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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
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 0-16615
PHOENIX LEASING CASH DISTRIBUTION FUND III,
A CALIFORNIA LIMITED PARTNERSHIP
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
California 68-0062480
- ------------------------------- ------------------------------------
(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, 516,716 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 III,
A CALIFORNIA LIMITED PARTNERSHIP
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I
Item 1. Business............................................... 3
Item 2. Properties............................................. 6
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................................ 7
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..................................... 31
PART III
Item 10. Directors and Executive Officers of the Registrant..... 31
Item 11. Executive Compensation................................. 32
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................. 32
Item 13. Certain Relationships and Related Transactions......... 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K............................................... 33
Signatures........................................................... 34
<PAGE>
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PART I
Item 1. Business.
General Development of Business.
Phoenix Leasing Cash Distribution Fund III, a California limited
partnership (the Partnership), was organized on June 29, 1987. The Partnership
was registered with the Securities and Exchange Commission with an effective
date of January 5, 1988 and shall continue to operate until its termination date
unless dissolved sooner due to the sale of substantially all of the assets of
the Partnership or a vote of the Limited Partners. The Partnership will
terminate on December 31, 1998. The General Partner is Phoenix Leasing
Incorporated, a California corporation. The General Partner or its affiliates
also is or has been a general partner in several other limited partnerships
formed to invest in capital equipment and other assets.
The initial public offering was for 400,000 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 600,000 units. The Partnership sold
528,151 units for a total capitalization of $132,037,750. The public offering
terminated on December 31, 1990. Of the proceeds received through the offering,
the Partnership has incurred $17,240,775 in organizational and offering
expenses.
Phoenix Black Rock Cable J.V. is a majority owned subsidiary of the
Partnership. The Subsidiary was formed under the laws of California on January
10, 1992 to own and operate a cable television system in the states of Nevada
and California. Phoenix Concept Cablevision of Indiana, L.L.C. is a wholly-owned
subsidiary of the Partnership. The Subsidiary was formed under the laws of
California on February 2, 1996 to own and operate a cable television system in
the state of Indiana. Phoenix Grassroots Cable Systems, L.L.C. is a majority
owned subsidiary of the Partnership. The Subsidiary was formed under the laws of
California on February 14, 1996 to own and operate a cable television system in
the states of Maine and New Hampshire. Hereinafter these entities are
collectively referred to as "the Partnership."
Narrative Description of Business.
The 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 $219,986,000. The average initial firm term of
contractual payments from equipment subject to lease was 38.56 months, and the
average initial net monthly payment rate as a percentage of the original
purchase price was 2.52%. The average initial firm term of contractual payments
from loans was 58.38 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 system operators and
others, on either a long-term or short-term basis. The types of equipment that
the Partnership will invest in will include, but is not limited to, 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 acquired equipment pursuant to either "Operating"
leases or "Financing" leases. At December 31, 1996, the remaining equipment
owned by the Partnership was classified as Operating leases. The Partnership has
also provided and intends to provide 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 were generally for a
longer term under which the non-cancellable rental payments due during the
initial term of the lease were at least sufficient to recover the purchase price
of the equipment. A significant portion of the net offering proceeds to the
Partnership has been invested in capital equipment subject to Operating leases.
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The Partnership has made secured loans to emerging growth companies,
security monitoring companies, cable television systems 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 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 contracts and other related
assets. In some cases the Partnership has also received personal guarantees from
the owners of the systems.
Several of the cable television system operators to whom the
Partnership provided financing have experienced financial difficulties. These
difficulties are believed to have been caused by several factors. Some of these
factors are: a significant reduction in the availability of debt from banks and
other financial institutions to finance the acquisition 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 obtained an ownership interest in several cable
system joint ventures that it obtained through foreclosure. These cable systems
currently generate a positive monthly cash flow and provided cash distributions
to the Partnership during 1996 and 1995. The cable systems are managed and
operated by an affiliate of the General Partner. Upon foreclosure, the assets of
the cable television system were booked at the lower of the Partnership's cost
(the carrying value of the note) or the estimated fair value of the cable
television system.
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 Systems Operations.
The Partnership's subsidiaries, Phoenix Black Rock Cable J.V., Phoenix
Concept Cablevision of Indiana, L.L.C. and Phoenix Grassroots Cable Systems,
L.L.C., are in the cable television system business segment of the Partnership's
operations.
During the year ended December 31, 1996, the Partnership acquired
through foreclosure two cable television systems. Phoenix Concept Cablevision of
Indiana, L.L.C. and Phoenix Grassroots Cable Systems, L.L.C. were formed to own
and operate these cable television systems.
Phoenix Concept Cablevision of Indiana, L.L.C., a wholly-owned
subsidiary of the Partnership, owns a cable television system in the state of
Indiana that was acquired through foreclosure on a defaulted note receivable to
the Partnership on February 2, 1996. The net carrying value of the Partnership's
share of this defaulted note receivable was approximately $4,321,000, which was
exchanged for a 100% ownership interest in this limited liability company.
The cable television system owned by Phoenix Concept Cablevision of
Indiana, L.L.C. is located in the counties of Benton, Parke, Greene, Montgomery,
Putnam, Boone, Hendricks, Clinton, Hamilton, and Madison in the state of
Indiana. The cable television system consists of headend equipment and 166 miles
of plant passing approximately 9,449 homes with approximately 5,462 subscribers.
The Subsidiary operates under non-exclusive franchise agreements with several of
these counties and with communities located within these counties.
Phoenix Grassroots Cable Systems, L.L.C., a majority owned subsidiary
of the Partnership, was acquired through foreclosure on a defaulted note
receivable on February 14, 1996. The net carrying value of the Partnership's
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share of this defaulted note receivable was approximately $9 million, which was
exchanged for a 98.5% ownership interest in this limited liability company. On
August 30, 1996, Phoenix Grassroots Cable Systems, L.L.C. sold all the assets
used in the operation of the cable television system, receiving net proceeds of
approximately $8.9 million, recognizing a gain on the sale of the assets of the
cable television system of $162,000. As a result of the sale of the cable
television system's assets, the Subsidiary ceased operations.
The cable television system owned by Phoenix Grassroots Cable Systems,
L.L.C. was located in the states of Maine in the counties of Franklin, Hancock,
Kennebec, Knox, Oxford and Penobscot and the state of New Hampshire in the
counties of Carroll, Coos, Grafton, Merrimack, Strafford and Sullivan. The cable
television system consisted of headend Equipment and 676 miles of plant passing
approximately 12,429 homes with approximately 7,197 subscribers. The Subsidiary
operated under non-exclusive franchise agreements with several of these counties
and with communities located within these counties.
Phoenix Black Rock Cable J.V., a majority-owned subsidiary which was
formed on January 10, 1992, sold all of its assets used in the operation of the
cable television system on January 17, 1996, receiving proceeds from the sale of
the assets of the cable system of $2.6 million, recognizing a gain on the sale
of these assets of $1.2 million. As a result of the sale of the cable television
system's assets, the Subsidiary ceased operations.
Phoenix Black Rock Cable J.V. owned a cable television system in the
states of Nevada and California that was acquired through foreclosure on a
defaulted note receivable to the Partnership on January 10, 1992. The net
carrying value of the Partnership's share of this defaulted notes receivable was
approximately $1.6 million, which was exchanged for an 81.22% ownership interest
in this joint venture.
The cable television system owned by Phoenix Black Rock Cable J.V. was
located in the counties of Clark and Nye in the state of Nevada and in the
county of Inyo in the state of California. The cable television system consisted
of headend equipment in five locations and 156 miles of plant passing
approximately 2,900 homes and approximately 1,820 cable subscribers. The
Subsidiary's cable television system served the communities of Pahrumph, Beatty
and Blue Diamond in Nevada and Cow Creek and Grapevine in California. The
Subsidiary operated under one non-exclusive franchise agreement with the county
of Nye in Nevada and a National Park Permit for Death Valley, California.
Phoenix Cable Management Inc. (PCMI), an affiliate of the General
Partner, provides day to day management services in connection with the
operation of the cable television systems.
Cable television systems receive signals transmitted by nearby radio
and television broadcast stations, microwave relay systems and communications
satellites and distribute the signals to subscribers via coaxial cable. The
subscribers pay a monthly fee to the cable television system for such services.
Cable television companies operate under a non-exclusive franchise agreement
granted by each local government authority. As part of the franchise agreement,
the franchisee typically pays a portion of the gross revenues of the system to
the local government.
The Partnership intends to own and operate the remaining cable system
until market conditions would enable a sale at acceptable terms. Any excess cash
generated from operations of the cable system will be used for upgrades and
improvements to the system in order to maximize the value of the system.
Competition. The Partnership's cable operations compete 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 which was passed allows 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 will be
immediately deregulated from most regulations and that the definition of a small
cable operator is under 600,000 subscribers. This will allow small operators to
raise rates if needed, and eliminate the need to provide franchise authorities
with costly rate filings and justifications. The bill also allows the local
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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
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.
Please 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.
Equipment Leasing and Financing Operations.
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 investments in joint ventures.
As of December 31, 1996, the Partnership owns equipment and has
outstanding loans to borrowers with an aggregate original cost of $16,007,000.
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 $ 6,848 43%
Computer Mainframes 5,654 35
Reproduction Equipment 1,223 8
Financing Related to Cable Television Systems and
Other Media 813 5
Capital Equipment Leased to Emerging Growth Companies 575 3
Small Computer Systems 401 3
Telecommunications Equipment 367 2
Miscellaneous 126 1
------- -----
TOTAL $16,007 100%
======= =====
(1) These amounts include the Partnership's pro rata interest in equipment joint
ventures of $887,000, and original cost of outstanding loans of $813,000 at
December 31, 1996.
Cable Television System Operations.
The Subsidiaries' principal plants and property consist of electronic
headend equipment and its plant (cable). The headends are located on land that
is owned or leased by the Subsidiaries.
Item 3. Legal Proceedings.
The Registrant is not a party to any material pending legal
proceedings.
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.
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PART II
Item 5. Market for the Registrant's Securities and Related Security Holder
Matters.
(a) The Registrant's limited partnership interests are not publicly
traded. There is no market for the Registrant's limited
partnership interests and it is unlikely that any will develop.
(b) Approximate Number of Equity Security Investments:
Number of Unit Holders
Title of Class as of December 31, 1996
---------------------------------- -----------------------
Limited Partners 12,592
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
1996 (1) 1995 (1) 1994 (1) 1993 1992
-------- -------- -------- ---- ----
(Amounts in Thousands Except for Per Unit Amounts)
<S> <C> <C> <C> <C> <C>
Total Income $ 7,075 $ 5,109 $ 7,697 $ 15,345 $ 25,221
Net Income (Loss) 4,542 3,800 945 194 (7,118)
Total Assets 20,991 20,381 24,322 32,435 58,644
Long-term Debt Obligations -- -- -- -- 1,479
Distributions to Partners 1,954 7,751 7,751 18,886 18,323
Net Income (Loss) per Limited Partnership
Unit 8.70 7.28 .85 -- (13.53)
Distributions per Limited Partnership Unit 3.78 15.00 15.00 36.43 35.17
(1) The 1996, 1995 and 1994 amounts reflect the consolidated activity of the Partnership and its subsidiaries.
</TABLE>
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 III, a California limited
partnership, and Subsidiaries (the Partnership) reported net income of
$4,542,000 during the year ended December 31, 1996, as compared to net income of
$3,800,000 and $945,000 during 1995 and 1994, respectively. The improvement in
earnings is attributable to a significant increase in cable subscriber revenues
and a gain on sale of assets of cable systems for the year ended December 31,
1996. The increase in net income during 1995, as compared to 1994, was primarily
attributable to the recognition, as income, the recovery of a portion of the
allowance for loan losses.
Total revenues increased by $1,966,000 for the year ended December 31,
1996, as compared to the previous year, but decreased by $2,588,000 during 1995,
compared to 1994. The increase in total revenues for the year ended December 31,
1996 is a result of an increase in subscriber revenues and a gain on sale of
assets of cable systems. The increase in subscriber revenues of $2,438,000 for
the year ended December 31, 1996, compared to 1995, is due to the addition of
two new cable systems during 1996.
The gain on sale of the assets of the cable television systems of
$1,347,000 for the year ended December 31, 1996, includes the sale of the assets
of the cable television system owned by Phoenix Black Rock Cable J.V., a
majority owned subsidiary of the Partnership. On January 17, 1996, Phoenix Black
Rock Cable J.V. sold the assets of its cable television system for $2.6 million,
recognizing a gain on sale of $1,185,000. The gain on sale of the assets of the
cable television systems also includes the sale of the assets of a cable
television system owned by Phoenix Grassroots Cable Systems, L.L.C., a majority
owned subsidiary of the Partnership. This cable television system was
transferred to the Partnership on February 14,1996. On August 30,1996, the
Partnership subsequently sold the assets of the cable system recording sales
proceeds of $8.9 million and a net gain on sale of $162,000. As a result of the
sale of the assets, Phoenix Black Rock Cable J.V. and Phoenix Grassroots Cable
System, L.L.C. ceased operations.
In February of 1996, the Partnership entered into agreements with two
cable television system operators to transfer all of the assets of the cable
television systems in satisfaction of defaulted notes receivable from these
cable television system operators to newly formed limited liability companies,
Phoenix Concept Cablevision of Indiana, L.L.C. and Phoenix Grassroots Cable
Systems, L.L.C. The assets received through foreclosure generally consist of
headend equipment, cable plant, franchise agreements, subscriber lists, leased
property, land, tools, vehicles and miscellaneous other assets. The assets of
Phoenix Grassroots Cable Systems, L.L.C. was subsequently sold during 1996. The
Partnership plans to continue to operate the remaining cable television system,
Phoenix Concept Cablevision of Indiana, L.L.C.
The Partnership reduced the allowance for loan losses by $2,035,000
during the year ended December 31, 1996 as a result of the foreclosure of a
cable television system, in which the Partnership had extended credit. The net
carrying value, before allowance for loan losses, for this note receivable was
carried over to the basis of the cable television system. This reduction in the
allowance for loan losses was recognized as income during 1996.
In part, the increase in total revenues from the gain on sale of cable
systems and the increase in cable subscriber revenue experienced during 1996,
compared to 1995, is offset by a decline in rental income of $1,332,000. The
decline in rental income of $2,572,000 for the year ended December 31, 1995,
compared to 1994, was the primary factor contributing to the decline in total
revenues for that year. The reduction in rental income for both 1996 and 1995 is
attributable to a decrease in the amount of equipment owned by the Partnership.
At December 31, 1996, the Partnership owned equipment, excluding the
Partnership's pro rata interest in joint ventures, with an aggregate original
cost of $14.3 million, compared to $20.4 million and $48.6 million at December
31, 1995 and 1994, respectively.
During 1995, the Partnership received payoffs on six notes receivable
from cable television system operators totaling $7.8 million of which $7.5
million was from notes receivable considered to be impaired. The Partnership
recognized interest income of $1.1 million from the receipt of the final payoff
on these notes receivable. Included in the payoff of $7.8 million is a
settlement payment of $2.7 million on a defaulted note receivable from a cable
television system operator. The Partnership had provided a loan loss reserve in
an amount equal to the net carrying value of this note in a prior year. Upon
recovery of a portion of this defaulted note receivable, the Partnership reduced
the allowance for loan losses by $2 million during 1995. This reduction in the
allowance for loan losses was recognized as income during the period.
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Total expenses increased by $1,045,000 for the year ended December 31,
1996, compared to 1995 but decreased by $5,436,000 during 1995, compared to
1994. The increase in total expenses experienced during 1996 is primarily due to
increases in depreciation expense, cable program service expense and general and
administrative expenses, resulting from the addition of two new cable television
systems during the year. In addition, the Partnership reported an increase in
management fees of $202,000 for the year ended December 31, 1996, compared to
1995, due to the sale of two cable systems during 1996.
The decline in total expenses for the year ended December 31, 1995,
compared to 1994, is primarily due to a decrease in depreciation and
amortization expense of $2,400,000 and a decrease in provision for losses on
receivables of $2,795,000. The decrease in depreciation and amortization is a
result of the reduction in the amount of equipment owned by the Partnership.
Additionally, an increasing portion of the equipment owned by the Partnership
had been fully depreciated. Another factor contributing to the decrease in total
expenses during 1995, when compared to 1994, was a recovery of a prior provision
for losses on receivables, as discussed previously.
Lease related operating expenses experienced a decrease during 1995, as
compared to 1994, primarily as a result of a decrease in remarketing and
administrative expenses charged to the Partnership on its reproduction equipment
that is leased pursuant to a vendor lease agreement. This decrease is reflective
of the decrease in the amount of reproduction equipment owned by the Partnership
and a corresponding decrease in the rental revenues received from such
equipment.
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.
Liquidity and Capital Resources
The Partnership's primary source of liquidity comes from its
contractual obligations with lessees and borrowers for fixed payment terms. As
the initial lease terms of the leases expire, the Partnership will continue to
renew, remarket or sell the equipment. The future liquidity of the Partnership
will depend upon the General Partner's success in collecting contractual amounts
and re-leasing and selling the Partnership's equipment as it comes off lease. As
another source of liquidity, the Partnership owns cable television systems, has
investments in foreclosed cable systems joint ventures and investments in
leasing joint ventures.
The net cash generated by operating activities were $1,528,000,
$1,761,000 and $4,721,000 during 1996, 1995 and 1994, respectively. The net cash
generated by operating activities decreased for both 1996 and 1995, compared to
the respective prior year, primarily as a result of a decrease in rental income.
The decline in rental income, as previously discussed, is attributable to a
reduction in the size of the equipment portfolio. The Partnership sold equipment
with an aggregate original cost of $6.1 million at December 31, 1996, compared
to $28.2 million and $26.7 million at December 31, 1995 and 1994, respectively.
This, in part, was offset by an increase in cable subscriber revenues from the
two new cable systems in 1996.
The net cash generated by payments received from financing leases and
notes receivable was $2,020,000, $9,632,000 and $2,546,000 during 1996,1995 and
1994, respectively. The decrease for 1996 is primarily due to a decline in
principal payments from notes receivable. Principal payments from notes
receivable increased substantially during 1995, due to payoffs from outstanding
notes receivable. The Partnership did not receive the degree of payoffs from
notes receivable during 1996 compared to 1995. The decline in net cash generated
by financing activities experienced during 1996 is also attributable to the
absence of principal payments from financing leases.
During 1996, the Partnership received $11,510,000 in proceeds from the
sale of assets of two cable systems owned by the Partnership's subsidiaries,
Phoenix Black Rock Cable J.V. and Phoenix Grassroots Cable Systems, L.L.C.
During the third quarter of 1995, the Partnership invested an
additional $6,146,000 in a note receivable from a cable television system
operator that the Partnership had previously extended credit. The net carrying
value of this prior credit was approximately $2.9 million of subordinated debt
to this cable television system operator. This cable television system operator
is in default on its outstanding debt. The current funding of $6.1 million was
paid to the senior lender and the Partnership has now assumed a first and second
secured position in the assets of the cable television system with an aggregate
net carrying value of $9 million. The General Partner believes that it is now in
a better position to negotiate a settlement or foreclosure with the borrower in
order to maximize the Partnership's recovery of its investment. To help finance
this additional funding, the Partnership borrowed an additional $2,000,000 from
a bank during 1995. The debt is repayable over 30 months with interest based on
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the bank's prime rate. During 1995, the Partnership repaid $1,671,000 of this
debt, which included a prepayment of $1,471,000 made in November of 1995. In
1996, principal payments of $729,000 were made and the debt was repaid in full.
During 1995, the Partnership reported an overall increase of $541,000
in cash distributions received from its joint ventures compared to the prior
year. The overall increase in distributions reflects an increase in
distributions from equipment joint ventures and foreclosed cable system joint
ventures. The increased distributions from the equipment joint venture during
1995 is related to distributions received from a joint venture that was formed
in October of 1994. The increased cash distributions from foreclosed cable
system joint ventures for 1995 was attributable to the sale of a cable system in
one joint venture and the distribution of excess cash from operations in the
other remaining cable system.
As of December 31, 1996, the Partnership owned equipment held for lease
with an aggregate original cost of $2,736,000 and a net book value of $0,
compared to $3,690,000 and $22,000, respectively, as of December 31, 1995 and
$18,707,000 and $447,000, respectively, as of December 31, 1994. The General
Partner is actively engaged, on behalf of the Partnership, in remarketing and
selling the Partnership's off-lease portfolio.
The cash distributed to limited partners during 1996, 1995 and 1994
were $1,954,000, $7,751,000, and $7,751,000, respectively. As a result, the
cumulative cash distributions to the limited partners are $98,180,000,
$96,226,000 and $88,475,000 as of December 31, 1996, 1995 and 1994,
respectively. The General Partner did not receive cash distributions during
1996, 1995 and 1994. The General Partner has elected not to receive payment, at
this time, for its share of the cash available for distribution due to its
negative capital account.
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 Partnership leasing operations will also decline. As the cash
generated by operations continues to decline, the rate of cash distributions
made to limited partners will also decline. The distributions to partners on
January 15, 1996 were made at approximately the same rate as the distributions
made during 1995. After the January 15, 1996 distribution, the Partnership
changed from quarterly to annual distributions with the first annual
distribution expected to be made on January 15, 1997. As a result of the sale of
certain cable television systems and the settlement of an impaired note during
1996, the Partnership will be distributing the excess cash provided by these
events on January 15,1997.
Cash generated from leasing and financing operations has been and is
anticipated to continue to be sufficient to meet the Partnership's continuing
operational expenses and to provide for distributions to partners.
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.
<PAGE>
Page 11 of 35
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PHOENIX LEASING CASH DISTRIBUTION FUND III,
A CALIFORNIA LIMITED PARTNERSHIP AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, 1996
<PAGE>
Page 12 of 35
REPORT OF INDEPENDENT AUDITORS
The Partners
Phoenix Leasing Cash Distribution Fund III, a California limited partnership
We have audited the consolidated financial statements of Phoenix Leasing Cash
Distribution Fund III, a California limited partnership, and Subsidiaries,
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 III, a California limited partnership, and Subsidiaries, 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
<PAGE>
Page 13 of 35
PHOENIX LEASING CASH DISTRIBUTION FUND III,
A CALIFORNIA LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands Except for Unit Amounts)
December 31,
1996 1995
---- ----
ASSETS
Cash and cash equivalents $ 15,591 $ 3,619
Accounts receivable (net of allowance for losses
on accounts receivable of $56 and $63 at
December 31, 1996 and 1995, respectively) 89 254
Notes receivable (net of allowance for losses
on notes receivable of $604 and $3,880 at
December 31, 1996 and 1995, respectively) 58 13,153
Equipment on operating leases and held for lease
(net of accumulated depreciation of $12,885 and
$17,004 at December 31, 1996 and 1995, respectively) 1 79
Net investment in financing leases (net of allowance
for early terminations of $0 and $81 at December
31, 1996 and 1995, respectively) -- 227
Cable systems, property and equipment (net of
accumulated depreciation of $239 and $548 at
December 31, 1996 and 1995, respectively) 3,215 1,449
Cable subscriber lists (net of accumulated
amortization of $189 and $0 at December 31, 1996
and 1995, respectively) 1,464 --
Investment in joint ventures 547 742
Capitalized acquisition fees (net of accumulated
amortization of $8,265 and $7,994 at December 31,
1996 and 1995, respectively) 11 283
Other assets 15 575
-------- --------
Total Assets $ 20,991 $ 20,381
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 2,847 $ 3,637
Minority interest in subsidiary 9 311
Note payable -- 329
-------- --------
Total Liabilities 2,856 4,277
-------- --------
Partners' Capital:
General Partner (25) (71)
Limited Partners, 600,000 units authorized,
528,151 units issued, 516,716 units outstanding
at December 31, 1996 and 1995 18,160 15,618
Unrealized gains on available-for-sale securities -- 557
-------- --------
Total Partners' Capital 18,135 16,104
-------- --------
Total Liabilities and Partners' Capital $ 20,991 $ 20,381
======== ========
The accompanying notes are an integral
part of these statements.
<PAGE>
Page 14 of 35
PHOENIX LEASING CASH DISTRIBUTION FUND III,
A CALIFORNIA LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands Except for Per Unit Amounts)
For the Years Ended December 31,
1996 1995 1994
---- ---- ----
INCOME
Rental income $ 862 $ 2,194 $ 4,766
Gain on sale of cable systems 1,347 -- --
Gain on sale of equipment 68 356 1,019
Interest income, notes receivable 839 1,171 810
Cable subscriber revenue 3,114 676 654
Equity in earnings (losses) from joint
ventures, net 148 240 (82)
Other income 697 472 530
------- ------- -------
Total Income 7,075 5,109 7,697
------- ------- -------
EXPENSES
Depreciation and amortization 1,613 1,149 3,549
Lease related operating expenses 93 280 805
Program service, cable system 906 181 154
Management fees to General Partner and affiliate 724 522 381
Reimbursed administrative costs to General Partner 176 321 403
Provision for (recovery of) losses on
receivables (2,294) (2,245) 550
Legal expense 259 619 379
General and administrative expenses 853 458 500
------- ------- -------
Total Expenses 2,330 1,285 6,721
------- ------- -------
NET INCOME BEFORE MINORITY INTEREST 4,745 3,824 976
Minority Interest in earnings of subsidiary (203) (24) (31)
------- ------- -------
NET INCOME $ 4,542 $ 3,800 $ 945
======= ======= =======
NET INCOME PER LIMITED PARTNERSHIP UNIT $ 8.70 $ 7.28 $ .85
======= ======= =======
ALLOCATION OF NET INCOME:
General Partner $ 46 $ 38 $ 504
Limited Partners 4,496 3,762 441
------- ------- -------
$ 4,542 $ 3,800 $ 945
======= ======= =======
The accompanying notes are an integral
part of these statements.
<PAGE>
<TABLE>
Page 15 of 35
PHOENIX LEASING CASH DISTRIBUTION FUND III,
A CALIFORNIA LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(Amounts in Thousands Except for Unit Amounts)
<CAPTION>
General Unrealized
Partner's Limited Partners' Gains Total
Amount Units Amount (Losses) Amount
------ ------------------ -------- ------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ (613) 516,716 $ 26,917 $ -- $ 26,304
Distributions to partners ($15.00 per limited
partnership unit) -- -- (7,751) -- (7,751)
Net income 504 -- 441 -- 945
-------- -------- -------- -------- --------
Balance, December 31, 1994 (109) 516,716 19,607 -- 19,498
Distributions to partners ($15.00 per limited
partnership unit) -- -- (7,751) -- (7,751)
Change for the year in unrealized gain on
available-for-sale securities -- -- -- 557 557
Net income 38 -- 3,762 -- 3,800
-------- -------- -------- -------- --------
Balance, December 31, 1995 (71) 516,716 15,618 557 16,104
Distributions to partners ($3.78 per limited
partnership unit) -- -- (1,954) -- (1,954)
Change for the year in unrealized gain on
available-for-sale securities -- -- -- (557) (557)
Net income 46 -- 4,496 -- 4,542
-------- -------- -------- -------- --------
Balance, December 31, 1996 $ (25) 516,716 $ 18,160 $ -- $ 18,135
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral
part of these statements.
<PAGE>
Page 16 of 35
PHOENIX LEASING CASH DISTRIBUTION FUND III,
A CALIFORNIA LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
For the Years Ended December 31,
1996 1995 1994
---- ---- ----
Operating Activities:
Net income $ 4,542 $ 3,800 $ 945
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,613 1,149 3,549
Gain on sale of cable systems (1,347) -- --
Gain on sale of equipment (68) (356) (1,019)
Gain on sale of securities (151) (7) (154)
Equity in losses (earnings) from joint
ventures, net (148) (240) 82
Recovery of early termination, financing
leases (81) -- --
Provision for (recovery of) losses on
notes receivable (2,260) (2,428) 576
Provision for (recovery of) losses on
accounts receivable 47 183 (26)
Settlement -- -- (106)
Minority interest in earnings of subsidiary 203 24 31
Decrease (increase) in accounts receivable (222) 473 578
Decrease in accounts payable and
accrued expenses (977) (876) (239)
Decrease in other assets 3 39 378
Other 374 -- 126
-------- -------- --------
Net cash provided by operating activities 1,528 1,761 4,721
-------- -------- --------
Investing Activities:
Principal payments, financing leases -- 695 1,620
Principal payments, notes receivable 2,020 8,937 926
Proceeds from sale of cable systems 11,510 -- --
Proceeds from sale of equipment 79 623 1,965
Proceeds from sale of securities 151 7 165
Distributions from joint ventures 343 601 60
Purchase of equipment -- -- (107)
Investment in financing leases -- -- (40)
Investment in notes receivable -- (6,146) --
Investment in joint ventures -- -- (117)
Investment in securities -- -- (11)
Cable systems, property and equipment (337) (49) (32)
Payment of acquisition fees -- -- (5)
-------- -------- --------
Net cash provided by investing activities 13,766 4,668 4,424
-------- -------- --------
Financing Activities:
Proceeds from notes payable -- 2,000 --
Payments of principal, notes payable (729) (1,671) (1,479)
Distributions to partners (1,954) (7,751) (7,751)
Distributions to minority partners (639) (24) (46)
-------- -------- --------
Net cash used by financing activities (3,322) (7,446) (9,276)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 11,972 (1,017) (131)
Cash and cash equivalents, beginning of period 3,619 4,636 4,767
-------- -------- --------
Cash and cash equivalents, end of period $ 15,591 $ 3,619 $ 4,636
======== ======== ========
Supplemental Cash Flow Information:
Cash paid for interest expense $ 26 $ 31 $ 19
The accompanying notes are an integral
part of these statements.
<PAGE>
Page 17 of 35
PHOENIX LEASING CASH DISTRIBUTION FUND III,
A CALIFORNIA LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
Note 1. Organization and Partnership Matters.
Phoenix Leasing Cash Distribution Fund III, a California limited
partnership (the Partnership), was formed on July 30, 1985, 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 January 21, 1988. The Partnership's
termination date is December 31, 1998.
The Partnership has also made investments in joint ventures with
affiliated partnerships managed by the General Partner for the purpose of
reducing the risks of financing or acquiring certain capital equipment leased to
third parties. (See Note 7.)
The Partnership's subsidiaries, Phoenix Black Rock Cable J.V., Phoenix
Concept Cablevision of Indiana, L.L.C. and Phoenix Grassroots Cable Systems,
L.L.C. were formed to acquire the assets and liabilities of specific foreclosed
cable television systems that the Partnership had extended credit. The
acquisition of assets and liabilities of the borrower by the subsidiaries
through foreclosure were accounted for using the "purchase method" of accounting
in which the transfer price was allocated to the net assets in accordance with
the relative fair market value of the assets acquired and liabilities assumed.
On January 10, 1992, the Partnership foreclosed upon a cable television
system in Nevada and California that was in default on a subordinated loan
payable to the Partnership with a carrying amount of approximately $1,620,000
which was carried over to the basis in the cable system. As part of the
settlement between the Partnership and the borrower, the borrower transferred
ownership of all of its assets and liabilities to a subsidiary of the
Partnership, Phoenix Black Rock Cable J.V. which was formed under the laws of
California on January 10, 1992 to own and operate the foreclosed cable
television system.
On January 17, 1996, Phoenix Black Rock Cable J.V., a majority owned
subsidiary of the Partnership, sold all of the assets used in the operation of
its cable television system receiving net proceeds of approximately $2.6
million, recognizing a gain on the sale of the assets of this cable system of
$1,185,000. As a result of the sale of the cable television system's assets, the
Subsidiary ceased operations.
On February 2, 1996, the Partnership and Phoenix Concept Cablevision of
Indiana, L.L.C. (Phoenix Concept), a newly formed limited liability company and
wholly owned subsidiary of the Partnership, entered into a Commercial Code
Section 9505 Agreement (the "Agreement") with Concept Cablevision of Indiana,
Inc., a cable television company that the Partnership had extended credit. The
Agreement which closed on February 2, 1996 allowed Phoenix Concept to foreclose
upon the cable television system (the collateral for the note) of Concept
Cablevision of Indiana, Inc. The Partnership's net carrying value for this
outstanding note receivable was $4,321,000 at February 2, 1996, which was
carried over to the basis in the cable system and exchanged for a 100% ownership
interest in this limited liability company. The Partnership had no related
allowance for this note receivable. In addition, Phoenix Concept made a cash
payment of $200,000 and assumed certain liabilities, including a note payable of
$600,000 and certain other miscellaneous accounts payable as specified in the
agreement.
On February 14, 1996, the Partnership and Phoenix Grassroots Cable
Systems, L.L.C. (Phoenix Grassroots), a newly formed limited liability company
and majority owned (98.5%) subsidiary of the Partnership, entered in a
Settlement Agreement and Releases (the "Amendment") with Grassroots Cable
Systems, Inc., a cable television company that the Partnership had extended
credit. The Agreement which closed on February 14,1996, allowed the Partnership
to foreclose upon the cable television system (the collateral for the note) of
Grassroots Cable Systems, Inc. The Partnership's net carrying value, before
allowance for loan losses, for this outstanding note receivable was $9,014,000
at February 14, 1996, which was carried over to the basis in the cable system
and exchanged for a 98.5% ownership interest in this limited liability company.
The Partnership had an allowance for loan losses of $2,035,000 for this note
receivable. The Partnership reduced its allowance for loan losses by $2,035,000
as a result of the acquisition of this cable system. This reduction in the
<PAGE>
Page 18 of 35
allowance for loan losses was recognized as income during the year ended
December 31, 1996. In addition, Phoenix Grassroots assumed certain liabilities
and miscellaneous payables as specified in the agreement.
On August 30, 1996, Phoenix Grassroots Cable Systems, L.L.C., sold the
assets of the cable television system receiving net proceeds of approximately
$8.9 million, recognizing a gain on sale of these assets of $162,000. As a
result of the sale of the cable television system's assets, the Subsidiary
ceased operations.
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, one percent 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, one percent to the General Partner and 99% to the Unit Holders.
The General Partner is entitled to receive five percent 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 1994, 1995 and 1996 the General Partner did not draw its
share of the 1994, 1995 and 1996 cash available for distribution.
As compensation for management services, the General Partner receives a
fee payable quarterly, subject to certain limitations, in an amount equal to
3.5% of the Partnership's gross revenues for the quarter from which such payment
is being made, which revenues shall include 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 Subsidiaries. The Subsidiaries will pay a management fee equal
to four and one-half percent of the systems' monthly gross revenue for these
services. Revenues subject to a management fee at the joint venture level will
not be subject to management fees at the Partnership level.
The General Partner is compensated for services performed in connection
with the analysis of equipment available to the Partnership, the selection of
such assets and the acquisition thereof, including negotiating and concluding
agreements with equipment manufacturers and obtaining leases for the equipment.
As compensation for such acquisition services, the General Partner will receive
a fee equal to four percent of (a) the purchase price of equipment acquired by
the Partnership, or equipment leased by manufacturers, the financing for which
is provided by the Partnership, or (b) financing provided to businesses such as
cable operators, or emerging growth companies, payable upon such acquisition or
financing, as the case may be. Such acquisition fees are amortized principally
on a straight-line basis.
Schedule of compensation paid and distributions made to the General
Partner and affiliates for the years ended December 31,
1996 1995 1994
---- ---- ----
(Amounts in Thousands)
Management fees $724 $522 $381
Acquisition fees -- -- 2
---- ---- ----
$724 $522 $383
==== ==== ====
Note 2. Summary of Significant Accounting Policies.
Principles of Consolidation. The 1996 financial statements include the
accounts of Phoenix Leasing Cash Distribution Fund III and its majority owned
subsidiaries, Phoenix Black Rock Cable J.V. (a California partnership) and
Phoenix Grassroots Cable Systems, L.L.C. (a Delaware limited liability company)
and its wholly owned subsidiary, Phoenix Concept Cablevision of Indiana, L.L.C.
(a Delaware limited liability company). Hereinafter these entities are
collectively referred to as "the Partnership." In addition to 1996, the 1995 and
1994 financial statements include the accounts of the Partnership and its
majority owned subsidiary, Phoenix Black Rock Cable J.V. All significant
intercompany accounts and transactions have been eliminated in consolidation.
<PAGE>
Page 19 of 35
During 1994, the Partnership determined that the financial position and
operations of Phoenix Black Rock Cable J.V. had become material to the
operations of the Partnership. Accordingly, the Partnership has consolidated the
financial results of this joint venture with those of the Partnership beginning
in 1994. The Partnership reported this joint venture using the equity method of
accounting for 1993. The effect of this change had no impact on the net income
or equity of the Partnership.
Leasing Operations. The Partnership's leasing operations consisted of
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 Partnerhsip's
leased equipment is depreciated primarily using an accelerated depreciation
method over the estimated useful life of six years.
The Partnership's policy is to review periodically the remaining
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 subsequent 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 provides for additional depreciation as appropriate. As
a result of such periodic reviews, the Partnership recognized additional
depreciation expense of $26,000, $68,000 and $27,000 ($.05, $.13 and $.05 per
limited partnership unit) for the year ended December 31, 1996, 1995 and 1994,
respectively.
Rental income for the year is determined on the basis of rental
payments due for the period under the terms of the lease. Maintenance, repairs
and minor renewals of the leased equipment are charged to expense.
Cable Television System Operations. The consolidated statement of
operations includes the operating activity of all three Subsidiaries for the
year ended December 31, 1996. In addition to 1996, Phoenix Black Rock Cable J.V.
is included in the consolidated statements for the years ended December 31, 1995
and 1994. The cable television system owned by Phoenix Black Rock Cable, J.V.
was located in the counties of Clark and Nye in the State of Nevada and in the
county of Inyo in the State of California. The cable television system consisted
of headend equipment in five locations and 156 miles of plant passing
approximately 2,900 homes and had approximately 1,820 cable subscribers. The
Subsidiary's cable television system serves the communities of Pahrumph, Beatty
and Blue Diamond in Nevada and Cow Creek and Grapevine in California. The
Subsidiary operates under one non-exclusive franchise agreement with the county
of Nye in Nevada, and under a National Park Service Permit for Death Valley,
California.
The cable television system owned by Phoenix Concept Cablevision of
Indiana, L.L.C. is located in the counties of Benton, Parke, Greene, Montgomery,
Putnam, Boone, Hendricks, Clinton, Hamilton and Madison in the state of Indiana.
The cable television system consists of headend equipment and 166 miles of plant
passing approximately 9,449 homes with approximately 5,462 subscribers. The
Subsidiary operates under non-exclusive franchise agreements with several of
these counties and with communities located within these counties.
The cable television system owned by Phoenix Grassroots Cable Systems,
L.L.C. was located in the counties of Franklin, Hancock, Kennebec, Knox, Oxford
and Penobscot in the state of Maine and the counties of Carroll, Coos, Grafton,
Merrimack, Strafford and Sullivan in the State of New Hampshire. The cable
television system consisted of headend equipment and 676 miles of plant passing
approximately 12,429 homes with approximately 7,197 subscribers. The Subsidiary
operates under non-exclusive franchise agreements with several of these counties
and with communities located within these counties.
Cable systems, property and equipment are depreciated using the
straight-line method over estimated service lives ranging from five to thirteen
years. Replacements, renewals and improvements are capitalized and maintenance
and repairs are charged to expense as incurred.
<PAGE>
Page 20 of 35
Cable subscriber lists are amortized using the straight-line method over
an estimated period of eight years.
Cable television services are billed monthly in advance. Revenue is
deferred and recognized as the services are provided.
Investment in Joint Ventures. Minority investments in net assets of
equipment joint ventures and foreclosed cable systems joint ventures reflect the
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 Partnership's share of earnings, losses, cash
contributions and cash distributions after the date of acquisition. Foreclosed
cable systems were non-performing notes receivable where foreclosure has
occurred.
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.
Non Cash Investing Activities.
For the Years Ended December 31,
1996 1995 1994
---- ---- ----
(Amounts in Thousands)
Contributions to a joint venture of
assets received pursuant to a
settlement agreement $ -- $-- $212
Foreclosed notes receivable contributed
to joint ventures -- 151 161
------ ---- ----
Total $ -- $151 $373
====== ==== ====
During the year ended December 31, 1996 and 1995, the Partnership
recorded an unrealized loss on available-for-sale securities which has been
included in Other Assets of $577,000 and a gain of $577,000, respectively.
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.
Investment in Available-for-Sale Securities. The Partnership had
investments in stock warrants in public companies. The Partnership 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
<PAGE>
Page 21 of 35
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.
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 $ 115 $ 271
Other 26 39
General Partner 4 7
----- -----
145 317
Less: allowance for losses on accounts receivable (56) (63)
----- -----
Total $ 89 $ 254
===== =====
Note 4. Notes Receivable.
Notes receivable consist of the following at December 31:
1996 1995
---- ----
(Amounts in Thousands)
Notes receivable from cable television
system operators with stated interest
ranging from 12% to 13% per annum,
receivable in installments ranging from
60 to 117 months, collateralized by a
security interest in the cable system
assets. These notes have a graduated
repayment schedule followed with a
balloon payment $ 662 $ 16,791
Notes receivable from security monitoring
companies with stated interest at 16%
per annum -- 242
-------- --------
662 17,033
Less: allowance for losses on notes
receivable (604) (3,880)
-------- --------
Total $ 58 $ 13,153
======== ========
The Partnership's notes receivable from cable television system
operators provide for a monthly payment rate in an amount that is less than the
contractual interest rate. The difference between the payment rate and the
contractual interest rate is added to the principal and therefore deferred until
the maturity date of the note. Upon maturity of the note, the original principal
and deferred interest is due and payable in full. Although the contractual
interest rates may be higher, 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 under Statement 114 was $662,000, for which the
related allowance for losses is $604,000. The average recorded investment in
<PAGE>
Page 22 of 35
impaired loans during the year ended December 31, 1996 was approximately
$1,530,000. The Partnership recognized interest income totaling $63,000 from
these impaired notes during the year ended 1996.
At December 31, 1995, the recorded investment in notes that are
considered to be impaired was $15,978,000. Included in this amount was
$11,673,000 of impaired notes for which the related allowance for losses was
$3,619,000 and $4,305,000 of impaired notes for which there is no allowance. The
average recorded investment in impaired loans during the year ended December 31,
1995 was approximately $16,448,000. The Partnership recognized interest income
totaling $1,079,000 from these impaired notes during the year ended 1995.
During the year ended December 31, 1996, the Partnership received a
settlement on one of its notes receivable from a cable television system
operator which was considered to be impaired. The Partnership received a partial
recovery of $1,008,000 as a settlement which was applied towards the $1,781,000
outstanding note receivable balance. The remaining balance of $773,000 was
written-off through its related allowance for loan losses provided for in a
previous year. Upon receipt of the settlement of this note receivable, the
Partnership reduced the remaining allowance for loan losses for this note by
$150,000 during the year ended December 31, 1996. This reduction in the
allowance for loan losses was recognized as income during the period.
The Partnership also wrote-off the outstanding note receivable balance
of $243,000 during the year ended December 31, 1996 from a security monitoring
system company which was considered to be impaired. This note receivable had
been fully reserved for in a previous year.
The Partnership also foreclosed on two notes receivable from cable
television system operators as discussed in Note 1.
During the year ended December 31, 1995, the Partnership received a
settlement on one of its notes receivable from a cable television system
operator which was considered to be impaired. The Partnership received a partial
recovery of $2,714,000 as a settlement which was applied towards the $4,562,000
outstanding note receivable balance which had been fully reserved for in a
previous year. The remaining balance of $1,848,000 was written-off through its
related allowance for loan losses. The Partnership received settlements from
seven other impaired notes receivable, a payoff from one note receivable to a
cable television system operator and foreclosed upon the assets of another note
receivable to a cable television system operator during the year ended December
31, 1995. Upon receipt of the settlement and payoffs of the above-mentioned
notes receivable, the Partnership reduced the allowance for loan losses by
$2,428,000 during the year ended December 31, 1995. This reduction in the
allowance for loan losses was recognized as income during the period.
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 $ 3,880 $ 8,357
Provision for (recovery of) losses (2,260) (2,428)
Write downs (1,016) (2,049)
------- -------
Ending balance $ 604 $ 3,880
======= =======
Note 5. Equipment on Operating Leases and Investment in Financing Leases.
Equipment on lease consists primarily of computer peripheral equipment
and computer mainframes subject to operating and financing leases.
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 one manufacturer of its equipment,
whereby such manufacturer will undertake to remarket off-lease equipment on a
best efforts basis. These agreements permit the Partnership to assume the
remarketing function directly if certain conditions contained in the agreements
are not met. For their remarketing services, the manufacturers are paid a
percentage of net monthly rentals.
The Partnership has also 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
<PAGE>
Page 23 of 35
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 $-- $ 30
Estimated residual value of leased
equipment (unguaranteed) -- 287
Less: unearned income -- (9)
allowance for early termination -- (81)
---- -----
Net investment in financing leases $-- $ 227
==== =====
Minimum rentals to be received on noncancellable operating leases for
the years ended December 31 are as follows:
Operating
---------
(Amounts in Thousands)
1997........................................ $ 97
1998........................................ 6
1999 and thereafter......................... -
-------
Totals $ 103
=======
The net book value of equipment held for lease at December 31, 1996 and
1995 amounted to $0 and $22,000, respectively.
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)
Distributions systems $ 2,254 $ 1,935
Headend equipment 1,042 13
Automobiles 77 11
Land 41 --
Building 40 38
------- -------
3,454 1,997
Less: accumulated depreciation (239) (548)
------- -------
Net property, cable systems and equipment $ 3,215 $ 1,449
======= =======
Depreciation expense totaled approximately $583,000 and $154,000 for
the years 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. The Partnership is participating in the following
equipment joint ventues:
<PAGE>
Page 24 of 35
Weighted
Joint Venture Percentage Interest
------------- -------------------
Leveraged Joint Venture 1990-1 35.29%
Phoenix Post Joint Venture(1) 26.69
Phoenix Joint Venture 1994-1 4.64
(1) Closed during 1995
An analysis of the Partnership's investment in equipment joint ventures
is as follows:
<TABLE>
<CAPTION>
Net Investment Equity in Net Investment
at Beginning Earnings at End
Date of Period Contributions (Losses) Distributions of Period
- ---- --------- ------------- -------- ------------- ---------
(Amounts in Thousands)
<S> <C> <C> <C> <C> <C>
Year Ended
December 31, 1994 $ 53 $ 302 $ (104) $ 9 $ 242
======== ====== ======= ======= =========
Year Ended
December 31, 1995 $ 242 $ 0 $ 222 $ 347 $ 117
======== ====== ======= ======= =========
Year Ended
December 31, 1996 $ 117 $ 0 $ 158 $ 230 $ 45
======== ====== ======= ======= =========
</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 1,772
Operating lease equipment 525 1,021
Other assets 512 691
------ ------
Total Assets $2,850 $4,016
====== ======
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 732 $ 918
Partners' capital 2,118 3,098
------ ------
Total Liabilities and Partners' Capital $2,850 $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 131 717 71
------- ------- -------
Total Income 3,338 5,949 3,750
------- ------- -------
<PAGE>
Page 25 of 35
EXPENSES
Depreciation 332 1,186 1,248
Lease related operating expenses 1,385 2,832 2,378
Management fee to the General Partner 119 286 199
Other expenses 125 268 62
------- ------- -------
Total Expenses 1,961 4,572 3,887
------- ------- -------
Net Income (Loss) $ 1,377 $ 1,377 $ (137)
======= ======= =======
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
$2,000 and $5,000, respectively.
The General Partner earns a management fee of 3.5% of the Partnership's
respective interest in gross revenues of each equipment joint venture. Revenues
subject to management fees at the joint venture level are not subject to
management fees at the Partnership level.
Foreclosed Cable Systems Joint Ventures.
The Partnership foreclosed upon nonperforming outstanding notes
receivable to cable television operators to whom the Partnership, along with
other affiliated partnerships managed by the General Partner, had extended
credit. The partnerships' notes receivables were exchanged for interests (their
capital contribution), on a pro rata basis, in newly formed joint ventures owned
by the partnerships and managed by the General Partner. Title to the cable
television systems is held by the joint ventures. Investments in the joint
ventures are accounted for using the equity method of accounting.
The joint venture investments of the Partnership, along with their
percentage ownership is as follows:
Weighted
Joint Venture Percentage Interest
------------- -------------------
Phoenix Black Rock Cable J.V.(4) 81.22%
Phoenix Pacific Northwest J.V. 37.72
Phoenix Glacier J.V.(1) 45.78
Phoenix Country Cable J.V.(3) 40.00
Phoenix Concept Cablevision, Inc. 14.19
Phoenix Independence Cable, LLC 28.76
(1) cable system sold and joint venture closed during 1993.
(2) cable systems operations are consolidated during 1994, 1995 and 1996.
(3) cable system sold during 1995 and joint venture closed during 1996.
(4) cable system sold and joint venture closed during 1996.
An analysis of the Partnership's net investment in foreclosed cable
systems joint ventures at December 31, is as follows:
<TABLE>
<CAPTION>
Net Investment Equity in Net Investment
at Beginning Earnings at End
Date of Period Contributions(1) (Losses) Distributions of Period
- ---- --------- ---------------- -------- ------------- ---------
(Amounts in Thousands)
<S> <C> <C> <C> <C> <C>
Year Ended
December 31, 1994 $1,956 $(1,218) $ 22 $ 51 $709
====== ======= ==== ==== ====
Year Ended
December 31, 1995 $ 709 $ 152 $ 18 $254 $625
====== ======= ==== ==== ====
Year Ended
December 31, 1996 $ 625 $ 0 $(10) $113 $502
====== ======= ==== ==== ====
</TABLE>
<PAGE>
Page 26 of 35
(1) Includes the reclassification effects of accounting for an
unconsolidated joint venture in 1993 as a consolidated subsidiary in
1994. This foreclosed cable systems joint venture is now being
consolidated with the Partnership.
(See Note 2.)
The aggregate combined financial information of the foreclosed cable
systems 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 $ 145 $ 375
Accounts receivable 78 88
Property, plant and equipment 2,022 2,176
Cable subscriber lists and franchise rights 88 116
Other assets 22 22
Deferred income taxes 119 118
------ ------
Total Assets $2,474 $2,895
====== ======
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 376 $ 323
Partners' capital 2,098 2,572
------ ------
Total Liabilities and Partners' Capital $2,474 $2,895
====== ======
COMBINED STATEMENTS OF OPERATIONS
INCOME
For the Years Ended December 31,
1996 1995 1994
---- ---- ----
(Amounts in Thousands)
Subscriber revenue $ 1,002 $ 1,077 $ 642
Gain on sale of cable systems 10 25 --
Other income 20 12 3
------- ------- -----
Total Income 1,039 1,114 645
------- ------- -----
EXPENSES
Depreciation 326 321 160
Program services 338 328 192
General and administrative expenses 345 310 164
Management fees to an affiliate of
the General Partner 53 48 28
Provision for losses on accounts
receivable 10 11 9
------- ------- -----
Total Expenses 1,072 1,018 553
------- ------- -----
Net Income (Loss) Before Income Taxes (33) 96 92
Income tax expense (4) (39) (19)
------- ------- -----
Net Income (Loss) $ (37) $ 57 $ 73
======= ======= =====
<PAGE>
Page 27 of 35
Phoenix Cable Management Inc. (PCMI), an affiliate of the General
Partner, provides day to day management services in connection with the
operation of the foreclosed cable systems joint ventures. The foreclosed cable
systems joint ventures will pay a management fee equal to four and one-half
percent of the System's monthly gross revenue for these services. Revenues
subject to a management fee at the joint venture level will not be subject to
management fees at the Partnership level.
Note 8. Accounts Payable and Accrued Expenses.
Accounts payable and accrued expenses consist of the following at
December 31:
1996 1995
---- ----
(Amounts in Thousands)
General Partner and affiliates $1,606 $2,086
Equipment lease operations 954 1,276
Other 287 275
------ ------
Total $2,847 $3,637
====== ======
Note 9. Notes Payable.
Notes payable consist of the following at December 31:
1996 1995
---- ----
(Amounts in Thousands)
Note payable to a bank, collateralized
by the assets of the Partnership with
interest tied to the bank's prime rate,
with monthly payments of 30 months. $-- $329
---- ----
Total $-- $329
==== ====
Note 10. Income Taxes.
Federal and state income tax regulations provide that taxes on the
income or loss of the Partnership and its majority owned subsidiary are
reportable by the partners in their individual income tax returns. Accordingly,
no provision for such taxes has been made in the accompanying financial
statements.
The net 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 $20,762 $22,275 $(1,513)
Liabilities 2,628 2,517 111
1995
- ----
Assets $19,980 $23,407 $(3,427)
Liabilities 3,876 3,763 113
<PAGE>
Page 28 of 35
Note 11. Related Entities.
The General Partner serves in the capacity of general partner in other
partnerships, all of which are engaged in the equipment leasing and financing
business.
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
$176,000, $321,000 and $403,000 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 $12,000, $112,000 and $264,000, 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 Partner's share of consolidated net income and distributions, and
the weighted average number of units outstanding of 516,716 for the years ended
December 31, 1996, 1995 and 1994. For the purposes of allocating consolidated
income (loss) and distributions to each individual limited partner, the
Partnership allocates consolidated net income (loss) and distributions based
upon each respective limited partner's net capital contributions.
Note 14. Subsequent Events.
In January 1997, cash distributions of $11,624,000 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 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 $ 2,563 $ 4,422 $ 7,035
Cable TV operations 4,512 687 662
------- ------- -------
Total $ 7,075 $ 5,109 $ 7,697
======= ======= =======
Net Income
Equipment leasing and financing $ 3,376 $ 3,695 $ 810
Cable TV operations 1,166 105 135
------- ------- -------
Total $ 4,542 $ 3,800 $ 945
======= ======= =======
Identifiable Assets
Equipment leasing and financing $15,871 $18,643 $22,571
Cable TV operations 5,120 1,738 1,751
------- ------- -------
Total $20,991 $20,381 $24,322
======= ======= =======
Depreciation and Amortization Expense
Equipment leasing and financing $ 687 $ 995 $ 3,399
<PAGE>
Page 29 of 35
Cable TV operations 926 154 150
------- ------- -------
Total $ 1,613 $ 1,149 $ 3,549
======= ======= =======
Capital Expenditures
Equipment leasing and financing $ -- $ 6,146 $ 147
Cable TV operations 337 49 32
------- ------- -------
Total $ 337 $ 6,195 $ 179
======= ======= =======
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.
Notes Payable
The carrying amount of the Partnership's variable rate notes payable
approximates fair value.
The estimated fair values of the Partnership's financial instruments at
December 31, are as follows:
Carrying
Amount Fair Value
------ ----------
(Amounts in Thousands)
1996
- ----
Assets
Cash and cash equivalents $15,591 $15,591
Notes receivable 58 58
1995
- ----
Assets
Cash and cash equivalents $ 3,619 $ 3,619
Securities, available-for-sale 559 559
Notes receivable 13,153 16,555
Liabilities
Notes payable 329 329
Note 17. Pro Forma Information (Unaudited).
As discussed in Note 1, on February 2, 1996, the Partnership entered
into a Commercial Code Section 9505 Agreement with Concept Cablevision of
Indiana, Inc., a cable television company that the Partnership had extended
credit. As a result of this agreement, Phoenix Concept Cablevision of Indiana,
L.L.C., a limited liability company and wholly owned subsidiary of the
Partnership, was formed.
On February 14, 1996, the Partnership, along with two other affiliated
partnerships managed by the General Partner, entered into a Settlement Agreement
<PAGE>
Page 30 of 35
and Releases with Grassroots Cable Systems, Inc., a cable television company
that the Partnership had extended credit. As a result of this agreement, Phoenix
Grassroots Cable Systems, L.L.C., a limited liability company and majority owned
subsidiary of the Partnership, was formed.
A summary of the unaudited pro forma consolidated results of operations
of the Partnership for the year ended December 31, 1995, as if these cable
television systems had been acquired at the beginning of the year, is as
follows:
(Amounts in Thousands Except
for Per Unit Amounts)
(Unaudited)
Cable subscriber revenue $5,322
Total income 9,765
Depreciation and amortization 2,699
Program service, cable systems 2,263
General and administrative expenses 1,719
Total expenses 6,178
Net income before minority interest 3,587
Minority interest in earnings of subsidiary 20
Net income 3,567
Net income per limited partnership unit $ 6.83
These pro forma results reflect certain adjustments which, among other
things, include an increase in operating revenues from cable subscribers,
increases in operating expenses of cable systems, depreciation and amortization
of tangible and intangible assets and adjustments of interest expense on
outstanding debt.
The above pro forma consolidated statement should not necessarily be
considered as indicative of the results that would have occurred had the
acquisitions been made at the beginning of the year and their operations
consolidated for the twelve month period.
<PAGE>
Page 31 of 35
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 32 of 35
Phoenix Income Fund, L.P.
Phoenix High Tech/High Yield Fund
Phoenix Leasing Cash Distribution Fund IV
Phoenix Leasing Cash Distribution Fund II
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.
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.
<TABLE>
<CAPTION>
(A) (B) (C) (D)
Cash and cash- Aggregate of
Name of Individual Capacities in equivalent forms contingent forms
or persons in group which served of remuneration of remuneration
- ------------------- ------------ --------------------------------------------- ----------------
(C1) (C2)
Securities or property
Salaries, fees, directors' insurance benefits or
fees, commissions, and reimbursement, personal
bonuses benefits
-------------------------- -----------------------
(Amounts in Thousands)
<S> <C> <C> <C>
Phoenix Leasing
Incorporated General Partner $ 153(1) $ 0 $ 0
Phoenix Cable 571(1) 0 0
Managment, Inc. Manager -------- ----- -----
$ 724 $ 0 $ 0
======== ===== =====
(1) 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 Interest Represents a 5% interest in the Registrant's profits 100%
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 177 units .03%
</TABLE>
<PAGE>
Page 33 of 35
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 17-30
2. Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
and Reserves 35
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) Balance Sheet of Phoenix Leasing Incorporated E21 1-12
b) Listing of all subsidiaries of the Registrant:
Phoenix Black Rock Cable J.V., a California general
partnership and majority (81.22%) owned subsidiary.
Phoenix Concept Cablevision of Indiana, LLC, a wholly owned
Subsidiary.
Phoenix Grassroots Cable System, LLC, a wholly
owned Subsidiary.
27. Financial Data Schedule
<PAGE>
Page 34 of 35
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 III
(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 a 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 of March 25, 1997
- ---------------------- 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 35 of 35
PHOENIX LEASING CASH DISTRIBUTION FUND III,
A CALIFORNIA LIMITED PARTNERSHIP 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 $ 597(1) $ 6 $ 32 $ 179 $ 392
Allowance for early termination
of financing leases 228 0 0 99 129
Allowance for losses on notes
receivable 7,781 576 0 0 8,357
------ ---- ------ ------ ------
Totals $8,606 $582 $ 32 $ 278 $8,878
====== ==== ====== ====== ======
Year ended December 31, 1995
Allowance for losses on accounts
receivable $ 392 $183 $ 0 $ 512 $ 63
Allowance for early termination
of financing leases 129 0 0 48 81
Allowance for losses on notes
receivable 8,357 0 2,428 2,049 3,880
------ ---- ------ ------ ------
Totals $8,878 $183 $2,428 $2,609 $4,024
====== ==== ====== ====== ======
Year ended December 31, 1996
Allowance for losses on accounts
receivable $ 63 $ 8 $ 0 $ 15 $ 56
Allowance for early termination
of financing leases 81 0 81 0 0
Allowance for losses on notes
receivable 3,880 0 2,260 1,016 604
------ ---- ------ ------ ------
Totals $4,024 $ 8 $2,341 $1,031 $ 660
====== ==== ====== ====== ======
(1) Includes allowance for losses on accounts receivable of $4,000 for a subsidiary which in prior years was not consolidated
</TABLE>
Exhibit 21 - Page 1 of 12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Phoenix Leasing Incorporated:
We have audited the accompanying consolidated balance sheets of Phoenix
Leasing Incorporated (a California corporation) and Subsidiaries as of June 30,
1996 and 1995. These consolidated balance sheets are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated balance sheets 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 consolidated balance sheets are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated balance sheets. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
balance sheet presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated balance sheets referred to above
present fairly, in all material respects, the financial position of Phoenix
Leasing Incorporated and Subsidiaries as of June 30, 1996 and 1995, in
conformity with generally accepted accounting principles.
San Francisco, California, ARTHUR ANDERSON LLP
September 4, 1996
<PAGE>
Exhibit 21 - Page 2 of 12
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
1996 1995
---- ----
Cash and cash equivalents $ 3,767,098 $ 4,100,325
Investments in marketable securities 1,287,323 7,298,771
Trade accounts receivable, net of allowance for
doubtful accounts of $31,246 and $237,458 at
June 30, 1996 and 1995, respectively 989,030 913,437
Receivables from Phoenix Leasing Partnerships and
other affiliates 3,955,935 3,975,262
Notes receivable from related party 8,767,694 5,574,452
Equipment inventory 2,240,448 --
Equipment subject to lease 17,792,847 17,044,686
Investments in Phoenix Leasing Partnerships 1,773,887 1,577,419
Property and equipment, net of accumulated
depreciation of $11,398,438 and $10,457,763 at
June 30, 1996 and 1995, respectively 6,933,608 7,669,302
Other assets 3,011,229 2,366,983
----------- -----------
TOTAL ASSETS $50,519,099 $50,520,637
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Short-term lines of credit $ 1,750,000 $ --
Warehouse lines of credit 16,930,044 17,644,012
Payables to affiliates 2,155,626 5,832,765
Accounts payable and accrued expenses 3,205,932 2,829,490
Deferred revenue 328,676 1,059,736
Long-term debt 620,899 229,390
Deficit in investments in Phoenix Leasing
Partnerships 761,214 1,164,445
----------- -----------
TOTAL LIABILITIES 25,752,391 28,759,838
----------- -----------
Minority Interests in Consolidated Subsidiaries 27,615 37,639
----------- -----------
Commitments and Contingencies (Note 14)
SHAREHOLDER'S EQUITY:
Common stock, without par value, 30,000,000 shares
authorized, 5,433,600 issued and outstanding at
June 30, 1996 and 1995, respectively 20,369 20,369
Additional capital 11,466,920 5,508,800
Retained earnings 13,251,804 16,193,991
----------- -----------
TOTAL SHAREHOLDER'S EQUITY 24,739,093 21,723,160
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY $50,519,099 $50,520,637
=========== ===========
<PAGE>
Exhibit 21 - Page 3 of 12
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996
Note 1. Summary of Significant Accounting Policies:
a. Organization - Phoenix Leasing Incorporated and subsidiaries (the
Company), a wholly owned subsidiary of Phoenix American Incorporated (PAI), is
engaged in the organization and management of partnerships which specialize in
the purchase and lease of primarily high-technology and data processing
equipment. The partnerships purchase equipment directly from equipment vendors
for lease to financial, commercial and industrial businesses and governmental
agencies. The partnerships also finance transactions in the areas of
microcomputers and emerging growth companies. The Company has also engaged in
similar leasing activities for its own account. The Company also provides
ongoing equipment maintenance services for end-users of high-technology data
processing equipment and graphic plotters.
b. Principles of Consolidation - The consolidated financial statements
include the accounts of Phoenix Leasing Incorporated and its wholly or
majority-owned subsidiaries and subsidiaries over which the Company exerts
control. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Except as otherwise explained below, minority interests in the net
assets and net income or loss of majority-owned subsidiaries are allocated on
the basis of the proportionate ownership interests of the minority owners.
Four of the consolidated subsidiaries are California limited
partnerships (the Partnerships) which are general partners of four of the
Phoenix Leasing Partnerships. As of June 30, 1996, the Company held a 50%
general partner ownership interest in two of the Partnerships and a 62.5%
interest in one and a 70% interest in the fourth. Under the terms of the
partnership agreements, profits and losses attributable to acquisition fees paid
to the Partnerships from Phoenix Leasing Partnerships are allocated to the
limited partner (the minority owner in the Partnerships) in proportion to the
limited partner's ownership interest. All remaining profits and losses are
allocated to the Company. Distributions to the partners are made in accordance
with the terms of the partnership agreement. The limited partner of each of the
Partnerships is Lease Management Associates, Inc., a Nevada corporation
controlled by an officer of the Company, who is the owner of PAI.
c. Management, Acquisition and Incentive Fee Income - As of June 30,
1996, the Company is the corporate general partner in 13 actively operating
limited partnerships and manager of 9 actively operating joint ventures, all of
which own and lease equipment. Eight of the partnership agreements provide for
payment of management fees based on partnership revenues and acquisition fees
when the partnerships' assets are acquired. Five of the limited partnership
agreements provide for payment of management fees and liquidation fees (see
discussion later in this footnote). Most of the joint venture agreements provide
for payment of management fees based on joint venture revenues.
These partnerships and the joint ventures are collectively referred to
as the "Phoenix Leasing Partnerships."
d. Investments - Investments in Phoenix Leasing Partnerships reflect
the Company's equity basis in the Phoenix Leasing Partnerships. Under the equity
method of accounting the original investment is recorded at cost and is adjusted
periodically to recognize the Company's share of earnings, losses and
distributions after the date of acquisition. The Company has adopted the equity
method of accounting on the basis of its control and significant influence over
the Phoenix Leasing Partnerships.
<PAGE>
Exhibit 21 - Page 4 of 12
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996
Note 1. Summary of Significant Accounting Policies (continued):
e. Liquidation Fee Income - The Company earns liquidation fees not to
exceed 15% of the net contributed capital from seven of the partnerships in
consideration for the services and activities performed in connection with the
disposition of the partnerships' assets. Management of the Company concluded
that the total liquidation fees to be earned over the life of these partnerships
may not be fully realizable. Accordingly, the Company recognizes liquidation fee
income when the fees are paid by the partnerships. The Company received and
recognized $1,062,046 and $3,221,000 in liquidation fees from these partnerships
during the years ended June 30, 1996 and 1995, respectively.
In three other partnerships, cash distributions received in excess of
the allocated cumulative net profits represent a liquidation fee which cannot
exceed, in the aggregate, 7.792% of the net contributed capital.
f. Lease Accounting - The Company's leasing operations consist of both
financing and operating leases. The finance 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 over the cost of the leased
equipment. Unearned income is amortized monthly over the term of the lease on a
declining basis to provide an approximate level rate of return on the
unrecovered cost of the investment. Initial direct costs of originating new
leases are capitalized and amortized over the initial lease term.
Under the operating method of accounting for leases, the leased
equipment is recorded as an asset, at cost, and is depreciated on a
straight-line basis over its estimated useful life, ranging up to six years.
Rental income represents the rental payments due during the period under the
terms of the lease.
The Company is the lessor in leveraged lease agreements under which
computer equipment having an estimated useful life of 5 years was leased for
periods from 4-5 years. The Company is the equity participant and equipment
owner. A portion of the purchase price was furnished by third-party financing in
the form of long-term debt that provides no recourse to the Company and is
secured by a first lien on the financed equipment.
g. Property and Equipment - Property and equipment which the Company
holds for its own use are recorded at cost and depreciated on a straight-line
basis over estimated useful lives ranging up to 45 years.
h. Income Taxes - The Company is included in consolidated and combined
tax returns filed by PAI.
i. Deferred Revenue - Deferred revenue is the result of selling
maintenance contracts which provide service over a specific period of time.
Deferred revenue is amortized on a straight-line basis over the service period
not to exceed 5 years.
j. Investments in Marketable Securities - Investments in marketable
securities, are stated at cost and consist primarily of United States government
obligations. Interest is recognized when earned.
k. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
<PAGE>
Exhibit 21 - Page 5 of 12
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996
Note 1. Summary of significant Accounting Policies (continued):
l. Reclassification - Certain 1995 balance have been reclassified to
conform to the 1996 presentation.
Note 2. Receivables from Phoenix Leasing Partnerships and Other Affiliates:
Receivables from Phoenix Leasing Partnerships and other affiliates
consist of the following for the years ended June 30:
1996 1995
---- ----
Management fees $ 416,149 $ 330,158
Acquisition fees 74,099 102,994
Other receivables from Phoenix Leasing Partnerships 3,458,687 3,535,110
Other receivables from corporate affiliates 7,000 7,000
---------- ----------
$3,955,935 $3,975,262
========== ==========
Note 3. Investments in Phoenix Leasing Partnerships:
The Company records its investments in Phoenix Leasing Partnerships
under the equity method of accounting. The ownership interest percentages vary,
ranging from .5% up to 25%. As general partner, the Company has complete
authority in, and responsibility for, the overall management and control of each
partnership, which includes responsibility for supervising partnership
acquisition, leasing, remarking and sale of equipment. Distributions of cash
from the partnerships are made at the discretion of the general partner;
historically, a significant portion of the partnerships' earnings has been
distributed annually.
A shareholder of PAI and officers of the Company also have general and
limited partner interests in several of the partnerships.
The activity in the investments in Phoenix Leasing Partnerships for the
years ended June 30 are as follows:
1996 1995
---- ----
Balance, beginning of year $ 412,974 $(1,120,980)
Additional investments 830,085 688,615
Equity in earnings 2,093,488 2,412,056
Cash distributions (2,323.874) (1,566,717)
----------- -----------
Balance, end of year $ 1,012,673 $ 412,974
=========== ===========
The Company's total investments in Phoenix Leasing Partnerships are
comprised of investments in certain partnerships which are subject to
fluctuations due to partnerships' performances and timing of cash distributions.
At times the investment in those partnerships will be a deficit.
Certain of the partnership agreements require the Company to restore any
deficit in its capital account to zero at the dissolution of the partnership.
This deficit is a result of cash distributions received and losses allocated to
the Company. The Company has determined that in certain partnerships it will be
<PAGE>
Exhibit 21 - Page 6 of 12
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996
Note 3. Investments in Phoenix Leasing Partnerships (continued):
unlikely that the deficit investment will reverse and as a result during the
year ended June 30, 1993 the Company elected to make capital contributions prior
to partnership dissolution totaling $2,028,733. As of April 1, 1992, the Company
elected to forgo any future cash distributions from, and will not record its
share of future earnings generated from the operations of, one of these
partnerships. The Company has deferred any future cash distributions from two
other partnerships. The Company believes that it would be likely that any future
cash distributions received from these partnerships would have to be paid back
at the dissolution of the partnerships. The Company will continue to record fee
income earned from the management of, and acquisition of equipment for these
partnerships.
The aggregate positive investment and aggregate deficit investment
balances are presented separately on the balance sheets as of June 30, 1996 and
1995.
The partnerships own and lease equipment. All debt of the partnerships
is secured by the equipment and is without recourse to the general partners. The
unaudited financial statements of the partnerships reflect the following
combined, summarized financial information as of June 30, 1996 and for the
twelve months then ended:
Assets $182,995,000
Liabilities 29,989,000
Partners' Capital 153,006,000
Revenue 46,353,000
Net Income 18,826,000
Note 4. Equipment Subject to Lease:
Equipment subject to lease includes the Company's investments in
leveraged leases, investments in financing leases, operating leases and notes
receivable.
Equipment subject to lease consists of the following at June 30:
1996 1995
---- ----
Equipment on lease, net of accumulated
depreciation of $258,102 $ 92,008 $ --
Leverage leases 1,589,772 1,696,703
Equipment held for resale 305,840 --
Investment in financing leases 12,036,604 13,284,177
Operating leases 207,793 --
Notes receivable 3,560,830 2,063,806
----------- -----------
$17,792,847 $17,044,686
=========== ===========
Leverage Leases:
The Company's net investment in leveraged leases is composed of the
following elements at June 30:
<PAGE>
Exhibit 21 - Page 7 of 12
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996
Note 4. Equipment Subject to Lease (continued):
1996 1995
---- ----
Rental receivable (net of principal and interest
on the nonrecourse debt) $ -- $ --
Estimated residual value of leased assets 2,498,233 2,759,783
Less: Unearned and deferred income (908,461) (1,063,080)
---------- -----------
Investment in leveraged leases 1,589,772 1,696,703
Less: Deferred taxes arising from leveraged leases (2,651,124) (2,960,190)
----------- -----------
Net investment in leveraged leases $(1,061,352) $(1,263,487)
=========== ===========
Investment in Financing Leases:
The Company has entered into direct lease arrangements with companies
engaged in the development of technologies and other growth industry businesses
operating in different industries located throughout the United States.
Generally, it is the responsibility of the lessee to provide maintenance on
leased equipment.
The Company's net investment in financing leases consists of the
following at June 30:
1996 1995
---- ----
Minimum lease payments to be received $ 16,089,868 $ 17,731,628
Less: unearned income (4,053,263) (4,447,451)
------------ ------------
Net investment in financing leases $ 12,036,605 $ 13,284,177
============ ============
Minimum rentals to be received on noncancellable financing leases for
the years ended June 30, are as follows:
1997 $ 4,161,068
1998 4,171,699
1999 4,248,885
2000 2,367,834
2001 1,080,674
Thereafter 59,708
-----------
Total $ 16,089,868
===========
Notes Receivable:
Notes receivable for the years ended June 30, are as follows:
1996 1995
---- ----
Notes receivable from emerging growth
and other companies with stated interest
ranging from 10% to 22.6% per annum receivable
in installments ranging from 36 to 85 months
collateralized by the equipment financed $3,560,830 $2,063,806
========== ==========
<PAGE>
Exhibit 21 - Page 8 of 12
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996
Note 5. Sale of Leased Assets and Notes Receivable:
The Company acquires leased or financed equipment with the intent to
subsequently sell those assets to a trust which issues lease backed
certificates. As of June 30, 1996, the Company has acquired $15,805,227 is such
leased or financed equipment which is included in equipment subject to lease.
The Company uses proceeds from its two warehouse lines of credit to purchase or
finance this equipment. During the holding period the Company recognizes the
revenues generated from these leases or notes and the interest expense related
to the drawdowns from the warehouse lines of credit.
On November 29, 1995, the Company entered into an agreement to sell
certain assets and notes receivables with a net carrying value of $27,337,402 to
a trust for the purpose of the trust issuing lease backed certificates in
exchange for cash proceeds. The Company recognized a gain on this transaction of
$459,632. The leased backed certificates are recourse only to the assets used to
collateralize the obligation. Under the terms of the agreement, the Company will
continue to acquire and sell additional assets to the trust over the twelve
month period beginning November 30, 1995 and ending November 28, 1996. During
the period November 30, 1995 through June 30, 1996, the Company sold additional
assets to the trust for $4,807,746. These assets had a net carrying value of
$4,225,596, resulting in a gain of $582,150.
Note 6. Property and Equipment:
Major classes of property and equipment at June 30 are as follows:
1996 1995
---- ----
Land $ 1,077,830 $ 1,077,830
Buildings 7,352,608 7,345,648
Office furniture, fixtures and equipment 8,573,547 8,259,319
Other 843,450 766,975
------------ ------------
17,847,435 17,449,772
Less accumulated depreciation and amortization (11,398,438) (10,457,763)
Inventory held for resale 484,611 677,293
------------ ------------
Net Property and Equipment $ 6,933,608 $ 7,669,302
------------ ------------
PAI owns its headquarters building in San Rafael, California. The
Company paid $7,749,476 to purchase the land and construct the building. The
cost of construction was paid for with a combination of $2,749,476 in cash from
the Company's operations and a $5,000,000 advance from PAI. The $5,000,000
advance is included as a reduction in receivable from Phoenix Leasing
Partnerships and other affiliates. PAI has pledged the market value of the
building as security for a $5,000,000 Industrial Revenue Bond ("IDB") which PAI
has with the City of San Rafael, California. The principal of the IDB is payable
in a lump sum payment on October 1, 2004. The Company paid $248,325 and $206,798
in interest payments related to the IDB during the year ended June 30, 1996 and
1995, respectively.
As of June 30, 1996, a portion of the Company's headquarters has been
leased to third parties. The remaining lease term is for less than one year and
the minimum lease payments receivable are as follows:
1997 $ 370,093
=========
<PAGE>
Exhibit 21 - Page 9 of 12
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996
Note 7. Investments in Marketable Securities:
In May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 115 - Accounting for Certain Investments
in Debt and Equity Securities (SFAS 115). The Company adopted this statement on
July 1, 1994. This pronouncement prescribes specific accounting treatment for
investments based on their classification as either held-to-maturity securities
(HTM), available-for-sale securities (AFS) or trading securities, as defined in
the statement.
As of June 30, 1996, all securities held by the Company are classified
as AFS and are reported at their amortized cost of $1,287,323, which
approximates fair value. This value includes Class C Equipment Investment Trust
Certificates (Class C Shares) valued at $1,248,843 and equities valued at
$38,479. As of June 30, 1995, all securities are classified as HTM and are
reported at amortized cost of $7,298,771, which approximated fair value. Gross
unrealized gains and gross unrealized losses on such securities as of June 30,
1996 and 1995 were immaterial.
As of June 30, 1996, none of the securities held by the Company had
specified contractual maturities. Contractual maturities of securities held as
of June 30, 1995, are as follows:
1995
----
Held-To-Maturity Securities
Due in one year or less $4,202,115
Due after one through five years 3,096,656
----------
Total $7,298,771
==========
During fiscal year 1996, the Company sold $3,000,000 in face value of
U.S. Treasury Notes, which were classified as HTM as of June 30, 1995. As a
result of the sale, the Company changed the classification of all of its U.S.
Treasury Notes from HTM to AFS in accordance with SFAS No. 115. The sale
resulted in an immaterial gain, and proceeds were used for general corporate
purposes.
Note 8. Fair Value of Financial Instruments:
Marketable Securities
The carrying amounts of marketable securities reported in the balance
sheets approximate their fair values.
Leases, Notes Receivable, and Debt
The fair values of the Company's leases, notes receivable, and debt are
estimated based on the market prices of similar instruments or on the current
market interest rates for instruments with similar terms, maturities, and risks.
The estimated fair values of the Company's leases, notes receivable, and debt
approximate the carrying amounts reported in the balance sheets.
Note 9. Short-Term and Warehouse Lines of Credit:
To provide interim financing for equipment and working capital needs,
the Company executes lines of credit which consist of short-term notes with
banks with interest rates equal to the prime rate or the banks' index rate. All
lines of credit are renewable annually at the banks' option.
<PAGE>
Exhibit 21 - Page 10 of 12
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996
Note 9. Short-Term and Warehouse Lines of Credit (continued):
As of June 30, 1996, the Company, through PAI, had access to one
short-term line of credit totaling $2.5 million. of which $750,000 was available
for borrowing at June 30, 1996. Draw downs under this credit line are secured by
the Company's receivable from Phoenix Leasing Partnerships.
In addition, the Company has two secured short-term warehouse lines of
credit totaling $37.5 million, which are used to provide interim financing for
the acquisition of equipment and the financing of notes receivable. As of June
30, 1996, $16.9 million of these lines have been drawn down. The draw downs
under these lines are collateralized by investments in financing leases and
notes receivable included in equipment subject to lease. The interest rate is
tied to the IBOR (Eurodollar) rate. The initial commitment period for these
lines of credit is 18 months and may be extended to 36 months at the discretion
of the bank. Principal payments are based on the lesser of the aggregate
payments received by the Company on its leases and notes receivable or the
aggregate principal and interest amount outstanding on the payment date of the
credit line.
In connection with the Company's lines of credit, various financial
ratios and other covenants must be maintained. The Company has guaranteed its
right, title and interest in certain of its assets and the future receipts from
these assets in order to secure payment and performance of these credit lines.
Additional information relating to the Company's short-term bank lines
follows:
1996 1995
---- ----
Balance at June 30 $18,680,044 $17,644,012
Maximum amount outstanding 32,111,837 17,644,012
Average amount outstanding 13,828,284 2,522,340
Weighted average interest rate during the period 7.56% 7.9%
Note 10. Long-Term Debt:
Long-term debt consists of the following at June 30:
1996 1995
---- ----
Mortgage payable at varying interest
rates with an initial rate of 8.75% secured by
a first deed of trust on real property with a cost
of $250,000. Note is amortized over 83 months
with monthly payments of $559 with a final
payments of $122,151. $154,238 $160,944
Note payable to a bank, collateralized
by the assets of Phoenix Leasing Liquidation
Corporation, a subsidiary of the Company, with
a variable rate of interest tied to the bank's
prime rate payable in 30 consecutive monthly
installments 466,661 --
<PAGE>
Exhibit 21 - Page 11 of 12
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996
Note 10. Long-Term Debt (continued):
Note payable at 9.75% secured by
computer equipment with a cost of
$668,994. Note is amortized over 46
months with monthly payments of $16,887 -- 68,446
-------- --------
Total long-term debt $620,899 $229,390
======== ========
The aggregate long-term debt maturities for the fiscal years ended June
30, are as follows:
1997 $ 440,034
1998 40,039
1999 6,706
2000 6,706
2001 5,588
2002 and thereafter 121,826
-------------
Total. $ 620,899
============
Note 11. Profit Sharing Plan:
The Company has a profit sharing plan covering substantially all
employees who meet certain age and service requirements. Contributions to the
plan by the Company are made at the discretion of the board of directors. The
profit sharing expense was $600,000 for the years ended June 30, 1996 and 1995,
respectively.
Note 12. Leased Facilities:
The Company leases office and warehouse space in various parts of the
country and had annual rental expense of approximately $417,000 and $402,000 for
the years ended June 30, 1996 and 1995, respectively.
Note 13. Transactions with Related Parties:
The Company provides an interest bearing line of credit totaling
$8,000,000 to PAI's controlling shareholder which is secured by common stock of
Phoenix Precision Graphics, Inc. (an unaffiliated Nevada corporation). As of
June 30, 1996 and 1995, $6,646,209 and $4,837,814 of this line of credit has
been drawn down and is included in notes receivable from related party. As of
June 30, 1996 and 1995, Phoenix Precision Graphics is in a start-up mode and has
cumulative losses of $9,120,711 and $5,959,708, respectively.
The Company provides an interest bearing line of credit to PAI's
controlling shareholder, which is secured by common stock of Phoenix Fiberlink
Inc. (an unaffiliated Nevada Corporation). As of June 30, 1996 and 1995,
$2,121,484 and $736,638 of this line of credit has been drawn down and is
included in notes receivable from related party.
The Company earned a management fee from an affiliate of $556,453 and
$678,947 for the years ended June 30, 1996 and 1995, respectively. This
management fee is included in Portfolio management fees.
The Company paid an affiliate an asset management fee of $305,770 and
$1,026,714 for the years ended June 30, 1996 and 1995, respectively. These asset
management fees are included in equipment lease operations, maintenance,
remarking and administrative fees.
<PAGE>
Exhibit 21 - Page 12 of 12
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996
Note 14. Commitments and Contingencies:
The Company has entered into agreements which contain specific purchase
commitments. The Company may satisfy these commitments by purchasing equipment
for its own account or by assigning equipment purchases to its affiliated
partnerships. At June 30, 1996 the Company anticipates being able to satisfy its
future obligations under the agreements and intends to assign most of the
purchases under the agreements to its affiliated partnerships.
The Company enters into commitments to purchase and sell
high-technology equipment on behalf of a corporate affiliate. The Company is
reimbursed for these services.
The Company is party to legal actions which arise as part of the normal
course of its business. The Company believes, after consultation with counsel,
that it has meritorious defenses in these actions, and that the liability, if
any, will not have a material adverse effect on the financial position of the
Company.
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
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<RECEIVABLES> 807
<ALLOWANCES> 660
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<PP&E> 16,340
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