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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 333-26933
COMMONWEALTH INCOME & GROWTH FUND III
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2895714
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
1160 West Swedesford Road
Berwyn, Pennsylvania 19312
(Address, including zip code, of principal executive offices)
(610) 647-6800
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (ii) has been subject to such
filing requirements for the past 90 days:
YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified under applicable items
herein)
Certain exhibits to the Company's Registration Statement on Form S-1
(File No. 333-26933) incorporated by reference as Exhibits in Part IV of this
Report.
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PART I
ITEM 1: BUSINESS
GENERAL
Commonwealth Income and Growth Fund III (the "Partnership") was formed
on April 17, 1997, under the Pennsylvania Revised Uniform Limited Partnership
Act. The Partnership began offering $15,000,000 of Units of Limited
Partnership ("Units") to the public on July 25, 1997 (the "Offerings"). On
January 27, 1998, the Partnership received and accepted subscription proceeds
of $1,526,000, which exceeded the minimum offering amount of $1,500,000 and
the funds were released from escrow. As of February 23, 1999, subscribers
for 110,063 Units ($2,201,259) had been admitted as Limited Partners of the
Partnership.
See "The Glossary" below for the definition of capitalized terms not
otherwise defined in the text of this report.
PRINCIPAL INVESTMENT OBJECTIVES
The Partnership was formed for the purpose of acquiring various types of
Equipment, including computer peripheral and other similar capital equipment.
The Partnership will utilize the net proceeds of the Offering to purchase
IBM and IBM compatible computer peripheral and other similar capital
equipment. The Partnership will utilize Retained Proceeds and debt financing
(not to exceed 30% of the aggregate cost of the Equipment owned or subject to
Conditional Sales Contract by the Partnership at the time the debt is
incurred) to purchase additional Equipment. The Partnership plans to acquire
Equipment which is subject to lease principally to U.S. corporations and
other institutions pursuant predominantly to Operating Leases. The
Partnership retains the flexibility to enter into Full Payout Net Leases and
Conditional Sales Contracts, but has not done so.
The Partnership's principal investment objectives are to;
(a) acquire, lease and sell Equipment to generate revenues from
operations sufficient to provide quarterly cash distributions to
Limited Partners;
(b) preserve and protect Limited Partners' capital;
(c) use a portion of Cash Flow and Net Disposition Proceeds derived
from the sale, refinancing or other disposition of Equipment to
purchase additional Equipment; and
(d) refinance, sell or otherwise dispose of Equipment in a manner
that will maximize the proceeds to the Partnership.
THERE CAN BE NO ASSURANCE THAT ANY OF THESE OBJECTIVES WILL BE ATTAINED.
Limited Partners do not have the right to vote on or otherwise
approve or disapprove any particular investment to be made by the Partnership.
Although the Partnership anticipates acquiring predominately new
Equipment, the Partnership may purchase used Equipment. Generally,
Equipment is acquired from manufacturers, distributors, leasing companies,
agents, owner-users, owner-lessors, and other suppliers upon terms that vary
depending upon the Equipment and supplier involved. Manufacturers and
distributors usually furnish a limited warranty against defects in material
and workmanship and some purchase agreements for Equipment provide for
service and replacement of parts during a limited period. Equipment
purchases are also made through lease brokers and on an ad hoc basis to meet
the needs of a particular lessee.
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As of December 31 1998, all Equipment purchased by the Partnership is
subject to an Operating Lease or an Operating Lease was entered into with a
third party when the Partnership acquired an item of Equipment. The
Partnership may also engage in sale/leaseback transactions, pursuant to which
the Partnership would purchase Equipment from companies that would then
immediately lease the Equipment from the Partnership. The Partnership may
also purchase Equipment which is leased under Full Payout Net Leases or sold
under Conditional Sales Contracts at the time of acquisition or the
Partnership may enter into a Full Payout Net Lease or Conditional Sales
Contract with a third party when the Partnership acquires an item of
Equipment.
The Partnership may enter into arrangements with one or more
manufacturers pursuant to which the Partnership purchases from such
manufacturers Equipment which has previously been leased directly by the
manufacturer to third parties ("vendor leasing agreements"). The
Partnership and manufacturers may agree to nonrecourse loans to the
Partnership from the manufacturers to finance the acquisition of Equipment
secured by the Equipment and the receivables due to the manufacturers from
users of such Equipment. It is expected that the manufacturers of Equipment
will provide maintenance, remarketing and other services for the Equipment
subject to such agreements. As of December 31, 1998, the Partnership has
not entered into any such agreements.
The General Partner has the discretion consistent with its fiduciary
duty to change the investment objectives of the Partnership if it determines
that such a change is in the best interest of the Limited Partners and so
long as such a change is consistent with the Partnership Agreement. The
General Partner will notify the Limited Partners if it makes such a
determination to change the Partnership's investment objectives.
TYPES OF EQUIPMENT
COMPUTER PERIPHERAL EQUIPMENT. Computer peripheral equipment consists
of devices used to convey information into and out of a central processing
unit (or "mainframe") of a computer system, such as tape drives, disk drives,
tape controllers, disk controllers, printers, terminals and related control
units, all of which are in some way related to the process of storing,
retrieving, and processing information by computer.
The Partnership acquires primarily IBM manufactured or IBM compatible
equipment. The General Partner believes that dealing in IBM or IBM
compatible equipment is particularly advantageous because of the large IBM
customer base, policy of supporting users with software and maintenance
services and the large amount of IBM and IBM compatible equipment in the
marketplace.
Computer technology has developed rapidly in recent years and is
expected to continue to do so. Technological advances have permitted
continued reductions in the cost of computer processing capacity, thereby
permitting applications not economically feasible a few years ago. Much of
the older IBM and IBM compatible computer peripheral equipment has not been
retired from service, because software is generally interchangeable between
older and newer equipment, and older equipment is capable of performing many
of the same functions as newer equipment. The General Partner believes that
historically values of peripheral equipment have been affected less
dramatically by changes in technology than have the values of central
processing units. An equipment user who upgrades to a more advanced central
processor generally can continue to use his existing peripheral equipment.
Peripheral equipment nevertheless is subject to declines in value as new,
improved models are developed and become available. Technological advances
and other factors, including year 2000 issues discussed below in Management
Discussion and Analysis, have at times caused dramatic reduction in the
market prices of older models of IBM and IBM compatible computer peripheral
equipment from the prices at which they were originally introduced.
Other Equipment-Restrictions. The Partnership plans to acquire
computer peripheral equipment, such as tape drives, disk drives, tape
controllers, disk controllers, printers, terminals and related control
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units, all of which are in some way related to the process of storing,
retrieving and processing information by computer. The General Partner is
also authorized, but does not presently intend, to cause the Partnership to
invest in non IBM compatible computer peripheral, data processing,
telecommunication or medical technology equipment. The Partnership may not
invest in any of such other types of Equipment (i) to the extent that the
purchase price of such Equipment, together with the aggregate Purchase Price
of all such other types of Equipment then owned by the Partnership, is in
excess of 25% of the total cost of all of the assets of the Partnership at
the time of the Partnership's commitment to invest therein; and (ii) unless
the General Partner determines that such purchase is in the best economic
interest of the Partnership at the time of the purchase and, in the case of
non-IBM compatible peripheral Equipment, that such Equipment is comparable in
quality to similar IBM or IBM compatible Equipment. There can be no
assurance that any Equipment investments can be found which meet this
standard. Accordingly, there can be no assurance that investments of this
type will be made by the Partnership.
DIVERSIFICATION
Diversification is generally desirable to minimize the effects of
changes in specific industries, local economic conditions or similar risks.
However, the extent of the Partnership's diversification, in the aggregate
and within each category of Equipment, depends in part upon the financing
which can be assumed by the Partnership or borrowed from third parties on
satisfactory terms. The Partnership's policy not to borrow on a recourse
basis will further limit its financing options. Diversification also depends
on the availability of various types of Equipment. As of December 31, 1998,
the Partnership has acquired a diversified Equipment portfolio which it has
leased to 4 different companies located throughout the United States.
Approximately 28% of the Equipment acquired by the Partnership consists of
tape storage. Approximately 69% of the Equipment acquired by the
Partnership consist of workstations, department servers and enterprise
servers. Approximately 3% of the Equipment acquired by the Partnership
consists of communication controllers. During the operational stage of the
Partnership, the Partnership may not at any one point in time lease (or sell
pursuant to a Conditional Sales Contract) more than 25% of the Equipment to a
single Person or Affiliated group of Persons.
DESCRIPTION OF LEASES
The Partnership intends to purchase only Equipment that is subject to
a lease or for which a lease or similar agreement will be entered into
contemporaneously with the consummation of the Partnership's acquisition of
the Equipment. The General Partner intends to lease most of the Equipment
purchased by the Partnership to third parties pursuant to Operating Leases.
Operating Leases are relatively short-term (12 to 48 month) leases under
which the aggregate noncancellable rental payments during the original term
of the lease are not sufficient to permit the lessor to recover the purchase
price of the subject Equipment. The Equipment may also be leased pursuant
to Full Payout Net Leases. Full Payout Net Leases are leases under which the
aggregate noncancellable rental payments during the original term of the
lease are at least sufficient to recover the purchase price of the subject
Equipment. It is anticipated that the Partnership will enter into few, if
any, Full Payout net Leases. The General Partner may also enter into
Conditional Sales Contracts for Equipment. A Conditional Sales Contract
generally provides that the noncancellable payments to the seller over the
term of the contract are sufficient to recover the investment in such
Equipment and to provide a return on such investment. Under a Conditional
Sales Contract, the seller reserves title to, and retains a security interest
in, the Equipment until the Purchase Price of the Equipment is paid . As of
December 31 1998, the Partnership has not entered into any Full Payout Net
Leases or Conditional Sales Contracts for Equipment and does not presently
intend to do so.
In general, the terms of the Partnership's leases, whether the Equipment
is leased pursuant to an Operating Lease or a Full Payout Net Lease, depend
upon a variety of factors, including: the desirability of each type of lease
from both an investment and a tax point of view; the relative demand among
lessees for Operating or Full Payout Net Leases; the type and use of
Equipment and its anticipated residual value; the business of the lessee and
its credit rating; the availability and cost of financing; regulatory
considerations; the accounting treatment of the lease sought by the lessee or
the Partnership; and competitive factors.
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An Operating Lease generally represents a greater risk to the
Partnership than a Full Payout Net Lease, because in order to recover the
purchase price of the subject Equipment and earn a return on such investment,
it is necessary to renew or extend the Operating Lease, lease the Equipment
to a third party at the end of the original lease term, or sell the
Equipment. On the other hand, the term of an Operating Lease is generally
much shorter than the term of a Full Payout Net Lease, and the lessor is thus
afforded an opportunity under an Operating Lease to re-lease or sell the
subject Equipment at an earlier stage of the Equipment's life cycle than
under a Full Payout Net Lease. Also, the annual rental payments received
under an Operating Lease are ordinarily higher than those received under a
Full Payout Net Lease.
The Partnership's policy is to generally enter into "triple net leases"
(or the equivalent, in the case of a Conditional Sales Contract) which
typically provide that the lessee or some other party bear the risk of
physical loss of the Equipment; pay taxes relating to the lease or use of the
Equipment; maintain the Equipment; indemnify the Partnership-lessor against
any liability suffered by the Partnership as the result of any act or
omission of the lessee or its agents; maintain casualty insurance in an
amount equal to the greater of the full value of the Equipment and a
specified amount set forth in the lease; and maintain liability insurance
naming the Partnership as an additional insured with a minimum coverage which
the General Partner deems appropriate. In addition, the Partnership may
purchase "umbrella" insurance policies to cover excess liability and casualty
losses, to the extent deemed practicable and advisable by the General
Partner. As of December 31, 1998, all leases that have been entered into are
"triple net leases".
The General Partner has not established any standards for lessees to
which it will lease Equipment and, as a result, there is not an investment
restriction prohibiting the Partnership from doing business with any lessees.
However, a credit analysis of all potential lessees will be undertaken by the
General Partner to determine the lessee's ability to make payments under the
proposed lease. The General Partner may refuse to enter into an agreement
with a potential lessee based on the outcome of the credit analysis.
The terms and conditions of the Partnership's leases, or Conditional
Sales Contracts, are each determined by negotiation and may impose
substantial obligations upon the Partnership. Where the Partnership assumes
maintenance or service obligations, the General Partner generally causes the
Partnership to enter into separate maintenance or service agreements with
manufacturers or certified maintenance organizations to provide such
services. Such agreements generally require annual or more frequent
adjustment of service fees. As of December 31, 1998, the Partnership has
not entered into any such agreements.
BORROWING POLICIES
The General Partner, at its discretion, may cause the Partnership to
incur debt in the maximum aggregate amount of 30% of the aggregate cost of
the Equipment owned by the Partnership, or subject to Conditional Sales
Contract (except that the partnership may not incur any indebtedness to
acquire Equipment until the net proceeds of the Offering are fully invested,
or committed to investment, in Equipment. The Partnership will incur only
non-recourse debt which is secured by Equipment and lease income therefrom.
Such leveraging permits the Partnership to increase the aggregate amount of
its depreciable assets, and, as a result, potentially increases both its
lease revenues and its federal income tax deductions above those levels which
would be achieved without leveraging. There is no limit on the amount of
debt that may be incurred in connection with the acquisition of any single
item of Equipment. Any debt incurred is fully amortized over the term of the
initial lease or Conditional Sales Contract to which the Equipment securing
the debt is subject. The precise amount borrowed by the Partnership depends
on a number of factors, including the types of Equipment acquired by the
Partnership; the creditworthiness of the lessee; the availability of suitable
financing; and prevailing interest rates. The Partnership is flexible in the
degree of leverage it employs, within the permissible limit. There can be no
assurance that credit will be available to the Partnership in the amount or
at the time desired or on terms considered reasonable by the General Partner.
As of December 31, 1998, the aggregate non recourse debt outstanding of
$8,442 was less than 1% of the aggregate cost of Equipment owned.
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The Partnership may purchase some items of Equipment without leverage.
If the Partnership purchases an item of Equipment without leverage and
thereafter suitable financing becomes available, it may then obtain the
financing, secure the financing with the purchased Equipment to the extent
practicable and invest any proceeds from such financing in additional items
of Equipment, or it may distribute some or all of such proceeds to the
Limited Partners. Any such later financing will be on terms consistent with
the terms applicable to borrowings generally. As of December 31, 1998, the
Partnership has not exercised this option.
After the net proceeds of the Offering are fully invested in Equipment,
the General Partner plans to cause the Partnership to borrow funds, to the
fullest extent practicable, at interest rates fixed at the time of
borrowing. However, the Partnership may borrow funds at rates which vary
with the "prime" or "base" rate. If lease revenues were fixed, a rise in the
"prime" or "base" rate would increase borrowing costs and reduce the amount
of the Partnership's income and cash available for distribution. Therefore,
the General Partner is permitted to borrow funds to purchase Equipment at
fluctuating rates only if the lease for such Equipment provides for
fluctuating rental payments calculated on a similar basis.
Any additional debt incurred by the Partnership must be nonrecourse.
Nonrecourse debt, in the context of the business to be conducted by the
Partnership, means that the lender providing the funds can look for security
only to the Equipment pledged as security and the proceeds derived from
leasing or selling such Equipment. Neither the Partnership nor any Partner
(including the General Partner) would be liable for repayment of any
nonrecourse debt.
Loan agreements may also require that the Partnership maintain certain
reserves or compensating balances and may impose other obligations upon the
Partnership. Moreover, since a significant portion of the Partnership's
revenues from the leasing of Equipment will be reserved for repayment of
debt, the use of financing reduces the cash which might otherwise be
available for distributions until the debt has been repaid and may reduce the
Partnership's Cash Flow over a substantial portion of the Partnership's
operating life. As of December 31, 1998, no such agreements existed.
The General Partner and any of its Affiliates may, but are not required
to, make loans to the Partnership on a short-term basis. If the General
Partner or any of its Affiliates makes such a short-term loan to the
Partnership, the General Partner of Affiliate may not charge interest at a
rate greater that the interest rate charged by unrelated lenders on
comparable loans for the same purpose in the same locality. In no event is
the Partnership required to pay interest on any such loan at an annual rate
greater than three percent over the "prime rate' from time to time announced
by PNC Bank, Philadelphia, Pennsylvania ("PNC Bank"). All payments of
principal and interest on any financing provided by the General Partner or
any of its affiliates are due and payable by the Partnership within 12 months
after the date of the loan.
REFINANCING POLICIES
Subject to the limitations set forth in "Borrowing Policies" above, the
Partnership may refinance its debt from time to time. With respect to a
particular item of Equipment, the General Partner will take into
consideration such factors as the amount of appreciation in value, if any, to
be realized, the possible risks of continued ownership, and the anticipated
advantages to be obtained for the Partnership, as compared to selling such
Equipment. As of December 31, 1998, the Partnership has not refinanced any
of its debt.
Refinancing, if achievable, may permit the Partnership to retain an item
of Equipment and at the same time to generate additional funds for
reinvestment in additional Equipment or for distribution to the Limited
Partners.
LIQUIDATION POLICIES
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The General Partner intends to cause the Partnership to begin disposing
of its Equipment in approximately January 2009. Notwithstanding the
Partnership's objective to sell all of its assets and dissolve in
approximately by December 31, 2009, the General Partner may at any time cause
the Partnership to dispose of all its Equipment and, dissolve the Partnership
upon the approval of Limited Partners holding a Majority in Interest of Units.
Particular items of Equipment may be sold at any time if, in the
judgment of the General Partner, it is in the best interest of the
Partnership to do so. The determination of whether particular items of
Partnership Equipment should be sold or otherwise disposed of is made by the
General Partner after consideration of all relevant factors (including
prevailing general economic conditions, lessee demand, the General Partner's
views of current and future market conditions, the cash requirements of the
Partnership, potential capital appreciation, cash flow and federal income tax
considerations), with a view toward achieving the principal investment
objectives of the Partnership. As partial payment for Equipment sold, the
Partnership may receive purchase money obligations secured by liens on such
Equipment. Subject to the General Partner's discretion the Partnership may
extend beyond December 31, 2009, if deemed beneficial to the Partnership.
MANAGEMENT OF EQUIPMENT
Equipment management services for the Partnership's Equipment is
provided by the General Partner and its Affiliates and by persons employed by
the General Partner. Such services will consist of collection of income from
the Equipment, negotiation and review of leases, Conditional Sales Contracts
and sales agreements, releasing and leasing-related services, payment of
operating expenses, periodic physical inspections and market surveys,
servicing indebtedness secured by Equipment, general supervision of lessees
to assure that they are properly utilizing and operating Equipment, providing
related services with respect to Equipment, supervising, monitoring and
reviewing services performed by others in respect to Equipment and preparing
monthly Equipment operating statements and related reports.
COMPETITION
The equipment leasing industry is highly competitive. The Partnership
competes with leasing companies, equipment manufacturers and their affiliated
financing companies, distributors and entities similar to the Partnership
(including other programs sponsored by the General Partner), some of which
have greater financial resources than the Partnership and more experience in
the equipment leasing business than the General Partner. Other leasing
companies and equipment manufacturers, their affiliated financing companies
and distributors may be in a position to offer equipment to prospective
lessees on financial terms which are more favorable that those which the
Partnership can offer. They may also be in a position to offer trade-in
privileges, software, maintenance contracts and other services which the
Partnership may not be able to offer. Equipment manufacturers and
distributors may offer to sell equipment on terms (such as liberal financing
terms and exchange privileges) which will afford benefits to the purchaser
similar to those obtained through leases. As a result of the advantages
which certain of its competitors may have, the Partnership may find it
necessary to lease its Equipment on a less favorable basis than certain of
its competitors.
The computer peripheral equipment industry is extremely competitive.
Competitive factors include pricing, technological innovation and methods of
financing. Certain manufacturer-lessors maintain advantages through patent
protection, where applicable, and through a policy that combines service and
hardware with payment accomplished through a single periodic charge.
The dominant firm in the computer marketplace is International Business
Machines Corporation, and its subsidiary IBM Credit Corporation is the
dominant force in the leasing of IBM equipment. Because of IBM's substantial
resources and dominant position, revolutionary changes with respect to
computer systems, pricing, marketing practices, technological innovation and
the availability of new and attractive financing plans could occur at any
time. Significant action in any of these areas by IBM or IBM Credit
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Corporation might materially adversely affect the Partnership's business or
the other manufacturers with whom the General Partner might negotiate
purchase and other agreements. Any adverse effect on these manufacturers
could be reflected in the overall return realized by the Partnership on
equipment from those manufacturers of from IBM.
INVESTMENTS
As of March 18, 1999, the Partnership has purchased, or has made the
commitment to purchase, the following Equipment:
<TABLE>
<CAPTION>
EQUIPMENT PURCHASE LIST MONTHLY LEASE
LESSEE MFG DESCRIPTION PRICE PRICE RENT TERM
<S> <C> <C> <C> <C> <C> <C>
Lucent SUN (12) Workstations 139,596 239,340 3,857 32
Lucent SUN Server 445,714 739,350 12,120 32
Chase SUN Server 252,681 394,360 6,493 36
Cendant SUN Server 131,470 221,095 3,216 36
Cendant SUN Server upgrade 40,382 39,590 1425 31
Chase STK Timberline drive 407,908 1,134,830 12,346 24
Chrysler IBM Controller 19,496 24,200 731 24
Chrysler IBM Controller 18,392 24,200 731 24
Kaiser IBM (7) Workstations 373,747 513,741 9,952 36
Kaiser IBM (4) Workstations 187,398 271,949 4,983 36
International Paper DEC (2) Servers 140,857 184,372 4,042 32
</TABLE>
Because the Partnership's leases are on a "triple-net" basis, no permanent
reserve for maintenance and repairs will be established from the Offering
Proceeds. However, the General Partner, in its sole discretion, may retain a
portion of the Cash Flow and Net Disposition Proceeds available to the
Partnership for maintenance, repairs and working capital. There are no
limitations on the amount of Cash Flow and Net Disposition Proceeds that may
be retained as reserves. Since no reserve will be established if available
Cash Flow of the Partnership is insufficient to cover the Partnership's
operating expenses and liabilities, it may be necessary for the Partnership
to obtain funds by refinancing its Equipment or borrowing.
GENERAL RESTRICTIONS
Under the Partnership Agreement, the Partnership is not permitted, among
other things, to:
(a) invest in junior trust deeds unless received in connection with the
sale of an item of Equipment in an aggregate amount which does not exceed 30%
of the assets of the Partnership on the date of the investment;
(b) invest in or underwrite the securities of other issuers;
(c) acquire any Equipment for Units;
(d) issue senior securities (except that the issuance to lenders of
notes or other evidences of indebtedness in connection with the financing or
refinancing of Equipment or the Partnership's business shall not be deemed to
be the issuance of senior securities);
(e) make loans to any Person, including the General Partner or any of
its Affiliates, except to the extent a Conditional Sales Contract constitutes
a loan;
(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
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(g) give the General Partner or any of its Affiliates an exclusive
right or employment to sell the Partnership's Equipment.
The General Partner has also agreed in the Partnership Agreement to use
its best efforts to assure that the Partnership shall not be deemed an
"investment company" as such term is detained in the Investment Company Act
of 1940.
The General Partner and its Affiliates may engage in other activities,
whether or not competitive with the Partnership. The Partnership Agreement
provides, however, that neither the General Partner nor any of its Affiliates
may receive any rebate or "give up" in connection with the Partnership's
activities or participate in reciprocal business arrangements that circumvent
the restrictions in the Partnership Agreement against dealings with
Affiliates.
EMPLOYEES
The Partnership has no employees and received administrative and other
services from the General Partner which has 12 employees.
ITEM 2: PROPERTIES
NOT APPLICABLE
ITEM 3: LEGAL PROCEEDINGS
NOT APPLICABLE
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NOT APPLICABLE
PART II
ITEM 5: MARKET FOR THE REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
There is no public market for the Units nor is it anticipated that one
will develop. The Units are not listed on any exchange or permitted to trade
on any over-the-counter market. In addition, there are substantial
restrictions on the transferability of Units. As of February 23, 1999, there
were 135 holders of Units.
GENERAL LIMITATIONS
Units cannot be transferred without the consent of the General Partner,
which may be withheld in its absolute discretion. The General Partner
monitors transfers of Units in an effort to ensure that all transfers are
within certain safe harbors promulgated by the IRS to furnish guidance
regarding publicly traded partnerships. These safe harbors limit the number
of transfers that can occur in any one year. The General Partner intends to
cause the Partnership to comply with the safe harbor that permits nonexempt
transfers and redemptions of Units of up to five percent of the total
outstanding interest in the Partnership's capital or profits in any one year.
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REDEMPTION PROVISION
Upon the conclusion of the 30 month period following the termination of
the Offering, the Partnership may, at the sole discretion of the General
Partner, repurchase a number of the outstanding Units. After such 30 month
period, on a semi-annual basis, the General Partner, at its discretion, will
establish an amount for redemption, generally not to exceed two percent of
the outstanding Units per year, subject to the General Partner's good faith
determination that such redemptions will not (a) cause the Partnership to be
taxed as a corporation under Section 7704 of the Code or (b) impair the
capital or operations of the Partnership. (The Partnership may redeem Units
in excess of the two percent limitation if, in the good faith judgment of the
General Partner, the conditions imposed in the preceding sentence would
remain satisfied.) The redemption price for Units will be 105% of the
selling Limited Partner's Adjusted Capital Contributions attributable to the
Units for sale. Following the determination of the annual redemption
amount, redemptions will occur on a semi-annual basis and all requests for
redemption, which must be made in writing, must be on file as of the Record
Date in which the redemption is to occur. The General Partner will maintain
a master list of requests for redemption with priority being given to Units
owned by estates, followed by IRAs and Qualified Plans. All other request
will be considered in the order received. Redemption requests made by or on
behalf of Limited Partners who are not affiliated with the General Partner or
its Affiliates will be given priority over those made by Limited Partners who
are affiliated with the General Partner or its Affiliates. All redemption
request will remain in effect until and unless canceled, in writing, by the
requesting Limited Partner(s).
The Partnership will accept redemption requests beginning 30 months
following the termination of the Offering. There will be no limitations on
the period of time that a redemption request may be pending prior to its
being granted. Limited Partners will not be required to hold their interest
in the Partnership for any specified period prior to their making a
redemption request.
In order to make a redemption request, Limited Partners will be required
to advise the General Partner in writing of such request. Upon receipt of
such notification, the Partnership will provide detailed forms and
instructions to complete the request.
EXEMPT TRANSFERS
The following six categories of transfers are exempt transfers for
purposes of calculating the volume limitations imposed by the IRS and will
generally be permitted by the General Partner:
(1) transfers in which the basis of the Unit in the hands of the
transferee is determined, in whole or in part, by reference to its basis in
the hands of the transferor (for example, Units acquired by corporations in
certain reorganizations, contributions to capital, gifts of Units, Units
contributed to another partnership, and nonliquidating as well as liquidating
distributions by a parent partnership to its partners of interests in a
subpartnership);
(2) transfers at death;
(3) transfers between members of a family (which include brothers
and sisters, spouse, ancestors, and lineal descendants);
(4) transfers resulting from the issuance of Units by the
Partnership in exchange for cash, property, or services;
(5) transfers resulting from distributions from Qualified Plans; and
(6) any transfer by a Limited Partner in one or more transactions
during any 30-day period of Units representing in the aggregate more than
five percent of the total outstanding interests in capital or profits of the
Partnership.
<PAGE>
ADDITIONAL RESTRICTIONS ON TRANSFER
Limited Partners who wish to transfer their Units to a new beneficial
owner are required to pay the Partnership up to $50 for each transfer to
cover the Partnership's cost of processing the transfer application and take
such other actions and execute such other documents as may be reasonably
requested by the General Partner. There is no charge for re-registration of
a certificate in the event of a marriage, divorce, death, or trust so long as
the transfer is not a result of a sale of the Units.
In addition, the following restrictions apply to each transfer: (i) no
transfer may be made if it would cause 25% or more of the outstanding Units
to be owned by benefit plans; and (ii) no transfer is permitted unless the
transferee obtains such governmental approvals as may reasonably be required
by the General Partner, including without limitation, the written consents of
the Pennsylvania Securities Commissioner and of any other state securities
agency or commission having jurisdiction over the transfer.
ALLOCATION AND DISTRIBUTION BETWEEN THE GENERAL PARTNER AND THE LIMITED
PARTNERS
Cash distributions, if any, will be made quarterly on December 31, March
31, June 30, and September 30 of each year. Distributions are made 99% to
the Limited Partners and one percent to the General Partner until the Limited
Partners have received an amount equal to their Capital Contributions plus
the Cumulative Return; thereafter, cash distributions will be made 90% to
Limited Partners and 10% to the General Partner. Distributions made in
connection with the liquidation of the Partnership or a Partner's Units will
be made in accordance with the Partner's positive Capital Account balance as
determined under the Partnership Agreement and Treasury Regulations.
The 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.
If the proceeds resulting from the sale of any Equipment are reinvested
in Equipment, sufficient cash will be distributed to the Partners to pay the
additional federal income tax resulting from such sale for a Partner in a
39.6% federal income tax bracket or, if lower, the maximum federal income tax
rate in effect for individuals for such taxable year.
Generally, the General Partner is allocated Net Profits equal to its
cash distributions (but not less than one percent of Net Profits) and the
balance is allocated to the Limited Partners. Net Profits arising from
transactions in connection with the termination or liquidation of the
Partnership are allocated in the following order: (1) First, to each Partner
in an amount equal to the negative amount, if any, of his Capital Account;
(2) Second, an amount equal to the excess of the proceeds which would be
distributed to the Partners based on the Operating Distributions to the
Partners over the aggregate Capital Accounts of all the Partners, to the
Partners in proportion to their respective shares of such excess, and (3)
Third, with respect to any remaining Net Profits, to the Partners in the same
proportions as if the distributions were Operating Distributions. Net
Losses, if any, are in all cases allocated 99% to the Limited Partners and
one percent to the General Partner.
Net Profits and Net Losses are computed without taking into account, in
each taxable year of the Partnership, any items of income, gain, loss or
deduction required to be specially allocated pursuant to Section 704(b) of
the Code and the Treasury Regulation promulgated thereunder. No Limited
Partner is required to contribute cash to the capital of the Partnership in
order to restore a closing Capital Account deficit, and the General Partner
has only a limited deficit restoration obligation under the Partnership
Agreement.
<PAGE>
Quarterly distributions in the following amounts were declared and paid
to the Limited Partners during 1998.
<TABLE>
<CAPTION>
Quarter Ended 1998
------------- --------
<S> <C>
March 31 $ 26,593
June 30 43,719
September 30 46,605
December 31 47,843
--------
$164,760
--------
--------
</TABLE>
ALLOCATIONS AND DISTRIBUTIONS AMONG THE LIMITED PARTNERS
Except during the Offering Period, Cash Available for Distribution which
is allocable to the Limited Partners is apportioned among and distributed to
them solely with reference to the number of Units owned by each as of the
Record Date for each such distribution. During the Offering Period, Cash
Available for Distribution which is allocable to the Limited Partners is
apportioned among and distributed to them with reference to both (i) the
number of Units owned by each as of each Record Date and (ii) the number of
days since the previous Record Date (or, in the case of the first Record
Date, the commencement of the Offering Period) that the Limited Partner owned
the Units.
After the Offering Period, Net Profits, Net Losses and Cash Available
for Distribution allocable to the Limited Partners is apportioned among them
in accordance with the number of Units owned by each. A different convention
is utilized during the Offering Period, whereby Net Profits and Net Losses
allocable to Limited Partners is apportioned among them in the ratio which
the product of the number of Units owned by a Limited Partner multiplied by
the number of days in which the Limited Partner owns such Units during the
period bears to the sum of such products for all Limited Partners.
In addition, where a Limited Partner transfers Units during a taxable
year, the Limited Partner may be allocated Net Profits for a period for which
such Limited Partner does not receive a corresponding cash distribution.
ITEM 6: SELECTED FINANCIAL DATA
The following table sets forth, in summary form, certain financial data
for the Partnership for the period January 27, 1998 (commencement of
operations) to December 31, 1998. This table is qualified in its entirely by
the more detailed information and financial statement presented elsewhere in
this report, and should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
financial statements and related notes thereto included herein.
<TABLE>
<CAPTION>
Period Ended December 31, 1998
------------------------------
<S> <C>
Lease Income $306,249
Net Income 18,250
Cash Distributions 166,451
Net Income per Unit .16
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Cash Distribution per Unit 1.64
December 31, 1998
-----------------
Total Assets $1,860,336
Notes Payable 8,442
</TABLE>
Net income per 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. Cash distribution per Unit
is computed based upon distributions allocated to the Limited Partners and
the weighted average number of equivalent Limited Partnership Units
outstanding during the period.
ITEM 7: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 Partners' contributions of $2,142,000, and cash from
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 the 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 on
noncancellable 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 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.
<PAGE>
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.
The equipment management fee is equal to 5% of the gross lease revenue
attributable to equipment which is subject to operating leases. The
equipment management fee was $15,000 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" 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 property 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 the third quarter of 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 declines in value
or technological obsolescence due to the equipment not being Year 2000
compliant. The Year 2000 Issue may also affect the carrying value of the
equipment when it comes off of lease or be detrimental in negotiating release
rates which may lead to equipment write downs or less than favorable lease
recoveries.
ITEM 7A: 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.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<PAGE>
Financial Statements
Commonwealth Income &
Growth Fund III
FOR THE PERIOD FROM JANUARY 27, 1998 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
CONTENTS
Report of Independent Auditors...................................................... 16
Audited Financial Statements
Balance Sheets...................................................................... 17
Statements of Operations............................................................ 18
Statements of Partners' Capital..................................................... 19
Statements of Cash Flows............................................................ 20
Notes to Financial Statements....................................................... 21
</TABLE>
<PAGE>
1
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 flows for the period from January 27, 1998 (commencement of operations)
to December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 23, 1999
except for Note 8 as to which
the date is February 23, 1999
1
<PAGE>
Commonwealth Income &
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.
2
<PAGE>
Commonwealth Income &
Growth Fund III
Statement of Operations
January 27, 1998 (commencement of operations)
to December 31, 1998
<TABLE>
<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) (234,641)
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
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</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.
5
<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 of 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 leased equipment is sold.
CASH AND CASH EQUIVALENTS
The Partnership considers all highly liquid investments with a maturity of three
months or less to be cash equivalents. At December 31, 1998 and 1997, cash
equivalents were invested in a money market fund investing directly in Treasury
obligations.
7
<PAGE>
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.
8
<PAGE>
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.
9
<PAGE>
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.
10
<PAGE>
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 l998.
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.
11
<PAGE>
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>
<PAGE>
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
Balance Sheet
February 28, 1998
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.................................................1
Balance Sheet..................................................................2
Notes to Balance Sheet.........................................................3
</TABLE>
<PAGE>
Report of Independent Auditors
To the Stockholder
Commonwealth Income & Growth Fund, Inc.
We have audited the accompanying balance sheet of Commonwealth Income & Growth
Fund, Inc. (an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
as of February 28, 1998. This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Commonwealth Income & Growth Fund,
Inc. at February 28, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 3, 1998
1
<PAGE>
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
Balance Sheet
February 28, 1998
<TABLE>
<S> <C>
ASSETS
Cash $ 500
Investment in Partnerships 3,000
---------------
$ 3,500
---------------
---------------
LIABILITIES
Accounts payable to Income Funds and
Commonwealth Capital Corp. $ 2,400
STOCKHOLDERS' EQUITY Common stock at $1 stated value:
Authorized shares--1,000
Issued and outstanding shares--100 100
Additional paid-in capital 1,001,000
---------------
1,001,100
Less: note receivable (1,000,000)
---------------
1,100
---------------
$ 3,500
---------------
---------------
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
Notes to Balance Sheet
February 28, 1998
1. THE COMPANY
Commonwealth Income & Growth Fund, Inc. (the "Company") is a wholly-owned
subsidiary of Commonwealth of Delaware, Inc. which in turn is a wholly-owned
subsidiary of Commonwealth Capital Corp. ("CCC"). The Company is the sole
General Partner of Commonwealth Income & Growth Fund I, a Pennsylvania limited
partnership, the sole General Partner of Commonwealth Income & Growth Fund II, a
Pennsylvania limited partnership, and the sole General Partner of Commonwealth
Income & Growth Fund III, a Pennsylvania limited partnership. The three limited
partnerships described above are collectively referred to herein as the
"Partnerships."
CCC has provided additional capital by means of a noninterest-bearing demand
note in the amount of $1,000,000, so that the Company will at all times have a
net worth (which includes the net equity of the Company and the demand note
receivable from CCC) of at least $1,000,000. In computing the Company's net
worth for this purpose, its interest in the Partnerships and any amounts and
notes receivable from and payable to the Partnerships will be excluded. The
Company's equity has been reduced by the note receivable from CCC resulting in
net equity of $1,100, which may be different for tax purposes. The Company's
operations will be included in the consolidated federal income tax return of
CCC.
2. INVESTMENT IN PARTNERSHIPS
The Company contributed $3,000 in cash to the Partnerships for its general
partner interest. The Company may, at its sole discretion, purchase a limited
partnership interest in the Partnerships ("Units") for an additional capital
contribution of $20 per Unit with a minimum investment of 125 Units.
3. RELATED PARTY TRANSACTIONS
The Company and its affiliates receive substantial fees and compensation in
connection with the offering of Units and the management of the Partnerships'
assets.
3
<PAGE>
Commonwealth Capital Corp.
Consolidated Balance Sheet
February 28, 1998
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors................................................1
Consolidated Balance Sheet....................................................2
Notes to Consolidated Balance Sheet...........................................3
</TABLE>
<PAGE>
Report of Independent Auditors
The Stockholder
Commonwealth Capital Corp.
We have audited the accompanying consolidated balance sheet of Commonwealth
Capital Corp. as of February 28, 1998. This balance sheet is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the consolidated financial position of Commonwealth Capital
Corp. at February 28, 1998 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 3, 1998
1
<PAGE>
Commonwealth Capital Corp.
Consolidated Balance Sheet
February 28, 1998
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents $ 143,089
Receivables from Income Funds 190,749
Advances to Income Funds 232,000
Other receivables 114,607
Income taxes receivable 50,000
Minimum lease payments receivable, net of
unearned interest income of $2,480,187 5,785,000
Investment in Income Funds 15,200
Other assets 11,731
Office furniture and equipment, net of
accumulated depreciation of $97,926 19,926
Deferred offering costs 223,670
------------------
Total assets $ 6,785,972
------------------
------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued expenses $ 252,987
Due to Income Funds 46,113
Nonrecourse obligations 5,785,000
------------------
Total liabilities 6,084,100
Stockholder's equity:
Common stock, $1 par value:
Authorized shares - 1,000
Issued and outstanding shares - 10 10
Retained earnings 701,862
------------------
Total stockholder's equity 701,872
------------------
Total liabilities and stockholder's equity $ 6,785,972
------------------
------------------
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Balance Sheet
February 28, 1998
1. BUSINESS
Commonwealth Capital Corp. (the Company), through its subsidiary, Commonwealth
of Delaware, Inc. (CDI), is primarily engaged in leasing various types of
computer peripheral equipment and other similar equipment, which are leased
primarily to U.S. corporations and institutions. Certain subsidiaries of CDI
were formed for the purpose of functioning as general partners/managing trustees
which own a 1% interest in limited partnerships/trusts (the "Income Funds"),
which were organized to acquire, own and act as lessor with respect to certain
computer equipment. As of February 28, 1998, the subsidiaries include
Commonwealth Capital Fund 1987-I, Inc., Commonwealth Capital Fund 1988-I, Inc.,
Commonwealth Capital Fund No. 3, Inc., Commonwealth Capital Fund No. 4, Inc.,
Commonwealth Capital Fund V, Inc., Commonwealth Capital Private Fund-I, Inc.,
Commonwealth Capital Fund VI, Inc., Commonwealth Capital Fund VII, Inc.,
Commonwealth Capital Private Fund - II, Inc., Commonwealth Capital Trustee VIII,
Inc., Commonwealth Capital Trustee IX, Inc., Commonwealth Capital Trustee X,
Inc., Commonwealth Capital Private Fund-III, Inc., Commonwealth Income and
Growth Fund, Inc., Commonwealth Capital Private Fund IV, Inc., Commonwealth
Capital Private Fund V, Inc., and Commonwealth Capital Private Fund VI, Inc.
(collectively the "General Partner Subsidiaries"), Commonwealth Capital
Securities Corp., Garden State Facilities Funding, Inc. (GSFF) and Commonwealth
Capital Delaware Trustee, Inc.
All of the Company's fee income is derived from the Income Funds within the
leasing industry. Commission income is derived from Commonwealth Capital
Securities Corp. which sells units of its affiliated partnerships through broker
dealer firms to their respective customers throughout the United States.
2. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated balance sheet includes the accounts of the
Company, its wholly-owned subsidiary, CDI, and its wholly-owned subsidiaries
(Note 1). All significant intercompany accounts and transactions have been
eliminated in the accompanying consolidated balance sheet. The balance sheet is
presented on an unclassified basis in accordance with leasing industry practice.
3
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Balance Sheet (continued)
2. ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of the balance sheet in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the balance sheet and accompanying notes. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. At February 28, 1998, cash
equivalents were invested in a money market fund investing directly in treasury
obligations.
OFFICE FURNITURE AND EQUIPMENT
Office furniture and equipment are carried at cost and are depreciated over the
estimated useful lives of the related assets ranging from 5 to 7 years using
accelerated methods.
INVESTMENT IN INCOME FUNDS
The Company accounts for its 1% interests in the Income Funds by the equity
method. In 1998, certain Income Funds had liabilities in excess of their assets.
As the Company, which serves the General Partner, is obligated to fund any
liabilities in excess of assets, the Company reduced its investment in Income
Funds and recorded a Due to Income Funds of $46,113 at February 28, 1998.
Financial information of the Income Funds as of December 31, 1997, is as
follows:
<TABLE>
<S> <C>
Total assets $ 29,851,000
Nonrecourse debt 10,903,000
Other liabilities 2,281,000
Partners' capital 16,667,000
Net income (loss) 280,000
</TABLE>
4
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Balance Sheet (continued)
2. ACCOUNTING POLICIES (CONTINUED)
The Company has guaranteed the performance of certain non-monetary obligations
of the General Partner Subsidiaries to the respective Income Funds, primarily
the responsibility for management of the Income Funds. In addition, the Company
is responsible for certain capital funding requirements of the General Partner
Subsidiaries and, accordingly, holds noninterest-bearing demand notes of
approximately $4,166,000 at February 28, 1998. Such notes have been eliminated
in the consolidation of the accompanying balance sheet.
The compensation to the Company from the Income Funds includes: (1) Equipment
Acquisition Fees (4% of the purchase price of all equipment purchased by the
Income Funds); (2) Debt Placement Fees (1% of financed equipment by the Income
Funds); (3) Sales Fees Expense (3% of gross proceeds of sold equipment by the
Income Funds); and (4) Equipment Management Fees (5% of the gross operating
lease revenues of the Income Funds).
Fees from two Income Funds for the year ended February 28, 1998, each exceeding
10% of total fee income for the year, aggregated 66%.
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, 1998 under the leases and
certificates of participation are approximately $5,785,000. These amounts are
included in minimum lease payments receivable and nonrecourse obligations in the
accompanying balance sheet. Of these amounts, $4,530,000 are secured by mortgage
insurance policies maintained by the lessee. The certificates mature from 1998
to 2011.
5
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Balance Sheet (continued)
3. LEASE COMMITMENTS (CONTINUED)
Future minimum lease payments to be received as of February 28, 1998 are as
follows:
<TABLE>
<S> <C>
1999 $ 920,374
2000 903,828
2001 906,935
2002 683,324
2003 684,490
Thereafter 4,166,236
---------------
8,265,187
Less amount representing interest 2,480,187
---------------
Total $ 5,785,000
---------------
---------------
</TABLE>
The Company leases an automobile, certain office equipment and office space
under noncancelable operating leases expiring in 1999 through 2001. Future
minimum lease payments under noncancelable operating leases at February 28, 1998
are $150,000 in 1999; $11,000 in 2000; and $4,000 in 2001.
4. PROFIT-SHARING PLAN
The Company has a profit-sharing plan covering all employees with one year of
service and 21 years of age. Profit-sharing contributions are made at the
discretion of management. It is the Company's policy to fund profit-sharing
costs as accrued. There was no profit-sharing contribution for the year ended
February 28, 1998.
5. INCOME TAXES
The Company files a consolidated federal income tax return with CDI and its
subsidiaries.
The Company has a net deferred tax asset of $237,000 at February 28, 1998,
arising primarily from investment tax credits and net operating loss
carryforwards. The deferred tax asset is net of deferred tax liabilities
associated with ownership of general partnership interests in the various
operating Income Funds of $53,000 at February 28, 1998. The Company has recorded
a valuation allowance of approximately $237,000 because the Company concluded
the future realization of the assets could not be reasonably assured based on
current and expected operating results.
6
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Balance Sheet (continued)
5. INCOME TAXES (CONTINUED)
The Company has investment tax credit carryforwards of $129,000 at February 28,
1998 which expire in 1999 through 2001. The Company has federal net operating
loss carryforwards of $1,512,000, which expire in 1999 through 2001.
6. RELATED PARTY TRANSACTIONS
During 1998, the Company made $697,000, in cash advances to certain Income Funds
to fund cash distributions to limited partners. The Company determined that
approximately $176,000 of these advances were uncollectible and such amounts
were written off. The remaining advances of $232,000 are due on demand.
During 1998, the Company determined that $12,750 in receivables from certain
Income Funds were uncollectible and such amounts were written off.
7. LEGAL SETTLEMENT
In fiscal 1998, the Company was a plaintiff in a lawsuit against a company that
provided office space and administrative support services in prior years. In
fiscal 1998, the Company was awarded a $50,000 judgment against this company
which has been included in other income. The entire balance is included in other
receivables at February 28, 1998.
7
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NOT APPLICABLE
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
GENERAL
The General Partner, a wholly-owned subsidiary of Commonwealth of
Delaware, Inc., a Delaware corporation, which is in turn a wholly-owned
subsidiary of Commonwealth Capital Corp., a Pennsylvania corporation ("Com
Cap Corp."), was incorporated in Pennsylvania on August 26, 1993. The
General Partner also acts as the General Partner for Commonwealth Income and
Growth Fund I and Commonwealth Income and Growth Fund II. The principal
business office of the General Partner is 1160 West Swedesford Road, Suite
340, Berwyn, PA 19312, and its telephone number is 610-647-6800. The General
Partner manages and controls the affairs of the Partnership and has sole
responsibility for all aspects of the Partnership's operations. The officers
of the General Partner devote such time to the affairs of the Partnership as
in the opinion of the General Partner is necessary to enable it to perform
its function as General Partner. The officers of the General Partner are not
required to spend their full time in meeting their obligations to the
Partnership.
The directors and officers of the General Partner and key employees of
Com Cap Corp. are as follows:
<TABLE>
<CAPTION>
NAME TITLE
- ------ -----
<S> <C>
George S. Springsteen Chairman of the Board of Directors and President of the General Partner and
Com Cap Corp.
Kimberly A. MacDougall Executive Vice President, Chief Operating Officer and Secretary of the General
Partner and Com Cap Corp.
Kathleen S. Enscoe Vice President and Controller of the General Partner and Com Cap Corp.
Magdalia Cruz Assistant Vice President of 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 or controlling entities of several prior programs sponsored by Com
Cap Corp. with objectives similar to the Partnership's. He has been the sole
shareholder and director of Com Cap Corp. since its formation in 1978. From
1971 to 1978, Mr. Springsteen was involved in the computer leasing business
of Granite Computer Corporation. Mr. Springsteen served as Vice President of
Marketing, in addition to other capacities, and managed a portfolio of
approximately $120,000,000 of IBM computers and peripherals. In 1978,
Granite Computer Corporation sold its equipment portfolio and left the
equipment leasing business. Mr. Springsteen acquired a portion of Granite's
portfolio, client base, employees and corporate offices in Jenkintown,
Pennsylvania. The new company began operations as Com Cap Corp. in May of
1978. Mr. Springsteen received a Bachelor of Science degree from the
University of Delaware in 1957.
Kimberly A. MacDougall, age 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, Senior Vice
President, served as Marketing Manager for the Direct Investments Department,
with over $450,000,000 of investments under management in real estate,
equipment leasing and energy-related industries. Ms. MacDougall holds Series
7, 63 and 39 NASD licenses and is a member of the Equipment Leasing
Association, Investment Partnership Association, and International
Association for Financial Planning.
<PAGE>
Kathleen S. Enscoe, age 33, is Vice President and Controller of Com Cap
Corp. and certain of its subsidiaries where she has been employed since 1992.
Ms. Enscoe is an active member of the Equipment Leasing Association. From
1988 to 1992, Ms. Enscoe was employed as a staff accountant in the financial
reporting department of WWF Paper Corporation. Ms. Enscoe received a B.S.B.A.
degree in 1988 from Geneva College with dual majors in accounting and
business administration.
Magdalia Cruz, age 30, is Assistant Vice President of Com Cap Corp. and
Vice President of Commonwealth Capital Securities Corp. Ms. Cruz has been
employed by Com Cap Corp. since 1993. From 1990 to 1993, Ms. Cruz was
employed as Marketing Coordinator for Shaffer DeSouza Brown. Prior to that,
as a Computer Equipment Analyst for the Defense Industrial Supply Center, a
government agency based in Philadelphia. She is completing her studies for a
B.S. in Business Management and Marketing at Chestnut Hill College. Ms. Cruz
is a member of the Equipment Leasing Association, Investment Partnership
Association, and holds her Series 22, 63 and 39 NASD licenses.
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. Abbot has
been active in the commercial lending industry, working primarily on
asset-backed transactions for more than twenty-seven years. Prior to
joining Com Cap Corp. Mr. Abbott was a founding partner of Westwood Capital
LLC, in New York. Prior to that, as Senior Vice President for IBJ Schroder
Leasing Corporation where Mr. Abbott managed a group specializing in
providing operating lease financing programs in the high technology sector.
Mr. Abbott brings extensive knowledge and experience in all facets of
asset-backed financing and has successfully managed $1.5 billion of secured
transactions. Mr. Abbott attended St. John's University. Mr. Abbott is a
member of the Equipment Leasing Association.
The directors and officers of the General Partner are required to spend
only such time on the Partnership's affairs as is necessary in the sole
discretion of the directors of the General Partner for the proper conduct of
the Partnership's business. A substantial amount of time of such directors
and officers is expected to be spent on matters unrelated to the Partnership,
particularly after the Partnership's investments have been selected. Under
certain circumstances, such directors and officers are entitled to
indemnification from the Partnership.
ITEM 11: EXECUTIVE COMPENSATION
The following table summarizes the types, amounts and recipients of
compensation to be paid by the Partnership directly or indirectly to the
General Partner and its Affiliates. Some of these fees are paid regardless
of the success or profitability of the Partnership's operations and
investments. While such compensation and fees were established by the
General Partner and are not based on arm's-length negotiations, the General
Partner believes that such compensation and fees are comparable to those
which would be charged by an unaffiliated entity or entities for similar
services. The Partnership Agreement limits the liability of the General
Partner and its Affiliates to the Partnership and the Limited Partners and
provides indemnification to the General Partner and its Affiliates under
certain circumstances.
<PAGE>
<TABLE>
<CAPTION>
Amount
Entity Receiving Incurred
Compensation Type of Compensation During 1997
- ------------------ ------------------------------------ ------------
OFFERING AND ORGANIZATION STAGE
<S> <C> <C>
Commonwealth Underwriting Commissions. The $192,856
Capital Securities Partnership will pay to the Dealer
Corp. Manager an aggregate amount of up
to nine percent of Capital
Contributions as Underwriting
Commissions after and only if the
required $1,500,000 Minimum
Subscription Amount is sold. The
Dealer Manager will pay other
broker-dealers ("Participating
Brokers") out of Underwriting
Commissions a selling commission
of up to eight percent of the
Capital Contributions from Units
sold by such Participating Brokers.
The amount of the Underwriting
Commissions will be determined
based upon the quantity of Units
sold to a single investor.
The General Organizational Fee. An Organization $ 64,285
Partner Fee equal to three percent of the
first $10,000,000 of Limited
Partners' Capital Contributions and
two percent of the Limited
Partners' Capital Contribution in
excess of $10,000,000, as
compensation for the organization
of the Partnership. It is
anticipated that the Organizational
and Offering Expenses, which
include legal, accounting and
printing expenses; various
registration and filing fees;
miscellaneous expenses related to
the organization and formation of
the Partnership; other costs of
registration; and costs incurred in
connection with the preparation,
printing and distribution of this
Prospectus and other sales
literature will be approximately
$300,000. The General Partner will
pay all Organizational and Offering
Expenses, other than Underwriting
Commissions.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Amount
Entity Receiving Incurred
Compensation Type of Compensation During 1998
- ------------------ ------------------------------------ ------------
OPERATIONAL AND SALE OR LIQUIDATION STAGES
<S> <C> <C>
The General Reimbursement of Expenses. The $7,500
Partner General Partner and its Affiliates
and its are entitled, under Section 5.2 of
Affiliates the Partnership Agreement, to
reimbursement by the Partnership
for the cost of goods, supplies or
services obtained and used by the
General Partner in connection with
the administration and operation of
the Partnership from third parties
unaffiliated with the General
Partner. The amounts set forth on
this table are approximations of
reimbursable expenses for the first
year of the Partnership's operation
and do not include expenses
incurred in the offering of Units.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Amount
Entity Receiving Incurred
Compensation Type of Compensation During 1998
- ------------------ ------------------------------------ ------------
<S> <C> <C>
The General Equipment Acquisition Fee. An $73,000
Partner Equipment Acquisition Fee of four
percent of the Purchase Price of
each item of Equipment purchased as
compensation for the negotiation of
the acquisition of the Equipment
and the lease thereof or sale under
a Conditional Sales Contract. The
fee will be paid upon closing of
the Offering with respect to the
Equipment to be purchased by the
Partnership with the net proceeds
of the Offering available for
investment in Equipment except for
fees on the leveraged portion of
the Purchase Price which are paid
when the Equipment is purchased. If
the Partnership does not purchase
Equipment with all the net proceeds
of the Offering, the General
Partner will return a pro rata
portion of the fee to the
Partnership. If the Partnership
acquires Equipment in an amount
exceeding the net proceeds of the
Offering available for investment
in Equipment, the fee will be paid
when such Equipment is acquired.
The estimated amounts set forth in
this table include fees on
Equipment assuming the maximum
allowable leverage, but exclude
such fees earned on Equipment
purchased with Retained Proceeds.
Such excluded fees may be
significant in amount. Equipment
Acquisition Fees will be lower than
the estimated maximum if a lower
level of acquisition borrowing is
utilized.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Amount
Entity Receiving Incurred
Compensation Type of Compensation During 1998
- ------------------ ------------------------------------ ------------
<S> <C> <C>
The General Debt Placement Fee. As compensation $0
Partner for arranging Term Debt to finance
the acquisition of Equipment by the
Partnership, a fee equal to one
percent of such indebtedness;
provided, however, that such fee
shall be reduced to the extent the
Partnership incurs such fees to
third parties, unaffiliated with
the General Partner or the lender,
with respect to such indebtedness
and no such fee will be paid with
respect to borrowings from the
General Partner or its Affiliates.
The estimated amounts set forth in
this table assume the expected
maximum allowable leverage
($535,135 if the minimum number of
Units are sold and $5,371,620 if
the maximum number of Units are
sold), but exclude such fees earned
on refinancings or debt incurred
with respect to Equipment purchased
with Retained Proceeds and
borrowings.
The General Equipment Management Fee. A monthly $15,313
Partner 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)
five percent of the Gross Lease
Revenues attributable to Equipment
which is subject to Operating
Leases.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Amount
Entity Receiving Incurred
Compensation Type of Compensation During 1998
- ------------------ ------------------------------------ ------------
<S> <C> <C>
The General Equipment Liquidation Fee. With $0
Partner 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 of such Equipment.
The payment of such fee is
subordinated to the receipt by the
Limited Partners of (i) a return of
their Capital Contributions and a
10% per annum cumulative return,
compounded daily, on Adjusted
Capital Contributions ("Cumulative
Return") and (ii) the Net
Disposition Proceeds from such sale
in accordance with the Partnership
Agreement. Such fee will be reduced
to the extent any liquidation or
resale fees are paid to
unaffiliated parties.
INTEREST IN THE PARTNERSHIP
The General Partnership Interest. The General $1,691
Partner Partner will have a present and
continuing one percent interest in
the Partnership's items of income,
gain, loss, deduction, credit, and
tax preference. In addition, the
General Partner will receive one
percent of Cash Available for
Distribution until the Limited
Partners have received
distributions of Cash Available for
Distribution equal to their Capital
Contributions plus the 10%
Cumulative Return and thereafter,
the General Partner will receive
10% of Cash Available for
Distribution. See "Risk Factors -
Dilution."
</TABLE>
<PAGE>
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
NOT APPLICABLE
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership is subject to various conflicts of interest arising out
of its relationships with the General Partner and its Affiliates. These
conflicts include the following:
COMPETITION WITH GENERAL PARTNER AND AFFILIATES: COMPETITION FOR
MANAGEMENT'S TIME
<PAGE>
The General Partner and its Affiliate sponsor other investor programs
which are in potential competition with the Partnership in connection with
the purchase of Equipment as well as opportunities to lease and sell such
Equipment. Competition for Equipment has occurred and is likely to occur in
the future. The General Partner and its Affiliates may also form additional
investor programs which may be competitive with the Partnership.
If one or more investor programs and the Partnership are in a position
to acquire the same Equipment, the General Partner will determine which
program will purchase the Equipment based upon the objectives of each and the
suitability of the acquisition in light of those objectives. The General
Partner will generally afford priority to the program or entity that has had
funds available to purchase Equipment for the longest period of time. If one
or more investor programs and the Partnership are in a position to enter into
lease with the same lessee or sell Equipment to the same purchaser, the
General Partner will generally afford priority to the Equipment which has
been available for lease or sale for the longest period of time.
Certain senior executives of the General Partner and its Affiliates also
serve as officers and directors of the other programs and are required to
apportion their time among these entities. The Partnership is, therefore, in
competition with the other programs for the attention and management time of
the General Partner and Affiliates. The officers and directors of the
General Partner are not required to devote all or substantially all of their
time to the affairs of the Partnership.
ACQUISITIONS
Com Cap Corp. and the General Partner or other Affiliates of the General
Partner may acquire Equipment for the Partnership provided that (i) the
Partnership has insufficient funds at the time the Equipment is acquired,
(ii) the acquisition is in the best interest of the partnership and (iii) no
benefit to the General Partner or its Affiliates arises from the acquisition
except for compensation paid to Com Cap Corp., the General Partner or such
other Affiliate as disclosed in this Report. Com Cap Corp., the General
Partner or their Affiliates will not hold Equipment for more than 60 days
prior to transfer to the Partnership. If sufficient funds become available
to the Partnership within such 60 day period, such Equipment may be resold to
the Partnership for a price not in excess of the sum of the cost of the
Equipment to such entity and any accountable Acquisition Expenses payable to
third parties which are incurred by such entity and interest on the Purchase
Price from the date of purchase to the date of transfer to the Partnership.
Com Cap Corp., the General Partner or such other Affiliate will retain any
rent or other payments received for the Equipment, and bear all expenses and
liabilities, other than accountable Acquisition Expenses payable to third
parties with respect to such Equipment, for all periods prior to the
acquisition of the Equipment by the Partnership. Except as described above,
there will be no sales of Equipment to or from any Affiliate of Com Cap Corp.
In certain instances, the Partnership may find it necessary, in
connection with the ordering and acquisition of Equipment, to make advances
to manufacturers or vendors with funds borrowed from the General Partner for
such purpose. The Partnership does not borrow money from the General Partner
or any of its Affiliates with a term in excess of twelve months. Interest is
paid on loans or advances (in the form of deposits with manufacturers or
vendors of Equipment or otherwise) from the General Partner of its Affiliates
from their own funds at a rate equal to that which would be charged by third
party financing institutions on comparable loans from the same purpose in the
same geographic area, but in no event in excess of the General Partner's or
Affiliate's own cost of funds. In addition, if the General Partner or its
Affiliates borrow money and loan or advance it on a short-term basis to or on
behalf of the Partnership, the General Partnership than that which the
General Partner or such Affiliates are paying. The Partnership does not loan
money to any Person including the General Partner or its Affiliates except to
the extent that a Conditional Sales Contract constitutes a loan.
If the General Partner or any of its Affiliates purchases Equipment in
its own name and with its own funds in order to facilitate ultimate purchase
by the Partnership, the purchaser is entitled to
<PAGE>
receive interest on the funds expended for such purchase on behalf of the
Partnership. Simple interest on any such temporary purchases is charged on a
floating rate basis not in excess of three percent over the "prime rate" from
time to time announced by PNC Bank, from the date of initial acquisition to
the date of repayment by the Partnership/ownership transfer.
The Partnership does not invest in equipment Limited Partnerships,
general partnerships or joint ventures, except that (a) the Partnership may
invest in general partnerships or joint ventures with persons other that
equipment Programs formed by the General Partner or its Affiliates, which
partnerships or joint ventures own specific equipment; provided that (i) the
Partnership has or acquires a controlling interest in such ventures or
partnerships, (ii) the non-controlling interest is owned by a non-Affiliated,
and (iii) the are no duplicate fees; and (b) the Partnership may invest in
joint venture arrangements with other equipment Programs formed by the
General Partner or its Affiliates if such action is in the best interest of
all Programs and if all the following conditions are met: (i) all the
Programs have substantially identical investment objectives; (ii) there are
no duplicate fees; (iii) the sponsor compensation is substantially identical
in each Program; (iv) the Partnership has a right of first refusal to buy
another Program's interest in a joint venture if the other Program wishes to
sell equipment held in the joint venture; (v) the investment of each Program
is on substantially the same terms and conditions; and (vi) the joint venture
is formed either for the purpose of effecting appropriated diversification
for the Programs or for the purpose of relieving the General Partner or its
Affiliates from a commitment entered into pursuant to certain provisions of
the Partnership Agreement.
GLOSSARY
The following terms used in this Report shall (unless otherwise
expressly provided herein or unless the context otherwise requires) have the
meanings set forth below.
"Acquisition Expenses" means expenses relating to the prospective
selection and acquisition of or investment in Equipment, whether or not
actually acquired, including, but not limited to, legal fees and expenses,
travel and communication expenses, costs of appraisals, accounting fees and
expenses and miscellaneous expenses.
"Acquisition Fee" means the total of all fees and commissions paid by
any party in connection with the initial purchase of Equipment acquired by
the Partnership. Included in the computation of such fees or commissions
shall be the Equipment Acquisition Fee, any commission, selection fee,
construction supervision fee, finance fee, non-recurring management fee of a
similar nature, however designated.
"Adjusted Capital Contributions" means Capital Contributions of the
Limited Partners reduced to not less than zero by any cash distribution
received by the Limited Partners pursuant to Sections 4/2 or 8/1, to the
extent such distributions exceed any unpaid Cumulative Return as of the date
such distributions were made.
"Affiliate" means, when used with reference to a specified Person, (I)
any Person that directly or indirectly through one or more intermediaries
controls or is controlled by or is under common control with the specified
Person, (ii) any Person that is a director or an executive officer of,
partner in, or serves in a similar capacity to, the specified Person, or any
Person which the specified Person is an executive officer of partner or with
respect to which the specified Person serves in a similar capacity, (iii) any
Person owning or controlling 10% or more of the outstanding voting securities
of such specified Person, or (iv) if such Person is an officer, director or
partner, any entity for which such Person acts in such capacity.
"Capital Account" means the separate account established for each
Partner pursuant to Section 4/.1.
"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.
<PAGE>
"Cash Available for Distribution" means Cash Flow plus net Disposition
Proceeds plus cash funds available for distribution from Partnership
reserves, less such amounts as the General Partner, in accordance with this
Agreement, causes the Partnership to reinvest in Equipment or interests
therein, and less such amounts as the General Partner, in its sole
discretion, determines should be set aside for the restoration or enhancement
of Partnership reserves.
"Cash Flow" for any fiscal period means the sum of (i) cash receipts
from operations, including, but not limited to, rents or other revenues
arising from the leasing or operation of the Equipment and interest, if any,
earned on funds on deposit for the Partnership, but not including Net
Disposition Proceeds, minus (ii) all cash expenses and costs incurred and
paid in connection with the ownership, lease, management, use and/or
operation of the Equipment, including, but not limited to, fees for handling
and storage; all interest expenses paid and all repayments of principal
regarding borrowed funds; maintenance; repair costs; insurance premiums;
accounting and legal fees and expenses; debt collection expenses; charges,
assessments or levies imposed upon or against the Equipment; ad valorem,
gross receipts and other property taxes levied against the Equipment; and all
costs of repurchasing Units in accordance with this Agreement; but not
including depreciation or amortization of fees or capital expenditures, or
provisions for future expenditures, including, without limitation,
Organizational and Offering Expenses.
"Closing Date" means the date, as designated by the General Partner, as
of which the Units shall cease being offered to the public pursuant to the
Offering, and shall be no later than the second anniversary of the Effective
Date.
"Code" means the Internal Revenue Code of 1986, as amended, and as may
be amended from time to time by future federal tax 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.
"Cumulative Return" means an amount equal to a return at a rate of 10%
per annum, compounded daily, on the Adjusted Capital Contribution for all
outstanding Units, which amount shall begin accruing at the end of the
calendar quarter in which such Units are sold by the Partnership.
"Effective Date" means the date on which the Partnership's registration
statement on Form S-1 with respect to the Units, as filed with the Securities
and Exchange Commission, becomes effective under the Securities Act of 1933,
as amended.
"Equipment" means each item of and all of the computer peripheral and
other similar capital equipment purchased, owned, operated, and/or leased by
the Partnership or in which the Partnership has acquired a direct or indirect
interest, as more fully described in this Agreement, together with all
appliances, parts, instruments, accessories, furnishings, or other equipment
included therein and all substitutions, renewals, or replacements of, and all
additions, improvements, and accessions to, any and all thereof.
"Full Payout Net Lease" means an initial Net Lease of the Equipment
under which the non-cancelable rental payments due (and which can be
calculated at the commencement of the Net Lease) during the initial
noncancellable fixed term (not including any renewal or extension period) of
the lease or other contract for the use of the Equipment are at least
sufficient to recover the Purchase Price of the Equipment.
"General Partner" means Commonwealth Income & Growth Fund, Inc. and any
additional, substitute or successor general partner of the Partnership.
<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.
"Initial Closing " means January 27, 1998.
"IRA" means an Individual Retirement Account as described in Section 408
of the Code.
"Limited Partner" means a Person who acquires Units and who is admitted
to the Partnership as a limited partner in accordance with the terms of this
Agreement.
"Majority in Interest" means, with respect to the Partnership, Limited
Partners holding more than 40% of the outstanding Units held by all Limited
Partners at the Record Date for any vote or consent of the Limited Partners.
"Minimum Subscription Amount" means an aggregate of $1,500,000 in
subscriptions from Limited Partners.
"Net Disposition Proceeds" means the net proceeds realized by the
Partnership from the refinancing, sale or other disposition of Equipment,
including insurance proceeds or lessee indemnity payments arising from the
loss or destruction of Equipment, less such amounts as are used to satisfy
Partnership liabilities.
"Net Lease" means a lease or other contract under which the owner
provides equipment to a lessee or other operator in return for a payment, and
the lessee assumes all obligations and pays for the operation, repair,
maintenance, taxes and insuring of the Equipment, so that the non-cancelable
rental payments under the lease are absolutely net to the lessor.
"Net Profits" or "Net Losses" shall be computed in accordance with
Section 703(a) of the Code (including all items of income, gain, loss or
deduction required to be stated separately pursuant to Section 703(a) (1) of
the Code) for each taxable year of the Partnership or shorter period or
subsequent to an interim closing of the Partnership's books with the
following adjustments: (I) any income of the Partnership that is exempt from
federal income tax and not otherwise taken into account in computing Net
Profits and Net Loss pursuant to this definition shall be added to such
taxable income of shall reduce such taxable loss; (ii) any expenditure of the
Partnership described in Code Section 705(a) (2) (B) or treated as Code
Section 705(a) (2) (B) expenditures pursuant to Treasury Regulations Section
1.704-1(b) (2) (iv) (I) and not otherwise taken into account in computing Net
Profits and Net Losses pursuant to this definition shall be subtracted from
such taxable income or loss; (iii) items of income, gain, loss and deduction
specially allocated pursuant to Section 7.3 of this Agreement shall not be
included in the computation of Net Profits or Net Loss; and if property is
reflected on the books of the Partnership at a book value that differs from
the adjusted tax basis of the property in accordance with Treasury Regulation
Section 1.704-1 (b) (2) (iv) (d) or (f), depreciation, amortization, and gain
or loss with respect to such property shall be determined by reference to
such book value in a manner consistent with Treasury Regulation Section
1.704-1 (b) (2) (iv) (g). The terms "Net Profit" or "Net Losses" shall
include the Partnership's distributive share of the profit or loss of any
partnership or joint venture in which it is a partner or joint venturer.
"Offering" means the initial public offering of the Units in the
Partnership, as described in the Prospectus.
"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.
<PAGE>
"Organizational and Offering Expenses" means the expenses incurred in
connection with the organization of the Partnership and in preparation of the
offering for registration and subsequently offering and distributing it to
the public, including Underwriting Commissions, listing fees and advertising
expenses except advertising expenses related to the leasing of the Program's
Equipment.
"Partners" means any one or more of the General Partner and the Limited
Partners.
"Partnership" means Commonwealth Income & Growth Fund III, a
Pennsylvania limited partnership.
"Person" means an individual, partnership, joint venture, corporation,
trust, estate or other entity.
"Program" means a limited or general partnership, joint venture,
unincorporated association or similar organization, other than a corporation
formed and operated for the primary purpose of investment in and the
operation of or gain from an interest in Equipment.
"Purchase Price" means, with respect to any Equipment, an amount equal
to the sum of (I) the invoice cost of such Equipment or any other such amount
paid to the seller, (ii) any closing, delivery and installation charges
associated therewith not included in such invoice cost and paid by or on
behalf of the Partnership, (iii) the cost of any capitalized modifications or
upgrades paid by or on behalf of the Partnership in connection with its
purchase of the Equipment, and (iv) the amount of the Equipment Acquisition
Fee and any other Acquisition Fees, but excluding points and prepaid interest.
"Term Debt" means debt of the Partnership with a term in excess of
twelve months, incurred with respect to acquiring or investing in Equipment,
or refinancing non-Term Debt, but not debt incurred with respect to
refinancing existing Partnership Term Debt.
"Underwriting Commissions" mean selling commissions and dealer-manager
fees paid to broker-dealers by the Partnership in connection with the offer
and sale of Units.
"Unit" means a limited partnership interest in the Partnership.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
Commonwealth Income & Growth Fund III
Report of Independent Auditors
Balance Sheets as of December 31, 1998 and 1997
Statement of Operations for the period January 27, 1998
(commencement of operations) to December 31, 1998
Statement of Partners' Capital for the period January 27, 1998
(commencement of operations) to December 31, 1998
Statement of Cash Flows for the period January 27, 1998
(commencement of operations) to December 31, 1998
<PAGE>
Notes to Financial Statements
Commonwealth Income & Growth Fund, Inc.
Report of Independent Auditors
Balance sheet as of February 28, 1998
Notes to Balance Sheet
Commonwealth Capital Corp.
Report of Independent Auditors
Consolidated Balance Sheet as of February 28, 1998
Notes to Consolidated Balance Sheet
(a) (2) Schedules.
Schedules are omitted because they are not applicable, not required, or
because the required information is included in the financial statements and
notes thereto.
(a) (3) Exhibits.
* 3.1 Certificate of Limited Partnership
* 3.2 Agreement of Limited Partnership
27 Financial Data Schedule
* Incorporated by reference from the Partnership's Registration
Statement on Form S-1 (Registration No. 333-26933)
(b) Reports on Form 8-K.
NOT APPLICABLE
(c) Exhibits.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf
on March 27, 1998 by the undersigned thereunto duly authorized.
COMMONWEALTH INCOME & GROWTH FUND III
By: COMMONWEALTH INCOME & GROWTH
FUND, INC., General Partner
By: /s/ George S. Springsteen
George S. Springsteen, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 31, 1999.
SIGNATURE CAPACITY
- ------------------------------ ---------------------------
/s/ GEORGE S. SPRINGSTEEN Chairman, President and Sole Director of
- ------------------------------ Commonwealth Income & Growth Fund, Inc.
George S. Springsteen
/s/ KIMBERLY A. MACDOUGALL Executive Vice President,
- ------------------------------ Chief Operating Officer
Kimberly A. MacDougall
/s/ KATHLEEN S. ENSCOE Controller of Commonwealth Income & Growth Fund,
- ------------------------------ Inc.
Kathleen S. Enscoe
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 507,193
<SECURITIES> 0
<RECEIVABLES> 67,641
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 70,000
<PP&E> 1,453,742
<DEPRECIATION> (238,240)
<TOTAL-ASSETS> 1,860,336
<CURRENT-LIABILITIES> 85,838
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,774,498
<TOTAL-LIABILITY-AND-EQUITY> 1,860,336
<SALES> 0
<TOTAL-REVENUES> 334,046
<CGS> 0
<TOTAL-COSTS> 311,712
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 584
<INCOME-PRETAX> 31,750
<INCOME-TAX> 0
<INCOME-CONTINUING> 31,750
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,750
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
