
2000 1,919,794
2001 1,230,924
2002 564,672
Thereafter 353,946
-----------
Total minimum payments to be received $ 7,701,112
===========
Less: unearned interest (1,875,270)
-----------
Net investment in notes receivable $ 5,825,842
===========
Note 5. Sale of Leased Assets and Notes Receivable:
The Company adopted SFAS 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", as it related to
transactions including revolving periods completed after January 1, 1997. Prior
to this date, such transactions were accounted for under SFAS 77, "Reporting by
Transferors for Transfers of Receivables without Recourse". The change in
standards has not had a material effect on the financial statements of the
Company during the year ended June 30, 1997.
8
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 5. Sale of Leased Assets and Notes Receivable (continued):
The Company acquires leased or financed equipment with the intent to
subsequently transfer those assets, accounted for herein as a sale, to a trust
which issues lease backed certificates and notes receivables. As of June 30,
1997, the Company has acquired $7,689,056 in such leased or financed equipment
which is included in Equipment subject to lease and notes receivable. The
Company uses proceeds from its two warehouse lines of credit to purchase or
finance this equipment. During the holding period the Company recognizes the
revenues generated from these leases or notes and the interest expense related
to the drawdowns from the warehouse lines of credit.
On June 4, 1997, the Company entered into an agreement to transfer
certain assets and notes receivables with a net carrying value of $30,817,909 to
a trust for the purpose of the trust issuing contract backed certificates in
exchange for cash proceeds, of which $10 million was held back in a specified
account ("Pre-funding Account") to acquire additional assets from a subsidiary .
The Pre-Funding Account has a termination date of September 25, 1997. The
Company recognized a gain on this transaction of $127,209. The contract backed
certificates are recourse only to the assets used to collateralize the
obligation. Under the terms of the agreement, the Company will continue to
acquire and transfer additional assets to the trust over the twelve month period
beginning June 5, 1997 and ending June 4, 1998. In accordance with this
agreement, the Company transferred additional assets to the trust for
$3,629,166. These assets had a net carrying value of $3,527,757, resulting in a
gain of $101,409.
On October 11, 1996, the Company entered into an agreement to transfer
certain assets and notes receivables with a net carrying value of $24,141,511 to
a trust for the purpose of the trust issuing lease backed certificates in
exchange for cash proceeds. The Company recognized a gain on this transaction of
$307,069. The certificates are recourse only to the assets used to collateralize
the obligation. Under the terms of the agreement, the Company will continue to
acquire and transfer additional assets to the trust over the twelve month period
beginning October 12, 1996 and ending October 11, 1997. During the period
October 12, 1996 through May 1, 1997, the Company transferred additional assets
to the trust for $4,786,735. These assets had a net carrying value of
$4,254,031, resulting in a gain of $532,704. Subsequent to May 1, 1997, the
Company ceased to acquire and transfer additional assets to the trust under this
agreement.
On November 29, 1995, the Company entered into an agreement to transfer
certain assets and notes receivables with a net carrying value of $27,337,402 to
a trust for the purpose of the trust issuing lease backed certificates in
exchange for cash proceeds. The Company recognized a gain on this transaction of
$459,633. The leased backed certificates are recourse only to the assets used to
collateralize the obligation. Under the terms of the agreement, the Company
continued to acquire and transfer additional assets to the trust over the twelve
month period beginning November 30, 1995 and ending November 28, 1996. During
the period November 30, 1995 through June 30, 1996, the Company transferred
additional assets to the trust for $4,668,388. These assets had a net carrying
value of $4,225,596, resulting in a gain of $442,792.
In addition, in accordance with the November 29, 1995 agreement, during
the period July 1, through November 28, 1996, the Company transferred assets to
the trust for $4,052,704,. These assets had a net carrying value of $3,676,390,
resulting in a gain of $376,314.
9
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 6. Property and Equipment:
Major classes of property and equipment at June 30 are as follows:
1997 1996
---- ----
Land $ 1,077,830 $ 1,077,830
Buildings 7,420,201 7,352,608
Office furniture, fixtures and equipment 7,468,072 8,441,476
Other 924,523 843,450
----------- -----------
16,890,626 17,715,364
Less accumulated depreciation and amortization (10,881,577) (11,398,438)
Inventory held for resale - 616,682
----------- -----------
Net Property and Equipment $ 6,009,049 $ 6,933,608
=========== ===========
PAI owns its headquarters building in San Rafael, California. The Company
paid $7,749,476 to purchase the land and construct the building. The cost of
construction was paid for with a combination of $2,749,476 in cash from the
Company's operations and a $5,000,000 advance from PAI. The $5,000,000 advance
is included as a reduction in receivable from Phoenix Leasing Partnerships and
other affiliates. PAI has pledged the market value of the building as security
for a $5,000,000 Industrial Revenue Bond ("IDB") which PAI has with the City of
San Rafael, California. The principal of the IDB is payable in a lump sum
payment on October 1, 2004. The Company paid $335,127 and $248,325 in interest
payments related to the IDB during the year ended June 30, 1997 and 1996,
respectively.
As of May 31, 1997, the Company sold certain assets and liabilities of its
subsidiary, which provided equipment maintenance services for end-users of
high-technology data processing equipment and graphic plotters, to an
unaffiliated company and recorded a gain on sale of property and equipment of
$544,732.
As of June 30, 1997, a portion of the Company's headquarters has been
leased to third parties. The remaining lease term is for less than one year and
the minimum lease payments receivable is $362,785.
Note 7. Investments in Securities:
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 - Accounting for Certain Investments in
Debt and Equity Securities (SFAS 115). The Company adopted this statement on
July 1, 1994. This pronouncement prescribes specific accounting treatment for
investments based on their classification as either held-to-maturity securities
(HTM), available-for-sale securities (AFS) or trading securities, as defined in
the statement.
In connection with the three prior lease and note securitizations (see
Note 7) the Company has acquired Class C Equipment Investment Trust Certificates
(Class C Shares) and notes. The Class C Shares are classified as AFS and are
reported at their amortized cost of $4,658,771 and $1,248,843, as of June 30,
1997 and 1996, respectively, which approximates fair value. The Class C Shares
do not have a specified contractual maturity.
10
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 7. Investments in Securities (continued):
All equities held by the Company are classified as AFS and are reported
at their fair value of $446,518 and $38,480 at June 30, 1997 and 1996,
respectively. Gross unrealized gains on such securities as of June 30, 1997 and
1996 were $405,518 and $0, respectively.
Note 8. Fair Value of Financial Instruments:
Investments in Securities
The carrying amounts of investments in securities, available for sale,
reported in the balance sheets approximate their fair values.
Notes Receivable and Debt
The fair values of the Company's notes receivable and debt are estimated
based on the market prices of similar instruments or on the current market
interest rates for instruments with similar terms, maturities, and risks. The
estimated fair values of the Company's notes receivable and debt approximate the
carrying amounts reported in the balance sheets.
Note 9. Short-Term and Warehouse Lines of Credit:
To provide interim financing for equipment and working capital needs, the
Company executes lines of credit which consist of short-term notes with banks
with interest rates equal to the prime rate or the banks' index rate. All lines
of credit are renewable annually at the banks' option.
As of June 30, 1997, the Company, through PAI, had access to one
short-term line of credit totaling $2.5 million, all of which was available.
Draw downs under this credit line are secured by the Company's receivable from
Phoenix Leasing Partnerships and its investments in class C shares.
In addition, the Company has two secured short-term warehouse lines of
credit totaling $37.5 million, which are used to provide interim financing for
the acquisition of equipment and the financing of notes receivable. As of June
30, 1997 and 1996, $10.3 and $16.9 million , respectively, of these lines have
been drawn down and are due in one year or less. The draw downs under these
lines are collateralized by investments in financing leases and notes receivable
included in equipment subject to lease. The interest rate is tied to the IBOR
(Eurodollar) rate. The initial commitment period for these lines of credit is 18
months and may be extended to 36 months at the discretion of the banks.
Principal payments are based on the lesser of the aggregate payments received by
the Company on its leases and notes receivable or the aggregate principal and
interest outstanding on the payment date of the credit line.
In connection with the Company's lines of credit, various financial
ratios and other covenants must be maintained. The Company has guaranteed its
right, title and interest in certain of its assets and the future receipts from
these assets in order to secure payment and performance of these credit lines.
11
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 10. Long-Term Debt:
Long-term debt consists of the following at June 30:
1997 1996
---- ----
Mortgage payable at varying interest rates
with an initial rate of 8.75% secured by a
first deed of trust on real property with a
cost of $167,650. Note is amortized over 83
months with monthly payments of $559 with a
final payment of $121,267. $ 147,532 $ 154,238
Note payable to a bank, collateralized by the
assets of Phoenix Leasing Liquidation
Corporation, a subsidiary of the Company, with
a variable rate of interest tied to the bank's
prime rate payable in 30 consecutive monthly
installments - 466,661
---------- ----------
$ 147,532 $ 620,899
========== ==========
The aggregate long-term debt maturities for the fiscal years ended June 30, are
as follows:
1998 $ 6,706
1999 6,706
2000 6,706
2001 127,414
----------
Total $ 147,532
==========
Note 11. Profit Sharing Plan:
The Company has a profit sharing plan covering substantially all employees
who meet certain age and service requirements. Contributions to the plan by the
Company are made at the discretion of the board of directors. The profit sharing
expense was $600,000 for the years ended June 30, 1997 and 1996, respectively.
Note 12. Leased Facilities:
The Company leases office and warehouse space in various parts of the
country and had annual rental expense of approximately $437,000 and $417,000 for
the years ended June 30, 1997 and 1996, respectively.
12
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 13. Income Taxes:
The Company's income or loss for tax reporting purposes is included in the
consolidated and combined tax returns filed by PAI which are prepared on the
accrual basis of accounting. In accordance with a Tax Sharing Agreement
effective July 1, 1991, between the Company and PAI, PAI has assumed all tax
liabilities and benefits arising from the Company's income or loss.
The Company computes and records its tax attributes and the related
benefit or provision is transferred to PAI.
The provision (benefit) for income taxes for the year ended June 30
consists of the following:
1997 1996
---- ----
Current tax benefit $ (111,925) $(551,913)
Deferred tax expense 670,305 598,161
---------- ---------
$ 782,230 $ 46,248
========== =========
Cumulative temporary differences of $10,097,889 and $7,977,571 as of June
30, 1997 and 1996, respectively, are primarily related to differences in book
and tax accounting treatments for leveraged leases.
The difference between the effective tax rate and statutory tax rate is
due to certain expenses deductible for financial reporting purposes but not for
tax purposes, state tax expense net of federal benefit and other miscellaneous
items.
Note 14. Transactions with Related Parties:
The Company provides an interest bearing line of credit totaling
$8,000,000 to PAI's controlling shareholder which is secured by common stock of
Phoenix Precision Graphics, Inc. (a Nevada corporation, owned by the principal
shareholder). As of June 30, 1997 and 1996, $511,493 and $6,646,209 of this line
of credit was outstanding and is included in notes receivable from related
party. As of June 30, 1997 and 1996, Phoenix Precision Graphics is in a start-up
mode and has cumulative losses of $13,236,982 and $9,120,711, respectively.
The Company provides an interest bearing line of credit to PAI's
controlling shareholder, which is secured by common stock of Phoenix Fiberlink
Inc. (a Nevada Corporation, owned by the principal shareholder). As of June 30,
1997 and 1996, $199,105 and $2,121,484 of this line of credit has been drawn
down and is included in notes receivable from related party.
The Company earned a management fee from an affiliate of $515,137 and
$556,453 for the years ended June 30, 1997 and 1996, respectively. This
management fee is included in Portfolio management fees.
The Company paid an affiliate an asset management fee of $305,770 during
the year ended June 30, 1996. This asset management fees is included in
equipment lease operations, maintenance, remarking and administrative fees.
13
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 14. Transactions with Related Parties (continued):
As of January 1, 1997, the Company transferred certain assets and
liabilities to a non-consolidated affiliate, ReSource/Phoenix, Inc., wholly
owned by the Company's controlling shareholder. No gain or loss was recorded as
a result of this transaction. In addition, the Company transferred all of its
third party resource service contracts to ReSource/Phoenix, Inc. The Company
recorded fees from these contracts of $657,295 for the period July 1 through
December 31, 1996 and $980,981 for the year ended June 30, 1996. For the period
January 1 through June 30, 1997, ReSource/Phoenix, Inc. recorded fees of
$746,333. ReSource/Phoenix, Inc. will continue to provide Accounting, Finance,
Human Resources, Legal, Investor Administration, and Information Technology
services to the Company. The Company paid ReSource/Phoenix, Inc. $1,089,012 for
these services for the period January 1 through June 30, 1997, the expense of
which is included in selling, general and administrative for the year ended June
30, 1997.
Note 15. Commitments and Contingencies:
The Company has entered into agreements which contain specific purchase
commitments. The Company may satisfy these commitments by purchasing equipment
for its own account or by assigning equipment purchases to its affiliated
partnerships. At June 30, 1997 the Company anticipates being able to satisfy its
future obligations under the agreements and intends to assign most of the
purchases under the agreements to its affiliated partnerships.
The Company is party to legal actions which arise as part of the normal
course of its business. The Company believes, after consultation with counsel,
that it has meritorious defenses in these actions, and that the liability, if
any, will not have a material adverse effect on the financial position of the
Company.
14
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