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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 33-69996
COMMONWEALTH INCOME & GROWTH FUND III
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2735641
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1160 West Swedesford Road
Berwyn, Pennsylvania 19312
(Address, including zip code, of principal executive offices)
(610) 647-6800
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (ii) has been subject to such filing
requirements for the past 90 days: YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified under applicable items herein)
Certain exhibits to the Company's Registration Statement on Form S-1 (File
No. 33-69996) and Annual Report on Form 10-K for the fiscal year ended December
31, 2000 are incorporated by reference as Exhibits in Part IV of this Report.
PART I
ITEM 1: BUSINESS
GENERAL
Commonwealth Income and Growth Fund III (the "Partnership") was formed on
April 17, 1997, 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 July 25, 1997 (the "Offerings"). On January 27, 1998,
the Partnership received and accepted subscription proceeds of $1,526,000, which
exceeded the minimum offering amount of $1,500,000 and the funds were released
from escrow. As of December 31, 2000, subscribers for 151,178 Units ($3,023,569)
had been 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 will utilize the net proceeds of the Offering to purchase IBM
and IBM compatible computer peripheral and other similar capital equipment. The
Partnership will utilize 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 plans to acquire and lease 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 anticipates acquiring predominately new Equipment,
the Partnership may purchase used Equipment. Generally, Equipment is acquired
from manufacturers, distributors, leasing companies, agents, owner-users,
owner-lessor, 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
which has previously been leased directly by the manufacturer to third parties
("vendor leasing agreements"). The Partnership and manufacturers may agree to
nonrecourse loans to the Partnership from the manufacturers to finance the
acquisition of Equipment secured by the Equipment and the receivables due to the
manufacturers from users of such Equipment. It is expected that the
manufacturers of Equipment will provide maintenance, remarketing and other
services for the Equipment subject to such agreements. As of December 31, 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 plans to acquire 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 that it has leased to 11 different companies
located throughout the United States. Approximately 14% of the Equipment
acquired by the Partnership consists of routers. Approximately 60% of the
Equipment acquired by the Partnership consists of workstations, printers,
department servers and enterprise servers. Approximately 26% of the Equipment
acquired by the Partnership consists of communication controllers. During the
operational stage of the Partnership, the Partnership may not at any one point
in time lease (or sell pursuant to a Conditional Sales Contract) more than 25%
of the Equipment to a single Person or Affiliated group of Persons.
DESCRIPTION OF LEASES
The Partnership intends 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 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 will be 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 by the Partnership, 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 that
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 $796,020 was less than 22% of the
aggregate cost of Equipment owned.
The Partnership may 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 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 that vary with the "prime" or "base"
rate. If lease revenues were fixed, a rise in the "prime" or "base" rate would
increase borrowing costs and reduce the amount of the Partnership's income and
cash available for distribution. Therefore, the General Partner is permitted to
borrow funds to purchase Equipment at fluctuating rates only if the lease for
such Equipment provides for fluctuating rental payments calculated on a similar
basis.
Any additional debt incurred by the Partnership must be nonrecourse.
Nonrecourse debt, in the context of the business to be conducted by the
Partnership, means that the lender providing the funds can look for security
only to the Equipment pledged as security and the proceeds derived from leasing
or selling such Equipment. Neither the Partnership nor any Partner (including
the General Partner) would be liable for repayment of any 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 that 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 2009. Notwithstanding the Partnership's
objective to sell all of its assets and dissolve in approximately by December
31, 2009, 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, 2009, 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 that 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 that 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 that 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 28, 2001, the Partnership has purchased the following
Equipment:
EQUIPMENT PURCHASE LIST MONTHLY LEASE
LESSEE MFG DESCRIPTION PRICE PRICE RENT TERM
Lucent SUN (12) Workstations $139,596 $ 239,340 $ 3,857 32
Lucent SUN Server 445,714 739,350 12,120 32
Chase SUN Server 252,681 394,360 6,493 36
Cendant SUN Server 131,470 221,095 3,216 36
Cendant SUN Server upgrade 40,382 39,590 1425 31
Chase STK Timberline drive 407,908 1,134,830 12,346 24
Chrysler IBM Controller 19,496 24,200 731 24
Chrysler IBM Controller 18,392 24,200 731 24
Kaiser IBM (7) Workstations 373,747 513,741 9,952 36
Kaiser IBM (4) Workstations 187,398 271,949 4,983 36
Kaiser CISCO (26) Routers 153,093 258,778 3,929 36
International Paper DEC (2) Servers 140,857 184,372 4,042 32
CMGI CISCO Server 140,579 187,345 3,973 35
CMGI SUN Workstations 24,342 32,029 937 24
AT&T ASX Controllers 58,048 59,106 1,654 36
GE Medical COMPAQ Servers 18,754 28,300 515 36
GE Medical COMPAQ Servers 21,716 32,750 596 36
GE Medical COMPAQ Servers 42,881 64,750 1,162 36
GE Medical COMPAQ Servers 56,039 84,525 1,573 36
GE Medical COMPAQ Servers 44,943 67,780 1,236 36
GE Medical Lexmark Printers 31,809 48,000 849 36
GE Medical Lexmark Printers 20,655 32,000 552 36
GE Medical Tektronix Monitors 48,252 99,350 1,845 36
CMGI CISCO Routers 88,103 115,168 2,495 36
Lennox BayNetwork Routers 441,115 441,115 3,465 36
Thomson Consumer Printronix Printers 233,298 325,862 6,343 36
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
funds by refinancing its Equipment or borrowing.
GENERAL RESTRICTIONS
Under the Partnership Agreement, the Partnership is not permitted, among
other things, to:
(a) invest in junior trust deeds unless received in connection with the
sale of an item of Equipment in an aggregate amount which does not exceed 30% of
the assets of the Partnership on the date of the investment;
(b) invest in or underwrite the securities of other issuers;
(c) acquire any Equipment for Units;
(d) issue senior securities (except that the issuance to lenders of notes
or other evidences of indebtedness in connection with the financing or
refinancing of Equipment or the Partnership's business shall not be deemed to be
the issuance of senior securities);
(e) make loans to any Person, including the General Partner or any of its
Affiliates, except to the extent a Conditional Sales Contract constitutes a
loan;
(f) sell or lease any Equipment to, lease any Equipment from, or enter into
any sale- leaseback transactions with, the General Partner or any of its
Affiliates; or
(g) give the General Partner or any of its Affiliates an exclusive right or
employment to sell the Partnership's Equipment.
The General Partner has also agreed in the Partnership Agreement to use its
best efforts to assure that the Partnership shall not be deemed an "investment
company" as such term is detained in the Investment Company Act of 1940.
The General Partner and its Affiliates may engage in other activities,
whether or not competitive with the Partnership. The Partnership Agreement
provides, however, that neither the General Partner nor any of its Affiliates
may receive any rebate or "give up" in connection with the Partnership's
activities or participate in reciprocal business arrangements that circumvent
the restrictions in the Partnership Agreement against dealings with Affiliates.
EMPLOYEES
The Partnership has no employees and received administrative and other
services from the General Partner which has 12 employees 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. 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. As of December 31, 2000, there were 166 holders 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 request
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 non-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, will be 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
Cumulative 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 Cumulative 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 Cumulative Return, the Adjusted Capital
Contributions will be reduced by the excess, decreasing the base on which the
Cumulative Return is calculated.
If the proceeds resulting from the sale of any Equipment are reinvested in
Equipment, sufficient cash will be distributed to the Partners to pay the
additional federal income tax resulting from such sale for a Partner in a 39.6%
federal income tax bracket or, if lower, the maximum federal income tax rate in
effect for individuals for such taxable year.
Generally, the General Partner is allocated Net Profits equal to its cash
distributions (but not less than one percent of Net Profits) and the balance is
allocated to the Limited Partners. Net Profits arising from transactions in
connection with the termination or liquidation of the Partnership are allocated
in the following order: (1) First, to each Partner in an amount equal to the
negative amount, if any, of his Capital Account; (2) Second, an amount equal to
the excess of the proceeds which would be distributed to the Partners based on
the Operating Distributions to the Partners over the aggregate Capital Accounts
of all the Partners, to the Partners in proportion to their respective shares of
such excess, and (3) Third, with respect to any remaining Net Profits, to the
Partners in the same proportions as if the distributions were Operating
Distributions. Net Losses, if any, are in all cases allocated 99% to the Limited
Partners and one percent to the General Partner.
Net Profits and Net Losses are computed without taking into account, in
each taxable year of the Partnership, any items of income, gain, loss or
deduction required to be specially allocated pursuant to Section 704(b) of the
Code and the Treasury Regulation promulgated thereunder. No Limited Partner is
required to contribute cash to the capital of the Partnership in order to
restore a closing Capital Account deficit, and the General Partner has only a
limited deficit restoration obligation under the Partnership Agreement.
Quarterly distributions in the following amounts were declared and paid to
the Limited Partners during 2000, 1999 and 1998.
QUARTER ENDED 2000 1999 1998
------------------------------------------------------------
March 31 $ 69,051 $ 51,493 $ 26,325
June 30 72,099 55,840 41,851
September 30 79,592 68,987 45,924
December 31 80,175 49,484 50,660
-------- -------- --------
$299,917 $225,804 $164,760
======== ======== ========
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 is 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 is
utilized during the Offering Period, whereby Net Profits and Net Losses
allocable to Limited Partners is 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 two years in the period ended December
31, 2000 and the period January 27, 1998 (Commencement of Operations) to
December 31, 1998. This table is qualified in its entirety by the more
detailed information and financial statements presented elsewhere in this
report, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes thereto included herein.
PERIOD
JANUARY 27,
1998
(COMMENCEMENT
OF OPERATIONS)
YEAR ENDED DECEMBER 31 TO
-------------------------- DECEMBER 31,
2000 1999 1998
-----------------------------------------
Lease Income $ 1,250,857 $ 937,851 $ 306,249
Net Income (Loss) (179,877) (308,734) 18,250
Cash Distributions 302,898 227,995 166,451
Net Income (Loss) per
Limited Partner Unit (1.25) (2.62) .16
Cash Distribution per
Limited Partner Unit 2.08 1.90 1.63
YEAR ENDED DECEMBER 31
----------------------------------------
2000 1999 1998
-------------------------------------------------------------
Total Assets $2,335,831 $2,745,817 $1,860,336
Notes Payable 796,020 976,142 8,442
Partner's Capital 1,525,781 1,683,632 1,760,998
Net income (loss) per unit is computed based upon net income allocated to
the Limited Partners and the weighted average number of equivalent Limited
Partners' Units outstanding during the period. 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 period.
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 January 27, 1998.
The Partnership's primary sources of capital for the years ended
December 31, 2000, 1999, and 1998 were from Partners' contributions of
$365,000, $516,000, and $2,142,000, respectively, and cash from operations of
$333,000, $209,000, and $272,000, respectively. The primary uses of cash for
the years ended December 31, 2000, 1999, and 1998 were for capital
expenditures for new equipment totaling $409,000, $730,000, and $1,449,000,
the payment of acquisition fees of $29,000, $66,000, and $73,000, the payment
of distributions to limited partners totaling $300,000, $226,000, and
$165,000, and the payment of offering costs totaling $40,000, $56,000, and
$235,000.
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
$100,000 and $129,000, 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.
This particular industry has experienced a decrease in lease rates during this
period due to an ongoing decrease in interest rates. As of December 31, 2000,
the Partnership had future minimum rentals on noncancellable operating leases of
$926,000 for the year ended 2001, and $483,000 thereafter. The Partnership
intends to purchase 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 $333,000, which includes net loss of $180,000
reduced by depreciation and amortization expenses of $971,000.
RESULTS FROM OPERATIONS
The Partnership commenced operation on January 27, 1998.
For the years ended December 31, 2000, 1999, and 1998, the Partnership
recognized income of $1,263,000, $954,000, and $344,000 and expenses of
$1,443,000, $1,263,000, and $326,000 resulting in net losses of $180,000 and
$309,000 for the years ended 2000 and 1999, and net income of $18,000 for 1998.
Interest income decreased 25% to $12,000 for the year ended December 31,
2000, from $16,000 for the year ended December 31, 1999 as a result of less
invested cash as distributions for the year ended December 31, 2000 were
made, whereas, for the year ended December 31, 1999 the cash was temporarily
being invested in money market accounts until being utilized for equipment
purchases.
Operating expenses, excluding depreciation, consist of accounting,
legal, outside service fees and reimbursement of expenses to Com Cap Corp., a
related party (see item 10), for administration and operation of the
Partnership. The decrease to $224,000 during the year ended December 31, 2000
from $275,000 during the year ended December 31, 1999 is attributable to less
reimbursable expenses with the administration and operation of the
Partnership charged by Com Cap Corp.
The equipment management fee is equal to 5% of the gross lease revenue
attributable to equipment that is subject to operating leases. The equipment
management fee increased to $63,000 for the year ended December 31, 2000, up
from $47,000 in 1999 and $16,000 in 1998 , which is consistent with the increase
of revenue.
Interest expense increased to $64,000 for 2000, from $55,000 and $1,000 for
1999 and 1998 respectively, as a result of the increase in debt from the
purchase of equipment.
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. Depreciation and
amortization during 2000 increased to $971,000 from $885,000 and $263,000 in
1999 and 1998 respectively, due to the purchase of equipment.
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 and 1998. 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
$115,000 to depreciation expense to record the assets at their estimated fair
value in the year ended December 31, 1999.
The Partnership sold computer equipment in 2000 with a net book value of
$178,000 for a net loss of $121,000.
NET (LOSS)
Net (loss) decreased to $180,000 for the year ended December 31, 2000 from
$309,000 for the year ended December 31, 1999, a decrease of $129,000. The
changes in net (loss) was attributable to the changes in revenues and expenses
as discussed above.
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 Partnership's principal accountants since the fiscal year
ended December 31, 1998. 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.
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.
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.
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 $11,000 $5,000 $64,000
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 $54,000 $26,000 $7,500
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 $29,000 $66,000 $73,000
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 $3,000 $12,000 $0
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 $63,000 $47,000 $15,000
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 $2,981 $2,191 $1,691
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 III
Reports of Independent Certified Public Accountants
Balance Sheets as of December 31, 2000 and 1999
Statements of Operations for the years ended December 31, 2000 and 1999 and the
period January 27, 1998 (commencement of operations) to December 31, 1998
Statement of Partners' Capital for the years ended December 31, 2000 and 1999
and the period January 27, 1998 (commencement of operations) to December 31,
1998
Statement of Cash Flows for the years ended December 31, 2000 and 1999 and the
period January 27, 1998 (commencement of operations) to December 31, 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
* Incorporated by reference from the Partnership's Registration
Statement on Form S-1 (Registration No. 333-26933)
** Incorporated by reference from the Partnership's Annual
Report on 10-K for the year ended December 31, 1998.
(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 III
CONTENTS
================================================================================
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3-4
REPORT OF INDEPENDENT AUDITORS
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 11-23
2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Partners
Commonwealth Income & Growth Fund III
Berwyn, Pennsylvania
We have audited the accompanying balance sheet of Commonwealth Income & Growth
Fund III 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 III 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 III
We have audited the accompanying balance sheets of Commonwealth Income &
Growth Fund III as of December 31, 1999, and the related statements of
operations, partners' capital, and cash flows for the year ended December 31,
1999 and for the period January 27, 1998 (commencement of operations) to
December 31, 1998. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with 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 III at December 31, 1999, and the results of its operations and its cash
flows for the year ended December 31, 1999 and for the period January 27,
1998 (commencement of operations) to December 31, 1998, 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 $ 110,730 $ 138,826
Lease income receivable 94,492 108,281
Accounts receivable, General Partner 16,683 3,567
Prepaid expenses 10,000 37
- ------------------------------------------------------------------------------------------------
231,905 250,711
- ------------------------------------------------------------------------------------------------
Computer equipment, at cost 3,673,656 3,355,144
Accumulated depreciation (1,636,102) (949,291)
- ------------------------------------------------------------------------------------------------
2,037,554 2,405,853
- ------------------------------------------------------------------------------------------------
EQUIPMENT ACQUISITION COSTS AND DEFERRED EXPENSES, net of
accumulated amortization of $100,681 and $61,939, respectively 66,372 89,253
- ------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,335,831 $ 2,745,817
================================================================================================
5
COMMONWEALTH INCOME & GROWTH FUND III
BALANCE SHEETS
================================================================================
DECEMBER 31, 2000 1999
- --------------------------------------------------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Accounts payable $ 14,009 $ 26,785
Accounts payable, Commonwealth Capital Corp. 21 --
Unearned lease income -- 59,258
Notes payable 796,020 976,142
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 810,050 1,062,185
- --------------------------------------------------------------------------------
PARTNERS' CAPITAL
General Partner 1,000 1,000
Limited partners 1,524,781 1,682,632
- --------------------------------------------------------------------------------
TOTAL PARTNERS' CAPITAL 1,525,781 1,683,632
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $2,335,831 $2,745,817
================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
COMMONWEALTH INCOME & GROWTH FUND III
STATEMENTS OF OPERATIONS
================================================================================
PERIOD
JANUARY 27,
1998
(COMMENCE-
MENT OF
YEAR ENDED OPERATIONS)
DECEMBER 31, TO
DECEMBER 31,
2000 1999 1998
- --------------------------------------------------------------------------------------------------------
INCOME
Lease $ 1,250,857 $ 937,851 $ 306,249
Interest and other 12,132 16,107 37,797
- --------------------------------------------------------------------------------------------------------
TOTAL INCOME 1,262,989 953,958 344,046
- --------------------------------------------------------------------------------------------------------
EXPENSES
Operating, excluding depreciation 223,838 275,066 46,632
Equipment management fee, General Partner 63,345 46,893 15,313
Depreciation 916,258 826,051 238,240
Amortization of organization costs, equipment
acquisition costs, and deferred expenses 54,624 59,412 25,027
Interest 64,205 55,270 584
Loss on sale of computer equipment 120,596 -- --
- --------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 1,442,866 1,262,692 325,796
- --------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME $ (179,877) $ (308,734) $ 18,250
========================================================================================================
NET (LOSS) INCOME PER EQUIVALENT LIMITED
PARTNERSHIP UNIT $ (1.25) $ (2.62) $ .16
WEIGHTED AVERAGE NUMBER OF EQUIVALENT
LIMITED PARTNERSHIP UNITS OUTSTANDING DURING THE PERIOD 143,877 118,562 100,707
========================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
COMMONWEALTH INCOME & GROWTH FUND III
STATEMENTS OF PARTNERS' CAPITAL
================================================================================
GENERAL LIMITED
PARTNER PARTNER GENERAL LIMITED
UNITS UNITS PARTNER PARTNERS TOTAL
- ----------------------------------------------------------------------------------------------------------
Initial contribution and balance
at commencement of operations 50 25 $ 1,000 $ 500 $ 1,500
Contributions January 27, 1998
through December 31, 1998 -- 107,117 -- 2,142,340 2,142,340
Offering costs -- -- -- (234,641) (234,641)
Net income -- -- 1,691 16,559 18,250
Distributions -- -- (1,691) (164,760) (166,451)
- ----------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1998 50 107,142 1,000 1,759,998 1,760,998
Contributions -- 25,792 -- 515,849 515,849
Offering costs -- -- -- (56,486) (56,486)
Net income (loss) -- -- 2,191 (310,925) (308,734)
Distributions -- -- (2,191) (225,804) (227,995)
- ----------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1999 50 132,934 1,000 1,682,632 1,683,632
Contributions -- 18,244 -- 364,878 364,878
Offering costs -- -- -- (39,954) (39,954)
Net income (loss) -- -- 2,981 (182,858) (179,877)
Distributions -- -- (2,981) (299,917) (302,898)
- ----------------------------------------------------------------------------------------------------------
BALANCE, December 31, 2000 50 151,178 $ 1,000 $ 1,524,781 $ 1,525,781
==========================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
COMMONWEALTH INCOME & GROWTH FUND III
STATEMENTS OF CASH FLOWS
================================================================================
PERIOD
JANUARY 27,
1998
(COMMENCE-
MENT OF
YEAR ENDED OPERATIONS)
DECEMBER 31, TO
DECEMBER 31,
2000 1999 1998
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (179,877) $ (308,734) $ 18,250
Adjustments to reconcile net (loss) income to
net cash provided by operating activities
Depreciation and amortization 970,882 885,463 263,267
Loss on sale of computer equipment 120,596 -- --
Other noncash activities included in
determination of net (loss) income (497,772) (318,386) (10,454)
Changes in assets and liabilities
(Increase) decrease in assets
Lease income receivable 13,789 (42,552) (65,729)
Accounts receivable, General
Partner (13,116) (3,916) 349
Prepaid expenses (9,963) 1,875 (1,912)
Organization costs paid to the
General Partner -- -- (22,500)
Increase (decrease) in liabilities
Accounts payable (12,776) (11,570) 38,355
Accounts payable,
Commonwealth Capital Corp. 21 -- --
Unearned lease income (59,258) 7,066 52,192
- -------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 332,526 209,246 271,818
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (408,770) (730,316) (1,448,552)
Net proceeds from sale of equipment 57,864 -- --
Equipment acquisition fees paid to the
General Partner (28,531) (66,279) (72,527)
- -------------------------------------------------------------------------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES (379,437) (796,595) (1,521,079)
- ------------------------------------------------------------------------------------------------
9
COMMONWEALTH INCOME & GROWTH FUND III
STATEMENTS OF CASH FLOWS
================================================================================
PERIOD
JANUARY 27,
1998
(COMMENCE-
MENT OF
YEAR ENDED OPERATIONS)
DECEMBER 31, TO
DECEMBER 31,
2000 1999 1998
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Partners contributions $ 364,878 $ 515,849 $ 2,142,340
Proceeds from note payable -- -- 13,706
Offering costs paid to affiliate (32,839) (46,426) (192,856)
Offering costs paid to the General Partner (7,115) (10,060) (41,785)
Distributions to partners (302,898) (227,995) (166,451)
Debt placement fee paid to the General Partner (3,211) (12,386) --
- -----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 18,815 218,982 1,754,954
- -----------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (28,096) (368,367) 505,693
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 138,826 507,193 1,500
- -----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 110,730 $ 138,826 $ 507,193
===============================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
1. THE PARTNERSHIP Commonwealth Income & Growth Fund III (the
"Partnership") is a limited partnership
organized in the Commonwealth of
Pennsylvania. The Partnership offered for
sale up to 750,000 Units of the limited
partnership at the purchase price of $20 per
unit (the "Offering"). The Offering was
terminated at the close of business on July
31, 2000 by the General Partner. The
Partnership uses the proceeds of the Offering
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, 2009.
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. For a limited
partner's unit outstanding for all of 2000,
distributions during 2000 reflect an annual
return of original contributed capital in the
amount of approximately $2.08 per limited
partnership unit. For a limited partner's
unit outstanding for all of 1999,
distributions during 1999 reflect a return of
original contributed capital in the amount of
approximately $1.90 per limited partnership
unit. For a limited partner's unit
outstanding from the Offering's first close
on January 27, 1998, distributions during
1998 reflected a return of original
contributed capital in the amount of
approximately $1.63 per limited partnership
unit. (For a limited partner's unit acquired
during either 1998, 1999 or 2000, the return
of capital would be less than these amounts.)
Annual cash distributions to all partners in
subsequent years will be made at a rate of
10% of original
11
contributed capital. In the event the
Partnership is unable to distribute
sufficient cash to meet the intended
preferred distribution, such amounts will be
deferred with no interest until sufficient
cash flow is available, as determined by the
General Partner or until the liquidation of
the Partnership. The Partnership may also
reduce distributions to its partners if it
deems necessary.
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. Fair value is determined
based on estimated discounted cash flows to
be generated by the asset.
During 2000, the Partnership identified
specific computer equipment and associated
equipment acquisition costs, which were
12
reevaluated due to technological changes. In
2000, the Partnership determined that no
impairment had occurred. In 1999, 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 $115,000 in the fourth quarter of
1999 to record the assets at their estimated
fair value. Such amounts have been included
in depreciation expense in the accompanying
financial statements. There were no
adjustments during 1998.
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.
13
OFFERING COSTS
Offering costs are payments for selling
commissions, dealer manager fees,
professional fees and other offering expenses
relating to the syndication. Selling
commissions are 7% of the partners'
contributed capital and dealer manager fees
are 2% of partners' contributed capital.
These costs are deducted from partnership
capital in the accompanying financial
statements.
NET (LOSS) INCOME PER EQUIVALENT LIMITED
PARTNERSHIP UNIT
The net (loss) income per equivalent limited
partnership unit is computed based upon net
(loss) income allocated to the limited
partners and the weighted average number of
equivalent limited partner units outstanding
during the period.
3. COMPUTER The Partnership is the lessor of equipment
EQUIPMENT under operating leases with periods ranging
from 24 to 36 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 $ 925,664
2002 379,863
2003 102,974
- --------------------------------------------------------------------------------
$ 1,408,501
================================================================================
14
Lease income from two lessees, each exceeding
10% of lease revenue, aggregated 30% of lease
income for the year ended December 31, 2000.
Lease income from four lessees, each
exceeding 10% of total lease income,
aggregated 80% of lease income for the year
ended December 31, 1999. Lease income from
two lessees, each exceeding 10% of total
lease income, aggregated 88% of lease income
for the period January 27, 1998 (commencement
of operations) to December 31, 1998.
As of December 31, 2000, three comprised
approximately 78% 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. During
2000, 1999 and the period January 27, 1998
(commencement of operations) to December 31,
1998, such organizational fees of
approximately $11,000, $5,000 and $64,000,
respectively, were paid to the General
Partner.
SELLING COMMISSION AND DEALER MANAGER FEES
The Partnership will pay to Commonwealth
Capital Securities Corp. (CCSC), an affiliate
of Commonwealth Capital Corp., an aggregate
of up to 9% of the partners' contributed
capital as selling commissions and dealer
manager fees, after the required $1,500,000
minimum subscription amount has been sold.
During 2000, 1999 and the period January 27,
1998 (commencement of operations) to December
31, 1998, selling commissions and dealer
manager fees of approximately $33,000,
$46,000 and $193,000, respectively, were paid
to CCSC.
REIMBURSEMENT OF EXPENSES
15
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 the period
January 27, 1998 (commencement of operations)
to December 31, 1998, $54,000, $26,000 and
$7,500, respectively, of expenses were
reimbursed to the General Partner. During
1999, the General Partner also received
reimbursement of $21,000 of expenses relating
to 1998.
EQUIPMENT ACQUISITION FEE
The General Partner is entitled to be paid an
equipment acquisition fee of 4% of the
purchase price of each item of equipment
purchased as compensation for the negotiation
of the acquisition of the equipment and 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 acquired. During 2000,
1999 and the period January 27, 1998
(commencement of operations) to December 31,
1998, equipment acquisition fees of
approximately $29,000, $66,000 and $73,000,
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,
16
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 and 1999, debt placement fees of
approximately $3,000 and $12,000,
respectively, were paid to the General
Partner. No debt placement fee was paid
during 1998.
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 the period January 27, 1998
(commencement of operations) to December 31,
1998, equipment management fees of
approximately $63,000, $47,000 and $15,000,
respectively, were paid to the General
Partner as determined pursuant to section
(ii) above.
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.
17
5. NOTES PAYABLE Notes payable consisted of the following:
DECEMBER 31, 2000 1999
- --------------------------------------------------------------------------------
Installment note payable to a bank; interest
at 6.60%; due in monthly installments of
$4,983 including interest through January 2002 $ 62,352 $116,093
Installment note payable to a bank; interest
at 6.60%; due in monthly installments of
$9,951 including interest through January 2002 124,525 231,851
Installment note payable to a bank; interest
at 7.12%; due in monthly installments of
$4,685 including interest through March 2002 67,058 116,850
Installment note payable to a bank; interest
at 6.75%; due in monthly installments of
$19,800 including interest through April 2002 302,151 511,618
Installment note payable to a bank; interest
at 7.42% due in monthly installments of $515
including interest through November 2002 11,010 --
18
DECEMBER 31, 2000 1999
- --------------------------------------------------------------------------------
Installment note payable to a bank; interest
at 7.6% due in monthly installments of $596
including interest through December 2002 $ 13,231 $ --
Installment note payable to a bank; interest
at 7.6% due in monthly installments of $1,573
including interest through February 2003 37,598 --
Installment note payable to a bank; interest
at 7.35% due in monthly installments of $1,162
including interest through January 2003 26,860 --
Installment note payable to a bank; interest
at 7.55% due in monthly installments of $1,236
including interest through February 2003 29,560 --
Installment note payable to a bank; interest
at 8.18% due in monthly installments of $1,845
including interest through April 2002 27,877 --
Installment note payable to a bank; interest
at 7.6% due in monthly installments of $3,465
including interest through June 2003 93,798 --
- --------------------------------------------------------------------------------
$796,020 $ 976,142
================================================================================
19
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 $ 559,091
2002 209,961
2003 26,968
- --------------------------------------------------------------------------------
$ 796,020
================================================================================
6. SUPPLEMENTAL Other noncash activities included in the
CASH FLOW determination of net income are as follows:
INFORMATION
PERIOD
JANUARY 27, 1998
(COMMENCEMENT OF
YEAR ENDED OPERATIONS)
DECEMBER 31, TO 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 $483,911 $270,908 $ 5,264
Lease income paid to original lessor in lieu
of cash payment for computer equipment acquired
13,861 47,478 5,190
- -------------------------------------------------------------------------------------------------
Total adjustment to net income from other
noncash activities $497,772 $318,386 $ 10,454
=================================================================================================
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.
20
Noncash investing and financing activities
include the following:
PERIOD
JANUARY 27, 1998
(COMMENCEMENT OF
YEAR ENDED OPERATIONS)
DECEMBER 31, TO DECEMBER 31,
2000 1999 1998
- -----------------------------------------------------------------------------------------
Debt assumed in connection with
purchase of computer equipment $ 303,789 $ 1,238,608 $ --
=========================================================================================
7. RECONCILIATION OF NET
(LOSS) INCOME REPORTED FOR
FINANCIAL REPORTING
PURPOSES TO TAXABLE
(LOSS) INCOME ON THE
FEDERAL PARTNERSHIP RETURN
PERIOD
JANUARY 27, 1998
(COMMENCEMENT OF
YEAR ENDED OPERATIONS)
DECEMBER 31, TO DECEMBER 31,
2000 1999 1998
- ---------------------------------------------------------------------------------------------
Net (loss) for financial reporting purposes $(179,877) $(308,734) $ 18,250
Adjustments
Gain on sale of computer equipment (76,073) -- --
Depreciation 304,446 316,429 92,865
Amortization 64,098 37,766 14,709
Unearned lease income (7,029) (14,316) 21,345
Other (146,733) (10,838) 13,502
- ---------------------------------------------------------------------------------------------
Taxable (loss) income on the Federal
Partnership Return $ (41,168) $ 20,307 $ 160,671
=============================================================================================
The "Adjustments-Other" includes financial statement adjustments reflected and
the tax return in the subsequent year.
21
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 $ 303,217 $ 300,264 $ 361,780 $ 297,728)
Gain on sale of computer equipment -- -- -- --
- ---------------------------------------------------------------------------------------------------------
Total revenues 303,217 300,264 361,780 297,728)
- ---------------------------------------------------------------------------------------------------------
Costs and expenses
Costs and expenses 338,110 309,778 372,365 302,017
Loss on sale of computer equipment -- -- 120,596 --
- ---------------------------------------------------------------------------------------------------------
Total costs and expenses 338,110 309,778 492,961 302,017
- ---------------------------------------------------------------------------------------------------------
Net (loss) $ (34,893) $ (9,514) $(131,181) $ (4,289)
=========================================================================================================
(Loss) per limited
partner unit $ (0.25) $ (0.07) $ (0.91) $ (0.03)
=========================================================================================================
22
QUARTER ENDED
------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ---------------------------------------------------------------------------------------------------------
1999
Revenues
Lease and other $ 158,167 $ 191,149 $ 271,627 $ 333,015
Gain on sale of computer equipment -- -- -- --
- --------------------------------------------------------------------------------------------------------
Total revenues 158,167 191,149 271,627 333,015
- --------------------------------------------------------------------------------------------------------
Costs and expenses
Costs and expenses 151,356 202,199 378,050 531,087
Loss on sale of computer equipment -- -- -- --
- --------------------------------------------------------------------------------------------------------
Total costs and expenses 151,356 202,199 378,050 531,087
- --------------------------------------------------------------------------------------------------------
Net income (loss) $ 6,811 $ (11,050) $(106,423) $(198,072)
========================================================================================================
Income (loss) per limited
partner unit $ 0.06 $ (0.10) $ (0.88) $ (1.67)
========================================================================================================
The cumulative gain or loss on sale of equipment is included in revenue or cost,
as appropriate.
23
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
=========== ===========