UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-KSB
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934
For the fiscal year ended December 31, 1998 Commission File Number 0-16615
PHOENIX LEASING CASH DISTRIBUTION FUND III,
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A CALIFORNIA LIMITED PARTNERSHIP
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(Exact name of Registrant as specified in its charter)
California 68-0062480
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2401 Kerner Boulevard, San Rafael, California 94901-5527
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 485-4500
--------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Units of Limited
Partnership Interest
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. ____________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The Registrant's revenue for its most recent fiscal year was $2,431,000.
As of December 31, 1998, 516,662 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, 1998.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Transitional Small Business Disclosure Format:
Yes No X
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Page 1 of 29
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PHOENIX LEASING CASH DISTRIBUTION FUND III,
A CALIFORNIA LIMITED PARTNERSHIP
1998 FORM 10-KSB 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.................................................. 6
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 7
Item 7. Financial Statements............................................ 10
Item 8. Disagreements on Accounting and Financial Disclosure Matters.... 26
PART III
Item 9. Directors and Executive Officers of the Registrant.............. 26
Item 10. Executive Compensation.......................................... 27
Item 11. Security Ownership of Certain Beneficial Owners and Management.. 28
Item 12. Certain Relationships and Related Transactions.................. 28
PART IV
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 28
Signatures................................................................. 29
2
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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 was
terminated on December 31, 1998. The remaining assets are being liquidated.
The General Partner of the Partnership 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 Concept Cablevision of Indiana, L.L.C., is a wholly-owned
subsidiary of the Partnership. The Subsidiary was formed under the laws of
Delaware on November 9, 1995 to own and operate a cable television system in the
state of Indiana.
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,
1998, 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 59.38 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, 1998, the remaining equipment
owned by the Partnership was classified as Operating leases. The Partnership has
also provided financing secured by assets in the form of notes receivable.
Operating leases are generally short-term leases under which the lessor will
receive aggregate rental payments in an amount that is less than the purchase
price of the equipment. Financing leases were generally for a longer term under
which the non-cancelable 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.
3
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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 were concentrated in the cable
television industry. The Partnership 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 were 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 also received personal guarantees from the owners of the systems.
Several of the cable television system operators to whom the
Partnership provided financing experienced financial difficulties. These
difficulties were believed to have been caused by several factors. Some of these
factors were: 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 resulted
in a significant decline in the demand for the acquisition of cable systems and
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 went into default. The result is that the
Partnership did not receive scheduled payments, had to grant loan extensions,
experienced an increase in legal and collection costs and in some cases, 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
have generated a positive monthly cash flow and provided cash distributions to
the Partnership during 1998 and 1997. 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.
- -----------------------------------
As of December 31, 1998, the Partnership's only remaining subsidiary,
Phoenix Concept Cablevision of Indiana, L.L.C., is in the cable television
system business segment of the Partnership's operations. The Partnership's
previous majority-owned subsidiaries, Phoenix Black Rock Cable J.V. and Phoenix
Grassroots Cable Systems, L.L.C., were also in this business segment.
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 5,248 subscribers.
The Subsidiary operates under non-exclusive franchise agreements with several of
these counties and with communities located within these counties.
4
<PAGE>
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
share of this defaulted note 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, with a net carrying value of $8.7 million, 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.
Phoenix Black Rock Cable J.V., a majority-owned subsidiary 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. Phoenix Black Rock Cable J.V. sold all of its assets used in the
operation of the cable television system, with a net carrying value of $1.4
million, 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 Cable Management Inc. (PCMI), an affiliate of the General
Partner, provides day to day management services in connection with the
operation of the remaining cable television system.
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.
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 were
immediately deregulated from most regulations and that the definition of a small
cable operator is under 600,000 subscribers. This allows small operators to
raise rates if needed, and eliminates the need to provide franchise authorities
with costly rate filings and justifications. The bill also allows the local
telephone companies to buy out small cable operators in their own region as well
as to joint venture with small cable operators.
Please see Note 13 in the Partnership's financial statements for
financial information about the Partnership's business segments.
Other.
A brief description of the type of assets in which the Partnership has
invested as of December 31, 1998, together with information concerning the uses
of assets is set forth in Item 2.
5
<PAGE>
Item 2. Properties.
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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,
to businesses located throughout the United States.
As of December 31, 1998, the Partnership owns equipment and has
outstanding loans to borrowers with an aggregate original cost of $910,000. The
following table summarizes the type of equipment owned or financed by the
Partnership, including its pro rata interest in joint ventures, at December 31,
1998.
Percentage of
Asset Types Purchase Price(1) Total Assets
----------- ----------------- -------------
(Amounts in Thousands)
Computer Peripherals $676 74%
Financing Related to Cable Television Systems
and Other Media 116 13
Reproduction Equipment 106 12
Small Computer Systems 12 1
---- ---
TOTAL $910 100%
==== ===
(1) These amounts include the Partnership's pro rata interest in equipment
joint ventures of $106,000 and original cost of outstanding loans of
$116,000 at December 31, 1998.
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
which would have a material adverse impact on its financial position.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
No matters were submitted to a vote of limited partners, through the
solicitation of proxies or otherwise, during the year covered by this report.
PART II
Item 5. Market for the Registrant's Securities and Related Security Holder
------------------------------------------------------------------
Matters.
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(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, 1998
-------------- -----------------------
Limited Partners 12,511
General Partner 1
6
<PAGE>
Item 6. 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 Subsidiary (the Partnership) reported net income of $435,000
during the year ended December 31, 1998, as compared to net income of $770,000
during 1997. The decline in net income experienced in 1998, compared to 1997, is
primarily attributable to a decline in total revenues.
The Subsidiary's cable operations has become the primary activity of
the Partnership. Cable subscriber revenue and cable system operations expenses
decreased slightly for the year ended December 31, 1998, compared to the same
periods in 1997.
Total revenues decreased by $302,000 for the year ended December 31,
1998, as compared to the previous year. The decrease in total revenues for 1998
is attributable to decreases in interest income from notes receivable and gain
on sale of cable systems. Additionally, for the year ended December 31, 1998,
compared to 1997, the Partnership experienced decreases in gain on sale of
securities and rental income.
Interest income from notes receivable decreased $101,000 for the year
ended December 31, 1998, compared to 1997. During the year ended December 31,
1997, the Partnership received additional settlement proceeds from a defaulted
note receivable with a net carrying value of $0. Such an occurrence did not
exist in 1998.
Gain on sale of cable systems decreased $169,000 during the year ended
December 31, 1998, as compared to 1997. During the year ended December 31, 1997,
Phoenix Grassroots Cable Systems, L.L.C. received proceeds of $169,000 which
were held in escrow from the August 30, 1996 sale of its assets. At the time of
the sale, a portion of the proceeds were held in escrow to cover liabilities
which may have arisen after the sale. The receipt of the escrow proceeds was
treated as an adjustment to the sales price, and as a result, the Partnership
recognized an additional gain on the sale of cable systems for the year ended
December 31, 1997 of $169,000.
Also contributing to the decline in total revenues was the decreases in
rental income of $107,000 and gain on sale of securities of $121,000 for the
year ended December 31, 1998, compared to 1997. The decrease in rental income is
primarily the result of a reduction in the amount of equipment owned by the
Partnership. At December 31, 1998, the Partnership owned equipment, excluding
the Partnership's pro rata interest in joint ventures, with an aggregate
original cost of $688,000 compared to $10.6 million at December 31, 1997.
The Partnership exercised and sold stock warrants during the year ended
December 31, 1998, as compared to 1997, recognizing a gain on securities of
$30,000, compared to $151,000 for the same period in 1997. The Partnership has
been granted stock warrants as part of its lease or financing agreements with
certain emerging growth companies.
The above mentioned decreases in revenues were partially offset by the
increase in earnings from joint ventures of $310,000. This is due to one
equipment joint venture having sold its remaining equipment which resulted in
the recovery of provision of doubtful accounts receivable and a write off of a
liability.
Total expenses increased by $27,000 for the year ended December 31,
1998, compared to 1997. This increase is a result of an increase in legal fees,
offset by a decrease in cable system operations expenses. Legal fees increased
as a result of legal costs associated to a Class Action Complaint as further
discussed in Note 15.
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 cable
television system operations and joint ventures. Additionally, the Partnership
continues to be in the process of liquidating the assets of the Partnership
which will provide further liquidity to the Partnership as proceeds from the
sale of these assets are received.
7
<PAGE>
The Partnership reported net cash generated by operating activities of
$663,000 for the year ended December 31, 1998, as compared to net cash used by
operating activities $1,300,000 during 1997. During the year ended December 31,
1997, the Partnership's net use of cash generated by operating activities was
attributable to payments of outstanding liabilities for reimbursements of costs
to the General Partner.
The net cash generated by investing activities was $350,000 during the
year ended December 31, 1998, compared to $409,000 during the year ended
December 31, 1997. This decrease during the year ended December 31, 1998,
compared to 1997 is primarily due to the decline in proceeds from the sale of
securities and proceeds from sale of cable systems. As previously discussed, the
Partnership exercised and sold stock warrants during the year ended December 31,
1998 and 1997. As a result, the Partnership received proceeds from the sale of
these securities of $31,000 and $151,000 for the year ended December 31, 1998
and 1997, respectively. Additionally, the decline in net cash generated by
investing activities for the year ended December 31, 1998 compared to 1997, is
also due to the absence of proceeds from sale of cable system, compared to
$169,000 in 1997, as was further discussed in "Results of Operations".
The increase in distributions from joint ventures of $178,000 for the
year ended December 31, 1998 compared to 1997 is attributable to a foreclosed
cable joint venture receiving proceeds from the sale of its assets.
During the year ended December 31, 1998, the Partnership received a
capital contribution of $2,072,000 from the General Partner in order to restore
the General Partner's tax basis deficit capital balance.
As of December 31, 1998, the Partnership owned equipment held for lease
with an aggregate original cost of $115,000 and a net book value of $0, compared
to $2,857,000 and $0, respectively, as of December 31, 1997. 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 1998 and 1997 were
$4,841,000 and $11,625,000, respectively. As a result, the cumulative cash
distributions to the limited partners are $114,646,000 and $109,805,000 as of
December 31, 1998 and 1997, respectively. As a result of the sale of certain
cable television systems and the settlement of an impaired note during 1996, the
Partnership included the excess cash provided by these events on the January 15,
1997 distribution. The General Partner did not receive cash distributions during
1998 and 1997. 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 operations will also decline. The remaining assets of the
Partnership consist primarily of : Phoenix Concept Cablevision of Indiana,
L.L.C., (a cable television system and wholly owned Subsidiary), an investment
in Phoenix Pacific Northwest J.V. (a foreclosed cable television system joint
venture), a note receivable from a cable television system operator and various
leased equipment. The General Partner is continuing its efforts in marketing
these assets for sale.
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.
Impact of the Year 2000 Issue
The General Partner has appointed ReSource/Phoenix, Inc. an affiliate
of the General Partner, to manage its Year 2000 project.
Resource/Phoenix has a Year 2000 project plan in place and a "Y2K
Project Team" has been appointed. If the Year 2000 project is not completed in a
timely manner, the Year 2000 issue could have a material impact on the
Partnership's operations. The Y2K Project Team, however, has identified Y2K
8
<PAGE>
risks and issues and the remediation procedures which need to be implemented.
The Y2K Project Team has budgeted for the necessary changes, built contingency
plans, and has progressed along the scheduled timelines.
Installation of any remediation changes to software and hardware is
planned to be completed by June 30, 1999.
Costs incurred by the Partnership will be expensed as incurred and are
not currently anticipated to be material to the Partnership's financial position
or results of operations.
The Partnership's customers consist of lessees and borrowers. The
Partnership does not have exposure to any individual customer that would
materially impact the Partnership should the customer experience a significant
Year 2000 problem.
9
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Item 7. CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
PHOENIX LEASING CASH DISTRIBUTION FUND III,
-------------------------------------------
A CALIFORNIA LIMITED PARTNERSHIP AND SUBSIDIARY
-----------------------------------------------
YEAR ENDED DECEMBER 31, 1998
----------------------------
10
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Partners of Phoenix Leasing Cash Distribution Fund III, a California
limited partnership:
We have audited the accompanying consolidated balance sheet of Phoenix Leasing
Cash Distribution Fund III, a California limited partnership and Subsidiary as
of December 31, 1998 and the related consolidated statements of operations and
comprehensive income, partners' capital and cash flows for the years ended
December 31, 1998 and 1997. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Phoenix Leasing Cash
Distribution Fund III, a California limited partnership and Subsidiary as of
December 31, 1998 and the results of their operations and their cash flows for
the years ended December 31, 1998 and 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California,
January 22, 1999
11
<PAGE>
PHOENIX LEASING CASH DISTRIBUTION FUND III,
A CALIFORNIA LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Amounts in Thousands Except for Unit Amounts)
December 31, 1998
-----------------
ASSETS
Cash and cash equivalents $1,316
Accounts receivable (net of allowance for losses on accounts
receivable of $57) 132
Notes receivable (net of allowance for losses on notes receivable
of $21) 43
Equipment on operating leases and held for lease (net of
accumulated depreciation of $579) --
Cable systems, property and equipment (net of accumulated
depreciation of $811) 2,859
Cable subscriber lists (net of accumulated amortization of $570) 946
Investment in joint ventures 205
Other assets 54
------
Total Assets $5,555
======
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 593
------
Total Liabilities 593
------
Partners' Capital:
General Partner 2,058
Limited Partners, 600,000 units authorized, 528,151 units
issued, 516,662 units outstanding 2,888
Accumulated other comprehensive income 16
------
Total Partners' Capital 4,962
------
Total Liabilities and Partners' Capital $5,555
======
The accompanying notes are an integral part of these statements.
12
<PAGE>
PHOENIX LEASING CASH DISTRIBUTION FUND III,
A CALIFORNIA LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Amounts in Thousands Except for Per Unit Amounts)
For the Years Ended December 31,
1998 1997
---- ----
INCOME
Cable subscriber revenue $ 1,668 $ 1,710
Rental income 299 406
Interest income, notes receivable 6 107
Equity in earnings (losses) from joint
ventures, net 227 (83)
Gain on sale of securities 30 151
Gain on sale of cable systems -- 169
Other income 201 273
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Total Income 2,431 2,733
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EXPENSES
Depreciation and amortization 488 457
Lease related operating expenses 35 31
Cable system operations 867 971
Management fees to General Partner and
affiliate 86 108
Reimbursed administrative costs to General
Partner 168 125
Provision for losses on receivables 28 43
Legal expense 194 83
General and administrative expenses 130 151
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Total Expenses 1,996 1,969
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NET INCOME BEFORE MINORITY INTEREST 435 764
Minority Interest in losses of subsidiary -- 6
------- -------
NET INCOME 435 770
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains arising during
period 46 151
Less: reclassification adjustment for gains
included in net income (30) (151)
------- --------
Other comprehensive income 16 --
------- --------
COMPREHENSIVE INCOME $ 451 $ 770
======= =======
NET INCOME PER LIMITED PARTNERSHIP UNIT $ .83 $ 1.48
======= =======
ALLOCATION OF NET INCOME:
General Partner $ 4 $ 7
Limited Partners 431 763
------- -------
$ 435 $ 770
======= =======
The accompanying notes are an integral part of these statements.
13
<PAGE>
PHOENIX LEASING CASH DISTRIBUTION FUND III,
A CALIFORNIA LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(Amounts in Thousands Except for Unit Amounts)
<TABLE>
<CAPTION>
Accumulated
General Other
Partner's Limited Partners' Comprehensive Total
Amount Units Amount Income Amount
------ ----------------- ------------- ------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ (25) 516,716 $ 18,160 $ -- $ 18,135
Distributions to partners ($22.50 per limited
partnership unit) -- -- (11,625) -- (11,625)
Redemptions of capital -- (54) -- -- --
Net income 7 -- 763 -- 770
-------- ------- -------- -------- --------
Balance, December 31, 1997 (18) 516,662 7,298 -- 7,280
Distributions to partners ($9.37 per limited
partnership unit) -- -- (4,841) -- (4,841)
Contribution from General Partner 2,072 -- -- -- 2,072
Other comprehensive income -- -- -- 16 16
Net income 4 -- 431 -- 435
-------- ------- -------- -------- --------
Balance, December 31, 1998 $ 2,058 516,662 $ 2,888 $ 16 $ 4,962
======== ======= ======== ======== ========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
14
<PAGE>
PHOENIX LEASING CASH DISTRIBUTION FUND III,
A CALIFORNIA LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
For the Years Ended December 31,
1998 1997
---- ----
Operating Activities:
- --------------------
Net income $ 435 $ 770
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 488 457
Gain on sale of cable systems -- (169)
Gain on sale of equipment (48) (74)
Gain on sale of securities (30) (151)
Equity in losses (earnings) from joint
ventures, net (227) 83
Provision for losses on accounts receivable 28 43
Minority interest in losses of subsidiary -- (6)
Decrease (increase) in accounts receivable 32 (7)
Decrease in accounts payable and accrued
expenses (15) (2,223)
Increase in other assets -- (23)
-------- --------
Net cash provided by (used in) operating
activities 663 (1,300)
-------- --------
Investing Activities:
- --------------------
Principal payments, notes receivable 2 13
Proceeds from sale of cable systems -- 169
Proceeds from sale of equipment 48 75
Proceeds from sale of securities 31 151
Distributions from joint ventures 332 154
Cable systems, property and equipment (63) (153)
-------- --------
Net cash provided by investing activities 350 409
-------- --------
Financing Activities:
- --------------------
Contribution from General Partner 2,072 --
Distributions to partners (4,841) (11,625)
Distributions to minority partners -- (3)
-------- --------
Net cash used in financing activities (2,769) (11,628)
-------- --------
Decrease in cash and cash equivalents (1,756) (12,519)
Cash and cash equivalents, beginning of period 3,072 15,591
-------- --------
Cash and cash equivalents, end of period $ 1,316 $ 3,072
======== ========
The accompanying notes are an integral part of these statements.
15
<PAGE>
PHOENIX LEASING CASH DISTRIBUTION FUND III,
A CALIFORNIA LIMITED PARTNERSHIP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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
reached the end of its term on December 31, 1998; however, the remaining assets
have not yet been liquidated.
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 current and prior 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 which 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. Phoenix Blackrock Grassroots sold these
systems prior to 1997 and ceased operations.
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 $1.6 million
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
$1.2 million. 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 in
the State of Delaware on November 9, 1995 and a 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 to which 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 $4.3 million 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.
Phoenix Concept Cablevision of Indiana, L.L.C. has accepted and agreed
to the terms stated on a Letter of Intent dated December 1, 1997 to sell all or
substantially all of its assets with a carrying value of $4.2 million at
December 31, 1997 for $6 million. Cash, accounts receivables, automobiles and
certain other miscellaneous items, currently owned by Phoenix Concept
Cablevision of Indiana, L.L.C. are excluded from this sale. This Letter of
Intent is subject to a definitive asset purchase agreement which is currently
being negotiated with the potential buyer.
On February 14, 1996, the Partnership and Phoenix Grassroots Cable
Systems, L.L.C. (Phoenix Grassroots), a newly formed limited liability company
16
<PAGE>
in the State of Delaware on February 9, 1996 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 $9.0 million 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 $2.0 million for this note receivable. The
Partnership reduced its allowance for loan losses by $2.0 million as a result of
the acquisition of this cable system. This reduction in the 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. On September 2, 1997, the Partnership received additional
proceeds of $169,000, which had been held in escrow for the sale of this system,
and recognized a gain of $169,000 during the year ended December 31, 1997.
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 Limited Partners. All Partnership losses shall
be allocated one percent to the General Partner and 99% to the Limited Partners.
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 1997 and 1998 the General Partner did not draw its share of
the 1997 and 1998 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 Subsidiary. The Subsidiary 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.
Compensation due to the General Partner and affiliates for the years
ended December 31,
1998 1997
---- ----
(Amounts in Thousands)
Management fees $ 86 $108
---- ----
$ 86 $108
==== ====
17
<PAGE>
Redemptions of Limited Partner units will only be made to the extent
permitted by applicable laws and regulations, the Partnership Agreement and if,
in the opinion of the General Partner, it is in the best interest of the
Partnership. In addition, redemptions will not be made if such redemptions would
cause the Partnership to be categorized as a publicly traded partnership for
federal income tax purposes. As provided for by the partnership agreement, the
General Partner has determined to exercise its discretion that no further
redemptions in the Partnership will be permitted after November 30, 1993.
The Partnership will acquire such limited partnership units for an
amount equal to 85% of the "accrual basis capital account" relating to the
redeemed units. The Partnership will retain the remaining 15% of the "accrual
basis capital account" relating to the redeemed units. Redemptions retained by
the Partnership were $0 during the years ended December 31, 1998 and 1997.
"Accrual basis capital account" is computed in accordance with the books and
records regularly maintained by the Partnership for financial reporting
purposes, utilizing the accrual method of accounting.
Note 2. Summary of Significant Accounting Policies.
------------------------------------------
Principles of Consolidation. The 1998 and 1997 financial statements
include the accounts of Phoenix Leasing Cash Distribution Fund III 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."
Leasing Operations. Under the operating method of accounting for
leases, the leased equipment is recorded as an asset at cost and depreciated.
The Partnership's leased equipment is depreciated primarily 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.
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.
Rental income for the year is determined on a straight-line basis of
rental payments due for the period under the terms of the lease. Maintenance,
repairs and minor renewals of the leased equipment are charged to expense.
Cable Television System Operations. The consolidated statements of
operations and comprehensive income include the operating activity of one
Subsidiary, Phoenix Concept Cablevision of Indiana, L.L.C. for the year ended
December 31, 1998 and 1997. 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
5,248 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.
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.
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.
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
18
<PAGE>
and, in some cases, other collateral of the borrower. In the event of default,
the Partnership has the right to foreclose upon the collateral used to secure
such loans.
Notes Receivable. Notes receivable generally are stated at their
outstanding unpaid principal balances, which includes accrued interest. Interest
income is accrued on the unpaid principal balance.
Impaired Notes Receivable. Generally, notes receivable are classified
as impaired and the accrual of interest on such notes are discontinued when the
contractual payment of principal or interest has become 90 days past due or
management has serious doubts about further collectibility of the contractual
payments, even though the loan may currently be performing. When a note
receivable is classified as impaired, income recognition is discontinued. Any
payments received subsequent to the placement of the note receivable 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.
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.
Investment in Available-for-Sale Securities. The Partnership has
investments in stock and stock warrants in public companies that have been
determined to be available for sale. Available-for-sale securities are stated at
their fair market value, with the unrealized gains and losses reported in a
separate component of partners' capital.
Reclassification. Certain 1997 amounts have been reclassified to
conform to the 1998 presentation.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Comprehensive Income. As of January 1, 1998, the Partnership adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130). This statement establishes standards for the reporting and
display of comprehensive income and its components in the financial statements.
For the Partnership, comprehensive income includes net income reported on the
statement of operations and changes in the fair value of its available-for-sale
investments reported as a component of partners' capital.
Business Segments. Effective January 1, 1998, the Partnership adopted
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments
of an Enterprise and Related Information," (SFAS 131). This Statement
establishes standards for the reporting and display of information about
operating segments and related disclosures. The Partnership's operating segments
are described in Note 13.
Note 3. Accounts Receivable.
-------------------
Accounts receivable consist of the following at December 31:
1998
----
(Amounts in Thousands)
Cable system service $ 132
General Partner and affiliates 39
Lease payments 18
-----
189
19
<PAGE>
Less: allowance for losses on accounts receivable (57)
-----
Total $ 132
=====
Note 4. Notes Receivable.
----------------
Notes receivable consist of the following at December 31:
1998
----
(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 92 to 95 months, collateralized by
a security interest in the cable system assets.
These notes have a graduated repayment schedule
followed with a balloon payment. $ 64
Less: allowance for losses on notes receivable (21)
----
Total $ 43
====
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, 1998, the recorded investment in notes that are
considered to be impaired is $64,000, for which the related allowance for losses
is $21,000. The average recorded investment in impaired loans during the years
ended December 31, 1998 and 1997 was approximately $306,000 and $652,000,
respectively.
The Partnership wrote-off the outstanding balance of several impaired
notes receivable from cable television system operators during the year ended
December 31, 1998 which totaled $583,000. These notes receivable had been fully
reserved for in a previous year.
The activity in the allowance for losses on notes receivable during the
years ended December 31, is as follows:
1998 1997
---- ----
(Amounts in Thousands)
Beginning balance $ 604 $ 604
Provision for losses -- --
Write downs (583) --
----- -----
Ending balance $ 21 $ 604
===== =====
Note 5. Equipment on Operating Leases.
-----------------------------
Equipment on lease consists primarily of computer peripheral equipment
subject to operating and financing leases. The Partnership's operating leases
are for initial lease terms of approximately 12 to 48 months.
The Partnership has entered into direct lease arrangements with lessees
consisting of Fortune 1000 companies and other businesses in different
industries located throughout the United States. Generally, it is the
responsibility of the lessee to provide maintenance on leased equipment. The
General Partner administers the equipment portfolio of leases acquired through
the direct leasing program. Administration includes the collection of rents from
the lessees and remarketing of the equipment.
20
<PAGE>
Minimum rentals to be received on noncancellable operating leases for
the years ended December 31 are as follows:
Operating
---------
(Amounts in Thousands)
1999............................................. $ 2
---
Totals $ 2
===
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:
1998
----
(Amounts in Thousands)
Distributions systems $ 2,413
Headend equipment 1,076
Automobiles 100
Land 37
Building 44
-------
3,670
Less: accumulated depreciation (811)
-------
Net property, cable systems and equipment $ 2,859
=======
Depreciation expense totaled approximately $290,000 and $282,000 for
the years ended December 31, 1998 and 1997, 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 ventures:
Weighted
Joint Venture Percentage Interest
------------- -------------------
Leveraged Joint Venture 1990-1(1) 35.29%
Phoenix Joint Venture 1994-1(1) 4.64
(1) Closed during 1998.
An analysis of the Partnership's investment in equipment joint ventures
is as follows:
21
<PAGE>
Net
Net Investment Investment
at Beginning Equity in at End
Date of Period Contributions Earnings Distributions of Period
- ---- ------------- ------------- -------- ------------- ---------
(Amounts in Thousands)
Year Ended
December 31, 1997 $ 45 $ 0 $ 30 $ 133 $ (58)
======== ====== ======= ======= ======
Year Ended
December 31, 1998 $ (58) $ 0 $ 152 $ 94 $ 0
======== ====== ======= ======= ======
The aggregate combined financial information of the equipment joint
ventures is presented as follows:
December 31, 1998
-----------------
(Amounts in Thousands)
Assets $ --
Liabilities --
Partners' Capital --
For the Years Ended December 31,
1998 1997
---- ----
(Amounts in Thousands)
Revenue $ 573 $ 1,571
Expenses 662 1,631
Net Loss (89) (60)
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 Pacific Northwest J.V 37.72%
Phoenix Concept Cablevision, Inc. (1) 14.19
Phoenix Independence Cable, LLC(1) 28.76
(1)cable system sold and joint venture closed during 1998.
An analysis of the Partnership's net investment in foreclosed cable
systems joint ventures at December 31, is as follows:
22
<PAGE>
Net
Net Investment Equity in Investment
at Beginning Earnings at End
Date of Period Contributions (Losses) Distributions of Period
- ---- ------------- ------------- -------- ------------- ---------
(Amounts in Thousands)
Year Ended
December 31, 1997 $ 502 $ 0 $ (113) $ 21 $ 368
======== ====== ======= ======= ======
Year Ended
December 31, 1998 $ 368 $ 0 $ 75 $ 238 $ 205
======== ====== ======= ======= ======
The aggregate combined financial information of the foreclosed cable
systems joint ventures is presented as follows:
December 31, 1998
-----------------
(Amounts in Thousands)
Assets $750
Liabilities 242
Partners' Capital 508
For the Years Ended December 31,
1998 1997
---- ----
(Amounts in Thousands)
Revenue $ 2,502 $ 1,011
Expenses 1,386 1,407
Net Income (Loss) 1,116 (396)
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:
1998
----
(Amounts in Thousands)
General Partner and affiliates $159
Equipment lease operations 11
Cable system service 180
Other 216
Trade 27
----
Total $593
====
Note 9. 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, 1998:
23
<PAGE>
Reported Amounts Tax Basis Net Difference
---------------- --------- --------------
(Amounts in Thousands)
Assets $5,555 $4,938 $ 617
Liabilities 593 175 418
Note 10. 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 11. 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
$168,000 and $125,000 for the years ended December 31, 1998 and 1997,
respectively. The equipment storage, remarketing and data processing costs
reimbursed to the General Partner during the years ended December 31, 1998 and
1997 were $15,000 and $4,000, respectively.
In addition, the General Partner receives a management fee and an
acquisition fee (see Note 1).
Note 12. 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 516,662 for the years ended
December 31, 1998 and 1997. 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 13. Business Segments.
-----------------
The Partnership was principally engaged in equipment leasing and
financing operations. It provided leasing and financing for various types of
capital equipment and other assets to Fortune 1000, middle-market, emerging
growth and other companies throughout the United States on either a long-term or
short-term basis. Additionally, the Partnership is engaged in cable television
system operations through its wholly owned subsidiary, Phoenix Concept
Cablevision of Indiana, L.L.C. These activities are monitored and reported by
management as separate operating segments.
The accounting policies of the segments are the same as those described
in Note 2. The Partnership evaluates segment performance based on profit or loss
from operations before income taxes not including nonrecurring gains and losses.
Summarized financial information for the years ended December 31, 1998
and 1997 concerning the Partnership's reportable segments is as follows:
1998 1997
---- ----
(Amounts in Thousands)
Total Revenues
Equipment leasing and financing $ 749 $ 833
Cable TV operations 1,682 1,900
------- -------
Total $ 2,431 $ 2,733
======= =======
24
<PAGE>
Net Income
Equipment leasing and financing $ 270 $ 415
Cable TV operations 165 355
------- -------
Total $ 435 $ 770
======= =======
Identifiable Assets
Equipment leasing and financing $ 1,312 $ 3,278
Cable TV operations 4,243 4,610
------- -------
Total $ 5,555 $ 7,888
======= =======
Depreciation and Amortization Expense
Equipment leasing and financing $ 9 $ (16)
Cable TV operations 479 473
------- -------
Total $ 488 $ 457
======= =======
Capital Expenditures
Cable TV operations $ 63 $ 153
------- -------
Total $ 63 $ 153
======= =======
Note 14. Fair Value of Financial Instruments.
-----------------------------------
The carrying amounts reported on the balance sheet for cash and cash
equivalents and notes receivable approximate the fair values.
Note 15. Legal Proceedings.
-----------------
On October 28, 1997, a Class Action Complaint (the "Complaint") was
filed against Phoenix Leasing Inc., Phoenix Leasing Associates, II and III L.P.,
Phoenix Securities Inc. and Phoenix American Inc. (the "Companies") in
California Superior Court for the County of Sacramento by eleven individuals on
behalf of investors in Phoenix Leasing Cash Distribution Funds I through V (the
"Partnerships"). The Companies were served with the Complaint on December 9,
1997. The Complaint sought declaratory and other relief including accounting,
receivership, imposition of constructive trust and judicial dissolution and
winding up of the Partnerships, and damages based on fraud, breach of fiduciary
duty and breach of contract by the Companies as general partners of the
Partnerships.
Plaintiffs severed one cause of action from the Complaint, a claim
related to the marketing and sale of CDF V, and transferred it to Marin County
Superior Court (the "Marin Action"). Plaintiffs then dismissed the remaining
claims in Sacramento Superior Court and re-filed them in a separate lawsuit
making similar allegations (the "Sacramento Action").
Plaintiffs have amended the Marin Action twice. Defendants have not yet
answered the Complaint and may file a demurrer to dismiss the claims. Discovery
has not commenced. The Companies intend to vigorously defend the Complaint.
In February 1999, plaintiffs requested a transfer of the Sacramento
Action to Marin County. The Court granted that request, and the case is
currently in transit. Defendants have not yet responded to the Complaint.
Discovery has not commenced. The Companies intend to vigorously defend the
Complaint.
During the year ended December 31, 1998, the Partnerships recorded
legal expenses of approximately $132,000 in connection with the above litigation
as indemnification to the General Partner.
The Partnership is not a party to any material pending legal
proceedings which would have a material adverse impact on its financial
position.
Note 16. Subsequent Events.
-----------------
In January of 1999, Phoenix Concept Cablevision of Indiana, L.L.C., a
wholly-owned subsidiary of the Partnership sold all of its assets used in the
operation of its cable television system receiving net proceeds of $5.8 million.
The net carrying value of the assets was $4.2 million on December 31, 1998.
25
<PAGE>
Item 8. Disagreements on Accounting and Financial Disclosure Matters.
------------------------------------------------------------
None.
PART III
Item 9. Directors and Executive Officers of the Registrant.
--------------------------------------------------
The registrant is a limited partnership and, therefore, has no
executive officers or directors. The general partner of the registrant is
Phoenix Leasing Incorporated, a California corporation. The directors and
executive officers of Phoenix Leasing Incorporated (PLI) are as follows:
GUS CONSTANTIN, age 61, is President, Chief Executive Officer and a
Director of PLI. Mr. Constantin received a B.S. degree in Engineering from the
University of Michigan and a Master's Degree in Management Science from Columbia
University. From 1969 to 1972, he served as Director, Computer and Technical
Equipment of DCL Incorporated (formerly Diebold Computer Leasing Incorporated),
a corporation formerly listed on the American Stock Exchange, and as Vice
President and General Manager of DCL Capital Corporation, a wholly-owned
subsidiary of DCL Incorporated. Mr. Constantin was actively engaged in marketing
manufacturer leasing programs to computer and medical equipment manufacturers
and in directing DCL Incorporated's IBM System/370 marketing activities. Prior
to 1969, Mr. Constantin was employed by IBM as a data processing systems
engineer for four years. Mr. Constantin is an individual general partner in four
active partnerships and is an NASD registered principal. Mr. Constantin is the
founder of PLI and the beneficial owner of all of the common stock of Phoenix
American Incorporated.
GARY W. MARTINEZ, age 48, is Executive Vice President, Chief Operating
Officer and a Director of PLI. He has been associated with PLI since 1976. He
manages the Asset Management Department, which is responsible for lease and loan
portfolio management. This includes credit analysis, contract terms,
documentation and funding; remittance application, change processing and
maintenance of customer accounts; customer service, invoicing, collection,
settlements and litigation; negotiating lease renewals, extensions, sales and
buyouts; and management information reporting. From 1973 to 1976, Mr. Martinez
was a Loan Officer with Crocker National Bank, San Francisco. Prior to 1973, he
was an Area Manager with Pennsylvania Life Insurance Company. Mr. Martinez is a
graduate of California State University, Chico.
HOWARD SOLOVEI, age 37, is the Chief Financial Officer, Treasurer and a
Director of PLI. He has been associated with PLI since 1984. Mr. Solovei
oversees the Finance Department. He is responsible for the structuring,
planning, and monitoring of the partnerships sponsored by the General Partner
and its affiliates, as well as maintaining the banking relationships. Mr.
Solovei graduated with a B.S. in Business Administration from the University of
California, Berkeley.
BRYANT J. TONG, age 44, is Senior Vice President, Financial Operations
and a Director of PLI. He has been with PLI since 1982. Mr. Tong is responsible
for investor services and overall company financial operations. He is also
responsible for the technical and administrative operations of the cash
management, corporate accounting, partnership accounting, accounting systems,
internal controls and tax departments, in addition to Securities and Exchange
Commission and other regulatory agency reporting. Prior to his association with
PLI, Mr. Tong was Controller-Partnership Accounting with the Robert A. McNeil
Corporation for two years and was an auditor with Ernst & Whinney (succeeded by
Ernst & Young) from 1977 through 1980. Mr. Tong holds a B.S. in Accounting from
the University of California, Berkeley, and is a Certified Public Accountant.
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.
Phoenix Income Fund, L.P.
Phoenix High Tech/High Yield Fund and
Phoenix Leasing Cash Distribution Fund IV
26
<PAGE>
Disclosure Pursuant to Section 16, Item 405 of Regulation S-K:
The General Partner (and any corporate general partner of the General
Partner) of the Registrant, and the executive officers of the General Partner
(or any corporate general partner of the General Partner) of the Registrant,
file reports pursuant to Section 16(a) of the Securities Exchange Act of 1934,
as amended. Based solely on the Registrant's review of the copies of such forms
received by the Registrant, the Registrant believes that, during 1997, all such
required reports were filed on a timely basis.
Certain Legal Proceedings.
On October 28, 1997, a Class Action Complaint (the "Complaint") was
filed against Phoenix Leasing Inc., Phoenix Leasing Associates, II and III L.P.,
Phoenix Securities Inc. and Phoenix American Inc. (the "Companies") in
California Superior Court for the County of Sacramento by eleven individuals on
behalf of investors in Phoenix Leasing Cash Distribution Funds I through V (the
"Partnerships"). The Companies were served with the Complaint on December 9,
1997. The Complaint sought declaratory and other relief including accounting,
receivership, imposition of a constructive trust and judicial dissolution and
winding up of the Partnerships, and damages based on fraud, breach of fiduciary
duty and breach of contract by the Companies as general partners of the
Partnerships.
Plaintiffs severed one cause of action from the Complaint, a claim
related to the marketing and sale of CDF V, and transferred it to Marin County
Superior Court (the "Marin Action"). Plaintiffs then dismissed the remaining
claims in Sacramento Superior Court and re-filed them in a separate lawsuit
making similar allegations (the "Sacramento Action").
Plaintiffs have amended the Marin Action twice. Defendants have not yet
answered the Complaint and may file a demurrer to dismiss the claims. Discovery
has not commenced. The Companies intend to vigorously defend the Complaint.
In February 1999, plaintiffs requested a transfer of the Sacramento
Action to Marin County. The Court granted that request, and the case is
currently in transit. Defendants have not yet responded to the Complaint.
Discovery has not commenced. The Companies intend to vigorously defend the
Complaint.
Item 10. Executive Compensation.
<TABLE>
Set forth is the information relating to all direct remuneration paid
or accrued by the Registrant during the last year to the General Partner and its
affiliate.
<CAPTION>
(A) (B) (C) (D)
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
------------------------- -----------------------
<S> <C> <C> <C> <C>
(Amounts in Thousands)
Phoenix Leasing
Incorporated General Partner $ 75(1) $ - $ -
Phoenix Cable
Managment, Inc. Manager 11(1) - -
-------- ----- ---
$ 86 $ - $ -
======== ===== ===
<FN>
(1) consists of management fees.
</FN>
</TABLE>
27
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
--------------------------------------------------------------
(a) No person owns of record, or is known by the Registrant to own
beneficially, more than five percent of any class of voting
securities of the Registrant.
(b) The General Partner of the Registrant owns the equity securities
of the Registrant set forth in the following table:
(1) (2) (3)
Title of Class Amount Beneficially Owned Percent of Class
-------------- ------------------------- ----------------
General Partner Interest Represents a 5% interest in 100%
the Registrant's profits 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%
Item 12. Certain Relationships and Related Transactions.
----------------------------------------------
None.
PART IV
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
----------------------------------------------------------------
Page No.
--------
(a) 1. Financial Statements:
Consolidated Balance Sheet as of December 31, 1998 12
Consolidated Statements of Operations and
Comprehensive Income for the Years Ended December
31, 1998 and 1997 13
Consolidated Statements of Partners' Capital
for the Years Ended December 31, 1998 and 1997 14
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998 and 1997 15
Notes to Consolidated Financial Statements 16-25
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,
1998.
(c) Exhibits
21. Additional Exhibits
a) Balance Sheet of Phoenix Leasing Incorporated E21 1-12
b) Listing of all subsidiaries of the Registrant:
Phoenix Concept Cablevision of Indiana, LLC, a
wholly owned Subsidiary.
27. Financial Data Schedule
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PHOENIX LEASING CASH DISTRIBUTION FUND III,
A CALIFORNIA LIMITED PARTNERSHIP
(Registrant)
BY: PHOENIX LEASING INCORPORATED,
A CALIFORNIA CORPORATION
GENERAL PARTNER
Date: March 24, 1999 By: /S/ GUS CONSTANTIN
-------------- -------------------------
Gus Constantin, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ GUS CONSTANTIN President, Chief Executive Officer March 24, 1999
- ------------------------- and a Director of --------------
(Gus Constantin) Phoenix Leasing Incorporated
General Partner
/S/ GARY W. MARTINEZ Executive Vice President, March 24, 1999
- ------------------------- Chief Operating Officer and a --------------
(Gary W. Martinez) Director of Phoenix Leasing
Incorporated
General Partner
/S/ HOWARD SOLOVEI Chief Financial Officer, March 24, 1999
- ------------------------- Treasurer and a Director of --------------
(Howard Solovei) Phoenix Leasing Incorporated
General Partner
/S/ BRYANT J. TONG Senior Vice President, March 24, 1999
- ------------------------- Financial Operations --------------
(Bryant J. Tong) (Principal Accounting Officer)
and a Director of
Phoenix Leasing Incorporated
General Partner
29
Exhibit 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Phoenix Leasing Incorporated:
We have audited the accompanying consolidated balance sheets of Phoenix Leasing
Incorporated (a California corporation) and Subsidiaries as of June 30, 1998 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheets are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheets. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the balance sheets referred to above present fairly, in all
material respects, the financial position of Phoenix Leasing Incorporated and
Subsidiaries as of June 30, 1998 and 1997, in conformity with generally accepted
accounting principles.
San Francisco, California, ARTHUR ANDERSEN LLP
September 9, 1998
Page 1 of 12
<PAGE>
<TABLE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
June 30, June 30,
1998 1997
---- ----
<S> <C> <C>
Cash and cash equivalents $ 6,530,661 $11,409,747
Investments in marketable securities 7,313,855 5,105,289
Trade accounts receivable, net of allowance for doubtful accounts
of $55,173 and $121,944 at June 30, 1998 and 1997, respectively 131,575 289,284
Receivables from Phoenix Leasing Partnerships, other affiliates and
trusts 4,515,180 4,315,315
Notes receivable from related party 3,053,037 1,002,060
Equipment subject to lease 6,622,323 4,320,755
Notes receivable 11,814,873 5,825,842
Investments in Phoenix Leasing Partnerships 2,085,922 1,678,239
Property and equipment, net of accumulated depreciation of $11,541,407
and $10,881,577 at June 30, 1998 and 1997, respectively 5,900,642 6,009,049
Capitalized initial direct costs of originating leases and loans 464,207 150,767
Other assets 2,490,060 2,936,974
----------- -----------
TOTAL ASSETS $50,922,335 $43,043,321
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Warehouse lines of credit $19,139,328 $10,310,568
Payables to affiliates 382,264 2,950,748
Accounts payable and accrued expenses 3,806,494 2,374,490
Long-term debt 140,215 147,532
Deficit in investments in Phoenix Leasing Partnerships 409,131 738,297
----------- -----------
TOTAL LIABILITIES 23,877,432 16,521,635
----------- -----------
Minority Interests in Consolidated Subsidiaries 122,744 105,901
----------- -----------
Commitments and Contingencies (Note 13)
SHAREHOLDER'S EQUITY:
Common stock, without par value, 30,000,000 shares
authorized, 5,433,600 issued and outstanding at
June 30, 1998 and 1997, respectively 20,369 20,369
Additional capital 11,466,920 11,466,920
Unrealized gains on investments in securities, available for sale 236,392 243,311
Retained earnings 15,198,478 14,685,185
----------- -----------
TOTAL SHAREHOLDER'S EQUITY 26,922,159 26,415,785
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $50,922,335 $43,043,321
=========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
2
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998
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 also engages in
similar leasing activities for its own account and pools these loans and leases
for sale to trusts which engage in the sale of asset backed securities . The
Company also provided ongoing equipment maintenance services for end-users of
high-technology data processing equipment and graphic plotters. This business
operation was sold in May 1997.
b. Principles of Consolidation - The consolidated financial statements
include the accounts of Phoenix Leasing Incorporated and its wholly or
majority-owned subsidiaries and subsidiaries over which the Company exerts
control. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Except as otherwise explained below, minority interests in the net
assets and net income or loss of majority-owned subsidiaries are allocated on
the basis of the proportionate ownership interests of the minority owners.
Three of the consolidated subsidiaries are California limited
partnerships (the Partnerships) which are general partners of three of the
Phoenix Leasing Partnerships. As of June 30, 1998, the Company held a 50%
general partner ownership interest in two of the Partnerships and a 62.5%
interest in one. Under the terms of the partnership agreements, profits and
losses attributable to acquisition fees paid to the Partnerships from Phoenix
Leasing Partnerships are allocated to the limited partner (the minority owner in
the Partnerships) in proportion to the limited partner's ownership interest. All
remaining profits and losses are allocated to the Company. Distributions to the
partners are made in accordance with the terms of the partnership agreement. The
limited partner of each of the Partnerships is Lease Management Associates,
Inc., a Nevada corporation controlled by an officer of the Company, who is the
owner of PAI.
c. 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.
d. Lease Accounting - The Company's leasing operations consist of both
financing and operating leases. The method of accounting for finance leases
recognizes unearned income at the inception of the lease calculated as the
excess of net rentals receivable and estimated residual value at the end of the
lease term over the cost of the equipment leased. Unearned income is amortized
monthly over the term of the lease on a declining basis to provide an
approximate level rate of return on the unrecovered cost of the investment.
Initial direct costs of originating new leases are capitalized and amortized
over the initial lease term.
When accounting for operating leases, the leased equipment is
recorded as an asset, at cost, and is depreciated on a straight-line basis over
its estimated useful life, ranging up to six years. Rental income represents the
rental payments due during the period under the terms of the lease.
3
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998
Note 1. Summary of Significant Accounting Policies (continued):
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.
e. 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.
f. Income Taxes - The Company is included in consolidated and combined
tax returns filed by PAI. See Note 15 for further information.
g. Investments in Securities - Investments in securities, available for
sale, are stated at fair value or amortized cost which approximates fair value,
as specified by SFAS 115. Interest is recognized when earned.
h. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
i. Reclassification - Certain 1997 balances have been reclassified to
conform to the 1998 presentation.
Note 2. Receivables from Phoenix Leasing Partnerships, Other Affiliates, and
Trusts:
Receivables from Phoenix Leasing Partnerships, other affiliates and
trusts consist of the following as of June 30:
1998 1997
---- ----
Management fees $ 342,154 $ 156,688
Acquisition fees 308,182 283,133
Other receivables from Phoenix Leasing Partnerships, net 846,578 3,353,327
Servicer advances due from unaffiliated Trusts 468,453 230,478
Receivable from Parent 2,511,601 --
Receivables from other corporate affiliates 38,212 291,689
---------- ----------
$4,515,180 $4,315,315
========== ==========
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
4
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998
Note 3. Investments in Phoenix Leasing Partnerships (continued):
partnership, which includes responsibility for supervising partnership
acquisition, leasing, remarketing and sale of equipment. Distributions of cash
from the partnerships are made at the discretion of the general partner;
historically, a significant portion of the partnerships' earnings has been
distributed annually.
The activity in the investments in Phoenix Leasing Partnerships for the
years ended June 30 are as follows:
1998 1997
---- ----
Balance, beginning of year $ 939,942 $ 1,012,671
Additional investments 6,109,431 178,243
Equity in earnings (losses) (664,595) 2,933,649
Cash distributions (4,707,987) (3,184,621)
----------- -----------
Balance, end of year $ 1,676,791 $ 939,942
=========== ===========
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.
In addition, four of the Phoenix Leasing Partnerships ceased operations
as of December 31, 1997. At closing, the Company, as General Partner, was
required to make additional capital contributions to the extent of differences
between the Partnership's general partner's tax capital account and book capital
account balances. The capital contributions were subsequently written off to
bring the book capital account balance to $0.
The aggregate positive investment and aggregate deficit investment
balances are presented separately on the balance sheets as of June 30, 1998 and
1997.
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, 1998 and for the
twelve months then ended:
Assets $85,615,000
Liabilities 7,763,000
Partners' Capital 77,852,000
Revenue 24,962,000
Net Income 12,186,000
Note 4. Equipment Subject to Lease and Notes Receivable:
Equipment subject to lease includes the Company's investments in
leveraged leases, investments in financing leases, operating leases and notes
receivable.
The Company purchases equipment subject to operating and full payout
leases with the intention of selling the equipment to one of its affiliated
limited partnerships or to trusts. Should the equipment be sold to an affiliated
5
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998
Note 4. Equipment Subject to Lease and Notes Receivable (continued):
limited partnership, the sales price will be the original purchase price paid by
the Company, plus any net acquisition and holding costs reduced by any rental
payments received by the Company during the warehousing period. When the
equipment is sold to a trust, the Company earns a brokerage commission.
Equipment subject to lease consists of the following at June 30:
1998 1997
---- ----
Equipment on lease, net of accumulated
depreciation of $47,146 and $47,177
at June 30, 1998 and 1997, respectively $ 8,154 $ 83,057
Leveraged leases 1,051,728 1,913,392
Equipment held for resale 252,133 225,084
Investment in financing leases 4,954,636 1,863,214
Lease Residuals 297,905 --
Operating leases 57,766 236,008
----------- -----------
Total equipment subject to lease $ 6,324,417 $ 4,320,755
=========== ===========
Notes receivable $11,814,873 $ 5,825,842
Leveraged Leases:
----------------
The Company's net investment in leveraged leases is composed of the
following elements at June 30:
1998 1997
---- ----
Rental receivable (net of principal and
interest on the nonrecourse debt) $ -- $ --
Estimated residual value of leased assets 1,740,972 2,602,636
Less: Unearned and deferred income (689,244) (689,244)
----------- -----------
Net investment in leveraged leases $ 1,051,728 $ 1,913,392
=========== ===========
Investment in Financing Leases:
------------------------------
The Company has entered into direct lease arrangements with companies
engaged 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:
1998 1997
---- ----
Minimum lease payments to be received $ 6,594,860 $ 2,420,101
Less: unearned income (1,584,490) (542,155)
allowance for early termination (55,734) (14,732)
----------- -----------
Net investment in financing leases $ 4,954,636 $ 1,863,214
=========== ===========
6
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998
Note 4. Equipment Subject to Lease and Notes Receivable (continued):
Minimum rentals to be received on non-cancelable financing leases for
the years ended June 30, are as follows:
1999 $ 1,554,861
2000 1,560,606
2001 1,532,905
2002 1,294,282
2003 642,901
Thereafter 9,305
-----------
Total $ 6,594,860
===========
Notes Receivable:
----------------
Notes receivable for the years ended June 30, are as follows:
1998 1997
---- ----
Notes receivable from emerging growth and
other companies with stated interest ranging
from 9% to 20.7% per annum receivable in
installments ranging from 35 to 86 months
collateralized by the equipment financed $ 12,195,557 $ 5,825,842
Less: allowance for losses (380,684) --
------------ ------------
Total $ 11,814,873 $ 5,825,842
============ ============
Minimum payments to be received on non-cancelable notes receivable for
the years ended June 30, are as follows:
1999 $ 3,727,594
2000 3,743,647
2001 3,708,383
2002 2,878,901
2003 1,816,735
Thereafter 937,524
------------
Total minimum payments to be received 16,812,784
Less: unearned interest (4,617,227)
allowance for losses (380,684)
------------
Net investment in notes receivable $ 11,814,873
============
Note 5. Sale of Leased Assets and Notes Receivable:
The Company adopted SFAS 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities", as it relates to
transactions including revolving periods completed after January 1, 1997.
Prior to this date, such transactions were accounted for under SFAS 77,
"Reporting by Transferors for Transfers of Receivables without Recourse". The
change in standards did not have a material effect on the financial statements
of the Company during the year ended June 30, 1997.
7
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998
Note 5. Sale of Leased Assets and Notes Receivable (continued):
The Company temporarily funds and holds equipment financing
transactions structured as either financing leases or notes receivable. These
financing transactions are held by the Company for a short period of time before
they are then transferred to a special purpose entity for the purpose of
securitizing the payment streams. To date, the Company has been involved in five
such securitization transactions. The first three transactions were entered into
prior to June 30, 1997, the fourth transaction was entered into on November 25,
1997, and the fifth on May 25, 1998. Pursuant to these securitization
transactions, the Company may continue to transfer additional finance leases or
notes receivable to these special purpose entities on a monthly basis for a
period of one year from the date of each securitization transaction. During the
year ended June 30, 1998, the Company transferred additional financing leases
and notes receivable to special purpose entities.
Note 6. Property and Equipment:
Major classes of property and equipment at June 30 are as follows:
1998 1997
---- ----
Land $ 1,077,830 $ 1,077,830
Buildings 7,452,634 7,420,201
Office furniture, fixtures and equipment 8,012,736 7,468,072
Other 898,849 924,523
------------ ------------
17,442,049 16,890,626
Less accumulated depreciation and
amortization (11,541,407) (10,881,577)
------------ ------------
Net Property and Equipment $ 5,900,642 $ 6,009,049
============ ============
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 ("IRB") which PAI
has with the City of San Rafael, California. The principal of the IRB is payable
in a lump sum payment on October 1, 2004.
As of June 30, 1998, a portion of the Company's headquarters has been
leased to third parties. The remaining lease term is for less than one year and
the minimum lease payments receivable is $146,055.
Note 7. Investments in Securities:
The Company accounts for its investments in securities under the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 115 - Accounting for Certain Investments in Debt and Equity
Securities (SFAS 115). 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.
8
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998
Note 7. Investments in Securities (continued):
In connection with the five prior lease and note securitizations (see
Note 7) the Company has acquired Class C Equipment Investment Trust Certificates
(Class C Shares) and notes. The Class C Shares are classified as AFS and are
reported at their amortized cost of $6,880,457 and $4,658,771, as of June 30,
1998 and 1997, respectively, which approximates fair value. The Class C Shares
do not have a specified contractual maturity.
All other equities held by the Company are classified as AFS and are
reported at their fair value of $433,397 and $446,518 at June 30, 1998 and 1997,
respectively. Gross unrealized gains on such securities as of June 30, 1998 and
1997 were $393,987 and $405,518, respectively.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring every derivative instruments (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. This Statement requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15,
1999. Statement 133 cannot be applied retroactively. Statement 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, substantively modified
after December 31, 1997.
The Company has not yet quantified the impacts of adopting Statement
133 on our financial statements and has not determined the timing of or method
of our adoption of Statement 133. However, the Statement could increase
volatility in earnings and other comprehensive income.
Note 8. Fair Value of Financial Instruments:
Investments in Securities
-------------------------
The carrying amounts of investments in securities, available for sale,
reported in the balance sheets approximate their fair values.
Notes Receivable and Debt
-------------------------
The fair values of the Company's notes receivable and debt are
estimated based on the market prices of similar instruments or on the current
market interest rates for instruments with similar terms, maturities, and risks.
The estimated fair values of the Company's notes receivable and debt approximate
the carrying amounts reported in the balance sheets.
9
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998
Note 9. Short-Term and Warehouse Lines of Credit:
To provide interim financing for equipment and working capital needs,
the Company executes lines of credit which consist of short-term notes with
banks with interest rates equal to the prime rate or the banks' index rate. All
lines of credit are renewable annually at the banks' option.
As of June 30, 1998, the Company, through PAI, had access to one
short-term line of credit totaling $2.5 million, all of which was available.
Draw downs under this credit line are secured by the Company's receivables from
Phoenix Leasing Partnerships and its Class C shares.
In addition, the Company has two secured short-term warehouse lines of
credit totaling $47.5 million, which are used to provide interim financing for
the acquisition of equipment and the financing of notes receivable. As of June
30, 1998 and 1997, $19.1 and $10.3 million, respectively, of these lines have
been drawn down and are due in one year or less. The draw downs under these
lines are collateralized by investments in financing leases and notes receivable
included in equipment subject to lease and by a second lien on the Company's
Class C shares. The interest rate is tied to the Bank's base rate or the IBOR
(Eurodollar) rate. The commitment period for one of the lines of credit which
totals $22.5 million terminates on December 31, 1999. The second line of credit
which totals $25 million terminates on August 31, 1999. Monthly 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 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.
Note 10. Long-Term Debt:
Long-term debt consists of the following at June 30:
1998 1997
---- ----
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
value of $167,650. Note is amortized over
83 months with monthly payments of $559 and
a final payment of $121,267. $140,215 $147,532
======== ========
The aggregate long-term debt maturities for the fiscal years ended June 30, are
as follows:
1999 $ 6,706
2000 6,706
2001 126,803
--------
Total $140,215
========
Note 11. Income Taxes:
The Company's income or loss for tax reporting purposes is included in
the consolidated and combined tax returns filed by PAI which are prepared on the
accrual basis of accounting. In accordance with a Tax Sharing Agreement
10
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998
Note 11. Income Taxes (continued):
effective July 1, 1991, between the Company and PAI, PAI has assumed all tax
liabilities and benefits arising from the Company's income or loss.
The Company computes its tax benefit or provision and the related
liability is transferred to PAI.
The provision for income taxes for the year ended June 30 consists of
the following:
1998 1997
---- ----
Current tax expense (benefit) $1,198,968 $ (111,925)
Deferred tax (benefit) expense (913,044) 670,305
---------- ----------
$ 285,924 $ 782,230
========== ==========
Cumulative temporary differences of $6,554,133 and $10,097,889 as of
June 30, 1998 and 1997, respectively, are primarily related to differences in
book and tax accounting treatments for leveraged leases.
The difference between the effective tax rate and statutory tax rate is
due to certain expenses deductible for financial reporting purposes but not for
tax purposes, state tax expense net of federal benefit and other miscellaneous
items.
Note 12. Transactions with Related Parties:
The Company provided a line of credit totaling $8,000,000 to its
principal shareholder which was recourse to the assets and common stock of
Phoenix Precision Graphics, Inc. (PPG) (a Nevada corporation owned by the
principal shareholder). At June 30, 1997, $511,493 of this line of credit was
outstanding and is included in notes receivable from related parties. On April
1, 1998, the Company's principal shareholder contributed the assets and
liabilities of Phoenix Precision Graphics, Inc. (PPG) to the Company. PPG is a
electrostatic plotter manufacturing company which is currently in the research
and development phase. At the time of contribution, PPG had total assets of
$1,949,436 and liabilities which the Company assumed totaling $577,016. The
Company's financial statements include this transaction as though the
contribution occurred on July 1, 1996.
The Company provided an interest bearing line of credit to PAI's
controlling shareholder, which was secured by common stock of Phoenix Fiberlink
Inc. (a Nevada Corporation, owned by the principal shareholder). At June 30,
1997, $199,105 of this line of credit has been drawn down and is included in
notes receivable from related party. This note was paid in full in October 1997.
The Company earned a management fee from an affiliate of $154,622 and
$515,137 for the years ended June 30, 1998 and 1997, respectively. This
management fee is included in Portfolio management fees.
As of January 1, 1997, the Company transferred certain assets and
liabilities to a non-consolidated affiliate, ReSource/Phoenix, Inc., wholly
owned by the Company's controlling shareholder. No gain or loss was recorded as
a result of this transaction. In addition, the Company transferred all of its
third party resource service contracts to ReSource/Phoenix, Inc. The Company
recorded fees from these contacts of $657,295 for the period July 1, 1996
through December 31, 1996. ReSource/Phoenix, Inc. will continue to provide
11
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998
Note 12. Transactions with Related Parties (continued):
Accounting, Investor Administration, and Information Technology services to the
Company.
The Company provides an interest bearing line of credit to
ReSource/Phoenix, Inc., which is secured by common stock of ReSource/Phoenix,
Inc. (an affiliated Nevada corporation). As of June 30, 1998, $3,053,037 of this
line of credit had been drawn down and is included in notes receivable from
related party.
Note 13. 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, 1998 the Company anticipates being able to satisfy its
future obligations under the agreements.
On October 28, 1997 a Class Action Complaint was filed against Phoenix
Leasing Incorporated, Phoenix Leasing Associates II, LP, Phoenix Leasing
Associates III, LP, Phoenix Securities Inc. and Phoenix American Incorporated
(the "Companies") in California Superior Court for the County of Sacramento by
eleven individuals on behalf of investors in Phoenix Leasing Cash Distribution
Funds I through V (the "Partnerships"). The Companies were served with the
Complaint on December 9, 1997. The Complaint seeks declaratory and other relief
including accounting, receivership, imposition of constructive trust and
judicial dissolution and winding up of the Partnerships, and damages based on
fraud, breach of fiduciary duty and breach of contract by the Companies as
general partners of the Partnerships. Plaintiffs served an amended complaint on
August 17, 1998. Discovery has not yet commenced. The Companies intend to
vigorously defend the Complaint.
Note 14. Subsequent Events:
Effective July 1, 1998, the Company and all its subsidiaries adopted
treatment as an Subchapter "S" Corporation pursuant to the Federal Income Tax
Regulations for tax reporting purposes and changed its fiscal year end from June
30 to September 30.
On July 15, 1998, the Company entered into a term loan agreement with a
Bank to borrow up to $10 million. Draw-downs under this term loan are secured by
equipment lease or loan contracts and repayment of the term loan is guaranteed
by the Company. The interest rate is a fixed rate equal to the two-year U.S.
Treasury (in effect at the time of the draw-downs) plus a margin. Monthly
payments of principal and interest are equal to cash received pursuant to the
lease and loan contracts less a .125% servicing fee and all expenses paid for
legal and collection expenses. The entire unpaid principal is due 48 months
after the draw down has occurred. On August 24, 1998, the Company borrowed
$9,999,648 of this term-loan to purchase equipment lease or loan contracts.
12
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