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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, 2003
( ) 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)
470 John Young Way
Exton, PA 19341
(Address, including zip code, of principal executive offices)
(610) 594-9600
(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:
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12c-2 of the Act): YES [ ] NO [X]
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).
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. The partnership terminated its offering of units on July 31, 2000,
with 151,178 Units ($3,023,569) 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.
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As of December 31 2003, all Equipment purchased by the Partnership is
subject to an Operating Lease or an Operating Lease was already entered into
with a third party when the Partnership acquired an item of Equipment. The
Partnership may also engage in sale/leaseback transactions, pursuant to which
the Partnership would purchase Equipment from companies that would then
immediately lease the Equipment from the Partnership. The Partnership may also
purchase Equipment which is leased under Full Payout Net Leases or sold under
Conditional Sales Contracts at the time of acquisition or the Partnership may
enter into a Full Payout Net Lease or Conditional Sales Contract with a third
party when the Partnership acquires an item of Equipment.
The Partnership may enter into arrangements with one or more manufacturers
pursuant to which the Partnership purchases from such manufacturers Equipment
that has previously been leased directly by the manufacturer to third parties
("vendor leasing agreements"). The Partnership and manufacturers may agree to
nonrecourse loans to the Partnership from the manufacturers to finance the
acquisition of Equipment secured by the Equipment and the receivables due to the
manufacturers from users of such Equipment. It is expected that the
manufacturers of Equipment will provide maintenance, remarketing and other
services for the Equipment subject to such agreements. As of December 31, 2003,
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.
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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. Through December 31, 2003, the Partnership has acquired a
diversified Equipment portfolio, which it has leased to 17 different companies
located throughout the United States. The allocations are as follows:
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Equipment Type Approximate %
--------------------------------------------------------------------
Workstations 64%
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Routers 20%
--------------------------------------------------------------------
High-End Printers 9%
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Communication Controllers 4%
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Scope Monitors 2%
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Low-End Printers 1%
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Total 100%
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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
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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 2003, 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, 2003, 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, 2003, the Partnership has not entered into any such agreements.
Remarketing fees are paid to the leasing companies from which the
Partnership purchases leases. These are fees that are earned by the leasing
companies when the initial terms of the lease have been met. The General Partner
believes that this strategy adds value since it entices the leasing company to
"stay with the lease" for potential extensions, remarketing or sale of
equipment. This strategy potentially minimizes any conflicts the leasing company
may have with a potential new lease and will potentially assist in maximizing
overall portfolio performance. The remarketing fee is tied into lease
performance thresholds and is factored in the negotiation of the fee.
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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, 2003, the aggregate
non-recourse debt outstanding of $91,000 was approximately 4.7% 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, 2003, 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,
2003, 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
6
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, 2003, 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
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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 that 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 firms in the computer marketplace are Dell, IBM, Hewlett
Packard, Sun Systems and Cisco. Because of the substantial resources and
dominant position of these companies, revolutionary changes with respect to
computer systems, pricing, marketing practices, technological innovation and the
availability of new and attractive financing plans would occur at any time.
Significant action in any of these areas by these firms might materially
adversely affect the partnerships' business or the other manufacturer's with
whom the General Partner might negotiate purchase and other agreements. Any
adverse affect on these manufacturers could be reflected in the overall return
realized by the Partnership on equipment from those manufacturers.
Investments
The Partnership, through CCC, participates in the purchase of equipment subject
to associated debt obligations and lease agreements. The purchase price, list
price and monthly rentals presented below are the Partnership's participation of
the total amounts, based on CCC's allocation of the equipment to the
Partnership, and in some instances, other affiliated partnerships.
Through March 11, 2004, the Partnership has purchased, or has made the
commitment to purchase, 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 1,425 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
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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 TEKRONIX Monitors 48,252 99,350 1,845 36
CMGI CISCO Routers 88,103 115,168 2,495 36
Lennox BayNetwork Routers 441,115 598,754 3,465 36
Thomson Consumer Printronix Printers 233,298 325,862 6,343 36
Thomson Consumer NORTEL Routers 134,394 203,840 3,747 36
GE Medical SUN (32) Workstations 139,961 211,970 3,831 35
Thomson Consumer XEROX Printer/Scanner/Plotter 20,384 30,720 792 24
AOL SUN Servers 22,163 34,010 604 35
Morgan Stanley SUN Servers 154,053 199,655 4,685 33
Hartford Insurance IBM Directors 744,597 901,500 19,800 36
Training A La COMPAQ Workstation 4,337 4,950 123 35
Vatterott Ed Ctr DELL Workstation 32,549 39,755 844 36
Vatterott Ed Ctr DELL Workstation 23,207 26,317 649 35
Vatterott Ed Ctr DELL Workstation 12,899 14,746 363 35
Vatterott Ed Ctr DELL Workstation 60,604 84,155 1,735 34
Triumph Pharm DELL Workstation 11,094 13,178 382 28
AOL SUN Server 110,713 116,754 3,661 27
GE Medical SUN Servers 30,000 34,456 782 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.
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The General Partner has also agreed in the Partnership Agreement to use its
best efforts to assure that the Partnership shall not be deemed an "investment
company" as such term is detained in the Investment Company Act of 1940.
The General Partner and its Affiliates may engage in other activities,
whether or not competitive with the Partnership. The Partnership Agreement
provides, however, that neither the General Partner nor any of its Affiliates
may receive any rebate or "give up" in connection with the Partnership's
activities or participate in reciprocal business arrangements that circumvent
the restrictions in the Partnership Agreement against dealings with Affiliates.
EMPLOYEES
The Partnership has no employees and receives administrative and other
services from a related party, CCC, which has 28 employees as of December 31,
2003.
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, 2003, there were 164 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
10
under Section 7704 of the Code or (b) impair the capital or operations of the
Partnership. (The Partnership may redeem Units in excess of the two percent
limitation if, in the good faith judgment of the General Partner, the conditions
imposed in the preceding sentence would remain satisfied.) The redemption price
for Units will be 105% of the selling Limited Partner's Adjusted Capital
Contributions attributable to the Units for sale. Following the determination of
the annual redemption amount, redemptions will occur on a semi-annual basis and
all requests for redemption, which must be made in writing, must be on file as
of the Record Date in which the redemption is to occur. The General Partner will
maintain a master list of requests for redemption with priority being given to
Units owned by estates, followed by IRAs and Qualified Plans. All other requests
will be considered in the order received. Redemption requests made by or on
behalf of Limited Partners who are not affiliated with the General Partner or
its Affiliates will be given priority over those made by Limited Partners who
are affiliated with the General Partner or its Affiliates. All redemption
requests will remain in effect until and unless canceled, in writing, by the
requesting Limited Partner(s).
The Partnership will accept redemption requests beginning 30 months
following the termination of the Offering. There will be no limitations on the
period of time that a redemption request may be pending prior to its being
granted. Limited Partners will not be required to hold their interest in the
Partnership for any specified period prior to their making a redemption request.
In order to make a redemption request, Limited Partners will be required to
advise the General Partner in writing of such request. Upon receipt of such
notification, the Partnership will provide detailed forms and instructions to
complete the request.
EXEMPT TRANSFERS
The following six categories of transfers are exempt transfers for purposes
of calculating the volume limitations imposed by the IRS and will generally be
permitted by the General Partner:
(1) transfers in which the basis of the Unit in the hands of the
transferee is determined, in whole or in part, by reference to its basis in the
hands of the transferor (for example, Units acquired by corporations in certain
reorganizations, contributions to capital, gifts of Units, Units contributed to
another partnership, and 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
11
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 2003, 2002 and 2001.
12
Quarter Ended 2003 2002 2001
- ------------------------------------------------------------------------------
March 31 $ 78,591 $ 78,591 $ 78,591
June 30 78,592 78,591 78,591
September 30 78,591 78,591 78,591
December 31 78,594 78,591 78,591
--------- --------- ---------
$ 314,368 $ 314,364 $ 314,364
========= ========= =========
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 as of and for each of the five years in the period ended
December 31, 2003. This table is qualified in its entirety by the more detailed
information and financial statements presented elsewhere in this report, and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
related notes thereto included herein.
Year Ended December 31
----------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Statements of Operations
Data: 2003 2002 2001 2000 1999
- ---------------------------- -------------------- -------------------- ---------------------- ------------------- ------------------
Lease Income $ 391,419 $ 784,368 $ 1,106,345 $ 1,250,857 $ 937,851
- ---------------------------- -------------------- -------------------- ---------------------- ------------------- ------------------
Net (Loss) (156,223) (291,844) (270,627) (179,877) (308,734)
- ---------------------------- -------------------- -------------------- ---------------------- ------------------- ------------------
Cash Distributions 317,500 317,498 317,497 302,898 227,995
- ---------------------------- -------------------- -------------------- ---------------------- ------------------- ------------------
Net (Loss) per Limited
Partner Unit (1.03) (1.93) (1.81) (1.27) (2.60)
- ---------------------------- -------------------- -------------------- ---------------------- ------------------- ------------------
Cash Distribution per
Limited Partner Unit 2.10 2.10 2.10 2.08 1.90
- ------------------------------------------------------------------------------------------------------------------------------------
13
As of December 31,
-----------------
- ------------------------------------------------------------------------------------------------------------------------------------
Other Data: 2003 2002 2001 2000 1999
- ---------------------------------- --------------- ------------------- ---------------------- ------------------- ------------------
Net cash provided by operating
activities 255,697 183,015 396,196 332,526 209,246
- ---------------------------------- --------------- ------------------- ---------------------- ------------------- ------------------
Net cash provided by (used in)
investing activities 61,863 132,079 (182,929) (379,437) (796,595)
- ---------------------------------- --------------- ------------------- ---------------------- ------------------- ------------------
Net cash (used in) provided by
financing activities (317,500) (319,702) (318,892) 18,815 218,982
- ------------------------------------------------------------------------------------------------------------------------------------
As of December 31
-----------------
- ------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- ------------------------------ ------------------- ------------------- ---------------------- ------------------- ------------------
Total Assets $ 336,461 $ 766,233 $ 1,427,609 $ 2,335,831 $2,745,817
- ------------------------------ ------------------- ------------------- ---------------------- ------------------- ------------------
Notes Payable 91,436 253,767 344,324 796,020 976,142
- ------------------------------ ------------------- ------------------- ---------------------- ------------------- ------------------
Partners' Capital 2,748 328,315 937,657 1,525,781 1,683,632
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per unit is computed based upon net income (loss)
allocated to the Limited Partners and the weighted average number of equivalent
Limited Partnership 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 Partnership Units outstanding
during the period.
ITEM 7: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Our significant accounting policies are described in Note
1 of the Notes to the Financial Statements. The significant accounting policies
that we believe are the most critical to aid in fully understanding our reported
financial results include the following:
COMPUTER EQUIPMENT
CCC, on behalf of the Partnership and other affiliated partnerships, acquires
computer equipment subject to associated debt obligations and lease agreements
and allocates a participation in the cost, debt and lease revenue to the various
partnerships based on certain risk factors.
14
REVENUE RECOGNITION
Through December 31, 2003, the Partnership has only entered into operating
leases. Lease revenue is recognized on a monthly basis in accordance with the
terms of the operating lease agreements.
The Company reviews a customer's credit history extending credit and establishes
provisions for uncollectible accounts based upon the credit risk of specific
customers, historical trends and other information.
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 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 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.
Depreciation on computer equipment for financial statement purposes is based on
the straight-line method over estimated useful lives of four years.
REIMBURSABLE EXPENSES
Reimbursable expenses, which are charged to the Partnership by CCC in connection
with the administration and operation of the Partnership, are allocated to the
Partnership based upon several factors including, but not limited to, the number
of investors, compliance issues, and the number of existing leases.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 2003, the Partnership generated cash flow from
operating activities of $256,000, which includes net loss of $156,000 reduced by
depreciation and amortization expenses of $380,000. Other noncash activities
included in the determination of net income include direct payments of lease
income by lessees to banks of $162,000.
The Partnership sold computer equipment in 2003 with a net book value of $45,000
for a net gain on sale of equipment of $17,000.
The Partnership's primary sources of capital for the years ended December 31,
2003, 2002 and 2001 were cash from operations of $256,000, $183,000 and
$396,000, respectively, and proceeds from the sale of computer equipment of
$62,000, $208,000 and $1,000 in 2003, 2002 and 2001, respectively. The primary
uses of cash for the years ended December 31, 2003, 2002 and 2001, were the
payment of preferred distributions to partners totaling $317,000 for each of the
periods, capital expenditures for new equipment totaling $65,000 and $171,000
for the years ended December 31, 2002 and 2001, respectively, the payment of
acquisition fees of $11,000, $13,000 for the years ended December 31, 2002 and
2001, respectively. There were no capital expenditures or acquisition fees for
the year ended December 31, 2003.
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.
15
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. As
of December 31, 2003, the Partnership had future minimum rentals on
noncancellable operating leases of $108,000 for the year ended 2004 and $14,000
thereafter. The Partnership incurred debt in 2002 and 2001 in the amount of
$220,000 and $139,000, respectively. The Partnership did not incur any debt in
2003. At December 31, 2003, the outstanding debt was $91,000, with interest
rates ranging from 6.25% to 8.00%, and will be payable through April 2005. The
Partnership intends to continue purchasing additional computer equipment with
existing cash, as well as when future cash becomes available. In addition, the
Partnership may incur debt in purchasing computer equipment in the future.
CCC, on behalf of the Partnership and other affiliated partnerships, acquires
computer equipment subject to associated debt obligations and lease agreements
and allocates a participation in the cost, debt and lease revenue to the various
partnerships based on certain risk factors. The Partnership's share of the
computer equipment in which they participate at December 31, 2003 and 2002 was
approximately $277,000 for both periods which is included in the Partnership's
fixed assets on their balance sheet, and the total cost of the equipment shared
by the Partnership with other partnerships at December 31, 2003 and 2002 was
approximately $2,157,000 for both periods. The Partnership's share of the
outstanding debt associated with this equipment at December 31, 2003 and 2002
was approximately $37,000 and $129,000, respectively, which is included in the
Partnership's liabilities on the balance sheet, and the total outstanding debt
at December 31, 2003 and 2002 related to the equipment shared by the Partnership
was approximately $509,000 and $1,197,000, respectively.
During the year ended December 31, 2003, the General Partner and one of its
affiliates, CCC, forgave payables owed to them by the Partnership in the amount
of approximately $148,000. Such amount has been recorded as a contribution to
capital. The General Partner has forgiven sales fees of approximately $8,000.
Also, CCC has forgiven direct reimbursements of approximately $140,000.
The General Partner and CCC have forgiven amounts payable by the partnership to
them and have deferred payments on other amounts owing to allow for
distributions to limited partners.
The General Partner and CCC have committed to fund, either through cash
contributions and/or forgiveness of indebtedness, any necessary cash shortfalls
of the Partnership, including the amounts necessary to fund, if any,
distributions to limited partners, through March 31, 2005.
The Partnership intends to purchase additional equipment once funds become
available through either future rentals from existing leases, extensions from
those existing leases or through sale of equipment.
The General Partner intends to review and reassess the Partnership's business
plan annually.
The General Partner intends to review and reassess its business plan annually.
RESULTS FROM OPERATIONS
For the years ended December 31, 2003, 2002 and 2001, the Partnership recognized
income of $408,000, $789,000, and $1,110,000, and expenses of $564,000,
$1,081,000 and $1,381,000, resulting in net losses of $156,000, $292,000 and
$271,000, respectively.
Lease income decreased to $391,000 in 2003, down from $784,000 and $1,106,000 in
2002 and 2001, respectively, primarily due to the expiration of older leases and
not entering into any new leases during 2003.
The Partnership sold computer equipment with a net book value of $45,000,
$204,000 and $56,000 during the years ended December 31, 2003, 2002 and 2001,
respectively, for a net gain of $17,000 and $4,000 for the year ended December
31, 2003 and 2002, respectively, and a net loss of $55,000 for the year ended
December 31, 2001.
Operating expenses, excluding depreciation, consist of accounting, legal,
outside service fees and reimbursement of expenses to CCC for administration and
operation of the Partnership. The decrease to $153,000 during the year ended
December 31, 2003, down from $266,000 and $234,000 during the years ended
December 31, 2002 and 2001, respectively, is attributable to a decrease in
reimbursable expenses with the administration and operation of the Partnership
charged by CCC of approximately $34,000, a decrease in accounting fees of
approximately $26,000, a decrease in conventions of approximately $6,000, a
decrease in due diligence of approximately $15,000 and a decrease in
miscellaneous office expense of approximately $2,000.
16
The equipment management fee is equal to approximately 5% of the gross lease
revenue attributable to equipment that is subject to operating leases. The
equipment management fee was $20,000 for the year ended December 31, 2003, down
from $39,000 in 2002 and $55,000 in 2001, which is consistent with the decrease
in revenue.
Interest expense decreased to $12,000 for 2003, down from $22,000 for 2002 and
$45,000 for 2001, as a result of certain notes being fully paid during 2003.
Depreciation and amortization expenses consist of depreciation on computer
equipment and amortization of equipment acquisition fees and debt placement
fees. Depreciation and amortization during 2003 decreased to $380,000 from
$724,000 and $992,000 in 2002 and 2001, respectively. This is attributable to
the decrease in the computer equipment portfolio being leased.
NET LOSS
Net loss decreased to $156,000 for the year ended December 31, 2003 from
$292,000 and $271,000 for the years ended December 31, 2002 and 2001,
respectively. The changes in net loss were attributable to the changes in
revenues and expenses as discussed above.
COMMITMENTS AND CONTINGENCIES
Contractual Cash Obligations
The following table presents our contractual cash obligations as of December 31,
2003:
Payments due by period
Total 2004 2005
-------------------------------------------------------------------------------------
Installment notes payable due 2004:
Principal $38,222 $38,222 $----
Interest 938 938 ----
Installment notes payable due 2005:
Principal $53,214 42,913 10,301
Interest 2,242 2,133 109
-------------------------------------------------------------------------------------
Total $94,616 $84,206 $10,410
=====================================================================================
17
RECENT ACCOUNTING PRONOUNCEMENTS
Interpretation No. 45
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others" ("Interpretation No. 45"). Interpretation No. 45
elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. It also clarifies
that at any time a company issues a guarantee, the company must recognize the
initial liability for the fair market value of the obligations it assumes under
the guarantee and must disclose that information in its interim and annual
financial statements. The initial recognition and measurement provisions of
Interpretation No. 45 apply on a prospective basis to guarantees issued or
modified after December 31, 2002. Interpretation No. 45 did not have an effect
on our financial statements.
Interpretation No. 46
In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities" ("Interpretation No. 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from the other parties. Interpretation No. 46 is applicable immediately
for variable interest entities created after January 31, 2003. For variable
interest entities created before January 31, 2003, the provisions of
Interpretation No. 46, the provisions of Interpretation No. 46 have been
deferred to the first quarter of 2004. The adoption of Interpretation No. 46 did
not have an impact on the financial position and results of operations.
SFAS 150
In May 2003, the FASB issued FASB Statement No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity, which establishes standards on how an issuer classifies and measures
certain financial instruments with characteristics of liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
entered into or modified after May 31, 2003 and otherwise shall be effective at
the beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS 150 did not have an impact on its financial position and
results of operations.
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 and its associated fixed
revenue streams.
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
NONE
ITEM 9A: CONTROLS AND PROCEDURES
Our management, under the supervision and with the participation of the
principal executive officer and principal financial offer, have evaluated the
effectiveness of our controls and procedures related to our reporting and
disclosure obligations as of December 31, 2003, which is the end of the period
covered by this Annual Report on Form 10-K. Based on that evaluation, the
principal executive officer and principal financial officer have concluded that
our disclosure controls and procedures are sufficient to provide that (a)
material information relating to us, including our consolidated subsidiaries, is
made known to these officers by our and our consolidated subsidiaries other
employees, particularly material information related to the period for which
18
this periodic report is being prepared; and (b) this information is recorded,
processed, summarized, evaluated and reported, as applicable, within the time
periods specified in the rules and forms promulgated by the Securities and
Exchange Commission.
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 CCC, a Pennsylvania corporation, was incorporated in Pennsylvania
on August 26, 1993. The General Partner also acts as the General Partner for
Commonwealth Income and Growth Fund I, Commonwealth Income and Growth Fund II
and Commonwealth Income and Growth Fund IV. The principal business office of the
General Partner is 470 John Young Way, Suite 300, Exton, PA 19341, and its
telephone number is 610-594-9600. 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 CCC are
as follows:
NAME TITLE
- ---- -----
George S. Springsteen Chairman of the Board of Directors and President of
the General Partner and CCC
Kimberly A. Springsteen Executive Vice President, Chief Operating Officer and
Secretary of the General Partner and CCC
Henry J. Abbott Senior Vice President, Director and Portfolio Manager
of the General Partner & CCC
Jay Dugan Senior Vice President & IT Manager of the General
Partner & CCC
Salvatore R. Barila Vice President and Controller of the General Partner
and CCC
Michelle Onuffer Assistant Vice President and Accounting Manager of
the General Partner and CCC
Dorothy A. Ferguson Assistant Vice President & Compliance Manager of the
General Partner & CCC
Karen Tramontano Assistant Vice President & Marketing Manager of the
General Partner & CCC
David Borham Assistant Vice President & Investor Relations Manager
of the General Partner & CCC
George S. Springsteen, age 68, is President of both CCC and the General
Partner. Mr. Springsteen is also President of the general partners or
controlling entities of several prior programs sponsored by CCC with objectives
similar to the Partnership's. He has been the sole shareholder and director of
CCC 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
19
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 CCC in
May of 1978. Mr. Springsteen received a Bachelor of Science degree from the
University of Delaware in 1957.
Kimberly A. Springsteen, age 44, is Executive Vice President, Chief
Operating Officer and Secretary of CCC and the General Partner and joined CCC in
1997. She is also the President of Commonwealth Capital Securities Corp. From
1980 to 1997, Ms. Springsteen was employed with Wheat First Butcher Singer, a
broker/dealer headquartered in Richmond, Virginia. While at Wheat First Butcher
Singer, Ms. Springsteen, 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.
Springsteen holds Series 7, 63 and 39 NASD licenses and is a member of the
Equipment Leasing Association, Investment Partnership Association, and
International Association for Financial Planning.
Henry J. Abbott, age 53, is Senior Vice President and Portfolio Manager
of CCC and has been employed by CCC 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 CCC 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.
Jay Dugan, age 55, is Senior Vice President and Information Technology
Manager of the General Partner and CCC and has been employed by CCC since 2002.
Mr. Dugan is responsible for computer network and information systems for the
General Partner and its affiliates. Mr. Dugan was a registered securities
representative from 1988 until 1998. During that period, Mr. Dugan founded First
Securities USA, a NASD member firm, and operated that firm through 1998. From
1999 until joining CCC in 2002, Mr. Dugan was an independent due diligence
consultant.
Salvatore R. Barila, age 33, is Vice President and Controller of the
General Partner and CCC and certain of its subsidiaries where he has been
employed since 2001. From 1992 to 2001, Mr. Barila was employed as Corporate
Accounting Manager of RCG Information Technology, Inc., whereby he was
responsible for the preparation of the monthly financial statements, budgeting
and forecasting for multiple divisions and the consolidated entity. Mr. Barila
received a B.B.A. degree in Accounting from Pace University in 1992. Mr. Barila
is a member of the Equipment Leasing Association.
Michelle Onuffer, age 32, is Assistant Vice President and Accounting
Manager of the General Partner and CCC and certain of its subsidiaries where she
has been employed since 2004. Prior to CCC, she was employed by Dutch State
Minds as an Accounting Manager, whereby she was responsible for month-end
reporting, monthly financial statements, budgeting, and cash management. Ms.
Onuffer was a registered securities representative from 1995 to 1999. She brings
4 years of securities experience and over 5 years of accounting experience. Ms.
Onuffer has a B.B. in Financial Management from Goldey-Beacon College and an MBA
in Accounting from the University of Phoenix.
Dorothy A. Ferguson, age 61, is Assistant Vice President of CCC and has
been employed by CCC since 1995. She brought with her over 20 years experience
in commercial banking and finance. Prior to joining Commonwealth, she held
positions as a Banking Officer and Administrative Assistant to the Chairman of a
large Philadelphia based bank, as well as Executive Secretary to the CEO of an
international manufacturing management group.
20
Karen Tramontano, age 51, Assistant Vice President & Marketing Manger,
joined Commonwealth in 2000, brining with her over a decade of experience of
international marketing and customer relations. Ms. Tramontano is responsible
for the generation and distribution of all marketing materials for the Manager's
investment programs. Prior to joining Commonwealth, Ms. Tramontano served from
1973 to 1983 as executive liaison to the President of V&V Noordland, Inc., an
international commercial company, and served as an office manager for a small
business in Florida from 1998 to 2000. Ms. Tramontano coordinates Commonwealth's
home office marketing department, which serves our broker dealer community and
registered representatives across the country. Ms. Tramontano attended Suffolk
College in New York, with a Major in Advertising/Promotion.
David Borham, age 26, Assistant Vice President & Marketing Manager,
joined Commonwealth in 2000, bringing with him 2 years of Customer Service
experience. Mr. Borham holds a Series 22 NASD license and is responsible for the
management of investor database maintenance and all investor inquiries and
correspondence. Prior to joining Commonwealth, Mr. Borham served as a Customer
Relations Representative in the food service industry for Dilworth Town Inn from
1996 to 2000. Mr. Borham attended Delaware County Community College
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 that 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 2003 DURING 2002 DURING 2001
OFFERING AND ORGANIZATION STAGE
The General Partner Organizational Fee. An Organization $0 $0 $0
Fee equal to three percent of the first
$10,000,000 of Limited Partners' Capital
Contributions and two percent of the Limited
Partners' Capital Contribution in excess of
$10,000,000, as compensation for the
organization of the Partnership. It is
anticipated that all Organizational and
Offering Expenses which include legal,
accounting and printing expenses; various
registration and filing fees; miscellaneous
expenses related to the organization and
formation of the Partnership; other costs of
registration; and costs incurred in
connection with the preparation, printing and
distribution of this Report and other sales
literature. The General Partner pays all
Organizational and Offering Expenses, other
than Underwriter's Commissions and a
non-accountable expense allowance payable to
the Dealer Manager that is equal to the
lesser of (i) one percent of the Offering
proceeds or (ii) $50,000.
21
OPERATIONAL AND SALE
OR LIQUIDATION STAGES
The General Partner Reimbursable Expenses. The General and $62,000 $363,000 $193,000
and its Affiliates 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 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 $0 $11,000 $13,000
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 $0 $2,000 $1,000
arranging Term Debt to finance the
acquisition of Equipment to the Partnership,
a fee equal to one percent of such
indebtedness; provided, however, that such
fee is reduced to the extent the Partnership
incurs such fees to third Parties, un
affiliated with the General Partner or the
lender, with respect to such indebtedness and
no such fee is paid with respect to
borrowings from the General Partner or its
Affiliates.
The General Partner Equipment Management Fee. A monthly fee $20,000 $40,000 $55,000
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 Re-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.
22
The General Partner Equipment Liquidation Fee. With respect $2,000 $7,000 $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 $3,132 $3,134 $3,133
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
that 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
that 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.
23
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
CCC 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 CCC, the General Partner or such other Affiliate as disclosed in this
Report. CCC, 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. CCC, 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 CCC.
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 Partner or such affiliates shall receive
no greater interest rate and financing charges from the Partnership than that
which unrelated lender charge on comparable loans. The Partnership will not
borrow money from the General Partner or any of its affiliates for a term in
excess of twelve months.
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 than
equipment Programs formed by the General Partner or its Affiliates, which
partnerships or joint ventures its 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-Affiliate, and
(iii) there 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
24
joint venture if the other Program wishes to sell equipment held in the joint
venture; (v) the investment of each Program is on substantially the same terms
and conditions; and (vi) the joint venture is formed either for the purpose of
effecting appropriated diversification for the Programs or for the purpose of
relieving the General Partner or its Affiliates from a commitment entered into
pursuant to certain provisions of the Partnership Agreement.
GLOSSARY
The following terms used in this Report shall (unless otherwise expressly
provided herein or unless the context otherwise requires) have the meanings set
forth below.
"Acquisition Expenses" means expenses relating to the prospective selection
and acquisition of or investment in Equipment, whether or not actually acquired,
including, but not limited to, legal fees and expenses, travel and communication
expenses, costs of appraisals, accounting fees and expenses and miscellaneous
expenses.
"Acquisition Fee" means the total of all fees and commissions paid by any
party in connection with the initial purchase of Equipment acquired by the
Partnership. Included in the computation of such fees or commissions shall be
the Equipment Acquisition Fee, any commission, selection fee, construction
supervision fee, finance fee, non-recurring management fee of a similar nature,
however designated.
"Adjusted Capital Contributions" means Capital Contributions of the Limited
Partners reduced to not less than zero by any cash distribution received by the
Limited Partners pursuant to Sections 4/2 or 8/1, to the extent such
distributions exceed any unpaid Cumulative Return as of the date such
distributions were made.
"Affiliate" means, when used with reference to a specified Person, (I) any
Person that directly or indirectly through one or more intermediaries controls
or is controlled by or is under common control with the specified Person, (ii)
any Person that is a director or an executive officer of, partner in, or serves
in a similar capacity to, the specified Person, or any Person which the
specified Person is an executive officer of partner or with respect to which the
specified Person serves in a similar capacity, (iii) any Person owning or
controlling 10% or more of the outstanding voting securities of such specified
Person, or (iv) if such Person is an officer, director or partner, any entity
for which such Person acts in such capacity.
"Capital Account" means the separate account established for each Partner
pursuant to Section 4/.1.
"Capital Contributions" means, in the case of the General partner, the
total amount of money contributed to the Partnership by the General Partner,
and, in the case of the Limited Partners, $20 for each Unit or where the context
requires, the total Capital Contributions of all the Partners.
"Capital Leases" are leases under which the Equipment either transfers to
the lessee at the end of the lease term, contains a bargain purchase price
option, the lease term is equal to 75% or more of the estimated economic life of
the Equipment, or the present value at the beginning of the lease term of the
minimum lease payments is equal to or exceeds 90% of the excess of the fair
value of the Equipment.
"Cash Available for Distribution" means Cash Flow plus net Disposition
Proceeds plus cash funds available for distribution from Partnership reserves,
less such amounts as the General Partner, in accordance with this Agreement,
causes the Partnership to reinvest in Equipment or interests therein, and less
such amounts as the General Partner, in its sole discretion, determines should
be set aside for the restoration or enhancement of Partnership reserves.
"Cash Flow" for any fiscal period means the sum of (i) cash receipts from
operations, including, but not limited to, rents or other revenues arising from
the leasing or operation of the Equipment and interest, if any, earned on funds
25
on deposit for the Partnership, but not including Net Disposition Proceeds,
minus (ii) all cash expenses and costs incurred and paid in connection with the
ownership, lease, management, use and/or operation of the Equipment, including,
but not limited to, fees for handling and storage; all interest expenses paid
and all repayments of principal regarding borrowed funds; maintenance; repair
costs; insurance premiums; accounting and legal fees and expenses; debt
collection expenses; charges, assessments or levies imposed upon or against the
Equipment; ad valorem, gross receipts and other property taxes levied against
the Equipment; and all costs of repurchasing Units in accordance with this
Agreement; but not including depreciation or amortization of fees or capital
expenditures, or provisions for future expenditures, including, without
limitation, Organizational and Offering Expenses.
"Closing Date" means the date, as designated by the General Partner, as of
which the Units shall cease being offered to the public pursuant to the
Offering, and shall be no later than the second anniversary of the Effective
Date.
"Code" means the Internal Revenue Code of 1986, as amended, and as may be
amended from time to time by future federal tax statues. Any reference this
Agreement to a particular provision of the Code shall mean, where appropriate,
the corresponding provision of any successor statute.
"Competitive Equipment Sale Commission" means that brokerage fee paid for
services rendered in connection with the purchase or sale of Equipment that is
reasonable, customary, and competitive in light of the size, type, and location
of the Equipment.
"Conditional Sales Contract" means an agreement to sell Equipment to a
buyer in which the seller reserves title to, and retains a security interest in,
the Equipment until the Purchase Price of the Equipment is paid.
"Cumulative Return" means an amount equal to a return at a rate of 10% per
annum, compounded daily, on the Adjusted Capital Contribution for all
outstanding Units, which amount shall begin accruing at the end of the calendar
quarter in which such Units are sold by the Partnership.
"Effective Date" means the date on which the Partnership's registration
statement on Form S-1 with respect to the Units, as filed with the Securities
and Exchange Commission, becomes effective under the Securities Act of 1933, as
amended.
"Equipment" means each item of and all of the computer peripheral and other
similar capital equipment purchased, owned, operated, and/or leased by the
Partnership or in which the Partnership has acquired a direct or indirect
interest, as more fully described in this Agreement, together with all
appliances, parts, instruments, accessories, furnishings, or other equipment
included therein and all substitutions, renewals, or replacements of, and all
additions, improvements, and accessions to, any and all thereof.
"Full Payout Net Lease" means an initial Net Lease of the Equipment under
which the non-cancelable rental payments due (and which can be calculated at the
commencement of the Net Lease) during the initial noncancellable fixed term (not
including any renewal or extension period) of the lease or other contract for
the use of the Equipment are at least sufficient to recover the Purchase Price
of the Equipment.
"General Partner" means Commonwealth Income & Growth Fund, Inc. and any
additional, substitute or successor general partner of the Partnership.
"Gross Lease Revenues" means Partnership gross receipts from leasing or
other operation of the Equipment, except that, to the extent the Partnership has
leased the Equipment from an unaffiliated party, it shall mean such receipts
less any lease expense.
26
"Initial Closing " means January 27, 1998.
"IRA" means an Individual Retirement Account as described in Section 408 of
the Code.
"Limited Partner" means a Person who acquires Units and who is admitted to
the Partnership as a limited partner in accordance with the terms of this
Agreement.
"Majority in Interest" means, with respect to the Partnership, Limited
Partners holding more than 40% of the outstanding Units held by all Limited
Partners at the Record Date for any vote or consent of the Limited Partners.
"Minimum Subscription Amount" means an aggregate of $1,500,000 in
subscriptions from Limited Partners.
"Net Disposition Proceeds" means the net proceeds realized by the
Partnership from the refinancing, sale or other disposition of Equipment,
including insurance proceeds or lessee indemnity payments arising from the loss
or destruction of Equipment, less such amounts as are used to satisfy
Partnership liabilities.
"Net Lease" means a lease or other contract under which the owner provides
equipment to a lessee or other operator in return for a payment, and the lessee
assumes all obligations and pays for the operation, repair, maintenance, taxes
and insuring of the Equipment, so that the non-cancelable rental payments under
the lease are absolutely net to the lessor.
"Net Profits" or "Net Losses" shall be computed in accordance with Section
703(a) of the Code (including all items of income, gain, loss or deduction
required to be stated separately pursuant to Section 703(a) (1) of the Code) for
each taxable year of the Partnership or shorter period or subsequent to an
interim closing of the Partnership's books with the following adjustments: (i)
any income of the Partnership that is exempt from federal income tax and not
otherwise taken into account in computing Net Profits and Net Loss pursuant to
this definition shall be added to such taxable income of shall reduce such
taxable loss; (ii) any expenditure of the Partnership described in Code Section
705(a) (2) (B) or treated as Code Section 705(a) (2) (B) expenditures pursuant
to Treasury Regulations Section 1.704-1(b) (2) (iv) (I) and not otherwise taken
into account in computing Net Profits and Net Losses pursuant to this definition
shall be subtracted from such taxable income or loss; (iii) items of income,
gain, loss and deduction specially allocated pursuant to Section 7.3 of this
Agreement shall not be included in the computation of Net Profits or Net Loss;
and if property is reflected on the books of the Partnership at a book value
that differs from the adjusted tax basis of the property in accordance with
Treasury Regulation Section 1.704-1 (b) (2) (iv) (d) or (f), depreciation,
amortization, and gain or loss with respect to such property shall be determined
by reference to such book value in a manner consistent with Treasury Regulation
Section 1.704-1 (b) (2) (iv) (g). The terms "Net Profit" or "Net Losses" shall
include the Partnership's distributive share of the profit or loss of any
partnership or joint venture in which it is a partner or joint venturer.
"Offering" means the initial public offering of the Units in the
Partnership, as described in the Prospectus.
"Offering Period" means the period commencing the Effective Date and ending
the last day of the calendar month in which the Closing Date occurs.
"Operating Lease" means a lease or other contractual arrangement under
which an unaffiliated party agrees to pay the Partnership, directly or
indirectly, for the use of the Equipment, and which is not a Full Payout Net
Lease.
"Organizational and Offering Expenses" means the expenses incurred in
connection with the organization of the Partnership and in preparation of the
offering for registration and subsequently offering and distributing it to the
public, including Underwriting Commissions, listing fees and advertising
expenses except advertising expenses related to the leasing of the Program's
Equipment.
27
"Partners" means any one or more of the General Partner and the Limited
Partners.
"Partnership" means Commonwealth Income & Growth Fund III, a Pennsylvania
limited partnership.
"Person" means an individual, partnership, joint venture, corporation,
trust, estate or other entity.
"Program" means a limited or general partnership, joint venture,
unincorporated association or similar organization, other than a corporation
formed and operated for the primary purpose of investment in and the operation
of or gain from an interest in Equipment.
"Purchase Price" means, with respect to any Equipment, an amount equal to
the sum of (i) the invoice cost of such Equipment or any other such amount paid
to the seller, (ii) any closing, delivery and installation charges associated
therewith not included in such invoice cost and paid by or on behalf of the
Partnership, (iii) the cost of any capitalized modifications or upgrades paid by
or on behalf of the Partnership in connection with its purchase of the
Equipment, and (iv) the amount of the Equipment Acquisition Fee and any other
Acquisition Fees, but excluding points and prepaid interest.
"Term Debt" means debt of the Partnership with a term in excess of twelve
months, incurred with respect to acquiring or investing in Equipment, or
refinancing non-Term Debt, but not debt incurred with respect to refinancing
existing Partnership Term Debt.
"Underwriting Commissions" mean selling commissions and dealer-manager fees
paid to broker-dealers by the Partnership in connection with the offer and sale
of Units.
"Unit" means a limited partnership interest in the Partnership.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 10-K
(a) (1) Financial Statements
Commonwealth Income & Growth Fund III
Report of Independent Certified Public Accountant
Balance Sheets as of December 31, 2003 and 2002
Statements of Operations for the years ended December 31, 2003, 2002
and 2001
Statements of Partners' Capital for the years ended December 31, 2003,
2002 and 2001
Statements of Cash Flows for the years ended December 31, 2003, 2002
and 2001
Notes to Financial Statements
(a) (2) Schedules.
28
Schedules are omitted because they are not applicable, not required, or
because the required information is included in the financial statements and
notes thereto.
(a) (3) Exhibits.
* 3.1 Certificate of Limited Partnership
* 3.2 Agreement of Limited Partnership
27 Financial Data Schedule
* Incorporated by reference from the Partnership's Registration Statement on
Form S-1 (Registration No. 333-26933)
(c) Exhibits.
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf on March 30, 2004 by the undersigned thereunto duly authorized.
COMMONWEALTH INCOME & GROWTH FUND III
By: COMMONWEALTH INCOME & GROWTH FUND,
INC., General Partner
By: /s/ George S. Springsteen
--------------------------
George S. Springsteen, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 30, 2004.
SIGNATURE CAPACITY
/s/ George S. Springsteen Chairman, President and Sole Director of
- --------------------------- Commonwealth Income & Growth Fund, Inc.
George S. Springsteen
/s/ Kimberly A. Springsteen Executive Vice President, Chief Operating Officer
- ---------------------------
Kimberly A. Springsteen
29
Commonwealth Income
& Growth Fund III
Years Ended December 31, 2003, 2002 and 2001
Commonwealth Income
& Growth Fund III
- --------------------------------------------------------------------------------
Financial Statements
Years Ended December 31, 2003, 2002 and 2001
Commonwealth Income & Growth Fund III
Contents
- --------------------------------------------------------------------------------
Report of Independent Certified Public Accountants 3
Financial statements
Balance sheets 4
Statements of operations 5
Statements of partners' capital 6
Statements of cash flows 7-8
Notes to financial statements 10-23
2
Report of Independent Certified Public Accountants
The Partners
Commonwealth Income & Growth Fund III
Exton, Pennsylvania
We have audited the accompanying balance sheets of Commonwealth Income & Growth
Fund III as of December 31, 2003 and 2002, and the related statements of
operations, partners' capital, and cash flows for each of the three years ended
December 31, 2003. 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
audits 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, 2003 and 2002, and the results of its operations and
its cash flows for each of the three years ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States.
/s/ BDO Seidman, LLP
Philadelphia, Pennsylvania
March 12, 2004
3
- -----------------------------------------------------------------------------------------------------------------
December 31, 2003 2002
- -----------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 557 $ 497
Lease income receivable, net of reserve of $0 in 2003
and $28,000 in 2002 9,181 14,161
- -----------------------------------------------------------------------------------------------------------------
9,738 14,658
- -----------------------------------------------------------------------------------------------------------------
Computer equipment, at cost 1,955,197 2,840,949
Accumulated depreciation (1,635,341) (2,108,544)
- -----------------------------------------------------------------------------------------------------------------
319,856 732,405
- -----------------------------------------------------------------------------------------------------------------
Equipment acquisition costs and deferred expenses, net of
accumulated amortization of $20,820 and $49,701, respectively
6,867 19,170
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 336,461 $ 766,233
=================================================================================================================
4
Commonwealth Income & Growth Fund III
Balance Sheets
- -----------------------------------------------------------------------------------------------------------------
December 31, 2003 2002
- -----------------------------------------------------------------------------------------------------------------
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 26,762 $ 31,149
Accounts payable, Commonwealth Capital Corp. 53,648 54,451
Accounts payable, General Partner 134,524 59,116
Accounts payable, affiliated limited partnerships 25,707 2,173
Unearned lease income 1,636 37,262
Notes payable 91,436 253,767
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 333,713 437,918
- -----------------------------------------------------------------------------------------------------------------
Partners' capital
General Partner 1,000 1,000
Limited partners 1,748 327,315
- -----------------------------------------------------------------------------------------------------------------
Total partners' capital 2,748 328,315
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and partners' capital $ 336,461 $ 766,233
=================================================================================================================
See accompanying notes to financial statements.
5
Commonwealth Income & Growth Fund III
Statements of Operations
- -----------------------------------------------------------------------------------------------------------------
Year ended December 31, 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Income
Lease $ 391,419 $ 784,368 $ 1,106,345
Interest and other 80 352 4,136
Gain on sale of computer equipment 16,865 4,343 --
- -----------------------------------------------------------------------------------------------------------------
Total income 408,364 789,063 1,110,481
- -----------------------------------------------------------------------------------------------------------------
Expenses
Operating, excluding depreciation 153,142 265,918 233,577
Equipment management fee, General Partner 19,571 39,218 55,126
Depreciation 367,551 696,104 944,997
Amortization of equipment acquisition costs and
deferred expenses 12,303 27,409 47,480
Interest 12,020 22,247 44,900
Uncollectible accounts receivable -- 30,011 --
Loss on sale of computer equipment -- -- 55,028
- -----------------------------------------------------------------------------------------------------------------
Total expenses 564,587 1,080,907 1,381,108
- -----------------------------------------------------------------------------------------------------------------
Net (loss) $ (156,223) $ (291,844) $ (270,627)
=================================================================================================================
Net (loss) per equivalent limited
partnership unit $ (1.03) $ (1.93) $ (1.79)
Weighted average number of equivalent
limited partnership units outstanding during the year
151,178 151,178 151,178
=================================================================================================================
See accompanying notes to financial statements.
6
Commonwealth Income & Growth Fund III
Statements of Partners' Capital
- ------------------------------------------------------------------------------------------------------------------
General Limited
Partner Partner General Limited
Units Units Partner Partners Total
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 50 151,178 $ 1,000 $ 1,524,781 $ 1,525,781
Net income (loss) -- -- 3,133 (273,760) (270,627)
Distributions -- -- (3,133) (314,364) (317,497)
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 50 151,178 1,000 936,657 937,657
Net income (loss) -- -- 3,134 (294,978) (291,844)
Distributions -- -- (3,134) (314,364) (317,498)
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 50 151,178 1,000 327,315 328,315
Net income (loss) -- -- 3,132 (159,355) (156,223)
Forgiveness of payables recorded as
capital contributions
-- -- 148,156 -- 148,156
Transfer of partners' capital -- -- (148,156) 148,156 --
Distributions -- -- (3,132) (314,368) (317,500)
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 50 151,178 $ 1,000 $ 1,748 $ 2,748
==================================================================================================================
See accompanying notes to financial statements.
7
Commonwealth Income & Growth Fund III
Statements of Cash Flows
- ---------------------------------------------------------------------------------------------------------------
Year ended December 31, 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net (loss) $ (156,223) $ (291,844) $ (270,627)
Adjustments to reconcile net (loss) to
net cash provided by operating activities
Depreciation and amortization 379,854 723,513 992,477
(Gain) loss on sale of computer equipment (16,865) (4,343) 55,028
Other noncash activities included in
determination of net (loss) (162,331) (310,970) (591,158)
Changes in assets and liabilities
Decrease (increase) in assets
Lease income receivable 4,980 28,136 52,195
Prepaid expenses -- -- 10,000
Increase (decrease) in liabilities
Accounts payable (4,387) 4,220 12,920
Accounts payable,
Commonwealth Capital Corp. 138,848 29,311 25,119
Accounts receivable / payable,
General Partner 83,913 (32,330) 108,129
Accounts payable, affiliated limited
partnerships 23,534 60 2,113
Unearned lease income (35,626) 37,262 --
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 255,697 183,015 396,196
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Capital expenditures -- (64,989) (170,943)
Net proceeds from sale of computer equipment 61,863 208,484 686
Equipment acquisition fees to the
General Partner -- (11,416) (12,672)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 61,863 132,079 (182,929)
- ---------------------------------------------------------------------------------------------------------------
8
Year ended December 31, 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Distributions to partners (317,500) (317,498) (317,497)
Debt placement fee to the General
Partner -- (2,204) (1,395)
- ---------------------------------------------------------------------------------------------------------------
Net cash (used in) financing activities (317,500) (319,702) (318,892)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 60 (4,608) (105,625)
Cash and cash equivalents at beginning of year 497 5,105 110,730
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 557 $ 497 $ 5,105
===============================================================================================================
See accompanying notes to financial statements.
9
Commonwealth Income & Growth Fund III
Notes to Financial Statements
- --------------------------------------------------------------------------------
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.
Commonwealth Capital Corp ("CCC"), on behalf of the
Partnership and other affiliated partnerships, acquires
computer equipment subject to associated debt
obligations and lease agreements and allocates a
participation in the cost, debt and lease revenue to the
various partnerships based on certain risk factors. The
Partnership's General Partner is Commonwealth Income &
Growth Fund, Inc. (the "General Partner"), a
Pennsylvania corporation that is an indirect wholly
owned subsidiary of CCC. 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. During 2003,
2002 and 2001, the Partnership distributed to the
limited partners $314,368, $314,364 and $314,364,
respectively. The 2003, 2002 and 2001 distributions were
at an annual rate of 10.4% of the limited partners'
original contributed capital. Distributions during 2003,
2002 and 2001 reflect an annual return of capital in the
amount of approximately $2.08 per limited partnership
unit, for units that were outstanding for the entire
year, respectively.
2. Business Plan
The General Partner and CCC have forgiven amounts
payable by the partnership to them and have deferred
payments on other amounts owing to allow for
distributions to limited partners.
10
Commonwealth Income & Growth Fund III
Notes to Financial Statements
- --------------------------------------------------------------------------------
The General Partner and CCC have committed to fund,
either through cash contributions and/or forgiveness of
indebtedness, any necessary cash shortfalls of the
Partnership, including the amounts necessary to fund, if
any, distributions to limited partners, through March
31, 2005.
The Partnership intends to purchase additional equipment
once funds become available through either future
rentals from existing leases, extensions from those
existing leases or through sale of equipment.
The General Partner intends to review and reassess the
Partnership's business plan annually.
3. Summary of Long-Lived Assets
Significant
Accounting The Partnership evaluates its long-lived assets when
Policies events or circumstances indicate that the value of the
asset may not be recoverable. The Partnership determines
whether impairment exists by estimating the undiscounted
cash flows to be generated by each asset, including cash
flows from lease revenues and proceeds from the sale of
equipment. If the estimated undiscounted cash flows are
less than the carrying value of the asset then
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. The Partnership determined that no impairment
had occurred during 2003, 2002, and 2001.
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-four
year lives. Unamortized acquisition fees and deferred
expenses are charged to amortization expense when the
associated leased equipment is sold.
11
Commonwealth Income & Growth Fund III
Notes to Financial Statements
- --------------------------------------------------------------------------------
Cash and Cash Equivalents
The Partnership considers all highly liquid investments
with a maturity of three months or less to be cash
equivalents.
Income Taxes
The Partnership is not subject to federal income taxes;
instead, any taxable income (loss) is passed through to
the partners and included on their respective income tax
returns.
Taxable income differs from financial statement net
income as a result of reporting certain income and
expense items for tax purposes in periods other than
those used for financial statement purposes, principally
relating to depreciation, amortization, and lease
income.
Offering Costs
Offering costs are payments for selling commissions,
dealer manager fees, professional fees and other
offering expenses relating to the syndication. Selling
commissions were 7% of the partners' contributed capital
and dealer manager fees were 2% of partners' contributed
capital. These costs were deducted from partnership
capital in the accompanying financial statements.
Net Income (Loss) Per Equivalent Limited Partnership
Unit
The net income (loss) per equivalent limited partnership
unit is computed based upon net income (loss) allocated
to the limited partners and the weighted average number
of equivalent limited partner units outstanding during
the year.
Reimbursable Expenses
Reimbursable expenses, which are charged to the
Partnership by CCC in connection with the administration
and operation of the Partnership, are allocated to the
Partnership based upon several factors including, but
not limited to, the number of investors, compliance
issues, and the number of existing leases.
12
Commonwealth Income & Growth Fund III
Notes to Financial Statements
- --------------------------------------------------------------------------------
Recent Accounting Pronouncements
Interpretation No. 45
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, including Indirect Guarantees of
Indebtedness of Others" ("Interpretation No. 45").
Interpretation No. 45 elaborates on the existing
disclosure requirements for most guarantees, including
loan guarantees such as standby letters of credit. It
also clarifies that at any time a company issues a
guarantee, the company must recognize the initial
liability for the fair market value of the obligations
it assumes under the guarantee and must disclose that
information in its interim and annual financial
statements. The initial recognition and measurement
provisions of Interpretation No. 45 apply on a
prospective basis to guarantees issued or modified after
December 31, 2002. Interpretation No. 45 did not have an
effect on our financial statements.
Interpretation No. 46
In January 2003, FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities"
("Interpretation No. 46"), which clarifies the
application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to certain entities
in which equity investors do not have the
characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated
financial support from the other parties. Interpretation
No. 46 is applicable immediately for variable interest
entities created after January 31, 2003. For variable
interest entities created before January 31, 2003, the
provisions of Interpretation No. 46, the provisions of
Interpretation No. 46 have been deferred to the first
quarter of 2004. The adoption of Interpretation No. 46
did not have an impact on the financial position and
results of operations.
13
Commonwealth Income & Growth Fund III
Notes to Financial Statements
- --------------------------------------------------------------------------------
SFAS 150
In May 2003, the FASB issued FASB Statement No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, which
establishes standards on how an issuer classifies and
measures certain financial instruments with
characteristics of liabilities and equity. It requires
that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some
circumstances). Many of those instruments entered into
or modified after May 31, 2003 and otherwise shall be
effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150
did not have an impact on its financial position and
results of operations.
4. Computer The Partnership is the lessor of equipment under
Equipment 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.
The Partnership's share of the computer equipment in
which they participate at December 31, 2003 and 2002 was
approximately $277,000 for both periods, which is
included in the Partnership's fixed assets on their
balance sheet, and the total cost of the equipment
shared by the Partnership with other partnerships at
December 31, 2003 and 2002 was approximately $2,157,000
for both periods. The Partnership's share of the
outstanding debt associated with this equipment at
December 31, 2003 and 2002 was approximately $37,000 and
$129,000, respectively, which is included in the
Partnership's liabilities on the balance sheet, and the
total outstanding debt at December 31, 2003 and 2002
related to the equipment shared by the Partnership was
approximately $509,000 and $1,197,000, respectively.
The following is a schedule of future minimum rentals on
noncancelable operating leases at December 31, 2003:
14
Commonwealth Income & Growth Fund III
Notes to Financial Statements
- --------------------------------------------------------------------------------
Year ending December 31, Amount
--------------------------------------------------------
2004 $ 108,000
2005 14,000
--------------------------------------------------------
$ 122,000
========================================================
Lease income from five lessees, each exceeding 10% of
lease revenue, aggregated 88% of lease income for the
year ended December 31, 2003. Lease income from three
lessees, each exceeding 10% of lease revenue, aggregated
31% of lease income for the year ended December 31,
2002. Lease income from two lessees, each exceeding 10%
of lease revenue, aggregated 32% of lease income for the
year ended December 31, 2001.
5. 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. There were no
fees paid to the General Partner in 2003, 2002 and 2001.
Forgiveness of Related Party Payables
During the year ended December 31, 2003, the General
Partner and one of its affiliates, CCC, forgave payables
owed to them by the Partnership in the amount of
approximately $148,000. Such amount has been recorded as
a contribution to capital. The General Partner has
forgiven sales fees of approximately $8,000. Also, CCC
has forgiven direct reimbursements of approximately
$140,000.
Selling Commission and Dealer Manager Fees
The Partnership paid 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, and after the required $1,500,000 minimum
subscription amount has been sold. There were no fees
paid to the General Partner in 2003, 2002 and 2001.
15
Commonwealth Income & Growth Fund III
Notes to Financial Statements
- --------------------------------------------------------------------------------
Reimbursable Expenses
The General Partner and its affiliates are entitled to
reimbursement by the Partnership for the cost of
supplies and 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 2003, 2002 and 2001, $62,000, $363,000, and
$193,000, respectively, of expenses were incurred by the
General Partner and its affiliates on behalf of the
Partnership.
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 2002 and 2001, equipment
acquisition fees of approximately $11,000 and $13,000,
respectively, were earned by the General Partner. There
were no acquisitions fees paid to the General Partner
during 2003.
Debt Placement Fee
As compensation for arranging term debt to finance the
acquisition of equipment by the Partnership, the General
Partner is paid a fee equal to 1% of such indebtedness;
provided, however, that such fee shall be reduced to the
extent the Partnership incurs such fees to third
parties, unaffiliated with the General Partner or the
lender, with respect to such indebtedness and no such
fee will be paid with respect to borrowings from the
General Partner or its affiliates. During 2002 and 2001,
debt placement fees of approximately $2,000 and $1,000,
respectively, were earned to the General Partner. There
were no finance fees paid to the General Partner during
2003.
16
Commonwealth Income & Growth Fund III
Notes to Financial Statements
- --------------------------------------------------------------------------------
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 2003, 2002 and 2001, equipment management
fees of approximately $20,000, $40,000 and $55,000,
respectively, were earned by 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. During
2003 and 2002, equipment liquidation fees of
approximately $2,000 and $7,000, respectively, were
earned by the General Partner. There were no equipment
liquidation fees earned in 2001.
17
Commonwealth Income & Growth Fund III
Notes to Financial Statements
- --------------------------------------------------------------------------------
6. Notes Payable Notes payable consisted of the following:
December 31, 2003 2002
---------------------------------------------------------------------------
Installment notes payable to banks; interest
ranging from 7.35% to 8.10%, were due in monthly
installments ranging from $1,162 to $3,465,
including interest, with final payments from
January through June 2003. $ --- $ 26,968
Installment notes payable to banks; interest
ranging from 6.75% to 8.00%, due in monthly
installments ranging from $382 to $3,831, including
interest, with final payments from January through
November 2004. 38,222 133,292
Installment notes payable to banks; interest
ranging from 6.25% to 6.75%, due in monthly
installments ranging from $123 to $1,735, including
interest, with final payments from February through
April 2005. 53,214 93,507
---------------------------------------------------------------------------
$ 91,436 $ 253,767
===========================================================================
These notes are secured by specific computer equipment
and are nonrecourse liabilities of the Partnership.
Aggregate maturities of notes payable for each of the
years subsequent to December 31, 2003 are as follows:
18
Commonwealth Income & Growth Fund III
Notes to Financial Statements
- --------------------------------------------------------------------------------
Year ending December 31, Amount
--------------------------------------------------------
2004 $ 81,135
2005 10,301
--------------------------------------------------------
$ 91,436
========================================================
7. Supplemental Other noncash activities included in the determination
Cash Flow of net income are as follows:
Information
Year ended December 31, 2003 2002 2001
- ---------------------------------------------------------------------------------------------
Lease income, net of interest expense on
notes payable realized as a result of direct
payment of principal by lessee to bank $ 162,331 $ 310,970 $ 587,327
Lease income paid to original lessor in lieu
of cash payment for computer equipment acquired
- ---------------------------------------------------------------------------------------------
Total adjustment to net (loss) from other
noncash activities $ 162,331 $ 310,970 $ 591,158
=============================================================================================
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.
Noncash investing and financing activities include the
following:
Year ended December 31, 2003 2002 2001
- ---------------------------------------------------------------------------------------------
Forgiveness of payables by related parties recorded
as capital contributions (see Note 5) $ 148,156 $ -- $ --
- ---------------------------------------------------------------------------------------------
Debt assumed in connection with
purchase of computer equipment $ -- $ 220,413 $ 139,462
=============================================================================================
19
Commonwealth Income & Growth Fund III
Notes to Financial Statements
- --------------------------------------------------------------------------------
8. Reconciliation of
Net (Loss) Reported
for Financial
Reporting Purposes
to Taxable (Loss) on
the Federal
Partnership Return
Year ended December 31, 2003 2002 2001
- --------------------------------------------------------------------------------------------------
Net (loss) for financial reporting
Purposes to taxable (loss) $ (156,223) $ (291,844) $ (207,627)
Adjustments
(Loss) on sale of computer equipment (174,813) (197,112) (129,701)
Depreciation (79,198) (9,592) 98,791
Amortization 9,886 19,000 38,155
Bad debt expense (28,096) 28,096 --
Unearned lease income (35,627) 37,262 --
Other (16,265) (100,016) 91,505
- --------------------------------------------------------------------------------------------------
Taxable (loss) on the Federal
Partnership Return $ (480,336) $ (514,206) $ (108,877)
==================================================================================================
The "Adjustments - Other" includes financial statement
adjustments reflected on the tax return in the
subsequent year.
Adjustment for (loss) on sale of equipment is due to
longer useful lives for tax reporting purposes.
20
Commonwealth Income & Growth Fund III
Notes to Financial Statements
- --------------------------------------------------------------------------------
9. Quarterly Results Summarized quarterly financial data for the years ended
of Operation December 31, 2003 and 2002 is as follows:
(Unaudited)
Quarter ended
--------------------------------------------------------------------
March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------------------------------------
2003
Revenues
Lease and other $ 139,517 $ 107,493 $ 77,461 $ 67,028
(Loss) gain on sale of computer
equipment (2,982) 6,299 13,861 (313)
- -----------------------------------------------------------------------------------------------------------------
Total revenues 136,535 113,792 91,322 66,715
Total costs and expenses 205,692 153,873 115,402 89,620
- -----------------------------------------------------------------------------------------------------------------
Net (loss) $ (69,157) $ (40,081) $ (24,080) $ (22,905)
=================================================================================================================
(Loss) per limited
partner unit $ (0.46) $ (0.27) $ (0.16) $ (0.14)
=================================================================================================================
21
Commonwealth Income & Growth Fund III
Notes to Financial Statements
- --------------------------------------------------------------------------------
Quarter ended
--------------------------------------------------------------------
March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------------------------------------
2002
Revenues
Lease and other $ 274,634 $ 182,459 $ 178,670 $ 148,957
Gain (loss) on sale of computer
equipment 4,994 4,123 (4,505) (269)
- -----------------------------------------------------------------------------------------------------------------
Total revenues 279,628 186,582 174,165 148,688
Total costs and expenses 303,721 271,288 267,584 238,314
- -----------------------------------------------------------------------------------------------------------------
Net (loss) $ (24,093) $ (84,706) $ (93,419) $ (89,626)
=================================================================================================================
(Loss) per limited
partner unit $ (0.16) $ (0.56) $ (0.62) $ (0.59)
=================================================================================================================
The cumulative gain or loss on sale of equipment is
included in revenue or cost, as appropriate.
22