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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 2000
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 33-89476
COMMONWEALTH INCOME & GROWTH FUND II
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2795120
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1160 West Swedesford Road
Berwyn, Pennsylvania 19312
(610) 647-6800
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 fillers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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. 33-89476) and Annual Report on form 10-K for the fiscal year ended December
31, 2000 are incorporated by reference as Exhibits in Part IV of this Report.
PART I
ITEM 1: BUSINESS
GENERAL
Commonwealth Income and Growth Fund II (the "Partnership") was formed on January
13, 1995, 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 May 12, 1995 (the "Offerings"). On September 22, 1995,
$2,521,380 in subscriptions from investors was released by the escrow agent and
126,118 Units were admitted as Limited Partners of the Partnership. The
Partnership terminated its offering of Units on May 12, 1997, with 461,817 Units
($9,235,185) 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 and leases Equipment principally
to U.S. corporations and other institutions pursuant 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, 2000, 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
that 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, 2000,
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, 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, 2000, the Partnership has acquired a
diversified Equipment portfolio, which it has leased to 23 different companies
located throughout the United States. Approximately 20% of the Equipment
acquired by the Partnership consists of Printers. Approximately another 36% of
the Equipment acquired by the Partnership consists of Workstations.
Approximately 13% of the Equipment acquired by the Partnership consists of tape
storage. Approximately 19% of the Equipment acquired by the Partnership consists
of Escon drivers. Approximately 7% of the Equipment acquired by the Partnership
consists of communication controllers. Approximately 5% of the Equipment
acquired by the Partnership consists of routers. During the operational stage of
the Partnership, the Partnership may not at any one point in time to 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 retain a security
interest in, the Equipment until the Purchase Price of the Equipment is paid. As
of December 31, 2000, 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, 2000, all leases that have
been entered into are "triple net leases".
The General Partner has not established any standards for lessees to whom 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, 2000, 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 (except that the Partnership may
not incur any indebtedness to acquire Equipment until the net proceeds of the
Offering are fully invested, or committed to investment, in Equipment). The
Partnership will incur only non-recourse debt, which is secured by Equipment and
lease income there from. 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, 2000, the aggregate non-recourse debt outstanding of $1,665,816 was
14% of the aggregate cost of the Equipment owned.
The Partnership 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, 2000, the Partnership has
not exercised this option.
After the net proceeds of the offering are fully invested in Equipment, the
General Partner plans to continue to cause the Partnership to borrow funds, to
the fullest extent practicable, at interest rates fixed at the time of
borrowing. However, 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 non-recourse.
Non-recourse 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 non-recourse 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,
2000, 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, 2000, 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 2006. Notwithstanding the Partnership's
objective to sell all of its assets and dissolve by December 31, 2006, 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, 2006, 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 than 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 of from IBM.
INVESTMENTS
As of March 29, 2001, the Partnership has purchased the following Equipment:
EQUIPMENT LIST PURCHASE MONTHLY LEASE
LESSEE MFG DESCRIPTION PRICE PRICE RENT TERM
Chrysler STK (2) 9490-M34 $ 686,158 $ 490,110 $12,001 48
ADP IBM (1) 3490-A20 422,900 178,673 4,290 36
Household Intl STK (3) 9490-M34 671,898 405,628 9,100 36
Timken DEC (1) Alpha server 259,507 204,781 5,308 36
Timken DEC (1) Alpha server 46,657 40,928 1,062 36
Johnson Control HP (13) HP9000-C110 441,415 304,718 7,961 36
Honda R&D SGI Onyx Infinite Reality 323,108 263,498 7,076 36
AT&T IBM (1) 3900 DW1/DW2 746,485 477,466 10,205 36
Federated IBM (38) 3130-020 909,910 600,000 15,162 34
Lucent SUN (1)E6000 server 642,452 461,207 12,042 36
Lucent upgrade SUN Upgrade to server 97,000 69,559 2,046 34
AT&T STK (9) 9490-M34 2,015,694 1,268,909 31,144 36
Avon IBM (75%) (8) 3900-OW1 2,002,710 1,542,485 37,058 36
Chrysler IBM (2) ES3000 1,146,500 778,454 22,844 24
Allied Signal HP (20) C180 workstations 838,339 362,615 11,775 24
Transamerica SUN (2) ES3000 servers 212,730 154,965 3,976 36
Computer Science Corp. SGI (50%) (141) workstations 2,055,893 822,455 20,174 36
Charles Schwab IBM (2) 9032-003 845,043 523,399 21,031 36
Charles Schwab IBM (20%)(6)9032-003 2,479,443 307,983 6,989 36
Equitable Life SUN (2) E3000 336,220 205,863 6,491 36
Chase SUN (3) E45D 358,562 244,584 8,386 24
Aetna STK (2) 9490-M34 535,932 194,272 4,395 36
Equitable Life SUN 6000 server 617,310 466,946 12,186 36
Chrysler STK Redwood tape drives 466,140 275,094 6,313 34
Chrysler STK Redwood tape drives 310,760 183,396 4,209 36
Depository Trust ESCON (4) 9032 directors 1,644,436 1,312,867 33,376 31
Depository Trust ESCON (4) 9032 directors 1,644,436 1,225,784 33,376 27
Pitney Bowes IBM (1) 3590 1,846,080 1,026,634 20,045 38
Lucent SUN (1) 4500 server 184,897 120,701 3,091 36
Kaiser IBM (7) RS6000 770,611 560,621 14,928 36
Kaiser IBM (2) RS170 209,445 138,149 3,666 36
Kaiser CISCO Routers 78,172 62,538 1,637 36
Thompson EPSON (16) Powelite Projectors 146,960 93,002 2,578 36
Thompson NORTEL Network LLXR759 165,000 109,328 4,245 36
Great Lakes Chemical CISCO (100) Routers 635,385 456,368 12,073 36
AT&T NM Net Ports DS3 16,288 15,229 435 36
Datapage Tech CISCO Routers 22,604 20,424 725 34
Digital Display Tech ROLLO Paper Roll System 18,422 16,785 567 36
Global Routing Tech DELL Workstations / Servers 46,698 42,452 1,434 36
Keller Group DELL Workstations / Servers 59,680 53,481 2,016 32
Keller Group HP Servers / Printers 34,210 30,487 1,203 30-31
Kennedy Assoc/Architects DELL Workstations / Servers 52,632 47,598 1,664 31-36
Missouri Farm Bureau Serv DELL Workstations / Servers 265,000 241,616 8,008 36-37
Missouri Farm Bureau Serv HP Workstations/Server/Printers 12,084 11,817 354 37
Missouri Farm Bureau Serv IBM Servers 11,034 9,971 364 33
Patients First Health Care MicroSys Workstations 2,863 2,605 88 36
Petrik & Smith Commun COMPAQ Server 19,215 17,523 642 33
Provident Counseling DELL Workstations 4,725 4,260 156 33
The Gannon Company IBM Workstations/Server 14,502 11,608 463 24-31
Tonnercharge of St Louis HP Server / Printers 9,927 7,790 332 20-27
Union Financial Group DELL Workstation 7,332 5,427 234 22
Vatterott Educational Centers DELL Workstations 43,191 39,084 1,381 34-35
GE Medical CISCO Routers 117,110 77,606 2,314 36
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 receives administrative and other services
from the General Partner, which has 12 employees as of December 31, 2000.
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, 2000, there were 501 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 requests 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.
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 no
liquidating as well as liquidating distributions by a parent
partnership to its partners of interests in a sub partnership);
(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 March 31, June 30, September
30 and December 31, 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 excess will reduce the
Adjusted Capital Contributions, 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 there under. 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 2000, 1999, and 1998.
QUARTER ENDED 2000 1999 1998
- --------------------------------------------------------------------------------
March 31 $228,600 $230,908 $230,908
June 30 228,599 230,908 230,908
September 30 228,625 230,908 230,908
December 31 228,600 190,049 230,910
------------------------------------------
$914,424 $882,773 $923,634
==========================================
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, selected financial data for
the Partnership for each of the five years in the period ended December 31,
2000. This table is qualified in its entirely by the more detailed
information and certain of the 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
----------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------------------
Lease Income $ 4,105,811 $ 4,598,009 $ 4,212,862 $ 2,444,661 $ 1,123,685
Net (Loss) (369,209) (379,337) (433,744) (61,837) (730)
Cash Distributions 923,546 891,690 932,964 908,714 608,045
Net (Loss) per
Limited Partner Unit (.80) (.84) (.96) (.16) (.02)
Cash Distribution per
Limited Partner Unit 1.98 1.90 2.00 2.00 2.00
YEARS ENDED DECEMBER 31
-----------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------------
Total Assets $ 4,387,648 $ 7,456,422 $10,232,970 $ 9,356,409 $ 6,614,654
Notes Payable 1,665,816 3,326,191 4,769,529 1,954,120 --
Partner's Capital 2,586,984 3,879,739 5,150,766 6,517,474 6,431,920
Net loss per unit is computed based upon net loss allocated to the Limited
Partners and the weighted average number of equivalent Limited Partners'
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 Limited Partners' Units outstanding during the
year.
ITEM 7: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Partnership satisfied its minimum offering requirements and commenced
operations on September 22, 1995.
The Partnership's primary sources of capital for the years ended December 31,
2000, 1999 and 1998 were from cash from operations of $857,000, $1,081,000,
and $1,924,000 respectively. The primary uses of cash for the years ended
December 31, 2000, 1999, and 1998, were for capital expenditures for new
equipment totaling $98,000, $255,000, and $1,702,000, the payment of
acquisition fees of $33,000, $57,000, and $223,000 and the payment of
distributions to partners totaling $924,000, $892,000, and $933,000
respectively.
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, 2000, and 1999 the Partnership had approximately
$263,000, and $52,000, 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 36% in
December 31, 2000 from December 31, 1999, due to computer equipment leases with
expirations in 2000. As of December 31, 2000, the Partnership had future minimum
rentals on noncancellable operating leases of $1,343,000 for the year ended 2001
and $664,000 thereafter. During 2000 and 1999, the Partnership incurred debt in
connection with the purchase of computer equipment totaling $721,000 and
$1,150,000, respectively. At December 31, 2000, the outstanding debt was
$1,666,000, with interest rates ranging from 6.35% to 9.75% and will be payable
through December 2003. 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 preferred
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.
For the year ended December 31, 2000, the Partnership generated cash flow from
operating activities of $857,000, which includes net loss of $369,000 reduced by
depreciation and amortization expenses of $3,680,000. Other noncash activities
included in the determination of net income include direct payments of lease
income by lessees to banks of $2,382,000.
RESULTS OF OPERATIONS
For the years ended December 31, 2000, 1999 and 1998, the Partnership recognized
income of $4,117,000, $4,625,000 and $4,246,000 and expenses of $4,486,000,
$5,004,000 and $4,679,000, resulting in a net loss of $369,000, for the year
ended December 31, 2000, $379,000 for the year ended December 31, 1999, and a
net loss of $434,000 for the year ended December 31, 1998.
Lease income decreased by 11% in 2000 from 1999 primarily due to operating
leases that matured in 2000. In 2000 the partnership expended approximately
$98,000 in cash and assumed debt of $721,000 to acquire 41 additional leases.
Interest income decreased to $11,000 for the year ended December 31, 2000
from $27,000 for the year ended December 31, 1999, and $33,000 for the year
ended December 31, 1998 as a result of cash being used to purchase additional
computer equipment and pay Limited Partners' distributions.
Operating expenses, excluding depreciation, consist of accounting, legal,
outside service fees and reimbursement of expenses to Com Cap Corp., a
related party (see Item 10), for administration and operation of the
Partnership. The increase to $241,000 during the year ended December 31, 2000
from $233,000 during the year ended December 31, 1999 is attributable to
reimbursable expenses in connection with the administration and operation of
the Partnership charged by Com Cap Corp.
The equipment management fee is approximated 5% of the gross lease revenue
attributable to equipment that is subject to operating leases. The equipment
management fee decreased to $222,000 during the year ended December 31, 2000
from $230,000 during the year ended December 31, 1999 and increased from
$211,000, during the year ended December 31, 1998, which is consistent with the
change in lease income.
Depreciation and amortization expenses consist of depreciation on computer
equipment, amortization of organization costs (for 1999 and 1998 only),
equipment acquisition fees and debt placement fees. The decrease to
$3,517,000 during the year ended December 31, 2000 from $3,977,000 and
$3,909,000 during the year ended December 31, 1999 and 1998, respectively, is
attributable to the decrease in the computer equipment portfolio being
leased.
In 2000, the Partnership recorded Bad Debt Expense of $45,000 as a result of
management's analysis that certain amounts receivable were deemed
uncollectible.
The Partnership sold computer equipment with a net book value of $569,000 during
the year ended December 31, 2000, for a net loss of $138,000 and in the year
ended December 31, 2000, the Partnership sold equipment with a net book value
of $57,000 for a net loss of $8,000.
The Partnership identified specific computer equipment and associated equipment
acquisition costs, which were reevaluated due to technological changes. The
Partnership determined that no impairment had occurred for the year ended
December 31, 2000. In 1999 and 1998 the Partnership determined that the carrying
amount of certain assets was greater than the undiscounted cash flows to be
generated by these assets and therefore recorded a charge of $181,000 and
$428,000 to depreciation expense to record the assets at their estimated fair
value in the year ended December 31, 1999 and 1998, respectively.
NET LOSS
As a result of the above factors, net loss decreased to $369,000 in 2000
from $379,000 and $434,000, in 1999 and 1998, 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
See financial statements commencing in Part IV Item 14.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 14, 2000 the Partnership informed the accounting firm of Ernst
& Young LLP ("E&Y") that the Partnership would not retain it to audit the
Partnership's financial statements for the year ended December 31, 2000. E&Y had
been the Partnerships' principal accountants since the fiscal year ended
December 31, 1995. The report of E&Y on the financial statements of the
Partnership for the two most recent fiscal years did not contain an adverse
opinion or a disclaimer of opinion, and was not qualified or modified as to
uncertainty, audit scope or accounting principles. The partnership has had no
disagreements with its former principal accountants on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure which disagreements, if not resolved to the satisfaction of the former
accountants, would have caused it to make reference to the subject matter of
disagreements in connection with its report relating to the audits for the
fiscal years ended December 31, 1999 and 1998 or during the period from January
1, 2000 to December 14, 2000.
The Partnership's decision not to retain E&Y was not based on the expectation
that any disagreement would arise in connection with the audit of its financial
statements for the year ended December 31, 2000. The decision not to retain E&Y
was made by the Partnership's Board of Directors.
On December 13, 2000 the Partnership approved the accounting firm of BDO Seidman
LLP as its principal accountants.
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.
Salvatore R. Barila Assistant Vice President and Controller of the
General Partner and 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 66, 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 41, wife of George Springsteen, 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 49, 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.
Salvatore R. Barila, age 30, is Controller of the General Partner and
Com Cap Corp. and certain of its subsidiaries where he has been employed
since 2000. From 1992 to 2000, Mr. Barila was employed as Corporate
Accounting Manager of RCG Information Technology, Inc. Mr. Barila received a
BS degree in Accounting from Pace University in 1992. Mr. Barila is a member
of the Equipment leasing Association.
John A. Conboy III, age 54, 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 58, 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 INCURRED INCURRED INCURRED
COMPENSATION TYPE OF COMPENSATION DURING 2000 DURING 1999 DURING 1998
`
OFFERING AND ORGANIZATION STAGE
The General Partner Organizational Fee. An Organization $0 $0 $0
Fee equal to 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 $91,000 $84,000 $72,000
and its Affiliates and its 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 $33,000 $57,000 $223,000
Acquisition 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 $7,000 $12,000 $40,000
arranging 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 $222,000 $230,000 $211,000
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) 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 $0 $0 $0
providing 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 $0 $0 $0
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.
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
parties.
The General Partner Partnership Interest. The General $9,122 $8,917 $9,330
Partner has a 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.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(a) (1) Financial Statements.
Commonwealth Income & Growth Fund II
Reports of Independent Certified Public Accountants
Balance Sheets as of December 31, 2000 and 1999
Statements of Operations for each of the three years ended December
31, 2000, 1999, and 1998.
Statements of Partners' Capital for each of the three years ended
December 31, 2000, 1999 and 1998.
Statements of Cash Flows for each of the three years ended December
31, 2000, 1999 and 1998.
Notes to Financial Statements
Commonwealth Income & Growth Fund, Inc.
Report of Independent Auditors
Balance Sheet as of February 29, 2000
Notes to Balance Sheet
Commonwealth Capital Corp.
Report of Independent Auditors
Consolidated Balance Sheet as of February 29, 2000
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
**10.1 Agency Agreement dated as of May 12, 1995 by and among the
Partnership, the General Partner and Wheat First Securities,
Inc.
* Incorporated by reference from the Partnership's
Registration Statement on Form S-1 (Registration No.
33-89476)
** Incorporated by reference for the Partnership's Annual
Report on Form 10-K for the year ended December 31, 1995.
(b) Reports on Form 8-K
On December 15, 2000, the partnership filed Form 8-K indicating on
Item 4, the registrant changed certifying accountants.
The Board of Directors of the Company approved the engagement of BDO
Seidman, LLP, at 1700 Market Street, Philadelphia, PA 19103-3592, as
its independent auditors for the fiscal year ended December 31,
2000. This is to replace the firm of Ernst & Young LLP, who were
dismissed as auditors of the Company. The audit committee of the
Board of Directors approved the change in auditors on December 13,
2000.
COMMONWEALTH INCOME & GROWTH FUND II
CONTENTS
================================================================================
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3-4
FINANCIAL STATEMENTS
Balance sheets 5-6
Statements of operations 7
Statements of partners' capital 8
Statements of cash flows 9-10
NOTES TO FINANCIAL STATEMENTS 11-22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Partners
Commonwealth Income & Growth Fund II
Berwyn, Pennsylvania
We have audited the accompanying balance sheet of Commonwealth Income & Growth
Fund II as of December 31, 2000, and the related statements of operations,
partners' capital, and cash flows for the year ended December 31, 2000. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards
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 audit provides 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 II at December 31, 2000, and the results of its operations and its cash
flows for the year ended December 31, 2000, in conformity with generally
accepted accounting principles in the United States.
/s/ BDO Seidman, LLP
Philadelphia, Pennsylvania
April 3, 2001
3
Report of Independent Auditors
The Partners
Commonwealth Income & Growth Fund II
We have audited the accompanying balance sheets of Commonwealth Income & Growth
Fund II as of December 31, 1999, and the related statements of operations,
partners' capital, and cash flows for each of the two 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 II at December 31, 1999, and the results of its operations and its cash
flows for each of the two 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
4
================================================================================
DECEMBER 31, 2000 1999
- ---------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 277,719 $ 52,323
Lease income receivable 457,245 300,507
Accounts receivable, General Partner -- 34,918
Prepaid fees 3,200 --
Interest and other receivables -- 30,689
- ---------------------------------------------------------------------------------------------------
738,164 418,437
- ---------------------------------------------------------------------------------------------------
Computer equipment, at cost 12,308,364 15,099,876
Accumulated depreciation (8,769,499) (8,294,526)
- ---------------------------------------------------------------------------------------------------
3,538,865 6,805,350
- ---------------------------------------------------------------------------------------------------
EQUIPMENT ACQUISITION COSTS AND DEFERRED EXPENSES, net of
accumulated amortization of $475,304 and $474,458, respectively 110,619 232,635
- ---------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 4,387,648 $ 7,456,422
===================================================================================================
5
COMMONWEALTH INCOME & GROWTH FUND II
BALANCE SHEETS
================================================================================
DECEMBER 31, 2000 1999
- --------------------------------------------------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Accounts payable $ 91,570 $ 87,558
Accounts payable, General Partner 5,501 --
Accounts payable, Commonwealth Capital Corp. 62 --
Accounts payable, affiliated limited partnerships 4,329 --
Unearned lease income 33,386 162,934
Notes payable 1,665,816 3,326,191
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 1,800,664 3,576,683
- --------------------------------------------------------------------------------
PARTNERS' CAPITAL
General Partner 1,000 1,000
Limited partners 2,585,984 3,878,739
- --------------------------------------------------------------------------------
TOTAL PARTNERS' CAPITAL 2,586,984 3,879,739
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $4,387,648 $7,456,422
================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
COMMONWEALTH INCOME & GROWTH FUND II
STATEMENTS OF OPERATIONS
================================================================================
YEAR ENDED DECEMBER 31, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------
INCOME
Lease $ 4,105,811 $ 4,598,009 $ 4,212,862
Interest and other 11,359 26,894 32,798
- ------------------------------------------------------------------------------------------------------
TOTAL INCOME 4,117,170 4,624,903 4,245,660
- ------------------------------------------------------------------------------------------------------
EXPENSES
Operating, excluding depreciation 241,150 232,565 135,840
Equipment management fee, General Partner 221,768 229,900 210,643
Depreciation 3,516,828 3,976,511 3,908,603
Amortization of organization costs, equipment
acquisition costs, and deferred expenses 162,722 258,696 220,296
Interest 160,897 298,121 204,022
Uncollectible accounts receivable 45,000 -- --
Loss on sale of computer equipment 138,014 8,447 --
- ------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 4,486,379 5,004,240 4,679,404
- ------------------------------------------------------------------------------------------------------
NET (LOSS) $ (369,209) $ (379,337) $ (433,744)
- ------------------------------------------------------------------------------------------------------
NET (LOSS) PER EQUIVALENT LIMITED PARTNERSHIP
UNIT $ (.80) $ (.84) $ (.96)
WEIGHTED AVERAGE NUMBER OF EQUIVALENT
LIMITED PARTNERSHIP UNITS OUTSTANDING DURING THE YEAR
461,817 461,817 461,817
======================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
COMMONWEALTH INCOME & GROWTH FUND II
STATEMENTS OF PARTNERS' CAPITAL
================================================================================
GENERAL LIMITED
PARTNER PARTNER GENERAL LIMITED
UNITS UNITS PARTNER PARTNERS TOTAL
- --------------------------------------------------------------------------------------------------
BALANCE, December 31, 1997 50 461,817 $ 1,000 $ 6,516,474 $ 6,517,474
Net income (loss) -- -- 9,330 (443,074) (433,744)
Distributions -- -- (9,330) (923,634) (932,964)
- --------------------------------------------------------------------------------------------------
BALANCE, December 31, 1998 50 461,817 1,000 5,149,766 5,150,766
Net income (loss) -- -- 8,917 (388,254) (379,337)
Distributions -- -- (8,917) (882,773) (891,690)
- --------------------------------------------------------------------------------------------------
BALANCE, December 31, 1999 50 461,817 1,000 3,878,739 3,879,739
Net income (loss) -- -- 9,122 (378,331) (369,209)
Distributions -- -- (9,122) (914,424) (923,546)
- --------------------------------------------------------------------------------------------------
BALANCE, December 31, 2000 50 461,817 $ 1,000 $ 2,585,984 $ 2,586,984
==================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
COMMONWEALTH INCOME & GROWTH FUND II
STATEMENTS OF CASH FLOWS
================================================================================
YEAR ENDED DECEMBER 31, 2000 1999 1998
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (369,209) $ (379,337) $ (433,744)
Adjustments to reconcile net (loss) to net cash
provided by operating activities
Depreciation and amortization 3,679,550 4,235,207 4,128,899
Loss (gain) on sale of computer
equipment 138,014 8,447 (493)
Other noncash activities included in
determination of net loss (2,381,576) (2,626,791) (1,558,644)
Changes in assets and liabilities
(Increase) decrease in assets
Lease income receivable (156,738) (53,577) (133,430)
Accounts receivable/payable,
General Partner 40,419 (20,408) 1,311
Interest and other receivables 30,689 (19,962) (10,627)
Prepaid fees (3,200) -- --
Increase (decrease) in liabilities
Accounts payable 4,012 (5,505) (3,263)
Accounts payable,
Commonwealth Capital Corp.
62 -- (68,265)
Accounts payable, affiliated
limited partnerships 4,329 -- --
Other accrued expenses -- (42,000) 42,000
Unearned lease income (129,548) (14,678) (39,891)
- -------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 856,804 1,081,396 1,923,853
- -------------------------------------------------------------------------------------------------
9
COMMONWEALTH INCOME & GROWTH FUND II
STATEMENTS OF CASH FLOWS
================================================================================
YEAR ENDED DECEMBER 31, 2000 1999 1998
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures $ (98,453) $ (254,787) $(1,701,559)
Net proceeds from sale of computer
equipment 431,394 50,106 851,607
Equipment acquisition fees paid to the
General Partner (33,588) (57,407) (222,916)
- ------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 299,353 (262,088) (1,072,868)
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to partners (923,546) (891,690) (932,964)
Debt placement fee paid to the General
Partner (7,215) (11,503) (39,980)
- ------------------------------------------------------------------------------------------
NET CASH (USED IN) FINANCING ACTIVITIES (930,761) (903,193) (972,944)
- ------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 225,396 (83,885) (121,959)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 52,323 136,208 258,167
- ------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 277,719 $ 52,323 $ 136,208
==========================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
COMMONWEALTH INCOME & GROWTH FUND II
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. BUSINESS Commonwealth Income & Growth Fund II (the
"Partnership") is a limited partnership
organized in the Commonwealth of Pennsylvania
to acquire, own and lease 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 sell or otherwise dispose of all
of its computer equipment, make final
distributions to partners, and to dissolve.
Unless sooner terminated, the Partnership
will continue until December 31, 2006.
Allocations of income and distributions of
cash are based on the Partnership's Limited
Partnership Agreement (the "Agreement"). The
various allocations under the Agreement
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 2000, annual
cash distributions to limited partners were
made at a rate of 9.9% of their original
contributed capital. During 1999, annual cash
distributions to limited partners were made
at a rate of 9.5% of their original
contributed capital. During 1998, annual cash
distributions to limited partners were made
at a rate of 10% of their original
contributed capital. Distributions during
2000 reflect an annual return of capital in
the amount of approximately $1.98 per limited
partnership unit for units, which were
outstanding for the entire year.
Distributions during 1999 reflect an annual
return of capital in the amount of
approximately $1.90 per limited partnership
unit for units, which were outstanding for
the entire year. Distributions during 1998
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.
11
COMMONWEALTH INCOME & GROWTH FUND II
NOTES TO FINANCIAL STATEMENTS
================================================================================
2. SUMMARY OF REVENUE RECOGNITION
SIGNIFICANT
ACCOUNTING Through December 31, 2000, the Partnership
POLICIES has only entered into operating leases. Lease
revenue is recognized on a monthly basis in
accordance with the terms of the operating
lease agreements.
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.
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. The fair value is
determined based on estimated discounted cash
flows to be generated by the asset.
During 2000, 1999 and 1998, the Partnership
identified specific computer equipment and
associated equipment acquisition costs, which
were reevaluated due to technological
changes. In 2000, the Partnership determined
that no impairment had occurred. In 1999 and
1998, 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 $181,000 and $428,000 in
the fourth quarter of 1999 and 1998,
12
COMMONWEALTH INCOME & GROWTH FUND II
NOTES TO FINANCIAL STATEMENTS
================================================================================
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 four years.
INTANGIBLE ASSETS
Equipment acquisition costs and deferred
expenses, are amortized on a straight-line
basis over two- to-five 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, 2000 and 1999, cash equivalents were
invested in a money market fund investing
directly in Treasury obligations.
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, dealer manager fees,
professional fees and other offering expenses
13
COMMONWEALTH INCOME & GROWTH FUND II
NOTES TO FINANCIAL STATEMENTS
================================================================================
relating to the syndication. Selling
commissions are 7% of the partners'
contributed capital and dealer manager fees
are 2% of the partners' contributed capital.
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 limited
partners' equivalent units outstanding
during the year.
3. COMPUTER The Partnership is the lessor of equipment
EQUIPMENT under operating leases with periods ranging
from 22 to 48 months. In general, associated
costs such as repairs and maintenance,
insurance and property taxes are paid by the
lessee. Typically, at the end of the
operating lease periods, the lessees
continue to lease the equipment on a month-
to-month basis.
The following is a schedule of future minimum
rentals on noncancelable operating leases at
December 31, 2000:
YEAR ENDING DECEMBER 31, AMOUNT
- --------------------------------------------------------------------------------
2001 $ 1,343,311
2002 459,027
2003 205,095
- --------------------------------------------------------------------------------
$ 2,007,433
================================================================================
Lease income from one lessee, exceeding 10%
of lease revenue, represented 11% of lease
income for the year ended December 31, 2000.
Lease income from three lessees, each
exceeding 10% of total lease income,
aggregated 40% of lease income for the year
ended December 31, 1999. Lease income from
four lessees, each exceeding 10% of total
lease income, aggregated 55% of lease income
for the year ended December 31, 1998.
14
COMMONWEALTH INCOME & GROWTH FUND II
NOTES TO FINANCIAL STATEMENTS
================================================================================
As of December 31, 2000, four lessees
comprised approximately 85% of the
Partnership's accounts receivable.
4. RELATED PARTY ORGANIZATIONAL FEE
TRANSACTIONS
The General Partner is entitled to be paid an
Organizational Fee equal to three percent of
the first $10,000,000 of Limited Partners'
Capital Contributions and two percent of the
Limited Partners' Capital Contributions in
excess of $10,000,000, as compensation for
the organization of the Partnership. No
organizational fees were paid during 2000,
1999 and 1998.
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
Partner and its affiliates in connection with
the administration and operation of the
Partnership. During 2000, 1999 and 1998, the
Partnership recorded $91,000, $84,000 and
$72,000, respectively, for reimbursement of
expenses to the General Partner.
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 lease
thereof or sale under a conditional sales
contract. The fee was paid upon each closing
of the Offering with respect to the equipment
to be purchased by the Partnership with the
net proceeds for 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
15
COMMONWEALTH INCOME & GROWTH FUND II
NOTES TO FINANCIAL STATEMENTS
================================================================================
acquired. During 2000, 1999 and 1998,
equipment acquisition fees of approximately
$33,000, $57,000 and $223,000, respectively,
were paid to the General Partner.
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
2000, 1999 and 1998, debt placement fees of
approximately $7,000, $12,000 and $40,000,
respectively, were paid to the General
Partner. No debt placement fee was paid to
the General Partner.
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 2000,
1999 and 1998, equipment management fees of
approximately $222,000, $230,000 and
$211,000, respectively, were paid to the
General Partner as determined pursuant to
section (ii) above.
RELEASE FEE
As compensation for providing releasing
services for any equipment for which the
General Partner has, following the
16
COMMONWEALTH INCOME & GROWTH FUND II
NOTES TO FINANCIAL STATEMENTS
================================================================================
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
("Release"), the General Partner shall
receive, on a monthly basis, a Release 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 Release. There
were no such fees paid to the General Partner
in 2000, 1999 and 1998.
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
2000, 1999 and 1998.
5. NOTES PAYABLE Notes payable consisted of the following:
DECEMBER 31, 2000 1999
- --------------------------------------------------------------------------------
Installment notes payable to banks; interest
ranging from 6.4% to 8.2%, due in monthly
installments ranging from $3,976 to $33,736,
including interest, with final payments due
from February through December 2000. $ -- $ 962,101
17
COMMONWEALTH INCOME & GROWTH FUND II
NOTES TO FINANCIAL STATEMENTS
================================================================================
DECEMBER 31, 2000 1999
- --------------------------------------------------------------------------------
Installment notes payable to banks; interest
ranging from 6.35% to 8.5%, due in monthly
installments ranging from $4,209 to $33,736,
including interest, with final payments due
from February through December 2001. $ 533,527 $ 1,556,431
Installment notes payable to banks; interest
ranging from 6.6% to 9.25%, due in monthly
installments ranging from $108 to $14,928,
including interest, with final payments due
from January through November 2002. 470,521 807,659
Installment notes payable to banks; interest
ranging from 7.75% to 9.75%, due in monthly
installments ranging from $67 to $4,236,
including interest, with final payments due
from February through December 2003. 661,768 --
- --------------------------------------------------------------------------------
$ 1,665,816 $ 3,326,191
================================================================================
18
COMMONWEALTH INCOME & GROWTH FUND II
NOTES TO FINANCIAL STATEMENTS
================================================================================
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, 2000 are as
follows:
YEAR ENDING DECEMBER 31, AMOUNT
- --------------------------------------------------------------------------------
2001 $ 1,144,767
2002 330,079
2003 190,965
- --------------------------------------------------------------------------------
$ 1,665,811
- --------------------------------------------------------------------------------
6. SUPPLEMENTAL Other noncash activities included in the
CASH FLOW determination of net loss are as follows:
INFORMATION
YEAR ENDED DECEMBER 31, 2000 1999 1998
- -------------------------------------------------------------------------------------------
Lease income, net of interest expense on
notes payable realized as a result of direct
payment of principal by lessee to bank $2,381,576 $2,593,673 $1,536,818
Lease income paid to original lessor in lieu
of cash payment for computer equipment acquired
-- 33,118 21,826
- -------------------------------------------------------------------------------------------
Total adjustment to net loss from other
noncash activities $2,381,576 $2,626,791 $1,558,644
===========================================================================================
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.
19
COMMONWEALTH INCOME & GROWTH FUND II
NOTES TO FINANCIAL STATEMENTS
================================================================================
Noncash investing and financing activities
include the following:
YEAR ENDED DECEMBER 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Debt assumed in connection with purchase
of computer equipment $ 721,296 $1,150,335 $4,352,228
Computer equipment payable converted to a
note payable $ -- $ -- $ 502,721
================================================================================
7. RECONCILIATION OF NET
(LOSS) REPORTED FOR
FINANCIAL REPORTING
PURPOSES TO TAXABLE
(LOSS) INCOME ON THE
FEDERAL PARTNERSHIP RETURN
YEAR ENDED DECEMBER 31, 2000 1999 1998
- --------------------------------------------------------------------------------------------
Net (loss) for financial reporting purposes $ (369,209) $ (379,337) $ (433,744)
Adjustments
Depreciation 748,607 860,760 1,060,451
Amortization 150,046 181,893 179,834
Unearned lease income (3,276) (25,485) (65,610)
Loss on sale of computer equipment (707,768) (49,424) (455,968)
Other (15,357) (144,487) 22,247
- --------------------------------------------------------------------------------------------
Taxable (loss) income on the Federal Partnership
Return $ (196,957) $ 443,920 $ 307,210
============================================================================================
The "Adjustments-other" includes financial statement adjustments reflected as
the tax return in the subsequent year.
20
COMMONWEALTH INCOME & GROWTH FUND II
NOTES TO FINANCIAL STATEMENTS
================================================================================
8. QUARTERLY RESULTS Summarized quarterly financial data for the
OF OPERATION years ended December 31, 2000 and 1999 is as
(UNAUDITED) follows:
QUARTER ENDED *
--------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ------------------------------------------------------------------------------------------------
2000
Revenues
Lease and other $ 1,126,872 $ 1,084,003 $ 1,001,721 $ 904,574
Gain on sale of computer equipment -- -- -- --
- ------------------------------------------------------------------------------------------------
Total revenues $ 1,126,872 $ 1,084,003 $ 424,477 $ 320,021
- ------------------------------------------------------------------------------------------------
Costs and expenses
Costs and expenses 1,167,462 1,126,882 1,004,417 1,049,604
Loss on sale of computer equipment 7,504 18,507 58,535 53,468
- ------------------------------------------------------------------------------------------------
Total cost and expenses 1,174,966 1,145,389 1,062,952 1,103,072
- ------------------------------------------------------------------------------------------------
Net (loss) $ (48,094) $ (61,386) $ (61,231) $ (198,498)
================================================================================================
(Loss) per limited
partner unit $ (0.10) $ (0.13) $ (0.13) $ (0.43)
================================================================================================
21
COMMONWEALTH INCOME & GROWTH FUND II
NOTES TO FINANCIAL STATEMENTS
================================================================================
QUARTER ENDED *
--------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- -------------------------------------------------------------------------------------------------
1999
Revenues
Lease and other $ 1,135,320 $ 1,160,174 $ 1,163,600 $ 1,165,809
Gain on sale of computer equipment -- -- -- --
- -------------------------------------------------------------------------------------------------
Total revenues $ 1,135,320 $ 1,160,174 $ 1,163,600 $ 1,165,809
- -------------------------------------------------------------------------------------------------
Costs and expenses
Costs and expenses 1,200,786 1,273,319 1,154,072 1,367,616
Loss on sale of computer equipment -- -- 8,447 --
- -------------------------------------------------------------------------------------------------
Net income (loss) $ (65,466) $ (113,145) $ 1,081 $ (201,807)
=================================================================================================
Income (loss) per limited
partner unit $ (0.14) $ (0.24) $ .01 $ (.44)
=================================================================================================
Net (loss) for the quarters ended March 31, 2000, June 30, 2000 and
September 30, 2000 decreased by approximately $47,000, $54,000 and $30,000,
respectively, due to decreases in the gain (loss) on sale of computer
equipment. The partnership will file new quarterly reports to reflect these
changes. The cumulative gain or loss on sale of equipment is included in
revenues or costs as appropriate.
Net income (loss) for the quarter ended September 30, 1999 decreased by
approximately $50,000 due to a decrease in the gain (loss) on sale of
computer equipment.
* Restated for the first, second and third quarters for the year ended
December 31, 2000 and the third quarter 1999.
9. FOURTH QUARTER During the fourth quarter of 2000, the
ADJUSTMENTS Partnership recorded bad debts of
approximately $45,000.
22
COMMONWEALTH INCOME & GROWTH FUND, INC.
(An Indirect Wholly-Owned Subsidiary
of Commonwealth Capital Corp.)
BALANCE SHEET
FEBRUARY 29, 2000
COMMONWEALTH INCOME & GROWTH FUND, INC.
(An Indirect Wholly-Owned Subsidiary
of Commonwealth Capital Corp.)
FEBRUARY 29, 2000
TABLE OF CONTENTS
PAGE
----
INDEPENDENT AUDITOR'S REPORT 1
BALANCE SHEET 2
NOTES TO BALANCE SHEET 3
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 29, 2000. 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 29, 2000, in conformity with generally accepted accounting
principles.
Fishbein & Company, P.C.
Elkins Park, Pennsylvania
May 22, 2000
COMMONWEALTH INCOME & GROWTH FUND, INC
(An Indirect Wholly-Owned Subsidiary
of Commonwealth Capital Corp.)
BALANCE SHEET
FEBRUARY 29, 2000
ASSETS
Cash $ 500
Investment in Partnerships 3,000
-----------
$ 3,500
-----------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Accrued expenses $ 200
Due to parent 468
Due to income funds 1,732
-----------
2,400
-----------
STOCKHOLDER'S 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
-----------
$ 3,500
-----------
See notes to balance sheet.
COMMONWEALTH INCOME & GROWTH FUND, INC.
(An Indirect Wholly-Owned Subsidiary
of Commonwealth Capital Corp.)
NOTES TO BALANCE SHEET
FEBRUARY 29, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. 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 non-interest 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
$1,000,000. 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.
b. Use of Estimates
The preparation of the balance sheet 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. Actual results could differ from
those estimates.
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 notes to balance sheet.
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
TABLE OF CONTENTS
PAGE
----
INDEPENDENT AUDITOR'S REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets 2
Statements of operations and retained earnings 3
Statements of cash flows 4
Notes to financial statements 5 - 11
INDEPENDENT AUDITOR'S REPORT
Stockholder
Commonwealth Capital Corp.
We have audited the accompanying consolidated balance sheets of
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES as of February 29, 2000 and February
28, 1999, and the related consolidated statements of operations and retained
earnings and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Commonwealth
Capital Corp. and Subsidiaries as of February 29, 2000 and February 28, 1999,
and the consolidated results of their operations and their consolidated cash
flows for the years then ended in conformity with generally accepted accounting
principles.
Fishbein & Company, P.C.
Elkins Park, Pennsylvania
May 22, 2000
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
February 29, February 28,
2000 1999
---------- ----------
Cash and cash equivalents $ 27,162 $ 28,544
Receivables from Income Funds 255,035 346,272
Other receivables 59,736 64,754
Minimum lease payments receivable -- Net of
unearned interest income of $ 1,725,985 -- 2000
and $ 2,804,813 -- 1999 4,715,000 5,260,000
Investment in income funds 12,666 16,200
Office furniture and equipment -- Net of
accumulated depreciation of $ 112,918 -- 2000
and $ 108,789 -- 1999 6,520 10,649
Deferred offering costs 8,192 257,673
Other assets 6,890 9,042
---------- ----------
$5,091,201 $5,993,134
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 75,713 $ 141,265
Due to Income Funds 61,255 63,382
Nonrecourse obligations 4,715,000 5,260,000
---------- ----------
4,851,968 5,464,647
---------- ----------
STOCKHOLDER'S EQUITY
Common stock -- Par value $ 1
Authorized 1,000 shares
Issued and outstanding 10 shares 10 10
Retained earnings 239,223 528,477
---------- ----------
239,233 528,487
---------- ----------
$5,091,201 $5,993,134
---------- ----------
See notes to consolidated financial statements.
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Year Ended Year Ended
February 29, February 28,
2000 1999
----------- -----------
INCOME
Fee income from Income Funds $ 972,246 $ 1,079,691
Commission income 49,432 15,576
Interest income on minimum lease
payments receivable 358,828 395,375
Equity in income of Income Funds 43,832 44,231
Interest and miscellaneous 21,822 96,597
----------- -----------
1,446,160 1,631,470
----------- -----------
EXPENSES
Personnel 669,538 770,209
General and administrative 534,984 512,862
Selling 167,935 115,732
Interest expense on nonrecourse obligations 358,828 395,375
Depreciation 4,129 10,677
----------- -----------
1,735,414 1,804,855
----------- -----------
NET LOSS (289,254) (173,385)
RETAINED EARNINGS -- BEGINNING 528,477 701,862
----------- -----------
RETAINED EARNINGS -- ENDING $ 239,223 $ 528,477
----------- -----------
See notes to consolidated financial statements.
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended
February 29, February 28,
2000 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($289,254) ($173,385)
Adjustments to reconcile net loss to net
cash used in operating activities
Equity in income of Income Funds (43,832) (44,231)
Depreciation 4,129 10,677
Changes in operating assets and liabilities:
Receivables from Income Funds 91,237 (155,523)
Other receivables 5,018 49,853
Income tax refunds receivable 50,000
Deferred offering costs 249,481 (34,003)
Other assets 2,252 2,689
Accounts payable and accrued expenses (65,552) (111,722)
--------- ---------
Net cash used in operating activities (46,621) (405,645)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Repayment of advances to Income Funds 232,000
Distributions from Income Funds 45,239 61,500
Investment in Income Funds (1,000)
Purchase of office furniture and equipment (1,400)
--------- ---------
Net cash provided by investing activities 45,239 291,100
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES -- None
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,382) (114,545)
CASH AND CASH EQUIVALENTS -- BEGINNING 28,544 143,089
--------- ---------
CASH AND CASH EQUIVALENTS -- ENDING $ 27,162 $ 28,544
--------- ---------
See notes to consolidated financial statements.
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
1. NATURE OF BUSINESS
Commonwealth Capital Corp., through its wholly-owned subsidiary, Commonwealth
of Delaware, Inc. (CDI), primarily leases various types of computer
peripheral equipment and related equipment to U.S. corporations and
institutions. Certain wholly-owned 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. CDI's 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 & 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 the
payment of fees to the Company, 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.
Commission income is earned by Commonwealth Capital Securities Corp., which
sells units of its affiliated partnerships through broker-dealer firms to
their respective customers throughout the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. 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.
The balance sheets are presented on an unclassified basis in accordance
with leasing industry practice.
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
b. 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.
c. Cash and Cash Equivalents
The Company maintains its cash balances in several financial institutions.
The balances in each institution are insured (up to $100,000) by the
Federal Deposit Insurance Corporation or the Securities Investor
Protection Corporation. At times, the balances may exceed federally
insured limits. The Company has not experienced any losses in such
accounts, and believes it is not exposed to any significant credit risk on
cash.
The Company considers all highly-liquid investments purchased with a
maturity of three months or less to be cash equivalents. At February 29,
2000 and February 28, 1999, cash equivalents consist of a money market
fund which invests in U.S. Treasury obligations.
d. Investment in Income Funds
The Company accounts for its 1% interests in the Income Funds by the
equity method. In 1999 and 1998, certain Income Funds had liabilities in
excess of their assets. As the Company is obligated to fund any
liabilities in excess of assets, the Company has reduced its investment in
Income Funds and recorded a Due to Income Funds of $61,255 and $63,382 at
February 29, 2000 and February 28, 1999, of which ($2,127) and $17,269 was
incurred during the years ended February 29, 2000 and February 28, 1999,
respectively. Financial information of the Income Funds as of December 31,
1999 and 1998, is as follows:
December 31,
---------------------------------
1999 1998
----------- -----------
Total assets $18,025,000 $24,883,000
Nonrecourse debt 7,214,000 9,234,000
Other liabilities 2,216,000 1,068,000
Partners' capital 8,595,000 14,581,000
Net loss (1,692,000) (721,000)
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d. Investment in Income Funds (Continued)
The Company has guaranteed the performance of certain nonmonetary
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
through noninterest-bearing demand notes. Such notes total approximately
$4,166,000 at February 29, 2000 and February 28, 1999, and have been
eliminated in consolidation.
Fee income earned by the Company from the Income Funds consists of: (1)
equipment acquisition fees (4% (as defined) of the purchase price of all
equipment purchased by the Income Funds), (2) debt placement fees (1% of
the cost of equipment financed by the Income Funds), (3) sales fees (3% of
the gross proceeds of equipment sold by the Income Funds), and (4)
equipment management fees (3% - 5% (as defined) of the gross operating
lease revenues of the Income Funds). Ongoing acquisition fees and
equipment management fees may be increased as an indirect result of
company loans.
Approximately 58% and 76% of fee income for the years ended February 29,
2000 and February 28, 1999, was from three Income Funds.
e. 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).
f. 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 29,
2000 and February 28, 1999, relate to an Income Fund whose offering period
expires in July, 2000.
g. Revenue Recognition
The Company recognizes fees as earned in accordance with the various
Limited 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.
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
h. Income Taxes
Deferred income taxes are provided as necessary for temporary differences
between the financial and tax bases of investment in Income Funds and
office furniture and equipment. The tax basis of investment in income
funds differs from financial reporting due to temporary differences
associated with ownership of general partnership interests in the various
Income Funds. Also, for income tax reporting, the cost of property and
equipment is being recovered using the methods and lives prescribed by the
Internal Revenue Code.
Deferred income tax assets are also recognized for net operating losses
and investment tax credit carryforwards that are available to offset
future income taxes. A valuation allowance is provided as necessary to
reduce the deferred income tax assets to the amount that is more likely
than not to be realized.
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 29, 2000 and February 28, 1999,
under these leases and certificates of participation are $4,715,000 and
$5,260,000, respectively, and are reflected as minimum lease payments
receivable and nonrecourse obligations in the accompanying balance sheets.
The certificates mature at various dates through 2011. The Company recognized
interest income and interest expense in connection with these leases of
$358,828 and $395,375 for the years ended February 29, 2000 and February 28,
1999, respectively.
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
3. LEASE COMMITMENTS (Continued)
Future minimum lease payments to be received as of February 29, 2000, are as
follows:
Year Ending February 28,
------------------------
2001 $ 906,935
2002 683,324
2003 684,490
2004 678,794
2005 676,097
Thereafter 2,811,345
----------
6,440,985
Less amount representing interest 1,725,985
----------
$4,715,000
==========
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 $155,000 and
$174,000 for the years ended February 29, 2000 and February 28, 1999,
respectively. Future minimum lease payments under noncancelable operating
leases as of February 29, 2000, are as follows:
Year Ending February 28,
------------------------
2001 $ 146,000
2002 141,000
2003 143,000
2004 146,000
----------
$ 576,000
==========
4. PROFIT SHARING PLAN
The Company has a profit sharing plan which covers substantially all of its
employees. Contributions to the plan may be made at the discretion of
management. No contributions to the plan were made or accrued for the years
ended February 29, 2000 and February 28, 1999.
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
5. RELATED PARTY TRANSACTIONS
For the year 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 fees in the amount of $28,907.
Accordingly, fee income from Income Funds is reflected net of these amounts.
No fees were waived or forgiven for the year ended February 29, 2000.
6. INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return.
The Company has net operating loss carryforwards of approximately $639,000
and investment tax credit carryforwards of approximately $109,000 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
------------------------ ------------- -----------
2001 $ 57,000
2002 52,000
2013 38,000
2019 149,000
2020 452,000
---------- ----------
$ 639,000 $ 109,000
========== ==========
The Company also has net operating loss carryforwards of approximately
$3,758,000 available to reduce future Pennsylvania state income taxes. If not
used, the carryforwards will expire as follows:
Year Ending February 28,
------------------------
2006 $ 147,000
2007 648,000
2008 973,000
2009 901,000
2010 1,089,000
----------
$3,758,000
==========
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
6. INCOME TAXES (Continued)
At February 29, 2000 and February 28, 1999, the cumulative temporary
differences resulted in net deferred tax assets or liabilities consisting
primarily of:
February 29, February 28,
2000 1999
------------ ------------
Deferred tax assets:
Other $ 4,500 $ 4,500
Investment tax credit carryforwards 37,100 52,400
Net operating loss carryforwards 465,000 287,000
Less valuation allowance (412,000) (266,000)
--------- ---------
Deferred tax assets, net 94,600 77,900
--------- ---------
Deferred tax liabilities:
Investment in Income Funds (94,200) (77,900)
Office furniture and equipment (400)
--------- ---------
Deferred tax liabilities, net (94,600) (77,900)
--------- ---------
Net deferred tax assets (liabilities) $ -- $ --
========= =========
The valuation allowance was increased by $146,000 and $29,000, respectively,
for the years ended February 29, 2000 and February 28, 1999.
7. SUPPLEMENTAL CASH FLOW INFORMATION
Other noncash activities associated with lease transactions:
Year Ended Year Ended
February 29, February 28,
2000 1999
------------ ------------
Reduction of minimum lease receivable and repayment of nonrecourse
obligation associated with direct payment made by
lessee to bank $ 545,000 $ 545,000
========== ==========