UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-KSB
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934
For the fiscal year ended December 31, 1997 Commission File Number 0-17989
PHOENIX HIGH TECH/HIGH YIELD FUND,
- --------------------------------------------------------------------------------
A CALIFORNIA LIMITED PARTNERSHIP
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
California 68-0166383
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2401 Kerner Boulevard, San Rafael, California 94901-5527
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 485-4500
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Units of Limited
Partnership Interest
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-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 $68,000.
As of December 31, 1997, 7,526 Units of Limited Partnership interest were
outstanding. No market exists for the Units of Partnership interest and
therefore there exists no aggregate market value at December 31, 1997.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Transitional Small Business Disclosure Format:
Yes _____ No __X__
Page 1 of 23
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PHOENIX HIGH TECH/HIGH YIELD FUND,
A CALIFORNIA LIMITED PARTNERSHIP
1997 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I
Item 1. Business........................................................ 3
Item 2. Properties...................................................... 4
Item 3. Legal Proceedings............................................... 4
Item 4. Submission of Matters to a Vote of Security Holders............. 4
PART II
Item 5. Market for the Registrant's Securities and Related Security
Holder Matters.................................................. 5
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 6
Item 7. Financial Statements and Supplementary Data..................... 8
Item 8. Disagreements on Accounting and Financial Disclosure Matters.... 20
PART III
Item 9. Directors and Executive Officers of the Registrant.............. 20
Item 10. Executive Compensation.......................................... 21
Item 11. Security Ownership of Certain Beneficial Owners and Management.. 21
Item 12. Certain Relationships and Related Transactions.................. 22
PART IV
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 22
Signatures.................................................................. 23
2
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PART I
Item 1. Business.
General Development of Business.
Phoenix High Tech/High Yield Fund, a California limited partnership (the
"Partnership"), was organized on July 26, 1988. The Partnership was registered
with the Securities and Exchange Commission with an effective date of November
10, 1988 and shall continue to operate until its termination date unless
dissolved sooner due to the sale of substantially all of the assets of the
Partnership or a vote of the Limited Partners. The Partnership will terminate on
December 31, 1999. The General Partner is Phoenix Leasing Incorporated, a
California corporation. The General Partner or its affiliates also is or has
been a general partner in several other limited partnerships formed to invest in
capital equipment and other assets.
The initial public offering was for 25,000 units of limited partnership
interest at a price of $1,000 per unit. The Partnership had the option of
increasing the public offering up to a maximum of 50,000 units. The Partnership
sold 7,526 units for a total capitalization of $7,526,000. Of the proceeds
received through the offering, the Partnership has incurred $967,837 in
organizational and offering expenses. The initial public offering was completed
on November 10, 1990.
From the initial formation of the Partnership through December 31, 1997,
the total investments in equipment leases and financing transactions (loans)
approximate $7,394,000. The average initial firm term of contractual payments
from equipment subject to lease was 45.20 months, and the average initial net
monthly payment rate as a percentage of the original purchase price was 2.92%.
The average initial firm term of contractual payments from loans was 61.96
months. These leases and loans have been concentrated primarily in the
manufacturing and telecommunications industries.
Summary of Business Activities.
The Partnership has engaged in diverse activities in which the General
Partner has had considerable experience. These areas include leasing and
financing activities for venture capital-backed emerging growth companies,
financing and leasing activities for cable television system operators and
related businesses, and other general leasing and financing activities. Set
forth below is a summary of these activities.
Emerging Growth Company Activities (Venture Financing). One of the major
purposes of the Partnership is to lease and finance various types of capital
equipment, primarily to emerging growth companies. The types of equipment in
which the Partnership has invested include various types of high technology
equipment such as semiconductor production and test equipment, general
electronic production equipment, computer terminals, data processing systems,
computer communications equipment and medical equipment, as well as office,
manufacturing and other types of capital equipment. The Partnership has also
entered into arrangements to provide secured financings, including financings of
accounts receivable and inventories, to emerging growth companies.
The emerging growth companies with which the Partnership has entered
into leases or financing transactions are located throughout the United States
and its possessions and are engaged in a variety of businesses for the provision
of products or services. Such companies are in the start-up or early phases of
operation with, in most cases, at least one round of venture capital debt or
equity financing having been concluded prior to the Partnership's investment.
Cable Television System Leasing and Financing (Cable Financing). The
other major purpose of the Partnership was to make secured loans to operators of
cable television systems for the acquisition, refinancing, construction, upgrade
and extension of such systems in the United States, its possessions and its
military bases. In addition, the Partnership had acquired cable television and
related equipment and leased such equipment to third parties.
3
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Loans to cable system operators were secured by a senior or
subordinated lien on the assets of the cable television system, its franchise,
contracts and related assets, including its subscriber list. Various types of
cable television and related equipment acquired by the Partnership and leased or
financed to third parties throughout the United States, its possessions and
military bases will be leased or financed on a long-term basis.
Several of the cable television system operators the Partnership
provided financing to 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 have further
caused an overall decrease in the value of many cable television systems. As a
result of the above, many of the Partnership's notes receivable from cable
television system operators went into default. The result was that the
Partnership had not received 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. The cable systems
are managed and operated by an affiliate of the General Partner.
Item 2. Properties.
The Partnership is engaged in the equipment leasing and financing
industry and as such, does not own or operate any principal plants, mines or
real property. The primary assets held by the Partnership are its investments in
leases and loans to businesses located throughout the United States.
As of December 31, 1997, the Partnership owns equipment with an
aggregate original cost of $89,000. The following table summarizes the type of
equipment owned or financed by the Partnership.
Percentage of
Asset Types Purchase Price Total Assets
----------- -------------- -------------
(Amounts in Thousands)
Capital Equipment Leased to Emerging
Growth Companies $ 89 100%
------ ---
TOTAL $ 89 100%
====== ===
Item 3. Legal Proceedings.
The Partnership is not a party to any pending legal proceedings which
would have a material adverse impact on its financial position.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of limited partners, through the
solicitation of proxies or otherwise, during the year covered by this report.
4
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PART II
Item 5. Market for the Registrant's Securities and Related Security Holder
Matters.
(a)The Registrant's limited partnership interests are not publicly
traded. There is no market for the Registrant's limited partnership
interests and it is unlikely that any will develop.
(b)Approximate number of equity security investments:
Number of Unit Holders
Title of Class as of December 31, 1997
---------------------------------- -----------------------
Limited Partners 379
General Partner 1
5
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Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Phoenix High Tech/High Yield Fund (the Partnership) reported a net loss
of $6,000 during the year ended December 31, 1997, as compared to net income of
$279,000 during 1996. During 1996, the Partnership experienced a recovery of
losses on receivables of $190,000 related to the payoff of a defaulted note
receivable from a cable television system operator which contributed to improved
earnings during 1996.
Total revenues decreased by $157,000 during the year ended December 31,
1997, as compared to 1996. The decrease in total revenues in 1997, compared to
1996, is partially attributable to a decline in leasing and financing related
revenues as a result of a decrease in the amount of equipment owned as of
December 31, 1997, compared to 1996. At December 31, 1997, the Partnership owned
equipment, excluding the Partnership's pro rata interest in joint ventures, with
an aggregate original cost of $89,000 compared to $758,000 at December 31, 1996.
Additionally, the Partnership's remaining equipment is being held for lease with
a net book value of $0 as of December 31, 1997. As a result, the Partnership
experienced an absence in rental income compared to $33,000 for the year ended
December 31, 1996 and a decline in earned income from financing leases of
$31,000 during the year ended December 31, 1997, compared to the prior year. The
decline in leasing and financing related revenues also contributed to the
$33,000 decrease in management fees to the General Partner for the year ended
December 31, 1997, compared to 1996.
Another primary factor contributing to the decrease in total revenues
for the year ended December 31, 1997, compared to 1996, is the decline in
earnings from joint ventures of $85,000. The decline in earnings from joint
ventures in 1997 is attributable to a write-down of cable system assets in one
of the foreclosed cable systems joint venture. The decrease in earnings from
joint ventures in 1997, compared to 1996, is also due to earnings being higher
than usual in 1996 as a result of a sale of a cable system for a gain in a
foreclosed cable systems joint venture.
The Partnership sold equipment with an aggregate original cost of
$669,000 during the year ended December 31, 1997. The lease agreements related
to the equipment which were sold in 1997 stated that the lessee would take title
to the equipment at the end of the lease term. As such, no gain or loss was
recognized on the sale of equipment during 1997, compared to a $12,000 gain on
sale of equipment in 1996.
Partially offsetting the factors contributing to the decline in total
revenues is an increase in interest income from notes receivable of $15,000 for
the year ended December 31, 1997, compared to 1996. 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. These settlement
proceeds are included in interest income from notes receivable on the Statement
of Operations.
The gain on sale of securities for both 1997 and 1996 of $50,000 and
$43,000, respectively, is attributable to the exercise and sale of stock
warrants held by the Partnership. The Partnership has been granted stock
warrants as part of its lease or financing agreements with certain emerging
growth companies.
Total expenses increased by $128,000 for the year ended December 31,
1997 compared to 1996. During the year ended December 31, 1996, the Partnership
had a recovery of losses on receivables of $190,000 which the Partnership did
not have in 1997. During 1996, the Partnership received a payoff on an impaired
note receivable from a cable television system operator. This outstanding note
receivable had been classified as impaired and the Partnership had suspended the
accrual of interest income on this note. The carrying value of this note was
$1,188,000, for which the Partnership had an allowance for loan losses of
$706,000, resulting in a net carrying value of $482,000. The Partnership
received total settlement proceeds of $672,000 on this note, which resulted in a
recovery of $190,000 of the allowance for losses on notes.
Partially offsetting the absence of a recovery of losses on receivables
for the year ended December 31, 1997, are the decreases in amortization of
acquisition fees and management fees to the General Partner, as previously
discussed. The decline in amortization of acquisition fees of $28,000 for 1997,
compared to 1996, is a result of the capitalized acquisition fees being fully
amortized as of December 31, 1997.
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 inflations have been
low, thereby having very little impact upon the Partnership.
6
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Liquidity and Capital Resources
The cash generated by leasing and financing activities was $116,000 for
the year ended December 31, 1997, as compared to $985,000 for the year ended
December 31, 1996. The net cash generated by leasing and financing activities
during 1996 were significantly higher as a result of a payoff of an impaired
note receivable of $672,000. The decrease in cash generated in 1997, compared to
1996, is also attributable to a decline in rental income.
The Partnership did not receive cash distributions from joint ventures
during the year ended December 31, 1997, compared to $87,000 in 1996. The cash
received from distributions from joint ventures during 1996 was attributable to
a foreclosed cable systems joint venture distributing proceeds from the sale of
its cable system assets.
The Partnership received proceeds from the sale of securities of $50,000
and $43,000 for the years ended December 31, 1997 and 1996, respectively, as a
result of the exercise and sale of stock warrants, as previously discussed.
As of December 31, 1997 and 1996, the Partnership owned equipment being
held for lease with an original cost of $89,000 and a net book value of $0. The
General Partner is actively engaged, on behalf of the Partnership, in
remarketing and selling the Partnership's equipment as it becomes available.
The cash distributed to partners was $1,169,000 and $283,000 during the
years ended December 31, 1997 and 1996, respectively. In accordance with the
Partnership Agreement, the Limited Partners are entitled to 99% of the cash
available for distribution and the General Partner is entitled to 1%. As a
result, the Limited Partners received $1,157,000 and $280,000 in distributions
during 1997 and 1996, respectively. The cumulative cash distributions to limited
partners are $6,994,000 and $5,837,000 at December 31, 1997 and 1996,
respectively. The General Partner received $12,000 and $3,000 for its share of
the cash distributions during 1997 and 1996, respectively.
The Partnership switched to an annual distribution method from a
quarterly distribution method with the first annual distribution being made on
January 15, 1997. The distribution on April 15, 1996 was the last scheduled
quarterly distribution made by the Partnership. The increase in distributions to
partners during the year ended December 31, 1997 is due to the receipt of a
settlement payment on an impaired note during the quarter ended September 30,
1996. The Partnership included these proceeds in the January 15, 1997
distribution to partners. If the cash generated by Partnership operations
decrease below expectations, the distributions to partners will be adjusted
accordingly.
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.
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.
7
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Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PHOENIX HIGH TECH/HIGH YIELD FUND,
A CALIFORNIA LIMITED PARTNERSHIP
YEAR ENDED DECEMBER 31, 1997
8
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Phoenix High Tech/High Yield Fund, a California limited
partnership:
We have audited the accompanying balance sheet of Phoenix High Tech/High Yield
Fund, a California limited partnership as of December 31, 1997, and the related
statements of operations, partners' capital and cash flows for the years ended
December 31, 1997 and 1996. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Phoenix High Tech/High Yield
Fund, a California Limited Partnership as of December 31, 1997, and the results
of its operations and its cash flows for the years ended December 31, 1997 and
1996, in conformity with generally accepted accounting principles.
San Francisco, California, ARTHUR ANDERSEN LLP
January 23, 1998
9
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PHOENIX HIGH TECH/HIGH YIELD FUND,
A CALIFORNIA LIMITED PARTNERSHIP
BALANCE SHEET
(Amounts in Thousands Except for Unit Amounts)
December 31, 1997
ASSETS -----------------
Cash and cash equivalents $ 496
Accounts receivable 37
Equipment on operating leases and held for
lease (net of accumulated depreciation of $56) --
Investment in joint ventures 130
Other assets 2
------
Total Assets $ 665
======
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 20
------
Total Liabilities 20
------
Partners' Capital:
General Partner (15)
Limited Partners, 25,000 units authorized,
7,526 units issued and outstanding 660
------
Total Partners' Capital 645
------
Total Liabilities and Partners' Capital $ 665
======
The accompanying notes are an integral part of
these statements.
10
<PAGE>
PHOENIX HIGH TECH/HIGH YIELD FUND,
A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(Amounts in Thousands Except for Per Unit Amounts)
For the Years Ended December 31,
1997 1996
---- ----
INCOME
Rental income $ -- $ 33
Earned income, financing leases 5 36
Gain on sale of equipment -- 12
Interest income, notes receivable 49 34
Equity in earnings (losses) from
joint ventures (67) 18
Gain on sale of securities 50 43
Other income 31 49
------ ------
Total Income 68 225
------ ------
EXPENSES
Amortization of acquisition fees 4 32
Management fees to General Partner 7 40
Reimbursed administrative costs to
General Partner 10 13
Recovery of losses on receivables -- (190)
Legal expense 22 29
General and administrative expenses 31 22
------ ------
Total Expenses 74 (54)
------ ------
NET INCOME (LOSS) $ (6) $ 279
====== ======
NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT $ (.74) $35.28
====== ======
ALLOCATION OF NET INCOME (LOSS):
General Partner $ -- $ 14
Limited Partners (6) 265
------ ------
$ (6) $ 279
====== ======
The accompanying notes are an integral part of
these statements.
11
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PHOENIX HIGH TECH/HIGH YIELD FUND,
A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL
(Amounts in Thousands Except for Unit Amounts)
General
Partner's Limited Partners' Unrealized Total
Amount Units Amount Gains Amount
--------- ---------------- --------- -------
Balance, December 31, 1995 $ (14) 7,526 $1,838 $ 149 $1,973
Distributions to partners ($37.27
per limited partnership unit) (3) -- (280) -- (283)
Change in unrealized gains on
available-for-sale securities -- -- -- (149) (149)
Net income 14 -- 265 -- 279
------ ----- ------ ------ ------
Balance, December 31, 1996 (3) 7,526 1,823 -- 1,820
Distributions to partners ($153.79
per limited partnership unit) (12) -- (1,157) -- (1,169)
Net loss -- -- (6) -- (6)
------ ----- ------ ------ ------
Balance, December 31, 1997 $ (15) 7,526 $ 660 $ -- $ 645
====== ===== ====== ====== ======
The accompanying notes are an integral part of
these statements.
12
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PHOENIX HIGH TECH/HIGH YIELD FUND,
A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
For the Years Ended
Ended December 31,
1997 1996
------- -------
Operating Activities:
Net income (loss) $ (6) $ 279
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Amortization of acquisition fees 4 32
Gain on sale of equipment -- (12)
Equity in losses (earnings) from joint ventures 67 (18)
Recovery of losses on notes receivable -- (190)
Gain on sale of securities (50) (43)
Decrease (increase) in accounts receivable 7 (26)
Decrease in accounts payable and accrued expenses (4) (20)
Increase in other assets (1) --
------- -------
Net cash provided by operating activities 17 2
------- -------
Investing Activities:
Principal payments, financing leases 99 212
Principal payments, notes receivable -- 771
Proceeds from sale of equipment -- 12
Proceeds from sale of securities 50 43
Distributions from joint ventures -- 87
------- -------
Net cash provided by investing activities 149 1,125
------- -------
Financing Activities:
Distributions to partners (1,169) (283)
------- -------
Net cash used by financing activities (1,169) (283)
------- -------
Increase (decrease) in cash and cash equivalents (1,003) 844
Cash and cash equivalents, beginning of period 1,499 655
------- -------
Cash and cash equivalents, end of period $ 496 $ 1,499
======= =======
The accompanying notes are an integral part of
these statements.
13
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PHOENIX HIGH TECH/HIGH YIELD FUND,
A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
Note 1. Organization and Partnership Matters.
Phoenix High Tech/High Yield Fund (the "Partnership"), was formed as a
California limited partnership on July 26, 1988. The initial Limited Partner
capital contribution of $1,000 was made by Phoenix Leasing Incorporated (the
"General Partner"). The Partnership's primary business objectives are: (1)
leasing and financing various types of capital equipment, primarily to and for
emerging growth companies and, in some cases, making secured loans to such
companies; (2) making secured loans to operators of cable television systems for
acquisition, refinancing, construction, upgrade and extension of cable
television systems; and (3) engaging in other types of leasing and financing
arrangements, including entering into equipment purchase and remarketing
agreements with various manufacturers of equipment and software available for
leasing or licensing by the Partnership.
The Partnership has also made investments in joint ventures with
affiliated partnerships managed by the General Partner for the purpose of
spreading the risks of financing or acquiring certain capital equipment leased
to third parties (see Note 6).
For financial reporting purposes, Partnership income is allocated as
follows: First, to the General Partner until the cumulative income so allocated
is equal to the cumulative distributions to the General Partner. Second, 1% to
the General Partner and 99% to the Limited Partners until the cumulative income
so allocated is equal to any cumulative Partnership loss and syndication
expenses, and the balance, if any, to the Limited Partners. All Partnership
losses are allocated 1% to the General Partner and 99% to the Limited Partners.
Syndication expenses are specially allocated one percent to the General Partner
and 99% to the Limited Partners.
Distributions. The General Partner is entitled to receive 1% of all
distributions until the Limited Partners have recovered their initial capital
contributions plus a return of 16% per annum, compounded annually, on their
unrecovered capital contributions (the "Priority Return"). Thereafter, cash
available for distribution will be distributed 20% to the General Partner and
80% to the Limited Partners.
Bonus Distribution. Pursuant to the Partnership Agreement, upon the 15th
of the calendar month following the earlier of (1) the Partnership raising
$10,000,000, or (2) the date 12 months from the date of release of funds from
the impound account, the Partnership made a bonus distribution to the Limited
Partners who had purchased units prior to that time. The bonus distribution was
calculated at 12% per annum (prorated for any partial year) of each Limited
Partner's capital account. In October of 1990, the General Partner made a
$571,000 capital contribution to the Partnership in an amount equal to the bonus
distribution and has acquired 571 units as a Limited Partner in return for such
contribution. Distributions pursuant to the bonus distribution will count
towards the Priority Return.
In the event the General Partner has a deficit balance in its capital
account at the time of Partnership liquidation, it will be required to
contribute the amount of such deficit to the Partnership.
As compensation for services performed in connection with the analysis
of equipment available to the Partnership and analysis of financing
transactions, the General Partner receives an acquisition and loan placement fee
equal to 4% of (a) the purchase price of equipment acquired by the Partnership,
(b) financing provided to businesses such as emerging growth companies or cable
television system operators, or (c) the purchase price of equipment leased by
manufacturers, the financing for which is provided by the Partnership, in each
case payable upon such acquisition or loan transaction, as the case may be. In
addition, as compensation for management services, the General Partner receives
a management fee payable quarterly equal to 3.5% of the Partnership's gross
revenues. Such revenues include loan payments, rental receipts, proceeds from
the sale of equipment and other income (other than interest income from
short-term, temporary investments). Acquisition fees are amortized over the
average expected life of the assets, principally on a straight-line basis.
Schedule of compensation paid and distributions made to the General
Partner for the years ended December 31,
14
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1997 1996
---- ----
(Amounts in Thousands)
Management fees $ 7 $ 40
Cash distributions 12 3
------- -------
$ 19 $ 43
======= =======
Note 2. Summary of Significant Accounting Policies.
Cash and Cash Equivalents. This includes deposits at banks, investments
in money market funds and other highly liquid short-term investments with
original maturities of less than 90 days.
Credit and Collateral. The Partnership's activities have been
concentrated in the equipment leasing and financing industry. A credit
evaluation is performed by the General Partner for all leases and loans made,
with the collateral requirements determined on a case-by-case basis. The
Partnership's loans are generally secured by the equipment or assets financed
and, in some cases, other collateral of the borrower. In the event of default,
the Partnership has the right to foreclose upon the collateral used to secure
such loans.
Leasing Operations. The Partnership's leasing operations consist of
financing and operating leases. The financing method of accounting for leases
records as unearned income at the inception of the lease, the excess of net
rentals receivable and estimated residual value at the end of the lease term,
over the cost of equipment leased. Unearned income is credited to income monthly
over the term of the lease on a declining basis to provide an approximate level
rate of return on the unrecovered cost of the investment. Direct costs of
consummating new leases are capitalized and included in the cost.
Under the operating method of accounting for leases, the leased
equipment is recorded as an asset at cost and depreciated on a straight-line
basis over the estimated useful life, ranging up to seven years.
Rental income for the year is determined on the basis of rental
payments due for the period under the terms of the lease. Maintenance and
repairs of the leased equipment are charged to expense.
Portfolio Valuation Methodology. The Partnership uses the portfolio
method of accounting for the net realizable value of the Partnership's equipment
portfolio.
Investment in Joint Ventures. Investments in net assets of the
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.
Reclassification. Certain 1996 amounts have been reclassified to conform
to the 1997 presentation.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Note 3. Accounts Receivable.
Accounts receivable consist of the following at December 31:
15
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1997
----
(Amounts in Thousands)
Lease payments $ 4
General Partner and Affiliates 10
Property tax 2
Other 21
-------
Total $ 37
=======
Note 4. 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. Any payments
received subsequent to the placement of the note receivable on to impaired
status will generally be applied towards the reduction of the outstanding note
receivable balance, which may include previously accrued interest as well as
principal. Once the principal and accrued interest balance has been reduced to
zero, the remaining payments will be applied to interest income.
During the year ended December 31, 1996, the Partnership received a
settlement on a note receivable from a cable television system operator which
was considered to be impaired. The Partnership received a partial recovery of
$672,000 as a settlement which was applied towards the $1,188,000 outstanding
note receivable balance. The remaining balance of $516,000 was written-off
through its related allowance for loan losses provided for in a previous year.
Upon receipt of the settlement of this note receivable, the Partnership reduced
the allowance for loan losses by $190,000 during the year ended December 31,
1996. This reduction in the allowance for loan losses was recognized as income
during the period.
The average recorded investment in impaired loans during the year ended
December 31, 1996 was approximately $619,000. The Partnership recognized
interest income on impaired loans during the year ended December 31, 1996
totaling $34,000.
During the year ended December 31, 1997, the Partnership received
additional settlement proceeds of $49,000 from a defaulted note receivable with
a net carrying value of $0.
Note 5. Equipment on Operating Leases.
Equipment on lease consists of capital equipment leased to emerging
growth companies subject to operating leases. The Partnership's equipment on
operating leases is fully depreciated.
The Partnership has entered into direct lease arrangements with certain
lessees. Generally, it is the responsibility of the lessee to provide
maintenance on leased equipment. The General Partner administers the equipment
portfolio of leases acquired through the direct leasing program. Administration
includes the collection of rents from the lessees and remarketing of the
equipment.
Note 6. Investment in Joint Ventures.
Foreclosed Cable Systems Joint Ventures
The Partnership owns an interest in foreclosed cable systems joint
ventures, along with other partnerships managed by the General Partner and its
affiliates. The Partnership foreclosed upon nonperforming outstanding notes
receivable to cable television operators to whom the Partnership, along with
other affiliated partnerships managed by the General Partner, had extended
credit. The partnerships' notes receivables were exchanged for interests (their
capital contribution), on a pro rata basis, in newly formed joint ventures owned
by the partnerships and managed by the General Partner. Title to the cable
television systems is held by the joint ventures. These investments are
accounted for using the equity method of accounting.
16
<PAGE>
The joint ventures owned by the Partnership, along with their percentage
ownership is as follows:
Percentage
Joint Venture Ownership
------------- ---------
Phoenix Black Rock Cable J.V.(1) 2.45%
Phoenix Pacific Northwest J.V. 19.82
Phoenix Independence Cable, LLC 17.75
(1)cable system sold and joint venture closed during 1996.
An analysis of the Partnership's net investment in foreclosed cable
systems joint ventures is as follows:
<TABLE>
<CAPTION>
Net Investment Equity in Net Investment
at Beginning Earnings at End
Date of Period Contributions (Losses) Distributions of Period
- ---- -------------- ------------- --------- ------------- --------------
(Amounts in Thousands)
<S> <C> <C> <C> <C> <C>
Year Ended
December 31, 1996 $ 266 $ - $ 18 $ 87 $ 197
====== ====== ====== ====== ======
Year Ended
December 31, 1997 $ 197 $ - $ (67) $ - $ 130
====== ====== ====== ====== ======
</TABLE>
The aggregate combined financial information of the foreclosed cable
systems joint ventures is presented as follows:
December 31, 1997
-----------------
(Amounts in Thousands)
Assets $ 909
Liabilities 240
Partners' Capital 669
For the Years Ended December 31,
1997 1996
---- ----
(Amounts in Thousands)
Revenue $ 404 $ 1,682
Expenses 778 652
Net Income (Loss) (374) 1,030
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 7. Accounts Payable and Accrued Expenses.
Accounts payable and accrued expenses consist of the following at
December 31:
17
<PAGE>
1997
----
(Amounts in Thousands)
General Partner and affiliates $ 1
Security deposits 6
Equipment lease operations 1
Other 12
-------
Total $ 20
=======
Note 8. Income Taxes.
Federal and state income tax regulations provide that taxes on the
income or loss of the Partnership are reportable by the partners in their
individual income tax returns. Accordingly, no provision for such taxes has been
made in the accompanying financial statements of the Partnership.
The net difference between the tax basis and the reported amounts of the
Partnership's assets and liabilities are as follows at December 31, 1997:
Reported Amounts Tax Basis Net Difference
---------------- --------- --------------
(Amounts in Thousands)
Assets $ 665 $ 652 $ 13
Liabilities 20 19 1
Note 9. Related Entities.
The General Partner and its affiliates also are, or have been a general
partner in other limited partnerships, most of which are generally engaged in
the equipment leasing business, but some of which provide financing to emerging
growth companies and operators of cable television systems.
Note 10. 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 $10,000
and $13,000 for the years ended December 31, 1997 and 1996, respectively. The
equipment storage, remarketing and data processing costs reimbursed to the
General Partner during the years ended December 31, 1997 and 1996 were $0.
In addition, the General Partner receives a management fee and an
acquisition fee for services rendered in connection with equipment acquisitions
(see Note 1).
Note 11. Net Income (Loss) and Distributions per Limited Partnership Unit.
Net income (loss) and distributions per limited partnership unit were
based on the Limited Partners' share of net income (loss) and distributions, and
the weighted average number of units outstanding of 7,526 for the years ended
December 31, 1997 and 1996. For the purposes of allocating income (loss) and
distributions to each individual Limited Partner, the Partnership allocates net
income (loss) and distributions based upon each respective Limited Partner's
ending capital account balance.
18
<PAGE>
Note 12. Fair Value of Financial Instruments.
The carrying amounts reported on the balance sheet for cash and cash
equivalents, available-for-sale securities and notes receivable approximate the
fair values.
Note 13. Subsequent Events.
In January 1998, cash distributions of $4,000 and $386,000 were made to
the General and Limited Partners, respectively.
19
<PAGE>
Item 8. Disagreements on Accounting and Financial Disclosure Matters.
None.
PART III
Item 9. Directors and Executive Officers of the Registrant.
The registrant is a limited partnership and, therefore, has no executive
officers or directors. The general partner of the registrant is Phoenix Leasing
Incorporated, a California corporation. The directors and executive officers of
Phoenix Leasing Incorporated (PLI) are as follows:
GUS CONSTANTIN, age 60, is President, Chief Executive Officer and a
Director of PLI. Mr. Constantin received a B.S. degree in Engineering from the
University of Michigan and a Master's Degree in Management Science from Columbia
University. From 1969 to 1972, he served as Director, Computer and Technical
Equipment of DCL Incorporated (formerly Diebold Computer Leasing Incorporated),
a corporation formerly listed on the American Stock Exchange, and as Vice
President and General Manager of DCL Capital Corporation, a wholly-owned
subsidiary of DCL Incorporated. Mr. Constantin was actively engaged in marketing
manufacturer leasing programs to computer and medical equipment manufacturers
and in directing DCL Incorporated's IBM System/370 marketing activities. Prior
to 1969, Mr. Constantin was employed by IBM as a data processing systems
engineer for four years. Mr. Constantin is an individual general partner in four
active partnerships and is an NASD registered principal. Mr. Constantin is the
founder of PLI and the beneficial owner of all of the common stock of Phoenix
American Incorporated.
GARY W. MARTINEZ, age 47, is Executive Vice President, Chief Operating
Officer and a Director of PLI. He has been associated with PLI since 1976. He
manages the Asset Management Department, which is responsible for lease and loan
portfolio management. This includes credit analysis, contract terms,
documentation and funding; remittance application, change processing and
maintenance of customer accounts; customer service, invoicing, collection,
settlements and litigation; negotiating lease renewals, extensions, sales and
buyouts; and management information reporting. From 1973 to 1976, Mr. Martinez
was a Loan Officer with Crocker National Bank, San Francisco. Prior to 1973, he
was an Area Manager with Pennsylvania Life Insurance Company. Mr. Martinez is a
graduate of California State University, Chico.
HOWARD SOLOVEI, age 36, is the Chief Financial Officer, Treasurer and a
Director of PLI. He has been associated with PLI since 1984. Mr. Solovei
oversees the Finance Department. He is responsible for the structuring,
planning, and monitoring of the partnerships sponsored by the General Partner
and its affiliates, as well as maintaining the banking relationships. Mr.
Solovei graduated with a B.S. in Business Administration from the University of
California, Berkeley.
BRYANT J. TONG, age 43, is Senior Vice President, Financial Operations
and a Director of PLI. He has been with PLI since 1982. Mr. Tong is responsible
for investor services and overall company financial operations. He is also
responsible for the technical and administrative operations of the cash
management, corporate accounting, partnership accounting, accounting systems,
internal controls and tax departments, in addition to Securities and Exchange
Commission and other regulatory agency reporting. Prior to his association with
PLI, Mr. Tong was Controller-Partnership Accounting with the Robert A. McNeil
Corporation for two years and was an auditor with Ernst & Whinney (succeeded by
Ernst & Young) from 1977 through 1980. Mr. Tong holds a B.S. in Accounting from
the University of California, Berkeley, and is a Certified Public Accountant.
CYNTHIA E. PARKS, age 42, is Senior Vice President, General Counsel and
Assistant Secretary of PLI. Prior to joining PLI in 1984, she was with GATX
Leasing Corporation, and had previously been Corporate Counsel for Stone
Financial Companies, and an Assistant Vice President of the Bank of America,
Bank Amerilease Group. She has a Bachelor's degree from Santa Clara University,
and earned her J.D. from the University of San Francisco School of Law.
Neither the General Partner nor any Executive Officer of the General
Partner has any family relationship with the others.
Phoenix Leasing Incorporated or its affiliates and the executive
officers of the General Partner serve in a similar capacity to the following
affiliated limited partnerships:
20
<PAGE>
Phoenix Leasing American Business Fund, L.P.
Phoenix Leasing Cash Distribution Fund V, L.P.
Phoenix Income Fund, L.P.
Phoenix Leasing Cash Distribution Fund IV
Phoenix Leasing Cash Distribution Fund III and
Phoenix Leasing Income Fund VII
Disclosure Pursuant to Section 16, Item 405 of Regulation S-K:
The General Partner (and any corporate general partner of the General
Partner) of the Registrant, and the executive officers of the General Partner
(or any corporate general partner of the General Partner) of the Registrant,
file reports pursuant to Section 16(a) of the Securities Exchange Act of 1934,
as amended. Based solely on the Registrant's review of the copies of such forms
received by the Registrant, the Registrant believes that, during 1997, all such
required reports were filed on a timely basis, except for reports on Form 3
(Initial Statement of Beneficial Ownership of Securities) filed late by Howard
Solovei and Cynthia E. Parks, each an executive officer of the General Partner
(or any corporate general partner of the General Partner) of the Registrant. No
units of limited partnership interest are held by such executive officers.
Certain Legal Proceedings.
On October 28, 1997 a Class Action Complaint was filed against Phoenix
Leasing Incorporated, Phoenix Leasing Associates, II and III L.P., Phoenix
Securities Inc. and Phoenix American Incorporated (the "Companies") in
California Superior Court for the County of Sacramento by eleven individuals on
behalf of investors in Phoenix Leasing Cash Distribution Funds I through V (the
"Partnerships"). The Companies were served with the Complaint on December 9,
1997. The Complaint seeks declaratory and other relief including accounting,
receivership, imposition of constructive trust and judicial dissolution and
winding up of the Partnerships, and damages based on fraud, breach of fiduciary
duty and breach of contract by the Companies as general partners of the
Partnerships. The Companies received an extension of time to answer the
Complaint and formal discovery has not commenced. The Companies intend to
vigorously defend the Complaint.
Item 10. Executive Compensation.
Set forth is the information relating to all direct remuneration paid or
accrued by the Registrant during the last year to the General Partner.
<TABLE>
<CAPTION>
(A) (B) (C) (D)
Cash and cash- Aggregate of
Name of Individual Capacities in equivalent forms contingent forms
or persons in group which served of remuneration of remuneration
- ------------------- ------------- ------------------------------------------- ----------------
(C1) (C2)
Securities or property
Salaries, fees, directors' insurance benefits or
fees, commissions, and reimbursement, personal
bonuses benefits
------------------------- -----------------------
(Amounts in Thousands)
<S> <C> <C> <C> <C>
Phoenix Leasing
Incorporated General Partner $ 7(1) $ 0 $ 0
==== ==== ====
(1) consists of management fees.
</TABLE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
(a)As of December 31, 1997, the following investors had a beneficial
ownership of more than 5% of the outstanding Limited Partnership
units:
21
<PAGE>
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Percent
Title of Class of Beneficial Owner Beneficial Ownership of Class
-------------- ------------------- -------------------- --------
<S> <C> <C> <C>
Limited Partner Independent Life & Accident 1,000 units 13.29%
Insurance Company
One Independent Drive
Jacksonville, FL 32276
Limited Partner Phoenix Leasing Incorporated 576.7 units 7.66%
2401 Kerner Boulevard
San Rafael, CA 94901
(b)The General Partner of the Registrant owns the equity securities of
the Registrant set forth in the following table:
</TABLE>
<TABLE>
<CAPTION>
(1) (2) (3)
Title of Class Amount Beneficially Owned Percent of Class
-------------- ------------------------- ----------------
<S> <C> <C>
General Partner Interest Represents a 1% interest in the Registrant's 100%
profits and distributions, until the Limited
Partners have recovered their capital contribu-
tions plus a cumulative return of 16% per annum,
compounded quarterly, on the unrecovered portion
thereof. Thereafter, the General Partner will
receive 20% interest in the Registrant's profits
and distributions.
Limited Partner Interest 576.7 units 7.66%
</TABLE>
Item 12. Certain Relationships and Related Transactions.
None.
PART IV
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Page No.
--------
(a) 1. Financial Statements:
Balance Sheets as of December 31, 1997 10
Statement of Operations for the Years Ended
December 31, 1997 and 1996 11
Statements of Partners' Capital for the Years
Ended December 31, 1997 and 1996 12
Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996 13
Notes to Financial Statements 14-19
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the financial
statements or notes thereto.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed for the quarter ended December 31,1997
(c) Exhibits:
21.Additional Exhibits:
Balance Sheets of Phoenix Leasing Incorporated E21 1-14
27.Financial Data Schedule.
22
<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 HIGH TECH/HIGH YIELD FUND,
A CALIFORNIA LIMITED PARTNERSHIP
(Registrant)
BY: PHOENIX LEASING INCORPORATED,
A CALIFORNIA CORPORATION
GENERAL PARTNER
Date: March 24, 1998 By: /S/ GUS CONSTANTIN
-------------- -------------------------
Gus Constantin, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ GUS CONSTANTIN President, Chief Executive Officer and a March 24, 1998
- -------------------- Director of Phoenix Leasing Incorporated --------------
(Gus Constantin) General Partner
/S/ GARY W. MARTINEZ Executive Vice President, March 24, 1998
- -------------------- Chief Operating Officer --------------
(Gary W. Martinez) and a Director of
Phoenix Leasing Incorporated
General Partner
/S/ HOWARD SOLOVEI Chief Financial Officer, March 24, 1998
- -------------------- Treasurer and a Director of --------------
(Howard Solovei) Phoenix Leasing Incorporated
General Partner
/S/ BRYANT J. TONG Senior Vice President, March 24, 1998
- -------------------- Financial Operations --------------
(Bryant J. Tong) (Principal Accounting Officer)
and a Director of
Phoenix Leasing Incorporated
General Partner
23
Exhibit 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Phoenix Leasing Incorporated:
We have audited the accompanying consolidated balance sheets of Phoenix Leasing
Incorporated (a California corporation) and Subsidiaries as of June 30, 1997 and
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheets are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheets. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the balance sheets referred to above present fairly, in all
material respects, the financial position of Phoenix Leasing Incorporated and
Subsidiaries as of June 30, 1997 and 1996, in conformity with generally accepted
accounting principles.
San Francisco, California, ARTHUR ANDERSEN LLP
September 5, 1997
Page 1 of 14
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, June 30,
1997 1996
----------- -----------
Cash and cash equivalents $11,409,747 $ 3,767,098
Investments in securities 5,105,289 1,287,323
Trade accounts receivable, net of allowance
for doubtful accounts of $121,944 and $31,246
at June 30, 1997 and 1996, respectively 289,284 989,030
Receivables from Phoenix Leasing Partnerships and
other affiliates 4,796,513 3,955,935
Notes receivable from related party 710,598 8,767,694
Equipment inventory -- 2,240,448
Equipment subject to lease 4,320,755 14,232,017
Notes receivable 5,825,842 3,560,830
Investments in Phoenix Leasing Partnerships 1,678,239 1,773,887
Property and equipment, net of accumulated
depreciation of $10,881,577 and $11,398,438 at
June 30, 1997 and 1996, respectively 6,009,049 6,933,608
Other assets 3,087,741 3,011,229
----------- -----------
TOTAL ASSETS $43,233,057 $50,519,099
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Short-term lines of credit $ -- $ 1,750,000
Warehouse lines of credit 10,310,568 16,930,044
Payables to affiliates 2,950,748 2,155,626
Accounts payable and accrued expenses 2,564,226 3,205,932
Deferred revenue -- 328,676
Long-term debt 147,532 620,899
Deficit in investments in Phoenix Leasing
Partnerships 738,297 761,214
----------- -----------
TOTAL LIABILITIES 16,711,371 25,752,391
----------- -----------
Minority Interests in Consolidated Subsidiaries 105,901 27,615
----------- -----------
Commitments and Contingencies (Note 15)
SHAREHOLDER'S EQUITY:
Common stock, without par value, 30,000,000 shares
authorized, 5,433,600 issued and outstanding at
June 30, 1997 and 1996, respectively 20,369 20,369
Additional paid-in capital 11,466,920 11,466,920
Unrealized gains on investments in securities,
available for sale 243,311 --
Retained earnings 14,685,185 13,251,804
----------- -----------
TOTAL SHAREHOLDER'S EQUITY 26,415,785 24,739,093
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $43,233,057 $50,519,099
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 1. Summary of Significant Accounting Policies:
a. Organization - Phoenix Leasing Incorporated and subsidiaries (the
Company), a wholly owned subsidiary of Phoenix American Incorporated (PAI), is
engaged in the organization and management of partnerships which specialize in
the purchase and lease of primarily high-technology and data processing
equipment. The partnerships purchase equipment directly from equipment vendors
for lease to financial, commercial and industrial businesses and governmental
agencies. The partnerships also finance transactions in the areas of
microcomputers and emerging growth companies. The Company has also engaged in
similar leasing activities for its own account. The Company also provides
ongoing equipment maintenance services for end-users of high-technology data
processing equipment and graphic plotters.
b. Principles of Consolidation - The consolidated financial statements
include the accounts of Phoenix Leasing Incorporated and its wholly or
majority-owned subsidiaries and subsidiaries over which the Company exerts
control. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Except as otherwise explained below, minority interests in the net
assets and net income or loss of majority-owned subsidiaries are allocated on
the basis of the proportionate ownership interests of the minority owners.
Three of the consolidated subsidiaries are California limited
partnerships (the Partnerships) which are general partners of three of the
Phoenix Leasing Partnerships. As of June 30, 1997, the Company held a 50%
general partner ownership interest in two of the Partnerships and a 62.5%
interest in one. Under the terms of the partnership agreements, profits and
losses attributable to acquisition fees paid to the Partnerships from Phoenix
Leasing Partnerships are allocated to the limited partner (the minority owner in
the Partnerships) in proportion to the limited partner's ownership interest. All
remaining profits and losses are allocated to the Company. Distributions to the
partners are made in accordance with the terms of the partnership agreement. The
limited partner of each of the Partnerships is Lease Management Associates,
Inc., a Nevada corporation controlled by an officer of the Company, who is the
owner of PAI.
c. Management, Acquisition and Incentive Fee Income - As of June 30, 1997,
the Company is the corporate general partner in 11 actively operating limited
partnerships and manager of 7 actively operating joint ventures, all of which
own and lease equipment. Seven of the partnership agreements provide for payment
of management fees based on partnership revenues and acquisition fees when the
partnerships' assets are acquired. Five of the limited partnership agreements
provide for payment of management fees and liquidation fees (see discussion
later in this footnote). One of the partnership agreements provides for a fee to
be paid to the Company based on a percentage of equity proceeds received by the
partnership and a percentage of net income. Most of the joint venture agreements
provide for payment of management fees based on joint venture revenues.
These partnerships and the joint ventures are collectively referred to as
the "Phoenix Leasing Partnerships."
d. Investments - Investments in Phoenix Leasing Partnerships reflect the
Company's equity basis in the Phoenix Leasing Partnerships. Under the equity
method of accounting the original investment is recorded at cost and is adjusted
periodically to recognize the Company's share of earnings, losses and
distributions after the date of acquisition. The Company has adopted the equity
method of accounting on the basis of its control and significant influence over
the Phoenix Leasing Partnerships.
3
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 1. Summary of Significant Accounting Policies (continued):
e. Liquidation Fee Income - The Company earned liquidation fees from five
of the Phoenix Leasing Partnerships in consideration for the services and
activities performed in connection with the disposition of the partnerships'
assets. Management of the Company concluded that the total liquidation fees to
be earned over the life of these partnerships may not be fully realizable.
Accordingly, the Company recognized liquidation fee income when the fees were
paid by the partnerships. During the year ended June 30, 1996, the Company
recognized the remaining $1,062,046 in liquidation fees from these partnerships.
In two other partnerships, cash distributions received in excess of
the allocated cumulative net profits represent a liquidation fee which cannot
exceed, in the aggregate, 7.792% of the net contributed capital.
f. Lease Accounting - The Company's leasing operations consist of both
financing and operating leases. The method of accounting for finance leases
recognizes unearned income at the inception of the lease calculated as the
excess of net rentals receivable and estimated residual value at the end of the
lease term over the cost of the equipment leased. Unearned income is amortized
monthly over the term of the lease on a declining basis to provide an
approximate level rate of return on the unrecovered cost of the investment.
Initial direct costs of originating new leases are capitalized and amortized
over the initial lease term.
When accounting for operating leases, the leased equipment is recorded
as an asset, at cost, and is depreciated on a straight-line basis over its
estimated useful life, ranging up to six years. Rental income represents the
rental payments due during the period under the terms of the lease.
The Company is the lessor in leveraged lease agreements under which
computer equipment having an estimated useful life of 5 years was leased for
periods from 4-5 years. The Company is the equity participant and equipment
owner. A portion of the purchase price was furnished by third-party financing in
the form of long-term debt that provides no recourse to the Company and is
secured by a first lien on the financed equipment.
g. Property and Equipment - Property and equipment which the Company holds
for its own use are recorded at cost and depreciated on a straight-line basis
over estimated useful lives ranging up to 45 years.
h. Income Taxes - The Company is included in consolidated and combined tax
returns filed by PAI. See Note 14 for further information.
i. Deferred Revenue - Deferred revenue is the result of selling
maintenance contracts which provide service over a specific period of time.
Deferred revenue is amortized on a straight-line basis over the service period
not to exceed 5 years. During the year ended June 30, 1997, the Company
discontinued sales of such contracts and all deferred revenue was fully
amortized.
j. Investments in Securities - Investments in securities, available for
sale, are stated at fair value or amortized cost, as specified by SFAS 115.
Interest is recognized when earned.
4
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 1. Summary of significant Accounting Policies (continued):
k. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
l. Reclassification - Certain 1996 balances have been reclassified to
conform to the 1997 presentation.
Note 2. Receivables from Phoenix Leasing Partnerships and Other Affiliates:
Receivables from Phoenix Leasing Partnerships and other affiliates consist
of the following for the years ended June 30:
1997 1996
---- ----
Management Fees $ 156,668 $ 416,149
Acquisition fees 283,133 74,099
Other receivables from Phoenix Leasing Partnerships, net 2,668,081 3,458,687
Other receivables from corporate affiliates 1,688,631 7,000
---------- ---------
$4,796,513 $3,955,935
========== ==========
The Company collected $2,155,543 of these other receivables from the
Phoenix Leasing Partnerships on September 2, 1997.
Note 3. Investments in Phoenix Leasing Partnerships:
The Company records its investments in Phoenix Leasing Partnerships under
the equity method of accounting. The ownership interest percentages vary,
ranging from .5% up to 25%. As general partner, the Company has complete
authority in, and responsibility for, the overall management and control of each
partnership, which includes responsibility for supervising partnership
acquisition, leasing, remarketing and sale of equipment. Distributions of cash
from the partnerships are made at the discretion of the general partner;
historically, a significant portion of the partnerships' earnings has been
distributed annually.
A shareholder of PAI and officers of the Company also have general and
limited partner interests in several of the partnerships.
5
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 3. Investments in Phoenix Leasing Partnerships (continued):
The activity in the investments in Phoenix Leasing Partnerships for the
years ended June 30 are as follows:
1997 1996
---- ----
Balance, beginning of year $1,012,673 $ 412,974
Additional investments 178,243 830,085
Equity in earnings 2,933,649 2,093,488
Cash distributions (3,184,621) (2,323,874)
---------- ----------
Balance, end of year $ 939,942 $1,012,673
========== ==========
The Company's total investments in Phoenix Leasing Partnerships are
comprised of investments in certain partnerships which are subject to
fluctuations due to partnerships' performances and timing of cash distributions.
At times the investment in those partnerships will be a deficit.
Certain of the partnership agreements require the Company to restore any
deficit in its capital account to zero at the dissolution of the partnership.
This deficit is a result of cash distributions received and losses allocated to
the Company. The Company has determined that in certain partnerships it will be
unlikely that the deficit investment will reverse and as a result during the
year ended June 30, 1993 the Company elected to make capital contributions prior
to partnership dissolution totaling $2,028,733. As of April 1, 1992, the Company
elected to forgo any future cash distributions from, and will not record its
share of future earnings generated from the operations of, one of these
partnerships. The Company has deferred any future cash distributions from two
other partnerships. The Company believes that it would be likely that any future
cash distributions received from these partnerships would have to be paid back
at the dissolution of the partnerships. The Company will continue to record fee
income earned from the management of, and acquisition of equipment for these
partnerships.
The aggregate positive investment and aggregate deficit investment
balances are presented separately on the balance sheets as of June 30, 1997 and
1996.
The partnerships own and lease equipment. All debt of the partnerships is
secured by the equipment and is without recourse to the general partners. The
unaudited financial statements of the partnerships reflect the following
combined, summarized financial information as of June 30, 1997 and for the
twelve months then ended:
Assets $ 120,259,000
Liabilities 19,520,000
Partners' Capital 100,739,000
Revenue 33,479,000
Net Income 13,994,000
6
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 4. Equipment Subject to Lease and Notes Receivable:
Equipment subject to lease includes the Company's investments in leveraged
leases, investments in financing leases, operating leases and notes receivable.
Equipment subject to lease consists of the following at June 30:
1997 1996
---- ----
Equipment on lease, net of accumulated
depreciation of $47,177 and $258,102 at
June 30, 1997 and 1996, respectively $ 83,057 $ 92,008
Leverage leases 1,913,392 1,589,772
Equipment held for resale 225,084 305,840
Investment in financing leases 1,863,214 12,036,604
Operating leases 236,008 207,793
----------- -----------
Total equipment subject to lease $ 4,320,755 $14,232,017
=========== ===========
Notes receivable 5,825,842 3,560,830
Leverage Leases:
The Company's net investment in leveraged leases is composed of the
following elements at June 30:
1997 1996
---- ----
Rental receivable (net of principal and
interest on the nonrecourse debt) $ - $ -
Estimated residual value of leased assets 2,602,636 2,498,233
Less: Unearned and deferred income (689,244) (908,461)
----------- -----------
Net investment in leveraged leases $ 1,913,392 $ 1,589,772
=========== ===========
Investment in Financing Leases:
The Company has entered into direct lease arrangements with companies
engaged in the development of technologies and other growth industry businesses
operating in different industries located throughout the United States.
Generally, it is the responsibility of the lessee to provide maintenance on
leased equipment.
The Company's net investment in financing leases consists of the following
at June 30:
1997 1996
---- ----
Minimum lease payments to be received $ 2,420,101 $ 16,089,868
Less:unearned income (542,155) (4,053,264)
allowance for early termination (14,732) -
----------- ------------
Net investment in financing leases $ 1,863,214 $ 12,036,604
=========== ============
7
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 4. Equipment Subject to Lease and Notes Receivable (continued):
Minimum rentals to be received on non-cancelable financing leases for the
years ended June 30, are as follows:
1998 $ 751,632
1999 704,531
2000 467,636
2001 401,409
2002 94,893
-----------
Total $ 2,420,101
===========
Notes Receivable:
Notes receivable for the years ended June 30, are as follows:
1997 1996
---- ----
Notes receivable from emerging growth and
other companies with stated interest ranging
from 13.8% to 19.8% per annum receivable in
installments ranging from 35 to 85 months
collateralized by the equipment financed $ 5,825,842 $ 3,560,830
=========== ===========
Minimum payments to be received on non-cancelable notes receivable for the
years ended June 30, are as follows:
1998 $ 1,838,665
1999 1,793,111
2000 1,919,794
2001 1,230,924
2002 564,672
Thereafter 353,946
-----------
Total minimum payments to be received $ 7,701,112
===========
Less: unearned interest (1,875,270)
-----------
Net investment in notes receivable $ 5,825,842
===========
Note 5. Sale of Leased Assets and Notes Receivable:
The Company adopted SFAS 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", as it related to
transactions including revolving periods completed after January 1, 1997. Prior
to this date, such transactions were accounted for under SFAS 77, "Reporting by
Transferors for Transfers of Receivables without Recourse". The change in
standards has not had a material effect on the financial statements of the
Company during the year ended June 30, 1997.
8
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 5. Sale of Leased Assets and Notes Receivable (continued):
The Company acquires leased or financed equipment with the intent to
subsequently transfer those assets, accounted for herein as a sale, to a trust
which issues lease backed certificates and notes receivables. As of June 30,
1997, the Company has acquired $7,689,056 in such leased or financed equipment
which is included in Equipment subject to lease and notes receivable. The
Company uses proceeds from its two warehouse lines of credit to purchase or
finance this equipment. During the holding period the Company recognizes the
revenues generated from these leases or notes and the interest expense related
to the drawdowns from the warehouse lines of credit.
On June 4, 1997, the Company entered into an agreement to transfer
certain assets and notes receivables with a net carrying value of $30,817,909 to
a trust for the purpose of the trust issuing contract backed certificates in
exchange for cash proceeds, of which $10 million was held back in a specified
account ("Pre-funding Account") to acquire additional assets from a subsidiary .
The Pre-Funding Account has a termination date of September 25, 1997. The
Company recognized a gain on this transaction of $127,209. The contract backed
certificates are recourse only to the assets used to collateralize the
obligation. Under the terms of the agreement, the Company will continue to
acquire and transfer additional assets to the trust over the twelve month period
beginning June 5, 1997 and ending June 4, 1998. In accordance with this
agreement, the Company transferred additional assets to the trust for
$3,629,166. These assets had a net carrying value of $3,527,757, resulting in a
gain of $101,409.
On October 11, 1996, the Company entered into an agreement to transfer
certain assets and notes receivables with a net carrying value of $24,141,511 to
a trust for the purpose of the trust issuing lease backed certificates in
exchange for cash proceeds. The Company recognized a gain on this transaction of
$307,069. The certificates are recourse only to the assets used to collateralize
the obligation. Under the terms of the agreement, the Company will continue to
acquire and transfer additional assets to the trust over the twelve month period
beginning October 12, 1996 and ending October 11, 1997. During the period
October 12, 1996 through May 1, 1997, the Company transferred additional assets
to the trust for $4,786,735. These assets had a net carrying value of
$4,254,031, resulting in a gain of $532,704. Subsequent to May 1, 1997, the
Company ceased to acquire and transfer additional assets to the trust under this
agreement.
On November 29, 1995, the Company entered into an agreement to transfer
certain assets and notes receivables with a net carrying value of $27,337,402 to
a trust for the purpose of the trust issuing lease backed certificates in
exchange for cash proceeds. The Company recognized a gain on this transaction of
$459,633. The leased backed certificates are recourse only to the assets used to
collateralize the obligation. Under the terms of the agreement, the Company
continued to acquire and transfer additional assets to the trust over the twelve
month period beginning November 30, 1995 and ending November 28, 1996. During
the period November 30, 1995 through June 30, 1996, the Company transferred
additional assets to the trust for $4,668,388. These assets had a net carrying
value of $4,225,596, resulting in a gain of $442,792.
In addition, in accordance with the November 29, 1995 agreement, during
the period July 1, through November 28, 1996, the Company transferred assets to
the trust for $4,052,704,. These assets had a net carrying value of $3,676,390,
resulting in a gain of $376,314.
9
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 6. Property and Equipment:
Major classes of property and equipment at June 30 are as follows:
1997 1996
---- ----
Land $ 1,077,830 $ 1,077,830
Buildings 7,420,201 7,352,608
Office furniture, fixtures and equipment 7,468,072 8,441,476
Other 924,523 843,450
----------- -----------
16,890,626 17,715,364
Less accumulated depreciation and amortization (10,881,577) (11,398,438)
Inventory held for resale - 616,682
----------- -----------
Net Property and Equipment $ 6,009,049 $ 6,933,608
=========== ===========
PAI owns its headquarters building in San Rafael, California. The Company
paid $7,749,476 to purchase the land and construct the building. The cost of
construction was paid for with a combination of $2,749,476 in cash from the
Company's operations and a $5,000,000 advance from PAI. The $5,000,000 advance
is included as a reduction in receivable from Phoenix Leasing Partnerships and
other affiliates. PAI has pledged the market value of the building as security
for a $5,000,000 Industrial Revenue Bond ("IDB") which PAI has with the City of
San Rafael, California. The principal of the IDB is payable in a lump sum
payment on October 1, 2004. The Company paid $335,127 and $248,325 in interest
payments related to the IDB during the year ended June 30, 1997 and 1996,
respectively.
As of May 31, 1997, the Company sold certain assets and liabilities of its
subsidiary, which provided equipment maintenance services for end-users of
high-technology data processing equipment and graphic plotters, to an
unaffiliated company and recorded a gain on sale of property and equipment of
$544,732.
As of June 30, 1997, a portion of the Company's headquarters has been
leased to third parties. The remaining lease term is for less than one year and
the minimum lease payments receivable is $362,785.
Note 7. Investments in Securities:
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 - Accounting for Certain Investments in
Debt and Equity Securities (SFAS 115). The Company adopted this statement on
July 1, 1994. This pronouncement prescribes specific accounting treatment for
investments based on their classification as either held-to-maturity securities
(HTM), available-for-sale securities (AFS) or trading securities, as defined in
the statement.
In connection with the three prior lease and note securitizations (see
Note 7) the Company has acquired Class C Equipment Investment Trust Certificates
(Class C Shares) and notes. The Class C Shares are classified as AFS and are
reported at their amortized cost of $4,658,771 and $1,248,843, as of June 30,
1997 and 1996, respectively, which approximates fair value. The Class C Shares
do not have a specified contractual maturity.
10
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 7. Investments in Securities (continued):
All equities held by the Company are classified as AFS and are reported
at their fair value of $446,518 and $38,480 at June 30, 1997 and 1996,
respectively. Gross unrealized gains on such securities as of June 30, 1997 and
1996 were $405,518 and $0, respectively.
Note 8. Fair Value of Financial Instruments:
Investments in Securities
The carrying amounts of investments in securities, available for sale,
reported in the balance sheets approximate their fair values.
Notes Receivable and Debt
The fair values of the Company's notes receivable and debt are estimated
based on the market prices of similar instruments or on the current market
interest rates for instruments with similar terms, maturities, and risks. The
estimated fair values of the Company's notes receivable and debt approximate the
carrying amounts reported in the balance sheets.
Note 9. Short-Term and Warehouse Lines of Credit:
To provide interim financing for equipment and working capital needs, the
Company executes lines of credit which consist of short-term notes with banks
with interest rates equal to the prime rate or the banks' index rate. All lines
of credit are renewable annually at the banks' option.
As of June 30, 1997, the Company, through PAI, had access to one
short-term line of credit totaling $2.5 million, all of which was available.
Draw downs under this credit line are secured by the Company's receivable from
Phoenix Leasing Partnerships and its investments in class C shares.
In addition, the Company has two secured short-term warehouse lines of
credit totaling $37.5 million, which are used to provide interim financing for
the acquisition of equipment and the financing of notes receivable. As of June
30, 1997 and 1996, $10.3 and $16.9 million , respectively, of these lines have
been drawn down and are due in one year or less. The draw downs under these
lines are collateralized by investments in financing leases and notes receivable
included in equipment subject to lease. The interest rate is tied to the IBOR
(Eurodollar) rate. The initial commitment period for these lines of credit is 18
months and may be extended to 36 months at the discretion of the banks.
Principal payments are based on the lesser of the aggregate payments received by
the Company on its leases and notes receivable or the aggregate principal and
interest outstanding on the payment date of the credit line.
In connection with the Company's lines of credit, various financial ratios
and other covenants must be maintained. The Company has guaranteed its right,
title and interest in certain of its assets and the future receipts from these
assets in order to secure payment and performance of these credit lines.
11
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 10. Long-Term Debt:
Long-term debt consists of the following at June 30:
1997 1996
---- ----
Mortgage payable at varying interest rates
with an initial rate of 8.75% secured by a
first deed of trust on real property with a
cost of $167,650. Note is amortized over 83
months with monthly payments of $559 with a
final payment of $121,267. $ 147,532 $ 154,238
Note payable to a bank, collateralized by the
assets of Phoenix Leasing Liquidation
Corporation, a subsidiary of the Company, with
a variable rate of interest tied to the bank's
prime rate payable in 30 consecutive monthly
installments - 466,661
---------- ----------
$ 147,532 $ 620,899
========== ==========
The aggregate long-term debt maturities for the fiscal years ended June 30, are
as follows:
1998 $ 6,706
1999 6,706
2000 6,706
2001 127,414
----------
Total $ 147,532
==========
Note 11. Profit Sharing Plan:
The Company has a profit sharing plan covering substantially all employees
who meet certain age and service requirements. Contributions to the plan by the
Company are made at the discretion of the board of directors. The profit sharing
expense was $600,000 for the years ended June 30, 1997 and 1996, respectively.
Note 12. Leased Facilities:
The Company leases office and warehouse space in various parts of the
country and had annual rental expense of approximately $437,000 and $417,000 for
the years ended June 30, 1997 and 1996, respectively.
12
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 13. Income Taxes:
The Company's income or loss for tax reporting purposes is included in the
consolidated and combined tax returns filed by PAI which are prepared on the
accrual basis of accounting. In accordance with a Tax Sharing Agreement
effective July 1, 1991, between the Company and PAI, PAI has assumed all tax
liabilities and benefits arising from the Company's income or loss.
The Company computes and records its tax attributes and the related
benefit or provision is transferred to PAI.
The provision (benefit) for income taxes for the year ended June 30
consists of the following:
1997 1996
---- ----
Current tax benefit $ (111,925) $(551,913)
Deferred tax expense 670,305 598,161
---------- ---------
$ 782,230 $ 46,248
========== =========
Cumulative temporary differences of $10,097,889 and $7,977,571 as of June
30, 1997 and 1996, respectively, are primarily related to differences in book
and tax accounting treatments for leveraged leases.
The difference between the effective tax rate and statutory tax rate is
due to certain expenses deductible for financial reporting purposes but not for
tax purposes, state tax expense net of federal benefit and other miscellaneous
items.
Note 14. Transactions with Related Parties:
The Company provides an interest bearing line of credit totaling
$8,000,000 to PAI's controlling shareholder which is secured by common stock of
Phoenix Precision Graphics, Inc. (a Nevada corporation, owned by the principal
shareholder). As of June 30, 1997 and 1996, $511,493 and $6,646,209 of this line
of credit was outstanding and is included in notes receivable from related
party. As of June 30, 1997 and 1996, Phoenix Precision Graphics is in a start-up
mode and has cumulative losses of $13,236,982 and $9,120,711, respectively.
The Company provides an interest bearing line of credit to PAI's
controlling shareholder, which is secured by common stock of Phoenix Fiberlink
Inc. (a Nevada Corporation, owned by the principal shareholder). As of June 30,
1997 and 1996, $199,105 and $2,121,484 of this line of credit has been drawn
down and is included in notes receivable from related party.
The Company earned a management fee from an affiliate of $515,137 and
$556,453 for the years ended June 30, 1997 and 1996, respectively. This
management fee is included in Portfolio management fees.
The Company paid an affiliate an asset management fee of $305,770 during
the year ended June 30, 1996. This asset management fees is included in
equipment lease operations, maintenance, remarking and administrative fees.
13
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
Note 14. Transactions with Related Parties (continued):
As of January 1, 1997, the Company transferred certain assets and
liabilities to a non-consolidated affiliate, ReSource/Phoenix, Inc., wholly
owned by the Company's controlling shareholder. No gain or loss was recorded as
a result of this transaction. In addition, the Company transferred all of its
third party resource service contracts to ReSource/Phoenix, Inc. The Company
recorded fees from these contracts of $657,295 for the period July 1 through
December 31, 1996 and $980,981 for the year ended June 30, 1996. For the period
January 1 through June 30, 1997, ReSource/Phoenix, Inc. recorded fees of
$746,333. ReSource/Phoenix, Inc. will continue to provide Accounting, Finance,
Human Resources, Legal, Investor Administration, and Information Technology
services to the Company. The Company paid ReSource/Phoenix, Inc. $1,089,012 for
these services for the period January 1 through June 30, 1997, the expense of
which is included in selling, general and administrative for the year ended June
30, 1997.
Note 15. Commitments and Contingencies:
The Company has entered into agreements which contain specific purchase
commitments. The Company may satisfy these commitments by purchasing equipment
for its own account or by assigning equipment purchases to its affiliated
partnerships. At June 30, 1997 the Company anticipates being able to satisfy its
future obligations under the agreements and intends to assign most of the
purchases under the agreements to its affiliated partnerships.
The Company is party to legal actions which arise as part of the normal
course of its business. The Company believes, after consultation with counsel,
that it has meritorious defenses in these actions, and that the liability, if
any, will not have a material adverse effect on the financial position of the
Company.
14
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