Exhibit 21 - Page 1 of 9
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Phoenix Leasing Incorporated:
We have audited the accompanying consolidated balance sheets of Phoenix Leasing
Incorporated (a California corporation) and subsidiaries as of June 30, 1995 and
1994. 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 consolidated balance sheets are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheets. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated balance sheets referred to above present
fairly, in all material respects, the financial position of Phoenix Leasing
Incorporated and subsidiaries as of June 30, 1995 and 1994, in conformity with
generally accepted accounting principles.
San Francisco, California ARTHUR ANDERSEN LLP
September 8, 1995
Exhibit 21 - Page 2 of 9
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
1995 1994
--------------- --------------
Cash and cash equivalents $ 4,100,325 $ 5,880,532
Investments in marketable securities, at cost 7,298,771 2,923
Trade accounts receivable, net of allowance for doubtful
accounts of $237,458 and $167,837 at June 30, 1995
and 1994, respectively 913,437 748,958
Receivables from Phoenix Leasing Partnerships and other
affiliates 3,975,262 5,806,921
Notes receivable from related party 5,574,452 5,714,493
Equipment subject to lease 17,044,686 2,118,116
Investments in Phoenix Leasing Partnerships 1,577,419 685,130
Property and equipment, net of accumulated depreciation
and amortization of $10,457,763 and $9,698,164 at
June 30, 1995 and 1994, respectively 7,669,302 7,771,869
Other assets 2,366,983 1,722,230
--------------- --------------
Total Assets $ 50,520,637 $ 30,451,172
=============== ==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Short-term lines of credit $ - $ 750,000
Warehouse line of credit 17,644,012 -
Payables to affiliates 5,832,765 2,812,408
Accounts payable and accrued expenses 2,829,490 2,261,982
Deferred revenue 1,059,736 869,638
Long-term debt 229,390 421,756
Deficit in investments in Phoenix Leasing Partnerships 1,164,445 1,806,110
--------------- --------------
Total Liabilities 28,759,838 8,921,894
--------------- --------------
Minority Interests in Consolidated Subsidiaries 37,639 161,072
--------------- --------------
Commitments and Contingencies (Note 12)
Shareholder's Equity:
Common stock, no par value, 30,000,000 shares
authorized, 5,433,600 shares issued and
outstanding at June 30, 1995 and 1994, respectively 20,369 20,369
Additional capital 5,508,800 5,508,800
Retained earnings 16,193,991 15,839,037
--------------- --------------
Total Shareholder's Equity 21,723,160 21,368,206
--------------- --------------
Total Liabilities and Shareholder's Equity $ 50,520,637 $ 30,451,172
=============== ==============
The accompanying notes are an integral
part of these financial statements.
Exhibit 21 - Page 3 of 9
PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
Note 1. Summary of Significant Accounting Policies:
a. Organization - Phoenix Leasing Incorporated and subsidiaries (the
Company), a wholly owned subsidiary of Phoenix American Incorporated (PAI), is
engaged in the organization and management of partnerships which specialize in
the purchase and lease of primarily high-technology and data processing
equipment. The partnerships purchase equipment directly from equipment vendors
for lease to financial, commercial and industrial businesses and governmental
agencies. The partnerships also finance transactions in the areas of
microcomputers and emerging growth companies. The Company has also engaged in
similar leasing activities for its own account. The Company also provides
ongoing equipment maintenance services for end-users of high-technology data
processing equipment and graphic plotters.
b. Principles of Consolidation - The consolidated financial statements
include the accounts of Phoenix Leasing Incorporated and its wholly- or
majority-owned subsidiaries and subsidiaries over which the Company exerts
control. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Except as otherwise explained below, minority interests in the net assets
and net income or loss of majority-owned subsidiaries are allocated on the basis
of the proportionate ownership interests of the minority owners.
Three of the consolidated subsidiaries are California limited partnerships
(the Partnerships) which are general partners of three of the Phoenix Leasing
Partnerships. As of June 30, 1995, the Company held a 50% general partner
ownership interest in two of the Partnerships and a 62.5% interest in the third.
Under the terms of the partnership agreements, profits and losses attributable
to acquisition fees paid to the Partnerships from Phoenix Leasing Partnerships
are allocated to the limited partner (the minority owner in the Partnerships) in
proportion to the limited partner's ownership interest. All remaining profits
and losses are allocated to the Company. Distributions to the partners are made
in accordance with the terms of the partnership agreement. The limited partner
of each of the Partnerships is Lease Management Associates, Inc., a Nevada
corporation controlled by an officer of the Company, who is the owner of PAI.
c. Management, Acquisition and Incentive Fee Income - As of June 30, 1995,
the Company is the corporate general partner in 17 actively operating limited
partnerships and manager of 13 actively operating joint ventures, all of which
own and lease equipment. Nine of the partnership agreements provide for payment
of management fees based on partnership revenues and acquisition fees when the
partnerships' assets are acquired. Seven of the limited partnership agreements
provide for payment of management fees and liquidation fees (see discussion
later in this footnote). One of the partnership agreements provides for a fee to
be paid to the Company based on a percentage of the equity proceeds received by
the partnership and a percentage of net income. Most of the joint venture
agreements provide for a payment of management fees based on joint venture
revenues.
These partnerships and the joint ventures are collectively referred to as
the "Phoenix Leasing Partnerships."
d. Investments - Investments in Phoenix Leasing Partnerships reflect the
Company's equity basis in the Phoenix Leasing Partnerships. Under the equity
method of accounting the original investment is recorded at cost and is adjusted
periodically to recognize the Company's share of earnings, losses and
distributions after the date of acquisition. The Company has adopted the equity
method of accounting on the basis of its control and significant influence over
the Phoenix Leasing Partnerships.
e. Liquidation Fee Income - The Company earns liquidation fees not to
exceed 15% of the net contributed capital from seven of the partnerships in
consideration for the services and activities performed in connection with the
disposition of the partnerships' assets. Management of the Company concluded
that the total liquidation fees to be earned over the life of these partnerships
may not be fully realizable. Accordingly, the Company recognizes liquidation fee
income when the fees are paid by the partnerships.
Exhibit 21 - Page 4 of 9
The Company received and recognized $3,221,000 and $3,929,000 in liquidation
fees from these partnerships during the years ended June 30, 1995 and 1994,
respectively.
In three other partnerships, cash distributions received in excess of the
allocated cumulative net profits represent a liquidation fee which cannot
exceed, in the aggregate, 7.792% of the net contributed capital.
f. Lease Accounting - The Company's leasing operations consist of both
financing and operating leases. The finance 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 over the cost of the leased
equipment. Unearned income is amortized monthly over the term of the lease on a
declining basis to provide an approximate level rate of return on the
unrecovered cost of the investment. Initial direct costs of originating new
leases are capitalized and amortized over the initial lease term.
Under the operating method of accounting for leases, the leased equipment
is recorded as an asset, at cost, and is depreciated on a straight-line basis
over its estimated useful life, ranging up to six years. Rental income
represents the rental payments due during the period under the terms of the
lease.
The Company is the lessor in leveraged lease agreements under which
computer equipment having an estimated useful life of 5 years was leased for
periods from 4-5 years. The Company is the equity participant and equipment
owner. A portion of the purchase price was furnished by third-party financing in
the form of long-term debt that provides no recourse to the Company and is
secured by a first lien on the financed equipment.
g. Property and Equipment - Property and equipment which the Company holds
for its own use are recorded at cost and depreciated on a straight-line basis
over estimated useful lives ranging up to 45 years.
h. Income Taxes - The Company is included in consolidated and combined tax
returns filed by PAI.
i. Deferred Revenue - Deferred revenue is the result of selling maintenance
contracts which provide service over a specific period of time. Deferred revenue
is amortized on a straight-line basis over the service period not to exceed 5
years.
j. Investments in Marketable Securities - Investments in marketable
securities, which will be held to maturity, are stated at cost and consist
primarily of United States government obligations. Interest is recognized when
earned.
k. Reclassification - Certain 1994 balances have been reclassified to
conform to the 1995 presentation.
Note 2. Receivables from Phoenix Leasing Partnerships and Other Affiliates:
Receivables from Phoenix Leasing Partnerships and other affiliates consist
of the following:
June 30,
1995 1994
----------- ----------
Management fees ................................... $ 330,158 $ 846,027
Acquisition fees .................................. 102,994 514,685
Other receivables from Phoenix Leasing Partnerships 3,535,110 3,828,069
Receivable from PAI ............................... -- 483,800
Other receivables from corporate affiliates ....... 7,000 134,340
---------- ----------
$3,975,262 $5,806,921
========== ==========
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.
Exhibit 21 - Page 5 of 9
A shareholder of PAI and officers of the Company also have general and
limited partner interests in several of the partnerships.
The activity in the investments in Phoenix Leasing Partnerships is as
follows:
Year Ended June 30,
1995 1994
----------- -----------
Balance, beginning of year ............. $(1,120,980) $ (945,797)
Additional investments ............... 688,615 --
Equity in earnings ................... 2,412,056 1,213,974
Cash distributions ................... (1,566,717) (1,389,157)
----------- -----------
Balance, end of year ................... $ 412,974 $(1,120,980)
=========== ===========
The Company's total investments in Phoenix Leasing Partnerships are
comprised of investments in certain partnerships which are subject to
fluctuations due to partnerships' performances and timing of cash distributions.
At times the investment in those partnerships will be a deficit.
Certain of the partnership agreements requires the Company to restore any
deficit in its capital account to zero at the dissolution of the partnership.
This deficit is a result of cash distributions received and losses allocated to
the Company. The Company has determined that in certain partnerships it will be
unlikely that the deficit investment will reverse and as a result during the
year ended June 30, 1993 the Company elected to make capital contributions prior
to partnership dissolution totaling $2,028,733. As of April 1, 1992, the Company
elected to forgo any future cash distributions from, and will not record its
share of future earnings generated from the operations of, one of these
partnerships. The Company has deferred any future cash distributions from two
other partnerships. The Company believes that it would be likely that any future
cash distributions received from these partnerships would have to be paid back
at the dissolution of the partnerships. The Company will continue to record fee
income earned from the management of, and acquisition of equipment for these
partnerships.
The aggregate positive investment and aggregate deficit investment balances
are presented separately on the balance sheets as of June 30, 1995 and 1994.
The partnerships own and lease equipment. All debt of the partnerships is
secured by the equipment and is without recourse to the general partners. The
unaudited financial statements of the partnerships reflect the following
combined, summarized financial information as of June 30, 1995 and for the
twelve months then ended:
Assets .......................................... $215,090,000
Liabilities ..................................... 39,956,000
Partners' Capital ............................... 175,134,000
Revenue ......................................... 62,093,000
Net Income ...................................... 18,280,000
Note 4. Equipment Subject to Lease:
Equipment subject to lease includes the Company's investments in leveraged
leases, investments in financing leases and notes receivable.
Equipment subject to lease consists of the following at June 30:
1995 1994
---- ----
Leverage leases ........................ $ 1,696,703 $1,990,343
Investment in financing leases ......... 13,284,177 --
Notes receivable ....................... 2,063,806 127,773
----------- ----------
$17,044,686 $2,118,116
=========== ==========
Exhibit 21 - 6 of 9
Leverage Leases:
The Company's net investment in leveraged leases is composed of the
following elements:
June 30, June 30,
1995 1994
-------- --------
Rental receivable (net of principal and interest on the
nonrecourse debt) .................................... $ -- $ --
Estimated residual value of leased assets ............. 2,759,783 3,268,772
Less: Unearned and deferred income .................... (1,063,080) (1,278,429)
----------- ----------
Investment in leveraged leases ........................ 1,696,703 1,990,343
Less: Deferred taxes arising from leveraged leases .... (2,960,190) (2,773,840)
----------- ----------
Net investment in leveraged leases .................... $(1,263,487) $ (783,497)
=========== ==========
Investment in Financing Leases:
The Company has entered into direct lease arrangements with companies
engaged in the development of technologies and other growth industry businesses
operating in different industries located throughout the United States.
Generally, it is the responsibility of the lessee to provide maintenance on
leased equipment.
The Company's net investment in financing leases consists of the following:
June 30,
1995
Minimum lease payments to be received ................. $ 17,731,628
Less: unearned income ................................. (4,447,451)
------------
Net investment in financing leases .................... $ 13,284,177
============
Minimum rentals to be received on noncancellable financing leases for the
years ended June 30, are as follows:
1996 .............................................. $ 4,478,150
1997 .............................................. 4,502,090
1998 .............................................. 4,422,824
1999 .............................................. 2,829,532
2000 .............................................. 1,475,565
2001 and thereafter ............................... 23,467
-----------
Total ......................................... $17,731,628
===========
Notes Receivable:
Notes receivable for the years ended June 30, are as follows:
1995 1994
---- ----
Notes receivable from emerging growth
and other companies with stated interest
ranging from 10% to 18% per annum receivable
in installments ranging from 36 to 60 months,
collateralized by the equipment financed....... $2,063,806 $ 127,773
========== =========
Note 5. Property and Equipment:
Major classes of property and equipment are as follows:
Exhibit 21 - Page 7 of 9
June 30,
1995 1994
------------ -----------
Land .............................. $ 1,077,830 $ 1,077,830
Buildings ......................... 7,345,648 7,336,424
Office furniture, fixtures
and equipment .................... 8,259,319 7,968,786
Other ............................. 766,975 534,303
------------ -----------
17,449,772 16,917,343
Less accumulated depreciation
and amortization ................. (10,457,763) (9,698,164)
Inventory held for resale ......... 677,293 552,690
------------ -----------
Net Property and Equipment ........ $ 7,669,302 $ 7,771,869
============ ===========
PAI owns its own headquarters building in San Rafael, California. The
Company paid $7,749,476 to purchase the land and construct the building. The
cost of construction was paid for with a combination of $2,749,476 in cash from
the Company's operations and a $5,000,000 advance from PAI. The $5,000,000
advance is included as a reduction in receivable from Phoenix Leasing
Partnerships and other affiliates. PAI has pledged the market value of the
building as security for a $5,000,000 Industrial Revenue Bond ("IDB") which PAI
has with the City of San Rafael, California. The principal of the IDB is payable
in a lump sum payment on October 1, 2004. The Company paid $206,798 and $156,129
in interest payments related to the IDB during the year ended June 30, 1995 and
1994, respectively.
As of June 30, 1995, a portion of the Company's headquarters has been
leased to third parties. The remaining lease term is for 2 years and the minimum
lease payments receivable are as follows:
1996 .................................................. $537,882
1997 .................................................. 362,901
--------
Total ............................................ $900,783
========
Note 6. Investments in Marketable Securities:
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 115 - Accounting for Certain
Investments in Debt and Equity Securities. The Company adopted this statement on
July 1, 1994. This pronouncement prescribes specific accounting treatment for
securities based on their classification as either held-to-maturity securities,
trading securities or available-for-sale securities, as defined in the
statement. All of the Company's investments meet the definition of
held-to-maturity securities and, accordingly, are reported at amortized costs.
The Company holds $7,000,000 face value U.S. Treasury Notes with the
contractual maturities of these debt securities as of June 30, 1995 as follows:
Amortized Estimated
Costs Fair Value
Due in one year or less ................ $4,202,115 $4,214,051
Due in one through five years .......... 3,096,656 3,142,908
---------- ----------
Total debt securities .................. $7,298,771 $7,356,959
========== ==========
Note 7. 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.
Exhibit 21 - Page 8 of 9
As of June 30, 1995, the Company, through PAI, had access to one short-term
line of credit totaling $2.5 million all of which was available for borrowing at
June 30, 1995. Draw downs under this credit line are secured by the Company's
receivable from Phoenix Leasing Partnerships.
In addition, the Company has two secured short-term warehouse lines of
credit totaling $35 million, which are used to provide interim financing for the
acquisition of equipment and the financing of notes receivable. As of June 30,
1995, $17.6 million of these lines have been drawn down. The draw downs under
these lines are collateralized by investments in financing leases and notes
receivable included in equipment subject to lease. The interest rate is tied to
the IBOR (Eurodollar) rate. The initial commitment period for these lines of
credit is 18 months and may be extended to 36 months at the discretion of the
bank. Principal payments are based on the lesser of the aggregate payments
received by the Company on its leases and notes receivable or the aggregate
principal and interest amount outstanding on the payment date of the credit
line.
In connection with the Company's lines of credit, various financial ratios
and other covenants must be maintained. The Company has guaranteed its right,
title and interest in certain of its assets and the future receipts from these
assets in order to secure payment and performance of these credit lines.
Additional information relating to the Company's short-term bank lines
follows:
1995 1994
----------- ----------
Balance at June 30 ............................... $17,644,012 $ 750,000
Maximum amount outstanding ....................... 17,644,012 2,500,000
Average amount outstanding ....................... 2,522,340 1,457,413
Weighted average interest rate during the period.. 7.9% 6.2%
Note 8. Long-Term Debt:
Long-term debt consists of the following:
June 30,
1995 1994
---- ----
Mortgage payable at varying interest rates
with an initial rate of 8.75% secured by a
first deed of trust on real property with a
cost of $250,000. Note is amortized over 83
months with monthly payments of $559 with
a final payment of $122,151................... $ 160,944 $ 167,650
Note payable at 9.75% secured by computer
equipment with a cost of $668,994. Note is
amortized over 46 months with monthly
payments of $16,887........................... 68,446 254,106
---------- ----------
Total long-term debt............................ $ 229,390 $ 421,756
========== ==========
The aggregate long-term debt maturities for the fiscal years ended June 30,
are as follows:
1996 ......................................... $ 74,920
1997 ......................................... 6,706
1998 ......................................... 6,706
1999 ......................................... 6,706
2000 ......................................... 6,706
2001 and thereafter .......................... 127,646
--------
Total .................................... $229,390
========
Exhibit 21 - Page 9 of 9
Note 9. Profit Sharing Plan:
The Company has a profit sharing plan covering substantially all employees
who meet certain age and service requirements. Contributions to the plan by the
Company are made at the discretion of the board of directors. The profit sharing
expense was $600,000 and $500,000 for the years ended June 30, 1995 and 1994,
respectively.
Note 10. Leased Facilities:
The Company leases office and warehouse space in various parts of the
country and had annual rental expense of approximately $402,000 and $424,000 for
the years ended June 30, 1995 and 1994, respectively.
Note 11. Transactions with Related Parties:
The Company provides an interest bearing line of credit totaling $6,000,000
to PAI's controlling shareholder which is secured by common stock of Phoenix
Precision Graphics, Inc. (an unaffiliated Nevada corporation). As of June 30,
1995 and 1994, $4,837,814 and $2,002,346 of this line of credit has been drawn
down and is included in notes receivable from related party. As of June 30, 1995
and 1994, Phoenix Precision Graphics is in a start-up mode and has cumulative
losses of $5,959,708 and $3,129,240, respectively.
The Company provided an interest bearing line of credit totaling $1,000,000
to PAI's controlling shareholder which was secured by common stock of Phoenix
Communications Incorporated and Phoenix Communications - LD, Inc. (unaffiliated
Nevada corporations). As of June 30, 1994, $858,133 of this line of credit had
been drawn down and is included in notes receivable from related party. This
note was paid in full on October 17, 1994.
The Company provided two interest bearing lines of credit each totaling
$5,000,000 to PAI's controlling shareholder which were secured by common stock
of Phoenix Fiberlink Incorporated and Phoenix Fiberlink II, Inc. (unaffiliated
Nevada corporations). As of June 30, 1994, $2,854,014 of these lines of credit
had been drawn down and are included in notes receivable from related party.
These notes were paid in full on October 17, 1994.
The Company provides an interest bearing line of credit to PAI's
controlling shareholder, which is secured by common stock of Phoenix Fiberlink
Inc. (an unaffiliated Nevada Corporation). As of June 30, 1995, $736,638 of this
line of credit has been drawn down and is included in notes receivable from
related party.
The Company earned a management fee from affiliates of $678,947 and
$325,624 for the years ended June 30, 1995 and 1994, respectively. This
management fee is included in Fees from Phoenix Leasing Partnerships and
affiliates.
The Company paid an affiliate an asset management fee of $1,026,714 and
$815,563 for the years ended June 30, 1995 and 1994, respectively. These asset
management fees are included in equipment lease operations, maintenance,
remarketing and administrative fees.
Note 12. Commitments and Contingencies:
The Company has entered into agreements which contain specific purchase
commitments. The Company may satisfy these commitments by purchasing equipment
for its own account or by assigning equipment purchases to its affiliated
partnerships. At June 30, 1995 the Company anticipates being able to satisfy its
future obligations under the agreements and intends to assign most of the
purchases under the agreements to its affiliated partnerships.
The Company enters into commitments to purchase and sell high-technology
equipment on behalf of a corporate affiliate. The Company is reimbursed for
these services.
The Company is party to legal actions which arise as part of the normal
course of its business. The Company believes, after consultation with counsel,
that it has meritorious defenses in these actions, and that the liability, if
any, will not have a material adverse effect on the financial position of the
Company.