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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 333-26933
COMMONWEALTH INCOME & GROWTH FUND III
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2895714
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
1160 West Swedesford Road
Berwyn, Pennsylvania 19312
(Address, including zip code, of principal executive offices)
(610) 647-6800
(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, and will not be
contained, 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.
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. 333-26933) incorporated by reference as Exhibits in Part IV of this
Report.
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PART I
ITEM 1: BUSINESS
GENERAL
Commonwealth Income and Growth Fund III (the "Partnership")was formed on
April 17, 1997, 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 July 25, 1997 (the "Offerings").
During 1997 the Partnership had no operations other than in connection with
the Offering. On January 27, 1998, the Partnership received and accepted
subscription proceeds of $1,526,000, which exceeded the minimum offering
amount of $1,500,000 and the funds were released from escrow.
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 will utilize the net proceeds of the Offering
to purchase IBM and IBM compatible computer peripheral and other similar
capital equipment. The Partnership will utilize 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 plans to acquire Equipment which is subject to lease
principally to U.S. corporations and other institutions pursuant
predominantly to Operating Leases. The Partnership retains the flexibility
to enter into Full Payout Net Leases and Conditional Sales Contracts, but
has not done so.
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 anticipates acquiring 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.
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The Partnership anticipates that all Equipment purchased by the
Partnership will be subject to an Operating Lease or an Operating Lease was
entered into with a third party when the Partnership acquired an item of
Equipment. The Partnership may also engage in sale/leaseback transactions,
pursuant to which the Partnership would purchase Equipment from companies
that would then immediately lease the Equipment from the Partnership. The
Partnership may also purchase Equipment which is leased under Full Payout Net
Leases or sold under Conditional Sales Contracts at the time of acquisition
or the Partnership may enter into a Full Payout Net Lease or Conditional
Sales Contract with a third party when the Partnership acquires an item of
Equipment.
The Partnership may enter into arrangements with one or more
manufacturers pursuant to which the Partnership purchases from such
manufacturers Equipment which 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.
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 plans to acquire 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, including year 2000 issues discussed below in Management
Discussion and Analysis have at times caused dramatic reduction in the market
prices of older models of IBM and IBM compatible computer peripheral
equipment from the prices at which they were originally introduced.
Other Equipment-Restrictions. The Partnership plans to acquire
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
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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.
During the operational stage of the Partnership, the Partnership may not
at any one point in time to 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 intends 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 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 retains a security interest
in, the Equipment until the Purchase Price of the Equipment is paid
In general, the terms of the Partnership's leases, whether the Equipment
is leased pursuant to an Operating Lease or a Full Payout Net Lease, depend
upon a variety of factors, including: the desirability of each type of lease
from both an investment and a tax point of view; the relative demand among
lessees for Operating or Full Payout Net Leases; the type and use of
Equipment and its anticipated residual value; the business of the lessee and
its credit rating; the availability and cost of financing; regulatory
considerations; the accounting treatment of the lease sought by the lessee or
the Partnership; and competitive factors.
An Operating Lease generally represents a greater risk to the
Partnership than a Full Payout Net Lease, because in order to recover the
purchase price of the subject Equipment and earn a return on such investment,
it is necessary to renew or extend the Operating Lease, lease the Equipment
to a third party at the end of the original lease term, or sell the
Equipment. On the other hand, the term of an Operating Lease is generally
much shorter than the term of a Full Payout Net Lease, and the lessor is thus
afforded an
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opportunity under an Operating Lease to re-lease or sell the subject
Equipment at an earlier stage of the Equipment's life cycle than under a Full
Payout Net Lease. Also, the annual rental payments received under an
Operating Lease are ordinarily higher than those received under a Full Payout
Net Lease.
The Partnership's policy is to generally enter into "triple net leases"
(or the equivalent, in the case of a Conditional Sales Contract) which
typically provide that the lessee or some other party bear the risk of
physical loss of the Equipment; pay taxes relating to the lease or use of the
Equipment; maintain the Equipment; indemnify the Partnership-lessor against
any liability suffered by the Partnership as the result of any act or
omission of the lessee or its agents; maintain casualty insurance in an
amount equal to the greater of the full value of the Equipment and a
specified amount set forth in the lease; and maintain liability insurance
naming the Partnership as an additional insured with a minimum coverage which
the General Partner deems appropriate. In addition, the Partnership may
purchase "umbrella" insurance policies to cover excess liability and casualty
losses, to the extent deemed practicable and advisable by the General
Partner.
The General Partner has not established any standards for lessees to
which 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 will be 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.
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 by the Partnership, 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 therefrom.
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.
The Partnership may purchase some items of Equipment without leverage.
If the Partnership purchases an item of Equipment without leverage and
thereafter suitable financing becomes available, it may then obtain the
financing, secure the financing with the purchased Equipment to the extent
practicable and invest any proceeds from such financing in additional items
of Equipment, or it may distribute some or all of such proceeds to the
Limited Partners. Any such later financing will be on terms consistent with
the terms applicable to borrowings generally.
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After the net proceeds of the Offering are fully invested in Equipment,
the General Partner plans 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 nonrecourse.
Nonrecourse 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
nonrecourse debt.
Loan agreements may also require that the Partnership maintain certain
reserves or compensating balances and may impose other obligations upon the
Partnership. Moreover, since a significant portion of the Partnership's
revenues from the leasing of Equipment will be reserved for repayment of
debt, the use of financing reduces the cash which might otherwise be
available for distributions until the debt has been repaid and may reduce the
Partnership's Cash Flow over a substantial portion of the Partnership's
operating life.
The General Partner and any of its Affiliates may, but are not required
to, make loans to the Partnership on a short-term basis. If the General
Partner or any of its Affiliates makes such a short-term loan to the
Partnership, the General Partner of Affiliate may not charge interest at a
rate greater that the interest rate charged by unrelated lenders on
comparable loans for the same purpose in the same locality. In no event is
the Partnership required to pay interest on any such loan at an annual rate
greater than three percent over the "prime rate' from time to time announced
by PNC Bank, Philadelphia, Pennsylvania ("PNC Bank"). All payments of
principal and interest on any financing provided by the General Partner or
any of its affiliates are due and payable by the Partnership within 12 months
after the date of the loan.
REFINANCING POLICIES
Subject to the limitations set forth in "Borrowing Policies" above, the
Partnership may refinance its debt from time to time. With respect to a
particular item of Equipment, the General Partner will take into
consideration such factors as the amount of appreciation in value, if any, to
be realized, the possible risks of continued ownership, and the anticipated
advantages to be obtained for the Partnership, as compared to selling such
Equipment.
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 2009. Notwithstanding the
Partnership's objective to sell all of its assets and dissolve in
approximately by December 31, 2009, 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
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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, 2009, 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 that those which the
Partnership can offer. They may also be in a position to offer trade-in
privileges, software, maintenance contracts and other services which the
Partnership may not be able to offer. Equipment manufacturers and
distributors any offer to sell equipment on terms (such as liberal financing
terms and exchange privileges) which will afford benefits to the purchaser
similar to those obtained through leases. As a result of the advantages which
certain of its competitors may have, the Partnership may find it necessary to
lease its Equipment on a less favorable basis than certain of its competitors.
The computer peripheral equipment industry is extremely competitive.
Competitive factors include pricing, technological innovation and methods of
financing. Certain manufacturer-lessors maintain advantages through patent
protection, where applicable, and through a policy that combines service and
hardware with payment accomplished through a single periodic charge.
The dominant firm in the computer marketplace is International Business
Machines Corporation, and its subsidiary IBM Credit Corporation is the
dominant force in the leasing of IBM equipment. Because of IBM's substantial
resources and dominant position, revolutionary changes with respect to
computer systems, pricing, marketing practices, technological innovation and
the availability of new and attractive financing plans could occur at any
time. Significant action in any of these areas by IBM or IBM Credit
Corporation might materially adversely affect the Partnership's business or
the other manufacturers with whom the General Partner might negotiate
purchase and other agreements. Any adverse effect on these manufacturers
could be reflected in the overall return realized by the Partnership on
equipment from those manufacturers of from IBM.
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
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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 the General Partner which has 15 employees.
ITEM 2: PROPERTIES
NOT APPLICABLE
ITEM 3: LEGAL PROCEEDINGS
NOT APPLICABLE
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
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There is no public market for the Units nor is it anticipated that one
will develop. 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. As of March 24, 1998, there
were 125 holders 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.
INVESTMENTS
As of March 18, 1998, the Partnership has not purchased any
equipment.
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 request
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
request will remain in effect until and unless canceled, in writing, by the
requesting Limited Partner(s).
The Partnership will accept redemption requests beginning 30 months
following the termination of the Offering. There will be no limitations on
the period of time that a redemption request may be pending prior to its
being granted. Limited Partners will not be required to hold their interest
in the Partnership for any specified period prior to their making a
redemption request.
In order to make a redemption request, Limited Partners will be required
to advise the General Partner in writing of such request. Upon receipt of
such notification, the Partnership will provide detailed forms and
instructions to complete the request.
EXEMPT TRANSFERS
The following six categories of transfers are exempt transfers for
purposes of calculating the volume limitations imposed by the IRS and will
generally be permitted by the General Partner:
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(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 nonliquidating as well as liquidating
distributions by a parent partnership to its partners of interests in a
subpartnership);
(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, will be made quarterly on December 31, March
31, June 30, and September 30 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 Adjusted
Capital Contributions will be reduced by the excess, 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.
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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 thereunder. No Limited
Partner is required to contribute cash to the capital of the Partnership in
order to restore a closing Capital Account deficit, and the General Partner
has only a limited deficit restoration obligation under the Partnership
Agreement.
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 is
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
is utilized during the Offering Period, whereby Net Profits and Net Losses
allocable to Limited Partners is apportioned among them in the ratio which
the product of the number of Units owned by a Limited Partner multiplied by
the number of days in which the Limited Partner owns such Units during the
period bears to the sum of such products for all Limited Partners.
In addition, where a Limited Partner transfers Units during a taxable
year, the Limited Partner may be allocated Net Profits for a period for which
such Limited Partner does not receive a corresponding cash distribution.
ITEM 6: SELECTED FINANCIAL DATA
The Partnership commenced operations on January 27, 1998; therefore, the
Partnership does not have any select financial data to report.
ITEM 7: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Partnership has no operating history. The Partnership intends to
acquire various types of computer peripheral and similar Equipment, and to
lease such Equipment predominantly under Operating Leases. The Partnership
may also lease Equipment under Full Payout Net Leases or enter into
Conditional Sales Contracts with respect to Equipment. The Partnership
anticipates that it will use a substantial portion of the proceeds of this
Offering, excess Cash Flow, debt financing and Net Disposition Proceeds
received by the Partnership prior to its liquidation phase to purchase
computer peripheral or other similar capital Equipment manufactured by, or
compatible with, equipment manufactured by IBM. See "BUSINESS -Preliminary
Investments."
11
<PAGE>
The Partnership's operating revenues will initially be generated
primarily from leasing, and otherwise entering into contracts for the use of
Equipment. Operating revenues will be utilized to pay Partnership expenses
and provide cash distributions to Limited Partners. The General Partner
anticipates that the Partnership will commence liquidation of all of its
assets beginning in the ninth year of program operations, subject to the
General Partner's discretion to extend the liquidation process if in the
General Partner's discretion such extension will enable the Partnership to
dispose of its assets on more favorable terms. In no event will the
Partnership continue after December 31, 2009.
Because the Partnership's leases and Conditional Sales Contracts will be
on a "triple-net" (or equivalent) basis, it is anticipated that no permanent
reserve for maintenance and repairs will be established from the Offering
proceeds. However, the General Partner is authorized to establish reserves
in the future if and to the extent it deems necessary for maintenance,
repairs and working capital. In addition, the General Partner and Com Cap
Corp. have agreed that the General Partner or Com Cap Corp. will lend or
contribute to the Partnership an amount equal to 1.01% of net Offering
proceeds, if needed, to meet the Partnership's expenses. If available Cash
Flow or Net Disposition Proceeds are insufficient to cover the Partnership's
expenses and liabilities, the Partnership will obtain additional funds by
disposing of or refinancing Equipment or by borrowing within its permissible
limits.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer
programs that have time-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
The Partnership does not have any computer programs or systems as all
services required for the management of the Partnership are provided by the
General Partner which receives fees and certain reimbursements for these
services. Therefore, the General Partner is responsible for any costs
associated with Year 2000 issues. Based on a recent assessment, the General
Partner determined that it will be required to modify or replace portions
of its software so that its computer systems will function properly with
respect to dates in the year 2000 and thereafter. The General Partner
presently believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue will not pose significant
operational problems for its computer systems. The General Partner expects
that its modifications will be complete by 1999. As of December 31, 1997,
the General Partner has not incurred any significant expenses.
The Partnership and the General Partner are not responsible for ensuring that
the computer peripheral equipment that it leases to customers is Year 2000
compliant, however, this equipment may be subject to declines in value or
technological obsolescence due to the equipment not being Year 2000
compliant. The Year 2000 issue may also affect the carrying value of the
equipment when it comes off of lease or be detrimental in negotiating
release rates which may lead to equipment write downs or less than
favorable lease recoveries.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
12
<PAGE>
Commonwealth Income &
Growth Fund III
Financial Statements
From April 28, 1997 (date of inception)
to December 31, 1997
Contents
<TABLE>
<S> <C>
Report of Independent Auditors..............................................14
Audited Financial Statements
Balance Sheet...............................................................15
Statement of Operations.....................................................16
Statement of Partners' Capital..............................................17
Statement of Cash Flows.....................................................18
Notes to Financial Statements...............................................19
</TABLE>
13
<PAGE>
Report of Independent Auditors
The General Partner and Limited Partner
Commonwealth Income & Growth Fund III
We have audited the accompanying balance sheet of Commonwealth Income & Growth
Fund III as of December 31, 1997, and the related statements of operations,
partners' capital, and cash flows from April 28, 1997 (date of inception) to
December 31, 1997. These financial statements are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 III at December 31, 1997, and the results of its operations and its cash
flows from April 28, 1997 (date of inception) to December 31, 1997, in
conformity with generally accepted accounting principles.
Philadelphia, Pennsylvania
February 6, 1998
14
<PAGE>
Commonwealth Income &
Growth Fund III
Balance Sheet
December 31, 1997
<TABLE>
<S> <C>
Assets
Cash ...................................................... $1,500
------
------
Partners' capital
General partner ........................................... $1,000
Limited partner ........................................... 500
------
Total partners' capital ................................... $1,500
</TABLE>
------
------
See accompanying notes.
15
<PAGE>
Commonwealth Income &
Growth Fund III
Statement of Operations
From April 28, 1997 (date of inception)
to December 31, 1997
None
See accompanying notes.
16
<PAGE>
Commonwealth Income &
Growth Fund III
Statement of Partners' Capital
From April 28, 1997 (date of inception)
to December 31, 1997
<TABLE>
<CAPTION>
General Limited
Partner Partner Total
--------- ---------- --------
<S> <C> <C> <C>
Initial contribution .............. $1,000 $ 500 $1,500
------ ------ ------
------ ------ ------
</TABLE>
See accompanying notes.
17
<PAGE>
Commonwealth Income &
Growth Fund III
Statement of Cash Flows
From April 28, 1997 (date of inception)
to December 31, 1997
<TABLE>
<S> <C>
Financing activities
General partner and limited partner contributions ................ $1,500
------
Net increase and cash at end of period ........................... $1,500
------
------
</TABLE>
See accompanying notes.
18
<PAGE>
Commonwealth Income &
Growth Fund III
Notes to Financial Statements
December 31, 1997
1. The Partnership
Commonwealth Income & Growth Fund III (the "Partnership") is a limited
partnership which was organized in the Commonwealth of Pennsylvania. The
Partnership has not yet commenced operations. The Partnership was organized to
acquire, own, lease, and sell income-producing equipment.
The General Partner's initial contribution consists of a $1,000 cash
contribution from Commonwealth Income & Growth Fund, Inc., a wholly-owned
subsidiary of Commonwealth of Delaware, Inc. which in turn is a wholly-owned
subsidiary of Commonwealth Capital Corp. The General Partner may in its sole
discretion purchase units of limited partnership interests (the "Units"). The
Initial Limited Partner has contributed $500 for the purchase of a limited
partnership interest.
The Partnership plans to offer for sale, through a public offering from 75,000
to 750,000 Units at a cash purchase price of $20 per Unit.
2. Related Party Transactions
The Partnership will pay an organizational fee to the General Partner in
connection with the issuance and distribution of Units of 3% of the first $10
million of Limited Partner Capital Contributions and 2% thereafter. The General
Partner will pay the organizational and offering expenses of the offering from
its fee. The General Partner and its affiliates including Commonwealth Capital
Securities Corp. will receive other substantial fees and compensation in
connection with the offering of Units and management of the Partnership's
assets. See "Compensation of General Partner and Affiliates," "Estimated Use of
Proceeds," and "Allocations and Distributions" in the Prospectus of the
Partnership for information with respect to the compensation to be paid to the
General Partner and its affiliates including Commonwealth Capital Securities
Corp. and the allocations of income, losses, and cash distributions.
3. Subsequent Event
Subsequent to December 31, 1997, the Partnership completed the first closing of
the public offering from which the Partnership issued 76,284 limited partnership
units and raised $1,342,598 of net proceeds ($1,525,680 less offering costs of
$183,082). The Company also committed to purchase approximately $857,000 in
equipment as of February 9, 1998.
19
<PAGE>
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
Balance Sheet
February 28, 1997
Contents
<TABLE>
<S> <C>
Report of Independent Auditors.............................................21
Balance Sheet..............................................................22
Notes to Balance Sheet.....................................................23
</TABLE>
20
<PAGE>
Report of Independent Auditors
To the Stockholder
Commonwealth Income & Growth Fund, Inc.
We have audited the accompanying balance sheet of Commonwealth Income & Growth
Fund, Inc. (an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
as of February 28, 1997. This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Commonwealth Income & Growth Fund,
Inc. at February 28, 1997, in conformity with generally accepted accounting
principles.
Philadelphia, Pennsylvania
April 28, 1997
21
<PAGE>
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
Balance Sheet
<TABLE>
<CAPTION>
February 28
1997
-----------
<S> <C>
Assets
Cash ......................................................... $ 500
Accounts receivable from Income Funds and
Commonwealth Capital Corp. ............................... 2,069
Investment in Partnerships ................................... 2,000
-----------
$ 4,569
-----------
-----------
Liabilities
Accounts payable to Income Funds and
Commonwealth Capital Corp. ............................... $ 3,469
Stockholders' equity
Common stock at $1 stated value:
Authorized shares--1,000
Issued and outstanding shares--100 ....................... 100
Additional paid-in capital ................................... 1,001,000
-----------
1,001,100
Less: note receivable ........................................ (1,000,000)
-----------
1,100
-----------
$ 4,569
-----------
-----------
</TABLE>
See accompanying notes.
22
<PAGE>
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
Notes to Balance Sheet
February 28, 1997
1. The Company
Commonwealth Income & Growth Fund, Inc. (the "Company") is a wholly-owned
subsidiary of Commonwealth of Delaware, Inc. which in turn is a wholly-owned
subsidiary of Commonwealth Capital Corp. ("CCC"). The Company is the sole
General Partner of Commonwealth Income & Growth Fund I, a Pennsylvania limited
partnership and the sole General Partner of Commonwealth Income & Growth Fund
II, a Pennsylvania limited partnership. On April 28, 1997 the Company
contributed $1,000 in cash to become the sole General Partner of Commonwealth
Income & Growth Fund III, a Pennsylvania limited Partnership. The three limited
partnerships described above are collectively referred to herein as the
"Partnerships."
CCC has provided additional capital by means of a noninterest-bearing demand
note in the amount of $1,000,000, so that the Company will at all times have a
net worth (which includes the net equity of the Company and the demand note
receivable from CCC) of at least $1,000,000. In computing the Company's net
worth for this purpose, its interest in the Partnerships and any amounts and
notes receivable from and payable to the Partnerships will be excluded. The
Company's equity has been reduced by the note receivable from CCC resulting in
net equity of $1,100, which may be different for tax purposes. The Company's
operations will be included in the consolidated federal income tax return of
CCC.
2. Investment in Partnerships
The Company contributed $2,000 in cash through February 28, 1997 to the
Partnerships for its general partner interests. The Company may, at its sole
discretion, purchase a limited partnership interest in the Partnerships
("Units") for an additional capital contribution of $20 per Unit with a minimum
investment of 125 Units.
3. Related Party Transactions
The Company and its affiliates receive substantial fees and compensation in
connection with the offering of Units and the management of the Partnerships'
assets. See "Compensation of General Partner and Affiliates," and "Allocations
and Distributions" elsewhere in the Prospectus of Commonwealth Income & Growth
Fund III for information with respect to the compensation to be paid to the
Company and its affiliates and the allocations of income, losses, and cash
distributions.
23
<PAGE>
Commonwealth Capital Corp.
Consolidated Balance Sheet
As of February 28, 1997
Contents
<TABLE>
<S> <C>
Report of Independent Auditors...............................................25
Audited Consolidated Balance Sheet...........................................26
Notes to Consolidated Balance Sheet..........................................27
</TABLE>
24
<PAGE>
Report of Independent Auditors
The Stockholder
Commonwealth Capital Corp.
We have audited the accompanying consolidated balance sheet of Commonwealth
Capital Corp. as of February 28, 1997. This balance sheet is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the consolidated financial position of Commonwealth Capital
Corp. at February 28, 1997, in conformity with generally accepted accounting
principles.
Philadelphia, Pennsylvania
April 28, 1997
25
<PAGE>
Commonwealth Capital Corp.
Consolidated Balance Sheet
February 28, 1997
<TABLE>
<S> <C>
Assets
Cash and cash equivalents .................................. $ 162,028
Receivables from Income Funds .............................. 308,686
Advances to Income Funds ................................... 317,400
Other receivables .......................................... 134,335
Income taxes receivable .................................... 33,000
Minimum lease payments receivable, net of
unearned interest income of $4,316,972 ................. 9,045,000
Deferred tax asset ......................................... 122,000
Investment in Income Funds ................................. 18,200
Other assets ............................................... 10,976
Office furniture and equipment, net of
accumulated depreciation of $84,668 .................... 32,323
-----------
Total assets ............................................... 10,183,948
-----------
-----------
Liabilities and stockholder's equity
Accounts payable and accrued expenses ...................... 118,144
Nonrecourse obligations .................................... 9,045,000
-----------
Total liabilities .......................................... 9,163,144
Stockholder's equity:
Common stock, $1 par value:
Authorized shares - 1,000
Issued and outstanding shares - 10 .................. 10
Retained earnings ...................................... 1,020,794
-----------
Total stockholder's equity ................................. 1,020,804
-----------
Total liabilities and stockholder's equity ................. $10,183,948
-----------
-----------
</TABLE>
See accompanying notes.
26
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Balance Sheet
February 28, 1997
1. Business
Commonwealth Capital Corp. (the Company), through its subsidiary, Commonwealth
of Delaware, Inc. (CDI), is primarily engaged in leasing various types of
computer peripheral equipment and other similar equipment, which are leased
primarily to U.S. corporations and institutions. Certain subsidiaries of CDI
were formed for the purpose of functioning as general partners/managing trustees
which own a 1% interest in limited partnerships/trusts (the "Income Funds"),
which were organized to acquire, own and act as lessor with respect to certain
computer equipment. As of February 28, 1997, the subsidiaries include
Commonwealth Capital Fund 1987-I, Inc., Commonwealth Capital Fund 1988-I, Inc.,
Commonwealth Capital Fund No. 3, Inc., Commonwealth Capital Fund No. 4, Inc.,
Commonwealth Capital Fund V, Inc., Commonwealth Capital Private Fund-I, Inc.,
Commonwealth Capital Fund VI, Inc., Commonwealth Capital Fund VII, Inc.,
Commonwealth Capital Private Fund - II, Inc., Commonwealth Capital Trustee VIII,
Inc., Commonwealth Capital Trustee IX, Inc., Commonwealth Capital Trustee X,
Inc., Commonwealth Capital Private Fund-III, Inc., Commonwealth Income and
Growth Fund, Inc., Commonwealth Capital Private Fund IV, Inc., Commonwealth
Capital Private Fund V, Inc., and Commonwealth Capital Private Fund VI, Inc.
(collectively the "General Partner Subsidiaries"), Commonwealth Capital
Securities Corp., Garden State Facilities Funding, Inc. (GSFF) and Commonwealth
Capital Delaware Trustee, Inc.
2. Accounting Policies
Basis of Presentation
The accompanying consolidated balance sheet includes the accounts of the
Company, its wholly-owned subsidiary, CDI, and its wholly-owned subsidiaries
(Note 1). All significant intercompany accounts and transactions have been
eliminated in the accompanying consolidated balance sheet. The balance sheet is
presented on an unclassified basis in accordance with leasing industry practice.
Use of Estimates
The preparation of the balance sheet in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the balance sheet and accompanying notes. Actual
results could differ from those estimates.
27
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Balance Sheet (continued)
2. Accounting Policies (continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. At February 28, 1997, cash
equivalents were invested in a money market fund investing directly in treasury
obligations.
Office Furniture and Equipment
Office furniture and equipment are carried at cost and are depreciated over the
estimated useful lives of the related assets ranging from 5 to 7 years using
accelerated methods.
Investment in Income Funds
The Company accounts for its 1% interests in the Income Funds by the equity
method. Distributions were received from these Income Funds and approximated the
Company's equity in the income of the Income Funds. Financial information of the
Income Funds as of December 31, 1996 is as follows:
<TABLE>
<S> <C>
Total assets ......................................... $34,502,000
Nonrecourse debt ..................................... 10,450,000
Other liabilities .................................... 2,952,000
Partners' capital .................................... 21,067,000
</TABLE>
The Company has guaranteed the performance of certain non-monetary obligations
of the General Partner Subsidiaries to the respective Income Funds, primarily
the responsibility for management of the Income Funds. In addition, the Company
is responsible for certain capital funding requirements of the General Partner
Subsidiaries and, accordingly, holds noninterest-bearing demand notes of
approximately $4,166,000 at February 28, 1997. Such notes have been eliminated
in the consolidation of the accompanying balance sheet.
The compensation to the Company from the Income Funds includes: (1) Equipment
Acquisition Fees (4% of the purchase price of all equipment purchased by the
Income Funds); (2) Debt Placement Fees (1% of financed equipment by the Income
Funds); (3) Sales Fees Expense (3% of gross proceeds of sold equipment by the
Income Funds); and (4) Equipment Management Fees (5% of the gross operating
lease revenues of the Income Funds). The Company earned approximately $1,509,000
in fees for managing the Income Funds during the year ended February 28, 1997.
28
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Balance Sheet (continued)
3. Lease Commitments
GSFF acted as lessor in a series of lease purchase transactions whereby the
underlying assets were funded by investors through certificates of
participation in the lease payments. All of GSFF's rights as lessor were
assigned to a third-party agent which administers the collection of rentals
paid by the lessee. The obligations under the certificates are nonrecourse to
GSFF. Accordingly, any reduction in the minimum lease payments receivable for
uncollectible accounts would result in an equal reduction of the nonrecourse
obligations. Amounts outstanding at February 28, 1997 under the leases and
certificates of participation are approximately $9,045,000. These amounts are
included in minimum lease payments receivable and nonrecourse obligations in
the accompanying balance sheet. Of these amounts, $7,690,000 are secured by
mortgage insurance policies maintained by the lessee. The certificates mature
from 1997 to 2011.
Future minimum lease payments to be received as of February 28, 1997 are as
follows:
<TABLE>
<C> <C>
1998 ........................................................ $ 1,190,923
1999 ........................................................ 1,202,479
2000 ........................................................ 1,190,739
2001 ........................................................ 1,192,935
2002 ........................................................ 972,677
Thereafter .................................................. 7,675,669
-----------
13,425,422
Less amount representing interest 4,380,422
-----------
Total $ 9,045,000
-----------
-----------
</TABLE>
The Company leases an automobile, certain office equipment and office space
under noncancelable operating leases expiring in 1998 through 2000. Future
minimum lease payments under noncancelable operating leases at February 28, 1997
are $184,000 in 1998; $143,000 in 1999; and $3,000 in 2000.
4. Profit-Sharing Plan
The Company has a profit-sharing plan covering all employees with one year of
service and 21 years of age. Profit-sharing contributions are made at the
discretion of management. It is the Company's policy to fund profit-sharing
costs as accrued.
29
<PAGE>
5. Income Taxes
The Company files a consolidated federal income tax return with CDI and its
subsidiaries. The Company has investment tax credit carryforwards of $266,000 at
February 28, 1997. The investment tax credits expire in 1998 through 2001 and
are available to reduce future federal income tax liabilities. The Company also
has state net operating loss carryforwards of approximately $508,000, which
expire during 1997 through 1999.
The Company has a federal deferred tax asset of $259,000 at February 28, 1997,
arising primarily from the carryforward of investment tax credits. At February
28, 1997, the Company recorded a valuation allowance of approximately $137,000
because the Company concluded the future realization of all of the tax benefits
underlying the asset could not be reasonably assured based on current and
expected operating results. The Company believes that the remaining asset of
$122,000 is more likely than not to be realized. In addition, the Company has a
state deferred tax asset of $48,000 at February 28, 1997; however, the future
realization of the tax benefits underlying the state deferred tax asset could
not be reasonably assured and, accordingly, a valuation allowance was recorded
in the amount of $48,000.
6. Related Party Transactions
During 1997, the Company made $373,388 in cash advances to certain Income Funds
to fund cash distributions to limited partners. The remaining advances of
$317,400 are due on demand.
7. Legal Settlement
In 1997, the Company settled a dispute over contract terms with a former lessee,
whereby the lessee agreed to pay $190,000 for release of all future liability.
The Company received $95,000 through February 28, 1997 and the remaining
$95,000, included in other receivables at February 28, 1997, was subsequently
received.
30
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
NOT APPLICABLE
PART III
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 Commonwealth Capital Corp., a Pennsylvania corporation ("Com
Cap Corp."), was incorporated in Pennsylvania on August 26, 1993. The
General Partner also acts as the General Partner for Commonwealth Income and
Growth Fund I and Commonwealth Income and Growth Fund II. The principal
business office of the General Partner is 1160 West Swedesford Road, Suite
340, Berwyn, PA 19312, and its telephone number is 610-647-6800. 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
Com Cap Corp. are as follows:
<TABLE>
<CAPTION>
NAME TITLE
- ------------------- ------------------------------------------------
<S> <C>
George S. Springsteen Chairman of the Board of Directors and President
of the General Partner and Com Cap Corp.
Kimberly A. MacDougall Executive Vice President, Chief Operating Officer
and Secretary of the General Partner and Com Cap Corp.
31
<PAGE>
David A. Kintzer Vice President and Chief Financial Officer of the
General Partner and Com Cap Corp.
Kathleen S. Enscoe Assistant Vice President and Controller of the General
Partner and Com Cap Corp.
Gregory M. Lorenz Vice President of Com Cap Corp.
Magdalia Cruz Assistant Vice President of Com Cap Corp.
</TABLE>
George S. Springsteen, age 63, is President of both Com Cap Corp. and
the General Partner. Mr. Springsteen is also President of the general
partners or controlling entities of several prior programs sponsored by Com
Cap Corp. with objectives similar to the Partnership's. He has been the sole
shareholder and director of Com Cap Corp. 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 Com Cap Corp. in May of 1978. Mr.
Springsteen received a Bachelor of Science degree from the University of
Delaware in 1957.
Kimberly A. MacDougall, age 38, is Executive Vice President, Chief
Operating Officer and Secretary of Com Cap Corp. and the General Partner and
joined ComCap Corp. in 1997. She is also the President of Commonwealth
Capital Securities Corp. From 1980 to 1997, Ms. MacDougall was employed with
Wheat First Butcher Singer, a broker/dealer headquartered in Richmond,
Virginia. While at Wheat First Butcher Singer, Ms. MacDougall, 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. MacDougall 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.
David A. Kintzer, age 38, is Vice President and Chief Financial Officer
of both Com Cap Corp. and the General Partner and has been employed at Com
Cap Corp. since 1991. Mr. Kintzer also serves as Vice President and Chief
Financial Officer of the general partners or controlling entities of several
prior programs sponsored by Com Cap Corp. with objectives similar to the
Partnership's. From 1984 to 1990, Mr. Kintzer was employed by Continental
Computer Leasing Corporation, a computer leasing company with an equipment
lease portfolio of $40,000,000 and annual revenue of $20,000,000. While at
Continental, Mr. Kintzer served as Controller and Chief Financial Officer and
managed its accounting, financial, EDP, banking relationships and personnel
functions. Prior to 1984, Mr. Kintzer was employed by the international
public accounting firm of Ernst & Young LLP. Mr. Kintzer is a member of both
the American Institute of Certified Public Accountants and The Pennsylvania
Institute of Certified Public Accountants. Mr. Kintzer received an A.B.
degree in accounting from Franklin & Marshall College in 1981.
Kathleen S. Enscoe, age 32, is Assistant Vice President and Controller
of Com Cap Corp. and certain of its subsidiaries where she has been employed
since 1992. Ms. Enscoe is an active member of the Equipment Leasing
Association. From 1988 to 1992, Ms. Enscoe was employed as a staff
accountant in the financial reporting department of WWF Paper Corporation.
Ms. Enscoe received a B.S.B.A. degree in 1988 from Geneva College with dual
majors in accounting and business administration.
32
<PAGE>
Gregory M. Lorenz, age 35, is Vice President of Com Cap Corp. and has
been employed by Com Cap Corp. since April of 1994. From 1985 to 1993, Mr.
Lorenz was employed by Daley Marketing Corp. where he served as Vice
President of Marketing and Director of Sales and Marketing. Mr. Lorenz is a
member of the Equipment Leasing Association and received an Associates of
Arts degree from Orange Coast College in 1984.
Magdalia Cruz, age 29, is Assistant Vice President of Com Cap Corp. and
Vice President of Commonwealth Capital Securities Corp. Ms. Cruz has been
employed by ComCap Corp. since 1993. From 1990 to 1993, Ms. Cruz was
employed as Marketing Coordinator for Shaffer DeSouza Brown. Prior to that,
as a Computer Equipment Analyst for the Defense Industrial Supply Center, a
government agency based in Philadelphia. She is completing her studies for a
B.S. in Business Management at West Chester University. Ms. Cruz is a member
of the Equipment Leasing Association, Investment Partnership Association, and
holds her Series 22, 63 and 39 NASD licenses.
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 which 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.
33
<PAGE>
<TABLE>
<CAPTION>
Estimated Estimated
Amount Amount
Assuming Assuming
Minimum of Maximum of
Entity Receiving 75,000 Units 750,000 Units
Compensation Type of Compensation Are Sold Are Sold
- ------------------ ------------------------------------ ------------ ------------
OFFERING AND ORGANIZATION STAGE
<S> <C> <C> <C>
Commonwealth Underwriting Commissions. The $135,000 $1,350,000
Capital Securities Partnership will pay to the Dealer
Corp. Manager an aggregate amount of up
to nine percent of Capital
Contributions as Underwriting
Commissions after and only if the
required $1,500,000 Minimum
Subscription Amount is sold. The
Dealer Manager will pay other
broker-dealers ("Participating
Brokers") out of Underwriting
Commissions a selling commission
of up to eight percent of the
Capital Contributions from Units
sold by such Participating Brokers.
The amount of the Underwriting
Commissions will be determined
based upon the quantity of Units
sold to a single investor.
The General Organizational Fee. An Organization $45,000 $400,000
Partner Fee equal to three percent of the
first $10,000,000 of Limited
Partners' Capital Contributions and
two percent of the Limited
Partners' Capital Contribution in
excess of $10,000,000, as
compensation for the organization
of the Partnership. It is
anticipated that the Organizational
and Offering Expenses, which
include legal, accounting and
printing expenses; various
registration and filing fees;
miscellaneous expenses related to
the organization and formation of
the Partnership; other costs of
registration; and costs incurred in
connection with the preparation,
printing and distribution of this
Prospectus and other sales
literature will be approximately
$300,000. The General Partner will
pay all Organizational and Offering
Expenses, other than Underwriting
Commissions.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Estimated Estimated
Amount Amount
Assuming Assuming
Minimum of Maximum of
Entity Receiving 75,000 Units 750,000 Units
Compensation Type of Compensation Are Sold Are Sold
- ------------------ ------------------------------------ ------------ ------------
OPERATIONAL AND SALE OR LIQUIDATION STAGES
<S> <C> <C> <C>
The General Reimbursement of Expenses. The $15,000 $20,000
Partner General Partner and its Affiliates
and its are entitled, under Section 5.2 of
Affiliates the Partnership Agreement, to
reimbursement by the Partnership
for the cost of goods, supplies or
services obtained and used by the
General Partner in connection with
the administration and operation of
the Partnership from third parties
unaffiliated with the General
Partner. The amounts set forth on
this table are approximations of
reimbursable expenses for the first
year of the Partnership's operation
and do not include expenses
incurred in the offering of Units.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Estimated Estimated
Amount Amount
Assuming Assuming
Minimum of Maximum of
Entity Receiving 75,000 Units 750,000 Units
Compensation Type of Compensation Are Sold Are Sold
- ------------------ ------------------------------------ ------------ ------------
<S> <C> <C> <C>
The General Equipment Acquisition Fee. An $71,351 $716,217
Partner Equipment 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 will be paid upon closing of
the Offering with respect to the
Equipment to be purchased by the
Partnership with the net proceeds
of the Offering available for
investment in Equipment except for
fees on the leveraged portion of
the Purchase Price which are paid
when the Equipment is purchased. If
the Partnership does not purchase
Equipment with all the net proceeds
of the Offering, the General
Partner will return a pro rata
portion of the fee to the
Partnership. If the Partnership
acquires Equipment in an amount
exceeding the net proceeds of the
Offering available for investment
in Equipment, the fee will be paid
when such Equipment is acquired.
The estimated amounts set forth in
this table include fees on
Equipment assuming the maximum
allowable leverage, but exclude
such fees earned on Equipment
purchased with Retained Proceeds.
Such excluded fees may be
significant in amount. Equipment
Acquisition Fees will be lower than
the estimated maximum if a lower
level of acquisition borrowing is
utilized.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Estimated Estimated
Amount Amount
Assuming Assuming
Minimum of Maximum of
Entity Receiving 75,000 Units 750,000 Units
Compensation Type of Compensation Are Sold Are Sold
- ------------------ ------------------------------------ ------------ ------------
<S> <C> <C> <C>
The General Debt Placement Fee. As compensation $5,351 $53,716
Partner for arranging Term Debt to finance
the acquisition of Equipment by the
Partnership, a fee equal to one
percent of such indebtedness;
provided, however, that such fee
shall be reduced to the extent the
Partnership incurs such fees to
third parties, unaffiliated with
the General Partner or the lender,
with respect to such indebtedness
and no such fee will be paid with
respect to borrowings from the
General Partner or its Affiliates.
The estimated amounts set forth in
this table assume the expected
maximum allowable leverage
($535,135 if the minimum number of
Units are sold and $5,371,620 if
the maximum number of Units are
sold), but exclude such fees earned
on refinancings or debt incurred
with respect to Equipment purchased
with Retained Proceeds and
borrowings.
The General Equipment Management Fee. A monthly Not Not
Partner fee equal to the lesser of (i) the determinable determinable
fees which would be charged by an at this time at this time
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.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Estimated Estimated
Amount Amount
Assuming Assuming
Minimum of Maximum of
Entity Receiving 75,000 Units 750,000 Units
Compensation Type of Compensation Are Sold Are Sold
- ------------------ ------------------------------------ ------------ ------------
<S> <C> <C> <C>
The General Equipment Liquidation Fee. With Not Not
Partner respect to each item of Equipment determinable determinable
sold by the General Partner (other at this time at this time
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 of 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 a
10% per annum cumulative return,
compounded daily, on Adjusted
Capital Contributions ("Cumulative
Return") and (ii) the Net
Disposition Proceeds from such sale
in accordance with the Partnership
Agreement. Such fee will be reduced
to the extent any liquidation or
resale fees are paid to
unaffiliated parties.
INTEREST IN THE PARTNERSHIP
The General Partnership Interest. The General Not Not
Partner Partner will have a present and determinable determinable
continuing one percent interest in at this time at this time
the Partnership's items of income,
gain, loss, deduction, credit, and
tax preference. In addition, the
General Partner will receive one
percent of Cash Available for
Distribution until the Limited
Partners have received
distributions of Cash Available for
Distribution equal to their Capital
Contributions plus the 10%
Cumulative Return and thereafter,
the General Partner will receive
10% of Cash Available for
Distribution. See "Risk Factors -
Dilution."
</TABLE>
38
<PAGE>
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.
ACQUISITIONS
Com Cap Corp. and the General Partner or other Affiliates of the General
Partner may acquire Equipment for the Partnership provided that (i) the
Partnership has insufficient funds at the time the Equipment is acquired,
(ii) the acquisition is in the best interest of the partnership and (iii) no
benefit to the General Partner or its Affiliates arises from the acquisition
except for compensation paid to Com Cap Corp., the General Partner or such
other Affiliate as disclosed in this Report. Com Cap Corp., the General
Partner or their Affiliates will not hold Equipment for more than 60 days
prior to transfer to the Partnership. If sufficient funds become available
to the Partnership within such 60 day period, 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.
Com Cap Corp., 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 Com Cap Corp.
In certain instances, the Partnership may find 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 that
equipment Programs formed by the General Partner or its Affiliates, which
partnerships or joint ventures own specific equipment; provided that (i) the
Partnership has or acquires a controlling interest in such ventures or
partnerships, (ii) the non-controlling interest is owned by a non-Affiliated,
and (iii) the are no duplicate fees; and (b) the Partnership may invest in
joint venture arrangements with other equipment
39
<PAGE>
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 Fees" means the total of all fees and commissions paid by any
party in connection with the initial purchase of Equipment acquired by the
Partnership. Included in the computation of such fees or commissions shall be
the Equipment Acquisition Fee, any commission, selection fee, construction
supervision fee, financing fee, non-recurring management fee or any fee of a
similar nature, however designated.
"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.
40
<PAGE>
"Affiliate" means, when used with reference to a specified Person, (i) any
Person, that directly or indirectly through one or more intermediaries controls
or is controlled by or is under common control with the specified Person, (ii)
any Person that is a director or an executive officer of, partner in, or serves
in a similar capacity to, the specified Person, or any Person of which the
specified Person is an executive officer or partner or with respect to which the
specified Person serves in a similar capacity, (iii) any Person owning or
controlling 10% or more of the outstanding voting securities of such specified
Person, or (iv) if such Person is an officer, director or partner, any entity
for which such Person acts in such capacity.
"Capital Account" means the separate account established for each Partner
pursuant to Section 4.1.
"Capital Contributions" means, in the case of the General Partner, the
total amount of money contributed to the Partnership by the General Partner,
and, in the case of the Limited Partners, $20 for each Unit or where the context
requires, the total Capital Contributions of all the Partners.
"Cash Available for Distribution" means Cash Flow plus Net Disposition
Proceeds plus cash funds available for distribution from Partnership reserves,
less such amounts as the General Partner, in accordance with this Agreement,
causes the Partnership to reinvest in Equipment or interests therein, and less
such amounts as the General Partner, in its sole discretion, determines should
be set aside for the restoration or enhancement of Partnership reserves.
"Cash Flow" for any fiscal period means the sum of (i) cash receipts from
operations, including, but not limited to, rents or other revenues arising from
the leasing or operation of the Equipment and interest, if any, earned on funds
on deposit for the Partnership, but not including Net Disposition Proceeds,
minus (ii) all cash expenses and costs incurred and paid in connection with the
ownership, lease, management, use and/or operation of the Equipment, including,
but not limited to, fees for handling and storage; all interest expenses paid
and all repayments of principal regarding borrowed funds; maintenance; repair
costs; insurance premiums; accounting and legal fees and expenses; debt
collection expenses; charges, assessments or levies imposed upon or against the
Equipment; ad valorem, gross receipts and other property taxes levied against
the Equipment; and all costs of repurchasing Units in accordance with this
Agreement; but not including depreciation or amortization of fees or capital
expenditures, or provisions for future expenditures, including, without
limitation, Organizational and Offering Expenses.
41
<PAGE>
"Closing Date" means the date, as designated by the General Partner, as of
which the Units shall cease being offered to the public pursuant to the
Offering, and shall be no later than the second anniversary of the Effective
Date.
"Code" means the Internal Revenue Code of 1986, as amended, and as may be
amended from time to time by future federal tax statutes. Any reference this
Agreement to a particular provision of the Code shall mean, where appropriate,
the corresponding provision of any successor statute.
"Competitive Equipment Sale Commission" means that brokerage fee paid for
services rendered in connection with the purchase or sale of Equipment which is
reasonable, customary, and competitive in light of the size, type, and location
of the Equipment.
"Conditional Sales Contract" means an agreement to sell Equipment to a
buyer in which the seller reserves title to, and retains a security interest in,
the Equipment until the Purchase Price of the Equipment is paid.
42
<PAGE>
"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-cancellable rental payments due (and which can be calculated at
the commencement of the Net Lease) during the initial noncancellable fixed term
(not including any renewal or extension period) of the lease or other contract
for the use of the Equipment are at least sufficient to recover the Purchase
Price of the Equipment.
43
<PAGE>
"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 the first time subscribers for Units are admitted
as Limited Partners.
"IRA" means an Individual Retirement Account as described in Section 408
of the Code.
"Limited Partner" means a Person who acquires Units and who is admitted to
the Partnership as a limited partner in accordance with the terms of this
Agreement.
"Majority in Interest" means, with respect to the Partnership, Limited
Partners holding more than 50% of the outstanding Units held by all Limited
Partners at the Record Date for any vote or consent of the Limited Partners.
"Minimum Subscription Amount" means an aggregate of $1,500,000 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.
44
<PAGE>
"Net Lease" means a lease or other contract under which the owner provides
equipment to a lessee or other operator in return for a payment, and the lessee
assumes all obligations and pays for the operation, repair, maintenance, taxes
and insuring of the equipment, so that the non-cancellable rental payments under
the lease are absolutely net to the lessor.
"Net Profits" or "Net Losses" shall be computed in accordance with Section
703(a) of the Code (including all items of income, gain, loss or deduction
required to be stated separately pursuant to Section 703(a)(1) of the Code) for
each taxable year of the Partnership or shorter period prior or subsequent to an
interim closing of the Partnership's books with the following adjustments: (i)
any income of the Partnership that is exempt from federal income tax and not
otherwise taken into account in computing Net Profits and Net Loss pursuant to
this definition shall be added to such taxable income or shall reduce such
taxable loss; (ii) any expenditure of the Partnership described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to
Treasury Regulations Section 1.704-1(b)(2)(iv)(i) and not otherwise taken into
account in computing Net Profits and Net Losses pursuant to this definition
shall be subtracted from such taxable income or loss; (iii) items of income,
gain, loss and deduction specially allocated pursuant to Section 7.3 of this
Agreement shall not be included in the computation of Net Profits or Net Loss;
and if property is reflected on the books of the Partnership at a book value
that differs from the adjusted tax basis of the property in accordance with
Treasury Regulation Section 1.704-1(b)(2)(iv)(d) or (f), depreciation,
amortization, and gain or loss with respect to such property shall be determined
by reference to such book value in a manner consistent with Treasury Regulation
Section 1.704-1(b)(2)(iv)(g). The terms "Net Profit" or "Net Losses" shall
include the Partnership's distributive share of the profit or loss of any
partnership or joint venture in which it is a partner or joint venturer.
"Offering" means the initial public offering of the Units in the
Partnership, as described in the Prospectus.
"Offering Period" means the period commencing the Effective Date and
ending the last day of the calendar month in which the Closing Date occurs.
"Operating Lease" means a lease or other contractual arrangement under
which an unaffiliated party agrees to pay the Partnership, directly or
indirectly, for the use of the Equipment, and which is not a Full Payout Net
Lease.
"Organizational and Offering Expenses" means the expenses incurred in
connection with the organization of the Partnership and in preparation of the
offering for registration and subsequently offering and distributing it to the
public, including Underwriting Commissions, listing fees and advertising
expenses except advertising expenses related to the leasing of the Program's
equipment.
"Partners" means any one or more of the General Partner and the Limited
Partners.
"Partnership" means Commonwealth Income & Growth Fund III, a Pennsylvania
limited partnership.
45
<PAGE>
"Person" means an individual, partnership, joint venture, corporation,
trust, estate or other entity.
"Program" means a limited or general partnership, joint venture,
unincorporated association or similar organization, other than a corporation
formed and operated for the primary purpose of investment in and the operation
of or gain from an interest in Equipment.
"Purchase Price" means, with respect to any Equipment, an amount equal to
the sum of (i) the invoice cost of such Equipment or any other such amount paid
to the seller, (ii) any closing, delivery and installation charges associated
therewith not included in such invoice cost and paid by or on behalf of the
Partnership, (iii) the cost of any capitalized modifications or upgrades paid by
or on behalf of the Partnership in connection with its purchase of the
Equipment, and (iv) the amount of the Equipment Acquisition Fee and any other
Acquisition Fees, but excluding points and prepaid interest.
46
<PAGE>
"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.
47
<PAGE>
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.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
Commonwealth Income & Growth Fund III
Report of Independent Auditors
Balance Sheet as of December 31, 1997
Statement of Operations from April 28, 1997 (date of inception) to
December 31, 1997
Statement of Partners' Capital from April 28, 1997 (date of
inception) to December 31, 1997
Statement of Cash Flows from April 28, 1997 (date of inception) to
December 31, 1997
Notes to Financial Statements
Commonwealth Income & Growth Fund, Inc.
Report of Independent Auditors
Balance sheet as of February 28, 1997
Notes to Balance Sheet
Commonwealth Capital Corp.
Report of Independent Auditors
Consolidated Balance Sheet as of February 28, 1997
Notes to Consolidated Balance Sheet
(a) (2) Schedules.
Schedules are omitted because they are not applicable, not required,
or because the required information is included in the financial
statements and notes thereto.
(a) (3) Exhibits.
* 3.1 Certificate of Limited Partnership
* 3.2 Agreement of Limited Partnership
27 Financial Data Schedule
* Incorporated by reference from the Partnership's
Registration Statement on Form S-1 (Registration No.
333-26933)
48
<PAGE>
(b) Reports on Form 8-K.
NOT APPLICABLE
(c) Exhibits.
49
<PAGE>
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
on March 27, 1998 by the undersigned thereunto duly authorized.
COMMONWEALTH INCOME & GROWTH FUND III
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 27, 1998.
SIGNATURE CAPACITY
- ------------------------------ ---------------------------
/s/ GEORGE S. SPRINGSTEEN Chairman, President and Sole Director of
- ------------------------------ Commonwealth Income & Growth Fund, Inc.
George S. Springsteen
/s/ KIMBERLY A. MACDOUGALL Executive Vice President,
- ------------------------------ Chief Operating Officer
Kimberly A. MacDougall
/s/ DAVID A. KINTZER Vice President and Chief Financial Officer
- ------------------------------ of Commonwealth Income & Growth
David A. Kintzer Fund, Inc.
/s/ KATHLEEN S. ENSCOE Controller of Commonwealth Income & Growth Fund,
- ------------------------------ Inc.
Kathleen S. Enscoe
50
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<NAME> COMMONWEALTH INCOME & GROWTH FUND II
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