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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996 Commission File Number 0-15287
PHOENIX LEASING CASH DISTRIBUTION FUND II
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
California 68-0032426
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2401 Kerner Boulevard, San Rafael, California 94901-5527
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 485-4500
--------------
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-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _______
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 ___
As of December 31, 1996, 379,583 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, 1996.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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PHOENIX LEASING CASH DISTRIBUTION FUND II
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business.............................................. 3
Item 2. Properties............................................ 5
Item 3. Legal Proceedings..................................... 6
Item 4. Submission of Matters to a Vote of Security Holders... 6
PART II
Item 5. Market for the Registrant's Securities and Related
Security Holder Matters............................... 6
Item 6. Selected Financial Data............................... 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 8
Item 8. Financial Statements and Supplementary Data........... 11
Item 9. Disagreements on Accounting and Financial Disclosure
Matters............................................... 28
PART III
Item 10. Directors and Executive Officers of the Registrant.... 28
Item 11. Executive Compensation................................ 29
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................ 29
Item 13. Certain Relationships and Related Transactions........ 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.............................................. 30
Signatures ...................................................... 31
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PART I
Item 1. Business.
General Development of Business.
Phoenix Leasing Cash Distribution Fund II, a California limited
partnership (the "Partnership"), was organized on June 28, 1984. The Partnership
was registered with the Securities and Exchange Commission with an effective
date of November 20, 1986 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 reach
the end of its term on December 31, 1997 at which time it will sell any
remaining assets at public auction and make a final distribution to the partners
of the excess cash, if any. The General Partner is actively marketing for sale
the Partnership's net assets and it is expected, based on current estimates of
fair market value, that the net carrying value of those assets will utlimately
be recovered. However, the amounts the Partnership will ultimately realize from
the disposition of assets could differ from the net carrying value at December
31, 1996. 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 initial registration was for 300,000 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 400,000 units. The Partnership sold 386,308 units
for a total capitalization of $96,577,000. Of the proceeds received through the
offering, the Partnership has incurred $11,540,000 in organizational and
offering expenses. The Partnership concluded its public offering on February 4,
1988.
Phoenix Concept Cablevision Inc. (the "Subsidiary") is a majority 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 December 22, 1992. The Partnership owns approximately 58%
of the outstanding shares of Phoenix Concept Cablevision Inc. Phoenix Concept
Cablevision Inc. owns 100% of the outstanding shares of Concept Cablevision of
South Carolina, Inc., a Delaware corporation. Concept Cablevision of South
Carolina, Inc. owns and operates a cable television system located in the state
of South Carolina.
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,
1996, the total investments in equipment leases and financing transactions
(loans), including the Partnership's pro rata interest in investments made by
joint ventures, approximate $175,590,000. The average initial firm term of
contractual payments from equipment subject to lease was 32.19 months, and the
average initial net monthly payment rate as a percentage of the original
purchase price was 2.24%. The average initial firm term of contractual payments
from loans was 82.01 months.
The Partnership's principal objective is to produce cash flow to the
investors on a continuing basis over the life of the Partnership. To achieve
this objective, the Partnership has invested in various types of capital
equipment and other assets to provide leasing or financing of the same to third
parties, including Fortune 1000 companies and their subsidiaries, middle-market
companies, emerging growth companies, cable television operators and others, on
either a long-term or short-term basis. The types of equipment that the
Partnership has invested in includes computer peripherals, terminal systems,
small computer systems, communications equipment, IBM mainframes, IBM-software
compatible mainframes, office systems, CAE/CAD/CAM equipment, telecommunications
equipment, cable television equipment, medical equipment, production and
manufacturing equipment and software products.
The Partnership has made secured loans to cable television systems,
emerging growth companies, security monitoring companies and other businesses.
These loans are asset-based and the Partnership receives a security interest in
the assets financed.
The Partnership's financing activities have been concentrated in the
cable television industry. The Partnership has made secured loans (notes
receivable) to operators of cable television systems for the acquisition,
refinancing, construction, upgrade and extension of such systems located
throughout the United States. The loans to cable television system operators are
secured by a senior or subordinated interest in the assets of the cable
television system, its franchise agreements, subscriber lists, material
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contracts and other related assets. In some cases the Partnership has also
received personal guarantees from the owners of the systems. At December 31,
1996, the Partnership's remaining investments in notes receivable consist of a
note receivable from one cable television system operator and a note receivable
from a security monitoring company. The Partnership's net investment in notes
receivable before consideration of the allowance for losses on notes receivable
approximates 25% of the total assets of the Partnership at December 31, 1996.
Several of the cable television system operators the Partnership
provided financing to have experienced financial difficulties. These
difficulties are believed to have been caused by several factors such as: a
significant reduction in the availability of debt from banks and other financial
institutions to finance acquisitions and operations, uncertainties related to
future government regulation in the cable television industry and the economic
recession in the United States. These factors have resulted in a significant
decline in the demand for the acquisition of cable systems and have further
caused an overall decrease in the value of many cable television systems. As a
result of the above, many of the Partnership's notes receivable from cable
television system operators have gone into default. The result is that the
Partnership has not received scheduled payments, has had to grant loan
extensions, has experienced an increase in legal and collection costs and in
some cases, has had to foreclose on the cable television system. The impact of
this has been a decrease in the overall return on the Partnership's investments
in such notes.
The Partnership has acquired equipment pursuant to either "Operating"
leases or "Financing" leases. At December 31, 1996, 100% of the equipment owned
by the Partnership was classified as Operating leases. The Partnership has also
provided financing secured by assets in the form of notes receivable. Operating
leases are generally short-term leases under which the lessor will receive
aggregate rental payments in an amount that is less than the purchase price of
the equipment. Financing leases are generally for a longer term under which the
non-cancelable rental payments due during the initial term of the lease are at
least sufficient to recover the purchase price of the equipment.
Competition. The General Partner has concentrated the Partnership's
activities in the equipment leasing and financing industry, an area in which the
General Partner has developed an expertise. The computer equipment leasing
industry is extremely competitive. The Partnership competes with many well
established companies having substantially greater financial resources.
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.
Cable Television System Operations.
Phoenix Concept Cablevision, Inc. (the "Subsidiary") is a majority
owned subsidiary of the Partnership. The Subsidiary was acquired through
foreclosure of a defaulted note receivable to the Partnership on September 15,
1994. The net carrying value of the Partnership's share of this defaulted note
receivable was approximately $769,000, which was exchanged for a 58% ownership
interest in this joint venture. The Partnership owns approximately 58% of the
outstanding shares of Phoenix Concept Cablevision, Inc. Phoenix Concept
Cablevision, Inc. owns 100% of the outstanding shares of Concept Cablevision of
South Carolina, Inc., which owns and operates a cable television system. 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.
Concept Cablevision of South Carolina, Inc. owns and operates a cable
television system located in the state of South Carolina, which currently
consists of two headend locations and 81 miles of plant passing approximately
3,710 homes and has approximately 1,931 cable subscribers at December 31, 1996.
The cable television system serves the communities of Holly Hill, St. George,
Reevesville, Eutawville, certain unincorporated areas in Dorchester County and
other communities in Orangeburg County. The cable system operates under six
non-exclusive franchise agreements with each of the stated municipalities. These
cable franchise agreements expire between the years 1997 and 2006. PCMI is
currently re-negotiating to renew its franchise agreements which expire during
the years 1996 and 1997.
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, operate and eventually sell the cable
system. The cable television system is currently being marketed for sale. Any
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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. As mentioned previously, the amount the Partnership will ultimately
realize could materially differ from the net carrying value of the cable
television system at December 31, 1996 as a result of continued technological
change affecting the cable television industry.
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 passed in 1995 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
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. During 1995, the General Partner
has observed a renewed market interest in small cable systems. The final impact
of the Telecommunications Bill will not be known fully until a technical rewrite
is completed and all the legal challenges have been made.
See Note 15 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, 1996, together with information concerning the uses
of assets is set forth in Item 2.
Item 2. Properties.
The Partnership is engaged in the equipment leasing and financing
industry. The primary assets held by the Partnership are its investments in
leases and loans either directly or through its investment in joint ventures.
As of December 31, 1996, the Partnership owns equipment and has
outstanding loans to borrowers with an aggregate original cost of $8,008,000.
The equipment and loans have been made to customers located throughout the
United States. 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, 1996.
Percentage of
Asset Types Purchase Price(1) Total Assets
----------- ----------------- ------------
(Amounts in Thousands)
Computer Peripherals $2,429 30%
Reproduction Equipment 2,348 29
Financing Related to Cable Television Systems 1,350 17
Telecommunications 1,038 13
Mainframes 525 7
Capital Equipment Leased to Emerging
Growth Companies 250 3
Financing of Security Monitoring System Companies 57 1
Small Computer Systems 11 --
------ ----
TOTAL $8,008 100%
====== ====
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(1) These amounts include the Partnership's pro rata interest in equipment joint
ventures of $1,454,000 and original cost of outstanding loans of $1,406,000
at December 31, 1996.
Cable Television System Operations.
The Subsidiary's principal plants and real property consist of
electronic headend equipment, its plant (cable) and two parcels of land. The
Subsidiary's headends are located on the two parcels of land.
Item 3. Legal Proceedings.
The Registrant 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.
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, 1996
---------------------------------- -----------------------
Limited Partners 9,100
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PART II
Item 6. Selected Financial Data.
1996 1995 1994 (1) 1993 1992
---- ---- -------- ---- ----
(Amounts in Thousands Except for Per Unit Amounts)
Total Income $ 1,878 $ 2,868 $ 5,095 $ 5,613 $ 10,706
Net Income (Loss) 679 1,164 2,925 1,570 (1,540)
Total Assets 6,513 6,150 6,338 6,922 10,168
Distributions to Partners 239 949 3,796 3,794 14,269
Net Income (Loss) per Limited
Partnership Unit 1.77 3.04 7.63 4.09 (4.01)
Distributions per Limited
Partnership Unit .63 2.50 10.00 9.99 37.54
(1) Commencing in 1994, the amounts reflect the consolidated activity of the
Partnership and its subsidiary.
The above selected financial data should be read in conjunction with
the financial statements and related notes appearing elsewhere in this report.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Phoenix Leasing Cash Distribution Fund II and Subsidiary (the
Partnership) reported net income of $679,000 during the year ended December 31,
1996, as compared to net income of $1,164,000 and $2,925,000 during 1995 and
1994, respectively. The decrease in net income during 1996, as compared to 1995,
is a result of a decline in total revenues which exceeded the decline in total
expenses. The decrease in earnings for the year ended December 31, 1995,
compared to 1994, was due to a decrease in rental income and the absence of
income from a settlement, as described below.
Total revenues declined by $990,000 during 1996, as compared to a
decline of $2,227,000 during 1995, when compared to the previous year. The
decrease in total revenues for both years is partially attributable to
reductions in rental income and gain on sale of equipment. Rental income
decreased by $210,000 and $1,491,000 for the year ended December 31, 1996 and
1995, respectively, compared to the prior year, and the gain on sale of
equipment decreased by $344,000 and $378,000 for 1996 and 1995, respectively.
The decline for rental income is a result of a reduction in the amount of
equipment owned by the Partnership. At December 31, 1996, the Partnership owned
equipment with an aggregate original cost of $5.1 million, compared to $7.1
million at December 31, 1995 and $16.6 million at December 31, 1994.
The decrease in gain on sale of equipment for both 1996 and 1995 is
attributable to a reduction in the amount of equipment sold, as well as a
decrease in the market value of an aging equipment portfolio. During the year
ended December 31, 1996, the Partnership sold equipment with an aggregate
original cost of $2 million, compared to $9.5 million during the year ended
December 31, 1995 and $22.5 million during the year ended December 31, 1994.
Proceeds received from the sale of equipment were $141,000, $428,000 and
$968,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
An additional factor contributing to the decline in total revenues for
the year ended December 31, 1996, compared to 1995, is the decrease in interest
income from notes receivable of $526,000. Interest income from notes receivable
was higher than usual during 1995 as a result of a payoff of a defaulted note
receivable from a cable television system operator. The Partnership had
suspended the accrual of interest income on this note. Upon payoff, the proceeds
were first applied against the outstanding balance, with the excess proceeds
being recognized as interest income. Such an event did not occur during 1996.
Interest income from notes receivable increased during the year ended
December 31, 1995, compared to 1994, due to the recognition of interest income
that had been deferred until the maturity of the note. This note matured in July
of 1996. The Partnership had been limiting the amount of interest recognized on
this note to the amount of payments received, thereby deferring the recognition
of a portion of the deferred interest until the loan was paid off.
In addition to the declines in rental income and gain on sale of
equipment experienced in 1995, the absence of a settlement, compared to a
settlement of $1,180,000 during 1994, also contributed to reducing total
revenues for the year ended December 31, 1995, compared to 1994. The settlement
income recognized during 1994 was composed of cash, common stock, receivables,
assigned rents from a pool of leased equipment, and credits for goods and
services.
Total expenses decreased by $468,000 during 1996, compared to 1995, and
decreased by $484,000 during 1995, compared to 1994. The most significant
decrease in total expenses for the year ended December 31, 1996, compared to
1995, came from depreciation and amortization expense and lease related
operating expenses. Depreciation and amortization expense decreased by $205,000
for the year ended December 31, 1996, compared to the prior year due to an
increasing portion of the Partnership's equipment lease portfolio reaching the
end of its depreciable or amortizable term.
The decrease in lease related operating expenses also contributed to
the decline in total expenses for the year ended December 31, 1996, compared to
1995, but was a major factor contributing to the decrease in total expenses for
the year ended December 31, 1995, compared to 1994. Lease related operating
expenses decreased by $196,000 and $456,000 for 1996 and 1995, respectively,
compared to the prior year. The decrease in lease related operating expenses for
both years is a result of a decline in maintenance, administrative and residual
sharing expenses on the Partnership's equipment leased pursuant to a purchase
agreement with the manufacturer of the equipment. These expenses decreased as a
result of the reduction in the revenues received from this equipment.
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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 Partnership.
Cable Television System Operations
The Partnership owns a majority interest in a cable television system
that it received through the foreclosure on a defaulted note receivable on
September 15, 1994. Only the results of operations since September 15, 1994 are
included in the consolidated results of operations of the Partnership for the
year ended December 31, 1994. As a result, this cable television system did not
generate significant revenues during 1994. During 1996 and 1995, the Partnership
reported cable subscriber revenues of $566,000 and $589,000, respectively, and
total expenses of $582,000 and $590,000, respectively, from this cable
television system.
Joint Ventures
The Partnership reported earnings from joint ventures of $379,000,
$342,000 and $6,000 for the year ended December 31, 1996, 1995 and 1994,
respectively. Earnings from joint ventures remained relatively the same during
1996 as compared to 1995. The considerable increase in 1995 was a result of a
full year's earnings from the Partnership's investment in a new equipment joint
venture that was formed on October 28, 1994. There were no significant earnings
from this joint venture during 1994.
Liquidity and Capital Resources
The Partnership's primary source of liquidity comes from equipment
leasing and financing activities. The Partnership has contractual obligations
with a diversified group of 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.
As another source of liquidity, the Partnership owns a majority
interest in a cable television company that it acquired ownership through
foreclosure on a defaulted note receivable. This cable television company is
expected to generate a positive cash flow, which will first be used for capital
improvements and upgrades to the system in order to maximize the value to be
received upon the eventual sale of the system. Any excess cash from operations
or the sale of the system will then be distributed to the Partnership in
accordance with its ownership interest. The cable television system operations
are currently being marketed for sale. 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. As mentioned previously, the amount
the Partnership will ultimately realize could materially differ from the net
carrying value of the cable system as a result of continued technological change
affecting the cable television industry.
The Partnership reported net cash generated by leasing, financing and
cable television operations of $713,000, $1,572,000 and $2,052,000 during 1996,
1995 and 1994, respectively. The net cash generated by equipment leasing and
financing activities continues to decline as a result of the decrease in rental
income. As previously discussed, the decline in rental income is attributable to
a reduction in the amount of equipment owned by the Partnership.
Cash generated by leasing and financing activities were higher than
usual for the year ended December 31, 1995 due to the receipt of a final balloon
payment on one of the Partnership's notes receivable.
Distributions from joint ventures has become one of the primary sources
of cash generated by the Partnership. Cash distributions from joint ventures
were $671,000, $835,000 and $0 for the years ended December 31, 1996, 1995 and
1994, respectively. A significant portion of the distribution for both 1995 and
1996 is being made by an equipment joint venture which was formed in October of
1994.
The Partnership owns equipment being held for lease with an aggregate
original cost of $1,896,000, $2,078,000 and $3,650,000, and a net book value of
$0, $0 and $36,000, at December 31, 1996, 1995 and 1994, respectively. The
General Partner is actively engaged, on behalf of the Partnership, in
remarketing and selling the Partnership's off-lease equipment portfolio.
The cash distributed to partners for the years ended December 31, 1996,
1995 and 1994 were $239,000, $949,000 and $3,796,000, respectively. In
accordance with the Limited Partnership Agreement, the limited partners are
entitled to 95% of the cash available for distribution and the General Partner
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is entitled to 5%. The limited partners received distributions of $239,000,
$949,000 and $3,796,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. The cumulative distributions to Limited Partners are $80,203,000,
$79,964,000 and $79,015,000 at December 31, 1996, 1995 and 1994, respectively.
The General Partner did not receive payment for its share of cash distributions
for the years ended December 31, 1996, 1995 and 1994. While the General Partner
is entitled to receive 5% of the cash distributions, it has voluntarily elected
not to receive payment for its share of the cash distributions.
The Partnership's asset portfolio continues to decline as a result of
the ongoing liquidation of assets, and therefore it is expected that the cash
generated from operations will also decline. As the cash generated by
Partnership operations continues to decline, the rate of cash distributions made
to limited partners will also decline. The Partnership made its last quarterly
distribution to partners in January of 1996. Future distributions to partners
will be made on an annual basis with the next distribution scheduled to be made
on January 15, 1997. The distribution to be made to partners on January 15, 1997
will be slightly higher than the January 15, 1996 distribution amount. The
Partnership will reach the end of its term on December 31, 1997, at which time
it will sell any remaining assets at public auction and make a final
distribution to partners of the excess cash, if any. The General Partner is
actively marketing for sale the Partnership's net assets and it is expected,
based on current estimates of fair market value, that the net carrying value of
those assets will ultimately be recovered. However, the amounts the Partnership
will ultimately realize from the disposition of assets could differ from the net
carrying value at December 31, 1996.
The Partnership has been adversely impacted by several factors that
have resulted in returns and recovery of investment in lower than anticipated
amounts. The factors impacting the Partnership have been the economic recession
in the United States, the rate of obsolescence of computer equipment, the market
demand and remarketability for equipment owned by the Partnership, aggressive
manufacturer sales practices and a general unavailability of debt to companies.
All of these factors have resulted in the decline in revenues and the reduced
distributions to partners.
Cash generated from leasing and financing operations has been and is
anticipated to continue to be sufficient to meet the 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 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.
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Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PHOENIX LEASING CASH DISTRIBUTION FUND II AND SUBSIDIARY
YEAR ENDED DECEMBER 31, 1996
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REPORT OF INDEPENDENT AUDITORS
The Partners
Phoenix Leasing Cash Distribution Fund II
We have audited the consolidated financial statements of Phoenix Leasing Cash
Distribution Fund II (a California limited partnership) and Subsidiary listed in
the accompanying index to financial statements (Item 14(a)). Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and the schedule are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements and the schedule 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 and schedule 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 listed in the accompanying
index to financial statements (Item 14(a)) present fairly, in all material
respects the consolidated financial position of Phoenix Leasing Cash
Distribution Fund II and Subsidiary at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
San Francisco, California
January 20, 1997
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PHOENIX LEASING CASH DISTRIBUTION FUND II AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands Except for Unit Amounts)
December 31,
1996 1995
---- ----
ASSETS
Cash and cash equivalents $3,077 $1,951
Accounts receivable (net of allowance for losses on
accounts receivable of $18 and $67 at December 31,
1996 and 1995, respectively) 137 110
Notes receivable (net of allowance for losses on
notes receivable of $358 at December 31, 1996
and 1995) 1,263 1,390
Equipment on operating leases and held for lease
(net of accumulated depreciation of $3,674 and
$5,061 at December 31, 1996 and 1995, respectively) 81 99
Net investment in financing leases -- 248
Investment in joint ventures 703 995
Cable systems, property and equipment (net of
accumulated depreciation of $808 and $640 at
December 31, 1996 and 1995, respectively) 895 997
Deferred income tax asset 115 118
Other assets 242 242
------ ------
Total Assets $6,513 $6,150
====== ======
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 558 $ 584
Minority interest in subsidiary 447 541
------ ------
Total Liabilities 1,005 1,125
------ ------
Partners' Capital:
General Partner 111 104
Limited Partners, 400,000 units authorized,
386,308 units issued and 379,583 units
outstanding at December 31, 1996 and 1995 5,328 4,895
Unrealized gains on available-for-sale securities 69 26
------ ------
Total Partners' Capital 5,508 5,025
------ ------
Total Liabilities and Partners' Capital $6,513 $6,150
====== ======
The accompanying notes are an integral
part of these statements.
<PAGE>
Page 14 of 32
PHOENIX LEASING CASH DISTRIBUTION FUND II AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands Except for Per Unit Amounts)
For the Years Ended December 31,
1996 1995 1994
---- ---- ----
INCOME
Rental income $ 632 $ 842 $ 2,333
Gain on sale of equipment 99 443 821
Equity in earnings from joint ventures 379 342 6
Interest income, notes receivable 54 580 300
Gain on sale of securities -- -- 203
Cable subscriber revenue 566 589 198
Settlement -- -- 1,180
Other income 148 72 54
------- ------- -------
Total Income 1,878 2,868 5,095
------- ------- -------
EXPENSES
Depreciation and amortization 283 488 474
Lease related operating expenses 150 346 802
Program services, cable systems 183 180 72
Management fees to General Partner
and affiliate 63 125 161
Provision for losses on receivables 6 10 2
Legal expense 85 156 284
Reimbursed administrative costs to
General Partner 143 162 147
General and administrative expenses 281 195 204
------- ------- -------
Total Expenses 1,194 1,662 2,146
------- ------- -------
NET INCOME BEFORE MINORITY INTEREST
AND INCOME TAXES 684 1,206 2,949
Minority interest in earnings
of subsidiary (1) (3) (5)
Income tax expense of subsidiary (4) (39) (19)
------- ------- -------
NET INCOME $ 679 $ 1,164 $ 2,925
======= ======= =======
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 1.77 $ 3.04 $ 7.63
======= ======= =======
ALLOCATION OF NET INCOME:
General Partner $ 7 $ 12 $ 29
Limited Partners 672 1,152 2,896
------- ------- -------
$ 679 $ 1,164 $ 2,925
======= ======= =======
The accompanying notes are an integral
part of these statements.
<PAGE>
<TABLE>
Page 15 of 32
PHOENIX LEASING CASH DISTRIBUTION FUND II AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(Amounts in Thousands Except for Unit Amounts)
<CAPTION>
General
Partner's Limited Partners' Unrealized Total
Amount Units Amount Gains Amount
------ ------------------ ----- ------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 63 379,583 $ 5,592 $-- $ 5,655
Distributions to partners ($10.00 per
limited partnership unit) -- -- (3,796) -- (3,796)
Net income 29 -- 2,896 -- 2,925
---- ------- ------- --- -------
Balance, December 31, 1994 92 379,583 4,692 -- 4,784
Distributions to partners ($2.50 per
limited partnership unit) -- -- (949) -- (949)
Change for the year in unrealized gains on
available-for-sale securities -- -- -- 26 26
Net income 12 -- 1,152 -- 1,164
---- ------- ------- --- -------
Balance, December 31, 1995 104 379,583 4,895 26 5,025
Distributions to partners ($.63 per -- -- (239) -- (239)
limited partnership unit)
Change for the year in unrealized gains on -- -- -- 43 43
available-for-sale securities
Net income 7 -- 672 -- 679
---- ------- ------- --- -------
Balance, December 31, 1996 $111 379,583 $ 5,328 $69 $ 5,508
==== ======= ======= === =======
The accompanying notes are an integral
part of these statements.
</TABLE>
<PAGE>
Page 16 of 32
PHOENIX LEASING CASH DISTRIBUTION FUND II AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
For the Years Ended December 31,
1996 1995 1994
---- ---- ----
Operating Activities:
Net income $ 679 $ 1,164 $ 2,925
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 283 488 474
Gain on sale of equipment (99) (443) (821)
Equity in earnings from joint ventures (379) (342) (6)
Minority interest in earnings of subsidiary 1 3 5
Recovery of losses on notes receivable -- (7) --
Provision for losses on accounts receivable 6 17 2
Gain on sale of securities -- (15) (203)
Decrease (increase) in accounts receivable (33) 82 90
Decrease in accounts payable, accrued
expenses (26) (400) (157)
Decrease in other assets 2 29 --
Settlement -- -- (711)
Decrease (increase) in deferred income
tax asset (1) 24 18
Other -- -- 12
------- ------- -------
Net cash provided by operating activities 433 600 1,628
------- ------- -------
Investing Activities:
Principal payments, financing leases 153 316 385
Principal payments, notes receivable 127 656 39
Proceeds from sale of equipment 141 428 968
Proceeds from sale of securities -- 15 245
Distributions from joint ventures 671 835 --
Purchase of equipment -- (32) (813)
Investment in notes receivable -- -- (106)
Investment in joint ventures -- -- (34)
Investment in securities -- -- (42)
Cable systems, property and equipment (65) (86) (128)
Payment of acquisition fees -- (1) (4)
------- ------- -------
Net cash provided by investing activities 1,027 2,131 510
------- ------- -------
Financing Activities:
Payments of principal, notes payable -- -- (174)
Distributions to minority partners (95) (31) --
Distributions to partners (239) (949) (3,796)
------- ------- -------
Net cash used by financing activities (334) (980) (3,970)
------- ------- -------
Increase (decrease) in cash and cash equivalents 1,126 1,751 (1,832)
Cash and cash equivalents, beginning of period 1,951 200 2,032
------- ------- -------
Cash and cash equivalents, end of period $ 3,077 $ 1,951 $ 200
======= ======= =======
Supplemental Cash Flow Information:
Cash paid for interest expense $ -- $ -- $ 3
Cash paid for income taxes $ 4 $ 16 $ 3
The accompanying notes are an integral
part of these statements.
<PAGE>
Page 17 of 32
PHOENIX LEASING CASH DISTRIBUTION FUND II AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
Note 1. Organization and Partnership Matters.
Phoenix Leasing Cash Distribution Fund II, a California limited
partnership (the "Partnership"), was formed on June 28, 1984, 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, and to provide financing to emerging
growth companies and cable television system operators. The Partnership's
minimum investment requirements were met November 24, 1986. The Partnership will
reach the end of its term on December 31, 1997, at which time it will sell any
remaining assets at public auction and make a final distribution to the partners
of the excess cash, if any. The General Partner is actively marketing for sale
the Partnership's net assets and it is expected, based on current estimates of
fair market value, that the net carrying value of those assets will ultimately
be recovered. However, the amounts the Partnership will ultimately realize from
the disposition of assets could differ from the net carrying value at December
31, 1996.
On September 15, 1994, the Partnership, along with three other
affiliated partnerships (collectively "the Partnerships"), entered into a
settlement agreement with a borrower to transfer ownership of all of the
outstanding stock in a cable television system company to a corporation owned by
the partnerships in full satisfaction of a defaulted note receivable to the
partnerships. As a result of this settlement agreement, Concept Cablevision of
South Carolina, Inc. transferred 100% of the outstanding stock to Phoenix
Concept Cablevision, Inc., a majority owned (58%) subsidiary of the Partnership.
The net carrying value of the defaulted note, including other capitalized costs,
to the Partnership at the settlement date was approximately $769,000 and was
carried over (from in-substance foreclosed cable systems) to the basis in the
cable system. Phoenix Concept Cablevision, Inc. (the Subsidiary) was formed
under the laws of Nevada on December 22, 1992 (hereinafter, the Partnership and
the Subsidiary are collectively referred to as the Consolidated Partnership).
The acquisition of Concept Cablevision of South Carolina Inc. by the Subsidiary
through foreclosure was accounted for using the "purchase method" of accounting
in which the transfer price was allocated in accordance with the relative fair
market value of the assets acquired and liabilities assumed.
For financial reporting purposes, Partnership income shall be allocated
as follows: (a) first, to the General Partner until the cumulative income so
allocated is equal to the cumulative distributions to the General Partner, (b)
second, before redemption fees, 1% to the General Partner and 99% to the Limited
Partners until the cumulative income so allocated is equal to any cumulative
Partnership loss and syndication expenses for the current and all prior
accounting periods, and (c) the balance, if any, to the Unit Holders. All
Partnership losses shall be allocated, before redemption fees, 1% to the General
Partner and 99% to the Unit Holders.
The General Partner is entitled to receive 5% of all cash distributions
until the Limited Partners have recovered their initial capital contributions
plus a cumulative return of 12% per annum. Thereafter, the General Partner will
receive 15% of all cash distributions. 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.
During the year ended December 31, 1992, the General Partner elected to make an
early contribution of $1,404,000, and the $189,000 in accrued distributions to
the General Partner at December 31, 1991 was reversed. In addition, the General
Partner did not draw its share of the 1996, 1995, 1994, 1993 and 1992 cash
available for distribution. As compensation for management services, the General
Partner receives a fee payable quarterly, in an amount equal to 3.5%, subject to
certain limitations, of the Partnership's gross revenues for the quarter from
which such payment is being made, which revenues shall include, but are not
limited to, rental receipts, maintenance fees, proceeds from the sale of
equipment and interest 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 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 Subsidiary level are not
subject to management fees at the Partnership level.
The General Partner will be compensated for services performed in
connection with the analysis of assets available to the Partnership, the
selection of such assets and the acquisition thereof, including obtaining
lessees for the equipment and negotiating and concluding master lease agreements
with certain lessees. As compensation for such acquisition services, the General
Partner will receive a fee equal to 4%, subject to certain limitations, of (a)
the purchase price of equipment acquired by the Partnership, or equipment leased
<PAGE>
Page 18 of 32
to customers by manufacturers, the financing for which is provided by the
Partnership, or (b) financing provided to businesses such as cable operators,
emerging growth companies, or security monitoring system companies, payable upon
such acquisition or financing, as the case may be. Acquisition fees are
amortized over the life of the assets principally on a straight-line basis.
A schedule of compensation paid and distributions made to the General
Partner and affiliate for the years ended December 31 follows:
1996 1995 1994
---- ---- ----
(Amounts in Thousands)
Management fees $ 63 $125 $161
Acquisition fees -- 1 4
---- ---- ----
$ 63 $126 $165
==== ==== ====
Note 2. Summary of Significant Accounting Policies.
Principles of Consolidation. The consolidated financial statements
include all of the accounts of the Partnership, and its majority owned
subsidiary, Phoenix Concept Cablevision Inc., a Nevada corporation, since the
date of acquisition, September 15, 1994. The Partnership owns approximately 58%
of the outstanding shares of Phoenix Concept Cablevision Inc. Phoenix Concept
Cablevision Inc. owns 100% of the outstanding shares of Concept Cablevision of
South Carolina, Inc., a Delaware corporation. All significant intercompany
accounts and transactions have been eliminated in the 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. The Partnership reviews its estimates of residual value at least
annually. If a decline in value has occurred which is other than temporary, a
reduction in the investment is recognized currently.
Under the operating method of accounting for leases, the leased
equipment is recorded as an asset at cost and depreciated. The Partnership's
leased equipment is depreciated primarily on 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 address, among other things,
recent and anticipated technological developments affecting computer equipment
and competitive factors within the computer marketplace. Although remarketing
rental rates are expected to decline in the future with respect to some of the
Partnership's rental equipment, such rentals are expected to exceed projected
expenses and depreciation. Where reviews of the equipment portfolio indicate
that rentals plus anticipated sales proceeds will not exceed expenses in any
future period, the Partnership revises its depreciation policy and accelerates
depreciation as appropriate.
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 statement of
operations includes the operating activity of the Subsidiary for the year ended
December 31, 1996, 1995 and for the period from the date of acquisition
(September 15, 1994) to December 31, 1994. The Subsidiary owns and operates a
cable television system located in the state of South Carolina, which currently
consists of two headend locations and 81 miles of plant passing approximately
3,710 homes and has approximately 1,931 cable subscribers at December 31, 1996.
The cable television system serves the communities of Holly Hill, St. George,
Reevesville, Eutawville, certain unincorporated areas in Dorchester County and
other communities in Orangeburg County. The cable system operates under six
non-exclusive franchise agreements with each of the stated municipalities. These
cable franchise agreements expire between the years 1997 and 2006.
Property, cable systems and equipment are carried at cost, which is not
in excess of the fair market value, are depreciated using the straight-line
<PAGE>
Page 19 of 32
method over the estimated service lives ranging from five to ten 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.
The cable television system operations are currently being marketed for
sale. 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. As mentioned previously, the amount the Partnership will ultimately
realize could materially differ from the net carrying value of the cable system
as a result of continued technological change affecting the cable television
industry.
Investments in Joint Ventures. Minority investments in net assets of the
equipment 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. The net carrying value is not in
excess of the estimated fair market value.
Investment in Available-for-Sale Securities . The Partnership has
investments in stock warrants in public companies. The Partnership has
classified its investments in stock warrants as available-for-sale in accordance
with FASB Statement No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Available-for-sale securities are stated at their fair
market value, with unrealized gains and losses reported as a separate component
of partners' capital. The stock warrants held by the Partnership were granted by
certain lessees or borrowers as additional compensation for leasing or financing
equipment. At the date of grant, such warrants were determined to have no fair
market value and were recorded at their historical cost of $0.
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. When a note
receivable is classified as impaired, income recognition is discontinued. 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.
Reclassification. Certain 1995 and 1994 amounts have been reclassified
to conform to the 1996 presentation.
Cash and Cash Equivalents. Cash and cash equivalents include deposits at
banks, investments in money market funds and other highly liquid short-term
investments with original maturities of less than 90 days. The Partnership
places its cash deposits in temporary cash investments with credit worthy, high
quality financial institutions. The concentration of such cash deposits and
temporary cash investments is not deemed to create a significant risk to the
Partnership.
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.
<PAGE>
Page 20 of 32
Non-Cash Investing Activities. During the year ended December 31, 1996
and 1995, the Partnership recorded an unrealized gain on available-for-sale
securities which has been included in Other Assets of $43,000 and $26,000,
respectively.
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 in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Note 3. Accounts Receivable.
Accounts receivable consist of the following at December 31:
1996 1995
---- ----
(Amounts in Thousands)
Lease payments $ 73 $ 119
Cable system service 68 54
Property taxes 10 --
Other 4 4
----- -----
155 177
Less: allowance for losses on accounts receivable (18) (67)
----- -----
Total $ 137 $ 110
===== =====
Note 4. Notes Receivable.
Notes receivable consist of the following at December 31:
1996 1995
---- ----
(Amounts in Thousands)
Note receivable from a cable television
system operator with stated interest
of 19% per annum, receivable in
installments of 108 months, collateralized
by a security interest in the cable system
assets. This note has a graduated repayment
schedule followed by a balloon payment. $ 1,591 $ 1,713
Note receivable from a security monitoring
company with stated interest at 16% per
annum, with payments to be taken out of
the monthly payments received from assigned
contracts, collateralized by all assets of
the borrower. At the end of 48 months, the
remaining balance, if any, is due and payable. 30 35
------- -------
1,621 1,748
Less: allowance for losses on notes receivable (358) (358)
------- -------
Total $ 1,263 $ 1,390
======= =======
The Partnership's note receivable to a cable television system operator
provides a payment rate in an amount that is less than the contractual interest
rate. The difference between the payment rate and the contractual interest rate
is added to the principal and 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, the
amount of interest being recognized on the Partnership's outstanding notes
receivable to cable television system operators is being limited to the amount
of the payments received, thereby deferring the recognition of a portion of the
deferred interest until the loan is paid off.
At December 31, 1996, the recorded investment in notes that are
considered to be impaired was $1,621,000. Included in this amount is $30,000 of
impaired notes for which the related allowance for losses is $23,000 and
$1,591,000 of impaired notes for which there is no allowance. The average
<PAGE>
Page 21 of 32
recorded investment in impaired loans during the year ended December 31, 1996
was approximately $1,279,000. The Partnership recognized interest income of
$54,000 on impaired notes during the year ended December 31, 1996.
At December 31, 1995, the recorded investment in notes that are
considered to be impaired was $36,000 for which the related allowance for losses
is $23,000. The average recorded investment in impaired loans during the year
ended December 31, 1995 was approximately $89,000. The Partnership recognized
interest income of $73,000 on impaired notes during the year ended December 31,
1995.
The Partnership received a settlement on one of its notes receivable
during the year ended December 31, 1995. This note receivable, which was
impaired, was from a cable television operator. The Partnership received
$140,000 as a settlement for this note receivable of which $68,000 was applied
towards the outstanding note receivable balance and the remaining $72,000
applied towards interest income. There was an allowance for losses on notes
receivable of $7,000 for this note receivable. Due to the receipt of a
settlement which exceeded the net carrying value of the note receivable, this
allowance was reversed and recognized as income.
The activity in the allowance for losses on notes receivable during the
years ended December 31, is as follows:
1996 1995
---- ----
(Amounts in Thousands)
Beginning balance $ 358 $ 368
Provision for (recovery of) losses -- (7)
Write downs -- (3)
----- -----
Ending balance $ 358 $ 358
===== =====
Note 5. Equipment on Operating Leases and Investment in Financing Leases.
Equipment on lease consists primarily of computer peripheral equipment,
telecommunications and reproduction equipment.
The Partnership's operating leases are for initial lease terms of
approximately 12 to 48 months. During the remaining terms of existing operating
leases, the Partnership will not recover all of the undepreciated cost and
related expenses of its rental equipment, and therefore must remarket a portion
of its equipment in future years.
The Partnership has agreements with some of the manufacturers of its
equipment, whereby such manufacturers will undertake to remarket off-lease
equipment on a best-efforts basis. This agreement permits 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.
The Partnership has entered into direct lease arrangements with lessees
consisting of Fortune 1000 companies and other businesses in different
industries located throughout the United States. 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.
The net investment in financing leases consists of the following at
December 31:
1996 1995
---- ----
(Amounts in Thousands)
Minimum lease payments to be received $ -- $ 159
Estimated residual value of leased
equipment (unguaranteed) -- 95
Less: unearned income -- (6)
------ -----
Net investment in financing leases $ -- $ 248
====== =====
Minimum rentals to be received on noncancellable operating leases for
the years ended December 31 are as follows:
<PAGE>
Page 22 of 32
Operating
(Amounts in Thousands)
1997.................................. $105
1998.................................. 1
1999 and thereafter................... --
----
Total $106
====
The Partnership receives contingent monthly rental payments on its
reproduction equipment that is not included in the minimum rentals to be
received. The contingent monthly rentals consist of a monthly rental payment
that is based upon actual machine usage. The monthly usage charge included in
income for the years ended December 31, 1996, 1995 and 1994 was $108,000,
$196,000 and $376,000, respectively.
The net book value of equipment held for lease at December 31, 1996 and
1995 amounted to $0.
Note 6. Cable Systems, Property and Equipment.
The cost of cable systems, property and equipment and the related
accumulated depreciation consist of the following at December 31:
1996 1995
---- ----
(Amounts in Thousands)
Distribution systems $ 989 $ 960
Headend equipment 344 338
Building 285 270
Land 21 21
Automobiles 64 48
------- -------
1,703 1,637
Less: accumulated depreciation (808) (640)
------- -------
Net property, cable systems and equipment $ 895 $ 997
======= =======
Depreciation expense totaled approximately $171,000 and $172,000 for
the year ended December 31, 1996 and 1995, respectively.
Note 7. 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
Cash Distribution Fund II has participated in the following equipment joint
ventures:
Weighted
Joint Venture Percentage Interest
------------- -------------------
Phoenix Leasing Joint Venture 1990-1 13.23%
Phoenix Joint Venture 1994-1 31.25
An analysis of the Partnership's investment in equipment joint
ventures is as follows:
<PAGE>
Page 23 of 32
<TABLE>
<CAPTION>
Net Investment Net Investment
at Beginning Equity In at End
Date of Period Contributions Earnings Distributions of Period
- ---- --------- ------------- -------- ------------- ---------
(Amounts in Thousands)
<S> <C> <C> <C> <C> <C>
Year Ended
December 31, 1994 $ 19 $1,463 $ 6 $ 0 $1,488
====== ====== ====== ====== ======
Year Ended
December 31, 1995 $1,488 $ 0 $ 342 $ 835 $ 995
====== ====== ====== ====== ======
Year Ended
December 31, 1996 $ 995 $ 0 $ 379 $ 671 $ 703
====== ====== ====== ====== ======
</TABLE>
The aggregate combined financial information of the equipment joint
ventures as of December 31 and for the years then ended is presented as follows:
COMBINED BALANCE SHEETS
ASSETS
December 31,
1996 1995
---- ----
(Amounts in Thousands)
Cash and cash equivalents $ 372 $ 532
Accounts receivable 1,441 1,773
Operating lease equipment 526 1,021
Other assets 512 690
------ ------
Total Assets $2,851 $4,016
====== ======
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 733 $ 918
Partners' capital 2,118 3,098
------ ------
Total Liabilities and Partners' Capital $2,851 $4,016
====== ======
COMBINED STATEMENTS OF OPERATIONS
INCOME
For the Years Ended December 31,
1996 1995 1994
---- ---- ----
(Amounts in Thousands)
Rental income $2,357 $3,595 $ 2,583
Gain on sale of equipment 850 1,637 1,096
Other income 131 716 38
------ ------ -------
Total Income 3,338 5,948 3,717
------ ------ -------
<PAGE>
Page 24 of 32
EXPENSES
Depreciation 332 1,186 1,248
Lease related operating expenses 1,385 2,832 2,378
Management fee to the General Partner 119 286 197
Other expenses 125 268 61
------ ------ -------
Total Expenses 1,961 4,572 3,884
------ ------ -------
Net Income (Loss) $1,377 $1,376 $ (167)
====== ====== =======
As of December 31, 1996 and 1995, the Partnership's pro rata interest
in the equipment joint ventures' net book value of off-lease equipment was
$11,000 and $32,000, respectively.
The General Partner earns a management fee of 3.5% of the Partnership's
respective interest in the gross receipts of the joint venture. Revenues subject
to a management fee at the joint venture level are not subject to management
fees at the Partnership level.
Note 8. Accounts Payable and Accrued Expenses.
Accounts payable and accrued expenses consist of the following at
December 31:
1996 1995
---- ----
(Amounts in Thousands)
Equipment lease operations $227 $237
Sales and property taxes 111 124
General Partner and affiliates 50 47
Other 170 176
---- ----
Total $558 $584
==== ====
Note 9. Settlement.
On July 1, 1991, Phoenix Leasing Incorporated, as General Partner to the
Partnership and sixteen other affiliated partnerships, filed suit in the
Superior Court for the County of Marin, Case No. 150016, against Xerox
Corporation, a corporation with which the General Partner had entered into
contractual agreements for the acquisition and administration of leased
equipment. The lawsuit was settled out of court effective as of October 28, 1994
pursuant to the terms of a Confidential Settlement Agreement and Mutual Release.
The settlement agreement generally provides for compensation payable to the
Partnership and its affiliates in cash and kind, including the assignment by
Xerox of certain goods and services. The agreement further provides for the sale
by Xerox to the Partnership and its affiliates of equipment subject to lease.
The suit that was filed in the Superior Court for the County of Marin, Case No.
150016, has been dismissed with prejudice on the merits.
The Partnership's pro rata share of the Xerox settlement was $1,180,000,
which consists of cash of $469,000, and assigned monthly rentals and credits for
goods and services valued at $711,000. In addition, the Partnership purchased
additional leased equipment at an aggregate cost of $718,000. The Partnership,
along with sixteen other affiliated partnerships managed by the General Partner,
contributed its share of the assigned monthly rentals, credits for goods and
services and purchased equipment leases to Phoenix Joint Venture 1994-1, in
exchange for an interest in the joint venture.
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.
<PAGE>
Page 25 of 32
The net differences between the tax basis and the reported amounts of
the Partnership's assets and liabilities are as follows at December 31:
Reported Amounts Tax Basis Net Difference
---------------- --------- --------------
(Amounts in Thousands)
1996
- ----
Assets $5,852 $6,409 $(557)
Liabilities 344 307 37
1995
- ----
Assets $5,404 $6,033 $(629)
Liabilities 380 343 37
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.
For the years ended December 31, the Subsidiary's income tax provision
includes the following components:
1996 1995
---- ----
(Amounts in Thousands)
Current tax benefit (provision) $ 0 $(11)
Deferred tax benefit (provision) (4) (28)
--- ----
Income tax benefit (provision), net $(4) $(39)
=== ====
The income tax provision differed from the statutory federal rate
because of the following:
1996 1995
---- ----
(Amounts in Thousands)
Federal income tax benefit (provision),
based on statutory federal and state
income tax rate of 37.3% $ 70 $(19)
Depreciation and amortization (77) (9)
Bad debt expense 3 --
Prior year tax payments -- (11)
---- ----
Total income tax benefit (provision) $ (4) $(39)
==== ====
The Subsidiary's net deferred tax asset as of December 31, resulted
from the following temporary differences:
1996 1995
---- ----
(Amounts in Thousands)
Depreciation and amortization $ 30 $105
Bad debt expense 5 3
Net operating loss carryforward 80 10
---- ----
Total $115 $118
==== ====
As of December 31, 1996 and 1995, the Subsidiary's net operating loss
carryforward of $215,000 and $26,000, respectively, for federal and state tax
reporting purposes expires December 31, 2011 and December 31, 2010,
respectively. The Partnership has not provided a valuation allowance for the
deferred tax asset as of December 31, 1996 and 1995 based on the General
Partner's evaluation of the realization of the benefit is more likely than not.
<PAGE>
Page 26 of 32
Note 11. Related Entities.
The General Partner and its affiliates serve in the capacity of general
partner in other partnerships, all of which are engaged in the equipment leasing
and financing business.
Note 12. Reimbursed Costs to the General Partner.
The General Partner incurs certain administrative costs, such as data
processing, investor and lessee communications, lease administration,
accounting, equipment storage and equipment remarketing, for which it is
reimbursed by the Partnership. These expenses incurred by the General Partner
are to be reimbursed at the lower of the actual costs or an amount equal to 90%
of the fair market value for such services.
The reimbursed administrative costs to the General Partner were
$143,000, $162,000 and $147,000 for the years ended December 31, 1996, 1995 and
1994, respectively. The equipment storage, remarketing and data processing costs
reimbursed to the General Partner during the years ended December 31, 1996, 1995
and 1994 were $8,000, $13,000 and $32,000, respectively.
In addition, the General Partner receives a management fee and an
acquisition fee (see Note 1).
Note 13. Net Income and Distributions per Limited Partnership Unit.
Net income and distributions per limited partnership unit were based on
the Limited Partners' share of consolidated net income and distributions, and
the weighted average number of units outstanding of 379,583 for the years ended
December 31, 1996, 1995 and 1994. For the purposes of allocating consolidated
income and distributions to each individual Limited Partner, the Partnership
allocates consolidated net income and distributions based upon each respective
Limited Partner's ending capital account balance.
Note 14. Subsequent Events.
In January 1997, cash distributions of $474,000 were made to the
Limited Partners.
Note 15. Business Segments.
The Partnership currently operates in two business segments: the
equipment leasing and financing industry and the cable TV industry. The
operations in the cable TV industry are for the years ended December 31, 1996,
1995 and the period from the date of acquisition (September 15, 1994) to
December 31, 1994. Information about the Partnership's operations in these two
segments are as follows:
1996 1995 1994
---- ---- ----
(Amounts in Thousands)
Total Revenues
Equipment leasing and financing $1,295 $2,274 $4,896
Cable TV operations 583 594 199
------ ------ ------
Total $1,878 $2,868 $5,095
====== ====== ======
Net Income
Equipment leasing and financing $ 678 $1,160 $2,918
Cable TV operations 1 4 7
------ ------ ------
Total $ 679 $1,164 $2,925
====== ====== ======
Identifiable Assets
Equipment leasing and financing $5,244 $4,658 $4,774
Cable TV operations 1,269 1,492 1,564
------ ------ ------
Total $6,513 $6,150 $6,338
====== ====== ======
<PAGE>
Page 27 of 32
Depreciation and Amortization Expense
Equipment leasing and financing $ 83 $ 288 $ 424
Cable TV operations 200 200 50
------ ------ ------
Total $ 283 $ 488 $ 474
====== ====== ======
Capital Expenditures
Equipment leasing and financing $ -- $ 32 $ 813
Cable TV operations 65 86 128
------ ------ ------
Total $ 65 $ 118 $ 941
====== ====== ======
Note 16. Fair Value of Financial Instruments.
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument which it is practicable to estimate
that value.
Cash and Cash Equivalents
The carrying amount of cash and cash equivalents approximates fair value because
of the short maturity of these instruments.
Notes Receivable
The fair value of notes receivable is estimated based on the lesser of the
discounted expected future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings, or the estimated
fair value of the underlying collateral.
Securities, Available-for-Sale
The fair values of investments in available for sale securities are estimated
based on quoted market prices.
The estimated fair values of the Partnership's financial instruments are as
follows at December 31:
Carrying
Amount Fair Value
------ ----------
(Amounts in Thousands)
1996
- ----
Assets
Cash and cash equivalents $3,077 $3,077
Securities, available-for-sale 69 69
Notes receivable 1,263 1,599
1995
- ----
Assets
Cash and cash equivalents $1,951 $1,951
Securities, available-for-sale 26 26
Notes receivable 1,390 2,786
<PAGE>
Page 28 of 32
Item 9. Disagreements on Accounting and Financial Disclosure Matters.
None.
PART III
Item 10. 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 59, 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.
PARITOSH K. CHOKSI, age 43, is Senior Vice President, Chief Financial
Officer, Treasurer and a Director of PLI. He has been associated with PLI since
1977. Mr. Choksi oversees the finance, accounting, information services and
systems development departments of the General Partner and its Affiliates and
oversees the structuring, planning and monitoring of the partnerships sponsored
by the General Partner and its Affiliates. Mr. Choksi graduated from the Indian
Institute of Technology, Bombay, India with a degree in Engineering. He holds an
M.B.A. degree from the University of California, Berkeley.
GARY W. MARTINEZ, age 46, is Senior Vice President 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.
BRYANT J. TONG, age 42, is Senior Vice President, Financial Operations
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 41, is 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:
Phoenix Leasing American Business Fund, L.P.
Phoenix Leasing Cash Distribution Fund V, L.P.
<PAGE>
Page 29 of 32
Phoenix Income Fund, L.P.
Phoenix High Tech/High Yield Fund
Phoenix Leasing Cash Distribution Fund IV
Phoenix Leasing Cash Distribution Fund III
Phoenix Leasing Income Fund VII
Phoenix Leasing Income Fund VI
Phoenix Leasing Growth Fund 1982 and
Phoenix Leasing Income Fund 1977
Item 11. Executive Compensation.
<TABLE>
Set forth is the information relating to all direct remuneration paid or accrued by the Registrant during
the last year to the General Partner and its affiliate.
<CAPTION>
(A) (B) (C) (D)
Aggregate of
Name of Capacities Cash and cash- contingent
Individual or in which equivalent forms forms of
persons in group served of remuneration remuneration
- ---------------- ----------- --------------- ------------
(C1) (C2)
Securities or
Salaries, fees, property insurance
directors' fees, benefits or reim-
commissions and bursement, personal
bonuses benefits
--------------- -------------------
(Amounts in Thousands)
<S> <C> <C> <C>
Phoenix Leasing
Incorporated General Partner $ 37(1) $ 0 $ 0
Phoenix Cable
Management Inc. Manager 26(2) 0 0
----- ---- ---
$ 63 $ 0 $ 0
===== ==== ===
(1) consists of management and acquisition fees.
(2) consists of management fees.
</TABLE>
Item 12. 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 Represents a 5% interest in the Registrant's profits 100%
Interest and distributions, until the Limited Partners have
recovered their capital contributions plus
a cumulative return of 12% per annum,
compounded quarterly, on the unrecovered
portion thereof. Thereafter, the General
Partner will receive 15% interest in the
Registrant's profits and distributions.
Limited Partner
Interest 336 units .09%
</TABLE>
<PAGE>
Page 30 of 32
Item 13. Certain Relationships and Related Transactions.
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Page No.
--------
(a) 1. Financial Statements:
Consolidated Balance Sheets as of December 31, 1996
and 1995 13
Consolidated Statements of Operations for the Years
Ended December 31, 1996, 1995 and 1994 14
Consolidated Statements of Partners' Capital for the
Years Ended December 31, 1996, 1995 and 1994 15
Consolidated Statements of Cash Flows for the Years
ended December 31, 1996, 1995 and 1994 16
Notes to Consolidated Financial Statements 17-27
2. Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
and Reserves 32
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,
1996.
(c) Exhibits
21. Additional Exhibits
a) Listing of all subsidiaries of the Registrant:
Phoenix Concept Cablevision, Inc., a Nevada corporation
and majority (58%) owned subsidiary.
b) Financial Statements for Significant Subsidiaries:
Phoenix Joint Venture 1994-1 E21 1-10
27. Financial Data Schedule
<PAGE>
Page 31 of 32
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 CASH DISTRIBUTION FUND II
(Registrant)
BY: PHOENIX LEASING INCORPORATED,
A CALIFORNIA CORPORATION
GENERAL PARTNER
Date: March 25, 1997 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 and March 25, 1997
- ----------------------- Director of Phoenix Leasing Incorporated --------------
(Gus Constantin) General Partner
/S/ PARITOSH K. CHOKSI Chief Financial Officer, March 25, 1997
- ----------------------- Senior Vice President, --------------
(Paritosh K. Choksi) Treasurer and a Director of
Phoenix Leasing Incorporated
General Partner
/S/ BRYANT J. TONG Senior Vice President, March 25, 1997
- ----------------------- Financial Operations of --------------
(Bryant J. Tong) (Principal Accounting Officer)
Phoenix Leasing Incorporated
General Partner
/S/ GARY W. MARTINEZ Senior Vice President and a Director March 25, 1997
- ----------------------- of Phoenix Leasing Incorporated --------------
(Gary W. Martinez) General Partner
/S/ MICHAEL K. ULYATT Partnership Controller March 25, 1997
- ----------------------- of Phoenix Leasing Incorporated --------------
(Michael K. Ulyatt) General Partner
<PAGE>
<TABLE>
Page 32 of 32
PHOENIX LEASING CASH DISTRIBUTION FUND II AND SUBSIDIARY
SCHEDULE II
(Amounts in Thousands)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
Classification Balance at Charged to Charged to Deductions Balance at
Beginning of Expense Revenue End of
Period Period
- ------------------------------------- ------------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for losses on accounts
receivable $453 $ 2 $334 $ 38 $ 83
Allowance for losses on notes
receivable 368 0 0 0 368
---- ---- ---- ---- ----
Totals $821 $ 2 $334 $ 38 $451
==== ==== ==== ==== ====
Year ended December 31, 1995
Allowance for losses on accounts
receivable $ 83 $ 17 $ 0 $ 33 $ 67
Allowance for losses on notes
receivable 368 0 7 3 358
---- ---- ---- ---- ----
Totals $451 $ 17 $ 7 $ 36 $425
==== ==== ==== ==== ====
Year ended December 31, 1996
Allowance for losses on accounts
receivable $ 67 $ 6 $ 0 $ 55 $ 18
Allowance for losses on notes
receivable 358 0 0 0 358
---- ---- ---- ---- ----
Totals $425 $ 6 $ 0 $ 55 $376
==== ==== ==== ==== ====
</TABLE>
Exhibit 21 - Page 1 of 10
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Venturers of
Phoenix Joint Venture 1994-1
We have audited the accompanying balance sheets of Phoenix Joint Venture 1994-1
(a California general partnership) as of December 31, 1996 and 1995 and the
related statements of operations, venturers' capital and cash flows for the
years ended December 31, 1996, 1995 and for the period from inception (October
28, 1994) to December 31, 1994. These financial statements and the schedule
referred to below are the responsibility of the Joint Venture's management. Our
responsibility is to express an opinion on these financial statements and the
schedule 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 financial statements referred to above present fairly, in
all material respects, the financial position of Phoenix Joint Venture 1994-1 as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the two years then ended and for the period from inception (October
28, 1994) to December 31, 1994, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not a
required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Francisco, California
January 17, 1997
<PAGE>
Exhibit 21 - Page 2 of 10
PHOENIX JOINT VENTURE 1994-1
BALANCE SHEET
(Amounts in Thousands)
December 31,
1996 1995
---- ----
ASSETS
Cash and cash equivalents $ 291 $ 433
Accounts receivable (net of allowance for losses
on accounts receivable of $51 and $191 at
December 31, 1996 and 1995, respectively) 230 215
Credits receivable, net 1,079 1,237
Assigned monthly rentals, net 512 691
Equipment on operating leases and held for lease
(net of accumulated depreciation of $1,002 and
$849 at December 31, 1996 and 1995, respectively) 521 1,004
Capitalized acquisition fees (net of accumulated
amortization of $29 and $22 at December 31, 1996
and 1995, respectively) 5 17
--------- ---------
Total Assets $ 2,638 $ 3,597
========= =========
LIABILITIES AND VENTURERS' CAPITAL
Liabilities
Accounts payable and accrued expenses $ 318 $ 399
--------- ---------
Total Liabilities 318 399
--------- ---------
Venturers' Capital 2,320 3,198
--------- ---------
Total Liabilities and Venturers' Capital $ 2,638 $ 3,597
========= =========
The accompanying notes are an integral
part of these statements.
<PAGE>
Exhibit 21 - Page 3 of 10
PHOENIX JOINT VENTURE 1994-1
STATEMENT OF OPERATIONS
(Amounts in Thousands)
For the period
from inception
(October 28, 1994)
December 31, through
1996 1995 December 31, 1994
---- ---- -----------------
INCOME
Rental income $ 1,587 $ 2,767 $ 389
Gain on sale of equipment 329 417 --
Earned income, assigned monthly rentals 33 81 20
Other income 92 109 17
------- ------- -------
Total Income 2,041 3,374 426
------- ------- -------
EXPENSES
Lease related operating expenses 641 1,179 169
Depreciation 332 955 77
Amortization, acquisition fees 7 21 1
Management fees to General Partner 97 174 20
Provision for (recovery of) losses
on receivables (132) 191 --
General and administrative expenses 1 1 --
------- ------- -------
Total Expenses 946 2,521 267
------- ------- -------
NET INCOME $ 1,095 $ 853 $ 159
======= ======= =======
The accompanying notes are an integral
part of these statements.
<PAGE>
Exhibit 21 - Page 4 of 10
PHOENIX JOINT VENTURE 1994-1
STATEMENT OF VENTURERS' CAPITAL
(Amounts in Thousands)
Balance at inception, October 28, 1994 $ 0
Net income 159
Contributions 4,576
------
Balance, December 31, 1994 4,735
Net income 853
Distributions (2,390)
------
Balance, December 31, 1995 3,198
Net income 1,095
Distributions (1,973)
-------
Balance, December 31, 1996 $ 2,320
=======
The accompanying notes are an integral
integral part of these statements.
<PAGE>
<TABLE>
Exhibit 21 - Page 5 of 10
PHOENIX JOINT VENTURE 1994-1
STATEMENT OF CASH FLOWS
(Amounts in Thousands)
<CAPTION>
For the period
from inception
(October 28, 1994)
December 31, through
1996 1995 December 31, 1994
---- ---- -----------------
<S> <C> <C> <C>
Operating Activities:
Net income $ 1,095 $ 853 $ 159
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 332 955 77
Amortization of acquisition fees 7 21 1
Amortization of discount on credits (73) (92) (17)
Gain on sale of equipment (329) (417) --
Provision for (recovery of) losses on accounts
receivable (132) 191 --
Decrease (increase) in accounts receivable 117 (17) (389)
Decrease in credits receivable 231 278 --
Increase (decrease) in accounts payable and
accrued expenses (81) 103 295
Accrued interest, assigned monthly rentals -- -- (20)
------- ------- -------
Net cash provided by operating activities 1,167 1,875 106
------- ------- -------
Investing Activities:
Principal payments, assigned monthly rentals 179 199 --
Proceeds from sale of equipment 480 681 --
Payment of acquisition fees 5 (38) --
------- ------- -------
Net cash provided by investing activities 664 842 --
------- ------- -------
Financing Activities:
Distributions to Venturers (1,973) (2,390) --
------- ------- -------
Net cash used by financing activities (1,973) (2,390) --
------- ------- -------
Increase (decrease) in cash and cash equivalents (142) 327 106
Cash and cash equivalents, beginning of period 433 106 --
------- ------- -------
Cash and cash equivalents, end of period $ 291 $ 433 $ 106
======= ======= =======
</TABLE>
The accompanying notes are an integral
part of these statements.
<PAGE>
Exhibit 21 - Page 6 of 10
PHOENIX JOINT VENTURE 1994-1
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
Note 1. Organization.
Phoenix Joint Venture 1994-1 (the "Joint Venture"), a California
general partnership, was formed on October 28, 1994 for the purpose of investing
in a pool of reproduction equipment and receivables by several Phoenix Leasing
Partnerships (the "Venturers").
Income or loss is allocated to each Venturer based upon their
respective interest in the Joint Venture. Distributions are made in the same
manner.
As compensation for its management services, the Joint Venture pays a
management fee to Phoenix Leasing Incorporated (PLI) based upon the management
fee rate of each respective Venturer of the Joint Venture applied to the
Venturers' respective interest in the Joint Venture's gross revenues for the
quarter, which revenue generally incudes rental and note receipts, proceeds from
the sale of equipment and other income. Any revenues subject to a management fee
at the Joint Venture level will not be subject to a management fee at the
Venturers' level.
As compensation for services performed in connection with the analysis
of equipment available to the Joint Venture, the Managing Venturer receives an
acquisition fee based on the acquisition fee rate of each respective Venturer of
the Joint Venture applied to the Venturer's respective interest in the Joint
Venture's purchase price of equipment acquired by the Joint Venture.
Acquisition fees are amortized over the average expected life of the
assets, principally on a straight-line basis.
Note 2. Summary of Significant Accounting Policies.
Leasing Operations - The Joint Venture's leasing operations consist of
reproduction equipment manufactured by Xerox Corporation. The leases have been
classified as operating leases.
Under the method of accounting for operating leases, the leased
equipment is recorded as an asset at cost and depreciated on a straight-line
basis over the estimated useful life of five years. Rental income for the year
is determined on the basis of rental payments due for the period under the terms
of the lease. Maintenance and repairs of the leased equipment are charged to
expense as incurred.
The Joint Venture's policy is to review periodically the probability of
recovering its undepreciated cost of equipment. Such reviews address, among
other matters recent and anticipated technological developments affecting
reproduction equipment and competitive factors within the reproduction equipment
marketplace. Although remarketing rental rates are expected to decline in the
future with respect to some of the Joint Venture's rental equipment, such
rentals are expected to exceed projected expenses, including depreciation.
Should subsequent reviews of the equipment portfolio indicate that rentals plus
anticipated sales proceeds will not exceed expenses in any future period, the
Joint Venture will revise its depreciation policy and may accelerate
depreciation as appropriate.
The Joint Venture has also been assigned the monthly rental payments
from a pool of engineering and graphics reprographic equipment owned by Xerox
Corporation. The Joint Venture has recorded these assigned monthly rentals at
the discounted value of the expected cash flows. The excess of the assigned
monthly rentals over the present value of the expected cash flows is recorded as
unearned income. Unearned income is credited to income monthly over the term of
the agreement on a declining basis to provide an approximate level rate of
return on the unrecovered cost of the investment.
Non-Cash Investing Activities. In October 1994, the Venturers formed
the Joint Venture to which they contributed the credits issued by Xerox
Corporation, the equipment purchased and the assigned monthly rentals from Xerox
Corporation as described in Notes 1, 3, 4 and 5 of the financial statements. The
following non-cash activities from this transaction were excluded from the
statement of cash flow.
<PAGE>
Exhibit 21 - Page 7 of 10
Amounts
In Thousands
------------
Credit receivable $1,406
Equipment purchased 2,300
Assigned monthly rentals 870
------
$4,576
======
Cash and Cash Equivalents - Cash and cash equivalents includes deposits
at banks and investments in money market funds.
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.
Note 3. Credits Receivable.
The Joint Venture owns credits issued by Xerox Corporation for the
purchase of products and services from Xerox Corporation and its subsidiaries.
The Credits granted are non-transferrable and are good for a period of seven
years at which time they expire. The credits will be used by Phoenix Leasing
Incorporated and affiliates, who will reimburse the Joint Venture for the fair
market value of the credits used.
The credits receivable consist of the following at December 31,
1996 1995
---- ----
(Amounts in Thousands)
Credits receivable $ 1,171 $ 1,402
Unamortized discount (92) (165)
------- -------
Credits receivable, net $ 1,079 $ 1,237
======= =======
Note 4. Assigned Monthly Rentals.
The Joint Venture has the right to receive payments on a pool of leased
equipment pursuant to the terms of an agreement with Xerox Corporation entered
into on October 28, 1994. Title to this equipment continues to be held by Xerox
Corporation. All of the monthly rental payments received pursuant to this
equipment, net of certain administrative and other costs, are passed along to
the Joint Venture and are applied towards the outstanding assigned monthly
rental balance and income. The end date of this agreement is the earlier of the
Joint Venture's receipt of $1.2 million in aggregate payments, 60 months from
the pool start date or the date on which no equipment remains subject to the
terms of the agreement. As of December 31, 1996 and 1995, the Joint Venture has
received cumulative assigned monthly rentals receipts of $491,000 and $280,000,
respectively, pursuant to this agreement.
Note 5. Equipment on Operating Leases.
Equipment on lease consists of reproduction equipment classified as
operating leases. During the initial terms of the existing operating leases the
Joint Venture will not recover all the undepreciated cost and related expenses
of its rental equipment and therefore must remarket a portion of its equipment
in future years.
Minimum rentals to be received on non-cancelable operating leases for
the years ended December 31, are as follows:
<PAGE>
Exhibit 21 - Page 8 of 10
(Amounts in Thousands)
1997........................................ $ 232
1998........................................ 39
1999 and future............................. 8
------
Total $ 279
======
The Joint Venture has an agreement with Xerox Corporation, whereby
Xerox Corporation provides administration, maintenance and repairs of leased
equipment on behalf of the Joint Venture. The agreement terminates upon the
earlier of (1) the Joint Venture receiving a specified dollar amount; (2) 66
months, or (3) the date on which no equipment remains. As compensation for these
services, Xerox deducts a fee from the monthly rentals and sales proceeds.
Also pursuant to the vendor agreement, Xerox Corporation undertakes to
remarket and refurbish off-lease equipment on a best efforts basis. This
agreement permits the Joint Venture to assume the remarketing function directly
if certain conditions contained in the agreement are not met. For its
remarketing services, Xerox Corporation is paid a remarketing and refurbishing
fee based on a specified percentage of the monthly rentals received by the Joint
Venture. On March 15, 1996, the agreement was amended to reduce the remarketing
and refurbishing fees paid to Xerox.
The Joint Venture also receives contingent rental payments on its
reproduction equipment that is not included in the minimum rentals to be
received. The contingent rentals consist of a monthly rental payment that is
based upon actual machine usage.
Note 6. Accounts Payable and Accrued Expenses.
Accounts payable and accrued expenses consist of the following at
December 31:
1996 1995
---- ----
(Amounts in Thousands)
Equipment lease operations $312 $368
PLI and affiliates 6 31
---- ----
Total $318 $399
==== ====
Note 7. Income Taxes.
Federal and state income tax regulations provide that taxes on the
income or loss of the Joint Venture are reportable by the Venturers on their
individual income tax returns. Accordingly, no provision for such taxes has been
made in the accompanying financial statements.
The net differences between the tax basis and the reported amounts of
the Partnership's assets and liabilities are as follows at December 31:
Reported Amounts Tax Basis Net Difference
---------------- --------- --------------
(Amounts in Thousands)
1996
- ----
Assets $2,638 $2,930 $ (292)
Liabilities 318 316 2
1995
- ----
Assets $3,597 $4,081 $ (484)
Liabilities 399 395 4
<PAGE>
Exhibit 21 - Page 9 of 10
Note 8. Related Entities.
The Joint Venture is sponsored and funded by various partnerships
managed by PLI. PLI serves in the capacity of general partner in other
partnerships and managing venturer in other joint ventures, all of which are
engaged in the equipment leasing and financing business.
Note 9. Fair Value of Financial Instruments.
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is practicable to
estimate that value.
Cash and Cash Equivalents
The carrying amount of cash and cash equivalents approximates fair value because
of the short maturity of these instruments.
Credits Receivable, Net
The fair value of credits receivable, net is estimated by the present value of
future cash flow discounted at an approximate fair value rate.
Assigned Monthly Rents, Net
The carrying amount of assigned monthly rents, net is estimated by taking the
present value of the projected cash flow expected to be received on the
portfolio of equipment that was assigned from Xerox pursuant to the agreement.
The estimated fair values of the Joint Venture's financial instruments
at December 31, 1996 and 1995 approximate the carrying amounts reported in the
balance sheet.
<PAGE>
<TABLE>
Exhibit 21 - Page 10 of 10
PHOENIX JOINT VENTURE 1994-1
SCHEDULE II
(Amounts in Thousands)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
Classification Balance at Charged to Charged to Deductions Balance at
Beginning of Expense Revenue End of
Period Period
- ------------------------------------- ------------ ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for credits receivable $320 $ 0 $ 0 $ 0 $320
---- ---- ---- ---- ----
Totals $320 $ 0 $ 0 $ 0 $320
==== ==== ==== ==== ====
Year ended December 31, 1995
Allowance for credits receivable $320 $ 0 $ 0 $ 80 $240
Allowance for losses on accounts
receivable 0 191 0 0 191
---- ---- ---- ---- ----
Totals $320 $191 $ 0 $ 80 $431
==== ==== ==== ==== ====
Year ended December 31, 1996
Allowance for credits receivable $240 $ 0 $ 0 $ 38 $202
Allowance for losses on accounts
receivable 191 0 132 8 51
---- ---- ---- ---- ----
Totals $431 $ 0 $132 $ 46 $253
==== ==== ==== ==== ====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,077
<SECURITIES> 0
<RECEIVABLES> 1,776
<ALLOWANCES> 376
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 5,461
<DEPRECIATION> 4,485
<TOTAL-ASSETS> 6,513
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 5,508
<TOTAL-LIABILITY-AND-EQUITY> 6,513
<SALES> 0
<TOTAL-REVENUES> 1,878
<CGS> 0
<TOTAL-COSTS> 1,194
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 683
<INCOME-TAX> 4
<INCOME-CONTINUING> 679
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 679
<EPS-PRIMARY> 1.77
<EPS-DILUTED> 0
</TABLE>
