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 0-17989
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 $126,000.
As of December 31, 1998, 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, 1998.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Transitional Small Business Disclosure Format:
Yes No X
----- -----
Page 1 of 22
<PAGE>
PHOENIX HIGH TECH/HIGH YIELD FUND,
A CALIFORNIA LIMITED PARTNERSHIP
1998 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......................................................... 4
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 5
Item 7. Financial Statements.............................................. 7
Item 8. Disagreements on Accounting and Financial Disclosure Matters...... 18
PART III
Item 9. Directors and Executive Officers of the Registrant................ 18
Item 10. Executive Compensation............................................ 19
Item 11. Security Ownership of Certain Beneficial Owners and Management.... 20
Item 12. Certain Relationships and Related Transactions.................... 20
PART IV
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 20
Signatures.................................................................. 22
2
<PAGE>
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,
1998, 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.
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
3
<PAGE>
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 were its investments
in leases and loans, either directly or through its investment in joint
ventures, to businesses located throughout the United States.
As of December 31, 1998, the Partnership owns no equipment nor does it
have any outstanding loans to borrowers.
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.
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, 1998
---------------------------- -----------------------
Limited Partners 378
General Partner 1
4
<PAGE>
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 net income
of $88,000 during the year ended December 31, 1998, as compared to a net loss of
$6,000 during 1997.
Total revenues increased by $58,000 during the year ended December 31,
1998, as compared to 1997. The increase in total revenues in 1998, compared to
1997, is attributable to an increase in gain on sale of securities and improved
earnings from joint ventures. These increases were partially offset by a
decrease in interest income from notes receivable.
The gain on sale of securities for both 1998 and 1997 of $111,000 and
$50,000, 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.
The increased earnings from joint ventures in 1998, compared to 1997,
is attributable to the absence of a write-down of cable system assets in one of
the foreclosed cable systems joint venture. Such a write down existed during the
year ended December 31, 1997.
Partially offsetting the factors contributing to the increase in total
revenues is a decrease in interest income from notes receivable of $45,000 for
the year ended December 31, 1998, compared to 1997. During the year ended
December 31, 1998, the Partnership received additional settlement proceeds of
$4,000 from a defaulted note receivable with a net carrying value of $0,
compared to additional settlement proceeds of $49,000 received during the year
ended December 31, 1997. These settlement proceeds are included in interest
income from notes receivable on the Statement of Operations.
The Partnership did recognize rental income of $7,000, during the year
ended December 31, 1998 compared to $0 in the previous year. The rental income
is attributable to the write-off of rental liabilities.
Total expenses decreased by $36,000 for the year ended December 31,
1998 compared to 1997. The decrease is due to a $21,000 and $15,000 decrease in
legal expenses and general and administrative expenses, respectively, compared
to 1997. Other items causing total expenses to decrease are the decreases in
amortization of acquisition fees and management fees to the General Partner. The
absence of amortization of acquisition fees and decrease in legal expenses are a
result of the Partnership's remaining equipment being sold. The amortization of
acquisition fees and the decrease in legal expenses were partially offset by an
increase in provision for losses on receivables of $6,000.
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 cash generated by leasing and financing activities was $16,000 for
the year ended December 31, 1998, as compared to $116,000 for the year ended
December 31, 1997. The decrease in cash generated in 1998, compared to 1997, is
attributable to the absence of principal payments from finance leases.
The Partnership received cash distributions from joint ventures during
the year ended December 31, 1998 of $15,000, compared to $0 in 1997. The
increase in distributions is a result of one foreclosed cable systems joint
venture making a final distribution.
The Partnership received proceeds from the sale of securities of
$111,000 and $50,000 for the years ended December 31, 1998 and 1997,
respectively, as a result of the exercise and sale of stock warrants, as
previously discussed.
As of December 31, 1998, the Partnership owned equipment being held for
lease with an original cost of $0 and a net book value of $0, compared to
$89,000 and $0, respectively, at December 31, 1997. The Partnership has sold all
of its remaining equipment as of December 31, 1998.
The cash distributed to partners was $530,000 and $1,169,000 during the
years ended December 31, 1998 and 1997, respectively. In accordance with the
5
<PAGE>
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 $525,000 and $1,157,000 in distributions
during 1998 and 1997, respectively. The cumulative cash distributions to limited
partners are $7,519,000 and $6,994,000 at December 31, 1998 and 1997,
respectively. The General Partner received $5,000 and $12,000 for its share of
the cash distributions during 1998 and 1997, respectively.
Distributions for the year ended December 31, 1997 were higher than
usual as a result of 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. The Partnership plans
to make its next distribution in December of 1999.
The Partnership sold equipment with an aggregate original cost of
$89,000 and $669,000 during the years ended December 31, 1998 and 1997,
respectively. The remaining assets of the Partnership consist primarily of an
investment in Phoenix Pacific Northwest J.V., a foreclosed cable television
joint venture. The General Partner is continuing its efforts in marketing this
cable television system for sale.
Cash generated from operating and investing activities 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.
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
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.
6
<PAGE>
Item 7. FINANCIAL STATEMENTS
--------------------
PHOENIX HIGH TECH/HIGH YIELD FUND,
----------------------------------
A CALIFORNIA LIMITED PARTNERSHIP
--------------------------------
YEAR ENDED DECEMBER 31, 1998
----------------------------
7
<PAGE>
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, 1998, and the related
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 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, 1998, and the results
of its operations and its cash flows for the years ended December 31, 1998 and
1997, in conformity with generally accepted accounting principles.
San Francisco, California, ARTHUR ANDERSEN LLP
January 22, 1999
8
<PAGE>
PHOENIX HIGH TECH/HIGH YIELD FUND,
A CALIFORNIA LIMITED PARTNERSHIP
BALANCE SHEET
(Amounts in Thousands Except for Unit Amounts)
December 31, 1998
-----------------
ASSETS
Cash and cash equivalents $ 108
Investment in joint ventures 105
Prepaid expense 2
-----
Total Assets $ 215
=====
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 12
-----
Total Liabilities 12
-----
Partners' Capital:
General Partner (2)
Limited Partners, 25,000 units authorized, 7,526 units
issued and outstanding 205
-----
Total Partners' Capital 203
-----
Total Liabilities and Partners' Capital $ 215
=====
The accompanying notes are an integral part of these statements.
9
<PAGE>
PHOENIX HIGH TECH/HIGH YIELD FUND,
A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Amounts in Thousands Except for Per Unit Amounts)
For the Years Ended December 31,
1998 1997
---- ----
INCOME
Rental income $ 7 $ -
Earned income, financing leases - 5
Interest income, notes receivable 4 49
Equity in losses from joint ventures (10) (67)
Gain on sale of securities 111 50
Other income 14 31
----- -----
Total Income 126 68
----- -----
EXPENSES
Amortization of acquisition fees - 4
Management fees to General Partner 4 7
Reimbursed administrative costs to General Partner 11 10
Provision for losses on receivables 6 -
Legal expense 1 22
General and administrative expenses 16 31
----- -----
Total Expenses 38 74
----- -----
NET INCOME (LOSS) 88 (6)
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains arising during period 111 50
Less: reclassification adjustment for gains
included in net income (111) (50)
----- -----
Other comprehensive income - -
----- -----
COMPREHENSIVE INCOME $ 88 $ (6)
===== =====
NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT $9.30 $(.74)
===== =====
ALLOCATION OF NET INCOME (LOSS):
General Partner $ 18 $ -
Limited Partners 70 (6)
----- -----
$ 88 $ (6)
===== =====
The accompanying notes are an integral part of these statements.
10
<PAGE>
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' Total
Amount Units Amount Amount
--------- ----------------- ------
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
Distributions to partners ($69.68 per
limited partnership unit) (5) -- (525) (530)
Net income 18 -- 70 88
------- ------- ------- -------
Balance, December 31, 1998 $ (2) 7,526 $ 205 $ 203
======= ======= ======= =======
The accompanying notes are an integral part of these statements.
11
<PAGE>
PHOENIX HIGH TECH/HIGH YIELD FUND,
A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
For the Years Ended December 31,
1998 1997
---- ----
Operating Activities:
Net income (loss) $ 88 $ (6)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Amortization of acquisition fees -- 4
Equity in losses from joint ventures 10 67
Provision for losses on accounts receivable 6 --
Gain on sale of securities (111) (50)
Decrease in accounts receivable 31 7
Decrease in accounts payable and accrued
expenses (8) (4)
Increase in other assets -- (1)
------- -------
Net cash provided by operating activities 16 17
------- -------
Investing Activities:
Principal payments, financing leases -- 99
Proceeds from sale of securities 111 50
Distributions from joint ventures 15 --
------- -------
Net cash provided by investing activities 126 149
------- -------
Financing Activities:
Distributions to partners (530) (1,169)
------- -------
Net cash used in financing activities (530) (1,169)
------- -------
Decrease in cash and cash equivalents (388) (1,003)
Cash and cash equivalents, beginning of period 496 1,499
------- -------
Cash and cash equivalents, end of period $ 108 $ 496
======= =======
The accompanying notes are an integral part of these statements.
12
<PAGE>
PHOENIX HIGH TECH/HIGH YIELD FUND,
A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 will terminate on
December 31, 1999.
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 4).
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.
The schedule of compensation due and distributions made to the General
Partner for the years ended December 31, is as follows:
13
<PAGE>
1998 1997
---- ----
(Amounts in Thousands)
Management fees $ 4 $ 7
Cash distributions 5 12
--- ---
$ 9 $19
=== ===
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.
Leasing Operations. The Partnership's leasing operations consisted of
financing and operating leases. The financing method of accounting for leases
records as unearned income at the inception of the lease, the excess of net
rentals receivable and estimated residual value at the end of the lease term,
over the cost of equipment leased. Unearned income was 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 were capitalized and included in the
cost.
Under the operating method of accounting for leases, the leased
equipment was 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 was determined on a straight-line basis of
rental payments due for the period under the terms of the lease. Maintenance and
repairs of the leased equipment were charged to expense.
Portfolio Valuation Methodology. The Partnership used 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 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 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.
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.
Note 3. 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, 1998 and 1997, the Partnership
received additional settlement proceeds of $4,000 and $49,000, respectively,
from a defaulted note receivable with a net carrying value of $0.
14
<PAGE>
Note 4. 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.
The joint ventures owned by the Partnership, along with their
percentage ownership is as follows:
Percentage
Joint Venture Ownership
------------- ----------
Phoenix Pacific Northwest J.V 19.82%
Phoenix Independence Cable, LLC(1) 17.75
(1) cable system sold and joint venture closed during 1998.
An analysis of the Partnership's net investment in foreclosed cable
systems joint ventures is as follows:
Net
Net Investment Equity in Investment
at Beginning Earnings at End
Date of Period Contributions (Losses) Distributions of Period
- ---- ------------- ------------- -------- ------------- ---------
(Amounts in Thousands)
Year Ended
December 31, 1997 $197 $ - $(67) $ - $130
==== ==== ==== ==== ====
Year Ended
December 31, 1998 $130 $ - $(10) $ 15 $105
==== ==== ==== ==== ====
The aggregate combined financial information of the foreclosed cable
systems joint ventures is presented as follows:
December 31, 1998
-----------------
(Amounts in Thousands)
Assets $626
Liabilities 97
Partners' Capital 529
For the Years Ended December 31,
1998 1997
---- ----
(Amounts in Thousands)
Revenue $ 284 $ 404
Expenses 342 778
Net Loss (58) (374)
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 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.
15
<PAGE>
Note 5. Accounts Payable and Accrued Expenses.
-------------------------------------
Accounts payable and accrued expenses consist of the following at
December 31:
1998
----
(Amounts in Thousands)
Legal $ 6
Other 5
General Partner and affiliates 1
---
Total $12
===
Note 6. 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, 1998:
Reported Amounts Tax Basis Net Difference
---------------- --------- --------------
(Amounts in Thousands)
Assets $215 $144 $ 71
Liabilities 12 12 --
Note 7. 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 8. 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 $11,000
and $10,000 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 $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 9. 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, 1998 and 1997. 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.
16
<PAGE>
Note 10. 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.
17
<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 Leasing Cash Distribution Fund IV and
Phoenix Leasing Cash Distribution Fund III
18
<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 1998, 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 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.
----------------------
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 $ 4(1) $ 0 $ 0
==== ==== ====
<FN>
(1) consists of management fees.
</FN>
</TABLE>
19
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
--------------------------------------------------------------
(a) As of December 31, 1998, the following investors had a beneficial
ownership of more than 5% of the outstanding Limited Partnership
units:
Amount and
Name and Address Nature of Beneficial Percent
Title of Class of Beneficial Owner Ownership of Class
- -------------- ------------------- -------------------- --------
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:
(1) (2) (3)
Title of Class Amount Beneficially Owned Percent of Class
-------------- ------------------------- ----------------
General Partner Interest Represents a 1% interest in the 100%
Registrant's profits and distributions,
until the Limited Partners have
recovered their capital contributions
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%
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 Sheet as of December 31, 1998 9
Statements of Operations and Comprehensive Income
for the Years Ended December 31, 1998 and 1997 10
Statements of Partners' Capital for the Years Ended
December 31, 1998 and 1997 11
Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997 12
Notes to Financial Statements 13 - 17
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.
20
<PAGE>
(c) Exhibits
21. Additional Exhibits:
Balance Sheets of Phoenix Leasing Incorporated E21 1-12
27. Financial Data Schedule.
21
<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, 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 and a March 24, 1999
- -------------------- Director of Phoenix Leasing Incorporated --------------
(Gus Constantin) General Partner
/S/ GARY W. MARTINEZ Executive Vice President, March 24, 1999
- -------------------- Chief Operating Officer --------------
(Gary W. Martinez) and a 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
22
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):
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.
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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 108
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 215
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 203
<TOTAL-LIABILITY-AND-EQUITY> 215
<SALES> 0
<TOTAL-REVENUES> 126
<CGS> 0
<TOTAL-COSTS> 38
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 88
<INCOME-TAX> 0
<INCOME-CONTINUING> 88
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 88
<EPS-PRIMARY> 9.30
<EPS-DILUTED> 0
</TABLE>
