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SUPPLEMENT TO PROSPECTUS DATED JULY 25, 1997
COMMONWEALTH
INCOME & GROWTH
FUND III
__________________________[GRAPHIC OMITTED]__________________________
UP TO 750,000 UNITS OF LIMITED PARTNERSHIP INTERESTS
COMMONWEALTH INCOME & GROWTH FUND III:
- - We are a Pennsylvania limited partnership.
- - We acquire computer peripheral equipment and other similar capital
equipment, which is leased primarily to US corporations and institutions.
- - Our principal objective is to generate sufficient leasing revenues to
enable us to make cash distributions to our limited partners.
- - We, together with selected securities brokers, will sell the units on a
best efforts basis.
- - We will close the offering on July 25, 1999 or sooner.
- MAXIMUM NUMBER OF UNITS: 750,000
- OFFERING SIZE: (MINIMUM) $ 1,500,000
(MAXIMUM) $ 15,000,000
- PRICE PER UNIT: $ 20.00
- NET PROCEEDS (PER UNIT): $ 18.20
THIS OFFERING INVOLVES SIGNFICANT RISKS, INCLUDING:
- LIMITED VOTING RIGHTS, NO PARTCIPATION IN MANAGEMENT
- THE GENERAL PARTNER WILL HAVE CONFLICTS OF INTEREST
- SIGNIFICANT FEES WILL BE PAID TO THE GENERAL PARTNER
- RESTRICTIONS ON TRANSFER OF UNITS
- A PORTION OF DISTRIBUTIONS WILL BE RETURN OF CAPITAL
- THE VALUE OF ASSETS MAY DEPRECIATE IN VALUE
- THERE ARE CERTAIN TAX RISKS ASSOCIATED WITH THIS OFFERING
THIS INVESTMENT INVOLVES RISKS. SEE "RISK FACTORS", BEGINNING ON PAGE 4.
Neither the SEC nor any state securities commission has determined whether this
Prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
Our Location And Telephone Number is:
COMMONWEALTH CAPITAL SECURITIES CORP.
1160 WEST SWEDESFORD ROAD, SUITE 340
BERWYN, PENNSYLVANIA 19312
1-800-497-4554
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(Inside Front Cover)
WHERE TO FIND MORE INFORMATION:
We will provide, at no cost, upon the request of an interested investor, a copy
of the most recent Annual Report on Form 10-K filed with the Securities and
Exchange Commission for Fund I and Fund II. A limited partner can request Form
10-Ks for Fund I and Fund II by calling 1-800-497-4554.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits relating thereto which the General
Partner has filed with the Securities and Exchange Commission, Washington, D.C.,
under the Securities Act of 1933, as amended, and to which reference is hereby
made.
Copies of the Registration Statement and the exhibits are on file at the
offices of the Securities and Exchange Commission in Washington, D.C. at 450
Fifth Street, N.W., Washington, DC 20549 and at the Commission's regional
offices at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL
60661, and 7 World Trade Center, New York, NY 10048; and may be obtained upon
payment of the fee prescribed by the SEC.
Further information is available by contacting the SEC at 1-800-SEC-0330.
The Commission also maintains a website that contains reports, proxy
statements, registration statements and other information regarding registrants
that file electronically at http//:www.sec.gov.
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PROSPECTUS SUMMARY
THE FOLLOWING IS ONLY A SUMMARY. FOR MORE DETAILED INFORMATION, PLEASE LOOK
ELSEWHERE IN THIS PROSPECTUS. FOR SHORT DEFINITIONS OF TERMS USED, SEE THE
GLOSSARY AT THE END OF THIS PROSPECTUS.
OUR COMPANY:
- We will acquire computer peripheral and other similar equipment which is
leased primarily to U.S. corporations and other institutions.
- We will use a substantial portion of the proceeds of the offering to
acquire Equipment.
- We will also use excess cash flow, sale proceeds and the proceeds of
debt financing to purchase additional Equipment from time to time
throughout our operational phase. We expect that most of the Equipment
will be placed on Operating Leases (short term leases under which we
will normally receive rental payments in an amount less than the
purchase price of the Equipment).
- At the end of initial Operating Leases, we will either re-lease or sell
Equipment. Substantially all of the Equipment will be manufactured by,
or compatible with equipment manufactured by IBM. See "Risk Factors" and
"Investment Objectives" and "Description of Leases."
- We intend to purchase only Equipment which will be leased at the same
time we acquire the equipment.
- We intend to dispose of all our assets in approximately 10 years from
the Closing Date.
GENERAL PARTNER
Our general partner is Commonwealth Income & Growth Fund, Inc., located at 1160
West Swedesford Road, Berwyn, Pennsylvania 19312 (telephone number is
610-647-6800). Commonwealth Income & Growth Fund, Inc. is owned by Commonwealth
of Delaware, Inc., which is owned by Commonwealth Capital Corp., ("Com Cap
Corp."). Affiliates of the General Partner have sponsored several prior
equipment leasing programs. See "Conflicts of Interest" and "Appendix II --
Prior Performance Tables."
COMPENSATING OUR GENERAL PARTNER AND ITS AFFILIATES.
Our general partner and its affiliates, including Commonwealth Capital
Securities Corp., will receive substantial fees and compensation from the
offering of Units and from our operations of the Partnership, regardless of
profitability and, in some cases, prior to any distributions to you.
WE MAY BORROW FUNDS
We may borrow a portion of the cost of the Equipment which we purchase. The
total amount of indebtedness will be limited to 30% of the total cost of the
Equipment. We may not borrow to acquire Equipment until the net proceeds of the
Offering are fully invested, or committed to investment, in Equipment. There are
no borrowing limits for any particular item of Equipment. All of our borrowings
will be non-recourse to us.
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DISTRIBUTIONS ARE EXPECTED TO BE MADE QUARTERLY
Distributions are expected to commence quarterly. There can be no assurance,
however, as to the exact date on which distributions will commence or the amount
of any distributions. In addition, if you purchase a minimum of 250 Units
($5,000), you will have the option to choose, for a fee, to receive
distributions, paid in arrears, on a monthly basis. In the future, the General
Partner, in its sole discretion, may elect to pay distributions to you on a
quarterly basis. See "Distributions & Allocations."
UNITS MAY NOT BE SOLD ON THE PUBLIC MARKET
You cannot sell your units on the public market. The General Partner expects
that no market will develop. The Units will be transferable only with the
General Partner's approval. The General Partner intends to permit transfers and
redemptions of Units of up to five percent of the total outstanding interests in
Commonwealth Income & Growth Fund III in any one year. In deciding whether a
transfer can be made, the General Partner will consider whether the transfer
will have an adverse affect on our federal tax status as a Partnership. See
"Transferability of Units."
UNITS MAY BE REDEEMED
After a 30-month period immediately following the termination of the
Offering, we may redeem up to two percent of the outstanding Units that may
be tendered each year, with the General Partner's approval. Request for
redemption is completely voluntary. The purchase price for outstanding Units
will be equal to 105% of the amount you paid for the Units, less the amount
of cash distributions you have received relating to such Units. The
redemption price formula will not be calculated at the fair market value of a
Unit. See "Transferability of Units."
THE PARTNERSHIP WILL TERMINATE
In the ninth year of operations, the General Partner intends to begin
liquidation of Commonwealth Income & Growth Fund III in an orderly fashion,
unless Commonwealth Income & Growth Fund III terminates earlier upon sale of all
of the Equipment. The term of our existence may be extended if the General
Partner believes that it would enable us to dispose of assets on terms more
favorable than those it would otherwise be able to obtain. The Partnership will
not continue beyond December 31, 2009. See "Partnership Agreement Summary."
THE COST OF THE EQUIPMENT WILL BE DEPRECIATED
The Equipment will be eligible for different methods and periods of cost
recovery ("Depreciation") depending on the type of Equipment. See "Income Tax
Considerations."
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RISK FACTORS
AN INVESTMENT IN OUR PARTNERSHIP INVOLVES VARIOUS RISKS. YOU SHOULD
CONSIDER THE FOLLOWING BEFORE MAKING A DECISION TO INVEST IN OUR UNITS.
OUR SUCCESS DEPENDS ON THE QUALITY OF OUR MANAGEMENT.
- - You will not be permitted to take part in the management of Commonwealth
Income and Growth Fund III. Our success, to a large extent, will depend on
the quality of our management, particularly as it relates to equipment
acquisition, releasing and disposition. The General Partner is dependent on
its key personnel; and has no life insurance policies on key personnel. In
certain instances, the interests of Commonwealth Income and Growth Fund III
may conflict with those of the General Partner or its Affiliates. See
"Conflicts of Interest," "Management," and "Investment Objectives and
Policies."
YOU WILL HAVE LIMITED VOTING RIGHTS ON MATTERS AFFECTING OUR BUSINESS SINCE YOU
ARE NOT PERMITTED TO TAKE PART IN THE MANAGEMENT OF COMMONWEALTH INCOME AND
GROWTH FUND III.
- - For any matter submitted to the Limited Partners, the affirmative vote of
at least a Majority is required for approval. See "Summary of the
Partnership Agreement -- Voting Rights of Limited Partners."
WE PAY SIGNIFICANT FEES TO THE GENERAL PARTNER AND AFFILIATES.
- - The General Partner and its Affiliates, including Commonwealth Capital
Securities Corp., will receive substantial fees. Some fees will be paid
irrespective of the amount of distributions paid and regardless of the
success or profitability of the Commonwealth Income and Growth Fund III'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 compensation and fees are
comparable to those which would be charged by an unaffiliated entity or
entities for similar services. See "Compensation of General Partner and
Affiliates."
UNITS OF COMMONWEALTH INCOME AND GROWTH FUND III ARE GENERALLY NOT TRANSFERABLE
- - Prior to this Offering, there has been no public market for the Units, and
the Units cannot be pledged or transferred without the consent of the
General Partner. The General Partner does not expect a public market for
Units to develop. The General Partner intends to limit the number of
transfers to no more than that number permitted by one of the safe harbors
available under the Code and applicable Treasury Regulations to prevent the
Partnership from being treated as a publicly traded partnership.
- - Generally, these safe harbors require that all nonexempt transfers and
redemptions of Units in any calendar year not exceed TWO PERCENT of the
outstanding interests in the capital or profits of the Partnership.
- - A Limited Partners' right to tender the redemption is completely voluntary.
Consequently, investors in the Partnership may not be able to liquidate
their investments in the event of an emergency.
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Limited Partners must be prepared to hold their Units for the life of the
Partnership and may be able to resell their Units, if at all, only at a
discount to the offering price, which may be significant.
DURING THE LIFE OF COMMONWEALTH INCOME AND GROWTH FUND III, A PORTION OF THE
DISTRIBUTIONS TO LIMITED PARTNERS WILL BE A RETURN OF CAPITAL.
THE GENERAL PARTNER HAS PREVIOUSLY SPONSORED TWO PUBLICLY-REGISTERED LIMITED
PARTNERSHIPS. THESE PREVIOUS PARTNERSHIPS ARE IN THEIR OPERATIONAL PHASE AND
HAVE INVESTMENT OBJECTIVES SUBSTANTIALLY IDENTICAL TO THE PARTNERSHIP'S. THE
GENERAL PARTNER WILL, UPON REQUEST, PROVIDE LIMITED PARTNERS WITH THE MOST
RECENT FORM 10-KS FOR THE TWO PRIOR PROGRAMS. SEE "CONFLICTS OF INTEREST."
COMPUTER EQUIPMENT WE PURCHASE MAY DEPRECIATE IN VALUE AND/OR BECOME OBSOLETE AS
NEW TECHNOLOGY IS DEVELOPED.
- - In the event of such an occurrence, the Equipment we purchased may have
little or no residual value resulting in insufficient assets for us to
distribute, over the term of our existence, cash in a total amount equal to
the invested capital of the Limited Partners. As a result, it may be
appropriate for Limited Partners to consider a portion of their annual cash
flow as being return of capital.
WE WILL CONCENTRATE ON ACQUIRING COMPUTER PERIPHERAL EQUIPMENT AND OTHER SIMILAR
CAPITAL EQUIPMENT AND WILL NOT DIVERSIFY THE ASSETS IN WHICH WE INVEST BEYOND
THOSE CLASSES OF EQUIPMENT.
- - Adverse developments in the market for such Equipment will have a more
significant adverse consequence to Commonwealth Income and Growth Fund III
than if it had acquired a portfolio that included a greater variety of
asset classes.
- - To the extent that this Offering results in the sale of significantly less
than the maximum number of Units offered, the ability to diversify our
risks will be reduced, and a default by any lessee would have a more
significant adverse affect than if greater diversification had been
achieved. The General Partner currently expects that a substantial majority
of our Equipment will be manufactured by IBM. Thus, adverse developments in
the business or prospects of IBM may have a significantly greater impact on
the Partnership than if Equipment made by a more diverse group of
manufacturers were acquired.
THE ULTIMATE CASH RETURN FROM AN INVESTMENT IN UNITS WILL DEPEND, IN PART, UPON
THE RESIDUAL VALUE OF EQUIPMENT AT THE TERMINATION OF ITS LEASES.
- - Residual value is the amount realized upon the sale or re-lease of
Equipment when the original lease has expired. The residual value depends
on, among other factors, the condition of the Equipment, the cost of
comparable new Equipment, the technological obsolescence of the Equipment
and supply and demand for the Equipment. See "Investment Objectives and
Policies."
IF WE ARE UNABLE TO ARRANGE PROMPTLY FOR THE RE-LEASING OR SALE OF THE EQUIPMENT
WHEN RETURNED BY A LESSEE, WE WILL LOSE ANTICIPATED REVENUES.
- - The default by a lessee under a lease may cause Equipment to be returned to
us at a time when the General Partner or its agents may be unable to
arrange promptly for the re-leasing or sale of the Equipment.
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- - Although the creditworthiness of potential lessees will be reviewed
(including a review of financial statements, credit history and public debt
record), there can be no assurance that a default will not occur. A default
may cause us to lose anticipated revenues and limit our ability to recover
our investment in the Equipment.
- - If any indebtedness is secured by the returned Equipment, the lender may
foreclose on and acquire ownership of the returned Equipment. In addition,
lessees of Equipment encountering financial difficulties may voluntarily or
involuntarily become subject to the provisions of the Bankruptcy Code which
could delay or prevent us from taking the Equipment back upon default. See
"Investment Objectives and Policies -- Description of Leases."
THE GENERAL PARTNER HAS MADE A LIMITED CONTRIBUTION TO COMMONWEALTH INCOME AND
GROWTH FUND III
We have received $1,000 from the General Partner as a capital contribution for
its interest in Commonwealth Income and Growth Fund III.
Therefore, contributions by the Limited Partners and the economic risks borne by
them will be substantially greater, in proportion to the interests owned and
benefits received by them, than the contribution by the General Partner, in
proportion to the interest owned and benefits received by the General Partner.
Approximately 15.1% (assuming the maximum amount of units are raised) to 15.4%
of the proceeds from the sale of the Units will be used to pay Front-End Fees.
See "Estimated Use of Proceeds."
WE WERE FORMED ON APRIL 17, 1997 AND HAVE A LIMITED OPERATING HISTORY.
- - No assurance can be given that our operations will be successful or that we
will meet our stated investment objectives. Specifically, there is no
assurance that cash will be available for distribution to investors.
LIMITED PARTNERS IN A PARTNERSHIP ARE NOT LIABLE FOR PARTNERSHIP OBLIGATIONS
UNLESS THEY TAKE AN ACTIVE PART IN THE CONTROL OF THE BUSINESS OF THE
PARTNERSHIP.
- - In general, limited partners in a partnership are not liable for
partnership obligations unless they take an active part in the control
of the business of the partnership. The Partnership Agreement provides
certain rights to the Limited Partners to remove and replace the
General Partner, to amend the Partnership Agreement, to approve or
disapprove the sale or other disposition at one time of all the
Partnership's property, to dissolve the Partnership and to take certain
other actions. The Pennsylvania Act provides that a limited partner
"does not participate in the control of the business" by exercising
such rights and that even if a limited partner participates in the
control of the business, he is liable only to persons who transact
business with the partnership reasonably believing, based on the
limited partner's conduct, that he is a general partner. However, there
is uncertainty as to which state's partnership laws may be applicable
to partnerships that are organized under the laws of one state and that
own property and have partners residing in other states. Thus it is
conceivable that the existence or the exercise of these rights under
certain circumstances could possibly cause the Limited Partners to be
deemed to be liable as general partners under the laws of states other
than Pennsylvania. If the Limited Partners were judged to be liable as
general partners, they would be personally liable for Partnership
obligations.
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- - The Limited Partners will be obligated to return any distribution from the
Partnership to the extent that, after giving effect to the distribution,
all liabilities of the Partnership (other than nonrecourse liabilities and
liabilities to Limited Partners on account of their interests in the
Partnership) exceed the fair value of its assets (including, as to assets
serving as security for nonrecourse liabilities, that portion of the fair
value of such assets which exceeds the amount of such nonrecourse
liabilities). See "Summary of the Partnership Agreement -- Liability of
Limited Partners."
THE ALLOCATION OF PROPERTY AND EQUIPMENT MAY RELIEVE THE GENERAL PARTNER AND ITS
AFFILIATES FROM AN ASPECT OF THEIR FIDUCIARY DUTY TO THE PARTNERSHIP.
- - The Partnership Agreement provides that the General Partner and its
Affiliates may allocate properties or equipment to other funds or other
programs, based on which program has had the funds the longest, the
cash/leverage available, the equipment type, the term of the lease, and the
percentage that each lessee represents to the total assets of the fund or
program. The allocation of property and equipment may relieve the General
Partner and its Affiliates from an aspect of their fiduciary duty to
Commonwealth Income and Growth Fund III.
THE BUSINESS OF LEASING AND INVESTING IN EQUIPMENT IS SUBJECT TO MANY RISKS
INCLUDING THE FOLLOWING WHICH COULD IMPACT THE RETURN TO INVESTORS:
- - The availability of satisfactory Equipment.
- - The increasing rate at which Equipment of the type in which the Partnership
intends to invest becomes obsolete.
- - The potential inability of Commonwealth Income and Growth Fund III to lease
Equipment coming off lease or following a default by the lessee.
- - The possibility of defaults by lessees.
EQUIPMENT OWNERSHIP AND OPERATION IS SUBJECT TO MANY RISKS, INCLUDING THE
POSSIBLE INABILITY TO KEEP ALL THE EQUIPMENT UNDER LEASES YIELDING REVENUES
WHICH, AFTER PAYMENT OF OPERATING AND ALL ASSOCIATED EXPENSES, PROVIDE, TOGETHER
WITH ANY ANTICIPATED SALE PROCEEDS, A RETURN ACCEPTABLE TO THE EQUIPMENT OWNER.
THE ABILITY TO OPERATE EQUIPMENT PROFITABLY MAY BE ADVERSELY AFFECTED BY VARIOUS
ECONOMIC AND BUSINESS FACTORS. MOST OF THESE FACTORS ARE BEYOND THE CONTROL OF
THE GENERAL PARTNER AND INCLUDE:
- - general economic conditions, such as inflation, fluctuations in general
business conditions and availability of financing;
- - fluctuations in supply and demand for various types of Equipment resulting
from, among other things, obsolescence and changes in the methods or
economics of a particular type of Equipment resulting in reduced lease
revenues;
- - increases in maintenance expenses, taxes and insurance costs attributable
to the Equipment; the risk of an uninsured or uninsurable loss with respect
to the Equipment or an insured loss for which insurance proceeds are
inadequate, resulting in a possible loss of invested capital in and any
profits anticipated from such Equipment;
- - bankruptcies, contract disputes or defaults in payment by lessees of the
Equipment resulting in delays in foreclosures and uncollectible accounts;
and
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- - loss of revenues during the period when Equipment is not being utilized.
WE INTEND TO INVEST PRIMARILY IN EQUIPMENT SUBJECT TO OPERATING LEASES.
OPERATING LEASES TYPICALLY WILL HAVE TERMS OF 12 TO 36 MONTHS AND PROVIDE THAT
WE WILL RECEIVE TOTAL PAYMENTS FROM THE LESSEE IN AN AMOUNT THAT IS LESS THAN
THE PARTNERSHIP'S PURCHASE PRICE OF THE EQUIPMENT. IN ORDER TO RECOVER THE
PARTNERSHIP'S PURCHASE PRICE OF THE EQUIPMENT, THE PARTNERSHIP ON TERMINATION OF
AN OPERATING LEASE MUST:
- - obtain a satisfactory renewal from the original lessee or other user,
- - lease the Equipment to a new lessee or other user or
- - sell the Equipment for a price which, when combined with previous lease
payments, equals or exceeds the Purchase Price.
There can be no assurance that the Partnership will successfully accomplish any
of these alternatives and, as a result, the Partnership may not realize
anticipated revenues and may fail to recover the Partnership's investment in the
Equipment. Shorter-term Operating Leases may increase these risks. See
"Investment Objectives and Policies."
THE PARTNERSHIP HAS NOT IDENTIFIED ALL EQUIPMENT FOR ACQUISITION BY THE
PARTNERSHIP. UNTIL EQUIPMENT IS IDENTIFIED IN SUPPLEMENTS TO THIS PROSPECTUS OR
IN QUARTERLY AND/OR ANNUAL INVESTOR REPORTS, INVESTORS WILL HAVE NO INFORMATION
ABOUT ANY EQUIPMENT TO BE PURCHASED BY THE PARTNERSHIP AND MUST RELY SOLELY UPON
THE JUDGMENT AND ABILITY OF THE GENERAL PARTNER WITH RESPECT TO THE SELECTION
AND EVALUATION OF EQUIPMENT.
- - Information concerning the type of equipment leased by the two previous
partnerships sponsored by the General Partner can be found in the 10-Ks for
those programs. Moreover, although it does not presently intend to do so,
the General Partner is authorized to invest in telecommunication and
medical technology equipment which would be new types of investments for
the General Partner. See "Investment Objectives and Policies."
ALTHOUGH CURRENTLY WE EXPECT THE PARTNERSHIP TO ACQUIRE PREDOMINANTLY NEW
EQUIPMENT, THE PARTNERSHIP MAY PURCHASE USED EQUIPMENT. THERE IS NO LIMITATION
ON THE AMOUNT OF USED EQUIPMENT WHICH THE PARTNERSHIP MAY ACQUIRE.
The acquisition of used equipment may increase the risk that such equipment will
become obsolete so that it will have little or no residual value.
WE WILL ATTEMPT TO ACQUIRE AND LEASE EQUIPMENT AS SOON AS PRACTICABLE AFTER THE
INITIAL CLOSING.
- - Due to competition with other lessors, we may experience difficulty in
obtaining and leasing appropriate Equipment. Our ability to acquire and
lease Equipment may also be adversely affected by interest rates, the
availability of capital or increases in corporate liquidity, since
prospective lessees may prefer to raise capital, incur debt or use
internally-generated cash to purchase Equipment rather than enter the
leasing market.
- - An overall decline in corporate expansion or demand for capital goods may
adversely affect our ability to invest the proceeds of this offering.
- - Delivery of Equipment may be delayed due to production delays, strikes,
work stoppages or other problems encountered by manufacturers.
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- - Delays in acquiring Equipment will reduce the anticipated benefits to
investors from the acquisition of Units.
CERTAIN OF OUR INVESTMENTS MAY BE FINANCED IN PART WITH NON-RECOURSE DEBT
BORROWED BY THE PARTNERSHIP.
Although borrowing increases the funds with which the Partnership can acquire
Equipment, it also increases the risks of an investment in the Partnership
because, in the case of nonrecourse debt, if debt service payments are not made
when due, the Partnership may sustain a loss of its investment in the Equipment
which secures that debt and the Limited Partners may experience adverse tax
consequences. See "Income Tax Considerations -- Allocation of Partnership
Income, Gains, Losses, Deductions and Credits."
We may incur indebtedness up to an amount no greater than 30% of the total cost
of all Equipment we own, except that we may not incur any indebtedness to
acquire Equipment until the net proceeds of the Offering are fully invested, or
committed to investment. There are no borrowing limits with respect to any
particular item of Equipment. See "Investment Objectives and Policies --
Borrowing Policies."
Money market fluctuations have affected the availability and cost of loans
that may finance the purchase of Equipment. The General Partner is unable to
predict the nature of the money market when Commonwealth Income and Growth
Fund III seeks financing and any future tightening of credit controls will
make obtaining financing more difficult and more costly. In such event, we
may be forced to purchase Equipment using only or mostly the cash proceeds
from this Offering, with little or no borrowings. This would make it more
difficult for us to achieve the desired diversification of Equipment and
would prevent Commonwealth Income and Growth Fund III from spreading the risk
of unproductive investments over a greater number of items of Equipment.
However, if we purchase an item of Equipment for cash and, thereafter, suitable
financing becomes available, we may finance such Equipment and invest the
proceeds of that financing in additional Equipment. In addition, future credit
restrictions may adversely affect the ability for us to sell or refinance
Equipment and may affect the terms of Equipment sales.
IN LEASING THE EQUIPMENT TO LESSEES, WE WILL, IN CERTAIN INSTANCES, BE EXPOSED
TO LIABILITY FOR DAMAGES RESULTING FROM THEIR ACTIONS OR INACTION'S INDEPENDENT
OF CONTRACT.
Although we will use our best efforts to minimize the possibility and exposure
of such tort liability, no assurances can be given that the Partnership's assets
will be protected against any such claims.
THE EQUIPMENT LEASING INDUSTRY IS HIGHLY COMPETITIVE.
The Partnership's competitors include independent leasing companies, affiliates
of banks and insurance companies and other partnerships. Many of these entities
may have larger Equipment inventories, greater financial resources and more
experience in the industry than the Partnership or the General Partner. See
"Conflicts of Interest -- Competition with General Partner and Affiliates;
Competition for Management's Time" and "Investment Objectives and Policies --
Competition."
THE GENERAL PARTNER CURRENTLY EXPECTS THAT A SUBSTANTIAL MAJORITY OF THE
PARTNERSHIP'S EQUIPMENT WILL BE MANUFACTURED BY IBM.
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Accordingly, the Partnership's ability to lease, re-lease or sell its equipment
may be affected by actions taken or not taken by, or the business or prospects
of, IBM.
OUR ABILITY TO RELEASE OR SELL THE EQUIPMENT AT THE END OF THE LEASE TERM COULD
BE ADVERSELY AFFECTED BY THE FAILURE OF AN EQUIPMENT MANUFACTURER TO HONOR ITS
PRODUCT WARRANTIES OR TO PROVIDE NECESSARY PARTS AND SERVICING, THE DECLINE OF
THE MANUFACTURER'S REPUTATION IN THE INDUSTRY, THE DISCONTINUANCE OF THE
MANUFACTURE OF SUCH EQUIPMENT OR THE TERMINATION OF THE MANUFACTURER'S BUSINESS.
We may enter into contracts with manufacturers or others in which such parties
may perform certain services related to Equipment, including refurbishing and
storing Equipment and performing related services. The ability of the
Partnership to meet its investment objectives would be partially dependent on
the satisfactory performance of these functions by such parties. See "Investment
Objectives and Policies -- Types of Equipment."
ALTHOUGH THE INDIVIDUALS ASSOCIATED WITH AND EMPLOYED BY COMMONWEALTH CAPITAL
SECURITIES CORP. ARE EXPERIENCED IN THE OFFERING OF SECURITIES, COMMONWEALTH
CAPITAL SECURITIES CORP. HAS LIMITED EXPERIENCE AS A DEALER-MANAGER.
TAX RISKS
In view of the complexity of the tax aspects of investing in a partnership
that may invest in many different types of equipment, and particularly in view
of the fact that the tax situation of each investor will not be the same, ALL
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS with specific
reference to their own tax situation prior to making an investment in the
Partnership. The Partnership is not intended to be a "tax shelter" and Limited
Partners should not expect a tax benefit from substantial tax deductions or
losses from the Partnership. The General Partner anticipates, however, that the
Partnership may distribute cash periodically to the Limited Partners, a portion
of which may not be taxable to the Limited Partners upon receipt. Trustees and
other fiduciaries of individual retirement accounts, qualified pension, profit
sharing or stock bonus plans, and other tax exempt entities should be aware that
an investment in Units will result in unrelated business taxable income
("UBTI"). See "Income Tax Considerations -- Investment by Tax Exempt Entities"
and "ERISA Considerations" below. Each Limited Partner, together with his tax
advisor, should carefully consider all of the tax aspects of an investment in
the Partnership, including, specifically, the risks discussed below.
Federal Tax Considerations. A ruling from the IRS has not been obtained,
and the General Partner does not presently intend to apply for a ruling, with
respect to any of the tax considerations associated with an investment in Units.
Availability of the tax treatment described in this Prospectus may be challenged
by the IRS upon audit of the tax return of either the Partnership or a Partner.
It should be noted that the determination of items of Partnership income, gain,
loss, deduction and credit will be made at the Partnership level rather than in
separate proceedings with the Limited Partners, and Limited Partners generally
will be required to report Partnership items consistent with the Partnership's
tax returns.
For any year in which the Partnership has income in excess of deductions,
each Limited Partner will be required to report his share of such income on his
federal and state tax returns and will be responsible for the payment of taxes
thereon. Such taxes may be greater than cash distributions received by the
Limited Partner from the Partnership in one or more taxable years.
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The primary tax benefits associated with an investment in Units are the
"tax-deferred" distributions (that is, distributions which are not subject to
current taxation) which may be available as a result of cost recovery or
depreciation deductions. The availability of tax-deferred distributions may be
reduced by the alternative minimum tax. The IRS may successfully challenge the
amount or timing of the depreciation deductions claimed by the Partnership, with
the result that the depreciation deductions of the Partnership may be reduced
and Partnership income may be increased (or loss may be decreased) for a taxable
year. The tax considerations associated with an investment in the Partnership
could be affected by a number of different factors which are described in detail
under the caption "Income Tax Considerations."
Any adjustment to a tax return of the Partnership as a result of an audit
by the IRS may result in adjustment to the tax returns of the Limited Partners,
and may result in an examination of other items in such returns unrelated to the
Partnership, or an examination of prior years' tax returns. Limited Partners
could incur substantial legal and accounting costs in contesting any challenge
by the IRS, regardless of the outcome.
Partnership Status. The General Partner has not requested, and does not
intend to request, a ruling from the IRS that the Partnership will be treated as
a partnership for tax purposes and not as an association taxable as a
corporation. Except as otherwise provided below, however, the Partnership may
elect to be taxed as a partnership for federal income tax purposes under the
recently promulgated "check the box" Treasury Regulations. These Treasury
Regulations generally allow newly formed unincorporated entities (such as the
Partnership) to choose whether to be taxed as a partnership or a corporation for
federal income tax purposes. Moreover, in the absence of any affirmative
election, to the extent that an unincorporated entity formed under United States
law (i.e., a domestic entity) has more than one owner, it generally will be
treated under the applicable default rules of these Regulations as a partnership
for federal income tax purposes.
Section 7704 of the Code treats certain partnerships, the interests of
which are deemed to be "publicly-traded," as corporations. While the General
Partner will use its best efforts to limit the type and number of transfers of
Units to those which will allow the Partnership to satisfy at least one of the
safe harbors under Treasury Regulation Section 1.7704-1, there is no assurance
that the Partnership will satisfy one of these safe harbors. Certain transfers
of Units could occur which would cause the Partnership to fall outside these
safe harbors.
While the failure to meet a safe harbor will not create a presumption that
a partnership is publicly-traded, no assurance can be given that if the amount
and type of trading in the Units were to fall outside the safe harbors, the IRS
would not claim that the Partnership was a "publicly-traded partnership" taxable
as a corporation. See "Transferability of Units" and "Income Tax Considerations
- -- Classification as a Partnership."
With regard to its tax status, the Partnership will rely upon the opinion
of Blank Rome Comisky & McCauley, counsel to the Partnership, to the effect that
the Partnership will be treated as a partnership for tax purposes
notwithstanding the fact that an IRS ruling will not be sought. The opinion is
subject to certain qualifications and representations of the General Partner,
and such opinions of counsel are not binding on the IRS.
If the IRS were successful in characterizing the Partnership as a "publicly
traded" partnership taxable as a corporation, then the Partnership would be
subject to tax on its net income (without
10
<PAGE>
deductions for cash distributions to Limited Partners), the Limited Partners
would be subject to tax on the distributions irrespective of their tax basis in
their Units, and such distributions would be recharacterized as portfolio income
to the Limited Partners.
Partnership Allocations. If the allocations of Partnership Net Profits and
Net Losses to the Limited Partners made pursuant to the Partnership Agreement
were successfully challenged by the IRS, Limited Partners may be required to
recognize additional taxable income without any corresponding increase in
distributions of cash from the Partnership. Counsel to the Partnership has
rendered its opinion that the allocations of Partnership Net Profits and Net
Losses will be respected for federal income tax purposes. The opinion, however,
is subject to certain qualifications and representations of the General Partner,
and is not binding on the IRS.
Passive Activity Income and Losses Limitations. Limited Partners may not be
able currently to deduct Partnership Net Losses as a result of limitations on
the current utilization of passive activity losses. In addition, any portfolio
income generated by the Partnership may not be netted against Partnership tax
losses. See "Income Tax Considerations -- Limitations on Utilization of
Partnership Losses -- Passive Activity Losses Limitations." Finally, in the
event that interests in the Partnership are deemed to be "publicly-traded,"
otherwise passive income will be treated as portfolio income which may not be
netted against Partnership tax losses or other passive losses, deductions, or
credits of the Limited Partner. Counsel to the Partnership has opined that the
income generated from the Partnership's leasing activities will constitute
income from a passive activity. Such opinion of counsel is subject to certain
qualifications and representations of the General Partner, and is not binding on
the IRS.
The Partnership as the Owner of the Equipment. The Partnership intends
to structure each lease transaction so that the lease will be treated as a
lease rather than as a financing arrangement for tax purposes. If, however,
the IRS were successful in challenging the status of a lease by treating the
lessee as the owner of the Equipment and the Partnership as a secured
creditor, among other items the Partnership would not be entitled to cost
recovery or depreciation deductions with respect to that item of Equipment.
See "Income Tax Considerations --Ownership of Equipment -- Lease versus Sale."
The IRS may assert upon audit that any pass-through entities organized by
the Partnership are associations taxable as corporations and, thus, are the true
owners of the Equipment for tax purposes. If the IRS were successful in such
assertions, it would result in the imposition of tax on such entities without
deductions for distributions to the Partnership, the taxation of distributions
to the Partnership to the extent of such entity's earnings and profits, and the
recharacterization of such entities' distributions to the Partnership. See
"Income Tax Considerations -- Ownership of Equipment -- Lease versus Sale."
Sale or Other Disposition of Equipment or Units -- Tax Liability. A sale or
other disposition of Equipment or of a Limited Partner's interest in the
Partnership may result in a tax liability to the Limited Partner in excess of
any cash proceeds received by such Limited Partner. To the extent a Limited
Partner's federal tax liabilities exceed cash proceeds, such excess would be a
nondeductible cost to such Limited Partner.
State and Foreign Taxes. Limited Partners may be required to file tax
returns and pay state or local taxes, such as income, franchise or personal
property taxes, as a result of an investment in the Partnership, and any use of
the Equipment in a country other than the United States may subject Limited
Partners to income taxation in such country. See "Income Tax Considerations --
State Taxes", and "Income Tax Considerations -- Foreign Tax Considerations."
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<PAGE>
Reliance on Existing Law. Tax benefits associated with an investment in
Units could be lost and/or substantial tax liabilities incurred by reason of
changes in the tax laws. Potential investors should be aware of tax legislation
currently pending before Congress and state legislatures and should consult
their own tax advisors as to the effect such legislation would have on their
potential investment in Units. Furthermore, there is no assurance that changes
in the interpretation of applicable tax laws will not be made by administrative
or judicial action which will adversely affect the tax consequences of an
investment in Units.
Administrative or judicial changes may or may not be retroactive with
respect to transactions entered into prior to the date on which they occur.
Periodic consultations with a professional advisor may be necessary given the
possibility of such changes.
Investment by Tax Exempt Entities. Investment in the Partnership by a tax
exempt entity, including a qualified employee pension or profit sharing trust or
an individual retirement account (a "Tax Exempt Entity"), will result in the
receipt of UBTI. If a Tax Exempt Entity realizes UBTI (net of deductions
attributable to such UBTI) from all sources in excess of $1,000 per year, it
will incur federal income tax liability with respect to such UBTI. Furthermore,
if a Tax Exempt Entity has at least $1,000 of gross income that is included in
the calculation of UBTI for any year, the Tax Exempt Entity will be obligated to
file a tax return for such year. See "Income Tax Considerations -- Investment by
Tax Exempt Entities."
ERISA Considerations. Fiduciaries of pension, profit sharing, stock bonus
or other employee benefit plans subject to Title I of ERISA ("ERISA Plans"),
fiduciaries of tax-qualified retirement plans not subject to ERISA ("Non-ERISA
Plans") and IRA owners should consider whether (i) an investment in Units is in
accordance with the documents and instruments governing the ERISA or Non-ERISA
Plan or IRA (hereinafter referred to as "Benefit Plan"), (ii) the purchase of
Units is prudent in light of the potential difficulties that may exist in
liquidating Units, (iii) an investment in Units will provide sufficient cash
distributions in light of the Benefit Plan's likely required benefit payments or
other distributions, (iv) the evaluation of the investment in Units has properly
taken into account the potential costs of determining and paying any amounts of
federal income tax that may be owed on UBTI in connection with the Units, (v) in
the case of a fiduciary of an ERISA Plan, that the investment, unless made in a
self-directed investment arrangement, is made solely in the interests of
participants in the ERISA Plan, and (vi) the fair market value of Units will be
sufficiently ascertainable, and with sufficient frequency, to enable the Benefit
Plan to value its assets in accordance with the rules and policies of the
Benefit Plan. In addition, if the Benefit Plan has certain relationships with
the Partnership, the General Partner or its Affiliates (other than as a Limited
Partner), investment in the Partnership may involve a "prohibited transaction"
under the Code or ERISA. See "ERISA Considerations -- Prohibited Transactions
Under ERISA and the Code."
To avoid classification of a pro rata portion of the Partnership's
underlying assets as "plan assets" of investors which are Benefit Plans, the
Partnership intends to restrict the ownership of Units by Benefit Plans to less
than 25% of the total value of outstanding Units at all times. See "ERISA
Considerations -- Plan Assets." Neither the General Partner nor the Partnership
shall have any liability or responsibility to any tax exempt Limited Partner or
any other Limited Partner for any tax, penalty or other sanction or costs or
damages arising as a result of there being a prohibited transaction or as a
result of Partnership assets being deemed plan assets of a tax exempt Limited
Partner under the Code or ERISA or other applicable law
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<PAGE>
ESTIMATED USE OF PROCEEDS
The following table explains the estimated use of proceeds of the offering of
Units. Except as otherwise disclosed in this Prospectus, we will not engage in
transactions with the General Partner or any of its Affiliates and all items of
compensation are disclosed in the table below or under the caption "Compensation
of General Partner and Affiliates." The Partnership has accepted subscriptions
from investors totaling approximately $2,331,000. As of June 30, 1999, the
Partnership has paid the underwriter Selling Commissions of approximately
$186,000 and Dealer Manager Fees of approximately $23,000. The General Partner
has been paid approximately $70,000 for Organizational and Offering Expenses,
and approximately $80,000 for Acquisition Fees. The net proceeds available for
investment were therefore approximately $1,972,000. The Partnership has
purchased and has committed to purchase Equipment costing approximately
$1,917,000 from such proceeds. The remaining cash available for investment is
approximately $55,000.
<TABLE>
<CAPTION>
Minimum Maximum Proceeds
Proceeds (750,000 Units)
(75,000 Units)
---------------------------- ---------------------------
Amount Percent Amount Percent
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Gross Offering Proceeds $1,500,000 100.0% $15,000,000 100.0%
Selling Commissions (1) 120,000 8.0% 1,200,000 8.0%
Dealer Manager Fee 15,000 1.0% 150,000 1.0%
Organizational and Offering Expenses (2) 45,000 3.0% 400,000 2.7%
-------------- ------------ -------------- ------------
Total Offering Expenses 180,000 12.0% 1,750,000 11.7%
Net Proceeds to Partnership Available
for Investment 1,320,000 88.0% 13,250,000 88.3%
Equipment Acquisition Fees (3) 50,769 3.4% 509,616 3.4%
Investment in Equipment (4) 1,269,231 84.6% 12,740,384 84.9%
</TABLE>
- -------------------------
(1) The amount of the Underwriting Commissions (which include the selling
commissions and Dealer Manager fees) will range between four percent and
nine percent of Capital Contributions based upon the quantity of Units sold
to a single investor. Gross Proceeds of the Offering are calculated as if
all Units are sold at $20.00 per Unit and do not take into account any
reduction in selling commissions. See "The Offering -- Plan of
Distribution" for a description of commission discounts available for
certain large volume purchases of Units and for purchases by certain
employees of the General Partner, Dealer Manager, Participating Brokers and
their Affiliates. The Units are being offered to the public through
Commonwealth Capital Securities Corp., which will receive selling
commissions of up to eight percent on all sales of Units and will act as
Dealer Manager for which it will receive a Dealer Manager fee of one
percent on all sales of Units. The Dealer Manager is an Affiliate of the
General Partner. Other broker dealers may be engaged as Participating
Brokers to sell Units and reallowed selling commissions of up to eight
percent with respect to Units which they sell. In addition, all or a
portion of the Dealer Manager fee may be reallowed to certain Participating
Brokers for expenses incurred by them in selling the Units, including
reimbursement for bona fide expenses incurred in connection with due
diligence activities. See "The Offering -- Plan of Distribution" for a more
complete description of this fee.
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<PAGE>
(2) Consists of estimated legal, accounting and printing expenses; various
registration and filing fees; miscellaneous expenses related to the
organization and formation of the Partnership; and other costs incurred in
connection with the preparation, printing and distribution of this
Prospectus and other sales literature. See "Plan of Distribution." The
General Partner will be paid an organizational fee equal to three percent
of Capital Contributions up to $10,000,000, and two percent of Capital
Contributions in excess of $10,000,000, and will pay all Organizational and
Offering Expenses.
(3) An Equipment Acquisition Fee of four percent of the Purchase Price of
Equipment purchased by the Partnership will be payable by the Partnership
to the General Partner. Does not include Acquisition Fees payable with
respect to the purchase of Equipment with the proceeds of leverage or with
Retained Proceeds. The General Partner will also be paid a Debt Placement
Fee to the extent leverage is used to acquire Equipment. The Partnership
may not incur any indebtedness to acquire Equipment until the net proceeds
of the Offering are fully invested, or committed to investment, in
Equipment.
(4) Represents the Partnership's expected cash investment from Capital
Contributions in Equipment, excluding Acquisition Fees. Does not include
Equipment acquired with leverage or Retained Proceeds. Because the
Partnership's leases are expected to be on a "triple-net" basis, it is
anticipated that no permanent reserve for maintenance and repairs will be
established from the Offering proceeds. However, the General Partner, in
its sole discretion, may retain a portion of the Offering proceeds, Cash
Flow or Net Disposition Proceeds available to the Partnership for
maintenance, repairs and for any other currently unanticipated working
capital needs. In addition, the General Partner and Com Cap Corp. have
agreed that the General Partner or Com Cap Corp. will lend or contribute to
the Partnership an amount equal to 1.01% of the net Offering proceeds, if
needed, to meet the Partnership's expenses. Certain expenses associated
with the selection and acquisition of Equipment for the Partnership (such
as legal and accounting fees and expenses, travel and communication
expenses, brokerage fees and inspection fees and expenses) will be paid to
third parties and, accordingly, the amount available for the purchase of
Equipment will be reduced by the amount of such expenses. The amounts of
such fees are not ascertainable at this time.
14
<PAGE>
MANAGEMENT
The General Partner, owned by Commonwealth of Delaware, Inc., which is
owned by Com Cap Corp., was incorporated in Pennsylvania on August 26, 1993.
The General Partner currently manages two other public equipment leasing
partnerships. The principal business office of the General Partner is at 1160
West Swedesford Road, Berwyn, Pennsylvania 19312, and its telephone number is
610-647-6800. The General Partner manages and controls our affairs and will
have sole responsibility for all aspects of operations. The directors and
officers of the General Partner and key employees of Com Cap Corp. are as
follows:
<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.
John A. Conboy, III Assistant Vice President and Accounting Manager of the General
Partner and Com Cap Corp.
Henry J. Abbott Vice President and Portfolio Manager of Com Cap Corp.
</TABLE>
GEORGE S. SPRINGSTEEN, age 64, is President of both Com Cap Corp. and the
General Partner. Mr. Springsteen is also President of the general partners of
several prior programs sponsored by Com Cap Corp. He is also Chairman of the
Board of Directors of Commonwealth Capital Securities Corp. He has been the sole
shareholder and director of Com Cap Corp. since 1978. From 1971 to 1978, Mr.
Springsteen was employed with Granite Computer Corporation. Mr. Springsteen, as
Vice President of Marketing, managed a portfolio of approximately $120,000,000
of IBM computers and peripherals. In 1978, Granite Computer Corporation sold its
equipment portfolio and left the equipment leasing business. Mr. Springsteen
acquired a portion of Granite's portfolio, client base, employees and corporate
offices in Jenkintown, Pennsylvania in 1978, now known as Com Cap Corp. Mr.
Springsteen attended the University of Delaware. Mr. Springsteen holds Series
22, 63 and 39 NASD licenses and is a member of the Equipment Leasing
Association.
KIMBERLY A. MACDOUGALL, age 39, is Executive Vice President, Chief
Operating Officer and Secretary of Com Cap Corp. and the General Partner and
joined Com Cap Corp. in 1997. She is also the President of Commonwealth Capital
Securities Corp. From 1980 to 1997, Ms. MacDougall was employed with Wheat First
Butcher Singer, a broker/dealer headquartered in Richmond, Virginia. While at
Wheat First Butcher Singer, Ms. MacDougall, as Senior Vice President, served as
Marketing Manager for the Direct Investments Department, with over $450,000,000
of investments under management in real estate, equipment leasing and
energy-related industries. Ms. MacDougall holds Series 7, 63, and 39 NASD
licenses and is a member of the Equipment Leasing Association.
15
<PAGE>
JOHN A. CONBOY, III, age 52, is Assistant Vice President and Accounting
Manager of the General Partner and Com Cap Corp. and certain of its
subsidiaries where he has been employed since 1999. From 1965 to 1999, Mr.
Conboy was employed as a Manager of Accounting Operations of Consolidated
Rail Corporation. Mr. Conboy attended the University of Phoenix with BS/BA in
Accounting and Business Administration. Mr. Conboy is a member of the
Equipment Leasing Association.
HENRY J. ABBOTT, age 48, is Vice President and Portfolio Manager of Com Cap
Corp. and has been employed by Com Cap Corp. since 1998. Mr. Abbott has been
active in the commercial lending industry, working primarily on asset-backed
transactions for more than twenty-seven years. Before joining Commonwealth, Mr.
Abbott was a founding partner of Westwood Capital LLC, in New York. Prior to
that, as Senior Vice President for IBJ Schroder Leasing Corporation, Mr. Abbott
managed a group, specializing in providing operating lease financing programs in
the high technology sector. Mr. Abbott brings extensive knowledge and experience
in all facets of asset-backed financing and has successfully managed $1.5
billion of secured transactions. Mr. Abbott attended St. John's University. Mr.
Abbott is a member of the Equipment Leasing Association.
The directors and officers of the General Partner are required to spend
only such time on the Partnership's affairs as is necessary for the proper
conduct of the Partnership's business. Under certain circumstances, such
directors and officers are entitled to indemnification from the Partnership. See
"Conflicts of Interest" and "Responsibilities of the General Partner."
16
<PAGE>
PRIOR PERFORMANCE
The General Partner has previously sponsored two Equipment leasing
programs, COMMON-WEALTH INCOME & GROWTH FUND I (Fund I) and COMMONWEALTH INCOME
& GROWTH FUND II (Fund II), which are registered securities under the Securities
Act of 1933 and which have investment objectives substantially identical to the
Partnership. Fund I terminated its offering of units on May 11, 1995, with
$12,624,153 raised from investors. Eighty-four percent of the total interests in
Fund I were sold. On December 8, 1995, Fund I's net offering proceeds were fully
utilized for the purchase of computer peripheral equipment. All of the equipment
was new when acquired.
Fund II terminated its offering of units on May 12, 1997 with $9,235,185
raised from investors. Sixty two percent of all interests in Fund II were sold.
As of June 30, 1997, Fund II's net offering proceeds were fully utilized for the
purchase of computer peripheral equipment. All of the equipment was new when
acquired. Additional updates to the prior performance tables will be filed by
amendment as they become available.
Com Cap Corp. has conducted single investor and leveraged lease
transactions involving a variety of types of Equipment. These transactions
involved arranging for the investment by single investors in Equipment and
simultaneous lease of the Equipment on a single transactions basis. The
investment objectives of these transactions were to provide tax deductions and
cash distributions. In addition, in 1984, Com Cap Corp. arranged for end user
leases of Equipment in a leveraged lease co-ownership program, involving the
private sale of partnership interest to 10 investors. The investment objectives
of that program were to provide tax deductions and cash distributions.
Affiliates of Com Cap Corp. have also sponsored 16 prior private equipment
leasing programs with investment objectives similar to the Partnership. As of
December 31, 1998, these programs raised a total of $31,662,500 from investors
in private offerings of securities. Thirteen of the programs were structured as
limited partnerships and three were structured as Delaware business trusts.
Interests in the programs were purchased by an aggregate of 784 investors. As of
December 31, 1998, the programs had acquired from original offering proceeds
$25,657,148 in equipment, all of which was computer peripheral equipment.
Approximately 97% of the equipment was new when acquired by the program and
approximately 3% percent was used. Currently, operating results for the private
programs is lower than projected in the prospective financial statements which
were included in the offering document applicable to the program primarily
because (i) some of the equipment acquired by such programs has not produced the
projected residual value on sale and (ii) lease rates have been lower than
projected as a result of a continuous decrease in interest rates generally.
As a result, while programs have made distributions to investors, Com Cap
Corp. and its Affiliates decided to make loans to and/or waive fees from certain
programs, some of which loans were forgiven, in order for those programs to make
cash distributions and/or to enable those programs to make additional
acquisitions of equipment.
In addition, because of the lower lease rates and sales of equipment below
projected levels, certain programs currently own less equipment than was
anticipated. Com Cap Corp. has outstanding demand promissory notes in the amount
of $2,766,250 to the general partners or trustees of its prior private programs.
See the prior performance tables attached as "Appendix I" for further
information concerning these prior public and private programs.
17
<PAGE>
RESPONSIBILITIES OF THE GENERAL PARTNER
The General Partner is accountable to the Partnership as a fiduciary and,
consequently, must exercise good faith and integrity in handling Partnership
affairs. Certain provisions of the Partnership Agreement may relieve the General
Partner and its Affiliates from an aspect of its state common law fiduciary
duties. General partners are held to a duty of the highest good faith in
conducting partnership affairs. Since the General Partner and certain programs
it has sponsored will acquire and lease Equipment, the General Partner may be
deemed to have a conflict of interest with the Partnership.
The Partnership Agreement also states that, if two or more investor
programs are in a position to acquire the same Equipment, the General Partner
will decide which program or entity will purchase the Equipment. (The General
Partner affords priority to the partnership that has had funds available to
purchase Equipment for the longest period of time.) If two or more investor
programs are in a position to enter into leases with the same lessee or to sell
Equipment to the same purchaser, the General Partner will give priority to the
Equipment which has been available for lease for the longest period of time. The
General Partner may also allocate equipment to other programs based on the
cash/borrowing available, the equipment type, the term of the lease, and the
percentage that each lessee represents to the total assets of the funds or
programs. This allocation equipment may relieve the General Partner and its
Affiliates from an aspect of their fiduciary duty to the Partnership.
Without modifying the General Partner's fiduciary duties, the General
Partner might not be able to serve as the General Partner for the Partnership
and other investor programs acquiring and leasing Equipment at the same time.
This modification may operate as a detriment to Limited Partners because there
may be business opportunities that will not be made available to the
Partnership.
The Partnership Agreement provides that the General Partner will not be
liable to the Partnership or to any Limited Partner for any loss or damage
performed or omitted in good faith in connection with the Partnership. If loss
arises out of any act or omission on the part of the General Partner, the
General Partner must determine, in good faith, that such course of conduct was
in the best interest of the Partnership. The Partnership Agreement also provides
that the Partnership will indemnify and hold harmless the General Partner, its
Affiliates and its successors and assigns against any liability, loss or damage
incurred by reason of any act or omission performed or omitted in good faith in
connection with the activities of the Partnership or in dealing with third
parties on behalf of the Partnership (including reasonable costs and reasonable
attorneys' fees); provided, however that:
(a) such act or omission does not constitute fraud, negligence, or breach
of fiduciary duty;
(b) if such liability, loss, or damage arose out of any act or omission on
the part of the General Partner, the General Partner must determine,
in good faith, that such course of conduct was in the best interest of
the Partnership; and
(c) any such indemnification shall be recoverable only from the assets of
the Partnership and not from the holders of Units. A successful claim
for indemnification could deplete the assets of the Partnership.
Based upon the present state of the law, a Limited Partner may institute
legal action on behalf of himself and all other Limited Partners (a class
action) to recover damages for a breach by the General Partner of its fiduciary
duty or on behalf of the Partnership (a partnership derivative action) to
recover damages from third parties. In addition, (i) investors may have the
right, subject to bring partnership class actions in federal courts to enforce
their rights under the federal and state securities laws; and (ii) investors who
have suffered losses in connection with the purchase or sale of their Units may
be able to
18
<PAGE>
recover such losses from the General Partner where the losses result from a
violation by the General Partner of the antifraud provisions of federal or state
securities laws.
Investors should know that the fiduciary duty owed by a general partner to
its partners is similar in many respects to the fiduciary duty owed by the
directors of a corporation to its shareholders and is subject to the same rule
commonly referred to as the "business judgment rule". Directors are not liable
for mistakes in the good faith exercise of honest business judgment or for
losses incurred in the good faith performance of their duties when performed
with such care as an ordinarily prudent person would use. Accordingly, the
General Partner may not be held liable for mistakes made or losses incurred in
the good faith exercise of reasonable business judgment.
If indemnification provisions purport to include indemnification for
liabilities under the Securities Act of 1933, in the opinion of the Securities
and Exchange Commission, such indemnification is contrary to public policy and
therefore unenforceable. The Partnership will not indemnify the General Partner
and its successors and assigns against liabilities arising under the Securities
Act of 1933 unless the indemnified party is successful in defending such action
and such indemnification is specifically approved by a court of law which has
been advised as to the current position of the Securities and Exchange
Commission regarding indemnification for violations of securities law. The
Partnership will not pay for any insurance covering the liability of the General
Partner or its successors or assigns for any act or omission whether or not
indemnification is permitted by the Partnership Agreement.
19
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
PRINCIPAL INVESTMENT POLICIES
The Partnership has been formed to acquire various types of Equipment,
including computer peripheral and other similar equipment. The Partnership
intends to use a substantial portion of the proceeds of this Offering, Retained
Proceeds and debt (not to exceed 30% of the total cost of the Equipment owned by
the Partnership) to purchase IBM and IBM-compatible computer peripheral
equipment. The Partnership intends to acquire Equipment which is leased to U.S.
corporations placed on Operating Leases. The Partnership retains the flexibility
to enter into Full Payout Net Leases and Conditional Sales Contracts, but has
not and does not anticipate doing so. See "Description of Leases," below. The
Partnership's principal investment objectives are to:
(a) acquire, lease and sell Equipment to generate revenues from operations
sufficient to provide cash distributions to Limited Partners;
(b) preserve and protect Limited Partners' capital;
(c) use a portion of Cash Flow and Sales Proceeds, refinancing or other
sale 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.
The content of the Partnership's Equipment portfolio cannot be determined,
as there is no way of anticipating what Equipment will be available on
reasonable terms throughout the Partnership's life. The General Partner may vary
the Partnership's portfolio and invest a substantial portion of the net proceeds
of this Offering in a single category of computer peripheral and other similar
equipment with certain restrictions. See "Computer Peripheral And Other
Equipment Restrictions"
As of the date of this Prospectus, the Partnership has not entered into any
commitments for the acquisition, financing, or leasing to third parties of any
Equipment. The Partnership will attempt to obtain contractual commitments for
the purchase of Equipment as soon as practicable. Limited Partners will not have
any right to vote on or otherwise approve or disapprove any particular
investment to be made by the Partnership. It is not possible to determine the
date when the net Offering proceeds, less working capital reserves, will be
fully invested in Equipment by the Partnership or the terms of any purchases of
Equipment.
If all of the net proceeds of this Offering are not invested by the
Partnership in Equipment or committed to such investment or otherwise utilized
for proper Partnership purposes prior to the expiration of 12 months from the
Closing Date, the net proceeds not invested or committed will thereupon be
promptly returned, with interest at the rate earned by the Partnership. See
"Risk Factors"
Although it is currently anticipated that the Partnership will acquire new
Equipment, the Partnership may also purchase used equipment. Equipment purchases
will be made through lease brokers who charge the Partnership a fee over their
cost of the Equipment as compensation.
20
<PAGE>
The General Partner anticipates that the Partnership's Equipment will be
leased under Operating Leases or that an Operating Lease will be entered into
with a third party when the Partnership acquires an item of Equipment. See
"Description of Leases" below.
The Partnership may also engage in sale/leaseback transactions, so the
Partnership would purchase Equipment from companies that would then immediately
lease the Equipment from the Partnership.
The Partnership may enter into arrangements with one or more manufacturers
so the Partnership can purchase from such manufacturers Equipment which have
previously been leased directly by the manufacturer to third parties ("vendor
leasing programs"). The manufacturers of Equipment will provide maintenance,
remarketing and other services for the Equipment subject to such agreements.
The General Partner can change the investment objectives of the Partnership
if it determines that such a change is in the best interest of the Limited
Partners and so long as such a change is consistent with Sections 10.2 and 10.3
of the Partnership Agreement. However, the General Partner cannot change the
Partnership's primary objective of acquiring, leasing and selling Equipment
without the consent of a Majority in Interest of the Limited Partners. The
General Partner will notify the Limited Partners if it makes such a
determination to change the Partnership's investment objectives.
COMPUTER PERIPHERAL EQUIPMENT
Computer peripheral equipment are devices used to convey information into and
out of a central processing unit (or "mainframe") of a computer system. Examples
are tape drives, disk drives, tape controllers, disk controllers, printers,
terminals and related control units, all of which are related to the process of
storing, retrieving, and processing information by computer.
The Partnership acquires primarily IBM manufactured or IBM-compatible
equipment. The General Partner believes that dealing in IBM-compatible equipment
is particularly advantageous because of the large IBM customer base, IBM's
policy of supporting IBM users with software and maintenance services and the
large amount of IBM and IBM-compatible equipment in the marketplace.
If, in the General Partner's opinion, IBM's competitors begin to offer
these advantages and the General Partner determines that non-IBM compatible
Equipment is comparable in quality, the General Partner may the increase its
purchases of computer equipment which is not IBM-compatible if such purchases
are in the best economic interest of the Partnership. See "Risk Factors"
Computer technology has developed rapidly in recent years and is expected
to continue to do so. Technological advances have permitted reductions in the
cost of computer processing capacity, permitting applications unavailable a few
years ago. Much of the older IBM and IBM-compatible computer peripheral
equipment has not been retired from service, because software is generally
interchangeable between older and newer equipment, and older equipment is
capable of performing many of the same functions as newer equipment.
The General Partner believes that, values of most peripheral equipment have
been affected less dramatically by changes in technology than have the values of
central processing units. An equipment user who upgrades to a more advanced
central processor generally can continue to use his existing peripheral
equipment. Peripheral equipment however is subject to declines in value as new,
improved models are developed and become available. Technological advances and
other factors have at times
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caused dramatic reduction in the market prices of certain older models of IBM
and IBM-compatible computer peripheral equipment.
OTHER EQUIPMENT RESTRICTIONS
The General Partner is also authorized to invest in telecommunication or medical
technology equipment. The Partnership may not invest in any other types of
Equipment if:
(i) the purchase price of such Equipment, together with the total Price of
all other types of Equipment is in excess of 25% of the total cost of all of the
assets of the Partnership at that time
(ii) unless the General Partner determines that such purchase is in the
best economic interest of the Partnership at the time of the purchase. There can
be no assurance that any Equipment investments can be found which meet this
standard; and there can be no assurance that investments of this type will be
made by the Partnership.
DIVERSIFICATION
Diversification is desirable to minimize the effects of changes in specific
industries, local economic conditions or similar risks. The Partnership's
diversification will depend upon the financing which can be assumed by the
Partnership or borrowed from third parties on satisfactory terms.
The Partnership's policy not to borrow on a recourse basis will further
limit its financing options. Diversification will also depend on the
availability of various types of Equipment. Since the needs of potential lessees
are unknown at this time, there can be no assurance given with respect to the
maximum percentages of proceeds which will be invested in any single item or
group of items of Equipment or in Equipment under lease to a single lessee,
except as explained below and under "Other Equipment Restrictions" above. See
also "Risk Factors" During the operational stage of the Partnership, the
Partnership may not at any one given point in time, lease more than 25% of the
Equipment to a single Person or Affiliated group of Persons.
DESCRIPTION OF LEASES
The Partnership will purchase only Equipment which is subject to a lease.
The General Partner intends to lease most of the Equipment to third parties
subject to Operating Leases. Operating Leases are relatively short-term (12 to
36 month) leases under which the rental payments during the original term of the
lease are not sufficient to recover the purchase price of the Equipment.
The terms of the leases will depend upon a variety of factors,
including:
a) the desirability of each type of lease from both an investment and a
tax point of view;
b) the relative demand among lessees for Operating Leases;
c) the type and use of Equipment and its anticipated residual value;
d) the business of the lessee and its credit rating; the availability and
cost of financing;
e) regulatory considerations; the accounting treatment of the lease
sought by the lessee or the Partnership; and competitive factors.
Based on current sales prices for Equipment and the past experience of the
General Partner in disposing of Equipment at the end of lease terms, the General
Partner believes that the Partnership will be able profitably, to re-lease or
dispose of its Equipment leased under Operating Leases after their initial
terms.
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The Partnership will enter into "triple net leases" which typically provide
that the lessee will bear the risk of physical loss of the Equipment; pay taxes
relating to the lease or use of the Equipment and maintain the Equipment. The
lessee will also 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 or a specified amount described in the lease; and
maintain liability insurance naming the Partnership as an additional insured
with a minimum coverage which the General Partner believes is appropriate. The
Partnership may also purchase "umbrella" insurance policies to cover excess
liability.
The General Partner has not established any standards for lessees to which
it will lease Equipment and there is no investment restriction prohibiting the
Partnership from doing business with any lessees. The General Partner will
perform a credit analysis (including a review of the financial statements,
credit history and public debt record) of all potential lessees to determine the
lessee's ability to make payments under the lease.
The terms and conditions of the Partnership's leases, will be determined by
negotiation and may impose substantial obligations to the Partnership. When the
Partnership assumes maintenance or service obligations, the Partnership will
enter into separate maintenance or service agreements with manufacturers or
certified maintenance organizations to provide such services. Such agreements
will generally require annual or more frequent adjustment of service fees. It is
not presently anticipated that any leases which require the Partnership to
perform maintenance duties will be entered into by the Partnership.
BORROWING POLICIES
The partnership may incur debt in the maximum amount of 30% of the total
cost of the Equipment, however, the Partnership may not incur any indebtedness
to acquire Equipment until the net proceeds of the Offering are fully invested
in Equipment. The Partnership will incur only non-recourse debt which will be
secured by Equipment and lease income . Such debt will permit the Partnership to
increase the amount of its depreciable assets, and should increase both its
lease revenues and its federal income tax deductions above those levels which
would be achieved without borrowing. There is no limit on the amount of debt
which may be incurred in connection with the acquisition of any single item of
Equipment. Any debt incurred will be fully amortized over the term of the
initial lease for the Equipment securing the debt. The amount borrowed by the
Partnership will depend on a number of factors, including the types of Equipment
acquired by the Partnership; the creditworthiness of the lessee; the
availability of suitable financing; and prevailing interest rates. The
Partnership intends to be flexible in the degree of leverage it employs, within
the permissible limit.
The Partnership will purchase some items of Equipment without debt. If the
Partnership purchases an item of Equipment without debt and then suitable
financing becomes available, it may then obtain the financing, secure the
financing with the Equipment purchased previously and invest any proceeds from
financing in additional items of Equipment. The Partnership will borrow funds,
to the fullest extent possible, at interest rates fixed at the time of
borrowing.
Any debt incurred by the Partnership must be nonrecourse. Nonrecourse debt
means that the lender providing the funds can look for security only to the
Equipment, pledged as security, including the proceeds derived from leasing or
selling the Equipment. Neither the Partnership nor any Partner (including the
General Partner) would be liable for repayment of any nonrecourse debt. To the
extent the Partnership borrows on a nonrecourse basis, the Limited Partners' tax
basis in their Units will increase,
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although there may not be a corresponding increase in the Partners' "At-Risk"
amount. See "Income Tax Considerations -- Limitation on Utilization of
Partnership Losses -- Tax Basis and Amounts at Risk."
The General Partner and its Affiliates may make loans to the Partnership on
a short-term basis in an amount of 1.01% of net offering proceeds, if necessary,
to the Partnership. If the General Partner or any of its Affiliates does so, the
General Partner or Affiliate may not charge interest at a rate greater than the
interest rate charged by unrelated lenders on comparable loans. The Partnership
will not pay interest on a loan at an annual rate greater than three percent
over the "prime rate" announced by Chase Bank, Philadelphia, Pennsylvania. All
payments of principal and interest on any financing provided by the General
Partner or any of its affiliates shall be due and payable by the Partnership
within 12 months after the date of the loan. See "Compensation of General
Partner and Affiliates."
If 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 will be entitled to receive interest on the funds.
See "Conflicts of Interest -- Acquisitions."
REFINANCING POLICIES
The Partnership may refinance its debt, subject to borrowing restrictions.
The General Partner will take into consideration factors as the amount of
appreciation in value to be realized, the possible risks of continued ownership
and the anticipated advantages, as compared to selling such Equipment.
The Partnership may retain an item of Equipment, through refinancing, to
generate additional funds for reinvestment in additional Equipment or for
distribution to the Limited Partners.
This will not be taxable to a Limited Partner unless it exceeds the tax
basis of the Limited Partner's Units (after any increase of the tax basis as a
result of the Partnership's incurring any additional nonrecourse debt). See
"Income Tax Considerations -- Limitations on Utilization of Partnership Losses
- -- Tax Basis."
LIQUIDATION POLICIES
The Partnership will begin to dispose its Equipment approximately nine
years after the Closing Date. However, the General Partner may, at any time,
decide to dispose of all its Equipment and dissolve the Partnership upon the
approval of Limited Partners holding a Majority in Interest of Units.
Particular items of Equipment may be sold at any time if, in the judgment
of the General Partner, it is in the best interest of the Partnership to do so.
The determination of whether particular items of Partnership Equipment should be
sold will be made by the General Partner after consideration of all relevant
factors (including prevailing economic conditions, lessee demand, the General
Partner's views of current and future market conditions, the cash requirements
of the Partnership, potential capital appreciation, cash flow and federal income
tax considerations), with a view toward achieving the principal investment
objectives of the Partnership.
As partial payment for Equipment sold, the Partnership may receive purchase
money obligations secured by liens on such Equipment. The term of the
Partnership will not extend beyond December 31, 2009. See "Compensation of
General Partner and Affiliates -- Equipment Liquidation Fee."
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<PAGE>
MANAGEMENT OF EQUIPMENT
Equipment management services for the Partnership's Equipment will be
provided by the General Partner and its Affiliates, consisting of collection of
income from the Equipment, negotiation and review of leases and sales
agreements, releasing and leasing-related services, payment of operating
expenses, periodic physical inspections and market surveys, servicing
indebtedness secured by Equipment, general supervision of lessees to assure that
they are properly utilizing and operating Equipment, providing related services
with respect to Equipment, supervising, monitoring and reviewing services
performed by others in respect to Equipment and preparing monthly Equipment
operating statements and related reports. Certain of these services may be
provided initially by lease brokers as part of their agreement to sell the
Equipment to the Partnership. See "Compensation of General Partner and
Affiliates -- Equipment Management Fee."
COMPETITION
The equipment leasing industry is highly competitive. The Partnership will
compete with leasing companies, equipment manufacturers and their affiliated
financing companies and entities similar to the Partnership (including other
programs sponsored by the General Partner), some of which will have greater
financial resources and more experience in the equipment leasing business than
the General Partner.
Other leasing companies and equipment manufacturers or their affiliated
financing companies may be in a position to offer equipment to prospective
lessees on financial terms which are more favorable than those which the
Partnership can offer. As a result of these advantages, the Partnership may find
it necessary to lease its equipment on a less favorable basis than some of its
competitors.
The computer peripheral equipment industry is also extremely competitive.
Competitive factors include pricing, technological innovation and methods of
financing. Manufacturer-lessors could maintain advantages through a policy which
combines service and hardware with payment accomplished through a single monthly
charge.
The dominant firm in the computer marketplace is International Business
Machines Corporation Its subsidiary, IBM Credit Corporation, is the dominant
force in the leasing of IBM equipment. Because of IBM's substantial resources
and dominant position changes with respect to computer systems, pricing,
marketing practices, technological innovation and the availability of new and
attractive financing plans could occur at almost any time. Significant action in
any of these areas by IBM or IBM Credit Corporation might materially adversely
affect the Partnership's business. See "Risk Factors."
PRELIMINARY INVESTMENTS
The partnership has purchased and now owns the following equipment:
On April 15, 1998, the Partnership purchased twelve (12) SUN Workstations
for approximately $140,000. The Equipment is subject to a 32 month lease with
Lucent Technology. The monthly rent during the term of the lease is
approximately $3,900.
On April 15, 1998, the Partnership purchased thirty (30) SUN Servers for
approximately $446,000. The Equipment is subject to a 32 month lease with Lucent
Technology. The monthly rent during the term of the lease is to be approximately
$12,100.
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On June 12, 1998, the Partnership purchased four (4) SUN Servers for
approximately $253,000. The Equipment is subject to a 36 month lease with Chase
Manhattan Bank. The monthly rent during the term of the lease is to be
approximately $6,500.
On July 2, 1998, the Partnership purchased five (5) Storagetek Timberline
Drives for approximately $408,000. The Equipment is subject to a 24 month lease
with Chase Manhattan Bank. The monthly rent during the term of the lease is to
be approximately $12,300.
On July 9, 1998, the Partnership purchased one (1) SUN Server for
approximately $131,000. The Equipment is subject to a 36 month lease with
Cendant. The monthly rent during the term of the lease is to be approximately
$3,200.
On November 2, 1998, the Partnership purchased an IBM Upgrade to a
controller for approximately $18,000. The Equipment is subject to a 24 month
lease with Chrysler Corp. The monthly rent during the term of the lease is to be
approximately $800.
On December 1, 1998, the Partnership purchased SUN additional memory for a
Server for approximately $40,000. The Equipment is subject to a 31 month lease
with Cendant. The monthly rent during the term of the lease is to be
approximately $1,300.
On February 1, 1999, the Partnership purchased (4) IBM Workstations for
approximately $187,398. The Equipment is subject to a 36 month lease with
Kaiser. The monthly rent during the term of the lease is to be approximately
$4,983.
On February 1, 1999, the Partnership purchased (1) IBM Workstation for
approximately $373,747. The Equipment is subject to a 36 month lease with
Kaiser. The monthly rent during the term of the lease is to be approximately
$9,952.
On March 12, 1999, the Partnership purchased (2) DEC Servers for
approximately $140,857. The Equipment is subject to a 32 month lease with
International Paper. The monthly rent during the term of the lease is to be
approximately $4,042.
On May 1, 1999, the Partnership purchased (1) SUN Workstation for
approximately $180,353. The Equipment is subject to a 36 month lease with Morgan
Stanley & Co. The monthly rent during the term of the lease is to be
approximately $4,686.
On June 1, 1999, the Partnership purchased (5) CISCO Routers for
approximately $140,579. The Equipment is subject to a 35 month lease with CMGI
Information Systems. The monthly rent during the term of the lease is to be
approximately $3,972.
On July 1, 1999, the Partnership purchased (10) CISCO Routers for
approximately $220,942. The Equipment is subject to a 36 month lease with Kaiser
Foundation. The monthly rent during the term of the lease is to be approximately
$5,670.
It is not possible to determine the date when the net Offering proceeds
will be fully invested in Equipment by the Partnership or the terms of any
purchases of Equipment. The Partnership will invest the net Offering proceeds,
prior to the acquisition of Equipment, in short-term, highly liquid investments
where there is appropriate safety of principal, such as United States Treasury
Bills.
If all of the net proceeds of this Offering are not invested in Equipment
utilized prior to the expiration of 12 months from the Closing Date, the net
proceeds not committed will be promptly returned, with interest at the rate
earned by the Partnership. Funds are considered to be committed to the extent:
(i) any funds may have been reserved to make contingent payments in
connection with any Equipment already acquired, whether or not any such payments
are ultimately made;
(ii) as a condition to obtaining financing the Partnership is required to
maintain funds as a compensating balance; or
(iii) the General Partner decides that an addition to the working capital
reserve is necessary in connection with any Equipment. In the event any such
uninvested funds are distributed to the Limited Partners, such distribution will
be treated as a return of capital. See "Income Tax Considerations -- Cash
Distributions."
RESERVES
Because the Partnership's leases are expected to be on a "triple-net"
basis, no permanent reserve for maintenance and repairs will be established from
the Offering proceeds. However, the General Partner, may retain a portion of the
Offering proceeds, Cash Flow and Net Disposition Proceeds available, for
maintenance, repairs and working capital. There are no limitations on the amount
of Offering Proceeds, Cash Flow and Net Disposition Proceeds that may be
retained as reserves. Since no reserve will be established initially, if
available Cash Flow of the Partnership is insufficient to cover the
Partnership's operating expenses and liabilities, it will be necessary for the
Partnership to obtain additional funds by refinancing its Equipment or
borrowing.
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<PAGE>
GENERAL RESTRICTIONS
Under the Partnership Agreement, the Partnership is not permitted to:
(a) invest in junior trust deeds unless received in connection with
the sale of an item of Equipment in an amount which does not exceed 30% of
value of the assets of the Partnership on the date of investment;
(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 in connection with the financing or refinancing of Equipment or the
Partnership's business shall not be senior securities);
(e) make loans to any Person, including the General Partner or any of
its Affiliates;
(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 to use its best efforts to assure that
the Partnership shall not be deemed an "investment company" as such term is
defined in the Investment Company Act of 1940.
The General Partner and its Affiliates may engage in other activities,
whether or not competitive with the Partnership. The Partnership Agreement also
indicates that neither the General Partner nor any of its Affiliates may receive
any rebate or "give up" in connection with the Partnership's activities. See
"Conflicts of Interest," "Compensation of General Partner and Affiliates," and
"Management."
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<PAGE>
COMPENSATION TO THE GENERAL PARTNER
The following table summarizes the types, estimated amounts and recipients
of compensation to be paid by the Partnership directly or indirectly to the
General Partner and its Affiliates.
Unless disclosed in this Prospectus, the Partnership will not engage in
transactions with the General Partner or any of its Affiliates. As described
below, the maximum Front-End Fees that could be paid during the first fiscal
year of operations without deduction of expenses are $2,539,933 (assuming the
maximum number of Units are sold and the maximum amount of leverage is incurred
excluding fees earned with Retained Proceeds).
<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>
OFFERING AND ORGANIZATION STAGE
Commonwealth Capital UNDERWRITING COMMISSIONS. The Partnership will pay to $135,000 $1,350,000
Securities Corp. the Dealer Manager an amount of up to nine percent of
Capital Contributions as Underwriting Commissions
after and only if the required $1,500,000 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 Partner ORGANIZATIONAL FEE. An Organization Fee equal to three $45,000 $400,000
percent of the first $10,000,000 of Limited Partners'
Capital Contributions and two percent of the Limited
Partners' Capital Contribution in excess of $10,000,000,
as compensation for the organization of the
Partnership. It is anticipated that the Organizational
and Offering Expenses, which include legal, accounting
and printing expenses; various registration and filing
fees; miscellaneous expenses related to the organization
and formation of the Partnership; other costs of
registration; and costs incurred in connection with the
preparation, printing and distribution of this
Prospectus and other sales literature will be
approximately $300,000. The General Partner will pay
all Organizational and Offering Expenses, other than
Underwriting Commissions.
OPERATIONAL AND SALE OR LIQUIDATION STAGES
The General Partner and REIMBURSEMENT OF EXPENSES. The General Partner and its $15,000 $20,000
its Affiliates Affiliates are entitled, under Section 5.2 of the
Partnership Agreement, to reimbursement by the
Partnership for the cost of goods, supplies or
services obtained and used by the General Partner in
connection with the administration and operation of
the Partnership from third parties unaffiliated with
the General Partner. The amounts set forth on this
table are approximations of reimbursable expenses
for the first year of the Partnership's operation
and do not include expenses
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
incurred in the offering of Units.
The General Partner EQUIPMENT ACQUISITION FEE. An Equipment Acquisition Fee $71,351 $716,217
of four percent of the Purchase Price of each item of
Equipment purchased as compensation for the negotiation
of the acquisition of the Equipment and the lease. The
fee will be paid upon closing of the Offering with
respect to the Equipment to be purchased by the
Partnership with the net proceeds of the Offering
available for investment in Equipment except for fees on
the leveraged portion of the Purchase Price which are
paid when the Equipment is purchased. If the
Partnership does not purchase Equipment with all the net
proceeds of the Offering, the General Partner will
return a pro rata portion of the fee to the
Partnership. If the Partnership acquires Equipment in
an amount exceeding the net proceeds of the Offering
available for investment in Equipment, the fee will be
paid when such Equipment is acquired. The estimated
amounts set forth in this table include fees on
Equipment assuming the maximum allowable debt, but
exclude such fees earned on Equipment purchased with
Retained Proceeds. Such excluded fees may be
significant in amount. Equipment Acquisition Fees will
be lower than the estimated maximum if a lower level of
acquisition borrowing is utilized.
The General Partner DEBT PLACEMENT FEE. As compensation for arranging Term $5,351 $53,716
Debt to finance the acquisition of Equipment by the
Partnership, a fee equal to one percent of such
indebtedness; provided, however, that such fee shall be
reduced to the extent the Partnership incurs such fees
to third parties, unaffiliated with the General Partner
or the lender, with respect to such indebtedness and no
such fee will be paid with respect to borrowings from
the General Partner or its Affiliates. The estimated
amounts set forth in this table assume the expected
maximum allowable leverage ($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 refinancing or debt incurred with respect to
Equipment purchased with Retained Proceeds and
borrowings.
The General Partner EQUIPMENT MANAGEMENT FEE. A monthly Not Not
fee equal to the Not Not lesser of (i) the fees determinable determinable
which would be charged by an determinable at this time at this time
determinable independent third party for similar
services for similar at this time at this time
equipment or (ii) the sum of five percent of the
Gross Lease Revenues attributable to Equipment which
is subject to Operating Leases.
The General Partner EQUIPMENT LIQUIDATION FEE. With respect to each item of Not Not
Equipment sold by the General Partner a fee equal to the determinable determinable
lesser of (i) 50% of the Competitive Equipment Sale at this time at this time
Commission or (ii) three percent of the sales price of
the Equipment. The payment of this fee is subordinated
to the receipt by the Limited Partners of (i) a return
of their Capital Contributions and a 10% per annum
cumulative return, compounded daily, on Adjusted Capital
Contributions ("Cumulative Return") and (ii) the Net
Disposition Proceeds from such sale in accordance with
the Partnership Agreement. Such fee will be reduced to
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
the extent any liquidation or resale fees are paid to
unaffiliated parties.
INTEREST IN THE PARTNERSHIP
The General Partner PARTNERSHIP INTEREST. The General Partner will have a Not Not
present and continuing one percent interest in the determinable determinable
Partnership's items of income, gain, loss, deduction, at this time at this time
credit, and tax preference. In addition, the General
Partner will receive one percent of Cash Available for
Distribution until the Limited Partners have received
distributions of Cash Available for Distribution equal
to their Capital Contributions plus the 10% Cumulative
Return and thereafter, the General Partner will receive
10% of Cash Available for Distribution. See "Risk
Factors--Dilution."
</TABLE>
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CONFLICTS OF INTEREST
The Partnership can have conflicts of interest arising out of its
relationships with the General Partner and its Affiliates. Nothing below shall
relieve the General Partner and its Affiliates from their general fiduciary
obligations to the Partnership as set forth under "Fiduciary Responsibility."
These conflicts include the following:
COMPETITION FOR GENERAL PARTNER'S TIME
The General Partner and its Affiliates have sponsored other investor
programs which will be in potential competition with the Partnership. Although
these programs have acquired all of the Equipment which they will acquire with
the proceeds of offerings to investors, each program may reinvest undistributed
cash in additional Equipment. The General Partner and its Affiliates may also
form additional investor programs which may be competitive with the Partnership.
If one or more investor programs and the Partnership are in a position to
acquire the same Equipment, conflicts may arise as to which of the programs
acquire the available items of Equipment. In addition, in order to promote
diversification of Equipment and lessees when two or more investor programs are
in a position to acquire the same Equipment, the General Partner may acquire
Equipment in Joint Ventures with affiliated investor programs. If one or more
investor programs and the Partnership are in a position to enter into leases
with the same lessee or to sell Equipment to the same purchaser conflicts may
arise as to which program shall lease or sell its Equipment.
Certain senior executives of the General Partner and its Affiliates also
serve as officers and directors of the other programs and are required to
apportion their time among these programs. The Partnership will, therefore, be
in competition with the other programs for the attention and management time of
the General Partner and its Affiliates. The officers and directors of the
General Partner are not required to devote all or substantially all of their
time to the affairs of the Partnership. See "Management."
ACQUISITIONS
Com Cap Corp. and the General Partner or other Affiliates of the General
Partner may acquire Equipment for the Partnership provided that (i) the
Partnership has insufficient funds at the time the Equipment is acquired, (ii)
the acquisition is in the best interest of the Partnership and (iii) no benefit
to the General Partner or its Affiliates arises from the acquisition except for
compensation paid to Com Cap Corp., the General Partner or such other Affiliate
as disclosed in this Prospectus. Com Cap Corp., the General Partner or their
Affiliates will not hold Equipment for more than 60 days prior to transfer to
the Partnership. If sufficient funds become available to the Partnership within
such 60 day period, the Equipment may be resold to the Partnership for a price
not in excess of the sum of the cost of the Equipment and any accountable
Acquisition Expenses payable to third parties which are incurred interest on the
Purchase Price from the date of purchase to the date of transfer to the
Partnership. Except as described above, there will be no sales of Equipment to
or from any Affiliate of Com Cap Corp. The Partnership may also find it
necessary to make advances to manufacturers or vendors with funds borrowed from
the General Partner for acquisitions. The Partnership will not borrow money from
the General Partner or any of its Affiliates with a term in excess of twelve
months.
Interest will be paid on loans or advances (in the form of deposits with
manufacturers or vendors of Equipment or otherwise) from the General Partner or
its Affiliates from their own funds at a rate equal to that which would be
charged by third party financing institutions on comparable loans for the same
purpose in the same geographic area, but in no event in excess of the General
Partner's or Affiliate's own
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<PAGE>
cost of funds. If the General Partner or its Affiliates borrow money and loan or
advance it on a short-term basis to or on behalf of the Partnership, the General
Partner or such Affiliates shall receive no greater interest rate and financing
charges from the Partnership than that which unrelated lenders charge on
comparable loans. See "Investment Objectives and Policies."
The Partnership shall not invest in equipment limited partnerships, general
partnerships or joint ventures, except that (a) the Partnership may invest in
general partnerships or joint ventures with persons other than equipment
Programs formed by the General Partner or its Affiliates, which partnerships or
joint ventures own specific equipment, if (i) the Partnership has or acquires a
controlling interest in ventures or partnerships, (ii) the non-controlling
interest is owned by a non- Affiliate, and (iii) there are no duplicate fees;
and (b) the Partnership may invest in joint venture arrangements with other
equipment Programs formed by the General Partner or its Affiliates if such
action is in the best interests of all Programs and if all the following
conditions are met: (i) all the Programs have substantially identical investment
objectives; (ii) there are no duplicate fees; (iii) the sponsor compensation is
substantially identical in each Program; (iv) the Partnership has a right of
first refusal to buy another Program's interest in a joint venture if the other
Program wishes to sell equipment held in the joint venture; (v) the investment
of each Program is on substantially the same terms and conditions; and (vi) the
joint venture is formed either for the purpose of effecting appropriate
diversification for the Programs or for the purpose of relieving the General
Partner or its Affiliates from a commitment entered into pursuant to Section
9.5.3 of the Partnership Agreement. See "Risk Factors."
RECEIPT OF COMPENSATION BY THE GENERAL PARTNER AND ITS AFFILIATES
Partnership transactions involving the acquisition, lease and/or sale of
Equipment will result in compensation to the General Partner and its Affiliates.
The General Partner has absolute discretion with all decisions related to such
transactions. Because the amount and timing of such fees depends, in part, on
the debt structure of Equipment acquisitions and the timing of such
transactions, the General Partner and its Affiliates may be subject to conflicts
of interest to the extent the acquisition, retention, re-lease or sale of
Equipment and the terms and conditions thereof may be less advantageous to the
Partnership and more advantageous to the General Partner under certain
circumstances.
LACK OF INDEPENDENT INVESTIGATION BY UNDERWRITER
Since Commonwealth Capital Securities Corp. is an Affiliate of the General
Partner, the Partnership will not be subject to an independent investigation of
the type normally performed by an underwriting firm in connection with the
public offering of securities.
NON-ARM'S-LENGTH AGREEMENTS
Any agreements and arrangements relating to compensation between the
Partnership and the General Partner or any of its Affiliates will not be the
result of arm's-length negotiations and the performance thereof by the General
Partner and its Affiliates will not be supervised or enforced at arm's-length.
JOINT VENTURES WITH AFFILIATES OF THE GENERAL PARTNER
The Partnership may enter into joint ownership or joint venture agreements
for the acquisition and leasing of Equipment with other persons, including joint
ventures controlled by the General Partner. Should any such joint ventures be
done, the General Partner may face conflicts of interest as it may control and
owe fiduciary duties to both the Partnership and, through such Affiliates, the
affiliated co-venturer.
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For example, because of the differing financial positions of the
co-venturing programs, it may be in the best interest of one program to sell the
jointly-held Equipment at a time when it is in the best interest of the other
program to hold such Equipment. There is a potential risk of impasse in joint
venture decisions since neither program may control and while one program may
wish to purchase Equipment from its co-joint venturer, it may not have
sufficient resources to do so. Nevertheless, such joint ventures are restricted
to circumstances where the co-venturer's investment objectives are similar to
the Partnership's, the Partnership's investment is on substantially the same
terms as the co-venturer and the compensation to be received by the General
Partner and its Affiliates from each co-venturer is substantially the same.
LEGAL COUNSEL
Blank Rome Comisky & McCauley serves as counsel to the Partnership and as
counsel to the General Partner and its Affiliates, including Commonwealth
Capital Securities Corp. It is anticipated that such representation of the
General Partner will continue in the future. If a conflict should arise,
appropriate consideration will be given to the extent to which the interests of
the Partnership may be different from those of the General Partner and its
Affiliates, including Commonwealth Capital Securities Corp. and, if necessary,
separate special counsel will be obtained for the Partnership and for the
General Partner and its Affiliates, including Commonwealth Capital Securities
Corp.
ORGANIZATION OF GENERAL PARTNER
The Partnership will do business with the General Partner and its
Affiliates, Com Cap Corp., Commonwealth Capital Securities Corp., and
Commonwealth of Delaware, Inc.. The General Partner is owned by Commonwealth of
Delaware, Inc., which is owned by Com Cap Corp. Persons investing in the
Partnership will not have an interest in the corporations unless they are also a
corporate investor.
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TRANSFERABILITY OF UNITS
GENERAL LIMITATIONS
Units cannot be transferred without the consent of the General Partner,
which consent shall not be unreasonably withheld. The General Partner intends to
monitor transfers of Units in an effort to ensure that all transfers will be
within certain safe harbors promulgated by the IRS to furnish guidance regarding
publicly traded partnerships. These safe harbors limit the number of transfers
that can occur in any one year. The General Partner intends to cause the
Partnership to comply with the safe harbor that permits nonexempt transfers and
redemptions of Units of up to two percent of the total outstanding interests in
the Partnership's capital or profits in any one year. In deciding whether a
proposed transfer can be made, the General Partner will consider whether the
transfer will have an adverse affect on the Partnership's federal tax status as
a Partnership.
REDEMPTION PROVISION
Upon the conclusion of the 30 month period following the termination of the
Offering, the Partnership may, at the sole discretion of the General Partner,
repurchase a number of the outstanding Units. After such 30 month period, on a
semi-annual basis, the General Partner, at its discretion, may establish an
amount for redemption, generally not to more than two percent of the outstanding
Units per year, subject to the General Partner's good faith determination that
such redemptions will not: (a) cause the Partnership to be taxed as a
corporation under Section 7704 of the Code or (b) impair the capital or
operations of the Partnership. (The Partnership may redeem Units in excess of
the two percent limitation if, in the good faith judgment of the General
Partner, the conditions imposed in the preceding sentence would remain
satisfied.) The redemption price for Units will be 105% of the selling Limited
Partner's Adjusted Capital Contributions attributable to the Units for sale. All
requests for redemption must be made in writing and must be on file as of the
record date for such redemption. The General Partner will maintain a master list
of requests for redemption with priority being given to Units owned by estates,
followed by IRAs and Qualified Plans. All other requests will be considered in
the order received. Redemption requests made by or on behalf of Limited Partners
who are not affiliated with the General Partner or its Affiliates will be given
priority over those made by Limited Partners who are affiliated with the General
Partner or its Affiliates. All redemption requests will remain in effect until
and unless canceled, in writing, by the requesting Limited Partner(s).
The Partnership will accept redemption requests beginning 30 months
following the termination of the Offering. There will be no limitations on the
period of time that a redemption request may be pending prior to its being
granted. Limited Partners will not be required to hold their interest in the
Partnership for any specified period prior to their making a redemption request.
The making of a request for a redemption is completely voluntary. Limited
Partners will receive notification concerning the action of the Partnership on
this request.
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.
The Partnership will comply with any applicable tender offer rules at the
time of the redemption. Investors should note that the redemption price is based
on a percentage of the selling Limited Partner's Adjusted Capital Contributions
and is, therefore, arbitrary and not calculated with reference to
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the fair market value of a Unit. For tax consequences relating to the redemption
of Units, see "Income Tax Considerations."
EXEMPT TRANSFERS
The following seven categories of transfers are exempt transfers for
purposes of calculating the volume limitations imposed by the IRS and will
generally be permitted by the General Partner:
(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 Plans;
(6) any transfer by a Limited Partner in one or more transactions
during any 30-day period of Units representing in the total more than two
(2%) percent of the total outstanding interests in capital or profits of
the Partnership; and
(7) transfers by one or more partners representing in the aggregate
fifty (50%) percent or more of the total interests in partnership capital
or profits in one transaction or a series of related transactions.
ADDITIONAL RESTRICTIONS ON TRANSFER
Limited Partners who wish to transfer their Units to a new beneficial owner
will be required to pay the Partnership up to $50 for each transfer to cover the
Partnership's cost of processing the transfer application and will take such
other actions and execute such other documents as may be reasonably requested by
the General Partner. There will be no charge for re-registration of a
certificate in the event of a marriage, divorce, death, or transfer to a trust
so long as the transfer is not a result of a sale of the Units.
In addition, the following restrictions will apply to each transfer: (i) no
transfer may be made if it would cause 25% or more of the outstanding Units to
be owned by Benefit Plans; and (ii) no transfer will be permitted unless the
transferee obtains such governmental approvals as may reasonably be required by
the General Partner, including without limitation, the written consents of the
Pennsylvania Securities Commissioner and of any other state securities agency or
commission having jurisdiction over the transfer.
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DISTRIBUTIONS AND ALLOCATIONS
BETWEEN THE GENERAL PARTNER AND THE LIMITED PARTNERS
Cash distributions, if any, will be made quarterly beginning with the first
quarter after the Initial Closing on December 31, March 31, June 30, and
September 30 of each year. Cash distributions will be made after the payment of
expenses of the Partnership, including the payment of fees to the General
Partner. The Partnership will make distributions of Cash Available for
Distribution of the Partnership that the General Partner, in its sole and
absolute discretion, determines is available for distribution. Such
distributions will be payable quarterly or by the election of the Limited
Partners for a fee, monthly. A Limited Partner who purchases a minimum of 250
Units ($5,000) may elect to receive monthly distributions, paid in arrears, by
written notice to the General Partner upon subscription, or, thereafter, upon at
least 30 days' prior written notice to the General Partner, with any such
election made following subscription to be effective as of the beginning of the
following calendar quarter. Without an election, Limited Partners will receive
distributions quarterly. In any quarter, Limited Partners may terminate their
election to receive distributions monthly rather than quarterly by written
notice to the Partnership, which termination will be effective as of the
beginning of the following calendar quarter. The General Partner, in its sole
discretion, will have the option in the future to make quarterly distributions
to all Limited Partners. In such event, annual fees for monthly distributions
will terminate.
Distributions of Cash Available for Distribution are expected to commence
no later than the end of the first full calendar quarter following receipt of
the minimum subscription amount. At that time, each Limited Partner will receive
a distribution of Cash Available for Distribution for the calendar quarter and
each Limited Partner who has elected to receive distributions monthly will
receive one-third of such amount. The remaining two-thirds of such amount will
be held in an interest-bearing monthly distribution account separate from other
Partnership funds, and will be paid, without interest, in approximately equal
installments in each of the next two months to those Limited Partners who have
chosen to receive distributions monthly.
Limited Partners who choose the monthly distribution option will be charged
an annual administrative fee, which will be $50.00 for 1997, designed to cover
the additional postage and handling associated with the more frequent
distributions. The annual administrative fee will be reduced by any interest
earned on the monthly distribution account and will be deducted equally from
each monthly distribution. In the event that the interest earned on the monthly
distribution account exceeds the annual administrative fee, such excess interest
will be available to the Partnership for Partnership purposes. It is anticipated
that the fee will be calculated in January of each year, although the General
Partner may change the amount of the fee during the year by written notice to
each Limited Partner who properly has chosen to receive monthly distributions,
with such notice to be given at least 30 days prior to the beginning of the
calendar quarter that includes the first month to which the new fee will apply.
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<PAGE>
Distributions will be made 99% to the Limited Partners and one percent to
the General Partner until the Limited Partners have received an amount equal to
their Capital Contributions plus the Cumulative Return; thereafter, cash
distributions will be made 90% to the Limited Partners and 10% to the General
Partner. Distributions made in connection with the liquidation of the
Partnership or a Partner's Units will be made in accordance with the Partner's
positive Capital Account balance as determined under the Partnership Agreement
and Treasury Regulations.
The Cumulative Return is calculated on the Limited Partners' Adjusted
Capital Contributions for their Units. The Adjusted Capital Contributions will
initially be equal to the amount paid by the Limited Partners for their Units.
If distributions at any time exceed the Cumulative Return, the Adjusted Capital
Contributions will be reduced by the excess, decreasing the base on which the
Cumulative Return is calculated. For example (without taking into account the
effect of compounding), on a $100 investment, a $12 distribution in year one
would result in a $2 reduction in Adjusted Capital Contribution, leaving a $98
base on which the 10% return would be calculated in year two. The $2 reduction
consists of $2 in distributions in excess of that required to satisfy the
Cumulative Return requirement for year one.
If the proceeds resulting from the sale of any Equipment are reinvested in
Equipment, sufficient cash will be distributed to the Partners to pay the
additional federal income tax resulting from such sale for a Partner in a 39.6%
federal income tax bracket or, if lower, the maximum federal income tax rate in
effect for individuals for that taxable year.
The General Partner will be allocated Net Profits equal to its cash
distributions (but not less than one percent of Net Profits) and the balance
will be allocated to the Limited Partners. Net Profits arising from transactions
in connection with the termination or liquidation of the Partnership will be
allocated in the following order: (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 from the liquidation or termination which
would be distributed to the Partners as Operating Distributions over the total
Capital Accounts of all the Partners, to the Partners in proportion to their
respective shares of such excess, and (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, will generally be allocated 99% to the Limited Partners
and one percent to the General Partner, except to the extent that any such
losses are required to be allocated in a different manner under applicable
federal income tax law.
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Net Profits and Net Losses will be computed without taking into account, in
each taxable year of the Partnership, any items of income, gain, loss or
deduction required to be specially allocated pursuant to Section 704(b) of the
Code and the Treasury Regulations promulgated thereunder. No Limited Partner
will be required to contribute cash to the capital of the Partnership in order
to restore a closing Capital Account deficit, and the General Partner has only a
limited deficit restoration obligation under the Partnership Agreement.
AMONG THE LIMITED PARTNERS
Except during the Offering Period, Cash Available for Distribution, Net
Profits and Net Losses allocable to the Limited Partners will be distributed to
them solely with reference to the number of Units owned by each as of the Record
Date for each such distribution. During the Offering Period, Cash Available for
Distribution, Net Profits and Net Losses allocable to the Limited Partners will
be distributed to them with reference to both (i) the number of Units owned by
each as of each Record Date and (ii) the number of days since the previous
Record Date (or, in the case of the first Record Date, the commencement of the
Offering Period) that the Limited Partner has owned the Units.
A different method for allocations and distributions, based upon the
number of days which each Limited Partner owned Units during the period, will
be utilized during the Offering Period to provide greater distributions to
those Partners who have held their Units for a longer period.
Limited Partners will start sharing in Net Profits, Net Losses, and cash
distributions on the date following the date the Capital Contributions are
received. If some Limited Partners are admitted to the Partnership after others,
those Limited Partners admitted later may receive a smaller portion of each item
of the Partnership's Net Profits and Net Losses than the Limited Partners who
were admitted earlier. Nevertheless, those Limited Partners still will be
obligated to make the same Capital Contributions to the Partnership for their
interests as the Limited Partners who were admitted previously. In addition,
where a Limited Partner transfers Units during a taxable year, the Limited
Partner may be allocated Net Profits for a period for which such Limited Partner
will not receive a corresponding cash distribution.
See the prior performance tables attached as "Appendix II" for further
information concerning these prior public and private programs.
The following is a summary of equipment acquired between January 1, 1994
and January 1, 1997 by prior programs which were sponsored by the General
Partner:
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SUMMARY OF EQUIPMENT ACQUIRED BETWEEN
JANUARY 1, 1996 AND JANUARY 1, 1999 BY PRIOR PROGRAMS
<TABLE>
<CAPTION>
Quantity of
Peripheral Cost of
Equipment Equipment Percent Leverage
Program Name Acquired Acquired
- ------------------------------------------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C>
Commonwealth 1987-1 Equipment Income Fund, Limited 2 $389,790.12 90%
Partnership
Commonwealth 1988-1 Equipment Income Fund, Limited N/A N/A N/A
Partnership
Commonwealth Equipment Income Fund No. 3, Limited 5 $668,492.00 85%
Partnership
Commonwealth Equipment Income Fund No. 4, Limited N/A N/A N/A
Partnership
Commonwealth Equipment Income Fund No. V, Limited N/A N/A N/A
Partnership
Commonwealth Equipment Income Private Fund I, 103 $353,926.00 35%
Limited Partnership
Commonwealth Equipment Income Fund VI, Limited N/A N/A N/A
Partnership
Commonwealth Equipment Income Fund VII, Limited N/A N/A N/A
Partnership
Commonwealth Equipment Income Private Fund II, 4 $103,001.00 90%
Limited Partnership
Commonwealth Equipment Income Trust VIII 33 $1,658,840.62 45%
Commonwealth Equipment Income Trust IX 27 $683,916.49 70%
Commonwealth Equipment Income Trust X 30 $733,700.73 40%
Commonwealth Equipment Income Private Fund III, 24 $4956,150.46 60%
Limited Partnership
Commonwealth Income & Growth Fund I 489 $9,798,531.00 35%
Commonwealth Equipment Income Private Fund IV, 147 $1,214,442.00 35%
Limited Partnership
Commonwealth Income & Growth Fund II 289 $13,487,338.44 27%
Commonwealth Equipment Income Private Fund V, 18 $1,501,283.00 30%
Limited Partnership
Commonwealth Equipment Income Private Fund VI, 138 $2,426,863.87 30%
Limited Partnership
</TABLE>
Some of the above funds have entered their liquidation stage, therefore no new
equipment will be acquired, according to the terms of their prospectus.
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<PAGE>
INCOME TAX CONSIDERATIONS
SUMMARY
The following is a summary of important federal income tax considerations
concerning an investment in the Partnership. This summary was prepared, and the
related opinions were given by Blank Rome Comisky & McCauley, counsel to the
Partnership ("Counsel"), and is based upon the Internal Revenue Code of 1986,
(the "Code"), applicable Treasury Regulations, rulings, procedures, and other
pronouncements published by the Internal Revenue Service ("IRS"), court
decisions, the assumption that the Partnership will operate its business as
described in the Prospectus, and certain representations by the General Partner.
A more detailed tax analysis, including items not discussed in this summary,
follows the Summary. Counsel has reviewed the following summary and detailed
analysis and is of the opinion that the descriptions of the law and the legal
conclusions contained therein are correct in all material respects, and that the
summary and detailed analysis do not omit any material provision with respect to
the matters covered.
CLASSIFICATION AS A "PARTNERSHIP. Counsel has given its opinion that the
Partnership will be classified as a partnership for federal income tax purposes.
Counsel's opinion is based on certain qualifications and on representations of
the General Partner, and is not binding on the IRS. See "Income Tax
Considerations -- General" and "Income Tax Considerations -- Classification as a
Partnership."
TAXATION OF LIMITED PARTNERS. A partnership is not subject to federal
income taxes. Rather, each Partner will be required to take into account in
computing such Partner's regular and alternative minimum tax items of income,
gain, loss, deduction, and credit derived by the Partnership for each taxable
year, irrespective of whether the Partner has received or will receive any cash
distributions relating to such taxable year. Any distributions in excess of a
Limited Partner's adjusted tax basis in his Units will cause such Limited
Partner to recognize such excess as taxable income. See "Income Tax
Considerations -- Certain Principles of Partnership Taxation."
INCOME RECOGNITION. The Partnership's tax returns will be prepared using
the accrual method of accounting. Under such method, the Partnership will
include in income items such as rentals and interest as and when earned by the
Partnership, whether or not received. Certain of the Partnership's Equipment
leases may be subject to Section 467 of the Code which could result in a Limited
Partner receiving increased allocations of taxable income (or reduced
allocations of loss) in earlier years without any increase in cash available for
distribution until subsequent years. See "Income Tax Considerations -- Certain
Principles of Partnership Taxation -- Timing of Income Recognition."
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<PAGE>
ALLOCATION OF PROFITS AND LOSSES. Counsel has opined that the tax
allocation provisions in the Partnership Agreement will comply with Code Section
704(b) and the Regulations promulgated thereunder and each Limited Partner's
distributive share of Net Profits and Net Losses will be determined and
allocated substantially in accordance with the Partnership Agreement. Counsel's
opinion is based on certain qualifications and representations of the General
Partner, and is not binding on the IRS. See "Income Tax Considerations --
Allocation of Partnership Income, Gains, Losses, Deductions and Credits."
PASSIVE ACTIVITY INCOME AND DEDUCTIONS. Counsel has opined that the income,
gains, losses, deductions and credits derived from the Partnership's leasing
activities will be subject to the passive loss rules. Counsel's opinion is based
on certain qualifications and representations of the General Partner, and is not
binding on the IRS. Counsel's opinion does not apply to any portion of
Partnership income attributable to (i) the investment of Partnership funds in
liquid investments, such as certificates of deposit and money market accounts,
prior to the purchase of Equipment and distributions of Net Cash Flow to the
Partners, (ii) the investment, in interest-bearing accounts or otherwise, of
amounts held by the Partnership as working capital, security deposits, or in
reserve, or (iii) income from Equipment with respect to which the Partnership is
determined not to be the owner for federal income tax purposes. Such income will
constitute, for purposes of Section 469 of the Code and the Regulations
promulgated thereunder, portfolio income which cannot be offset by losses from
passive activities.
LIMITATIONS ON DEDUCTION OF LOSSES. There are certain limitations on the
ability of a Limited Partner to use his share of losses from the Partnership to
offset income from other sources. See "Income Tax Considerations -- Limitations
on Utilization of Partnership Losses."
DEDUCTIBILITY OF FEES. The Partnership intends to pay, and deduct, various
fees including fees paid to the General Partner. The determination of the nature
and deductibility of all or a portion of such fees involves a number of factual
matters relating to the nature and extent of the services provided. Therefore,
it is not possible to predict whether all or any portion of such fees will be
challenged by the IRS. See "Income Tax Considerations -- Fees and Reimbursements
to the General Partner and Affiliates."
OWNERSHIP OF LEASED EQUIPMENT. In order for the Partnership and Limited
Partners to be entitled to depreciation deductions, the leases of Equipment must
be treated as leases rather than sales or financing for federal income tax
purposes. The Partnership intends to structure each lease transaction so that
the lease will be treated as a lease rather than a sale or financing arrangement
for federal income tax purposes. See "Income Tax Considerations -- Ownership of
Equipment."
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<PAGE>
SALE OR EXCHANGE OF PARTNERSHIP EQUIPMENT. The Partnership's gain or loss
on sale or disposition of an item of Equipment will equal the difference between
sale proceeds (including the Partnership's adjusted tax basis in the Equipment.
In certain circumstances, the amount of tax payable by a Limited Partner on his
share of gain on sale of Equipment may exceed his share of cash proceeds
therefrom. See "Income Tax Considerations -- Sale of Equipment."
DISPOSITION OF UNITS. On sale of Units, a Limited Partner will recognize
gain equal to the excess, if any, of any cash and the fair market value of
property received (plus the Limited Partner's share of any Partnership
liabilities, including nonrecourse liabilities allocable to such Limited
Partner) over the Limited Partner's adjusted tax basis in the Units. Such gain
will be taxed at ordinary income tax rates to the extent of depreciation
recapture. In certain circumstances, the amount of tax payable by a Limited
Partner on the gain realized from a sale or disposition of his Units may exceed
the cash received therefrom. See "Income Tax Considerations -- Disposition of
Units."
TAX ELECTIONS. The Partnership is not expected to file an election under
Section 754 of the Code. The absence of such election may have an adverse effect
on the marketability and sale price of Units. See "Income Tax Considerations --
No Section 754 Election."
INVESTMENT BY TAX EXEMPT ENTITIES. The Partnership will generate UBTI to
Limited Partners who are tax exempt entities, including qualified employee
pension or profit sharing trusts or individual retirement accounts ("Tax Exempt
Entities"), with the result that the Partnership income will be subject to tax
to the extent that the Tax Exempt Entity's gross UBTI from all sources exceeds
all deductions attributable to the UBTI plus $1,000. See "Income Tax
Considerations -- Investment by Tax Exempt Entities."
ALTERNATIVE MINIMUM TAX. The tax preference items and adjustments under the
alternative minimum tax that may be present in the Partnership include the
excess of depreciation deductions claimed over deductions that would be
allowable if the Equipment were subject to depreciation over its asset
depreciation range class life using the 150% declining balance method, switching
to the straight-line method in later years. See "Income Tax Considerations --
Taxes -- Alternative Minimum Tax."
FOREIGN TAX CONSIDERATIONS. Because the Partnership may acquire Equipment
which is operated outside the United States, Limited Partners may be required to
file returns and pay taxes in foreign jurisdictions. Limited Partners who pay
foreign tax as a result of Partnership operations may be entitled to a foreign
tax credit or deduction to reduce their United States tax liability. See "Income
Tax Considerations -- Partnership Tax Returns and Tax Information -- Foreign Tax
Considerations."
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<PAGE>
DISSOLUTION OF PARTNERSHIP. Upon dissolution of the Partnership, a Limited
Partner will recognize taxable income if the cash distributed to the Limited
Partner (including the reduction in the Limited Partner's share of Partnership
liabilities) exceeds the Limited Partner's adjusted tax basis in his Units. See
"Income Tax Considerations -- Certain Principles of Partnership Taxation."
GENERAL
Subject to the qualifications and assumptions set forth herein, and
certain representations of the General Partner, counsel has opined that
(i) the Partnership will be classified as a partnership for federal income
tax purposes, (ii) with certain exceptions, Net Profits, Net Losses, and
credits derived from the Partnership will be subject to the passive loss
rules, (iii) the allocations of Net Profits and Net Losses in the Partnership
Agreement will be respected for federal income tax purposes, and (iv) Limited
Partners will be considered "at-risk" for purposes of Section 465 of the Code
in any one year with respect to Equipment placed in service in the same
taxable year in an amount equal to (A) the Capital Contributions of such
Limited Partner (provided that funds for such contributions are not from
borrowed amounts), less (B) the sum of (1) the total net losses with respect
to such Equipment which have been allowed as deductions to the Limited
Partner under the at-risk rules and (2) cash distributions received by the
Limited Partner, plus (C) the Limited Partner's distributive share of total
Net Profits with respect to such Equipment of the Partnership. Counsel's
opinion is not binding on the IRS.
Neither the General Partner, the Partnership, nor Counsel can guarantee
that any federal income tax advantages described in this summary will be
available. An opinion of Counsel represents only such counsel's best legal
judgment, and has no binding effect or official status of any kind, so that no
assurance can be given that the opinions of Counsel would be sustained by a
court, if contested, or that legislative or administrative changes or court
decisions may not be forthcoming which would require modifications of the
statements and conclusions expressed herein. Except for the opinions
specifically addressed herein, Counsel has not opined as to the probable outcome
on the merits of any issue discussed below. Final disallowance of all or any
portion of the Partnership's federal income tax advantages would of course
adversely affect an investment in the Partnership.
Counsel will not prepare or review the Partnership's income tax information
returns, which will be prepared by management and independent accountants for
the Partnership. The Partnership has made and will make a number of decisions on
such tax matters as the expensing or capitalizing of particular items, the
proper period over which capital costs may be depreciated or amortized and many
other similar matters. Such matters are handled by the Partnership, often with
the advice of independent accountants retained by the Partnership, and are
usually not reviewed with Counsel.
The following discussion is not intended as a substitute for careful tax
planning by prospective investors. The income tax consequences of an investment
in a partnership such as the Partnership are often uncertain and complex and
will not be the same for all investors.
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<PAGE>
Details of significance to a particular taxpayer may not be present, as it
is impractical to set forth in a discussion of acceptable length all aspects of
federal income tax law that may be relevant to an investment in the Partnership.
The discussion below considers the federal income tax considerations associated
with an investment in the Partnership by individuals who are citizens of the
United States or resident aliens and is not intended to deal with matters which
may be relevant to other investors, such as corporations, partnerships or
trusts. The discussion, however, does describe some, but not all, of the
material federal income tax considerations associated with an investment in the
Partnership by non-resident alien and foreign corporations and Keogh plans and
pension and profit-sharing plans qualifying under Section 401(a) of the Code
(collectively, "Qualified Plans") and individual retirement accounts described
in Section 408 of the Code. A corporate investor should be aware that the tax
consequences of its investment in the Partnership will differ in several
material respects from those applicable to individuals.
- --------------------------------------------------------------------------------
PLEASE CONSULT WITH A TAX ADVISOR ON FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES FROM AN INVESTMENT IN THE PARTNERSHIP AS IT RELATES TO YOUR OWN TAX
SITUATION.
- --------------------------------------------------------------------------------
CLASSIFICATION AS A PARTNERSHIP
It is the opinion of Counsel that the Partnership will be classified as a
partnership, and not as an association taxable as a corporation, for federal
income tax purposes. This opinion is based upon: (i) existing federal income tax
law, which is presently subject to differing interpretations; (ii) continuing
compliance with the conditions set forth below; and (iii) certain
representations by the General Partner set forth below. Counsel's opinion is not
binding on the IRS.
The Partnership has not requested a ruling from the IRS that the
Partnership will be treated as a partnership for federal income tax purposes and
does not intend to request such a ruling. An opinion of counsel has no binding
effect or official status of any kind, and no assurance can be given that the
conclusions reached in Counsel's opinion would be sustained by a court if
contested by the IRS. Thus, in the absence of a ruling from the IRS, there can
be no assurance that the IRS will not treat the Partnership as a corporation. If
the IRS were to prevail on this issue, the Limited Partners would be deprived of
the potential tax benefits associated with the ownership of Units.
Section 301.7701-2 of the Treasury Regulations (the "Check-the-Box" rules)
provides that certain unincorporated entities which have more than one owner may
generally elect to be treated as a partnership or a corporation for federal
income tax purposes. In the absence of a specific election, any such entities
which are formed under United States law (i.e., domestic entities), through
default, are treated as partnerships for federal income tax purposes.
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In this case, the General Partner has represented that the Partnership will
file any tax or informational returns, if any (including Department of the
Treasury/Internal Revenue Service Form 8832), which may be required in order for
the Partnership to be treated as a partnership for federal income tax purposes.
Consequently, subject to the discussion below, the Partnership will qualify as a
partnership for federal income tax purposes.
Counsel's opinion takes into account Section 7704 of the Code which
provides, with certain exceptions which are not relevant to this discussion,
that "publicly traded partnerships" are taxable as corporations. Section 7704(b)
of the Code defines the term "publicly traded partnership" to mean any
partnership if: (i) interests in the partnership are traded on an established
securities market, or (ii) interests in the partnership are readily tradable on
a secondary market (or the substantial equivalent thereof). The legislative
history of Code Section 7704 provides that a secondary market for interests in a
partnership or the substantial equivalent thereof exists if investors are
readily able to buy, sell or exchange their partnership interests in a manner
that is comparable, economically, to trading on established securities markets.
A secondary market is generally indicated by the existence of a person
standing ready to make a market in the interests. The substantial equivalent of
a secondary market will be deemed to exist either: (i) if the holders of
interests in the partnership have a readily available, regular, and ongoing
opportunity to sell or exchange their interests through a public means of
obtaining or providing information of offers to buy, sell, or exchange
interests, or (ii) buyers and sellers have the opportunity to buy, sell, or
exchange interests in the partnership in a time frame that a market-maker would
provide and prospective buyers have similar opportunities to acquire such
interests. The legislative history of Section 7704 also indicates that a regular
plan of redemptions or repurchases by a partnership may constitute public
trading where holders of interests have readily available, regular, and ongoing
opportunities to dispose of their interests.
The Partnership Agreement provides that no transfer of any Unit "will be
recognized or effective for any purpose to the extent it is determined by the
General Partner to be effectuated through an established securities market or a
secondary market (or the substantial equivalent thereof), within the meaning of
Section 7704 of the Code and the Treasury Regulations applicable with respect
thereto, so as to adversely affect the tax status of the Partnership as a
partnership rather than as an association taxable as a corporation;" the General
Partner will also prohibit any transfer of Units which, in the General Partner's
good faith judgment, will cause the Partnership to fall outside of the safe
harbors of Treasury Regulation Section 1.7704-1(e), discussed below. See "Risk
Factors -- Limited Transferability of Units."
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Under Treasury Regulation Section 1.7704-1(e), (f), (g), (h) or (j),
certain types of limited, non-public transfers which will be disregarded in
determining whether a partnership is publicly traded ("Exempt Transfers").
Recognizing that these Exempt Transfers will not result in the Partnership
being deemed publicly traded, the General Partner anticipates permitting seven
categories of these Exempt Transfers. See "Transferability of Units -- Exempt
Transfers."
In addition to providing for the Exempt Transfers, Treasury Regulation
1.7704-1 states that partnership interests will not be deemed "readily tradable
on a secondary market (or the substantial equivalent thereof)" if any one of
several other safe harbors provided for in such Treasury Regulation is
satisfied. One of these is the "two percent safe harbor." It provides that a
secondary market or its equivalent will not exist if the sum of the interests in
partnership capital or profits attributable to those partnership interests that
are sold, redeemed, or otherwise disposed of during the partnership's taxable
year does not exceed two percent of the total interests in partnership capital
or profits. The seven categories of Exempt Transfers, among other items, do not
count towards the two percent ceiling. In determining whether the Partnership
satisfies the two percent safe harbor, redemption of Units pursuant to Article
12 of the Partnership Agreement will be counted.
While the General Partner will use its best efforts to limit the type and
number of transfers of Units to those which will allow the Partnership to remain
within the two percent safe harbor, the General Partner does not warrant that
the Partnership will satisfy this safe harbor during each of its taxable years.
It is conceivable that transfers of Units could occur which would cause the
Partnership to fall outside the safe harbor. In this regard, Treasury Regulation
Section 1.7704-1(c)(3) states that failure to meet any of the safe harbors will
not create a presumption that a secondary market or its equivalent exists for
partnership interests. No assurances can be offered, however, that, if the
amount and type of trading in the Units were to fall outside the safe harbor,
the IRS would not claim publicly traded partnership status with respect to the
Partnership.
If, for any reason, the Partnership were treated for federal income tax
purposes as a corporation, the Partnership's income, deductions and credits
would be reflected only on its income tax return rather than being passed
through to Limited Partners, and the Partnership would be required to pay income
tax at corporate tax rates on any net income. Any amounts available (after
corporate taxes) for distribution to the Limited Partners would be treated as
dividends to the extent of current or accumulated earnings and profits. In
addition, distributions from the Partnership would be classified as portfolio
income rather than passive activity income and thus would not be eligible to be
offset by passive activity losses attributable to the Partnership or other
activities giving rise to passive losses. See "Income Tax Considerations --
Limitations on Utilization of Partnership Losses -- Passive Activity Losses
Limitations."
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CERTAIN PRINCIPLES OF PARTNERSHIP TAXATION
GENERAL. A partnership is not subject to federal income tax, but is
required to file a partnership information tax return each year. Each Limited
Partner will be required to take into account, in computing the Limited
Partner's federal income tax liability, the Limited Partner's distributive share
(as determined by the Partnership Agreement and reported on Schedule K-1 to Form
1065) of all items of Net Profits, Net Losses, credit and tax preference of the
Partnership for any taxable year of the Partnership ending within or without the
taxable year of the Limited Partner without regard to whether the Limited
Partner has received or will receive any cash distributions from the
Partnership. Thus, a Limited Partner may be subject to tax if the Partnership
has net income even though no corresponding cash distribution is made. To the
extent a Limited Partner's tax liability attributable to his investment in the
Partnership exceeds his cash distributions from the partnership in any year,
such Partner will be required to pay the excess tax liabilities from other
sources.
Pursuant to Code Section 731, any cash received by a Limited Partner from
the Partnership in his capacity as a Partner will generally not cause
recognition of taxable income (or tax loss) for federal income tax purposes.
Instead, such distributions will generally reduce the Limited Partner's basis in
his Units (but not below zero). However, cash distributions in excess of a
Limited Partner's adjusted basis in his Units will result in the recognition of
taxable income to the extent of any such excess. It should also be noted that
pursuant to the Code, the fair market value of certain actively traded
marketable securities, as defined in Section 731(c) ("Marketable Securities")
distributed by the Partnership, if any exist, will, under certain circumstances,
be treated as cash for purposes of the distribution rules described above. It is
not anticipated, however, that the Partnership will make any distributions of
Marketable Securities to its Partners. Any taxable income recognized upon such
distributions will generally be characterized as capital gain income and will be
long-term or short-term depending upon the Limited Partner's holding period for
his Units; however, to the extent that the gain recognized is with respect to
Marketable Securities that are either "substantially appreciated inventory
items" or "unrealized receivables" within the meaning of Section 751 of the Code
(see generally, "Income Tax Considerations -- Disposition of Units"), all or a
portion of such gain may be taxed to the distributee Partner as ordinary income.
With respect to a Partner subject to the "at risk" rules, if the Partner's share
of Partnership losses or distributions reduces his "at risk" amount to zero,
subsequent distributions of cash or other property to him will cause him
generally to recapture as ordinary income an amount equal to the Partnership
losses previously deducted by him to the extent of such distributions. The gain
realized on a non-pro rata distribution to a Limited Partner may be taxed to the
Limited Partner as ordinary income to the extent attributable to the Limited
Partner's share of depreciation recapture, other "unrealized receivables" and
inventory that has substantially appreciated in value. See "Cost Recovery and
Depreciation -- Recapture of Cost Recovery Deductions" and "Disposition of
Units" below. No loss will be recognized by a Limited Partner upon
distributions, other than a loss recognized upon a distribution in liquidation
of his Partnership interest.
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The treatment and the potential restrictions on the use of Partnership
losses is discussed below. See "Income Tax Considerations -- Limitations on
Utilization of Partnership Losses.
A Limited Partner's distributive share of any taxable income generated by
the Partnership will not be deemed to be "net earnings from self employment."
Accordingly, such income will not be subject to the tax imposed on self-employed
persons by Sections 1401 through 1403 of the Code, commonly referred to as
"social security taxes."
Prospective investors who receive social security benefits should be aware
that, although income generated by the Partnership will not be deemed to be "net
earnings from self employment," such income will be included in a Limited
Partner's "modified adjusted gross income" under Section 86 of the Code for
purposes of determining whether a Limited Partner's social security benefits, if
any, are subject to taxation.
TIMING OF INCOME RECOGNITION. The Partnership's tax returns will be
prepared using the accrual method of accounting. Under the accrual method, the
Partnership will recognize as income items such as interest and rentals as and
when earned by the Partnership whether or not they are received. In certain
circumstances, where a lease provides for varying rental payments, increasing
(or decreasing) in the later years of the lease ("step rentals"), Section 467 of
the Code requires the lessor to take the rentals into income as if the rent
accrued at a constant level rate. This provision applies to sale-leaseback
transactions. An additional consequence of the application of Section 467 would
be a conversion of a portion of the Partnership's rental income (passive) from
such lease to interest income (portfolio). If step rentals are provided for in a
lease, the General Partner anticipates that the lease will fall within one of
the exceptions to such provision and, therefore, the Partnership should
recognize such income as it is earned under the lease rather than at a constant
level rate as otherwise provided by Section 467.
ALLOCATION OF PARTNERSHIP INCOME,
GAINS, LOSSES, DEDUCTIONS AND CREDITS
IN GENERAL. Cash distributions, if any, will be made quarterly, 99% to the
Limited Partners and one percent to the General Partner until the Limited
Partners have received an amount equal to $20 per Unit plus their 10% cumulative
compounded Cumulative Return; thereafter, cash distributions will be made 90% to
the Limited Partners and 10% to the General Partner. Distributions in redemption
of a Partner's Units pursuant to Article 12 of the Partnership Agreement (see
"Transferability of Units - Redemption Provision") will be equal to 105% of the
Selling Partner's Adjusted Capital Contribution at the time of the redemption.
Distributions made in connection with the liquidation of the Partnership or a
Partner's Units (other than pursuant to Section 8.1.3 of the Partnership
Agreement) will be made in accordance with the Partner's positive Capital
Account balance as determined under the Partnership Agreement and Treasury
Regulations.
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Generally, the General Partner will be allocated Net Profits equal to its
cash distributions (but not less than one percent of Net Profits) and the
balance will be allocated to the Limited Partners. Net Profits arising from
transactions in connection with the termination or liquidation of the
Partnership will be allocated in the following order: (i) First, to each Partner
in an amount equal to the negative amount, if any, of his Capital Account; (ii)
Second, an amount equal to the excess of the proceeds which would be distributed
to the Partners based on the Operating Distributions to the Partners over the
aggregate Capital Accounts of all the Partners, to the Partners in proportion to
their respective shares of such excess, and (iii) third, with respect to any
remaining Net Profits, to the Partners in the same proportions as if the
distributions were Operating Distributions.
Net Losses, if any, will be allocated 99% to the Limited Partners and one
percent to the General Partner.
The above allocations, however, are subject to several special allocations
designed in part to prevent a Partner's Capital Account (particularly a Limited
Partner's Capital Account) from going below zero and to allow the Partner's
Capital Account accurately to reflect the above-described sharing ratios.
Although a partnership agreement may allocate certain partnership items, or
overall profit and loss, in a manner disproportionate to the partners'
respective capital contributions (a "special allocation"), such an allocation
will be recognized for federal income tax purposes only if it has "substantial
economic effect." A special allocation generally will be considered to have such
effect if it actually affects the dollar amount of the partners' share of total
partnership income or loss independently of tax consequences.
SUBSTANTIAL ECONOMIC EFFECT. The final Treasury Regulations under Section
704(b) of the Code seek to define which partnership allocations have
"substantial economic effect." Under Sections 1.704-1(b)(2) through (4), an
allocation will be respected by the IRS only if it meets any one of the
following: (i) the allocation has "substantial economic effect"; (ii) the
allocation is in accordance with the partners' interests in the partnership; or,
(iii) the allocation is deemed to be in accordance with the partners' interests
in the partnership. Any allocation which fails to satisfy at least one of these
three tests will be reallocated in accordance with the partners' interests in
the partnership as defined in the Treasury Regulations.
Section 1.704-1(b)(2) sets forth a two-part analysis to determine whether
an allocation has "substantial economic effect." First, the allocation must have
"economic effect." In other words, the allocation must be consistent with the
underlying economic arrangement of the partners. If there is an economic benefit
or burden that corresponds to the allocation, the partner receiving such an
allocation should benefit from the economic benefit or bear the economic burden.
Normally, economic effect will be present only if the partners' capital accounts
are determined and maintained as required by the Treasury Regulations.
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Under these rules, liquidation proceeds must be distributed in accordance
with the partners' positive capital account balances (after certain adjustments)
and, following the liquidation of a partner's interest, the partner must be
unconditionally obligated to restore any deficit capital account balance by the
end of the taxable year or, if later, within 90 days after the date of
liquidation.
The Partnership Agreement provides that, upon dissolution and termination
of the Partnership, the Limited Partners have no obligation to restore a
negative capital account balance and that the General Partner must contribute to
the Partnership an amount equal to the lesser of (i) the deficit balance of the
General Partner's Capital Account, or (ii) the excess of 1.01% of the Capital
Contributions of the Limited Partners over any Capital Contribution of the
General Partner.
Nevertheless, the Partnership Agreement provides that no loss or deduction
may be allocated to a Partner if such allocation would create a deficit balance
in such Partner's Capital Account in excess of the amount such Partner is
obligated to restore to the Partnership or is treated as required to restore to
the Partnership and contains a "qualified income offset," requiring that if a
Partner who unexpectedly receives an adjustment, allocation, or distribution
described in subparagraphs (4), (5) or (6) of Treasury Regulation Section
1.704-1(b)(2)(ii)(d) which creates or increases a deficit in such Partner's
Capital Account will be allocated items of Net Profits and gain (consisting of a
pro rata portion of each item of partnership income, including gross income, and
gain for such year) in an amount and manner sufficient to eliminate such deficit
balance as quickly as possible.
Thus, the allocations provided in the Partnership Agreement will satisfy
the "alternate test for economic effect" notwithstanding the limitations on the
Partners' obligations to restore deficits in their Capital Accounts.
Second, the economic effect must be "substantial." Substantiality is
present if there is a reasonable possibility that the allocation will
substantially affect the dollar amounts to be received by a partner independent
of his tax consequences. If a shifting of tax attributes results in little or no
change to the partner's capital accounts, or if the shift is merely transitory,
they will not be recognized. Thus, if the allocation causes a shift in tax
consequences that is disproportionately large in relation to the shift in
economic consequence, there is a presumption that the economic effect of the
allocation is not substantial and such allocation will be disregarded (and the
partnership items will therefore be apportioned according to the partners'
respective interests).
The Treasury Regulations contain several exceptions and qualifications. For
example, if a partnership allocation fails the above "economic effect" test, it
may still be recognized if it meets the "economic effect equivalence" test. An
allocation will be viewed as having economic effect if the agreement among the
partners would in all cases produce the same results as the requirements
outlined above. Further, there are also several exceptions which come into play
where the partner does not have an absolute obligation to restore a negative
capital account.
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Pursuant to the Partnership Agreement, Net Profits, Net Losses and cash
distributions allocated to a Partner will be reflected by appropriate
adjustments to the Partner's Capital Account. Furthermore, the Partnership
Agreement contains provisions which would in all cases produce distributions of
liquidation proceeds on dissolution on the basis of the relative amounts of the
Partners' Capital Accounts to the extent of the balances of such Capital
Accounts. The tax allocations, however, are predicated on the assumption that
the management fees payable to the General Partner will be treated as deductible
guaranteed payments, rather than as Partnership distributions. See "Income Tax
Considerations -- Summary -- Deductibility of Fees."
RETROACTIVE ALLOCATIONS. Under Section 706(d) of the Code, "retroactive
allocations," i.e., allocations of items to partners before they became
partners, are prohibited. Section 706(d) of the Code and the Treasury
Regulations thereunder accomplish this prohibition by providing that if there is
a change in any partner's interest in any taxable year of the partnership, each
partner's distributive share of a partnership's tax items is to be determined by
use of any method prescribed by the Secretary of the Treasury in Treasury
Regulations which take into account the varying interests of the partners in the
partnership during such taxable year. The Partnership Agreement provides that
Limited Partners will be admitted to the Partnership and will commence sharing
in Net Profits, Net Losses and cash distributions on the day following the date
on which their Capital Contributions are received. Thus, if some Limited
Partners are admitted to the Partnership after others, those Limited Partners
admitted later may receive a smaller portion of each item of the Partnership's
Net Profits and Net Losses than the Limited Partners who were admitted earlier.
Nevertheless, those Limited Partners still will be obligated to make the same
Capital Contributions to the Partnership for their interests as the Limited
Partners who were admitted previously. In addition, where a Limited Partner
transfers Units during a taxable year, the Limited Partner may be allocated Net
Profits for a period and for which such Limited Partner will not receive a
corresponding cash distribution.
CONCLUSION. Based on the Treasury Regulations, the legislative history and
existing case law, Counsel is of the opinion that the allocations contained in
the Partnership Agreement of the Partnership's Net Profits and Net Losses will
be respected for federal income tax purposes.
LIMITATIONS ON UTILIZATION OF PARTNERSHIP LOSSES
TAX BASIS. A Limited Partner may not deduct losses in excess of his "tax
basis" in his Units, but may carry forward such excess losses to such time, if
ever, as his basis is sufficient to absorb them. A Limited Partner's tax basis
in his Units also determines the tax consequences of his distributions, as well
as the amount of the gain or loss he may realize upon any sale of his Units.
"Income Tax Considerations -- Disposition of Units."
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Initially, the tax basis of a Limited Partner's Units will be equal to the
amount of cash contributed by the Limited Partner to the Partnership or the
amount paid to a transferor Limited Partner, plus the Limited Partner's share of
the Partnership's nonrecourse liabilities, if any. A Limited Partner's initial
tax basis will then be (i) increased by the his allocable share of any Net
Profits for each year, contributions made to the Partnership by the Limited
Partner, and any increase in his share of nonrecourse liabilities, and (ii)
reduced by his allocable share of any Net Losses, the amount of any
distributions made to him during the year, and any reduction in his share of
nonrecourse liabilities.
The IRS has ruled that a partner acquiring multiple interests in a
partnership in separate transactions at different prices must maintain an
aggregate adjusted tax basis in a single partnership interest consisting of the
partner's combined interests. Possible adverse tax consequences could result
from the application of this ruling upon a sale of some but not all of a Limited
Partner's Units. See "Income Tax Considerations Disposition of Units."
AMOUNTS AT RISK. Section 465 of the Code limits the deductions that an
individual or a closely held "C" corporation may claim from an activity to the
aggregate amount with respect to which such taxpayer is "at risk" for such
activity as of the close of the taxable year.
Except as otherwise provided below, a Limited Partner will be considered to
be "at risk" with respect to the amount of money and the adjusted basis of other
property the Limited Partner contributes to the Partnership. A Limited Partner
will be at risk with respect to amounts borrowed by the Partnership only to the
extent that the Limited Partner is personally liable for their repayment or the
net fair market value of the Limited Partner's personal assets (other than
Units) that secure the indebtedness. A Limited Partner will not be considered at
risk with respect to any amounts that are protected against loss through
nonrecourse financing, guarantees, stop loss agreements or similar arrangements.
Because the Limited Partners will not be personally liable for Partnership
indebtedness, any such indebtedness will not augment the Limited Partners'
amounts at risk.
A Limited Partner's amount at risk will be reduced by (i) Net Losses which
are allowed as a deduction to the Limited Partner under the at-risk rules and
(ii) cash distributions received by a Limited Partner with respect to the
Limited Partner's Units, and increased by that Limited Partner's distributive
share of Net Profits. Investors should note that Net Losses that may be
allowable as a deduction under the at-risk rules may be disallowed currently
under the passive activity loss limitations. See "Income Tax Considerations --
Limitations on Utilization of Partnership Losses -- Passive Activity Losses
Limitations."
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If a Limited Partner's at risk amount is reduced below zero (due to a cash
distribution to a Limited Partner), the Limited Partner must recognize income to
the extent of the deficit at risk amount. Losses of the Partnership that have
been disallowed as a deduction in any year because of the at-risk rules will be
allowable, subject to other limitations, as a deduction to the Limited Partner
in subsequent years to the extent that the Limited Partner's amount at risk has
been increased.
It is not anticipated that, on an aggregate basis, the Partnership will
incur losses. However, the Code will allow the Partnership to aggregate its
equipment leasing activities only with respect to Equipment placed in service
during the same taxable year. Therefore, the "at risk" rules will be applied to
the net taxable income or loss resulting from leasing Equipment which was placed
in service during the same taxable year. This could result in a Partner's
deduction for losses with respect to certain items of Equipment being limited by
the "at risk" rules, even though he must recognize income with respect to other
items of Equipment. Counsel has rendered an opinion that each Limited Partner
will be considered "at risk" in any one year with respect to Equipment placed in
service in the same taxable year for purposes of Section 465 of the Code in an
amount equal to
(i) the Capital Contributions of such Limited Partner (provided that funds
for such contributions are not from borrowed amounts), less (ii) the sum of (a)
the total Net Losses with respect to such Equipment which have been allowed as
deductions to the Limited Partner under the at-risk rules and (b) cash
distributions received by the Limited Partner, plus (iii) the Limited Partner's
distributive share of total Net Profits with respect to such Equipment of the
Partnership.
PASSIVE ACTIVITY LOSSES LIMITATIONS. Section 469 of the Code prohibits an
individual, estate, trust, closely held "C" corporation, or personal service
corporation from using losses and credits from a business activity in which the
taxpayer does not materially participate, or a rental activity, to offset other
income, including salary and active business income as well as portfolio income
(such as dividends, interest and royalties, whether derived from property held
directly or through a pass-through entity such as a partnership). However,
Section 469(l)(3) of the Code authorizes the issuance of Treasury Regulations
requiring net income or gain from a limited partnership or other passive
activity to be treated as not from a passive activity. This regulatory authority
could be broad enough to treat income of any limited partnership as portfolio
income.
Interest income derived by the Partnership from the interim investment of
offering proceeds or reserves (and any income derived by the Partnership from
leases treated as loans for federal income tax purposes) will be treated as
portfolio income and, thus, will not be offset for these purposes by Partnership
deductions such as depreciation or cost recovery deductions.
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Losses from a passive activity that are not allowed currently will be
carried forward indefinitely, and are allowed in subsequent years against
passive activity income or in full upon complete disposition of the taxpayer's
interest in that passive activity to an unrelated party in a fully taxable
transaction.
Code Section 469(k), as clarified by IRS Notice 88-75, prevents the
utilization of losses from the Partnership and other passive activities to
offset income from a publicly traded partnership and further causes the income
from a publicly traded partnership to be investment income. Limited Partners,
therefore, will be unable to use losses from the Partnership to offset passive
income from publicly traded partnerships that are not taxed as corporations and
income from the Partnership cannot be offset by passive losses from publicly
traded partnerships that are not taxed as corporations.
If a Limited Partner incurs indebtedness in order to acquire or carry
Units, interest paid by the Limited Partner on the indebtedness will be subject
to the limitations for passive activity losses, except to the extent that the
indebtedness relates to "portfolio income," if any, of the Partnership. Interest
expense a Limited Partner attributable to "portfolio income" may be subject to
other limitations on its deductibility. See "Income Tax Considerations --
Interest Deduction Limitations."
Based on the above discussion, certain qualifications and representations
of the General Partner, assuming that all leases entered into by the Partnership
are considered "true leases" for federal income tax purposes, and subject to the
broad discretion granted to the Department of Treasury, it is Counsel's opinion
that Net Profits, Net Losses, and credits derived from the Partnership with
respect to its leasing activities will be subject to the passive activity rules.
Thus, any income produced by the Partnership should be income from a passive
activity. Counsel's opinion does not apply to any Partnership income
attributable to (i) the investment of Partnership funds in liquid investments
prior to the purchase of Equipment, (ii) the investment, in interest-bearing
accounts or otherwise, of amounts held by the Partnership as working capital,
security deposits, or in reserve, or (iii) Equipment with respect to which the
Partnership is determined not to be the owner for federal income tax purposes.
HOBBY LOSSES. Section 183 of the Code limits deductions attributable to
"activities not engaged in for profit." The phrase "activities not engaged in
for profit" means any activity other than one that constitutes a trade or
business, or one that is engaged in for the production or collection of income
or for the management, conservation or maintenance of property held for the
production of income. The Treasury Regulations provide that the determination of
whether an activity is engaged in for profit is to be made by reference to
objective standards, taking into account all of the facts and circumstances in
each case. The Treasury Regulations also provide that, although a reasonable
expectation of profit is not required, the facts and circumstances must indicate
that the taxpayer entered into the activity, or continued the activity, with the
objective of making a profit.
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The Treasury Regulations enumerate a number of nonexclusive factors which
should be taken into account in determining whether an activity is engaged in
for profit. The IRS has ruled that this test will be applied at the partnership
level.
Based upon these Treasury Regulations and the investment goals of the
Partnership, and certain representations made by the General Partner, Counsel
believes that the proposed activities of the Partnership will constitute an
activity engaged in for profit within the meaning of Section 183 of the Code.
However, the test of whether an activity is deemed to be engaged in for profit
is based on the facts and circumstances applicable from time to time including
the motives of the investors, and no assurance can be given that Code Section
183 may not be applied in the future to disallow the deductions.
FEES AND REIMBURSEMENTS TO THE GENERAL PARTNER AND AFFILIATES
GENERAL. There is no assurance that the IRS will not challenge the position
of the Partnership with respect to the amount, character, time of deduction or
tax treatment of any of the fees discussed herein or, if challenged, that the
position of the Partnership would be sustained. In any year such fees are
incurred, the disallowance of the deductibility of such fees would result in a
proportionate increase in the taxable income (or reduction in the loss) of the
Limited Partners with no associated increase in cash distributions with which to
pay any resulting increase in tax liabilities.
ORGANIZATIONAL AND OFFERING EXPENSES. The General Partner will be paid an
organizational fee for its services in organizing the Partnership and preparing
the Offering. The General Partner plans to make a reasonable allocation of such
fees between syndication expenses which must be capitalized and start-up
expenses which may be amortized over a 60-month period. The range of the fee
based on the minimum and maximum amounts sold will be between $45,000 and
$400,000. The organizational fee is anticipated to be approximately $300,000.
EQUIPMENT ACQUISITION AND DEBT PLACEMENT FEES. The cost of Acquisition Fees
will be capitalized to the cost of the Equipment. Debt Placement Fees will be
amortized over the term of the borrowings to which they relate.
THE EQUIPMENT MANAGEMENT FEE. The Equipment Management Fee should be
deductible as an ordinary and necessary business expense under Section 162 of
the Code, to the extent that its amount is commercially reasonable.
EQUIPMENT LIQUIDATION FEE. Equipment Liquidation Fees should be treated as
a cost of sale of the Equipment.
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OWNERSHIP OF EQUIPMENT
LEASE VERSUS SALE. The fact that each agreement between the Partnership and
a lessee will be denominated a "lease" may not be determinative of the character
for income tax purposes of the transaction which the agreement reflects. The IRS
may assert that any such lease constitutes an installment or conditional sale
for income tax purposes rather than a lease. If any of the Partnership's leases
were treated as sales for income tax purposes, the Limited Partners would not be
entitled to depreciation or cost recovery deductions with respect to the items
of Equipment involved. On the other hand, a portion of the rental payments
(otherwise fully taxable) would be deemed to constitute a return of capital,
which would not be taxable to the Limited Partners.
Whether a transaction is to be characterized as a lease for income tax
purposes involves a determination based upon all of the facts and circumstances
involved. Section 162(a)(3) of the Code provides that a deduction shall be
allowed for "rentals or other payments required to be made as a condition to the
continued use or possession, for purposes of the trade or business, of property
to which the taxpayer has not taken or is not taking title or in which he has no
equity."
The IRS has stated in Revenue Ruling 55-540, 1955-2 C.B. 39, that the
presence of any of the following six factors would be significant evidence of a
sale rather than a lease: (i) portions of the periodic payments are made
applicable to an equity interest to be acquired by the lessee; (ii) the lessee
will acquire title upon payment of a stated amount of rental payments; (iii) the
total amount which the lessee is required to pay for a relatively short period
of use constitutes an inordinately large proportion of the total sum required to
be paid to secure the transfer of title; (iv) the agreed rental payments
materially exceed the current fair rental value, indicating that the payments
include an element other than compensation for the use of the property; (v) the
property may be acquired under a purchase option at a nominal price; and (vi)
some portion of the periodic payments is specifically designated as interest or
is otherwise readily recognizable as the equivalent of interest.
The presence of a purchase option at a price less than fair market value is
the most influential factor cited by the IRS to support a determination that a
transaction will not be treated as a lease. Even if a purchase option is not
present, a constructive transfer of ownership to the lessee may be found if the
lease term is for all or substantially all of the economic useful life of the
property and the rental payments merely reimburse the lessor for its equity
investment and financing costs and pay the lessor a guaranteed sum reflecting a
market rate of return.
In several cases, the Tax Court has examined the lessor's profit motive
in entering into a lease. In general, the parties' characterization of a
transaction as a lease has been respected so long as the lessor retains
significant and genuine attributes of a traditional lessor, while the form of
the transaction as a lease has been disregarded if it was entered into
without any economic purpose apart from tax motives.
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See ESTATE OF THOMAS V. COMMISSIONER, 84 T.C. 412 (1985); RICE'S TOYOTA
WORLD, INC. V. COMMISSIONER, 81 T.C. 184 (1983), aff'd in part and rev'd in
part, 752 F.2d 89 (4th Cir. 1985); MUKERJI V. COMMISSIONER, 87 T.C. 926 (1986);
JAMES V. COMMISSIONER, 87 T.C. 876 (1986); and LARSEN V. COMMISSIONER, 89 T.C.
1229 (1987).
In Revenue Procedures 75-21, 1975-1 C.B. 715, 75-28, 1975-1 C.B. 752,
76-30, 1976-2 C.B. 647, and 79-48, 1979-2 C.B. 529, the IRS established those
requirements which must be satisfied in order for a lessor in a leveraged lease
transaction to receive an advance ruling that it is the owner of the property
subject to the lease. In brief, these requirements are: (i) the taxpayer must
anticipate a significant return on the lease apart from any tax benefits; (ii)
the estimated useful life of the property at the end of the lease term
(including fixed rate renewal options) must exceed 20% of the property's
estimated useful life at the beginning of the lease; (iii) the estimated value
of the property at the end of the lease term must exceed 20% of the taxpayer's
capitalized costs; (iv) any purchase options held by the lessee must be at fair
market value at the time of the option exercise; (v) none of the rental payments
may be credited against the option purchase price; (vi) the lease may not
contain put or abandonment clauses; and (vii) the property must not be limited
use property. Although Revenue Procedure 75-21 forbids an option price "at a
price less than its fair market value at the time the right is exercised," the
Tax Court has approved fixed price purchase options when the fixed price is the
expected fair market value upon exercise at the time the transaction is entered
into (see Lockhart Leasing v. Commissioner, 54 T.C. 301 (1970), aff'd, 446 F.2d
269 (10th Cir. 1971) and Northwest Acceptance Corp. v. Commissioner, 58 T.C. 836
(1972), aff'd, per curiam, 500 F.2d 1222 (9th Cir. 1974)).
The requirements of these Revenue Procedures are not necessarily indicative
of those standards which would be applied by a court in seeking to determine
whether a given transaction constitutes a lease for federal income tax purposes,
but the Revenue Procedures provide a safe harbor for the characterization of a
transaction as a lease, even where, as in the case of leases to be entered into
by the Partnership, the leases are not highly leveraged.
The Partnership intends to structure each lease transaction so that the
lease will be treated as a lease rather than a financing arrangement for federal
income tax purposes. Due to the factual nature of this determination, however,
neither the General Partner nor Counsel can offer any assurance or guarantee in
this regard. In addition, the Partnership may sell Equipment under Conditional
Sales Contracts in which case the Partnership will not be treated as the owner
of such Equipment. In this event, the Partnership and the Partners will not be
entitled to depreciation or cost recovery deductions with respect to such
Equipment. The Partnership, however, would be entitled to treat a portion of the
each payment as a return of its cost basis in purchasing such Equipment. The
Partnership is entitled to enter into Full Payout Net Leases. While the tax
consequences are less clear for Full Payout Net Leases, the IRS is likely to
take the position that the tax treatment is the same as for Conditional Sales
Contracts.
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Thus, if the Partnership enters into Full Payout Net Leases, the
Partnership and the Partners may not be entitled to depreciation or cost
recovery deductions with respect to such Equipment, although a portion of each
payment would be treated as a return of cost basis.
COST RECOVERY AND DEPRECIATION
COST RECOVERY RULES. The Tax Reform Act of 1986 substantially amended
the Accelerated Cost Recovery System ("ACRS") rules which were introduced
into law as part of the 1981 Tax Reform Act. Under revised Code Section 168,
which is generally effective with respect to property placed in service after
December 31, 1986, the period of time over which covered property must be
depreciated is generally, although not in every case, longer. The rate of
depreciation allowable for many types of property, however, has been
increased from 150 percent to 200 percent declining balance.
The revised system generally applies to new and used tangible property
("recovery property") which would otherwise be depreciable under Section 167
of the Code. As a general matter, the new system allows a taxpayer to recover
the cost or other tax basis of recovery property through deductions over a
prescribed period of time that is dependent upon the type of property
involved and not upon the property's actual economic useful life.
Under Section 168, the cost of Equipment which is held by the Partnership
and leased to others, and with respect to which the Partnership is considered to
be the owner for federal income tax purposes, will be capitalized by the
Partnership and deducted over a specified period. Except as discussed below with
respect to computer software, it is anticipated that substantially all of the
Partnership's recovery property will be "five-year property."
The Partnership will be required to recover its basis in such property
using either the straight-line method or the prescribed accelerated method (200%
declining balance switching to straight-line for the first taxable year that the
straight-line method will yield a larger allowance) over a five year recovery
period. Although the Partnership intends to elect to recover Equipment costs on
the straight-line method for the Equipment purchased with the proceeds of the
Offering, it may, in other cases elect to recover Equipment costs on the
accelerated basis.
If, however, any tax exempt entities become Limited Partners, the
Partnership likely will continue to use a straight-line depreciation method.
Both the accelerated and straight-line methods are applied to the entire cost or
other tax basis of the Equipment without regard to salvage value. The
Partnership intends to include Acquisition Fees as part of the cost of
Equipment.
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With respect to personal property, both the straight-line method and the
accelerated method generally use a "half-year" convention, which assumes that
property is placed in service at the midpoint of the taxable year, regardless of
when it is actually placed in service. For the year property is acquired and for
the year property is disposed of, only a half year of depreciation is allowable.
However, if the aggregate bases of property placed in service during the last
three months of the year exceed 40% of the aggregate bases of all of the
property placed in service during the year, then the taxpayer cannot use the
half-year convention. Instead, the taxpayer must use the mid-quarter convention
for all such property placed in service by the taxpayer for that year. For
purposes of this test, members of an affiliated group are treated as one
taxpayer.
Therefore, assuming that the Equipment in question is five-year recovery
property, that the straight-line method is elected, and that the mid-quarter
convention is not required, 10% of the tax basis of the Equipment would be
recovered in the year the property is placed in service. In each of the next
four succeeding years, 20% of the basis would be recovered, and the remaining
10% would be recovered in the sixth year. Under the accelerated method, again
assuming the mid-quarter convention is not required and that the appropriate
recovery period is five years, approximately 20% of the tax basis of the
Equipment would be recovered in the first year, 32% in the second year, 19.20%
in the third year, 11.52% in both the fourth and fifth years, and 5.76% in the
sixth year.
Cost recovery deductions must be prorated for the first taxable year
recovery property is placed in service if it is considered to be a short taxable
year i.e., if the Partnership is operating for less than 12 months. Proposed
Treasury Regulation Section 1.168-2(f). Under Section 1.168-2(f)(4), the
Partnership's first taxable year will be considered to begin on the date of its
initial substantial acquisition of Equipment.
This required proration of the cost recovery deductions of the Partnership
for its initial taxable year will reduce the tax benefits of an investment in
the Partnership for 1998, but the tax benefits will be increased in some
subsequent years because of increased cost recovery deductions in such years.
Certain Equipment acquired by the Partnership may be subject to the
so-called "anti-churning" rules found in either Code Section 168(f)(5) or
Section 168(e)(4) of the Internal Revenue Code of 1954. Equipment subject to the
anti-churning rules may be subject to depreciation under old Section 168 or
under Section 167. In addition, special rules under Code Section 168 apply to
recovery property used predominantly outside the United States and to recovery
property leased to tax exempt and governmental entities. The Partnership does
not anticipate acquiring significant amounts of Equipment in these categories.
A portion of the property acquired by the Partnership for lease to others
may consist of computer software. There are a number of uncertainties as to the
proper tax treatment of computer software costs.
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However, Revenue Procedure 69-21, 1969-1 C.B. 303, provides that if
computer software costs are included, without being separately stated, in the
costs of computer hardware, the software costs may be recovered on the same
basis as the hardware cost.
If computer software costs are separately stated, the software may be
treated as an intangible asset and its cost may be amortized ratably over a
five-year period or a shorter period if the software has a shorter useful life.
Section 167(f) of the Code, as amended by the Omnibus Reconciliation Act of
1993, provides that to the extent that a depreciation deduction is otherwise
allowable pursuant to Section 167(a) of the Code, the depreciation deduction for
computer software shall be computed using the straight line method and useful
life of 36 months.
If the Partnership is considered to be the owner of its property for
federal income tax purposes, the Partnership should be entitled to all cost
recovery, depreciation and amortization deductions allowable with respect to the
property under the existing Code, Treasury Regulations, court decisions and
other applicable law.
RECAPTURE OF COST RECOVERY DEDUCTIONS. All or part of the cost recovery,
depreciation or amortization deductions of the Partnership may be recaptured as
ordinary income upon a subsequent disposition by the Partnership of its
Equipment or other property or, with respect to a Partner's share of such
deductions, upon the disposition of the Partner's Units. See "Income Tax
Considerations -- Disposition of Units" below. The cost recovery, depreciation
or amortization deductions of the Partnership will be recaptured to the extent
of any gain on disposition. This recapture amount will be recognized in full as
ordinary income in the year of sale even if the Partnership has made an
installment sale of the property. See "Income Tax Considerations -- Sale of
Equipment."
If the Partnership has not made a basis adjustment election under Section
754, a purchaser of Units also may be required to recapture amounts attributable
to cost recovery, depreciation or amortization deductions taken by the
Partnership prior to his purchase of his Units when the Partnership disposes of
property subject to recapture or when the purchaser subsequently sells his
Units.
The Partnership does not intend to make an election under Section 754, but
may do so in the discretion of the General Partner. The absence of such an
election may make it more difficult for a Limited Partner to dispose of his
Units.
INTEREST DEDUCTION LIMITATIONS
SECTION 163(D). Section 163(d) of the Code restricts the ability of
noncorporate taxpayers to deduct interest on funds borrowed to acquire or carry
investment assets. Such taxpayers may deduct "investment interest" only to the
extent of the "net investment income" of the taxpayer for the taxable year. Any
interest disallowed under this provision in one year may be carried forward
indefinitely and claimed at such time as the taxpayer has sufficient investment
income.
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Interest expense that is allocable to a passive activity is subject to the
passive loss limitations, and is not subject to the investment interest
limitations. The General Partner anticipates that the Partnership will be deemed
a passive activity with respect to the income, gains, losses, deductions and
credits passed through to the Limited Partners and, therefore, will not figure
in a Limited Partner's investment interest limitations calculation.
Again, however, no assurances can be made because of the broad discretion
given to the Department of Treasury in Section 469(l). Consequently, because the
Partnership may borrow to acquire Equipment, it is possible that the Partnership
will generate interest expense. Further, because the Partnership will enter into
net leases, any interest expense that might be paid by the Partnership might be
considered to be investment interest expense and, as such, would be subject to
the limitations described herein. Because the amount of any Limited Partner's
investment interest that would be subject to disallowance in any year will
depend upon the other investment income and expenses of that Limited Partner,
the extent, if any, of such disallowance will depend upon that Limited Partner's
particular tax situation.
Additionally, the IRS might argue that all or some portion of any interest
incurred in connection with the acquisition or maintenance of a Unit in the
Partnership is investment interest. As noted above, however, it is anticipated
that any interest in the Partnership as a Limited Partner will be deemed a
passive activity (unless modified by Treasury Regulations or legislation). To
the extent the investment in a Unit is treated as a passive activity, any
interest incurred in acquiring or maintaining such an interest would not be
subject to Section 163(d) but instead would be subject to the passive activity
limitations.
SECTION 265. Section 265 of the Code denies any deduction for interest paid
by a taxpayer on indebtedness incurred or continued for the purpose of
purchasing or carrying tax exempt obligations. Denied interest may not be
deducted in any year. The IRS announced in Revenue Procedure 72-18, 1972-1 C.B.
740 (clarified by Revenue Procedure 74-8, 1974-1 C.B. 419), that the prescribed
purpose generally will be deemed to exist with respect to indebtedness incurred
to finance a "portfolio investment," including a limited partnership interest.
In the case of a Limited Partner owning tax exempt obligations, the IRS may
take the position that, with respect to a Limited Partner who borrows funds to
purchase Units, the interest paid by the Limited Partner on such loan should be
viewed as incurred on loans which enable him to continue carrying his tax exempt
obligations. If this position were upheld, the Limited Partner would not be
allowed to deduct such interest.
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CASH DISTRIBUTIONS
Cash distributions made to a Limited Partner, other than those in exchange
for, or redemption of, all or part of his Units, reduce a Limited Partner's
adjusted basis in his Units and may represent both a return of capital and
income. To the extent distributions of cash (including reductions in a Limited
Partner's proportionate share of Partnership nonrecourse liabilities, if any)
reduce a Limited Partner's adjusted basis in his Units to zero, such
distributions will be treated as returns of capital which generally do not
result in any recognition of gain or loss for federal income tax purposes. To
the extent such distributions or reductions in liabilities exceed a Limited
Partner's adjusted basis in his Units immediately prior thereto, such Limited
Partner will recognize gain to the extent of such excess. Such gain may be
treated as ordinary income to the extent the distribution is deemed to be in
exchange for a share of the Limited Partner's interest in the Partnership's
"substantially appreciated" inventory and "unrealized receivables" (which
includes depreciation recapture); any excess gain will be treated as capital
gain.
The gain that a Limited Partner will recognize as a result of a reduction
of liabilities in excess of such Limited Partner's adjusted tax basis in his
Units immediately prior thereto will result in a tax liability to the Limited
Partner without any cash distribution to such Limited Partner. To the extent a
Limited Partner's federal tax liabilities exceed cash distributions, such excess
in effect would be a nondeductible cost to such Limited Partner.
SALE OF EQUIPMENT
Gain realized by the Partnership upon the sale or other disposition of any
of its properties, including Equipment, held for more than 12 months will
generally be treated as Section 1231 gain, as discussed below (except to the
extent that the gain represents depreciation recapture taxable as ordinary
income --see "Income Tax Considerations - Cost Recovery and Depreciation --
Recapture of Cost Recovery Deductions"), unless it is determined that the
particular property sold constitutes stock in trade or property held primarily
for sale to customers in the ordinary course of the Partnership's trade or
business. Under the general rule of Section 1231, to the extent that the
Partnership assets that are sold constitute Section 1231 assets (i.e.,
depreciable property used in the Partnership's trade or business and held for
more than 12 months), a Partner's share of the net gains or losses incurred
would be treated as long-term capital gains, or ordinary losses, as the case may
be.
To the extent that such assets are subject to depreciation recapture, gains
will be treated as ordinary income. In addition, if Partnership assets are sold
on an installment sale basis, Code Section 453(i) requires that all depreciation
recapture be recognized as ordinary income in the year of disposition, whether
or not any payments are received in that year. Furthermore, a taxpayer who has a
net Section 1231 gain for the taxable year must look back to the five most
recent preceding taxable years commencing after 1981 for possible "recapture" of
net Section 1231 losses for such past years. If there were any net Section 1231
losses for such past periods, the taxpayer must treat his current year's net
Section 1231 gain as ordinary income to the extent of the amount of unrecaptured
net Section 1231 losses for such past years.
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If the Partnership is held to be a "dealer" (defined as a taxpayer
regularly engaged in the sale of personal property of the same type on the
installment basis), or if any of the Equipment sold is found to constitute stock
in trade or property held primarily for sale to customers in the ordinary course
of the Partnership's trade or business, gain or loss on the sale or other
disposition of such Equipment will be ordinary income or loss, and under Code
Section 453(b), gain from such dispositions will not be eligible for the
installment sales method of reporting income.
In determining the amount realized upon the sale, exchange or other
disposition of a Partnership asset, the Partnership must include the amount of
any liability to which the property is subject. Thus, the Partnership's gain or
loss on the sale of any such property may exceed the cash proceeds of such sale.
In such case, the income tax payable by the Limited Partners with respect to
such gain may exceed the cash distributed to the Limited Partners. Further, the
Partnership may, instead of receiving all cash, take back purchase money
obligations as part of the consideration for the sale of any its of property.
While the Partnership anticipates that any such sale would qualify as an
"installment sale" for federal income tax purposes, any depreciation recapture
with respect to the item of property still would have to be recognized in full
in the year of sale. See "Income Tax Considerations -- Cost Recovery and
Depreciation -- Recapture of Cost Recovery Deductions." In addition, depending
upon the amount of the Partnership's and any individual Limited Partner's
outstanding installment obligations at the end of any year, a Limited Partner
may be liable for the payment of interest on the amount of the tax liability
deferred as a result of the "installment sale" of Equipment.
A foreclosure of a security interest in Partnership property will generally
be treated as a sale of such property, subject to the rules discussed above.
Ordinarily, gain will be realized to the extent of the excess of the
indebtedness over the adjusted basis of the property at the time of the
foreclosure.
Gain realized on a sale or other disposition of an item of Equipment should
be treated as income from the activity of leasing such Equipment, which should
permit any amounts disallowed under Section 465 for the leasing of such
Equipment in previous years to be allowed for the taxable year of the sale. See
"Income Tax Considerations -- Limitations on Utilization of Partnership Losses
- -- Amounts at Risk" and "Summary of the Partnership Agreement."
The Partnership has not been organized to operate as a "dealer" in
Equipment and does not presently intend to hold any Equipment as inventory, as
stock in trade or primarily for sale to customers in the ordinary course of its
trade or business. Under existing law, whether property is held as inventory is
a question of fact, depending upon all of the circumstances of the particular
transaction. There are cases holding, for instance, that property acquired by a
taxpayer for investment purposes was later held as inventory for sale to
customers in the ordinary course of business. Other cases have held that
taxpayers continuously involved in buying and selling property still may hold
specific property for investment.
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Important factors in making these determinations generally include the
purpose or reason for the purchase and sale of the property, the continuity of
sales or sales-related activities, the number and frequency of sales, and the
substantiality of sales income compared to the taxpayer's other income. The
Partnership intends to purchase Equipment for investment only and to engage in
the business of leasing such Equipment. Accordingly, the Partnership anticipates
that it will not be treated as holding any Equipment primarily for sale in the
ordinary course of its trade or business. Nevertheless, there is no assurance
that the IRS will not take the contrary position.
DISPOSITION OF UNITS
IN GENERAL. A Partner who sells or otherwise disposes of his Units,
including redemptions of a Limited Partner's Units pursuant to Article 12 of the
Partnership Agreement, will realize taxable gain or loss measured by the
difference between the selling or redemption price and the adjusted tax basis of
his Units. See "Income Tax Considerations -- Limitations on Utilization of
Partnership Losses -- Tax Basis." Gain or loss, in general, will be taxed as
short-term or long-term capital gain or loss, depending on the period the Units
have been held (provided the Partner is not a dealer in the Units).
However, gain attributable to the Partner's share of "substantially
appreciated inventory items" and "unrealized receivables" of the Partnership, as
those terms are defined in Code Section 751, will be taxed as ordinary income.
Unrealized receivables include any cost recovery, depreciation and amortization
deductions of the Partnership that would have been recaptured upon a
hypothetical sale of the Equipment.
As a result, Code Section 453(i), which requires that recapture amounts be
recognized in full in the year of sale even if the sale qualifies as an
installment sale, may apply to an installment sale of Units. See "Income Tax
Considerations -- Cost Recovery and Depreciation -- Recapture of Cost Recovery
Deductions." In determining the amount realized upon the sale or exchange of
Units, a Limited Partner must include, among other things, his allocable share
of Partnership indebtedness included in his basis in such Units. See "Income Tax
Considerations -- Limitations on Utilization of Partnership Losses -- Tax
Basis." Thus, a Partner's gain on the sale or exchange of Units should be
treated as income from the activity of leasing the Equipment. As a result,
suspended losses, if any, from prior years could offset the gain realized on the
sale or exchange of Units. See "Income Tax Consideration -- Limitation on
Utilization of Partnership Losses -- Amounts at Risk -- Passive Activity Losses
Limitations." A Partner who sells or otherwise disposes of his Units must also
report his share of the taxable income or loss of the Partnership for the
portion of the taxable year of the Partnership during which he owned his Units.
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GIFT OF UNITS. Since the tax consequences of any gift or transfer will
depend upon the particular circumstances and upon the individuals or
organizations involved in the transaction, before making any gift of Units, a
Limited Partner should consult his tax advisor as to the consequences of such a
gift and as to the basis of the Units in the hands of his successor.
DEATH OF PARTNER. If a Limited Partner dies, the fair market value of his
Units at death (or, if elected, at the alternate valuation date) will be subject
to federal estate taxation. Under present law, the death of a Limited Partner
does not result in a sale or exchange giving rise to a federal income tax. It is
not clear what the tax consequences are if the decedent's proportionate share of
the Partnership's liabilities exceeds the adjusted basis of his Units at death.
In this event, some gain may be recognized to the decedent or his estate upon
the distribution of the Units to the extent of such excess. The cost or other
basis of the Units inherited from the decedent generally is "stepped up" or
"stepped down" to its fair market value for federal income tax purposes.
NOTICE OF TRANSFER. Pursuant to Code Section 6050K, a Limited Partner who
transfers an interest in a partnership, whether by sale, gift or otherwise, must
notify the partnership of such transfer within 30 days of the transfer or, if
earlier, by January 15 of the calendar year following the calendar year in which
transfer occurs.
In addition, Section 6050K requires a partnership to file a separate
information return (Form 8308) with the partnership's Form 1065 for the tax year
in which the transfer occurs whenever there is a transfer of a partnership
interest involving a Code Section 751(a) sale or exchange. If a partnership
fails to timely file the Form 8308 with its Form 1065, the partnership may be
liable for a penalty of $50 per unreported transfer with an annual maximum
penalty of $250,000. A Limited Partner who fails to inform the Partnership of a
transfer of the Limited Partner's Units in accordance with the rules described
in this paragraph is liable for a penalty of $50 per unreported transfer with an
annual maximum penalty of $100,000. Each such return must contain the following:
(a) the names, addressees and taxpayer identification numbers of the transferee
and transferor involved in the exchange and (b) the date of the sale or
exchange.
Once notified, Section 6050K(b) of the Code requires the partnership to
provide the transferee and the transferor with a copy of the completed Form
8308, and to include the name, address and telephone number of the information
contact of the partnership required to make the return.
The Partnership must provide this information by January 31 of the calendar
year following the transfer. Failure to timely provide this notice may result in
a $50 penalty per unreported transfer with an annual maximum penalty of
$100,000.
However, the partnership is not required to file a Form 8308 or furnish
statements regarding any Section 751(a) exchanges until it has been notified, or
has reason to know, that such an exchange has taken place.
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The partnership may rely on a written statement from the transferor that
the transfer was not a Section 751(a) exchange unless the partnership has
knowledge to the contrary. These reporting requirements may increase the
Partnership's administrative costs. If a return is required to be filed by a
broker pursuant to Section 6045 of the Code with respect to the transfer, no
return is required under Code Section 6050K by either a selling Limited Partner
or the Partnership. See Treasury Regulations Section 1.6050K-1.
TERMINATION OF THE PARTNERSHIP FOR TAX PURPOSES
The Code provides that if 50% or more of the capital and profits interests
in a partnership is sold or exchanged within a single twelve-month period, the
partnership will terminate for tax purposes. The Partnership Agreement prohibits
the transfer of any Unit if such transfer would result in the termination of the
Partnership for federal income tax purposes. However, involuntary transfers
(such as transfers by death, dissolution, etc.) could possibly result in
termination of the Partnership for federal income tax purposes.
Under recently promulgated treasury regulations, if the partnership
should terminate for tax purposes, the terminated partnership ("Old and
Par") will be treated (i) as having transferred all of its assets subject to
liabilities to a new partnership ("New Par") in exchange for partnership
interests therein, and then (ii) as having distributed such partnership
interests in New Par to the partners of Old Par in liquidation of Old Par. As
a result, among other items, the change in Partnership Tax Basis which could
have occurred under prior law as a result of the deemed distribution of
partnership assets would be avoided.
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Note, however, that if the Proposed Treasury Regulations with respect to
partnership terminations described above are finalized in their present form,
this potential for gain recognition upon a partnership termination will be
eliminated, except to the extent that (i) the amount of the reduction, if any,
in a Limited Partner's share of Partnership liabilities as a result of the
partnership termination exceeds (ii) such Limited Partner's adjusted tax basis
of his Units.
In addition, upon a Partnership termination, the Partnership's taxable year
would terminate. If the Limited Partner's taxable year were other than the
calendar year, the inclusion of more than one year of Partnership income in a
single taxable year of the Limited Partner could result. Because the new
partnership would be treated as a separate entity for federal income tax
purposes, the tax elections of the prior partnership would not generally remain
valid. Thus, new federal income tax elections would generally be required to be
made.
NO SECTION 754 ELECTION
Due to the burdensome and costly recordkeeping requirements that a Section
754 Election entails, it is unlikely that the General Partner will exercise its
discretion in favor of making this election to adjust the basis of Partnership
property in the case of transfers of Units. If the General Partner does not make
a Code Section 754 Election, a subsequent Limited Partner's share of gain or
loss upon the sale of the Partnership assets will be determined by taking into
account the Partnership's tax basis in the assets and without reference to the
cost associated with acquiring the Units. Thus, the absence of a Code Section
754 Election may reduce the marketability of Units.
INVESTMENT BY TAX EXEMPT ENTITIES
The income earned by a tax exempt entity, including a qualified employee
pension or profit sharing trust or an individual retirement account (a "Tax
Exempt Entity"), is generally exempt from taxation. However, gross UBTI of a Tax
Exempt Entity is subject to tax to the extent that, when combined with all other
gross UBTI of the Tax Exempt Entity for a taxable year, it exceeds all
deductions attributable to the UBTI plus $1,000 during the taxable year. Such
UBTI will be taxable at ordinary income rates and may be subject to the
alternative minimum tax. See "Income Tax Considerations -- Taxes-Alternative
Minimum Tax."
The leasing of tangible personal property is treated for purposes of the
Code as an unrelated trade or business. See Revenue Rulings 78-144, 1978-1 C.B.
168, 69-278, 1969-1 C.B. 148, and 60-206, 1960-1 C.B. 201. The IRS has ruled
that a partner's distributive share of income or gain from a partnership engaged
in the leasing of tangible personal property is treated in the same manner as if
such income or gain were realized directly by the partner. Therefore, a Tax
Exempt Entity that invests in the Partnership will be subject to the tax on UBTI
for any taxable year of the Tax Exempt Entity to the extent the Partnership
generates income from the leasing of the Equipment and the total of the Tax
Exempt Entity's share of that income for the taxable year plus its UBTI from all
other sources for the taxable year exceeds the sum of all deductions
attributable to the UBTI plus $1,000.
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Although the Partnership's portfolio income (e.g., interest income from the
investment of Partnership cash balances) generally will not produce UBTI for a
Tax Exempt Entity that invests in the Partnership, a portion of such Tax Exempt
Entity's portfolio income from the Partnership will constitute UBTI pursuant to
the "debt-financed property" rules if the Tax Exempt Entity finances its
acquisition of Units with debt.
Furthermore, social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts, and qualified group legal services
plans that are exempt from taxation under paragraphs (7), (9), (17), and (20),
respectively, of Code section 501(c) are subject to different UBTI rules, which
generally will require them to characterize all income from the Partnership as
UBTI.
Except to the extent of gain or loss from the sale, exchange, or other
disposition of acquisition indebtedness property and except to the extent the
Equipment constitutes inventory or property held primarily for sale to customers
in the ordinary course of a trade or business, gains from the sale or exchange
of the Equipment generally will be excludable from the scope of UBTI. However,
any gain on the disposition of Equipment that is characterized as ordinary
income as a result of the recapture of cost recovery or depreciation deductions
will constitute UBTI for Tax Exempt Entities.
If the gross income taken into account in computing UBTI exceeds $1,000,
the Tax Exempt Entity is obligated to file a tax return for such year on IRS
Form 990-T. Neither the Partnership nor the General Partner expects to undertake
the preparation or filing of IRS Form 990-T for any Tax Exempt Entity in
connection with an investment by such Tax Exempt Entity in the Units. Generally,
IRS Form 990-T must be filed with the IRS by May 15 of the year following the
year to which it relates.
Penalties may be imposed by the IRS for failing to file this tax return
when required, and, if tax is due, additional penalties and interest may be
imposed if the tax is not paid. In addition, any tax due should be paid by the
Tax Exempt Entity.
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PLEASE REVIEW "ERISA CONSIDERATIONS" AND GET ADVICE FROM A QUALIFIED TAX ADVISOR
FOR POTENTIAL REALIZATION OF UNRELATED BUSINESS TAXABLE INCOME (UBTI).
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INVESTMENT BY NONRESIDENT ALIEN INDIVIDUALS AND FOREIGN CORPORATIONS
Nonresident alien individuals and foreign corporations that become Limited
Partners will, like the Partnership, be deemed to be engaged in the conduct of a
trade business within the United States. Under Sections 871(b) and 882(a) of the
Code, nonresident aliens individuals and foreign corporations, respectively,
will be subject to United States income tax on their allocable shares of any
Partnership taxable income.
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Nonresident alien individuals and closely held foreign corporations that
acquire Units will also be subject to the same limitations on the deduction of
Partnership losses that apply to domestic Limited Partners. See "Income Tax
Considerations -- Certain Principles of Partnership Taxation, Limitations on
Utilization of Partnership Losses."
Foreign corporations may also be subject to the branch profits tax under
Section 884 of the Code. Such tax is equal to 30% of a foreign corporation's
earnings and profits effectively connected with a United States business that
are withdrawn (or deemed withdrawn) from investment in the United States. This
tax is payable in addition to the regular United States corporate tax. In
certain circumstances, the imposition of the branch profits tax may be
overridden by the nondiscrimination provisions of applicable United States tax
treaties.
The Partnership will be required to withhold from distributions to each
foreign Limited Partner an amount equal to a percentage of the Partnership's
taxable income that is allocable to the Limited Partner. Section 1446 of the
Code provides that the amount of tax to be withheld is the "applicable
percentage" of the taxable income of the Partnership allocable to foreign
Limited Partners. The applicable percentage is equal to the highest appropriate
tax rate, currently 39.6% for individual foreign Limited Partners and 35% for
corporate foreign Limited Partners.
See "Income Tax Considerations -- Taxes." Such withheld amounts will be
credited against the Limited Partners' federal income tax liabilities for the
taxable year in which withheld, and any excess will be refundable. Foreign
Limited Partners may be entitled to tax credits for United States taxes in their
countries of residence, and should consult with their local and United States
tax advisors with regard to the tax consequences of an investment in Units.
TAXES
GENERAL. The highest stated marginal individual tax rate is currently
39.6%. For 1999, the deduction for personal exemptions begin to be phased out
for single taxpayers with an adjusted gross income over $126,600 and for
married taxpayers filing joint returns with an adjusted gross income over
$189,950. Further, otherwise allowable itemized deductions (other than
medical expenses, casualty and theft losses and investment interest) for 1999
are reduced by an amount equal to three percent of a taxpayer's adjusted
gross income over $126,600 ($63,300 in the case of a married person filing a
separate return). Such deductions are not reduced by more than 80%. For
purposes of the Alternative Minimum Tax set forth in Section 55 of the Code
(see discussion below), the 3% reduction in allowable itemized deductions
does not apply; however, the taxpayer is subject to additional limitations on
deductions as set forth in Section 56 of the Code and other provisions
relating to Alternative Minimum Tax.
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CAPITAL GAINS AND LOSSES. Net capital gains (i.e., the excess of net
long-term capital gains over short-term capital losses) of individuals are
taxed at a 20% maximum tax rate. Generally, a special rate of 18% applies to
property acquired after December 31, 2000, when the asset was held more than
5 years. Capital losses, whether long-term or short-term, of individuals are
only available to offset $3,000 of ordinary income in a given taxable year.
Any remaining capital loss may be carried forward indefinitely.
TWO PERCENT FLOOR ON MISCELLANEOUS ITEMIZED DEDUCTIONS. Noncorporate
Limited Partners may deduct expenses paid or incurred for (a) the production or
collection of income, (b) the management, conservation, or maintenance of
property held for the production of income, or (c) in connection with the
determination, collection or refund of a tax, only to the extent such expenses
exceed two percent of adjusted gross income. This rule applies with respect
to indirect deductions through pass-through entities (such as the Partnership)
of amounts that would not be allowable as a deduction if paid or incurred
directly by an individual. Although it is not anticipated that the Partnership
will incur any material expenses of this nature, the two percent limit described
above may cause certain expenses allocable to Limited Partners to be
nondeductible.
ALTERNATIVE MINIMUM TAX. This discussion only addresses the alternative
minimum tax as it applies to noncorporate taxpayers (and to shareholders of an S
corporation). The first step in determining a taxpayer's alternative minimum tax
liability, if any, is calculation of the taxpayer's alternative minimum taxable
income. Alternative minimum taxable income is computed by adjusting the
taxpayer's taxable income in accordance with the rules set forth in Sections 55,
56 and 58 of the Code, and by increasing the resulting amount by the taxpayer's
items of tax preference described in Code Section 57. Alternative minimum
taxable income is then reduced by a specified exemption amount and by the
taxpayer's alternative minimum tax foreign tax credit for the taxable year. The
exemption amounts are $45,000 for married couples filing joint returns, $33,750
for single individuals, and $22,500 for married persons filing separate returns.
The exemption is phased out above certain alternative minimum taxable income
levels: $150,000 for married taxpayers filing joint returns, $112,500 for single
taxpayers, and $75,000 for married taxpayers filing separate returns.
The alternative minimum tax rate is 26% on the amount of the taxpayer's
alternative minimum taxable income which does not exceed $175,000 (after taking
into account the exemption amount) and 28% on the amount exceeding $175,000. A
taxpayer is only required to pay an alternative minimum tax liability to the
extent that the amount of that liability exceeds the liability which the
taxpayer would otherwise have for the regular federal income tax.
One of the adjustments to taxable income established by Code Section 56
relates to the amount of cost recovery deduction claimed on personal property.
To derive a taxpayer's alternative minimum taxable income, the taxpayer's
taxable income must be adjusted by an amount equal to the difference between (i)
the amount of cost recovery deductions claimed by the taxpayer with respect to
personal property and (ii) the amount which would have been allowable over the
asset depreciation range class life of the property using the 150% declining
balance method, converting to straight-line when necessary to maximize the
remaining deductions.
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The adjustment results in a basis in the depreciated property for
alternative minimum tax purposes which may differ from its basis for regular tax
purposes.
Thus, upon disposition of the property, the taxpayer will generally
recognize less gain (or a greater loss) for alternative minimum tax purposes
than for regular tax purposes. Items of tax preference include other items which
are not anticipated to be generated by the Partnership, but may apply in the
case of certain Limited Partners due to their particular facts and circumstances
unrelated to the Partnership.
PARTNERSHIP TAX RETURNS AND TAX INFORMATION
The General Partner will file the Partnership's tax returns using the
accrual method of accounting and will adopt the calendar year as the
Partnership's taxable year. See "Income Tax Considerations -- Certain Principles
of Partnership Taxation." The Partnership will provide tax information to the
Limited Partners within 75 days after the close of each taxable year. If a
Limited Partner is required to file its tax return on or before March 15, it may
be necessary for the Limited Partner to obtain an extension to file if the tax
information referred to above is not distributed until the end of the 75-day
period.
Limited Partners will be required to file their returns consistent with the
information provided on the Partnership's informational return or notify the IRS
of any inconsistency. A failure to notify the IRS of an inconsistent position
allows the IRS automatically to assess and collect the tax, if any, attributable
to the inconsistent treatment.
IRS AUDIT OF THE PARTNERSHIP
The tax return filed by the Partnership may be audited by the IRS.
Adjustments, if any, from such audit may result in an audit of the Limited
Partners' own returns. Any such audit of the Limited Partners' tax returns could
result in adjustments of non-Partnership as well as Partnership items of income,
gain, loss, deduction and tax preference.
Audit proceedings are conducted at the partnership level and, if the IRS
initiates an administrative proceeding or makes a "final adjustment" at the
partnership level, it must notify each partner of the beginning and completion
of the partnership administrative proceedings. Notice need not be given,
however, to a partner who has less than a one percent interest in a partnership
which has more than 100 partners, although a group of such partners having at
least a five percent interest in partnership profits in the aggregate may
designate a member of the group to receive notice.
Because the Partnership will have more than 100 Limited Partners, the IRS
will not notify individual Limited Partners of an audit of the Partnership. The
General Partner is the "tax matters partner" who will normally have the
authority to negotiate with the IRS with respect to any Partnership tax matter;
the General Partner will also have the right to initiate judicial proceedings.
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A Limited Partner will thus be unable to control either an audit of the
Partnership or any subsequent litigation. If, in such event, the General Partner
does not go to court, any Limited Partner entitled to receive notice of the
proceedings may bring an action to challenge any proposed audit findings by the
IRS. A special statute of limitations exists in connection with the IRS's right
to audit matters at the partnership level.
INTEREST AND PENALTIES
With certain exceptions, a penalty will be assessed for each month or
fraction thereof (up to a maximum of five months) that a partnership return is
filed either late or incomplete. The monthly penalty is equal to $50 multiplied
by the number of partners in the partnership during the year for which the
return is due.
With certain exceptions, a penalty will be assessed if the Partnership
fails to furnish to the Limited Partners a correct Schedule K-1 to the federal
income tax return for the Partnership on or before the prescribed due date
(including any extension thereof). The penalty is equal to $50 multiplied by the
number of partners not furnished a correct Schedule K-1 on or before the
prescribed due date (including any extension thereof), with a maximum penalty of
$100,000 per calendar year.
Section 6662 of the Code establishes a penalty equal to 20% (40% in certain
gross valuation misstatements) on underpayment of tax attributable to
substantial valuation overstatements. This penalty applies only if (i) the value
or adjusted basis of any property as claimed on an income tax return exceeds
200% of the correctly determined amount of its value or adjusted basis and (ii)
the underpayment of tax attributable to the substantial overvaluation exceeds
$5,000 ($10,000 in the case of a corporation other than an S corporation or
personal holding company). All or any part of the penalty may be waived by the
IRS upon the taxpayer's showing that a reasonable basis existed for the
valuation claimed on the return and that the claim was made in good faith. If
the Partnership were to overstate the value of Equipment, a Limited Partner
might be liable for this penalty.
There is a 20% penalty on the amount of an underpayment of tax attributable
to a taxpayer's negligent disregard of applicable rules and regulations or to
the "substantial understatement" of a tax liability. A substantial
understatement is defined as an understatement for the taxable year that exceeds
the greater of 10% of the required tax or $5,000 ($10,000 for corporations other
than personal holding companies and S corporations). The penalty can be avoided
either by disclosing the questionable item on the return or by showing that
there was "substantial authority" for taking the position on the return. If a
questionable item is related to a tax shelter, the understatement penalty can
only be avoided by showing that the taxpayer reasonably believed that the
treatment of the item was "more likely than not" the proper treatment. Based
upon the representations of the General Partner, Counsel believes the
Partnership will not be characterized as a "tax shelter" for these purposes.
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It should also be noted that the General Partner will not cause the
Partnership to claim a deduction unless the General Partner believes, based upon
the advice of its accountants or Counsel, that substantial authority exists to
support the deduction.
All interest payable with respect to a deficiency is compounded daily.
Interest rates are redetermined quarterly and are based on the federal
short-term interest rate (the average rate of interest on Treasury obligations
maturing in less than three years) for the first month of the preceding quarter
plus three percent.
FOREIGN TAX CONSIDERATIONS
As noted above, the Partnership may acquire Equipment which is operated
outside the United States. As a consequence, Limited Partners may be required to
file returns and pay taxes in foreign jurisdictions with respect to the foreign
source income of the Partnership. The income taxed by the foreign jurisdiction
would in such a case be calculated according to the tax laws of the foreign
jurisdiction which may or may not correspond with applicable United States
standards.
Limited Partners who have foreign tax liabilities as a result of the
Partnership may be entitled to a foreign tax credit or to a deduction for
foreign taxes paid which can be utilized to reduce their United States tax
liabilities or taxable income, respectively. The calculation of the foreign tax
credit is quite complex and no assurance can be given that a credit will be
available in the amount of any foreign tax paid.
In particular, prospective Limited Partners should be aware that United
States law does not generally allow a foreign tax credit greater than the
taxpayer's United States federal income tax liability with respect to the
foreign source income of the taxpayer calculated separately for certain types of
income including shipping income and passive rental income. In the event the
Partnership earns these types of income, a Limited Partner must compute
separately the foreign tax credit for each type of income. The foreign source
income of a taxpayer is calculated according to United States rather than the
foreign jurisdiction's tax law. It is possible that a foreign country might
impose a tax in an amount greater than the allowable foreign credit under United
States law. In such a case, Limited Partners would be subject to a higher
effective rate of taxation than if no foreign tax had been imposed. To the
extent that all income taxes paid to a foreign country on a certain type of
income exceed the amount of foreign tax credit allowable in any year for such
type of income, the excess foreign tax credits generally may be carried back two
years or forward five years to offset United States income taxes on that certain
type of foreign source income in those tax years. If the Partnership were to
suffer an overall foreign loss in one year and incur foreign taxes in a
subsequent year, the amount of foreign tax credit allowable in that subsequent
taxable year could be reduced on account of the prior foreign loss, regardless
of whether the loss resulted in a United States tax benefit to the Limited
Partners. Each Limited Partner should consult his own tax advisor regarding the
applicability of foreign taxes to his own situation.
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Prior to the Partnership entering into an arrangement which contemplates
the use of Equipment outside the United States, the General Partner will consult
with its Counsel and with special counsel located in the foreign jurisdiction
concerning the possibility of structuring the transaction in a manner which will
enable the Limited Partners to avoid being required to file income tax returns
in the foreign jurisdiction. The General Partner has discretion to cause the
Partnership to enter into any such arrangement.
PARTNERSHIP ANTI-ABUSE RULES
Treasury Regulations have recently been promulgated (the "Anti-Abuse
Rules") which purportedly grant authority to the IRS to recharacterize certain
transactions to the extent that it is determined that the utilization of
partnerships is inconsistent with the intent of the federal partnership tax
rules. Under these Anti-Abuse Rules, the IRS may, under certain circumstances,
(i) recast transactions which attempt to use the partnership form of ownership,
or (ii) otherwise treat the partnership as an aggregation of its partners rather
than a distinct separate entity, as appropriate in order to carry out the
purposes of the partnership tax rules. The Anti-Abuse Rules also provide that
the authority to recharacterize transactions is limited to circumstances under
which the tax characterization by the taxpayer is not, based on all facts and
circumstances, clearly contemplated under the Code or the applicable Treasury
Regulations.
These Anti-Abuse Rules are intended to impact only a small number of
transactions which improperly utilize partnership tax rules. It is therefore not
anticipated that the Partnership and/or the transactions contemplated herein
will be affected by the promulgation or administration of these Anti-Abuse
Rules. In light of the broad language incorporated in these Regulations,
however, no assurance can be given that the IRS will not attempt to utilize the
Anti-Abuse Rules to alter, in whole or part, the tax consequences described
herein with regard to an investment in the Partnership.
FUTURE FEDERAL INCOME TAX CHANGES
Neither the General Partner nor Counsel can predict what further
legislation, if any, may be proposed by members of Congress, by the current
administration, or by any subsequent administration, nor can either predict
which proposals, if any, might ultimately be enacted. Neither the General
Partner nor Counsel can predict what changes may be made to existing Treasury
Regulations, or what revisions may occur in the IRS' ruling policy.
Consequently, no assurance can be given that the income tax consequences of an
investment in the Partnership will continue to be as described herein. Any
changes adopted into law may have retroactive effect.
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STATE TAXES
In addition to the federal income tax considerations described above,
prospective investors should consider applicable state and local taxes which may
be imposed by various jurisdictions. A Limited Partner's distributive share of
the income or loss of the Partnership generally will be required to be included
in determining the Limited Partner's reportable income for state or local tax
purposes in the jurisdiction in which the Limited Partner is a resident.
Moreover, Pennsylvania and a number of other states in which the Partnership may
do business generally impose state income tax on a nonresident and foreign
Limited Partner's distributive share of Partnership income which is derived from
such states. Pennsylvania and a number of other states have adopted a
withholding tax procedure in order to facilitate the collection of taxes from
nonresident and foreign Limited Partners on Partnership income derived from such
states. Any amounts withheld would be deemed distributed to the nonresident or
foreign Limited Partner and would, therefore, reduce the amount of cash actually
received by the nonresident or foreign Limited Partner as a result of such
distribution. Nonresidents may be allowed a credit for the amount so withheld
against income tax imposed by their state of residency.
The Partnership cannot, at present, estimate the percentage of its future
income that will be from states which have adopted such withholding tax
procedures and it cannot, therefore, estimate the required withholding tax, if
any.
In addition, while the Partnership intends to apply to the applicable
taxing authority of such states for a waiver (or a partial waiver), if any, of
such withholding requirements, no assurance can be given that such waiver will
ultimately be granted.
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PLEASE BE ADVISED THAT YOU MAY BE SUBJECT TO RULES, DETERMINING YOUR STATE
INCOME TAX, THAT ARE LESS FAVORABLE THAN FEDERAL INCOME TAX LAWS.
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NEED FOR INDEPENDENT ADVICE
The foregoing summary is not intended as a substitute for careful tax
planning, particularly since the income tax consequences associated with an
investment in the Partnership are complex and certain of them will not be the
same for all taxpayers.
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YOU ARE STRONGLY URGED TO CONSULT YOUR OWN TAX ADVISORS WITH SPECIFIC REFERENCE
TO YOUR OWN TAX SITUATIONS.
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ERISA CONSIDERATIONS
FIDUCIARIES UNDER ERISA
A fiduciary of a pension, profit sharing or other employee benefit plan
subject to Title I of ERISA (an "ERISA Plan"), should consider whether an
investment in the Units is consistent with his fiduciary responsibilities under
ERISA. In particular, the fiduciary requirements under Part 4 of Title I of
ERISA require the discharge of duties solely in the interest of, and for the
exclusive purpose of providing benefits to, the ERISA Plan's participants and
beneficiaries. A fiduciary is required to perform the fiduciary's duties with
the skill, prudence, and diligence of a prudent man acting in like capacity, to
diversify investments so as to minimize the risk of large losses unless it is
clearly prudent not to do so, and to act in accordance with the ERISA Plan's
governing documents, provided that the documents are consistent with ERISA.
Fiduciaries with respect to an ERISA Plan include any persons who have any
power of control, management, or disposition over the funds or other property of
the ERISA Plan. An investment professional who knows or ought to know that his
or her advice will serve as one of the primary bases for the ERISA Plan's
investment decisions may be a fiduciary of the ERISA Plan, as may any other
person with special knowledge or influence with respect to a ERISA Plan's
investment or administrative activities.
While the beneficial "owner" or "account holder" of an IRA is treated as a
fiduciary of the IRA under the Code, Tax Exempt Entities generally are not
subject to ERISA's fiduciary duty rules. Also, if a participant in an ERISA Plan
exercises independent control over the investment of the participant's
individual account in the ERISA Plan (a "self-directed investment" arrangement),
the participant is not deemed to be a fiduciary. Finally, certain Qualified
Plans of sole proprietors or partnerships in which at all times (before and
after the investment) the only participant(s) is/are the sole proprietor and his
or her spouse or the partners and their spouses, and certain Qualified Plans of
corporations in which at all times (before and after the investment) the only
participant(s) is/are an individual or/and his or her spouse who own(s) 100% of
the corporation's stock, are generally not subject to ERISA's fiduciary
standards, although they are subject to the Code's prohibited transaction rules
explained below.
A person subject to ERISA's fiduciary rules with respect to an ERISA Plan
should consider those rules in the context of the particular circumstances of
the ERISA Plan before authorizing an investment of a portion of the ERISA Plan's
assets in Units.
Fiduciaries of an ERISA Plan that permits a participant to exercise
independent control over the investments of his individual account in accordance
with Section 404(c) of ERISA (a "self-directed investment" arrangement) will not
be liable for any investment loss or for any breach of the prudence or
diversification obligations that results from the participant's exercise of such
control, and the participant is not deemed to be a fiduciary subject to the
general ERISA fiduciary obligations described above merely by virtue of his
exercise of such control.
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The fiduciary of an IRA or a qualified retirement plan not subject to Title
I of ERISA because it is a governmental or church plan or because it does not
cover common law employees (a "Non-ERISA Plan") should consider that such an IRA
or Non-ERISA Plan may only make investments that are authorized by the
appropriate governing documents and under applicable state law.
PROHIBITED TRANSACTIONS UNDER ERISA AND THE CODE
Any fiduciary of an ERISA Plan or a person making an investment decision
for a non-ERISA Plan or an IRA should consider the prohibited transactions
provisions of Section 4975 of the Code and Section 406 of ERISA when making
their investment decisions. These rules prohibit such plans from engaging in
certain transactions involving "plan assets" with parties that are "disqualified
persons" described in Section 4975(e)(2) of the Code or "parties in interest"
described in Section 3(14) of ERISA ("Disqualified persons" and "parties in
interest" are hereinafter collectively referred to as "disqualified persons").
"Prohibited transactions" include, but are not limited to, any direct or
indirect transfer or use of a Benefit Plan's or IRA's assets to or for the
benefit of a disqualified person, any act by a fiduciary that involves the use
of a Benefit Plan's assets in the fiduciary's individual interest or for the
fiduciary's own account, and any receipt by a fiduciary of consideration for his
or her own personal account from any party dealing with a Benefit Plan. Under
ERISA, a disqualified person that engaged in a prohibited transaction will be
made to disgorge any profits made in connection with the transaction and will be
required to compensate any ERISA Plan that was a party to the prohibited
transaction for any losses sustained by the ERISA Plan. Section 4975 of the Code
imposes excise taxes on a disqualified person that engages in a prohibited
transaction with an ERISA Plan or a non-ERISA Plan or an IRA subject to Section
4975 of the Code. If the disqualified person who engages in the transaction is
the individual on behalf of whom the IRA is maintained (or his beneficiary), the
IRA may lose its tax exempt status and the assets will be deemed to be
distributed to such individual in a taxable transaction.
In order to avoid the occurrence of a prohibited transaction under Section
4975 of the Code and/or Section 406 of ERISA, Units may not be purchased by a
ERISA Plan, an IRA, or a non-ERISA plan subject to Section 4975 of the Code, as
to which the General Partner or any of its Affiliates have investment discretion
with respect to the assets used to purchase the Units, or with respect to which
they have regularly given individualized investment advice that serves as the
primary basis for the investment decisions made with respect to such assets.
Additionally, fiduciaries of, and other disqualified persons with respect to, an
ERISA Plan, an IRA, and a non-ERISA Plan subject to Section 4975 of the Code,
should be alert to the potential for prohibited transactions to occur in the
context of a particular plan's or IRA's decision to purchase Units.
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Neither the General Partner nor the Partnership shall have any liability or
responsibility to any Benefit Plan that is a Limited Partner or any other
Limited Partner, including any Limited Partner that is a Tax Exempt Entity, for
any tax, penalty or other sanction or costs or damages arising as a result of
there being a prohibited transaction or as a result of Partnership assets being
deemed plan assets of the Limited Partner under the Code or ERISA or other
applicable law.
"PLAN ASSETS"
If the Partnership's assets were determined under ERISA or the Code to be
"plan assets" of a Limited Partner which is a Benefit Plan (i) the prudence
standards and other provisions of Part 4 of Title I of ERISA would be applicable
to any transactions involving the Partnership's assets, (ii) persons who
exercise any authority or control over the Partnership's assets, or who provide
investment advice to the Partnership, would (for purposes of the fiduciary
responsibility provisions of ERISA) be fiduciaries of each ERISA Plan that
acquires the Unit, and transactions involving the Partnership's assets
undertaken at their direction or pursuant to their advice might violate their
fiduciary responsibilities under ERISA, especially with regard to conflicts of
interest, (iii) a fiduciary exercising his investment discretion over the assets
of an ERISA Plan to cause it to acquire or hold the Unit could be liable under
Part 4 of Title I of ERISA for transactions entered into by the Partnership that
do not conform to ERISA standards of prudence and fiduciary responsibility, and
(iv) certain transactions that the Partnership might enter into in the ordinary
course of its business and operations might constitute "prohibited transactions"
under ERISA and the Code. The Benefit Plan's fiduciaries might, under certain
circumstances, be subject to liability for actions taken by the General Partner
or its affiliates, and certain of the transactions described in this Prospectus
in which the Partnership might engage, including certain transactions with
Affiliates, may constitute prohibited transactions under the Code and ERISA with
respect to such Benefit Plan, even if their acquisition of Units did not
originally constitute a prohibited transaction.
Under the Department of Labor ("DOL") regulations governing the
determination of what constitutes the assets of a Benefit Plan in the context of
investment securities such as Units, an undivided interest in the underlying
assets of a collective investment entity such as the Partnership will be treated
as "plan assets" of Benefit Plan investors if (i) the securities are not
publicly offered, (ii) 25% or more by value of any class of equity securities of
the entity is owned by Benefit Plans, (iii) the interests of the Benefit Plan
investors are "equity interests," and (iv) the entity is not an "operating
company." In order for securities to be treated as "publicly offered," they have
to be either (a) part of a class of securities registered under Section 12(b) or
12(g) of the Securities Exchange Act of 1934 or (b) sold as part of an offering
registered under the Securities Act of 1933, and must also meet certain other
requirements, including a requirement that they be "freely transferable."
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Units will be sold as part of an offering registered under the Securities
Act of 1933. However, in Counsel's view, the Partnership is not an "operating
company" and the restrictions on transferability of Units (see "Transferability
of Units") prevent the Units from being "freely transferable" for purposes of
the DOL's regulations. Consequently, in order to ensure that the assets of the
Partnership will not constitute "plan assets" of Limited Partners which are
Benefit Plans, the General Partner will take such steps as are necessary to
ensure that ownership of Units by Benefit Plan investors is at all times less
than 25% of the total value of outstanding Units. In calculating this limit, the
General Partner shall, as provided in the DOL's regulations, disregard the value
of any Units held by a person (other than a Benefit Plan) who has discretionary
authority or control with respect to the assets of the Partnership, or any
person who provides investment advice for a fee (direct or indirect) with
respect to the assets of the Partnership, or any affiliate of any such a person.
See "Investor Suitability Standards." However, neither the General Partner nor
the Partnership shall have any liability or responsibility to any Tax Exempt
Entity Limited Partner or any other Limited Partner for any tax, penalty or
other sanction or costs or damages arising as a result of Partnership assets
being deemed plan assets of a Tax Exempt Entity Limited Partner under the Code
or ERISA or other applicable law.
OTHER ERISA CONSIDERATIONS
In addition to the above considerations in connection with the "plan
assets" issue, a decision to cause a Benefit Plan to acquire Units should
involve considerations, among other factors, of whether (i) the investment is in
accordance with the documents and instruments governing the Benefit Plan, (ii)
the purchase is prudent in light of the diversification of assets requirement
and the potential difficulties that may exist in liquidating Units, (iii) the
investment will provide sufficient cash distributions in light of the Benefit
Plan's required benefit payments or other distributions, (iv) the evaluation of
the investment has properly taken into account the potential costs of
determining and paying any amounts of federal income tax that may be owed on
UBTI derived from the Partnership, (v) in the case of an ERISA Plan, the
investment, unless the investment is made in accordance with a self-directed
individual arrangement under Section 404(c) of ERISA and regulations promulgated
thereunder, is made solely in the interests of the ERISA Plan's participants,
and (vi) the fair market value of Units will be sufficiently ascertainable, and
with sufficient frequency, to enable the Benefit Plan to value its assets in
accordance with the rules and policies applicable to the Benefit Plan.
Prospective ERISA Plan investors should note that, with respect to the
diversification of assets requirement, the legislative history of ERISA and a
DOL advisory opinion indicate that the determination of whether the assets of a
ERISA Plan that has invested in an entity such as the Partnership are
sufficiently diversified may be made by looking through the ERISA Plan's
interest in the entity to the underlying portfolio of assets owned by the
entity.
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MANAGEMENT DISCUSSION OF
CERTAIN FINANCIAL DATA
The Partnership satisfied its minimum offering requirements and commenced
operations on January 27, 1998. The Partnership's primary sources of capital for
the period ended December 31, 1998, was from Partner's contributions of
$2,142,000, and cash operations of $272,000. The primary uses of cash for the
period ended December 31, 1998, was for capital expenditures for new equipment
totaling $1,449,000, the payment of acquisition fees of $73,000, for the payment
of preferred distributions to partners totaling $166,000, and for the payment of
offering costs totaling $235,000. Cash is invested in money market accounts that
invest directly in treasury obligations pending the Partnership's use of such
funds to purchase additional computer equipment, to pay Partnership expenses or
to make distributions to Partners. At December 31, 1998 and 1997, the
Partnership had approximately $506,000 and $2,000, respectively, invested in
these money market accounts. The Partnership's investment strategy of acquiring
computer equipment and generally leasing it under triple-net leases to operators
who generally meet specified financial standards minimizes the Partnership's
operating expenses. This particular industry has experienced a decrease in lease
rates during this period due to an ongoing decrease in interest rates. As of
December 31, 1998, the Partnership had future minimum rentals of non-cancelable
operating leases of $489,000 for the year ended 1999, and $433,000 thereafter.
The Partnership intends to purchase additional computer equipment with existing
cash, as well as when future cash becomes available. In addition, the
Partnership may incur debt in purchasing computer equipment in the future. The
Partnership's cash flow from operations is expected to continue to be adequate
to cover all operating expenses, liabilities, and preferred distributions to
partners during the next 12 month period. If available Cash Flow or Net
Disposition Proceeds are insufficient to cover the Partnership expenses and
liabilities on a short term and long term basis, the Partnership will attempt to
obtain additional funds by disposing of or refinancing Equipment, or by
borrowing within its permissible limits. The Partnership may also reduce the
distributions to its Partners if it deems necessary. Since the Partnership's
leases are on a "triple-net" basis, no reserve for maintenance and repairs are
deemed necessary.
RESULTS OF OPERATIONS - 1998 OPERATING RESULTS - The Partnership commenced
operation on January 27, 1998. For the period ended December 31, 1998, the
Partnership recognized income of $344,000 and expenses of $326,000, resulting in
net income of $18,000. During 1998, the Partnership expended approximately
$1,449,000 in cash to acquire 8 leases which generated approximately $306,000 in
revenue. Interest income of $38,000 for the period ended December 31, 1998, is a
result of capital contributions temporarily being invested in money market
accounts until being utilized for equipment purchases. Operating expenses,
excluding depreciation, primarily consist of accounting, legal and outside
service fees. An expense of $47,000 was recognized for the period ended December
31, 1998. For the period ended December 31, 1998, the Partnership generated cash
flow from operating activities of $272,000, which includes net income of $18,000
reduced by depreciation and amortization expenses of $263,000.
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"
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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 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. The costs are not expected to exceed
$15,000 and only a small percentage of these costs would be charged to the
Partnership. As of December 31, 1998, 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
decline 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 lease or be detrimental in negotiating release
rates which may lead to equipment write downs or less than favorable lease
recoveries.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership believes its exposure to market risk is not material due to the
fixed interest rate of its long term debt.
PARTNERSHIP AGREEMENT SUMMARY
The rights and obligations of the Partners in the Partnership will be
governed by the Partnership Agreement, which is attached in its entirety as
Appendix I hereto. The following statements, and other statements in this
Prospectus concerning the Partnership Agreement and related matters, are merely
an outline, do not purport to be complete, in no way modify or amend the
Partnership Agreement and are qualified in all respects and in each case by the
language of the Partnership Agreement. All material aspects of the Partnership
Agreement are included in this summary.
THE UNITS
A maximum of 750,000 Units are authorized for issuance and sale in the
Offering. Subscribers who are accepted as Limited Partners by the General
Partner on or before the Initial Closing will be admitted to the Partnership as
Limited Partners on the day of the Initial Closing. Thereafter, Subscribers who
are accepted as Limited Partners by the General Partner will be admitted into
the Partnership as Limited Partners on or before the last day of the calendar
month following the date such acceptance occurs. Transferees of Units will be
recognized as Substituted Limited Partners on or before the first day of the
calendar month following the calendar month in which the General Partner
receives a completed transfer application and approves the transferee as a
Substituted Limited Partner. The Partnership's records shall be amended to
reflect the substitution of Limited Partners at least once in each calendar
quarter.
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NONASSESSABILITY OF UNITS
The Units are nonassessable. When a Unit has been paid for in full, the
holder of the Unit has no obligation to make additional contributions to the
Partnership's capital.
LIABILITY OF LIMITED PARTNERS
Limited Partners are not personally liable for the obligations of the
Partnership, but their investments are subject to the risks of the Partnership's
business and the claims of its creditors. A Limited Partner, under certain
circumstances, may be liable to return any distributions from the Partnership to
the extent that, after giving effect to the distribution, all liabilities of the
Partnership (other than nonrecourse liabilities and liabilities to Partners on
account of their interests in the Partnership) exceed the fair value of the
Partnership's assets, including assets serving as security for nonrecourse
liabilities.
ALLOCATIONS AND DISTRIBUTIONS
The provisions of the Partnership Agreement governing the allocation of tax
items and the apportionment of cash distributions are summarized under the
caption "Allocations and Distributions."
RESPONSIBILITIES OF THE GENERAL PARTNER
The General Partner has the exclusive responsibility for the management
and control of all aspects of the business of the Partnership. In the course
of its management, the General Partner may, in its absolute discretion, cause
the Partnership to purchase, own, lease, sell and/or make future commitments
to purchase, lease and/or sell the Equipment and interests therein when and
upon such terms as it determines to be in the best interests of the
Partnership as it deems necessary for the efficient operation of the
Partnership, except that Limited Partners holding more than 50% of the
outstanding Units held by all Limited Partners (a "Majority in Interest")
must approve the sale of substantially all of the assets of the Partnership,
except when such sales occur in the orderly liquidation and winding up of the
business of the Partnership. The General Partner determined that a 12 month
extension of the offering period would be in the best interest for the
operation of the Partnership, therefore requested on April 28, 1999 and
subsequently obtained approval from more than 50% of the then outstanding
Units held by All Limited Partners.
A Majority in Interest of the Limited Partners may, at any time, remove the
General Partner. Upon the removal of the General Partner, the Partnership will
be dissolved and liquidated unless, within 60 days of such removal, a Majority
in Interest of the Limited Partners elect a successor General Partner to
continue the Partnership.
RECORDS AND REPORTS
The General Partner will keep at the Partnership's principal place of
business adequate books of account and records of the Partnership. Each Limited
Partner has the right, upon reasonable notice and within normal working hours,
and at the expense of the Limited Partner, to inspect and copy true and full
information regarding the state of the business and financial condition of the
Partnership, federal, state and local tax returns of the Partnership, a list of
the Partners and other information regarding the affairs of the
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Partnership as it may reasonably request. See "Reports to Limited Partners" for
a description of the reports and financial statements which the General Partner
will provide to the Limited Partners during the term of the Partnership.
MEETINGS OF THE PARTNERS
The General Partner may call a meeting of the Limited Partners at any time,
or call for a vote, without a meeting, of the Limited Partners on matters on
which they are entitled to vote. The General Partner is required to call such a
meeting, or for such a vote, on the written request of Limited Partners holding
10% or more of the total Units held by all Limited Partners. Any vote of a
Limited Partner may be made in person or by proxy.
VOTING RIGHTS OF LIMITED PARTNERS
The voting rights of the Limited Partners are set forth in the Partnership
Agreement. By a vote of Limited Partners holding more than one-half of the
outstanding Units, the Limited Partners may vote to: (a) approve or disapprove a
sale of all or substantially all of the assets of the Partnership; (b) dissolve
the Partnership; (c) remove or approve the withdrawal of the General Partner;
(d) prior to the removal, withdrawal or dissolution of the General Partner,
elect a successor General Partner; and (e) amend the Partnership Agreement
(except that without the consent of the Partner adversely affected, no amendment
may be made which (i) converts a Limited Partner into a General Partner; (ii)
modifies the limited liability of a Limited Partner; (iii) alters the interest
of the General Partner or Limited Partner in Net Profits, Net Losses or
distributions from the Partnership or of the General Partner in its
compensation; or (iv) affects the status of the Partnership as a partnership for
federal income tax purposes, and except that without the prior consent of
Limited Partners owning at least 66 2/3% of the Units, the Partnership may not
amend the provisions in the Partnership Agreement relating to allocations,
distributions or fees to the General Partner).
With respect to any Units owned by the General Partner or its Affiliates,
the General Partner and its Affiliates may not vote or consent on matters
submitted to the Limited Partners regarding removal of the General Partner or
any transaction between the Partnership and the General Partner or its
Affiliates. In determining the required percentage in interest of Units
necessary to approve a matter on which the General Partner and its Affiliates
may not vote or consent, any Units owned by the General Partner or its
Affiliates shall not be included.
ROLL-UPS AND CONVERSIONS
Without the approval of holders of at least 66-2/3% of all outstanding
Units, the Partnership shall not enter into any Roll-Up. A Roll-Up is defined in
the Partnership Agreement to mean any transaction involving the acquisition,
merger, conversion, or consolidation, either directly or indirectly, of the
Partnership and the issuance of securities of a Roll-Up Entity. A Roll-Up does
not include: a transaction involving securities if the securities have been
listed for at least twelve months on a national securities exchange or traded
through the NASD Automated Quotation National Market System; or a transaction
involving the conversion to corporate, trust or association form of only the
Partnership if, as a consequence of the transaction, there will be no
significant adverse change in the Limited Partners' voting rights, the term of
existence of
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the Partnership, compensation of the General Partner or its Affiliates, or the
Partnership's investment objectives. Limited Partners who do not consent to an
approved Roll-Up shall be given the option of (i) accepting the securities of
the Roll-Up Entity offered in the proposed Roll-Up; or (ii) receiving cash in an
amount equal to the non-consenting Limited Partner's pro rata share of the
appraised value of the net assets of the Partnership.
An appraisal of the net assets of the Partnership shall be performed by a
competent independent expert engaged for the benefit of the Partnership and the
Limited Partners. Such appraisal shall be made on the basis of an orderly
liquidation of the assets of the Partnership over a 12-month period as of a date
immediately prior to the announcement of the proposed Roll-Up. If the appraisal
will be included in a prospectus used to offer the securities of a Roll-Up
Entity, the appraisal shall be filed with the Securities and Exchange Commission
and the states as an exhibit to the registration statement for the offering. The
Partnership shall not reimburse the sponsor of a proposed Roll-Up for the costs
of an unsuccessful proxy contest in the event the Roll-Up is not approved by the
Limited Partners.
By the vote of a majority in interest of the Limited Partners the
Partnership is permitted to engage is a conversion of the Partnership into
another form of business entity which does not result in a significant adverse
change in (i) the voting rights of the Limited Partners, (ii) the termination
date of the Partnership (currently, December 31, 2009, unless terminated earlier
in accordance with the Partnership Agreement), (iii) the compensation payable to
the General Partner or its Affiliates, or (iv) the ability to meet the
Partnership's investment objectives without materially impairing the rights of
the Limited Partners.
The General Partner will make the determination as to whether or not any
such conversion will result in a significant adverse change in any of the
provisions listed in the preceding paragraph based on various factors relevant
at the time of the proposed conversion, including an analysis of the historic
and projected operations of the Partnership; the tax consequences (from the
standpoint of the Limited Partners) of the conversion and of an investment in a
limited partnership as compared to an investment in the type of business entity
into which the Partnership would be converted; and the performance of the
equipment industry in general, and of the computer peripherals segment of the
industry in particular. In general, the General Partner would consider any
material limitation on the voting rights of the Limited Partners or any
substantial increase in the compensation payable to the General Partner or its
Affiliates to be a significant adverse change in the listed provisions.
POWER OF ATTORNEY
Pursuant to the terms of the Partnership Agreement, each purchaser of a
Unit and each transferee of a Unit appoints the General Partner, acting alone,
as the purchaser's or transferee's attorney-in-fact to make, execute, file,
and/or record (i) documents relating to the Partnership and its business
operations requested by or appropriate under the laws of any appropriate
jurisdiction; (ii) instruments with respect to any amendment (iii) instruments
or papers required to continue the business of the Partnership pursuant to the
Partnership Agreement; (iv) instruments relating to the admission of any Partner
to the Partnership; (v) a master list in accordance with Section 6112 of the
Code (or any successor provision), relating to the Partnership's tax shelter
registration (see "Income
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Tax Considerations - Partnership Tax Returns and Tax Information"); and (vi) all
other instruments deemed necessary or advisable to carry out the provisions of
the Partnership Agreement.
The power of attorney is irrevocable, will survive the death, incompetency,
dissolution, disability, incapacity, bankruptcy, or termination of the granting
purchaser or transferee, and will extend to such person's heirs, successors, and
assigns.
The General Partner will be designated as the "Tax Matters Partner" who
shall have authority to make certain elections on behalf of the Partnership and
the Limited Partners, including extending the statute of limitations for
assessment of tax deficiencies against the Limited Partners with respect to
Partnership items, and to enter into a settlement agreement with the IRS. See
"Income Tax Considerations -- Audit of the Partnership."
PARTNERSHIP TERM
The term of the Partnership will expire on December 31, 2009, though the
Partnership may be terminated and dissolved earlier after any of the following
events:
(i) The vote or written consent of a Majority in Interest of the
Limited Partners;
(ii) The dissolution of the Partnership by judicial decree;
(iii) The expiration of 60 days following the removal, withdrawal,
involuntary dissolution, or Bankruptcy (or, in the case of an individual,
the death or appointment of a conservator for the person or any of the
assets) of the last remaining general partner of the Partnership, unless
all Limited Partners (or a Majority in Interest of the Limited Partners, if
the Terminating Event is the removal, Bankruptcy, or involuntary
dissolution of the last remaining general partner) vote to continue the
Partnership and a successor general partner is elected;
(iv) The determination by the General Partner that it is necessary to
commence the liquidation of the Equipment in order for the liquidation of
all the Equipment to be completed in an orderly and business like fashion
prior to December 31, 2009; or
(v) The sale of disposition of all the Partnership's Equipment.
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INVESTOR SUITABILITY STANDARDS
An investment in the Partnership is suitable only for persons or entities
of adequate means who have no need for liquidity in their investment since (i)
investment in the Units involves certain risks and (ii) the Units are not freely
transferable and a public market for the Units does not exist and is not likely
to develop. See "Risk Factors."
NET WORTH/INCOME
Except with respect to Qualified Plans and Tax Exempt Entities, Units will
be sold only to an investor who represents that he has either (i) a net worth
(exclusive of home, home furnishings and automobiles) of at least $45,000 AND an
annual gross income of at least $45,000, OR (ii) irrespective of annual gross
income, a net worth (exclusive of home, home furnishings and automobiles) of at
least $150,000, or that he is purchasing in a fiduciary capacity for a person
who meets such conditions. If the investor is a Qualified Plan or an IRA, such
investor must represent (i) that the IRA owner or the participant in the
self-directed Qualified Plan satisfies the foregoing standards, or (ii) if other
than a self-directed Qualified Plan, that the Qualified Plan satisfies the
foregoing suitability standards. The Partnership will apply these suitability
standards only with respect to investors who acquire Units in its Offering.
Although the General Partner believes that Units may represent suitable
investments for individuals, Qualified Plans, Tax Exempt Entities, and many
different types of entities, due to tax rules of particular application to
certain types of entities, Units may not be suitable investments for such
entities. The Partnership will produce UBTI which, to the extent that it exceeds
$1,000 in any taxable year from all sources, is taxable to Qualified Plans and
Tax Exempt Entities. See "Income Tax Considerations -- Investment by Tax Exempt
Entities." Prospective investors should consult their tax advisors with respect
to the tax consequences of an investment in Units as it may affect their
particular tax situations.
Certain state securities commissions have established suitability standards
or minimum investment amounts for the offer and sale of securities which are
different than those set forth above. All states in which the Partnership is
authorized to sell Units have minimum investor suitability standards and minimum
investment amounts which are within the standards and amounts set by the
Partnership except for those states listed below or in a supplement to this
Prospectus. Net worth in all cases excludes home, home furnishings and
automobiles.
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ADDITIONAL SUITABILITY STANDARDS or minimum investment amounts are as
follows:
ARIZONA: Net worth of at least $225,000 or current annual income of at
least $60,000 and a net worth of at least $60,000.
CALIFORNIA: Net worth of at least $225,000 or current annual income of
at least $60,000 and a net worth of at least $60,000.
IOWA: Net worth of at least $225,000 or current annual income of at
least $60,000 and a net worth of at least $60,000. Minimum investment
amount for Tax Exempt Entities and Keogh Plans is $2,500.
MAINE: Net worth of at least $225,000 or current annual income of at
least $60,000 and a net worth of at least $60,000.
MICHIGAN: In no event shall the aggregate purchase price of Units
exceed 10% of net worth.
MINNESOTA: Minimum investment amount for IRA's or Qualified Plans (but
not Tax Exempt Entities) is $2,000.
MISSOURI: Net worth of at least $225,000 or current annual gross
income of at least $60,000 and a net worth of at least $60,000.
NEBRASKA: Minimum investment amount for all investors is $5,000 except
that the minimum investment amount for Tax Exempt Entities and Keogh
Plans is $1,000.
NEW JERSEY: Net worth of at least $225,000 or current annual income of
at least $60,000 and a net worth of at least $60,000.
NORTH CAROLINA: Net worth of at least $225,000 or current annual
income of at least $60,000 and a net worth of at least $60,000.
OHIO: In no event shall the aggregate purchase price of Units exceed
10% of net worth.
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PENNSYLVANIA:Net worth of at least $225,000 or current annual income
of at least $60,000 and a net worth of at least $60,000. The aggregate
purchase price of Units may not exceed 10% of net worth.
TEXAS: Net worth of at least $225,000 or current annual income of at
least $60,000 and a net worth of at least $60,000.
The suitability standards imposed by the Partnership will apply to
transferees upon resale of an investor's Units.
It is the responsibility of the General Partner and the Dealer Manager on
behalf of the Partnership to make every reasonable effort to determine that the
purchase of Units is a suitable and appropriate investment for each investor,
based on information provided by the investor about the investor's financial
situation and investment objectives.
The Partnership and/or Dealer Manager will maintain records for at least
six years of the information used to determine the suitability of investors.
Subscribers' Representations and Warranties
Each Subscriber will execute or authorize the execution of a Subscription
Agreement to be submitted to the General Partner. In the States of Florida,
Iowa, Maine, Michigan, Minnesota, Missouri, Nebraska, North Carolina, Oregon and
Tennessee and Texas, Subscribers are required to personally sign the
Subscription Agreement. Each Subscriber will make certain representations and
warranties to the General Partner in his Subscription Agreement or by paying for
his Units, including that he (i) has received this Prospectus, including the
form of Partnership Agreement attached hereto as Appendix I; (ii) meets the
applicable requirements as to investor suitability; (iii) accepts and adopts the
provisions of the Partnership Agreement; and (iv) authorizes the General
Partner, as his attorney-in-fact, to execute the Partnership Agreement and such
other documents as may be required to carry out the business of the Partnership.
Each Subscriber is also instructed that (a) he should not rely upon any
information not specifically set forth in this Prospectus or any supplements
thereto in making a decision to invest in the Partnership and the General
Partner, the Dealer Manager and the Partnership accept no responsibility for
information provided to an investor that is not clearly marked as being prepared
and authorized by them for use with the public and (b) an investment in the
Partnership involves certain risks including the matters set forth under the
captions "Risk Factors," "Conflicts of Interest," "Management" and "Income Tax
Considerations" in this Prospectus.
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SPECIAL LIMIT ON OWNERSHIP OF UNITS BY BENEFIT PLANS
To avoid classification of a pro rata portion of the Partnership's
underlying assets as "plan assets" of investors which are Benefit Plans, the
Partnership intends to restrict the ownership of Units by Benefit Plans to less
than 25% of the total value of outstanding Units at all times. See "ERISA
Considerations -- Plan Assets." Benefits Plans include Qualified Plans, Tax
Exempt Entities and certain other entities included in the definition of Benefit
Plans in this Prospectus.
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PLAN OF DISTRIBUTION
GENERAL
The Units are offered through Commonwealth Capital Securities Corp., Inc.
as Dealer Manager. The Dealer Manager may offer the Units through other
broker-dealers who are members of the National Association of Securities
Dealers, Inc. ("NASD"). The Units are being offered on a "best efforts" basis,
which means that the Dealer Manager and the other broker-dealers are not
obligated to purchase any Units and are only required to use their best efforts
to sell Units to investors. The Offering of the Units is intended to be in
compliance with Rule 2810 of the Rules of Conduct of the National Association of
Securities Dealers, Inc.
The Partnership will pay to the Dealer Manager an aggregate amount of up to
nine percent of Capital Contributions as Underwriting Commissions after and only
if the required $1,500,000 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. In
addition, all or a portion of the Dealer Manager fee may be reallowed to certain
Participating Brokers for expenses incurred by them in selling the Units,
including reimbursement for bona fide expenses incurred in connection with due
diligence activities. The amount of the selling commissions will be determined
based upon the quantity of Units sold to a single investor according to the
following schedule:
Purchase Price Selling
Individual Transaction Size Per Unit Commission
- ------------------------------------ ---------------- -----------------
$1,000 to $250,000 $20.00 8%
$ 250,020 to $350,000 $19.80 7%
$ 350,020 to $500,000 $19.60 6%
$ 500,020 to $750,000 $19.40 6%
$750,020 to $1,000,000 $19.20 5%
$1,000,020 and over $19.00 4%
The Underwriting Agreement, under which the Dealer Manager will offer the
Units, which is terminable without penalty by any party on 60 days' notice,
contains cross-indemnity clauses with respect to certain liabilities between the
General Partner and the Dealer Manager, including liabilities under the
Securities Act. The Dealer Manager and Participating Brokers participating in
the offering may be deemed to be "underwriters" as that term is defined in the
Securities Act.
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OFFERING OF UNITS
The offering of Units will commence on the Effective Date of the
Registration Statement of which this Prospectus is a part. Provided the General
Partner does not terminate the Offering of Units earlier, the Offering may
continue until the full 750,000 Units are sold, or until July 25, 1999. In the
event the Minimum Subscription Amount has not been received by July 25, 1998,
Subscriptions will be released from the Escrow Account and returned to the
prospective investors, together with any interest actually earned thereon, net
of any tax withholding required by law. See "Plan of Distribution -- Escrow
Arrangements and Fundings."
The General Partner and its Affiliates will not be prohibited from
purchasing Units, although it is not their present intention to make such
purchases. Any Units purchased by the General Partner or its Affiliates would be
purchased for their own account and for investment and not for resale. No Units
purchased by the General Partner and its Affiliates may be counted for purposes
of obtaining the Minimum Subscription Amount. If the General Partner or its
Affiliates purchase any Units, the voting rights of the General Partner with
respect to the Units will be as described in the last paragraph of "Summary of
the Partnership Agreement -- Voting Rights of Limited Partners".
Any purchase of Units in connection with this Offering must be accompanied
by tender of the sum of $20 per Unit (subject to the quantity discounts referred
to above), which is the full purchase price of a Unit; provided, however, the
Dealer Manager or that Participating Brokers may waive the selling commission
with respect to the purchase of Units by employees of the Dealer Manager,
Participating Brokers, the General Partner and its Affiliates, so long as those
employees are purchasing Units for their own accounts. If such fees are so
waived, such employees will tender no less than $18.40, for the purchase of each
Unit.
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THE INVESTORS SUBSCRIPTION AGREEMENT MUST BE ACCEPTED BY THE GENERAL PARTNER.
ONCE ACCEPTED, THIS WILL CONSTITUTE THE INVESTOR'S AGREEMENT TO THE TERMS OF THE
AGREEMENT AND THE AUTHORITY OF THE GENERAL PARTNER.
- --------------------------------------------------------------------------------
ESCROW ARRANGEMENTS AND FUNDINGS
Subscriptions will be held in the Escrow Account at PNC Bank until funds
equal to the Minimum Subscription Amount have been received. While held in
escrow, Subscriptions will be invested in United States short-term government
securities or interest bearing bank accounts, PNC Bank's Market Value Savings
Account, or a similar account, for the benefit of the investors.
The Partnership will not be funded until the Minimum Subscription Amount
has been received. Once the Minimum Subscription Amount has been deposited in
the Escrow Account, the Subscriptions will be released to the Partnership.
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Any interest earned on the Subscriptions while in escrow will be
distributed, net of any tax withholding required by law, directly to the
investors promptly following the funding, allocated in accordance with the
amount of Subscriptions held for each investor and the length of time such
Subscriptions were held.
The Offering may be terminated, in the General Partner's discretion, at any
time after the Minimum Subscription Amount has been received and accepted by the
General Partner on behalf of the Partnership. The General Partner also has the
discretion to terminate the Offering prior to receiving the Minimum Subscription
Amount. In such event, the Partnership would be dissolved and Subscriptions held
in escrow, together with any interest actually earned thereon net of any tax
withholding required by law would be returned to the Subscribers. It is
anticipated that the offering of Units will terminate no later than July 25,
2000. Subscriptions will be released from the Escrow Account and returned to the
Subscribers together with any interest actually earned thereon, net of any tax
withholding required by law, in the event the Minimum Subscription Amount has
not been received by July 25, 1998. Minimum subscription amount was met on
January 27, 1998.
Subscribers will be admitted to the Partnership and receive Units at one or
more closings. Following receipt of the Minimum Subscription Amount and the
Initial Closing, Limited Partners will be admitted not later than 15 days after
the release from the Escrow Account to the Partnership of the Subscriber's
funds. Additional closings will be held from time to time during the Offering
Period as Subscriptions are accepted by the General Partner, but no less often
than monthly. Subsequent Subscriptions will be accepted or rejected by the
General Partner within 30 days of their receipt. Funds received from rejected
subscriptions will be returned to the Subscribers immediately upon rejection of
their subscription. The final closing will be held shortly after the termination
of the Offering Period or, if earlier, upon the sale of all the Units. After the
Initial Closing, Limited Partners will be admitted to the Partnership no later
than the last day of the calendar month following the date their Subscriptions
are accepted by the General Partner. Each Subscriber to the Partnership will be
paid his share of interest earned on Subscription amounts following the transfer
of his Subscription to the Partnership, net of any tax withholding required by
law. These interest payments will be paid by the Partnership.
SUBSCRIPTION FOR UNITS
Each prospective investor who satisfies the qualifications described under
"Investor Suitability Standards" and desires to purchase Units must:
(a) Review the Subscription Agreement, Signature Page and Power of Attorney
attached as Appendix II to this Prospectus to insure that the investor is aware
of the representations and warranties the investor will be deemed to have made
by subscribing for Units; and
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(b) Deliver to the Dealer Manager a check made payable to "Chase Bank,
Escrow Agent FBO Commonwealth Income & Growth Fund III," in the amount of
$20.00, or such other amount as set forth in the table above, for each Unit that
the investor is seeking to purchase.
The Dealer Manager will not complete a sale of Units until at least five
business days after the date the investor receives a final prospectus and shall
send the investor a confirmation of his or her purchase.
Prospective investors that are not natural persons may be required to
deliver evidence of their authority to subscribe for Units, or opinions of
counsel as to their authority to subscribe for Units and the binding effect of
their subscriptions. Investors who submit subscriptions will not be permitted to
terminate or withdraw their subscriptions without the prior consent of the
General Partner.
The General Partner has the right to reject an investor's subscription for
any reason whatsoever, including the investor's failure to satisfy the
suitability standards described under "Investor Suitability Standards."
SALES MATERIAL
Sales material may be used in connection with the Offering only when
accompanied or preceded by the delivery of this Prospectus. Only sales material
which indicates that it is distributed by the General Partner may be distributed
to prospective investors. Material regarding an investment in the Partnership
may include a question and answer sales booklet, a speech for public seminars,
an invitation to attend public seminars, slide and video presentations,
prospecting letters, mailing cards and tombstone advertisements; all of which
would provide information regarding the General Partner and the Partnership. In
certain jurisdictions, such sales material will not be available. Use of any
materials will be conditioned on the provision of such materials to the SEC and
the filing with, and if required, clearance by, other appropriate state
regulatory authorities. Such clearance does not mean, however, that the agency
allowing use of the sales literature has passed on the merits of this Offering
or the accuracy of the material contained in such literature. Other than as
described herein, the Partnership has not authorized the use of sales material.
Although the information contained in such sales material does not conflict
with any of the information contained in this Prospectus, such material does not
purport to be complete and should not be considered as part of this Prospectus
or the Registration Statement of which this Prospectus is a part, or as
incorporated in this Prospectus or the Registration Statement by reference, or
as forming the basis of the Offering. The Offering is made only by this
Prospectus.
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REPORTS TO LIMITED PARTNERS
The General Partner will deliver to each Limited Partner, within 120 days
after the end of each year, a balance sheet of the Partnership dated as of
December 31 of such year, together with statements of income, Partners' equity,
and the cash flow position of the Partnership for such year, prepared in
accordance with generally accepted accounting principles and accompanied by an
auditor's report from the Partnership's independent certified public
accountants. The General Partner will within such period also furnish (i) a
report of the activities of the Partnership for the year, which will include for
each item of Equipment acquired by the Partnership which individually represents
at least 10% of the total investment in Equipment, (ii) certain information
relevant to the value or utilization of the Equipment, (iii) a report on
distributions to the Limited Partners during the year and their source, (iv) if
any Equipment is sold during that year a report of the sale price, purchase
price and lease revenues from such Equipment, and (v) a report on any costs
incurred by the General Partner and its Affiliates in performing administrative
services which are reimbursed by the Partnership during the year. Within 60 days
after the end of each calendar quarter, the General Partner will also furnish a
report of all services rendered and all fees received by the General Partners
and its Affiliates from the Partnership, an unaudited balance sheet, a statement
of income, a statement of changes in financial position and a report on the
activities of the Partnership.
Until the net proceeds of the Offering of Units are fully invested, the
General Partner will furnish to the Limited Partners, within 60 days after the
end of each calendar quarter, a report of Equipment acquisitions during the
quarter, including the type and manufacturer of each item of Equipment, the
purchase price of the Equipment, and any other material terms of purchase, a
statement of the total amount of cash expended by the Partnership to acquire the
Equipment (including an itemization of all commissions, fees, and expenses and
the name of each payee), and a statement of the amount of net proceeds in the
Partnership which remain unexpended or uncommitted at the end of the quarter.
The General Partner will also furnish to all Limited Partners within 75
days after the end of the year other information regarding the Partnership
necessary for the preparation of their tax returns.
LEGAL MATTERS
Certain legal matters in connection with the Units offered hereby will be
passed upon for the General Partner and the Partnership by Blank Rome Comisky &
McCauley, Philadelphia, Pennsylvania, counsel to the Dealer-Manager, the General
Partner and the Partnership.
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EXPERTS
The financial statements of the Partnership as of December 31, 1998
1997 and for the period from January 27, 1998 (commencement of operations) to
December 31, 1998, appearing in this Prospectus and Registration Statement,
have been audited by Ernst & Young, LLP, independent auditors, as set forth
in their report thereon appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Com Cap Corp. as of February
28, 1999 and for the year then ended and the balance sheet of the General
Partner as of February 28, 1999, appearing in this Prospectus and
Registration Statement, have been audited by Fishbein & Company, PC,
independent auditors, as set forth in their reports thereon appearing
elsewhere herein and in the Registration Statement, and are in-cluded in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
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GLOSSARY
The following terms used in this Prospectus have the meanings below:
"ACQUISITION EXPENSES" means expenses relating to the selection and
acquisition of Equipment by the Partnership.
"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.
"ADJUSTED CAPITAL CONTRIBUTIONS" means Capital Contributions of the Limited
Partners reduced by any cash distribution received by the Limited Partners
pursuant to the Partnership Agreement.
"ADJUSTED BASIS" means the basis for determining gain or loss from the
sale, transfer, or other disposition of property.
"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.
"BANKRUPT" or "Bankruptcy" means, when used with reference to a specified
Person if they commence any proceeding under any bankruptcy or reorganization
statute, or under any provision of the Bankruptcy Code, or under any insolvency
law, or under any dissolution or liquidation law whether now or hereafter in
effect.
"BENEFIT PLAN" means any of the following: (i) any employee benefit plan
(as defined in Section 3(3) of ERISA) whether or not it is subject to Title I of
ERISA; (ii) any plan described in Section 4975(e)(1) of the Code.
"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 Limited Partners, $20 for each Unit, or where the context requires,
the total Capital Contributions of all the Partners.
"CASH FLOW" for any fiscal period means the sum of (i) cash receipts from
operations, including 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; gross
receipts and other property taxes levied against the Equipment; and all costs of
repurchasing Units in accordance with the Partnership Agreement; but not
including depreciation or amortization of fees or capital expenditures, or
provisions for future expenditures, including, without limitation,
Organizational and Offering Expenses.
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"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.
"CUMULATIVE RETURN" means an amount equal to a return at a rate of 10% per
annum, compounded daily, on the Adjusted Capital Contribution for all
outstanding Units, which amount shall begin accruing at the end of the calendar
quarter in which such Units are sold by the Partnership.
"EFFECTIVE DATE" means the date on which the Registration Statement is
declared effective by the Securities and Exchange Commission.
"ERISA PLAN" means a retirement plan subject to the provisions of Title I
of ERISA.
"ESCROW ACCOUNT" means the account at Chase Bank, Philadelphia,
Pennsylvania where Subscriptions will be held until they aggregate the Minimum
Subscription Amount of $1,500,000.
"FRONT-END FEES" means fees and expenses paid by any Person to any Person
during the Partnership's organizational and acquisition phase including all
Organizational and Offering Expenses (including the Organizational Fee),
Acquisition Fees, Acquisition Expenses, Debt Placement Fees, Leasing Fees, and
other similar fees and expenses; provided, however, any costs or expenses
incurred by the General Partner or its Affiliates (not including the
Partnership) which are not reimbursed by the Partnership, shall not be included
as Front-End Fees.
"FULL PAYOUT LEASE" means an initial Net Lease of the Equipment under which
the non-cancelable rental payments due (and which can be calculated at the
commencement of the Net Lease) during the initial noncancellable fixed term (not
including any renewal or extension period) of the lease or other contract for
the use of the Equipment are at least sufficient to recover the Purchase Price
of the Equipment.
"GENERAL PARTNER" means Commonwealth Income & Growth Fund, Inc. and any
additional, substitute or successor general partner of the Partnership.
"GROSS LEASE REVENUES" means Partnership gross receipts from leasing or
other operation of the Equipment, except that, to the extent the Partnership has
leased the Equipment from an unaffiliated party, it shall mean such receipts
less any lease expense.
"INITIAL CLOSING" means the date after the Minimum Subscription Amount is
received on which funds to acquire Units are released from the Escrow Account
and distributed to the Partnership for the acquisition of Units by Limited
Partners.
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"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 the
Partnership 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.
"NET PROFITS" OR "NET LOSSES" shall be computed for each taxable year of
the Partnership or shorter period prior 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 the
Partnership 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.
"ORGANIZATIONAL AND OFFERING EXPENSES" means the expenses incurred in
connection with the organization of the Partnership and in preparation of the
Offering, including Underwriting Commissions, listing fees and advertising
expenses specifically incurred in connection with the distribution of the Units.
"PARTNERSHIP AGREEMENT" means that Limited Partnership Agreement of
Commonwealth Income & Growth Fund III by and among the General Partner and the
Limited Partners, pursuant to which the Partnership is governed. The Partnership
Agreement is set forth in its entirety as Appendix I to this Prospectus.
"PASSIVE INCOME" AND "PASSIVE TAXABLE INCOME" means income derived from a
"passive activity" as that term is defined in Section 469(c) of the Code.
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"PRIORITY RETURN" is equal to 10% of the original contributed capital.
"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) solely for purposes of the definition of Full Payout Net
Lease, the amount of the Equipment Acquisition Fee and any other Acquisition
Fees, but excluding points and prepaid interest.
"QUALIFIED PLAN" means a trust established pursuant to the terms of a
pension, profit sharing or stock bonus plan, including Keogh Plans, meeting the
requirements of Section 401 and following of the Code.
"RETIRING GENERAL PARTNER" means a general partner of the Partnership who
or which has been removed or withdrawn as such or is Bankrupt, which has been
involuntarily dissolved, or who has died or had a conservator appointed for the
person or any of the property of such general partner.
"ROLL-UP" means a transaction involving the acquisition, merger,
conversion, or consolidation, either directly or indirectly, of the Partnership
and the issuance of securities of a Roll-Up Entity. Such term does not include:
(i) a transaction involving units if the Units have been listed for at least
twelve months on a national securities exchange or traded through the NASD
Automated Quotation National Market System; or (ii) a transaction involving the
conversion to corporate, trust or association form of only the Partnership if,
as a consequence of the transaction, there will be no significant adverse change
in any of the following: (a) the Limited Partners' voting rights, (b) the term
of existence of the Partnerships, (c) compensation of the General Partner or its
Affiliates, or (d) the Partnership's investment objectives. "Roll-Up Entity"
means the partnership, corporation, trust or other entity that would be created
or would survive after the successful completion of a proposed Roll-Up
transaction.
"SALE-LEASEBACK" means a transaction where an asset is sold to a vendee who
immediately leases such asset back to the vendor.
"SPONSOR" means any Person directly or indirectly instrumental in
organizing, wholly or in part, a Program or any Person who will manage or
participate in the management of a Program, and any Affiliate of any such
Person. Sponsor does not include a Person whose only relation with the Program
is that of an independent equipment manager and whose only compensation is as
such. Sponsor does not include wholly independent third parties such as
attorneys, accountants, and underwriters whose only compensation is for
professional services rendered in connection with the offering of Program
interests.
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"SUBSCRIBERS" refers to those Persons who have tendered monies to the
Partnership for the purchase of Units, but have not been accepted as Limited
Partners as provided for in Section 3.2 of the Partnership Agreement.
"SUBSCRIPTION AGREEMENT" means the agreement attached as Appendix III to
this Prospectus whereby a Subscriber becomes bound to purchase Units and which
shall be maintained in the offices of the General Partner and the Dealer
Manager.
"SUBSTITUTED LIMITED PARTNER" means any Person admitted to the Partnership
as a Limited Partner pursuant to the provisions of Section 11.2 of the
Partnership Agreement.
"TAX EXEMPT ENTITY" means entities exempt from federal income tax such as
qualified employee pension or profit-sharing trusts and individual retirement
accounts.
"DEBT" means debt of the Partnership with a term in excess of twelve
months, incurred with respect to acquiring or investing in Equipment, or
refinancing non-Term Debt, but not debt incurred with respect to refinancing
existing Partnership Term Debt.
"TERMINATING EVENT" means the first to occur of the withdrawal, removal,
retirement, resignation, expulsion, Bankruptcy, involuntary dissolution, death,
insanity or appointment of a conservator for the person or any of the assets of
the last remaining general partner of the Partnership.
"TRIPLE-NET LEASES" are leases that will typically provide that the lessee
or some other party will 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.
"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.
"U.S. CITIZEN" means any of the following Persons: (i) an individual who is
a citizen of the United States or one of its possessions, (ii) a partnership in
which each partner is a U.S. Citizen, (iii) a trust of which each trustee and
all of the beneficiaries are U.S. Citizens (provided that Persons who are not
U.S. Citizens do not possess more than 25% of the aggregate power to direct or
remove the trustee), and (iv) a corporation incorporated in the United States or
one of its possessions of which the president/chief executive officer, chairman
of the board of directors and two-thirds or more of the members of the board of
directors and other managing officers are U.S. Citizens and in which at least
75% of the voting interest is owned or controlled by U.S. Citizens.
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TABLE I
SUBSCRIPTION AGREEMENT
<PAGE>
$1,500,000 - MINIMUM
COMMONWEALTH INCOME & GROWTH FUND III
(A PENNSYLVANIA LIMITED PARTNERSHIP)
SUBSCRIPTION AGREEMENT,
SIGNATURE PAGE &
POWER OF ATTORNEY
750,000 UNITS - $20.00 PER UNIT
MINIMUM PURCHASE - 125 UNITS ($2,500)
50 UNITS ($1,000) FOR IRAS, KEOGHS AND PENSION PLANS
(MINIMUM PURCHASE MAY BE HIGHER IN CERTAIN STATES)
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PLEASE CAREFULLY READ this Subscription Agreement and the Terms and Conditions
(on the back of the Signature Page) before
completing this document. TO SUBSCRIBE FOR UNITS, please complete and sign the
Signature Page and deliver the Subscription Agreement to your Financial
Consultant.
ALL ITEMS ON THIS AGREEMENT MUST BE COMPLETED IN ORDER FOR YOUR SUBSCRIPTION TO
BE PROCESSED, including any additional information necessary to complete Item
6(c) of the Section entitled "Terms and Conditions".
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COMMONWEALTH CAPITAL SECURITIES CORP.
(800)497-4554
PLEASE MAKE CHECKS PAYABLE TO:
CHASE MANHATTAN TRUST CO., ESCROW AGENT,
(COMMONWEALTH INCOME & GROWTH FUND III)
Mailing Address:
COMMONWEALTH CAPITAL SECURITIES CORP.
P.O. BOX 535
PAOLI, PA 19301-0535
Subscription Questions:
(800)497-4554
Fax (610)647-8858
<PAGE>
SUBSCRIPTION AGREEMENT
COMMONWEALTH INCOME & GROWTH FUND III
TERMS AND CONDITIONS
Each person or entity named as a registered owner on the Subscription
Agreement (the "Subscriber") desires to become a limited partner (a "Limited
Partner") of Commonwealth Income & Growth Fund III (the "Partnership") and to
purchase units of a limited partnership interest (the "Units") of the
Partnership in accordance with the terms and conditions of the final prospectus
pursuant to which the Partnership will offer Units to the public including any
amendments and supplements thereto (the "Prospectus"), and of the Partnership's
Amended and Restated Agreement of Limited Partnership (the "Partnership
Agreement"), attached as Exhibit 1 to the Prospectus. BY EXECUTING THIS
AGREEMENT, A SUBSCRIBER DOES NOT WAIVE ANY RIGHTS HE MAY HAVE UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934 or any State
Securities or Blue Sky law. In connection herewith, the Subscriber represents,
warrants, and agrees as follows:
1. SUBSCRIPTION. The Subscriber agrees to purchase the number of Units set
forth in the space provided on the Signature Page of this Subscription Agreement
and delivers herewith the full amount required to purchase such Units.
2. ACCEPTANCE. The Subscriber hereby acknowledges and agrees that the
general partner of the Partnership (the "General Partner") may in its sole and
absolute discretion accept or reject the Subscriber's subscription, in whole or
in part, and that, if rejected, the amount of the Subscriber's subscription
which is rejected will be promptly returned to Subscriber, without interest. The
General Partner may not complete the sale of a Unit to a Subscriber until at
least five business days after the date the Subscriber received the Prospectus.
3. NO REVOCATION. The Subscriber hereby acknowledges and agrees that he
will not be entitled to revoke or withdraw his subscription, except during the
five business days following the subscriber's receipt of the prospectus.
4. ADOPTION OF PARTNERSHIP AGREEMENT. The Subscriber hereby accepts, adopts
and agrees to be bound by each and every provision contained in the Partnership
Agreement and agrees to become a Limited Partner thereunder.
5. POWER OF ATTORNEY. The Subscriber hereby irrevocably makes, constitutes
and appoints the General Partner, with full power of substitution and
ratification, its true and lawful attorney-in-fact for the purposes and in the
manner provided in the Partnership Agreement.
6. REPRESENTATION AND WARRANTIES. The Subscriber (which, for this purpose,
includes any Financial Consultant and Branch Manager executing this Subscription
Agreement on behalf of the Subscriber) represents and warrants to the
Partnership, the General Partner, the affiliates, agents and representatives of
the Partnership or the General Partner, and any broker-dealer involved in the
offering of Units for sale that:
(a) the Subscriber has received the Prospectus;
(b) the Subscriber has received the form of Partnership Agreement;
(c) the Subscriber meets the minimum financial suitability standards set
forth in the Prospectus under "Investor Suitability Standards," as
well as any additional minimum financial suitability standards
required by state securi- ties authorities which are applicable to the
Subscriber.
(d) the Subscriber is subscribing for Units in his own account or for the
account or benefit of a family member or members or in a fiduciary
capacity for the account of another person; and
(e) the Subscriber has received no representations or warranties from the
Partnership, the General Partner, or any affiliates, agents or
representatives of the Partnership or the General Partner other than
those contained in the Prospectus, except as follows:
The Partnership reserves the right to assert these representations as a
defense in any subsequent litigation in which one or more of the representations
is in issue; provided, however, that the representations contained in Paragraph
6(e) shall not be binding on any Subscriber resident in Arizona, Maine,
Minnesota, Missouri, Nebraska, Pennsylvania, Tennessee or Texas. Subscribers in
Arizona, Michigan, Missouri, Nebraska, and Texas are required to sign or initial
each representation contained in paragraph (6) above.
NOTICE TO ALL INVESTORS:
(a) The purchase of Units for an IRA or Keogh plan does not itself create
the plan.
(b) Section 1446 of the Internal Revenue Code provides that a partnership
must pay a withholding tax to the Internal Revenue Service with
respect to a partner's allocable share of such partnership's
effectively connected taxable income if the partner is a foreign
person, and the Partnership Agreement authorizes the Partnership to
withhold any required amounts from distribution otherwise payable to
any foreign person.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
SUBSCRIPTION AGREEMENT, SIGNATURE PAGE AND POWER OF ATTORNEY
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1. UNITS PURCHASED: X $20.00 Per Unit = $ (Total Capital Contribution)
INITIAL INVESTMENT / / ADDITIONAL INVESTMENT / /(IN THIS FUND)
DO YOU WISH TO RECEIVE QUARTERLY OR MONTHLY DISTRIBUTIONS? / / QUARTERLY
/ /MONTHLY
ARE YOU AN EMPLOYEE OF A SELECTED AGENT, IS THIS A NAV PURCHASE? YES / /
NO / /
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2. REGISTRATION INFORMATION - INVESTOR'S ACCOUNT NUMBER:_____________
(with broker's firm, if applicable)
LEGAL ACCOUNT TITLE:
INVESTORS NAME(S) OR
TRUSTEE(S) OR CUSTODIAN(S)
INVESTOR DATE OF TRUST/IRA
NAME(S) AND/OR IRA NUMBER:
SOCIAL SECURITY NUMBER: CORPORATE/CUSTODIAL TAX I.D.
(REQUIRED ALSO FOR IRA/QUALIFIED PLAN INVESTORS)
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LEGAL RESIDENT/BUSINESS/CUSTODIAL ADDRESS:
CITY/STATE BUSINESS/CUSTODIAL
ZIP + 4 HOME PHONE: PHONE:
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ADDITIONAL MAILING ADDRESS - If Different from Above (Or Investor Address if
Custodial Account) - Must Complete to Receive Copies of Statements & Reports.
Street City State Zip + 4
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3. PLEASE INDICATE CITIZENSHIP STATUS: (PLEASE REVIEW "INVESTOR SUITABILITY
STANDARDS" IN THE PROSPECTUS)
US CITIZEN / / RESIDENT ALIEN / / NON-RESIDENT ALIEN (Attach IRA Form W8) / /
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If Corporation or Partnership: U.S. / / or FOREIGN (Attach IRA Form W8) / /
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4. TYPE OF REGISTRATION (CHECK ONE):
/ / INDIVIDUAL / / JOINT TENANTS WITH RIGHT OF SURVIVORSHIP
/ / IRA / / PARTNERSHIP
/ / OTHER TAX-EXEMPT ENTITY / / QUALIFIED PLAN
/ / CORPORATION / / UNIFORM GIFT TO MINORS ACT STATE OF_____
/ / TENANTS IN COMMON / / TRUST (SPECIFY)_________________________
/ / COMMUNITY PROPERTY / / OTHER (SPECIFY)_________________________
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5. SIGNATURE: I certify that (1) I have received the Prospectus relating to
Commonwealth Income & Growth Fund III as supplemented (the "Prospectus" and the
"Limited Partnership Agreement"), (2) I agree to the provisions on the reverse
hereof, (3) by executing this Subscription Agreement, I am entering into a
limited partnership agreement and agreeing to invest money, (4) the information
set forth in this Subscription Agreement, Signature Page and Power of Attorney
is true and correct, (5) I meet the minimum financial suitability standards
described in the Prospectus under "Investor Suitability Standards", and, I
declare under penalty of perjury that (6) I have entered my correct taxpayer
identification or social security number on this form and (7) I verify that I am
not subject to withholding either because I have not been notified that I am
subject to backup withholding as result of a failure to report all interests or
dividends, or the Internal Revenue Service has notified me that I am no longer
subject to backup withholding (if the undersigned is subject to backup
withholding, they shall strike out the language in clause (7) before signing
below), and (8) I acknowledge that this investment is not liquid.
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X X
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SUBSCRIBER'S SIGNATURE DATE CO-SUBSCRIBER'S SIGNATURE OR DATE
AUTHORIZED/CUSTODIAL REPRESENTATIVE
If Financial Consultant and Branch Manager are executing the signature page,
both must sign below. Authorized custodian signature required for IRA/custodian
accounts. Financial Consultant and Branch Managers may NOT sign on behalf of
residents of Florida, Iowa, Maine, Michigan, Minnesota, Missouri, Nebraska,
North Carolina, Oregon, and Tennessee. (NOTE: Not to be executed until
Subscriber(s) has (have) acknowledged receipt of final Prospectus.)
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X X
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FINANCIAL CONSULTANT'S SIGNATURE DATE BRANCH MANAGER'S SIGNATURE DATE
- --------------------------------------------------------------------------------
6. SPECIAL PAYMENT INSTRUCTIONS: Payment to other individual or entity as
designated below. Investor must complete this section if they want cash
distributions made to anyone other than the records holder. Investors requesting
direct deposit of distribution checks to another financial institution or mutual
fund please complete below:
Please Check if: ______ You wish Distributions of the Partnership to be
reinvested in additional Units during the Offering
Period.
______ You wish Distributions to be sent to the Payee and
Address listed below. Please complete the following
information.
Payee Name:_____________________________________________________________________
For Account Of: ____________________ Account Number: ________________________
Street Address: __________________ City/State/Zip+4: ______________________
Phone Number: _____________________
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7. BROKER/DEALER DATA: Completed by selling Financial Consultant (PLEASE ENTER
YOUR OFFICE ADDRESS HERE)
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FINANCIAL CONSULTANT(S) NAME ADDRESS
- ----------------------------------- --------------------------------
BROKER/DEALER FIRM NAME CITY/STATE/ZIP + 4
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FINANCIAL CONSULTANT'S PHONE NUMBER FAX NUMBER
BY SELLING FINANCIAL CONSULTANT: In compliance with Section (3)b and 4(d) of
Appendix F of Article III, Section 34 of the NASD Rules of Fair Practice, I
represent that I have reasonable grounds to believe, based on information from
the investor(s) concerning investment objectives, other investments, financial
situation and needs, and any other information known by me, that investment in
the Partnership is suitable for such investor(s) and that I have informed the
investor(s) of the lack of liquidity and marketability of the investment and
confirm that the investor(s) signatures appears above. (Signatures of both
representatives required if joint account.)
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X X
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FINANCIAL CONSULTANT'S SIGNATURE DATE BRANCH MANAGER'S SIGNATURE DATE
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THIS SUBSCRIPTION AGREEMENT, SIGNATURE ------------------ -----------------
PAGE AND POWER OF ATTORNEY WILL NOT BE RESERVATION NUMBER CCSC RECEIPT DATE
AN EFFECTIVE AGREEMENT UNTIL IT ------------------ -----------------
IS ACCEPTED BY THE GENERAL PARTNER FC NUMBER DATE INTO ESCROW
OF COMMONWEALTH INCOME & GROWTH FUND III. ------------------ -----------------
ACCOUNT NUMBER CLOSING NUMBER
AGREED TO AND ACCEPTED BY:
----------------
(GENERAL PARTNER)
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<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
RESTATED LIMITED PARTNERSHIP AGREEMENT
_______________________, 1997
<PAGE>
TABLE OF CONTENTS
PAGE
INTRODUCTION 1
ARTICLE 1: Definitions 1
ARTICLE 2: Organization 8
2.1. Continuation 8
2.2 Name. 8
2.3 Place of Business. 8
2.4 Registered Office and Registered Agent. 9
2.5 Business. 9
2.6 Term. 9
ARTICLE 3: Capital Contributions and Status of Partners 9
3.1 General Partner. 9
3.2 Limited Partners. 9
3.3 Capital Contribution of Limited Partners 9
3.4 Registration. 10
3.5 Withdrawal of Capital Contributions. 10
3.7 Continuation of Limited Partner Status. 10
3.8 Limited Liability of Limited Partners. 10
ARTICLE 4: Partners'Capital 11
4.1 Capital Accounts. 11
4.2 Withdrawal and Return of Capital. 11
4.3 Interest on Capital. 11
ARTICLE 5: Partnership Expenses 11
5.1 Organization Expenses. 11
5.2 Other Expenses. 11
5.3 Excluded Expenses. 13
ARTICLE 6: Compensation of the General Partner 13
6.1 Organizational Fee. 13
6.2 Equipment Management Fee. 13
6.3 Equipment Acquisition Fee. 13
6.4 Equipment Liquidation Fee. 13
6.5 Debt Placement Fee. 14
6.6 Limitations on Fees. 14
ARTICLE 7: Allocation of Net Profits, Net Losses and Other Items 14
7.1 Net Profits. 14
7.2 Net Losses. 15
7.3 Required Allocations. 15
7.4 Syndication Expenses. 16
<PAGE>
7.5 Recharacterization of Fees. 16
7.6 Recapture. 16
7.7 Allocations Among Limited Partners. 16
7.8 Other Allocations. 16
ARTICLE 8: Distributions 17
8.1 Cash Distributions. 17
8.2 Allocation of Distributions to Limited Partners. 18
8.3 Amounts Withheld. 18
8.4 Return of Offering Proceeds. 18
ARTICLE 9: Rights, Powers, and Duties of General Partner 19
9.1 Rights and Powers. 19
9.2 Reliance on Certificate of General Partner. 21
9.3 Independent Activities. 21
9.4 Duties. 21
9.5 Restrictions on Authority. 22
9.6 General Partner's Net Worth. 25
ARTICLE 10: Rights of Limited Partners 25
10.1 No Limited Partner in Control. 25
10.2 Voting Rights. 25
10.3 Conversions and Roll-Ups. 26
10.4 Meetings. 27
10.5 Certain Amendments. 27
ARTICLE 11 Transfer of Units 28
11.1 Assignment. 28
11.2 Substituted Limited Partners. 29
11.3 Transfer Fee. 29
11.4 General. 29
ARTICLE 12 Redemption 30
ARTICLE 13 General Partner's Interest 30
13.1 Voluntary Withdrawal or Assignment. 30
13.2 Removal. 30
ARTICLE 14 Dissolution, Continuation and Termination 30
14.1 Dissolution 30
14.2 Continuation. 31
14.3 Purchase of Interest of General Partner. 31
14.4 Liquidation. 32
ARTICLE 15 Accounting and Fiscal Matters 32
15.1 Partnership Records. 32
15.2 Accounting; Fiscal Year. 33
15.3 Reports. 33
15.4 Bank Accounts. 35
15.5 Partnership Returns. 35
ARTICLE 16 Power of Attorney 35
16.1 Power of Attorney. 35
ARTICLE 17 Liability and Indemnification of General Partner 35
17.1 Exclusion of Liability for Return of Capital
Contributions. 36
17.2 Limitation on Liability of General Partner;
Indemnification. 36
ARTICLE 18 Tax Exempt Limited Partners 37
18.1 Tax Exempt Limited Partners. 37
ARTICLE 19: Miscellaneous 37
19.1 Notices. 37
19.2 Parties in Interest. 37
19.3 Section Captions. 37
19.4 Severability. 37
19.5 Right to Rely on General Partner. 38
19.6 Pennsylvania Law. 38
19.7 Exclusive Jurisdiction. 38
19.8 Counterpart Execution. 38
19.9 Gender. 38
19.10 Integrated Agreement. 38
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
RESTATED LIMITED PARTNERSHIP AGREEMENT
RESTATED LIMITED PARTNERSHIP AGREEMENT, dated as of _________, 1997, by and
among Commonwealth Income & Growth Fund, Inc., a Pennsylvania corporation (the
"General Partner"), David A. Kintzer (the "Initial Limited Partner"), and the
persons who on or after the execution of this Agreement are admitted as limited
partners of the Partnership.
INTRODUCTION
On April 17, 1997, the General Partner and the Initial Limited Partner,
formed Commonwealth Income & Growth Fund III as a Pennsylvania limited
partnership (the "Partnership") by the filing of a certificate of limited
partnership in the Office of the Department of State of the Commonwealth of
Pennsylvania. The parties desire to effect the withdrawal of the Initial Limited
Partner, and the admission of the purchasers of the Partnership's Units as
limited partners of the Partnership and to restate the agreement of the Partners
to read in its entirety as set forth below. To accomplish this, the parties
agree that (i) the persons whose subscriptions for Units have been accepted by
the General Partner and who are reflected in the records of the Partnership as
purchasing Units on the date hereof are admitted as limited partners of the
Partnership; (ii) the Initial Limited Partner withdraws as a limited partner of
the Partnership and is released from all its obligations to the Partnership, and
the Partnership shall promptly return the Initial Limited Partner's capital
contribution, and (iii) the agreement of the Partners is hereby restated to read
in its entirety as set forth below.
ARTICLE 1
DEFINITIONS
The following terms used in this Agreement shall have the meanings set
forth below.
"Acquisition Expenses" means expenses relating to the prospective selection
and acquisition of or investment in Equipment, whether or not actually acquired,
including, but not limited to, legal fees and expenses, travel and communication
expenses, costs of appraisals, accounting fees and expenses and miscellaneous
expenses.
"Acquisition Fees" means the total of all fees and commissions paid by any
party in connection with the initial purchase of Equipment acquired by the
Partnership. Included in the computation of such fees or commissions shall be
the Equipment Acquisition Fee, any commission, selection fee, construction
supervision fee, financing fee, non-recurring management fee or any fee of a
similar nature, however designated.
"Act" means the Pennsylvania Revised Uniform Limited Partnership Act.
"Adjusted Basis" means the basis, as defined in Section 1011 of the Code,
for determining gain or loss for federal income tax purposes from the sale,
transfer, or other disposition of property.
"Adjusted Capital Contributions" means Capital Contributions of the Limited
Partners reduced to not less than zero by any cash distribution received by the
Limited Partners pursuant to Sections 4.2 or 8.1, to the extent such
distributions exceed any unpaid Cumulative Return as of the date such
distributions were made.
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"Affiliate" means, when used with reference to a specified Person, (i) any
Person, that directly or indirectly through one or more intermediaries controls
or is controlled by or is under common control with the specified Person, (ii)
any Person that is a director or an executive officer of, partner in, or serves
in a similar capacity to, the specified Person, or any Person of which the
specified Person is an executive officer or partner or with respect to which the
specified Person serves in a similar capacity, (iii) any Person owning or
controlling 10% or more of the outstanding voting securities of such specified
Person, or (iv) if such Person is an officer, director or partner, any entity
for which such Person acts in such capacity.
"Agreement" means this Restated Limited Partnership Agreement, as amended
from time to time.
"Average Daily Units" means for any period an amount equal to the sum of
the outstanding Limited Partners' Units as of the close of business on each day
in the period, divided by the number of days in the period.
"Bankrupt" or "Bankruptcy" means, when used with reference to a specified
Person, (a) if such Person (i) files any application or petition in any tribunal
for the appointment of a trustee or receiver, or (ii) commences any proceeding
under any bankruptcy or reorganization statute, or under any provision of the
United States Bankruptcy Code, or under any insolvency law, or under any
dissolution or liquidation law whether now or hereafter in effect, or (b) if any
petition or application of the type described in subsection (a) above is
commenced against such Person and is not dismissed within 60 days of filing, or
an order is entered appointing a trustee or receiver for such Person, or an
order for relief is issued in any bankruptcy.
"Capital Account" means the separate account established for each Partner
pursuant to Section 4.1.
"Capital Contributions" means, in the case of the General Partner, the
total amount of money contributed to the Partnership by the General Partner,
and, in the case of the Limited Partners, $20 for each Unit or where the context
requires, the total Capital Contributions of all the Partners.
"Cash Available for Distribution" means Cash Flow plus Net Disposition
Proceeds plus cash funds available for distribution from Partnership reserves,
less such amounts as the General Partner, in accordance with this Agreement,
causes the Partnership to reinvest in Equipment or interests therein, and less
such amounts as the General Partner, in its sole discretion, determines should
be set aside for the restoration or enhancement of Partnership reserves.
"Cash Flow" for any fiscal period means the sum of (i) cash receipts from
operations, including, but not limited to, rents or other revenues arising from
the leasing or operation of the Equipment and interest, if any, earned on funds
on deposit for the Partnership, but not including Net Disposition Proceeds,
minus (ii) all cash expenses and costs incurred and paid in connection with the
ownership, lease, management, use and/or operation of the Equipment, including,
but not limited to, fees for handling and storage; all interest expenses paid
and all repayments of principal regarding borrowed funds; maintenance; repair
costs; insurance premiums; accounting and legal fees and expenses; debt
collection expenses; charges, assessments or levies imposed upon or against the
Equipment; ad valorem, gross receipts and other property taxes levied against
the Equipment; and all costs of repurchasing Units in accordance with this
Agreement; but not including depreciation or amortization of fees or capital
2
<PAGE>
expenditures, or provisions for future expenditures, including, without
limitation, Organizational and Offering Expenses.
"Certificate" means the certificate of limited partnership filed by the
Partnership in the Office of the Department of State of the Commonwealth of
Pennsylvania as may be amended from time to time.
"Closing Date" means the date, as designated by the General Partner, as of
which the Units shall cease being offered to the public pursuant to the
Offering, and shall be no later than the second anniversary of the Effective
Date.
"Code" means the Internal Revenue Code of 1986, as amended, and as may be
amended from time to time by future federal tax statutes. Any reference this
Agreement to a particular provision of the Code shall mean, where appropriate,
the corresponding provision of any successor statute.
"Competitive Equipment Sale Commission" means that brokerage fee paid for
services rendered in connection with the purchase or sale of Equipment which is
reasonable, customary, and competitive in light of the size, type, and location
of the Equipment.
"Conditional Sales Contract" means an agreement to sell Equipment to a
buyer in which the seller reserves title to, and retains a security interest in,
the Equipment until the Purchase Price of the Equipment is paid.
"Controlling Person" means any person, whatever his or her title,
performing functions for the General Partner or its Affiliates similar to those
of chairman or member of the Board of Directors or executive management (such as
the president, vice president or senior vice president, corporate secretary or
treasurer), senior management (such as the vice president of an operating
division who reports directly to executive management), or any person holding a
five percent or more equity interest in the General Partner or its Affiliates or
having the power to direct or cause the direction of the General Partner or its
Affiliates, whether through the ownership of voting securities, by contract, or
otherwise.
"Cumulative Return" means the amount equal to a return at a rate of 10% per
annum, compounded daily, on the Adjusted Capital Contribution for all
outstanding Units, which amount shall begin accruing at the end of the calendar
quarter in which such Units are sold by the Partnership.
"Debt Placement Fee" means the fee payable to the General Partner in
accordance with Section 6.5 of this Agreement.
"Distribution Fee" means for any year until changed by the General Partner
in accordance with the following sentence, an amount equal to $50.00. The
General Partner may change the amount of the Distribution Fee only by written
notice to each Limited Partner who properly has elected to receive monthly
distributions at least 30 days prior to the beginning of the calendar quarter
that includes the first month to which the new Distribution Fee will apply. The
Distribution Fee is designed to cover the additional postage and handling
associated with the more frequent monthly distributions; the payment of which
shall be subtracted equally from the distribution check of any Limited Partner
receiving distributions of net cash flow on a monthly basis.
"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.
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"Equipment" means each item of and all of the computer peripheral and other
similar capital equipment purchased, owned, operated, and/or leased by the
Partnership or in which the Partnership has acquired a direct or indirect
interest, as more fully described in this Agreement, together with all
appliances, parts, instruments, accessories, furnishings, or other equipment
included therein and all substitutions, renewals, or replacements of, and all
additions, improvements, and accessions to, any and all thereof.
"Equipment Acquisition Fee" means the fee payable to the General Partner in
accordance with Section 6.3 of this Agreement.
"Equipment Liquidation Fee" means the fee payable to the General Partner in
accordance with Section 6.4 of this Agreement.
"Equipment Management Fee" means the fee payable to the General Partner in
accordance with Section 6.2 of this Agreement.
"Equipment Management" means personnel and services necessary to the
leasing activities of the Partnership, including but not limited to, leasing and
re-leasing of Equipment, arranging for necessary maintenance and repair of the
Equipment, collecting revenues, paying operating expenses, determining that the
equipment is used in accordance with all operative contractual arrangements and
providing clerical and bookkeeping services necessary to the operation of
Equipment.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means the account at PNC Bank, Philadelphia, Pennsylvania
where Subscriptions will be held until they aggregate the Minimum Subscription
Amount of $1,500,000.
"Final Closing" means the last time at which subscribers for Units are
admitted as Limited Partners.
"Front-End Fees" means fees and expenses paid by any Person to any Person
during the Partnership's organizational and acquisition phase including all
Organizational and Offering Expenses (including the Organizational Fee),
Acquisition Fees, Acquisition Expenses, Debt Placement Fees, Leasing Fees, and
other similar fees and expenses; provided, however, any costs or expenses
incurred by the General Partner or its Affiliates (not including the
Partnership) which are not reimbursed by the Partnership, shall not be included
as Front-End Fees.
"Full Payout Net Lease" means an initial Net Lease of the Equipment under
which the non-cancellable rental payments due (and which can be calculated at
the commencement of the Net Lease) during the initial noncancellable fixed term
(not including any renewal or extension period) of the lease or other contract
for the use of the Equipment are at least sufficient to recover the Purchase
Price of the Equipment.
"Funding Date" means the date on which Capital Contributions are released
to the Partnership from the Escrow Account.
"General Partner" means Commonwealth Income & Growth Fund, Inc. and any
additional, substitute or successor general partner of the Partnership.
4
<PAGE>
"Gross Lease Revenues" means Partnership gross receipts from leasing or
other operation of the Equipment, except that, to the extent the Partnership has
leased the Equipment from an unaffiliated party, it shall mean such receipts
less any lease expense.
"Independent Expert" means a Person with no current material or prior
business or personal relationship with the General Partner who is engaged to a
substantial extent in the business of rendering opinions regarding the value of
assets of the type held by the Partnership and who is qualified to perform such
work.
"Initial Closing" means the first time subscribers for Units are admitted
as Limited Partners.
"Investment in Equipment" means the amount of Capital Contributions
actually paid or allocated to the purchase of or investment in Equipment by the
Partnership including working capital reserves (except that working capital
reserves in excess of three percent of Capital Contributions shall not be
included) and other cash payments such as interest and taxes, but excluding
Front-End Fees.
"IRA" means an Individual Retirement Account as described in Section 408 of
the Code.
"Leasing Fees" means the total of all fees and commissions paid by any
party in connection with the initial lease of Equipment acquired by the
Partnership.
"Limited Partner" means a Person who acquires Units and who is admitted to
the Partnership as a limited partner in accordance with the terms of this
Agreement.
"Majority in Interest" means, with respect to the Partnership, Limited
Partners holding more than 50% of the outstanding Units held by all Limited
Partners at the Record Date for any vote or consent of the Limited Partners.
"Minimum Subscription Amount" means an aggregate of $1,500,000 in
subscriptions from Limited Partners.
"Monthly Distribution Account" means an account established by the
Partnership for the benefit of those Limited Partners who elect to receive
monthly distributions of Cash Available for Distribution, into which account the
amounts specified in 8.1.2(a)(iii) shall be deposited.
"Net Disposition Proceeds" means the net proceeds realized by the
Partnership from the refinancing, sale or other disposition of Equipment,
including insurance proceeds or lessee indemnity payments arising from the loss
or destruction of Equipment, less such amounts as are used to satisfy
Partnership liabilities.
"Net Lease" means a lease or other contract under which the owner provides
equipment to a lessee or other operator in return for a payment, and the lessee
assumes all obligations and pays for the operation, repair, maintenance, taxes
and insuring of the equipment, so that the non-cancellable rental payments under
the lease are absolutely net to the lessor.
"Net Profits" or "Net Losses" shall be computed in accordance with Section
703(a) of the Code (including all items of income, gain, loss or deduction
required to be stated separately pursuant to Section 703(a)(1) of the Code) for
each taxable year of the Partnership or shorter period prior or
5
<PAGE>
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.
"Organizational Fee" means the fee payable to the General Partner in
accordance with Section 6.1 of this Agreement.
"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.
"Partnership Interest" means the ownership interest of a Partner in the
Partnership, as represented by his Capital Account, including all rights of such
Partner under this Agreement.
"Person" means an individual, partnership, joint venture, corporation,
trust, estate or other entity.
"Program" means a limited or general partnership, joint venture,
unincorporated association or similar organization, other than a corporation
formed and operated for the primary purpose of investment in and the operation
of or gain from an interest in Equipment.
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"Prospectus" means the Partnership's prospectus contained in the
Registration Statement filed with the Securities and Exchange Commission
("Commission") for the registration of the Units under the Securities Act of
1933, as amended (the "1933 Act"), at effectiveness of such Registration
Statement except that (A) if the Partnership files a post-effective amendment to
the Registration Statement, then the term "Prospectus" shall, from and after the
effectiveness of such post-effective amendment, refer to the amended prospectus
then on file with the Commission and (B) if the Partnership files a form of
prospectus or prospectus supplement pursuant to Rule 424(b) of the regulations
of the Commission under the 1933 Act, then the term "Prospectus" shall refer to
the prospectus as so filed or supplemented from and after the date of such
filing.
"Purchase Price" means, with respect to any Equipment, an amount equal to
the sum of (i) the invoice cost of such Equipment or any other such amount paid
to the seller, (ii) any closing, delivery and installation charges associated
therewith not included in such invoice cost and paid by or on behalf of the
Partnership, (iii) the cost of any capitalized modifications or upgrades paid by
or on behalf of the Partnership in connection with its purchase of the
Equipment, and (iv) the amount of the Equipment Acquisition Fee and any other
Acquisition Fees, but excluding points and prepaid interest.
"Qualified Plan" means a trust established pursuant to the terms of a
pension, profit sharing or stock bonus plan, including Keogh Plans, meeting the
requirements of Section 401 and following of the Code.
"Record Date" means, (a) for purposes of a meeting of, or actions by, the
Limited Partners pursuant to Article 10 of this Agreement, the close of business
on the business day preceding the date on which the written notice referred to
in that Article is given, and (b) for purposes of Article 12 of this Agreement,
the close of business on December 31 and June 30 of each year.
"Retiring General Partner" means a general partner of the Partnership who
or which has been removed or withdrawn as such or is Bankrupt, which has been
involuntarily dissolved, or who has died or had a conservator appointed for the
person or any of the property of such general partner.
"Roll-Up" means a transaction involving the acquisition, merger,
conversion, or consolidation, either directly or indirectly, of the Partnership
and the issuance of securities of a Roll-Up Entity. Such term does not include:
(i) a transaction involving securities if the securities have been listed for at
least twelve months on a national securities exchange or traded through the NASD
Automated Quotation National Market System; or (ii) a transaction involving the
conversion to corporate, trust or association form of only the Partnership if,
as a consequence of the transaction, there will be no significant adverse change
in any of the following: (a) the Limited Partners' voting rights; (b) the term
of existence of the Partnership; (c) compensation of the General Partner or its
Affiliates; or (d) the Partnership's investment objectives.
"Roll-Up Entity" means the partnership, corporation, trust or other entity
that would be created or would survive after the successful completion of a
proposed Roll-Up transaction.
"Participating Broker" means a member of the National Association of
Securities Dealers, Inc. who will be engaged to sell Units.
"Sponsor" means any Person directly or indirectly instrumental in
organizing, wholly or in part, a Program or any Person who will manage or
participate in the management of a Program, and any Affiliate of any such
Person. Sponsor does not include a Person whose only relation with the Program
is
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<PAGE>
that of an independent equipment manager and whose only compensation is as such.
Sponsor does not include wholly independent third parties such as attorneys,
accountants, and underwriters whose only compensation is for professional
services rendered in connection with the offering of Program interests.
"Substituted Limited Partner" means any Person admitted to the Partnership
as a Limited Partner pursuant to the provisions of Section 11.2 of this
Agreement.
"Syndication Expenses" means all expenditures classified as syndication
expenses pursuant to Treasury Regulations Section 1.709-2(b). Syndication
Expenses shall be taken into account under this Agreement at the time they would
be taken into account under the Partnership's method of accounting if they were
deductible expenses.
"Term Debt" means debt of the Partnership with a term in excess of twelve
months, incurred with respect to acquiring or investing in Equipment, or
refinancing non-Term Debt, but not debt incurred with respect to refinancing
existing Partnership Term Debt.
"Terminating Event" means the first to occur of the withdrawal, removal,
retirement, resignation, expulsion, Bankruptcy, involuntary dissolution, death,
insanity or appointment of a conservator for the person or any of the assets of
the last remaining general partner of the Partnership.
"Treasury Regulations" means the income tax regulations promulgated under
the Code, as such regulations may be amended from time to time (including
corresponding provisions of successor regulations).
"Underwriting Commissions" mean selling commissions and dealer-manager fees
paid to broker-dealers by the Partnership in connection with the offer and sale
of Units.
"Unit" means a limited partnership interest in the Partnership.
ARTICLE 2
ORGANIZATION
2.1. CONTINUATION. The Partners hereby continue the Partnership as a
limited partnership under the Act.
2.2 NAME. The name of the Partnership shall continue to be "Commonwealth
Income & Growth Fund III" or such other name as may be selected by the General
Partner, who shall give notice of any such other name to the Limited Partners.
2.3 PLACE OF BUSINESS. The principal place of business of the Partnership
shall be 1160 W. Swedesford Road, Suite 340, Berwyn, PA 19312, or at another
location selected by the General Partner, who shall give notice of any such
other location to the Limited Partners. The Partnership may have such additional
offices or places of business as the General Partner may determine.
2.4 REGISTERED OFFICE AND REGISTERED AGENT. The Partnership's registered
office in the Commonwealth of Pennsylvania and its registered agent at such
other office shall be determined by the General Partner.
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2.5 BUSINESS. The principal business and purpose of the Partnership is to
purchase, acquire, own, lease, re-lease, maintain, improve, manage, pledge,
finance, convey, assign, dispose and sell Equipment pursuant to such
arrangements as the General Partner in its sole discretion may enter into on
behalf of the Partnership. The purpose and business of the Partnership includes
the realization and distribution of cash from sales or other dispositions of
Equipment. The Partnership is authorized to take any and all actions necessary,
appropriate, advisable, incidental to, convenient for or related to this purpose
or for the protection and benefit of the Partnership, unless expressly
prohibited by this Agreement.
2.6 TERM. The Partnership shall exist for a term ending December 31, 2009,
at which time it shall be dissolved, unless previously dissolved in accordance
with this Agreement.
ARTICLE 3
CAPITAL CONTRIBUTIONS AND STATUS OF PARTNERS
3.1 GENERAL PARTNER. The General Partner has contributed $1,000 to the
capital of the Partnership. Except as provided in this Section and Section
14.4.3, the General Partner shall have no obligation to make any Capital
Contribution or to loan or otherwise provide funds to the Partnership or any
partnership, joint venture or other entity in which the Partnership has an
interest, even if the failure to do so would or could result in a default by the
Partnership, foreclosure upon the properties of the Partnership or any such
partnership, joint venture or other entity, or any other consequence adverse to
the Partnership or any such partnership, joint venture or other entity.
3.2 LIMITED PARTNERS. Limited Partners shall be those persons whose
subscriptions for Units have been accepted by the General Partner and who are
reflected in the records of the Partnership as purchasing Units from the
Partnership and Substituted Limited Partners where a transfer of Units is made
pursuant to Article 11. The Partnership intends to offer and sell not less than
$1,500,000 nor more than $15,000,000 worth of Units of limited partnership
interests and to admit as Limited Partners the persons who contribute cash to
the capital of the Partnership as the purchase price for the Units.
3.3 CAPITAL CONTRIBUTION OF LIMITED PARTNERS.
3.3.1 Each Limited Partner shall make a capital contribution of
$20.00, (or the subscription price of $20.00 less the volume discount stated in
the Prospectus), as the purchase price for each Unit which he purchases from the
Partnership. The Capital Contributions of the Limited Partners shall be made in
cash. Except as required by the Act, each Unit shall be fully paid and
non-assessable, and no assessments for payments by the Limited Partners will be
made by the General Partner.
3.3.2 Any portion of the net proceeds from sales of the Units which is
not invested or committed for investment in Equipment or for any Partnership
purposes or reserved for necessary operating expenses within 12 months from the
Final Closing shall be distributed to the Limited Partners by the Partnership as
a return of capital, without reduction for the General Partner's Organizational
Fee or for any Equipment Acquisition Fee which would have been payable to the
General Partner if such proceeds had been invested. Funds will be deemed to have
been committed to investment and will not be returned to the Limited Partners to
the extent written agreements in principle, commitment letters, letters of
intent or understanding or any similar contracts or understandings have, at any
time before the end of such 12-month period, been executed, provided that such
investments are consummated. Should any such investment not be consummated, the
funds attributable thereto shall be distributed to the Limited Partners in a
timely manner.
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3.4 REGISTRATION. Upon the admission of a person as a Limited Partner or
Substituted Limited Partner, such Person shall be registered on the records of
the Partnership as a Limited Partner, together with his address, the number of
Units he owns, and his transferor's Capital Contribution. Each person registered
as a holder of record of Units shall continue to be the holder of record of such
Units until notification of the transfer of any such Units is given in
accordance with the terms of this Agreement. A holder of record shall be
entitled to all distributions and all allocations of Net Profits and Net Losses
with respect to Units registered in his name and to all other rights of a
Limited Partner until his rights in such Units have been transferred and the
General Partner has been notified as required herein. The Partnership shall not
be affected by any notice or knowledge of transfer of any interest in any Unit,
except as expressly provided in Article 11. The payment to the holder of record
of any distribution with respect to such Units shall discharge the Partnership
of its obligations in respect thereto.
3.5 WITHDRAWAL OF CAPITAL CONTRIBUTIONS. Except as otherwise provided in
this Agreement, no Partner shall have the right to withdraw or reduce his
Capital Contribution. No Partner shall have the right to bring an action for
partition against the Partnership or to demand or receive property other than
cash in return for his capital contribution. No Limited Partner shall have
priority over any other Limited Partner, either as to the return of his Capital
Contribution or as to Net Profits, Net Losses or distributions.
3.6 ADMISSION OF LIMITED PARTNER. The Initial Closing shall take place not
later than 15 days after the release from the Escrow Account of the subscribers'
funds to the Partnership. Thereafter, subscribers shall be admitted as Limited
Partners not later than the last day of the calendar month following the date
their subscriptions are accepted by the Partnership. The General Partner shall
determine whether subscriptions received after the Initial Closing will be
accepted or rejected within 30 days of their receipt by the Partnership and, if
a subscription is rejected, the subscription funds will be promptly returned to
the subscriber without interest.
3.7 CONTINUATION OF LIMITED PARTNER STATUS. Once admitted as a Limited
Partner, a Person shall, except as otherwise provided in the Agreement, continue
to be a Limited Partner for all purposes of this Agreement and the Certificate
of Limited Partnership, as amended from time to time, until a Substituted
Limited Partner is admitted in place of such person pursuant to the provisions
of Article 11.
3.8 LIMITED LIABILITY OF LIMITED PARTNERS. No Limited Partner, in his
capacity as such, shall be liable for the debts, liabilities, contracts or any
other obligations of the Partnership or any partnership, joint venture or other
entity in which the Partnership has an interest. No Limited Partner shall be
obligated to make any Capital Contribution or to loan or otherwise provide funds
to the Partnership; provided, however, in accordance with the Act, Limited
Partners will be obligated to return any distribution from the Partnership to
the extent that, after giving effect to the distribution, all liabilities of the
Partnership (other than nonrecourse liabilities and liabilities to Limited
Partners on account of their interests in the Partnership) exceed the fair value
of its assets (including, as to assets serving as security for nonrecourse
liabilities, that portion of the fair value of such assets which exceeds the
amount of such nonrecourse liabilities).
ARTICLE 4
PARTNERS' CAPITAL
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4.1 CAPITAL ACCOUNTS. A separate Capital Account shall be established and
maintained for each Partner. The Capital Account of each Partner shall be
credited with such Partner's Capital Contribution, plus all Net Profits and
items of income and gain of the Partnership allocated to such Partner pursuant
to Article 7, and shall be debited with the sum of (a) all Net Losses and items
of loss or deduction of the Partnership allocated to such Partner pursuant to
Article 7, and (b) all cash and the fair market value of any property (net of
liabilities of the Partnership assumed by such Partner and the liabilities to
which such property is subject) distributed by the Partnership to such Partner
pursuant to Article 8. The computation of the amount of the Capital Account of a
Partner shall be determined in all events solely in accordance with the rules
set forth in Treasury Regulation Section 1.704-1(b)(2)(iv). Any references in
this Agreement to the Capital Account of a Partner shall be deemed to refer to
such Capital Account as the same may be credited or debited from time to time as
set forth above in this Section 4.1.
4.2 WITHDRAWAL AND RETURN OF CAPITAL. No Limited Partner shall withdraw any
of his capital without the consent of the General Partner and Limited Partners
holding a Majority in Interest of the Units, except upon dissolution or
liquidation of the Partnership or as provided in Article 12. Under circumstances
requiring a return of any Capital Contribution or constituting a withdrawal of a
Limited Partner, no Limited Partner shall have the right to receive property
other than cash, except as may be specifically provided in this Agreement.
4.3 INTEREST ON CAPITAL. No interest shall be paid on any Capital
Contribution made to the Partnership.
ARTICLE 5
PARTNERSHIP EXPENSES
5.1 ORGANIZATION EXPENSES. The General Partner shall bear and pay all
Organizational and Offering Expenses other than Underwriting Commissions.
5.2 OTHER EXPENSES. All expenses of the Partnership, other than the
expenses required to be paid by the General Partner pursuant to Section 5.1,
shall be billed (to the extent practicable) directly to and paid by the
Partnership. Subject to Section 5.1, the General Partner and its Affiliates
shall be reimbursed for the actual cost of goods and materials used for or by
the Partnership and obtained from entities unaffiliated with the General
Partner. Subject to (and only in accordance with) the foregoing, the Partnership
shall pay (or reimburse the General Partner and its Affiliates for) the lower of
the actual cost or the amount the Partnership would have to pay independent
third parties for such services in the same geographic area of all expenses
related to the administration and operation of the Partnership, including
without limitation:
5.2.1 all costs of personnel involved in the business of the
Partnership;
5.2.2 all taxes and assessments on Equipment and other taxes
applicable to the Partnership;
5.2.3 legal, appraisal, audit, accounting and other professional fees;
5.2.4 printing and other expenses incurred in connection with the
transfer, registration and recording of documents evidencing ownership of Units
or in connection with the business of the Partnership;
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5.2.5 fees and expenses paid to independent contractors, mortgage
bankers, equipment brokers, servicers, leasing agents, consultants, equipment
lease brokers, insurance brokers and other agents;
5.2.6 expenses paid to nonaffiliated parties in connection with the
disposition, replacement, alteration, maintenance and repair, leasing,
re-leasing, storage and operation of Equipment (including the costs and expenses
for foreclosures, insurance premiums, equipment lease brokerage and leasing
commissions and of maintenance of Equipment);
5.2.7 subject to Section 9.4.4, expenses in connection with the
acquisition of Equipment other than Equipment acquired through the proceeds of
the offering of the Units;
5.2.8 expenses of revising, amending, converting, modifying or
terminating the Partnership or this Agreement;
5.2.9 the cost of preparation and dissemination of the informational
material and documentation relating to potential sale, leasing, re-leasing,
financing or other disposition of Equipment;
5.2.10 costs incurred in connection with any litigation in which the
Partnership is involved or proceedings conducted by any regulatory agency,
including legal and accounting fees incurred in connection therewith;
5.2.11 costs of any accounting, statistical or bookkeeping equipment
necessary for the maintenance of the books and records of the Partnership;
5.2.12 costs of investor communications and regulatory reports,
including without limitation initiation, review and approval of reports and
communications to Limited Partners or regulatory agencies; expenses in
connection with distributions made by the Partnership to, and communications,
bookkeeping and clerical work necessary in maintaining relations with, Limited
Partners, including the costs of design, production, printing and mailing of
reports, conducting elections in any circumstance requiring a vote of the
Limited Partners, holding meetings with Limited Partners, and preparing and
mailing reports required to be furnished to Limited Partners for tax reporting
or other purposes or reports which the General Partner deems to be in the best
interests of the Partnership;
5.2.13 expenses of professionals employed by the Partnership in
connection with any of the foregoing, including attorneys, accountants, and
appraisers; and
5.2.14 such other related administrative expenses as are necessary to
the prudent operation of the Partnership.
5.3 EXCLUDED EXPENSES. No reimbursement shall be permitted for services for
which the General Partner is entitled to compensation by way of a separate fee.
Excluded from the allowable reimbursement shall be (i) rent or depreciation,
utilities, capital equipment, other administrative items; and (ii) salaries,
fringe benefits, travel expenses and other administrative items incurred or
allocated to any Controlling Person of the General Partner.
ARTICLE 6
COMPENSATION OF THE GENERAL PARTNER
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6.1 ORGANIZATIONAL FEE. For the services and activities of the General
Partner performed and to be performed by the General Partner in connection with
the organization of the Partnership, the General Partner will be paid an
Organizational Fee equal to three percent of the first $10,000,000 of Limited
Partners' Capital Contributions plus two percent of the Limited Partners'
Capital Contributions in excess of $10,000,000. The Organizational Fee will
accrue and be paid as Limited Partners are admitted to the Partnership.
6.2 EQUIPMENT MANAGEMENT FEE. For the services and activities performed and
to be performed by the General Partner and its Affiliates in connection with
Equipment Management, the General Partner shall receive a monthly fee equal to
the lesser of (a) the fees which would be charged by an independent third party
in the same geographic market for similar services and equipment or (b) the sum
of (i) two percent of (A) the Gross Lease Revenues attributable to Equipment
subject to Full Payout Net Leases which contain net lease provisions plus, (B)
the purchase price paid on Conditional Sales Contracts as received by the
Partnership and (ii) five percent of the Gross Lease Revenues attributable to
Equipment subject to Operating Leases. The Equipment Management Fee shall accrue
as funds are received by the Partnership and shall be paid to the General
Partner on conclusion of each calendar month, except such Equipment Management
Fee may be accrued as a debt of the Partnership payable, without interest, out
of future available cash if the Partnership does not generate sufficient cash
from operations to pay the Equipment Management Fee currently, or if the General
Partner determines that such action is in the best interest of the Partnership.
Fees or expenses to nonaffiliated parties for such services and activities shall
be paid by the General Partner from its Equipment Management Fee.
6.3 EQUIPMENT ACQUISITION FEE. For the services and activities performed
and to be performed by the General Partner in connection with the acquisition
and lease of Equipment, the General Partner shall receive an Equipment
Acquisition Fee of four percent of the Purchase Price of each item of Equipment
purchased. The Equipment Acquisition Fee will be paid from the net proceeds of
the Offering which are available to be used to purchase Equipment when such
proceeds are received by the Partnership. To the extent that the Partnership
acquires Equipment at an aggregate Purchase Price exceeding the net proceeds of
the Offering available to be used to purchase Equipment, the Equipment
Acquisition fee will be paid with respect to that Equipment as the Equipment is
acquired.
6.4 EQUIPMENT LIQUIDATION FEE. For the services and activities to be
performed by the General Partner in connection with the disposition of the
Partnership's Equipment (other than by a Conditional Sales Contract), the
General Partner shall receive an Equipment Liquidation Fee equal to the lesser
of (a) 50% of the Competitive Equipment Sale Commission or (b) three percent of
the sales price of such Equipment. The payment of the Equipment Liquidation Fee
shall be made as proceeds of the sale are received and is subordinated to the
receipt by the Limited Partners of (a) a return of their Capital Contributions
plus the Cumulative Return and (b) the Net Disposition Proceeds from such sale.
Such fee will be reduced to the extent any liquidation or resale fees are paid
to unaffiliated parties.
6.5 DEBT PLACEMENT FEE. For the services rendered or to be rendered by the
General Partner's arrangement of Term Debt to finance the acquisition of
Equipment by the Partnership, the General Partner shall receive a Debt Placement
Fee equal to one percent of such indebtedness. Such fee shall be paid when the
proceeds of the Term Debt are received by the Partnership and shall be reduced
to the extent the Partnership incurs such fees to third parties unaffiliated
with the General Partner or the lender with respect to such indebtedness, and no
such fee will be paid with respect to borrowings from the General Partner or its
Affiliates.
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6.6 LIMITATIONS ON FEES. The Partnership shall commit a substantial portion
of Capital Contributions toward Investment in Equipment. The remaining Capital
Contributions may be used to pay Front-End Fees. The Partnership will commit a
percentage of Capital Contributions to Investment in Equipment which is equal to
the greater of (i) 80% of Capital Contributions reduced by .0625% for each one
percent of indebtedness encumbering Equipment or (ii) 75% of Capital
Contributions. To calculate the percent of indebtedness encumbering Equipment,
divide the amount of indebtedness by the Purchase Price (excluding Front-End
Fees) and multiply the quotient by .0625% to determine the percentage to be
deducted from 80%. For example, if the percentage of indebtedness were 30%, the
percentage to be deducted from 80% is 1.875% (30 x .0625) and the percentage to
be committed to Investment in Equipment is 78.125% (80-1.875).
ARTICLE 7
ALLOCATION OF NET PROFITS, NET LOSSES AND OTHER ITEMS
7.1 NET PROFITS.
7.1.1 Net Profits for each fiscal year of the Partnership (other than
Net Profits arising from transactions in connection with the termination or
liquidation of the Partners) shall be allocated as follows:
(a) to the General Partner, the greater of (i) one percent of
such Net Profits or (ii) Net Profits equal to the excess, if any, of (A)
all distributions to the General Partner pursuant to Section 8.1.2 with
respect to such fiscal year and all prior fiscal years over (B) the total
Net Profits allocated to the General Partner pursuant to this Section
7.1.1(a) for all such prior fiscal years; and
(b) any balance to the Limited Partners.
7.1.2 Net Profits arising from transactions in connection with the
termination or liquidation of the Partnership shall be allocated in the
following order of priority:
(a) Net Profits shall be allocated to each Partner in an amount
equal to the negative amount, if any, of his Capital Account. If the Net
Profits available to be so allocated is less than the sum of all Partners'
negative Capital Accounts, then such Net Profits shall be allocated to the
Partners in proportion to the respective amounts of their negative Capital
Accounts.
(b) An amount of Net Profits equal to the excess of (A) the
proceeds from such transaction that would be distributed to the Partners
pursuant to Section 8.1.2 (without regard to Section 8.1.3) over (B) the
aggregate Capital Accounts (as adjusted to reflect the allocation of Net
Profit pursuant to Section 7.1.2(a)) of all Partners shall be allocated
among such Partners in proportion to their respective shares of such
excess.
(c) Any remaining Net Profits shall be allocated in the same
proportions that cash distributions equal to such remaining Net Profits
would be distributed pursuant to Section 8.1 (without regard to Section
8.1.3).
7.2 NET LOSSES. Net Losses for each fiscal year of the Partnership shall be
allocated 99% to the Limited Partners and one percent to the General Partner.
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7.3 REQUIRED ALLOCATIONS. Notwithstanding Sections 7.1 and 7.2:
7.3.1 Beginning in the first year in which the Partnership has
"nonrecourse deductions" (as such term is defined and the amount thereof is
determined in accordance with Treasury Regulation Sections 1.704-2(b)(1)), and
in each year thereafter, if there is a net decrease in "partnership minimum
gain" (as defined in Treasury Regulation Section 1.704-2(d)(1)) during a
Partnership taxable year, then any Partner with a deficit balance in his Capital
Account at the end of such taxable year shall be allocated, before any other
allocation is made of Partnership items for such taxable year, items of income
and gain for such taxable year (and, if necessary, subsequent years) in the
amounts and proportions needed to eliminate such deficit as quickly as possible,
such allocations to be made in accordance with the "minimum gain chargeback"
provisions of Treasury Regulation Section 1.704-(2)(f);
7.3.2 No loss or deduction shall be allocated to a Partner if such
allocation would create a deficit balance in such Partner's Capital Account in
excess of the amount such Partner is obligated to restore to the Partnership or
is treated as being obligated to restore to the Partnership under Treasury
Regulations Sections 1.704-1(b)(2)(ii)(c), 1.704-2(g)(1) or 1.740-2(i)(5). Any
losses or deductions that cannot be allocated to a Partner because of the
foregoing limitation shall be allocated among the Partners in accordance with
their relative ownership of Units, subject to the limitations of this Section
7.3.2.
7.3.3 Any Partner who unexpectedly receives with respect to the
Partnership: (a) an adjustment pursuant to Treasury Regulation
1.704-1(b)(2)(iv)(k); (b) an allocation of loss or deduction pursuant to
Sections 704(e)(2) or 706(d) of the Code or pursuant to Treasury Regulation
Section 1.751-1(b)(2)(ii); or (c) a distribution in excess of an offsetting
increase to such Partner's Capital Account reasonably expected to occur during
(or prior to) the Partnership taxable year in which such distribution occurs,
will be allocated, as quickly as possible, items of income and gain in an amount
and manner sufficient to eliminate any resulting deficit balance in his Capital
Account in accordance with the "qualified income offset" provisions of Treasury
Regulations Section 1.704-1(b)(2)(ii)(d);
7.3.4 Loss, deductions, and expenditures attributable to nonrecourse
debt for which a Partner bears the economic risk of loss shall be determined and
allocated to the Partner who bears such economic risk of loss in accordance with
Treasury Regulation Section 1.704-2, and if there is a decrease in partner
"nonrecourse debt minimum gain" (as defined in Treasury Regulation Section
1.704-2(i)(3)), any Partner with a share of that partner nonrecourse debt
minimum gain shall be allocated items of income and gain in accordance with the
chargeback provisions of Treasury Regulations Section 1.704-2(i)(4);
7.3.5 For purposes of this Section 7.3, a Partner's Capital Account
deficit balance shall be determined by excluding from such Partner's Capital
Account any amount such Partner is obligated to restore to the Partnership or
treated as obligated to restore to the Partnership under Treasury Regulations
Sections 1.704.1(b)(2)(ii)(c), 1.704-2(g)(l) or 1.704-2(i)(5), and by adjusting
such Partner's Capital Account balance for items described in Treasury
Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6); and
7.3.6 If property is reflected on the books of the Partnership at a
book value that differs from the adjusted tax basis of the property in
accordance with Treasury Regulations Section 1.704-1(b)(2)(iv)(d) or (f),
depreciation, amortization, and gain or loss as determined for federal income
tax purposes shall be allocated so as to take into account such difference
between book value and
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adjusted tax basis in accordance with the principles of Code Section 704(c). The
General Partner shall have the authority to elect the method to be used by the
Partnership for allocating items required by Section 704(c) of the Code and such
election shall be binding on the Limited Partners.
7.4 SYNDICATION EXPENSES. Syndication Expenses attributable to the
Underwriting Commissions paid on the Partnership's sale of any Unit shall be
specially allocated to the Limited Partner who owns the Units, and all other
Syndication Expenses shall be allocated to the Limited Partners who are admitted
to the Partnership from time to time so that, to the extent possible, the
cumulative Syndication Expenses (other than Underwriting Commissions) allocated
with respect to each Unit at any time is the same. If the General Partner
determines that such result is not likely to be achieved through future
allocations of Syndication Expenses, the General Partner may allocate a portion
of Net Profits or Net Losses to achieve the same effect on the Capital Accounts
of the Limited Partners.
7.5 RECHARACTERIZATION OF FEES. Any fees paid to the General Partner or any
of its Affiliates which are disallowed as deductible expenses by the Internal
Revenue Service shall constitute special allocations of gross income to the
General Partner for income tax purposes.
7.6 RECAPTURE. If the Partnership recognizes gain on the sale, exchange or
other disposition of any property, any portion of such gain which is treated as
ordinary income pursuant to Code Section 1245 shall be divided between the
General Partner and the Limited Partners in proportion to the aggregate
deductions for cost recovery and depreciation previously allocated to them and
shall be allocated among the Limited Partners in the same proportions as the
gain from such disposition is allocated among them.
7.7 ALLOCATIONS AMONG LIMITED PARTNERS. Except as otherwise provided in
this Agreement, Net Profits and Net Losses allocated to the Limited Partners for
any fiscal year shall be divided among them in proportion to their Average Daily
Units for such fiscal year. If an interest of a Partner in the Partnership is
transferred in accordance with Section 11 of this Agreement, the General
Partner, in its sole discretion, may allocate such items of Net Profits, Net
Loss, and credit by closing the books of the Partnership immediately after the
transfer of the interest. All such allocations shall be made without regard to
the date, amount or recipient of any distributions which may have been made with
respect to such transferred interest.
7.8 OTHER ALLOCATIONS. Any allocations not otherwise provided for shall be
divided among the Partners in the same proportions as they share Net Profits or
Net Losses, as the case may be, for the period.
ARTICLE 8
DISTRIBUTIONS
8.1 CASH DISTRIBUTIONS. For purposes of this Article Eight, the following
terms should have the meanings set forth below:
(a) "Limited Partner" means each Limited Partner of the
Partnership, as defined in Article 1.22, and includes all the Monthly
Limited Partners and all the Quarterly Limited Partners.
(b) "Monthly Limited Partner" means any Limited Partner who makes
a Capital Contribution of $5,000 or more and who, for the quarter in
question, has elected (either (i) by
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written notice to the General Partner upon subscription or (ii) thereafter,
upon ten days' prior written notice to the General Partner, effective as of
the beginning of the following quarter), to receive monthly distributions
of cash available for distribution.
(c) "Quarterly Limited Partner" means any Limited Partner other
than a Monthly Limited Partner.
8.1.1 Except as otherwise provided in this Section 8.1, Cash Available
for Distribution shall be distributed as follows:
(a) The General Partner, within thirty (30) days following the
close of each fiscal quarter or as soon thereafter as practicable, shall
determine in its sole and absolute discretion, the amount of Cash Available
for Distribution. Such Cash Available for Distribution shall be apportioned
for the related year.
(b) 99% to the Limited Partners and one percent to the General
Partner until (i) the Limited Partners have received an amount equal to the
excess, if any, of (A) the Cumulative Return from the inception of the
Partnership to the end of the calendar quarter to which the distribution
relates, over (B) the sum of all prior distributions under this Section
8.1.2(a)(i), and (ii) the Limited Partners' Capital Contributions have been
reduced to zero; and
(c) thereafter, 90% to the Limited Partners and ten percent to
the General Partner.
8.1.2 Cash Available for Distribution
(a) Cash Available for Distribution to the Limited Partners on
quarterly basis shall be allocated between the Monthly Limited Partners, as
a group, and the Quarterly Limited Partners, as a group, in proportion to
the number of Units owned by each such group of Limited Partners.
(b) The portion of Cash Available for Distribution allocable to
the Quarterly Limited Partners shall be distributed to the Quarterly
Limited Partners and one-third (1/3) of the portion allocable to the
Monthly Limited Partners shall be distributed to the Monthly Limited
Partners, with all such distributions to be made within thirty (30) days
following the close of each fiscal quarter or as soon thereafter as
practicable. The remaining two-thirds (2/3) of the Cash Available for
Distribution to the Monthly Limited Partners shall be deposited in the
Monthly Distribution Account. One-half (1/2) of the amount so deposited
shall be distributed to the Monthly Limited Partners within seventy (70)
days following the close of such immediately preceding fiscal quarter, or
as soon thereafter as practicable, and the remainder of the Cash Available
for Distribution so deposited shall be distributed within one hundred (100)
days following the close of such immediately preceding fiscal quarter, or
as soon thereafter as practicable. Notwithstanding the foregoing, each
distribution pursuant to this Article Eight that is payable to the Monthly
Limited Partners first shall be reduced by an amount equal to the
Distribution Fee, less any interest earned on the Monthly Distribution
Account.
8.1.3 Notwithstanding Section 8.1.2, amounts distributed in connection
with the liquidation of the Partnership or a Partner's interest (within the
meaning of Treasury Regulations Section
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1.704-1(b)(2)(ii)) shall be distributed in accordance with the Partner's
positive Capital Account as adjusted for all operations and transactions
preceding such distribution.
8.1.4 Notwithstanding Section 8.1.2, if the proceeds resulting from
the sale of any Equipment are reinvested in Equipment, sufficient cash will be
distributed to the Partners to pay the additional federal income tax resulting
from such sale for a Partner in a 39.6% federal income tax bracket or, if lower,
the maximum federal income tax rate in effect for individuals for such taxable
year.
8.2 ALLOCATION OF DISTRIBUTIONS TO LIMITED PARTNERS. Distributions to the
Limited Partners with respect to any period other than during the Offering
Period shall be allocated pro rata among the Limited Partners who are Limited
Partners on the Record Date for purposes of such distributions. Distributions to
the Limited Partners during the Offering Period shall be allocated among the
Limited Partners in proportion to their Average Daily Units for that period.
8.3 AMOUNTS WITHHELD. Any amounts withheld pursuant to Section 9.1.16 shall
be treated as amounts distributed to the Partners for all purposes under this
Agreement. Amounts treated as distributed to a Partner pursuant to this Section
8.3 shall reduce the amounts otherwise distributed to such Partner pursuant to
this Agreement.
8.4 RETURN OF OFFERING PROCEEDS. If all of the net proceeds of the Offering
are not invested by the Partnership in Equipment or committed to such investment
or otherwise utilized for proper Partnership purposes prior to the expiration of
12 months from the Closing Date, the net proceeds not so invested, committed, or
set aside as working capital reserves will thereupon be promptly returned, with
a proportionate share of interest at the rate earned by the Partnership on the
investment of such proceeds, to the Limited Partners based upon their respective
numbers of Units and time of purchase, without reduction for the General
Partner's Organizational Fee or for any Equipment Acquisition Fee which would
have been payable to the General Partner if such proceeds had been invested. For
such purpose, funds will be deemed to be committed to investment and will not be
returned to the Limited Partners to the extent written agreements in principle,
commitment letters, letters of intent or understanding, option agreements, or
any similar contracts or understandings exist, whether or not any such
investment is ultimately consummated. Funds will also be deemed to be committed
to the extent: (i) any funds may have been reserved to make contingent payments
in connection with any Equipment already acquired, whether or not any such
payments are ultimately made; (ii) as a condition to obtaining financing the
Partnership is required to maintain funds s a compensating balance; or (iii) the
General Partner decides that an addition to the working capital reserve is
necessary in connection with any Equipment. In the event any such uninvested
funds are distributed to the Limited Partners, such distribution will be treated
as a return of capital.
ARTICLE 9
RIGHTS, POWERS, AND DUTIES OF GENERAL PARTNER
9.1 RIGHTS AND POWERS. Except as otherwise specifically provided in this
Agreement, the General Partner shall exercise complete and exclusive control
over the management of the Partnership business and affairs. In addition to any
other rights and powers which the General Partner may possess under this
Agreement and the Act, the General Partner shall, except to the extent otherwise
provided in this Agreement, have all rights and powers required or appropriate
to its management of the Partnership and the Partnership's business, which byway
of illustration but not by way of limitation, include the following rights and
powers which may be exercised on behalf of, and, subject to Article 5, at the
expense of, the Partnership:
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9.1.1 to acquire, purchase, hold, sell, exchange or otherwise transfer
Equipment; to lease Equipment to third parties; to make loans to manufacturers
of Equipment with respect to and secured by Equipment leased directly by the
manufacturer to third parties; and to enter into agreements with others with
respect to such activities, which agreements may contain such provisions as the
General Partner in its sole and absolute discretion shall approve;
9.1.2 to invest Partnership funds in commercial paper, government
securities, certificates of deposit, time deposits, bankers acceptances, money
market certificates or accounts, or other short-term investments (such as money
market funds) which the General Partner deems appropriate;
9.1.3 subject to Section 17.2.3, to purchase liability, casualty and
other insurance which the General Partner deems appropriate for the protection
of the Equipment or for any purpose convenient or beneficial to the Partnership,
provided that the General Partner will not provide insurance services to the
Partnership;
9.1.4 to delegate all or any of its duties under this Agreement, and
in furtherance of any such delegation to appoint, employ or contract with any
persons, which persons may, under the supervision of the General Partner,
administer or assist in the day-to-day operations of the Partnership; act as
consultants, accountants, correspondents, attorneys, brokers, escrow agents or
in any other capacity deemed by the General Partner necessary or desirable; and
perform such other acts or services for the Partnership as the General Partner
in its sole and absolute discretion may approve;
9.1.5 to designate and appoint one or more agents for the Partnership
who shall have authority as may be conferred on them by the General Partner, and
who may perform any of the duties, and exercise any of the powers and authority,
conferred on the General Partner under this Agreement, including, but not
limited to, designation of one or more agents as authorized signatories on any
bank accounts maintained by the Partnership;
9.1.6 to act in its own name as nominee for the Partnership and to
place title to Partnership assets in its own name or the names of others as
nominees or trustees for any purpose convenient or beneficial to the
Partnership;
9.1.7 to collect all amounts due to the Partnership, and otherwise to
enforce all rights of the Partnership including rights under any lease of its
assets, and to retain counsel and institute suits or proceedings, in the name
and on behalf of the Partnership;
9.1.8 to establish and maintain one or more bank accounts for the
Partnership in such bank or banks as the General Partner may, from time to time,
designate as depositaries of the funds of the Partnership;
9.1.9 to make or revoke any elections permitted under the Code;
9.1.10 to determine the appropriate accounting method or methods to be
used by the Partnership;
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9.1.11 to offer and sell Units of the Partnership to the public
directly or through Commonwealth Capital Securities Corp. or any licensed
Affiliate of the General Partner; to employ personnel, agents and dealers for
such purpose; and, in connection therewith, to cause the Partnership to
indemnify Commonwealth Capital Securities Corp. to the extent permitted under
federal and state securities laws;
9.1.12 to admit the purchasers of the Units as Limited Partners of the
Partnership, to amend this Agreement and the Certificate to reflect the addition
or substitution of Limited Partners and the reduction of Capital Accounts on the
return of capital to Partners;
9.1.13 to borrow money for Partnership purposes (other than for the
acquisition of Equipment) and as security therefor to mortgage, pledge,
hypothecate or encumber or otherwise place liens upon all or part of the
Equipment and other property of the Partnership, to pledge or encumber the
assets of the Partnership to secure any remarketing rights of vendors or
suppliers of Equipment;
9.1.14 to prepay in whole or in part, refinance, increase, modify,
consolidate, extend or increase any lien or encumbrance affecting any Equipment;
9.1.15 to require in all Partnership obligations that the General
Partner shall not have any personal liability thereon but that the person or
entity contracting with the Partnership is to look solely to the Partnership and
its assets for satisfaction; provided, however, that the inclusion of such
provisions shall not materially affect the cost of the service or material being
supplied;
9.1.16 to withhold income taxes as required or permitted by any
federal, state or local taxing authority, and otherwise to comply with and take
actions necessary or appropriate as a result of provisions of the Code or any
state or other tax law requiring or permitting withholding;
9.1.17 to deal with, or otherwise engage in business with, any person
who has dealt with or engaged in business with or may in the future deal with or
engage in business with the General Partner or its Affiliates; provided that no
such dealing or engaging in business may involve any arrangement which would
circumvent any of the provisions of this Agreement, including the restrictions
against dealing with the General Partner or its Affiliates;
9.1.18 to commence the dissolution and liquidation of the Partnership
in its ninth year of existence in order to terminate the Partnership by December
31, 2009; and
9.1.19 to prohibit Qualified Plans from acquiring, individually or in
the aggregate, more than 25% of the Units.
9.2 RELIANCE ON CERTIFICATE OF GENERAL PARTNER. Any person dealing with the
Partnership or the General Partner may rely on a certificate signed by the
General Partner as authority with respect to (a) the identity of any General
Partner or Limited Partner; (b) the existence or nonexistence of any fact or
facts which constitute a condition precedent to acts by the General Partner or
in any other manner are germane to the affairs of the Partnership; (c) the
persons who are authorized to execute and deliver any instrument or document of
the Partnership; or (d) any act or failure to act by the Partnership or as to
any other matter involving the Partnership or any Partner.
9.3 INDEPENDENT ACTIVITIES. The General Partner and its Affiliates and each
Limited Partner may, notwithstanding the existence of this Agreement, engage in
whatever activities they choose,
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whether competitive with the Partnership or otherwise, without having or
incurring any obligation to offer any interest in such activities to the
Partnership or any party hereto. The General Partner and its Affiliates shall
not be obligated to present to the Partnership any particular investment
opportunity which comes to their attention if the General Partner, in good
faith, determines that such opportunity is not an appropriate investment for the
Partnership at that time or if the opportunity is not presented to the
Partnership because it has been presented to other partnerships sponsored by the
General Partner that may have priority based on criteria established by the
General Partner. Subject to the foregoing, neither this Agreement nor any
activity undertaken pursuant hereto shall prevent the General Partner or its
Affiliates from engaging in any activity, or require the General Partner or its
Affiliates to permit the Partnership or any Limited Partner to participate
therein. The General Partner may organize and participate as a general partner
in partnerships which may engage in activities similar to the activity engaged
in by this Partnership and which may use the name "Commonwealth Income & Growth
Fund" or variations of such name. The General Partner retains the rights to such
name and its variations. The General Partner will give priority to the Limited
Partners when the interests of the Limited Partners conflict with the interests
of the General Partner.
If one or more programs affiliated with the General Partner and the
Partnership are in a position to acquire the same Equipment, the General Partner
will determine which program will purchase the Equipment based upon the
objectives of each and the suitability of the acquisition in light of those
objectives. The General Partner will generally afford priority to the program or
entity that has had funds available to purchase Equipment for the longest period
of time. In addition, in order to promote diversification of Equipment and
lessees, when two or more programs are in a position to acquire the same
Equipment, the General Partner may acquire Equipment in joint ventures with
affiliated investor programs. If one or more investor programs affiliated with
the General Partner and the Partnership are in a position to enter into leases
with the same lessee or to sell Equipment to the same purchaser, the General
Partner will generally afford priority to the Equipment which has been available
for lease or sale for the longest period of time.
9.4 DUTIES.
9.4.1 The General Partner shall manage and control the Partnership,
its business and affairs. The General Partner shall devote such time to the
business of the Partnership as in its discretion it determines is necessary for
the efficient carrying on of the business.
9.4.2 The General Partner shall be the tax matters partner of the
Partnership as defined under the Code, and as such tax matters partner, shall be
subject to Section 17.2 of this Agreement.
9.4.3 The General Partner shall have fiduciary responsibility for the
safekeeping and use of all funds and assets of the Partnership, whether or not
in the General Partner's immediate possession or control. The General Partner
shall not employ, or permit another to employ, such funds or assets in any
manner except for the exclusive benefit of the Partnership. The Limited Partners
may not contract away the fiduciary duty owed to them by the General Partner
under the common law.
9.4.4 The General Partner shall commit toward Investment in Equipment
at least that portion of the Limited Partners' Capital Contributions for their
Units required by Section 6.6 hereof. If the total amount of Front-End Fees must
be reduced in order to enable the Partnership to commit such Capital
Contributions to Investment in Equipment, the General Partner shall, and shall
cause its Affiliates or other persons to, reimburse the Partnership for such
amount of Front-End Fees and any Acquisition Fees, Debt Placement Fees and
Acquisition Expenses paid in connection with the
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reinvestment of the Partnership's funds received by them as is necessary to
enable the Partnership to meet such requirement within 30 days after the need
for reimbursement arises.
9.4.5 The General Partner shall maintain reserves in such amount and
for such times and purposes as it deems appropriate.
9.5 RESTRICTIONS ON AUTHORITY. Notwithstanding any other provisions of this
Agreement:
9.5.1 The General Partner shall not have the authority to do any act
in contravention of this Agreement or the Act; possess Partnership property, or
assign rights in specific Partnership property, for other than a Partnership
purpose; admit a person as a General Partner or a Limited Partner, except as
provided in this Agreement; knowingly perform any act that would subject any
Limited Partner to liability as a general partner in any jurisdiction; alter the
purpose or character of the Partnership as set forth in Section 2.5; or confess
a judgment against the Partnership.
9.5.2 Except pursuant to Section 10.2, the General Partner shall not
sell all or substantially all of the assets of the Partnership in a single sale,
except in the winding up and liquidation of the business of the Partnership or
in a final liquidating sale of Equipment remaining after the disposition in the
ordinary course of business of substantially all of the Partnership's other
Equipment.
9.5.3 The Partnership shall not purchase or lease Equipment from the
Sponsor or its Affiliates, including Equipment in which the General Partner or
its Affiliates have an interest, except that the General Partner shall be
permitted to make acquisitions of Equipment in its own name (and assume loans in
connection therewith) and hold title thereto on an interim basis (not in excess
of 60 days) for the purpose of facilitating the acquisition of such Equipment or
the borrowing of money or obtaining of financing, or any other purpose related
to the business of the Partnership provided that (a) such acquisitions are in
the best interest of the Partnership; (b) such Equipment is purchased by the
Partnership for a price no greater than the sum of the actual cost of such
Equipment, accountable Acquisition Expenses payable to third parties, interest
on the Purchase Price (at a rate no greater than that charged by unrelated
lenders on comparable loans) from the date of purchase to the date of transfer
to the Partnership and compensation permitted in accordance with Article 6 of
this Agreement; (c) there is no difference in interest terms of the loans
secured by the Equipment at the time acquired by the General Partner and the
time acquired by the Partnership; and (d) no benefit arises out of such
acquisitions to the General Partner except for the compensation permitted under
this Agreement. During interim purchases by the General Partner, all profits and
losses shall accrue to the Partnership.
9.5.4 The Partnership shall not invest in junior trust deeds unless
received in connection with the sale of an item of Equipment in an aggregate
amount which does not exceed 30% of value of the assets of the Partnership on
the date of the investment.
9.5.5 The Partnership shall not sell or lease Equipment to the General
Partner or its Affiliates.
9.5.6 The Partnership shall not make loans to any Person, including
without limitation, the General Partner or its Affiliates (except to the extent
a Conditional Sales Contract constitutes a loan.
9.5.7 The Partnership shall not acquire Equipment from an Equipment
Program in which the General Partner or its Affiliates have an interest.
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9.5.8 The Partnership shall not acquire Equipment in exchange for
Units.
9.5.9 The Partnership shall not give the General Partner or its
Affiliates an exclusive right to sell or exclusive employment to sell Equipment
for the Partnership.
9.5.10 The Partnership shall not pay, directly or indirectly, a
commission or fee (except as specifically described under this Agreement) to the
General Partner or its Affiliates in connection with the reinvestment or
distribution of Cash Available for Distribution or of the proceeds of the
resale, exchange, or refinancing of the Partnership's Equipment.
9.5.11 No rebates or give-ups may be received by the General Partner
or its Affiliates, nor may the General Partner or its Affiliates participate in
any reciprocal business arrangements which would circumvent any of the
provisions of this Agreement, including the restrictions against dealing with
the General Partner or its Affiliates.
9.5.12 The General Partner and its Affiliates shall not directly or
indirectly pay or award any commissions or other compensation to any person
engaged by a potential Limited Partner for investment advice as an inducement to
such adviser to advise the purchase of Units. This Section 9.5.12, however,
shall not prohibit the payment of Underwriting Commissions to the Dealer Manager
or other properly licensed person for selling Units.
9.5.13 The funds of the Partnership shall not be commingled with the
funds of any other Person. This prohibition shall not apply to investments
meeting the requirements of Section 9.5.14.
9.5.14 Except to the extent that a permitted investment in the
entities referred to in this Section 9.5.14 constitutes "securities" within the
meaning of the Securities Act of 1933, as amended, the Partnership will not
invest in securities, including equipment limited partnerships, general
partnerships or joint ventures, except that (a) the Partnership may invest in
general partnerships or joint ventures with persons other than equipment
Programs formed by the General Partner or its Affiliates, which partnerships or
joint ventures own specific equipment; provided that (i) the Partnership has or
acquires a controlling interest in such ventures or partnerships; (ii) the
non-controlling interest is owned by a non-Affiliate, and (iii) there are no
duplicate fees; and (b) the Partnership may invest in joint venture arrangements
with other equipment Programs formed by the General Partner or its Affiliates if
such action is in the best interests of all Programs and if all the following
conditions are met: (i) all the Programs have substantially identical investment
objectives; (ii) there are no duplicate fees; (iii) the sponsor compensation is
substantially identical in each Program; (iv) the Partnership has a right of
first refusal to buy another Program's interest in a joint venture if the other
Program wishes to sell equipment held in the joint venture; (v) the investment
of each Program is on substantially the same terms and conditions; and (vi) the
joint venture is formed either for the purpose of effecting appropriate
diversification for the Programs or for the purpose of relieving the General
Partner or its Affiliates from a commitment entered into pursuant to Section
9.5.3.
9.5.15 Neither the General Partner nor its Affiliates shall lend money
to the Partnership if interest rates and other financing charges and fees in
connection with such loan are in excess of the lesser of their cost of funds or
the amount which would be charged by unrelated lending institutions on
comparable loans for the same purpose or if such loan contains any prepayment
charge or prepayment penalty. Neither the General Partner nor its Affiliates
shall provide financing for the Partnership unless such financing has a term of
not more than 12 months or carries an interest rate in excess of three percent
over the prime rate of PNC Bank, N.A.
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9.5.16 Other than as specifically described in Section 5.2 and Article
6 of this Agreement and the section "Compensation of the General Partner and its
Affiliates" in the Prospectus at the time it was declared effective by the
Securities and Exchange Commission, the General Partner shall not enter into any
agreement, contract or arrangement on behalf of the Partnership providing for
compensation to the General Partner or its Affiliates for performing services
for, or selling or leasing goods or materials to, the Partnership.
9.5.17 All services or goods for which the General Partner or its
Affiliates are to receive compensation (other than pursuant to this Agreement)
shall be embodied in a written contract which precisely describes the subject
matter thereof and all compensation to be paid, which contract may only be
modified by a vote of a Majority in Interest of the Limited Partners and which
contract shall contain a clause allowing termination by either party without
penalty on 60 days' prior written notice.
9.5.18 In connection with the borrowing of money, recourse for the
payment of which is limited solely to property of the Partnership and which
shall be amortized fully over the initial lease term, no lender shall be granted
or acquire, at any time as a result of making such a loan, any direct or
indirect interest in the profits, capital or property of the Partnership other
than as a secured creditor.
9.5.19 Partnership funds shall not be invested in any financial
institution or entity affiliated with the General Partner and shall not be used
in a compensating balance arrangement for the benefit of any entity other than
the Partnership.
9.5.20 Without the consent of the General Partner and a Majority in
Interest of the Limited Partners, the Partnership shall not convert to another
form of business entity if the conversion results in a significant adverse
change in (a) the voting rights of the Limited Partners, (b) the termination
date of the Partnership, (c) the compensation payable to the General Partner or
its Affiliates or (d) the ability to meet the Partnership's objectives without
materially impairing the rights of Limited Partners.
9.5.21 The Partnership shall not make distributions in kind except
upon dissolution and liquidation, and then only to a liquidating trust which has
been established for the purpose of the liquidation of the assets of the
Partnership and the distribution of cash in accordance with this Agreement.
9.5.22 The Partnership shall not incur debt in excess of 30% of the
expected aggregate cost of the Equipment to be owned or subject to a Conditional
Sales Contract except that the Partnership may not incur indebtedness to acquire
Equipment until the net proceeds of the Offering have been invested, or
committed to investment, in Equipment.
9.5.23 The Partnership shall not purchase Equipment unless such
Equipment is subject to a lease or a Conditional Sales Contract or for which a
lease or a Conditional Sales Contract will be entered into when the Partnership
acquires the Equipment.
9.5.24 The Partnership's leases and other contracts will each contain
a statement that the Partnership has been organized as a limited partnership
under the Act.
9.5.25 Without the consent of the General Partner and a Majority in
Interest of the Limited Partners, the Partnership will not change its principal
purpose of acquiring, leasing and selling Equipment.
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9.5.26 The Partnership shall not issue equity securities senior to the
Units.
9.6 GENERAL PARTNER'S NET WORTH. The General Partner agrees, represents and
warrants that it will at all times have a net worth in an amount (i) sufficient
in the opinion of counsel to the Partnership to enable the Partnership either to
avoid having the corporate characteristic of limited liability for federal
income tax purposes or to avoid being treated as an association taxable as a
corporation for federal income tax purposes, and (ii) at least five percent of
the gross amount of all direct participation programs sold by the General
Partner within the prior 12 months plus five percent of the amount of the
Capital Contribution to the Partnership, up to $1,000,000.
ARTICLE 10
RIGHTS OF LIMITED PARTNERS
10.1 NO LIMITED PARTNER IN CONTROL. No Limited Partner, as such, shall
participate in the management or control of the Partnership's business, nor
shall any Limited Partner, as such, have the power to act for or bind the
General Partner or the Partnership.
10.2 VOTING RIGHTS. The Limited Partners by a vote of a Majority in
Interest of the Limited Partners may, without the necessity for concurrence by
the General Partner (a) approve or disapprove a sale of all or substantially all
of the assets of the Partnership, except as otherwise permitted or required
under Section 14.1 or 14.4 of this Agreement; (b) dissolve the Partnership; (c)
subject to Section 10.5, amend this Agreement except that amendment of Articles
6, 7 and 8 shall require the affirmative vote of Limited Partners owning at
least 66-2/3% of the Units owned by all Limited Partners; (d) remove or approve
the withdrawal of the General Partner; or (e) prior to the effective date of a
removal, withdrawal or dissolution of the General Partner, elect an additional,
replacement or successor General Partner to be admitted prior to such effective
date. With respect to any Units owned by the General Partner or its Affiliates,
the General Partner and its Affiliates may not vote or consent on matters
submitted to the Limited Partners regarding removal of the General Partner or
any transaction between the Partnership and the General Partner or its
Affiliates. In determining the required percentage in interest of Units
necessary to approve a matter on which the General Partner and its Affiliates
may not vote or consent, any Units owned by the General Partner or its
Affiliates shall not be included.
10.3 CONVERSIONS AND ROLL-UPS.
10.3.1 CONSENT REQUIRED. Without the approval of the General Partner
and the holders of at least 66-2/3% of all outstanding Units, the Partnership
shall not enter into any Roll-Up. Limited Partners who do not consent to an
approved Roll-Up shall be given the option of (i) accepting the securities of
the Roll- Up Entity offered in the proposed Roll-Up; or (ii) receiving cash in
an amount equal to the non-consenting Limited Partner's pro rata share of the
appraised value of the net assets of the Partnership. The Partnership shall not
reimburse the sponsor of a proposed Roll-Up for the costs of an unsuccessful
proxy contest in the event that the Roll-Up is not approved by the Limited
Partners as required by the first sentence of this Section 10.3.1.
10.3.2 APPRAISAL. The "appraised value of the net assets of the
Partnership" as used in Section 10.3.1 shall be established by means of an
appraisal of the net assets of the Partnership by a competent Independent
Expert, engaged for the benefit of the Partnership and the Limited Partners,
with no current material or prior business or personal relationship with the
General Partner or its Affiliates. Such Independent Expert must be engaged to a
substantial extent in the business of rendering opinions
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regarding the value of assets of the type held by the Partnership, and must be
qualified to perform such work. The appraisal shall be based on an evaluation of
all relevant information and shall indicate the value of the Partnership's
assets, assuming an orderly liquidation of such assets over a twelve-month
period, as of a date immediately prior to the date of the proposed Roll-Up. A
summary of the independent appraisal, including all material assumptions
underlying the appraisal, shall be included in a report to the Limited Partners
in connection with a proposed Roll-Up and shall be appraised on a consistent
basis. If the appraisal will be included in a prospectus used to offer the
securities of a Roll-Up Entity, the appraisal shall be filed with the Securities
and Exchange Commission and the states as an exhibit to the registration
statement for the offering and accordingly, in that event, the issuer would be
subject to liability for violations of Section 11 of the Securities Act of 1933
and comparable provisions under state laws for any material misrepresentations
or material omissions in the appraisal.
10.3.3 PROHIBITED ROLL-UPS. The Partnership shall not participate in
any proposed Roll-Up: (a) which would result in the Limited Partner's having
voting rights and rights to hold meetings which are less than those rights
provided for under Section 10.2; (b) which includes provisions which would
operate to materially impede or frustrate the accumulation of shares by any
purchaser of the securities of the Roll-Up Entity (except to the minimum extent
necessary to preserve the tax status of the Roll-Up Entity); (c) which would
limit the ability of a Limited Partner to exercise the voting rights of its
securities of the Roll-Up Entity on the basis of the number of Units held by
that Limited Partner, and (d) in which the Limited Partners' rights of access to
the records of the Roll-Up Entity will be less than those rights provided for
under Section 15.1 hereof.
10.3.4 With the consent of a Majority in Interest of the Limited
Partners, the Partnership is permitted to convert into another form of business
entity which does not result in a significant adverse change in (a) the voting
rights of the Limited Partners, (b) the termination date of the Partnership
(currently, December 31, 2009, unless terminated earlier in accordance with this
Agreement), (c) the compensation payable to the General Partner or its
Affiliates (provided however that any increase in the compensation payable to
the General Partner and its Affiliates requires the approval of 66-2/3% of all
outstanding Units), or (d) the ability to meet the Partnership's investment
objectives without materially impairing the rights of the Limited Partners. The
General Partner will make the determination as to whether or not any such
conversion will result in a significant adverse change in any of the provisions
listed in Section 10.3.1 based on various factors relevant at the time of the
proposed conversion, including an analysis of the historic and projected
operations of the Partnership; the tax consequences (from the standpoint of the
Limited Partners) of the conversion and of an investment in a limited
partnership as compared to an investment in the type of business entity into
which the Partnership would be converted; and the performance of the equipment
industry in general, and of the computer peripherals segment of the industry in
particular. In general, the General Partner would consider any material
limitation on the voting rights of the Limited Partners or any substantial
increase in the compensation payable to the General Partner or its Affiliates to
be a significant adverse change in the listed provisions.
10.4 MEETINGS.
10.4.1 Meetings of the Limited Partners to vote upon any matters as to
which the Limited Partners are authorized to take action under this Agreement,
as the same may be amended from time to time, may be called at any time by the
General Partner or by one or more Limited Partners holding more than 10% of the
then outstanding Units, by delivering written notice, either in person or by
registered mail stating the purpose of the meeting, to the General Partner.
Promptly, but in any event within 10 days following receipt of such request, the
General Partner shall cause a written notice, either
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in person or by certified mail, to be delivered to the Limited Partners entitled
to vote at such meeting. The meeting will be held at the time and place
specified in the request, or if none, at a time and place convenient to the
Limited Partners, such meeting to be held not less than 15 days nor more than 60
days after the mailing of the notice of the meeting. Included with the notice of
a meeting shall be a detailed statement of the action proposed, including a
verbatim statement of the wording of any resolution proposed for adoption by the
Limited Partners and of any proposed amendment to this Agreement. All expenses
of the meeting and notification shall be borne by the Partnership.
10.4.2 A Limited Partner shall be entitled to vote (a) at a meeting,
in person or by a proxy in writing or by a signed writing directing the manner
in which he desires that his vote be cast, which writing must be received by the
General Partner prior to such meeting, or (b) without a meeting, by a signed
writing directing the manner in which he desires that his vote be cast, which
writing must be received by the General Partner prior to the date on which the
votes of Limited Partners are to be counted. Only the votes of persons who were
Limited Partners on the record date, whether at a meeting or otherwise, shall be
counted.
10.5 CERTAIN AMENDMENTS.
10.5.1 In addition to any amendments otherwise authorized herein, this
Agreement may be amended from time to time by the General Partner, without the
consent of any of the Limited Partners (a) to add to the representations, duties
or obligations of the General Partner or surrender any right or power granted to
the General Partner herein, for the benefit of the Limited Partners; (b) to cure
any ambiguity or inconsistency; (c) to delete or add any provisions required to
be so deleted or added by, or to meet the requirements of, applicable law
(including the Code, ERISA and the regulations thereunder); and (d) to delete or
add any provisions required to be so deleted or added by, or to meet the
requirements of, applicable law (including the Code, ERISA and the regulations
thereunder); and (e) to delete or add any provisions required to be so deleted
or added by the staff of the Securities and Exchange Commission or by state
securities commissioner or similar official, which addition or deletion is
deemed by such person, commissioner or official to be for the benefit or
protection of the Limited Partners.
10.5.2 Notwithstanding anything to the contrary contained in this
Agreement, this Agreement may not be amended without the consent of each Limited
Partner to be affected adversely by an amendment that (a) converts a Limited
Partner into a General Partner; (b) modifies the limited liability of a Limited
Partner; (c) alters the interest of the General Partner or Limited Partners in
Net Profits, Net Losses, or distributions from the Partnership; or (d) adversely
affects the status of the Partnership as a partnership for federal income tax
purposes.
10.5.3 Each Limited Partner shall be notified of any amendment to this
Agreement within 30 days of the effective date of the amendment by means of
first class mail, postage prepaid, to the address of the Limited Partner on the
books of the Partnership.
ARTICLE 11
TRANSFER OF UNITS
11.1 ASSIGNMENT.
11.1.1 No Limited Partner may transfer or assign his Units or any
interest therein except as permitted in this Article 11. Any act in violation of
this Article 11 shall be null and void and shall not be recognized by the
Partnership.
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11.1.2 With the prior written consent of the General Partner, a
Limited Partner may transfer or assign part or all of his Units if, and only if:
(a) the assignor and the assignee execute, acknowledge and deliver to the
Partnership such instruments of transfer and assignment and other documents as
may be required by the General Partner; (b) either (i) at least 125 Units are
assigned and at least 125 Units are retained by the assignor or (ii) the Units
being assigned are all the Units of the assignor (except that the General
Partner, in its discretion, may waive this requirement for transfers by gift,
inheritance or family dissolution or transfers to Affiliates of the assignor);
(c) the assignee agrees in writing not to assign such Units other than in
accordance with this Article 11; (d) such assignment complies with any
applicable state and federal securities laws; (e) assignor obtains an opinion of
counsel that such assignment will not result in the termination of the
Partnership for federal income tax purposes and will not result in the
Partnership being classified as a publicly traded partnership or an association
taxable as a corporation for federal income tax purposes.
11.1.3 An assignee, if he does not become a Substituted Limited
Partner pursuant to Section 11.2, shall have no rights of a Limited Partner as a
result of the assignment, but shall only be entitled to receive the
distributions under Article 8 and Sections 3.3.2 and 14.4 to which the assignor
would otherwise be entitled.
11.2 SUBSTITUTED LIMITED PARTNERS. No assignee of Units shall have the
right to become a Substituted Limited Partner in place of his assignor unless
all of the following conditions are first satisfied: (a) the written instrument
of assignment (or another writing) sets forth the intention of the assignor that
the assignee succeed to the assignor's interest as a Substituted Limited Partner
in his place; (b) the assignor and assignee execute, acknowledge and deliver
such instruments as the General Partner may deem necessary or desirable to
effect such substitution, including the written acceptance and adoption by the
assignee of this Agreement; and (c) the written consent of the General Partner
to such substitution is obtained, the granting or denial of which shall not be
unreasonably withheld. The Partnership's records shall be amended to reflect the
substitution of Limited Partners at least once in each calendar quarter.
11.3 TRANSFER FEE. On any assignment of Units, any substitution of an
assignee as a Limited Partner or any redemption of Units, the Partnership may
charge a transfer fee to cover reasonable out-of-pocket expenses in connection
with the substitution.
11.4 GENERAL. No transfer or assignment or redemption of any Units shall be
made if it would result in the Partnership being treated as an association
taxable as a corporation for tax purposes or as a publicly traded partnership.
In addition, no transfer of any Unit will be recognized or effective for any
purpose to the extent that it is determined by the General Partner to be
effectuated through an established securities market or a secondary market (or
the substantial equivalent thereof) within the meaning of Section 7704 of the
Code and the applicable Treasury Regulations thereunder so as to adversely
affect the tax status of the Partnership as a partnership rather than as an
association taxable as a corporation. The General Partner, in its sole
discretion, may impose any restrictions on transfers or assignments of Units as
it deems appropriate to give effect to the preceding two sentences including
prohibitions of any transfers or assignments of Units which fall outside the
safe harbors described in Section 1.7704-1 of the Treasury Regulations. A
Limited Partner must obtain the consent of the General Partner to any transfer
or assignment, which consent shall not be unreasonably withheld. Any prohibition
on a transfer or assignment shall be supported by an opinion of counsel that it
is necessary to give effect to the first two sentences of this paragraph. In
connection therewith, the General Partner shall be permitted to amend this
Agreement without the consent of the Limited Partners. Assignments and
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substitutions shall be effective on the first day of the month following the
month in which there has been full compliance with the requirements of this
Article 11. For the purposes of this Article 11, a pledge of Units shall be
deemed to be an assignment of such Units.
ARTICLE 12
REDEMPTION
Upon the conclusion of the 30-month period following the termination of the
Offering, the Partnership may, at the sole discretion of the General Partner,
repurchase a number of the then outstanding Units. On a semi-annual basis, the
General Partner will establish an amount for redemption, generally not to exceed
two percent of the outstanding Units per year, subject to the General Partner's
sole discretion and its good faith determination that such redemptions will not
(a) cause the Partnership to be taxed as a corporation under Section 7704 of the
Code or (b) impair the capital or operations of the Partnership. At the sole
discretion of the General Partner, the Partnership may redeem Units in excess of
the two percent limitation. The redemption price for Units will be 105% of the
selling Limited Partner's Adjusted Capital Contributions attributable to the
Units for sale. Following the determination of the annual redemption amount,
redemptions will occur on a semi-annual basis and all requests for redemption,
which must be made in writing, must be on file as of the Record Date in which
the redemption is to occur. The General Partner will maintain a master list of
requests for redemption with priority being given to Units owned by estates,
followed by IRAs and Qualified Plans. All other Limited Partners will be treated
on a first come, first served basis. Redemption requests made by or on behalf of
Limited Partners who are not affiliated with the General Partner or its
affiliates will be given priority over those made by Limited Partners who are
affiliated with the General Partner or its Affiliates. All redemption requests
will remain in effect until and unless canceled, in writing, by the requesting
Limited Partner(s). The making of a request for redemption by a Limited Partner
is completely voluntary.
ARTICLE 13
GENERAL PARTNER'S INTEREST
13.1 VOLUNTARY WITHDRAWAL OR ASSIGNMENT. The General Partner shall not
voluntarily withdraw, retire or resign as general partner of the Partnership, or
assign, transfer or otherwise dispose of all or any part of its general
partnership interest unless:
13.1.1 the Limited Partners consent by a Majority in Interest;
13.1.2 in the case of withdrawal, retirement or resignation, it gives
at least 60 days' notice thereof and if there would be no remaining General
Partner, nominates a successor General Partner satisfactory to a Majority in
Interest of the Limited Partners, who becomes a General Partner prior to such
withdrawal, retirement or resignation; and
13.1.3 the Partnership receives an opinion of its counsel to the
effect that such withdrawal, retirement, resignation, assignment, transfer or
other disposition would not subject the Partnership to federal income taxation
as an association taxable as a corporation and would not cause a termination of
the Partnership for federal income tax purposes.
13.2 REMOVAL. Subject to Section 14.3, after the Final Closing the General
Partner may be removed, and shall cease to be General Partner of the
Partnership, on the vote of the Majority in Interest of the Limited Partners.
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ARTICLE 14
DISSOLUTION, CONTINUATION AND TERMINATION
14.1 DISSOLUTION. The Partnership shall be dissolved on the occurrence of
any of the following events:
14.1.1 The vote or written consent of a Majority in Interest of the
Limited Partners determines that the Partnership should be dissolved;
14.1.2 The dissolution of the Partnership by judicial decree;
14.1.3 The expiration of 60 days following a Terminating Event, unless
a Majority in Interest of the Limited Partners, elect to continue the
Partnership in accordance with Section 14.2.2 and elect a successor general
partner; or
14.1.4 The determination by the General Partner that it is necessary
to commence the liquidation of the Equipment in order for the liquidation of all
the Equipment to be completed in an orderly and business-like business-like
fashion prior to December 31, 2009.
14.2 CONTINUATION.
14.2.1 On the occurrence of the removal, withdrawal, retirement,
resignation, expulsion, involuntary dissolution, or Bankruptcy (or, in the case
of an individual, the death, insanity or appointment of a conservator for the
person or any of his assets) of one or more, but less than all, of the General
Partners, then the remaining General Partners shall have the right to, and
shall, continue the business of the Partnership.
14.2.2 On the occurrence of a Terminating Event, the last remaining
General Partner shall promptly send written notice of such event to all the
Limited Partners, who (subject to Sections 14.2.3 and 14.3) (a) may elect, by a
vote of the Majority in Interest within 60 days thereafter, to reconstitute the
Partnership and continue its business in accordance with this Agreement by
selecting one or more new General Partners who agree in writing to be bound by
this Agreement, and all Limited Partners, as such, shall be bound by such
action, or (b) may continue the business of the Partnership pursuant to Section
8571 of the Act.
14.2.3 The rights to continue the business of the Partnership provided
in this Section 14.2 shall be subject to receipt by the Partnership of an
opinion of counsel to the Partnership that such continuation would not result in
the Partnership's being classified for federal income tax purposes as an
association taxable as a corporation and would not result in the termination of
the Partnership for federal income tax purposes.
14.3 PURCHASE OF INTEREST OF GENERAL PARTNER. On any continuation of the
business of the Partnership under Section 14.2.1 or Section 14.2.2, or any
removal of the General Partner under Section 13.2, the following shall apply:
14.3.1 The General Partner who withdraws (voluntary termination) or is
removed (involuntary termination) shall be paid the then present fair market
value of its interest, determined in the manner described in this Section 14.3.
If the termination is voluntary pursuant to Section 13.1, the terminated General
Partner shall receive a non-interest bearing unsecured promissory note payable,
if at all, from distributions the terminated General Partner would have received
under this Agreement if it had
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not voluntarily terminated. If the termination is involuntary pursuant to
Section 13.2, such amount shall be paid in no less than five equal annual
installments, the first of which shall be paid one year from the date of such
termination. The unpaid portion of such amount shall bear simple interest at the
rate of 10% per annum from the date of such termination, such interest to accrue
and be paid annually in addition to each such annual installment. In any event,
the method of payment must protect the solvency and liquidity of the
Partnership.
14.3.2 The fair market value of a terminated General Partner's
Partnership interest shall be determined by agreement between the terminated
General Partner and the Partnership, which agreement shall require a vote of the
Majority in Interest of the Limited Partners. If the terminated General Partner
and the Partnership cannot agree on the fair market value of such partnership
interest within 45 days of the continuation, the fair market value thereof shall
be determined by arbitration in accordance with the then current rules of the
American Arbitration Association. The expense of arbitration shall be borne
equally by the terminated General Partner and the Partnership.
14.4 LIQUIDATION.
14.4.1 On any dissolution of the Partnership, absent any continuation
under Section 14.2, the General Partner, or a court-appointed liquidator if
there is no General Partner, shall take full account of the Partnership's assets
and liabilities. The assets shall be liquidated as promptly as is consistent
with obtaining the fair market value thereof, and the proceeds therefrom, to the
extent sufficient therefor, shall be applied in the following order: (a) to the
payment of all debts and liabilities of the Partnership to creditors; (b) to the
establishment, for such period as the liquidator deems reasonably necessary, of
such reserves as the liquidator deems reasonably necessary to provide for
contingent and unforseen liabilities or obligations of the Partnership; and (c)
to the Partners in accordance with Section 8.1.3.
14.4.2 The debts and liabilities of the Partnership shall not include
liabilities or obligations of the Partnership to Partners for distributions or
on account of their contributions or in respect to profits (or other
compensation by way of income) or capital.
14.4.3 Notwithstanding anything to the contrary that may be expressed
or implied in this Agreement, upon the dissolution or termination of the
Partnership, the General Partner, in all events by the end of the Partnership's
taxable year in which the General Partner's interest is liquidated or, if later,
within 90 days of the date of such liquidation, will contribute to the
Partnership an amount of cash equal to the lesser of (a) the deficit balance of
the General Partner's Capital Account or (b) the excess of 1.01% of the total
Capital Contributions of the Limited Partners over the capital previously
contributed by the General Partner and such cash shall be distributed to the
Limited Partners in the ratio of the then credit balances in their Capital
Accounts.
14.4.4 Any capital contribution by the General Partner pursuant to
Section 14.4.3 and any liquidating distribution pursuant to Section 14.4.1 shall
be made no later than the later of (a) the end of the taxable year during which
such liquidation occurs or (b) 90 days after the date of such liquidation.
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ARTICLE 15
ACCOUNTING AND FISCAL MATTERS
15.1 PARTNERSHIP RECORDS. The records of the Partnership shall be
maintained at the principal office of the Partnership. Every Limited Partner or
his duly authorized representative shall at any reasonable time have access to
the records of the Partnership and may inspect and copy any of them. An
alphabetical list of the names, addresses, and business telephone numbers of the
Limited Partners of the Partnership along with the number of Units held by each
of them (the "Limited Partner List") shall be maintained as a part of the books
and records of the Partnership and shall be available for inspection by any
Limited Partner or its designated agent at the home office of the Partnership
upon the request of the Limited Partner. The Limited Partner List shall be
updated at least quarterly to reflect changes in the information contained
therein. A copy of the Limited Partner List shall be mailed to any Limited
Partner requesting the Limited Partner List within ten days of the request. The
copy of the Limited Partner List shall be printed in alphabetical order, on
white paper, and in a readily readable type size (in no event smaller than
10-point type). A reasonable charge for copy work may be charged by the
Partnership. The purposes for which a Limited Partner may request a copy of the
Limited Partner List include, without limitation, matters relating to Limited
Partners' voting rights under the Partnership Agreement, and the exercise of the
Limited Partners' rights under federal proxy laws. If the General Partner
neglects or refuses to exhibit, produce, or mail a copy of the Limited Partner
List as requested, the General Partner shall be liable to any Limited Partner
requesting the list for the costs, including attorneys' fees, incurred by that
Limited Partner for compelling the production of the Limited Partner List, and
for actual damages suffered by any Limited Partner by reason of such refusal or
neglect. It shall be a defense that the actual purpose and reason for the
requests for inspection or for a copy of the Limited Partner List is to secure
such list of Limited Partners or other information for the purpose of selling
such list or copies thereof, or of using the same for a commercial purpose other
than in the interest of the applicant as a Limited Partner relative to the
affairs of the Partnership. The General Partner may require the Limited Partner
requesting the Limited Partner List to represent that the list is not requested
for a commercial purpose unrelated to the Limited Partner's interest in the
Partnership. The remedies provided hereunder to the Limited Partners requesting
copies of the Limited Partner List are in addition to, and shall not in any way
limit, other remedies available to the Limited Partners under federal law, or
the laws of any state.
15.2 ACCOUNTING; FISCAL YEAR. The Partnership's books and records shall be
kept on the accrual method of accounting. The fiscal year of the Partnership
shall be the calendar year.
15.3 REPORTS.
15.3.1 The General Partner will deliver to each Limited Partner,
within 120 days after the end of each year, a balance sheet of the Partnership
dated as of December 31 of such year, together with statements of income,
Partners' equity, and the changes in financial position of the Partnership for
such year, prepared in accordance with generally accepted accounting principles
and accompanied by an auditor's report containing an opinion of the
Partnership's independent certified public accountants, as well as an unaudited
Cash Flow statement containing a breakdown of distributions to Limited Partners
for the year, separately identifying distributions from (a) Cash Flow from
operations during the year, (b) Cash Flow from operations during a prior period
which had been held as reserves, (c) proceeds from disposition of Equipment and
investments and (d) reserves from gross proceeds of the Offering originally
obtained from the Limited Partners. The General Partner will within such period
also furnish a report of the activities of the Partnership for the year, which
will include (a) for each item of Equipment acquired by the Partnership which
individually represents at least 10% of the total investment in Equipment, a
status report as part of the annual report, (which status report shall indicate:
(i) condition of Equipment,
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(ii) how Equipment is being utilized as of the end of year (leased, operated,
held for lease, repair, or sale), (iii) remaining term of leases, (iv) projected
use of Equipment for next year (renew lease, lease, retire, or sell), and (v)
such other information relevant to the value or utilization of the equipment as
the General Partner deems appropriate including the method used or basis for
valuation), (b) a report on distributions to the Limited Partners during the
year and their source, (c) a report on any costs incurred by the General Partner
and its Affiliates in performing administrative services which are reimbursed by
the Partnership during the year which will be verified by independent public
accountants in accordance with generally accepted accounting principles (the
cost of such verification to be so reimbursable only to the extent that such
reimbursement, when added to the reimbursement for services, does not exceed the
competitive rate for such services, excluding the cost of the verification) and
(d) for each item of Equipment sold by the Partnership in such year, such
Equipment's original purchase price, sale price and aggregate lease revenues.
The annual report will contain a breakdown of the costs reimbursed to the
sponsor. Within the scope of the annual audit of the General Partner's financial
statements, the independent certified public accountants must issue a special
report on the allocation of such costs to the Partnership in accordance with
this Partnership Agreement. The special report shall at a minimum provide: (i) a
review of the time records of individual employees, the costs of whose services
were reimbursed; and (ii) a review of the specific nature of the work performed
by each such employee. The special report shall be in accordance with the
American Institute of Certified Public Accountants United States auditing
standards relating to special reports. The additional costs of such special
report will be itemized by said accountants on a program-by-program basis and
may be reimbursed to the General Partner by the Partnership in accordance with
this subparagraph only to the extent that such reimbursement, when added to the
cost for administrative services rendered does not exceed the competitive rate
for such services as determined in this subsection. Within 60 days after the end
of each calendar quarter, the General Partner will also furnish a report of all
services rendered and all fees received by the General Partner and its
Affiliates from the Partnership, an unaudited balance sheet, a statement of
income, a statement of changes in financial position and a report on the
activities of the Partnership, as well as an unaudited Cash Flow statement.
15.3.2 Until the net proceeds of the Offering are fully invested, the
General Partner will furnish to the Limited Partners, within 60 days after the
end of each calendar quarter, a report of Equipment acquisitions during the
quarter, including the type and manufacturer of each item of Equipment, the
purchase price of the Equipment, and any other material terms of purchase, a
statement of the total amount of cash expended by the Partnership to acquire the
Equipment (including an itemization of all commissions, fees, and expenses and
the name of each payee), and a statement of the amount of net proceeds of the
Offering which remain unexpended or uncommitted at the end of the quarter.
15.3.3 The General Partner will also furnish to all Limited Partners
within 75 days after the end of the year other information regarding the
Partnership to aid them in the preparation of their tax returns.
15.3.4 Within 120 days after the end of the first full fiscal year for
which Form 10-K under the Securities Exchange Act of 1934 is filed with the
Securities and Exchange Commission, the General Partner shall send the financial
statements required by Form 10-K to the Limited Partners.
15.3.5 Until the net proceeds from sales of the Units have been fully
invested or otherwise used for Partnership purposes or been set aside as
reserves or been returned to the Limited Partners under Section 4.2.2, the
reports under Sections 15.3.1 and 15.3.3 shall include a report of
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material equipment acquisitions made during the periods covered by such reports
which have not previously been reported.
15.3.6 The information required to be provided in the various reports
pursuant to this Section 15.3 may be sent earlier than or separately from any of
the other information required pursuant to this Section 15.3, and the
information required to be contained in any of the reports pursuant to this
Section 15.3 may be contained in more than one report.
15.3.7 If the Securities and Exchange Commission or the North American
Securities Administrators Association, Inc. promulgates rules which allow a
reduction in reporting requirements, the Partnership may cease preparing and
filing certain of the aforementioned reports in compliance with such rules if
the General Partner determines such action to be in the best interests of the
Partnership.
15.3.8 On request of the official or agency administering the
securities law of a state in which the Partnership has sold Units, the General
Partner shall submit to such official or agency any report or statement required
to be distributed to Limited Partners pursuant to this Section 15.3.
15.4 BANK ACCOUNTS. The bank accounts of the Partnership shall be
maintained in such banking institutions as the General Partner may determine,
and withdrawals shall be made only in the regular course of Partnership business
on such signatures as the General Partner may determine.
15.5 PARTNERSHIP RETURNS. For each tax year, the General Partner shall,
within the time prescribed by law (including extensions), file on behalf of the
Partnership the annual information return required for federal, state and local
income tax purposes.
ARTICLE 16
POWER OF ATTORNEY
16.1 POWER OF ATTORNEY.
16.1.1 Pursuant to the terms of this Agreement, each purchaser of a
Unit and each transferee of a Unit appoints the General Partner, acting alone,
as the purchaser's or transferee's attorney-in-fact to make, execute, file,
and/or record (a) documents relating to the Partnership and its business
operations requested by or appropriate under the laws of any appropriate
jurisdiction; (b) instruments with respect to any amendment of this Agreement or
the Certificate; (c) instruments or papers required to continue the business of
the Partnership pursuant to this Agreement; (d) instruments relating to the
admission of any Partner to the Partnership; (e) a master list in accordance
with Section 6112 of the Code (or any successor provision), relating to the
Partnership's tax shelter registration; and (f) all other instruments deemed
necessary or advisable to carry out the Partnership's business or the provisions
of this Agreement. The power of attorney is irrevocable, will survive the death,
incompetency, dissolution, disability, incapacity, bankruptcy, or termination of
the granting purchaser or transferee, and will extend to such person's heirs,
successors, and assigns. Each Limited Partner authorizes such attorney-in-fact
to take any further action which such attorney-in-fact shall consider necessary
or advisable in connection with any of the foregoing, hereby giving such
attorney-in-fact power and authority to do and perform each and every act or
thing whatsoever requisite or advisable to be done in and about the foregoing as
fully as such Limited Partner might or could if personally present, hereby
ratifying and confirming all that such attorney-in-fact shall lawfully do or
cause to be done by virtue hereof.
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16.1.2 The power of attorney granted in this Section 16.1, (a) is a
special power of attorney coupled with an interest and is irrevocable; (b) may
be exercised by the attorney-in-fact by listing all of the Limited Partners
executing any document with the signature of the attorney-in-fact acting as
attorney-in-fact for all of them; and (c) shall survive the delivery of an
assignment by a Limited Partner of the whole or a portion of his interest in the
Partnership, except that where the assignee is admitted as a substituted Limited
Partner, the power of attorney shall survive the delivery of such assignment for
the sole purpose of enabling such attorney-in-fact to execute, acknowledge and
file any document necessary to effect such substitution.
ARTICLE 17
LIABILITY AND INDEMNIFICATION OF GENERAL PARTNER
17.1 EXCLUSION OF LIABILITY FOR RETURN OF CAPITAL CONTRIBUTIONS. Subject to
the General Partner's compliance with the standards set forth in Section 17.2.1,
the General Partner shall not be personally liable for the return of any of the
Capital Contributions of the Limited Partners, it being expressly understood
that any such return shall be made solely from Partnership assets.
17.2 LIMITATION ON LIABILITY OF GENERAL PARTNER; INDEMNIFICATION.
17.2.1 The General Partner and its Affiliates who were acting on
behalf of or performing services for the Partnership and acting within the scope
of the General Partner's authority as set forth in this Agreement (an
"Indemnitee") shall have no liability to the Partnership or to any Partner for
any loss suffered by the Partnership which arises out of any action or inaction
of any Indemnitee if the General Partner, in good faith, determined that such
course of conduct was reasonable and in the best interest of the Partnership and
such course of conduct did not constitute negligence or misconduct of the
General Partner or its Affiliates. The Indemnitees shall be indemnified by the
Partnership against any losses, judgments, liabilities and expenses sustained by
them in connection with the Partnership, provided that the same were not the
result of negligence or misconduct on the part of the Indemnitee, and provided
further that for such indemnification to be made, the General Partner must have
made a good faith determination that the course of conduct involved was
reasonable and in the best interest of the Partnership. Such indemnification or
agreement to hold harmless is recoverable only out of the assets of the
Partnership and not from the Limited Partners.
17.2.2 Notwithstanding anything to the contrary stated in Section
17.2.1, the Indemnitee and any person acting as a broker-dealer shall not be
indemnified for any losses, liabilities or expenses arising from or out of an
alleged violation of federal or state securities laws unless (a) there has been
a successful adjudication on the merits of each count involving alleged
securities laws violations as to the particular Indemnitee and the court
approved the indemnification of litigation costs, or (b) such claims have been
dismissed with prejudice on the merits by a court of competent jurisdiction as
to the particular Indemnitee and the court approved the indemnification of
litigation costs or (c) a court of competent jurisdiction approves a settlement
of the claims against a particular Indemnitee and finds that indemnification of
the settlement and related costs should be made. In any claim for
indemnification for federal or state securities law violations, the party
seeking indemnification shall place before the court the position of the
Securities and Exchange Commission, the Massachusetts Securities Division, the
Pennsylvania Securities Commission, the Texas Securities Board and other
applicable state securities commissions with respect to the issue of
indemnification for securities law violations.
17.2.3 The Partnership shall not incur the cost of that portion of any
insurance which insures the Indemnitee for any liability as to which the
Indemnitee is prohibited from being indemnified
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under this Section 17.2; however, nothing contained in this Agreement shall
preclude the Partnership from purchasing and paying for such types of insurance,
including extended coverage liability and casualty and workers' compensation, as
would be customary for any person owning comparable assets and engaged in a
similar business, or from naming the Indemnitee as additional insured parties
thereunder, provided that such addition does not add to the premiums payable by
the Partnership.
17.2.4 The provision of advances from Partnership funds to the
Indemnitee for legal expenses and other costs incurred as a result of any legal
action initiated against the General Partner by a Limited Partner of the
Partnership is prohibited. The provision of advances from Partnership funds to
the Indemnitee for legal expenses and other costs incurred as a result of a
legal action is permissible if the following three conditions are satisfied: (a)
the legal action relates to the performance of duties or services by the
Indemnitee on behalf of the Partnership; and (b) the legal action is initiated
by a third party who is not a Limited Partner of the Partnership; and (c) the
Indemnitee undertakes to repay the advanced funds to the Partnership with
interest at the rate of 10% per year in cases in which they would not be
entitled to indemnification under Section 17.2.1 and such undertaking is secured
by a full recourse note from the recipient of the advance.
ARTICLE 18
TAX EXEMPT LIMITED PARTNERS
18.1 TAX EXEMPT LIMITED PARTNERS. If any individual retirement accounts,
pension, profit sharing or other tax-qualified retirement plans or other
entities exempt from federal income taxation under the Code (collectively, "Tax
Exempt Limited Partners") become Limited Partners of the Partnership, neither
the General Partner nor the Partnership shall have any liability or
responsibility to any Tax Exempt Limited Partner or any other Limited Partner
for any tax, penalty or other sanction or costs or damages arising as a result
of there being a prohibited transaction or as a result of Partnership assets
being deemed plan assets of a Tax Exempt Limited Partner under the Code or ERISA
or other applicable law.
ARTICLE 19
MISCELLANEOUS
19.1 NOTICES. Any notice, payment, demand, offer or communication required
or permitted to be given by any provision of this Agreement shall be deemed to
have been delivered and given for all purposes (a) if delivered personally to
the party or to an officer of the party to whom it is directed or (b) whether or
not it is actually received, if sent by registered or certified or regular mail,
postage and charges prepaid, addressed as follows: if to the General Partner, at
its business address set forth in Section 2.3 or to such other address as the
General Partner may specify by written notice to the Limited Partners; and if to
a Limited Partner, at such Limited Partner's address set forth on his
Subscription Agreement or to such other address as such Limited Partner may
specify by written notice to the General Partner; and if to the Partnership, at
the address set forth in Section 2.3 or to such other address as the Partnership
may specify by written notice to the Partners. Any such notice shall be deemed
to be given as of the date so delivered personally, or as of the date on which
the same was deposited in a regular receptacle for the deposit of the United
States mail, addressed and sent as aforesaid.
19.2 PARTIES IN INTEREST. Subject to Article 11, this Agreement shall bind
and benefit the successors and assigns of the respective parties hereto.
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19.3 SECTION CAPTIONS. Section and other captions in this Agreement are for
reference purposes only and are not intended to describe, interpret, define or
limit the scope, extent or intent of this Agreement or any provision hereof.
19.4 SEVERABILITY. Every provision of this Agreement is intended to be
severable. If any term or provision hereof is illegal or invalid for any reason,
such illegality or invalidity shall not affect the validity of the remainder of
this Agreement.
19.5 RIGHT TO RELY ON GENERAL PARTNER. No person dealing with the General
Partner shall be required to determine its authority to make any commitment or
undertaking on behalf of the Partnership, or to determine any fact or
circumstance bearing upon the existence of its authority. In addition, no
purchaser of Partnership property shall be required to determine the sole and
exclusive authority of the General Partner to sign and deliver on behalf of the
Partnership any instrument of transfer, or to see to the application or
distribution of revenues or proceeds paid or credited in connection therewith,
unless such purchasers have received written notice from the Partnership
affecting the same.
19.6 PENNSYLVANIA LAW. This Agreement is made under, and shall be construed
and enforced in accordance with, the laws of the Commonwealth of Pennsylvania
applicable to agreements made and to be performed solely therein, without giving
effect to principles of conflicts of laws.
19.7 EXCLUSIVE JURISDICTION. Any disputes arising out of or related to this
Agreement shall be subject to the exclusive jurisdiction of the Court of Common
Pleas of Pennsylvania in the County of Delaware or the Federal District Court
for the Eastern District of Pennsylvania.
19.8 COUNTERPART EXECUTION. This Agreement may be executed in any number of
counterparts with the same effect as if all parties hereto had signed the same
document. All counterparts shall be construed together and shall constitute one
Agreement.
19.9 GENDER. Whenever necessary or appropriate in order to construe this
Agreement, the masculine gender shall include the feminine or neuter and vice
versa, and the singular shall include the plural and the plural, the singular.
19.10 INTEGRATED AGREEMENT. This Agreement constitutes the entire
understanding and agreement among the parties hereto with respect to the subject
matter hereof, and there are no agreements, understandings, restrictions,
representations or warranties among the parties other than those set forth
herein.
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APPENDIX I
SELECTED FINANCIAL DATA
<PAGE>
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
FEBRUARY 28, 1999
-----------------
<PAGE>
Consolidated Financial Statements
Commonwealth Capital Corp.
YEARS ENDED FEBRUARY 28, 1998 AND 1997
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
FEBRUARY 28, 1999
-----------------
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
INDEPENDENT AUDITOR'S REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheet 2
Statement of operations and retained earnings 3
Statement of cash flows 4
Notes to financial statements 5 - 11
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
Stockholder
Commonwealth Capital Corp.
We have audited the accompanying consolidated balance sheet of
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES as of February 28, 1999, and the
related consolidated statements of operations and retained earnings and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our 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 consolidated financial position of
Commonwealth Capital Corp. and Subsidiaries as of February 28, 1999, and the
consolidated results of their operations and their consolidated cash flows
for the year then ended in conformity with generally accepted accounting
principles.
/s/ FISHBEIN & COMPANY, P.C.
----------------------------
FISHBEIN & COMPANY, P.C.
Elkins Park, Pennsylvania
June 16, 1999
<PAGE>
Page 2
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
FEBRUARY 28, 1999
-----------------
ASSETS
------
<TABLE>
<S> <C>
Cash and cash equivalents $ 28,544
Receivables from Income Funds 346,272
Other Receivables 64,754
Minimum lease payments receivable - Net of
unearned interest income of $2,084,813 5,260,000
Investment in income funds 16,200
Office furniture and equipment - Net of
accumulated depreciation of $108,789 10,649
Deferred offering costs 257,673
Other assets 9,042
----------
$5,993,134
----------
----------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 141,265
Due to Income Funds 63,382
Nonrecourse obligations 5,260,000
----------
5,464,647
----------
STOCKHOLDER'S EQUITY
Common stock - par value $1
Authorized 1,000 shares
Issued and outstanding 10 shares 10
Retained earnings 528,477
----------
528,487
----------
$5,993,134
----------
----------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Page 3
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
AND RETAINED EARNINGS
--------------------------
YEAR ENDED FEBRUARY 28, 1999
----------------------------
<TABLE>
<S> <C>
INCOME
Fee income from Income Funds $1,079,691
Commission income 15,576
Interest income on minimum lease
payments receivable 395,375
Equity in income of Income Funds 44,231
Interest and miscellaneous 95,597
----------
1,631,470
----------
EXPENSES
Personnel 770,209
General and administrative 512,862
Selling 115,732
Interest expense on nonrecourse obligations 395,375
Depreciation 10,677
----------
1,084,855
----------
NET LOSS (173,385)
RETAINED EARNINGS - BEGINNING 701,862
----------
RETAINED EARNINGS - ENDING $ 528,477
----------
----------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Page 4
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
YEAR ENDED FEBRUARY 28, 1999
----------------------------
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($ 173,385)
Adjustments to reconcile net loss to net
cash used in operating activities
Equity in income of Income Funds ( 44,231)
Depreciation 10,677
Changes in operating assets and liabilities:
Receivables from Income Funds ( 155,523)
Other receivables 49,853
Income tax refunds receivable 50,000
Deferred offering costs ( 34,003)
Other assets 2,689
Accounts payable and accrued expenses ( 111,722)
----------
Net cash used in operating activities ( 405,645)
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of advances to Income Funds 232,000
Distributions from Income Funds 61,500
Investment in Income Funds ( 1,000)
Purchase of office furniture and equipment ( 1,400)
----------
Net cash provided by investing activities 291,100
CASH FLOWS FROM FINANCING ACTIVITIES - None --
----------
NET DECREASE IN CASH AND CASH EQUIVALENTS ( 114,545)
CASH AND CASH EQUIVALENTS - BEGINNING 143,089
----------
CASH AND CASH EQUIVALENTS - ENDING $ 28,544
----------
----------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Page 5
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FEBRUARY 28, 1999
-----------------
1. NATURE OF BUSINESS
Commonwealth Capital Corp., through its wholly-owned subsidiary,
Commonwealth of Delaware, Inc. (CDI), primarily leases various types of
computer peripheral equipment and related equipment to U.S. corporations and
institutions. Certain wholly-owned subsidiaries of CDI were formed for the
purpose of functioning as general partners/managing trustees which own a 1%
interest in limited partnerships/trusts (the "Income Funds") which were
organized to acquire, own, and act as lessor with respect to certain
computer equipment. CDI's subsidiaries include Commonwealth Capital Fund
1987-I, Inc., Commonwealth Capital Fund 1998-I, Inc., Commonwealth Capital
FUnd No. 3, Inc., Commonwealth Capital Private Fund No. 4, Inc., Commonwealth
Capital Fund V, Inc., Commonwealth Capital Private Fund-I, Inc., Commonwealth
Capital Fund VI Inc. COmmonwealth Capital Fund VII, Inc., COmmonwealth
Capital Private Fund-II, Inc., Commonwealth Capital Trustee VIII, Inc.,
COmmonwealth Capital Trustee IX, Inc., Commonwealth Capital Trustee X, Inc.,
COmmonwealth Capital Private Fund-III, Inc., Commonwealth Income & Growth
Fund, Inc., Commonwealth Capital Private Fund IV, Inc., Commonwealth Capital
Private Fund V, Inc., and Commonwealth Capital Private Fund VI, Inc.,
(collectively the "General Partner Subsidiaries"), Commonwealth Capital
Securities Corp., Garden State Facilities Funding, Inc. (GSFF), and
Commonwealth Capital Delaware Trustee, Inc.
The company is dependent on the compensation it receives from the INcome
Funds. This compensation may be reduced due to the financial performance of
each Income Fund. There are certain Income Funds that have deferred the
payment fees of the Company, because distributions to the limited partners
were reduced because of their financial performance. if the financial
performance of additional Income Funds deteriorates and the distributions to
the limited partners are reduced, there is no assurance that the Company
would be able to continue to collect fees for services provided.
Commission income is earned by Commonwealth Capital Securities Corp., which
sells units of its affiliated partnerships through broker-dealer firms to
their respect give customers throughout the United States.
<PAGE>
Page 6
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
FEBRUARY 28, 1999
-----------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company, CDI, and CDI's subsidiaries (the Company)(see Note 1). All
significant intercompany transactions and balances have been eliminated.
b. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
c. Cash and Cash Equivalents
The Company considers all highly-liquid investments purchased with a
maturity of three month is or less to be cash equivalents. At February 28,
1999, cash equivalents consist of money market fund which invests in U.S.
Treasury obligations.
d. Investment in Income Funds
The Company accounts for its 1% interests in the Income Funds by the
equity method. In 1998, certain Income Funds had liabilities in excess of
their assets. As the Company is obligated to fund any liabilities in excess
of assets, the Company has reduced its investment in Income Funds and
recorded a Due to Income Funds of $63,382 at February 28, 1999, of which
$17,269 was incurred during the year ended February 28, 1999. Financial
information of the Income Funds as of December 31, 1998, is as follows:
Total assets..................$24,883,000
Nonrecourse debt.............. 9,234,000
Other liabilities............. 1,068,000
Partners' capital............. 14,581,000
Net income (loss)............. (721,000)
<PAGE>
Page 7
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
FEBRUARY 28, 1999
-----------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d. Investment in Income Funds (Continued)
The Company has guaranteed the performance of certain nonmonetary
obligations of the General Partner Subsidiaries to the respective Income
Funds, primarily the responsibility for management of the Income FUnds. In
addition, the Company is responsible for certain capital funding re-
quirements of the General Partner Subsidiaries which it satisfies through
noninterest-bearing demand notes. Such notes total approximately
$4,166,000 at February 28, 1999, and have been eliminated in
consolidation.
Fee income earned by the Company from the Income Funds consists of:
(1) equipment acquisition fees (4% of the purchase price of all equipment
purchased by the Income Funds), (2) debt placement fees (1% of the cost of
equipment financed by the Income Funds), (3) sales fees (3% of the gross
proceeds of equipment sold by the Income Funds), and (4) equipment manage-
ment fees (5% of the gross operating lease revenues of the Income Funds).
Approximately 64% of fee income for the year ended February 28, 1999,
was from two Income Funds.
e. Office Furniture and Equipment
Office furniture and equipment are stated cost. Depreciation is provided
using the declining balance method over the estimated useful lives of the
assets (ranging from 5 to 7 years.)
f. Deferred Offering Costs
Deferred offering costs represent amounts incurred by the Company for
the organization of an Income Fund. These costs are recovered from the
Income FUnd through fees as cash proceeds are raised through the sale of
Limited Partnership Units during the offering period or, if necessary, the
future operations of the Income Fund. Deferred offering costs at February
28, 1999, relate to an Income Fund whose offering period expires in July,
2000.
<PAGE>
Page 8
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FEBRUARY 28, 1999
-----------------
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,
1999, under these leases and certificates of participation are
approximately $5,260,000, and are reflected as minimum lease payments
receivable and nonrecourse obligations in the accompanying balance sheet.
Of these amounts, $4,110,000 are secured by mortgage insurance policies
maintained by the lessee. The certificates mature at various dates through
2011. The Company recognized interest income and interest expense in
connection with these leases of $395,375 for the year ended February 28,
1999.
Future minimum lease payments to be received as of February 28, 1999, are
as follows:
Year Ending February 28
-----------------------
2000 $ 903,828
2001 906,935
2002 683,324
2003 684,490
2004 678,794
Thereafter 3,487,442
---------
7,344,813
Less amount representing interest 2,084,813
---------
$5,260,000
---------
---------
<PAGE>
Page 9
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FEBRUARY 28, 1999
-----------------
3. LEASE COMMITMENTS (Continued)
The Company leases an automobile, certain office equipment, and office
space under noncancelable operating leases expiring in various dates
through 2004. Rent expense under all operating leases was approximately
$174,00 for the year ended February 28, 1999. Future minimum lease
payments under noncancelable operating leases as of February 28, 1999,
are as follows:
Year Ending February 28
-----------------------
2000 $ 154,000
2001 146,000
2002 141,000
2003 143,000
2004 146,000
-------
$ 730,000
-------
-------
4. PROFIT SHARING PLAN
The Company has a profit sharing plan which covers all of its employees.
Contributions to the plan are made at the discretion of management. No
contribution to the plan was made or accrued for the year ended February
28, 1999.
5. RELATED PARTY TRANSACTIONS
For the year ended February 28, 1999, certain of the General Partner
Subsidiaries agreed to waive or forgive the related Income Funds'
obligations to pay certain equipment management in the amount of $28,
907. Accordingly, fee income from Income Funds is reflected net of these
amounts.
<PAGE>
Page 10
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FEBRUARY 28, 1999
-----------------
6. INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return.
The Company has net operating loss carryforwards of approximately $235,000
and investment tax credit carryforwards of approximately $129,000 available
to reduce future federal income taxes. If not used, the carryforwards will
expire as follows:
Net Operating Investment
Year Ending February 28 Losses Tax Credits
----------------------- ------------- -----------
2000 $ $ 20,000
2001 57,000
2002 52,000
2013 38,000
2019 197,000
---------- ----------
$ 235,000 $ 129,000
---------- ----------
---------- ----------
The company also has net operating loss carryforwards of approximately
$1,983,000 available to reduce future Pennsylvania state income taxes. If
not used, the carryforwards will expire as follows:
Year Ending February 28
-----------------------
2006 $ 158,000
2007 651,000
2008 977,000
2009 197,000
----------
$1,983,000
----------
At February 28, 1999, the Company has deferred income tax assets of
$370,000 arising primarily from net operating loss and investment tax
credit carryforwards, and deferred income tax liabilities of approximately
$104,000 associated with ownership of general partnership interests in the
various operating Income Funds. The Company has recorded a valuation
allowance for the net deferred income tax assets of approximately $266,000
at February 28, 1999, because the Company concluded the future realization
of the assets could not be reasonably assured based on current and
expected operating results.
<PAGE>
Page 11
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FEBRUARY 28, 1999
-----------------
7. SUPPLEMENTAL CASH FLOW INFORMATION
Other noncash activities associated with lease transactions:
Reduction of minimum lease
receivable and repayment of
nonrecourse obligation
associated with direct payment
made by lessee to bank $ 525,000
---------
---------
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this Post-Effective Amendment No.2 to
Registration Statement on Form S-1 of our report dated June 16, 1999, on our
audit of the consolidated financial statements of Commonwealth Capital Corp.
and Subsidiaries. We also consent to the reference to our firm under the
caption "Experts".
/s/FISHBEIN & COMPANY, P.C.
---------------------------
FISHBEIN & COMPANY, P.C.
Elkins Park, Pennsylvania
July 9, 1999
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND, INC.
--------------------------------------
(an Indirect Wholly-Owned Subsidiary
of Commonwealth Capital Corp.)
BALANCE SHEET
-------------
FEBRUARY 28, 1999
-----------------
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND, INC.
--------------------------------------
(an Indirect Wholly-Owned Subsidiary
of Commonwealth Capital Corp.)
FEBRUARY 28, 1999
-----------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITOR'S REPORT 1
BALANCE SHEET 2
NOTES TO BALANCE SHEET 3
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
Stockholder
Commonwealth Income & Growth Fund, Inc.
We have audited the accompanying balance sheet of COMMONWEALTH INCOME &
GROWTH FUND, INC. (an indirect wholly-owned subsidiary of Commonwealth
Capital Corp.) as of February 28, 1999. This balance sheet is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of Commonwealth Income & Growth
Fund, Inc. as of February 28, 1999, in conformity with generally accepted
accounting principles.
/s/ FISHBEIN & COMPANY, P.C.
---------------------------
FISHBEIN & COMPANY, P.C.
Elkins Park, Pennsylvania
June 16, 1999
<PAGE>
Page 2
COMMONWEALTH INCOME & GROWTH FUND, INC.
(An Indirect Wholly-Owned Subsidiary
of Commonwealth Capital Corp.)
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash.................................................................$ 500
Receivable from Income Funds.......................................... 128,803
Investment in Partnerships............................................ 3,000
-----------
$ 132,303
-----------
-----------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Accounts payable and accrued expenses...............................$ 3,422
Due to parent....................................................... 127,781
-----------
131,203
-----------
-----------
STOCKHOLDER'S EQUITY
Common Stock - No par value
Authorized 1,000 shares
Issued and outstanding 100 shares................................. 1,000
Additional paid-in capital.......................................... 1,000,000
---------
1,001,100
Less note receivable.................................................. (1,000,000)
-----------
1,100
-----
$ 132,303
------------
------------
</TABLE>
See notes to balance sheet.
<PAGE>
Page 3
COMMONWEALTH INCOME & GROWTH FUND, INC.
(An Indirect Wholly-Owned Subsidiary
of Commonwealth Capital Corp.)
NOTE TO BALANCE SHEET
FEBRUARY 28, 1999
1. NATURE OF BUSINESS
Commonwealth Income & Growth Fund, Inc. (the COmpany) is wholly-owned
subsidiary of Commonwealth of Delaware, Inc. which is a wholly-owned
subsidiary of Commonwealth Capital Corp. (CC). The Company is the sole
General Partner of Commonwealth Income & Growth Fund I, Commonwealth Income
& Growth Fund II, and Commonwealth Income & Growth Fund III, all
Pennsylvania limited partnerships (the "Partnerships").
CCC has provided additional capital by means of noninterest-bearing
demand note in the amount of $1,000,000, so that the Company will at all
times have a net worth which includes the net equity of the Company and the
demand note receivable from CCC) of at least $1,000,000. The note receivable
is reflected on the accompanying balance sheet as a reduction of the
Company's equity.
The Company's operations are included in the consolidated federal income
tax return of CCC.
2. INVESTMENT IN PARTNERSHIPS
The Company contributed $3,000 in cash to the Partnerships for its general
partner interests. The Company may, at is 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 [unreadable]of Commonwealth Income &
Growth Company and its affiliates and the allocations of income,
losses and cash distributions.
See notes to balance sheet.
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in the Post-Effective Amendment No. 2 to
Registration Statement on For S-1 of our report dated June 16, 1999, on our
audit of the balance sheet of Commonwealth Income & Growth Fund, Inc. We also
consent to the reference to our firm under the caption "Experts".
/s/Fishbein & Company, P.C.
----------------------------
FISHBEIN & COMPANY
Elkins Park, Pennsylvania
July 9, 1999
<PAGE>
Financial Statements
Commonwealth Income &
Growth Fund III
FOR THE PERIOD FROM JANUARY 27, 1998 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1998
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Commonwealth Income &
Growth Fund III
Financial Statements
For the period from January 27, 1998 (commencement of operations)
to December 31, 1998
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.........................................1
Audited Financial Statements
Balance Sheets.........................................................2
Statement of Operations................................................3
Statement of Partners' Capital.........................................4
Statement of Cash Flows................................................5
Notes to Financial Statements..........................................6
</TABLE>
<PAGE>
Report of Independent Auditors
The Partners
Commonwealth Income & Growth Fund III
We have audited the accompanying balance sheets of Commonwealth Income & Growth
Fund III as of December 31, 1998 and 1997, and the related statements of
operations, partners' capital, and cash flows for the period from January 27,
1998 (commencement of operations) to December 31, 1998. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Commonwealth Income & Growth
Fund III at December 31, 1998 and 1997, and the results of its operations and
its cash flow for the period from January 27, 1998 (commencement of operations)
to December 31, 1998, in conformity with generally accepted accounting
principles.
Ernest & Young LLP
Philadelphia, Pennsylvania
January 23, 1999
except for Note 8 as to which
the date is February 23, 1999
<PAGE>
Commonwealth Income & Growth Fund III
Growth Fund III
Balance Sheets
<TABLE>
<CAPTION>
December 31
1998 1997
---------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................ $ 507,193 $1,500
Lease income receivable.............................. 65,729 --
Other receivables.................................... 1,912 --
Computer equipment, at cost.......................... 1,453,742 --
Accumulated depreciation............................. (238,240) --
---------- ------
1,215,502 --
Equipment acquisition costs, net of accumulated
amortization of $20,779............................ 51,748 --
Organization costs, net of accumulated amortization
of $4,248.......................................... 18,252 --
---------- ------
Total assets......................................... $1,860,336 $1,500
---------- ------
---------- ------
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable..................................... $ 38,355 $ --
Accounts payable - General Partner................... 349 --
Unearned lease income................................ 52,192 --
Note payable......................................... 8,442 --
---------- ------
Total liabilities.................................... 99,338 --
Partners' capital:
General Partner.................................... 1,000 1,000
Limited partners................................... 1,759,998 500
---------- ------
Total partners' capital.............................. 1,760,998 1,500
---------- ------
Total liabilities and partners' capital.............. $1,860,336 $1,500
---------- ------
---------- ------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Commonwealth Income &
Growth Fund III
Statement of Operations
January 27, 1998 (commencement of operations)
to December 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Income:
Lease $306,249
Interest and other 37,797
--------
344,046
Expenses:
Operating, excluding depreciation 46,632
Equipment management fee--General Partner 15,313
Depreciation 238,240
Amortization of organization and equipment acquisition costs 25,027
Interest 584
---------
325,796
---------
Net Income $ 18,250
---------
---------
Net income per equivalent limited partnership unit $ .16
---------
---------
Weighted average number of equivalent limited partnership
units outstanding during the period 100,707
---------
---------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Commonwealth Income &
Growth Fund III
Statement of Partners' Capital
From January 27, 1998 (commencement of operations) to December 31, 1998
<TABLE>
<CAPTION>
General Limited
Partner Partner General Limited
Units Units Partner Partners Total
------- -------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Initial contribution and balance at
commencement of operations 50 25 $ 1,000 $ 500 $ 1,500
Contributions January 27, 1998
through December 31, 1998 -- 107,117 -- 2,142,340 2,142,340
Offering costs -- -- -- (234,641) (234,642)
Net income -- -- 1,691 16,559 8,250
Distributions -- -- (1,691) (164,760) (166,451)
------- -------- ------- ---------- -----------
Partners' capital, December 31, 1998 50 107,142 $ 1,000 $1,759,998 $1,760,998
------- -------- ------- ---------- -----------
------- -------- ------- ---------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
Commonwealth Income &
Growth Fund III
Statement of Cash Flows
From January 27, 1998 (commencement of operations) to December 31, 1998
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income.................................................... $ 18,250
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 263,267
Other noncash activities included in determination of
net income................................................. (10,454)
Changes in operating assets and liabilities:
Lease income receivable.................................... (65,729)
Other receivables.......................................... (1,912)
Accounts payable........................................... 38,355
Accounts payable--General Partner.......................... 349
Unearned lease income...................................... 52,192
Organization costs paid to the General Partner............. (22,500)
-------------
Net cash provided by operating activities..................... 271,818
INVESTING ACTIVITIES
Capital expenditures.......................................... (1,448,552)
Equipment acquisition fees paid to the General Partner........ (72,527)
-------------
Net cash used in investing activities......................... (1,521,079)
FINANCING ACTIVITIES
Partners contributions........................................ 2,142,340
Proceeds from note payable.................................... 13,706
Offering costs paid to affiliate.............................. (192,856)
Offering costs paid to the General Partner.................... (41,785)
Distributions to partners..................................... (166,451)
-------------
Net cash provided by financing activities..................... 1,754,954
-------------
Net increase in cash and cash equivalents..................... 505,693
Cash and cash equivalents at beginning of period.............. 1,500
-------------
Cash and cash equivalents at end of period.................... $ 507,193
-------------
-------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
COMMONWEALTH INCOME &
GROWTH FUND III
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. THE PARTNERSHIP
Commonwealth Income & Growth Fund III (the "Partnership") is a limited
partnership. The Partnership is currently offering for sale up to 750,000
Units of the limited partnership at the purchase price of $20 per unit (the
"Offering") and expect to issue such units on a monthly basis. The Offering
will terminate at the close of business on July 25, 1999 unless sooner
terminated by the General Partner or extended. The Partnership will use
proceeds of the Offering to acquire, own, lease, and sell various types of
computer peripheral equipment and other similar capital equipment, which
will be leased primarily to U.S. corporations and institutions. The
Partnership's general partner is Commonwealth Income & Growth Fund, Inc. (the
"General Partner"), a Pennsylvania corporation which is an indirect
wholly-owned subsidiary of Commonwealth Capital Corp. Approximately ten years
after the commencement of operations, the Partnership intends to have sold or
otherwise disposed of all its computer equipment, make final distributions to
partners, and to dissolve. Unless sooner terminated, the Partnership will
continue until December 31, 2009.
Allocations of income and distributions of cash are based on Commonwealth
Income & Growth Fund III, Limited Partnership Agreement (the "Agreement").
The various allocations prevent any limited partner's capital account from
being reduced below zero and ensure the capital accounts reflect the
anticipated sharing ratios of cash distributions, as defined in the
Agreement. For a limited partner's unit outstanding from the Offering's first
close on January 27, 1998, distributions during 1998 reflected a return of
capital in the amount of approximately $1.36 per limited partnership unit.
(For a limited partner's unit acquired subsequent to the Offering's first
close, the return of capital would be less.) Annual cash distributions to
limited partners in subsequent years will be made at a rate of 10% (Preferred
Distribution) of their original contributed capital. In 1998, all Preferred
Distributions were made in accordance with the Agreement. In the event the
Partnership is unable to distribute sufficient cash to meet the intended
preferred distribution, such amounts will be deferred with no interest until
sufficient cash flow is available, as determined by the General Partner or
until the liquidation of the Partnership. The Partnership may also reduce
distributions to its partners if it deems necessary. Further, ongoing
acquisition fees, equipment management fees, and financing fees payable to
the General Partner (Note 4) will also be deferred until payment of any
unpaid Preferred Distribution.
6
<PAGE>
COMMONWEALTH INCOME &
GROWTH FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACCOUNTING POLICIES
REVENUE RECOGNITION
Through December 31, 1998, the Partnership has only entered into operating
leases. Lease revenue is recognized on a monthly basis in accordance with the
terms of the operating lease agreements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from these estimates.
LONG-LIVED ASSETS
The Partnership evaluates its long-lived assets, when events or circumstances
indicate that the value of the asset may not be recoverable. The Partnership
determines whether an impairment exists by estimating the undiscounted cash
flows to be generated by each asset. If the estimated undiscounted cash flows
are less than the carrying value of the asset then an impairment exists. The
amount of the impairment is determined based on the difference between the
carrying value and the fair value. Fair value is determined based on
estimated discounted cash flows to be generated by the asset. There were no
adjustments needed during 1998.
Depreciation on computer equipment for financial statement purposes is based
on the straight-line method over estimated useful lives of 4 years. Other
assets, consisting of organization costs and other deferred expenses, are
amortized on a straight-line basis over 2 to 5 year lives. Unamortized
acquisition fees are charged to amortization expense when the associated
lease equipment is sold.
CASH AND CASH EQUIVALENTS
The Partnership considers all highly liquid investments with a maturity of
three months or less to be cash equivalents. At December 31, 1998 and 1997,
cash equivalents were invested in a money market fund investing directly in
Treasury obligations.
7
<PAGE>
Commonwealth Income &
Growth Fund III
Notes to Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Partnership is not subject to federal income taxes; instead, any
taxable income (loss) is passed through to the partners and included on their
respective income tax returns.
Taxable income differs from financial statement net income as a result
of reporting certain income and expense items for tax purposes in periods
other than those used for financial statement purposes, principally relating
to depreciation, amortization, and lease income.
OFFERING COSTS
Offering costs are payment for selling commissions of 7% and dealer
manager fees of 2% of the partners' contributed capital, professional fees
and other offering expenses relating to the syndication. These costs are
deducted from partnership capital in the accompanying financial statements.
NET INCOME PER EQUIVALENT LIMITED PARTNERSHIP UNIT
The net income per equivalent limited partnership unit is computed based
upon net income allocated to the limited partners and the weighted average
number of equivalent limited partnership units outstanding during the period.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1998, Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-up Activities," was issued which requires that the costs associated
with such activities be expensed as incurred. SOP 98-5 is required to be
adopted in the first quarter of 1999 and will result in the write-off of
$18,000 of unamortized organization costs.
3. COMPUTER EQUIPMENT
The Partnership is the lessor of equipment under operating leases with
periods ranging from 24 to 36 months. In general, associated costs such as
repairs and maintenance, insurance, and property taxes are paid by the lessee.
<PAGE>
Commonwealth Income &
Growth Fund III
Notes to Financial Statements (continued)
3. COMPUTER EQUIPMENT (CONTINUED)
The following is a schedule of future minimum rentals on noncancelable
operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999....................... $ 489,458
2000....................... 383,677
2001....................... 48,527
-----------
$ 921,662
-----------
-----------
</TABLE>
Lease income from two lessees, each exceeding 10% of total lease income,
aggregated 88% of lease income for the year ended December 31, 1998.
4. RELATED PARTY TRANSACTIONS
ORGANIZATIONAL FEE
The General Partner is entitled to be paid an Organizational Fee equal
to three percent of the first $10,000,000 of Limited Partners' Capital
Contributions and two percent of the Limited Partners' Capital Contributions
in excess of $10,000,000, as compensation for the organization of the
Partnership. During 1998, such organizational fees of approximately $64,000
were paid to the General Partner.
SELLING COMMISSION AND DEALER MANAGER FEES
The Partnership will pay to Commonwealth Capital Securities Corp.
(CCSC), an affiliate of Commonwealth Capital Corp., an aggregate of up to 9%
of the partners' contributed capital as selling commissions and dealer
manager fees, after the required $1,500,000 minimum subscription amount has
been sold. During 1998, selling commissions and dealer manager fees of
approximately $193,000 were paid to CCSC.
REIMBURSEMENT OF EXPENSES
The General Partner and its Affiliates are entitled to reimbursement by
the Partnership for the cost of goods, supplies, or services obtained and
used by the General Partner in connection with the administration and
operation of the Partnership from third parties unaffiliated with the General
Partner. In addition, the General Partner and its affiliates are entitled to
reimbursement for certain expenses incurred by the General Partner and its
affiliates in connection with the administration and operation of the
Partnership. During 1998, $7,500 of expenses were reimbursed to the General
Partner.
<PAGE>
COMMONWEALTH INCOME &
GROWTH FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
EQUIPMENT ACQUISITION FEE
The General Partner is entitled to be paid an equipment Acquisition Fee of 4%
of the Purchase Price of each item of equipment purchased as compensation for
the negotiation of the acquisition of the equipment and the lease thereof or
sale under a conditional sales contract. The fee is paid upon each 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.
If the Partnership acquires equipment in an amount exceeding the net proceeds
of the Offering available for investment in equipment, the fee will be paid
when such equipment is acquired. During 1998, equipment acquisition fees of
approximately $73,000 were paid to the General Partner.
DEBT PLACEMENT FEE
As compensation for arranging term debt to finance the acquisition of
equipment by the Partnership, the General Partner is paid a fee equal to 1%
of such indebtedness; provided, however, that such fee shall be reduced to
the extent the Partnership incurs such fees to third parties, unaffiliated
with General Partner or the lender, with respect to such indebtedness and no
such fee will be paid with respect to borrowings from the General Partner or
its Affiliates. During 1998, no debt placement fees were paid to the General
Partner.
EQUIPMENT MANAGEMENT FEE
The General Partner is entitled to be paid a monthly fee equal to the lesser
of (i) the fees which would be charged by an independent third party for
similar services for similar equipment or (ii) the sum of (a) two percent of
(1) the Gross Lease Revenues attributable to equipment which is subject to
full payout net leases which contain net lease provisions plus (2) the
purchase price paid on conditional sales contracts as received by the
Partnership and (b) 5% of the gross lease revenues attributable to equipment
which is subject to operating leases. During 1998, equipment management fees
of approximately $15,000 respectively, were paid to the General Partner, as
determined pursuant to section (ii) above.
<PAGE>
COMMONWEALTH INCOME &
GROWTH FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
EQUIPMENT LIQUIDATION FEE
With respect to each item of equipment sold by the General Partner (other
than in connection with a Conditional Sales Contract), a fee equal to the
lesser of (i) 50% of the competitive equipment sale commission or (ii) three
percent of the sales price for such equipment is payable to the General
Partner. The payment of such fee is subordinated to the receipt by the
Limited Partners of the net disposition proceeds from such sale in accordance
with the Partnership Agreement. Such fee will be reduced to the extent any
liquidation or resale fees are paid to unaffiliated parties. There were no
such fees paid to the General Partner in 1998.
5. NOTE PAYABLE
Note payable consists of an installment note payable to a bank; with an
outstanding balance of $8,442 which bears interest at 7.2%; due in monthly
installments of $685 including interest through December 1999.
This note is secured by specific computer equipment and is a nonrecourse
liability of the Partnership.
The fair market value of debt approximates its carrying value at December 31,
1998.
6.SUPPLEMENTAL CASH FLOW INFORMATION
Other noncash activities included in determination of net income are as
follows:
<TABLE>
<S> <C>
Lease income, net of interest expense on notes payable realized as a result of
direct payment of principal by lessee to bank..................................... $ 5,264
Lease income paid to original lessor in lieu of cash payment for computer equipment
acquired.......................................................................... 5,190
---------
Total adjustment to net income from other noncash activities........................ $ 10,454
---------
---------
</TABLE>
No interest or principal on notes payable was paid by the Partnership because
direct payment was made by lessee to the bank in lieu of collection of lease
income and payment of interest and principal by the Partnership.
<PAGE>
COMMONWEALTH INCOME &
GROWTH FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. RECONCILIATION OF NET INCOME REPORTED FOR FINANCIAL REPORTING PURPOSES TO
TAXABLE INCOME ON THE FEDERAL PARTNERSHIP RETURN
<TABLE>
<CAPTION>
1998
-------
<S> <C>
Net income for financial reporting purposes $18,250
Adjustments:
Depreciation 92,865
Amortization 14,709
Unearned lease income 21,345
Other 13,502
--------
Taxable income on the Federal Partnership Return $160,671
--------
--------
</TABLE>
8. SUBSEQUENT EVENT
Subsequent to December 31, 1998, the Partnership issued 2,921 limited
partnership units and raised approximately $51,000 of net proceeds.
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 23, 1999 (except for Note 8 as to which
the date is February 23, 1999) in the Post Effective Amendment No. 2 to the
Registration Statement (Form S-1 No. 333-26933) and related Prospectus of
Commonwealth Income & Growth Fund III for the registration of 750,000 units
of its Limited Partnership Interests.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
July 9, 1999
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
SUMMARY OF RESULTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
EQUIPMENT SUMMARY
The Partnership currently owns equipment with an original cost of $2,157,000
as of March 31, 1999. The initial terms for the aforementioned equipment is
32 to 36 months.
LESSEES
The Partnership has equipment on lease with the following companies:
Lucent Technologies The Chase Manhattan Bank
Cendant Operations, Inc. Chrysler Corporation
Kaiser Foundation Health Plan, Inc. Morgan Stanley
Hartford Insurance Group International Paper
CASH DISTRIBUTIONS
The quarterly distribution for the first quarter of 1999 was paid on March 31,
1999. The total amount distributed on March 31, 1999, to the limited partners
was $52,000. Investors received distributions equal to 9.75% on an annualized
basis on March 31, 1999.
FINANCIAL RESULTS
The Partnership had net income of $7,000 for the three months ended March 31,
1999. Gross revenues for the three months ended March 31, 999, were $158,000.
Rental income from the leasing of computer peripheral equipment accounted for
98% of total revenue for the three months ended March 31, 1999.
Expenses for the three months ended March 31, 1999, were $151,000.
Depreciation and amortization comprised 83% of total expenses for the three
months ended March 31, 1999.
The Partnership generated $132,000 of funds from operations for purposes of
determining cash available for distribution and distributed 39% of this
amount to limited partners at the three months ended March 31, 1999.
OTHER
If you would like to change your address or update your social security or
tax identification number, please contact our Investor Relations Department:
COMMONWEALTH CAPITAL CORP.
1160 WEST SWEDESFORD ROAD
SUITE 340
BERWYN, PA 19312
(800) 497-4554 OR (610) 647-6800
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
BALANCE SHEETS
<TABLE>
<CAPTION>
(AUDITED)
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Assets
Cash and cash equivalents $ 336,420 $ 507,193
Lease income receivable 54,305 65,729
Accounts receivable - General Partner 11,014 --
Other receivables 9,371 1,912
Computer equipment, at cost 2,156,537 1,453,742
Accumulated depreciation (355,464) (238,240)
----------- -----------
1,801,073 1,215,502
Equipment acquisition costs, net of accumulated
amortization of $27,344 for 1999, and $20,779 for 1998 58,917 51,748
Organization costs, net of accumulated amortization of
$5,670 for 1999, and $4,248 for 1998 22,333 18,252
----------- -----------
Total assets $ 2,293,433 $ 1,860,336
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 2,790 $ 38,355
Accounts payable - General Partner -- 349
Unearned lease income 53,101 52,192
Note payable 469,735 8,442
----------- -----------
Total liabilites 525,626 99,338
PARTNERS' CAPITAL:
General partner 1,000 1,000
Limited partners 1,766,807 1,759,998
----------- -----------
Total partners' capital 1,767,807 1,760,998
----------- -----------
----------- -----------
Total liabilities and partners' capital $ 2,293,433 $ 1,860,336
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
Statements of Operations
For the quarter ended March 31, 1999 and for the period from January 27, 1999
(commencement of operations) to March 31, 1999
<TABLE>
<CAPTION>
1998 1998
---- ----
<S> <C> <C>
Income:
Lease $154,905 $ --
Interest and other 3,262 12,274
-------- --------
158,167 12,274
Expenses:
Operating, excluding depreciation 15,473 12
Equipment management fee - General Partner 7,745 --
Derpreciation 117,224 --
Amortization of organization costs and deferred expenses 7,987 6,228
Interest 2,927 --
-------- --------
151,356 6,240
-------- --------
Net income $ 6,811 $ 6,034
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
STATEMENT OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNER GENERAL LIMITED
UNITS UNITS PARTNER PARTNER TOTAL
----- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Initial contribution 50 25 $ 1,000 $ 500 $ 1,500
Contributions -- 107,117 -- 2,142,340 2,142,340
Offering costs -- (234,641) (234,641)
Net income 1,691 16,559 18,250
Distributions (1,691) (164,760) (166,451)
------ ------- ----- --------- ---------
Partners' capital - December 31, 1998 50 107,142 1,000 1,759,998 1,760,998
Contributions -- 2,921 -- 58,418 58,418
Offering costs -- (6,397) (6,397)
Net income 510 6,301 6,811
Distributions (510) (51,513) (52,023)
------ ------- ----- --------- ---------
Partners' capital - December 31, 1998 50 110,063 $ 1,000 $ 1,766,807 $ 1,767,807
------ ------- ----- --------- ---------
------ ------- ----- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
STATEMENTS OF CASH FLOWS
For the quarter ended March 31, 1998 and for the period from
January 27, 1998 (commencement of operations) to March 31, 1999
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,811 $ 6,034
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 125,211 6,228
Other non-cash activities included in determination of net income (27,673) --
Changes in operating assets and liabilities: $ --
Lease income receivable 11,424 --
Other receivables and deposits (7,454) (7,343)
Accounts receivable - General Partner (11,363) --
Accounts payable (35,565) 1,846
Unearned lease income 909 --
Organization cost paid to the General Partner (613) (21,336)
----------- -----------
Net cash provided by operating activities 61,682 (14,571)
INVESTING ACTIVITIES
Capital expenditures (213,829) --
Equipment acquisition fees paid to the General Partner (13,735) (68,775)
----------- -----------
Net cash used in investing activities (227,564) (68,775)
FINANCING ACTIVITIES
Partners' contributions 58,418 2,032,980
Offering costs (4,645) (201,165)
Offering costs paid to the General Partner (1,752) (21,336)
Distributions to partners (52,023) (26,862)
Debt placement fee paid to the General Partner (4,889) --
----------- -----------
Net cash provided by financing activities (4,891) 1,783,617
Net increase (decrease) in cash and cash equivalents (170,773) 1,700,271
Cash and cash equivalents at begining of year 507,193 --
----------- -----------
----------- -----------
Cash and cash equivalents at end of period $ 336,420 $ 1,700,271
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
BASIS OF PRESENTATION
The financial information presented as of any date other than December 31 has
been prepared from the books and records without audit. Financial information as
of December 31 has been derived from the audited financial statements of
Commonwealth Income & Growth Fund I (the "Partnership"), but does not include
all disclosures required by generally accepted accounting principles. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial information for
the periods indicated have been included. For further information regarding the
Partnership's accounting policies, refer to the financial statements and related
notes included in the Partnership's annual report on Form 10-K for the year
ended December 31, 1998.
NET INCOME PER EQUIVALENT LIMITED PARTNERSHIP UNIT
The net income per equivalent limited partnership unit is computed based upon
net income allocated to the limited partners and the weighted average number of
equivalent units outstanding during the period.
SUBSEQUENT EVENT
On April 2, 1999, reinvestment subscriptions from investors totaling $1,456 were
released by the escrow agent and accepted by the Partnership. The net proceeds
to the Partnership available for investment in computer equipment after payment
of offering expenses and the equipment acquisition fees were $1,232.
On April 15, 1999, May 3, 1999, and May 11, 1999, subscriptions from investors
totaling $108,000 were released by the escrow agent and accepted by the
Partnership. The net proceeds to the Partnership available for investment in
computer equipment after payment of offering expenses and the equipment
acquisition fees were $91,385.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
STATEMENT OF CASH EXPENDED
AS OF MARCH 31, 1999
The following is the Statement of Cash Expended to acquire equipment and the
amount of the net proceeds of the offering which remain unexpended and
uncommitted at 3/31/99.
<TABLE>
<S> <C>
Net Proceeds to Partnership @ 3/31/99 $ 2,016,309
Cash Expended:
Lucent #N9CJO-14 139,596
Lucent #N9JL9804 445,714
Chase #19 252,681
Cendant Operations #2 131,470
Cedent #4 Upgrade 40,382
Chase Manhattan Bank #20 407,908
Chrysler #102A 18,392
Chrysler #102B 18,760
International Paper #37 140,857
Kaiser #34 24,252
Kaiser #35 47,927
-----------
Net proceeds not expended 348,370
Cash committed:
Hartford Insurance #5 111,690
Morgan Stanley #8 25,858
-----------
Total cash committed 137,548
Net proceeds not expended or
committed $ 210,822
-----------
-----------
</TABLE>
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
SCHEDULE OF EQUIPMENT HELD AS OF MARCH 31, 1999
<TABLE>
<CAPTION>
Original Original Original
List Purchase Monthly Lease
Lessee Manufacturer Equipment Price Price Rental Term
------ ------------ --------- ---------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Chase #19 SUN (4) SPARC II 394,360 252,681 6,493 36
Lucent #N9CJO-14 SUN (12) WORKSTATIONS 239,340 139,596 3,857 32
Lucent #N9JL9804 SUN (30) SERVERS 739,350 445,714 12,120 32
Chase #20 SUN (5) 9490-M34 1,134,830 407,908 12,346 24
Cendant #2 SUN (1) E4000 221,095 131,470 3,216 36
Chrysler #102A IBM (1) 3745 24,200 18,392 731 24
Chrysler #102B IBM (1) 3745-21A, (1) 3746-900 24,200 18,760 978 18
Cendant #4 (Upgrade to #2) SUN ADDITIONAL MEMORY 39,500 40,382 1,295 31
International Paper #37 DEC (2) ALPHA 4100 184,372 140,857 4,042 32
Kaiser #34 IBM (4) RS 6000 H-50 271,949 24,252 4,983 36
Kaiser #35 IBM (1) RS 6000 H-50 513,741 47,927 9,952 36
</TABLE>
<PAGE>
APPENDIX II
PRIOR PERFORMANCE TABLES
<PAGE>
COMMONWEALTH CAPITAL CORP.
EXPERIENCE IN RAISING AND INVESTING FUNDS
as of December 31, 1998
(TABLE I)
<TABLE>
<CAPTION>
COMMONWEALTH
COMMONWEALTH EQUIPMENT
INCOME & GROWTH INCOME PRIVATE
FUND II FUND - VI, L.P.
---------------------------------
<S> <C> <C>
Offering Information:
Amount offered (maximum) 15,000,000 1,500,000
Dollar Amount Sold 9,235,185 1,500,000
(1) Dealer/Manager Expenses 830,092 75,000
(2) Offering/Organizational Expenses 327,056 51,505
---------------------------------
Net Proceeds Available 8,078,037 1,373,495
Total Equipment Purchases:
Equipment purchased with cash 7,753,562 1,330,341
Equipment financed 6,828,701 587,351
---------------------------------
6,578,334 462,487
% of Equipment financed as of December 31, 1998 62.0% 57.0%
Initial Acquisition Fees (%) (3) 3.4% 2.2%
Date Offering Commenced 05/12/95 09/30/96
Date Offering Completed 05/12/97 09/30/96
Average Initial Term of Leases
(in months) 34 31
Months from closing to invest 90% 1 6
</TABLE>
(1) Dealer/Manager expenses include commissions to brokers, due diligence and
out-of-pocket expenses.
(2) Offering/Organizational expenses consist of legal fees, blue sky filings,
accounting fees, printing charges for perspective books and the guarantee
fee.
(3) Fees were paid to the General Partner/Management Trustee at fund closing.
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH CAPITAL CORP.
COMPENSATION TO GENERAL PARTNERS AND AFFILIATES
as of December 31, 1998
(TABLE II)
<TABLE>
<CAPTION>
COMMONWEALTH
COMMONWEALTH EQUIPMENT
INCOME & GROWTH INCOME PRIVATE
FUND II FUND -VI, L.P.
-------------------------------
<S> <C> <C>
Date offering commenced 05/12/95 09/30/96
Dollar amount raised 9,235,185 $1,500,000
Amount paid from the proceeds of
offering, reinvestment and/or debt:
Initial Acquisition Fee 310,694 33,000
Organizational Fee 114,469 7,701
Cash generated from operations before
deducting payments to the General
Partner and Affiliates 2,134,853 333,688
Amount paid to the General Partner
and Affiliates from operations:
Equipment Management Fee 211,000 22,477
Acquisition Fee 223,000 13,892
Finance Fee 40,000 0
Dollar amount of equipment sales and
refinancing before deducting
payments to the General Partner and
Affiliates 0 0
Amount paid to the General Partner and
Affiliates from equipment sales
and refinancing 0 0
</TABLE>
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND I
OPERATING RESULTS OF PRIOR PROGRAMS
(TABLE III)
Program Inception to December 31, 1998
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMPUTATION OF NET INCOME (LOSS)
Months of Operations **10 12 12 12 12
Gross Revenues 1,223,900 4,317,522 5,955,142 5,229,664 4,620,771
Less: Operating Expenses 71,556 93,265 80,883 111,263 116,833
Equipment Management Fee 56,473 207,230 295,420 259,757 226,367
Interest Expense 48,184 212,365 311,247 348,681 272,640
Loss on Sale of Computer Equipment - - 691,808 196,690 -
Depreciation and Amortization 952,640 3,849,897 5,895,531 5,219,396 4,280,185
----------------------------------------------------------------------
Net Income (Loss) - GAAP Basis 95,047 (45,235) (1,319,747) (906,123) (275,254)
----------------------------------------------------------------------
----------------------------------------------------------------------
Federal Taxable Income (Loss) 363,865 326,931 (1,726,506) (1,574,024) (36,795)
Cash Distributions - GAAP Basis (443,614) (1,195,585) (1,275,467) (1,275,467) (1,275,467)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 95,047 (45,235) (1,319,747) (906,123) (275,254)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 952,640 3,849,897 5,895,531 5,219,396 4,280,185
Loss (Gain) on Sale of Computer Equipment - - 691,808 196,690 (71,682)
Other Non-Cash Activities Included in the
Determination of Net Income (Loss) * (633,035) (1,514,550) (2,689,616) (2,848,893) (3,094,256)
Net Change in Operating Assets and Liabilities (204,290) 121,072 (52,325) 85,384 (82,125)
----------------------------------------------------------------------
Net Cash Provided by Operating Activities 210,362 2,411,184 2,525,651 1,746,454 756,868
Capital Expenditures (4,783,921) (6,353,404) (1,035,293) (1,347,809) (544,691)
Accounts Payable - Commonwealth Capital Corp. - - (22,222) 1,823 (1,823)
Net Proceeds from Sale of Equipment - - 748,241 347,654 893,739
Payment of Equipment Payable - - (9,624) (195,864) -
Equipment Acquisition Fees Paid to the General Partner (282,368) (403,549) (156,616) (213,186) (39,699)
----------------------------------------------------------------------
Net Cash Used in (Provided by) Investing Activities (5,066,289) (6,756,953) (475,514) (1,407,382) 307,526
Proceeds from Short-term Note Payable - - - - 78,804
Advance from Commonwealth Capital Corp. - - - - 22,000
Partners' Contributions 8,271,511 4,352,171 - - -
Offering Costs (932,803) (459,421) - - -
Debt Placement Fees (20,305) (29,920) (33,713) (30,141) (4,425)
Distributions to Partners (443,614) (1,195,585) (1,275,467) (1,275,467) (1,275,467)
----------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 6,874,789 2,667,245 (1,309,180) (1,305,608) (1,179,088)
Net Increase (Decrease) in Cash 2,018,862 (1,678,524) 740,957 (966,536) (114,694)
Cash at Beginning of Year 1,500 2,020,362 341,838 1,082,795 116,259
----------------------------------------------------------------------
Cash at End of Year 2,020,362 341,838 1,082,795 116,259 1,565
----------------------------------------------------------------------
----------------------------------------------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income (Loss) - GAAP Basis 11 (4) (105) (72) (22)
Federal Taxable Income (Loss) to Investors 42 27 (138) (125) (3)
Cash Distributions to Investors - GAAP Basis (53) (94) (100) (101) (100)
Return of Capital to Investors - GAAP Basis 42 94 100 101 100
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented
was caused primarily by the acquisition of more financed equipment.
** Partnership commenced operations on 3/14/94
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND - IV, L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
Program Inception to December 31, 1998
<TABLE>
<CAPTION>
1995 1996 1997 1998
------------------------------------------------------
<S> <C> <C> <C> <C>
Computation of Net Income (Loss)
Months of Operations ** 6 12 12 12
Gross Revenues 168,862 566,819 741,389 809,373
Less: Operating Expenses 10,818 12,115 9,931 9,708
Equipment Management Fee 7,432 27,759 37,194 40,249
Interest Expense 3,850 29,704 41,327 31,504
Loss on Sale of Computer Equipment - - - 23,659
Depreciation and Amortization 145,570 518,281 746,014 745,059
------------------------------------------------------
Net Income (Loss) - GAAP Basis 1,192 (21,040) (93,077) (40,806)
------------------------------------------------------
------------------------------------------------------
Federal Taxable Income (Loss) 30,850 86,491 137,013 (23,756)
Cash Distributions - GAAP Basis (98,829) (187,879) (187,879) (187,879)
Computation of Cash Flows
Net Income (Loss) 1,192 (21,040) (93,077) (40,806)
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 145,570 518,281 746,014 745,059
Loss (Gain) on Sale of Computer Equipment - (5,301) - 23,659
Other Non-Cash Activities Included in the
Determination of Net Income * (41,201) (186,248) (365,738) (404,112)
Net Change in Operating Assets and
Liabilities (141,072) 166,935 (17,599) (37,711)
------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities (35,511) 472,627 269,600 286,089
Capital Expenditures (1,243,766) (147,878) (93,553) (75,167)
Net Proceeds from Sale of Equipment - 25,322 - 10,808
Increase in Organization Costs and Deferred Expenses (41,841) (34,289) (17,047) (14,649)
Payment of Equipment Payable - (125,392) - -
------------------------------------------------------
Net Cash Used in Investing Activities (1,285,607) (282,237) (110,600) (79,008)
Partners' Contributions 1,551,000 - -
Offering Costs (95,820) - -
Distributions to Partners (98,829) (187,879) (187,879) (187,879)
------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 1,356,351 (187,879) (187,879) (187,879)
Net Increase (Decrease) in Cash 35,233 2,511 (28,879) 19,202
Cash at Beginning of Year - 35,233 37,744 8,865
------------------------------------------------------
Cash at End of Year 35,233 37,744 8,865 28,067
------------------------------------------------------
------------------------------------------------------
Investment Data Per $1,000 Investment
Net Income (Loss) - GAAP Basis 1 (14) (60) (26)
Federal Taxable Income (Loss) to Investors 20 60 88 (15)
Cash Distributions to Investors - GAAP Basis (63) (120) (120) (120)
Return of Capital to Investors - GAAP Basis 62 120 120 120
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented
was caused primarily by the acquisition of more financed equipment.
** Partnership commenced operations on 6/23/95
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND II
OPERATING RESULTS OF PRIOR PROGRAMS
(TABLE III)
Program Inception to December 31, 1998
<TABLE>
<CAPTION>
1995 1996 1997 1998
------------------------------------------------------
<S> <C> <C> <C> <C>
COMPUTATION OF NET INCOME (LOSS)
Months of Operations **3 12 12 12
Gross Revenues 123,878 1,194,114 2,540,007 4,245,660
Less: Operating Expenses 23,059 56,707 163,749 93,840
Equipment Management Fee 4,927 56,184 122,233 210,643
Interest Expense - - 37,106 204,022
Loss on Sale of Computer Equipment - - 31,955 -
Depreciation and Amortization 107,957 1,081,953 2,246,801 4,128,899
------------------------------------------------------
Net Income (Loss) - GAAP Basis (12,065) (730) (61,837) (391,744)
------------------------------------------------------
------------------------------------------------------
Federal Taxable Income 25,505 257,899 534,897 307,210
Cash Distributions - GAAP Basis (84,642) (608,045) (908,714) (932,964)
COMPUTATION OF CASH FLOWS
Net Loss (12,065) (730) (61,837) (391,744)
Adjustments to Reconcile Net Loss to Net Cash Provided
by Operating Activities:
Depreciation and Amortization 107,957 1,081,953 2,246,801 4,128,899
(Gain) Loss on Sale of Computer Equipment - - 31,955 (493)
Other Non-Cash Activities Included in the
Determination of Net Loss* - (4,290) (416,823) (1,558,644)
Net Change in Operating Assets and
Liabilities (39,441) (127,550) 157,053 (254,165)
------------------------------------------------------
Net Cash Provided by Operating Activities 56,451 949,383 1,957,149 1,923,853
Capital Expenditures (2,850,156) (1,777,488) (4,179,080) (1,701,559)
Net Proceeds of Sale of Computer Equipment - - 10,585 851,607
Equipment Acquisition Fees Paid to the General Partner (123,105) (147,448) (202,760) (222,916)
------------------------------------------------------
Net Cash Used in Investing Activities (2,973,261) (1,924,936) (4,371,255) (1,072,868)
Partners' Contributions 3,678,960 4,371,440 1,185,785 -
Offering Costs (425,732) (487,266) (129,680) -
Distributions to Partners (84,642) (608,045) (908,714) (932,964)
Debt Placement Fee - - (27,470) (39,980)
------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 3,168,586 3,276,129 119,921 (972,944)
Net Increase (Decrease) in Cash 251,776 2,300,576 (2,294,185) (121,959)
Cash at Beginning of Year - 251,776 2,552,352 258,167
------------------------------------------------------
Cash at End of Year 251,776 2,552,352 258,167 136,208
------------------------------------------------------
------------------------------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Loss - GAAP Basis (3) (0) (7) (42)
Federal Taxable Income to Investors 7 43 (59) 33
Cash Distributions to Investors - GAAP Basis (23) (100) (100) (100)
Return of Capital to Investors - GAAP Basis 23 100 100 100
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment in financed. The increase over the periods presented
was caused primarily by the acquisition of more financed equipment.
** Partnership commenced operations on 9/22/95
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND - V, L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(TABLE III)
Program Inception to December 31, 1998
<TABLE>
<CAPTION>
1995 1996 1997 1998
-------------------------------------------------------
<S> <C> <C> <C> <C>
COMPUTATION OF NET INCOME (LOSS)
Months of Operations ** 3 12 12 12
Gross Revenues 42,461 357,457 417,731 570,701
Less: Operating Expenses 7,040 12,843 10,837 8,839
Equipment Management Fee 1,697 17,285 20,476 28,310
Interest Expense - 10,160 11,583 35,307
Loss on Sale of Computer Equipment - - - 73,265
Depreciation and Amortization 32,267 285,983 441,049 531,075
-------------------------------------------------------
Net Income (Loss) - GAAP Basis 1,457 31,186 (66,214) (106,095)
-------------------------------------------------------
-------------------------------------------------------
Federal Taxable Income (Loss) 13,806 139,400 89,797 (157,191)
Cash Distributions - GAAP Basis (31,548) (121,212) (121,212) (121,212)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 1,457 31,186 (66,214) (106,095)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provied
by Operating Activities:
Depreciation and Amortization 32,267 285,983 441,049 531,075
Loss on Sale of Computer Equipment 73,265
Other Non-Cash Activities Included in the Determination
of Net Income * (1,510) (82,739) (135,891) (299,699)
Net Change in Operating Assets and Liabilities (3,419) 27,732 (12,035) (6,635)
-------------------------------------------------------
Net Cash Provided by Operating Activities 28,795 262,162 226,909 191,911
Capital Expenditures (556,175) (340,144) - (239,656)
Payment of Equipment Payable - (73,086) - -
Net Proceeds from Sale of Computer Equipment - - - 41,802
Increase in Organization Costs and Deferred Expenses (24,600) (12,177) (12,644) (38,105)
-------------------------------------------------------
Net Cash Used in Investing Activities (580,775) (425,407) (12,644) (235,959)
Partners' Contributions 1,001,000 - - -
Offering Costs (60,400) - - -
Distributions to Partners (31,548) (121,212) (121,212) (121,212)
-------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 909,052 (121,212) (121,212) (121,212)
Net Increase (Decrease) in Cash 357,072 (284,457) 93,053 (165,260)
Cash at Beginning of Year - 357,072 72,615 165,668
-------------------------------------------------------
Cash at End of Year 357,072 72,615 165,668 408
-------------------------------------------------------
-------------------------------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income (Loss) - GAAP Basis 1 31 (66) (106)
Federal Taxable Income (Loss) to Investors 11 145 90 (157)
Cash Distributions to Investors - GAAP Basis (31) (120) (120) (120)
Return of Capital to Investors - GAAP Basis 30 89 120 120
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented
was caused primarily by the acquisition of more financed equipment.
** Partnership commenced operations on 9/28/95
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND - VI L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(TABLE III)
Program Inception to December 31, 1998
<TABLE>
<CAPTION>
1996 1997 1998
---------------------------------------------
<S> <C> <C> <C>
COMPUTATION OF NET INCOME (LOSS)
Months of Operations ** 3 12 12
Gross Revenues 16,391 486,992 752,626
Less: Operating Expenses 6,507 12,477 7,241
Equipment Management Fee 221 22,676 22,477
Interest Expense - 20,830 28,696
Depreciation and Amortization 8,550 343,422 682,071
---------------------------------------------
Net Income - GAAP Basis 1,113 87,587 12,141
---------------------------------------------
---------------------------------------------
Federal Taxable Income (Loss) (5,969) 56,542 (45,154)
Cash Distributions - GAAP Basis (45,455) (181,818) (181,818)
COMPUTATION OF CASH FLOWS
Net Income 1,113 87,587 12,141
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation and Amortization 8,550 343,422 682,071
Other Non-Cash Activities Included in the Determination
of Net Income * (7,375) (268,050) (395,347)
Net Change in Operating Assets and Liabilities (3,704) 7,557 12,346
---------------------------------------------
Net Cash Provided by (Used in) Operating Activities (1,416) 170,516 311,211
Capital Expenditures - (1,188,102) (109,667)
Payment of Computer Equipment Payable - (97,920) -
Increase in Organization Costs and Deferred Expenses (35,701) (13,691) (13,892)
---------------------------------------------
Net Cash Used in Investing Activities (35,701) (1,299,713) (123,559)
Partners' Contributions 1,501,000 - -
Offering Costs (85,804) - -
Distributions to Partners (45,455) (181,818) (181,818)
---------------------------------------------
Net Cash Used in (Provided by) Financing Activities 1,369,741 (181,818) (181,818)
Net Increase (Decrease) in Cash 1,332,624 (1,311,015) 5,834
Cash at Beginning of Year - 1,332,624 21,609
---------------------------------------------
Cash at End of Year 1,332,624 21,609 27,443
---------------------------------------------
---------------------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income - GAAP Basis 1 58 8
Federal Taxable Income (Loss) to Investors (4) 38 (30)
Cash Distributions to Investors - GAAP Basis (30) (120) (120)
Return of Capital to Investors - GAAP Basis 29 62 112
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented
was caused primarily by the acquisition of more financed equipment.
** Partnership commenced operations on 9/30/96
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND II
EQUIPMENT SALES
For the three year period ended December 31, 1998
(TABLE V)
<TABLE>
<CAPTION>
YEAR YEAR ORIGINAL
EQUIPMENT OF OF ACQUISITION NET BOOK
MANUFACTURER EQUIPMENT TYPE DESCRIPTION ACQUISITION DISPOSAL COST VALUE
<S> <C> <C> <C> <C> <C> <C>
IBM (23) 4028-NS1 Printer 1996 1997 68,063 42,539
STK (1) 9200-XN3, (1) 6172, Disk Array 1995 1998 787,196 180,399
(1) 9220-A42, (1) 9220-B22
STK (1) 9200-XN3, (1) 6172, Disk Array 1995 1998 582,671 133,529
(1) 9220-A42
STK (1) 4410-001, (2) 4480-M24, Drive Timberline, 1996 1998 383,553 135,842
(2) 4480-M20, (1) 9490-M34 Library, Drive
IBM (50) 4028-NS1 Printer 1996 1998 79,900 29,962
IBM (325) 4230-5S3 Printer 1996 1998 990,357 371,384
<CAPTION>
NET FEDERAL
PROCEEDS GAAP TAXABLE
MANUFACTURER RECEIVED NET GAIN/(LOSS) NET GAIN/(LOSS)
<S> <C> <C> <C>
IBM 10,584 (31,955) (38,966)
STK 83,300 (97,099) (230,528)
STK 66,406 (67,123) (165,883)
STK 169,512 33,670 (43,231)
IBM 28,909 (1,053) (4,329)
IBM 503,483 132,099 (11,504)
</TABLE>
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND II
SUMMARY OF EQUIPMENT ACQUISITIONS
For the three year period ended December 31, 1998
(TABLE VI)
<TABLE>
<CAPTION>
YEAR
OF RENT IN DEBT
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION CASH LIEU ASSUMED
<S> <C> <C> <C> <C> <C> <C>
STK (1) 9200-XN3, (1) 9220-A42, (1) 9220-B22 Disk Array 1995 787,196 0 0
STK (1) 9200-XN3, (1) 9220-A42 Disk Array 1995 582,671 0 0
IBM (325) 4230-5S3 Printer 1995 990,357 0 0
IBM (50) 4028-NS1 Printer 1995 147,963 0 0
STK (50%) (4) 4490-M30 UPGR, (2) 4490-M34 UPGR Tape Drive 1995 490,110 0 0
(6) 9490-M34
STK (1) 4410-001, (2) 4480-M24, (2) 4480-M20, Tape Drive 1996 383,553 0 0
(1) 9490-M34
IBM (1) 3490-A20, (2) 3490-B40 Tape Drive 1996 174,383 4,290 0
STK (3) 9490-M34 Tape Drive 1996 405,628 0 0
DEC (1) Alpha Server 2100A-5/250 Departmental Server 1996 204,781 0 0
DEC (1) Alpha Server 2100A-5/250 Departmental Server 1996 40,928 0 0
HP (13) HP9000-C110 Workstation 1996 304,718 0 0
SGI (1) Onyx infinite reality ds Departmental Server 1996 263,498 0 0
IBM (1) 3900 DW1/DW2 Printer 1997 477,466 0 0
IBM (38) 3130-02D Printer 1997 600,000 0 0
SUN E6000 Server 1997 461,207 0 0
STK (9) 9490-M34 Tape Drive 1997 253,297 0 1,015,612
IBM (75%): (8) 3900-OW1 Printer 1997 1,542,485 0 0
SUN ES3000 Server 1997 25,314 0 129,651
HP (20) HP C180 Workstation 1997 362,615 0 0
IBM (2) 3745-31A, (2) 3746-900 Communication Controller 1997 260,517 0 517,937
SGI (50%) workstations Workstation 1997 126,622 0 695,833
SUN upgrade Server Upgrade 1997 69,559 0 0
SUN (2) 3000 Servers Server 1998 -6,779 0 212,642
SUN (3) 450 Servers Server 1998 55,139 0 189,445
SGI (2) 9490-M34 Drive Timberline 1998 51,103 0 143,169
SUN 6000 Server Server 1998 130,900 0 336,046
STK SD-3H33, SD-H32 Drive Redwood 1998 79,646 0 195,448
STK SD-3H33, SD-H32 Drive Redwood 1998 56,258 0 127,138
ESCON (4) 9032 Escon Director 1998 356,523 0 869,261
ESCON (4) 9032 Escon Director 1998 347,493 0 965,374
IBM 3590 Tape Drive 1998 308,750 0 717,884
SUN 4500 Server Server 1998 120,701 0 0
<CAPTION>
TOTAL
OBLIGATIONS EQUIPMENT
MANUFACTURER INCURRED COST
<S> <C> <C>
STK 0 787,196
STK 0 582,671
IBM 0 990,357
IBM 0 147,963
STK 0 490,110
STK 0 383,553
IBM 0 178,673
STK 0 405,628
DEC 0 204,781
DEC 0 40,928
HP 0 304,718
SGI 0 263,498
IBM 0 477,466
IBM 0 600,000
SUN 0 461,207
STK 0 1,268,909
IBM 0 1,542,485
SUN 0 154,965
HP 0 362,615
IBM 0 778,454
SGI 0 822,455
SUN 0 69,559
SUN 0 205,863
SUN 0 244,584
SGI 0 194,272
SUN 0 466,946
STK 0 275,094
STK 0 183,396
ESCON 0 1,225,784
ESCON 0 1,312,867
IBM 0 1,026,634
SUN 0 120,701
</TABLE>
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND VI LIMITED PARTNERSHIP
SUMMARY OF EQUIPMENT ACQUISITIONS
For the three year period ended December 31, 1998
(TABLE VI)
<TABLE>
<CAPTION>
YEAR
OF RENT IN DEBT
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION CASH LIEU ASSUMED
<S> <C> <C> <C> <C> <C> <C>
STK (25%) (7) 9490-M34 Tape Drive 1996 102,635 0 166,641
HP (25%): (101) HP9000-C110, (2) HP9000-D350/2 Server/Workstation 1997 111,736 0 312,124
IBM (1) 3829-001 Printer 1997 131,369 0 0
SUN E5000 Server 1997 223,342 0 0
IBM (16%): (8) 3900-OW1 Printer 1997 329,063 0 0
STK (1) Redwood SD3H34 Tape Drive 1997 108,499 0 0
STK (1) 9710 timberwolf Libary Base w/Tape 1997 125,435 0 0
STK (1) 9710 timberwolf Libary Base w/Tape 1997 125,435 0 0
IBM (1) 3995-C36, (1) 3995-C16 Optical Storage 1997 28,509 0 191,593
SIEM (1) 774 Twin, (2) Troy 2000, (1) Print Server 8000 Printer 1998 34,500 0 120,003
<CAPTION>
TOTAL
OBLIGATIONS EQUIPMENT
MANUFACTURER INCURRED COST
<S> <C> <C>
STK 0 269,276
HP 0 423,860
IBM 0 131,369
SUN 0 223,342
IBM 0 329,063
STK 0 108,499
STK 0 125,435
STK 0 125,435
IBM 0 220,102
SIEM 0 154,503
</TABLE>
<PAGE>
Commonwealth Equipment Income Private Fund IV, LP
Equipment Sales
For the three year period ended December 31, 1997
(Table V)
<TABLE>
<CAPTION>
YEAR YEAR ORIGINAL NET FEDERAL
EQUIPMENT OF OF ACQUISITION NET BOOK PROCEEDS GAAP TAXABLE
MANUFACTURER EQUIPMENT TYPE DESCRIPTION ACQUISITION DISPOSAL COST VALUE RECEIVED NET GAIN/(LOSS) NET GAIN/(LOSS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
IBM (17) 4230-202 Printer 1995 1996 34,323 21,355 26,656 5,301 1,937
</TABLE>
<PAGE>
Commonwealth Income & Growth Fund II
Equipment Sales
For the three year period ended December 31, 1997
(Table V)
<TABLE>
<CAPTION>
YEAR YEAR ORIGINAL NET FEDERAL
EQUIPMENT OF OF ACQUISITION NET BOOK PROCEEDS GAAP TAXABLE
MANUFACTURER EQUIPMENT TYPE DESCRIPTION ACQUISITION DISPOSAL COST VALUE RECEIVED NET GAIN/(LOSS) NET GAIN/(LOSS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
IBM (23) 4028-NS1 Printer 1996 1997 68,063 42,539 10,584 (31,955) (38,966)
</TABLE>
<PAGE>
Commonwealth Equipment Income Private Fund IV, Limited Partnership
Summary of Equipment Acquisitions
For the three year period ended December 31, 1997
(Table VI)
<TABLE>
<CAPTION>
YEAR
OF
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION CASH
<S> <C> <C> <C> <C>
IBM / Roll Sytstems, Inc. (50%) 3900-DW1, Roll to Fold Printer & Roll to Fold 1995 343,010
SIEMENS (2) 2240-004 Printer 1995 459,592
PYR (26) 7000-0354 Enterprise Server 1995 81,713
STK (1) 9200-XP3, 9220-A22 Disk Array 1995 287,850
IBM (17) 4230-202 Printer 1995 14,000
STK (1) 9200-XN3, 9210-A21, 9210-C21 Disk Array 1995 57,601
STK (50%) (1) 9490-M34, 4412, 3T43, 9300001 Tape Drive 1995 73,086
STK (1) 9310-301 to 001 Upgr. Tape Library 1996 61,450
STK (50%) (1) 9490-M34 Tape Drive 1996 74,596
PYR (50%) NILE 100 Departmental Server 1996 35,913
STK (15%) (20) 9490-M32 Tape Drive 1996 68,650
HP (17) HP9000-C110 Workstation 1996 43,315
HP (10%): (101) HP9000-C110, (2) HP9000-D350/2 Workstations 1997 44,690
SUN ES5000 Server 1997 48,864
</TABLE>
<TABLE>
<CAPTION>
TOTAL
RENT IN DEBT OBLIGATIONS EQUIPMENT
MANUFACTURER LIEU ASSUMED INCURRED COST
<S> <C> <C> <C> <C>
IBM / Roll Sytstems, Inc. 0 0 0 343,010
SIEMENS 0 0 0 459,592
PYR 0 0 0 81,713
STK 0 0 0 287,850
IBM 0 20,323 0 34,323
STK 0 179,039 0 236,640
STK 1,510 0 0 74,596
STK 0 0 0 61,450
STK 0 0 0 74,596
PYR 0 132,663 0 168,576
STK 0 166,006 0 234,656
HP 0 268,837 0 312,152
HP 0 124,853 0 169,543
SUN 0 141,244 0 190,108
</TABLE>
<PAGE>
Summary of Equipment Acquisitions
For the three year period ended December 31, 1997
(Table VI)
<TABLE>
<CAPTION>
YEAR
OF
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION CASH
<S> <C> <C> <C> <C>
STK (1) 9200-XN3, (1) 9220-A42, (1) 9220-B22 Disk Array 1995 787,196
STK (1) 9200-XN3, (1) 9220-A42 Disk Array 1995 582,671
IBM (325) 4230-5S3 Printer 1995 990,357
IBM (50) 4028-NS1 Printer 1995 147,963
STK (50%) (4) 4490-M30 UPGR, (2) 4490-M34 UPGR Tape Drive 1995 490,110
(6) 9490-M34
STK (1) 4410-001, (2) 4480-M24, (2) 4480-M20, Tape Drive 1996 383,553
(1) 9490-M34
IBM (1) 3490-A20, (2) 3490-B40 Tape Drive 1996 174,383
STK (3) 9490-M34 Tape Drive 1996 405,628
DEC (1) Alpha Server 2100A-5/250 Departmental Server 1996 204,781
DEC (1) Alpha Server 2100A-5/250 Departmental Server 1996 40,928
HP (13) HP9000-C110 Workstation 1996 304,718
SGI (1) Onyx infinite reality ds Departmental Server 1996 263,498
IBM (1) 3900 DW1/DW2 Printer 1997 477,466
IBM (38) 3130-02D Printer 1997 600,000
SUN E6000 Server 1997 461,207
STK (9) 9490-M34 Tape Drive 1997 253,297
IBM (75%): (8) 3900-OW1 Printer 1997 1,542,485
SUN ES3000 Server 1997 25,314
HP (20) HP C180 Workstation 1997 362,615
IBM (2) 3745-31A, (2) 3746-900 Communication Controller 1997 260,517
Silicon Graphics (50%) workstations Workstation 1997 126,622
SUN upgrade Server Upgrade 1997 69,559
</TABLE>
<TABLE>
<CAPTION>
TOTAL
RENT IN DEBT OBLIGATIONS EQUIPMENT
MANUFACTURER LIEU ASSUMED INCURRED COST
<S> <C> <C> <C> <C>
STK 0 0 0 787,196
STK 0 0 0 582,671
IBM 0 0 0 990,357
IBM 0 0 0 147,963
STK 0 0 0 490,110
STK 0 0 0 383,553
IBM 4,290 0 0 178,673
STK 0 0 0 405,628
DEC 0 0 0 204,781
DEC 0 0 0 40,928
HP 0 0 0 304,718
SGI 0 0 0 263,498
IBM 0 0 0 477,466
IBM 0 0 0 600,000
SUN 0 0 0 461,207
STK 0 1,015,612 0 1,268,909
IBM 0 0 0 1,542,485
SUN 0 129,651 0 154,965
HP 0 0 0 362,615
IBM 0 517,937 0 778,454
Silicon Graphics 0 695,833 0 822,455
SUN 0 0 0 69,559
</TABLE>
<PAGE>
Commonwealth Equipment Income Private Fund V, Limited Partnership
Summary of Equipment Acquisitions
For the three year period ended December 31, 1997
(Table VI)
<TABLE>
<CAPTION>
YEAR
OF RENT IN
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION CASH LIEU
<S> <C> <C> <C> <C> <C>
STK (1) 9200-XJ3, 6172, 9220-A22 Disk Array 1995 409,422 0
EMC (1/4) 3200-9024, 3200-9016 Disk Array 1995 146,753 0
STK (50%) (1) 9490-M34, 4412, 3T43, 9300001 Tape Drive 1995 73,086 1,510
STK (1) 9490-M32 Tape Drive 1996 85,714 0
PYR (50%) NILE 100 Departmental Server 1996 35,913 0
IBM (1) 3745-31A, (1) 3746-900 Communication Controller 1996 155,160 0
IBM (1) 3490-B40 Tape Drive 1996 42,194 0
HP (50%) (2) HP9000-K420 Departmental Server 1996 21,164 0
</TABLE>
<TABLE>
<CAPTION>
TOTAL
DEBT OBLIGATIONS EQUIPMENT
MANUFACTURER ASSUMED INCURRED COST
<S> <C> <C> <C>
STK 0 0 409,422
EMC 0 0 146,753
STK 0 0 74,596
STK 0 0 85,714
PYR 132,663 0 168,576
IBM 0 0 155,160
IBM 0 0 42,194
HP 134,155 0 155,319
</TABLE>
<PAGE>
Commonwealth Equipment Income Private Fund VI Limited Partnership
Summary of Equipment Acquisitions
For the three year period ended December 31, 1997
(Table VI)
<TABLE>
<CAPTION>
YEAR
OF RENT IN
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION CASH LIEU
<S> <C> <C> <C> <C> <C>
STK (25%) (7) 9490-M34 Tape Drive 1996 102,635 0
HP (25%): (101) HP9000-C110, (2) HP9000-D350/2 Server/Workstation 1997 111,736 0
IBM (1) 3829-001 Printer 1997 131,369 0
SUN E5000 Server 1997 223,342 0
IBM (16%): (8) 3900-OW1 Printer 1997 329,063 0
STK (1) Redwood SD3H34 Tape Drive 1997 108,499 0
STK (1) 9710 timberwolf Libary Base w/Tape 1997 125,435 0
STK (1) 9710 timberwolf Libary Base w/Tape 1997 125,435 0
IBM (1) 3995-C36, (1) 3995-C16 Optical Storage 1997 28,509 0
</TABLE>
<TABLE>
<CAPTION>
TOTAL
DEBT OBLIGATIONS EQUIPMENT
MANUFACTURER ASSUMED INCURRED COST
<S> <C> <C> <C>
STK 166,641 0 269,276
HP 312,124 0 423,860
IBM 0 0 131,369
SUN 0 0 223,342
IBM 0 0 329,063
STK 0 0 108,499
STK 0 0 125,435
STK 0 0 125,435
IBM 191,593 0 220,102
</TABLE>
<PAGE>
(Inside Back Cover)
ANY SUPPLEMENTS AND/OR STICKERS WHICH UPDATE
THIS PROSPECTUS ARE CONTAINED ON THE INSIDE BACK COVER.
(1) The price to public and the underwriting commissions will be reduced by
volume discounts in the case of purchases in excess of $250,000 by a
single investor. However, the proceeds to the Partnership will not be
reduced by such discounts. See "Plan of Distribution -- General."
(2) The Partnership will indemnify the Dealer Manager and selected securities
brokers against certain civil liabilities, including liabilities under
the Securities Act of 1933. See "Plan of Distribution."
(3) Before deducting an Organization Fee equal to three percent of the
Limited Partners' Capital Contributions up to $10,000,000 and two percent
of the Limited Partners' Capital Contributions thereafter to be paid by
the Partnership to the General Partner ($45,000 if 75,000 Units are sold
and $400,000 if 750,000 Units are sold). The General Partner will pay all
organization and offering expenses other than underwriting commission.
- --------------------------------------------------------------------------------
PLEASE BE ADVISED THAT ANY INFORMATION REPRESENTED THAT IS NOT CONTAINED IN THIS
PROSPECTUS HAS NOT BEEN AUTHORIZED BY THE PARTNERSHIP, THE GENERAL PARTNER OR
THE DEALER MANAGER. IF ANY MATERIAL CHANGE IN THE PROSPECTUS OCCURS, THIS
PROSPECTUS WILL BE APPROPRIATELY AMENDED OR SUPPLEMENTED. THE USE OF FORECASTS
IN THIS OFFERING IS ALSO PROHIBITED AND NOT PERMITTED.
- --------------------------------------------------------------------------------
SUPPLEMENT FOR TEXAS INVESTORS
Although this Partnership uses the word "Growth" in its title, the assets
to be acquired by the Partnership will not appreciate in value and will in fact
lose value rapidly after acquisition. By using the term "Growth," the sponsor of
this Partnership means that the sponsor will purchase additional equipment with
money that otherwise could be distributed to investors as a return on their
investment.
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. YOU SHOULD CAREFULLY REVIEW AND CONSIDER THIS
INFORMATION BEFORE MAKING YOUR INVESTMENT DECISION.
[GRAPHIC OMITTED]
COMMONWEALTH CAPITAL
SECURITIES CORP.
1160 WEST SWEDESFORD ROAD, SUITE 340
BERWYN, PENNSYLVANIA 19312
1-800-497-4554
TABLE OF CONTENTS
Where To Find More Information Inside Front Cover
Prospectus Summary 1
Risk Factors 3
Estimated Use of Proceeds 13
Management & Key Officers 15
Responsibilities of the General Partner 18
Investment Objectives and Policies 20
Compensation To The General Partner and Affiliates 28
Conflicts Of Interest 31
Transferability of Units 34 Distributions and Allocations 36
Income Tax Considerations 40
Erisa Considerations 76
Management's Discussion of Financial Data 80
Partnership Agreement Summary 81
Investor Suitability Standards 86
Plan of Distribution 90
Experts 95
Glossary of Terms 96
Subscription Agreement Table I
Partnership Agreement Table II
Selected Financial Data Appendix I
Prior Performance Tables Appendix II
Supplements Inside Back Cover
- --------------------------------------------------------------------------------
Oustide Back Cover
