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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 33-69996
COMMONWEALTH INCOME & GROWTH FUND I
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2735641
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1160 West Swedesford Road
Berwyn, Pennsylvania 19312
(Address, including zip code, of principal executive offices)
(610) 647-6800
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (i) 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, and (ii) has been subject to such filing
requirements for the past 90 days: YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified under applicable items herein)
Certain exhibits to the Company's Registration Statement on Form S-1
(File No. 33-69996) and Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 are incorporated by reference as Exhibits in Part IV of this
Report.
PART I
ITEM 1: BUSINESS
GENERAL
Commonwealth Income and Growth Fund I ( the "Partnership") was formed
on August 26, 1993 under the Pennsylvania Revised Uniform Limited Partnership
Act. The Partnership began offering $15,000,000 of Units of Limited Partnership
("Units") to the public on December 17, 1993 (the "Offerings"). The Partnership
terminated its offering of Units on May 11, 1995, with 631,358 Units
($12,623,682) admitted as Limited Partners of the Partnership.
See "The Glossary" below for the definition of capitalized terms not
otherwise defined in the text of this report.
PRINCIPAL INVESTMENT OBJECTIVES
The Partnership was formed for the purpose of acquiring various types
of Equipment, including computer peripheral and other similar capital equipment.
The Partnership utilized the net proceeds of the Offering to purchase IBM and
IBM compatible computer peripheral and other similar capital equipment. The
Partnership utilizes Retained Proceeds and debt financing (not to exceed 30% of
the aggregate cost of the Equipment owned or subject to Conditional Sales
Contract by the Partnership at the time the debt is incurred) to purchase
additional Equipment. The Partnership acquires Equipment which is subject to
lease principally to U.S. corporations and other institutions pursuant
predominantly to Operating Leases. The Partnership retains the flexibility to
enter into Full Payout Net Leases and Conditional Sales Contracts, but has not
done so.
The Partnership's principal investment objectives are to;
(a) acquire, lease and sell Equipment to generate revenues from
operations sufficient to provide quarterly cash distributions to
Limited Partners;
(b) preserve and protect Limited Partners' capital;
(c) use a portion of Cash Flow and Net Disposition Proceeds derived
from the sale, refinancing or other disposition of Equipment to
purchase additional Equipment; and
(d) refinance, sell or otherwise dispose of Equipment in a manner that
will maximize the proceeds to the Partnership.
THERE CAN BE NO ASSURANCE THAT ANY OF THESE OBJECTIVES WILL BE ATTAINED.
Limited Partners do not have the right to vote on or otherwise approve
or disapprove any particular investment to be made by the Partnership.
Although the Partnership has acquired predominately new Equipment, the
Partnership may purchase used Equipment. Generally, Equipment is acquired from
manufacturers, distributors, leasing companies, agents, owner-users,
owner-lessors, and other suppliers upon terms that vary depending upon the
Equipment and supplier involved. Manufacturers and distributors usually furnish
a limited warranty against defects in material and workmanship and some purchase
agreements for Equipment provide for service and replacement of parts during a
limited period. Equipment purchases are also made through lease brokers and on
an ad hoc basis to meet the needs of a particular lessee.
As of December 31, 1999, all Equipment purchased by the Partnership is
subject to an Operating Lease or an Operating Lease was entered into with a
third party when the Partnership acquired an item of Equipment. The Partnership
may also engage in sale/leaseback transactions, pursuant to which the
Partnership would purchase Equipment from companies that would then immediately
lease the Equipment from the Partnership. The Partnership may also purchase
Equipment which is leased under Full Payout Net Leases or sold under Conditional
Sales Contracts at the time of acquisition or the Partnership may enter into a
Full Payout Net Lease or Conditional Sales Contract with a third party when the
Partnership acquires an item of Equipment.
The Partnership may enter into arrangements with one or more
manufacturers pursuant to which the Partnership purchases from such
manufacturers Equipment which has previously been leased directly by the
manufacturer to third parties ("vendor leasing agreements"). The Partnership and
manufacturers may agree to nonrecourse loans to the Partnership from the
manufacturers to finance the acquisition of Equipment secured by the Equipment
and the receivables due to the manufacturers from users of such Equipment. It is
expected that the manufacturers of Equipment will provide maintenance,
remarketing and other services for the Equipment subject to such agreements. As
of December 31, 1999, the Partnership has not entered into any such agreements.
The General Partner has the discretion consistent with its fiduciary
duty to change the investment objectives of the Partnership if it determines
that such a change is in the best interest of the Limited Partners and so long
as such a change is consistent with the Partnership Agreement. The General
Partner will notify the Limited Partners if it makes such a determination to
change the Partnership's investment objectives.
TYPES OF EQUIPMENT
COMPUTER PERIPHERAL EQUIPMENT. Computer peripheral equipment consists
of devices used to convey information into and out of a central processing unit
(or "mainframe") of a computer system, such as tape drives, disk drives, tape
controllers, disk controllers, printers, terminals and related control units,
all of which are in some way related to the process of storing, retrieving, and
processing information by computer.
The Partnership acquires primarily IBM manufactured or IBM compatible
equipment. The General Partner believes that dealing in IBM or IBM compatible
equipment is particularly advantageous because of the large IBM customer base,
policy of supporting users with software and maintenance services and the large
amount of IBM and IBM compatible equipment in the marketplace.
Computer technology has developed rapidly in recent years and is
expected to continue to do so. Technological advances have permitted continued
reductions in the cost of computer processing capacity, thereby permitting
applications not economically feasible a few years ago. Much of the older IBM
and IBM compatible computer peripheral equipment has not been retired from
service, because software is generally interchangeable between older and newer
equipment, and older equipment is capable of performing many of the same
functions as newer equipment. The General Partner believes that historically
values of peripheral equipment have been affected less dramatically by changes
in technology than have the values of central processing units. An equipment
user who upgrades to a more advanced central processor generally can continue to
use his existing peripheral equipment. Peripheral equipment nevertheless is
subject to declines in value as new, improved models are developed and become
available. Technological advances and other factors, including Year 2000 Issues
discussed below in Management Discussion and Analysis, have at times caused
dramatic reduction in the market prices of older models of IBM and IBM
compatible computer peripheral equipment from the prices at which they were
originally introduced.
OTHER EQUIPMENT-RESTRICTIONS. The Partnership acquires computer
peripheral equipment, such as tape drives, disk drives, tape controllers, disk
controllers, printers, terminals and related control units, all
of which are in some way related to the process of storing, retrieving and
processing information by computer. The General Partner is also authorized, but
does not presently intend, to cause the Partnership to invest in non IBM
compatible computer peripheral, data processing, telecommunication or medical
technology equipment. The Partnership may not invest in any of such other types
of Equipment (i) to the extent that the purchase price of such Equipment,
together with the aggregate Purchase Price of all such other types of Equipment
then owned by the Partnership, is in excess of 25% of the total cost of all of
the assets of the Partnership at the time of the Partnership's commitment to
invest therein and (ii) unless the General Partner determines that such purchase
is in the best economic interest of the Partnership at the time of the purchase
and, in the case of non-IBM compatible peripheral Equipment, that such Equipment
is comparable in quality to similar IBM or IBM compatible Equipment. There can
be no assurance that any Equipment investments can be found which meet this
standard. Accordingly, there can be no assurance that investments of this type
will be made by the Partnership.
DIVERSIFICATION
Diversification is generally desirable to minimize the effects of
changes in specific industries, local economic conditions or similar risks.
However, the extent of the Partnership's diversification, in the aggregate and
within each category of Equipment, depends in part upon the financing which can
be assumed by the Partnership or borrowed from third parties on satisfactory
terms. The Partnership's policy not to borrow on a recourse basis will further
limit its financing options. Diversification also depends on the availability of
various types of Equipment. As of December 31, 1999, the Partnership has
acquired a diversified Equipment portfolio which it has leased to 22 different
companies located throughout the United States. Approximately 42% of the
Equipment acquired by the Partnership consists of tape storage Approximately 28%
of the Equipment acquired by the Partnership consist of workstations, department
servers and enterprise servers. Approximately 13% of the Equipment acquired by
the Partnership consist of printers. Approximately 10% of the Equipment acquired
by the Partnership consists of communication controllers. Approximately 5% of
the Equipment acquired by the Partnership consists of Escon drivers.
Approximately another 2% of the Equipment acquired by the Partnership consists
of more traditional forms of disk storage.
During the operational stage of the Partnership, the Partnership may
not at any one point in time lease (or sell pursuant to a Conditional Sales
Contract) more than 25% of the Equipment to a single Person or Affiliated group
of Persons.
DESCRIPTION OF LEASES
The Partnership to date has purchased, and in the future intends to
continue to purchase only Equipment that is subject to a lease or for which a
lease or similar agreement will be entered into contemporaneously with the
consummation of the Partnership's acquisition of the Equipment. The General
Partner to date has leased and in the future intends to lease most of the
Equipment purchased by the Partnership to third parties pursuant to Operating
Leases. Operating Leases are relatively short-term (12 to 48 month) leases under
which the aggregate noncancellable rental payments during the original term of
the lease are not sufficient to permit the lessor to recover the purchase price
of the subject Equipment. The Equipment may also be leased pursuant to Full
Payout Net Leases. Full Payout Net Leases are leases under which the aggregate
noncancellable rental payments during the original term of the lease are at
least sufficient to recover the purchase price of the subject Equipment. It is
anticipated that the Partnership will enter into few, if any, Full Payout net
Leases. The General Partner may also enter into Conditional Sales Contracts for
Equipment. A Conditional Sales Contract generally provides that the
noncancellable payments to the seller over the term of the contract are
sufficient to recover the investment in such Equipment and to provide a return
on such investment. Under a Conditional Sales Contract, the seller reserves
title to, and retains a security interest in, the Equipment until the Purchase
Price of the Equipment is paid. As of December 31, 1999, the Partnership has not
entered into any Full Payout Net Leases or Conditional Sales Contracts for
Equipment and does not presently intend to do so.
In general, the terms of the Partnership's leases, whether the
Equipment is leased pursuant to an Operating lease or a Full Payout Net Lease,
depend upon a variety of factors, including: the desirability of each type of
lease from both an investment and a tax point of view; the relative demand among
lessees for Operating or Full Payout Net Leases; the type and use of Equipment
and its anticipated residual value; the business of the lessee and its credit
rating; the availability and cost of financing; regulatory considerations; the
accounting treatment of the lease sought by the lessee or the Partnership; and
competitive factors.
An Operating Lease generally represents a greater risk to the
Partnership than a Full Payout Net Lease, because in order to recover the
purchase price of the subject Equipment and earn a return on such investment, it
is necessary to renew or extend the Operating Lease, lease the Equipment to a
third party at the end of the original lease term, or sell the Equipment. On the
other hand, the term of an Operating Lease is generally much shorter than the
term of a Full Payout Net Lease, and the lessor is thus afforded an opportunity
under an Operating Lease to re-lease or sell the subject Equipment at an earlier
stage of the Equipment's life cycle than under a Full Payout Net Lease. Also,
the annual rental payments received under an Operating Lease are ordinarily
higher than those received under a Full Payout Net Lease.
The Partnership's policy is to generally enter into "triple net leases"
(or the equivalent, in the case of a Conditional Sales Contract) which typically
provide that the lessee or some other party bear the risk of physical loss of
the Equipment; pay taxes relating to the lease or use of the Equipment; maintain
the Equipment; indemnify the Partnership-lessor against any liability suffered
by the Partnership as the result of any act or omission of the lessee or its
agents; maintain casualty insurance in an amount equal to the greater of the
full value of the Equipment and a specified amount set forth in the lease; and
maintain liability insurance naming the Partnership as an additional insured
with a minimum coverage which the General Partner deems appropriate. In
addition, the Partnership may purchase "umbrella" insurance policies to cover
excess liability and casualty losses, to the extent deemed practicable and
advisable by the General Partner. As of December 31, 1999, all leases that have
been entered into are "triple net leases".
The General Partner has not established any standards for lessees to
which it will lease Equipment and, as a result, there is not an investment
restriction prohibiting the Partnership from doing business with any lessees.
However, a credit analysis of all potential lessees is undertaken by the General
Partner to determine the lessee's ability to make payments under the proposed
lease. The General Partner may refuse to enter into an agreement with a
potential lessee based on the outcome of the credit analysis.
The terms and conditions of the Partnership's leases, or Conditional
Sales Contracts, are each determined by negotiation and may impose substantial
obligations upon the Partnership. Where the Partnership assumes maintenance or
service obligations, the General Partner generally causes the Partnership to
enter into separate maintenance or service agreements with manufacturers or
certified maintenance organizations to provide such services. Such agreements
generally require annual or more frequent adjustment of service fees. As of
December 31, 1999, the Partnership has not entered into any such agreements.
BORROWING POLICIES
The General Partner, at its discretion, may cause the Partnership to
incur debt in the maximum aggregate amount of 30% of the aggregate cost of the
Equipment owned, or subject to Conditional Sales Contract, by the Partnership at
the time the debt is incurred. The Partnership incurs only non-recourse debt
which is secured by Equipment and lease income therefrom. Such leveraging
permits the Partnership to increase the aggregate amount of its depreciable
assets, and, as a result, potentially increases both its lease revenues and its
federal income tax deductions above those levels which would be achieved without
leveraging. There is no limit on the amount of debt that may be incurred in
connection with the acquisition of any single item of Equipment. Any debt
incurred is fully amortized over the term of the initial lease or Conditional
Sales Contract to which the Equipment securing the debt is subject. The precise
amount borrowed by the Partnership depends on a number of factors, including the
types of Equipment acquired by the Partnership; the creditworthiness of the
lessee; the availability of suitable financing; and prevailing
interest rates. The Partnership is flexible in the degree of leverage it
employs, within the permissible limit. There can be no assurance that credit
will be available to the Partnership in the amount or at the time desired or on
terms considered reasonable by the General Partner. As of December 31, 1999, the
aggregate nonrecourse debt outstanding of $717,000 was 7.5% of the aggregate
cost of the Equipment owned.
The Partnership has and may continue to purchase some items of
Equipment without leverage. If the Partnership purchases an item of Equipment
without leverage and thereafter suitable financing becomes available, it may
then obtain the financing, secure the financing with the purchased Equipment to
the extent practicable and invest any proceeds from such financing in additional
items of Equipment, or it may distribute some or all of such proceeds to the
Limited Partners. Any such later financing will be on terms consistent with the
terms applicable to borrowings generally. As of December 31, 1999, the
Partnership has not exercised this option.
To date, the General Partner has caused the Partnership to borrow funds
at fixed interest rates and plans to continue borrowing additional funds, to the
fullest extent practicable. The Partnership may borrow funds at rates which vary
with the "prime" or "base" rate. If lease revenues were fixed, a rise in the
"prime" or "base" rate would increase borrowing costs and reduce the amount of
the Partnership's income and cash available for distribution. Therefore, the
General Partner is permitted to borrow funds to purchase Equipment at
fluctuating rates only if the lease for such Equipment provides for fluctuating
rental payments calculated on a similar basis.
Any additional debt incurred by the Partnership must be nonrecourse.
Nonrecourse debt, in the context of the business to be conducted by the
Partnership, means that the lender providing the funds can look for security
only to the Equipment pledged as security and the proceeds derived from leasing
or selling such Equipment. Neither the Partnership nor any Partner (including
the General Partner) would be liable for repayment of any nonrecourse debt.
Loan agreements may also require that the Partnership maintain certain
reserves or compensating balances and may impose other obligations upon the
Partnership. Moreover, since a significant portion of the Partnership's revenues
from the leasing of Equipment will be reserved for repayment of debt, the use of
financing reduces the cash which might otherwise be available for distributions
until the debt has been repaid and may reduce the Partnership's Cash Flow over a
substantial portion of the Partnership's operating life. As of December 31,
1999, no such agreements existed.
The General Partner and any of its Affiliates may, but are not required
to, make loans to the Partnership on a short-term basis. If the General Partner
or any of its Affiliates makes such a short-term loan to the Partnership, the
General Partner of Affiliate may not charge interest at a rate greater that the
interest rate charged by unrelated lenders on comparable loans for the same
purpose in the same locality. In no event is the Partnership required to pay
interest on any such loan at an annual rate greater than three percent over the
"prime rate' from time to time announced by PNC Bank, Philadelphia, Pennsylvania
("PNC Bank"). All payments of principal and interest on any financing provided
by the General Partner or any of its affiliates are due and payable by the
Partnership within 12 months after the date of the loan.
REFINANCING POLICIES
Subject to the limitations set forth in "Borrowing Policies" above, the
Partnership may refinance its debt from time to time. With respect to a
particular item of Equipment, the General Partner will take into consideration
such factors as the amount of appreciation in value, if any, to be realized, the
possible risks of continued ownership, and the anticipated advantages to be
obtained for the Partnership, as compared to selling such Equipment. As of
December 31, 1999, the Partnership has not refinanced any of its debt.
Refinancing, if achievable, may permit the Partnership to retain an
item of Equipment and at the same time to generate additional funds for
reinvestment in additional Equipment or for distribution to the Limited
Partners.
LIQUIDATION POLICIES
The General Partner intends to cause the Partnership to begin disposing
of its Equipment in approximately January 2004. Notwithstanding the
Partnership's objective to sell all of its assets and dissolve by December 31,
2004, the General Partner may at any time cause the Partnership to dispose of
all its Equipment and, dissolve the Partnership upon the approval of Limited
Partners holding a Majority in Interest of Units.
Particular items of Equipment may be sold at any time if, in the
judgment of the General Partner, it is in the best interest of the Partnership
to do so. The determination of whether particular items of Partnership Equipment
should be sold or otherwise disposed of is made by the General Partner after
consideration of all relevant factors (including prevailing general economic
conditions, lessee demand, the General Partner's views of current and future
market conditions, the cash requirements of the Partnership, potential capital
appreciation, cash flow and federal income tax considerations), with a view
toward achieving the principal investment objectives of the Partnership. As
partial payment for Equipment sold, the Partnership may receive purchase money
obligations secured by liens on such Equipment. Subject to the General Partner's
discretion the Partnership may extend beyond December 31, 2004, if deemed
beneficial to the Partnership.
MANAGEMENT OF EQUIPMENT
Equipment management services for the Partnership's Equipment is
provided by the General Partner and its Affiliates and by persons employed by
the General Partner. Such services will consist of collection of income from the
Equipment, negotiation and review of leases, Conditional Sales Contracts and
sales agreements, releasing and leasing-related services, payment of operating
expenses, periodic physical inspections and market surveys, servicing
indebtedness secured by Equipment, general supervision of lessees to assure that
they are properly utilizing and operating Equipment, providing related services
with respect to Equipment, supervising, monitoring and reviewing services
performed by others in respect to Equipment and preparing monthly Equipment
operating statements and related reports.
COMPETITION
The equipment leasing industry is highly competitive. The Partnership
competes with leasing companies, equipment manufacturers and their affiliated
financing companies, distributors and entities similar to the Partnership
(including other programs sponsored by the General Partner), some of which have
greater financial resources than the Partnership and more experience in the
equipment leasing business than the General Partner. Other leasing companies and
equipment manufacturers, their affiliated financing companies and distributors
may be in a position to offer equipment to prospective lessees on financial
terms which are more favorable that those which the Partnership can offer. They
may also be in a position to offer trade-in privileges, software, maintenance
contracts and other services which the Partnership may not be able to offer.
Equipment manufacturers and distributors may offer to sell equipment on terms
(such as liberal financing terms and exchange privileges) which will afford
benefits to the purchaser similar to those obtained through leases. As a result
of the advantages which certain of its competitors may have, the Partnership may
find it necessary to lease its Equipment on a less favorable basis than certain
of its competitors.
The computer peripheral equipment industry is extremely competitive.
Competitive factors include pricing, technological innovation and methods of
financing. Certain manufacturer-lessors maintain advantages through patent
protection, where applicable, and through a policy that combines service and
hardware with payment accomplished through a single periodic charge.
The dominant firm in the computer marketplace is International Business
Machines Corporation, and its subsidiary IBM Credit Corporation is the dominant
force in the leasing of IBM equipment. Because of IBM's substantial resources
and dominant position, revolutionary changes with respect to computer systems,
pricing, marketing practices, technological innovation and the availability of
new and attractive financing plans could occur at any time. Significant action
in any of these areas by IBM or IBM Credit Corporation might materially
adversely affect the Partnership's business or the other manufacturers with whom
the General Partner might negotiate purchase and other agreements. Any adverse
effect on these manufacturers could be reflected in the overall return realized
by the Partnership on equipment from those manufacturers from IBM.
INVESTMENTS
As of March 31, 2000, the Partnership has purchased, or has made the
commitment to purchase, the following Equipment:
EQUIPMENT LIST PURCHASE MONTHLY LEASE
LESSEE MFG DESCRIPTION PRICE PRICE RENT TERM
Xerox Corp. SUN (32) SUN WORK ST 440,800 277,705 286 39
Xerox Corp. SUN (4)SPARC2000 590,840 305,875 1,019 39
Fingerhut Corp. SIEMEN (2) 2240-004 722,000 459,592 8,558 48
Chrysler Corp. STK (2) 4490-M30 686,158 490,110 12,001 48
GE Industrial & Power Systems HP (50%) HP9000/J200 202,680 157,635 4,115 36
Wang Laboratories, Inc. PYR (50%) NILE150 937,290 589,287 16,639 36
Chrysler Corp. IBM (20%) 3745-31A 242,244 184,383 4,203 48
Sprint Communications Company STK (9) 9490-M32 1,335,897 703,968 15,501 36
Honda R&D SGI (45%) 4XR10000 400,220 298,094 7,683 36
Sprint Communications Company IBM (2) 3995-133 421,500 286,536 10,166 24
Equitable Life Assurance Company LEX (80) N240 571,351 497,477 11,501 36
Chrysler Corp. STK (55%) 28% tape libraries,
30% redwd, 42% timberl 1,693,479 997,891 22,520 36
Equitable Life Assurance Company LEX (16) OPTRA 74,458 94,098 2,615 36
Kaiser IBM (3) 3745-61A,
(3) 3746-900 2,149,234 1,191,555 29,786 36
Litton SUN (1) E3000 251,967 148,492 3,771 36
Sprint Communications Company SUN (2) E5000 371,640 231,551 7,199 30
Computer Science Corporation SGI (50%)144 workstations 2,055,893 822,455 21,031 36
PaineWebber IBM (2) 9032-003 932,206 455,473 11,060 36
Charles Schwab IBM (20%) (6) 9032-003 495,889 307,983 6,989 36
ADP IBM (3) 3490-A20
(1) 3490-B40 579,850 379,682 5,036 69
Lucent SUN (1)3000server 70,300 45,892 1,181 36
Lucent SUN (1)3500server 75,750 49,505 1,274 36
Pitney Bowes IBM (1)3590 526,390 299,832 5,852 40
Cendant SUN (1)6000 512,640 274,774 6,722 36
Sprint SUN Upgrade to
ES5000 21,400 14,491 602 25
Kaiser CISCO (33) Routers 65,835 38,948 1,333 36
Morgan Stanley SUN ENT4000 184,144 122,751 3,018 24
Moore Business IBM (2)3900-DW1/2 515,000 460,490 9,040 43
SMS STK TAPE DRIVE 1,452,140 576,586 34,140 36
UNUM IBM PRINTER 343,010 343,010 6,338 48
RESERVES
Because the Partnership's leases are on a "triple-net" basis, no
permanent reserve for maintenance and repairs will be established from the
Offering proceeds. However, the General Partner, in its sole discretion, may
retain a portion of the Cash Flow and Net Disposition Proceeds available to the
Partnership for maintenance, repairs and working capital. There are no
limitations on the amount of Cash Flow and Net Disposition Proceeds that may be
retained as reserves. Since no reserve will be established if available Cash
Flow of the Partnership is insufficient to cover the Partnership's operating
expenses and liabilities, it may be necessary for the Partnership to obtain
additional funds by refinancing its Equipment or borrowing.
GENERAL RESTRICTIONS
Under the Partnership Agreement, the Partnership is not permitted,
among other things, to:
(a) invest in junior trust deeds unless received in connection with the
sale of an item of Equipment in an aggregate amount which does not exceed 30% of
the assets of the Partnership on the date of the investment;
(b) invest in or underwrite the securities of other issuers;
(c) acquire any Equipment for Units;
(d) issue senior securities (except that the issuance to lenders of
notes or other evidences of indebtedness in connection with the financing or
refinancing of Equipment or the Partnership's business shall not be deemed to be
the issuance of senior securities);
(e) make loans to any Person, including the General Partner or any of
its Affiliates, except to the extent a Conditional Sales Contract constitutes a
loan;
(f) sell or lease any Equipment to, lease any Equipment from, or enter
into any sale- leaseback transactions with, the General Partner or any of its
Affiliates; or
(g) give the General Partner or any of its Affiliates an exclusive
right or employment to sell the Partnership's Equipment.
The General Partner has also agreed in the Partnership Agreement to use
its best efforts to assure that the Partnership shall not be deemed an
"investment company" as such term is detained in the Investment Company Act of
1940.
The General Partner and its Affiliates may engage in other activities,
whether or not competitive with the Partnership. The Partnership Agreement
provides, however, that neither the General Partner nor any of its Affiliates
may receive any rebate or "give up" in connection with the Partnership's
activities or participate in reciprocal business arrangements that circumvent
the restrictions in the Partnership Agreement against dealings with Affiliates.
EMPLOYEES
The Partnership has no employees and received administrative and other
services from the General Partner which has 12 employees.
ITEM 2: PROPERTIES
NOT APPLICABLE
ITEM 3: LEGAL PROCEEDINGS
NOT APPLICABLE
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NOT APPLICABLE
PART II
ITEM 5: MARKET FOR THE REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
There is no public market for the Units nor is it anticipated that one
will develop. As of December 31, 1999, there were 683 holders of Units. The
Units are not listed on any exchange or permitted to trade on any
over-the-counter market. In addition, there are substantial restrictions on the
transferability of Units.
GENERAL LIMITATIONS
Units cannot be transferred without the consent of the General Partner,
which may be withheld in its absolute discretion. The General Partner monitors
transfers of Units in an effort to ensure that all transfers are within certain
safe harbors promulgated by the IRS to furnish guidance regarding publicly
traded partnerships. These safe harbors limit the number of transfers that can
occur in any one year. The General Partner intends to cause the Partnership to
comply with the safe harbor that permits nonexempt transfers and redemptions of
Units of up to five percent of the total outstanding interest in the
Partnership's capital or profits in any one year.
REDEMPTION PROVISION
Upon the conclusion of the 30 month period following the termination of
the Offering, the Partnership may, at the sole discretion of the General
Partner, repurchase a number of the outstanding Units. After such 30 month
period, on a semi-annual basis, the General Partner, at its discretion, will
establish an amount for redemption, generally not to exceed two percent of the
outstanding Units per year, subject to the General Partner's good faith
determination that such redemptions will not (a) cause the Partnership to be
taxed as a corporation under Section 7704 of the Code or (b) impair the capital
or operations of the Partnership. (The Partnership may redeem Units in excess of
the two percent limitation if, in the good faith judgment of the General
Partner, the conditions imposed in the preceding sentence would remain
satisfied.) The redemption price for Units will be 105% of the selling Limited
Partner's Adjusted Capital Contributions attributable to the Units for sale.
Following the determination of the annual redemption amount, redemptions will
occur on a semi-annual basis and all requests for redemption, which must be made
in writing, must be on file as of the Record Date in which the redemption is to
occur. The General Partner will maintain a master list of requests for
redemption with priority being given to Units owned by estates, followed by IRAs
and Qualified Plans. All other requests will be considered in the order
received. Redemption requests made by or on behalf of Limited Partners who are
not affiliated with the General Partner or its Affiliates will be given priority
over those made by Limited Partners who
are affiliated with the General Partner or its Affiliates. All redemption
request will remain in effect until and unless canceled, in writing, by the
requesting Limited Partner(s).
The Partnership will accept redemption requests beginning 30 months
following the termination of the Offering. There will be no limitations on the
period of time that a redemption request may be pending prior to its being
granted. Limited Partners will not be required to hold their interest in the
Partnership for any specified period prior to their making a redemption request.
In order to make a redemption request, Limited Partners will be
required to advise the General Partner in writing of such request. Upon receipt
of such notification, the Partnership will provide detailed forms and
instructions to complete the request. At December 31, 1999, the General Partner
has not redeemed any Units. Additionally, no Limited Partners have requested
redemption of their Units.
EXEMPT TRANSFERS
The following six categories of transfers are exempt transfers for
purposes of calculating the volume limitations imposed by the IRS and will
generally be permitted by the General Partner:
(1) transfers in which the basis of the Unit in the hands of the
transferee is determined, in whole or in part, by reference to its basis in the
hands of the transferor (for example, Units acquired by corporations in certain
reorganizations, contributions to capital, gifts of Units, Units contributed to
another partnership, and nonliquidating as well as liquidating distributions by
a parent partnership to its partners of interests in a subpartnership);
(2) transfers at death;
(3) transfers between members of a family (which include brothers and
sisters, spouse, ancestors, and lineal descendants);
(4) transfers resulting from the issuance of Units by the Partnership
in exchange for cash, property, or services;
(5) transfers resulting from distributions from Qualified Plans; and
(6) any transfer by a Limited Partner in one or more transactions
during any 30-day period of Units representing in the aggregate more than five
percent of the total outstanding interests in capital or profits of the
Partnership.
ADDITIONAL RESTRICTIONS ON TRANSFER
Limited Partners who wish to transfer their Units to a new beneficial
owner are required to pay the Partnership up to $50 for each transfer to cover
the Partnership's cost of processing the transfer application and take such
other actions and execute such other documents as may be reasonably requested by
the General Partner. There is no charge for re-registration of a certificate in
the event of a marriage, divorce, death, or trust so long as the transfer is not
a result of a sale of the Units.
In addition, the following restrictions apply to each transfer: (i) no
transfer may be made if it would cause 25% or more of the outstanding Units to
be owned by benefit plans; and (ii) no transfer is permitted unless the
transferee obtains such governmental approvals as may reasonably be required by
the General Partner, including without limitation, the written consents of the
Pennsylvania Securities Commissioner and of any other state securities agency or
commission having jurisdiction over the transfer.
ALLOCATION AND DISTRIBUTION BETWEEN THE GENERAL PARTNER AND THE LIMITED PARTNERS
Cash distributions, if any, are made quarterly on December 31, March
31, June 30, and September 30 of each year. Distributions are made 99% to the
Limited Partners and one percent to the General Partner until the Limited
Partners have received an amount equal to their Capital Contributions plus the
Priority Return; thereafter, cash distributions will be made 90% to Limited
Partners and 10% to the General Partner. Distributions made in connection with
the liquidation of the Partnership or a Partner's Units will be made in
accordance with the Partner's positive Capital Account balance as determined
under the Partnership Agreement and Treasury Regulations.
The Priority Return is calculated on the Limited Partners' Adjusted
Capital Contributions for their Units. The Adjusted Capital Contributions will
initially be equal to the amount paid by the Limited Partners for their Units.
If distributions at any time exceed the Priority Return, the Adjusted Capital
Contributions will be reduced by the excess, decreasing the base on which the
Priority Return is calculated.
If the proceeds resulting from the sale of any Equipment are reinvested
in Equipment, sufficient cash will be distributed to the Partners to pay the
additional federal income tax resulting from such sale for a Partner in a 39.6%
federal income tax bracket or, if lower, the maximum federal income tax rate in
effect for individuals for such taxable year.
Generally, the General Partner is allocated Net Profits equal to its
cash distributions (but not less than one percent of Net Profits) and the
balance is allocated to the Limited Partners. Net Profits arising from
transactions in connection with the termination or liquidation of the
Partnership are allocated in the following order: (1) First, to each Partner in
an amount equal to the negative amount, if any, of his Capital Account; (2)
Second, an amount equal to the excess of the proceeds which would be distributed
to the Partners based on the Operating Distributions to the Partners over the
aggregate Capital Accounts of all the Partners, to the Partners in proportion to
their respective shares of such excess, and (3) Third, with respect to any
remaining Net Profits, to the Partners in the same proportions as if the
distributions were Operating Distributions. Net Losses, if any, are in all cases
allocated 99% to the Limited Partners and one percent to the General Partner.
Net Profits and Net Losses are computed without taking into account, in
each taxable year of the Partnership, any items of income, gain, loss or
deduction required to be specially allocated pursuant to Section 704(b) of the
Code and the Treasury Regulation promulgated thereunder. No Limited Partner is
required to contribute cash to the capital of the Partnership in order to
restore a closing Capital Account deficit, and the General Partner has only a
limited deficit restoration obligation under the Partnership Agreement.
Quarterly distributions in the following amounts were declared and paid
to the Limited Partners during 1999, 1998, and 1997.
QUARTER ENDED 1999 1998 1997
- -----------------------------------------------------------------
March 31 $ 315,678 $ 315,678 $ 315,678
June 30 315,678 315,678 315,678
August 31 315,678 315,678 315,678
December 31 2,444 315,678 315,678
-------------------------------------
$ 949,473 $1,262,712 $1,262,712
-------------------------------------
-------------------------------------
ALLOCATIONS AND DISTRIBUTIONS AMONG THE LIMITED PARTNERS
Except during the Offering Period, Cash Available for Distribution
which is allocable to the Limited Partners is apportioned among and distributed
to them solely with reference to the number of Units owned by each as of the
Record Date for each such distribution. During the Offering Period, Cash
Available for Distribution which is allocable to the Limited Partners was
apportioned among and distributed to them with reference to both (i) the number
of Units owned by each as of each Record Date and (ii) the number of days since
the previous Record Date (or, in the case of the first Record Date, the
commencement of the Offering Period) that the Limited Partner owned the Units.
After the Offering Period, Net Profits, Net Losses and Cash Available
for Distribution allocable to the Limited Partners is apportioned among them in
accordance with the number of Units owned by each. A different convention was
utilized during the Offering Period, whereby Net Profits and Net Losses
allocable to Limited Partners were apportioned among them in the ratio which the
product of the number of Units owned by a Limited Partner multiplied by the
number of days in which the Limited Partner owns such Units during the period
bears to the sum of such products for all Limited Partners.
In addition, where a Limited Partner transfers Units during a taxable
year, the Limited Partner may be allocated Net Profits for a period for which
such Limited Partner does not receive a corresponding cash distribution.
ITEM 6: SELECTED FINANCIAL DATA
The following table sets forth, in summary form, certain financial data
for the Partnership as of and for the year ended December 31, 1999,1998, and
1997. This table is qualified in its entirety by the more detailed information
and financial statements presented elsewhere in this report, and should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and related notes
thereto included herein.
YEAR ENDED DECEMBER 31
------------------------------------------------
1999 1998 1997
------------------------------------------------
Lease Income $ 2,995,506 $ 4,527,348 $ 5,195,139
Net Loss (537,168) (275,254) (906,123)
Cash Distributions 959,043 1,275,467 1,275,467
Net Loss per Unit (.85) (.46) (1.46)
Cash Distribution per Unit 1.50 2.00 2.00
DECEMBER 31
---------------------------------------
1999 1998 1997
---------------------------------------
Total Assets $ 2,858,500 $ 5,906,884 $10,081,644
Notes Payable 716,792 2,401,080 4,968,748
Net loss per unit is computed based upon net loss allocated to the
Limited Partners and the weighted average number of equivalent Units outstanding
during the year. Cash distribution per Unit is
computed based upon distributions allocated to the Limited Partners and the
weighted average number of equivalent Units outstanding during the year.
ITEM 7: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary sources of capital for the years ended
December 31, 1999, 1998, and 1997 were cash from operations of $752,000,
$757,000, and $1,746,000, respectively and proceeds from the sale of computer
equipment of $590,000, $894,000, and $348,000 in the years ended December 31,
1999, 1998, and 1997 respectively. The primary uses of cash were for capital
expenditures for new equipment totaling $161,000, $545,000, and $1,348,000 for
the years ended December 31, 1999, 1998, and 1997, respectively, and for the
payment of distributions to partners totaling $959,000 for 1999, and $1,275,000,
in 1998 and 1997.
Cash is invested in money market accounts that invest directly in
treasury obligations pending the Partnership's use of such funds to purchase
additional computer equipment, to pay Partnership expenses or to make
distributions to the Partners. At December 31, 1999, 1998 and 1997 the
Partnership had approximately $217,000, $2,000 and $116,000, respectively,
invested in these money market accounts.
The Partnership's investment strategy of acquiring computer equipment
and generally leasing it under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
Future minimum rentals on noncancellable operating leases decreased by 65% from
$3,441,000 on December 31, 1998 to $1,153,000 on December 31, 1999, due to
computer equipment leases with expiration dates in 1999. This particular
industry has experienced a decrease in lease rates during this period due to an
ongoing decrease in interest rates. As of December 31, 1999, the Partnership had
future minimum rentals on noncancellable operating leases of $784,000 for the
year ended 2000 and $368,000 thereafter. During 1998, and 1997, the Partnership
incurred debt in connection with the purchase of computer equipment totaling
$443,000 and $3,982,000 respectively. No debt was incurred in 1999. At December
31, 1999, the outstanding debt was $717,000, with interest rates ranging from
6.4% to 7.5% and will be payable through December 2001. The Partnership intends
to continue purchasing additional computer equipment with existing cash, as well
as when future cash becomes available. In addition, the Partnership may incur
debt in purchasing computer equipment in the future.
The Partnership's cash flow from operations is expected to continue to
be adequate to cover all operating expenses, liabilities, and distributions to
Partners during the next 12 month period. If available Cash Flow or Net
Disposition Proceeds are insufficient to cover the Partnership expenses and
liabilities on a short and long term basis, the Partnership will attempt to
obtain additional funds by disposing of or refinancing Equipment, or by
borrowing within its permissible limits. The Partnership may also reduce the
distributions to its Partners if it deems necessary. Since the Partnership's
leases are on a "triple-net" basis, no reserve for maintenance and repairs are
deemed necessary.
RESULTS OF OPERATIONS
1999 and 1998 and 1997 OPERATING RESULTS
For the year ended December 31, 1999,1998 and 1997, the Partnership
recognized income of $3,005,000, $4,620,000 and $5,230,000 and expenses of
$3,542,000, $4,896,000 and $6,136,000, resulting in net losses of $537,000,
$275,000 and $906,000, respectively.
Lease income decreased from $5,195,000 in 1997 to $4,527,000 and
$2,996,000 in 1998 and 1999 respectively, primarily due to the expiration of
leases in 1999. The decrease was offset by $27,000 in lease income from 2
additional leases acquired in 1999 for which the Partnership expended
approximately $161,000 in cash.
Interest income decreased from $35,000 in 1997 to $22,000 and $10,000
for the years ended December 31, 1998 and 1999 respectively, as a result of the
excess cash from operations and rental income being utilized for Equipment
purchases for the year ended December 31, 1999, whereas, for the year ended
December 31, 1997 and 1998 the capital contributions and rental income were
temporarily being invested in money market accounts until being utilized for
equipment purchases.
Operating expenses, excluding depreciation, consist of accounting,
legal, outside service fees and reimbursement of expenses to Com Cap Corp. for
administration and operation of the Partnership. The increase from approximately
$111,000 in 1997 to approximately $117,000 and $320,000 for 1998 and 1999
respectively, is primarily attributable to reimbursable expenses to Com Cap
Corp. for cost incurred in connection with the administration and operation of
the Partnership. Certain administration and operation expenses were not charged
to the Partnership by Com Cap Corp in 1998. The increase from $117,000 during
the year ended December 31, 1998 to $320,000 during the year ended December 31,
1999 is attributable to the uncharged 1998 expenses of $59,000 for costs
incurred in connection with the administration and operation of the Partnership
being charged to, and taken by, Com Cap Corp. and an increase in reimbursable
expenses paid to the General Partner and its affiliates of $72,000 and an
increase in outside service fees of $72,000.
The equipment management fee is equal to 5% of the gross lease revenue
attributable to equipment, which is subject to operating leases. The equipment
management fee decreased from $260,000 in 1997 to $226,000 and $150,000 for 1998
and 1999 respectively, which is consistent with the decrease in lease income.
Interest expense of $349,000 for 1997 decreased to $273,000 and
$105,000 for 1998 and 1999 respectively, as a result of reduced debt from the
sale of equipment.
Depreciation and amortization expenses consist of depreciation on
computer equipment, amortization of organization costs, equipment acquisition
fees and debt placement fees. Depreciation and amortization during 1997 was
$5,219,000 and decreased to $4,280,000 and $2,809,000 in 1998 and 1999
respectively, due to the reduction of the equipment under lease.
The Partnership sold computer equipment with a net book value of
$677,000, $822,000 and $544,000 during the years ended December 31, 1999, 1998
and 1997, respectively, for a net loss of $108,000 for the year ended December
31, 1999 and a gain of $72,000 for the year ended December 31, 1998 an a net
loss of $197,000 for the year ended December 31, 1997.
The Partnership adopted FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and
identified specific computer equipment and associated equipment acquisition
costs which were evaluated due to technological changes. The Partnership
determined that the carrying amount of certain assets was greater than the
undiscounted cash flows to be generated by these assets. The Partnership
recorded a charge of $10,000 to depreciation expense to record the assets at
their estimated fair value in the year ended December 31, 1999 and $135,000 and
$154,000 in the years ended December 31, 1998 and 1997 respectively.
For the year ended December 31, 1999, 1998 and 1997, the Partnership
generated cash flow from operating activities of $752,000, $757,000 and
$1,746,000 respectively, which includes a net loss of $537,000, $275,000 and
$906,000 which was reduced by depreciation and amortization expenses of
$2,809,000, $4,280,000 and $5,219,000 respectively. Other noncash activities
included in the determination of the net loss include direct payments of lease
income by lessees to banks of $1,707,000, $3,089,000 and $2,849,000
respectively.
ITEM 7.A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership believes its exposure to market risk is not material
due to the fixed interest rate of its long term debt.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE NOT APPLICABLE
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
GENERAL
The General Partner, a wholly-owned subsidiary of Commonwealth of
Delaware, Inc., a Delaware corporation, which is in turn a wholly-owned
subsidiary of Commonwealth Capital Corp., a Pennsylvania corporation ("Com Cap
Corp."), was incorporated in Pennsylvania on August 26, 1993. The General
Partner also acts as the General Partner for Commonwealth Income and Growth Fund
I and Commonwealth Income and Growth Fund II. The principal business office of
the General Partner is 1160 West Swedesford Road, Suite 340, Berwyn, PA 19312,
and its telephone number is 610-647-6800. The General Partner manages and
controls the affairs of the Partnership and has sole responsibility for all
aspects of the Partnership's operations. The officers of the General Partner
devote such time to the affairs of the Partnership as in the opinion of the
General Partner is necessary to enable it to perform its function as General
Partner. The officers of the General Partner are not required to spend their
full time in meeting their obligations to the Partnership.
The directors and officers of the General Partner and key employees of
Com Cap Corp. are as follows:
NAME TITLE
George S. Springsteen Chairman of the Board of Directors and President of the General Partner and
Com Cap Corp.
Kimberly A. MacDougall Executive Vice President, Chief Operating Officer and Secretary of the General
Partner and Com Cap Corp.
Henry J. Abbott Vice President and Portfolio Manager of Com Cap Corp.
John A. Conboy III Assistant Vice President and Accounting Manager of the General Partner and Com Cap Corp.
Dorothy A. Ferguson Assistant Vice President of Com Cap Corp.
George S. Springsteen, age 65, is President of both Com Cap Corp. and
the General Partner. Mr. Springsteen is also President of the general partners
or controlling entities of several prior programs sponsored by Com Cap Corp.
with objectives similar to the Partnership's. He has been the sole shareholder
and director of Com Cap Corp. since its formation in 1978. From 1971 to 1978,
Mr. Springsteen was
involved in the computer leasing business of Granite Computer Corporation. Mr.
Springsteen served as Vice President of Marketing, in addition to other
capacities, and managed a portfolio of approximately $120,000,000 of IBM
computers and peripherals. In 1978, Granite Computer Corporation sold its
equipment portfolio and left the equipment leasing business. Mr. Springsteen
acquired a portion of Granite's portfolio, client base, employees and corporate
offices in Jenkintown, Pennsylvania. The new company began operations as Com Cap
Corp. in May of 1978. Mr. Springsteen received a Bachelor of Science degree from
the University of Delaware in 1957.
Kimberly A. MacDougall, age 40, is Executive Vice President, Chief
Operating Officer and Secretary of Com Cap Corp. and the General Partner and
joined Com Cap Corp. in 1997. She is also the President of Commonwealth Capital
Securities Corp. From 1980 to 1997, Ms. MacDougall was employed with Wheat First
Butcher Singer, a broker/dealer headquartered in Richmond, Virginia. While at
Wheat First Butcher Singer, Ms. MacDougall, Senior Vice President, served as
Marketing Manager for the Direct Investments Department, with over $450,000,000
of investments under management in real estate, equipment leasing and
energy-related industries. Ms. MacDougall holds Series 7, 63 and 39 NASD
licenses and is a member of the Equipment Leasing Association, Investment
Partnership Association, and International Association for Financial Planning.
Henry J. Abbott, age 48, is Vice President and Portfolio Manager of Com
Cap Corp. and has been employed by Com Cap Corp. since 1998. Mr. Abbot has been
active in the commercial lending industry, working primarily on asset-backed
transactions for more than twenty-seven years. Prior to joining Com Cap Corp.
Mr. Abbott was a founding partner of Westwood Capital LLC, in New York. Prior to
that, as Senior Vice President for IBJ Schroder Leasing Corporation where Mr.
Abbott managed a group specializing in providing operating lease financing
programs in the high technology sector. Mr. Abbott brings extensive knowledge
and experience in all facets of asset-backed financing and has successfully
managed $1.5 billion of secured transactions. Mr. Abbott attended St. John's
University. Mr. Abbott is a member of the Equipment Leasing Association.
John A. Conboy III, age 53, is Assistant Vice President and Accounting
Manager of the General Partner and Com Cap Corp. and certain of its subsidiaries
where he has been employed since 1999. From 1965 to 1996, Mr. Conboy was
employed as a Manager of Accounting Operations of Consolidated Rail Corporation.
Mr. Conboy received a BS/BA degree in Accounting and Business Administration
from the University of Phoenix in 1994. Mr. Conboy is a member of the Equipment
Leasing Association.
Dorothy A. Ferguson, age 57, is Assistant Vice President of Com Cap
Corp. and has been employed by Com Cap Corp. since 1995. She brought with her
over 20 years experience in commercial banking and finance. Prior to joining
Commonwealth, she held positions as a Banking Officer and Administrative
Assistant to the Chairman of a large Philadelphia based bank, as well as
Executive Secretary to the CEO of an international manufacturing management
group.
The directors and officers of the General Partner are required to spend
only such time on the Partnership's affairs as is necessary in the sole
discretion of the directors of the General Partner for the proper conduct of the
Partnership's business. A substantial amount of time of such directors and
officers is expected to be spent on matters unrelated to the Partnership,
particularly after the Partnership's investments have been selected. Under
certain circumstances, such directors and officers are entitled to
indemnification from the Partnership.
ITEM 11: EXECUTIVE COMPENSATION
The following table summarizes the types, amounts and recipients of
compensation to be paid by the Partnership directly or indirectly to the General
Partner and its Affiliates. Some of these fees are paid
regardless of the success or profitability of the Partnership's operations and
investments. While such compensation and fees were established by the General
Partner and are not based on arm's-length negotiations, the General Partner
believes that such compensation and fees are comparable to those which would be
charged by an unaffiliated entity or entities for similar services. The
Partnership Agreement limits the liability of the General Partner and its
Affiliates to the Partnership and the Limited Partners and provides
indemnification to the General Partner and its Affiliates under certain
circumstances.
AMOUNT AMOUNT AMOUNT
ENTITY RECEIVING ICCURRED INCURRD INCURED
COMPENSATION TYPE OF COMPENSATION DURING 1999 DURING 1998 DURING 1997
OFFERING AND ORGNAIZATION STAGE
The General Partner Organizational Fee. An Organization Fee equal to $0 $0 $0
three percent of the first $10,000,000 of Limited
Partners' Capital Contributions and two percent of
the Limited Partners' Capital Contribution in excess
of $10,000,000, as compensation for the organization
of the Partnership. It is anticipated that all
Organizational and Offering Expenses which include
legal, accounting and printing expenses; various
registration and filing fees; miscellaneous expenses
related to the organization and formation of the
Partnership; other costs of registration; and costs
incurred in connection with the preparation, printing
and distribution of this Report and other sales
literature. The General Partner pays all
Organizational and Offering Expenses, other than
Underwriter's Commissions and a non-accountable
expense allowance payable to the Dealer Manager that
is equal to the lesser of (i) one percent of the
Offering proceeds or (ii) $50,000.
OPERATIONAL AND SALE
OR LIQUIDATION STAGES
The General Partner Reimbursement of Expenses. The General and its $160,000 $41,000 $54,000
and its Affiliates Affiliates Partner are entitled to reimbursement by
the Partnership for the cost of goods, supplies or
services obtained and used by the General Partner in
connection with the administration and operation of
the Partnership from third parties unaffiliated with
the General Partner. In addition, the General Partner
and its affiliates are entitled to reimbursement of
certain expenses incurred by the General Partner and
its affiliates in connection with the administration
and operation of the Partnership. The amounts set
forth on this table do not include expenses incurred
in the offering of Units.
The General Partner Equipment Acquisition Fee. An Equipment Acquisition $60,000 $40,000 $213,000
Fee of four percent of the Purchase Price of each
item of Equipment purchased as compensation for the
negotiation of the acquisition of the Equipment and
the lease thereof or sale under a Conditional Sales
Contract. The fee was paid upon each closing of the
Offering with respect to the Equipment purchased by
the Partnership with the net proceeds of the Offering
available for investment
in Equipment. If the Partnership acquires Equipment
in an amount exceeding the net proceeds of the
Offering available for investment in Equipment, the
fee will be paid when such Equipment is acquired.
The General Partner Debt Placement Fee. As compensation for arranging $0 $4,000 $30,000
Term Debt to finance the acquisition of Equipment to
the Partnership, a fee equal to one percent of such
indebtedness; provided, however, that such fee is
reduced to the extent the Partnership incurs such
fees to third Parties, un affiliated with the General
Partner or the lender, with respect to such
indebtedness and no such fee is paid with respect to
borrowings from the General Partner or its
Affiliates.
The General Partner Equipment Management Fee. A monthly fee equal to the $150,000 $226,000 $260,000
lesser of (I) the fees which would be charged by an
independent third party for similar services for
similar equipment or (ii) the sum of (a) two percent
of (1) the Gross Lease Revenues attributable to
Equipment which is subject to Full Payout Net Leases
which contain net lease provisions plus (2) the
purchase price paid on Conditional Sales Contracts as
received by the Partnership and (b) five percent of
the Gross Lease Revenues attributable to Equipment
which is subject to Operating Leases.
The General Partner Re-Lease Fee. As Compensation for providing $0 $0 $0
re-leasing services for any Equipment for which the
General Partner has, following the expiration of, or
default under, the most recent lease of Conditional
Sales Contract, arranged a subsequent lease of
Conditional Sales Contract for the use of such
Equipment to a lessee or other party, other than the
current or most recent lessee of other operator of
such equipment or its Affiliates ("Re-lease"), the
General Partner will receive, on a monthly basis, a
Re3-lease Fee equal to the lesser of (a) the fees
which would be charged by an independent third party
of comparable services for comparable equipment or
(b) two percent of Gross Lease Revenues derived from
such Re-lease.
The General Partner Equipment Liquidation Fee. With respect to each item $0 $0 $0
of Equipment sold by the General Partner (other than
in connection with a Conditional Sales Contract), a
fee equal to the lesser of (I) 50% of the Competitive
Equipment Sale Commission or (ii) three percent of
the sales price for such Equipment. The payment of
such fee is subordinated to the receipt by the
Limited Partners of (I) a return of their Capital
Contributions and 10% annum cumulative return,
compounded daily, on Adjusted Capital Contributions
("Priority Return") and (ii) the Net Disposition
Proceeds from such sale in accordance with the
Partnership Agreement. Such fee is reduced to the
extent any liquidation or resale fees are paid to
unaffiliated arties.
The General Partner Partnership Interest. The General Partner has a $9,565 $12,755 $12,755
present and continuing one percent interest of $1,000
in the Partnership's item of income, gain,
loss, deduction, credit, and tax preference. In
addition, the General Partner receives one percent of
Cash Available for Distribution until the Limited
Partners have received distributions of Cash
Available for Distribution equal to their Capital
Contributions plus the 10% Priority Return and
thereafter, the General Partner will receive 10% of
Cash Available for Distribution.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
NOT APPLICABLE
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership is subject to various conflicts of interest arising out
of its relationships with the General Partner and its Affiliates. These
conflicts include the following:
COMPETITION WITH GENERAL PARTNER AND AFFILIATES: COMPETITION FOR MANAGEMENT'S
TIME
The General Partner and its Affiliate sponsor other investor programs
which are in potential competition with the Partnership in connection with the
purchase of Equipment as well as opportunities to lease and sell such Equipment.
Competition for Equipment has occurred and is likely to occur in the future. The
General Partner and its Affiliates may also form additional investor programs
which may be competitive with the Partnership.
If one or more investor programs and the Partnership are in a position
to acquire the same Equipment, the General Partner will determine which program
will purchase the Equipment based upon the objectives of each and the
suitability of the acquisition in light of those objectives. The General Partner
will generally afford priority to the program or entity that has had funds
available to purchase Equipment for the longest period of time. If one or more
investor programs and the Partnership are in a position to enter into lease with
the same lessee or sell Equipment to the same purchaser, the General Partner
will generally afford priority to the Equipment which has been available for
lease or sale for the longest period of time.
Certain senior executives of the General Partner and its Affiliates
also serve as officers and directors of the other programs and are required to
apportion their time among these entities. The Partnership is, therefore, in
competition with the other programs for the attention and management time of the
General Partner and Affiliates. The officers and directors of the General
Partner are not required to devote all or substantially all of their time to the
affairs of the Partnership.
ACQUISITIONS
Com Cap Corp. and the General Partner or other Affiliates of the
General Partner may acquire Equipment for the Partnership provided that (i) the
Partnership has insufficient funds at the time the Equipment is acquired, (ii)
the acquisition is in the best interest of the partnership and (iii) no benefit
to the General Partner or its Affiliates arises from the acquisition except for
compensation paid to Com Cap Corp., the General Partner or such other Affiliate
as disclosed in this Report. Com Cap Corp., the General Partner or their
Affiliates will not hold Equipment for more than 60 days prior to transfer to
the Partnership. If sufficient funds become available to the Partnership within
such 60 day period, such
Equipment may be resold to the Partnership for a price not in excess of the sum
of the cost of the Equipment to such entity and any accountable Acquisition
Expenses payable to third parties which are incurred by such entity and interest
on the Purchase Price from the date of purchase to the date of transfer to the
Partnership. Com Cap Corp., the General Partner or such other Affiliate will
retain any rent or other payments received for the Equipment, and bear all
expenses and liabilities, other than accountable Acquisition Expenses payable to
third parties with respect to such Equipment, for all periods prior to the
acquisition of the Equipment by the Partnership. Except as described above,
there will be no sales of Equipment to or from any Affiliate of Com Cap Corp.
In certain instances, the Partnership may find it necessary, in
connection with the ordering and acquisition of Equipment, to make advances to
manufacturers or vendors with funds borrowed from the General Partner for such
purpose. The Partnership does not borrow money from the General Partner or any
of its Affiliates with a term in excess of twelve months. Interest is paid on
loans or advances (in the form of deposits with manufacturers or vendors of
Equipment or otherwise) from the General Partner of its Affiliates from their
own funds at a rate equal to that which would be charged by third party
financing institutions on comparable loans from the same purpose in the same
geographic area, but in no event in excess of the General Partner's or
Affiliate's own cost of funds. In addition, if the General Partner or its
Affiliates borrow money and loan or advance it on a short-term basis to or on
behalf of the Partnership, the General Partnership than that which the General
Partner or such Affiliates are paying. The Partnership does not loan money to
any Person including the General Partner or its Affiliates except to the extent
that a Conditional Sales Contract constitutes a loan.
If the General Partner or any of its Affiliates purchases Equipment in
its own name and with its own funds in order to facilitate ultimate purchase by
the Partnership, the purchaser is entitled to receive interest on the funds
expended for such purchase on behalf of the Partnership. Simple interest on any
such temporary purchases is charged on a floating rate basis not in excess of
three percent over the "prime rate" from time to time announced by PNC Bank,
from the date of initial acquisition to the date of repayment by the
Partnership/ownership transfer.
The Partnership does not invest in equipment Limited Partnerships,
general partnerships or joint ventures, except that (a) the Partnership may
invest in general partnerships or joint ventures with persons other that
equipment Programs formed by the General Partner or its Affiliates, which
partnerships or joint ventures own specific equipment; provided that (i) the
Partnership has or acquires a controlling interest in such ventures or
partnerships, (ii) the non-controlling interest is owned by a non-Affiliated,
and (iii) the are no duplicate fees; and (b) the Partnership may invest in joint
venture arrangements with other equipment Programs formed by the General Partner
or its Affiliates if such action is in the best interest of all Programs and if
all the following conditions are met: (i) all the Programs have substantially
identical investment objectives; (ii) there are no duplicate fees; (iii) the
sponsor compensation is substantially identical in each Program; (iv) the
Partnership has a right of first refusal to buy another Program's interest in a
joint venture if the other Program wishes to sell equipment held in the joint
venture; (v) the investment of each Program is on substantially the same terms
and conditions; and (vi) the joint venture is formed either for the purpose of
effecting appropriated diversification for the Programs or for the purpose of
relieving the General Partner or its Affiliates from a commitment entered into
pursuant to certain provisions of the Partnership Agreement.
GLOSSARY
The following terms used in this Report shall (unless otherwise expressly
provided herein or unless the context otherwise requires) have the meanings set
forth below.
"Acquisition Expenses" means expenses relating to the prospective selection and
acquisition of or investment in Equipment by the Partnership, whether or not
actually acquired, including, but not limited to, legal fees and expenses,
travel and communication expenses, costs of appraisal, accounting fees and
expenses and other related expenses.
"Acquisition Fees" means the total of all fees and commissions paid by any party
in connection with the initial purchase of Equipment acquired by the
Partnership. Included in the computation of such fees or commissions shall be
the Equipment Acquisition Fee and any commission, selection fee, construction
supervision fee, financing fee, non-recurring management fee or any fee of a
similar nature, however designated.
"Adjusted Capital Contributions" means Capital Contributions of the Limited
Partners reduced by any cash distribution received by the Limited Partners
pursuant to the Partnership Agreement, to the extent such distributions exceed
any unpaid Priority Return as of the date such distributions were made.
"Affiliate" means, when used with reference to a specified Person, (i) any
person, that directly or indirectly through one or more intermediaries controls
or is controlled by or is under common control with the specified Person, (ii)
any Person that is a director or an executive officer of, partner in, or serves
in a similar capacity to, the specified Person, or any Person of which the
specified Person is an executive officer or partner or with respect to which the
specified Person serves in a similar capacity, (iii) any Person owning or
controlling 10% or more of the outstanding voting securities of such specified
Person, or (iv) if such Person is an officer, director or partner, any entity
for which such Person acts in such capacity.
"Capital Account" means the bookkeeping account maintained by the Partnership
for each Partner.
"Capital Contributions" means in the case of the General Partner, the total
amount of money contributed to the Partnership by the General Partner, and in
the case of Limited Partners, $20 for each Unit, or where the context requires,
the total Capital Contributions of all the Partners.
"Cash Available for Distribution" means Cash Flow plus Net Disposition Proceeds
plus cash funds available for distribution from Partnership reserves, less such
amounts as the General Partner, in accordance with the Partnership Agreement,
causes the Partnership to reinvest in Equipment or interests therein, and less
such amounts as the General Partner, in its sole discretion, determines should
be set aside for the restoration or enhancement of Partnership reserves.
"Cash Flow" for any fiscal period means the sum of (i) cash receipts from
operations, including, but not limited to, rents or revenues arising from the
leasing or operation of the Equipment and interest, if any, earned on funds on
deposit for the Partnership, but not including Net Disposition Proceeds, minus
(ii) all cash expenses and costs incurred and paid in connection with the
ownership, lease, management, use and/or operation of the Equipment, including,
but not limited to, fees for handling and storage; all interest expenses paid
and all repayments of principal regarding borrowed funds; maintenance; repair
costs; insurance premiums; accounting and legal fees and expenses; debt
collection expenses; charges, assessments or levies imposed upon or against the
Equipment; ad valorem, gross receipts and other property taxes levied against
the Equipment; and all costs of repurchasing Units in accordance with the
Partnership Agreement; but not including depreciation or amortization of fees or
capital expenditures, or provisions for future expenditures, including, without
limitation, Organizational and Offering Expenses.
"Closing Date" means May 11, 1995.
"Code" means the Internal Revenue Code of 1986, as amended, and as may be
amended from tine to time by future federal tax statutes.
"Competitive Equipment Sale Commission" means that brokerage fee paid for
services rendered in connection with the purchase or sale of Equipment which is
reasonable, customary, and competitive in light of the size, type, and location
of the Equipment.
"Conditional Sales Contract" means an agreement to sell Equipment to a buyer in
which the seller reserves title to, and retains a security interest in, the
Equipment until the Purchase Price of the Equipment is paid.
"Effective Date" means December 17, 1993, the date on which the Partnership's
Registration Statement on Form S-1 was declared effective by the United States
Securities and Exchange Commission.
"Equipment" means each item of and all of the computer peripheral and other
similar capital equipment purchased, owned, operated, and/or leased by the
Partnership or in which the Partnership has acquired a direct or indirect
interest, together with all appliances, parts, instruments, accessories,
furnishings, or other equipment included therein and all substitutions,
renewals, or replacements of, and all additions, improvements, and accessions
to, any and all thereof.
"Full Payout Net Lease" means an initial Net Lease of the Equipment under which
the non-cancelable rental payments due (and which can be calculated at the
commencement of the Net Lease) during the initial noncancelable fixed term (not
including any renewal or extension period of the lease or other contract for the
use of the Equipment are at least sufficient to recover the Purchase Price of
the Equipment.
"General Partner" means Commonwealth Income & Growth Fund, Inc. and any
additional, substitute or successor general partner of the Partnership.
"Gross Lease Revenues" means Partnership gross receipts from leasing or other
operation of the Equipment, except that, to the extent the Partnership has
leased the Equipment from an unaffiliated party, it shall mean such receipts
less any lease expense.
"Initial Closing" means March 14, 1994, the date after the Minimum Subscription
Amount was received on which funds to acquire Units were released from the
Escrow Account and distributed to the Partnership for the acquisition of Units
by Limited Partners.
"IRS" means the Internal Revenue Service.
"Limited Partner" means a person who acquires Units and who is admitted to the
Partnership as a limited partner in accordance with the terms of the Partnership
Agreement.
"Majority in Interest" means, with respect to the Partnership, Limited Partners
holding more than 50% of the outstanding Units held by all Limited Partners at
the Record Date for any vote or consent of the Limited Partners.
"Minimum Subscription Amount" means an aggregate of $2,500,000 in Subscriptions.
"Net Dispositions Proceeds" means the net proceeds realized by the Partnership
from the refinancing, sale or other disposition of Equipment, including
insurance proceeds or lessee indemnity payments arising from the loss or
destruction of Equipment, less such amounts as are used to satisfy Partnership
liabilities.
"Net Lease" means a lease or other contract under which the owner provides
equipment to a lessee or other operator in return for a payment, and the lessee
assumes all obligations and pays for the operation, repair, maintenance and
insuring of the equipment.
"Net Profits" or "Net Losses" shall be computed in accordance with Section
703(a) of the Code (including all items of income, gain, loss or deduction
required to be stated separately pursuant to Section 703(a) (1) of the Code) for
each taxable year of the Partnership or shorter period prior to an interim
closing of the Partnership's books with the following adjustments: (I) any
income of the Partnership that is exempt from federal income tax and not
otherwise taken into account in computing Net Profits and Net Loss pursuant to
this definition shall be added to such taxable income or shall reduce such
taxable loss; (ii) any expenditure of the Partnership described in Code Section
705(a) (2) (B) or treated as Code Section 705(a) (2) (B) expenditures pursuant
to Treasury Regulations section 1.704-1(b) (2) (iv) (i) and not otherwise taken
into account in computing Net Profits and Net Losses pursuant to this definition
shall be subtracted from such taxable income or loss; (iii) items of income,
gain, loss and deduction specially allocated pursuant to
Section 7.3 of the Partnership Agreement shall not be included in the
computation of Net Profits or Net Loss; and if property is reflected on the
books of the Partnership at a book value that differs from the adjusted tax
basis of the property in accordance with Treasury Regulation Section 1.704-1(b)
(2) (iv) (d) or (f), depreciation, amortization, and gain or loss with respect
to such property shall be determined by reference to such book value in a manner
consistent with Treasury Regulation Section 1.704-1(b) (2) (iv) (g). The terms
"Net Profit" or "Net Losses" shall include the Partnership's distributive share
of the profit or loss of any partnership or joint venture in which it is a
partner or joint venturer.
"Offering" means the initial public offering of Units in the Partnership.
"Offering Period" means the period commencing the Effective Date and ending the
last day of the calendar month in which the Closing Date occurs.
"Operating Distributions" means the quarterly distributions made to the Partners
pursuant to Article 8 of the Partnership Agreement.
"Operating Lease" means a lease or other contractual arrangement under which an
unaffiliated party agrees to pay the Partnership, directly or indirectly, for
the use of the Equipment, and which is not a Full Payout Net Lease.
"Organizational and Offering Expenses" means the expenses incurred in connection
with the organization of the Partnership and in preparation of the Offering,
including Underwriting Commissions, listing fees and advertising expenses
specifically incurred in connection with the distribution of the Units.
"Partner (s)" means any one or more of the General Partner and the Limited
Partners.
"Partnership" means Commonwealth Income & Growth Fund I, a Pennsylvania limited
partnership.
"Partnership Agreement" means that Limited Partnership Agreement of Commonwealth
Income & Growth Fund I by and among the General Partner and the Limited
Partners, pursuant to which the Partnership is governed.
"Person" means an individual, partnership, limited liability company, joint
venture, corporation, trust, estate or other entity.
"Priority Return" means an amount equal to a return at a rate of 10% per annum,
compounded daily, on the Adjusted Capital Contribution for all outstanding
Units, which amount shall begin accruing at the end of the calendar quarter in
which such Units are sold by the Partnership.
"Proceeds" means proceeds from the sale of the Units.
"Program" means a limited or general partnership, joint venture, unincorporated
association or similar organization, other than a corporation formed and
operated for the primary purpose of investment in and the operation of or gain
from an interest in Equipment.
"Purchase Price" means, with respect to any Equipment, an amount equal to the
sum of (i) the invoice cost of such Equipment or any other such amount paid to
the seller, (ii) any closing, delivery and installation charges associated
therewith not included in such invoice cost and paid by or on behalf of the
Partnership, (iii) the cost of any capitalized modifications or upgrades paid by
on or behalf of the Partnership in connection with its purchase of the
Equipment, and (iv) solely for purposes of the definition of Full Payout Net
Lease, the amount of the Equipment Acquisition Fee and any other Acquisition
Fees.
"Retained Proceeds" means Cash Available for Distribution, which instead of
being distributed to the Partners is retained by the Partnership for the purpose
of acquiring or investing in Equipment.
"Term Debt" means debt of the Partnership with a term in excess of twelve
months, incurred with respect to acquiring or investing in Equipment, or
refinancing non-Term Debt, but not debt incurred with respect to refinancing
existing Partnership Term Debt.
"Unit" means a Limited Partnership interest in the Partnership.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(a) (1) Financial Statements
Commonwealth Income & Growth Fund I
Report of Independent Auditors
Balance Sheets as of December 31, 1999 and 1998
Statement of Operations for each of the three years ended December 31,
1999, 1998 and 1997
Statement of Partners' Capital for each of the three years ended
December 31, 1999, 1998 and 1997
Statement of Cash Flows for each of the three years ended December 31,
1999, 1998 and 1997
Notes to Financial Statements
Commonwealth Income & Growth Fund, Inc.
Report of Independent Auditors
Balance sheet as of February 28, 1999
Notes to Balance Sheet
Commonwealth Capital Corp.
Report of Independent Auditors
Consolidated Balance Sheet as of February 28, 1999
Notes to Consolidated Balance Sheet
(a) (2) Schedules.
Schedules are omitted because they are not applicable, not required, or
because the required information is included in the financial statements and
notes thereto.
(a) (3) Exhibits.
* 3.1 Certificate of Limited Partnership
* 3.2 Agreement of Limited Partnership
27 Financial Data Schedule
* Incorporated by reference from the Partnership's Registration
Statement on Form S-1
(Registration No. 333-26933)
(b) Reports on Form 8-K
NOT APPLICABLE
(c) Exhibits.
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf April 14, 1999 by the undersigned thereunto duly authorized.
COMMONWEALTH INCOME & GROWTH FUND II
By: COMMONWEALTH INCOME &
GROWTH FUND, INC., General Partner
By: /S/ GEORGE S. SPRINGSTEEN
---------------------------
George S. Springsteen, 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 indicated on April 14, 1999.
SIGNATURE CAPACITY
/S/ GEORGE S. SPRINGSTEEN Chairman, President and Director of
- -------------------------- Commonwealth Income & Growth Fund, Inc.
George S. Springsteen
/S/ KIMBERLY A. MACDOUGALL Executive Vice President Chief Operating
- -------------------------- Officer and Director of Commonwealth Income
Kimberly A. MacDougall & Growth Fund, Inc.
/S/ JOHN A. CONBOY III Accounting Manager of Commonwealth
- ------------------------- Income & Growth Fund, Inc.
John A. Conboy III
Financial Statements
Commonwealth Income &
Growth Fund I
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
WITH REPORT OF INDEPENDENT AUDITORS
Commonwealth Income &
Growth Fund I
Financial Statements
Years ended December 31, 1999, 1998, and 1997
CONTENTS
Report of Independent Auditors................................1
Audited Financial Statements
Balance Sheets................................................2
Statements of Operations......................................3
Statements of Partners' Capital...............................4
Statements of Cash Flows......................................5
Notes to Financial Statements.................................6
Report of Independent Auditors
The Partners
Commonwealth Income & Growth Fund I
We have audited the accompanying balance sheets of Commonwealth Income & Growth
Fund I as of December 31, 1999 and 1998, and the related statements of
operations, partners' capital, and cash flows for each of the three years in the
period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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 Commonwealth Income & Growth
Fund I at December 31, 1999 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 24, 2000
1
Commonwealth Income & Growth Fund I
Balance Sheets
DECEMBER 31
1999 1998
------------------------------------------
ASSETS
Cash and cash equivalents $ 217,288 $ 1,565
Lease income receivable 212,624 148,204
Other receivables and deposits 2,009 3,303
Accounts receivable - General Partner - 9,199
Computer equipment, at cost 9,551,365 13,864,309
Accumulated depreciation (7,174,110) (8,306,508)
------------------------------------------
2,377,255 5,557,801
Equipment acquisition costs and deferred expenses,
net of accumulated amortization of $370,770 in
1999 and $448,421 in 1998 49,324 169,252
Organization costs, net of accumulated amortization
of $121,778 in 1998 - 17,560
------------------------------------------
Total assets $ 2,858,500 $ 5,906,884
==========================================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 54,037 $ 50,310
Accounts payable - General Partner 35,018 -
Accounts payable - Commonwealth Capital Corp. 29,288 22,480
Accounts payable - affiliated limited partnerships 77,500 -
Unearned lease income 101,030 116,968
Other accrued expenses 25,000 -
Notes payable 716,792 2,401,080
------------------------------------------
Total liabilities 1,038,665 2,590,838
Partners' capital:
General partner 1,000 1,000
Limited partners 1,818,835 3,315,046
------------------------------------------
Total partners' capital 1,819,835 3,316,046
------------------------------------------
Total liabilities and partners' capital $ 2,858,500 $ 5,906,884
==========================================
SEE ACCOMPANYING NOTES.
2
Commonwealth Income & Growth Fund I
Statements of Operations
YEAR ENDED DECEMBER 31
1999 1998 1997
----------------------------------------------------------
Income:
Lease $ 2,995,506 $ 4,527,348 $ 5,195,139
Interest and other 9,683 21,741 34,525
Gain on sale of computer equipment - 71,682 -
----------------------------------------------------------
3,005,189 4,620,771 5,229,664
Expenses:
Operating, excluding depreciation 320,038 116,833 111,263
Equipment management fee - General Partner
149,675 226,367 259,757
Interest 105,223 272,640 348,681
Depreciation 2,664,825 4,039,371 4,912,073
Amortization of organization costs,
equipment acquisition costs, and
deferred expenses 143,956 240,814 307,323
Uncollectible accounts receivable 50,000 - -
Loss on sale of computer equipment 108,640 - 196,690
----------------------------------------------------------
3,542,357 4,896,025 6,135,787
----------------------------------------------------------
Net loss $ (537,168) $ (275,254) $ (906,123)
==========================================================
Net loss per equivalent limited
partnership unit $ (.85) $ (.46) $ (1.46)
==========================================================
Weighted average number of equivalent limited
partnership units outstanding during the year
631,358 631,358 631,358
==========================================================
SEE ACCOMPANYING NOTES.
3
Commonwealth Income & Growth Fund I
Statements of Partners' Capital
GENERAL LIMITED
PARTNER PARTNER GENERAL LIMITED
UNITS UNITS PARTNER PARTNERS TOTAL
-------------------------------------------------------------------------------
Partners' capital -
December 31, 1996 50 631,358 $ 1,000 $ 7,047,357 $ 7,048,357
Net income (loss) - - 12,755 (918,878) (906,123)
Distributions - - (12,755) (1,262,712) (1,275,467)
-------------------------------------------------------------------------------
Partners' capital -
December 31, 1997 50 631,358 1,000 4,865,767 4,866,767
Net income (loss) - - 12,755 (288,009) (275,254)
Distributions - - (12,755) (1,262,712) (1,275,467)
-------------------------------------------------------------------------------
Partners' capital -
December 31, 1998 50 631,358 1,000 3,315,046 3,316,046
Net income (loss) - - 9,565 (546,733) (537,168)
Distributions - - (9,565) (949,478) (959,043)
-------------------------------------------------------------------------------
Partners' capital -
December 31, 1999 50 631,538 $ 1,000 $ 1,818,835 $ 1,819,835
===============================================================================
SEE ACCOMPANYING NOTES.
4
Commonwealth Income & Growth Fund I
Statements of Cash Flows
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (537,168) $ (275,254) $ (906,123)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 2,808,801 4,280,185 5,219,396
Loss (gain) on sale of computer
equipment 108,640 (71,682) 196,690
Other non-cash activities included in
determination of net loss (1,706,647) (3,094,256) (2,848,893)
Changes in operating assets and
liabilities:
Lease income receivable (64,420) (1,642) 112,488
Other receivables and deposits 1,294 5,264 15,017
Accounts receivable - General
Partner 9,199 (9,199) 6,772
Accounts payable 3,727 25,701 (39,773)
Accounts payable - General Partner 35,018 (18,810) 18,810
Accounts payable - Commonwealth Capital
Corp. 6,808 (38,626) 39,106
Accounts payable - Other limited
partnerships 77,500 - -
Accrued expenses 25,000 - -
Unearned lease income (15,938) (44,813) (67,036)
-------------------------------------------------------
Net cash provided by operating activities 751,814 756,868 1,746,454
INVESTING ACTIVITIES
Capital expenditures (160,935) (544,691) (1,347,809)
Accounts payable - Commonwealth Capital
Corp. - (1,823) 1,823
Net proceeds from sale of computer
equipment 590,355 893,739 347,654
Payment of computer equipment payable - - (195,864)
Equipment acquisition fees paid to the
General Partner (6,468) (39,699) (213,186)
-------------------------------------------------------
Net cash provided by (used in) investing activities 422,952 307,526 (1,407,382)
FINANCING ACTIVITIES
Proceeds from short-term note payable - 78,804 -
Advance from Commonwealth Capital Corp. - 22,000 -
Distributions to partners (959,043) (1,275,467) (1,275,467)
Debt placement fee paid to the General
Partner - (4,425) (30,141)
------------------------------------------------------
Net cash used in financing activities (959,043) (1,179,088) (1,305,608)
------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 215,723 (114,694) (966,536)
Cash and cash equivalents at beginning of year 1,565 116,259 1,082,795
------------------------------------------------------
Cash and cash equivalents at end of year $ 217,288 $ 1,565 $ 116,259
======================================================
SEE ACCOMPANYING NOTES.
5
Commonwealth Income & Growth Fund I
Notes to Financial Statements
December 31, 1999
1. BUSINESS
Commonwealth Income & Growth Fund I (the "Partnership") is a limited partnership
organized in the Commonwealth of Pennsylvania to acquire, own, lease, and sell
various types of computer peripheral equipment and other similar capital
equipment, which will be leased primarily to U.S. corporations and institutions.
The Partnership's general partner is Commonwealth Income & Growth Fund, Inc.
(the "General Partner"), a Pennsylvania corporation which is an indirect
wholly-owned subsidiary of Commonwealth Capital Corp. Approximately ten years
after the commencement of operations, the Partnership intends to have sold or
otherwise disposed of all of its computer equipment, make final distributions to
partners, and to dissolve. Unless sooner terminated, the Partnership will
continue until December 31, 2004.
Allocations of income and distributions of cash are based on Commonwealth Income
& Growth Fund I, Limited Partnership Agreement (the "Agreement"). The various
allocations prevent any limited partner's capital account from being reduced
below zero and ensure the capital accounts reflect the anticipated sharing
ratios of cash distributions, as defined in the Agreement. During 1999, the
Partnership distributed to the Limited Partners, three quarterly distributions
totaling $949,478 and in January 2000 distributed a fourth quarterly
distribution relating to 1999 of $240,103 which is at an annual rate of 9.4%.
During 1998 and 1997, cash distributions to limited partners have been made at a
rate of 10% of their original contributed capital. Distributions during 1999
reflect an annual return of capital in the amount of approximately $1.50 per
limited partnership unit for units which were outstanding for the entire year.
The Partnership distributed an additional $.38 per limited partnership unit as a
return of capital in January 2000. Distributions during 1998 and 1997 reflect an
annual return of capital in the amount of approximately $2.00 per limited
partnership unit, for units which were outstanding for the entire year.
2. ACCOUNTING POLICIES
REVENUE RECOGNITION
Through December 31, 1999, the Partnership has only entered into operating
leases. Lease revenue is recognized on a monthly basis in accordance with the
terms of the operating lease agreements.
6
Commonwealth Income & Growth Fund I
Notes to Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States 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.
LONG-LIVED ASSETS
The Partnership evaluates its long-lived assets when events or circumstances
indicate that the value of the asset may not be recoverable. The Partnership
determines whether an impairment exists by estimating the undiscounted cash
flows to be generated by each asset. If the estimated undiscounted cash flows
are less than the carrying value of the asset then an impairment exists. The
amount of the impairment is determined based on the difference between the
carrying value and the fair value. Fair value is determined based on estimated
discounted cash flows to be generated by the asset.
During 1999, 1998, and 1997 the Partnership identified specific computer
equipment and associated equipment acquisition costs which were evaluated due to
technological changes. The Partnership determined that the carrying amount of
certain assets was greater than the undiscounted cash flows to be generated by
these assets. The Partnership recorded charges of $10,000, $135,000, and
$154,000 in the fourth quarter of 1999, 1998, and 1997, respectively, to record
the assets at their estimated fair value. Such amounts have been included in
depreciation expense in the accompanying financial statements.
Depreciation on computer equipment for financial statement purposes is based on
the straight-line method over estimated useful lives of 4 years. Other assets,
consisting of organization costs and other deferred expenses, are amortized on a
straight-line basis over 2 to 5 year lives. Unamortized acquisition fees are
charged to amortization expense when the associated leased equipment is sold.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less to be cash equivalents. At December 31, 1999 and 1998, cash
equivalents were invested in a money market fund investing directly in Treasury
obligations.
7
Commonwealth Income & Growth Fund I
Notes to Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Partnership is not subject to federal income taxes; instead, any taxable
income (loss) is passed through to the partners and included on their respective
income tax returns.
Taxable income differs from financial statement net income as a result of
reporting certain income and expense items for tax purposes in periods other
than those used for financial statement purposes, principally relating to
depreciation, amortization, and lease income.
OFFERING COSTS
Offering costs are payments for selling commissions of 7% and dealer manager
fees of 2% of the partners' contributed capital, professional fees and other
offering expenses relating to the syndication. These costs are deducted from
partnership capital in the accompanying financial statements.
NET LOSS PER EQUIVALENT LIMITED PARTNERSHIP UNIT
The net loss per equivalent limited partnership unit is computed based upon net
loss allocated to the limited partners and the weighted average number of
equivalent units outstanding during the year.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1998, Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up
Activities," was issued which requires that the costs associated with such
activities be expensed as incurred. SOP 98-5 was required to be adopted in the
first quarter of 1999 and resulted in the write-off of $18,000 of unamortized
organization costs.
3. COMPUTER EQUIPMENT
The Partnership is the lessor of equipment under operating leases with periods
ranging from 18 to 48 months. In general, associated costs such as repairs and
maintenance, insurance and property taxes are paid by the lessee.
8
Commonwealth Income & Growth Fund I
Notes to Financial Statements (continued)
3. COMPUTER EQUIPMENT (CONTINUED)
The following is a schedule of future minimum rentals on noncancelable operating
leases at December 31, 1999:
2000 $ 784,471
2001 359,282
2002 8,997
----------------------
$ 1,152,750
======================
Lease income from two lessees, each exceeding 10% of total lease income,
aggregated 27% and 23% of lease income for the years ended December 31, 1998,
and 1997, respectively. Lease income from one lessee aggregated 12% of lease
income for the year ended December 31, 1999.
4. RELATED PARTY TRANSACTIONS
REIMBURSEMENT OF EXPENSES
The General Partner and its Affiliates are entitled to reimbursement by the
Partnership for the cost of goods, supplies or services obtained and used by the
General Partner in connection with the administration and operation of the
Partnership from third parties unaffiliated with the General Partner. In
addition, the General Partner and its affiliates are entitled to reimbursement
for certain expenses incurred by the General Partners and its affiliates in
connection with the administration and operation of the Partnership. During
1999, 1998, and 1997, the Partnership paid $111,000, $41,000, and $54,000,
respectively, to the General Partner for reimbursement of expenses. During 1999,
the General Partner also received reimbursement of $59,000 of expenses relating
to 1998.
EQUIPMENT ACQUISITION FEE
The General Partner is entitled to be paid an Equipment Acquisition Fee of 4% of
the purchase price of each item of equipment purchased as compensation for the
negotiation of the acquisition of the equipment and the lease thereof or sale
under a conditional sales contract. During 1999, 1998, and 1997, equipment
acquisition fees of approximately $60,000, $40,000, and $213,000 respectively,
were paid to the General Partner.
9
Commonwealth Income & Growth Fund I
Notes to Financial Statements (continued)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
DEBT PLACEMENT FEE
As compensation for arranging term debt to finance the acquisition of equipment
by the Partnership, the General Partner is paid a fee equal to 1% of such
indebtedness; provided, however, that such fee shall be reduced to the extent
the Partnership incurs such fees to third parties, unaffiliated with the General
Partner or the lender, with respect to such indebtedness and no such fee will be
paid with respect to borrowings from the General Partner or its Affiliates.
During 1998 and 1997, debt placement fees of approximately $4,000 and $30,000,
respectively, were paid to the General Partner. No debt placement fee was paid
to the General Partner in 1999.
EQUIPMENT MANAGEMENT FEE
The General Partner is entitled to be paid a monthly fee equal to the lesser of
(i) the fees which would be charged by an independent third party for similar
services for similar equipment or (ii) the sum of (a) two percent of (1) the
gross lease revenues attributable to equipment which is subject to full payout
net leases which contain net lease provisions plus (2) the purchase price paid
on conditional sales contracts as received by the Partnership and (b) 5% of the
gross lease revenues attributable to equipment which is subject to operating
leases. During 1999, 1998, and 1997, equipment management fees of approximately
$150,000, $226,000, and $260,000, respectively, were paid to the General Partner
as determined pursuant to section (ii) above.
RE-LEASE FEE
As compensation for providing re-leasing services for any equipment for which
the General Partner has, following the expiration of, or default under, the most
recent lease or conditional sales contract, arranged a subsequent lease or
conditional sales contract for the use of such equipment to a lessee or other
party, other than the current or most recent lessee or other operator of such
equipment or its Affiliates ("Re-lease"), the General Partner shall receive, on
a monthly basis, a Re-lease Fee equal to the lesser of (a) the fees which would
be charged by an independent third party for comparable services for comparable
equipment or (b) two percent of gross lease revenues derived from such Re-lease.
There were no such fees paid to the General Partner in 1999, 1998, or 1997.
10
Commonwealth Income & Growth Fund I
Notes to Financial Statements (continued)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
EQUIPMENT LIQUIDATION FEE
With respect to each item of equipment sold by the general partner (other than
in connection with a conditional sales contract), a fee equal to the lesser of
(i) 50% of the competitive equipment sale commission or (ii) three percent of
the sales price for such equipment is payable to the General Partner. The
payment of such fee is subordinated to the receipt by the limited partners of
the net disposition proceeds from such sale in accordance with the Partnership
Agreement. Such fee will be reduced to the extent any liquidation or resale fees
are paid to unaffiliated parties. There were no such fees paid to the General
Partner in 1999, 1998, or 1997.
5. NOTES PAYABLE
Notes payable consisted of the following:
1999 1998
---------------------------------------
Installment note payable to a bank; interest at 6.5%; due
in monthly installments of $15,983 including interest
through February 1999 $ - $ 31,708
Installment note payable to a bank; interest at 8.5%; due
in monthly installments of $29,191 including interest
through March 1999 - 86,347
Installment note payable to a bank; interest at 7.5%; due
in monthly installments of $15,501 including interest
through June 1999 - 105,849
Installment note payable to a bank; interest at 7.2%; due
in monthly installments of $10,711 including interest
through July 1999 - 73,209
Installment note payable to a bank; interest at 6.7%; due
in monthly installments of $11,501 including interest
through September 1999 - 100,690
Installment note payable to a bank; interest at 6.8%; due
in monthly installments of $22,520 including interest
through November 1999 - 239,559
Installment note payable to a bank; interest at 7.2%; due
in monthly installments of $4,203 including interest
through December 1999 - 48,536
11
Commonwealth Income & Growth Fund I
Notes to Financial Statements (continued)
5. NOTES PAYABLE (CONTINUED)
1999 1998
---------------------------------------
Installment note payable to a bank; interest at 7.5%;
due in monthly installments of $6,597 including
interest through February 2000 $ 13,069 $ 88,167
Installment note payable to a bank; interest at 7.10%;
due in monthly installments of $29,786 including
interest through May 2000 146,341 480,556
Installment note payable to a bank; interest at 7.3%;
due in monthly installments of $9,040 including
interest through July 2000 61,778 161,807
Installment note payable to a bank; interest at 6.4%;
due in monthly installments of $21,031 including
interest through September 2000 184,329 416,767
Installment note payable to a bank; interest at 7.12%;
due in monthly installments of $11,060 including
interest through October 2000 107,075 227,477
Installment note payable to a bank; interest at 6.5%;
due in monthly installments of $6,989 including
interest through November 2000 73,442 150,770
Installment note payable to a bank; interest at 7.0%;
due in monthly installments of $5,852 including
interest through December 2001 130,758 189,638
---------------------------------------
$ 716,792 $ 2,401,080
=======================================
These notes are secured by specific computer equipment and are nonrecourse
liabilities of the Partnership. Aggregate maturities of notes payable for each
of the three years subsequent to December 31, 1999 are as follows:
2000 $ 650,144
2001 66,648
2002 -
----------------------
$ 716,792
======================
The fair market value of debt approximates its carrying value at December 31,
1999 and 1998.
12
Commonwealth Income & Growth Fund I
Notes to Financial Statements (continued)
6. SUPPLEMENTAL CASH FLOW INFORMATION
Other non-cash activities included in the determination of net loss are as
follows:
1999 1998 1997
------------------------------------------------------
Lease income, net of interest expense on
notes payable realized as a result of direct
payment of principal by lessee to bank $ 1,684,288 $ 3,088,868 $ 2,848,893
Lease income paid to original lessor in lieu
of cash payment for computer equipment
acquired 22,359 5,388 -
------------------------------------------------------
Total adjustment to net loss from other
non-cash activities $ 1,706,647 $ 3,094,256 $ 2,848,893
======================================================
No interest or principal on notes payable was paid by the Partnership because
direct payment was made by lessee to the bank in lieu of collection of lease
income and payment of interest and principal by the Partnership.
Non-cash investing and financing activities include the following:
1999 1998 1997
------------------------------------------------------
Debt assumed in connection with purchase
of computer equipment $ - $ 442,937 $ 3,981,858
======================================================
Accounts payable in connection with the
purchase of computer equipment $ - $ - -
======================================================
Computer equipment payable converted
to a note payable $ - $ - $ 333,260
======================================================
13
Commonwealth Income & Growth Fund I
Notes to Financial Statements (continued)
7. RECONCILIATION OF NET LOSS REPORTED FOR FINANCIAL REPORTING PURPOSES TO
TAXABLE LOSS ON THE FEDERAL PARTNERSHIP RETURN
1999 1998 1997
-----------------------------------------------------
Net loss for financial reporting purposes $ (537,168) $ (275,254) $ (906,123)
Adjustments:
Loss on sale of computer equipment (322,612) (287,465) (1,224,887)
Depreciation 480,316 405,303 241,706
Amortization 115,830 185,057 248,516
Unearned lease income (11,074) (38,829) 27,603
Penalties and other (35,843) (25,606) 39,161
-----------------------------------------------------
Taxable loss on the Federal Partnership
Return $ (310,551) $ (36,794) $ (1,574,024)
=====================================================
14
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
February 28, 1999
TABLE OF CONTENTS
Report of Independent Auditors......................................2
Balance Sheet.......................................................3
Notes to Balance Sheet..............................................4
INDEPENDENT AUDITOR'S REPORT
Stockholder
Commonwealth Income & Growth Fund, Inc.
We have audited the accompanying balance sheet of COMMONWEALTH INCOME & GROWTH
FUND, INC. (An indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
as of February 28, 1999. This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Commonwealth Income & Growth Fund,
Inc. as of February 28, 1999, in conformity with generally accepted accounting
principles.
/s/ Fishbein & Company, P.C.
June 16, 1999
2
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
Balance Sheet
February 28, 1999
ASSETS
Cash $ 500
Receivable from Income Funds 128,803
Investment in Partnerships 3,000
------------
$ 132,303
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 3,422
Due to parent 127,781
------------
131,203
------------
STOCKHOLDERS EQUITY
Common stock -- No par value
Authorized 1,000 shares
Issued and outstanding 100 shares 1,000
Additional paid-in capital 1,000,100
------------
1,001,100
Less note receivable (1,000,000)
1,100
------------
132,303
------------
3
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
NOTE TO BALANCE SHEET
February 28, 1999
1. NATURE OF BUSINESS
Commonwealth Income & Growth Fund, Inc. (the Company) is a wholly-owned
subsidiary of Commonwealth of Delaware, Inc. which is a wholly- owned subsidiary
of Commonwealth Capital Corp. (CCC). The Company is the sole General Partner of
Commonwealth Income & Growth Fund I, Commonwealth Income & Growth Fund II, and
Commonwealth Income & Growth Fund III, all Pennsylvania limited partnerships
(the "Partnerships).
CCC has provided additional capital by means of a noninterest-bearing demand
note in the amount of $1,000,000, so that the Company will at all times have a
net worth (which includes the net equity of the Company and the demand note
receivable from CCC) of at least $1,000,00. The note receivable is reflected on
the accompanying balance sheet as a reduction of the Company's equity.
The Company's operations are included in the consolidated federal income tax
return of CCC.
2. INVESTMENT IN PARTNERSHIPS
The Company contributed $3,000 in cash to the Partnerships for its general
partner interests. The Company may, at its sole discretion, purchase a limited
partnership interest in the Partnerships ("Units") for an additional capital
contribution of $20 per Unit with a minimum investment of 125 units.
3. RELATED PARTY TRANSACTIONS
The Company and its affiliates receive substantial fees and compensation in
connection with the offering of Units and the management of the Partnerships'
assets. See "Compensation of General Partner and Affiliates, " and "Allocations
and Distributions" elsewhere in the Prospectus of Commonwealth Income & Growth
Fund III for information with respect to the compensation to be paid to the
Company and its affiliates and the allocations of income, losses, and cash
distributions.
4
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1999
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITOR'S REPORT 6
CONSOLIDATED BALANCE SHEET 7
NOTES TO CONSOLIDATED BALANCE SHEET 8
5
INDEPENDENT AUDITOR'S REPORT
Stockholder
Commonwealth Capital Corp.
We have audited the accompanying consolidated balance sheet of
Commonwealth Capital Corp. and Subsidiaries as of February 28, 1999, and the
related consolidated statements of operations and retained earnings and cash
flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Commonwealth Capital Corp. and Subsidiaries as of February 28, 1999, and the
consolidated results of their operations and their consolidated cash flows for
the year ended in conformity with generally accepted accounting principles.
/s/ Fishbein & Company, P.C.
June 16, 1999
6
COMMONWEALTH CAPITAL CORP.
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1999
ASSETS
Cash and cash equivalents $ 28,544
Receivables from Income Funds 346,272
Other receivables 64,754
Minimum lease payments receivable - Net of
unearned interest income of $2,084,813 5,260,000
Investment in income funds 16,200
Office furniture and equipment - Net of
accumulated depreciation of $108,789 10,649
Deferred offering costs 257,673
Other assets 9,042
----------
$5,993,134
----------
----------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 141,265
Due to Income Funds 63,382
Nonrecourse obligations 5,260,000
----------
5,464,647
----------
STOCKHOLDER'S EQUITY
Common stock -Par value $1
Authorized 1,000 shares
Issued and outstanding 10 shares 10
Retained Earnings 528,477
----------
528,487
----------
$5,993,134
----------
----------
See notes to consolidated financial statements
7
1. BUSINESS
Commonwealth Capital Corp. (the Company), through its subsidiary, Commonwealth
of Delaware, Inc. (CDI), is primarily engaged in leasing various types of
computer peripheral equipment and other similar equipment, which are leased
primarily to U.S. corporations and institutions. Certain subsidiaries of CDI
were formed for the purpose of functioning as general partners/managing trustees
which own a 1% interest in limited partnerships/trusts (the "Income Funds"),
which were organized to acquire, own, and act as lessor with respect to certain
computer equipment. As of February 28, 1998, the subsidiaries include
Commonwealth Capital Fund 1987-I, Inc., Commonwealth Capital Fund 1988-I, Inc.,
Commonwealth Capital Fund No. 3, Inc., Commonwealth Capital Fund No. 4, Inc.,
Commonwealth Capital Fund V, Inc., Commonwealth Capital Private Fund-I, Inc.,
Commonwealth Capital Fund VI, Inc., Commonwealth Capital Fund VII, Inc.,
Commonwealth Capital Private Fund - II, Inc., Commonwealth Capital Trustee VIII,
Inc., Commonwealth Capital Trustee IX, Inc., Commonwealth Capital Trustee X,
Inc., Commonwealth Capital Private Fund-III, Inc., Commonwealth Income and
Growth Fund, Inc., Commonwealth Capital Private Fund IV, Inc., Commonwealth
Capital Private Fund V, Inc., and Commonwealth Capital Private Fund VI, Inc.
(collectively the "General Partner Subsidiaries"), Commonwealth Capital
Securities Corp., Garden State Facilities Funding, Inc. (GSFF), and Commonwealth
Capital Delaware Trustee, Inc.
The Company is dependent on the compensation it receives from the Income Funds.
This compensation may be reduced due to the financial performance of each Income
Fund. There are certain Income Funds that have deferred fees subsequent to
February 28, 1998 because distributions to the limited partners were reduced
because of their financial performance. If the financial performance of
additional Income Funds deteriorates and the distributions to the limited
partners are reduced, there is no assurance that the Company would be able to
continue to collect fees for services provided. Management believes that fees
currently being collected will be sufficient to enable it to support its
operations during the next year. Commission income is derived from Commonwealth
Capital Securities Corp. which sells units of its affiliated partnerships
through broker dealer firms to their respective customers throughout the United
States.
2. ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company, CDI, and CDI's subsidiaries (the Company) (See Note 1). All significant
interCompany transactions and balances have been eliminated.
8
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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. At February 28, 1999 cash
equivalents were invested in a money market fund investing directly in treasury
obligations.
REVENUE RECOGNITION
The Company recognizes fees as earned in accordance with the various General
Partnership and Trust Agreements. The Company recognizes commission income and
brokerage fee expense on an accrual basis based on the trade date of the
underlying customer transactions. Interest income on minimum lease payments
receivable is recognized as earned.
INVESTMENT IN INCOME FUNDS
The Company accounts for its 1% interests in the Income Funds by the equity
method. In 1998, certain Income Funds had liabilities in excess of their assets.
As the Company, which serves the General Partner, is obligated to fund any
liabilities in excess of assets, the Company reduced its investment in Income
Funds and recorded a Due to Income Funds of $63,382 at February 28, 1999 of
which $17,269 was incurred during the year ended February 28, 1999. Financial
information of the Income Funds as of
December 31, 1998 is as follows:
1998
------------------
Total assets $ 24,883,000
Nonrecourse debt 9,234,000
Other liabilities 1,068,000
Partners' capital 14,581,000
Net income (loss) (721,000)
The Company has guaranteed the performance of certain non-monetary obligations
of the General Partner Subsidiaries to the respective Income Funds, primarily
the responsibility for management of the Income Funds. In addition, the Company
is responsible for certain capital funding requirements of the General Partner
Subsidiaries which it satisfies
9
through noninterest-bearing demand notes. Such notes total approximately
$4,166,000 at February 28, 1999 and have been eliminated in the consolidation of
the accompanying financial statements.
Fee income earned by the Company from the Income Funds includes: (1) Equipment
Acquisition Fees (4% of the purchase price of all equipment purchased by the
Income Funds); (2) Debt Placement Fees (1% of financed equipment by the Income
Funds); (3) Sales Fees Expense (3% of gross proceeds of sold equipment by the
Income Funds); and (4) Equipment Management Fees (5% of the gross operating
lease revenues of the Income Funds).
Approximately 64% of fee income for the year ended February 28, 1999, was from
two Income Funds.
OFFICE FURNITURE AND EQUIPMENT
Office furniture and equipment are stated at cost. Depreciation is provided
using the declining balance method over the estimated useful lives of the assets
(ranging from 5 to 7 years
DEFERRED OFFERING COSTS
Deferred offering costs represent amounts incurred by the Company for the
organization of an Income Fund. These costs are recovered from the Income Fund
through fees as cash proceeds are raised through the sale of Limited Partnership
Units during the offering period or if necessary the future operations of the
Income Fund. Deferred offering costs at February 28, 1999, relate to an Income
Fund whose offering period expires in July 2000.
3. LEASE COMMITMENTS
GSFF acted as lessor in a series of lease purchase transactions whereby the
underlying assets were funded by investors through certificates of participation
in the lease payments. All of GSFF's rights as lessor were assigned to a
third-party agent which administers the collection of rentals paid by the
lessee. The obligations under the certificates are nonrecourse to GSFF.
Accordingly, any reduction in the minimum lease payments receivable for
uncollectible accounts would result in an equal reduction of the nonrecourse
obligations. Amounts outstanding at February 28, 1999 under these leases and
certificates of participation are approximately $5,260,000 and are reflected as
minimum lease payments receivable and nonrecourse obligations in the
accompanying balance sheet. Of these amounts, $4,110,000 are secured by mortgage
insurance policies maintained by the lessee. The certificates mature at various
dates through 2011. The Company recognized interest income and interest expense
in connection with the lease purchase transactions of $395,375 for the year
ended February 28, 1999.
10
Future minimum lease payments to be received as of February 28, 1998 are as
follows:
2000 903,828
2001 906,935
2002 683,324
2003 684,490
Thereafter 4,166,236
-------------------
7,344,913
Less amount representing interest 2,084,813
===================
Total $ 5,260,000
===================
The Company leases an automobile, certain office equipment and office space
under noncancelable operating leases expiring in various dates through 2004.
Rent expense under all operating leases was approximately $174,000 for the year
ended February 28, 1999. Future minimum lease payments under noncancelable
operating leases at February 28, 1999 are as follows: $150,000 in 1999; $11,000
in 2000; and $4,000 in 2001.
YEAR ENDING FEBRUARY 28,
2000 $ 154,000
2001 146,000
2002 141,000
2003 143,000
2004 146,000
-------
$ 730,000
PROFIT-SHARING PLAN
The Company has a profit-sharing plan covering all employees with one year of
service and 21 years of age. Profit-sharing contributions are made at the
discretion of management. There was no profit-sharing contribution for the years
ended February 28, 1999.
RELATED PARTY TRANSACTIONS
For the years ended February 28, 1999, certain of the General Partner
Subsidiaries agreed to waive or forgive the related Income Funds' obligations to
pay certain equipment management, acquisition, and financing fees in the amount
of $28,907. Accordingly, fee income from Income Funds is reflected net of these
amounts.
11
INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax return.
The Company has net operating loss carryforwards of approximately $235,000 and
investment tax credit carryforwards of approximately $129,000 available to
reduce future federal income taxes. If not used, the carryforwards will expire
as follows
NET OPERATING INVESTMENT
YEAR ENDING FEBRUARY 28, LOSSES TAX CREDITS
2000 $ $ 20,000
2001 57,000
2002 52,000
2013 38,000
2019 197,000
-----------
235,000 $ 129,000
The Company also has net operating loss carryforwards of approximately
$1,983,000 available to reduce future Pennsylvania state income taxes. If not
used, the carryforwards will expire as follows:
Year Ending February 28,
2006 $ 158,000
2007 651,000
2008 977,000
2009 197,000
----------
$1,983,000
At February 28, 1999, the Company has deferred income tax assets of $370,000
arising primarily from net operating loss and investment tax credit
carryforwards, and deferred income tax liabilities of approximately $104,000
associated with ownership of general partnership interests in the various
operating Income Funds. The Company has recorded a valuation allowance for the
net deferred income tax assets of approximately $266,000 at February 28, 1999,
because the Company concluded the future realization of the assets could not be
reasonably assured based on current and expected operating results.
12