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, 1999 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 $2,922,000.
As of December 31, 1999, 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, 1999.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Transitional Small Business Disclosure Format:
Yes No X
----- -----
Page 1 of 28
<PAGE>
PHOENIX LEASING CASH DISTRIBUTION FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
1999 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.............................................. 9
Item 8. Disagreements on Accounting and Financial Disclosure Matters...... 25
PART III
Item 9. Directors and Executive Officers of the Registrant................ 25
Item 10. Executive Compensation............................................ 26
Item 11. Security Ownership of Certain Beneficial Owners and Management.... 27
Item 12. Certain Relationships and Related Transactions.................... 27
PART IV
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 27
Signatures.................................................................. 28
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,
1999, 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,
1999, 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, 1999, 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, 1999, the Partnership owns equipment and has
outstanding loans to borrowers with an aggregate original cost of $15,255,000.
The following table summarizes the type of equipment owned or financed by the
Partnership at December 31, 1999.
Percentage of
Asset Types Purchase Price(1) Total Assets
- ---------------------------------- ----------------- -------------
(Amounts in Thousands)
Furniture and Fixtures $ 3,707 24%
Capital Equipment Leased to Emerging
Growth Companies 3,256 21
Financing of Other Businesses 3,172 21
Financing Related to Emerging Growth
Companies 2,033 13
Computer Peripherals 1,995 13
Telecommunications 748 5
Small Computer Systems 278 2
Miscellaneous 66 1
------- ---
TOTAL $15,255 100%
======= ===
(1) These amounts include the cost of equipment on financing leases of
$5,943,000 and original cost of outstanding loans of $4,915,000 at
December 31, 1999.
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
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PART II
Item 5. Market for the Registrant's Securities and Related Security Holder
------------------------------------------------------------------
Matters.
-------
(a) The Registrant's limited partnership interests are not publicly
traded. There is no market for the Registrant's limited
partnership interests and it is unlikely that any will develop.
(b) Approximate Number of Equity Security Investments:
Number of Unit Holders
Title of Class as of December 31, 1999
---------------------------- -----------------------
Limited Partners 7,867
General Partner 1
5
<PAGE>
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 $2,292,000 for the year ended December 31, 1999, as compared to
$2,823,000 during 1998. The decline in net income during 1999, as compared to
1998, is due primarily to a decrease in revenues generated from leasing
activities.
The decrease in total revenues of $2,027,000 for the year ended
December 31, 1999, as compared to 1998, is primarily the result of a decrease in
rental income of $1,441,000, a decrease in earned income from financing leases
of $690,000 and interest income from notes receivable of $272,000. These
declines in revenue were in part offset by an increase in gain on sale of
securities of $583,000.
The decrease in rental income is reflective of a reduction in the size
of the equipment portfolio. As of December 31, 1999, the Partnership owned
equipment with an aggregate original cost of $10 million compared to $22.3
million at December 31, 1998. 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, 1999, the Partnership owned equipment being held for lease with an
original purchase price of $3,432,000 and a net book value of $8,000, compared
to $8,020,000 and $2,000, respectively, at December 31, 1998. The General
Partner is actively engaged, on behalf of the Partnership, in remarketing and
selling the Partnership's equipment as it becomes available.
The decrease in earned income from financing leases for the year ended
December 31, 1999, as compared to prior year, is due to a decrease in the
Partnership's net investment in financing leases to $1.1 million at December 31,
1999 from $3.4 million at December 31, 1998. 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.
Interest income from notes receivable decreased by $272,000 for the
year ended December 31, 1999, compared to 1998. The decrease in interest income
from notes receivable, for the year ended December 31, 1999, compared to 1998,
is attributable to the decline in net investment in notes receivable. The net
investment in notes receivable was $2 million at December 31, 1999, compared to
$4 million at December 31, 1998.
The Partnership reported a gain on sale of securities of $620,000 for
the year ended December 31, 1999, compared to $37,000 in 1998. The securities
sold for both 1999 and 1998 consisted of common stock received through the
exercise of stock warrants granted to the Partnership as part of financing
agreements with emerging growth companies that are publicly traded. The
Partnership received proceeds of $620,000 and $37,000 from the sale of these
securities during the year ended December 31, 1999 and 1998, respectively. In
addition, at December 31, 1999, the Partnership owns shares of stock and stock
warrants in emerging growth companies that are publicly traded with an
unrealized gain of approximately $41,000. These stock warrants contain certain
restrictions, but are generally exercisable within one year.
Total expenses decreased by $1,496,000 during year ended December 31,
1999, as compared to 1998. 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 $161,000 during 1999, compared to 1998. 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. These decreases were offset by recovery of the provision for
losses on receivables of $549,000. This recovery is due primarily to the
determination that the provision for early termination of financing leases was
over reserved.
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.
6
<PAGE>
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 $5,581,000 during 1999, as compared to $11,676,000
during 1998. The decrease in the net cash generated during 1999 is due to a
decrease in payments on financing leases and notes receivable, as well as rental
income.
The Partnership received cash distributions from joint ventures of
$477,000 during 1999, as compared to cash distributions of $661,000 during 1998.
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.
Proceeds from the sale of equipment decreased by $120,000, as a result
of a decline in sales activity of the Partnership's equipment portfolio. The
Partnership sold equipment with an aggregate original cost of $12.3 million for
the year ended December 31, 1999 as compared to $23 million for the year ended
December 31, 1998.
As of December 31, 1999, the Partnership owned equipment being held for
lease with an original cost of $3,432,000 and a net book value of $8,000, as
compared to equipment with an original cost of $8,020,000 and a net book value
of $2,000 at December 31, 1998. The General Partner is actively engaged, on
behalf of the Partnership, in remarketing and selling the Partnership's off
lease equipment. 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.
The total cash distributed to partners during 1999 was $5,958,000, as
compared to $14,905,000 during 1998. 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 $5,632,000 and $14,121,000 during 1999 and 1998, respectively.
The cumulative cash distributions to limited partners was $122,934,000 at
December 31, 1999, as compared to $117,301,000 at December 31, 1998. The General
Partner received $326,000 and $784,000 for its share of the cash available for
distribution during 1999 and 1998, respectively. The Partnership is not planning
to make distributions in 2000, compared to the December 1999 distribution rate
of 5%.
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 ResourcePhoenix.com. (RPC), an
affiliate of the General Partner, to manage its Year 2000 project.
7
<PAGE>
RPC has a Year 2000 project plan in place and a "Y2K Project Team" has
been appointed. The team has identified risks, and has implemented remediation
procedures for its Year 2000 issues. RPC has budgeted for the necessary changes,
built contingency plans, and has progressed along the scheduled timeline.
Installation of all remediation changes to critical software and hardware was
completed on November 5, 1999. As of January 31, 2000 RPC has not encountered
any material year 2000 problems with the hardware and software systems used in
our operations. In addition, none of RPC's critical vendors have reported any
material year 2000 problems nor have they experienced any decline in service
levels from such vendors.
RPC will continue to monitor internal and external issues related to
year 2000.
Costs incurred by the Partnership will be expenses 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.
8
<PAGE>
Item 7. FINANCIAL STATEMENTS
--------------------
PHOENIX LEASING CASH DISTRIBUTION FUND IV,
------------------------------------------
A CALIFORNIA LIMITED PARTNERSHIP
--------------------------------
YEAR ENDED DECEMBER 31, 1999
----------------------------
9
<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, 1999
and the related statements of operations and comprehensive income, partners'
capital and cash flows for the years ended December 31, 1999 and 1998. 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, 1999,
and the results of its operations and its cash flows for the years ended
December 31, 1999 and 1998, in conformity with generally accepted accounting
principles.
San Francisco, California, ARTHUR ANDERSEN LLP
January 26, 2000
10
<PAGE>
PHOENIX LEASING CASH DISTRIBUTION FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
BALANCE SHEET
(Amounts in Thousands Except for Unit Amounts)
December 31, 1999
-----------------
ASSETS
Cash and cash equivalents $ 7,732
Accounts receivable (net of allowance for losses
on accounts receivable of $161) 95
Notes receivable (net of allowance for losses on
notes receivable of $409) 2,060
Equipment on operating leases and held for lease
(net of accumulated depreciation of $2,371) 8
Net investment in financing leases (net of
allowance for early terminations of $11) 1,090
Capitalized acquisition fees (net of accumulated
amortization of $10,811) 120
Other assets 143
-------
Total Assets $11,248
=======
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 846
-------
Total Liabilities 846
-------
Partners' Capital:
General Partner --
Limited Partners, 6,500,000 units authorized,
6,492,727 units issued, 6,192,840 units outstanding 10,361
Accumulated other comprehensive income 41
-------
Total Partners' Capital 10,402
-------
Total Liabilities and Partners' Capital $11,248
=======
The accompanying notes are an integral part of these statements.
11
<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,
1999 1998
---- ----
INCOME
Rental income $ 624 $ 2,065
Earned income, financing leases 342 1,032
Gain on sale of equipment 135 154
Gain on sale of securities 620 37
Interest income, notes receivable 614 886
Equity in earnings from joint ventures, net 213 308
Other income 374 467
------- -------
Total Income 2,922 4,949
------- -------
EXPENSES
Depreciation 173 334
Amortization of acquisition fees 196 364
Lease related operating expenses 23 86
Management fees to General Partner 244 436
Reimbursed administrative costs to General
Partner 208 264
Provision for (recovery of) losses on
receivables (549) 139
Legal expenses 188 328
General and administrative expenses 147 175
------- -------
Total Expenses 630 2,126
------- -------
NET INCOME 2,292 2,823
Other comprehensive income:
Unrealized gains (losses) on securities:
Unrealized holding gains arising during period 279 414
Less: reclassification adjustment for gains
included in net income (620) (37)
------- -------
Other comprehensive income (loss) (341) 377
------- -------
COMPREHENSIVE INCOME $ 1,951 $ 3,200
======= =======
NET INCOME PER LIMITED PARTNERSHIP UNIT $ .32 $ .33
======= =======
ALLOCATION OF NET INCOME:
General Partner $ 326 $ 784
Limited Partners 1,966 2,039
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$ 2,292 $ 2,823
======= =======
The accompanying notes are an integral part of these statements.
12
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PHOENIX LEASING CASH DISTRIBUTION FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
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, 1997 $ -- 6,208,563 $ 26,169 $ 5 $ 26,174
Distributions to partners ($2.28 per limited
partnership unit) (784) -- (14,121) -- (14,905)
Redemptions of Capital -- (15,723) (60) -- (60)
Net income 784 -- 2,039 -- 2,823
Other comprehensive income -- -- -- 377 377
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1998 -- 6,192,840 14,027 382 14,409
Distributions to partners ($.91 per limited
partnership unit) (326) -- (5,632) -- (5,958)
Net income 326 -- 1,966 -- 2,292
Other comprehensive income -- -- -- (341) (341)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1999 $ -- 6,192,840 $ 10,361 $ 41 $ 10,402
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
13
<PAGE>
PHOENIX LEASING CASH DISTRIBUTION FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
For the Years Ended December 31,
1999 1998
---- ----
Operating Activities:
- --------------------
Net income $ 2,292 $ 2,823
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 173 334
Amortization of acquisition fees 196 364
Gain on sale of equipment (135) (154)
Gain on sale of securities (620) (37)
Equity in earnings from joint ventures, net (213) (308)
Provision for (recovery of) early
termination, financing leases (586) 32
Provision for losses on notes receivable 37 107
Decrease in accounts receivable 10 403
Decrease in accounts payable and accrued
expenses (227) (140)
Decrease in other assets 29 11
-------- --------
Net cash provided by operating activities 956 3,435
-------- --------
Investing Activities:
- --------------------
Principal payments, financing leases 2,704 5,858
Principal payments, notes receivable 1,921 2,383
Proceeds from sale of equipment 135 255
Proceeds from sale of securities 620 37
Distributions from joint ventures 477 661
Payment of acquisition fees -- (5)
-------- --------
Net cash provided by investing activities 5,857 9,189
-------- --------
Financing Activities:
- --------------------
Redemptions of capital -- (60)
Distributions to partners (5,958) (14,905)
-------- --------
Net cash used in financing activities (5,958) (14,965)
-------- --------
Increase (decrease) in cash and cash equivalents 855 (2,341)
Cash and cash equivalents, beginning of period 6,877 9,218
-------- --------
Cash and cash equivalents, end of period $ 7,732 $ 6,877
======== ========
The accompanying notes are an integral part of these statements.
14
<PAGE>
PHOENIX LEASING CASH DISTRIBUTION FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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
15
<PAGE>
Partner will receive a fee equal to four percent, subject to certain
limitations, of (a) the purchase price of equipment acquired by the Partnership
or equipment leased by manufacturers, the financing for which is provided by the
Partnership, or (b) financing provided to businesses such as cable operators,
emerging growth companies, or other businesses, payable upon such acquisition or
financing, as the case may be. Acquisition fees are amortized over the life of
the assets principally on a straight-line basis.
Phoenix Cable Management Inc. (PCMI), an affiliate of the General
Partner, provided day to day management services in connection with the
operation of the Subsidiary. The Subsidiary paid a management fee equal to four
and one-half percent of the System's monthly gross revenue for these services.
Revenues subject to a management fee at the Subsidiary level were not subject to
management fees at the Partnership level.
A schedule of compensation due and distributions made to the General
Partner and affiliate for the years ended December 31, follows:
1999 1998
---- ----
(Amounts in Thousands)
Management fees $ 244 $ 436
Cash distributions 326 784
------ ------
Total $ 570 $1,220
====== ======
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 $0 and $9,000 during the years ended December 31, 1999 and
1998, 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 $0 and $31,000 ($0 and $.01 per limited partnership
unit) for the years ended December 31, 1999 and 1998, respectively.
16
<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 1998 amounts have been reclassified to
conform to the 1999 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.
17
<PAGE>
Note 3. Accounts Receivable.
-------------------
Accounts receivable consist of the following at December 31:
1999
----
(Amounts in Thousands)
Lease payments $244
Other 8
Reimbursement for property taxes 4
----
256
Less: allowance for losses on accounts receivable 161
----
Total $ 95
====
Note 4. Notes Receivable.
----------------
Notes receivable consist of the following at December 31:
1999
----
(Amounts in Thousands)
Note 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 $ 1,710
Notes receivable from emerging growth companies,
with stated interest ranging from 15% to 19%
per annum, receivable in installments
ranging from 42 to 43 months, collateralized by
a security interest in the equipment financed 759
-------
2,469
Less: allowance for losses on notes receivable (409)
-------
Total $ 2,060
=======
Minimum payments to be received on non-cancelable notes receivable for
the years ended December 31, are as follows:
(Amounts in Thousands)
2000............................................... $ 1,524
2001............................................... 653
2002............................................... 337
2003............................................... 125
2004............................................... 31
-------
Total minimum payments to be received.............. 2,670
Impaired notes receivable.......................... 190
Less: unearned interest........................... (391)
Less: allowance for losses........................ (409)
-------
Net investment in notes receivable................. $ 2,060
=======
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
18
<PAGE>
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, 1999, the recorded investment in notes that are
considered to be impaired was $190,000, net of specific write-downs. The average
recorded investment in impaired loans during the year ended December 31, 1999
and 1998 was $343,000 and 256,000, respectively. The Partnership recognized
$24,000 and $25,000 of interest income on impaired notes receivable during the
years ended December 31, 1999 and 1998, respectively.
The activity in the allowance for losses on notes receivable during the
years ended December 31, is as follows:
1999 1998
---- ----
(Amounts in Thousands)
Beginning balance $ 2,375 $ 2,268
Provision for losses 37 107
Write downs (2,003) --
------- -------
Ending balance $ 409 $ 2,375
======= =======
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:
1999
----
(Amounts in Thousands)
Minimum lease payments to be received $ 1,188
Less: unearned income (87)
allowance for early termination (11)
-------
Net investment in financing leases $ 1,090
=======
Minimum rentals to be received on noncancellable operating and
financing leases for the years ended December 31 are as follows:
Operating Financing
--------- ---------
(Amounts in Thousands)
2000.................................... $ 53 $ 995
2001.................................... 13 162
2002.................................... 11 31
2003.................................... 7 -
------ ------
Total $ 84 $1,188
====== ======
The net book value of equipment held for lease at December 31, 1999
amounted to $8,000.
19
<PAGE>
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, 1998 $255 $ -- $320 $545 $ 30
==== ======= ==== ==== ====
Year Ended
December 31, 1999 $ 30 $ -- $231 $198 $ 63
==== ======= ==== ==== ====
The aggregate financial information of the Equipment Joint Venture is
presented as follows:
December 31,
1999
----
(Amounts in Thousands)
Assets $177
Liabilities 35
Partners' Capital 142
For the Years Ended December 31,
1999 1998
---- ----
(Amounts in Thousands)
Revenue $586 $766
Expenses 72 59
Net Income 514 707
20
<PAGE>
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 owned a 25% interest in Phoenix Joint Venture 1994-2, a
Financing Joint Venture. This joint ventures was closed during 1999. This
investment was accounted for using the equity method of accounting. The other
partners of the venture were 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 Equity in Investment
at Beginning Earnings at End
Date of Period Contributions (Losses) Distributions of Period
- ---- -------------- ------------- --------- ------------- ---------
(Amounts in Thousands)
Year Ended
December 31, 1998 $ 169 $ - $ 13 $ 83 $ 99
======= ====== ==== ==== ======
Year Ended
December 31, 1999 $ 99 $ - $(39) $ 60 $ -
======= ====== ==== ==== ======
The aggregate financial information of the Financing Joint Venture is
presented as follows:
For the Years Ended December 31,
1999 1998
---- ----
(Amounts in Thousands)
Revenue $ 2 $ 85
Expenses 155 17
Net Income (Loss) (153) 68
The General Partner earned 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
were not subject to management fees at the Partnership level.
Foreclosed Cable Systems Joint Ventures.
- ---------------------------------------
The Partnership owned 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 were exchanged for interests (their
capital contribution), on a pro rata basis, in newly formed joint ventures owned
by the partnerships and managed by the General Partner. Title to the cable
television systems was held by the joint ventures. These investments were
accounted for using the equity method of accounting.
Weighted
Joint Venture Percentage Interest
------------- -------------------
Phoenix Independence Cable, LLC (1) 43.69%
Phoenix Pacific Northwest Cable J.V. (2) 37.22
(1) Cable system sold and joint venture closed in 1998.
(2) Cable system sold and joint venture closed in 1999.
21
<PAGE>
Net
Net Investment Equity in Investment
at Beginning Earnings at End
Date of Period Contributions (Losses) Distributions of Period
- ---- -------------- ------------- --------- ------------- ---------
(Amounts in Thousands)
Year Ended
December 31, 1998 $ 256 $ - $ (25) $ 33 $ 198
======= ====== ======== ====== =======
Year Ended
December 31, 1999 $ 198 $ - $ 21 $ 219 $ -
======= ====== ======== ====== =======
The aggregate combined financial information of the foreclosed cable
systems joint ventures is presented as follows:
For the Years Ended December 31,
1999 1998
---- ----
(Amounts in Thousands)
Revenue $ 245 $ 284
Expenses 187 342
Net Income (Loss) 58 (58)
Phoenix Cable Management Inc. (PCMI), an affiliate of the General
Partner, provided day to day management services in connection with the
operation of the foreclosed cable systems joint ventures. The foreclosed cable
systems joint ventures 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 joint venture level were not 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:
1999
----
(Amounts in Thousands)
Equipment lease operations $490
Other 134
Sales Tax 96
Security deposits 66
General Partner and affiliates 60
----
$846
====
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, 1999:
Reported Amounts Tax Basis Net Difference
---------------- --------- --------------
(Amounts in Thousands)
Assets $11,248 $12,427 $(1,179)
Liabilities 846 401 445
22
<PAGE>
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
$208,000 and $264,000 for the years ended December 31, 1999 and 1998,
respectively. The equipment storage, remarketing and data processing costs
reimbursed to the General Partner during the years ended December 31, 1999 and
1998 were $31,000 and $83,000 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 net income and distributions, and the weighted
average number of units outstanding of 6,192,840 and 6,195,597 for the years
ended December 31, 1999 and 1998, respectively. For the purposes of allocating
income (loss) and distributions to each individual limited partner, the
Partnership allocates net income (loss) and distributions based upon each
respective limited partner's 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
their fair values.
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, 1999 and 1998, the Partnership
recorded legal expenses of approximately $20,000 and $130,000, respectively, in
connection with the above litigation as indemnification to the General Partner.
23
<PAGE>
The Partnership is not a party to any legal proceedings which would
have a material adverse impact on its financial position.
24
<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 62, 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 49, 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 38, 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.
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. and
Phoenix Income Fund, L.P.
25
<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 $ 244 $ 0 $ 0
======= ===== =====
<FN>
(1) consists of management fees.
</FN>
</TABLE>
26
<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, 1999 11
Statements of Operations and Comprehensive
Income for the Years Ended December 31, 1999
and 1998 12
Statements of Partners' Capital for the Years
Ended December 31, 1999 and 1998 13
Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998 14
Notes to Financial Statements 15 - 24
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,
1999.
(c) 21. Additional Exhibits.
a) Balance Sheets of Phoenix Leasing Incorporated E21 1-15
27. Financial Data Schedule
27
<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 17, 2000 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 17, 2000
- --------------------- Director of Phoenix Leasing Incorporated, --------------
(Gus Constantin) General Partner
/S/ GARY W. MARTINEZ Executive Vice President, March 17, 2000
- --------------------- Chief Operating Officer and a Director of --------------
(Gary W. Martinez) Phoenix Leasing Incorporated
General Partner
/S/ HOWARD SOLOVEI Chief Financial Officer, March 17, 2000
- --------------------- Treasurer and a Director of --------------
(Howard Solovei) Phoenix Leasing Incorporated
General Partner
28
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 September
30, 1999 and June 30, 1998. 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 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 balance sheets referred to above present fairly, in
all material respects, the financial position of Phoenix Leasing Incorporated
and subsidiaries as of September 30, 1999 and June 30, 1998, in conformity with
generally accepted accounting principles.
San Francisco, California, ARTHUR ANDERSEN LLP
December 28, 1999
Page 1 of 15
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, June 30,
1999 1998
---- ----
Cash and cash equivalents $ 6,720,999 $ 6,530,661
Investments in securities 11,181,265 7,313,855
Trade accounts receivable, net of allowance for
doubtful accounts of $41,534 and $55,173 at
September 30, 1999 and June 30, 1998, respectively 310,293 131,575
Receivable from Phoenix Leasing Partnerships, other
affiliates and trusts 3,444,482 4,515,180
Notes receivable from related party 2,093,883 3,053,037
Equipment subject to lease 28,093,038 6,622,323
Notes receivable 53,032,140 11,814,873
Investments in Phoenix Leasing Partnerships 216,088 2,085,922
Property and equipment, net of accumulated
depreciation of $8,654,783 and $11,541,407 at
September 30, 1999 and June 30, 1998,
respectively 5,463,220 5,900,642
Capitalized initial direct costs of originating
leases and loans 2,394,849 464,207
Other assets 2,483,549 2,490,060
------------ ------------
TOTAL ASSETS $115,433,806 $ 50,922,335
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Warehouse lines of credit $ 64,462,354 $ 19,139,328
Payables to affiliates -- 382,264
Accounts payable and accrued expenses 4,907,345 3,806,494
Long-term debt 19,185,694 140,215
Deficit in investments in Phoenix Leasing
Partnerships 24,180 409,131
------------ ------------
TOTAL LIABILITIES 88,579,573 23,877,432
------------ ------------
Minority Interests in Consolidated Subsidiaries 169,309 122,744
------------ ------------
Commitments and Contingencies (Note 16)
SHAREHOLDER'S EQUITY:
Common stock, without par value, 30,000,000 shares
authorized, 5,433,600 issued and outstanding at
September 30, 1999 and June 30, 1998, respectively 20,369 20,369
Additional capital 11,466,920 11,466,920
Accumulated other comprehensive income 5,949,048 236,392
Retained earnings 9,248,587 15,198,478
------------ ------------
TOTAL SHAREHOLDER'S EQUITY 26,684,924 26,922,159
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $115,433,806 $ 50,922,335
============ ============
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999
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 management of partnerships which specialize in equipment lease
financing and secured lending. The Company also engages in similar financing
activities for its own account and pools these loans and leases for sale to
trusts which engage in the sale of asset backed securities.
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 September 30, 1999, 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. Equipment Leasing and Financing Operations - The Company's primary
leasing activity is the origination of financing leases. The method of
accounting for financing 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 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 originating new
leases and notes receivable are capitalized and amortized over the initial term.
The Company's notes receivable generally are stated at their
outstanding unpaid principal balances, which includes accrued interest. Interest
income is accrued on the unpaid principal balance.
e. Impaired Notes Receivable - Notes receivable are classified as
impaired and the accrual of interest on such notes are discontinued when the
contractual payment of principal and interest becomes 90 days past due or
management has serious doubts about further collectibility of the contractual
payments, even though the loan may currently be performing. When a note
receivable is classified as impaired, income recognition is discontinued. Any
payments received subsequent to the placement of the note receivable on 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 has been reduced to zero, the
remaining payments will be applied to interest income.
f. Portfolio Valuation Methodology - The Company uses the portfolio
method of accounting for net realizable value of the Company's equipment
portfolio.
3
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999
Note 1. Summary of Significant Accounting Policies (continued):
g. Property and Equipment - Property and equipment which the Company
holds for its own use are recorded at cost and depreciated on a straight-line
basis over estimated useful lives ranging up to 45 years.
h. Income Taxes - Prior to July 1, 1998, the Company was included in
the consolidated and combined tax returns filed by PAI.
Effective July 1, 1998, the Company and all its subsidiaries
adopted treatment as a 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. Federal and state income tax regulations provide that
taxes on the income or loss of the Company are reportable on the shareholder's
individual income tax return. Therefore no provision for income taxes has been
recorded for periods subsequent to July 1, 1998.
i. 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.
j. 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.
k. Reclassification - Certain 1998 balances have been reclassified to
conform to the 1999 presentation.
l. Cash and Cash Equivalents - Includes deposits at banks, investments
in money market funds and other highly liquid short-term investments with
original maturities of less than 90 days.
m. Credit and Collateral - A credit evaluation is performed by the
Company for all leases and loans made, with the collateral requirements
determined on a case-by-case basis. The Company'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 Company has the right to foreclose upon
the collateral used to secure such financing.
Note 2. Receivables from Phoenix Leasing Partnerships, Other Affiliates, and
Trusts:
Receivables from Phoenix Leasing Partnerships, other affiliates and
trusts consist of the following:
September 30, June 30,
1999 1998
---- ----
Management fees $ 155,083 $ 342,154
Acquisition fees 185,030 308,182
Other receivables from Phoenix Leasing
Partnerships, net 203,542 846,578
Secured line of credit due from Parent 615,019 468,453
Receivable from Parent 2,082,065 2,511,601
Receivables from other corporate affiliates 203,743 38,212
---------- ----------
$3,444,482 $4,515,180
========== ==========
4
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999
Note 3. Investments in Phoenix Leasing Partnerships:
The Company records its investments in Phoenix Leasing Partnerships
under the equity method of accounting. The ownership interest percentages vary,
ranging from .5% up to 25%. As general partner, the Company has complete
authority in, and responsibility for, the overall management and control of each
partnership, which includes responsibility for supervising partnership
acquisition, leasing, remarketing and sale of equipment. Distributions of cash
from the partnerships are made at the discretion of the general partner;
historically, a significant portion of the partnerships' earnings has been
distributed annually.
The activity in the investments in Phoenix Leasing Partnerships are as
follows:
Twelve Months Three Months Twelve Months
Ended Ended Ended
September 30 September 30, June 30,
1999 1998 1998
---- ---- ----
Balance, beginning of year $ 1,655,329 $ 1,676,791 $ 939,942
Additional investments 1,159,756 -- 9,024,452
Write-off investment (1,583,868) -- (4,991,925)
Equity in earnings 943,259 467,081 1,412,308
Cash distributions (1,982,568) (488,543) (4,707,987)
----------- ----------- -----------
Balance, end of year $ 191,908 $ 1,655,329 $ 1,676,791
=========== =========== ===========
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 and one as of December 31, 1998. 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 Company recorded a loss of $1,583,868 and $4,991,925 as a
result of these write-offs during the twelve months ended September 30, 1999 and
June 30, 1998, respectively.
The aggregate positive investment and aggregate deficit investment
balances are presented separately on the balance sheets as of September 30, 1999
and June 30, 1998.
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
September 30,
1999
----
Assets $58,331,000
Liabilities 3,380,000
Partners' Capital 54,951,000
5
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999
Note 3. Investments in Phoenix Leasing Partnerships (continued):
Twelve Months Three Months
Ended Ended
September 30, September 30,
1999 1998
---- ----
Revenue $17,166,000 $ 5,365,000
Net Income 9,152,000 2,766,000
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 and operating leases, which
the Company purchases with the intention of selling the equipment to one of its
affiliated limited partnerships or to trusts, and off-lease equipment held for
remarketing and sale.
Equipment subject to lease consists of the following:
September 30, June 30,
1999 1998
---- ----
Equipment on lease and held for lease, net
of accumulated depreciation of $1,014,088
and $1,049,718 at September 30, 1999 and
June 30, 1998, respectively $ 677,498 $ 65,921
Leverage leases -- 1,051,728
Equipment held for resale 174,326 252,133
Investment in financing leases 26,910,121 4,954,636
Lease Residuals 331,093 297,905
----------- -----------
Total equipment subject to lease $28,093,038 $ 6,622,323
=========== ===========
Leverage Leases:
- ---------------
The Company's net investment in leveraged leases is composed of the
following elements:
September 30, June 30,
1999 1998
---- ----
Rental receivable (net of principal and
interest on the nonrecourse debt) $ -- $ --
Estimated residual value of leased assets -- 1,740,972
Less: Unearned and deferred income -- (689,244)
------ -----------
Net investment in leveraged leases $ -- $ 1,051,728
====== ===========
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.
6
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999
Note 4. Equipment Subject to Lease and Notes Receivable (continued):
The Company's net investment in financing leases consists of the
following:
September 30, June 30,
1999 1998
---- ----
Minimum lease payments to be received $ 34,723,627 $ 6,594,860
Less: unearned income (7,587,775) (1,584,490)
allowance for early termination (225,731) (55,734)
------------ ------------
Net investment in financing leases $ 26,910,121 $ 4,954,636
============ ============
Minimum rentals to be received on non-cancelable financing leases for
the twelve months ended September 30, are as follows:
2000 .................................................. $ 10,705,488
2001 ................................................... 10,520,594
2002 ................................................... 8,330,819
2003 ................................................... 4,168,023
2004 ................................................... 947,224
Thereafter.............................................. 51,479
-------------
Total $ 34,723,627
=============
Notes Receivable:
- ----------------
Notes receivable for the years consists of the following:
September 30, June 30,
1999 1998
---- ----
Notes receivable from emerging growth and
other companies with stated interest
ranging from 9.7% to 26.8% per annum
receivable in installments ranging from
35 to 85 months collateralized by the
equipment financed $ 53,482,375 $ 2,258,164
Less: allowance for losses (451,234) (443,291)
------------ ------------
Total $ 53,032,141 $ 11,814,873
============ ============
Minimum payments to be received on non-cancelable notes receivable for
the twelve months ended September 30, are as follows:
7
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999
Note 4. Equipment Subject to Lease and Notes Receivable (continued):
2000 ................................................. $ 17,651,033
2001 ................................................. 18,466,129
2002 ................................................. 16,758,280
2003 ................................................. 11,620,163
2004 ................................................. 4,998,673
Thereafter............................................ 1,280,156
------------
Total minimum payments to be received................. 70,774,434
Impaired notes receivable............................. 817,765
Less: unearned interest.............................. (18,108,824)
allowance for losses........................... (451,234)
------------
Net investment in notes receivable $ 53,032,141
============
At September 30, 1999, the recorded investment in notes that are
considered to be impaired was $817,765. The average recorded investment in
impaired loans during the twelve months ended September 30, 1999 and June 30,
1998 was $404,472 and $26,420, respectively. The average recorded investment in
impaired loans during the three months ended September 30, 1998 was $41,006.
The activity in the allowance for losses on notes receivable is as
follows:
Twelve Months Three Months Twelve Months
Ended Ended Ended
September 30 September 30, June 30,
1999 1998 1998
---- ---- ----
Beginning balance $ 334,409 $ 443,291 $ --
Provision for (recovery of)
losses 478,189 (46,275) 623,686
Write downs (361,364) (62,607) (180,395)
--------- --------- ---------
Ending balance $ 451,234 $ 334,409 $ 443,291
========= ========= =========
Note 5. Transfer of Leased Assets and Notes Receivable:
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. The Company recognized a net gain of
$484,060 upon the initial transfer of assets to a special purpose entity in
connection with the November 25, 1997 securitization transaction and a net gain
of $392,570 upon the initial transfer of assets to a special purpose entity in
connection with the May 25, 1998 securitization transaction. 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 (the Revolver Periods). During the twelve months ended September 30,
1999 and June 30, 1998, as well as the three months ended September 30, 1998,
the Company transferred additional financing leases and notes receivable to
special purpose entities and recognized gains of $855,504, $2,046,765 and
$590,184, respectively. As of September 30, 1999, the Revolver Periods under the
securitizations had expired. During the period ending September 30, 1999 the
Company closed two sales of loans and leases for $18,787,767 of proceeds and
recognized total net losses of $686,745.
8
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999
Note 5. Transfer of Leased Assets and Notes Receivable (continued):
Loans and leases financed under short term warehouse lines of credit
are accounted for as held for sale and carried at the lower of cost or market.
Loans and leases financed under term debt facilities are accounted for as held
for investment and carried at cost.
September 30, June 30,
1999 1998
---- ----
Equipment subject to lease:
Held for sale $24,392,505 $ 5,310,307
Held for investment 3,700,533 1,312,016
----------- -----------
$28,093,038 $ 6,622,323
=========== ===========
Notes receivable:
Held for sale $36,954,599 $11,814,873
Held for investment 16,077,541 --
----------- -----------
$53,032,140 $11,814,873
=========== ===========
Note 6. Property and Equipment:
Major classes of property and equipment are as follows:
September 30, June 30,
1999 1998
---- ----
Land $ 1,077,830 $ 1,077,830
Buildings 7,795,494 7,452,634
Office furniture, fixtures and equipment 4,345,830 8,012,736
Other 898,849 898,849
----------- -----------
14,118,003 17,442,049
Less accumulated depreciation and
amortization (8,654,783) (11,541,407)
----------- -----------
Net Property and Equipment $ 5,463,220 $ 5,900,642
=========== ===========
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. The Company paid $203,418, $233,492
and $45,363 in interest payments related to the IRB during the twelve months
ended September 30, 1999 and June 30, 1998, and the three months ended September
30, 1998, respectively.
A portion of the Company's headquarters had been leased to third
parties through October of 1998. Effective August 1, 1999, the Company and
ResourcePhoenix.Com, Inc. (RPC), an affiliate, have entered into a rental
agreement with a termination date of July 31, 2001 in which RPC will pay rent in
the amount of $53,650 per month.
9
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999
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.
In connection with the five prior lease and note securitizations (see
Note 6) the Company 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 estimated fair value of $6,689,254 and $6,880,457, as of
September 30, 1999 and June 30, 1998, respectively. The Class C Shares do not
have a specified contractual maturity. The Company determined that under the
standards of SFAS 115 a writedown was required to adjust the carrying value of
four of the five Class C Shares to fair value. The writedown in the amount of
$6,141,937 was recorded in the twelve months ended September 30, 1999. The gross
unrealized gain on the Class C Shares from the remaining securitization as of
September 30, 1999 and June 30, 1998 was $1,457,037 and $0, respectively. This
amount was recorded as an adjustment to shareholder's equity.
All other equities held by the Company are classified as AFS and are
reported at their fair value of $4,492,011 and $433,398 at September 30, 1999
and June 30, 1998, respectively. Gross unrealized gains on such securities as of
September 30, 1999 and June 30, 1998 were $4,492,011 and $393,987, 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,
2000. 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 uses derivative financial instruments from time to time to
hedge against exposures to market risks resulting from fluctuations in interest
rates. Derivative financial instruments used by the Company include interest
rate on future securitization transactions. Gains or losses related to these
interest rate swap agreements that qualify for hedge accounting are recognized
as adjustments to the carrying amount of the hedged item.
During the twelve months ended September 30, 1999, the Company expensed
$854,708 related to the interest rate lock-in which was being capitalized. This
interest rate lock was for a securitization transaction which did not occur.
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.
10
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999
Note 8. Fair Value of Financial Instruments (continued):
Notes Receivable and Debt
-------------------------
The fair values of the Company's notes receivable and debt are
estimated based on the market prices of similar instruments or on the current
market interest rates for instruments with similar terms, maturities, and risks.
The estimated fair values of the Company's notes receivable and debt approximate
the carrying amounts reported in the balance sheets.
Note 9. Short-Term and Warehouse Lines of Credit:
To provide interim financing for equipment and working capital needs,
the Company executes lines of credit which consist of short-term notes with
banks with interest rates equal to the prime rate or the banks' index rate. All
lines of credit are renewable annually at the banks' option.
The Company, through PAI, had access to one short-term line of credit
totaling $2.5 million. As of June 30, 1999, the line of credit was fully paid
off and the line was terminated.
In addition, the Company has three secured short-term warehouse lines
of credit totaling $82.5 million, which are used to provide interim financing
for the acquisition of equipment and the financing of notes receivable. As of
September 30, 1999 and June 30, 1998, $64.5 and $19.1 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. The interest rate is tied to the Bank's base rate or LIBOR
(London Interbank Offered Rate). The commitment period for one of the lines of
credit which totals $37.5 million ($31.7 million outstanding at September 30,
1999) terminates on December 31, 1999. The second line of credit which totals
$25 million ($12.9 million outstanding at September 30, 1999) terminates on
December 15, 1999. Availability under this line was capped at its outstanding
balance at September 30, 1999 and the Company does not have the ability to
reborrow under this line. Subsequent to year end this line has been extended to
March 31, 2000. The third line of credit which totals $20 million ($19.9 million
outstanding at September 30, 1999). The Company's ability to borrow under the
line expires on December 31, 1999. Balances remaining under the line after
December 31, 1999 will fully amortize over a two year period. 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.
The Company is negotiating to extend the termination date on the $37.5
million line of credit to the end of April 2000. Management believes that it
will be able to continue to finance its operations through the period ending
September 30, 2000. This may be done by extending and/or refinancing its
existing debt, sales of leases and loans, and sales of investments.
11
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999
Note 10. Long-Term Debt:
Long-term debt consists of the following:
September 30, June 30,
1999 1998
---- ----
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 $133,482 $140,215
The aggregate long-term debt maturities for the fiscal years ended
September 30, are as follows:
2000.............................................. $ 7,797
2001.............................................. 125,685
--------
Total $133,482
========
On July 15, 1998, the Company entered into a term loan agreement with a
bank. Under the term loan, the Company could borrow up to $10,000,000 for the
purpose of financing or refinancing the investments in financing leases and
notes receivable. The amounts borrowed under the loan agreement are
collateralized by these assets financed. On August 24, 1998, the Company
borrowed $9,999,648. This amount is due and payable in 48 months. On August 15,
1999, the Company entered into an agreement to increase the amount that could be
borrowed to $14,500,000. On August 30, 1999, the Company borrowed $4,458,240. At
September 30, 1999, $11,984,442 was outstanding.
Interest on this term loan is accrued on the outstanding principal
balance at a fixed rate in excess of the two-year U.S. Treasury rate that was in
effect at the time of the funding. The amount payable for each month is
calculated by taking the difference of the amount received from leases and notes
receivable and the monthly servicing fee, as well as expenses paid to
unaffiliated third parties for legal and collection expenses related to
defaulted leases and notes receivable. Payments will first be applied to
interest and the remainder applied to the principal outstanding.
On June 28, 1999, the Company entered into a term loan agreement with a
bank. Under the term loan agreement, the Company could borrow up to $7,500,000
for the purpose of financing or refinancing the investments in financing leases
and notes receivable. The amounts borrowed under the loan agreement are
collateralized by these assets financed. On July 2, 1999, the Company borrowed
$7,325,666. This amount is due and payable in 48 months. At September 30, 1999,
$7,067,770 is outstanding.
The terms of the agreement with the bank allow for an election between
a prime rate or a LIBOR (London Interbank Offered Rate). The amount payable for
each month is calculated by taking the difference of the amount received from
leases and notes receivable and the monthly servicing fee, as well as expenses
paid to unaffiliated third parties for legal and collection expenses related to
defaulted leases and notes receivable. Payments will first be applied to
interest and the remainder applied to the principal outstanding.
For both term loan agreements, the Company has also pledged its right,
title and interest in certain of its assets and the future receipts from these
assets, to secure payment and performance of the loans.
12
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999
Note 11. Income Taxes:
Effective July 1, 1998, the Company and all its subsidiaries adopted
treatment as a Subchapter "S" Corporation pursuant to the Federal Income Tax
Regulations for tax reporting purposes. Federal and State income tax regulations
provide that taxes on the income or loss of the Company are reportable on the
shareholder's individual income tax return.
For the twelve months ended June 30, 1998, the Company's income for tax
reporting purposes was included in the consolidated and combined tax returns
filed by PAI which were prepared on the accrual basis of accounting. In
accordance with a Tax Sharing Agreement effective July 1, 1991, between the
Company and PAI, PAI has assumed all tax liabilities and benefits arising from
the Company's income or loss. The Company computed and recorded its tax
attributes and the related benefit was transferred to PAI.
The provision for income taxes for the year ended June 30, 1998
consisted of the following:
1998
----
Current tax expense $ 1,198,968
Deferred tax benefit (913,044)
-----------
$ 285,924
===========
Cumulative temporary differences of $6,554,133 as of June 30, 1998 was
primarily related to differences in book and tax accounting treatments for
leveraged leases.
The difference between the effective tax rate and statutory tax rate
was 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 an interest bearing secured line of credit
totaling $10,000,000 to Phoenix Precision Graphics, Inc. (PPG) secured by the
common stock of PPG. PPG is a wholly owned subsidiary of PAI. As of October 1,
1998, this secured line of credit was transferred to Phoenix American, Inc. As
of September 30, 1999, $56,781 of this line of credit was outstanding and is
included in Receivables from Phoenix Leasing Partnerships, other affiliates, and
trusts on the balance sheet.
The Company has contracted with ReSourcePhoenix.com, Inc. (RPC) to
perform accounting, investor related, and information technology services. The
Company paid RPC $1,827,791, $2,399,031 and $522,072 for these services for the
twelve months ended September 30, 1999 and June 30, 1998, and for the three
months ended September 30, 1998, respectively. In addition, the Company paid its
parent $1,012,854, $602,030 and $344,695 for the same periods, respectively, for
legal, human resources and other administrative services.
Effective August 1, 1999, the Parent transferred certain of its
employees who performed corporate functions including legal, human resources,
facilities management, word processing and other administrative functions to
RPC. As a result, effective August 1, 1999, the Company has entered into an
agreement with RPC in which RPC will perform accounting, investor services,
information technology services, legal, human resources and other administrative
services for a monthly program fee. The terms of the agreement is for one year,
unless earlier terminated and shall renew automatically for successive one year
terms unless written notice is received by either party at least ninety days
prior.
13
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999
Note 12. Transactions with Related Parties (continued):
The Company provides an interest bearing secured line of credit to
PAI's controlling shareholder, which is secured by the common stock of RPC (a
California corporation owned by PAI's controlling shareholder). As of September
30, 1999, $2,093,859 of this line of credit had been drawn down and is included
in notes receivable from related parties. In October 1999 this line of credit
was fully paid off by PAI's controlling shareholder.
The Company earned a management fee from an affiliate of $500,296 and
$154,622 for the twelve months ended September 30, 1999 and June 30, 1998,
respectively, and $24,675 for the three months ended September 30, 1998. This
management fee is included in Portfolio management fees.
Note 13. Commitments and Contingencies:
Purchase Commitments. 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 September 30, 1999, the Company anticipates
being able to satisfy its future obligations under the agreements.
Funding Leases and Loans. As of September 30, 1999 the Company had
unexpired remaining commitments to customers to fund lease and loan transactions
aggregating $90,552,937. The Company's obligation to fund under these
commitments is subject to various terms and conditions including satisfactory
performance to plan. The commitments typically expire within a year of the
original commitment date.
Legal Proceedings. On October 28, 1997, a class action complaint was
filed against Phoenix Leasing Incorporated, Phoenix Leasing Associates, II and
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 sought declaratory and other relief including
accounting, receivership, imposition of a constructive trust and judicial
dissolution and winding up of the Partnerships, and damages based on fraud,
breach of fiduciary duty and breach of contract by the Companies as general
partners of the Partnerships.
Plaintiffs severed one cause of action from the complaint, a claim
related to the marketing and sale of CDF V, and transferred it to Marin County
Superior Court (the "Berger Action"). Plaintiffs then dismissed the remaining
claims in Sacramento Superior Court and refiled them in a separate lawsuit
making similar allegations (the "Ash Action"). That complaint was subsequently
transferred to Marin County as well.
Plaintiffs have amended the Berger Action twice. Defendants recently
answered the complaint. Discovery has recently commenced. The Companies intend
to vigorously defend the complaint.
Defendants have filed a demurrer to the Ash Action, which plaintiffs
amended three times. Discovery has not commenced. The Companies intend to
vigorously defend the complaint.
Impact of Year 2000 Issue. RPC, an affiliate of PLI, does all local
computer processing for PLI and as such it manages the Company's Year 2000
project.
RPC has a Year 2000 project plan in place. The Year 2000 project team
has identified risks, and has implemented remediation procedures for its Year
2000 issues. RPC has budgeted for the necessary changes, built contingency
plans, and has progressed along the scheduled timeline. Installation of all
remediation changes to critical software and hardware was completed on November
5, 1999.
14
<PAGE>
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999
Note 13. Commitments and Contingencies (continued):
From September 1, 1997 to September 30, 1999 the Company has incurred
direct costs of approximately $2,839,748 related to its Year 2000 compliance
efforts, of which $2,297,496 is attributable to consulting services. These costs
do not include compensation expense associated with our salaried employees nor
those of RPC who have devoted some of their time to the Year 2000 assessment and
remediation efforts.
The Company does not have exposure to any individual customer that
would materially affect the Company should the customer experience a significant
Year 2000 problem. However, cumulative exposure to multiple individual customers
could materially affect the Company should multiple customers experience a
significant Year 2000 problem.
Note 14. Subsequent Events:
On November 18, 1999, the Company sold leases and notes receivable to a
third party with a net carrying value of $4,133,045 for cash proceeds of
$4,463,610.
On December 20, 1999, the Company sold leases and notes receivable to a
third party with a net carrying value of $5,186,669 for cash proceeds of
$5,281,770.
As of December 27, 1999, the gross unrealized gains on the Company's
equity investments increased $15,969,942 since September 30, 1999. Of this
increase, $8,625,068 is related to investments which were not marketable at
September 30, 1999 which have since become marketable at December 27, 1999. The
remaining amount of the increase is attributable to the change in fair market
value of the investments from September 30, 1999 to December 27, 1999.
15
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