UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 33-89476
COMMONWEALTH INCOME & GROWTH FUND II
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2785120
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
470 John Young Way
Exton, PA 19341
(Address, including zip code, of principal executive offices)
(610) 594-9600
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (ii) has been subject to such filing
requirements for the past 90 days: YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K: YES
[X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12c-2 of the Act): YES [ ] NO [X]
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).
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.
2
As of December 31, 2003, substantially all Equipment purchased by the
Partnership is subject to an Operating Lease or an Operating Lease was already
entered into with a third party when the Partnership acquired an item of
Equipment. The Partnership may also engage in sale/leaseback transactions,
pursuant to which the Partnership would purchase Equipment from companies that
would then immediately lease the Equipment from the Partnership. The Partnership
may also purchase Equipment which is leased under Full Payout Net Leases, Direct
Financing Leases or sold under Conditional Sales Contracts at the time of
acquisition or the Partnership may enter into a Full Payout Net Lease, Direct
Financing Leases or Conditional Sales Contract with a third party when the
Partnership acquires an item of Equipment.
The Partnership may enter into arrangements with one or more manufacturers
pursuant to which the Partnership purchases from such manufacturers Equipment
that has previously been leased directly by the manufacturer to third parties
("vendor leasing agreements"). The Partnership and manufacturers may agree to
nonrecourse loans to the Partnership from the manufacturers to finance the
acquisition of Equipment secured by the Equipment and the receivables due to the
manufacturers from users of such Equipment. It is expected that the
manufacturers of Equipment will provide maintenance, remarketing and other
services for the Equipment subject to such agreements. As of December 31, 2003,
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.
3
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.
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, 2003, the Partnership has acquired a
diversified Equipment portfolio, which it has leased to 48 different companies
located throughout the United States. The allocations are as follows:
-------------------------------------------------------------
Equipment Type Approximate %
-------------------------------------------------------------
Workstations/Servers 48%
-------------------------------------------------------------
High-End Printers 19%
-------------------------------------------------------------
Tape Subsystems 14%
-------------------------------------------------------------
Escon Directors 12%
-------------------------------------------------------------
Routers 4%
-------------------------------------------------------------
Communication Controllers 2%
-------------------------------------------------------------
Low-End Printers 1%
-------------------------------------------------------------
Total 100%
-------------------------------------------------------------
During the operational stage of the Partnership, the Partnership may not at any
one point in time lease (or sell pursuant to a Conditional Sales Contract) more
than 25% of the Equipment to a single Person or Affiliated group of Persons.
DESCRIPTION OF LEASES
The Partnership to date has purchased, and in the future intends to continue to
purchase only Equipment that is subject to a lease or for which a lease or
similar agreement will be entered into contemporaneously with the consummation
of the Partnership's acquisition of the Equipment. The General Partner to date
has leased and in the future intends to lease most of the Equipment purchased by
the Partnership to third parties pursuant to Operating Leases. Operating Leases
are relatively short-term (12 to 48 month) leases under which the aggregate
noncancellable rental payments during the original term of the lease are not
sufficient to permit the lessor to recover the purchase price of the subject
Equipment. The Equipment may also be leased pursuant to Full Payout Net Leases.
Full Payout Net Leases are leases under which the aggregate noncancellable
rental payments during the original term of the lease are at least sufficient to
recover the purchase price of the subject Equipment. It is anticipated that the
Partnership will enter into few, if any, Full Payout net Leases. The General
Partner may also enter into Conditional Sales Contracts for Equipment. A
Conditional Sales Contract generally provides that the noncancellable payments
to the seller over the term of the contract are sufficient to recover the
investment in such Equipment and to provide a return on such investment. Under a
Conditional Sales Contract, the seller reserves title to, and retain a security
interest in, the Equipment until the Purchase Price of the Equipment is paid. As
of December 31, 2003, 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, 2003, we have entered into seven
Capital Leases with two lessees.
4
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.
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, 2003, 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, 2003, the Partnership has not entered into any such agreements.
Remarketing fees are paid to the leasing companies from which the Partnership
purchases leases. These are fees that are earned by the leasing companies when
the initial terms of the lease have been met. The General Partner believes that
this strategy adds value since it entices the leasing company to "stay with the
lease" for potential extensions, remarketing or sale of equipment. This strategy
potentially minimizes any conflicts the leasing company may have with a
potential new lease and will potentially assist in maximizing overall portfolio
performance. The remarketing fee is tied into lease performance thresholds and
is factored in the negotiation of the fee.
5
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, 2003, the aggregate non-recourse debt outstanding of $728,000 was
13.5% of the aggregate cost of the Equipment owned.
The Partnership may continue to purchase some items of Equipment without
leverage. If the Partnership purchases an item of Equipment without leverage and
thereafter suitable financing becomes available, it may then obtain the
financing, secure the financing with the purchased Equipment to the extent
practicable and invest any proceeds from such financing in additional items of
Equipment, or it may distribute some or all of such proceeds to the Limited
Partners. Any such later financing will be on terms consistent with the terms
applicable to borrowings generally. As of December 31, 2003, 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,
2003, 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.
6
REFINANCING POLICIES
Subject to the limitations set forth in "Borrowing Policies" above, the
Partnership may refinance its debt from time to time. With respect to a
particular item of Equipment, the General Partner will take into consideration
such factors as the amount of appreciation in value, if any, to be realized, the
possible risks of continued ownership, and the anticipated advantages to be
obtained for the Partnership, as compared to selling such Equipment. During
2002, the Partnership refinanced its notes payable for six existing Operating
Leases. The refinanced notes payable, originally set to expire between February,
2004 and December, 2004, had a balance of approximately $190,000 at the time of
refinancing. The Partnership received cash of approximately $46,000, net of
refinancing fees of approximately $3,000. The new notes payable, which 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 two lessees for this Equipment.
Refinancing, if achievable, may permit the Partnership to retain an item of
Equipment and at the same time to generate additional funds for reinvestment in
additional Equipment or for distribution to the Limited Partners.
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.
7
The computer peripheral equipment industry is extremely competitive. Competitive
factors include pricing, technological innovation and methods of financing.
Certain manufacturer-lessors maintain advantages through patent protection,
where applicable, and through a policy that combines service and hardware with
payment accomplished through a single periodic charge.
The dominant firms in the computer marketplace are Dell, IBM, Hewlett Packard,
Sun Systems and Cisco. Because of the substantial resources and dominant
position of these companies, revolutionary changes with respect to computer
systems, pricing, marketing practices, technological innovation and the
availability of new and attractive financing plans would occur at any time.
Significant action in any of these areas by these firms might materially
adversely affect the partnerships' business or the other manufacturer's with
whom the General Partner might negotiate purchase and other agreements. Any
adverse affect on these manufacturers could be reflected in the overall return
realized by the Partnership on equipment from those manufacturers.
INVESTMENTS
The Partnership, through Commonwealth Capital Corp ("CCC"), participates in the
purchase of equipment subject to associated debt obligations and lease
agreements. The purchase price, list price and monthly rentals presented below
are the Partnership's participation of the total amounts, based on CCC's
allocation of the equipment to the Partnership, and in some instances, other
affiliated partnerships.
Through March 11, 2004, 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
8
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
XTS Corp COMPAQ Workstation 21,500 15,000 427 36
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.
9
GENERAL RESTRICTIONS
Under the Partnership Agreement, the Partnership is not permitted, among
other things, to:
(a) invest in junior trust deeds unless received in connection with the
sale of an item of Equipment in an aggregate amount which does not
exceed 30% of the assets of the Partnership on the date of the
investment;
(b) invest in or underwrite the securities of other issuers; (c) acquire
any Equipment for Units;
(d) issue senior securities (except that the issuance to lenders of notes
or other evidences of indebtedness in connection with the financing or
refinancing of Equipment or the Partnership's business shall not be
deemed to be the issuance of senior securities);
(e) make loans to any Person, including the General Partner or any of its
Affiliates, except to the extent a Conditional Sales Contract
constitutes a loan;
(f) sell or lease any Equipment to, lease any Equipment from, or enter into
any sale-leaseback transactions with, the General Partner or any of its
Affiliates; or
(g) give the General Partner or any of its Affiliates an exclusive right or
employment to sell the Partnership's Equipment.
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 28 employees as of December 31, 2003.
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 June 2003, the Partnership, through CCC, reached a
favorable settlement in the lawsuit. The settlement
did not have a material adverse impact to the
financial statements of the Partnership. As of
December 31, 2002, the Partnership had recorded a
receivable from the customer of approximately
$404,000, net of an allowance of approximately
$330,000. In July 2003, the Partnership received
approximately $405,000 in proceeds relating to this
receivable.
10
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, 2003, there were 527 holders of Units. The Units are
not listed on any exchange or permitted to trade on any over-the-counter market.
In addition, there are substantial restrictions on the transferability of Units.
GENERAL LIMITATIONS
Units cannot be transferred without the consent of the General Partner, which
may be withheld in its absolute discretion. The General Partner monitors
transfers of Units in an effort to ensure that all transfers are within certain
safe harbors promulgated by the IRS to furnish guidance regarding publicly
traded partnerships. These safe harbors limit the number of transfers that can
occur in any one year. The General Partner intends to cause the Partnership to
comply with the safe harbor that permits nonexempt transfers and 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.
11
In order to make a redemption request, Limited Partners will be required to
advise the General Partner in writing of such request. Upon receipt of such
notification, the Partnership will provide detailed forms and instructions to
complete the request.
EXEMPT TRANSFERS
The following six categories of transfers are exempt transfers for purposes of
calculating the volume limitations imposed by the IRS and will generally be
permitted by the General Partner:
(1) transfers in which the basis of the Unit in the hands of the transferee
is determined, in whole or in part, by reference to its basis in the
hands of the transferor (for example, Units acquired by corporations in
certain reorganizations, contributions to capital, gifts of Units,
Units contributed to another partnership, and no liquidating as well as
liquidating distributions by a parent partnership to its partners of
interests in a sub partnership);
(2) transfers at death;
(3) transfers between members of a family (which include brothers and
sisters, spouse, ancestors, and lineal descendants);
(4) transfers resulting from the issuance of Units by the Partnership in
exchange for cash, property, or services;
(5) transfers resulting from distributions from Qualified Plans; and
(6) any transfer by a Limited Partner in one or more transactions during
any 30-day period of Units representing in the aggregate more than five
percent of the total outstanding interests in capital or profits of the
Partnership.
ADDITIONAL RESTRICTIONS ON TRANSFER
Limited Partners who wish to transfer their Units to a new beneficial owner are
required to pay the Partnership up to $50 for each transfer to cover the
Partnership's cost of processing the transfer application and take such other
actions and execute such other documents as may be reasonably requested by the
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.
12
Generally, the General Partner is allocated Net Profits equal to its cash
distributions (but not less than one percent of Net Profits) and the balance is
allocated to the Limited Partners. Net Profits arising from transactions in
connection with the termination or liquidation of the Partnership are allocated
in the following order: (1) First, to each Partner in an amount equal to the
negative amount, if any, of his Capital Account; (2) Second, an amount equal to
the excess of the proceeds which would be distributed to the Partners based on
the Operating Distributions to the Partners over the aggregate Capital Accounts
of all the Partners, to the Partners in proportion to their respective shares of
such excess, and (3) Third, with respect to any remaining Net Profits, to the
Partners in the same proportions as if the distributions were Operating
Distributions. Net Losses, if any, are in all cases allocated 99% to the Limited
Partners and one percent to the General Partner.
Net Profits and Net Losses are computed without taking into account, in each
taxable year of the Partnership, any items of income, gain, loss or deduction
required to be specially allocated pursuant to Section 704(b) of the Code and
the Treasury Regulation promulgated there under. No Limited Partner is required
to contribute cash to the capital of the Partnership in order to restore a
closing Capital Account deficit, and the General Partner has only a limited
deficit restoration obligation under the Partnership Agreement.
Quarterly distributions in the following amounts were declared and paid to the
Limited Partners during 2003, 2002 and 2001.
Quarter Ended 2003 2002 2001
-----------------------------------------------------------------------------------------
March 31 $114,286 $171,428 $228,600
June 30 171,428 114,286 228,600
September 30 171,428 114,286 228,229
December 31 114,286 114,286 -
---------------------------------------------------------
$571,428 $514,286 $685,429
======== ======== ========
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.
13
ITEM 6: SELECTED FINANCIAL DATA
The following table sets forth, in summary form, selected financial data for the
Partnership for each of the five years in the period ended December 31, 2003.
This table is qualified in its entirely by the more detailed information and
financial statements presented elsewhere in this report, and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and related notes
thereto included herein.
YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------
Statements of
Operations
Data: 2003 2002 2001 2000 1999
- ------------------- ---------------------- -------------------- -------------------- ------------------- -------------------
Lease Income $1,515,990 $2,711,579 $3,014,643 $4,105,811 $4,598,009
- ------------------- ---------------------- -------------------- -------------------- ------------------- -------------------
Net Income (Loss) 129,629 (251,242) 422,762 (369,209) (379,337)
- ------------------- ---------------------- -------------------- -------------------- ------------------- -------------------
Cash Distributions 577,200 519,480 692,269 923,546 891,690
- ------------------- ---------------------- -------------------- -------------------- ------------------- -------------------
Net Income (Loss)
per Limited
Partner Unit 0.28 (0.55) 0.90 (0.82) (0.84)
- ------------------- ---------------------- -------------------- -------------------- ------------------- -------------------
Cash Distribution
per Limited
Partner Unit 1.24 1.12 1.50 1.98 1.90
- ----------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31,
------------------
- ----------------------------------------------------------------------------------------------------------------------------
Other Data: 2003 2002 2001 2000 1999
- ------------------------------- --------------- ------------------ --------------------- ------------------ ----------------
Net cash provided by
operating activities $61,782 $480,314 $1,148,982 $856,804 $1,081,396
- ------------------------------- --------------- ------------------ --------------------- ------------------ ----------------
Net cash provided by (used
in) investing activities 406,933 13,199 (374,359) 299,353 (262,088)
- ------------------------------- --------------- ------------------ --------------------- ------------------ ----------------
Net cash (used in) financing
activities (464,318) (474,577) (1,037,917) (930,761) (903,193)
- ----------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31,
------------------
- ----------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- ---------------------- -------------------- ------------------- -------------------- ------------------- -------------------
Total Assets $1,992,457 $3,592,482 $4,859,360 $4,387,648 $7,456,422
- ---------------------- -------------------- ------------------- -------------------- ------------------- -------------------
Notes Payable 728,365 1,780,299 2,380,383 1,665,816 3,326,191
- ---------------------- -------------------- ------------------- -------------------- ------------------- -------------------
Partners' Capital 1,084,443 1,532,014 2,306,900 2,586,984 3,879,739
- ---------------------------------------------------------------------------------------------------------------------------
14
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.
REVENUE RECOGNITION
Through December 31, 2003, the Partnership's leasing operations consist
substantially of operating leases and seven direct financing leases. Operating
lease revenue is recognized on a monthly basis in accordance with the terms of
the lease agreement. Unearned revenue from direct financing agreements is
amortized to revenue over the lease term.
The Partnership reviews a customer's credit history before extending credit and
establishes a provision for uncollectible accounts receivable based upon the
credit risk of specific customers, historical trends and other information.
LONG-LIVED ASSETS
The Partnership evaluates its long-lived assets when events or circumstances
indicate that the value of the asset may not be recoverable. The Partnership
determines whether impairment exists by estimating the undiscounted cash flows
to be generated by each asset. If the estimated undiscounted cash flows are less
than the carrying value of the asset then impairment exists. The amount of the
impairment is determined based on the difference between the carrying value and
the fair value. Fair value is determined based on estimated discounted cash
flows to be generated by the asset.
Depreciation on computer equipment for financial statement purposes is based on
the straight-line method over estimated useful lives of four years.
REIMBURSABLE EXPENSES
Reimbursable expenses, which are charged to the Partnership by CCC in connection
with the administration and operation of the Partnership, are allocated to the
Partnership based upon several factors including, but not limited to, the number
of investors, compliance issues, and the number of existing leases.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership satisfied its minimum offering requirements and commenced
operations on September 22, 1995.
15
For the year ended December 31, 2003, the Partnership generated cash flow from
operating activities of $62,000, which includes a net gain of $130,000 and gain
on the sale of computer equipment of $439,000, reduced by depreciation and
amortization expenses of $1,055,000. Other noncash activities included in the
determination of net income include direct payments of lease income by lessees
to banks of $996,000.
The Partnership's primary sources of capital for the years ended December 31,
2003, 2002 and 2001 were from cash from operations of $62,000, $480,000 and
$1,149,000, and proceeds from the sale of computer equipment of $423,000,
$134,000 and $409,000, respectively. The primary uses of cash for the years
ended December 31, 2003, 2002 and 2001, were for capital expenditures for new
equipment totaling $15,000, $97,000 and $677,000, the payment of acquisition
fees of $ 1,000, $24,000 and $106,000, 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 $577,000, $519,000 and $692,000,
respectively.
In June 2003, the Partnership, through CCC, reached a favorable settlement in
the lawsuit with Avon Products, Inc. As of December 31, 2002, the Partnership
had recorded a receivable from the customer of approximately $404,000, net of an
allowance of approximately $330,000. In July 2003, the Partnership received
approximately $405,000 in proceeds relating to this receivable.
Cash is invested in money market accounts that invest directly in treasury
obligations pending the Partnership's use of such funds to purchase additional
computer equipment, to pay Partnership expenses or to make distributions to the
Partners. At December 31, 2003 and 2002 the Partnership had approximately
$26,000 and $24,000, respectively, invested in these money market accounts.
As of December 31, 2003, the Partnership has a non-interest bearing receivable
from CCC, a related party to the Partnership, in the amount of approximately
$354,000. CCC, through its indirect subsidiaries, including the General Partner
of the Partnership, earns fees based on revenues and new lease purchases from
this fund. This receivable has been reduced by approximately $106,000 during the
twelve months ended December 31, 2003 by the offsetting of equipment management
and other fees and payments by CCC. On December 30, 2003, CCC received
approximately $160,000 on behalf of the Partnership resulting from the sale of
equipment shared with an affiliated limited partnership. These sales proceeds
were not repaid to the Partnership by December 31, 2003, however, CCC intends to
repay $100,000 by March 31, 2004, with the remaining balance of $60,000 to be
repaid by June 30, 2004. CCC intends to repay the remaining balance of
approximately $194,000 through acquisition fees, debt placement fees and
reimbursement of expenses, over approximately the next three fiscal years, with
a minimum amount of $10,000 per month, commencing March 1, 2004.
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, 2003, the Partnership had future minimum rentals on
noncancellable operating leases of $645,000 for the year ended 2004 and $41,000
thereafter. As of December 31, 2003, the Partnership had future minimum rentals
on noncancellable capital leases of $72,000 for the year ended 2004 and $104,000
thereafter. During 2002, the Partnership incurred debt in connection with the
purchase of computer equipment totaling $504,000. There was no debt incurred in
2003. At December 31, 2003, the outstanding debt was $728,000, with interest
rates ranging from 5.95% to 8.75% 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, 2003 and 2002 was
approximately $1,660,000 and $1,645,000, 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, 2003
and 2002 was approximately $2,813,000 and $2,7650,000, respectively. The
Partnership's share of the outstanding debt associated with this equipment at
December 31, 2003 and 2002 was approximately $422,000 and $923,000,
respectively, which is included in the Partnership's liabilities on the balance
sheet, and the total outstanding debt at December 31, 2003 and 2002 related to
the equipment shared by the Partnership was approximately $696,000 and
$1,566,000, respectively.
16
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, 2003, 2002 and 2001, the Partnership recognized
income of $1,958,000, $2,714,000 and $3,319,000 and expenses of $1,828,000,
$2,965,000 and $2,896,000, resulting in net income of $130,000 and $423,000 for
the years ended December 31, 2003 and 2001, respectively, and a net loss for the
year ended December 31, 2002 of $251,000.
Lease income decreased to $1,516,000 in 2003, down from $2,712,000 and
$3,015,000 in 2002 and 2001, respectively, primarily due to the fact that more
lease agreements terminated than new lease agreements were entered into since
2001.
Interest income increased by 50% to $3,000 for the year ended December 31, 2003,
up from $2,000 for the year ended December 31, 2002, but down from $9,000 for
the year ended December 31, 2001 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, 2003,
2002 and 2001 with a net book value of $143,000, $134,000 and $113,000,
respectively, for a net gain of $439,000, $1,000 and $295,000 in 2003, 2002 and
2001, respectively.
Operating expenses, excluding depreciation, consist of accounting, legal,
outside service fees and reimbursement of expenses to CCC, for administration
and operation of the Partnership. These expenses increased by 7 % to $608,000,
up from $571,000 and $360,000 during the years ended December 31, 2002 and 2001,
respectively. This increase is primarily attributable to remarketing fees paid
to brokers increasing by approximately $64,000, an increase in legal fees of
approximately $37,000, an increase in postage/shipping of approximately $3,000,
a decrease in recruiting fees of approximately $11,000, a decrease in due
diligence of approximately $8,000, a decrease in conventions of approximately
$4,000 and a decrease in reimbursable expenses in connection with the
administration and operation of the Partnership charged by CCC, of approximately
$40,000.
The equipment management fee is approximately 5% of the gross lease revenue
attributable to equipment that is subject to operating and capital leases. The
equipment management fee decreased 44% to $76,000 during the year ended December
31, 2003, down from $136,000 and $151,000 during the years ended December 31,
2002 and 2001, respectively, which is consistent with the change in lease
income.
Depreciation and amortization expenses consist of depreciation on computer
equipment, equipment acquisition fees and debt placement fees. The decrease of
38% to $1,055000, during the year ended December 31, 2003, down from $1,704,000
and $2,270,000 during the years ended December 31, 2002 and 2001, respectively,
is attributable to the decrease in the computer equipment portfolio being
leased.
The Partnership had recorded $399,000 and $9,000 as allowances against accounts
receivable for the periods ending December 31, 2002 and 2001, respectively. The
increase in 2002 is due to the Avon lawsuit discussed in Part I, Item 3. There
were no allowances recorded in 2003.
17
The Partnership identified specific computer equipment and associated equipment
acquisition costs, which were reevaluated due to technological changes. In 2003
and 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 $31,000 and $100,000, respectively, in the
fourth quarters of 2003 and 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, the Partnership determined that no
impairment had occurred.
NET INCOME/LOSS
Net income increased to $130,000 in 2003 from a net loss of $251,000 in
2002, but decreased from net income of $423,000 in 2001.
The changes in net income (loss) were attributable to the changes in
revenues and expenses as discussed above.
COMMITMENTS AND CONTINGENCIES
Contractual Cash Obligations
The following table presents our contractual cash obligations as of December 31,
2003:
Payments due by period
Total 2004 2005-2006
-------------------------------------------------------------------
Installment notes payable
due 2004:
Principal $498,520 $498,520 $ ----
Interest 14,716 14,716 ----
Installment notes payable
due 2005:
Principal $74,204 60,885 13,319
Interest 3,096 2,961 135
Installment notes payable
due 2006:
Principal 155,641 59,449 96,192
Interest 13,079 8,129 4,950
-------------------------------------------------------------------
Total $759,256 $644,660 $114,596
===================================================================
RECENT ACCOUNTING PRONOUNCEMENTS
Interpretation No. 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"). Interpretation No. 45
elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. It also clarifies
that at any time a company issues a guarantee, the company must recognize the
initial liability for the fair market value of the obligations it assumes under
the 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. Interpretation No. 45 did not have an effect
on our financial statements.
18
Interpretation No. 46
In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities" ("Interpretation No. 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from the other parties. Interpretation No. 46 is applicable immediately
for variable interest entities created after January 31, 2003. For variable
interest entities created before January 31, 2003, the provisions of
Interpretation No. 46, the provisions of Interpretation No. 46 have been
deferred to the first quarter of 2004. The adoption of Interpretation No. 46 did
not have an impact on the financial position and results of operations.
SFAS 150
In May 2003, the FASB issued FASB Statement No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity, which establishes standards on how an issuer classifies and measures
certain financial instruments with characteristics of liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
entered into or modified after May 31, 2003 and otherwise shall be effective at
the beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS 150 did 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
ITEM 9A: CONTROLS AND PROCEDURES
Our management, under the supervision and with the participation of the
principal executive officer and principal financial offer, have evaluated the
effectiveness of our controls and procedures related to our reporting and
disclosure obligations as of December 31, 2003, which is the end of the period
covered by this Annual Report on Form 10-K. Based on that evaluation, the
principal executive officer and principal financial officer have concluded that
our disclosure controls and procedures are sufficient to provide that (a)
material information relating to us, including our consolidated subsidiaries, is
made known to these officers by our and our consolidated subsidiaries other
employees, particularly material information related to the period for which
this periodic report is being prepared; and (b) this information is recorded,
processed, summarized, evaluated and reported, as applicable, within the time
periods specified in the rules and forms promulgated by the Securities and
Exchange Commission.
19
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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, Commonwealth Income and Growth Fund III
and Commonwealth Income and Growth Fund IV. The principal business office of the
General Partner is 470 John Young Way, Suite 300, Exton, PA 19341, and its
telephone number is 610-594-9600. The General Partner manages and controls the
affairs of the Partnership and has sole responsibility for all aspects of the
Partnership's operations. The officers of the General Partner devote such time
to the affairs of the Partnership as in the opinion of the General Partner is
necessary to enable it to perform its function as General Partner. The officers
of the General Partner are not required to spend their full time in meeting
their obligations to the Partnership.
The directors and officers of the General Partner and key employees of
CCC are as follows:
NAME TITLE
- ---- -----
George S. Springsteen Chairman of the Board of Directors and President of
the General Partner and CCC
Kimberly A. Springsteen Executive Vice President, Chief Operating Officer and
Secretary of the General Partner and CCC
Henry J. Abbott Senior Vice President, Director and Portfolio Manager
of the General Partner & CCC
Jay Dugan Senior Vice President & IT Manager of the General
Partner & CCC
Salvatore R. Barila Vice President and Controller of the General Partner
and CCC
Michelle Onuffer Assistant Vice President and Accounting Manager of
the General Partner and CCC
Dorothy A. Ferguson Assistant Vice President & Compliance Manager of the
General Partner & CCC
Karen Tramontano Assistant Vice President & Marketing Manager of the
General Partner & CCC
David Borham Assistant Vice President & Investor Relations Manager
of the General Partner & CCC
George S. Springsteen, age 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.
20
Kimberly A. Springsteen, age 44, 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 53, is Senior Vice President and Portfolio Manager
of CCC and has been employed by CCC since 1998. Mr. Abbot has been active in the
commercial lending industry, working primarily on asset-backed transactions for
more than twenty-seven years. Prior to joining CCC Mr. Abbott was a founding
partner of Westwood Capital LLC, in New York. Prior to that, as Senior Vice
President for IBJ Schroder Leasing Corporation where Mr. Abbott managed a group
specializing in providing operating lease financing programs in the high
technology sector. Mr. Abbott brings extensive knowledge and experience in all
facets of asset-backed financing and has successfully managed $1.5 billion of
secured transactions. Mr. Abbott attended St. John's University. Mr. Abbott is a
member of the Equipment Leasing Association.
Jay Dugan, age 55, is Senior Vice President and Information Technology
Manager of the General Partner and CCC and has been employed by CCC since 2002.
Mr. Dugan is responsible for computer network and information systems for the
General Partner and its affiliates. Mr. Dugan was a registered securities
representative from 1988 until 1998. During that period, Mr. Dugan founded First
Securities USA, a NASD member firm, and operated that firm through 1998. From
1999 until joining CCC in 2002, Mr. Dugan was an independent due diligence
consultant.
Salvatore R. Barila, age 33, is Vice President and Controller of the
General Partner and CCC and certain of its subsidiaries where he has been
employed since 2001. From 1992 to 2001, Mr. Barila was employed as Corporate
Accounting Manager of RCG Information Technology, Inc., whereby he was
responsible for the preparation of the monthly financial statements, budgeting
and forecasting for multiple divisions and the consolidated entity. 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.
Michelle Onuffer, age 32, is Assistant Vice President and Accounting
Manager of the General Partner and CCC and certain of its subsidiaries where she
has been employed since 2004. Prior to CCC, she was employed by Dutch State
Minds as an Accounting Manager, whereby she was responsible for month-end
reporting, monthly financial statements, budgeting, and cash management. Ms.
Onuffer was a registered securities representative from 1995 to 1999. She brings
4 years of securities experience and over 5 years of accounting experience. Ms.
Onuffer has a B.B. in Financial Management from Goldey-Beacon College and an MBA
in Accounting from the University of Phoenix.
Dorothy A. Ferguson, age 61, is Assistant Vice President of CCC and has
been employed by CCC since 1995. She brought with her over 20 years experience
in commercial banking and finance. Prior to joining Commonwealth, she held
positions as a Banking Officer and Administrative Assistant to the Chairman of a
large Philadelphia based bank, as well as Executive Secretary to the CEO of an
international manufacturing management group.
Karen Tramontano, age 51, Assistant Vice President & Marketing Manger,
joined Commonwealth in 2000, brining with her over a decade of experience of
international marketing and customer relations. Ms. Tramontano is responsible
for the generation and distribution of all marketing materials for the Manager's
investment programs. Prior to joining Commonwealth, Ms. Tramontano served from
1973 to 1983 as executive liaison to the President of V&V Noordland, Inc., an
international commercial company, and served as an office manager for a small
business in Florida from 1998 to 2000. Ms. Tramontano coordinates Commonwealth's
home office marketing department, which serves our broker dealer community and
registered representatives across the country. Ms. Tramontano attended Suffolk
College in New York, with a Major in Advertising/Promotion.
21
David Borham, age 26, Assistant Vice President & Marketing Manager,
joined Commonwealth in 2000, bringing with him 2 years of Customer Service
experience. Mr. Borham holds a Series 22 NASD license and is responsible for the
management of investor database maintenance and all investor inquiries and
correspondence. Prior to joining Commonwealth, Mr. Borham served as a Customer
Relations Representative in the food service industry for Dilworth Town Inn from
1996 to 2000. Mr. Borham attended Delaware County Community College
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.
AMOUNT AMOUNT AMOUNT
ENTITY RECEIVING INCURRED INCURRED INCURRED
COMPENSATION TYPE OF COMPENSATION DURING 2003 DURING 2002 DURING 2001
OFFERING AND ORGANIZATION STAGE
The General Partner Organizational Fee. An Organization Fee $0 $0 $0
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.
22
OPERATIONAL AND SALE
OR LIQUIDATION STAGES
The General Partner Reimbursable Expenses. The General and $371,000 $491,000 $403,000
and its Affiliates its Affiliates are entitled to
reimbursement by the Partnership for the
cost of goods, supplies or services
obtained and used by the General Partner
in connection with the administration
and operation of the Partnership from
third parties unaffiliated with the
General Partner. In addition, the
General Partner and its affiliates are
entitled to reimbursement of certain
expenses incurred by the General Partner
and its affiliates in connection with
the administration and operation of the
Partnership. The amounts set forth on
this table do not include expenses
incurred in the offering of Units.
The General Partner Equipment Acquisition Fee. An Equipment $1,000 $24,000 $106,000
Acquisition Fee of four percent of the
Purchase Price of each item of Equipment
purchased as compensation for the
negotiation of the acquisition of the
Equipment and the lease thereof or sale
under a Conditional Sales Contract. The
fee was paid upon each closing of the
Offering with respect to the Equipment
purchased by the Partnership with the
net proceeds of the Offering available
for investment in Equipment. If the
Partnership acquires Equipment in an
amount exceeding the net proceeds of the
Offering available for investment in
Equipment, the fee will be paid when
such Equipment is acquired.
The General Partner Debt Placement Fee. As compensation for $0 $5,000 $20,000
arranging Term Debt to finance the
acquisition of Equipment to the
Partnership, a fee equal to one percent
of such indebtedness; provided, however,
that such fee is reduced to the extent
the Partnership incurs such fees to
third Parties, un affiliated with the
General Partner or the lender, with
respect to such indebtedness and no such
fee is paid with respect to borrowings
from the General Partner or its
Affiliates.
The General Partner Equipment Management Fee. A monthly fee $76,000 $136,000 $151,000
equal to the lesser of (i) the fees
which would be charged by an independent
third party for similar services for
similar equipment or (ii) the sum of (a)
two percent of (1) the Gross Lease
Revenues attributable to Equipment which
is subject to Full Payout Net Leases
which contain net lease provisions plus
(2) the purchase price paid on
Conditional Sales Contracts as received
by the Partnership and (b) five percent
of the Gross Lease Revenues attributable
to Equipment which is subject to
Operating Leases.
The General Partner Re-Lease Fee. As Compensation for $0 $0 $0
providing re-leasing services for any
Equipment for which the General Partner
has, following the expiration of, or
default under, the most recent lease of
Conditional Sales Contract, arranged a
subsequent lease of Conditional Sales
Contract for the use of such Equipment
to a lessee or other party, other than
the current or most recent lessee of
other operator of such equipment or its
Affiliates ("Re-lease"), the General
Partner will receive, on a monthly
basis, a Re-lease Fee equal to the
lesser of (a) the fees which would be
charged by an independent third party of
comparable services for comparable
equipment or (b) two percent of Gross
Lease Revenues derived from such
Re-lease.
23
The General Partner Equipment Liquidation Fee. With respect $0 $0 $0
to each item of Equipment sold by the
General Partner (other than in
connection with a Conditional Sales
Contract), a fee equal to the lesser of
(i) 50% of the Competitive Equipment
Sale Commission or (ii) three percent of
the sales price for such Equipment. The
payment of such fee is subordinated to
the receipt by the Limited Partners of
(i) a return of their Capital
Contributions and 10% annum cumulative
return, compounded daily, on Adjusted
Capital Contributions ("Priority
Return") and (ii) the Net Disposition
Proceeds from such sale in accordance
with the Partnership Agreement. Such fee
is reduced to the extent any liquidation
or resale fees are paid to unaffiliated
parties.
The General Partner Partnership Interest. The General $5,772 $5,194 $6,840
Partner 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
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.
24
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.
If the General Partner or any of its Affiliates purchases Equipment in
its own name and with its own funds in order to facilitate ultimate purchase by
the Partnership, the purchaser is entitled to receive interest on the funds
expended for such purchase on behalf of the Partnership. Simple interest on any
such temporary purchases is charged on a floating rate basis not in excess of
three percent over the "prime rate" from time to time announced by PNC Bank,
from the date of initial acquisition to the date of repayment by the
Partnership/ownership transfer.
The Partnership does not invest in equipment Limited Partnerships,
general partnerships or joint ventures, except that (a) the Partnership may
invest in general partnerships or joint ventures with persons other than
equipment Programs formed by the General Partner or its Affiliates, which
partnerships or joint ventures its specific equipment; provided that (i) the
Partnership has or acquires a controlling interest in such ventures or
partnerships, (ii) the non-controlling interest is owned by a non-Affiliate, and
(iii) there are no duplicate fees; and (b) the Partnership may invest in joint
venture arrangements with other equipment Programs formed by the General Partner
or its Affiliates if such action is in the best interest of all Programs and if
all the following conditions are met: (i) all the Programs have substantially
identical investment objectives; (ii) there are no duplicate fees; (iii) the
sponsor compensation is substantially identical in each Program; (iv) the
Partnership has a right of first refusal to buy another Program's interest in a
joint venture if the other Program wishes to sell equipment held in the joint
venture; (v) the investment of each Program is on substantially the same terms
and conditions; and (vi) the joint venture is formed either for the purpose of
effecting appropriated diversification for the Programs or for the purpose of
relieving the General Partner or its Affiliates from a commitment entered into
pursuant to certain provisions of the Partnership Agreement.
25
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.
"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.
26
"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.
"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.
27
"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.
"Offering Period" means the period commencing the Effective Date and ending
the last day of the calendar month in which the Closing Date occurs.
"Operating Lease" means a lease or other contractual arrangement under
which an unaffiliated party agrees to pay the Partnership, directly or
indirectly, for the use of the Equipment, and which is not a Full Payout Net
Lease.
"Organizational and Offering Expenses" means the expenses incurred in
connection with the organization of the Partnership and in preparation of the
offering for registration and subsequently offering and distributing it to the
public, including Underwriting Commissions, listing fees and advertising
expenses except advertising expenses related to the leasing of the Program's
Equipment.
"Partners" means any one or more of the General Partner and the Limited
Partners.
"Partnership" means Commonwealth Income & Growth Fund II, a Pennsylvania
limited partnership.
"Person" means an individual, partnership, joint venture, corporation,
trust, estate or other entity.
28
"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, 2003 and 2002
Statements of Operations for each of the three years ended December 31,
2003, 2002 and 2001
Statements of Partners' Capital for each of the three years ended
December 31, 2003, 2002 and 2001
Statements of Cash Flows for each of the three years ended December 31,
2003, 2002 and 2001
Notes to Financial Statements
(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
29
* Incorporated by reference from the Partnership's Registration
Statement on Form S-1 (Registration No. 33-89476)
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf March 30, 2004 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
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 30, 2004.
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
30
Commonwealth Income
& Growth Fund II
Years Ended December 31, 2003, 2002 and 2001
Commonwealth Income
& Growth Fund II
- --------------------------------------------------------------------------------
Financial Statements
Years Ended December 31, 2003, 2002 and 2001
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 10-24
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, 2003 and 2002, and the related statements of
operations, partners' capital, and cash flows for each of the three years in the
period ended December 31, 2003. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Commonwealth Income & Growth
Fund II at December 31, 2003 and 2002, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States.
/s/ BDO Seidman, LLP
Philadelphia, Pennsylvania
March 12, 2004
3
- -----------------------------------------------------------------------------------------------------------------
December 31, 2003 2002
- -----------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 37,758 $ 33,361
Lease income receivable, net of reserve of $0 in 2003, and $421,000 in
2002 4,550 409,516
Net investment in direct financing leases 146,478 191,426
Accounts receivable, affiliated limited partnerships 7,888 8,434
Prepaid fees 3,200 6,219
- -----------------------------------------------------------------------------------------------------------------
199,874 648,956
- -----------------------------------------------------------------------------------------------------------------
Computer equipment, at cost 5,409,223 10,350,520
Accumulated depreciation (4,013,668) (7,819,423)
- -----------------------------------------------------------------------------------------------------------------
1,395,555 2,531,097
- -----------------------------------------------------------------------------------------------------------------
Equipment acquisition costs and deferred expenses, net of
accumulated amortization of $109,250 and $91,604, respectively 42,906 105,025
Accounts receivable, Commonwealth Capital Corp. 354,122 307,404
- -----------------------------------------------------------------------------------------------------------------
397,028 412,429
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 1,992,457 $ 3,592,482
=================================================================================================================
4
Commonwealth Income & Growth Fund II
Balance Sheets
- -----------------------------------------------------------------------------------------------------------------
December 31, 2003 2002
- -----------------------------------------------------------------------------------------------------------------
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 53,606 $ 72,658
Accounts payable, General Partner 20,065 27,457
Other accrued expenses 5,938 7,362
Unearned lease income 100,040 172,692
Notes payable 728,365 1,780,299
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 908,014 2,060,468
- -----------------------------------------------------------------------------------------------------------------
Partners' capital
General Partner 1,000 1,000
Limited Partners 1,083,443 1,531,014
- -----------------------------------------------------------------------------------------------------------------
Total partners' capital 1,084,443 1,532,014
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and partners' capital $ 1,992,457 $ 3,592,482
=================================================================================================================
See accompanying notes to financial statements.
5
Commonwealth Income & Growth Fund II
Statements of Operations
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Income
Lease $ 1,515,990 $ 2,711,579 $ 3,014,643
Interest and other 2,466 2,054 9,248
Gain on sale of equipment 439,124 828 295,135
- -------------------------------------------------------------------------------------------------------------------
Total income 1,957,580 2,714,461 3,319,026
- -------------------------------------------------------------------------------------------------------------------
Expenses
Operating, excluding depreciation 608,439 571,038 360,293
Equipment management fee, General Partner 75,934 135,579 151,046
Depreciation 992,234 1,630,810 2,183,171
Amortization of equipment acquisition costs, and
deferred expenses 62,719 73,028 87,058
Interest 88,625 156,380 105,496
Provision for uncollectible accounts receivable -- 398,868 9,200
- -------------------------------------------------------------------------------------------------------------------
Total expenses 1,827,951 2,965,703 2,896,264
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 129,629 $ (251,242) 422,762
===================================================================================================================
Net income (loss) per equivalent limited partnership unit
$ 0.28 $ (0.55) 0.92
Weighted average number of equivalent
limited partnership units outstanding during the year 460,067 460,126 461,400
===================================================================================================================
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, 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
Net income -- -- 5,772 123,857 129,629
Distributions -- -- (5,772) (571,428) (577,200)
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 50 460,067 $ 1,000 $ 1,083,443 $ 1,084,044
==================================================================================================================
See accompanying notes to financial statements.
7
Commonwealth Income & Growth Fund II
Statements of Cash Flows
- ---------------------------------------------------------------------------------------------------------------
Year ended December 31, 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) $ 129,629 $ (251,242) $ 422,762
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation and amortization 1,054,953 1,703,838 2,270,229
Amortization of unearned lease income (10,945) (19,111) --
(Gain) on sale of computer
equipment (439,124) (828) (295,135)
Other noncash activities included in
determination of net income (loss) (995,568) (1,149,810) (1,252,115)
Changes in assets and liabilities
(Increase) decrease in assets
Lease income receivable 404,966 78,956 (31,227)
Minimum lease receivables 3,881 -- --
Accounts receivable , affiliated
limited partnerships 546 (5,673) (7,090)
Prepaid fees 3,019 (3,019) --
Increase (decrease) in liabilities
Accounts payable (19,052) 32,186 (51,098)
Accounts payable,
Commonwealth Capital Corp. -- -- (62)
Accounts payable, General Partner (7,392) (28,218) 50,174
Other accrued expenses (1,424) 7,362 --
Unearned lease income (61,707) 115,873 42,544
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 61,782 480,314 1,148,982
- ---------------------------------------------------------------------------------------------------------------
8
Commonwealth Income & Growth Fund II
Statements of Cash Flows
- ---------------------------------------------------------------------------------------------------------------
Year ended December 31, 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Capital expenditures $ (15,000) $ (97,107) $ (677,233)
Net proceeds from sale of computer
equipment 422,533 134,335 408,634
Equipment acquisition fees paid to the
General Partner (600) (24,029) (105,760)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 406,933 13,199 (374,359)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from refinancing notes payable -- 46,103 --
Distributions to partners (577,200) (519,480) (692,269)
Accounts receivables - Commonwealth
Capital Corp. 112,882 8,000 (315,404)
Redemption of limited partners -- (4,164) (10,577)
Debt placement fee paid to the General
Partner -- (5,036) (19,667)
- ---------------------------------------------------------------------------------------------------------------
Net cash (used in) financing activities (464,318) (474,577) (1,037,917)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 4,397 18,936 (263,294)
Cash and cash equivalents at beginning of year 33,361 14,425 277,719
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 37,758 $ 33,361 $ 14,425
===============================================================================================================
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 2003, annual cash distributions to
limited partners were made at a rate of 6.2% of their original
contributed capital. During 2002, annual cash distributions to
limited partners were made at a rate of 5.6% of their original
contributed capital. During 2001, annual cash distributions to
limited partners were made at a rate of 7.4% of their original
contributed capital. Distributions during 2003 reflect an
annual return of capital in the amount of approximately $1.25
per weighted average number of limited partnership units
outstanding during the year. Distributions during 2002 reflect
an annual return of capital in the amount of approximately
$1.12 per weighted average number of limited partnership units
outstanding during the year. Distributions during 2001 reflect
an annual return of capital in the amount of approximately
$1.49 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 Revenue Recognition
Significant
Accounting Through December 31, 2003 the Partnership's leasing operations
Policies consist substantially of operating leases and seven
direct-financing leases. Operating lease revenue is recognized
on a monthly basis in accordance with the terms of the lease
agreement. Unearned revenue from direct financing agreements
is amortized to revenue over the lease term.
The Partnership reviews a customer's credit history before
extending credit and establishes a provision for uncollectible
accounts receivable based upon the credit risk of specific
customers, historical trends and other information.
Use of Estimates
The preparation of financial statements in conformity with
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, including cash flows from lease
revenues and proceeds from the sale of equipment. 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 2003 and 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 $31,000 and
$100,000 in the fourth quarters of 2003 and 2001, respectively
to record the assets at their estimated fair value. Such
amounts have been included in depreciation expense in the
accompanying financial statements. In 2002, the Partnership
determined that no impairment had occurred.
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.
Reimbursable Expenses
Reimbursable expenses, which are charged to the Partnership by
CCC in connection with the administration and operation of the
Partnership, are allocated to the Partnership based upon
several factors including, but not limited to, the number of
investors, compliance issues, and the number of existing
leases.
Recent Accounting Pronouncements
Interpretation No. 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"). Interpretation No. 45
elaborates on the existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters
of credit. It also clarifies that at any time a company issues
a guarantee, the company must recognize the initial liability
for the fair market value of the obligations it assumes under
the 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. Interpretation No. 45 did
not have an effect on our financial statements.
13
Commonwealth Income & Growth Fund II
Notes to Financial Statements
- --------------------------------------------------------------------------------
Interpretation No. 46
In January 2003, FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities"
("Interpretation No. 46"), which clarifies the application
of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to certain entities in which equity
investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at
risk for the entity to finance its activities without
additional subordinated financial support from the other
parties. Interpretation No. 46 is applicable immediately
for variable interest entities created after January 31,
2003. For variable interest entities created before
January 31, 2003, the provisions of Interpretation No. 46,
the provisions of Interpretation No. 46 have been deferred
to the first quarter of 2004. The adoption of
Interpretation No. 46 did not have an impact on the
financial position and results of operations.
SFAS 150
In May 2003, the FASB issued FASB Statement No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, which
establishes standards on how an issuer classifies and
measures certain financial instruments with
characteristics of liabilities and equity. It requires
that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some
circumstances). Many of those instruments entered into or
modified after May 31, 2003 and otherwise shall be
effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150
did not have an impact on its financial position and
results of operations.
3. Net Investment in The following lists the components of the net investment
Direct Financing in direct financing leases as of December 31, 2003 and
Leases 2002:
December 31, 2003 2002
------------------------------------------------------------------------------
Minimum lease payments receivable $ 176,035 $ 236,208
Less: Unearned Revenue 29,557 44,782
------------------------------------------------------------------------------
Net investment in direct financing leases $ 146,478 $ 191,426
==============================================================================
14
Commonwealth Income & Growth Fund II
Notes to Financial Statements
- --------------------------------------------------------------------------------
The following is a schedule of future minimum rentals on
noncancellable direct financing leases at December 31,
2003:
Year ending December 31,
Amount
2004 $ 72,108
2005 $ 70,183
2006 $ 33,744
$176,035
There are two lessees involved with the seven direct
financing leases.
15
Commonwealth Income & Growth Fund II
Notes to Financial Statements
- --------------------------------------------------------------------------------
4. Computer The Partnership is the lessor of equipment under operating
Equipment and capital leases with periods ranging from 24 to 48
months. In general, associated costs such as repairs and
maintenance, insurance and property taxes are paid by the
lessee.
The Partnership's share of the computer equipment in which
they participate at December 31, 2003 and 2002 was
approximately $1,660,000 and $1,645,000, 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, 2003 and 2002 was approximately $2,813,000
and $2,765,000, respectively. The Partnership's share of
the outstanding debt associated with this equipment at
December 31, 2003 and 2002 was approximately $422,000 and
$923,000, respectively, which is included in the
Partnership's liabilities on the balance sheet, and the
total outstanding debt at December 31, 2003 and 2002
related to the equipment shared by the Partnership was
approximately $696,000 and $1,566,000, respectively.
The following is a schedule of future minimum rentals on
noncancelable operating leases at December 31, 2003:
Year ending December 31, Amount
--------------------------------------------------------
2004 $ 645,000
2005 34,000
2006 7,000
--------------------------------------------------------
$ 686,000
========================================================
Lease income from three lessees, each exceeding 10% of
lease revenue, represented approximately 49% of lease
income for the year ended December 31, 2003. Lease income
from three lessees approximated 50% of lease income for
the year ended December 31, 2002. Lease income from two
lessees approximated 40% of lease income for the year
ended December 31, 2001.
16
Commonwealth Income & Growth Fund II
Notes to Financial Statements
- --------------------------------------------------------------------------------
5. Related Party Organizational Fee
Transactions
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 2003, 2002 and 2001.
Reimbursable Expenses
The General Partner and its affiliates are entitled to
reimbursement by the Partnership for the cost of goods,
supplies or services obtained and used by the General
Partner in connection with the administration and
operation of the Partnership from third parties
unaffiliated with the General Partner. In addition, the
General Partner and its affiliates are entitled to
reimbursement for certain expenses incurred by the General
Partner and its affiliates in connection with the
administration and operation of the Partnership. During
2003, 2002 and 2001, the Partnership recorded $371,000,
$491,000 and $403,000, 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 2003, 2002
and 2001, equipment acquisition fees of approximately
$1,000, $24,000 and $106,000, respectively, were paid to
the General Partner.
17
Commonwealth Income & Growth Fund II
Notes to Financial Statements
- --------------------------------------------------------------------------------
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 and 2001, debt placement fees of
approximately $5,000 and $20,000, respectively, were paid
to the General Partner. There were no debt placement fees
paid to the General Partner in 2003.
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
2003, 2002 and 2001, equipment management fees of
approximately $76,000, $136,000 and $151,000,
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 2003, 2002 and 2001.
18
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 2003, 2002 and 2001.
19
Commonwealth Income & Growth Fund II
Notes to Financial Statements
- --------------------------------------------------------------------------------
Accounts Receivable - Commonwealth Capital Corp
As of December 31, 2003, the Partnership has a
non-interest bearing receivable from CCC, a related party
to the Partnership, in the amount of approximately
$354,000. CCC, through its indirect subsidiaries,
including the General Partner of the Partnership, earns
fees based on revenues and new lease purchases from this
fund. This receivable has been reduced by approximately
$106,000 during the twelve months ended December 31, 2003
by the offsetting of equipment management and other fees
and payments by CCC. On December 30, 2003, CCC received
approximately $160,000 on behalf of the Partnership
resulting from the sale of equipment shared with an
affiliated limited partnership. These sales proceeds were
not repaid to the Partnership by December 31, 2003,
however, CCC intends to repay $100,000 by March 31, 2004,
with the remaining balance of $60,000 to be repaid by June
30, 2004. CCC intends to repay the remaining balance of
approximately $194,000 through acquisition fees, debt
placement fees and reimbursement of expenses, with a
minimum amount of $10,000 per month, commencing March 1,
2004.
6. Notes Payable Notes payable consisted of the following:
December 31, 2003 2002
----------------------------------------------------------------------------------
Installment notes payable to banks; interest
ranging from 7.25% to 9.75%, were due in
monthly installments ranging from $72 to
$5,975, including interest, with final
payments due from February through December
2003. $ -- $ 224,172
20
Commonwealth Income & Growth Fund II
Notes to Financial Statements
- --------------------------------------------------------------------------------
Installment notes payable to banks; interest
ranging from 6.50% to 8.75%, due in monthly
installments ranging from $96 to $22,799,
including interest, with final payments due
from February through November 2004. 498,520 1,213,397
Installment notes payable to banks; interest
ranging from 6.25% to 6.75%, due in monthly
installments ranging from $241 to $1,875,
including interest, with final payments due
from February through April 2005. 74,204 131,353
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. 155,641 211,377
----------------------------------------------------------------------------------
$ 728,365 $ 1,780,299
==================================================================================
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, 2003 are as follows:
Year ending December 31, Amount
--------------------------------------------------------
2004 $ 618,764
2005 76,536
2006 33,065
--------------------------------------------------------
$ 728,365
========================================================
21
Commonwealth Income & Growth Fund II
Notes to Financial Statements
- --------------------------------------------------------------------------------
7. Supplemental Other noncash activities included in the determination of
Cash Flow net loss are as follows:
Information
Year ended December 31, 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Lease income, net of interest expense on
notes payable realized as a result of direct
payment of principal by lessee to bank $ 995,568 $ 1,149,810 $ 1,250,353
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 $ 995,568 $ 1,149,810 $ 1,252,115
=================================================================================================================
No interest or principal on notes payable was paid by the
Partnership because direct payment was made by lessee to
the bank in lieu of collection of lease income and payment
of interest and principal by the Partnership.
Noncash investing and financing activities include the
following:
Year ended December 31, 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Debt assumed in connection with purchase
of computer equipment $ -- $ 503,623 $ 1,966,682
- -----------------------------------------------------------------------------------------------------------------
Proceeds from sales received by CCC on behalf
of the Partnership $ 159,600 $ -- $ --
- -----------------------------------------------------------------------------------------------------------------
Net book value of equipment converted to direct
financing leases $ 15,299 $ 226,581 $ --
- -----------------------------------------------------------------------------------------------------------------
Notes payable refinanced $ -- $ 189,909 $ --
- -----------------------------------------------------------------------------------------------------------------
22
Commonwealth Income & Growth Fund II
Notes to Financial Statements
- --------------------------------------------------------------------------------
8. Litigation In June 2003, the Partnership, through CCC, reached a
favorable settlement in a lawsuit against a customer for
failure to make monthly lease payments based on the
existing lease terms. The settlement did not have a
material adverse impact to the financial statements of the
Partnership. As of December 31, 2002, the Partnership had
recorded a receivable from the customer of approximately
$404,000, net of an allowance of approximately $330,000.
In July 2003, the Partnership received approximately
$405,000 in proceeds relating to this receivable.
9. Reconciliation of
Net Income (Loss)
Reported for
Financial Reporting
Purposes to Taxable
(Loss) on the
Federal Partnership
Return
Year ended December 31, 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) for financial
reporting purposes $ 129,629 $ (251,242) $ 422,762
Adjustments
Depreciation (107,236) (747,721) (626)
Amortization 52,324 60,869 69,077
Unearned lease income (248,685) 251,553 4,176
Bad debt (recovery) expense (326,008) 281,008 --
Loss on sale of computer equipment (260,312) (318,453) (921,318)
Other (55,856) 186,706 (112,207)
- -----------------------------------------------------------------------------------------------------------------
Taxable (loss) on the Federal Partnership
Return $ (816,144) $ (537,280) $ (538,136)
=================================================================================================================
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
longer useful lives for tax reporting purposes.
23
Commonwealth Income & Growth Fund II
Notes to Financial Statements
- --------------------------------------------------------------------------------
10. Quarterly Results Summarized quarterly financial data for the years ended
of Operation December 31, 2003 and 2002 is as follows:
(Unaudited)
Quarter ended
-------------------------------------------------------------------
March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------------
2003
Revenues
Lease and other $ 542,701 $ 410,632 $ 301,133 $ 263,990
(Loss) gain on sale of computer
equipment (5,192) 323,511 (13,414) 134,219
- ----------------------------------------------------------------------------------------------------------------
Total revenues 537,509 734,143 287,719 398,209
Total costs and expenses 533,580 438,915 370,171 485,285
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 3,929 $ 295,228 $ (82,452) $ (87,076)
================================================================================================================
Income (loss) per limited
partner unit $ 0.01 $ 0.64 $ (0.18) $ (0.19)
================================================================================================================
Total costs and expenses includes an impairment adjustment
of approximately $31,000 that was recorded in the fourth
quarter of 2003.
24
Commonwealth Income & Growth Fund II
Notes to Financial Statements
- --------------------------------------------------------------------------------
Quarter ended
-------------------------------------------------------------------
March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------------
2002
Revenues
Lease and other $ 703,717 $ 686,154 $ 668,151 $ 655,611
Gain (loss) 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)
================================================================================================================
The cumulative gain or loss on sale of equipment is
included in revenues or costs as appropriate.
26