UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-KSB
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934
For the fiscal year ended December 31, 1998 Commission File Number 0-18278
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 $4,949,000.
As of December 31, 1998, 6,192,840 Units of Limited Partnership interest were
outstanding. No market exists for the Units of Partnership interest and
therefore there exists no aggregate market value at December 31, 1998.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Transitional Small Business Disclosure Format:
Yes No X
----- -----
Page 1 of 27
<PAGE>
PHOENIX LEASING CASH DISTRIBUTION FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
1998 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I
Item 1. Business........................................................ 3
Item 2. Properties...................................................... 4
Item 3. Legal Proceedings............................................... 4
Item 4. Submission of Matters to a Vote of Security Holders............. 4
PART II
Item 5. Market for the Registrant's Securities and Related Security
Holder Matters................................................ 5
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 6
Item 7. Financial Statements............................................ 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.. 26
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,
1998, the total investments in equipment leases and financing transactions
(loans), including the Partnership's pro rata interest in investments made by
joint ventures, approximate $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 61.21 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,
1998, approximately 99% of the leased assets 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
3
<PAGE>
the 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, 1998, 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, 1998, the Partnership owns equipment and has
outstanding loans to borrowers with an aggregate original cost of $36,857,000.
The following table summarizes the type of equipment owned or financed by the
Partnership, including its pro rata interest in joint ventures, at December 31,
1998.
Percentage of
Asset Types Purchase Price(1) Total Assets
----------- ----------------- -------------
(Amounts in Thousands)
Capital Equipment Leased to Emerging Growth
Companies $ 8,576 23%
Financing Related to Emerging Growth Companies 5,963 16
Furniture and Fixtures 5,938 16
Financing of Other Businesses 5,586 15
Computer Peripherals 5,015 14
Miscellaneous 2,447 7
Small Computer Systems 1,432 4
Telecommunications 1,109 3
Financing Related to Pay TV Systems and Other
Media 791 2
------- ---
TOTAL $36,857 100%
======= ===
(1) These amounts include the Partnership's pro rata interest in equipment
joint ventures of $2,173,000, a financing joint venture of $290,000, cost
of equipment on financing leases of $12,447,000 and original cost of
outstanding loans of $12,049,000 at December 31, 1998.
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.
4
<PAGE>
PART II
Item 5. Market for the Registrant's Securities and Related Security Holder
------------------------------------------------------------------
Matters.
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(a) The Registrant's limited partnership interests are not publicly
traded. There is no market for the Registrant's limited
partnership interests and it is unlikely that any will develop.
(b) Approximate Number of Equity Security Investments:
Number of Unit Holders
Title of Class as of December 31, 1998
---------------------------- -----------------------
Limited Partners 8,028
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 (the Partnership) reported
net income of $2,823,000 for the year ended December 31, 1998, as compared to
$4,560,000 during 1997. The decline in net income during 1998, as compared to
1997, is due primarily to a decrease in revenues generated from leasing
activities.
The decrease in total revenues of $3,505,000 for the year ended
December 31, 1998, as compared to 1997, is primarily the result of a decrease in
earned income from financing leases of $1,206,000 and a decrease in rental
income of $874,000. The decrease in earned income from financing leases for the
year ended December 31, 1998, as compared to prior year, is due to a decrease in
the Partnership's net investment in financing leases to $3.4 million at December
31, 1998 from $9.6 million at December 31, 1997. 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 if
the Partnership invests in new financing leases. During the year ended December
31, 1998, the Partnership made no new investments in financing leases, compared
to $2 million for the same period in 1997.
The decrease in rental income is reflective of a reduction in the size
of the equipment portfolio. As of December 31, 1998, the Partnership owned
equipment with an aggregate original cost of $22.3 million compared to $45.3
million at December 31, 1997. 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, 1998, the Partnership owned equipment being held for lease with an
original purchase price of $8,020,000 and a net book value of $2,000, compared
to $8,635,000 and $68,000, respectively, at December 31, 1997. The General
Partner is actively engaged, on behalf of the Partnership, in remarketing and
selling the Partnership's equipment as it becomes available.
Also contributing to the decrease in revenues was a decrease in gain on
sale of equipment of $888,000 and a decrease in interest income from notes
receivable of $429,000, as compared to 1997. The decrease in gain on sale of
equipment was due to a decrease in sales activity of the Partnership's equipment
portfolio. Correspondingly, proceeds from the sale of equipment also decreased.
The Partnership sold equipment with an aggregate original cost of $23 million
for the year ended December 31, 1998, compared to $33.4 million during 1997. The
decrease in interest income from notes receivable is attributable to the fact
that no new investments were made during the year ended December 31, 1998.
During the year ended December 31, 1997, the Partnership made new investments in
notes receivable of $5 million.
Total expenses decreased by $1,768,000 during year ended December 31,
1998, as compared to 1997. The decrease in total expenses is a result of a
decrease in nearly all of the items comprising total expenses, with depreciation
expense contributing the largest decrease. These decreases are the result of the
continued decrease in the size of the equipment portfolio. Depreciation expense
decreased $610,000 during 1998, compared to 1997. 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.
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 and
financing activities of $11,676,000 during 1998, as compared to $16,837,000
6
<PAGE>
during 1997. The decrease in the net cash generated during 1997 is due to a
decrease in rental income and payments on financing leases.
The Partnership received cash distributions from joint ventures of
$661,000 during 1998, as compared to cash distributions of $1,931,000 during
1997. The decrease in distributions from joint ventures is attributable to a
decline in the amount of cash available for distribution from one equipment
joint venture as a result of a decrease in rental income and proceeds from sale
of equipment.
The total cash distributed to partners during 1998 was $14,905,000, as
compared to $15,747,000 during 1997. 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 $14,121,000 and $14,959,000 during 1998 and 1997,
respectively. The cumulative cash distributions to limited partners was
$117,301,000 at December 31, 1998, as compared to $103,181,000 at December 31,
1997. The General Partner received $784,000 and $788,000 for its share of the
cash available for distribution during 1998 and 1997, respectively. The
Partnership anticipates making distributions at the same rate as the December
1998 distribution.
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.
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.
Impact of the Year 2000 Issue
The General Partner has appointed ReSource/Phoenix, Inc. an affiliate
of the General Partner, to manage its Year 2000 project.
Resource/Phoenix has a Year 2000 project plan in place and a "Y2K
Project Team" has been appointed. If the Year 2000 project is not completed in a
timely manner, the Year 2000 issue could have a material impact on the
Partnership's operations. The Y2K Project Team, however, has identified Y2K
risks and issues and the remediation procedures which need to be implemented.
The Y2K Project Team has budgeted for the necessary changes, built contingency
plans, and has progressed along the scheduled timelines.
Installation of any remediation changes to software and hardware is
planned to be completed by June 30, 1999.
Costs incurred by the Partnership will be expensed as incurred and are
not currently anticipated to be material to the Partnership's financial position
or results of operations.
The Partnership's customers consist of lessees and borrowers. The
Partnership does not have exposure to any individual customer that would
materially impact the Partnership should the customer experience a significant
Year 2000 problem.
7
<PAGE>
Item 7. FINANCIAL STATEMENTS
--------------------
PHOENIX LEASING CASH DISTRIBUTION FUND IV,
------------------------------------------
A CALIFORNIA LIMITED PARTNERSHIP
--------------------------------
YEAR ENDED DECEMBER 31, 1998
----------------------------
8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Partners of Phoenix Leasing Cash Distribution Fund IV, a California
limited partnership:
We have audited the accompanying balance sheet of Phoenix Leasing Cash
Distribution Fund IV, a California limited partnership as of December 31, 1998
and the related statements of operations and comprehensive income, partners'
capital and cash flows for the years ended December 31, 1998 and 1997. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Phoenix Leasing Cash
Distribution Fund IV, a California limited partnership as of December 31, 1998,
and the results of their operations and their cash flows for the years ended
December 31, 1998 and 1997, in conformity with generally accepted accounting
principles.
San Francisco, California, ARTHUR ANDERSEN LLP
January 22, 1999
9
<PAGE>
PHOENIX LEASING CASH DISTRIBUTION FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
BALANCE SHEET
(Amounts in Thousands Except for Unit Amounts)
December 31, 1998
-----------------
ASSETS
Cash and cash equivalents $ 6,877
Accounts receivable (net of allowance for losses on accounts
receivable of $308) 106
Notes receivable (net of allowance for losses on notes
receivable of $2,375) 4,018
Equipment on operating leases and held for lease (net of
accumulated depreciation of $5,378) 36
Net investment in financing leases (net of allowance for early
terminations of $661) 3,352
Investment in joint ventures 327
Capitalized acquisition fees (net of accumulated amortization
of $10,615) 316
Other assets 450
-------
Total Assets $15,482
=======
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 1,073
-------
Total Liabilities 1,073
-------
Partners' Capital:
General Partner --
Limited Partners, 6,500,000 units authorized, 6,492,727 units
issued, 6,192,840 units outstanding 14,027
Accumulated other comprehensive income 382
-------
Total Partners' Capital 14,409
-------
Total Liabilities and Partners' Capital $15,482
=======
The accompanying notes are an integral part of these statements.
10
<PAGE>
PHOENIX LEASING CASH DISTRIBUTION FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Amounts in Thousands Except for Per Unit Amounts)
For the Years Ended December 31,
1998 1997
---- ----
INCOME
Rental income $ 2,065 $ 2,939
Earned income, financing leases 1,032 2,238
Gain on sale of equipment 154 1,042
Interest income, notes receivable 886 1,315
Equity in earnings from joint ventures, net 308 333
Other income 504 587
------- -------
Total Income 4,949 8,454
------- -------
EXPENSES
Depreciation 334 944
Amortization of acquisition fees 364 557
Lease related operating expenses 86 229
Management fees to General Partner 436 698
Reimbursed administrative costs to General
Partner 264 500
Provision for losses on receivables 139 455
Legal expenses 328 311
General and administrative expenses 175 200
------- -------
Total Expenses 2,126 3,894
------- -------
NET INCOME 2,823 4,560
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains arising during period 414 (520)
Less: reclassification adjustment for gains
included in net income (37) --
------- -------
Other comprehensive income 377 (520)
------- -------
COMPREHENSIVE INCOME $ 3,200 $ 4,040
======= =======
NET INCOME PER LIMITED PARTNERSHIP UNIT $ .33 $ .61
======= =======
ALLOCATION OF NET INCOME:
General Partner $ 784 $ 788
Limited Partners 2,039 3,772
------- -------
$ 2,823 $ 4,560
======= =======
The accompanying notes are an integral part of these statements.
11
<PAGE>
PHOENIX LEASING CASH DISTRIBUTION FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(Amounts in Thousands Except for Unit Amounts)
<TABLE>
<CAPTION>
Accumulated
General Other
Partner's Limited Partners' Comprehensive Total
Amount Units Amount Income Amount
--------- ------------------- ------------- ------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ -- 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
Other comprehensive income -- -- -- (520) (520)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 -- 6,208,563 26,169 5 26,174
Distributions to partners ($2.28 per limited
partnership unit) (784) -- (14,121) -- (14,905)
Redemptions of Capital -- (15,723) (60) -- (60)
Net income 784 -- 2,039 -- 2,823
Other comprehensive income -- -- -- 377 377
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1998 $ -- 6,192,840 $ 14,027 $ 382 $ 14,409
========== ========== ========== ========== ==========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
12
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PHOENIX LEASING CASH DISTRIBUTION FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
For the Years Ended December 31,
1998 1997
---- ----
Operating Activities:
Net income $ 2,823 $ 4,560
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 334 944
Amortization of acquisition fees 364 557
Gain on sale of equipment (154) (1,042)
Gain on sale of securities (37) --
Equity in earnings from joint ventures, net (308) (333)
Provision for early termination, financing
leases 32 199
Provision for losses on notes receivable 107 154
Provision for losses on accounts receivable -- 102
Decrease (increase) in accounts receivable 403 (127)
Decrease in accounts payable and
accrued expenses (140) (298)
Decrease in other assets 11 113
-------- --------
Net cash provided by operating activities 3,435 4,829
-------- --------
Investing Activities:
Principal payments, financing leases 5,858 9,001
Principal payments, notes receivable 2,383 3,007
Proceeds from sale of equipment 255 1,496
Proceeds from sale of securities 37 --
Distributions from joint ventures 661 1,931
Investment in financing leases -- (2,008)
Investment in notes receivable -- (4,965)
Payment of acquisition fees (5) (277)
-------- --------
Net cash provided by investing activities 9,189 8,185
-------- --------
Financing Activities:
Redemptions of capital (60) (183)
Distributions to partners (14,905) (15,747)
-------- --------
Net cash used in financing activities (14,965) (15,930)
-------- --------
Decrease in cash and cash equivalents (2,341) (2,916)
Cash and cash equivalents, beginning of period 9,218 12,134
-------- --------
Cash and cash equivalents, end of period $ 6,877 $ 9,218
======== ========
The accompanying notes are an integral part of these statements.
13
<PAGE>
PHOENIX LEASING CASH DISTRIBUTION FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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. was 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 equal to the excess of the
cumulative distributions over the cumulative profits allocated to the General
Partner for all prior accounting periods, (b) second, one percent to the General
Partner and 99% to the Limited Partners until the cumulative income so allocated
is equal to any cumulative Partnership loss and syndication expenses for the
current and all prior accounting periods, and (c) the balance, if any, to the
Limited Partners. All Partnership losses shall be allocated one percent to the
General Partner and 99% to the Limited Partners.
The General Partner is entitled to receive five percent of all cash
distributions until the Limited Partners have recovered their initial capital
contributions plus a cumulative return of 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 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
14
<PAGE>
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 due and distributions made to the General
Partner and affiliate for the years ended December 31, follows:
1998 1997
---- ----
(Amounts in Thousands)
Management fees $ 436 $ 698
Acquisition fees -- 279
Cash distributions 784 788
------ ------
Total $1,220 $1,765
====== ======
Redemptions of Limited Partner units will only be made to the extent
permitted by applicable laws and regulations, the Partnership Agreement and if,
in the opinion of the General Partner, it is in the best interest of the
Partnership. In addition, redemptions will not be made if such redemptions would
cause the Partnership to be categorized as a publicly traded partnership for
federal income tax purposes. As provided for by the Partnership Agreement, the
General Partner has determined to exercise its discretion that no further
redemptions in the Partnership will be permitted after March 31, 1998.
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 $9,000 and $27,000 during the years ended December 31, 1998 and
1997, 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.
------------------------------------------
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
depreciation expense of $31,000 and $577,000 ($.01 and $.09 per limited
partnership unit) for the years ended December 31, 1998 and 1997, respectively.
15
<PAGE>
Rental income for the year is determined on a straight-line basis of
rental payments due for the period under the term of the lease. Maintenance,
repairs and minor renewals of the leased equipment are charged to expense.
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 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 other comprehensive
income.
Reclassification. Certain 1997 amounts have been reclassified to
conform to the 1998 presentation.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Comprehensive Income. As of January 1, 1998, the Partnership adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130). This statement establishes standards for the reporting and
display of comprehensive income and its components in the financial statements.
For the Partnership, comprehensive income includes net income reported on the
statement of operations and changes in the fair value of its available-for-sale
investments reported as a component of partners' capital.
16
<PAGE>
Note 3. Accounts Receivable.
-------------------
Accounts receivable consist of the following at December 31:
1998
----
(Amounts in Thousands)
Lease payments $ 390
Reimbursement for property taxes 15
Other 9
-----
414
Less: allowance for losses on accounts receivable (308)
-----
Total $ 106
=====
Note 4. Notes Receivable.
----------------
Notes receivable consist of the following at December 31:
1998
----
(Amounts in Thousands)
Notes receivable from emerging growth companies,
with stated interest ranging from 10% to 21%
per annum, receivable in installments ranging
from 37 to 60 months, collateralized by a
security interest in the equipment financed. $ 3,178
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. 398
Notes receivable from other businesses with stated
interest ranging from 10% to 24% per annum,
receivable in installments ranging from
35 to 85 months, collateralized by the equipment
financed. 2,817
-------
6,393
Less: allowance for losses on notes receivable (2,375)
-------
Total $ 4,018
=======
Minimum payments to be received on non-cancelable notes receivable for
the years ended December 31, are as follows:
(Amounts in Thousands)
1999 ............................................ $ 2,122
2000 ............................................ 1,721
2001 ............................................ 729
2002 ............................................ 384
2003 ............................................ 141
Thereafter ...................................... 33
-------
Total minimum payments to be received ........... 5,130
Impaired notes receivable ....................... 2,211
Less: unearned interest ........................ (948)
Less: allowance for losses ..................... (2,375)
-------
Net investment in notes receivable .............. $ 4,018
=======
17
<PAGE>
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, 1998, the recorded investment in notes that are
considered to be impaired was $2,211,000. Included in this amount is $2,083,000
of impaired notes for which the related allowance for losses is $1,930,000 and
$128,000 of impaired notes for which there is no allowance. The average recorded
investment in impaired loans during the years ended December 31, 1998 and 1997
was approximately $2,122,000 and $1,991,000, respectively. The Partnership
recognized $25,000 and $16,000 of interest income on impaired notes receivable
during the years ended December 31, 1998 and 1997, respectively.
The activity in the allowance for losses on notes receivable during the
years ended December 31, is as follows:
1998 1997
---- ----
(Amounts in Thousands)
Beginning balance $ 2,268 $ 2,224
Provision for losses 107 154
Write downs -- (110)
------- -------
Ending balance $ 2,375 $ 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.
The net investment in financing leases consists of the following at
December 31:
1998
----
(Amounts in Thousands)
Minimum lease payments to be received $ 4,462
Less: unearned income (449)
allowance for early termination (661)
-------
Net investment in financing leases $ 3,352
=======
Minimum rentals to be received on noncancellable operating and
financing leases for the years ended December 31 are as follows:
18
<PAGE>
Operating Financing
--------- ---------
(Amounts in Thousands)
1999 ......................... $ 170 $3,117
2000 ......................... 37 1,128
2001 ......................... 13 186
2002 ......................... 11 31
2003 ......................... 7 --
------ ------
Total ........................ $ 238 $4,462
====== ======
The net book value of equipment held for lease at December 31, 1998
amounted to $2,000.
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, 1997 $1,636 $ - $ 467 $1,848 $ 255
====== ====== ====== ====== ======
Year Ended
December 31, 1998 $ 255 $ - $ 317 $ 545 $ 27
====== ====== ====== ====== ======
The aggregate financial information of the Equipment Joint Venture is
presented as follows:
December 31,
1998
----
(Amounts in Thousands)
Assets $184
Liabilities 117
Partners' Capital 67
19
<PAGE>
For the Years Ended December 31,
1998 1997
---- ----
(Amounts in Thousands)
Revenue $ 766 $1,129
Expenses 59 78
Net Income 707 1,051
As of December 31, 1998 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, 1997 $224 $ - $ 28 $ 81 $171
==== ==== ==== ==== ====
Year Ended
December 31, 1998 $171 $ - $ 16 $ 83 $104
==== ==== ==== ==== ====
The aggregate financial information of the Financing Joint Venture is
presented as follows:
December 31,
1998
----
(Amounts in Thousands)
Assets $550
Liabilities 151
Partners' Capital 399
For the Years Ended December 31,
1998 1997
---- ----
(Amounts in Thousands)
Revenue $ 85 $127
Expenses 17 25
Net Income 68 102
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 receivable was exchanged for interests (their
20
<PAGE>
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 Independence Cable, LLC (1) 43.69
Phoenix Grassroots Cable System, LLC (2) .80
(1) Cable system sold and joint venture closed in 1998.
(2) Cable system sold in 1996 and joint venture closed in 1997.
Net
Net Investment Equity in Investment
at Beginning Earnings at End
Date of Period Contributions (Losses) Distributions of Period
- ---- -------------- ------------- --------- ------------- ---------
(Amounts in Thousands)
Year Ended
December 31, 1997 $ 418 $ - $ (162) $ 2 $ 254
====== ====== ====== ====== ======
Year Ended
December 31, 1998 $ 254 $ - $ (25) $ 33 $ 196
====== ====== ====== ====== ======
The aggregate combined financial information of the foreclosed cable
systems joint ventures is presented as follows:
December 31,
1998
----
(Amounts in Thousands)
Assets $626
Liabilities 97
Partners' Capital 529
For the Years Ended December 31,
1998 1997
---- ----
(Amounts in Thousands)
Revenue $ 284 $ 529
Expenses 342 789
Net Loss (58) (260)
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:
21
<PAGE>
1998
----
(Amounts in Thousands)
Equipment lease operations $ 586
Security deposits 191
Other 116
Sales Tax 102
General Partner and affiliates 78
------
$1,073
======
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, 1998:
Reported Amounts Tax Basis Net Difference
---------------- --------- --------------
(Amounts in Thousands)
Assets $15,482 $22,151 $(6,669)
Liabilities 1,073 630 443
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.
The reimbursed administrative costs to the General Partner were
$264,000 and $500,000 for the years ended December 31, 1998 and 1997,
respectively. The equipment storage, remarketing and data processing costs
reimbursed to the General Partner during the years ended December 31, 1998 and
1997 were $83,000 and $181,000, 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 6,195,597 and 6,223,655 for
the years ended December 31, 1998 and 1997, 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. 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.
22
<PAGE>
Note 13. Legal Proceedings.
-----------------
On October 28, 1997, a Class Action Complaint (the "Complaint") was
filed against Phoenix Leasing Inc., Phoenix Leasing Associates, II and III L.P.,
Phoenix Securities Inc. and Phoenix American Inc. (the "Companies") in
California Superior Court for the County of Sacramento by eleven individuals on
behalf of investors in Phoenix Leasing Cash Distribution Funds I through V (the
"Partnerships"). The Companies were served with the Complaint on December 9,
1997. The Complaint sought declaratory and other relief including accounting,
receivership, imposition of constructive trust and judicial dissolution and
winding up of the Partnerships, and damages based on fraud, breach of fiduciary
duty and breach of contract by the Companies as general partners of the
Partnerships.
Plaintiffs severed one cause of action from the Complaint, a claim
related to the marketing and sale of CDF V, and transferred it to Marin County
Superior Court (the "Marin Action"). Plaintiffs then dismissed the remaining
claims in Sacramento Superior Court and re-filed them in a separate lawsuit
making similar allegations (the "Sacramento Action").
Plaintiffs have amended the Marin Action twice. Defendants have not yet
answered the Complaint and may file a demurrer to dismiss the claims. Discovery
has not commenced. The Companies intend to vigorously defend the Complaint.
In February 1999, plaintiffs requested a transfer of the Sacramento
Action to Marin County. The Court granted that request, and the case is
currently in transit. Defendants have not yet responded to the Complaint.
Discovery has not commenced. The Companies intend to vigorously defend the
Complaint.
During the year ended December 31, 1998, the Partnerships recorded
legal expenses of approximately $130,000 in connection with the above litigation
as indemnification to the General Partner.
The Partnership is not a party to any legal proceedings which would
have a material adverse impact on its financial position.
Note 14. Subsequent Events.
-----------------
In January 1999, cash distributions of $81,000 and $993,000 were made
to the General and Limited Partners, respectively.
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 61, is President, Chief Executive Officer and a
Director of PLI. Mr. Constantin received a B.S. degree in Engineering from the
University of Michigan and a Master's Degree in Management Science from Columbia
University. From 1969 to 1972, he served as Director, Computer and Technical
Equipment of DCL Incorporated (formerly Diebold Computer Leasing Incorporated),
a corporation formerly listed on the American Stock Exchange, and as Vice
President and General Manager of DCL Capital Corporation, a wholly-owned
subsidiary of DCL Incorporated. Mr. Constantin was actively engaged in marketing
manufacturer leasing programs to computer and medical equipment manufacturers
and in directing DCL Incorporated's IBM System/370 marketing activities. Prior
to 1969, Mr. Constantin was employed by IBM as a data processing systems
engineer for four years. Mr. Constantin is an individual general partner in four
active partnerships and is an NASD registered principal. Mr. Constantin is the
founder of PLI and the beneficial owner of all of the common stock of Phoenix
American Incorporated.
GARY W. MARTINEZ, age 48, is Executive Vice President, Chief Operating
Officer and a Director of PLI. He has been associated with PLI since 1976. He
manages the Asset Management Department, which is responsible for lease and loan
portfolio management. This includes credit analysis, contract terms,
documentation and funding; remittance application, change processing and
maintenance of customer accounts; customer service, invoicing, collection,
settlements and litigation; negotiating lease renewals, extensions, sales and
buyouts; and management information reporting. From 1973 to 1976, Mr. Martinez
was a Loan Officer with Crocker National Bank, San Francisco. Prior to 1973, he
was an Area Manager with Pennsylvania Life Insurance Company. Mr. Martinez is a
graduate of California State University, Chico.
HOWARD SOLOVEI, age 37, is the Chief Financial Officer, Treasurer and a
Director of PLI. He has been associated with PLI since 1984. Mr. Solovei
oversees the Finance Department. He is responsible for the structuring,
planning, and monitoring of the partnerships sponsored by the General Partner
and its affiliates, as well as maintaining the banking relationships. Mr.
Solovei graduated with a B.S. in Business Administration from the University of
California, Berkeley.
BRYANT J. TONG, age 44, is Senior Vice President, Financial Operations
and a Director of PLI. He has been with PLI since 1982. Mr. Tong is responsible
for investor services and overall company financial operations. He is also
responsible for the technical and administrative operations of the cash
management, corporate accounting, partnership accounting, accounting systems,
internal controls and tax departments, in addition to Securities and Exchange
Commission and other regulatory agency reporting. Prior to his association with
PLI, Mr. Tong was Controller-Partnership Accounting with the Robert A. McNeil
Corporation for two years and was an auditor with Ernst & Whinney (succeeded by
Ernst & Young) from 1977 through 1980. Mr. Tong holds a B.S. in Accounting from
the University of California, Berkeley, and is a Certified Public Accountant.
Neither the General Partner nor any Executive Officer of the General
Partner has any family relationship with the others.
Phoenix Leasing Incorporated or its affiliates and the executive
officers of the General Partner serve in a similar capacity to the following
affiliated limited partnerships:
Phoenix Leasing American Business Fund, L.P.
Phoenix Leasing Cash Distribution Fund V, L.P.
Phoenix Income Fund, L.P.
Phoenix High Tech/High Yield Fund and
Phoenix Leasing Cash Distribution Fund III
24
<PAGE>
Disclosure Pursuant to Section 16, Item 405 of Regulation S-K:
The General Partner (and any corporate general partner of the General
Partner) of the Registrant, and the executive officers of the General Partner
(or any corporate general partner of the General Partner) of the Registrant,
file reports pursuant to Section 16(a) of the Securities Exchange Act of 1934,
as amended. Based solely on the Registrant's review of the copies of such forms
received by the Registrant, the Registrant believes that, during 1998, all such
required reports were filed on a timely basis.
Certain Legal Proceedings.
On October 28, 1997, a Class Action Complaint (the "Complaint") was
filed against Phoenix Leasing Inc., Phoenix Leasing Associates, II and III L.P.,
Phoenix Securities Inc. and Phoenix American Inc. (the "Companies") in
California Superior Court for the County of Sacramento by eleven individuals on
behalf of investors in Phoenix Leasing Cash Distribution Funds I through V (the
"Partnerships"). The Companies were served with the Complaint on December 9,
1997. The Complaint sought declaratory and other relief including accounting,
receivership, imposition of constructive trust and judicial dissolution and
winding up of the Partnerships, and damages based on fraud, breach of fiduciary
duty and breach of contract by the Companies as general partners of the
Partnerships.
Plaintiffs severed one cause of action from the Complaint, a claim
related to the marketing and sale of CDF V, and transferred it to Marin County
Superior Court (the "Marin Action"). Plaintiffs then dismissed the remaining
claims in Sacramento Superior Court and re-filed them in a separate lawsuit
making similar allegations (the "Sacramento Action").
Plaintiffs have amended the Marin Action twice. Defendants have not yet
answered the Complaint and may file a demurrer to dismiss the claims. Discovery
has not commenced. The Companies intend to vigorously defend the Complaint.
In February 1999, plaintiffs requested a transfer of the Sacramento
Action to Marin County. The Court granted that request, and the case is
currently in transit. Defendants have not yet responded to the Complaint.
Discovery has not commenced. The Companies intend to vigorously defend the
Complaint.
Item 10. Executive Compensation.
----------------------
Set forth is the information relating to all direct remuneration paid
or accrued by the Registrant during the last year to the General Partner and its
affiliate.
<TABLE>
<CAPTION>
(A) (B) (C) (D)
Cash and cash- Aggregate of
Name of Individual Capacities in equivalent forms contingent forms
or persons in group which served of remuneration of remuneration
- ------------------- ------------- ------------------------------------------- ----------------
(C1) (C2)
Securities or property
Salaries, fees, directors' insurance benefits or
fees, commissions, and reimbursement, personal
bonuses benefits
------------------------- -----------------------
(Amounts in Thousands)
<S> <C> <C> <C> <C>
Phoenix Leasing
Incorporated General Partner $ 436 $ 0 $ 0
======= ===== =====
<FN>
(1) consists of management and acquisition fees.
</FN>
</TABLE>
25
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
--------------------------------------------------------------
(a) No person owns of record, or is known by the Registrant to own
beneficially, more than five percent of any class of voting
securities of the Registrant.
(b) The General Partner of the Registrant owns the equity securities
of the Registrant set forth in the following table:
(1) (2) (3)
Title of Class Amount Beneficially Owned Percent of Class
-------------- ------------------------- ----------------
General Partner Interest Represents a 5% interest in 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:
Balance Sheet as of December 31, 1998 10
Statements of Operations and Comprehensive
Income for the Years Ended December 31, 1998
and 1997 11
Statements of Partners' Capital for the Years
Ended December 31, 1998 and 1997 12
Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997 13
Notes to Financial Statements 14 - 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,
1998.
(c) 21. Additional Exhibits.
a) Balance Sheets of Phoenix Leasing Incorporated E21 1-12
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, 1999 By: /S/ GUS CONSTANTIN
-------------- ----------------------------
Gus Constantin, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ GUS CONSTANTIN President, Chief Executive Officer and a March 24, 1999
- --------------------- Director of Phoenix Leasing Incorporated, --------------
(Gus Constantin) General Partner
/S/ GARY W. MARTINEZ Executive Vice President, March 24, 1999
- --------------------- Chief Operating Officer and a Director of --------------
(Gary W. Martinez) Phoenix Leasing Incorporated
General Partner
/S/ HOWARD SOLOVEI Chief Financial Officer, March 24, 1999
- --------------------- Treasurer and a Director of --------------
(Howard Solovei) Phoenix Leasing Incorporated
General Partner
/S/ BRYANT J. TONG Senior Vice President, March 24, 1999
- --------------------- Financial Operations --------------
(Bryant J. Tong) (Principal Accounting Officer)
and a Director of
Phoenix Leasing Incorporated
General Partner
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, 1998 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheets are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheets. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the balance sheets referred to above present fairly, in all
material respects, the financial position of Phoenix Leasing Incorporated and
Subsidiaries as of June 30, 1998 and 1997, in conformity with generally accepted
accounting principles.
San Francisco, California, ARTHUR ANDERSEN LLP
September 9, 1998
Page 1 of 12
<PAGE>
<TABLE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
June 30, June 30,
1998 1997
---- ----
<S> <C> <C>
Cash and cash equivalents $ 6,530,661 $11,409,747
Investments in marketable securities 7,313,855 5,105,289
Trade accounts receivable, net of allowance for doubtful accounts
of $55,173 and $121,944 at June 30, 1998 and 1997, respectively 131,575 289,284
Receivables from Phoenix Leasing Partnerships, other affiliates and
trusts 4,515,180 4,315,315
Notes receivable from related party 3,053,037 1,002,060
Equipment subject to lease 6,622,323 4,320,755
Notes receivable 11,814,873 5,825,842
Investments in Phoenix Leasing Partnerships 2,085,922 1,678,239
Property and equipment, net of accumulated depreciation of $11,541,407
and $10,881,577 at June 30, 1998 and 1997, respectively 5,900,642 6,009,049
Capitalized initial direct costs of originating leases and loans 464,207 150,767
Other assets 2,490,060 2,936,974
----------- -----------
TOTAL ASSETS $50,922,335 $43,043,321
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Warehouse lines of credit $19,139,328 $10,310,568
Payables to affiliates 382,264 2,950,748
Accounts payable and accrued expenses 3,806,494 2,374,490
Long-term debt 140,215 147,532
Deficit in investments in Phoenix Leasing Partnerships 409,131 738,297
----------- -----------
TOTAL LIABILITIES 23,877,432 16,521,635
----------- -----------
Minority Interests in Consolidated Subsidiaries 122,744 105,901
----------- -----------
Commitments and Contingencies (Note 13)
SHAREHOLDER'S EQUITY:
Common stock, without par value, 30,000,000 shares
authorized, 5,433,600 issued and outstanding at
June 30, 1998 and 1997, respectively 20,369 20,369
Additional capital 11,466,920 11,466,920
Unrealized gains on investments in securities, available for sale 236,392 243,311
Retained earnings 15,198,478 14,685,185
----------- -----------
TOTAL SHAREHOLDER'S EQUITY 26,922,159 26,415,785
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $50,922,335 $43,043,321
=========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
2
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998
Note 1. Summary of Significant Accounting Policies:
a. Organization - Phoenix Leasing Incorporated and subsidiaries (the
Company), a wholly owned subsidiary of Phoenix American Incorporated (PAI), is
engaged in the organization and management of partnerships which specialize in
the purchase and lease of primarily high-technology and data processing
equipment. The partnerships purchase equipment directly from equipment vendors
for lease to financial, commercial and industrial businesses and governmental
agencies. The partnerships also finance transactions in the areas of
microcomputers and emerging growth companies. The Company also engages in
similar leasing activities for its own account and pools these loans and leases
for sale to trusts which engage in the sale of asset backed securities . The
Company also provided ongoing equipment maintenance services for end-users of
high-technology data processing equipment and graphic plotters. This business
operation was sold in May 1997.
b. Principles of Consolidation - The consolidated financial statements
include the accounts of Phoenix Leasing Incorporated and its wholly or
majority-owned subsidiaries and subsidiaries over which the Company exerts
control. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Except as otherwise explained below, minority interests in the net
assets and net income or loss of majority-owned subsidiaries are allocated on
the basis of the proportionate ownership interests of the minority owners.
Three of the consolidated subsidiaries are California limited
partnerships (the Partnerships) which are general partners of three of the
Phoenix Leasing Partnerships. As of June 30, 1998, the Company held a 50%
general partner ownership interest in two of the Partnerships and a 62.5%
interest in one. Under the terms of the partnership agreements, profits and
losses attributable to acquisition fees paid to the Partnerships from Phoenix
Leasing Partnerships are allocated to the limited partner (the minority owner in
the Partnerships) in proportion to the limited partner's ownership interest. All
remaining profits and losses are allocated to the Company. Distributions to the
partners are made in accordance with the terms of the partnership agreement. The
limited partner of each of the Partnerships is Lease Management Associates,
Inc., a Nevada corporation controlled by an officer of the Company, who is the
owner of PAI.
c. Investments - Investments in Phoenix Leasing Partnerships reflect
the Company's equity basis in the Phoenix Leasing Partnerships. Under the equity
method of accounting the original investment is recorded at cost and is adjusted
periodically to recognize the Company's share of earnings, losses and
distributions after the date of acquisition. The Company has adopted the equity
method of accounting on the basis of its control and significant influence over
the Phoenix Leasing Partnerships.
d. Lease Accounting - The Company's leasing operations consist of both
financing and operating leases. The method of accounting for finance leases
recognizes unearned income at the inception of the lease calculated as the
excess of net rentals receivable and estimated residual value at the end of the
lease term over the cost of the equipment leased. Unearned income is amortized
monthly over the term of the lease on a declining basis to provide an
approximate level rate of return on the unrecovered cost of the investment.
Initial direct costs of originating new leases are capitalized and amortized
over the initial lease term.
When accounting for operating leases, the leased equipment is
recorded as an asset, at cost, and is depreciated on a straight-line basis over
its estimated useful life, ranging up to six years. Rental income represents the
rental payments due during the period under the terms of the lease.
3
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998
Note 1. Summary of Significant Accounting Policies (continued):
The Company is the lessor in leveraged lease agreements under which
computer equipment having an estimated useful life of 5 years was leased for
periods from 4-5 years. The Company is the equity participant and equipment
owner. A portion of the purchase price was furnished by third-party financing in
the form of long-term debt that provides no recourse to the Company and is
secured by a first lien on the financed equipment.
e. Property and Equipment - Property and equipment which the Company
holds for its own use are recorded at cost and depreciated on a straight-line
basis over estimated useful lives ranging up to 45 years.
f. Income Taxes - The Company is included in consolidated and combined
tax returns filed by PAI. See Note 15 for further information.
g. Investments in Securities - Investments in securities, available for
sale, are stated at fair value or amortized cost which approximates fair value,
as specified by SFAS 115. Interest is recognized when earned.
h. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
i. Reclassification - Certain 1997 balances have been reclassified to
conform to the 1998 presentation.
Note 2. Receivables from Phoenix Leasing Partnerships, Other Affiliates, and
Trusts:
Receivables from Phoenix Leasing Partnerships, other affiliates and
trusts consist of the following as of June 30:
1998 1997
---- ----
Management fees $ 342,154 $ 156,688
Acquisition fees 308,182 283,133
Other receivables from Phoenix Leasing Partnerships, net 846,578 3,353,327
Servicer advances due from unaffiliated Trusts 468,453 230,478
Receivable from Parent 2,511,601 --
Receivables from other corporate affiliates 38,212 291,689
---------- ----------
$4,515,180 $4,315,315
========== ==========
Note 3. Investments in Phoenix Leasing Partnerships:
The Company records its investments in Phoenix Leasing Partnerships
under the equity method of accounting. The ownership interest percentages vary,
ranging from .5% up to 25%. As general partner, the Company has complete
authority in, and responsibility for, the overall management and control of each
4
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998
Note 3. Investments in Phoenix Leasing Partnerships (continued):
partnership, which includes responsibility for supervising partnership
acquisition, leasing, remarketing and sale of equipment. Distributions of cash
from the partnerships are made at the discretion of the general partner;
historically, a significant portion of the partnerships' earnings has been
distributed annually.
The activity in the investments in Phoenix Leasing Partnerships for the
years ended June 30 are as follows:
1998 1997
---- ----
Balance, beginning of year $ 939,942 $ 1,012,671
Additional investments 6,109,431 178,243
Equity in earnings (losses) (664,595) 2,933,649
Cash distributions (4,707,987) (3,184,621)
----------- -----------
Balance, end of year $ 1,676,791 $ 939,942
=========== ===========
The Company's total investments in Phoenix Leasing Partnerships are
comprised of investments in certain partnerships which are subject to
fluctuations due to partnerships' performances and timing of cash distributions.
At times the investment in those partnerships will be a deficit.
In addition, four of the Phoenix Leasing Partnerships ceased operations
as of December 31, 1997. At closing, the Company, as General Partner, was
required to make additional capital contributions to the extent of differences
between the Partnership's general partner's tax capital account and book capital
account balances. The capital contributions were subsequently written off to
bring the book capital account balance to $0.
The aggregate positive investment and aggregate deficit investment
balances are presented separately on the balance sheets as of June 30, 1998 and
1997.
The partnerships own and lease equipment. All debt of the partnerships
is secured by the equipment and is without recourse to the general partners. The
unaudited financial statements of the partnerships reflect the following
combined, summarized financial information as of June 30, 1998 and for the
twelve months then ended:
Assets $85,615,000
Liabilities 7,763,000
Partners' Capital 77,852,000
Revenue 24,962,000
Net Income 12,186,000
Note 4. Equipment Subject to Lease and Notes Receivable:
Equipment subject to lease includes the Company's investments in
leveraged leases, investments in financing leases, operating leases and notes
receivable.
The Company purchases equipment subject to operating and full payout
leases with the intention of selling the equipment to one of its affiliated
limited partnerships or to trusts. Should the equipment be sold to an affiliated
5
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998
Note 4. Equipment Subject to Lease and Notes Receivable (continued):
limited partnership, the sales price will be the original purchase price paid by
the Company, plus any net acquisition and holding costs reduced by any rental
payments received by the Company during the warehousing period. When the
equipment is sold to a trust, the Company earns a brokerage commission.
Equipment subject to lease consists of the following at June 30:
1998 1997
---- ----
Equipment on lease, net of accumulated
depreciation of $47,146 and $47,177
at June 30, 1998 and 1997, respectively $ 8,154 $ 83,057
Leveraged leases 1,051,728 1,913,392
Equipment held for resale 252,133 225,084
Investment in financing leases 4,954,636 1,863,214
Lease Residuals 297,905 --
Operating leases 57,766 236,008
----------- -----------
Total equipment subject to lease $ 6,324,417 $ 4,320,755
=========== ===========
Notes receivable $11,814,873 $ 5,825,842
Leveraged Leases:
----------------
The Company's net investment in leveraged leases is composed of the
following elements at June 30:
1998 1997
---- ----
Rental receivable (net of principal and
interest on the nonrecourse debt) $ -- $ --
Estimated residual value of leased assets 1,740,972 2,602,636
Less: Unearned and deferred income (689,244) (689,244)
----------- -----------
Net investment in leveraged leases $ 1,051,728 $ 1,913,392
=========== ===========
Investment in Financing Leases:
------------------------------
The Company has entered into direct lease arrangements with companies
engaged in different industries located throughout the United States. Generally,
it is the responsibility of the lessee to provide maintenance on leased
equipment.
The Company's net investment in financing leases consists of the
following at June 30:
1998 1997
---- ----
Minimum lease payments to be received $ 6,594,860 $ 2,420,101
Less: unearned income (1,584,490) (542,155)
allowance for early termination (55,734) (14,732)
----------- -----------
Net investment in financing leases $ 4,954,636 $ 1,863,214
=========== ===========
6
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998
Note 4. Equipment Subject to Lease and Notes Receivable (continued):
Minimum rentals to be received on non-cancelable financing leases for
the years ended June 30, are as follows:
1999 $ 1,554,861
2000 1,560,606
2001 1,532,905
2002 1,294,282
2003 642,901
Thereafter 9,305
-----------
Total $ 6,594,860
===========
Notes Receivable:
----------------
Notes receivable for the years ended June 30, are as follows:
1998 1997
---- ----
Notes receivable from emerging growth and
other companies with stated interest ranging
from 9% to 20.7% per annum receivable in
installments ranging from 35 to 86 months
collateralized by the equipment financed $ 12,195,557 $ 5,825,842
Less: allowance for losses (380,684) --
------------ ------------
Total $ 11,814,873 $ 5,825,842
============ ============
Minimum payments to be received on non-cancelable notes receivable for
the years ended June 30, are as follows:
1999 $ 3,727,594
2000 3,743,647
2001 3,708,383
2002 2,878,901
2003 1,816,735
Thereafter 937,524
------------
Total minimum payments to be received 16,812,784
Less: unearned interest (4,617,227)
allowance for losses (380,684)
------------
Net investment in notes receivable $ 11,814,873
============
Note 5. Sale of Leased Assets and Notes Receivable:
The Company adopted SFAS 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities", as it relates to
transactions including revolving periods completed after January 1, 1997.
Prior to this date, such transactions were accounted for under SFAS 77,
"Reporting by Transferors for Transfers of Receivables without Recourse". The
change in standards did not have a material effect on the financial statements
of the Company during the year ended June 30, 1997.
7
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998
Note 5. Sale of Leased Assets and Notes Receivable (continued):
The Company temporarily funds and holds equipment financing
transactions structured as either financing leases or notes receivable. These
financing transactions are held by the Company for a short period of time before
they are then transferred to a special purpose entity for the purpose of
securitizing the payment streams. To date, the Company has been involved in five
such securitization transactions. The first three transactions were entered into
prior to June 30, 1997, the fourth transaction was entered into on November 25,
1997, and the fifth on May 25, 1998. Pursuant to these securitization
transactions, the Company may continue to transfer additional finance leases or
notes receivable to these special purpose entities on a monthly basis for a
period of one year from the date of each securitization transaction. During the
year ended June 30, 1998, the Company transferred additional financing leases
and notes receivable to special purpose entities.
Note 6. Property and Equipment:
Major classes of property and equipment at June 30 are as follows:
1998 1997
---- ----
Land $ 1,077,830 $ 1,077,830
Buildings 7,452,634 7,420,201
Office furniture, fixtures and equipment 8,012,736 7,468,072
Other 898,849 924,523
------------ ------------
17,442,049 16,890,626
Less accumulated depreciation and
amortization (11,541,407) (10,881,577)
------------ ------------
Net Property and Equipment $ 5,900,642 $ 6,009,049
============ ============
PAI owns its headquarters building in San Rafael, California. The
Company paid $7,749,476 to purchase the land and construct the building. The
cost of construction was paid for with a combination of $2,749,476 in cash from
the Company's operations and a $5,000,000 advance from PAI. The $5,000,000
advance is included as a reduction in receivable from Phoenix Leasing
Partnerships and other affiliates. PAI has pledged the market value of the
building as security for a $5,000,000 Industrial Revenue Bond ("IRB") which PAI
has with the City of San Rafael, California. The principal of the IRB is payable
in a lump sum payment on October 1, 2004.
As of June 30, 1998, a portion of the Company's headquarters has been
leased to third parties. The remaining lease term is for less than one year and
the minimum lease payments receivable is $146,055.
Note 7. Investments in Securities:
The Company accounts for its investments in securities under the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 115 - Accounting for Certain Investments in Debt and Equity
Securities (SFAS 115). This pronouncement prescribes specific accounting
treatment for investments based on their classification as either
held-to-maturity securities (HTM), available-for-sale securities (AFS) or
trading securities, as defined in the statement.
8
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998
Note 7. Investments in Securities (continued):
In connection with the five prior lease and note securitizations (see
Note 7) the Company has acquired Class C Equipment Investment Trust Certificates
(Class C Shares) and notes. The Class C Shares are classified as AFS and are
reported at their amortized cost of $6,880,457 and $4,658,771, as of June 30,
1998 and 1997, respectively, which approximates fair value. The Class C Shares
do not have a specified contractual maturity.
All other equities held by the Company are classified as AFS and are
reported at their fair value of $433,397 and $446,518 at June 30, 1998 and 1997,
respectively. Gross unrealized gains on such securities as of June 30, 1998 and
1997 were $393,987 and $405,518, respectively.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring every derivative instruments (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. This Statement requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15,
1999. Statement 133 cannot be applied retroactively. Statement 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, substantively modified
after December 31, 1997.
The Company has not yet quantified the impacts of adopting Statement
133 on our financial statements and has not determined the timing of or method
of our adoption of Statement 133. However, the Statement could increase
volatility in earnings and other comprehensive income.
Note 8. Fair Value of Financial Instruments:
Investments in Securities
-------------------------
The carrying amounts of investments in securities, available for sale,
reported in the balance sheets approximate their fair values.
Notes Receivable and Debt
-------------------------
The fair values of the Company's notes receivable and debt are
estimated based on the market prices of similar instruments or on the current
market interest rates for instruments with similar terms, maturities, and risks.
The estimated fair values of the Company's notes receivable and debt approximate
the carrying amounts reported in the balance sheets.
9
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998
Note 9. Short-Term and Warehouse Lines of Credit:
To provide interim financing for equipment and working capital needs,
the Company executes lines of credit which consist of short-term notes with
banks with interest rates equal to the prime rate or the banks' index rate. All
lines of credit are renewable annually at the banks' option.
As of June 30, 1998, the Company, through PAI, had access to one
short-term line of credit totaling $2.5 million, all of which was available.
Draw downs under this credit line are secured by the Company's receivables from
Phoenix Leasing Partnerships and its Class C shares.
In addition, the Company has two secured short-term warehouse lines of
credit totaling $47.5 million, which are used to provide interim financing for
the acquisition of equipment and the financing of notes receivable. As of June
30, 1998 and 1997, $19.1 and $10.3 million, respectively, of these lines have
been drawn down and are due in one year or less. The draw downs under these
lines are collateralized by investments in financing leases and notes receivable
included in equipment subject to lease and by a second lien on the Company's
Class C shares. The interest rate is tied to the Bank's base rate or the IBOR
(Eurodollar) rate. The commitment period for one of the lines of credit which
totals $22.5 million terminates on December 31, 1999. The second line of credit
which totals $25 million terminates on August 31, 1999. Monthly payments are
based on the lesser of the aggregate payments received by the Company on its
leases and notes receivable or the aggregate principal and interest amount
outstanding on the credit line.
In connection with the Company's lines of credit, various financial
ratios and other covenants must be maintained. The Company has guaranteed its
right, title and interest in certain of its assets and the future receipts from
these assets in order to secure payment and performance of these credit lines.
Note 10. Long-Term Debt:
Long-term debt consists of the following at June 30:
1998 1997
---- ----
Mortgage payable at varying interest
rates with an initial rate of 8.75% secured by
a first deed of trust on real property with a
value of $167,650. Note is amortized over
83 months with monthly payments of $559 and
a final payment of $121,267. $140,215 $147,532
======== ========
The aggregate long-term debt maturities for the fiscal years ended June 30, are
as follows:
1999 $ 6,706
2000 6,706
2001 126,803
--------
Total $140,215
========
Note 11. Income Taxes:
The Company's income or loss for tax reporting purposes is included in
the consolidated and combined tax returns filed by PAI which are prepared on the
accrual basis of accounting. In accordance with a Tax Sharing Agreement
10
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998
Note 11. Income Taxes (continued):
effective July 1, 1991, between the Company and PAI, PAI has assumed all tax
liabilities and benefits arising from the Company's income or loss.
The Company computes its tax benefit or provision and the related
liability is transferred to PAI.
The provision for income taxes for the year ended June 30 consists of
the following:
1998 1997
---- ----
Current tax expense (benefit) $1,198,968 $ (111,925)
Deferred tax (benefit) expense (913,044) 670,305
---------- ----------
$ 285,924 $ 782,230
========== ==========
Cumulative temporary differences of $6,554,133 and $10,097,889 as of
June 30, 1998 and 1997, respectively, are primarily related to differences in
book and tax accounting treatments for leveraged leases.
The difference between the effective tax rate and statutory tax rate is
due to certain expenses deductible for financial reporting purposes but not for
tax purposes, state tax expense net of federal benefit and other miscellaneous
items.
Note 12. Transactions with Related Parties:
The Company provided a line of credit totaling $8,000,000 to its
principal shareholder which was recourse to the assets and common stock of
Phoenix Precision Graphics, Inc. (PPG) (a Nevada corporation owned by the
principal shareholder). At June 30, 1997, $511,493 of this line of credit was
outstanding and is included in notes receivable from related parties. On April
1, 1998, the Company's principal shareholder contributed the assets and
liabilities of Phoenix Precision Graphics, Inc. (PPG) to the Company. PPG is a
electrostatic plotter manufacturing company which is currently in the research
and development phase. At the time of contribution, PPG had total assets of
$1,949,436 and liabilities which the Company assumed totaling $577,016. The
Company's financial statements include this transaction as though the
contribution occurred on July 1, 1996.
The Company provided an interest bearing line of credit to PAI's
controlling shareholder, which was secured by common stock of Phoenix Fiberlink
Inc. (a Nevada Corporation, owned by the principal shareholder). At June 30,
1997, $199,105 of this line of credit has been drawn down and is included in
notes receivable from related party. This note was paid in full in October 1997.
The Company earned a management fee from an affiliate of $154,622 and
$515,137 for the years ended June 30, 1998 and 1997, respectively. This
management fee is included in Portfolio management fees.
As of January 1, 1997, the Company transferred certain assets and
liabilities to a non-consolidated affiliate, ReSource/Phoenix, Inc., wholly
owned by the Company's controlling shareholder. No gain or loss was recorded as
a result of this transaction. In addition, the Company transferred all of its
third party resource service contracts to ReSource/Phoenix, Inc. The Company
recorded fees from these contacts of $657,295 for the period July 1, 1996
through December 31, 1996. ReSource/Phoenix, Inc. will continue to provide
11
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998
Note 12. Transactions with Related Parties (continued):
Accounting, Investor Administration, and Information Technology services to the
Company.
The Company provides an interest bearing line of credit to
ReSource/Phoenix, Inc., which is secured by common stock of ReSource/Phoenix,
Inc. (an affiliated Nevada corporation). As of June 30, 1998, $3,053,037 of this
line of credit had been drawn down and is included in notes receivable from
related party.
Note 13. Commitments and Contingencies:
The Company has entered into agreements which contain specific purchase
commitments. The Company may satisfy these commitments by purchasing equipment
for its own account or by assigning equipment purchases to its affiliated
partnerships. At June 30, 1998 the Company anticipates being able to satisfy its
future obligations under the agreements.
On October 28, 1997 a Class Action Complaint was filed against Phoenix
Leasing Incorporated, Phoenix Leasing Associates II, LP, Phoenix Leasing
Associates III, LP, Phoenix Securities Inc. and Phoenix American Incorporated
(the "Companies") in California Superior Court for the County of Sacramento by
eleven individuals on behalf of investors in Phoenix Leasing Cash Distribution
Funds I through V (the "Partnerships"). The Companies were served with the
Complaint on December 9, 1997. The Complaint seeks declaratory and other relief
including accounting, receivership, imposition of constructive trust and
judicial dissolution and winding up of the Partnerships, and damages based on
fraud, breach of fiduciary duty and breach of contract by the Companies as
general partners of the Partnerships. Plaintiffs served an amended complaint on
August 17, 1998. Discovery has not yet commenced. The Companies intend to
vigorously defend the Complaint.
Note 14. Subsequent Events:
Effective July 1, 1998, the Company and all its subsidiaries adopted
treatment as an Subchapter "S" Corporation pursuant to the Federal Income Tax
Regulations for tax reporting purposes and changed its fiscal year end from June
30 to September 30.
On July 15, 1998, the Company entered into a term loan agreement with a
Bank to borrow up to $10 million. Draw-downs under this term loan are secured by
equipment lease or loan contracts and repayment of the term loan is guaranteed
by the Company. The interest rate is a fixed rate equal to the two-year U.S.
Treasury (in effect at the time of the draw-downs) plus a margin. Monthly
payments of principal and interest are equal to cash received pursuant to the
lease and loan contracts less a .125% servicing fee and all expenses paid for
legal and collection expenses. The entire unpaid principal is due 48 months
after the draw down has occurred. On August 24, 1998, the Company borrowed
$9,999,648 of this term-loan to purchase equipment lease or loan contracts.
12
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