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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 33-69996
COMMONWEALTH INCOME & GROWTH FUND I
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2735641
(State or other jurisdiction of (I.R.S. Employer identification No.)
incorporation or organization)
1160 West Swedesford Road
Berwyn, Pennsylvania 19312
(Address, including zip code, of principal executive offices)
(610) 647-6800
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (ii) has been subject to such
filing requirements for the past 90 days: YES [X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified under applicable items herein)
Certain exhibits to the Company's Registration Statement on Form S-1
(File No. 33-69996) and Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 are incorporated by reference as Exhibits in Part IV of
this Report.
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PART I
ITEM 1: BUSINESS
GENERAL
Commonwealth Income and Growth Fund I (the "Partnership") was formed on
August 26, 1993 under the Pennsylvania Revised Uniform Limited Partnership
Act. The Partnership began offering $15,000,000 of Units of Limited
Partnership ("Units") to the public on December 17, 1993 (the "Offerings").
The Partnership terminated its offering of Units on May 11, 1995, with
631,358 Units ($12,623,682) admitted as Limited Partners of the Partnership.
See "The Glossary" below for the definition of capitalized terms not
otherwise defined in the text of this report.
PRINCIPAL INVESTMENT OBJECTIVES
The Partnership was formed for the purpose of acquiring various types of
Equipment, including computer peripheral and other similar capital equipment.
The Partnership utilized the net proceeds of the Offering to purchase IBM
and IBM compatible computer peripheral and other similar capital equipment.
The Partnership utilizes Retained Proceeds and debt financing (not to exceed
30% of the aggregate cost of the Equipment owned or subject to Conditional
Sales Contract by the Partnership at the time the debt is incurred) to
purchase additional Equipment. The Partnership acquires Equipment which is
subject to lease principally to U.S. corporations and other institutions
pursuant predominantly to Operating Leases. The Partnership retains the
flexibility to enter into Full Payout Net Leases and Conditional Sales
Contracts, but has not done so.
The Partnership's principal investment objectives are to;
(a) acquire, lease and sell Equipment to generate revenues from operations
sufficient to provide quarterly cash distributions to Limited Partners;
(b) preserve and protect Limited Partners' capital;
(c) use a portion of Cash Flow and Net Disposition Proceeds derived from
the sale, refinancing or other disposition of Equipment to purchase
additional Equipment; and
(d) refinance, sell or otherwise dispose of Equipment in a manner that will
maximize the proceeds to the Partnership.
THERE CAN BE NO ASSURANCE THAT ANY OF THESE OBJECTIVES WILL BE ATTAINED.
Limited Partners do not have the right to vote on or otherwise approve
or disapprove any particular investment to be made by the Partnership.
Although the Partnership has acquired predominately new Equipment, the
Partnership may purchase used Equipment. Generally, Equipment is acquired
from manufacturers, distributors, leasing companies, agents, owner-users,
owner-lessors, and other suppliers upon terms that vary depending upon the
Equipment and supplier involved. Manufacturers and distributors usually
furnish a limited warranty against defects in material and workmanship and
some purchase agreements for Equipment provide for service and replacement of
parts during a limited period. Equipment purchases are also made through
lease brokers and on an ad hoc basis to meet the needs of a particular lessee.
As of December 31, 1997, all Equipment purchased by the Partnership is
subject to an Operating Lease or an Operating Lease was entered into with a
third party when the Partnership acquired an item of Equipment. The
Partnership may also engage in sale/leaseback transactions, pursuant to which
the
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Partnership would purchase Equipment from companies that would then
immediately lease the Equipment from the Partnership. The Partnership may
also purchase Equipment which is leased under Full Payout Net Leases or sold
under Conditional Sales Contracts at the time of acquisition or the
Partnership may enter into a Full Payout Net Lease or Conditional Sales
Contract with a third party when the Partnership acquires an item of
Equipment.
The Partnership may enter into arrangements with one or more
manufacturers pursuant to which the Partnership purchases from such
manufacturers Equipment which has previously been leased directly by the
manufacturer to third parties ("vendor leasing agreements"). The Partnership
and manufacturers may agree to nonrecourse loans to the Partnership from the
manufacturers to finance the acquisition of Equipment secured by the
Equipment and the receivables due to the manufacturers from users of such
Equipment. It is expected that the manufacturers of Equipment will provide
maintenance, remarketing and other services for the Equipment subject to such
agreements. As of December 31, 1997, the Partnership has not entered into
any such agreements.
The General Partner has the discretion consistent with its fiduciary
duty to change the investment objectives of the Partnership if it determines
that such a change is in the best interest of the Limited Partners and so
long as such a change is consistent with the Partnership Agreement. The
General Partner will notify the Limited Partners if it makes such a
determination to change the Partnership's investment objectives.
TYPES OF EQUIPMENT
Computer Peripheral Equipment. Computer peripheral equipment consists
of devices used to convey information into and out of a central processing
unit (or "mainframe") of a computer system, such as tape drives, disk
drives, tape controllers, disk controllers, printers, terminals and related
control units, all of which are in some way related to the process of
storing, retrieving, and processing information by computer.
The Partnership acquires primarily IBM manufactured or IBM compatible
equipment. The General Partner believes that dealing in IBM or IBM
compatible equipment is particularly advantageous because of the large IBM
customer base, policy of supporting users with software and maintenance
services and the large amount of IBM and IBM compatible equipment in the
marketplace.
Computer technology has developed rapidly in recent years and is
expected to continue to do so. Technological advances have permitted
continued reductions in the cost of computer processing capacity, thereby
permitting applications not economically feasible a few years ago. Much of
the older IBM and IBM compatible computer peripheral equipment has not been
retired from service, because software is generally interchangeable between
older and newer equipment, and older equipment is capable of performing many
of the same functions as newer equipment. The General Partner believes that
historically values of peripheral equipment have been affected less
dramatically by changes in technology than have the values of central
processing units. An equipment user who upgrades to a more advanced central
processor generally can continue to use his existing peripheral equipment.
Peripheral equipment nevertheless is subject to declines in value as new,
improved models are developed and become available. Technological advances
and other factors, including year 2000 issues discussed below in Management
Discussion and Analysis, have at times caused dramatic reduction in the
market prices of older models of IBM and IBM compatible computer peripheral
equipment from the prices at which they were originally introduced.
Other Equipment-Restrictions. The Partnership acquires computer
peripheral equipment, such as tape drives, disk drives, tape controllers,
disk controllers, printers, terminals and related control units, all of which
are in some way related to the process of storing, retrieving and processing
information by computer. The General Partner is also authorized, but does
not presently intend, to cause the Partnership to invest in non IBM
compatible computer peripheral, data processing, telecommunication or medical
technology equipment. The Partnership may not invest in any of such other
types of Equipment (i) to the
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extent that the purchase price of such Equipment, together with the aggregate
Purchase Price of all such other types of Equipment then owned by the
Partnership, is in excess of 25% of the total cost of all of the assets of
the Partnership at the time of the Partnership's commitment to invest therein
and (ii) unless the General Partner determines that such purchase is in the
best economic interest of the Partnership at the time of the purchase and, in
the case of non-IBM compatible peripheral Equipment, that such Equipment is
comparable in quality to similar IBM or IBM compatible Equipment. There can
be no assurance that any Equipment investments can be found which meet this
standard. Accordingly, there can be no assurance that investments of this
type will be made by the Partnership.
DIVERSIFICATION
Diversification is generally desirable to minimize the effects of
changes in specific industries, local economic conditions or similar risks.
However, the extent of the Partnership's diversification, in the aggregate
and within each category of Equipment, depends in part upon the financing
which can be assumed by the Partnership or borrowed from third parties on
satisfactory terms. The Partnership's policy not to borrow on a recourse
basis will further limit its financing options. Diversification also depends
on the availability of various types of Equipment. As of December 31, 1997,
the Partnership has acquired a diversified Equipment portfolio which it has
leased to 27 different companies located throughout the United States.
Approximately 32% of the Equipment acquired by the Partnership consists of
tape storage Approximately 23% of the Equipment acquired by the Partnership
consist of workstations, department servers and enterprise servers.
Approximately 18% of the Equipment acquired by the Partnership consist of
printers. Approximately 13% of the Equipment acquired by the Partnership
consists of disk arrays. Approximately 8% of the Equipment acquired by the
Partnership consists of communication controllers. Approximately 4% of the
Equipment acquired by the Partnership consists of escon drivers.
Approximately another 2% of the Equipment acquired by the Partnership
consists of more traditional forms of disk storage.
During the operational stage of the Partnership, the Partnership may not
at any one point in time lease (or sell pursuant to a Conditional Sales
Contract) more than 25% of the Equipment to a single Person or Affiliated
group of Persons.
DESCRIPTION OF LEASES
The Partnership to date has purchased, and in the future intends to
continue to purchase only Equipment that is subject to a lease or for which
a lease or similar agreement will be entered into contemporaneously with the
consummation of the Partnership's acquisition of the Equipment. The General
Partner to date has leased and in the future intends to lease most of the
Equipment purchased by the Partnership to third parties pursuant to Operating
Leases. Operating Leases are relatively short-term (12 to 48 month) leases
under which the aggregate noncancellable rental payments during the original
term of the lease are not sufficient to permit the lessor to recover the
purchase price of the subject Equipment. The Equipment may also be leased
pursuant to Full Payout Net Leases. Full Payout Net Leases are leases under
which the aggregate noncancellable rental payments during the original term
of the lease are at least sufficient to recover the purchase price of the
subject Equipment. It is anticipated that the Partnership will enter into
few, if any, Full Payout net Leases. The General Partner may also enter into
Conditional Sales Contracts for Equipment. A Conditional Sales Contract
generally provides that the noncancellable payments to the seller over the
term of the contract are sufficient to recover the investment in such
Equipment and to provide a return on such investment. Under a Conditional
Sales Contract, the seller reserves title to, and retains a security interest
in, the Equipment until the Purchase Price of the Equipment is paid. As of
December 31, 1997, the Partnership has not entered into any Full Payout Net
Leases or Conditional Sales Contracts for Equipment and does not presently
intend to do so.
In general, the terms of the Partnership's leases, whether the Equipment
is leased pursuant to an Operating lease or a Full Payout Net Lease, depend
upon a variety of factors, including: the desirability of each type of lease
from both an investment and a tax point of view; the relative demand among
lessees for
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Operating or Full Payout Net Leases; the type and use of Equipment and its
anticipated residual value; the business of the lessee and its credit rating;
the availability and cost of financing; regulatory considerations; the
accounting treatment of the lease sought by the lessee or the Partnership;
and competitive factors.
An Operating Lease generally represents a greater risk to the
Partnership than a Full Payout Net Lease, because in order to recover the
purchase price of the subject Equipment and earn a return on such investment,
it is necessary to renew or extend the Operating Lease, lease the Equipment
to a third party at the end of the original lease term, or sell the
Equipment. On the other hand, the term of an Operating Lease is generally
much shorter than the term of a Full Payout Net Lease, and the lessor is thus
afforded an opportunity under an Operating Lease to re-lease or sell the
subject Equipment at an earlier stage of the Equipment's life cycle than
under a Full Payout Net Lease. Also, the annual rental payments received
under an Operating Lease are ordinarily higher than those received under a
Full Payout Net Lease.
The Partnership's policy is to generally enter into "triple net leases"
(or the equivalent, in the case of a Conditional Sales Contract) which
typically provide that the lessee or some other party bear the risk of
physical loss of the Equipment; pay taxes relating to the lease or use of the
Equipment; maintain the Equipment; indemnify the Partnership-lessor against
any liability suffered by the Partnership as the result of any act or
omission of the lessee or its agents; maintain casualty insurance in an
amount equal to the greater of the full value of the Equipment and a
specified amount set forth in the lease; and maintain liability insurance
naming the Partnership as an additional insured with a minimum coverage which
the General Partner deems appropriate. In addition, the Partnership may
purchase "umbrella" insurance policies to cover excess liability and casualty
losses, to the extent deemed practicable and advisable by the General
Partner. As of December 31, 1997, all leases that have been entered into are
"triple net leases".
The General Partner has not established any standards for lessees to
which it will lease Equipment and, as a result, there is not an investment
restriction prohibiting the Partnership from doing business with any lessees.
However, a credit analysis of all potential lessees is undertaken by the
General Partner to determine the lessee's ability to make payments under the
proposed lease. The General Partner may refuse to enter into an agreement
with a potential lessee based on the outcome of the credit analysis.
The terms and conditions of the Partnership's leases, or Conditional
Sales Contracts, are each determined by negotiation and may impose
substantial obligations upon the Partnership. Where the Partnership assumes
maintenance or service obligations, the General Partner generally causes the
Partnership to enter into separate maintenance or service agreements with
manufacturers or certified maintenance organizations to provide such
services. Such agreements generally require annual or more frequent
adjustment of service fees. As of December 31, 1997, the Partnership has not
entered into any such agreements.
BORROWING POLICIES
The General Partner, at its discretion, may cause the Partnership to
incur debt in the maximum aggregate amount of 30% of the aggregate cost of
the Equipment owned, or subject to Conditional Sales Contract, by the
Partnership at the time the debt is incurred. The Partnership incurs only
non-recourse debt which is secured by Equipment and lease income therefrom.
Such leveraging permits the Partnership to increase the aggregate amount of
its depreciable assets, and, as a result, potentially increases both its
lease revenues and its federal income tax deductions above those levels which
would be achieved without leveraging. There is no limit on the amount of
debt that may be incurred in connection with the acquisition of any single
item of Equipment. Any debt incurred is fully amortized over the term of the
initial lease or Conditional Sales Contract to which the Equipment securing
the debt is subject. The precise amount borrowed by the Partnership depends
on a number of factors, including the types of Equipment acquired by the
Partnership; the creditworthiness of the lessee; the availability of suitable
financing; and prevailing interest rates. The Partnership is flexible in the
degree of leverage it employs, within the permissible limit. There can be no
assurance that credit will be available to the Partnership in the amount or
at the time
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desired or on terms considered reasonable by the General Partner. As of
December 31, 1997, the aggregate nonrecourse debt outstanding of $4,968,748
was 29% of the aggregate cost of the Equipment owned.
The Partnership has and may continue to purchase some items of Equipment
without leverage. If the Partnership purchases an item of Equipment without
leverage and thereafter suitable financing becomes available, it may then
obtain the financing, secure the financing with the purchased Equipment to
the extent practicable and invest any proceeds from such financing in
additional items of Equipment, or it may distribute some or all of such
proceeds to the Limited Partners. Any such later financing will be on terms
consistent with the terms applicable to borrowings generally. As of December
31, 1997, the Partnership has not exercised this option.
To date, the General Partner has caused the Partnership to borrow funds
at fixed interest rates and plans to continue borrowing additional funds, to
the fullest extent practicable. The Partnership may borrow funds at rates
which vary with the "prime" or "base" rate. If lease revenues were fixed, a
rise in the "prime" or "base" rate would increase borrowing costs and reduce
the amount of the Partnership's income and cash available for distribution.
Therefore, the General Partner is permitted to borrow funds to purchase
Equipment at fluctuating rates only if the lease for such Equipment provides
for fluctuating rental payments calculated on a similar basis.
Any additional debt incurred by the Partnership must be nonrecourse.
Nonrecourse debt, in the context of the business to be conducted by the
Partnership, means that the lender providing the funds can look for security
only to the Equipment pledged as security and the proceeds derived from
leasing or selling such Equipment. Neither the Partnership nor any Partner
(including the General Partner) would be liable for repayment of any
nonrecourse debt.
Loan agreements may also require that the Partnership maintain certain
reserves or compensating balances and may impose other obligations upon the
Partnership. Moreover, since a significant portion of the Partnership's
revenues from the leasing of Equipment will be reserved for repayment of
debt, the use of financing reduces the cash which might otherwise be
available for distributions until the debt has been repaid and may reduce the
Partnership's Cash Flow over a substantial portion of the Partnership's
operating life. As of December 31, 1997, no such agreements existed.
The General Partner and any of its Affiliates may, but are not required
to, make loans to the Partnership on a short-term basis. If the General
Partner or any of its Affiliates makes such a short-term loan to the
Partnership, the General Partner of Affiliate may not charge interest at a
rate greater that the interest rate charged by unrelated lenders on
comparable loans for the same purpose in the same locality. In no event is
the Partnership required to pay interest on any such loan at an annual rate
greater than three percent over the "prime rate' from time to time announced
by PNC Bank, Philadelphia, Pennsylvania ("PNC Bank"). All payments of
principal and interest on any financing provided by the General Partner or
any of its affiliates are due and payable by the Partnership within 12 months
after the date of the loan.
REFINANCING POLICIES
Subject to the limitations set forth in "Borrowing Policies" above, the
Partnership may refinance its debt from time to time. With respect to a
particular item of Equipment, the General Partner will take into
consideration such factors as the amount of appreciation in value, if any, to
be realized, the possible risks of continued ownership, and the anticipated
advantages to be obtained for the Partnership, as compared to selling such
Equipment. As of December 31, 1997, the Partnership has not refinanced any
of its debt.
Refinancing, if achievable, may permit the Partnership to retain an item
of Equipment and at the same time to generate additional funds for
reinvestment in additional Equipment or for distribution to the Limited
Partners.
LIQUIDATION POLICIES
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The General Partner intends to cause the Partnership to begin disposing
of its Equipment in approximately January 2004. Notwithstanding the
Partnership's objective to sell all of its assets and dissolve by December
31, 2004, the General Partner may at any time cause the Partnership to
dispose of all its Equipment and, dissolve the Partnership upon the approval
of Limited Partners holding a Majority in Interest of Units.
Particular items of Equipment may be sold at any time if, in the
judgment of the General Partner, it is in the best interest of the
Partnership to do so. The determination of whether particular items of
Partnership Equipment should be sold or otherwise disposed of is made by the
General Partner after consideration of all relevant factors (including
prevailing general economic conditions, lessee demand, the General Partner's
views of current and future market conditions, the cash requirements of the
Partnership, potential capital appreciation, cash flow and federal income tax
considerations), with a view toward achieving the principal investment
objectives of the Partnership. As partial payment for Equipment sold, the
Partnership may receive purchase money obligations secured by liens on such
Equipment. Subject to the General Partner's discretion the Partnership may
extend beyond December 31, 2004, if deemed beneficial to the Partnership.
MANAGEMENT OF EQUIPMENT
Equipment management services for the Partnership's Equipment is
provided by the General Partner and its Affiliates and by persons employed by
the General Partner. Such services will consist of collection of income from
the Equipment, negotiation and review of leases, Conditional Sales Contracts
and sales agreements, releasing and leasing-related services, payment of
operating expenses, periodic physical inspections and market surveys,
servicing indebtedness secured by Equipment, general supervision of lessees
to assure that they are properly utilizing and operating Equipment, providing
related services with respect to Equipment, supervising, monitoring and
reviewing services performed by others in respect to Equipment and preparing
monthly Equipment operating statements and related reports.
COMPETITION
The equipment leasing industry is highly competitive. The Partnership
competes with leasing companies, equipment manufacturers and their affiliated
financing companies, distributors and entities similar to the Partnership
(including other programs sponsored by the General Partner), some of which
have greater financial resources than the Partnership and more experience in
the equipment leasing business than the General Partner. Other leasing
companies and equipment manufacturers, their affiliated financing companies
and distributors may be in a position to offer equipment to prospective
lessees on financial terms which are more favorable that those which the
Partnership can offer. They may also be in a position to offer trade-in
privileges, software, maintenance contracts and other services which the
Partnership may not be able to offer. Equipment manufacturers and
distributors may offer to sell equipment on terms (such as liberal financing
terms and exchange privileges) which will afford benefits to the purchaser
similar to those obtained through leases. As a result of the advantages
which certain of its competitors may have, the Partnership may find it
necessary to lease its Equipment on a less favorable basis than certain of
its competitors.
The computer peripheral equipment industry is extremely competitive.
Competitive factors include pricing, technological innovation and methods of
financing. Certain manufacturer-lessors maintain advantages through patent
protection, where applicable, and through a policy that combines service and
hardware with payment accomplished through a single periodic charge.
The dominant firm in the computer marketplace is International Business
Machines Corporation, and its subsidiary IBM Credit Corporation is the
dominant force in the leasing of IBM equipment. Because of IBM's substantial
resources and dominant position, revolutionary changes with respect to
computer systems, pricing, marketing practices, technological innovation and
the availability of new and attractive
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financing plans could occur at any time. Significant action in any of these
areas by IBM or IBM Credit Corporation might materially adversely affect the
Partnership's business or the other manufacturers with whom the General
Partner might negotiate purchase and other agreements. Any adverse effect on
these manufacturers could be reflected in the overall return realized by the
Partnership on equipment from those manufacturers of from IBM.
Investments
As of March 16, 1998, the Partnership has purchased, or has made the
commitment to purchase, the following Equipment:
<TABLE>
<CAPTION>
EQUIPMENT PURCHASE LIST MONTHLY LEASE
LESSEE MFG DESCRIPTION PRICE PRICE RENT TERM
<S> <C> <C> <C> <C> <C> <C>
Xerox Corp. SUN (32) SUN WORK ST 440,800 277,705 286 39
Xerox Corp. SUN (4)SPARC2000 590,840 305,875 1,019 39
Shared Medical Systems Corp. STK-ICE (25%)9200-XJ3 499,630 213,583 4,949 36
UNUM Life Insurance IBM (50%) 3900 & roll 413,368 343,010 6,338 48
Fingerhut Corp. SIEMEN (2) 2240-004 722,000 459,592 8,558 48
Software Maintenance Inc. STK (50%) 9200-XN3 949,580 236,640 5,607 36
Bellsouth Telecommunications, Inc. STK (1) 9200-XN3 2,635,720 582,671 12,929 36
GE Information Services, Inc. EMC (50%) 3200-9024 702,660 293,506 5,307 28
Southern Pacific Transportation Co. IBM (375) 4230-5S3 1,273,125 1,064,930 26,019 36
Chrysler Corp. STK (2) 4490-M30 686,158 490,110 12,001 48
GE Industrial & Power Systems HP (50%) HP9000/J200 202,680 157,635 4,115 36
Wang Laboratories, Inc. PYR (50%) NILE150 937,290 589,287 16,639 36
Shared Medical Systems Corp. STK (8) 9490-M34 2,126,928 1,452,140 29,191 48
Chrysler Corp. IBM (20%) 3745-31A 242,244 184,383 4,203 48
Sprint Communications Company STK (10) 9490-M32 1,481,830 779,676 15,983 36
Sprint Communications Company STK (9) 9490-M32 1,335,897 703,968 15,501 36
Honda R&D SGI (45%) 4XR10000 400,220 298,094 7,683 36
TRW HP (19) HP9000-C110 507,370 411,075 10,711 36
Sprint Communications Company IBM (2) 3995-133 421,500 286,536 10,166 24
Equitable Life Assurance Company LEX (80) N240 571,351 497,477 11,501 36
Damark International PYR (1) 3445-1210 327,288 216,419 5,681 36
Chrysler Corp. STK (50%) (7) 9490-M34 951,881 538,529 14,749 24
Chrysler Corp. STK (55%) 28% tape libraries,
30% redwd, 42% timberline 1,693,479 997,891 22,520 36
McDonnell Douglas HP (55%) (101) HP9000 1,662,009 932,491 34,621 22
Equitable Life Assurance Company LEX (16) OPTRA 74,458 94,098 2,615 36
Kaiser IBM (3) 3745-61A,
(3) 3746-900 2,149,234 1,191,555 29,786 36
Litton SUN (1) E3000 251,967 148,492 3,771 36
Sprint Communications Company SUN (2) E5000 371,640 246,042 7,199 30
Computer Science Corporation SGI (50%)144 workstations 2,055,893 822,455 21,031 36
PaineWebber IBM (2) 9032-003 932,206 453,900 11,060 36
Charles Schwab IBM (20%) (6) 9032-005 2,479,443 1,509,981 6,989 36
Xerox Corporation SUN (5) SPARC 20 243,719 153,776 1,300 39
ADP IBM (3) 3490-A20
(1) 3490-B40 579,850 379,682 5,036 69
Reserves
</TABLE>
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Because the Partnership's leases are on a "triple-net" basis, no
permanent reserve for maintenance and repairs will be established from the
Offering proceeds. However, the General Partner, in its sole discretion, may
retain a portion of the Cash Flow and Net Disposition Proceeds available to
the Partnership for maintenance, repairs and working capital. There are no
limitations on the amount of Cash Flow and Net Disposition Proceeds that may
be retained as reserves. Since no reserve will be established if available
Cash Flow of the Partnership is insufficient to cover the Partnership's
operating expenses and liabilities, it may be necessary for the Partnership
to obtain additional funds by refinancing its Equipment or borrowing.
General Restrictions
Under the Partnership Agreement, the Partnership is not permitted, among
other things, to:
(a) invest in junior trust deeds unless received in connection with
the sale of an item of Equipment in an aggregate amount which does not
exceed 30% of the assets of the Partnership on the date of the investment;
(b) invest in or underwrite the securities of other issuers;
(c) acquire any Equipment for Units;
(d) issue senior securities (except that the issuance to lenders of
notes or other evidences of indebtedness in connection with the financing
or refinancing of Equipment or the Partnership's business shall not be
deemed to be the issuance of senior securities);
(e) make loans to any Person, including the General Partner or any
of its Affiliates, except to the extent a Conditional Sales Contract
constitutes a loan;
(f) sell or lease any Equipment to, lease any Equipment from, or
enter into any sale-leaseback transactions with, the General Partner or
any of its Affiliates; or
(g) give the General Partner or any of its Affiliates an exclusive
right or employment to sell the Partnership's Equipment.
The General Partner has also agreed in the Partnership Agreement to use
its best efforts to assure that the Partnership shall not be deemed an
"investment company" as such term is detained in the Investment Company Act
of 1940.
The General Partner and its Affiliates may engage in other activities,
whether or not competitive with the Partnership. The Partnership Agreement
provides, however, that neither the General Partner nor any of its Affiliates
may receive any rebate or "give up" in connection with the Partnership's
activities or participate in reciprocal business arrangements that circumvent
the restrictions in the Partnership Agreement against dealings with
Affiliates.
EMPLOYEES
The Partnership has no employees and receives administrative and other
services from the General Partner which has 15 employees.
ITEM 2: PROPERTIES
NOT APPLICABLE
ITEM 3: LEGAL PROCEEDINGS
NOT APPLICABLE
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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NOT APPLICABLE
PART II
ITEM 5: MARKET FOR THE REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
There is no public market for the Units nor is it anticipated that one
will develop. As of December 31, 1997, there were 683 holders of Units. The
Units are not listed on any exchange or permitted to trade on any
over-the-counter market. In addition, there are substantial restrictions on
the transferability of Units.
GENERAL LIMITATIONS
Units cannot be transferred without the consent of the General Partner,
which may be withheld in its absolute discretion. The General Partner
monitors transfers of Units in an effort to ensure that all transfers are
within certain safe harbors promulgated by the IRS to furnish guidance
regarding publicly traded partnerships. These safe harbors limit the number
of transfers that can occur in any one year. The General Partner intends to
cause the Partnership to comply with the safe harbor that permits nonexempt
transfers and redemptions of Units of up to five percent of the total
outstanding interest in the Partnership's capital or profits in any one year.
REDEMPTION PROVISION
Upon the conclusion of the 30 month period following the termination of
the Offering, the Partnership may, at the sole discretion of the General
Partner, repurchase a number of the outstanding Units. After such 30 month
period, on a semi-annual basis, the General Partner, at its discretion, will
establish an amount for redemption, generally not to exceed two percent of
the outstanding Units per year, subject to the General Partner's good faith
determination that such redemptions will not (a) cause the Partnership to be
taxed as a corporation under Section 7704 of the Code or (b) impair the
capital or operations of the Partnership. (The Partnership may redeem Units
in excess of the two percent limitation if, in the good faith judgment of the
General Partner, the conditions imposed in the preceding sentence would
remain satisfied.) The redemption price for Units will be 105% of the
selling Limited Partner's Adjusted Capital Contributions attributable to the
Units for sale. Following the determination of the annual redemption
amount, redemptions will occur on a semi-annual basis and all requests for
redemption, which must be made in writing, must be on file as of the Record
Date in which the redemption is to occur. The General Partner will maintain
a master list of requests for redemption with priority being given to Units
owned by estates, followed by IRAs and Qualified Plans. All other requests
will be considered in the order received. Redemption requests made by or on
behalf of Limited Partners who are not affiliated with the General Partner or
its Affiliates will be given priority over those made by Limited Partners who
are affiliated with the General Partner or its Affiliates. All redemption
request will remain in effect until and unless canceled, in writing, by the
requesting Limited Partner(s).
The Partnership will accept redemption requests beginning 30 months
following the termination of the Offering. There will be no limitations on
the period of time that a redemption request may be pending prior to its
being granted. Limited Partners will not be required to hold their interest
in the Partnership for any specified period prior to their making a
redemption request.
In order to make a redemption request, Limited Partners will be required
to advise the General Partner in writing of such request. Upon receipt of
such notification, the Partnership will provide detailed forms
10
<PAGE>
and instructions to complete the request. At December 31, 1997, the General
Partner has not redeemed any Units. Additionally, no Limited Partners have
requested redemption of their Units.
EXEMPT TRANSFERS
The following six categories of transfers are exempt transfers for
purposes of calculating the volume limitations imposed by the IRS and will
generally be permitted by the General Partner:
(1) transfers in which the basis of the Unit in the hands of the
transferee is determined, in whole or in part, by reference to its basis in
the hands of the transferor (for example, Units acquired by corporations in
certain reorganizations, contributions to capital, gifts of Units, Units
contributed to another partnership, and nonliquidating as well as liquidating
distributions by a parent partnership to its partners of interests in a
subpartnership);
(2) transfers at death;
(3) transfers between members of a family (which include brothers and
sisters, spouse, ancestors, and lineal descendants);
(4) transfers resulting from the issuance of Units by the Partnership
in exchange for cash, property, or services;
(5) transfers resulting from distributions from Qualified Plans; and
(6) any transfer by a Limited Partner in one or more transactions
during any 30-day period of Units representing in the aggregate more than
five percent of the total outstanding interests in capital or profits of the
Partnership.
ADDITIONAL RESTRICTIONS ON TRANSFER
Limited Partners who wish to transfer their Units to a new beneficial
owner are required to pay the Partnership up to $50 for each transfer to
cover the Partnership's cost of processing the transfer application and take
such other actions and execute such other documents as may be reasonably
requested by the General Partner. There is no charge for re-registration of
a certificate in the event of a marriage, divorce, death, or trust so long as
the transfer is not a result of a sale of the Units.
In addition, the following restrictions apply to each transfer: (i) no
transfer may be made if it would cause 25% or more of the outstanding Units
to be owned by benefit plans; and (ii) no transfer is permitted unless the
transferee obtains such governmental approvals as may reasonably be required
by the General Partner, including without limitation, the written consents of
the Pennsylvania Securities Commissioner and of any other state securities
agency or commission having jurisdiction over the transfer.
ALLOCATION AND DISTRIBUTION BETWEEN THE GENERAL PARTNER AND THE
LIMITED PARTNERS
Cash distributions, if any, are made quarterly on December 31, March 31,
June 30, and September 30 of each year. Distributions are made 99% to the
Limited Partners and one percent to the General Partner until the Limited
Partners have received an amount equal to their Capital Contributions plus
the Priority Return; thereafter, cash distributions will be made 90% to
Limited Partners and 10% to the General Partner. Distributions made in
connection with the liquidation of the Partnership or a Partner's Units will
be made in accordance with the Partner's positive Capital Account balance as
determined under the Partnership Agreement and Treasury Regulations.
11
<PAGE>
The Priority Return is calculated on the Limited Partners' Adjusted
Capital Contributions for their Units. The Adjusted Capital Contributions
will initially be equal to the amount paid by the Limited Partners for their
Units. If distributions at any time exceed the Priority Return, the Adjusted
Capital Contributions will be reduced by the excess, decreasing the base on
which the Priority Return is calculated.
If the proceeds resulting from the sale of any Equipment are reinvested
in Equipment, sufficient cash will be distributed to the Partners to pay the
additional federal income tax resulting from such sale for a Partner in a
39.6% federal income tax bracket or, if lower, the maximum federal income tax
rate in effect for individuals for such taxable year.
Generally, the General Partner is allocated Net Profits equal to its
cash distributions (but not less than one percent of Net Profits) and the
balance is allocated to the Limited Partners. Net Profits arising from
transactions in connection with the termination or liquidation of the
Partnership are allocated in the following order: (1) First, to each Partner
in an amount equal to the negative amount, if any, of his Capital Account;
(2) Second, an amount equal to the excess of the proceeds which would be
distributed to the Partners based on the Operating Distributions to the
Partners over the aggregate Capital Accounts of all the Partners, to the
Partners in proportion to their respective shares of such excess, and (3)
Third, with respect to any remaining Net Profits, to the Partners in the same
proportions as if the distributions were Operating Distributions. Net
Losses, if any, are in all cases allocated 99% to the Limited Partners and
one percent to the General Partner.
Net Profits and Net Losses are computed without taking into account, in
each taxable year of the Partnership, any items of income, gain, loss or
deduction required to be specially allocated pursuant to Section 704(b) of
the Code and the Treasury Regulation promulgated thereunder. No Limited
Partner is required to contribute cash to the capital of the Partnership in
order to restore a closing Capital Account deficit, and the General Partner
has only a limited deficit restoration obligation under the Partnership
Agreement.
Quarterly distributions in the following amounts were declared and paid to
the Limited Partners during 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Quarter Ended 1997 1996 1995
- ------------- ---------- ---------- ----------
<S> <C> <C> <C>
March 31 $ 315,678 $ 315,678 $ 247,659
June 30 315,678 315,678 304,686
August 31 315,678 315,678 315,605
December 31 315,678 315,678 315,679
---------- ---------- ----------
$1,262,712 $1,262,712 $1,183,629
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
ALLOCATIONS AND DISTRIBUTIONS AMONG THE LIMITED PARTNERS
Except during the Offering Period, Cash Available for Distribution which
is allocable to the Limited Partners is apportioned among and distributed to
them solely with reference to the number of Units owned by each as of the
Record Date for each such distribution. During the Offering Period, Cash
Available for Distribution which is allocable to the Limited Partners was
apportioned among and distributed to them with reference to both (i) the
number of Units owned by each as of each Record Date and (ii) the number of
days since the previous Record Date (or, in the case of the first Record
Date, the commencement of the Offering Period) that the Limited Partner owned
the Units.
12
<PAGE>
After the Offering Period, Net Profits, Net Losses and Cash Available
for Distribution allocable to the Limited Partners is apportioned among them
in accordance with the number of Units owned by each. A different convention
was utilized during the Offering Period, whereby Net Profits and Net Losses
allocable to Limited Partners were apportioned among them in the ratio which
the product of the number of Units owned by a Limited Partner multiplied by
the number of days in which the Limited Partner owns such Units during the
period bears to the sum of such products for all Limited Partners.
In addition, where a Limited Partner transfers Units during a taxable
year, the Limited Partner may be allocated Net Profits for a period for which
such Limited Partner does not receive a corresponding cash distribution.
ITEM 6: SELECTED FINANCIAL DATA
The following table sets forth, in summary form, certain financial data
for the Partnership as of and for the year ended December 31, 1997, 1996,
1995 and 1994. This table is qualified in its entirely by the more detailed
information and financial statements presented elsewhere in this report, and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements
and related notes thereto included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------
1997 1996 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Lease Income $5,195,139 $5,908,389 $4,144,609 $1,129,457
Net (Loss) Income (906,123) (1,319,747) (45,235) 95,047
Cash Distributions 1,275,467 1,275,467 1,195,585 443,614
Net (Loss) Income per Unit (1.46) (2.11) (.10) .33
Cash Distribution per Unit 2.00 2.00 2.00 1.60
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------------
1997 1996 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total Assets $10,081,644 $11,373,203 $13,910,708 $8,827,670
Notes Payable 4,968,748 3,502,523 3,305,310 1,642,251
</TABLE>
Net income (loss) per unit is computed based upon net income (loss)
allocated to the Limited Partners and the weighted average number of
equivalent Units outstanding during the year. Cash distribution per Unit is
computed based upon distributions allocated to the Limited Partners and the
weighted average number of equivalent Units outstanding during the year.
ITEM 7: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
13
<PAGE>
The Partnership's primary source of capital for the year ended December
31, 1997 was cash from operations of $1,746,000. The Partnership's primary
source of capital for the year ended December 31, 1996 was from cash from
operations of $2,526,000. The Partnership's primary sources of capital for
the year ended December 31, 1995, were from Partners' contributions of
$4,352,000 and cash from operations of $2,411,000. The primary uses of cash
were for capital expenditures for new equipment totaling $1,348,000
$1,035,000 and $6,353,000 for the years ended December 31, 1997, 1996 and
1995, respectively, for the payment of preferred distributions to partners
totaling $1,275,000 for 1997 and 1996 and $1,196,000 for 1995, and for the
payment of offering costs totaling $459,000 for 1995.
Cash is invested in money market accounts that invest directly in
treasury obligations pending the Partnership's use of such funds to purchase
additional computer equipment, to pay Partnership expenses or to make
distributions to the Partners. At December 31, 1997 and 1996 the Partnership
had approximately $116,000 and $1,083,000, respectively, invested in these
money market accounts.
The Partnership's investment strategy of acquiring computer equipment
and generally leasing it under triple-net leases to operators who generally
meet specified financial standards minimizes the Partnership's operating
expenses. Future minimum rentals on noncancellable operating leases
increased by 10% from December 31, 1996 to December 31, 1997, due to
additional computer equipment leases which commenced in 1997. This
particular industry has experienced a decrease in lease rates during this
period due to an ongoing decrease in interest rates. As of December 31, 1997,
the Partnership had future minimum rentals on noncancellable operating leases
of $4,244,000 for the year ended 1998 and $2,508,000 thereafter. During
1997,1996 and 1995, the Partnership incurred debt in connection with the
purchase of computer equipment totaling $3,982,000, $2,344,000 and
$3,128,000, respectively. At December 31, 1997, the outstanding debt was
$4,969,000, with interest rates ranging from 6.4% to 8.8% and will be payable
through October 2000. The Partnership intends to continue purchasing
additional computer equipment with existing cash, as well as when future cash
becomes available. In addition, the Partnership may incur debt in purchasing
computer equipment in the future.
The Partnership's cash flow from operations is expected to continue to
be adequate to cover all operating expenses, liabilities, and preferred
distributions to Partners during the next 12 month period. If available Cash
Flow or Net Disposition Proceeds are insufficient to cover the Partnership
expenses and liabilities on a short and long term basis, the Partnership will
attempt to obtain additional funds by disposing of or refinancing Equipment,
or by borrowing within its permissible limits. The Partnership may also
reduce the distributions to its Partners if it deems necessary. Since the
Partnership's leases are on a "triple-net" basis, no reserve for maintenance
and repairs are deemed necessary.
RESULTS OF OPERATIONS
1997 and 1996 OPERATING RESULTS
For the year ended December 31, 1997 and 1996, the Partnership
recognized income of $5,230,000 and $5,955,000 and expenses of $6,136,000 and
$7,275,000, resulting in net losses of $906,000 and $1,320,000, respectively.
Lease income decreased by 12% compared to 1996 primarily due to the
expiration of leases in 1997. The decrease was offset by $1,292,000 in
lease income from the 10 additional leases acquired in 1997 for which the
Partnership expended approximately $1,348,000 in cash and assumed debt for
equipment of $3,982,000 to acquire the 10 additional leases..
Interest income decreased 26% from $47,000 for the year ended December
31, 1996 to $35,000 for the year ended December 31, 1997, as a result of the
capital contributions and rental income being utilized for Equipment
purchases for the year ended December 31, 1997, whereas, for the year ended
December 31, 1996 the capital contributions and rental income were
temporarily being invested in money market accounts until being utilized for
Equipment purchases.
14
<PAGE>
Operating expenses, excluding depreciation, consist of accounting,
legal, outside service fees and reimbursement of expenses to Com Cap Corp
for administration and operations of the Partnership. The 37% increase from
approximately $81,000 during the year ended December 31, 1996 to $111,000
during the year ended December 31, 1997 is primarily attributable to costs
incurred by the General Partner and its affiliates in connection with the
administration and operation of the Partnership which were not changed by
Com Cap Corp in 1996.
The equipment management fee is equal to 5% of the gross lease revenue
attributable to equipment which is subject to operating leases. The
equipment management fee decreased 12% from approximately $295,000 during the
year ended December 31, 1996 to $260,000 during the year ended December 31,
1997, which is consistent with the decrease in lease income.
Interest expense increased 12% from approximately $311,000 during the
year ended December 31, 1996 to approximately $349,000 during the year ended
December 31, 1997, as a result of additional debt incurred for the purchase
of Equipment.
Depreciation and amortization expenses consist of depreciation on
computer equipment, amortization of organization costs, equipment acquisition
fees and debt placement fees. Depreciation and amortization during 1997
decreased approximately 11% from $5,896,000 in 1996 to $5,219,000 due to the
reduction of the equipment under lease. Additionally, in 1996 depreciation
and amortization contained a write down of approximately $904,000 compared to
$154,000 in 1997 due to the impairment of assets.
The Partnership sold computer equipment with a net book value of
$1,440,000 and $544,000 during the years ended December 31, 1996 and 1997,
respectively, for a net loss of $692,000 and $197,000.
In 1996, the Partnership adopted FASB Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" and identified specific computer equipment and associated equipment
acquisition costs which were evaluated due to technological changes. The
Partnership determined that the carrying amount of certain assets was greater
than the undiscounted cash flows to be generated by these assets. The
Partnership recorded a charge of $904,000 to depreciation expense to record
the assets at their estimated fair value at December 31, 1996. The
Partnership also recorded a charge of $154,000 to depreciation expense to
record certain asset at their estimated fair value at December 31, 1997.
For the year ended December 31, 1997, the Partnership generated cash
flow from operating activities of $1,746,000, which includes a net loss of
$906,000 and was reduced by depreciation and amortization expenses of
$5,219,000. Other noncash activities included in the determination of the
net loss includes direct payments of lease income by lessees to banks of
$2,849,000.
1996 and 1995 OPERATING RESULTS
For the year ended December 31, 1996 and 1995, the Partnership
recognized income of $5,955,000 and $4,318,000 and expenses of $7,275,000 and
$4,363,000, resulting in a net loss of $1,320,000 and $45,000, respectively.
Lease income increased by 43% over 1995 primarily due to the Partnership
expended approximately $6,353,000 in cash and assumed debt and accounts
payable for equipment of $3,687,000 to acquire 19 additional leases in 1995,
which have generated a full year of lease income in 1996. Additionally,
during 1996 the Partnership expended approximately $1,035,000 in cash and
assumed debt and accounts payable for equipment of $2,874,000 to acquire 9
additional leases.
Interest income decreased (73%) from $173,000 for the year ended
December 31, 1995 to $47,000 for the year ended December 31, 1996, as a
result of the capital contributions being utilized for Equipment purchases
for the year ended December 31, 1996 whereas, for the year ended December 31,
1995 the capital contributions were temporarily being invested in money
market accounts until being utilized for Equipment purchases.
15
<PAGE>
Operating expenses, excluding depreciation, primarily consist of
accounting, legal and outside service fees. The 13% decrease from
approximately $93,000 during the year ended December 31, 1995 to $81,000
during the year ended December 31, 1996 is primarily attributable to a
decrease in legal fees and outside service fees.
The equipment management fee is equal to 5% of the gross lease revenue
attributable to Equipment which is subject to operating leases. The
equipment management fee increased (43%) from approximately $207,000 during
the year ended December 31, 1995 to $295,000 during the year ended December
31, 1996, which is consistent with the increase in lease income.
Interest expense increased (47%) from approximately $212,000 during the
year ended December 31, 1995 to approximately $311,000 during the year ended
December 31, 1996, as a result of additional debt incurred for the purchase
of Equipment.
Depreciation and amortization expenses consist of depreciation on
computer equipment, amortization of organizational costs, equipment
acquisition fees and debt placement fees. The increase (53%) from
approximately $3,850,000 during the year ended December 31, 1995 to
$5,896,000 during the year ended December 31, 1996 is attributable to the
purchase of approximately $3,922,000 in additional Equipment.
The Partnership sold computer equipment with a net book value of
$1,440,000 during the year ended December 31, 1996, for a net loss of
$692,000.
Additionally, in 1996, the Partnership adopted FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" and identified specific computer equipment and associated
equipment acquisition costs which were evaluated due to technological
changes. The Partnership determined that the carrying amount of certain
assets was greater than the undiscounted cash flows to be generated by these
assets. The Partnership recorded a charge of $904,000 to depreciation
expense to record the assets at their estimated fair value at December 31,
1996.
For the year ended December 31, 1996, the Partnership generated cash
flow from operating activities of $2,526,000, which includes a net loss of
$1,320,000 reduced by depreciation and amortization expenses of $5,896,000.
Other noncash activities included in the determination of the net loss
includes direct payments of lease income be lessees to banks of $2,675,000
and lease income paid to original lessors in lieu of cash payments for
computer equipment of $15,000.
Impact of Year 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any
computer programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Partnership does not have any computer programs or systems as all
services required for the management of the Partnership are provided by the
General Partner which receives fees and certain reimbursements for these
services. 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. The General Partner and its affiliates will be
entitled to reimbursement for any costs associated with the Year 2000 issue.
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. Management has considered these factors in determining the
recovery of its equipment at December 31, 1997 in accordance with FASB
Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". Based on its current assessment of the
Partnership does not believe that the reduction in carrying values of
equipment, if any, due to the Year 2000 issue will have a significant effect
on operations.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
16
<PAGE>
Commonwealth Income &
Growth Fund I
Financial Statements
Years ended December 31, 1997, 1996, and 1995
Contents
<TABLE>
<S> <C>
Report of Independent Auditors................................................18
Audited Financial Statements
Balance Sheets................................................................19
Statements of Operations......................................................20
Statements of Partners' Capital...............................................21
Statements of Cash Flows......................................................22
Notes to Financial Statements.................................................23
</TABLE>
17
<PAGE>
Report of Independent Auditors
The Partners
Commonwealth Income & Growth Fund I
We have audited the accompanying balance sheets of Commonwealth Income & Growth
Fund I as of December 31, 1997 and 1996, and the related statements of
operations, partners' capital, and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Commonwealth Income & Growth
Fund I at December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, in 1996 the Partnership
changed its method of accounting for impairment of long-lived assets.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 6, 1998
18
<PAGE>
Commonwealth Income & Growth Fund I
Balance Sheets
<TABLE>
<CAPTION>
December 31
1997 1996
------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 116,259 $ 1,082,795
Lease income receivable 146,562 259,050
Other receivables and deposits 8,567 23,584
Accounts receivable - General Partner -- 6,772
Computer equipment, at cost 17,355,551 16,080,646
Accumulated depreciation (7,928,798) (6,527,143)
------------------------------------------
9,426,753 9,553,503
Organization costs and deferred expenses, net of
accumulated amortization of $532,265 in 1997
and $435,215 in 1996 383,503 447,499
------------------------------------------
Total assets $ 10,081,644 $ 11,373,203
------------------------------------------
------------------------------------------
Liabilities and partners' capital
Accounts payable $ 24,609 $ 64,382
Accounts payable - General Partner 18,810 --
Accounts payable - Commonwealth Capital Corp. 40,929 --
Unearned lease income 161,781 228,817
Payables for computer equipment - 529,124
Notes payable 4,968,748 3,502,523
------------------------------------------
Total liabilities $ 5,214,877 4,324,846
Partners' capital:
General partner 1,000 1,000
Limited partners 4,865,767 7,047,357
------------------------------------------
Total partners' capital 4,866,767 7,048,357
------------------------------------------
Total liabilities and partners' capital $ 10,081,644 $ 11,373,203
------------------------------------------
------------------------------------------
</TABLE>
See accompanying notes.
19
<PAGE>
Commonwealth Income & Growth Fund I
Statements of Operations
<TABLE>
<CAPTION>
Year ended
December 31
1997 1996 1995
---------------------------------------------------
<S> <C> <C> <C>
Income:
Lease $ 5,195,139 $ 5,908,389 $ 4,144,609
Interest 34,525 46,753 172,913
--------------------------------------------------
5,229,664 5,955,142 4,317,522
Expenses:
Operating, excluding depreciation 111,263 80,883 93,265
Equipment management fee - General
Partner 259,757 295,420 207,230
Interest 348,681 311,247 212,365
Depreciation 4,912,073 5,555,331 3,636,163
Amortization of organization costs and
deferred expenses 307,323 340,200 213,734
Loss on sale of computer equipment 196,690 691,808 --
---------------------------------------------------
6,135,787 7,274,889 4,362,757
---------------------------------------------------
Net loss $ (906,123) $ (1,319,747) $ (45,235)
---------------------------------------------------
---------------------------------------------------
Net loss per equivalent limited
partnership unit $ (1.46) $ (2.11) $ (.10)
------------------------------------------------------
------------------------------------------------------
Weighted average number of equivalent limited
partnership units outstanding during the year 631,358 631,358 594,446
------------------------------------------------------
------------------------------------------------------
</TABLE>
See accompanying notes.
20
<PAGE>
Commonwealth Income & Growth Fund I
Statements of Partners' Capital
<TABLE>
<CAPTION>
General Limited
Partner Partner General Limited
Units Units Partner Partners Total
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Partners' capital -
December 31, 1994 50 413,719 $ 1,000 $ 6,990,641 $ 6,991,641
Contributions - 217,639 - 4,352,171 4,352,171
Offering costs - (459,421) (459,421)
Net income (loss) 11,956 (57,191) (45,235)
Distributions (11,956) (1,183,629) (1,195,585)
----------------------------------------------------------------------------
Partners' capital -
December 31, 1995 50 631,358 1,000 9,642,571 9,643,571
Net income (loss) 12,755 (1,332,502) (1,319,747)
Distributions (12,755) (1,262,712) (1,275,467)
----------------------------------------------------------------------------
Partners' capital -
December 31, 1996 50 631,358 1,000 7,047,357 7,048,357
Net income (loss) 12,755 (918,878) (906,123)
Distributions (12,755) (1,262,712) (1,275,467)
----------------------------------------------------------------------------
Partners' capital -
December 31, 1997 50 631,358 $ 1,000 $ 4,865,767 $ 4,866,767
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
See accompanying notes.
21
<PAGE>
Commonwealth Income & Growth Fund I
Statements of Cash Flows
<TABLE>
Year ended December 31,
1997 1996 1995
------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net loss $ (906,123) $ (1,319,747) $ (45,235)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 5,219,396 5,895,531 3,849,897
Loss on sale of computer equipment 196,690 691,808 -
Other non-cash activities included in
determination of net loss (2,848,893) (2,689,616) (1,514,550)
Changes in operating assets and
liabilities:
Lease income receivable 112,488 51,405 (174,362)
Other receivables and deposits 15,017 12,193 49,453
Accounts receivable -
General Partner 6,772 (6,772) 74,139
Accounts payable (39,773) (11,741) 39,419
Accounts payable - General Partner 57,916 (83,874) 57,005
Unearned lease income (67,036) (13,536) 112,152
Organization cost paid to the
General Partner -- -- (36,734)
--------------------------------------------------------------
Net cash provided by operating activities 1,746,454 2,525,651 2,411,184
Investing activities
Capital expenditures (1,347,809) (1,035,293) (6,353,404)
Accounts payable - Commonwealth
Capital Corp. 1,823 (22,222) --
Net proceeds from sale of computer
equipment 347,654 748,241 --
Payment of computer equipment payable (195,864) (9,624) --
Equipment acquisition fees paid to the
General Partner (213,186) (156,616) (403,549)
--------------------------------------------------------------
Net cash used in investing activities (1,407,382) (475,514) (6,756,953)
Financing activities
Limited partners' contributions - - 4,352,171
Offering costs - - (391,829)
Offering costs paid to the General Partner - - (67,592)
Distributions to partners (1,275,467) (1,275,467) (1,195,585)
Debt placement fee paid to the
General Partner (30,141) (33,713) (29,920)
--------------------------------------------------------------
--------------------------------------------------------------
Net cash (used in) provided by financing
activities (1,305,608) (1,309,180) 2,667,245
--------------------------------------------------------------
Net (decrease) increase in cash and cash
equivalents (966,536) 740,957 (1,678,524)
--------------------------------------------------------------
Cash and cash equivalents at beginning
of year 1,082,795 341,838 2,020,362
--------------------------------------------------------------
Cash and cash equivalents at end of year $ 116,259 $ 1,082,795 $ 341,838
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>
See accompanying notes.
22
<PAGE>
Commonwealth Income & Growth Fund I
Notes to Financial Statements
1. Business
Commonwealth Income & Growth Fund I (the "Partnership") is a limited
partnership. The Partnership was declared effective by the Securities and
Exchange Commission on December 17, 1993, and began offering up to 750,000
units of the limited partnership at the purchase price of $20 per unit. The
offering terminated on May 11, 1995 after it sold 631,358 units at a price of
$20 per unit. The Partnership was organized in the Commonwealth of
Pennsylvania to acquire, own, lease, and sell various types of computer
peripheral equipment and other similar capital equipment, which will be
leased primarily to U.S. corporations and institutions. The Partnership's
general partner is Commonwealth Income & Growth Fund, Inc. (the "General
Partner"), a Pennsylvania corporation which is an indirect wholly-owned
subsidiary of Commonwealth Capital Corp. Approximately ten years after the
commencement of operations, the Partnership intends to have sold or otherwise
disposed of all of its computer equipment, make final distributions to
partners, and to dissolve. Unless sooner terminated, the Partnership will
continue until December 31, 2004.
Allocations of income and distributions of cash are based on Commonwealth
Income & Growth Fund I, Limited Partnership Agreement (the "Agreement"). The
various allocations prevent any partner's capital account from being reduced
below zero and ensure the capital accounts reflect the anticipated sharing
ratios of cash distributions, as defined in the Agreement. Annual cash
distributions to limited partners have been made at a rate of 10% (Preferred
Distribution) of their original contributed capital. Distributions during
1997, 1996, and 1995 reflect an annual return of capital in the amount of
approximately $2.00 per limited partnership unit, for units which were
outstanding for the entire year. (For a limited partner's unit acquired
during 1995 the return of capital would be less than these amounts.) In the
event the Partnership is unable to distribute sufficient cash to meet the
intended preferred distribution, such amounts will be deferred with no
interest until sufficient cash flow is available, as determined by the
General Partner or until the liquidation of the Partnership. The Partnership
may also reduce distributions to its partners if it deems necessary. Further,
ongoing acquisition fees, equipment management fees, and financing fees
payable to the General Partner (Note 4) will also be deferred until payment
of any unpaid Preferred Distribution.
23
<PAGE>
Commonwealth Income & Growth Fund I
Notes to Financial Statements (continued)
1. Business (continued)
Use of Estimates
The preparation of the 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.
2. Accounting Policies
Revenue Recognition
Through December 31, 1997, the Partnership has only entered into operating
leases. Lease revenue is recognized on a monthly basis in accordance with the
terms of the operating lease agreements.
Long-Lived Assets
In 1996, the Partnership adopted FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Partnership evaluates its long-lived assets when events or circumstances
indicate that the value of the asset may not be recoverable. The Partnership
determines whether an impairment exists by estimating the undiscounted cash
flows to be generated by each asset. If the estimated undiscounted cash flows
are less than the carrying value of the asset then an impairment exists. The
amount of the impairment is determined based on the difference between the
carrying value and the fair value. Fair value is determined based on
estimated discounted cash flows to be generated by the asset.
During 1997 and 1996, the Partnership identified specific computer equipment
and associated equipment acquisition costs which were evaluated due to
technological changes. The Partnership determined that the carrying amount of
certain assets was greater than the undiscounted cash flows to be generated
by these assets. The Partnership recorded charges of $154,000 and $904,000 in
the fourth quarters of 1997 and 1996, respectively, to record the assets at
their estimated fair value. Such amounts have been included in depreciation
expense in the accompanying financial statements.
24
<PAGE>
Commonwealth Income & Growth Fund I
Notes to Financial Statements (continued)
2. Accounting Policies (continued)
Additionally in 1995, the Partnership identified specific computer equipment
whose lives were reduced from the established useful lives, to reflect the
impact of technological changes. These changes in estimates reduced net
income by approximately $299,000 in 1995. Such amounts have been included in
depreciation expense in the accompanying financial statements.
Depreciation on computer equipment for financial statement purposes is based
on the straight-line method over estimated useful lives of 4 years. Other
assets, consisting of organization costs and other deferred expenses, are
amortized on a straight-line basis over 2 to 5 year lives. Unamortized
acquisition fees are charged to amortization expense when the associated
leased equipment is sold.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less to be cash equivalents. At December 31, 1997 and 1996, cash
equivalents were invested in a money market fund investing directly in
Treasury obligations.
Income Taxes
The Partnership is not subject to federal income taxes; instead, any taxable
income (loss) is passed through to the partners and included on their
respective income tax returns.
Taxable income differs from financial statement net income as a result of
reporting certain income and expense items for tax purposes in periods other
than those used for financial statement purposes, principally relating to
depreciation, amortization, and lease income.
Offering Costs
Offering costs are payments for selling commissions of 7% and dealer manager
fees of 2% of the partners' contributed capital, professional fees and other
offering expenses relating to the syndication. These costs are deducted from
partnership capital in the accompanying financial statements.
25
<PAGE>
Commonwealth Income & Growth Fund I
Notes to Financial Statements (continued)
2. Accounting Policies (continued)
Net Loss per Equivalent Limited Partnership Unit
The net loss per equivalent limited partnership unit is computed based upon
net loss allocated to the limited partners and the weighted average number of
equivalent units outstanding during the year.
3. Computer Equipment
The Partnership is the lessor of equipment under operating leases with
periods ranging from 18 to 48 months. In general, associated costs such as
repairs and maintenance, insurance and property taxes are paid by the lessee.
The following is a schedule of future minimum rentals on noncancelable operating
leases at December 31, 1997:
<TABLE>
<S> <C>
1998 $ 4,244,000
1999 2,093,000
2000 415,000
----------------------
$ 6,752,000
----------------------
----------------------
</TABLE>
Lease income from two lessees, each exceeding 10% of total lease income,
aggregated 23% of lease income for the year ended December 31, 1997. Lease
income from two lessees, each exceeding 10% of total lease income, aggregated
35% of lease income for the year ended December 31, 1996. Lease income from
three lessees, each exceeding 10% of total lease income, aggregated 40% of
lease income for the year ended December 31, 1995.
4. Related Party Transactions
Organizational Fee
The General Partner was entitled to be paid an Organizational Fee equal to
three percent of the first $10,000,000 of Limited Partners' Capital
Contributions and two percent of the Limited Partners' Capital Contributions
in excess of $10,000,000, as compensation for the organization of the
Partnership. During 1995, such organizational fees of approximately $104,000
were paid to the General Partner.
26
<PAGE>
Commonwealth Income & Growth Fund I
Notes to Financial Statements (continued)
4. Related Party Transactions (continued)
Reimbursement of Expenses
The General Partner and its Affiliates are entitled to reimbursement by the
Partnership for the cost of goods, supplies or services obtained and used by
the General Partner in connection with the administration and operation of
the Partnership from third parties unaffiliated with the General Partner. In
addition, the General Partner and its affiliates are entitled to
reimbursement for certain expenses incurred by the General Partner and its
affiliates in connection with the administration and operation of the
Partnership. During 1997, 1996 and 1995 the Partnership paid $54,000, $0, and
$7,000 to the General Partner for reimbursement of expenses.
Equipment Acquisition Fee
The General Partner is entitled to be paid an Equipment Acquisition Fee of 4% of
the Purchase Price of each item of Equipment purchased as compensation for the
negotiation of the acquisition of the Equipment and the lease thereof or sale
under a Conditional Sales Contract. During 1997, 1996, and 1995, equipment
acquisition fees of approximately $213,000, $157,000, and $404,000,
respectively, were paid to the General Partner.
Debt Placement Fee
As compensation for arranging Term Debt to finance the acquisition of Equipment
by the Partnership, the General Partner is paid a fee equal to 1% of such
indebtedness; provided, however, that such fee shall be reduced to the extent
the Partnership incurs such fees to third parties, unaffiliated with the General
Partner or the lender, with respect to such indebtedness and no such fee will be
paid with respect to borrowings from the General Partner or its Affiliates.
During 1997, 1996, and 1995, debt placement fees of approximately $30,000,
$33,000, and $30,000, respectively, were paid to the General Partner.
27
<PAGE>
Commonwealth Income & Growth Fund I
Notes to Financial Statements (continued)
4. Related Party Transactions (continued)
Equipment Management Fee
The General Partner is entitled to be paid a monthly fee equal to the lesser
of (i) the fees which would be charged by an independent third party for
similar services for similar equipment or (ii) the sum of (a) two percent of
(1) the Gross Lease Revenues attributable to Equipment which is subject to
Full Payout Net Leases which contain net lease provisions plus (2) the
purchase price paid on Conditional Sales Contracts as received by the
Partnership and (b) 5% of the Gross Lease Revenues attributable to Equipment
which is subject to Operating Leases. During 1997, 1996, and 1995, equipment
management fees of approximately $260,000, $295,000, and $207,000,
respectively, were paid to the General Partner as determined pursuant to
section (ii) above.
Re-lease Fee
As compensation for providing re-leasing services for any Equipment for which
the General Partner has, following the expiration of, or default under, the
most recent lease or Conditional Sales Contract, arranged a subsequent lease
or Conditional Sales Contract for the use of such Equipment to a lessee or
other party, other than the current or most recent lessee or other operator
of such equipment or its Affiliates ("Re-lease"), the General Partner shall
receive, on a monthly basis, a Re-lease Fee equal to the lesser of (a) the
fees which would be charged by an independent third party for comparable
services for comparable equipment or (b) two percent of Gross Lease Revenues
derived from such Re-lease. There were no such fees paid to the General
Partner in 1997, 1996, or 1995.
Equipment Liquidation Fee
With respect to each item of Equipment sold by the General Partner (other
than in connection with a Conditional Sales Contract), a fee equal to the
lesser of (i) 50% of the Competitive Equipment Sale Commission or (ii) three
percent of the sales price for such Equipment is payable to the General
Partner. The payment of such fee is subordinated to the receipt by the
Limited Partners of (i) a return of their Capital Contributions and a 10% per
annum cumulative return, compounded daily, on Adjusted Capital Contributions
("Priority Return") and (ii) the Net Disposition Proceeds from such sale in
accordance with the Partnership Agreement. Such fee will be reduced to the
extent any liquidation or resale fees are paid to unaffiliated parties. There
were no such fees paid to the General Partner in 1997, 1996 or 1995.
28
<PAGE>
Commonwealth Income & Growth Fund I
Notes to Financial Statements (continued)
5. Notes Payable
Notes payable consisted of the following:
<TABLE>
1997 1996
-----------------------------------------
<S> <C> <C>
Installment note payable to a bank; interest at 8.6%; due in monthly
installments of $10,072 including interest through
September 1997 $ - $ 87,483
Installment note payable to a bank; interest at 8.6%; due in
monthly installments of $6,204 including interest through
November 1997 - 71,084
Installment note payable to a bank; interest at 8.5%; due in
monthly installments of $8,315 including interest through
December 1997 - 95,334
Installment note payable to a bank; interest at 8.8%; due in
monthly installments of $4,949 including interest through
December 1997 - 56,664
Installment note payable to a bank; interest at 6.3%; due in
monthly installments of $5,254 including interest through
December 1997 - 60,946
Installment note payable to a bank; interest at 8.8%; due in
monthly installments of $5,607 including interest through
August 1998 43,415 103,986
Installment note payable to a bank; interest at 8.6%; due in
monthly installments of $16,639 including interest through
September 1998 144,501 323,228
Installment note payable to a bank; interest at 7.8%; due in
monthly installments of $10,166 including interest through
November 1998 107,746 217,161
Installment note payable to a bank; interest at 7.5%; due in
monthly installments of $4,115 including interest through
December 1998 47,751 92,629
Installment note payable to a bank; interest at 6.5%; due in
monthly installments of $15,983 including interest through
February 1999 214,928 386,648
Installment note payable to a bank; interest at 8.5%; due in
monthly installments of $29,191 including interest through
March 1999 414,018 715,078
Installment note payable to a bank; interest at 7.9%; due in
monthly installments of $7,683 including interest through
June 1999 130,042 208,614
Installment note payable to a bank; interest at 7.5%; due in
monthly installments of $15,501 including interest through
June 1999 276,895 435,618
Installment note payable to a bank; interest at 7.2%; due in
monthly installments of $10,711 including interest through
July 1999 191,795 302,166
Installment note payable to a bank; interest at 6.7%; due in
monthly installments of $11,501 including interest through
September 1999 227,363 345,884
</TABLE>
29
<PAGE>
Commonwealth Income & Growth Fund I
Notes to Financial Statements (continued)
5. Notes Payable (continued)
Notes payable consisted of the following: (continued)
<TABLE>
<CAPTION>
1997 1996
-----------------------------
<S> <C> <C>
Installment note payable to a bank; interest at 6.8%; due in monthly
installments of $22,520 including interest through
November 1999 $ 484,578 $ -
Installment note payable to a bank; interest at 6.4%; due in
monthly installments of $14,749 including interest through
December 1998 171,020 -
Installment note payable to a bank; interest at 7.0%; due in
monthly installments of $34,621 including interest through
October 1998 335,433 -
Installment note payable to a bank; interest at 7.5%; due in
monthly installments of $6,597 including interest through
February 2000 157,855 -
Installment note payable to a bank; interest at 7.10%; due in
monthly installments of $29,786 including interest through
May 2000 792,084 -
Installment note payable to a bank; interest at 7.3%; due in
monthly installments of $9,040 including interest through
July 2000 254,862 -
Installment note payable to a bank; interest at 6.4%; due in
monthly installments of $21,031 including interest through
September 2000 634,833 -
Installment note payable to a bank; interest at 7.12%; due in
monthly installments of $11,060 including interest through
October 2000 339,629 -
------------------------------
$4,968,748 $3,502,523
===============================
</TABLE>
These notes are secured by specific computer equipment and are nonrecourse
liabilities of the Partnership. Aggregate maturities of notes payable for each
of the three years subsequent to December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $2,911,551
1999 1,544,605
2000 512,592
---------------
$4,968,748
---------------
---------------
</TABLE>
The fair market value of debt approximates its carrying value at December 31,
1997 and 1996.
30
<PAGE>
Commonwealth Income & Growth Fund I
Notes to Financial Statements (continued)
6. Supplemental Cash Flow Information
Other non-cash activities included in the determination of net loss are as
follows:
<TABLE>
1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C>
Lease income, net of interest expense on
notes payable realized as a result of direct
payment of principal by lessee to bank $ 2,848,893 $ 2,674,867 $ 1,464,632
Lease income paid to original lessor in lieu
of cash payment for computer equipment
acquired - 14,749 49,918
---------------------------------------------------------------
Total adjustment to net loss from other
noncash activities $ 2,848,893 $ 2,689,616 $ 1,514,550
---------------------------------------------------------------
---------------------------------------------------------------
</TABLE>
No interest or principal on notes payable was paid by the Partnership because
direct payment was made by lessee to the bank in lieu of collection of lease
income and payment of interest and principal by the Partnership.
Non-cash investing and financing activities include the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt assumed in connection with purchase
of computer equipment $ 3,981,858 $ 2,344,453 $ 3,127,691
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Accounts payable in connection with the
purchase of computer equipment - $ 529,124 $ 559,473
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Computer equipment payable converted to a
note payable $ 333,260 $ 527,627 $ -
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
Commonwealth Income & Growth Fund I
Notes to Financial Statements (continued)
7. Reconciliation of Net Loss Reported for Financial Reporting Purposes to
Taxable (Loss) Income
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C>
Net loss for financial reporting purposes $ (906,123) $ (1,319,747) $ (45,235)
Adjustments:
Loss on sale of computer equipment (1,224,887) (1,177,731) -
Depreciation 241,706 469,401 203,759
Amortization 248,516 287,516 171,728
Unearned lease income 27,603 14,055 (3,321)
Penalties and other 39,161 - -
----------------------------------------------------------------------
Taxable (loss) income $ (1,574,024) $ (1,726,506) $ 326,931
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
32
<PAGE>
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
Balance Sheet
February 28, 1997
Contents
<TABLE>
<S> <C>
Report of Independent Auditors.............................................38
Balance Sheet..............................................................39
Notes to Balance Sheet.....................................................40
</TABLE>
33
<PAGE>
Report of Independent Auditors
To the Stockholder
Commonwealth Income & Growth Fund, Inc.
We have audited the accompanying balance sheet of Commonwealth Income & Growth
Fund, Inc. (an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
as of February 28, 1997. This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Commonwealth Income & Growth Fund,
Inc. at February 28, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 28, 1997
34
<PAGE>
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
Balance Sheet
<TABLE>
<CAPTION>
February 28
1997
-----------
<S> <C>
Assets
Cash ......................................................... $ 500
Accounts receivable from Income Funds and
Commonwealth Capital Corp. ............................... 2,069
Investment in Partnerships ................................... 2,000
-----------
$ 4,569
-----------
-----------
Liabilities
Accounts payable to Income Funds and
Commonwealth Capital Corp. ............................... $ 3,469
Stockholders' equity
Common stock at $1 stated value:
Authorized shares--1,000
Issued and outstanding shares--100 ....................... 100
Additional paid-in capital ................................... 1,001,000
-----------
1,001,100
Less: note receivable ........................................ (1,000,000)
-----------
1,100
-----------
$ 4,569
-----------
-----------
</TABLE>
See accompanying notes.
35
<PAGE>
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
Notes to Balance Sheet
February 28, 1997
1. The Company
Commonwealth Income & Growth Fund, Inc. (the "Company") is a wholly-owned
subsidiary of Commonwealth of Delaware, Inc. which in turn is a wholly-owned
subsidiary of Commonwealth Capital Corp. ("CCC"). The Company is the sole
General Partner of Commonwealth Income & Growth Fund I, a Pennsylvania limited
partnership and the sole General Partner of Commonwealth Income & Growth Fund
II, a Pennsylvania limited partnership. On April 28, 1997 the Company
contributed $1,000 in cash to become the sole General Partner of Commonwealth
Income & Growth Fund III, a Pennsylvania limited Partnership. The three limited
partnerships described above are collectively referred to herein as the
"Partnerships."
CCC has provided additional capital by means of a noninterest-bearing demand
note in the amount of $1,000,000, so that the Company will at all times have a
net worth (which includes the net equity of the Company and the demand note
receivable from CCC) of at least $1,000,000. In computing the Company's net
worth for this purpose, its interest in the Partnerships and any amounts and
notes receivable from and payable to the Partnerships will be excluded. The
Company's equity has been reduced by the note receivable from CCC resulting in
net equity of $1,100, which may be different for tax purposes. The Company's
operations will be included in the consolidated federal income tax return of
CCC.
2. Investment in Partnerships
The Company contributed $2,000 in cash through February 28, 1997 to the
Partnerships for its general partner interests. The Company may, at its sole
discretion, purchase a limited partnership interest in the Partnerships
("Units") for an additional capital contribution of $20 per Unit with a minimum
investment of 125 Units.
3. Related Party Transactions
The Company and its affiliates receive substantial fees and compensation in
connection with the offering of Units and the management of the Partnerships'
assets. See "Compensation of General Partner and Affiliates," and "Allocations
and Distributions" elsewhere in the Prospectus of Commonwealth Income & Growth
Fund III for information with respect to the compensation to be paid to the
Company and its affiliates and the allocations of income, losses, and cash
distributions.
36
<PAGE>
Commonwealth Capital Corp.
Consolidated Balance Sheet
As of February 28, 1997
Contents
<TABLE>
<S> <C>
Report of Independent Auditors...............................................38
Audited Consolidated Balance Sheet...........................................39
Notes to Consolidated Balance Sheet..........................................40
</TABLE>
37
<PAGE>
Report of Independent Auditors
The Stockholder
Commonwealth Capital Corp.
We have audited the accompanying consolidated balance sheet of Commonwealth
Capital Corp. as of February 28, 1997. This balance sheet is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the consolidated financial position of Commonwealth Capital
Corp. at February 28, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 28, 1997
38
<PAGE>
Commonwealth Capital Corp.
Consolidated Balance Sheet
February 28, 1997
<TABLE>
<S> <C>
Assets
Cash and cash equivalents .................................. $ 162,028
Receivables from Income Funds .............................. 308,686
Advances to Income Funds ................................... 317,400
Other receivables .......................................... 134,335
Income taxes receivable .................................... 33,000
Minimum lease payments receivable, net of
unearned interest income of $4,316,972 ................. 9,045,000
Deferred tax asset ......................................... 122,000
Investment in Income Funds ................................. 18,200
Other assets ............................................... 10,976
Office furniture and equipment, net of
accumulated depreciation of $84,668 .................... 32,323
-----------
Total assets ............................................... 10,183,948
-----------
-----------
Liabilities and stockholder's equity
Accounts payable and accrued expenses ...................... 118,144
Nonrecourse obligations .................................... 9,045,000
-----------
Total liabilities .......................................... 9,163,144
Stockholder's equity:
Common stock, $1 par value:
Authorized shares - 1,000
Issued and outstanding shares - 10 .................. 10
Retained earnings ...................................... 1,020,794
-----------
Total stockholder's equity ................................. 1,020,804
-----------
Total liabilities and stockholder's equity ................. $10,183,948
-----------
-----------
</TABLE>
See accompanying notes.
39
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Balance Sheet
February 28, 1997
1. Business
Commonwealth Capital Corp. (the Company), through its subsidiary, Commonwealth
of Delaware, Inc. (CDI), is primarily engaged in leasing various types of
computer peripheral equipment and other similar equipment, which are leased
primarily to U.S. corporations and institutions. Certain subsidiaries of CDI
were formed for the purpose of functioning as general partners/managing trustees
which own a 1% interest in limited partnerships/trusts (the "Income Funds"),
which were organized to acquire, own and act as lessor with respect to certain
computer equipment. As of February 28, 1997, the subsidiaries include
Commonwealth Capital Fund 1987-I, Inc., Commonwealth Capital Fund 1988-I, Inc.,
Commonwealth Capital Fund No. 3, Inc., Commonwealth Capital Fund No. 4, Inc.,
Commonwealth Capital Fund V, Inc., Commonwealth Capital Private Fund-I, Inc.,
Commonwealth Capital Fund VI, Inc., Commonwealth Capital Fund VII, Inc.,
Commonwealth Capital Private Fund - II, Inc., Commonwealth Capital Trustee VIII,
Inc., Commonwealth Capital Trustee IX, Inc., Commonwealth Capital Trustee X,
Inc., Commonwealth Capital Private Fund-III, Inc., Commonwealth Income and
Growth Fund, Inc., Commonwealth Capital Private Fund IV, Inc., Commonwealth
Capital Private Fund V, Inc., and Commonwealth Capital Private Fund VI, Inc.
(collectively the "General Partner Subsidiaries"), Commonwealth Capital
Securities Corp., Garden State Facilities Funding, Inc. (GSFF) and Commonwealth
Capital Delaware Trustee, Inc.
2. Accounting Policies
Basis of Presentation
The accompanying consolidated balance sheet includes the accounts of the
Company, its wholly-owned subsidiary, CDI, and its wholly-owned subsidiaries
(Note 1). All significant intercompany accounts and transactions have been
eliminated in the accompanying consolidated balance sheet. The balance sheet is
presented on an unclassified basis in accordance with leasing industry practice.
Use of Estimates
The preparation of the balance sheet in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the balance sheet and accompanying notes. Actual
results could differ from those estimates.
40
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Balance Sheet (continued)
2. Accounting Policies (continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. At February 28, 1997, cash
equivalents were invested in a money market fund investing directly in treasury
obligations.
Office Furniture and Equipment
Office furniture and equipment are carried at cost and are depreciated over the
estimated useful lives of the related assets ranging from 5 to 7 years using
accelerated methods.
Investment in Income Funds
The Company accounts for its 1% interests in the Income Funds by the equity
method. Distributions were received from these Income Funds and approximated the
Company's equity in the income of the Income Funds. Financial information of the
Income Funds as of December 31, 1996 is as follows:
<TABLE>
<S> <C>
Total assets ......................................... $34,502,000
Nonrecourse debt ..................................... 10,450,000
Other liabilities .................................... 2,952,000
Partners' capital .................................... 21,067,000
</TABLE>
The Company has guaranteed the performance of certain non-monetary obligations
of the General Partner Subsidiaries to the respective Income Funds, primarily
the responsibility for management of the Income Funds. In addition, the Company
is responsible for certain capital funding requirements of the General Partner
Subsidiaries and, accordingly, holds noninterest-bearing demand notes of
approximately $4,166,000 at February 28, 1997. Such notes have been eliminated
in the consolidation of the accompanying balance sheet.
The compensation to the Company from the Income Funds includes: (1) Equipment
Acquisition Fees (4% of the purchase price of all equipment purchased by the
Income Funds); (2) Debt Placement Fees (1% of financed equipment by the Income
Funds); (3) Sales Fees Expense (3% of gross proceeds of sold equipment by the
Income Funds); and (4) Equipment Management Fees (5% of the gross operating
lease revenues of the Income Funds). The Company earned approximately $1,509,000
in fees for managing the Income Funds during the year ended February 28, 1997.
41
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Balance Sheet (continued)
3. Lease Commitments
GSFF acted as lessor in a series of lease purchase transactions whereby the
underlying assets were funded by investors through certificates of
participation in the lease payments. All of GSFF's rights as lessor were
assigned to a third-party agent which administers the collection of rentals
paid by the lessee. The obligations under the certificates are nonrecourse to
GSFF. Accordingly, any reduction in the minimum lease payments receivable for
uncollectible accounts would result in an equal reduction of the nonrecourse
obligations. Amounts outstanding at February 28, 1997 under the leases and
certificates of participation are approximately $9,045,000. These amounts are
included in minimum lease payments receivable and nonrecourse obligations in
the accompanying balance sheet. Of these amounts, $7,690,000 are secured by
mortgage insurance policies maintained by the lessee. The certificates mature
from 1997 to 2011.
Future minimum lease payments to be received as of February 28, 1997 are as
follows:
<TABLE>
<C> <C>
1998 ........................................................ $ 1,190,923
1999 ........................................................ 1,202,479
2000 ........................................................ 1,190,739
2001 ........................................................ 1,192,935
2002 ........................................................ 972,677
Thereafter .................................................. 7,675,669
-----------
13,425,422
Less amount representing interest 4,380,422
-----------
Total $ 9,045,000
-----------
-----------
</TABLE>
The Company leases an automobile, certain office equipment and office space
under noncancelable operating leases expiring in 1998 through 2000. Future
minimum lease payments under noncancelable operating leases at February 28, 1997
are $184,000 in 1998; $143,000 in 1999; and $3,000 in 2000.
4. Profit-Sharing Plan
The Company has a profit-sharing plan covering all employees with one year of
service and 21 years of age. Profit-sharing contributions are made at the
discretion of management. It is the Company's policy to fund profit-sharing
costs as accrued.
42
<PAGE>
5. Income Taxes
The Company files a consolidated federal income tax return with CDI and its
subsidiaries. The Company has investment tax credit carryforwards of $266,000 at
February 28, 1997. The investment tax credits expire in 1998 through 2001 and
are available to reduce future federal income tax liabilities. The Company also
has state net operating loss carryforwards of approximately $508,000, which
expire during 1997 through 1999.
The Company has a federal deferred tax asset of $259,000 at February 28, 1997,
arising primarily from the carryforward of investment tax credits. At February
28, 1997, the Company recorded a valuation allowance of approximately $137,000
because the Company concluded the future realization of all of the tax benefits
underlying the asset could not be reasonably assured based on current and
expected operating results. The Company believes that the remaining asset of
$122,000 is more likely than not to be realized. In addition, the Company has a
state deferred tax asset of $48,000 at February 28, 1997; however, the future
realization of the tax benefits underlying the state deferred tax asset could
not be reasonably assured and, accordingly, a valuation allowance was recorded
in the amount of $48,000.
6. Related Party Transactions
During 1997, the Company made $373,388 in cash advances to certain Income Funds
to fund cash distributions to limited partners. The remaining advances of
$317,400 are due on demand.
7. Legal Settlement
In 1997, the Company settled a dispute over contract terms with a former lessee,
whereby the lessee agreed to pay $190,000 for release of all future liability.
The Company received $95,000 through February 28, 1997 and the remaining
$95,000, included in other receivables at February 28, 1997, was subsequently
received.
43
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
NOT APPLICABLE
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
GENERAL
The General Partner, a wholly-owned subsidiary of Commonwealth of
Delaware, Inc., a Delaware corporation, which is in turn a wholly-owned
subsidiary of Commonwealth Capital Corp., a Pennsylvania corporation ("Com
Cap Corp."), was incorporated in Pennsylvania on August 26, 1993. The
General Partner also acts as the General Partner for Commonwealth Income and
Growth Fund I and Commonwealth Income and Growth Fund II. The principal
business office of the General Partner is 1160 West Swedesford Road, Suite
340, Berwyn, PA 19312, and its telephone number is 610-647-6800. The General
Partner manages and controls the affairs of the Partnership and has sole
responsibility for all aspects of the Partnership's operations. The officers
of the General Partner devote such time to the affairs of the Partnership as
in the opinion of the General Partner is necessary to enable it to perform
its function as General Partner. The officers of the General Partner are not
required to spend their full time in meeting their obligations to the
Partnership.
The directors and officers of the General Partner and key employees of
Com Cap Corp. are as follows:
<TABLE>
<CAPTION>
NAME TITLE
- ------------------- ------------------------------------------------
<S> <C>
George S. Springsteen Chairman of the Board of Directors and President
of the General Partner and Com Cap Corp.
Kimberly A. MacDougall Executive Vice President, Chief Operating Officer
and Secretary of the General Partner and Com Cap Corp.
44
<PAGE>
David A. Kintzer Vice President and Chief Financial Officer of the
General Partner and Com Cap Corp.
Kathleen S. Enscoe Assistant Vice President and Controller of the General
Partner and Com Cap Corp.
Gregory M. Lorenz Vice President of Com Cap Corp.
Magdalia Cruz Assistant Vice President of Com Cap Corp.
</TABLE>
George S. Springsteen, age 63, is President of both Com Cap Corp. and
the General Partner. Mr. Springsteen is also President of the general
partners or controlling entities of several prior programs sponsored by Com
Cap Corp. with objectives similar to the Partnership's. He has been the sole
shareholder and director of Com Cap Corp. since its formation in 1978. From
1971 to 1978, Mr. Springsteen was involved in the computer leasing business
of Granite Computer Corporation. Mr. Springsteen served as Vice President of
Marketing, in addition to other capacities, and managed a portfolio of
approximately $120,000,000 of IBM computers and peripherals. In 1978, Granite
Computer Corporation sold its equipment portfolio and left the equipment
leasing business. Mr. Springsteen acquired a portion of Granite's portfolio,
client base, employees and corporate offices in Jenkintown, Pennsylvania.
The new company began operations as Com Cap Corp. in May of 1978. Mr.
Springsteen received a Bachelor of Science degree from the University of
Delaware in 1957.
Kimberly A. MacDougall, age 38, is Executive Vice President, Chief
Operating Officer and Secretary of Com Cap Corp. and the General Partner and
joined ComCap Corp. in 1997. She is also the President of Commonwealth
Capital Securities Corp. From 1980 to 1997, Ms. MacDougall was employed with
Wheat First Butcher Singer, a broker/dealer headquartered in Richmond,
Virginia. While at Wheat First Butcher Singer, Ms. MacDougall, Senior Vice
President, served as Marketing Manager for the Direct Investments Department,
with over $450,000,000 of investments under management in real estate,
equipment leasing and energy-related industries. Ms. MacDougall holds Series
7, 63 and 39 NASD licenses and is a member of the Equipment Leasing
Association, Investment Partnership Association, and International
Association for Financial Planning.
David A. Kintzer, age 38, is Vice President and Chief Financial Officer
of both Com Cap Corp. and the General Partner and has been employed at Com
Cap Corp. since 1991. Mr. Kintzer also serves as Vice President and Chief
Financial Officer of the general partners or controlling entities of several
prior programs sponsored by Com Cap Corp. with objectives similar to the
Partnership's. From 1984 to 1990, Mr. Kintzer was employed by Continental
Computer Leasing Corporation, a computer leasing company with an equipment
lease portfolio of $40,000,000 and annual revenue of $20,000,000. While at
Continental, Mr. Kintzer served as Controller and Chief Financial Officer and
managed its accounting, financial, EDP, banking relationships and personnel
functions. Prior to 1984, Mr. Kintzer was employed by the international
public accounting firm of Ernst & Young LLP. Mr. Kintzer is a member of both
the American Institute of Certified Public Accountants and The Pennsylvania
Institute of Certified Public Accountants. Mr. Kintzer received an A.B.
degree in accounting from Franklin & Marshall College in 1981.
Kathleen S. Enscoe, age 32, is Assistant Vice President and Controller
of Com Cap Corp. and certain of its subsidiaries where she has been employed
since 1992. Ms. Enscoe is an active member of the Equipment Leasing
Association. From 1988 to 1992, Ms. Enscoe was employed as a staff
accountant in the financial reporting department of WWF Paper Corporation.
Ms. Enscoe received a B.S.B.A. degree in 1988 from Geneva College with dual
majors in accounting and business administration.
46
<PAGE>
Gregory M. Lorenz, age 35, is Vice President of Com Cap Corp. and has
been employed by Com Cap Corp. since April of 1994. From 1985 to 1993, Mr.
Lorenz was employed by Daley Marketing Corp. where he served as Vice
President of Marketing and Director of Sales and Marketing. Mr. Lorenz is a
member of the Equipment Leasing Association and received an Associates of
Arts degree from Orange Coast College in 1984.
Magdalia Cruz, age 29, is Assistant Vice President of Com Cap Corp. and
Vice President of Commonwealth Capital Securities Corp. Ms. Cruz has been
employed by Com Cap Corp. since 1993. From 1990 to 1993, Ms. Cruz was
employed as Marketing Coordinator for Shafer DeSouza Brown. Prior to that,
as a Computer Equipment Analyst for the Defense Industrial Supply Center, a
government agency based in Philadelphia. She is completing her studies for a
B.S. degree in Business Management at West Chester University. Ms. Cruz is a
member of the Equipment Leasing Association, Investment Planning Association,
and holds her Series 22, 63, and 39 NASD licenses.
The directors and officers of the General Partner are required to spend
only such time on the Partnership's affairs as is necessary in the sole
discretion of the directors of the General Partner for the proper conduct of
the Partnership's business. A substantial amount of time of such directors
and officers is expected to be spent on matters unrelated to the Partnership,
particularly after the Partnership's investments have been selected. Under
certain circumstances, such directors and officers are entitled to
indemnification from the Partnership.
47
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AMOUNT AMOUNT
ENTITY INCURRED INCURRED INCURRED
RECEIVING DURING DURING DURING
COMPENSATION TYPE OF COMPENSATION 1997 1996 1995
- -------------------------------------------- -------------------------------------------- --------- --------- ----------
<S> <C> <C> <C> <C>
OFFERING AND ORGANIZATION STAGE
The General Partner Organizational Fee. An Organization Fee $0 $0 $104,000
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. The General
Partner paid all Organizational and Offering
Expenses which include legal, accounting and
printing expenses; various registration and
filing fees; miscellaneous expenses related
to the organization and formation of the
Partnership; other costs of registration;
and costs incurred in connection with the
preparation, printing and distribution of
this Report and other sales literature,
other than underwriter's commissions and a
non-accountable expense allowance payable to
the Dealer Manager.
OPERATIONAL AND SALE OR LIQUIDATION STAGES
The General Partner and its Affiliates Reimbursement of Expenses. The General $54,000 $0 $7,000
Partner and its Affiliates are entitled to
reimbursement by the Partnership for the
cost of goods, supplies or services obtained
and used by the General Partner in
connection with the administration and
operation of the Partnership from third
parties unaffiliated with the General
Partner. In addition, the General Partner and
its affiliates are entitled to reimbursement
for certain expenses incurred by the General
Partner and its affiliates in connection with
the administration and operation of the
Partnership.
The General Partner Equipment Acquisition Fee. An Equipment $213,000 $157,000 $404,000
Acquisition Fee of four percent of the
Purchase Price of each item of Equipment
purchased as compensation for the
negotiation of the acquisition of the
Equipment and the lease thereof or sale
under a Conditional Sales Contract. The fee
was paid upon closing of the Offering with
respect to the Equipment purchased by the
Partnership with the net proceeds of the
Offering available for investment in
Equipment. When the Partnership acquired
Equipment in an amount exceeding the net
proceeds of the Offering available for
investment in Equipment, the fee was paid
when such Equipment was acquired.
The General Partner Debt Placement Fee. As compensation for $30,000 $33,000 $30,000
arranging Term Debt to finance the
acquisition of Equipment by the Partnership,
a fee equal to one percent of such
indebtedness; provided, however,
48
<PAGE>
that such fee is reduced to the extent
the Partnership incurred such fees to
third parties, unaffiliated with the
General Partner or the lender, with respect
to such indebtedness and no such fee was
paid with respect to borrowings from the
General Partner or its Affiliates.
The General Partner Equipment Management Fee. A monthly fee $260,000 $295,000 $207,000
equal to the lesser of (i) the fees which
would be charged by an independent third
party for similar services for similar
equipment or (ii) the sum of (a) two percent
of (1) the Gross Lease Revenues attributable
to Equipment which is subject to Full Payout
Net Leases which contain net lease
provisions plus (2) the purchase price paid
on Conditional Sales Contracts as received
by the Partnership and (b) five percent of
the Gross Lease Revenues attributable to
Equipment which is subject to Operating
Leases.
The General Partner Re-Lease Fee. As compensation for providing $0 $0 $0
re-leasing services for any Equipment for
which the General Partner has, following the
expiration of, or default under, the most
recent lease or Conditional Sales Contract,
arranged a subsequent lease or Conditional
Sales Contract for the use of such Equipment
to a lessee or other party, other than the
current or most recent lessee or other
operator of such equipment or its Affiliates
("Re-lease"), the General Partner will
receive, on a monthly basis, a Re-lease Fee
equal to the lesser of (a) the fees which
would be charged by an independent third
party for comparable services for comparable
equipment or (b) two percent of Gross Lease
Revenues derived from such Re-lease.
The General Partner Equipment Liquidation Fee. With respect to $0 $0 $0
each item of Equipment sold by the General
Partner (other than in connection with a
Conditional Sales Contract), a fee equal to
the lesser of (i) 50% of the Competitive
Equipment Sale Commission or (ii) three
percent of the sales price of such
Equipment. The payment of such fee is
subordinated to the receipt by the Limited
Partners of (i) a return of their Capital
Contributions and a 10% per annum cumulative
return, compounded daily, on Adjusted
Capital Contributions ("Priority Return")
and (ii) the Net Disposition Proceeds from
such sale in accordance with the Partnership
Agreement. Such fee is reduced to the extent
any liquidation or resale fees are paid to
unaffiliated parties.
49
<PAGE>
INTEREST IN THE PARTNERSHIP
The General Partner Partnership Interest. The General Partner $12,755 $12,755 $11,956
has a present and continuing one percent
interest of $1,000 in the Partnership's
items of income, gain, loss, deduction,
credit, and tax preference. In addition, the
General Partner receives one percent of Cash
Available for Distribution until the
Limited Partners have received distributions
of Cash Available for Distribution equal to
their Capital Contributions plus the 10%
Priority Return and thereafter, the General
Partner will receive 10% of Cash Available
for Distribution.
</TABLE>
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
NOT APPLICABLE
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
50
<PAGE>
The Partnership is subject to various conflicts on interest arising out
of its relationships with the General Partner and its Affiliates. These
conflicts include the following:
COMPETITION WITH GENERAL PARTNER AND AFFILIATES: COMPETITION FOR
MANAGEMENT'S TIME
The General Partner and its Affiliate sponsor other investor programs
which are in potential competition with the Partnership in connection with
the purchase of Equipment as well as opportunities to lease and sell such
Equipment. Competition for Equipment has occurred and is likely to occur in
the future. The General Partner and its Affiliates may also form additional
investor programs which may be competitive with the Partnership.
If one or more investor programs and the Partnership are in a position
to acquire the same Equipment, the General Partner will determine which
program will purchase the Equipment based upon the objectives of each and the
suitability of the acquisition in light of those objectives. The General
Partner will generally afford priority to the program or entity that has had
funds available to purchase Equipment for the longest period of time. If one
or more investor programs and the Partnership are in a position to enter into
lease with the same lessee or sell Equipment to the same purchaser, the
General Partner will generally afford priority to the Equipment which has
been available for lease or sale for the longest period of time.
Certain senior executives of the General Partner and its Affiliates also
serve as officers and directors of the other programs and are required to
apportion their time among these entities. The Partnership is, therefore, in
competition with the other programs for the attention and management time of
the General Partner and Affiliates. The officers and directors of the
General Partner are not required to devote all or substantially all of their
time to the affairs of the Partnership.
ACQUISITIONS
Com Cap Corp. and the General Partner or other Affiliates of the General
Partner may acquire Equipment for the Partnership provided that (i) the
Partnership has insufficient funds at the time the Equipment is acquired,
(ii)the acquisition is in the best interest of the partnership and (iii) no
benefit to the General Partner or its Affiliates arises from the acquisition
except for compensation paid to Com Cap Corp., the General Partner or such
other Affiliate as disclosed in this Report. Com Cap Corp., the General
Partner or their Affiliates will not hold Equipment for more than 60 days
prior to transfer to the Partnership. If sufficient funds become available
to the Partnership within such 60 day period, such Equipment may be resold to
the Partnership for a price not in excess of the sum of the cost of the
Equipment to such entity and any accountable Acquisition Expenses payable to
third parties which are incurred by such entity and interest on the Purchase
Price from the date of purchase to the date of transfer to the Partnership.
Com Cap Corp., the General Partner or such other Affiliate will retain any
rent or other payments received for the Equipment, and bear all expenses and
liabilities, other than accountable Acquisition Expenses payable to third
parties with respect to such Equipment, for all periods prior to the
acquisition of the Equipment by the Partnership. Except as described above,
there will be no sales of Equipment to or from any Affiliate of Com Cap Corp.
In certain instances, the Partnership finds it necessary, in connection
with the ordering and acquisition of Equipment, to make advances to
manufacturers or vendors with funds borrowed from the General Partner for
such purpose. The Partnership does not borrow money from the General Partner
or any of its Affiliates with a term in excess of twelve months. Interest is
paid on loans or advances (in the form of deposits with manufacturers or
vendors of Equipment or otherwise) from the General Partner of its Affiliates
from their own funds at a rate equal to that which would be charged by third
party financing institutions on comparable loans from the same purpose in the
same geographic area, but in no event in excess of the General Partner's or
Affiliate's own cost of funds. In addition, if the General Partner or its
Affiliates borrow money and loan or advance it on a short-term basis to or on
behalf of the Partnership, the General Partnership than that which the
General Partner or such Affiliates are paying. The Partnership
51
<PAGE>
does not loan money to any Person including the General Partner or its
Affiliates except to the extent that a Conditional Sales Contract constitutes
a loan.
If the General Partner or any of its Affiliates purchases Equipment in
its own name and with its own funds in order to facilitate ultimate purchase
by the Partnership, the purchaser is entitled to receive interest on the
funds expended for such purchase on behalf of the Partnership. Simple
interest on any such temporary purchases is charged on a floating rate basis
not in excess of three percent over the "prime rate" from time to time
announced by PNC Bank, from the date of initial acquisition to the date of
repayment by the Partnership/ownership transfer.
The Partnership does not invest in equipment Limited Partnerships,
general partnerships or joint ventures, except that (a) the Partnership may
invest in general partnerships or joint ventures with persons other that
equipment Programs formed by the General Partner or its Affiliates, which
partnerships or joint ventures own specific equipment; provided that (i) the
Partnership has or acquires a controlling interest in such ventures or
partnerships, (ii) the non-controlling interest is owned by a non-Affiliated,
and (iii) the are no duplicate fees; and (b) the Partnership may invest in
joint venture arrangements with other equipment Programs formed by the
General Partner or its Affiliates if such action is in the best interest of
all Programs and if all the following conditions are met: (i) all the
Programs have substantially identical investment objectives; (ii) there are
no duplicate fees; (iii) the sponsor compensation is substantially identical
in each Program; (iv) the Partnership has a right of first refusal to buy
another Program's interest in a joint venture if the other Program wishes to
sell equipment held in the joint venture; (v) the investment of each Program
is on substantially the same terms and conditions; and (vi) the joint venture
is formed either for the purpose of effecting appropriated diversification
for the Programs or for the purpose of relieving the General Partner or its
Affiliates from a commitment entered into pursuant to certain provisions of
the Partnership Agreement.
As of December 31, 1997, the Partnership was indebted to Com Cap Corp.
for approximately $41,000 in connection with the Partnership's reimbursable
expenses. The entire debt was satisfied in January 1998.
As of December 31, 1995, the Partnership was indebted to Com Cap Corp.
for approximately $22,000 in connection with the Partnership's acquisition of
Equipment. The entire debt was satisfied in January 1996.
52
<PAGE>
GLOSSARY
The following terms used in this Report shall (unless otherwise expressly
provided herein or unless the context otherwise requires) have the meanings
set forth below.
"Acquisition Expenses" means expenses relating to the prospective
selection and acquisition of or investment in Equipment 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 Priority Return as of the date such
distributions were made.
"Affiliate" means, when used with reference to a specified Person, (i)
any Person, that directly or indirectly through one or more intermediaries
controls or is controlled by or is under common control with the specified
Person, (ii) any Person that is a director or an executive officer of,
partner in, or serves in a similar capacity to, the specified Person, or any
Person of which the specified Person is an executive officer or partner or
with respect to which the specified Person serves in a similar capacity,
(iii) any Person owning or controlling 10% or more of the outstanding voting
securities of such specified Person, or (iv) if such Person is an officer,
director or partner, any entity for which such Person acts in such capacity.
"Capital Account" means the bookkeeping account maintained by the
Partnership for each Partner.
"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.
"Closing Date" means May 11, 1995.
"Code" means the Internal Revenue Code of 1986, as amended, and as may be
amended from time to time by future federal tax statutes.
53
<PAGE>
"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.
"Effective Date" means December 17, 1993, the date on which the
Partnership's Registration Statement on Form S-1 was declared effective by
the United States 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, together with all appliances, parts, instruments, accessories,
furnishings, or other equipment included therein and all substitutions,
renewals, or replacements of, and all additions, improvements, and accessions
to, any and all thereof.
"Full Payout Net Lease" means an initial Net Lease of the Equipment
underwhich the non-cancelable rental payments due (and which can be
calculated at the commencement of the Net Lease) during the initial
noncancellable fixed term (not including any renewal or extension period of
the lease or other contract for the use of the Equipment are at least
sufficient to recover the Purchase Price of the Equipment.
"General Partner" means Commonwealth Income & Growth Fund, Inc. and any
additional, substitute or successor general partner of the Partnership.
"Gross Lease Revenues" means Partnership gross receipts from leasing or
other operation of the Equipment, except that, to the extent the Partnership
has leased the Equipment from an unaffiliated party, it shall mean such
receipts less any lease expense.
"Initial Closing" means March 14, 1994, the date after the Minimum
Subscription Amount was received on which funds to acquire Units were
released from the Escrow Account and distributed to the Partnership for the
acqusition of Units by Limited Partners.
"IRS" means the Internal Revenue Service.
"Limited Partner" means a Person who acquires Units and who is admitted
to the Partnership as a limited partner in accordance with the terms of the
Partnership Agreement.
"Majority in Interest" means, with respect to the Partnership, Limited
Partners holding more than 50% of the outstanding Units held by all Limited
Partners at the Record Date for any vote or consent of the Limited Partners.
"Minimum Subscription Amount" means an aggregate of $2,500,000 in
Subscriptions.
"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 and insuring of the equipment.
"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
54
<PAGE>
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.
"Offering" means the initial public offering of Units in the Partnership.
"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 distributions made to the
Partners pursuant to Article 8 of the Partnership Agreement.
"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.
"Partner(s)" means any one or more of the General Partner and the Limited
Partners.
"Partnership" means Commonwealth Income & Growth Fund I, a Pennsylvania
limited partnership.
"Partnership Agreement" means that Limited Partnership Agreement of
Commonwealth Income & Growth Fund I by and among the General Partner and the
Limited Partners, pursuant to which the Partnership is governed.
"Person" means an individual, partnership, limited liability company,
joint venture, corporation, trust, estate or other entity.
"Priority Return" means an amount equal to a return at a rate of 10%
perannum, 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.
"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
55
<PAGE>
modifications or upgrades paid 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.
"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.
"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.
"Unit" means a Limited Partnership interest in the Partnership
56
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
Commonwealth Income & Growth Fund I
Report of Independent Auditors
Balance Sheets as of December 31, 1997 and 1996
Statements of Operations for each of the three years ended
December 31, 1997
Statements of Partners' Capital for each of the three years ended
December 31, 1997
Statements of Cash Flows for each of the three years ended
December 31, 1997
Notes to Financial Statements
Commonwealth Income & Growth Fund, Inc.
Report of Independent Auditors
Balance Sheet as of February 28, 1997
Notes to Balance Sheet
Commonwealth Capital Corp.
Report of Independent Auditors
Consolidated Balance Sheet as of February 28, 1997
Notes to Consolidated Balance Sheet
(a)(2) Schedules.
Schedules are omitted because
they are not applicable, not required,
or because the required information is included
in the financial statements and notes thereto.
(a)(3) Exhibits.
* 3.1 Certificate of Limited Partnership
**3.2 Agreement of Limited Partnership
27 Financial Data Schedule
----------------
* Incorporated by reference from the Partnership's
Registration Statement on Form S-1 (Registration No. 33-69996)
** Incorporated by reference for the Partnership's Annual Report on
Form 10-K for the year ended December 31, 1994.
(b) Reports on Form 8-K.
NOT APPLICABLE
(c) Exhibits.
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf on April 9, 1998 by the undersigned thereunto duly authorized.
COMMONWEALTH INCOME & GROWTH FUND I
By: COMMONWEALTH INCOME & GROWTH
FUND, INC., General Partner
By: /s/ George S. Springsteen
--------------------------------
George S. Springsteen, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on April 9, 1998.
SIGNATURE CAPACITY
- ------------------------------ ---------------------------
/s/ GEORGE S. SPRINGSTEEN Chairman, President and Sole Director of
- ------------------------------ Commonwealth Income & Growth Fund, Inc.
George S. Springsteen
/s/ KIMBERLY A. MACDOUGALL Executive Vice President Chief Operating
- ------------------------------ Officer and Secretary
Kimberly A. MacDougall
/s/ DAVID A. KINTZER Vice President, and Chief Financial Officer
- ------------------------------ of Commonwealth Income & Growth Fund, Inc.
David A. Kintzer
/s/ KATHLEEN S. ENSCOE Controller of Commonwealth
- ------------------------------ Income & Growth Fund,
Kathleen S. Enscoe Inc.
58
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<PAGE>
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 116,259
<SECURITIES> 0
<RECEIVABLES> 155,129
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 383,503
<PP&E> 17,355,551
<DEPRECIATION> (7,928,798)
<TOTAL-ASSETS> 10,081,644
<CURRENT-LIABILITIES> 5,214,877
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 4,866,767
<TOTAL-LIABILITY-AND-EQUITY> 10,081,644
<SALES> 0
<TOTAL-REVENUES> 5,229,664
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,787,106
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 348,681
<INCOME-PRETAX> (906,123)
<INCOME-TAX> 0
<INCOME-CONTINUING> (906,123)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (906,123)
<EPS-PRIMARY> (1.46)
<EPS-DILUTED> 0
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