UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

THE FISCAL YEAR ENDED DECEMBER 31, 2008 2009 or

Commission File Number:                                                      333-108057

(Exact name of registrant as specified in its charter)

Brandywine Bldg. One, Suite 200

2 Christy Drive, Chadds Ford PA 19317

(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:

Securities registered pursuant to Section 12(g) of the Act:

 (Title of Class)

 

 

 

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "accelerated filer, “large accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter:  N/A

 

Documents incorporated by reference:  None

 

 

 

From time to time, we and our representatives may provide information, whether orally or in writing, including certain statements in this Annual Report on Form 10-K, which are deemed to be “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Litigation Reform Act”). These forward-looking statements reflect our current beliefs and expectations with respect to future events and are based on assumptions and are subject to risks and uncertainties and other factors outside our control that may cause actual results to differ materially from those projected.

 

The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended or using other similar expressions. We do not intend to update these forward-looking statements, except as required by law.

 

In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Annual Report on Form 10-K, any exhibits to this Form 10-K and other public statements we make. Such factors include, but are not limited to: the outcome of litigation and regulatory proceedings to which we may be a party; actions of competitors; changes and developments affecting our industry; quarterly or cyclical variations in financial results; development of new products and services; interest rates and cost of borrowing; our ability to maintain and improve cost efficiency of operations;operat ions; changes in foreign currency exchange rates; changes in economic conditions, political conditions, trade protection measures, licensing requirements and tax matters in the foreign countries in which we do business; reliance on third parties for manufacturing of products and provision of services; and other factors that are set forth in the “Legal Proceedings” section, the “Management’s Discussion and Analysis of  Financial Condition and Results of Operations” section and other sections of this Annual Report on Form 10-K, as well as in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

 

PART I

ITEM 1:                      BUSINESS

GENERAL

Commonwealth Income & Growth Fund V (the “Partnership” or “CIGF5”) was formed on May 19, 2003 under the Pennsylvania Revised Uniform Limited Partnership Act.  The Partnership offered for sale up to 1,250,000 units of the limited partnership at the purchase price of $20 per unit (the “Offering”).  The Partnership raised the minimum capital required ($1,150,000) and commenced operations on March 14, 2005.  The Partnership terminated its offering of units on February 24, 2006 with 1,249,951 units ($24,957,862) sold.

During the yearyears ended December 31, 2009 and 2008 limited partners redeemed 3,606 and 4,099 units, respectively, of the partnership for a total redemption price of approximately $38,000 and $52,000, respectively, in accordance with the terms of the limited partnership agreement.

See “The Glossary” below for the definition of selected 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 Information Technology (I.T.) and other similar capital equipment.  The Partnership utilized the net proceeds of the offering to purchase IBM and IBM compatible I.T.information technology and other similar capital equipment.  The Partnership has utilized retained proceeds and debt financing (not in excess of 30% of the aggregate cost of the equipment owned or subject to conditional sales contracts by the Partnership at the time the debt is incurred) to purchase additional equipment.  The Partnership acquires and leases equipment principally to U.S. corporations and other institutions pursuant to operating leases.  The Partnership retains the flexibility to enter into full payout net leases and conditional sales contracts, but has notn ot done so.

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 generally acquires 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, 2008,2009, 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.lease.  The Partnership may also engage in sale/leaseback transactions, pursuant to which the Partnership would purchase equipment from companies that would then immediately lease the equipment from the Partnership.   The Partnership may also purchase equipment which is leased under full payout net leases or sold under conditional sales contracts at the time of acquisition or the Partnership may enter into a full payout net lease or conditional sales contract with a third party when the Partnership acquires an item of equipment.

The Partnership may enter into arrangements with one or more manufacturers pursuant to which the Partnership purchases from such manufacturersmanufacturer’s equipment that has previously been leased directly by the manufacturer to third parties (“vendor leasing agreements”).   The Partnership and manufacturers may agree to obtain non-recoursenonrecourse loans to the Partnership from the manufacturers, to finance the acquisition of equipment.  Such loans would be secured only by the specific equipment financed 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, 2008,2009, 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

We also acquire high technology medical and telecommunications equipment. Our general partner will seek to maintain an appropriate balance and diversity in the older IBMtypes of equipment acquired.  The medical equipment we acquire may consist of ventilators, IV infusion pumps, long-term acute care beds, CT scanners, MRIs, flow cytometers, and IBM compatible computer I.T.other medical technology devices.  The telecom equipment has not been retired from service, because software is generally interchangeable between olderwe acquire may include Cisco switches, routers, blade switches, wireless access points, and newer equipment, and oldervideo conferencing systems. The market for high technology medical equipment is capablegrowing each year.  Generally this type of performing many of the same functions as newerequipment will have a longer useful life tahn information technology equipment.  The General Partner believes that historically, values of I.T. 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 I.T. equipment.   I.T. equipment neverthelessThis allows for increased re-marketability, if it is subject to declines in value as new, improved models are developed and become available.   Technological advances and other factors, discussed below in Management’s Discussion and Analysis, have at times caused dramatic reductions in the market prices of older models of I.T. equipment from the prices at which they were originally introduced.returned before its economic or announcement cycle is depleted .

DIVERSIFICATION

Diversification is generally desirable to minimize the effects of changes in specific industries, local economic conditions or similar risks.  However, the extent of the Partnership’s diversification, in the aggregate and within each category of equipment, depends in part upon the financing which can be assumed by the Partnership or borrowed from third parties on satisfactory terms.  The Partnership’s policy not to borrow on a recourse basis will further limit its financing options.  Diversification also depends on the availability of various types of equipment.  Through December 31, 2008,2009, the Partnership has acquired a diversified equipment portfolio, which it has leased to 2743 different companies located throughout the United States.

The equipment types comprising the portfoliosportfolio at December 31, 20082009 are as follows:

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

In general, the terms of the Partnership’s leases, whether the equipment is leased pursuant to an operating lease or a full payout net lease, depend upon a variety of factors, including: the desirability of each type of lease from both an investment and a tax point of view; the relative demand among lessees for operating or full payout net leases; the type and use of equipment and its anticipated residual value; the business of the lessee and its credit rating; the availability and cost of financing; regulatory considerations; the accounting treatment of the lease sought by the lessee or the Partnership; and competitive factors.

An operating lease generally represents a greater risk to the Partnership than a full payout net lease, because in order to recover the purchase price of the subject equipment and earn a return on such investment, it is necessary to renew or extend the operating lease, lease the equipment to a third party at the end of the original lease term, or sell the equipment.  On the other hand, the term of an operating lease is generally much shorter than the term of a full payout net lease, and the lessor is thus afforded an opportunity under an operating lease to re-lease or sell the subject equipment at an earlier stage of the equipment’s life cycle than under a full payout netfinance lease.  Also, the annual rental payments received under an operating lease are ordinarily higher than those received under a full payout net lease.

The Partnership’s policy is to generally enter into “triple net leases” (or the equivalent, in the case of a conditional sales contract) which typically provide that the lessee or some other party bear the risk of physical loss of the equipment; pay taxes relating to the lease or use of the equipment; maintain the equipment; indemnify the Partnership-lessor against any liability suffered by the Partnership as the result of any act or omission of the lessee or its agents; maintain casualty insurance in an amount equal to the greater of the full value of the equipment and a specified amount set forth in the lease; and maintain liability insurance naming the Partnership as an additional insured with a minimum coverage which the General Partner deems appropriate.  In addition, the Partnership may purchase “umbrella”“um brella” insurance policies to cover excess liability and casualty losses, to the extent deemed practicable and advisable by the General Partner.  As of December 31, 2008,2009, 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.

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 PartnershipGeneral Partner believes that this strategy adds value since it entices the leasing company to “stay"stay with the lease”lease" for potential extensions, remarketing or sale of equipment.  This strategy potentially minimizesis designed to minimize any conflicts the leasing company may have with a potential new lease and will potentiallymay assist in maximizing overall portfolio performance.  The remarketing fee is tied into lease performance thresholds and is a factor in the negotiation of the fee.

BORROWING POLICIES

The Partnership may purchase some items of equipment without leverage.  If the Partnership purchases an item of equipment without leverage and thereafter suitable financing becomes available, it may then obtain the financing, secure the financing with the purchased equipment to the extent practicable and invest any proceeds from such financing in additional items of equipment, or it may distribute some or all of such proceeds to the Limited Partners.  Any such later financing will be on terms consistent with the terms applicable to borrowings generally.  As of December 31, 2008,2009, the Partnership has not exercised this option.

The General Partner may cause the Partnership to borrow funds, to the fullest extent practicable, at interest rates fixed at the time of borrowing.  However, the Partnership may borrow funds at rates that vary with the “prime” or “base” rate.  If lease revenues were fixed, a rise in the “prime” or “base” rate would increase borrowing costs and reduce the amount of the Partnership’s income and cash available for distribution.  Therefore, the General Partner is permitted to borrow funds to purchase equipment at fluctuating rates only if the lease for such equipment provides for fluctuating rental payments calculated on a similar basis.

Any additional debt incurred by the Partnership must be nonrecourse.  Nonrecourse debt means that the lender providing the funds can look for security only to the equipment pledged as security and the proceeds derived from leasing or selling such equipment.  Neither the Partnership nor any Partner (including the General Partner) would be liable for repayment of any nonrecourse debt.

Loan agreements may also require that the Partnership maintain certain reserves or compensating balances and may impose other obligations upon the Partnership.  Moreover, since a significant portion of the Partnership’s revenues from the leasing of equipment will be reserved for repayment of debt, the use of financing reduces the cash, which might otherwise be available for distributions until the debt has been repaid and may reduce the Partnership’s cash flow over a substantial portion of the Partnership’s operating life.  As of December 31, 2008,2009, the Partnership had not entered into any such agreements.

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 or affiliate may not charge interest at a rate greater than 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.  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 dated ate of the loan.

REFINANCING POLICIES

Subject to the limitations set forth in “Borrowing Policies” above, the Partnership may refinance its debt from time to time.  With respect to a particular item of equipment, the General Partner will take into consideration such factors as the amount of appreciation in value, if any, to be realized, the possible risks of continued ownership, and the anticipated advantages to be obtained for the Partnership, as compared to selling such equipment.  As of December 31, 2008,2009, the Partnership has no such debt.

Refinancing, if achievable, may permit the Partnership to retain an item of equipment and at the same time to generate additional funds for reinvestment in additional equipment or for distribution to the Limited Partners.

LIQUIDATION POLICIES

The General Partner intends to cause the Partnership to begin disposing of its equipment approximately 10 years after commencement of operations or in January 2015.  Notwithstanding the Partnership’s objective to sell all of its assets and dissolve by December 31, 2015, 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 are 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.

The equipment leasing industry is highly competitive.  The Partnership competes with leasing companies, equipment manufacturers and their affiliated financing companies, distributors and entities similar to the Partnership (including other programs sponsored by the General Partner), some of which have greater financial resources than the Partnership and more experience in the equipment leasing business than the General Partner.  Other leasing companies and equipment manufacturers, their affiliated financing companies and distributors may be in a position to offer equipment to prospective lessees on financial terms, which are more favorable, that those which the Partnership can offer.  They may also be in a position to offer trade-in privileges, software, maintenance contracts and other services, than those whichwh ich the Partnership can offer.  Equipment manufacturers and distributors may offer to sell equipment on terms (such as liberal financing terms and exchange privileges)privileges or service contracts), 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.

INVESTMENTS

Through March 10, 2009,16, 2010, the Partnership has purchased, or has made the commitment to purchase, the following equipment:

 

 

 

RESERVES

Because the Partnership’s leases are on a “triple-net” basis, no permanent reserve for maintenance and repairs has been 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.  The Partnership’s operating expenses increasedexpense s decreased approximately $214,000$197,000 during 20082009 and cash flows were sufficient to cover all expenses and liabilities.

GENERAL RESTRICTIONS

Under the Partnership Agreement, the Partnership is not permitted, among other things, to:

 

 

 

 

 

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 had no employees during 20082009 and received administrative and other services from a related party, Commonwealth Capital Corp. (“CCC”), which had 9181 employees as of December 31, 2008.2009.

 

 

ITEM 1A:                      RISK FACTORS

 

ITEM 1B:                      UNRESOLVED STAFF COMMENTS

 

NOT APPLICABLE

 

ITEM 2:                      PROPERTIES

 

NOT APPLICABLE

 

ITEM 3:                      LEGAL PROCEEDINGS

In August 2007, a lessee, MobilePro, Inc. defaulted on lease payments for wi-fi equipment owned by the fund.  We were able to coverrecover unpaid amounts by retaining cash collateral in the form of security deposits, which covered approximately eight months of additional rent. Since that period, we communicated with and attempted to work with MobilePro on a resolution, through an equipment sale that could satisfy their obligations to us.

Simultaneously, we also filed suit against the City of Tempe, Arizona in order to seek access to our equipment, so that we could repossess and remarket the equipment, as Tempe has denied us access.  On March 27, 2009, the City of Tempe filed a response and counterclaim, seeking an unspecified amount for the use of the right-of-way on the utility poles where the equipment is located, as well as an unspecified fee for electricity used by the equipment and the city is additionally seeking entitlement to ownership of the equipment. We believe both counterclaims are without merit for several reasons and will continue to enforce our rights to the equipment.  The partnership has taken reserves against this lease, from quarter to quarter, to maintain a conservative position on our books.

ITEM 4:                      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

NOT APPLICABLE

 

PART II

 

 

 

 

 

Units cannot be transferred without the consent of the General Partner, which may be withheld in its discretion.   The General Partner monitors transfers of units in an effort to ensure that all transfers are within certain safe harbors promulgated by the IRS to furnish guidance regarding publicly traded partnerships.   These safe harbors limit the number of transfers that can occur in any one year.  The General Partner intends to cause the Partnership to comply with the safe harbor that permits nonexempt transfers and redemptions of units of up to five percent of the total outstanding interest in the Partnership’s capital or profits in any one year.

 

REDEMPTION PROVISION

 

 

 

The following seven 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:

 

 

 

 

 

 

 

 

ADDITIONAL RESTRICTIONS ON TRANSFER

 

Limited Partners who wish to transfer their units to a new beneficial owner are required to pay the Partnership up to $50 for each transfer to cover the Partnership’s cost of processing the transfer application and take such other actions and execute such other documents as may be reasonably requested by the General Partner.  There is no charge for re-registration of a certificate in the event of a marriage, divorce, death, or transfer to a 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 1% to the General Partner until the Limited Partners have received an amount equal to their capital contributions plus the priority return;return of 10% per annum; 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 35% 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 distributionsdistr ibutions were operating distributions.   Net losses, if any, are in all cases allocated 99% to the Limited Partners and 1% to the General Partner.

 

Net profits and net losses are computed without taking into account, in each taxable year of the Partnership, any items of income, gain, loss or deduction required to be specially allocated pursuant to Section 704(b) of the Code and the Treasury Regulation promulgated thereunder.  No Limited Partner is required to contribute cash to the capital of the Partnership in order to restore a closing capital account deficit, and the General Partner has only a limited deficit restoration obligation under the Partnership Agreement.

 

Quarterly distributions in the following amounts were paid to the Limited Partners during the year 20082009 and 2007:2008: