UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 33-89476
COMMONWEALTH INCOME & GROWTH FUND II
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2795120
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
470 John Young Way
Exton PA 19341
(610) 494-9600
Indicate by check mark whether the registrant (I) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (ii) has been subject to such filing requirements
for the past 90 days:
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent fillers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
(Specific Sections Incorporated are identified under applicable items herein)
Certain exhibits to the Company's Registration Statement on Form S-1
(File No. 33-89476) and Annual Report on form 10-K for the fiscal year ended
December 31, 2002 are incorporated by reference as Exhibits in Part IV of this
Report.
PART I
ITEM 1: BUSINESS
GENERAL
Commonwealth Income and Growth Fund II (the "Partnership") was formed on January
13, 1995, under the Pennsylvania Revised Uniform Limited Partnership Act. The
Partnership began offering $15,000,000 of Units of Limited Partnership ("Units")
to the public on May 12, 1995 (the "Offerings"). On September 22, 1995, the
escrow agent released $2,521,380 in subscriptions from investors and 126,118
Units were admitted as Limited Partners of the Partnership. The Partnership
terminated its offering of Units on May 12, 1997, with 461,817 Units
($9,235,185) admitted as Limited Partners of the Partnership.
See "The Glossary" below for the definition of capitalized terms not otherwise
defined in the text of this report.
PRINCIPAL INVESTMENT OBJECTIVES
The Partnership was formed for the purpose of acquiring various types of
Equipment, including computer peripheral and other similar capital equipment.
The Partnership utilized the net proceeds of the Offering to purchase IBM and
IBM compatible computer peripheral and other similar capital equipment. The
Partnership utilizes Retained Proceeds and debt financing (not to exceed 30% of
the aggregate cost of the Equipment owned or subject to Conditional Sales
Contract by the Partnership at the time the debt is incurred) to purchase
additional Equipment. The Partnership acquires and leases equipment principally
to U.S. corporations and other institutions pursuant to Operating Leases. The
Partnership retains the flexibility to enter into Full Payout Net Leases, Direct
Financing Leases and Conditional Sales Contracts.
The Partnership's principal investment objectives are to;
(a) acquire, lease and sell Equipment to generate revenues from operations
sufficient to provide quarterly cash distributions to Limited
Partners;
(b) preserve and protect Limited Partners' capital;
(c) use a portion of Cash Flow and Net Disposition Proceeds derived from
the sale, refinancing or other disposition of Equipment to purchase
additional Equipment; and
(d) refinance, sell or otherwise dispose of Equipment in a manner that
will maximize the proceeds to the Partnership.
THERE CAN BE NO ASSURANCE THAT ANY OF THESE OBJECTIVES WILL BE ATTAINED.
Limited Partners do not have the right to vote on or otherwise approve or
disapprove any particular investment to be made by the Partnership.
Although the Partnership has acquired predominately new Equipment, the
Partnership may purchase used Equipment. Generally, Equipment is acquired from
manufacturers, distributors, leasing companies, agents, owner-users,
owner-lessors, and other suppliers upon terms that vary depending upon the
Equipment and supplier involved. Manufacturers and distributors usually furnish
a limited warranty against defects in material and workmanship and some purchase
agreements for Equipment provide for service and replacement of parts during a
limited period. Equipment purchases are also made through lease brokers and on
an ad hoc basis to meet the needs of a particular lessee.
As of December 31, 2002, substantially all Equipment purchased by the
Partnership is subject to an Operating Lease or an Operating Lease was entered
into with a third party when the Partnership acquired an item of Equipment. The
Partnership may also engage in sale/leaseback transactions, pursuant to which
the Partnership would purchase Equipment from companies that would then
immediately lease the Equipment from the Partnership. The Partnership may also
purchase Equipment which is leased under Full Payout Net Leases, Direct
Financing Leases or sold under Conditional Sales Contracts at the time of
acquisition or the Partnership may enter into a Full Payout Net Lease, Direct
Financing Leases or Conditional Sales Contract with a third party when the
Partnership acquires an item of Equipment.
2
The Partnership may enter into arrangements with one or more manufacturers
pursuant to which the Partnership purchases from such manufacturers Equipment
that has previously been leased directly by the manufacturer to third parties
("vendor leasing agreements"). The Partnership and manufacturers may agree to
nonrecourse loans to the Partnership from the manufacturers to finance the
acquisition of Equipment secured by the Equipment and the receivables due to the
manufacturers from users of such Equipment. It is expected that the
manufacturers of Equipment will provide maintenance, remarketing and other
services for the Equipment subject to such agreements. As of December 31, 2002,
the Partnership has not entered into any such agreements.
The General Partner has the discretion consistent with its fiduciary duty to
change the investment objectives of the Partnership if it determines that such a
change is in the best interest of the Limited Partners and so long as such a
change is consistent with the Partnership Agreement. The General Partner will
notify the Limited Partners if it makes such a determination to change the
Partnership's investment objectives.
TYPES OF EQUIPMENT
Computer Peripheral Equipment. Computer peripheral equipment consists of devices
used to convey information into and out of a central processing unit (or
"mainframe") of a computer system, such as tape drives, disk drives, tape
controllers, disk controllers, printers, terminals and related control units,
all of which are in some way related to the process of storing, retrieving, and
processing information by computer.
The Partnership acquires primarily IBM manufactured or IBM compatible equipment.
The General Partner believes that dealing in IBM or IBM compatible equipment is
particularly advantageous because of the large IBM customer base, policy of
supporting users with software and maintenance services and the large amount of
IBM and IBM compatible equipment in the marketplace.
Computer technology has developed rapidly in recent years and is expected to
continue to do so. Technological advances have permitted continued reductions in
the cost of computer processing capacity, thereby permitting applications not
economically feasible a few years ago. Much of the older IBM and IBM compatible
computer peripheral equipment has not been retired from service, because
software is generally interchangeable between older and newer equipment, and
older equipment is capable of performing many of the same functions as newer
equipment. The General Partner believes that historically values of peripheral
equipment have been affected less dramatically by changes in technology than
have the values of central processing units. An equipment user who upgrades to a
more advanced central processor generally can continue to use his existing
peripheral equipment. Peripheral equipment nevertheless is subject to declines
in value as new, improved models are developed and become available.
Technological advances and other factors, discussed below in Management
Discussion and Analysis, have at times caused dramatic reduction in the market
prices of older models of IBM and IBM compatible computer peripheral equipment
from the prices at which they were originally introduced.
Other Equipment-Restrictions. The Partnership acquires computer peripheral
equipment, such as tape drives, disk drives, tape controllers, disk controllers,
printers, terminals and related control units, all of which are in some way
related to the process of storing, retrieving and processing information by
computer. The General Partner is also authorized, but does not presently intend,
to cause the Partnership to invest in non-IBM compatible computer peripheral,
data processing, telecommunication or medical technology equipment. The
Partnership may not invest in any of such other types of Equipment (i) to the
extent that the purchase price of such Equipment, together with the aggregate
Purchase Price of all such other types of Equipment then owned by the
Partnership, is in excess of 25% of the total cost of all of the assets of the
Partnership at the time of the Partnership's commitment to invest therein and
(ii) unless the General Partner determines that such purchase is in the best
economic interest of the Partnership at the time of the purchase and, in the
case of non-IBM compatible peripheral Equipment, that such Equipment is
comparable in quality to similar IBM or IBM compatible Equipment. There can be
no assurance that any Equipment investments can be found which meet this
standard. Accordingly, there can be no assurance that investments of this type
will be made by the Partnership.
3
DIVERSIFICATION
Diversification is generally desirable to minimize the effects of changes in
specific industries, local economic conditions or similar risks. However, the
extent of the Partnership's diversification, in the aggregate and within each
category of Equipment, depends in part upon the financing which can be assumed
by the Partnership or borrowed from third parties on satisfactory terms. The
Partnership's policy not to borrow on a recourse basis will further limit its
financing options. Diversification also depends on the availability of various
types of Equipment. As of December 31, 2002, the Partnership has acquired a
diversified Equipment portfolio, which it has leased to 47 different companies
located throughout the United States. The allocations are as follows:
-----------------------------------------------------------------
Equipment Type Approximate %
-----------------------------------------------------------------
Workstations 40%
Escon Directors 18%
High-End Printers 18%
Tape Subsystems 12%
Communication Controllers 6%
Routers 5%
Low-End Printers 1%
----
Total 100%
====
During the operational stage of the Partnership, the Partnership may
not at any one point in time lease (or sell pursuant to a Conditional Sales
Contract) more than 25% of the Equipment to a single Person or Affiliated group
of Persons.
DESCRIPTION OF LEASES
The Partnership to date has purchased, and in the future intends to continue to
purchase only Equipment that is subject to a lease or for which a lease or
similar agreement will be entered into contemporaneously with the consummation
of the Partnership's acquisition of the Equipment. The General Partner to date
has leased and in the future intends to lease most of the Equipment purchased by
the Partnership to third parties pursuant to Operating Leases. Operating Leases
are relatively short-term (12 to 48 month) leases under which the aggregate
noncancellable rental payments during the original term of the lease are not
sufficient to permit the lessor to recover the purchase price of the subject
Equipment. The Equipment may also be leased pursuant to Full Payout Net Leases.
Full Payout Net Leases are leases under which the aggregate noncancellable
rental payments during the original term of the lease are at least sufficient to
recover the purchase price of the subject Equipment. It is anticipated that the
Partnership will enter into few, if any, Full Payout net Leases. The General
Partner may also enter into Conditional Sales Contracts for Equipment. A
Conditional Sales Contract generally provides that the noncancellable payments
to the seller over the term of the contract are sufficient to recover the
investment in such Equipment and to provide a return on such investment. Under a
Conditional Sales Contract, the seller reserves title to, and retain a security
interest in, the Equipment until the Purchase Price of the Equipment is paid. As
of December 31, 2002, the Partnership has not entered into any Full Payout Net
Leases or Conditional Sales Contracts for Equipment and does not presently
intend to do so. The Equipment may also be leased pursuant to Capital Leases.
Capital Leases are leases under which the Equipment either transfers to the
lessee at the end of the lease term, contains a bargain purchase price option,
the lease term is equal to 75% or more of the estimated economic life of the
Equipment, or the present value at the beginning of the lease term of the
minimum lease payments is equal to or exceeds 90% of the excess of the fair
value of the Equipment. As of December 31, 2002, we have entered into six
Capital Leases with one lessee.
In general, the terms of the Partnership's leases, whether the Equipment is
leased pursuant to an Operating lease, Capital Lease or a Full Payout Net Lease,
depend upon a variety of factors, including: the desirability of each type of
lease from both an investment and a tax point of view; the relative demand among
lessees for Operating, Capital Lease or Full Payout Net Leases; the type and use
of Equipment and its anticipated residual value; the business of the lessee and
its credit rating; the availability and cost of financing; regulatory
considerations; the accounting treatment of the lease sought by the lessee or
the Partnership; and competitive factors.
4
An Operating Lease generally represents a greater risk to the Partnership than a
Capital Lease or Full Payout Net Lease, because in order to recover the purchase
price of the subject Equipment and earn a return on such investment, it is
necessary to renew or extend the Operating Lease, lease the Equipment to a third
party at the end of the original lease term, or sell the Equipment. On the other
hand, the term of an Operating Lease is generally much shorter than the term of
a Capital Lease or Full Payout Net Lease, and the lessor is thus afforded an
opportunity under an Operating Lease to re-lease or sell the subject Equipment
at an earlier stage of the Equipment's life cycle than under a Capital Lease or
Full Payout Net Lease. Also, the annual rental payments received under an
Operating Lease are ordinarily higher than those received under a Capital Lease
or Full Payout Net Lease.
The Partnership's policy is to generally enter into "triple net leases" (or the
equivalent, in the case of a Conditional Sales Contract) which typically provide
that the lessee or some other party bear the risk of physical loss of the
Equipment; pay taxes relating to the lease or use of the Equipment; maintain the
Equipment; indemnify the Partnership-lessor against any liability suffered by
the Partnership as the result of any act or omission of the lessee or its
agents; maintain casualty insurance in an amount equal to the greater of the
full value of the Equipment and a specified amount set forth in the lease; and
maintain liability insurance naming the Partnership as an additional insured
with a minimum coverage which the General Partner deems appropriate. In
addition, the Partnership may purchase "umbrella" insurance policies to cover
excess liability and casualty losses, to the extent deemed practicable and
advisable by the General Partner. As of December 31, 2002, all leases that have
been entered into are "triple net leases".
The General Partner has not established any standards for lessees to whom it
will lease Equipment and, as a result, there is not an investment restriction
prohibiting the Partnership from doing business with any lessees. However, a
credit analysis of all potential lessees is undertaken by the General Partner to
determine the lessee's ability to make payments under the proposed lease. The
General Partner may refuse to enter into an agreement with a potential lessee
based on the outcome of the credit analysis.
The terms and conditions of the Partnership's leases, or Conditional Sales
Contracts, are each determined by negotiation and may impose substantial
obligations upon the Partnership. Where the Partnership assumes maintenance or
service obligations, the General Partner generally causes the Partnership to
enter into separate maintenance or service agreements with manufacturers or
certified maintenance organizations to provide such services. Such agreements
generally require annual or more frequent adjustment of service fees. As of
December 31, 2002, the Partnership has not entered into any such agreements.
BORROWING POLICIES
The General Partner, at its discretion, may cause the Partnership to incur debt
in the maximum aggregate amount of 30% of the aggregate cost of the Equipment
owned, or subject to Conditional Sales Contract (except that the Partnership may
not incur any indebtedness to acquire Equipment until the net proceeds of the
Offering are fully invested, or committed to investment, in Equipment). The
Partnership will incur only non-recourse debt, which is secured by Equipment and
lease income there from. Such leveraging permits the Partnership to increase the
aggregate amount of its depreciable assets, and, as a result, potentially
increases both its lease revenues and its federal income tax deductions above
those levels, which would be achieved without leveraging. There is no limit on
the amount of debt that may be incurred in connection with the acquisition of
any single item of Equipment. Any debt incurred is fully amortized over the term
of the initial lease or Conditional Sales Contract to which the Equipment
securing the debt is subject. The precise amount borrowed by the Partnership
depends on a number of factors, including the types of Equipment acquired by the
Partnership; the creditworthiness of the lessee; the availability of suitable
financing; and prevailing interest rates. The Partnership is flexible in the
degree of leverage it employs, within the permissible limit. There can be no
assurance that credit will be available to the Partnership in the amount or at
the time desired or on terms considered reasonable by the General Partner. As of
December 31, 2002, the aggregate non-recourse debt outstanding of $1,780,000 was
17.2% of the aggregate cost of the Equipment owned.
5
The Partnership may continue to purchase some items of Equipment without
leverage. If the Partnership purchases an item of Equipment without leverage and
thereafter suitable financing becomes available, it may then obtain the
financing, secure the financing with the purchased Equipment to the extent
practicable and invest any proceeds from such financing in additional items of
Equipment, or it may distribute some or all of such proceeds to the Limited
Partners. Any such later financing will be on terms consistent with the terms
applicable to borrowings generally. As of December 31, 2002, the Partnership has
not exercised this option.
After the net proceeds of the offering are fully invested in Equipment, the
General Partner plans to continue to cause the Partnership to borrow funds, to
the fullest extent practicable, at interest rates fixed at the time of
borrowing. However, the Partnership may borrow funds at rates, which vary with
the "prime" or "base" rate. If lease revenues were fixed, a rise in the "prime"
or "base" rate would increase borrowing costs and reduce the amount of the
Partnership's income and cash available for distribution. Therefore, the General
Partner is permitted to borrow funds to purchase Equipment at fluctuating rates
only if the lease for such Equipment provides for fluctuating rental payments
calculated on a similar basis.
Any additional debt incurred by the Partnership must be non-recourse.
Non-recourse debt, in the context of the business to be conducted by the
Partnership, means that the lender providing the funds can look for security
only to the Equipment pledged as security and the proceeds derived from leasing
or selling such Equipment. Neither the Partnership nor any Partner (including
the General Partner) would be liable for repayment of any non-recourse debt.
Loan agreements may also require that the Partnership maintain certain reserves
or compensating balances and may impose other obligations upon the Partnership.
Moreover, since a significant portion of the Partnership's revenues from the
leasing of Equipment will be reserved for repayment of debt, the use of
financing reduces the cash, which might otherwise be available for distributions
until the debt has been repaid and may reduce the Partnership's Cash Flow over a
substantial portion of the Partnership's operating life. As of December 31,
2002, no such agreements existed.
The General Partner and any of its Affiliates may, but are not required to, make
loans to the Partnership on a short-term basis. If the General Partner or any of
its Affiliates makes such a short-term loan to the Partnership, the General
Partner of Affiliate may not charge interest at a rate greater that the interest
rate charged by unrelated lenders on comparable loans for the same purpose in
the same locality. In no event is the Partnership required to pay interest on
any such loan at an annual rate greater than three percent over the "prime rate'
from time to time announced by PNC Bank, Philadelphia, Pennsylvania ("PNC
Bank"). All payments of principal and interest on any financing provided by the
General Partner or any of its affiliates are due and payable by the Partnership
within 12 months after the date of the loan.
REFINANCING POLICIES
Subject to the limitations set forth in "Borrowing Policies" above, the
Partnership may refinance its debt from time to time. With respect to a
particular item of Equipment, the General Partner will take into consideration
such factors as the amount of appreciation in value, if any, to be realized, the
possible risks of continued ownership, and the anticipated advantages to be
obtained for the Partnership, as compared to selling such Equipment. As of
December 31, 2002, the Partnership has refinanced its notes payable for six
existing Operating Leases. The refinanced notes payable, originally set to
expire between February, 2004 and December, 2004, had a balance of approximately
$190,000 at the time of refinancing. The Partnership received cash of
approximately $46,000, net of refinancing fees of approximately $3,000. The new
notes payable, which was approximately $239,000 at the time of refinancing,
expire in June 2006. Simultaneous, with the refinancing, the Partnership entered
into Direct Financing Capital Leases with the lessee for this Equipment.
Refinancing, if achievable, may permit the Partnership to retain an item of
Equipment and at the same time to generate additional funds for reinvestment in
additional Equipment or for distribution to the Limited Partners.
6
LIQUIDATION POLICIES
The General Partner intends to cause the Partnership to begin disposing of its
Equipment in approximately January 2006. Notwithstanding the Partnership's
objective to sell all of its assets and dissolve by December 31, 2006, the
General Partner may at any time cause the Partnership to dispose of all its
Equipment and, dissolve the Partnership upon the approval of Limited Partners
holding a Majority in Interest of Units.
Particular items of Equipment may be sold at any time if, in the judgment of the
General Partner, it is in the best interest of the Partnership to do so. The
determination of whether particular items of Partnership Equipment should be
sold or otherwise disposed of is made by the General Partner after consideration
of all relevant factors (including prevailing general economic conditions,
lessee demand, the General Partner's views of current and future market
conditions, the cash requirements of the Partnership, potential capital
appreciation, cash flow and federal income tax considerations), with a view
toward achieving the principal investment objectives of the Partnership. As
partial payment for Equipment sold, the Partnership may receive purchase money
obligations secured by liens on such Equipment. Subject to the General Partner's
discretion the Partnership may extend beyond December 31, 2006, if deemed
beneficial to the Partnership.
MANAGEMENT OF EQUIPMENT
Equipment management services for the Partnership's Equipment is provided by the
General Partner and its Affiliates and by persons employed by the General
Partner. Such services will consist of collection of income from the Equipment,
negotiation and review of leases, Conditional Sales Contracts and sales
agreements, releasing and leasing-related services, payment of operating
expenses, periodic physical inspections and market surveys, servicing
indebtedness secured by Equipment, general supervision of lessees to assure that
they are properly utilizing and operating Equipment, providing related services
with respect to Equipment, supervising, monitoring and reviewing services
performed by others in respect to Equipment and preparing monthly Equipment
operating statements and related reports.
COMPETITION
The equipment leasing industry is highly competitive. The Partnership competes
with leasing companies, equipment manufacturers and their affiliated financing
companies, distributors and entities similar to the Partnership (including other
programs sponsored by the General Partner), some of which have greater financial
resources than the Partnership and more experience in the equipment leasing
business than the General Partner. Other leasing companies and equipment
manufacturers, their affiliated financing companies and distributors may be in a
position to offer equipment to prospective lessees on financial terms, which are
more favorable than those, which the Partnership can offer. They may also be in
a position to offer trade-in privileges, software, maintenance contracts and
other services, which the Partnership may not be able to offer. Equipment
manufacturers and distributors may offer to sell equipment on terms (such as
liberal financing terms and exchange privileges), which will afford benefits to
the purchaser similar to those obtained through leases. As a result of the
advantages, which certain of its competitors may have, the Partnership may find
it necessary to lease its Equipment on a less favorable basis than certain of
its competitors.
The computer peripheral equipment industry is extremely competitive. Competitive
factors include pricing, technological innovation and methods of financing.
Certain manufacturer-lessors maintain advantages through patent protection,
where applicable, and through a policy that combines service and hardware with
payment accomplished through a single periodic charge.
The dominant firm in the computer marketplace is International Business Machines
Corporation, and its subsidiary IBM Credit Corporation is the dominant force in
the leasing of IBM equipment. Because of IBM's substantial resources and
dominant position, revolutionary changes with respect to computer systems,
pricing, marketing practices, technological innovation and the availability of
new and attractive financing plans could occur at any time. Significant action
in any of these areas by IBM or IBM Credit Corporation might materially
adversely affect the Partnership's business or the other manufacturers with whom
the General Partner might negotiate purchase and other agreements. Any adverse
effect on these manufacturers could be reflected in the overall return realized
by the Partnership on equipment from those manufacturers of from IBM.
7
Investments
The Partnership, through Commonwealth Capital Corp ("CCC"), participates in the
purchase of equipment subject to associated debt obligations and lease
agreements. The purchase price, list price and monthly rentals presented below
are the Partnership's participation of the total amounts, based on CCC's
allocation of the equipment to the Partnership, and in some instances, other
affiliated partnerships.
As of March 26, 2003, the Partnership has purchased, or has made the commitment
to purchase, the following Equipment:
EQUIPMENT LIST PURCHASE MONTHLY LEASE
LESSEE MFG DESCRIPTION PRICE PRICE RENT TERM
Chrysler STK (2) 9490-M34 $ 686,158 $ 490,110 $12,001 48
ADP IBM (1) 3490-A20 422,900 178,673 4,290 36
Household Intl. STK (3) 9490-M34 671,898 405,628 9,100 36
Timken DEC (1) Alpha server 259,507 204,781 5,308 36
Timken DEC (1) Alpha server 46,657 40,928 1,062 36
Johnson Control HP (13) HP9000-C110 441,415 304,718 7,961 36
Honda R&D SGI Onyx Infinite Reality 323,108 263,498 7,076 36
AT&T IBM (1) 3900 DW1/DW2 746,485 477,466 10,205 36
Federated IBM (38) 3130-020 909,910 600,000 15,162 34
Lucent SUN (1)E6000 server 642,452 461,207 12,042 36
Lucent upgrade SUN Upgrade to server 97,000 69,559 2,046 34
AT&T STK (9) 9490-M34 2,015,694 1,268,909 31,144 36
Avon IBM (75%( (8) 3900-OW1 2,002,710 1,542,485 37,058 36
Chrysler IBM (2) ES3000 1,146,500 778,454 22,844 24
Allied Signal HP (20) C180 workstations 838,339 362,615 11,775 24
Transamerica SUN (2) ES3000 servers 212,730 154,965 3,976 36
Computer Science Corp. SGI (50%) (141) workstations 2,055,893 822,455 20,174 36
Charles Schwab IBM (2) 9032-003 845,043 523,399 21,031 36
Charles Schwab IBM (20%) (6) 9032-003 2,479,443 307,983 6,989 36
Equitable Life SUN (2) E3000 336,220 205,893 6,491 36
Chase SUN (3) E45D 358,562 244,584 8,386 24
Aetna STK (2) 9490-M34 535,932 194,272 4,395 36
Equitable Life SUN 6000 Server 617,310 466,496 12,186 36
Chrysler STK Redwood Tape Drives 466,140 275,094 6,313 36
Chrysler STK Redwood Tape Drives 310,760 183,396 4,209 36
Depository Trust ESCON (4) 9032 Directors 1,644,436 1,312,867 33,376 31
Depository Trust ESCON (4) 9032 Directors 1,644,436 1,255,784 33,376 27
Pitney Bowes IBM (1) 3590 1,846,080 1,026,634 20,045 38
Lucent SUN (1) 4500 Server 184,897 120,701 3,091 36
Kaiser IBM (7) RS 6000 770,611 560,621 14,928 36
Kaiser IBM (2) RS 170 209,445 138,149 3,666 36
Kaiser CISCO Routers 78,172 62,538 1,637 36
Thomson EPSON (16) Powerlite Projectors 146,960 93,002 2,578 36
Thomson NORTEL Network LLXR759 165,000 109,328 4,245 36
Great Lakes Chemical CISCO (100) Routers 635,385 456,368 12,073 36
AT&T NM Net Ports DS3 16,288 15,229 435 36
Datapage Tech CISCO Routers 22,604 20,424 725 34
Digital Display Tech ROLLO Paper Roll System 18,422 16,785 567 36
Global Routing Tech DELL Workstations/Servers 46,698 42,452 1,434 36
Keller Group DELL Workstations/Servers 59,680 53,481 2,016 32
Keller Group HP Servers/Printers 34,210 30,487 1,203 30-31
Kennedy Assoc/Architects DELL Workstations/Servers 52,632 47,598 1,664 31-36
Missouri Farm Bureau Serv DELL Workstations/Servers 265,000 241,616 8,008 36-37
Missouri Farm Bureau Serv HP Workstations/Serv/Printers 12,084 11,817 354 37
Missouri Farm Bureau Serv IBM Servers 11,034 9,971 364 33
Patients First Health Care Micro Sys Workstations 2,863 2,605 88 36
Petnik & Smith Commun. COMPAQ Server 19,215 17,523 642 33
Provident Counseling DELL Workstations 4,725 4,260 156 33
The Gannon Company IBM Workstations/Server 14,502 11,608 463 24-31
Tonnercharge of St Louis HP Server/Printers 9,927 7,790 332 20-27
Union Financial Group DELL Workstation 7,332 5,427 234 22
Vatterott Educational Centers DELL Workstations 43,191 39,084 1,381 34-35
Thomson NORTEL (46) LAN Routers 74,480 49,106 1,369 36
General Electric Medical CISCO Routers 117,110 69,523 1,856 35
General Electric Medical CISCO Routers 100,000 65,491 1,762 36
Thomson Thermojet SOP System 27,430 18,189 710 24
General Electric Medical IBM (15) 4320-001 InfoPrint 64,050 41,996 1,159 36
Thomson XEROX 8830 Printer/Plotter 41,280 27,391 1,064 24
Kaiser IBM 7017-S85 147,308 150,254 11,655 36
Boeing SUN 280R Sparclil Model 555,663 566,776 14,892 36
Eq Pkg Various Routers/Servers 454,096 454,096 15,940 16-36
General Electric Medical CISCO 24 Port Access Server 15,175 15,479 411 36
General Electric Medical CISCO 1 Port upgrade 1,943 1,982 67 30
Cap Tech Various Routers/Servers 458,504 347,833 10,685 25-37
America Online SUN Servers 836,026 836,026 22,799 35
JC Penny NCR Router 74,071 74,071 2,249 30
JC Penny NCR Router 120,767 120,767 3,896 30
ITT Night Vision DELL Workstation 24,486 24,486 1,084 22
America Online SUN Server 135,315 135,315 4,474 27
Budnick Converting Inc DELL Workstation 47,955 47,955 1,370 34
Datapage Technologies DELL Workstations/Printer 10,160 10,160 280 36
C. Hager & Sons Hinge Mfg DELL Workstations 65,496 65,496 1,875 34
C. Hager & Sons Hinge Mfg DELL Server 19,036 19,036 549 34
Paric Corporation NEC Monitors 32,151 32,151 1,267 24
Rogers Townsend COMPAQ Servers 36,696 36,696 1,006 36
Retex Corporation COMPAQ Workstation 6,093 6,093 379 14
Training A-La-Carte COMPAQ Workstation 8,502 8,502 241 35
General Electric Medical SUN Server 20,000 20,000 521 36
8
Reserves
Because the Partnership's leases are on a "triple-net" basis, no permanent
reserve for maintenance and repairs will be established from the Offering
proceeds. However, the General Partner, in its sole discretion, may retain a
portion of the Cash Flow and Net Disposition Proceeds available to the
Partnership for maintenance, repairs and working capital. There are no
limitations on the amount of Cash Flow and Net Disposition Proceeds that may be
retained as reserves. Since no reserve will be established if available Cash
Flow of the Partnership is insufficient to cover the Partnership's operating
expenses and liabilities, it may be necessary for the Partnership to obtain
additional funds by refinancing its Equipment or borrowing.
General Restrictions
Under the Partnership Agreement, the Partnership is not permitted,
among other things, to:
(a) invest in junior trust deeds unless received in connection
with the sale of an item of Equipment in an aggregate amount
which does not exceed 30% of the assets of the Partnership on
the date of the investment;
(b) invest in or underwrite the securities of other issuers;
(c) acquire any Equipment for Units;
(d) issue senior securities (except that the issuance to lenders
of notes or other evidences of indebtedness in connection with
the financing or refinancing of Equipment or the Partnership's
business shall not be deemed to be the issuance of senior
securities);
(e) make loans to any Person, including the General Partner or any
of its Affiliates, except to the extent a Conditional Sales
Contract constitutes a loan;
9
(f) sell or lease any Equipment to, lease any Equipment from, or
enter into any sale-leaseback transactions with, the General
Partner or any of its Affiliates; or
(g) give the General Partner or any of its Affiliates an exclusive
right or employment to sell the Partnership's Equipment.
The General Partner has also agreed in the Partnership Agreement to use its best
efforts to assure that the Partnership shall not be deemed an "investment
company" as such term is detained in the Investment Company Act of 1940.
The General Partner and its Affiliates may engage in other activities, whether
or not competitive with the Partnership. The Partnership Agreement provides,
however, that neither the General Partner nor any of its Affiliates may receive
any rebate or "give up" in connection with the Partnership's activities or
participate in reciprocal business arrangements that circumvent the restrictions
in the Partnership Agreement against dealings with Affiliates.
EMPLOYEES
The Partnership has no employees and receives administrative and other services
from a related party, CCC, which has 26 employees as of December 31, 2002.
ITEM 2: PROPERTIES
NOT APPLICABLE
ITEM 3: LEGAL PROCEEDINGS
Commonwealth Capital Corp filed a complaint on December 21,
2001 with Avon Products, Inc. with the Federal District Court
of the Eastern District of Pennsylvania, No. 01-C2-6915. The
complaint alleges that the defendants illegally purchased/sold
leased equipment without the Partnership's authorization,
along with suing for late fees on various lease payments.
In December 2002, the representatives of CCC, along with
representatives from El Camino and consultants for Avon, met
for a reconciliation meeting. This meeting was designed to
reconcile all accounting issues (rentals due) related to the
Avon lease. A final reconciliation was not submitted by all
parties until around February 15, 2003. At that time, CCC
reconciled, via payments histories, the amounts owed by each
party. A settlement conference with the judge was then
scheduled for March 6, 2003. Prior to the conference, CCC
submitted their reconciliation of amounts due. At the
conference, a reasonable settlement could not be reached on
various issues involved in the litigation. Avon was granted
another 90 days for discovery, after which a trial date will
be set.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NOT APPLICABLE
PART II
ITEM 5: MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no public market for the Units nor is it anticipated that one will
develop. As of December 31, 2002, there were 524 holders of Units. The Units are
not listed on any exchange or permitted to trade on any over-the-counter market.
In addition, there are substantial restrictions on the transferability of Units.
10
GENERAL LIMITATIONS
Units cannot be transferred without the consent of the General Partner, which
may be withheld in its absolute discretion. The General Partner monitors
transfers of Units in an effort to ensure that all transfers are within certain
safe harbors promulgated by the IRS to furnish guidance regarding publicly
traded partnerships. These safe harbors limit the number of transfers that can
occur in any one year. The General Partner intends to cause the Partnership to
comply with the safe harbor that permits nonexempt transfers and redemptions of
Units of up to five percent of the total outstanding interest in the
Partnership's capital or profits in any one year.
REDEMPTION PROVISION
Upon the conclusion of the 30-month period following the termination of the
Offering, the Partnership may, at the sole discretion of the General Partner,
repurchase a number of the outstanding Units. After such 30 month period, on a
semi-annual basis, the General Partner, at its discretion, will establish an
amount for redemption, generally not to exceed two percent of the outstanding
Units per year, subject to the General Partner's good faith determination that
such redemptions will not (a) cause the Partnership to be taxed as a corporation
under Section 7704 of the Code or (b) impair the capital or operations of the
Partnership. (The Partnership may redeem Units in excess of the two percent
limitation if, in the good faith judgment of the General Partner, the conditions
imposed in the preceding sentence would remain satisfied.) The redemption price
for Units will be 105% of the selling Limited Partner's Adjusted Capital
Contributions attributable to the Units for sale. Following the determination of
the annual redemption amount, redemptions will occur on a semi-annual basis and
all requests for redemption, which must be made in writing, must be on file as
of the Record Date in which the redemption is to occur. The General Partner will
maintain a master list of requests for redemption with priority being given to
Units owned by estates, followed by IRAs and Qualified Plans. All other requests
will be considered in the order received. Redemption requests made by or on
behalf of Limited Partners who are not affiliated with the General Partner or
its Affiliates will be given priority over those made by Limited Partners who
are affiliated with the General Partner or its Affiliates. All redemption
requests will remain in effect until and unless canceled, in writing, by the
requesting Limited Partner(s).
The Partnership will accept redemption requests beginning 30 months following
the termination of the Offering. There will be no limitations on the period of
time that a redemption request may be pending prior to its being granted.
Limited Partners will not be required to hold their interest in the Partnership
for any specified period prior to their making a redemption request.
In order to make a redemption request, Limited Partners will be required to
advise the General Partner in writing of such request. Upon receipt of such
notification, the Partnership will provide detailed forms and instructions to
complete the request.
EXEMPT TRANSFERS
The following six categories of transfers are exempt transfers for purposes of
calculating the volume limitations imposed by the IRS and will generally be
permitted by the General Partner:
(1) transfers in which the basis of the Unit in the hands of the
transferee is determined, in whole or in part, by reference to
its basis in the hands of the transferor (for example, Units
acquired by corporations in certain reorganizations,
contributions to capital, gifts of Units, Units contributed to
another partnership, and no liquidating as well as liquidating
distributions by a parent partnership to its partners of
interests in a sub partnership);
(2) transfers at death;
11
(3) transfers between members of a family (which include brothers
and sisters, spouse, ancestors, and lineal descendants);
(4) transfers resulting from the issuance of Units by the
Partnership in exchange for cash, property, or services;
(5) transfers resulting from distributions from Qualified Plans;
and
(6) any transfer by a Limited Partner in one or more transactions
during any 30-day period of Units representing in the
aggregate more than five percent of the total outstanding
interests in capital or profits of the Partnership.
ADDITIONAL RESTRICTIONS ON TRANSFER
Limited Partners who wish to transfer their Units to a new beneficial owner are
required to pay the Partnership up to $50 for each transfer to cover the
Partnership's cost of processing the transfer application and take such other
actions and execute such other documents as may be reasonably requested by the
General Partner. There is no charge for re-registration of a certificate in the
event of a marriage, divorce, death, or trust so long as the transfer is not a
result of a sale of the Units.
In addition, the following restrictions apply to each transfer: (i) no transfer
may be made if it would cause 25% or more of the outstanding Units to be owned
by benefit plans; and (ii) no transfer is permitted unless the transferee
obtains such governmental approvals as may reasonably be required by the General
Partner, including without limitation, the written consents of the Pennsylvania
Securities Commissioner and of any other state securities agency or commission
having jurisdiction over the transfer.
ALLOCATION AND DISTRIBUTION BETWEEN THE GENERAL PARTNER AND THE LIMITED PARTNERS
Cash distributions, if any, are made quarterly on March 31, June 30, September
30 and December 31, of each year. Distributions are made 99% to the Limited
Partners and one percent to the General Partner until the Limited Partners have
received an amount equal to their Capital Contributions plus the Priority
Return; thereafter, cash distributions will be made 90% to Limited Partners and
10% to the General Partner. Distributions made in connection with the
liquidation of the Partnership or a Partner's Units will be made in accordance
with the Partner's positive Capital Account balance as determined under the
Partnership Agreement and Treasury Regulations.
The Priority Return is calculated on the Limited Partners' Adjusted Capital
Contributions for their Units. The Adjusted Capital Contributions will initially
be equal to the amount paid by the Limited Partners for their Units. If
distributions at any time exceed the Priority Return, the excess will reduce the
Adjusted Capital Contributions, decreasing the base on which the Priority Return
is calculated.
If the proceeds resulting from the sale of any Equipment are reinvested in
Equipment, sufficient cash will be distributed to the Partners to pay the
additional federal income tax resulting from such sale for a Partner in a 39.6%
federal income tax bracket or, if lower, the maximum federal income tax rate in
effect for individuals for such taxable year.
Generally, the General Partner is allocated Net Profits equal to its cash
distributions (but not less than one percent of Net Profits) and the balance is
allocated to the Limited Partners. Net Profits arising from transactions in
connection with the termination or liquidation of the Partnership are allocated
in the following order: (1) First, to each Partner in an amount equal to the
negative amount, if any, of his Capital Account; (2) Second, an amount equal to
the excess of the proceeds which would be distributed to the Partners based on
the Operating Distributions to the Partners over the aggregate Capital Accounts
of all the Partners, to the Partners in proportion to their respective shares of
such excess, and (3) Third, with respect to any remaining Net Profits, to the
Partners in the same proportions as if the distributions were Operating
Distributions. Net Losses, if any, are in all cases allocated 99% to the Limited
Partners and one percent to the General Partner.
Net Profits and Net Losses are computed without taking into account, in each
taxable year of the Partnership, any items of income, gain, loss or deduction
required to be specially allocated pursuant to Section 704(b) of the Code and
the Treasury Regulation promulgated there under. No Limited Partner is required
to contribute cash to the capital of the Partnership in order to restore a
closing Capital Account deficit, and the General Partner has only a limited
deficit restoration obligation under the Partnership Agreement.
12
Quarterly distributions in the following amounts were declared and paid to the
Limited Partners during 2002, 2001 and 2000.
Quarter Ended 2002 2001 2000
---------------------------------------------------------
March 31 $ 171,428 $ 228,600 $ 228,600
June 30 114,286 228,600 228,599
September 30 114,286 228,229 228,625
December 31 114,286 - 228,600
---------------------------------------
$ 514,286 $ 685,429 $ 914,424
========== ========== ==========
ALLOCATIONS AND DISTRIBUTIONS AMONG THE LIMITED PARTNERS
Except during the Offering Period, Cash Available for Distribution, which is
allocable to the Limited Partners, is apportioned among and distributed to them
solely with reference to the number of Units owned by each as of the Record Date
for each such distribution. During the Offering Period, Cash Available for
Distribution which is allocable to the Limited Partners was apportioned among
and distributed to them with reference to both (i) the number of Units owned by
each as of each Record Date and (ii) the number of days since the previous
Record Date (or, in the case of the first Record Date, the commencement of the
Offering Period) that the Limited Partner owned the Units.
After the Offering Period, Net Profits, Net Losses and Cash Available for
Distribution allocable to the Limited Partners is apportioned among them in
accordance with the number of Units owned by each. A different convention was
utilized during the Offering Period, whereby Net Profits and Net Losses
allocable to Limited Partners were apportioned among them in the ratio which the
product of the number of Units owned by a Limited Partner multiplied by the
number of days in which the Limited Partner owns such Units during the period
bears to the sum of such products for all Limited Partners.
In addition, where a Limited Partner transfers Units during a taxable year, the
Limited Partner may be allocated Net Profits for a period for which such Limited
Partner does not receive a corresponding cash distribution.
ITEM 6: SELECTED FINANCIAL DATA
The following table sets forth, in summary form, selected financial data for the
Partnership for each of the five years ended December 31, 2002. This table is
qualified in its entirely by the more detailed information and financial
statements presented elsewhere in this report, and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes thereto included
herein.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Lease Income $ 2,711,579 $ 3,014,643 $ 4,105,811 $ 4,598,009 $ 4,212,862
------------ ------------ ------------ ------------ ------------
Net (Loss) Income (251,242) 422,762 (369,209) (379,337) (433,744)
------------ ------------ ------------ ------------ ------------
Cash Distributions 519,480 692,269 923,546 891,690 932,964
------------ ------------ ------------ ------------ ------------
Net (Loss) Income
per Limited Partner
Unit (0.55) 0.90 (0.82) (0.84) (0.96)
------------ ------------ ------------ ------------ ------------
Cash Distribution
per Limited
Partner Unit 1.12 1.50 1.98 1.90 2.02
------------ ------------ ------------ ------------ ------------
13
AS OF DECEMBER 31,
-------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ -------------
Total Assets $ 3,592,482 $ 4,859,360 $ 4,387,648 $ 7,456,422 $ 10,232,970
------------ ------------ ------------ ------------ -------------
Notes Payable 1,780,299 2,380,383 1,665,816 3,326,191 4,769,529
------------ ------------ ------------ ------------ -------------
Partners' Capital 1,532,014 2,306,900 2,586,984 3,879,739 5,150,766
------------ ------------ ------------ ------------ -------------
Net income (loss) per unit is computed based upon net income (loss) allocated to
the Limited Partners and the weighted average number of equivalent Units
outstanding during the year. Cash distribution per Unit is computed based upon
distributions allocated to the Limited Partners and the weighted average number
of equivalent Units outstanding during the year.
ITEM 7: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Our significant accounting policies are described in Note
1 of the Notes to the Financial Statements. The significant accounting policies
that we believe are the most critical to aid in fully understanding our reported
financial results include the following:
COMPUTER EQUIPMENT
CCC, on behalf of the Partnership and other affiliated partnerships, acquires
computer equipment subject to associated debt obligations and lease agreements
and allocates a participation in the cost, debt and lease revenue to the various
partnerships based on certain risk factors.
14
REVENUE RECOGNITION
Through December 31, 2002, the Partnership's leasing operations consist
substantially of operating leases and six direct financing leases. Operating
lease revenue is recognized on a monthly basis in accordance with the terms of
the lease agreement. Unearned revenue from direct financing agreements is
amortized to revenue over the lease term.
The Partnership reviews a customer's credit history extending credit and
establishes a provision for uncollectible accounts receivable based upon the
credit risk of specific customers, historical trends and other information.
LONG-LIVED ASSETS
The Partnership evaluates its long-lived assets when events or circumstances
indicate that the value of the asset may not be recoverable. The Partnership
determines whether impairment exists by estimating the undiscounted cash flows
to be generated by each asset. If the estimated undiscounted cash flows are less
than the carrying value of the asset then impairment exists. The amount of the
impairment is determined based on the difference between the carrying value and
the fair value. Fair value is determined based on estimated discounted cash
flows to be generated by the asset.
Depreciation on computer equipment for financial statement purposes is based on
the straight-line method over estimated useful lives of four years.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership satisfied its minimum offering requirements and commenced
operations on September 22, 1995.
For the year ended December 31, 2002, the Partnership generated cash flow from
operating activities of $480,000, which includes a net loss of $206,000 and gain
on the sale of computer equipment of $1,000, reduced by depreciation and
amortization expenses of $1,704,000. Other noncash activities included in the
determination of net income include direct payments of lease income by lessees
to banks of $1,150,000.
The Partnership's primary sources of capital for the years ended December 31,
2002, 2001 and 2000 were from cash from operations of $480,000, $1,149,000 and
$857,000, and proceeds from the sale of computer equipment of $134,000, $409,000
and $431,000, respectively. The primary uses of cash for the years ended
December 31, 2002, 2001 and 2000, were for capital expenditures for new
equipment totaling $97,000, $677,000 and $98,000, the payment of acquisition
fees of $ 24,000, $106,000 and $33,000, an advance to CCC in the amount of
$315,000 for the year ended December 31, 2001, and the payment of preferred
distributions to partners totaling $519,000, $692,000 and $924,000,
respectively.
Cash is invested in money market accounts that invest directly in treasury
obligations pending the Partnership's use of such funds to purchase additional
computer equipment, to pay Partnership expenses or to make distributions to the
Partners. At December 31, 2002 and 2001 the Partnership had approximately
$24,000 and $14,000, respectively, invested in these money market accounts.
As of December 31, 2002, the Partnership has a receivable from CCC, a related
party to the Partnership, in the amount of approximately $307,000. CCC, through
its indirect subsidiaries, including the General Partner of the Partnership,
earns fees based on revenues and new lease purchases from this fund and other
funds. This is a non-interest bearing receivable that CCC intends to repay over
the next three fiscal years from acquisition and debt placement fees earned by
the General Partner of the Partnership, as well as agreeing to pay approximately
$5,000 per month commencing January 1, 2003.
15
The Partnership's investment strategy of acquiring computer equipment and
generally leasing it under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses. As
of December 31, 2002, the Partnership had future minimum rentals on
noncancellable operating leases of $1,278,000 for the year ended 2003 and
$766,000 thereafter. As of December 31, 2002, the Partnership had future minimum
rentals on noncancellable capital leases of $67,000 for the year ended 2003 and
$169,000 thereafter. During 2002 and 2001, the Partnership incurred debt in
connection with the purchase of computer equipment totaling $504,000 and
$1,967,000, respectively. At December 31, 2002, the outstanding debt was
$1,780,000, with interest rates ranging from 5.95% to 9.75% and will be payable
through June 2006. The Partnership intends to continue purchasing additional
computer equipment with existing cash, as well as when future cash becomes
available. In addition, the Partnership may incur debt in purchasing computer
equipment in the future.
CCC, on behalf of the Partnership and other affiliated partnerships, acquires
computer equipment subject to associated debt obligations and lease agreements
and allocates a participation in the cost, debt and lease revenue to the various
partnerships based on certain risk factors. The Partnership's share of the
computer equipment in which they participate at December 31, 2002 and 2001 was
approximately $3,211,000 and $3,012,000, respectively, which is included in the
Partnership's fixed assets on their balance sheet, and the total cost of the
equipment shared by the Partnership with other partnerships at December 31, 2002
and 2001 was approximately $6,294,000 and $5,650,000, respectively. The
Partnership's share of the outstanding debt associated with this equipment at
December 31, 2002 and 2001 was approximately $1,103,000 and $1,581,000,
respectively, which is included in the Partnership's liabilities on the balance
sheet, and the total outstanding debt at December 31, 2002 and 2001 related to
the equipment shared by the Partnership was approximately $1,956,000 and
$2,406,000, respectively.
The Partnership's cash flow from operations is expected to continue to be
adequate to cover all operating expenses, liabilities, and preferred
distributions to Partners during the next 12-month period. If available Cash
Flow or Net Disposition Proceeds are insufficient to cover the Partnership
expenses and liabilities on a short and long term basis, the Partnership will
attempt to obtain additional funds by disposing of or refinancing Equipment, or
by borrowing within its permissible limits. The Partnership may also reduce the
distributions to its Partners if it deems necessary. Since the Partnership's
leases are on a "triple-net" basis, no reserve for maintenance and repairs are
deemed necessary.
RESULTS OF OPERATIONS
For the years ended December 31, 2002, 2001 and 2000, the Partnership recognized
income of $2,714,000, $3,319,000 and $4,117,000 and expenses of $2,920,000,
$2,896,000 and $4,486,000, resulting in net losses for the years ended December
31, 2002 and 2000 of $206,000 and $369,000, respectively, and net income of
$423,000 for the year ended December 31, 2001.
Lease income decreased by 10% in 2002 from 2001 primarily due to more operating
leases maturing in 2002 than new leases entered into.
Interest income decreased by 78% to $2,000 for the year ended December 31, 2002
from $9,000 for the year ended December 31, 2001, and $11,000 for the year ended
December 31, 2000 as a result of rental income being used to purchase additional
computer equipment as well as paying distributions to the partners.
The Partnership sold computer equipment during the year ended December 31, 2002,
2001 and 2000 with a net book value of $134,000, $113,000 and $569,000,
respectively, for a net gain of $1,000 and $295,000 in 2002 and 2001,
respectively, and a net loss of $138,000 in 2000.
Operating expenses, excluding depreciation, consist of accounting, legal,
outside service fees and reimbursement of expenses to CCC, for administration
and operation of the Partnership. These expenses increased by 59 % to $571,000,
up from $360,000 during the year ended December 31, 2001 and $241,000 during the
year ended December 31, 2000. This increase is primarily attributable to
reimbursable expenses in connection with the administration and operation of the
Partnership charged by CCC, increasing by approximately $97,000, remarketing
fees paid to brokers increasing by approximately $30,000, postage and shipping
costs increasing by approximately $9,000, conventions increasing by
approximately $11,000, legal fees increasing by approximately $32,000, equipment
shipping costs increasing by approximately $4,000, accounting fees increasing by
approximately $7,000 and due diligence of approximately $22,000.
16
The equipment management fee is approximately 5% of the gross lease revenue
attributable to equipment that is subject to operating and capital leases. The
equipment management fee decreased to $136,000 during the year ended December
31, 2002 from $151,000 during the year ended December 31, 2001 and $222,000,
during the year ended December 31, 2000, which is consistent with the change in
lease income.
Depreciation and amortization expenses consist of depreciation on computer
equipment, amortization of organization costs (for 2000 only), equipment
acquisition fees and debt placement fees. The 25% decrease to $1,704,000 during
the year ended December 31, 2002 from $2,270,000 and $3,680,000 during the year
ended December 31, 2001 and 2000, respectively, is attributable to the decrease
in the computer equipment portfolio being leased.
The Partnership has recorded $399,000, $9,000 and $45,000 as allowances against
accounts receivable for the periods ending December 31, 2002, 2001 and 2000,
respectively. The increase in 2002 is due to the Avon lawsuit discussed in
Part I, Item 3.
The Partnership identified specific computer equipment and associated equipment
acquisition costs, which were reevaluated due to technological changes. In 2001,
the Partnership determined that the carrying amount of certain assets was
greater than the undiscounted cash flows to be generated by these assets. The
Partnership recorded charges of $100,000 in the fourth quarter of 2001 to record
the assets at their estimated fair value. Such amounts have been included in
depreciation expense in the accompanying financial statements. In 2002 and 2000,
the Partnership determined that no impairment had occurred.
For the periods ended December 31, 2002 and 2001, the Partnership has a
receivable from CCC, a related party to the Partnership, in the amount of
approximately $307,000 and $315,000, respectively. CCC, through its indirect
subsidiaries, including the General Partner of the Partnership, earns fees based
on revenues and new lease purchases from this fund and other funds.
NET INCOME / LOSS
Net income decreased to a net loss of $251,000 in 2002 from net income
of $423,000 in 2001 and a net loss of $369,000 in 2000.
The changes in net income (loss) were attributable to the changes in
revenues and expenses as discussed above.
RECENT ACCOUNTING PRONOUNCEMENTS
FIN 45
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others" ("Interpretation No. 45"). This
Interpretation elaborates on the existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit. It also
clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair market value of the obligations it
assumes under that guarantee and must disclose that information in its interim
and annual financial statements. The initial recognition and measurement
provisions of Interpretation No. 45 apply on a prospective basis to guarantees
issued or modified after December 31, 2002. The adoption of Interpretation No.
45 is not expected to have a material impact on the Company's results of
operations, financial position or cash flows.
17
SFAS 144
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. However, the Statement retains the
fundamental provisions of Statement 121 for (a) recognition and measurement of
the impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale.
This Statement supersedes the accounting and reporting provisions of
APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a business.
However, this Statement retains the requirement of Opinion 30 to report
discontinued operations separately from continuing operations and extends that
reporting to a component of an entity that either has been disposed of (by sale,
by abandonment, or in distribution to owners) or is classified as held for sale.
This Statement also amends ARB No. 51, Consolidated Financial Statements, to
eliminate the exception to consolidation for a temporarily controlled
subsidiary.
The provisions of this Statement are effective for financial statements
issued for fiscal years beginning after December 15, 2001, and interim periods
within those fiscal years, with earlier application encouraged. The provisions
of this Statement generally are to be applied prospectively. The adoption of the
Statement on January 1, 2002, did not have a material impact on earnings
SFAS 146
On July 30, 2002, the FASB issued FASB Statement No. 146, Accounting
for Costs Associated with Exit or Disposal Activities, which nullifies EITF
Issues No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
an a Restructuring)" and No. 88-10, Costs Associated with Lease Modification or
Termination." Statement 146 fundamentally changed how a company should account
for future "restructurings." The Partnership believes that the adoption of SFAS
146 will not have an impact on its financial position and results of operations.
ITEM 7.A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership believes its exposure to market risk is not material
due to the fixed interest rate of its long- term debt and its associated fixed
revenue streams.
ITEM 8: FINANCIAL STATEMENTS
See financial statements commencing in Part IV Item 14.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
18
GENERAL
The General Partner, a wholly owned subsidiary of Commonwealth of
Delaware, Inc., a Delaware corporation, which is in turn a wholly-owned
subsidiary of CCC, a Pennsylvania corporation, was incorporated in Pennsylvania
on August 26, 1993. The General Partner also acts as the General Partner for
Commonwealth Income and Growth Fund I and Commonwealth Income and Growth Fund
II. The principal business office of the General Partner is 470 John Young Way,
Suite 300, Exton, PA 19341, and its telephone number is 610-594-9600. The
General Partner manages and controls the affairs of the Partnership and has sole
responsibility for all aspects of the Partnership's operations. The officers of
the General Partner devote such time to the affairs of the Partnership as in the
opinion of the General Partner is necessary to enable it to perform its function
as General Partner. The officers of the General Partner are not required to
spend their full time in meeting their obligations to the Partnership.
The directors and officers of the General Partner and key employees of
CCC are as follows:
NAME TITLE
- ---- -----
George S. Springsteen Chairman of the Board of Directors and President of
the General Partner and CCC
Kimberly A. Springsteen Executive Vice President, Chief Operating Officer and
Secretary of the General Partner and CCC
Henry J. Abbott Senior Vice President and Portfolio Manager of CCC
Salvatore R. Barila Vice President and Controller of the General Partner
and CCC
Lynn Franceschina Vice President and Accounting Manager of the General
Partner and CCC
Dorothy A. Ferguson Assistant Vice President of CCC
George S. Springsteen, age 68, is President of both CCC and the General
Partner. Mr. Springsteen is also President of the general partners or
controlling entities of several prior programs sponsored by CCC with objectives
similar to the Partnership's. He has been the sole shareholder and director of
CCC since its formation in 1978. From 1971 to 1978, Mr. Springsteen was involved
in the computer leasing business of Granite Computer Corporation. Mr.
Springsteen served as Vice President of Marketing, in addition to other
capacities, and managed a portfolio of approximately $120,000,000 of IBM
computers and peripherals. In 1978, Granite Computer Corporation sold its
equipment portfolio and left the equipment leasing business. Mr. Springsteen
acquired a portion of Granite's portfolio, client base, employees and corporate
offices in Jenkintown, Pennsylvania. The new company began operations as CCC in
May of 1978. Mr. Springsteen received a Bachelor of Science degree from the
University of Delaware in 1957.
Kimberly A. Springsteen, age 43, is Executive Vice President, Chief
Operating Officer and Secretary of CCC and the General Partner and joined CCC in
1997. She is also the President of Commonwealth Capital Securities Corp. From
1980 to 1997, Ms. Springsteen was employed with Wheat First Butcher Singer, a
broker/dealer headquartered in Richmond, Virginia. While at Wheat First Butcher
Singer, Ms. Springsteen, Senior Vice President, served as Marketing Manager for
the Direct Investments Department, with over $450,000,000 of investments under
management in real estate, equipment leasing and energy-related industries. Ms.
Springsteen holds Series 7, 63 and 39 NASD licenses and is a member of the
Equipment Leasing Association, Investment Partnership Association, and
International Association for Financial Planning.
Henry J. Abbott, age 52, is Senior Vice President and Portfolio Manager
of CCC and has been employed by CCC since 1998. Mr. Abbot has been active in the
commercial lending industry, working primarily on asset-backed transactions for
more than twenty-seven years. Prior to joining CCC, Mr. Abbott was a founding
partner of Westwood Capital LLC, in New York. Prior to that, as Senior Vice
President for IBJ Schroder Leasing Corporation where Mr. Abbott managed a group
specializing in providing operating lease financing programs in the high
technology sector. Mr. Abbott brings extensive knowledge and experience in all
facets of asset-backed financing and has successfully managed $1.5 billion of
secured transactions. Mr. Abbott attended St. John's University. Mr. Abbott is a
member of the Equipment Leasing Association.
19
Salvatore R. Barila, age 32, is Vice President and Controller of the
General Partner and CCC 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
B.B.A. degree in Accounting from Pace University in 1992. Mr. Barila is a member
of the Equipment Leasing Association.
Lynn A. Franceschina, age 31, is Vice President and Accounting Manager
of the General Partner and CCC and certain of its subsidiaries where she has
been employed since 2001. From 1991 to 2001, Ms. Franceschina worked as an
Accountant, most recently as the Business Controls Manager at Liquent, Inc. Ms.
Franceschina received a B.S.B.A. degree from Robert Morris College. Ms.
Franceschina is a member of the Equipment Leasing Association.
Dorothy A. Ferguson, age 60, is Assistant Vice President of CCC and has
been employed by CCC since 1995. She brought with her over 20 years experience
in commercial banking and finance. Prior to joining Commonwealth, she held
positions as a Banking Officer and Administrative Assistant to the Chairman of a
large Philadelphia based bank, as well as Executive Secretary to the CEO of an
international manufacturing management group.
The directors and officers of the General Partner are required to spend
only such time on the Partnership's affairs as is necessary in the sole
discretion of the directors of the General Partner for the proper conduct of the
Partnership's business. A substantial amount of time of such directors and
officers is expected to be spent on matters unrelated to the Partnership,
particularly after the Partnership's investments have been selected. Under
certain circumstances, such directors and officers are entitled to
indemnification from the Partnership.
ITEM 11: EXECUTIVE COMPENSATION
The following table summarizes the types, amounts and recipients of
compensation to be paid by the Partnership directly or indirectly to the General
Partner and its Affiliates. Some of these fees are paid regardless of the
success or profitability of the Partnership's operations and investments. While
such compensation and fees were established by the General Partner and are not
based on arm's-length negotiations, the General Partner believes that such
compensation and fees are comparable to those that would be charged by an
unaffiliated entity or entities for similar services. The Partnership Agreement
limits the liability of the General Partner and its Affiliates to the
Partnership and the Limited Partners and provides indemnification to the General
Partner and its Affiliates under certain circumstances.
20
AMOUNT AMOUNT AMOUNT
ENTITY INCURRED INCURRED INCURRED
RECEIVING
COMPENSATION TYPE OF COMPENSATION DURING 2002 DURING 2001 DURING 2000
OFFERING AND ORGANIZATION STAGE
The General Partner Organizational Fee. An Organization $0 $0 $0
Fee equal to three percent of the first
$10,000,000 of Limited Partners' Capital Contributions
and two percent of the Limited Partners' Capital
Contribution in excess of $10,000,000, as compensation
for the organization of the Partnership. It is
anticipated that all Organizational and Offering
Expenses which include legal, accounting and printing
expenses; various registration and filing fees;
miscellaneous expenses related to the organization and
formation of the Partnership; other costs of
registration; and costs incurred in connection with the
preparation, printing and distribution of this Report
and other sales literature. The General Partner pays all
Organizational and Offering Expenses, other than
Underwriter's Commissions and a non-accountable expense
allowance payable to the Dealer Manager that is equal to
the lesser of (i) one percent of the Offering proceeds
or (ii) $50,000.
OPERATIONAL AND SALE OR LIQUIDATION STAGES
The General Partner Reimbursement of Expenses. The General $246,000 $148,000 $91,000
and its Affiliates and its Affiliates Partner are entitled
to reimbursement by the Partnership for the cost of
goods, supplies or services obtained and used by the
General Partner in connection with the administration
and operation of the Partnership from third parties
unaffiliated with the General Partner. In addition, the
General Partner and its affiliates are entitled to
reimbursement of certain expenses incurred by the
General Partner and its affiliates in connection with
the administration and operation of the Partnership. The
amounts set forth on this table do not include expenses
incurred in the offering of Units.
The General Partner Equipment Acquisition Fee. An Equipment Acquisition $24,000 $106,000 $33,000
Fee of four percent of the Purchase Price of each item
of Equipment purchased as compensation for the
negotiation of the acquisition of the Equipment and the
lease thereof or sale under a Conditional Sales
Contract. The fee was paid upon each closing of the
Offering with respect to the Equipment purchased by the
Partnership with the net proceeds of the Offering
available for investment in Equipment. If the
Partnership acquires Equipment in an amount exceeding
the net proceeds of the Offering available for
investment in Equipment, the fee will be paid when such
Equipment is acquired.
The General Partner Debt Placement Fee. As compensation for arranging $5,000 $20,000 $7,000
Term Debt to finance the acquisition of Equipment to the
Partnership, a fee equal to one percent of such
indebtedness; provided, however, that such fee is
reduced to the extent the Partnership incurs such fees
to third Parties, un affiliated with the General Partner
or the lender, with respect to such indebtedness and no
such fee is paid with respect to borrowings from the
General Partner or its Affiliates.
21
The General Partner Equipment Management Fee. A monthly fee equal to the $136,000 $151,000 $222,000
lesser of (I) the fees which would be charged by an
independent third party for similar services for similar
equipment or (ii) the sum of (a) two percent of (1) the
Gross Lease Revenues attributable to Equipment which is
subject to Full Payout Net Leases which contain net
lease provisions plus (2) the purchase price paid on
Conditional Sales Contracts as received by the
Partnership and (b) five percent of the Gross Lease
Revenues attributable to Equipment which is subject to
Operating Leases.
The General Partner Re-Lease Fee. As Compensation for providing $0 $0 $0
re-leasing services for any Equipment for which the
General Partner has, following the expiration of, or
default under, the most recent lease of Conditional
Sales Contract, arranged a subsequent lease of
Conditional Sales Contract for the use of such Equipment
to a lessee or other party, other than the current or
most recent lessee of other operator of such equipment
or its Affiliates ("Re-lease"), the General Partner will
receive, on a monthly basis, a Re3-lease Fee equal to
the lesser of (a) the fees which would be charged by an
independent third party of comparable services for
comparable equipment or (b) two percent of Gross Lease
Revenues derived from such Re-lease.
The General Partner Equipment Liquidation Fee. With respect to each $0 $0 $0
item of Equipment sold by the General Partner (other
than in connection with a Conditional Sales Contract), a
fee equal to the lesser of (I) 50% of the Competitive
Equipment Sale Commission or (ii) three percent of the
sales price for such Equipment. The payment of such fee
is subordinated to the receipt by the Limited Partners
of (I) a return of their Capital Contributions and 10%
annum cumulative return, compounded daily, on Adjusted
Capital Contributions ("Priority Return") and (ii) the
Net Disposition Proceeds from such sale in accordance
with the Partnership Agreement. Such fee is reduced to
the extent any liquidation or resale fees are paid to
unaffiliated parties.
The General Partner Partnership Interest. The General Partner $5,194 $6,840 $9,122
has a present and continuing one percent interest of
$1,000 in the Partnership's item of income, gain, loss,
deduction, credit, and tax preference. In addition, the
General Partner receives one percent of Cash Available
for Distribution until the Limited Partners have
received distributions of Cash Available for
Distribution equal to their Capital Contributions plus
the 10% Priority Return and thereafter, the General
Partner will receive 10% of Cash Available for
Distribution.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
NOT APPLICABLE
22
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership is subject to various conflicts of interest arising out
of its relationships with the General Partner and its Affiliates. These
conflicts include the following:
COMPETITION WITH GENERAL PARTNER AND AFFILIATES: COMPETITION FOR MANAGEMENT'S
TIME
The General Partner and its Affiliate sponsor other investor programs,
which are in potential competition with the Partnership in connection with the
purchase of Equipment as well as opportunities to lease and sell such Equipment.
Competition for Equipment has occurred and is likely to occur in the future. The
General Partner and its Affiliates may also form additional investor programs,
which may be competitive with the Partnership.
If one or more investor programs and the Partnership are in a position
to acquire the same Equipment, the General Partner will determine which program
will purchase the Equipment based upon the objectives of each and the
suitability of the acquisition in light of those objectives. The General Partner
will generally afford priority to the program or entity that has had funds
available to purchase Equipment for the longest period of time. If one or more
investor programs and the Partnership are in a position to enter into lease with
the same lessee or sell Equipment to the same purchaser, the General Partner
will generally afford priority to the Equipment which has been available for
lease or sale for the longest period of time.
Certain senior executives of the General Partner and its Affiliates
also serve as officers and directors of the other programs and are required to
apportion their time among these entities. The Partnership is, therefore, in
competition with the other programs for the attention and management time of the
General Partner and Affiliates. The officers and directors of the General
Partner are not required to devote all or substantially all of their time to the
affairs of the Partnership.
ACQUISITIONS
CCC and the General Partner or other Affiliates of the General Partner
may acquire Equipment for the Partnership provided that (i) the Partnership has
insufficient funds at the time the Equipment is acquired, (ii) the acquisition
is in the best interest of the partnership and (iii) no benefit to the General
Partner or its Affiliates arises from the acquisition except for compensation
paid to CCC, the General Partner or such other Affiliate as disclosed in this
Report. CCC, the General Partner or their Affiliates will not hold Equipment for
more than 60 days prior to transfer to the Partnership. If sufficient funds
become available to the Partnership within such 60 day period, such Equipment
may be resold to the Partnership for a price not in excess of the sum of the
cost of the Equipment to such entity and any accountable Acquisition Expenses
payable to third parties which are incurred by such entity and interest on the
Purchase Price from the date of purchase to the date of transfer to the
Partnership. CCC, the General Partner or such other Affiliate will retain any
rent or other payments received for the Equipment, and bear all expenses and
liabilities, other than accountable Acquisition Expenses payable to third
parties with respect to such Equipment, for all periods prior to the acquisition
of the Equipment by the Partnership. Except as described above, there will be no
sales of Equipment to or from any Affiliate of CCC.
In certain instances, the Partnership may find it necessary, in
connection with the ordering and acquisition of Equipment, to make advances to
manufacturers or vendors with funds borrowed from the General Partner for such
purpose. The Partnership does not borrow money from the General Partner or any
of its Affiliates with a term in excess of twelve months. Interest is paid on
loans or advances (in the form of deposits with manufacturers or vendors of
Equipment or otherwise) from the General Partner of its Affiliates from their
own funds at a rate equal to that which would be charged by third party
financing institutions on comparable loans from the same purpose in the same
geographic area, but in no event in excess of the General Partner's or
Affiliate's own cost of funds. In addition, if the General Partner or its
Affiliates borrow money and loan or advance it on a short-term basis to or on
behalf of the Partnership, the General Partnership than that which the General
Partner or such Affiliates are paying. The Partnership does not loan money to
any Person including the General Partner or its Affiliates except to the extent
that a Conditional Sales Contract constitutes a loan.
23
If the General Partner or any of its Affiliates purchases Equipment in
its own name and with its own funds in order to facilitate ultimate purchase by
the Partnership, the purchaser is entitled to receive interest on the funds
expended for such purchase on behalf of the Partnership. Simple interest on any
such temporary purchases is charged on a floating rate basis not in excess of
three percent over the "prime rate" from time to time announced by PNC Bank,
from the date of initial acquisition to the date of repayment by the
Partnership/ownership transfer.
The Partnership does not invest in equipment Limited Partnerships,
general partnerships or joint ventures, except that (a) the Partnership may
invest in general partnerships or joint ventures with persons other that
equipment Programs formed by the General Partner or its Affiliates, which
partnerships or joint ventures own specific equipment; provided that (i) the
Partnership has or acquires a controlling interest in such ventures or
partnerships, (ii) the non-controlling interest is owned by a non-Affiliated,
and (iii) the are no duplicate fees; and (b) the Partnership may invest in joint
venture arrangements with other equipment Programs formed by the General Partner
or its Affiliates if such action is in the best interest of all Programs and if
all the following conditions are met: (i) all the Programs have substantially
identical investment objectives; (ii) there are no duplicate fees; (iii) the
sponsor compensation is substantially identical in each Program; (iv) the
Partnership has a right of first refusal to buy another Program's interest in a
joint venture if the other Program wishes to sell equipment held in the joint
venture; (v) the investment of each Program is on substantially the same terms
and conditions; and (vi) the joint venture is formed either for the purpose of
effecting appropriated diversification for the Programs or for the purpose of
relieving the General Partner or its Affiliates from a commitment entered into
pursuant to certain provisions of the Partnership Agreement.
GLOSSARY
The following terms used in this Report shall (unless otherwise expressly
provided herein or unless the context otherwise requires) have the meanings set
forth below.
"Acquisition Expenses" means expenses relating to the prospective selection
and acquisition of or investment in Equipment, whether or not actually acquired,
including, but not limited to, legal fees and expenses, travel and communication
expenses, costs of appraisals, accounting fees and expenses and miscellaneous
expenses.
"Acquisition Fee" means the total of all fees and commissions paid by any
party in connection with the initial purchase of Equipment acquired by the
Partnership. Included in the computation of such fees or commissions shall be
the Equipment Acquisition Fee, any commission, selection fee, construction
supervision fee, finance fee, non-recurring management fee of a similar nature,
however designated.
"Adjusted Capital Contributions" means Capital Contributions of the Limited
Partners reduced to not less than zero by any cash distribution received by the
Limited Partners pursuant to Sections 4/2 or 8/1, to the extent such
distributions exceed any unpaid Cumulative Return as of the date such
distributions were made.
"Affiliate" means, when used with reference to a specified Person, (I) any
Person that directly or indirectly through one or more intermediaries controls
or is controlled by or is under common control with the specified Person, (ii)
any Person that is a director or an executive officer of, partner in, or serves
in a similar capacity to, the specified Person, or any Person which the
specified Person is an executive officer of partner or with respect to which the
specified Person serves in a similar capacity, (iii) any Person owning or
controlling 10% or more of the outstanding voting securities of such specified
Person, or (iv) if such Person is an officer, director or partner, any entity
for which such Person acts in such capacity.
"Capital Account" means the separate account established for each Partner
pursuant to Section 4/.1.
24
"Capital Contributions" means, in the case of the General partner, the
total amount of money contributed to the Partnership by the General Partner,
and, in the case of the Limited Partners, $20 for each Unit or where the context
requires, the total Capital Contributions of all the Partners.
"Capital Leases" are leases under which the Equipment either transfers to
the lessee at the end of the lease term, contains a bargain purchase price
option, the lease term is equal to 75% or more of the estimated economic life of
the Equipment, or the present value at the beginning of the lease term of the
minimum lease payments is equal to or exceeds 90% of the excess of the fair
value of the Equipment.
"Cash Available for Distribution" means Cash Flow plus net Disposition
Proceeds plus cash funds available for distribution from Partnership reserves,
less such amounts as the General Partner, in accordance with this Agreement,
causes the Partnership to reinvest in Equipment or interests therein, and less
such amounts as the General Partner, in its sole discretion, determines should
be set aside for the restoration or enhancement of Partnership reserves.
"Cash Flow" for any fiscal period means the sum of (i) cash receipts from
operations, including, but not limited to, rents or other revenues arising from
the leasing or operation of the Equipment and interest, if any, earned on funds
on deposit for the Partnership, but not including Net Disposition Proceeds,
minus (ii) all cash expenses and costs incurred and paid in connection with the
ownership, lease, management, use and/or operation of the Equipment, including,
but not limited to, fees for handling and storage; all interest expenses paid
and all repayments of principal regarding borrowed funds; maintenance; repair
costs; insurance premiums; accounting and legal fees and expenses; debt
collection expenses; charges, assessments or levies imposed upon or against the
Equipment; ad valorem, gross receipts and other property taxes levied against
the Equipment; and all costs of repurchasing Units in accordance with this
Agreement; but not including depreciation or amortization of fees or capital
expenditures, or provisions for future expenditures, including, without
limitation, Organizational and Offering Expenses.
"Closing Date" means the date, as designated by the General Partner, as of
which the Units shall cease being offered to the public pursuant to the
Offering, and shall be no later than the second anniversary of the Effective
Date.
"Code" means the Internal Revenue Code of 1986, as amended, and as may be
amended from time to time by future federal tax statues. Any reference this
Agreement to a particular provision of the Code shall mean, where appropriate,
the corresponding provision of any successor statute.
"Competitive Equipment Sale Commission" means that brokerage fee paid for
services rendered in connection with the purchase or sale of equipment that is
reasonable, customary, and competitive in light of the size, type, and location
of the Equipment.
"Conditional Sales Contract" means an agreement to sell Equipment to a
buyer in which the seller reserves title to, and retains a security interest in,
the Equipment until the Purchase Price of the Equipment is paid.
"Cumulative Return" means an amount equal to a return at a rate of 10% per
annum, compounded daily, on the Adjusted Capital Contribution for all
outstanding Units, which amount shall begin accruing at the end of the calendar
quarter in which such Units are sold by the Partnership.
"Effective Date" means the date on which the Partnership's registration
statement on Form S-1 with respect to the Units, as filed with the Securities
and Exchange Commission, becomes effective under the Securities Act of 1933, as
amended.
"Equipment" means each item of and all of the computer peripheral and other
similar capital equipment purchased, owned, operated, and/or leased by the
Partnership or in which the Partnership has acquired a direct or indirect
interest, as more fully described in this Agreement, together with all
appliances, parts, instruments, accessories, furnishings, or other equipment
included therein and all substitutions, renewals, or replacements of, and all
additions, improvements, and accessions to, any and all thereof.
25
"Full Payout Net Lease" means an initial Net Lease of the Equipment under
which the non-cancelable rental payments due (and which can be calculated at the
commencement of the Net Lease) during the initial noncancellable fixed term (not
including any renewal or extension period) of the lease or other contract for
the use of the Equipment are at least sufficient to recover the Purchase Price
of the Equipment.
"General Partner" means Commonwealth Income & Growth Fund, Inc. and any
additional, substitute or successor general partner of the Partnership.
"Gross Lease Revenues" means Partnership gross receipts from leasing or
other operation of the Equipment, except that, to the extent the Partnership has
leased the Equipment from an unaffiliated party, it shall mean such receipts
less any lease expense.
"Initial Closing " means January 27, 1998.
"IRA" means an Individual Retirement Account as described in Section 408 of
the Code.
"Limited Partner" means a Person who acquires Units and who is admitted to
the Partnership as a limited partner in accordance with the terms of this
Agreement.
"Majority in Interest" means, with respect to the Partnership, Limited
Partners holding more than 40% of the outstanding Units held by all Limited
Partners at the Record Date for any vote or consent of the Limited Partners.
"Minimum Subscription Amount" means an aggregate of $1,500,000 in
subscriptions from Limited Partners.
"Net Disposition Proceeds" means the net proceeds realized by the
Partnership from the refinancing, sale or other disposition of Equipment,
including insurance proceeds or lessee indemnity payments arising from the loss
or destruction of Equipment, less such amounts as are used to satisfy
Partnership liabilities.
"Net Lease" means a lease or other contract under which the owner provides
equipment to a lessee or other operator in return for a payment, and the lessee
assumes all obligations and pays for the operation, repair, maintenance, taxes
and insuring of the Equipment, so that the non-cancelable rental payments under
the lease are absolutely net to the lessor.
"Net Profits" or "Net Losses" shall be computed in accordance with Section
703(a) of the Code (including all items of income, gain, loss or deduction
required to be stated separately pursuant to Section 703(a) (1) of the Code) for
each taxable year of the Partnership or shorter period or subsequent to an
interim closing of the Partnership's books with the following adjustments: (I)
any income of the Partnership that is exempt from federal income tax and not
otherwise taken into account in computing Net Profits and Net Loss pursuant to
this definition shall be added to such taxable income of shall reduce such
taxable loss; (ii) any expenditure of the Partnership described in Code Section
705(a) (2) (B) or treated as Code Section 705(a) (2) (B) expenditures pursuant
to Treasury Regulations Section 1.704-1(b) (2) (iv) (I) and not otherwise taken
into account in computing Net Profits and Net Losses pursuant to this definition
shall be subtracted from such taxable income or loss; (iii) items of income,
gain, loss and deduction specially allocated pursuant to Section 7.3 of this
Agreement shall not be included in the computation of Net Profits or Net Loss;
and if property is reflected on the books of the Partnership at a book value
that differs from the adjusted tax basis of the property in accordance with
Treasury Regulation Section 1.704-1 (b) (2) (iv) (d) or (f), depreciation,
amortization, and gain or loss with respect to such property shall be determined
by reference to such book value in a manner consistent with Treasury Regulation
Section 1.704-1 (b) (2) (iv) (g). The terms "Net Profit" or "Net Losses" shall
include the Partnership's distributive share of the profit or loss of any
partnership or joint venture in which it is a partner or joint venturer.
"Offering" means the initial public offering of the Units in the
Partnership, as described in the Prospectus.
26
"Offering Period" means the period commencing the Effective Date and ending
the last day of the calendar month in which the Closing Date occurs.
"Operating Lease" means a lease or other contractual arrangement under
which an unaffiliated party agrees to pay the Partnership, directly or
indirectly, for the use of the Equipment, and which is not a Full Payout Net
Lease.
"Organizational and Offering Expenses" means the expenses incurred in
connection with the organization of the Partnership and in preparation of the
offering for registration and subsequently offering and distributing it to the
public, including Underwriting Commissions, listing fees and advertising
expenses except advertising expenses related to the leasing of the Program's
Equipment.
"Partners" means any one or more of the General Partner and the Limited
Partners.
"Partnership" means Commonwealth Income & Growth Fund III, a Pennsylvania
limited partnership.
"Person" means an individual, partnership, joint venture, corporation,
trust, estate or other entity.
"Program" means a limited or general partnership, joint venture,
unincorporated association or similar organization, other than a corporation
formed and operated for the primary purpose of investment in and the operation
of or gain from an interest in Equipment.
"Purchase Price" means, with respect to any Equipment, an amount equal to
the sum of (I) the invoice cost of such Equipment or any other such amount paid
to the seller, (ii) any closing, delivery and installation charges associated
therewith not included in such invoice cost and paid by or on behalf of the
Partnership, (iii) the cost of any capitalized modifications or upgrades paid by
or on behalf of the Partnership in connection with its purchase of the
Equipment, and (iv) the amount of the Equipment Acquisition Fee and any other
Acquisition Fees, but excluding points and prepaid interest.
"Term Debt" means debt of the Partnership with a term in excess of twelve
months, incurred with respect to acquiring or investing in Equipment, or
refinancing non-Term Debt, but not debt incurred with respect to refinancing
existing Partnership Term Debt.
"Underwriting Commissions" mean selling commissions and dealer-manager fees
paid to broker-dealers by the Partnership in connection with the offer and sale
of Units.
"Unit" means a limited partnership interest in the Partnership.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(a) (1) Financial Statements.
Commonwealth Income & Growth Fund II
Report of Independent Certified Public Accountant
Balance Sheets as of December 31, 2002 and 2001
Statements of Operations for each of the three years ended December 31,
2002, 2001 and 2000.
Statements of Partners' Capital for each of the three years ended
December 31, 2002, 2001 and 2000.
27
Statements of Cash Flows for each of the three years ended December 31,
2002, 2001 and 2000.
Notes to Financial Statements
Commonwealth Income & Growth Fund, Inc.
Report of Independent Auditor
Balance Sheet as of February 28, 2002
Notes to Balance Sheet
Commonwealth Capital Corp.
Report of Independent Auditor
Consolidated Balance Sheet as of February 28, 2002
Notes to Consolidated Balance Sheet
(a) (2) Schedules.
Schedules are omitted because they are not applicable, not required, or
because the required information is included in the financial
statements and notes thereto.
(a) (3) Exhibits.
* 3.1 Certificate of Limited Partnership
** 3.2 Agreement of Limited Partnership
** 10.1 Agency Agreement dated as of May 12, 1995 by and among the
Partnership, the General Partner and Wheat First Securities, Inc.
27 Financial Data Schedule
* Incorporated by reference from the Partnership's Registration
Statement on Form S-1 (Registration No. 33-89476)
** Incorporated by reference for the Partnership's Annual Report
on Form 10-K for the year ended December 31, 1995.
99.1 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Commonwealth Income & Growth Fund II,
(the "Company") on Form 10-K for the period ending December 31, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, George S. Springsteen, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
28
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ GEORGE S. SPRINGSTEEN
- --------------------------
George S. Springsteen
Chief Executive Officer
March 31, 2003
99.2 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Commonwealth Income & Growth Fund II,
(the "Company") on Form 10-K for the period ending December 31, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
Kimberly A. Springsteen, Principal Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ KIMBERLY A. SPRINGSTEEN
- ----------------------------
Kimberly A. Springsteen
Principal Financial Officer
March 31, 2003
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf March 31, 2003 by the undersigned thereunto duly authorized.
COMMONWEALTH INCOME & GROWTH FUND II
By: COMMONWEALTH INCOME &
GROWTH FUND, INC., General Partner
By: /s/ GEORGE S. SPRINGSTEEN
-------------------------
George S. Springsteen, President
29
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 31, 2003
SIGNATURE CAPACITY
/s/ GEORGE S. SPRINGSTEEN Chairman, President and Sole Director of
- ------------------------- Commonwealth Income & Growth Fund, Inc.
George S. Springsteen
/s/ KIMBERLY A. SPRINGSTEEN Executive Vice President Chief Operating
- --------------------------- Officer and Secretary
Kimberly A. Springsteen
CERTIFICATIONS
I, George Springsteen certify that:
1. I have reviewed this annual report on Form 10-K of Commonwealth Income &
Growth Fund II (the Registrant);
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure
the material information relating to the Registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this annual report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the" Evaluation Date"
); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and the procedures
based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit committee
of the Registrant's board of directors ( or persons performing the equivalent
function):
a) all significant deficiencies in the design or the operation
of internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data we have identified for the Registrant's
auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ GEORGE S. SPRINGSTEEN
- --------------------------
George S. Springsteen
Chief Executive Officer
March 31, 2003
30
I, Kimberly A. Springsteen, certify that:
1. I have reviewed this annual report on Form 10-K of Commonwealth Income &
Growth Fund II (the Registrant);
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure
the material information relating to the Registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this annual report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the" Evaluation Date"
); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and the procedures
based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit committee
of the Registrant's board of directors ( or persons performing the equivalent
function):
a) all significant deficiencies in the design or the operation
of internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data we have identified for the Registrant's
auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ KIMBERLY A. SPRINGSTEEN
- ----------------------------
Kimberly A. Springsteen
Principal Financial Officer
March 31, 2003
31
Commonwealth Income & Growth Fund II
Years Ended December 31, 2002, 2001 and 2000
Commonwealth Income & Growth Fund II
Financial Statements
Years Ended December 31, 2002, 2001 and 2000
Commonwealth Income & Growth Fund II
Contents
Report of Independent Certified Public Accountants 3
Financial statements
Balance sheets 4-5
Statements of operations 6
Statements of partners' capital 7
Statements of cash flows 8-9
Notes to financial statements 10-26
2
Report of Independent Certified Public Accountants
The Partners
Commonwealth Income & Growth Fund II
Exton, Pennsylvania
We have audited the accompanying balance sheets of Commonwealth Income & Growth
Fund II as of December 31, 2002 and 2001, and the related statements of
operations, partners' capital, and cash flows for each of the three years in the
period ended December 31, 2002. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Commonwealth Income & Growth
Fund II at December 31, 2002 and 2001, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2002, in
conformity with generally accepted accounting principles in the United States.
/s/ BDO Seidman, LLP
Philadelphia, Pennsylvania
March 7, 2003
3
December 31, 2002 2001
- ------------------------------------------------------------------------- ----------------- ----------------
Assets
Cash and cash equivalents $ 33,361 $ 14,425
Lease income receivable, net of reserve of $421,000 in 2002,
and $54,200 in 2001 409,516 488,472
Net investment in direct financing leases 191,426 -
Accounts receivable, affiliated limited partnerships 8,434 2,761
Prepaid fees 6,219 3,200
----------------- ----------------
648,956 508,858
----------------- ----------------
Computer equipment, at cost 10,350,520 11,656,085
Accumulated depreciation (7,819,423) (7,769,975)
----------------- ----------------
2,531,097 3,886,110
----------------- ----------------
Equipment acquisition costs and deferred expenses, net of
accumulated amortization of $91,604 and $85,025, respectively 105,025 148,988
Accounts receivable, Commonwealth Capital Corp. 307,404 315,404
----------------- ----------------
412,429 464,392
----------------- ----------------
Total assets $ 3,592,482 $ 4,859,360
================= ================
4
Commonwealth Income & Growth Fund II
Balance Sheet
December 31, 2002 2001
- ------------------------------------------------------------------------- ----------------- ----------------
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 72,658 $ 40,472
Accounts payable, General Partner 27,457 55,675
Other accrued expenses 7,362 -
Unearned lease income 172,692 75,930
Notes payable 1,780,299 2,380,383
----------------- ----------------
Total liabilities 2,060,468 2,552,460
----------------- ----------------
Partners' capital
General Partner 1,000 1,000
Limited Partners 1,531,014 2,305,900
----------------- ----------------
Total partners' capital 1,532,014 2,306,900
----------------- ----------------
Total liabilities and partners' capital $ 3,592,482 $ 4,859,360
================= ================
See accompanying notes to financial statements.
5
Commonwealth Income & Growth Fund II
Statements of Operations
Year ended December 31, 2002 2001 2000
- ----------------------------------------------------------- ------------- ------------- ------------
Income
Lease $ 2,711,579 $ 3,014,643 $ 4,105,811
Interest and other 2,054 9,248 11,359
Gain on sale of equipment 828 295,135 -
------------- ------------- ------------
Total income 2,714,461 3,319,026 4,117,170
------------- ------------- ------------
Expenses
Operating, excluding depreciation 571,038 360,293 241,150
Equipment management fee, General Partner 135,579 151,046 221,768
Depreciation 1,630,810 2,183,171 3,516,828
Amortization of equipment acquisition costs, and
deferred expenses 73,028 87,058 162,722
Interest 156,380 105,496 160,897
Provision for uncollectible accounts receivable 398,868 9,200 45,000
Loss on sale of computer equipment - - 138,014
------------- ------------- ------------
Total expenses 2,965,703 2,896,264 4,486,379
------------- ------------- ------------
Net (loss) income $ (251,242) $ 422,762 $ (369,209)
============= ============= ============
Net (loss) income per equivalent limited partnership unit $ (0.55) $ 0.90 $ (.82)
Weighted average number of equivalent
limited partnership units outstanding during the year 460,126 461,400 461,817
============= ============= ============
See accompanying notes to financial statements.
6
Commonwealth Income & Growth Fund II
Statements of Partners' Capital
General Limited
Partner Partner General Limited
Units Units Partner Partners Total
------- ------- ------------ -------------- ---------------
Balance, December 31, 1999 50 461,817 $ 1,000 $ 3,878,739 $ 3,879,739
Net income (loss) - - 9,122 (378,331) (369,209)
Distributions - - (9,122) (914,424) (923,546)
------- ------- ------------ -------------- ---------------
Balance, December 31, 2000 50 461,817 1,000 2,585,984 2,586,984
Net income - - 6,840 415,922 422,762
Redemption - (1,250) - (10,577) (10,577)
Distributions - - (6,840) (685,429) (692,269)
------- ------- ------------ -------------- ---------------
Balance, December 31, 2001 50 460,567 1,000 2,305,900 2,306,900
Net income (loss) - - 5,194 (256,436) (251,242)
Redemption - (500) - (4,164) (4,164)
Distributions - - (5,194) (514,286) (519,480)
------- ------- ------------ -------------- ---------------
Balance, December 31, 2002 50 460,067 $ 1,000 $ 1,531,014 $ 1,532,014
======= ======= ============ ============== ===============
See accompanying notes to financial statements.
7
Commonwealth Income & Growth Fund II
Statements of Cash Flows
Year ended December 31, 2002 2001 2000
- ------------------------------------------------------------ --------------- -------------- ---------------
Cash flows from operating activities
Net (loss) income $ (251,242) $ 422,762 $ (369,209)
Adjustments to reconcile net (loss) income to net cash
provided by operating activities
Depreciation and amortization 1,703,838 2,270,229 3,679,550
(Gain) loss on sale of computer
equipment (828) (295,135) 138,014
Other noncash activities included in
determination of net (loss) income (1,149,810) (1,252,115) (2,381,576)
Changes in assets and liabilities
(Increase) decrease in assets
Lease income receivable 78,956 (31,227) (156,738)
Interest and other receivables - - 30,689
Prepaid fees (3,019) - (3,200)
Increase (decrease) in liabilities
Accounts payable 32,186 (51,098) 4,012
Accounts payable,
Commonwealth Capital Corp. - (62) 62
Accounts payable, General Partner (28,218) 50,174 40,419
Accounts receivable / payable,
affiliated limited partnerships (5,673) (7,090) 4,329
Other accrued expenses 7,362 - -
Unearned lease income 96,762 42,544 (129,548)
--------------- -------------- ---------------
Net cash provided by operating activities 480,314 1,148,982 856,804
--------------- -------------- ---------------
8
Commonwealth Income & Growth Fund II
Statements of Cash Flows
Year ended December 31, 2002 2001 2000
- ------------------------------------------------------------- ---------------- ------------ ------------
Cash flows from investing activities
Capital expenditures $ (97,107) $ (677,233) $ (98,453)
Net proceeds from sale of computer
equipment 134,335 408,634 431,394
Equipment acquisition fees paid to the
General Partner (24,029) (105,760) (33,588)
---------------- ------------ ------------
Net cash provided by (used in) investing
activities 13,199 (374,359) 299,353
---------------- ------------ ------------
Cash flows from financing activities
Proceeds from refinancing notes payable 46,103 - -
Distributions to partners (519,480) (692,269) (923,546)
Accounts receivables - Commonwealth
Capital Corp. 8,000 (315,404) -
Redemption of limited partners (4,164) (10,577) -
Debt placement fee paid to the General
Partner (5,036) (19,667) (7,215)
---------------- ------------ ------------
Net cash (used in) financing activities (474,577) (1,037,917) (930,761)
---------------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents 18,936 (263,294) 225,396
Cash and cash equivalents at beginning of year 14,425 277,719 52,323
---------------- ------------ ------------
Cash and cash equivalents at end of year $ 33,361 $ 14,425 $ 277,719
================ ============ ============
See accompanying notes to financial statements.
9
Commonwealth Income & Growth Fund II
Notes to Financial Statements
1. Business
Commonwealth Income & Growth Fund II (the "Partnership") is a limited
partnership organized in the Commonwealth of Pennsylvania to acquire, own and
lease various types of computer peripheral equipment and other similar capital
equipment, which will be leased primarily to U.S. corporations and institutions.
Commonwealth Capital Corp. ("CCC"), on behalf of the Partnership and other
affiliated partnerships, acquires computer equipment subject to associated debt
obligations and lease agreements and allocates a participation in the cost, debt
and lease revenue to the various partnerships based on certain risk factors. The
Partnership's General Partner is Commonwealth Income & Growth Fund, Inc. (the
"General Partner"), a Pennsylvania corporation which is an indirect wholly owned
subsidiary of CCC. CCC is a member of the Investment Program Association (IPA),
Financial Planning Association (FPA), and the Equipment Leasing Association
(ELA). Approximately ten years after the commencement of operations, the
Partnership intends to sell or otherwise dispose of all of its computer
equipment, make final distributions to partners, and to dissolve. Unless sooner
terminated, the Partnership will continue until December 31, 2006.
Allocations of income and distributions of cash are based on the Partnership's
Limited Partnership Agreement (the "Agreement"). The various allocations under
the Agreement prevent any limited partner's capital account from being reduced
below zero and ensure the capital accounts reflect the anticipated sharing
ratios of cash distributions, as defined in the Agreement. During 2002, annual
cash distributions to limited partners were made at a rate of 5.6% of their
original contributed capital. During 2001, annual cash distributions to limited
partners were made at a rate of 7.4% of their original contributed capital.
During 2000, annual cash distributions to limited partners were made at a rate
of 9.9% of their original contributed capital. Distributions during 2002 reflect
an annual return of capital in the amount of approximately $1.12 per weighted
average number of limited partnership units outstanding during the year.
Distributions during 2001 reflect an annual return of capital in the amount of
approximately $1.49 per weighted average number of limited partnership units
outstanding during the year. Distributions during 2000 reflect an annual return
of capital in the amount of approximately $1.98 per limited partnership unit for
units, which were outstanding for the entire year.
10
Commonwealth Income & Growth Fund II
Notes to Financial Statements
2. Summary of Significant Accounting Policies
Revenue Recognition
Through December 31, 2002, the Partnership's leasing operations consist
substantially of operating leases and six direct-financing leases. Operating
lease revenue is recognized on a monthly basis in accordance with the terms of
the lease agreement. Unearned revenue from direct financing agreements is
amortized to revenue over the lease term.
The Partnership reviews a customer's credit history before extending credit and
establishes a provision for uncollectible accounts receivable based upon the
credit risk of specific customers, historical trends and other information.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Long-Lived Assets
The Partnership evaluates its long-lived assets when events or circumstances
indicate that the value of the asset may not be recoverable. The Partnership
determines whether impairment exists by estimating the undiscounted cash flows
to be generated by each asset. If the estimated undiscounted cash flows are less
than the carrying value of the asset then impairment exists. The amount of the
impairment is determined based on the difference between the carrying value and
the fair value. The fair value is determined based on estimated discounted cash
flows to be generated by the asset. In 2002 and 2000, the Partnership determined
that no impairment had occurred. In 2001, the Partnership determined that the
carrying amount of certain assets was greater than the undiscounted cash flows
to be generated by these assets. The Partnership recorded charges of $100,000
and in the fourth quarter of 2001 to record the assets at their estimated fair
value. Such amounts have been included in depreciation expense in the
accompanying financial statements.
11
Commonwealth Income & Growth Fund II
Notes to Financial Statements
Depreciation on computer equipment for financial statement purposes is based on
the straight-line method over estimated useful lives of four years.
Intangible Assets
Equipment acquisition costs and deferred expenses, are amortized on a
straight-line basis over two- to-four year lives. Unamortized acquisition fees
and deferred expenses are charged to amortization expense when the associated
leased equipment is sold.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three
months or less to be cash equivalents. Cash equivalents have been invested in a
money market fund investing directly in Treasury obligations.
Income Taxes
The Partnership is not subject to federal income taxes; instead, any taxable
income (loss) is passed through to the partners and included on their respective
income tax returns.
Taxable income differs from financial statement net income as a result of
reporting certain income and expense items for tax purposes in periods other
than those used for financial statement purposes, principally relating to
depreciation, amortization, and lease income.
Offering Costs
Offering costs are payments for selling commissions, dealer manager fees,
professional fees and other offering expenses relating to the syndication.
Selling commissions were 7% of the partners' contributed capital and dealer
manager fees were 2% of the partners' contributed capital. These costs have been
deducted from partnership capital in the accompanying financial statements.
12
Commonwealth Income & Growth Fund II
Notes to Financial Statements
Net Income (Loss) Per Equivalent Limited Partnership Unit
The net income (loss) per equivalent limited partnership unit is computed based
upon net income (loss) allocated to the limited partners and the weighted
average number of equivalent limited partner units outstanding during the year.
13
Commonwealth Income & Growth Fund II
Notes to Financial Statements
Reimbursable Expenses
Reimbursable expenses, which are charged to the Partnership by CCC in connection
with the administration and operation of the Partnership, are allocated to the
Partnership based upon several factors including, but not limited to, the number
of investors, compliance issues, and the number of existing leases.
Recent Accounting Pronouncements
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others" ("Interpretation No. 45"). This Interpretation
elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. It also clarifies
that at the time a company issues a guarantee, the company must recognize an
initial liability for the fair market value of the obligations it assumes under
that guarantee and must disclose that information in its interim and annual
financial statements. The initial recognition and measurement provisions of
Interpretation No. 45 apply on a prospective basis to guarantees issued or
modified after December 31, 2002. The adoption of Interpretation No. 45 is not
expected to have a material impact on the Company's results of operations,
financial position or cash flows.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. However, the Statement retains the
fundamental provisions of Statement 121 for (a) recognition and measurement of
the impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale.
This Statement supersedes the accounting and reporting provisions of APB Opinion
No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of
a Segment of a business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. However,
this Statement retains the requirement of Opinion 30 to report discontinued
operations separately from continuing operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, by
abandonment, or in distribution to owners) or is classified as held for sale.
This Statement also amends ARB No. 51, Consolidated Financial Statements, to
eliminate the exception to consolidation for a temporarily controlled
subsidiary.
The provisions of this Statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years, with earlier application encouraged. The provisions of this
Statement generally are to be applied prospectively. The adoption of the
Statement on January 1, 2002, did not have a material impact on earnings.
14
Commonwealth Income & Growth Fund II
Notes to Financial Statements
3. Net Investment in Direct Financing Sales-Type Leases
The following lists the components of the net investment in direct financing and
sales-type leases as of December 31, 2002 and 2001:
2002 2001
----------- ---------
Minimum lease payments receivable $ 236,208 $ -
Less: Unearned Revenue 44,782 -
----------- ---------
Net investment in direct financing leases $ 191,426 --
----------- ---------
The following is a schedule of future minimum rentals on noncancellable direct
financing at December 31, 2002:
Year ending December 31, Amount
------------------------ ---------
2003 $ 67,488
2004 67,488
2005 67,488
2006 33,744
---------
$ 236,208
=========
All direct financing leases are with one lessee.
15
Commonwealth Income & Growth Fund II
Notes to Financial Statements
4. Computer Equipment
The Partnership is the lessor of equipment under operating and capital leases
with periods ranging from 12 to 48 months. In general, associated costs such as
repairs and maintenance, insurance and property taxes are paid by the lessee.
The Partnership's share of the computer equipment in which they participate at
December 31, 2002 and 2001 was approximately $3,211,000 and $3,012,000,
respectively, which is included in the Partnership's fixed assets on their
balance sheet, and the total cost of the equipment shared by the Partnership
with other partnerships at December 31, 2002 and 2001 was approximately
$6,294,000 and $5,650,000, respectively. The Partnership's share of the
outstanding debt associated with this equipment at December 31, 2002 and 2001
was approximately $1,103,000 and $1,581,000, respectively, which is included in
the Partnership's liabilities on the balance sheet, and the total outstanding
debt at December 31, 2002 and 2001 related to the equipment shared by the
Partnership was approximately $1,956,000 and $2,406,000, respectively.
The following is a schedule of future minimum rentals on noncancelable operating
leases at December 31, 2002:
Year ending December 31, Amount
--------------------------------------------- --------------
2003 $ 1,278,000
2004 731,000
2005 28,000
2006 7,000
--------------
$ 2,044,000
==============
Lease income from four lessees, each exceeding 10% of lease revenue, represented
approximately 50% of lease income for the year ended December 31, 2002. Lease
income from three lessees approximated 40% of lease income for the year ended
December 31, 2001. Lease income from one lessee approximated 11% of lease income
for the year ended December 31, 2000.
As of December 31, 2002, two lessees comprised approximately 99% of the
Partnership's accounts receivable.
16
Commonwealth Income & Growth Fund II
Notes to Financial Statements
5. Related Party Transactions
Organizational Fee
The General Partner is entitled to be paid an Organizational Fee equal to three
percent of the first $10,000,000 of Limited Partners' Capital Contributions and
two percent of the Limited Partners' Capital Contributions in excess of
$10,000,000, as compensation for the organization of the Partnership. No
organizational fees were paid during 2002, 2001 and 2000.
17
Commonwealth Income & Growth Fund II
Notes to Financial Statements
Reimbursement of Expenses
The General Partner and its affiliates are entitled to reimbursement by the
Partnership for the cost of goods, supplies or services obtained and used by the
General Partner in connection with the administration and operation of the
Partnership from third parties unaffiliated with the General Partner. In
addition, the General Partner and its affiliates are entitled to reimbursement
for certain expenses incurred by the General Partner and its affiliates in
connection with the administration and operation of the Partnership. During
2002, 2001 and 2000, the Partnership recorded $246,000, $148,000 and $91,000,
respectively, for reimbursement of expenses to the General Partner.
Equipment Acquisition Fee
The General Partner is entitled to be paid an equipment acquisition fee of 4% of
the purchase price of each item of equipment purchased as compensation for the
negotiation of the acquisition of the equipment and lease thereof or sale under
a conditional sales contract. The fee was paid upon each closing of the Offering
with respect to the equipment to be purchased by the Partnership with the net
proceeds for the Offering available for investment in equipment. If the
Partnership acquires equipment in an amount exceeding the net proceeds of the
Offering available for investment in equipment, the fee will be paid when such
equipment is acquired. During 2002, 2001 and 2000, equipment acquisition fees of
approximately $24,000, $106,000 and $33,000, respectively, were paid to the
General Partner.
Debt Placement Fee
As compensation for arranging term debt to finance the acquisition of equipment
by the Partnership, the General Partner is paid a fee equal to 1% of such
indebtedness; provided, however, that such fee shall be reduced to the extent
the Partnership incurs such fees to third parties, unaffiliated with the General
Partner or the lender, with respect to such indebtedness and no such fee will be
paid with respect to borrowings from the General Partner or its affiliates.
During 2002, 2001 and 2000, debt placement fees of approximately $5,000, $20,000
and $7,000, respectively, were paid to the General Partner.
18
Commonwealth Income & Growth Fund II
Notes to Financial Statements
Equipment Management Fee
The General Partner is entitled to be paid a monthly fee equal to the lesser of
(i) the fees which would be charged by an independent third party for similar
services for similar equipment or (ii) the sum of (a) two percent of (1) the
gross lease revenues attributable to equipment which is subject to full payout
net leases which contain net lease provisions plus (2) the purchase price paid
on conditional sales contracts as received by the Partnership and (b) 5% of the
gross lease revenues attributable to equipment which is subject to operating
leases. During 2002, 2001 and 2000, equipment management fees of approximately
$136,000, $151,000 and $222,000, respectively, were paid to the General Partner
as determined pursuant to section (ii) above.
Release Fee
As compensation for providing releasing services for any equipment for which the
General Partner has, following the expiration of, or default under, the most
recent lease or conditional sales contract, arranged a subsequent lease or
conditional sales contract for the use of such equipment to a lessee or other
party, other than the current or most recent lessee or other operator of such
equipment or its affiliates ("Release"), the General Partner shall receive, on a
monthly basis, a Release Fee equal to the lesser of (a) the fees which would be
charged by an independent third party for comparable services for comparable
equipment or (b) two percent of gross lease revenues derived from such Release.
There were no such fees paid to the General Partner in 2002, 2001 and 2000.
19
Commonwealth Income & Growth Fund II
Notes to Financial Statements
Equipment Liquidation Fee
With respect to each item of equipment sold by the General Partner (other than
in connection with a conditional sales contract), a fee equal to the lesser of
(i) 50% of the competitive equipment sale commission or (ii) three percent of
the sales price for such equipment is payable to the General Partner. The
payment of such fee is subordinated to the receipt by the limited partners of
the net disposition proceeds from such sale in accordance with the Partnership
Agreement. Such fee will be reduced to the extent any liquidation or resale fees
are paid to unaffiliated parties. There were no such fees paid to the General
Partner in 2002, 2001 and 2000.
Accounts Receivable - Commonwealth Capital Corp
As of December 31, 2002, the Partnership has a non-interest bearing receivable
from Commonwealth Capital Corp ("CCC"), a related party to the Partnership, in
the amount of approximately $286,000, which originated in 2001. CCC, through its
indirect subsidiaries, including the General Partner of the Partnership, earns
fees based on revenues and new lease purchases from this fund. CCC intends to
repay, through acquisition and debt placement fees, over approximately the next
two fiscal years, with a minimum payment of $5,000 per month, commencing January
1, 2003.
6. Notes Payable
Notes payable consisted of the following:
December 31, 2002 2001
---------------------------------------------- --------- -----------
Installment notes payable to banks; interest
ranging from 6.6% to 9.25%, due in monthly
installments ranging from $108 to $14,928,
including interest, with final payments due
from January through November 2002. $ - $ 81,833
20
Commonwealth Income & Growth Fund II
Notes to Financial Statements
December 31, 2002 2001
---------------------------------------------- ----------- -----------
Installment notes payable to banks; interest
ranging from 7.25% to 9.75%, due in monthly
installments ranging from $72 to $5,975,
including interest, with final payments due
from February through December 2003. $ 224,172 $ 490,762
Installment notes payable to banks; interest
ranging from 6.50% to 8.75%, due in monthly
installments ranging from $96 to $22,799,
including interest, with final payments due
from February through December 2004. 1,213,397 1,807,788
Installment notes payable to banks; interest
ranging from 6.25% to 6.80%, due in monthly
installments ranging from $241 to $1,875,
including interest, with final payments due
from February through April 2005. 131,353 -
Installment notes payable to banks; interest
ranging from 5.95% to 6.50%, due in monthly
installments ranging from $507 to $1,892,
including interest, with final payments due
June 2006. 211,377 -
----------- -----------
$ 1,780,299 $ 2,380,383
=========== ===========
21
Commonwealth Income & Growth Fund II
Notes to Financial Statements
These notes are secured by specific computer equipment and are nonrecourse
liabilities of the Partnership. Aggregate maturities of notes payable for each
of the years subsequent to December 31, 2002 are as follows:
Year ending December 31, Amount
-------------------------------------------------- -----------
2003 $ 1,051,933
2004 618,764
2005 76,536
2006 33,066
-----------
$ 1,780,299
===========
7. Supplemental Cash Flow Information
Other noncash activities included in the determination of net loss are as
follows:
Year ended December 31, 2002 2001 2000
- ------------------------------------------------------- ---------------- ---------------- ----------------
Lease income, net of interest expense on
notes payable realized as a result of direct
payment of principal by lessee to bank $ 1,149,810 $ 1,250,353 $ 2,381,576
Lease income paid to original lessor in lieu
of cash payment for computer equipment acquired - 1,762 -
---------------- ---------------- ----------------
Total adjustment to net loss from other
noncash activities $ 1,149,810 $ 1,252,115 $ 2,381,576
---------------- ---------------- ----------------
No interest or principal on notes payable was paid by the Partnership because
direct payment was made by lessee to the bank in lieu of collection of lease
income and payment of interest and principal by the Partnership.
22
Commonwealth Income & Growth Fund II
Notes to Financial Statements
Noncash investing and financing activities include the following:
Year ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Debt assumed in connection with purchase
of computer equipment $ 503,623 $ 1,966,682 $ 721,296
- -----------------------------------------------------------------------------------------------------------------
Net book value of equipment converted to
direct financing leases $ 226,581 $ -- $ --
- -----------------------------------------------------------------------------------------------------------------
Notes payable refinanced $ 189,909 $ -- $ --
- -----------------------------------------------------------------------------------------------------------------
8. Litigation
The Partnership, through Commonwealth Capital Corp, has initiated a lawsuit
against a customer for failure to make monthly lease payments based on the
existing lease terms. Management believes that the Partnership will prevail in
this matter and that the outcome of this uncertainty is not expected to have a
material adverse impact to the financial statements of the Partnership. The
Partnership has approximately $404,000 of unreserved accounts receivable
relating to this matter.
9. Reconciliation of Net (Loss) Income Reported for Financial Reporting
Purposes to Taxable (Loss) Income on the Federal Partnership Return
Year ended December 31, 2002 2001 2000
- ------------------------------------------------------- ---------------- ---------------- ----------------
Net (loss) income for financial
reporting purposes $ (251,242) $ 422,762 $ (369,209)
Adjustments
Depreciation (747,721) (626) 748,607
Amortization 60,869 69,077 150,046
Unearned lease income 251,553 4,176 (3,276)
Bad debt expense 281,008 - -
Loss on sale of computer equipment (318,453) (921,318) (707,768)
Other 186,706 (112,207) (15,357)
---------------- ---------------- ----------------
Taxable (loss) on the Federal Partnership
Return $ (537,280) $ (536,884) $ (196,957)
================ ================ ================
23
Commonwealth Income & Growth Fund II
Notes to Financial Statements
The "Adjustments - Other" includes financial statement adjustments reflected on
the tax return in the subsequent year.
Adjustment for (loss) on sale of equipment is due to larger depreciation lives
for tax reporting purposes.
10. Quarterly Results of Operation (Unaudited)
Summarized quarterly financial data for the years ended December 31, 2002 and
2001 is as follows:
Quarter ended
-------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------------- ------------- --------------- -------------
2002
Revenues
Lease and other $ 703,717 $ 686,154 $ 668,151 $ 655,611
Gain on sale of computer
equipment 1,842 (1,539) (611) 1,136
-------------- ------------- --------------- -------------
Total revenues 705,559 684,615 667,540 656,747
Total costs and expenses 782,877 717,176 720,191 745,459
-------------- ------------- --------------- -------------
Net (loss) $ (77,318) $ (32,561) $ (52,651) $ (88,712)
============== ============= =============== =============
(Loss) per limited
partner unit $ (.17) $ (.07) $ (.11) $ (.19)
============== ============= =============== =============
During the fourth quarter of 2002, the Partnership recorded a provision for
uncollectible accounts receivable of approximately $212,000 "representing a $.46
loss per limited partner unit", which includes approximately $111,000 for
revenues recorded in the 4th quarter.
24
Commonwealth Income & Growth Fund II
Notes to Financial Statements
Quarter ended
----------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------------- -------------- ---------------- ---------------
2001
Revenues
Lease and other $ 832,208 $ 748,966 $ 750,903 $ 691,814
Gain on sale of computer
equipment - 95,628 182,389 40,363
-------------- -------------- ---------------- ---------------
Total revenues 832,208 844,594 933,292 732,177
-------------- -------------- ---------------- ---------------
Costs and expenses
Costs and expenses 938,892 627,545 546,334 783,493
Loss on sale of computer
equipment 23,245 - - -
-------------- -------------- ---------------- ---------------
Total costs and expenses 962,137 627,545 546,334 783,493
-------------- -------------- ---------------- ---------------
Net (loss) income $ (129,929) $ 217,049 $ 386,958 $ (51,316)
============== ============== ================ ===============
(Loss) income per limited
partner unit $ (0.29) $ 0.47 $ 0.84 $ (0.08)
============== ============== ================ ===============
The cumulative gain or loss on sale of equipment is included in revenues or
costs as appropriate.
25