F Fishbein&Company, P.C.
& Certified Public Accountants
Co.
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
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CONSOLIDATED FINANCIAL STATEMENTS
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FEBRUARY 28, 2002
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COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
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CONSOLIDATED FINANCIAL STATEMENTS
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FEBRUARY 28, 2002
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TABLE OF CONTENTS
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PAGE
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INDEPENDENT AUDITOR'S REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets 2
Statements of operations and retained earnings 3
Statements of cash flows 4
Notes to financial statements 5 - 11
F Fishbein&Company, P.C. Elkins Park Square -- Suite 200
& Certified Public Accountants 8080 Old York Road
Co. Elkins Park, PA 19027-1455
215-635-3100
Fax: 215-635-5788
INDEPENDENT AUDITOR'S REPORT
----------------------------
Stockholder
Commonwealth Capital Corp.
We have audited the accompanying consolidated balance sheets of
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES as of February 28, 2002 and 2001,
and the related consolidated statements of operations and retained earnings and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Commonwealth Capital Corp. and Subsidiaries as of February 28, 2002 and 2001,
and the consolidated results of their operations and their consolidated cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ Fishbein&Company, P.C.
Elkins Park, Pennsylvania
April 9, 2002
Page 2
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
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ASSETS
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February 28,
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2002 2001
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Cash and cash equivalents $ 22,037 $ 145,343
Receivables from Income Funds 206,780 317,577
Other receivables 41,619 60,423
Minimum lease payments receivable - Net of
unearned interest income of $655,944 - 2002
and $1,404,050 - 2001 3,410,000 4,130,000
Investment in Income Funds 11,541 11,666
Office furniture and equipment - Net of
accumulated depreciation of $122,604 - 2002
and $115,407 - 2001 22,276 4,031
Deferred offering costs 46,363
Other assets 12,513 6,127
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$3,773,129 $4,675,167
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LIABILITIES AND STOCKHOLDER'S EQUITY
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LIABILITIES
Accounts payable and accrued expenses $ 170,970 $ 285,790
Nonrecourse obligations 3,410,000 4,130,000
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3,580,970 4,415,790
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STOCKHOLDER'S EQUITY
Common stock - Par value $1
Authorized 1,000 shares
Issued and outstanding 10 shares 10 10
Retained earnings 192,149 259,367
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192,159 259,377
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$3,773,129 $4,675,167
========== ==========
See notes to consolidated financial statements.
Page 3
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
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Year Ended February 28,
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2002 2001
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INCOME
Fee income from Income Funds $ 769,004 $ 928,913
Commission income 24,576
Interest income on minimum lease
payments receivable 199,570 321,935
Equity in income of Income Funds 17,293 93,207
Interest and miscellaneous 118,281 92,252
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1,104,148 1,460,883
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EXPENSES
Personnel 597,026 587,067
General and administrative 314,176 429,640
Selling 53,397 99,608
Interest expense on nonrecourse obligations 199,570 321,935
Depreciation 7,197 2,489
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1,171,366 1,440,739
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NET INCOME (LOSS) (67,218) 20,144
RETAINED EARNINGS - BEGINNING 259,367 239,223
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RETAINED EARNINGS - ENDING $ 192,149 $ 259,367
========== ==========
See notes to consolidated financial statements.
Page 4
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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Year Ended February 28,
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2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ($ 67,218) $ 20,144
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Equity in income of Income Funds (17,293) (93,207)
Depreciation 7,197 2,489
Gain on sale of computer equipment (7,000)
Changes in operating assets and liabilities:
Receivables from Income Funds 110,797 (62,542)
Other receivables (18,804) (687)
Deferred offering costs (46,363) 8,192
Other assets (6,386) 763
Accounts payable and accrued expenses (114,820) 210,077
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Net cash provided by (used in) operating
activities (122,282) 85,229
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (25,442)
Net proceeds from sale of computer equipment 7,000
Distributions from Income Funds 17,418 32,952
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Net cash provided by (used in)
investing activities (1,024) 32,952
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CASH FLOWS FROM FINANCING ACTIVITIES - None - -
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NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (123,306) 118,181
CASH AND CASH EQUIVALENTS - BEGINNING 145,343 27,162
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CASH AND CASH EQUIVALENTS - ENDING $ 22,037 $ 145,343
========== ==========
See notes to consolidated financial statements.
Page 5
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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FEBRUARY 28, 2002
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1. NATURE OF BUSINESS
Commonwealth Capital Corp., through its wholly-owned subsidiary,
Commonwealth of Delaware, Inc. (CDI), primarily leases various types of
computer peripheral equipment and related equipment to U.S. corporations and
institutions. Certain wholly-owned subsidiaries of CDI were formed for the
purpose of functioning as general partners /managing trustees which own a 1%
interest in limited partnership/trusts (the "Income Funds") which were
organized to acquire, own, and act as lessor with respect to certain computer
equipment. CDI's subsidiaries include Commonwealth Capital Fund 1987-1, Inc.,
Commonwealth Capital Fund 1988-1, Inc., Commonwealth Capital Fund No. 3,
Inc., Commonwealth Capital Fund No. 4, Inc., Commonwealth Capital Fund V,
Inc., Commonwealth Capital Private Fund-1, Inc., Commonwealth Capital Fund
VI, Inc., Commonwealth Capital Fund VII, Inc., Commonwealth Capital Private
Fund - II, Inc., Commonwealth Capital Trustee VIII, Inc., Commonwealth
Capital Trustee IX, Inc., Commonwealth Capital Trustee X, Inc., Commonwealth
Capital Private Fund-III, Inc. , Commonwealth Income & Growth Fund, Inc.,
Commonwealth Capital Private Fund IV, Inc., Commonwealth Capital Private Fund
V, Inc., and Commonwealth Capital Private Fund VI, Inc. (collectively the
"General Partner Subsidiaries"), Commonwealth Capital Securities Corp.,
Garden State Facilities Funding, Inc. (GSFF), and Commonwealth Capital
Delaware Trustee, Inc.
Certain limited partnerships/trusts have been liquidated during the years
ended February 28, 2002 (two entities) and 2001 (four entities)
The Company is dependent on the compensation it receives from the Income
Funds. This compensation may be reduced due to the financial performance of
each Income Fund. There are certain Income Funds that have deferred the
payment of fees to the Company, because distributions to the limited partners
were reduced because of their financial performance. If the financial
performance of additional Income Funds deteriorates and the distributions to
the limited partners are reduced, there is no assurance that the Company
would be able to continue to collect fees for services provided. No fees were
waived or forgiven for the years ended February 28, 2002 or 2001.
Commission income is earned by Commonwealth Capital Securities Corp., which
sells units of its affiliated partnerships through broker-dealer firms to
their respective customers throughout the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company, CDI, and CDI's subsidiaries (the Company) (see Note 1). All
significant intercompany transactions and balances have been eliminated.
The balance sheets are presented on an unclassified basis in accordance
with leasing industry practice.
Page 6
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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FEBRUARY 28, 2002
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
b. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
c. Cash and Cash Equivalents
The Company maintains its cash balances in several financial institutions.
The balances in each institution are insured (up to $100,000) by the
Federal Deposit Insurance Corporation or the Securities Investor
Protection Corporation. At times, the balances may exceed federally
insured limits. The Company has not experienced any losses in such
accounts, and believes it is not exposed to any significant credit risk on
cash.
The Company considers all highly-liquid investments purchased with a
maturity of three months or less to be cash equivalents. At February 28,
2002 and 2001, cash equivalents consist of a money market fund which
invests in U.S. Treasury obligations.
d. Investment in Income Funds
The Company accounts for its 1% interests in the Income Funds by the
equity method. Financial information of the Income Funds as of December
31, 2001 and 2000 is as follows:
December 31,
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2001 2000
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Total assets $12,348,O0O $11,742,000
Nonrecourse debt 5,366,000 4,524,000
Other liabilities 1,123,000 846,000
Partners' capital 5,859,000 6,371,000
Net income (loss) 1,239,380 (921,757)
Page 7
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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FEBRUARY 28, 2002
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d. Investment in Income Funds (Continued)
The Company has guaranteed the performance of certain nonmonetary
obligations of the General Partner Subsidiaries to the respective Income
Funds, primarily the responsibility for management of the Income Funds. In
addition, the Company is responsible for certain capital funding
requirements of the General Partner Subsidiaries which it satisfies
through noninterest-bearing demand notes. Such notes total approximately
$3,171,000 and $4,166,000 at February 28, 2002 and 2001, and have been
eliminated in consolidation.
Fee income earned by the Company from the Income Funds consists of:
(1) equipment acquisition fees (3% - 4% as defined of the purchase price
of all equipment purchased by the Income Funds), (2) debt placement fees
(1% of the cost of equipment financed by the Income Funds), (3) sales fees
(3% of the gross proceeds of equipment sold by the Income Funds), and
(4) equipment management fees (3% - 5% as defined of the gross operating
lease revenues of the Income Funds). Ongoing acquisition fees and
equipment management fees may be increased as an indirect result of
company loans.
Approximately 76% and 79% of fee income for the years ended February 28,
2002 and 2001, respectively, was from three Income Funds.
e. Office Furniture and Equipment
Office furniture and equipment are stated at cost. Depreciation is
provided using the declining balance method over the estimated useful
lives of the assets (ranging from 5 to 7 years).
f. Deferred Offering Costs
Deferred offering costs represent amounts incurred by the Company for the
organization of a related "Income Fund." These costs are recovered from
the Income Fund through fees as cash proceeds are raised through the sale
of Limited Partnership Units during the offering period or, if necessary,
the future operations of the Income Fund. Deferred offering costs at
February 28, 2002 relate to an Income Fund whose offering period expires
in June, 2003.
g. Revenue Recognition
The Company recognizes fees as earned in accordance with the various
Limited Partnership and Trust Agreements. The Company recognizes
commission income and brokerage fee expense on an accrual basis based on
the trade date of the underlying customer transactions. Interest income on
minimum lease payments receivable is recognized as earned.
Page 8
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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FEBRUARY 28, 2002
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
h. Income Taxes
Deferred income taxes are provided as necessary for temporary differences
between the financial and tax bases of investment in Income Funds and
office furniture and equipment. The tax basis of investment in Income
Funds differs from financial reporting due to temporary differences
associated with ownership of general partnership interests in the various
Income Funds. Also, for income tax reporting, the cost of property and
equipment is being recovered using the methods and lives prescribed by the
Internal Revenue Code.
Deferred income tax assets are also recognized for net operating losses
and investment tax credit carryforwards that are available to offset
future income taxes. A valuation allowance is provided as necessary to
reduce the deferred income tax assets to the amount that is more likely
than not to be realized.
3. LEASE COMMITMENTS
GSFF acted as lessor in a series of lease purchase transactions whereby the
underlying assets were funded by investors through certificates of
participation in the lease payments. All of GSFF's rights as lessor were
assigned to a third-party agent which administers the collection of rentals
paid by the lessee. The obligations under the certificates are nonrecourse to
GSFF. Accordingly, any reduction in the minimum lease payments receivable for
uncollectible accounts would result in an equal reduction of the nonrecourse
obligations. Amounts outstanding at February 28, 2002 and 2001 under these
leases and certificates of participation are $3,410,000 and $4,130,000,
respectively, and are reflected as minimum lease payments receivable and
nonrecourse obligations in the accompanying balance sheets. The certificates
mature at various dates through 2011. The Company recognized interest income
and interest expense in connection with these leases of $199,570 and $321,935
for the years ended February 28, 2002 and 2001, respectively.
Page 9
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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FEBRUARY 28, 2002
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3. LEASE COMMITMENTS (Continued)
Future minimum lease payments to be received as of February 28, 2002, are as
follows:
Year Ending February 28,
------------------------
2003 $ 640,938
2004 635,928
2005 634,384
2006 635,924
2007 1,518,770
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4,065,944
Less amount representing interest 655,94
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$3,410,000
==========
The Company leases an automobile, certain office equipment and office space
under noncancelable operating leases expiring in various dates through 2007.
Rent expense under all operating leases was approximately $110,000 and
$149,000 for the years ended February 28, 2002 and 2001, respectively. Future
minimum lease payments under noncancelable operating leases as of February
28, 2002 are as follows:
Year Ending February 28,
------------------------
2003 $ 68,322
2004 58,538
2005 60,080
2006 61,620
2007 15,790
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$ 264,350
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4. PROFIT SHARING PLAN
The Company has a profit sharing plan which covers substantially all of its
employees. Contributions to the plan may be made at the discretion of
management. No contributions to the plan were made or accrued for the year
ended February 28, 2002. Profit sharing plan contributions were $20,615 for
the year ended February 28, 2001.
Page 10
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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FEBRUARY 28, 2002
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5. INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return.
The Company has net operating loss carryforwards of approximately $663,000
available to reduce future federal income taxes. If not used, the
carryforwards will expire as follows:
Net Operating
Year Ending February 28, Losses
------------------------ -------------
2019 $ 135,000
2020 452,000
2022 76,000
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$ 663,000
==========
The Company also has net operating loss carryforwards of approximately
$5,058,000 available to reduce future Pennsylvania state income taxes. If not
used, the carryforwards will expire as follows:
Year Ending February 28,
------------------------
2006 $ 108,000
2007 638,000
2008 962,000
2009 899,000
2010 1,086,000
2011 657,000
2012 707,000
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$5,057,000
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Page 11
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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FEBRUARY 28, 2002
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5. INCOME TAXES (Continued)
At February 28, 2002 and 2001, the cumulative temporary differences resulted
in net deferred tax assets or liabilities consisting primarily of:
February 28,
-----------------------
2002 2001
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Deferred tax assets:
Other $ $ 3,000
Investment tax credit carryforwards 52,000
Net operating loss carryforwards 559,000 485,000
Less valuation allowance (473,700) (463,300)
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Deferred tax assets, net 85,300 76,700
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Deferred tax liabilities:
Investment in Income Funds (85,000) (76,000)
Office furniture and equipment (300) (700)
-------- --------
Deferred tax liabilities, net (85,300) (76,700)
-------- --------
Net deferred tax assets (liabilities) $ - $ -
======== ========
The valuation allowance was increased (decreased) by $20,400 and ($20,600)
respectively, for the years ended February 28, 2002 and February 28, 2001.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Other noncash activities associated with lease transactions:
Year Ended February 28,
-----------------------
2002 2001
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Reduction of minimum lease receivable
and repayment of nonrecourse obligation
associated with direct payment made by
lessee to bank $720,000 $585,000
======== ========
Other noncash activities associated with
investment in income funds
Increase (decrease) in due to income funds $ - ($ 61,255)
======== ========