Back to GetFilings.com
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, 2004
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 33-89476
COMMONWEALTH INCOME & GROWTH FUND II
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2785120
(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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class to Name of exchange on
be so registered which each class
is to be registered
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
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|
FORM 10-K
DECEMBER 31, 2004
TABLE OF CONTENTS
PART I
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters 11
Item 6. Selected Financial Data 14
Management's Discussion and Analysis of Financial Condition and
Item 7. Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 19
Item 8. Financial Statements and Supplementary Data 19
Changes in and Disagreements with Accountants on Accounting and
Item 9. Financial Disclosure 19
Item 9A. Controls and Procedures 20
Item 9B. Other Information 20
PART III
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial Owners and Management 23
Item 13. Certain Relationships and Related Transactions 23
Item 14. Principal Accountant Fees and Services 30
PART IV
Item 15. Exhibits and Financial Statements 30
Index to Exhibits
Signatures
Certifications
2
PART I
ITEM 1: BUSINESS
GENERAL
Commonwealth Income and Growth Fund II was formed on January 13, 1995, under the
Pennsylvania Revised Uniform Limited Partnership Act. The Partnership began
offering $15,000,000 of Units of Limited Partnership ("Units") to the public on
May 12, 1995. On September 22, 1995, the escrow agent released $2,521,380 in
subscriptions from investors and 126,118 Units were admitted as Limited Partners
of the Partnership. The Partnership terminated its offering of Units on May 12,
1997, with 461,817 Units ($9,235,185) admitted as Limited Partners of the
Partnership.
See "The Glossary" below for the definition of capitalized terms not otherwise
defined in the text of this report.
PRINCIPAL INVESTMENT OBJECTIVES
The Partnership was formed for the purpose of acquiring various types of
Equipment, including computer peripheral and other similar capital equipment.
The Partnership utilized the net proceeds of the Offering to purchase IBM and
IBM compatible computer peripheral and other similar capital equipment. The
Partnership utilizes Retained Proceeds and debt financing (not to exceed 30% of
the aggregate cost of the Equipment owned or subject to Conditional Sales
Contract by the Partnership at the time the debt is incurred) to purchase
additional Equipment. The Partnership acquires and leases equipment principally
to U.S. corporations and other institutions pursuant to Operating Leases. The
Partnership retains the flexibility to enter into Full Payout Net Leases, Direct
Financing Leases and Conditional Sales Contracts.
The Partnership's principal investment objectives are to:
(a) acquire, lease and sell Equipment to generate revenues from
operations sufficient to provide quarterly cash distributions to
Limited Partners;
(b) preserve and protect Limited Partners' capital;
(c) use a portion of Cash Flow and Net Disposition Proceeds derived from
the sale, refinancing or other disposition of Equipment to purchase
additional Equipment; and
(d) refinance, sell or otherwise dispose of Equipment in a manner that
will maximize the proceeds to the Partnership.
THERE CAN BE NO ASSURANCE THAT ANY OF THESE OBJECTIVES WILL BE ATTAINED.
Limited Partners do not have the right to vote on or otherwise approve or
disapprove any particular investment to be made by the Partnership.
Although the Partnership has acquired predominately new Equipment, the
Partnership may purchase used Equipment. Generally, Equipment is acquired from
manufacturers, distributors, leasing companies, agents, owner-users,
owner-lessors, and other suppliers upon terms that vary depending upon the
Equipment and supplier involved. Manufacturers and distributors usually furnish
a limited warranty against defects in material and workmanship and some purchase
agreements for Equipment provide for service and replacement of parts during a
limited period. Equipment purchases are also made through lease brokers and on
an ad hoc basis to meet the needs of a particular lessee.
As of December 31, 2004, substantially 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, Direct
Financing Leases or sold under Conditional Sales Contracts at the time of
3
acquisition or the Partnership may enter into a Full Payout Net Lease, Direct
Financing Leases 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, 2004,
the Partnership has not entered into any such agreements.
The General Partner has the discretion consistent with its fiduciary duty to
change the investment objectives of the Partnership if it determines that such a
change is in the best interest of the Limited Partners and so long as such a
change is consistent with the Partnership Agreement. The General Partner will
notify the Limited Partners if it makes such a determination to change the
Partnership's investment objectives.
TYPES OF EQUIPMENT
Computer Peripheral Equipment. Computer peripheral equipment consists of devices
used to convey information into and out of a central processing unit (or
"mainframe") of a computer system, such as tape drives, disk drives, tape
controllers, disk controllers, printers, terminals and related control units,
all of which are in some way related to the process of storing, retrieving, and
processing information by computer.
The Partnership acquires primarily IBM manufactured or IBM compatible equipment.
The General Partner believes that dealing in IBM or IBM compatible equipment is
particularly advantageous because of the large IBM customer base, policy of
supporting users with software and maintenance services and the large amount of
IBM and IBM compatible equipment in the marketplace.
Computer technology has developed rapidly in recent years and is expected to
continue to do so. Technological advances have permitted continued reductions in
the cost of computer processing capacity, thereby permitting applications not
economically feasible a few years ago. Much of the older IBM and IBM compatible
computer peripheral equipment has not been retired from service, because
software is generally interchangeable between older and newer equipment, and
older equipment is capable of performing many of the same functions as newer
equipment. The General Partner believes that historically values of peripheral
equipment have been affected less dramatically by changes in technology than
have the values of central processing units. An equipment user who upgrades to a
more advanced central processor generally can continue to use his existing
peripheral equipment. Peripheral equipment nevertheless is subject to declines
in value as new, improved models are developed and become available.
Technological advances and other factors, discussed below in Management
Discussion and Analysis, have at times caused dramatic reduction in the market
prices of older models of IBM and IBM compatible computer peripheral equipment
from the prices at which they were originally introduced.
Other Equipment-Restrictions. The Partnership acquires computer peripheral
equipment, such as tape drives, disk drives, tape controllers, disk controllers,
printers, terminals and related control units, all of which are in some way
related to the process of storing, retrieving and processing information by
computer. The General Partner is also authorized, but does not presently intend,
to cause the Partnership to invest in non-IBM compatible computer peripheral,
data processing, telecommunication or medical technology equipment. The
Partnership may not invest in any of such other types of Equipment (i) to the
extent that the purchase price of such Equipment, together with the aggregate
Purchase Price of all such other types of Equipment then owned by the
Partnership, is in excess of 25% of the total cost of all of the assets of the
Partnership at the time of the Partnership's commitment to invest therein and
(ii) unless the General Partner determines that such purchase is in the best
economic interest of the Partnership at the time of the purchase and, in the
case of non-IBM compatible peripheral Equipment, that such Equipment is
comparable in quality to similar IBM or IBM compatible Equipment. There can be
no assurance that any Equipment investments can be found which meet this
standard. Accordingly, there can be no assurance that investments of this type
will be made by the Partnership.
4
DIVERSIFICATION
Diversification is generally desirable to minimize the effects of changes in
specific industries, local economic conditions or similar risks. However, the
extent of the Partnership's diversification, in the aggregate and within each
category of Equipment, depends in part upon the financing which can be assumed
by the Partnership or borrowed from third parties on satisfactory terms. The
Partnership's policy not to borrow on a recourse basis will further limit its
financing options. Diversification also depends on the availability of various
types of Equipment. As of December 31, 2004, the Partnership has acquired a
diversified Equipment portfolio, which it has leased to 48 different companies
located throughout the United States. The allocations are as follows:
-----------------------------------------------------------------
Equipment Type Approximate %
-----------------------------------------------------------------
Workstations/Servers 48%
-----------------------------------------------------------------
High-End Printers 19%
-----------------------------------------------------------------
Tape Subsystems 14%
-----------------------------------------------------------------
Escon Directors 12%
-----------------------------------------------------------------
Routers 4%
-----------------------------------------------------------------
Communication Controllers 2%
-----------------------------------------------------------------
Low-End Printers 1%
-----------------------------------------------------------------
Total 100%
-----------------------------------------------------------------
During the operational stage of the Partnership, the Partnership may not at any
one point in time lease (or sell pursuant to a Conditional Sales Contract) more
than 25% of the Equipment to a single Person or Affiliated group of Persons.
DESCRIPTION OF LEASES
The Partnership to date has purchased, and in the future intends to continue to
purchase only Equipment that is subject to a lease or for which a lease or
similar agreement will be entered into contemporaneously with the consummation
of the Partnership's acquisition of the Equipment. The General Partner to date
has leased and in the future intends to lease most of the Equipment purchased by
the Partnership to third parties pursuant to Operating Leases. Operating Leases
are relatively short-term (12 to 48 month) leases under which the aggregate
noncancellable rental payments during the original term of the lease are not
sufficient to permit the lessor to recover the purchase price of the subject
Equipment. The Equipment may also be leased pursuant to Full Payout Net Leases.
Full Payout Net Leases are leases under which the aggregate noncancellable
rental payments during the original term of the lease are at least sufficient to
recover the purchase price of the subject Equipment. It is anticipated that the
Partnership will enter into few, if any, Full Payout net Leases. The General
Partner may also enter into Conditional Sales Contracts for Equipment. A
Conditional Sales Contract generally provides that the noncancellable payments
to the seller over the term of the contract are sufficient to recover the
investment in such Equipment and to provide a return on such investment. Under a
Conditional Sales Contract, the seller reserves title to, and retain a security
interest in, the Equipment until the Purchase Price of the Equipment is paid. As
of December 31, 2004, 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. The Equipment may also be leased pursuant to Capital Leases.
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. As of December 31, 2004, we have entered into seven
Capital Leases with two lessees.
In general, the terms of the Partnership's leases, whether the Equipment is
leased pursuant to an Operating lease, Capital 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, Capital Lease 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.
5
An Operating Lease generally represents a greater risk to the Partnership than a
Capital Lease or 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 Capital Lease or 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 Capital Lease or
Full Payout Net Lease. Also, the annual rental payments received under an
Operating Lease are ordinarily higher than those received under a Capital Lease
or 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, 2004, all leases that have
been entered into are "triple net leases".
The General Partner has not established any standards for lessees to whom it
will lease Equipment and, as a result, there is not an investment restriction
prohibiting the Partnership from doing business with any lessees. However, a
credit analysis of all potential lessees is undertaken by the General Partner to
determine the lessee's ability to make payments under the proposed lease. The
General Partner may refuse to enter into an agreement with a potential lessee
based on the outcome of the credit analysis.
The terms and conditions of the Partnership's leases, or Conditional Sales
Contracts, are each determined by negotiation and may impose substantial
obligations upon the Partnership. Where the Partnership assumes maintenance or
service obligations, the General Partner generally causes the Partnership to
enter into separate maintenance or service agreements with manufacturers or
certified maintenance organizations to provide such services. Such agreements
generally require annual or more frequent adjustment of service fees. As of
December 31, 2004, 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.
BORROWING POLICIES
The General Partner, at its discretion, may cause the Partnership to incur debt
in the maximum aggregate amount of 30% of the aggregate cost of the Equipment
owned, or subject to Conditional Sales Contract (except that the Partnership may
not incur any indebtedness to acquire Equipment until the net proceeds of the
Offering are fully invested, or committed to investment, in Equipment). The
Partnership will incur only non-recourse debt, which is secured by Equipment and
lease income there from. Such leveraging permits the Partnership to increase the
aggregate amount of its depreciable assets, and, as a result, potentially
increases both its lease revenues and its federal income tax deductions above
those levels, which would be achieved without leveraging. There is no limit on
the amount of debt that may be incurred in connection with the acquisition of
any single item of Equipment. Any debt incurred is fully amortized over the term
of the initial lease or Conditional Sales Contract to which the Equipment
securing the debt is subject. The precise amount borrowed by the Partnership
depends on a number of factors, including the types of Equipment acquired by the
Partnership; the creditworthiness of the lessee; the availability of suitable
financing; and prevailing interest rates. The Partnership is flexible in the
degree of leverage it employs, within the permissible limit. There can be no
assurance that credit will be available to the Partnership in the amount or at
the time desired or on terms considered reasonable by the General Partner. As of
December
6
31, 2004, the aggregate non-recourse debt outstanding of $116,000 was 4.0% of
the aggregate cost of the Equipment owned.
The Partnership may continue to purchase some items of Equipment without
leverage. If the Partnership purchases an item of Equipment without leverage and
thereafter suitable financing becomes available, it may then obtain the
financing, secure the financing with the purchased Equipment to the extent
practicable and invest any proceeds from such financing in additional items of
Equipment, or it may distribute some or all of such proceeds to the Limited
Partners. Any such later financing will be on terms consistent with the terms
applicable to borrowings generally. As of December 31, 2004, the Partnership has
not exercised this option.
The General Partner plans to continue to cause the Partnership to borrow funds,
to the fullest extent practicable, at interest rates fixed at the time of
borrowing. However, the Partnership may borrow funds at rates, which vary with
the "prime" or "base" rate. If lease revenues were fixed, a rise in the "prime"
or "base" rate would increase borrowing costs and reduce the amount of the
Partnership's income and cash available for distribution. Therefore, the General
Partner is permitted to borrow funds to purchase Equipment at fluctuating rates
only if the lease for such Equipment provides for fluctuating rental payments
calculated on a similar basis.
Any additional debt incurred by the Partnership must be non-recourse.
Non-recourse debt, in the context of the business to be conducted by the
Partnership, means that the lender providing the funds can look for security
only to the Equipment pledged as security and the proceeds derived from leasing
or selling such Equipment. Neither the Partnership nor any Partner (including
the General Partner) would be liable for repayment of any non-recourse debt.
Loan agreements may also require that the Partnership maintain certain reserves
or compensating balances and may impose other obligations upon the Partnership.
Moreover, since a significant portion of the Partnership's revenues from the
leasing of Equipment will be reserved for repayment of debt, the use of
financing reduces the cash, which might otherwise be available for distributions
until the debt has been repaid and may reduce the Partnership's Cash Flow over a
substantial portion of the Partnership's operating life. As of December 31,
2004, no such agreements existed.
The General Partner and any of its Affiliates may, but are not required to, make
loans to the Partnership on a short-term basis. If the General Partner or any of
its Affiliates makes such a short-term loan to the Partnership, the General
Partner of Affiliate may not charge interest at a rate greater that the interest
rate charged by unrelated lenders on comparable loans for the same purpose in
the same locality. In no event is the Partnership required to pay interest on
any such loan at an annual rate greater than three percent over the "prime rate'
from time to time announced by PNC Bank, Philadelphia, Pennsylvania ("PNC
Bank"). All payments of principal and interest on any financing provided by the
General Partner or any of its affiliates are due and payable by the Partnership
within 12 months after the date of the loan.
REFINANCING POLICIES
Subject to the limitations set forth in "Borrowing Policies" above, the
Partnership may refinance its debt from time to time. With respect to a
particular item of Equipment, the General Partner will take into consideration
such factors as the amount of appreciation in value, if any, to be realized, the
possible risks of continued ownership, and the anticipated advantages to be
obtained for the Partnership, as compared to selling such Equipment. During
2002, the Partnership refinanced its notes payable for six existing Operating
Leases. The refinanced notes payable, originally set to expire between February,
2004 and December, 2004, had a balance of approximately $190,000 at the time of
refinancing. The Partnership received cash of approximately $46,000, net of
refinancing fees of approximately $3,000. The new notes payable, which were
approximately $239,000 at the time of refinancing, expire in June 2006.
Simultaneous, with the refinancing, the Partnership entered into Direct
Financing Capital Leases with the two lessees for this Equipment.
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.
7
LIQUIDATION POLICIES
The General Partner intends to cause the Partnership to begin disposing of its
Equipment in approximately January 2006. Notwithstanding the Partnership's
objective to sell all of its assets and dissolve by December 31, 2006, the
General Partner may at any time cause the Partnership to dispose of all its
Equipment and, dissolve the Partnership upon the approval of Limited Partners
holding a Majority in Interest of Units.
Particular items of Equipment may be sold at any time if, in the judgment of the
General Partner, it is in the best interest of the Partnership to do so. The
determination of whether particular items of Partnership Equipment should be
sold or otherwise disposed of is made by the General Partner after consideration
of all relevant factors (including prevailing general economic conditions,
lessee demand, the General Partner's views of current and future market
conditions, the cash requirements of the Partnership, potential capital
appreciation, cash flow and federal income tax considerations), with a view
toward achieving the principal investment objectives of the Partnership. As
partial payment for Equipment sold, the Partnership may receive purchase money
obligations secured by liens on such Equipment.
MANAGEMENT OF EQUIPMENT
Equipment management services for the Partnership's Equipment is provided by the
General Partner and its Affiliates and by persons employed by the General
Partner. Such services will consist of collection of income from the Equipment,
negotiation and review of leases, Conditional Sales Contracts and sales
agreements, releasing and leasing-related services, payment of operating
expenses, periodic physical inspections and market surveys, servicing
indebtedness secured by Equipment, general supervision of lessees to assure that
they are properly utilizing and operating Equipment, providing related services
with respect to Equipment, supervising, monitoring and reviewing services
performed by others in respect to Equipment and preparing monthly Equipment
operating statements and related reports.
COMPETITION
The equipment leasing industry is highly competitive. The Partnership competes
with leasing companies, equipment manufacturers and their affiliated financing
companies, distributors and entities similar to the Partnership (including other
programs sponsored by the General Partner), some of which have greater financial
resources than the Partnership and more experience in the equipment leasing
business than the General Partner. Other leasing companies and equipment
manufacturers, their affiliated financing companies and distributors may be in a
position to offer equipment to prospective lessees on financial terms, which are
more favorable than those, which the Partnership can offer. They may also be in
a position to offer trade-in privileges, software, maintenance contracts and
other services, which the Partnership may not be able to offer. Equipment
manufacturers and distributors may offer to sell equipment on terms (such as
liberal financing terms and exchange privileges), which will afford benefits to
the purchaser similar to those obtained through leases. As a result of the
advantages, which certain of its competitors may have, the Partnership may find
it necessary to lease its Equipment on a less favorable basis than certain of
its competitors.
The computer peripheral equipment industry is extremely competitive. Competitive
factors include pricing, technological innovation and methods of financing.
Certain manufacturer-lessors maintain advantages through patent protection,
where applicable, and through a policy that combines service and hardware with
payment accomplished through a single periodic charge.
The dominant 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.
8
INVESTMENTS
The Partnership, through Commonwealth Capital Corp ("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 29, 2005, the Partnership has purchased, or has made the
commitment to purchase, the following Equipment:
EQUIPMENT LIST PURCHASE MONTHLY LEASE
LESSEE MFG DESCRIPTION PRICE PRICE RENT TERM
Chrysler STK (2) 9490-M34 $ 686,158 $ 490,110 $12,001 48
ADP IBM (1) 3490-A20 422,900 178,673 4,290 36
Household Intl. STK (3) 9490-M34 671,898 405,628 9,100 36
Timken DEC (1) Alpha server 259,507 204,781 5,308 36
Timken DEC (1) Alpha server 46,657 40,928 1,062 36
Johnson Control HP (13) HP9000-C110 441,415 304,718 7,961 36
Honda R&D SGI Onyx Infinite Reality 323,108 263,498 7,076 36
AT&T IBM (1) 3900 DW1/DW2 746,485 477,466 10,205 36
Federated IBM (38) 3130-020 909,910 600,000 15,162 34
Lucent SUN (1)E6000 server 642,452 461,207 12,042 36
Lucent upgrade SUN Upgrade to server 97,000 69,559 2,046 34
AT&T STK (9) 9490-M34 2,015,694 1,268,909 31,144 36
Avon IBM (75%) (8) 3900-OW1 2,002,710 1,542,485 37,058 36
Chrysler IBM (2) ES3000 1,146,500 778,454 22,844 24
Allied Signal HP (20) C180 workstations 838,339 362,615 11,775 24
Transamerica SUN (2) ES3000 servers 212,730 154,965 3,976 36
Computer Science Corp. SGI (50%) (141) workstations 2,055,893 822,455 20,174 36
Charles Schwab IBM (2) 9032-003 845,043 523,399 21,031 36
Charles Schwab IBM (20%) (6) 9032-003 2,479,443 307,983 6,989 36
Equitable Life SUN (2) E3000 336,220 205,893 6,491 36
Chase SUN (3) E45D 358,562 244,584 8,386 24
Aetna STK (2) 9490-M34 535,932 194,272 4,395 36
Equitable Life SUN 6000 Server 617,310 466,496 12,186 36
Chrysler STK Redwood Tape Drives 466,140 275,094 6,313 36
Chrysler STK Redwood Tape Drives 310,760 183,396 4,209 36
Depository Trust ESCON (4) 9032 Directors 1,644,436 1,312,867 33,376 31
Depository Trust ESCON (4) 9032 Directors 1,644,436 1,255,784 33,376 27
Pitney Bowes IBM (1) 3590 1,846,080 1,026,634 20,045 38
Lucent SUN (1) 4500 Server 184,897 120,701 3,091 36
Kaiser IBM (7) RS 6000 770,611 560,621 14,928 36
Kaiser IBM (2) RS 170 209,445 138,149 3,666 36
Kaiser CISCO Routers 78,172 62,538 1,637 36
Thomson EPSON (16) Powerlite Projectors 146,960 93,002 2,578 36
Thomson NORTEL Network LLXR759 165,000 109,328 4,245 36
Great Lakes Chemical CISCO (100) Routers 635,385 456,368 12,073 36
AT&T NM Net Ports DS3 16,288 15,229 435 36
Datapage Tech CISCO Routers 22,604 20,424 725 34
Digital Display Tech ROLLO Paper Roll System 18,422 16,785 567 36
Global Routing Tech DELL Workstations/Servers 46,698 42,452 1,434 36
Keller Group DELL Workstations/Servers 59,680 53,481 2,016 32
Keller Group HP Servers/Printers 34,210 30,487 1,203 30-31
Kennedy Assoc/Architects DELL Workstations/Servers 52,632 47,598 1,664 31-36
Missouri Farm Bureau Serv DELL Workstations/Servers 265,000 241,616 8,008 36-37
Missouri Farm Bureau Serv HP Workstations/Serv/Printers 12,084 11,817 354 37
Missouri Farm Bureau Serv IBM Servers 11,034 9,971 364 33
Patients First Health Care Micro Sys Workstations 2,863 2,605 88 36
Petnik & Smith Commun. COMPAQ Server 19,215 17,523 642 33
Provident Counseling DELL Workstations 4,725 4,260 156 33
The Gannon Company IBM Workstations/Server 14,502 11,608 463 24-31
Tonnercharge of St Louis HP Server/Printers 9,927 7,790 332 20-27
9
Union Financial Group DELL Workstation 7,332 5,427 234 22
Vatterott Educational Centers DELL Workstations 43,191 39,084 1,381 34-35
Thomson NORTEL (46) LAN Routers 74,480 49,106 1,369 36
General Electric Medical CISCO Routers 117,110 69,523 1,856 35
General Electric Medical CISCO Routers 100,000 65,491 1,762 36
Thomson Thermojet SOP System 27,430 18,189 710 24
General Electric Medical IBM (15) 4320-001 InfoPrint 64,050 41,996 1,159 36
Thomson XEROX 8830 Printer/Plotter 41,280 27,391 1,064 24
Kaiser IBM 7017-S85 147,308 150,254 11,655 36
Boeing SUN 280R Sparclil Model 555,663 566,776 14,892 36
Eq Pkg Various Routers/Servers 454,096 454,096 15,940 16-36
General Electric Medical CISCO 24 Port Access Server 15,175 15,479 411 36
General Electric Medical CISCO 1 Port upgrade 1,943 1,982 67 30
Cap Tech Various Routers/Servers 458,504 347,833 10,685 25-37
America Online SUN Servers 836,026 836,026 22,799 35
JC Penny NCR Router 74,071 74,071 2,249 30
JC Penny NCR Router 120,767 120,767 3,896 30
ITT Night Vision DELL Workstation 24,486 24,486 1,084 22
America Online SUN Server 135,315 135,315 4,474 27
Budnick Converting Inc DELL Workstation 47,955 47,955 1,370 34
Datapage Technologies DELL Workstations/Printer 10,160 10,160 280 36
C. Hager & Sons Hinge Mfg DELL Workstations 65,496 65,496 1,875 34
C. Hager & Sons Hinge Mfg DELL Server 19,036 19,036 549 34
Paric Corporation NEC Monitors 32,151 32,151 1,267 24
Rogers Townsend COMPAQ Servers 36,696 36,696 1,006 36
Retex Corporation COMPAQ Workstation 6,093 6,093 379 14
Training A-La-Carte COMPAQ Workstation 8,502 8,502 241 35
General Electric Medical SUN Server 20,000 20,000 521 36
XTS Corp COMPAQ Workstation 21,500 15,000 427 36
Aisin Brake HP Server 21,139 21,139 1,267 14
RESERVES
Because the Partnership's leases are on a "triple-net" basis, no permanent
reserve for maintenance and repairs will be established from the Offering
proceeds. However, the General Partner, in its sole discretion, may retain a
portion of the Cash Flow and Net Disposition Proceeds available to the
Partnership for maintenance, repairs and working capital. There are no
limitations on the amount of Cash Flow and Net Disposition Proceeds that may be
retained as reserves. Since no reserve will be established if available Cash
Flow of the Partnership is insufficient to cover the Partnership's operating
expenses and liabilities, it may be necessary for the Partnership to obtain
additional funds by refinancing its Equipment or borrowing.
GENERAL RESTRICTIONS
Under the Partnership Agreement, the Partnership is not permitted, among
other things, to:
(a) invest in junior trust deeds unless received in connection with the
sale of an item of Equipment in an aggregate amount which does not
exceed 30% of the assets of the Partnership on the date of the
investment;
(b) invest in or underwrite the securities of other issuers;
(c) acquire any Equipment for Units;
(d) issue senior securities (except that the issuance to lenders of
notes or other evidences of indebtedness in connection with the
financing or refinancing of Equipment or the Partnership's business
shall not be deemed to be the issuance of senior securities);
(e) make loans to any Person, including the General Partner or any of
its Affiliates, except to the extent a Conditional Sales Contract
constitutes a loan;
(f) sell or lease any Equipment to, lease any Equipment from, or enter
into any sale-leaseback transactions with, the General Partner or
any of its Affiliates; or
(g) give the General Partner or any of its Affiliates an exclusive right
or employment to sell the Partnership's Equipment.
10
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, Commonwealth Capital Corp. (CCC), which has 34 employees
as of December 31, 2004.
ITEM 2: PROPERTIES
NOT APPLICABLE
ITEM 3: LEGAL PROCEEDINGS
Commonwealth Capital Corp filed a complaint on December 21,
2001 with Avon Products, Inc. with the Federal District Court
of the Eastern District of Pennsylvania, No. 01-C2-6915. The
complaint alleged that the defendants illegally purchased/sold
leased equipment without the Partnership's authorization,
and sought late fees on various lease payments.
In June 2003, the Partnership, through CCC, reached a
favorable settlement in the lawsuit. The settlement did not
have a material adverse impact to the financial statements of
the Partnership. As of December 31, 2002, the Partnership had
recorded a receivable from the customer of approximately
$404,000, net of an allowance of approximately $330,000. In
July 2003, the Partnership received approximately $405,000 in
proceeds relating to this receivable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NOT APPLICABLE
PART II
ITEM 5: MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public market for the Units nor is it anticipated that one
will develop. As of December 31, 2004, there were 539 holders of Units. The
Units are not listed on any exchange or permitted to trade on any
over-the-counter market. In addition, there are substantial restrictions on the
transferability of Units.
GENERAL LIMITATIONS
Units cannot be transferred without the consent of the General Partner, which
may be withheld in its absolute discretion. The General Partner monitors
transfers of Units in an effort to ensure that all transfers are within certain
safe harbors promulgated by the IRS to furnish guidance regarding publicly
traded partnerships. These safe harbors limit the number of transfers that can
occur in any one year. The General Partner intends to cause the Partnership to
comply with the safe harbor that permits nonexempt transfers and
11
redemptions of Units of up to five percent of the total outstanding interest in
the Partnership's capital or profits in any one year.
REDEMPTION PROVISION
Upon the conclusion of the 30-month period following the termination of the
Offering, the Partnership may, at the sole discretion of the General Partner,
repurchase a number of the outstanding Units. After such 30 month period, on a
semi-annual basis, the General Partner, at its discretion, will establish an
amount for redemption, generally not to exceed two percent of the outstanding
Units per year, subject to the General Partner's good faith determination that
such redemptions will not (a) cause the Partnership to be taxed as a corporation
under Section 7704 of the Code or (b) impair the capital or operations of the
Partnership. (The Partnership may redeem Units in excess of the two percent
limitation if, in the good faith judgment of the General Partner, the conditions
imposed in the preceding sentence would remain satisfied.) The redemption price
for Units will be 105% of the selling Limited Partner's Adjusted Capital
Contributions attributable to the Units for sale. Following the determination of
the annual redemption amount, redemptions will occur on a semi-annual basis and
all requests for redemption, which must be made in writing, must be on file as
of the Record Date in which the redemption is to occur. The General Partner will
maintain a master list of requests for redemption with priority being given to
Units owned by estates, followed by IRAs and Qualified Plans. All other requests
will be considered in the order received. Redemption requests made by or on
behalf of Limited Partners who are not affiliated with the General Partner or
its Affiliates will be given priority over those made by Limited Partners who
are affiliated with the General Partner or its Affiliates. All redemption
requests will remain in effect until and unless canceled, in writing, by the
requesting Limited Partner(s).
The Partnership will accept redemption requests beginning 30 months following
the termination of the Offering. There will be no limitations on the period of
time that a redemption request may be pending prior to its being granted.
Limited Partners will not be required to hold their interest in the Partnership
for any specified period prior to their making a redemption request.
In order to make a redemption request, Limited Partners will be required to
advise the General Partner in writing of such request. Upon receipt of such
notification, the Partnership will provide detailed forms and instructions to
complete the request.
EXEMPT TRANSFERS
The following six categories of transfers are exempt transfers for purposes of
calculating the volume limitations imposed by the IRS and will generally be
permitted by the General Partner:
(1) transfers in which the basis of the Unit in the hands of the
transferee is determined, in whole or in part, by reference to its
basis in the hands of the transferor (for example, Units acquired by
corporations in certain reorganizations, contributions to capital,
gifts of Units, Units contributed to another partnership, and no
liquidating as well as liquidating distributions by a parent
partnership to its partners of interests in a sub partnership);
(2) transfers at death;
(3) transfers between members of a family (which include brothers and
sisters, spouse, ancestors, and lineal descendants);
(4) transfers resulting from the issuance of Units by the Partnership in
exchange for cash, property, or services;
(5) transfers resulting from distributions from Qualified Plans; and
(6) any transfer by a Limited Partner in one or more transactions during
any 30-day period of Units representing in the aggregate more than
five percent of the total outstanding interests in capital or
profits of the Partnership.
ADDITIONAL RESTRICTIONS ON TRANSFER
Limited Partners who wish to transfer their Units to a new beneficial owner are
required to pay the Partnership up to $50 for each transfer to cover the
Partnership's cost of processing the transfer application and take such other
actions and execute such other documents as may be reasonably requested by the
12
General Partner. There is no charge for re-registration of a certificate in the
event of a marriage, divorce, death, or trust so long as the transfer is not a
result of a sale of the Units.
In addition, the following restrictions apply to each transfer: (i) no transfer
may be made if it would cause 25% or more of the outstanding Units to be owned
by benefit plans; and (ii) no transfer is permitted unless the transferee
obtains such governmental approvals as may reasonably be required by the General
Partner, including without limitation, the written consents of the Pennsylvania
Securities Commissioner and of any other state securities agency or commission
having jurisdiction over the transfer.
ALLOCATION AND DISTRIBUTION BETWEEN THE GENERAL PARTNER AND THE LIMITED PARTNERS
Cash distributions, if any, are made quarterly on March 31, June 30, September
30 and December 31, of each year. Distributions are made 99% to the Limited
Partners and one percent to the General Partner until the Limited Partners have
received an amount equal to their Capital Contributions plus the Priority
Return; thereafter, cash distributions will be made 90% to Limited Partners and
10% to the General Partner. Distributions made in connection with the
liquidation of the Partnership or a Partner's Units will be made in accordance
with the Partner's positive Capital Account balance as determined under the
Partnership Agreement and Treasury Regulations.
The Priority Return is calculated on the Limited Partners' Adjusted Capital
Contributions for their Units. The Adjusted Capital Contributions will initially
be equal to the amount paid by the Limited Partners for their Units. If
distributions at any time exceed the Priority Return, the excess will reduce the
Adjusted Capital Contributions, decreasing the base on which the Priority Return
is calculated.
If the proceeds resulting from the sale of any Equipment are reinvested in
Equipment, sufficient cash will be distributed to the Partners to pay the
additional federal income tax resulting from such sale for a Partner in a 39.6%
federal income tax bracket or, if lower, the maximum federal income tax rate in
effect for individuals for such taxable year.
Generally, the General Partner is allocated Net Profits equal to its cash
distributions (but not less than one percent of Net Profits) and the balance is
allocated to the Limited Partners. Net Profits arising from transactions in
connection with the termination or liquidation of the Partnership are allocated
in the following order: (1) First, to each Partner in an amount equal to the
negative amount, if any, of his Capital Account; (2) Second, an amount equal to
the excess of the proceeds which would be distributed to the Partners based on
the Operating Distributions to the Partners over the aggregate Capital Accounts
of all the Partners, to the Partners in proportion to their respective shares of
such excess, and (3) Third, with respect to any remaining Net Profits, to the
Partners in the same proportions as if the distributions were Operating
Distributions. Net Losses, if any, are in all cases allocated 99% to the Limited
Partners and one percent to the General Partner.
Net Profits and Net Losses are computed without taking into account, in each
taxable year of the Partnership, any items of income, gain, loss or deduction
required to be specially allocated pursuant to Section 704(b) of the Code and
the Treasury Regulation promulgated there under. No Limited Partner is required
to contribute cash to the capital of the Partnership in order to restore a
closing Capital Account deficit, and the General Partner has only a limited
deficit restoration obligation under the Partnership Agreement.
Quarterly distributions in the following amounts were declared and paid to the
Limited Partners during 2004, 2003 and 2002.
Quarter Ended 2004 2003 2002
-------------------------------------------------------------------
March 31 $114,286 $114,286 $171,428
June 30 114,285 171,428 114,286
September 30 114,285 171,428 114,286
December 31 56,925 114,286 114,286
------------------------------------------
$399,781 $571,428 $514,286
======== ======== ========
13
ALLOCATIONS AND DISTRIBUTIONS AMONG THE LIMITED PARTNERS
Except during the Offering Period, Cash Available for Distribution, which is
allocable to the Limited Partners, is apportioned among and distributed to them
solely with reference to the number of Units owned by each as of the Record Date
for each such distribution. During the Offering Period, Cash Available for
Distribution which is allocable to the Limited Partners was apportioned among
and distributed to them with reference to both (i) the number of Units owned by
each as of each Record Date and (ii) the number of days since the previous
Record Date (or, in the case of the first Record Date, the commencement of the
Offering Period) that the Limited Partner owned the Units.
After the Offering Period, Net Profits, Net Losses and Cash Available for
Distribution allocable to the Limited Partners is apportioned among them in
accordance with the number of Units owned by each. A different convention was
utilized during the Offering Period, whereby Net Profits and Net Losses
allocable to Limited Partners were apportioned among them in the ratio which the
product of the number of Units owned by a Limited Partner multiplied by the
number of days in which the Limited Partner owns such Units during the period
bears to the sum of such products for all Limited Partners.
In addition, where a Limited Partner transfers Units during a taxable year, the
Limited Partner may be allocated Net Profits for a period for which such Limited
Partner does not receive a corresponding cash distribution.
ITEM 6: SELECTED FINANCIAL DATA
The following table sets forth, in summary form, selected financial data for the
Partnership for each of the five years in the period ended December 31, 2004.
This table is qualified in its entirely 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.
YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------
Statements of
Operations Data: 2004 2003 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
Lease Income $697,530 $1,515,990 $2,711,579 $3,014,643 $4,105,811
- -------------------------------------------------------------------------------------------------------------
Net Income
(Loss) (541,798) 129,629 (251,242) 422,762 (369,209)
- -------------------------------------------------------------------------------------------------------------
Cash
Distributions 403,419 577,200 519,480 692,269 923,546
- -------------------------------------------------------------------------------------------------------------
Net Income
(Loss) per
Limited
Partner Unit (1.18) 0.28 (0.55) 0.90 (0.82)
- -------------------------------------------------------------------------------------------------------------
Cash
Distribution
per Limited
Partner Unit 0.87 1.24 1.12 1.50 1.98
- -------------------------------------------------------------------------------------------------------------
14
AS OF DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
Other Data: 2004 2003 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used
in) operating activities $(102,527) $ 61,782 $480,314 $1,148,982 $ 856,804
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used
in) investing activities 239,177 406,933 13,199 (374,359) 299,353
- -------------------------------------------------------------------------------------------------------------------
Net cash (used in)
financing activities (173,323) (464,318) (474,577) (1,037,917) (930,761)
- -------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Total Assets $522,871 $1,992,457 $3,592,482 $4,859,360 $4,387,648
- ------------------------------------------------------------------------------------------------------------------
Notes Payable 115,967 728,365 1,780,299 2,380,383 1,665,816
- ------------------------------------------------------------------------------------------------------------------
Partners' Capital 138,826 1,084,443 1,532,014 2,306,900 2,586,984
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) per unit is computed based upon net income (loss) allocated to
the Limited Partners and the weighted average number of equivalent Units
outstanding during the year. Cash distribution per Unit is computed based upon
distributions allocated to the Limited Partners and the weighted average number
of equivalent Units outstanding during the year.
ITEM 7: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Partnership's discussion and analysis of its financial condition and results
of operations are based upon its financial statements which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires the Partnership
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. The Partnership bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Partnership believes that its critical accounting policies affect its more
significant judgments and estimates used in the preparation of its financial
statements.
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.
REVENUE RECOGNITION
15
Through December 31, 2004, the Partnership's leasing operations consist
substantially of operating leases and seven direct financing leases. Operating
lease revenue is recognized on a monthly basis in accordance with the terms of
the lease agreement. Unearned revenue from direct financing agreements is
amortized to revenue over the lease term.
The Partnership reviews a customer's credit history before extending credit and
establishes a provision for uncollectible accounts receivable 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
The Partnership satisfied its minimum offering requirements and commenced
operations on September 22, 1995.
For the year ended December 31, 2004, the Partnership used cash flow from
operating activities of $103,000, which includes a net loss of $541,798, a loss
on the sale of computer equipment of $54,000, and depreciation and amortization
expenses of $770,000. Other noncash activities included in the determination of
net loss include direct payments of lease income by lessees to banks of
$574,000.
The Partnership's primary source of capital for the year ended December 31, 2004
was from repayment of $231,000 made by CCC for the outstanding note, and
proceeds from the sale of computer equipment of $244,000. The Partnership's
primary sources of capital for the years ended December 31, 2003 and 2002 were
from cash from operations of $62,000 and $480,000, and proceeds from the sale of
computer equipment of $423,000, and $134,000 respectively. The primary uses of
cash for the years ended December 31, 2004, 2003 and 2002, were for capital
expenditures for new equipment totaling $4,000, $15,000, and $97,000, the
payment of acquisition fees of $1,000, $1,000, and $24,000, and the payment of
preferred distributions to partners totaling $404,000, $577,000, and $519,000,
respectively.
In June 2003, the Partnership, through CCC, reached a favorable settlement in
the lawsuit with Avon Products, Inc. As of December 31, 2002, the Partnership
had recorded a receivable from the customer of approximately $404,000, net of an
allowance of approximately $330,000. In July 2003, the Partnership received
approximately $405,000 in proceeds relating to this receivable.
Cash is invested in money market accounts that invest directly in treasury
obligations pending the Partnership's use of such funds to purchase additional
computer equipment, to pay Partnership expenses or to make distributions to the
Partners. At December 31, 2004 and 2003 the Partnership had $0 and $26,000,
respectively, invested in these money market accounts.
As of December 31, 2004, the Partnership had a non-interest bearing receivable
from CCC, a related party to the Partnership, in the amount of approximately
$16,000. CCC, through its indirect subsidiaries, including the General Partner
of the Partnership, earns fees based on revenues and new lease purchases
16
from this fund. This receivable has been reduced by approximately $354,000
during the twelve months ended December 31, 2004 by the offsetting of equipment
management and other fees and payments by CCC.
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, 2004, the Partnership had future minimum rentals on
noncancellable operating leases of $42,000 for the year ended 2005 and $7,000
thereafter. As of December 31, 2004, the Partnership had future minimum rentals
on noncancellable capital leases of $72,000 for the year ended 2005 and $32,000
thereafter. At December 31, 2004, the outstanding debt was $116,000, with
interest rates ranging from 5.95% to 6.75% and will be payable through June
2006. 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, 2004 and 2003 was
approximately $1,306,000 and $1,660,000, respectively, 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, 2004
and 2003 was approximately $2,249,000 and $2,813,000, respectively. The
Partnership's share of the outstanding debt associated with this equipment at
December 31, 2004 and 2003 was approximately $700 and $422,000, respectively,
which is included in the Partnership's liabilities on the balance sheet, and the
total outstanding debt at December 31, 2004 and 2003 related to the equipment
shared by the Partnership was approximately $1,000 and $696,000, respectively.
The Partnership's cash flow from operations is expected to continue to be
adequate to cover all operating expenses, liabilities, and preferred
distributions to Partners during the next 12-month period. If available Cash
Flow or Net Disposition Proceeds are insufficient to cover the Partnership
expenses and liabilities on a short and long term basis, the Partnership will
attempt to obtain additional funds by disposing of or refinancing Equipment, or
by borrowing within its permissible limits. The Partnership may also reduce the
distributions to its Partners if it deems necessary. Since the Partnership's
leases are on a "triple-net" basis, no reserve for maintenance and repairs are
deemed necessary.
RESULTS OF OPERATIONS
For the year ended December 31, 2004, the Partnership had a net loss of
$542,000. In 2004,2003 and 2002, the Partnership recognized income of $742,000,
$1,958,000 and $2,714,000 and expenses of $1,284,000, $1,828,000 and $2,965,000,
resulting in net loss of $542,000 and $251,000 for the years ended December 31,
2004 and 2002, respectively, and net income for the year ended December 31, 2003
of $130,000.
Lease income decreased to $698,000 in 2004, down from $1,516,000 and $2,712,000
in 2003 and 2002, respectively, primarily due to the fact that more lease
agreements terminated than new lease agreements were entered into since 2001.
The Partnership sold computer equipment during the years ended December 31,
2004, 2003 and 2002 with a net book value of $298,000, $143,000 and $134,000,
respectively, for a net (loss)gain of $(54,000), 439,000 and $1,000 in 2004,
2003 and 2002, respectively.
Operating expenses, excluding depreciation, consist of accounting, legal,
outside service fees and reimbursement of expenses to CCC, for administration
and operation of the Partnership. These expenses decreased by 35 % to $398,000,
down from $608,000 and $571,000 during the years ended December 31, 2003 and
2002, respectively. This decrease is primarily attributable to remarketing fees
paid to brokers decreasing by approximately $53,000, a decrease in legal fees of
approximately $77,000, a decrease in
17
postage/shipping of approximately $17,000, a decrease in training of
approximately $13,000, a decrease in due diligence of approximately $24,000, a
decrease in conventions of approximately $4,000 and a decrease in reimbursable
expenses in connection with the administration and operation of the Partnership
charged by CCC, of approximately $40,000.
The equipment management fee is approximately 5% of the gross lease revenue
attributable to equipment that is subject to operating and capital leases. The
equipment management fee decreased 53% to $36,000 during the year ended December
31, 2004, down from $76,000 and $136,000 during the years ended December 31,
2003 and 2002, respectively, which is consistent with the change in lease
income.
Depreciation and amortization expenses consist of depreciation on computer
equipment, impairment charges and equipment acquisition fees and debt placement
fees. The decrease of 27% to $770,000, during the year ended December 31, 2004,
down from $1,055,000 and $1,704,000 during the years ended December 31, 2003 and
2002, respectively, is attributable to the decrease in the computer equipment
portfolio being leased.
The Partnership identified specific computer equipment and associated equipment
acquisition costs, which were reevaluated due to technological changes. In 2004
and 2003, the Partnership determined that the carrying amount of certain assets
was greater than the undiscounted cash flows to be generated by these assets.
The Partnership recorded charges of $40,000 and $31,000, respectively, in the
fourth quarters of 2004 and 2003 to record the assets at their estimated fair
value. Such amounts have been included in depreciation expense in the
accompanying financial statements. In 2002, the Partnership determined that no
impairment had occurred.
NET INCOME / LOSS
Net loss increased to $542,000 in 2004 from net income of $130,000 in 2003
and net loss of $252,000 in 2002.
The changes in net income (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,
2004:
Payments due by period
Total 2005 2006
-------- -------- --------
Installment notes payable
due 2005:
Principal $ 19,685 $ 19,685 $ --
Interest 3,409 3,409 --
Installment notes payable
due 2006:
Principal 96,282 63,217 33,065
Interest 4,949 4,271 678
----------------------------------------
Total $124,325 $ 90,582 $ 33,743
========================================
18
RECENT ACCOUNTING PRONOUNCEMENTS
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. In December 2003,
FASB issued a revision to Interpretation 46 ("FIN 46-R") to clarify the
provisions of FIN 46. The application of FIN 46-R is effective for public
companies, other than small business issuers, after March 15, 2004. Management
believes that the adoption of Interpretation No. 46-R did not have an impact on
the 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
Our financial statements for the fiscal years ended December 31, 2004 and
2003, and the reports thereon of Asher and Company, Ltd. and BDO Seidman, LLP
respectively, are included in this annual report.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective October 11, 2004, the registrant dismissed its principal
independent accounting firm, BDO Seidman, LLP. BDO Seidman, LLP's reports on the
registrant's financial statements for the two most recently completed fiscal
years did not contain any adverse opinion or a disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or accounting
principles. The decision to change accountants was approved by the board of
directors of the registrant's general partner. During the registrant's two most
recent fiscal years and the interim period prior to such dismissal, the
registrant had no disagreements with BDO Seidman, LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
BDO Seidman, LLP, would have caused BDO Seidman, LLP to make reference to the
subject matter of the disagreements in connection with its report. Further,
during the registrant's two most recent fiscal years and the interim period
prior to such dismissal, there occurred no reportable events, as set forth in
Item 304(a)(1)(v) of Regulation S-K.
The registrant has provided BDO Seidman, LLP with a copy of this
disclosure on or prior to the date hereof and has requested BDO Seidman, LLP to
provide the registrant with a letter addressed to the Securities and Exchange
Commission stating whether it agrees with the statements contained herein. A
copy of such letter will be filed by amendment to this report when and if it is
received by the registrant.
Also effective October 11, 2004, the registrant has retained Asher &
Company, Ltd. of Philadelphia, Pennsylvania as its principal independent
accounting firm. The registrant believes that Asher
19
& Company, Ltd. is an accounting firm of a size and scope of experience better
suited to the registrant's current needs than the registrant's former accounting
firm.
During our two most recent fiscal years, we have not consulted with Asher
& Company, Ltd. on any matter that (i) involved the application of accounting
principles to a specific completed or contemplated transaction, or the type of
audit opinion that might be rendered on our financial statements, in each case
where written or oral advice was provided, that was an important factor
considered by us in reaching a decision as to the accounting, auditing or
financial reporting issue; or (ii) was either the subject of a disagreement or
event, as that term is described in item 304(a)(1)(iv)(A) of Regulation S-X.
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, 2004, 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
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 9B: OTHER INFORMATION
NO APPLICABLE
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
GENERAL
The Partnership does not have any Directors or executive officers.
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 III,
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.
20
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
Lynn A. Franceschina Vice President and Controller of the General Partner
and CCC
Donald Bachmayer 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 70, 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
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. (Mr. Springsteen is the spouse of Kimberly A.
Springsteen)
Kimberly A. Springsteen, age 45, 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. (Ms. Springsteen is the spouse
of George S. Springsteen)
Henry J. Abbott, age 54, 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 56, 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.
21
Lynn A. Franceschina, , age 33, is Vice President and Controller of the
General Partner and CCC and certain of its subsidiaries after returning to the
organization in 2004. From the period of March 2004 to October 2004, Ms.
Franceschina was employed at Wilmington Trust Corp. where she was part of the
policies & procedures team responsible for Sarbanes Oxley documentation. From
November 2001 to February 2004, Ms. Franceschina was Vice President and
Accounting Manager of the General Partner and CCC and certain of its
subsidiaries. Prior to that, Ms. Franceschina served as Business Controls
Manager for Liquent, Inc., a regulatory publishing software developer. Ms.
Franceschina received a Bachelor of Science degree in Accounting from Robert
Morris University. Ms. Franceschina is a member of the Institute of Management
Accountants and the Equipment Leasing Association.
Donald Bachmayer, age 40, is Assistant Vice President and Accounting Manager of
the General Partner and CCC and certain of its subsidiaries where he has been
employed since 2004. From 1997 to 2001, Mr. Bachmayer was an accountant with
Fishbein & Company, P.C., certified public accountants. Prior to joining
Commonwealth, Mr. Bachmayer was employed as Accounting Supervisor for LEAF
Financial, an equipment leasing sponsor. Mr. Bachmayer received a B.S. degree in
Accounting from LaSalle University.
Dorothy A. Ferguson, age 62, 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.
Karen Tramontano, age 52, Assistant Vice President & Marketing Manger,
joined Commonwealth in 2000, bringing 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 27, 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. (Mr. Borham is the
son of Kimberly A. Springsteen)
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.
The Partnership has no audit committee financial expert, as defined under
Section 229.401 of the Exchange Act, serving on its audit committee. An audit
committee is not required because the Partnership is not a listed security as
defined by Section 240.10A-3; therefore, no audit committee financial expert is
required.
CODE OF ETHICS
In view of the fiduciary obligation that the General Partner has to the
Partnership, the General Partner believes an adoption of a formal code of ethics
is unnecessary and would not benefit the Partnership, particularly, in light of
Partnership's limited business activities.
22
ITEM 11: EXECUTIVE COMPENSATION
NOT APPLICABLE
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
NOT APPLICABLE
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 2004 DURING 2003 DURING 2002
The General Partner Reimbursable Expenses. The General and $331,000 $371,000 $491,000
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.
23
The General Partner Equipment Acquisition Fee. An Equipment $1,000 $1,000 $24,000
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 $0 $5,000
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 $36,000 $76,000 $136,000
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.
24
The General Partner Equipment Liquidation Fee. With respect $0 $0 $0
to each item of Equipment sold by the
General Partner (other than in connection
with a Conditional Sales Contract), a fee
equal to the lesser of (i) 50% of the
Competitive Equipment Sale Commission or
(ii) three percent of the sales price for
such Equipment. The payment of such fee
is subordinated to the receipt by the
Limited Partners of (i) a return of their
Capital Contributions and 10% annum
cumulative return, compounded daily, on
Adjusted Capital Contributions ("Priority
Return") and (ii) the Net Disposition
Proceeds from such sale in accordance
with the Partnership Agreement. Such fee
is reduced to the extent any liquidation
or resale fees are paid to unaffiliated
parties.
The General Partner Partnership Interest. The General Partner $4,038 $5,772 $5,194
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.
The Partnership is subject to various conflicts of interest arising out of
its relationships with the General Partner and its Affiliates. These conflicts
include the following:
COMPETITION WITH GENERAL PARTNER AND AFFILIATES: COMPETITION FOR MANAGEMENT'S
TIME
The General Partner and its Affiliate sponsor other investor programs,
which are in potential competition with the Partnership in connection with the
purchase of Equipment as well as opportunities to lease and sell such Equipment.
Competition for Equipment has occurred and is likely to occur in the future. The
General Partner and its Affiliates may also form additional investor programs,
which may be competitive with the Partnership.
If one or more investor programs and the Partnership are in a position to
acquire the same Equipment, the General Partner will determine which program
will purchase the Equipment based upon the objectives of each and the
suitability of the acquisition in light of those objectives. The General Partner
will generally afford priority to the program or entity that has had funds
available to purchase Equipment for the longest period of time. If one or more
investor programs and the Partnership are in a position to enter into lease with
the same lessee or sell Equipment to the same purchaser, the General Partner
will generally afford priority to the Equipment which has been available for
lease or sale for the longest period of time.
Certain senior executives of the General Partner and its Affiliates also
serve as officers and directors of the other programs and are required to
apportion their time among these entities. The Partnership is, therefore, in
competition with the other programs for the attention and management time of the
General Partner and Affiliates. The officers and directors of the General
Partner are not required to devote all or substantially all of their time to the
affairs of the Partnership.
ACQUISITIONS
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
25
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 Partnership than that which the General
Partner or such Affiliates are paying. The Partnership does not loan money to
any Person including the General Partner or its Affiliates except to the extent
that a Conditional Sales Contract constitutes a loan.
If the General Partner or any of its Affiliates purchases Equipment in its
own name and with its own funds in order to facilitate ultimate purchase by the
Partnership, the purchaser is entitled to receive interest on the funds expended
for such purchase on behalf of the Partnership. Simple interest on any such
temporary purchases is charged on a floating rate basis not in excess of three
percent over the "prime rate" from time to time announced by PNC Bank, from the
date of initial acquisition to the date of repayment by the
Partnership/ownership transfer.
The Partnership does not invest in equipment Limited Partnerships, general
partnerships or joint ventures, except that (a) the Partnership may invest in
general partnerships or joint ventures with persons other 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 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.
26
"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
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.
27
"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.
"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.
28
"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.
"Partners" means any one or more of the General Partner and the Limited
Partners.
"Partnership" means Commonwealth Income & Growth Fund II, 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.
29
"Unit" means a limited partnership interest in the Partnership.
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
AUDIT FEES
The aggregate fees billed for each of the fiscal years ended December 31, 2004
and 2003 for professional services rendered by the principal accountant for the
audit of our annual financial statements and review of the financial statements
included in our Form 10-Q or services that are normally provided by the
accountant in connection with statutory and regulatory filings or engagements
for those fiscal years were $32,000 and $25,000, respectively.
AUDIT-RELATED FEES
The aggregate fees billed in the fiscal years ended December 31, 2004 and 2003
for assurance and related services by the principal accountant that are
reasonably related to the performance of the audit or review of the registrant's
financial statements and are not reported under the paragraph captioned "Audit
Fees" above are $0 and $0, respectively.
TAX FEES
The aggregate fees billed in the fiscal years ended December 31, 2004 and 2003
for professional services rendered by the principal accountant for tax
compliance, tax advice and tax planning were $0 and $0, respectively.
ALL OTHER FEES The aggregate fees billed in the fiscal years ended December 31,
2004 and 2003 for products and services provided by the principal accountant,
other than the services reported above under other captions of this Item 14 are
$0 and $0, respectively.
PRE-APPROVAL POLICIES AND PROCEDURES
All audit related services, tax planning and other services were pre-approved by
the General Partner, which concluded that the provision of such services by the
Partnership's auditors was compatible with the maintenance of that firm's
independence in the conduct of its auditing functions. The policy of the General
Partner provides for pre-approval of these services and all audit related, tax
or other services not prohibited under Section 10A(g) of the Securities Exchange
Act of 1934, as amended to be performed for us by our independent auditors,
subject to the de minimus exception described in Section 10A(i)(1)(B) of the
Exchange Act. on an annual basis and on individual engagements if minimum
thresholds are exceeded.
The percentage of audit-related, tax and other services that were approved by
the board of directors is zero (-0-).
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(a) (1) Financial Statements
Report of Independent Registered Public Accounting Firm 1
Report of Independent Registered Public Accounting Firm 2
30
Balance Sheets as of December 31, 2004 and 2003 3-4
Statements of Operations for the year ended December 31, 2002
through the year ended December 31, 2004 5
Statements of Partners' Capital for the years ended
December 31, 2004, 2003, and 2002 6
Statements of Cash Flows for years ended December 31, 2002
through the year ended December 31, 2004 7-8
Notes to Financial Statements 9-23
(a) (2) Schedules.
Schedules are omitted because they are not applicable, not required, or
because the required information is included in the financial statements and
notes thereto.
(a) (3) Exhibits.
*3.1 Certificate of Limited Partnership
*3.2 Agreement of Limited Partnership
*10.1 Agency Agreement dated as of May 12, 1995 by and among the
Partnership, the General Partner and Wheat First Securities, Inc.
* Incorporated by reference from the Partnership's Registration
Statement on Form S-1 (Registration No. 33-89476)
(b) Reports on Form 8-K
(c) Exhibits.
31.1 Rule 13a-14(a)/15d-14(a) Certifications by the Principal Executive
Officer
31.2 Rule 13a-14(a)/15d-14(a) Certifications by the Principal Financial
Officer
32 Section 1350 Certifications by the Principal Executive Officer and
Principal Financial Officer
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 March 30, 2005 by the undersigned thereunto duly authorized.
COMMONWEALTH INCOME & GROWTH FUND II
By: COMMONWEALTH INCOME &
GROWTH FUND, INC., General Partner
By: /s/ George S. Springsteen
--------------------------------
George S. Springsteen, President
31
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, 2005.
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 and Secretary
Kimberly A. Springsteen
32
Commonwealth Income & Growth Fund II
Contents
================================================================================
Report of Independent Registered Public Accounting Firm 1
Report of Independent Registered Public Accounting Firm 2
Financial statements
Balance sheets 3-4
Statements of operations 5
Statements of partners' capital 6
Statements of cash flows 7-8
Notes to financial statements 9-23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Partners
Commonwealth Income & Growth Fund II
Exton, Pennsylvania
We have audited the accompanying balance sheet of Commonwealth Income & Growth
Fund II (the "Partnership") as of December 31, 2004 and the related statements
of operations, Partners' capital and cash flows for the year then ended. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Commonwealth Income & Growth
Fund II as of December 31, 2004 and the results of its operations and its cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Asher & Company, Ltd.
Philadelphia, Pennsylvania
March 29, 2005
1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Partners
Commonwealth Income & Growth Fund II
Exton, Pennsylvania
We have audited the accompanying balance sheet of Commonwealth Income & Growth
Fund II as of December 31, 2003 and the related statements of operations,
partners' capital, and cash flows for each of the two years in the period 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 II at December 31, 2003 and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States.
/s/ BDO Seidman, LLP
Philadelphia, Pennsylvania
March 12, 2004
2
Commonwealth Income & Growth Fund II
Balance Sheets
================================================================================
December 31, 2004 2003
- ------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 1,085 $ 37,758
Lease income receivable 9,478 4,550
Net investment in direct financing leases 86,487 146,478
Accounts receivable, affiliated limited partnerships 16,792 7,888
Deposits 25 --
Prepaid fees -- 3,200
- ------------------------------------------------------------------------------------------
113,867 199,874
- ------------------------------------------------------------------------------------------
Computer equipment, at cost 2,850,669 5,409,223
Accumulated depreciation (2,460,366) (4,013,668)
- ------------------------------------------------------------------------------------------
390,303 1,395,555
- ------------------------------------------------------------------------------------------
Equipment acquisition costs and deferred expenses, net of
accumulated amortization of $64,953 and $109,250,
respectively
2,601 42,906
Accounts receivable, Commonwealth Capital Corp. 16,100 354,122
- ------------------------------------------------------------------------------------------
Total assets $ 522,871 $ 1,992,457
==========================================================================================
3
Commonwealth Income & Growth Fund II
Balance Sheets
================================================================================
December 31, 2004 2003
- --------------------------------------------------------------------------------
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 51,515 $ 53,606
Accounts payable, General Partner 79,488 20,065
Accounts payable, Commonwealth Capital Corp 42,499 --
Other accrued expenses -- 5,938
Unearned lease income 94,576 100,040
Notes payable 115,967 728,365
- --------------------------------------------------------------------------------
Total liabilities 384,045 908,014
- --------------------------------------------------------------------------------
Partners' capital
General Partner 1,000 1,000
Limited Partners 137,826 1,083,443
- --------------------------------------------------------------------------------
Total partners' capital 138,826 1,084,443
- --------------------------------------------------------------------------------
Total liabilities and partners' capital $ 522,871 $ 1,992,457
================================================================================
See accompanying notes to financial statements.
4
Commonwealth Income & Growth Fund II
Statements of Operations
================================================================================
Years ended December 31, 2004 2003 2002
- ---------------------------------------------------------------------------------------------------------------
Income
Lease $ 697,530 $ 1,515,990 $ 2,711,579
Interest and other 44,781 2,466 2,054
Gain on sale of equipment -- 439,124 828
- ---------------------------------------------------------------------------------------------------------------
Total income 742,311 1,957,580 2,714,461
- ---------------------------------------------------------------------------------------------------------------
Expenses
Operating, excluding depreciation 398,197 608,439 571,038
Equipment management fee, General Partner 36,016 75,934 135,579
Depreciation 728,595 992,234 1,630,810
Amortization of equipment acquisition costs and deferred
expenses 41,321 62,719 73,028
Interest 26,255 88,625 156,380
Loss on sale of equipment 53,725 -- --
Provision for uncollectible lease income receivable -- -- 398,868
- ---------------------------------------------------------------------------------------------------------------
Total expenses 1,284,109 1,827,951 2,965,703
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) $ (541,798) $ 129,629 (251,242)
===============================================================================================================
Net income (loss) per equivalent limited partnership unit
$ (1.18) $ 0.28 $ (0.55)
Weighted average number of equivalent
limited partnership units outstanding during the year
460,067 460,067 460,126
===============================================================================================================
See accompanying notes to financial statements.
5
Commonwealth Income & Growth Fund II
Statements of Partners' Capital
================================================================================
General Limited
Partner Partner General Limited
Units Units Partner Partners Total
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 50 460,567 $ 1,000 $ 2,305,900 $ 2,306,900
Net income (loss) -- -- 5,194 (256,436) (251,242)
Redemption -- (500) -- (4,164) (4,164)
Distributions -- -- (5,194) (514,286) (519,480)
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 50 460,067 1,000 1,531,014 1,532,014
Net income -- -- 5,772 123,857 129,629
Distributions -- -- (5,772) (571,428) (577,200)
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 50 460,067 1,000 1,083,443 1,084,443
Net income (loss) -- -- 4,038 (545,836) (541,798)
Distributions -- -- (4,038) (399,781) (403,819)
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 50 460,067 $ 1,000 $ 137,826 138,826
=============================================================================================================
See accompanying notes to financial statements.
6
Commonwealth Income & Growth Fund II
Statements of Cash Flows
================================================================================
Years ended December 31, 2004 2003 2002
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) $ (541,798) $ 129,629 $ (251,242)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities
Depreciation and amortization 769,917 1,054,953 1,703,838
Amortization of unearned lease income -- (10,945) (19,111)
(Gain) loss on sale of computer
equipment 53,725 (439,124) (828)
Other noncash activities included in
determination of net income (loss) (574,117) (995,568) (1,149,810)
Changes in assets and liabilities
Lease income receivable (4,928) 404,966 78,956
Minimum lease receivables 4,620 3,881 --
Accounts receivable, affiliated
limited partnerships (8,904) 546 (5,673)
Deposits (25) -- --
Prepaid fees 3,200 3,019 (3,019)
Accounts payable (2,091) (19,052) 32,186
Accounts payable, General Partner
166,777 (7,392) (28,218)
Accounts payable, Commonwealth Capital
Corp
42,499 -- --
Other accrued expenses (5,938) (1,424) 7,362
Unearned lease income (5,464) (61,707) 115,873
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (102,527) 61,782 480,314
- --------------------------------------------------------------------------------------------------------------
7
Commonwealth Income & Growth Fund II
Statements of Cash Flows
================================================================================
Years ended December 31, 2004 2003 2002
- ------------------------------------------------------------------------------------------
Cash flows from investing activities
Capital expenditures $ (4,049) $ (15,000) $ (97,107)
Net proceeds from sale of computer
equipment 244,072 422,533 134,335
Equipment acquisition fees paid to the
General Partner (846) (600) (24,029)
- ------------------------------------------------------------------------------------------
Net cash provided by investing activities 239,177 406,933 13,199
- ------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from refinancing notes payable -- -- 46,103
Distributions to partners (403,819) (577,200) (519,480)
Accounts receivable - Commonwealth
Capital Corp. 230,667 112,882 8,000
Redemption of limited partners -- -- (4,164)
Debt placement fee paid to the General
Partner (171) -- (5,036)
- ------------------------------------------------------------------------------------------
Net cash used in financing activities (173,323) (464,318) (474,577)
- ------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (36,673) 4,397 18,936
Cash and cash equivalents at beginning of year 37,758 33,361 14,425
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,085 $ 37,758 $ 33,361
==========================================================================================
See accompanying notes to financial statements.
8
Commonwealth Income & Growth Fund II
Notes to Financial Statements
================================================================================
1. Business Commonwealth Income & Growth Fund II (the "Partnership")
is a limited partnership organized in the Commonwealth
of Pennsylvania to acquire, own and lease various types
of computer peripheral equipment and other similar
capital equipment, which will be leased primarily to
U.S. corporations and institutions. 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 which is
an indirect wholly owned subsidiary of CCC. CCC is a
member of the Investment Program Association (IPA),
Financial Planning Association (FPA), and the Equipment
Leasing Association (ELA). Approximately ten years after
the commencement of operations, the Partnership intends
to sell or otherwise dispose of all of its computer
equipment, make final distributions to partners, and to
dissolve. Unless sooner terminated, the Partnership will
continue until December 31, 2006.
Allocations of income and distributions of cash are
based on the Partnership's Limited Partnership Agreement
(the "Agreement"). The various allocations under the
Agreement prevent any limited partner's capital account
from being reduced below zero and ensure the capital
accounts reflect the anticipated sharing ratios of cash
distributions, as defined in the Agreement. During 2004,
annual cash distributions to limited partners were made
at rate of 4.3% of their original contributed capital.
During 2003, annual cash distributions to limited
partners were made at a rate of 6.2% of their original
contributed capital. During 2002, annual cash
distributions to limited partners were made at a rate of
5.6% of their original contributed capital.
Distributions during 2004 reflect an annual return of
capital in the amount of approximately $0.87 per
weighted average number of limited partnership units
outstanding during the year. Distributions during 2003
reflect an annual return of capital in the amount of
approximately $1.25 per weighted average number of
limited partnership units outstanding during the year.
Distributions during 2002 reflect an annual return of
capital in the amount of approximately $1.12 per
weighted average number of limited partnership units
outstanding during the year.
9
Commonwealth Income & Growth Fund II
Notes to Financial Statements
================================================================================
2. Summary of Revenue Recognition
Significant
Accounting Through December 31, 2004 the Partnership's leasing
Policies operations consist substantially of operating leases and
seven direct-financing leases. Operating lease revenue
is recognized on a monthly basis in accordance with the
terms of the lease agreement. Unearned revenue from
direct financing agreements is amortized to revenue over
the lease term.
The Partnership reviews a customer's credit history
before extending credit and establishes a provision for
uncollectible accounts receivable based upon the credit
risk of specific customers, historical trends and other
information.
Use of Estimates
The preparation of financial statements in conformity
with U.S. generally accepted accounting principles
requires management to make estimates and assumptions
that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards ("SFAS")
No.107, Disclosures About Fair Value of Financial
Instruments, requires disclosure of the fair value of
certain instruments. The carrying values of cash,
receivables and payables approximate fair value due to
the short term maturity of these instruments. For debt,
the carrying amounts approximate fair value because the
interest rates approximate current market rates.
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
10
Commonwealth Income & Growth Fund II
Notes to Financial Statements
================================================================================
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. The fair value is determined
based on estimated discounted cash flows to be generated
by the asset. In 2004 and 2003, the Partnership
determined that the carrying amount of certain assets
was greater than the undiscounted cash flows to be
generated by these assets. The Partnership recorded
charges of $40,000 and $31,000 in the fourth quarter of
2004 and 2003, respectively to record the assets at
their estimated fair value. Such amounts have been
included in depreciation expense in the accompanying
financial statements. In 2002, the Partnership
determined that no impairment had occurred.
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.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments
with a maturity of three months or less to be cash
equivalents. Cash equivalents have been invested in a
money market fund investing directly in Treasury
obligations. Cash at December 31, 2004 and 2003 was held
in the custody of one financial institution. At times,
the balances may exceed federally insured limits. The
Partnership mitigates this risk by depositing funds with
a major financial institution. The Partnership has not
experienced any losses in such accounts, and believes it
is not exposed to any significant credit risk.
11
Commonwealth Income & Growth Fund II
Notes to Financial Statements
================================================================================
Accounts Receivable
Accounts receivable includes current accounts
receivable, net of allowances and other accruals. The
Partnership regularly reviews the collectability of its
receivables and the credit worthiness of its customers
and adjusts its allowance for doubtful accounts
accordingly. The Partnership determined that no
allowance was necessary at December 31, 2004 and 2003.
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 the partners'
contributed capital. These costs have been deducted from
partnership capital in the accompanying financial
statements.
12
Commonwealth Income & Growth Fund II
Notes to 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.
Recent Accounting Pronouncements
Interpretation No. 46 & 46-R
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. In December
2003, a revision was issued (46-R) to clarify some of
the original provisions. Management has determined that
the adoption of Interpretation No. 46-R did not have an
impact on the financial position and results of
operations.
3. Net Investment in The following lists the components of the net investment
Direct Financing in direct financing leases as of December 31, 2004 and
Leases 2003:
December 31, 2004 2003
-------------------------------------------------------------------------------
Minimum lease payments receivable $ 103,927 $ 176,035
Less: Unearned Revenue 17,440 29,557
-------------------------------------------------------------------------------
Net investment in direct financing leases $ 86,487 $ 146,478
-------------------------------------------------------------------------------
13
Commonwealth Income & Growth Fund II
Notes to Financial Statements
================================================================================
The following is a schedule of future minimum rentals on
noncancellable direct financing leases at December 31,
2004:
Year ending December 31, Amount
--------------------------------------------------------
2005 $ 70,183
2006 33,744
--------------------------------------------------------
$103,927
========================================================
There are two lessees involved with the seven direct
financing leases.
4. Computer The Partnership is the lessor of equipment under
Equipment operating and capital leases with periods ranging from
24 to 48 months. In general, associated costs such as
repairs and maintenance, insurance and property taxes
are paid by the lessee.
The Partnership participates in leases that are shared
with other affiliated Partnerships. The Partnership's
share of the computer equipment in which they
participate at December 31, 2004 and 2003 was
approximately $1,306,000 and $1,660,000, respectively,
which is included in the Partnership's fixed assets on
their balance sheet. The total cost of the equipment
shared by the Partnership with other affiliated
partnerships at December 31, 2004 and 2003 was
approximately $2,249,000 and $2,813,000, respectively.
The Partnership's share of the outstanding debt
associated with this equipment at December 31, 2004 and
2003 was approximately $700 and $422,000, respectively,
which is included in the Partnership's liabilities on
the balance sheet. The total outstanding debt at
December 31, 2004 and 2003 related to the equipment
shared by the Partnership was approximately $1,100 and
$696,000, respectively.
14
Commonwealth Income & Growth Fund II
Notes to Financial Statements
================================================================================
The following is a schedule of future minimum rentals on
noncancelable operating leases at December 31, 2004:
Year ending December 31, Amount
--------------------------------------------------------
2005 $ 42,000
2006 7,000
--------------------------------------------------------
$ 49,000
========================================================
Significant Lessees exceeding 10% of lease income for the years
Customers ended:
Lessee 2004 2003 2002
--------------------------------------------------------
Lessee A 41% 22% 10%
Lessee B -- -- 16%
Lessee C -- 16% 23%
Lessee D 19% 12% --
Lessee E 11% -- --
--------------------------------------------------------
Total % of Lease Income 71% 50% 49%
========================================================
Lessees exceeding 10% of accounts receivable at December
31:
Lessee 2004 2003
--------------------------------------------------
Lessee A 23% --
Lessee E 11% --
Lessee F -- 65%
Lessee G -- 24%
Lessee I 49% --
--------------------------------------------------
Total % of Accounts Receivable 83% 89%
==================================================
5. Related Party Organizational Fee
Transactions
The General Partner is entitled to be paid an
Organizational Fee equal
15
Commonwealth Income & Growth Fund II
Notes to Financial Statements
================================================================================
to three percent of the first $10,000,000 of Limited
Partners' Capital Contributions and two percent of the
Limited Partners' Capital Contributions in excess of
$10,000,000, as compensation for the organization of the
Partnership. No organizational fees were paid during
2004, 2003 and 2002.
Reimbursable Expenses
The General Partner and its affiliates are entitled to
reimbursement by the Partnership for the cost of goods,
supplies or services obtained and used by the General
Partner in connection with the administration and
operation of the Partnership from third parties
unaffiliated with the General Partner. In addition, the
General Partner and its affiliates are entitled to
reimbursement for certain expenses incurred by the
General Partner and its affiliates in connection with
the administration and operation of the Partnership.
During 2004, 2003 and 2002, the Partnership recorded
$331,000, $371,000, and $491,000, respectively, for
reimbursement of expenses to the General Partner.
Equipment Acquisition Fee
The General Partner is entitled to be paid an equipment
acquisition fee of 4% of the purchase price of each item
of equipment purchased as compensation for the
negotiation of the acquisition of the equipment and
lease thereof or sale under a conditional sales
contract. The fee was paid upon each closing of the
Offering with respect to the equipment to be purchased
by the Partnership with the net proceeds for the
Offering available for investment in equipment. If the
Partnership acquires equipment in an amount exceeding
the net proceeds of the Offering available for
investment in equipment, the fee will be paid when such
equipment is acquired. During 2004, 2003 and 2002,
equipment acquisition fees of approximately $1,000,
$1,000 and $24,000, respectively, were paid to the
General Partner.
Debt Placement Fee
As compensation for arranging term debt to finance the
acquisition of equipment by the Partnership, the General
Partner is paid a fee equal to 1% of such indebtedness;
provided, however, that such fee shall be
16
Commonwealth Income & Growth Fund II
Notes to Financial Statements
================================================================================
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, debt
placement fees of approximately $5,000 were paid to the
General Partner. There were no debt placement fees paid
to the General Partner in 2003 and 2004.
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 2004, 2003 and 2002, equipment management
fees of approximately $36,000, $76,000 and $136,000,
respectively, were paid to the General Partner as
determined pursuant to section (ii) above.
Release Fee
As compensation for providing releasing services for any
equipment for which the General Partner has, following
the expiration of, or default under, the most recent
lease or conditional sales contract, arranged a
subsequent lease or conditional sales contract for the
use of such equipment to a lessee or other party, other
than the current or most recent lessee or other operator
of such equipment or its affiliates ("Release"), the
General Partner shall receive, on a monthly basis, a
Release Fee equal to the lesser of (a) the fees which
would be charged by an independent third party for
comparable services for comparable equipment or (b) two
percent of gross lease revenues derived from such
Release. There were no such fees paid to the General
Partner in 2004, 2003 and 2002.
17
Commonwealth Income & Growth Fund II
Notes to Financial Statements
================================================================================
Equipment Liquidation Fee
With respect to each item of equipment sold by the
General Partner (other than in connection with a
conditional sales contract), a fee equal to the lesser
of (i) 50% of the competitive equipment sale commission
or (ii) three percent of the sales price for such
equipment is payable to the General Partner. The payment
of such fee is subordinated to the receipt by the
limited partners of the net disposition proceeds from
such sale in accordance with the Partnership Agreement.
Such fee will be reduced to the extent any liquidation
or resale fees are paid to unaffiliated parties. There
were no such fees paid to the General Partner in 2004,
2003 and 2002.
Accounts Receivable - Commonwealth Capital Corp
The Partnership had an unsecured, non-interest bearing
receivable from CCC, a related party to the Partnership.
CCC, through its indirect subsidiaries, including the
General Partner of the Partnership, earns fees based on
revenues and new lease purchases from this fund. This
receivable was reduced by approximately $354,000 during
2004 to zero at December 31, 2004 by offsetting
equipment management and other fees and payments by CCC.
6. Notes Payable Notes payable consisted of the following:
December 31, 2004 2003
---------------------------------------------------------------------------------
Installment notes payable to banks; interest
ranging from 6.50% to 8.75%, due in monthly
installments ranging from $96 to $22,799,
including interest, with final payments due from
February through November 2004.
$ -- $ 498,520
18
Commonwealth Income & Growth Fund II
Notes to Financial Statements
================================================================================
Installment notes payable to banks; interest
ranging from 6.25% to 6.75%, due in monthly
installments ranging from $241 to $1,875,
including interest, with final payments due from
February through April 2005.
82,902 74,204
Installment notes payable to banks; interest
ranging from 5.95% to 6.50%, due in monthly
installments ranging from $507 to $1,892,
including interest, with final payments due June
2006.
33,065 155,641
---------------------------------------------------------------------------------
$ 115,967 $ 728,365
=================================================================================
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,
2004 are as follows:
Year ending December 31, Amount
-----------------------------------------------------------------------------
2005 19,685
2006 96,282
-----------------------------------------------------------------------------
$ 115,967
=============================================================================
7. Supplemental Other noncash activities included in the determination
Cash Flow of net loss are as follows:
Information
Year ended December 31, 2004 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Lease income, net of interest expense on
notes payable realized as a result of direct
payment of principal by lessee to bank $ 574,117 $ 995,568 $ 1,149,810
19
Commonwealth Income & Growth Fund II
Notes to Financial Statements
================================================================================
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, 2004 2003 2002
- ------------------------------------------------------------------------------------------------
Debt assumed in connection with purchase
of computer equipment $ -- $ -- $ 503,623
- ------------------------------------------------------------------------------------------------
Proceeds from sale received by CCC on behalf of the
Partnership $ -- $ 159,600 $ --
- ------------------------------------------------------------------------------------------------
Net book value of equipment converted to direct
financing leases $ -- $ 15,299 $ 226,581
- ------------------------------------------------------------------------------------------------
Notes payable refinanced $ -- $ -- $ 189,909
- ------------------------------------------------------------------------------------------------
8. Commitments and In June 2003, the Partnership, through CCC, reached a
Contingencies favorable settlement in a lawsuit against a customer for
failure to make monthly lease payments based on the
existing lease terms. The settlement did not have a
material adverse impact to the financial statements of
the Partnership. As of December 31, 2002, the
Partnership had recorded a receivable from the customer
of approximately $404,000, net of an allowance of
approximately $330,000. In July 2003, the Partnership
received approximately $405,000 in proceeds relating to
this receivable.
20
Commonwealth Income & Growth Fund II
Notes to Financial Statements
================================================================================
9. Reconciliation of Net Income (Loss) Reported for Financial Reporting
Purposes to Taxable (Loss) on the Federal Partnership Return
Year ended December 31, 2004 2003 2002
- ------------------------------------------------------------------------------------------
Net income (loss) for financial
reporting purposes $ (541,798) $ 129,629 $ (251,242)
Adjustments
Depreciation 195,721 (107,236) (747,721)
Amortization 34,496 52,324 60,869
Unearned lease income (5,464) (248,685) 251,553
Bad debt (recovery) expense -- (326,008) 281,008
Loss on sale of computer equipment (227,770) (260,312) (318,453)
Other (78,311) (55,856) 186,706
- ------------------------------------------------------------------------------------------
Taxable (loss) on the Federal Partnership
Return $ (623,126) $ (816,144) $ (537,280)
==========================================================================================
21
Commonwealth Income & Growth Fund II
Notes to Financial Statements
================================================================================
10. Quarterly Results Summarized quarterly financial data for the years ended
of Operation December 31, 2004 and 2003 is as follows:
(Unaudited)
Quarter ended
-----------------------------------------------------------
March 31 June 30 September 30 December 31
- ---------------------------------------------------------------------------------------------------
2004
Revenues
Lease and other $ 232,911 $ 217,347 $ 171,611 $ 120,442
(Loss) gain on sale of computer
equipment (9,891) (13,861) (6,746) (23,227)
- ---------------------------------------------------------------------------------------------------
Total revenues 223,020 203,486 164,865 97,215
Total costs and expenses 338,059 270,196 309,698 312,431
- ---------------------------------------------------------------------------------------------------
Net income (loss) $ (115,039) $ (66,710) $ (144,833) $ (215,216)
===================================================================================================
Income (loss) per limited
partner unit $ (0.25) $ (0.15) $ (0.31) $ (0.47)
===================================================================================================
Total costs and expenses includes an impairment
adjustment of approximately $40,000 that was recorded in
the fourth quarter of 2004.
22
Commonwealth Income & Growth Fund II
Notes to Financial Statements
================================================================================
Quarter ended
-----------------------------------------------------------
March 31 June 30 September 30 December 31
- ---------------------------------------------------------------------------------------------------
2003
Revenues
Lease and other $ 542,701 $ 410,632 $ 301,133 $ 263,990
(Loss) gain on sale of computer
equipment (5,192) 323,511 (13,414) 134,219
- ---------------------------------------------------------------------------------------------------
Total revenues 537,509 734,143 287,719 398,209
Total costs and expenses 533,580 438,915 370,171 485,285
- ---------------------------------------------------------------------------------------------------
Net income (loss) $ 3,929 $ 295,228 $ (82,452) $ (87,076)
==================================================================================================
Income (loss) per limited
partner unit $ 0.01 $ 0.64 $ (0.18) $ (0.19)
==================================================================================================
Total costs and expenses includes an impairment
adjustment of approximately $31,000 that was recorded in
the fourth quarter of 2003.
23