AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE __, 2001
REGISTRATION NO.________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
COMMONWEALTH INCOME & GROWTH FUND IV, A PENNSYLVANIA LIMITED PARTNERSHIP
(Exact name of registrant as specified in governing instruments)
PENNSYLVANIA 7394 23-3080409
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
1160 WEST SWEDESFORD ROAD, SUITE 340, BERWYN, PA 19312
(610) 647-6800
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
KIMBERLY A. SPRINGSTEEN, PRESIDENT
Commonwealth Capital Securities Corp.
1160 West Swedesford Road, Suite 340
Berwyn, PA 19312
(610) 647-6800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Michael B. Pollack, Esq.
Reed Smith LLP
2500 One Liberty Place
Philadelphia, PA 19103
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _______
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _________
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
Title Of Each Class Of Amount To Be Proposed Maximum Proposed Maximum Amount Of
Securities To Be Registered Registered Offering Price Per Unit Aggregate Offering Registration Fee
- --------------------------- ------------ ----------------------- ------------------ ----------------
Limited Partnership Units 750,000 $20.00 $15,000,000 $3,750.00
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Prospectus Dated June __, 2001
COMMONWEALTH
INCOME & GROWTH
FUND IV
[GRAPHIC OMITTED]
Up To 750,000 Units of Limited Partnership Interests
COMMONWEALTH INCOME & GROWTH FUND IV:
o We are a Pennsylvania limited partnership.
o We acquire computer peripheral equipment and other similar
capital equipment, which is leased primarily to US
corporations and institutions.
o Our principal objective is to generate sufficient leasing
revenues to enable us to make cash distributions to our
limited partners.
o We, together with selected securities brokers, will sell the
units on a best efforts basis. The partnership is a
Pennsylvania limited partnership formed to acquire various
types of computer peripheral equipment and other similar
capital equipment, which will be leased primarily to U.S.
o We will close the offering on June 15, 2003 or sooner.
o Minimum Number of Units: 50,000
o Maximum Number of Units: 750,000
o Offering Size: (Minimum) $ 1,000,000
(Maximum) $15,000,000
o Price Per Unit: $ 20.00
o Net Proceeds (per unit): $ 18.20
THIS OFFERING INVOLVES SIGNIFICANT RISKS, INCLUDING:
o Investors will have limited voting rights and
participation in management.
o The general partner will have conflicts of interest.
o Significant fees will be paid to the general partner.
o There will be restrictions on the transfer of units.
o A portion of distributions will be return of capital.
o Our assets may depreciate in value.
o There are certain tax risks associated with this
offering.
This Investment Involves Risks. See "RISK FACTORS", BEGINNING ON PAGE 4.
Price to Public Selling Commissions(1) Proceeds to the partnership(2)
--------------- ---------------------- ------------------------------
Per Share $ 20 $ 1.80 $ 18.20
Total Minimum $ 1,000,000 $ 90,000 $ 910,000
Total Maximum $ 15,000,000 $ 1,350,000 $ 13,650,000
(1) The price to the public and the selling commissions will be reduced by
volume discounts in the case of a purchase in excess of $250,000 by a single
investor. However, the proceeds to the partnership will not be reduced by
such discounts. See the "Plan of Distribution" section of this prospectus
for a complete description of the amount and terms of such commissions.
(2) Before deducting an organization fee equal to three percent of the limited
partners' capital contributions up to $10,000,000 and two percent of the
limited partners' capital contributions thereafter to be paid by the
partnership to the general partner ($30,000 if 50,000 units are sold and
$400,000 if 750,000 units are sold). The general partner will pay all
organizational and offering expenses other than underwriting commission.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OF THESE SECURITIES OR DETERMINED WHETHER THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. THEY HAVE NOT MADE, NOR WILL THEY MAKE, ANY DETERMINATION
AS TO WHETHER ANYONE SHOULD BUY THESE SECURITIES. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. ANY
REPRESENTATIONS TO THE CONTRARY AND ANY PREDICTIONS, WRITTEN OR ORAL, AS TO THE
AMOUNT OR CERTAINTY OF ANY PRESENT OR FUTURE CASH BENEFIT OR TAX CONSEQUENCE
WHICH MAY FLOW FROM AN INVESTMENT IN THIS PROGRAM IS NOT PERMITTED.
Our Location and Telephone Number is:
COMMONWEALTH CAPITAL SECURITIES CORP.
1160 WEST SWEDESFORD ROAD, SUITE 340
BERWYN, PA 19312
1-800-249-3700
PROSPECTUS SUMMARY
The following is only a summary which highlights some information from
this prospectus. It may not include all of the information that is important to
you. To understand this offering fully, you should read the entire prospectus
carefully, including the risk factors and the financial statements. For short
definitions of terms used, see the glossary at the end of this prospectus.
Our Company
Commonwealth Income & Growth Fund IV is a Pennsylvania limited
partnership that will own and lease computer peripheral equipment. Our office is
at 1160 West Swedesford Road, Suite 340, Berwyn, PA. Our phone number is
1-800-249-3700. We refer to Commonwealth Income & Growth Fund IV as the
partnership in this prospectus. Our business strategy is as follows:
o We will use a substantial portion of the proceeds of the
offering to acquire computer peripheral and other similar
equipment, which will be leased to U.S. corporations and other
institutions.
o We will also use excess cash flow, sale proceeds and the
proceeds of debt financing to purchase additional equipment
from time to time throughout our operational phase. We expect
that most of the equipment will be placed on operating leases
(short term leases under which we will normally receive rental
payments in an amount less than the purchase price of the
equipment).
o At the end of initial operating leases, we will either
re-lease or sell equipment. Substantially all of the equipment
will be manufactured by, or compatible with equipment
manufactured by IBM. See "Risk Factors" and "Investment
Objectives" and "Description of Leases."
o We intend to purchase only equipment which will be leased at
the same time we acquire the equipment.
o We intend to dispose of all our assets in approximately 10
years from the termination of this offering.
General Partner
Our general partner is Commonwealth Income & Growth Fund, Inc., located
at 1160 West Swedesford Road, Berwyn, Pennsylvania 19312 (telephone number is
610-647-6800). The general partner is responsible for managing our affairs on a
day-to-day basis. The general partner is also responsible for identifying and
making investments on our behalf. Our general partner is owned by Commonwealth
of Delaware, Inc., which is owned by Commonwealth Capital Corp., ("Com Cap
Corp."). Affiliates (individuals or entities considered to be in control of,
controlled by, or under common control with a specified person or entity) of our
general partner have sponsored several prior equipment leasing programs. See
"Conflicts of Interest" and "Table II -- Prior Performance Tables."
Risk Factors
An investment in the partnership has many risks. The "Risk Factors"
section of this prospectus contains a detailed discussion of the most important
risks. Please refer to the "Risk Factors" section for a more detailed discussion
of the risks summarized below:
o There is currently no public trading market for the units, and
there is no assurance that one will develop. An investment in
units will be highly illiquid and it may be difficult for you
to sell your units at the time and for the price you desire.
o You will not have the opportunity to evaluate the terms of the
investments made by the partnership
o The general partner and its affiliates are or will be engaged
in other activities that will result in potential conflicts of
interest with the services that the general partner and
affiliates will provide to us.
o We may purchase computer equipment that may depreciate in
value and/or become obsolete over time.
o We will concentrate on acquiring computer peripheral equipment
and other similar capital equipment and will not diversify the
assets in which we invest beyond those classes of equipment.
o We are a newly formed partnership and have no operating
history.
o Market and economic conditions that we cannot control will
affect the value of our investments.
o Certain of our investments may be financed with non-recourse
debt. In connection with such borrowing, we will likely grant
security interests in the financed property, which would put
us at risk of losing that asset if we are unable to pay that
debt.
Compensating our general partner and its affiliates.
Our general partner and its affiliates, including Commonwealth Capital
Securities Corp., will receive substantial fees and compensation from the
offering of units and from our operations of the Partnership, regardless of
profitability and, in some cases, prior to any distributions to you. Outlined
below are the most significant items of compensation.
o We will pay Commonwealth Capital Securities Corp., as the
dealer manager, an underwriting commission of up to 9% of the
capital contributions received in this offering, but only if
at least $1,000,000 in units are sold. A portion of this
commission may be re-allowed by the dealer manager to other
Participating Brokers.
o As compensation for organizing the partnership, we will pay
the general partner an organizational fee equal to 3% of the
first $10,000,000 of capital contributions and 2% of capital
contributions in excess of $10,000,000.
o As compensation for the negotiation of equipment acquisitions
and related leases, we will pay the general partner an
equipment acquisition fee of 4% of the purchase price of each
item of equipment purchased.
Other fees will be paid to the General Partner or its affiliates in
connection with the reimbursement of expenses, debt placements with a term over
twelve months, equipment management and equipment liquidation services. See
"Compensation to the General Partner."
The Offering
Offering Size (maximum)...... $15,000,000
(minimum)...... $ 1,000,000
Minimum Investments.......... Individuals - $2,500
IRA, Keogh and other qualified plans - $1,000
Suitability Standards........ Net worth of at least $45,000 and annual gross
income of at least $45,000;
OR
Net worth of at least $150,000 (For this purpose,
net worth excludes home, furnishings and personal
automobiles).
Suitability standards may vary from state to
state. Please See the "Investor Suitability
Standards" section, which Begins on page 64.
Unit Price................... $20.00
2
Holding Period of Units...... Units cannot be transferred without consent of
the general partner, which may be withheld in
order to limit the number of transfers to satisfy
certain tax requirements.
Beginning 30 months after the completion of this
offering, the general partner may, in its
discretion, redeem a limited number of units upon
request. Other transfer restrictions may apply.
Our General Partner.......... Commonwealth Income & Growth Fund Inc. will
administer our day-to-day operations and select
our computer peripheral investments.
Estimated Proceeds........... If the maximum number of units are sold:
88.3% - to acquire equipment
11.7% - for commissions, fees and expenses
If the minimum number of units are sold:
88.0% - to acquire equipment
12.0% - for commissions, fees and expenses
We May Borrow Funds
We may borrow a portion of the cost of the equipment which we purchase.
Our total amount of indebtedness will be limited to 30% of the total cost of the
equipment. We may not borrow to acquire equipment until the net proceeds of the
offering are fully invested, or committed to investment, in equipment. There are
no borrowing limits for any particular item of equipment. All of our borrowings
will be non-recourse to us. Up to one percent of the amount of such indebtedness
may be payable to the general partner as a debt placement fee.
Distributions Are Expected To Be Made Quarterly
Distributions are expected to be made quarterly. There can be no
assurance, however, as to the exact date on which distributions will begin or
the amount of any distributions. In addition, if you purchase a minimum of 250
units ($5,000), you will have the option to choose, for a fee, to receive
distributions, paid in arrears, on a monthly basis. In the future, the general
partner, in its sole discretion, may elect to pay distributions to you on a
quarterly basis. See "Distributions and Allocations."
Distributions May Be Automatically Reinvested in Additional Units During the
Offering Period
You may purchase additional units, if desired, by automatically
reinvesting all or a portion of your cash distributions in units during the
offering period. You may elect to reinvest your distributions by marking section
6 of your subscription agreement accordingly. Your election to reinvest
distributions is entirely voluntary, and you may terminate automatic
reinvestment at any time by notifying us in writing. Your share of the
partnership's taxable income is still taxable to you, even though distributions
have been reinvested. See "Distributions and Allocations -- Distribution
Reinvestment"
Units May Not Be Sold On The Public Market
You cannot sell your units on the public market. The general partner
expects that no market will develop. The units will be transferable only with
the general partner's approval. The general partner intends to permit transfers
and redemptions of units of up to five percent of the total outstanding
interests in Commonwealth Income & Growth Fund IV in any one year. In deciding
whether a transfer can be made, the general partner will consider whether the
transfer will have an adverse affect on our federal tax status as a partnership.
See "Transferability of Units."
3
Units May Be Redeemed
After a 30-month period immediately following the termination of the
offering, we may redeem units that may be tendered each year, up to two percent
of the outstanding units, subject to the general partner's approval. Request for
redemption is completely voluntary. The purchase price for outstanding units
will be equal to 105% of the amount you paid for the units, less the amount of
cash distributions you have received relating to such units. The redemption
price formula will not be calculated at the fair market value of a unit.
See "Transferability of Units"
The Partnership Will Terminate
In the ninth year of operations, the general partner intends to begin
liquidation of the partnership in an orderly fashion, unless it terminates
earlier upon sale of all of the equipment. The term of our existence may be
extended if the general partner believes that it would enable us to dispose of
assets on terms more favorable than those it would otherwise be able to obtain.
The partnership will not continue beyond December, 2013. See "Partnership
Agreement Summary."
The Cost Of The Equipment Will Be Depreciated
The equipment will be eligible for different methods and periods of
depreciation depending on the type of equipment. See "United States Federal
Income Tax Considerations."
RISK FACTORS
An investment in our partnership involves various risks, including
those described below. You should consider the following risk factors together
with all of the other information included in this prospectus before making a
decision to invest in our units.
Our success depends on the quality of our management.
o You will not be permitted to take part in the management of
Commonwealth Income & Growth Fund IV. Our success, to a large
extent, will depend on the quality of our management,
particularly as it relates to equipment acquisition, releasing
and disposition. The general partner is dependent on its key
personnel; and has no life insurance policies on key
personnel. In certain instances, the interests of Commonwealth
Income & Growth Fund IV may conflict with those of the general
partner or its affiliates. See "Conflicts of Interest,"
"Management," and "Investment Objectives and Policies."
You will have limited voting rights on matters affecting our business since you
are not permitted to take part in the management of Commonwealth Income and
Growth Fund IV.
o For any matter submitted to the limited partners, the
affirmative vote of the holders of at least a majority of the
outstanding units is required for approval. See "Summary of
the Partnership Agreement -- Voting Rights of Limited
Partners."
We pay significant fees to the general partner and affiliates.
o The general partner and its affiliates, including Commonwealth
Capital Securities Corp., will receive substantial fees. Some
fees will be paid irrespective of the amount of distributions
paid and regardless of the success or profitability of the
Commonwealth Income & Growth Fund IV's operations and
investments. Such compensation and fees were established by
the general partner and are not based on arm's-length
negotiations. See "Compensation of General Partner and
Affiliates."
4
Units of Commonwealth Income and Growth Fund IV are generally not transferable.
o Prior to this offering, there has been no public market for
the units, and the units cannot be pledged or transferred
without the consent of the general partner. The general
partner does not expect a public market for units to develop.
The units should be purchased as a long-term investment only.
The general partner intends to limit the number of transfers
to no more than that number permitted by one of the safe
harbors available under the tax laws and regulations to
prevent the partnership from being taxed as a corporation.
o Generally, these safe harbors require that all nonexempt
transfers and redemptions of units in any calendar year not
exceed two percent of the outstanding interests in the capital
or profits of the partnership.
o The general partner has sole discretion in deciding whether we
will redeem units in the future. Consequently, investors in
the partnership may not be able to liquidate their investments
in the event of an emergency. Limited partners must be
prepared to hold their units for the life of the partnership
and may be able to resell their units, if at all, only at a
discount to the offering price, which may be significant. See
"Transferability of Units - Redemption Provision."
Computer equipment we purchase may depreciate in value and/or become obsolete as
new technology is developed.
o In the event of such an occurrence, the equipment we purchased
may have little or no residual value. This will result in
insufficient assets for us to distribute cash in a total
amount equal to the invested capital of the limited partners
over the term of our existence. Also, such an occurrence may
reduce the value of the units.
o Although currently we expect the partnership to acquire
predominantly new equipment, the partnership may purchase used
equipment. There is no limitation on the amount of used
equipment which the partnership may acquire. The acquisitions
of used equipment may increase the risk that such equipment
will become obsolete so that it will have little or no
residual value.
During the life of Commonwealth Income & Growth Fund IV, a portion of the
distributions to Limited Partners will be a return of capital.
As equipment values decrease over the term of our existence, a portion
of each distribution may be considered a return of capital, rather than income.
We will concentrate on acquiring computer peripheral equipment and other similar
capital equipment and will not diversify the assets in which we invest beyond
those classes of equipment.
o Adverse developments in the market for computer peripheral
equipment will have a more significant adverse consequence to
the partnership than if it had acquired a portfolio that
included a greater variety of asset classes.
o To the extent that this offering results in the sale of
significantly less than the maximum number of units offered,
the ability to diversify our risks will be reduced, and a
default by any lessee would have a more significant adverse
affect than if greater diversification had been achieved. The
general partner currently expects that a substantial portion
of our equipment will be compatible with equipment
manufactured by IBM. Thus, adverse developments in the
business or prospects of IBM may have a significantly greater
impact on the partnership than if equipment compatible with
that made by a more diverse group of manufacturers were
acquired.
The ultimate cash return from an investment in units will depend, in part, upon
the residual value of equipment at the termination of our leases.
Residual value is the amount realized upon the sale or re-lease of
equipment when the original lease has expired. The residual value of our
equipment may decline if technological advancements make it obsolete or change
market preferences. The residual value depends on, among other factors, the
condition of the equipment, the cost of comparable new equipment, the
technological obsolescence of the equipment and supply and demand for the
equipment. See "Investment Objectives and Policies."
5
If we are unable to arrange promptly for the re-leasing or sale of the equipment
when returned by a lessee, our revenue will be reduced.
o While the creditworthiness of potential lessees will be
reviewed, there can be no assurance that a default will not
occur. A default may cause us to lose anticipated revenues and
limit our ability to recover our investment in the equipment.
o The default by a lessee under a lease may cause equipment to
be returned to us at a time when the general partner or its
agents may be unable to arrange promptly for the re-leasing or
sale of the equipment.
o If any indebtedness is secured by the returned equipment, its
return will hinder our ability to make scheduled debt payments
with respect to such equipment. In such case, the lender may
foreclose on and acquire ownership of the returned equipment.
In addition, lessees of equipment encountering financial
difficulties may voluntarily or involuntarily become subject
to the provisions of the Bankruptcy Code which could delay or
prevent us from taking the equipment back upon default. See
"Investment Objectives and Policies -- Description of Leases."
The general partner has made a limited contribution to Commonwealth Income &
Growth Fund IV.
We have received $1,000 from the general partner as a capital
contribution for its interest in Commonwealth Income & Growth Fund IV.
Therefore, contributions by the limited partners and the economic risks borne by
them will be substantially greater, in proportion to the interests owned and
benefits received by them, than the contribution by the General Partner, in
proportion to the interest owned and benefits received by the General Partner.
Approximately 15.1% (assuming the maximum amount of units are raised) to 15.4%
of the proceeds from the sale of the units will be used to pay organization,
offering and equipment acquisition fees. See "Estimated Use of Proceeds."
We were formed on April 20, 2001 and have a limited operating history.
No assurance can be given that our operations will be successful or
that we will meet our stated investment objectives. Specifically, there is no
assurance that cash will be available for distribution to investors.
Limited partners in a partnership may be liable for partnership obligations if
they take an active part in the control of the business of the partnership.
In general, limited partners in a partnership are not liable for
partnership obligations unless they take an active part in the control of the
business of the partnership. The partnership agreement provides certain rights
to the limited partners to remove and replace the general partner, to amend the
partnership agreement, to approve or disapprove the sale or other disposition at
one time of all the partnership's property, to dissolve the partnership and to
take certain other actions. While Pennsylvania law would not impose liability
for these activities, there is uncertainty as to which state's partnership laws
may be applicable to partnerships that are organized under the laws of one state
and that own property and have partners residing in other states. Thus it is
conceivable that the existence or the exercise of these rights under certain
circumstances could possibly cause the limited partners to be deemed to be
liable as general partners under the laws of states other than Pennsylvania. If
the limited partners were judged to be liable as general partners, they would be
personally liable for partnership obligations. Also, the limited partners will
be obligated to return any distribution from the partnership to the extent that,
after giving effect to the distribution, all liabilities of the partnership
(other than non-recourse liabilities and liabilities to limited partners on
account of their interests in the partnership) exceed the fair value of its
assets (including, as to assets serving as security for non-recourse
liabilities, that portion of the fair value of our assets which exceeds the
amount of such non-recourse liabilities). See "Summary of the Partnership
Agreement -- Liability of Limited Partners."
6
The partnership agreement that allows the general partner to allocate among
other managed funds may relieve the general partner and its affiliates from an
aspect of their fiduciary duty to the partnership.
o The partnership agreement provides that the general partner
and its affiliates may allocate properties or equipment to
other funds or other programs, based on which program has had
the funds the longest, the cash/leverage available, the
equipment type, the term of the lease, and the percentage that
each lessee represents to the total assets of the fund or
program. The allocation of property and equipment may relieve
the general partner and its affiliates from an aspect of their
fiduciary duty to Commonwealth Income & Growth Fund IV.
The business of leasing and investing in equipment is subject to many risks
which could impact the return to investors, including the following:
o The availability of satisfactory equipment.
o The increasing rate at which equipment of the type in which
the partnership intends to invest becomes obsolete.
o The potential inability of Commonwealth Income & Growth Fund
IV to lease equipment coming off lease or following a default
by the lessee.
o The possibility of defaults by lessees.
General economic risks could reduce our income, cash flow and the value of our
assets.
The ability to operate the fund profitably may be adversely affected by
various economic and business factors. These factors are beyond the control of
the general partner and include:
o general economic conditions, such as inflation, fluctuations
in general business conditions and availability of financing;
o fluctuations in supply and demand for various types of
equipment resulting from, among other things, obsolescence and
changes in the methods or economics of a particular type of
equipment resulting in reduced lease revenues;
o increases in maintenance expenses, taxes and insurance costs
attributable to the equipment;
o the risk of an uninsured or uninsurable loss with respect to
the equipment or an insured loss for which insurance proceeds
are inadequate, resulting in a possible loss of invested
capital in and any profits anticipated from such equipment;
o bankruptcies, contract disputes or defaults in payment by
lessees of the equipment resulting in delays in foreclosures
and uncollectible accounts;
o an overall decline in corporate expansion or demand for
capital goods, which may adversely affect our ability to
invest the proceeds of this offering; and
o delayed delivery of equipment due to production delays,
strikes, work stoppages or other problems encountered by
manufacturers.
7
We intend to invest primarily in equipment subject to operating leases.
Operating leases typically will have terms of 12 to 36 months and
provide that we will receive total payments from the lessee in an amount that is
less than our purchase price of the equipment. In order to recover our purchase
price on termination of an operating lease, we must:
o obtain a satisfactory renewal from the original lessee;
o lease the equipment to a new lessee or other user; or
o sell the equipment for a price which, when combined with
previous lease payments, equals or exceeds the purchase price.
We cannot guaranty that we will successfully accomplish any of these
alternatives and, as a result, we may not realize anticipated revenues and may
fail to recover our investment in the equipment. Shorter-term Operating Leases
may increase these risks. See "Investment Objectives and Policies."
We have not yet identified any of our investments in equipment.
o We have not identified any equipment for acquisition by the
partnership. Until equipment is identified in supplements to
this prospectus or in quarterly and/or annual investor
reports, investors will have no information about any
equipment to be purchased by the partnership and must rely
solely upon the judgment and ability of the general partner
with respect to the selection and evaluation of equipment.
o Except for the investments described in this prospectus, you
will have no opportunity to evaluate the terms of transactions
or other economic or financial data concerning our
investments.
o Information concerning the type of equipment leased by the
three previous partnerships sponsored by the general partner
can be found in the 10-Ks for those programs. Moreover,
although it does not presently intend to do so, the general
partner is authorized to invest in telecommunication and
medical technology equipment which would be new types of
investments for the general partner. See "Investment
Objectives and Policies."
Any delay in acquiring equipment will diminish our returns.
o Due to competition with other lessors, we may experience
difficulty in obtaining and leasing appropriate equipment. Our
ability to acquire and lease equipment may also be adversely
affected by interest rates, the availability of capital or
increases in corporate liquidity, since prospective lessees
may prefer to raise capital, incur debt or use
internally-generated cash to purchase equipment rather than
enter the leasing market.
o Delays in acquiring equipment will reduce the anticipated
benefits to investors from the acquisition of units.
Our inability to repay non-recourse debt could cause a loss of our investment in
financed equipment.
Borrowing increases the risks of investment in the partnership because,
in the case of non-recourse debt, if debt service payments are not made when
due, we may sustain a loss of our investment in the equipment which secures that
debt and the limited partners may experience adverse tax consequences. Borrowing
can also lead to increased losses or the imposition of restrictions on our
ability to borrow further amounts. See "United States Federal Income Tax
Considerations -- Allocation of Partnership Income, Gains, Losses, Deductions
and Credits."
8
Money market fluctuations have affected the availability and cost of
loans that may finance the purchase of equipment. The general partner is unable
to predict the nature of the money market when Commonwealth Income & Growth Fund
IV seeks financing and any future tightening of credit controls will make
obtaining financing more difficult and more costly. In such event, we may be
forced to purchase equipment using only or mostly the cash proceeds from this
offering, with little or no borrowings. This would make it more difficult for us
to achieve the desired diversification of equipment and would prevent
Commonwealth Income & Growth Fund IV from spreading the risk of unproductive
investments over a greater number of items of equipment.
However, if we purchase an item of equipment for cash and, thereafter,
suitable financing becomes available, we may finance such equipment and invest
the proceeds of that financing in additional equipment. In addition, future
credit restrictions may adversely affect the ability for us to sell or refinance
equipment and may affect the terms of equipment sales.
In leasing the equipment to Lessees, we will, in certain instances, be exposed
to liability for damages resulting from their actions or inaction, independent
of contract.
Lessees' use of the equipment may cause damages for which the
partnership, as owner of the equipment, may be held liable, whether or not the
partnership caused the damage. Although we will use our best efforts to minimize
the possibility and exposure of such tort liability, no assurances can be given
that the partnership's assets will be protected against any such claims.
The equipment leasing industry is highly competitive.
The partnership's competitors include independent leasing companies,
affiliates of banks and insurance companies and other partnerships. Many of
these entities may have larger equipment inventories, greater financial
resources and more experience in the industry than the partnership or the
general partner. See "Investment Objectives and Policies -- Competition."
The partnership's ability to lease, release or sell its equipment may be
affected by actions taken or not taken by, or the business prospects of, IBM.
The general partner currently expects that a substantial portion of the
partnership's equipment will be manufactured by IBM or will be compatible with
equipment manufactured by IBM, making the success of the partnership dependent
in part on the success of IBM.
Our ability to release or sell the equipment at the end of the lease term could
be adversely affected by the actions of the equipment manufacturer or others
hired to perform services on the equipment.
The failure of an equipment manufacturer to honor its product
warranties or to provide necessary parts and servicing, the decline of the
manufacturer's reputation in the industry, the discontinuance of the manufacture
of such equipment or the termination of the manufacturer's business may also
hinder our ability to release or sell the equipment.
We may enter into contracts with manufacturers or others in which such
parties may perform certain services related to equipment, including
refurbishing and storing equipment and performing related services. Our ability
to meet our investment objectives would be partially dependent on the
satisfactory performance of these functions by such parties. See "Investment
Objectives and Policies -- Types of equipment."
9
Although the individuals associated with and employed by Commonwealth
Capital Securities Corp. are experienced in the offering of securities,
Commonwealth Capital Securities Corp. has limited experience as a dealer
manager.
There are multiple tax risks associated with an investment in the partnership.
In view of the complexity of the tax aspects of investing in a
partnership that may invest in many different types of equipment, and
particularly in view of the fact that the tax situation of each investor will
not be the same, ALL PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX
ADVISORS with specific reference to their own tax situation prior to making an
investment in the partnership. The partnership is not intended to be a "tax
shelter" and limited partners should not expect a tax benefit from substantial
tax deductions or losses from the partnership. The general partner anticipates,
however, that the partnership may distribute cash periodically to the limited
partners, a portion of which may not be taxable to the limited partners upon
receipt. Trustees and other fiduciaries of individual retirement accounts,
qualified pension, profit sharing or stock bonus plans, and other tax exempt
entities should be aware that an investment in units will result in unrelated
business taxable income ("UBTI"). See "United States Federal Income Tax
Considerations -- Investment by Tax Exempt Entities" and "ERISA Considerations"
below. Each limited partner, together with his tax advisor, should carefully
consider all of the tax aspects of an investment in the partnership, including,
specifically, the risks discussed below.
A ruling from the IRS has not been obtained, and the general partner does not
presently intend to apply for a ruling, with respect to the tax considerations
associated with an investment in units.
Availability of the tax treatment described in this prospectus may be
challenged by the IRS upon audit of the tax return of either the partnership or
a partner. It should be noted that the determination of items of partnership
income, gain, loss, deduction and credit will be made at the partnership level
rather than in separate proceedings with the limited partners, and limited
partners generally will be required to report partnership items consistent with
the partnership's tax returns.
For any year in which the partnership has income in excess of
deductions, each limited partner will be required to report his share of such
income on his federal and state tax returns and will be responsible for the
payment of taxes thereon. Such taxes may be greater than cash distributions
received by the limited partner from the partnership in one or more taxable
years.
The primary tax benefits associated with an investment in units are the
"tax-deferred" distributions (that is, distributions which are not subject to
current taxation) which may be available as a result of cost recovery or
depreciation deductions. The availability of tax-deferred distributions may be
reduced by the alternative minimum tax. The IRS may successfully challenge the
amount or timing of the depreciation deductions claimed by the partnership, with
the result that the depreciation deductions of the partnership may be reduced
and partnership income may be increased (or loss may be decreased) for a taxable
year. The tax considerations associated with an investment in the partnership
could be affected by a number of different factors which are described in detail
under the caption "United States Federal Income Tax Considerations."
Any adjustment to a tax return of the partnership as a result of an audit by the
IRS may result in adjustment to the tax returns of the limited partners.
Any such adjustment may result in an examination of other items in such
returns unrelated to the partnership, or an examination of prior years' tax
returns. Limited partners could incur substantial legal and accounting costs in
contesting any challenge by the IRS, regardless of the outcome.
10
The IRS may challenge our partnership status.
Treasury Regulations generally allow newly formed unincorporated
entities (such as the partnership) to choose whether to be taxed as a
partnership or a corporation for federal income tax purposes. However, Section
7704 of the Code treats certain partnerships, the interests of which are deemed
to be "publicly-traded," as corporations. While the general partner will use its
best efforts to limit the type and number of transfers of units to those which
will allow the partnership to satisfy at least one of the safe harbors under
Treasury Regulation Section 1.7704-1, there is no assurance that the partnership
will satisfy one of these safe harbors. Certain transfers of units could occur
which would cause the partnership to fall outside these safe harbors.
While the failure to meet a safe harbor will not create a presumption
that a partnership is publicly-traded, no assurance can be given that if the
amount and type of trading in the units were to fall outside the safe harbors,
the IRS would not claim that the partnership was a "publicly-traded partnership"
taxable as a corporation. See "Transferability of Units" and "United States
Federal Income Tax Considerations -- Classification as a Partnership."
If the IRS were successful in characterizing the partnership as a
"publicly traded" partnership taxable as a corporation, then the partnership
would be subject to tax on its net income (without deductions for cash
distributions to limited partners), the limited partners would be subject to tax
on the distributions irrespective of their tax basis in their units, and such
distributions would be re-characterized as portfolio income to the limited
partners.
The IRS may challenge certain partnership allocations.
If the allocations of partnership net profits and net losses to the
limited partners made pursuant to the partnership agreement were successfully
challenged by the IRS, limited partners may be required to recognize additional
taxable income without any corresponding increase in distributions of cash from
the partnership.
Limited partners may not be able currently to deduct partnership net
losses as a result of limitations on the current utilization of passive activity
losses. In addition, any portfolio income generated by the partnership may not
be netted against partnership tax losses. See "United States Federal Income Tax
Considerations -- Limitations on Utilization of Partnership Losses -- Passive
Activity Losses Limitations." Finally, in the event that interests in the
partnership are deemed to be "publicly-traded," otherwise passive income will be
treated as portfolio income which may not be netted against partnership tax
losses or other passive losses, deductions, or credits of the limited partner.
The IRS may consider the partnership to be a secured lender with respect to
certain equipment.
The partnership intends to structure each lease transaction so that the
lease will be treated as a lease rather than as a financing arrangement for tax
purposes. If, however, the IRS were successful in challenging the status of a
lease by treating the lessee as the owner of the equipment and the partnership
as a secured creditor, among other items, the partnership would not be entitled
to cost recovery or depreciation deductions with respect to that item of
equipment. See "United States Federal Income Tax Considerations -- Ownership of
Equipment -- Lease versus Sale."
Limited partners' tax liabilities may exceed cash proceeds from the sale or
other disposition of equipment or units.
A sale or other disposition of equipment or of a limited partner's
interest in the partnership may result in a tax liability to the limited partner
in excess of any cash proceeds received by such limited partner. To the extent a
limited partner's federal tax liabilities exceed cash proceeds, such excess
would be a nondeductible cost to such limited partner.
11
Limited partners may incur tax and foreign tax liabilities.
Limited partners may be required to file tax returns and pay state or
local taxes, such as income, franchise or personal property taxes, as a result
of an investment in the partnership, and any use of the equipment in a country
other than the United States may subject limited partners to income taxation in
such country. See "United States Federal Income Tax Considerations -- State
Taxes", and "United States Federal Income Tax Considerations -- Foreign Tax
Considerations."
Tax benefits associated with an investment in units could be lost and/or
substantial tax liabilities incurred by reason of changes in the tax laws.
Potential investors should be aware of tax legislation currently
pending before Congress and state legislatures and should consult their own tax
advisors as to the effect such legislation would have on their potential
investment in units. Furthermore, there is no assurance that changes in the
interpretation of applicable tax laws will not be made by administrative or
judicial action which will adversely affect the tax consequences of an
investment in units.
Administrative or judicial changes may or may not be retroactive with
respect to transactions entered into prior to the date on which they occur.
Periodic consultations with a professional advisor may be necessary given the
possibility of such changes.
Investment in the partnership by a tax exempt entity, including a qualified
employee pension or profit sharing trust or an individual retirement account (a
"tax exempt entity") will result in the receipt of UBTI.
If a tax exempt entity realizes UBTI (net of deductions attributable to
such UBTI) from all sources in excess of $1,000 per year, it will incur federal
income tax liability with respect to such UBTI. Furthermore, if a tax exempt
entity has at least $1,000 of gross income that is included in the calculation
of UBTI for any year, the tax exempt entity will be obligated to file a tax
return for such year. See "United States Federal Income Tax Considerations --
Investment by Tax Exempt Entities."
Investment in the partnership by certain benefit plans may impose additional
burdens on the partnership.
Fiduciaries of pension, profit sharing, stock bonus or other employee
benefit plans subject to Title I of ERISA ("ERISA Plans"), fiduciaries of
tax-qualified retirement plans not subject to ERISA ("Non-ERISA Plans") and IRA
owners should consider whether (i) an investment in units is in accordance with
the documents and instruments governing the ERISA or Non-ERISA Plan or IRA
(hereinafter referred to as "Benefit Plan"), (ii) the purchase of units is
prudent in light of the potential difficulties that may exist in liquidating
units, (iii) an investment in units will provide sufficient cash distributions
in light of the Benefit Plan's likely required benefit payments or other
distributions, (iv) the evaluation of the investment in units has properly taken
into account the potential costs of determining and paying any amounts of
federal income tax that may be owed on UBTI in connection with the units, (v) in
the case of a fiduciary of an ERISA Plan, that the investment, unless made in a
self-directed investment arrangement, is made solely in the interests of
participants in the ERISA Plan, and (vi) the fair market value of units will be
sufficiently ascertainable, and with sufficient frequency, to enable the Benefit
Plan to value its assets in accordance with the rules and policies of the
Benefit Plan. In addition, if the Benefit Plan has certain relationships with
the partnership, the general partner or its affiliates other than as a Limited
Partner), investment in the partnership may involve a "prohibited transaction"
under the Code or ERISA. See "ERISA Considerations -- Prohibited Transactions
Under ERISA and the Code."
To avoid classification of a pro rata portion of the partnership's
underlying assets as "plan assets" of investors which are benefit plans, the
partnership intends to restrict the ownership of units by benefit plans to less
than 25% of the total value of outstanding units at all times. See "ERISA
Considerations -- Plan Assets." Neither the general partner nor the partnership
shall have any liability or responsibility to any tax exempt limited partner or
any other limited partner for any tax, penalty or other sanction or costs or
damages arising as a result of there being a prohibited transaction or as a
result of partnership assets being deemed plan assets of a tax exempt limited
partner under the Code or ERISA or other applicable law.
12
ESTIMATED USE OF PROCEEDS
The following table explains the estimated use of proceeds of the
offering of units. Except as otherwise disclosed in this prospectus, we will not
engage in transactions with the general partner or any of its affiliates and all
items of compensation are disclosed in the table below or under the caption
"Compensation of General Partner and Affiliates."
Minimum Proceeds Maximum Proceeds
(75,000 Units) (750,000 Units)
----------------------------- ---------------------------
Amount Percent Amount Percent
--------------- ------------ -------------- ------------
Gross Offering Proceeds $1,000,000 100.0% $15,000,000 100.0%
Selling Commissions (1) 80,000 8.0% 1,200,000 8.0%
Dealer Manager Fee 10,000 1.0% 150,000 1.0%
Organizational and Offering Expenses (2) 30,000 3.0% 400,000 2.7%
--------------- ------------ -------------- ------------
Total Offering Expenses 120,000 12.0% 1,750,000 11.7%
Net Proceeds to Partnership Available
for Investment 880,000 88.0% 13,250,000 88.3%
Equipment Acquisition Fees (3) 34,000 3.4% 509,616 3.4%
Investment in Equipment (4) 846,000 84.6% 12,740,384 84.9%
- -------------------------------------------------------------------------------------------------------------------
(1) The amount of the underwriting commissions (which include the selling
commissions and dealer manager fees) will range between four percent and
nine percent of capital contributions based upon the quantity of units sold
to a single investor. Gross proceeds of the offering are calculated as if
all units are sold at $20.00 per unit and do not take into account any
reduction in selling commissions. See "Plan of Distribution" for a
description of commission discounts available for certain large volume
purchases of units and for purchases by certain employees of the general
partner, dealer manager, participating brokers and their affiliates. The
units are being offered to the public through Commonwealth Capital
Securities Corp., which will receive selling commissions of up to eight
percent on all sales of units and will act as dealer manager for which it
will receive a dealer manager fee of one percent on all sales of units. The
dealer manager is an affiliate of the general partner. Other broker dealers
may be engaged as participating brokers to sell units and re-allowed
selling commissions of up to eight percent with respect to units, which
they sell. In addition, all or a portion of the dealer manager fee may be
re-allowed to certain participating brokers for expenses incurred by them
in selling the units, including reimbursement for bona fide expenses
incurred in connection with due diligence activities. See "Plan of
Distribution" for a more complete description of this fee.
(2) Consists of estimated legal, accounting and printing expenses; various
registration and filing fees; miscellaneous expenses related to the
organization and formation of the partnership; and other costs incurred in
connection with the preparation, printing and distribution of this
prospectus and other sales literature. See "Plan of Distribution." The
general partner will be paid an organizational fee equal to three percent
of capital contributions up to $10,000,000, and two percent of capital
contributions in excess of $10,000,000, and will pay all organizational and
offering expenses.
13
(3) An equipment acquisition fee of four percent of the purchase price of
equipment we purchase will be payable by us to the general partner. Does
not include acquisition fees payable with respect to the purchase of
equipment with the proceeds of leverage or with undistributed proceeds from
the sales of equipment. The general partner will also be paid a debt
placement fee to the extent leverage is used to acquire equipment. 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.
(4) Represents the partnership's expected cash investment from capital
contributions in equipment, excluding acquisition fees. Does not include
equipment acquired with leverage or with undistributed proceeds from the
sale of equipment. Because the partnership's leases are expected to be on a
"triple-net" basis, it is anticipated that 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 offering proceeds, cash flow or net disposition proceeds available
to the partnership for maintenance, repairs and for any other currently
unanticipated working capital needs. In addition, the general partner and
Com Cap Corp. have agreed that the general partner or Com Cap Corp. will
lend or contribute to the partnership an amount equal to 1.01% of the net
offering proceeds, if needed, to meet the partnership's expenses. Certain
expenses associated with the selection and acquisition of equipment for the
partnership (such as legal and accounting fees and expenses, travel and
communication expenses, brokerage fees and inspection fees and expenses)
will be paid to third parties and, accordingly, the amount available for
the purchase of equipment will be reduced by the amount of such expenses.
The amounts of such fees are not ascertainable at this time.
MANAGEMENT
The general partner, owned by Commonwealth of Delaware, Inc., which is
owned by Com Cap Corp., was incorporated in Pennsylvania on August 26, 1993. The
general partner currently manages three other public equipment leasing
partnerships. The principal business office of the general partner is at 1160
West Swedesford Road, Berwyn, Pennsylvania 19312, and its telephone number is
610-647-6800. The general partner manages and controls our affairs and will have
sole responsibility for all aspects of operations. The directors and officers of
the general partner and key employees of Com Cap Corp. are as follows:
Name Title
- -------------------------------------- ------------------------------------------------------------------
George S. Springsteen Chairman of the Board of Directors and President of the
general partner and Com Cap Corp.
Kimberly A. Springsteen Executive Vice President, Chief Operating Officer and Secretary
of the general partner and Com Cap Corp.
Henry J. Abbott Vice President and Portfolio Manager of Com Cap Corp.
Salvatore R. Barila Assistant Vice President and Controller of the general partner
and Com Cap Corp.
John A. Conboy, III Assistant Vice President and Accounting Manager of the
general partner and Com Cap Corp.
George S. Springsteen, age 66, is President of both Com Cap Corp. and
the general partner. Mr. Springsteen is also President of the general partners
of several prior programs sponsored by Com Cap Corp. He is also Chairman of the
Board of Directors of Commonwealth Capital Securities Corp. He has been the sole
shareholder and director of Com Cap Corp. since 1978. From 1971 to 1978, Mr.
Springsteen was employed with Granite Computer Corporation. Mr. Springsteen, as
Vice President of Marketing, 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 in 1978, now known as Com Cap Corp. Mr.
Springsteen attended the University of Delaware. Mr. Springsteen holds Series
22, 63 and 39 NASD licenses and is a member of the Equipment Leasing
Association. Mr. Springsteen is the husband of Kimberly A. Springsteen.
14
Kimberly A. Springsteen, age 41, is Executive Vice President, Chief
Operating Officer and Secretary of Com Cap Corp. and the general partner and
joined Com Cap Corp. in 1997. She is also the President of Commonwealth Capital
Securities Corp. From 1980 to 1997, Ms. Springsteen was employed with Wheat
First Butcher Singer, a broker/dealer headquartered in Richmond, Virginia. While
at Wheat First Butcher Singer, Ms. Springsteen, as 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. Ms. Springsteen
is the wife of George S. Springsteen.
Henry J. Abbott, age 48, is Vice President and Portfolio Manager of Com
Cap Corp. and has been employed by Com Cap Corp. since 1998. Mr. Abbott has been
active in the commercial lending industry, working primarily on asset-backed
transactions for more than twenty-seven years. Before joining Commonwealth, Mr.
Abbott was a founding partner of Westwood Capital LLC, in New York. Prior to
that, as Senior Vice President for IBJ Schroeder Leasing Corporation, 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 and
is a member of the Equipment Leasing Association.
Salvatore R. Barila, age 30, is Assistant Vice President and Controller
of the general partner and Com Cap Corp. and certain of its subsidiaries where
he has been employed since 2000. From 1992 to 2000, Mr. Barila was employed as
Corporate Accounting Manager of RCG Information Technology, Inc. Mr. Barila
received a BS degree in Accounting from Pace University in 1992. Mr. Barila is a
member of the Equipment Leasing Association.
John A. Conboy, III, age 55, is Assistant Vice President and Accounting
Manager of the general partner and Com Cap Corp. and certain of its subsidiaries
where he has been employed since 1999. From 1965 to 1999, Mr. Conboy was
employed as a Manager of Accounting Operations of Consolidated Rail Corporation.
Mr. Conboy attended the University of Phoenix with BS/BA in Accounting and
Business Administration. Mr. Conboy is a member of the Equipment Leasing
Association.
The directors and officers of the general partner are required to spend
only such time on the partnership's affairs as is necessary for the proper
conduct of the partnership's business. Under certain circumstances, such
directors and officers are entitled to indemnification from the partnership. See
"Conflicts of Interest" and "Responsibilities of the General Partner."
RESPONSIBILITIES OF THE GENERAL PARTNER
The general partner is accountable to the partnership as a fiduciary
and, consequently, must exercise good faith and integrity in handling
partnership affairs. Certain provisions of the partnership agreement may relieve
the general partner and its affiliates from an aspect of its state common law
fiduciary duties. General partners are held to a duty of the highest good faith
in conducting partnership affairs.
Since the general partner and certain programs it has sponsored will
acquire and lease equipment in the same manner as the partnership, the general
partner may be deemed to have a conflict of interest with the partnership. This
conflict arises because the partnership agreement states that, if two or more
investor programs are in a position to acquire the same equipment, the general
partner will decide which program or entity will purchase the equipment. (The
general partner generally affords priority to the partnership that has had funds
available to purchase equipment for the longest period of time.) If two or more
investor programs are in a position to enter into leases with the same lessee or
to sell equipment to the same purchaser, the general partner will generally give
priority to the equipment, which has been available for lease for the longest
period of time. The general partner may also allocate equipment to other
programs based on the cash/borrowing available, the equipment type, the term of
the lease, and the percentage that each lessee represents to the total assets of
the funds or programs. This allocation equipment may relieve the general partner
and its affiliates from an aspect of their fiduciary duty to the partnership.
15
Without modifying the general partner's fiduciary duties, the general
partner might not be able to serve as the general partner for the partnership
and other investor programs acquiring and leasing equipment at the same time.
This modification may operate as a detriment to limited partners because there
may be business opportunities that will not be made available to the
partnership.
The partnership agreement provides that the general partner will not be
liable to the partnership or to any limited partner for any loss or damage
caused by the general partner's actions or omissions, if made in good faith in
connection with the partnership. An act or omission, giving rise to a loss will
be considered made in good faith, if the general partner has determined such
course of conduct to be in the best interest of the partnership. The partnership
agreement also provides that the partnership will indemnify and hold harmless
the general partner, its affiliates and its successors and assigns against any
liability, loss or damage incurred by reason of any act or omission performed or
omitted in good faith in connection with the activities of the partnership or in
dealing with third parties on behalf of the partnership (including reasonable
costs and reasonable attorneys' fees).
If such act or omission constitutes fraud, negligence, or breach of
fiduciary duty, this indemnification will not be available. If such liability,
loss, or damage arose out of any act or omission on the part of the general
partner, the general partner must have acted in the good faith belief that such
course of conduct was in the best interest of the partnership in order to be
indemnified, and any such indemnification shall be recoverable only from the
assets of the partnership and not from the holders of units. A successful claim
for indemnification could deplete the assets of the partnership.
Based upon the present state of the law, a limited partner may
institute legal action on behalf of himself and all other limited partners (a
class action) to recover damages for a breach by the general partner of its
fiduciary duty or on behalf of the partnership (a partnership derivative action)
to recover damages from third parties. In addition, (i) investors may bring
partnership class actions in federal courts to enforce their rights under the
federal and state securities laws. Investors who have suffered losses in
connection with the purchase or sale of their units may be able to recover such
losses from the general partner where the losses result from a violation by the
general partner of the antifraud provisions of federal or state securities laws.
Investors should know that the fiduciary duty owed by a general partner
to its partners is similar in many respects to the fiduciary duty owed by the
directors of a corporation to its shareholders and is subject to the same rule
commonly referred to as the "business judgment rule." Directors are not liable
for mistakes in the good faith exercise of honest business judgment or for
losses incurred in the good faith performance of their duties when performed
with such care as an ordinarily prudent person would use. Accordingly, the
general partner may not be held liable for mistakes made or losses incurred in
the good faith exercise of reasonable business judgment.
If indemnification provisions purport to include indemnification for
liabilities under the Securities Act of 1933, the partnership has been informed
that, in the opinion of the Securities and Exchange Commission, such
indemnification is contrary to public policy and is therefore unenforceable. The
partnership will not indemnify the general partner and its successors and
assigns against liabilities arising under the Securities Act of 1933 unless the
indemnified party is successful in defending such action and such
indemnification is specifically approved by a court of law which has been
advised as to the current position of the Securities and Exchange Commission
regarding indemnification for violations of securities law. The partnership will
not pay for any insurance covering the liability of the general partner or its
successors or assigns for any act or omission whether or not indemnification is
permitted by the partnership agreement.
16
INVESTMENT OBJECTIVES AND POLICIES
Principal Investment Policies
We intend to use a substantial portion of the proceeds of this offering,
retained proceeds and debt (not to exceed 30% of the total cost of the equipment
we own) to purchase IBM and IBM-compatible computer peripheral equipment. We
intend to acquire equipment, which is leased to U.S. corporations placed on
operating leases. We retain the flexibility to enter into "full payout net
leases" (in which the non-cancelable rental payments due are at least sufficient
to recover the purchase price of the equipment) and "conditional sales
contracts" but have not and do not anticipate doing so. See "Description of
Leases," below. Our principal investment objectives are to:
o acquire, lease and sell equipment to generate revenues from
operations sufficient to provide cash distributions to limited
partners;
o preserve and protect limited partners' capital;
o use a portion of cash flow and sales proceeds, refinancing or
other sale of equipment to purchase additional equipment; and
o refinance, sell or otherwise dispose of equipment in a manner
that will maximize the proceeds to the partnership.
The equipment that will be in our portfolio cannot be determined, as
there is no way of anticipating what equipment will be available on reasonable
terms throughout the partnership's life. The general partner may vary our
portfolio and invest a substantial portion of the net proceeds of this offering
in a single category of computer peripheral and other similar equipment with
certain restrictions. See "Computer Peripheral And Other Equipment Restrictions"
As of the date of this prospectus, the partnership has not entered into
any commitments for the acquisition, financing, or leasing to third parties of
any equipment. The partnership will attempt to obtain contractual commitments
for the purchase of equipment as soon as practicable. Limited partners will not
have any right to vote on or otherwise approve or disapprove any particular
investment to be made by the partnership. It is not possible to determine the
date when the net offering proceeds (capital contributions less commissions and
other organizational fees and expenses) will be fully invested in equipment by
the partnership or the terms of any purchases of equipment.
If all of the net proceeds of this offering are not invested by the
partnership in equipment or committed to such investment or otherwise utilized
for proper partnership purposes prior to the expiration of 12 months from the
completion of this offering, the net proceeds not invested or committed will
thereupon be promptly returned, with interest at the rate earned by the
partnership. See "Risk Factors."
Although it is currently anticipated that the partnership will acquire
new equipment, the partnership may also purchase used equipment. Equipment
purchases will be made through lease brokers who charge the partnership a fee
over their cost of the equipment as compensation.
The general partner anticipates that the partnership's equipment will
be leased under operating leases or that an operating lease will be entered into
with a third party when the partnership acquires an item of equipment. See
"Description of Leases" below.
The partnership may also engage in sale/leaseback transactions, so the
partnership would purchase equipment from companies that would then immediately
lease the equipment from the partnership.
17
The partnership may enter into arrangements with one or more
manufacturers so the partnership can purchase from such manufacturers equipment,
which have previously been leased directly by the manufacturer to third parties
("vendor leasing programs"). The manufacturers of equipment will provide
maintenance, remarketing and other services for the equipment subject to such
agreements.
The general partner can 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 Sections 10.2
and 10.3 of the partnership agreement. However, the general partner cannot
change the partnership's primary objective of acquiring, leasing and selling
equipment without the consent of holders of more than fifty percent of the
units. The general partner will notify the limited partners if it makes such a
determination to change the partnership's investment objectives.
Computer Peripheral Equipment
Computer peripheral equipment are devices used to convey information
into and out of a central processing unit (or "mainframe") of a computer system.
Examples are tape drives, disk drives, tape controllers, disk controllers,
printers, terminals and related control units, all of which are 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-compatible equipment
is particularly advantageous because of the large IBM customer base, IBM's
policy of supporting IBM users with software and maintenance services and the
large amount of IBM and IBM-compatible equipment in the marketplace.
If, in the general partner's opinion, IBM's competitors begin to offer
these advantages and the general partner determines that non-IBM compatible
equipment is comparable in quality, the general partner may increase its
purchases of computer equipment which is not IBM-compatible if such purchases
are in the best economic interest of the partnership. See "Risk Factors."
Computer technology has developed rapidly in recent years and is
expected to continue to do so. technological advances have permitted reductions
in the cost of computer processing capacity, permitting applications unavailable
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. In the
future, the rate or nature of equipment development may cause equipment to
become obsolete more rapidly.
The general partner believes that, values of most 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 however is subject to declines in value as new,
improved models are developed and become available. Technological advances and
other factors have at times caused dramatic reduction in the market prices of
certain older models of IBM and IBM-compatible computer peripheral equipment.
Other Equipment Restrictions
The general partner is also authorized to invest in telecommunication
or medical technology equipment.
The partnership may not invest in any additional types of equipment
unless:
o the total purchase price of all equipment purchased by the
partnership which is not computer peripheral,
telecommunication or medical technology equipment represents
25% or less of the total cost of all of the assets of the
partnership at that time; and
18
o the general partner determines that such purchase is in the
best economic interest of the partnership at the time of the
purchase. There can be no assurance that any equipment
investments can be found which meet this standard; and there
can be no assurance that investments of this type will be made
by the partnership.
Diversification
Diversification is desirable to minimize the effects of changes in
specific industries, local economic conditions or similar risks. The
partnership's diversification will depend upon the financing which can be
assumed by the partnership or borrowed from third parties on satisfactory terms.
Our policy not to borrow on a recourse basis will further limit our
financing options. Diversification will also depend on the availability of
various types of equipment. Since the needs of potential lessees are unknown at
this time, there can be no assurance given with respect to the maximum
percentages of proceeds which will be invested in any single item or group of
items of equipment or in equipment under lease to a single lessee, except as
explained below and under "Other Equipment Restrictions" above. See also "Risk
Factors." During the operational stage of the partnership, we may not at any one
point in time, lease more than 25% of the equipment to a single person or
affiliated group of persons.
Description of Leases
We will purchase only equipment, which will be subject to a lease. The
general partner intends to lease most of the equipment to third parties subject
to operating leases. Operating leases are relatively short-term (12 to 36 month)
leases under which the rental payments during the original term of the lease are
not sufficient to recover the purchase price of the equipment.
The terms of the leases will depend upon a variety of factors,
including:
o the desirability of each type of lease from both an investment
and a tax point of view;
o the relative demand among lessees for operating leases, as
opposed to financing or other types of leases not offered by
us;
o the type and use of equipment and its anticipated residual
value;
o the business of the lessee and its credit rating; the
availability and cost of financing;
o regulatory considerations; the accounting treatment of the
lease sought by the lessee or the partnership; and competitive
factors.
Based on current sales prices for equipment and the past experience of
the general partner in disposing of equipment at the end of lease terms, the
general partner believes that the partnership will be able profitably, to
re-lease or dispose of its equipment leased under operating leases after their
initial terms.
We will enter into "triple net leases" which typically provide that the
lessee will bear the risk of physical loss of the equipment; pay taxes relating
to the lease or use of the equipment and maintain the equipment. The lessee will
also:
o 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;
o maintain casualty insurance in an amount equal to the greater
of the full value of the equipment or a specified amount
described in the lease; and
o maintain liability insurance naming the partnership as an
additional insured with a minimum coverage which the general
partner believes is appropriate.
19
We may also purchase "umbrella" insurance policies to cover excess
liability.
The general partner has not established any standards for lessees to
which it will lease equipment and there is no investment restriction prohibiting
the Partnership from doing business with any lessees. The general partner will
perform a credit analysis (including a review of the financial statements,
credit history and public debt record) of all potential lessees to determine the
lessee's ability to make payments under the lease.
The terms and conditions of our leases will be determined by
negotiation and may impose substantial obligations on the partnership. When we
assume maintenance or service obligations, we will enter into separate
maintenance or service agreements with manufacturers or certified maintenance
organizations to provide such services. Such agreements will generally require
annual or more frequent adjustments of service fees. We do not presently
anticipate entering into any leases which require us to perform maintenance
duties.
Borrowing Policies
We may incur debt in an amount of up to 30% of the total cost of the
equipment, however, we may not incur any indebtedness to acquire equipment until
the net proceeds of the offering are fully invested in equipment. Debt, for
purposes of this prospectus, 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. We will incur only non-recourse debt, which will
be secured by equipment and lease income. This debt will permit us to increase
the amount of our depreciable assets, and should increase both our lease
revenues and our federal income tax deductions above those levels which would be
achieved without borrowing. There is no limit on the amount of debt which may be
incurred in connection with the acquisition of any single item of equipment. Any
debt incurred will be fully amortized over the term of the initial lease for the
equipment securing the debt. The amount borrowed by the partnership will depend
on a number of factors, including:
o the types of equipment acquired by the partnership;
o the creditworthiness of the lessee;
o the availability of suitable financing; and
o prevailing interest rates.
The partnership intends to be flexible in the degree of leverage it
employs, within the permissible limit. The partnership will purchase some items
of equipment without debt. If the partnership purchases an item of equipment
without debt and then suitable financing becomes available, it may then obtain
the financing, secure the financing with the equipment purchased previously and
invest any proceeds from financing in additional items of equipment. The
partnership will attempt to borrow funds, to the fullest extent possible, at
interest rates fixed at the time of borrowing.
Any debt incurred by the partnership must be non-recourse. Non-recourse
debt means that the lender providing the funds can look for security only to the
equipment, pledged as security, including the proceeds derived from leasing or
selling the equipment. Neither the partnership nor any partner (including the
general partner) would be liable for repayment of any non-recourse debt. To the
extent the partnership borrows on a non-recourse basis, the limited partners'
tax basis in their units will increase, although there may not be a
corresponding increase in the partners' "At-Risk" amount. See "United States
Federal Income Tax Considerations -- Limitation on Utilization of Partnership
Losses -- Tax Basis and Amounts at Risk."
The general partner and its affiliates may make loans to the
partnership on a short-term basis in an amount of 1.01% of net offering
proceeds, if necessary, to the partnership. If the general partner or any of its
affiliates does so, the general partner or affiliate may not charge interest at
a rate greater than the interest rate charged by unrelated lenders on comparable
loans. The partnership will not pay interest on a loan at an annual rate greater
than three percent over the "prime rate" published in The Wall Street Journal.
All payments of principal and interest on any financing provided by the general
partner or any of its affiliates shall be due and payable by the partnership
within 12 months after the date of the loan. See "Compensation of General
Partner and Affiliates."
20
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 general partner or any such affiliate will be entitled to
receive interest on the funds. See "Conflicts of Interest -- Acquisitions."
Refinancing Policies
The partnership may refinance its debt, subject to borrowing
restrictions. The general partner will take into consideration factors as the
amount of appreciation in value to be realized, the possible risks of continued
ownership and the anticipated advantages, as compared to selling such equipment.
The partnership may retain an item of equipment, through refinancing,
to generate additional funds for reinvestment in additional equipment or for
distribution to the limited partners.
A refinancing will not be taxable to a limited partner unless it
exceeds the tax basis of the limited partner's units (after any increase of the
tax basis as a result of the partnership's incurring any additional non-recourse
debt). See "United States Federal Income Tax Considerations -- Limitations on
Utilization of Partnership Losses -- Tax Basis."
Liquidation Policies
The partnership will begin to dispose of its equipment approximately
nine years after the completion of this offering. The general partner may begin
to dispose of all its equipment at such time as the general partner believes
will allow for an orderly, business-like disposition of all of the equipment
prior to the termination of the partnership on December 31, 2013. However, the
general partner may, at any time, decide 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 will be made by the general partner after consideration of all
relevant factors (including prevailing 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. The term of the
partnership will not extend beyond December 31, 2013. See "Compensation of
General Partner and Affiliates -- Equipment Liquidation Fee."
Management of Equipment
Equipment management services for the partnership's equipment will be
provided by the general partner and its affiliates, consisting of collection of
income from the equipment, negotiation and review of leases 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. Certain of these services may be
provided initially by lease brokers as part of their agreement to sell the
equipment to the partnership. See "Compensation of General Partner and
Affiliates -- Equipment Management Fee."
21
Competition
The equipment leasing industry is highly competitive. We will compete
with leasing companies, equipment manufacturers and their affiliated financing
companies and entities similar to the partnership (including other programs
sponsored by the general partner), some of which will have greater financial
resources and more experience in the equipment leasing business than the general
partner.
Other leasing companies and equipment manufacturers or their affiliated
financing companies 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. As a result of these advantages, we may find it necessary
to lease our equipment on a less favorable basis than some of our competitors.
The computer peripheral equipment industry is also extremely
competitive. Competitive factors include pricing, technological innovation and
methods of financing. Manufacturer-lessors could maintain advantages through a
policy, which combines service and hardware with payment accomplished through a
single monthly charge.
The dominant firm in the computer marketplace is International Business
Machines Corporation. Its subsidiary, IBM Credit Corporation, is the dominant
force in the leasing of IBM equipment. Because of IBM's substantial resources
and dominant position, changes with respect to computer systems, pricing,
marketing practices, technological innovation and the availability of new and
attractive financing plans could occur at almost any time. Significant action in
any of these areas by IBM or IBM Credit Corporation might materially adversely
affect our business. See "Risk Factors"
Preliminary Investments
The partnership does not now own, and has made no commitment to
purchase, any equipment. The general partner or its affiliates may purchase
equipment prior to the completion of this offering, which equipment and the
related leases, if any, to which it is subject would be sold and assigned to the
partnership after it commences its business operations. No such purchase shall
commence until the minimum offering level has been reached. See "Conflicts of
Interest - Acquisitions."
It is not possible to determine the date when the net offering
proceeds, less working capital reserves, will be fully invested in equipment by
the partnership or the terms of any purchases of equipment. The partnership will
invest the net offering proceeds prior to the acquisition of equipment in
short-term, highly liquid investments where there is appropriate safety of
principal, such as United States Treasury Bills.
If all of the net proceeds of this offering are not invested by the
partnership in equipment or committed to such investment or otherwise utilized
for proper partnership purposes prior to the expiration of 12 months from the
completion of this offering, the net proceeds not so invested, committed, or set
aside as working capital reserves will thereupon be promptly returned, with a
proportionate share of interest at the rate earned by the partnership on the
investment of such proceeds, to the limited partners, based upon their
respective number of units and time of purchase. For such purpose, funds will be
deemed to be committed to investment and will not be returned to the limited
partners to the extent written agreements in principle, commitment letters,
letter of intent or understanding, option agreements, or any similar contracts
or understandings exist, whether or not any such investment is ultimately
consummated. Funds will also be deemed to be committed to the extent:
o any funds may have been reserved to make contingent payments
in connection with any equipment already acquired, whether or
not any such payments are ultimately made;
22
o as a condition of obtaining financing the partnership is
required to maintain funds as a compensating balance; or
o the general partner decides that an addition to the working
capital reserve is necessary in connection with any equipment.
In the event any such uninvested funds are distributed to the
limited partners, such distribution will be treated as a
return of capital. See "United States Federal Income Tax
Considerations - Cash Distributions."
Reserves
Because the partnership's leases are expected to be on a "triple-net"
basis, no permanent reserve for maintenance and repairs will be established from
the offering proceeds. However, the general partner may retain a portion of the
offering proceeds, cash flow and net disposition proceeds available, for
maintenance, repairs and working capital. There are no limitations on the amount
of offering proceeds, cash flow and net disposition proceeds that may be
retained as reserves. Since no reserve will be established initially, if
available cash flow of the partnership is insufficient to cover the
partnership's operating expenses and liabilities, it will 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 to:
o invest in junior trust deeds unless received in connection
with the sale of an item of equipment in an amount which does
not exceed 30% of value of the assets of the partnership on
the date of investment;
o invest in or underwrite the securities of other issuers;
o acquire any equipment for units;
o issue senior securities (except that the issuance to lenders
of notes in connection with the financing or refinancing of
equipment or the partnership's business shall not be senior
securities);
o make loans to any Person, including the general partner or any
of its affiliates;
o 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
o give the general partner or any of its affiliates an exclusive
right or employment to sell the partnership's equipment.
However, we may invest in joint venture arrangements with other
equipment programs formed by the general partner or its affiliates, if those
investments or arrangements meet certain conditions, See "Conflicts of Interest
- - Joint Ventures with Affiliates of the General Partner."
The general partner has also agreed to use its best efforts to assure
that the partnership shall not be deemed an "investment company" as such term is
defined 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 also
indicates that neither the general partner nor any of its affiliates may receive
any rebate or "give up" in connection with the partnership's activities. See
"Conflicts of Interest," "Compensation of General Partner and Affiliates," and
"Management."
23
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 own specific equipment, if:
o the partnership has or acquires a controlling interest in
ventures or partnerships;
o the non-controlling interest is owned by a non-affiliate; and
o there are no duplicate fees.
COMPENSATION TO THE GENERAL PARTNER AND AFFILIATES
The following table summarizes the types, estimated amounts and
recipients of compensation to be paid by the partnership directly or indirectly
to the general partner and its affiliates in connection with this offering and
our operation. These payments initially will result from non-arm's-length
bargaining. See "Conflicts of Interest."
Unless disclosed in this prospectus, the partnership will not engage in
transactions with the general partner or any of its affiliates. As described
below, the maximum front-end fees (which include fees and expenses incurred by
any person in connection with the organization of the partnership and
acquisition of equipment during the initial organization and acquisition phase),
that could be paid during the first fiscal year of operations without deduction
of expenses are $2,539,933 (assuming the maximum number of units are sold and
the maximum amount of leverage is incurred excluding fees earned with retained
proceeds).
Estimated Estimated
Amount Amount
Assuming Assuming
Minimum of Maximum of
Entity Receiving 50,000 Units 750,000 Units
Compensation Type of Compensation Are Sold Are Sold
- ------------------------------------------------------------------------------------------------------------------------------
OFFERING AND ORGANIZATION STAGE
Commonwealth Capital Underwriting Commissions. The partnership will pay to $90,000 $1,350,000
Securities Corp. the dealer manager an amount of up to nine percent of
capital contributions as underwriting commissions
after and only if the required $1,000,000 minimum
subscription amount is sold. The dealer manager will
pay other broker-dealers ("participating brokers")
out of underwriting commissions a selling commission
of up to eight percent of the capital contributions
from units sold by such participating brokers. The
amount of the underwriting commissions will be
determined based upon the quantity of units sold to
a single investor.
The General Partner Organizational Fee. An organization fee equal to three $30,000 $400,000
percent of the first $10,000,000 of limited partners'
capital contributions and two percent of the limited
partners' capital contribution in excess of $10,000,000,
as compensation for the organization of the
partnership. It is anticipated that the organizational
and offering expenses, which include legal, accounting
and printing expenses; various registration and filing
fees; miscellaneous expenses related to the organization
and formation of the partnership; other costs of
registration; and costs incurred in connection with the
preparation, printing and distribution of this
prospectus and other sales literature will be
approximately $300,000. The general partner will pay
all organizational and offering expenses, other than
underwriting commissions.
24
Estimated Estimated
Amount Amount
Assuming Assuming
Minimum of Maximum of
Entity Receiving 50,000 Units 750,000 Units
Compensation Type of Compensation Are Sold Are Sold
- ------------------------------------------------------------------------------------------------------------------------------
OPERATIONAL AND SALE OR LIQUIDATION STAGES
The General Partner and Reimbursement of Expenses. The general partner and its $15,000 $20,000
its Affiliates affiliates are entitled, under Section 5.2 of the
partnership agreement, 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. The amounts set forth on this
table are approximations of reimbursable expenses
for the first year of the partnership's operation
and do not include expenses incurred in the offering
of units.
The General Partner Equipment Acquisition Fee. An equipment acquisition fee $48,342 $716,217
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. The
fee will be paid upon closing of the offering with
respect to the equipment to be purchased by the
partnership with the net proceeds of the offering
available for investment in equipment except for fees on
the leveraged portion of the purchase price which are
paid when the equipment is purchased. If the
partnership does not purchase equipment with all the net
proceeds of the offering, the general partner will
return a pro rata portion of the fee to the
partnership. 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 estimated
amounts set forth in this table include fees on
equipment assuming the maximum allowable debt, but
exclude such fees earned on equipment purchased with
retained proceeds. Such excluded fees may be
significant in amount. Equipment acquisition fees will
be lower than the estimated maximum if a lower level of
acquisition borrowing is utilized.
The General Partner Debt Placement Fee. As compensation for arranging term $3,625 $53,716
debt to finance the acquisition of equipment by the
partnership, a fee equal to one percent of such
indebtedness; provided, however, that such fee shall be
reduced to the extent the partnership incurs such fees
to third parties, unaffiliated with the general partner
or the lender, with respect to such indebtedness and no
such fee will be paid with respect to borrowings from
the general partner or its affiliates. The estimated
amounts set forth in this table assume the expected
maximum allowable leverage ($362,571 if the minimum
number of units are sold and $5,371,620 if the maximum
number of units are sold), but exclude such fees earned
on refinancing or debt incurred with respect to
equipment purchased with retained proceeds and
borrowings.
25
Estimated Estimated
Amount Amount
Assuming Assuming
Minimum of Maximum of
Entity Receiving 50,000 Units 750,000 Units
Compensation Type of Compensation Are Sold Are Sold
- ------------------------------------------------------------------------------------------------------------------------------
OPERATIONAL AND SALE OR LIQUIDATION STAGES
The General Partner Equipment Management Fee. A monthly fee equal to the Not Not
lesser of (i) the fees which would be charged by an determinable determinable
independent third party for similar services for similar at this time at this time
equipment or (ii) the sum of five percent of the
gross lease revenues attributable to equipment which
is subject to operating leases.
The General Partner Equipment Liquidation Fee. With respect to each item of Not Not
equipment sold by the general partner a fee equal to the determinable determinable
lesser of (i) 50% of the competitive equipment sale at this time at this time
commission or (ii) three percent of the sales price of
the equipment. The payment of this fee is subordinated
to the receipt by the limited partners of (i) a return
of their capital contributions and a 10% per annum
cumulative return, compounded daily, on adjusted capital
contributions ("cumulative return") and (ii) 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.
INTEREST IN THE PARTNERSHIP
The General Partner Partnership Interest. The general partner will have a Not Not
present and continuing one percent interest in the determinable determinable
partnership's items of income, gain, loss, deduction, at this time at this time
credit, and tax preference. In addition, the general
partner will receive 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% cumulative
return and thereafter, the general partner will receive
10% of cash available for distribution.
CONFLICTS OF INTEREST
The partnership can have conflicts of interest arising out of its
relationships with the general partner and its affiliates. Nothing below shall
relieve the general partner and its affiliates from their general fiduciary
obligations to the partnership as set forth under "Fiduciary Responsibility."
These conflicts include the following:
Competition for General Partner's Time
The general partner and its affiliates have sponsored other investor
programs, which will be in potential competition with the partnership. Although
these programs have acquired all of the equipment, which they will acquire with
the proceeds of offerings to investors, each program may reinvest undistributed
cash in additional equipment. The general partner and its affiliates may also
form additional investor programs, which may be competitive with the
partnership.
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 programs. The partnership will, therefore, be
in competition with the other programs for the attention and management time of
the general partner and its affiliates. The general partner and its affiliates
will devote the time to our affairs as they, within their sole discretion,
exercised in good faith, determine to be necessary for our benefit and that of
the limited partners. 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. See "Management."
26
Competition with Affiliates
If one or more investor programs and the partnership are in a position
to acquire the same equipment, conflicts may arise as to which of the programs
acquire the available items of equipment. In addition, in order to promote
diversification of equipment and lessees when two or more investor programs are
in a position to acquire the same equipment, the general partner may acquire
equipment in joint ventures with affiliated investor programs. If one or more
investor programs and the partnership are in a position to enter into leases
with the same lessee or to sell equipment to the same purchaser conflicts may
arise as to which program shall lease or sell its equipment.
Acquisitions
Com Cap Corp. and the general partner or other affiliates of the
general partner may acquire equipment for the partnership provided that (i) the
partnership has insufficient funds at the time the equipment is acquired, (ii)
the acquisition is in the best interest of the partnership and (iii) no benefit
to the general partner or its affiliates arises from the acquisition except for
compensation paid to Com Cap Corp., the general partner or such other affiliate
as disclosed in this prospectus. Com Cap Corp., the general partner or their
affiliates will not hold equipment for more than 60 days prior to transfer to
the partnership. If sufficient funds become available to the partnership within
such 60 day period, the equipment may be resold to the partnership for a price
not in excess of the sum of the cost of the equipment and any accountable
expense relating to the selection and acquisition of equipment, or "acquisition
expenses" payable to third parties which are incurred and interest on the
purchase price from the date of purchase to the date of transfer to the
partnership. Except as described above, there will be no sales of equipment to
or from any affiliate of Com Cap Corp. The partnership may also find it
necessary to make advances to manufacturers or vendors with funds borrowed from
the general partner for acquisitions. The partnership will not borrow money from
the general partner or any of its affiliates for a term in excess of twelve
months.
Interest will be paid on loans or advances (in the form of deposits
with manufacturers or vendors of equipment or otherwise) from the general
partner or its affiliates from their own funds at a rate equal to that which
would be charged by third party financing institutions on comparable loans for
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. If the general partner or
its affiliates borrow money and loan or advance it on a short-term basis to or
on behalf of the partnership, the general partner or such affiliates shall
receive no greater interest rate and financing charges from the partnership than
that which unrelated lenders charge on comparable loans. See "Investment
Objectives and Policies."
Receipt Of Compensation by the General Partner and its Affiliates
Partnership transactions involving the acquisition, lease and/or sale
of equipment will result in compensation to the general partner and its
affiliates. The general partner has absolute discretion with all decisions
related to such transactions. Because the amount and timing of such fees
depends, in part, on the debt structure of equipment acquisitions and the timing
of such transactions, the general partner and its affiliates may be subject to
conflicts of interest to the extent the acquisition, retention, re-lease or sale
of equipment and the terms and conditions thereof may be less advantageous to
the partnership and more advantageous to the general partner under certain
circumstances.
Lack of Independent Investigation by Underwriter
Since Commonwealth Capital Securities Corp. is an affiliate of the
general partner, the partnership will not be subject to an independent
investigation of the type normally performed by an underwriting firm in
connection with the public offering of securities.
27
Non-Arm's-Length Agreements
Any agreements and arrangements relating to compensation between the
partnership and the general partner or any of its affiliates will not be the
result of arm's-length negotiations and the performance thereof by the general
partner and its affiliates will not be supervised or enforced at arm's-length.
However, the general partner believes that such compensation and fees are
comparable to those which would be charged by an unaffiliated entity or entities
for similar services. See "Compensation of General Partner and Affiliates."
Joint Ventures with Affiliates of the General Partner
The partnership may enter into joint ownership or joint venture
agreements for the acquisition and leasing of equipment with other persons,
including joint ventures controlled by the general partner. Should any such
joint ventures be done, the general partner may face conflicts of interest as it
may control and owe fiduciary duties to both the partnership and, through such
affiliates, the affiliated co-venturer.
The partnership may invest in joint venture arrangements with other
equipment leasing 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:
o all the programs have substantially similar investment
objectives;
o there are no duplicate fees;
o the sponsor compensation is substantially similar in each
program;
o 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;
o the investment of each program is on substantially the same
terms and conditions; and
o the joint venture is formed either for the purpose of
effecting appropriate diversification for the programs or for
the purpose of relieving the general partner or its affiliates
from a commitment entered into pursuant to Section 9.5.3 of
the partnership agreement. See "Risk Factors."
For example, because of the differing financial positions of the
co-venturing programs, it may be in the best interest of one program to sell the
jointly-held equipment at a time when it is in the best interest of the other
program to hold such equipment. There is a potential risk of impasse in joint
venture decisions since neither program may control and while one program may
wish to purchase equipment from its co-joint venturer, it may not have
sufficient resources to do so. Nevertheless, such joint ventures are restricted
to circumstances where the co-venturer's investment objectives are similar to
the partnership's, the partnership's investment is on substantially the same
terms as the co-venturer and the compensation to be received by the general
partner and its affiliates from each co-venturer is substantially the same.
Organization of General Partner
The partnership will do business with the general partner and its
affiliates, Com Cap Corp., Commonwealth Capital Securities Corp., and
Commonwealth of Delaware, Inc.. The general partner is owned by Commonwealth of
Delaware, Inc., which is owned by Com Cap Corp. Persons investing in the
partnership will not have an interest in the corporations solely as a result of
their investment in the partnership.
PRIOR OFFERINGS BY AFFILIATES
Our general partner has previously sponsored three equipment leasing
programs, Commonwealth Income & Growth Fund I (Fund I), Commonwealth Income &
Growth Fund II (Fund II) and Commonwealth Income & Growth Fund III (Fund III),
whose securities are registered under the Securities Act of 1933 and which have
investment objectives substantially identical to the partnership. Fund I
terminated its offering of units on May 11, 1995 with $12,634,153 raised from
investors. Eighty-four percent of the total interests offered in Fund I were
sold. On December 8, 1995, Fund I's net offering proceeds were fully utilized
for the purchase of computer peripheral equipment. All of the equipment was new
when acquired.
28
Fund II terminated it offering of units on May 12, 1997 with $9,235,185
raised from investors. Sixty two percent of all interests offered in Fund II
were sold. As of June 30, 1997, Fund II's net offering proceeds were fully
utilized for the purchase of computer peripheral equipment. All of the equipment
was new when acquired.
Fund III terminated its offering of units on July 25, 2000 with
$3,085,801 raised from investors. Twenty-one percent of all interests offered in
Fund III were sold. As of July 30, 2000, Fund III's net offering proceeds were
fully utilized for the purchase of computer peripheral equipment. All of the
equipment was new when acquired. Additional updates to the prior performance
tables will be filed by amendment when they become available.
Com Cap Corp. has conducted single investor and leveraged lease
transactions involving a variety of types of equipment. These transactions
involved arranging for the investment by single investors in equipment and
simultaneous lease of the equipment on a single transactions basis. The
investment objectives of these transactions were to provide tax deductions and
cash distributions. In addition, in 1984, Com Cap Corp. arranged for end-user
leases of equipment in a leveraged lease co-ownership program, involving the
private sale of partnership interest to 10 investors. The investment objectives
of that program were to provide tax deductions and cash distributions.
Affiliates of Com Cap Corp. have also sponsored 16 prior private
equipment leasing programs with investment objectives similar to those of the
partnership. As of December 31, 2000, these programs raised a total of
$31,662,500 from investors in private offerings of securities. Thirteen of the
programs were structured as limited partnerships and three were structured as
Delaware Business Trusts. Interests in the programs were purchased by an
aggregate of 784 investors. As of December 31, 2000, the programs had acquired
from original offering proceeds $25,657148 in equipment, all of which was
computer peripheral equipment.
Approximately 97% of the equipment was new when acquired by the
programs and approximately 3% percent was used. Currently, operating results for
the private programs is lower than expected in the prospective financial
statements, which were included in the offering document applicable to the
program primarily because (i) lease rates have been lower than expected as a
result of decreases in interest rates generally and (ii) some of the equipment
acquired by such programs has not produced the expected residual value on sale.
As a result, while programs have made distributions to investors, Com
Cap Corp. and its affiliates decided to make loans to and/or waive fees from
certain programs, some of which loans were forgiven, in order for those programs
to make cash distributions and/or to enable those programs to make additional
acquisitions of equipment.
In addition, because of the lower lease rates and sales of equipment,
below expected levels, certain programs currently own less equipment than was
anticipated. Com Cap Corp. has outstanding demand promissory notes in the amount
of $2,766,250 to the general partners or trustees of its prior private programs.
See the prior performance tables attached as "Table II" for further information
concerning these prior public and private programs.
The information presented in this section of the prospectus concerning
our prior programs, as well as the information and data included in the attached
Appendices and Exhibits for our prior programs, represents our experience in the
prior programs and is not audited. IF YOU PURCHASE UNITS IN THE PARTNERSHIP, YOU
WILL NOT HAVE ANY OWNERSHIP INTEREST IN ANY OTHER PROGRAM. AS A RESULT OF YOUR
PURCHASE, YOU SHOULD NOT ASSUME THAT YOU WILL EXPERIENCE RETURNS, IF ANY,
COMPARABLE TO THOSE EXPERIENCED BY INVESTORS IN OUR PRIOR PROGRAMS.
29
See the prior performance tables attached as "Table II" for further
information concerning these prior public and private programs.
The following is a summary of equipment acquired between January 1,
1998 and January 1, 2001 by prior programs, which were sponsored by the general
partner:
Summary of Equipment Acquired Between
January 1, 1998 and January 1, 2001 by Prior Programs
Quantity of
Peripheral Cost of
Equipment Equipment Percent
Program Name Acquired Acquired Leverage
- ------------------------------------------------------ ------------------ ---------------- ----------------
Commonwealth 1987-1 Equipment Income Fund, Limited N/A N/A N/A
Partnership
Commonwealth 1988-1 Equipment Income Fund, Limited N/A N/A N/A
Partnership
Commonwealth Equipment Income Fund No. 3, Limited N/A N/A N/A
Partnership
Commonwealth Equipment Income Fund No. 4, Limited N/A N/A N/A
Partnership
Commonwealth Equipment Income Fund No. V, Limited N/A N/A N/A
Partnership
Commonwealth Equipment Income Private Fund I, N/A N/A N/A
Limited Partnership
Commonwealth Equipment Income Fund VI, Limited N/A N/A N/A
Partnership
Commonwealth Equipment Income Fund VII, Limited N/A N/A N/A
Partnership
Commonwealth Equipment Income Private Fund II, 6 $123,918.06 65%
Limited Partnership
Commonwealth Equipment Income Trust VIII 83 $659,002.69 57%
Commonwealth Equipment Income Trust IX 26 $132,376.96 22%
Commonwealth Equipment Income Trust X 35 $426,840.33 87%
Commonwealth Equipment Income Private Fund III, 107 $1,134761.98 46%
Limited Partnership
Commonwealth Income & Growth Fund I 47 $209,582.38 47%
Commonwealth Equipment Income Private Fund IV, 55 $116,720.18 67%
Limited Partnership
Commonwealth Income & Growth Fund II 182 $5,664,338.07 81%
Commonwealth Equipment Income Private Fund V, 12 $520,630.80 73%
Limited Partnership
Commonwealth Equipment Income Private Fund VI, 197 $2,063,798.15 94%
Limited Partnership
Commonwealth Income & Growth Fund III 248 $1,575,775.65 43%
Some of the above funds have entered their liquidation stage, therefore
no new equipment will be acquired, according to the terms of their prospectus.
30
TRANSFERABILITY OF UNITS
General Limitations
Units cannot be transferred without the consent of the general partner,
which consent shall not be unreasonably withheld. The general partner intends to
monitor transfers of units in an effort to ensure that all transfers will be
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 two percent of the total outstanding interests in
the partnership's capital or profits in any one year. In deciding whether a
proposed transfer can be made, the general partner will consider whether the
transfer will have an adverse affect on the partnership's federal tax status as
a partnership.
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, may
establish an amount for redemption, generally not more than 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,
net of the offering fees and expenses attributable to the units for sale. A
limited partner's adjusted capital contributions are his or her initial capital
contributions, reduced by the amount of all distributions received by that
limited partner attributable to the units for sale. This amount will be further
reduced, in determining the redemption price, by the offering fees and expenses
attributable to the units for sale, which offering fees and expenses will be
amortized over ten years after the termination of the offering. One quarter of
these expenses will be amortized in each thirty-month period following the
termination of the offering. Therefore, for example, one-fourth of the amount
such fees and expenses will be added back to the adjusted capital contribution
amount used to determine the redemption price after the expiration of the first
thirty-month period from the date of the termination of the offering. All
requests for redemption must be made in writing and must be on file as of the
record date for such redemption. 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," which are trusts established pursuant to
the terms of a pension, profit sharing or stock bonus plan, including Keogh
Plans, meeting the requirements of Section 401 of the Internal Revenue Code. 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 general partner has complete
discretion in deciding whether to establish an amount for redemption. Therefore,
there can be no assurance that any units for which redemption is requested will
ever be redeemed.
We 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. Substituted limited
partners may also make redemption requests, and their units will retain their
transferor's adjusted capital contribution amount. The making of a request for a
redemption is completely voluntary. Limited partners will receive notification
concerning the action of the partnership on this request. The general partner
may withhold consent to the transfer of units for which redemption has been
requested during the pendency of the request.
31
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.
Investors should note that the redemption price is based on a
percentage of the selling limited partner's adjusted capital contributions and
is, therefore, arbitrary and not calculated with reference to the fair market
value of a Unit. For tax consequences relating to the redemption of units, see
"United States Federal Income Tax Considerations."
Exempt Transfers
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:
o transfers in which the basis of the unit in the hands of the
transferee is determined, in whole or in part, by reference to
its basis in the hands of the transferor (for example, units
acquired by corporations in certain reorganizations,
contributions to capital, gifts of units, units contributed to
another partnership, and non-liquidating as well as
liquidating distributions by a parent partnership to its
partners of interests in a sub-partnership);
o transfers at death;
o transfers between members of a family (which include brothers
and sisters, spouse, ancestors, and lineal descendants);
o transfers resulting from the issuance of units by the
partnership in exchange for cash, property, or services;
o transfers resulting from distributions from benefit plans
defined in Section 3(3) of ERISA or Section 4975(e)(1) of the
Internal Revenue Code;
o any transfer by a limited partner in one or more transactions
during any 30-day period of units representing in total more
than two (2%) percent of the total outstanding interests in
capital or profits of the partnership; and
o transfers by one or more partners representing in the
aggregate fifty (50%) percent or more of the total interests
in partnership capital or profits in one transaction or a
series of related transactions.
Additional Restrictions on Transfer
Limited partners who wish to transfer their units to a new beneficial
owner will be required to pay the partnership up to $50 for each transfer to
cover the partnership's cost of processing the transfer application and will
take such other actions and execute such other documents as may be reasonably
requested by the general partner. There will be 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 will 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 will be 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.
32
DISTRIBUTIONS AND ALLOCATIONS
Between the General Partner and the Limited Partners
Cash distributions, if any, will be made quarterly. The first
distribution will be made at the end of the first full quarter after the minimum
offering amount of units are purchased by investors. Thereafter, any
distributions will be made as of December 31, March 31, June 30, and September
30 of each year. Cash distributions will be made after the payment of expenses
of the partnership, including the payment of fees to the general partner. The
partnership will make distributions of cash available for distribution of the
partnership that the general partner, in its sole and absolute discretion,
determines is available for distribution. Such distributions will be payable
quarterly or by the election of the limited partners for a fee of $25.00,
monthly. A limited partner who purchases a minimum of 250 units ($5,000) may
elect to receive monthly distributions, paid in arrears, by written notice to
the general partner upon subscription, or, thereafter, upon at least 30 days'
prior written notice to the general partner, with any such election made
following subscription to be effective as of the beginning of the following
calendar quarter. Without an election, limited partners will receive
distributions quarterly. In any quarter, limited partners may terminate their
election to receive distributions monthly rather than quarterly by written
notice to the partnership, which termination will be effective as of the
beginning of the following calendar quarter. The general partner, in its sole
discretion, will have the option in the future to make quarterly distributions
to all limited partners. In such event, annual fees for monthly distributions
will terminate.
Distributions of cash available for distribution are expected to
commence no later than the end of the first full calendar quarter following
receipt of the minimum subscription amount. At that time, each limited partner
will receive a distribution of cash available for distribution for the calendar
quarter and each limited partner who has elected to receive distributions
monthly will receive one-third of such amount. The remaining two-thirds of such
amount will be held in an interest-bearing monthly distribution account separate
from other partnership funds, and will be paid, without interest, in
approximately equal installments in each of the next two months to those limited
partners who have chosen to receive distributions monthly.
Limited partners who choose the monthly distribution option will be
charged a minimum annual administrative fee of $25.00, designed to cover the
additional postage and handling associated with the more frequent distributions.
The annual administrative fee will be reduced by any interest earned on the
monthly distribution account and will be deducted equally from each monthly
distribution. In the event that the interest earned on the monthly distribution
account exceeds the annual administrative fee, such excess interest will be
available to the partnership for partnership purposes. It is anticipated that
the fee will be calculated in January of each year, although the general partner
may change the amount of the fee during the year by written notice to each
limited partner who properly has chosen to receive monthly distributions, with
such notice to be given at least 30 days prior to the beginning of the calendar
quarter that includes the first month to which the new fee will apply.
Distributions will be made 99% to the limited partners and one percent
to the general partner until the limited partners have received an amount equal
to their capital contributions plus the cumulative return. The cumulative return
is 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
begins accruing at the end of the calendar quarter in which such units are sold
by the partnership. Thereafter, cash distributions will be made 90% to the
limited partners and 10% to the general partner. Distributions made in
connection with the liquidation of the partnership or a partner's units will be
made in accordance with the partner's positive capital account balance as
determined under the partnership agreement and Treasury Regulations.
The cumulative return is calculated on the limited partners' adjusted
capital contributions for their units. The adjusted capital contributions will
initially be equal to the amount paid by the limited partners for their units.
If distributions at any time exceed the cumulative return, the adjusted capital
contributions will be reduced by the excess, decreasing the base on which the
cumulative return is calculated. For example (without taking into account the
effect of compounding), on a $100 investment, a $12 distribution in year one
would result in a $2 reduction in adjusted capital contribution, leaving a $98
base on which the 10% return would be calculated in year two. The $2 reduction
consists of $2 in distributions in excess of that required to satisfy the
cumulative return requirement for year one.
33
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 that taxable year.
The general partner will be allocated net profits equal to its cash
distributions (but not less than one percent of net profits) and the balance
will be allocated to the limited partners. Net profits arising from transactions
in connection with the termination or liquidation of the partnership will be
allocated in the following order:
o first, to each partner in an amount equal to the negative
amount, if any, of his capital account;
o second, an amount equal to the excess of the proceeds from the
liquidation or termination which would be distributed to the
partners as operating distributions over the total capital
accounts of all the partners, to the partners in proportion to
their respective shares of such excess, and
o 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, will generally be allocated 99% to the limited
partners and one percent to the general partner, except to the extent that any
such losses are required to be allocated in a different manner under applicable
federal income tax law.
Net profits and net losses will be 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 Regulations promulgated thereunder. No limited
partner will be 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.
Distribution Reinvestment
You may elect to have your distributions reinvested in additional units
during the offering period, rather than receiving your distributions in cash. To
make this election, mark the item in section 6 of the attached subscription
agreement which reads "You wish Distributions of the Partnership to be
reinvested in additional Units during the Offering Period." When the offering
period is complete, you will receive all subsequent distributions in cash.
All units purchased for you through distribution reinvestment will be
newly-issued units purchased directly from the partnership. The number of units
to be purchased for you through a reinvestment purchase will depend upon the
amount of the dividends being reinvested. The purchase price of all units
purchased through reinvestment will be $20.00 per unit. All distributions paid
on units acquired through reinvestment will also be reinvested in additional
units. The distributions paid on such units will continue to be reinvested
unless you elect to have them paid in cash by changing your investment option.
All units that you purchase through the reinvestment of distributions are
recorded in your name on our books.
The reinvestment of distributions does not relieve you of any income
tax which may be payable on your share of the partnership's taxable income.
Please see "United States Federal Income Tax Considerations -- Distribution
Reinvestment" for further information about the taxability of reinvested
distributions.
34
Allocation of Profits and Losses Among the Limited Partners
Except during the offering period, cash available for distribution, net
profits and net losses allocable to the limited partners will be 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, net profits and net losses allocable to the limited partners will
be 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 has owned the units.
A different method for allocations and distributions, based upon the
number of days, which each limited partner owned units during the period, will
be utilized during the offering period to provide greater distributions to those
partners who have held their units for a longer period.
Limited partners will start sharing in net profits, net losses, and
cash distributions on the date following the date the capital contributions are
received. If some limited partners are admitted to the partnership after others,
those limited partners admitted later may receive a smaller portion of each item
of the partnership's net profits and net losses than the limited partners who
were admitted earlier. Nevertheless, those limited partners still will be
obligated to make the same capital contributions to the partnership for their
interests as the limited partners who were admitted previously. 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
will not receive a corresponding cash distribution.
Net profits and net loss shall be computed for each taxable year or
shorter period with the following adjustments:
o 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 shall be added to such taxable income
or shall reduce taxable loss;
o any expenditure of the partnership described in Treasury
Regulation Section 1.704-1(b)(2)(iv)(I) and not otherwise
taken into account in computing net profits and net loss shall
be subtracted from such income or loss;
o items of income, gain, loss and deduction specially allocated
pursuant to Section 7.3 of the partnership agreement shall not
be included in the computation of net profits and net loss;
and
o if equipment is reflected on the books of the partnership at a
book value that differs from the adjusted tax basis of the
equipment 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 equipment 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 profits" 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.
UNITED STATES FEDERAL
INCOME TAX CONSIDERATIONS
The following is a summary of important federal income tax
considerations concerning an investment in the partnership. In this section,
when we refer to "the Code" we mean the Internal Revenue Code, as amended. This
summary is not exhaustive of all possible tax considerations and is not tax
advice. Moreover, this summary does not deal with all aspects that might be
relevant to you, as a particular prospective limited partner in light of your
personal circumstances; nor does it deal with particular types of limited
partners that are subject to special treatment under the Code, such as insurance
companies, financial institutions and broker-dealers. The Code provisions
governing the federal income tax treatment of limited partnerships are highly
technical and complex. This summary is qualified in its entirety by the
applicable Code provisions, rules and regulations promulgated thereunder, and
administrative and judicial interpretations thereof. The following discussion is
based on current law.
35
We urge you, as a prospective investor, to consult your own tax advisor
regarding the specific tax consequences to you of the purchase, ownership and
sale of the units, including the federal, state, local, foreign and other tax
consequences of such purchase, ownership and sale.
General
Subject to the qualifications and assumptions set forth herein, and
certain representations of the general partner, counsel has opined that the
partnership will be classified as a partnership for federal income tax purposes.
Counsel reviewed the United States Federal Income Tax Considerations and Tax
Risks section of this prospectus; to the extent these sections contain
statements or conclusions of law, counsel is of the opinion that these
statements or conclusions are correct under the Code, current and proposed
Treasury Regulations, published administrative positions of the IRS, and
judicial decisions, all as of the date of this prospectus. Counsel's opinion is
not binding on the IRS.
Neither the general partner, the partnership, nor Counsel can guarantee
that any federal income tax advantages described in this summary will be
available. An opinion of Counsel represents only such counsel's best legal
judgment, and has no binding effect or official status of any kind, so that no
assurance can be given that the opinions of Counsel would be sustained by a
court, if contested, or that legislative or administrative changes or court
decisions may not be forthcoming which would require modifications of the
statements and conclusions expressed herein. Except for the opinions
specifically addressed herein, Counsel has not opined as to the probable outcome
on the merits of any issue discussed below. Final disallowance of all or any
portion of the partnerships federal income tax advantages would of course
adversely affect an investment in the partnership.
Counsel will not prepare or review the partnership's income tax
information returns, which will be prepared by management and independent
accountants for the partnership. The partnership will make a number of decisions
on such tax matters as the expensing or capitalizing of particular items, the
proper period over which capital costs may be depreciated or amortized and many
other similar matters. Such matters are handled by the partnership often with
the advice of independent accountants retained by the partnership and are
usually not reviewed with Counsel.
The following discussion is not intended as a substitute for careful
tax planning by prospective investors. The income tax consequences of an
investment in a partnership such as the partnership are often uncertain and
complex and will not be the same for all investors.
Details of significance to a particular taxpayer may not be present, as
it is impractical to set forth in a discussion of acceptable length all aspects
of federal income tax law that may be relevant to an investment in the
partnership. The discussion below considers the federal income tax
considerations associated with an investment in the partnership by individuals
who are citizens of the United States or resident aliens and is not intended to
deal with matters which may be relevant to other investors, such as
corporations, partnerships or trusts. The discussion, however, does describe
some, but not all, of the material federal income tax considerations associated
with an investment in the partnership by non-resident alien and foreign
corporations and Keogh plans and pension and profit-sharing plans qualifying
under Section 401(a) of the Code (collectively, qualified plans) and individual
retirement accounts described in Section 408 of the Code. A corporate investor
should be aware that the tax consequences of its investment in the partnership
will differ in several material respects from those applicable to individuals.
36
Classification as a Partnership
It is the opinion of Counsel that the partnership will be classified as
a partnership, and not as an association taxable as a corporation, for federal
income tax purposes. This opinion is based upon: (i) existing federal income tax
law; (ii) continuing compliance with the conditions set forth below; and (iii)
certain representations by the general partner set forth below. Counsel's
opinion is not binding on the IRS.
Section 301.7701-2 of the Treasury Regulations (the "Check-the-Box"
rules) provides that certain unincorporated entities, which have more than one
owner may generally elect to be treated as a partnership or a corporation for
federal income tax purposes. In the absence of a specific election, any such
entities, which are formed under United States law (i.e., domestic entities),
through default, are treated as partnerships for federal income tax purposes.
In this case, the general partner has represented that the partnership
will file any tax or informational returns, if any (including Department of the
Treasury/Internal Revenue Service Form 8832), which may be required in order for
the partnership to be treated as a partnership for federal income tax purposes.
Consequently, subject to the discussion below, the partnership will qualify as a
partnership for federal income tax purposes.
Counsel's opinion takes into account Section 7704 of the Code, which
provides, with certain exceptions which are not relevant to this discussion,
that "publicly traded partnerships" are taxable as corporations. Section 7704(b)
of the Code defines the term "publicly traded partnership" to mean any
partnership if: (i) interests in the partnership are traded on an established
securities market, or (ii) interests in the partnership are readily tradable on
a secondary market (or the substantial equivalent thereof). The legislative
history of Code Section 7704 provides that a secondary market for interests in a
partnership or the substantial equivalent thereof exists if investors are
readily able to buy, sell or exchange their partnership interests in a manner
that is comparable, economically, to trading on established securities markets.
A secondary market is generally indicated by the existence of a person
standing ready to make a market in the interests. The substantial equivalent of
a secondary market will be deemed to exist either: (i) if the holders of
interests in the partnership have a readily available, regular, and ongoing
opportunity to sell or exchange their interests through a public means of
obtaining or providing information of offers to buy, sell, or exchange
interests, or (ii) buyers and sellers have the opportunity to buy, sell, or
exchange interests in the partnership in a time frame that a market-maker would
provide and prospective buyers have similar opportunities to acquire such
interests. The legislative history of Section 7704 also indicates that a regular
plan of redemptions or repurchases by a partnership may constitute public
trading where holders of interests have readily available, regular, and ongoing
opportunities to dispose of their interests.
The partnership agreement provides that no transfer of any unit "will
be recognized or effective for any purpose to the extent it is determined by the
general partner to be effectuated through an established securities market or a
secondary market (or the substantial equivalent thereof), within the meaning of
Section 7704 of the Code and the Treasury Regulations applicable with respect
thereto, so as to adversely affect the tax status of the partnership as a
partnership rather than as an association taxable as a corporation;" the general
partner will also prohibit any transfer of units which, in the general partner's
good faith judgment, will cause the partnership to fall outside of the safe
harbors of Treasury Regulation Section 1.7704-1(e), discussed below. See "Risk
Factors --Units of Commonwealth Income & Growth Fund IV are generally not
transferable."
Under Treasury Regulation Section 1.7704-1(e), (f), (g), (h) or (j),
certain types of limited, non-public transfers which will be disregarded in
determining whether a partnership is publicly traded, the general partner
anticipates permitting seven categories of these Exempt Transfers. See
"Transferability of Units --Exempt Transfers."
37
In addition to providing for the Exempt Transfers, Treasury Regulation
1.7704-1 states that partnership interests will not be deemed "readily tradable
on a secondary market (or the substantial equivalent thereof)" if any one of
several other safe harbors provided for in such Treasury Regulation is
satisfied. One of these is the "two percent safe harbor." It provides that a
secondary market or its equivalent will not exist if the sum of the interests in
partnership capital or profits attributable to those partnership interests that
are sold, redeemed, or otherwise disposed of during the partnership's taxable
year does not exceed two percent of the total interests in partnership capital
or profits. The seven categories of exempt transfers, among other items, do not
count towards the two percent ceiling. In determining whether the partnership
satisfies the two percent safe harbor, redemption of units pursuant to Article
12 of the partnership agreement will be counted.
While the general partner will use its best efforts to limit the type
and number of transfers of units to those which will allow the partnership to
remain within the two percent safe harbor, the general partner does not warrant
that the partnership will satisfy this safe harbor during each of its taxable
years. It is conceivable that transfers of units could occur which would cause
the partnership to fall outside the safe harbor. In this regard, Treasury
Regulation Section 1.7704-1(c)(3) states that failure to meet any of the safe
harbors will not create a presumption that a secondary market or its equivalent
exists for partnership interests. No assurances can be offered, however, that,
if the amount and type of trading in the units were to fall outside the safe
harbor, the IRS would not claim publicly traded partnership status with respect
to the partnership.
If, for any reason, the partnership were treated for federal income tax
purposes as a corporation, the partnership's income, deductions and credits
would be reflected only on its income tax return rather than being passed
through to limited partners, and the partnership would be required to pay income
tax at corporate tax rates on any net income. Any amounts available (after
corporate taxes) for distribution to the limited partners would be treated as
dividends to the extent of current or accumulated earnings and profits. In
addition, distributions from the partnership would be classified as portfolio
income rather than passive activity income and thus would not be eligible to be
offset by passive activity losses attributable to the partnership or other
activities giving rise to passive losses. See "United States Federal Income Tax
Considerations -- Limitations on Utilization of Partnership Losses -- Passive
Activity Losses Limitations."
Certain Principles of Partnership Taxation
A partnership is not subject to federal income tax, but is required to
file a partnership information tax return each year. Each limited partner will
be required to take into account, in computing the limited partner's income tax
liability, the limited partner's distributive share (as determined by the
partnership agreement and reported on Schedule K-1 to Form 1065) of all items of
net profits, losses, credit and tax preference of the partnership for any
taxable year of the partnership ending within or without the taxable year of the
limited partner without regard to whether the limited partner has received or
will receive any cash distributions from the partnership. Thus, a limited
partner may be subject to tax if the partnership has net income even though no
corresponding cash distribution is made. To the extent a limited partner's tax
liability attributable to his investment in the partnership exceeds his cash
distributions from the partnership in any year, such partner will be required to
pay the excess tax liabilities from other sources.
Any cash received by a limited partner from the partnership in his
capacity as a partner generally will not cause recognition of taxable income (or
tax loss) for federal income tax purposes. Instead, such distributions generally
will reduce the limited partner's basis in his units (but not below zero).
However, cash distributions (and certain distributions of marketable securities,
as defined by the Code) in excess of a limited partner's adjusted basis in his
units will result in the recognition of taxable income to the extent of any such
excess. Any taxable income recognized upon such distributions will generally be
characterized as capital gain income and will be long-term or short-term
depending upon the limited partner's holding period for his units. With respect
to a partner subject to the " at risk" rules, if the partner's share of
partnership losses or distributions reduces his "at risk" amount to zero,
subsequent distributions of cash or other equipment to him will cause him
generally to recapture as ordinary income an amount equal to the partnership
losses previously deducted by him to the extent of such distributions. The gain
realized on a non-pro rata distribution to a limited partner may be taxed to the
limited partner as ordinary income to the extent attributable to the limited
partner's share of depreciation recapture, other "unrealized receivables" and
inventory that has substantially appreciated in value. See "Cost Recovery and
Depreciation - Recapture of Cost Recovery Deductions" and "Disposition of Units"
below. No loss will be recognized by a limited partner upon distributions, other
than a loss recognized upon a distribution in liquidation of his partnership
interest.
38
A limited partner's distributive share of any taxable income generated
by the partnership will not be deemed to be "net earnings from self employment."
Accordingly, such income will not be subject to the tax imposed on self-employed
persons by Section 1401 through 1403 of the Code, commonly referred to as
"social security taxes."
Prospective investors who receive social security benefits should be
aware that, although income generated by the partnership will not be deemed to
be "net earnings from self employment," such income will be included in a
limited partners' "modified adjusted gross income" under Section 86 of the Code
for purposes of determining whether a limited partner's social security
benefits, if any, are subject to taxation.
Timing of Income Recognition. The partnership's tax returns will be
prepared using the accrual method of accounting. Under the accrual method, the
partnership will recognize as income items such as rentals and interest as and
when earned by the partnership, whether or not they are received. In certain
circumstances, where a lease provides for varying rental payments, increasing
(or decreasing) in the later years of the lease ("step rentals"), the Code
requires the lessor to take the rentals into income as if the rent accrued at a
constant level rate. This provision applies to sale-leaseback transactions. An
additional consequence of the application of these provisions of the Code would
be a conversion of a portion of the partnership's rental income (passive) from
such lease to interest income (portfolio). If step rentals are provided for in a
lease, the general partner anticipates that the lease will fall within one of
the exceptions to such provision and, therefore, the partnership should
recognize such income as it is earned under the lease rather than at a constant
level rate as otherwise provided by the Code.
Allocation of Partnership Income, Gains, Losses, Deductions and Credits
In General. Cash distributions, if any, will be made quarterly, 99% to
the limited partners and one percent to the general partner until the limited
partners have received an amount equal to $20 per unit plus their 10% cumulative
compounded cumulative return; thereafter, cash distributions will be made 90% to
the limited partners and 10% to the general partner. Distributions in redemption
of a partner's units pursuant to Article 12 of the partnership agreement (see
"Transferability of Units - Redemption Provision") will be equal to 105% of the
selling partner's adjusted capital contribution at the time of the redemption.
Distributions made in connection with the liquidation of the partnership or a
partner's units (other than pursuant to Section 8.1.3 of the partnership
agreement) will be made in accordance with the partner's positive capital
account balance as determined under the partnership agreement and Treasury
Regulations.
Generally, the general partner will be allocated net profits equal to
its cash distributions (but not less than one percent of net profits) and the
balance will be allocated to the limited partners. Net profits arising from
transactions in connection with the termination or liquidation of the
partnership will be allocated in the following order: (i) First, to each partner
in an amount equal to the negative amount, if any, of his capital account; (ii)
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 (iii) 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, will be allocated
99% to the limited partners and one percent to the general partner.
39
The above allocations, however, are subject to several special
allocations designed in part to prevent a partner's capital account
(particularly a limited partner's capital account) from going below zero and to
allow the partner's capital account accurately to reflect the above-described
sharing ratios.
Although a partnership agreement may allocate certain partnership
items, or overall profit and loss, in a manner disproportionate to the partners'
respective capital contributions (a "special allocation"), such an allocation
will be recognized for federal income tax purposes only if it has "substantial
economic effect." A special allocation generally will be considered to have such
effect if it actually affects the dollar amount of the partners' share of total
partnership income or loss independently of tax consequences.
Substantial Economic Effect. Under Treasury Regulations, an allocation
will be respected by the IRS only if it meets any one of the following: (i) the
allocation has "substantial economic effect"; (ii) the allocation is in
accordance with the partners' interests in the partnership; or, (iii) the
allocation is deemed to be in accordance with the partners' interests in the
partnership. Any allocation which fails to satisfy at least one of these three
tests will be reallocated in accordance with the partners' interests in the
partnership as defined in the Treasury Regulations.
The Treasury Regulations set forth a two-part analysis to determine
whether an allocation has "substantial economic effect." First, the allocation
must have "economic effect." In other words, the allocation must be consistent
with the underlying economic arrangement of the partners. If there is an
economic benefit or burden that corresponds to the allocation, the partner
receiving such an allocation should benefit from the economic benefit or bear
the economic burden. Normally, economic effect will be present only if the
partners' capital accounts are determined and maintained as required by the
Treasury Regulations.
Liquidation proceeds must be distributed in accordance with the
partners' positive capital account balances (after certain adjustments).
Additionally, if partners are not required to restore any deficit capital
account balance, no loss or deduction may be allocated to a partner if such
allocation would create a deficit balance in such partner's capital account in
excess of the amount such partner is obligated to restore to the partnership or
is treated as required to restore to the partnership and contains a "qualified
income offset," requiring that if a partner who unexpectedly receives an
adjustment, allocation, or distribution described in subparagraphs (4), (5) or
(6) of Treasury Regulation Section 1.704-1(b)(2)(ii)(d) which creates or
increases a deficit in such partner's capital account will be allocated items of
net profits and gain (consisting of a pro rata portion of each item of
partnership income, including gross income, and gain for such year) in an amount
and manner sufficient to eliminate such deficit balance as quickly as possible.
Second, the economic effect must be "substantial." Substantiality is
present if there is a reasonable possibility that the allocation will
substantially affect the dollar amounts to be received by a partner independent
of his tax consequences. If a shifting of tax attributes results in little or no
change to the partner's capital accounts, or if the shift is merely transitory,
they will not be recognized. Thus, if the allocation causes a shift in tax
consequences that is disproportionately large in relation to the shift in
economic consequence, there is a presumption that the economic effect of the
allocation is not substantial and such allocation will be disregarded (and the
partnership items will therefore be apportioned according to the partners'
respective interests).
The Treasury Regulations contain several exceptions and qualifications.
For example, if a partnership allocation fails the above "economic effect" test,
it may still be recognized if it meets the "economic effect equivalence" test.
An allocation will be viewed as having economic effect if the agreement among
the partners would in all cases produce the same results as the requirements
outlined above. Further, there are also several exceptions, which come into play
where the partner does not have an absolute obligation to restore a negative
capital account.
40
Pursuant to the partnership agreement, net profits, net losses and cash
distributions allocated to a partner will be reflected by appropriate
adjustments to the partner's capital account. Furthermore, the partnership
agreement contains provisions, which would in all cases produce distributions of
liquidation proceeds on dissolution on the basis of the relative amounts of the
partners' capital Accounts to the extent of the balances of such capital
accounts. The tax allocations, however, are predicated on the assumption that
the management fees payable to the general partner will be treated as deductible
guaranteed payments, rather than as partnership distributions. See "United
States Federal Income Tax Considerations -- Summary -- Deductibility of Fees."
Retroactive Allocations. Under Section 706(d) of the Code, "retroactive
allocations," i.e., allocations of items to partners before they became
partners, are prohibited. Section 706(d) of the Code and the Treasury
Regulations thereunder accomplish this prohibition by providing that if there is
a change in any partner's interest in any taxable year of the partnership, each
partner's distributive share of a partnership's tax items is to be determined by
use of any method prescribed by the Secretary of the Treasury in Treasury
Regulations which take into account the varying interests of the partners in the
partnership during such taxable year. The partnership agreement provides that
limited partners will be admitted to the partnership and will commence sharing
in net profits, net losses and cash distributions on the day following the date
on which their capital contributions are received. Thus, if some limited
partners are admitted to the partnership after others, those limited partners
admitted later may receive a smaller portion of each item of the partnership's
net profits and net losses than the limited partners who were admitted earlier.
Nevertheless, those limited partners still will be obligated to make the same
capital contributions to the partnership for their interests as the limited
partners who were admitted previously. In addition, where a limited partner
transfers units during a taxable year, the limited partner may be allocated net
profits for a period and for which such limited partner will not receive a
corresponding cash distribution.
Conclusion. Based on the Treasury Regulations, the legislative history
and existing case law, the allocations contained in the partnership agreement of
the partnership's net profits and net losses should be respected for federal
income tax purposes.
Limitations on Utilization of Partnership Losses
Tax Basis. A limited partner may not deduct losses in excess of his
"tax basis" in his units, but may carry forward such excess losses to such time,
if ever, as his basis is sufficient to absorb them. A limited partner's tax
basis in his units also determines the tax consequences of his distributions, as
well as the amount of the gain or loss he may realize upon any sale of his
units. "United States Federal Income Tax Considerations -- Disposition of
Units."
Initially, the tax basis of a limited partner's units will be equal to
the amount of cash contributed by the limited partner to the partnership or the
amount paid to a transferor limited partner, plus the limited partner's share of
the partnership's non-recourse liabilities, if any. A limited partner's initial
tax basis will then be (i) increased by the his allocable share of any net
profits for each year, contributions made to the partnership by the limited
partner, and any increase in his share of non-recourse liabilities, and (ii)
reduced by his allocable share of any net losses, the amount of any
distributions made to him during the year, and any reduction in his share of
non-recourse liabilities.
The IRS has ruled that a partner acquiring multiple interests in a
partnership in separate transactions at different prices must maintain an
aggregate adjusted tax basis in a single partnership interest consisting of the
partner's combined interests. Possible adverse tax consequences could result
from the application of this ruling upon a sale of some but not all of a limited
partner's units. See "United States Federal Income Tax Considerations -
Disposition of Units."
Amounts at Risk. The Code limits the deductions that an individual or a
closely held "C" corporation may claim from an activity to the aggregate amount
with respect to which such taxpayer is "at risk" for such activity as of the
close of the taxable year.
41
Except as otherwise provided below, a limited partner will be
considered to be "at risk" with respect to the amount of money and the adjusted
basis of other property the limited partner contributes to the partnership. A
limited partner will be at risk with respect to amounts borrowed by the
partnership only to the extent that the limited partner is personally liable for
their repayment or the net fair market value of the limited partner's personal
assets (other than units) that secure the indebtedness. A limited partner will
not be considered at risk with respect to any amounts that are protected against
loss through non-recourse financing, guarantees, stop loss agreements or similar
arrangements. Because the limited partners will not be personally liable for
partnership indebtedness, any such indebtedness will not augment the limited
partners' amounts at risk.
A limited partner's amount at risk will be reduced by (i) net losses
which are allowed as a deduction to the limited partner under the at-risk rules
and (ii) cash distributions received by a limited partner with respect to the
limited partner's units, and increased by that limited partner's distributive
share of net profits. Investors should note that net losses that may be
allowable as a deduction under the at-risk rules may be disallowed currently
under the passive activity loss limitations. See "United States Federal Income
Tax Considerations -- Limitations on Utilization of Partnership Losses --
Passive Activity Losses Limitations."
If a limited partner's at risk amount is reduced below zero (due to a
cash distribution to a limited partner), the limited partner must recognize
income to the extent of the deficit at risk amount. Losses of the partnership
that have been disallowed as a deduction in any year because of the at-risk
rules will be allowable, subject to other limitations, as a deduction to the
limited partner in subsequent years to the extent that the limited partner's
amount at-risk has been increased.
It is not anticipated that, on an aggregate basis, the partnership will
incur losses. However, the Code will allow the partnership to aggregate its
equipment leasing activities only with respect to equipment placed in service
during the same taxable year. Therefore, the "at risk" rules will be applied to
the net taxable income or loss resulting from leasing equipment, which was
placed in service during the same taxable year. This could result in a partner's
deduction for losses with respect to certain items of equipment being limited by
the "at risk" rules, even though he must recognize income with respect to other
items of equipment. Each limited partner will be considered "at risk" in any one
year with respect to equipment placed in service in the same taxable year for
purposes of Section 465 of the Code in an amount equal to:
(i) the capital contributions of such limited partner (provided that
funds for such contributions are not from borrowed amounts), less (ii) the sum
of (a) the total net losses with respect to such equipment which have been
allowed as deductions to the limited partner under the at-risk rules and (b)
cash distributions received by the limited partner, plus (iii) the limited
partner's distributive share of total net profits with respect to such equipment
of the partnership.
Passive Activity Losses Limitations. The Code prohibits an individual,
estate, trust, closely-held "C" corporation, or personal service corporation
from using losses and credits from a business activity in which the taxpayer
does not materially participate, or a rental activity, to offset other income,
including salary and active business income as well as portfolio income (such as
dividends, interest and royalties, whether derived from property held directly
or through a pass-through entity such as a partnership).
Interest income derived by the partnership from the interim investment
of offering proceeds or reserves (and any income derived by the partnership from
leases treated as loans for federal income tax purposes) will be treated as
portfolio income and, thus, will not be offset for those purposes by partnership
deductions such as depreciation or cost recovery deductions.
Losses from a passive activity that are not allowed currently will be
carried forward indefinitely, and are allowed in subsequent years against
passive activity income or in full upon complete disposition of the taxpayer's
interest in that passive activity to an unrelated party in a fully taxable
transaction.
42
Losses from the partnership and other passive activities may not be
used to offset income from a publicly traded partnership and income from a
publicly traded partnership is treated as investment income. Limited partners,
therefore, will be unable to use losses from the partnership to offset passive
income from publicly traded partnerships that are not taxed as corporations and
income from the partnership cannot be offset by losses from publicly traded
partnerships that are not taxed as corporations.
If a limited partner incurs indebtedness in order to acquire or carry
units, interest paid by the limited partner on the indebtedness will be subject
to the limitations for passive activity losses, except to the extent that the
indebtedness relates to "portfolio income," if any, of the partnership. Interest
expense a limited partner attributable to "portfolio income" may be subject to
other limitations on its deductibility. See "United States Federal Income Tax
Considerations -- Interest Deduction Limitations."
Based on the above discussion, assuming that all leases entered into by
the partnership are considered "true leases" for federal income tax purposes,
the net profits, net losses, and credits derived from the partnership with
respect to its leasing activities will be subject to the passive activity rules.
Thus, any income produced by the partnership should be income from a passive
activity. However, any partnership income attributable to (i) the investment of
partnership funds in liquid investments prior to the purchase of equipment, (ii)
the investment, in interest-bearing accounts or otherwise, of amounts held by
the partnership as working capital, security deposits, or in reserve, or (iii)
equipment with respect to which the partnership is determined not to be the
owner for federal income tax purposes will not be passive activity income.
Hobby Losses. Section 183 of the Code limits deductions attributable to
"activities not engaged in for profit." The phrase "activities not engaged in
for profit" means any activity other than one that constitutes a trade or
business, or one that is engaged in for the production or collection of income
or for the management, conservation or maintenance of property held for the
production of income. The Treasury Regulations provide that the determination of
whether an activity is engaged in for profit is to be made by reference to
objective standards, taking into account all of the facts and circumstances in
each case. The Treasury Regulations also provide that, although a reasonable
expectation of profit is not required, the facts and circumstances must indicate
that the taxpayer entered into the activity, or continued the activity, with the
objective of making a profit.
The Treasury Regulations enumerate a number of nonexclusive factors,
which should be taken into account in determining whether an activity is engaged
in for profit. The IRS has ruled that this test will be applied at the
partnership level.
Based upon these Treasury Regulations and the investment goals of the
partnership, and certain representations made by the general partner, the
proposed activities of the partnership will constitute an activity engaged in
for profit within the meaning of Section 183 of the Code. However, the test of
whether an activity is deemed to be engaged in for profit is based on the facts
and circumstances applicable from time to time including the motives of the
investors, and no assurance can be given that Code Section 183 may not be
applied in the future to disallow the deductions.
Cash Distributions
Cash distributions made to a limited partner, other than those in
exchange for, or redemption of, all or part of his units, reduce a limited
partner's adjusted basis in his units and may represent both a return of capital
and income. To the extent distributions of cash (including reductions in a
limited partner's proportionate share of partnership non-recourse liabilities,
if any) reduce a limited partner's adjusted basis in his units to zero, such
distributions will be retreated as returns of capital which generally do not
result in any recognition of gain or loss for federal income tax purposes. To
the extent such distributions or reductions in liabilities exceed a limited
partner's adjusted basis in his units immediately prior thereto, such limited
partner will recognize gain to the extent of such excess. Such gain may be
treated as ordinary income to the extent the distribution is deemed to be in
exchange for a share of the limited partner's interest in the partnership's
"substantially appreciated" inventory and "unrealized receivables" (which
includes depreciation recapture), any excess gain will be treated as capital
gain.
43
The gain that a limited partner will recognize as a result of a
reduction of liabilities in excess of such limited partner's adjusted tax basis
in his units immediately prior thereto will result in a tax liability to the
limited partner without any cash distribution. To the extent a limited partner's
federal tax liabilities exceed cash distributions, such excess in effect would
be a nondeductible cost to such limited partner.
Distribution Reinvestment
If you elect to have your distributions reinvested in additional units
during the offering period, the amount of such distributions will be includable
in your cost basis of units purchased. The information return (Schedule K-1)
sent by the partnership to you and the IRS at the end of the year will show the
amount of the distributions paid to you.
The income tax consequences for investors in units who do not reside in
the United States may vary from jurisdiction to jurisdiction.
If you are considering electing to reinvest your distributions, we urge
you to consult with your own tax advisors regarding the specific tax
consequences (including the federal, state and local tax consequences) that may
result from your election and of potential changes in applicable tax laws.
If you are a foreign unitholder whose share of taxable income is
subject to United States income tax withholding at the current statutory rate
(or lower treaty rate), the appropriate amount will be withheld and the balance
will be used to purchase additional shares.
Tax-exempt unitholders, including IRAs, Keogh Plans, 401(k) plans,
charitable remainder trusts, etc. generally will not have to pay any taxes on
their share of partnership income.
Fees and Reimbursements to the General Partner and Affiliates
General. There is no assurance that the IRS will not challenge the
position of the partnership with respect to the amount, character, time of
deduction or tax treatment of any of the fees discussed herein or, if
challenged, that the position of the partnership would be sustained. In any year
such fees are incurred, the disallowance of the deductibility of such fees would
result in a proportionate increase in the taxable income (or reduction in the
loss) of the limited partners with no associated increase in cash distributions
with which to pay any resulting increase in tax liabilities.
Organizational and Offering Expenses. The general partner will be paid
an organizational fee for its services in organizing the partnership and
preparing the offering. The general partner plans to make a reasonable
allocation of such fees between syndication expenses, which must be capitalized
and start-up expenses which may be amortized over a 60-month period. The range
of the fee based on the minimum and maximum amounts sold will be between $30,000
and $400,000. The organizational fee is anticipated to be approximately
$300,000.
Equipment Acquisition and Debt Placement Fees. The cost of acquisition
fees will be capitalized to the cost of the equipment. Debt placement fees will
be amortized over the term of the borrowings to which they relate.
44
The Equipment Management Fee. The equipment management fee should be
deductible as an ordinary and necessary business expense under Section 162 of
the Code, to the extent that its amount is commercially reasonable.
Equipment Liquidation Fee. Equipment liquidation fees should be treated
as a cost of sale of the equipment.
Ownership of Equipment
Tax Treatment of Leases. Your depreciation and cost recovery deductions
with respect to any item of partnership equipment depends, in part, on the tax
classification of the rental agreement under which it leased. These deductions
are only available if the rental agreement is a true lease of equipment, meaning
the partnership retains ownership of it. Depreciation and cost recovery
deductions are not available if the transaction is classified as a sale,
financing or refinancing arrangement where ownership shifts to a purchaser, the
nominal lessee.
Whether a partnership is the owner of any particular item of equipment,
and whether a lease is a true lease for federal income tax purposes, depends
upon both factual and legal considerations. The IRS has published guidelines on
the tax treatment of leveraged leases. These guidelines do not purport to be
substantive rules of law and are not supposed to be applied in audit contexts,
although they have been in a number of instances.
Whether any lease will meet the relevant requirements to be
characterized as a true lease, and whether the partnership will be treated for
tax purposes as the owner of each item of equipment acquired by that
partnership, would depend on the specific facts in each case. Since these facts
cannot now be determined with regard to leases that will be entered into in the
future, counsel can render no opinion on this issue.
Cost Recovery and Depreciation
Cost Recovery Rules. The equipment we plan to acquire and lease for the
partnership generally is classified as 5-year equipment, and may be written off
for federal income tax purposes, through cost recovery or depreciation
deductions, over its respective recovery period. The amount deductible in each
year may be calculated using the 200 percent declining-balance depreciation
method, switching to the straight-line method at a time that maximizes the
deduction. A taxpayer may, however, choose to use a straight line method of
depreciation for the entire recovery period.
The partnership will allocate all or part of the acquisition fees,
which are fees paid to us in connection with the selection and purchase of
equipment, to the cost basis of equipment. We cannot assure you that the IRS
will agree that cost recovery deductions calculated on a cost basis that
includes acquisition fees are properly allowable. The IRS might assert that the
acquisition fees are attributable to items other than the equipment, or are not
subject to cost recovery at all. If the IRS were successful in making that
claim, the cost recovery deductions available to the partnership would be
reduced accordingly. Because the determination of this issue depends on the
magnitude and type of services performed for the acquisition fees, which is
presently undeterminable and may vary for each piece of equipment acquired by
the partnership, counsel is unable to render an opinion about whether our cost
recovery deductions would be upheld if challenged by the IRS.
In some circumstances, a taxpayer will be required to recover the cost
of an asset over longer periods of time than described above. These
circumstances include the use of equipment predominately outside the United
States and the use of equipment by a tax-exempt entity.
Recapture of Cost Recovery Deductions. All of part of the cost
recovery, depreciation or amortization deductions of the partnership may be
recaptured as ordinary income upon a subsequent disposition by the partnership
of its equipment or other property or, with respect to a partner's share of such
deductions, upon the disposition of the partner's units. See "United States
Federal Income Tax Considerations - Disposition of Units" below. The cost
recovery, depreciation or amortization deductions of the partnership will be
recaptured to the extent of any gain on disposition. This recapture amount will
be recognized in full as ordinary income in the year of sale even if the
partnership has made an installment sale of the equipment. See "United States
Federal Income Tax Considerations - Sale of Equipment."
45
If the partnership has not made a basis adjustment election under
Section 754, a purchaser of units also may be required to recapture amounts
attributable to cost recovery or depreciation when the partnership disposes of
equipment subject to recapture or when the purchaser subsequently sells his
units.
Interest Deduction Limitations
The Code restricts the ability of non-corporate taxpayers to deduct
interest on funds borrowed to acquire or carry investment assets. Such taxpayers
may deduct "investment interest" only to the extent of the "net investment
income" of the taxpayer for the taxable year. Any interest disallowed under this
provision in one year may be carried forward indefinitely and claimed at such
time as the taxpayer has sufficient investment income.
Interest expense that is allocable to a passive activity is subject to
the passive loss limitations, and is not subject to the investment interest
limitations. The general partner anticipates that the partnership will be deemed
a passive activity with respect to the income, gains, losses, deductions and
credits passed through to the limited partners and, therefore, will not figure
in a limited partner's investment interest limitations calculation.
Because the partnership will enter into net leases, any interest
expense that might be paid by the partnership might be considered to be
investment interest expense and, as such, would be subject to the limitations
described herein. Because the amount of any limited partner's investment
interest that would be subject to disallowance in any year will depend upon the
other investment income and expenses of that limited partner, the extent, if
any, of such disallowance will depend upon that limited partner's particular tax
situation.
Additionally, the IRS might argue that all or some portion of any
interest incurred in connection with the acquisition or maintenance of a unit in
the partnership is investment interest. As noted above, however, it is
anticipated that any interest in the partnership as a limited partner will be
deemed a passive activity (unless modified by Treasury Regulations or
legislation). To the extent the investment in a unit is treated as a passive
activity, any interest incurred in acquiring or maintaining such an interest
would not be subject to Section 163(d) but instead would be subject to the
passive activity limitations.
The Code denies any deduction for interest paid by a taxpayer on
indebtedness incurred or continued for purchasing or carrying tax exempt
obligations. Denied interest may not be deducted in any year. The prescribed
purpose generally will be deemed to exist with respect to indebtedness incurred
to finance a "portfolio investment" including a limited partnership interest.
In the case of a limited partner owning tax exempt obligations, the IRS
may take the position, that with respect to a limited partner who borrows funds
to purchase units, the interest paid by the limited partner on such loan should
be viewed as incurred on loans which enable him to continue carrying his tax
exempt obligations. If this position were upheld, the limited partner would not
be allowed to deduct such interest.
Sale of Equipment
Because of the different individual tax rates for capital gains and
ordinary income, the tax code provides various rules classifying income as
ordinary income or capital gains, and for distinguishing between long-term and
short-term gains and losses. The distinction between ordinary income and capital
gains is relevant for other purposes as well. For example, there are limits on
the amount of capital losses that an individual may offset against ordinary
income.
46
Upon a sale or other disposition of equipment, the partnership will
realize capital gain or loss equal to the difference between the basis of the
equipment at the time of disposition and the price received for it upon
dispositions. Any foreclosure of a security interest in equipment would be
considered a taxable disposition and the partnership would realize capital gain
if the face amount of the debt being discharged were greater than the tax basis
of the equipment, even though the partnership would receive no cash. In the case
of a disposition of equipment at a gain, the income would first be ordinary
income to the extent of recapture, as discussed below, and only the excess, if
any, would be capital gain.
Because the equipment is tangible personal property, upon its
disposition, all of the depreciation and cost recovery deductions taken by the
partnership will be subject to recapture to the extent of any realized gain.
Recapture means that the depreciation, previously deducted, is reversed by
recognizing the depreciated amounts as ordinary income, in the year of the sale.
Recapture cannot be avoided by holding the equipment for any specified period of
time. If a partnership were to sell property on an installment basis, all
depreciation recapture income is recognized at the time of sale, even though the
payments are received in later taxable years.
Certain gains and losses are grouped together to determine their tax
treatment. The gains on the sale or exchange of some assets including equipment
used in a trade or business and held for more than one year are added to the
gains from some compulsory or involuntary conversions; if these gains exceed the
losses from such sales, exchanges, and conversions, the excess gains will be
taxed as capital gains (subject to a special recapture rule described below). If
the losses exceed the gains, however, the excess losses will be treated as
ordinary losses. Under a special recapture provision, any net gain under this
aggregation rule will be treated as ordinary income rather than capital gains if
the taxpayer has non-recaptured net losses, which are net losses under this
aggregation rule from the five preceding taxable years which have not yet been
offset against net gains in those years.
Disposition of Units
In General. A partner who sells or otherwise disposes of his units,
including redemptions of a limited partner's units pursuant to Article 12 of the
partnership agreement, will realize taxable gain or loss measured by the
difference between the selling or redemption price and the adjusted tax basis of
his units. See "United States Federal Income Tax Considerations -- Limitations
on Utilization of Partnership Losses -- Tax Basis." Gain or loss, in general,
will be taxed as short-term or long-term capital gain or loss, depending on the
period the units have been held (provided the partner is not a dealer in the
units).
However, gain attributable to the partner's share of "substantially
appreciated inventory items" and "unrealized receivables" of the partnership, as
those terms are defined in the Code, will be taxed as ordinary income.
Unrealized receivables include any cost recovery, depreciation and amortization
deductions of the partnership that would have been recaptured upon a
hypothetical sale of the equipment.
The requirement that recapture amounts be recognized in full in the
year of sale even if the sale qualifies as an installment sale, may apply to an
installment sale of units. See "United States Federal Income Tax Considerations
- -- Cost Recovery and Depreciation -- Recapture of Cost Recovery Deductions." In
determining the amount realized upon the sale or exchange of units, a limited
partner must include, among other things, his allocable share of partnership
indebtedness included in his basis in such units. See "United States Federal
Income Tax Considerations -- Limitations on Utilization of Partnership Losses --
Tax Basis." A partner's gain on the sale or exchange of units should be treated
as income from the activity of leasing the equipment. As a result, suspended
losses, if any, from prior years could offset the gain realized on the sale or
exchange of units. See "United States Federal Income Tax Considerations --
Limitation on Utilization of Partnership Losses -- Amounts at Risk -- Passive
Activity Losses Limitations." A partner who sells or otherwise disposes of his
units must also report his share of the taxable income or loss of the
partnership for the portion of the taxable year of the partnership during which
he owned his units.
47
Gift of Units. Since the tax consequences of any gift or transfer will
depend upon the particular circumstances and upon the individuals or
organizations involved in the transaction, before making any gift of units, a
limited partner should consult his tax advisor as to the consequences of such a
gift and as to the basis of the units in the hands of his successor.
Death of Partner. If a limited partner dies, the fair market value of
his units at death (or, if elected, at the alternate valuation date) will be
subject to federal estate taxation. Under present law, the death of a limited
partner does not result in a sale or exchange giving rise to a federal income
tax. It is not clear what the tax consequences are if the decedent's
proportionate share of the partnership's liabilities exceeds the adjusted basis
of his units at death. In this event, some gain may be recognized to the
decedent or his estate upon the distribution of the units to the extent of such
excess. The cost or other basis of the units inherited from the decedent
generally is "stepped up" or "stepped down" to its fair market value for federal
income tax purposes.
Notice of Transfer. The Code requires that a limited partner who
transfers an interest in a partnership, whether by sale, gift or otherwise, must
notify the partnership of such transfer within 30 days of the transfer or, if
earlier, by January 15 of the calendar year following the calendar year in which
transfer occurs.
In addition, the Code requires a partnership to file a separate
information return with the partnership's federal information return, for the
tax year in which the transfer occurs whenever there is a transfer of a
partnership interest involving a sale or exchange where there are inventory
items or unrealized receivables as defined by the Code. A limited partner who
fails to inform the partnership of a transfer of the limited partner's units in
accordance with the rules described in this paragraph is liable for a penalty of
$50 per unreported transfer with an annual maximum penalty of $100,000. Each
such return must contain the following: (a) the names, addresses and taxpayer
identification numbers of the transferee and transferor involved in the exchange
and (b) the date of the sale or exchange.
Once notified, the Code requires the partnership to provide the
transferee and the transferor with a copy of the completed information return
reporting transfers, and to include the name, address and telephone number of
the information contact of the partnership required to make the return.
Termination of the Partnership for Tax Purposes
The Code provides that if 50% or more of the capital and profits
interests in a partnership is sold or exchanged within a single twelve-month
period, the partnership will terminate for tax purposes. The partnership
agreement prohibits the transfer of any unit if such transfer would result in
the termination of the partnership for federal income tax purposes. However,
involuntary transfers (such as transfers by death, dissolution, etc.) could
possibly result in termination of the partnership for federal income tax
purposes.
If the partnership should terminate for tax purposes, the terminated
partnership ("Old Par") will be treated (i) as having transferred all of its
assets subject to liabilities to a new partnership ("New Par") in exchange for
partnership interests therein, and then (ii) as having distributed such
partnership interests in New Par to the partners of Old Par in liquidation of
Old Par.
Gain could be recognized to the extent that (i) the amount of the
reduction, if any, in a limited partner's share of partnership liabilities as a
result of the partnership termination exceeds (ii) such limited partner's
adjusted tax basis of his units.
In addition, upon a partnership termination, the partnership's taxable
year would terminate. If the limited partner's taxable year were other than the
calendar year, the inclusion of more than one year of partnership income in a
single taxable year of the limited partner could result. Because the new
partnership would be treated as a separate entity for federal income tax
purposes, the tax elections of the prior partnership would not generally remain
valid. Thus, new federal income tax elections would generally be required to be
made.
48
No Section 754 Election
Due to the burdensome and costly record keeping requirements that a
Section 754 Election entails, it is unlikely that the general partner will
exercise its discretion in favor of making this election to adjust the basis of
partnership property in the case of transfers of units. If the general partner
does not make a Code Section 754 Election, a subsequent limited partner's share
of gain or loss upon the sale of the partnership assets will be determined by
taking into account the partnership's tax basis in the assets and without
reference to the cost associated with acquiring the units. Thus, the absence of
a Code Section 754 Election may reduce the marketability of units and the price
a purchaser would be willing to pay.
Investment by Tax Exempt Entities
The income earned by a tax exempt entity, including a qualified
employee pension or profit sharing trust or an individual retirement account is
generally exempt from taxation. However, gross UBTI of a tax exempt entity is
subject to tax to the extent that, when combined with all other gross UBTI of
the tax exempt entity for a taxable year, it exceeds all deductions attributable
to the UBTI plus $1,000 during the taxable year. Such UBTI will be taxable at
ordinary income rates and may be subject to the alternative minimum tax. See
"United States Federal Income Tax Considerations -- Taxes-Alternative Minimum
Tax."
The leasing of tangible personal property is treated for purposes of
the Code as an unrelated trade or business. See Revenue Rulings 78-144, 1978-1
C.B. 168, 69-278, 1969-1 C.B. 148, and 60-206, 1960-1 C.B. 201. The IRS has
ruled that a partner's distributive share of income or gain from a partnership
engaged in the leasing of tangible personal property is treated in the same
manner as if such income or gain were realized directly by the partner.
Therefore, a tax exempt entity that invests in the partnership will be subject
to the tax on UBTI for any taxable year of the tax exempt entity to the extent
the partnership generates income from the leasing of the equipment and the total
of the tax exempt entity's share of that income for the taxable year plus its
UBTI from all other sources for the taxable year exceeds the sum of all
deductions attributable to the UBTI plus $1,000.
Although the partnership's portfolio income (e.g., interest income from
the investment of partnership cash balances) generally will not produce UBTI for
a tax exempt entity that invests in the partnership, a portion of such tax
exempt entity's portfolio income from the partnership will constitute UBTI
pursuant to the "debt-financed property" rules if the tax exempt entity finances
its acquisition of units with debt.
Furthermore, social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts, and qualified group legal services
plans that are exempt from taxation under paragraphs (7), (9), (17), and (20),
respectively, of Code section 501(c) are subject to different UBTI rules, which
generally will require them to characterize all income from the partnership as
UBTI.
Except to the extent of gain or loss from the sale, exchange, or other
disposition of acquisition indebtedness property and except to the extent the
equipment constitutes inventory or property held primarily for sale to customers
in the ordinary course of a trade or business, gains from the sale or exchange
of the equipment generally will be excludable from the scope of UBTI. However,
any gain on the disposition of equipment that is characterized as ordinary
income as a result of the recapture of cost recovery or depreciation deductions
will constitute UBTI for tax exempt entities.
If the gross income taken into account in computing UBTI exceeds
$1,000, the tax exempt entity is obligated to file a tax return for such year on
IRS Form 990-T. Neither the partnership nor the general partner expects to
undertake the preparation or filing of IRS Form 990-T for any tax exempt entity
in connection with an investment by such tax exempt entity in the units.
Generally, IRS Form 990-T must be filed with the IRS by May 15 of the year
following the year to which it relates.
49
Penalties may be imposed by the IRS for failing to file this tax return
when required, and, if tax is due, additional penalties and interest may be
imposed if the tax is not paid.
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Please review "ERISA Considerations" and get advice from a qualified tax advisor
for potential realization of unrelated business taxable income (UBTI).
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Investment by Nonresident Alien Individuals and Foreign Corporations
Nonresident alien individuals and foreign corporations that become
limited partners will, like the partnership, be deemed to be engaged in the
conduct of a trade business within the United States. Under the Code,
nonresident aliens individuals and foreign corporations, respectively, will be
subject to United States income tax on their allocable shares of any partnership
taxable income.
Nonresident alien individuals and closely held foreign corporations
that acquire units will also be subject to the same limitations on the deduction
of partnership losses that apply to domestic limited partners. See "United
States Federal Income Tax Considerations -- Certain Principles of Partnership
Taxation, Limitations on Utilization of Partnership Losses."
Foreign corporations may also be subject to the branch profits tax.
Such tax is equal to 30% of a foreign corporation's earnings and profits
effectively connected with a United States business that are withdrawn (or
deemed withdrawn) from investment in the United States. This tax is payable in
addition to the regular United States corporate tax. In certain circumstances,
the imposition of the branch profits tax may be overridden by the
nondiscrimination provisions of applicable United States tax treaties or subject
to a lower rate of tax.
The partnership will be required to withhold from distributions to each
foreign limited partner an amount equal to a percentage of the partnership's
taxable income that is allocable to the limited partner. The Code provides that
the amount of tax to be withheld is the "applicable percentage" of the taxable
income of the partnership allocable to foreign limited partners. The applicable
percentage is equal to the highest appropriate tax rate, currently 39.6% for
individual foreign limited partners and 35% for corporate foreign limited
partners. See "United States Federal Income Tax Considerations -- Taxes." Such
withheld amounts will be credited against the limited partners' federal income
tax liabilities for the taxable year in which withheld, and any excess will be
refundable. Foreign limited partners may be entitled to tax credits for United
States taxes in their countries of residence, and should consult with their
local and United States tax advisors with regard to the tax consequences of an
investment in units.
Alternative Minimum Tax
This discussion only addresses the alternative minimum tax as it
applies to non-corporate taxpayers (and to shareholders of an S corporation).
The first step in determining a taxpayer's alternative minimum tax liability, if
any, is calculation of the taxpayer's alternative minimum taxable income.
Alternative minimum taxable income is computed by adjusting the taxpayer's
taxable income in accordance with the rules set forth in Sections 55, 56 and 58
of the Code, and by increasing the resulting amount by the taxpayer's items of
tax preference described in Code Section 57. Alternative minimum taxable income
is then reduced by a specified exemption amount and by the taxpayer's
alternative minimum tax foreign tax credit for the taxable year. The exemption
amounts are $45,000 for married couples filing joint returns, $33,750 for single
individuals, and $22,500 for married persons filing separate returns. The
exemption is phased out above certain alternative minimum taxable income levels:
$150,000 for married taxpayers filing joint returns, $112,500 for single
taxpayers, and $75,000 for married taxpayers filing separate returns.
The alternative minimum tax rate is 26% on the amount of the taxpayer's
alternative minimum taxable income, which does not exceed $175,000 (after taking
into account the exemption amount) and 28% on the amount exceeding $175,000. A
taxpayer is only required to pay an alternative minimum tax liability to the
extent that the amount of that liability exceeds the liability, which the
taxpayer would otherwise have for the regular federal income tax.
50
One of the adjustments to taxable income established by Code Section 56
relates to the amount of cost recovery deduction claimed on personal property.
To derive a taxpayer's alternative minimum taxable income, the taxpayer's
taxable income must be adjusted by an amount equal to the difference between (i)
the amount of cost recovery deductions claimed by the taxpayer with respect to
personal property and (ii) the amount which would have been allowable over the
asset depreciation range class life of the property using the 150% declining
balance method, converting to straight-line when necessary to maximize the
remaining deductions.
The adjustment results in a basis in the depreciated property for
alternative minimum tax purposes, which may differ from its basis for regular
tax purposes. Thus, upon disposition of the property, the taxpayer will
generally recognize less gain (or a greater loss) for alternative minimum tax
purposes than for regular tax purposes. Items of tax preference include other
items which are not anticipated to be generated by the partnership, but may
apply in the case of certain limited partners due to their particular facts and
circumstances unrelated to the partnership.
Partnership Tax Returns and Tax Information
The general partner will file the partnership's tax returns using the
accrual method of accounting and will adopt the calendar year as the
partnership's taxable year. See "United States Federal Income Tax Considerations
- -- Certain Principles of Partnership Taxation." The partnership will provide tax
information to the limited partners within 75 days after the close of each
taxable year. If a limited partner is required to file its tax return on or
before March 15, it may be necessary for the limited partner to obtain an
extension to file if the tax information referred to above is not distributed
until the end of the 75-day period.
Limited partners will be required to file their returns consistent with
the information provided on the partnership's informational return or notify the
IRS of any inconsistency. A failure to notify the IRS of an inconsistent
position allows the IRS automatically to assess and collect the tax, if any,
attributable to the inconsistent treatment.
IRS Audit of the Partnership
The tax return filed by the partnership may be audited by the IRS.
Adjustments, if any, from such audit may result in an audit of the limited
partners' own returns. Any such audit of the limited partners' tax returns could
result in adjustments of non-partnership as well as partnership items of income,
gain, loss, deduction and tax preference.
Audit proceedings are conducted at the partnership level and, if the
IRS initiates an administrative proceeding or makes a "final adjustment" at the
partnership level, it must notify each partner of the beginning and completion
of the partnership administrative proceedings. Notice need not be given,
however, to a partner who has less than a one percent interest in a partnership,
which has more than 100 partners, although a group of such partners having at
least a five percent interest in partnership profits in the aggregate may
designate a member of the group to receive notice.
Because the partnership will have more than 100 limited partners, the
IRS will not notify individual limited partners of an audit of the partnership.
The general partner is the "tax matters partner" who will normally have the
authority to negotiate with the IRS with respect to any partnership tax matter;
the general partner will also have the right to initiate judicial proceedings.
A limited partner will thus be unable to control either an audit of the
partnership or any subsequent litigation. If, in such event, the general partner
does not go to court, any limited partner entitled to receive notice of the
proceedings may bring an action to challenge any proposed audit findings by the
IRS. A special statute of limitations exists in connection with the IRS's right
to audit matters at the partnership level.
51
Tax Shelter Registrations
Tax shelters must be registered with the IRS. Under temporary IRS
regulations, an investment is a tax shelter if a potential investor could
reasonably infer from representation made in connection with the sale of the
investment that the aggregate amount of deductions and 350% of the credits
potentially allowable with respect to the investment will be greater than twice
the amount to be invested for any of the first five years. The partnership is a
tax shelter under the IRS definition because the term "amount of deductions"
means gross deductions, and gross income expected to be realized by a
partnership is not counted. A tax shelter is not required to be registered
initially, however, if it is a projected income investment. A projected income
investment is any tax shelter that is not expected to reduce the cumulative tax
liability of any investor in the first five years of the investment. Because
there can be no assurance that unexpected economic or business developments will
not cause you to incur tax losses from the partnership, with the result that
your cumulative tax liability during the first five years might be reduced, we
have registered the partnership as a "tax shelter" with the IRS and the
partnership has (or will have) a tax shelter registration number. However, if
the partnership is a project income investment, you are not required to include
its registration number on your tax returns.
Even though the partnership may be a projected income investment, it
will nonetheless be required to maintain a list identifying each person who sold
a unit and including information required by the IRS regulations. This list must
be made available to the IRS upon its request.
If the partnership ceases to be a project income investment, the partnership and
its limited partners will become subject to all remaining requirements,
applicable to tax shelters. This means, among other things, that you will be
required to include the partner-ships' registration number on your tax returns.
We are required to notify you if the partnership no longer qualifies as a
projected income investment, and to inform you that you must begin to report the
partnerships' registration number on your tax return if you claim a deduction,
credit, or other tax benefit from the partnership.
WE ARE REQUIRED BY IRS REGULATIONS TO INCLUDE THE FOLLOWING STATEMENT IN THIS
PROSPECTUS: "ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS
INVESTMENT OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED
BY THE INTERNAL REVENUE SERVICE."
Interest and Penalties
With certain exceptions, a penalty will be assessed for each month or
fraction thereof (up to a maximum of five months) that a partnership return is
filed either late or incomplete. The monthly penalty is equal to $50 multiplied
by the number of partners in the partnership during the year for which the
return is due.
With certain exceptions, a penalty will be assessed if the partnership
fails to furnish to the limited partners a correct Schedule K-1 to the federal
income tax return for the partnership on or before the prescribed due date
(including any extension thereof). The penalty is equal to $50 multiplied by the
number of partners not furnished a correct Schedule K-1 on or before the
prescribed due date (including any extension thereof), with a maximum penalty of
$100,000 per calendar year.
The Code establishes a penalty equal to 20% (40% in certain gross
valuation misstatements) on underpayment of tax attributable to substantial
valuation over-statements. This penalty applies only if (i) the value or
adjusted basis of any property as claimed on an income tax return exceeds 200%
of the correctly determined amount of its value or adjusted basis and (ii) the
underpayment of tax attributable to the substantial overvaluation exceeds $5,000
($10,000 in the case of a corporation other than an S corporation or personal
holding company). All or any part of the penalty may be waived by the IRS upon
the taxpayer's showing that a reasonable basis existed for the valuation claimed
on the return and that the claim was made in good faith. If the partnership were
to overstate the value of equipment, a limited partner might be liable for this
penalty.
52
There is a 20% penalty on the amount of an underpayment of tax
attributable to a taxpayer's negligent disregard of applicable rules and
regulations or to the "substantial understatement" of a tax liability. A
substantial understatement is defined as an under-statement for the taxable year
that exceeds the greater of 10% of the required tax or $5,000 ($10,000 for
corporations other than personal holding companies and S corporations). The
penalty can be avoided either by disclosing the questionable item on the return
or by showing that there was "substantial authority" for taking the position on
the return. If a questionable item is related to a tax shelter, the
understatement penalty can only be avoided by showing that the taxpayer
reasonably believed that the treatment of the item was "more likely than not"
the proper treatment. Based upon the representations of the general partner,
Counsel believes the partnership will not be characterized as a "tax shelter"
for these purposes.
It should also be noted that the general partner will not cause the
partnership to claim a deduction unless the general partner believes, based upon
the advice of its accountants or Counsel, that substantial authority exists to
support the deduction.
All interest payable with respect to a deficiency is compounded daily.
Interest rates are re-determined quarterly and are based on the federal
short-term interest rate (the average rate of interest on Treasury obligations
maturing in less than three years) for the first month of the preceding quarter
plus three percent.
Foreign Tax Considerations
As noted above, the partnership may acquire equipment which is operated
outside the United States. As a consequence, limited partners may be required to
file returns and pay taxes in foreign jurisdictions with respect to the foreign
source income of the partnership. The income taxed by the foreign jurisdiction
would in such a case be calculated according to the tax laws of the foreign
jurisdiction, which may or may not correspond with applicable United States
standards.
Limited partners who have foreign tax liabilities as a result of the
partnership may be entitled to a foreign tax credit or to a deduction for
foreign taxes paid which can be utilized to reduce their United States tax
liabilities or taxable income, respectively. The calculation of the foreign tax
credit is quite complex and no assurance can be given that a credit will be
available in the amount of any foreign tax paid.
In particular, prospective limited partners should be aware that United
States law does not generally allow a foreign tax credit greater than the
taxpayer's United States federal income tax liability with respect to the
foreign source income of the taxpayer calculated separately for certain types of
income including shipping income and passive rental income. In the event the
partnership earns these types of income, a limited partner must compute
separately the foreign tax credit for each type of income. The foreign source
income of a taxpayer is calculated according to United States rather than the
foreign jurisdiction's tax law. It is possible that a foreign country might
impose a tax in an amount greater than the allowable foreign credit under United
States law. In such a case, limited partners would be subject to a higher
effective rate of taxation than if no foreign tax had been imposed. To the
extent that all income taxes paid to a foreign country on a certain type of
income exceed the amount of foreign tax credit allowable in any year for such
type of income, the excess foreign tax credits generally may be carried back two
years or forward five years to offset United States income taxes on that certain
type of foreign source income in those tax years. If the partnership were to
suffer an overall foreign loss in one year and incur foreign taxes in a
subsequent year, the amount of foreign tax credit allowable in that subsequent
taxable year could be reduced on account of the prior foreign loss, regardless
of whether the loss resulted in a United States tax benefit to the limited
partners. Each limited partner should consult his own tax advisor regarding the
applicability of foreign taxes to his own situation.
Prior to the partnership entering into an arrangement which
contemplates the use of equipment outside the United States, the general partner
will consult with its Counsel and with special counsel located in the foreign
jurisdiction concerning the possibility of structuring the transaction in a
manner which will enable the limited partners to avoid being required to file
income tax returns in the foreign jurisdiction. The general partner has
discretion to cause the partnership to enter into any such arrangement.
53
Partnership Anti-Abuse Rules
Treasury Regulations have recently been promulgated (the "Anti-Abuse
Rules") which purportedly grant authority to the IRS to re-characterize certain
transactions to the extent that it is determined that the utilization of
partnerships is inconsistent with the intent of the federal partnership tax
rules. Under these Anti-Abuse Rules, the IRS may, under certain circumstances,
(i) recast transactions which attempt to use the partnership form of ownership,
or (ii) otherwise treat the partnership as an aggregation of its partners rather
than a distinct separate entity, as appropriate in order to carry out the
purposes of the partnership tax rules. The Anti-Abuse Rules also provide that
the authority to re-characterize transactions is limited to circumstances under
which the tax characterization by the taxpayer is not, based on all facts and
circumstances, clearly contemplated under the Code or the applicable Treasury
Regulations.
These Anti-Abuse Rules are intended to impact only a small number of
transactions, which improperly utilize partnership tax rules. It is therefore
not anticipated that the partnership and/or the transactions contemplated herein
will be affected by the promulgation or administration of these Anti-Abuse
Rules. In light of the broad language incorporated in these Regulations,
however, no assurance can be given that the IRS will not attempt to utilize the
Anti-Abuse Rules to alter, in whole or part, the tax consequences described
herein with regard to an investment in the partnership.
Future Federal Income Tax Changes
Neither the general partner nor Counsel can predict what further
legislation, if any, may be proposed by members of Congress, by the current
administration, or by any subsequent administration, nor can either predict
which proposals, if any, might ultimately be enacted. Neither the general
partner nor Counsel can predict what changes may be made to existing Treasury
Regulations, or what revisions may occur in the IRS' ruling policy.
Consequently, no assurance can be given that the income tax consequences of an
investment in the partnership will continue to be as described herein. Any
changes adopted into law may have retroactive effect.
State Taxes
In addition to the federal income tax considerations described above,
prospective investors should consider applicable state and local taxes, which
may be imposed by various jurisdictions. A limited partner's distributive share
of the income or loss of the partnership generally will be required to be
included in determining the limited partner's reportable income for state or
local tax purposes in the jurisdiction in which the limited partner is a
resident. Moreover, Pennsylvania and a number of other states in which the
partnership may do business generally impose state income tax on a nonresident
and foreign limited partner's distributive share of partnership income, which is
derived from such states. Pennsylvania and a number of other states have adopted
a withholding tax procedure in order to facilitate the collection of taxes from
nonresident and foreign limited partners on partnership income derived from such
states. Any amounts withheld would be deemed distributed to the nonresident or
foreign limited partner and would, therefore, reduce the amount of cash actually
received by the nonresident or foreign limited partner as a result of such
distribution. Nonresidents may be allowed a credit for the amount so withheld
against income tax imposed by their state of residency.
The partnership cannot, at present, estimate the percentage of its
future income that will be from states, which have adopted such withholding tax
procedures and it cannot, therefore, estimate the required withholding tax, if
any.
54
In addition, while the partnership intends to apply to the applicable
taxing authority of such states for a waiver (or a partial waiver), if any, of
such withholding requirements, no assurance can be given that such waiver will
ultimately be granted.
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Please be advised that you may be subject to rules, determining your state
income tax, that are less favorable than federal income tax laws.
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Need for Independent Advice
The foregoing summary is not intended as a substitute for careful tax
planning, particularly since the income tax consequences associated with an
investment in the partnership are complex and certain of them will not be the
same for all taxpayers.
- --------------------------------------------------------------------------------
YOU ARE STRONGLY URGED TO CONSULT YOUR OWN TAX ADVISORS WITH SPECIFIC REFERENCE
TO YOUR OWN TAX SITUATIONS.
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55
ERISA CONSIDERATIONS
The following is a summary of some non-tax considerations associated
with an investment in the partnership by a qualified plan, Keogh Plan or an IRA.
This summary is based on provisions of ERISA and the Code, as amended through
the date of this prospectus, and relevant regulations and opinions issued by the
Department of Labor. No assurance can be given that legislative or
administrative changes or court decisions may not be forthcoming which would
significantly modify the statements expressed herein. Any changes may or may not
apply to transactions entered into prior to the date of their enactment.
Fiduciaries Under ERISA
A fiduciary of a pension, profit sharing or other employee benefit plan
subject to Title I of ERISA (an "ERISA Plan"), should consider whether an
investment in the units is consistent with his fiduciary responsibilities under
ERISA. In particular, the fiduciary requirements under Part 4 of Title I of
ERISA require the discharge of duties solely in the interest of, and for the
exclusive purpose of providing benefits to, the ERISA Plan's participants and
beneficiaries. A fiduciary is required to perform the fiduciary's duties with
the skill, prudence, and diligence of a prudent man acting in like capacity, to
diversify investments so as to minimize the risk of large losses unless it is
clearly prudent not to do so, and to act in accordance with the ERISA Plan's
governing documents, provided that the documents are consistent with ERISA.
Fiduciaries with respect to an ERISA Plan include any persons who have
any power of control, management, or disposition over the funds or other
property of the ERISA Plan. An investment professional who knows or ought to
know that his or her advice will serve as one of the primary bases for the ERISA
Plan's investment decisions may be a fiduciary of the ERISA Plan, as may any
other person with special knowledge or influence with respect to a ERISA Plan's
investment or administrative activities.
While the beneficial "owner" or "account holder" of an IRA is treated
as a fiduciary of the IRA under the Code, tax exempt entities generally are not
subject to ERISA's fiduciary duty rules. Also, if a participant in an ERISA Plan
exercises independent control over the investment of the participant's
individual account in the ERISA Plan (a "self-directed investment" arrangement),
the participant is not deemed to be a fiduciary. Finally, certain qualified
plans of sole proprietors or partnerships in which at all times (before and
after the investment) the only participant(s) is/are the sole proprietor and his
or her spouse or the partners and their spouses, and certain qualified plans of
corporations in which at all times (before and after the investment) the only
participant(s) is/are an individual or/and his or her spouse who own(s) 100% of
the corporation's stock, are generally not subject to ERISA's fiduciary
standards, although they are subject to the Code's prohibited transaction rules
explained below.
A person subject to ERISA's fiduciary rules with respect to an ERISA
Plan should consider those rules in the context of the particular circumstances
of the ERISA Plan before authorizing an investment of a portion of the ERISA
Plan's assets in units.
Fiduciaries of an ERISA Plan that permits a participant to exercise
independent control over the investments of his individual account in accordance
with Section 404(c) of ERISA (a "self-directed investment" arrangement) will not
be liable for any investment loss or for any breach of the prudence or
diversification obligations that results from the participant's exercise of such
control, and the participant is not deemed to be a fiduciary subject to the
general ERISA fiduciary obligations described above merely by virtue of his
exercise of such control.
The fiduciary of an IRA or a qualified retirement plan not subject to
Title I of ERISA because it is a governmental or church plan or because it does
not cover common law employees (a "Non-ERISA Plan") should consider that such an
IRA or Non-ERISA Plan may only make investments that are authorized by the
appropriate governing documents and under applicable state law.
56
Prohibited Transactions Under ERISA and the Code
Any fiduciary of an ERISA Plan or a person making an investment
decision for a non-ERISA Plan or an IRA should consider the prohibited
transactions provisions of Section 4975 of the Code and Section 406 of ERISA
when making their investment decisions. These rules prohibit such plans from
engaging in certain transactions involving "plan assets" with parties that are
"disqualified persons" described in Section 4975(e)(2) of the Code or "parties
in interest" described in Section 3(14) of ERISA ("Disqualified persons" and
"parties in interest" are hereinafter collectively referred to as "disqualified
persons").
"Prohibited transactions" include, but are not limited to, any direct
or indirect transfer or use of a Benefit Plan's or IRA's assets to or for the
benefit of a disqualified person, any act by a fiduciary that involves the use
of a Benefit Plan's assets in the fiduciary's individual interest or for the
fiduciary's own account, and any receipt by a fiduciary of consideration for his
or her own personal account from any party dealing with a Benefit Plan. Under
ERISA, a disqualified person that engaged in a prohibited transaction will be
made to disgorge any profits made in connection with the transaction and will be
required to compensate any ERISA Plan that was a party to the prohibited
transaction for any losses sustained by the ERISA Plan. Section 4975 of the Code
imposes excise taxes on a disqualified person that engages in a prohibited
transaction with an ERISA Plan or a non-ERISA Plan or an IRA subject to Section
4975 of the Code. If the disqualified person who engages in the transaction is
the individual on behalf of whom the IRA is maintained (or his beneficiary), the
IRA may lose its tax exempt status and the assets will be deemed to be
distributed to such individual in a taxable transaction.
In order to avoid the occurrence of a prohibited transaction under
Section 4975 of the Code and/or Section 406 of ERISA, units may not be purchased
by an ERISA Plan, an IRA, or a non-ERISA plan subject to Section 4975 of the
Code, as to which the general partner or any of its affiliates have investment
discretion with respect to the assets used to purchase the units, or with
respect to which they have regularly given individualized investment advice that
serves as the primary basis for the investment decisions made with respect to
such assets. Additionally, fiduciaries of, and other disqualified persons with
respect to, an ERISA Plan, an IRA, and a non-ERISA Plan subject to Section 4975
of the Code, should be alert to the potential for prohibited transactions to
occur in the context of a particular plan's or IRA's decision to purchase units.
Neither the general partner nor the partnership shall have any
liability or responsibility to any benefit plan that is a limited partner or any
other limited partner, including any limited partner that is a tax exempt
entity, for any tax, penalty or other sanction or costs or damages arising as a
result of there being a prohibited transaction or as a result of partnership
assets being deemed plan assets of the limited partner under the Code or ERISA
or other applicable law.
"Plan Assets"
If the partnership's assets were determined under ERISA or the Code to
be "plan assets" of a limited partner which is a Benefit Plan:
o the prudence standards and other provisions of Part 4 of Title
I of ERISA would be applicable to any transactions involving
the partnership's assets;
o persons who exercise any authority or control over the
partnership's assets, or who provide investment advice to the
partnership, would (for purposes of the fiduciary
responsibility provisions of ERISA) be fiduciaries of each
ERISA Plan that acquires the unit, and transactions involving
the partnership's assets undertaken at their direction or
pursuant to their advice might violate their fiduciary
responsibilities under ERISA, especially with regard to
conflicts of interest,
57
o a fiduciary exercising his investment discretion over the
assets of an ERISA Plan to cause it to acquire or hold the
unit could be liable under Part 4 of Title I of ERISA for
transactions entered into by the partnership that do not
conform to ERISA standards of prudence and fiduciary
responsibility, and
o certain transactions that the partnership might enter into in
the ordinary course of its business and operations might
constitute "prohibited transactions" under ERISA and the Code.
The Benefit Plan's fiduciaries might, under certain circumstances, be
subject to liability for actions taken by the general partner or its affiliates,
and certain of the transactions described in this prospectus in which the
partnership might engage, including certain transactions with affiliates, may
constitute prohibited transactions under the Code and ERISA with respect to such
Benefit Plan, even if their acquisition of units did not originally constitute a
prohibited transaction.
Under the Department of Labor ("DOL") regulations governing the
determination of what constitutes the assets of a Benefit Plan in the context of
investment securities such as units, an undivided interest in the underlying
assets of a collective investment entity such as the partnership will be treated
as "plan assets" of Benefit Plan investors if (i) the securities are not
publicly offered, (ii) 25% or more by value of any class of equity securities of
the entity is owned by Benefit Plans, (iii) the interests of the Benefit Plan
investors are "equity interests," and (iv) the entity is not an "operating
company." In order for securities to be treated as "publicly offered," they have
to be either (a) part of a class of securities registered under Section 12(b) or
12(g) of the Securities Exchange Act of 1934 or (b) sold as part of an offering
registered under the Securities Act of 1933, and must also meet certain other
requirements, including a requirement that they be "freely transferable."
Units will be sold as part of an offering registered under the
Securities Act of 1933. However, in Counsel's view, the partnership is not an
"operating company" and the restrictions on transferability of units (see
"Transferability of Units") prevent the units from being "freely transferable"
for purposes of the DOL's regulations. Consequently, in order to ensure that the
assets of the partnership will not constitute "plan assets" of limited partners
which are Benefit Plans, the general partner will take such steps as are
necessary to ensure that ownership of units by Benefit Plan investors is at all
times less than 25% of the total value of outstanding units. In calculating this
limit, the general partner shall, as provided in the DOL's regulations,
disregard the value of any units held by a person (other than a Benefit Plan)
who has discretionary authority or control with respect to the assets of the
partnership, or any person who provides investment advice for a fee (direct or
indirect) with respect to the assets of the partnership, or any affiliate of any
such a person. See "Investor Suitability Standards." However, neither the
general partner nor the partnership shall have any liability or responsibility
to any tax exempt entity limited partner or any other limited partner for any
tax, penalty or other sanction or costs or damages arising as a result of
partnership assets being deemed plan assets of a tax exempt entity limited
partner under the Code or ERISA or other applicable law.
Other ERISA Considerations
In addition to the above considerations in connection with the "plan
assets" issue, a decision to cause a Benefit Plan to acquire units should
involve considerations, among other factors, of whether:
o the investment is in accordance with the documents and
instruments governing the Benefit Plan,
o the purchase is prudent in light of the diversification of
assets requirement and the potential difficulties that may
exist in liquidating units,
o the investment will provide sufficient cash distributions in
light of the Benefit Plan's required benefit payments or other
distributions,
58
o the evaluation of the investment has properly taken into
account the potential costs of determining and paying any
amounts of federal income tax that may be owed on UBTI derived
from the partnership,
o in the case of an ERISA Plan, the investment, unless the
investment is made in accordance with a self-directed
individual arrangement under Section 404(c) of ERISA and
regulations promulgated there under, is made solely in the
interests of the ERISA Plan's participants, and
o the fair market value of units will be sufficiently
ascertainable, and with sufficient frequency, to enable the
Benefit Plan to value its assets in accordance with the rules
and policies applicable to the Benefit Plan.
Prospective ERISA Plan investors should note that, with respect to the
diversification of assets requirement, the legislative history of ERISA and a
DOL advisory opinion indicate that the determination of whether the assets of a
ERISA Plan that has invested in an entity such as the partnership are
sufficiently diversified may be made by looking through the ERISA Plan's
interest in the entity to the underlying portfolio of assets owned by the
entity.
MANAGEMENT'S DISCUSSION OF
CERTAIN FINANCIAL DATA
We have no operating history. The following discussion includes forward
looking statements. Forward looking statements, which are based on certain
assumptions, describe our future plans, strategies and expectations. Such
statements involve known and unknown risks, uncertainties and other factors that
may cause our actual results, performance or achievement to be materially
different from the results of operations or plan expressed or implied by these
forward looking statements. Accordingly, this information should not be regarded
as representations that the results or condition described in these statements
or objectives and plans will be achieved.
We intend to acquire various types of computer peripheral and similar
equipment, and to lease such equipment predominantly under operating leases. The
partnership may also lease equipment under full payment net leases or enter into
conditional sales contracts with respect to equipment. The partnership
anticipates that it will use a substantial portion of the proceeds of this
offering, excess cash flow, debt financing and net disposition proceeds received
by the partnership prior to its liquidation phase to purchase computer
peripheral or other similar capital equipment manufactured by, or compatible
with, equipment manufactured by IBM. See "Investment Objectives and Policies --
Types of Equipment," "Description of Leases" and "Risk Factors - The
partnership's ability to lease, re-lease or sell its equipment may be affected
by actions taken or not taken by, or the business or prospects of, IBM,"
"Certain of our investments may be financed in part with non-recourse debt
borrowed by the partnership," " The business of leasing and investing in
equipment is subject to many risks..." and "We have not yet identified any of
our investments in equipment."
The partnership's operating revenues will initially be generated
primarily from leasing, and otherwise entering into contracts for the use of
equipment. Operating revenues will be utilized to pay partnership expenses and
provide cash distributions to limited partners. See "Investment Objectives and
Policies -- Description of Leases." The general partner anticipates that the
partnership will commence liquidation of all of its assets beginning in the
ninth year of program operations, subject to the general partner's discretion to
extend the liquidation process if in the general partner's discretion such
extension will enable the partnership to dispose of its assets on more favorable
terms. In no event will the partnership continue after December 31, 2013. See
"Investment Objectives and Policies -- Liquidation Policies."
59
Because the partnership's leases will be on a "triple-net" (or
equivalent) basis, it is anticipated that no permanent reserve for maintenance
and repairs will be established from the offering proceeds. However, the general
partner is authorized to establish reserves in the future if and to the extent
it deems necessary for maintenance, repairs and working capital. In addition,
the general partner and Com Cap Corp. have agreed that the general partner or
Com Cap Corp. will lend or contribute to the partnership an amount equal to
1.01% of net offering proceeds, if needed, to meet the partnership's expenses.
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 will the
partnership be 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
Chase Bank, Philadelphia, Pennsylvania. All payments of principal and interest
on any financing provided by the general partner or any of its affiliates shall
be due and payable by the partnership within 12 months after the date of the
loan. See "Compensation of General Partner and Affiliates." If available cash
flow or net disposition proceeds are insufficient to cover the partnership's
expenses and liabilities, the partnership will obtain additional funds by
disposing of or refinancing equipment or by borrowing within its permissible
limits.
PARTNERSHIP AGREEMENT SUMMARY
The rights and obligations of the Partners in the partnership will be
governed by the partnership agreement, which is attached in its entirety as
Appendix II hereto. The following statements, and other statements in this
prospectus concerning the partnership agreement and related matters, are merely
an outline, do not purport to be complete, in no way modify or amend the
partnership agreement and are qualified in all respects and in each case by the
language of the partnership agreement. All material aspects of the partnership
agreement are included in this summary.
The Units
A maximum of 750,000 units are authorized for issuance and sale in the
offering. Subscribers who are accepted as limited partners by the general
partner on or before the initial closing will be admitted to the partnership as
limited partners on the day of the initial closing. Thereafter, subscribers who
are accepted as limited partners by the general partner will be admitted into
the partnership as limited partners on or before the last day of the calendar
month following the date such acceptance occurs. Transferees of units will be
recognized as substituted limited partners on or before the first day of the
calendar month following the calendar month in which the general partner
receives a completed transfer application and approves the transferee as a
substituted limited partner. The partnership's records shall be amended to
reflect the substitution of limited partners at least once in each calendar
quarter.
Non-assessability of Units
The units are non-assessable. When a unit has been paid for in full,
the holder of the unit has no obligation to make additional contributions to the
partnership's capital.
Liability of Limited Partners
Limited partners are not personally liable for the obligations of the
partnership, but their investments are subject to the risks of the partnership's
business and the claims of its creditors. A limited partner, under certain
circumstances, may be liable to return any distributions from the partnership to
the extent that, after giving effect to the distribution, all liabilities of the
partnership (other than non-recourse liabilities and liabilities to partners on
account of their interests in the partnership) exceed the fair value of the
partnership's assets, including assets serving as security for non-recourse
liabilities.
Allocations and Distributions
The provisions of the partnership agreement governing the allocation of
tax items and the apportionment of cash distributions are summarized under the
caption "Allocations and Distributions."
60
Responsibilities of the General Partner
The general partner has the exclusive responsibility for the management
and control of all aspects of the business of the partnership. In the course of
its management, the general partner may, in its absolute discretion, cause the
partnership to purchase, own, lease, sell and/or make future commitments to
purchase, lease and/or sell the equipment and interests therein when and upon
such terms as it determines to be in the best interests of the partnership as it
deems necessary for the efficient operation of the partnership, except that
limited partners holding more than 50% of the outstanding units held by all
limited partners, referred to as a majority in interest, must approve the sale
of substantially all of the assets of the partnership, except when such sales
occur in the orderly liquidation and winding up of the business of the
partnership.
A majority in interest of the limited partners may, at any time, remove
the general partner. Upon the removal of the general partner, the partnership
will be dissolved and liquidated unless, within 60 days of such removal, a
majority in interest of the limited partners elect a successor general partner
to continue the partnership.
Records and Reports
The general partner will keep at the partnership's principal place of
business adequate books of account and records of the partnership. You will have
the right, upon reasonable notice and within normal working hours, and at your
expense, to inspect and copy true and full information regarding the state of
the business and financial condition of the partnership, federal, state and
local tax returns of the partnership, a list of the partners and other
information regarding the affairs of the partnership as you may reasonably
request. You will also receive an annual account statement setting forth a
current estimated value of your investment in the partnership. This account
statement will be included in the partnership's annual report filed with the SEC
as part of Form 10-K. See "Reports to Limited Partners" for a description of the
reports and financial statements, which the general partner will provide to you
during the term of the partnership.
Meetings of the Partners
The general partner may call a meeting of the limited partners at any
time, or call for a vote, without a meeting, of the limited partners on matters
on which they are entitled to vote. The general partner is required to call such
a meeting, or for such a vote, on the written request of limited partners
holding 10% or more of the total units held by all limited partners. Any vote of
a limited partner may be made in person or by proxy.
We are not required to hold annual or other regular meetings of the
partners.
Voting Rights of Limited Partners
Your voting rights are set forth in the partnership agreement. By a
vote of limited partners holding more than one-half of the outstanding units,
the limited partners may vote to:
o approve or disapprove a sale of all or substantially all of
the assets of the partnership;
o dissolve the partnership;
o remove or approve the withdrawal of the general partner;
o prior to the removal, withdrawal or dissolution of the general
partner, elect a successor general partner; and
61
o amend the partnership agreement except that without the
consent of the partner adversely affected, no amendment may be
made which:
o converts a limited partner into a general partner;
o modifies the limited liability of a limited partner;
o alters the interest of the general partner or limited
partner in net profits, net losses or distributions
from the partnership or of the general partner in its
compensation; or
o affects the status of the partnership as a
partnership for federal income tax purposes.
Also, without prior consent of limited partners owning at least 66 2/3%
of the units, the partnership may not amend the provisions in the partnership
agreement relating to allocations, distributions or fees to the general partner.
With respect to any units owned by the general partner or its
affiliates, the general partner and its affiliates may not vote or consent on
matters submitted to the limited partners regarding removal of the general
partner or any transaction between the partnership and the general partner or
its affiliates. In determining the required percentage in interest of units
necessary to approve a matter on which the general partner and its affiliates
may not vote or consent, any units owned by the general partner or its
affiliates shall not be included.
Roll-Ups and Conversions
We will not enter into any roll-up without the approval of the general
partners and the holders of at least 66-2/3% of all outstanding units, the
partnership shall not enter into any roll-up. A roll-up is defined in the
partnership agreement to mean any transaction involving the acquisition, merger,
conversion, or consolidation, either directly or indirectly, of the partnership
and the issuance of securities of a roll-up entity. A roll-up does not include:
a transaction involving securities if the securities have been listed for at
least twelve months on a national securities exchange, including the NASDAQ
Stock Market or a transaction involving the conversion to corporate, trust or
association form of only the partnership if, as a consequence of the
transaction, there will be no significant adverse change in the limited
partners' voting rights, the term of existence of the partnership, compensation
of the general partner or its affiliates, or the partnership's investment
objectives. Limited partners who do not consent to an approved roll-up shall be
given the option of (i) accepting the securities of the roll-up entity offered
in the proposed roll-up; or (ii) receiving cash in an amount equal to the
non-consenting limited partner's pro rata share of the appraised value of the
net assets of the partnership.
In the event a roll-up is proposed, an appraisal of the net assets of
the partnership shall be performed by a competent independent expert engaged for
the benefit of the partnership and the limited partners. Such appraisal shall be
made on the basis of an orderly liquidation of the assets of the partnership
over a 12-month period as of a date immediately prior to the announcement of the
proposed roll-up. If the appraisal will be included in a prospectus used to
offer the securities of a roll-up entity, the appraisal shall be filed with the
Securities and Exchange Commission and the states as an exhibit to the
registration statement for the offering. The partnership shall not reimburse the
sponsor of a proposed roll-up for the costs of an unsuccessful proxy contest in
the event the roll-up is not approved by the limited partners.
By the vote of a majority in interest of the limited partners the
partnership is permitted to engage in a conversion of the partnership into
another form of business entity which does not result in a significant adverse
change in:
o the voting rights of the limited partners,
62
o the termination date of the partnership (currently, December
31, 2013, unless terminated earlier in accordance with the
partnership agreement),
o the compensation payable to the general partner or its
affiliates, or
o the ability to meet the partnership's investment objectives
without materially impairing the rights of the limited
partners.
The general partner will make the determination as to whether or not
any such conversion will result in a significant adverse change in any of the
provisions listed in the preceding paragraph based on various factors relevant
at the time of the proposed conversion, including an analysis of the historic
and projected operations of the partnership; the tax consequences (from the
standpoint of the limited partners) of the conversion and of an investment in a
limited partnership as compared to an investment in the type of business entity
into which the partnership would be converted; and the performance of the
equipment industry in general, and of the computer peripherals segment of the
industry in particular. In general, the general partner would consider any
material limitation on the voting rights of the limited partners or any
substantial increase in the compensation payable to the general partner or its
affiliates to be a significant adverse change in the listed provisions.
Power of Attorney
Pursuant to the terms of the partnership agreement, each purchaser of a
unit and each transferee of a unit appoints the general partner, acting alone,
as the purchaser's or transferee's attorney-in-fact to make, execute, file,
and/or record:
o documents relating to the partnership and its business
operations requested by or appropriate under the laws of any
appropriate jurisdiction;
o instruments with respect to any amendment;
o instruments or papers required to continue the business of the
partnership pursuant to the partnership agreement;
o instruments relating to the admission of any partner to the
partnership;
o a master list in accordance with Section 6112 of the Code (or
any successor provision), relating to the partnership's tax
shelter registration (see "Income Tax Considerations -
Partnership Tax Returns and Tax Information"); and
o all other instruments deemed necessary or advisable to carry
out the provisions of the partnership agreement.
The power of attorney is irrevocable, will survive the death,
incompetency, dissolution, disability, incapacity, bankruptcy, or termination of
the granting purchaser or transferee, and will extend to such person's heirs,
successors, and assigns.
The general partner will be designated as the "Tax Matters Partner" who
shall have authority to make certain elections on behalf of the partnership and
the limited partners, including extending the statute of limitations for
assessment of tax deficiencies against the limited partners with respect to
partnership items, and to enter into a settlement agreement with the IRS. See
"United States Federal Income Tax Considerations -- Audit of the Partnership."
63
Partnership Term
The term of the partnership will expire on December 31, 2013, though
the partnership may be terminated and dissolved earlier after any of the
following events:
o The vote or written consent of a majority in interest of the
limited partners;
o The dissolution of the partnership by judicial decree;
o The expiration of 60 days following the removal, withdrawal,
involuntary dissolution, or bankruptcy (or, in the case of an
individual, the death or appointment of a conservator for the
person or any of the assets) of the last remaining general
partner interest of the limited partners, if the terminating
event is the removal, bankruptcy, or involuntary dissolution
of the last remaining general partner) vote to continue the
partnership and a successor general partner is elected;
o The determination by the general partner that it is necessary
to commence the liquidation of the equipment in order for the
liquidation of all the equipment to be completed in an orderly
and business like fashion prior to December 31, 2013; or
o The sale of disposition of all the partnership's equipment.
INVESTOR SUITABILITY STANDARDS
An investment in the partnership is suitable only for persons or
entities of adequate means who have no need for liquidity in their investment
since (i) investment in the units involves certain risks and (ii) the units are
not freely transferable and a public market for the units does not exist and is
not likely to develop.
See "Risk Factors."
Net Worth/Income
Except with respect to qualified plans and Tax Exempt Entities, units
will be sold only to an investor who represents that he has either
o a net worth (exclusive of home, home furnishings and
automobiles) of at least $45,000 AND an annual gross income of
at least $45,000, OR
o irrespective of annual gross income, a net worth (exclusive of
home, home furnishings and automobiles) of at least $150,000,
or that he is purchasing in a fiduciary capacity for a person
who meets such conditions.
If the investor is a qualified plan or an IRA, such investor must
represent:
o that the IRA owner or the participant in the self-directed
qualified plan satisfies the foregoing standards, or
o if other than a self-directed qualified plan, that the
qualified plan satisfies the foregoing suitability standards.
The partnership will apply these suitability standards only with
respect to investors who acquire units in its offering.
64
Although the general partner believes that units may represent suitable
investments for individuals, qualified plans, tax exempt entities, and many
different types of entities, due to tax rules of particular application to
certain types of entities, units may not be suitable investments for such
entities. The partnership will produce UBTI which, to the extent that it exceeds
$1,000 in any taxable year from all sources, is taxable to qualified plans and
tax exempt entities. See "United States Federal Income Tax Considerations --
Investment by Tax Exempt Entities." Prospective investors should consult their
tax advisors with respect to the tax consequences of an investment in units as
it may affect their particular tax situations.
Certain state securities commissions have established suitability
standards or minimum investment amounts for the offer and sale of securities,
which are different than those set forth above. All states in which the
partnership is authorized to sell units have minimum investor suitability
standards and minimum investment amounts which are within the standards and
amounts set by the partnership except for those states listed below or in a
supplement to this prospectus. Net worth in all cases excludes home, home
furnishings and automobiles.
Additional suitability standards or minimum investment amounts are as
follows:
California: Net worth of at least $75,000 or current annual
income of at least $30,000 and a net worth of at
least $30,000.
Iowa: Net worth of at least $225,000 or current annual
income of at least $60,000 and a net worth of at
least $60,000. Minimum investment amount for Tax
Exempt Entities and Keogh Plans is $2,500.
Maine: Net worth of at least $200,000 or current annual
income of at least $50,000 and a net worth of at
least $50,000.
Michigan: In no event shall the aggregate purchase price of
Units exceed 10% of net worth.
Minnesota: Minimum investment amount for IRA's or qualified
plans (but not Tax Exempt Entities) is $2,000
individuals, minimum investment amount is $2,500.
Missouri: Net worth of at least $150,000 or current annual
gross income of at least $45,000 and a net worth of
at least $45,000.
Nebraska: Minimum investment amount for all investors is $5,000
except that the minimum investment amount for Tax
Exempt Entities and Keogh Plans is $1,000.
New Jersey: Net worth of at least $225,000 or current annual
income of at least $60,000 and a net worth of at
least $60,000.
North Carolina: Net worth of at least $225,000 or current annual
income of at least $60,000 and a net worth of at
least $60,000.
Pennsylvania: Net worth of at least $225,000 or current annual
income of at least $60,000 and a net worth of at
least $60,000. The aggregate purchase price of units
may not exceed 10% of net worth.
The suitability standards imposed by the partnership will apply to
transferees upon resale of an investor's units.
It is the responsibility of the general partner and the dealer manager
on behalf of the partnership to make every reasonable effort to determine that
the purchase of units is a suitable and appropriate investment for each
investor, based on information provided by the investor about the investor's
financial situation and investment objectives.
65
The partnership and/or dealer manager will maintain records for at
least six years of the information used to determine the suitability of
investors.
Subscribers' Representations and Warranties
If you decide to purchase units, you must execute or authorize the
execution of a subscription agreement to be submitted to the general partner. In
the States of Florida, Iowa, Maine, Michigan, Minnesota, Missouri, Nebraska,
North Carolina, Oregon and Tennessee and Texas, you are required to personally
sign the subscription agreement. You will make certain representations and
warranties to the general partner in your subscription agreement or by paying
for your units, including that you:
o have received this prospectus, including the form of
partnership agreement attached hereto as Appendix II;
o meet the applicable requirements as to investor suitability;
o accept and adopt the provisions of the partnership agreement;
and
o authorize the general partner, as your attorney-in-fact, to
execute the partnership agreement and such other documents as
may be required to carry out the business of the partnership.
You are also instructed that you should not rely upon any information
not specifically set forth in this prospectus or any supplements thereto in
making a decision to invest in the partnership and the general partner, the
dealer manager and the partnership accept no responsibility for information
provided to an investor that is not clearly marked as being prepared and
authorized by them for use with the public. Also, an investment in the
partnership involves certain risks including the matters set forth under the
captions "Risk Factors," "Conflicts of Interest," "Management" and "Income Tax
Considerations" in this prospectus.
Special Limit on Ownership of Units by Benefit Plans
To avoid classification of a pro rata portion of the partnership's
underlying assets as "plan assets" of investors which are benefit plans, the
partnership intends to restrict the ownership of units by benefit plans to less
than 25% of the total value of outstanding units at all times. See "ERISA
Considerations -- Plan Assets." Benefits Plans include qualified plans, tax
exempt entities and certain other entities included in the definition of benefit
plans in this prospectus.
66
PLAN OF DISTRIBUTION
General
The units are offered through Commonwealth Capital Securities Corp.,
Inc. as dealer manager. The dealer manager may offer the units through other
broker-dealers who are members of the National Association of Securities
Dealers, Inc. ("NASD"). The units are being offered on a "best efforts" basis,
which means that the dealer manager and the other broker-dealers are not
obligated to purchase any units and are only required to use their best efforts
to sell units to investors. The offering of the units is intended to be in
compliance with Rule 2810 of the Rules of Conduct of the National Association of
Securities Dealers, Inc.
The partnership will pay to the dealer manager an aggregate amount of
up to nine percent of capital contributions as underwriting commissions after
and only if the required $1,000,000 minimum subscription amount is sold. The
dealer manager will pay other broker-dealers ("Participating Brokers") out of
underwriting commissions, a selling commission of up to eight percent of the
capital contributions from units sold by such Participating Brokers. In
addition, all or a portion of the dealer manager fee may be reallowed to certain
Participating Brokers for expenses incurred by them in selling the units,
including reimbursement for bona fide expenses incurred in connection with due
diligence activities. The amount of the selling commissions will be determined
based upon the quantity of units sold to a single investor. The selling
commission and purchase price for all units purchased by an investor will be
reduced in accordance with the following schedule:
Individual Transaction Purchase Price Selling
Size Per Unit Commission
---------------------- -------------- ----------
$ 1,000 to $250,000 $20.00 8%
$250,020 to $350,000 $19.80 7%
$350,020 to $500,000 $19.60 6%
$500,020 to $750,000 $19.40 6%
$750,020 to $1,000,000 $19.20 5%
$1,000,020 and over $19.00 4%
The underwriting agreement, under which the dealer manager will offer
the units, which is terminable without penalty by any party on 60 days' notice,
contains cross-indemnity clauses with respect to certain liabilities between the
general partner and the dealer manager, including liabilities under the
Securities Act and liabilities arising out of misleading or untrue statements
attributable to either party in this prospectus or other materials sent to
investors in connection with this offering, and breaches of the underwriting
agreement. The dealer manager and Participating Brokers participating in the
offering may be deemed to be "underwriters" as that term is defined in the
Securities Act.
Offering of Units
The offering of units will commence on the effective date of the
registration statement of which this prospectus is a part. Provided the general
partner does not terminate the offering of units earlier, the offering may
continue until the full 750,000 units are sold, or until June 15, 2003. See
"Plan of Distribution -- Escrow Arrangements and Fundings."
The general partner and its affiliates will not be prohibited from
purchasing units, although it is not their present intention to make such
purchases. Any units purchased by the general partner or its affiliates would be
purchased for their own account and for investment and not for resale. No units
purchased by the general partner and its affiliates may be counted for purposes
of obtaining the minimum subscription amount. If the general partner or its
affiliates purchase any units, the voting rights of the general partner with
respect to the units will be as described in the last paragraph of "Summary of
the Partnership Agreement -- Voting Rights of Limited Partners".
67
Any purchase of units in connection with this offering must be
accompanied by tender of the sum of $20 per unit (subject to the quantity
discounts referred to above), which is the full purchase price of a unit;
provided, however, that the dealer manager or Participating Brokers may waive
the selling commission with respect to the purchase of units by employees of the
dealer manager, Participating Brokers, the general partner and its affiliates,
so long as those employees are purchasing units for their own accounts. If such
fees are so waived, such employees will tender no less than $18.40, for the
purchase of each unit.
- --------------------------------------------------------------------------------
Your subscription must be accepted by the general partner. Once accepted, this
will constitute the investor's agreement to the terms of the agreement and the
authority of the general partner.
- --------------------------------------------------------------------------------
Escrow Arrangements and Funding
All funds received by the general partner, the dealer manager or the
Participating Broker will be held in the escrow account at Chase Bank, until
funds equal to the minimum subscription amount have been received. While held in
escrow, subscriptions will be invested in United States short-term government
securities or interest bearing bank accounts, Chase Bank's Market Value Savings
Account, or a similar account, for the benefit of the investors.
The partnership will not be funded until the minimum subscription
amount has been received. Once the minimum subscription amount has been
deposited in the escrow account, the subscriptions will be released to the
partnership.
Any interest earned on the subscriptions while in escrow will be
distributed, net of any tax withholding required by law, directly to the
investors promptly following the funding, allocated in accordance with the
amount of subscriptions held for each investor and the length of time such
subscriptions were held.
The offering may be terminated, in the general partner's discretion, at
any time after the minimum subscription amount has been received and accepted by
the general partner on behalf of the partnership. The general partner also has
the discretion to terminate the offering prior to receiving the minimum
subscription amount. In such event, the partnership would be dissolved and
subscriptions held in escrow, together with any interest actually earned thereon
net of any tax withholding required by law would be returned to the subscribers.
It is anticipated that the offering of units will terminate no later than June
15, 2003. Subscriptions will be released from the escrow account and returned to
the subscribers together with any interest actually earned thereon, net of any
tax withholding required by law, in the event the minimum subscription amount
has not been received by June 15, 2003.
Subscribers will be admitted to the partnership and receive units at
one or more closings. Following receipt of the minimum subscription amount and
the initial closing, limited partners will be admitted not later than 15 days
after the release from the escrow account to the partnership of the subscriber's
funds. Additional closings will be held from time to time during the offering
period as subscriptions are accepted by the general partner, but no less often
than monthly. Subsequent subscriptions will be accepted or rejected by the
general partner within 30 days of their receipt. Funds received from rejected
subscriptions will be returned to the subscribers immediately upon rejection of
their subscription. The final closing will be held shortly after the termination
of the offering period or, if earlier, upon the sale of all the units. After the
initial closing, limited partners will be admitted to the partnership no later
than the last day of the calendar month following the date their Subscriptions
are accepted by the general partner. Each subscriber to the partnership will be
paid his share of interest earned on subscription amounts following the transfer
of his subscription to the partnership, net of any tax withholding required by
law. These interest payments will be paid by the partnership.
68
Subscription for Units
If you satisfy the qualifications described under "Investor Suitability
Standards" and desire to purchase units, you must:
(a) Review the subscription agreement attached as Appendix I to this
prospectus to insure that you are aware of the representations and warranties
you will be deemed to have made by subscribing for units; and
(b) Deliver to the dealer manager a check made payable to "Chase Bank,
Escrow Agent FBO Commonwealth Income & Growth Fund IV," in the amount of $20.00,
or such other amount as set forth in the table above, for each unit that you are
seeking to purchase.
The dealer manager will not complete a sale of units until at least
five business days after the date you receive a final prospectus and shall send
you a confirmation of your purchase.
Prospective investors that are not natural persons may be required to
deliver evidence of their authority to subscribe for units, or opinions of
counsel as to their authority to subscribe for units and the binding effect of
their subscriptions. Investors who submit subscriptions will not be permitted to
terminate or withdraw their subscriptions without the prior consent of the
general partner.
The general partner has the right to reject your subscription for any
reason whatsoever, including your failure to satisfy the suitability standards
described under "Investor Suitability Standards."
Sales Material
Sales material may be used in connection with the offering only when
accompanied or preceded by the delivery of this prospectus. Only sales material
which indicates that it is distributed by the general partner may be distributed
to prospective investors. Material regarding an investment in the partnership
may include a question and answer sales booklet, a speech for public seminars,
an invitation to attend public seminars, slide and video presentations,
prospecting letters, mailing cards and tombstone advertisements; all of which
would provide information regarding the general partner and the partnership. In
certain jurisdictions, such sales material will not be available. Use of any
materials will be conditioned on the provision of such materials to the SEC and
the filing with, and if required, clearance by, other appropriate state
regulatory authorities. Such clearance does not mean, however, that the agency
allowing use of the sales literature has passed on the merits of this offering
or the accuracy of the material contained in such literature. Other than as
described herein, the partnership has not authorized the use of sales material.
Although the information contained in such sales material does not
conflict with any of the information contained in this prospectus, such material
does not purport to be complete and should not be considered as part of this
prospectus or the registration statement of which this prospectus is a part, or
as incorporated in this prospectus or the registration statement by reference,
or as forming the basis of the offering. The offering is made only by this
prospectus.
REPORTS TO LIMITED PARTNERS
The general partner will deliver to each limited partner, within 120
days after the end of each year, a balance sheet of the partnership dated as of
December 31 of such year, together with statements of income, partners' equity,
and the cash flow position of the partnership for such year, prepared in
accordance with generally accepted accounting principles and accompanied by an
auditor's report from the partnership's independent certified public
accountants. Such annual report will also contain a statement of the per-unit
estimated value of your units, the method by which that value was determined,
and the date of the data used to develop the estimated value.
69
The general partner will within such period also furnish (i) a report
of the activities of the partnership for the year, which will include for each
item of equipment acquired by the partnership which individually represents at
least 10% of the total investment in equipment, (ii) certain information
relevant to the value or utilization of the equipment, (iii) a report on
distributions to the limited partners during the year and their source, (iv) if
any equipment is sold during that year a report of the sale price, purchase
price and lease revenues from such equipment, and (v) a report on any costs
incurred by the general partner and its affiliates in performing administrative
services which are reimbursed by the partnership during the year. Within 60 days
after the end of each calendar quarter, the general partner will also furnish a
report of all services rendered and all fees received by the general partners
and its affiliates from the partnership, an unaudited balance sheet, a statement
of income, a statement of changes in financial position and a report on the
activities of the partnership.
The general partner, at the time it furnishes you the partnership's
annual report, it will furnish you, through your participating broker, with an
account statement that sets forth the following:
o an estimated per-unit value of the units;
o the source of the information used to determine such per-unit
values; and
o the method by which the per-unit value as determined.
Until the net proceeds of the offering of units are fully invested, the
general partner will furnish to the limited partners, within 60 days after the
end of each calendar quarter, a report of equipment acquisitions during the
quarter, including the type and manufacturer of each item of equipment, the
purchase price of the equipment, and any other material terms of purchase, a
statement of the total amount of cash expended by the partnership to acquire the
equipment (including an itemization of all commissions, fees, and expenses and
the name of each payee), and a statement of the amount of net proceeds in the
partnership which remain unexpended or uncommitted at the end of the quarter.
The general partner will also furnish to all limited partners within 75
days after the end of the year other information regarding the partnership
necessary for the preparation of their tax returns.
LEGAL MATTERS
Certain legal matters in connection with the units offered hereby will
be passed upon for the general partner and the partnership Reed Smith LLP,
Philadelphia, Pennsylvania, counsel to the dealer-manager, the general partner
and the partnership.
EXPERTS
The financial statements of the partnership as of May 14, 2001,
appearing in this prospectus and registration statement, have been audited by
BDO Seidman LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the registration statement, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of Com Cap Corp. as of February
28, 2001 and for the year then ended and the balance sheet of the general
partner as of February 28, 2001, appearing in this prospectus and registration
statement, have been audited by Fishbein & Company, PC, independent auditors, as
set forth in their reports thereon appearing elsewhere herein and in the
registration statement, and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
70
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We will provide, at no cost, upon the request of an interested
investor, a copy of the most recent annual report on Form 10-K, filed with the
Securities and Exchange Commission for Fund I, Fund II and Fund III. You can
request Form 10-Ks for Fund I, Fund II and Fund III by calling 1-800-249-3700.
This prospectus does not contain all the information set forth in the
registration statement and the exhibits relating thereto, which the general
partner has filed with the Securities and Exchange Commission, Washington, D.C.,
under the Securities Act of 1933, as amended, and to which reference is hereby
made.
Copies of the registration statement and the exhibits are on file at
the Securities and Exchange Commission's Public Reference Room in Washington,
D.C.
Further information on the operation of the Public Reference Room is
available by contacting the SEC at 1-800-SEC-0330.
The Commission also maintains a website that contains reports, proxy
statements, registration statements and other information regarding registrants
that file electronically at http://www.sec.gov.
71
APPENDIX I
SUBSCRIPTION AGREEMENT
$15,000,000 - Maximum
$ 1,000,000 - Minimum
Commonwealth Income & Growth Fund IV
(a Pennsylvania Limited Partnership)
SUBSCRIPTION AGREEMENT,
SIGNATURE PAGE &
POWER OF ATTORNEY
750,000 Units - $20.00 per Unit
Minimum Purchase - 125 Units ($2,500)
50 Units ($1,000) for IRAs, Keoghs and Pension Plans
(Minimum purchase may be higher in certain states)
- --------------------------------------------------------------------------------
PLEASE CAREFULLY READ this Subscription Agreement and the Terms and Conditions
(on the back of the Signature Page) before completing this document. TO
SUBSCRIBE FOR UNITS, please complete and sign the Signature Page and deliver the
Subscription Agreement to your Financial Consultant.
ALL ITEMS ON THIS AGREEMENT MUST BE COMPLETED IN ORDER FOR YOUR SUBSCRIPTION TO
BE PROCESSED, including any additional information necessary to complete Item
6(c) of the Section entitled "Terms and Conditions".
- --------------------------------------------------------------------------------
Commonwealth Capital Securities Corp.
(800) 249-3700
(877) 654-1500
Please make checks payable to:
Chase Manhattan Trust Co., Escrow Agent,
(Commonwealth Income & Growth Fund IV)
Mailing Address:
Commonwealth Capital Securities Corp.
P.O. Box 67
Exton, PA 19341
Subscription Questions:
(800 )249-3700
Fax (610) 647-8858
SUBSCRIPTION AGREEMENT
COMMONWEALTH INCOME & GROWTH FUND IV
TERMS AND CONDITIONS
Each person or entity named as a registered owner on the Subscription
Agreement (the "Subscriber") desires to become a limited partner (a "Limited
Partner") of Commonwealth Income & Growth Fund IV (the "Partnership") and to
purchase units of a limited partnership interest (the "Units") of the
Partnership in accordance with the terms and conditions of the final prospectus
pursuant to which the Partnership will offer Units to the public including any
amendments and supplements thereto (the "Prospectus"), and of the Partnership's
Amended and Restated Agreement of Limited Partnership (the "Partnership
Agreement"), attached as Exhibit 1 to the Prospectus. BY EXECUTING THIS
AGREEMENT, A SUBSCRIBER DOES NOT WAIVE ANY RIGHTS HE MAY HAVE UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934 or any State
Securities or Blue Sky law. In connection herewith, the Subscriber represents,
warrants, and agrees as follows:
1. Subscription. The Subscriber agrees to purchase the number of Units
set forth in the space provided on the Signature Page of this Subscription
Agreement and delivers herewith the full amount required to purchase such Units.
2. Acceptance. The Subscriber hereby acknowledges and agrees that the
general partner of the Partnership (the "General Partner") may in its sole and
absolute discretion accept or reject the Subscriber's subscription, in whole or
in part, and that, if rejected, the amount of the Subscriber's subscription
which is rejected will be promptly returned to Subscriber, without interest. The
General Partner may not complete the sale of a Unit to a Subscriber until at
least five business days after the date the Subscriber received the Prospectus.
3. No Revocation. The Subscriber hereby acknowledges and agrees that he
will not be entitled to revoke or withdraw his subscription, except during the
five business days following the subscriber's receipt of the prospectus.
4. Adoption of Partnership Agreement. The Subscriber hereby accepts,
adopts and agrees to be bound by each and every provision contained in the
Partnership Agreement and agrees to become a Limited Partner thereunder.
5. Power of Attorney. The Subscriber hereby irrevocably makes,
constitutes and appoints the General Partner, with full power of substitution
and ratification, its true and lawful attorney-in-fact for the purposes and in
the manner provided in the Partnership Agreement.
6. Representation and Warranties. The Subscriber (which, for this
purpose, includes any Financial Consultant and Branch Manager executing this
Subscription Agreement on behalf of the Subscriber) represents and warrants to
the Partnership, the General Partner, the affiliates, agents and representatives
of the Partnership or the General Partner, and any broker-dealer involved in the
offering of Units for sale that:
(a) the Subscriber has received the Prospectus;
(b) the Subscriber has received the form of Partnership Agreement;
(c) the Subscriber meets the minimum financial suitability
standards set forth in the Prospectus under "Investor
Suitability Standards," as well as any additional minimum
financial suitability standards required by state securities
authorities which are applicable to the Subscriber.
(d) the Subscriber is subscribing for Units in his own account or
for the account or benefit of a family member or members or in
a fiduciary capacity for the account of another person; and
(e) the Subscriber has received no representations or warranties
from the Partnership, the General Partner, or any affiliates,
agents or representatives of the Partnership or the General
Partner other than those contained in the Prospectus, except
as follows:
The Partnership reserves the right to assert these representations as a
defense in any subsequent litigation in which one or more of the representations
is in issue; provided, however, that the representations contained in Paragraph
6(e) shall not be binding on any Subscriber resident in Arizona, Maine,
Minnesota, Missouri, Nebraska, Pennsylvania, Tennessee or Texas. Subscribers in
Arizona, Michigan, Missouri, Nebraska, and Texas are required to sign or initial
each representation contained in paragraph (6) above.
Notice to all Investors:
(a) The purchase of Units for an IRA or Keogh plan does not itself
create the plan.
(b) Section 1446 of the Internal Revenue Code provides that a
partnership must pay a withholding tax to the Internal Revenue Service with
respect to a partner's allocable share of such partnership's effectively
connected taxable income if the partner is a foreign person, and the Partnership
Agreement authorizes the Partnership to withhold any required amounts from
distribution otherwise payable to any foreign person.
COMMONWEALTH INCOME & GROWTH FUND IV
SUBSCRIPTION AGREEMENT, SIGNATURE PAGE AND POWER OF ATTORNEY
- ------------------------------------------------------------------------------------------------------------------------------------
1. Units Purchased: x $20.00 Per Unit = $ (Total Capital Contribution)
- ------------------------------------------------------------------------------------------------------------------------------------
INITIAL INVESTMENT ADDITIONAL INVESTMENT [ ] (IN THIS FUND)
DO YOU WISH TO RECEIVE QUARTERLY OR MONTHLY DISTRIBUTIONS? [ ] QUARTERLY [ ] MONTHLY
- ------------------------------------------------------------------------------------------------------------------------------------
ARE YOU AN EMPLOYEE OF A SELECTED AGENT, IS THIS A NAV PURCHASE? [ ] YES [ ] NO
- ------------------------------------------------------------------------------------------------------------------------------------
2. REGISTRATION INFORMATION - INVESTOR'S ACCOUNT NUMBER:_________________________________________________
(with broker's firm, if applicable)
- ------------------------------------------------------------------------------------------------------------------------------------
Legal Account Title:
INVESTORS NAME(S) OR
TRUSTEE(S) OR CUSTODIAN(S)
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTOR DATE OF TRUST/IRA
NAME(S) AND/OR IRA NUMBER:
- ------------------------------------------------------------------------------------------------------------------------------------
SOCIAL SECURITY NUMBER: CORPORATE/CUSTODIAL TAX I.D.
(REQUIRED ALSO FOR IRA/QUALIFIED PLAN INVESTORS)
- ------------------------------------------------------------------------------------------------------------------------------------
LEGAL RESIDENT/BUSINESS/CUSTODIAL ADDRESS:
- ------------------------------------------------------------------------------------------------------------------------------------
CITY/STATE BUSINESS/CUSTODIAL
ZIP + 4 HOME PHONE: PHONE:
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL MAILING ADDRESS - If Different from Above (Or Investor Address if
Custodial Account) - Must Complete to Receive Copies of Statements & Reports.
- ------------------------------------------------------------------------------------------------------------------------------------
Street City State Zip + 4
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
3. PLEASE INDICATE CITIZENSHIP STATUS: (please review "Investor Suitability Standards" in the Prospectus)
US CITIZEN [ ] RESIDENT ALIEN [ ] NON-RESIDENT ALIEN (Attach IRA Form W8) [ ]
- ------------------------------------------------------------------------------------------------------------------------------------
If Corporation or Partnership: U.S. [ ] or FOREIGN (Attach IRA Form W8) [ ]
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
4. TYPE OF REGISTRATION (CHECK ONE):
- ------------------------------------------------------------------------------------------------------------------------------------
[ ] INDIVIDUAL [ ] JOINT TENANTS WITH RIGHT OF SURVIVORSHIP
[ ] IRA [ ] PARTNERSHIP
[ ] OTHER TAX-EXEMPT ENTITY [ ] QUALIFIED PLAN
[ ] CORPORATION [ ] UNIFORM GIFT TO MINORS ACT STATE OF
[ ] TENANTS IN COMMON [ ] TRUST (SPECIFY)
[ ] COMMUNITY PROPERTY [ ] OTHER (SPECIFY)
- ------------------------------------------------------------------------------------------------------------------------------------
5. SIGNATURE: I certify that (1) I have received the Prospectus relating to
Commonwealth Income & Growth Fund IV as supplemented (the "Prospectus" and the
"Limited Partnership Agreement"), (2) I agree to the provisions on the reverse
hereof, (3) by executing this Subscription Agreement, I am entering into a
limited partnership agreement and agreeing to invest money, (4) the information
set forth in this Subscription Agreement, Signature Page and Power of Attorney
is true and correct, (5) I meet the minimum financial suitability standards
described in the Prospectus under "Investor Suitability Standards", and, I
declare under penalty of perjury that (6) I have entered my correct taxpayer
identification or social security number on this form and (7) I verify that I am
not subject to withholding either because I have not been notified that I am
subject to backup withholding as result of a failure to report all interests or
dividends, or the Internal Revenue Service has notified me that I am no longer
subject to backup withholding (if the undersigned is subject to backup
withholding, they shall strike out the language in clause (7) before signing
below), and (8) I acknowledge that this investment is not liquid.
- ------------------------------------------------------------------------------------------------------------------------------------
X X
- ------------------------------------------------------------------------------------------------------------------------------------
SUBSCRIBER'S SIGNATURE DATE CO-SUBSCRIBER'S SIGNATURE OR DATE
AUTHORIZED/CUSTODIAL REPRESENTATIVE
If Financial Consultant and Branch Manager are executing the signature page,
both must sign below. Authorized custodian signature required for IRA/custodian
accounts. Financial Consultant and Branch Managers may not sign on behalf of
residents of Florida, Iowa, Maine, Michigan, Minnesota, Missouri, Nebraska,
North Carolina, Oregon, and Tennessee.
(NOTE: Not to be executed until Subscriber(s) has (have) acknowledged receipt of final Prospectus.)
- ------------------------------------------------------------------------------------------------------------------------------------
X X
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONSULTANT'S SIGNATURE DATE BRANCH MANAGER'S SIGNATURE DATE
6. SPECIAL PAYMENT INSTRUCTIONS: Payment to other individual or entity as
designated below. Investor must complete this section if they want cash
distributions made to anyone other than the records holder. Investors requesting
direct deposit of distribution checks to another financial institution or mutual
fund please complete below:
Please Check if: ______ You wish Distributions of the Partnership to be reinvested in additional Units during the Offering Period.
______ You wish Distributions to be sent to the Payee and Address listed below Please complete the following
information.
Payee Name:_________________________________________________________________________________________________________________________
For Account Of: ____________________________________________________ Account Number: ___________________________________________
Street Address: ___________________________________________________ City/State/Zip+4: _________________________________________
Phone Number: _____________________________________________________________________________________________________________________
- ------------------------------------------------------------------------------------------------------------------------------------
7. BROKER/DEALER DATA: Completed by selling Financial Consultant (PLEASE ENTER YOUR OFFICE ADDRESS HERE)
FINANCIAL CONSULTANT(S) NAME ______________________________________ ADDRESS __________________________________________________
BROKER/DEALER FIRM NAME ____________________________________________ CITY/STATE/ZIP + 4 _______________________________________
FINANCIAL CONSULTANT'S PHONE NUMBER ________________________________ FAX NUMBER _______________________________________________
BY SELLING FINANCIAL CONSULTANT: In compliance with Section (3)b and 4(d) of
Appendix F of Article III, Section 34 of the NASD Rules of Fair Practice, I
represent that I have reasonable grounds to believe, based on information from
the investor(s) concerning investment objectives, other investments, financial
situation and needs, and any other information known by me, that investment in
the Partnership is suitable for such investor(s) and that I have informed the
investor(s) of the lack of liquidity and marketability of the investment and
confirm that the investor(s) signatures appears above. (Signatures of both
representatives required if joint account.)
- ------------------------------------------------------------------------------------------------------------------------------------
X X
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONSULTANT'S SIGNATURE DATE BRANCH MANAGER'S SIGNATURE DATE
- ------------------------------------------------------------------------------------------------------------------------------------
THIS SUBSCRIPTION AGREEMENT, SIGNATURE PAGE AND POWER
OF ATTORNEY WILL NOT BE AN EFFECTIVE AGREEMENT UNTIL IT RESERVATION NUMBER CCSC RECEIPT DATE
IS ACCEPTED BY THE GENERAL PARTNER OF COMMONWEALTH
INCOME & GROWTH FUND IV. FC NUMBER DATE INTO ESCROW
--------------------- ----------------------
AGREED TO AND ACCEPTED BY: | ACCOUNT NUMBER CLOSING NUMBER
-------------------------------- |
- --------------------------------------------------------------|---------------------------------------------------------------------
|
| ---------------------- ------------------------
|
(GENERAL PARTNER) |
- ------------------------------------------------------------------------------------------------------------------------------------
APPENDIX II
LIMITED PARTNERSHIP AGREEMENT
COMMONWEALTH INCOME & GROWTH FUND IV
RESTATED LIMITED PARTNERSHIP AGREEMENT
May 15, 2001
TABLE OF CONTENTS
INTRODUCTION..................................................................1
ARTICLE 1 Definitions........................................................1
ARTICLE 2 Organization.......................................................9
2.1. Continuation........................................................9
2.2 Name................................................................9
2.3 Place of Business...................................................9
2.4 Registered Office and Registered Agent..............................9
2.5 Business............................................................9
2.6 Term................................................................9
ARTICLE 3 Capital Contributions and Status of Partners.......................9
3.1 General Partner.....................................................9
3.2 Limited Partners....................................................9
3.3 Capital Contribution of Limited Partners...........................10
3.4 Registration.......................................................10
3.5 Withdrawal of Capital Contributions................................10
3.6 Admission of Limited Partner.......................................10
3.7 Continuation of Limited Partner Status.............................11
3.8 Limited Liability of Limited Partners..............................11
ARTICLE 4 Partners' Capital.................................................11
4.1 Capital Accounts...................................................11
4.2 Withdrawal and Return of Capital...................................11
4.3 Interest on Capital................................................12
ARTICLE 5 Partnership Expenses..............................................12
5.1 Organization Expenses..............................................12
5.2 Other Expenses.....................................................12
5.3 Excluded Expenses..................................................13
ARTICLE 6 Compensation of the General Partner...............................13
6.1 Organizational Fee.................................................13
6.2 Equipment Management Fee...........................................13
6.3 Equipment Acquisition Fee..........................................14
6.4 Equipment Liquidation Fee..........................................14
6.5 Debt Placement Fee.................................................14
6.6 Limitations on Fees................................................14
ARTICLE 7 Allocation of Net Profits, Net Losses and Other Items.............15
7.1 Net Profits........................................................15
7.2 Net Losses.........................................................15
7.3 Required Allocations...............................................15
7.4 Syndication Expenses...............................................16
7.5 Recharacterization of Fees.........................................17
7.6 Recapture..........................................................17
7.7 Allocations Among Limited Partners.................................17
7.8 Other Allocations..................................................17
ARTICLE 8 Distributions.....................................................17
8.1 Cash Distributions.................................................17
8.2 Allocation of Distributions to Limited Partners....................19
8.3 Amounts Withheld...................................................19
8.4 Return of Offering Proceeds........................................19
ARTICLE 9 Rights, Powers, and Duties of General Partner.....................19
9.1 Rights and Powers..................................................19
9.2 Reliance on Certificate of General Partner.........................21
9.3 Independent Activities.............................................22
9.4 Duties.............................................................22
9.5 Restrictions on Authority..........................................23
9.6 General Partner's Net Worth........................................26
ARTICLE 10 Rights of Limited Partners.......................................26
10.1 No Limited Partner in Control......................................26
10.2 Voting Rights......................................................26
10.3 Conversions and Roll-Ups...........................................27
10.4 Meetings...........................................................28
10.5 Certain Amendments.................................................29
ARTICLE 11 Transfer of Units................................................29
11.1 Assignment.........................................................29
11.2 Substituted Limited Partners.......................................30
11.3 Transfer Fee.......................................................30
11.4 General............................................................30
ARTICLE 12 Redemption.......................................................30
ARTICLE 13 General Partner's Interest.......................................31
13.1 Voluntary Withdrawal or Assignment.................................31
13.2 Removal............................................................31
ARTICLE 14 Dissolution, Continuation and Termination........................31
14.1 Dissolution........................................................31
14.2 Continuation.......................................................32
14.3 Purchase of Interest of General Partner............................32
14.4 Liquidation........................................................33
ARTICLE 15 Accounting and Fiscal Matters....................................34
15.1 Partnership Records................................................34
15.2 Accounting; Fiscal Year............................................34
15.3 Reports............................................................34
15.4 Bank Accounts......................................................36
15.5 Partnership Returns................................................36
ARTICLE 16 Power of Attorney................................................36
16.1 Power of Attorney..................................................36
ARTICLE 17 Liability and Indemnification of General Partner.................37
17.1 Exclusion of Liability for Return of Capital Contributions.........37
17.2 Limitation on Liability of General Partner; Indemnification........37
ARTICLE 18 Tax Exempt Limited Partners......................................38
18.1 Tax Exempt Limited Partners........................................38
ARTICLE 19 Miscellaneous....................................................39
19.1 Notices............................................................39
19.2 Parties in Interest................................................39
19.3 Section Captions...................................................39
19.4 Severability.......................................................39
19.5 Right to Rely on General Partner...................................39
19.6 Pennsylvania Law...................................................39
19.7 Exclusive Jurisdiction.............................................39
19.8 Counterpart Execution..............................................39
19.9 Gender.............................................................40
19.10 Integrated Agreement...............................................40
COMMONWEALTH INCOME & GROWTH FUND IV
RESTATED LIMITED PARTNERSHIP AGREEMENT
RESTATED LIMITED PARTNERSHIP AGREEMENT, dated as of May 15, 2001, by
and among Commonwealth Income & Growth Fund, Inc., a Pennsylvania corporation
(the "General Partner"), Kimberly A. Springsteen (the "Initial Limited
Partner"), and the persons who on or after the execution of this Agreement are
admitted as limited partners of the Partnership.
INTRODUCTION
On April 20, 2001, the General Partner and the Initial Limited Partner,
formed Commonwealth Income & Growth Fund IV as a Pennsylvania limited
partnership (the "Partnership") by the filing of a certificate of limited
partnership in the Office of the Department of State of the Commonwealth of
Pennsylvania. The parties desire to effect the withdrawal of the Initial Limited
Partner, and the admission of the purchasers of the Partnership's Units as
limited partners of the Partnership and to restate the agreement of the Partners
to read in its entirety as set forth below. To accomplish this, the parties
agree that (i) the persons whose subscriptions for Units have been accepted by
the General Partner and who are reflected in the records of the Partnership as
purchasing Units on the date hereof are admitted as limited partners of the
Partnership; (ii) the Initial Limited Partner withdraws as a limited partner of
the Partnership and is released from all its obligations to the Partnership, and
the Partnership shall promptly return the Initial Limited Partner's capital
contribution, and (iii) the agreement of the Partners is hereby restated to read
in its entirety as set forth below.
ARTICLE 1
Definitions
The following terms used in this Agreement shall have the meanings set
forth below.
"Acquisition Expenses" means expenses relating to the prospective
selection and acquisition of or investment in Equipment, whether or not actually
acquired, including, but not limited to, legal fees and expenses, travel and
communication expenses, costs of appraisals, accounting fees and expenses and
miscellaneous expenses.
"Acquisition Fees" 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, financing fee, non-recurring management fee or any fee of a
similar nature, however designated.
"Act" means the Pennsylvania Revised Uniform Limited Partnership Act.
"Adjusted Basis" means the basis, as defined in Section 1011 of the
Code, for determining gain or loss for federal income tax purposes from the
sale, transfer, or other disposition of property.
"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 of
which the specified Person is an executive officer or 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.
"Agreement" means this Restated Limited Partnership Agreement, as
amended from time to time.
"Average Daily Units" means for any period an amount equal to the sum
of the outstanding Limited Partners' Units as of the close of business on each
day in the period, divided by the number of days in the period.
"Bankrupt" or "Bankruptcy" means, when used with reference to a
specified Person, (a) if such Person (i) files any application or petition in
any tribunal for the appointment of a trustee or receiver, or (ii) commences any
proceeding under any bankruptcy or reorganization statute, or under any
provision of the United States Bankruptcy Code, or under any insolvency law, or
under any dissolution or liquidation law whether now or hereafter in effect, or
(b) if any petition or application of the type described in subsection (a) above
is commenced against such Person and is not dismissed within 60 days of filing,
or an order is entered appointing a trustee or receiver for such Person, or an
order for relief is issued in any bankruptcy.
"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.
"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.
2
"Certificate" means the certificate of limited partnership filed by the
Partnership in the Office of the Department of State of the Commonwealth of
Pennsylvania as may be amended from time to time.
"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 statutes. Any reference this
Agreement to a particular provision of the Code shall mean, where appropriate,
the corresponding provision of any successor statute.
"Competitive Equipment Sale Commission" means that brokerage fee paid
for services rendered in connection with the purchase or sale of Equipment,
which 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.
"Controlling Person" means any person, whatever his or her title,
performing functions for the General Partner or its Affiliates similar to those
of chairman or member of the Board of Directors or executive management (such as
the president, vice president or senior vice president, corporate secretary or
treasurer), senior management (such as the vice president of an operating
division who reports directly to executive management), or any person holding a
five percent or more equity interest in the General Partner or its Affiliates or
having the power to direct or cause the direction of the General Partner or its
Affiliates, whether through the ownership of voting securities, by contract, or
otherwise.
"Cumulative Return" means the 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.
"Debt Placement Fee" means the fee payable to the General Partner in
accordance with Section 6.5 of this Agreement.
"Distribution Fee" means for any year until changed by the General
Partner in accordance with the following sentence, an amount not to exceed
$25.00. The General Partner may change the amount of the Distribution Fee only
by written notice to each Limited Partner who properly has elected to receive
monthly distributions at least 30 days prior to the beginning of the calendar
quarter that includes the first month to which the new Distribution Fee will
apply. The Distribution Fee is designed to cover the additional postage and
handling associated with the more frequent monthly distributions; the payment of
which shall be subtracted equally from the distribution check of any Limited
Partner receiving distributions of net cash flow on a monthly basis.
3
"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.
"Equipment Acquisition Fee" means the fee payable to the General
Partner in accordance with Section 6.3 of this Agreement.
"Equipment Liquidation Fee" means the fee payable to the General
Partner in accordance with Section 6.4 of this Agreement.
"Equipment Management Fee" means the fee payable to the General Partner
in accordance with Section 6.2 of this Agreement.
"Equipment Management" means personnel and services necessary to the
leasing activities of the Partnership, including but not limited to, leasing and
re-leasing of Equipment, arranging for necessary maintenance and repair of the
Equipment, collecting revenues, paying operating expenses, determining that the
equipment is used in accordance with all operative contractual arrangements and
providing clerical and bookkeeping services necessary to the operation of
Equipment.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means the account at Chase Bank, Philadelphia,
Pennsylvania where Subscriptions will be held until they aggregate the Minimum
Subscription Amount of $1,000,000.
"Final Closing" means the last time at which subscribers for Units are
admitted as Limited Partners.
"Front-End Fees" means fees and expenses paid by any Person to any
Person during the Partnership's organizational and acquisition phase including
all Organizational and Offering Expenses (including the Organizational Fee),
Acquisition Fees, Acquisition Expenses, Debt Placement Fees, Leasing Fees, and
other similar fees and expenses; provided, however, any costs or expenses
incurred by the General Partner or its Affiliates (not including the
Partnership) which are not reimbursed by the Partnership, shall not be included
as Front-End Fees.
4
"Full Payout Net Lease" means an initial Net Lease of the Equipment
under which the non-cancellable 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.
"Funding Date" means the date on which Capital Contributions are
released to the Partnership from the Escrow Account.
"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.
"Independent Expert" means a Person with no current material or prior
business or personal relationship with the General Partner who is engaged to a
substantial extent in the business of rendering opinions regarding the value of
assets of the type held by the Partnership and who is qualified to perform such
work.
"Initial Closing" means the first time subscribers for Units are
admitted as Limited Partners.
"Investment in Equipment" means the amount of Capital Contributions
actually paid or allocated to the purchase of or investment in Equipment by the
Partnership including working capital reserves (except that working capital
reserves in excess of three percent of Capital Contributions shall not be
included) and other cash payments such as interest and taxes, but excluding
Front-End Fees.
"IRA" means an Individual Retirement Account.
"Leasing Fees" means the total of all fees and commissions paid by any
party in connection with the initial lease of Equipment acquired by the
Partnership.
"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 50% 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 $1,000,000 in
subscriptions from Limited Partners.
"Monthly Distribution Account" means an account established by the
Partnership for the benefit of those Limited Partners who elect to receive
monthly distributions of Cash Available for Distribution, into which account the
amounts specified in 8.1.2(b) shall be deposited.
5
"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-cancellable
rental payments under the lease are absolutely net to the lessor.
"Net Profits" or "Net Losses" shall be computed in accordance with
Section 703(a) of the Code (including all items of income, gain, loss or
deduction required to be stated separately pursuant to Section 703(a)(1) of the
Code) for each taxable year of the Partnership or shorter period prior 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 or 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 subsequent offer and distribution to the public,
including Underwriting Commissions, listing fees and advertising expenses except
advertising expenses related to the leasing of the Program's equipment.
"Organizational Fee" means the fee payable to the General Partner in
accordance with Section 6.1 of this Agreement.
6
"Partners" means any one or more of the General Partner and the Limited
Partners.
"Partnership" means Commonwealth Income & Growth Fund IV, a
Pennsylvania limited partnership.
"Partnership Interest" means the ownership interest of a Partner in the
Partnership, as represented by his Capital Account, including all rights of such
Partner under this Agreement.
"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.
"Prospectus" means the Partnership's prospectus contained in the
Registration Statement filed with the Securities and Exchange Commission
("Commission") for the registration of the Units under the Securities Act of
1933, as amended (the "1933 Act"), at effectiveness of such Registration
Statement except that (A) if the Partnership files a post-effective amendment to
the Registration Statement, then the term "Prospectus" shall, from and after the
effectiveness of such post-effective amendment, refer to the amended prospectus
then on file with the Commission and (B) if the Partnership files a form of
prospectus or prospectus supplement pursuant to Rule 424(b) of the regulations
of the Commission under the 1933 Act, then the term "Prospectus" shall refer to
the prospectus as so filed or supplemented from and after the date of such
filing.
"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.
"Qualified Plan" means a trust established pursuant to the terms of a
pension, profit sharing or stock bonus plan, including Keogh Plans, meeting the
requirements of Section 401 and following of the Code.
"Record Date" means, (a) for purposes of a meeting of, or actions by,
the Limited Partners pursuant to Article 10 of this Agreement, the close of
business on the business day preceding the date on which the written notice
referred to in that Article is given, and (b) for purposes of Article 12 of this
Agreement, the close of business on December 31 and June 30 of each year.
"Retiring General Partner" means a general partner of the Partnership
who or which has been removed or withdrawn as such or is Bankrupt, which has
been involuntarily dissolved, or who has died or had a conservator appointed for
the person or any of the property of such general partner.
7
"Roll-Up" means a transaction involving the acquisition, merger,
conversion, or consolidation, either directly or indirectly, of the Partnership
and the issuance of securities of a Roll-Up Entity. Such term does not include:
(i) a transaction involving securities if the securities have been listed for at
least twelve months on a national securities exchange or traded through the NASD
Automated Quotation National Market System; or (ii) a transaction involving the
conversion to corporate, trust or association form of only the Partnership if,
as a consequence of the transaction, there will be no significant adverse change
in any of the following: (a) the Limited Partners' voting rights; (b) the term
of existence of the Partnership; (c) compensation of the General Partner or its
Affiliates; or (d) the Partnership's investment objectives.
"Roll-Up Entity" means the partnership, corporation, trust or other
entity that would be created or would survive after the successful completion of
a proposed Roll-Up transaction.
"Participating Broker" means a member of the National Association of
Securities Dealers, Inc. who will be engaged to sell Units.
"Sponsor" means any Person directly or indirectly instrumental in
organizing, wholly or in part, a Program or any Person who will manage or
participate in the management of a Program, and any Affiliate of any such
Person. Sponsor does not include a Person whose only relation with the Program
is that of an independent equipment manager and whose only compensation is as
such. Sponsor does not include wholly independent third parties such as
attorneys, accountants, and underwriters whose only compensation is for
professional services rendered in connection with the offering of Program
interests.
"Substituted Limited Partner" means any Person admitted to the
Partnership as a Limited Partner pursuant to the provisions of Section 11.2 of
this Agreement.
"Syndication Expenses" means all expenditures classified as syndication
expenses pursuant to Treasury Regulations Section 1.709-2(b). Syndication
Expenses shall be taken into account under this Agreement at the time they would
be taken into account under the Partnership's method of accounting if they were
deductible expenses.
"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.
"Terminating Event" means the first to occur of the withdrawal,
removal, retirement, resignation, expulsion, Bankruptcy, involuntary
dissolution, death, insanity or appointment of a conservator for the person or
any of the assets of the last remaining general partner of the Partnership.
"Treasury Regulations" means the income tax regulations promulgated
under the Code, as such regulations may be amended from time to time (including
corresponding provisions of successor regulations).
"Underwriting Commissions" mean selling commissions and dealer-manager
fees paid to broker-dealers by the Partnership in connection with the offer and
sale of Units.
"Unit" means a limited partnership interest in the Partnership.
8
ARTICLE 2
Organization
2.1. Continuation. The Partners hereby continue the Partnership as a
limited partnership under the Act.
2.2 Name. The name of the Partnership shall continue to be
"Commonwealth Income & Growth Fund III" or such other name as may be selected by
the General Partner, who shall give notice of any such other name to the Limited
Partners.
2.3 Place of Business. The principal place of business of the
Partnership shall be 1160 W. Swedesford Road, Suite 340, Berwyn, PA 19312, or at
another location selected by the General Partner, who shall give notice of any
such other location to the Limited Partners. The Partnership may have such
additional offices or places of business as the General Partner may determine.
2.4 Registered Office and Registered Agent. The Partnership's
registered office in the Commonwealth of Pennsylvania and its registered agent
at such other office shall be determined by the General Partner.
2.5 Business. The principal business and purpose of the Partnership is
to purchase, acquire, own, lease, re-lease, maintain, improve, manage, pledge,
finance, convey, assign, dispose and sell Equipment pursuant to such
arrangements as the General Partner in its sole discretion may enter into on
behalf of the Partnership. The purpose and business of the Partnership includes
the realization and distribution of cash from sales or other dispositions of
Equipment. The Partnership is authorized to take any and all actions necessary,
appropriate, advisable, incidental to, convenient for or related to this purpose
or for the protection and benefit of the Partnership, unless expressly
prohibited by this Agreement.
2.6 Term. The Partnership shall exist for a term ending December 31,
2013, at which time it shall be dissolved, unless previously dissolved in
accordance with this Agreement.
ARTICLE 3
Capital Contributions and Status of Partners
3.1 General Partner. The General Partner has contributed $1,000 to the
capital of the Partnership. Except as provided in this Section and Section
14.4.3, the General Partner shall have no obligation to make any Capital
Contribution or to loan or otherwise provide funds to the Partnership or any
partnership, joint venture or other entity in which the Partnership has an
interest, even if the failure to do so would or could result in a default by the
Partnership, foreclosure upon the properties of the Partnership or any such
partnership, joint venture or other entity, or any other consequence adverse to
the Partnership or any such partnership, joint venture or other entity.
3.2 Limited Partners. Limited Partners shall be those persons whose
subscriptions for Units have been accepted by the General Partner and who are
reflected in the records of the Partnership as purchasing Units from the
Partnership and Substituted Limited Partners where a transfer of Units is made
pursuant to Article 11. The Partnership intends to offer and sell not less than
$1,000,000 nor more than $15,000,000 worth of Units of limited partnership
interests and to admit as Limited Partners the persons who contribute cash to
the capital of the Partnership as the purchase price for the Units.
9
3.3 Capital Contribution of Limited Partners.
3.3.1 Each Limited Partner shall make a capital contribution
of $20.00, (or the subscription price of $20.00 less the volume discount stated
in the Prospectus), as the purchase price for each Unit which he purchases from
the Partnership. The Capital Contributions of the Limited Partners shall be made
in cash. Except as required by the Act, each Unit shall be fully paid and
non-assessable, and no assessments for payments by the Limited Partners will be
made by the General Partner.
3.3.2 Any portion of the net proceeds from sales of the Units
which is not invested or committed for investment in Equipment or for any
Partnership purposes or reserved for necessary operating expenses within 12
months from the Final Closing shall be distributed to the Limited Partners by
the Partnership as a return of capital, without reduction for the General
Partner's Organizational Fee or for any Equipment Acquisition Fee which would
have been payable to the General Partner if such proceeds had been invested.
Funds will be deemed to have been committed to investment and will not be
returned to the Limited Partners to the extent written agreements in principle,
commitment letters, letters of intent or understanding or any similar contracts
or understandings have, at any time before the end of such 12-month period, been
executed, provided that such investments are consummated. Should any such
investment not be consummated, the funds attributable thereto shall be
distributed to the Limited Partners in a timely manner.
3.4 Registration. Upon the admission of a person as a Limited Partner
or Substituted Limited Partner, such Person shall be registered on the records
of the Partnership as a Limited Partner, together with his address, the number
of Units he owns, and his transferor's Capital Contribution. Each person
registered as a holder of record of Units shall continue to be the holder of
record of such Units until notification of the transfer of any such Units is
given in accordance with the terms of this Agreement. A holder of record shall
be entitled to all distributions and all allocations of Net Profits and Net
Losses with respect to Units registered in his name and to all other rights of a
Limited Partner until his rights in such Units have been transferred and the
General Partner has been notified as required herein. The Partnership shall not
be affected by any notice or knowledge of transfer of any interest in any Unit,
except as expressly provided in Article 11. The payment to the holder of record
of any distribution with respect to such Units shall discharge the Partnership
of its obligations in respect thereto.
3.5 Withdrawal of Capital Contributions. Except as otherwise provided
in this Agreement, no Partner shall have the right to withdraw or reduce his
Capital Contribution. No Partner shall have the right to bring an action for
partition against the Partnership or to demand or receive property other than
cash in return for his capital contribution. No Limited Partner shall have
priority over any other Limited Partner, either as to the return of his Capital
Contribution or as to Net Profits, Net Losses or distributions.
3.6 Admission of Limited Partner. The Initial Closing shall take place
not later than 15 days after the release from the Escrow Account of the
subscribers' funds to the Partnership. Thereafter, subscribers shall be admitted
as Limited Partners not later than the last day of the calendar month following
the date their subscriptions are accepted by the Partnership. The General
Partner shall determine whether subscriptions received after the Initial Closing
will be accepted or rejected within 30 days of their receipt by the Partnership
and, if a subscription is rejected, the subscription funds will be promptly
returned to the subscriber without interest.
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3.7 Continuation of Limited Partner Status. Once admitted as a Limited
Partner, a Person shall, except as otherwise provided in the Agreement, continue
to be a Limited Partner for all purposes of this Agreement and the Certificate
of Limited Partnership, as amended from time to time, until a Substituted
Limited Partner is admitted in place of such person pursuant to the provisions
of Article 11.
3.8 Limited Liability of Limited Partners. No Limited Partner, in his
capacity as such, shall be liable for the debts, liabilities, contracts or any
other obligations of the Partnership or any partnership, joint venture or other
entity in which the Partnership has an interest. No Limited Partner shall be
obligated to make any Capital Contribution or to loan or otherwise provide funds
to the Partnership; provided, however, in accordance with the Act, Limited
Partners will be obligated to return any distribution from the Partnership to
the extent that, after giving effect to the distribution, all liabilities of the
Partnership (other than nonrecourse liabilities and liabilities to Limited
Partners on account of their interests in the Partnership) exceed the fair value
of its assets (including, as to assets serving as security for nonrecourse
liabilities, that portion of the fair value of such assets which exceeds the
amount of such nonrecourse liabilities).
ARTICLE 4
Partners' Capital
4.1 Capital Accounts. A separate Capital Account shall be established
and maintained for each Partner. The Capital Account of each Partner shall be
credited with such Partner's Capital Contribution, plus all Net Profits and
items of income and gain of the Partnership allocated to such Partner pursuant
to Article 7, and shall be debited with the sum of (a) all Net Losses and items
of loss or deduction of the Partnership allocated to such Partner pursuant to
Article 7, and (b) all cash and the fair market value of any property (net of
liabilities of the Partnership assumed by such Partner and the liabilities to
which such property is subject) distributed by the Partnership to such Partner
pursuant to Article 8. The computation of the amount of the Capital Account of a
Partner shall be determined in all events solely in accordance with the rules
set forth in Treasury Regulation Section 1.704-1(b)(2)(iv). Any references in
this Agreement to the Capital Account of a Partner shall be deemed to refer to
such Capital Account as the same may be credited or debited from time to time as
set forth above in this Section 4.1.
4.2 Withdrawal and Return of Capital. No Limited Partner shall withdraw
any of his capital without the consent of the General Partner and Limited
Partners holding a Majority in Interest of the Units, except upon dissolution or
liquidation of the Partnership or as provided in Article 12. Under circumstances
requiring a return of any Capital Contribution or constituting a withdrawal of a
Limited Partner, no Limited Partner shall have the right to receive property
other than cash, except as may be specifically provided in this Agreement.
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4.3 Interest on Capital. No interest shall be paid on any Capital
Contribution made to the Partnership.
ARTICLE 5
Partnership Expenses
5.1 Organization Expenses. The General Partner shall bear and pay all
Organizational and Offering Expenses other than Underwriting Commissions.
5.2 Other Expenses. All expenses of the Partnership, other than the
expenses required to be paid by the General Partner pursuant to Section 5.1,
shall be billed (to the extent practicable) directly to and paid by the
Partnership. Subject to Section 5.1, the General Partner and its Affiliates
shall be reimbursed for the actual cost of goods and materials used for or by
the Partnership and obtained from entities unaffiliated with the General
Partner. Subject to (and only in accordance with) the foregoing, the Partnership
shall pay (or reimburse the General Partner and its Affiliates for) the lower of
the actual cost or the amount the Partnership would have to pay independent
third parties for such services in the same geographic area of all expenses
related to the administration and operation of the Partnership, including
without limitation:
5.2.1 all costs of personnel involved in the business of the
Partnership;
5.2.2 all taxes and assessments on Equipment and other taxes
applicable to the Partnership;
5.2.3 legal, appraisal, audit, accounting and other
professional fees;
5.2.4 printing and other expenses incurred in connection with
the transfer, registration and recording of documents evidencing ownership of
Units or in connection with the business of the Partnership;
5.2.5 fees and expenses paid to independent contractors,
mortgage bankers, equipment brokers, servicers, leasing agents, consultants,
equipment lease brokers, insurance brokers and other agents;
5.2.6 expenses paid to nonaffiliated parties in connection
with the disposition, replacement, alteration, maintenance and repair, leasing,
re-leasing, storage and operation of Equipment (including the costs and expenses
for foreclosures, insurance premiums, equipment lease brokerage and leasing
commissions and of maintenance of Equipment);
5.2.7 subject to Section 9.4.4, expenses in connection with
the acquisition of Equipment other than Equipment acquired through the proceeds
of the offering of the Units;
5.2.8 expenses of revising, amending, converting, modifying or
terminating the Partnership or this Agreement;
5.2.9 the cost of preparation and dissemination of the
informational material and documentation relating to potential sale, leasing,
re-leasing, financing or other disposition of Equipment;
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5.2.10 costs incurred in connection with any litigation in
which the Partnership is involved or proceedings conducted by any regulatory
agency, including legal and accounting fees incurred in connection therewith;
5.2.11 costs of any accounting, statistical or bookkeeping
equipment necessary for the maintenance of the books and records of the
Partnership;
5.2.12 costs of investor communications and regulatory
reports, including without limitation initiation, review and approval of reports
and communications to Limited Partners or regulatory agencies; expenses in
connection with distributions made by the Partnership to, and communications,
bookkeeping and clerical work necessary in maintaining relations with, Limited
Partners, including the costs of design, production, printing and mailing of
reports, conducting elections in any circumstance requiring a vote of the
Limited Partners, holding meetings with Limited Partners, and preparing and
mailing reports required to be furnished to Limited Partners for tax reporting
or other purposes or reports which the General Partner deems to be in the best
interests of the Partnership;
5.2.13 expenses of professionals employed by the Partnership
in connection with any of the foregoing, including attorneys, accountants, and
appraisers; and
5.2.14 such other related administrative expenses as are
necessary to the prudent operation of the Partnership.
5.3 Excluded Expenses. No reimbursement shall be permitted for services
for which the General Partner is entitled to compensation by way of a separate
fee. Excluded from the allowable reimbursement shall be (i) rent or
depreciation, utilities, capital equipment, other administrative items; and (ii)
salaries, fringe benefits, travel expenses and other administrative items
incurred or allocated to any Controlling Person of the General Partner.
ARTICLE 6
Compensation of the General Partner
6.1 Organizational Fee. For the services and activities of the General
Partner performed and to be performed by the General Partner in connection with
the organization of the Partnership, the General Partner will be paid an
Organizational Fee equal to three percent of the first $10,000,000 of Limited
Partners' Capital Contributions plus two percent of the Limited Partners'
Capital Contributions in excess of $10,000,000. The Organizational Fee will
accrue and be paid as Limited Partners are admitted to the Partnership.
6.2 Equipment Management Fee. For the services and activities performed
and to be performed by the General Partner and its Affiliates in connection with
Equipment Management, the General Partner shall receive a monthly fee equal to
the lesser of (a) the fees which would be charged by an independent third party
in the same geographic market for similar services and equipment or (b) the sum
of (i) two percent of (A) the Gross Lease Revenues attributable to Equipment
subject to Full Payout Net Leases which contain net lease provisions plus, (B)
the purchase price paid on Conditional Sales Contracts as received by the
Partnership and (ii) five percent of the Gross Lease Revenues attributable to
Equipment subject to Operating Leases. The Equipment Management Fee shall accrue
as funds are received by the Partnership and shall be paid to the General
Partner on conclusion of each calendar month, except such Equipment Management
Fee may be accrued as a debt of the Partnership payable, without interest, out
of future available cash if the Partnership does not generate sufficient cash
from operations to pay the Equipment Management Fee currently, or if the General
Partner determines that such action is in the best interest of the Partnership.
Fees or expenses to nonaffiliated parties for such services and activities shall
be paid by the General Partner from its Equipment Management Fee.
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6.3 Equipment Acquisition Fee. For the services and activities
performed and to be performed by the General Partner in connection with the
acquisition and lease of Equipment, the General Partner shall receive an
Equipment Acquisition Fee of four percent of the Purchase Price of each item of
Equipment purchased. The Equipment Acquisition Fee will be paid from the net
proceeds of the Offering which are available to be used to purchase Equipment
when such proceeds are received by the Partnership. To the extent that the
Partnership acquires Equipment at an aggregate Purchase Price exceeding the net
proceeds of the Offering available to be used to purchase Equipment, the
Equipment Acquisition fee will be paid with respect to that Equipment as the
Equipment is acquired.
6.4 Equipment Liquidation Fee. For the services and activities to be
performed by the General Partner in connection with the disposition of the
Partnership's Equipment (other than by a Conditional Sales Contract), the
General Partner shall receive an Equipment Liquidation Fee equal to the lesser
of (a) 50% of the Competitive Equipment Sale Commission or (b) three percent of
the sales price of such Equipment. The payment of the Equipment Liquidation Fee
shall be made as proceeds of the sale are received and is subordinated to the
receipt by the Limited Partners of (a) a return of their Capital Contributions
plus the Cumulative Return and (b) the Net Disposition Proceeds from such sale.
Such fee will be reduced to the extent any liquidation or resale fees are paid
to unaffiliated parties.
6.5 Debt Placement Fee. For the services rendered or to be rendered by
the General Partner's arrangement of Term Debt to finance the acquisition of
Equipment by the Partnership, the General Partner shall receive a Debt Placement
Fee equal to one percent of such indebtedness. Such fee shall be paid when the
proceeds of the Term Debt are received by the Partnership and shall be reduced
to the extent the Partnership incurs such fees to third parties unaffiliated
with the General Partner or the lender with respect to such indebtedness, and no
such fee will be paid with respect to borrowings from the General Partner or its
Affiliates.
6.6 Limitations on Fees. The Partnership shall commit a substantial
portion of Capital Contributions toward Investment in Equipment. The remaining
Capital Contributions may be used to pay Front-End Fees. The Partnership will
commit a percentage of Capital Contributions to Investment in Equipment which is
equal to the greater of (i) 80% of Capital Contributions reduced by .0625% for
each one percent of indebtedness encumbering Equipment or (ii) 75% of Capital
Contributions. To calculate the percent of indebtedness encumbering Equipment,
divide the amount of indebtedness by the Purchase Price (excluding Front-End
Fees) and multiply the quotient by .0625% to determine the percentage to be
deducted from 80%. For example, if the percentage of indebtedness were 30%, the
percentage to be deducted from 80% is 1.875% (30 x .0625) and the percentage to
be committed to Investment in Equipment is 78.125% (80-1.875).
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ARTICLE 7
Allocation of Net Profits, Net Losses and Other Items
7.1 Net Profits.
7.1.1 Net Profits for each fiscal year of the Partnership
(other than Net Profits arising from transactions in connection with the
termination or liquidation of the Partners) shall be allocated as follows:
(a) to the General Partner, the greater of (i) one
percent of such Net Profits or (ii) Net Profits equal to the excess, if
any, of (A) all distributions to the General Partner pursuant to
Section 8.1.1 with respect to such fiscal year and all prior fiscal
years over (B) the total Net Profits allocated to the General Partner
pursuant to this Section 7.1.1(a) for all such prior fiscal years; and
(b) any balance to the Limited Partners.
7.1.2 Net Profits arising from transactions in connection with
the termination or liquidation of the Partnership shall be allocated in the
following order of priority:
(a) Net Profits shall be allocated to each Partner in
an amount equal to the negative amount, if any, of his Capital Account.
If the Net Profits available to be so allocated is less than the sum of
all Partners' negative Capital Accounts, then such Net Profits shall be
allocated to the Partners in proportion to the respective amounts of
their negative Capital Accounts.
(b) An amount of Net Profits equal to the excess of
(A) the proceeds from such transaction that would be distributed to the
Partners pursuant to Section 8.1.2 (without regard to Section 8.1.3)
over (B) the aggregate Capital Accounts (as adjusted to reflect the
allocation of Net Profit pursuant to Section 7.1.2(a)) of all Partners
shall be allocated among such Partners in proportion to their
respective shares of such excess.
(c) Any remaining Net Profits shall be allocated in
the same proportions that cash distributions equal to such remaining
Net Profits would be distributed pursuant to Section 8.1 (without
regard to Section 8.1.3).
7.2 Net Losses. Net Losses for each fiscal year of the Partnership
shall be allocated 99% to the Limited Partners and one percent to the General
Partner.
7.3 Required Allocations. Notwithstanding Sections 7.1 and 7.2:
7.3.1 Beginning in the first year in which the Partnership has
"nonrecourse deductions" (as such term is defined and the amount thereof is
determined in accordance with Treasury Regulation Sections 1.704-2(b)(1)), and
in each year thereafter, if there is a net decrease in "partnership minimum
gain" (as defined in Treasury Regulation Section 1.704-2(d)(1)) during a
Partnership taxable year, then any Partner with a deficit balance in his Capital
Account at the end of such taxable year shall be allocated, before any other
allocation is made of Partnership items for such taxable year, items of income
and gain for such taxable year (and, if necessary, subsequent years) in the
amounts and proportions needed to eliminate such deficit as quickly as possible,
such allocations to be made in accordance with the "minimum gain chargeback"
provisions of Treasury Regulation Section 1.704-(2)(f);
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7.3.2 No loss or deduction shall be allocated to a Partner if
such allocation would create a deficit balance in such Partner's Capital Account
in excess of the amount such Partner is obligated to restore to the Partnership
or is treated as being obligated to restore to the Partnership under Treasury
Regulations Sections 1.704-1(b)(2)(ii)(c), 1.704-2(g)(1) or 1.740-2(i)(5). Any
losses or deductions that cannot be allocated to a Partner because of the
foregoing limitation shall be allocated among the Partners in accordance with
their relative ownership of Units, subject to the limitations of this Section
7.3.2.
7.3.3 Any Partner who unexpectedly receives with respect to
the Partnership: (a) an adjustment pursuant to Treasury Regulation
1.704-1(b)(2)(iv)(k); (b) an allocation of loss or deduction pursuant to
Sections 704(e)(2) or 706(d) of the Code or pursuant to Treasury Regulation
Section 1.751- 1(b)(2)(ii); or (c) a distribution in excess of an offsetting
increase to such Partner's Capital Account reasonably expected to occur during
(or prior to) the Partnership taxable year in which such distribution occurs,
will be allocated, as quickly as possible, items of income and gain in an amount
and manner sufficient to eliminate any resulting deficit balance in his Capital
Account in accordance with the "qualified income offset" provisions of Treasury
Regulations Section 1.704-1(b)(2)(ii)(d);
7.3.4 Loss, deductions, and expenditures attributable to
nonrecourse debt for which a Partner bears the economic risk of loss shall be
determined and allocated to the Partner who bears such economic risk of loss in
accordance with Treasury Regulation Section 1.704-2, and if there is a decrease
in partner "nonrecourse debt minimum gain" (as defined in Treasury Regulation
Section 1.704-2(i)(3)), any Partner with a share of that partner nonrecourse
debt minimum gain shall be allocated items of income and gain in accordance with
the chargeback provisions of Treasury Regulations Section 1.704-2(i)(4);
7.3.5 For purposes of this Section 7.3, a Partner's Capital
Account deficit balance shall be determined by excluding from such Partner's
Capital Account any amount such Partner is obligated to restore to the
Partnership or treated as obligated to restore to the Partnership under Treasury
Regulations Sections 1.704.1(b)(2)(ii)(c), 1.704-2(g)(l) or 1.704-2(i)(5), and
by adjusting such Partner's Capital Account balance for items described in
Treasury Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6); and
7.3.6 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 Regulations Section 1.704- 1(b)(2)(iv)(d) or (f),
depreciation, amortization, and gain or loss as determined for federal income
tax purposes shall be allocated so as to take into account such difference
between book value and adjusted tax basis in accordance with the principles of
Code Section 704(c). The General Partner shall have the authority to elect the
method to be used by the Partnership for allocating items required by Section
704(c) of the Code and such election shall be binding on the Limited Partners.
7.4 Syndication Expenses. Syndication Expenses attributable to the
Underwriting Commissions paid on the Partnership's sale of any Unit shall be
specially allocated to the Limited Partner who owns the Units, and all other
Syndication Expenses shall be allocated to the Limited Partners who are admitted
to the Partnership from time to time so that, to the extent possible, the
cumulative Syndication Expenses (other than Underwriting Commissions) allocated
with respect to each Unit at any time is the same. If the General Partner
determines that such result is not likely to be achieved through future
allocations of Syndication Expenses, the General Partner may allocate a portion
of Net Profits or Net Losses to achieve the same effect on the Capital Accounts
of the Limited Partners.
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7.5 Recharacterization of Fees. Any fees paid to the General Partner or
any of its Affiliates which are disallowed as deductible expenses by the
Internal Revenue Service shall constitute special allocations of gross income to
the General Partner for income tax purposes.
7.6 Recapture. If the Partnership recognizes gain on the sale, exchange
or other disposition of any property, any portion of such gain which is treated
as ordinary income pursuant to Code Section 1245 shall be divided between the
General Partner and the Limited Partners in proportion to the aggregate
deductions for cost recovery and depreciation previously allocated to them and
shall be allocated among the Limited Partners in the same proportions as the
gain from such disposition is allocated among them.
7.7 Allocations Among Limited Partners. Except as otherwise provided in
this Agreement, Net Profits and Net Losses allocated to the Limited Partners for
any fiscal year shall be divided among them in proportion to their Average Daily
Units for such fiscal year. If an interest of a Partner in the Partnership is
transferred in accordance with Section 11 of this Agreement, the General
Partner, in its sole discretion, may allocate such items of Net Profits, Net
Loss, and credit by closing the books of the Partnership immediately after the
transfer of the interest. All such allocations shall be made without regard to
the date, amount or recipient of any distributions which may have been made with
respect to such transferred interest.
7.8 Other Allocations. Any allocations not otherwise provided for shall
be divided among the Partners in the same proportions as they share Net Profits
or Net Losses, as the case may be, for the period.
ARTICLE 8
Distributions
8.1 Cash Distributions. For purposes of this Article Eight, the
following terms should have the meanings set forth below:
(a) "Limited Partner" means each Limited Partner of the
Partnership, as defined in Article 1, and includes all the Monthly
Limited Partners and all the Quarterly Limited Partners.
(b) "Monthly Limited Partner" means any Limited Partner who
makes a Capital Contribution of $5,000 or more and who, for the quarter
in question, has elected (either (i) by written notice to the General
Partner upon subscription or (ii) thereafter, upon ten days' prior
written notice to the General Partner, effective as of the beginning of
the following quarter), to receive monthly distributions of cash
available for distribution.
(c) "Quarterly Limited Partner" means any Limited Partner
other than a Monthly Limited Partner.
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8.1.1 Except as otherwise provided in this Section 8.1, Cash
Available for Distribution shall be distributed as follows:
(a) The General Partner, within thirty (30) days
following the close of each fiscal quarter or as soon thereafter as
practicable, shall determine in its sole and absolute discretion, the
amount of Cash Available for Distribution. Such Cash Available for
Distribution shall be apportioned for the related year.
(b) 99% to the Limited Partners and one percent to
the General Partner until (i) the Limited Partners have received an
amount equal to the excess, if any, of (A) the Cumulative Return from
the inception of the Partnership to the end of the calendar quarter to
which the distribution relates, over (B) the sum of all prior
distributions under this Section 8.1.1, and (ii) the Limited Partners'
Capital Contributions have been reduced to zero; and
(c) thereafter, 90% to the Limited Partners and ten
percent to the General Partner.
8.1.2 Cash Available for Distribution
(a) Cash Available for Distribution to the Limited
Partners on quarterly basis shall be allocated between the Monthly
Limited Partners, as a group, and the Quarterly Limited Partners, as a
group, in proportion to the number of Units owned by each such group of
Limited Partners.
(b) The portion of Cash Available for Distribution
allocable to the Quarterly Limited Partners shall be distributed to the
Quarterly Limited Partners and one-third (1/3) of the portion allocable
to the Monthly Limited Partners shall be distributed to the Monthly
Limited Partners, with all such distributions to be made within thirty
(30) days following the close of each fiscal quarter or as soon
thereafter as practicable. The remaining two-thirds (2/3) of the Cash
Available for Distribution to the Monthly Limited Partners shall be
deposited in the Monthly Distribution Account. One-half (1/2) of the
amount so deposited shall be distributed to the Monthly Limited
Partners within seventy (70) days following the close of such
immediately preceding fiscal quarter, or as soon thereafter as
practicable, and the remainder of the Cash Available for Distribution
so deposited shall be distributed within one hundred (100) days
following the close of such immediately preceding fiscal quarter, or as
soon thereafter as practicable. Notwithstanding the foregoing, each
distribution pursuant to this Article Eight that is payable to the
Monthly Limited Partners first shall be reduced by an amount equal to
the Distribution Fee, less any interest earned on the Monthly
Distribution Account.
8.1.3 Notwithstanding Section 8.1.1, amounts distributed in
connection with the liquidation of the Partnership or a Partner's interest
(within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)) shall be
distributed in accordance with the Partner's positive Capital Account as
adjusted for all operations and transactions preceding such distribution.
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8.1.4 Notwithstanding Section 8.1.1, 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.
8.2 Allocation of Distributions to Limited Partners. Distributions to
the Limited Partners with respect to any period other than during the Offering
Period shall be allocated pro rata among the Limited Partners who are Limited
Partners on the Record Date for purposes of such distributions. Distributions to
the Limited Partners during the Offering Period shall be allocated among the
Limited Partners in proportion to their Average Daily Units for that period.
8.3 Amounts Withheld. Any amounts withheld pursuant to Section 9.1.16
shall be treated as amounts distributed to the Partners for all purposes under
this Agreement. Amounts treated as distributed to a Partner pursuant to this
Section 8.3 shall reduce the amounts otherwise distributed to such Partner
pursuant to this Agreement.
8.4 Return of Offering Proceeds. If all of the net proceeds of the
Offering are not invested by the Partnership in Equipment or committed to such
investment or otherwise utilized for proper Partnership purposes prior to the
expiration of 12 months from the Closing Date, the net proceeds not so invested,
committed, or set aside as working capital reserves will thereupon be promptly
returned, with a proportionate share of interest at the rate earned by the
Partnership on the investment of such proceeds, to the Limited Partners based
upon their respective numbers of Units and time of purchase, without reduction
for the General Partner's Organizational Fee or for any Equipment Acquisition
Fee which would have been payable to the General Partner if such proceeds had
been invested. For such purpose, funds will be deemed to be committed to
investment and will not be returned to the Limited Partners to the extent
written agreements in principle, commitment letters, letters of intent or
understanding, option agreements, or any similar contracts or understandings
exist, whether or not any such investment is ultimately consummated. Funds will
also be deemed to be committed to the extent: (i) any funds may have been
reserved to make contingent payments in connection with any Equipment already
acquired, whether or not any such payments are ultimately made; (ii) as a
condition to obtaining financing the Partnership is required to maintain funds s
a compensating balance; or (iii) the General Partner decides that an addition to
the working capital reserve is necessary in connection with any Equipment. In
the event any such uninvested funds are distributed to the Limited Partners,
such distribution will be treated as a return of capital.
ARTICLE 9
Rights, Powers, and Duties of General Partner
9.1 Rights and Powers. Except as otherwise specifically provided in
this Agreement, the General Partner shall exercise complete and exclusive
control over the management of the Partnership business and affairs. In addition
to any other rights and powers which the General Partner may possess under this
Agreement and the Act, the General Partner shall, except to the extent otherwise
provided in this Agreement, have all rights and powers required or appropriate
to its management of the Partnership and the Partnership's business, which byway
of illustration but not by way of limitation, include the following rights and
powers which may be exercised on behalf of, and, subject to Article 5, at the
expense of, the Partnership:
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9.1.1 to acquire, purchase, hold, sell, exchange or otherwise
transfer Equipment; to lease Equipment to third parties; to make loans to
manufacturers of Equipment with respect to and secured by Equipment leased
directly by the manufacturer to third parties; and to enter into agreements with
others with respect to such activities, which agreements may contain such
provisions as the General Partner in its sole and absolute discretion shall
approve;
9.1.2 to invest Partnership funds in commercial paper,
government securities, certificates of deposit, time deposits, bankers
acceptances, money market certificates or accounts, or other short-term
investments (such as money market funds) which the General Partner deems
appropriate;
9.1.3 subject to Section 17.2.3, to purchase liability,
casualty and other insurance which the General Partner deems appropriate for the
protection of the Equipment or for any purpose convenient or beneficial to the
Partnership, provided that the General Partner will not provide insurance
services to the Partnership;
9.1.4 to delegate all or any of its duties under this
Agreement, and in furtherance of any such delegation to appoint, employ or
contract with any persons, which persons may, under the supervision of the
General Partner, administer or assist in the day-to-day operations of the
Partnership; act as consultants, accountants, correspondents, attorneys,
brokers, escrow agents or in any other capacity deemed by the General Partner
necessary or desirable; and perform such other acts or services for the
Partnership as the General Partner in its sole and absolute discretion may
approve;
9.1.5 to designate and appoint one or more agents for the
Partnership who shall have authority as may be conferred on them by the General
Partner, and who may perform any of the duties, and exercise any of the powers
and authority, conferred on the General Partner under this Agreement, including,
but not limited to, designation of one or more agents as authorized signatories
on any bank accounts maintained by the Partnership;
9.1.6 to act in its own name as nominee for the Partnership
and to place title to Partnership assets in its own name or the names of others
as nominees or trustees for any purpose convenient or beneficial to the
Partnership;
9.1.7 to collect all amounts due to the Partnership, and
otherwise to enforce all rights of the Partnership including rights under any
lease of its assets, and to retain counsel and institute suits or proceedings,
in the name and on behalf of the Partnership;
9.1.8 to establish and maintain one or more bank accounts for
the Partnership in such bank or banks as the General Partner may, from time to
time, designate as depositaries of the funds of the Partnership;
9.1.9 to make or revoke any elections permitted under the
Code;
9.1.10 to determine the appropriate accounting method or
methods to be used by the Partnership;
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9.1.11 to offer and sell Units of the Partnership to the
public directly or through Commonwealth Capital Securities Corp. or any licensed
Affiliate of the General Partner; to employ personnel, agents and dealers for
such purpose; and, in connection therewith, to cause the Partnership to
indemnify Commonwealth Capital Securities Corp. to the extent permitted under
federal and state securities laws;
9.1.12 to admit the purchasers of the Units as Limited
Partners of the Partnership, to amend this Agreement and the Certificate to
reflect the addition or substitution of Limited Partners and the reduction of
Capital Accounts on the return of capital to Partners;
9.1.13 to borrow money for Partnership purposes (other than
for the acquisition of Equipment) and as security therefor to mortgage, pledge,
hypothecate or encumber or otherwise place liens upon all or part of the
Equipment and other property of the Partnership, to pledge or encumber the
assets of the Partnership to secure any remarketing rights of vendors or
suppliers of Equipment;
9.1.14 to prepay in whole or in part, refinance, increase,
modify, consolidate, extend or increase any lien or encumbrance affecting any
Equipment;
9.1.15 to require in all Partnership obligations that the
General Partner shall not have any personal liability thereon but that the
person or entity contracting with the Partnership is to look solely to the
Partnership and its assets for satisfaction; provided, however, that the
inclusion of such provisions shall not materially affect the cost of the service
or material being supplied;
9.1.16 to withhold income taxes as required or permitted by
any federal, state or local taxing authority, and otherwise to comply with and
take actions necessary or appropriate as a result of provisions of the Code or
any state or other tax law requiring or permitting withholding;
9.1.17 to deal with, or otherwise engage in business with, any
person who has dealt with or engaged in business with or may in the future deal
with or engage in business with the General Partner or its Affiliates; provided
that no such dealing or engaging in business may involve any arrangement which
would circumvent any of the provisions of this Agreement, including the
restrictions against dealing with the General Partner or its Affiliates;
9.1.18 to commence the dissolution and liquidation of the
Partnership in its eleventh year of existence in order to terminate the
Partnership by December 31, 2013; and
9.1.19 to prohibit Qualified Plans from acquiring,
individually or in the aggregate, more than 25% of the Units.
9.2 Reliance on Certificate of General Partner. Any person dealing with
the Partnership or the General Partner may rely on a certificate signed by the
General Partner as authority with respect to (a) the identity of any General
Partner or Limited Partner; (b) the existence or nonexistence of any fact or
facts which constitute a condition precedent to acts by the General Partner or
in any other manner are germane to the affairs of the Partnership; (c) the
persons who are authorized to execute and deliver any instrument or document of
the Partnership; or (d) any act or failure to act by the Partnership or as to
any other matter involving the Partnership or any Partner.
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9.3 Independent Activities. The General Partner and its Affiliates and
each Limited Partner may, notwithstanding the existence of this Agreement,
engage in whatever activities they choose, whether competitive with the
Partnership or otherwise, without having or incurring any obligation to offer
any interest in such activities to the Partnership or any party hereto. The
General Partner and its Affiliates shall not be obligated to present to the
Partnership any particular investment opportunity which comes to their attention
if the General Partner, in good faith, determines that such opportunity is not
an appropriate investment for the Partnership at that time or if the opportunity
is not presented to the Partnership because it has been presented to other
partnerships sponsored by the General Partner that may have priority based on
criteria established by the General Partner. Subject to the foregoing, neither
this Agreement nor any activity undertaken pursuant hereto shall prevent the
General Partner or its Affiliates from engaging in any activity, or require the
General Partner or its Affiliates to permit the Partnership or any Limited
Partner to participate therein. The General Partner may organize and participate
as a general partner in partnerships which may engage in activities similar to
the activity engaged in by this Partnership and which may use the name
"Commonwealth Income & Growth Fund" or variations of such name. The General
Partner retains the rights to such name and its variations. The General Partner
will give priority to the Limited Partners when the interests of the Limited
Partners conflict with the interests of the General Partner.
If one or more programs affiliated with the General Partner 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. In addition, in order to promote diversification of Equipment and
lessees, when two or more programs are in a position to acquire the same
Equipment, the General Partner may acquire Equipment in joint ventures with
affiliated investor programs. If one or more investor programs affiliated with
the General Partner and the Partnership are in a position to enter into leases
with the same lessee or to 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.
9.4 Duties.
9.4.1 The General Partner shall manage and control the
Partnership, its business and affairs. The General Partner shall devote such
time to the business of the Partnership as in its discretion it determines is
necessary for the efficient carrying on of the business.
9.4.2 The General Partner shall be the tax matters partner of
the Partnership as defined under the Code, and as such tax matters partner,
shall be subject to Section 17.2 of this Agreement.
9.4.3 The General Partner shall have fiduciary responsibility
for the safekeeping and use of all funds and assets of the Partnership, whether
or not in the General Partner's immediate possession or control. The General
Partner shall not employ, or permit another to employ, such funds or assets in
any manner except for the exclusive benefit of the Partnership. The Limited
Partners may not contract away the fiduciary duty owed to them by the General
Partner under the common law.
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9.4.4 The General Partner shall commit toward Investment in
Equipment at least that portion of the Limited Partners' Capital Contributions
for their Units required by Section 6.6 hereof. If the total amount of Front-End
Fees must be reduced in order to enable the Partnership to commit such Capital
Contributions to Investment in Equipment, the General Partner shall, and shall
cause its Affiliates or other persons to, reimburse the Partnership for such
amount of Front-End Fees and any Acquisition Fees, Debt Placement Fees and
Acquisition Expenses paid in connection with the reinvestment of the
Partnership's funds received by them as is necessary to enable the Partnership
to meet such requirement within 30 days after the need for reimbursement arises.
9.4.5 The General Partner shall maintain reserves in such
amount and for such times and purposes as it deems appropriate.
9.5 Restrictions on Authority. Notwithstanding any other provisions of
this Agreement:
9.5.1 The General Partner shall not have the authority to do
any act in contravention of this Agreement or the Act; possess Partnership
property, or assign rights in specific Partnership property, for other than a
Partnership purpose; admit a person as a General Partner or a Limited Partner,
except as provided in this Agreement; knowingly perform any act that would
subject any Limited Partner to liability as a general partner in any
jurisdiction; alter the purpose or character of the Partnership as set forth in
Section 2.5; or confess a judgment against the Partnership.
9.5.2 Except pursuant to Section 10.2, the General Partner
shall not sell all or substantially all of the assets of the Partnership in a
single sale, except in the winding up and liquidation of the business of the
Partnership or in a final liquidating sale of Equipment remaining after the
disposition in the ordinary course of business of substantially all of the
Partnership's other Equipment.
9.5.3 The Partnership shall not purchase or lease Equipment
from the Sponsor or its Affiliates, including Equipment in which the General
Partner or its Affiliates have an interest, except that the General Partner
shall be permitted to make acquisitions of Equipment in its own name (and assume
loans in connection therewith) and hold title thereto on an interim basis (not
in excess of 60 days) for the purpose of facilitating the acquisition of such
Equipment or the borrowing of money or obtaining of financing, or any other
purpose related to the business of the Partnership provided that (a) such
acquisitions are in the best interest of the Partnership; (b) such Equipment is
purchased by the Partnership for a price no greater than the sum of the actual
cost of such Equipment, accountable Acquisition Expenses payable to third
parties, interest on the Purchase Price (at a rate no greater than that charged
by unrelated lenders on comparable loans) from the date of purchase to the date
of transfer to the Partnership and compensation permitted in accordance with
Article 6 of this Agreement; (c) there is no difference in interest terms of the
loans secured by the Equipment at the time acquired by the General Partner and
the time acquired by the Partnership; and (d) no benefit arises out of such
acquisitions to the General Partner except for the compensation permitted under
this Agreement. During interim purchases by the General Partner, all profits and
losses shall accrue to the Partnership.
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9.5.4 The Partnership shall not 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 value of the assets of the
Partnership on the date of the investment.
9.5.5 The Partnership shall not sell or lease Equipment to the
General Partner or its Affiliates.
9.5.6 The Partnership shall not make loans to any Person,
including without limitation, the General Partner or its Affiliates (except to
the extent a Conditional Sales Contract constitutes a loan.
9.5.7 The Partnership shall not acquire Equipment from an
Equipment Program in which the General Partner or its Affiliates have an
interest.
9.5.8 The Partnership shall not acquire Equipment in exchange
for Units.
9.5.9 The Partnership shall not give the General Partner or
its Affiliates an exclusive right to sell or exclusive employment to sell
Equipment for the Partnership.
9.5.10 The Partnership shall not pay, directly or indirectly,
a commission or fee (except as specifically described under this Agreement) to
the General Partner or its Affiliates in connection with the reinvestment or
distribution of Cash Available for Distribution or of the proceeds of the
resale, exchange, or refinancing of the Partnership's Equipment.
9.5.11 No rebates or give-ups may be received by the General
Partner or its Affiliates, nor may the General Partner or its Affiliates
participate in any reciprocal business arrangements which would circumvent any
of the provisions of this Agreement, including the restrictions against dealing
with the General Partner or its Affiliates.
9.5.12 The General Partner and its Affiliates shall not
directly or indirectly pay or award any commissions or other compensation to any
person engaged by a potential Limited Partner for investment advice as an
inducement to such adviser to advise the purchase of Units. This Section 9.5.12,
however, shall not prohibit the payment of Underwriting Commissions to the
Dealer Manager or other properly licensed person for selling Units.
9.5.13 The funds of the Partnership shall not be commingled
with the funds of any other Person. This prohibition shall not apply to
investments meeting the requirements of Section 9.5.14.
9.5.14 Except to the extent that a permitted investment in the
entities referred to in this Section 9.5.14 constitutes "securities" within the
meaning of the Securities Act of 1933, as amended, the Partnership will not
invest in securities, including 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 own specific equipment; provided that (i) the Partnership has or
acquires a controlling interest in such ventures or partnerships; (ii) the
non-controlling interest is owned by a non-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 interests 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 appropriate
diversification for the Programs or for the purpose of relieving the General
Partner or its Affiliates from a commitment entered into pursuant to Section
9.5.3.
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9.5.15 Neither the General Partner nor its Affiliates shall
lend money to the Partnership if interest rates and other financing charges and
fees in connection with such loan are in excess of the lesser of their cost of
funds or the amount which would be charged by unrelated lending institutions on
comparable loans for the same purpose or if such loan contains any prepayment
charge or prepayment penalty. Neither the General Partner nor its Affiliates
shall provide financing for the Partnership unless such financing has a term of
not more than 12 months or carries an interest rate in excess of three percent
over the prime rate of PNC Bank, N.A.
9.5.16 Other than as specifically described in Section 5.2 and
Article 6 of this Agreement and the section "Compensation of the General Partner
in the Prospectus at the time it was declared effective by the Securities and
Exchange Commission, the General Partner shall not enter into any agreement,
contract or arrangement on behalf of the Partnership providing for compensation
to the General Partner or its Affiliates for performing services for, or selling
or leasing goods or materials to, the Partnership.
9.5.17 All services or goods for which the General Partner or
its Affiliates are to receive compensation (other than pursuant to this
Agreement) shall be embodied in a written contract which precisely describes the
subject matter thereof and all compensation to be paid, which contract may only
be modified by a vote of a Majority in Interest of the Limited Partners and
which contract shall contain a clause allowing termination by either party
without penalty on 60 days' prior written notice.
9.5.18 In connection with the borrowing of money, recourse for
the payment of which is limited solely to property of the Partnership and which
shall be amortized fully over the initial lease term, no lender shall be granted
or acquire, at any time as a result of making such a loan, any direct or
indirect interest in the profits, capital or property of the Partnership other
than as a secured creditor.
9.5.19 Partnership funds shall not be invested in any
financial institution or entity affiliated with the General Partner and shall
not be used in a compensating balance arrangement for the benefit of any entity
other than the Partnership.
9.5.20 Without the consent of the General Partner and a
Majority in Interest of the Limited Partners, the Partnership shall not convert
to another form of business entity if the conversion results in a significant
adverse change in (a) the voting rights of the Limited Partners, (b) the
termination date of the Partnership, (c) the compensation payable to the General
Partner or its Affiliates or (d) the ability to meet the Partnership's
objectives without materially impairing the rights of Limited Partners.
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9.5.21 The Partnership shall not make distributions in kind
except upon dissolution and liquidation, and then only to a liquidating trust
which has been established for the purpose of the liquidation of the assets of
the Partnership and the distribution of cash in accordance with this Agreement.
9.5.22 The Partnership shall not incur debt in excess of 30%
of the expected aggregate cost of the Equipment to be owned or subject to a
Conditional Sales Contract except that the Partnership may not incur
indebtedness to acquire Equipment until the net proceeds of the Offering have
been invested, or committed to investment, in Equipment.
9.5.23 The Partnership shall not purchase Equipment unless
such Equipment is subject to a lease or a Conditional Sales Contract or for
which a lease or a Conditional Sales Contract will be entered into when the
Partnership acquires the Equipment.
9.5.24 The Partnership's leases and other contracts will each
contain a statement that the Partnership has been organized as a limited
partnership under the Act.
9.5.25 Without the consent of the General Partner and a
Majority in Interest of the Limited Partners, the Partnership will not change
its principal purpose of acquiring, leasing and selling Equipment.
9.5.26 The Partnership shall not issue equity securities
senior to the Units.
9.6 General Partner's Net Worth. The General Partner agrees, represents
and warrants that it will at all times have a net worth in an amount (i)
sufficient in the opinion of counsel to the Partnership to enable the
Partnership either to avoid having the corporate characteristic of limited
liability for federal income tax purposes or to avoid being treated as an
association taxable as a corporation for federal income tax purposes, and (ii)
at least five percent of the gross amount of all direct participation programs
sold by the General Partner within the prior 12 months plus five percent of the
amount of the Capital Contribution to the Partnership, up to $1,000,000.
ARTICLE 10
Rights of Limited Partners
10.1 No Limited Partner in Control. No Limited Partner, as such, shall
participate in the management or control of the Partnership's business, nor
shall any Limited Partner, as such, have the power to act for or bind the
General Partner or the Partnership.
10.2 Voting Rights. The Limited Partners by a vote of a Majority in
Interest of the Limited Partners may, without the necessity for concurrence by
the General Partner (a) approve or disapprove a sale of all or substantially all
of the assets of the Partnership, except as otherwise permitted or required
under Section 14.1 or 14.4 of this Agreement; (b) dissolve the Partnership; (c)
subject to Section 10.5, amend this Agreement except that amendment of Articles
6, 7 and 8 shall require the affirmative vote of Limited Partners owning at
least 66-2/3% of the Units owned by all Limited Partners; (d) remove or approve
the withdrawal of the General Partner; or (e) prior to the effective date of a
removal, withdrawal or dissolution of the General Partner, elect an additional,
replacement or successor General Partner to be admitted prior to such effective
date. With respect to any Units owned by the General Partner or its Affiliates,
the General Partner and its Affiliates may not vote or consent on matters
submitted to the Limited Partners regarding removal of the General Partner or
any transaction between the Partnership and the General Partner or its
Affiliates. In determining the required percentage in interest of Units
necessary to approve a matter on which the General Partner and its Affiliates
may not vote or consent, any Units owned by the General Partner or its
Affiliates shall not be included.
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10.3 Conversions and Roll-Ups.
10.3.1 Consent Required. Without the approval of the General
Partner and the holders of at least 66-2/3% of all outstanding Units, the
Partnership shall not enter into any Roll-Up. Limited Partners who do not
consent to an approved Roll-Up shall be given the option of (i) accepting the
securities of the Roll- Up Entity offered in the proposed Roll-Up; or (ii)
receiving cash in an amount equal to the non-consenting Limited Partner's pro
rata share of the appraised value of the net assets of the Partnership. The
Partnership shall not reimburse the sponsor of a proposed Roll-Up for the costs
of an unsuccessful proxy contest in the event that the Roll-Up is not approved
by the Limited Partners as required by the first sentence of this Section
10.3.1.
10.3.2 Appraisal. The "appraised value of the net assets of
the Partnership" as used in Section 10.3.1 shall be established by means of an
appraisal of the net assets of the Partnership by a competent Independent
Expert, engaged for the benefit of the Partnership and the Limited Partners,
with no current material or prior business or personal relationship with the
General Partner or its Affiliates. Such Independent Expert must be engaged to a
substantial extent in the business of rendering opinions regarding the value of
assets of the type held by the Partnership, and must be qualified to perform
such work. The appraisal shall be based on an evaluation of all relevant
information and shall indicate the value of the Partnership's assets, assuming
an orderly liquidation of such assets over a twelve-month period, as of a date
immediately prior to the date of the proposed Roll-Up. A summary of the
independent appraisal, including all material assumptions underlying the
appraisal, shall be included in a report to the Limited Partners in connection
with a proposed Roll-Up and shall be appraised on a consistent basis. If the
appraisal will be included in a prospectus used to offer the securities of a
Roll-Up Entity, the appraisal shall be filed with the Securities and Exchange
Commission and the states as an exhibit to the registration statement for the
offering and accordingly, in that event, the issuer would be subject to
liability for violations of Section 11 of the Securities Act of 1933 and
comparable provisions under state laws for any material misrepresentations or
material omissions in the appraisal.
10.3.3 Prohibited Roll-Ups. The Partnership shall not
participate in any proposed Roll-Up: (a) which would result in the Limited
Partner's having voting rights and rights to hold meetings which are less than
those rights provided for under Section 10.2; (b) which includes provisions
which would operate to materially impede or frustrate the accumulation of shares
by any purchaser of the securities of the Roll-Up Entity (except to the minimum
extent necessary to preserve the tax status of the Roll-Up Entity); (c) which
would limit the ability of a Limited Partner to exercise the voting rights of
its securities of the Roll-Up Entity on the basis of the number of Units held by
that Limited Partner, and (d) in which the Limited Partners' rights of access to
the records of the Roll-Up Entity will be less than those rights provided for
under Section 15.1 hereof.
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10.3.4 With the consent of a Majority in Interest of the
Limited Partners, the Partnership is permitted to convert into another form of
business entity which does not result in a significant adverse change in (a) the
voting rights of the Limited Partners, (b) the termination date of the
Partnership (currently, December 31, 2013, unless terminated earlier in
accordance with this Agreement), (c) the compensation payable to the General
Partner or its Affiliates (provided however that any increase in the
compensation payable to the General Partner and its Affiliates requires the
approval of 66-2/3% of all outstanding Units), or (d) the ability to meet the
Partnership's investment objectives without materially impairing the rights of
the Limited Partners. The General Partner will make the determination as to
whether or not any such conversion will result in a significant adverse change
in any of the provisions listed in Section 10.3.1 based on various factors
relevant at the time of the proposed conversion, including an analysis of the
historic and projected operations of the Partnership; the tax consequences (from
the standpoint of the Limited Partners) of the conversion and of an investment
in a limited partnership as compared to an investment in the type of business
entity into which the Partnership would be converted; and the performance of the
equipment industry in general, and of the computer peripherals segment of the
industry in particular. In general, the General Partner would consider any
material limitation on the voting rights of the Limited Partners or any
substantial increase in the compensation payable to the General Partner or its
Affiliates to be a significant adverse change in the listed provisions.
10.4 Meetings.
10.4.1 Meetings of the Limited Partners to vote upon any
matters as to which the Limited Partners are authorized to take action under
this Agreement, as the same may be amended from time to time, may be called at
any time by the General Partner or by one or more Limited Partners holding more
than 10% of the then outstanding Units, by delivering written notice, either in
person or by registered mail stating the purpose of the meeting, to the General
Partner. Promptly, but in any event within 10 days following receipt of such
request, the General Partner shall cause a written notice, either in person or
by certified mail, to be delivered to the Limited Partners entitled to vote at
such meeting. The meeting will be held at the time and place specified in the
request, or if none, at a time and place convenient to the Limited Partners,
such meeting to be held not less than 15 days nor more than 60 days after the
mailing of the notice of the meeting. Included with the notice of a meeting
shall be a detailed statement of the action proposed, including a verbatim
statement of the wording of any resolution proposed for adoption by the Limited
Partners and of any proposed amendment to this Agreement. All expenses of the
meeting and notification shall be borne by the Partnership.
10.4.2 A Limited Partner shall be entitled to vote (a) at a
meeting, in person or by a proxy in writing or by a signed writing directing the
manner in which he desires that his vote be cast, which writing must be received
by the General Partner prior to such meeting, or (b) without a meeting, by a
signed writing directing the manner in which he desires that his vote be cast,
which writing must be received by the General Partner prior to the date on which
the votes of Limited Partners are to be counted. Only the votes of persons who
were Limited Partners on the record date, whether at a meeting or otherwise,
shall be counted.
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10.5 Certain Amendments.
10.5.1 In addition to any amendments otherwise authorized
herein, this Agreement may be amended from time to time by the General Partner,
without the consent of any of the Limited Partners (a) to add to the
representations, duties or obligations of the General Partner or surrender any
right or power granted to the General Partner herein, for the benefit of the
Limited Partners; (b) to cure any ambiguity or inconsistency; (c) to delete or
add any provisions required to be so deleted or added by, or to meet the
requirements of, applicable law (including the Code, ERISA and the regulations
thereunder); and (d) to delete or add any provisions required to be so deleted
or added by, or to meet the requirements of, applicable law (including the Code,
ERISA and the regulations thereunder); and (e) to delete or add any provisions
required to be so deleted or added by the staff of the Securities and Exchange
Commission or by state securities commissioner or similar official, which
addition or deletion is deemed by such person, commissioner or official to be
for the benefit or protection of the Limited Partners.
10.5.2 Notwithstanding anything to the contrary contained in
this Agreement, this Agreement may not be amended without the consent of each
Limited Partner to be affected adversely by an amendment that (a) converts a
Limited Partner into a General Partner; (b) modifies the limited liability of a
Limited Partner; (c) alters the interest of the General Partner or Limited
Partners in Net Profits, Net Losses, or distributions from the Partnership; or
(d) adversely affects the status of the Partnership as a partnership for federal
income tax purposes.
10.5.3 Each Limited Partner shall be notified of any amendment
to this Agreement within 30 days of the effective date of the amendment by means
of first class mail, postage prepaid, to the address of the Limited Partner on
the books of the Partnership.
ARTICLE 11
Transfer of Units
11.1 Assignment.
11.1.1 No Limited Partner may transfer or assign his Units or
any interest therein except as permitted in this Article 11. Any act in
violation of this Article 11 shall be null and void and shall not be recognized
by the Partnership.
11.1.2 With the prior written consent of the General Partner,
a Limited Partner may transfer or assign part or all of his Units if, and only
if: (a) the assignor and the assignee execute, acknowledge and deliver to the
Partnership such instruments of transfer and assignment and other documents as
may be required by the General Partner; (b) either (i) at least 125 Units are
assigned and at least 125 Units are retained by the assignor or (ii) the Units
being assigned are all the Units of the assignor (except that the General
Partner, in its discretion, may waive this requirement for transfers by gift,
inheritance or family dissolution or transfers to Affiliates of the assignor);
(c) the assignee agrees in writing not to assign such Units other than in
accordance with this Article 11; (d) such assignment complies with any
applicable state and federal securities laws; (e) assignor obtains an opinion of
counsel that such assignment will not result in the termination of the
Partnership for federal income tax purposes and will not result in the
Partnership being classified as a publicly traded partnership or an association
taxable as a corporation for federal income tax purposes.
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11.1.3 An assignee, if he does not become a Substituted
Limited Partner pursuant to Section 11.2, shall have no rights of a Limited
Partner as a result of the assignment, but shall only be entitled to receive the
distributions under Article 8 and Sections 3.3.2 and 14.4 to which the assignor
would otherwise be entitled.
11.2 Substituted Limited Partners. No assignee of Units shall have the
right to become a Substituted Limited Partner in place of his assignor unless
all of the following conditions are first satisfied: (a) the written instrument
of assignment (or another writing) sets forth the intention of the assignor that
the assignee succeed to the assignor's interest as a Substituted Limited Partner
in his place; (b) the assignor and assignee execute, acknowledge and deliver
such instruments as the General Partner may deem necessary or desirable to
effect such substitution, including the written acceptance and adoption by the
assignee of this Agreement; and (c) the written consent of the General Partner
to such substitution is obtained, the granting or denial of which shall not be
unreasonably withheld. The Partnership's records shall be amended to reflect the
substitution of Limited Partners at least once in each calendar quarter.
11.3 Transfer Fee. On any assignment of Units, any substitution of an
assignee as a Limited Partner or any redemption of Units, the Partnership may
charge a transfer fee to cover reasonable out-of-pocket expenses in connection
with the substitution.
11.4 General. No transfer or assignment or redemption of any Units
shall be made if it would result in the Partnership being treated as an
association taxable as a corporation for tax purposes or as a publicly traded
partnership. In addition, no transfer of any Unit will be recognized or
effective for any purpose to the extent that it is determined by the General
Partner to be effectuated through an established securities market or a
secondary market (or the substantial equivalent thereof) within the meaning of
Section 7704 of the Code and the applicable Treasury Regulations thereunder so
as to adversely affect the tax status of the Partnership as a partnership rather
than as an association taxable as a corporation. The General Partner, in its
sole discretion, may impose any restrictions on transfers or assignments of
Units as it deems appropriate to give effect to the preceding two sentences
including prohibitions of any transfers or assignments of Units which fall
outside the safe harbors described in Section 1.7704-1 of the Treasury
Regulations. A Limited Partner must obtain the consent of the General Partner to
any transfer or assignment, which consent shall not be unreasonably withheld.
Any prohibition on a transfer or assignment shall be supported by an opinion of
counsel that it is necessary to give effect to the first two sentences of this
paragraph. In connection therewith, the General Partner shall be permitted to
amend this Agreement without the consent of the Limited Partners. Assignments
and substitutions shall be effective on the first day of the month following the
month in which there has been full compliance with the requirements of this
Article 11. For the purposes of this Article 11, a pledge of Units shall be
deemed to be an assignment of such Units.
ARTICLE 12
Redemption
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 then outstanding Units. On a semi-annual
basis, the General Partner will establish an amount for redemption, generally
not to exceed two percent of the outstanding Units per year, subject to the
General Partner's sole discretion and its 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. At the sole discretion of the General Partner, the Partnership may
redeem Units in excess of the two percent limitation. The redemption price for
Units will be 105% of the selling Limited Partner's Adjusted Capital
Contributions attributable to the Units for sale, net of the offering fees and
expenses attributable to the units for sale. Such offering fees ad expenses will
be amortized over ten years after the termination of the offering. One quarter
of these expenses will be amortized in each 30-month period following the
termination of the offering. 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 Limited
Partners will be treated on a first come, first served basis. 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 making of a request for
redemption by a Limited Partner is completely voluntary.
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ARTICLE 13
General Partner's Interest
13.1 Voluntary Withdrawal or Assignment. The General Partner shall not
voluntarily withdraw, retire or resign as general partner of the Partnership, or
assign, transfer or otherwise dispose of all or any part of its general
partnership interest unless:
13.1.1 the Limited Partners consent by a Majority in
Interest;
13.1.2 in the case of withdrawal, retirement or resignation,
it gives at least 60 days' notice thereof and if there would be no remaining
General Partner, nominates a successor General Partner satisfactory to a
Majority in Interest of the Limited Partners, who becomes a General Partner
prior to such withdrawal, retirement or resignation; and
13.1.3 the Partnership receives an opinion of its counsel to
the effect that such withdrawal, retirement, resignation, assignment, transfer
or other disposition would not subject the Partnership to federal income
taxation as an association taxable as a corporation and would not cause a
termination of the Partnership for federal income tax purposes.
13.2 Removal. Subject to Section 14.3, after the Final Closing the
General Partner may be removed, and shall cease to be General Partner of the
Partnership, on the vote of the Majority in Interest of the Limited Partners.
ARTICLE 14
Dissolution, Continuation and Termination
14.1 Dissolution. The Partnership shall be dissolved on the occurrence
of any of the following events:
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14.1.1 The vote or written consent of a Majority in Interest
of the Limited Partners determines that the Partnership should be dissolved;
14.1.2 The dissolution of the Partnership by judicial decree;
14.1.3 The expiration of 60 days following a Terminating
Event, unless a Majority in Interest of the Limited Partners, elect to continue
the Partnership in accordance with Section 14.2.2 and elect a successor general
partner; or
14.1.4 The determination by the General Partner that it is
necessary to commence the liquidation of the Equipment in order for the
liquidation of all the Equipment to be completed in an orderly and business-like
business-like fashion prior to December 31, 2009.
14.2 Continuation.
14.2.1 On the occurrence of the removal, withdrawal,
retirement, resignation, expulsion, involuntary dissolution, or Bankruptcy (or,
in the case of an individual, the death, insanity or appointment of a
conservator for the person or any of his assets) of one or more, but less than
all, of the General Partners, then the remaining General Partners shall have the
right to, and shall, continue the business of the Partnership.
14.2.2 On the occurrence of a Terminating Event, the last
remaining General Partner shall promptly send written notice of such event to
all the Limited Partners, who (subject to Sections 14.2.3 and 14.3) (a) may
elect, by a vote of the Majority in Interest within 60 days thereafter, to
reconstitute the Partnership and continue its business in accordance with this
Agreement by selecting one or more new General Partners who agree in writing to
be bound by this Agreement, and all Limited Partners, as such, shall be bound by
such action, or (b) may continue the business of the Partnership pursuant to
Section 8571 of the Act.
14.2.3 The rights to continue the business of the Partnership
provided in this Section 14.2 shall be subject to receipt by the Partnership of
an opinion of counsel to the Partnership that such continuation would not result
in the Partnership's being classified for federal income tax purposes as an
association taxable as a corporation and would not result in the termination of
the Partnership for federal income tax purposes.
14.3 Purchase of Interest of General Partner. On any continuation of
the business of the Partnership under Section 14.2.1 or Section 14.2.2, or any
removal of the General Partner under Section 13.2, the following shall apply:
14.3.1 The General Partner who withdraws (voluntary
termination) or is removed (involuntary termination) shall be paid the then
present fair market value of its interest, determined in the manner described in
this Section 14.3. If the termination is voluntary pursuant to Section 13.1, the
terminated General Partner shall receive a non-interest bearing unsecured
promissory note payable, if at all, from distributions the terminated General
Partner would have received under this Agreement if it had not voluntarily
terminated. If the termination is involuntary pursuant to Section 13.2, such
amount shall be paid in no less than five equal annual installments, the first
of which shall be paid one year from the date of such termination. The unpaid
portion of such amount shall bear simple interest at the rate of 10% per annum
from the date of such termination, such interest to accrue and be paid annually
in addition to each such annual installment. In any event, the method of payment
must protect the solvency and liquidity of the Partnership.
32
14.3.2 The fair market value of a terminated General Partner's
Partnership interest shall be determined by agreement between the terminated
General Partner and the Partnership, which agreement shall require a vote of the
Majority in Interest of the Limited Partners. If the terminated General Partner
and the Partnership cannot agree on the fair market value of such partnership
interest within 45 days of the continuation, the fair market value thereof shall
be determined by arbitration in accordance with the then current rules of the
American Arbitration Association. The expense of arbitration shall be borne
equally by the terminated General Partner and the Partnership.
14.4 Liquidation.
14.4.1 On any dissolution of the Partnership, absent any
continuation under Section 14.2, the General Partner, or a court-appointed
liquidator if there is no General Partner, shall take full account of the
Partnership's assets and liabilities. The assets shall be liquidated as promptly
as is consistent with obtaining the fair market value thereof, and the proceeds
therefrom, to the extent sufficient therefor, shall be applied in the following
order: (a) to the payment of all debts and liabilities of the Partnership to
creditors; (b) to the establishment, for such period as the liquidator deems
reasonably necessary, of such reserves as the liquidator deems reasonably
necessary to provide for contingent and unforeseen liabilities or obligations of
the Partnership; and (c) to the Partners in accordance with Section 8.1.3.
14.4.2 The debts and liabilities of the Partnership shall not
include liabilities or obligations of the Partnership to Partners for
distributions or on account of their contributions or in respect to profits (or
other compensation by way of income) or capital.
14.4.3 Notwithstanding anything to the contrary that may be
expressed or implied in this Agreement, upon the dissolution or termination of
the Partnership, the General Partner, in all events by the end of the
Partnership's taxable year in which the General Partner's interest is liquidated
or, if later, within 90 days of the date of such liquidation, will contribute to
the Partnership an amount of cash equal to the lesser of (a) the deficit balance
of the General Partner's Capital Account or (b) the excess of 1.01% of the total
Capital Contributions of the Limited Partners over the capital previously
contributed by the General Partner and such cash shall be distributed to the
Limited Partners in the ratio of the then credit balances in their Capital
Accounts.
14.4.4 Any capital contribution by the General Partner
pursuant to Section 14.4.3 and any liquidating distribution pursuant to Section
14.4.1 shall be made no later than the later of (a) the end of the taxable year
during which such liquidation occurs or (b) 90 days after the date of such
liquidation.
33
ARTICLE 15
Accounting and Fiscal Matters
15.1 Partnership Records. The records of the Partnership shall be
maintained at the principal office of the Partnership. Every Limited Partner or
his duly authorized representative shall at any reasonable time have access to
the records of the Partnership and may inspect and copy any of them. An
alphabetical list of the names, addresses, and business telephone numbers of the
Limited Partners of the Partnership along with the number of Units held by each
of them (the "Limited Partner List") shall be maintained as a part of the books
and records of the Partnership and shall be available for inspection by any
Limited Partner or its designated agent at the home office of the Partnership
upon the request of the Limited Partner. The Limited Partner List shall be
updated at least quarterly to reflect changes in the information contained
therein. A copy of the Limited Partner List shall be mailed to any Limited
Partner requesting the Limited Partner List within ten days of the request. The
copy of the Limited Partner List shall be printed in alphabetical order, on
white paper, and in a readily readable type size (in no event smaller than
10-point type). A reasonable charge for copy work may be charged by the
Partnership. The purposes for which a Limited Partner may request a copy of the
Limited Partner List include, without limitation, matters relating to Limited
Partners' voting rights under the Partnership Agreement, and the exercise of the
Limited Partners' rights under federal proxy laws. If the General Partner
neglects or refuses to exhibit, produce, or mail a copy of the Limited Partner
List as requested, the General Partner shall be liable to any Limited Partner
requesting the list for the costs, including attorneys' fees, incurred by that
Limited Partner for compelling the production of the Limited Partner List, and
for actual damages suffered by any Limited Partner by reason of such refusal or
neglect. It shall be a defense that the actual purpose and reason for the
requests for inspection or for a copy of the Limited Partner List is to secure
such list of Limited Partners or other information for the purpose of selling
such list or copies thereof, or of using the same for a commercial purpose other
than in the interest of the applicant as a Limited Partner relative to the
affairs of the Partnership. The General Partner may require the Limited Partner
requesting the Limited Partner List to represent that the list is not requested
for a commercial purpose unrelated to the Limited Partner's interest in the
Partnership. The remedies provided hereunder to the Limited Partners requesting
copies of the Limited Partner List are in addition to, and shall not in any way
limit, other remedies available to the Limited Partners under federal law, or
the laws of any state.
15.2 Accounting; Fiscal Year. The Partnership's books and records shall
be kept on the accrual method of accounting. The fiscal year of the Partnership
shall be the calendar year.
34
15.3 Reports.
15.3.1 The General Partner will deliver to each Limited
Partner, within 120 days after the end of each year, a balance sheet of the
Partnership dated as of December 31 of such year, together with statements of
income, Partners' equity, and the changes in financial position of the
Partnership for such year, prepared in accordance with generally accepted
accounting principles and accompanied by an auditor's report containing an
opinion of the Partnership's independent certified public accountants, as well
as an unaudited Cash Flow statement containing a breakdown of distributions to
Limited Partners for the year, separately identifying distributions from (a)
Cash Flow from operations during the year, (b) Cash Flow from operations during
a prior period which had been held as reserves, (c) proceeds from disposition of
Equipment and investments and (d) reserves from gross proceeds of the Offering
originally obtained from the Limited Partners. The General Partner will within
such period also furnish a report of the activities of the Partnership for the
year, which will include (a) for each item of Equipment acquired by the
Partnership which individually represents at least 10% of the total investment
in Equipment, a status report as part of the annual report, (which status report
shall indicate: (i) condition of Equipment, (ii) how Equipment is being utilized
as of the end of year (leased, operated, held for lease, repair, or sale), (iii)
remaining term of leases, (iv) projected use of Equipment for next year (renew
lease, lease, retire, or sell), and (v) such other information relevant to the
value or utilization of the equipment as the General Partner deems appropriate
including the method used or basis for valuation), (b) a report on distributions
to the Limited Partners during the year and their source, (c) a report on any
costs incurred by the General Partner and its Affiliates in performing
administrative services which are reimbursed by the Partnership during the year
which will be verified by independent public accountants in accordance with
generally accepted accounting principles (the cost of such verification to be so
reimbursable only to the extent that such reimbursement, when added to the
reimbursement for services, does not exceed the competitive rate for such
services, excluding the cost of the verification) and (d) for each item of
Equipment sold by the Partnership in such year, such Equipment's original
purchase price, sale price and aggregate lease revenues. The annual report will
contain a breakdown of the costs reimbursed to the sponsor. Within the scope of
the annual audit of the General Partner's financial statements, the independent
certified public accountants must issue a special report on the allocation of
such costs to the Partnership in accordance with this Partnership Agreement. The
special report shall at a minimum provide: (i) a review of the time records of
individual employees, the costs of whose services were reimbursed; and (ii) a
review of the specific nature of the work performed by each such employee. The
special report shall be in accordance with the American Institute of Certified
Public Accountants United States auditing standards relating to special reports.
The additional costs of such special report will be itemized by said accountants
on a program-by-program basis and may be reimbursed to the General Partner by
the Partnership in accordance with this subparagraph only to the extent that
such reimbursement, when added to the cost for administrative services rendered
does not exceed the competitive rate for such services as determined in this
subsection. Within 60 days after the end of each calendar quarter, the General
Partner will also furnish a report of all services rendered and all fees
received by the General Partner and its Affiliates from the Partnership, an
unaudited balance sheet, a statement of income, a statement of changes in
financial position and a report on the activities of the Partnership, as well as
an unaudited Cash Flow statement.
15.3.2 Until the net proceeds of the Offering are fully
invested, the General Partner will furnish to the Limited Partners, within 60
days after the end of each calendar quarter, a report of Equipment acquisitions
during the quarter, including the type and manufacturer of each item of
Equipment, the purchase price of the Equipment, and any other material terms of
purchase, a statement of the total amount of cash expended by the Partnership to
acquire the Equipment (including an itemization of all commissions, fees, and
expenses and the name of each payee), and a statement of the amount of net
proceeds of the Offering which remain unexpended or uncommitted at the end of
the quarter.
15.3.3 The General Partner will also furnish to all Limited
Partners within 75 days after the end of the year other information regarding
the Partnership to aid them in the preparation of their tax returns.
35
15.3.4 Within 120 days after the end of the first full fiscal
year for which Form 10-K under the Securities Exchange Act of 1934 is filed with
the Securities and Exchange Commission, the General Partner shall send the
financial statements required by Form 10-K to the Limited Partners.
15.3.5 Until the net proceeds from sales of the Units have
been fully invested or otherwise used for Partnership purposes or been set aside
as reserves or been returned to the Limited Partners under Section 4.2.2, the
reports under Sections 15.3.1 and 15.3.3 shall include a report of material
equipment acquisitions made during the periods covered by such reports which
have not previously been reported.
15.3.6 The information required to be provided in the various
reports pursuant to this Section 15.3 may be sent earlier than or separately
from any of the other information required pursuant to this Section 15.3, and
the information required to be contained in any of the reports pursuant to this
Section 15.3 may be contained in more than one report.
15.3.7 If the Securities and Exchange Commission or the North
American Securities Administrators Association, Inc. promulgates rules which
allow a reduction in reporting requirements, the Partnership may cease preparing
and filing certain of the aforementioned reports in compliance with such rules
if the General Partner determines such action to be in the best interests of the
Partnership.
15.3.8 On request of the official or agency administering the
securities law of a state in which the Partnership has sold Units, the General
Partner shall submit to such official or agency any report or statement required
to be distributed to Limited Partners pursuant to this Section 15.3.
15.4 Bank Accounts. The bank accounts of the Partnership shall be
maintained in such banking institutions as the General Partner may determine,
and withdrawals shall be made only in the regular course of Partnership business
on such signatures as the General Partner may determine.
15.5 Partnership Returns. For each tax year, the General Partner shall,
within the time prescribed by law (including extensions), file on behalf of the
Partnership the annual information return required for federal, state and local
income tax purposes.
ARTICLE 16
Power of Attorney
16.1 Power of Attorney.
16.1.1 Pursuant to the terms of this Agreement, each purchaser
of a Unit and each transferee of a Unit appoints the General Partner, acting
alone, as the purchaser's or transferee's attorney-in-fact to make, execute,
file, and/or record (a) documents relating to the Partnership and its business
operations requested by or appropriate under the laws of any appropriate
jurisdiction; (b) instruments with respect to any amendment of this Agreement or
the Certificate; (c) instruments or papers required to continue the business of
the Partnership pursuant to this Agreement; (d) instruments relating to the
admission of any Partner to the Partnership; (e) a master list in accordance
with Section 6112 of the Code (or any successor provision), relating to the
Partnership's tax shelter registration; and (f) all other instruments deemed
necessary or advisable to carry out the Partnership's business or the provisions
of this Agreement. The power of attorney is irrevocable, will survive the death,
incompetency, dissolution, disability, incapacity, bankruptcy, or termination of
the granting purchaser or transferee, and will extend to such person's heirs,
successors, and assigns. Each Limited Partner authorizes such attorney-in-fact
to take any further action which such attorney-in-fact shall consider necessary
or advisable in connection with any of the foregoing, hereby giving such
attorney-in-fact power and authority to do and perform each and every act or
thing whatsoever requisite or advisable to be done in and about the foregoing as
fully as such Limited Partner might or could if personally present, hereby
ratifying and confirming all that such attorney-in-fact shall lawfully do or
cause to be done by virtue hereof.
36
16.1.2 The power of attorney granted in this Section 16.1, (a)
is a special power of attorney coupled with an interest and is irrevocable; (b)
may be exercised by the attorney-in-fact by listing all of the Limited Partners
executing any document with the signature of the attorney-in-fact acting as
attorney-in-fact for all of them; and (c) shall survive the delivery of an
assignment by a Limited Partner of the whole or a portion of his interest in the
Partnership, except that where the assignee is admitted as a substituted Limited
Partner, the power of attorney shall survive the delivery of such assignment for
the sole purpose of enabling such attorney-in-fact to execute, acknowledge and
file any document necessary to effect such substitution.
ARTICLE 17
Liability and Indemnification of General Partner
17.1 Exclusion of Liability for Return of Capital Contributions.
Subject to the General Partner's compliance with the standards set forth in
Section 17.2.1, the General Partner shall not be personally liable for the
return of any of the Capital Contributions of the Limited Partners, it being
expressly understood that any such return shall be made solely from Partnership
assets.
17.2 Limitation on Liability of General Partner; Indemnification.
17.2.1 The General Partner and its Affiliates who were acting
on behalf of or performing services for the Partnership and acting within the
scope of the General Partner's authority as set forth in this Agreement (an
"Indemnitee") shall have no liability to the Partnership or to any Partner for
any loss suffered by the Partnership which arises out of any action or inaction
of any Indemnitee if the General Partner, in good faith, determined that such
course of conduct was reasonable and in the best interest of the Partnership and
such course of conduct did not constitute negligence or misconduct of the
General Partner or its Affiliates. The Indemnitees shall be indemnified by the
Partnership against any losses, judgments, liabilities and expenses sustained by
them in connection with the Partnership, provided that the same were not the
result of negligence or misconduct on the part of the Indemnitee, and provided
further that for such indemnification to be made, the General Partner must have
made a good faith determination that the course of conduct involved was
reasonable and in the best interest of the Partnership. Such indemnification or
agreement to hold harmless is recoverable only out of the assets of the
Partnership and not from the Limited Partners.
37
17.2.2 Notwithstanding anything to the contrary stated in
Section 17.2.1, the Indemnitee and any person acting as a broker-dealer shall
not be indemnified for any losses, liabilities or expenses arising from or out
of an alleged violation of federal or state securities laws unless (a) there has
been a successful adjudication on the merits of each count involving alleged
securities laws violations as to the particular Indemnitee and the court
approved the indemnification of litigation costs, or (b) such claims have been
dismissed with prejudice on the merits by a court of competent jurisdiction as
to the particular Indemnitee and the court approved the indemnification of
litigation costs or (c) a court of competent jurisdiction approves a settlement
of the claims against a particular Indemnitee and finds that indemnification of
the settlement and related costs should be made. In any claim for
indemnification for federal or state securities law violations, the party
seeking indemnification shall place before the court the position of the
Securities and Exchange Commission, the Massachusetts Securities Division, the
Pennsylvania Securities Commission, the Texas Securities Board and other
applicable state securities commissions with respect to the issue of
indemnification for securities law violations.
17.2.3 The Partnership shall not incur the cost of that
portion of any insurance which insures the Indemnitee for any liability as to
which the Indemnitee is prohibited from being indemnified under this Section
17.2; however, nothing contained in this Agreement shall preclude the
Partnership from purchasing and paying for such types of insurance, including
extended coverage liability and casualty and workers' compensation, as would be
customary for any person owning comparable assets and engaged in a similar
business, or from naming the Indemnitee as additional insured parties
thereunder, provided that such addition does not add to the premiums payable by
the Partnership.
17.2.4 The provision of advances from Partnership funds to the
Indemnitee for legal expenses and other costs incurred as a result of any legal
action initiated against the General Partner by a Limited Partner of the
Partnership is prohibited. The provision of advances from Partnership funds to
the Indemnitee for legal expenses and other costs incurred as a result of a
legal action is permissible if the following three conditions are satisfied: (a)
the legal action relates to the performance of duties or services by the
Indemnitee on behalf of the Partnership; and (b) the legal action is initiated
by a third party who is not a Limited Partner of the Partnership; and (c) the
Indemnitee undertakes to repay the advanced funds to the Partnership with
interest at the rate of 10% per year in cases in which they would not be
entitled to indemnification under Section 17.2.1 and such undertaking is secured
by a full recourse note from the recipient of the advance.
ARTICLE 18
Tax Exempt Limited Partners
18.1 Tax Exempt Limited Partners. If any individual retirement
accounts, pension, profit sharing or other tax-qualified retirement plans or
other entities exempt from federal income taxation under the Code (collectively,
"Tax Exempt Limited Partners") become Limited Partners of the Partnership,
neither the General Partner nor the Partnership shall have any liability or
responsibility to any Tax Exempt Limited Partner or any other Limited Partner
for any tax, penalty or other sanction or costs or damages arising as a result
of there being a prohibited transaction or as a result of Partnership assets
being deemed plan assets of a Tax Exempt Limited Partner under the Code or ERISA
or other applicable law.
38
ARTICLE 19
Miscellaneous
19.1 Notices. Any notice, payment, demand, offer or communication
required or permitted to be given by any provision of this Agreement shall be
deemed to have been delivered and given for all purposes (a) if delivered
personally to the party or to an officer of the party to whom it is directed or
(b) whether or not it is actually received, if sent by registered or certified
or regular mail, postage and charges prepaid, addressed as follows: if to the
General Partner, at its business address set forth in Section 2.3 or to such
other address as the General Partner may specify by written notice to the
Limited Partners; and if to a Limited Partner, at such Limited Partner's address
set forth on his Subscription Agreement or to such other address as such Limited
Partner may specify by written notice to the General Partner; and if to the
Partnership, at the address set forth in Section 2.3 or to such other address as
the Partnership may specify by written notice to the Partners. Any such notice
shall be deemed to be given as of the date so delivered personally, or as of the
date on which the same was deposited in a regular receptacle for the deposit of
the United States mail, addressed and sent as aforesaid.
19.2 Parties in Interest. Subject to Article 11, this Agreement shall
bind and benefit the successors and assigns of the respective parties hereto.
19.3 Section Captions. Section and other captions in this Agreement are
for reference purposes only and are not intended to describe, interpret, define
or limit the scope, extent or intent of this Agreement or any provision hereof.
19.4 Severability. Every provision of this Agreement is intended to be
severable. If any term or provision hereof is illegal or invalid for any reason,
such illegality or invalidity shall not affect the validity of the remainder of
this Agreement.
19.5 Right to Rely on General Partner. No person dealing with the
General Partner shall be required to determine its authority to make any
commitment or undertaking on behalf of the Partnership, or to determine any fact
or circumstance bearing upon the existence of its authority. In addition, no
purchaser of Partnership property shall be required to determine the sole and
exclusive authority of the General Partner to sign and deliver on behalf of the
Partnership any instrument of transfer, or to see to the application or
distribution of revenues or proceeds paid or credited in connection therewith,
unless such purchasers have received written notice from the Partnership
affecting the same.
19.6 Pennsylvania Law. This Agreement is made under, and shall be
construed and enforced in accordance with, the laws of the Commonwealth of
Pennsylvania applicable to agreements made and to be performed solely therein,
without giving effect to principles of conflicts of laws.
19.7 Exclusive Jurisdiction. Any disputes arising out of or related to
this Agreement shall be subject to the exclusive jurisdiction of the Court of
Common Pleas of Pennsylvania in the County of Delaware or the Federal District
Court for the Eastern District of Pennsylvania.
19.8 Counterpart Execution. This Agreement may be executed in any
number of counterparts with the same effect as if all parties hereto had signed
the same document. All counterparts shall be construed together and shall
constitute one Agreement.
39
19.9 Gender. Whenever necessary or appropriate in order to construe
this Agreement, the masculine gender shall include the feminine or neuter and
vice versa, and the singular shall include the plural and the plural, the
singular.
19.10 Integrated Agreement. This Agreement constitutes the entire
understanding and agreement among the parties hereto with respect to the subject
matter hereof, and there are no agreements, understandings, restrictions,
representations or warranties among the parties other than those set forth
herein.
IN WITNESS WHEREOF, the parties have executed, or have caused their
duly authorized officer to execute, this Agreement on the date first written
above.
GENERAL PARTNER:
COMMONWEALTH INCOME & GROWTH FUND, INC.
By: /s/ George S. Springsteen
----------------------------------------
Name: George S. Springsteen
-------------------------------------
Title: President
-------------------------------------------
INITIAL LIMITED PARTNER:
/s/ Kimberly A. Springsteen
- --------------------------------------------
KIMBERLY A. SPRINGSTEEN
40
TABLE I
SELECTED FINANCIAL DATA
COMMONWEALTH INCOME
& GROWTH FUND IV
================================================================================
BALANCE SHEET
APRIL 11, 2001
F-1
COMMONWEALTH INCOME & GROWTH FUND IV
CONTENTS
================================================================================
Report of Independent Certified Public Accountants F-3
Balance sheet F-4
Notes to balance sheet F-5
F-2
Report of Independent Certified Public Accountants
To the General Partner
Commonwealth Income & Growth Fund IV
Berwyn, Pennsylvania
We have audited the accompanying balance sheet of Commonwealth Income & Growth
Fund IV as of April 11, 2001. This balance sheet is the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting prnciples used and significant estimates made
by management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Commonwealth Income & Growth Fund
IV at April 11, 2001, in conformity with accounting principles generally
accepted in the United States.
/s/ BDO Seidman, LLP
Philadelphia, Pennsylvania
April 12, 2001
F-3
COMMONWEALTH INCOME & GROWTH FUND IV
BALANCE SHEET
================================================================================
April 11, 2001
- ------------------------------------------------------------------------------
Assets
Cash $1,000
==============================================================================
Partner's Capital
General partner $1,000
==============================================================================
See accompanying notes to balance sheet.
F-4
COMMONWEALTH INCOME & GROWTH FUND IV
NOTES TO BALANCE SHEET
================================================================================
1. The Partnership Commonwealth Income & Growth Fund IV (the "Partnership")
is a limited partnership, which was organized in April
2001 in the Commonwealth of Pennsylvania. The
Partnership has not yet commenced operations. The
Partnership was organized to acquire, own, lease and sell
income-producing equipment.
The General Partner's initial contribution consists of a
$1,000 cash contribution from Commonwealth Income &
Growth Fund, Inc., a wholly owned subsidiary of
Commonwealth of Delaware, Inc., which in turn is a wholly
owned subsidiary of Commonwealth Capital Corp. The
General Partner may, in its sole discretion, purchase
units of limited partnership interest (the "Units").
The Partnership plans to offer for sale, through a public
offering from 75,000 to 750,000 Units at a cash purchase
price of $20 per Unit.
2. Related Party The Partnership will pay for organizational and offering
Transactions expenses in connection with the issuance and distribution
of Units. The General Partner and Commonwealth Capital
Securities Corp., also is a wholly owned subsidiary of
Commonwealth of Delaware, Inc. and their respective
affiliates will receive substantial fees and compensation
in connection with the offering of Units and management
of the Partnership's assets.
F-5
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
FEBRUARY 28, 2001
-----------------
TABLE OF CONTENTS
-----------------
PAGE
----
INDEPENDENT AUDITOR'S REPORT F-7
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets F-8
Statements of operations and retained earnings F-9
Statements of cash flows F-10
Notes to financial statements F-11 - F-17
F-6
INDEPENDENT AUDITOR'S REPORT
Stockholder
Commonwealth Capital Corp.
We have audited the accompanying consolidated balance sheets of
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES as of February 28, 2001 and February
29, 2000, and the related consolidated statements of operations and retained
earnings and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Commonwealth Capital Corp. and Subsidiaries as of February 28, 2001 and February
29, 2000, and the consolidated results of their operations and their
consolidated cash flows for the years then ended in conformity with generally
accepted accounting principles.
Elkins Park, Pennsylvania
April 5, 2001
F-7
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
February 28, February 29,
2001 2000
------------ ------------
Cash and cash equivalents $ 145,343 $ 27,162
Receivables from Income Funds 317,577 255,035
Other receivables 60,423 59,736
Minimum lease payments receivable - Net of
unearned interest income of $1,404,050 - 2001
and $1,725,985 - 2000 4,130,000 4,715,000
Investment in Income Funds 11,666 12,666
Office furniture and equipment - Net of
accumulated depreciation of $115,407 - 2001
and $112,918 - 2000 4,031 6,520
Deferred offering costs 8,192
Other assets 6,127 6,890
---------- ----------
$4,675,167 $5,091,201
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
LIABILITIES
Accounts payable and accrued expenses $ 285,790 $ 75,713
Due to Income Funds 61,255
Nonrecourse obligations 4,130,000 4,715,000
---------- ----------
4,415,790 4,851,968
---------- ----------
STOCKHOLDER'S EQUITY
Common stock - Par value $1
Authorized 1,000 shares
Issued and outstanding 10 shares 10 10
Retained earnings 259,367 239,223
---------- ----------
259,377 239,233
---------- ----------
$4,675,167 $5,091,201
========== ==========
See notes to consolidated financial statements.
F-8
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
-----------------------------------------------------------
Year Ended
----------------------------
February 28, February 29,
2001 2000
------------ ------------
INCOME
Fee income from Income Funds $ 928,913 $ 972,246
Commission income 24,576 49,432
Interest income on minimum lease
payments receivable 321,935 358,828
Equity in income of Income Funds 93,207 43,832
Interest and miscellaneous 92,252 21,822
---------- ----------
1,460,883 1,446,160
---------- ----------
EXPENSES
Personnel 587,067 669,538
General and administrative 429,640 534,984
Selling 99,608 167,935
Interest expense on nonrecourse obligations 321,935 358,828
Depreciation 2,489 4,129
---------- ----------
1,440,739 1,735,414
---------- ----------
NET INCOME (LOSS) 20,144 ( 289,254)
RETAINED EARNINGS - BEGINNING 239,223 528,477
---------- ----------
RETAINED EARNINGS - ENDING $ 259,367 $ 239,223
========== ==========
See notes to consolidated financial statements.
F-9
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Year Ended
---------------------------------
February 28, February 29,
2001 2000
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 20,144 ($ 289,254)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Equity in income of Income Funds ( 93,207) ( 43,832)
Depreciation 2,489 4,129
Changes in operating assets and liabilities:
Receivables from Income Funds ( 62,542) 91,237
Other receivables ( 687) 5,018
Deferred offering costs 8,192 249,481
Other assets 763 2,152
Accounts payable and accrued expenses 210,077 ( 65,552)
---------- ----------
Net cash provided by (used in) operating
activities 85,229 ( 46,621)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Distributions from Income Funds - Net cash
provided by investing activities 32,952 45,239
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES - None - -
---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 118,181 ( 1,382)
CASH AND CASH EQUIVALENTS - BEGINNING 27,162 28,544
---------- ----------
CASH AND CASH EQUIVALENTS - ENDING $ 145,343 $ 27,162
========== ==========
See notes to consolidated financial statements.
F-10
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FEBRUARY 28, 2001
-----------------
1. NATURE OF BUSINESS
Commonwealth Capital Corp., through its wholly-owned subsidiary, Commonwealth of
Delaware, Inc. (CDI), primarily leases various types of computer peripheral
equipment and related equipment to U.S. corporations and institutions. Certain
wholly-owned subsidiaries of CDI were formed for the purpose of functioning as
general partners/managing trustees which own a 1% interest in limited
partnerships/trusts (the "Income Funds") which were organized to acquire, own,
and act as lessor with respect to certain computer equipment. CDI's subsidiaries
include Commonwealth Capital Fund 1987-I, Inc., Commonwealth Capital Fund
1988-I, Inc., Commonwealth Capital Fund No. 3, Inc., Commonwealth Capital Fund
No. 4, Inc., Commonwealth Capital Fund V, Inc., Commonwealth Capital Private
Fund-I, Inc., Commonwealth Capital Fund VI, Inc., Commonwealth Capital Fund VII,
Inc., Commonwealth Capital Private Fund - II, Inc., Commonwealth Capital Trustee
VIII, Inc., Commonwealth Capital Trustee IX, Inc., Commonwealth Capital Trustee
X, Inc., Commonwealth Capital Private Fund-III, Inc., Commonwealth Income &
Growth Fund, Inc., Commonwealth Capital Private Fund IV, Inc., Commonwealth
Capital Private Fund V, Inc., and Commonwealth Capital Private Fund VI, Inc.
(collectively the "General Partner Subsidiaries"), Commonwealth Capital
Securities Corp., Garden State Facilities Funding, Inc. (GSFF), and Commonwealth
Capital Delaware Trustee, Inc.
Certain limited partnerships/trusts have been liquidated during the years ended
February 28, 2001 (four entities) and February 29, 2000 (one entity).
The Company is dependent on the compensation it receives from the Income Funds.
This compensation may be reduced due to the financial performance of each Income
Fund. There are certain Income Funds that have deferred the payment of fees to
the Company, because distributions to the limited partners were reduced because
of their financial performance. If the financial performance of additional
Income Funds deteriorates and the distributions to the limited partners are
reduced, there is no assurance that the Company would be able to continue to
collect fees for services provided. No fees were waived or forgiven for the
years ended February 28, 2001 or February 29, 2000.
Commission income is earned by Commonwealth Capital Securities Corp., which
sells units of its affiliated partnerships through broker-dealer firms to their
respective customers throughout the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company, CDI, and CDI's subsidiaries (the Company) (see Note 1). All
significant intercompany transactions and balances have been eliminated.
The balance sheets are presented on an unclassified basis in accordance
with leasing industry practice.
F-11
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FEBRUARY 28, 2001
-----------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
b. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
c. Cash and Cash Equivalents
The Company maintains its cash balances in several financial institutions.
The balances in each institution are insured (up to $100,000) by the
Federal Deposit Insurance Corporation or the Securities Investor
Protection Corporation. At times, the balances may exceed federally
insured limits. The Company has not experienced any losses in such
accounts, and believes it is not exposed to any significant credit risk on
cash.
The Company considers all highly-liquid investments purchased with a
maturity of three months or less to be cash equivalents. At February 28,
2001 and February 29, 2000, cash equivalents consist of a money market
fund which invests in U.S. Treasury obligations.
d. Investment in Income Funds
The Company accounts for its 1% interests in the Income Funds by the
equity method. At February 29, 2000, certain Income Funds had liabilities
in excess of their assets. As the Company is obligated to fund any
liabilities in excess of assets, the Company reduced its investment in
Income Funds and recorded a Due to Income Funds of $61,255 at February 29,
2000, which was restored during the year ended February 28, 2001.
Financial information of the Income Funds as of December 31, 2000 and
1999, is as follows:
December 31,
----------------------------
2000 1999
----------- -----------
Total assets $11,742,000 $18,025,000
Nonrecourse debt 4,524,000 7,214,000
Other liabilities 846,000 2,216,000
Partners' capital 6,371,000 8,595,000
Net loss ( 921,757) ( 1,692,000)
F-12
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FEBRUARY 28, 2001
-----------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d. Investment in Income Funds (Continued)
The Company has guaranteed the performance of certain nonmonetary
obligations of the General Partner Subsidiaries to the respective Income
Funds, primarily the responsibility for management of the Income Funds. In
addition, the Company is responsible for certain capital funding
requirements of the General Partner Subsidiaries which it satisfies
through noninterest-bearing demand notes. Such notes total approximately
$4,166,000 at February 28, 2001 and February 29, 2000, and have been
eliminated in consolidation.
Fee income earned by the Company from the Income Funds consists of: (1)
equipment acquisition fees (4% (as defined) of the purchase price of all
equipment purchased by the Income Funds), (2) debt placement fees (1% of
the cost of equipment financed by the Income Funds), (3) sales fees (3% of
the gross proceeds of equipment sold by the Income Funds), and (4)
equipment management fees (3% - 5% as defined) of the gross operating
lease revenues of the Income Funds). Ongoing acquisition fees and
equipment management fees may be increased as an indirect result of
company loans.
Approximately 79% and 58% of fee income for the years ended February 28,
2001 and February 29, 2001, was from three Income Funds.
e. Office Furniture and Equipment
Office furniture and equipment are stated at cost. Depreciation is
provided using the declining balance method over the estimated useful
lives of the assets (ranging from 5 to 7 years).
f. Deferred Offering Costs
Deferred offering costs represented amounts incurred by the Company for
the organization of an Income Fund. These costs were recovered from the
Income Fund through fees as cash proceeds were raised through the sale of
Limited Partnership Units during the offering period or, if necessary, the
future operations of the Income Fund. Deferred offering costs at February
29, 2000, relating to an Income Fund, expired in July, 2000.
g. Revenue Recognition
The Company recognizes fees as earned in accordance with the various
Limited Partnership and Trust Agreements. The Company recognizes
commission income and brokerage fee expense on an accrual basis based on
the trade date of the underlying customer transactions. Interest income on
minimum lease payments receivable is recognized as earned.
F-13
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FEBRUARY 28, 2001
-----------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(h) Income Taxes
Deferred income taxes are provided as necessary for temporary differences
between the financial and tax bases of investment in Income Funds and
office furniture and equipment. The tax basis of investment in Income
Funds differs from financial reporting due to temporary differences
associated with ownership of general partnership interests in the various
Income Funds. Also, for income tax reporting, the cost of property and
equipment is being recovered using the methods and lives prescribed by the
Internal Revenue Code.
Deferred income tax assets are also recognized for net operating losses
and investment tax credit carryforwards that are available to offset
future income taxes. A valuation allowance is provided as necessary to
reduce the deferred income tax assets to the amount that is more likely
than not to be realized.
3. LEASE COMMITMENTS
GSFF acted as lessor in a series of lease purchase transactions whereby the
underlying assets were funded by investors through certificates of participation
in the lease payments. All of GSFF's rights as lessor were assigned to a
third-party agent which administers the collection of rentals paid by the
lessee. The obligations under the certificates are nonrecourse to GSFF.
Accordingly, any reduction in the minimum lease payments receivable for
uncollectible accounts would result in an equal reduction of the nonrecourse
obligations. Amounts outstanding at February 28, 2001 and February 29, 2000,
under these leases and certificates of participation are $4,130,000 and
$4,715,000, respectively, and are reflected as minimum lease payments receivable
and nonrecourse obligations in the accompanying balance sheets. The certificates
mature at various dates through 2011. The Company recognized interest income and
interest expense in connection with these leases of $321,935 and $358,828 for
the years ended February 28, 2001 and February 29, 2000, respectively.
F-14
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FEBRUARY 28, 2001
-----------------
3. LEASE COMMITMENTS (Continued)
Future minimum lease payments to be received as of February 28, 2001, are as
follows:
Year Ending February 28,
------------------------
2002 $ 683,324
2003 684,490
2004 678,794
2005 676,097
2006 680,759
Thereafter 2,130,586
----------
5,534,050
Less amount representing interest 1,404,050
----------
$4,130,000
==========
The Company leases an automobile, certain office equipment and office space
under noncancelable operating leases expiring in various dates through 2006.
Rent expense under all operating leases was approximately $149,000 and $155,000
for the years ended February 28, 2001 and February 29, 2000, respectively.
Future minimum lease payments under noncancelable operating leases as of
February 28, 2001, are as follows:
Year Ending February 28,
------------------------
2002 $ 89,955
2003 78,866
2004 58,539
2005 61,620
2006 63,161
----------
$ 352,141
==========
4. PROFIT SHARING PLAN
The Company has a profit sharing plan which covers substantially all of its
employees. Contributions to the plan may be made at the discretion of
management. Profit sharing plan contributions were $20,615 for the year ended
February 28, 2001 and no contributions to the plan were made or accrued for the
year ended February 29, 2000.
F-15
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FEBRUARY 28, 2001
-----------------
5. INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax return.
The Company has net operating loss carryforwards of approximately $537,000 and
investment tax credit carryforwards of approximately $52,000 available to reduce
future federal income taxes. If not used, the carryforwards will expire as
follows:
Net Operating Investment
Year Ending February 28, Losses Tax Credits
------------------------ ------------- -----------
2002 $ $ 52,000
2019 135,000
2020 452,000
---------- ----------
$ 587,000 $ 52,000
========== ==========
The Company also has net operating loss carryforwards of approximately
$4,325,000 available to reduce future Pennsylvania state income taxes. If not
used, the carryforwards will expire as follows:
Year Ending February 28,
------------------------
2006 $ 108,000
2007 638,000
2008 962,000
2009 899,000
2010 1,086,000
2011 632,000
----------
$4,325,000
==========
F-16
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FEBRUARY 28, 2001
-----------------
5. INCOME TAXES (Continued)
At February 28, 2001 and February 29, 2000, the cumulative temporary differences
resulted in net deferred tax assets or liabilities consisting primarily of:
February 28, February 29,
2001 2000
------------ ------------
Deferred tax assets:
Other $ 3,000 $ 4,500
Investment tax credit carryforwards 52,000 109,000
Net operating loss carryforwards 485,000 465,000
Less valuation allowance ( 463,300) ( 483,900)
---------- ----------
Deferred tax assets, net 76,700 94,600
---------- ----------
Deferred tax liabilities:
Investment in Income Funds ( 76,000) ( 94,200)
Office furniture and equipment ( 700) ( 400)
---------- ----------
Deferred tax liabilities, net ( 76,700) ( 94,600)
---------- ----------
Net deferred tax assets (liabilities) $ - $ -
========== ==========
The valuation allowance was increased (decreased) by ($20,600) and $146,000,
respectively, for the years ended February 28, 2001 and February 29, 2000.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Other noncash activities associated with lease transactions:
Year Ended Year Ended
February 28, February 29,
2001 2000
------------ ------------
Reduction of minimum lease receivable
and repayment of nonrecourse obligation
associated with direct payment made by
lessee to bank $ 585,000 $ 545,000
========== ==========
Other noncash activities associated with
investment in income funds
Increase (decrease) in due to income funds ($ 61,255) ($ 2,127)
========== ==========
F-17
COMMONWEALTH INCOME & GROWTH FUND, INC.
---------------------------------------
(An Indirect Wholly-Owned Subsidiary
of Commonwealth Capital Corp.)
FEBRUARY 28, 2001
-----------------
TABLE OF CONTENTS
-----------------
PAGE
----
INDEPENDENT AUDITOR'S REPORT F-19
BALANCE SHEET F-20
NOTES TO BALANCE SHEET F-21
F-18
INDEPENDENT AUDITOR'S REPORT
Stockholder
Commonwealth Income & Growth Fund, Inc.
We have audited the accompanying balance sheet of COMMONWEALTH INCOME &
GROWTH FUND, INC. (An indirect wholly-owned subsidiary of Commonwealth Capital
Corp.) as of February 28, 2001. This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of Commonwealth Income & Growth
Fund, Inc. as of February 28, 2001, in conformity with generally accepted
accounting principles.
FISHBEIN & COMPANY, P.C.
April 5, 2001
F-19
COMMONWEALTH INCOME & GROWTH FUND, INC.
---------------------------------------
(An Indirect Wholly-Owned Subsidiary
of Commonwealth Capital Corp.)
BALANCE SHEET
-------------
FEBRUARY 28, 2001
-----------------
ASSETS
------
Cash $ 9,732
Due from parent 84,203
Investment in Partnerships 3,000
----------
$ 96,935
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
LIABILITIES
Due to Income Funds $ 95,835
----------
STOCKHOLDER'S EQUITY
Common stock - No par value
Authorized 1,000 shares
Issued and outstanding 100 shares 1,000
Additional paid-in capital 1,000,100
----------
1,001,100
Less note receivable (1,000,000)
----------
1,100
----------
$ 96,935
==========
See notes to balance sheet.
F-20
COMMONWEALTH INCOME & GROWTH FUND, INC.
---------------------------------------
(An Indirect Wholly-Owned Subsidiary
of Commonwealth Capital Corp.)
NOTES TO BALANCE SHEET
----------------------
FEBRUARY 28, 2001
-----------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Nature of Business
Commonwealth Income & Growth Fund, Inc. (the Company) is a wholly-owned
subsidiary of Commonwealth of Delaware, Inc. which is a wholly-owned
subsidiary of Commonwealth Capital Corp. (CCC). The Company, through its
wholly-owned subsidiaries, primarily leases various types of computer
peripheral equipment and related equipment to U.S. corporations and
institutions. The Company is the sole General Partner of Commonwealth Income
& Growth Fund I, Commonwealth Income & Growth Fund II, and Commonwealth
Income & Growth Fund III, all Pennsylvania limited partnerships (the
"Partnerships").
CCC has provided additional capital by means of a noninterest-bearing demand
note in the amount of $1,000,000, so that the Company will at all times have
a net worth (which includes the net equity of the Company and the demand note
receivable from CCC) of at least $1,000,000. The note receivable is reflected
on the accompanying balance sheet as a reduction of the Company's equity.
The Company's operations are included in the consolidated federal income tax
return of CCC.
b. Use of Estimates
The preparation of the balance sheet in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
2. INVESTMENT IN PARTNERSHIPS
The Company contributed $3,000 in cash to the Partnerships for its general
partner interests. The Company may, at its sole discretion, purchase a
limited partnership interest in the Partnerships ("Units") for an additional
capital contribution of $20 per Unit with a minimum investment of 125 units.
3. RELATED PARTY TRANSACTIONS
The Company and its affiliates receive substantial fees and compensation in
connection with the offering of Units and the management of the Partnerships'
assets. The Company pays expenses to CCC equal to the fees collected from the
Partnerships.
F-21
TABLE II
PRIOR PERFORMANCE TABLES
COMMONWEALTH CAPITAL CORP.
EXPERIENCE IN RAISING AND INVESTING FUNDS
As of December 31, 2000
(Table 1)
Commonwealth Commonwealth Commonwealth
INCOME & GROWTH INCOME & GROWTH INCOME & GROWTH
FUND III FUND II FUND I
--------------- --------------- ---------------
Offering Information:
Amount offered (maximum) $15,000,000 $15,000,000 $15,000,000
Dollar Amount Sold 3,023,569 9,235,185 12,623,682
(1) Dealer/Manager Expenses 272,121 831,167 1,136,131
(2) Offering/Organizational Expenses 90,707 277,056 378,710
Net Proceeds Available 2,660,741 8,126,962 11,108,841
Total Equipment Purchases:
Equipment purchased with cash 2,587,638 2,054,799 14,226,053
Equipment financed 1,542,397 6,223,859 12,447,940
Rent paid to original lessor in lieu of cash 66,529 54,944 344,326
Obligation incurred in connection to leased
equipment - 502,721 1,421,857
4,196,564 8,836,323 28,440,176
% of Equipment financed as of
December 31, 2000 36.8% 70.4% 43.8%
(3) Initial Acquisition Fees (%) 3.4% 3.4% 3.4%
Date Offering Commenced 07/25/97 05/12/95 12/17/93
Date Offering Completed 07/27/00 05/12/97 05/11/95
Average Initial Term of Leases (in months) 33 33 32
Months from closing to invest 90% 2 N/A 5
(1) Dealer/Manager expenses include commissions to brokers, due diligence and
out-of-pocket expenses.
(2) Offering/Organizational expenses consist of legal fees, blue sky filings,
accounting fees, printing charges for perspective books and the guarantee
fee.
(3) Fees were paid to the General Partner/Management Trustee at fund closing.
Prior performance is not indicative of future performance
TABLE II
COMPENSATION TO GENERAL PARTNERS AND AFFILIATES
The following table sets forth certain information concerning all the
compensation earned by the General Partner and its Affiliates for three private
equipment leasing programs and two public equipment leasing programs sponsored
by the General Partner and Affiliates which closed in the most recent three
years. Amounts are from two sources: (1) proceeds from the offering and (2)
gross revenues. Amounts for operations are cumulative.
COMMONWEALTH CAPITAL CORP.
COMPENSATION TO GENERAL PARTNERS AND AFFILIATES
As of December 31, 2000
(TABLE II)
Commonwealth Commonwealth Commonwealth
INCOME & GROWTH INCOME & GROWTH INCOME & GROWTH
FUND III FUND II FUND I
---------------- --------------- --------------
Date offering commenced 07/25/97 05/12/95 12/17/93
Dollar amount raised $3,023,569 $9,235,185 $12,623,153
Amount paid from the proceeds of
offering, reinvestment and/or debt:
Initial Acquisition Fee 102,835 270,553 426,473
Organizational Fee 31,747 241,482 140,869
Cash generated from operations before
deducting payments to the General Partner
and Affiliates 939,141 4,524,364 10,199,052
Amount paid to the General Partner
and Affiliates from operations:
Equipment Management Fee 125,551 662,311 1,283,316
Acquisition Fee 167,337 313,911 675,880
Finance Fee 15,597 58,698 117,566
Dollar amount of equipment sales and
refinancing before deducting payments to
the General Partner and Affiliates 59,654 1,374,337 3,031,571
Amount paid to the General Partner and
Affiliates from equipment sales and
refinancing 1,790 41,230 90,946
Prior performance is not indicative of future performance.
COMMONWEALTH INCOME & GROWTH FUND I
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
For the Years Ended December 31, 1996, 1997, 1998, 1999, and 2000
1996 1997 1998 1999 2000
-------- -------- -------- --------- ---------
Computation of Net Income
Months of Operations 12 12 12 12 12
Gross Revenues $ 5,995,142 $ 5,229,664 $ 4,620,771 $ 3,005,189 $ 1,797,061
Less: Operating Expenses 80,883 111,263 175,833 261,038 192,622
Equipment Management Fee 295,420 259,757 226,367 149,675 89,517
Depreciation and Amortization 5,895,531 5,219,396 4,280,185 2,808,781 1,475,744
Interest expense 311,247 348,681 272,640 105,223 22,242
Uncollectible accounts receivable - - - 50,000 103,818
Loss on sale of computer equipment 691,808 196,690 - 108,640 118,397
Net Loss - GAAP Basis (1,319,747) (906,123) (334,254) (478,168) (205,279)
Federal Taxable Income (1,726,506) (1,574,024) (36,794) (310,551) 293,334
Cash Distributions - GAAP Basis (1,275,467) (1,275,467) (1,275,467) (959,043) (1,031,324)
Computation of Cash Flows Net Loss
Net income (loss) (1,319,747) (906,123) (334,254) (478,168) (205,279)
Adjustments to Reconcile Net Loss to
Net Cash Provided by Operating
Activities:
Depreciation and Amortization 5,895,531 5,219,396 4,280,185 2,808,801 1,475,744
Loss (gain) on sale of equipment 691,808 196,690 (71,682) 108,640 118,397
Other Non-Cash Activities Included in
the Determination of Net Loss* (2,689,616) (2,848,893) (3,094,256) (1,706,647) (649,145)
Net Change in Operating Assets and
Liabilities (52,325) 85,384 (23,125) 19,188 (226,314)
Net Cash Provided by Operating
Activities 2,525,651 1,746,454 756,868 751,814 513,403
Capital Expenditures (1,035,293) (1,347,809) (544,691) (160,935) -
Net proceeds from sale of equipment 748,241 347,654 893,739 590,355 365,210
Accounts Payable - CCC (22,222) 1,823 (1,823) - -
Payment of Equipment Payable (9,624) (195,864) - - -
Equipment Acquisition Fees Paid to
the General Partner (156,616) (213,186) (39,699) (6,468) -
Net Cash Used in Investing Activities (475,514) (1,407,382) 307,526 422,952 365,210
Partners' Contributions - - - - -
Offering Costs - - - - -
Advance to Commonwealth Capital Corp. - - 22,000 - -
Proceeds from short-term note payable - - 78,804 - -
Distributions to Partners (1,275,467) (1,275,467) (1,275,467) (959,043) (1,031,324)
Debt placement fee (33,713) (30,141) (4,425) - -
Net Cash Provided by Financing
Activities (1,309,180) (1,305,608) (1,179,088) (959,043) (1,031,324)
Net Increase in Cash 740,957 (966,536) (114,694) 215,723 (152,711)
Cash at Beginning of Year 341,838 1,082,795 116,259 1,565 217,288
Cash at End of Year 1,082,795 116,259 1,565 217,288 64,577
Investment Data Per $ 1,000
Investment
Net Loss - GAAP Basis (104) (72) (26) (38) (16)
Federal Taxable Income to Investors (138) (125) (3) (25) 23
Cash Distributions to Investors -
GAAP Basis (100) (101) (100) (75) (81)
Return of Capital to Investors - GAAP
Basis 100 101 100 75 81
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented was
caused primarily by the acquisition of more financed equipment.
Prior Performance is not indicative of future performance
COMMONWEALTH INCOME & GROWTH FUND II
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
For the Years Ended December 31, 1996, 1997, 1998, 1999, and 2000
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Computation of Net Income
Months of Operations 12 12 12 12 12
Gross Revenues $1,194,114 $2,540,007 $4,245,660 $4,624,903 $4,117,170
Less: Operating Expenses 56,707 163,749 135,840 232,565 241,150
Equipment Management Fee 56,184 122,233 210,643 229,900 221,768
Depreciation and Amortization 1,081,953 2,246,801 4,128,899 4,235,207 3,679,550
Interest expense - 37,106 204,022 298,121 160,897
Uncollectible accounts receivable - - - - 45,000
Loss on sale of computer equipment - 31,955 - 8,447 138,014
Net Loss - GAAP Basis (730) 7,224 (229,722) (72,769) (25,298)
Federal Taxable Income 257,899 534,897 307,210 443,920 (196,957)
Cash Distributions - GAAP Basis (608,045) (908,714) (932,964) (891,690) (923,546)
Computation of Cash Flows Net Loss
Net income (loss) (730) (61,837) (433,744) (379,337) (369,209)
Adjustments to Reconcile Net Loss
to Net Cash Provided by Operating
Activities:
Depreciation and Amortization 1,081,953 2,246,801 4,128,899 4,235,207 3,679,550
Loss (gain) on sale of equipment - 31,955 (493) 8,447 138,014
Other Non-Cash Activities Included
in the Determination of Net Loss* (4,290) (416,823) (1,558,644) (2,626,791) (2,381,576)
Net Change in Operating Assets and
Liabilities (127,550) 157,053 (212,165) (156,165) (209,975)
Net Cash Provided by Operating
Activities 949,383 1,957,149 1,923,853 1,081,396 856,804
Capital Expenditures (1,777,488) (4,179,080) (1,701,559) (254,787) (98,453)
Net proceeds from sale of equipment - 10,585 851,607 50,106 431,394
Equipment Acquisition Fees Paid to
the General Partner (147,448) (202,760) (222,916) (57,407) (33,588)
Net Cash Used in Investing
Activities (1,924,936) (4,371,255) (1,072,868) (262,088) 299,353
Partners' Contributions 4,371,440 1,185,785 - - -
Offering Costs (487,266) (129,680) - - -
Distributions to Partners (608,045) (908,714) (932,964) (891,690) (923,546)
Debt placement fee - (27,470) (39,980) (11,503) (7,215)
Net Cash Provided by Financing
Activities 3,726,129 119,921 (972,944) (903,193) (930,761)
Net Increase in Cash 2,300,576 (2,294,185) (121,959) (83,885) 225,396
Cash at Beginning of Year 251,776 2,552,352 258,167 136,208 52,323
Cash at End of Year 2,552,352 258,167 136,208 52,323 277,719
Investment Data Per $ 1,000
Investment
Net Loss - GAAP Basis (0) (7) (47) (41) (40)
Federal Taxable Income to Investors 29 58 33 48 (21)
Cash Distributions to Investors -
GAAP Basis (65) (97) (100) (96) (99)
Return of Capital to Investors - 65 97 100 96 99
GAAP Basis
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented was
caused primarily by the acquisition of more financed equipment.
Prior Performance is not indicative of future performance
COMMONWEALTH INCOME & GROWTH FUND III
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
Program inception to December 31, 2000
1998 1999 2000
-------- -------- --------
Computation of Net Income
Months of Operations 11* 12 12
Gross Revenues $344,046 $953,958 $1,262,989
Less: Operating Expenses 43,632 275,066 223,838
Equipment Management Fee 15,313 46,893 63,345
Depreciation and Amortization 263,267 885,463 970,882
Interest expense 584 55,270 64,205
Uncollectible accounts receivable - - -
Loss on sale of computer equipment - - 120,596
Net Loss - GAAP Basis 18,250 (308,734) (179,877)
Federal Taxable Income 160,671 20,307 (41,168)
Cash Distributions - GAAP Basis (166,451) (227,995) (302,898)
Computation of Cash Flows Net Loss
Net income (loss) 18,250 (308,734) (179,877)
Adjustments to Reconcile Net Loss to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 263,267 885,463 970,882
Loss (gain) on sale of equipment - - 120,596
Other Non-Cash Activities Included in the
Determination of Net Loss** (10,454) (318,386) (497,722)
Net Change in Operating Assets and
Liabilities 755 (49,097) (81,303)
Net Cash Provided by Operating Activities 271,818 209,246 332,526
Capital Expenditures (1,448,552) (730,316) (408,770)
Net proceeds from sale of equipment - - 57,864
Equipment Acquisition Fees Paid to the
General Partner (72,527) (66,279) (28,531)
Net Cash Used in Investing Activities (1,521,079) (796,595) (379,437)
Partners' Contributions 2,142,340 515,849 364,878
Offering Costs paid to affiliate (192,856) (46,426) (32,829)
Offering Costs paid to the General Partner (41,785) (10,060) (7,115)
Distributions to Partners (166,451) (227,995) (302,898)
Proceeds from note payable 13,706 - -
Debt placement fee - (12,386) (3,211)
Net Cash Provided by Financing Activities 1,754,954 218,982 18,815
Net Increase in Cash 505,693 (368,367) (28,096)
Cash at Beginning of Year 1,500 507,193 138,826
Cash at End of Year 507,193 138,826 110,730
Investment Data Per $ 1,000 Investment
Net Loss - GAAP Basis 9 (116) (59)
Federal Taxable Income to Investors 75 8 (14)
Cash Distributions to Investors - GAAP
Basis (77) (85) (99)
Return of Capital to Investors - GAAP 77 85 99
Basis
* Commencement Date is 01/27/98.
** The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented was
caused primarily by the acquisition of more financed equipment.
Prior Performance is not indicative of future performance
COMMONWEALTH INCOME & GROWTH FUND I
EQUIPMENT SALES
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 2000
(Table V) - PAGE 1 of 2
Year Year
Equipment of of
Manufacturer Equipment Type Description Acquisition Disposal
------------ -------------- ----------- ----------- --------
STK 50%-(1) 9200-XN3, 9210-A21, 9210-C21 Disk Array 1995 1998
STK 50%-(1) 9200-XN3, 9210-A21, 9210-C21 Disk Array 1995 1998
STK (1) 9200-XN3, 6172 Disk Array 1995 1998
SGI 33%-(1) 4XR10000, (4) WB-TWO250H14 Server 1995 1998
SGI 33%-(1) 4XR10000, (4) WB-TWO250H14 Server 1995 1998
SUN (1) SUNSPARC 1000 Server 1994 1998
IBM (2) 3829-001 Disk Array 1995 1998
IBM (2) 3829-001 Disk Array 1995 1998
STK (2) 9200-XJ3, (2) 9210-A21 Disk Array 1995 1998
STK 25%-9200-XJ3,9210-A21, 9210-B11, 9210-C21 Disk Array 1995 1998
STK 25%-9200-XJ3,9210-A21, 9210-B11, 9210-C21 Disk Array 1995 1998
IBM (375) 4230-5S3 Printer 1995 1998
STK 25%-9200-XJ3,9210-A21, 9210-B11, 9210-C21 Disk Array 1995 1998
STK (2) 9200-XJ3, (2) 9210-A21 Disk Array 1995 1998
SUN (17) SPARC 20, (1) Printer Workstation 1994 1998
SUN (17) SPARC 20, (1) Printer Workstation 1994 1998
IBM (375) 4230-5S3 Printer 1995 1998
EMC 50%-(1) 3200-9024, 3200-9016 Disk Array 1995 1998
EMC 50%-(1) 3200-9024, 3200-9016 Disk Array 1995 1998
SUN (4) SUNSPARC 2000, (1) SUNSPARC 400, (1) Server 1994 1998
FEATURE X655A
SUN (22) SPARC 5, (10) SPARC 20 Workstation 1994 1998
EMC 50%-(1) 3200-9024, 3200-9016 Disk Array 1995 1998
STK 25%-9200-XJ3, 9210-A21, 9210-B11, 9210-C21 Disk Array 1995 1998
HP 55%-(101) HP9000-C110,(2) HP900-D350/2 Workstation 1997 1999
STK 50%-(20) 9490- Tape Drive 1996 1999
M32,4415,3T,3T22,2511,9415,9414,(3)9416
IBM 3445-1210 Tape Library 1996 1999
STK (8) 9490-M34 Tape Drive 1995 1999
IBM 50%-3900-DW1 Printer 1995 2000
HP 50%-(9)HP9000-J200 Workstation 1996 2000
LEX (5)OPTRA RT+,(7) OPTRA N24,(4)OPTRA R+ Server 1997 2000
LEX (80) N240,(4) OPTRA C, (10) OPTRA RT Laser Printer 1996 2000
STK 50%-(4) 4490-M30 UPGR,(2) 4490-M34 Tape Drive 1995 2000
UPGR,(6)9490-M34
STK 55%-STK Tape libraries,STK Redwd, STK Tape Drive 1996 2000
Timberline
IBM 20% (6) 9032-003 Escon Director 1997 2000
IBM (2) 9032-003 Escon Director 1997 2000
IBM (3) 3745-61A,(3) 3746-900 Comm Controller 1997 2000
COMMONWEALTH INCOME & GROWTH FUND I
EQUIPMENT SALES
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 2000
(Table V) - PAGE 2 of 2
Original Net Net GAAP Federal
Acquisition Book Proceeds Net Taxable
Cost Value Received Gain/(Loss) Net Gain/(Loss)
----------- ------- -------- ----------- ----------------
$236,640 $21,593 $11,250 $(10,343) $(45,453)
582,671 133,529 67,761 (67,123) (73,210)
238,671 104,419 11,167 (93,252) (84,256)
- - 3,956 3,956 (6,953)
271,074 50,826 58,000 7,174 (3,991)
572,152 - 13,500 13,500 258
53,396 - 1,875 1,875 (7,561)
1,064,930 332,791 667,818 236,722 59,745
53,396 - 3,650 3,650 (11,654)
572,152 21,646 20,900 (746) (4,652)
45,228 3,769 3,000 (811) (12,456)
- - 2,224 2,224 (3,974)
146,753 (31,091) 12,490 43,581 11,358
116,371 24,517 41,375 16,858 1,452
334,056 84,730 59,400 (25,330) (44,139)
146,753 64,205 13,700 (50,504) (51,455)
53,396 11,124 1,375 (9,749) (18,142)
872,253 291,901 21,230 (336,401) (373,677)
779,676 146,189 172,625 4,944 (41,322)
216,419 76,648 81,500 2,407 (147,167)
1,452,140 - 232,000 220,410 (92,680)
- - 7,000 6,790 (20,045)
157,635 - 630 611 (25,462)
94,605 19,709 65,600 43,923 37,538
497,477 21,821 65,600 11,811 (18,651)
490,100 - 60,500 57,985 (8,361)
249,473 - 7,700 7,469 (47,405)
307,982 76,996 67,196 (11,816) (24,665)
455,473 161,313 36,000 (126,393) (74,219)
1,191,555 173,768 67,000 (108,778) (105,924)
COMMONWEALTH INCOME & GROWTH FUND II
EQUIPMENT SALES
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 2000
(Table V)
Year Year
Equipment of of
Manufacturer Equipment Type Description Acquisition Disposal
------------ -------------- ----------- ----------- --------
STK (1) 9200 - XN3, (1) 6172, (1) 9220 - A42, (1)
9220 - B22 Disk Array 1995 1998
STK (1) 9200 - XN3, (1) 6172, (1) 9220 - A42 Disk Array 1995 1998
STK (1) 4410 - 001, (2) 4480 - M24, (2) 4480 - M20,
(1) 9490 - M34 Drive Timberline 1996 1998
IBM (50) 4028 - NS1 Printer 1996 1998
IBM (325) 4230 - 5S3 Printer 1996 1998
DEC Alpha Server 2100A 5/250 Server 1996 1999
DEC Alpha Server 2100A 5/250 Server 1996 1999
STK (3) 9490 - M34 Drive Timberline 1996 2000
SGI (1) Onyx Infinite Reality DS Server 1996 2000
HP (20) HP C180 Workstation 1997 2000
STK (4) 4490 - M30 UPGR, (2) 4490 - M34 UPGR, (6)
9490 - M34 Drive Timberline 1995 2000
IBM (8) 9032 - 003 Escon Director 1997 2000
STK (9) 9490 - M34 Drive Timberline 1997 2000
Original Net Net GAAP Federal
Acquisition Book Proceeds Net Taxable
Cost Value Received Gain/(Loss) Net Gain/(Loss)
----------- -------- -------- ----------- ---------------
$787,196 $180,399 $85,000 $(97,099) $(101,540)
582,671 133,529 67,761 (67,123) (75,844)
383,553 135,842 169,512 33,670 5,614
79,900 29,962 28,909 (1,053) (4,963)
990,357 371,384 568,562 132,099 29,774
200,869 48,004 42,826 (6,503) (47,198)
39,406 9,006 7,280 (1,994) (10,673)
405,628 25,352 39,000 11,698 (71,928)
263,498 27,448 8,500 (19,203) (76,249)
351,736 79,775 3,385 (76,491) (152,184)
490,110 - 60,500 57,985 (561)
831,382 225,349 177,196 (53,468) (199,716)
1,268,909 211,485 161,000 (58,535) (345,144)
COMMONWEALTH INCOME & GROWTH FUND III
EQUIPMENT SALES
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 2000
(Table V)
Year Year
Equipment of of
Manufacturer Equipment Type Description Acquisition Disposal
------------ ---------------- ----------- ----------- --------
STK (5) STK 9490 - M34 Timberline Drive 1998 2000
Original Net Net GAAP Federal
Acquisition Book Proceeds Net Taxable
Cost Value Received Gain/(Loss) Net Gain/(Loss)
----------- -------- -------- ----------- ---------------
$407,908 $178,461 $59,564 $(120,596) $(196,669.00)
Commonwealth Income & Growth Fund I
Summary of Equipment Acquisitions
For the three year period ended December 31, 2000
(Table VI) - PAGE 1 of 2
Manufacturer Equipment Type Equipment Description Year of Acquisition
------------ -------------- --------------------- -------------------
IBM (3) 3490-A20, 3490-B40 Tape Drive 1994
STK (8) 9490-M34 Tape Drive 1995
IBM 3900-DW1 Printer 1995
SIEMENS (2) 2240-004 Printer 1995
PYR (2) Nile 150 Server 1995
STK (4) 4490-M30 UPGR, (2) Tape Drive 1996
HP (9) HP9000-J200 Workstation 1996
IBM (2) 3745-31A, 3746-900 Comm Controller 1996
STK (20) 9490-M32, 4415, 3T, 3T22, 2511, 9415, Tape Drive 1996
9414, (3) 9416
STK (20) 9490-M-32 Tape Drive 1996
HP (18) HP9000-C110, HP9000-D250 Workstation 1998
IBM (2) 3995-133, 3995-113 Optical Storage 1996
LEX (80) N240, (4) OPTRA C, (10) OPTRA RT Laser Printer 1996
IBM 3445-1210 Tape Library 1996
STK (7) 9490-M34 Tape Drive 1997
STK STK Libraries, STK Redwd, STK Timberline Tape Drive 1996
HP (101) HP9000-C110, (2) HP9000-D350/2 Workstation 1997
IBM (3) 3745-61A, (3) 3746-900 Comm Controller 1997
LEX (5) OPTRA RT+, (7) OPTRA N24, (4) OPTRA R+ Server 1997
HP 3900-DW1, 3900-DW2 Printer 1997
SUN SUN E3000 Server 1997
SGI SGI Workstations Workstation 1997
SUN (2) SUN E5000 Server 1997
SUN Upgrade to SUN E5000 Server 1997
IBM (2) 9032-003 Escon Director 1997
IBM (6) 9032-003 Escon Director 1998
SUN SUN 6000 Server Server 1997
SUN Enterprise 3000 Server Server 1997
SUN Enterprise 3500 Server Server 1998
IBM 3590 Tape Drive 1998
CIS Cisco Router Routers 1999
SUN SUNE E-4000 Server 1999
Commonwealth Income & Growth Fund I
Summary of Equipment Acquisitions
For the three year period ended December 31, 2000
(Table VI) - PAGE 2 of 2
Obligations Total Equipment
Manufacturer Cash Rent in Lieu Debt Assumed Incurred Cost
------------ ---- ------------ ------------ ----------- --------------
IBM $379,682 - - - $ 379,682
STK 260,000 - $1,192,140 - 1,452,140
IBM 343,010 - - - 343,010
SIEMENS 459,592 - - - 459,592
PYR 59,555 - 529,732 - 589,287
STK 490,110 - - - 490,110
HP 22,222 - 135,412 - 157,634
IBM 64,986 - 119,397 - 184,383
STK 258,474 - 521,203 - 779,677
STK 205,951 - 498,018 - 703,968
HP 61,110 - 349,965 - 411,075
IBM 60,105 - 226,431 - 286,536
LEX 117,090 - 380,387 - 497,477
IBM 216,419 - - - 216,419
STK 205,269 - 333,260 - 538,529
STK 253,799 - 744,092 - 997,891
HP 245,827 - 686,664 - 932,491
IBM 221,027 - 970,528 - 1,191,555
LEX 94,605 - - - 94,605
HP 117,000 - 343,490 - 460,490
SUN 148,492 - - - 148,492
SGI 126,621 - 695,834 - 822,455
SUN 49,982 - 181,569 - 231,551
SUN 14,491 - - - 14,491
IBM 95,793 - 359,680 - 455,473
IBM 75,167 - 232,816 - 307,983
SUN 274,774 - - - 274,774
SUN 45,892 - - - 45,892
SUN 49,505 - - - 49,505
IBM 90,250 - 209,582 - 299,832
CIS 38,948 - - - 38,948
SUN 122,750 - - - 122,750
Prior performance is not indicative of future performance.
COMMONWEALTH INCOME & GROWTH FUND II
SUMMARY OF EQUIPMENT ACQUISITIONS
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 2000
(TABLE VI) - PAGE 1 of 4
Manufacturer Equipment Type Equipment Description Year of Acquisition
------------ -------------- --------------------- -------------------
STK (4) 4490-M30 UPGR, (2) 4490-M34 UPGR, (6) Drive Timberline 1995
9490-M34
IBM 3490-A20 w/ (4) 3312,(2) 3490-B40 Drive-3490 1996
STK (3) 9490-M34 Drive Timberline 1996
DEC Alpha Server 2100A 5/250 Server 1996
DEC Alpha Server 2100A 5/250 Server 1996
HP (13) HP9000-C110 Workstation 1996
SGI Onyx Infinite Reality DS Server 1996
IBM 3900 DW1/DW2 Printer 1997
IBM (38) 3130-02D Printer 1997
IBM (8) 3900-OW1 Printer 1997
SUN SUN E6000 Server Server 1997
SUN Upgrade-SUN E6000 Server Server 1997
HP (20) HP C180 Workstations Workstation 1997
STK (9) 9490-M34 Drive Timberline 1997
IBM (2) 3745-31A, (2) 3746-900 IBM Controller 1997
SUN (2) ES 3000 SUN Servers Server 1997
SGI SGI Workstations Workstation 1997
IBM (2) 9032-003 Escon Director 1997
IBM (6) 9032-003 Escon Director 1997
SUN (2) Sun 3000 Servers Server 1998
SUN (3) Sun 450 Servers Server 1998
STK (2) 9490 - M34 Drive Timberline 1998
SUN Sun 6000 Server Server 1998
STK STK Redwood Tape Drives Drive-Redwood 1998
STK STK Redwood Tape Drives Drive-Redwood 1998
IBM 4 Escon Directors Escon Director 1998
IBM 4 Escon Directors Escon Director 1998
IBM 3590 Tape Drive 1998
SUN Enterprise 4500 Server Server 1998
IBM RS6000-H50 Workstation 1999
IBM RS6000-H50 Workstation 1999
FORE ASX 1000 Comm Switch 1999
CISCO Cisco Routers Routers 1999
CISCO (5) Catalyst 5500 Routers 1999
NORTEL Nortel DJ 1401E11 Comm Switch 1999
EPSON EOSIB EKO Display 1999
STK 9730-001 Tape Library 1999
Manufacturer Equipment Type Equipment Description Year of Acquisition
------------ -------------- --------------------- -------------------
LEXMARK 20T2040-Optra Printer 2000
CISCO (2) 3640 4-Slot Modular Router Routers 2000
LEXMARK Rollo 67 Paper Roll System 2000
IBM IBM 8476-50U Netfinity 3000 Server 2000
IBM (2) Workstations Workstations 2000
DELL (3) Servers / (&) Workstation Server/Workstation 2000
DELL Server Server 2000
DELL Server Server 2000
DELL Server Server 2000
DELL (2) Servers / (24) Workstations Server/Workstation 2000
DELL (20) Workstations Workstations 2000
HP (13) Printers Printer 2000
METRIX (3) Servers Server 2000
METRIX Server Server 2000
DELL Workstation Workstation 2000
DELL (3) Servers / (2) Workstations Workstation 2000
DELL Workstation Server/Workstation 2000
MICRO Server w/ (9) workstations Workstation 2000
MICRO (2) Workstations Server/Workstation 2000
COMPAQ Server Server 2000
DELL (4) Workstations Workstation 2000
HP Server/Workstation Server/Workstation 2000
HP Printer Printer 2000
HP Printer Printer 2000
DELL Workstation Workstation 2000
DELL Workstation Workstation 2000
DELL Workstation Workstation 2000
DELL Server Server 2000
DELL Workstation Workstation 2000
DELL Workstation Workstation 2000
DELL (10) Workstations Workstation 2000
DELL (1) Workstations Workstation 2000
DELL (8) Workstations Workstation 2000
DELL (9) Workstations Workstation 2000
DELL (9) Workstations Workstation 2000
DELL (5) Workstations Workstation 2000
DELL (12) Workstations Workstation 2000
DELL (10) Workstations Workstation 2000
DELL (10) Workstations Workstation 2000
DELL Server, (3) Workstation, (2) Printers Server/Workstation 2000
Obligations Total Equipment
Manufacturer Cash Rent in Lieu Debt Assumed Incurred Cost
------------ ---- ------------ ------------ ----------- ---------------
STK $490,110 - - - $ 490,110
IBM 178,673 - - - 178,673
STK 405,628 - - - 405,628
DEC 204,781 - - - 204,781
DEC 40,928 - - - 40,928
HP 304,718 - - - 304,718
SGI 263,498 - - - 263,498
IBM 477,466 - - - 477,466
IBM 600,000 - - - 600,000
IBM 1,542,485 - - - 1,542,485
SUN 461,207 - - - 461,207
SUN 69,559 - - - 69,559
HP 362,615 - - - 362,615
STK 253,296 - $1,015,612 - 1,268,909
IBM 260,517 - 517,937 - 778,454
SUN 25,314 - 129,651 - 154,965
SGI 126,621 - 695,834 - 822,455
IBM 126,658 - 396,741 - 523,399
IBM 75,167 - 232,816 - 307,983
SUN 33,226 - 212,642 - 245,868
SUN 55,139 - 188,395 - 244,584
STK 51,103 - 143,169 - 194,272
SUN 71,366 - 395,580 - 466,946
STK 66,410 - 208,684 - 275,094
STK 44,276 - - - 183,396
IBM 356,523 - 869,261 - 1,225,784
IBM 347,493 - 965,374 - 1,312,867
IBM 308,750 - 717,884 - 1,026,634
SUN 120,701 - - - 120,701
IBM 71,891 - 488,730 - 560,621
IBM 18,123 - 120,025 - 138,149
FORE 16,288 - - - 16,288
CISCO 60,403 - 352,596 - 413,000
CISCO 64,189 - - - 64,189
NORTEL 15,279 - 94,049 - 109,328
EPSON 11,325 - 81,677 - 93,002
STK 19,449 - - - 19,449
Obligations Total Equipment
Manufacturer Cash Rent in Lieu Debt Assumed Incurred Cost
------------ ---- ------------ ------------ ----------- ---------------
LEXMARK $20,976 - $136,524 - $157,500
CISCO 2,180 - 20,424 - 22,604
LEXMARK 1,636 - 16,785 - 18,422
IBM 885 - 9,122 - 10,006
IBM 454 - 4,042 - 4,495
DELL 4,247 - 42,452 - 46,698
DELL 359 - 2,936 - 3,295
DELL 560 - 4,593 - 5,153
DELL 1,520 - 12,449 - 13,969
DELL 3,569 - 30,508 - 34,077
DELL 2,630 - 22,973 - 25,603
HP 1,284 - 10,509 - 11,793
METRIX 746 - 7,182 - 7,928
METRIX 202 - 1,933 - 2,135
DELL 273 - 2,317 - 2,590
DELL 237 - 2,060 - 2,297
DELL 941 - 8,410 - 9,351
MICRO 236 - 2,250 - 2,486
MICRO 2,398 - 23,446 - 25,845
COMPAQ 258 - 2,605 - 2,863
DELL 1,693 - 17,523 - 19,215
HP 465 - 4,260 - 4,725
HP 440 - 4,095 - 4,535
HP 318 - 3,231 - 3,549
DELL 697 - 6,635 - 7,332
DELL 2,913 - 27,489 - 30,402
DELL 1,194 - 11,595 - 12,790
DELL 1,063 - 9,971 - 11,034
DELL 2,392 - 24,329 - 26,721
DELL 1,594 - 16,220 - 17,814
DELL 2,657 - 27,033 - 29,690
DELL 266 - 2,703 - 2,969
DELL 2,126 - 21,626 - 23,752
DELL 2,657 - 27,723 - 30,380
DELL 2,126 - 22,179 - 24,304
DELL 2,392 - 24,951 - 27,342
DELL 1,329 - 13,862 - 15,190
DELL 3,189 - 33,268 - 36,457
DELL 2,657 - 27,723 - 30,380
DELL 1,032 - 10,785 - 11,187
Commonwealth Income & Growth Fund III
Summary of Equipment Acquisitions
For the three year period ended December 31, 2000
(Table VI) - PAGE 1 of 2
Manufacturer Equipment Type Equipment Description Year of Acquisition
------------ -------------- --------------------- -------------------
SUN (12) Workstations Workstation 1998
SUN (30) Sun Servers Server 1998
SUN (4) Sun Servers Server 1998
SUN (1) Sun Server Server 1998
SUN Additional Memory Server 1998
STK (5) STK 9490-M34 Timberline Tape Drive 1998
IBM Upgrade 3745,3746 FEA IBM Controller 1998
IBM Upgrade 3745 features IBM Controller 1998
DEC (2) DEC Alpha 4100 Servers Server 1999
IBM RS6000 H-50 Workstation 1999
IBM RS6000 H-50 Workstation 1999
CIS (5) Catalyst 5500 Routers 1999
SUN Server 6500 Server 1999
IBM Escon Directors Directors 1999
CIS Cisc0 Routers Router 1999
SUN Sun Ultra Workstation Workstation 1999
FORE ASX 100 Comm. Switch 1999
FORE ASX 100 Comm. Switch 1999
FORE ASX 100 Comm. Switch 1999
CISCO Cisco Routers Routers 2000
Compaq (2) 100745-003 (2) 295636 Workstation 2000
Compaq (2) PS/550 (2) Smart 3200 Array Workstation 2000
Compaq P3, 3200 Smart Array Workstation 1999
Compaq P3550 Server 1999
Compaq Proliant Smart Array Controller 2000
Printronix (24) P505E (23) PL5428 Printer 2000
Tektronix Scope Monitor Scope Monitor 2000
Lexmark W810DIV, (4) 1200N Printer 2000
Baynetwork Router Router 2000
Lexmark (20) 20T2040, (20) 11KO688 Printer 2000
Commonwealth Income & Growth Fund III
Summary of Equipment Acquisitions
For the three year period ended December 31, 2000
(Table VI) - PAGE 2 of 2
Obligations Total Equipment
Manufacturer Cash Rent in Lieu Debt Assumed Incurred Cost
------------ ---- ------------ ------------ ----------- --------------
SUN $139,596 - - - $139,596
SUN 445,714 - - - 445,714
SUN 252,681 - - - 252,681
SUN 131,470 - - - 131,470
SUN 40,382 - - - 40,382
STK 407,908 - - - 407,908
IBM 18,392 - - - 18,392
IBM 18,392 - - - 18,392
DEC 140,857 - - - 140,857
IBM 24,252 - $163,146 - 187,398
IBM 47,927 - 325,820 - 373,747
CIS 154,053 - - - 154,053
SUN 27,973 - 152,380 - 180,353
IBM 111,690 - 632,907 - 744,597
CIS 140,579 - - - 140,579
SUN 24,342 - - - 24,342
FORE 16,288 - - - 16,288
FORE 804 - - - 804
Prior performance is not indicative of future performance.
ANY SUPPLEMENTS AND/OR STICKERS WHICH UPDATE
THIS PROSPECTUS ARE CONTAINED ON THE INSIDE BACK COVER.
Please be advised that any information represented that is not contained in this
prospectus has not been authorized by the partnership, the general partner or
the dealer manager. If any material change in the prospectus occurs, this
prospectus will be appropriately amended or supplemented. The use of forecasts
in this offering is also prohibited and not permitted.
SUPPLEMENT FOR TEXAS INVESTORS
Although this partnership uses the work "Growth" in its title, the
assets to be acquired by the partnership will not appreciate in value and will
in fact lose value rapidly after acquisition. By using the term "Growth," the
sponsor of this partnership means that the sponsor will purchase additional
equipment with money that otherwise could be distributed to investors as a
return on their investment.
You should rely only on the information contained in
this prospectus. We have not authorized anyone to
provide you with information different from that
contained in this prospectus. You should carefully
review and consider this information before making
your investment decision. Neither the delivery of this COMMONWEALTH INCOME
prospectus nor any sale made hereunder shall under any & GROWTH FUND IV
circumstances create an implication that there has
been no change in the affairs of the partnership since
the date hereof. However, if any material change
occurs while this prospectus is required by law to be
delivered, this prospectus will be amended or
supplemented accordingly.
Table of Contents Page Number
Prospectus Summary................................ 1
Risk Factors...................................... 4
Estimated Use of Proceeds........................ 13
Management....................................... 14
Responsibilities of the General Partner.......... 15
Investment Objectives and Policies............... 17
Compensation To the General
Partner and Affiliates....................... 24 [LOGO]
Conflicts Of Interest............................ 26 Commonwealth
Prior Offerings By Affiliates.................... 28 Capital Securities Corp.
Transferability of Units......................... 31 1160 West Swedesford Road, Suite 340
Distributions and Allocations.................... 33 Berwyn, Pennsylvania 19312
United States Federal Income 1-800-497-4554
Tax Considerations........................... 35
ERISA Considerations............................. 56
Management's Discussion of Certain
Financial Data............................... 59
Partnership Agreement Summary.....................60
Investor Suitability Standards................... 64
Plan of Distribution............................. 67
Reports to Limited Partners...................... 69
Legal Matters.................................... 70
Experts.......................................... 70
Where You Can Find
Additional Information...................... 71
Subscription Agreement....................Appendix I
Partnership Agreement....................Appendix II
Selected Financial Data......................Table I
Prior Performance Tables....................Table II
Supplements........................Inside Back Cover
===================================================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Securities and Exchange Commission Registration Fee $ 3,750.00
National Association of Securities Dealers, Inc. Filing Fee $ 2,000.00
Blue Sky fees and expenses $ 17,500.00
Printing Costs $ 25,000.00
Legal fees and expenses $ 30,000.00
Miscellaneous $ 173,500.00
Total $ 251,750.00
- ----------
Except for the SEC Registration Fee and the NASD Filing Fee, the
amounts listed above are estimates.
Item 14. Indemnification of Directors and Officers.
The Registrant's Agreement of Limited Partnership contains certain
indemnification provisions for the benefit of the General Partner and its
officers, directors and employees. Reference is made to "Responsibilities of the
General Partner" and "Summary of the Partnership Agreement" in the Prospectus
included in this Registration Statement for a summary of such provisions and to
the Agreement of Limited Partnership which is filed as an exhibit to this
Registration Statement.
Item 15. Recent Sales of Unregistered Securities.
On or about April 20, 2001, the Registrant sold a limited partnership
interest to Kimberly A. Springsteen, the initial limited partner of the
Partnership, for $500.00 paid in cash. The Registrant determined the issuance of
such interest to be exempt from registration under the Securities Act of 1933,
as amended, by virtue of the provisions of Section 4(2) thereof exempting
transactions by an issuer not involving any public offering.
II-1
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
1.1 Form of Dealer Manager Agreement
3.1 Certificate of Limited Partnership
3.2 Agreement of Limited Partnership (incorporated herein by
reference to Appendix I to the Prospectus)
5.1 Opinion of Reed Smith LLP as to legality of the Units
8.1 Opinion of Reed Smith LLP as to tax matters
10.1 Form of Participating Broker Agreement
10.2 Form of Escrow Agreement
23.1 Consent of Fishbein & Company
23.2 Consent of BDO Seidman
23.3 Consent of Reed Smith LLP (included in Exhibit 5.1 and 8.1)
24.1 Power of Attorney (included on the signature page to this
registration statement)
(b) Financial Statements Included in the Prospectus
Commonwealth Income & Growth Fund IV
Report of Independent Auditors
Balance Sheet at April 11, 2001
Notes to Balance Sheet
Commonwealth Income & Growth Fund, Inc.
Report of Independent Auditors
Balance Sheet at February 28, 2001
Notes to Balance Sheets
Commonwealth Capital Corp.
Report of Independent Auditors
Consolidated Balance Sheets at February 28, 2001 and
February 29, 2000 Consolidated Statements of Operations and
Retained Earnings for the Years ended February 28,
2001 and February 29, 2000
Consolidated Statements of Cash Flows for the Years ended
February 28, 2001 and February 29, 2000
Notes to Consolidated Financial Statements
All Schedules have been omitted as the required information is
presented in the balance sheet or related notes.
II-2
Item 17. Undertakings.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-3
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Berwyn, Commonwealth of Pennsylvania, on June 7, 2001.
COMMONWEALTH INCOME & GROWTH FUND IV
a Pennsylvania Limited Partnership
By: COMMONWEALTH INCOME & GROWTH
FUND, INC., General Partner
By: /s/ George S. Springsteen
--------------------------------
George S. Springsteen, President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Kimberly A. Springsteen and George S.
Springsteen and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution or resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Registration Statement, and to file the same, with all exhibits thereto,
and other documentation in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- -----
/s/ George S. Springsteen Chairman of the Board and June 7, 2001
- ------------------------------------ President of Commonwealth
George S. Springsteen Income & Growth Fund, Inc.
(Principal Executive Officer)
/s/ Kimberly A. Springsteen Executive Vice President, June 7, 2001
- ------------------------------------ Chief Operating Officer and
Kimberly A. Springsteen Secretary of Commonwealth
Income & Growth Fund, Inc.
/s/ Salvatore R. Barila Assistant Vice President and June 7, 2001
- ------------------------------------ Controller of Commonwealth
Salvatore R. Barila Income & Growth Fund, Inc.
(Chief Financial Officer)
/s/ Henry J. Abbott Vice President of Commonwealth June 7, 2001
- ------------------------------------ Income & Growth Fund, Inc.
Henry J. Abbott
II-4
EXHIBIT INDEX
Exhibit No. Exhibit Descripton
- ----------- ------------------
1.1 Form of Dealer Manager Agreement
3.1 Certificate of Limited Partnership
3.2 Agreement of Limited Partnership (incorporated herein by
reference to Appendix I to the Prospectus)
5.1 Opinion of Reed Smith LLP as to legality of the Units
8.1 Opinion of Reed Smith LLP as to tax matters
10.1 Form of Participating Broker Agreement
10.2 Form of Escrow Agreement
23.1 Consent of Fishbein & Company
23.2 Consent of BDO Seidman
23.3 Consent of Reed Smith LLP (included in Exhibit 5.1 and 8.1)
24.1 Power of Attorney (included on the signature page to this
Registration Statement)