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Registration No. 333-26933
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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COMMONWEALTH INCOME & GROWTH FUND III
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
PENNSYLVANIA 6159 23-2895714
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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1160 West Swedesford Road
Berwyn, Pennsylvania 19312
Telephone (610) 647-6800
(Address, including zip code and telephone number, including area
code, of registrant's principal executive offices)
George S. Springsteen
Commonwealth Capital Corp.
1160 West Swedesford Road
Berwyn, Pennsylvania 19312
Telephone (610) 647-6800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Harry D. Madonna, Esquire
Blank, Rome, Comisky & McCauley
1200 Four Penn Center Plaza
Philadelphia, Pennsylvania 19103
Telephone (215) 569-5520
This Post-Effective Amendment to the Registration Statement shall hereafter
become effective in accordance with Section 8(c) of the Securities Act of 1933,
as amended.
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The Registration Statement, including the Prospectus forming a part
thereof and included in this Post-Effective Amendment No. 1, is hereby
amended as set forth in the Supplement which is attached hereto.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
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COMMONWEALTH INCOME & GROWTH FUND III
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Minimum Offering 75,000 Units of Limited Partnership Interests
$20 per Unit--Minimum Investment 125 Units
(50 Units for Individual Retirement Accounts and Qualified Plans)
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COMMONWEALTH INCOME & GROWTH FUND III (the "Partnership") is a Pennsylvania
limited partnership formed to acquire various types of computer peripheral
equipment and other similar capital equipment, which will be leased primarily to
U.S. corporations and institutions. The principal objective of the partnership
is to generate sufficient leasing revenues to enable the Partnership to make
cash distributions to its Limited Partners. There is no assurance that this
objective will be attained. The General Partner of the Partnership is
Commonwealth Income & Growth Fund, Inc., a Pennsylvania corporation which is an
indirect wholly-owned subsidiary of Commonwealth Capital Corp. The Partnership
is not a mutual fund or other type of investment company within the meaning of
the Investment Company Act of 1940 and is not subject to regulation thereunder.
This offering (the "Offering") of units of limited partnership interests in
the Partnership ("Units") is being made on a best efforts basis by Commonwealth
Capital Securities Corp. as Dealer Manager, and selected securities brokers. The
Offering will terminate at the close of business on July 25, 1999 unless
sooner terminated by the General Partner. Until the initial admittance of
investors as Limited Partners on the sale of at least 75,000 Units (the "Minimum
Subscription Amount"), all funds received from subscribers will be deposited
with PNC Bank, Philadelphia, Pennsylvania, as escrow agent, and invested in
United States government securities or interest-bearing bank accounts. Interest
earned on such funds will be paid by the escrow agent to such investors as
promptly as practicable after such initial admittance. If less than 75,000 Units
are subscribed for prior to July 25, 1998, no Units will be sold and all
funds received from subscribers will be promptly refunded by the escrow agent
together with interest earned thereon. If only the Minimum Subscription Amount
is sold, approximately 84.6% of the gross proceeds will be invested in
Equipment.
THIS OFFERING INVOLVES SIGNIFICANT RISKS, INCLUDING:
o Limited Partners will have limited voting rights, will not participate in the
management of the Partnership and must rely on the General Partner for
management of the Partnership.
o The General Partner will have conflicts of interest in the management of the
Partnership.
o Substantial fees will be paid to the General Partner and its Affiliates
regardless of profitability and, in most cases, prior to any distributions to
Limited Partners.
o There are restrictions on transfer of, and the General Partner
expects that there will be no public or private market for the
Units; due to this lack of liquidity, Limited Partners must be prepared to
hold their Units for the life of the Partnership and Limited Partners will be
able to sell their Units, if at all, only at a substantial discount. The
Partnership will liquidate no later than December 31, 2009.
o During the life of the Partnership, a portion of the distributions to Limited
Partners will be a return of capital.
o The ownership, leasing, operation and sale of Equipment may be adversely
affected by various economic and business factors.
o It is expected that the Partnership will invest primarily in Operating Leases
rather than Full Payout Leases which increases the Partnership's risk of
failing to recover its investment in Equipment.
o The Partnership has not identified any Equipment for acquisition
by the Partnership.
o There are certain tax risks associated with this offering, including the
possible adverse effects of future tax legislation.
o There are certain risks of leverage associated with this Offering.
SEE "RISK FACTORS" ON PAGE 6, "COMPENSATION OF GENERAL PARTNER AND
AFFILIATES" AND "CONFLICTS OF INTEREST."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Price to Underwriting Proceeds to
Public(1) Commissions(2) Partnership(3)
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Per Unit............. $ 20.00 $ 1.80 $ 18.20
Total Minimum........ $ 1,500,000.00 $ 135,000.00 $ 1,365,000.00
Total Maximum........ $15,000,000.00 $1,350,000.00 $13,650,000.00
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(See Notes to Table on following page.)
The date of this Prospectus is July 25, 1997
COMMONWEALTH CAPITAL SECURITIES CORP.
(The Cover Page is Continued on the Following Page)
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ANY SUPPLEMENTS AND/OR STICKERS WHICH UPDATE
THIS PROSPECTUS ARE CONTAINED INSIDE THE BACK COVER.
(1) The price to public and the underwriting commissions will be reduced by
volume discounts in the case of purchases in excess of $250,000 by a single
investor. However, the proceeds to the Partnership will not be reduced by
such discounts. See "Plan of Distribution - General."
(2) The Partnership will indemnify the Dealer Manager and selected securities
brokers against certain civil liabilities, including liabilities under the
Securities Act of 1933. See "Plan of Distribution."
(3) Before deducting an Organization Fee equal to three percent of the Limited
Partners' Capital Contributions up to $10,000,000 and two percent of the
Limited Partners' Capital Contributions thereafter to be paid by the
Partnership to the General Partner ($45,000 if 75,000 Units are sold and
$400,000 if 750,000 Units are sold). The General Partner will pay all
organization and offering expenses other than underwriting commissions .
NO ONE HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THIS
OFFERING. ANY INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN SHOULD NOT BE
RELIED ON AS HAVING BEEN AUTHORIZED BY THE PARTNERSHIP, THE GENERAL PARTNER OR
THE DEALER MANAGER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES OR AN OFFER OR A SOLICITATION BY OR TO ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION MAY NOT LAWFULLY BE MADE.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE PARTNERSHIP SINCE THE DATE HEREOF. HOWEVER, IF ANY MATERIAL
CHANGE IN THE PARTNERSHIP'S AFFAIRS OCCURS AT ANY TIME WHEN THIS PROSPECTUS IS
REQUIRED TO BE DELIVERED, THIS PROSPECTUS WILL BE APPROPRIATELY AMENDED OR
SUPPLEMENTED.
The Partnership intends to furnish its Limited Partners with annual reports
containing audited financial statements for each year and with quarterly reports
containing unaudited financial information for each of the first three quarters
of each year. See "Reports to Limited Partners."
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. ANY REPRESENTATION TO
THE CONTRARY AND ANY PREDICTION, WRITTEN OR ORAL, AS TO THE AMOUNT OR CERTAINTY
OF ANY PRESENT OR FUTURE CASH BENEFIT OR TAX CONSEQUENCE WHICH MAY FLOW FROM AN
INVESTMENT IN THE FUND IS NOT PERMITTED.
SUPPLEMENT FOR TEXAS INVESTORS
Although this Partnership uses the word "Growth" in its title, the assets
to be acquired by the Partnership will not appreciate in value and will in fact
lose value rapidly after acquisition. By using the term "Growth," the sponsor of
this Partnership means that the sponsor will purchase additional equipment with
money that otherwise could be distributed to investors as a return on their
investment.
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TABLE OF CONTENTS
Page
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SUMMARY OF THE OFFERING......................................................1
The Partnership........................................................1
General Partner........................................................1
Business of the Partnership............................................1
Risk Factors...........................................................1
Conflicts of Interest..................................................3
Compensation to General Partner and Affiliates.........................3
Objectives of the Partnership..........................................3
Leverage...............................................................4
Reinvestment of Cash Flow and Net Disposition Proceeds.................4
Distributions to Limited Partners......................................4
The Offering...........................................................4
Escrow Arrangement.....................................................4
Transferability of Units...............................................5
Redemption Provision...................................................5
Termination of the Partnership.........................................5
Tax Ruling.............................................................5
Depreciation...........................................................5
RISK FACTORS.................................................................6
Reliance on the General Partner and Conflicts of Interest..............6
Significant Fees Paid to the General Partner and Affiliates............6
Limited Transferability of Units; Possibility of Significant
Discount.............................................................6
Return of Capital......................................................6
Prior Experience of the General Partner................................7
Limited Contribution to Partnership by General Partner; Reduction
of Proceeds Available for Investment.................................7
No Assurance of Successful Operations..................................7
Liability of Limited Partners..........................................7
Waiver of Fiduciary Duty...............................................7
Certain Risks of the Equipment Leasing Business........................8
Risks of Equipment Operations..........................................8
Risks Inherent in Operating Leases.....................................8
Unspecified Equipment and Leases.......................................9
Equipment Obsolescence.................................................9
Risk of Used Equipment ................................................9
Difficulty and Delays in Acquiring and Leasing Equipment...............9
Risks of Leverage and Availability of Financing........................9
Lack of Diversification...............................................10
Uncertainty of Residual Value of Equipment............................10
Defaults by Lessees...................................................10
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Tort Liability........................................................10
Risks of Joint Investments............................................11
Competition...........................................................11
Dependence on Manufacturers and IBM...................................11
Limited Experience of Dealer Manager..................................11
Tax Risks.............................................................11
General..........................................................11
Federal Tax Considerations in General............................12
Partnership Status...............................................12
Partnership Allocations..........................................13
Passive Activity Income and Losses Limitations...................13
The Partnership as the Owner of the Equipment....................13
Sale or Other Disposition of Equipment or Units-Tax
Liability......................................................14
State and Foreign Taxes..........................................14
Reliance on Existing Law.........................................14
Investment by Tax Exempt Entities................................14
ERISA Considerations.............................................14
ESTIMATED USE OF PROCEEDS...................................................16
COMPENSATION OF GENERAL PARTNER AND AFFILIATES..............................18
CONFLICTS OF INTEREST.......................................................25
Competition with General Partner and Affiliates; Competition
for Management's Time..............................................25
Acquisitions..........................................................25
Receipt of Fees and Other Compensation by the General Partner
and its Affiliates.................................................26
Lack of Independent Investigation by Underwriter......................27
Non-Arm's-Length Agreements...........................................27
Joint Ventures with Affiliates of the General Partner.................27
Legal Counsel.........................................................27
Organization of General Partner.......................................27
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER.............................28
INVESTMENT OBJECTIVES AND POLICIES..........................................30
Principal Investment Objectives.......................................30
Types of Equipment....................................................31
Diversification.......................................................32
Description of Leases.................................................33
Borrowing Policies....................................................34
Refinancing Policies..................................................35
Liquidation Policies..................................................36
Management of Equipment...............................................36
Competition...........................................................36
Preliminary Investments...............................................37
Reserves..............................................................38
General Restrictions..................................................38
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TRANSFERABILITY OF UNITS....................................................39
General Limitations...................................................39
Redemption Provision..................................................39
Exempt Transfers......................................................40
Additional Restrictions on Transfer...................................40
ALLOCATIONS AND DISTRIBUTIONS...............................................41
Between the General Partner and the Limited Partners..................41
Among the Limited Partners............................................42
MANAGEMENT..................................................................44
General...............................................................44
Prior Performance.....................................................45
INCOME TAX CONSIDERATIONS...................................................49
Summary...............................................................49
Classification as a "Partnership"................................49
Taxation of Limited Partners.....................................49
Income Recognition...............................................49
Allocation of Profits and Losses.................................49
Passive Activity Income and Deductions...........................49
Limitations on Deduction of Losses...............................50
Deductibility of Fees............................................50
Ownership of Leased Equipment....................................50
Sale or Exchange of Partnership Equipment........................50
Disposition of Units.............................................50
Tax Elections....................................................50
Investment by Tax Exempt Entities................................51
Alternative Minimum Tax..........................................51
Foreign Tax Considerations.......................................51
Dissolution of Partnership.......................................51
General...............................................................51
Classification as a Partnership.......................................52
Certain Principles of Partnership Taxation............................54
General..........................................................54
Timing of Income Recognition.....................................55
Allocation of Partnership Income, Gains, Losses, Deductions
and Credits.........................................................55
In General.......................................................55
Substantial Economic Effect......................................56
Retroactive Allocations..........................................57
Conclusion.......................................................57
Limitations on Utilization of Partnership Losses......................58
Tax Basis........................................................58
Amounts at Risk..................................................58
Passive Activity Losses Limitations..............................59
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Hobby Losses.....................................................60
Fees and Reimbursements to the General Partner and Affiliates.........60
General..........................................................60
Organizational and Offering Expenses.............................60
Equipment Acquisition and Debt Placement Fees....................60
The Equipment Management Fee.....................................60
Equipment Liquidation Fee........................................60
Ownership of Equipment................................................61
Lease versus Sale................................................61
Cost Recovery and Depreciation........................................62
Cost Recovery Rules..............................................62
Recapture of Cost Recovery Deductions............................64
Interest Deduction Limitations........................................64
Section 163(d)...................................................64
Section 265......................................................65
Cash Distributions....................................................65
Sale of Equipment.....................................................65
Disposition of Units..................................................67
In General.......................................................67
Gift of Units....................................................67
Death of Partner.................................................67
Notice of Transfer...............................................67
Termination of the Partnership for Tax Purposes.......................68
No Section 754 Election...............................................69
Investment by Tax Exempt Entities.....................................69
Investment by Nonresident Alien Individuals and Foreign
Corporations........................................................70
Taxes.................................................................71
General..........................................................71
Capital Gains and Losses.........................................71
Two Percent Floor on Miscellaneous Itemized Deductions...........71
Alternative Minimum Tax..........................................71
Partnership Tax Returns and Tax Information...........................72
IRS Audit of the Partnership..........................................72
Interest and Penalties................................................73
Foreign Tax Considerations............................................73
Partnership Anti-Abuse Rules..........................................74
Future Federal Income Tax Changes.....................................75
State Taxes...........................................................75
Need for Independent Advice...........................................75
ERISA CONSIDERATIONS........................................................76
Fiduciaries Under ERISA...............................................76
Prohibited Transactions Under ERISA and the Code......................77
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"Plan Assets".........................................................77
Other ERISA Considerations............................................78
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS..............................................80
SUMMARY OF THE PARTNERSHIP AGREEMENT........................................81
The Units.............................................................81
Nonassessability of Units.............................................81
Liability of Limited Partners.........................................81
Allocations and Distributions.........................................81
Responsibilities of the General Partner...............................81
Records and Reports...................................................82
Meetings of the Partners..............................................82
Voting Rights of Limited Partners.....................................82
Roll-Ups and Conversions..............................................83
Power of Attorney.....................................................83
Partnership Term......................................................84
INVESTOR SUITABILITY STANDARDS..............................................84
Net Worth/Income......................................................84
Subscribers' Representations and Warranties...........................86
Special Limit on Ownership of Units by Benefit Plan...................86
PLAN OF DISTRIBUTION........................................................87
General...............................................................87
Offering of Units.....................................................87
Escrow Arrangements and Fundings......................................88
Subscription for Units................................................89
SALES MATERIAL..............................................................89
REPORTS TO LIMITED PARTNERS.................................................90
LEGAL MATTERS...............................................................90
EXPERTS.....................................................................91
FURTHER INFORMATION.........................................................91
GLOSSARY....................................................................91
INDEX TO FINANCIAL STATEMENTS...............................................99
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SUMMARY OF THE OFFERING
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus. For definitions of certain
capitalized terms used in this Prospectus, see "Glossary."
The Partnership. The Partnership was formed on April 17, 1997, under the
Pennsylvania Revised Uniform Limited Partnership Act ("Pennsylvania Act") and is
governed by the terms of the Partnership Agreement included herein as Appendix I
to this Prospectus ("Partnership Agreement"). Investors purchasing Units will
become limited partners in the Partnership ("Limited Partners"), and will be
entitled to share in the Partnership's Net Profits, Net Losses and distributions
of Cash Flow and Net Disposition Proceeds. The management of the business of the
Partnership is entrusted to the General Partner who will manage and control the
affairs of the Partnership and will have general responsibility and ultimate
authority over matters affecting the Partnership. See "Summary of the
Partnership Agreement" and "Fiduciary Responsibility of the General Partner."
General Partner. The General Partner of the Partnership is Commonwealth
Income & Growth Fund, Inc., a Pennsylvania corporation, with its principal place
of business located at 1160 West Swedesford Road, Berwyn, Pennsylvania 19312
(telephone 610-647-6800). The General Partner is 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."). Affiliates of the General Partner have sponsored
several prior private equipment leasing programs and two prior public equipment
leasing programs. See "Conflicts of Interest," "Management" and "Appendix II-
Prior Performance Tables."
Business of the Partnership. The Partnership will acquire computer
peripheral and other similar capital equipment ("Equipment") which will be
leased, or sold under Conditional Sales Contracts (an agreement in which the
seller of Equipment holds title to the Equipment until the purchase price is
paid), primarily to U.S. corporations and other institutions. The Partnership
will use a substantial portion of the proceeds of the Offering and the proceeds
of debt financing (not to exceed 30% of the expected aggregate cost of the
Equipment to be owned by the Partnership, or subject to Conditional Sales
Contracts) to acquire Equipment. The Partnership will also use excess Cash Flow,
Net Disposition Proceeds from the sale of Equipment coming off lease and the
proceeds of debt financing to purchase additional Equipment from time to time
throughout the operational phase of the Partnership. It is anticipated that most
of the Equipment will be subject to Operating Leases (short term leases under
which the Partnership will normally receive aggregate rental payments in an
amount less than the purchase price of the Equipment). At the end of initial
Operating Leases, the Partnership will either re-lease or sell Equipment.
Substantially all of the Equipment will be manufactured by, or compatible with,
equipment manufactured by IBM. Although not currently anticipated, the
Partnership may also lease Equipment under Full Payout Net Leases or sell
Equipment pursuant to Conditional Sales Contracts. See "Risk Factors" and
"Investment Objectives and Policies - Types of Equipment" and "Description of
Leases." The Partnership intends to purchase only Equipment which is subject to
a lease or Conditional Sales Contract, or for which a lease or Conditional Sales
Contract will be entered into concurrently with the Partnership's acquisition of
the Equipment. The Partnership intends to dispose of all its assets in
approximately 10 years from the Closing Date.
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Compensation to General Partner and Affiliates. The General Partner and its
Affiliates, including Commonwealth Capital Securities Corp., will receive
substantial fees and compensation from the offering of Units hereunder and from
the operations of the Partnership, regardless of profitability and, in most
cases, prior to any distributions to Limited Partners. See "Compensation of
General Partner and Affiliates."
Leverage. The Partnership may borrow a portion of the cost of the Equipment
which it purchases. The aggregate amount of indebtedness which the Partnership
may incur will be limited to 30% of the aggregate cost of the Equipment owned by
the Partnership, or subject to Conditional Sales Contracts, 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. There are no borrowing limits with respect to any particular item of
Equipment. All of the Partnership's borrowings will be non-recourse to the
Partnership and secured by Equipment. Any debt incurred will be fully amortized
over the term of the initial lease or Conditional Sales Contract to which the
Equipment securing the debt is subject. See "Investment Objectives and Policies
- -Borrowing Policies" and "Refinancing Policies."
Distributions to Limited Partners. Distributions to the Limited Partners of
the Partnership are expected to commence not later than the close of the first
full calendar quarter after the receipt of the Minimum Subscription Amount and
will be paid quarterly thereafter. There can be no assurance, however, as to the
date on which distributions will commence or the amount of any distributions. In
addition, Limited Partners who purchase a minimum of 250 Units ($5,000) have the
option upon subscription to elect, for a fee, to receive distributions, paid in
arrears, on a monthly basis. In the future, the General Partner, in its sole
discretion, may elect to pay distributions to all Limited Partners on a
quarterly basis. "Allocations and Distributions - Distributions of Cash
Available for Distribution" for a description of the timing and anticipated
amount of any such distributions.
The Offering. The offering price for each Unit is $20 and the minimum
investment is $2,500 ($1,000 for Individual Retirement Accounts and Qualified
Plans). The Partnership will seek to raise a minimum of $1,500,000 (75,000
Units) and a maximum of $15,000,000 (750,000 Units) in the Offering. If the
Minimum Subscription Amount is not received by July 25, 1998, the Offering
will terminate, Subscribers' funds will be returned and no Subscribers will
be admitted to the Partnership. If the Minimum Subscription Amount is
received prior to July 25, 1998, Subscribers will be admitted to the
Partnership upon the Partnership's receipt of their Subscription funds and
the Offering will continue until July 25, 1999. See "Plan of Distribution."
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Transferability of Units. There is no public market for the Units and the
General Partner expects that no market will develop. In addition, the Units will
be transferable only with the consent of the General Partner, which consent
will not be unreasonably withheld. The General Partner generally intends to
permit transfers and redemptions of Units of up to five percent of the total
outstanding interests in the Partnership's capital or profits in any one
year. In addition, in deciding whether a proposed transfer can be made, the
General Partner will consider whether the transfer will have an adverse
affect on the Partnership's federal tax status as a partnership.
See "Transferability of Units."
Redemption Provision. Upon the conclusion of the 30-month period
immediately following the termination of the Offering, the Partnership may,
at the General Partner's sole discretion, redeem up to two percent of the
outstanding Units that may be tendered each year. The making of a request for
redemption by the Limited Partner is completely voluntary. The purchase price
paid by the Partnership for outstanding Units will be equal to 105% of the
amount Limited Partners paid for the Units, less the amount of cash
distributions Limited Partners have received relating to such Units. The
redemption price formula will be calculated without reference to the fair
market value of a Unit. See "Transferability of Units Redemption Provision."
Termination of the Partnership. In the ninth year of operations of the
Partnership, the General Partner intends to begin the dissolution and
liquidation of the Partnership in an orderly fashion, unless the Partnership is
terminated earlier upon sale of all of the Equipment or by certain other events.
The term of the Partnership may be extended if the General Partner in its
discretion believes that such extension would enable the Partnership to dispose
of its assets on terms more favorable than those it would otherwise be able to
obtain. In no event will the term of the Partnership continue beyond December
31, 2009. See "Summary of the Partnership Agreement."
Depreciation. The Equipment will be eligible for different methods and
periods of cost recovery ("Depreciation") depending on various factors,
including the type of Equipment and the nature of lessees of the Equipment. See
"Income Tax Considerations - Cost Recovery and Depreciation."
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RISK FACTORS
An investment in the Partnership involves various risks. Prospective
investors should consider the following factors, among others discussed in this
Prospectus, before making a decision to invest in the Partnership.
PARTNERSHIP RISKS
Reliance on the General Partner and Conflicts of Interest. The Partnership
will be managed exclusively by the General Partner. Limited Partners are not
permitted to take part in the management of the Partnership. The success of the
Partnership, to a large extent, will depend on the quality of its management,
particularly as it relates to Equipment acquisition, releasing and disposition.
The General Partner, in turn, is dependent on its key personnel; the General
Partner has no employment agreements with or life insurance policies on, any
such key personnel. In certain instances the Partnership's interests may
conflict with those of the General Partner or its Affiliates. See "Conflicts of
Interest," "Management," and "Investment Objectives and Policies."
Limited Partners have limited voting rights on matters affecting the
Partnership's business since they are not permitted to take part in the
management of the Partnership. For any matter submitted to the Limited Partners,
the affirmative vote of at least a Majority in Interest of the Limited Partners
is required for approval. See "Summary of the Partnership Agreement - Voting
Rights of Limited Partners."
Significant Fees Paid to the General Partner and Affiliates. The General
Partner and its Affiliates, including Commonwealth Capital Securities Corp.,
will receive substantial fees in connection with the sale of Units and the
acquisition and management of Equipment by the Partnership. Some fees will be
paid irrespective of the amount of distributions paid to Limited Partners and
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. See
"Compensation of General Partner and Affiliates."
Limited Transferability of Units; Possibility of Significant Discount.
Prior to this Offering, there has been no public market for the Units, and the
Units cannot be pledged or transferred without the consent of the General
Partner, will not be unreasonably withheld. The General Partner
does not expect a public market for Units to develop. The General Partner
intends to limit the number of transfers to no more than that number permitted
by one of the safe harbors available under the Code and applicable Treasury
Regulations to prevent the Partnership from being treated as a publicly traded
partnership. Generally, these safe harbors require that all nonexempt transfers
and redemptions of Units in any calendar year not exceed two percent of the
outstanding interests in the capital or profits of the Partnership. In
addition, in deciding whether a proposed transfer can be made, the General
Partner will consider whether the transfer will have an adverse affect on the
partnership's federal tax status as a partnership. A Limited Partners' right
to tender the redemption is completely voluntary. Consequently, investors in
the Partnership may not be able to liquidate their investments in the event of
an emergency. Moreover, the Units may not be readily acceptable as collateral
for a loan. Therefore, Limited Partners must be prepared to hold their Units
for the life of the Partnership and may be able to resell their Units, if at
all, only at a discount to the offering price, which may be significant.
Return of Capital. During the life of the Partnership, a portion of the
distributions to Limited Partners will be a return of capital.
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Prior Experience of the General Partner. The General Partner has previously
sponsored two limited partnerships which offered securities to the public in an
offering registered under the Securities Act of 1933, as amended. These previous
partnerships are in their operational phase and have investment objectives
substantially identical to the Partnership's. The General Partner will
provide Limited Partners with the most recent form 10-Ks for the two prior
programs. See "Conflicts of Interest."
Limited Contribution to Partnership by General Partner; Reduction of
Proceeds Available for Investment. The General Partner has contributed $1,000 to
the capital of the Partnership for its interest in the Partnership. Therefore,
contributions by the Limited Partners and the economic risks borne by them will
be substantially greater, in proportion to the interests owned and benefits
received by them, than the contribution by the General Partner, in proportion to
the interest owned and benefits received by the General Partner. Approximately
15.1% (assuming the maximum amount of are raised) to 15.4% (assuming the minimum
amount of proceeds are raised) of the proceeds from the sale of the Units will
be used to pay Front-End Fees. Accordingly, the amount of the proceeds available
to the Partnership for investment in Equipment will be less than the total
amount paid by the Limited Partners for their Units. See "Estimated Use of
Proceeds."
No Assurance of Successful Operations. The Partnership was formed on April
17, 1997 and has no operating history. No assurance can be given that the
Partnership's operations will be successful or that it will meet its stated
investment objectives. Specifically, there is no assurance that cash will be
available for distribution to investors.
Liability of Limited Partners. In general, limited partners in a
partnership are not liable for partnership obligations unless they take an
active part in the control of the business of the partnership. The Partnership
Agreement provides certain rights to the Limited Partners to remove and replace
the General Partner, to amend the Partnership Agreement, to approve or
disapprove the sale or other disposition at one time of all the Partnership's
property, to dissolve the Partnership and to take certain other actions. The
Pennsylvania Act provides that a limited partner "does not participate in the
control of the business" by exercising such rights and that even if a limited
partner participates in the control of the business, he is liable only to
persons who transact business with the partnership reasonably believing, based
on the limited partner's conduct, that he is a general partner. However, there
is uncertainty as to which state's partnership laws may be applicable to
partnerships that are organized under the laws of one state and that own
property and have partners residing in other states. Thus it is conceivable that
the existence or the exercise of these rights under certain circumstances could
possibly cause the Limited Partners to be deemed to be liable as general
partners under the laws of states other than Pennsylvania. If the Limited
Partners were deemed to be liable as general partners, they would be personally
liable for Partnership obligations.
In accordance with the Pennsylvania Act, Limited Partners will be obligated
to return any distribution from the Partnership to the extent that, after giving
effect to the distribution, all liabilities of the Partnership (other than
nonrecourse liabilities and liabilities to Limited Partners on account of their
interests in the Partnership) exceed the fair value of its assets (including, as
to assets serving as security for nonrecourse liabilities, that portion of the
fair value of such assets which exceeds the amount of such nonrecourse
liabilities). See "Summary of the Partnership Agreement - Liability of Limited
Partners."
Waiver of Fiduciary Duty. The Partnership Agreement provides that the
General Partner and its Affiliates may allocate properities or equipment to
other funds or other programs based on which program has had funds the
longest, the cash/leverage available, the equipment type, the term of the
lease, and the percentage that each lessee represents to the total assets of
the fund or program. The allocation of property and equipment, may relieve the
General Partner and its Affiliates from an aspect of their fiduciary duty to the
Partnership.
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<PAGE>
BUSINESS RISKS
Certain Risks of the Equipment Leasing Business. The business of leasing
and investing in Equipment is subject to many risks including the following
which could adversely impact on the return to investors: (i) the availability of
satisfactory Equipment, (ii) the increasing rate at which Equipment of the type
in which the Partnership intends to invest becomes obsolete, (iii) the potential
inability of the Partnership to lease Equipment coming off lease or following a
default by the lessee and (iv) the possibility of defaults by lessees.
Risks of Equipment Operations. Equipment ownership and operation is subject
to many risks, including the possible inability to keep all the Equipment under
leases yielding revenues which, after payment of operating and all associated
expenses, provide, together with any anticipated sale proceeds, a return
acceptable to the Equipment owner. The ability to operate Equipment profitably
may be adversely affected by various economic and business factors. Most of
these factors are beyond the control of the General Partner and the lessees of
the Equipment, and include:
(a) general economic conditions, such as inflation, fluctuations in general
business conditions and availability of financing;
(b) fluctuations in supply and demand for various types of Equipment
resulting from, among other things, obsolescence and changes in the methods or
economics of a particular mode of Equipment sector resulting in reduced lease
revenues;
(c) increases in maintenance expenses, taxes and insurance costs
attributable to the Equipment;
(d) the risk of an uninsured or uninsurable loss with respect to the
Equipment or an insured loss for which insurance proceeds are inadequate,
resulting in a possible loss of invested capital in and any profits anticipated
from such Equipment;
(e) bankruptcies, contract disputes or defaults in payment by lessees of
the Equipment resulting in delays in foreclosures and uncollectible accounts;
and
(f) loss of revenues during the period when Equipment is not being
utilized.
Risks Inherent in Operating Leases. The Partnership intends to invest
primarily in Equipment subject to Operating Leases. Operating Leases typically
will have terms of 12 to 36 months and provide that the Partnership will receive
aggregate payments from the lessee in an amount that is less than the
Partnership's Purchase Price of the Equipment. In order to recover the
Partnership's Purchase Price of such Equipment, the Partnership on termination
of an Operating Lease must (i) obtain a satisfactory renewal from the original
lessee or other user, (ii) lease the Equipment to a new lessee or other user or
(iii) sell the Equipment for a price which, when combined with previous lease
payments, equals or exceeds the Purchase Price. There can be no assurance that
the Partnership will successfully accomplish any of these alternatives and, as a
result, the Partnership may not realize anticipated revenues and may fail to
recover the Partnership's investment in the Equipment. Shorter-term Operating
Leases may increase these risks. See "Investment Objectives and Policies."
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<PAGE>
Unspecified Equipment and Leases. The Partnership has not identified any
Equipment for acquisition by the Partnership. Until Equipment is identified in
supplements to this Prospectus or in quarterly and/or annual investor reports,
investors will have no information about any Equipment to be purchased by the
Partnership and must rely solely upon the judgment and ability of the General
Partner with respect to the selection and evaluation of any as yet unidentified
Equipment. Information concerning the type of equipment leased by the two
previous partnerships sponsored by the General Partner can be found in the
10-Ks for those programs. Moreover, although it does not presently intend to
do so, the General Partner is authorized to invest in telecommunication and
medical technology equipment which would be new types of investments for the
General Partner. See "Investment Objectives and Policies."
Equipment Obsolescence. Computer Equipment purchased by the Partnership may
depreciate in value and/or become obsolete as new technology is developed. In
the event of such an occurrence, the Equipment purchased by the Partnership may
have little or no residual value resulting in insufficient assets for the
Partnership to distribute over the term of the Partnership cash in an aggregate
amount equal to the invested capital of the Limited Partners. Consequently, it
may be appropriate for Limited Partners to construe a portion of their annual
cash flow as being return of capital.
Risk of Used Equipment. Although it is currently anticipated that the
Partnership will acquire predominantly new equipment, the Partnership may
purchase used equipment. There is no limitation on the amount of used equipment
which the Partnership may acquire. The acquisition of used equipment may
increase the risk that such equipment will become obsolete so that it will have
little or no residual value.
Difficulty and Delays in Acquiring and Leasing Equipment. The Partnership
will attempt to acquire and lease Equipment as soon as practicable after the
Initial Closing. Due to competition with other lessors, the Partnership may
experience difficulty in obtaining and leasing appropriate Equipment. The
Partnership's ability to acquire and lease Equipment may also be adversely
affected by interest rates, the availability of capital and long term corporate
debt, or increases in corporate liquidity, since prospective lessees may prefer
to raise capital, incur debt or use internally-generated cash to purchase
Equipment rather than enter the leasing market. An overall decline in corporate
expansion or demand for capital goods may adversely affect the Partnership's
ability to invest the proceeds of this offering. Delivery of Equipment may be
delayed due to production delays, strikes, work stoppages or other problems
encountered by manufacturers. Delays in acquiring Equipment will reduce the
anticipated benefits to investors from the acquisition of Units.
Risks of Leverage and Availability of Financing. Certain investments of the
Partnership may be financed in part with non-recourse debt borrowed by the
Partnership. Although borrowing increases the funds with which the Partnership
can acquire Equipment, it also increases the risks of an investment in the
Partnership because, in the case of nonrecourse debt, if debt service payments
are not made when due, the Partnership may sustain a loss of its investment in
the Equipment which secures that debt and the Limited Partners may experience
adverse tax consequences. See "Income Tax Considerations - Allocation of
Partnership Income, Gains, Losses, Deductions and Credits." In addition, lenders
from whom the Partnership borrows may seek to impose restrictions on the future
borrowing, distribution, and operating policies of the Partnership. Moreover,
debt service requirements may reduce the amount of Cash Available for
Distribution to Limited Partners. The General Partner, in its discretion, may
cause the Partnership to incur indebtedness up to an amount no greater than 30%
of the aggregate cost of all Equipment owned by the Partnership, or subject to
Conditional Sales Contracts, 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. There are no borrowing
limits with respect to any particular item of Equipment. See "Investment
Objectives and Policies - Borrowing Policies."
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<PAGE>
Money market fluctuations have affected the availability and cost of loans
that may finance the purchase of Equipment. The General Partner is unable to
predict the nature of the money market when the Partnership seeks financing and
any future tightening of credit controls will make obtaining financing more
difficult and more costly. In such event, the Partnership may be forced to
purchase Equipment using only or mostly the cash proceeds from this Offering,
with little or no borrowings. This would make it more difficult for the
Partnership to achieve the desired diversification of Equipment and would
prevent the Partnership from spreading the risk of unproductive investments over
a greater number of items of Equipment. However, if the Partnership purchases an
item of Equipment for cash and, thereafter, suitable financing becomes
available, the Partnership intends to finance such Equipment and to invest the
proceeds of that financing in additional Equipment or distribute such proceeds
to the Limited Partners. In addition, future credit restrictions may adversely
affect the ability of the Partnership to sell or refinance Equipment and may
affect the terms of Equipment sales.
Lack of Diversification. The Partnership will concentrate on acquiring
computer peripheral equipment and other similar capital equipment and will not
diversify the assets in which it invests beyond those classes of Equipment.
Accordingly, adverse developments in the market for such Equipment will have a
more significant adverse consequence to the Partnership than if it had acquired
a portfolio that included a greater variety of asset classes. To the extent that
this Offering results in the sale of significantly less than the maximum number
of Units offered, the ability of the Partnership to diversify its risks will be
reduced, and a default by any lessee would have a more significant adverse
consequence than if greater diversification had been achieved. The General
Partner currently anticipates that a substantial majority of the Partnership's
Equipment will be manufactured by IBM. Thus, adverse developments in the
business or prospects of IBM may have a significantly greater adverse impact
on the Partnership than if Equipment made by a more diverse group of
manufacturers were acquired.
Uncertainty of Residual Value of Equipment. The ultimate cash return from
an investment in Units will depend, in part, upon the residual value of
Equipment at the termination of its Leases. Residual value is the amount
realized upon the sale or re-lease or other contract of Equipment with respect
to which an original lease has expired. The residual value depends on, among
other factors, the condition of the Equipment, the cost of comparable new
Equipment, the technological obsolescence of the Equipment and supply and demand
regarding the Equipment. See "Investment Objectives and Policies."
Defaults by Lessees. The default by a lessee under a lease, or a buyer
under a Conditional Sales Contract, may cause Equipment to be returned to the
Partnership at a time when the General Partner or its agents may be unable to
arrange promptly for the re-leasing or sale of the Equipment. Although the
creditworthiness of potential lessees and other contracting parties will be
reviewed (including a review of financial statements, credit history and public
debt record), there can be no assurance that a default will not occur. Thus, a
default may cause the Partnership to lose anticipated revenues and inhibit its
ability to recover its investment in the Equipment. If any indebtedness is
secured by the returned Equipment and rental revenues and sales proceeds
generated by other items of Equipment are not sufficient to service such
indebtedness, the lender may foreclose on and acquire ownership of the returned
Equipment. In addition, lessees, or buyers under Conditional Sales Contracts, of
Equipment encountering financial difficulties may voluntarily or involuntarily
become subject to the provisions of the Bankruptcy Code or similar laws of
foreign nations, which could delay or prevent the Partnership from taking the
Equipment back upon default. See "Investment Objectives and Policies --
Description of Leases."
Tort Liability. In leasing the Equipment, the Partnership will, in certain
instances, be exposed to liability for damages resulting from their actions or
inactions independent of contract. Although the Partnership
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<PAGE>
will use its best efforts to minimize the possibility and exposure of such tort
liability, no assurances can be given that the Partnership's assets will be
protected against any such claims.
Risks of Joint Investments. The Partnership may participate on a co-tenancy
or partnership basis in investments in certain Equipment. This involves risks
not otherwise present if the Partnership were the sole owner of the Equipment.
These risks include the possibility that the Partnership's co-investors might
become bankrupt, that such co-investors may at any time have economic or
business interests or goals which are inconsistent with those of the
Partnership, or that such co-investors may be in a position to take action
contrary to the instructions or the requests of the Partnership or contrary to
the Partnership's policies or objectives. There is a potential risk of impasse
in joint venture decisions since neither program may control and while one
program may wish to purchase Equipment from its co-joint venturer, it may not
have sufficient resources to do so.
Competition. The Equipment leasing industry is highly competitive. The
Partnership's competitors include independent leasing companies, affiliates of
banks and insurance companies and other partnerships. Many of these entities may
have larger Equipment inventories, greater financial resources and more
experience in the industry than the Partnership or the General Partner. See
"Conflicts of Interest - Competition with General Partner and Affiliates;
Competition for Management's Time" and "Investment Objectives and Policies -
Competition."
Dependence on Manufacturers and IBM. The General Partner currently
anticipates that a substantial majority of the Partnership's Equipment will be
manufactured by IBM. Accordingly, the Partnership's ability to lease, re-lease
or sell its equipment may be adversely affected by actions taken or not taken
by, or the business or prospects of, IBM. The Partnership's ability to release
or sell the Equipment at the end of the lease term could be adversely affected
by the failure of an equipment manufacturer to honor its product warranties or
to provide necessary parts and servicing, the decline of the manufacturer's
reputation in the industry, the discontinuance of the manufacture of such
Equipment or the termination of the manufacturer's business. The Partnership may
enter into contracts with manufacturers or others pursuant to which such parties
may perform certain services related to Equipment, including refurbishing and
storing Equipment and performing related services. Thus, the ability of the
Partnership to meet its investment objectives would be partially dependent on
the satisfactory performance of these functions by such parties. See "Investment
Objectives and Policies - Types of Equipment."
Limited Experience of Dealer-Manager. Although the individuals
associated with and employed by Commonwealth Capital Securities Corp. are
experienced in the offering of securities, Commonwealth Capital Securities
Corp. has limited experience as a Dealer-Manager.
TAX RISKS
General. In view of the complexity of the tax aspects of investing in a
partnership that may invest in many different types of equipment, and
particularly in view of the fact that the tax situation of each investor will
not be the same, ALL PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX
ADVISORS with specific reference to their own tax situation prior to making an
investment in the Partnership. The Partnership is not intended to be a "tax
shelter" and Limited Partners should not expect a tax benefit from substantial
tax deductions or losses from the Partnership. The General Partner anticipates,
however, that the Partnership may distribute cash periodically to the Limited
Partners, a portion of which may not be taxable to the Limited Partners upon
receipt. Trustees and other fiduciaries of individual retirement accounts,
qualified pension, profit sharing or stock bonus plans, and other tax exempt
entities should be aware that an investment in Units will result in unrelated
business taxable income ("UBTI"). See "Income Tax Considerations - Investment by
Tax Exempt Entities" and "ERISA Considerations" below. Each Limited
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Partner, together with his tax advisor, should carefully consider all of the tax
aspects of an investment in the Partnership, including, specifically, the risks
discussed below.
Federal Tax Considerations in General. A ruling from the IRS has not been
obtained, and the General Partner does not presently intend to apply for a
ruling, with respect to any of the tax considerations associated with an
investment in Units. Availability of the tax treatment described in this
Prospectus may be challenged by the IRS upon audit of the tax return of either
the Partnership or a Partner. It should be noted that the determination of items
of Partnership income, gain, loss, deduction and credit will be made at the
Partnership level rather than in separate proceedings with the Limited Partners,
and Limited Partners generally will be required to report Partnership items
consistent with the Partnership's tax returns.
For any year in which the Partnership has income in excess of deductions,
each Limited Partner will be required to report his share of such income on his
federal and state tax returns and will be responsible for the payment of taxes
thereon. Such taxes may be greater than cash distributions received by the
Limited Partner from the Partnership in one or more taxable years.
The primary tax benefits associated with an investment in Units are the
"tax-deferred" distributions (that is, distributions which are not subject to
current taxation) which may be available as a result of cost recovery or
depreciation deductions. The availability of tax-deferred distributions may be
reduced by the imposition of the alternative minimum tax. The IRS may
successfully challenge the amount or timing of the depreciation deductions
claimed by the Partnership, with the result that the depreciation deductions of
the Partnership may be reduced and Partnership income may be increased (or loss
may be decreased) for a taxable year. The tax considerations associated with an
investment in the Partnership could be affected by a number of different factors
which are described in detail under the caption "Income Tax Considerations."
Any adjustment to a tax return of the Partnership as a result of an audit
by the IRS may result in adjustment to the tax returns of the Limited Partners,
and may result in an examination of other items in such returns unrelated to the
Partnership, or an examination of prior years' tax returns. Limited Partners
could incur substantial legal and accounting costs in contesting any challenge
by the IRS, regardless of the outcome.
Partnership Status. The General Partner has not requested, and does not
intend to request, a ruling from the IRS that the Partnership will be treated as
a partnership for tax purposes and not as an association taxable as a
corporation. Except as otherwise provided below, however, the Partnership may
elect to be taxed as a partnership for federal income tax purposes under the
recently promulgated "check the box" Treasury Regulations. These Treasury
Regulations generally allow newly formed unincorporated entities (such as the
Partnership) to choose whether to be taxed as a partnership or a corporation for
federal income tax purposes. Moreover, in the absence of any affirmative
election, to the extent that an unincorporated entity formed under United States
law (i.e., a domestic entity) has more than one owner, it generally will be
treated under the applicable default rules of these Regulations as a partnership
for federal income tax purposes.
Notwithstanding the foregoing, Section 7704 of the Code treats certain
partnerships, the interests of which are deemed to be "publicly-traded," as
corporations. While the General Partner will use its best efforts to limit the
type and number of transfers of Units to those which will allow the Partnership
to satisfy at least one of the safe harbors under Treasury Regulation Section
1.7704-1, there is no assurance that the Partnership will satisfy one of these
safe harbors. Certain transfers of Units could occur which would cause the
Partnership to fall outside these safe harbors. While the failure to meet a safe
harbor will not create a presumption that a partnership is publicly-traded, no
assurance can be given that if the amount and type of trading in the Units
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<PAGE>
were to fall outside the safe harbors, the IRS would not claim that the
Partnership was a "publicly-traded partnership" taxable as a corporation. See
"Transferability of Units" and "Income Tax Considerations - Classification as a
Partnership."
With regard to its tax status, the Partnership will rely upon the opinion
of Blank Rome Comisky & McCauley, counsel to the Partnership, to the effect that
the Partnership will be treated as a partnership for tax purposes
notwithstanding the fact that an IRS ruling will not be sought. The opinion is
subject to certain qualifications and representations of the General Partner,
and such opinions of counsel are not binding on the IRS.
If the IRS were successful in characterizing the Partnership as a "publicly
traded" partnership taxable as a corporation, then the Partnership would be
subject to tax on its net income (without deductions for cash distributions to
Limited Partners), the Limited Partners would be subject to tax on the
distributions irrespective of their tax basis in their Units, and such
distributions would be recharacterized as portfolio income to the Limited
Partners.
Partnership Allocations. If the allocations of Partnership Net Profits and
Net Losses to the Limited Partners made pursuant to the Partnership Agreement
were successfully challenged by the IRS, Limited Partners may be required to
recognize additional taxable income without any corresponding increase in
distributions of cash from the Partnership. Counsel to the Partnership has
rendered its opinion that the allocations of Partnership Net Profits and Net
Losses will be respected for federal income tax purposes. The opinion, however,
is subject to certain qualifications and representations of the General Partner,
and is not binding on the IRS.
Passive Activity Income and Losses Limitations. Limited Partners may not be
able currently to deduct Partnership Net Losses as a result of limitations on
the current utilization of passive activity losses. In addition, any portfolio
income generated by the Partnership may not be netted against Partnership tax
losses. See "Income Tax Considerations -Limitations on Utilization of
Partnership Losses - Passive Activity Losses Limitations." Finally, in the event
that interests in the Partnership are deemed to be "publicly-traded," otherwise
passive income will be treated as portfolio income which may not be netted
against Partnership tax losses or other passive losses, deductions, or credits
of the Limited Partner. Counsel to the Partnership has opined that the income
generated from the Partnership's leasing activities will constitute income from
a passive activity. Such opinion of counsel is subject to certain qualifications
and representations of the General Partner, and is not binding on the IRS.
The Partnership as the Owner of the Equipment. The Partnership intends to
structure each lease transaction so that the lease will be treated as a lease
rather than as a financing arrangement for tax purposes. If, however, the IRS
were successful in challenging the status of a lease by treating the lessee as
the owner of the subject item of Equipment and the Partnership as a secured
creditor, the Partnership would not be entitled to cost recovery or depreciation
deductions with respect to that item of Equipment. In addition, the Partnership
is permitted to enter into Full Payout Net Leases and to sell Equipment under
Conditional Sales Contracts. In the event the Partnership enters into such
arrangements, the Partnership will not be treated as the owner of such Equipment
and the Partners will not be entitled to depreciation or cost recovery
deductions with respect to such Equipment. See "Income Tax Considerations -
Ownership of Equipment - Lease versus Sale."
In addition, the IRS may assert upon audit that any pass-through entities
organized by the Partnership are associations taxable as corporations and, thus,
are the true owners of the Equipment for tax purposes. If
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the IRS were successful in such assertions, it would result in the imposition of
tax on such entities without deductions for distributions to the Partnership,
the taxation of distributions to the Partnership to the extent of such entity's
earnings and profits, and the recharacterization of such entities' distributions
to the Partnership. See "Income Tax Considerations - Ownership of Equipment -
Lease versus Sale."
Sale or Other Disposition of Equipment or Units-Tax Liability. A sale or
other disposition of Equipment or of a Limited Partner's interest in the
Partnership may result in a tax liability to the Limited Partner in excess of
any cash proceeds received by such Limited Partner. To the extent a Limited
Partner's federal tax liabilities exceed cash proceeds, such excess would be a
nondeductible cost to such Limited Partner.
State and Foreign Taxes. Limited Partners may be required to file tax
returns and pay state or local taxes, such as income, franchise or personal
property taxes, as a result of an investment in the Partnership, and any use of
the Equipment in a country other than the United States may subject Limited
Partners to income taxation in such country. See "Income Tax Considerations -
State Taxes", and "Income Tax Considerations - Foreign Tax Considerations."
Reliance on Existing Law. Tax benefits associated with an investment in
Units could be lost and/or substantial tax liabilities incurred by reason of
changes in the tax laws. Potential investors should be aware of tax legislation
currently pending before Congress and state legislatures and should consult
their own tax advisors as to the effect such legislation would have on their
potential investment in Units. Furthermore, there is no assurance that changes
in the interpretation of applicable tax laws will not be made by administrative
or judicial action which will adversely affect the tax consequences of an
investment in Units. Administrative or judicial changes may or may not be
retroactive with respect to transactions entered into prior to the date on which
they occur. Periodic consultations with a professional advisor may be necessary
given the possibility of such changes.
Investment by Tax Exempt Entities. Investment in the Partnership by a tax
exempt entity, including a qualified employee pension or profit sharing trust or
an individual retirement account (a "Tax Exempt Entity"), will result in the
receipt of UBTI. If a Tax Exempt Entity realizes UBTI (net of deductions
attributable to such UBTI) from all sources in excess of $1,000 per year, it
will incur federal income tax liability with respect to such UBTI. Furthermore,
if a Tax Exempt Entity has at least $1,000 of gross income that is included in
the calculation of UBTI for any year, the Tax Exempt Entity will be obligated to
file a tax return for such year. See "Income Tax Considerations - Investment by
Tax Exempt Entities."
ERISA Considerations. Fiduciaries of pension, profit sharing, stock bonus
or other employee benefit plans subject to Title I of ERISA ("ERISA Plans"),
fiduciaries of tax-qualified retirement plans not subject to ERISA ("Non-ERISA
Plans") and IRA owners should consider whether (i) an investment in Units is in
accordance with the documents and instruments governing the ERISA or Non-ERISA
Plan or IRA (hereinafter referred to as "Benefit Plan"), (ii) the purchase of
Units is prudent in light of the potential difficulties that may exist in
liquidating Units, (iii) an investment in Units will provide sufficient cash
distributions in light of the Benefit Plan's likely required benefit payments or
other distributions, (iv) the evaluation of the investment in Units has properly
taken into account the potential costs of determining and paying any amounts of
federal income tax that may be owed on UBTI in connection with the Units, (v) in
the case of a fiduciary of an ERISA Plan, that the investment, unless made in a
self-directed investment arrangement, is made solely in the interests of
participants in the ERISA Plan, and (vi) the fair market value of Units will be
sufficiently ascertainable, and with sufficient frequency, to enable the Benefit
Plan to value its assets in accordance with the rules and policies
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of the Benefit Plan. In addition, if the Benefit Plan has certain relationships
with the Partnership, the General Partner or its Affiliates (other than as a
Limited Partner), investment in the Partnership may involve a "prohibited
transaction" under the Code or ERISA. See "ERISA Considerations - Prohibited
Transactions Under ERISA and the Code."
To avoid classification of a pro rata portion of the Partnership's
underlying assets as "plan assets" of investors which are Benefit Plans, the
Partnership intends to restrict the ownership of Units by Benefit Plans to less
than 25% of the total value of outstanding Units at all times. See "ERISA
Considerations - Plan Assets."
Neither the General Partner nor the Partnership shall have any liability or
responsibility to any tax exempt Limited Partner or any other Limited Partner
for any tax, penalty or other sanction or costs or damages arising as a result
of there being a prohibited transaction or as a result of Partnership assets
being deemed plan assets of a tax exempt Limited Partner under the Code or ERISA
or other applicable law.
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ESTIMATED USE OF PROCEEDS
The following table sets forth information concerning the estimated use of
proceeds of the offering of Units. Except as otherwise disclosed in this
Prospectus, the Partnership will not engage in transactions with the General
Partner or any of its Affiliates and all items of compensation are disclosed in
the table below or under the caption "Compensation of General Partner and
Affiliates."
<TABLE>
<CAPTION>
Minimum Proceeds Maximum Proceeds
(75,000 Units) (750,000 Units)
------------------ ------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Gross Offering Proceeds $1,500,000 100.0% $15,000,000 100.0%
Selling Commissions (1) 120,000 8.0% 1,200,000 8.0%
Dealer Manager Fee 15,000 1.0% 150,000 1.0%
Organizational and Offering Expenses (2) 45,000 3.0% 400,000 2.7%
------ ----- ----------- -----
Total Offering Expenses 180,000 12.0% 1,750,000 11.7%
Net Proceeds to Partnership
Available for Investment 1,320,000 88.0% 13,250,000 88.3%
Equipment Acquisition Fees (3) 50,769 3.4% 509,616 3.4%
Investment in Equipment (4) 1,269,231 84.6% 12,740,384 84.9%
</TABLE>
- ----------
(1) The amount of the Underwriting Commissions (which include the selling
commissions and Dealer Manager fees) will range between four percent and
nine percent of Capital Contributions based upon the quantity of Units sold
to a single investor. Gross Proceeds of the Offering are calculated as if
all Units are sold at $20.00 per Unit and do not take into account any
reduction in selling commissions. See "The Offering -- Plan of
Distribution" for a description of commission discounts available for
certain large volume purchases of Units and for purchases by certain
employees of the General Partner, Dealer Manager, Participating Brokers
and their Affiliates. The Units are being offered to the public through
Commonwealth Capital Securities Corp., which will receive selling
commissions of up to eight percent on all sales of Units and will act as
Dealer Manager for which it will receive a Dealer Manager fee of one
percent on all sales of Units. The Dealer Manager is an Affiliate of the
General Partner. Other broker dealers may be engaged as Participating
Brokers to sell Units and reallowed selling commissions of up to eight
percent with respect to Units which they sell. In addition, all or a
portion of the Dealer Manager fee may be reallowed to certain
Participating Brokers for expenses incurred by them in selling the Units,
including reimbursement for bona fide expenses incurred in connection with
due diligence activities. See "The Offering -- Plan of Distribution" for a
more complete description of this fee.
(2) Consists of estimated legal, accounting and printing expenses; various
registration and filing fees; miscellaneous expenses related to the
organization and formation of the Partnership; and other costs incurred in
connection with the preparation, printing and distribution of this
Prospectus and other sales literature. See "Plan of Distribution." The
General Partner will be paid an organizational fee equal to
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<PAGE>
three percent of Capital Contributions up to $10,000,000, and two percent
of Capital Contributions in excess of $10,000,000, and will pay all
Organizational and Offering Expenses.
(3) An Equipment Acquisition Fee of four percent of the Purchase Price of
Equipment purchased by the Partnership will be payable by the Partnership
to the General Partner. Does not include Acquisition Fees payable with
respect to the purchase of Equipment with the proceeds of leverage or with
Retained Proceeds. The General Partner will also be paid a Debt Placement
Fee to the extent leverage is used to acquire Equipment. The Partnership
may not incur any indebtedness to acquire Equipment until the net proceeds
of the Offering are fully invested, or committed to investment, in
Equipment.
(4) Represents the Partnership's expected cash investment from Capital
Contributions in Equipment, excluding Acquisition Fees. Does not include
Equipment acquired with leverage or Retained Proceeds. Because the
Partnership's leases are expected to be on a "triple-net" basis, it is
anticipated that no permanent reserve for maintenance and repairs will be
established from the Offering proceeds. However, the General Partner, in
its sole discretion, may retain a portion of the Offering proceeds, Cash
Flow or Net Disposition Proceeds available to the Partnership for
maintenance, repairs and for any other currently unanticipated working
capital needs. In addition, the General Partner and Com Cap Corp. have
agreed that the General Partner or Com Cap Corp. will lend or contribute to
the Partnership an amount equal to 1.01% of the net Offering proceeds, if
needed, to meet the Partnership's expenses. Certain expenses associated
with the selection and acquisition of Equipment for the Partnership (such
as legal and accounting fees and expenses, travel and communication
expenses, brokerage fees and inspection fees and expenses) will be paid to
third parties and, accordingly, the amount available for the purchase of
Equipment will be reduced by the amount of such expenses. The amounts of
such fees are not ascertainable at this time.
-15-
<PAGE>
COMPENSATION OF GENERAL PARTNER AND AFFILIATES
The following table summarizes the types, estimated amounts and recipients
of compensation to be paid by the Partnership directly or indirectly to the
General Partner and its Affiliates. Some of these fees will be 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. Except as otherwise
disclosed in this Prospectus, the Partnership will not engage in transactions
with the General Partner or any of its Affiliates. As described under "Fiduciary
Responsibility of the General Partner," 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. As described below, the maximum
aggregate Front-End Fees to be paid during the first fiscal year of operations
without deduction of expenses are $2,539,933 (assuming the maximum number of
Units are sold and the maximum amount of leverage is incurred excluding fees
earned with Retained Proceeds).
-16-
<PAGE>
<TABLE>
<CAPTION>
Estimated Estimated
Amount Amount
Assuming Assuming
Minimum of Maximum of
Entity Receiving 75,000 Units 750,000 Units
Compensation Type of Compensation Are Sold Are Sold
- ------------------ ------------------------------------ ------------ ------------
OFFERING AND ORGANIZATION STAGE
<S> <C> <C> <C>
Commonwealth Underwriting Commissions. The $135,000 $1,350,000
Capital Securities Partnership will pay to the Dealer
Corp. Manager an aggregate amount of up
to nine percent of Capital
Contributions as Underwriting
Commissions after and only if the
required $1,500,000 Minimum
Subscription Amount is sold. The
Dealer Manager will pay other
broker-dealers ("Participating
Brokers") out of Underwriting
Commissions a selling commission
of up to eight percent of the
Capital Contributions from Units
sold by such Participating Brokers.
The amount of the Underwriting
Commissions will be determined
based upon the quantity of Units
sold to a single investor.
The General Organizational Fee. An Organization $45,000 $400,000
Partner Fee equal to three percent of the
first $10,000,000 of Limited
Partners' Capital Contributions and
two percent of the Limited
Partners' Capital Contribution in
excess of $10,000,000, as
compensation for the organization
of the Partnership. It is
anticipated that the Organizational
and Offering Expenses, which
include legal, accounting and
printing expenses; various
registration and filing fees;
miscellaneous expenses related to
the organization and formation of
the Partnership; other costs of
registration; and costs incurred in
connection with the preparation,
printing and distribution of this
Prospectus and other sales
literature will be approximately
$300,000. The General Partner will
pay all Organizational and Offering
Expenses, other than Underwriting
Commissions.
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
Estimated Estimated
Amount Amount
Assuming Assuming
Minimum of Maximum of
Entity Receiving 75,000 Units 750,000 Units
Compensation Type of Compensation Are Sold Are Sold
- ------------------ ------------------------------------ ------------ ------------
OPERATIONAL AND SALE OR LIQUIDATION STAGES
<S> <C> <C> <C>
The General Reimbursement of Expenses. The $15,000 $20,000
Partner General Partner and its Affiliates
and its are entitled, under Section 5.2 of
Affiliates the Partnership Agreement, to
reimbursement by the Partnership
for the cost of goods, supplies or
services obtained and used by the
General Partner in connection with
the administration and operation of
the Partnership from third parties
unaffiliated with the General
Partner. The amounts set forth on
this table are approximations of
reimbursable expenses for the first
year of the Partnership's operation
and do not include expenses
incurred in the offering of Units.
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
Estimated Estimated
Amount Amount
Assuming Assuming
Minimum of Maximum of
Entity Receiving 75,000 Units 750,000 Units
Compensation Type of Compensation Are Sold Are Sold
- ------------------ ------------------------------------ ------------ ------------
<S> <C> <C> <C>
The General Equipment Acquisition Fee. An $71,351 $716,217
Partner Equipment Acquisition Fee of four
percent of the Purchase Price of
each item of Equipment purchased as
compensation for the negotiation of
the acquisition of the Equipment
and the lease thereof or sale under
a Conditional Sales Contract. The
fee will be paid upon closing of
the Offering with respect to the
Equipment to be purchased by the
Partnership with the net proceeds
of the Offering available for
investment in Equipment except for
fees on the leveraged portion of
the Purchase Price which are paid
when the Equipment is purchased. If
the Partnership does not purchase
Equipment with all the net proceeds
of the Offering, the General
Partner will return a pro rata
portion of the fee to the
Partnership. If the Partnership
acquires Equipment in an amount
exceeding the net proceeds of the
Offering available for investment
in Equipment, the fee will be paid
when such Equipment is acquired.
The estimated amounts set forth in
this table include fees on
Equipment assuming the maximum
allowable leverage, but exclude
such fees earned on Equipment
purchased with Retained Proceeds.
Such excluded fees may be
significant in amount. Equipment
Acquisition Fees will be lower than
the estimated maximum if a lower
level of acquisition borrowing is
utilized.
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
Estimated Estimated
Amount Amount
Assuming Assuming
Minimum of Maximum of
Entity Receiving 75,000 Units 750,000 Units
Compensation Type of Compensation Are Sold Are Sold
- ------------------ ------------------------------------ ------------ ------------
<S> <C> <C> <C>
The General Debt Placement Fee. As compensation $5,351 $53,716
Partner for arranging Term Debt to finance
the acquisition of Equipment by the
Partnership, a fee equal to one
percent of such indebtedness;
provided, however, that such fee
shall be reduced to the extent the
Partnership incurs such fees to
third parties, unaffiliated with
the General Partner or the lender,
with respect to such indebtedness
and no such fee will be paid with
respect to borrowings from the
General Partner or its Affiliates.
The estimated amounts set forth in
this table assume the expected
maximum allowable leverage
($535,135 if the minimum number of
Units are sold and $5,371,620 if
the maximum number of Units are
sold), but exclude such fees earned
on refinancings or debt incurred
with respect to Equipment purchased
with Retained Proceeds and
borrowings.
The General Equipment Management Fee. A monthly Not Not
Partner fee equal to the lesser of (i) the determinable determinable
fees which would be charged by an at this time at this time
independent third party for similar
services for similar equipment or
(ii) the sum of (a) two percent of
(1) the Gross Lease Revenues
attributable to Equipment which is
subject to Full Payout Net Leases
which contain net lease provisions
plus (2) the purchase price paid on
Conditional Sales Contracts as
received by the Partnership and (b)
five percent of the Gross Lease
Revenues attributable to Equipment
which is subject to Operating
Leases.
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
Estimated Estimated
Amount Amount
Assuming Assuming
Minimum of Maximum of
Entity Receiving 75,000 Units 750,000 Units
Compensation Type of Compensation Are Sold Are Sold
- ------------------ ------------------------------------ ------------ ------------
<S> <C> <C> <C>
The General Equipment Liquidation Fee. With Not Not
Partner respect to each item of Equipment determinable determinable
sold by the General Partner (other at this time at this time
than in connection with a
Conditional Sales Contract), a fee
equal to the lesser of (i) 50% of
the Competitive Equipment Sale
Commission or (ii) three percent of
the sales price of such Equipment.
The payment of such fee is
subordinated to the receipt by the
Limited Partners of (i) a return of
their Capital Contributions and a
10% per annum cumulative return,
compounded daily, on Adjusted
Capital Contributions ("Cumulative
Return") and (ii) the Net
Disposition Proceeds from such sale
in accordance with the Partnership
Agreement. Such fee will be reduced
to the extent any liquidation or
resale fees are paid to
unaffiliated parties.
INTEREST IN THE PARTNERSHIP
The General Partnership Interest. The General Not Not
Partner Partner will have a present and determinable determinable
continuing one percent interest in at this time at this time
the Partnership's items of income,
gain, loss, deduction, credit, and
tax preference. In addition, the
General Partner will receive one
percent of Cash Available for
Distribution until the Limited
Partners have received
distributions of Cash Available for
Distribution equal to their Capital
Contributions plus the 10%
Cumulative Return and thereafter,
the General Partner will receive
10% of Cash Available for
Distribution. See "Risk Factors -
Dilution."
</TABLE>
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<PAGE>
Partnership transactions involving the acquisition, lease and/or sale of
Equipment will result in the foregoing fees and other compensation to the
General Partner and its Affiliates. The General Partner has absolute discretion
with respect to all decisions related to such transactions. Because the amount
and timing of such fees depends, in part, on the debt structure of Equipment
acquisitions and the timing of such transactions, the General Partner and its
Affiliates may be subject to conflicts of interest to the extent the
acquisition, retention, re-lease or sale of Equipment and the terms and
conditions thereof may be less advantageous to the Partnership and more
advantageous to the General Partner under certain circumstances. For example,
because the General Partner is entitled to a Debt Placement Fee and the
Acquisition Fees payable to the General Partner are determined as a percentage
of the Purchase Price of Equipment, the General Partner will receive higher fees
as the amount of acquisition debt incurred by the Partnership increases. In all
cases where the General Partner or its Affiliate may have a conflict of interest
in determining the terms or timing of a transaction by the Partnership, it will
exercise its discretion strictly in accordance with its fiduciary duty to the
Partnership and the Limited Partners.
-22-
<PAGE>
CONFLICTS OF INTEREST
The Partnership will be subject to various conflicts of interest arising
out of its relationships with the General Partner and its Affiliates. Nothing
herein shall relieve the General Partner and its Affiliates from their general
fiduciary obligations to the Partnership as set forth under "Fiduciary
Responsibility." These conflicts include the following:
Competition with General Partner and Affiliates; Competition for
Management's Time
The General Partner and its Affiliates have sponsored other investor
programs which will be in potential competition with the Partnership in
connection with the purchase of Equipment as well as opportunities to lease and
sell such Equipment. These programs have each been organized to acquire the same
types of Equipment as will be acquired by the Partnership. Although these
programs have acquired substantially all of the Equipment which they will
acquire with the proceeds of offerings to investors, each program may reinvest
undistributed cash in additional Equipment and accordingly competition for
Equipment will 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 conflicts may arise as to which of the programs shall
acquire the available items of Equipment. The General Partner will determine
which program will purchase the Equipment based upon which program has had
funds the longest,the cash/leverage available, the equipment type, the term
of the lease and the percentage that each lessee represents to the total
assets of the program. The allocation of property and equipment may relieve
the General Partner and Affiliates from an aspect of their fiduciary duty to
the Partnership. The General Partner will generally afford priority to the
program or entity that has had funds available to purchase Equipment for the
longest period of time. In addition, in order to promote diversification of
Equipment and lessees when two or more investor programs are in a position to
acquire the same Equipment, the General Partner may acquire Equipment in Joint
Ventures with affiliated investor programs. If one or more investor programs
and the Partnership are in a position to enter into leases with the same lessee
or to sell Equipment to the same purchaser conflicts may arise as to which
program shall lease or sell its Equipment. 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 will, therefore, be
in competition with the other programs for the attention and management time of
the General Partner and its Affiliates. The officers and directors of the
General Partner are not required to devote all or substantially all of their
time to the affairs of the Partnership. See "Management."
Acquisitions
Com Cap Corp. and the General Partner or other Affiliates of the General
Partner may acquire Equipment for the Partnership provided that (i) the
Partnership has insufficient funds at the time the Equipment is acquired, (ii)
the acquisition is in the best interest of the Partnership and (iii) no benefit
to the General Partner or its Affiliates arises from the acquisition except for
compensation paid to Com Cap Corp., the General Partner or such other Affiliate
as disclosed in this Prospectus. Com Cap Corp., the General Partner or their
Affiliates will not hold Equipment for more than 60 days prior to transfer to
the Partnership. If sufficient funds become available to the Partnership within
such 60 day period, 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
-23-
<PAGE>
the Purchase Price from the date of purchase to the date of transfer to the
Partnership. Except as described above, there will be no sales of Equipment to
or from any Affiliate of Com Cap Corp.
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 will not borrow money from the General Partner or any
of its Affiliates with a term in excess of twelve months. Interest will be paid
on loans or advances (in the form of deposits with manufacturers or vendors of
Equipment or otherwise) from the General Partner or its Affiliates from their
own funds at a rate equal to that which would be charged by third party
financing institutions on comparable loans for the same purpose in the same
geographic area, but in no event in excess of the General Partner's or
Affiliate's own 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 Partner or such Affiliates shall receive
no greater interest rate and financing charges from the Partnership than that
which unrelated lenders charge on comparable loans. See "Investment Objectives
and Policies." The Partnership will 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.
The Partnership shall not invest in equipment limited partnerships, general
partnerships or joint ventures, except that (a) the Partnership may invest in
general partnerships or joint ventures with persons other than equipment
Programs formed by the General Partner or its Affiliates, which partnerships or
joint ventures own specific equipment; provided that (i) the Partnership has or
acquires a controlling interest in such ventures or partnerships, (ii) the
non-controlling interest is owned by a non- Affiliate, and (iii) there are no
duplicate fees; and (b) the Partnership may invest in joint venture arrangements
with other equipment Programs formed by the General Partner or its Affiliates if
such action is in the best interests of all Programs and if all the following
conditions are met: (i) all the Programs have substantially identical investment
objectives; (ii) there are no duplicate fees; (iii) the sponsor compensation is
substantially identical in each Program; (iv) the Partnership has a right of
first refusal to buy another Program's interest in a joint venture if the other
Program wishes to sell equipment held in the joint venture; (v) the investment
of each Program is on substantially the same terms and conditions; and (vi) the
joint venture is formed either for the purpose of effecting appropriate
diversification for the Programs or for the purpose of relieving the General
Partner or its Affiliates from a commitment entered into pursuant to Section
9.5.3 of the Partnership Agreement. See "Risk Factors - Risks of Joint
Investments."
Receipt of Fees and Other Compensation by the General Partner and its Affiliates
Partnership transactions involving the acquisition, lease and/or sale of
Equipment will result in certain fees and other compensation to the General
Partner and its Affiliates. The General Partner has absolute discretion with
respect to all decisions related to such transactions. Because the amount and
timing of such fees depends, in part, on the debt structure of Equipment
acquisitions and the timing of such transactions, the General Partner and its
Affiliates may be subject to conflicts of interest to the extent the
acquisition, retention, re-lease or sale of Equipment and the terms and
conditions thereof may be less advantageous to the Partnership and more
advantageous to the General Partner under certain circumstances. For example,
because the General Partner is entitled to a Debt Placement Fee and the
Acquisition Fees payable to the General Partner are determined as a percentage
of the Purchase Price of Equipment, the General Partner will receive higher fees
as the amount of acquisition debt incurred by the Partnership increases. In all
cases where the General Partner or its Affiliate may have a conflict of interest
in determining the terms or timing of a transaction by the Partnership, it will
exercise its discretion strictly in accordance with its fiduciary duty to the
Partnership and the Limited Partners.
-24-
<PAGE>
Lack of Independent Investigation by Underwriter
Since Commonwealth Capital Securities Corp. is an Affiliate of the General
Partner, the Partnership will not be subject to an independent investigation of
the type normally performed by an underwriting firm in connection with the
public offering of securities.
Non-Arm's-Length Agreements
Any agreements and arrangements relating to compensation between the
Partnership and the General Partner or any of its Affiliates will not be the
result of arm's-length negotiations and the performance thereof by the General
Partner and its Affiliates will not be supervised or enforced at arm's-length.
Joint Ventures with Affiliates of the General Partner
The Partnership may enter into joint ownership or joint venture agreements
for the acquisition and leasing of Equipment with other persons, including joint
ventures controlled by the General Partner. Should any such joint ventures be
consummated, the General Partner may face certain conflicts of interest inasmuch
as it may control and owe fiduciary duties to both the Partnership and, through
such Affiliates, the affiliated co-venturer. For example, because of the
differing financial positions of the co-venturing programs, it may be in the
best interest of one program to sell the jointly-held Equipment at a time when
it is in the best interest of the other program to hold such Equipment. There is
a potential risk of impasse in joint venture decisions since neither program may
control and while one program may wish to purchase Equipment from its co-joint
venturer, it may not have sufficient resources to do so. Nevertheless, such
joint ventures are restricted to circumstances where the co-venturer's
investment objectives are comparable to the Partnership, the Partnership's
investment is on substantially the same terms as the co-venturer and the
compensation to be received by the General Partner and its Affiliates from each
co-venturer is substantially identical.
Legal Counsel
Blank Rome Comisky & McCauley serves as counsel to the Partnership and as
counsel to the General Partner and its Affiliates, including Commonwealth
Capital Securities Corp. It is anticipated that such representation of the
General Partner will continue in the future. If a conflict should arise,
appropriate consideration will be given to the extent to which the interests of
the Partnership may diverge from those of the General Partner and its
Affiliates, including Commonwealth Capital Securities Corp. and, if necessary,
separate special counsel will be obtained for the Partnership and for the
General Partner and its Affiliates, including Commonwealth Capital Securities
Corp.
Organization of General Partner
The Partnership will do business with the General Partner and its
Affiliates, Com Cap Corp., a Pennsylvania corporation, Commonwealth Capital
Securities Corp., a Pennsylvania corporation and Commonwealth of Delaware, Inc.,
a Delaware corporation. The General Partner is a wholly-owned subsidiary of
Commonwealth of Delaware, Inc., which is a wholly-owned subsidiary of Com Cap
Corp.
Persons investing in the Partnership will not have an interest in the
corporations discussed above unless they are also an investor in those
corporations.
-25-
<PAGE>
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER
The General Partner is accountable to the Partnership as a fiduciary and,
consequently, must exercise good faith and integrity in handling Partnership
affairs. Certain provisions of the Partnership Agreement may relieve the General
Partner and its Affiliates from an aspect of its state common law fiduciary
duties. General partners are held to a duty of the highest good faith in
conducting partnership affairs. This has been interpreted to mean that a general
partner cannot engage in a business which would create an interest for the
general partner adverse to that of the partnership. Since the General Partner
and certain programs it has sponsored will acquire and lease Equipment, the
General Partner may be deemed to have a position adverse to the Partnership. The
Partnership Agreement provides that, if two or more investor programs or
entities which are affiliated with the General Partner and the Partnership, are
in a position to acquire the same Equipment, the General Partner will determine
which program or entity 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 partnership that has had
funds available to purchase Equipment for the longest period of time.) If two or
more investor programs or entities, including the Partnership, are in a position
to enter into leases with the same lessee or to sell Equipment to the same
purchaser, the General Partner will generally afford priority to the Equipment
which has been available for lease or sale for the longest period of time. In
addition, the General Partner may allocate property or equipment to other
funds or other programs based on the cash/leverage available, the equipment
type, the term of the lease, and the percentage that each lessee represents
to the total assets of the funds or programs. This allocation of property and
equipment may relieve the General Partner and its Affiliates from an aspect
of their fiduciary duty to the Partnership.
Without modifying this aspect of the General Partner's fiduciary duties,
the General Partner might not be able to serve as the General Partner for the
Partnership and other investor programs acquiring and leasing Equipment at the
same time. This modification may operate as a detriment to Limited Partners
because there may be business opportunities that will not be made available to
the Partnership.
The Partnership Agreement provides that the General Partner, its Affiliates
and its successors and assigns will not be liable to the Partnership or to any
Limited Partner for any loss or damage incurred by reason of any act in good
faith performed or omitted in connection with the activities of the Partnership
or in dealing with third parties on behalf of the Partnership, if such act or
omission does not constitute fraud, negligence, or breach of fiduciary duty;
provided, however, that if such loss or damage arises out of any act or omission
on the part of the General Partner, the General Partner must determine, in good
faith, that such course of conduct was in the best interest of the Partnership.
The Partnership Agreement also provides that the Partnership will indemnify and
hold harmless the General Partner, its Affiliates and its successors and assigns
against any liability, loss or damage incurred by reason of any act or omission
performed or omitted in good faith in connection with the activities of the
Partnership or in dealing with third parties on behalf of the Partnership
(including reasonable costs and reasonable attorneys' fees); provided, however
that: (a) such act or omission does not constitute fraud, negligence, or breach
of fiduciary duty; (b) if such liability, loss, or damage arose out of any act
or omission on the part of the General Partner, the General Partner must
determine, in good faith, that such course of conduct was in the best interest
of the Partnership; and (c) any such indemnification shall be recoverable only
from the assets of the Partnership and not from the holders of Units. A
successful claim for indemnification could deplete the assets of the
Partnership.
Based upon the present state of the law, a Limited Partner may institute
legal action on behalf of himself and all other similarly situated Limited
Partners (a class action) to recover damages for a breach by the General Partner
of its fiduciary duty or on behalf of the Partnership (a partnership derivative
action) to recover damages from third parties. In addition, (i) investors may
have the right, subject to procedural and jurisdictional requirements, to bring
partnership class actions in federal courts to enforce their rights under the
federal and state securities laws; and (ii) investors who have suffered losses
in connection with the purchase
-26-
<PAGE>
or sale of their Units may be able to recover such losses from the General
Partner where the losses result from a violation by the General Partner of the
antifraud provisions of federal or state securities laws.
Investors should note that the fiduciary duty owed by a general partner to
its partners is similar in many respects to the fiduciary duty owed by the
directors of a corporation to its shareholders and is subject to the same rule,
commonly referred to as the "business judgment rule", that directors are not
liable for mistakes in the good faith exercise of honest business judgment or
for losses incurred in the good faith performance of their duties when performed
with such care as an ordinarily prudent person would use. Accordingly, the
General Partner may not be held liable for mistakes made or losses incurred in
the good faith exercise of reasonable business judgment.
To the extent that such indemnification provisions purport to include
indemnification for liabilities under the Securities Act of 1933, in the opinion
of the Securities and Exchange Commission, such indemnification is contrary to
public policy and therefore unenforceable. The Partnership will not indemnify
the General Partner and its successors and assigns against liabilities arising
under the Securities Act of 1933 unless the indemnified party is successful in
defending such action and such indemnification is specifically approved by a
court of law which has been advised as to the current position of the Securities
and Exchange Commission regarding indemnification for violations of securities
law. The Partnership will not pay for any insurance covering the liability of
the General Partner or its successors or assigns for any act or omission whether
or not indemnification is permitted by the Partnership Agreement.
-27-
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Principal Investment Objectives
The Partnership has been formed for the purpose of acquiring various types
of Equipment, including computer peripheral and other similar capital equipment.
The Partnership intends to use a substantial portion of the proceeds of this
Offering, Retained Proceeds and debt financing (not to exceed 30% of the
aggregate cost of the Equipment owned by, or subject to Conditional Sales
Contract with, the Partnership) to purchase IBM and IBM-compatible computer
peripheral and other similar capital equipment. The Partnership intends 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 does not presently anticipate doing so. See "Description of
Leases," below.
The Partnership's principal investment objectives are to:
(a) acquire, lease and sell Equipment to generate revenues from
operations sufficient to provide cash distributions to Limited Partners;
(b) preserve and protect Limited Partners' capital;
(c) use a portion of Cash Flow and 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.
The composition of the Partnership's actual Equipment portfolio cannot be
determined, as there is no way of anticipating what Equipment will be available
on reasonable terms at the time the Partnership is ready to invest its funds.
The General Partner may, in accordance with its best business judgment, vary the
Partnership's portfolio and invest a substantial portion of the net proceeds of
this Offering in a single category of computer peripheral and other similar
capital equipment, subject to certain restrictions. See "Types of Equipment -
Other Equipment - Restrictions" below.
As of the date of this Prospectus, the Partnership has not entered into any
commitments for the acquisition, financing, or leasing to third parties of any
Equipment. The Partnership will attempt to obtain contractual commitments for
the purchase of Equipment as soon as practicable. Limited Partners will not have
any right to vote on or otherwise approve or disapprove any particular
investment to be made by the Partnership. It is not possible to determine the
date when the net Offering proceeds, less working capital reserves, will be
fully invested in Equipment by the Partnership or the terms of any purchases of
Equipment. If all of the net proceeds of this Offering are not invested by the
Partnership in Equipment or committed to such investment or otherwise utilized
for proper Partnership purposes prior to the expiration of 12 months from the
Closing Date, the net proceeds not so invested, committed, or set aside as
working capital reserves will thereupon be promptly returned, with a
proportionate share of interest at the rate earned by the Partnership on
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the investment of such proceeds, to the Limited Partners based upon their
respective numbers of Units and time of purchase. See "Risk Factors -
Unspecified Equipment and Leases."
Although it is currently anticipated that the Partnership will acquire
predominantly new Equipment, the Partnership may purchase used equipment.
Equipment purchases will generally be made through lease brokers who charge the
Partnership a premium over their cost of the Equipment to compensate them for
their services. Equipment may also be acquired from manufacturers, distributors,
leasing companies, agents, owner-users, owner-lessors, other suppliers upon
terms that will 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
will provide for service and replacement of parts during a limited period.
The General Partner anticipates that the Partnership's Equipment will be
leased under Operating Leases at the time of acquisition or that an Operating
Lease will be entered into with a third party when the Partnership acquires
an item of Equipment. See "Description of Leases" below. The Partnership may
also engage in sale/leaseback transactions, 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 will be 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 will purchase from such
manufacturers Equipment which has previously been leased directly by the
manufacturer to third parties ("vendor leasing programs"). The Partnership
and manufacturers may agree to nonrecourse loans to the Partnership from the
manufacturer to finance the acquisition of Equipment, which loans will be
secured by the Equipment and the receivables due to the Partnership from
users of such Equipment. It is expected that the manufacturers of Equipment
will provide maintenance, remarketing and other services for the Equipment
subject to such agreements.
The General Partner has the discretion consistent with its fiduciary
duty to change the investment objectives of the Partnership if it determines
that such a change is in the best interest of the Limited Partners and so
long as such a change is consistent with Sections 10.2 and 10.3 of the
Partnership Agreement; provided however, that the General Partner will not
change the Partnership's primary objective of acquiring, leasing and selling
Equipment without the consent of a Majority in Interest of the Limited
Partners. The General Partner will notify the Limited Partners if it makes
such a determination to change the Partnership's investment objectives.
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 related to the process of storing, retrieving, and processing
information by computer.
The Partnership intends to acquire primarily IBM manufactured or
IBM-compatible equipment. The General Partner believes that dealing in
IBM-compatible equipment is particularly advantageous because of the large IBM
customer base, IBM's policy of supporting IBM users with software and
maintenance services and the large amount of IBM and IBM-compatible equipment in
the marketplace. If, in the General Partner's
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opinion, IBM's competitors begin to offer these advantages and the General
Partner determines that non-IBM compatible Equipment is comparable in quality,
the General Partner may cause the Partnership to increase its purchases of
computer equipment which is not IBM-compatible if such purchases are in the best
economic interest of the Partnership. See "Risk Factors - Dependence on
Manufacturers and IBM."
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 most
peripheral equipment have been affected less dramatically by changes in
technology than have the values of central processing units. An equipment user
who upgrades to a more advanced central processor generally can continue to use
his existing peripheral equipment. Peripheral equipment nevertheless is subject
to declines in value as new, improved models are developed and become available.
Technological advances and other factors have at times caused dramatic reduction
in the market prices of certain older models of IBM and IBM-compatible computer
peripheral equipment from the prices at which they were originally introduced.
Other Equipment-Restrictions. The Partnership intends to acquire computer
peripheral equipment, such as tape drives, disk drives, tape controllers, disk
controllers, printers, terminals and related control units, all of which are
related to the process of storing, retrieving and processing information by
computer and other new technologies in related areas. The Partnership expects to
invest primarily in computer peripheral equipment that is compatible with IBM
equipment; however the Partnership may acquire computer peripheral equipment
that is not compatible with IBM equipment if the General Partner determines that
such acquisitions are in the best interest of the Partnership and that such
Equipment is comparable in quality to similar IBM or IBM compatible Equipment.
The General Partner is also authorized, but does not presently intend, to cause
the Partnership to invest in 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. There can be
no assurance that any Equipment investments can be found which meet this
standard; and, 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, will depend in part upon the financing which can be
assumed by the Partnership or borrowed from third parties on satis factory
terms. The Partnership's policy not to borrow on a recourse basis will further
limit its financing options. Diversification will also depend on the
availability of various types of Equipment. Since the needs of potential lessees
are not known at this time, there can be no assurance given with respect to the
maximum percentages of proceeds which will be invested in any single item or
group of items of Equipment or in Equipment under lease to a single lessee,
except as set forth below and under "Other Equipment - Restrictions" above. See
also "Risk Factors - Lack of Diversification."
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During the operational stage of the Partnership, the Partnership may not at
any one given 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 will purchase only Equipment which 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 36 month) leases under which the aggregate
noncancellable rental payments during the original term of the lease are not
sufficient to permit the lessor to recover the purchase price of the subject
Equipment. The Equipment may also be leased pursuant to Full Payout Net Leases.
Full Payout Net Leases are leases under which the aggregate noncancellable
rental payments during the original term of the lease are at least sufficient to
recover the purchase price of the subject Equipment. It is anticipated that the
Partnership will enter into few, if any, Full Payout Net Leases. The General
Partner may also enter into Conditional Sales Contracts for Equipment. A
Conditional Sales Contract generally provides that the noncancellable payments
to the seller over the term of the contract are sufficient to recover the
investment in such Equipment and to provide a return on such investment. Under a
Conditional Sales Contract, the seller reserves title to, and retains a security
interest in, the Equipment until the Purchase Price of the Equipment is paid.
In general, the terms of the Partnership's leases, whether the Equipment is
leased pursuant to an Operating Lease or a Full Payout Net Lease, will depend
upon a variety of factors, including: the desirability of each type of lease
from both an investment and a tax point of view; the relative demand among
lessees for Operating or Full Payout Net Leases; the type and use of Equipment
and its anticipated residual value; the business of the lessee and its credit
rating; the availability and cost of financing; regulatory considerations; the
accounting treatment of the lease sought by the lessee or the Partnership; and
competitive factors.
An Operating Lease generally will represent 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
will be 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. This may
afford a greater overall return on the Partnership's investment.
Based on current sales prices for Equipment and the past experience of
certain officers of the General Partner in disposing of Equipment at the
expiration of lease terms, the General Partner believes that the Partnership
will be able profitably, in the aggregate, to re-lease or dispose of its
Equipment leased under Operating Leases after their initial terms. However, no
assurance can be given that the Partnership will in fact be successful in
re-leasing or disposing of such Equipment profitably.
The Partnership will enter into "triple net leases" (or the equivalent in
the case of a Conditional Sales Contract) which typically will provide that the
lessee or some other party will bear the risk of physical loss of the Equipment;
pay taxes relating to the lease or use of the Equipment; maintain the Equipment;
indemnify the Partnership-lessor against any liability suffered by the
Partnership as the result of any act or omission of the
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lessee or its agents; maintain casualty insurance in an amount equal to the
greater of the full value of the Equipment and a specified amount set forth in
the lease; and maintain liability insurance naming the Partnership as an
additional insured with a minimum coverage which the General Partner deems
appropriate. In addition, the Partnership may purchase "umbrella" insurance
policies to cover excess liability and casualty losses, to the extent deemed
practicable and advisable by the General Partner.
The General Partner has not established any standards for lessees to which
it will lease Equipment and, as a result, there is not an investment restriction
prohibiting the Partnership from doing business with any lessees. However, a
credit analysis (including a review of the financial statements, credit history
and public debt record) 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 terms and conditions of the Partnership's leases, or Conditional Sales
Contracts, will each be determined by negotiation and may impose substantial
obligations upon the Partnership. Where the Partnership assumes maintenance or
service obligations, the General Partner intends to cause the Partnership to
enter into separate maintenance or service agreements with manufacturers or
certified maintenance organizations to provide such services. Such agreements
will generally require annual or more frequent adjustment of service fees. It is
not presently anticipated that any leases which require the Partnership to
perform maintenance duties will be entered into by the Partnership.
Borrowing Policies
The 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 will be secured by Equipment and lease income therefrom. Such leveraging
will permit the Partnership to increase the aggregate amount of its depreciable
assets, and, as a result, should increase 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 which may be incurred in
connection with the acquisition of any single item of Equipment. Any debt
incurred will be fully amortized over the term of the initial lease or
Conditional Sales Contract to which the Equipment securing the debt is subject.
The precise amount borrowed by the Partnership will depend on a number of
factors, including the types of Equipment acquired by the Partnership; the
creditworthiness of the lessee; the availability of suitable financing; and
prevailing interest rates. The Partnership intends to be flexible in the degree
of leverage it employs, within the permissible limit. There can be no assurance
that credit will be available to the Partnership in the amount or at the time
desired or on terms considered reasonable by the General Partner.
The Partnership will 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 Equipment purchased previously to the extent practicable
and invest any proceeds from such financings 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. 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.
Any 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
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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. To
the extent the Partnership borrows on a nonrecourse basis, the Limited Partners'
tax basis in their Units will increase, although there may not be a
corresponding increase in the Partners' "At-Risk" amount. See "Income Tax
Considerations - Limitation on Utilization of Partnership Losses - Tax Basis"
and "Income Tax Considerations - Limitations on Utilization of Partnership
Losses-Amounts at Risk."
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 portion of the Partnership's revenues from the
leasing of Equipment will be reserved for repayment of debt, the use of
financing will reduce the cash which might otherwise be available for
distributions until the debt has been repaid and may reduce the Partnership's
cash flow over a substantial portion of the Partnership's operating life.
The General Partner and its Affiliates have agreed to make
loans to the Partnership on a short-term basis in an aggregate amount of
1.01% of net offering proceeds, if necessary, to the Partnership.
If the General Partner or any of its Affiliates makes such a short-term
loan to the Partnership, the General Partner or Affiliate may not charge
interest at a rate greater than the interest rate charged by unrelated
lenders on comparable loans for the same purpose in the same locality. In no
event will the Partnership be 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. All payments of
principal and interest on any financing provided by the General Partner or
any of its affiliates shall be due and payable by the Partnership within 12
months after the date of the loan. See "Compensation of General Partner and
Affiliates."
If the General Partner or any of its Affiliates purchases Equipment in its
own name and with its own funds in order to facilitate ultimate purchase by the
Partnership, the purchaser will be entitled to receive interest on the funds
expended for such purchase on behalf of the Partnership. Simple interest on any
such temporary purchases will be 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. See "Conflicts of Interest - Acquisitions."
Refinancing Policies
Subject to the limitations set forth in "Borrowing Policies" above, the
Partnership may refinance its debt from time to time. With respect to a
particular item of Equipment, the General Partner will take into consideration
such factors as the amount of appreciation in value, if any, to be realized, the
possible risks of continued ownership, and the anticipated advantages to be
obtained for the Partnership, as compared to selling such Equipment.
Refinancing, if achievable, may permit the Partnership to retain an item of
Equipment and at the same time to generate additional funds for reinvestment in
additional Equipment or for distribution to the Limited Partners. Such a
distribution will not be taxable to a Limited Partner unless it exceeds the tax
basis of such Limited Partner's Units (after any increase of such tax basis as a
result of the Partnership's incurring any additional nonrecourse debt). See
"Income Tax Considerations - Limitations on Utilization of Partnership Losses -
Tax Basis."
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Liquidation Policies
The General Partner intends to cause the Partnership to begin disposing of
its Equipment approximately nine years after the Closing Date. Notwithstanding
the Partnership's objective to sell all of its assets and dissolve in
approximately 10 years, 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 will be 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. In no event will the term of the
Partnership extend beyond December 31, 2009. See "Compensation of General
Partner and Affiliates - Equipment Liquidation Fee."
Management of Equipment
Equipment management services for the Partnership's Equipment generally
will be 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. Certain of these
services may be provided initially by lease brokers as part of their agreement
to sell the Equipment to the Partnership. See "Compensation of General Partner
and Affiliates - Equipment Management Fee."
Competition
The equipment leasing industry is highly competitive. The Partnership will
compete with leasing companies, equipment manufacturers and their affiliated
financing companies, distributors and entities similar to the Partnership
(including other programs sponsored by the General Partner), some of which will
have greater financial resources than the Partnership and more experience in the
equipment leasing business than the General Partner. Other leasing companies and
equipment manufacturers, their affiliated financing companies and distributors
may be in a position to offer equipment to prospective lessees on financial
terms which are more favorable than those which the Partnership can offer. They
may also be in a position to offer trade-in privileges, software, maintenance
contracts and other services which the Partnership may not be able to offer.
Equipment manufacturers and distributors may offer to sell equipment on terms
(such as liberal financing terms and exchange privileges) which will afford
benefits to the purchaser similar to those obtained through leases. As a result
of the advantages which certain of its competitors may have, the Partnership may
find it necessary to lease its equipment on a less favorable basis than certain
of its competitors.
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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 which 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 almost any time. Significant
action in any of these areas by IBM or IBM Credit Corporation might materially
adversely affect the Partnership's business or the other manufacturers with whom
the General Partner might negotiate purchase and other agreements. Any adverse
effect on these manufacturers could be reflected in the overall return realized
by the Partnership on equipment from those manufacturers or from IBM. Since it
is anticipated that a substantial majority of the Partnership's equipment will
be manufactured by IBM, the Partnership's ability to lease, re-lease or sell its
equipment may be adversely affected by actions taken by IBM. See "Risk Factors -
Dependence on Manufacturers and IBM."
Preliminary Investments
The Partnership does not now own, and has made no commitment to
purchase, any Equipment. The General Partner or its Affiliates may purchase
Equipment prior to the termination of this Offering, which Equipment and the
related leases, if any, to which it is subject would be sold and assigned to
the Partnership after it commences its business operations. No such purchases
shall commence until the Minimum Offering level has been reached. See
"Conflicts of Interest - Acquisitions."
It is not possible to determine the date when the net Offering proceeds,
less working capital reserves, will be fully invested in Equipment by the
Partnership or the terms of any purchases of Equipment. The Partnership will
invest the net Offering proceeds prior to the acquisition of Equipment in
short-term, highly liquid investments where there is appropriate safety of
principal, such as United States Treasury Bills.
If all of the net proceeds of this Offering are not invested by the
Partnership in Equipment or committed to such investment or otherwise utilized
for proper Partnership purposes prior to the expiration of 12 months from the
Closing Date, the net proceeds not so invested, committed, or set aside as
working capital reserves will thereupon be promptly returned, with a
proportionate share of interest at the rate earned by the Partnership on the
investment of such proceeds, to the Limited Partners based upon their respective
numbers of Units and time of purchase. For such purpose, funds will be deemed to
be committed to investment and will not be returned to the Limited Partners to
the extent written agreements in principle, commitment letters, letters of
intent or understanding, option agreements, or any similar contracts or
understandings exist, whether or not any such investment is ultimately
consummated. Funds will also be deemed to be committed to the extent: (i) any
funds may have been reserved to make contingent payments in connection with any
Equipment already acquired, whether or not any such payments are ultimately
made; (ii) as a condition to obtaining financing the Partnership is required to
maintain funds as a compensating balance; or (iii) the General Partner decides
that an addition to the working capital reserve is necessary in connection with
any Equipment. In the event any such uninvested funds are distributed to the
Limited Partners, such distribution will be treated as a return of capital. See
"Income Tax Considerations-Cash Distributions."
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Reserves
Because the Partnership's leases are expected to be on a "triple-net"
basis, it is anticipated that no permanent reserve for maintenance and repairs
will be established from the Offering proceeds. However, the General Partner, in
its sole discretion, may retain a portion of the Offering proceeds, Cash Flow
and Net Disposition Proceeds available to the Partnership for maintenance,
repairs and working capital. There are no limitations on the amount of Offering
Proceeds, Cash Flow and Net Disposition Proceeds that may be retained as
reserves. Since no reserve will be established initially, if available Cash Flow
of the Partnership is insufficient to cover the Partnership's operating expenses
and liabilities, it will be necessary for the Partnership to obtain additional
funds by refinancing its Equipment or borrowing.
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 value 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 Equip ment from, or
enter into any sale-leaseback transactions with, the General Partner or
any of its Affiliates; or
(g) give the General Partner or any of its Affiliates an exclusive
right or employment to sell the Partnership's Equipment.
The General Partner has also agreed in the Partnership Agreement to use
its best efforts to assure that the Partnership shall not be deemed an
"investment company" as such term is defined in the Investment Company Act of
1940.
The General Partner and its Affiliates may engage in other activities,
whether or not competitive with the Partnership. The Partnership Agreement
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.
See "Conflicts of Interest," "Compensation of General Partner and Affiliates,"
and "Management."
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TRANSFERABILITY OF UNITS
The General Partner anticipates that no public market will develop for the
Units. The Partnership does not intend to list the Units on any exchange or to
permit trading on any over-the-counter market. In addition, there are
substantial restrictions on the transferability of Units.
General Limitations
Units cannot be transferred without the consent of the General Partner,
which consent shall not be unreasonably withheld. The General Partner intends to
monitor transfers of Units in an effort to ensure that all transfers will be
within certain safe harbors promulgated by the IRS to furnish guidance regarding
publicly traded partnerships. These safe harbors limit the number of transfers
that can occur in any one year. The General Partner intends to cause the
Partnership to comply with the safe harbor that permits nonexempt transfers and
redemptions of Units of up to two percent of the total outstanding interests in
the Partnership's capital or profits in any one year. In addition, in
deciding whether a proposed transfer can be made, the General Partner will
consider whether the transfer will have an adverse affect on the Partnership's
federal tax status as a Partnership.
Redemption Provision
Upon the conclusion of the 30 month period following the termination of
the Offering, the Partnership may, at the sole discretion of the General
Partner, repurchase a number of the outstanding Units. After such 30 month
period, on a semi-annual basis, the General Partner, at its discretion, may
establish an amount for redemption, generally not to 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. All
requests for redemption must be made in writing and must be on file as of the
record date for such redemption. The General Partner will maintain a master list
of requests for redemption with priority being given to Units owned by estates,
followed by IRAs and Qualified Plans. All other requests will be considered in
the order received. Redemption requests made by or on behalf of Limited Partners
who are not affiliated with the General Partner or its Affiliates will be given
priority over those made by Limited Partners who are affiliated with the General
Partner or its Affiliates. All redemption requests will remain in effect until
and unless canceled, in writing, by the requesting Limited Partner(s).
The Partnership will accept redemption requests beginning 30 months
following the termination of the Offering. There will be no limitations on
the period of time that a redemption request may be pending prior to its
being granted. Limited Partners will not be required to hold their interest
in the Partnership for any specified period prior to their making a
redemption request. The making of a request for a redemption by a Limited
Partner is completely voluntary. Limited Partners will receive notification
concerning the action of the Partnership on this request.
In order to make a redemption request, Limited Partners will be required
to advise the General Partner in writing of such request. Upon receipt of such
notification, the Partnership will provide detailed forms and instructions to
complete the request.
The Partnership will comply with any applicable tender offer rules at
the time of the redemption.
Investors should note that the redemption price is based on a percentage
of the selling Limited Partner's Adjusted Capital Contributions and is,
therefore, arbitrary and not calculated with reference to the fair market value
of a Unit.
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For tax consequences relating to the redemption of Units, see "Income Tax
Considerations - Disposition of Units -In General."
Exempt Transfers
The following seven categories of transfers are exempt transfers for
purposes of calculating the volume limitations imposed by the IRS and will
generally be permitted by the General Partner:
(1) transfers in which the basis of the Unit in the hands of the
transferee is determined, in whole or in part, by reference to its basis
in the hands of the transferor (for example, Units acquired by
corporations in certain reorganizations, contributions to capital, gifts
of Units, Units contributed to another partnership, and nonliquidating as
well as liquidating distributions by a parent partnership to its partners
of interests in a subpartnership);
(2) transfers at death;
(3) transfers between members of a family (which
include brothers and sisters, spouse, ancestors, and lineal
descendants);
(4) transfers resulting from the issuance of Units by
the Partnership in exchange for cash, property, or services;
(5) transfers resulting from distributions from Qualified
Plans;
(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
two (2%) percent of the total outstanding interests in capital or profits
of the Partnership; and
(7) transfers by one or more partners representing in the aggregate
fifty (50%) percent or more of the total interests in partnership capital
or profits in one transaction or a series of related transactions.
Additional Restrictions on Transfer
Limited Partners who wish to transfer their Units to a new beneficial
owner will be required to pay the Partnership up to $50 for each transfer to
cover the Partnership's cost of processing the transfer application and will
take such other actions and execute such other documents as may be reasonably
requested by the General Partner. There will be no charge for re-registration of
a certificate in the event of a marriage, divorce, death, or transfer to a trust
so long as the transfer is not a result of a sale of the Units.
In addition, the following restrictions will apply to each transfer: (i)
no transfer may be made if it would cause 25% or more of the outstanding Units
to be owned by Benefit Plans; and (ii) no transfer will be permitted unless the
transferee obtains such governmental approvals as may reasonably be required by
the General Partner, including without limitation, the written consents of the
Pennsylvania Securities Commissioner and of any other state securities agency or
commission having jurisdiction over the transfer.
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<PAGE>
ALLOCATIONS AND DISTRIBUTIONS
Between the General Partner and the Limited Partners
Cash distributions, if any, will be made quarterly beginning with the
first quarter after the Initial Closing on December 31, March 31, June 30, and
September 30 of each year. Cash distributions will be made after the payment of
expenses of the Partnership, including the payment of fees to the General
Partner. The Partnership will make distributions of Cash Available for
Distribution of the Partnership that the General Partner, in its sole and
absolute discretion, determines is available for distribution. Such
distributions will be payable quarterly or by the election of the Limited
Partners for a fee, monthly. A Limited Partner who purchases a minimum of 250
Units ($5,000) may elect to receive monthly distributions, paid in arrears, by
written notice to the General Partner upon subscription, or, thereafter, upon at
least 30 days' prior written notice to the General Partner, with any such
election made following subscription to be effective as of the beginning of the
following calendar quarter. Absent such an election, Limited Partners will
receive distributions quarterly. In any quarter, Limited Partners may terminate
their election to receive distributions monthly rather than quarterly by written
notice to the Partnership, which termination will be effective as of the
beginning of the following calendar quarter. The General Partner, in its sole
discretion, will have the option in the future to make quarterly distributions
to all Limited Partners. In such event, annual fees for monthly distributions
will terminate.
Distributions of Cash Available for Distribution are expected to commence
no later than the end of the first full calendar quarter following receipt of
the minimum subscription amount. At that time, each Limited Partner will receive
a distribution of Cash Available for Distribution for the calendar quarter and
each Limited Partner who has elected to receive distributions monthly will
receive one-third of such amount. The remaining two-thirds of such amount will
be held in an interest-bearing monthly distribution account segregated from
other Partnership funds, and will be paid, without interest, in approximately
equal installments in each of the next two months to those Limited Partners who
have elected to receive distributions monthly.
Limited Partners who elect the monthly distribution option will be charged
an annual administrative fee, which will be $50.00 for 1997, designed to cover
the additional postage and handling associated with the more frequent
distributions. The annual administrative fee will be reduced by any interest
earned on the monthly distribution account and will be deducted equally from
each monthly distribution. In the event that the interest earned on the monthly
distribution account exceeds the annual administrative fee, such excess interest
will be available to the Partnership for Partnership purposes. It is anticipated
that the fee will be calculated in January of each year, although the General
Partner may change the amount of the fee during the year by written notice to
each Limited Partner who properly has elected to receive monthly distributions,
with such notice to be given at least 30 days prior to the beginning of the
calendar quarter that includes the first month to which the new fee will apply.
Distributions will be made 99% to the Limited Partners and one percent to
the General Partner until the Limited Partners have received an amount equal to
their Capital Contributions plus the Cumulative Return; thereafter, cash
distributions will be made 90% to the Limited Partners and 10% to the General
Partner. Distributions made in connection with the liquidation of the
Partnership or a Partner's Units will be made in accordance with the Partner's
positive Capital Account balance as determined under the Partnership Agreement
and Treasury Regulations.
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<PAGE>
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. Thus, for example (without taking into account
the effect of compounding), on a $100 investment, a $12 distribution in year one
would result in a $2 reduction in Adjusted Capital Contribution, leaving a $98
base on which the 10% return would be calculated in year two. The $2 reduction
consists of $2 in distributions in excess of that required to satisfy the
Cumulative Return requirement for year one.
If the proceeds resulting from the sale of any Equipment are reinvested in
Equipment, sufficient cash will be distributed to the Partners to pay the
additional federal income tax resulting from such sale for a Partner in a 39.6%
federal income tax bracket or, if lower, the maximum federal income tax rate in
effect for individuals for such taxable year.
Generally, the General Partner will be allocated Net Profits equal to its
cash distributions (but not less than one percent of Net Profits) and the
balance will be allocated to the Limited Partners. Net Profits arising from
transactions in connection with the termination or liquidation of the
Partnership will be allocated in the following order: (1) first, to each Partner
in an amount equal to the negative amount, if any, of his Capital Account; (2)
second, an amount equal to the excess of the proceeds from the liquidation or
termination which would be distributed to the Partners as Operating
Distributions over the 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, will generally be allocated 99% to the Limited
Partners and one percent to the General Partner, except to the extent that any
such losses are required to be allocated in a different manner under applicable
federal income tax law.
Net Profits and Net Losses will be computed without taking into account,
in each taxable year of the Partnership, any items of income, gain, loss or
deduction required to be specially allocated pursuant to Section 704(b) of the
Code and the Treasury Regulations promulgated thereunder. No Limited Partner
will be required to contribute cash to the capital of the Partnership in order
to restore a closing Capital Account deficit, and the General Partner has only a
limited deficit restoration obligation under the Partnership Agreement.
Among the Limited Partners
Except during the Offering Period, Cash Available for Distribution, Net
Profits and Net Losses allocable to the Limited Partners will be 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, Net Profits and Net Losses allocable to
the Limited Partners will be 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 has owned the Units. A different convention for allocations and
distributions, based upon the number of days which each Limited Partner owned
Units during the period, will be utilized during the Offering Period to provide
greater distributions to those Partners who have held their Units for a longer
period.
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<PAGE>
Limited Partners will commence sharing in Net Profits, Net Losses,
and cash distributions on the date following the date the Capital
Contributions are received. Thus, if some Limited Partners are admitted to
the Partnership after others, those Limited Partners admitted later may
receive a smaller portion of each item of the Partnership's Net Profits and
Net Losses than the Limited Partners who were admitted earlier. Nevertheless,
those Limited Partners still will be obligated to make the same Capital
Contributions to the Partnership for their interests as the Limited Partners
who were admitted previously. In addition, where a Limited Partner transfers
Units during a taxable year, the Limited Partner may be allocated Net Profits
for a period for which such Limited Partner will not receive a corresponding
cash distribution.
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<PAGE>
MANAGEMENT
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 Com Cap Corp., was incorporated in Pennsylvania on August 26,
1993. The General Partner previously sponsored, and currently manages, two other
public equipment leasing partnerships. The principal business office of the
General Partner is located at 1160 West Swedesford Road, Berwyn, Pennsylvania
19312, and its telephone number is 610-647-6800. The General Partner will manage
and control the affairs of the Partnership and will have sole responsibility for
all aspects of the Partnership's operations. The officers of the General Partner
will 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. It is not expected that the officers of the General Partner will be
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:
Name Title
---- -----
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.
David A. Kintzer Vice President and Chief Financial
Officer of the General Partner and Com Cap Corp.
Kathleen S. Enscoe Assistant Vice President and
Controller of the General Partner and Com Cap Corp.
Gregory M. Lorenz Vice President of Com Cap Corp.
George S. Springsteen, age 62, 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 is also Chairman
of the Board of Directors of Commonwealth Capital Securities Corp. He has
been the sole shareholder and director of Com Cap Corp. since 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. Mr. Springsteen holds a 22, 63 and 39 NASD
License and is a member of the Equipment Leasing Association.
Kimberly A. MacDougall, age 37, 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
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<PAGE>
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.
David A. Kintzer, CPA, age 38, is Vice President and Chief Financial
Officer of both Com Cap Corp. and the General Partner and has been employed at
Com Cap Corp. since 1991. Mr. Kintzer also serves as Vice President, Chief
Financial Officer, and Secretary of the general partners or controlling entities
of several prior programs sponsored by Com Cap Corp. with objectives similar to
the Partnership's, as well as other Affiliates of Com Cap Corp. From 1984 to
1990, Mr. Kintzer was employed by Continental Computer Leasing Corporation, a
computer leasing company with an equipment lease portfolio of $40,000,000 and
annual revenue of $20,000,000. While at Continental, Mr. Kintzer served as
Controller and Chief Financial Officer and managed its accounting, financial,
EDP, banking relationships and personnel functions. Prior to 1984, Mr. Kintzer
was employed by the international public accounting firm of Ernst & Young LLP.
Mr. Kintzer is a member of both the American Institute of Certified Public
Accountants and The Pennsylvania Institute of Certified Public Accountants. Mr.
Kintzer received an A.B. degree in accounting from Franklin & Marshall College
in 1981.
Kathleen S. Enscoe, age 31, is Assistant Vice President and Controller of
the General Partner and 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 Bachelor of Science Business Administration degree in 1988
from Geneva College with dual majors in accounting and business administration.
Gregory M. Lorenz, age 34, is Vice President of Com Cap Corp. and has
been employed by Com Cap Corp. since April of 1994. From 1985 to 1993, Mr.
Lorenz was employed by Daley Marketing Corp. where he served as Vice
President of Marketing and Director of Sales and Marketing. Mr. Lorenz is a
member of the Equipment Leasing Association and received an Associates of
Arts degree from Orange Coast College in 1984.
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. See "Conflicts of Interest" and "Fiduciary
Responsibility of the General Partner."
Prior Performance
The General Partner has previously sponsored two Equipment leasing
programs, Commonwealth Income & Growth Fund I ("Fund I"), a limited
partnership, and Commonwealth Income & Growth Fund II ("Fund II"), a limited
partnership, which registered securities under the Securities Act of 1933 and
which has investment objectives substantially identical to the Partnership.
Fund I terminated its offering of units on May 11, 1995, with $12,624,153
raised from investors. Eighty-four percent of the total interests in Fund I
were sold. On December 8, 1995, Fund I's net offering proceeds were
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<PAGE>
fully utilized in the purchase of computer peripheral equipment. All of the
equipment was new when acquired.
As of December 31, 1996, Fund I had sold computer equipment with a net
book value of $1,440,000 for a net loss of $692,000. Fund II terminated its
offering of units on May 12, 1997 with $9,235,185 raised from investors.
Sixty two percent of all interests in Fund II were sold. As of April 14, 1997,
$4,780,076 net offering proceeds have been fully utilized for the purchase of
computer peripheral equipment.
Com Cap Corp. has conducted single investor and leveraged lease
transactions involving a variety of types of Equipment. These transactions
involved arranging for the investment by single investors in Equipment and
simultaneous lease of the Equipment on a single transactions basis. The
investment objectives of these transactions were to provide tax deductions and
cash distributions. In addition, in 1984, Com Cap Corp. arranged for end user
leases of Equipment in a leveraged lease co-ownership program involving the
private sale of partnership interest to 10 investors. The investment objectives
of that program were to provide tax deductions and cash distributions.
Affiliates of Com Cap Corp. have also sponsored 16 prior private equipment
leasing programs with investment objectives similar to the Partnership. As of
December 31, 1996, these programs raised a total of $31,662,500 from investors
in private offerings of securities. Thirteen of the programs were structured as
limited partnerships and three were structured as Delaware business trusts.
Interests in the programs were purchased by an aggregate of 784 investors. As of
December 31, 1996, the programs had acquired from original offering proceeds
$25,657,148 in equipment, all of which was computer peripheral equipment.
Approximately 97% of the equipment was new when acquired by the program and
approximately three percent was used, and approximately 60% of the equipment has
been sold. Currently, operating results for these private programs is lower than
projected in the prospective financial statements which were included in the
offering document applicable to each such program primarily because (i) some of
the equipment acquired by such programs has not produced the projected residual
value on sale and (ii) lease rates have been lower than projected as a result of
a continuous decrease in interest rates generally. As a result, while the
programs have made all projected distributions to investors, Com Cap Corp. and
its Affiliates decided to make loans to and/or waive fees from certain programs,
some of which loans were subsequently forgiven, in order for those programs to
make such cash distributions and/or to enable those programs to make additional
acquisitions of equipment. In addition, because of the lower lease rates and
sales of equipment below projected levels, certain programs currently own less
equipment than was anticipated. Com Cap Corp. has outstanding demand promissory
notes in the amount of $3,016,250 to the general partners or trustees of its
prior private programs. See the prior performance tables attached as "Appendix
I" for further information concerning these prior public and private programs.
The General Partner will provide at no cost, upon the request of an
interested investor, a copy of the most recent Annual Report on Form 10-K
filed with the Securities and Exchange Commission for Fund I and Fund II. A
Limited Partner can request Form 10-Ks for Fund I and Fund II
by calling 1-800-497-4554.
See the prior performance tables attached as "Appendix II" for further
information concerning these prior public and private programs.
The following is a summary of equipment acquired between January 1, 1994
and January 1, 1997 by prior programs which were sponsored by the General
Partner:
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Summary of equipment acquired between January 1, 1994 and January 1, 1997 by
prior programs
<TABLE>
<CAPTION>
Quantity of Cost
Peripheral of
Equipment Equipment Percent
Program Name Acquired Acquired Leverage
===============================================================================================================
<S> <C> <C> <C>
Commonwealth 1987-1 Equipment 4 $ 1,510,143 87%
Income Fund, Limited Partnership
- ----------------------------------------------------------------------------------------------------------------
Commonwealth 1988-1 Equipment 9 $ 1,361,869 75%
Income Fund, Limited Partnership
- ----------------------------------------------------------------------------------------------------------------
Commonwealth Equipment Income Fund 86 $ 1,695,403 78%
No. 3, Limited Partnership
- ----------------------------------------------------------------------------------------------------------------
Commonwealth Equipment Income Fund
No. 4, Limited Partnership 5 $ 799,308 84%
- ----------------------------------------------------------------------------------------------------------------
Commonwealth Equipment Income Fund 8 $ 1,258,412 86%
No. V, Limited Partnership
- ----------------------------------------------------------------------------------------------------------------
Commonwealth Equipment Income 3 $ 1,045,145 56%
Private Fund I, Limited Partnership
- ----------------------------------------------------------------------------------------------------------------
Commonwealth Equipment Income Fund 25 $ 1,542,147 80%
VI, limited Partnership
- ----------------------------------------------------------------------------------------------------------------
Commonwealth Equipment Income Fund 6 $ 1,320,216 69%
VII, Limited Partnership
- ----------------------------------------------------------------------------------------------------------------
Commonwealth Equipment Income 8 $ 620,125 59%
Private Fund II, Limited Partnership
- ----------------------------------------------------------------------------------------------------------------
Commonwealth Equipment Income 63 $ 2,855,808 76%
Trust VIII
- ----------------------------------------------------------------------------------------------------------------
Commonwealth Equipment Income 53 $ 2,743,218 79%
Trust IX
- ----------------------------------------------------------------------------------------------------------------
Commonwealth Equipment Income 28 $ 5,676,973 63%
Trust X
- ----------------------------------------------------------------------------------------------------------------
Commonwealth Equipment Income 11 $ 2,504,598 52%
Private Fund III, Limited Partnership
- ----------------------------------------------------------------------------------------------------------------
Commonwealth Income & Growth Fund I 1,327 $ 21,073,311 36%
- ----------------------------------------------------------------------------------------------------------------
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<PAGE>
Quantity of Cost
Peripheral of
Equipment Equipment Percent
Program Name Acquired Acquired Leverage
===============================================================================================================
Commonwealth Equipment Income 72 $ 2,369,154 32%
Private Fund IV, Limited Partnership
- ----------------------------------------------------------------------------------------------------------------
Commonwealth Income & Growth Fund II 415 $ 4,780,076 0%
- ----------------------------------------------------------------------------------------------------------------
Commonwealth Equipment Income 10 $ 1,237,734 22%
Private Fund V, Limited Partnership
- ----------------------------------------------------------------------------------------------------------------
Commonwealth Equipment Income 2 $ 271,936 0%
Private Fund VI, Limited Partnership
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
INCOME TAX CONSIDERATIONS
Summary
The following is a summary of relevant federal income tax considerations
concerning an investment in the Partnership. This summary was prepared, and the
related opinions were given by Blank Rome Comisky & McCauley, counsel to the
Partnership ("Counsel"), and is based upon the Internal Revenue Code of 1986, as
amended and in effect as of the date of this Prospectus (the "Code"), applicable
Treasury Regulations promulgated thereunder, rulings, procedures, and other
pronouncements published by the Internal Revenue Service ("IRS"), court
decisions, the assumption that the Partnership will operate its business as
described in the Prospectus, and certain representations by the General Partner.
A more detailed tax analysis, including items not discussed in this summary,
follows the Summary. Counsel has reviewed the following summary and detailed
analysis and is of the opinion that the descriptions of the law and the legal
conclusions contained therein are correct in all material respects, and that the
summary and detailed analysis do not omit any material provision with respect to
the matters covered.
Classification as a "Partnership." Counsel has rendered its opinion that
the Partnership will be classified as a partnership for federal income tax
purposes. Counsel's opinion is based on certain qualifications and on
representations of the General Partner, and is not binding on the IRS. See
"Income Tax Considerations - General" and "Income Tax Considerations -
Classification as a Partnership."
Taxation of Limited Partners. A partnership is not subject to federal
income taxes. Rather, each Partner will be required to take into account in
computing such Partner's regular and alternative minimum tax items of income,
gain, loss, deduction, and credit derived by the Partnership for each taxable
year, irrespective of whether the Partner has received or will receive any cash
distributions relating to such taxable year. In addition, any distributions in
excess of a Limited Partner's adjusted tax basis in his Units will cause such
Limited Partner to recognize such excess as taxable income. See "Income Tax
Considerations - Certain Principles of Partnership Taxation."
Income Recognition. The Partnership's tax returns will be prepared using
the accrual method of accounting. Under such method, the Partnership will
include in income items such as rentals and interest as and when earned by the
Partnership, whether or not received. In addition, certain of the Partnership's
Equipment leases may be subject to Section 467 of the Code which could result in
a Limited Partner receiving increased allocations of taxable income (or reduced
allocations of loss) in earlier years without any increase in cash available for
distribution until subsequent years. See "Income Tax Considerations - Certain
Principles of Partnership Taxation - Timing of Income Recognition."
Allocation of Profits and Losses. Counsel has opined that the tax
allocation provisions in the Partnership Agreement will comply with Code Section
704(b) and the Regulations promulgated thereunder and each Limited Partner's
distributive share of Net Profits and Net Losses will be determined and
allocated substantially in accordance with the Partnership Agreement. Counsel's
opinion is based on certain qualifications and representations of the General
Partner, and is not binding on the IRS. See "Income Tax Considerations -
Allocation of Partnership Income, Gains, Losses, Deductions and Credits."
Passive Activity Income and Deductions. Counsel has opined that the
income, gains, losses, deductions and credits derived from the Partnership's
leasing activities will be subject to the passive loss rules. Counsel's opinion
is based on certain qualifications and representations of the General Partner,
and is not binding on the IRS. Counsel's opinion does not apply to any portion
of Partnership income attributable to (i)
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the investment of Partnership funds in liquid investments, such as certificates
of deposit and money market accounts, prior to the purchase of Equipment and
distributions of Net Cash Flow to the Partners, (ii) the investment, in
interest-bearing accounts or otherwise, of amounts held by the Partnership as
working capital, security deposits, or in reserve, or (iii) income from
Equipment with respect to which the Partnership is determined not to be the
owner for federal income tax purposes. Such income will constitute, for purposes
of Section 469 of the Code and the Regulations promulgated thereunder, portfolio
income which cannot be offset by losses from passive activities.
Limitations on Deduction of Losses. There are certain limitations on the
ability of a Limited Partner to utilize his distributive shares of losses from
the Partnership to offset income from other sources. See "Income Tax
Considerations - Limitations on Utilization of Partnership Losses."
Deductibility of Fees. The Partnership intends to pay, and deduct, various
fees including fees paid to the General Partner. The determination of the nature
and deductibility of all or a portion of such fees involves a number of factual
matters relating to the nature and extent of the services provided. Therefore,
it is not possible to predict whether all or any portion of such fees will be
challenged by the IRS. See "Income Tax Considerations - Fees and Reimbursements
to the General Partner and Affiliates."
Ownership of Leased Equipment. In order for the Partnership and Limited
Partners to be entitled to depreciation deductions, the leases of Equipment must
be treated as leases rather than sales or financings for federal income tax
purposes. The Partnership intends to structure each lease transaction so that
the lease will be treated as a lease rather than a sale or financing arrangement
for federal income tax purposes. The Partnership, however, may also enter into
Full Payout Net Leases in which the Partnership may not be treated as the owner
of such Equipment for federal income tax purposes or sell Equipment under
Conditional Sales Contracts, in which case the Partnership will not be treated
as the owner of such Equipment for federal income tax purposes. In this event,
the Partnership and the Partners will not be entitled to depreciation or cost
recovery deductions with respect to such Equipment. See "Income Tax
Considerations - Ownership of Equipment."
Sale or Exchange of Partnership Equipment. The Partnership's gain or loss
on sale or disposition of an item of Equipment will equal the difference between
sale proceeds (including the amount of any indebtedness to which the Equipment
is subject) and the Partnership's adjusted tax basis in the Equipment. In
certain circumstances, the amount of tax payable by a Limited Partner on his
share of gain on sale of Equipment may exceed his share of cash proceeds
therefrom. See "Income Tax Considerations - Sale of Equipment."
Disposition of Units. On sale or disposition of Units, a Limited Partner
will recognize gain equal to the excess, if any, of any cash and the fair market
value of property received (plus the Limited Partner's share of any Partnership
liabilities, including nonrecourse liabilities allocable to such Limited
Partner) over the Limited Partner's adjusted tax basis in the Units. Such gain
will be taxed at ordinary income tax rates to the extent of depreciation
recapture. In certain circumstances, the amount of tax payable by a Limited
Partner on the gain realized from a sale or disposition of his Units may exceed
the cash received therefrom. See "Income Tax Considerations -
Disposition of Units."
Tax Elections. The Partnership is not expected to file an election
under Section 754 of the Code. The absence of such election may have an
adverse effect on the marketability and sale price of Units. See "Income Tax
Considerations - No Section 754 Election."
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<PAGE>
Investment by Tax Exempt Entities. The Partnership will generate UBTI to
Limited Partners who are tax exempt entities, including qualified employee
pension or profit sharing trusts or individual retirement accounts ("Tax Exempt
Entities"), with the result that the Partnership income will be subject to tax
to the extent that the Tax Exempt Entity's gross UBTI from all sources exceeds
all deductions attributable to the UBTI plus $1,000. See "Income Tax
Considerations - Investment by Tax Exempt Entities."
Alternative Minimum Tax. The tax preference items and adjustments under
the alternative minimum tax that may be present in the Partnership include the
excess of depreciation deductions claimed over deductions that would be
allowable if the Equipment were subject to depreciation over its asset
depreciation range class life using the 150% declining balance method, switching
to the straight-line method in later years. See "Income Tax Considerations -
Taxes - Alternative Minimum Tax."
Foreign Tax Considerations. Because the Partnership may acquire Equipment
which is operated outside the United States, Limited Partners may be required to
file returns and pay taxes in foreign jurisdictions. Limited Partners who pay
foreign tax as a result of Partnership operations may be entitled to a foreign
tax credit or deduction to reduce their United States tax liability. See "Income
Tax Considerations - Partnership Tax Returns and Tax Information - Foreign Tax
Considerations."
Dissolution of Partnership. Upon dissolution of the Partnership, a Limited
Partner will recognize taxable income if the cash distributed to the Limited
Partner (including the reduction in the Limited Partner's share of Partnership
liabilities) exceeds the Limited Partner's adjusted tax basis in his Units. See
"Income Tax Considerations - Certain Principles of Partnership Taxation."
General
Subject to the qualifications and assumptions set forth herein, and
certain representations of the General Partner, counsel has opined that (i) the
Partnership will be classified as a partnership for federal income tax purposes,
(ii) with certain exceptions, Net Profits, Net Losses, and credits derived from
the Partnership will be subject to the passive loss rules, (iii) the allocations
of Net Profits and Net Losses in the Partnership Agreement will be respected for
federal income tax purposes, and (iv) Limited Partners will be considered
"at-risk" for purposes of Section 465 of the Code in any one year with respect
to Equipment placed in service in the same taxable year in an amount equal to
(A) the Capital Contributions of such Limited Partner (provided that funds for
such contributions are not from borrowed amounts), less (B) the sum of (1) the
total net losses with respect to such Equipment which have been allowed as
deductions to the Limited Partner under the at-risk rules and (2) cash
distributions received by the Limited Partner, plus (C) the Limited Partner's
distributive share of total Net Profits with respect to such Equipment of the
Partnership. Counsel's opinion is not binding on the IRS.
Neither the General Partner, the Partnership, nor Counsel can guarantee
that any federal income tax advantages described in this summary will be
available. An opinion of Counsel represents only such counsel's best legal
judgment, and has no binding effect or official status of any kind, so that no
assurance can be given that the opinions of Counsel would be sustained by a
court, if contested, or that legislative or administrative changes or court
decisions may not be forthcoming which would require modifications of the
statements and conclusions expressed herein. Except for the opinions
specifically addressed herein, Counsel has not opined as to the probable outcome
on the merits of any issue discussed below. Final disallowance of all or any
portion of the Partnership's federal income tax advantages would of course
adversely affect an investment in the Partnership.
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<PAGE>
Counsel will not prepare or review the Partnership's income tax
information returns, which will be prepared by management and independent
accountants for the Partnership. The Partnership has made and will make a number
of decisions on such tax matters as the expensing or capitalizing of particular
items, the proper period over which capital costs may be depreciated or
amortized and many other similar matters. Such matters are handled by the
Partnership, often with the advice of independent accountants retained by the
Partnership, and are usually not reviewed with Counsel.
The following discussion is not intended as a substitute for careful tax
planning by prospective investors. The income tax consequences of an investment
in a partnership such as the Partnership are often uncertain and complex and
will not be the same for all investors. Details of significance to a particular
taxpayer may not be present, as it is impractical to set forth in a discussion
of acceptable length all aspects of federal income tax law that may be relevant
to an investment in the Partnership. The discussion below considers the federal
income tax considerations associated with an investment in the Partnership by
individuals who are citizens of the United States or resident aliens and is not
intended to deal with matters which may be relevant to other investors, such as
corporations, partnerships or trusts. The discussion, however, does describe
some, but not all, of the material federal income tax considerations associated
with an investment in the Partnership by non-resident alien and foreign
corporations and Keogh plans and pension and profit-sharing plans qualifying
under Section 401(a) of the Code (collectively, "Qualified Plans") and
individual retirement accounts described in Section 408 of the Code. A corporate
investor should be aware that the tax consequences of its investment in the
Partnership will differ in several material respects from those applicable to
individuals.
FOR THE FOREGOING REASONS, EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT
THE INVESTOR'S OWN TAX ADVISOR WITH RESPECT TO THE FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES ARISING FROM AN INVESTMENT IN THE PARTNERSHIP AS THEY
RELATE TO THE INVESTOR'S OWN TAX SITUATION.
Classification as a Partnership
It is the opinion of Counsel that the Partnership will be classified as a
partnership, and not as an association taxable as a corporation, for federal
income tax purposes. This opinion is based upon: (i) existing federal income tax
law, which is presently subject to differing interpretations; (ii) continuing
compliance with the conditions set forth below; and (iii) certain
representations by the General Partner set forth below. Counsel's opinion is not
binding on the IRS.
The Partnership has not requested a ruling from the IRS that the
Partnership will be treated as a partnership for federal income tax purposes and
does not intend to request such a ruling. An opinion of counsel has no binding
effect or official status of any kind, and no assurance can be given that the
conclusions reached in Counsel's opinion would be sustained by a court if
contested by the IRS. Thus, in the absence of a ruling from the IRS, there can
be no assurance that the IRS will not treat the Partnership as a corporation. If
the IRS were to prevail on this issue, the Limited Partners would be deprived of
the potential tax benefits associated with the ownership of Units.
Section 301.7701-2 of the Treasury Regulations (the "Check-the-Box" rules)
provides that certain unincorporated entities which have more than one owner may
generally elect to be treated as a partnership or a corporation for federal
income tax purposes. In the absence of a specific election, any such entities
which are formed under United States law (i.e., domestic entities), through
default, are treated as partnerships for federal income tax purposes. In this
case, the General Partner has represented that the Partnership will file any tax
or informational returns, if any (including Department of the Treasury/Internal
Revenue Service Form
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8832), which may be required in order for the Partnership to be treated as a
partnership for federal income tax purposes. Consequently, subject to the
discussion below, the Partnership will qualify as a partnership for federal
income tax purposes.
Counsel's opinion takes into account Section 7704 of the Code which
provides, with certain exceptions which are not relevant to this discussion,
that "publicly traded partnerships" are taxable as corporations. Section 7704(b)
of the Code defines the term "publicly traded partnership" to mean any
partnership if: (i) interests in the partnership are traded on an established
securities market, or (ii) interests in the partnership are readily tradable on
a secondary market (or the substantial equivalent thereof). The legislative
history of Code Section 7704 provides that a secondary market for interests in a
partnership or the substantial equivalent thereof exists if investors are
readily able to buy, sell or exchange their partnership interests in a manner
that is comparable, economically, to trading on established securities markets.
A secondary market is generally indicated by the existence of a person
standing ready to make a market in the interests. The substantial equivalent of
a secondary market will be deemed to exist either: (i) if the holders of
interests in the partnership have a readily available, regular, and ongoing
opportunity to sell or exchange their interests through a public means of
obtaining or providing information of offers to buy, sell, or exchange
interests, or (ii) buyers and sellers have the opportunity to buy, sell, or
exchange interests in the partnership in a time frame that a market-maker would
provide and prospective buyers have similar opportunities to acquire such
interests. The legislative history of Section 7704 also indicates that a regular
plan of redemptions or repurchases by a partnership may constitute public
trading where holders of interests have readily available, regular, and ongoing
opportunities to dispose of their interests.
The Partnership Agreement provides that no transfer of any Unit "will be
recognized or effective for any purpose to the extent it is determined by the
General Partner to be effectuated through an established securities market or a
secondary market (or the substantial equivalent thereof), within the meaning of
Section 7704 of the Code and the Treasury Regulations applicable with respect
thereto, so as to adversely affect the tax status of the Partnership as a
partnership rather than as an association taxable as a corporation;" the General
Partner will also prohibit any transfer of Units which, in the General Partner's
good faith judgment, will cause the Partnership to fall outside of the safe
harbors of Treasury Regulation Section 1.7704-1(e), discussed below. See "Risk
Factors - Limited Transferability of Units."
Under Treasury Regulation Section 1.7704-1(e), (f), (g), (h) or (j),
certain types of limited, non-public transfers which will be disregarded in
determining whether a partnership is publicly traded ("Exempt Transfers").
Recognizing that these Exempt Transfers will not result in the Partnership being
deemed publicly traded, the General Partner anticipates permitting seven
categories of these Exempt Transfers. See "Transferability of Units - Exempt
Transfers."
In addition to providing for the Exempt Transfers, Treasury Regulation
1.7704-1 states that partnership interests will not be deemed "readily tradable
on a secondary market (or the substantial equivalent thereof)" if any one of
several other safe harbors provided for in such Treasury Regulation is
satisfied. One of these is the "two percent safe harbor." It provides that a
secondary market or its equivalent will not exist if the sum of the interests in
partnership capital or profits attributable to those partnership interests that
are sold, redeemed, or otherwise disposed of during the partnership's taxable
year does not exceed two percent of the total interests in partnership capital
or profits. The seven categories of Exempt Transfers, among other items, do not
count towards the two percent ceiling. In determining whether the Partnership
satisfies the two percent safe harbor, redemption of Units pursuant to Article
12 of the Partnership Agreement will be counted.
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While the General Partner will use its best efforts to limit the type and
number of transfers of Units to those which will allow the Partnership to remain
within the two percent safe harbor, the General Partner does not warrant that
the Partnership will satisfy this safe harbor during each of its taxable years.
It is conceivable that transfers of Units could occur which would cause the
Partnership to fall outside the safe harbor. In this regard, Treasury Regulation
Section 1.7704-1(c)(3) states that failure to meet any of the safe harbors will
not create a presumption that a secondary market or its equivalent exists for
partnership interests. No assurances can be offered, however, that, if the
amount and type of trading in the Units were to fall outside the safe harbor,
the IRS would not claim publicly traded partnership status with respect to the
Partnership.
If, for any reason, the Partnership were treated for federal income tax
purposes as a corporation, the Partnership's income, deductions and credits
would be reflected only on its income tax return rather than being passed
through to Limited Partners, and the Partnership would be required to pay income
tax at corporate tax rates on any net income. Any amounts available (after
corporate taxes) for distribution to the Limited Partners would be treated as
dividends to the extent of current or accumulated earnings and profits. In
addition, distributions from the Partnership would be classified as portfolio
income rather than passive activity income and thus would not be eligible to be
offset by passive activity losses attributable to the Partnership or other
activities giving rise to passive losses. See "Income Tax Considerations -
Limitations on Utilization of Partnership Losses - Passive Activity Losses
Limitations."
Certain Principles of Partnership Taxation
General. A partnership is not subject to federal income tax, but is
required to file a partnership information tax return each year. Each Limited
Partner will be required to take into account, in computing the Limited
Partner's federal income tax liability, the Limited Partner's distributive share
(as determined by the Partnership Agreement and reported on Schedule K-1 to Form
1065) of all items of Net Profits, Net Losses, credit and tax preference of the
Partnership for any taxable year of the Partnership ending within or without the
taxable year of the Limited Partner without regard to whether the Limited
Partner has received or will receive any cash distributions from the
Partnership. Thus, a Limited Partner may be subject to tax if the Partnership
has net income even though no corresponding cash distribution is made. To the
extent a Limited Partner's tax liability attributable to his investment in the
Partnership exceeds his cash distributions from the partnership in any year,
such Partner will be required to pay the excess tax liabilities from other
sources.
Pursuant to Code Section 731, any cash received by a Limited Partner from
the Partnership in his capacity as a Partner will generally not cause
recognition of taxable income (or tax loss) for federal income tax purposes.
Instead, such distributions will generally reduce the Limited Partner's basis in
his Units (but not below zero). However, cash distributions in excess of a
Limited Partner's adjusted basis in his Units will result in the recognition of
taxable income to the extent of any such excess. It should also be noted that
pursuant to the Code, the fair market value of certain actively traded
marketable securities, as defined in Section 731(c) ("Marketable Securities")
distributed by the Partnership, if any exist, will, under certain circumstances,
be treated as cash for purposes of the distribution rules described above. It is
not anticipated, however, that the Partnership will make any distributions of
Marketable Securities to its Partners. Any taxable income recognized upon such
distributions will generally be characterized as capital gain income and will be
long-term or short-term depending upon the Limited Partner's holding period for
his Units; however, to the extent that the gain recognized is with respect to
Marketable Securities that are either "substantially appreciated inventory
items" or "unrealized receivables" within the meaning of Section 751 of the Code
(see generally, "Income Tax Considerations - Disposition of Units"), all or a
portion of such gain may be taxed to the distributee Partner as ordinary income.
With respect to a Partner subject to the "at risk" rules, if the Partner's share
of Partnership losses or distributions reduces his "at risk" amount to zero,
subsequent distributions of cash or other property
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to him will cause him generally to recapture as ordinary income an amount equal
to the Partnership losses previously deducted by him to the extent of such
distributions. The gain realized on a non-pro rata distribution to a Limited
Partner may be taxed to the Limited Partner as ordinary income to the extent
attributable to the Limited Partner's share of depreciation recapture, other
"unrealized receivables" and inventory that has substantially appreciated in
value. See "Cost Recovery and Depreciation - Recapture of Cost Recovery
Deductions" and "Disposition of Units" below. No loss will be recognized by a
Limited Partner upon distributions, other than a loss recognized upon a
distribution in liquidation of his Partnership interest. The treatment and the
potential restrictions on the use of Partnership losses is discussed below. See
"Income Tax Considerations - Limitations on Utilization of Partnership Losses.
A Limited Partner's distributive share of any taxable income generated by
the Partnership will not be deemed to be "net earnings from self employment."
Accordingly, such income will not be subject to the tax imposed on self-employed
persons by Sections 1401 through 1403 of the Code, commonly referred to as
"social security taxes." Prospective investors who receive social security
benefits should be aware that, although income generated by the Partnership will
not be deemed to be "net earnings from self employment," such income will be
included in a Limited Partner's "modified adjusted gross income" under Section
86 of the Code for purposes of determining whether a Limited Partner's social
security benefits, if any, are subject to taxation.
Timing of Income Recognition. The Partnership's tax returns will be
prepared using the accrual method of accounting. Under the accrual method, the
Partnership will recognize as income items such as interest and rentals as and
when earned by the Partnership whether or not they are received. In certain
circumstances, where a lease provides for varying rental payments, increasing
(or decreasing) in the later years of the lease ("step rentals"), Section 467 of
the Code requires the lessor to take the rentals into income as if the rent
accrued at a constant level rate. This provision applies to sale-leaseback
transactions. An additional consequence of the application of Section 467 would
be a conversion of a portion of the Partnership's rental income (passive) from
such lease to interest income (portfolio). If step rentals are provided for in a
lease, the General Partner anticipates that the lease will fall within one of
the exceptions to such provision and, therefore, the Partnership should
recognize such income as it is earned under the lease rather than at a constant
level rate as otherwise provided by Section 467.
Allocation of Partnership Income,
Gains, Losses, Deductions and Credits
In General. Cash distributions, if any, will be made quarterly, 99% to the
Limited Partners and one percent to the General Partner until the Limited
Partners have received an amount equal to $20 per Unit plus their 10% cumulative
compounded Cumulative Return; thereafter, cash distributions will be made 90% to
the Limited Partners and 10% to the General Partner. Distributions in redemption
of a Partner's Units pursuant to Article 12 of the Partnership Agreement (see
"Transferability of Units - Redemption Provision") will be equal to 105% of the
Selling Partner's Adjusted Capital Contribution at the time of the redemption.
Distributions made in connection with the liquidation of the Partnership or a
Partner's Units (other than pursuant to Section 8.1.3 of the Partnership
Agreement) will be made in accordance with the Partner's positive Capital
Account balance as determined under the Partnership Agreement and Treasury
Regulations.
Generally, the General Partner will be allocated Net Profits equal to its
cash distributions (but not less than one percent of Net Profits) and the
balance will be allocated to the Limited Partners. Net Profits arising from
transactions in connection with the termination or liquidation of the
Partnership will be allocated in the following order: (i) First, to each Partner
in an amount equal to the negative amount, if any, of his Capital Account; (ii)
Second, an amount equal to the excess of the proceeds which would be distributed
to the Partners
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based on the Operating Distributions to the Partners over the aggregate Capital
Accounts of all the Partners, to the Partners in proportion to their respective
shares of such excess, and (iii) third, with respect to any remaining Net
Profits, to the Partners in the same proportions as if the distributions were
Operating Distributions. Net Losses, if any, will be allocated 99% to the
Limited Partners and one percent to the General Partner.
The above allocations, however, are subject to several special allocations
designed in part to prevent a Partner's Capital Account (particularly a Limited
Partner's Capital Account) from going below zero and to allow the Partner's
Capital Account accurately to reflect the above-described sharing ratios.
Although a partnership agreement may allocate certain partnership items,
or overall profit and loss, in a manner disproportionate to the partners'
respective capital contributions (a "special allocation"), such an allocation
will be recognized for federal income tax purposes only if it has "substantial
economic effect." A special allocation generally will be considered to have such
effect if it actually affects the dollar amount of the partners' share of total
partnership income or loss independently of tax consequences.
Substantial Economic Effect. The final Treasury Regulations under Section
704(b) of the Code seek to define which partnership allocations have
"substantial economic effect." Under Sections 1.704-1(b)(2) through (4), an
allocation will be respected by the IRS only if it meets any one of the
following: (i) the allocation has "substantial economic effect"; (ii) the
allocation is in accordance with the partners' interests in the partnership; or,
(iii) the allocation is deemed to be in accordance with the partners' interests
in the partnership. Any allocation which fails to satisfy at least one of these
three tests will be reallocated in accordance with the partners' interests in
the partnership as defined in the Treasury Regulations.
Section 1.704-1(b)(2) sets forth a two-part analysis to determine whether
an allocation has "substantial economic effect." First, the allocation must have
"economic effect." In other words, the allocation must be consistent with the
underlying economic arrangement of the partners. If there is an economic benefit
or burden that corresponds to the allocation, the partner receiving such an
allocation should benefit from the economic benefit or bear the economic burden.
Normally, economic effect will be present only if the partners' capital accounts
are determined and maintained as required by the Treasury Regulations. Under
these rules, liquidation proceeds must be distributed in accordance with the
partners' positive capital account balances (after certain adjustments) and,
following the liquidation of a partner's interest, the partner must be
unconditionally obligated to restore any deficit capital account balance by the
end of the taxable year or, if later, within 90 days after the date of
liquidation.
The Partnership Agreement provides that, upon dissolution and termination
of the Partnership, the Limited Partners have no obligation to restore a
negative capital account balance and that the General Partner must contribute to
the Partnership an amount equal to the lesser of (i) the deficit balance of the
General Partner's Capital Account, or (ii) the excess of 1.01% of the Capital
Contributions of the Limited Partners over any Capital Contribution of the
General Partner. Nevertheless, the Partnership Agreement provides that no loss
or deduction may be allocated to a Partner if such allocation would create a
deficit balance in such Partner's Capital Account in excess of the amount such
Partner is obligated to restore to the Partnership or is treated as required to
restore to the Partnership and contains a "qualified income offset," requiring
that if a Partner who unexpectedly receives an adjustment, allocation, or
distribution described in subparagraphs (4), (5) or (6) of Treasury Regulation
Section 1.704-1(b)(2)(ii)(d) which creates or increases a deficit in such
Partner's Capital Account will be allocated items of Net Profits and gain
(consisting of a pro rata portion of each item of partnership income, including
gross income, and gain for such year) in an amount and manner sufficient to
eliminate such deficit balance as quickly as possible. Thus, the allocations
provided in the
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Partnership Agreement will satisfy the "alternate test for economic effect"
notwithstanding the limitations on the Partners' obligations to restore deficits
in their Capital Accounts.
Second, the economic effect must be "substantial." Substantiality is
present if there is a reasonable possibility that the allocation will
substantially affect the dollar amounts to be received by a partner independent
of his tax consequences. If a shifting of tax attributes results in little or no
change to the partner's capital accounts, or if the shift is merely transitory,
they will not be recognized. Thus, if the allocation causes a shift in tax
consequences that is disproportionately large in relation to the shift in
economic consequence, there is a rebuttable presumption that the economic effect
of the allocation is not substantial and such allocation will be disregarded
(and the partnership items will therefore be apportioned according to the
partners' respective interests).
The Treasury Regulations contain several exceptions and qualifications.
For example, if a partnership allocation fails the above "economic effect" test,
it may still be recognized if it meets the "economic effect equivalence" test.
An allocation will be viewed as having economic effect if the agreement among
the partners would in all cases produce the same results as the requirements
outlined above. Further, there are also several exceptions which come into play
where the partner does not have an absolute obligation to restore a negative
capital account.
Pursuant to the Partnership Agreement, Net Profits, Net Losses and cash
distributions allocated to a Partner will be reflected by appropriate
adjustments to the Partner's Capital Account. Furthermore, the Partnership
Agreement contains provisions which would in all cases produce distributions of
liquidation proceeds on dissolution on the basis of the relative amounts of the
Partners' Capital Accounts to the extent of the balances of such Capital
Accounts. The tax allocations, however, are predicated on the assumption that
the management fees payable to the General Partner will be treated as deductible
guaranteed payments, rather than as Partnership distributions. See "Income Tax
Considerations - Summary - Deductibility of Fees."
Retroactive Allocations. Under Section 706(d) of the Code, "retroactive
allocations," i.e., allocations of items to partners before they became
partners, are prohibited. Section 706(d) of the Code and the Treasury
Regulations thereunder accomplish this prohibition by providing that if there is
a change in any partner's interest in any taxable year of the partnership, each
partner's distributive share of a partnership's tax items is to be determined by
use of any method prescribed by the Secretary of the Treasury in Treasury
Regulations which take into account the varying interests of the partners in the
partnership during such taxable year. The Partnership Agreement provides that
Limited Partners will be admitted to the Partnership and will commence sharing
in Net Profits, Net Losses and cash distributions on the day following the date
on which their Capital Contributions are received. Thus, if some Limited
Partners are admitted to the Partnership after others, those Limited Partners
admitted later may receive a smaller portion of each item of the Partnership's
Net Profits and Net Losses than the Limited Partners who were admitted earlier.
Nevertheless, those Limited Partners still will be obligated to make the same
Capital Contributions to the Partnership for their interests as the Limited
Partners who were admitted previously. In addition, where a Limited Partner
transfers Units during a taxable year, the Limited Partner may be allocated Net
Profits for a period and for which such Limited Partner will not receive a
corresponding cash distribution.
Conclusion. Based on the Treasury Regulations, the legislative history and
existing case law, Counsel is of the opinion that the allocations contained in
the Partnership Agreement of the Partnership's Net Profits and Net Losses will
be respected for federal income tax purposes.
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Limitations on Utilization of Partnership Losses
Tax Basis. A Limited Partner may not deduct losses in excess of his "tax
basis" in his Units, but may carry forward such excess losses to such time, if
ever, as his basis is sufficient to absorb them. A Limited Partner's tax basis
in his Units also determines the tax consequences of his distributions, as well
as the amount of the gain or loss he may realize upon any sale of his Units. See
"Income Tax Considerations - Disposition of Units." Initially, the tax basis of
a Limited Partner's Units will be equal to the amount of cash contributed by the
Limited Partner to the Partnership or the amount paid to a transferor Limited
Partner, plus the Limited Partner's share of the Partnership's nonrecourse
liabilities, if any. A Limited Partner's initial tax basis will then be (i)
increased by the his allocable share of any Net Profits for each year,
contributions made to the Partnership by the Limited Partner, and any increase
in his share of nonrecourse liabilities, and (ii) reduced by his allocable share
of any Net Losses, the amount of any distributions made to him during the year,
and any reduction in his share of nonrecourse liabilities.
The IRS has ruled that a partner acquiring multiple interests in a
partnership in separate transactions at different prices must maintain an
aggregate adjusted tax basis in a single partnership interest consisting of the
partner's combined interests. Possible adverse tax consequences could result
from the application of this ruling upon a sale of some but not all of a Limited
Partner's Units. See "Income Tax Considerations Disposition of Units."
Amounts at Risk. Section 465 of the Code limits the deductions that an
individual or a closely held "C" corporation may claim from an activity to the
aggregate amount with respect to which such taxpayer is "at risk" for such
activity as of the close of the taxable year.
Except as otherwise provided below, a Limited Partner will be considered
to be "at risk" with respect to the amount of money and the adjusted basis of
other property the Limited Partner contributes to the Partnership. A Limited
Partner will be at risk with respect to amounts borrowed by the Partnership only
to the extent that the Limited Partner is personally liable for their repayment
or the net fair market value of the Limited Partner's personal assets (other
than Units) that secure the indebtedness. A Limited Partner will not be
considered at risk with respect to any amounts that are protected against loss
through nonrecourse financing, guarantees, stop loss agreements or similar
arrangements.
Because the Limited Partners will not be personally liable for Partnership
indebtedness, any such indebtedness will not augment the Limited Partners'
amounts at risk.
A Limited Partner's amount at risk will be reduced by (i) Net Losses which
are allowed as a deduction to the Limited Partner under the at-risk rules and
(ii) cash distributions received by a Limited Partner with respect to the
Limited Partner's Units, and increased by that Limited Partner's distributive
share of Net Profits. Investors should note that Net Losses that may be
allowable as a deduction under the at-risk rules may be disallowed currently
under the passive activity loss limitations. See "Income Tax Considerations
- -Limitations on Utilization of Partnership Losses - Passive Activity Losses
Limitations." If a Limited Partner's at risk amount is reduced below zero (due
to a cash distribution to a Limited Partner), the Limited Partner must recognize
income to the extent of the deficit at risk amount. Losses of the Partnership
that have been disallowed as a deduction in any year because of the at-risk
rules will be allowable, subject to other limitations, as a deduction to the
Limited Partner in subsequent years to the extent that the Limited Partner's
amount at risk has been increased.
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It is not anticipated that, on an aggregate basis, the Partnership will
incur losses. However, the Code will allow the Partnership to aggregate its
equipment leasing activities only with respect to Equipment placed in service
during the same taxable year. Therefore, the "at risk" rules will be applied to
the net taxable income or loss resulting from leasing Equipment which was placed
in service during the same taxable year. This could result in a Partner's
deduction for losses with respect to certain items of Equipment being limited by
the "at risk" rules, even though he must recognize income with respect to other
items of Equipment. Counsel has rendered an opinion that each Limited Partner
will be considered "at risk" in any one year with respect to Equipment placed in
service in the same taxable year for purposes of Section 465 of the Code in an
amount equal to (i) the Capital Contributions of such Limited Partner (provided
that funds for such contributions are not from borrowed amounts), less (ii) the
sum of (a) the total Net Losses with respect to such Equipment which have been
allowed as deductions to the Limited Partner under the at-risk rules and (b)
cash distributions received by the Limited Partner, plus (iii) the Limited
Partner's distributive share of total Net Profits with respect to such Equipment
of the Partnership.
Passive Activity Losses Limitations. Section 469 of the Code prohibits an
individual, estate, trust, closely held "C" corporation, or personal service
corporation from using losses and credits from a business activity in which the
taxpayer does not materially participate, or a rental activity, to offset other
income, including salary and active business income as well as portfolio income
(such as dividends, interest and royalties, whether derived from property held
directly or through a pass-through entity such as a partnership). However,
Section 469(l)(3) of the Code authorizes the issuance of Treasury Regulations
requiring net income or gain from a limited partnership or other passive
activity to be treated as not from a passive activity. This regulatory authority
could be broad enough to treat income of any limited partnership as portfolio
income.
Interest income derived by the Partnership from the interim investment of
offering proceeds or reserves (and any income derived by the Partnership from
leases treated as loans for federal income tax purposes) will be treated as
portfolio income and, thus, will not be offset for these purposes by Partnership
deductions such as depreciation or cost recovery deductions.
Losses from a passive activity that are not allowed currently will be
carried forward indefinitely, and are allowed in subsequent years against
passive activity income or in full upon complete disposition of the taxpayer's
interest in that passive activity to an unrelated party in a fully taxable
transaction.
Code Section 469(k), as clarified by IRS Notice 88-75, prevents the
utilization of losses from the Partnership and other passive activities to
offset income from a publicly traded partnership and further causes the income
from a publicly traded partnership to be investment income. Limited Partners,
therefore, will be unable to use losses from the Partnership to offset passive
income from publicly traded partnerships that are not taxed as corporations and
income from the Partnership cannot be offset by passive losses from publicly
traded partnerships that are not taxed as corporations.
If a Limited Partner incurs indebtedness in order to acquire or carry
Units, interest paid by the Limited Partner on the indebtedness will be subject
to the limitations for passive activity losses, except to the extent that the
indebtedness relates to "portfolio income," if any, of the Partnership. Interest
expense a Limited Partner attributable to "portfolio income" may be subject to
other limitations on its deductibility. See "Income Tax Considerations -
Interest Deduction Limitations."
Based on the above discussion, certain qualifications and representations
of the General Partner, assuming that all leases entered into by the Partnership
are considered "true leases" for federal income tax purposes, and subject to the
broad discretion granted to the Department of Treasury, it is Counsel's opinion
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that Net Profits, Net Losses, and credits derived from the Partnership with
respect to its leasing activities will be subject to the passive activity rules.
Thus, any income produced by the Partnership should be income from a passive
activity. Counsel's opinion does not apply to any Partnership income
attributable to (i) the investment of Partnership funds in liquid investments
prior to the purchase of Equipment, (ii) the investment, in interest-bearing
accounts or otherwise, of amounts held by the Partnership as working capital,
security deposits, or in reserve, or (iii) Equipment with respect to which the
Partnership is determined not to be the owner for federal income tax purposes.
Hobby Losses. Section 183 of the Code limits deductions attributable to
"activities not engaged in for profit." The phrase "activities not engaged in
for profit" means any activity other than one that constitutes a trade or
business, or one that is engaged in for the production or collection of income
or for the management, conservation or maintenance of property held for the
production of income. The Treasury Regulations provide that the determination of
whether an activity is engaged in for profit is to be made by reference to
objective standards, taking into account all of the facts and circumstances in
each case. The Treasury Regulations also provide that, although a reasonable
expectation of profit is not required, the facts and circumstances must indicate
that the taxpayer entered into the activity, or continued the activity, with the
objective of making a profit. The Treasury Regulations enumerate a number of
nonexclusive factors which should be taken into account in determining whether
an activity is engaged in for profit. The IRS has ruled that this test will be
applied at the partnership level.
Based upon these Treasury Regulations and the investment goals of the
Partnership, and certain representations made by the General Partner, Counsel
believes that the proposed activities of the Partnership will constitute an
activity engaged in for profit within the meaning of Section 183 of the Code.
However, the test of whether an activity is deemed to be engaged in for profit
is based on the facts and circumstances applicable from time to time including
the motives of the investors, and no assurance can be given that Code Section
183 may not be applied in the future to disallow the deductions.
Fees and Reimbursements to the General Partner and Affiliates
General. There is no assurance that the IRS will not challenge the
position of the Partnership with respect to the amount, character, time of
deduction or tax treatment of any of the fees discussed herein or, if
challenged, that the position of the Partnership would be sustained. In any year
such fees are incurred, the disallowance of the deductibility of such fees would
result in a proportionate increase in the taxable income (or reduction in the
loss) of the Limited Partners with no associated increase in cash distributions
with which to pay any resulting increase in tax liabilities.
Organizational and Offering Expenses. The General Partner will be paid
an organizational fee for its services in organizing the Partnership and
preparing the Offering. The General Partner plans to make a reasonable
allocation of such fees between syndication expenses which must be
capitalized and start-up expenses which may be amortized over a 60-month
period. The range of the fee based on the minimum and maximum amounts sold
will be between $45,000 and $400,000. The organizational fee is anticipated
to be approximately $300,000.
Equipment Acquisition and Debt Placement Fees. The cost of Acquisition
Fees will be capitalized to the cost of the Equipment. Debt Placement Fees will
be amortized over the term of the borrowings to which they relate.
The Equipment Management Fee. The Equipment Management Fee should be
deductible as an ordinary and necessary business expense under Section 162 of
the Code, to the extent that its amount is commercially reasonable.
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Equipment Liquidation Fee. Equipment Liquidation Fees should be treated as
a cost of sale of the Equipment.
Ownership of Equipment
Lease versus Sale. The fact that each agreement between the Partnership
and a lessee will be denominated a "lease" may not be determinative of the
character for income tax purposes of the transaction which the agreement
reflects. The IRS may assert that any such lease constitutes an installment or
conditional sale for income tax purposes rather than a lease. If any of the
Partnership's leases were treated as sales for income tax purposes, the Limited
Partners would not be entitled to depreciation or cost recovery deductions with
respect to the items of Equipment involved. On the other hand, a portion of the
rental payments (otherwise fully taxable) would be deemed to constitute a return
of capital, which would not be taxable to the Limited Partners.
Whether a transaction is to be characterized as a lease for income tax
purposes involves a determination based upon all of the facts and circumstances
involved. Section 162(a)(3) of the Code provides that a deduction shall be
allowed for "rentals or other payments required to be made as a condition to the
continued use or possession, for purposes of the trade or business, of property
to which the taxpayer has not taken or is not taking title or in which he has no
equity." The IRS has stated in Revenue Ruling 55-540, 1955-2 C.B. 39, that the
presence of any of the following six factors would be significant evidence of a
sale rather than a lease: (i) portions of the periodic payments are made
applicable to an equity interest to be acquired by the lessee; (ii) the lessee
will acquire title upon payment of a stated amount of rental payments; (iii) the
total amount which the lessee is required to pay for a relatively short period
of use constitutes an inordinately large proportion of the total sum required to
be paid to secure the transfer of title; (iv) the agreed rental payments
materially exceed the current fair rental value, indicating that the payments
include an element other than compensation for the use of the property; (v) the
property may be acquired under a purchase option at a nominal price; and (vi)
some portion of the periodic payments is specifically designated as interest or
is otherwise readily recognizable as the equivalent of interest.
The presence of a purchase option at a price less than fair market value
is the most influential factor cited by the IRS to support a determination that
a transaction will not be treated as a lease. Even if a purchase option is not
present, a constructive transfer of ownership to the lessee may be found if the
lease term is for all or substantially all of the economic useful life of the
property and the rental payments merely reimburse the lessor for its equity
investment and financing costs and pay the lessor a guaranteed sum reflecting a
market rate of return.
In recent cases, the Tax Court has examined the lessor's profit motive in
entering into a lease. In general, the parties' characterization of a
transaction as a lease has been respected so long as the lessor retains
significant and genuine attributes of a traditional lessor, while the form of
the transaction as a lease has been disregarded if it was entered into without
any economic purpose apart from tax motives. See Estate of Thomas v.
Commissioner, 84 T.C. 412 (1985); Rice's Toyota World, Inc. v. Commissioner, 81
T.C. 184 (1983), aff'd in part and rev'd in part, 752 F.2d 89 (4th Cir. 1985);
Mukerji v. Commissioner, 87 T.C. 926 (1986); James v. Commissioner, 87 T.C. 876
(1986); and Larsen v. Commissioner, 89 T.C. 1229 (1987).
In Revenue Procedures 75-21, 1975-1 C.B. 715, 75-28, 1975-1 C.B. 752,
76-30, 1976-2 C.B. 647, and 79-48, 1979-2 C.B. 529, the IRS established those
requirements which must be satisfied in order for a lessor in a leveraged lease
transaction to receive an advance ruling that it is the owner of the property
subject to the lease. In brief, these requirements are: (i) the taxpayer must
anticipate a significant return on the lease
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apart from any tax benefits; (ii) the estimated useful life of the property at
the end of the lease term (including fixed rate renewal options) must exceed 20%
of the property's estimated useful life at the beginning of the lease; (iii) the
estimated value of the property at the end of the lease term must exceed 20% of
the taxpayer's capitalized costs; (iv) any purchase options held by the lessee
must be at fair market value at the time of the option exercise; (v) none of the
rental payments may be credited against the option purchase price; (vi) the
lease may not contain put or abandonment clauses; and (vii) the property must
not be limited use property. Although Revenue Procedure 75-21 forbids an option
price "at a price less than its fair market value at the time the right is
exercised," the Tax Court has approved fixed price purchase options when the
fixed price is the expected fair market value upon exercise at the time the
transaction is entered into (see Lockhart Leasing v. Commissioner, 54 T.C. 301
(1970), aff'd, 446 F.2d 269 (10th Cir. 1971) and Northwest Acceptance Corp. v.
Commissioner, 58 T.C. 836 (1972), aff'd, per curiam, 500 F.2d 1222 (9th Cir.
1974)). The requirements of these Revenue Procedures are not necessarily
indicative of those standards which would be applied by a court in seeking to
determine whether a given transaction constitutes a lease for federal income tax
purposes, but the Revenue Procedures provide a safe harbor for the
characterization of a transaction as a lease, even where, as in the case of
leases to be entered into by the Partnership, the leases are not highly
leveraged.
The Partnership intends to structure each lease transaction so that the
lease will be treated as a lease rather than a financing arrangement for federal
income tax purposes. Due to the factual nature of this determination, however,
neither the General Partner nor Counsel can offer any assurance or guarantee in
this regard. In addition, the Partnership may sell Equipment under Conditional
Sales Contracts in which case the Partnership will not be treated as the owner
of such Equipment. In this event, the Partnership and the Partners will not be
entitled to depreciation or cost recovery deductions with respect to such
Equipment. The Partnership, however, would be entitled to treat a portion of the
each payment as a return of its cost basis in purchasing such Equipment. The
Partnership is entitled to enter into Full Payout Net Leases. While the tax
consequences are less clear for Full Payout Net Leases, the IRS is likely to
take the position that the tax treatment is the same as for Conditional Sales
Contracts. Thus, if the Partnership enters into Full Payout Net Leases, the
Partnership and the Partners may not be entitled to depreciation or cost
recovery deductions with respect to such Equipment, although a portion of each
payment would be treated as a return of cost basis.
Cost Recovery and Depreciation
Cost Recovery Rules. The Tax Reform Act of 1986 substantially amended the
Accelerated Cost Recovery System ("ACRS") rules which were introduced into law
as part of the 1981 Tax Reform Act. Under new Code Section 168, which is
generally effective with respect to property placed in service after December
31, 1986, the period of time over which covered property must be depreciated is
generally, although not in every case, longer. The rate of depreciation
allowable for many types of property, however, has been increased from 150
percent to 200 percent declining balance.
The new system generally applies to new and used tangible property
("recovery property") which would otherwise be depreciable under Section 167 of
the Code. As a general matter, the new system allows a taxpayer to recover the
cost or other tax basis of recovery property through deductions over a
prescribed period of time that is dependent upon the type of property involved
and not upon the property's actual economic useful life.
Under Section 168, the cost of Equipment which is held by the Partnership
and leased to others, and with respect to which the Partnership is considered to
be the owner for federal income tax purposes, will be capitalized by the
Partnership and deducted over a specified period. Except as discussed below with
respect to computer software, it is anticipated that substantially all of the
Partnership's recovery property will be "five-
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year property." Accordingly, the Partnership will be required to recover its
basis in such property using either the straight-line method or the prescribed
accelerated method (200% declining balance switching to straight-line for the
first taxable year that the straight-line method will yield a larger allowance)
over a five year recovery period. Although the Partnership intends to elect to
recover Equipment costs on the straight-line method for the Equipment purchased
with the proceeds of the Offering, it may, in other cases elect to recover
Equipment costs on the accelerated basis. If, however, any tax exempt entities
become Limited Partners, the Partnership likely will continue to use a
straight-line depreciation method. Both the accelerated and straight-line
methods are applied to the entire cost or other tax basis of the Equipment
without regard to salvage value. The Partnership intends to include Acquisition
Fees as part of the cost of Equipment.
With respect to personal property, both the straight-line method and the
accelerated method generally use a "half-year" convention, which assumes that
property is placed in service at the midpoint of the taxable year, regardless of
when it is actually placed in service. For the year property is acquired and for
the year property is disposed of, only a half year of depreciation is allowable.
However, if the aggregate bases of property placed in service during the last
three months of the year exceed 40% of the aggregate bases of all of the
property placed in service during the year, then the taxpayer cannot use the
half-year convention. Instead, the taxpayer must use the mid-quarter convention
for all such property placed in service by the taxpayer for that year. For
purposes of this test, members of an affiliated group are treated as one
taxpayer.
Therefore, assuming that the Equipment in question is five-year recovery
property, that the straight-line method is elected, and that the mid-quarter
convention is not required, 10% of the tax basis of the Equipment would be
recovered in the year the property is placed in service. In each of the next
four succeeding years, 20% of the basis would be recovered, and the remaining
10% would be recovered in the sixth year. Under the accelerated method, again
assuming the mid-quarter convention is not required and that the appropriate
recovery period is five years, approximately 20% of the tax basis of the
Equipment would be recovered in the first year, 32% in the second year, 19.20%
in the third year, 11.52% in both the fourth and fifth years, and 5.76% in the
sixth year.
Cost recovery deductions must be prorated for the first taxable year
recovery property is placed in service if it is considered to be a short taxable
year i.e., if the Partnership is operating for less than 12 months. Proposed
Treasury Regulation Section 1.168-2(f). Under Section 1.168-2(f)(4), the
Partnership's first taxable year will be considered to begin on the date of its
initial substantial acquisition of Equipment. This required proration of the
cost recovery deductions of the Partnership for its initial taxable year will
reduce the tax benefits of an investment in the Partnership for 1995, but the
tax benefits will be increased in some subsequent years because of increased
cost recovery deductions in such years.
Certain Equipment acquired by the Partnership may be subject to the
so-called "anti-churning" rules found in either Code Section 168(f)(5) or
Section 168(v)(4) of the Internal Revenue Code of 1954. Equipment subject to the
anti-churning rules may be subject to depreciation under old Section 168 or
under Section 167. In addition, special rules under Code Section 168 apply to
recovery property used predominantly outside the United States and to recovery
property leased to tax exempt and governmental entities. The Partnership does
not anticipate acquiring significant amounts of Equipment in these categories.
A portion of the property acquired by the Partnership for lease to others
may consist of computer software. There are a number of uncertainties as to the
proper tax treatment of computer software costs. However, Revenue Procedure
69-21, 1969- 1 C.B. 303, provides that if computer software costs are included,
without being separately stated, in the costs of computer hardware, the software
costs may be recovered on the same basis as the hardware cost. If computer
software costs are separately stated, the software may be treated
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as an intangible asset and its cost may be amortized ratably over a five-year
period or a shorter period if the software has a shorter useful life. Section
167(f) of the Code, as amended by the Omnibus Reconciliation Act of 1993,
provides that to the extent that a depreciation deduction is otherwise allowable
pursuant to Section 167(a) of the Code, the depreciation deduction for computer
software shall be computed using the straight line method and useful life of 36
months.
If the Partnership is considered to be the owner of its property for
federal income tax purposes, the Partnership should be entitled to all cost
recovery, depreciation and amortization deductions allowable with respect to the
property under the existing Code, Treasury Regulations, court decisions and
other applicable law.
Recapture of Cost Recovery Deductions. All or part of the cost recovery,
depreciation or amortization deductions of the Partnership may be recaptured as
ordinary income upon a subsequent disposition by the Partnership of its
Equipment or other property or, with respect to a Partner's share of such
deductions, upon the disposition of the Partner's Units. See "Income Tax
Considerations - Disposition of Units" below. The cost recovery, depreciation or
amortization deductions of the Partnership will be recaptured to the extent of
any gain on disposition. This recapture amount will be recognized in full as
ordinary income in the year of sale even if the Partnership has made an
installment sale of the property. See "Income Tax Considerations - Sale of
Equipment."
If the Partnership has not made a basis adjustment election under Section
754, a purchaser of Units also may be required to recapture amounts attributable
to cost recovery, depreciation or amortization deductions taken by the
Partnership prior to his purchase of his Units when the Partnership disposes of
property subject to recapture or when the purchaser subsequently sells his
Units. The Partnership does not intend to make an election under Section 754,
but may do so in the discretion of the General Partner. The absence of such an
election may make it more difficult for a Limited Partner to dispose of his
Units.
Interest Deduction Limitations
Section 163(d). Section 163(d) of the Code restricts the ability of
noncorporate taxpayers to deduct interest on funds borrowed to acquire or carry
investment assets. Such taxpayers may deduct "investment interest" only to the
extent of the "net investment income" of the taxpayer for the taxable year. Any
interest disallowed under this provision in one year may be carried forward
indefinitely and claimed at such time as the taxpayer has sufficient investment
income.
Interest expense that is allocable to a passive activity is subject to the
passive loss limitations, and is not subject to the investment interest
limitations. The General Partner anticipates that the Partnership will be deemed
a passive activity with respect to the income, gains, losses, deductions and
credits passed through to the Limited Partners and, therefore, will not figure
in a Limited Partner's investment interest limitations calculation.
Again, however, no assurances can be made because of the broad discretion
given to the Department of Treasury in Section 469(l). Consequently, because the
Partnership may borrow to acquire Equipment, it is possible that the Partnership
will generate interest expense. Further, because the Partnership will enter into
net leases, any interest expense that might be paid by the Partnership might be
considered to be investment interest expense and, as such, would be subject to
the limitations described herein. Because the amount of any Limited Partner's
investment interest that would be subject to disallowance in any year will
depend upon the other investment income and expenses of that Limited Partner,
the extent, if any, of such disallowance will depend upon that Limited Partner's
particular tax situation.
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Additionally, the IRS might argue that all or some portion of any interest
incurred in connection with the acquisition or maintenance of a Unit in the
Partnership is investment interest. As noted above, however, it is anticipated
that any interest in the Partnership as a Limited Partner will be deemed a
passive activity (unless modified by Treasury Regulations or legislation). To
the extent the investment in a Unit is treated as a passive activity, any
interest incurred in acquiring or maintaining such an interest would not be
subject to Section 163(d) but instead would be subject to the passive activity
limitations.
Section 265. Section 265 of the Code denies any deduction for interest
paid by a taxpayer on indebtedness incurred or continued for the purpose of
purchasing or carrying tax exempt obligations. Denied interest may not be
deducted in any year. The IRS announced in Revenue Procedure 72-18, 1972-1 C.B.
740 (clarified by Revenue Procedure 74-8, 1974-1 C.B. 419), that the prescribed
purpose generally will be deemed to exist with respect to indebtedness incurred
to finance a "portfolio investment," including a limited partnership interest.
Accordingly, in the case of a Limited Partner owning tax exempt obligations, the
IRS may take the position that, with respect to a Limited Partner who borrows
funds to purchase Units, the interest paid by the Limited Partner on such loan
should be viewed as incurred on loans which enable him to continue carrying his
tax exempt obligations. If this position were upheld, the Limited Partner would
not be allowed to deduct such interest.
Cash Distributions
Cash distributions made to a Limited Partner, other than those in exchange
for, or redemption of, all or part of his Units, reduce a Limited Partner's
adjusted basis in his Units and may represent both a return of capital and
income. To the extent distributions of cash (including reductions in a Limited
Partner's proportionate share of Partnership nonrecourse liabilities, if any)
reduce a Limited Partner's adjusted basis in his Units to zero, such
distributions will be treated as returns of capital which generally do not
result in any recognition of gain or loss for federal income tax purposes. To
the extent such distributions or reductions in liabilities exceed a Limited
Partner's adjusted basis in his Units immediately prior thereto, such Limited
Partner will recognize gain to the extent of such excess. Such gain may be
treated as ordinary income to the extent the distribution is deemed to be in
exchange for a share of the Limited Partner's interest in the Partnership's
"substantially appreciated" inventory and "unrealized receivables" (which
includes depreciation recapture); any excess gain will be treated as capital
gain. The gain that a Limited Partner will recognize as a result of a reduction
of liabilities in excess of such Limited Partner's adjusted tax basis in his
Units immediately prior thereto will result in a tax liability to the Limited
Partner without any cash distribution to such Limited Partner. To the extent a
Limited Partner's federal tax liabilities exceed cash distributions, such excess
in effect would be a nondeductible cost to such Limited Partner.
Sale of Equipment
Gain realized by the Partnership upon the sale or other disposition of any
of its properties, including Equipment, held for more than 12 months will
generally be treated as Section 1231 gain, as discussed below (except to the
extent that the gain represents depreciation recapture taxable as ordinary
income --see "Income Tax Considerations - Cost Recovery and Depreciation -
Recapture of Cost Recovery Deductions"), unless it is determined that the
particular property sold constitutes stock in trade or property held primarily
for sale to customers in the ordinary course of the Partnership's trade or
business. Under the general rule of Section 1231, to the extent that the
Partnership assets that are sold constitute Section 1231 assets (i.e.,
depreciable property used in the Partnership's trade or business and held for
more than 12 months), a Partner's share of the net gains or losses incurred
would be treated as long-term capital gains, or ordinary losses, as the case may
be.
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Notwithstanding the general rule, to the extent that such assets are
subject to depreciation recapture, gains will be treated as ordinary income. In
addition, if Partnership assets are sold on an installment sale basis, Code
Section 453(i) requires that all depreciation recapture be recognized as
ordinary income in the year of disposition, whether or not any payments are
received in that year. Furthermore, a taxpayer who has a net Section 1231 gain
for the taxable year must look back to the five most recent preceding taxable
years commencing after 1981 for possible "recapture" of net Section 1231 losses
for such past years. If there were any net Section 1231 losses for such past
periods, the taxpayer must treat his current year's net Section 1231 gain as
ordinary income to the extent of the amount of unrecaptured net Section 1231
losses for such past years.
If the Partnership is held to be a "dealer" (defined as a taxpayer
regularly engaged in the sale of personal property of the same type on the
installment basis), or if any of the Equipment sold is found to constitute stock
in trade or property held primarily for sale to customers in the ordinary course
of the Partnership's trade or business, gain or loss on the sale or other
disposition of such Equipment will be ordinary income or loss, and under Code
Section 453(b), gain from such dispositions will not be eligible for the
installment sales method of reporting income.
In determining the amount realized upon the sale, exchange or other
disposition of a Partnership asset, the Partnership must include the amount
of any liability to which the property is subject. Thus, the Partnership's
gain or loss on the sale of any such property may exceed the cash proceeds of
such sale. In such case, the income tax payable by the Limited Partners with
respect to such gain may exceed the cash distributed to the Limited Partners.
Further, the Partnership may, instead of receiving all cash, take back
purchase money obligations as part of the consideration for the sale of any
its of property. While the Partnership anticipates that any such sale would
qualify as an "installment sale" for federal income tax purposes, any
depreciation recapture with respect to the item of property still would have
to be recognized in full in the year of sale. See "Income Tax Considerations
- - Cost Recovery and Depreciation - Recapture of Cost Recovery Deductions." In
addition, depending upon the amount of the Partnership's and any individual
Limited Partner's outstanding installment obligations at the end of any year,
a Limited Partner may be liable for the payment of interest on the amount of
the tax liability deferred as a result of the "installment sale" of Equipment.
A foreclosure of a security interest in Partnership property will
generally be treated as a sale of such property, subject to the rules discussed
above. Ordinarily, gain will be realized to the extent of the excess of the
indebtedness over the adjusted basis of the property at the time of the
foreclosure.
Gain realized on a sale or other disposition of an item of Equipment
should be treated as income from the activity of leasing such Equipment, which
should permit any amounts disallowed under Section 465 for the leasing of such
Equipment in previous years to be allowed for the taxable year of the sale. See
"Income Tax Considerations - Limitations on Utilization of Partnership Losses -
Amounts at Risk" and "Summary of the Partnership Agreement."
The Partnership has not been organized to operate as a "dealer" in
Equipment and does not presently intend to hold any Equipment as inventory, as
stock in trade or primarily for sale to customers in the ordinary course of its
trade or business. Under existing law, whether property is held as inventory is
a question of fact, depending upon all of the circumstances of the particular
transaction. There are cases holding, for instance, that property acquired by a
taxpayer for investment purposes was later held as inventory for sale to
customers in the ordinary course of business. Other cases have held that
taxpayers continuously involved in buying and selling property still may hold
specific property for investment. Important factors in making these
determinations generally include the purpose or reason for the purchase and sale
of the property, the continuity
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of sales or sales-related activities, the number and frequency of sales, and the
substantiality of sales income compared to the taxpayer's other income. The
Partnership intends to purchase Equipment for investment only and to engage in
the business of leasing such Equipment. Accordingly, the Partnership anticipates
that it will not be treated as holding any Equipment primarily for sale in the
ordinary course of its trade or business. Nevertheless, there is no assurance
that the IRS will not take the contrary position.
Disposition of Units
In General. A Partner who sells or otherwise disposes of his Units,
including redemptions of a Limited Partner's Units pursuant to Article 12 of the
Partnership Agreement, will realize taxable gain or loss measured by the
difference between the selling or redemption price and the adjusted tax basis of
his Units. See "Income Tax Considerations - Limitations on Utilization of
Partnership Losses - Tax Basis." Gain or loss, in general, will be taxed as
short-term or long-term capital gain or loss, depending on the period the Units
have been held (provided the Partner is not a dealer in the Units). However,
gain attributable to the Partner's share of "substantially appreciated inventory
items" and "unrealized receivables" of the Partnership, as those terms are
defined in Code Section 751, will be taxed as ordinary income. Unrealized
receivables include any cost recovery, depreciation and amortization deductions
of the Partnership that would have been recaptured upon a hypothetical sale of
the Equipment. As a result, Code Section 453(i), which requires that recapture
amounts be recognized in full in the year of sale even if the sale qualifies as
an installment sale, may apply to an installment sale of Units. See "Income Tax
Considerations - Cost Recovery and Depreciation - Recapture of Cost Recovery
Deductions." In determining the amount realized upon the sale or exchange of
Units, a Limited Partner must include, among other things, his allocable share
of Partnership indebtedness included in his basis in such Units. See "Income Tax
Considerations - Limitations on Utilization of Partnership Losses - Tax Basis."
Thus, a Partner's gain on the sale or exchange of Units should be treated as
income from the activity of leasing the Equipment. As a result, suspended
losses, if any, from prior years could offset the gain realized on the sale or
exchange of Units. See "Income Tax Consideration - Limitation on Utilization of
Partnership Losses - Amounts at Risk - Passive Activity Losses Limitations." A
Partner who sells or otherwise disposes of his Units must also report his share
of the taxable income or loss of the Partnership for the portion of the taxable
year of the Partnership during which he owned his Units.
Gift of Units. Since the tax consequences of any gift or transfer will
depend upon the particular circumstances and upon the individuals or
organizations involved in the transaction, before making any gift of Units, a
Limited Partner should consult his tax advisor as to the consequences of such a
gift and as to the basis of the Units in the hands of his successor.
Death of Partner. If a Limited Partner dies, the fair market value of his
Units at death (or, if elected, at the alternate valuation date) will be subject
to federal estate taxation. Under present law, the death of a Limited Partner
does not result in a sale or exchange giving rise to a federal income tax. It is
not clear what the tax consequences are if the decedent's proportionate share of
the Partnership's liabilities exceeds the adjusted basis of his Units at death.
In this event, some gain may be recognized to the decedent or his estate upon
the distribution of the Units to the extent of such excess. The cost or other
basis of the Units inherited from the decedent generally is "stepped up" or
"stepped down" to its fair market value for federal income tax purposes.
Notice of Transfer. Pursuant to Code Section 6050K, a Limited Partner who
transfers an interest in a partnership, whether by sale, gift or otherwise, must
notify the partnership of such transfer within 30 days of the transfer or, if
earlier, by January 15 of the calendar year following the calendar year in which
transfer occurs. In addition, Section 6050K requires a partnership to file a
separate information return (Form 8308)
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with the partnership's Form 1065 for the tax year in which the transfer occurs
whenever there is a transfer of a partnership interest involving a Code Section
751(a) sale or exchange. If a partnership fails to timely file the Form 8308
with its Form 1065, the partnership may be liable for a penalty of $50 per
unreported transfer with an annual maximum penalty of $250,000. A Limited
Partner who fails to inform the Partnership of a transfer of the Limited
Partner's Units in accordance with the rules described in this paragraph is
liable for a penalty of $50 per unreported transfer with an annual maximum
penalty of $100,000. Each such return must contain the following: (a) the names,
addressees and taxpayer identification numbers of the transferee and transferor
involved in the exchange and (b) the date of the sale or exchange. Once
notified, Section 6050K(b) of the Code requires the partnership to provide the
transferee and the transferor with a copy of the completed Form 8308, and to
include the name, address and telephone number of the information contact of the
partnership required to make the return. The Partnership must provide this
information by January 31 of the calendar year following the transfer. Failure
to timely provide this notice may result in a $50 penalty per unreported
transfer with an annual maximum penalty of $100,000. However, the partnership is
not required to file a Form 8308 or furnish statements regarding any Section
751(a) exchanges until it has been notified, or has reason to know, that such an
exchange has taken place. The partnership may rely on a written statement from
the transferor that the transfer was not a Section 751(a) exchange unless the
partnership has knowledge to the contrary. These reporting requirements may
increase the Partnership's administrative costs. If a return is required to be
filed by a broker pursuant to Section 6045 of the Code with respect to the
transfer, no return is required under Code Section 6050K by either a selling
Limited Partner or the Partnership. See Treasury Regulations Section 1.6050K-1.
Termination of the Partnership for Tax Purposes
The Code provides that if 50% or more of the capital and profits interests
in a partnership is sold or exchanged within a single twelve-month period, the
partnership will terminate for tax purposes. The Partnership Agreement prohibits
the transfer of any Unit if such transfer would result in the termination of the
Partnership for federal income tax purposes. However, involuntary transfers
(such as transfers by death, dissolution, etc.) could possibly result in
termination of the Partnership for federal income tax purposes.
Under current law, if the Partnership should terminate for tax purposes,
it would be deemed to have distributed its assets to the Limited Partners, who
would then be deemed to have contributed the assets to a new partnership. Some
of the effects of a termination of the Partnership for federal income tax
purposes could include changes in the Partnership's tax basis in its assets and
the period over which such assets could be depreciated. It should be noted,
however, that the IRS has issued certain proposed Treasury Regulations, which if
finalized in their present form, will eliminate the deemed distribution (and
recontribution) of partnership assets by a partnership which terminates for tax
purposes. Instead, the terminated partnership ("Old Par") will be treated (i) as
having transferred all of its assets subject to liabilities to a new partnership
("New Par") in exchange for partnership interests therein, and then (ii) as
having distributed such partnership interests in New Par to the partners of Old
Par in liquidation of Old Par. As a result, among other items, the change in
partnership tax basis which could have occurred under current law as a result of
the deemed distribution of partnership assets would be avoided. It is presently
unclear, however, when and if such Proposed Treasury Regulations will be
finalized (or whether the finalized version would be significantly revised from
their present form).
A Limited Partner may recognize gain to the extent, if any, that the
Limited Partner's pro rata share of the Partnership's cash (and the reduction,
if any, in the Limited Partner's share of any Partnership indebtedness,
including nonrecourse indebtedness) at the date of termination exceeds the
adjusted tax basis of his Units. Note, however, that if the Proposed Treasury
Regulations with respect to partnership terminations
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described above are finalized in their present form, this potential for gain
recognition upon a partnership termination will be eliminated, except to the
extent that (i) the amount of the reduction, if any, in a Limited Partner's
share of Partnership liabilities as a result of the partnership termination
exceeds (ii) such Limited Partner's adjusted tax basis of his Units.
In addition, upon a Partnership termination, the Partnership's taxable
year would terminate. If the Limited Partner's taxable year were other than the
calendar year, the inclusion of more than one year of Partnership income in a
single taxable year of the Limited Partner could result. Because the new
partnership would be treated as a separate entity for federal income tax
purposes, the tax elections of the prior partnership would not generally remain
valid. Thus, new federal income tax elections would generally be required to be
made.
No Section 754 Election
Due to the burdensome and costly recordkeeping requirements that a Section
754 Election entails, it is unlikely that the General Partner will exercise its
discretion in favor of making this election to adjust the basis of Partnership
property in the case of transfers of Units. If the General Partner does not make
a Code Section 754 Election, a subsequent Limited Partner's share of gain or
loss upon the sale of the Partnership assets will be determined by taking into
account the Partnership's tax basis in the assets and without reference to the
cost associated with acquiring the Units. Thus, the absence of a Code Section
754 Election may reduce the marketability of Units.
Investment by Tax Exempt Entities
The income earned by a tax exempt entity, including a qualified employee
pension or profit sharing trust or an individual retirement account (a "Tax
Exempt Entity"), is generally exempt from taxation. However, gross UBTI of a Tax
Exempt Entity is subject to tax to the extent that, when combined with all other
gross UBTI of the Tax Exempt Entity for a taxable year, it exceeds all
deductions attributable to the UBTI plus $1,000 during the taxable year. Such
UBTI will be taxable at ordinary income rates and may be subject to the
alternative minimum tax. See "Income Tax Considerations - Taxes-Alternative
Minimum Tax."
The leasing of tangible personal property is treated for purposes of the
Code as an unrelated trade or business. See Revenue Rulings 78-144, 1978-1 C.B.
168, 69-278, 1969-1 C.B. 148, and 60-206, 1960-1 C.B. 201. The IRS has ruled
that a partner's distributive share of income or gain from a partnership engaged
in the leasing of tangible personal property is treated in the same manner as if
such income or gain were realized directly by the partner. Therefore, a Tax
Exempt Entity that invests in the Partnership will be subject to the tax on UBTI
for any taxable year of the Tax Exempt Entity to the extent the Partnership
generates income from the leasing of the Equipment and the total of the Tax
Exempt Entity's share of that income for the taxable year plus its UBTI from all
other sources for the taxable year exceeds the sum of all deductions
attributable to the UBTI plus $1,000.
Although the Partnership's portfolio income (e.g., interest income from
the investment of Partnership cash balances) generally will not produce UBTI for
a Tax Exempt Entity that invests in the Partnership, a portion of such Tax
Exempt Entity's portfolio income from the Partnership will constitute UBTI
pursuant to the "debt-financed property" rules if the Tax Exempt Entity finances
its acquisition of Units with debt. Furthermore, social clubs, voluntary
employee benefit associations, supplemental unemployment benefit trusts, and
qualified group legal services plans that are exempt from taxation under
paragraphs (7), (9), (17), and (20),
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respectively, of Code section 501(c) are subject to different UBTI rules, which
generally will require them to characterize all income from the Partnership as
UBTI.
Except to the extent of gain or loss from the sale, exchange, or other
disposition of acquisition indebtedness property and except to the extent the
Equipment constitutes inventory or property held primarily for sale to customers
in the ordinary course of a trade or business, gains from the sale or exchange
of the Equipment generally will be excludible from the scope of UBTI. However,
any gain on the disposition of Equipment that is characterized as ordinary
income as a result of the recapture of cost recovery or depreciation deductions
will constitute UBTI for Tax Exempt Entities.
If the gross income taken into account in computing UBTI exceeds $1,000,
the Tax Exempt Entity is obligated to file a tax return for such year on IRS
Form 990-T. Neither the Partnership nor the General Partner expects to undertake
the preparation or filing of IRS Form 990-T for any Tax Exempt Entity in
connection with an investment by such Tax Exempt Entity in the Units. Generally,
IRS Form 990-T must be filed with the IRS by May 15 of the year following the
year to which it relates.
Penalties may be imposed by the IRS for failing to file this tax return
when required, and, if tax is due, additional penalties and interest may be
imposed if the tax is not paid. In addition, any tax due should be paid by the
Tax Exempt Entity.
A TAX EXEMPT ENTITY'S INVESTMENT IN UNITS WILL RESULT IN THE REALIZATION
OF UBTI AND SUCH TAX EXEMPT ENTITY IS URGED TO OBTAIN THE ADVICE OF A QUALIFIED
TAX ADVISOR ON THE EFFECT OF REALIZING UBTI AND ANY OBLIGATION TO FILE INCOME
TAX RETURNS AND TO PAY TAX ON SUCH UBTI. SEE "ERISA CONSIDERATIONS."
Investment by Nonresident Alien Individuals and Foreign
Corporations
Nonresident alien individuals and foreign corporations that become Limited
Partners will, like the Partnership, be deemed to be engaged in the conduct of a
trade business within the United States. Under Sections 871(b) and 882(a) of the
Code, nonresident aliens individuals and foreign corporations, respectively,
will be subject to United States income tax on their allocable shares of any
Partnership taxable income. Nonresident alien individuals and closely held
foreign corporations that acquire Units will also be subject to the same
limitations on the deduction of Partnership losses that apply to domestic
Limited Partners. See "Income Tax Considerations - Certain Principles of
Partnership Taxation, Limitations on Utilization of Partnership Losses."
Foreign corporations may also be subject to the branch profits tax under
Section 884 of the Code. Such tax is equal to 30% of a foreign corporation's
earnings and profits effectively connected with a United States business that
are withdrawn (or deemed withdrawn) from investment in the United States. This
tax is payable in addition to the regular United States corporate tax. In
certain circumstances, the imposition of the branch profits tax may be
overridden by the nondiscrimination provisions of applicable United States tax
treaties.
The Partnership will be required to withhold from distributions to each
foreign Limited Partner an amount equal to a percentage of the Partnership's
taxable income that is allocable to the Limited Partner. Section 1446 of the
Code provides that the amount of tax to be withheld is the "applicable
percentage" of the taxable income of the Partnership allocable to foreign
Limited Partners. The applicable percentage is equal
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to the highest appropriate tax rate, currently 39.6% for individual foreign
Limited Partners and 35% for corporate foreign Limited Partners. See "Income Tax
Considerations -Taxes." Such withheld amounts will be credited against the
Limited Partners' federal income tax liabilities for the taxable year in which
withheld, and any excess will be refundable. Foreign Limited Partners may be
entitled to tax credits for United States taxes in their countries of residence,
and should consult with their local and United States tax advisors with regard
to the tax consequences of an investment in Units.
Taxes
General. The highest stated marginal individual tax rate is currently
39.6%. For 1995, the deduction for personal exemptions begin to be phased out
for single taxpayers with an adjusted gross income over $114,700 and for married
taxpayers filing joint returns with an adjusted gross income over $172,050.
Further, otherwise allowable itemized deductions (other than medical expenses,
casualty and theft losses and investment interest) for 1995 are reduced by an
amount equal to three percent of a taxpayer's adjusted gross income over
$114,700 ($57,350 in the case of a married person filing a separate return).
Such deductions are not reduced by more than 80%. For purposes of the
Alternative Minimum Tax set forth in Section 55 of the Code (see discussion
below), the 3% reduction in allowable itemized deductions does not apply;
however, the taxpayer is subject to additional limitations on deductions as set
forth in Section 56 of the Code.
Capital Gains and Losses. Net capital gains (i.e., the excess of net
long-term capital gains over short-term capital losses) of individuals are taxed
at a 28% maximum tax rate. Capital losses, whether long-term or short-term, of
individuals are only available to offset $3,000 of ordinary income in a given
taxable year. Any remaining capital loss may be carried forward indefinitely.
Two Percent Floor on Miscellaneous Itemized Deductions. Noncorporate
Limited Partners may deduct expenses paid or incurred for (a) the production or
collection of income, (b) the management, conservation, or maintenance of
property held for the production of income, or (c) in connection with the
determination, collection or refund of a tax, only to the extent such expenses
exceed two percent of adjusted gross income. This rule is to apply with respect
to indirect deductions through pass-through entities (such as the Partnership)
of amounts that would not be allowable as a deduction if paid or incurred
directly by an individual. Although it is not anticipated that the Partnership
will incur any material expenses of this nature, the two percent limit described
above may cause certain expenses allocable to Limited Partners to be
nondeductible.
Alternative Minimum Tax. This discussion only addresses the alternative
minimum tax as it applies to noncorporate taxpayers (and to shareholders of an S
corporation). The first step in determining a taxpayer's alternative minimum tax
liability, if any, is calculation of the taxpayer's alternative minimum taxable
income. Alternative minimum taxable income is computed by adjusting the
taxpayer's taxable income in accordance with the rules set forth in Sections 55,
56 and 58 of the Code, and by increasing the resulting amount by the taxpayer's
items of tax preference described in Code Section 57. Alternative minimum
taxable income is then reduced by a specified exemption amount and by the
taxpayer's alternative minimum tax foreign tax credit for the taxable year. The
exemption amounts are $45,000 for married couples filing joint returns, $33,750
for single individuals, and $22,500 for married persons filing separate returns.
The exemption is phased out above certain alternative minimum taxable income
levels: $150,000 for married taxpayers filing joint returns, $112,500 for single
taxpayers, and $75,000 for married taxpayers filing separate returns. The
alternative minimum tax rate is 26% on the amount of the taxpayer's alternative
minimum taxable income which does not exceed $175,000 (after taking into account
the exemption amount) and 28% on the amount exceeding $175,000. A taxpayer is
only required to pay an alternative minimum tax liability to the extent that the
amount
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of that liability exceeds the liability which the taxpayer would otherwise have
for the regular federal income tax.
One of the adjustments to taxable income established by Code Section 56
relates to the amount of cost recovery deduction claimed on personal property.
To derive a taxpayer's alternative minimum taxable income, the taxpayer's
taxable income must be adjusted by an amount equal to the difference between (i)
the amount of cost recovery deductions claimed by the taxpayer with respect to
personal property and (ii) the amount which would have been allowable over the
asset depreciation range class life of the property using the 150% declining
balance method, converting to straight-line when necessary to maximize the
remaining deductions. The adjustment results in a basis in the depreciated
property for alternative minimum tax purposes which may differ from its basis
for regular tax purposes. Thus, upon disposition of the property, the taxpayer
will generally recognize less gain (or a greater loss) for alternative minimum
tax purposes than for regular tax purposes. Items of tax preference include
other items which are not anticipated to be generated by the Partnership, but
may apply in the case of certain Limited Partners due to their particular facts
and circumstances unrelated to the Partnership.
Partnership Tax Returns and Tax Information
The General Partner will file the Partnership's tax returns using the
accrual method of accounting and will adopt the calendar year as the
Partnership's taxable year. See "Income Tax Considerations - Certain Principles
of Partnership Taxation." The Partnership will provide tax information to the
Limited Partners within 75 days after the close of each taxable year. If a
Limited Partner is required to file its tax return on or before March 15, it may
be necessary for the Limited Partner to obtain an extension to file if the tax
information referred to above is not distributed until the end of the 75-day
period.
Limited Partners will be required to file their returns consistent with
the information provided on the Partnership's informational return or notify the
IRS of any inconsistency. A failure to notify the IRS of an inconsistent
position allows the IRS automatically to assess and collect the tax, if any,
attributable to the inconsistent treatment.
IRS Audit of the Partnership
The tax return filed by the Partnership may be audited by the IRS.
Adjustments, if any, from such audit may result in an audit of the Limited
Partners' own returns. Any such audit of the Limited Partners' tax returns could
result in adjustments of non-Partnership as well as Partnership items of income,
gain, loss, deduction and tax preference.
Audit proceedings are conducted at the partnership level and, if the IRS
initiates an administrative proceeding or makes a "final adjustment" at the
partnership level, it must notify each partner of the beginning and completion
of the partnership administrative proceedings. Notice need not be given,
however, to a partner who has less than a one percent interest in a partnership
which has more than 100 partners, although a group of such partners having at
least a five percent interest in partnership profits in the aggregate may
designate a member of the group to receive notice. Because the Partnership will
have more than 100 Limited Partners, the IRS will not notify individual Limited
Partners of an audit of the Partnership. The General Partner is the "tax matters
partner" who will normally have the authority to negotiate with the IRS with
respect to any Partnership tax matter; the General Partner will also have the
right to initiate judicial proceedings. A Limited Partner will thus be unable to
control either an audit of the Partnership or any subsequent litigation. If, in
such event, the General Partner does not go to court, any Limited Partner
entitled to receive notice of the proceedings may
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bring an action to challenge any proposed audit findings by the IRS. A special
statute of limitations exists in connection with the IRS's right to audit
matters at the partnership level.
Interest and Penalties
With certain exceptions, a penalty will be assessed for each month or
fraction thereof (up to a maximum of five months) that a partnership return is
filed either late or incomplete. The monthly penalty is equal to $50 multiplied
by the number of partners in the partnership during the year for which the
return is due.
With certain exceptions, a penalty will be assessed if the Partnership
fails to furnish to the Limited Partners a correct Schedule K-1 to the federal
income tax return for the Partnership on or before the prescribed due date
(including any extension thereof). The penalty is equal to $50 multiplied by the
number of partners not furnished a correct Schedule K-1 on or before the
prescribed due date (including any extension thereof), with a maximum penalty of
$100,000 per calendar year.
Section 6662 of the Code establishes a penalty equal to 20% (40% in
certain gross valuation misstatements) on underpayment of tax attributable to
substantial valuation overstatements. This penalty applies only if (i) the value
or adjusted basis of any property as claimed on an income tax return exceeds
200% of the correctly determined amount of its value or adjusted basis and (ii)
the underpayment of tax attributable to the substantial overvaluation exceeds
$5,000 ($10,000 in the case of a corporation other than an S corporation or
personal holding company). All or any part of the penalty may be waived by the
IRS upon the taxpayer's showing that a reasonable basis existed for the
valuation claimed on the return and that the claim was made in good faith. If
the Partnership were to overstate the value of Equipment, a Limited Partner
might be liable for this penalty.
There is a 20% penalty on the amount of an underpayment of tax
attributable to a taxpayer's negligent disregard of applicable rules and
regulations or to the "substantial understatement" of a tax liability. A
substantial understatement is defined as an understatement for the taxable year
that exceeds the greater of 10% of the required tax or $5,000 ($10,000 for
corporations other than personal holding companies and S corporations). The
penalty can be avoided either by disclosing the questionable item on the return
or by showing that there was "substantial authority" for taking the position on
the return. If a questionable item is related to a tax shelter, the
understatement penalty can only be avoided by showing that the taxpayer
reasonably believed that the treatment of the item was "more likely than not"
the proper treatment. Based upon the representations of the General Partner,
Counsel believes the Partnership will not be characterized as a "tax shelter"
for these purposes. It should also be noted that the General Partner will not
cause the Partnership to claim a deduction unless the General Partner believes,
based upon the advice of its accountants or Counsel, that substantial authority
exists to support the deduction.
All interest payable with respect to a deficiency is compounded daily.
Interest rates are redetermined quarterly and are based on the federal
short-term interest rate (the average rate of interest on Treasury obligations
maturing in less than three years) for the first month of the preceding quarter
plus three percent.
Foreign Tax Considerations
As noted above, the Partnership may acquire Equipment which is operated
outside the United States. As a consequence, Limited Partners may be required to
file returns and pay taxes in foreign jurisdictions with respect to the foreign
source income of the Partnership. The income taxed by the foreign jurisdiction
would
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in such a case be calculated according to the tax laws of the foreign
jurisdiction which may or may not correspond with applicable United States
standards.
Limited Partners who have foreign tax liabilities as a result of the
Partnership may be entitled to a foreign tax credit or to a deduction for
foreign taxes paid which can be utilized to reduce their United States tax
liabilities or taxable income, respectively. The calculation of the foreign tax
credit is quite complex and no assurance can be given that a credit will be
available in the amount of any foreign tax paid. In particular, prospective
Limited Partners should be aware that United States law does not generally allow
a foreign tax credit greater than the taxpayer's United States federal income
tax liability with respect to the foreign source income of the taxpayer
calculated separately for certain types of income including shipping income and
passive rental income. In the event the Partnership earns these types of income,
a Limited Partner must compute separately the foreign tax credit for each type
of income. The foreign source income of a taxpayer is calculated according to
United States rather than the foreign jurisdiction's tax law. It is possible
that a foreign country might impose a tax in an amount greater than the
allowable foreign credit under United States law. In such a case, Limited
Partners would be subject to a higher effective rate of taxation than if no
foreign tax had been imposed. To the extent that all income taxes paid to a
foreign country on a certain type of income exceed the amount of foreign tax
credit allowable in any year for such type of income, the excess foreign tax
credits generally may be carried back two years or forward five years to offset
United States income taxes on that certain type of foreign source income in
those tax years. If the Partnership were to suffer an overall foreign loss in
one year and incur foreign taxes in a subsequent year, the amount of foreign tax
credit allowable in that subsequent taxable year could be reduced on account of
the prior foreign loss, regardless of whether the loss resulted in a United
States tax benefit to the Limited Partners. Each Limited Partner should consult
his own tax advisor regarding the applicability of foreign taxes to his own
situation.
Prior to the Partnership entering into an arrangement which contemplates
the use of Equipment outside the United States, the General Partner will consult
with its Counsel and with special counsel located in the foreign jurisdiction
concerning the possibility of structuring the transaction in a manner which will
enable the Limited Partners to avoid being required to file income tax returns
in the foreign jurisdiction. The General Partner has discretion to cause the
Partnership to enter into any such arrangement.
Partnership Anti-Abuse Rules
Treasury Regulations have recently been promulgated (the "Anti-Abuse
Rules") which purportedly grant authority to the IRS to recharacterize certain
transactions to the extent that it is determined that the utilization of
partnerships is inconsistent with the intent of the federal partnership tax
rules. Under these Anti-Abuse Rules, the IRS may, under certain circumstances,
(i) recast transactions which attempt to use the partnership form of ownership,
or (ii) otherwise treat the partnership as an aggregation of its partners rather
than a distinct separate entity, as appropriate in order to carry out the
purposes of the partnership tax rules. The Anti-Abuse Rules also provide that
the authority to recharacterize transactions is limited to circumstances under
which the tax characterization by the taxpayer is not, based on all facts and
circumstances, clearly contemplated under the Code or the applicable Treasury
Regulations.
These Anti-Abuse Rules are intended to impact only a small number of
transactions which improperly utilize partnership tax rules. It is therefore not
anticipated that the Partnership and/or the transactions contemplated herein
will be affected by the promulgation or administration of these Anti-Abuse
Rules. In light of the broad language incorporated in these Regulations,
however, no assurance can be given that the IRS will not attempt to utilize the
Anti-Abuse Rules to alter, in whole or part, the tax consequences described
herein with regard to an investment in the Partnership.
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Future Federal Income Tax Changes
Neither the General Partner nor Counsel can predict what further
legislation, if any, may be proposed by members of Congress, by the current
administration, or by any subsequent administration, nor can either predict
which proposals, if any, might ultimately be enacted. Neither the General
Partner nor Counsel can predict what changes may be made to existing Treasury
Regulations, or what revisions may occur in the IRS' ruling policy.
Consequently, no assurance can be given that the income tax consequences of an
investment in the Partnership will continue to be as described herein. Any
changes adopted into law may have retroactive effect.
State Taxes
In addition to the federal income tax considerations described above,
prospective investors should consider applicable state and local taxes which may
be imposed by various jurisdictions. A Limited Partner's distributive share of
the income or loss of the Partnership generally will be required to be included
in determining the Limited Partner's reportable income for state or local tax
purposes in the jurisdiction in which the Limited Partner is a resident.
Moreover, Pennsylvania and a number of other states in which the Partnership may
do business generally impose state income tax on a nonresident and foreign
Limited Partner's distributive share of Partnership income which is derived from
such states. Pennsylvania and a number of other states have adopted a
withholding tax procedure in order to facilitate the collection of taxes from
nonresident and foreign Limited Partners on Partnership income derived from such
states. Any amounts withheld would be deemed distributed to the nonresident or
foreign Limited Partner and would, therefore, reduce the amount of cash actually
received by the nonresident or foreign Limited Partner as a result of such
distribution. Nonresidents may be allowed a credit for the amount so withheld
against income tax imposed by their state of residency. The Partnership cannot,
at present, estimate the percentage of its future income that will be from
states which have adopted such withholding tax procedures and it cannot,
therefore, estimate the required withholding tax, if any. In addition, while the
Partnership intends to apply to the applicable taxing authority of such states
for a waiver (or a partial waiver), if any, of such withholding requirements, no
assurance can be given that such waiver will ultimately be granted.
PROSPECTIVE INVESTORS SHOULD BE AWARE THAT, IN COMPUTING THEIR TAXABLE
INCOME FOR PURPOSES OF DETERMINING THEIR STATE INCOME TAX LIABILITIES, THEY MAY
BE SUBJECT TO RULES WHICH ARE LESS FAVORABLE THAN THOSE UNDER FEDERAL INCOME TAX
LAWS.
Need for Independent Advice
The foregoing summary is not intended as a substitute for careful tax
planning, particularly since the income tax consequences associated with an
investment in the Partnership are complex and certain of them will not be the
same for all taxpayers. ACCORDINGLY, PROSPECTIVE PURCHASERS OF UNITS ARE
STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH SPECIFIC REFERENCE TO
THEIR OWN TAX SITUATIONS.
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ERISA CONSIDERATIONS
Fiduciaries Under ERISA
A fiduciary of a pension, profit sharing or other employee benefit plan
subject to Title I of ERISA (an "ERISA Plan"), should consider whether an
investment in the Units is consistent with his fiduciary responsibilities under
ERISA. In particular, the fiduciary requirements under Part 4 of Title I of
ERISA require the discharge of duties solely in the interest of, and for the
exclusive purpose of providing benefits to, the ERISA Plan's participants and
beneficiaries. A fiduciary is required to perform the fiduciary's duties with
the skill, prudence, and diligence of a prudent man acting in like capacity, to
diversify investments so as to minimize the risk of large losses unless it is
clearly prudent not to do so, and to act in accordance with the ERISA Plan's
governing documents, provided that the documents are consistent with ERISA.
Fiduciaries with respect to an ERISA Plan include any persons who have any
power of control, management, or disposition over the funds or other property of
the ERISA Plan. An investment professional who knows or ought to know that his
or her advice will serve as one of the primary bases for the ERISA Plan's
investment decisions may be a fiduciary of the ERISA Plan, as may any other
person with special knowledge or influence with respect to a ERISA Plan's
investment or administrative activities.
It should be noted that while the beneficial "owner" or "account holder"
of an IRA is treated as a fiduciary of the IRA under the Code, Tax Exempt
Entities generally are not subject to ERISA's fiduciary duty rules. Also, if a
participant in an ERISA Plan exercises independent control over the investment
of the participant's individual account in the ERISA Plan (a "self-directed
investment" arrangement), the participant is not deemed to be a fiduciary.
Finally, certain Qualified Plans of sole proprietors or partnerships in which at
all times (before and after the investment) the only participant(s) is/are the
sole proprietor and his or her spouse or the partners and their spouses, and
certain Qualified Plans of corporations in which at all times (before and after
the investment) the only participant(s) is/are an individual or/and his or her
spouse who own(s) 100% of the corporation's stock, are generally not subject to
ERISA's fiduciary standards, although they are subject to the Code's prohibited
transaction rules explained below.
A person subject to ERISA's fiduciary rules with respect to an ERISA Plan
should consider those rules in the context of the particular circumstances of
the ERISA Plan before authorizing an investment of a portion of the ERISA Plan's
assets in Units.
Fiduciaries of an ERISA Plan that permits a participant to exercise
independent control over the investments of his individual account in accordance
with Section 404(c) of ERISA (a "self-directed investment" arrangement) will not
be liable for any investment loss or for any breach of the prudence or
diversification obligations that results from the participant's exercise of such
control, and the participant is not deemed to be a fiduciary subject to the
general ERISA fiduciary obligations described above merely by virtue of his
exercise of such control.
The fiduciary of an IRA or a qualified retirement plan not subject to
Title I of ERISA because it is a governmental or church plan or because it does
not cover common law employees (a "Non-ERISA Plan") should consider that such an
IRA or Non-ERISA Plan may only make investments that are authorized by the
appropriate governing documents and under applicable state law.
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Prohibited Transactions Under ERISA and the Code
Any fiduciary of an ERISA Plan or a person making an investment decision
for a non-ERISA Plan or an IRA should consider the prohibited transactions
provisions of Section 4975 of the Code and Section 406 of ERISA when making
their investment decisions. These rules prohibit such plans from engaging in
certain transactions involving "plan assets" with parties that are "disqualified
persons" described in Section 4975(e)(2) of the Code or "parties in interest"
described in Section 3(14) of ERISA ("Disqualified persons" and "parties in
interest" are hereinafter collectively referred to as "disqualified persons").
"Prohibited transactions" include, but are not limited to, any direct or
indirect transfer or use of a Benefit Plan's or IRA's assets to or for the
benefit of a disqualified person, any act by a fiduciary that involves the use
of a Benefit Plan's assets in the fiduciary's individual interest or for the
fiduciary's own account, and any receipt by a fiduciary of consideration for his
or her own personal account from any party dealing with a Benefit Plan. Under
ERISA, a disqualified person that engaged in a prohibited transaction will be
made to disgorge any profits made in connection with the transaction and will be
required to compensate any ERISA Plan that was a party to the prohibited
transaction for any losses sustained by the ERISA Plan. Section 4975 of the Code
imposes excise taxes on a disqualified person that engages in a prohibited
transaction with an ERISA Plan or a non-ERISA Plan or an IRA subject to Section
4975 of the Code. If the disqualified person who engages in the transaction is
the individual on behalf of whom the IRA is maintained (or his beneficiary), the
IRA may lose its tax exempt status and the assets will be deemed to be
distributed to such individual in a taxable transaction.
In order to avoid the occurrence of a prohibited transaction under Section
4975 of the Code and/or Section 406 of ERISA, Units may not be purchased by a
ERISA Plan, an IRA, or a non-ERISA plan subject to Section 4975 of the Code, as
to which the General Partner or any of its Affiliates have investment discretion
with respect to the assets used to purchase the Units, or with respect to which
they have regularly given individualized investment advice that serves as the
primary basis for the investment decisions made with respect to such assets.
Additionally, fiduciaries of, and other disqualified persons with respect to, an
ERISA Plan, an IRA, and a non-ERISA Plan subject to Section 4975 of the Code,
should be alert to the potential for prohibited transactions to occur in the
context of a particular plan's or IRA's decision to purchase Units.
Neither the General Partner nor the Partnership shall have any liability
or responsibility to any Benefit Plan that is a Limited Partner or any other
Limited Partner, including any Limited Partner that is a Tax Exempt Entity, for
any tax, penalty or other sanction or costs or damages arising as a result of
there being a prohibited transaction or as a result of Partnership assets being
deemed plan assets of the Limited Partner under the Code or ERISA or other
applicable law.
"Plan Assets"
If the Partnership's assets were determined under ERISA or the Code to be
"plan assets" of a Limited Partner which is a Benefit Plan (i) the prudence
standards and other provisions of Part 4 of Title I of ERISA would be applicable
to any transactions involving the Partnership's assets, (ii) persons who
exercise any authority or control over the Partnership's assets, or who provide
investment advice to the Partnership, would (for purposes of the fiduciary
responsibility provisions of ERISA) be fiduciaries of each ERISA Plan that
acquires the Unit, and transactions involving the Partnership's assets
undertaken at their direction or pursuant to their advice might violate their
fiduciary responsibilities under ERISA, especially with regard to conflicts of
interest, (iii) a fiduciary exercising his investment discretion over the assets
of an ERISA Plan to cause it to acquire or hold the Unit could be liable under
Part 4 of Title I of ERISA for transactions entered into by the
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Partnership that do not conform to ERISA standards of prudence and fiduciary
responsibility, and (iv) certain transactions that the Partnership might enter
into in the ordinary course of its business and operations might constitute
"prohibited transactions" under ERISA and the Code. The Benefit Plan's
fiduciaries might, under certain circumstances, be subject to liability for
actions taken by the General Partner or its affiliates, and certain of the
transactions described in this Prospectus in which the Partnership might engage,
including certain transactions with Affiliates, may constitute prohibited
transactions under the Code and ERISA with respect to such Benefit Plan, even if
their acquisition of Units did not originally constitute a prohibited
transaction.
Under the Department of Labor ("DOL") regulations governing the
determination of what constitutes the assets of a Benefit Plan in the context of
investment securities such as Units, an undivided interest in the underlying
assets of a collective investment entity such as the Partnership will be treated
as "plan assets" of Benefit Plan investors if (i) the securities are not
publicly offered, (ii) 25% or more by value of any class of equity securities of
the entity is owned by Benefit Plans, (iii) the interests of the Benefit Plan
investors are "equity interests," and (iv) the entity is not an "operating
company." In order for securities to be treated as "publicly offered," they have
to be either (a) part of a class of securities registered under Section 12(b) or
12(g) of the Securities Exchange Act of 1934 or (b) sold as part of an offering
registered under the Securities Act of 1933, and must also meet certain other
requirements, including a requirement that they be "freely transferable."
Units will be sold as part of an offering registered under the Securities
Act of 1933. However, in Counsel's view, the Partnership is not an "operating
company" and the restrictions on transferability of Units (see "Transferability
of Units") prevent the Units from being "freely transferable" for purposes of
the DOL's regulations. Consequently, in order to ensure that the assets of the
Partnership will not constitute "plan assets" of Limited Partners which are
Benefit Plans, the General Partner will take such steps as are necessary to
ensure that ownership of Units by Benefit Plan investors is at all times less
than 25% of the total value of outstanding Units. In calculating this limit, the
General Partner shall, as provided in the DOL's regulations, disregard the value
of any Units held by a person (other than a Benefit Plan) who has discretionary
authority or control with respect to the assets of the Partnership, or any
person who provides investment advice for a fee (direct or indirect) with
respect to the assets of the Partnership, or any affiliate of any such a person.
See "Investor Suitability Standards." However, neither the General Partner nor
the Partnership shall have any liability or responsibility to any Tax Exempt
Entity Limited Partner or any other Limited Partner for any tax, penalty or
other sanction or costs or damages arising as a result of Partnership assets
being deemed plan assets of a Tax Exempt Entity Limited Partner under the Code
or ERISA or other applicable law.
Other ERISA Considerations
In addition to the above considerations in connection with the "plan
assets" issue, a decision to cause a Benefit Plan to acquire Units should
involve considerations, among other factors, of whether (i) the investment is in
accordance with the documents and instruments governing the Benefit Plan, (ii)
the purchase is prudent in light of the diversification of assets requirement
and the potential difficulties that may exist in liquidating Units, (iii) the
investment will provide sufficient cash distributions in light of the Benefit
Plan's required benefit payments or other distributions, (iv) the evaluation of
the investment has properly taken into account the potential costs of
determining and paying any amounts of federal income tax that may be owed on
UBTI derived from the Partnership, (v) in the case of an ERISA Plan, the
investment, unless the investment is made in accordance with a self-directed
individual arrangement under Section 404(c) of ERISA and regulations promulgated
thereunder, is made solely in the interests of the ERISA Plan's participants,
and (vi) the fair market value of Units will be sufficiently ascertainable, and
with sufficient frequency, to enable the Benefit Plan to value its assets in
accordance with the rules and policies applicable to the Benefit Plan.
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Prospective ERISA Plan investors should note that, with respect to the
diversification of assets requirement, the legislative history of ERISA and a
DOL advisory opinion indicate that the determination of whether the assets of a
ERISA Plan that has invested in an entity such as the Partnership are
sufficiently diversified may be made by looking through the ERISA Plan's
interest in the entity to the underlying portfolio of assets owned by the
entity.
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MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULT OF OPERATIONS
The Partnership has no operating history. The Partnership intends to
acquire various types of computer peripheral and similar Equipment, and to lease
such Equipment predominantly under Operating Leases. The Partnership may also
lease Equipment under Full Payment Net Leases or enter into Conditional Sales
Contracts with respect to Equipment. The Partnership anticipates that it will
use a substantial portion of the proceeds of this Offering, excess Cash Flow,
debt financing and Net Disposition Proceeds received by the Partnership prior to
its liquidation phase to purchase computer peripheral or other similar capital
Equipment manufactured by, or compatible with, equipment manufactured by IBM.
See "Investment Objectives and Policies - Types of Equipment," "Description of
Leases" and "Risk Factors - Dependence on Manufacturers and IBM," "Risks of
Leverage and Availability of Financing," "Risks of Equipment Operations" and
"Unspecified Equipment and Lessees."
The Partnership's operating revenues will initially be generated primarily
from leasing, and otherwise entering into contracts for the use of Equipment.
Operating revenues will be utilized to pay Partnership expenses and provide cash
distributions to Limited Partners. See "Investment Objectives and Policies
- -Description of Leases." The General Partner anticipates that the Partnership
will commence liquidation of all of its assets beginning in the ninth year of
program operations, subject to the General Partner's discretion to extend the
liquidation process if in the General Partner's discretion such extension will
enable the Partnership to dispose of its assets on more favorable terms. In no
event will the Partnership continue after December 31, 2009. See "Investment
Objectives and Policies - Liquidation Policies."
Because the Partnership's leases and Conditional Sales Contracts will
be on a "triple-net" (or equivalent) basis, it is anticipated that no
permanent reserve for maintenance and repairs will be established from the
Offering proceeds. However, the General Partner is authorized to establish
reserves in the future if and to the extent it deems necessary for
maintenance, repairs and working capital. In addition, the General Partner
and Com Cap Corp. have agreed that the General Partner or Com Cap Corp. will
lend or contribute to the Partnership an amount equal to 1.01% of net
Offering proceeds, if needed, to meet the Partnership's expenses. If the
General Partner or any of its Affiliates makes such a short-term loan to the
Partnership, the General Partner or Affiliate may not charge interest at a
rate greater than the interest rate charged by unrelated lenders on
comparable loans for the same purpose in the same locality. In no event will
the Partnership be 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. All payments of principal
and interest on any financing provided by the General Partner or any of its
Affiliates shall be due and payable by the Partnership within 12 months after
the date of the loan. See "Compensation of General Partner and Affiliates." If
available Cash Flow or Net Disposition Proceeds are insufficient to cover the
Partnership's expenses and liabilities, the Partnership will obtain additional
funds by disposing of or refinancing Equipment or by borrowing within its
permissible limits.
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SUMMARY OF THE PARTNERSHIP AGREEMENT
The rights and obligations of the Partners in the Partnership will be
governed by the Partnership Agreement, which is attached in its entirety as
Appendix I hereto. The following statements, and other statements in this
Prospectus concerning the Partnership Agreement and related matters, are merely
an outline, do not purport to be complete, in no way modify or amend the
Partnership Agreement and are qualified in all respects and in each case by the
language of the Partnership Agreement. All material aspects of the
Partnership Agreement are included in this summary.
The Units
A maximum of 750,000 Units are authorized for issuance and sale in the
Offering. Subscribers who are accepted as Limited Partners by the General
Partner on or before the Initial Closing will be admitted to the Partnership as
Limited Partners on the day of the Initial Closing. Thereafter, Subscribers who
are accepted as Limited Partners by the General Partner will be admitted into
the Partnership as Limited Partners on or before the last day of the calendar
month following the date such acceptance occurs. Transferees of Units will be
recognized as Substituted Limited Partners on or before the first day of the
calendar month following the calendar month in which the General Partner
receives a completed transfer application and approves the transferee as a
Substituted Limited Partner. The Partnership's records shall be amended to
reflect the substitution of Limited Partners at least once in each calendar
quarter.
Nonassessability of Units
The Units are nonassessable. When a Unit has been paid for in full, the
holder of the Unit has no obligation to make additional contributions to the
Partnership's capital.
Liability of Limited Partners
Limited Partners are not personally liable for the obligations of the
Partnership, but their investments are subject to the risks of the Partnership's
business and the claims of its creditors. A Limited Partner, under certain
circumstances, may be liable to return any distributions from the Partnership to
the extent that, after giving effect to the distribution, all liabilities of the
Partnership (other than nonrecourse liabilities and liabilities to Partners on
account of their interests in the Partnership) exceed the fair value of the
Partnership's assets, including assets serving as security for nonrecourse
liabilities.
Allocations and Distributions
The provisions of the Partnership Agreement governing the allocation of
tax items and the apportionment of cash distributions are summarized under the
caption "Allocations and Distributions."
Responsibilities of the General Partner
The General Partner has the exclusive responsibility for the management
and control of all aspects of the business of the Partnership. In the course of
its management, the General Partner may, in its absolute discretion, cause the
Partnership to purchase, own, lease, sell and/or make future commitments to
purchase, lease and/or sell the Equipment and interests therein when and upon
such terms as it determines to be in the best interests of the Partnership as it
deems necessary for the efficient operation of the Partnership, except that
Limited Partners holding more than 50% of the outstanding Units held by all
Limited Partners (a "Majority in
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Interest") must approve the sale of substantially all of the assets of the
Partnership, except when such sales occur in the orderly liquidation and winding
up of the business of the Partnership.
A Majority in Interest of the Limited Partners may, at any time, remove
the General Partner. Upon the removal of the General Partner, the Partnership
will be dissolved and liquidated unless, within 60 days of such removal, a
Majority in Interest of the Limited Partners elect a successor General Partner
to continue the Partnership.
Records and Reports
The General Partner will keep at the Partnership's principal place of
business adequate books of account and records of the Partnership. Each Limited
Partner has the right, upon reasonable notice and within normal working hours,
and at the expense of the Limited Partner, to inspect and copy true and full
information regarding the state of the business and financial condition of the
Partnership, federal, state and local tax returns of the Partnership, a list of
the Partners and other information regarding the affairs of the Partnership as
it may reasonably request. See "Reports to Limited Partners" for a description
of the reports and financial statements which the General Partner will provide
to the Limited Partners during the term of the Partnership.
Meetings of the Partners
The General Partner may call a meeting of the Limited Partners at any
time, or call for a vote, without a meeting, of the Limited Partners on matters
on which they are entitled to vote. The General Partner is required to call such
a meeting, or for such a vote, on the written request of Limited Partners
holding 10% or more of the total Units held by all Limited Partners. Any vote of
a Limited Partner may be made in person or by proxy.
Voting Rights of Limited Partners
The voting rights of the Limited Partners are set forth in the Partnership
Agreement. By a vote of Limited Partners holding more than one-half of the
outstanding Units, the Limited Partners may vote to: (a) approve or disapprove a
sale of all or substantially all of the assets of the Partnership; (b) dissolve
the Partnership; (c) remove or approve the withdrawal of the General Partner;
(d) prior to the removal, withdrawal or dissolution of the General Partner,
elect a successor General Partner; and (e) amend the Partnership Agreement
(except that without the consent of the Partner adversely affected, no amendment
may be made which (i) converts a Limited Partner into a General Partner; (ii)
modifies the limited liability of a Limited Partner; (iii) alters the interest
of the General Partner or Limited Partner in Net Profits, Net Losses or
distributions from the Partnership or of the General Partner in its
compensation; or (iv) affects the status of the Partnership as a partnership for
federal income tax purposes, and except that without the prior consent of
Limited Partners owning at least 66 2/3% of the Units, the Partnership may not
amend the provisions in the Partnership Agreement relating to allocations,
distributions or fees to the General Partner).
With respect to any Units owned by the General Partner or its Affiliates,
the General Partner and its Affiliates may not vote or consent on matters
submitted to the Limited Partners regarding removal of the General Partner or
any transaction between the Partnership and the General Partner or its
Affiliates. In determining the required percentage in interest of Units
necessary to approve a matter on which the General Partner and its Affiliates
may not vote or consent, any Units owned by the General Partner or its
Affiliates shall not be included.
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Roll-Ups and Conversions
Without the approval of holders of at least 66-2/3% of all outstanding
Units, the Partnership shall not enter into any Roll-Up. A Roll-Up is defined in
the Partnership Agreement to mean any transaction involving the acquisition,
merger, conversion, or consolidation, either directly or indirectly, of the
Partnership and the issuance of securities of a Roll-Up Entity. A Roll-Up does
not include: a transaction involving securities if the securities have been
listed for at least twelve months on a national securities exchange or traded
through the NASD Automated Quotation National Market System; or a transaction
involving the conversion to corporate, trust or association form of only the
Partnership if, as a consequence of the transaction, there will be no
significant adverse change in the Limited Partners' voting rights, the term of
existence of the Partnership, compensation of the General Partner or its
Affiliates, or the Partnership's investment objectives. Limited Partners who do
not consent to an approved Roll-Up shall be given the option of (i) accepting
the securities of the Roll-Up Entity offered in the proposed Roll-Up; or (ii)
receiving cash in an amount equal to the non-consenting Limited Partner's pro
rata share of the appraised value of the net assets of the Partnership. An
appraisal of the net assets of the Partnership shall be performed by a competent
independent expert engaged for the benefit of the Partnership and the Limited
Partners. Such appraisal shall be made on the basis of an orderly liquidation of
the assets of the Partnership over a 12-month period as of a date immediately
prior to the announcement of the proposed Roll-Up. If the appraisal will be
included in a prospectus used to offer the securities of a Roll-Up Entity, the
appraisal shall be filed with the Securities and Exchange Commission and the
states as an exhibit to the registration statement for the offering. The
Partnership shall not reimburse the sponsor of a proposed Roll-Up for the costs
of an unsuccessful proxy contest in the event the Roll-Up is not approved by the
Limited Partners.
By the vote of a majority in interest of the Limited Partners the
Partnership is permitted to engage is a conversion of the Partnership into
another form of business entity which does not result in a significant adverse
change in (i) the voting rights of the Limited Partners, (ii) the termination
date of the Partnership (currently, December 31, 2009, unless terminated earlier
in accordance with the Partnership Agreement), (iii) the compensation payable to
the General Partner or its Affiliates, or (iv) the ability to meet the
Partnership's investment objectives without materially impairing the rights of
the Limited Partners. The General Partner will make the determination as to
whether or not any such conversion will result in a significant adverse change
in any of the provisions listed in the preceding paragraph based on various
factors relevant at the time of the proposed conversion, including an analysis
of the historic and projected operations of the Partnership; the tax
consequences (from the standpoint of the Limited Partners) of the conversion and
of an investment in a limited partnership as compared to an investment in the
type of business entity into which the Partnership would be converted; and the
performance of the equipment industry in general, and of the computer
peripherals segment of the industry in particular. In general, the General
Partner would consider any material limitation on the voting rights of the
Limited Partners or any substantial increase in the compensation payable to the
General Partner or its Affiliates to be a significant adverse change in the
listed provisions.
Power of Attorney
Pursuant to the terms of the Partnership Agreement, each purchaser of a
Unit and each transferee of a Unit appoints the General Partner, acting alone,
as the purchaser's or transferee's attorney-in-fact to make, execute, file,
and/or record (i) documents relating to the Partnership and its business
operations requested by or appropriate under the laws of any appropriate
jurisdiction; (ii) instruments with respect to any amendment (iii) instruments
or papers required to continue the business of the Partnership pursuant to the
Partnership Agreement; (iv) instruments relating to the admission of any Partner
to the Partnership; (v) a master list in accordance with Section 6112 of the
Code (or any successor provision), relating to the Partnership's tax shelter
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registration (see "Income Tax Considerations - Partnership Tax Returns and Tax
Information"); and (vi) all other instruments deemed necessary or advisable to
carry out the provisions of the Partnership Agreement. The power of attorney is
irrevocable, will survive the death, incompetency, dissolution, disability,
incapacity, bankruptcy, or termination of the granting purchaser or transferee,
and will extend to such person's heirs, successors, and assigns.
The General Partner will be designated as the "Tax Matters Partner" who
shall have authority to make certain elections on behalf of the Partnership and
the Limited Partners, including extending the statute of limitations for
assessment of tax deficiencies against the Limited Partners with respect to
Partnership items, and to enter into a settlement agreement with the IRS. See
"Income Tax Considerations - Audit of the Partnership."
Partnership Term
The term of the Partnership will expire on December 31, 2009, though the
Partnership may be terminated and dissolved earlier after any of the following
events:
(i) The vote or written consent of a Majority in Interest of
the Limited Partners;
(ii) The dissolution of the Partnership by judicial decree;
(iii) The expiration of 60 days following the removal, withdrawal,
involuntary dissolution, or Bankruptcy (or, in the case of an individual,
the death or appointment of a conservator for the person or any of the
assets) of the last remaining general partner of the Partnership, unless
all Limited Partners (or a Majority in Interest of the Limited Partners,
if the Terminating Event is the removal, Bankruptcy, or involuntary
dissolution of the last remaining general partner) vote to continue the
Partnership and a successor general partner is elected;
(iv) The determination by the General Partner that it is necessary
to commence the liquidation of the Equipment in order for the liquidation
of all the Equipment to be completed in an orderly and business like
fashion prior to December 31, 2009; or
(v) The sale of disposition of all the Partnership's
Equipment.
INVESTOR SUITABILITY STANDARDS
An investment in the Partnership is suitable only for persons or entities
of adequate means who have no need for liquidity in their investment since (i)
investment in the Units involves certain risks and (ii) the Units are not freely
transferrable and a public market for the Units does not exist and is not likely
to develop. See "Risk Factors."
Net Worth/Income
Except with respect to Qualified Plans and Tax Exempt Entities, Units will
be sold only to an investor who represents that he has either (i) a net worth
(exclusive of home, home furnishings and automobiles) of at least $45,000 AND an
annual gross income of at least $45,000, OR (ii) irrespective of annual gross
income, a net worth (exclusive of home, home furnishings and automobiles) of at
least $150,000, or that he is
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purchasing in a fiduciary capacity for a person who meets such conditions. If
the investor is a Qualified Plan or an IRA, such investor must represent (i)
that the IRA owner or the participant in the self-directed Qualified Plan
satisfies the foregoing standards, or (ii) if other than a self-directed
Qualified Plan, that the Qualified Plan satisfies the foregoing suitability
standards. The Partnership will apply these suitability standards only with
respect to investors who acquire Units in its Offering.
Although the General Partner believes that Units may represent suitable
investments for individuals, Qualified Plans, Tax Exempt Entities, and many
different types of entities, due to tax rules of particular application to
certain types of entities, Units may not be suitable investments for such
entities. The Partnership will produce UBTI which, to the extent that it exceeds
$1,000 in any taxable year from all sources, is taxable to Qualified Plans and
Tax Exempt Entities. See "Income Tax Considerations - Investment by Tax Exempt
Entities." Prospective investors should consult their tax advisors with respect
to the tax consequences of an investment in Units as it may affect their
particular tax situations.
Certain state securities commissions have established suitability
standards or minimum investment amounts for the offer and sale of securities
which are different than those set forth above. All states in which the
Partnership is authorized to sell Units have minimum investor suitability
standards and minimum investment amounts which are within the standards and
amounts set by the Partnership except for those states listed below or in a
supplement to this Prospectus. Net worth in all cases excludes home, home
furnishings and automobiles.
Additional suitability standards or minimum investment amounts are as
follows:
Arizona: Net worth of at least $225,000 or current annual income
of at least $60,000 and a net worth of at least $60,000.
* California: Net worth of at least $225,000 or current annual income
of at least $60,000 and a net worth of at least $60,000.
Iowa: Net worth of at least $225,000 or current annual income
of at least $60,000 and a net worth of at least $60,000.
Minimum investment amount for Tax Exempt Entities and
Keogh Plans is $2,500.
Maine: Net worth of at least $225,000 or current annual income
of at least $60,000 and a net worth of at least $60,000.
Michigan: In no event shall the aggregate purchase price of Units
exceed 10% of net worth.
Minnesota: Minimum investment amount for IRA's or Qualified Plans
(but not Tax Exempt Entities) is $2,000.
Missouri: Net worth of at least $225,000 or current annual gross
income of at least $60,000 and a net worth of at least
$60,000.
Nebraska: Minimum investment amount for all investors is $5,000
except that the minimum investment amount for Tax Exempt
Entities and Keogh Plans is $1,000.
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New Jersey: Net worth of at least $225,000 or current annual income
of at least $60,000 and a net worth of at least $60,000.
North Carolina: Net worth of at least $225,000 or current annual income
of at least $60,000 and a net worth of at least $60,000.
Ohio: In no event shall the aggregate purchase price of Units
exceed 10% of net worth.
Pennsylvania: Net worth of at least $225,000 or current annual income
of at least $60,000 and a net worth of at least $60,000.
The aggregate purchase price of Units may not exceed
10% of net worth.
Texas: Net worth of at least $225,000 or current annual
income of at least $60,000 and a net worth of at
least $60,000.
The suitability standards imposed by the Partnership will apply to
transferees upon resale of an investor's Units.
It is the responsibility of the General Partner and the Dealer Manager on
behalf of the Partnership to make every reasonable effort to determine that the
purchase of Units is a suitable and appropriate investment for each investor,
based on information provided by the investor about the investor's
financial situation and investment objectives.
The Partnership and/or Dealer Manager will maintain records for at least
six years of the information used to determine the suitability of investors.
Subscribers' Representations and Warranties
Each Subscriber will execute or authorize the execution of a Subscription
Agreement to be submitted to the General Partner. In the States of Florida,
Iowa, Maine, Michigan, Minnesota, Missouri, Nebraska, North
Carolina, Oregon and Tennessee and Texas, Subscribers are required to personally
sign the Subscription Agreement. Each Subscriber will make certain
representations and warranties to the General Partner in his Subscription
Agreement or by paying for his Units, including that he (i) has received this
Prospectus, including the form of Partnership Agreement attached hereto as
Appendix I; (ii) meets the applicable requirements as to investor suitability;
(iii) accepts and adopts the provisions of the Partnership Agreement; and
(iv) authorizes the General Partner, as his attorney-in-fact, to execute the
Partnership Agreement and such other documents as may be required to carry out
the business of the Partnership. Each Subscriber is also instructed that (a) he
should not rely upon any information not specifically set forth in this
Prospectus or any supplements thereto in making a decision to invest in the
Partnership and the General Partner, the Dealer Manager and the Partnership
accept no responsibility for information provided to an investor that is not
clearly marked as being prepared and authorized by them for use with the public
and (b) an investment in the Partnership involves certain risks including the
matters set forth under the captions "Risk Factors," "Conflicts of Interest,"
"Management" and "Income Tax Considerations" in this Prospectus.
Special Limit on Ownership of Units by Benefit Plans
To avoid classification of a pro rata portion of the Partnership's
underlying assets as "plan assets" of investors which are Benefit Plans, the
Partnership intends to restrict the ownership of Units by Benefit Plans to less
than 25% of the total value of outstanding Units at all times. See "ERISA
Considerations - Plan Assets." Benefits Plans include Qualified Plans, Tax
Exempt Entities and certain other entities included in the definition of Benefit
Plans in this Prospectus.
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PLAN OF DISTRIBUTION
General
The Units are offered through Commonwealth Capital Securities Corp.,
Inc. as Dealer Manager. The Dealer Manager may offer the Units through other
broker-dealers who are members of the National Association of Securities
Dealers, Inc. ("NASD"). The Units are being offered on a "best efforts"
basis, which means that the Dealer Manager and the other broker-dealers are
not obligated to purchase any Units and are only required to use their best
efforts to sell Units to investors. The Offering of the Units is intended to
be in compliance with 2810 of the Rules of Conduct of the National
Association of Securities Dealers, Inc.
The Partnership will pay to the Dealer Manager an aggregate amount of up
to nine percent of Capital Contributions as Underwriting Commissions after and
only if the required $1,500,000 Minimum Subscription Amount is sold. The Dealer
Manager will pay other broker-dealers ("Participating Brokers") out of
Underwriting Commissions, a selling commission of up to eight percent of the
Capital Contributions from Units sold by such Participating Brokers. In
addition, all or a portion of the Dealer Manager fee may be reallowed to
certain Participating Brokers for expenses incurred by them in selling the
Units, including reimbursement for bona fide expenses incurred in connection
with due diligence activities. The amount of the selling commissions will be
determined based upon the quantity of Units sold to a single investor according
to the following schedule:
Purchase
Individual Price Selling
Transaction Size Per Unit Commission
- ----------------------- ------------ ---------------
$ 1,000 to $250,000 $20.00 8%
$ 250,020 to $350,000 $19.80 7%
$ 350,020 to $500,000 $19.60 6%
$ 500,020 to $750,000 $19.40 6%
$750,020 to $1,000,000 $19.20 5%
$1,000,020 and over $19.00 4%
The Underwriting Agreement, under which the Dealer Manager will offer the
Units, which is terminable without penalty by any party on 60 days' notice,
contains cross-indemnity clauses with respect to certain liabilities between the
General Partner and the Dealer Manager, including liabilities under the
Securities Act. The Dealer Manager and Participating Brokers participating in
the offering may be deemed to be "underwriters" as that term is defined in the
Securities Act.
Offering of Units
The offering of Units will commence on the Effective Date of the
Registration Statement of which this Prospectus is a part. Provided the General
Partner does not terminate the Offering of Units earlier, the Offering may
continue until the full 750,000 Units are sold, or until July 25, 1999. In
the event the Minimum Subscription Amount has not been received by July 25,
1998, Subscriptions will be released from the Escrow Account and returned to the
prospective investors, together with any interest actually earned thereon, net
of any tax withholding required by law. See "Plan of Distribution - Escrow
Arrangements and Fundings."
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The General Partner and its Affiliates will not be prohibited from
purchasing Units, although it is not their present intention to make such
purchases. Any Units purchased by the General Partner or its Affiliates would be
purchased for their own account and for investment and not for resale. No Units
purchased by the General Partner and its Affiliates may be counted for purposes
of obtaining the Minimum Subscription Amount. If the General Partner or its
Affiliates purchase any Units, the voting rights of the General Partner with
respect to the Units will be as described in the last paragraph of "Summary of
the Partnership Agreement - Voting Rights of Limited Partners".
Any purchase of Units in connection with this Offering must be accompanied
by tender of the sum of $20 per Unit (subject to the quantity discounts referred
to above), which is the full purchase price of a Unit; provided, however, the
Dealer Manager or that Participating Brokers may waive the selling commission
with respect to the purchase of Units by employees of the Dealer Manager,
Participating Brokers, the General Partner and its Affiliates, so long as those
employees are purchasing Units for their own accounts. If such fees are so
waived, such employees will tender no less than $18.40, for the purchase of
each Unit.
SUBJECT TO ACCEPTANCE BY THE GENERAL PARTNER OF THE INVESTOR'S
SUBSCRIPTION AGREEMENT OR PAYMENT FOR THE UNITS PURCHASED, EXECUTION OF THE
SUBSCRIPTION AGREEMENT OR PAYMENT FOR THE UNITS PURCHASED SHALL CONSTITUTE THE
INVESTOR'S AGREEMENT TO THE TERMS AND CONDITIONS OF THE SUBSCRIPTION AGREEMENT
AND THE PARTNERSHIP AGREEMENT, AND THE AUTHORITY OF THE GENERAL PARTNER TO
EXECUTE THE PARTNERSHIP AGREEMENT ON BEHALF OF THE INVESTOR.
Escrow Arrangements and Fundings
Subscriptions will be held in the Escrow Account at PNC Bank until funds
equal to the Minimum Subscription Amount have been received. While held in
escrow, Subscriptions will be invested in United States short-term government
securities or interest bearing bank accounts, PNC Bank's Market Value Savings
Account, or a similar account, for the benefit of the investors.
The Partnership will not be funded until the Minimum Subscription Amount
has been received. Once the Minimum Subscription Amount has been deposited in
the Escrow Account, the Subscriptions will be released to the Partnership. Any
interest earned on the Subscriptions while in escrow will be distributed, net of
any tax withholding required by law, directly to the investors promptly
following the funding, allocated in accordance with the amount of Subscriptions
held for each investor and the length of time such Subscriptions were held.
The Offering may be terminated, in the General Partner's discretion, at
any time after the Minimum Subscription Amount has been received and accepted by
the General Partner on behalf of the Partnership. The General Partner also has
the discretion to terminate the Offering prior to receiving the Minimum
Subscription Amount. In such event, the Partnership would be dissolved and
Subscriptions held in escrow, together with any interest actually earned thereon
net of any tax withholding required by law would be returned to the Subscribers.
It is anticipated that the offering of Units will terminate no later than
July 25, 1999. Subscriptions will be released from the Escrow Account and
returned to the Subscribers together with any interest actually earned thereon,
net of any tax withholding required by law, in the event the Minimum
Subscription Amount has not been received by July 25, 1998.
Subscribers will be admitted to the Partnership and receive Units at one
or more closings. Following receipt of the Minimum Subscription Amount and the
Initial Closing, Limited Partners will be admitted not
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later than 15 days after the release from the Escrow Account to the Partnership
of the Subscriber's funds. Additional closings will be held from time to time
during the Offering Period as Subscriptions are accepted by the General Partner,
but no less often than monthly. Subsequent Subscriptions will be accepted or
rejected by the General Partner within 30 days of their receipt. Funds received
from rejected subscriptions will be returned to the Subscribers immediately upon
rejection of their subscription. The final closing will be held shortly after
the termination of the Offering Period or, if earlier, upon the sale of all the
Units. After the Initial Closing, Limited Partners will be admitted to the
Partnership no later than the last day of the calendar month following the date
their Subscriptions are accepted by the General Partner. Each Subscriber to the
Partnership will be paid his share of interest earned on Subscription amounts
following the transfer of his Subscription to the Partnership, net of any tax
withholding required by law. These interest payments will be paid by the
Partnership.
Subscription for Units
Each prospective investor who satisfies the qualifications described under
"Investor Suitability Standards" and desires to purchase Units must:
(a) Review the Subscription Agreement, Signature Page and Power of
Attorney attached as Appendix II to this Prospectus to insure that the investor
is aware of the representations and warranties the investor will be deemed to
have made by subscribing for Units; and
(b) Deliver to the Dealer Manager a check made payable to "PNC Bank,
Escrow Agent FBO Commonwealth Income & Growth Fund III," in the amount of
$20.00, or such other amount as set forth in the table above, for each Unit that
the investor is seeking to purchase.
The Dealer Manager will not complete a sale of Units until at least five
business days after the date the investor receives a final prospectus and shall
send the investor a confirmation of his or her purchase.
Prospective investors that are not natural persons may be required to
deliver evidence of their authority to subscribe for Units, or opinions of
counsel as to their authority to subscribe for Units and the binding effect of
their subscriptions. Investors who submit subscriptions will not be permitted to
terminate or withdraw their subscriptions without the prior consent of the
General Partner.
The General Partner has the right to reject an investor's subscription for
any reason whatsoever, including the investor's failure to satisfy the
suitability standards described under "Investor Suitability Standards."
SALES MATERIAL
Sales material may be used in connection with the Offering only when
accompanied or preceded by the delivery of this Prospectus. Only sales
material which indicates that it is distributed by the General Partner may be
distributed to prospective investors. Material regarding an investment in the
Partnership may include a question and answer sales booklet, a speech for
public seminars, an invitation to attend public seminars, slide and video
presentations, prospecting letters, mailing cards and tombstone
advertisements; all of which would provide information regarding the General
Partner and the Partnership. In certain jurisdictions, such sales material
will not be available. Use of any materials will be conditioned on the
provision of such materials to the SEC and the filing with, and if required,
clearance by, other appropriate state regulatory authorities. Such clearance
does not mean, however, that the agency allowing use
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of the sales literature has passed on the merits of this Offering or the
accuracy of the material contained in such literature. Other than as described
herein, the Partnership has not authorized the use of sales material.
Although the information contained in such sales material does not
conflict with any of the information contained in this Prospectus, such material
does not purport to be complete and should not be considered as part of this
Prospectus or the Registration Statement of which this Prospectus is a part, or
as incorporated in this Prospectus or the Registration Statement by reference,
or as forming the basis of the Offering. The Offering is made only by this
Prospectus.
REPORTS TO LIMITED PARTNERS
The General Partner will deliver to each Limited Partner, within 120 days
after the end of each year, a balance sheet of the Partnership dated as of
December 31 of such year, together with statements of income, Partners' equity,
and the cash flow position of the Partnership for such year, prepared in
accordance with generally accepted accounting principles and accompanied by an
auditor's report from the Partnership's independent certified public
accountants. The General Partner will within such period also furnish (i) a
report of the activities of the Partnership for the year, which will include for
each item of Equipment acquired by the Partnership which individually represents
at least 10% of the total investment in Equipment, (ii) certain information
relevant to the value or utilization of the Equipment, (iii) a report on
distributions to the Limited Partners during the year and their source, (iv) if
any Equipment is sold during that year a report of the sale price, purchase
price and lease revenues from such Equipment, and (v) a report on any costs
incurred by the General Partner and its Affiliates in performing administrative
services which are reimbursed by the Partnership during the year. Within 60 days
after the end of each calendar quarter, the General Partner will also furnish a
report of all services rendered and all fees received by the General Partners
and its Affiliates from the Partnership, an unaudited balance sheet, a statement
of income, a statement of changes in financial position and a report on the
activities of the Partnership.
Until the net proceeds of the Offering of Units are fully invested, the
General Partner will furnish to the Limited Partners, within 60 days after the
end of each calendar quarter, a report of Equipment acquisitions during the
quarter, including the type and manufacturer of each item of Equipment, the
purchase price of the Equipment, and any other material terms of purchase, a
statement of the total amount of cash expended by the Partnership to acquire the
Equipment (including an itemization of all commissions, fees, and expenses and
the name of each payee), and a statement of the amount of net proceeds in the
Partnership which remain unexpended or uncommitted at the end of the quarter.
The General Partner will also furnish to all Limited Partners within 75
days after the end of the year other information regarding the Partnership
necessary for the preparation of their tax returns.
LEGAL MATTERS
Certain legal matters in connection with the Units offered hereby will be
passed upon for the General Partner and the Partnership by Blank Rome Comisky &
McCauley, Philadelphia, Pennsylvania, counsel to the Dealer-Manager, the General
Partner and the Partnership.
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EXPERTS
The balance sheet of the Partnership at April 28, 1997, the balance sheets
of the General Partner at February 28, 1997 and February 29, 1996, and the
consolidated financial statements of Com Cap Corp. at February 28, 1997 and
February 29, 1996, and for the years then ended, appearing in this Prospectus
and Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein and
in the Registration Statement, and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
FURTHER INFORMATION
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits relating thereto which the General
Partner has filed with the Securities and Exchange Commission, Washington,
D.C., under the Securities Act of 1933, as amended, and to which reference is
hereby made. Copies of the Registration Statement and the exhibits are on
file at the offices of the Securities and Exchange Commission in Washington,
D.C., 450 Fifth Street, N.W., Washington, DC 20549 and at the Commission's
regional offices at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, IL 60661, and 7 World Trade Center, New York, NY 10048; and may be
obtained upon payment of the fee prescribed by the SEC. The Commission also
maintains a website that contains reports, proxy statements, registration
statements and other information regarding registrants that file
electronically at http//:www.sec.gov.
GLOSSARY
The following terms used in this Prospectus shall (unless otherwise
expressly provided herein or unless the context otherwise requires) have the
meanings set forth below. Capitalized terms not otherwise defined herein or
elsewhere in the Prospectus shall have the meanings as set forth in the
Partnership Agreement.
"Accounting Period" shall mean each calendar month during the term of the
Partnership.
"Acquisition Expenses" means expenses relating to the prospective
selection and acquisition of or investment in Equipment by the Partnership,
whether or not actually acquired, including, but not limited to, legal fees and
expenses, travel and communication expenses, costs of appraisal, accounting fees
and expenses and other related expenses.
"Acquisition Fees" means the total of all fees and commissions paid by any
party in connection with the initial purchase of Equipment acquired by the
Partnership. Included in the computation of such fees or commissions shall be
the Equipment Acquisition Fee and any commission, selection fee, construction
supervision fee, financing fee, non-recurring management fee or any fee of a
similar nature, however designated.
"Adjusted Capital Contributions" means Capital Contributions of the
Limited Partners reduced by any cash distribution received by the Limited
Partners pursuant to the Partnership Agreement, to the extent such distributions
exceed any unpaid Cumulative Return as of the date such distributions were made.
"Adjusted Basis" means the basis, as defined in Section 1011 of the Code,
for determining gain or loss for federal income tax purposes from the sale,
transfer, or other disposition of property.
"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
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specified Person, (ii) any Person that is a director or an executive officer of,
partner in, or serves in a similar capacity to, the specified Person, or any
Person of which the specified Person is an executive officer or partner or with
respect to which the specified Person serves in a similar capacity, (iii) any
Person owning or controlling 10% or more of the outstanding voting securities of
such specified Person, or (iv) if such Person is an officer, director or
partner, any entity for which such Person acts in such capacity.
"Attorney-in-fact" means a Person authorized by another to act in his
place and stead, either for some particular purpose, as to do a particular act,
or for the transaction of business in general.
"Bankrupt" or "Bankruptcy" means, when used with reference to a specified
Person, (i) if such Person (a) files any application or petition in any tribunal
for the appointment of a trustee or receiver, or (b) commences any proceeding
under any bankruptcy or reorganization statute, or under any provision of the
Bankruptcy Code, or under any insolvency law, or under any dissolution or
liquidation law whether now or hereafter in effect, or (ii) if any petition or
application of the type described in subsection (i) above is commenced against
such Person and is not dismissed within 60 days of filing, or an order is
entered appointing a trustee or receiver for such Person, or an order for relief
is issued in any bankruptcy.
"Bankruptcy Code" means the United States Bankruptcy Code.
"Benefit Plan" means any of the following: (i) any employee benefit plan
(as defined in Section 3(3) of ERISA) whether or not it is subject to Title I of
ERISA; (ii) any plan described in Section 4975(e)(1) of the Code; or (iii)
entities whose assets include assets of entities described in paragraphs (i) and
(ii) above by virtue of investment in such entities by the types of entities
described in paragraphs (i) and (ii).
"Capital Account" means a bookkeeping account maintained by the
Partnership for each Partner pursuant to Section 4.1 of the Partnership
Agreement.
"Capital Contributions" means in the case of the General Partner, the
total amount of money contributed to the Partnership by the General Partner, and
in the case of Limited Partners, $20 for each Unit, or where the context
requires, the total Capital Contributions of all the Partners.
"Cash 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 the Partnership
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 the
Partnership Agreement; but not including depreciation or amortization of fees or
capital expenditures, or provisions for future expenditures, including, without
limitation, Organizational and Offering Expenses.
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"Closing Date" means the date, as designated by the General Partner, as of
which the Units shall cease being offered to the public pursuant to the
Offering, and shall be no later than the second anniversary of the Effective
Date.
"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 in the
Partnership 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 Registration Statement is
declared effective by the Securities and Exchange Commission.
"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 the Partnership Agreement, together with
all appliances, parts, instruments, accessories, furnishings, or other equipment
included therein and all substitutions, renewals, or replacements of, and all
additions, improvements, and accessions to, any and all thereof.
"Equipment Acquisition Fee" means the fee payable to the General Partner
in accordance with Section 6.3 of the Partnership Agreement.
"Equipment Liquidation Fee" means the fees payable to the General Partner
in accordance with Section 6.4 of the Partnership Agreement.
"Equipment Management Fee" means the fee payable to the General Partner in
accordance with Section 6.2 of the Partnership Agreement.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"ERISA Plan" means a retirement plan subject to the provisions of Title I
of ERISA.
"Escrow Account" means the account at PNC Bank, Philadelphia, Pennsylvania
where Subscriptions will be held until they aggregate the Minimum Subscription
Amount of $1,500,000.
"Exempt Transfer" means the transfers which will be disregarded in
determining whether a partnership will be considered to be publicly traded
pursuant to Treasury Regulation Section 1.7704-1.
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"Front-End Fees" means fees and expenses paid by any Person to any Person
during the Partnership's organizational and acquisition phase including all
Organizational and Offering Expenses (including the Organizational Fee),
Acquisition Fees, Acquisition Expenses, Debt Placement Fees, Leasing Fees, and
other similar fees and expenses; provided, however, any costs or expenses
incurred by the General Partner or its Affiliates (not including the
Partnership) which are not reimbursed by the Partnership, shall not be included
as Front-End Fees.
"Full Payout Net Lease" means an initial Net Lease of the Equipment under
which the non-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.
"Funding Date" means the date on which Capital Contributions are released
to the Partnership from the Escrow Account.
"General Partner" means Commonwealth Income & Growth Fund, Inc. and any
additional, substitute or successor general partner of the Partnership.
"Gross Income" means the gross income of the Partnership within the
meaning of Section 61(a) of the Code.
"Gross Lease Revenues" means Partnership gross receipts from leasing or
other operation of the Equipment, except that, to the extent the Partnership has
leased the Equipment from an unaffiliated party, it shall mean such receipts
less any lease expense.
"Initial Closing" means the date after the Minimum Subscription Amount is
received on which funds to acquire Units are released from the Escrow Account
and distributed to the Partnership for the acquisition of Units by Limited
Partners.
"Investment Account" means the account maintained by the Partnership for
the Partners which reflects the Partners' investment in the Partnership,
calculated under generally accepted accounting principles, consistently applied,
using the straight-line method of depreciation.
"Investment in Equipment" means the amount of Capital Contributions
actually paid or allocated to the purchase of or investment in Equipment by the
Partnership including working capital reserves (except that working capital
reserves in excess of three percent of Capital Contributions shall not be
included) and other cash payments such as interest and taxes, but excluding
Front-End Fees.
"IRA" means an Individual Retirement Account as described in
Section 408 of the Code.
"IRS" means the Internal Revenue Service.
"Letter of Suitability" means an agreement which may be used by investors
in lieu of a Subscription Agreement to subscribe to purchase Units and to
authorize the debit of the Subscriber's securities account.
"Limited Partner" means a Person who acquires Units and who is admitted to
the Partnership as a limited partner in accordance with the terms of the
Partnership Agreement.
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"Majority in Interest" means, with respect to the Partnership, Limited
Partners holding more than 50% of the outstanding Units held by all Limited
Partners at the Record Date for any vote or consent of the Limited Partners.
"Minimum Subscription Amount" means an aggregate of
$1,500,000 in Subscriptions.
"Modified ACRS" means the Accelerated Cost Recovery System, as modified by
the 1986 Act.
"NASD" means the National Association of Securities Dealers,
Inc.
"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 prior or subsequent to an
interim closing of the Partnership's books with the following adjustments: (i)
any income of the Partnership that is exempt from federal income tax and not
otherwise taken into account in computing Net Profits and Net Loss pursuant to
this definition shall be added to such taxable income or shall reduce such
taxable loss; (ii) any expenditure of the Partnership described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to
Treasury Regulations Section 1.704-1(b)(2)(iv)(i) and not otherwise taken into
account in computing Net Profits and Net Losses pursuant to this definition
shall be subtracted from such taxable income or loss; (iii) items of income,
gain, loss and deduction specially allocated pursuant to Section 7.3 of the
Partnership Agreement shall not be included in the computation of Net Profits or
Net Loss; and if property is reflected on the books of the Partnership at a book
value that differs from the adjusted tax basis of the property in accordance
with Treasury Regulation Section 1.704-1(b)(2)(iv)(d) or (f), depreciation,
amortization, and gain or loss with respect to such property shall be determined
by reference to such book value in a manner consistent with Treasury Regulation
Section 1.704-1(b)(2)(iv)(g). The terms "Net Profit" or "Net Losses" shall
include the Partnership's distributive share of the profit or loss of any
partnership or joint venture in which it is a partner or joint venturer.
"Net Worth" means the total assets of a Person less the total liabilities
of such Person.
"1986 Act" means the Tax Reform Act of 1986.
"Offering" means the initial public offering of Units in the Partnership,
as described in this 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 Distributions" means the quarterly or monthly distributions
made to the Partners pursuant to Article 8 of the Partnership Agreement.
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"Operating Lease" means a lease or other contractual arrangement under
which an unaffiliated party agrees to pay the Partnership, directly or
indirectly, for the use of the Equipment, and which is not a Full Payout Net
Lease.
"Organizational and Offering Expenses" means the expenses incurred in
connection with the organization of the Partnership and in preparation of the
Offering, including Underwriting Commissions, listing fees and advertising
expenses specifically incurred in connection with the distribution of the
Units.
"Participating Brokers" means members of the NASD who will be engaged by
the Dealer Manager to sell the Units.
"Participating Broker Fee" means commissions of up to eight percent of
the Capital Contributions from Units sold by the Participating Brokers.
"Partner(s)" means any one or more of the General Partner
and the Limited Partners.
"Partnership" means Commonwealth Income & Growth Fund III, a Pennsylvania
limited partnership.
"Partnership Agreement" means that Limited Partnership Agreement of
Commonwealth Income & Growth Fund III by and among the General Partner and the
Limited Partners, pursuant to which the Partnership is governed. The Partnership
Agreement is set forth in its entirety as Appendix I to this Prospectus.
"Passive Income" and "Passive Taxable Income" means income derived from a
"passive activity" as that term is defined in Section 469(c) of the Code.
"Person" means an individual, partnership, joint venture, corporation,
trust, estate or other entity.
"Proceeds" means proceeds from the sale of the Units.
"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) solely for purposes of the definition of Full Payout Net
Lease, the amount of the Equipment Acquisition Fee and any other Acquisition
Fees, but excluding points and prepaid interest.
"Qualified Plan" means a trust established pursuant to the terms of a
pension, profit sharing or stock bonus plan, including Keogh Plans, meeting the
requirements of Section 401 and following of the Code.
"Record Date" means, (a) for purposes of a meeting of, or actions by, the
Limited Partners pursuant to Article 10 of the Partnership Agreement, the close
of business on the business day preceding the date on which the written notice
referred to in that Article is given and (b) for purposes of Article 12 of the
Partnership Agreement, the close of business on December 31 and June 30 of each
year.
"Registration Statement" means the Registration Statement on Form S-1
filed by the Partnership with the Securities and Exchange Commission under the
Securities Act to register the offer and sale of the Units, as the same may be
amended from time to time.
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"Retained Proceeds" means Cash Available for Distribution, which instead
of being distributed to the Partners is retained by the Partnership for the
purpose of acquiring or investing in Equipment.
"Retiring General Partner" means a general partner of the Partnership who
or which has been removed or withdrawn as such or is Bankrupt, which has been
involuntarily dissolved, or who has died or had a conservator appointed for the
person or any of the property of such general partner.
"Roll-Up" means a transaction involving the acquisition, merger,
conversion, or consolidation, either directly or indirectly, of the Partnership
and the issuance of securities of a Roll-Up Entity. Such term does not include:
(i) a transaction involving units if the Units have been listed for at least
twelve months on a national securities exchange or traded through the NASD
Automated Quotation National Market System; or (ii) a transaction involving the
conversion to corporate, trust or association form of only the Partnership if,
as a consequence of the transaction, there will be no significant adverse change
in any of the following: (a) the Limited Partners' voting rights, (b) the term
of existence of the Partnerships, (c) compensation of the General Partner or its
Affiliates, or (d) the Partnership's investment objectives.
"Roll-Up Entity" means the partnership, corporation, trust or other entity
that would be created or would survive after the successful completion of a
proposed Roll-Up transaction.
"Sale-leaseback" means a transaction where an asset is sold to a vendee
who immediately leases such asset back to the vendor.
"Section 754 Election" shall mean an election under Section 754 of the
Code, relating to the Adjusted Basis of Partnership Assets, as provided for
under Sections 734 and 743 of the Code.
"Securities Act" means the Securities Act of 1933, as
amended.
"Sponsor" means any Person directly or indirectly instrumental in
organizing, wholly or in part, a Program or any Person who will manage or
participate in the management of a Program, and any Affiliate of any such
Person. Sponsor does not include a Person whose only relation with the Program
is that of an independent equipment manager and whose only compensation is as
such. Sponsor does not include wholly independent third parties such as
attorneys, accountants, and underwriters whose only compensation is for
professional services rendered in connection with the offering of Program
interests.
"Subscribers" refers to those Persons who have tendered monies to the
Partnership for the purchase of Units, but have not been accepted as Limited
Partners as provided for in Section 3.2 of the Partnership Agreement.
"Subscription" means money tendered to the Partnership for
the purchase of Units.
"Subscription Agreement" means the agreement attached as Appendix III to
this Prospectus whereby a Subscriber becomes bound to purchase Units and which
shall be maintained in the offices of the General Partner and the Dealer
Manager.
"Substituted Limited Partner" means any Person admitted to the Partnership
as a Limited Partner pursuant to the provisions of Section 11.2 of the
Partnership Agreement.
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"Supplemental Sales Material" means sales material distributed by the
General Partner for use in connection with the Offering including, but not
limited to, a question and answer sales booklet, a speech for public seminars,
an invitation to attend public seminars, slide and video presentations,
prospecting letters, mailing cards and tombstone advertisements.
"Tax Exempt Entity" means entities exempt from federal income tax such as
qualified employee pension or profit-sharing trusts and individual retirement
accounts.
"Term Debt" means debt of the Partnership with a term in excess of twelve
months, incurred with respect to acquiring or investing in Equipment, or
refinancing non-Term Debt, but not debt incurred with respect to refinancing
existing Partnership Term Debt.
"Terminating Event" means the first to occur of the withdrawal, removal,
retirement, resignation, expulsion, Bankruptcy, involuntary dissolution, death,
insanity or appointment of a conservator for the person or any of the assets of
the last remaining general partner of the Partnership.
"Treasury Regulations" or "Regulations" means the income tax regulations
promulgated under the Code, as such regulations may be amended from time to time
(including corresponding provisions of successor regulations).
"Triple-net leases" are leases that will typically provide that the
lessee or some other party will bear the risk of physical loss of the
Equipment; pay taxes relating to the lease or use of the Equipment; maintain
the Equipment; indemnify the Partnership-lessor against any liability
suffered by the Partnership as the result of any act or omission of the
lessee or its agents; maintain casualty insurance in an amount equal to the
greater of the full value of the Equipment and a specified amount set forth in
the lease; and maintain liability insurance naming the Partnership as an
additional insured with a minimum coverage which the General Partner deems
appropriate.
"Underwriting Commissions" mean selling commissions and dealer-manager
fees paid to broker-dealers by the Partnership in connection with the offer and
sale of Units.
"U.S. Citizen" means any of the following Persons: (i) an individual who
is a citizen of the United States or one of its possessions, (ii) a partnership
in which each partner is a U.S. Citizen, (iii) a trust of which each trustee and
all of the beneficiaries are U.S. Citizens (provided that Persons who are not
U.S. Citizens do not possess more than 25% of the aggregate power to direct or
remove the trustee), and (iv) a corporation incorporated in the United States or
one of its possessions of which the president/chief executive officer, chairman
of the board of directors and two-thirds or more of the members of the board of
directors and other managing officers are U.S. Citizens and in which at least
75% of the voting interest is owned or controlled by U.S. Citizens.
"Unit" means a limited partnership interest in the Partnership.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
COMMONWEALTH INCOME & GROWTH FUND III
Report of Independent Auditors.............................................F-1
Balance Sheet at April 28, 1997............................................F-2
Notes to Balance Sheet.....................................................F-3
COMMONWEALTH INCOME & GROWTH FUND, INC.
Report of Independent Auditors.............................................F-4
Balance Sheets at February 28, 1997 and February 29, 1996..................F-5
Notes to Balance Sheets....................................................F-6
COMMONWEALTH CAPITAL CORP.
Report of Independent Auditors.............................................F-7
Consolidated Balance Sheets at February 28, 1997 and February 29, 1996.....F-8
Consolidated Statements of Income and Retained Earnings
for the Years ended February 28, 1997 and February 29, 1996.............F-9
Consolidated Statements of Cash Flows for the Years ended
February 29, 1996 and February 29, 1996................................F-10
Notes to Consolidated Financial Statements................................F-11
</TABLE>
97
<PAGE>
Report of Independent Auditors
To the General Partner and Limited Partner
Commonwealth Income & Growth Fund III
We have audited the accompanying balance sheet of Commonwealth Income &
Growth Fund III at April 28, 1997. This balance sheet is the responsibility
of the Fund'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 of the balance sheet 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 III at April 28, 1997 in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
April 28, 1997
F-1
<PAGE>
Commonwealth Income & Growth Fund III
Balance Sheet
April 28, 1997
Assets
Cash $1,500
------
------
Partners' capital
General partner $1,000
Limited partner 500
------
Total partners' capital $1,500
------
------
See accompanying notes.
F-2
<PAGE>
Commonwealth Income & Growth Fund III
Notes to Balance Sheet
April 28, 1997
1. The Partnership
Commonwealth Income & Growth Fund III (the "Partnership") is a limited
partnership which was organized in the Commonwealth of Pennsylvania. The
Partnership has not yet commenced operations. The Partnership was organized
to acquire, own, lease, and sell income-producing equipment.
The General Partner's initial contribution consists of a $1,000 cash
contribution from Commonwealth Income & Growth Fund, Inc., a wholly-owned
subsidiary of Commonwealth of Delaware, Inc. which in turn is a wholly-owned
subsidiary of Commonwealth Capital Corp. The General Partner may in its sole
discretion purchase units of limited partnership interest (the "Units"). The
Initial Limited Partner has contributed $500 for the purchase of a limited
partnership interest.
The Partnership plans to offer for sale, through a public offering from
75,000 to 750,000 Units at a cash purchase price of $20 per Unit.
2. Related Party Transactions
The Partnership will pay for organizational and offering expenses in
connection with the issuance and distribution of Units. The General Partner
and its affiliates, including Commonwealth Capital Securities Corp., will
receive substantial fees and compensation in connection with the offering of
Units and management of the Partnership's assets. See "Compensation of
General Partner and Affiliates," "Estimated Use of Proceeds," and
"Allocations and Distributions" elsewhere in the Prospectus of the
Partnership for information with respect to the compensation to be paid to
the General Partner and its affiliates, including Commonwealth Capital
Securities Corp., and the allocations of income, losses, and cash
distributions.
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholder
Commonwealth Income & Growth Fund, Inc.
We have audited the accompanying balance sheets of Commonwealth Income &
Growth Fund, Inc. (an indirect wholly-owned subsidiary of Commonwealth
Capital Corp.) as of February 28, 1997 and February 29, 1996. These balance
sheets are the responsibility of the Company's management. Our responsibility
is to express an opinion on these balance sheets 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 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 audits provide a reasonable basis for our
opinion.
In our opinion, the balance sheets referred to above present fairly, in all
material respects, the financial position of Commonwealth Income & Growth
Fund, Inc. at February 28, 1997 and February 29, 1996, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 28, 1997
F-4
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND, INC.
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF COMMONWEALTH CAPITAL CORP.)
BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28 FEBRUARY 29
1997 1996
------------- -------------
<S> <C> <C>
Assets
Cash................................................................................ $ 500 $ 500
Accounts receivable from Income Funds and Commonwealth Capital Corp................. 2,069 127,798
Investment in Partnerships.......................................................... 2,000 2,000
------------- -------------
$ 4,569 $ 130,298
------------- -------------
------------- -------------
Liabilities
Accounts payable to Income Funds and Commonwealth Capital Corp...................... $ 3,469 $ 129,198
Stockholders' equity
Common stock at $1 stated value:
Authorized shares--1,000..........................................................
Issued and outstanding shares--100................................................ 100 100
Additional paid-in capital.......................................................... 1,001,000 1,001,000
------------- -------------
1,001,100 1,001,100
Less: note receivable............................................................... (1,000,000) (1,000,000)
------------- -------------
1,100 1,100
------------- -------------
$ 4,569 $ 130,298
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND, INC.
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF COMMONWEALTH CAPITAL CORP.)
NOTES TO BALANCE SHEETS
FEBRUARY 28, 1997
1. THE COMPANY
Commonwealth Income & Growth Fund, Inc. (the "Company") is a wholly-owned
subsidiary of Commonwealth of Delaware, Inc. which in turn is a wholly-owned
subsidiary of Commonwealth Capital Corp. ("CCC"). The Company is the sole
General Partner of Commonwealth Income & Growth Fund I, a Pennsylvania
limited partnership and the sole General Partner of Commonwealth Income &
Growth Fund II, a Pennsylvania limited partnership. On April 28, 1997 the
Company contributed $1,000 in cash to become the sole General Partner of
Commonwealth Income & Growth Fund III, a Pennsylvania limited Partnership.
The three limited partnerships described above are collectively referred to
herein as the "Partnerships."
CCC has provided additional capital by means of a noninterest-bearing demand
note in the amount of $1,000,000, so that the Company will at all times have a
net worth (which includes the net equity of the Company and the demand note
receivable from CCC) of at least $1,000,000. In computing the Company's net
worth for this purpose, its interest in the Partnerships and any amounts and
notes receivable from and payable to the Partnerships will be excluded. The
Company's equity has been reduced by the note receivable from CCC resulting in
net equity of $1,100, which may be different for tax purposes. The Company's
operations will be included in the consolidated federal income tax return of
CCC.
2. INVESTMENT IN PARTNERSHIPS
The Company contributed $2,000 in cash 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. See "Compensation of General Partner and Affiliates," and "Allocations
and Distributions" elsewhere in the Prospectus of Commonwealth Income & Growth
Fund III for information with respect to the compensation to be paid to the
Company and its affiliates and the allocations of income, losses, and cash
distributions.
F-6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Stockholder
Commonwealth Capital Corp.
We have audited the accompanying consolidated balance sheets of Commonwealth
Capital Corp. as of February 28, 1997 and February 29, 1996, and the related
consolidated statements of operations and retained earnings and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with 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 consolidated financial position of Commonwealth
Capital Corp. at February 28, 1997 and February 29, 1996, and the consolidated
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 28, 1997
F-7
<PAGE>
COMMONWEALTH CAPITAL CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1997 1996
------------- -------------
<S> <C> <C>
Assets
Cash and cash equivalents.......................................................... $ 162,028 $ 283,806
Receivables from Income Funds...................................................... 308,686 458,781
Advances to Income Funds........................................................... 317,400 223,012
Other receivables.................................................................. 134,335 44,243
Income taxes receivable............................................................ 33,000 41,300
Minimum lease payments receivable, net of unearned interest income of $4,316,972 in
1997 and $4,998,828 in 1996...................................................... 9,045,000 9,775,605
Deferred tax asset................................................................. 122,000 132,000
Investment in Income Funds......................................................... 18,200 17,200
Other assets....................................................................... 10,976 12,084
Office furniture and equipment, accumulated depreciation of $84,668 in 1997 and
$66,986 in 1996.................................................................. 32,323 40,471
------------- -------------
Total assets....................................................................... $ 10,183,948 $ 11,028,502
------------- -------------
------------- -------------
Liabilities and stockholder's equity
Accounts payable and accrued expenses.............................................. $ 118,144 $ 245,752
Nonrecourse obligations............................................................ 9,045,000 9,775,605
------------- -------------
Total liabilities.................................................................. 9,163,144 10,021,357
Stockholder's equity:
Common stock, $1 par value:
Authorized shares--1,000.......................................................
Issued and outstanding shares -10.............................................. 10 10
Retained earnings................................................................ 1,020,794 1,007,135
------------- -------------
Total stockholder's equity......................................................... 1,020,804 1,007,145
------------- -------------
Total liabilities and stockholder's equity......................................... $ 10,183,948 $ 11,028,502
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-8
<PAGE>
COMMONWEALTH CAPITAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------
<S> <C> <C>
FEBRUARY 28, FEBRUARY 29,
1997 1996
------------ ------------
Income:
Fee income from Income Funds........................................................ $ 1,508,572 $ 1,777,398
Interest income on minimum lease payments receivable................................ 616,353 656,005
Equity in income of Income Funds.................................................... 60,004 43,425
Interest and other.................................................................. 195,979 23,391
------------ ------------
2,380,908 2,500,219
Expenses:
Personnel........................................................................... 708,767 795,894
General and administrative.......................................................... 568,489 364,404
Selling............................................................................. 158,658 188,657
Interest expense on nonrecourse obligations......................................... 616,353 656,005
Depreciation........................................................................ 17,682 22,075
Provision for uncollectible advances and notes receivable from Income Funds......... 279,000 574,704
------------ ------------
2,348,949 2,601,739
------------ ------------
Income (loss) before provision for income taxes....................................... 31,959 (101,520)
Provision for income taxes............................................................ 18,300 181,885
------------ ------------
Net income (loss)..................................................................... 13,659 (283,405)
Retained earnings at beginning of year................................................ 1,007,135 1,290,540
------------ ------------
Retained earnings at end of year...................................................... $ 1,020,794 $ 1,007,135
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-9
<PAGE>
COMMONWEALTH CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------
<S> <C> <C>
FEBRUARY 28, FEBRUARY 29,
1997 1996
------------ ------------
Operating activities
Net income (loss)..................................................................... $ 13,659 $ (283,405)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation........................................................................ 17,682 22,075
Deferred income tax provision....................................................... 10,000 176,000
Provision for uncollectible advances and notes receivable from Income Funds......... 279,000 574,704
Loss on disposal of asset........................................................... -- 1,984
Changes in operating assets and liabilities:
Receivables from Income Funds..................................................... 150,095 (23,515)
Other receivables................................................................. (90,092) 6,812
Income taxes receivable........................................................... 8,300 32,635
Other assets...................................................................... 1,108 (1,580)
Accounts payable and accrued expenses............................................. (127,608) 130,702
------------ ------------
Net cash provided by operating activities............................................. 262,144 636,412
Investing activities
Net advances to Income Funds.......................................................... (373,388) (524,284)
Capital expenditures.................................................................. (9,534) (11,762)
Investment in Income Funds............................................................ (1,000) (2,000)
------------ ------------
Net cash used in investing activities................................................. (383,922) (538,046)
Net (decrease) increase in cash and cash equivalents.................................. (121,778) 98,366
Cash and cash equivalents at beginning of year........................................ 283,806 185,440
------------ ------------
Cash and cash equivalents at end of year.............................................. $ 162,028 $ 283,806
------------ ------------
------------ ------------
Supplemental disclosures of cash flow information
Cash paid during the year for income taxes............................................ $ -- $ 5,300
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-10
<PAGE>
COMMONWEALTH CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
1. BUSINESS
Commonwealth Capital Corp. (the Company), through its subsidiary,
Commonwealth of Delaware, Inc. (CDI), is primarily engaged in leasing various
types of computer peripheral equipment and other similar equipment, which are
leased primarily to U.S. corporations and institutions. Certain subsidiaries of
CDI were formed for the purpose of functioning as general partners/managing
trustees which own a 1% interest in limited partnerships/trusts (the "Income
Funds"), which were organized to acquire, own and act as lessor with respect to
certain computer equipment. As of February 28, 1997, the subsidiaries include
Commonwealth Capital Fund 1987-I, Inc., Commonwealth Capital Fund 1988-I, Inc.,
Commonwealth Capital Fund No. 3, Inc., Commonwealth Capital Fund No. 4, Inc.,
Commonwealth Capital Fund V, Inc., Commonwealth Capital Private Fund-I, Inc.,
Commonwealth Capital Fund VI, Inc., Commonwealth Capital Fund VII, Inc.,
Commonwealth Capital Private Fund--II, Inc., Commonwealth Capital Trustee VIII,
Inc., Commonwealth Capital Trustee IX, Inc., Commonwealth Capital Trustee X,
Inc., Commonwealth Capital Private Fund-III, Inc., Commonwealth Income and
Growth Fund, Inc., Commonwealth Capital Private Fund IV, Inc., Commonwealth
Capital Private Fund V, Inc., and Commonwealth Capital Private Fund VI, Inc.
(collectively the "General Partner Subsidiaries"), Commonwealth Capital
Securities Corp., Garden State Facilities Funding, Inc. (GSFF) and Commonwealth
Capital Delaware Trustee, Inc.
All of the Company's fee income is derived from the Income Funds within the
leasing industry.
2. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include 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 financial statements. The balance
sheets are presented on an unclassified basis in accordance with leasing
industry practice.
F-11
<PAGE>
COMMONWEALTH CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1997
2. ACCOUNTING POLICIES (CONTINUED)
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 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, 1997 and
February 29, 1996, cash equivalents were invested in a money market fund
investing directly in treasury obligations.
REVENUE RECOGNITION
The Company recognizes fees as earned in accordance with the various General
Partnership and Trust Agreements. Interest income on minimum lease payments
receivable is recognized as earned.
OFFICE FURNITURE AND EQUIPMENT
Office furniture and equipment are carried at cost and are depreciated over
the estimated useful lives of the related assets ranging from 5 to 7 years using
accelerated methods.
INVESTMENT IN INCOME FUNDS
The Company accounts for its 1% interests in the Income Funds by the equity
method. Distributions were received from these Income Funds and approximated the
Company's equity in the income of the Income Funds as reflected in the
accompanying income statement. Financial information of the Income Funds as of
December 31, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Total assets................................................... $ 34,502,000 $ 42,067,000
Nonrecourse debt............................................... 10,450,000 13,561,000
Other liabilities.............................................. 2,952,000 3,860,000
Partners' capital.............................................. 21,067,000 24,646,000
Net loss....................................................... (2,878,000) (837,000)
</TABLE>
F-12
<PAGE>
COMMONWEALTH CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1997
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 and $4,016,000 at February 28, 1997 and
February 29, 1996, respectively. Such notes have been eliminated in the
consolidation of the accompanying financial statements.
The compensation to the Company from the Income Funds includes: 1) Equipment
Acquisition Fees (4% of the purchase price of all equipment purchased by the
Income Funds); 2) Debt Placement Fees (1% of financed equipment by the Income
Funds); 3) Sales Fees Expense (3% of gross proceeds of sold equipment by the
Income Funds); and 4) Equipment Management Fees (5% of the gross operating lease
revenues of the Income Funds). The Company earned approximately $1,509,000 and
$1,777,000 in fees for managing the Income Funds during the years ended February
28, 1997 and February 29, 1996, respectively.
Fee income from three Income Funds, each exceeding 10% of total fee income,
aggregated 60% and 57% for the years ended February 28, 1997 and February 29,
1996, respectively.
3. LEASE COMMITMENTS
GSFF acted as lessor in a series of lease purchase transactions whereby the
underlying assets were funded by investors through certificates of participation
in the lease payments. All of GSFF's rights as lessor were assigned to a
third-party agent which administers the collection of rentals paid by the
lessee. The obligations under the certificates are nonrecourse to GSFF.
Accordingly, any reduction in the minimum lease payments receivable for
uncollectible accounts would result in an equal reduction of the nonrecourse
obligations. Amounts outstanding at February 28, 1997 and February 29, 1996
under the leases and certificates of participation are approximately $9,045,000
and $9,615,000, respectively. These amounts are included in minimum lease
payments receivable and nonrecourse obligations in the accompanying balance
sheets. Of these amounts, $7,690,000 and $8,170,000, respectively, are secured
by mortgage insurance policies maintained by the lessee. The certificates mature
from 1997 to 2011. The Company recognized interest income and interest expense
in connection with the lease purchase transactions of $616,353 and $656,005 for
fiscal years ended February 28, 1997 and February 29, 1996, respectively.
F-13
<PAGE>
COMMONWEALTH CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1997
3. LEASE COMMITMENTS (CONTINUED)
Future minimum lease payments to be received as of February 28, 1997 are as
follows:
<TABLE>
<S> <C>
1998............................................................ $1,190,923
1999............................................................ 1,202,479
2000............................................................ 1,190,739
2001............................................................ 1,192,935
2002............................................................ 972,677
Thereafter...................................................... 7,675,669
---------
13,425,422
Less amount representing interest............................... 4,380,422
---------
Total........................................................... $9,045,000
---------
---------
</TABLE>
The Company leases an automobile, certain office equipment and office space
under noncancelable operating leases expiring in 1998 through 2000. Rent expense
for the years ended February 28, 1997 and February 29, 1996 was approximately
$181,000 and $112,000, respectively. Future minimum lease payments under
noncancelable operating leases at February 28, 1997 are $184,000 in 1998;
$143,000 in 1999; and $3,000 in 2000.
4. PROFIT-SHARING PLAN
The Company has a profit-sharing plan covering all employees with one year
of service and 21 years of age. Profit-sharing contributions are made at the
discretion of management. It is the Company's policy to fund profit-sharing
costs as accrued. There was no profit-sharing contribution for the years ended
February 28, 1997 and February 29, 1996.
5. INCOME TAXES
The Company files a consolidated federal income tax return with CDI and its
subsidiaries. The Company has investment tax credit carryforwards of $266,000 at
February 28, 1997. The investment tax credits expire in 1998 through 2001 and
are available to reduce future federal income tax liabilities. The Company also
has state net operating loss carryforwards of approximately $508,000, which
expire during 1997 through 1999.
The Company has a federal deferred tax asset of $259,000 and $281,000 at
February 28, 1997 and February 29, 1996, respectively, arising primarily from
the carryforward of investment tax credits. At February 28, 1997 and February
29, 1996, the Company recorded a valuation allowance of approximately $137,000
and $166,000, respectively,
F-14
<PAGE>
COMMONWEALTH CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1997
5. INCOME TAXES (CONTINUED)
because the Company concluded the future realization of all of the tax benefits
underlying the asset could not be reasonably assured based on current and
expected operating results. The Company believes that the remaining asset of
$122,000 is more likely than not to be realized. In addition, the Company has a
state deferred tax asset of $48,000 at February 28, 1997; however, the future
realization of the tax benefits underlying the state deferred tax asset could
not be reasonably assured and, accordingly, a valuation allowance was recorded
in the amount of $48,000.
The income tax provision is comprised of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Current tax provision (net of $800 in 1997 of federal investment tax
credits realized).................................................... $ 8,300 $ 5,885
Deferred tax provision................................................. 10,000 176,000
--------- ----------
$ 18,300 $ 181,885
--------- ----------
--------- ----------
</TABLE>
6. RELATED PARTY TRANSACTIONS
For the years ended February 28, 1997 and February 29, 1996, certain of the
General Partner Subsidiaries agreed to waive or forgive the related Income
Funds' obligations to pay certain equipment management, acquisition, selling and
financing fees in the amount of approximately $157,000 and $335,000,
respectively. Accordingly, fee income from Income Funds is reflected net of
these amounts.
During 1997 and 1996, the Company made $373,388 and $524,284, respectively,
in cash advances to certain Income Funds to fund cash distributions to limited
partners. During 1997 and 1996, the Company determined that approximately
$279,000 and $375,000, respectively, of these advances were uncollectible and
such amounts were written off. The remaining advances of $317,400 are due on
demand.
7. SUPPLEMENTAL CASH FLOW INFORMATION
Other noncash activities associated with lease transactions:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Reduction of minimum lease receivable and repayment of nonrecourse
obligation associated with direct payment made by lessee to bank.... $ 730,605 $ 710,000
---------- ----------
---------- ----------
</TABLE>
F-15
<PAGE>
COMMONWEALTH CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1997
8. LEGAL SETTLEMENT
In 1997, the Company settled a dispute over contract terms with a former
lessee, whereby the lessee agreed to pay $190,000 for release of all future
liability. The settlement has been included in other income for the year ended
February 28, 1997. The Company received $95,000 through February 28, 1997 and
the remaining $95,000, included in other receivables at February 28, 1997, was
subsequently received.
F-16
<PAGE>
APPENDIX I
LIMITED PARTNERSHIP AGREEMENT
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
RESTATED LIMITED PARTNERSHIP AGREEMENT
_______________________, 1997
<PAGE>
TABLE OF CONTENTS
Page
----
INTRODUCTION.................................................................1
ARTICLE 1: Definitions......................................................1
ARTICLE 2: Organization.....................................................8
2.1 Continuation.....................................................8
2.2 Name.............................................................9
2.3 Place of Business................................................9
2.4 Registered Office and Registered Agent...........................9
2.5 Business.........................................................9
2.6 Term.............................................................9
ARTICLE 3: Capital Contributions and Status of Partners.....................9
3.1 General Partner..................................................9
3.2 Limited Partners.................................................9
3.3 Capital Contribution of Limited Partners........................10
3.4 Registration....................................................10
3.5 Withdrawal of Capital Contributions.............................10
3.6 Admission of Limited Partner....................................10
3.7 Continuation of Limited Partner Status..........................11
3.8 Limited Liability of Limited Partners...........................11
ARTICLE 4: Partners' Capital...............................................11
4.1 Capital Accounts................................................11
4.2 Withdrawal and Return of Capital................................11
4.3 Interest on Capital.............................................11
ARTICLE 5: Partnership Expenses............................................12
5.1 Organization Expenses...........................................12
5.2 Other Expenses..................................................12
5.3 Excluded Expenses...............................................13
ARTICLE 6: Compensation of the General Partner.............................13
6.1 Organizational Fee..............................................13
6.2 Equipment Management Fee........................................13
6.3 Equipment Acquisition Fee.......................................14
6.4 Equipment Liquidation Fee.......................................14
6.5 Debt Placement Fee..............................................14
6.6 Limitations on Fees.............................................14
ARTICLE 7: Allocation of Net Profits, Net Losses and Other Items...........15
7.1 Net Profits.....................................................15
7.2 Net Losses......................................................15
(i)
<PAGE>
Page
----
7.3 Required Allocations............................................15
7.4 Syndication Expenses............................................16
7.5 Recharacterization of Fees......................................17
7.6 Recapture.......................................................17
7.7 Allocations Among Limited Partners..............................17
7.8 Other Allocations...............................................17
ARTICLE 8: Distributions...................................................17
8.1 Cash Distributions..............................................17
8.2 Allocation of Distributions to Limited Partners.................19
8.3 Amounts Withheld................................................19
8.4 Return of Offering Proceeds.....................................19
ARTICLE 9: Rights, Powers, and Duties of General Partner...................19
9.1 Rights and Powers...............................................19
9.2 Reliance on Certificate of General Partner......................21
9.3 Independent Activities..........................................22
9.4 Duties..........................................................22
9.5 Restrictions on Authority.......................................23
9.6 General Partner's Net Worth.....................................26
ARTICLE 10: Rights of Limited Partners......................................26
10.1 No Limited Partner in Control...................................26
10.2 Voting Rights...................................................26
10.3 Conversions and Roll-Ups........................................27
10.4 Meetings........................................................28
10.5 Certain Amendments..............................................28
ARTICLE 11: Transfer of Units...............................................29
11.1 Assignment......................................................29
11.2 Substituted Limited Partners....................................29
11.3 Transfer Fee....................................................30
11.4 General.........................................................30
ARTICLE 12: Redemption......................................................30
ARTICLE 13: General Partner's Interest......................................31
13.1 Voluntary Withdrawal or Assignment..............................31
13.2 Removal.........................................................31
ARTICLE 14: Dissolution, Continuation and Termination.......................31
14.1 Dissolution.....................................................31
14.2 Continuation....................................................32
(ii)
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Page
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14.3 Purchase of Interest of General Partner.........................32
14.4 Liquidation.....................................................32
ARTICLE 15: Accounting and Fiscal Matters...................................33
15.1 Partnership Records.............................................33
15.2 Accounting; Fiscal Year.........................................34
15.3 Reports.........................................................34
15.4 Bank Accounts...................................................35
15.5 Partnership Returns.............................................35
ARTICLE 16: Power of Attorney...............................................36
16.1 Power of Attorney...............................................36
ARTICLE 17: Liability and Indemnification of General Partner................36
17.1 Exclusion of Liability for Return of Capital Contributions......36
17.2 Limitation on Liability of General Partner; Indemnification.....36
ARTICLE 18: Tax Exempt Limited Partners.....................................38
18.1 Tax Exempt Limited Partners.....................................38
ARTICLE 19: Miscellaneous...................................................38
19.1 Notices.........................................................38
19.2 Parties in Interest.............................................38
19.3 Section Captions................................................38
19.4 Severability....................................................38
19.5 Right to Rely on General Partner................................38
19.6 Pennsylvania Law................................................39
19.7 Counterpart Execution...........................................39
19.8 Gender..........................................................39
19.9 Integrated Agreement............................................39
(iii)
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
RESTATED LIMITED PARTNERSHIP AGREEMENT
RESTATED LIMITED PARTNERSHIP AGREEMENT, dated as of _____________, by
and among Commonwealth Income & Growth Fund, Inc., a Pennsylvania corporation
(the "General Partner"), David A. Kintzer (the "Initial Limited Partner"), and
the persons who on or after the execution of this Agreement are admitted as
limited partners of the Partnership.
INTRODUCTION
On April 17, 1997, the General Partner and the Initial Limited Partner,
formed Commonwealth Income & Growth Fund III as a Pennsylvania limited
partnership (the "Partnership") by the filing of a certificate of limited
partnership in the Office of the Department of State of the Commonwealth of
Pennsylvania. The parties desire to effect the withdrawal of the Initial Limited
Partner, and the admission of the purchasers of the Partnership's Units as
limited partners of the Partnership and to restate the agreement of the Partners
to read in its entirety as set forth below. To accomplish this, the parties
agree that (i) the persons whose subscriptions for Units have been accepted by
the General Partner and who are reflected in the records of the Partnership as
purchasing Units on the date hereof are admitted as limited partners of the
Partnership; (ii) the Initial Limited Partner withdraws as a limited partner of
the Partnership and is released from all its obligations to the Partnership, and
the Partnership shall promptly return the Initial Limited Partner's capital
contribution, and (iii) the agreement of the Partners is hereby restated to read
in its entirety as set forth below.
ARTICLE 1
Definitions
The following terms used in this Agreement shall have the meanings set
forth below.
"Acquisition Expenses" means expenses relating to the prospective
selection and acquisition of or investment in Equipment, whether or not actually
acquired, including, but not limited to, legal fees and expenses, travel and
communication expenses, costs of appraisals, accounting fees and expenses and
miscellaneous expenses.
"Acquisition Fees" means the total of all fees and commissions paid by any
party in connection with the initial purchase of Equipment acquired by the
Partnership. Included in the computation of such fees or commissions shall be
the Equipment Acquisition Fee, any commission, selection fee, construction
supervision fee, financing fee, non-recurring management fee or any fee of a
similar nature, however designated.
"Act" means the Pennsylvania Revised Uniform Limited Partnership Act.
"Adjusted Basis" means the basis, as defined in Section 1011 of the Code,
for determining gain or loss for federal income tax purposes from the sale,
transfer, or other disposition of property.
"Adjusted Capital Contributions" means Capital Contributions of the
Limited Partners reduced to not less than zero by any cash distribution received
by the Limited Partners pursuant to Sections 4.2 or 8.1, to the extent such
distributions exceed any unpaid Cumulative Return as of the date such
distributions were made.
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"Affiliate" means, when used with reference to a specified Person, (i) any
Person, that directly or indirectly through one or more intermediaries controls
or is controlled by or is under common control with the specified Person, (ii)
any Person that is a director or an executive officer of, partner in, or serves
in a similar capacity to, the specified Person, or any Person of which the
specified Person is an executive officer or partner or with respect to which the
specified Person serves in a similar capacity, (iii) any Person owning or
controlling 10% or more of the outstanding voting securities of such specified
Person, or (iv) if such Person is an officer, director or partner, any entity
for which such Person acts in such capacity.
"Agreement" means this Restated Limited Partnership Agreement, as amended
from time to time.
"Average Daily Units" means for any period an amount equal to the sum of
the outstanding Limited Partners' Units as of the close of business on each day
in the period, divided by the number of days in the period.
"Bankrupt" or "Bankruptcy" means, when used with reference to a specified
Person, (a) if such Person (i) files any application or petition in any tribunal
for the appointment of a trustee or receiver, or (ii) commences any proceeding
under any bankruptcy or reorganization statute, or under any provision of the
United States Bankruptcy Code, or under any insolvency law, or under any
dissolution or liquidation law whether now or hereafter in effect, or (b) if any
petition or application of the type described in subsection (a) above is
commenced against such Person and is not dismissed within 60 days of filing, or
an order is entered appointing a trustee or receiver for such Person, or an
order for relief is issued in any bankruptcy.
"Capital Account" means the separate account established for each Partner
pursuant to Section 4.1.
"Capital Contributions" means, in the case of the General Partner, the
total amount of money contributed to the Partnership by the General Partner,
and, in the case of the Limited Partners, $20 for each Unit or where the context
requires, the total Capital Contributions of all the Partners.
"Cash Available for Distribution" means Cash Flow plus Net Disposition
Proceeds plus cash funds available for distribution from Partnership reserves,
less such amounts as the General Partner, in accordance with this Agreement,
causes the Partnership to reinvest in Equipment or interests therein, and less
such amounts as the General Partner, in its sole discretion, determines should
be set aside for the restoration or enhancement of Partnership reserves.
"Cash Flow" for any fiscal period means the sum of (i) cash receipts from
operations, including, but not limited to, rents or other revenues arising from
the leasing or operation of the Equipment and interest, if any, earned on funds
on deposit for the Partnership, but not including Net Disposition Proceeds,
minus (ii) all cash expenses and costs incurred and paid in connection with the
ownership, lease, management, use and/or operation of the Equipment, including,
but not limited to, fees for handling and storage; all interest expenses paid
and all repayments of principal regarding borrowed funds; maintenance; repair
costs; insurance premiums; accounting and legal fees and expenses; debt
collection expenses; charges, assessments or levies imposed upon or against the
Equipment; ad valorem, gross receipts and other property taxes levied against
the Equipment; and all costs of repurchasing Units in accordance with this
Agreement; but not including depreciation or amortization of fees or capital
expenditures, or provisions for future expenditures, including, without
limitation, Organizational and Offering Expenses.
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"Certificate" means the certificate of limited partnership filed by the
Partnership in the Office of the Department of State of the Commonwealth of
Pennsylvania as may be amended from time to time.
"Closing Date" means the date, as designated by the General Partner, as of
which the Units shall cease being offered to the public pursuant to the
Offering, and shall be no later than the second anniversary of the Effective
Date.
"Code" means the Internal Revenue Code of 1986, as amended, and as may be
amended from time to time by future federal tax statutes. Any reference this
Agreement to a particular provision of the Code shall mean, where appropriate,
the corresponding provision of any successor statute.
"Competitive Equipment Sale Commission" means that brokerage fee paid for
services rendered in connection with the purchase or sale of Equipment which is
reasonable, customary, and competitive in light of the size, type, and location
of the Equipment.
"Conditional Sales Contract" means an agreement to sell Equipment to a
buyer in which the seller reserves title to, and retains a security interest in,
the Equipment until the Purchase Price of the Equipment is paid.
"Controlling Person" means any person, whatever his or her title,
performing functions for the General Partner or its Affiliates similar to those
of chairman or member of the Board of Directors or executive management (such as
the president, vice president or senior vice president, corporate secretary or
treasurer), senior management (such as the vice president of an operating
division who reports directly to executive management), or any person holding a
five percent or more equity interest in the General Partner or its Affiliates or
having the power to direct or cause the direction of the General Partner or its
Affiliates, whether through the ownership of voting securities, by contract, or
otherwise.
"Cumulative Return" means the amount equal to a return at a rate of 10%
per annum, compounded daily, on the Adjusted Capital Contribution for all
outstanding Units, which amount shall begin accruing at the end of the calendar
quarter in which such Units are sold by the Partnership.
"Debt Placement Fee" means the fee payable to the General Partner in
accordance with Section 6.5 of this Agreement.
"Distribution Fee" means for any year until changed by the General Partner
in accordance with the following sentence, an amount equal to $50.00. The
General Partner may change the amount of the Distribution Fee only by written
notice to each Limited Partner who properly has elected to receive monthly
distributions at least 30 days prior to the beginning of the calendar quarter
that includes the first month to which the new Distribution Fee will apply. The
Distribution Fee is designed to cover the additional postage and handling
associated with the more frequent monthly distributions; the payment of which
shall be subtracted equally from the distribution check of any Limited Partner
receiving distributions of net cash flow on a monthly basis.
3
<PAGE>
"Effective Date" means the date on which the Partnership's registration
statement on Form S-1 with respect to the Units, as filed with the Securities
and Exchange Commission, becomes effective under the Securities Act of 1933, as
amended.
"Equipment" means each item of and all of the computer peripheral and
other similar capital equipment purchased, owned, operated, and/or leased by the
Partnership or in which the Partnership has acquired a direct or indirect
interest, as more fully described in this Agreement, together with all
appliances, parts, instruments, accessories, furnishings, or other equipment
included therein and all substitutions, renewals, or replacements of, and all
additions, improvements, and accessions to, any and all thereof.
"Equipment Acquisition Fee" means the fee payable to the General Partner
in accordance with Section 6.3 of this Agreement.
"Equipment Liquidation Fee" means the fee payable to the General Partner
in accordance with Section 6.4 of this Agreement.
"Equipment Management Fee" means the fee payable to the General Partner in
accordance with Section 6.2 of this Agreement.
"Equipment Management" means personnel and services necessary to the
leasing activities of the Partnership, including but not limited to, leasing and
re-leasing of Equipment, arranging for necessary maintenance and repair of the
Equipment, collecting revenues, paying operating expenses, determining that the
equipment is used in accordance with all operative contractual arrangements and
providing clerical and bookkeeping services necessary to the operation of
Equipment.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means the account at PNC Bank, Philadelphia, Pennsylvania
where Subscriptions will be held until they aggregate the Minimum Subscription
Amount of $1,500,000.
"Final Closing" means the last time at which subscribers for Units are
admitted as Limited Partners.
"Front-End Fees" means fees and expenses paid by any Person to any Person
during the Partnership's organizational and acquisition phase including all
Organizational and Offering Expenses (including the Organizational Fee),
Acquisition Fees, Acquisition Expenses, Debt Placement Fees, Leasing Fees, and
other similar fees and expenses; provided, however, any costs or expenses
incurred by the General Partner or its Affiliates (not including the
Partnership) which are not reimbursed by the Partnership, shall not be included
as Front-End Fees.
"Full Payout Net Lease" means an initial Net Lease of the Equipment under
which the non-cancellable rental payments due (and which can be calculated at
the commencement of the Net Lease) during the initial noncancellable fixed term
(not including any renewal or extension period) of the lease or other contract
for the use of the Equipment are at least sufficient to recover the Purchase
Price of the Equipment.
4
<PAGE>
"Funding Date" means the date on which Capital Contributions are released
to the Partnership from the Escrow Account.
"General Partner" means Commonwealth Income & Growth Fund, Inc. and any
additional, substitute or successor general partner of the Partnership.
"Gross Lease Revenues" means Partnership gross receipts from leasing or
other operation of the Equipment, except that, to the extent the Partnership has
leased the Equipment from an unaffiliated party, it shall mean such receipts
less any lease expense.
"Independent Expert" means a Person with no current material or prior
business or personal relationship with the General Partner who is engaged to a
substantial extent in the business of rendering opinions regarding the value of
assets of the type held by the Partnership and who is qualified to perform such
work.
"Initial Closing" means the first time subscribers for Units are admitted
as Limited Partners.
"Investment in Equipment" means the amount of Capital Contributions
actually paid or allocated to the purchase of or investment in Equipment by the
Partnership including working capital reserves (except that working capital
reserves in excess of three percent of Capital Contributions shall not be
included) and other cash payments such as interest and taxes, but excluding
Front-End Fees.
"IRA" means an Individual Retirement Account as described in Section 408
of the Code.
"Leasing Fees" means the total of all fees and commissions paid by any
party in connection with the initial lease of Equipment acquired by the
Partnership.
"Limited Partner" means a Person who acquires Units and who is admitted to
the Partnership as a limited partner in accordance with the terms of this
Agreement.
"Majority in Interest" means, with respect to the Partnership, Limited
Partners holding more than 50% of the outstanding Units held by all Limited
Partners at the Record Date for any vote or consent of the Limited Partners.
"Minimum Subscription Amount" means an aggregate of $1,500,000 in
subscriptions from Limited Partners.
"Monthly Distribution Account" means an account established by the
Partnership for the benefit of those Limited Partners who elect to receive
monthly distributions of Cash Available for Distribution, into which account the
amounts specified in 8.1.2(a)(iii) shall be deposited.
"Net Disposition Proceeds" means the net proceeds realized by the
Partnership from the refinancing, sale or other disposition of Equipment,
including insurance proceeds or lessee indemnity payments arising from the loss
or destruction of Equipment, less such amounts as are used to satisfy
Partnership liabilities.
5
<PAGE>
"Net Lease" means a lease or other contract under which the owner provides
equipment to a lessee or other operator in return for a payment, and the lessee
assumes all obligations and pays for the operation, repair, maintenance, taxes
and insuring of the equipment, so that the non-cancellable rental payments under
the lease are absolutely net to the lessor.
"Net Profits" or "Net Losses" shall be computed in accordance with Section
703(a) of the Code (including all items of income, gain, loss or deduction
required to be stated separately pursuant to Section 703(a)(1) of the Code) for
each taxable year of the Partnership or shorter period prior or subsequent to an
interim closing of the Partnership's books with the following adjustments: (i)
any income of the Partnership that is exempt from federal income tax and not
otherwise taken into account in computing Net Profits and Net Loss pursuant to
this definition shall be added to such taxable income or shall reduce such
taxable loss; (ii) any expenditure of the Partnership described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to
Treasury Regulations Section 1.704-1(b)(2)(iv)(i) and not otherwise taken into
account in computing Net Profits and Net Losses pursuant to this definition
shall be subtracted from such taxable income or loss; (iii) items of income,
gain, loss and deduction specially allocated pursuant to Section 7.3 of this
Agreement shall not be included in the computation of Net Profits or Net Loss;
and if property is reflected on the books of the Partnership at a book value
that differs from the adjusted tax basis of the property in accordance with
Treasury Regulation Section 1.704-1(b)(2)(iv)(d) or (f), depreciation,
amortization, and gain or loss with respect to such property shall be determined
by reference to such book value in a manner consistent with Treasury Regulation
Section 1.704-1(b)(2)(iv)(g). The terms "Net Profit" or "Net Losses" shall
include the Partnership's distributive share of the profit or loss of any
partnership or joint venture in which it is a partner or joint venturer.
"Offering" means the initial public offering of the Units in the
Partnership, as described in the Prospectus.
"Offering Period" means the period commencing the Effective Date and
ending the last day of the calendar month in which the Closing Date occurs.
"Operating Lease" means a lease or other contractual arrangement under
which an unaffiliated party agrees to pay the Partnership, directly or
indirectly, for the use of the Equipment, and which is not a Full Payout Net
Lease.
"Organizational and Offering Expenses" means the expenses incurred in
connection with the organization of the Partnership and in preparation of the
offering for registration and subsequently offering and distributing it to the
public, including Underwriting Commissions, listing fees and advertising
expenses except advertising expenses related to the leasing of the Program's
equipment.
"Organizational Fee" means the fee payable to the General Partner in
accordance with Section 6.1 of this Agreement.
"Partners" means any one or more of the General Partner and the Limited
Partners.
"Partnership" means Commonwealth Income & Growth Fund III, a Pennsylvania
limited partnership.
6
<PAGE>
"Partnership Interest" means the ownership interest of a Partner in the
Partnership, as represented by his Capital Account, including all rights of such
Partner under this Agreement.
"Person" means an individual, partnership, joint venture, corporation,
trust, estate or other entity.
"Program" means a limited or general partnership, joint venture,
unincorporated association or similar organization, other than a corporation
formed and operated for the primary purpose of investment in and the operation
of or gain from an interest in Equipment.
"Prospectus" means the Partnership's prospectus contained in the
Registration Statement filed with the Securities and Exchange Commission
("Commission") for the registration of the Units under the Securities Act of
1933, as amended (the "1933 Act"), at effectiveness of such Registration
Statement except that (A) if the Partnership files a post-effective amendment to
the Registration Statement, then the term "Prospectus" shall, from and after the
effectiveness of such post-effective amendment, refer to the amended prospectus
then on file with the Commission and (B) if the Partnership files a form of
prospectus or prospectus supplement pursuant to Rule 424(b) of the regulations
of the Commission under the 1933 Act, then the term "Prospectus" shall refer to
the prospectus as so filed or supplemented from and after the date of such
filing.
"Purchase Price" means, with respect to any Equipment, an amount equal to
the sum of (i) the invoice cost of such Equipment or any other such amount paid
to the seller, (ii) any closing, delivery and installation charges associated
therewith not included in such invoice cost and paid by or on behalf of the
Partnership, (iii) the cost of any capitalized modifications or upgrades paid by
or on behalf of the Partnership in connection with its purchase of the
Equipment, and (iv) the amount of the Equipment Acquisition Fee and any other
Acquisition Fees, but excluding points and prepaid interest.
"Qualified Plan" means a trust established pursuant to the terms of a
pension, profit sharing or stock bonus plan, including Keogh Plans, meeting the
requirements of Section 401 and following of the Code.
"Record Date" means, (a) for purposes of a meeting of, or actions by, the
Limited Partners pursuant to Article 10 of this Agreement, the close of business
on the business day preceding the date on which the written notice referred to
in that Article is given, and (b) for purposes of Article 12 of this Agreement,
the close of business on December 31 and June 30 of each year.
"Retiring General Partner" means a general partner of the Partnership who
or which has been removed or withdrawn as such or is Bankrupt, which has been
involuntarily dissolved, or who has died or had a conservator appointed for the
person or any of the property of such general partner.
"Roll-Up" means a transaction involving the acquisition, merger,
conversion, or consolidation, either directly or indirectly, of the Partnership
and the issuance of securities of a Roll-Up Entity. Such term does not include:
(i) a transaction involving securities if the securities have been listed for at
least twelve months on a national securities exchange or traded through the NASD
Automated Quotation National Market System; or (ii) a transaction involving the
conversion to corporate, trust or association form of only the Partnership if,
as a consequence of the transaction, there will be no significant adverse change
in any of the following: (a) the Limited Partners' voting rights; (b) the term
of existence of the Partnership; (c) compensation of the General Partner or its
Affiliates; or (d) the Partnership's investment objectives.
7
<PAGE>
"Roll-Up Entity" means the partnership, corporation, trust or other entity
that would be created or would survive after the successful completion of a
proposed Roll-Up transaction.
"Participating Broker" means a member of the National Association of
Securities Dealers, Inc. who will be engaged to sell Units.
"Sponsor" means any Person directly or indirectly instrumental in
organizing, wholly or in part, a Program or any Person who will manage or
participate in the management of a Program, and any Affiliate of any such
Person. Sponsor does not include a Person whose only relation with the Program
is that of an independent equipment manager and whose only compensation is as
such. Sponsor does not include wholly independent third parties such as
attorneys, accountants, and underwriters whose only compensation is for
professional services rendered in connection with the offering of Program
interests.
"Substituted Limited Partner" means any Person admitted to the Partnership
as a Limited Partner pursuant to the provisions of Section 11.2 of this
Agreement.
"Syndication Expenses" means all expenditures classified as syndication
expenses pursuant to Treasury Regulations Section 1.709-2(b). Syndication
Expenses shall be taken into account under this Agreement at the time they would
be taken into account under the Partnership's method of accounting if they were
deductible expenses.
"Term Debt" means debt of the Partnership with a term in excess of twelve
months, incurred with respect to acquiring or investing in Equipment, or
refinancing non-Term Debt, but not debt incurred with respect to refinancing
existing Partnership Term Debt.
"Terminating Event" means the first to occur of the withdrawal, removal,
retirement, resignation, expulsion, Bankruptcy, involuntary dissolution, death,
insanity or appointment of a conservator for the person or any of the assets of
the last remaining general partner of the Partnership.
"Treasury Regulations" means the income tax regulations promulgated under
the Code, as such regulations may be amended from time to time (including
corresponding provisions of successor regulations).
"Underwriting Commissions" mean selling commissions and dealer-manager
fees paid to broker-dealers by the Partnership in connection with the offer and
sale of Units.
"Unit" means a limited partnership interest in the Partnership.
ARTICLE 2
Organization
2.1 Continuation. The Partners hereby continue the Partnership as a
limited partnership under the Act.
8
<PAGE>
2.2 Name. The name of the Partnership shall continue to be "Commonwealth
Income & Growth Fund III" or such other name as may be selected by the General
Partner, who shall give notice of any such other name to the Limited Partners.
2.3 Place of Business. The principal place of business of the Partnership
shall be 1160 W. Swedesford Road, Suite 340, Berwyn, PA 19312, or at another
location selected by the General Partner, who shall give notice of any such
other location to the Limited Partners. The Partnership may have such additional
offices or places of business as the General Partner may determine.
2.4 Registered Office and Registered Agent. The Partnership's registered
office in the Commonwealth of Pennsylvania and its registered agent at such
other office shall be determined by the General Partner.
2.5 Business. The principal business and purpose of the Partnership is to
purchase, acquire, own, lease, re-lease, maintain, improve, manage, pledge,
finance, convey, assign, dispose and sell Equipment pursuant to such
arrangements as the General Partner in its sole discretion may enter into on
behalf of the Partnership. The purpose and business of the Partnership includes
the realization and distribution of cash from sales or other dispositions of
Equipment. The Partnership is authorized to take any and all actions necessary,
appropriate, advisable, incidental to, convenient for or related to this purpose
or for the protection and benefit of the Partnership, unless expressly
prohibited by this Agreement.
2.6 Term. The Partnership shall exist for a term ending December 31, 2009,
at which time it shall be dissolved, unless previously dissolved in accordance
with this Agreement.
ARTICLE 3
Capital Contributions and Status of Partners
3.1 General Partner. The General Partner has contributed $1,000 to the
capital of the Partnership. Except as provided in this Section and Section
14.4.3, the General Partner shall have no obligation to make any Capital
Contribution or to loan or otherwise provide funds to the Partnership or any
partnership, joint venture or other entity in which the Partnership has an
interest, even if the failure to do so would or could result in a default by the
Partnership, foreclosure upon the properties of the Partnership or any such
partnership, joint venture or other entity, or any other consequence adverse to
the Partnership or any such partnership, joint venture or other entity.
3.2 Limited Partners. Limited Partners shall be those persons whose
subscriptions for Units have been accepted by the General Partner and who are
reflected in the records of the Partnership as purchasing Units from the
Partnership and Substituted Limited Partners where a transfer of Units is made
pursuant to Article 11. The Partnership intends to offer and sell not less than
$1,500,000 nor more than $15,000,000 worth of Units of limited partnership
interests and to admit as Limited Partners the persons who contribute cash to
the capital of the Partnership as the purchase price for the Units.
9
<PAGE>
3.3 Capital Contribution of Limited Partners.
3.3.1 Each Limited Partner shall make a capital contribution of
$20.00, (or the subscription price of $20.00 less the volume discount stated in
the Prospectus), as the purchase price for each Unit which he purchases from the
Partnership. The Capital Contributions of the Limited Partners shall be made in
cash. Except as required by the Act, each Unit shall be fully paid and
non-assessable, and no assessments for payments by the Limited Partners will be
made by the General Partner.
3.3.2 Any portion of the net proceeds from sales of the Units which
is not invested or committed for investment in Equipment or for any Partnership
purposes or reserved for necessary operating expenses within 12 months from the
Final Closing shall be distributed to the Limited Partners by the Partnership as
a return of capital, without reduction for the General Partner's Organizational
Fee or for any Equipment Acquisition Fee which would have been payable to the
General Partner if such proceeds had been invested. Funds will be deemed to have
been committed to investment and will not be returned to the Limited Partners to
the extent written agreements in principle, commitment letters, letters of
intent or understanding or any similar contracts or understandings have, at any
time before the end of such 12-month period, been executed, provided that such
investments are consummated. Should any such investment not be consummated, the
funds attributable thereto shall be distributed to the Limited Partners in a
timely manner.
3.4 Registration. Upon the admission of a person as a Limited Partner or
Substituted Limited Partner, such Person shall be registered on the records of
the Partnership as a Limited Partner, together with his address, the number of
Units he owns, and his transferor's Capital Contribution. Each person registered
as a holder of record of Units shall continue to be the holder of record of such
Units until notification of the transfer of any such Units is given in
accordance with the terms of this Agreement. A holder of record shall be
entitled to all distributions and all allocations of Net Profits and Net Losses
with respect to Units registered in his name and to all other rights of a
Limited Partner until his rights in such Units have been transferred and the
General Partner has been notified as required herein. The Partnership shall not
be affected by any notice or knowledge of transfer of any interest in any Unit,
except as expressly provided in Article 11. The payment to the holder of record
of any distribution with respect to such Units shall discharge the Partnership
of its obligations in respect thereto.
3.5 Withdrawal of Capital Contributions. Except as otherwise provided in
this Agreement, no Partner shall have the right to withdraw or reduce his
Capital Contribution. No Partner shall have the right to bring an action for
partition against the Partnership or to demand or receive property other than
cash in return for his capital contribution. No Limited Partner shall have
priority over any other Limited Partner, either as to the return of his Capital
Contribution or as to Net Profits, Net Losses or distributions.
3.6 Admission of Limited Partner. The Initial Closing shall take place not
later than 15 days after the release from the Escrow Account of the subscribers'
funds to the Partnership. Thereafter, subscribers shall be admitted as Limited
Partners not later than the last day of the calendar month following the date
their subscriptions are accepted by the Partnership. The General Partner shall
determine whether subscriptions received after the Initial Closing will be
accepted or rejected within 30 days of their receipt by the Partnership and, if
a subscription is rejected, the subscription funds will be promptly returned to
the subscriber without interest.
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3.7 Continuation of Limited Partner Status. Once admitted as a Limited
Partner, a Person shall, except as otherwise provided in the Agreement, continue
to be a Limited Partner for all purposes of this Agreement and the Certificate
of Limited Partnership, as amended from time to time, until a Substituted
Limited Partner is admitted in place of such person pursuant to the provisions
of Article 11.
3.8 Limited Liability of Limited Partners. No Limited Partner, in his
capacity as such, shall be liable for the debts, liabilities, contracts or any
other obligations of the Partnership or any partnership, joint venture or other
entity in which the Partnership has an interest. No Limited Partner shall be
obligated to make any Capital Contribution or to loan or otherwise provide funds
to the Partnership; provided, however, in accordance with the Act, Limited
Partners will be obligated to return any distribution from the Partnership to
the extent that, after giving effect to the distribution, all liabilities of the
Partnership (other than nonrecourse liabilities and liabilities to Limited
Partners on account of their interests in the Partnership) exceed the fair value
of its assets (including, as to assets serving as security for nonrecourse
liabilities, that portion of the fair value of such assets which exceeds the
amount of such nonrecourse liabilities).
ARTICLE 4
Partners' Capital
4.1 Capital Accounts. A separate Capital Account shall be established and
maintained for each Partner. The Capital Account of each Partner shall be
credited with such Partner's Capital Contribution, plus all Net Profits and
items of income and gain of the Partnership allocated to such Partner pursuant
to Article 7, and shall be debited with the sum of (a) all Net Losses and items
of loss or deduction of the Partnership allocated to such Partner pursuant to
Article 7, and (b) all cash and the fair market value of any property (net of
liabilities of the Partnership assumed by such Partner and the liabilities to
which such property is subject) distributed by the Partnership to such Partner
pursuant to Article 8. The computation of the amount of the Capital Account of a
Partner shall be determined in all events solely in accordance with the rules
set forth in Treasury Regulation Section 1.704-1(b)(2)(iv). Any references in
this Agreement to the Capital Account of a Partner shall be deemed to refer to
such Capital Account as the same may be credited or debited from time to time as
set forth above in this Section 4.1.
4.2 Withdrawal and Return of Capital. No Limited Partner shall withdraw
any of his capital without the consent of the General Partner and Limited
Partners holding a Majority in Interest of the Units, except upon dissolution or
liquidation of the Partnership or as provided in Article 12. Under circumstances
requiring a return of any Capital Contribution or constituting a withdrawal of a
Limited Partner, no Limited Partner shall have the right to receive property
other than cash, except as may be specifically provided in this Agreement.
4.3 Interest on Capital. No interest shall be paid on any Capital
Contribution made to the Partnership.
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ARTICLE 5
Partnership Expenses
5.1 Organization Expenses. The General Partner shall bear and pay all
Organizational and Offering Expenses other than Underwriting Commissions.
5.2 Other Expenses. All expenses of the Partnership, other than the
expenses required to be paid by the General Partner pursuant to Section 5.1,
shall be billed (to the extent practicable) directly to and paid by the
Partnership. Subject to Section 5.1, the General Partner and its Affiliates
shall be reimbursed for the actual cost of goods and materials used for or by
the Partnership and obtained from entities unaffiliated with the General
Partner. Subject to (and only in accordance with) the foregoing, the Partnership
shall pay (or reimburse the General Partner and its Affiliates for) the lower of
the actual cost or the amount the Partnership would have to pay independent
third parties for such services in the same geographic area of all expenses
related to the administration and operation of the Partnership, including
without limitation:
5.2.1 all costs of personnel involved in the business of the
Partnership;
5.2.2 all taxes and assessments on Equipment and other taxes
applicable to the Partnership;
5.2.3 legal, appraisal, audit, accounting and other professional
fees;
5.2.4 printing and other expenses incurred in connection with the
issuance, distribution, transfer, registration and recording of documents
evidencing ownership of Units or in connection with the business of the
Partnership;
5.2.5 fees and expenses paid to independent contractors, mortgage
bankers, equipment brokers, servicers, leasing agents, consultants, equipment
lease brokers, insurance brokers and other agents;
5.2.6 expenses paid to nonaffiliated parties in connection with the
disposition, replacement, alteration, maintenance and repair, leasing,
re-leasing, storage and operation of Equipment (including the costs and expenses
for foreclosures, insurance premiums, equipment lease brokerage and leasing
commissions and of maintenance of Equipment);
5.2.7 subject to Section 9.4.4, expenses in connection with the
acquisition of Equipment other than Equipment acquired through the proceeds of
the offering of the Units;
5.2.8 expenses of organizing, revising, amending, converting,
modifying or terminating the Partnership or this Agreement;
5.2.9 the cost of preparation and dissemination of the informational
material and documentation relating to potential sale, leasing, re-leasing,
financing or other disposition of Equipment;
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5.2.10 costs incurred in connection with any litigation in which the
Partnership is involved or proceedings conducted by any regulatory agency,
including legal and accounting fees incurred in connection therewith;
5.2.11 costs of any accounting, statistical or bookkeeping equipment
necessary for the maintenance of the books and records of the Partnership;
5.2.12 costs of investor communications and regulatory reports,
including without limitation initiation, review and approval of reports and
communications to Limited Partners or regulatory agencies; expenses in
connection with distributions made by the Partnership to, and communications,
bookkeeping and clerical work necessary in maintaining relations with, Limited
Partners, including the costs of design, production, printing and mailing of
reports, conducting elections in any circumstance requiring a vote of the
Limited Partners, holding meetings with Limited Partners, and preparing and
mailing reports required to be furnished to Limited Partners for tax reporting
or other purposes or reports which the General Partner deems to be in the best
interests of the Partnership;
5.2.13 expenses of professionals employed by the Partnership in
connection with any of the foregoing, including attorneys, accountants, and
appraisers; and
5.2.14 such other related administrative expenses as are necessary
to the prudent operation of the Partnership.
5.3 Excluded Expenses. No reimbursement shall be permitted for services
for which the General Partner is entitled to compensation by way of a separate
fee. Excluded from the allowable reimbursement shall be (i) rent or
depreciation, utilities, capital equipment, other administrative items; and (ii)
salaries, fringe benefits, travel expenses and other administrative items
incurred or allocated to any Controlling Person of the General Partner.
ARTICLE 6
Compensation of the General Partner
6.1 Organizational Fee. For the services and activities of the General
Partner performed and to be performed by the General Partner in connection with
the organization of the Partnership, the General Partner will be paid an
Organizational Fee equal to three percent of the first $10,000,000 of Limited
Partners' Capital Contributions plus two percent of the Limited Partners'
Capital Contributions in excess of $10,000,000. The Organizational Fee will
accrue and be paid as Limited Partners are admitted to the Partnership.
6.2 Equipment Management Fee. For the services and activities performed
and to be performed by the General Partner and its Affiliates in connection with
Equipment Management, the General Partner shall receive a monthly fee equal to
the lesser of (a) the fees which would be charged by an independent third party
in the same geographic market for similar services and equipment or (b) the sum
of (i) two percent of (A) the Gross Lease Revenues attributable to Equipment
subject to Full Payout Net Leases which contain net lease provisions plus, (B)
the purchase price paid on Conditional Sales Contracts as received by the
Partnership and (ii) five percent of the Gross Lease Revenues attributable to
Equipment subject to Operating Leases. The
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Equipment Management Fee shall accrue as funds are received by the Partnership
and shall be paid to the General Partner on conclusion of each calendar month,
except such Equipment Management Fee may be accrued as a debt of the Partnership
payable, without interest, out of future available cash if the Partnership does
not generate sufficient cash from operations to pay the Equipment Management Fee
currently, or if the General Partner determines that such action is in the best
interest of the Partnership. Fees or expenses to nonaffiliated parties for such
services and activities shall be paid by the General Partner from its Equipment
Management Fee.
6.3 Equipment Acquisition Fee. For the services and activities performed
and to be performed by the General Partner in connection with the acquisition
and lease of Equipment, the General Partner shall receive an Equipment
Acquisition Fee of four percent of the Purchase Price of each item of Equipment
purchased. The Equipment Acquisition Fee will be paid from the net proceeds of
the Offering which are available to be used to purchase Equipment when such
proceeds are received by the Partnership. To the extent that the Partnership
acquires Equipment at an aggregate Purchase Price exceeding the net proceeds of
the Offering available to be used to purchase Equipment, the Equipment
Acquisition fee will be paid with respect to that Equipment as the Equipment is
acquired.
6.4 Equipment Liquidation Fee. For the services and activities to be
performed by the General Partner in connection with the disposition of the
Partnership's Equipment (other than by a Conditional Sales Contract), the
General Partner shall receive an Equipment Liquidation Fee equal to the lesser
of (a) 50% of the Competitive Equipment Sale Commission or (b) three percent of
the sales price of such Equipment. The payment of the Equipment Liquidation Fee
shall be made as proceeds of the sale are received and is subordinated to the
receipt by the Limited Partners of (a) a return of their Capital Contributions
plus the Cumulative Return and (b) the Net Disposition Proceeds from such sale.
Such fee will be reduced to the extent any liquidation or resale fees are paid
to unaffiliated parties.
6.5 Debt Placement Fee. For the services rendered or to be rendered by the
General Partner's arrangement of Term Debt to finance the acquisition of
Equipment by the Partnership, the General Partner shall receive a Debt Placement
Fee equal to one percent of such indebtedness. Such fee shall be paid when the
proceeds of the Term Debt are received by the Partnership and shall be reduced
to the extent the Partnership incurs such fees to third parties unaffiliated
with the General Partner or the lender with respect to such indebtedness, and no
such fee will be paid with respect to borrowings from the General Partner or its
Affiliates.
6.6 Limitations on Fees. The Partnership shall commit a substantial
portion of Capital Contributions toward Investment in Equipment. The remaining
Capital Contributions may be used to pay Front-End Fees. The Partnership will
commit a percentage of Capital Contributions to Investment in Equipment which is
equal to the greater of (i) 80% of Capital Contributions reduced by .0625% for
each one percent of indebtedness encumbering Equipment or (ii) 75% of Capital
Contributions. To calculate the percent of indebtedness encumbering Equipment,
divide the amount of indebtedness by the Purchase Price (excluding Front-End
Fees) and multiply the quotient by .0625% to determine the percentage to be
deducted from 80%. For example, if the percentage of indebtedness were 30%, the
percentage to be deducted from 80% is 1.875% (30 x .0625) and the percentage to
be committed to Investment in Equipment is 78.125% (80 - 1.875).
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ARTICLE 7
Allocation of Net Profits, Net Losses and Other Items
7.1 Net Profits.
7.1.1 Net Profits for each fiscal year of the Partnership (other
than Net Profits arising from transactions in connection with the termination or
liquidation of the Partners) shall be allocated as follows:
(a) to the General Partner, the greater of (i) one percent of
such Net Profits or (ii) Net Profits equal to the excess, if any, of (A)
all distributions to the General Partner pursuant to Section 8.1.2 with
respect to such fiscal year and all prior fiscal years over (B) the total
Net Profits allocated to the General Partner pursuant to this Section
7.1.1(a) for all such prior fiscal years; and
(b) any balance to the Limited Partners.
7.1.2 Net Profits arising from transactions in connection with the
termination or liquidation of the Partnership shall be allocated in the
following order of priority:
(a) Net Profits shall be allocated to each Partner in an
amount equal to the negative amount, if any, of his Capital Account. If
the Net Profits available to be so allocated is less than the sum of all
Partners' negative Capital Accounts, then such Net Profits shall be
allocated to the Partners in proportion to the respective amounts of their
negative Capital Accounts.
(b) An amount of Net Profits equal to the excess of (A) the
proceeds from such transaction that would be distributed to the Partners
pursuant to Section 8.1.2 (without regard to Section 8.1.3) over (B) the
aggregate Capital Accounts (as adjusted to reflect the allocation of Net
Profit pursuant to Section 7.1.2(a)) of all Partners shall be allocated
among such Partners in proportion to their respective shares of such
excess.
(c) Any remaining Net Profits shall be allocated in the same
proportions that cash distributions equal to such remaining Net Profits
would be distributed pursuant to Section 8.1 (without regard to Section
8.1.3).
7.2 Net Losses. Net Losses for each fiscal year of the Partnership shall
be allocated 99% to the Limited Partners and one percent to the General Partner.
7.3 Required Allocations. Notwithstanding Sections 7.1 and 7.2:
7.3.1 Beginning in the first year in which the Partnership has
"nonrecourse deductions" (as such term is defined and the amount thereof is
determined in accordance with Treasury Regulation Sections 1.704-2(b)(1)), and
in each year thereafter, if there is a net decrease in "partnership minimum
gain" (as defined in Treasury Regulation Section 1.704-2(d)(1)) during a
Partnership taxable year, then any Partner with a deficit balance in his Capital
Account at the end of such taxable year shall be allocated, before any other
allocation is made of Partnership items for such taxable year, items of income
and gain for such taxable year (and, if necessary, subsequent years) in the
amounts and proportions needed to eliminate such deficit as quickly as
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possible, such allocations to be made in accordance with the "minimum gain
chargeback" provisions of Treasury Regulation Section 1.704-(2)(f);
7.3.2 No loss or deduction shall be allocated to a Partner if such
allocation would create a deficit balance in such Partner's Capital Account in
excess of the amount such Partner is obligated to restore to the Partnership or
is treated as being obligated to restore to the Partnership under Treasury
Regulations Sections 1.704-1(b)(2)(ii)(c), 1.704-2(g)(1) or 1.740-2(i)(5). Any
losses or deductions that cannot be allocated to a Partner because of the
foregoing limitation shall be allocated among the Partners in accordance with
their relative ownership of Units, subject to the limitations of this Section
7.3.2.
7.3.3 Any Partner who unexpectedly receives with respect to the
Partnership: (a) an adjustment pursuant to Treasury Regulation
1.704-1(b)(2)(iv)(k); (b) an allocation of loss or deduction pursuant to
Sections 704(e)(2) or 706(d) of the Code or pursuant to Treasury Regulation
Section 1.751- 1(b)(2)(ii); or (c) a distribution in excess of an offsetting
increase to such Partner's Capital Account reasonably expected to occur during
(or prior to) the Partnership taxable year in which such distribution occurs,
will be allocated, as quickly as possible, items of income and gain in an amount
and manner sufficient to eliminate any resulting deficit balance in his Capital
Account in accordance with the "qualified income offset" provisions of Treasury
Regulations Section 1.704-1(b)(2)(ii)(d);
7.3.4 Loss, deductions, and expenditures attributable to nonrecourse
debt for which a Partner bears the economic risk of loss shall be determined and
allocated to the Partner who bears such economic risk of loss in accordance with
Treasury Regulation Section 1.704-2, and if there is a decrease in partner
"nonrecourse debt minimum gain" (as defined in Treasury Regulation Section
1.704-2(i)(3)), any Partner with a share of that partner nonrecourse debt
minimum gain shall be allocated items of income and gain in accordance with the
chargeback provisions of Treasury Regulations Section 1.704-2(i)(4);
7.3.5 For purposes of this Section 7.3, a Partner's Capital Account
deficit balance shall be determined by excluding from such Partner's Capital
Account any amount such Partner is obligated to restore to the Partnership or
treated as obligated to restore to the Partnership under Treasury Regulations
Sections 1.704.1(b)(2)(ii)(c), 1.704-2(g)(l) or 1.704-2(i)(5), and by adjusting
such Partner's Capital Account balance for items described in Treasury
Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6); and
7.3.6 If property is reflected on the books of the Partnership at a
book value that differs from the adjusted tax basis of the property in
accordance with Treasury Regulations Section 1.704- 1(b)(2)(iv)(d) or (f),
depreciation, amortization, and gain or loss as determined for federal income
tax purposes shall be allocated so as to take into account such difference
between book value and adjusted tax basis in accordance with the principles of
Code Section 704(c). The General Partner shall have the authority to elect the
method to be used by the Partnership for allocating items required by Section
704(c) of the Code and such election shall be binding on the Limited Partners.
7.4 Syndication Expenses. Syndication Expenses attributable to the
Underwriting Commissions paid on the Partnership's sale of any Unit shall be
specially allocated to the Limited Partner who owns the Units, and all other
Syndication Expenses shall be allocated to the Limited Partners who are admitted
to the Partnership from time to time so that, to the extent possible, the
cumulative Syndication Expenses (other than Underwriting Commissions) allocated
with respect to each Unit at any time is the same. If the General Partner
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determines that such result is not likely to be achieved through future
allocations of Syndication Expenses, the General Partner may allocate a portion
of Net Profits or Net Losses to achieve the same effect on the Capital Accounts
of the Limited Partners.
7.5 Recharacterization of Fees. Any fees paid to the General Partner or
any of its Affiliates which are disallowed as deductible expenses by the
Internal Revenue Service shall constitute special allocations of gross income to
the General Partner for income tax purposes.
7.6 Recapture. If the Partnership recognizes gain on the sale, exchange or
other disposition of any property, any portion of such gain which is treated as
ordinary income pursuant to Code Section 1245 shall be divided between the
General Partner and the Limited Partners in proportion to the aggregate
deductions for cost recovery and depreciation previously allocated to them and
shall be allocated among the Limited Partners in the same proportions as the
gain from such disposition is allocated among them.
7.7 Allocations Among Limited Partners. Except as otherwise provided in
this Agreement, Net Profits and Net Losses allocated to the Limited Partners for
any fiscal year shall be divided among them in proportion to their Average Daily
Units for such fiscal year. If an interest of a Partner in the Partnership is
transferred in accordance with Section 11 of this Agreement, the General
Partner, in its sole discretion, may allocate such items of Net Profits, Net
Loss, and credit by closing the books of the Partnership immediately after the
transfer of the interest. All such allocations shall be made without regard to
the date, amount or recipient of any distributions which may have been made with
respect to such transferred interest.
7.8 Other Allocations. Any allocations not otherwise provided for shall be
divided among the Partners in the same proportions as they share Net Profits or
Net Losses, as the case may be, for the period.
ARTICLE 8
Distributions
8.1 Cash Distributions. For purposes of this Article Eight, the following
terms should have the meanings set forth below:
(a) "Limited Partner" means each Limited Partner of the Partnership,
as defined in Article 1.22, and includes all the Monthly Limited Partners and
all the Quarterly Limited Partners.
(b) "Monthly Limited Partner" means any Limited Partner who makes a
Capital Contribution of $5,000 or more and who, for the quarter in question, has
elected (either (i) by written notice to the General Partner upon subscription
or (ii) thereafter, upon ten days' prior written notice to the General Partner,
effective as of the beginning of the following quarter), to receive monthly
distributions of cash available for distribution.
(c) "Quarterly Limited Partner" means any Limited Partner other than
a Monthly Limited Partner.
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8.1.1 Except as otherwise provided in this Section 8.1, Cash
Available for Distribution shall be distributed as follows:
(a) The General Partner, within thirty (30) days following the
close of each fiscal quarter or as soon thereafter as practicable, shall
determine in its sole and absolute discretion, the amount of Cash
Available for Distribution. Such Cash Available for Distribution shall be
apportioned for the related year.
(b) 99% to the Limited Partners and one percent to the General
Partner until (i) the Limited Partners have received an amount equal to
the excess, if any, of (A) the Cumulative Return from the inception of the
Partnership to the end of the calendar quarter to which the distribution
relates, over (B) the sum of all prior distributions under this Section
8.1.2(a)(i), and (ii) the Limited Partners' Capital Contributions have
been reduced to zero; and
(c) thereafter, 90% to the Limited Partners and ten percent to
the General Partner.
8.1.2 Cash Available for Distribution
(a) Cash Available for Distribution to the Limited Partners on
a quarterly basis shall be allocated between the Monthly Limited Partners,
as a group, and the Quarterly Limited Partners, as a group, in proportion
to the number of Units owned by each such group of Limited Partners.
(b) The portion of Cash Available for Distribution allocable to
the Quarterly Limited Partners shall be distributed to the Quarterly
Limited Partners and one-third (1/3) of the portion allocable to the
Monthly Limited Partners shall be distributed to the Monthly Limited
Partners, with all such distributions to be made within thirty (30) days
following the close of each fiscal quarter or as soon thereafter as
practicable. The remaining two-thirds (2/3) of the Cash Available for
Distribution to the Monthly Limited Partners shall be deposited in the
Monthly Distribution Account. One-half (1/2) of the amount so deposited
shall be distributed to the Monthly Limited Partners within seventy (70)
days following the close of such immediately preceding fiscal quarter, or
as soon thereafter as practicable, and the remainder of the Cash Available
for Distribution so deposited shall be distributed within one hundred
(100) days following the close of such immediately preceding fiscal
quarter, or as soon thereafter as practicable. Notwithstanding the
foregoing, each distribution pursuant to this Article Eight that is
payable to the Monthly Limited Partners first shall be reduced by an
amount equal to the Distribution Fee, less any interest earned on the
Monthly Distribution Account.
8.1.3 Notwithstanding Section 8.1.2, amounts distributed in
connection with the liquidation of the Partnership or a Partner's interest
(within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)) shall be
distributed in accordance with the Partner's positive Capital Account as
adjusted for all operations and transactions preceding such distribution.
8.1.4 Notwithstanding Section 8.1.2, if the proceeds resulting from
the sale of any Equipment are reinvested in Equipment, sufficient cash will be
distributed to the Partners to pay the additional
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federal income tax resulting from such sale for a Partner in a 39.6% federal
income tax bracket or, if lower, the maximum federal income tax rate in effect
for individuals for such taxable year.
8.2 Allocation of Distributions to Limited Partners. Distributions to the
Limited Partners with respect to any period other than during the Offering
Period shall be allocated pro rata among the Limited Partners who are Limited
Partners on the Record Date for purposes of such distributions. Distributions to
the Limited Partners during the Offering Period shall be allocated among the
Limited Partners in proportion to their Average Daily Units for that period.
8.3 Amounts Withheld. Any amounts withheld pursuant to Section 9.1.16
shall be treated as amounts distributed to the Partners for all purposes under
this Agreement. Amounts treated as distributed to a Partner pursuant to this
Section 8.3 shall reduce the amounts otherwise distributed to such Partner
pursuant to this Agreement.
8.4 Return of Offering Proceeds. If all of the net proceeds of the
Offering are not invested by the Partnership in Equipment or committed to such
investment or otherwise utilized for proper Partnership purposes prior to the
expiration of 12 months from the Closing Date, the net proceeds not so invested,
committed, or set aside as working capital reserves will thereupon be promptly
returned, with a proportionate share of interest at the rate earned by the
Partnership on the investment of such proceeds, to the Limited Partners based
upon their respective numbers of Units and time of purchase, without reduction
for the General Partner's Organizational Fee or for any Equipment Acquisition
Fee which would have been payable to the General Partner if such proceeds had
been invested. For such purpose, funds will be deemed to be committed to
investment and will not be returned to the Limited Partners to the extent
written agreements in principle, commitment letters, letters of intent or
understanding, option agreements, or any similar contracts or understandings
exist, whether or not any such investment is ultimately consummated. Funds will
also be deemed to be committed to the extent: (i) any funds may have been
reserved to make contingent payments in connection with any Equipment already
acquired, whether or not any such payments are ultimately made; (ii) as a
condition to obtaining financing the Partnership is required to maintain funds
as a compensating balance; or (iii) the General Partner decides that an addition
to the working capital reserve is necessary in connection with any Equipment. In
the event any such uninvested funds are distributed to the Limited Partners,
such distribution will be treated as a return of capital.
ARTICLE 9
Rights, Powers, and Duties of General Partner
9.1 Rights and Powers. Except as otherwise specifically provided in this
Agreement, the General Partner shall exercise complete and exclusive control
over the management of the Partnership business and affairs. In addition to any
other rights and powers which the General Partner may possess under this
Agreement and the Act, the General Partner shall, except to the extent otherwise
provided in this Agreement, have all rights and powers required or appropriate
to its management of the Partnership and the Partnership's business, which by
way of illustration but not by way of limitation, include the following rights
and powers which may be exercised on behalf of, and, subject to Article 5, at
the expense of, the Partnership:
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9.1.1 to acquire, purchase, hold, sell, exchange or otherwise
transfer Equipment; to lease Equipment to third parties; to make loans to
manufacturers of Equipment with respect to and secured by Equipment leased
directly by the manufacturer to third parties; and to enter into agreements with
others with respect to such activities, which agreements may contain such
provisions as the General Partner in its sole and absolute discretion shall
approve;
9.1.2 to invest Partnership funds in commercial paper, government
securities, certificates of deposit, time deposits, bankers acceptances, money
market certificates or accounts, or other short-term investments (such as money
market funds) which the General Partner deems appropriate;
9.1.3 subject to Section 17.2.3, to purchase liability, casualty and
other insurance which the General Partner deems appropriate for the protection
of the Equipment or for any purpose convenient or beneficial to the Partnership,
provided that the General Partner will not provide insurance services to the
Partnership;
9.1.4 to delegate all or any of its duties under this Agreement, and
in furtherance of any such delegation to appoint, employ or contract with any
persons, which persons may, under the supervision of the General Partner,
administer or assist in the day-to-day operations of the Partnership; act as
consultants, accountants, correspondents, attorneys, brokers, escrow agents or
in any other capacity deemed by the General Partner necessary or desirable; and
perform such other acts or services for the Partnership as the General Partner
in its sole and absolute discretion may approve;
9.1.5 to designate and appoint one or more agents for the
Partnership who shall have authority as may be conferred on them by the General
Partner, and who may perform any of the duties, and exercise any of the powers
and authority, conferred on the General Partner under this Agreement, including,
but not limited to, designation of one or more agents as authorized signatories
on any bank accounts maintained by the Partnership;
9.1.6 to act in its own name as nominee for the Partnership and to
place title to Partnership assets in its own name or the names of others as
nominees or trustees for any purpose convenient or beneficial to the
Partnership;
9.1.7 to collect all amounts due to the Partnership, and otherwise
to enforce all rights of the Partnership including rights under any lease of its
assets, and to retain counsel and institute suits or proceedings, in the name
and on behalf of the Partnership;
9.1.8 to establish and maintain one or more bank accounts for the
Partnership in such bank or banks as the General Partner may, from time to time,
designate as depositaries of the funds of the Partnership;
9.1.9 to make or revoke any elections permitted under the Code;
9.1.10 to determine the appropriate accounting method or methods to
be used by the Partnership;
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9.1.11 to offer and sell Units of the Partnership to the public
directly or through Commonwealth Capital Securities Corp. or any licensed
Affiliate of the General Partner; to employ personnel, agents and dealers for
such purpose; and, in connection therewith, to cause the Partnership to
indemnify Commonwealth Capital Securities Corp. to the extent permitted under
federal and state securities laws;
9.1.12 to admit the purchasers of the Units as Limited Partners of
the Partnership, to amend this Agreement and the Certificate to reflect the
addition or substitution of Limited Partners and the reduction of Capital
Accounts on the return of capital to Partners;
9.1.13 to borrow money for Partnership purposes (other than for the
acquisition of Equipment) and as security therefor to mortgage, pledge,
hypothecate or encumber or otherwise place liens upon all or part of the
Equipment and other property of the Partnership, to pledge or encumber the
assets of the Partnership to secure any remarketing rights of vendors or
suppliers of Equipment;
9.1.14 to prepay in whole or in part, refinance, increase, modify,
consolidate, extend or increase any lien or encumbrance affecting any Equipment;
9.1.15 to require in all Partnership obligations that the General
Partner shall not have any personal liability thereon but that the person or
entity contracting with the Partnership is to look solely to the Partnership and
its assets for satisfaction; provided, however, that the inclusion of such
provisions shall not materially affect the cost of the service or material being
supplied;
9.1.16 to withhold income taxes as required or permitted by any
federal, state or local taxing authority, and otherwise to comply with and take
actions necessary or appropriate as a result of provisions of the Code or any
state or other tax law requiring or permitting withholding;
9.1.17 to deal with, or otherwise engage in business with, any
person who has dealt with or engaged in business with or may in the future deal
with or engage in business with the General Partner or its Affiliates; provided
that no such dealing or engaging in business may involve any arrangement which
would circumvent any of the provisions of this Agreement, including the
restrictions against dealing with the General Partner or its Affiliates;
9.1.18 to commence the dissolution and liquidation of the
Partnership in its ninth year of existence in order to terminate the Partnership
by December 31, 2009; and
9.1.19 to prohibit Qualified Plans from acquiring, individually or
in the aggregate, more than 25% of the Units.
9.2 Reliance on Certificate of General Partner. Any person dealing with
the Partnership or the General Partner may rely on a certificate signed by the
General Partner as authority with respect to (a) the identity of any General
Partner or Limited Partner; (b) the existence or nonexistence of any fact or
facts which constitute a condition precedent to acts by the General Partner or
in any other manner are germane to the affairs of the Partnership; (c) the
persons who are authorized to execute and deliver any instrument or document of
the Partnership; or (d) any act or failure to act by the Partnership or as to
any other matter involving the Partnership or any Partner.
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9.3 Independent Activities. The General Partner and its Affiliates and
each Limited Partner may, notwithstanding the existence of this Agreement,
engage in whatever activities they choose, whether competitive with the
Partnership or otherwise, without having or incurring any obligation to offer
any interest in such activities to the Partnership or any party hereto. The
General Partner and its Affiliates shall not be obligated to present to the
Partnership any particular investment opportunity which comes to their attention
if the General Partner, in good faith, determines that such opportunity is not
an appropriate investment for the Partnership at that time or if the opportunity
is not presented to the Partnership because it has been presented to other
partnerships sponsored by the General Partner that may have priority based on
criteria established by the General Partner. Subject to the foregoing, neither
this Agreement nor any activity undertaken pursuant hereto shall prevent the
General Partner or its Affiliates from engaging in any activity, or require the
General Partner or its Affiliates to permit the Partnership or any Limited
Partner to participate therein. The General Partner may organize and participate
as a general partner in partnerships which may engage in activities similar to
the activity engaged in by this Partnership and which may use the name
"Commonwealth Income & Growth Fund" or variations of such name. The General
Partner retains the rights to such name and its variations. The General Partner
will give priority to the Limited Partners when the interests of the Limited
Partners conflict with the interests of the General Partner.
If one or more programs affiliated with the General Partner and the
Partnership are in a position to acquire the same Equipment, the General Partner
will determine which program will purchase the Equipment based upon the
objectives of each and the suitability of the acquisition in light of those
objectives. The General Partner will generally afford priority to the program or
entity that has had funds available to purchase Equipment for the longest period
of time. In addition, in order to promote diversification of Equipment and
lessees, when two or more programs are in a position to acquire the same
Equipment, the General Partner may acquire Equipment in joint ventures with
affiliated investor programs. If one or more investor programs affiliated with
the General Partner and the Partnership are in a position to enter into leases
with the same lessee or to sell Equipment to the same purchaser, the General
Partner will generally afford priority to the Equipment which has been available
for lease or sale for the longest period of time.
9.4 Duties.
9.4.1 The General Partner shall manage and control the Partnership,
its business and affairs. The General Partner shall devote such time to the
business of the Partnership as in its discretion it determines is necessary for
the efficient carrying on of the business.
9.4.2 The General Partner shall be the tax matters partner of the
Partnership as defined under the Code, and as such tax matters partner, shall be
subject to Section 17.2 of this Agreement.
9.4.3 The General Partner shall have fiduciary responsibility for
the safekeeping and use of all funds and assets of the Partnership, whether or
not in the General Partner's immediate possession or control. The General
Partner shall not employ, or permit another to employ, such funds or assets in
any manner except for the exclusive benefit of the Partnership. The Limited
Partners may not contract away the fiduciary duty owed to them by the General
Partner under the common law.
9.4.4 The General Partner shall commit toward Investment in
Equipment at least that portion of the Limited Partners' Capital Contributions
for their Units required by Section 6.6 hereof. If the total
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amount of Front-End Fees must be reduced in order to enable the Partnership to
commit such Capital Contributions to Investment in Equipment, the General
Partner shall, and shall cause its Affiliates or other persons to, reimburse the
Partnership for such amount of Front-End Fees and any Acquisition Fees, Debt
Placement Fees and Acquisition Expenses paid in connection with the reinvestment
of the Partnership's funds received by them as is necessary to enable the
Partnership to meet such requirement within 30 days after the need for
reimbursement arises.
9.4.5 The General Partner shall maintain reserves in such amount and
for such times and purposes as it deems appropriate.
9.5 Restrictions on Authority. Notwithstanding any other provisions of
this Agreement:
9.5.1 The General Partner shall not have the authority to do any act
in contravention of this Agreement or the Act; possess Partnership property, or
assign rights in specific Partnership property, for other than a Partnership
purpose; admit a person as a General Partner or a Limited Partner, except as
provided in this Agreement; knowingly perform any act that would subject any
Limited Partner to liability as a general partner in any jurisdiction; alter the
purpose or character of the Partnership as set forth in Section 2.5; or confess
a judgment against the Partnership.
9.5.2 Except pursuant to Section 10.2, the General Partner shall not
sell all or substantially all of the assets of the Partnership in a single sale,
except in the winding up and liquidation of the business of the Partnership or
in a final liquidating sale of Equipment remaining after the disposition in the
ordinary course of business of substantially all of the Partnership's other
Equipment.
9.5.3 The Partnership shall not purchase or lease Equipment from the
Sponsor or its Affiliates, including Equipment in which the General Partner or
its Affiliates have an interest, except that the General Partner shall be
permitted to make acquisitions of Equipment in its own name (and assume loans in
connection therewith) and hold title thereto on an interim basis (not in excess
of 60 days) for the purpose of facilitating the acquisition of such Equipment or
the borrowing of money or obtaining of financing, or any other purpose related
to the business of the Partnership provided that (a) such acquisitions are in
the best interest of the Partnership; (b) such Equipment is purchased by the
Partnership for a price no greater than the sum of the actual cost of such
Equipment, accountable Acquisition Expenses payable to third parties, interest
on the Purchase Price (at a rate no greater than that charged by unrelated
lenders on comparable loans) from the date of purchase to the date of transfer
to the Partnership and compensation permitted in accordance with Article 6 of
this Agreement; (c) there is no difference in interest terms of the loans
secured by the Equipment at the time acquired by the General Partner and the
time acquired by the Partnership; and (d) no benefit arises out of such
acquisitions to the General Partner except for the compensation permitted under
this Agreement. During interim purchases by the General Partner, all profits
and losses shall accrue to the Partnership.
9.5.4 The Partnership shall not invest in junior trust deeds unless
received in connection with the sale of an item of Equipment in an aggregate
amount which does not exceed 30% of value of the assets of the Partnership on
the date of the investment.
9.5.5 The Partnership shall not sell or lease Equipment to the
General Partner or its Affiliates.
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9.5.6 The Partnership shall not make loans to any Person, including
without limitation, the General Partner or its Affiliates (except to the extent
a Conditional Sales Contract constitutes a loan.
9.5.7 The Partnership shall not acquire Equipment from an Equipment
Program in which the General Partner or its Affiliates have an interest.
9.5.8 The Partnership shall not acquire Equipment in exchange for
Units.
9.5.9 The Partnership shall not give the General Partner or its
Affiliates an exclusive right to sell or exclusive employment to sell Equipment
for the Partnership.
9.5.10 The Partnership shall not pay, directly or indirectly, a
commission or fee (except as specifically described under this Agreement) to the
General Partner or its Affiliates in connection with the reinvestment or
distribution of Cash Available for Distribution or of the proceeds of the
resale, exchange, or refinancing of the Partnership's Equipment.
9.5.11 No rebates or give-ups may be received by the General Partner
or its Affiliates, nor may the General Partner or its Affiliates participate in
any reciprocal business arrangements which would circumvent any of the
provisions of this Agreement, including the restrictions against dealing with
the General Partner or its Affiliates.
9.5.12 The General Partner and its Affiliates shall not directly or
indirectly pay or award any commissions or other compensation to any person
engaged by a potential Limited Partner for investment advice as an inducement to
such adviser to advise the purchase of Units. This Section 9.5.12, however,
shall not prohibit the payment of Underwriting Commissions to the Dealer Manager
or other properly licensed person for selling Units.
9.5.13 The funds of the Partnership shall not be commingled with the
funds of any other Person. This prohibition shall not apply to investments
meeting the requirements of Section 9.5.14.
9.5.14 Except to the extent that a permitted investment in the
entities referred to in this Section 9.5.14 constitutes "securities" within the
meaning of the Securities Act of 1933, as amended, the Partnership will not
invest in securities, including equipment limited partnerships, general
partnerships or joint ventures, except that (a) the Partnership may invest in
general partnerships or joint ventures with persons other than equipment
Programs formed by the General Partner or its Affiliates, which partnerships or
joint ventures own specific equipment; provided that (i) the Partnership has or
acquires a controlling interest in such ventures or partnerships; (ii) the
non-controlling interest is owned by a non-Affiliate, and (iii) there are no
duplicate fees; and (b) the Partnership may invest in joint venture arrangements
with other equipment Programs formed by the General Partner or its Affiliates if
such action is in the best interests of all Programs and if all the following
conditions are met: (i) all the Programs have substantially identical investment
objectives; (ii) there are no duplicate fees; (iii) the sponsor compensation is
substantially identical in each Program; (iv) the Partnership has a right of
first refusal to buy another Program's interest in a joint venture if the other
Program wishes to sell equipment held in the joint venture; (v) the investment
of each Program is on substantially the same terms and conditions; and (vi) the
joint venture is formed either for the purpose of effecting appropriate
diversification
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for the Programs or for the purpose of relieving the General Partner or its
Affiliates from a commitment entered into pursuant to Section 9.5.3.
9.5.15 Neither the General Partner nor its Affiliates shall lend
money to the Partnership if interest rates and other financing charges and fees
in connection with such loan are in excess of the lesser of their cost of funds
or the amount which would be charged by unrelated lending institutions on
comparable loans for the same purpose or if such loan contains any prepayment
charge or prepayment penalty. Neither the General Partner nor its Affiliates
shall provide financing for the Partnership unless such financing has a term of
not more than 12 months or carries an interest rate in excess of three percent
over the prime rate of PNC Bank, N.A.
9.5.16 Other than as specifically described in Section 5.2 and
Article 6 of this Agreement and the section "Compensation of the General Partner
and its Affiliates" in the Prospectus at the time it was declared effective by
the Securities and Exchange Commission, the General Partner shall not enter into
any agreement, contract or arrangement on behalf of the Partnership providing
for compensation to the General Partner or its Affiliates for performing
services for, or selling or leasing goods or materials to, the Partnership.
9.5.17 All services or goods for which the General Partner or its
Affiliates are to receive compensation (other than pursuant to this Agreement)
shall be embodied in a written contract which precisely describes the subject
matter thereof and all compensation to be paid, which contract may only be
modified by a vote of a Majority in Interest of the Limited Partners and which
contract shall contain a clause allowing termination by either party without
penalty on 60 days' prior written notice.
9.5.18 In connection with the borrowing of money, recourse for the
payment of which is limited solely to property of the Partnership and which
shall be amortized fully over the initial lease term, no lender shall be
granted or acquire, at any time as a result of making such a loan, any direct
or indirect interest in the profits, capital or property of the Partnership
other than as a secured creditor.
9.5.19 Partnership funds shall not be invested in any financial
institution or entity affiliated with the General Partner and shall not be used
in a compensating balance arrangement for the benefit of any entity other than
the Partnership.
9.5.20 Without the consent of the General Partner and a Majority in
Interest of the Limited Partners, the Partnership shall not convert to another
form of business entity if the conversion results in a significant adverse
change in (a) the voting rights of the Limited Partners, (b) the termination
date of the Partnership, (c) the compensation payable to the General Partner or
its Affiliates or (d) the ability to meet the Partnership's objectives without
materially impairing the rights of Limited Partners.
9.5.21 The Partnership shall not make distributions in kind except
upon dissolution and liquidation, and then only to a liquidating trust which has
been established for the purpose of the liquidation of the assets of the
Partnership and the distribution of cash in accordance with this Agreement.
9.5.22 The Partnership shall not incur debt in excess of 30% of the
expected aggregate cost of the Equipment to be owned or subject to a
Conditional Sales Contract except that the Partnership may
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not incur indebtedness to acquire Equipment until the net proceeds of the
Offering have been invested, or committed to investment, in Equipment.
9.5.23 The Partnership shall not purchase Equipment unless such
Equipment is subject to a lease or a Conditional Sales Contract or for which a
lease or a Conditional Sales Contract will be entered into when the Partnership
acquires the Equipment.
9.5.24 The Partnership's leases and other contracts will each
contain a statement that the Partnership has been organized as a limited
partnership under the Act.
9.5.25 Without the consent of the General Partner and a Majority in
Interest of the Limited Partners, the Partnership will not change its principal
purpose of acquiring, leasing and selling Equipment.
9.5.26 The Partnership shall not issue equity securities senior to
the Units.
9.6 General Partner's Net Worth. The General Partner agrees, represents
and warrants that it will at all times have a net worth in an amount (i)
sufficient in the opinion of counsel to the Partnership to enable the
Partnership either to avoid having the corporate characteristic of limited
liability for federal income tax purposes or to avoid being treated as an
association taxable as a corporation for federal income tax purposes, and (ii)
at least five percent of the gross amount of all direct participation programs
sold by the General Partner within the prior 12 months plus five percent of the
amount of the Capital Contribution to the Partnership, up to $1,000,000.
ARTICLE 10
Rights of Limited Partners
10.1 No Limited Partner in Control. No Limited Partner, as such, shall
participate in the management or control of the Partnership's business, nor
shall any Limited Partner, as such, have the power to act for or bind the
General Partner or the Partnership.
10.2 Voting Rights. The Limited Partners by a vote of a Majority in
Interest of the Limited Partners may, without the necessity for concurrence by
the General Partner (a) approve or disapprove a sale of all or substantially
all of the assets of the Partnership, except as otherwise permitted or required
under Section 14.1 or 14.4 of this Agreement; (b) dissolve the Partnership; (c)
subject to Section 10.5, amend this Agreement except that amendment of Articles
6, 7 and 8 shall require the affirmative vote of Limited Partners owning at
least 66-2/3% of the Units owned by all Limited Partners; (d) remove or approve
the withdrawal of the General Partner; or (e) prior to the effective date of a
removal, withdrawal or dissolution of the General Partner, elect an additional,
replacement or successor General Partner to be admitted prior to such effective
date. With respect to any Units owned by the General Partner or its Affiliates,
the General Partner and its Affiliates may not vote or consent on matters
submitted to the Limited Partners regarding removal of the General Partner or
any transaction between the Partnership and the General Partner or its
Affiliates. In determining the required percentage in interest of Units
necessary to approve a matter on which the General
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Partner and its Affiliates may not vote or consent, any Units owned by the
General Partner or its Affiliates shall not be included.
10.3 Conversions and Roll-Ups.
10.3.1 Consent Required. Without the approval of the General Partner
and the holders of at least 66-2/3% of all outstanding Units, the Partnership
shall not enter into any Roll-Up. Limited Partners who do not consent to an
approved Roll-Up shall be given the option of (i) accepting the securities of
the Roll- Up Entity offered in the proposed Roll-Up; or (ii) receiving cash in
an amount equal to the non-consenting Limited Partner's pro rata share of the
appraised value of the net assets of the Partnership. The Partnership shall not
reimburse the sponsor of a proposed Roll-Up for the costs of an unsuccessful
proxy contest in the event that the Roll-Up is not approved by the Limited
Partners as required by the first sentence of this Section 10.3.1.
10.3.2 Appraisal. The "appraised value of the net assets of the
Partnership" as used in Section 10.3.1 shall be established by means of an
appraisal of the net assets of the Partnership by a competent Independent
Expert, engaged for the benefit of the Partnership and the Limited Partners,
with no current material or prior business or personal relationship with the
General Partner or its Affiliates. Such Independent Expert must be engaged to a
substantial extent in the business of rendering opinions regarding the value of
assets of the type held by the Partnership, and must be qualified to perform
such work. The appraisal shall be based on an evaluation of all relevant
information and shall indicate the value of the Partnership's assets, assuming
an orderly liquidation of such assets over a twelve-month period, as of a date
immediately prior to the date of the proposed Roll-Up. A summary of the
independent appraisal, including all material assumptions underlying the
appraisal, shall be included in a report to the Limited Partners in connection
with a proposed Roll-Up and shall be appraised on a consistent basis. If the
appraisal will be included in a prospectus used to offer the securities of a
Roll-Up Entity, the appraisal shall be filed with the Securities and Exchange
Commission and the states as an exhibit to the registration statement for the
offering and accordingly, in that event, the issuer would be subject to
liability for violations of Section 11 of the Securities Act of 1933 and
comparable provisions under state laws for any material misrepresentations or
material omissions in the appraisal.
10.3.3 Prohibited Roll-Ups. The Partnership shall not participate in
any proposed Roll-Up: (a) which would result in the Limited Partner's having
voting rights and rights to hold meetings which are less than those rights
provided for under Section 10.2; (b) which includes provisions which would
operate to materially impede or frustrate the accumulation of shares by any
purchaser of the securities of the Roll-Up Entity (except to the minimum extent
necessary to preserve the tax status of the Roll-Up Entity); (c) which would
limit the ability of a Limited Partner to exercise the voting rights of its
securities of the Roll-Up Entity on the basis of the number of Units held by
that Limited Partner, and (d) in which the Limited Partners' rights of access to
the records of the Roll-Up Entity will be less than those rights provided for
under Section 15.1 hereof.
10.3.4 With the consent of a Majority in Interest of the Limited
Partners, the Partnership is permitted to convert into another form of business
entity which does not result in a significant adverse change in (a) the voting
rights of the Limited Partners, (b) the termination date of the Partnership
(currently, December 31, 2009, unless terminated earlier in accordance with this
Agreement), (c) the compensation payable to the General Partner or its
Affiliates (provided however that any increase in the compensation
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payable to the General Partner and its Affiliates requires the approval of
66-2/3% of all outstanding Units), or (d) the ability to meet the Partnership's
investment objectives without materially impairing the rights of the Limited
Partners. The General Partner will make the determination as to whether or not
any such conversion will result in a significant adverse change in any of the
provisions listed in Section 10.3.1 based on various factors relevant at the
time of the proposed conversion, including an analysis of the historic and
projected operations of the Partnership; the tax consequences (from the
standpoint of the Limited Partners) of the conversion and of an investment in a
limited partnership as compared to an investment in the type of business entity
into which the Partnership would be converted; and the performance of the
equipment industry in general, and of the computer peripherals segment of the
industry in particular. In general, the General Partner would consider any
material limitation on the voting rights of the Limited Partners or any
substantial increase in the compensation payable to the General Partner or its
Affiliates to be a significant adverse change in the listed provisions.
10.4 Meetings.
10.4.1 Meetings of the Limited Partners to vote upon any matters as
to which the Limited Partners are authorized to take action under this
Agreement, as the same may be amended from time to time, may be called at any
time by the General Partner or by one or more Limited Partners holding more than
10% of the then outstanding Units, by delivering written notice, either in
person or by registered mail stating the purpose of the meeting, to the General
Partner. Promptly, but in any event within 10 days following receipt of such
request, the General Partner shall cause a written notice, either in person or
by certified mail, to be delivered to the Limited Partners entitled to vote at
such meeting. The meeting will be held at the time and place specified in the
request, or if none, at a time and place convenient to the Limited Partners,
such meeting to be held not less than 15 days nor more than 60 days after the
mailing of the notice of the meeting. Included with the notice of a meeting
shall be a detailed statement of the action proposed, including a verbatim
statement of the wording of any resolution proposed for adoption by the Limited
Partners and of any proposed amendment to this Agreement. All expenses of the
meeting and notification shall be borne by the Partnership.
10.4.2 A Limited Partner shall be entitled to vote (a) at a meeting,
in person or by a proxy in writing or by a signed writing directing the manner
in which he desires that his vote be cast, which writing must be received by the
General Partner prior to such meeting, or (b) without a meeting, by a signed
writing directing the manner in which he desires that his vote be cast, which
writing must be received by the General Partner prior to the date on which the
votes of Limited Partners are to be counted. Only the votes of persons who were
Limited Partners on the record date, whether at a meeting or otherwise, shall be
counted.
10.5 Certain Amendments.
10.5.1 In addition to any amendments otherwise authorized herein,
this Agreement may be amended from time to time by the General Partner, without
the consent of any of the Limited Partners (a) to add to the representations,
duties or obligations of the General Partner or surrender any right or power
granted to the General Partner herein, for the benefit of the Limited Partners;
(b) to cure any ambiguity or inconsistency; (c) to delete or add any provisions
required to be so deleted or added by, or to meet the requirements of,
applicable law (including the Code, ERISA and the regulations thereunder); and
(d) to delete or add any provisions required to be so deleted or added by, or to
meet the requirements of, applicable law (including the Code, ERISA and the
regulations thereunder); and (e) to delete or add any provisions required to be
so deleted or added by the staff of the Securities and Exchange Commission or by
a state securities
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commissioner or similar official, which addition or deletion is deemed by such
person, commissioner or official to be for the benefit or protection of the
Limited Partners.
10.5.2 Notwithstanding anything to the contrary contained in this
Agreement, this Agreement may not be amended without the consent of each Limited
Partner to be affected adversely by an amendment that (a) converts a Limited
Partner into a General Partner; (b) modifies the limited liability of a Limited
Partner; (c) alters the interest of the General Partner or Limited Partners in
Net Profits, Net Losses, or distributions from the Partnership; or (d) adversely
affects the status of the Partnership as a partnership for federal income tax
purposes.
10.5.3 Each Limited Partner shall be notified of any amendment to
this Agreement within 30 days of the effective date of the amendment by means of
first class mail, postage prepaid, to the address of the Limited Partner on the
books of the Partnership.
ARTICLE 11
Transfer of Units
11.1 Assignment.
11.1.1 No Limited Partner may transfer or assign his Units or any
interest therein except as permitted in this Article 11. Any act in violation of
this Article 11 shall be null and void and shall not be recognized by the
Partnership.
11.1.2 With the prior written consent of the General Partner, a
Limited Partner may transfer or assign part or all of his Units if, and only if:
(a) the assignor and the assignee execute, acknowledge and deliver to the
Partnership such instruments of transfer and assignment and other documents as
may be required by the General Partner; (b) either (i) at least 125 Units are
assigned and at least 125 Units are retained by the assignor or (ii) the Units
being assigned are all the Units of the assignor (except that the General
Partner, in its discretion, may waive this requirement for transfers by gift,
inheritance or family dissolution or transfers to Affiliates of the assignor);
(c) the assignee agrees in writing not to assign such Units other than in
accordance with this Article 11; (d) such assignment complies with any
applicable state and federal securities laws; (e) assignor obtains an opinion of
counsel that such assignment will not result in the termination of the
Partnership for federal income tax purposes and will not result in the
Partnership being classified as a publicly traded partnership or an association
taxable as a corporation for federal income tax purposes.
11.1.3 An assignee, if he does not become a Substituted Limited
Partner pursuant to Section 11.2, shall have no rights of a Limited Partner as a
result of the assignment, but shall only be entitled to receive the
distributions under Article 8 and Sections 3.3.2 and 14.4 to which the assignor
would otherwise be entitled.
11.2 Substituted Limited Partners. No assignee of Units shall have the
right to become a Substituted Limited Partner in place of his assignor unless
all of the following conditions are first satisfied: (a) the written instrument
of assignment (or another writing) sets forth the intention of the assignor that
the assignee succeed to the assignor's interest as a Substituted Limited Partner
in his place; (b) the assignor and assignee execute, acknowledge and deliver
such instruments as the General Partner may deem necessary or desirable to
effect such substitution, including the written acceptance and adoption by the
assignee of this
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Agreement; and (c) the written consent of the General Partner to such
substitution is obtained, the granting or denial of which shall be within the
absolute discretion of the General Partner. The Partnership's records shall be
amended to reflect the substitution of Limited Partners at least once in each
calendar quarter.
11.3 Transfer Fee. On any assignment of Units, any substitution of an
assignee as a Limited Partner or any redemption of Units, the Partnership may
charge a transfer fee to cover reasonable out-of-pocket expenses in connection
with the substitution.
11.4 General. No transfer or assignment or redemption of any Units shall
be made if it would result in the Partnership being treated as an association
taxable as a corporation for tax purposes or as a publicly traded partnership.
In addition, no transfer of any Unit will be recognized or effective for any
purpose to the extent that it is determined by the General Partner to be
effectuated through an established securities market or a secondary market (or
the substantial equivalent thereof) within the meaning of Section 7704 of the
Code and the applicable Treasury Regulations thereunder so as to adversely
affect the tax status of the Partnership as a partnership rather than as an
association taxable as a corporation. The General Partner, in its sole
discretion, may impose any restrictions on transfers or assignments of Units as
it deems appropriate to give effect to the preceding two sentences including
prohibitions of any transfers or assignments of Units which fall outside the
safe harbors described in Section 1.7704-1 of the Treasury Regulations. A
Limited Partner must obtain the consent of the General Partner to any
transfer or assignment, which consent shall not be unreasonably withheld. In
connection therewith, the General Partner shall be permitted to amend this
Agreement without the consent of the Limited Partners. Assignments and
substitutions shall be effective on the first day of the month following the
month in which there has been full compliance with the requirements of this
Article 11. For the purposes of this Article 11, a pledge of Units shall be
deemed to be an assignment of such Units.
ARTICLE 12
Redemption
Upon the conclusion of the 30-month period following the termination of
the Offering, the Partnership may, at the sole discretion of the General
Partner, repurchase a number of the then outstanding Units. On a semi-annual
basis, the General Partner will establish an amount for redemption, generally
not to exceed two percent of the outstanding Units per year, subject to the
General Partner's sole discretion and its good faith determination that such
redemptions will not (a) cause the Partnership to be taxed as a corporation
under Section 7704 of the Code or (b) impair the capital or operations of the
Partnership. At the sole discretion of the General Partner, the Partnership
may redeem Units in excess of the two percent limitation. The redemption
price for Units will be 105% of the selling Limited Partner's Adjusted
Capital Contributions attributable to the Units for sale. Following the
determination of the annual redemption amount, redemptions will occur on a
semi-annual basis and all requests for redemption, which must be made in
writing, must be on file as of the Record Date in which the redemption is to
occur. The General Partner will maintain a master list of requests for
redemption with priority being given to Units owned by estates, followed by
IRAs and Qualified Plans. All other Limited Partners will be treated on a
first come, first served basis. Redemption requests made by or on behalf of
Limited Partners who are not affiliated with the General Partner or its
affiliates will be given priority over those made by Limited Partners who are
affiliated with the General Partner or its Affiliates. All redemption
requests will remain in effect until and unless canceled, in writing, by the
requesting Limited Partner(s). The making of a request for redemption by a
Limited Partner is completely voluntary.
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ARTICLE 13
General Partner's Interest
13.1 Voluntary Withdrawal or Assignment. The General Partner shall not
voluntarily withdraw, retire or resign as general partner of the Partnership, or
assign, transfer or otherwise dispose of all or any part of its general
partnership interest unless:
13.1.1 the Limited Partners consent by a Majority in Interest;
13.1.2 in the case of withdrawal, retirement or resignation, it
gives at least 60 days' notice thereof and if there would be no remaining
General Partner, nominates a successor General Partner satisfactory to a
Majority in Interest of the Limited Partners, who becomes a General Partner
prior to such withdrawal, retirement or resignation; and
13.1.3 the Partnership receives an opinion of its counsel to the
effect that such withdrawal, retirement, resignation, assignment, transfer or
other disposition would not subject the Partnership to federal income taxation
as an association taxable as a corporation and would not cause a termination of
the Partnership for federal income tax purposes.
13.2 Removal. Subject to Section 14.3, after the Final Closing the General
Partner may be removed, and shall cease to be General Partner of the
Partnership, on the vote of the Majority in Interest of the Limited Partners.
ARTICLE 14
Dissolution, Continuation and Termination
14.1 Dissolution. The Partnership shall be dissolved on the occurrence of
any of the following events:
14.1.1 The vote or written consent of a Majority in Interest of the
Limited Partners determines that the Partnership should be dissolved;
14.1.2 The dissolution of the Partnership by judicial decree;
14.1.3 The expiration of 60 days following a Terminating Event,
unless a Majority in Interest of the Limited Partners, elect to continue
the Partnership in accordance with Section 14.2.2 and elect a successor
general partner; or
14.1.4 The determination by the General Partner that it is necessary
to commence the liquidation of the Equipment in order for the liquidation
of all the Equipment to be completed in an orderly and business-like
fashion prior to December 31, 2009.
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14.2 Continuation.
14.2.1 On the occurrence of the removal, withdrawal, retirement,
resignation, expulsion, involuntary dissolution, or Bankruptcy (or, in the case
of an individual, the death, insanity or appointment of a conservator for the
person or any of his assets) of one or more, but less than all, of the General
Partners, then the remaining General Partners shall have the right to, and
shall, continue the business of the Partnership.
14.2.2 On the occurrence of a Terminating Event, the last remaining
General Partner shall promptly send written notice of such event to all the
Limited Partners, who (subject to Sections 14.2.3 and 14.3) (a) may elect, by a
vote of the Majority in Interest within 60 days thereafter, to reconstitute the
Partnership and continue its business in accordance with this Agreement by
selecting one or more new General Partners who agree in writing to be bound by
this Agreement, and all Limited Partners, as such, shall be bound by such
action, or (b) may continue the business of the Partnership pursuant to Section
8571 of the Act.
14.2.3 The rights to continue the business of the Partnership
provided in this Section 14.2 shall be subject to receipt by the Partnership of
an opinion of counsel to the Partnership that such continuation would not result
in the Partnership's being classified for federal income tax purposes as an
association taxable as a corporation and would not result in the termination of
the Partnership for federal income tax purposes.
14.3 Purchase of Interest of General Partner. On any continuation of the
business of the Partnership under Section 14.2.1 or Section 14.2.2, or any
removal of the General Partner under Section 13.2, the following shall apply:
14.3.1 The General Partner who withdraws (voluntary termination) or
is removed (involuntary termination) shall be paid the then present fair market
value of its interest, determined in the manner described in this Section 14.3.
If the termination is voluntary pursuant to Section 13.1, the terminated General
Partner shall receive a non-interest bearing unsecured promissory note payable,
if at all, from distributions the terminated General Partner would have received
under this Agreement if it had not voluntarily terminated. If the termination is
involuntary pursuant to Section 13.2, such amount shall be paid in no less than
five equal annual installments, the first of which shall be paid one year from
the date of such termination. The unpaid portion of such amount shall bear
simple interest at the rate of 10% per annum from the date of such termination,
such interest to accrue and be paid annually in addition to each such annual
installment. In any event, the method of payment must protect the solvency and
liquidity of the Partnership.
14.3.2 The fair market value of a terminated General Partner's
Partnership interest shall be determined by agreement between the terminated
General Partner and the Partnership, which agreement shall require a vote of the
Majority in Interest of the Limited Partners. If the terminated General Partner
and the Partnership cannot agree on the fair market value of such partnership
interest within 45 days of the continuation, the fair market value thereof shall
be determined by arbitration in accordance with the then current rules of the
American Arbitration Association. The expense of arbitration shall be borne
equally by the terminated General Partner and the Partnership.
14.4 Liquidation.
14.4.1 On any dissolution of the Partnership, absent any
continuation under Section 14.2, the General Partner, or a court-appointed
liquidator if there is no General Partner, shall take full account of
32
<PAGE>
the Partnership's assets and liabilities. The assets shall be liquidated as
promptly as is consistent with obtaining the fair market value thereof, and the
proceeds therefrom, to the extent sufficient therefor, shall be applied in the
following order: (a) to the payment of all debts and liabilities of the
Partnership to creditors; (b) to the establishment, for such period as the
liquidator deems reasonably necessary, of such reserves as the liquidator deems
reasonably necessary to provide for contingent and unforseen liabilities or
obligations of the Partnership; and (c) to the Partners in accordance with
Section 8.1.3.
14.4.2 The debts and liabilities of the Partnership shall not
include liabilities or obligations of the Partnership to Partners for
distributions or on account of their contributions or in respect to profits (or
other compensation by way of income) or capital.
14.4.3 Notwithstanding anything to the contrary that may be
expressed or implied in this Agreement, upon the dissolution or termination of
the Partnership, the General Partner, in all events by the end of the
Partnership's taxable year in which the General Partner's interest is liquidated
or, if later, within 90 days of the date of such liquidation, will contribute to
the Partnership an amount of cash equal to the lesser of (a) the deficit balance
of the General Partner's Capital Account or (b) the excess of 1.01% of the total
Capital Contributions of the Limited Partners over the capital previously
contributed by the General Partner and such cash shall be distributed to the
Limited Partners in the ratio of the then credit balances in their Capital
Accounts.
14.4.4 Any capital contribution by the General Partner pursuant to
Section 14.4.3 and any liquidating distribution pursuant to Section 14.4.1 shall
be made no later than the later of (a) the end of the taxable year during which
such liquidation occurs or (b) 90 days after the date of such liquidation.
ARTICLE 15
Accounting and Fiscal Matters
15.1 Partnership Records. The records of the Partnership shall be
maintained at the principal office of the Partnership. Every Limited Partner or
his duly authorized representative shall at any reasonable time have access to
the records of the Partnership and may inspect and copy any of them. An
alphabetical list of the names, addresses, and business telephone numbers of the
Limited Partners of the Partnership along with the number of Units held by each
of them (the "Limited Partner List") shall be maintained as a part of the books
and records of the Partnership and shall be available for inspection by any
Limited Partner or its designated agent at the home office of the Partnership
upon the request of the Limited Partner. The Limited Partner List shall be
updated at least quarterly to reflect changes in the information contained
therein. A copy of the Limited Partner List shall be mailed to any Limited
Partner requesting the Limited Partner List within ten days of the request. The
copy of the Limited Partner List shall be printed in alphabetical order, on
white paper, and in a readily readable type size (in no event smaller than
10-point type). A reasonable charge for copy work may be charged by the
Partnership. The purposes for which a Limited Partner may request a copy of the
Limited Partner List include, without limitation, matters relating to Limited
Partners' voting rights under the Partnership Agreement, and the exercise of the
Limited Partners' rights under federal proxy laws. If the General Partner
neglects or refuses to exhibit, produce, or mail a copy of the Limited Partner
List as requested, the General Partner shall be liable to any Limited Partner
requesting the list for the costs, including attorneys' fees, incurred by that
Limited Partner for compelling the production of the Limited Partner List, and
for actual damages suffered by any Limited Partner by reason of such refusal or
neglect. It shall be a defense that the
33
<PAGE>
actual purpose and reason for the requests for inspection or for a copy of the
Limited Partner List is to secure such list of Limited Partners or other
information for the purpose of selling such list or copies thereof, or of using
the same for a commercial purpose other than in the interest of the applicant as
a Limited Partner relative to the affairs of the Partnership. The General
Partner may require the Limited Partner requesting the Limited Partner List to
represent that the list is not requested for a commercial purpose unrelated to
the Limited Partner's interest in the Partnership. The remedies provided
hereunder to the Limited Partners requesting copies of the Limited Partner List
are in addition to, and shall not in any way limit, other remedies available to
the Limited Partners under federal law, or the laws of any state.
15.2 Accounting; Fiscal Year. The Partnership's books and records shall be
kept on the accrual method of accounting. The fiscal year of the Partnership
shall be the calendar year.
15.3 Reports.
15.3.1 The General Partner will deliver to each Limited Partner,
within 120 days after the end of each year, a balance sheet of the Partnership
dated as of December 31 of such year, together with statements of income,
Partners' equity, and the changes in financial position of the Partnership for
such year, prepared in accordance with generally accepted accounting principles
and accompanied by an auditor's report containing an opinion of the
Partnership's independent certified public accountants, as well as an unaudited
Cash Flow statement containing a breakdown of distributions to Limited Partners
for the year, separately identifying distributions from (a) Cash Flow from
operations during the year, (b) Cash Flow from operations during a prior period
which had been held as reserves, (c) proceeds from disposition of Equipment and
investments and (d) reserves from gross proceeds of the Offering originally
obtained from the Limited Partners. The General Partner will within such period
also furnish a report of the activities of the Partnership for the year, which
will include (a) for each item of Equipment acquired by the Partnership which
individually represents at least 10% of the total investment in Equipment, a
status report as part of the annual report, (which status report shall indicate:
(i) condition of Equipment, (ii) how Equipment is being utilized as of the end
of year (leased, operated, held for lease, repair, or sale), (iii) remaining
term of leases, (iv) projected use of Equipment for next year (renew lease,
lease, retire, or sell), and (v) such other information relevant to the value or
utilization of the equipment as the General Partner deems appropriate including
the method used or basis for valuation), (b) a report on distributions to the
Limited Partners during the year and their source, (c) a report on any costs
incurred by the General Partner and its Affiliates in performing administrative
services which are reimbursed by the Partnership during the year which will be
verified by independent public accountants in accordance with generally accepted
accounting principles (the cost of such verification to be so reimbursable only
to the extent that such reimbursement, when added to the reimbursement for
services, does not exceed the competitive rate for such services, excluding the
cost of the verification) and (d) for each item of Equipment sold by the
Partnership in such year, such Equipment's original purchase price, sale price
and aggregate lease revenues. The annual report will contain a breakdown of the
costs reimbursed to the sponsor. Within the scope of the annual audit of the
General Partner's financial statements, the independent certified public
accountants must issue a special report on the allocation of such costs to the
Partnership in accordance with this Partnership Agreement. The special report
shall at a minimum provide: (i) a review of the time records of individual
employees, the costs of whose services were reimbursed; and (ii) a review of the
specific nature of the work performed by each such employee. The special report
shall be in accordance with the American Institute of Certified Public
Accountants United States auditing standards relating to special reports. The
additional costs of such special report will be itemized by said accountants on
a program-by-program basis and may be reimbursed to the General Partner by the
Partnership in accordance with this subparagraph only to the extent
34
<PAGE>
that such reimbursement, when added to the cost for administrative services
rendered does not exceed the competitive rate for such services as determined in
this subsection. Within 60 days after the end of each calendar quarter, the
General Partner will also furnish a report of all services rendered and all fees
received by the General Partner and its Affiliates from the Partnership, an
unaudited balance sheet, a statement of income, a statement of changes in
financial position and a report on the activities of the Partnership, as well as
an unaudited Cash Flow statement.
15.3.2 Until the net proceeds of the Offering are fully invested,
the General Partner will furnish to the Limited Partners, within 60 days after
the end of each calendar quarter, a report of Equipment acquisitions during the
quarter, including the type and manufacturer of each item of Equipment, the
purchase price of the Equipment, and any other material terms of purchase, a
statement of the total amount of cash expended by the Partnership to acquire the
Equipment (including an itemization of all commissions, fees, and expenses and
the name of each payee), and a statement of the amount of net proceeds of the
Offering which remain unexpended or uncommitted at the end of the quarter.
15.3.3 The General Partner will also furnish to all Limited Partners
within 75 days after the end of the year other information regarding the
Partnership to aid them in the preparation of their tax returns.
15.3.4 Within 120 days after the end of the first full fiscal year
for which Form 10-K under the Securities Exchange Act of 1934 is filed with the
Securities and Exchange Commission, the General Partner shall send the financial
statements required by Form 10-K to the Limited Partners.
15.3.5 Until the net proceeds from sales of the Units have been
fully invested or otherwise used for Partnership purposes or been set aside as
reserves or been returned to the Limited Partners under Section 4.2.2, the
reports under Sections 15.3.1 and 15.3.3 shall include a report of material
Equipment acquisitions made during the periods covered by such reports which
have not previously been reported.
15.3.6 The information required to be provided in the various
reports pursuant to this Section 15.3 may be sent earlier than or separately
from any of the other information required pursuant to this Section 15.3, and
the information required to be contained in any of the reports pursuant to this
Section 15.3 may be contained in more than one report.
15.3.7 If the Securities and Exchange Commission or the North
American Securities Administrators Association, Inc. promulgates rules which
allow a reduction in reporting requirements, the Partnership may cease preparing
and filing certain of the aforementioned reports in compliance with such rules
if the General Partner determines such action to be in the best interests of the
Partnership.
15.3.8 On request of the official or agency administering the
securities law of a state in which the Partnership has sold Units, the General
Partner shall submit to such official or agency any report or statement required
to be distributed to Limited Partners pursuant to this Section 15.3.
15.4 Bank Accounts. The bank accounts of the Partnership shall be
maintained in such banking institutions as the General Partner may determine,
and withdrawals shall be made only in the regular course of Partnership
business on such signatures as the General Partner may determine.
35
<PAGE>
15.5 Partnership Returns. For each tax year, the General Partner shall,
within the time prescribed by law (including extensions), file on behalf of the
Partnership the annual information return required for federal, state and local
income tax purposes.
ARTICLE 16
Power of Attorney
16.1 Power of Attorney.
16.1.1 Pursuant to the terms of this Agreement, each purchaser of a
Unit and each transferee of a Unit appoints the General Partner, acting alone,
as the purchaser's or transferee's attorney-in-fact to make, execute, file,
and/or record (a) documents relating to the Partnership and its business
operations requested by or appropriate under the laws of any appropriate
jurisdiction; (b) instruments with respect to any amendment of this Agreement or
the Certificate; (c) instruments or papers required to continue the business of
the Partnership pursuant to this Agreement; (d) instruments relating to the
admission of any Partner to the Partnership; (e) a master list in accordance
with Section 6112 of the Code (or any successor provision), relating to the
Partnership's tax shelter registration; and (f) all other instruments deemed
necessary or advisable to carry out the Partnership's business or the provisions
of this Agreement. The power of attorney is irrevocable, will survive the death,
incompetency, dissolution, disability, incapacity, bankruptcy, or termination of
the granting purchaser or transferee, and will extend to such person's heirs,
successors, and assigns. Each Limited Partner authorizes such attorney-in-fact
to take any further action which such attorney-in-fact shall consider necessary
or advisable in connection with any of the foregoing, hereby giving such
attorney-in-fact power and authority to do and perform each and every act or
thing whatsoever requisite or advisable to be done in and about the foregoing as
fully as such Limited Partner might or could if personally present, hereby
ratifying and confirming all that such attorney-in-fact shall lawfully do or
cause to be done by virtue hereof.
16.1.2 The power of attorney granted in this Section 16.1, (a) is a
special power of attorney coupled with an interest and is irrevocable; (b) may
be exercised by the attorney-in-fact by listing all of the Limited Partners
executing any document with the signature of the attorney-in-fact acting as
attorney-in-fact for all of them; and (c) shall survive the delivery of an
assignment by a Limited Partner of the whole or a portion of his interest in the
Partnership, except that where the assignee is admitted as a substituted Limited
Partner, the power of attorney shall survive the delivery of such assignment for
the sole purpose of enabling such attorney-in-fact to execute, acknowledge and
file any document necessary to effect such substitution.
ARTICLE 17
Liability and Indemnification of General Partner
17.1 Exclusion of Liability for Return of Capital Contributions. Subject
to the General Partner's compliance with the standards set forth in Section
17.2.1, the General Partner shall not be personally liable for the return of any
of the Capital Contributions of the Limited Partners, it being expressly
understood that any such return shall be made solely from Partnership assets.
17.2 Limitation on Liability of General Partner; Indemnification.
36
<PAGE>
17.2.1 The General Partner and its Affiliates who were acting on
behalf of or performing services for the Partnership and acting within the scope
of the General Partner's authority as set forth in this Agreement (an
"Indemnitee") shall have no liability to the Partnership or to any Partner for
any loss suffered by the Partnership which arises out of any action or inaction
of any Indemnitee if the General Partner, in good faith, determined that such
course of conduct was reasonable and in the best interest of the Partnership and
such course of conduct did not constitute negligence or misconduct of the
General Partner or its Affiliates. The Indemnitees shall be indemnified by the
Partnership against any losses, judgments, liabilities and expenses sustained by
them in connection with the Partnership, provided that the same were not the
result of negligence or misconduct on the part of the Indemnitee, and provided
further that for such indemnification to be made, the General Partner must have
made a good faith determination that the course of conduct involved was
reasonable and in the best interest of the Partnership. Such indemnification or
agreement to hold harmless is recoverable only out of the assets of the
Partnership and not from the Limited Partners.
17.2.2 Notwithstanding anything to the contrary stated in Section
17.2.1, the Indemnitee and any person acting as a broker-dealer shall not be
indemnified for any losses, liabilities or expenses arising from or out of an
alleged violation of federal or state securities laws unless (a) there has been
a successful adjudication on the merits of each count involving alleged
securities laws violations as to the particular Indemnitee and the court
approved the indemnification of litigation costs, or (b) such claims have been
dismissed with prejudice on the merits by a court of competent jurisdiction as
to the particular Indemnitee and the court approved the indemnification of
litigation costs or (c) a court of competent jurisdiction approves a settlement
of the claims against a particular Indemnitee and finds that indemnification of
the settlement and related costs should be made. In any claim for
indemnification for federal or state securities law violations, the party
seeking indemnification shall place before the court the position of the
Securities and Exchange Commission, the Massachusetts Securities Division, the
Pennsylvania Securities Commission, the Texas State Securities Board,
and other applicable state securities commissions with respect to the issue of
indemnification for securities law violations.
17.2.3 The Partnership shall not incur the cost of that portion of
any insurance which insures the Indemnitee for any liability as to which the
Indemnitee is prohibited from being indemnified under this Section 17.2;
however, nothing contained in this Agreement shall preclude the Partnership from
purchasing and paying for such types of insurance, including extended coverage
liability and casualty and workers' compensation, as would be customary for any
person owning comparable assets and engaged in a similar business, or from
naming the Indemnitee as additional insured parties thereunder, provided that
such addition does not add to the premiums payable by the Partnership.
17.2.4 The provision of advances from Partnership funds to the
Indemnitee for legal expenses and other costs incurred as a result of any legal
action initiated against the General Partner by a Limited Partner of the
Partnership is prohibited. The provision of advances from Partnership funds to
the Indemnitee for legal expenses and other costs incurred as a result of a
legal action is permissible if the following three conditions are satisfied: (a)
the legal action relates to the performance of duties or services by the
Indemnitee on behalf of the Partnership; and (b) the legal action is initiated
by a third party who is not a Limited Partner of the Partnership; and (c) the
Indemnitee undertakes to repay the advanced funds to the Partnership with
interest at the rate of 10% per year in cases in which they would not be
entitled to indemnification under Section 17.2.1 and such undertaking is secured
by a full recourse note from the recipient of the advance.
37
<PAGE>
ARTICLE 18
Tax Exempt Limited Partners
18.1 Tax Exempt Limited Partners. If any individual retirement accounts,
pension, profit sharing or other tax-qualified retirement plans or other
entities exempt from federal income taxation under the Code (collectively, "Tax
Exempt Limited Partners") become Limited Partners of the Partnership, neither
the General Partner nor the Partnership shall have any liability or
responsibility to any Tax Exempt Limited Partner or any other Limited Partner
for any tax, penalty or other sanction or costs or damages arising as a result
of there being a prohibited transaction or as a result of Partnership assets
being deemed plan assets of a Tax Exempt Limited Partner under the Code or ERISA
or other applicable law.
ARTICLE 19
Miscellaneous
19.1 Notices. Any notice, payment, demand, offer or communication required
or permitted to be given by any provision of this Agreement shall be deemed to
have been delivered and given for all purposes (a) if delivered personally to
the party or to an officer of the party to whom it is directed or (b) whether or
not it is actually received, if sent by registered or certified or regular mail,
postage and charges prepaid, addressed as follows: if to the General Partner, at
its business address set forth in Section 2.3 or to such other address as the
General Partner may specify by written notice to the Limited Partners; and if to
a Limited Partner, at such Limited Partner's address set forth on his
Subscription Agreement or to such other address as such Limited Partner may
specify by written notice to the General Partner; and if to the Partnership, at
the address set forth in Section 2.3 or to such other address as the Partnership
may specify by written notice to the Partners. Any such notice shall be deemed
to be given as of the date so delivered personally, or as of the date on which
the same was deposited in a regular receptacle for the deposit of the United
States mail, addressed and sent as aforesaid.
19.2 Parties in Interest. Subject to Article 11, this Agreement shall bind
and benefit the successors and assigns of the respective parties hereto.
19.3 Section Captions. Section and other captions in this Agreement are
for reference purposes only and are not intended to describe, interpret, define
or limit the scope, extent or intent of this Agreement or any provision hereof.
19.4 Severability. Every provision of this Agreement is intended to be
severable. If any term or provision hereof is illegal or invalid for any reason,
such illegality or invalidity shall not affect the validity of the remainder of
this Agreement.
19.5 Right to Rely on General Partner. No person dealing with the General
Partner shall be required to determine its authority to make any commitment or
undertaking on behalf of the Partnership, or to determine any fact or
circumstance bearing upon the existence of its authority. In addition, no
purchaser of Partnership property shall be required to determine the sole and
exclusive authority of the General Partner to sign and deliver on behalf of the
Partnership any instrument of transfer, or to see to the application or
distribution of revenues or proceeds paid or credited in connection therewith,
unless such purchasers have received written notice from the Partnership
affecting the same.
38
<PAGE>
19.6 Pennsylvania Law. This Agreement is made under, and shall be
construed and enforced in accordance with, the laws of the Commonwealth of
Pennsylvania applicable to agreements made and to be performed solely therein,
without giving effect to principles of conflicts of laws.
19.7 Exclusive Jurisdiction. Any disputes arising out of or related to
this Agreement shall be subject to the exclusive jurisdiction of the Court of
Common Pleas of Pennsylvania in the County of Delaware or the Federal
District Court for the Eastern District of Pennsylvania.
19.8 Counterpart Execution. This Agreement may be executed in any
number of counterparts with the same effect as if all parties hereto had
signed the same document. All counterparts shall be construed together and
shall constitute one Agreement.
19.9 Gender. Whenever necessary or appropriate in order to construe this
Agreement, the masculine gender shall include the feminine or neuter and vice
versa, and the singular shall include the plural and the plural, the singular.
19.10 Integrated Agreement. This Agreement constitutes the entire
understanding and agreement among the parties hereto with respect to the subject
matter hereof, and there are no agreements, understandings, restrictions,
representations or warranties among the parties other than those set forth
herein.
IN WITNESS WHEREOF, the parties have executed, or have caused their duly
authorized officer to execute, this Agreement on the date first written above.
GENERAL PARTNER: COMMONWEALTH INCOME & GROWTH FUND, INC.
By:____________________________________
Name:____________________________
Title:___________________________
INITIAL LIMITED PARTNER: _______________________________________
DAVID A. KINTZER
39
<PAGE>
COMMONWEALTH CAPITAL CORP.
EXPERIENCE IN RAISING AND INVESTING FUNDS
as of December 31, 1996
(TABLE I)
<TABLE>
<CAPTION>
COMMONWEALTH COMMONWEALTH COMMONWEALTH
COMMONWEALTH EQUIPMENT COMMONWEALTH EQUIPMENT EQUIPMENT
INCOME & GROWTH INCOME PRIVATE INCOME & GROWTH INCOME PRIVATE INCOME PRIVATE
FUND I FUND--IV, L.P. FUND II FUND--V, L.P. FUND--VI, L.P.
--------------------- -------------- --------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Offering Information:
Amount offered (maximum).... 15,000,000 1,550,000 15,000,000 1,000,000 1,500,000
Dollar Amount Sold......... 12,623,682 1,550,000 8,049,400 1,000,000 1,500,000
(1) Dealer/ Manager Expenses... 1,133,377 77,500 723,535 50,000 75,000
(2) Offering/ Organizational
Expenses... 402,483 62,000 291,482 40,000 51,505
----------- -------------- ----------- ---------- ---------------
Net Proceeds Available...... 11,087,822 1,410,500 7,034,383 910,000 1,373,495
Total Equipment Purchases:
Equipment purchased
with cash................. 12,172,618 1,391,644 4,627,644 896,319 0
Equipment financed......... 8,023,145 766,867 0 266,818 0
Rent paid to original
lessor in leiu of cash.... 316,579 10,653 4,290 1,510 7,375
Obligation incurred in
connection to leased
equipment................. 1,088,597 125,392 0 73,086 264,561
----------- -------------- ----------- ---------- ---------------
21,600,939 2,294,556 4,631,934 1,237,733 271,936
% of Equipment
financed as of
December 31, 1996......... 20.6% 24.3% 0.0% 14.9% 0.0%
Initial Acquisition
Fees (%)(3)................ 3.4% 2.2% 3.4% 2.2% 2.2%
Date Offering Commenced..... 12/17/93 06/23/95 05/12/95 09/28/95 09/30/96
Date Offering Completed..... 05/11/95 06/23/95 N/A 09/28/95 09/30/96
Average Initial Term of
Leases (in months)........ 32 35 35 33 24
Months from closing to
invest 90%................ 5 4 N/A 3 N/A
</TABLE>
- ------------------------
(1) Dealer/Manager expenses include commissions to brokers, due diligence and
out-of-pocket expenses.
(2) Offering/Organizational expenses consist of legal fees, blue sky filings,
accounting fees, printing charges for perspective books and the guarantee
fee.
(3) Fees were paid to the General Partner/Management Trustee at fund closing.
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH CAPITAL CORP.
COMPENSATION TO GENERAL PARTNERS AND AFFILITATES
as of December 31, 1996
(TABLE II)
<TABLE>
<CAPTION>
COMMONWEALTH COMMONWEALTH COMMONWEALTH
COMMONWEALTH EQUIPMENT COMMONWEALTH EQUIPMENT EQUIPMENT
INCOME & GROWTH INCOME PRIVATE INCOME & GROWTH INCOME PRIVATE INCOME PRIVATE
FUND I FUND--IV, L.P. FUND II FUND--V, L.P. FUND--VI, L.P.
--------------------- -------------- --------------------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
Date offering commenced........ 3/14/94 06/23/95 09/22/95 09/29/95 09/30/96
Dollar amount raised........... 12,624,153 $ 1,550,000 8,049,400 $ 1,000,000 $ 1,500,000
Amount paid from the proceeds
of offering, reinvestment
and/or debt:
Initial Acquisition Fee.... 426,473 34,100 270,553 22,000 33,000
Organizational Fee......... 140,869 9,590 241,482 7,600 7,701
Cash generated from operations
before deducting payments to
the General Partner and
Affiliates................... 5,705,197 472,307 1,066,761 309,939 (1,195)
Amount paid to the General
Partner and Affiliates from
operations:
Equipment Management Fee... 558,000 35,191 60,927 18,982 221
Acquisition Fee............ 416,527 29,782 0 9,509 0
Finance Fee................ 83,000 7,669 0 2,668 0
Dollar amount of equipment
sales and refinancing before
deducting payments to the
General Partner and
Affiliates................... 766,667 26,667 0 0 0
Amount paid to the General
Partner and Affiliates from
equipment sales and
refinancing.................. 23,000 800 0 0 0
</TABLE>
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND--II, L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
PROGRAM INCEPTION TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
PROGRAM INCEPTION TO DECEMBER 31, 1996 1992 1993 1994 1995 1996
- -------------------------------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Computation of Net Income
Months of Operations.......................................... **6 12 12 12 12
Gross Revenues................................................ 139,299 528,396 763,330 543,795 444,107
Less: Operating Expenses...................................... 2,664 12,233 18,758 66,172 12,187
Equipment Management Fee.................................. 6,707 26,338 38,022 27,126 22,170
Interest Expense.......................................... 11,112 31,650 33,373 12,897
Loss on Sale of Computer Equipment........................ 148 54,140 25,713 112,387
Depreciation and Amortization............................. 91,620 328,145 765,705 547,525 496,067
---------- ---------- ---------- ---------- ----------
Net Income (Loss)--GAAP Basis................................. 38,308 150,420 (144,945) (156,114) (211,601)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Federal Taxable Income........................................ 71,965 56,951 1,433 (286,429) (31,634)
Cash Distributions--GAAP Basis................................ (68,534) (131,313) (131,313) (131,313) (131,313)
Computation of Cash Flows
Net Income (Loss)............................................. 38,308 150,420 (144,945) (156,114) (211,601)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation and Amortization............................... 91,620 328,145 765,705 547,525 496,067
Loss on Sale of Computer Equipment.......................... 148 54,140 25,713 112,387
Other Non-Cash Activities Included in the Determination of
Net Income (Loss) *....................................... (18,403) (200,833) (371,925) (338,310) (290,814)
Net Change in Operating Assets and Liabilities.............. (22,618) 55,624 (16,891) 35,966 18,670
---------- ---------- ---------- ---------- ----------
Net Cash Provided by Operating Activities..................... 88,907 333,504 286,084 114,780 124,709
Capital Expenditures.......................................... (851,213) (299,704) (179,555) (62,898)
Net Proceeds from Sale of Computer Equipment.................. 68,400 49,325 87,352 9,845
Increase in Organization Costs amd Deferred Expenses.......... (26,178) (52,374) (25,922) (2,515)
---------- ---------- ---------- ---------- ----------
Net Cash (Used in) Provided by Investing Activities........... (877,391) (283,678) (156,152) 21,939 9,845
Partners' Contributions....................................... 1,001,000
Offering Costs................................................ (60,400)
Distributions to Partners..................................... (68,534) (131,313) (131,313) (131,313) (131,313)
---------- ---------- ---------- ---------- ----------
Net Cash Provided by (Used in) Financing Activities........... 872,066 (131,313) (131,313) (131,313) (131,313)
Net Increase (Decrease) in Cash............................... 83,582 (81,487) (1,381) 5,406 3,241
Cash at Beginning of Year..................................... 83,582 2,095 714 6,120
---------- ---------- ---------- ---------- ----------
Cash at End of Year........................................... 83,582 2,095 714 6,120 9,361
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Investment Data Per $1,000 Investment
Net Income (Loss)--GAAP Basis................................. 38 150 (145) (156) (212)
Federal Taxable Income to Investors........................... 71 56 0.35 (289) (32)
Cash Distributions to Investors--GAAP Basis................... (68) (130) (130) (130) (130)
Return of Capital to Investors--GAAP Basis.................... 30 130 130 130
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented
was caused primarily by the acquisition of more financed equipment.
** Partnership commenced operations on 6/23/92
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME TRUST VIII
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
<TABLE>
<CAPTION>
PROGRAM INCEPTION TO DECEMBER 31, 1996 1992 1993 1994 1995 1996
- ------------------------------------------------------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Computation of Net Income
Months of Operations................................... **3 12 12 12 12
Gross Revenues......................................... 119,454 1,246,627 1,694,076 1,601,494 1,620,033
Less: Operating Expenses............................... 2,375 19,322 99,634 28,206 28,363
Equipment Management Fee............................ 5,200 61,525 84,344 79,606 77,052
Interest............................................ 33,210 67,189 85,160 94,699
Loss on Sale of Equipment........................... 16,892 96,528 62,222 --
Depreciation and Amortization....................... 61,815 756,143 1,563,577 1,527,015 1,631,876
----------- ----------- ---------- ---------- ----------
Net Income (Loss) -GAAP Basis.......................... 50,064 359,535 (217,196) (180,715) (211,957)
----------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ----------
Federal Taxable Income (Loss).......................... 49,316 18,450 (137,962) (2,429) 123,442
Cash Distributions--GAAP Basis......................... (112,515) (393,939) (393,939) (393,939) (393,939)
Computation of Cash Flows
Net Income (Loss)...................................... 50,064 359,535 (217,196) (180,715) (211,957)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation and Amortization....................... 61,815 756,143 1,563,577 1,527,015 1,631,876
Loss on Sale of Equipment........................... 16,892 96,528 62,222 (72,391)
Other Non-Cash Activities Included in the Determination
of Net Income (Loss) *............................ (64,081) (501,571) (871,264) (823,423) (991,839)
Net Change in Operating Assets and Liabilities...... 10,355 240 143,083 (86,946) (98,933)
----------- ----------- ---------- ---------- ----------
Net Cash Provided by Operating Activities.............. 58,153 631,239 714,728 498,153 256,756
Capital Expenditures................................... (982,795) (1,546,729) (313,675) (117,000) (215,636)
Increase in Organization Costs and Deferred Expenses... (95,799) (135,769) (64,940) (33,589) (53,084)
Net Proceeds From Sale of Computer Equipment........... 114,262 41,666 230,734 243,306
Payment of Computer Equipment Payable.................. (22,223)
----------- ----------- ---------- ---------- ----------
Net Cash (Used in) Provided by Investing Activities.... (1,078,594) (1,568,236) (336,949) 80,145 (47,637)
Trust Beneficiaries and Managing Trustee
Contributions........................................ 3,001,000
Offering Costs......................................... (345,150)
Payment of Computer Equipment Payable.................. (159,357)
Distributions to Trust Beneficiaries and Managing
Trustee.............................................. (112,515) (393,939) (393,939) (393,939) (393,939)
----------- ----------- ---------- ---------- ----------
Net Cash Provided by (Used in) Financing Activities.... 2,543,335 (393,939) (553,296) (393,939) (393,939)
Net Increase (Decrease) in Cash........................ 1,522,894 (1,330,936) (175,517) 184,359 (184,820)
Cash at Beginning of Year.............................. 1,522,894 191,958 16,441 200,800
----------- ----------- ---------- ---------- ----------
Cash at End of Year.................................... 1,522,894 191,958 16,441 200,800 15,980
----------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ----------
Investment Data Per $1,000 Investment
Net Income (Loss)--GAAP Basis.......................... 17 120 (72) (60) (71)
Federal Taxable Income (Loss) to Investors............. 16 6 (47) (0.92) 41.86
Cash Distributions to Investors--GAAP Basis............ (37) (130) (130) (130) (130)
Return of Capital to Investors--GAAP Basis............. 21 11 130 130 130
</TABLE>
- ------------------------
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented
was caused primarily by the acquisition of more financed equipment.
** Partnership commenced operations on 9/18/92
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME TRUST IX
OPERATING RESULTS OF PRIOR PROGRAMS
(TABLE III)
Program Inception to December 31, 1996
<TABLE>
<CAPTION>
COMPUTATION OF NET INCOME 1993 1994 1995 1996
- ------------------------------------------------------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Months of Operations........................................ ** 12 12 12 12
Gross Revenues.............................................. 1,046,655 1,598,529 1,701,131 1,209,610
Less: Operating Expenses 6,295 41,237 30,992 25,492
Equipment Management Fee................................ 50,681 79,067 84,862 59,873
Interest................................................ 34,897 68,876 100,272 73,547
Loss on Sale of Computer Equipment...................... 113,283 35,784 --
Depreciation and Amortization........................... 654,388 1,549,475 1,596,729 1,294,695
----------- ---------- ----------- -----------
Net Income (Loss) -GAAP Basis............................... 300,394 (253,409) (147,508) (243,997)
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Federal Taxable Income (Loss)............................... 28,736 (339,227) 152,888 (115,201)
Cash Distributions--GAAP Basis.............................. (385,305) (393,938) (393,938) (393,938)
Computation of Cash Flows
Net Income (Loss)........................................... 300,394 (253,409) (147,508) (243,997)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation and Amortization............................. 654,388 1,549,475 1,596,729 1,294,695
(Gain)/Loss on Sale of Computer Equipment................. 113,283 35,784 (1,964)
Other Non-Cash Activities Included in the Determination of
Net Income (Loss) *..................................... (737,271) (739,868) (1,036,766) (772,069)
Net Change in Operating Assets and Liabilities............ 105,157 (63,826) (19,953) 47,968
----------- ---------- ----------- -----------
Net Cash Provided by Operating Activities................... 322,668 605,655 428,286 324,633
Capital Expenditures........................................ (2,381,335) (207,196) (66,250) (314,020)
Net Poceeds from Sale of Computer Equipment................. 112,551 208,191 278,108
Payment of Computer Equipment Payable....................... (55,588)
Increase in Organization Costs and Deferred Expenses........ (211,939) (64,138) (14,943) (52,207)
----------- ---------- ----------- -----------
Net Cash (Used in) Provided by Investing Activities......... (2,593,274) (214,371) 126,998 (88,119)
Trust Beneficiaries & Managing Trustee Contributions........ 3,001,000
Offering Costs.............................................. (341,268)
Distributions to Trust Beneficiaries and Managing Trustee... (385,305) (393,938) (393,938) (393,938)
----------- ---------- ----------- -----------
Net Cash Provided by (Used in) Financing Activities......... 2,274,427 (393,938) (393,938) (393,938)
Net Increase (Decrease) in Cash............................. 3,821 (2,654) 161,346 (157,424)
Cash at Beginning of Year................................... -- 3,821 1,167 162,513
----------- ---------- ----------- -----------
Cash at End of Year......................................... 3,821 1,167 162,513 5,089
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Investment Data Per $1,000 Investment
Net Income (Loss)--GAAP Basis............................... 100 (84) (49) (81)
Federal Taxable Income (Loss) to Investors.................. 9 (115) 52 (39)
Cash Distributions to Investors--GAAP Basis................. (127) (130) (130) (130)
Return of Capital to Investors--GAAP Basis.................. 28 130 130 130
</TABLE>
- ------------------------
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented
was caused primarily by the acquisition of more financed equipment.
** Partnership commenced operations on 1/6/93
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME TRUST X
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
Program Inception to December 31, 1996
<TABLE>
<CAPTION>
1993 1994 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Computation of Net Income
Months of Operations....................................... ** 6 12 12 12
Gross Revenues............................................. 469,154 1,942,165 2,356,253 2,042,037
Less: Operating Expenses 3,493 45,372 27,209 33,003
Equipment Management Fee............................... 22,715 96,088 117,200 101,678
Interest............................................... 19,922 111,203 103,563 121,373
Loss on Sale of Equipment.............................. 247,173 275,138
Depreciation and Amortization.......................... 290,701 1,738,026 2,093,524 2,168,922
----------- ----------- ----------- -----------
Net Income (Loss)-GAAP Basis............................... 132,323 (48,524) (232,416) (658,077)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Federal Taxable Income (Loss).............................. 84,363 250,199 (424,225) (562,989)
Cash Distributions--GAAP Basis............................. (189,845) (484,848) (484,848) (484,848)
Computation of Cash Flows
Net Income (Loss).......................................... 132,323 (48,524) (232,416) (658,077)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation and Amortization............................ 290,701 1,738,026 2,093,524 2,168,922
Loss on Sale of Computer Equipment....................... 247,173 275,138
Other Non-Cash Activities Included in the Determination
of Net Income (Loss) *................................. (275,249) (921,663) (1,230,866) (1,329,258)
Net Change in Operating Assets and Liabilities........... (1,074) 182,745 (73,394) (80,879)
----------- ----------- ----------- -----------
Net Cash Provided by Operating Activities.................. 146,701 950,584 804,021 375,846
Capital Expenditures....................................... (2,363,652) (1,291,685) (256,843) (133,637)
Net Proceeds from Sale of Equipment........................ 236,246 245,756
Increase in Organization Costs and Deferred Expenses....... (233,521) (105,713) (71,197) (35,876)
----------- ----------- ----------- -----------
Net Cash Used in Investing Activities...................... (2,597,173) (1,397,398) (91,794) 76,243
Trust Beneficiaries & Managing Trustee Contributions....... 4,001,000
Offering Costs............................................. (427,991)
Distributions to Trust Beneficiaries and Managing
Trustee.................................................. (189,845) (484,848) (484,848) (484,848)
----------- ----------- ----------- -----------
Net Cash Provided by (Used in) Financing Activities........ 3,383,164 (484,848) (484,848) (484,848)
Net Increase (Decrease) in Cash............................ 932,692 (931,662) 227,379 (32,759)
Cash at Beginning of Year.................................. -- 932,692 1,030 228,409
----------- ----------- ----------- -----------
Cash at End of Year........................................ 932,692 1,030 228,409 195,650
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Investment Data Per $1,000 Investment
Net Income (Loss)--GAAP Basis.............................. 33 (12) (58) (165)
Federal Taxable Income to Investors........................ 21 62 (108) (142)
Cash Distributions to Investors--GAAP Basis................ (47) (120) (120) (120)
Return of Capital to Investors--GAAP Basis................. 14 120 120 120
</TABLE>
- ------------------------
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented
was caused primarily by the acquisition of more financed equipment.
** Partnership commenced operations on 7/7/93
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND--III, L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
Program Inception to December 31, 1996
<TABLE>
<CAPTION>
1993 1994 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Computation of Net Income
Months of Operations....................................... ** 1 12 12 12
Gross Revenues............................................. 12,102 497,829 692,749 732,199
Less: Operating Expenses................................... 128 18,904 8,570 8,958
Equipment Management Fee............................... 550 24,301 34,258 36,429
Interest............................................... 21,105 48,772 24,721
Loss on Sale of Equipment.............................. 344,143
Depreciation and Amortization.......................... 6,548 381,105 552,463 694,502
--------------------------------------------------
Net Income -GAAP Basis..................................... 4,876 52,414 48,686 (376,554)
--------------------------------------------------
--------------------------------------------------
Federal Taxable Income/(Loss).............................. 8,149 61,991 20,091 (277,992)
Cash Distributions--GAAP Basis............................. (2,989) (121,212) (121,212) (121,212)
Computation of Cash Flows
Net Income................................................. 4,876 52,414 48,686 (376,554)
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Depreciation and Amortization.............................. 6,548 381,105 552,463 694,502
Loss on Sale of Equipment.................................. 344,143
Other Non-Cash Activities Included in the Determination of
Net Income *............................................. (10,990) (183,329) (405,265) (421,022)
Net Change in Operating Assets and Liabilities............. (4,941) 38,191 22,582 (63,498)
--------------------------------------------------
Net Cash (Used in) Provided by Operating Activities........ (4,507) 288,381 218,466 177,571
Capital Expenditures....................................... (370,110) (611,167) (55,001) (131,917)
Net Proceeds from Sale of Equipment........................ 46,586
Increase in Organization Costs and Deferred Expenses....... (24,600) (40,332) (9,442) (27,064)
--------------------------------------------------
Net Cash Used in Investing Activities...................... (394,710) (651,499) (64,443) (112,395)
Partners' Contributions.................................... 1,001,000
Offering Costs............................................. (60,400)
Distributions to Partners.................................. (2,989) (121,212) (121,212) (121,212)
--------------------------------------------------
Net Cash Provided by (Used in) Financing Activities........ 937,611 (121,212) (121,212) (121,212)
Net Increase (Decrease) in Cash............................ 538,394 (484,330) 32,811 (56,036)
Cash at Beginning of Year.................................. -- 538,394 54,064 86,875
--------------------------------------------------
Cash at End of Year........................................ 538,394 54,064 86,875 30,839
--------------------------------------------------
--------------------------------------------------
Investment Data Per $1,000 Investment
Net Income--GAAP Basis..................................... 5 52 49 (377)
Federal Taxable Income to Investors........................ 8 61 20 (279)
Cash Distributions to Investors--GAAP Basis................ (3) (120) (120) (120)
Return of Capital to Investors--GAAP Basis................. 2 68 72 72
</TABLE>
- ------------------------
*The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented
was caused primarily by the acquisition of more financed equipment.
** Partnership commenced operations on 12/23/93
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND I
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
Program Inception to December 31, 1996
<TABLE>
<CAPTION>
1994 1995 1996
-----------------------------------------------------
<S> <C> <C> <C>
Computation of Net Income
Months of Operations.................................................. **10 12 12
Gross Revenues........................................................ 1,223,900 4,317,522 5,955,142
Less: Operating Expenses.............................................. 71,556 93,265 80,883
Equipment Management Fee........................................ 56,473 207,230 295,420
Interest........................................................ 48,184 212,365 311,247
Loss on Sale of Equipment....................................... 691,808
Depreciation and Amortization................................... 952,640 3,849,897 5,895,531
---------------------------------------------------
Net Income (Loss)--GAAP Basis......................................... 95,047 (45,235) (1,319,747)
---------------------------------------------------
---------------------------------------------------
Federal Taxable Income/(Loss)......................................... 363,865 326,931 (1,726,506)
Cash Distributions--GAAP Basis........................................ (443,614) (1,195,585) (1,275,467)
Computation of Cash Flows
Net Income (Loss)..................................................... 95,047 (45,235) (1,319,747)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation and Amortization................................... 952,640 3,849,897 5,895,531
Loss on Sale of Equipment....................................... 691,808
Other Non-Cash Activities Included
in the Determination of Net Income (Loss)*..................... (633,035) (1,514,550) (2,689,616)
Net Change in Operating Assets and Liabilities.................. (204,290) 121,072 (52,325)
---------------------------------------------------
Net Cash Provided by Operating Activities............................. 210,362 2,411,184 2,525,651
Capital Expenditures.................................................. (4,783,921) (6,353,404) (1,035,293)
Accounts Payable-- Commonwealth Capital Corp.......................... (22,222)
Net Proceeds from Sale of Equipment................................... 748,241
Payment of Equipment Payable.......................................... (9,624)
Equipment Acquisition Fees Paid to the General Partner................ (282,368) (403,549) (156,616)
---------------------------------------------------
Net Cash Used in Investing Activities................................. (5,066,289) (6,756,953) (475,514)
Partners' Contributions............................................... 8,271,511 4,352,171 --
Offering Costs........................................................ (932,803) (459,421) --
Debt Placement Fees................................................... (20,305) (29,920) (33,713)
Distributions to Partners............................................. (443,614) (1,195,585) (1,275,467)
---------------------------------------------------
Net Cash Provided by Financing Activities............................. 6,874,789 2,667,245 (1,309,180)
Net Increase in Cash.................................................. 2,018,862 (1,678,524) 740,957
Cash at Beginning of Year............................................. 1,500 2,020,362 341,838
---------------------------------------------------
Cash at End of Year................................................... 2,020,362 341,838 1,082,795
---------------------------------------------------
---------------------------------------------------
Investment Data Per $1,000 Investment
Net Income (Loss)--GAAP Basis......................................... 11 (4) (105)
Federal Taxable Income to Investors................................... 42 27 (138)
Cash Distributions to Investors--GAAP Basis........................... (53) (94) (100)
Return of Capital to Investors--GAAP Basis............................ 42 94 94
</TABLE>
- ------------------------
*The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented
was caused primarily by the acquisition of more financed equipment.
**Partnership commenced operations on 3/14/94
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND--IV, L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
Program Inception to December 31, 1996
<TABLE>
<CAPTION>
1995 1996
-------------------------------------------------
<S> <C> <C>
Computation of Net Income
Months of Operations....................................... ** 6 12
Gross Revenues............................................. 168,862 566,819
Less: Operating Expenses................................... 10,818 12,115
Equipment Management Fee............................. 7,432 27,759
Interest............................................. 3,850 29,704
Depreciation and Amortization........................ 145,570 518,281
--------------------------------------------------
Net Income -GAAP Basis..................................... 1,192 (21,040)
--------------------------------------------------
--------------------------------------------------
Federal Taxable Income..................................... 30,850 86,491
Cash Distributions--GAAP Basis............................. (98,829) (187,879)
Computation of Cash Flows
Net Income................................................. 1,192 (21,040)
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization........................ 145,570 518,281
Gain on Sale of Equipment............................ (5,301)
Other Non-Cash Activities Included in the
Determination of Net Income *....................... (41,201) (186,248)
Net Change in Operating Assets and
Liabilities......................................... (141,072) 166,935
--------------------------------------------------
Net Cash Used in Operating Activities...................... (35,511) 472,627
Capital Expenditures....................................... (1,243,766) (147,878)
Net Proceeds from Sale of Equipment........................ 25,322
Increase in Organization Costs and Deferred
Expenses.................................................. (41,841) (34,289)
Payment of Equipment Payable............................... (125,392)
--------------------------------------------------
Net Cash Used in Investing Activities...................... (1,285,607) (282,237)
Partners' Contributions.................................... 1,551,000 --
Offering Costs............................................. (95,820) --
Distributions to Partners.................................. (98,829) (187,879)
--------------------------------------------------
Net Cash Provided by (Used in) Financing
Activities................................................ 1,356,351 (187,879)
Net Increase (Decrease) in Cash............................ 35,233 2,511
Cash at Beginning of Year.................................. -- 35,233
--------------------------------------------------
Cash at End of Year........................................ 35,233 37,744
--------------------------------------------------
--------------------------------------------------
Investment Data Per $1,000 Investment
Net Income--GAAP Basis..................................... 0.77 (13.57)
Federal Taxable Income to Investors........................ 20 60
Cash Distributions to Investors--GAAP
Basis..................................................... (63) (120)
Return of Capital to Investors--GAAP Basis................. 62 120
</TABLE>
- ------------------------
*The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented
was caused primarily by the acquisition of more financed equipment.
**Partnership commenced operations on 6/23/95
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND II
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
Program Inception to December 31, 1996
<TABLE>
<CAPTION>
1995 1996
------------- ------------
<S> <C> <C>
Computation of Net Income
Months of Operations........................ **3 12
Gross Revenues.............................. 123,878 1,194,114
Less: Operating Expenses.................... 23,059 56,707
Equipment Management Fee.............. 4,927 56,184
Depreciation and Amortization......... 107,957 1,081,953
--------- ----------
Net Loss -GAAP Basis........................ (12,065) (730)
--------- ----------
--------- ----------
Federal Taxable Income...................... 25,505 257,899
Cash Distributions--GAAP Basis.............. (84,642) (608,045)
Computation of Cash Flows
Net Loss.................................... (12,065) (730)
Adjustments to Reconcile Net Loss to Net
Cash Provided by Operating Activities:
Depreciation and Amortization......... 107,957 1,081,953
Other Non-Cash Activities Included in
the Determination of Net Loss*...... (4,290)
Net Change in Operating Assets and
Liabilities............................... (39,441) (127,550)
--------- ----------
Net Cash Provided by Operating Activities... 56,451 949,383
Capital Expenditures........................ (2,850,156) (1,777,488)
Equipment Acquisition Fees Paid to the
General Partner........................... (123,105) (147,448)
--------- ----------
Net Cash Used in Investing Activities....... (2,973,261) (1,924,936)
Partners' Contributions..................... 3,678,960 4,371,440
Offering Costs.............................. (425,732) (487,266)
Distributions to Partners................... (84,642) (608,045)
--------- ----------
Net Cash Provided by Financing Activities... 3,168,586 3,276,129
Net Increase in Cash........................ 251,776 2,300,576
Cash at Beginning of Year................... -- 251,776
--------- ----------
Cash at End of Year......................... 251,776 2,552,352
--------- ----------
--------- ----------
Investment Data Per $1,000 Investment
Net Loss--GAAP Basis........................ (3) (0)
Federal Taxable Income to Investors......... 7 74
Cash Distributions to Investors--GAAP
Basis..................................... (23) (164)
Return of Capital to Investors--GAAP
Basis..................................... 23 23
</TABLE>
- ------------------------
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment in financed. The increase over the periods presented
was caused primarily by the acquisition of more financed equipment.
<PAGE>
** Partnership commenced operations on 9/22/95
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND--V, L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III) Program Inception to December 31, 1996
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C>
Computation of Net Income
Months of Operations......................... ** 3 12
Gross Revenues............................... 42,461 357,457
Less: Operating Expenses..................... 7,040 12,843
Equipment Management Fee..................... 1,697 17,285
Interest Expense............................. 10,160
Depreciation and Amortization................ 32,267 285,983
-------- ---------
Net Income -GAAP Basis............................. 1,457 31,186
-------- ---------
-------- ---------
Federal Taxable Income....................... 13,806 139,400
Cash Distributions--GAAP Basis............... (31,548) (121,212)
Computation of Cash Flows
Net Income................................... 1,457 31,186
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization................ 32,267 285,983
Other Non-Cash Activities Included in the
Determination of Net Income *.............. (1,510) (82,739)
Net Change in Operating Assets and
Liabilities................................ (3,419) 27,732
-------- ---------
Net Cash Used in Operating Activities.............. 28,795 262,162
Capital Expenditures......................... (556,175) (340,144)
Payment of Equipment Payable................. (73,086)
Increase in Organization Costs and Deferred
Expenses................................... (24,600) (12,177)
-------- ---------
Net Cash Used in Investing Activities........ (580,775) (425,407)
Partners' Contributions...................... 1,001,000 --
Offering Costs............................... (60,400) --
Distributions to Partners.................... (31,548) (121,212)
-------- ---------
Net Cash Provided by Financing Activities.... 909,052 (121,212)
Net Increase (Decrease) in Cash.............. 357,072 (284,457)
Cash at Beginning of Year.................... -- 357,072
-------- ---------
Cash at End of Year.......................... 357,072 72,615
-------- ---------
-------- ---------
Investment Data Per $1,000 Investment
Net Income--GAAP Basis....................... 1 31
Federal Taxable Income to Investors.......... 11 145
Cash Distributions to Investors--GAAP
Basis...................................... (31) (120)
Return of Capital to Investors--GAAP Basis... 30 30
</TABLE>
- ------------------------
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The
increase over the periods presented was caused primarily by the acquisition
of more financed equipment.
** Partnership commenced operations on 9/28/95
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND--VI L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
Program Inception to December 31, 1996
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Computation of Net Income
Months of Operations...................... ** 3
Gross Revenues............................ 16,391
Less: Operating Expenses 6,507
Equipment Management Fee.................. 221
Depreciation and Amortization............. 8,550
---------
Net Income -GAAP Basis.................... 1,113
---------
---------
Federal Taxable Loss...................... (5,969)
Cash Distributions--GAAP Basis............ (45,455)
Computation of Cash Flows
Net Income................................ 1,113
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization............. 8,550
Other Non-Cash Activities Included in the (7,375)
Determination of Net Income *...........
---------
Net Change in Operating Assets and
Liabilities............................. (3,704)
Net Cash Used in Operating Activities..... (1,416)
Increase in Organization Costs and
Deferred Expenses....................... (35,701)
---------
Net Cash Used in Investing Activities..... (35,701)
Partners' Contributions................... 1,501,000
Offering Costs............................ (85,804)
Distributions to Partners................. (45,455)
---------
Net Cash Provided by Financing
Activities.............................. 1,369,741
Net Increase (Decrease) in Cash........... 1,332,624
Cash at Beginning of Year................. --
---------
Cash at End of Year....................... 1,332,624
---------
---------
Investment Data Per $1,000 Investment
Net Income--GAAP Basis.................... 1
Federal Taxable Income to Investors....... 7
Cash Distributions to Investors-- GAAP
Basis................................... (45)
Return of Capital to Investors-- GAAP
Basis................................... 30
</TABLE>
- ------------------------
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented
was caused primarily by the acquisition of more financed equipment.
** Partnership commenced operations on 9/30/96
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND-II, LIMITED PARTNERSHIP
EQUIPMENT SALES
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1996
(TABLE V)
<TABLE>
<CAPTION>
YEAR YEAR
EQUIPMENT OF OF
MANUFACTURER EQUIPMENT TYPE DESCRIPTION ACQUISITION DISPOSAL
- -------------------------------------------------- ------------------------- ------------------------- ----------- --------
<S> <C> <C> <C> <C>
(9) 7012-340, (1)
IBM............................................... 7013-53H Workstation 1992 1994
IBM............................................... (7) 7012-350 Workstation 1992 1995
IBM............................................... (1) 3745-410 Communications controller 1993 1995
EMC............................................... (1) 4480-M20, (1) 4416 Control unit/Disk array 1993 1995
(1) 7690-001, (1)
HDS............................................... 7693-032 Disk storage 1993 1996
<CAPTION>
ORIGINAL NET FEDERAL
ACQUISITION NET BOOK PROCEEDS GAAP TAXABLE
MANUFACTURER COST VALUE RECEIVED NET GAIN/(LOSS) NET GAIN/(LOSS)
- -------------------------------------------------- ----------- -------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
IBM............................................... 215,925 103,464 49,324 (54,140) (92,610)
IBM............................................... 291,395 39,230 31,892 (7,338) (100,908)
IBM............................................... 139,829 76,142 45,000 (31,142) (12,192)
EMC............................................... 227,272 0 12,767 12,767 (77,996)
HDS............................................... 721,119 132,537 10,150 (112,387) (162,946)
</TABLE>
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME TRUST VIII
EQUIPMENT SALES
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1996
(TABLE V)
<TABLE>
<CAPTION>
YEAR YEAR
EQUIPMENT OF OF
MANUFACTURER EQUIPMENT TYPE DESCRIPTION ACQUISITION DISPOSAL
- -------------------------------------------------- -------------------------- ------------------------- ----------- --------
<S> <C> <C> <C> <C>
IBM............................................... (13) 7235-002 Workstation 1992 1994
IBM............................................... (5) 7012-340 Workstation 1992 1994
IBM............................................... (7) 7012-350 Workstation 1992 1995
Arrow............................................. (5) ST424OON Disk drive 1993 1995
IBM............................................... (1) 7208-011 Tape drive 1993 1995
IBM............................................... (1) 7013-580 Workstation 1993 1995
IBM............................................... (1) 7012-350 Workstation 1992 1995
IBM............................................... (1) 7013-580 Workstation 1993 1995
IBM............................................... (4) 7235-002 Workstation 1992 1995
IBM............................................... (1) 7013-2980 Feature 1993 1995
Sears............................................. HP laser Printer 1993 1995
IBM............................................... (3) 7013-580, (1) 7012-350 Workstation 1993 1995
Wallace........................................... (2) Lasermax Unwinder/folder 1993 1996
EMC............................................... (1/2) 4832-002 Disk array 1993 1996
IBM............................................... (1) 3745-210, (1) 3746-A11 Communications controller 1992 1996
Roll Systems...................................... Roll system Roll-to-fold 1993 1996
IBM............................................... 1993 1996
<CAPTION>
ORIGINAL NET FEDERAL
ACQUISITION NET BOOK PROCEEDS GAAP TAXABLE
MANUFACTURER COST VALUE RECEIVED NET GAIN/(LOSS) NET GAIN/(LOSS)
- -------------------------------------------------- ----------- -------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
IBM............................................... 112,896 51,744 3,492 (48,252) (64,020)
IBM............................................... 172,900 86,450 38,174 (48,276) (66,719)
IBM............................................... 249,800 58,266 34,000 (24,266) (66,607)
Arrow............................................. 11,200 5,696 3,212 (2,484) (1,340)
IBM............................................... 6,016 2,552 1,500 (1,052) (619)
IBM............................................... 67,234 43,788 12,200 (31,588) (14,073)
IBM............................................... 34,054 15,078 5,975 (9,103) (13,684)
IBM............................................... 213,737 61,884 48,957 (12,927) (34,869)
IBM............................................... 50,176 18,586 27,187 8,601 (1,025)
IBM............................................... 1,083 587 750 163 246
Sears............................................. 1,820 897 820 (77) 94
IBM............................................... 199,872 92,877 103,388 10,511 31,263
Wallace........................................... 167,250 45,312 50,000 4,688 (10,961)
EMC............................................... 262,199 4,725 15,000 10,275 (75,832)
IBM............................................... 217,900 16,349 52,000 35,651 (11,585)
Roll Systems...................................... 495,000 31,841 56,000 24,159 (73,222)
IBM............................................... 320,282 63,703 80,200 16,497 (35,247)
</TABLE>
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME TRUST IX
EQUIPMENT SALES
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1996
(TABLE V)
<TABLE>
<CAPTION>
YEAR YEAR
EQUIPMENT OF OF
MANUFACTURER EQUIPMENT TYPE DESCRIPTION ACQUISITION DISPOSAL
- -------------------------------------------------- -------------------------- ------------------------- ----------- --------
<S> <C> <C> <C> <C>
IBM............................................... (1) 7013-530 Workstation 1993 1994
IBM............................................... (2) 7013-550 Workstation 1993 1994
EMC............................................... (1/2) 4832-002 Workstation 1993 1994
IBM............................................... (1) 7013-530 Workstation 1993 1995
IBM............................................... (1) 7013-550 Workstation 1993 1995
IBM............................................... (1) 7013-530 Workstation 1993 1995
IBM............................................... (1) 7012-355 Workstation 1993 1995
Roll Systems...................................... Roll system Roll-to-fold 1993 1995
IBM............................................... (1) 3745-310, (1) 3746-A11 Communications controller 1993 1996
IBM............................................... (1) 7013-550 Workstation 1993 1996
IBM............................................... (1) 7013-560 Workstation 1993 1996
EMC............................................... (1) 4832-002 Disk array 1993 1996
Disk array/Stg.
(1) 7690-001, (1) 7693-016 controller
HDS............................................... (1) 7693-032 Disk storage 1993 1996
<CAPTION>
ORIGINAL NET FEDERAL
ACQUISITION NET BOOK PROCEEDS GAAP TAXABLE
MANUFACTURER COST VALUE RECEIVED NET GAIN/(LOSS) NET GAIN/(LOSS)
- -------------------------------------------------- ----------- -------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
IBM............................................... 39,318 24,832 11,400 (13,432) (14,770)
IBM............................................... 88,941 24,535 12,350 (12,185) (46,849)
EMC............................................... 310,578 176,465 88,800 (87,665) (117,921)
IBM............................................... 30,133 4,252 3,200 (1,052) (8,930)
IBM............................................... 63,281 11,095 10,800 (295) (14,796)
IBM............................................... 51,876 6,548 5,200 (1,348) (15,778)
IBM............................................... 51,951 22,198 18,400 (3,798) (2,899)
Roll Systems...................................... 459,690 206,428 177,137 (29,291) (11,759)
IBM............................................... 597,806 156,514 252,000 95,486 97,950
IBM............................................... 70,863 253 8,440 8,187 (16,369)
IBM............................................... 121,910 14,467 9,705 (4,762) (32,832)
EMC............................................... 524,398 255 8,500 8,245 (173,474)
HDS............................................... 819,900 119,443 14,250 (105,193) (270,297)
</TABLE>
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME TRUST X
EQUIPMENT SALES
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1996
(TABLE V)
<TABLE>
<CAPTION>
YEAR YEAR ORIGINAL NET
EQUIPMENT OF OF ACQUISITION NET BOOK PROCEEDS
MANUFACTURER EQUIPMENT TYPE DESCRIPTION ACQUISITION DISPOSAL COST VALUE RECEIVED
- -------------- --------------------------- -------------------- ------------- ----------- ----------- ----------- -----------
<C> <S> <C> <C> <C> <C> <C> <C>
EMC........... (1) 4824-003 Disk array 1993 1995 472,770 224,041 81,000
EMC........... (1) 4832-002 Disk array 1993 1995 455,000 153,352 62,500
Roll Systems.. Roll system Roll-to-fold 1993 1995 209,317 68,585 66,132
Roll Systems.. Roll system Roll-to-fold 1993 1995 143,685 44,748 33,921
PYR........... (50%) 85860E Controller 1994 1996 295,000 116,680 1,750
IBM........... (12) 7012-350 Workstation 1993 1996 424,027 57,108 28,107
IBM........... (5) 9032-002 Escon director 1994 1996 514,390 153,942 168,000
SUN........... (50%) SUNSPARC 2000 Enterprise server 1994 1996 241,873 50,449 32,500
HDS........... (1) 7690-001, 7693-032 Disk storage 1993 1996 583,600 97,582 10,500
EMC........... (50%) 4832-003 Disk array 1993 1996 326,718 52,733 12,500
<CAPTION>
FEDERAL
GAAP TAXABLE
MANUFACTURER NET GAIN/(LOSS) NET GAIN/(LOSS)
- -------------- --------------- ---------------
<C> <C> <C>
EMC........... (143,041) (216,439)
EMC........... (90,852) (223,295)
Roll Systems.. (2,453) (66,466)
Roll Systems.. (10,827) (56,757)
PYR........... (114,930) (153,467)
IBM........... (29,001) (149,132)
IBM........... 14,058 (107,599)
SUN........... (17,949) (95,695)
HDS........... (87,082) (232,592)
EMC........... (40,233) (123,790)
</TABLE>
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND III
EQUIPMENT SALES
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1996
(TABLE V)
<TABLE>
<CAPTION>
YEAR YEAR ORIGINAL NET
EQUIPMENT OF OF ACQUISITION NET BOOK PROCEEDS
MANUFACTURER EQUIPMENT TYPE DESCRIPTION ACQUISITION DISPOSAL COST VALUE RECEIVED
- --------------- --------------------------- ------------------- ------------- ----------- ----------- ----------- -----------
<C> <S> <C> <C> <C> <C> <C> <C>
PYR............ (50%) 85860E Controller 1994 1996 295,000 116,680 1,750
SUN............ (50%) SUNSPARC 2000 Enterprise server 1994 1996 241,873 50,449 32,500
HDS............ (8) 7693 HDU Group Disk array 1993 1996 381,100 84,045 7,500
1994 1996 427,600 140,995 6,276
<CAPTION>
FEDERAL
GAAP TAXABLE
MANUFACTURER NET GAIN/(LOSS) NET GAIN/(LOSS)
- --------------- --------------- ---------------
<C> <C> <C>
PYR............ (114,930) (153,369)
SUN............ (17,949) (90,802)
HDS............ (76,545) (217,276)
(134,719) (217,840)
</TABLE>
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND I
EQUIPMENT SALES
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1996
(TABLE V)
<TABLE>
<CAPTION>
YEAR YEAR ORIGINAL
EQUIPMENT OF OF ACQUISITION NET BOOK
MANUFACTURER EQUIPMENT TYPE DESCRIPTION ACQUISITION DISPOSAL COST VALUE
- ------------------ -------------------------------- -------------------- ------------- ----------- ----------- -----------
<C> <S> <C> <C> <C> <C> <C>
HDS............... (2) 7693-032, (1) 7390-B3C, Disk storage 1994 1996 1,045,093 256,606
(1) 7690-128 Disk array
IBM............... (8) 9032-002 Escon director 1994 1996 878,580 269,326
HDS............... (1) 7693-032 Disk storage 1994 1996 446,171 76,331
HDS............... UPGRD (1) 7693-008 TO 032 Disk array 1994 1996 268,526 53,804
IBM............... (2) 3390-A38, (4) 3390-B3C Storage controller 1995 1996 537,585 269,099
Silicon Graphics.. (80) Indigo 2XZ Workstation 1995 1996 912,710 549,004
<CAPTION>
NET FEDERAL
PROCEEDS GAAP TAXABLE
MANUFACTURER RECEIVED NET GAIN/(LOSS) NET GAIN/(LOSS)
- ------------------ ----------- --------------- ---------------
<C> <C> <C> <C>
HDS............... 245,500 (11,106) (418,833)
IBM............... 306,000 36,674 (263,356)
HDS............... 7,650 (68,681) (270,989)
HDS............... 2,625 (51,179) (165,014)
IBM............... 10,224 (258,875) (394,025)
Silicon Graphics.. 210,363 (338,641) (481,758)
</TABLE>
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND IV, LP
EQUIPMENT SALES
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1996
(TABLE V)
<TABLE>
<CAPTION>
YEAR YEAR ORIGINAL NET
EQUIPMENT OF OF ACQUISITION NET BOOK PROCEEDS GAAP
MANUFACTURER EQUIPMENT TYPE DESCRIPTION ACQUISITION DISPOSAL COST VALUE RECEIVED NET GAIN/(LOSS)
- --------------- --------------- ----------- ------------- ----------- ----------- ----------- ----------- ---------------
<C> <S> <C> <C> <C> <C> <C> <C> <C>
IBM............ (17) 4230-202 Printer 1995 1996 34,323 21,355 26,656 5,301
<CAPTION>
FEDERAL
TAXABLE
MANUFACTURER NET GAIN/(LOSS)
- --------------- ---------------
<C> <C>
IBM............ 1,937
</TABLE>
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND II, LIMITED PARTNERSHIP
SUMMARY OF EQUIPMENT ACQUISITIONS
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1996
(TABLE VI)
<TABLE>
<CAPTION>
YEAR
OF
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION
- ---------------------------------------- ------------------------------ ---------------------------------------- -------------
<S> <C> <C> <C>
IBM..................................... (1) 3390-A38 Disk Storage 1994
IBM..................................... (1) 3390-B9C, (1) 3390-A98 Disk Storage 1994
IBM..................................... (5) 7011-25T Workstation 1995
<CAPTION>
TOTAL
RENT IN DEBT OBLIGATIONS EQUIPMENT
MANUFACTURER CASH LIEU ASSUMED INCURRED COST
- ---------------------------------------- --------- --------- --------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
IBM..................................... 86,652 14,285 0 0 100,937
IBM..................................... 92,903 0 363,387 0 456,290
IBM..................................... 62,898 0 0 0 62,898
</TABLE>
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME TRUST VIII, LIMITED PARTNERSHIP
SUMMARY OF EQUIPMENT ACQUISITIONS
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1996
(TABLE VI)
<TABLE>
<CAPTION>
YEAR
OF
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION
- ---------------------------------- ----------------------------------------- ---------------------------------- -------------
<S> <C> <C> <C>
HDS............................... (1/4) 7690, (1/4) 7693-32 Disk Array/Stg. Controller 1994
IBM............................... upgrade Communication Controller 1994
IBM............................... (2) 7013-590 Workstation 1994
IBM............................... (2) 3995-153, (2) 3995-113, (58) 7344 Optical Storage 1994
SUN............................... (31) Sun--Workstations Workstation 1994
STK............................... (1) 9490-M34 Tape Drive 1995
SUN............................... (2) Sunsparc 1000 Departmental Server 1995
SUN............................... (10) Sunsparc 20 Workstation 1995
HP................................ (50%) (9) HP9000--J200 Workstation 1995
PYR............................... (50%): (2) NILE 100 Departmental Server 1996
STK............................... (25%): (20) 9490-M32 Tape Drive 1996
Silicon Graphics.................. (33%): (1) 4XR10000, (4) WB- TWO250H14 Enterprise Server 1996
<CAPTION>
TOTAL
RENT IN DEBT OBLIGATIONS EQUIPMENT
MANUFACTURER CASH LIEU ASSUMED INCURRED COST
- ---------------------------------- --------- --------- --------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
HDS............................... 28,075 0 122,050 0 150,125
IBM............................... 75,816 0 0 0 75,816
IBM............................... 85,206 22,722 0 0 107,928
IBM............................... 70,578 0 399,057 0 469,635
SUN............................... 54,000 0 193,877 0 247,877
STK............................... 65,000 0 298,004 0 363,004
SUN............................... 17,820 0 116,574 0 134,394
SUN............................... 34,180 0 37,494 0 71,674
HP................................ 22,222 0 135,412 0 157,634
PYR............................... 35,250 0 354,540 0 389,790
STK............................... 129,237 0 260,601 0 389,838
Silicon Graphics.................. 51,148 0 246,945 0 298,093
</TABLE>
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME TRUST IX, LIMITED PARTNERSHIP
SUMMARY OF EQUIPMENT ACQUISITIONS
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1996
(TABLE VI)
<TABLE>
<CAPTION>
YEAR
OF
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION
- ---------------------------- ---------------------------------------------------- ---------------------------- -------------
<S> <C> <C> <C>
HDS......................... (1/4) 7690, (1/4) 7693-32 Disk Array/Stg. Controller 1994
SUN......................... (2) Sunsparc 20, (2) Sunsparc 1000 Workstation/Dept. Server 1994
IBM......................... (2) 3995-153, (2) 3995-113, (58) 7344 Optical Storage 1994
PYR......................... (1/2) NS100-CL File server 1994
SUN......................... (31) Sun--Workstations Workstation 1994
STK......................... (1/4) 9200-XJ3, 9210-A21, 9210-B11, 9210-C21 Disk Array 1995
PYR......................... (50%) NILE R4400--DPU Enterprise Server 1995
IBM......................... (20%): (2) 3745-31A, 3746-900 Communication Controller 1996
STK......................... (25%): (20) 9490-M32 Tape Drive 1996
STK......................... (15%): (20) 9490-M32 Tape Drive 1996
Silicon Graphics............ (33%): (1) 4XR10000, (4) WB-TWO250H14 Enterprise Server 1996
<CAPTION>
TOTAL
RENT IN DEBT OBLIGATIONS EQUIPMENT
MANUFACTURER CASH LIEU ASSUMED INCURRED COST
- ---------------------------- --------- ------------- --------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
HDS......................... 28,075 0 122,050 0 150,125
SUN......................... 19,543 0 140,289 0 159,832
IBM......................... 70,577 0 399,057 0 469,634
PYR......................... 35,000 0 261,709 0 296,709
SUN......................... 54,000 0 193,877 0 247,877
STK......................... 56,250 0 157,332 0 213,582
PYR......................... 10,000 0 88,489 0 98,489
IBM......................... 64,986 0 119,397 0 184,383
STK......................... 129,237 0 260,601 0 389,838
STK......................... 68,650 0 166,006 0 234,656
Silicon Graphics............ 51,148 0 246,945 0 298,093
</TABLE>
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME TRUST X, LIMITED PARTNERSHIP
SUMMARY OF EQUIPMENT ACQUISITIONS
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31 1996
(TABLE VI)
<TABLE>
<CAPTION>
YEAR
OF RENT IN
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION CASH LIEU
- ----------- ---------------------------------------------- ------------------------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
HDS... (1) 7693-032 Disk Array 1994 92,630 0
IBM... (2) 3745-310 Communication Controller 1994 42,302 0
EMC... (1/4) EMC 5500-3064 Disk Array 1994 48,966 0
PYR... (1/2) Pyramid 85860E File Server 1994 295,000 0
SUN... (1/2) Sunsparc 2000 Enterprise Server 1994 41,183 0
IBM... (2) 3490-B40 Tape Drive 1994 129,834 16,360
IBM... (1) 3390-B3C, (1)3390-A98, (1) 3990-006 Disk Storage/Stg. Controller 1994 426,491 70,290
IBM... (5) 9032-002 Escon Director 1994 157,681 0
IBM... (2) 3995-153, (1) 3995-113, (44) 7344 Optical Storage 1994 57,600 0
STK... (1) 9490-M34 Tape Drive 1995 35,000 0
STK... (1) 9200-XN3, 6172, 9220-A42, 9220-B42 Disk Array 1995 221,843 0
PYR... (50%) (1) RM600 Enterprise Server 1995 0 49,915
IBM... (20%): (2) 3745-31A, 3746-900 Communication Controller 1996 64,986 5,254
STK... (15%): (20) 9490-M32 Tape Drive 1996 68,650 0
STK... (25%): (7) 9490-M34 Tape Drive 1996 0 7,375
<CAPTION>
TOTAL
DEBT OBLIGATIONS EQUIPMENT
MANUFACTURER ASSUMED INCURRED COST
- ------------ --------- ----------- -----------
<S> <C> <C> <C>
HDS... 361,744 0 454,374
IBM... 536,692 0 578,994
EMC... 233,177 0 282,143
PYR... 0 0 295,000
SUN... 200,690 0 241,873
IBM... 0 0 146,194
IBM... 0 0 496,781
IBM... 356,709 0 514,390
IBM... 325,888 0 383,488
STK... 158,175 0 193,175
STK... 590,574 0 812,417
PYR... 537,254 0 587,169
IBM... 114,143 0 184,383
STK... 166,006 0 234,656
STK... 0 264,561 271,936
</TABLE>
Prior performance is not indicative of future performance.
<PAGE>
Commonwealth Equipment Income Private Fund III, Limited Partnership
Summary of Equipment Acquisitions
For the three year period ended December 31, 1996
(Table VI)
<TABLE>
<CAPTION>
YEAR
OF RENT IN DEBT
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION CASH LIEU ASSUMED
- ----------- -------------------------------- ------------------------------ ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
HDS... (8) 7693-HDU Disk Array 1994 370,110 10,990 0
EMC... (1/4) 5500-3064 Disk Array 1994 48,965 0 233,177
SUN... (1/2) Suncparc 2000 Enterprise Server 1994 41,183 0 200,690
PYR... (1/2) Pyramid 85860E File Server 1994 295,000 0 0
IBM... (1/2) 3990-006 Storage Controller 1994 91,102 11,648 0
IBM... (1) 3490-B40 Tape Drive 1994 64,917 8,180 0
IBM... (1) 3990-A38, (2) 3390-B3C Disk Storage 1994 70,000 0 357,600
IBM... (1) 3900-001 Printer 1995 55,000 0 149,885
IBM... (20%): (2) 3745-31A, 3746-900 Communication Controller 1996 64,986 0 119,397
STK... (10%): (20) 9490-M32 Tape Drive 1996 45,767 0 110,681
HP.... (50%): (2) HP9000-K420 Departmental Server 1996 21,164 0 134,156
<CAPTION>
TOTAL
OBLIGATIONS EQUIPMENT
MANUFACTURER INCURRED COST
- ------------ ----------------- -----------
<S> <C> <C>
HDS... 0 381,100
EMC... 0 282,142
SUN... 0 241,873
PYR... 0 295,000
IBM... 0 102,750
IBM... 0 73,097
IBM... 0 427,600
IBM... 0 204,885
IBM... 0 184,383
STK... 0 156,448
HP.... 0 155,320
</TABLE>
Prior performance is not indicative of future performance.
<PAGE>
Commonwealth Income & Growth Fund I
Summary of Equipment Acquisitions
For the three year period ended December 31, 1996
(Table VI)
<TABLE>
<CAPTION>
YEAR
OF
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION
- -------------------------- --------------------------------------------------- ------------------------------ -------------
<S> <C> <C> <C>
HDS.................. (2) 7693-032, (1) 7390-B3C, (1) 7690-128 Dsk Arry/Stg Cont/Dsk Stg 1994
EMC.................. (1/2) 5500-3064 Disk Array 1994
HDS.................. upgrade (1) 7693-8 to 32 Disk Array 1994
HDS.................. (1) 7693-032 Disk Array 1994
HDS.................. (2) 7693-032 Disk Array 1994
IBM.................. (1) 3390-B3C, (1) 3390-B9C Disk Storage 1994
IBM.................. (1/2) 3990-006 Storage Controller 1994
IBM.................. (3) 3490-A20, (1) 3490-B40 Tape Drive 1994
SUN.................. (17) Sunsparc 1000 Dept. Server 1994
IBM.................. (8) 9032-002 Escon Director 1994
SUN.................. (1) Sunsparc 1000 Departmental Server 1994
IBM.................. (80%) (1) 9200-XJ3 Disk Array 1994
HDS.................. (1) 7693-032 Disk Array 1994
IBM.................. (1) 9391-A10 (16) 9392-B13 Disk Array 1994
SUN.................. (4) Sunsparc 2000 Enterprise Server 1995
STK.................. (1/4) 9200-XJ3, 9210-A21, 9210-B11, 9210-C21 Disk Array 1995
STK.................. (2) 9200-XJ3, 9210-A21 Disk Array 1995
SUN.................. (32) Sunsparc 1000 Departmental Server 1995
STK.................. (8) 9490-M34 Tape Drive 1995
IBM.................. (2) 9391-A10, (32) 9392-B13 Disk Array 1995
IBM.................. (2) 3829-001 Printer 1995
IBM / Roll Systems, Inc... (50%) 3900-DW1, Roll to Fold Printer & Roll to Fold 1995
SIEMENS.............. (2) 2240-004 Printer 1995
SUN.................. (3) Upgr. to Sunsparc 1000 Departmental Server 1995
STK.................. (1) 9200-XN3, 6172, 9220-A42 Disk Array 1995
SGI.................. (80) Indigo 2XZ Workstation 1995
EMC.................. (1/2) 3200-9024, 3200-9016 Disk Array 1995
STK.................. (1) 9200-XN3, 9210-A21, 9210-C21 Disk Array 1995
IBM.................. (375) 4230-5S3 Printer 1995
IBM.................. (2) 3390-A38, (4) 3390-B3C Disk Storager 1995
HP................... (50%) (9) HP9000-J200 Communication Controller 1995
STK.................. (2) 4490-M30, (1) 4490-M34, (3) 9490-M34 Tape Drive 1995
PYR.................. (50%) (1) RM600 Enterprise Server 1995
STK.................. (50%) (20) 9490-M32 Tape Drive 1996
IBM.................. (20%) (2) 3745-31A Communication Controller 1996
SGI.................. (33%) (1) 4XR10000 Enterprise Server 1996
STK.................. (45%) (20) 9490-M32 Tape Drive 1996
HP................... (18) HP9000-C110, (1) HP9000-D250 Workstation 1996
LEX.................. (80) N240, (4) OPTRA C, (10) OPTRA RT Laser Printer 1996
PYR.................. (1) 3445-1210 Tape Library 1996
IBM.................. (2) 3995-133, (1) 3995-113 Optical Storage 1996
STK.................. (50%) (7) 9490-M34 Tape Drive 1996
<CAPTION>
TOTAL
RENT IN DEBT OBLIGATIONS EQUIPMENT
MANUFACTURER CASH LIEU ASSUMED INCURRED COST
- -------------------------- ---------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
HDS.................. 985,358 59,735 0 0 1,045,093
EMC.................. 97,931 0 466,354 0 564,285
HDS.................. 268,526 0 0 0 268,526
HDS.................. 82,200 0 363,971 0 446,171
HDS.................. 620,099 72,200 0 0 692,299
IBM.................. 399,561 65,845 0 0 465,406
IBM.................. 91,098 11,652 0 0 102,750
IBM.................. 337,202 42,480 0 0 379,682
SUN.................. 153,776 0 0 0 153,776
IBM.................. 269,319 0 609,261 0 878,580
SUN.................. 158,072 0 0 0 158,072
IBM.................. 1,216,040 0 0 0 1,216,040
HDS.................. 49,909 0 318,518 0 368,427
IBM.................. 54,831 0 265,269 0 320,100
SUN.................. 305,875 0 0 0 305,875
STK.................. 56,250 0 157,332 0 213,582
STK.................. 1,144,304 0 0 0 1,144,304
SUN.................. 277,705 0 0 0 277,705
STK.................. 260,000 0 1,192,140 0 1,452,140
IBM.................. 600,000 0 0 0 600,000
IBM.................. 72,117 0 198,956 0 271,073
IBM / Roll Systems, Inc... 343,010 0 0 0 343,010
SIEMENS.............. 459,592 0 0 0 459,592
SUN.................. 52,731 0 0 0 52,731
STK.................. 582,671 0 0 0 582,671
SGI.................. 163,000 0 749,710 0 912,710
EMC.................. 293,506 0 0 0 293,506
STK.................. 57,601 0 179,039 0 236,640
IBM.................. 1,064,930 0 0 0 1,064,930
IBM.................. 130,000 0 515,102 0 645,102
HP................... 22,222 0 135,412 0 157,634
STK.................. 490,110 0 0 0 490,110
PYR.................. 9,639 49,916 529,732 0 589,287
STK.................. 258,473 0 521,203 0 779,676
IBM.................. 64,986 0 119,397 0 184,383
SGI.................. 51,148 0 246,946 0 298,094
STK.................. 205,951 0 498,018 0 703,969
HP................... 61,110 0 349,965 0 411,075
LEX.................. 117,090 0 380,387 0 497,477
PYR.................. 216,419 0 0 0 216,419
IBM.................. 60,105 0 226,431 0 286,536
STK.................. 0 14,749 0 529,124 543,873
</TABLE>
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND IV, LIMITED PARTNERSHIP
SUMMARY OF EQUIPMENT ACQUISITIONS
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1996
(TABLE VI)
<TABLE>
<CAPTION>
YEAR
EQUIPMENT OF
MANUFACTURER EQUIPMENT TYPE DESCRIPTION ACQUISITION
- ----------------------------- ------------------------------------- ------------------- -------------
<S> <C> <C> <C>
IBM / Roll Sytstems, Inc..... (50%) 3900-DW1, Roll to Fold Printer & Roll to 1995
Fold
SIEMENS...................... (2) 2240-004 Printer 1995
PYR.......................... (26) 7000-0354 Enterprise Server 1995
STK.......................... (1) 9200-XP3, 9220-A22 Disk Array 1995
IBM.......................... (17) 4230-202 Printer 1995
STK.......................... (1) 9200-XN3, 9210-A21, 9210-C21 Disk Array 1995
STK.......................... (50%) (1) 9490-M34, 4412, 3T43, Tape Drive 1995
9300001
STK.......................... (1) 9310-301 to 001 Upgr. Tape Library 1996
STK.......................... (50%) (1) 9490-M34 Tape Drive 1996
PYR.......................... (50%) NILE 100 Departmental Server 1996
STK.......................... (15%) (20) 9490-M32 Tape Drive 1996
HP........................... (17) HP9000-C110 Workstation 1996
<CAPTION>
TOTAL
RENT IN DEBT OBLIGATIONS EQUIPMENT
MANUFACTURER CASH LIEU ASSUMED INCURRED COST
- ----------------------------- ----------- ----------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
IBM / Roll Sytstems, Inc..... 343,010 0 0 0 343,010
SIEMENS...................... 459,592 0 0 0 459,592
PYR.......................... 81,713 0 0 0 81,713
STK.......................... 287,850 0 0 0 287,850
IBM.......................... 14,000 0 20,323 0 34,323
STK.......................... 57,601 0 179,039 0 236,640
STK.......................... 73,086 1,510 0 0 74,596
STK.......................... 0 9,144 0 52,306 61,450
STK.......................... 74,596 0 0 0 74,596
PYR.......................... 35,913 0 132,663 0 168,576
STK.......................... 68,650 0 166,006 0 234,656
HP........................... 43,315 0 268,837 0 312,152
</TABLE>
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND II
SUMMARY OF EQUIPMENT ACQUISITIONS
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1996
(TABLE VI)
<TABLE>
<CAPTION>
YEAR
EQUIPMENT OF
MANUFACTURER EQUIPMENT TYPE DESCRIPTION ACQUISITION
- ------------------------ --------------------------------------------- ------------------- -------------
<S> <C> <C> <C>
STK..................... (1) 9200-XN3, (1) 9220-A42, (1) 9220-B22 Disk Array 1995
STK..................... (1) 9200-XN3, (1) 9220-A42 Disk Array 1995
IBM..................... (325) 4230-5S3 Printer 1995
IBM..................... (50) 4028-NS1 Printer 1995
STK..................... (50%) (4) 4490-M30 UPGR, (2) 4490-M34 UPGR Tape Drive 1995
(6) 9490-M34]
STK..................... (1) 4410-001, (2) 4480-M24, (2) 4480-M20, Tape Drive 1996
(1) 9490-M34
IBM..................... (1) 3490-A20, (2) 3490-B40 Tape Drive 1996
STK..................... (3) 9490-M34 Tape Drive 1996
DEC..................... (1) Alpha Server 2100A-5/250 Departmental Server 1996
DEC..................... (1) Alpha Server 2100A-5/250 Departmental Server 1996
HP...................... (13) HP9000-C110 Workstation 1996
SGI..................... (1) Onyx infinite reality ds Departmental Server 1996
<CAPTION>
TOTAL
RENT IN DEBT OBLIGATIONS EQUIPMENT
MANUFACTURER CASH LIEU ASSUMED INCURRED COST
- ------------------------ ----------- --------------- ----------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
STK..................... 787,196 0 0 0 787,196
STK..................... 582,671 0 0 0 582,671
IBM..................... 990,357 0 0 0 990,357
IBM..................... 147,963 0 0 0 147,963
STK..................... 490,110 0 0 0 490,110
STK..................... 383,553 0 0 0 383,553
IBM..................... 174,383 4,290 0 0 178,673
STK..................... 405,628 0 0 0 405,628
DEC..................... 204,781 0 0 0 204,781
DEC..................... 40,928 0 0 0 40,928
HP...................... 304,718 0 0 0 304,718
SGI..................... 263,498 0 0 0 263,498
</TABLE>
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND V, LIMITED PARTNERSHIP
SUMMARY OF EQUIPMENT ACQUISITIONS
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1996
(TABLE VI)
<TABLE>
<CAPTION>
YEAR
OF
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION
- ------------------------ ------------------------------------- ------------------------ -------------
<S> <C> <C> <C>
STK..................... (1) 9200-XJ3, 6172, 9220-A22 Disk Array 1995
EMC..................... (1/4) 3200-9024, 3200-9016 Disk Array 1995
STK..................... (50%) (1) 9490-M34, 4412, 3T43, Tape Drive 1995
9300001
STK..................... (1) 9490-M32 Tape Drive 1996
PYR..................... (50%) NILE 100 Departmental Server 1996
IBM..................... (1) 3745-31A, (1) 3746-900 Communication Controller 1996
IBM..................... (1) 3490-B40 Tape Drive 1996
HP...................... (50%) (2) HP9000-K420 Departmental Server 1996
<CAPTION>
TOTAL
RENT IN DEBT OBLIGATIONS EQUIPMENT
MANUFACTURER CASH LIEU ASSUMED INCURRED COST
- ------------------------ ----------- ----------- ----------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
STK..................... 409,422 0 0 0 409,422
EMC..................... 146,753 0 0 0 146,753
STK..................... 73,086 1,510 0 0 74,596
STK..................... 85,714 0 0 0 85,714
PYR..................... 35,913 0 132,663 0 168,576
IBM..................... 155,160 0 0 0 155,160
IBM..................... 42,194 0 0 0 42,194
HP...................... 21,164 0 134,155 0 155,319
</TABLE>
Prior performance is not indicative of future performance.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND VI LIMITED PARTNERSHIP
SUMMARY OF EQUIPMENT ACQUISITIONS
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1996
(TABLE VI)
<TABLE>
<CAPTION>
YEAR
OF
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION
- ------------------------ ------------------------------------- ------------------------ -------------
<S> <C> <C> <C>
STK..................... (25%) (7) 9490-M34 Tape Drive 1996
TOTAL
RENT IN DEBT OBLIGATIONS EQUIPMENT
MANUFACTURER CASH LIEU ASSUMED INCURRED COST
- ------------------------ ----------- ----------- ----------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
STK..................... 0 7,375 0 264,561 271,936
</TABLE>
Prior performance is not indicative of future performance.
<PAGE>
APPENDIX III
SUBSCRIPTION AGREEMENT
<PAGE>
$1,500,000 - minimum
Commonwealth Income & Growth Fund III
(a Pennsylvania Limited Partnership)
SUBSCRIPTION AGREEMENT,
SIGNATURE PAGE &
POWER OF ATTORNEY
750,000 Units - $20.00 per Unit
Minimum Purchase - 125 Units ($2,500)
50 Units ($1,000) for IRAs, Keoghs and Pension Plans
(Minimum purchase may be higher in certain states)
- --------------------------------------------------------------------------------
PLEASE CAREFULLY READ this Subscription Agreement and the Terms and Conditions
(on the back of the Signature Page) before completing this document. TO
SUBSCRIBE FOR UNITS, please complete and sign the Signature Page and deliver the
Subscription Agreement to your Financial Consultant.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALL ITEMS ON THIS AGREEMENT MUST BE COMPLETED IN ORDER FOR YOUR SUBSCRIPTION TO
BE PROCESSED, including any additional information necessary to complete Item
6(e) of the Section entitled "Terms and Conditions".
- --------------------------------------------------------------------------------
Commonwealth Capital Securities Corp.
(800)497-4554
Please make checks payable to:
PNC Bank, Escrow Agent,
(Commonwealth Income & Growth Fund III)
Mailing Address:
Commonwealth Capital Securities Corp.
P.O. Box 535
Paoli, PA 19301-0535
Subscription Questions:
(800)497-4554
Fax (610)647-8858
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
SUBSCRIPTION AGREEMENT, SIGNATURE PAGE AND POWER OF ATTORNEY
- --------------------------------------------------------------------------------
1. Units Purchased: x $20.00 Per Unit = $ (Total Capital Contribution)
- --------------------------------------------------------------------------------
INITIAL INVESTMENT / / ADDITIONAL INVESTMENT / /
(IN THIS FUND)
- --------------------------------------------------------------------------------
ARE YOU AN EMPLOYEE OF A SELECTED AGENT, IS THIS
A NAV PURCHASE? YES / / NO / /
- --------------------------------------------------------------------------------
2. REGISTRATION INFORMATION - INVESTOR'S ACCOUNT NUMBER:
(with broker's firm, if applicable)
- --------------------------------------------------------------------------------
Legal Account Title:
INVESTORS NAME(S) OR
TRUSTEE(S) OR CUSTODIAN(S)
- --------------------------------------------------------------------------------
INVESTOR DATE OF TRUST/IRA
NAME(S) AND/OR IRA NUMBER:
- --------------------------------------------------------------------------------
SOCIAL SECURITY NUMBER: CORPORATE/CUSTODIAL TAX I.D.
(REQUIRED ALSO FOR IRA/QUALIFIED PLAN INVESTORS)
- --------------------------------------------------------------------------------
LEGAL RESIDENT/BUSINESS/CUSTODIAL ADDRESS:
- --------------------------------------------------------------------------------
CITY/STATE BUSINESS/CUSTODIAL
ZIP + 4 HOME PHONE: PHONE:
- --------------------------------------------------------------------------------
ADDITIONAL MAILING ADDRESS - If Different from Above (Or Investor Address if
Custodial Account) - Must Complete to Receive Copies of Statements & Reports.
- --------------------------------------------------------------------------------
Street City State Zip + 4
- --------------------------------------------------------------------------------
3. PLEASE INDICATE CITIZENSHIP STATUS: (please review "Investor Suitability
Standards" in the Prospectus)
US CITIZEN / / RESIDENT ALIEN / / NON-RESIDENT ALIEN (Attach IRA Form W8) / /
- --------------------------------------------------------------------------------
If Corporation or Partnership: U.S. / / or / / FOREIGN (Attach IRA Form W8)
- --------------------------------------------------------------------------------
4. TYPE OF REGISTRATION (CHECK ONE):
/ / INDIVIDUAL / / JOINT TENANTS WITH RIGHT OF SURVIVORSHIP
/ / IRA / / PARTNERSHIP
/ / OTHER TAX-EXEMPT ENTITY / / QUALIFIED PLAN
/ / CORPORATION / / UNIFORM GIFT TO MINORS ACT STATE OF
/ / TENANTS IN COMMON / / TRUST (SPECIFY)
/ / COMMUNITY PROPERTY / / OTHER (SPECIFY)
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5. SIGNATURE: I certify that (1) I have received the Prospectus relating to
Commonwealth Income & Growth Fund III as supplemented (the "Prospectus") and
the limited partnership agreement, (2) I agree to the provisions on the
reverse hereof, (3) by executing this Subscription Agreement, I am entering
into a limited partnership agreement and agreeing to invest money, (4) the
information set forth in this Subscription Agreement, Signature Page and
Power of Attorney is true and correct, (5) I meet the minimum financial
suitability standards described in the Prospectus under "Investor Suitability
Standards", and, I declare under penalty of perjury that (6) I have entered
my correct taxpayer identification or social security number on this form (7)
I verify that I am not subject to withholding either because I have not been
notified that I am subject to backup withholding as result of a failure to
report all interests or dividends, or the Internal Revenue Service has
notified me that I am no longer subject to backup withholding (if the
undersigned is subject to backup withholding, they shall strike out the
language in clause (7) before signing below), and (8) I acknowledge that the
investment is not liquid.
- --------------------------------------------------------------------------------
X X
- --------------------------------------------------------------------------------
SUBSCRIBER'S SIGNATURE DATE CO-SUBSCRIBER'S SIGNATURE OR DATE
AUTHORIZED/CUSTODIAL REPRESENTATIVE
If Financial Consultant and Branch Manager are executing the signature page,
both must sign below. Authorized custodian signature required for IRA/custodian
accounts. Financial Consultant and Branch Managers may not sign on behalf of
residents of Florida, Iowa, Maine, Michigan, Minnesota, Missouri,
Nebraska, North Carolina, Oregon and Tennessee.
(NOTE: Not to be executed until Subscriber(s) has (have) acknowledged receipt
of final Prospectus.)
- --------------------------------------------------------------------------------
X X
- --------------------------------------------------------------------------------
FINANCIAL CONSULTANT'S SIGNATURE DATE BRANCH MANAGER'S SIGNATURE DATE
________________________________________________________________________________
6. SPECIAL PAYMENT INSTRUCTIONS: Payment to other individual or entity as
designated below. Investor must complete this section if they want cash
distributions made to anyone other than the records holder. Investors
requesting direct deposit of distribution checks to another financial
institution or mutual fund please complete below:
- ------------------------- -----------------------------------
ENTITY/FUND NAME STREET ADDRESS
- ------------------------- -----------------------------------
FOR ACCOUNT OF CITY/STATE/ZIP+4
- ------------------------- -----------------------------------
ACCOUNT NUMBER (Please indicate fund number)PHONE NUMBER
________________________________________________________________________________
7. BROKER/DEALER DATA: Completed by selling Financial Consultant (PLEASE ENTER
YOUR OFFICE ADDRESS HERE)
- ----------------------------- ----------------------------------
FINANCIAL CONSULTANT(S) NAME ADDRESS
- ----------------------------- ----------------------------------
BROKER/DEALER FIRM NAME CITY/STATE/ZIP + 4
- ----------------------------- ----------------------------------
FINANCIAL CONSULTANT'S PHONE NUMBER FAX NUMBER
BY SELLING FINANCIAL CONSULTANT: In compliance with Section (3)b and 4(d) of
Appendix F of Article III, Section 34 of the NASD Rules of Fair Practice, I
represent that I have reasonable grounds to believe, based on information from
the investor(s) concerning investment objectives, other investments, financial
situation and needs, and any other information known by me, that investment in
the Partnership is suitable for such investor(s) and that I have informed the
investor(s) of the lack of liquidity and marketability of the investment and
confirm that the investor(s) signatures appears above. (Signatures of both
representatives required if joint account.)
- --------------------------------------------------------------------------------
X X
- --------------------------------------------------------------------------------
FINANCIAL CONSULTANT'S SIGNATURE DATE BRANCH MANAGER'S SIGNATURE DATE
<PAGE>
- --------------------------------------------------------------------------------
THIS SUBSCRIPTION AGREEMENT, SIGNATURE ------------------ -----------------
PAGE AND POWER OF ATTORNEY WILL NOT RESERVATION NUMBER CCSC RECEIPT DATE
BE AN EFFECTIVE AGREEMENT UNTIL IT
IS ACCEPTED BY THE GENERAL PARTNER ---------- ----------------
OF COMMONWEALTH INCOME & GROWTH FUND FC NUMBER DATE INTO ESCROW
III.
-------------- ---------------
AGREED TO AND ACCEPTED BY:___________ ACCOUNT NUMBER CLOSING NUMBER
(GENERAL PARTNER)
- --------------------------------------------------------------------------------
<PAGE>
SUBSCRIPTION AGREEMENT
COMMONWEALTH INCOME & GROWTH FUND III
TERMS AND CONDITIONS
Each person or entity named as a registered owner on the Subscription
Agreement (the "Subscriber") desires to become a limited partner (a "Limited
Partner") of Commonwealth Income & Growth Fund III (the "Partnership") and to
purchase units of a limited partnership interest (the "Units") of the
Partnership in accordance with the terms and conditions of the final
prospectus pursuant to which the Partnership will offer Units to the public
including any amendments and supplements thereto (the "Prospectus"), and of
the Partnership's Amended and Restated Agreement of Limited Partnership (the
"Partnership Agreement"), attached as Exhibit 1 to the Prospectus. BY
EXECUTING THIS AGREEMENT, A SUBSCRIBER DOES NOT WAIVE ANY RIGHTS HE MAY HAVE
UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934 or
any State Securities or Blue Sky law. In connection herewith, the Subscriber
represents, warrants, and agrees as follows:
1. Subscription. The Subscriber agrees to purchase the number of Units
set forth in the space provided on the Signature Page of this Subscription
Agreement and delivers herewith the full amount required to purchase such Units.
2. Acceptance. The Subscriber hereby acknowledges and agrees that the
general partner of the Partnership (the "General Partner") may in its sole and
absolute discretion accept or reject the Subscriber's subscription, in whole or
in part, and that, if rejected, the amount of the Subscriber's subscription
which is rejected will be promptly returned to Subscriber, without interest.
The General Partner may not complete the sale of a Unit to a Subscriber until at
least five business days after the date the Subscriber received the Prospectus.
3. No Revocation. The Subscriber hereby acknowledges and agrees that he
will not be entitled to revoke or withdraw his subscription, except that the
Subscriber can revoke the subscription within the first five days after the
Subscriber has received the prospectus.
4. Adoption of Partnership Agreement. The Subscriber hereby accepts,
adopts and agrees to be bound by each and every provision contained in the
Partnership Agreement and agrees to become a Limited Partner thereunder.
5. Power of Attorney. The Subscriber hereby irrevocably makes,
constitutes and appoints the General Partner, with full power of substitution
and ratification, its true and lawful attorney-in-fact for the purposes and in
the manner provided in the Partnership Agreement.
6. Representation and Warranties. The Subscriber (which, for this
purpose, includes any Financial Consultant and Branch Manager executing this
Subscription Agreement on behalf of the Subscriber) represents and warrants to
the Partnership, the General Partner, the affiliates, agents and representatives
of the Partnership or the General Partner, and any broker-dealer involved in the
offering of Units for sale that:
(a) the Subscriber has received the Prospectus;
(b) the Subscriber has received the form of Partnership Agreement;
(c) the Subscriber meets the minimum financial suitability standards set
forth in the Prospectus under "Investor Suitability Standards,"
as well as any additional minimum financial suitability standards
required by state securities authorities which are applicable to the
Subscriber; and
(d) the Subscriber is subscribing for Units in his own account or for the
account or benefit of a family member or members or in a fiduciary
capacity for the account of another person;
(e) the Subscriber has received no representations or warranties from the
Partnership, the General Partner, or any affiliates, agents or
representatives of the Partnership or the General Partner other than
those contained in the Prospectus, except as follows:
The Partnership reserves the right to assert these
representatives as a defense in any subsequent litigation in
which one or more of these representatives is in issue;
provided, however, that the representations contained in
Paragraph 6(e) shall not be binding on any Subscriber resident
in Arizona, Maine, Minnesota, Missouri, Nebraska,
Pennsylvania, Tennessee or Texas.
Subscribers in Arizona, Michigan, Missouri, Nebraska and Texas are
required to sign or initial each representation contained in paragraph six.
Notice to all Investors:
(a) The purchase of Units for an IRA or Keogh plan does not itself create
the plan.
(b) Section 1446 of the Internal Revenue Code provides that a partnership
must pay a withholding tax to the Internal Revenue Service with respect to a
partner's allocable share of such partnership's effectively connected taxable
income if the partner is a foreign person, and the Partnership Agreement
authorizes the Partnership to withhold any required amounts from distribution
otherwise payable to any foreign person.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
Cumulative Supplement Dated January 26, 1999
To
Prospectus Dated July 25, 1997
This Supplement is part of, and should be read in conjunction with, the
Prospectus dated July 25, 1997. This cumulative supplement replaces all prior
supplements to the Prospectus. The purpose of cumulative supplements is to
report on the status of the offering, describe equipment acquisitions by the
Partnership, provide updated industry information, as applicable, describe any
amendments to the prospectus, update prior performance of certain diversified
equipment leasing programs sponsored by the General Partner and provide updated
financial statements of the Partnership and General Partner.
ACQUISITION OF EQUIPMENT
On April 15, 1998, the Partnership purchased twelve SUN Workstations for
approximately $140,000. The Equipment is subject to a 32 month lease with Lucent
Technology. The monthly rent during the term of the lease is to be approximately
$3,900.
On April 15, 1998, the Partnership purchased thirty SUN Servers for
approximately $446,000. The Equipment is subject to a 32 month lease with Lucent
Technology. The monthly rent during the term of the lease is to be approximately
$12,100.
On June 12, 1998, the Partnership purchased four SUN Servers for approximately
$253,000. The Equipment is subject to a 36 month lease with Chase Manhattan
Bank. The monthly rent during the term of the lease is to be approximately
$6,500.
On July 2, 1998, the Partnership purchased five Storagetek Timberline Drives for
approximately $408,000. The Equipment is subject to a 24 month lease with Chase
Manhattan Bank. The monthly rent during the term of the lease is to be
approximately $12,300.
On July 9, 1998, the Partnership purchased one SUN Server for approximately
$131,000. The Equipment is subject to a 36 month lease with Cendant. The monthly
rent during the term of the lease is to be approximately $3,200.
On November 2, 1998, the Partnership purchased an IBM Upgrade to a Controller
for approximately $18,000. The Equipment is subject to a 24 month lease with
Chrysler Corp. The monthly rent during the term of the lease is to be
approximately $800.
On December 1, 1998, the Partnership purchased SUN additional memory for a
Server for approximately $40,000. The Equipment is subject to a 31 month lease
with Cendant. The monthly rent during the term of the lease is to be
approximately $1,300.
1
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
SUPPLEMENT DATED JANUARY 26, 1999.
PAGE 2 OF 4.
- --------------------------------------------------------------------------------
ACQUISITION OF EQUIPMENT (CONTINUE)
As of January 4, 1999, the Partnership has committed to purchase an IBM upgrade
to a Controller for approximately $19,000. The Equipment is subject to an 18
month lease with Chrysler Corp. The monthly rent during the term of the lease is
to be approximately $1,000.
CLOSING OF SALE OF ADDITIONAL UNITS
On January 27, 1998, the Partnership received and accepted subscriptions for
more than 75,000 Units. On February 27, 1998, March 30, 1998, April 2, 1998, May
21, 1998, July 1, 1998, September 23, 1998, October 2, 1998, November 5, 1998,
November 25, 1998 and January 4, 1999, the payments received from subscribers,
as well as the reinvestment of dividends, were released from escrow and have
become available to the Partnership for the payment of expenses and utilization
as described under "USE OF PROCEEDS". As of January 26, 1999, the Partnership
has accepted subscriptions from investors totaling approximately $2,191,000
(110,000 Limited Partnership Units).
PRIOR PERFORMANCE
The General Partner has previously sponsored two Equipment leasing programs,
Commonwealth Income & Growth Fund I and Commonwealth Income & Growth Fund II,
limited partnerships, which registered securities under the Securities Act of
1933 and which have investment objectives substantially identical to the
Partnership. The General Partner, on behalf of the partnership, terminated its
offering of units for Commonwealth Income & Growth Fund I on May 11, 1995, and
Commonwealth Income & Growth Fund II on May 12, 1997, with $12,624,153 and
$9,235,185, respectively, raised from investors. On December 8, 1995, the net
offering proceeds of Commonwealth Income & Growth Fund I's were fully utilized
in the purchase of computer peripheral equipment. On June 30, 1997, the net
offering proceeds of Commonwealth Income & Growth Fund II's were fully utilized
in the purchase of computer peripheral equipment. All of the equipment was new
when acquired. Additional specific details on prior performance are available in
the Form S-1 filed by the Partnership on May 12, 1997 (Registration No.
333-26933) and as subsequently amended. Additional updates to the prior
performance tables will be filed by amendment as they become available.
2
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
SUPPLEMENT DATED JANUARY 26, 1999.
PAGE 3 OF 4.
- --------------------------------------------------------------------------------
ADDITION TO SUBSCRIPTION DOCUMENT
The Partnership has offered investors an additional alternative for mailing of
cash distributions. Through Section 6 of the amended Subscription Document
(attached) investors may now request to have their distributions sent directly
to Chase Manhattan Trust Co., Escrow Agent, for investment in additional Units
of the Partnership. These additional Units will be closed in on a monthly basis.
All subscriptions are subject to acceptance by the General Partner. This would
enable investors to accumulated additional Units THROUGH THE OFFERING PERIOD
ONLY. Once the "Offering Period" has terminated, investors will receive their
cash distributions, as indicated on their subscription document. All existing
investors have the option to "re-execute" the attached subscription document, if
interested.
FINANCIAL INFORMATION
Appendix attached here to contains the following:
o Audited financial statements of Commonwealth Income & Growth Fund III as of
December 31, 1997 and from April 28, 1997 (date of inception) to December
31, 1997.
o Management's Discussion and Analysis of Financial Condition and Results of
Operations for the period ended December 31, 1997.
o Audited Financial Statements of Commonwealth Capital Corp. as of February
28, 1998 and 1997 and for the years then ended.
o Audited Balance Sheets of Commonwealth Income & Growth Fund, Inc. as of
February 28, 1998 and 1997.
o Unaudited financial statements of Commonwealth Income & Growth Fund III as
of September 30, 1998 and for the nine months then ended.
o Management's Discussion and Analysis of Financial Condition and Results of
Operations for the period ended September 30, 1998.
o Unaudited Balance Sheet of Commonwealth Capital Corp. as of September 30,
1998.
o Unaudited Balance Sheet of Commonwealth Income & Growth Fund, Inc. as of
September 30, 1998.
o Prior Performance Tables - Updated to December 31, 1997.
USE OF PROCEEDS
As indicated above, the Partnership has accepted subscriptions from investors
totaling approximately $2,143,000. To date, the Partnership has paid the
underwriter Selling Commissions of approximately $171,000 and Dealer Manager
Fees of approximately $21,000. The General Partner has been paid approximately
$64,000 for Organizational and Offering Expenses, and approximately $73,000 for
Acquisition Fees. The net proceeds available for investment were therefore
approximately $1,814,000. The Partnership has purchased and has committed to
purchase Equipment costing approximately $1,455,000 from such proceeds. The
remaining cash available for investment is approximately $359,000.
3
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
SUPPLEMENT DATED JANUARY 26, 1999.
PAGE 4 OF 4.
- --------------------------------------------------------------------------------
EXPERTS
The financial statements of the Partnership, at December 31, 1997, and from
April 28, 1997 (date of inception) to December 31, 1997, the Balance Sheets
of the General Partner at February 28, 1998 and 1997, and the consolidated
financial statements of Commonwealth Capital Corp. at February 28, 1998 and
1997, and for the years then ended, appearing in this Post Effective
Amendment No. 1 to the Registration Statement, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
SUPPLEMENT FOR TEXAS INVESTORS
Although this Partnership uses the word "Growth" in its title, the assets to be
acquired by the Partnership will not appreciate in value and will in fact lose
value rapidly after acquisition. By using the term "Growth", the sponsor of this
Partnership means that the sponsor will purchase additional equipment with money
that otherwise could be distributed to investors as a return on their
investment.
4
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
APPENDIX 1
TO THE SUPPLEMENT DATED JANUARY 26, 1999
o Audited financial statements of Commonwealth Income & Growth Fund III as of
December 31, 1997 and for the period April 28, 1997 (date of inception) to
December 31, 1997.
o Management's Discussion and Analysis of Financial Condition and Results of
Operations for the period ended December 31, 1997.
o Audited Financial Statements of Commonwealth Capital Corp. as of February
28, 1998, and 1997 and for the years then ended.
o Audited Balance Sheets of Commonwealth Income & Growth Fund, Inc. as of
February 28, 1998 and 1997.
o Unaudited financial statements of Commonwealth Income & Growth Fund III as
of September 30, 1998 and for the nine months then ended.
o Management's Discussion and Analysis of Financial Condition and Results of
Operations for the period ended September 30, 1998.
o Unaudited Balance Sheet of Commonwealth Capital Corp. as of September 30,
1998.
o Unaudited Balance Sheet of Commonwealth Income & Growth Fund, Inc. as of
September 30, 1998.
o Prior Performance Tables - Updated to December 31, 1997.
5
<PAGE>
ITEM 7: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Partnership has no operating history. The Partnership intends to
acquire various types of computer peripheral and similar Equipment, and to
lease such Equipment predominantly under Operating Leases. The Partnership
may also lease Equipment under Full Payout Net Leases or enter into
Conditional Sales Contracts with respect to Equipment. The Partnership
anticipates that it will use a substantial portion of the proceeds of this
Offering, excess Cash Flow, debt financing and Net Disposition Proceeds
received by the Partnership prior to its liquidation phase to purchase
computer peripheral or other similar capital Equipment manufactured by, or
compatible with, equipment manufactured by IBM. See "BUSINESS -Preliminary
Investments."
The Partnership's operating revenues will initially be generated
primarily from leasing, and otherwise entering into contracts for the use of
Equipment. Operating revenues will be utilized to pay Partnership expenses
and provide cash distributions to Limited Partners. The General Partner
anticipates that the Partnership will commence liquidation of all of its
assets beginning in the ninth year of program operations, subject to the
General Partner's discretion to extend the liquidation process if in the
General Partner's discretion such extension will enable the Partnership to
dispose of its assets on more favorable terms. In no event will the
Partnership continue after December 31, 2009.
Because the Partnership's leases and Conditional Sales Contracts will be
on a "triple-net" (or equivalent) basis, it is anticipated that no permanent
reserve for maintenance and repairs will be established from the Offering
proceeds. However, the General Partner is authorized to establish reserves
in the future if and to the extent it deems necessary for maintenance,
repairs and working capital. In addition, the General Partner and Com Cap
Corp. have agreed that the General Partner or Com Cap Corp. will lend or
contribute to the Partnership an amount equal to 1.01% of net Offering
proceeds, if needed, to meet the Partnership's expenses. If available Cash
Flow or Net Disposition Proceeds are insufficient to cover the Partnership's
expenses and liabilities, the Partnership will obtain additional funds by
disposing of or refinancing Equipment or by borrowing within its permissible
limits.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer
programs that have time-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
The Partnership does not have any computer programs or systems as all
services required for the management of the Partnership are provided by the
General Partner which receives fees and certain reimbursements for these
services. Therefore, the General Partner is responsible for any costs
associated with Year 2000 issues. Based on a recent assessment, the General
Partner determined that it will be required to modify or replace portions
of its software so that its computer systems will function properly with
respect to dates in the year 2000 and thereafter. The General Partner
presently believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue will not pose significant
operational problems for its computer systems. The General Partner expects
that its modifications will be complete by 1999. As of December 31, 1997,
the General Partner has not incurred any significant expenses.
The Partnership and the General Partner are not responsible for ensuring that
the computer peripheral equipment that it leases to customers is Year 2000
compliant, however, this equipment may be subject to declines in value or
technological obsolescence due to the equipment not being Year 2000
compliant. The Year 2000 issue may also affect the carrying value of the
equipment when it comes off of lease or be detrimental in negotiating
release rates which may lead to equipment write downs or less than
favorable lease recoveries.
6
<PAGE>
Commonwealth Income &
Growth Fund III
Financial Statements
From April 28, 1997 (date of inception)
to December 31, 1997
Contents
<TABLE>
<S> <C>
Report of Independent Auditors..............................................F-2
Audited Financial Statements
Balance Sheet...............................................................F-3
Statement of Operations.....................................................F-4
Statement of Partners' Capital..............................................F-5
Statement of Cash Flows.....................................................F-6
Notes to Financial Statements...............................................F-7
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
The General Partner and Limited Partner
Commonwealth Income & Growth Fund III
We have audited the accompanying balance sheet of Commonwealth Income & Growth
Fund III as of December 31, 1997, and the related statements of operations,
partners' capital, and cash flows from April 28, 1997 (date of inception) to
December 31, 1997. These financial statements are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Commonwealth Income & Growth
Fund III at December 31, 1997, and the results of its operations and its cash
flows from April 28, 1997 (date of inception) to December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 6, 1998
F-2
<PAGE>
Commonwealth Income &
Growth Fund III
Balance Sheet
December 31, 1997
<TABLE>
<S> <C>
Assets
Cash ...................................................... $1,500
------
------
Partners' capital
General partner ........................................... $1,000
Limited partner ........................................... 500
------
Total partners' capital ................................... $1,500
</TABLE>
------
------
See accompanying notes.
F-3
<PAGE>
Commonwealth Income &
Growth Fund III
Statement of Operations
From April 28, 1997 (date of inception)
to December 31, 1997
None
See accompanying notes.
F-4
<PAGE>
Commonwealth Income &
Growth Fund III
Statement of Partners' Capital
From April 28, 1997 (date of inception)
to December 31, 1997
<TABLE>
<CAPTION>
General Limited
Partner Partner Total
--------- ---------- --------
<S> <C> <C> <C>
Initial contribution .............. $1,000 $ 500 $1,500
------ ------ ------
------ ------ ------
</TABLE>
See accompanying notes.
F-5
<PAGE>
Commonwealth Income &
Growth Fund III
Statement of Cash Flows
From April 28, 1997 (date of inception)
to December 31, 1997
<TABLE>
<S> <C>
Financing activities
General partner and limited partner contributions ................ $1,500
------
Net increase and cash at end of period ........................... $1,500
------
------
</TABLE>
See accompanying notes.
F-6
<PAGE>
Commonwealth Income &
Growth Fund III
Notes to Financial Statements
December 31, 1997
1. The Partnership
Commonwealth Income & Growth Fund III (the "Partnership") is a limited
partnership which was organized in the Commonwealth of Pennsylvania. The
Partnership has not yet commenced operations. The Partnership was organized to
acquire, own, lease, and sell income-producing equipment.
The General Partner's initial contribution consists of a $1,000 cash
contribution from Commonwealth Income & Growth Fund, Inc., a wholly-owned
subsidiary of Commonwealth of Delaware, Inc. which in turn is a wholly-owned
subsidiary of Commonwealth Capital Corp. The General Partner may in its sole
discretion purchase units of limited partnership interests (the "Units"). The
Initial Limited Partner has contributed $500 for the purchase of a limited
partnership interest.
The Partnership plans to offer for sale, through a public offering from 75,000
to 750,000 Units at a cash purchase price of $20 per Unit.
2. Related Party Transactions
The Partnership will pay an organizational fee to the General Partner in
connection with the issuance and distribution of Units of 3% of the first $10
million of Limited Partner Capital Contributions and 2% thereafter. The General
Partner will pay the organizational and offering expenses of the offering from
its fee. The General Partner and its affiliates including Commonwealth Capital
Securities Corp. will receive other substantial fees and compensation in
connection with the offering of Units and management of the Partnership's
assets. See "Compensation of General Partner and Affiliates," "Estimated Use of
Proceeds," and "Allocations and Distributions" in the Prospectus of the
Partnership for information with respect to the compensation to be paid to the
General Partner and its affiliates including Commonwealth Capital Securities
Corp. and the allocations of income, losses, and cash distributions.
3. Subsequent Event
Subsequent to December 31, 1997, the Partnership completed the first closing of
the public offering from which the Partnership issued 76,284 limited partnership
units and raised $1,342,598 of net proceeds ($1,525,680 less offering costs of
$183,082). The Company also committed to purchase approximately $857,000 in
equipment as of February 9, 1998.
F-7
<PAGE>
Commonwealth Capital Corp.
Consolidated Financial Statements
Years ended February 28, 1998 and 1997
<TABLE>
<CAPTION>
<S> <C>
CONTENTS
Report of Independent
Auditors............................................................................ F-9
Consolidated Financial Statements
Consolidated Balance Sheets......................................................... F-10
Consolidated Statements of Operations and Retained Earnings......................... F-11
Consolidated Statements of Cash Flows............................................... F-12
Notes to Consolidated Financial Statements.......................................... F-13
</TABLE>
F-8
<PAGE>
Report of Independent Auditors
The Stockholder
Commonwealth Capital Corp.
We have audited the accompanying consolidated balance sheets of Commonwealth
Capital Corp. as of February 28, 1998 and 1997, and the related consolidated
statements of operations and retained earnings and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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 consolidated financial position of Commonwealth
Capital Corp. at February 28, 1998 and 1997, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 3, 1998
F-9
<PAGE>
Commonwealth Capital Corp.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
FEBRUARY 28
1998 1997
-----------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 143,089 $ 162,028
Receivables from Income Funds 190,749 308,686
Advances to Income Funds 232,000 317,400
Other receivables 114,607 134,335
Income taxes receivable 50,000 33,000
Minimum lease payments receivable, net of
unearned interest income of $2,480,187 in 1998
and $4,316,972 in 1997 5,785,000 9,045,000
Deferred tax asset - 122,000
Investment in Income Funds 15,200 18,200
Other assets 11,731 10,976
Office furniture and equipment, net of
accumulated depreciation of $97,926
in 1998 and $84,668 in 1997 19,926 32,323
Deferred offering costs 223,670 -
-------
Total assets $ 6,785,972 $ 10,183,948
---------------- ----------------
---------------- ----------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued expenses $ 252,987 $ 118,144
Due to Income Funds 46,113 -
Nonrecourse obligations 5,785,000 9,045,000
--------- ---------
Total liabilities 6,084,100 9,163,144
Stockholder's equity:
Common stock, $1 par value:
Authorized shares - 1,000
Issued and outstanding shares - 10 10 10
Retained earnings 701,862 1,020,794
------- ---------
Total stockholder's equity 701,872 1,020,804
------- ---------
Total liabilities and stockholder's equity $ 6,785,972 $ 10,183,948
---------------- ----------------
---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-10
<PAGE>
Commonwealth Capital Corp.
Consolidated Statements of Operations and Retained Earnings
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28
1998 1997
-----------------------------------
<S> <C> <C>
Income:
Fee income from Income Funds $ 1,352,102 $ 1,508,572
Commission income 182,428 -
Interest income on minimum lease payments
receivable 505,645 616,353
Equity in income of Income Funds 8,060 60,004
Interest and other 73,194 195,979
------ -------
2,121,429 2,380,908
Expenses:
Personnel 857,038 708,767
General and administrative 501,927 568,489
Selling 127,043 158,658
Brokerage fees 174,700 -
Interest expense on nonrecourse obligations 505,645 616,353
Depreciation 13,258 17,682
Provision for uncollectible advances and
notes receivable from Income Funds 188,750 279,000
------- -------
2,368,361 2,348,949
--------- ---------
(Loss) income before provision for income taxes (246,932) 31,959
Provision for income taxes 72,000 18,300
------ ------
Net (loss) income (318,932) 13,659
Retained earnings at beginning of year 1,020,794 1,007,135
--------- ---------
Retained earnings at end of year $ 701,862 $ 1,020,794
---------------- ----------------
---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-11
<PAGE>
Commonwealth Capital Corp.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28
1998 1997
-----------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (318,932) $ 13,659
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation 13,258 17,682
Deferred income tax provision 122,000 10,000
Provision for uncollectible advances and notes
receivable from Income Funds 188,750 279,000
Equity in income of Income Funds (8,060) (60,004)
Changes in operating assets and liabilities:
Receivables from Income Funds 105,187 150,095
Other receivables 19,728 (90,092)
Income taxes receivable (17,000) 8,300
Other assets (755) 1,108
Accounts payable and accrued expenses (88,827) (127,608)
------- --------
Net cash provided by operating activities 15,349 202,140
INVESTING ACTIVITIES
Net advances to Income Funds (90,600) (373,388)
Capital expenditures (861) (9,534)
Investment in Income Funds (1,000) (1,000)
Distributions from Income Funds 58,173 60,004
------ ------
Net cash used in investing activities (34,288) (323,918)
Net decrease in cash and cash equivalents (18,939) (121,778)
Cash and cash equivalents at beginning of year 162,028 283,806
------- -------
Cash and cash equivalents at end of year $ 143,089 $ 162,028
---------------- ----------------
---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-12
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Financial Statements (continued)
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.
The Company is dependent on the compensation it receives from the Income Funds.
This compensation may be reduced due to the financial performance of each Income
Fund. There are certain Income Funds that have deferred fees subsequent to
February 28, 1998 because distributions to the limited partners were reduced
because of their financial performance. If the financial performance of
additional Income Funds deteriorates and the distributions to the limited
partners are reduced, there is no assurance that the Company would be able to
continue to collect fees for services provided. Management believes that fees
currently being collected will be sufficient to enable it to support its
operations during the next year. 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 financial statements include 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 financial statements. The balance
sheets are presented on an unclassified basis in accordance with leasing
industry practice.
F-13
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
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 those estimates.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with the current
year presentation.
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 and
1997, cash equivalents were invested in a money market fund investing directly
in treasury obligations.
REVENUE RECOGNITION
The Company recognizes fees as earned in accordance with the various General
Partnership and Trust Agreements. The Company recognizes commission income and
brokerage fee expense on an accrual basis based on the trade date of the
underlying customer transactions. Interest income on minimum lease payments
receivable is recognized as earned.
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.
DEFERRED OFFERING COSTS
Deferred offering costs represent amounts incurred by the Company for the
organization of an Income Fund. These costs are recovered from the Income Fund
through fees as cash proceeds are raised through the sale of Limited Partnership
Units during the offering period or if necessary the future operations of the
Income Fund. The $223,670 of deferred offering costs at February 28, 1998,
relate to an Income Fund whose offering period expires in July 1999.
F-14
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
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 and 1996, is
as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------
<S> <C> <C>
Total assets $ 29,851,000 $ 34,502,000
Nonrecourse debt 10,903,000 10,450,000
Other liabilities 2,281,000 2,952,000
Partners' capital 16,667,000 21,067,000
Net income (loss) 280,000 (2,878,000)
</TABLE>
The Company has guaranteed the performance of certain non-monetary obligations
of the General Partner Subsidiaries to the respective Income Funds, primarily
the responsibility for management of the Income Funds. In addition, the Company
is responsible for certain capital funding requirements of the General Partner
Subsidiaries which it satisfies through noninterest-bearing demand notes. Such
notes total approximately $4,166,000 at February 28, 1998 and 1997 and have been
eliminated in the consolidation of the accompanying financial statements.
INVESTMENT IN INCOME FUNDS (CONTINUED)
The compensation to the Company from the Income Funds includes: (1) Equipment
Acquisition Fees (4% of the purchase price of all equipment purchased by the
Income Funds); (2) Debt Placement Fees (1% of financed equipment by the Income
Funds); (3) Sales Fees Expense (3% of gross proceeds of sold equipment by the
Income Funds); and (4) Equipment Management Fees (5% of the gross operating
lease revenues of the Income Funds). The Company earned approximately $1,352,000
and $1,509,000 in fees for managing the Income Funds during the years ended
February 28, 1998 and 1997, respectively.
Fees from two Income Funds for the years ended February 28, 1998 and 1997, each
exceeding 10% of total fee income for the year, aggregated 66% and 60%,
respectively.
F-15
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Financial Statements (continued)
3. LEASE COMMITMENTS
GSFF acted as lessor in a series of lease purchase transactions whereby the
underlying assets were funded by investors through certificates of participation
in the lease payments. All of GSFF's rights as lessor were assigned to a
third-party agent which administers the collection of rentals paid by the
lessee. The obligations under the certificates are nonrecourse to GSFF.
Accordingly, any reduction in the minimum lease payments receivable for
uncollectible accounts would result in an equal reduction of the nonrecourse
obligations. Amounts outstanding at February 28, 1998 and 1997 under the leases
and certificates of participation are approximately $5,785,000 and $9,045,000,
respectively. These amounts are included in minimum lease payments receivable
and nonrecourse obligations in the accompanying balance sheets. Of these
amounts, $4,530,000 and $7,690,000, respectively, are secured by mortgage
insurance policies maintained by the lessee. The certificates mature from 1998
to 2011. The Company recognized interest income and interest expense in
connection with the lease purchase transactions of $505,645 and $616,353 for
fiscal years ended February 28, 1998 and 1997, respectively.
Future minimum lease payments to be received as of February 28, 1998 are as
follows:
<TABLE>
<CAPTION>
<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. Rent expense
for the years ended February 28, 1998 and 1997 was approximately $183,000 and
$181,000, respectively. 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. There was no profit-sharing contribution for the years
ended February 28, 1998 and 1997.
F-16
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Financial Statements (continued)
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 and $307,000 at February
28, 1998 and 1997, respectively, 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 and $78,000 at February 28, 1998
and 1997, respectively. The Company has recorded a valuation allowance of
approximately $237,000 and $185,000 at February 28, 1998 and 1997, respectively,
because the Company concluded the future realization of the assets could not be
reasonably assured based on current and expected operating results.
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 $40,000 which expire in 2013. The Company also has state
net operating loss carryforwards of $1,512,000 which expire in 1999 through
2001.
The current income tax benefit recorded for the year ended February 28, 1998
reflects the carryback of the 1998 net operating loss to prior year tax returns.
The income tax provision is comprised of the following:
<TABLE>
<CAPTION>
1998 1997
------------------------------
<S> <C> <C>
Current $ (50,000) $ 8,300
Deferred 122,000 10,000
------- ------
$ 72,000 $ 18,300
----------- -----------
----------- -----------
</TABLE>
6. RELATED PARTY TRANSACTIONS
For the years ended February 28, 1998 and 1997, certain of the General Partner
Subsidiaries agreed to waive or forgive the related Income Funds' obligations to
pay certain equipment management, acquisition, and financing fees in the amount
of $61,000 and $157,000, respectively. Accordingly, fee income from Income Funds
is reflected net of these amounts.
F-17
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Financial Statements (continued)
6. RELATED PARTY TRANSACTIONS (CONTINUED)
During 1998 and 1997, the Company made $697,000 and $373,388, respectively, in
cash advances to certain Income Funds to fund cash distributions to limited
partners. During 1998 and 1997, the Company determined that approximately
$176,000 and $279,000, respectively, 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. SUPPLEMENTAL CASH FLOW INFORMATION
Other noncash activities associated with lease transactions:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------
<S> <C> <C>
Reduction of minimum lease receivable and repayment
of nonrecourse obligation associated with direct
payment made by lessee to bank $ 3,260,000 $ 730,605
---------------- ----------------
---------------- ----------------
</TABLE>
8. LEGAL SETTLEMENT
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.
In 1997, the Company settled a dispute over contract terms with a former lessee,
whereby the lessee agreed to pay $190,000 for release of all future liability.
The settlement was included in other income for the year ended February 28,
1997.
F-18
<PAGE>
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
Balance Sheets
February 28, 1998 and 1997
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors................................................. F-20
Balance Sheets................................................................. F-21
Notes to Balance Sheets........................................................ F-22
</TABLE>
F-19
<PAGE>
Report of Independent Auditors
To the Stockholder
Commonwealth Income & Growth Fund, Inc.
We have audited the accompanying balance sheets of Commonwealth Income & Growth
Fund, Inc. (an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
as of February 28, 1998 and 1997. These balance sheets are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
balance sheets 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 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 audits provide a reasonable basis for our opinion.
In our opinion, the balance sheets referred to above present fairly, in all
material respects, the financial position of Commonwealth Income & Growth Fund,
Inc. at February 28, 1998 and 1997, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 3, 1998
F-20
<PAGE>
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
Balance Sheets
<TABLE>
<CAPTION>
FEBRUARY 28
1998 1997
--------------------- ---------------------
<S> <C> <C>
ASSETS
Cash $ 500 $ 500
Accounts receivable from Income Funds and
Commonwealth Capital Corp. - 2,069
Investment in Partnerships 3,000 2,000
------------------ ---------------
------------------ ---------------
$ 3,500 $ 4,569
------------------ ---------------
------------------ ---------------
LIABILITIES
Accounts payable to Income Funds and
Commonwealth Capital Corp. $ 2,400 $ 3,469
STOCKHOLDERS' EQUITY
Common stock at $1 stated value:
Authorized shares--1,000
Issued and outstanding shares--100 100 100
Additional paid-in capital 1,001,000 1,001,000
------------------ ---------------
1,001,100 1,001,100
Less: note receivable (1,000,000) (1,000,000)
------------------ ---------------
1,100 1,100
------------------ ---------------
------------------ ---------------
$ 3,500 $ 4,569
------------------ ---------------
------------------ ---------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-21
<PAGE>
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
Notes to Balance Sheets
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.
F-22
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Unaudited Balance Sheet ...................................... F-24
Unuadited Statement of Operations from January 27, 1998
(commencement of operations) to September 30, 1998........... F-25
Unuadited Statement of Partners' Capital from January 27, 1998
(commencement of operations) to September 30, 1998........... F-26
Unuadited Statement of Cash Flows from January 27, 1998
(commencement of operations) to September 30, 1998........... F-27
Notes to Financial Statements................................. F-28
</TABLE>
F-23
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
BALANCE SHEET
(UNAUDITED)
September 30, 1998
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents $ 448,718
Lease income receivables 63,942
Other receivables 1,755
Computer equipment, at cost 1,414,520
Accumulated depreciation (149,054)
------------
1,265,466
Organization costs and deferred expenses, net of
accumulated amortization of $18,037 in 1998 74,271
------------
Total assets $ 1,854,152
------------
------------
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 24,811
Accounts payable - Commonwealth Capital Corp. 500
Unearned lease income 52,192
Payables for computer equipment 27,639
Partners' capital:
General partner 1,000
Limited partners 1,748,010
------------
Total liabilities and partners' capital $ 1,854,152
------------
------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-24
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
STATEMENTS OF OPERATIONS
(Unaudited)
From January 27, 1998 (commencement of operations) to September 30, 1998
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, 1998 September 30, 1998
------------------ -------------------
<S> <C> <C>
Income:
Lease $ 123,607 $ 185,922
Interest and other 5,412 32,349
---------------------------------------
129,019 218,271
Expenses:
Operating, excluding depreciation 26,187 29,376
Equipment management fee - General Partner 6,180 9,296
Depreciation 108,165 149,054
Amortization of organization costs and deferred expenses 6,915 18,037
---------------------------------------
147,447 205,763
---------------------------------------
Net income (loss) $ (18,428) $ 12,508
---------------------------------------
---------------------------------------
Net income (loss) per equivalent limited partnership units $ (0.18) $ 0.13
---------------------------------------
---------------------------------------
Weighted average number of equivalent limited partnership
units outstanding during the period 102,690 99,208
---------------------------------------
---------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-25
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
STATEMENT OF PARTNERS' CAPITAL
(UNAUDITED)
From January 27, 1998 (commencement of operations) to June 30, 1998
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNER GENERAL LIMITED
UNITS UNITS PARTNER PARTNER TOTAL
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Initial contribution 50 25 $ 1,000 $ 500 $ 1,500
Contributions - 101,574 - 2,031,480 2,031,480
Offering costs - (222,501) (222,501)
Net income 269 5,765 6,034
Distributions (269) (26,593) (26,862)
-----------------------------------------------------------------
Partners' capital - March 31, 1998 50 101,599 1,000 1,788,651 1,789,651
Contributions - 916.627 - 18,333 18,333
Offering costs - (2,007) (2,007)
Net income 442 24,460 24,902
Distributions (442) (43,718) (44,160)
-----------------------------------------------------------------
Partners' capital - June 30, 1998 50 102,516 1,000 1,785,719 1,786,719
Contributions - 1,561 - 31,214 31,214
Offering costs - (3,419) (3,419)
Net income (loss) 471 (18,899) (18,428)
Distributions (471) (46,605) (47,076)
----------------------------------------------------------------
Partners' capital - September 30, 1998 50 104,076 $ 1,000 $ 1,748,010 $ 1,749,010
----------------------------------------------------------------
----------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-26
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
STATEMENT OF CASH FLOWS
(Unaudited)
From January 27, 1998 (commencement of operations) to September 30, 1998
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income $ 12,508
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization
167,091
Other non-cash activities included in determination of net income
(14,703)
Changes in operating assets and liabilities:
Lease income receivables (63,942)
Other receivables and deposits (1,755)
Accounts payable 24,811
Accounts payable - Commonwealth Capital Corp. 500
Unearned lease income 52,192
Organization cost paid to the General Partner (21,856)
--------------
Net cash provided by operating activities 154,846
INVESTING ACTIVITIES
Capital expenditures (1,372,178)
Equipment acquisition fees paid to the General Partner (70,452)
--------------
Net cash used in investing activities (1,442,630)
FINANCING ACTIVITIES
Partners' contributions 2,082,527
Offering costs (205,105)
Offering costs paid to the General Partner (22,822)
Distributions to partners (118,098)
--------------
Net cash provided by financing activities 1,736,502
--------------
Cash and cash equivalents at September 30, 1998 $ 448,718
--------------
--------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-27
<PAGE>
COMMON WEALTH INCOME & GROWTH FUND III
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
BASIS OF PRESENTATION
The financial information presented as of any date other than December 31,
has been prepared from the books and records without audit. Financial
information as of December 31 has been derived from the audited financial
statements of Commonwealth Income & Growth Fund I (the "Partnership"), but
does not include all disclosures required by generally accepted accounting
principles. In the opinion of management, all adjustments, consisiting only
of normal recurring adjustments, necessary for a fair presentation of the
financial information for the periods indicated have been included. For
further information regarding the Partnership's accounting policies, refer to
the financial statements and related notes included in the Partnership's
annual report on Form 10-K for the year ended December 31, 1997.
NET INCOME (LOSS) PER EQUIVALENT LIMITED PARTNERSHIP UNIT
The net income (loss) per equivalent limited partnership unit is computed
based upon net income allocated to the limited partners and the weighted
average number of equivalent units outstanding during the period.
F-28
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 31, 1998
LIQUIDITY AND CAPITAL RESOURCES
The Partnership satisfied its minimum offering requirements and commenced
operations on January 27, 1998. On that date, subscribers for 76,284 Units were
admitted as Limited Partners of the Partnership. Through September 30, 1998,
subscribers owning an additional 27,792 Units were admitted as Limited Partners.
The Partnership's primary sources of capital for the nine months ended September
30, 1998, were from Partners' contributions of $2,082,000. The primary uses of
cash for the nine months ended September 30, 1998, were for the payment of
offering costs of $250,000, the payment of preferred distributions to partners
of $118,000, the payment of acquisition fees of $70,000, and capital
expenditures of $1,372,000 for the purchase of computer equipment.
Currently, Partners' contributions from the Partnership's leases are invested in
money market accounts investing 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 September
30, 1998, the Partnership had approximately $449,000 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. As
of September 30, 1998, the Partnership had future minimum rentals on
noncancellable operating leases of $116,000 for the year ending December 31,
1998 and $875,000, thereafter. The Partnership intends to continue purchasing
additional computer equipment with existing cash, as well as when future cash
becomes available. In addition, the Partnership may incur debt in purchasing
computer equipment after the net proceeds of the Offering are fully invested in
Equipment.
The Partnership's cash from operations is expected to continue to be adequate to
cover all operating expenses, liabilities, and preferred distributions to
Partners during the next 12 month period. If available Cash Flow or Net
Disposition Proceeds are insufficient to cover the Partnership expenses and
liabilities on a short and long term basis, the Partnership will attempt to
obtain additional funds by disposing of or refinancing Equipment, or by
borrowing within its permissible limits. The Partnership may also reduce the
distributions to its Partners if it deems necessary. Since the Partnership's
leases are on a "triple-net" basis, no reserve for maintenance and repairs are
deemed necessary.
RESULTS OF OPERATIONS
For the quarter ended September 30, 1998, the Partnership recognized income of
$129,000 and expenses of $147,000, resulting in the net loss of $18,000. For the
quarter ended June 30, 1998, the Partnership recognized income of $77,000 and
expenses of $52,000, resulting in net income of $25,000. For the quarter ended
March 31, 1998, the Partnership recognized income of $12,000, and expenses of
$6,000, resulting in net income of $6,000.
During the nine months ended September 30, 1998, the Partnership expended
$1,372,000 and incurred a computer equipment payable of $28,000 to acquire seven
leases, which generated approximately $186,000 in revenue.
The equipment management fee is equal to 5% of the gross lease revenue
attributable to equipment which is subject to operating leases. The expense for
the nine months ended September 30, 1998, was approximately $9,000.
Depreciation and amortization expenses consist of depreciation on computer
equipment, amortization of organizational costs, and equipment acquisition fees.
The expense for the nine months ended September 30, 1998, was approximately
$167,000.
For the nine month period ended September 30, 1998, the Partnership generated
cash flow from operating activities of $155,000, which includes net income of
$13,000, and depreciation and amortization expenses of $167,000. Other noncash
activities included in the determination of net income includes lease income
paid to original lessors in lieu of cash payments for computer equipment of
$15,000.
F-29
<PAGE>
COMMONWEALTH CAPITAL CORP.
UNAUDITED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
PAGE
<S> <C>
Unaudited Consolidated Balance Sheet....................................... F-31
Notes to Balance Sheet..................................................... F-32
</TABLE>
F-30
<PAGE>
COMMONWEALTH CAPITAL CORP.
Consolidated Balance Sheet
September 30, 1998
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Cash $ 41,431
Receivables from Income Funds 215,064
Advances to Income Funds 14,000
Other receivables 77,912
Income Tax Receivable 50,000
Minimum lease payments receivable net of unearned interest income 5,365,000
Investment in Income Funds 15,200
Property and equipment, at cost, net of accumulated depreciation of $104,581 13,271
Other assets 15,329
Deferred offering cost 246,792
------------
Total assets $ 6,053,999
------------
------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued expenses $ 171,547
Nonrecourse obligations 5,365,000
------------
Total liabilities 5,536,547
Stockholder's equity:
Common stock, $1 par value:
Authorized shares - 1,000
Issued and outstanding shares - 10 10
Retained earnings 517,442
------------
Total stockholder's equity 517,452
------------
Total liabilities and stockholder's equity $ 6,053,999
------------
------------
</TABLE>
NOTE: A PURCHASE OF A UNIT IS NOT ACQUIRING AN INTEREST IN THIS CORPORATION.
F-31
<PAGE>
COMMONWEALTH CAPITAL CORP.
NOTES TO CONSOLIDATED BALANCE SHEET
September 30, 1998
(Unaudited)
BASIS OF PRESENTATION
The balance sheet presented has been prepared from the books and records of
the Company without audit. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the balance sheet for the period indicated have been
included. For further information regarding the Company's accounting
policies, refer to the financial statements and related notes at Febraury 29,
1998 and for the years then ended included elsewehere herein.
F-32
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND, INC.
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF COMMONWEALTH CAPITAL CORP.)
UNAUDITED BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
PAGE
<S> <C>
Unaudited Balance Sheet............................................................... F-34
Notes to Balance Sheet................................................................ F-35
</TABLE>
F-33
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND, INC.
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF COMMONWEALTH CAPITAL CORP.)
BALANCE SHEETS
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Cash $ 500
Receivables from Income Funds 0
Investment in Partnership 3,000
----------
$ 3,500
----------
----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable to CCC $ 2,400
----------
2,400
Common stock at stated value, no par value:
Authorized shares--2,000
Issued and outstanding shares--100 $ 1,000
Additional paid-in capital 1,000,100
----------
1,001,100
Less: note receivable (1,000,000)
----------
1,100
----------
$ 3,500
----------
----------
</TABLE>
SEE ACCOMPANYING NOTES.
Note: A purchaser of a Unit is not acquiring an interest in this corporation.
F-34
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND, INC.
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF COMMONWEALTH CAPITAL CORP.
NOTES TO CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
BASIS OF PRESENTATION
The balance sheet presented has been prepared from books and records of the
Company without audit. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the balance sheet for the period indicated have been
included. For further information regarding the Company's accounting
policies, refer to the balance sheet and related notes at February 29, 1998
included elsewhere herein.
F-35
<PAGE>
APPENDIX II
PRIOR PERFORMANCE TABLES
T-1
<PAGE>
APPENDIX II
PRIOR PERFORMANCE TABLES
The information in this Appendix II contains certain relevant summary
information concerning prior programs sponsored by the General Partner and
its Affiliates (the "Prior Programs") which have investment objections
similar to the Partnership. See "Management - Prior Performance."
The Investment objectives of the Prior Programs, which are substantially
the same as those of the Partnership, generally include the acquisition,
lease and sale of Equipment to generate revenues sufficient to make
distributions to investors, the preservation and protection of investors'
capital, the potential use of income to purchase additional Equipment, and
the potential for capital appreciation.
THE INFORMATION SET FORTH IN THE FOLLOWING PERFORMANCE TABLES IS
INCLUDED HEREIN SOLELY TO INFORM INVESTORS OF THE PRIOR AND NOT FUTURE
PERFORMANCE OF EQUIPMENT PROGRAMS PREVIOUSLY SPONSORED BY THE GENERAL PARTNER
AND ITS AFFILIATES AND SHOULD NOT BE CONSIDERED AS INDICATIVE OF POSSIBLE
CAPITALIZATION OR OPERATIONS OF THE PARTNERSHIP. PURCHASERS OF UNITS OFFERED
HEREBY WILL HAVE NO INTEREST IN THE PROGRAMS DESCRIBED ON THE FOLLOWING
TABLES UNLESS THEY ARE ALSO INVESTORS IN THOSE PROGRAMS.
Description of Tables
The following Tables are included herein:
Table I: Experience in Raising and Investing Funds
Table II: Compensation to General Partners and Affiliates
Table III: Operating Results of Prior Programs
Table V: Equipment Sales
Table VI: Acquisition of Equipment by Prior Programs
Unless otherwise indicated in the Tables, all information contained in
the Tables is as of December 31, 1997.
T-2
<PAGE>
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
The following table sets forth certain information about the
experience of the General Partner in raising and investing
funds for three private equipment leasing programs and two
public equipment leasing programs sponsored by the General
Partner and Affiliates which closed in the most recent three
years. It is expected that the prior programs will
continue to purchase additional equipment.
T-3
<PAGE>
COMMONWEALTH CAPITAL CORP.
EXPERIENCE IN RAISING AND INVESTING FUNDS
AS OF DECEMBER 31, 1997
(TABLE I)
<TABLE>
<CAPTION>
COMMONWEALTH
COMMONWEALTH EQUIPMENT
INCOME & GROWTH INCOME PRIVATE
FUND II FUND - VI, L.P.
------------------------------------
<S> <C> <C>
Offering Information:
Amount offered (maximum) 15,000,000 1,500,000
Dollar Amount Sold 9,235,185 1,500,000
(1) Dealer/Manager Expenses 830,092 75,000
(2) Offering/Organizational Expenses 327,056 51,505
-----------------------------------
Net Proceeds Available 8,078,037 1,373,495
Total Equipment Purchases:
Equipment purchased with cash 8,806,724 1,188,102
Equipment financed 2,359,033 496,342
Rent paid to original lessor in leiu of cash 16,200 7,375
Obligation incurred in connection to leased equipment 502,721 264,561
-----------------------------------
11,684,678 1,956,380
% of Equipment financed as of December 31, 1997 16.6% 20.2%
Initial Acquisition Fees (%) (3) 3.4% 2.2%
Date Offering Commenced 05/12/95 09/30/96
Date Offering Completed 05/12/97 09/30/96
Average Initial Term of Leases (in months) 34 30
Months from closing to invest 90% 1 6
</TABLE>
(1) Dealer/Manager expenses include commissions to brokers, due diligence and
out-of-pocket expenses.
(2) Offering/Organizational expenses consist of legal fees, blue sky filings,
accounting fees, printing charges for perspective books and the guarantee
fee.
(3) Fees were paid to the General Partner/Management Trustee at fund closing.
Prior performance is not indicative of future performance.
T-4
<PAGE>
TABLE II
COMPENSATION TO
GENERAL PARTNERS AND AFFILIATES
The following table sets forth certain information concerning all the
compensation earned by the General Partner and its Affiliates for three
private equipment leasing programs and two public equipment leasing programs
sponsored by the General Partner and Affiliates which closed in the most
recent three years. Amounts are from two sources: (1) proceeds from the
offering and (2) gross revenues. Amounts for operations are cumulative.
T-5
<PAGE>
COMMONWEALTH CAPITAL CORP.
COMPENSATION TO GENERAL PARTNERS AND AFFILITATES
AS OF DECEMBER 31, 1997
(TABLE II)
<TABLE>
<CAPTION>
COMMONWEALTH
COMMONWEALTH EQUIPMENT
INCOME & GROWTH INCOME PRIVATE
FUND II FUND -VI, L.P.
---------------------------------------
<S> <C> <C>
Date offering commenced 09/22/95 09/30/96
Dollar amount raised 9,235,185 $1,500,000
Amount paid from the proceeds of
offering, reinvestment and/or debt:
Initial Acquisition Fee 310,694 33,000
Organizational Fee 277,056 7,701
Cash generated from operations before
deducting payments to the General
Partner and Affiliates 3,146,143 191,997
Amount paid to the General Partner
and Affiliates from operations:
Equipment Management Fee 183,160 22,897
Acquisition Fee 162,619 13,691
Finance Fee 27,470 0
Dollar amount of equipment sales and
refinancing before deducting
payments to the General Partner and
Affiliates 0 0
Amount paid to the General Partner and
Affiliates from equipment sales
and refinancing 0 0
</TABLE>
T-6
<PAGE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
The following table sets forth certain information about the operating
results of eight prior private programs and two prior public programs
sponsored by the General Partner and its Affiliates during the most recent
five years. This table provides a computation of Net Income, and cash flows,
as well as investment data per a $1,000 investment.
T-7
<PAGE>
COMMONWEALTH EQUIPMENT INCOME TRUST IX
OPERATING RESULTS OF PRIOR PROGRAMS
(TABLE III)
PROGRAM INCEPTION TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMPUTATION OF NET INCOME (LOSS)
Months of Operations ** 12 12 12 12 12
Gross Revenues 1,046,655 1,598,529 1,701,131 1,209,610 967,856
Less: Operating Expenses 6,295 41,237 30,992 25,492 21,681
Equipment Management Fee 50,681 79,067 84,862 59,873 42,724
Interest Expense 34,897 68,876 100,272 73,547 43,597
Loss on Sale of Computer Equipment - 113,283 35,784 - -
Depreciation and Amortization 654,388 1,549,475 1,596,729 1,294,695 732,008
------------------------------------------------------------------
Net Income (Loss) - GAAP Basis 300,394 (253,409) (147,508) (243,997) 127,846
------------------------------------------------------------------
------------------------------------------------------------------
Federal Taxable Income (Loss) 28,736 (339,227) 152,888 (115,201) 70,093
Cash Distributions - GAAP Basis (385,305) (393,938) (393,938) (393,938) (393,939)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 300,394 (253,409) (147,508) (243,997) 127,846
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 654,388 1,549,475 1,596,729 1,294,695 732,008
Loss (Gain) on Sale of Computer Equipment
- 113,283 35,784 (1,964) (142,460)
Other Non-Cash Activities Included in the
Determination of Net Income (Loss) * (737,271) (739,868) (1,036,766) (772,069) (541,822)
Net Change in Operating Assets and Liabilities 105,157 (63,826) (19,953) 47,968 (103,138)
--------------------------------------------------------------------
Net Cash Provided by Operating Activities 322,668 605,655 428,286 324,633 72,434
Capital Expenditures (2,381,335) (207,196) (66,250) (314,020) -
Net Poceeds from Sale of Computer Equipment - 112,551 208,191 278,108 334,023
Payment of Computer Equipment Payable - (55,588) - - -
Increase in Organization Costs and Deferred Expenses (211,939) (64,138) (14,943) (52,207) -
--------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities (2,593,274) (214,371) 126,998 (88,119) 334,023
Trust Beneficiaries & Managing Trustee Contributions 3,001,000 - - - -
Offering Costs (341,268) - - - -
Distributions to Trust Beneficiaries and Managing
Trustee (385,305) (393,938) (393,938) (393,938) (393,939)
--------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 2,274,427 (393,938) (393,938) (393,938) (393,939)
Net Increase (Decrease) in Cash 3,821 (2,654) 161,346 (157,424) 12,518
Cash at Beginning of Year - 3,821 1,167 162,513 5,089
------------------------------------------------------------------
------------------------------------------------------------------
Cash at End of Year 3,821 1,167 162,513 5,089 17,607
------------------------------------------------------------------
------------------------------------------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income (Loss) - GAAP Basis 100 (84) (49) (81) 43
Federal Taxable Income (Loss) to Investors 9 (115) 52 (39) 23
Cash Distributions to Investors - GAAP Basis (127) (130) (130) (130) (130)
Return of Capital to Investors - GAAP Basis 28 130 130 130 88
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented
was caused primarily by the acquisition of more financed equipment.
** Partnership commenced operations on 1/6/93
Prior performance is not indicative of future performance.
T-8
<PAGE>
COMMONWEALTH EQUIPMENT INCOME TRUST X
OPERATING RESULTS OF PRIOR PROGRAMS
(TABLE III)
PROGRAM INCEPTION TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMPUTATION OF NET INCOME (LOSS)
Months of Operations ** 6 12 12 12 12
Gross Revenues 469,154 1,942,165 2,356,253 2,042,037 1,203,991
Less: Operating Expenses 3,493 45,372 27,209 33,003 28,586
Equipment Management Fee 22,715 96,088 117,200 101,678 50,415
Interest Expense 19,922 111,203 103,563 121,373 78,668
Loss on Sale of Computer Equipment - - 247,173 275,138 -
Depreciation and Amortization 290,701 1,738,026 2,093,524 2,168,922 1,002,741
-------------------------------------------------------------------
Net Income (Loss) - GAAP Basis 132,323 (48,524) (232,416) (658,077) 43,581
-------------------------------------------------------------------
-------------------------------------------------------------------
Federal Taxable Income (Loss) 84,363 250,199 (424,225) (562,989) (138,334)
Cash Distributions - GAAP Basis (189,845) (484,848) (484,848) (484,848) (484,848)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 132,323 (48,524) (232,416) (658,077) 43,581
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 290,701 1,738,026 2,093,524 2,168,922 1,002,741
Loss (Gain) on Sale of Computer Equipment - - 247,173 275,138 (184,476)
Other Non-Cash Activities Included in the
Determination of Net Income (Loss) * (275,249) (921,663) (1,230,866) (1,329,258) (791,507)
Net Change in Operating Assets and Liabilities (1,074) 182,745 (73,394) (80,879) (3,805)
-------------------------------------------------------------------
Net Cash Provided by Operating Activities 146,701 950,584 804,021 375,846 66,534
Capital Expenditures (2,363,652) (1,291,685) (256,843) (133,637) (112,715)
Net Proceeds from Sale of Equipment - - 236,246 245,756 470,694
Payment of Computer Equipment Payable - - - - (97,920)
Increase in Organization Costs and Deferred Expenses (233,521) (105,713) (71,197) (35,876) (23,083)
-------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities (2,597,173) (1,397,398) (91,794) 76,243 236,976
Trust Beneficiaries & Managing Trustee Contributions 4,001,000 - - - -
Offering Costs (427,991) - - - -
Distributions to Trust Beneficiaries and Managing
Trustee (189,845) (484,848) (484,848) (484,848) (484,848)
--------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 3,383,164 (484,848) (484,848) (484,848) (484,848)
Net Increase (Decrease) in Cash 932,692 (931,662) 227,379 (32,759) (181,338)
Cash at Beginning of Year - 932,692 1,030 228,409 195,650
--------------------------------------------------------------------
Cash at End of Year 932,692 1,030 228,409 195,650 14,312
--------------------------------------------------------------------
--------------------------------------------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income (Loss) - GAAP Basis 33 (12) (58) (165) 11
Federal Taxable Income to Investors 21 62 (108) (142) (35)
Cash Distributions to Investors - GAAP Basis (47) (120) (120) (120) (120)
Return of Capital to Investors - GAAP Basis 14 120 120 120 109
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented
was caused primarily by the acquisition of more financed equipment.
** Partnership commenced operations on 7/7/93
Prior performance is not indicative of future performance.
T-9
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND - III, L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
Program Inception to December 31, 1997
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMPUTATION OF NET INCOME (LOSS)
Months of Operations ** 1 12 12 12 12
Gross Revenues 12,102 497,829 692,749 732,199 248,416
Less: Operating Expenses 128 18,904 8,570 8,958 8,432
Equipment Management Fee 550 24,301 34,258 36,429 12,871
Interest Expense -- 21,105 48,772 24,721 17,552
Loss on Sale of Computer Equipment -- -- -- 344,143 --
Depreciation and Amortization 6,548 381,105 552,463 694,502 230,099
-------------------------------------------------------------
Net Income (Loss) - GAAP Basis 4,876 52,414 48,686 (376,554) (20,538)
-------------------------------------------------------------
-------------------------------------------------------------
Federal Taxable Income (Loss) 8,149 61,991 20,091 (277,992) (101,578)
Cash Distributions - GAAP Basis (2,989) (121,212) (121,212) (121,212) (111,111)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 4,876 52,414 48,686 (376,554) (20,538)
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 6,548 381,105 552,463 694,502 230,100
Loss (Gain) on Sale of Computer Equipment -- -- -- 344,143 (5,603)
Other Non-Cash Activities Included in the
Determination of Net Income * (10,990) (183,329) (405,265) (421,022) (180,608)
Net Change in Operating Assets and Liabilities (4,941) 38,191 22,582 (63,498) 14,738
---------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities (4,507) 288,381 218,466 177,571 38,089
Capital Expenditures (370,110) (611,167) (55,001) (131,917) --
Net Proceeds from Sale of Equipment -- -- -- 46,586 29,471
Increase in Organization Costs and Deferred Expenses (24,600) (40,332) (9,442) (27,064) --
---------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities (394,710) (651,499) (64,443) (112,395) 29,471
Partners' Contributions 1,001,000 -- -- -- --
Offering Costs (60,400) -- -- -- --
Advance From Affiliate -- -- -- -- 14,000
Distributions to Partners (2,989) (121,212) (121,212) (121,212) (111,111)
---------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 937,611 (121,212) (121,212) (121,212) (97,111)
Net Increase (Decrease) in Cash 538,394 (484,330) 32,811 (56,036) (29,551)
Cash at Beginning of Year -- 538,394 54,064 86,875 30,839
---------------------------------------------------------------
Cash at End of Year 538,394 54,064 86,875 30,839 1,288
---------------------------------------------------------------
---------------------------------------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income - GAAP Basis 5 52 49 (377) (21)
Federal Taxable Income to Investors 8 61 20 (279) (102)
Cash Distributions to Investors - GAAP Basis (3) (120) (120) (120) (110)
Return of Capital to Investors - GAAP Basis 2 68 72 (120) (110)
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented
was caused primarily by the acquisition of more financed equipment.
** Partnership commenced operations on 12/23/93
Prior performance is not indicative of future performance.
T-10
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND I
OPERATING RESULTS OF PRIOR PROGRAMS
(TABLE III)
PROGRAM INCEPTION TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
1994 1995 1996 1997
----------------------------------------------------
<S> <C> <C> <C> <C>
COMPUTATION OF NET INCOME (LOSS)
Months of Operations **10 12 12 12
Gross Revenues 1,223,900 4,317,522 5,955,142 5,229,664
Less: Operating Expenses 71,556 93,265 80,883 111,263
Equipment Management Fee 56,473 207,230 295,420 259,757
Interest Expense 48,184 212,365 311,247 348,681
Loss on Sale of Computer Equipment -- -- 691,808 196,690
Depreciation and Amortization 952,640 3,849,897 5,895,531 5,219,396
---------------------------------------------------
Net Income (Loss) - GAAP Basis 95,047 (45,235) (1,319,747) (906,123)
---------------------------------------------------
---------------------------------------------------
Federal Taxable Income (Loss) 363,865 326,931 (1,726,506) (1,574,024)
Cash Distributions - GAAP Basis (443,614) (1,195,585) (1,275,467) (1,275,467)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 95,047 (45,235) (1,319,747) (906,123)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided
by Operating Activities:
Depreciation and Amortization 952,640 3,849,897 5,895,531 5,219,396
Loss (Gain) on Sale of Computer Equipment -- -- 691,808 196,690
Other Non-Cash Activities Included in the Determination
of Net Income (Loss) * (633,035) (1,514,550) (2,689,616) (2,848,893)
Net Change in Operating Assets and Liabilities (204,290) 121,072 (52,325) 85,384
---------------------------------------------------
Net Cash Provided by Operating Activities 210,362 2,411,184 2,525,651 1,746,454
Capital Expenditures (4,783,921) (6,353,404) (1,035,293) (1,347,809)
Accounts Payable - Commonwealth Capital Corp. -- -- (22,222) 1,823
Net Proceeds from Sale of Equipment -- -- 748,241 347,654
Payment of Equipment Payable -- -- (9,624) (195,864)
Equipment Acquisition Fees Paid to the General Partner (282,368) (403,549) (156,616) (213,186)
---------------------------------------------------
Net Cash Used in Investing Activities (5,066,289) (6,756,953) (475,514) (1,407,382)
Partners' Contributions 8,271,511 4,352,171 -- --
Offering Costs (932,803) (459,421) -- --
Debt Placement Fees (20,305) (29,920) (33,713) (30,141)
Distributions to Partners (443,614) (1,195,585) (1,275,467) (1,275,467)
---------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 6,874,789 2,667,245 (1,309,180) (1,305,608)
Net Increase (Decrease) in Cash 2,018,862 (1,678,524) 740,957 (966,536)
Cash at Beginning of Year 1,500 2,020,362 341,838 1,082,795
---------------------------------------------------
Cash at End of Year 2,020,362 341,838 1,082,795 116,259
---------------------------------------------------
---------------------------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income (Loss) - GAAP Basis 11 (4) (105) (72)
Federal Taxable Income to Investors 42 27 (138) (125)
Cash Distributions to Investors - GAAP Basis (53) (94) (100) (101)
Return of Capital to Investors - GAAP Basis 42 94 100 101
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented
was caused primarily by the acquisition of more financed equipment.
** Partnership commenced operations on 3/14/94
Prior performance is not indicative of future performance.
T-11
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND - IV, L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(TABLE III)
PROGRAM INCEPTION TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------------------------------
<S> <C> <C> <C>
COMPUTATION OF NET INCOME (LOSS)
Months of Operations ** 6 12 12
Gross Revenues 168,862 566,819 741,389
Less: Operating Expenses 10,818 12,115 9,931
Equipment Management Fee 7,432 27,759 37,194
Interest Expense 3,850 29,704 41,327
Loss on Sale of Computer Equipment -- -- --
Depreciation and Amortization 145,570 518,281 746,014
--------------------------------------
Net Income (Loss) - GAAP Basis 1,192 (21,040) (93,077)
--------------------------------------
--------------------------------------
Federal Taxable Income 30,850 86,491 137,013
Cash Distributions - GAAP Basis (98,829) (187,879) (187,879)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 1,192 (21,040) (93,077)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided
by Operating Activities:
Depreciation and Amortization 145,570 518,281 746,014
Loss (Gain) on Sale of Computer Equipment -- (5,301) --
Other Non-Cash Activities Included in the Determination
of Net Income * (41,201) (186,248) (365,738)
Net Change in Operating Assets and Liabilities (141,072) 166,935 (17,599)
--------------------------------------
Net Cash Provided by (Used in) Operating Activities (35,511) 472,627 269,600
Capital Expenditures (1,243,766) (147,878) (93,553)
Net Proceeds from Sale of Equipment -- 25,322 --
Increase in Organization Costs and Deferred Expenses (41,841) (34,289) (17,047)
Payment of Equipment Payable -- (125,392) --
--------------------------------------
Net Cash Used in Investing Activities (1,285,607) (282,237) (110,600)
Partners' Contributions 1,551,000 -- --
Offering Costs (95,820) -- --
Distributions to Partners (98,829) (187,879) (187,879)
--------------------------------------
Net Cash Provided by (Used in) Financing Activities 1,356,351 (187,879) (187,879)
Net Increase (Decrease) in Cash 35,233 2,511 (28,879)
Cash at Beginning of Year -- 35,233 37,744
--------------------------------------
Cash at End of Year 35,233 37,744 8,865
--------------------------------------
--------------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income - GAAP Basis 1 (14) (60)
Federal Taxable Income to Investors 20 60 88
Cash Distributions to Investors - GAAP Basis (63) (120) (120)
Return of Capital to Investors - GAAP Basis 62 120 120
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented
was caused primarily by the acquisition of more financed equipment.
** Partnership commenced operations on 6/23/95
Prior performance is not indicative of future performance.
T-12
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND II
OPERATING RESULTS OF PRIOR PROGRAMS
(TABLE III)
PROGRAM INCEPTION TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
1995 1996 1997
-----------------------------------
<S> <C> <C> <C>
COMPUTATION OF NET INCOME (LOSS)
Months of Operations **3 12 12
Gross Revenues 123,878 1,194,114 2,540,007
Less: Operating Expenses 23,059 56,707 163,749
Equipment Management Fee 4,927 56,184 122,233
Interest Expense -- -- 37,106
Loss on Sale of Computer Equipment -- -- 31,955
Depreciation and Amortization 107,957 1,081,953 2,246,801
--------------------------------------
Net Income (Loss) - GAAP Basis (12,065) (730) (61,837)
--------------------------------------
--------------------------------------
Federal Taxable Income 25,505 257,899 534,897
Cash Distributions - GAAP Basis (84,642) (608,045) (908,714)
COMPUTATION OF CASH FLOWS
Net Loss (12,065) (730) (61,837)
Adjustments to Reconcile Net Loss to Net Cash Provided
by Operating Activities:
Depreciation and Amortization 107,957 1,081,953 2,246,801
Loss on Sale of Computer Equipment -- -- 31,955
Other Non-Cash Activities Included in the Determination
of Net Loss* -- (4,290) (416,823)
Net Change in Operating Assets and Liabilities (39,441) (127,550) 157,053
--------------------------------------
Net Cash Provided by Operating Activities 56,451 949,383 1,957,149
Capital Expenditures (2,850,156) (1,777,488) (4,179,080)
Net Proceeds of Sale of Computer Equipment -- -- 10,585
Equipment Acquisition Fees Paid to the General Partner (123,105) (147,448) (202,760)
--------------------------------------
Net Cash Used in Investing Activities (2,973,261) (1,924,936) (4,371,255)
Partners' Contributions 3,678,960 4,371,440 1,185,785
Offering Costs (425,732) (487,266) (129,680)
Distributions to Partners (84,642) (608,045) (908,714)
Debt Placement Fee -- -- (27,470)
--------------------------------------
Net Cash Provided by Financing Activities 3,168,586 3,276,129 119,921
Net Increase (Decrease) in Cash 251,776 2,300,576 (2,294,185)
Cash at Beginning of Year -- 251,776 2,552,352
--------------------------------------
Cash at End of Year 251,776 2,552,352 258,167
--------------------------------------
--------------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Loss - GAAP Basis (3) (0) (17)
Federal Taxable Income to Investors 7 74 145
Cash Distributions to Investors - GAAP Basis (23) (164) (245)
Return of Capital to Investors - GAAP Basis 23 164 245
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment in financed. The increase over the periods presented
was caused primarily by the acquisition of more financed equipment.
** Partnership commenced operations on 9/22/95
Prior performance is not indicative of future performance.
T-13
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND - V, L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(TABLE III)
PROGRAM INCEPTION TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
1995 1996 1997
-----------------------------------
<S> <C> <C> <C>
COMPUTATION OF NET INCOME (LOSS)
Months of Operations ** 3 12 12
Gross Revenues 42,461 357,457 417,731
Less: Operating Expenses 7,040 12,843 10,837
Equipment Management Fee 1,697 17,285 20,476
Interest Expense -- 10,160 11,583
Loss on Sale of Computer Equipment -- -- --
Depreciation and Amortization 32,267 285,983 441,049
--------------------------------------
Net Income (Loss) - GAAP Basis 1,457 31,186 (66,214)
--------------------------------------
--------------------------------------
Federal Taxable Income 13,806 139,400 89,797
Cash Distributions - GAAP Basis (31,548) (121,212) (121,212)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 1,457 31,186 (66,214)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided
by Operating Activities:
Depreciation and Amortization 32,267 285,983 441,049
Other Non-Cash Activities Included in the Determination
of Net Income * (1,510) (82,739) (135,891)
Net Change in Operating Assets and Liabilities (3,419) 27,732 (12,035)
--------------------------------------
Net Cash Provided by Operating Activities 28,795 262,162 226,909
Capital Expenditures (556,175) (340,144) --
Payment of Equipment Payable -- (73,086) --
Increase in Organization Costs and Deferred Expenses (24,600) (12,177) (12,644)
--------------------------------------
Net Cash Used in Investing Activities (580,775) (425,407) (12,644)
Partners' Contributions 1,001,000 -- --
Offering Costs (60,400) -- --
Distributions to Partners (31,548) (121,212) (121,212)
--------------------------------------
Net Cash Provided by (Used in) Financing Activities 909,052 (121,212) (121,212)
Net Increase (Decrease) in Cash 357,072 (284,457) 93,053
Cash at Beginning of Year -- 357,072 72,615
--------------------------------------
Cash at End of Year 357,072 72,615 165,668
--------------------------------------
--------------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income - GAAP Basis 1 31 (66)
Federal Taxable Income to Investors 11 145 90
Cash Distributions to Investors - GAAP Basis (31) (120) (120)
Return of Capital to Investors - GAAP Basis 30 89 120
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented
was caused primarily by the acquisition of more financed equipment.
** Partnership commenced operations on 9/28/95
Prior performance is not indicative of future performance.
T-14
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND - VI L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(TABLE III)
PROGRAM INCEPTION TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
1996 1997
--------------------------------
<S> <C> <C>
COMPUTATION OF NET INCOME (LOSS)
Months of Operations ** 3 12
Gross Revenues 16,391 486,992
Less: Operating Expenses 6,507 12,477
Equipment Management Fee 221 22,676
Interest Expense -- 20,830
Loss on Sale of Computer Equipment -- --
Depreciation and Amortization 8,550 343,422
----------------------------------
Net Income (Loss) - GAAP Basis 1,113 87,587
----------------------------------
----------------------------------
Federal Taxable Income (Loss) (5,969) 56,542
Cash Distributions - GAAP Basis (45,455) (181,818)
COMPUTATION OF CASH FLOWS
Net Income 1,113 87,587
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation and Amortization 8,550 343,422
Loss (Gain) on Sale of Computer Equipment -- --
Other Non-Cash Activities Included in the Determination
of Net Income * (7,375) (268,050)
Net Change in Operating Assets and Liabilities (3,704) 7,557
----------------------------------
Net Cash Provided by (Used in) Operating Activities (1,416) 170,516
Capital Expenditures (1,188,102)
Payment of Computer Equipment Payable -- (97,920)
Increase in Organization Costs and Deferred Expenses (35,701) (13,691)
----------------------------------
Net Cash Used in Investing Activities (35,701) (1,299,713)
Partners' Contributions 1,501,000 --
Offering Costs (85,804) --
Distributions to Partners (45,455) (181,818)
----------------------------------
Net Cash Used in Financing Activities 1,369,741 (181,818)
Net Increase (Decrease) in Cash 1,332,624 (1,311,015)
Cash at Beginning of Year -- 1,332,624
----------------------------------
Cash at End of Year 1,332,624 21,609
----------------------------------
----------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income - GAAP Basis 1 88
Federal Taxable Income to Investors 7 57
Cash Distributions to Investors - GAAP Basis (45) (180)
Return of Capital to Investors - GAAP Basis 30 93
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented
was caused primarily by the acquisition of more financed equipment.
** Partnership commenced operations on 9/30/96
Prior performance is not indicative of future performance.
T-15
<PAGE>
TABLE V
EQUIPMENT SALES
The following table sets forth the sales and other dispositions of
equipment by eight prior private programs and two prior public programs
sponsored by the General Partner and its Affiliates during the most recent
three year period ending December 31, 1997. There were no sales or other
dispositions of equipment in Commonwealth Equipment Income Private Fund V,
and Commonwealth Equipment Income Private Fund VI.
T-16
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND II
EQUIPMENT SALES
FOR THE THREE YEAR PERIOD ENDED
DECEMBER 31, 1997
(TABLE V)
<TABLE>
<CAPTION>
YEAR YEAR ORIGINAL NET FEDERAL
EQUIPMENT OF OF ACQUISITION NET BOOK PROCEEDS GAAP TAXABLE
MANUFACTURER EQUIPMENT TYPE DESCRIPTION ACQUISITION DISPOSAL COST VALUE RECEIVED NET GAIN/(LOSS) NET GAIN/(LOSS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
IBM (23) 4028-NS1 Printer 1996 1997 68,063 42,539 10,584 (31,955) (38,966)
</TABLE>
T-17
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
TABLE VI - ACQUISITION OF EQUIPMENT BY PRIOR PROGRAMS
The following table sets forth acquisition of equipment by eight prior
private programs and two prior public programs sponsored by the General Partner
and its Affiliates during the most recent three year period ending December 31,
1997.
T-18
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND II
SUMMARY OF EQUIPMENT ACQUISITIONS
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1997
(TABLE VI)
<TABLE>
<CAPTION>
YEAR
OF
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION
<S> <C> <C> <C>
STK (1) 9200-XN3, (1) 9220-A42, (1) 9220-B22 Disk Array 1995
STK (1) 9200-XN3, (1) 9220-A42 Disk Array 1995
IBM (325) 4230-5S3 Printer 1995
IBM (50) 4028-NS1 Printer 1995
STK (50%) (4) 4490-M30 UPGR, (2) 4490-M34 UPGR Tape Drive 1995
(6) 9490-M34
STK (1) 4410-001, (2) 4480-M24, (2) 4480-M20, Tape Drive 1996
(1) 9490-M34
IBM (1) 3490-A20, (2) 3490-B40 Tape Drive 1996
STK (3) 9490-M34 Tape Drive 1996
DEC (1) Alpha Server 2100A-5/250 Departmental Server 1996
DEC (1) Alpha Server 2100A-5/250 Departmental Server 1996
HP (13) HP9000-C110 Workstation 1996
SGI (1) Onyx infinite reality ds Departmental Server 1996
IBM (1) 3900 DW1/DW2 Printer 1997
IBM (38) 3130-02D Printer 1997
SUN E6000 Server 1997
STK (9) 9490-M34 Tape Drive 1997
IBM (75%): (8) 3900-OW1 Printer 1997
SUN ES3000 Server 1997
HP (20) HP C180 Workstation 1997
IBM (2) 3745-31A, (2) 3746-900 Communication Controller 1997
Silicon Graphics (50%) workstations Workstation 1997
SUN upgrade Server Upgrade 1997
</TABLE>
<TABLE>
<CAPTION>
TOTAL
RENT IN DEBT OBLIGATIONS EQUIPMENT
MANUFACTURER CASH LIEU ASSUMED INCURRED COST
<S> <C> <C> <C> <C> <C>
STK 787,196 0 0 0 787,196
STK 582,671 0 0 0 582,671
IBM 990,357 0 0 0 990,357
IBM 147,963 0 0 0 147,963
STK 490,110 0 0 0 490,110
STK 383,553 0 0 0 383,553
IBM 174,383 4,290 0 0 178,673
STK 405,628 0 0 0 405,628
DEC 204,781 0 0 0 204,781
DEC 40,928 0 0 0 40,928
HP 304,718 0 0 0 304,718
SGI 263,498 0 0 0 263,498
IBM 477,466 0 0 0 477,466
IBM 600,000 0 0 0 600,000
SUN 461,207 0 0 0 461,207
STK 253,297 0 1,015,612 0 1,268,909
IBM 1,542,485 0 0 0 1,542,485
SUN 25,314 0 129,651 0 154,965
HP 362,615 0 0 0 362,615
IBM 260,517 0 517,937 0 778,454
Silicon Graphics 126,622 0 695,833 0 822,455
SUN 69,559 0 0 0 69,559
</TABLE>
T-19
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this post-effective amendment to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Berwyn, Commonwealth of Pennsylvania, on February
15, 1999.
COMMONWEALTH INCOME & GROWTH FUND III
a Pennsylvania Limited Partnership
By: COMMONWEALTH INCOME & GROWTH
FUND, INC., General Partner
By: /s/ George S. Springsteen
--------------------------------
George S. Springsteen, President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints George S. Springsteen and Kimberly A.
McDougall and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution or resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Post Effective Ammendment No. 1 to the Registration Statement, and to
file the same, with all exhibits thereto, and other documentation in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Post
Effective Amendment No. 1 to the registration statement has been signed by
the following persons in the capacities and on the dates indicated.
Signature Title Date
----------------------- ----------------------- -----------------------
/s/ George S. Springsteen Chairman, President February 15, 1999
- ------------------------- and Sole Director of
George S. Springsteen Commonwealth Income &
Growth Fund, Inc
(Principal Executive
Officer)
/s/ Kimberly A. McDougall Executive Vice February 15, 1999
- ------------------------- President, Chief
Kimberly A. McDougall Operating Officer and
Secretary of
Commonwealth Income and
Growth Fund, Inc and
Commonwealth Capital Corp
/s/ Kathleen S. Enscoe
- ---------------------- Controller of Commonwealth February 15, 1999
Kathleen S. Enscoe Income & Growth Fund, Inc.
Exhibit No.
- -----------
24.1 Consent of Ernst & Young LLP
27.0 Financial Data Schedule
<PAGE>
Exhibit 24.1
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports (i) the Balance Sheet of Commonwealth Income and
Growth Fund III at April 28, 1997, dated April 28, 1997, (ii) the financial
statements of Commonwealth Income and Growth Fund III at December 31, 1997,
and from April 28, 1997 (date of inception) to December 31, 1997 dated
February 6, 1998, (iii) the Balance Sheets of Commonwealth Income & Growth,
Inc. at February 28, 1997 and February 29, 1996, dated April 27, 1997, (iv)
the Balance Sheets of Commonwealth Income & Growth Fund, Inc. at February 28,
1998 and 1997 dated, April 3, 1998, (v) the consolidated financial statements
of Commonwealth Capital Corp. at February 28, 1997 and February 29, 1996, and
for the years the ended, dated April 28, 1997, and (vi) the consolidated
financial statements of Commonwealth Capital Corp., at February 28, 1998 and
1997 and for the years then ended, dated April 3, 1998, all included in Post
Effective Amendment No. 1 to the Registration Statement (Form S-1 No.
333-26933) and related Prospectus of Commonwealth Income & Growth Fund III
for the registration of 750,000 units of Limited Partnership Interests.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 11, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001038878
<NAME> CIGF III
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 448,718
<SECURITIES> 0
<RECEIVABLES> 65,697
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 74,271
<PP&E> 1,414,520
<DEPRECIATION> (149,054)
<TOTAL-ASSETS> 1,854,152
<CURRENT-LIABILITIES> 105,142
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,749,010
<TOTAL-LIABILITY-AND-EQUITY> 1,854,152
<SALES> 0
<TOTAL-REVENUES> 218,271
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 205,763
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,508
<INCOME-TAX> 0
<INCOME-CONTINUING> 12,508
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,508
<EPS-PRIMARY> .13
<EPS-DILUTED> 0
</TABLE>
