UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 0-18278
PHOENIX LEASING CASH DISTRIBUTION FUND IV,
- --------------------------------------------------------------------------------
A CALIFORNIA LIMITED PARTNERSHIP
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
California 68-0191380
- ------------------------------- ------------------------------------
(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 $8,454,000.
As of December 31, 1997, 6,208,563 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 27
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PHOENIX LEASING CASH DISTRIBUTION FUND IV,
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...... 24
PART III
Item 9. Directors and Executive Officers of the Registrant................ 24
Item 10. Executive Compensation............................................ 25
Item 11. Security Ownership of Certain Beneficial Owners and Management.... 25
Item 12. Certain Relationships and Related Transactions.................... 26
PART IV
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 26
Signatures................................................................. 27
2
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PART I
Item 1. Business.
General Development of Business.
Phoenix Leasing Cash Distribution Fund IV, a California limited
partnership (the Partnership), was organized on August 22, 1989. The Partnership
was registered with the Securities and Exchange Commission with an effective
date of December 27, 1989 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, 2000. 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 3,750,000 units of limited
partnership interest at a price of $20 per unit. During 1991, the Partnership
increased the public offering up to a maximum of 6,500,000 units. The
Partnership completed its public offering on December 27, 1991. As of December
27, 1991, the Partnership sold 6,492,727 units for a total capitalization of
$129,847,540. Of the proceeds received through the offering, the Partnership has
incurred $16,292,000 in organizational and offering expenses.
Narrative Description of Business.
Equipment Leasing and Financing Operations
From the initial formation of the Partnership through December 31,
1997, the total investments in equipment leases and financing transactions
(loans), including the Partnership's pro rata interest in investments made by
joint ventures, approximate $273,825,000. The average initial firm term of
contractual payments from equipment subject to lease was 43.43 months, and the
average initial net monthly payment rate as a percentage of the original
purchase price was 2.71%. The average initial firm term of contractual payments
from loans was 61.22 months.
The Partnership's principal objective is to produce cash flow to the
investors on a continuing basis over the life of the Partnership. To achieve
this objective, the Partnership will invest in various types of capital
equipment and other assets to provide leasing or financing of the same to third
parties, including Fortune 1000 companies and their subsidiaries, middle-market
companies, emerging growth companies, franchised businesses, pay television
system operators and others, on either a long-term or short-term basis. The
types of equipment that the Partnership will invest in will include, but is not
limited to, computer peripherals, terminal systems, small computer systems,
communications equipment, IBM mainframes, IBM-software compatible mainframes,
office systems, CAE/CAD/CAM equipment, telecommunications equipment, cable
television equipment, medical equipment, production and manufacturing equipment
and software products.
In addition to acquiring equipment for lease to third parties, the
Partnership, either directly or through the investment in joint ventures, has
provided limited financing to certain emerging growth companies, cable
television operators, manufacturers and their lessees with respect to assets
leased directly by such manufacturers to third parties. The Partnership
maintains a security interest in the assets financed and in the receivables due
under any lease or rental agreement relating to such assets. Such security
interests constitute a lien on the equipment and will give the Partnership the
right, upon default, to obtain possession of the assets.
During the Partnership offering, the Partnership acquired significant
amounts of equipment or assets and provided financing with the net offering
proceeds. In addition, the Partnership has acquired equipment through the use of
debt financing. The ratio of the outstanding debt to net capital contributions
less any investment in Leveraged Joint Ventures at the end of the Partnership's
offering period will not exceed one-to-one. The cash flow generated by such
investments in equipment leases or financing transactions has been and will be
used to provide for debt service, to provide cash distributions to the Partners
and the remainder will be reinvested in capital equipment or other assets.
The Partnership has acquired and intends to acquire and lease equipment
pursuant to either "Operating" leases or "Financing" leases. At December 31,
1997, approximately 99% of the equipment owned by the Partnership was classified
as Financing leases. The Partnership has also provided and intends to provide
financing secured by assets in the form of notes receivable. Operating leases
are generally short-term leases under which the lessor will receive aggregate
rental payments in an amount that is less than the purchase price of the
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equipment. Financing leases are generally for a longer term under which the
noncancellable rental payments due during the initial term of the lease are at
least sufficient to recover the purchase price of the equipment.
Competition. The General Partner has concentrated the Partnership's
activities in the equipment leasing and financing industry, an area where the
General Partner has developed an expertise. The equipment leasing industry is
extremely competitive. The Partnership competes with many well established
companies having substantially greater financial resources. Competitive factors
include pricing, technological innovation and methods of financing (including
use of various short-term and long-term financing plans, as well as the outright
purchase of equipment). Generally, the impact of these factors to the
Partnership would be the realization of increased equipment remarketing and
storage costs, as well as lower residuals received from the sale or remarketing
of such equipment.
Other.
A brief description of the type of assets in which the Partnership has
invested as of December 31, 1997, together with information concerning the uses
of assets is set forth in Item 2.
Item 2. Properties.
Equipment Leasing and Financing Operations.
The Partnership is engaged in the equipment leasing and financing
industry 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 and has
outstanding loans to borrowers with an aggregate original cost of $65,375,000.
The following table summarizes the type of equipment owned or financed by the
Partnership, including its pro rata interest in joint ventures, at December 31,
1997.
Percentage of
Asset Types Purchase Price(1) Total Assets
- ------------------------------- --------------------- -------------
(Amounts in Thousands)
Capital Equipment Leased to Emerging
Growth Companies $ 19,659 30%
Furniture and Fixtures 13,749 21
Financing Related to Emerging Growth
Companies 8,333 13
Computer Peripherals 8,210 13
Financing of Other Businesses 6,754 10
Miscellaneous 3,208 5
Small Computer Systems 3,154 5
Telecommunications 1,517 2
Financing Related to Pay TV Systems
and Other Media 791 1
--------- ---
TOTAL $ 65,375 100%
========= ===
(1) These amounts include the Partnership's pro rata interest in equipment
joint ventures of $4,156,000, a financing joint venture of $290,000, cost
of equipment on financing leases of $25,853,000 and original cost of
outstanding loans of $15,588,000 at December 31, 1997.
Item 3. Legal Proceedings.
The Registrant is not a party to any pending legal proceedings which
would have a material adverse impact on its financial position.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of limited partners, through the
solicitation of proxies or otherwise, during the year covered by this report.
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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 8,184
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 Leasing Cash Distribution Fund IV and Subsidiary (the
Partnership) reported net income of $4,560,000 for the year ended December 31,
1997, as compared to $5,856,000 during 1996. The decline in net income during
1997, as compared to 1996, is due to a decrease in revenues generated from
leasing activities.
The decrease in total revenues of $4,463,000 for the year ended
December 31, 1997, as compared to 1996, is primarily the result of a decrease in
rental income of $2,889,000, and to a lesser extent, a decrease in earned income
from financing leases of $1,134,000. The decrease in rental income is reflective
of a reduction in the size of the equipment portfolio. As of December 31, 1997,
the Partnership owned equipment with an aggregate original cost of $45.3 million
compared to $76.7 million at December 31, 1996. Another factor contributing to
the decrease in rental income is the equipment being held for lease. Until new
lessees or buyers of equipment can be found, the equipment will continue to
generate depreciation expense without any corresponding rental income. The
effect of this will be a reduction of the Partnership earnings during this
remarketing period. As of December 31, 1997, the Partnership owned equipment
being held for lease with an original purchase price of $8,635,000 and a net
book value of $68,000, compared to $17,496,000 and $1,015,000, respectively, at
December 31, 1996. The General Partner is actively engaged, on behalf of the
Partnership, in remarketing and selling the Partnership's equipment as it
becomes available.
The decrease in earned income from financing leases for the year ended
December 31, 1997, as compared to prior year, is due to a decrease in the
Partnership's net investment in financing leases to $9.6 million at December 31,
1997 from $17 million at December 31, 1996. The investment in financing leases,
as well as earned income from financing leases, will decrease over the lease
term as the Partnership amortizes income over the lease term using the interest
method of accounting. This effect will be mitigated to some degree as the
Partnership continues to invest in new financing leases over its life. During
1997 and 1996, the Partnership invested $2 million and $6.4 million in new
financing leases, respectively.
An additional factor contributing to the decline in total revenues for
the year ended December 31, 1997, compared to 1996, is the absence of a gain on
sale of securities, compared to $977,000 in 1996. The securities sold during
1996 consisted of common stock received through the exercise of stock warrants
granted to the Partnership as part of a financing agreement with several
emerging growth companies. In addition, the Partnership owns shares of stock and
stock warrants in emerging growth companies that are publicly traded with
unrealized gains of $5,000 and $525,000 at December 31, 1997 and 1996,
respectively. These investments in stock and stock warrants carry certain
restrictions, but generally can be exercised within a one year period.
Partially offsetting the factors contributing to the decline in total
revenues is an increase in gain on sale of equipment. The gain on sale of
equipment was $1,042,000 for which the Partnership received proceeds of
$1,496,000 for the year ended December 31, 1997, compared to a gain of $381,000
and proceeds of $925,000 for 1996. The increase in gain and proceeds from sale
of equipment is a result of an increase in sales activity of the Partnership's
equipment portfolio. The Partnership sold equipment with an aggregate original
cost of $33.4 million for the year ended December 31, 1997, compared to $25.8
million during 1996.
Total expenses decreased by $3,120,000 during year ended December 31,
1997, as compared to 1996. A majority of the decrease in total expenses is due
to the decrease in depreciation expense of $2,346,000 during 1997, compared to
1996. This decrease is due to a decline in the amount of depreciable equipment
owned by the Partnership, as well as, an increasing portion of the equipment
owned by the Partnership becoming fully depreciated.
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 investments of the Partnership.
Cable Television System:
On October 10, 1996, Phoenix Westcom Cablevision Inc. sold all of its
tangible and intangible assets used in the operation of its cable television
system for proceeds of $735,000 resulting in a loss on the sale of these assets
of $64,000. This loss on sale is included in Other Income on the Statement of
Operations during 1996. As a result of the sale of the cable television system's
assets, the subsidiary ceased operations. Accordingly, there are no results
6
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of operations from this cable television system during the year ended December
31, 1997. The revenues from this cable television system did not have a
significant impact upon total revenues during 1996.
Liquidity and Capital Resources
The Partnership's primary source of liquidity is derived from its
contractual obligations with a diversified group of lessees for fixed lease
terms at fixed rental amounts, and from payments of principal and interest on
its outstanding notes receivable. As the initial lease terms expire, the
Partnership will re-lease or sell the equipment. The future liquidity of the
Partnership will depend upon the General Partner's success in collecting the
contractual amounts owed, as well as re-leasing and selling the Partnership's
equipment as it comes off lease.
The Partnership reported net cash generated by equipment leasing,
financing and cable television activities of $16,837,000 during 1997, as
compared to $23,034,000 during 1996. The decrease in the net cash generated
during 1997 is due to a decrease in rental income and payments on financing
leases, as previously discussed in the Results of Operations.
The Partnership received cash distributions from joint ventures of
$1,931,000 during 1997, as compared to cash distributions of $727,000 during
1996. Distributions from joint ventures were higher during 1997, as compared to
1997, due to the Partnership receiving a distribution of excess cash on hand
from a joint venture that was formed on August 1, 1994. During 1994, this newly
formed joint venture made a significant distribution as a result of it receiving
proceeds from the issuance of lease backed certificates. As a result, this joint
venture made a distribution of the proceeds to the Partnership. This joint
venture was not expected to generate any significant amounts of cash available
for distribution until the outstanding debt of this joint venture was paid in
full. In November of 1996, the outstanding debt had been repaid in full. This
joint venture began making distributions to the Partnership in 1997.
The Partnership anticipates reinvesting a portion of the cash generated
from operations in new leasing or financing transactions over the life of the
Partnership. During 1997 and 1996, the Partnership made investments in financing
leases with an aggregate original cost of $2 million and $6.4 million,
respectively, and invested in notes receivable of $5 million and $2.4 million,
respectively.
The total cash distributed to partners during 1997 was $15,747,000, as
compared to $15,880,000 during 1996. In accordance with the partnership
agreement, the limited partners are entitled to 95% of the cash available for
distribution and the General Partner is entitled to 5%. As a result, the limited
partners received $14,959,000 and $15,085,000 during 1997 and 1996,
respectively. The cumulative cash distributions to limited partners was
$103,181,000 at December 31, 1997, as compared to $88,222,000 at December 31,
1996. The General Partner received $788,000 and $795,000 for its share of the
cash available for distribution during 1997 and 1996, respectively. The
Partnership anticpates making distributions during 1998 at a lower rate than the
current distributions made during 1997.
As provided for by the partnership agreement, the General Partner has
determined to exercise its discretion that no further redemptions in the
Partnership will be permitted after March 31, 1998. During the year ended
December 31, 1997, the number of units that have been redeemed has been
immaterial.
The cash to be generated from leasing and financing operations is
anticipated to be sufficient to meet the Partnership's continuing operational
expenses and to provide for distributions to partners.
Forward-looking statements in this report are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Actual results could differ from those anticipated by some of the statements
made above. Limited Partners are cautioned that such forward-looking statements
involve risks and uncertainties including without limitation the following: (I)
the Partnership's plans are subject to change at any time at the discretion of
the General Partner of the Partnership, (ii) future technological developments
in the industry in which the Partnership operates, (iii) competitive pressure on
pricing or services, (iv) substantial customer defaults or cancellations, (v)
changes in business conditions and the general economy, (vi) changes in
government regulations affecting the Partnership's core businesses and (vii) the
ability of the Partnership to sell its remaining assets.
7
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Item 7. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PHOENIX LEASING CASH DISTRIBUTION FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP AND SUBSIDIARY
YEAR ENDED DECEMBER 31, 1997
8
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Phoenix Leasing Cash Distribution Fund IV, a California
limited partnership:
We have audited the accompanying consolidated balance sheet of Phoenix Leasing
Cash Distribution Fund IV, a California limited partnership and Subsidiary as of
December 31, 1997 and the related consolidated statements of operations,
partners' capital and cash flows for the year then ended. 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 audit. The consolidated statements of operations, partners' capital and cash
flows of Phoenix Leasing Cash Distribution Fund IV as of December 31, 1996, were
audited by other auditors whose report dated January 20, 1997, expressed an
unqualified opinion on these statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Phoenix Leasing Cash
Distribution Fund IV, a California limited partnership and Subsidiary as of
December 31, 1997, and the results of their operations and their cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
San Francisco, California, ARTHUR ANDERSEN LLP
January 23, 1998
9
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PHOENIX LEASING CASH DISTRIBUTION FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Amounts in Thousands Except for Unit Amounts)
December 31, 1997
-----------------
ASSETS
Cash and cash equivalents $ 9,218
Accounts receivable (net of allowance for
losses on accounts receivable of $389) 509
Notes receivable (net of allowance for
losses on notes receivable of $2,268) 6,458
Equipment on operating leases and held for
lease (net of accumulated depreciation of $11,646) 128
Net investment in financing leases (net of
allowance for early terminations of $777) 9,631
Investment in joint ventures 680
Capitalized acquisition fees (net of accumulated
amortization of $10,252) 680
Other assets 86
---------
Total Assets $ 27,390
=========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 1,216
---------
Total Liabilities 1,216
---------
Partners' Capital:
General Partner -
Limited Partners, 6,500,000 units authorized,
6,492,727 units issued, 6,208,563 units outstanding 26,169
Unrealized gain on available-for-sale securities 5
---------
Total Partners' Capital 26,174
---------
Total Liabilities and Partners' Capital $ 27,390
=========
The accompanying notes are an
integral part of these statements.
10
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PHOENIX LEASING CASH DISTRIBUTION FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands Except for Per Unit Amounts)
For the Years Ended December 31,
1997 1996
---- ----
INCOME
Rental income $ 2,939 $ 5,828
Earned income, financing leases 2,238 3,372
Gain on sale of equipment 1,042 381
Interest income, notes receivable 1,315 1,202
Gain on sale of securities - 977
Equity in earnings from joint ventures, net 333 412
Other income 587 745
------- -------
Total Income 8,454 12,917
------- -------
EXPENSES
Depreciation 944 3,290
Amortization of acquisition fees 557 733
Lease related operating expenses 229 296
Management fees to General Partner 698 971
Reimbursed administrative costs to General
Partner 500 734
Provision for losses on receivables 455 338
Legal expenses 311 203
General and administrative expenses 207 456
------- -------
Total Expenses 3,901 7,021
------- -------
NET INCOME BEFORE INCOME TAXES 4,553 5,896
Income tax benefit (expense) of subsidiary 7 (40)
------- -------
NET INCOME $ 4,560 $ 5,856
======= =======
NET INCOME PER LIMITED PARTNERSHIP UNIT $ .61 $ .81
======= =======
ALLOCATION OF NET INCOME:
General Partner $ 788 $ 795
Limited Partners 3,772 5,061
------- -------
$ 4,560 $ 5,856
======= =======
The accompanying notes are an
integral part of these statements.
11
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PHOENIX LEASING CASH DISTRIBUTION FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED 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 $ -- 6,318,955 $ 48,068 $ 377 $ 48,445
Distributions to partners
($2.40 per limited
partnership unit) (795) -- (15,085) -- (15,880)
Redemptions of capital -- (76,012) (505) -- (505)
Net income 795 -- 5,061 -- 5,856
Change for the year in
unrealized gain on
available-for-sale
securities -- -- -- 148 148
------- --------- --------- ----- --------
Balance, December 31, 1996 -- 6,242,943 37,539 525 38,064
Distributions to partners
($2.40 per limited
partnership unit) (788) -- (14,959) -- (15,747)
Redemptions of Capital -- (34,380) (183) -- (183)
Net income 788 -- 3,772 -- 4,560
Change for the year in
unrealized gain on
available-for-sale
securities -- -- -- (520) (520)
------- --------- --------- ----- --------
Balance, December 31, 1997 $ -- 6,208,563 $ 26,169 $ 5 $ 26,174
======= ========= ========= ===== ========
The accompanying notes are an
integral part of these statements.
12
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PHOENIX LEASING CASH DISTRIBUTION FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
For the Years Ended
December 31,
1997 1996
---- ----
Operating Activities:
Net income $ 4,560 $ 5,856
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 944 3,290
Amortization of acquisition fees 557 733
Gain on sale of equipment (1,042) (381)
Gain on sale of securities -- (977)
Loss on sale of assets of the cable
television system -- 64
Equity in earnings from joint ventures, net (333) (412)
Provision for early termination, financing leases 199 352
Provision for (recovery of) losses on
notes receivable 154 (17)
Provision for losses on accounts receivable 102 3
Decrease (increase) in accounts receivable (127) 88
Decrease in accounts payable and accrued expenses (298) (118)
Decrease in other assets 120 92
Decrease (increase) in deferred income tax asset (7) 40
-------- --------
Net cash provided by operating activities 4,829 8,613
-------- --------
Investing Activities:
Principal payments, financing leases 9,001 11,263
Principal payments, notes receivable 3,007 3,158
Proceeds from sale of equipment 1,496 925
Proceeds from sale of securities -- 1,005
Proceeds from sale of assets of the
cable television system -- 735
Distributions from joint ventures 1,931 727
Investment in financing leases (2,008) (6,446)
Cable systems, property and equipment -- (36)
Investment in notes receivable (4,965) (2,440)
Investment in joint ventures -- (69)
Investment in securities -- (28)
Payment of acquisition fees (277) (459)
-------- --------
Net cash provided by investing activities 8,185 8,335
-------- --------
Financing Activities:
Redemptions of capital (183) (505)
Distributions to partners (15,747) (15,880)
-------- --------
Net cash used by financing activities (15,930) (16,385)
-------- --------
Increase (decrease) in cash and cash equivalents (2,916) 563
Cash and cash equivalents, beginning of period 12,134 11,571
-------- --------
Cash and cash equivalents, end of period $ 9,218 $ 12,134
======== ========
The accompanying notes are an
integral part of these statements.
13
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PHOENIX LEASING CASH DISTRIBUTION FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
Note 1. Organization and Partnership Matters.
Phoenix Leasing Cash Distribution Fund IV, a California limited
partnership (the Partnership), was formed on July 14, 1989, to invest in capital
equipment of various types and to lease such equipment to third parties on
either a long-term or short-term basis and provide financing to emerging growth
companies and cable television system operators. The Partnership met its minimum
investment requirements on January 12, 1990. The Partnership's termination date
is December 31, 2000.
The Partnership has also made investments in joint ventures with
affiliated partnerships managed by the General Partner for the purpose of
reducing the risks of financing or acquiring certain capital equipment leased to
third parties (see Note 6).
On December 23, 1994, the Partnership foreclosed upon a cable
television system in Arizona that was in default on a loan payable to the
Partnership with a carrying amount of approximately $885,000 which was carried
over to the basis in the cable system. Phoenix Westcom Cablevision, Inc. (the
Subsidiary), a wholly owned subsidiary of the Partnership, was formed under the
laws of Nevada on August 5, 1994 to own and operate the foreclosed cable
television system. Phoenix Westcom Cablevision, Inc. is a wholly-owned
subsidiary of the Partnership (hereinafter, the Partnership and the Subsidiary
are collectively referred to as the Consolidated Partnership). The acquisition
of Westcom Cablevision by the Subsidiary through foreclosure was accounted for
using the "purchase method" of accounting in which the net carrying value of the
loan was allocated to the net assets in accordance with the relative fair market
value of the assets acquired and liabilities assumed.
On October 23, 1996, Phoenix Westcom Cablevision, Inc. sold the assets
used in the operation of the cable television system receiving net proceeds of
approximately $735,000, recognizing a loss on sale of the assets of this cable
television system of $64,000. As a result of the sale of the cable television
system's assets, the Subsidiary ceased operations.
For financial reporting purposes, Partnership income shall be allocated
as follows: (a) first, to the General Partner until the cumulative income so
allocated is equal to the cumulative distributions to the General Partner, (b)
second, one percent to the General Partner and 99% to the Limited Partners until
the cumulative income so allocated is equal to any cumulative Partnership loss
and syndication expenses for the current and all prior accounting periods, and
(c) the balance, if any, to the Unit Holders. All Partnership losses shall be
allocated one percent to the General Partner and 99% to the Unit Holders.
The General Partner is entitled to receive five percent of all cash
distributions until the Limited Partners have recovered their initial capital
contributions plus a cumulative return of twelve percent per annum. Thereafter,
the General Partner will receive 15% of all cash distributions. From inception
of the Partnership until December 31, 1996, the General Partner's interest in
Cash Available for Distribution was subordinated in any calendar quarter until
the Limited Partners received quarterly distributions equal to three percent of
their Capital Contributions (i.e., 12% per annum), prorated for any partial
period.
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 management services subject to certain limitations,
the General Partner receives a fee, payable quarterly, in an amount equal to
3.5% of the Partnership's gross revenues for the quarter from which such payment
is being made, which revenues shall include, but are not limited to, rental
receipts, maintenance fees, proceeds from the sale of equipment and interest
income.
The General Partner will be compensated for services performed in
connection with the analysis of assets available to the Partnership, the
selection of such assets and the acquisition thereof, including obtaining
lessees for the equipment, negotiating and concluding master lease agreements
with certain lessees. As compensation for such acquisition services, the
14
<PAGE>
General Partner will receive a fee equal to four percent, subject to certain
limitations, of (a) the purchase price of equipment acquired by the Partnership
or equipment leased by manufacturers, the financing for which is provided by the
Partnership, or (b) financing provided to businesses such as cable operators,
emerging growth companies, or other businesses, payable upon such acquisition or
financing, as the case may be. Acquisition fees are amortized over the life of
the assets principally on a straight-line basis.
Phoenix Cable Management Inc. (PCMI), an affiliate of the General
Partner, provided day to day management services in connection with the
operation of the Subsidiary. The Subsidiary paid a management fee equal to four
and one-half percent of the System's monthly gross revenue for these services.
Revenues subject to a management fee at the Subsidiary level were not subject to
management fees at the Partnership level.
A schedule of compensation paid and distributions made to the General
Partner and affiliate for the years ended December 31, follows:
1997 1996
---- ----
(Amounts in Thousands)
Management fees $ 698 $ 971
Acquisition fees 279 355
Cash distributions 788 795
-------- --------
$ 1,765 $ 2,121
======== ========
Redemptions of Limited Partner units will only be made to the extent
permitted by applicable laws and regulations, the Partnership Agreement and if,
in the opinion of the General Partner, it is in the best interest of the
Partnership. In addition, redemptions will not be made if such redemptions would
cause the Partnership to be categorized as a publicly traded partnership for
federal income tax purposes.
The Partnership will acquire such limited partnership units for an amount
equal to 85% of the "accrual basis capital account" relating to the redeemed
units. The Partnership will retain the remaining 15% of the "accrual basis
capital account" relating to the redeemed units. Redemptions retained by the
Partnership were $27,000 and $68,000 during the years ended December 31, 1997
and 1996, respectively. "Accrual basis capital account" is computed in
accordance with the books and records regularly maintained by the Partnership
for financial reporting purposes, utilizing the accrual method of accounting.
Note 2. Summary of Significant Accounting Policies.
Principles of Consolidation. The 1996 consolidated financial statements
include the accounts of the Partnership and its wholly-owned subsidiary, Phoenix
Westcom Cablevision, Inc., since the date of acquisition, December 23, 1994. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Leasing Operations. The Partnership's leasing operations consist of both
financing and operating leases. The financing method of accounting for leases
records as unearned income at the inception of the lease, the excess of net
rentals receivable and estimated residual value at the end of the lease term,
over the cost of equipment leased. Unearned income is credited to income monthly
over the term of the lease on a declining basis to provide an approximate level
rate of return on the unrecovered cost of the investment. Initial direct costs
of consummating new leases are capitalized and included in the cost of
equipment. The Partnership reviews its estimates of residual value at least
annually. If a decline in value has occurred which is other than temporary, a
reduction in the investment is recognized currently.
Under the operating method of accounting for leases, the leased
equipment is recorded as an asset at cost and depreciated. The Partnership's
leased equipment is depreciated primarily using an accelerated depreciation
method over the estimated useful life of six years.
The Partnership's policy is to review periodically the expected
economic life of its rental equipment in order to determine the probability of
recovering its undepreciated cost. Such reviews address, among other things,
recent and anticipated technological developments affecting computer equipment
and competitive factors within the computer marketplace. Where reviews of the
equipment portfolio indicate that rentals plus anticipated sales proceeds will
not exceed expenses in any future period, the Partnership revises its
depreciation policy and may provide additional depreciation as appropriate. As a
result of such periodic reviews, the Partnership provided additional
15
<PAGE>
depreciation expense of $577,000 and $544,000 ($.09 and $.09 per limited
partnership unit) for the years ended December 31, 1997 and 1996, respectively.
Rental income for the year is determined on the basis of rental
payments due for the period under the terms of the lease. Maintenance, repairs
and minor renewals of the leased equipment are charged to expense.
Cable Television System Operations. The consolidated statement of
operations includes the operating activity of the Subsidiary for the year ended
December 31, 1996. The Subsidiary's cable operations consisted of a cable system
located in the counties of Maricopa and Mohave in the State of Arizona and
consisted of headend equipment and 69 miles of plant passing, approximately
2,060 homes and serving approximately 737 cable subscribers. The Subsidiary's
cable television system served the communities of Cave Creek, Perryville and
Peach Springs. The Subsidiary operated under four non-exclusive franchise
agreements with the Town of Cave Creek, Maricopa County, Yavapai County and the
Hualapai Tribe in Mohave County.
Cable television services were billed monthly in advance. Revenue was
deferred and recognized as the services were provided.
Cash and Cash Equivalents. Cash and cash equivalents include deposits at
banks, investments in money market funds and other highly liquid short-term
investments with original maturities of less than 90 days.
Credit and Collateral. The Partnership's activities have been
concentrated in the equipment leasing and financing industry. A credit
evaluation is performed by the General Partner for all leases and loans made,
with the collateral requirements determined on a case-by-case basis. The
Partnership's loans are generally secured by the equipment or assets financed
and, in some cases, other collateral of the borrower. In the event of default,
the Partnership has the right to foreclose upon the collateral used to secure
such loans.
Notes Receivable. Notes receivable generally are stated at their
outstanding unpaid principal balances, which includes accrued interest. Interest
income is accrued on the unpaid principal balance.
Impaired Notes Receivable. Generally, notes receivable are classified as
impaired and the accrual of interest on such notes is discontinued when the
contractual payment of principal or interest has become 90 days past due or
management has serious doubts about further collectibility of the contractual
payments, even though the loan may currently be performing. When a note
receivable is classified as impaired, income recognition is discontinued. Any
payments received subsequent to the placement of the note receivable on to
impaired status will generally be applied towards the reduction of the
outstanding note receivable balance, which may include previously accrued
interest as well as principal. Once the principal and accrued interest balance
has been reduced to zero, the remaining payments will be applied to interest
income. Generally, notes receivable are restored to accrual status when the
obligation is brought current, has performed in accordance with the contractual
terms for a reasonable period of time and the ultimate collectibility of the
total contractual principal and interest is no longer in doubt.
Allowance for Losses. An allowance for losses is established through
provisions for losses charged against income. Notes receivable deemed to be
uncollectible are charged against the allowance for losses, and subsequent
recoveries, if any, are credited to the allowance.
Investments in Joint Ventures. Minority investments in net assets of the
equipment, financing and foreclosed cable systems joint ventures reflect the
Partnership's equity basis in the ventures. Under the equity method of
accounting, the original investment is recorded at cost and is adjusted
periodically to recognize the Partnership's share of earnings, losses, cash
contributions and cash distributions after the date of acquisition.
Investment in Available-for-Sale Securities. The Partnership has
investments in stock warrants in public companies that have been determined to
be available for sale. Available-for-sale securities are stated at their fair
market value, with unrealized gains and losses reported as a separate component
of partners' capital.
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 amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
16
<PAGE>
Note 3. Accounts Receivable.
Accounts receivable consist of the following at December 31:
1997
----
(Amounts in Thousands)
Lease payments $ 785
Reimbursement for property taxes 70
General Partners and Affiliates 24
Other 19
---------
898
Less: allowance for losses on accounts receivable (389)
---------
Total $ 509
=========
Note 4. Notes Receivable.
Notes receivable consist of the following at December 31:
1997
----
(Amounts in Thousands)
Notes receivable from emerging growth
companies, with stated interest
ranging from 10% to 21% per annum,
receivable in installments ranging
from 36 to 60 months, collateralized
by a security interest in the equipment
financed. $ 4,719
Notes receivable from cable television
system operators with stated interest
ranging from 11% to 13% per annum,
receivable in installments ranging
from 78 to 96 months, collateralized by
a security interest in the cable system
assets. These notes have a graduated repayment
schedule followed with a balloon payment. 459
Notes receivable from other businesses with
stated interest ranging from 13% to 18%
per annum, receivable in installments
ranging from 35 to 85 months, collateralized
by the equipment financed. 3,548
---------
8,726
Less: allowance for losses on notes receivable (2,268)
---------
Total $ 6,458
=========
Minimum payments to be received on non-cancelable notes receivable for
the years ended December 31, are as follows:
(Amounts in Thousands)
1998......................................... $ 3,196
1999......................................... 2,158
2000......................................... 1,803
2001......................................... 811
2002......................................... 445
Thereafter................................... 175
---------
17
<PAGE>
Total minimum payments to be received........ 8,588
Impaired notes receivable.................... 2,006
Less: unearned interest..................... (1,868)
Less: allowance for losses.................. (2,268)
---------
Net investment in notes receivable........... $ 6,458
=========
The Partnership's notes receivable to cable television system operators
provide for a monthly payment rate in an amount that is less than the
contractual interest rate. The difference between the payment rate and the
contractual interest rate is added to the principal and therefore deferred until
the maturity date of the note. Upon maturity of the note, the original principal
and deferred interest is due and payable in full. Although the contractual
interest rates may be higher, the amount of interest being recognized on the
Partnership's outstanding notes receivable to cable television system operators
is being limited to the amount of the payments received, thereby deferring the
recognition of a portion of the deferred interest until the loan is paid off.
At December 31, 1997, the recorded investment in notes that are
considered to be impaired was $2,006,000. Included in this amount is $1,874,000
of impaired notes for which the related allowance for losses is $1,874,000 and
$132,000 of impaired notes for which there is no allowance. The average recorded
investment in impaired loans during the years ended December 31, 1997 and 1996
was approximately $1,991,000 and $2,479,000, respectively. The Partnership
recognized $16,000 and $287,000 of interest income on impaired notes receivable
during the years ended December 31, 1997 and 1996, respectively.
On February 14, 1996, the Partnership foreclosed upon a nonperforming
outstanding note receivable to a cable television operator to whom the
Partnership, along with other affiliated partnerships managed by the General
Partner, had extended credit. Upon foreclosure, this note was reclassified to
Investment in Joint Ventures on the balance sheet. The Partnership's net
carrying value for this outstanding note receivable was $73,000, for which the
Partnership had an allowance for losses on notes of $17,000. This allowance of
$17,000 was reversed and recognized as income during the year ended December 31,
1996. This joint venture subsequently sold the cable system on August 30, 1996
at a small gain.
During the year ended December 31, 1996, the Partnership received a
settlement on one of its notes receivable from a cable television system
operator which was considered to be impaired. The Partnership received a
recovery of $856,000 as a settlement which was applied to the $605,000
outstanding note receivable balance and the difference of $251,000 was
recognized as interest income from notes receivable during the year ended
December 31, 1996.
The activity in the allowance for losses on notes receivable during the
years ended December 31, is as follows:
1997
----
(Amounts in Thousands)
Beginning balance $ 2,224
Provision for losses 154
Write downs (110)
---------
Ending balance $ 2,268
=========
Note 5. Equipment on Operating Leases and Investment in Financing Leases.
Equipment on lease consists primarily of computer peripheral, small
computers and other capital equipment.
The Partnership's operating leases are for initial lease terms of
approximately 24 to 48 months. During the remaining terms of existing operating
leases, the Partnership will not recover all of the undepreciated cost and
related expenses of its rental equipment, and therefore must remarket a portion
of its equipment in future years.
The Partnership has entered into direct lease arrangements with
businesses in different industries located throughout the United States.
Generally, it is the responsibility of the lessee to provide maintenance on
leased equipment. The General Partner administers the equipment portfolio of
leases acquired through the direct leasing program. Administration includes the
collection of rents from the lessees and remarketing of the equipment.
18
<PAGE>
The net investment in financing leases consists of the following at
December 31:
1997
----
(Amounts in Thousands)
Minimum lease payments to be received $ 12,018
Less: unearned income (1,610)
allowance for early termination (777)
---------
Net investment in financing leases $ 9,631
=========
Minimum rentals to be received on noncancellable operating and
financing leases for the years ended December 31 are as follows:
Operating Financing
--------- ---------
(Amounts in Thousands)
1998.................................... $ 946 $ 6,749
1999.................................... 548 3,748
2000.................................... 230 1,284
2001.................................... 5 203
2002.................................... - 34
--------- ---------
Total $ 1,729 $ 12,018
========= =========
The net book value of equipment held for lease at December 31, 1997
amounted to $68,000.
Note 6. Investment in Joint Ventures.
Equipment Joint Venture.
On August 1, 1994, the Partnership entered into an agreement along with
two other affiliated partnerships to contribute certain leased assets and notes
receivable (the "Assets") to Phoenix Acceptance Limited Liability Company, a
Delaware limited liability company (the "Joint Venture") in exchange for a
44.97% equity interest in the Joint Venture. The interest received in the Joint
Venture was accounted for at the historical cost basis of the Assets
transferred. The Partnership has accounted for its net investment in this Joint
Venture using the equity method of accounting. The Joint Venture was organized
to hold title to the assets and subsequently transfer such assets to a trust for
the purpose of the trust issuing two classes of lease backed certificates to
third parties in exchange for cash proceeds. The transaction between the Joint
Venture and the trust has been accounted for as a financing arrangement. The
Joint Venture retains a residual interest in the assets transferred through the
ownership of a third class of subordinated trust certificates. The lease backed
certificates are recourse only to the assets used to collateralize the
obligation.
The net carrying value of such assets contributed by the Partnership to
the Joint Venture was approximately $11.2 million and the total carrying value
of all of the assets contributed by all three partnerships approximated $24.7
million. The net proceeds from the issuance of the lease backed certificates are
being distributed back to the partnerships who contributed to the Joint Venture.
On August 5, 1994, the Joint Venture received proceeds from the issuance of the
7.10% Class A lease backed certificates in the principal amount of $18.5
million. On August 12, 1994, the Joint Venture received proceeds from the
issuance of the 8.25% Class B lease backed certificates in the principal amount
of $5.3 million. The lease backed certificates were paid in full in November
1996.
An analysis of the Partnership's investment in the Equipment Joint
Venture is as follows:
Net
Net Investment Investment
at Beginning Equity in at End
Date of Period Contributions Earnings Distributions of Period
- ---- -------------- ------------- --------- ------------- ---------
(Amounts in Thousands)
Year Ended
December 31, 1996 $1,657 $ 69 $ 393 $ 483 $1,636
====== ====== ====== ====== ======
19
<PAGE>
Year Ended
December 31, 1997 $1,636 $ - $ 467 $1,848 $ 255
====== ====== ====== ====== ======
The aggregate financial information of the Equipment Joint Venture is
presented as follows:
December 31,
1997
----
(Amounts in Thousands)
Assets $ 730
Liabilities 156
Partners' Capital 574
For the Years Ended December 31,
1997 1996
---- ----
(Amounts in Thousands)
Revenue $ 1,129 $ 2,025
Expenses 78 1,149
Net Income (Loss) 1,051 876
As of December 31, 1997 the Partnership's pro rata interest in the
Equipment Joint Venture's net book value of off-lease equipment was $0.
The General Partner earns a management fee of 3.5% of the Partnership's
respective interest in gross revenues of the Equipment Joint Venture. Cash
proceeds subject to a management fee at the joint venture level are not subject
to management fees at the Partnership level.
Financing Joint Venture.
The Partnership owns a 25% interest in Phoenix Joint Venture 1994-2, a
Financing Joint Venture. This investment is accounted for using the equity
method of accounting. The other partners of the venture are entities organized
and managed by the General Partner.
An analysis of the Partnership's investment account in the Financing
Joint Venture is as follows:
Net
Net Investment Investment
at Beginning Equity in at End
Date of Period Contributions Earnings Distributions of Period
- ---- -------------- ------------- --------- ------------- ----------
(Amounts in Thousands)
Year Ended
December 31, 1996 $ 271 $ - $ 39 $ 86 $ 224
====== ====== ====== ====== ======
Year Ended
December 31, 1997 $ 224 $ - $ 28 $ 81 $ 171
====== ====== ====== ====== ======
The aggregate financial information of the Financing Joint Venture is
presented as follows:
December 31,
1997
----
(Amounts in Thousands)
Assets $ 803
Liabilities 136
Partners' Capital 667
20
<PAGE>
For the Years Ended December 31,
1997 1996
---- ----
(Amounts in Thousands)
Revenue $ 127 $ 162
Expenses 25 6
Net Income (Loss) 102 156
The General Partner earns a management fee of 3.5% of the Partnership's
respective interest in gross payments received for the Financing Joint Venture.
Revenues subject to a management fee at the joint venture level are not subject
to management fees at the Partnership level.
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.
Weighted
Joint Venture Percentage Interest
------------- -------------------
Phoenix Pacific Northwest Cable J.V. 37.22%
Phoenix Country Cable J.V. (1) 46.65
Phoenix Independence Cable, LLC 43.69
Phoenix Grassroots Cable System, LLC (2) .80
(1) Cable system sold in 1995 and joint venture closed in 1996.
(2) Cable system sold in 1996.
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, 1996 $ 523 $ 73 $ (20) $ 158 $ 418
====== ====== ====== ====== ======
Year Ended
December 31, 1997 $ 418 $ - $ (162) $ 2 $ 254
====== ====== ====== ====== ======
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
21
<PAGE>
For the Years Ended December 31,
1997 1996
---- ----
(Amounts in Thousands)
Revenue $ 529 $ 2,168
Expenses 789 2,213
Net Income (Loss) (260) (45)
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:
1997
----
(Amounts in Thousands)
Equipment lease operations $ 559
General Partner and affiliates 181
Security deposits 202
Other 147
Sales Tax 127
--------
$ 1,216
========
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.
The net differences between the tax basis and the reported amounts of
the Partnership's assets and liabilities is as follows at December 31, 1997:
Reported Amounts Tax Basis Net Difference
---------------- --------- --------------
(Amounts in Thousands)
Assets $ 27,390 $ 32,809 $ (5,419)
Liabilities 1,216 735 481
Note 9. Related Entities.
The General Partner and affiliates serve in the capacity of general
partner in other partnerships, all of which are engaged in the equipment leasing
and financing business.
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.
22
<PAGE>
The reimbursed administrative costs to the General Partner were
$500,000 and $734,000 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 $181,000 and $237,000, respectively.
Note 11. Net Income (Loss) and Distributions per Limited Partnership Unit.
Net income and distributions per limited partnership unit were based on
the limited partner's share of consolidated net income and distributions, and
the weighted average number of units outstanding of 6,223,655 and 6,273,582 for
the years ended December 31, 1997 and 1996, respectively. For the purposes of
allocating consolidated income (loss) and distributions to each individual
limited partner, the Partnership allocates consolidated net income (loss) and
distributions based upon each respective limited partner's net capital
contributions.
Note 12. Subsequent Events.
In January 1998, cash distributions of $196,000 and $2,399,000 were
made to the General and Limited Partners, respectively.
Note 13. 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.
23
<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:
24
<PAGE>
Phoenix Leasing American Business Fund, L.P.
Phoenix Leasing Cash Distribution Fund V, L.P.
Phoenix Income Fund, L.P.
Phoenix High Tech/High Yield Fund
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 and its
affiliate.
<TABLE>
(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 $ 977 $ 0 $ 0
======= ===== =====
(1) consists of management and acquisition fees.
</TABLE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
(a) No person owns of record, or is known by the Registrant to own
beneficially, more than five percent of any class of voting
securities of the Registrant.
(b) The General Partner of the Registrant owns the equity securities
of the Registrant set forth in the following table:
25
<PAGE>
(1) (2) (3)
Title of Class Amount Beneficially Owned Percent of Class
-------------- ------------------------- ----------------
General Partner Interest Represents a 5% interest in the 100%
Registrant's profits and
distributions, until the Limited
Partners have recovered their
capital contributions plus a
cumulative return of 12% per annum,
compounded quarterly, on the
unrecovered portion thereof.
Thereafter, the General Partner
will receive 15%interest in the
Registrant's profits and distributions.
Limited Partner Interest 1,100 units .02
Item 12. Certain Relationships and Related Transactions.
None.
PART IV
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Page No.
--------
(a) 1. Financial Statements:
Consolidated Balance Sheet as of December 31, 1997 10
Consolidated Statements of Operations for
the Years Ended December 31, 1997 and 1996 11
Consolidated Statements of Partners' Capital
for the Years Ended December 31, 1997 and 1996 12
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997 and 1996 13
Notes to Consolidated Financial Statements 4-23
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) 21. Additional Exhibits.
a) Balance Sheets of Phoenix Leasing Incorporated E21 1-14
27. Financial Data Schedule
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PHOENIX LEASING CASH DISTRIBUTION FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
(Registrant)
BY: PHOENIX LEASING INCORPORATED,
A CALIFORNIA CORPORATION
GENERAL PARTNER
Date: March 24, 1998 By: /S/ GUS CONSTNTIN
-------------- ----------------------------
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 and a Director of --------------
(Gary W. Martinez) 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
27
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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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,218
<SECURITIES> 0
<RECEIVABLES> 9,624
<ALLOWANCES> 2,657
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<PP&E> 11,774
<DEPRECIATION> 11,646
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0
0
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