<PAGE>
Registration No. 33-89476
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 8
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
COMMONWEALTH INCOME & GROWTH FUND II
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
PENNSYLVANIA 6159 23-2795120
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
1160 West Swedesford Road
Berwyn, Pennsylvania 19312
Telephone (610) 647-6800
(Address, including zip code and telephone number, including area
code, of registrant's principal executive offices)
George S. Springsteen
Commonwealth Capital Corp.
1160 West Swedesford Road
Berwyn, Pennsylvania 19312
Telephone (610) 647-6800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Richard J. McMahon, Esquire Mark A. Murphy, Esquire
Blank, Rome, Comisky & McCauley Hunton & Williams
1200 Four Penn Center Plaza Riverfront Plaza, East Tower
Philadelphia, Pennsylvania 19103 951 East Byrd Street
Richmond, Virginia 23219
This Post-Effective Amendment to the Registration Statement shall hereafter
become effective in accordance with Section 8(c) of the Securities Act of 1933,
as amended.
- --------------------------------------------------------------------------------
The Registration Statement, including the Prospectus forming a part
thereof and included in this Post-Effective Amendment No. 4, is hereby
amended as set forth in the Supplement which is attached hereto.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND II
----------------------------------------------------------------
MINIMUM OFFERING 125,000 UNITS OF LIMITED PARTNERSHIP INTERESTS
$20 PER UNIT--MINIMUM INVESTMENT 125 UNITS
(50 UNITS FOR INDIVIDUAL RETIREMENT ACCOUNTS AND QUALIFIED PLANS)
----------------------------------------------------------------
COMMONWEALTH INCOME & GROWTH FUND II (the "Partnership") is a Pennsylvania
limited partnership formed to acquire various types of computer peripheral
equipment and other similar capital equipment, which will be leased primarily to
U.S. corporations and institutions. The principal objective of the partnership
is to generate sufficient leasing revenues to enable the Partnership to make
quarterly cash distributions to its Limited Partners. There is no assurance
that this objective will be attained. The General Partner of the Partnership is
Commonwealth Income & Growth Fund, Inc., a Pennsylvania corporation which is an
indirect wholly-owned subsidiary of Commonwealth Capital Corp. The Partnership
is not a mutual fund or other type of investment company within the meaning of
the Investment Company Act of 1940 and is not subject to regulation thereunder.
This offering (the "Offering") of units of limited partnership interests in
the Partnership ("Units") is being made on a best efforts basis by Wheat First
Butcher Singer, as Dealer Manager, and selected securities brokers. The
Offering will terminate at the close of business on May 12, 1997 unless sooner
terminated by the General Partner. Until the initial admittance of investors as
Limited Partners on the sale of at least 125,000 Units (the "Minimum
Subscription Amount"), all funds received from subscribers will be deposited
with PNC Bank, Philadelphia, Pennsylvania, as escrow agent, and invested in
United States government securities or interest-bearing bank accounts. Interest
earned on such funds will be paid by the escrow agent to such investors as
promptly as practicable after such initial admittance. If less than 125,000
Units are subscribed for prior to May 12, 1996, no Units will be sold and all
funds received from subscribers will be promptly refunded by the escrow agent
together with interest earned thereon. If only the Minimum Subscription Amount
is sold, approximately 83.7% of the gross proceeds will be Invested in
Equipment.
THIS OFFERING INVOLVES SIGNIFICANT RISKS, INCLUDING:
- - Limited Partners will have limited voting rights, will not participate in
the management of the Partnership and must rely on the General Partner for
management of the Partnership.
- - The General Partner will have conflicts of interest in the management of the
Partnership.
- - Substantial fees will be paid to the General Partner and its Affiliates
regardless of profitability and, in most cases, prior to any distributions
to Limited Partners.
- - There are restrictions on transfer of, and the General Partner expects that
there will be no public or private market for the Units; due to this lack of
liquidity, Limited Partners must be prepared to hold their Units for the
life of the Partnership and Limited Partners will be able to sell their
Units, if at all, only at a substantial discount.
- - During the life of the Partnership, a portion of the distributions to
Limited Partners will be a return of capital.
- - The ownership, leasing, operation and sale of Equipment may be adversely
affected by various economic and business factors.
- - It is expected that the Partnership will invest primarily in Operating
Leases rather than Full Payout Leases which increases the Partnership's risk
of failing to recover its investment in Equipment.
- - The Partnership has not identified any Equipment for acquisition by the
Partnership.
- - There are certain tax risks associated with this offering, including the
possible adverse effects of future tax legislation.
SEE "RISK FACTORS," "COMPENSATION OF GENERAL PARTNER AND AFFILIATES" AND
"CONFLICTS OF INTEREST."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) PARTNERSHIP(3)
- --------------------------------------------------------------------------------
Per Unit . . . . . . . . $ 20.00 $ 1.80 $ 18.20
Total Minimum . . . . . . $ 2,500,000.00 $ 225,000.00 $ 2,275,000.00
Total Maximum . . . . . . $15,000,000.00 $1,350,000.00 $13,650,000.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(See Notes to Table on following page.)
The date of this Prospectus is May 12, 1995
WHEAT FIRST BUTCHER SINGER
(THE COVER PAGE IS CONTINUED ON THE FOLLOWING PAGE)
<PAGE>
ANY SUPPLEMENTS AND/OR STICKERS WHICH UPDATE THIS
PROSPECTUS ARE CONTAINED INSIDE THE BACK COVER.
(1) The price to public and the underwriting commissions will be reduced by
volume discounts in the case of purchases in excess of $250,000 by a single
investor. However, the proceeds to the Partnership will not be reduced by
such discounts. See "Plan of Distribution - General."
(2) Does not include a non-accountable expense allowance payable to the Dealer
Manager equal to the lesser of (i) one percent of the Offering proceeds or
(ii) $50,000. The Partnership will indemnify the Dealer Manager and
selected securities brokers against certain civil liabilities, including
liabilities under the Securities Act of 1933. See "Plan of Distribution."
(3) Before deducting an Organization Fee equal to three percent of the Limited
Partners' Capital Contributions up to $10,000,000 and two percent of the
Limited Partners' Capital Contributions thereafter to be paid by the
Partnership to the General Partner ($75,000 if 125,000 Units are sold and
$400,000 if 750,000 Units are sold). The General Partner will pay all
organization and offering expenses other than underwriting commissions and
the non-accountable expense allowance payable to the Dealer Manager.
NO ONE HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THIS
OFFERING. ANY INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN SHOULD NOT BE
RELIED ON AS HAVING BEEN AUTHORIZED BY THE PARTNERSHIP, THE GENERAL PARTNER OR
THE DEALER MANAGER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES OR AN OFFER OR A SOLICITATION BY OR TO ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION MAY NOT LAWFULLY BE MADE.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE PARTNERSHIP SINCE THE DATE HEREOF. HOWEVER, IF ANY MATERIAL
CHANGE IN THE PARTNERSHIP'S AFFAIRS OCCURS AT ANY TIME WHEN THIS PROSPECTUS IS
REQUIRED TO BE DELIVERED, THIS PROSPECTUS WILL BE APPROPRIATELY AMENDED OR
SUPPLEMENTED.
The Partnership intends to furnish its Limited Partners with annual reports
containing audited financial statements for each year and with quarterly reports
containing unaudited financial information for each of the first three quarters
of each year. See "Reports to Limited Partners."
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. ANY REPRESENTATION TO
THE CONTRARY AND ANY PREDICTION, WRITTEN OR ORAL, AS TO THE AMOUNT OR CERTAINTY
OF ANY PRESENT OR FUTURE CASH BENEFIT OR TAX CONSEQUENCE WHICH MAY FLOW FROM AN
INVESTMENT IN THE FUND IS NOT PERMITTED.
<PAGE>
TABLE OF CONTENTS
PAGE
----
SUMMARY OF THE OFFERING. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Partnership. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
General Partner. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Business of the Partnership. . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Conflicts of Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Compensation to General Partner and Affiliates . . . . . . . . . . . . . . 3
Objectives of the Partnership. . . . . . . . . . . . . . . . . . . . . . . 3
Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Reinvestment of Cash Flow and Net Disposition Proceeds . . . . . . . . . . 3
Distributions to Limited Partners. . . . . . . . . . . . . . . . . . . . . 3
The Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Escrow Arrangement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Transferability of Units . . . . . . . . . . . . . . . . . . . . . . . . . 4
Redemption Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Termination of the Partnership . . . . . . . . . . . . . . . . . . . . . . 4
Tax Ruling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Reliance on the General Partner and Conflicts of Interest. . . . . . . . . 5
Significant Fees Paid to the General Partner . . . . . . . . . . . . . . . 5
Limited Transferability of Units; Possibility of Significant Discount. . . 5
Return of Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Prior Experience of the General Partner. . . . . . . . . . . . . . . . . . 6
Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
No Assurance of Successful Operations. . . . . . . . . . . . . . . . . . . 6
Lack of Diversification. . . . . . . . . . . . . . . . . . . . . . . . . . 6
Liability of Limited Partners. . . . . . . . . . . . . . . . . . . . . . . 6
Waiver of Fiduciary Duty . . . . . . . . . . . . . . . . . . . . . . . . . 6
Certain Risks of the Equipment Leasing Business. . . . . . . . . . . . . . 6
Risks of Equipment Operations. . . . . . . . . . . . . . . . . . . . . . . 6
Risks Inherent in Operating Leases . . . . . . . . . . . . . . . . . . . . 7
Unspecified Equipment and Leases . . . . . . . . . . . . . . . . . . . . . 7
Equipment Obsolescence . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Risk of Used Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Difficulty and Delays in Acquiring and Leasing Equipment . . . . . . . . . 7
Risks of Leverage and Availability of Financing. . . . . . . . . . . . . . 8
Lack of Diversification. . . . . . . . . . . . . . . . . . . . . . . . . . 8
Uncertainty of Residual Value of Equipment . . . . . . . . . . . . . . . . 8
Defaults by Lessees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Tort Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
-i-
<PAGE>
PAGE
----
Risks of Joint Investments . . . . . . . . . . . . . . . . . . . . . . . . 9
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Dependence on Manufacturers and IBM. . . . . . . . . . . . . . . . . . . . 9
Tax Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Federal Tax Considerations in General. . . . . . . . . . . . . . . . .10
Partnership Status . . . . . . . . . . . . . . . . . . . . . . . . . .10
Partnership Allocations. . . . . . . . . . . . . . . . . . . . . . . .11
Passive Activity Income and Losses Limitations . . . . . . . . . . . .11
The Partnership as the Owner of the Equipment. . . . . . . . . . . . .11
Sale or Other Disposition of Equipment or Units-Tax Liability. . . . .11
State and Foreign Taxes. . . . . . . . . . . . . . . . . . . . . . . .11
Reliance on Existing Law . . . . . . . . . . . . . . . . . . . . . . .11
Investment by Tax Exempt Entities. . . . . . . . . . . . . . . . . . .12
ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . . .12
ESTIMATED USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . .13
COMPENSATION OF GENERAL PARTNER AND AFFILIATES . . . . . . . . . . . . . . . .14
CONFLICTS OF INTEREST. . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Competition with General Partner and Affiliates; Competition
for Management's Time . . . . . . . . . . . . . . . . . . . . . . . . .20
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Receipt of Fees and Other Compensation by the General Partner
and its Affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . .21
Non-Arm's-Length Agreements. . . . . . . . . . . . . . . . . . . . . . . .21
Joint Ventures with Affiliates of the General Partner. . . . . . . . . . .22
Legal Counsel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
Organization of General Partner. . . . . . . . . . . . . . . . . . . . . .22
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER. . . . . . . . . . . . . . . .23
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . . .25
Principal Investment Objectives. . . . . . . . . . . . . . . . . . . . . .25
Types of Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Diversification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Description of Leases. . . . . . . . . . . . . . . . . . . . . . . . . . .27
Borrowing Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
Refinancing Policies . . . . . . . . . . . . . . . . . . . . . . . . . . .30
Liquidation Policies . . . . . . . . . . . . . . . . . . . . . . . . . . .30
Management of Equipment. . . . . . . . . . . . . . . . . . . . . . . . . .30
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
Preliminary Investments. . . . . . . . . . . . . . . . . . . . . . . . . .31
Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
General Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . .32
TRANSFERABILITY OF UNITS . . . . . . . . . . . . . . . . . . . . . . . . . . .34
General Limitations. . . . . . . . . . . . . . . . . . . . . . . . . . . .34
-ii-
<PAGE>
PAGE
----
Redemption Provision . . . . . . . . . . . . . . . . . . . . . . . . . . .34
Exempt Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
Additional Restrictions on Transfer. . . . . . . . . . . . . . . . . . . .35
ALLOCATIONS AND DISTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . . . . .36
Between the General Partner and the Limited Partners . . . . . . . . . . .36
Among the Limited Partners . . . . . . . . . . . . . . . . . . . . . . . .37
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Prior Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
INCOME TAX CONSIDERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . .41
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
Classification as a "Partnership". . . . . . . . . . . . . . . . . . .41
Taxation of Limited Partners . . . . . . . . . . . . . . . . . . . . .41
Income Recognition . . . . . . . . . . . . . . . . . . . . . . . . . .41
Allocation of Profits and Losses . . . . . . . . . . . . . . . . . . .41
Passive Activity Income and Deductions . . . . . . . . . . . . . . . .41
Limitations on Deduction of Losses . . . . . . . . . . . . . . . . . .42
Deductibility of Fees. . . . . . . . . . . . . . . . . . . . . . . . .42
Ownership of Leased Equipment. . . . . . . . . . . . . . . . . . . . .42
Sale or Exchange of Partnership Equipment. . . . . . . . . . . . . . .42
Disposition of Units . . . . . . . . . . . . . . . . . . . . . . . . .42
Tax Elections. . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
Investment by Tax Exempt Entities. . . . . . . . . . . . . . . . . . .42
Alternative Minimum Tax. . . . . . . . . . . . . . . . . . . . . . . .42
Foreign Tax Considerations . . . . . . . . . . . . . . . . . . . . . .43
Dissolution of Partnership . . . . . . . . . . . . . . . . . . . . . .43
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
Classification as a Partnership. . . . . . . . . . . . . . . . . . . . . .44
Certain Principles of Partnership Taxation . . . . . . . . . . . . . . . .46
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
Timing of Income Recognition . . . . . . . . . . . . . . . . . . . . .47
Allocation of Partnership Income, Gains, Losses, Deductions and Credits. .47
In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
Substantial Economic Effect. . . . . . . . . . . . . . . . . . . . . .48
Retroactive Allocations. . . . . . . . . . . . . . . . . . . . . . . .49
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
Limitations on Utilization of Partnership Losses . . . . . . . . . . . . .49
Tax Basis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
Amounts at Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . .49
Passive Activity Losses Limitations. . . . . . . . . . . . . . . . . .50
Hobby Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51
Fees and Reimbursements to the General Partner and Affiliates. . . . . . .51
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51
-iii-
<PAGE>
PAGE
----
Organizational and Offering Expenses . . . . . . . . . . . . . . . . .52
Equipment Acquisition, Re-Lease and Debt Placement Fees. . . . . . . .52
The Equipment Management Fee . . . . . . . . . . . . . . . . . . . . .52
Equipment Liquidation Fee. . . . . . . . . . . . . . . . . . . . . . .52
Ownership of Equipment . . . . . . . . . . . . . . . . . . . . . . . . . .52
Lease versus Sale. . . . . . . . . . . . . . . . . . . . . . . . . . .52
Cost Recovery and Depreciation . . . . . . . . . . . . . . . . . . . . . .53
Cost Recovery Rules. . . . . . . . . . . . . . . . . . . . . . . . . .53
Recapture of Cost Recovery Deductions. . . . . . . . . . . . . . . . .55
Interest Deduction Limitations . . . . . . . . . . . . . . . . . . . . . .55
Section 163(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
Section 265. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
Cash Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
Sale of Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
Disposition of Units . . . . . . . . . . . . . . . . . . . . . . . . . . .57
In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57
Gift of Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . .58
Death of Partner . . . . . . . . . . . . . . . . . . . . . . . . . . .58
Notice of Transfer . . . . . . . . . . . . . . . . . . . . . . . . . .58
Termination of the Partnership for Tax Purposes. . . . . . . . . . . . . .58
No Section 754 Election. . . . . . . . . . . . . . . . . . . . . . . . . .59
Investment by Tax Exempt Entities. . . . . . . . . . . . . . . . . . . . .59
Investment by Nonresident Alien Individuals and Foreign Corporations . . .60
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61
Capital Gains and Losses . . . . . . . . . . . . . . . . . . . . . . .61
Two Percent Floor on Miscellaneous Itemized Deductions . . . . . . . .61
Alternative Minimum Tax. . . . . . . . . . . . . . . . . . . . . . . .61
Partnership Tax Returns and Tax Information. . . . . . . . . . . . . . . .62
IRS Audit of the Partnership . . . . . . . . . . . . . . . . . . . . . . .62
Interest and Penalties . . . . . . . . . . . . . . . . . . . . . . . . . .62
Foreign Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . .63
Partnership Anti-Abuse Rules . . . . . . . . . . . . . . . . . . . . . . .64
Future Federal Income Tax Changes. . . . . . . . . . . . . . . . . . . . .64
State Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64
Need for Independent Advice. . . . . . . . . . . . . . . . . . . . . . . .65
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65
Fiduciaries Under ERISA. . . . . . . . . . . . . . . . . . . . . . . . . .65
Prohibited Transactions Under ERISA and the Code . . . . . . . . . . . . .66
"Plan Assets". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
Other ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . .67
-iv-
<PAGE>
PAGE
----
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . .69
SUMMARY OF THE PARTNERSHIP AGREEMENT . . . . . . . . . . . . . . . . . . . . .70
The Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70
Nonassessability of Units. . . . . . . . . . . . . . . . . . . . . . . . .70
Liability of Limited Partners. . . . . . . . . . . . . . . . . . . . . . .70
Allocations and Distributions. . . . . . . . . . . . . . . . . . . . . . .70
Responsibilities of the General Partner. . . . . . . . . . . . . . . . . .70
Records and Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . .71
Meetings of the Partners . . . . . . . . . . . . . . . . . . . . . . . . .71
Voting Rights of Limited Partners. . . . . . . . . . . . . . . . . . . . .71
Roll-Ups and Conversions . . . . . . . . . . . . . . . . . . . . . . . . .71
Power of Attorney. . . . . . . . . . . . . . . . . . . . . . . . . . . . .72
Partnership Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73
INVESTOR SUITABILITY STANDARDS . . . . . . . . . . . . . . . . . . . . . . . .73
Net Worth/Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73
Subscribers' Representations and Warranties. . . . . . . . . . . . . . . .75
Special Limit on Ownership of Units by Benefit Plan. . . . . . . . . . . .75
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75
Offering of Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . .76
Escrow Arrangements and Fundings . . . . . . . . . . . . . . . . . . . . .77
Subscription for Units . . . . . . . . . . . . . . . . . . . . . . . . . .77
SALES MATERIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .78
REPORTS TO LIMITED PARTNERS. . . . . . . . . . . . . . . . . . . . . . . . . .78
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79
FURTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79
INDEX TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . .87
-v-
<PAGE>
SUMMARY OF THE OFFERING
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. FOR DEFINITIONS OF CERTAIN
CAPITALIZED TERMS USED IN THIS PROSPECTUS, SEE "GLOSSARY."
THE PARTNERSHIP. The Partnership was formed on January 13, 1995, under the
Pennsylvania Revised Uniform Limited Partnership Act ("Pennsylvania Act") and is
governed by the terms of the Partnership Agreement included herein as Appendix I
to this Prospectus ("Partnership Agreement"). Investors purchasing Units will
become limited partners in the Partnership ("Limited Partners"), and will be
entitled to share in the Partnership's Net Profits, Net Losses and distributions
of Cash Flow and Net Disposition Proceeds. The management of the business of
the Partnership is entrusted to the General Partner who will manage and control
the affairs of the Partnership and will have general responsibility and ultimate
authority over matters affecting the Partnership. See "Summary of the
Partnership Agreement" and "Fiduciary Responsibility of the General Partner."
GENERAL PARTNER. The General Partner of the Partnership is Commonwealth
Income & Growth Fund, Inc., a Pennsylvania corporation, with its principal place
of business located at 1160 West Swedesford Road, Berwyn, Pennsylvania 19312
(telephone 610-647-6800). The General Partner is a wholly-owned subsidiary of
Commonwealth of Delaware, Inc., a Delaware corporation, which is in turn a
wholly-owned subsidiary of Commonwealth Capital Corp., a Pennsylvania
corporation ("Com Cap Corp."). Affiliates of the General Partner have sponsored
several prior private equipment leasing programs and one prior public equipment
leasing program. See "Conflicts of Interest," "Management" and "Appendix II -
Prior Performance Tables."
BUSINESS OF THE PARTNERSHIP. The Partnership will acquire computer
peripheral and other similar capital equipment ("Equipment") which will be
leased, or sold under Conditional Sales Contracts (an agreement in which the
seller of Equipment holds title to the Equipment until the purchase price is
paid), primarily to U.S. corporations and other institutions. The Partnership
will use a substantial portion of the proceeds of the Offering and the proceeds
of debt financing (not to exceed 30% of the expected aggregate cost of the
Equipment to be owned by the Partnership, or subject to Conditional Sales
Contracts) to acquire Equipment. The Partnership will also use excess Cash
Flow, Net Disposition Proceeds from the sale of Equipment coming off lease and
the proceeds of debt financing to purchase additional Equipment from time to
time throughout the operational phase of the Partnership. It is anticipated
that most of the Equipment will be subject to Operating Leases (short term
leases under which the Partnership will normally receive aggregate rental
payments in an amount less than the purchase price of the Equipment). At the
end of initial Operating Leases, the Partnership will either re-lease or sell
Equipment. Substantially all of the Equipment will be manufactured by, or
compatible with, equipment manufactured by IBM. Although not currently
anticipated, the Partnership may also lease Equipment under Full Payout Net
Leases or sell Equipment pursuant to Conditional Sales Contracts. See "Risk
Factors" and "Investment Objectives and Policies - Types of Equipment" and
"Description of Leases." The Partnership intends to purchase only Equipment
which is subject to a lease or Conditional Sales Contract, or for which a lease
or Conditional Sales Contract will be entered into concurrently with the
Partnership's acquisition of the Equipment. The Partnership intends to dispose
of all its assets in approximately 10 years.
RISK FACTORS. An investment in the Partnership involves various risks,
including the following:
PARTNERSHIP RISKS
- Since Limited Partners will not participate in the management of the
Partnership, they must rely totally on the General Partner.
- Limited Partners will have limited voting rights.
- The General Partner will have conflicts of interest in the management
of the Partnership.
- Substantial fees will be paid to the General Partner and its Affiliates
regardless of profitability and in most cases prior to any
distributions to Limited Partners.
<PAGE>
- Limited Partners must be prepared to hold their Units for the life of
the Partnership since there are restrictions on transfer and the
General Partner expects that there will be no public or private market
for the Units. Investors may be able to resell their Units, if at all,
only at a discount to the offering price, which may be significant.
- During the life of the Partnership, a portion of the distributions to
Limited Partners will be a return of capital.
- The Partnership was formed on January 13, 1995 and has no operating
history.
BUSINESS RISKS
- The ownership, leasing, operation and sale of Equipment may be
adversely affected by various economic and business factors, including
factors which are beyond the control of the General Partner such as
inflation, business fluctuations, fluctuations in supply and demand for
different types of Equipment, increases in taxes and maintenance
expenses, uninsurable losses and Bankruptcy.
- It is expected that the Partnership will invest primarily in Operating
Leases rather than Full Payout Leases which increases the Partnership's
risk of failing to recover its investment in Equipment.
- The Partnership has not identified any Equipment for acquisition by the
Partnership; accordingly, investors will have no information about the
specific Equipment to be purchased by the Partnership prior to their
investment.
- The business of leasing and investing in Equipment is subject to many
risks including the increasing rate at which equipment of the type in
which the Partnership intends to invest becomes obsolete. The
Partnership may purchase any amount of used Equipment which increases
the risk of obsolescence.
- The acquisition of Equipment by the Partnership may be delayed for
various reasons such as difficulties in obtaining and leasing
appropriate Equipment, declines in demand for Equipment and delays in
delivery of Equipment. Such delays may reduce the anticipated benefits
to investors from acquisition of Units.
- Certain investments by the Partnership may be financed in part with
non-recourse borrowings by the Partnership secured by the Partnership's
Equipment (not to exceed 30% of the expected aggregate cost of the
Equipment to be owned by the Partnership, or subject to Conditional
Sales Contracts). Such borrowings increase the risks of investment
because if debt service payments are not made when due, the Partnership
may sustain a loss of its investment in the Equipment which secures the
debt.
- The default by a lessee under a lease may cause the Partnership to lose
anticipated revenues. In addition, the Partnership may be unable to
re-lease the Equipment at its initial rate or otherwise recover the
cost of the Equipment upon a default by the lessee.
- The General Partner anticipates that a substantial majority of the
Partnership's Equipment will be computer peripheral equipment and other
similar capital equipment manufactured primarily by IBM. Adverse
developments in the market for such equipment, including adverse
developments with respect to IBM, will have a significant adverse
consequence to the Partnership.
-2-
<PAGE>
- Computer Equipment purchased by the Partnership may depreciate in value
and/or become obsolete as new technology is developed. In the event of
such an occurrence, the Equipment purchased by the Partnership may have
little or no residual value resulting in insufficient assets for the
Partnership to distribute over the term of the Partnership cash in an
aggregate amount equal to the invested capital of the Limited Partners.
TAX RISKS
- There are certain tax risks associated with this offering, including
the possible adverse effects of future tax legislation. The Partnership
will not apply for a ruling from the IRS as to any of the tax
considerations associated with an investment in the Partnership.
CONFLICTS OF INTEREST. The General Partner will have conflicts of interest
in the management of the Partnership, including that the General Partner and its
Affiliates have sponsored other investor programs which will be in potential
competition with the Partnership in connection with the purchase, lease and sale
of Equipment and that certain management actions in the discretion of the
General Partner affect the amount of compensation which it may receive. See
"Conflicts of Interest."
COMPENSATION TO GENERAL PARTNER AND AFFILIATES. The General Partner and
its Affiliates will receive substantial fees and compensation from the offering
of Units hereunder and from the operations of the Partnership, regardless of
profitability and, in most cases, prior to any distributions to Limited
Partners. See "Compensation of General Partner and Affiliates."
OBJECTIVES OF THE PARTNERSHIP. The principal investment objectives of the
Partnership are to: (i) acquire, lease and sell Equipment to generate revenues
from operations sufficient to provide quarterly cash distributions to Limited
Partners; (ii) preserve and protect Limited Partners' capital; (iii) 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 (iv) refinance, sell, or otherwise dispose of Equipment in a manner that
will maximize the proceeds to the Partnership. The Partnership anticipates that
distributions may be partially tax-deferred during the early years of the
Partnership. See "Income Tax Considerations," "Risk Factors" and "Investment
Objectives and Policies." THERE IS NO ASSURANCE THAT ANY OR ALL OF THE
OBJECTIVES OF THE PARTNERSHIP WILL BE ATTAINED.
LEVERAGE. The Partnership may borrow a portion of the cost of the
Equipment which it purchases. The aggregate amount of indebtedness which the
Partnership may incur will be limited to 30% of the aggregate cost of the
Equipment owned by the Partnership, or subject to Conditional Sales Contracts,
except that the Partnership may not incur any indebtedness to acquire Equipment
until the net proceeds of the Offering are fully invested, or committed to
investment, in Equipment. There are no borrowing limits with respect to any
particular item of Equipment. All of the Partnership's borrowings will be non-
recourse to the Partnership and secured by Equipment. Any debt incurred will be
fully amortized over the term of the initial lease or Conditional Sales Contract
to which the Equipment securing the debt is subject. See "Investment Objectives
and Policies -Borrowing Policies" and "Refinancing Policies."
REINVESTMENT OF CASH FLOW AND NET DISPOSITION PROCEEDS. During the first
eight years of the Partnership's operations, the General Partner intends to
reinvest a portion of Cash Flow and Net Disposition Proceeds in additional
Equipment.
DISTRIBUTIONS TO LIMITED PARTNERS. Cash distributions are anticipated to
commence in the quarter following the receipt of the Minimum Subscription Amount
and thereafter will be determined by the General Partner and paid quarterly.
The Partnership anticipates that a portion of distributions paid to Limited
Partners during the life of the Partnership will be a return of capital. There
can be no assurances as to the amount of such distributions. See "Allocations
and Distributions."
-3-
<PAGE>
THE OFFERING. The offering price for each Unit is $20 and the minimum
investment is $2,500 ($1,000 for Individual Retirement Accounts and Qualified
Plans). The Partnership will seek to raise a minimum of $2,500,000 (125,000
Units) and a maximum of $15,000,000 (750,000 Units) in the Offering. If the
Minimum Subscription Amount is not received by May 12, 1996, the Offering will
terminate, subscribers' funds will be returned and no subscribers will be
admitted to the Partnership. If the Minimum Subscription Amount is received
prior to May 12, 1996, subscribers will be admitted to the Partnership upon the
Partnership's receipt of their subscription funds and the Offering will continue
until May 12, 1996, or if extended by the General Partner, up to May 12, 1997.
See "Plan of Distribution."
ESCROW ARRANGEMENT. Subscriptions for the Partnership will be submitted to
PNC Bank, Philadelphia, Pennsylvania, as escrow holder, and will be held in the
Escrow Account at PNC Bank, until Subscriptions for the Minimum Subscription
Amount ($2,500,000) have been received. While held in the Escrow Account, the
funds will be invested in short-term United States government securities or
interest-bearing bank accounts, the earnings, net of tax withholding required by
applicable law, on which will be distributed to the investors in all events.
See "Plan of Distribution."
TRANSFERABILITY OF UNITS. There is no public market for the Units and the
General Partner expects that no market will develop. In addition, the Units
will be transferable only with the consent of the General Partner, which may be
withheld in its absolute discretion. The General Partner generally intends to
permit transfers and redemptions of Units of up to five percent of the total
outstanding interests in the Partnership's capital or profits in any one year.
See "Transferability of Units."
REDEMPTION PROVISION. Upon the conclusion of the 30-month period
immediately following the termination of the Offering, the Partnership may, at
the General Partner's sole discretion, redeem up to two percent of the
outstanding Units that may be tendered each year. The purchase price paid by
the Partnership for outstanding Units will be equal to 105% of the amount
Limited Partners paid for the Units, less the amount of cash distributions
Limited Partners have received relating to such Units. The redemption price
formula will be calculated without reference to the fair market value of a Unit.
See "Transferability of Units - Redemption Provision."
TERMINATION OF THE PARTNERSHIP. In the ninth year of operations of the
Partnership, the General Partner intends to begin the dissolution and
liquidation of the Partnership in an orderly fashion, unless the Partnership is
terminated earlier upon sale of all of the Equipment or by certain other events.
The term of the Partnership may be extended if the General Partner in its
discretion believes that such extension would enable the Partnership to dispose
of its assets on terms more favorable than those it would otherwise be able to
obtain. In no event will the term of the Partnership continue beyond
December 31, 2006. See "Summary of the Partnership Agreement."
TAX RULING. The General Partner has not requested a private ruling from
the IRS as to any of the tax considerations associated with an investment in
Units. The absence of a ruling increases the risk of a challenge by the IRS. As
to the status of the Partnership as a partnership for federal income tax
purposes and certain other federal income tax matters, the General Partner is
relying upon an opinion of counsel, which is described under the caption "Income
Tax Considerations." See also "Risk Factors - Tax Risks - Partnership Status."
Counsel's opinion is limited in scope, is qualified by certain assumptions, is
not binding on the IRS and relies, in part, on certain representations of the
General Partner.
DEPRECIATION. The Equipment will be eligible for different methods and
periods of cost recovery ("Depreciation") depending on various factors,
including the type of Equipment and the nature of lessees of the Equipment. See
"Income Tax Considerations - Cost Recovery and Depreciation."
-4-
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE PARTNERSHIP INVOLVES VARIOUS RISKS. PROSPECTIVE
INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS, AMONG OTHERS DISCUSSED IN THIS
PROSPECTUS, BEFORE MAKING A DECISION TO INVEST IN THE PARTNERSHIP.
PARTNERSHIP RISKS
RELIANCE ON THE GENERAL PARTNER AND CONFLICTS OF INTEREST. The Partnership
will be managed exclusively by the General Partner. Limited Partners are not
permitted to take part in the management of the Partnership. The success of the
Partnership, to a large extent, will depend on the quality of its management,
particularly as it relates to Equipment acquisition, releasing and disposition.
The General Partner, in turn, is dependent on its key personnel; the General
Partner has no employment agreements with or life insurance policies on, any
such key personnel. In certain instances the Partnership's interests may
conflict with those of the General Partner or its Affiliates. See "Conflicts of
Interest," "Management," and "Investment Objectives and Policies."
Limited Partners have limited voting rights on matters affecting the
Partnership's business since they are not permitted to take part in the
management of the Partnership. For any matter submitted to the Limited
Partners, the affirmative vote of at least a Majority in Interest of the Limited
Partners is required for approval. See "Summary of the Partnership Agreement -
Voting Rights of Limited Partners."
SIGNIFICANT FEES PAID TO THE GENERAL PARTNER. The General Partner will
receive substantial fees in connection with the sale of Units and the
acquisition and management of Equipment by the Partnership. Some fees will be
paid irrespective of the amount of distributions paid to Limited Partners and
regardless of the success or profitability of the Partnership's operations and
investments. While such compensation and fees were established by the General
Partner and are not based on arm's-length negotiations, the General Partner
believes that such compensation and fees are comparable to those which would be
charged by an unaffiliated entity or entities for similar services. See
"Compensation of General Partner and Affiliates."
LIMITED TRANSFERABILITY OF UNITS; POSSIBILITY OF SIGNIFICANT DISCOUNT.
Prior to this Offering, there has been no public market for the Units, and the
Units cannot be pledged or transferred without the consent of the General
Partner, which may be withheld in its absolute discretion. The General Partner
does not expect a public market for Units to develop. The General Partner
intends to limit the number of transfers to no more than that number permitted
by one of the safe harbors available under the Code to prevent the Partnership
from being treated as a publicly traded partnership. Generally, these safe
harbors require that all nonexempt transfers and redemptions of Units in any
calendar year not exceed five percent of the outstanding interests in the
capital or profits of the Partnership. Consequently, investors in the
Partnership may not be able to liquidate their investments in the event of an
emergency. Moreover, the Units may not be readily acceptable as collateral for a
loan. Therefore, Limited Partners must be prepared to hold their Units for the
life of the Partnership and may be able to resell their Units, if at all, only
at a discount to the offering price, which may be significant.
RETURN OF CAPITAL. During the life of the Partnership, a portion of the
distributions to Limited Partners will be a return of capital.
PRIOR EXPERIENCE OF THE GENERAL PARTNER. The General Partner has
previously sponsored only one limited partnership which offered securities to
the public in an offering registered under the Securities Act of 1933, as
amended. This previous partnership is in its operational phase and has
investment objectives substantially identical to the Partnership's. See
"Conflicts of Interest."
LIMITED CONTRIBUTION TO PARTNERSHIP BY GENERAL PARTNER; REDUCTION OF
PROCEEDS AVAILABLE FOR INVESTMENT. The General Partner has contributed $1,000
to the capital of the Partnership for its interest in the Partnership.
Therefore, contributions by the Limited Partners and the economic risks borne by
them will be substantially greater, in proportion to the interests owned and
benefits received by them, than the contribution by the General Partner, in
proportion to the interest owned and benefits received by the General Partner.
Approximately 15.4% (assuming the maximum amount of proceeds are raised) to
17.3%
-5-
<PAGE>
(assuming the minimum amount of proceeds are raised) of the proceeds from the
sale of the Units will be used to pay Front-End Fees. Accordingly, the amount
of the proceeds available to the Partnership for investment in Equipment will be
less than the total amount paid by the Limited Partners for their Units. See
"Estimated Use of Proceeds."
NO ASSURANCE OF SUCCESSFUL OPERATIONS. The Partnership was formed on
January 13, 1995 and has no operating history. No assurance can be given that
the Partnership's operations will be successful or that it will meet its stated
investment objectives. Specifically, there is no assurance that cash will be
available for distribution to investors.
LIABILITY OF LIMITED PARTNERS. In general, limited partners in a
partnership are not liable for partnership obligations unless they take an
active part in the control of the business of the partnership. The Partnership
Agreement provides certain rights to the Limited Partners to remove and replace
the General Partner, to amend the Partnership Agreement, to approve or
disapprove the sale or other disposition at one time of all the Partnership's
property, to dissolve the Partnership and to take certain other actions. The
Pennsylvania Act provides that a limited partner "does not participate in the
control of the business" by exercising such rights and that even if a limited
partner participates in the control of the business, he is liable only to
persons who transact business with the partnership reasonably believing, based
on the limited partner's conduct, that he is a general partner. However, there
is uncertainty as to which state's partnership laws may be applicable to
partnerships that are organized under the laws of one state and that own
property and have partners residing in other states. Thus it is conceivable
that the existence or the exercise of these rights under certain circumstances
could possibly cause the Limited Partners to be deemed to be liable as general
partners under the laws of states other than Pennsylvania. If the Limited
Partners were deemed to be liable as general partners, they would be personally
liable for Partnership obligations.
In accordance with the Pennsylvania Act, Limited Partners will be obligated
to return any distribution from the Partnership to the extent that, after giving
effect to the distribution, all liabilities of the Partnership (other than
nonrecourse liabilities and liabilities to Limited Partners on account of their
interests in the Partnership) exceed the fair value of its assets (including, as
to assets serving as security for nonrecourse liabilities, that portion of the
fair value of such assets which exceeds the amount of such nonrecourse
liabilities). See "Summary of the Partnership Agreement - Liability of Limited
Partners."
WAIVER OF FIDUCIARY DUTY. The Partnership Agreement provides that the
General Partner and its Affiliates may engage in other activities which are
competitive with the Partnership. This provision may relieve the General
Partner and its Affiliates from an aspect of its fiduciary duty to the
Partnership.
BUSINESS RISKS
CERTAIN RISKS OF THE EQUIPMENT LEASING BUSINESS. The business of leasing
and investing in Equipment is subject to many risks including the following
which could adversely impact on the return to investors: (i) the availability of
satisfactory Equipment, (ii) the increasing rate at which Equipment of the type
in which the Partnership intends to invest becomes obsolete, (iii) the potential
inability of the Partnership to lease Equipment coming off lease or following a
default by the lessee and (iv) the possibility of defaults by lessees.
RISKS OF EQUIPMENT OPERATIONS. Equipment ownership and operation is
subject to many risks, including the possible inability to keep all the
Equipment under leases yielding revenues which, after payment of operating and
all associated expenses, provide, together with any anticipated sale proceeds, a
return acceptable to the Equipment owner. The ability to operate Equipment
profitably may be adversely affected by various economic and business factors.
Most of these factors are beyond the control of the General Partner and the
lessees of the Equipment, and include:
(a) general economic conditions, such as inflation, fluctuations in general
business conditions and availability of financing;
-6-
<PAGE>
(b) fluctuations in supply and demand for various types of Equipment
resulting from, among other things, obsolescence and changes in the methods or
economics of a particular mode of Equipment sector resulting in reduced lease
revenues;
(c) increases in maintenance expenses, taxes and insurance costs
attributable to the Equipment;
(d) the risk of an uninsured or uninsurable loss with respect to the
Equipment or an insured loss for which insurance proceeds are inadequate,
resulting in a possible loss of invested capital in and any profits anticipated
from such Equipment;
(e) bankruptcies, contract disputes or defaults in payment by lessees of
the Equipment resulting in delays in foreclosures and uncollectible accounts;
and
(f) loss of revenues during the period when Equipment is not being
utilized.
RISKS INHERENT IN OPERATING LEASES. The Partnership intends to invest
primarily in Equipment subject to Operating Leases. Operating Leases typically
will have terms of 12 to 36 months and provide that the Partnership will receive
aggregate payments from the lessee in an amount that is less than the
Partnership's Purchase Price of the Equipment. In order to recover the
Partnership's Purchase Price of such Equipment, the Partnership on termination
of an Operating Lease must (i) obtain a satisfactory renewal from the original
lessee or other user, (ii) lease the Equipment to a new lessee or other user or
(iii) sell the Equipment for a price which, when combined with previous lease
payments, equals or exceeds the Purchase Price. There can be no assurance that
the Partnership will successfully accomplish any of these alternatives and, as a
result, the Partnership may not realize anticipated revenues and may fail to
recover the Partnership's investment in the Equipment. Shorter-term Operating
Leases may increase these risks. See "Investment Objectives and Policies."
UNSPECIFIED EQUIPMENT AND LEASES. The Partnership has not identified any
Equipment for acquisition by the Partnership. Until Equipment is identified in
supplements to this Prospectus or in quarterly and/or annual investor reports,
investors will have no information about any Equipment to be purchased by the
Partnership and must rely solely upon the judgment and ability of the General
Partner with respect to the selection and evaluation of any as yet unidentified
Equipment. See "Investment Objectives and Policies."
EQUIPMENT OBSOLESCENCE. Computer Equipment purchased by the Partnership
may depreciate in value and/or become obsolete as new technology is developed.
In the event of such an occurrence, the Equipment purchased by the Partnership
may have little or no residual value resulting in insufficient assets for the
Partnership to distribute over the term of the Partnership cash in an aggregate
amount equal to the invested capital of the Limited Partners. Consequently, it
may be appropriate for Limited Partners to construe a portion of their annual
cash flow as being return of capital.
RISK OF USED EQUIPMENT. Although it is currently anticipated that the
Partnership will acquire predominantly new equipment, the Partnership may
purchase used equipment. There is no limitation on the amount of used equipment
which the Partnership may acquire. The acquisition of used equipment may
increase the risk that such equipment will become obsolete so that it will have
little or no residual value.
DIFFICULTY AND DELAYS IN ACQUIRING AND LEASING EQUIPMENT. The Partnership
will attempt to acquire and lease Equipment as soon as practicable after the
Initial Closing. Due to competition with other lessors, the Partnership may
experience difficulty in obtaining and leasing appropriate Equipment. The
Partnership's ability to acquire and lease Equipment may also be adversely
affected by interest rates, the availability of capital and long term corporate
debt, or increases in corporate liquidity, since prospective lessees may prefer
to raise capital, incur debt or use internally-generated cash to purchase
Equipment rather than enter the leasing market. An overall decline in corporate
expansion or demand for capital goods may adversely affect the Partnership's
ability to invest the proceeds of this offering. Delivery of Equipment may be
delayed due to production delays, strikes, work stoppages or other problems
encountered by manufacturers. Delays in acquiring Equipment will reduce the
anticipated benefits to investors from the acquisition of Units.
-7-
<PAGE>
RISKS OF LEVERAGE AND AVAILABILITY OF FINANCING. Certain investments of
the Partnership may be financed in part with non-recourse debt borrowed by the
Partnership. Although borrowing increases the funds with which the Partnership
can acquire Equipment, it also increases the risks of an investment in the
Partnership because, in the case of nonrecourse debt, if debt service payments
are not made when due, the Partnership may sustain a loss of its investment in
the Equipment which secures that debt and the Limited Partners may experience
adverse tax consequences. See "Income Tax Considerations - Allocation of
Partnership Income, Gains, Losses, Deductions and Credits." In addition,
lenders from whom the Partnership borrows may seek to impose restrictions on the
future borrowing, distribution, and operating policies of the Partnership.
Moreover, debt service requirements may reduce the amount of Cash Available for
Distribution to Limited Partners. The General Partner, in its discretion, may
cause the Partnership to incur indebtedness up to an amount no greater than 30%
of the aggregate cost of all Equipment owned by the Partnership, or subject to
Conditional Sales Contracts, except that the Partnership may not incur any
indebtedness to acquire Equipment until the net proceeds of the Offering are
fully invested, or committed to investment, in Equipment. There are no
borrowing limits with respect to any particular item of Equipment. See
"Investment Objectives and Policies - Borrowing Policies."
Money market fluctuations have affected the availability and cost of loans
that may finance the purchase of Equipment. The General Partner is unable to
predict the nature of the money market when the Partnership seeks financing and
any future tightening of credit controls will make obtaining financing more
difficult and more costly. In such event, the Partnership may be forced to
purchase Equipment using only or mostly the cash proceeds from this Offering,
with little or no borrowings. This would make it more difficult for the
Partnership to achieve the desired diversification of Equipment and would
prevent the Partnership from spreading the risk of unproductive investments over
a greater number of items of Equipment. However, if the Partnership purchases
an item of Equipment for cash and, thereafter, suitable financing becomes
available, the Partnership intends to finance such Equipment and to invest the
proceeds of that financing in additional Equipment or distribute such proceeds
to the Limited Partners. In addition, future credit restrictions may adversely
affect the ability of the Partnership to sell or refinance Equipment and may
affect the terms of Equipment sales.
LACK OF DIVERSIFICATION. The Partnership will concentrate on acquiring
computer peripheral equipment and other similar capital equipment and will not
diversify the assets in which it invests beyond those classes of Equipment.
Accordingly, adverse developments in the market for such Equipment will have a
more significant adverse consequence to the Partnership than if it had acquired
a portfolio that included a greater variety of asset classes. To the extent
that this Offering results in the sale of significantly less than the maximum
number of Units offered, the ability of the Partnership to diversify its risks
will be reduced, and a default by any lessee would have a more significant
adverse consequence than if greater diversification had been achieved. A
substantial majority of the Partnership's Equipment will be manufactured by IBM.
Thus adverse developments in the business or prospects of IBM may have a
significantly greater adverse impact on the Partnership than if Equipment made
by a more diverse group of manufacturers were acquired.
UNCERTAINTY OF RESIDUAL VALUE OF EQUIPMENT. The ultimate cash return from
an investment in Units will depend, in part, upon the residual value of
Equipment at the termination of its Leases. Residual value is the amount
realized upon the sale or re-lease or other contract of Equipment with respect
to which an original lease has expired. The residual value depends on, among
other factors, the condition of the Equipment, the cost of comparable new
Equipment, the technological obsolescence of the Equipment and supply and demand
regarding the Equipment. See "Investment Objectives and Policies."
DEFAULTS BY LESSEES. The default by a lessee under a lease, or a buyer
under a Conditional Sales Contract, may cause Equipment to be returned to the
Partnership at a time when the General Partner or its agents may be unable to
arrange promptly for the re-leasing or sale of the Equipment. Although the
creditworthiness of potential lessees and other contracting parties will be
reviewed (including a review of financial statements, credit history and public
debt record), there can be no assurance that a default will not occur. Thus, a
default may cause the Partnership to lose anticipated revenues and inhibit its
ability to recover its investment in the Equipment. If any indebtedness is
secured by the returned Equipment and rental revenues and sales proceeds
generated by other items of Equipment are not sufficient to service such
indebtedness, the lender may foreclose on and acquire ownership of the returned
Equipment. In addition,
-8-
<PAGE>
lessees, or buyers under Conditional Sales Contracts, of Equipment encountering
financial difficulties may voluntarily or involuntarily become subject to the
provisions of the Bankruptcy Code or similar laws of foreign nations, which
could delay or prevent the Partnership from taking the Equipment back upon
default. See "Investment Objectives and Policies -- Description of Leases."
TORT LIABILITY. In leasing the Equipment, the Partnership will, in certain
instances, be exposed to liability for damages resulting from their actions or
inactions independent of contract. Although the Partnership will use its best
efforts to minimize the possibility and exposure of such tort liability, no
assurances can be given that the Partnership's assets will be protected against
any such claims.
RISKS OF JOINT INVESTMENTS. The Partnership may participate on a co-
tenancy or partnership basis in investments in certain Equipment. This involves
risks not otherwise present if the Partnership were the sole owner of the
Equipment. These risks include the possibility that the Partnership's co-
investors might become bankrupt, that such co-investors may at any time have
economic or business interests or goals which are inconsistent with those of the
Partnership, or that such co-investors may be in a position to take action
contrary to the instructions or the requests of the Partnership or contrary to
the Partnership's policies or objectives. There is a potential risk of impasse
in joint venture decisions since neither program may control and while one
program may wish to purchase Equipment from its co-joint venturer, it may not
have sufficient resources to do so.
COMPETITION. The Equipment leasing industry is highly competitive. The
Partnership's competitors include independent leasing companies, affiliates of
banks and insurance companies and other partnerships. Many of these entities
may have larger Equipment inventories, greater financial resources and more
experience in the industry than the Partnership or the General Partner. See
"Conflicts of Interest - Competition with General Partner and Affiliates;
Competition for Management's Time" and "Investment Objectives and Policies -
Competition."
DEPENDENCE ON MANUFACTURERS AND IBM. A substantial majority of the
Partnership's Equipment will be manufactured by IBM. Accordingly, the
Partnership's ability to lease, re-lease or sell its equipment may be adversely
affected by actions taken or not taken by, or the business or prospects of, IBM.
The Partnership's ability to re-lease or sell the Equipment at the end of the
lease term could be adversely affected by the failure of an equipment
manufacturer to honor its product warranties or to provide necessary parts and
servicing, the decline of the manufacturer's reputation in the industry, the
discontinuance of the manufacture of such Equipment or the termination of the
manufacturer's business. The Partnership may enter into contracts with
manufacturers or others pursuant to which such parties may perform certain
services related to Equipment, including refurbishing and storing Equipment and
performing related services. Thus, the ability of the Partnership to meet its
investment objectives would be partially dependent on the satisfactory
performance of these functions by such parties. See "Investment Objectives and
Policies - Types of Equipment."
TAX RISKS
GENERAL. In view of the complexity of the tax aspects of investing in a
partnership that may invest in many different types of equipment, and
particularly in view of the fact that the tax situation of each investor will
not be the same, ALL PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX
ADVISORS with specific reference to their own tax situation prior to making an
investment in the Partnership. The Partnership is not intended to be a "tax
shelter" and Limited Partners should not expect a tax benefit from substantial
tax deductions or losses from the Partnership. The General Partner anticipates,
however, that the Partnership may distribute cash periodically to the Limited
Partners, a portion of which may not be taxable to the Limited Partners upon
receipt. Trustees and other fiduciaries of individual retirement accounts,
qualified pension, profit sharing or stock bonus plans, and other tax exempt
entities should be aware that an investment in Units will result in unrelated
business taxable income. See "Income Tax Considerations - Investment by Tax
Exempt Entities" and "ERISA Considerations" below. Each Limited Partner,
together with his tax advisor, should carefully consider all of the tax aspects
of an investment in the Partnership, including, specifically, the risks
discussed below.
-9-
<PAGE>
FEDERAL TAX CONSIDERATIONS IN GENERAL. A ruling from the IRS has not been
obtained, and the General Partner does not presently intend to apply for a
ruling, with respect to any of the tax considerations associated with an
investment in Units. Availability of the tax treatment described in this
Prospectus may be challenged by the IRS upon audit of the tax return of either
the Partnership or a Partner. It should be noted that the determination of items
of Partnership income, gain, loss, deduction and credit will be made at the
Partnership level rather than in separate proceedings with the Limited Partners,
and Limited Partners generally will be required to report Partnership items
consistent with the Partnership's tax returns.
For any year in which the Partnership has income in excess of deductions,
each Limited Partner will be required to report his share of such income on his
federal and state tax returns and will be responsible for the payment of taxes
thereon. Such taxes may be greater than cash distributions received by the
Limited Partner from the Partnership in one or more taxable years.
The primary tax benefits associated with an investment in Units are the
"tax-deferred" distributions (that is, distributions which are not subject to
current taxation) which may be available as a result of cost recovery or
depreciation deductions. The availability of tax-deferred distributions may be
reduced by the imposition of the alternative minimum tax. The IRS may
successfully challenge the amount or timing of the depreciation deductions
claimed by the Partnership, with the result that the depreciation deductions of
the Partnership may be reduced and Partnership income may be increased (or loss
may be decreased) for a taxable year. The tax considerations associated with an
investment in the Partnership could be affected by a number of different factors
which are described in detail under the caption "Income Tax Considerations."
Any adjustment to a tax return of the Partnership as a result of an audit
by the IRS may result in adjustment to the tax returns of the Limited Partners,
and may result in an examination of other items in such returns unrelated to the
Partnership, or an examination of prior years' tax returns. Limited Partners
could incur substantial legal and accounting costs in contesting any challenge
by the IRS, regardless of the outcome.
PARTNERSHIP STATUS. The General Partner has not requested, and does not
intend to request, a ruling from the IRS that the Partnership will be treated as
a partnership for tax purposes and not as an association taxable as a
corporation. In the absence of a ruling, there can be no assurance that the
Partnership will not constitute an association taxable as a corporation.
Section 7704 of the Code treats certain partnerships, the interests of
which are deemed to be "publicly-traded," as corporations. While the General
Partner will use its best efforts to limit the type and number of transfers of
Units to those which will allow the Partnership to satisfy at least one of the
safe harbors under IRS Notice 88-75, there is no assurance that the Partnership
will satisfy one of these safe harbors. Certain transfers of Units could occur
which would cause the Partnership to fall outside these safe harbors. While the
failure to meet a safe harbor will not create a presumption that a partnership
is publicly-traded, no assurance can be given that if the amount and type of
trading in the Units were to fall outside the safe harbors, the IRS would not
claim that the Partnership was a "publicly-traded partnership" taxable as a
corporation. See "Transferability of Units" and "Income Tax Considerations -
Classification as a Partnership."
With regard to its tax status, the Partnership will rely upon the opinion
of Blank, Rome, Comisky & McCauley, counsel to the Partnership, to the effect
that the Partnership will be treated as a partnership for tax purposes
notwithstanding the fact that an IRS ruling will not be sought. The opinion is
subject to certain qualifications and representations of the General Partner,
and such opinions of counsel are not binding on the IRS.
If the IRS were successful in characterizing the Partnership as an
association taxable as a corporation, then the Partnership would be subject to
tax on its net income (without deductions for cash distributions to Limited
Partners), the Limited Partners would be subject to tax on the distributions
irrespective of their tax basis in their Units, and such distributions would be
recharacterized as portfolio income to the Limited Partners.
-10-
<PAGE>
PARTNERSHIP ALLOCATIONS. If the allocations of Partnership Net Profits and
Net Losses to the Limited Partners made pursuant to the Partnership Agreement
were successfully challenged by the IRS, Limited Partners may be required to
recognize additional taxable income without any corresponding increase in
distributions of cash from the Partnership. Counsel to the Partnership has
rendered its opinion that the allocations of Partnership Net Profits and Net
Losses will be respected for federal income tax purposes. The opinion, however,
is subject to certain qualifications and representations of the General Partner,
and is not binding on the IRS.
PASSIVE ACTIVITY INCOME AND LOSSES LIMITATIONS. Limited Partners may not
be able currently to deduct Partnership Net Losses as a result of limitations on
the current utilization of passive activity losses. In addition, any portfolio
income generated by the Partnership may not be netted against Partnership tax
losses. See "Income Tax Considerations - Limitations on Utilization of
Partnership Losses - Passive Activity Losses Limitations." Finally, in the
event that interests in the Partnership are deemed to be "publicly-traded,"
otherwise passive income will be treated as portfolio income which may not be
netted against Partnership tax losses or other passive losses, deductions, or
credits of the Limited Partner. Counsel to the Partnership has opined that the
income generated from the Partnership's leasing activities will constitute
income from a passive activity. Such opinion of counsel is subject to certain
qualifications and representations of the General Partner, and is not binding on
the IRS.
THE PARTNERSHIP AS THE OWNER OF THE EQUIPMENT. The Partnership intends to
structure each lease transaction so that the lease will be treated as a lease
rather than as a financing arrangement for tax purposes. If, however, the IRS
were successful in challenging the status of a lease by treating the lessee as
the owner of the subject item of Equipment and the Partnership as a secured
creditor, the Partnership would not be entitled to cost recovery or depreciation
deductions with respect to that item of Equipment. In addition, the Partnership
is permitted to enter into Full Payout Net Leases and to sell Equipment under
Conditional Sales Contracts. In the event the Partnership enters into such
arrangements, the Partnership will not be treated as the owner of such Equipment
and the Partners will not be entitled to depreciation or cost recovery
deductions with respect to such Equipment. See "Income Tax Considerations -
Ownership of Equipment - Lease versus Sale."
In addition, the IRS may assert upon audit that any pass-through entities
organized by the Partnership are associations taxable as corporations and, thus,
are the true owners of the Equipment for tax purposes. If the IRS were
successful in such assertions, it would result in the imposition of tax on such
entities without deductions for distributions to the Partnership, the taxation
of distributions to the Partnership to the extent of such entity's earnings and
profits, and the recharacterization of such entities' distributions to the
Partnership. See "Income Tax Considerations - Ownership of Equipment - Lease
versus Sale."
SALE OR OTHER DISPOSITION OF EQUIPMENT OR UNITS-TAX LIABILITY. A sale or
other disposition of Equipment or of a Limited Partner's interest in the
Partnership may result in a tax liability to the Limited Partner in excess of
any cash proceeds received by such Limited Partner. To the extent a Limited
Partner's federal tax liabilities exceed cash proceeds, such excess would be a
nondeductible cost to such Limited Partner.
STATE AND FOREIGN TAXES. Limited Partners may be required to file tax
returns and pay state or local taxes, such as income, franchise or personal
property taxes, as a result of an investment in the Partnership, and any use of
the Equipment in a country other than the United States may subject Limited
Partners to income taxation in such country. See "Income Tax Considerations -
State Taxes", and "Income Tax Considerations - Foreign Tax Considerations."
RELIANCE ON EXISTING LAW. Tax benefits associated with an investment in
Units could be lost and/or substantial tax liabilities incurred by reason of
changes in the tax laws. Potential investors should be aware of tax legislation
currently pending before Congress and state legislatures and should consult
their own tax advisors as to the effect such legislation would have on their
potential investment in Units. Furthermore, there is no assurance that changes
in the interpretation of applicable tax laws will not be made by administrative
or judicial action which will adversely affect the tax consequences of an
investment in Units. Administrative or judicial changes may or may not be
retroactive with respect to transactions entered into
-11-
<PAGE>
prior to the date on which they occur. Periodic consultations with a
professional advisor may be necessary given the possibility of such changes.
INVESTMENT BY TAX EXEMPT ENTITIES. Investment in the Partnership by a tax
exempt entity, including a qualified employee pension or profit sharing trust or
an individual retirement account (a "Tax Exempt Entity"), will result in the
receipt of unrelated business taxable income ("UBTI"). If a Tax Exempt Entity
realizes UBTI (net of deductions attributable to such UBTI) from all sources in
excess of $1,000 per year, it will incur federal income tax liability with
respect to such UBTI. Furthermore, if a Tax Exempt Entity has at least $1,000
of gross income that is included in the calculation of UBTI for any year, the
Tax Exempt Entity will be obligated to file a tax return for such year. See
"Income Tax Considerations - Investment by Tax Exempt Entities."
ERISA CONSIDERATIONS. Fiduciaries of pension, profit sharing, stock bonus
or other employee benefit plans subject to Title I of ERISA ("ERISA Plans"),
fiduciaries of tax-qualified retirement plans not subject to ERISA ("Non-ERISA
Plans") and IRA owners should consider whether (i) an investment in Units is in
accordance with the documents and instruments governing the ERISA or Non-ERISA
Plan or IRA (hereinafter referred to as "Benefit Plan"), (ii) the purchase of
Units is prudent in light of the potential difficulties that may exist in
liquidating Units, (iii) an investment in Units will provide sufficient cash
distributions in light of the Benefit Plan's likely required benefit payments or
other distributions, (iv) the evaluation of the investment in Units has properly
taken into account the potential costs of determining and paying any amounts of
federal income tax that may be owed on UBTI in connection with the Units, (v) in
the case of a fiduciary of an ERISA Plan, that the investment, unless made in a
self-directed investment arrangement, is made solely in the interests of
participants in the ERISA Plan, and (vi) the fair market value of Units will be
sufficiently ascertainable, and with sufficient frequency, to enable the Benefit
Plan to value its assets in accordance with the rules and policies of the
Benefit Plan. In addition, if the Benefit Plan has certain relationships with
the Partnership, the General Partner or its Affiliates (other than as a Limited
Partner), investment in the Partnership may involve a "prohibited transaction"
under the Code or ERISA. See "ERISA Considerations - Prohibited Transactions
Under ERISA and the Code."
To avoid classification of a pro rata portion of the Partnership's
underlying assets as "plan assets" of investors which are Benefit Plans, the
Partnership intends to restrict the ownership of Units by Benefit Plans to less
than 25% of the total value of outstanding Units at all times. See "ERISA
Considerations - Plan Assets."
Neither the General Partner nor the Partnership shall have any liability or
responsibility to any tax exempt Limited Partner or any other Limited Partner
for any tax, penalty or other sanction or costs or damages arising as a result
of there being a prohibited transaction or as a result of Partnership assets
being deemed plan assets of a tax exempt Limited Partner under the Code or ERISA
or other applicable law.
-12-
<PAGE>
ESTIMATED USE OF PROCEEDS
The following table sets forth information concerning the estimated use of
proceeds of the offering of Units. Except as otherwise disclosed in this
Prospectus, the Partnership will not engage in transactions with the General
Partner or any of its Affiliates and all items of compensation are disclosed in
the table below or under the caption "Compensation of General Partner and
Affiliates."
MINIMUM PROCEEDS MAXIMUM PROCEEDS
(125,000 UNITS) (750,000 UNITS)
--------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
Gross Offering Proceeds $2,500,000 100.0% $15,000,000 100.0%
Selling Commissions (1) 175,000 7.0% 1,050,000 7.0%
Dealer Manager Fee (1) 50,000 2.0% 300,000 2.0%
---------- ------ ----------- ------
Organizational and Offering
Expenses (2) 100,000 4.0% 450,000 3.0%
Total Offering Expenses 325,000 13.0% 1,800,000 12.0%
Net Proceeds to Partnership
Available for Investment 2,175,000 87.0% 13,200,000 88.0%
---------- ------ ----------- ------
Equipment Acquisition Fees (3) 83,654 3.3% 507,693 3.4%
Investment in Equipment (4) 2,091,346 83.7% 12,692,307 84.6%
---------- ------ ----------- ------
- ----------------------------
(1) The aggregate amount of the Underwriting Commissions (which include the
Selling Commissions and Dealer Manager Fee) will range between four percent
and nine percent of Capital Contributions based upon the quantity of Units
sold to a single investor. The amounts set forth on the table assume that
quantity discounts are not applicable. See "Plan of Distribution."
(2) Consists of estimated legal, accounting and printing expenses; various
registration and filing fees; miscellaneous expenses related to the
organization and formation of the Partnership; other costs incurred in
connection with the preparation, printing and distribution of this
Prospectus and other sales literature; and the non-accountable expense
allowance payable to the Dealer Manager. See "Plan of Distribution." The
General Partner will be paid an organizational fee equal to three percent
of Capital Contributions up to $10,000,000, and two percent of Capital
Contributions in excess of $10,000,000, and will pay all Organizational and
Offering Expenses, other than the non-accountable expense allowance payable
to the Dealer Manager which equals the lesser of (i) one percent of the
Offering proceeds or (ii) $50,000.
(3) An Equipment Acquisition Fee of four percent of the Purchase Price of
Equipment purchased by the Partnership will be payable by the Partnership
to the General Partner. Does not include Acquisition Fees payable with
respect to the purchase of Equipment with the proceeds of leverage or with
Retained Proceeds. The General Partner will also be paid a Debt Placement
Fee to the extent leverage is used to acquire Equipment. The Partnership
may not incur any indebtedness to acquire Equipment until the net proceeds
of the Offering are fully invested, or committed to investment, in
Equipment.
(4) Represents the Partnership's expected cash investment from Capital
Contributions in Equipment, excluding Acquisition Fees. Does not include
Equipment acquired with leverage or Retained Proceeds. Because the
Partnership's leases are expected to be on a "triple-net" basis, it is
anticipated that no permanent reserve for maintenance and repairs will be
established from the Offering proceeds. However, the General Partner, in
its sole discretion, may retain a portion of the Offering proceeds, Cash
Flow or Net Disposition Proceeds available to the Partnership for
maintenance, repairs and for any other currently unanticipated working
capital needs. In addition, the General Partner and Com Cap Corp. have
agreed that the General Partner or Com Cap Corp. will lend or contribute to
the Partnership an amount equal to 1.01% of the net Offering proceeds, if
needed, to meet the Partnership's expenses. Certain expenses associated
with the selection and acquisition of Equipment for the Partnership (such
as legal and accounting fees and expenses, travel and communication
expenses, brokerage fees and inspection fees and expenses) will be paid to
third parties and, accordingly, the amount available for the purchase of
Equipment will be reduced by the amount of such expenses. The amounts of
such fees are not ascertainable at this time.
-13-
<PAGE>
COMPENSATION OF GENERAL PARTNER AND AFFILIATES
The following table summarizes the types, estimated amounts and recipients
of compensation to be paid by the Partnership directly or indirectly to the
General Partner and its Affiliates. Some of these fees will be paid regardless
of the success or profitability of the Partnership's operations and investments.
While such compensation and fees were established by the General Partner and are
not based on arm's-length negotiations, the General Partner believes that such
compensation and fees are comparable to those which would be charged by an
unaffiliated entity or entities for similar services. Except as otherwise
disclosed in this Prospectus, the Partnership will not engage in transactions
with the General Partner or any of its Affiliates. As described under
"Fiduciary Responsibility of the General Partner," the Partnership Agreement
limits the liability of the General Partner and its Affiliates to the
Partnership and the Limited Partners and provides indemnification to the General
Partner and its Affiliates under certain circumstances. As described below, the
maximum aggregate Front-End Fees to be paid during the first fiscal year of
operations without deduction of expenses are $1,179,671 (assuming the maximum
number of Units are sold and the maximum amount of leverage is incurred
excluding fees earned with Retained Proceeds).
<TABLE>
<CAPTION>
Estimated Estimated
Amount Amount
Assuming Assuming
Minimum of Maximum of
Entity Receiving 125,000 Units 750,000 Units
Compensation Type of Compensation Are Sold Are Sold
- ---------------- -------------------- ------------- --------------
<S> <C> <C> <C>
OFFERING AND ORGANIZATION STAGE
The General Partner ORGANIZATIONAL FEE. An Organization Fee equal $75,000 $400,000
to three percent of the first $10,000,000 of
Limited Partners' Capital Contributions and two
percent of the Limited Partners' Capital
Contribution in excess of $10,000,000, as
compensation for the organization of the
Partnership. It is anticipated that the
Organizational and Offering Expenses, which
include legal, accounting and printing
expenses; various registration and filing fees;
miscellaneous expenses related to the
organization and formation of the Partnership;
other costs of registration; and costs incurred
in connection with the preparation, printing
and distribution of this Prospectus and other
sales literature will be approximately
$300,000. The General Partner will pay all
Organizational and Offering Expenses, other
than Underwriter's Commissions and a non-
accountable expense allowance payable to the
Dealer Manager which is equal to the lesser of
(i) one percent of the Offering proceeds or
(ii) $50,000.
-14-
<PAGE>
<CAPTION>
ESTIMATED ESTIMATED
AMOUNT AMOUNT
ASSUMING ASSUMING
MINIMUM OF MAXIMUM OF
ENTITY RECEIVING 125,000 UNITS 750,000 UNITS
COMPENSATION TYPE OF COMPENSATION ARE SOLD ARE SOLD
- ---------------- -------------------- ------------- --------------
<S> <C> <C> <C>
OPERATIONAL AND SALE OR LIQUIDATION STAGES
The General Partner REIMBURSEMENT OF EXPENSES. The General $15,000 $20,000
and its Affiliates Partner and its Affiliates are
entitled, under Section 5.2 of the
Partnership Agreement, to reimbursement
by the Partnership for the cost of
goods, supplies or services obtained
and used by the General Partner in
connection with the administration and
operation of the Partnership from third
parties unaffiliated with the General
Partner. The amounts set forth on this
table are approximations of
reimbursable expenses for the first
year of the Partnership's operation and
do not include expenses incurred in the
offering of Units.
-15-
<PAGE>
<CAPTION>
ESTIMATED ESTIMATED
AMOUNT AMOUNT
ASSUMING ASSUMING
MINIMUM OF MAXIMUM OF
ENTITY RECEIVING 125,000 UNITS 750,000 UNITS
COMPENSATION TYPE OF COMPENSATION ARE SOLD ARE SOLD
- ---------------- -------------------- ------------- --------------
<S> <C> <C> <C>
The General Partner EQUIPMENT ACQUISITION FEE. An Equipment $125,481 $725,275
Acquisition Fee of four percent of the
Purchase Price of each item of Equipment
purchased as compensation for the
negotiation of the acquisition of the
Equipment and the lease thereof or sale
under a Conditional Sales Contract. The
fee will be paid upon closing of the
Offering with respect to the Equipment
to be purchased by the Partnership with
the net proceeds of the Offering
available for investment in Equipment
except for fees on the leveraged portion
of the Purchase Price which are paid
when the Equipment is purchased. If the
Partnership does not purchase Equipment
with all the net proceeds of the
Offering, the General Partner will
return a pro rata portion of the fee to
the Partnership. If the Partnership
acquires Equipment in an amount
exceeding the net proceeds of the
Offering available for investment in
Equipment, the fee will be paid when
such Equipment is acquired. The
estimated amounts set forth in this
table include fees on Equipment assuming
the maximum allowable leverage, but
exclude such fees earned on Equipment
purchased with Retained Proceeds. Such
excluded fees may be significant in
amount. Equipment Acquisition Fees will
be lower than the estimated maximum if a
lower level of acquisition borrowing is
utilized.
-16-
<PAGE>
<CAPTION>
ESTIMATED ESTIMATED
AMOUNT AMOUNT
ASSUMING ASSUMING
MINIMUM OF MAXIMUM OF
ENTITY RECEIVING 125,000 UNITS 750,000 UNITS
COMPENSATION TYPE OF COMPENSATION ARE SOLD ARE SOLD
- ---------------- -------------------- ------------- --------------
<S> <C> <C> <C>
The General Partner DEBT PLACEMENT FEE. As compensation for $10,456 $54,396
arranging Term Debt to finance the acqui-
sition of Equipment by the Partnership, a
fee equal to one percent of such indebted-
ness; provided, however, that such fee
shall be reduced to the extent the Part-
nership incurs such fees to third parties,
unaffiliated with the General Partner or
the lender, with respect to such indebted-
ness and no such fee will be paid with
respect to borrowings from the General
Partner or its Affiliates. The estimated
amounts set forth in this table assume the
expected maximum allowable leverage
($1,045,600 if the minimum number of Units
are sold and $5,439,600 if the maximum
number of Units are sold), but exclude
such fees earned on refinancings or debt
incurred with respect to Equipment
purchased with Retained Proceeds and
borrowings.
The General Partner EQUIPMENT MANAGEMENT FEE. A monthly fee Not Not
equal to the lesser of (i) the fees which determinable determinable
would be charged by an independent third at this time at this time
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.
-17-
<PAGE>
<CAPTION>
ESTIMATED ESTIMATED
AMOUNT AMOUNT
ASSUMING ASSUMING
MINIMUM OF MAXIMUM OF
ENTITY RECEIVING 125,000 UNITS 750,000 UNITS
COMPENSATION TYPE OF COMPENSATION ARE SOLD ARE SOLD
- ---------------- -------------------- ------------- --------------
<S> <C> <C> <C>
The General Partner RE-LEASE FEE. As compensation for providing Not Not
re-leasing services for any Equipment for determinable determinable
which the General Partner has, following the at this time at this time
expiration of, or default under, the most
recent lease or Conditional Sales Contract,
provided substantial services in connection
with 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 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. Such payment shall be paid as each
rental payment is made over the term of the
lease.
The General Partner EQUIPMENT LIQUIDATION FEE. With respect to Not Not
each item of Equipment sold by the General determinable determinable
Partner (other than in connection with a at this time at this time
Conditional Sales Contract), a fee equal to
the lesser of (i) 50% of the Competitive
Equipment Sale Commission or (ii) three
percent of the sales price of such
Equipment. The payment of such fee is
subordinated to the receipt by the Limited
Partners of (i) a return of their Capital
Contributions and a 10% per annum cumulative
return, compounded daily, on Adjusted
Capital Contributions ("Cumulative Return")
and (ii) the Net Disposition Proceeds from
such sale in accordance with the Partnership
Agreement. Such fee will be reduced to the
extent any liquidation or resale fees are
paid to unaffiliated parties.
-18-
<PAGE>
<CAPTION>
ESTIMATED ESTIMATED
AMOUNT AMOUNT
ASSUMING ASSUMING
ENTITY MINIMUM OF MAXIMUM OF
RECEIVING 125,000 UNITS 750,000 UNITS
COMPENSATION TYPE OF COMPENSATION ARE SOLD ARE SOLD
- ------------ -------------------- ------------- -------------
<S> <C> <C> <C>
INTEREST IN THE PARTNERSHIP
The General Partner PARTNERSHIP INTEREST. The General Partner Not Not
will have a present and continuing one determinable determinable
percent interest in the Partnership's at this time at this time
items of income, gain, loss, deduction,
credit, and tax preference. In addition,
the General Partner will receive one percent
of Cash Available for Distribution until the
Limited Partners have received distributions
of Cash Available for Distribution equal to
their Capital Contributions plus the 10%
Cumulative Return and thereafter, the General
Partner will receive 10% of Cash Available for
Distribution. See "Risk Factors - Dilution."
</TABLE>
Partnership transactions involving the acquisition, lease and/or sale of
Equipment will result in the foregoing fees and other compensation to the
General Partner and its Affiliates. The General Partner has absolute
discretion with respect to all decisions related to such transactions.
Because the amount and timing of such fees depends, in part, on the debt
structure of Equipment acquisitions and the timing of such transactions, the
General Partner and its Affiliates may be subject to conflicts of interest
to the extent the acquisition, retention, re-lease or sale of Equipment and
the terms and conditions thereof may be less advantageous to the Partnership
and more advantageous to the General Partner under certain circumstances.
For example, because the General Partner is entitled to a Debt Placement Fee
and the Acquisition Fees payable to the General Partner are determined as a
percentage of the Purchase Price of Equipment, the General Partner will receive
higher fees as the amount of acquisition debt incurred by the Partnership
increases. In all cases where the General Partner or its Affiliate may have a
conflict of interest in determining the terms or timing of a transaction by
the Partnership, it will exercise its discretion strictly in accordance with
its fiduciary duty to the Partnership and the Limited Partners.
-19-
<PAGE>
CONFLICTS OF INTEREST
The Partnership will be subject to various conflicts of interest arising
out of its relationships with the General Partner and its Affiliates.
Nothing herein shall relieve the General Partner and its Affiliates from
their general fiduciary obligations to the Partnership as set forth under
"Fiduciary Responsibility." These conflicts include the following:
COMPETITION WITH GENERAL PARTNER AND AFFILIATES; COMPETITION FOR
MANAGEMENT'S TIME
The General Partner and its Affiliates have sponsored other investor
programs which will be in potential competition with the Partnership in
connection with the purchase of Equipment as well as opportunities to lease
and sell such Equipment. These programs have each been organized to acquire
the same types of Equipment as will be acquired by the Partnership.
Although these programs have acquired substantially all of the Equipment
which they will acquire with the proceeds of offerings to investors, each
program may reinvest undistributed cash in additional Equipment and
accordingly competition for Equipment will occur in the future. The General
Partner and its Affiliates may also form additional investor programs which
may be competitive with the Partnership.
If one or more investor programs and the Partnership are in a position
to acquire the same Equipment conflicts may arise as to which of the
programs shall acquire the available items of Equipment. The General
Partner will determine which program will purchase the Equipment based upon
the objectives of each and the suitability of the acquisition in light of
those objectives. The General Partner will generally afford priority to the
program or entity that has had funds available to purchase Equipment for the
longest period of time. In addition, in order to promote diversification of
Equipment and lessees when two or more investor programs are in a position
to acquire the same Equipment, the General Partner may acquire Equipment in
Joint Ventures with affiliated investor programs. If one or more investor
programs and the Partnership are in a position to enter into leases with the
same lessee or to sell Equipment to the same purchaser conflicts may arise
as to which program shall lease or sell its Equipment. The General Partner
will generally afford priority to the Equipment which has been available for
lease or sale for the longest period of time.
Certain senior executives of the General Partner and its Affiliates also
serve as officers and directors of the other programs and are required to
apportion their time among these entities. The Partnership will, therefore,
be in competition with the other programs for the attention and management
time of the General Partner and its Affiliates. The officers and directors
of the General Partner are not required to devote all or substantially all
of their time to the affairs of the Partnership. See "Management."
ACQUISITIONS
Com Cap Corp. and the General Partner or other Affiliates of the General
Partner may acquire Equipment for the Partnership provided that (i) the
Partnership has insufficient funds at the time the Equipment is acquired,
(ii) the acquisition is in the best interest of the Partnership and (iii)
no benefit to the General Partner or its Affiliates arises from the
acquisition except for compensation paid to Com Cap Corp., the General
Partner or such other Affiliate as disclosed in this Prospectus. Com Cap
Corp., the General Partner or their Affiliates will not hold Equipment for
more than 60 days prior to transfer to the Partnership. If sufficient funds
become available to the Partnership within such 60 day period, such
Equipment may be resold to the Partnership for a price not in excess of the
sum of the cost of the Equipment to such entity and any accountable
Acquisition Expenses payable to third parties which are incurred by such
entity and interest on the Purchase Price from the date of purchase to the
date of transfer to the Partnership. Except as described above, there will
be no sales of Equipment to or from any Affiliate of Com Cap Corp.
-20-
<PAGE>
In certain instances, the Partnership may find it necessary, in
connection with the ordering and acquisition of Equipment, to make advances
to manufacturers or vendors with funds borrowed from the General Partner for
such purpose. The Partnership will not borrow money from the General
Partner or any of its Affiliates with a term in excess of twelve months.
Interest will be paid on loans or advances (in the form of deposits with
manufacturers or vendors of Equipment or otherwise) from the General Partner
or its Affiliates from their own funds at a rate equal to that which would
be charged by third party financing institutions on comparable loans for the
same purpose in the same geographic area, but in no event in excess of the
General Partner's or Affiliate's own cost of funds. In addition, if the
General Partner or its Affiliates borrow money and loan or advance it on a
short-term basis to or on behalf of the Partnership, the General Partner or
such Affiliates shall receive no greater interest rate and financing charges
from the Partnership than that which unrelated lenders charge on comparable
loans. See "Investment Objectives and Policies." The Partnership will not
loan money to any Person including the General Partner or its Affiliates
except to the extent that a Conditional Sales Contract constitutes a loan.
The Partnership shall not invest in equipment limited partnerships,
general partnerships or joint ventures, except that (a) the Partnership may
invest in general partnerships or joint ventures with persons other than
equipment Programs formed by the General Partner or its Affiliates, which
partnerships or joint ventures own specific equipment; provided that (i) the
Partnership has or acquires a controlling interest in such ventures or
partnerships, (ii) the non-controlling interest is owned by a non-Affiliate,
and (iii) there are no duplicate fees; and (b) the Partnership may invest in
joint venture arrangements with other equipment Programs formed by the
General Partner or its Affiliates if such action is in the best interests of
all Programs and if all the following conditions are met: (i) all the
Programs have substantially identical investment objectives; (ii) there are
no duplicate fees; (iii) the sponsor compensation is substantially identical
in each Program; (iv) the Partnership has a right of first refusal to buy
another Program's interest in a joint venture if the other Program wishes to
sell equipment held in the joint venture; (v) the investment of each Program
is on substantially the same terms and conditions; and (vi) the joint
venture is formed either for the purpose of effecting appropriate
diversification for the Programs or for the purpose of relieving the General
Partner or its Affiliates from a commitment entered into pursuant to
Section 9.5.3 of the Partnership Agreement. See "Risk Factors - Risks of
Joint Investments."
RECEIPT OF FEES AND OTHER COMPENSATION BY THE GENERAL PARTNER AND ITS
AFFILIATES
Partnership transactions involving the acquisition, lease and/or sale of
Equipment will result in certain fees and other compensation to the General
Partner and its Affiliates. The General Partner has absolute discretion
with respect to all decisions related to such transactions. Because the
amount and timing of such fees depends, in part, on the debt structure of
Equipment acquisitions and the timing of such transactions, the General
Partner and its Affiliates may be subject to conflicts of interest to the
extent the acquisition, retention, re-lease or sale of Equipment and the
terms and conditions thereof may be less advantageous to the Partnership and
more advantageous to the General Partner under certain circumstances. For
example, because the General Partner is entitled to a Debt Placement Fee and
the Acquisition Fees payable to the General Partner are determined as a
percentage of the Purchase Price of Equipment, the General Partner will
receive higher fees as the amount of acquisition debt incurred by the
Partnership increases. In all cases where the General Partner or its
Affiliate may have a conflict of interest in determining the terms or timing
of a transaction by the Partnership, it will exercise its discretion
strictly in accordance with its fiduciary duty to the Partnership and the
Limited Partners.
NON-ARM'S-LENGTH AGREEMENTS
Any agreements and arrangements relating to compensation between the
Partnership and the General Partner or any of its Affiliates will not be the
result of arm's-length negotiations and the performance thereof by the
General Partner and its Affiliates will not be supervised or enforced at
arm's-length.
-21-
<PAGE>
JOINT VENTURES WITH AFFILIATES OF THE GENERAL PARTNER
The Partnership may enter into joint ownership or joint venture
agreements for the acquisition and leasing of Equipment with other persons,
including joint ventures controlled by the General Partner. Should any such
joint ventures be consummated, the General Partner may face certain
conflicts of interest inasmuch as it may control and owe fiduciary duties to
both the Partnership and, through such Affiliates, the affiliated
co-venturer. For example, because of the differing financial positions of
the co-venturing programs, it may be in the best interest of one program to
sell the jointly-held Equipment at a time when it is in the best interest of
the other program to hold such Equipment. There is a potential risk of
impasse in joint venture decisions since neither program may control and
while one program may wish to purchase Equipment from its co-joint venturer,
it may not have sufficient resources to do so. Nevertheless, such joint
ventures are restricted to circumstances where the co-venturer's investment
objectives are comparable to the Partnership, the Partnership's investment
is on substantially the same terms as the co-venturer and the compensation
to be received by the General Partner and its Affiliates from each
co-venturer is substantially identical.
LEGAL COUNSEL
Blank, Rome, Comisky & McCauley serves as counsel to the Partnership and
as counsel to the General Partner and its Affiliates. It is anticipated that
such representation of the General Partner will continue in the future. If a
conflict should arise, appropriate consideration will be given to the extent
to which the interests of the Partnership may diverge from those of the
General Partner and its Affiliates and, if necessary, separate special
counsel will be obtained for the Partnership and for the General Partner and
its Affiliates.
ORGANIZATION OF GENERAL PARTNER
The Partnership will do business with the General Partner and its
Affiliates, Com Cap Corp., a Pennsylvania corporation, and Commonwealth of
Delaware, Inc., a Delaware corporation. The General Partner is a
wholly-owned subsidiary of Commonwealth of Delaware, Inc., which is a
wholly-owned subsidiary of Com Cap Corp.
Persons investing in the Partnership will not have an interest in the
corporations discussed above unless they are also an investor in those
corporations.
-22-
<PAGE>
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER
The General Partner is accountable to the Partnership as a fiduciary
and, consequently, must exercise good faith and integrity in handling
Partnership affairs. Certain provisions of the Partnership Agreement may
relieve the General Partner and its Affiliates from an aspect of its state
common law fiduciary duties. General partners are held to a duty of the
highest good faith in conducting partnership affairs. This has been
interpreted to mean that a general partner cannot engage in a business which
would create an interest for the general partner adverse to that of the
partnership. Since the General Partner and certain programs it has
sponsored will acquire and lease Equipment, the General Partner may be
deemed to have a position adverse to the Partnership. The Partnership
Agreement provides that, if two or more investor programs or entities which
are affiliated with the General Partner and the Partnership, are in a
position to acquire the same Equipment, the General Partner will determine
which program or entity will purchase the Equipment based upon the
objectives of each and the suitability of the acquisition in light of those
objectives. (The General Partner will generally afford priority to the
partnership that has had funds available to purchase Equipment for the
longest period of time.) If two or more investor programs or entities,
including the Partnership, are in a position to enter into leases with the
same lessee or to sell Equipment to the same purchaser, the General Partner
will generally afford priority to the Equipment which has been available for
lease or sale for the longest period of time.
Without modifying this aspect of the General Partner's fiduciary duties,
the General Partner might not be able to serve as the General Partner for
the Partnership and other investor programs acquiring and leasing Equipment
at the same time. This modification may operate as a detriment to Limited
Partners because there may be business opportunities that will not be made
available to the Partnership.
The Partnership Agreement provides that the General Partner, its
Affiliates and its successors and assigns will not be liable to the
Partnership or to any Limited Partner for any loss or damage incurred by
reason of any act in good faith performed or omitted in connection with the
activities of the Partnership or in dealing with third parties on behalf of
the Partnership, if such act or omission does not constitute fraud,
negligence, or breach of fiduciary duty; provided, however, that if such
loss or damage arises out of any act or omission on the part of the General
Partner, the General Partner must determine, in good faith, that such course
of conduct was in the best interest of the Partnership. The Partnership
Agreement also provides that the Partnership will indemnify and hold
harmless the General Partner, its Affiliates and its successors and assigns
against any liability, loss or damage incurred by reason of any act or
omission performed or omitted in good faith in connection with the
activities of the Partnership or in dealing with third parties on behalf of
the Partnership (including reasonable costs and reasonable attorneys' fees);
provided, however that: (a) such act or omission does not constitute fraud,
negligence, or breach of fiduciary duty; (b) if such liability, loss, or
damage arose out of any act or omission on the part of the General Partner,
the General Partner must determine, in good faith, that such course of
conduct was in the best interest of the Partnership; and (c) any such
indemnification shall be recoverable only from the assets of the Partnership
and not from the holders of Units. A successful claim for indemnification
could deplete the assets of the Partnership.
Based upon the present state of the law, a Limited Partner may institute
legal action on behalf of himself and all other similarly situated Limited
Partners (a class action) to recover damages for a breach by the General
Partner of its fiduciary duty or on behalf of the Partnership (a partnership
derivative action) to recover damages from third parties. In addition,
(i) investors may have the right, subject to procedural and jurisdictional
requirements, to bring partnership class actions in federal courts to
enforce their rights under the federal and state securities laws; and
(ii) investors who have suffered losses in connection with the purchase or sale
of their Units may be able to recover such losses from the General Partner
where the losses result from a violation by the General Partner of the
antifraud provisions of federal or state securities laws.
-23-
<PAGE>
Investors should note that the fiduciary duty owed by a general partner
to its partners is similar in many respects to the fiduciary duty owed by
the directors of a corporation to its shareholders and is subject to the
same rule, commonly referred to as the "business judgment rule", that
directors are not liable for mistakes in the good faith exercise of honest
business judgment or for losses incurred in the good faith performance of
their duties when performed with such care as an ordinarily prudent person
would use. Accordingly, the General Partner may not be held liable for
mistakes made or losses incurred in the good faith exercise of reasonable
business judgment.
To the extent that such indemnification provisions purport to include
indemnification for liabilities under the Securities Act of 1933, in the
opinion of the Securities and Exchange Commission, such indemnification is
contrary to public policy and therefore unenforceable. The Partnership will
not indemnify the General Partner and its successors and assigns against
liabilities arising under the Securities Act of 1933 unless the indemnified
party is successful in defending such action and such indemnification is
specifically approved by a court of law which has been advised as to the
current position of the Securities and Exchange Commission regarding
indemnification for violations of securities law. The Partnership will not
pay for any insurance covering the liability of the General Partner or its
successors or assigns for any act or omission whether or not indemnification
is permitted by the Partnership Agreement.
-24-
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
PRINCIPAL INVESTMENT OBJECTIVES
The Partnership has been formed for the purpose of acquiring various
types of Equipment, including computer peripheral and other similar capital
equipment. The Partnership intends to use a substantial portion of the
proceeds of this Offering, Retained Proceeds and debt financing (not to
exceed 30% of the aggregate cost of the Equipment owned by, or subject to
Conditional Sales Contract with, the Partnership) to purchase IBM and
IBM-compatible computer peripheral and other similar capital equipment. The
Partnership intends to acquire Equipment which is subject to lease
principally to U.S. corporations and other institutions pursuant
predominantly to Operating Leases. The Partnership retains the flexibility
to enter into Full Payout Net Leases and Conditional Sales Contracts, but
does not presently anticipate doing so. See "Description of Leases," below.
The Partnership's principal investment objectives are to:
(a) acquire, lease and sell Equipment to generate revenues from
operations sufficient to provide 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.
The composition of the Partnership's actual Equipment portfolio cannot
be determined, as there is no way of anticipating what Equipment will be
available on reasonable terms at the time the Partnership is ready to invest
its funds. The General Partner may, in accordance with its best business
judgment, vary the Partnership's portfolio and invest a substantial portion
of the net proceeds of this Offering in a single category of computer
peripheral and other similar capital equipment, subject to certain
restrictions. See "Types of Equipment - Other Equipment - Restrictions"
below.
As of the date of this Prospectus, the Partnership has not entered into
any commitments for the acquisition, financing, or leasing to third parties
of any Equipment. The Partnership will attempt to obtain contractual
commitments for the purchase of Equipment as soon as practicable. Limited
Partners will not have any right to vote on or otherwise approve or
disapprove any particular investment to be made by the Partnership. It is
not possible to determine the date when the net Offering proceeds, less
working capital reserves, will be fully invested in Equipment by the
Partnership or the terms of any purchases of Equipment. If all of the net
proceeds of this Offering are not invested by the Partnership in Equipment
or committed to such investment or otherwise utilized for proper Partnership
purposes prior to the expiration of 12 months from the Closing Date, the net
proceeds not so invested, committed, or set aside as working capital
reserves will thereupon be promptly returned, with a proportionate share of
interest at the rate earned by the Partnership on the investment of such
proceeds, to the Limited Partners based upon their respective numbers of
Units and time of purchase. See "Risk Factors - Unspecified Equipment and
Leases."
Although it is currently anticipated that the Partnership will acquire
predominantly new Equipment, the Partnership may purchase used equipment.
Equipment purchases will generally be made through lease brokers who charge
the Partnership a premium over their cost of the Equipment to compensate
them for their services.
-25-
<PAGE>
Equipment may also be acquired from manufacturers, distributors, leasing
companies, agents, owner-users, owner-lessors, other suppliers upon terms that
will vary depending upon the Equipment and supplier involved. Manufacturers
and distributors usually furnish a limited warranty against defects in material
and workmanship and some purchase agreements for Equipment will provide for
service and replacement of parts during a limited period.
The General Partner anticipates that the Partnership's Equipment will be
leased under Operating Leases at the time of acquisition or that an
Operating Lease will be entered into with a third party when the Partnership
acquires an item of Equipment. See "Description of Leases" below. The
Partnership may also engage in sale/leaseback transactions, pursuant to
which the Partnership would purchase Equipment from companies that would
then immediately lease the Equipment from the Partnership. The Partnership
may also purchase Equipment which will be leased under Full Payout Net
Leases or sold under Conditional Sales Contracts at the time of acquisition
or the Partnership may enter into a Full Payout Net Lease or Conditional
Sales Contract with a third party when the Partnership acquires an item of
Equipment.
The Partnership may enter into arrangements with one or more
manufacturers pursuant to which the Partnership will purchase from such
manufacturers Equipment which has previously been leased directly by the
manufacturer to third parties ("vendor leasing programs"). The Partnership
and manufacturers may agree to nonrecourse loans to the Partnership from the
manufacturer to finance the acquisition of Equipment, which loans will be
secured by the Equipment and the receivables due to the Partnership from
users of such Equipment. It is expected that the manufacturers of Equipment
will provide maintenance, remarketing and other services for the Equipment
subject to such agreements.
The General Partner has the discretion consistent with its fiduciary
duty to change the investment objectives of the Partnership if it determines
that such a change is in the best interest of the Limited Partners and so
long as such a change is consistent with Sections 10.2 and 10.3 of the
Partnership Agreement; provided however, that the General Partner will not
change the Partnership's primary objective of acquiring, leasing and selling
Equipment without the consent of a majority in interest of the Limited
Partners. The General Partner will notify the Limited Partners if it makes
such a determination to change the Partnership's investment objectives.
TYPES OF EQUIPMENT
COMPUTER PERIPHERAL EQUIPMENT. Computer peripheral equipment consists
of devices used to convey information into and out of a central processing
unit (or "mainframe") of a computer system, such as tape drives, disk
drives, tape controllers, disk controllers, printers, terminals and related
control units, all of which are related to the process of storing,
retrieving, and processing information by computer.
The Partnership intends to acquire primarily IBM manufactured or
IBM-compatible equipment. The General Partner believes that dealing in
IBM-compatible equipment is particularly advantageous because of the large
IBM customer base, IBM's policy of supporting IBM users with software and
maintenance services and the large amount of IBM and IBM-compatible
equipment in the marketplace. If, in the General Partner's opinion, IBM's
competitors begin to offer these advantages and the General Partner
determines that non-IBM compatible Equipment is comparable in quality, the
General Partner may cause the Partnership to increase its purchases of
computer equipment which is not IBM-compatible if such purchases are in the
best economic interest of the Partnership. IBM has recently suffered
financial and business reverses. See "Risk Factors - Dependence on
Manufacturers and IBM."
Computer technology has developed rapidly in recent years and is
expected to continue to do so. Technological advances have permitted
continued reductions in the cost of computer processing capacity, thereby
permitting applications not economically feasible a few years ago. Much of
the older IBM and
-26-
<PAGE>
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 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 intends to acquire
computer peripheral equipment, such as tape drives, disk drives, tape
controllers, disk controllers, printers, terminals and related control units,
all of which are related to the process of storing, retrieving and processing
information by computer. The Partnership expects to invest primarily in
computer peripheral equipment that is compatible with IBM equipment; however
the Partnership may acquire computer peripheral equipment that is not
compatible with IBM equipment if the General Partner determines that such
acquisitions are in the best interest of the Partnership and that such
Equipment is comparable in quality to similar IBM or IBM compatible
Equipment. The General Partner is also authorized, but does not presently
intend, to cause the Partnership to invest in data processing,
telecommunication or medical technology equipment. The Partnership may not
invest in any of such other types of Equipment (i) to the extent that the
purchase price of such Equipment, together with the aggregate Purchase Price
of all such other types of Equipment then owned by the Partnership, is in
excess of 25% of the total cost of all of the assets of the Partnership at
the time of the Partnership's commitment to invest therein and (ii) unless
the General Partner determines that such purchase is in the best economic
interest of the Partnership at the time of the purchase. There can be no
assurance that any Equipment investments can be found which meet this
standard; and, accordingly, there can be no assurance that investments of
this type will be made by the Partnership.
DIVERSIFICATION
Diversification is generally desirable to minimize the effects of
changes in specific industries, local economic conditions or similar risks.
However, the extent of the Partnership's diversification, in the aggregate
and within each category of Equipment, will depend in part upon the
financing which can be assumed by the Partnership or borrowed from third
parties on satisfactory terms. The Partnership's policy not to borrow on a
recourse basis will further limit its financing options. Diversification
will also depend on the availability of various types of Equipment. Since
the needs of potential lessees are not known at this time, there can be no
assurance given with respect to the maximum percentages of proceeds which
will be invested in any single item or group of items of Equipment or in
Equipment under lease to a single lessee, except as set forth below and
under "Other Equipment - Restrictions" above. See also "Risk Factors - Lack
of Diversification."
During the operational stage of the Partnership, the Partnership may not
at any one given point in time lease (or sell pursuant to a Conditional
Sales Contract) more than 25% of the Equipment to a single Person or
Affiliated group of Persons.
DESCRIPTION OF LEASES
The Partnership will purchase only Equipment which is subject to a lease
or for which a lease or similar agreement will be entered into
contemporaneously with the consummation of the Partnership's acquisition of
the Equipment. The General Partner intends to lease most of the Equipment
purchased by the Partnership to third parties pursuant to Operating Leases.
Operating Leases are relatively short-term (12 to 36 month) leases under
which the aggregate noncancellable rental payments during the original term
of the lease are not sufficient to permit the lessor to recover the purchase
price of the subject Equipment. The Equipment may
-27-
<PAGE>
also be leased pursuant to Full Payout Net Leases. Full Payout Net Leases are
leases under which the aggregate noncancellable rental payments during the
original term of the lease are at least sufficient to recover the purchase
price of the subject Equipment. It is anticipated that the Partnership will
enter into few, if any, Full Payout Net Leases. The General Partner may also
enter into Conditional Sales Contracts for Equipment. A Conditional Sales
Contract generally provides that the noncancellable payments to the seller over
the term of the contract are sufficient to recover the investment in such
Equipment and to provide a return on such investment. Under a Conditional
Sales Contract, the seller reserves title to, and retains a security
interest in, the Equipment until the Purchase Price of the Equipment is
paid.
In general, the terms of the Partnership's leases, whether the Equipment
is leased pursuant to an Operating Lease or a Full Payout Net Lease, will
depend upon a variety of factors, including: the desirability of each type
of lease from both an investment and a tax point of view; the relative
demand among lessees for Operating or Full Payout Net Leases; the type and
use of Equipment and its anticipated residual value; the business of the
lessee and its credit rating; the availability and cost of financing;
regulatory considerations; the accounting treatment of the lease sought by
the lessee or the Partnership; and competitive factors.
An Operating Lease generally will represent a greater risk to the
Partnership than a Full Payout Net Lease, because in order to recover the
purchase price of the subject Equipment and earn a return on such
investment, it will be necessary to renew or extend the Operating Lease,
lease the Equipment to a third party at the end of the original lease term,
or sell the Equipment. On the other hand, the term of an Operating Lease
is generally much shorter than the term of a Full Payout Net Lease, and the
lessor is thus afforded an opportunity under an Operating Lease to re-lease
or sell the subject Equipment at an earlier stage of the Equipment's life
cycle than under a Full Payout Net Lease. Also, the annual rental payments
received under an Operating Lease are ordinarily higher than those received
under a Full Payout Net Lease. This may afford a greater overall return on
the Partnership's investment.
Based on current sales prices for Equipment and the past experience of
certain officers of the General Partner in disposing of Equipment at the
expiration of lease terms, the General Partner believes that the Partnership
will be able profitably, in the aggregate, to re-lease or dispose of its
Equipment leased under Operating Leases after their initial terms. However,
no assurance can be given that the Partnership will in fact be successful in
re-leasing or disposing of such Equipment profitably.
The Partnership will enter into "triple net leases" (or the equivalent
in the case of a Conditional Sales Contract) which typically will provide
that the lessee or some other party will bear the risk of physical loss of
the Equipment; pay taxes relating to the lease or use of the Equipment;
maintain the Equipment; indemnify the Partnership-lessor against any
liability suffered by the Partnership as the result of any act or omission
of the lessee or its agents; maintain casualty insurance in an amount equal
to the greater of the full value of the Equipment and a specified amount set
forth in the lease; and maintain liability insurance naming the Partnership
as an additional insured with a minimum coverage which the General Partner
deems appropriate. In addition, the Partnership may purchase "umbrella"
insurance policies to cover excess liability and casualty losses, to the
extent deemed practicable and advisable by the General Partner.
The General Partner has not established any standards for lessees to
which it will lease Equipment and, as a result, there is not an investment
restriction prohibiting the Partnership from doing business with any
lessees. However, a credit analysis (including a review of the financial
statements, credit history and public debt record) of all potential lessees
will be undertaken by the General Partner to determine the lessee's ability
to make payments under the proposed lease.
The terms and conditions of the Partnership's leases, or Conditional
Sales Contracts, will each be determined by negotiation and may impose
substantial obligations upon the Partnership. Where the Partnership assumes
maintenance or service obligations, the General Partner intends to cause the
Partnership to enter into
-28-
<PAGE>
separate maintenance or service agreements with manufacturers or certified
maintenance organizations to provide such services. Such agreements will
generally require annual or more frequent adjustment of service fees. It is
not presently anticipated that any leases which require the Partnership to
perform maintenance duties will be entered into by the Partnership.
BORROWING POLICIES
The General Partner, at its discretion, may cause the Partnership to
incur debt in the maximum aggregate amount of 30% of the aggregate cost of
the Equipment owned by the Partnership, or subject to Conditional Sales
Contract (except that the Partnership may not incur any indebtedness to
acquire Equipment until the net proceeds of the Offering are fully invested,
or committed to investment, in Equipment). The Partnership will incur only
non-recourse debt which will be secured by Equipment and lease income
therefrom. Such leveraging will permit the Partnership to increase the
aggregate amount of its depreciable assets, and, as a result, should
increase both its lease revenues and its federal income tax deductions above
those levels which would be achieved without leveraging. There is no limit
on the amount of debt which may be incurred in connection with the
acquisition of any single item of Equipment. Any debt incurred will be
fully amortized over the term of the initial lease or Conditional Sales
Contract to which the Equipment securing the debt is subject. The precise
amount borrowed by the Partnership will depend on a number of factors,
including the types of Equipment acquired by the Partnership; the
creditworthiness of the lessee; the availability of suitable financing; and
prevailing interest rates. The Partnership intends to be flexible in the
degree of leverage it employs, within the permissible limit. There can be
no assurance that credit will be available to the Partnership in the amount
or at the time desired or on terms considered reasonable by the General
Partner.
The Partnership will purchase some items of Equipment without leverage.
If the Partnership purchases an item of Equipment without leverage and
thereafter suitable financing becomes available, it may then obtain the
financing, secure the financing with the Equipment purchased previously to
the extent practicable and invest any proceeds from such financings in
additional items of Equipment, or it may distribute some or all of such
proceeds to the Limited Partners. Any such later financing will be on terms
consistent with the terms applicable to borrowings generally. The General
Partner plans to cause the Partnership to borrow funds, to the fullest
extent practicable, at interest rates fixed at the time of borrowing.
Any debt incurred by the Partnership must be nonrecourse. Nonrecourse
debt, in the context of the business to be conducted by the Partnership,
means that the lender providing the funds can look for security only to the
Equipment pledged as security and the proceeds derived from leasing or
selling such Equipment. Neither the Partnership nor any Partner (including
the General Partner) would be liable for repayment of any nonrecourse debt.
To the extent the Partnership borrows on a nonrecourse basis, the Limited
Partners' tax basis in their Units will increase, although there may not be
a corresponding increase in the Partners' "At-Risk" amount. See "Income Tax
Considerations - Limitation on Utilization of Partnership Losses - Tax
Basis" and "Income Tax Considerations - Limitations on Utilization of
Partnership Losses - Amounts at Risk."
Loan agreements may also require that the Partnership maintain certain
reserves or compensating balances and may impose other obligations upon the
Partnership. Moreover, since a portion of the Partnership's revenues from
the leasing of Equipment will be reserved for repayment of debt, the use of
financing will reduce the cash which might otherwise be available for
distributions until the debt has been repaid and may reduce the
Partnership's cash flow over a substantial portion of the Partnership's
operating life.
The General Partner and 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 or Affiliate may not charge interest at a
rate greater than the interest rate charged by unrelated lenders on
comparable loans for the same purpose in the same locality. In no event
will the Partnership be required to pay interest on any such loan at an
annual rate greater than three percent over
-29-
<PAGE>
the "prime rate" from time to time announced by PNC Bank, Philadelphia,
Pennsylvania. All payments of principal and interest on any financing provided
by the General Partner or any of its affiliates shall be due and payable by the
Partnership within 12 months after the date of the loan. See "Compensation of
General Partner and Affiliates."
If the General Partner or any of its Affiliates purchases Equipment in
its own name and with its own funds in order to facilitate ultimate purchase
by the Partnership, the purchaser will be entitled to receive interest on
the funds expended for such purchase on behalf of the Partnership. Simple
interest on any such temporary purchases will be charged on a floating rate
basis not in excess of three percent over the "prime rate" from time to time
announced by PNC Bank, from the date of initial acquisition to the date of
repayment by the Partnership/ownership transfer. See "Conflicts of Interest
- - Acquisitions."
REFINANCING POLICIES
Subject to the limitations set forth in "Borrowing Policies" above, the
Partnership may refinance its debt from time to time. With respect to a
particular item of Equipment, the General Partner will take into
consideration such factors as the amount of appreciation in value, if any,
to be realized, the possible risks of continued ownership, and the
anticipated advantages to be obtained for the Partnership, as compared to
selling such Equipment.
Refinancing, if achievable, may permit the Partnership to retain an item
of Equipment and at the same time to generate additional funds for
reinvestment in additional Equipment or for distribution to the Limited
Partners. Such a distribution will not be taxable to a Limited Partner
unless it exceeds the tax basis of such Limited Partner's Units (after any
increase of such tax basis as a result of the Partnership's incurring any
additional nonrecourse debt). See "Income Tax Considerations - Limitations
on Utilization of Partnership Losses - Tax Basis."
LIQUIDATION POLICIES
The General Partner intends to cause the Partnership to begin disposing
of its Equipment approximately nine years after the Closing Date.
Notwithstanding the Partnership's objective to sell all of its assets and
dissolve in approximately 10 years, the General Partner may at any time
cause the Partnership to dispose of all its Equipment and dissolve the
Partnership upon the approval of Limited Partners holding a Majority in
Interest of Units.
Particular items of Equipment may be sold at any time if, in the
judgment of the General Partner, it is in the best interest of the
Partnership to do so. The determination of whether particular items of
Partnership Equipment should be sold or otherwise disposed of will be made
by the General Partner after consideration of all relevant factors
(including prevailing general economic conditions, lessee demand, the
General Partner's views of current and future market conditions, the cash
requirements of the Partnership, potential capital appreciation, cash flow
and federal income tax considerations), with a view toward achieving the
principal investment objectives of the Partnership. As partial payment for
Equipment sold, the Partnership may receive purchase money obligations
secured by liens on such Equipment. In no event will the term of the
Partnership extend beyond December 31, 2006. See "Compensation of General
Partner and Affiliates - Equipment Liquidation Fee."
MANAGEMENT OF EQUIPMENT
Equipment management services for the Partnership's Equipment generally
will be provided by the General Partner and its Affiliates and by persons
employed by the General Partner. Such services will consist of collection
of income from the Equipment, negotiation and review of leases, Conditional
Sales Contracts and
-30-
<PAGE>
sales agreements, releasing and leasing-related services, payment of operating
expenses, periodic physical inspections and market surveys, servicing
indebtedness secured by Equipment, general supervision of lessees to assure
that they are properly utilizing and operating Equipment, providing related
services with respect to Equipment, supervising, monitoring and reviewing
services performed by others in respect to Equipment and preparing monthly
Equipment operating statements and related reports. Certain of these services
may be provided initially by lease brokers as part of their agreement to sell
the Equipment to the Partnership. See "Compensation of General Partner and
Affiliates - Equipment Management Fee."
COMPETITION
The equipment leasing industry is highly competitive. The Partnership
will compete with leasing companies, equipment manufacturers and their
affiliated financing companies, distributors and entities similar to the
Partnership (including other programs sponsored by the General Partner),
some of which will have greater financial resources than the Partnership and
more experience in the equipment leasing business than the General Partner.
Other leasing companies and equipment manufacturers, their affiliated
financing companies and distributors may be in a position to offer equipment
to prospective lessees on financial terms which are more favorable than
those which the Partnership can offer. They may also be in a position to
offer trade-in privileges, software, maintenance contracts and other
services which the Partnership may not be able to offer. Equipment
manufacturers and distributors may offer to sell equipment on terms (such as
liberal financing terms and exchange privileges) which will afford benefits
to the purchaser similar to those obtained through leases. As a result of
the advantages which certain of its competitors may have, the Partnership
may find it necessary to lease its equipment on a less favorable basis than
certain of its competitors.
The computer peripheral equipment industry is extremely competitive.
Competitive factors include pricing, technological innovation and methods of
financing. Certain manufacturer-lessors maintain advantages through patent
protection, where applicable, and through a policy which combines service
and hardware with payment accomplished through a single periodic charge.
The dominant firm in the computer marketplace is International Business
Machines Corporation, and its subsidiary IBM Credit Corporation is the
dominant force in the leasing of IBM equipment. Because of IBM's
substantial resources and dominant position, revolutionary changes with
respect to computer systems, pricing, marketing practices, technological
innovation and the availability of new and attractive financing plans could
occur at almost any time. Significant action in any of these areas by IBM
or IBM Credit Corporation might materially adversely affect the
Partnership's business or the other manufacturers with whom the General
Partner might negotiate purchase and other agreements. Any adverse effect
on these manufacturers could be reflected in the overall return realized by
the Partnership on equipment from those manufacturers or from IBM. Since it
is anticipated that a substantial majority of the Partnership's equipment
will be manufactured by IBM, the Partnership's ability to lease, re-lease or
sell its equipment may be adversely affected by actions taken by IBM. See
"Risk Factors - Dependence on Manufacturers and IBM."
PRELIMINARY INVESTMENTS
The Partnership does not now own, and has made no commitment to
purchase, any Equipment. The General Partner or its Affiliates may purchase
Equipment prior to the termination of this Offering, which Equipment and the
related leases, if any, to which it is subject would be sold and assigned to
the Partnership after it commences its business operations. See "Conflicts
of Interest - Acquisitions."
It is not possible to determine the date when the net Offering proceeds,
less working capital reserves, will be fully invested in Equipment by the
Partnership or the terms of any purchases of Equipment. The Partnership
will invest the net Offering proceeds prior to the acquisition of Equipment
in short-term, highly liquid investments where there is appropriate safety
of principal, such as United States Treasury Bills.
-31-
<PAGE>
If all of the net proceeds of this Offering are not invested by the
Partnership in Equipment or committed to such investment or otherwise
utilized for proper Partnership purposes prior to the expiration of 12
months from the Closing Date, the net proceeds not so invested, committed,
or set aside as working capital reserves will thereupon be promptly
returned, with a proportionate share of interest at the rate earned by the
Partnership on the investment of such proceeds, to the Limited Partners
based upon their respective numbers of Units and time of purchase. For such
purpose, funds will be deemed to be committed to investment and will not be
returned to the Limited Partners to the extent written agreements in
principle, commitment letters, letters of intent or understanding, option
agreements, or any similar contracts or understandings exist, whether or not
any such investment is ultimately consummated. Funds will also be deemed to
be committed to the extent: (i) any funds may have been reserved to make
contingent payments in connection with any Equipment already acquired,
whether or not any such payments are ultimately made; (ii) as a condition to
obtaining financing the Partnership is required to maintain funds as a
compensating balance; or (iii) the General Partner decides that an addition
to the working capital reserve is necessary in connection with any
Equipment. In the event any such uninvested funds are distributed to the
Limited Partners, such distribution will be treated as a return of capital.
See "Income Tax Considerations - Cash Distributions."
RESERVES
Because the Partnership's leases are expected to be on a "triple-net"
basis, it is anticipated that no permanent reserve for maintenance and
repairs will be established from the Offering proceeds. However, the
General Partner, in its sole discretion, may retain a portion of the
Offering proceeds, Cash Flow and Net Disposition Proceeds available to the
Partnership for maintenance, repairs and working capital. There are no
limitations on the amount of Offering Proceeds, Cash Flow and Net
Disposition Proceeds that may be retained as reserves. Since no reserve
will be established initially, if available Cash Flow of the Partnership is
insufficient to cover the Partnership's operating expenses and liabilities,
it will be necessary for the Partnership to obtain additional funds by
refinancing its Equipment or borrowing.
GENERAL RESTRICTIONS
Under the Partnership Agreement, the Partnership is not permitted, among
other things, to:
(a) invest in junior trust deeds unless received in connection with
the sale of an item of Equipment in an aggregate amount which does not
exceed 30% of value of the assets of the Partnership on the date of the
investment;
(b) invest in or underwrite the securities of other issuers;
(c) acquire any Equipment for Units;
(d) issue senior securities (except that the issuance to lenders of
notes or other evidences of indebtedness in connection with the
financing or refinancing of Equipment or the Partnership's business
shall not be deemed to be the issuance of senior securities);
(e) make loans to any Person, including the General Partner or any
of its Affiliates, except to the extent a Conditional Sales Contract
constitutes a loan;
(f) sell or lease any Equipment to, lease any 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.
-32-
<PAGE>
The General Partner has also agreed in the Partnership Agreement to use
its best efforts to assure that the Partnership shall not be deemed an
"investment company" as such term is defined in the Investment Company Act
of 1940.
The General Partner and its Affiliates may engage in other activities,
whether or not competitive with the Partnership. The Partnership Agreement
provides, however, that neither the General Partner nor any of its
Affiliates may receive any rebate or "give up" in connection with the
Partnership's activities or participate in reciprocal business arrangements
that circumvent the restrictions in the Partnership Agreement against
dealings with Affiliates. See "Conflicts of Interest," "Compensation of
General Partner and Affiliates," and "Management."
-33-
<PAGE>
TRANSFERABILITY OF UNITS
The General Partner anticipates that no public market will develop for
the Units. The Partnership does not intend to list the Units on any
exchange or to permit trading on any over-the-counter market. In addition,
there are substantial restrictions on the transferability of Units.
GENERAL LIMITATIONS
Units cannot be transferred without the consent of the General Partner,
which may be withheld in its absolute discretion. The General Partner
intends to monitor transfers of Units in an effort to ensure that all
transfers will be within certain safe harbors promulgated by the IRS to
furnish guidance regarding publicly traded partnerships. These safe harbors
limit the number of transfers that can occur in any one year. The General
Partner intends to cause the Partnership to comply with the safe harbor that
permits nonexempt transfers and redemptions of Units of up to five percent
of the total outstanding interests 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, may
establish an amount for redemption, generally not to exceed two percent of
the outstanding Units per year, subject to the General Partner's good faith
determination that such redemptions will not (a) cause the Partnership to be
taxed as a corporation under Section 7704 of the Code or (b) impair the
capital or operations of the Partnership. (The Partnership may redeem Units
in excess of the two percent limitation if, in the good faith judgment of
the General Partner, the conditions imposed in the preceding sentence would
remain satisfied.) The redemption price for Units will be 105% of the
selling Limited Partner's Adjusted Capital Contributions attributable to the
Units for sale. All requests for redemption must be made in writing and
must be on file as of the record date for such redemption. The General
Partner will maintain a master list of requests for redemption with priority
being given to Units owned by estates, followed by IRAs and Qualified Plans.
All other requests will be considered in the order received. Redemption
requests made by or on behalf of Limited Partners who are not affiliated
with the General Partner or its Affiliates will be given priority over those
made by Limited Partners who are affiliated with the General Partner or its
Affiliates. All redemption requests will remain in effect until and unless
canceled, in writing, by the requesting Limited Partner(s).
The Partnership will accept redemption requests beginning 30 months
following the termination of the Offering. There will be no limitations on
the period of time that a redemption request may be pending prior to its
being granted. Limited Partners will not be required to hold their interest
in the Partnership for any specified period prior to their making a
redemption request.
In order to make a redemption request, Limited Partners will be required
to advise the General Partner in writing of such request. Upon receipt of
such notification, the Partnership will provide detailed forms and
instructions to complete the request.
Investors should note that the redemption price is based on a percentage
of the selling Limited Partner's Adjusted Capital Contributions and is,
therefore, arbitrary and not calculated with reference to the fair market
value of a Unit.
For tax consequences relating to the redemption of Units, see "Income
Tax Considerations - Disposition of Units - In General."
-34-
<PAGE>
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 will be required to pay the Partnership up to $50 for each transfer to
cover the Partnership's cost of processing the transfer application and will
take such other actions and execute such other documents as may be
reasonably requested by the General Partner. There will be no charge for
re-registration of a certificate in the event of a marriage, divorce, death,
or transfer to a trust so long as the transfer is not a result of a sale of
the Units.
In addition, the following restrictions will apply to each transfer: (i)
no transfer may be made if it would cause 25% or more of the outstanding
Units to be owned by Benefit Plans; and (ii) no transfer will be permitted
unless the transferee obtains such governmental approvals as may reasonably
be required by the General Partner, including without limitation, the
written consents of the Pennsylvania Securities Commissioner and of any
other state securities agency or commission having jurisdiction over the
transfer.
-35-
<PAGE>
ALLOCATIONS AND DISTRIBUTIONS
BETWEEN THE GENERAL PARTNER AND THE LIMITED PARTNERS
Cash distributions, if any, will be made quarterly beginning with the
first quarter after the Initial Closing on December 31, March 31, June 30,
and September 30 of each year. Cash distributions will be made after the
payment of expenses of the Partnership, including the payment of fees to the
General Partner. Distributions will be made 99% to the Limited Partners and
one percent to the General Partner until the Limited Partners have received
an amount equal to their Capital Contributions plus the Cumulative Return;
thereafter, cash distributions will be made 90% to the Limited Partners and
10% to the General Partner. Distributions made in connection with the
liquidation of the Partnership or a Partner's Units will be made in
accordance with the Partner's positive Capital Account balance as determined
under the Partnership Agreement and Treasury Regulations.
The Cumulative Return is calculated on the Limited Partners' Adjusted
Capital Contributions for their Units. The Adjusted Capital Contributions
will initially be equal to the amount paid by the Limited Partners for their
Units. If distributions at any time exceed the Cumulative Return, the
Adjusted Capital Contributions will be reduced by the excess, decreasing the
base on which the Cumulative Return is calculated. Thus, for example
(without taking into account the effect of compounding), on a $100
investment, a $12 distribution in year one would result in a $2 reduction in
Adjusted Capital Contribution, leaving a $98 base on which the 10% return
would be calculated in year two. The $2 reduction consists of $2 in
distributions in excess of that required to satisfy the Cumulative Return
requirement for year one.
If the proceeds resulting from the sale of any Equipment are reinvested
in Equipment, sufficient cash will be distributed to the Partners to pay the
additional federal income tax resulting from such sale for a Partner in a
39.6% federal income tax bracket or, if lower, the maximum federal income
tax rate in effect for individuals for such taxable year.
Generally, the General Partner will be allocated Net Profits equal to
its cash distributions (but not less than one percent of Net Profits) and
the balance will be allocated to the Limited Partners. Net Profits arising
from transactions in connection with the termination or liquidation of the
Partnership will be allocated in the following order: (1) First, to each
Partner in an amount equal to the negative amount, if any, of his Capital
Account; (2) Second, an amount equal to the excess of the proceeds from the
liquidation or termination which would be distributed to the Partners as
Operating Distributions over the aggregate Capital Accounts of all the
Partners, to the Partners in proportion to their respective shares of such
excess, and (3) third, with respect to any remaining Net Profits, to the
Partners in the same proportions as if the distributions were Operating
Distributions.
Net Losses, if any, will in all cases be allocated 99% to the Limited
Partners and one percent to the General Partner.
Net Profits and Net Losses will be computed without taking into account,
in each taxable year of the Partnership, any items of income, gain, loss or
deduction required to be specially allocated pursuant to Section 704(b) of
the Code and the Treasury Regulations promulgated thereunder. No Limited
Partner will be required to contribute cash to the capital of the
Partnership in order to restore a closing Capital Account deficit, and the
General Partner has only a limited deficit restoration obligation under the
Partnership Agreement.
-36-
<PAGE>
AMONG THE LIMITED PARTNERS
Except during the Offering Period, Cash Available for Distribution, Net
Profits and Net Losses allocable to the Limited Partners will be apportioned
among and distributed to them solely with reference to the number of Units
owned by each as of the Record Date for each such distribution. During the
Offering Period, Cash Available for Distribution, Net Profits and Net Losses
allocable to the Limited Partners will be apportioned among and distributed
to them with reference to both (i) the number of Units owned by each as of
each Record Date and (ii) the number of days since the previous Record Date
(or, in the case of the first Record Date, the commencement of the Offering
Period) that the Limited Partner has owned the Units. A different
convention for allocations and distributions, based upon the number of days
which each Limited Partner owned Units during the period, will be utilized
during the Offering Period to provide greater distributions to those
Partners who have held their Units for a longer period.
If some Limited Partners are admitted to the Partnership after others,
those Limited Partners admitted later may receive a smaller portion of each
item of the Partnership's Net Profits and Net Losses than the Limited
Partners who were admitted earlier. Nevertheless, those Limited Partners
still will be obligated to make the same Capital Contributions to the
Partnership for their interests as the Limited Partners who were admitted
previously. In addition, where a Limited Partner transfers Units during a
taxable year, the Limited Partner may be allocated Net Profits for a period
for which such Limited Partner will not receive a corresponding cash
distribution.
-37-
<PAGE>
MANAGEMENT
GENERAL
The General Partner, a wholly-owned subsidiary of Commonwealth of
Delaware, Inc., a Delaware corporation, which is in turn a wholly-owned
subsidiary of Com Cap Corp., was incorporated in Pennsylvania on August 26,
1993. The General Partner previously sponsored, and currently manages, one
other public equipment leasing partnership. The principal business office
of the General Partner is located at 1160 West Swedesford Road, Berwyn,
Pennsylvania 19312, and its telephone number is 610-647-6800. The General
Partner will manage and control the affairs of the Partnership and will have
sole responsibility for all aspects of the Partnership's operations. The
officers of the General Partner will devote such time to the affairs of the
Partnership as in the opinion of the General Partner is necessary to enable
it to perform its function as General Partner. It is not expected that the
officers of the General Partner will be required to spend their full time in
meeting their obligations to the Partnership.
The directors and officers of the General Partner and key employees of
Com Cap Corp. are as follows:
NAME TITLE
---- -----
George S. Springsteen Chairman of the Board of Directors and
President of the General Partner and Com
Cap Corp.
David A. Kintzer Vice President, Chief Financial Officer and
Secretary of the General Partner and Com Cap
Corp.
Lewis M. Baum Assistant Vice President - Finance of the
General Partner and Com Cap Corp.
Kathleen S. Enscoe Controller of the General Partner and Com Cap
Corp.
Gregory M. Lorenz Vice President of Com Cap Corp.
George S. Springsteen, age 59, 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.
David A. Kintzer, CPA, age 35, is Vice President, Chief Financial
Officer, and Secretary of both Com Cap Corp. and the General Partner and has
been employed at Com Cap Corp. since 1991. Mr. Kintzer also serves as Vice
President, Chief Financial Officer, and Secretary of the general partners or
controlling entities of several prior programs sponsored by Com Cap Corp.
with objectives similar to the Partnership's, as well as other Affiliates of
Com Cap Corp. From 1984 to 1990, Mr. Kintzer was employed by Continental
Computer
-38-
<PAGE>
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.
Lewis M. Baum, CPA, age 28, is Assistant Vice President, Finance of the
General Partner and Com Cap Corp. and certain of its subsidiaries. Mr. Baum
is an active member of the Equipment Leasing Association. From 1990 to
1993, Mr. Baum was employed with the public accounting firm of Ernst & Young
LLP and specialized in audits of financial management companies including as
a Senior Auditor. Mr. Baum is a member of both the American Institute of
Certified Public Accountants and the Pennsylvania Institute of Certified
Public Accountants and received a Bachelor of Arts degree from Syracuse
University in 1990.
Kathleen S. Enscoe, age 29, is Controller of the General Partner and Com
Cap Corp. and certain of its subsidiaries where she has been employed since
1992. Ms. Enscoe is an active member of the Equipment Leasing Association.
From 1988 to 1992, Ms. Enscoe was employed as a staff accountant in the
financial reporting department of WWF Paper Corporation. Ms. Enscoe
received a Bachelor of Science Business Administration degree in 1988 from
Geneva College with dual majors in accounting and business administration.
Gregory M. Lorenz, age 31, is Vice President of Com Cap Corp. and has
been employed by Com Cap Corp. since April of 1994. From 1985 to 1993,
Mr. Lorenz was employed by Daley Marketing Corp. where he served as Vice
President of Marketing and Director of Sales and Marketing. Mr. Lorenz is a
member of the Equipment Leasing Association and received an Associates of
Arts degree from Orange Coast College in 1984.
The directors and officers of the General Partner are required to spend
only such time on the Partnership's affairs as is necessary in the sole
discretion of the directors of the General Partner for the proper conduct of
the Partnership's business. A substantial amount of time of such directors
and officers is expected to be spent on matters unrelated to the
Partnership, particularly after the Partnership's investments have been
selected. Under certain circumstances, such directors and officers are
entitled to indemnification from the Partnership. See "Conflicts of
Interest" and "Fiduciary Responsibility of the General Partner."
PRIOR PERFORMANCE
The General Partner has previously sponsored one Equipment leasing
program, Commonwealth Income & Growth Fund I, a limited partnership, which
registered securities under the Securities Act of 1933 and which has
investment objectives substantially identical to the Partnership. As of
February 2, 1995 this program had raised a total of $10,137,683 from
investors and had acquired from offering proceeds $7,130,380 in equipment,
all of which was computer peripheral equipment. All of the equipment was
new when acquired. None of the equipment has been sold.
Com Cap Corp. has conducted single investor and leveraged lease
transactions involving a variety of types of Equipment. These transactions
involved arranging for the investment by single investors in Equipment and the
simultaneous lease of the Equipment on a single transaction basis. The
investment objectives of these transactions were to provide tax deductions and
cash distributions. In addition, in 1984, Com Cap Corp. arranged for end user
leases of Equipment in a leveraged lease co-ownership program involving the
private sale of partnership interests to 10 investors. The investment
objectives of that program were to provide tax deductions and cash
distributions.
-39-
<PAGE>
Affiliates of Com Cap Corp. have also sponsored 13 prior private
equipment leasing programs with investment objectives similar to the
Partnership. As of December 31, 1994, these programs raised a total of
$27,612,500 from investors in private offerings of securities. Ten of the
programs were structured as limited partnerships and three were structured
as Delaware business trusts. Interests in the programs were purchased by an
aggregate of 781 investors. As of December 31, 1994, the programs had
acquired from original offering proceeds $22,269,308 in equipment, all of
which was computer peripheral equipment. Approximately 95% of the equipment
was new when acquired by the program and approximately five percent was
used, and approximately 60% of the equipment has been sold. All of these
programs are currently performing substantially in accordance with the
prospective financial statements which were included in the offering
document applicable to each such program except for two programs which are
currently performing below their projected results due to an equipment
acquisition which did not produce the expected residual value on sale. Com
Cap Corp. has outstanding demand promissory notes in the amount of
$2,761,250 to the general partners or trustees of its prior private programs.
The General Partner will provide at no cost, upon the request of an
interested investor, a copy of the most recent Annual Report on Form 10-K
filed with the Securities and Exchange Commission for Commonwealth Income &
Growth Fund I.
See the prior performance tables attached as "Appendix II" for further
information concerning these prior public and private programs.
The following is a summary of equipment acquired between January 1, 1992
and January 1, 1995 by prior programs which were sponsored by the General
Partner:
<TABLE>
<CAPTION>
QUANTITY OF
PERIPHERAL COST OF
EQUIPMENT EQUIPMENT PERCENT
PROGRAM NAME ACQUIRED ACQUIRED LEVERAGE
- ------------------------------------------------ ----------- -------- --------
<S> <C> <C> <C>
Commonwealth 1987-1 Equipment Income Fund,
Limited Partnership . . . . . . . . . . . . . . 0 0 0%
Commonwealth 1988-1 Equipment Income Fund,
Limited Partnership . . . . . . . . . . . . . . 0 0 0%
Commonwealth Equipment Income Fund No. 3,
Limited Partnership . . . . . . . . . . . . . . 31 $2,564,958 18%
Commonwealth Equipment Income Fund No. 4,
Limited Partnership . . . . . . . . . . . . . . 25 $1,955,688 24%
Commonwealth Equipment Income Fund No. V,
Limited Partnership . . . . . . . . . . . . . . 91 $3,863,231 27%
Commonwealth Equipment Income Private Fund I,
Limited Partnership . . . . . . . . . . . . . . 25 $2,537,386 27%
Commonwealth Equipment Income Fund VI,
Limited Partnership . . . . . . . . . . . . . . 112 $4,838,398 33%
Commonwealth Equipment Income Fund VII,
Limited Partnership . . . . . . . . . . . . . . 132 $4,165,843 29%
Commonwealth Equipment Income Private Fund II,
Limited Partnership . . . . . . . . . . . . . . 31 $2,611,063 30%
Commonwealth Equipment Income Trust VIII. . . . . 163 $5,843,170 26%
Commonwealth Equipment Income Trust IX. . . . . . 131 $5,762,945 31%
Commonwealth Equipment Income Trust X . . . . . . 81 $6,814,064 29%
Commonwealth Equipment Income Private Fund III,
Limited Partnership . . . . . . . . . . . . . . 14 $1,809,851 16%
Commonwealth Income & Growth Fund I . . . . . . . 44 $7,059,207 23%
</TABLE>
-40-
<PAGE>
INCOME TAX CONSIDERATIONS
SUMMARY
The following is a summary of relevant federal income tax considerations
concerning an investment in the Partnership. This summary was prepared, and
the related opinions were given by Blank, Rome, Comisky & McCauley, counsel
to the Partnership ("Counsel"), and is based upon the Internal Revenue Code
of 1986, as amended and in effect as of the date of this Prospectus (the
"Code"), applicable Treasury Regulations promulgated thereunder, rulings,
procedures, and other pronouncements published by the Internal Revenue
Service ("IRS"), court decisions, the assumption that the Partnership will
operate its business as described in the Prospectus, and certain
representations by the General Partner. A more detailed tax analysis,
including items not discussed in this summary, follows the Summary. Counsel
has reviewed the following summary and detailed analysis and is of the
opinion that the descriptions of the law and the legal conclusions contained
therein are correct in all material respects, and that the summary and
detailed analysis do not omit any material provision with respect to the
matters covered.
CLASSIFICATION AS A "PARTNERSHIP." Counsel has rendered its opinion
that the Partnership will be classified as a partnership for federal income
tax purposes. Counsel's opinion is based on certain qualifications and on
representations of the General Partner, and is not binding on the IRS. See
"Income Tax Considerations - General" and "Income Tax Considerations -
Classification as a Partnership."
TAXATION OF LIMITED PARTNERS. A partnership is not subject to federal
income taxes. Rather, each Partner will be required to take into account in
computing such Partner's regular and alternative minimum tax items of
income, gain, loss, deduction, and credit derived by the Partnership for
each taxable year, irrespective of whether the Partner has received or will
receive any cash distributions relating to such taxable year. In addition,
any distributions in excess of a Limited Partner's adjusted tax basis in his
Units will cause such Limited Partner to recognize such excess as taxable
income. See "Income Tax Considerations - Certain Principles of Partnership
Taxation."
INCOME RECOGNITION. The Partnership's tax returns will be prepared
using the accrual method of accounting. Under such method, the Partnership
will include in income items such as rentals and interest as and when earned
by the Partnership, whether or not received. In addition, certain of the
Partnership's Equipment leases may be subject to Section 467 of the Code
which could result in a Limited Partner receiving increased allocations of
taxable income (or reduced allocations of loss) in earlier years without any
increase in cash available for distribution until subsequent years. See
"Income Tax Considerations - Certain Principles of Partnership Taxation -
Timing of Income Recognition."
ALLOCATION OF PROFITS AND LOSSES. Counsel has opined that the tax
allocation provisions in the Partnership Agreement will comply with Code
Section 704(b) and the Regulations promulgated thereunder and each Limited
Partner's distributive share of Net Profits and Net Losses will be
determined and allocated substantially in accordance with the Partnership
Agreement. Counsel's opinion is based on certain qualifications and
representations of the General Partner, and is not binding on the IRS. See
"Income Tax Considerations - Allocation of Partnership Income, Gains, Losses,
Deductions and Credits."
PASSIVE ACTIVITY INCOME AND DEDUCTIONS. Counsel has opined that the
income, gains, losses, deductions and credits derived from the Partnership's
leasing activities will be subject to the passive loss rules. Counsel's
opinion is based on certain qualifications and representations of the
General Partner, and is not binding on the IRS. Counsel's opinion does not
apply to any portion of Partnership income attributable to (i) the
investment of Partnership funds in liquid investments, such as certificates
of deposit and money market accounts, prior to the purchase of Equipment and
distributions of Net Cash Flow to the Partners, (ii) the investment, in
interest-bearing accounts or otherwise, of amounts held by the Partnership
as working capital, security deposits, or in reserve, or (iii) income from
Equipment with respect to which the Partnership is determined not to be the
owner for federal income tax purposes. Such income will constitute, for
purposes of Section 469 of the Code
-41-
<PAGE>
and the Regulations promulgated thereunder, portfolio income which cannot be
offset by losses from passive activities.
LIMITATIONS ON DEDUCTION OF LOSSES. There are certain limitations on
the ability of a Limited Partner to utilize his distributive shares of
losses from the Partnership to offset income from other sources. See
"Income Tax Considerations - Limitations on Utilization of Partnership
Losses."
DEDUCTIBILITY OF FEES. The Partnership intends to pay, and deduct,
various fees including fees paid to the General Partner. The determination
of the nature and deductibility of all or a portion of such fees involves a
number of factual matters relating to the nature and extent of the services
provided. Therefore, it is not possible to predict whether all or any
portion of such fees will be challenged by the IRS. See "Income Tax
Considerations - Fees and Reimbursements to the General Partner and
Affiliates."
OWNERSHIP OF LEASED EQUIPMENT. In order for the Partnership and Limited
Partners to be entitled to depreciation deductions, the leases of Equipment
must be treated as leases rather than sales or financings for federal income
tax purposes. The Partnership intends to structure each lease transaction
so that the lease will be treated as a lease rather than a sale or financing
arrangement for federal income tax purposes. The Partnership, however, may
also enter into Full Payout Net Leases in which the Partnership may not be
treated as the owner of such Equipment for federal income tax purposes or
sell Equipment under Conditional Sales Contracts, in which case the
Partnership will not be treated as the owner of such Equipment for federal
income tax purposes. In this event, the Partnership and the Partners will
not be entitled to depreciation or cost recovery deductions with respect to
such Equipment. See "Income Tax Considerations - Ownership of Equipment."
SALE OR EXCHANGE OF PARTNERSHIP EQUIPMENT. The Partnership's gain or
loss on sale or disposition of an item of Equipment will equal the
difference between sale proceeds (including the amount of any indebtedness
to which the Equipment is subject) and the Partnership's adjusted tax basis
in the Equipment. In certain circumstances, the amount of tax payable by a
Limited Partner on his share of gain on sale of Equipment may exceed his
share of cash proceeds therefrom. See "Income Tax Considerations - Sale of
Equipment."
DISPOSITION OF UNITS. On sale or disposition of Units, a Limited
Partner will recognize gain equal to the excess, if any, of any cash and the
fair market value of property received (plus the Limited Partner's share of
any Partnership liabilities, including nonrecourse liabilities allocable to
such Limited Partner) over the Limited Partner's adjusted tax basis in the
Units. Such gain will be taxed at ordinary income tax rates to the extent
of depreciation recapture. In certain circumstances, the amount of tax
payable by a Limited Partner on the gain realized from a sale or disposition
of his Units may exceed the cash received therefrom. See "Income Tax
Considerations - Disposition of Units."
TAX ELECTIONS. The Partnership is not expected to file an election
under Section 754 of the Code. The absence of such election may have an
adverse effect on the marketability and sale price of Units. See "Income
Tax Considerations - No Section 754 Election."
INVESTMENT BY TAX EXEMPT ENTITIES. The Partnership will generate
unrelated business taxable income to Limited Partners who are tax exempt
entities, including qualified employee pension or profit sharing trusts or
individual retirement accounts ("Tax Exempt Entities"), with the result that
the Partnership income will be subject to tax to the extent that the Tax
Exempt Entity's gross unrelated business taxable income from all sources
exceeds all deductions attributable to the unrelated business taxable income
plus $1,000. See "Income Tax Considerations - Investment by Tax Exempt
Entities."
ALTERNATIVE MINIMUM TAX. The tax preference items and adjustments under
the alternative minimum tax that may be present in the Partnership include
the excess of depreciation deductions claimed over deductions that would be
allowable if the Equipment were subject to depreciation over its asset
depreciation range class
-42-
<PAGE>
life using the 150% declining balance method, switching to the straight-line
method in later years. See "Income Tax Considerations - Taxes - Alternative
Minimum Tax."
FOREIGN TAX CONSIDERATIONS. Because the Partnership may acquire
Equipment which is operated outside the United States, Limited Partners may
be required to file returns and pay taxes in foreign jurisdictions. Limited
Partners who pay foreign tax as a result of Partnership operations may be
entitled to a foreign tax credit or deduction to reduce their United States
tax liability. See "Income Tax Considerations - Partnership Tax Returns and
Tax Information - Foreign Tax Considerations."
DISSOLUTION OF PARTNERSHIP. Upon dissolution of the Partnership, a
Limited Partner will recognize taxable income if the cash distributed to the
Limited Partner (including the reduction in the Limited Partner's share of
Partnership liabilities) exceeds the Limited Partner's adjusted tax basis in
his Units. See "Income Tax Considerations - Certain Principles of
Partnership Taxation."
GENERAL
Subject to the qualifications and assumptions set forth herein, and
certain representations of the General Partner, counsel has opined that
(i) the Partnership will be classified as a partnership for federal income tax
purposes, (ii) with certain exceptions, Net Profits, Net Losses, and credits
derived from the Partnership will be subject to the passive loss rules,
(iii) the allocations of Net Profits and Net Losses in the Partnership
Agreement will be respected for federal income tax purposes, and (iv) Limited
Partners will be considered "at-risk" for purposes of Section 465 of the Code
in any one year with respect to Equipment placed in service in the same
taxable year in an amount equal to (A) the Capital Contributions of such
Limited Partner (provided that funds for such contributions are not from
borrowed amounts), less (B) the sum of (1) the total net losses with respect to
such Equipment which have been allowed as deductions to the Limited Partner
under the at-risk rules and (2) cash distributions received by the Limited
Partner, plus (C) the Limited Partner's distributive share of total Net Profits
with respect to such Equipment of the Partnership. Counsel's opinion is not
binding on the IRS.
Neither the General Partner, the Partnership, nor Counsel can guarantee
that any federal income tax advantages described in this summary will be
available. An opinion of Counsel represents only such counsel's best legal
judgment, and has no binding effect or official status of any kind, so that
no assurance can be given that the opinions of Counsel would be sustained by
a court, if contested, or that legislative or administrative changes or court
decisions may not be forthcoming which would require modifications of the
statements and conclusions expressed herein. Except for the opinions
specifically addressed herein, Counsel has not opined as to the probable
outcome on the merits of any issue discussed below. Final disallowance of
all or any portion of the Partnership's federal income tax advantages would
of course adversely affect an investment in the Partnership.
Counsel will not prepare or review the Partnership's income tax
information returns, which will be prepared by management and independent
accountants for the Partnership. The Partnership has made and will make a
number of decisions on such tax matters as the expensing or capitalizing of
particular items, the proper period over which capital costs may be
depreciated or amortized and many other similar matters. Such matters are
handled by the Partnership, often with the advice of independent accountants
retained by the Partnership, and are usually not reviewed with Counsel.
The following discussion is not intended as a substitute for careful tax
planning by prospective investors. The income tax consequences of an
investment in a partnership such as the Partnership are often uncertain and
complex and will not be the same for all investors. Details of significance
to a particular taxpayer may not be present, as it is impractical to set
forth in a discussion of acceptable length all aspects of federal income tax
law that may be relevant to an investment in the Partnership. The discussion
below considers the federal income tax considerations associated with an
investment in the Partnership by individuals who are citizens of the United
States or resident aliens and is not intended to deal with matters which may
be relevant
-43-
<PAGE>
to other investors, such as corporations, partnerships or trusts.
The discussion, however, does describe some, but not all, of the material
federal income tax considerations associated with an investment in the
Partnership by non-resident alien and foreign corporations and Keogh plans
and pension and profit-sharing plans qualifying under Section 401(a) of the
Code (collectively, "Qualified Plans") and individual retirement accounts
described in Section 408 of the Code. A corporate investor should be aware
that the tax consequences of its investment in the Partnership will differ in
several material respects from those applicable to individuals.
FOR THE FOREGOING REASONS, EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT
THE INVESTOR'S OWN TAX ADVISOR WITH RESPECT TO THE FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES ARISING FROM AN INVESTMENT IN THE PARTNERSHIP AS
THEY RELATE TO THE INVESTOR'S OWN TAX SITUATION.
CLASSIFICATION AS A PARTNERSHIP
It is the opinion of Counsel that the Partnership will be classified as
a partnership, and not as an association taxable as a corporation, for
federal income tax purposes. This opinion is based upon: (i) existing
federal income tax law, which is presently subject to differing
interpretations; (ii) continuing compliance with the conditions set forth
below; and (iii) certain representations by the General Partner set forth
below. Counsel's opinion is not binding on the IRS.
The Partnership has not requested a ruling from the IRS that the
Partnership will be treated as a partnership for federal income tax purposes
and does not intend to request such a ruling. An opinion of counsel has no
binding effect or official status of any kind, and no assurance can be given
that the conclusions reached in Counsel's opinion would be sustained by a
court if contested by the IRS. Thus, in the absence of a ruling from the
IRS, there can be no assurance that the IRS will not treat the Partnership as
a corporation. If the IRS were to prevail on this issue, the Limited Partners
would be deprived of the potential tax benefits associated with the ownership
of Units.
Section 301.7701-2 of the Treasury Regulations sets forth criteria for
determining whether an organization will be treated as an organization
taxable as a corporation rather than as a partnership. Generally, an
unincorporated organization will be classified as a partnership if it lacks
two or more of the following four corporate characteristics:
(i) centralization of management; (ii) continuity of life; (iii) free
transferability of interests; and (iv) limited liability.
It is the opinion of Counsel that the Partnership lacks the corporate
characteristics of "continuity of life" and "free transferability of
interests" as those terms are defined in the Treasury Regulations; but that
the Partnership may possess the corporate characteristic of "centralization
of management." Counsel also believes that while the General Partner is not
anticipated to meet the "net worth" requirements for purposes of obtaining an
advance ruling from the IRS with respect to its status as a partnership for
federal tax purposes, the General Partner will not be deemed to be "merely a
'dummy' acting as an agent for the Limited Partners" under Treasury
Regulation Section 301.7701-2(d)(2), and thus the Partnership will not be
deemed to have the corporate characteristic of limited liability. SEE
ZUCKMAN V. U.S., 524 F.2d 729 (Ct. Cl. 1975); LARSON V. COMMISSIONER, 66 T.C.
159 (1976), ACQ., 1979-1 C.B. 1. Although the Partnership has certain other
corporate attributes (E.G., it has the power to hold title to property as an
entity and may raise funds from investors through the sale of its Units),
Counsel has determined that it lacks at least two of the four major corporate
characteristics identified in the regulations. Therefore, subject to certain
qualifications and assumptions discussed herein, and certain representations
of the General Partner, it is the opinion of Counsel that the Partnership
will be classified and treated as a partnership for federal income tax
purposes. Counsel's opinion is not binding on the IRS.
Counsel's opinion is subject to continuing compliance throughout the
term of the Partnership with the following conditions: (i) that Units will
not be transferable without the consent of the General Partner which, may be
withheld in its absolute discretion; and (ii) that the General Partner will
prohibit any transfer of Units which, in the General Partner's good faith
judgment, will result in more than five percent of capital or profits
-44-
<PAGE>
in the Partnership being sold or otherwise disposed of in any one taxable year
in violation of the five percent safe harbor set forth in IRS Notice 88-75.
Counsel's opinion takes into account Section 7704 of the Code which
provides, with certain exceptions which are not relevant to this discussion,
that "publicly traded partnerships" are taxable as corporations.
Section 7704(b) of the Code defines the term "publicly traded partnership" to
mean any partnership if: (i) interests in the partnership are traded on an
established securities market, or (ii) interests in the partnership are
readily tradable on a secondary market (or the substantial equivalent thereof).
The legislative history of Code Section 7704 provides that a secondary market
for interests in a partnership or the substantial equivalent thereof exists if
investors are readily able to buy, sell or exchange their partnership interests
in a manner that is comparable, economically, to trading on established
securities markets.
A secondary market is generally indicated by the existence of a person
standing ready to make a market in the interests. The substantial equivalent
of a secondary market will be deemed to exist either: (i) if the holders of
interests in the partnership have a readily available, regular, and ongoing
opportunity to sell or exchange their interests through a public means of
obtaining or providing information of offers to buy, sell, or exchange
interests, or (ii) buyers and sellers have the opportunity to buy, sell, or
exchange interests in the partnership in a time frame that a market-maker
would provide and prospective buyers have similar opportunities to acquire
such interests. The legislative history of Section 7704 also indicates that
a regular plan of redemptions or repurchases by a partnership may constitute
public trading where holders of interests have readily available, regular,
and ongoing opportunities to dispose of their interests.
The Partnership Agreement provides that no transfer of any Unit "will be
recognized or effective for any purpose to the extent it is determined by the
General Partner to be effectuated through an established securities market or
a secondary market (or the substantial equivalent thereof), within the
meaning of Section 7704 of the Code, so as to adversely affect the tax status
of the Partnership as a partnership rather than as an association taxable as
a corporation;" the General Partner will also prohibit any transfer of Units
which, in the General Partner's good faith judgment, will cause the
Partnership to fall outside of the safe harbors of IRS Notice 88-75,
discussed below. See "Risk Factors - Limited Transferability of Units."
In IRS Notice 88-75, 1988-2 C.B. 386, the IRS lists certain types of
limited, non-public transfers which will be disregarded in determining
whether a partnership is publicly traded ("Exempt Transfers"). Recognizing
that these Exempt Transfers will not result in the Partnership being deemed
publicly traded, the General Partner anticipates permitting six categories of
these Exempt Transfers. See "Transferability of Units - Exempt Transfers."
In addition to providing for the Exempt Transfers, IRS Notice 88-75
states that partnership interests will not be deemed "readily tradable on a
secondary market (or the substantial equivalent thereof)" if any one of
several safe harbors provided for in that Notice is satisfied. One of these
is the "five percent safe harbor." It provides that a secondary market or
its equivalent will not exist if the sum of the interests in partnership
capital or profits attributable to those partnership interests that are sold,
redeemed, or otherwise disposed of during the partnership's taxable year does
not exceed five percent of the total interests in partnership capital or
profits. The six categories of Exempt Transfers do not count towards the
five percent ceiling. In determining whether the Partnership satisfies the
five percent safe harbor, redemption of Units pursuant to Article 12 of the
Partnership Agreement will be counted.
While the General Partner will use its best efforts to limit the type
and number of transfers of Units to those which will allow the Partnership to
remain within the five percent safe harbor, the General Partner does not
warrant that the Partnership will satisfy this safe harbor during each of its
taxable years. It is conceivable that transfers of Units could occur which
would cause the Partnership to fall outside the safe harbor. In this regard,
IRS Notice 88-75 states that failure to meet any of the safe harbors will not
create a presumption that a secondary market or its equivalent exists for
partnership interests. This Notice, however, remains the IRS' only
promulgation of official guidance under Code Section 7704 to date. No
assurances can
-45-
<PAGE>
be offered that, if the amount and type of trading in the Units were to fall
outside the safe harbor, the IRS would not claim publicly traded partnership
status with respect to the Partnership.
If for any reason the Partnership were treated for federal income tax
purposes as a corporation, the Partnership's income, deductions and credits
would be reflected only on its income tax return rather than being passed
through to Limited Partners, and the Partnership would be required to pay
income tax at corporate tax rates on any net income. Any amounts available
(after corporate taxes) for distribution to the Limited Partners would be
treated as dividends to the extent of current or accumulated earnings and
profits. In addition, distributions from the Partnership would be classified
as portfolio income rather than passive activity income and thus would not be
eligible to be offset by passive activity losses attributable to the
Partnership or other activities giving rise to passive losses. See "Income
Tax Considerations - Limitations on Utilization of Partnership Losses -
Passive Activity Losses Limitations."
CERTAIN PRINCIPLES OF PARTNERSHIP TAXATION
GENERAL. A partnership is not subject to federal income tax, but is
required to file a partnership information tax return each year. Each
Limited Partner will be required to take into account, in computing the
Limited Partner's federal income tax liability, the Limited Partner's
distributive share (as determined by the Partnership Agreement and reported
on Schedule K-1 to Form 1065) of all items of Net Profits, Net Losses, credit
and tax preference of the Partnership for any taxable year of the Partnership
ending within or without the taxable year of the Limited Partner without
regard to whether the Limited Partner has received or will receive any cash
distributions from the Partnership. Thus, a Limited Partner may be subject
to tax if the Partnership has net income even though no corresponding cash
distribution is made. To the extent a Limited Partner's tax liability
attributable to his investment in the Partnership exceeds his cash
distributions from the partnership in any year, such Partner will be required
to pay the excess tax liabilities from other sources.
Pursuant to Code Section 731, any cash received by a Limited Partner
from the Partnership in his capacity as a Partner will generally not cause
recognition of taxable income (or tax loss) for federal income tax purposes.
Instead, such distributions will generally reduce the Limited Partner's basis
in his Units (but not below zero). However, cash distributions in excess of
a Limited Partner's adjusted basis in his Units will result in the
recognition of taxable income to the extent of any such excess. It should
also be noted that pursuant to a recent amendment to the Code, the fair
market value of certain actively traded marketable securities, as defined in
Section 731(c) ("Marketable Securities") distributed by the Partnership, if
any exist, will, under certain circumstances, be treated as cash for purposes
of the distribution rules described above. It is not anticipated, however,
that the Partnership will make any distributions of Marketable Securities to
its Partners. Any taxable income recognized upon such distributions will
generally be characterized as capital gain income and will be long-term or
short-term depending upon the Limited Partner's holding period for his Units;
however, to the extent that the gain recognized is with respect to Marketable
Securities that are either "substantially appreciated inventory items" or
"unrealized receivables" within the meaning of Section 751 of the Code (see
generally, "Income Tax Considerations - Disposition of Units"), all or a
portion of such gain may be taxed to the distributee Partner as ordinary
income. With respect to a Partner subject to the "at risk" rules, if the
Partner's share of Partnership losses or distributions reduces his "at risk"
amount to zero, subsequent distributions of cash or other property to him
will cause him generally to recapture as ordinary income an amount equal to
the Partnership losses previously deducted by him to the extent of such
distributions. The gain realized on a non-pro rata distribution to a Limited
Partner may be taxed to the Limited Partner as ordinary income to the extent
attributable to the Limited Partner's share of depreciation recapture, other
"unrealized receivables" and inventory that has substantially appreciated in
value. See "Cost Recovery and Depreciation - Recapture of Cost Recovery
Deductions" and "Disposition of Units" below. No loss will be recognized by
a Limited Partner upon distributions, other than a loss recognized upon a
distribution in liquidation of his Partnership interest. The treatment and
the potential restrictions on the use of Partnership losses is discussed
below. See "Income Tax Considerations - Limitations on Utilization of
Partnership Losses.
-46-
<PAGE>
A Limited Partner's distributive share of any taxable income generated
by the Partnership will not be deemed to be "net earnings from self
employment." Accordingly, such income will not be subject to the tax imposed
on self-employed persons by Sections 1401 through 1403 of the Code, commonly
referred to as "social security taxes." Prospective investors who receive
social security benefits should be aware that, although income generated by
the Partnership will not be deemed to be "net earnings from self employment,"
such income will be included in a Limited Partner's "modified adjusted gross
income" under Section 86 of the Code for purposes of determining whether a
Limited Partner's social security benefits, if any, are subject to taxation.
TIMING OF INCOME RECOGNITION. The Partnership's tax returns will be
prepared using the accrual method of accounting. Under the accrual method,
the Partnership will recognize as income items such as interest and rentals
as and when earned by the Partnership whether or not they are received. In
certain circumstances, where a lease provides for varying rental payments,
increasing in the later years of the lease ("step rentals"), Section 467 of
the Code requires the lessor to take the rentals into income as if the rent
accrued at a constant level rate. This provision applies to sale-leaseback
transactions. An additional consequence of the application of Section 467
would be a conversion of a portion of the Partnership's rental income
(passive) from such lease to interest income (portfolio). If step rentals
are provided for in a lease, the General Partner anticipates that the lease
will fall within one of the exceptions to such provision and, therefore, the
Partnership should recognize such income as it is earned under the lease
rather than at a constant level rate as otherwise provided by Section 467.
ALLOCATION OF PARTNERSHIP INCOME,
GAINS, LOSSES, DEDUCTIONS AND CREDITS
IN GENERAL. Cash distributions, if any, will be made quarterly, 99% to
the Limited Partners and one percent to the General Partner until the Limited
Partners have received an amount equal to $20 per Unit plus their 10%
cumulative compounded Cumulative Return; thereafter, cash distributions will
be made 90% to the Limited Partners and 10% to the General Partner.
Distributions in redemption of a Partner's Units pursuant to Article 12 of
the Partnership Agreement (see "Transferability of Units - Redemption
Provision") will be equal to 105% of the Selling Partner's Adjusted Capital
Contribution at the time of the redemption. Distributions made in connection
with the liquidation of the Partnership or a Partner's Units (other than
pursuant to Section 8.1.3 of the Partnership Agreement) will be made in
accordance with the Partner's positive Capital Account balance as determined
under the Partnership Agreement and Treasury Regulations.
Generally, the General Partner will be allocated Net Profits equal to
its cash distributions (but not less than one percent of Net Profits) and the
balance will be allocated to the Limited Partners. Net Profits arising from
transactions in connection with the termination or liquidation of the
Partnership will be allocated in the following order: (i) First, to each
Partner in an amount equal to the negative amount, if any, of his Capital
Account; (ii) Second, an amount equal to the excess of the proceeds which
would be distributed to the Partners based on the Operating Distributions to
the Partners over the aggregate Capital Accounts of all the Partners, to the
Partners in proportion to their respective shares of such excess, and (iii)
third, with respect to any remaining Net Profits, to the Partners in the same
proportions as if the distributions were Operating Distributions. Net
Losses, if any, will be allocated 99% to the Limited Partners and one percent
to the General Partner.
The above allocations, however, are subject to several special
allocations designed in part to prevent a Partner's Capital Account
(particularly a Limited Partner's Capital Account) from going below zero and
to allow the Partner's Capital Account accurately to reflect the
above-described sharing ratios.
Although a partnership agreement may allocate certain partnership items,
or overall profit and loss, in a manner disproportionate to the partners'
respective capital contributions (a "special allocation"), such an allocation
will be recognized for federal income tax purposes only if it has
"substantial economic effect." A special allocation generally will be
considered to have such effect if it actually affects the dollar amount of
the partners' share of total partnership income or loss independently of tax
consequences.
-47-
<PAGE>
SUBSTANTIAL ECONOMIC EFFECT. The final Treasury Regulations under
Section 704(b) of the Code seek to define which partnership allocations have
"substantial economic effect." Under Sections 1.704-1(b)(2) through (4), an
allocation will be respected by the IRS only if it meets any one of the
following: (i) the allocation has "substantial economic effect"; (ii) the
allocation is in accordance with the partners' interests in the partnership;
or, (iii) the allocation is deemed to be in accordance with the partners'
interests in the partnership. Any allocation which fails to satisfy at least
one of these three tests will be reallocated in accordance with the partners'
interests in the partnership as defined in the Treasury Regulations.
Section 1.704-1(b)(2) sets forth a two-part analysis to determine
whether an allocation has "substantial economic effect." First, the
allocation must have "economic effect." In other words, the allocation must
be consistent with the underlying economic arrangement of the partners. If
there is an economic benefit or burden that corresponds to the allocation,
the partner receiving such an allocation should benefit from the economic
benefit or bear the economic burden. Normally, economic effect will be
present only if the partners' capital accounts are determined and maintained
as required by the Treasury Regulations. Under these rules, liquidation
proceeds must be distributed in accordance with the partners' positive
capital account balances (after certain adjustments) and, following the
liquidation of a partner's interest, the partner must be unconditionally
obligated to restore any deficit capital account balance by the end of the
taxable year or, if later, within 90 days after the date of liquidation.
The Partnership Agreement provides that, upon dissolution and
termination of the Partnership, the Limited Partners have no obligation to
restore a negative capital account balance and that the General Partner must
contribute to the Partnership an amount equal to the lesser of (i) the
deficit balance of the General Partner's Capital Account, or (ii) the excess
of 1.01% of the Capital Contributions of the Limited Partners over any
Capital Contribution of the General Partner. Nevertheless, the Partnership
Agreement provides that no loss or deduction may be allocated to a Partner if
such allocation would create a deficit balance in such Partner's Capital
Account in excess of the amount such Partner is obligated to restore to the
Partnership or is treated as required to restore to the Partnership and
contains a "qualified income offset," requiring that if a Partner who
unexpectedly receives an adjustment, allocation, or distribution described in
subparagraphs (4), (5) or (6) of Treasury Regulation Section
1.704-1(b)(2)(ii)(d) which creates or increases a deficit in such Partner's
Capital Account will be allocated items of Net Profits and gain (consisting
of a pro rata portion of each item of partnership income, including gross
income, and gain for such year) in an amount and manner sufficient to
eliminate such deficit balance as quickly as possible. Thus, the allocations
provided in the Partnership Agreement will satisfy the "alternate test for
economic effect" notwithstanding the limitations on the Partners' obligations
to restore deficits in their Capital Accounts.
Second, the economic effect must be "substantial." Substantiality is
present if there is a reasonable possibility that the allocation will
substantially affect the dollar amounts to be received by a partner
independent of his tax consequences. If a shifting of tax attributes results
in little or no change to the partner's capital accounts, or if the shift is
merely transitory, they will not be recognized. Thus, if the allocation
causes a shift in tax consequences that is disproportionately large in
relation to the shift in economic consequence, there is a rebuttable
presumption that the economic effect of the allocation is not substantial and
such allocation will be disregarded (and the partnership items will therefore
be apportioned according to the partners' respective interests).
The Treasury Regulations contain several exceptions and qualifications.
For example, if a partnership allocation fails the above "economic effect"
test, it may still be recognized if it meets the "economic effect
equivalence" test. An allocation will be viewed as having economic effect if
the agreement among the partners would in all cases produce the same results
as the requirements outlined above. Further, there are also several
exceptions which come into play where the partner does not have an absolute
obligation to restore a negative capital account.
Pursuant to the Partnership Agreement, Net Profits, Net Losses and cash
distributions allocated to a Partner will be reflected by appropriate
adjustments to the Partner's Capital Account. Furthermore, the
-48-
<PAGE>
Partnership Agreement contains provisions which would in all cases produce
distributions of liquidation proceeds on dissolution on the basis of the
relative amounts of the Partners' Capital Accounts to the extent of the balances
of such Capital Accounts. The tax allocations, however, are predicated on the
assumption that the management fees payable to the General Partner will be
treated as deductible guaranteed payments, rather than as Partnership
distributions. See "Income Tax Considerations - Summary - Deductibility of
Fees."
RETROACTIVE ALLOCATIONS. Under Section 706(d) of the Code, "retroactive
allocations," I.E., allocations of items to partners before they became
partners, are prohibited. Section 706(d) of the Code and the Treasury
Regulations thereunder accomplish this prohibition by providing that if there
is a change in any partner's interest in any taxable year of the partnership,
each partner's distributive share of a partnership's tax items is to be
determined by use of any method prescribed by the Secretary of the Treasury in
Treasury Regulations which take into account the varying interests of the
partners in the partnership during such taxable year. The Partnership
Agreement provides that Limited Partners will be admitted to the Partnership
and will commence sharing in Net Profits, Net Losses and cash distributions
on the day following the date on which their Capital Contributions are
received. Thus, if some Limited Partners are admitted to the Partnership
after others, those Limited Partners admitted later may receive a smaller
portion of each item of the Partnership's Net Profits and Net Losses than the
Limited Partners who were admitted earlier. Nevertheless, those Limited
Partners still will be obligated to make the same Capital Contributions to
the Partnership for their interests as the Limited Partners who were admitted
previously. In addition, where a Limited Partner transfers Units during a
taxable year, the Limited Partner may be allocated Net Profits for a period
and for which such Limited Partner will not receive a corresponding cash
distribution.
CONCLUSION. Based on the Treasury Regulations, the legislative history
and existing case law, Counsel is of the opinion that the allocations
contained in the Partnership Agreement of the Partnership's Net Profits and
Net Losses will be respected for federal income tax purposes.
LIMITATIONS ON UTILIZATION OF PARTNERSHIP LOSSES
TAX BASIS. A Limited Partner may not deduct losses in excess of his
"tax basis" in his Units, but may carry forward such excess losses to such
time, if ever, as his basis is sufficient to absorb them. A Limited
Partner's tax basis in his Units also determines the tax consequences of his
distributions, as well as the amount of the gain or loss he may realize upon
any sale of his Units. See "Income Tax Considerations - Disposition of
Units." Initially, the tax basis of a Limited Partner's Units will be equal
to the amount of cash contributed by the Limited Partner to the Partnership
or the amount paid to a transferor Limited Partner, plus the Limited
Partner's share of the Partnership's nonrecourse liabilities, if any. A
Limited Partner's initial tax basis will then be (i) increased by the his
allocable share of any Net Profits for each year, contributions made to the
Partnership by the Limited Partner, and any increase in his share of
nonrecourse liabilities, and (ii) reduced by his allocable share of any Net
Losses, the amount of any distributions made to him during the year, and any
reduction in his share of nonrecourse liabilities.
The IRS has ruled that a partner acquiring multiple interests in a
partnership in separate transactions at different prices must maintain an
aggregate adjusted tax basis in a single partnership interest consisting of
the partner's combined interests. Possible adverse tax consequences could
result from the application of this ruling upon a sale of some but not all of
a Limited Partner's Units. See "Income Tax Considerations - Disposition of
Units."
AMOUNTS AT RISK. Section 465 of the Code limits the deductions that an
individual or a closely held "C" corporation may claim from an activity to
the aggregate amount with respect to which such taxpayer is "at risk" for
such activity as of the close of the taxable year.
Except as otherwise provided below, a Limited Partner will be considered
to be "at risk" with respect to the amount of money and the adjusted basis of
other property the Limited Partner contributes to the Partnership. A Limited
Partner will be at risk with respect to amounts borrowed by the Partnership
only to
-49-
<PAGE>
the extent that the Limited Partner is personally liable for their
repayment or the net fair market value of the Limited Partner's personal
assets (other than Units) that secure the indebtedness. A Limited Partner
will not be considered at risk with respect to any amounts that are protected
against loss through nonrecourse financing, guarantees, stop loss agreements
or similar arrangements.
Because the Limited Partners will not be personally liable for
Partnership indebtedness, any such indebtedness will not augment the Limited
Partners' amounts at risk.
A Limited Partner's amount at risk will be reduced by (i) Net Losses
which are allowed as a deduction to the Limited Partner under the at-risk
rules and (ii) cash distributions received by a Limited Partner with respect
to the Limited Partner's Units, and increased by that Limited Partner's
distributive share of Net Profits. Investors should note that Net Losses
that may be allowable as a deduction under the at-risk rules may be
disallowed currently under the passive activity loss limitations. See
"Income Tax Considerations -Limitations on Utilization of Partnership Losses
- - Passive Activity Losses Limitations." If a Limited Partner's at risk
amount is reduced below zero (due to a cash distribution to a Limited
Partner), the Limited Partner must recognize income to the extent of the
deficit at risk amount. Losses of the Partnership that have been disallowed
as a deduction in any year because of the at-risk rules will be allowable,
subject to other limitations, as a deduction to the Limited Partner in
subsequent years to the extent that the Limited Partner's amount at risk has
been increased.
It is not anticipated that, on an aggregate basis, the Partnership will
incur losses. However, the Code will allow the Partnership to aggregate its
equipment leasing activities only with respect to Equipment placed in service
during the same taxable year. Therefore, the "at risk" rules will be applied
to the net taxable income or loss resulting from leasing Equipment which was
placed in service during the same taxable year. This could result in a
Partner's deduction for losses with respect to certain items of Equipment
being limited by the "at risk" rules, even though he must recognize income
with respect to other items of Equipment. Counsel has rendered an opinion
that each Limited Partner will be considered "at risk" in any one year with
respect to Equipment placed in service in the same taxable year for purposes
of Section 465 of the Code in an amount equal to (i) the Capital
Contributions of such Limited Partner (provided that funds for such
contributions are not from borrowed amounts), less (ii) the sum of (a) the
total Net Losses with respect to such Equipment which have been allowed as
deductions to the Limited Partner under the at-risk rules and (b) cash
distributions received by the Limited Partner, plus (iii) the Limited
Partner's distributive share of total Net Profits with respect to such
Equipment of the Partnership.
PASSIVE ACTIVITY LOSSES LIMITATIONS. Section 469 of the Code prohibits
an individual, estate, trust, closely held "C" corporation, or personal
service corporation from using losses and credits from a business activity in
which the taxpayer does not materially participate, or a rental activity, to
offset other income, including salary and active business income as well as
portfolio income (such as dividends, interest and royalties, whether derived
from property held directly or through a pass-through entity such as a
partnership). However, Section 469(l)(3) of the Code authorizes the issuance
of Treasury Regulations requiring net income or gain from a limited
partnership or other passive activity to be treated as not from a passive
activity. This regulatory authority could be broad enough to treat income of
any limited partnership as portfolio income.
Interest income derived by the Partnership from the interim investment
of offering proceeds or reserves (and any income derived by the Partnership
from leases treated as loans for federal income tax purposes) will be treated
as portfolio income and, thus, will not be offset for these purposes by
Partnership deductions such as depreciation or cost recovery deductions.
Losses from a passive activity that are not allowed currently will be
carried forward indefinitely and are allowed in subsequent years against
passive activity income or in full upon complete disposition of the
taxpayer's interest in that passive activity to an unrelated party in a fully
taxable transaction.
-50-
<PAGE>
Code Section 469(k), as clarified by IRS Notice 88-75, prevents the
utilization of losses from the Partnership and other passive activities to
offset income from a publicly traded partnership and further causes the
income from a publicly traded partnership to be investment income. Limited
Partners, therefore, will be unable to use losses from the Partnership to
offset passive income from publicly traded partnerships that are not taxed as
corporations and income from the Partnership cannot be offset by passive
losses from publicly traded partnerships that are not taxed as corporations.
If a Limited Partner incurs indebtedness in order to acquire or carry
Units, interest paid by the Limited Partner on the indebtedness will be
subject to the limitations for passive activity losses, except to the extent
that the indebtedness relates to "portfolio income," if any, of the
Partnership. Interest expense a Limited Partner attributable to "portfolio
income" may be subject to other limitations on its deductibility. See
"Income Tax Considerations - Interest Deduction Limitations."
Based on the above discussion, certain qualifications and
representations of the General Partner, assuming that all leases entered into
by the Partnership are considered "true leases" for federal income tax
purposes, and subject to the broad discretion granted to the Department of
Treasury, it is Counsel's opinion that Net Profits, Net Losses, and credits
derived from the Partnership with respect to its leasing activities will be
subject to the passive activity rules. Thus, any income produced by the
Partnership should be income from a passive activity. Counsel's opinion does
not apply to any Partnership income attributable to (i) the investment of
Partnership funds in liquid investments prior to the purchase of Equipment,
(ii) the investment, in interest-bearing accounts or otherwise, of amounts
held by the Partnership as working capital, security deposits, or in reserve,
or (iii) Equipment with respect to which the Partnership is determined not to
be the owner for federal income tax purposes.
HOBBY LOSSES. Section 183 of the Code limits deductions attributable to
"activities not engaged in for profit." The phrase "activities not engaged
in for profit" means any activity other than one that constitutes a trade or
business, or one that is engaged in for the production or collection of
income or for the management, conservation or maintenance of property held
for the production of income. The Treasury Regulations provide that the
determination of whether an activity is engaged in for profit is to be made
by reference to objective standards, taking into account all of the facts and
circumstances in each case. The Treasury Regulations also provide that,
although a reasonable expectation of profit is not required, the facts and
circumstances must indicate that the taxpayer entered into the activity, or
continued the activity, with the objective of making a profit. The Treasury
Regulations enumerate a number of nonexclusive factors which should be taken
into account in determining whether an activity is engaged in for profit.
The IRS has ruled that this test will be applied at the partnership level.
Based upon these Treasury Regulations and the investment goals of the
Partnership, and certain representations made by the General Partner, Counsel
believes that the proposed activities of the Partnership will constitute an
activity engaged in for profit within the meaning of Section 183 of the Code.
However, the test of whether an activity is deemed to be engaged in for
profit is based on the facts and circumstances applicable from time to time
including the motives of the investors, and no assurance can be given that
Code Section 183 may not be applied in the future to disallow the deductions.
FEES AND REIMBURSEMENTS TO THE GENERAL PARTNER AND AFFILIATES
GENERAL. There is no assurance that the IRS will not challenge the
position of the Partnership with respect to the amount, character, time of
deduction or tax treatment of any of the fees discussed herein or, if
challenged, that the position of the Partnership would be sustained. In any
year such fees are incurred, the disallowance of the deductibility of such
fees would result in a proportionate increase in the taxable income (or
reduction in the loss) of the Limited Partners with no associated increase in
cash distributions with which to pay any resulting increase in tax
liabilities.
-51-
<PAGE>
ORGANIZATIONAL AND OFFERING EXPENSES. The General Partner will be paid
an organizational fee for its services in organizing the Partnership and
preparing the Offering. The General Partner plans to make a reasonable
allocation of such fees between syndication expenses which must be
capitalized and start-up expenses which may be amortized over a 60-month
period.
EQUIPMENT ACQUISITION, RE-LEASE AND DEBT PLACEMENT FEES. The cost of
Acquisition Fees will be capitalized to the cost of the Equipment. The cost
of Re-Lease Fees will be amortized over the term of the leases to which they
relate. Debt Placement Fees will be amortized over the term of the
borrowings to which they relate.
THE EQUIPMENT MANAGEMENT FEE. The Equipment Management Fee should be
deductible as an ordinary and necessary business expense under Section 162 of
the Code, to the extent that its amount is commercially reasonable.
EQUIPMENT LIQUIDATION FEE. Equipment Liquidation Fees should be treated
as a cost of sale of the Equipment.
OWNERSHIP OF EQUIPMENT
LEASE VERSUS SALE. The fact that each agreement between the Partnership
and a lessee will be denominated a "lease" may not be determinative of the
character for income tax purposes of the transaction which the agreement
reflects. The IRS may assert that any such lease constitutes an installment
or conditional sale for income tax purposes rather than a lease. If any of
the Partnership's leases were treated as sales for income tax purposes, the
Limited Partners would not be entitled to depreciation or cost recovery
deductions with respect to the items of Equipment involved. On the other
hand, a portion of the rental payments (otherwise fully taxable) would be
deemed to constitute a return of capital, which would not be taxable to the
Limited Partners.
Whether a transaction is to be characterized as a lease for income tax
purposes involves a determination based upon all of the facts and
circumstances involved. Section 162(a)(3) of the Code provides that a
deduction shall be allowed for "rentals or other payments required to be made
as a condition to the continued use or possession, for purposes of the trade
or business, of property to which the taxpayer has not taken or is not taking
title or in which he has no equity." The IRS has stated in Revenue Ruling
55-540, 1955-2 C.B. 39, that the presence of any of the following six factors
would be significant evidence of a sale rather than a lease: (i) portions of
the periodic payments are made applicable to an equity interest to be
acquired by the lessee; (ii) the lessee will acquire title upon payment of a
stated amount of rental payments; (iii) the total amount which the lessee is
required to pay for a relatively short period of use constitutes an
inordinately large proportion of the total sum required to be paid to secure
the transfer of title; (iv) the agreed rental payments materially exceed the
current fair rental value, indicating that the payments include an element
other than compensation for the use of the property; (v) the property may be
acquired under a purchase option at a nominal price; and (vi) some portion of
the periodic payments is specifically designated as interest or is otherwise
readily recognizable as the equivalent of interest.
The presence of a purchase option at a price less than fair market value
is the most influential factor cited by the IRS to support a determination
that a transaction will not be treated as a lease. Even if a purchase option
is not present, a constructive transfer of ownership to the lessee may be
found if the lease term is for all or substantially all of the economic
useful life of the property and the rental payments merely reimburse the
lessor for its equity investment and financing costs and pay the lessor a
guaranteed sum reflecting a market rate of return.
In recent cases, the Tax Court has examined the lessor's profit motive
in entering into a lease. In general, the parties' characterization of a
transaction as a lease has been respected so long as the lessor retains
significant and genuine attributes of a traditional lessor, while the form of
the transaction as a lease has been
-52-
<PAGE>
disregarded if it was entered into without any economic purpose apart from tax
motives. See ESTATE OF THOMAS V. COMMISSIONER, 84 T.C. 412 (1985); RICE'S
TOYOTA WORLD, INC. V. COMMISSIONER, 81 T.C. 184 (1983), AFF'D IN PART and REV'D
IN PART, 752 F.2d 89 (4th Cir. 1985); MUKERJI V. COMMISSIONER, 87 T.C. 926
(1986); JAMES V. COMMISSIONER, 87 T.C. 876 (1986); and LARSEN V. COMMISSIONER,
89 T.C. 1229 (1987).
In Revenue Procedures 75-21, 1975-1 C.B. 715, 75-28, 1975-1 C.B. 752,
76-30, 1976-2 C.B. 647, and 79-48, 1979-2 C.B. 529, the IRS established those
requirements which must be satisfied in order for a lessor in a leveraged
lease transaction to receive an advance ruling that it is the owner of the
property subject to the lease. In brief, these requirements are: (i) the
taxpayer must anticipate a significant return on the lease apart from any tax
benefits; (ii) the estimated useful life of the property at the end of the
lease term (including fixed rate renewal options) must exceed 20% of the
property's estimated useful life at the beginning of the lease; (iii) the
estimated value of the property at the end of the lease term must exceed 20%
of the taxpayer's capitalized costs; (iv) any purchase options held by the
lessee must be at fair market value at the time of the option exercise;
(v) none of the rental payments may be credited against the option purchase
price; (vi) the lease may not contain put or abandonment clauses; and
(vii) the property must not be limited use property. Although Revenue Procedure
75-21 forbids an option price "at a price less than its fair market value at
the time the right is exercised," the Tax Court has approved fixed price
purchase options when the fixed price is the expected fair market value upon
exercise at the time the transaction is entered into (see LOCKHART LEASING V.
COMMISSIONER, 54 T.C. 301 (1970), aff'd, 446 F.2d 269 (10th Cir. 1971) and
NORTHWEST ACCEPTANCE CORP. V. COMMISSIONER, 58 T.C. 836 (1972), aff'd, per
curiam, 500 F.2d 1222 (9th Cir. 1974)). The requirements of these Revenue
Procedures are not necessarily indicative of those standards which would be
applied by a court in seeking to determine whether a given transaction
constitutes a lease for federal income tax purposes, but the Revenue
Procedures provide a safe harbor for the characterization of a transaction as
a lease, even where, as in the case of leases to be entered into by the
Partnership, the leases are not highly leveraged.
The Partnership intends to structure each lease transaction so that the
lease will be treated as a lease rather than a financing arrangement for
federal income tax purposes. Due to the factual nature of this
determination, however, neither the General Partner nor Counsel can offer any
assurance or guarantee in this regard. In addition, the Partnership may
sell Equipment under Conditional Sales Contracts in which case the
Partnership will not be treated as the owner of such Equipment. In this
event, the Partnership and the Partners will not be entitled to depreciation
or cost recovery deductions with respect to such Equipment. The
Partnership, however, would be entitled to treat a portion of the each
payment as a return of its cost basis in purchasing such Equipment. The
Partnership is entitled to enter into Full Payout Net Leases. While the tax
consequences are less clear for Full Payout Net Leases, the IRS is likely to
take the position that the tax treatment is the same as for Conditional Sales
Contracts. Thus, if the Partnership enters into Full Payout Net Leases, the
Partnership and the Partners may not be entitled to depreciation or cost
recovery deductions with respect to such Equipment, although a portion of
each payment would be treated as a return of cost basis.
COST RECOVERY AND DEPRECIATION
COST RECOVERY RULES. The Tax Reform Act of 1986 substantially amended
the Accelerated Cost Recovery System ("ACRS") rules which were introduced
into law as part of the 1981 Tax Reform Act. Under new Code Section 168,
which is generally effective with respect to property placed in service after
December 31, 1986, the period of time over which covered property must be
depreciated is generally, although not in every case, longer. The rate of
depreciation allowable for many types of property, however, has been
increased from 150 percent to 200 percent declining balance.
The new system generally applies to new and used tangible property
("recovery property") which would otherwise be depreciable under Section 167
of the Code. As a general matter, the new system allows a taxpayer to
recover the cost or other tax basis of recovery property through deductions
over a prescribed period of time that is dependent upon the type of property
involved and not upon the property's actual economic useful life.
-53-
<PAGE>
Under Section 168, the cost of Equipment which is held by the
Partnership and leased to others, and with respect to which the Partnership
is considered to be the owner for federal income tax purposes, will be
capitalized by the Partnership and deducted over a specified period. Except
as discussed below with respect to computer software, it is anticipated that
substantially all of the Partnership's recovery property will be "five-year
property." Accordingly, the Partnership will be required to recover its
basis in such property using either the straight-line method or the
prescribed accelerated method (200% declining balance switching to
straight-line for the first taxable year that the straight-line method will
yield a larger allowance) over a five year recovery period. Although the
Partnership intends to elect to recover Equipment costs on the straight-line
method for the Equipment purchased with the proceeds of the Offering, it may,
in other cases elect to recover Equipment costs on the accelerated basis.
If, however, any tax exempt entities become Limited Partners, the Partnership
likely will continue to use a straight-line depreciation method. Both the
accelerated and straight-line methods are applied to the entire cost or other
tax basis of the Equipment without regard to salvage value. The Partnership
intends to include Acquisition Fees as part of the cost of Equipment.
With respect to personal property, both the straight-line method and the
accelerated method generally use a "half-year" convention, which assumes that
property is placed in service at the midpoint of the taxable year, regardless
of when it is actually placed in service. For the year property is acquired
and for the year property is disposed of, only a half year of depreciation is
allowable. However, if the aggregate bases of property placed in service
during the last three months of the year exceed 40% of the aggregate bases of
all of the property placed in service during the year, then the taxpayer
cannot use the half-year convention. Instead, the taxpayer must use the
mid-quarter convention for all such property placed in service by the
taxpayer for that year. For purposes of this test, members of an affiliated
group are treated as one taxpayer.
Therefore, assuming that the Equipment in question is five-year recovery
property, that the straight-line method is elected, and that the mid-quarter
convention is not required, 10% of the tax basis of the Equipment would be
recovered in the year the property is placed in service. In each of the next
four succeeding years, 20% of the basis would be recovered, and the remaining
10% would be recovered in the sixth year. Under the accelerated method,
again assuming the mid-quarter convention is not required and that the
appropriate recovery period is five years, approximately 20% of the tax basis
of the Equipment would be recovered in the first year, 32% in the second
year, 19.20% in the third year, 11.52% in both the fourth and fifth years,
and 5.76% in the sixth year.
Cost recovery deductions must be prorated for the first taxable year
recovery property is placed in service if it is considered to be a short
taxable year I.E., if the Partnership is operating for less than 12 months.
Proposed Treasury Regulation Section 1.168-2(f). Under Section
1.168-2(f)(4), the Partnership's first taxable year will be considered to
begin on the date of its initial substantial acquisition of Equipment. This
required proration of the cost recovery deductions of the Partnership for its
initial taxable year will reduce the tax benefits of an investment in the
Partnership for 1995, but the tax benefits will be increased in some
subsequent years because of increased cost recovery deductions in such years.
Certain Equipment acquired by the Partnership may be subject to the
so-called "anti-churning" rules found in either Code Section 168(f)(5) or
Section 168(v)(4) of the Internal Revenue Code of 1954. Equipment subject to
the anti-churning rules may be subject to depreciation under old Section 168
or under Section 167. In addition, special rules under Code Section 168
apply to recovery property used predominantly outside the United States and
to recovery property leased to tax exempt and governmental entities. The
Partnership does not anticipate acquiring significant amounts of Equipment in
these categories.
A portion of the property acquired by the Partnership for lease to
others may consist of computer software. There are a number of uncertainties
as to the proper tax treatment of computer software costs. However, Revenue
Procedure 69-21, 1969-1 C.B. 303, provides that if computer software costs
are included, without being separately stated, in the costs of computer
hardware, the software costs may be recovered on the same basis as the
hardware cost. If computer software costs are separately stated, the
software may be treated as an intangible asset and its cost may be amortized
ratably over a five-year period or a shorter period if the
-54-
<PAGE>
software has a shorter useful life. Section 167(f) of the Code, as amended by
the Omnibus Reconciliation Act of 1993, provides that to the extent that a
depreciation deduction is otherwise allowable pursuant to Section 167(a) of the
Code, the depreciation deduction for computer software shall be computed using
the straight line method and useful life of 36 months.
If the Partnership is considered to be the owner of its property for
federal income tax purposes, the Partnership should be entitled to all cost
recovery, depreciation and amortization deductions allowable with respect to
the property under the existing Code, Treasury Regulations, court decisions
and other applicable law.
RECAPTURE OF COST RECOVERY DEDUCTIONS. All or part of the cost
recovery, depreciation or amortization deductions of the Partnership may be
recaptured as ordinary income upon a subsequent disposition by the
Partnership of its Equipment or other property or, with respect to a
Partner's share of such deductions, upon the disposition of the Partner's
Units. See "Income Tax Considerations - Disposition of Units" below. The
cost recovery, depreciation or amortization deductions of the Partnership
will be recaptured to the extent of any gain on disposition. This recapture
amount will be recognized in full as ordinary income in the year of sale even
if the Partnership has made an installment sale of the property. See "Income
Tax Considerations - Sale of Equipment."
If the Partnership has not made a basis adjustment election under
Section 754, a purchaser of Units also may be required to recapture amounts
attributable to cost recovery, depreciation or amortization deductions taken
by the Partnership prior to his purchase of his Units when the Partnership
disposes of property subject to recapture or when the purchaser subsequently
sells his Units. The Partnership does not intend to make an election under
Section 754, but may do so in the discretion of the General Partner. The
absence of such an election may make it more difficult for a Limited Partner
to dispose of his Units.
INTEREST DEDUCTION LIMITATIONS
SECTION 163(d). Section 163(d) of the Code restricts the ability of
noncorporate taxpayers to deduct interest on funds borrowed to acquire or
carry investment assets. Such taxpayers may deduct "investment interest"
only to the extent of the "net investment income" of the taxpayer for the
taxable year. Any interest disallowed under this provision in one year may
be carried forward indefinitely and claimed at such time as the taxpayer has
sufficient investment income.
Interest expense that is allocable to a passive activity is subject to
the passive loss limitations, and is not subject to the investment interest
limitations. The General Partner anticipates that the Partnership will be
deemed a passive activity with respect to the income, gains, losses,
deductions and credits passed through to the Limited Partners and, therefore,
will not figure in a Limited Partner's investment interest limitations
calculation.
Again, however, no assurances can be made because of the broad
discretion given to the Department of Treasury in Section 469(l).
Consequently, because the Partnership may borrow to acquire Equipment, it is
possible that the Partnership will generate interest expense. Further,
because the Partnership will enter into net leases, any interest expense that
might be paid by the Partnership might be considered to be investment
interest expense and, as such, would be subject to the limitations described
herein. Because the amount of any Limited Partner's investment interest that
would be subject to disallowance in any year will depend upon the other
investment income and expenses of that Limited Partner, the extent, if any,
of such disallowance will depend upon that Limited Partner's particular tax
situation.
Additionally, the IRS might argue that all or some portion of any
interest incurred in connection with the acquisition or maintenance of a Unit
in the Partnership is investment interest. As noted above, however, it is
anticipated that any interest in the Partnership as a Limited Partner will be
deemed a passive activity (unless modified by Treasury Regulations or
legislation). To the extent the investment in a Unit is treated as
-55-
<PAGE>
a passive activity, any interest incurred in acquiring or maintaining such an
interest would not be subject to Section 163(d) but instead would be subject to
the passive activity limitations.
SECTION 265. Section 265 of the Code denies any deduction for interest
paid by a taxpayer on indebtedness incurred or continued for the purpose of
purchasing or carrying tax exempt obligations. Denied interest may not be
deducted in any year. The IRS announced in Revenue Procedure 72-18, 1972-1
C.B. 740 (clarified by Revenue Procedure 74-8, 1974-1 C.B. 419), that the
prescribed purpose generally will be deemed to exist with respect to
indebtedness incurred to finance a "portfolio investment," including a
limited partnership interest. Accordingly, in the case of a Limited Partner
owning tax exempt obligations, the IRS may take the position that, with
respect to a Limited Partner who borrows funds to purchase Units, the
interest paid by the Limited Partner on such loan should be viewed as
incurred on loans which enable him to continue carrying his tax exempt
obligations. If this position were upheld, the Limited Partner would not be
allowed to deduct such interest.
CASH DISTRIBUTIONS
Cash distributions made to a Limited Partner, other than those in
exchange for, or redemption of, all or part of his Units, reduce a Limited
Partner's adjusted basis in his Units and may represent both a return of
capital and income. To the extent distributions of cash (including
reductions in a Limited Partner's proportionate share of Partnership
nonrecourse liabilities, if any) reduce a Limited Partner's adjusted basis in
his Units to zero, such distributions will be treated as returns of capital
which generally do not result in any recognition of gain or loss for federal
income tax purposes. To the extent such distributions or reductions in
liabilities exceed a Limited Partner's adjusted basis in his Units
immediately prior thereto, such Limited Partner will recognize gain to the
extent of such excess. Such gain may be treated as ordinary income to the
extent the distribution is deemed to be in exchange for a share of the
Limited Partner's interest in the Partnership's "substantially appreciated"
inventory and "unrealized receivables" (which includes depreciation
recapture); any excess gain will be treated as capital gain. The gain that a
Limited Partner will recognize as a result of a reduction of liabilities in
excess of such Limited Partner's adjusted tax basis in his Units immediately
prior thereto will result in a tax liability to the Limited Partner without
any cash distribution to such Limited Partner. To the extent a Limited
Partner's federal tax liabilities exceed cash distributions, such excess in
effect would be a nondeductible cost to such Limited Partner.
SALE OF EQUIPMENT
Gain realized by the Partnership upon the sale or other disposition of
any of its properties, including Equipment, held for more than 12 months will
generally be treated as Section 1231 gain, as discussed below (except to the
extent that the gain represents depreciation recapture taxable as ordinary
income -- see "Income Tax Considerations - Cost Recovery and Depreciation
- -Recapture of Cost Recovery Deductions"), unless it is determined that the
particular property sold constitutes stock in trade or property held
primarily for sale to customers in the ordinary course of the Partnership's
trade or business. Under the general rule of Section 1231, to the extent
that the Partnership assets that are sold constitute Section 1231 assets
(I.E., depreciable property used in the Partnership's trade or business and
held for more than 12 months), a Partner's share of the net gains or losses
incurred would be treated as long-term capital gains, or ordinary losses, as
the case may be.
Notwithstanding the general rule, to the extent that such assets are
subject to depreciation recapture, gains will be treated as ordinary income.
In addition, if Partnership assets are sold on an installment sale basis,
Code Section 453(i) requires that all depreciation recapture be recognized as
ordinary income in the year of disposition, whether or not any payments are
received in that year. Furthermore, a taxpayer who has a net Section 1231
gain for the taxable year must look back to the five most recent preceding
taxable years commencing after 1981 for possible "recapture" of net Section
1231 losses for such past years. If there were any net Section 1231 losses
for such past periods, the taxpayer must treat his current year's net
Section 1231 gain as ordinary income to the extent of the amount of
unrecaptured net Section 1231 losses for such past years.
-56-
<PAGE>
If the Partnership is held to be a "dealer" (defined as a taxpayer
regularly engaged in the sale of personal property of the same type on the
installment basis), or if any of the Equipment sold is found to constitute
stock in trade or property held primarily for sale to customers in the
ordinary course of the Partnership's trade or business, gain or loss on the
sale or other disposition of such Equipment will be ordinary income or loss,
and under Code Section 453(b), gain from such dispositions will not be
eligible for the installment sales method of reporting income.
In determining the amount realized upon the sale, exchange or other
disposition of a Partnership asset, the Partnership must include the amount
of any liability to which the property is subject. Thus, the Partnership's
gain or loss on the sale of any such property may exceed the cash proceeds of
such sale. In such case, the income tax payable by the Limited Partners with
respect to such gain may exceed the cash distributed to the Limited Partners.
Further, the Partnership may, instead of receiving all cash, take back
purchase money obligations as part of the consideration for the sale of any
its of property. While the Partnership anticipates that any such sale would
qualify as an "installment sale" for federal income tax purposes, any
depreciation recapture with respect to the item of property still would have
to be recognized in full in the year of sale. See "Income Tax Considerations
- - Cost Recovery and Depreciation - Recapture of Cost Recovery Deductions."
In addition, depending upon the amount of the Partnership's and any
individual Limited Partner's outstanding installment obligations at the end
of any year, a Limited Partner may be liable for the payment of interest on
the amount of the tax liability deferred as a result of the "installment
sale" of Equipment.
A foreclosure of a security interest in Partnership property will
generally be treated as a sale of such property, subject to the rules
discussed above. Ordinarily, gain will be realized to the extent of the
excess of the indebtedness over the adjusted basis of the property at the
time of the foreclosure.
Gain realized on a sale or other disposition of an item of Equipment
should be treated as income from the activity of leasing such Equipment,
which should permit any amounts disallowed under Section 465 for the leasing
of such Equipment in previous years to be allowed for the taxable year of the
sale. See "Income Tax Considerations - Limitations on Utilization of
Partnership Losses - Amounts at Risk" and "Summary of the Partnership
Agreement."
The Partnership has not been organized to operate as a "dealer" in
Equipment and does not presently intend to hold any Equipment as inventory,
as stock in trade or primarily for sale to customers in the ordinary course
of its trade or business. Under existing law, whether property is held as
inventory is a question of fact, depending upon all of the circumstances of
the particular transaction. There are cases holding, for instance, that
property acquired by a taxpayer for investment purposes was later held as
inventory for sale to customers in the ordinary course of business. Other
cases have held that taxpayers continuously involved in buying and selling
property still may hold specific property for investment. Important factors
in making these determinations generally include the purpose or reason for
the purchase and sale of the property, the continuity of sales or
sales-related activities, the number and frequency of sales, and the
substantiality of sales income compared to the taxpayer's other income. The
Partnership intends to purchase Equipment for investment only and to engage
in the business of leasing such Equipment. Accordingly, the Partnership
anticipates that it will not be treated as holding any Equipment primarily
for sale in the ordinary course of its trade or business. Nevertheless,
there is no assurance that the IRS will not take the contrary position.
DISPOSITION OF UNITS
IN GENERAL. A Partner who sells or otherwise disposes of his Units,
including redemptions of a Limited Partner's Units pursuant to Article 12 of
the Partnership Agreement, will realize taxable gain or loss measured by the
difference between the selling or redemption price and the adjusted tax basis
of his Units. See "Income Tax Considerations - Limitations on Utilization of
Partnership Losses - Tax Basis." Gain or loss, in general, will be taxed
as short-term or long-term capital gain or loss, depending on the period the
Units have been held (provided the Partner is not a dealer in the Units).
However, gain attributable to the Partner's share of "substantially
appreciated inventory items" and "unrealized receivables" of the Partnership,
as those terms are
-57-
<PAGE>
defined in Code Section 751, will be taxed as ordinary income. Unrealized
receivables include any cost recovery, depreciation and amortization deductions
of the Partnership that would have been recaptured upon a hypothetical sale of
the Equipment. As a result, Code Section 453(i), which requires that recapture
amounts be recognized in full in the year of sale even if the sale qualifies as
an installment sale, may apply to an installment sale of Units. See "Income
Tax Considerations - Cost Recovery and Depreciation - Recapture of Cost
Recovery Deductions." In determining the amount realized upon the sale or
exchange of Units, a Limited Partner must include, among other things, his
allocable share of Partnership indebtedness included in his basis in such
Units. See "Income Tax Considerations - Limitations on Utilization of
Partnership Losses - Tax Basis." Thus, a Partner's gain on the sale or
exchange of Units should be treated as income from the activity of leasing
the Equipment. As a result, suspended losses, if any, from prior years
could offset the gain realized on the sale or exchange of Units. See "Income
Tax Consideration - Limitation on Utilization of Partnership Losses - Amounts
at Risk - Passive Activity Losses Limitations." A Partner who sells or
otherwise disposes of his Units must also report his share of the taxable
income or loss of the Partnership for the portion of the taxable year of the
Partnership during which he owned his Units.
GIFT OF UNITS. Since the tax consequences of any gift or transfer will
depend upon the particular circumstances and upon the individuals or
organizations involved in the transaction, before making any gift of Units, a
Limited Partner should consult his tax advisor as to the consequences of such
a gift and as to the basis of the Units in the hands of his successor.
DEATH OF PARTNER. If a Limited Partner dies, the fair market value of
his Units at death (or, if elected, at the alternate valuation date) will be
subject to federal estate taxation. Under present law, the death of a
Limited Partner does not result in a sale or exchange giving rise to a
federal income tax. It is not clear what the tax consequences are if the
decedent's proportionate share of the Partnership's liabilities exceeds the
adjusted basis of his Units at death. In this event, some gain may be
recognized to the decedent or his estate upon the distribution of the Units
to the extent of such excess. The cost or other basis of the Units inherited
from the decedent generally is "stepped up" or "stepped down" to its fair
market value for federal income tax purposes.
NOTICE OF TRANSFER. Pursuant to Code Section 6050K, a Limited Partner
who transfers an interest in a partnership, whether by sale, gift or
otherwise, must notify the partnership of such transfer within 30 days of the
transfer or, if earlier, by January 15 of the calendar year following the
calendar year in which transfer occurs. In addition, Section 6050K requires
a partnership to file a separate information return (Form 8308) whenever
there is a transfer of a partnership interest involving a Code Section 751(a)
sale or exchange. A Limited Partner who fails to inform the Partnership of a
transfer of the Limited Partner's Units in accordance with the rules
described in this paragraph is liable for a penalty of $50 per unreported
transfer with an annual maximum penalty of $100,000. Each such return must
contain the following: (a) the names, addressees and taxpayer identification
numbers of the transferee and transferor involved in the exchange and (b) the
date of the sale or exchange. Once notified, Section 6050K(b) of the Code
requires the partnership to provide the transferee and the transferor with a
copy of the completed Form 8308. Failure to provide this notice may result in
a $50 penalty per unreported transfer with an annual maximum penalty of
$250,000. However, the partnership is not required to file a Form 8308 or
furnish statements regarding any Section 751(a) exchanges until it has been
notified, or has reason to know, that such an exchange has taken place. The
partnership may rely on a written statement from the transferor that the
transfer was not a Section 751(a) exchange unless the partnership has
knowledge to the contrary. These reporting requirements may increase the
Partnership's administrative costs. If a return is required to be filed by a
broker pursuant to Section 6045 of the Code with respect to the transfer, no
return is required under Code Section 6050K by either a selling Limited
Partner or the Partnership. See Treasury Regulations Section 1.6050K-1.
TERMINATION OF THE PARTNERSHIP FOR TAX PURPOSES
The Code provides that if 50% or more of the capital and profits
interests in a partnership is sold or exchanged within a single twelve-month
period, the partnership will terminate for tax purposes. The Partnership
-58-
<PAGE>
Agreement prohibits the transfer of any Unit if such transfer would result in
the termination of the Partnership for federal income tax purposes. However,
involuntary transfers (such as transfers by death, dissolution, etc.) could
possibly result in termination of the Partnership for federal income tax
purposes.
If the Partnership should terminate for tax purposes, it would be deemed
to have distributed its assets to the Limited Partners, who would then be
deemed to have contributed the assets to a new partnership. Some of the
effects of a termination of the Partnership for federal income tax purposes
could include changes in the Partnership's tax basis in its assets and the
period over which such assets could be depreciated.
A Limited Partner may recognize gain to the extent, if any, that the
Limited Partner's pro rata share of the Partnership's cash (and the
reduction, if any, in the Limited Partner's share of any Partnership
indebtedness, including nonrecourse indebtedness) at the date of termination
exceeds the adjusted tax basis of his Units. In addition, the Partnership's
taxable year would terminate. If the Limited Partner's taxable year were
other than the calendar year, the inclusion of more than one year of
Partnership income in a single taxable year of the Limited Partner could
result. Because the new partnership would be treated as a separate entity
for federal income tax purposes, no election of the prior partnership would
remain valid. Thus, new federal income tax elections would be required to be
made.
NO SECTION 754 ELECTION
Due to the burdensome and costly recordkeeping requirements that a
Section 754 Election entails, it is unlikely that the General Partner will
exercise its discretion in favor of making this election to adjust the basis
of Partnership property in the case of transfers of Units. If the General
Partner does not make a Code Section 754 Election, a subsequent Limited
Partner's share of gain or loss upon the sale of the Partnership assets will
be determined by taking into account the Partnership's tax basis in the
assets and without reference to the cost associated with acquiring the Units.
Thus, the absence of a Code Section 754 Election may reduce the
marketability of Units.
INVESTMENT BY TAX EXEMPT ENTITIES
The income earned by a tax exempt entity, including a qualified employee
pension or profit sharing trust or an individual retirement account (a "Tax
Exempt Entity"), is generally exempt from taxation. However, gross unrelated
business taxable income ("UBTI") of a Tax Exempt Entity is subject to tax to
the extent that, when combined with all other gross UBTI of the Tax Exempt
Entity for a taxable year, it exceeds all deductions attributable to the UBTI
plus $1,000 during the taxable year. Such UBTI will be taxable at ordinary
income rates and may be subject to the alternative minimum tax. See "Income
Tax Considerations - Taxes-Alternative Minimum Tax."
The leasing of tangible personal property is treated for purposes of the
Code as an unrelated trade or business. See Revenue Rulings 78-144, 1978-1
C.B. 168, 69-278, 1969-1 C.B. 148, and 60-206, 1960-1 C.B. 201. The IRS has
ruled that a partner's distributive share of income or gain from a
partnership engaged in the leasing of tangible personal property is treated
in the same manner as if such income or gain were realized directly by the
partner. Therefore, a Tax Exempt Entity that invests in the Partnership will
be subject to the tax on UBTI for any taxable year of the Tax Exempt Entity
to the extent the Partnership generates income from the leasing of the
Equipment and the total of the Tax Exempt Entity's share of that income for
the taxable year plus its UBTI from all other sources for the taxable year
exceeds the sum of all deductions attributable to the UBTI plus $1,000.
Although the Partnership's portfolio income (e.g., interest income from
the investment of Partnership cash balances) generally will not produce UBTI
for a Tax Exempt Entity that invests in the Partnership, a portion of such
Tax Exempt Entity's portfolio income from the Partnership will constitute
UBTI pursuant to the "debt-financed property" rules if the Tax Exempt Entity
finances its acquisition of Units with debt. Furthermore, social clubs,
voluntary employee benefit associations, supplemental unemployment benefit
trusts,
-59-
<PAGE>
and qualified group legal services plans that are exempt from taxation under
paragraphs (7), (9), (17), and (20), respectively, of Code section 501(c) are
subject to different UBTI rules, which generally will require them to
characterize all income from the Partnership as UBTI.
Except to the extent of gain or loss from the sale, exchange, or other
disposition of acquisition indebtedness property and except to the extent the
Equipment constitutes inventory or property held primarily for sale to
customers in the ordinary course of a trade or business, gains from the sale
or exchange of the Equipment generally will be excludible from the scope of
UBTI. However, any gain on the disposition of Equipment that is
characterized as ordinary income as a result of the recapture of cost
recovery or depreciation deductions will constitute UBTI for Tax Exempt
Entities.
If the gross income taken into account in computing UBTI exceeds $1,000,
the Tax Exempt Entity is obligated to file a tax return for such year on IRS
Form 990-T. Neither the Partnership nor the General Partner expects to
undertake the preparation or filing of IRS Form 990-T for any Tax Exempt
Entity in connection with an investment by such Tax Exempt Entity in the
Units. Generally, IRS Form 990-T must be filed with the IRS by May 15 of the
year following the year to which it relates.
Penalties may be imposed by the IRS for failing to file this tax return
when required, and, if tax is due, additional penalties and interest may be
imposed if the tax is not paid. In addition, any tax due should be paid by
the Tax Exempt Entity.
A TAX EXEMPT ENTITY'S INVESTMENT IN UNITS WILL RESULT IN THE REALIZATION
OF UBTI AND SUCH TAX EXEMPT ENTITY IS URGED TO OBTAIN THE ADVICE OF A
QUALIFIED TAX ADVISOR ON THE EFFECT OF REALIZING UBTI AND ANY OBLIGATION TO
FILE INCOME TAX RETURNS AND TO PAY TAX ON SUCH UBTI. SEE "ERISA
CONSIDERATIONS."
INVESTMENT BY NONRESIDENT ALIEN INDIVIDUALS AND FOREIGN CORPORATIONS
Nonresident alien individuals and foreign corporations that become
Limited Partners will, like the Partnership, be deemed to be engaged in the
conduct of a trade business within the United States. Under Sections 871(b)
and 882(a) of the Code, nonresident aliens individuals and foreign
corporations, respectively, will be subject to United States income tax on
their allocable shares of any Partnership taxable income. Nonresident alien
individuals and closely held foreign corporations that acquire Units will
also be subject to the same limitations on the deduction of Partnership
losses that apply to domestic Limited Partners. See "Income Tax
Considerations - Certain Principles of Partnership Taxation, Limitations on
Utilization of Partnership Losses."
Foreign corporations may also be subject to the branch profits tax under
Section 884 of the Code. Such tax is equal to 30% of a foreign corporation's
earnings and profits effectively connected with a United States business that
are withdrawn (or deemed withdrawn) from investment in the United States.
This tax is payable in addition to the regular United States corporate tax.
In certain circumstances, the imposition of the branch profits tax may be
overridden by the nondiscrimination provisions of applicable United States
tax treaties.
The Partnership will be required to withhold from distributions to each
foreign Limited Partner an amount equal to a percentage of the Partnership's
taxable income that is allocable to the Limited Partner. Section 1446 of the
Code provides that the amount of tax to be withheld is the "applicable
percentage" of the taxable income of the Partnership allocable to foreign
Limited Partners. The applicable percentage is equal to the highest
appropriate tax rate, currently 39.6% for individual foreign Limited Partners
and 35% for corporate foreign Limited Partners. See "Income Tax
Considerations - Taxes." Such withheld amounts will be credited against the
Limited Partners' federal income tax liabilities for the taxable year in
which withheld, and any excess will be refundable. Foreign Limited Partners
may be entitled to tax credits for United States taxes
-60-
<PAGE>
in their countries of residence, and should consult with their local and United
States tax advisors with regard to the tax consequences of an investment in
Units.
TAXES
GENERAL. The highest stated marginal individual tax rate is currently
39.6%. For 1995, the deduction for personal exemptions begin to be phased
out for single taxpayers with an adjusted gross income over $114,700 and for
married taxpayers filing joint returns with an adjusted gross income over
$172,050. Further, otherwise allowable itemized deductions (other than
medical expenses, casualty and theft losses and investment interest) for 1995
are reduced by an amount equal to three percent of a taxpayer's adjusted
gross income over $114,700 ($57,350 in the case of a married person filing a
separate return). Such deductions are not reduced by more than 80%. For
purposes of the Alternative Minimum Tax set forth in Section 55 of the Code
(see discussion below), the 3% reduction in allowable itemized deductions
does not apply; however, the taxpayer is subject to additional limitations on
deductions as set forth in Section 56 of the Code.
CAPITAL GAINS AND LOSSES. Net capital gains (i.e., the excess of net
long-term capital gains over short-term capital losses) of individuals are
taxed at a 28% maximum tax rate. Capital losses, whether long-term or
short-term, of individuals are only available to offset $3,000 of ordinary
income in a given taxable year. Any remaining capital loss may be carried
forward indefinitely.
TWO PERCENT FLOOR ON MISCELLANEOUS ITEMIZED DEDUCTIONS. Noncorporate
Limited Partners may deduct expenses paid or incurred for (a) the production
or collection of income, (b) the management, conservation, or maintenance of
property held for the production of income, or (c) in connection with the
determination, collection or refund of a tax, only to the extent such
expenses exceed two percent of adjusted gross income. This rule is to apply
with respect to indirect deductions through pass-through entities (such as
the Partnership) of amounts that would not be allowable as a deduction if
paid or incurred directly by an individual. Although it is not anticipated
that the Partnership will incur any material expenses of this nature, the two
percent limit described above may cause certain expenses allocable to Limited
Partners to be nondeductible.
ALTERNATIVE MINIMUM TAX. This discussion only addresses the alternative
minimum tax as it applies to noncorporate taxpayers (and to shareholders of
an S corporation). The first step in determining a taxpayer's alternative
minimum tax liability, if any, is calculation of the taxpayer's alternative
minimum taxable income. Alternative minimum taxable income is computed by
adjusting the taxpayer's taxable income in accordance with the rules set
forth in Sections 55, 56 and 58 of the Code, and by increasing the resulting
amount by the taxpayer's items of tax preference described in Code Section
57. Alternative minimum taxable income is then reduced by a specified
exemption amount and by the taxpayer's alternative minimum tax foreign tax
credit for the taxable year. The exemption amounts are $45,000 for married
couples filing joint returns, $33,750 for single individuals, and $22,500 for
married persons filing separate returns. The exemption is phased out above
certain alternative minimum taxable income levels: $150,000 for married
taxpayers filing joint returns, $112,500 for single taxpayers, and $75,000
for married taxpayers filing separate returns. The alternative minimum tax
rate is 26% on the amount of the taxpayer's alternative minimum taxable
income which does not exceed $175,000 (after taking into account the
exemption amount) and 28% on the amount exceeding $175,000. A taxpayer is
only required to pay an alternative minimum tax liability to the extent that
the amount of that liability exceeds the liability which the taxpayer would
otherwise have for the regular federal income tax.
One of the adjustments to taxable income established by Code Section 56
relates to the amount of cost recovery deduction claimed on personal
property. To derive a taxpayer's alternative minimum taxable income, the
taxpayer's taxable income must be adjusted by an amount equal to the
difference between (i) the amount of cost recovery deductions claimed by the
taxpayer with respect to personal property and (ii) the amount which would
have been allowable over the asset depreciation range class life of the
property using the 150% declining balance method, converting to straight-line
when necessary to maximize the remaining deductions. The adjustment results
in a basis in the depreciated property for alternative minimum tax purposes
which may differ from its basis for regular tax purposes. Thus, upon
disposition of the property, the taxpayer will generally
-61-
<PAGE>
recognize less gain (or a greater loss) for alternative minimum tax purposes
than for regular tax purposes. Contributions of appreciated property (real,
personal and intangible) to certain qualified charitable organizations made
after December 31, 1992 (after June 30, 1992 in the case of tangible personal
property) will no longer result in an alternative minimum tax adjustment.
Items of tax preference include other items which are not anticipated to be
generated by the Partnership, but may apply in the case of certain Limited
Partners due to their particular facts and circumstances unrelated to the
Partnership.
PARTNERSHIP TAX RETURNS AND TAX INFORMATION
The General Partner will file the Partnership's tax returns using the
accrual method of accounting and will adopt the calendar year as the
Partnership's taxable year. See "Income Tax Considerations - Certain
Principles of Partnership Taxation." The Partnership will provide tax
information to the Limited Partners within 75 days after the close of each
taxable year. If a Limited Partner is required to file its tax return on or
before March 15, it may be necessary for the Limited Partner to obtain an
extension to file if the tax information referred to above is not distributed
until the end of the 75-day period.
Limited Partners will be required to file their returns consistent with
the information provided on the Partnership's informational return or notify
the IRS of any inconsistency. A failure to notify the IRS of an inconsistent
position allows the IRS automatically to assess and collect the tax, if any,
attributable to the inconsistent treatment.
IRS AUDIT OF THE PARTNERSHIP
The tax return filed by the Partnership may be audited by the IRS.
Adjustments, if any, from such audit may result in an audit of the Limited
Partners' own returns. Any such audit of the Limited Partners' tax returns
could result in adjustments of non-Partnership as well as Partnership items
of income, gain, loss, deduction and tax preference.
Audit proceedings are conducted at the partnership level and, if the IRS
initiates an administrative proceeding or makes a "final adjustment" at the
partnership level, it must notify each partner of the beginning and
completion of the partnership administrative proceedings. Notice need not be
given, however, to a partner who has less than a one percent interest in a
partnership which has more than 100 partners, although a group of such
partners having at least a five percent interest in partnership profits in
the aggregate may designate a member of the group to receive notice. Because
the Partnership will have more than 100 Limited Partners, the IRS will not
notify individual Limited Partners of an audit of the Partnership. The
General Partner is the "tax matters partner" who will normally have the
authority to negotiate with the IRS with respect to any Partnership tax
matter; the General Partner will also have the right to initiate judicial
proceedings. A Limited Partner will thus be unable to control either an
audit of the Partnership or any subsequent litigation. If, in such event,
the General Partner does not go to court, any Limited Partner entitled to
receive notice of the proceedings may bring an action to challenge any
proposed audit findings by the IRS. A special statute of limitations exists
in connection with the IRS's right to audit matters at the partnership level.
INTEREST AND PENALTIES
With certain exceptions, a penalty will be assessed for each month or
fraction thereof (up to a maximum of five months) that a partnership return
is filed either late or incomplete. The monthly penalty is equal to $50
multiplied by the number of partners in the partnership during the year for
which the return is due.
With certain exceptions, a penalty will be assessed if the Partnership
fails to furnish to the Limited Partners a correct Schedule K-1 to the
federal income tax return for the Partnership on or before the prescribed due
date (including any extension thereof). The penalty is equal to $50
multiplied by the number of partners
-62-
<PAGE>
not furnished a correct Schedule K-1 on or before the prescribed due date
(including any extension thereof), with a maximum penalty of $100,000 per
calendar year.
Section 6662 of the Code establishes a penalty equal to 20% (40% in
certain gross valuation misstatements) on underpayment of tax attributable to
substantial valuation overstatements. This penalty applies only if (i) the
value or adjusted basis of any property as claimed on an income tax return
exceeds 200% of the correctly determined amount of its value or adjusted
basis and (ii) the underpayment of tax attributable to the substantial
overvaluation exceeds $5,000 ($10,000 in the case of a corporation other than
an S corporation or personal holding company). All or any part of the
penalty may be waived by the IRS upon the taxpayer's showing that a
reasonable basis existed for the valuation claimed on the return and that the
claim was made in good faith. If the Partnership were to overstate the value
of Equipment, a Limited Partner might be liable for this penalty.
There is a 20% penalty on the amount of an underpayment of tax
attributable to a taxpayer's negligent disregard of applicable rules and
regulations or to the "substantial understatement" of a tax liability. A
substantial understatement is defined as an understatement for the taxable
year that exceeds the greater of 10% of the required tax or $5,000 ($10,000
for corporations other than personal holding companies and S corporations).
The penalty can be avoided either by disclosing the questionable item on the
return or by showing that there was "substantial authority" for taking the
position on the return. If a questionable item is related to a tax shelter,
the understatement penalty can only be avoided by showing that the taxpayer
reasonably believed that the treatment of the item was "more likely than not"
the proper treatment. Based upon the representations of the General Partner,
Counsel believes the Partnership will not be characterized as a "tax shelter"
for these purposes. It should also be noted that the General Partner will
not cause the Partnership to claim a deduction unless the General Partner
believes, based upon the advice of its accountants or Counsel, that
substantial authority exists to support the deduction.
All interest payable with respect to a deficiency is compounded daily.
Interest rates are redetermined quarterly and are based on the federal
short-term interest rate (the average rate of interest on Treasury
obligations maturing in less than three years) for the first month of the
preceding quarter plus three percent.
FOREIGN TAX CONSIDERATIONS
As noted above, the Partnership may acquire Equipment which is operated
outside the United States. As a consequence, Limited Partners may be
required to file returns and pay taxes in foreign jurisdictions with respect
to the foreign source income of the Partnership. The income taxed by the
foreign jurisdiction would in such a case be calculated according to the tax
laws of the foreign jurisdiction which may or may not correspond with
applicable United States standards.
Limited Partners who have foreign tax liabilities as a result of the
Partnership may be entitled to a foreign tax credit or to a deduction for
foreign taxes paid which can be utilized to reduce their United States tax
liabilities or taxable income, respectively. The calculation of the foreign
tax credit is quite complex and no assurance can be given that a credit will
be available in the amount of any foreign tax paid. In particular,
prospective Limited Partners should be aware that United States law does not
generally allow a foreign tax credit greater than the taxpayer's United
States federal income tax liability with respect to the foreign source income
of the taxpayer calculated separately for certain types of income including
shipping income and passive rental income. In the event the Partnership
earns these types of income, a Limited Partner must compute separately the
foreign tax credit for each type of income. The foreign source income of a
taxpayer is calculated according to United States rather than the foreign
jurisdiction's tax law. It is possible that a foreign country might impose a
tax in an amount greater than the allowable foreign credit under United
States law. In such a case, Limited Partners would be subject to a higher
effective rate of taxation than if no foreign tax had been imposed. To the
extent that all income taxes paid to a foreign country on a certain type of
income exceed the amount of foreign tax credit allowable in any year for such
type of income, the excess foreign tax credits generally may be carried back
two years or forward five years to offset United States income taxes on that
-63-
<PAGE>
certain type of foreign source income in those tax years. If the Partnership
were to suffer an overall foreign loss in one year and incur foreign taxes in
a subsequent year, the amount of foreign tax credit allowable in that
subsequent taxable year could be reduced on account of the prior foreign
loss, regardless of whether the loss resulted in a United States tax benefit
to the Limited Partners. Each Limited Partner should consult his own tax
advisor regarding the applicability of foreign taxes to his own situation.
Prior to the Partnership entering into an arrangement which contemplates
the use of Equipment outside the United States, the General Partner will
consult with its Counsel and with special counsel located in the foreign
jurisdiction concerning the possibility of structuring the transaction in a
manner which will enable the Limited Partners to avoid being required to file
income tax returns in the foreign jurisdiction. The General Partner has
discretion to cause the Partnership to enter into any such arrangement.
PARTNERSHIP ANTI-ABUSE RULES
Treasury Regulations have recently been promulgated (the "Anti-Abuse
Rules") which purportedly grant authority to the IRS to recharacterize
certain transactions to the extent that it is determined that the utilization
of partnerships is inconsistent with the intent of the federal partnership
tax rules. Under these Anti-Abuse Rules, the IRS may, under certain
circumstances, (i) recast transactions which attempt to use the partnership
form of ownership, or (ii) otherwise treat the partnership as an aggregation
of its partners rather than a distinct separate entity, as appropriate in
order to carry out the purposes of the partnership tax rules. The
Anti-Abuse Rules also provide that the authority to recharacterize
transactions is limited to circumstances under which the tax characterization
by the taxpayer is not, based on all facts and circumstances, clearly
contemplated under the Code or the applicable Treasury Regulations.
These Anti-Abuse Rules are intended to impact only a small number of
transactions which improperly utilize partnership tax rules. It is therefore
not anticipated that the Partnership and/or the transactions contemplated
herein will be affected by the promulgation or administration of these
Anti-Abuse Rules. In light of the broad language incorporated in these
Regulations, however, no assurance can be given that the IRS will not attempt
to utilize the Anti-Abuse Rules to alter, in whole or part, the tax
consequences described herein with regard to an investment in the Partnership.
FUTURE FEDERAL INCOME TAX CHANGES
Neither the General Partner nor Counsel can predict what further
legislation, if any, may be proposed by members of Congress, by the current
administration, or by any subsequent administration, nor can either predict
which proposals, if any, might ultimately be enacted. Neither the General
Partner nor Counsel can predict what changes may be made to existing Treasury
Regulations, or what revisions may occur in the IRS' ruling policy.
Consequently, no assurance can be given that the income tax consequences of
an investment in the Partnership will continue to be as described herein.
Any changes adopted into law may have retroactive effect.
STATE TAXES
In addition to the federal income tax considerations described above,
prospective investors should consider applicable state and local taxes which
may be imposed by various jurisdictions. A Limited Partner's distributive
share of the income or loss of the Partnership generally will be required to
be included in determining the Limited Partner's reportable income for state
or local tax purposes in the jurisdiction in which the Limited Partner is a
resident. Moreover, Pennsylvania and a number of other states in which the
Partnership may do business generally impose state income tax on a
nonresident and foreign Limited Partner's distributive share of Partnership
income which is derived from such states. Pennsylvania and a number of other
states have adopted a withholding tax procedure in order to facilitate the
collection of taxes from nonresident and foreign Limited Partners on
Partnership income derived from such states. Any amounts withheld would be
deemed distributed to the nonresident or foreign Limited Partner and would,
therefore, reduce the amount
-64-
<PAGE>f
of cash actually received by the nonresident or foreign Limited Partner as a
result of such distribution. Nonresidents may be allowed a credit for the
amount so withheld against income tax imposed by their state of residency.
The Partnership cannot, at present, estimate the percentage of its future
income that will be from states which have adopted such withholding tax
procedures and it cannot, therefore, estimate the required withholding tax, if
any. In addition, while the Partnership intends to apply to the applicable
taxing authority of such states for a waiver (or a partial waiver), if any, of
such withholding requirements, no assurance can be given that such waiver will
ultimately be granted.
PROSPECTIVE INVESTORS SHOULD BE AWARE THAT, IN COMPUTING THEIR TAXABLE
INCOME FOR PURPOSES OF DETERMINING THEIR STATE INCOME TAX LIABILITIES, THEY
MAY BE SUBJECT TO RULES WHICH ARE LESS FAVORABLE THAN THOSE UNDER FEDERAL
INCOME TAX LAWS.
NEED FOR INDEPENDENT ADVICE
The foregoing summary is not intended as a substitute for careful tax
planning, particularly since the income tax consequences associated with an
investment in the Partnership are complex and certain of them will not be the
same for all taxpayers. ACCORDINGLY, PROSPECTIVE PURCHASERS OF UNITS ARE
STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH SPECIFIC REFERENCE TO
THEIR OWN TAX SITUATIONS.
ERISA CONSIDERATIONS
FIDUCIARIES UNDER ERISA
A fiduciary of a pension, profit sharing or other employee benefit plan
subject to Title I of ERISA (an "ERISA Plan"), should consider whether an
investment in the Units is consistent with his fiduciary responsibilities
under ERISA. In particular, the fiduciary requirements under Part 4 of Title
I of ERISA require the discharge of duties solely in the interest of, and for
the exclusive purpose of providing benefits to, the ERISA Plan's participants
and beneficiaries. A fiduciary is required to perform the fiduciary's duties
with the skill, prudence, and diligence of a prudent man acting in like
capacity, to diversify investments so as to minimize the risk of large losses
unless it is clearly prudent not to do so, and to act in accordance with the
ERISA Plan's governing documents, provided that the documents are consistent
with ERISA.
Fiduciaries with respect to an ERISA Plan include any persons who have
any power of control, management, or disposition over the funds or other
property of the ERISA Plan. An investment professional who knows or ought to
know that his or her advice will serve as one of the primary bases for the
ERISA Plan's investment decisions may be a fiduciary of the ERISA Plan, as
may any other person with special knowledge or influence with respect to a
ERISA Plan's investment or administrative activities.
It should be noted that while the beneficial "owner" or "account holder"
of an IRA is treated as a fiduciary of the IRA under the Code, Tax Exempt
Entities generally are not subject to ERISA's fiduciary duty rules. Also, if
a participant in an ERISA Plan exercises independent control over the
investment of the participant's individual account in the ERISA Plan (a
"self-directed investment" arrangement), the participant is not deemed to be
a fiduciary. Finally, certain Qualified Plans of sole proprietors or
partnerships in which at all times (before and after the investment) the only
participant(s) is/are the sole proprietor and his or her spouse or the
partners and their spouses, and certain Qualified Plans of corporations in
which at all times (before and after the investment) the only participant(s)
is/are an individual or/and his or her spouse who own(s) 100% of the
corporation's stock, are generally not subject to ERISA's fiduciary
standards, although they are subject to the Code's prohibited transaction
rules explained below.
-65-
<PAGE>
A person subject to ERISA's fiduciary rules with respect to an ERISA
Plan should consider those rules in the context of the particular
circumstances of the ERISA Plan before authorizing an investment of a portion
of the ERISA Plan's assets in Units.
Fiduciaries of an ERISA Plan that permits a participant to exercise
independent control over the investments of his individual account in
accordance with Section 404(c) of ERISA (a "self-directed investment"
arrangement) will not be liable for any investment loss or for any breach of
the prudence or diversification obligations that results from the
participant's exercise of such control, and the participant is not deemed to
be a fiduciary subject to the general ERISA fiduciary obligations described
above merely by virtue of his exercise of such control.
The fiduciary of an IRA or a qualified retirement plan not subject to
Title I of ERISA because it is a governmental or church plan or because it
does not cover common law employees (a "Non-ERISA Plan") should consider that
such an IRA or Non-ERISA Plan may only make investments that are authorized
by the appropriate governing documents and under applicable state law.
PROHIBITED TRANSACTIONS UNDER ERISA AND THE CODE
Any fiduciary of an ERISA Plan or a person making an investment decision
for a non-ERISA Plan or an IRA should consider the prohibited transactions
provisions of Section 4975 of the Code and Section 406 of ERISA when making
their investment decisions. These rules prohibit such plans from engaging in
certain transactions involving "plan assets" with parties that are
"disqualified persons" described in Section 4975(e)(2) of the Code or
"parties in interest" described in Section 3(14) of ERISA ("Disqualified
persons" and "parties in interest" are hereinafter collectively referred to
as "disqualified persons").
"Prohibited transactions" include, but are not limited to, any direct or
indirect transfer or use of a Benefit Plan's or IRA's assets to or for the
benefit of a disqualified person, any act by a fiduciary that involves the
use of a Benefit Plan's assets in the fiduciary's individual interest or for
the fiduciary's own account, and any receipt by a fiduciary of consideration
for his or her own personal account from any party dealing with a Benefit
Plan. Under ERISA, a disqualified person that engaged in a prohibited
transaction will be made to disgorge any profits made in connection with the
transaction and will be required to compensate any ERISA Plan that was a
party to the prohibited transaction for any losses sustained by the ERISA
Plan. Section 4975 of the Code imposes excise taxes on a disqualified person
that engages in a prohibited transaction with an ERISA Plan or a non-ERISA
Plan or an IRA subject to Section 4975 of the Code. If the disqualified
person who engages in the transaction is the individual on behalf of whom the
IRA is maintained (or his beneficiary), the IRA may lose its tax exempt
status and the assets will be deemed to be distributed to such individual in
a taxable transaction.
In order to avoid the occurrence of a prohibited transaction under
Section 4975 of the Code and/or Section 406 of ERISA, Units may not be
purchased by a ERISA Plan, an IRA, or a non-ERISA plan subject to Section
4975 of the Code, as to which the General Partner or any of its Affiliates
have investment discretion with respect to the assets used to purchase the
Units, or with respect to which they have regularly given individualized
investment advice that serves as the primary basis for the investment
decisions made with respect to such assets. Additionally, fiduciaries of, and
other disqualified persons with respect to, an ERISA Plan, an IRA, and a
non-ERISA Plan subject to Section 4975 of the Code, should be alert to the
potential for prohibited transactions to occur in the context of a particular
plan's or IRA's decision to purchase Units.
Neither the General Partner nor the Partnership shall have any liability
or responsibility to any Benefit Plan that is a Limited Partner or any other
Limited Partner, including any Limited Partner that is a Tax Exempt Entity,
for any tax, penalty or other sanction or costs or damages arising as a
result of there being a prohibited transaction or as a result of Partnership
assets being deemed plan assets of the Limited Partner under the Code or
ERISA or other applicable law.
-66-
<PAGE>
"PLAN ASSETS"
If the Partnership's assets were determined under ERISA or the Code to be
"plan assets" of a Limited Partner which is a Benefit Plan (i) the prudence
standards and other provisions of Part 4 of Title I of ERISA would be applicable
to any transactions involving the Partnership's assets, (ii) persons who
exercise any authority or control over the Partnership's assets, or who provide
investment advice to the Partnership, would (for purposes of the fiduciary
responsibility provisions of ERISA) be fiduciaries of each ERISA Plan that
acquires the Unit, and transactions involving the Partnership's assets
undertaken at their direction or pursuant to their advice might violate their
fiduciary responsibilities under ERISA, especially with regard to conflicts of
interest, (iii) a fiduciary exercising his investment discretion over the assets
of an ERISA Plan to cause it to acquire or hold the Unit could be liable under
Part 4 of Title I of ERISA for transactions entered into by the Partnership that
do not conform to ERISA standards of prudence and fiduciary responsibility, and
(iv) certain transactions that the Partnership might enter into in the ordinary
course of its business and operations might constitute "prohibited transactions"
under ERISA and the Code. The Benefit Plan's fiduciaries might, under certain
circumstances, be subject to liability for actions taken by the General Partner
or its affiliates, and certain of the transactions described in this Prospectus
in which the Partnership might engage, including certain transactions with
Affiliates, may constitute prohibited transactions under the Code and ERISA with
respect to such Benefit Plan, even if their acquisition of Units did not
originally constitute a prohibited transaction.
Under the Department of Labor ("DOL") regulations governing the
determination of what constitutes the assets of a Benefit Plan in the context of
investment securities such as Units, an undivided interest in the underlying
assets of a collective investment entity such as the Partnership will be treated
as "plan assets" of Benefit Plan investors if (i) the securities are not
publicly offered, (ii) 25% or more by value of any class of equity securities of
the entity is owned by Benefit Plans, (iii) the interests of the Benefit Plan
investors are "equity interests," and (iv) the entity is not an "operating
company." In order for securities to be treated as "publicly offered," they
have to be either (a) part of a class of securities registered under Section
12(b) or 12(g) of the Securities Exchange Act of 1934 or (b) sold as part of an
offering registered under the Securities Act of 1933, and must also meet certain
other requirements, including a requirement that they be "freely transferable."
Units will be sold as part of an offering registered under the Securities
Act of 1933. However, in Counsel's view, the Partnership is not an "operating
company" and the restrictions on transferability of Units (see "Transferability
of Units") prevent the Units from being "freely transferable" for purposes of
the DOL's regulations. Consequently, in order to ensure that the assets of the
Partnership will not constitute "plan assets" of Limited Partners which are
Benefit Plans, the General Partner will take such steps as are necessary to
ensure that ownership of Units by Benefit Plan investors is at all times less
than 25% of the total value of outstanding Units. In calculating this limit,
the General Partner shall, as provided in the DOL's regulations, disregard the
value of any Units held by a person (other than a Benefit Plan) who has
discretionary authority or control with respect to the assets of the
Partnership, or any person who provides investment advice for a fee (direct or
indirect) with respect to the assets of the Partnership, or any affiliate of any
such a person. See "Investor Suitability Standards." However, neither the
General Partner nor the Partnership shall have any liability or responsibility
to any Tax Exempt Entity Limited Partner or any other Limited Partner for any
tax, penalty or other sanction or costs or damages arising as a result of
Partnership assets being deemed plan assets of a Tax Exempt Entity Limited
Partner under the Code or ERISA or other applicable law.
OTHER ERISA CONSIDERATIONS
In addition to the above considerations in connection with the "plan
assets" issue, a decision to cause a Benefit Plan to acquire Units should
involve considerations, among other factors, of whether (i) the investment is in
accordance with the documents and instruments governing the Benefit Plan, (ii)
the purchase is prudent in light of the diversification of assets requirement
and the potential difficulties that may exist in liquidating Units, (iii) the
investment will provide sufficient cash distributions in light of the Benefit
Plan's required benefit payments or other distributions, (iv) the evaluation of
the investment has properly taken into account the potential costs of
determining and paying any amounts of federal income tax that may be owed on
-67-
<PAGE>
UBTI derived from the Partnership, (v) in the case of an ERISA Plan, the
investment, unless the investment is made in accordance with a self-directed
individual arrangement under Section 404(c) of ERISA and regulations promulgated
thereunder, is made solely in the interests of the ERISA Plan's participants,
and (vi) the fair market value of Units will be sufficiently ascertainable, and
with sufficient frequency, to enable the Benefit Plan to value its assets in
accordance with the rules and policies applicable to the Benefit Plan.
Prospective ERISA Plan investors should note that, with respect to the
diversification of assets requirement, the legislative history of ERISA and a
DOL advisory opinion indicate that the determination of whether the assets of a
ERISA Plan that has invested in an entity such as the Partnership are
sufficiently diversified may be made by looking through the ERISA Plan's
interest in the entity to the underlying portfolio of assets owned by the
entity.
-68-
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULT OF OPERATIONS
The Partnership has no operating history. The Partnership intends to
acquire various types of computer peripheral and similar Equipment, and to lease
such Equipment predominantly under Operating Leases. The Partnership may also
lease Equipment under Full Payment Net Leases or enter into Conditional Sales
Contracts with respect to Equipment. The Partnership anticipates that it will
use a substantial portion of the proceeds of this Offering, excess Cash Flow,
debt financing and Net Disposition Proceeds received by the Partnership prior to
its liquidation phase to purchase computer peripheral or other similar capital
Equipment manufactured by, or compatible with, equipment manufactured by IBM.
See "Investment Objectives and Policies - Types of Equipment," "Description of
Leases" and "Risk Factors - Dependence on Manufacturers and IBM," "Risks of
Leverage and Availability of Financing," "Risks of Equipment Operations" and
"Unspecified Equipment and Lessees."
The Partnership's operating revenues will initially be generated primarily
from leasing, and otherwise entering into contracts for the use of Equipment.
Operating revenues will be utilized to pay Partnership expenses and provide cash
distributions to Limited Partners. See "Investment Objectives and Policies -
Description of Leases." The General Partner anticipates that the Partnership
will commence liquidation of all of its assets beginning in the ninth year of
program operations, subject to the General Partner's discretion to extend the
liquidation process if in the General Partner's discretion such extension will
enable the Partnership to dispose of its assets on more favorable terms. In no
event will the Partnership continue after December 31, 2006. See "Investment
Objectives and Policies - Liquidation Policies."
Because the Partnership's leases and Conditional Sales Contracts will be on
a "triple-net" (or equivalent) basis, it is anticipated that no permanent
reserve for maintenance and repairs will be established from the Offering
proceeds. However, the General Partner is authorized to establish reserves in
the future if and to the extent it deems necessary for maintenance, repairs and
working capital. In addition, the General Partner and Com Cap Corp. have agreed
that the General Partner or Com Cap Corp. will lend or contribute to the
Partnership an amount equal to 1.01% of net Offering proceeds, if needed, to
meet the Partnership's expenses. If available Cash Flow or Net Disposition
Proceeds are insufficient to cover the Partnership's expenses and liabilities,
the Partnership will obtain additional funds by disposing of or refinancing
Equipment or by borrowing within its permissible limits.
-69-
<PAGE>
SUMMARY OF THE PARTNERSHIP AGREEMENT
The rights and obligations of the Partners in the Partnership will be
governed by the Partnership Agreement, which is attached in its entirety as
Appendix I hereto. The following statements, and other statements in this
Prospectus concerning the Partnership Agreement and related matters, are merely
an outline, do not purport to be complete, in no way modify or amend the
Partnership Agreement and are qualified in all respects and in each case by the
language of the Partnership Agreement.
THE UNITS
A maximum of 750,000 Units are authorized for issuance and sale in the
Offering. Subscribers who are accepted as Limited Partners by the General
Partner on or before the Initial Closing will be admitted to the Partnership as
Limited Partners on the day of the Initial Closing. Thereafter, Subscribers who
are accepted as Limited Partners by the General Partner will be admitted into
the Partnership as Limited Partners on or before the last day of the calendar
month following the date such acceptance occurs. Transferees of Units will be
recognized as Substituted Limited Partners on or before the first day of the
calendar month following the calendar month in which the General Partner
receives a completed transfer application and approves the transferee as a
Substituted Limited Partner. The Partnership's records shall be amended to
reflect the substitution of Limited Partners at least once in each calendar
quarter.
NONASSESSABILITY OF UNITS
The Units are nonassessable. When a Unit has been paid for in full, the
holder of the Unit has no obligation to make additional contributions to the
Partnership's capital.
LIABILITY OF LIMITED PARTNERS
Limited Partners are not personally liable for the obligations of the
Partnership, but their investments are subject to the risks of the Partnership's
business and the claims of its creditors. A Limited Partner, under certain
circumstances, may be liable to return any distributions from the Partnership to
the extent that, after giving effect to the distribution, all liabilities of the
Partnership (other than nonrecourse liabilities and liabilities to Partners on
account of their interests in the Partnership) exceed the fair value of the
Partnership's assets, including assets serving as security for nonrecourse
liabilities.
ALLOCATIONS AND DISTRIBUTIONS
The provisions of the Partnership Agreement governing the allocation of tax
items and the apportionment of cash distributions are summarized under the
caption "Allocations and Distributions."
RESPONSIBILITIES OF THE GENERAL PARTNER
The General Partner has the exclusive responsibility for the management and
control of all aspects of the business of the Partnership. In the course of its
management, the General Partner may, in its absolute discretion, cause the
Partnership to purchase, own, lease, sell and/or make future commitments to
purchase, lease and/or sell the Equipment and interests therein when and upon
such terms as it determines to be in the best interests of the Partnership as it
deems necessary for the efficient operation of the Partnership, except that
Limited Partners holding more than 50% of the outstanding Units held by all
Limited Partners (a "Majority in Interest") must approve the sale of
substantially all of the assets of the Partnership, except when such sales occur
in the orderly liquidation and winding up of the business of the Partnership.
A Majority in Interest of the Limited Partners may, at any time, remove the
General Partner. Upon the removal of the General Partner, the Partnership will
be dissolved and liquidated unless, within 60 days of
-70-
<PAGE>
such removal, a Majority in Interest of the Limited Partners elect a
successor General Partner to continue the Partnership.
RECORDS AND REPORTS
The General Partner will keep at the Partnership's principal place of
business adequate books of account and records of the Partnership. Each Limited
Partner has the right, upon reasonable notice and within normal working hours,
and at the expense of the Limited Partner, to inspect and copy true and full
information regarding the state of the business and financial condition of the
Partnership, federal, state and local tax returns of the Partnership, a list of
the Partners and other information regarding the affairs of the Partnership as
it may reasonably request. See "Reports to Limited Partners" for a description
of the reports and financial statements which the General Partner will provide
to the Limited Partners during the term of the Partnership.
MEETINGS OF THE PARTNERS
The General Partner may call a meeting of the Limited Partners at any time,
or call for a vote, without a meeting, of the Limited Partners on matters on
which they are entitled to vote. The General Partner is required to call such
a meeting, or for such a vote, on the written request of Limited Partners
holding 10% or more of the total Units held by all Limited Partners. Any vote
of a Limited Partner may be made in person or by proxy.
VOTING RIGHTS OF LIMITED PARTNERS
The voting rights of the Limited Partners are set forth in the Partnership
Agreement. By a vote of Limited Partners holding more than one-half of the
outstanding Units, the Limited Partners may vote to: (a) approve or disapprove
a sale of all or substantially all of the assets of the Partnership;
(b) dissolve the Partnership; (c) remove or approve the withdrawal of the
General Partner; (d) prior to the removal, withdrawal or dissolution of the
General Partner, elect a successor General Partner; and (e) amend the
Partnership Agreement (except that without the consent of the Partner adversely
affected, no amendment may be made which (i) converts a Limited Partner into a
General Partner; (ii) modifies the limited liability of a Limited Partner;
(iii) alters the interest of the General Partner or Limited Partner in Net
Profits, Net Losses or distributions from the Partnership or of the General
Partner in its compensation; or (iv) affects the status of the Partnership as a
partnership for federal income tax purposes, and except that without the prior
consent of Limited Partners owning at least 66 2/3% of the Units, the
Partnership may not amend the provisions in the Partnership Agreement relating
to allocations, distributions or fees to the General Partner).
With respect to any Units owned by the General Partner or its Affiliates,
the General Partner and its Affiliates may not vote or consent on matters
submitted to the Limited Partners regarding removal of the General Partner or
any transaction between the Partnership and the General Partner or its
Affiliates. In determining the required percentage in interest of Units
necessary to approve a matter on which the General Partner and its Affiliates
may not vote or consent, any Units owned by the General Partner or its
Affiliates shall not be included.
ROLL-UPS AND CONVERSIONS
Without the approval of holders of at least 66 2/3% of all outstanding
Units, the Partnership shall not enter into any Roll-Up. A Roll-Up is defined
in the Partnership Agreement to mean any transaction involving the acquisition,
merger, conversion, or consolidation, either directly or indirectly, of the
Partnership and the issuance of securities of a Roll-Up Entity. A Roll-Up does
not include: a transaction involving securities if the securities have been
listed for at least twelve months on a national securities exchange or traded
through the NASD Automated Quotation National Market System; or a transaction
involving the conversion to corporate, trust or association form of only the
Partnership if, as a consequence of the transaction, there will be no
significant adverse change in the Limited Partners' voting rights, the term of
existence of the Partnership,
-71-
<PAGE>
compensation of the General Partner or its Affiliates, or the Partnership's
investment objectives. Limited Partners who do not consent to an approved
Roll-Up shall be given the option of (i) accepting the securities of the
Roll-Up Entity offered in the proposed Roll-Up; or (ii) receiving cash in an
amount equal to the non-consenting Limited Partner's pro rata share of the
appraised value of the net assets of the Partnership. An appraisal of the
net assets of the Partnership shall be performed by a competent independent
expert engaged for the benefit of the Partnership and the Limited Partners.
Such appraisal shall be made on the basis of an orderly liquidation of the
assets of the Partnership over a 12-month period as of a date immediately
prior to the announcement of the proposed Roll-Up. If the appraisal will be
included in a prospectus used to offer the securities of a Roll-Up Entity,
the appraisal shall be filed with the Securities and Exchange Commission and
the states as an exhibit to the registration statement for the offering. The
Partnership shall not reimburse the sponsor of a proposed Roll-Up for the
costs of an unsuccessful proxy contest in the event the Roll-Up is not
approved by the Limited Partners.
By the vote of a majority in interest of the Limited Partners the
Partnership is permitted to engage is a conversion of the Partnership into
another form of business entity which does not result in a significant adverse
change in (i) the voting rights of the Limited Partners, (ii) the termination
date of the Partnership (currently, December 31, 2006, unless terminated earlier
in accordance with the Partnership Agreement), (iii) the compensation payable to
the General Partner or its Affiliates, or (iv) the ability to meet the
Partnership's investment objectives without materially impairing the rights of
the Limited Partners. The General Partner will make the determination as to
whether or not any such conversion will result in a significant adverse change
in any of the provisions listed in the preceding paragraph based on various
factors relevant at the time of the proposed conversion, including an analysis
of the historic and projected operations of the Partnership; the tax
consequences (from the standpoint of the Limited Partners) of the conversion and
of an investment in a limited partnership as compared to an investment in the
type of business entity into which the Partnership would be converted; and the
performance of the equipment industry in general, and of the computer
peripherals segment of the industry in particular. In general, the General
Partner would consider any material limitation on the voting rights of the
Limited Partners or any substantial increase in the compensation payable to the
General Partner or its Affiliates to be a significant adverse change in the
listed provisions.
POWER OF ATTORNEY
Pursuant to the terms of the Partnership Agreement, each purchaser of a
Unit and each transferee of a Unit appoints the General Partner, acting alone,
as the purchaser's or transferee's attorney-in-fact to make, execute, file,
and/or record (i) documents relating to the Partnership and its business
operations requested by or appropriate under the laws of any appropriate
jurisdiction; (ii) instruments with respect to any amendment (iii) instruments
or papers required to continue the business of the Partnership pursuant to the
Partnership Agreement; (iv) instruments relating to the admission of any Partner
to the Partnership; (v) a master list in accordance with Section 6112 of the
Code (or any successor provision), relating to the Partnership's tax shelter
registration (see "Income Tax Considerations - Partnership Tax Returns and Tax
Information"); and (vi) all other instruments deemed necessary or advisable to
carry out the provisions of the Partnership Agreement. The power of attorney is
irrevocable, will survive the death, incompetency, dissolution, disability,
incapacity, bankruptcy, or termination of the granting purchaser or transferee,
and will extend to such person's heirs, successors, and assigns.
The General Partner will be designated as the "Tax Matters Partner" who
shall have authority to make certain elections on behalf of the Partnership and
the Limited Partners, including extending the statute of limitations for
assessment of tax deficiencies against the Limited Partners with respect to
Partnership items, and to enter into a settlement agreement with the IRS. See
"Income Tax Considerations - Audit of the Partnership."
-72-
<PAGE>
PARTNERSHIP TERM
The term of the Partnership will expire on December 31, 2006, though the
Partnership may be terminated and dissolved earlier after any of the following
events:
(i) The vote or written consent of a Majority in Interest of the
Limited Partners;
(ii) The dissolution of the Partnership by judicial decree;
(iii) The expiration of 60 days following the removal, withdrawal,
involuntary dissolution, or Bankruptcy (or, in the case of an individual,
the death or appointment of a conservator for the person or any of the
assets) of the last remaining general partner of the Partnership, unless
all Limited Partners (or a Majority in Interest of the Limited Partners, if
the Terminating Event is the removal, Bankruptcy, or involuntary
dissolution of the last remaining general partner) vote to continue the
Partnership and a successor general partner is elected;
(iv) The determination by the General Partner that it is
necessary to commence the liquidation of the Equipment in order for the
liquidation of all the Equipment to be completed in an orderly and business
like fashion prior to December 31, 2006; or
(v) The sale of disposition of all the Partnership's Equipment.
INVESTOR SUITABILITY STANDARDS
An investment in the Partnership is suitable only for persons or entities
of adequate means who have no need for liquidity in their investment since
(i) investment in the Units involves certain risks and (ii) the Units are not
freely transferrable and a public market for the Units does not exist and is not
likely to develop. See "Risk Factors."
NET WORTH/INCOME
Except with respect to Qualified Plans and Tax Exempt Entities, Units will
be sold only to an investor who represents that he has either (i) a net worth
(exclusive of home, home furnishings and automobiles) of at least $45,000 AND an
annual gross income of at least $45,000, OR (ii) irrespective of annual gross
income, a net worth (exclusive of home, home furnishings and automobiles) of at
least $150,000, or that he is purchasing in a fiduciary capacity for a person
who meets such conditions. If the investor is a Qualified Plan or an IRA, such
investor must represent (i) that the IRA owner or the participant in the self-
directed Qualified Plan satisfies the foregoing standards, or (ii) if other than
a self-directed Qualified Plan, that the Qualified Plan satisfies the foregoing
suitability standards. The Partnership will apply these suitability standards
only with respect to investors who acquire Units in its Offering.
Although the General Partner believes that Units may represent suitable
investments for individuals, Qualified Plans, Tax Exempt Entities, and many
different types of entities, due to tax rules of particular application to
certain types of entities, Units may not be suitable investments for such
entities. The Partnership will produce unrelated business taxable income which,
to the extent that it exceeds $1,000 in any taxable year from all sources, is
taxable to Qualified Plans and Tax Exempt Entities. See "Income Tax
Considerations - Investment by Tax Exempt Entities." Prospective investors
should consult their tax advisors with respect to the tax consequences of an
investment in Units as it may affect their particular tax situations.
Certain state securities commissions have established suitability standards
or minimum investment amounts for the offer and sale of securities which are
different than those set forth above. All states in which the Partnership is
authorized to sell Units have minimum investor suitability standards and minimum
investment
-73-
<PAGE>
amounts which are within the standards and amounts set by the Partnership
except for those states listed below or in a supplement to this Prospectus.
Net worth in all cases excludes home, home furnishings and automobiles.
Additional suitability standards or minimum investment amounts are as
follows:
Arizona: Net worth of at least $225,000 or current annual income of
at least $60,000 and a net worth of at least $60,000.
California: Net worth of at least $225,000 or current annual income
of at least $60,000 and a net worth of at least
$60,000.
Iowa: Net worth of at least $225,000 or current annual income
of at least $60,000 and a net worth of at least
$60,000. Minimum investment amount for Tax Exempt
Entities and Keogh Plans is $2,500.
Massachusetts: Net worth of at least $225,000 or current annual income
of at least $60,000 and a net worth of at least
$60,000.
Michigan: In no event shall the aggregate purchase price of Units
exceed 10% of net worth.
Minnesota: Minimum investment amount for IRA's or Qualified Plans
(but not Tax Exempt Entities) is $2,000.
Missouri: Net worth of at least $225,000 or current annual gross
income of at least $60,000 and a net worth of at least
$60,000.
Nebraska: Minimum investment amount for all investors is $5,000 except
that the minimum investment amount for Tax Exempt Entities
and Keogh Plans is $1,000.
New Jersey: Net worth of at least $225,000 or current annual income
of at least $60,000 and a net worth of at least
$60,000.
North Carolina:Net worth of at least $225,000 or current annual income
of at least $60,000 and a net worth of at least
$60,000.
Ohio: In no event shall the aggregate purchase price of Units
exceed 10% of net worth.
Pennsylvania: The aggregate purchase price of Units may not exceed
10% of net worth.
The suitability standards imposed by the Partnership will apply to
transferees upon resale of an investor's Units.
It is the responsibility of the General Partner and the Dealer Manager on
behalf of the Partnership to make every reasonable effort to determine that the
purchase of Units is a suitable and appropriate investment for each investor,
based on information provided by the investor regardless of the investor's
financial situation and investment objectives.
The Partnership and/or Dealer Manager will maintain records for at least
six years of the information used to determine the suitability of investors.
-74-
<PAGE>
SUBSCRIBERS' REPRESENTATIONS AND WARRANTIES
Each Subscriber will execute or authorize the execution of a
Subscription Agreement to be submitted to the General Partner. In the States
of Florida, Iowa, Maine, Massachusetts, Michigan, Minnesota, Missouri,
Nebraska, North Carolina, Oregon and Tennessee, Subscribers are required to
personally sign the Subscription Agreement. Each Subscriber will make
certain representations and warranties to the General Partner in his
Subscription Agreement or by paying for his Units, including that he (i) has
received this Prospectus, including the form of Partnership Agreement
attached hereto as Appendix I; (ii) meets the applicable requirements as to
investor suitability; (iii) accepts and adopts the provisions of the
Partnership Agreement; and (iv) authorizes the General Partner, as his
attorney-in-fact, to execute the Partnership Agreement and such other
documents as may be required to carry out the business of the Partnership.
Each Subscriber is also instructed that (a) he should not rely upon any
information not specifically set forth in this Prospectus or any supplements
thereto in making a decision to invest in the Partnership and the General
Partner, the Dealer Manager and the Partnership accept no responsibility for
information provided to an investor that is not clearly marked as being
prepared and authorized by them for use with the public and (b) an investment
in the Partnership involves certain risks including the matters set forth
under the captions "Risk Factors," "Conflicts of Interest," "Management" and
"Income Tax Considerations" in this Prospectus.
SPECIAL LIMIT ON OWNERSHIP OF UNITS BY BENEFIT PLANS
To avoid classification of a pro rata portion of the Partnership's
underlying assets as "plan assets" of investors which are Benefit Plans, the
Partnership intends to restrict the ownership of Units by Benefit Plans to
less than 25% of the total value of outstanding Units at all times. See
"ERISA Considerations - Plan Assets." Benefits Plans include Qualified
Plans, Tax Exempt Entities and certain other entities included in the
definition of Benefit Plans in this Prospectus.
PLAN OF DISTRIBUTION
GENERAL
The Units are offered through Wheat, First Securities, Inc. as Dealer
Manager. The Dealer Manager may offer the Units through other broker-dealers
who are members of the National Association of Securities Dealers, Inc.
("NASD"). The Units are being offered on a "best efforts" basis, which means
that the Dealer Manager and the other broker-dealers are not obligated to
purchase any Units and are only required to use their best efforts to sell Units
to investors. The Offering of the Units is intended to be in compliance with
Article III, Section 34 of the Rules of Fair Practice of the National
Association of Securities Dealers, Inc.
The Partnership will pay to the Dealer Manager an aggregate amount of up to
nine percent of Capital Contributions as Underwriting Commissions after and only
if the required $2,500,000 Minimum Subscription Amount is sold. In addition,
the Partnership will pay the Dealer Manager a non-accountable expense allowance
equal to the lesser of (i) one percent of the Offering proceeds or (ii) $50,000
in connection with the sale and distribution of the Units. The Dealer Manager
will pay other broker-dealers ("Selected Agents") out of Underwriting
Commissions a selling commission of up to seven percent of the Capital
Contributions from Units sold by such Selected Agents. The amount of the
Underwriting Commissions will be determined based upon the quantity of Units
sold to a single investor according to the following schedule:
-75-
<PAGE>
<TABLE>
<CAPTION>
INDIVIDUAL PURCHASE PRICE SELLING
TRANSACTION SIZE PER UNIT COMMISSION DEALER MANAGER FEE
- ---------------- -------- ---------- ------------------
<S> <C> <C> <C>
$ 1,000 to $250,000 $20.00 7% 2%
$250,020 to $350,000 $19.80 6% 2%
$350,020 to $500,000 $19.60 5% 2%
$500,020 to $750,000 $19.40 5% 1%
$750,020 to $1,000,000 $19.20 4% 1%
$1,000,000 and over $19.00 3% 1%
</TABLE>
The Underwriting Agreement, under which the Dealer Manager will offer the
Units, which is terminable without penalty by any party on 60 days' notice,
contains cross-indemnity clauses with respect to certain liabilities between the
General Partner and the Dealer Manager, including liabilities under the
Securities Act. The Dealer Manager and Selected Agents participating in the
offering may be deemed to be "underwriters" as that term is defined in the
Securities Act.
OFFERING OF UNITS
The offering of Units will commence on the Effective Date of the
Registration Statement of which this Prospectus is a part. Provided the General
Partner does not terminate the Offering of Units earlier, the Offering may
continue until the full 750,000 Units are sold, or until May 12, 1997. In the
event the Minimum Subscription Amount has not been received by May 12, 1996,
Subscriptions will be released from the Escrow Account and returned to the
prospective investors, together with any interest actually earned thereon, net
of any tax withholding required by law. See "Plan of Distribution - Escrow
Arrangements and Fundings."
The General Partner and its Affiliates will not be prohibited from
purchasing Units, although it is not their present intention to make such
purchases. Any Units purchased by the General Partner or its Affiliates would
be purchased for their own account and for investment and not for resale. No
Units purchased by the General Partner and its Affiliates may be counted for
purposes of obtaining the Minimum Subscription Amount. If the General Partner
or its Affiliates purchase any Units, the voting rights of the General Partner
with respect to the Units will be as described in the last paragraph of "Summary
of the Partnership Agreement - Voting Rights of Limited Partners".
Any purchase of Units in connection with this Offering must be accompanied
by tender of the sum of $20 per Unit (subject to the quantity discounts referred
to above), which is the full purchase price of a Unit; provided, however, the
Dealer Manager or that Selected Agents may waive the Selling Commission with
respect to the purchase of Units by employees of the Dealer Manager, Selected
Agents, the General Partner and their Affiliates, so long as those employees are
purchasing Units for their own accounts. If such fees are so waived, such
employees will tender no less than $18.60, for the purchase of each Unit. An
investor will be able to subscribe to the purchase of Units by authorizing the
Dealer Manager or a Selected Agent to debit the investor's account maintained
with the Dealer Manager or Selected Agent in the full amount of the subscription
payment. To effect such a purchase, an investor must have the amount of the
subscription payment in the investor's account on the day on which the account
is debited (but such funds are not required to be in the account on an earlier
date). An investor's funds so debited by a Selected Agent will be transferred
by such a Selected Agent to the Dealer Manager no later than the first business
day following the day on which the investor's account is debited.
SUBJECT TO ACCEPTANCE BY THE GENERAL PARTNER OF THE INVESTOR'S SUBSCRIPTION
AGREEMENT OR PAYMENT FOR THE UNITS PURCHASED, EXECUTION OF THE SUBSCRIPTION
AGREEMENT OR PAYMENT FOR THE UNITS PURCHASED SHALL CONSTITUTE THE INVESTOR'S
AGREEMENT TO THE TERMS AND CONDITIONS OF THE SUBSCRIPTION AGREEMENT AND THE
PARTNERSHIP AGREEMENT, AND THE AUTHORITY OF THE GENERAL PARTNER TO EXECUTE THE
PARTNERSHIP AGREEMENT ON BEHALF OF THE INVESTOR.
-76-
<PAGE>
ESCROW ARRANGEMENTS AND FUNDINGS
Subscriptions will be held in the Escrow Account at PNC Bank until funds
equal to the Minimum Subscription Amount have been received. While held in
escrow, Subscriptions will be invested in United States short-term government
securities or interest bearing bank accounts, PNC Bank's Market Value Savings
Account, or a similar account, for the benefit of the investors.
The Partnership will not be funded until the Minimum Subscription Amount
has been received. Once the Minimum Subscription Amount has been deposited in
the Escrow Account, the Subscriptions will be released to the Partnership. Any
interest earned on the Subscriptions while in escrow will be distributed, net of
any tax withholding required by law, directly to the investors promptly
following the funding, allocated in accordance with the amount of Subscriptions
held for each investor and the length of time such Subscriptions were held.
The Offering may be terminated, in the General Partner's discretion, at any
time after the Minimum Subscription Amount has been received and accepted by the
General Partner on behalf of the Partnership. The General Partner also has the
discretion to terminate the Offering prior to receiving the Minimum Subscription
Amount. In such event, the Partnership would be dissolved and Subscriptions held
in escrow, together with any interest actually earned thereon net of any tax
withholding required by law would be returned to the Subscribers. It is
anticipated that the offering of Units will terminate no later than May 12,
1997. Subscriptions will be released from the Escrow Account and returned to
the Subscribers together with any interest actually earned thereon, net of any
tax withholding required by law, in the event the Minimum Subscription Amount
has not been received by May 12, 1996.
Subscribers will be admitted to the Partnership and receive Units at one or
more closings. Following receipt of the Minimum Subscription Amount and the
Initial Closing, Limited Partners will be admitted not later than 15 days after
the release from the Escrow Account to the Partnership of the Subscriber's
funds. Additional closings will be held from time to time during the Offering
Period as Subscriptions are accepted by the General Partner, but no less often
than monthly. Subsequent subscriptions will be accepted or rejected by the
General Partner within 30 days of their receipt. Funds received from rejected
subscriptions will be returned to the Subscribers immediately upon rejection of
their subscription. The final closing will be held shortly after the
termination of the Offering Period or, if earlier, upon the sale of all the
Units. After the Initial Closing, Limited Partners will be admitted to the
Partnership no later than the last day of the calendar month following the date
their Subscriptions are accepted by the General Partner. Each subscriber to the
Partnership will be paid his share of interest earned on Subscription amounts
following the transfer of his Subscription to the Partnership, net of any tax
withholding required by law. These interest payments will be paid by the
Partnership.
SUBSCRIPTION FOR UNITS
Each prospective investor who satisfies the qualifications described under
"Investor Suitability Standards" and desires to purchase Units must:
(a) Review the Subscription Agreement, Signature Page and Power of
Attorney attached as Appendix II to this Prospectus to insure that the investor
is aware of the representations and warranties the investor will be deemed to
have made by subscribing for Units; and
(b) Deliver to the Dealer Manager a check made payable to "PNC Bank,
Escrow Agent FBO Commonwealth Income & Growth Fund II," in the amount of $20.00,
or such other amount as set forth in the table above, for each Unit that the
investor is seeking to purchase. When permitted by applicable law, the Dealer
Manager and certain Selected Agents participating in the sale of Units may
request that the investor authorize a debit to the investor's account maintained
with the Dealer Manager or Selected Agent in the full amount of the subscription
payment in lieu of having the investor deliver a check payable as described
above.
-77-
<PAGE>
The Dealer Manager will not complete a sale of Units until at least five
business days after the date the investor receives a final prospectus and shall
send the investor a confirmation of his or her purchase.
Prospective investors that are not natural persons may be required to
deliver evidence of their authority to subscribe for Units, or opinions of
counsel as to their authority to subscribe for Units and the binding effect of
their subscriptions. Investors who submit subscriptions will not be permitted
to terminate or withdraw their subscriptions without the prior consent of the
General Partner.
The General Partner has the right to reject an investor's subscription for
any reason whatsoever, including the investor's failure to satisfy the
suitability standards described under "Investor Suitability Standards."
SALES MATERIAL
Sales material may be used in connection with the Offering only when
accompanied or preceded by the delivery of this Prospectus. Only sales material
which indicates that it is distributed by the General Partner may be distributed
to prospective investors. Material regarding an investment in the Partnership
may include a question and answer sales booklet, a speech for public seminars,
an invitation to attend public seminars, slide and video presentations,
prospecting letters, mailing cards and tombstone advertisements; all of which
would provide information regarding the General Partner and the Partnership. In
certain jurisdictions, such sales material will not be available. Use of any
materials will be conditioned on filing with, and if required, clearance by,
appropriate regulatory authorities. Such clearance does not mean, however, that
the agency allowing use of the sales literature has passed on the merits of this
Offering or the accuracy of the material contained in such literature. Other
than as described herein, the Partnership has not authorized the use of sales
material.
Although the information contained in such sales material does not conflict
with any of the information contained in this Prospectus, such material does not
purport to be complete and should not be considered as part of this Prospectus
or the Registration Statement of which this Prospectus is a part, or as
incorporated in this Prospectus or the Registration Statement by reference, or
as forming the basis of the Offering. The Offering is made only by this
Prospectus.
REPORTS TO LIMITED PARTNERS
The General Partner will deliver to each Limited Partner, within 120 days
after the end of each year, a balance sheet of the Partnership dated as of
December 31 of such year, together with statements of income, Partners' equity,
and the cash flow position of the Partnership for such year, prepared in
accordance with generally accepted accounting principles and accompanied by an
auditor's report from the Partnership's independent certified public
accountants. The General Partner will within such period also furnish (i) a
report of the activities of the Partnership for the year, which will include for
each item of Equipment acquired by the Partnership which individually represents
at least 10% of the total investment in Equipment, (ii) certain information
relevant to the value or utilization of the Equipment, (iii) a report on
distributions to the Limited Partners during the year and their source, (iv) if
any Equipment is sold during that year a report of the sale price, purchase
price and lease revenues from such Equipment, and (v) a report on any costs
incurred by the General Partner and its Affiliates in performing administrative
services which are reimbursed by the Partnership during the year. Within 60
days after the end of each calendar quarter, the General Partner will also
furnish a report of all services rendered and all fees received by the General
Partners and its Affiliates from the Partnership, an unaudited balance sheet, a
statement of income, a statement of changes in financial position and a report
on the activities of the Partnership.
Until the net proceeds of the Offering of Units are fully invested, the
General Partner will furnish to the Limited Partners, within 60 days after the
end of each calendar quarter, a report of Equipment acquisitions during the
quarter, including the type and manufacturer of each item of Equipment, the
purchase price of the
-78-
<PAGE>
Equipment, and any other material terms of purchase, a statement of the total
amount of cash expended by the Partnership to acquire the Equipment
(including an itemization of all commissions, fees, and expenses and the name
of each payee), and a statement of the amount of net proceeds in the
Partnership which remain unexpended or uncommitted at the end of the quarter.
The General Partner will also furnish to all Limited Partners within 75
days after the end of the year other information regarding the Partnership
necessary for the preparation of their tax returns.
LEGAL MATTERS
Certain legal matters in connection with the Units offered hereby will be
passed upon for the General Partner and the Partnership by Blank, Rome, Comisky
& McCauley, Philadelphia, Pennsylvania, counsel to the General Partner and to
the Partnership. Hunton & Williams, Richmond, Virginia, has acted on behalf of
the Dealer Manager in connection with this transaction.
EXPERTS
The balance sheet of the Partnership, at February 7, 1995, the balance
sheets of the General Partner at February 28, 1995 and February 28, 1994, and
the consolidated financial statements of Com Cap Corp. at February 28, 1995 and
1994, and for the years then ended, appearing in this Prospectus and
Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein and
in the Registration Statement, and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
FURTHER INFORMATION
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits relating thereto which the General
Partner has filed with the Securities and Exchange Commission, Washington, D.C.,
under the Securities Act of 1933, as amended, and to which reference is hereby
made. Copies of the Registration Statement and the exhibits are on file at the
offices of the Securities and Exchange Commission in Washington, D.C., and may
be obtained upon payment of the fee prescribed by the SEC, or may be examined
without charge at the offices of the SEC.
GLOSSARY
The following terms used in this Prospectus shall (unless otherwise
expressly provided herein or unless the context otherwise requires) have the
meanings set forth below. Capitalized terms not otherwise defined herein or
elsewhere in the Prospectus shall have the meanings as set forth in the
Partnership Agreement.
"Accounting Period" shall mean each calendar month during the term of the
Partnership.
"Acquisition Expenses" means expenses relating to the prospective selection
and acquisition of or investment in Equipment by the Partnership, whether or not
actually acquired, including, but not limited to, legal fees and expenses,
travel and communication expenses, costs of appraisal, accounting fees and
expenses and other related expenses.
"Acquisition Fees" means the total of all fees and commissions paid by any
party in connection with the initial purchase of Equipment acquired by the
Partnership. Included in the computation of such fees or
-79-
<PAGE>
commissions shall be the Equipment Acquisition Fee and any commission,
selection fee, construction supervision fee, financing fee, non-recurring
management fee or any fee of a similar nature, however designated.
"Adjusted Capital Contributions" means Capital Contributions of the Limited
Partners reduced by any cash distribution received by the Limited Partners
pursuant to the Partnership Agreement, to the extent such distributions exceed
any unpaid Cumulative Return as of the date such distributions were made.
"Adjusted Basis" means the basis, as defined in Section 1011 of the Code,
for determining gain or loss for federal income tax purposes from the sale,
transfer, or other disposition of property.
"Affiliate" means, when used with reference to a specified Person, (i) any
Person, that directly or indirectly through one or more intermediaries controls
or is controlled by or is under common control with the specified Person, (ii)
any Person that is a director or an executive officer of, partner in, or serves
in a similar capacity to, the specified Person, or any Person of which the
specified Person is an executive officer or partner or with respect to which the
specified Person serves in a similar capacity, (iii) any Person owning or
controlling 10% or more of the outstanding voting securities of such specified
Person, or (iv) if such Person is an officer, director or partner, any entity
for which such Person acts in such capacity.
"Attorney-in-fact" means a Person authorized by another to act in his place
and stead, either for some particular purpose, as to do a particular act, or for
the transaction of business in general.
"Bankrupt" or "Bankruptcy" means, when used with reference to a specified
Person, (i) if such Person (a) files any application or petition in any tribunal
for the appointment of a trustee or receiver, or (b) commences any proceeding
under any bankruptcy or reorganization statute, or under any provision of the
Bankruptcy Code, or under any insolvency law, or under any dissolution or
liquidation law whether now or hereafter in effect, or (ii) if any petition or
application of the type described in subsection (i) above is commenced against
such Person and is not dismissed within 60 days of filing, or an order is
entered appointing a trustee or receiver for such Person, or an order for relief
is issued in any bankruptcy.
"Bankruptcy Code" means the United States Bankruptcy Code.
"Benefit Plan" means any of the following: (i) any employee benefit plan
(as defined in Section 3(3) of ERISA) whether or not it is subject to Title I of
ERISA; (ii) any plan described in Section 4975(e)(1) of the Code; or
(iii) entities whose assets include assets of entities described in paragraphs
(i) and (ii) above by virtue of investment in such entities by the types of
entities described in paragraphs (i) and (ii).
"Capital Account" means a bookkeeping account maintained by the Partnership
for each Partner pursuant to Section 4.1 of the Partnership Agreement.
"Capital Contributions" means in the case of the General Partner, the total
amount of money contributed to the Partnership by the General Partner, and in
the case of Limited Partners, $20 for each Unit, or where the context requires,
the total Capital Contributions of all the Partners.
"Cash Available for Distribution" means Cash Flow plus Net Disposition
Proceeds plus cash funds available for distribution from Partnership reserves,
less such amounts as the General Partner, in accordance with the Partnership
Agreement, causes the Partnership to reinvest in Equipment or interests therein,
and less such amounts as the General Partner, in its sole discretion, determines
should be set aside for the restoration or enhancement of Partnership reserves.
"Cash Flow" for any fiscal period means the sum of (i) cash receipts from
operations, including, but not limited to, rents or other revenues arising from
the leasing or operation of the Equipment and interest, if any, earned on funds
on deposit for the Partnership, but not including Net Disposition Proceeds,
minus (ii) all cash expenses and costs incurred and paid in connection with the
ownership, lease, management, use and/or
-80-
<PAGE>
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 the date, as designated by the General Partner, as of
which the Units shall cease being offered to the public pursuant to the
Offering, and shall be no later than the second anniversary of the Effective
Date.
"Code" means the Internal Revenue Code of 1986, as amended, and as may be
amended from time to time by future federal tax statutes. Any reference in the
Partnership Agreement to a particular provision of the Code shall mean, where
appropriate, the corresponding provision of any successor statute.
"Competitive Equipment Sale Commission" means that brokerage fee paid for
services rendered in connection with the purchase or sale of Equipment which is
reasonable, customary, and competitive in light of the size, type, and location
of the Equipment.
"Conditional Sales Contract" means an agreement to sell Equipment to a
buyer in which the seller reserves title to, and retains a security interest in,
the Equipment until the Purchase Price of the Equipment is paid.
"Cumulative Return" means an amount equal to a return at a rate of 10% per
annum, compounded daily, on the Adjusted Capital Contribution for all
outstanding Units, which amount shall begin accruing at the end of the calendar
quarter in which such Units are sold by the Partnership.
"Effective Date" means the date on which the Registration Statement is
declared effective by the Securities and Exchange Commission.
"Equipment" means each item of and all of the computer peripheral and other
similar capital equipment purchased, owned, operated, and/or leased by the
Partnership or in which the Partnership has acquired a direct or indirect
interest, as more fully described in the Partnership Agreement, together with
all appliances, parts, instruments, accessories, furnishings, or other equipment
included therein and all substitutions, renewals, or replacements of, and all
additions, improvements, and accessions to, any and all thereof.
"Equipment Acquisition Fee" means the fee payable to the General Partner in
accordance with Section 6.3 of the Partnership Agreement.
"Equipment Liquidation Fee" means the fees payable to the General Partner
in accordance with Section 6.4 of the Partnership Agreement.
"Equipment Management Fee" means the fee payable to the General Partner in
accordance with Section 6.2 of the Partnership Agreement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Plan" means a retirement plan subject to the provisions of Title I
of ERISA.
"Escrow Account" means the account at PNC Bank, Philadelphia, Pennsylvania
where Subscriptions will be held until they aggregate the Minimum Subscription
Amount of $2,500,000.
-81-
<PAGE>
"Exempt Transfer" means the transfers which will be disregarded in
determining whether a partnership will be considered to be publicly traded
pursuant to IRS Notice 88-75, 1988-2 C.B. 386.
"Front-End Fees" means fees and expenses paid by any Person to any Person
during the Partnership's organizational and acquisition phase including all
Organizational and Offering Expenses (including the Organizational Fee),
Acquisition Fees, Acquisition Expenses, Debt Placement Fees, Leasing Fees, and
other similar fees and expenses; provided, however, any costs or expenses
incurred by the General Partner or its Affiliates (not including the
Partnership) which are not reimbursed by the Partnership, shall not be included
as Front-End Fees.
"Full Payout Net Lease" means an initial Net Lease of the Equipment under
which the non-cancelable rental payments due (and which can be calculated at the
commencement of the Net Lease) during the initial noncancellable fixed term (not
including any renewal or extension period) of the lease or other contract for
the use of the Equipment are at least sufficient to recover the Purchase Price
of the Equipment.
"Funding Date" means the date on which Capital Contributions are released
to the Partnership from the Escrow Account.
"General Partner" means Commonwealth Income & Growth Fund, Inc. and any
additional, substitute or successor general partner of the Partnership.
"Gross Income" means the gross income of the Partnership within the meaning
of Section 61(a) of the Code.
"Gross Lease Revenues" means Partnership gross receipts from leasing or
other operation of the Equipment, except that, to the extent the Partnership has
leased the Equipment from an unaffiliated party, it shall mean such receipts
less any lease expense.
"Initial Closing" means the date after the Minimum Subscription Amount is
received on which funds to acquire Units are released from the Escrow Account
and distributed to the Partnership for the acquisition of Units by Limited
Partners.
"Investment Account" means the account maintained by the Partnership for
the Partners which reflects the Partners' investment in the Partnership,
calculated under generally accepted accounting principles, consistently applied,
using the straight-line method of depreciation.
"Investment in Equipment" means the amount of Capital Contributions
actually paid or allocated to the purchase of or investment in Equipment by the
Partnership including working capital reserves (except that working capital
reserves in excess of three percent of Capital Contributions shall not be
included) and other cash payments such as interest and taxes, but excluding
Front-End Fees.
"IRA" means an Individual Retirement Account as described in Section 408 of
the Code.
"IRS" means the Internal Revenue Service.
"Letter of Suitability" means an agreement which may be used by investors
in lieu of a Subscription Agreement to subscribe to purchase Units and to
authorize the debit of the Subscriber's securities account.
"Limited Partner" means a Person who acquires Units and who is admitted to
the Partnership as a limited partner in accordance with the terms of the
Partnership Agreement.
-82-
<PAGE>
"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.
"Modified ACRS" means the Accelerated Cost Recovery System, as modified by
the 1986 Act.
"NASD" means the National Association of Securities Dealers, Inc.
"Net Disposition Proceeds" means the net proceeds realized by the
Partnership from the refinancing, sale or other disposition of Equipment,
including insurance proceeds or lessee indemnity payments arising from the loss
or destruction of Equipment, less such amounts as are used to satisfy
Partnership liabilities.
"Net Lease" means a lease or other contract under which the owner provides
equipment to a lessee or other operator in return for a payment, and the lessee
assumes all obligations and pays for the operation, repair, maintenance, taxes
and insuring of the equipment, so that the non-cancellable rental payments under
the lease are absolutely net to the lessor.
"Net Profits" or "Net Losses" shall be computed in accordance with Section
703(a) of the Code (including all items of income, gain, loss or deduction
required to be stated separately pursuant to Section 703(a)(1) of the Code) for
each taxable year of the Partnership or shorter period prior or subsequent to an
interim closing of the Partnership's books with the following adjustments: (i)
any income of the Partnership that is exempt from federal income tax and not
otherwise taken into account in computing Net Profits and Net Loss pursuant to
this definition shall be added to such taxable income or shall reduce such
taxable loss; (ii) any expenditure of the Partnership described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to
Treasury Regulations Section 1.704-1(b)(2)(iv)(i) and not otherwise taken into
account in computing Net Profits and Net Losses pursuant to this definition
shall be subtracted from such taxable income or loss; (iii) items of income,
gain, loss and deduction specially allocated pursuant to Section 7.3 of the
Partnership Agreement shall not be included in the computation of Net Profits or
Net Loss; and if property is reflected on the books of the Partnership at a book
value that differs from the adjusted tax basis of the property in accordance
with Treasury Regulation Section 1.704-1(b)(2)(iv)(d) or (f), depreciation,
amortization, and gain or loss with respect to such property shall be determined
by reference to such book value in a manner consistent with Treasury Regulation
Section 1.704-1(b)(2)(iv)(g). The terms "Net Profit" or "Net Losses" shall
include the Partnership's distributive share of the profit or loss of any
partnership or joint venture in which it is a partner or joint venturer.
"Net Worth" means the total assets of a Person less the total liabilities
of such Person.
"1986 Act" means the Tax Reform Act of 1986.
"Offering" means the initial public offering of Units in the Partnership,
as described in this Prospectus.
"Offering Period" means the period commencing the Effective Date and ending
the last day of the calendar month in which the Closing Date occurs.
"Operating Distributions" means the quarterly 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.
-83-
<PAGE>
"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 II, a Pennsylvania
limited partnership.
"Partnership Agreement" means that Limited Partnership Agreement of
Commonwealth Income & Growth Fund II by and among the General Partner and the
Limited Partners, pursuant to which the Partnership is governed. The
Partnership Agreement is set forth in its entirety as Appendix I to this
Prospectus.
"Passive Income" and "Passive Taxable Income" means income derived from a
"passive activity" as that term is defined in Section 469(c) of the Code.
"Person" means an individual, partnership, joint venture, corporation,
trust, estate or other entity.
"Proceeds" means proceeds from the sale of the Units.
"Program" means a limited or general partnership, joint venture,
unincorporated association or similar organization, other than a corporation
formed and operated for the primary purpose of investment in and the operation
of or gain from an interest in Equipment.
"Purchase Price" means, with respect to any Equipment, an amount equal to
the sum of (i) the invoice cost of such Equipment or any other such amount paid
to the seller, (ii) any closing, delivery and installation charges associated
therewith not included in such invoice cost and paid by or on behalf of the
Partnership, (iii) the cost of any capitalized modifications or upgrades paid by
or on behalf of the Partnership in connection with its purchase of the
Equipment, and (iv) solely for purposes of the definition of Full Payout Net
Lease, the amount of the Equipment Acquisition Fee and any other Acquisition
Fees, but excluding points and prepaid interest.
"Qualified Plan" means a trust established pursuant to the terms of a
pension, profit sharing or stock bonus plan, including Keogh Plans, meeting the
requirements of Section 401 and following of the Code.
"Record Date" means, (a) for purposes of a meeting of, or actions by, the
Limited Partners pursuant to Article 10 of the Partnership Agreement, the close
of business on the business day preceding the date on which the written notice
referred to in that Article is given, (b) for purposes of distributions pursuant
to Article 8 of the Partnership Agreement, the close of business on December 31,
March 31, June 30, and September 30 of each year and (c) for purposes of Article
12 of the Partnership Agreement, the close of business on December 31 and June
30 of each year.
"Registration Statement" means the Registration Statement on Form S-1 filed
by the Partnership with the Securities and Exchange Commission under the
Securities Act to register the offer and sale of the Units, as the same may be
amended from time to time.
"Re-Lease Fee" means the fee payable to the General Partner in accordance
with Section 6.6 of the Partnership Agreement.
"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.
-84-
<PAGE>
"Retiring General Partner" means a general partner of the Partnership
who or which has been removed or withdrawn as such or is Bankrupt, which has
been involuntarily dissolved, or who has died or had a conservator appointed
for the person or any of the property of such general partner.
"Roll-Up" means a transaction involving the acquisition, merger,
conversion, or consolidation, either directly or indirectly, of the
Partnership and the issuance of securities of a Roll-Up Entity. Such term
does not include: (i) a transaction involving units if the Units have been
listed for at least twelve months on a national securities exchange or traded
through the NASD Automated Quotation National Market System; or (ii) a
transaction involving the conversion to corporate, trust or association form
of only the Partnership if, as a consequence of the transaction, there will
be no significant adverse change in any of the following: (a) the Limited
Partners' voting rights, (b) the term of existence of the Partnerships, (c)
compensation of the General Partner or its Affiliates, or (d) the
Partnership's investment objectives.
"Roll-Up Entity" means the partnership, corporation, trust or other
entity that would be created or would survive after the successful completion
of a proposed Roll-Up transaction.
"Sale-leaseback" means a transaction where an asset is sold to a vendee
who immediately leases such asset back to the vendor.
"Section 754 Election" shall mean an election under Section 754 of the
Code, relating to the Adjusted Basis of Partnership Assets, as provided for
under Sections 734 and 743 of the Code.
"Securities Act" means the Securities Act of 1933, as amended.
"Selected Agents" means members of the NASD who will be engaged by the
Dealer Manager to sell the Units.
"Selected Agent Fee" means commissions of up to seven percent of the
Capital Contributions from Units sold by the Selected Agents.
"Sponsor" means any Person directly or indirectly instrumental in
organizing, wholly or in part, a Program or any Person who will manage or
participate in the management of a Program, and any Affiliate of any such
Person. Sponsor does not include a Person whose only relation with the Program
is that of an independent equipment manager and whose only compensation is as
such. Sponsor does not include wholly independent third parties such as
attorneys, accountants, and underwriters whose only compensation is for
professional services rendered in connection with the offering of Program
interests.
"Subscribers" refers to those Persons who have tendered monies to the
Partnership for the purchase of Units, but have not been accepted as Limited
Partners as provided for in Section 3.2 of the Partnership Agreement.
"Subscription" means money tendered to the Partnership for the purchase of
Units.
"Subscription Agreement" means the agreement attached as Appendix III to
this Prospectus whereby a Subscriber becomes bound to purchase Units and which
shall be maintained in the offices of the General Partner and the Dealer
Manager.
"Substituted Limited Partner" means any Person admitted to the Partnership
as a Limited Partner pursuant to the provisions of Section 11.2 of the
Partnership Agreement.
"Supplemental Sales Material" means sales material distributed by the
General Partner for use in connection with the Offering including, but not
limited to, a question and answer sales booklet, a speech for public seminars,
an invitation to attend public seminars, slide and video presentations,
prospecting letters, mailing cards and tombstone advertisements.
-85-
<PAGE>
"Tax Exempt Entity" means entities exempt from federal income tax such as
qualified employee pension or profit-sharing trusts and individual retirement
accounts.
"Term Debt" means debt of the Partnership with a term in excess of twelve
months, incurred with respect to acquiring or investing in Equipment, or
refinancing non-Term Debt, but not debt incurred with respect to refinancing
existing Partnership Term Debt.
"Terminating Event" means the first to occur of the withdrawal, removal,
retirement, resignation, expulsion, Bankruptcy, involuntary dissolution, death,
insanity or appointment of a conservator for the person or any of the assets of
the last remaining general partner of the Partnership.
"Treasury Regulations" or "Regulations" means the income tax regulations
promulgated under the Code, as such regulations may be amended from time to time
(including corresponding provisions of successor regulations).
"Underwriting Commissions" mean selling commissions and dealer-manager fees
paid to broker-dealers by the Partnership in connection with the offer and sale
of Units.
"U.S. Citizen" means any of the following Persons: (i) an individual who is
a citizen of the United States or one of its possessions, (ii) a partnership in
which each partner is a U.S. Citizen, (iii) a trust of which each trustee and
all of the beneficiaries are U.S. Citizens (provided that Persons who are not
U.S. Citizens do not possess more than 25% of the aggregate power to direct or
remove the trustee), and (iv) a corporation incorporated in the United States or
one of its possessions of which the president/chief executive officer, chairman
of the board of directors and two-thirds or more of the members of the board of
directors and other managing officers are U.S. Citizens and in which at least
75% of the voting interest is owned or controlled by U.S. Citizens.
"Unit" means a limited partnership interest in the Partnership.
-86-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
COMMONWEALTH INCOME & GROWTH FUND II
Report of Independent Auditors.............................................F-1
Balance Sheet at February 7, 1995..........................................F-2
Notes to Balance Sheet.....................................................F-3
COMMONWEALTH INCOME & GROWTH FUND, INC.
Report of Independent Auditors.............................................F-4
Balance Sheets at February 28, 1995 and 1994...............................F-5
Notes to Balance Sheets....................................................F-6
COMMONWEALTH CAPITAL CORP.
Report of Independent Auditors.............................................F-7
Consolidated Balance Sheets at February 28, 1995 and 1994..................F-8
Consolidated Statements of Income and Retained Earnings
for the Years ended February 28, 1995 and 1994..........................F-9
Consolidated Statements of Cash Flows for the Years ended
February 28, 1995 and 1994.............................................F-10
Notes to Consolidated Financial Statements................................F-11
</TABLE>
-87-
<PAGE>
Report of Independent Auditors
To the General Partner and Limited Partners
Commonwealth Income & Growth Fund II
We have audited the accompanying balance sheet of Commonwealth Income & Growth
Fund II at February 7, 1995. This balance sheet is the responsibility of the
Fund's management. Our responsibility is to express an opinion on this balance
sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Commonwealth Income & Growth
Fund II at February 7, 1995 in conformity with generally accepted accounting
principles.
Philadelphia, Pennsylvania Ernst & Young LLP
February 8, 1995
F-1
<PAGE>
Commonwealth Income & Growth Fund II
Balance Sheet
February 7, 1995
ASSETS
Cash $1,500
------
------
PARTNERS' CAPITAL
General partner $1,000
Limited partner 500
------
Total partners' capital $1,500
------
------
SEE ACCOMPANYING NOTES.
F-2
<PAGE>
Commonwealth Income & Growth Fund II
Notes to Balance Sheet
February 7, 1995
1. THE PARTNERSHIP
Commonwealth Income & Growth Fund II (the "Partnership") is a limited
partnership which was organized in the Commonwealth of Pennsylvania. The
Partnership has not yet commenced operations. The Partnership was organized to
acquire, own, lease, and sell income-producing equipment.
The General Partner's initial contribution consists of a $1,000 cash
contribution from Commonwealth Income & Growth Fund, Inc., a wholly-owned
subsidiary of Commonwealth of Delaware, Inc. which in turn is a wholly-owned
subsidiary of Commonwealth Capital Corp. The General Partner may in its sole
discretion purchase units of limited partnership interest (the "Units"). The
Initial Limited Partner, as defined, has contributed $500 for the purchase of a
limited partnership interest.
The Partnership plans to offer for sale, through a public offering from 125,000
to 750,000 Units at a cash purchase price of $20 per Unit.
2. RELATED PARTY TRANSACTIONS
The Partnership will pay for organizational and offering expenses in connection
with the issuance and distribution of Units. The General Partner and Wheat,
First Securities, Inc., and their respective affiliates will receive substantial
fees and compensation in connection with the offering of Units and management of
the Partnership's assets. See "Compensation of General Partner and Affiliates,"
"Estimated Use of Proceeds" and "Allocations and Distributions" elsewhere in the
Prospectus of the Partnership for information with respect to the compensation
to be paid to the General Partner and Wheat, First Securities, Inc., and their
respective affiliates and the allocations of income, losses, and cash
distributions.
F-3
<PAGE>
Report of Independent Auditors
To the Stockholder
Commonwealth Income & Growth Fund, Inc.
We have audited the accompanying balance sheets of Commonwealth Income & Growth
Fund, Inc. (an indirect wholly-owned subsidiary of Commonwealth Capital Corp.),
as of February 28, 1995 and 1994. These balance sheets are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
balance sheets based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheets are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheets. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audits of the balance sheets provide a reasonable basis for our
opinion.
In our opinion, the balance sheets referred to above present fairly, in all
material respects, the financial position of Commonwealth Income & Growth Fund,
Inc. at February 28, 1995 and 1994, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Philadelphia, Pennsylvania
April 11, 1995
F-4
<PAGE>
Commonwealth Income & Growth Fund Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
Balance Sheets
<TABLE>
<CAPTION>
FEBRUARY 28
1995 1994
-----------------------------------
<S> <C> <C>
ASSETS
Cash $ 500 $ 86
Receivables from Income Funds 32,631 69,417
Investment in Partnerships 2,000 1,000
-----------------------------------
$ 35,131 $ 70,503
-----------------------------------
-----------------------------------
LIABILITIES
Accounts payable to Commonwealth Capital
Corp. $ 34,031 $ 69,403
STOCKHOLDER'S EQUITY
Common stock at $1 stated value:
Authorized shares-1,000
Issued and outstanding shares-100 1,000 1,000
Additional paid-in capital 1,000,100 1,000,100
-----------------------------------
1,001,100 1,001,100
Less note receivable (1,000,000) (1,000,000)
-----------------------------------
1,100 1,100
-----------------------------------
$ 35,131 $ 70,503
-----------------------------------
-----------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
Notes to Balance Sheets
February 28, 1995 and 1994
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 (the "Partnerships").
CCC has provided additional capital by means of a noninterest-bearing demand
note in the amount of $1,000,000, so that the Company will at all times have a
net worth (which includes the net equity of the Company and the demand note
receivable from CCC) of at least $1,000,000. In computing the Company's net
worth for this purpose, its interest in the Partnerships and any amounts and
notes receivable from and payable to the Partnerships will be excluded. The
Company's equity has been reduced by the note receivable from CCC resulting in
net equity of $1,100, which may be different for tax purposes. The Company's
operations will be included in the consolidated federal income tax return of
CCC.
2. INVESTMENT IN PARTNERSHIPS
The Company contributed $2,000 in cash to the Partnerships for its general
partner interest. The Company may, at its sole discretion, purchase a limited
partnership interest in the Partnerships ("Units") for an additional capital
contribution of $20 per Unit with a minimum investment of 125 units.
3. RELATED PARTY TRANSACTIONS
The Company and its affiliates receive substantial fees and compensation in
connection with the offering of Units and the management of the Partnerships'
assets. See "Compensation of General Partner and Affiliates," and "Allocations
and Distributions" elsewhere in the Prospectus of Commonwealth Income & Growth
Fund II of the Partnerships for information with respect to the compensation to
be paid to the Company and its affiliates and the allocations of income, losses,
and cash distributions.
F-6
<PAGE>
Report of Independent Auditors
The Stockholder
Commonwealth Capital Corp.
We have audited the accompanying consolidated balance sheets of Commonwealth
Capital Corp. as of February 28, 1995 and 1994, and the related consolidated
statements of income and retained earnings and of cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Commonwealth
Capital Corp. and subsidiaries at February 28, 1995 and 1994, and the
consolidated results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
Ernst & Young LLP
Philadelphia, Pennsylvania
April 11, 1995
F-7
<PAGE>
Commonwealth Capital Corp.
Consolidated Balance Sheets
FEBRUARY 28
1995 1994
--------------------------
ASSETS
Cash and cash equivalents $ 185,440 $ 66,644
Receivables from Income Funds 508,698 1,662,469
Other receivables 51,055 129,820
Notes receivable from Income Funds 200,000 150,000
Income taxes receivable 73,935 -
Minimum lease payments receivable, net of unearned
interest income of $5,687,707 in 1995 and
$6,393,021 in 1994 10,485,605 11,365,588
Deferred tax asset 308,000 302,000
Investment in Income Funds 15,200 14,200
Other assets 10,504 13,129
Property and equipment, net of accumulated
depreciation 52,768 484,464
--------------------------
Total assets $11,891,205 $14,188,314
--------------------------
--------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued expenses $ 115,050 $ 218,039
Nonrecourse obligations 10,485,605 11,365,588
Notes payable - 1,434,828
Income taxes payable - 44,615
--------------------------
Total liabilities 10,600,655 13,063,070
Stockholder's equity:
Common stock, $1 par value:
Authorized shares - 1,000
Issued and outstanding shares - 10 10 10
Retained earnings 1,290,540 1,125,234
--------------------------
Total stockholder's equity 1,290,550 1,125,244
--------------------------
Total liabilities and stockholder's equity $11,891,205 $14,188,314
--------------------------
--------------------------
SEE ACCOMPANYING NOTES.
F-8
<PAGE>
Commonwealth Capital Corp.
Consolidated Statements of Income and Retained Earnings
YEAR ENDED FEBRUARY 28
1995 1994
-----------------------
Income:
Fee income from Income Funds $1,549,168 $1,586,703
Interest income on minimum lease payments receivable 707,314 924,279
Equity in income of Income Funds 40,094 31,119
Interest and other 37,894 97,409
-----------------------
2,334,470 2,639,510
Expenses:
Personnel 663,234 566,501
General and administrative 556,594 513,436
Selling 192,014 179,562
Interest expense on non-recourse obligations 707,314 924,279
Depreciation and amortization 20,008 38,408
-----------------------
2,139,164 2,222,186
-----------------------
Income before provision for (benefit from) income taxes 195,306 417,324
Provision for (benefit from) income taxes 30,000 (239,809)
-----------------------
Net income 165,306 657,133
Retained earnings at beginning of year 1,125,234 468,101
-----------------------
Retained earnings at end of year $1,290,540 $1,125,234
-----------------------
-----------------------
SEE ACCOMPANYING NOTES.
F-9
<PAGE>
Commonwealth Capital Corp.
Consolidated Statements of Cash Flows
YEAR ENDED FEBRUARY 28
1995 1994
------------------------
OPERATING ACTIVITIES
Net income $ 165,306 $ 657,133
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 20,008 38,408
Deferred income tax benefit (6,000) (307,000)
Changes in operating assets and liabilities:
Receivables from Income Funds 165,114 (307,269)
Other receivables 78,765 (44,998)
Income taxes receivable (73,935) -
Other assets 2,625 14,738
Accounts payable and accrued expenses (102,989) 100,233
Income taxes payable (44,615) 28,953
------------------------
Net cash provided by operating activities 204,279 180,198
INVESTING ACTIVITIES
Change in notes receivable from Income Funds (50,000) (150,000)
Capital expenditures (34,483) (33,009)
Investment in Income Funds (1,000) (3,000
------------------------)
Net cash used in investing activities (85,483) (186,009)
FINANCING ACTIVITIES
Due to Income Funds -- (2,619,665)
------------------------
Net increase (decrease) in cash and cash equivalents 118,796 (2,625,476)
Cash and cash equivalents at beginning of year 66,644 2,692,120
------------------------
Cash and cash equivalents at end of year $ 185,440 $ 66,644
------------------------
------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for income taxes $ 123,157 $ 53,535
------------------------
------------------------
SEE ACCOMPANYING NOTES.
F-10
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Financial Statements
February 28, 1995
1. BUSINESS
Commonwealth Capital Corp. (the Company), through its subsidiary, Commonwealth
of Delaware, Inc. (CDI), is primarily engaged in leasing various types of
equipment. Certain subsidiaries of CDI were formed for the purpose of
functioning as general partners/managing trustees 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, 1995, 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. and Commonwealth Capital Private
Fund IV, 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 financial statements include the accounts of the
Company, its wholly-owned subsidiary, CDI, and its wholly-owned subsidiaries
(Note 1). All significant intercompany accounts and transactions have been
eliminated in the accompanying consolidated financial statements. Certain
amounts in the 1994 financial statements have been reclassified to conform with
the current year presentation. The balance sheets are presented on an
unclassified basis in accordance with leasing industry practice.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less to be cash equivalents. At February 28, 1995 and 1994, cash
equivalents were invested in a money market fund investing directly in Treasury
obligations.
F-11
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Financial Statements
2. ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes fees as earned in accordance with the various General
Partnership and Trust Agreements. Interest income on minimum lease payments
receivable is recognized as earned.
PROPERTY AND EQUIPMENT
Property 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 these investments by the equity method. Distributions
were received from these Income Funds and approximated the Company's equity in
the income of the Income Funds as reflected in the accompanying income
statement. Results of the Income Funds as of December 31, 1994 and 1993, are as
follows:
1994 1993
----------------------------------
Total assets $ 38,195,000 $ 33,546,000
Nonrecourse debt 14,482,000 11,075,000
Other liabilities 2,697,000 3,371,000
Partners' capital 21,016,000 19,100,000
Net (loss) income (1,415,000) 1,377,000
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, has issued noninterest-bearing demand notes of
approximately $3,761,000 and $2,861,000 at February 28, 1995 and 1994,
respectively. Such notes have been eliminated in the consolidation of the
accompanying financial statements.
F-12
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
INVESTMENT IN INCOME FUNDS (CONTINUED)
The compensation to the Company from the Income Funds includes: 1) Equipment
Acquisition Fees (4% of the purchase price of all equipment purchased by the
Income Funds); 2) Debt Placement Fees (1% of financed equipment by the Income
Funds; 3) Sales Fees Expense (3% of gross proceeds of sold equipment by the
Income Funds); and 4) Equipment Management Fees (5% of the gross operating
lease revenues of the Income Funds). The Company earned approximately
$1,549,000 and $1,583,000 in fees for managing the Income Funds during the years
ended February 28, 1995 and 1994, respectively.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
1995 1994
------------------------
Office furniture and equipment $104,671 $ 70,188
Leased equipment - 465,277
------------------------
104,671 535,465
Less accumulated depreciation 51,903 51,001
------------------------
$ 52,768 $484,464
------------------------
------------------------
4. 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. Amounts outstanding
at February 28, 1995 and February 28, 1994 under the leases and certificates of
participation are approximately $10,325,000 and $11,205,000, respectively, of
which $8,625,000 and $9,050,000, respectively, are secured by mortgage insurance
policies maintained by the lessee. These amounts are included in minimum lease
payments receivable and nonrecourse obligations in the accompanying balance
sheets. The certificates mature from 1995 to 2011. The Company recognized
interest income and interest expense in connection with the lease purchase
transactions of $707,314 and $924,279 for fiscal years ended February 28, 1995
and 1994, respectively.
F-13
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Financial Statements (continued)
4. LEASE COMMITMENTS (CONTINUED)
The Company entered into a lease transaction whereby the underlying asset was
funded by a note payable to a bank. The Company assigned its rights as lessor
to the bank. The note is a nonrecourse obligation to the Company and is
personally guaranteed by the lessee owners. The lease and note payable
approximated $160,605 at February 28, 1995 and 1994, and matures in 1997. In
June 1994, the lessee filed for protection from creditors under Chapter 11, and
as a result, they did not make any payments during the years ended February 28,
1995 or 1994. As this note is a nonrecourse obligation of the Company, and the
Company has been notified by the bank that collection of the note is expected,
the asset and related nonrecourse obligation are reflected in the accompanying
consolidated financial statements.
Future minimum lease payments to be received, excluding interest, as of
February 28, 1995 are as follows:
1996 $ 807,688
1997 607,066
1998 630,851
1999 655,000
2000 685,000
Thereafter 7,100,000
-------------
Total $10,485,605
-------------
-------------
The Company leases office space under a noncancelable operating lease expiring
in September 1998. The lease currently requires monthly payments of $6,144
which increases annually for the remainder of the lease. Rent expense for the
years ended February 28, 1995 and 1994 was approximately $73,000 and $82,000,
respectively. Future minimum lease payments under noncancelable operating
leases with remaining terms of one year or more are approximately $93,000 in
1996; $92,000 in 1997; $93,000 in 1998; and $48,000 in 1999.
5. 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. Profit-sharing expense was approximately $30,000 for each of
the years ended February 28, 1995 and 1994.
F-14
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES
The Company files a consolidated federal income tax return with CDI and its
subsidiaries. The Company has investment tax credits of $275,000 and $302,000
at February 28, 1995 and 1994, respectively. 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 $428,000, which expire during 1995 through 1997.
The Company has a federal deferred tax asset arising primarily from the
carryforward of investment tax credits of $308,000 and $302,000 at February 28,
1995 and 1994, respectively, which the Company believes is more likely than not
to be realized. The Company expects to recover the deferred tax asset through
future taxable income based on its recent historical trend of earnings which the
Company expects to continue. At February 28, 1995, the Company has a state
deferred tax asset of $64,000; 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 $64,000.
The income tax provision is comprised of the following:
1995 1994
-------------------------
Current federal (net of $43,000 in 1995 and $68,000
in 1994 of investment tax credits realized) $ 36,000 $ 64,238
Current state - 2,953
Deferred federal tax benefit (6,000) (307,000)
-------------------------
$ 30,000 $(239,809)
-------------------------
-------------------------
7. RELATED PARTY TRANSACTIONS
For the years ended February 28, 1995 and 1994, certain of the General Partner
Subsidiaries agreed to waive or forgive the related Income Funds' obligations to
pay certain equipment management, acquisition, selling and financing fees in the
amount of approximately $213,000 and $204,000, respectively.
F-15
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Financial Statements (continued)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
At February 28, 1995, two of the General Partner Subsidiaries had outstanding
two noninterest bearing subordinated notes in the amount of $120,000 and $80,000
to two of the Income Funds for operating cash flow purposes. Principal payments
are due on a semiannual basis within 30 days of December 31 and June 30
commencing December 31, 1994 for the $120,000 loan and December 31, 1995 for the
$80,000 loan. Principal payments will be made from cash available, if any,
after payments are made to the Limited Partners of the Income Fund for priority
distributions as defined in the note. Upon the liquidation of the Income Funds,
after the priority distributions have been made to its Limited Partners, the
outstanding principal on these notes shall be repaid to the General Partner
Subsidiary.
During January 1994, the Company entered into two lease deals and recorded
equipment of approximately $1,533,000, debt of $1,435,000 and two months rental
income of $82,000. On February 28, 1994, one of the lease deals was sold at its
net book value of approximately $1,045,000 to Commonwealth Income & Growth Fund
I (CIGF I). The $1,045,000 is reflected in receivables from income funds in the
accompanying financial statements at February 28, 1994. On April 5, 1994, the
equipment from the second lease deal, the receivable from income funds, and
related debt outstanding, were transferred to CIGF I.
8. LINE OF CREDIT
At February 28, 1995 the Company has an unused line of credit agreement with a
bank expiring on April 30, 1995. The line of credit agreement, which is
callable on demand, provides for the payment of interest at the prime rate (9%
at February 28, 1995), plus 1%. The borrowings on the line are limited to the
lesser of $500,000 or 75% of eligible accounts receivable as defined in the
agreement.
F-16
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Financial Statements (continued)
9. SUPPLEMENTAL CASH FLOW INFORMATION
Other noncash activities associated with lease purchase transactions:
1995 1994
------------------------
Reduction of minimum lease receivable and repayment
of nonrecourse obligation associated with direct
payment made by lessee to bank $879,983 $7,348,324
------------------------
------------------------
Debt assumed in connection with purchase of
computer equipment
$ - $465,277
------------------------
------------------------
F-17
<PAGE>
APPENDIX I
LIMITED PARTNERSHIP AGREEMENT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 1: DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 2: ORGANIZATION. . . . . . . . . . . . . . . . . . . . . . . . . 7
2.1 CONTINUATION. . . . . . . . . . . . . . . . . . . . . . . . . 7
2.2 NAME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.3 PLACE OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . 7
2.4 REGISTERED OFFICE AND REGISTERED AGENT. . . . . . . . . . . . 7
2.5 BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.6 TERM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE 3: CAPITAL CONTRIBUTIONS AND STATUS OF PARTNERS. . . . . . . . . 8
3.1 GENERAL PARTNER . . . . . . . . . . . . . . . . . . . . . . . 8
3.2 LIMITED PARTNERS. . . . . . . . . . . . . . . . . . . . . . . 8
3.3 CAPITAL CONTRIBUTION OF LIMITED PARTNERS. . . . . . . . . . . 8
3.4 REGISTRATION. . . . . . . . . . . . . . . . . . . . . . . . . 8
3.5 WITHDRAWAL OF CAPITAL CONTRIBUTIONS . . . . . . . . . . . . . 9
3.6 ADMISSION OF LIMITED PARTNER. . . . . . . . . . . . . . . . . 9
3.7 CONTINUATION OF LIMITED PARTNER STATUS. . . . . . . . . . . . 9
3.8 LIMITED LIABILITY OF LIMITED PARTNERS . . . . . . . . . . . . 9
ARTICLE 4: PARTNERS' CAPITAL . . . . . . . . . . . . . . . . . . . . . . 9
4.1 CAPITAL ACCOUNTS. . . . . . . . . . . . . . . . . . . . . . . 9
4.2 WITHDRAWAL AND RETURN OF CAPITAL. . . . . . . . . . . . . . . 9
4.3 INTEREST ON CAPITAL . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE 5 PARTNERSHIP EXPENSES . . . . . . . . . . . . . . . . . . . . . . . 10
5.1 ORGANIZATION EXPENSES . . . . . . . . . . . . . . . . . . . . 10
5.2 OTHER EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE 6: COMPENSATION OF THE GENERAL PARTNER . . . . . . . . . . . . . 11
6.1 ORGANIZATIONAL FEE. . . . . . . . . . . . . . . . . . . . . . 11
6.2 EQUIPMENT MANAGEMENT FEE. . . . . . . . . . . . . . . . . . . 11
6.3 EQUIPMENT ACQUISITION FEE . . . . . . . . . . . . . . . . . . 12
6.4 EQUIPMENT LIQUIDATION FEE . . . . . . . . . . . . . . . . . . 12
6.5 DEBT PLACEMENT FEE. . . . . . . . . . . . . . . . . . . . . . 12
6.6 RE-LEASING FEE. . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE 7: ALLOCATION OF NET PROFITS, NET LOSSES AND OTHER ITEMS . . . . 13
7.1 NET PROFITS . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.2 NET LOSSES. . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.3 REQUIRED ALLOCATIONS. . . . . . . . . . . . . . . . . . . . . 13
7.4 SYNDICATION EXPENSES. . . . . . . . . . . . . . . . . . . . . 14
7.5 RECHARACTERIZATION OF FEES. . . . . . . . . . . . . . . . . . 14
7.6 RECAPTURE . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.7 ALLOCATIONS AMONG LIMITED PARTNERS. . . . . . . . . . . . . . 15
7.8 OTHER ALLOCATIONS . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
I-(i)
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 8: DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . 15
8.1 CASH DISTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . . 15
8.2 ALLOCATION OF DISTRIBUTIONS TO LIMITED PARTNERS . . . . . . . 15
8.3 AMOUNTS WITHHELD. . . . . . . . . . . . . . . . . . . . . . . 15
8.4 RETURN OF OFFERING PROCEEDS . . . . . . . . . . . . . . . . . 16
ARTICLE 9: RIGHTS, POWERS, AND DUTIES OF GENERAL PARTNER . . . . . . . . 16
9.1 RIGHTS AND POWERS . . . . . . . . . . . . . . . . . . . . . . 16
9.2 RELIANCE ON CERTIFICATE OF GENERAL PARTNER. . . . . . . . . . 18
9.3 INDEPENDENT ACTIVITIES. . . . . . . . . . . . . . . . . . . . 18
9.4 DUTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
9.5 RESTRICTIONS ON AUTHORITY . . . . . . . . . . . . . . . . . . 19
9.6 GENERAL PARTNER'S NET WORTH . . . . . . . . . . . . . . . . . 22
ARTICLE 10: RIGHTS OF LIMITED PARTNERS. . . . . . . . . . . . . . . . . . 22
10.1 NO LIMITED PARTNER IN CONTROL . . . . . . . . . . . . . . . . 22
10.2 VOTING RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . 22
10.3 CONVERSIONS AND ROLL-UPS. . . . . . . . . . . . . . . . . . . 22
10.4 MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
10.5 CERTAIN AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE 11: TRANSFER OF UNITS . . . . . . . . . . . . . . . . . . . . . . 24
11.1 ASSIGNMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 24
11.2 SUBSTITUTED LIMITED PARTNERS. . . . . . . . . . . . . . . . . 25
11.3 TRANSFER FEE. . . . . . . . . . . . . . . . . . . . . . . . . 25
11.4 GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ARTICLE 12: REDEMPTION. . . . . . . . . . . . . . . . . . . . . . . . . . 25
ARTICLE 13: GENERAL PARTNER'S INTEREST. . . . . . . . . . . . . . . . . . 26
13.1 VOLUNTARY WITHDRAWAL OR ASSIGNMENT. . . . . . . . . . . . . . 26
13.2 REMOVAL . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE 14: DISSOLUTION, CONTINUATION AND TERMINATION . . . . . . . . . . 26
14.1 DISSOLUTION . . . . . . . . . . . . . . . . . . . . . . . . . 26
14.2 CONTINUATION. . . . . . . . . . . . . . . . . . . . . . . . . 27
14.3 PURCHASE OF INTEREST OF GENERAL PARTNER . . . . . . . . . . . 27
14.4 LIQUIDATION . . . . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE 15: ACCOUNTING AND FISCAL MATTERS . . . . . . . . . . . . . . . . 28
15.1 PARTNERSHIP RECORDS . . . . . . . . . . . . . . . . . . . . . 28
15.2 ACCOUNTING; FISCAL YEAR . . . . . . . . . . . . . . . . . . . 29
15.3 REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
15.4 BANK ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . 30
15.5 PARTNERSHIP RETURNS . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE 16: POWER OF ATTORNEY . . . . . . . . . . . . . . . . . . . . . . 30
16.1 POWER OF ATTORNEY . . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>
I-(ii)
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 17: LIABILITY AND INDEMNIFICATION OF GENERAL PARTNER. . . . . . . 31
17.1 EXCLUSION OF LIABILITY FOR RETURN OF CAPITAL CONTRIBUTIONS. . 31
17.2 LIMITATION ON LIABILITY OF GENERAL PARTNER; INDEMNIFICATION . 31
ARTICLE 18: TAX EXEMPT LIMITED PARTNERS . . . . . . . . . . . . . . . . . 32
18.1 TAX EXEMPT LIMITED PARTNERS . . . . . . . . . . . . . . . . . 32
ARTICLE 19: MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 32
19.1 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
19.2 PARTIES IN INTEREST . . . . . . . . . . . . . . . . . . . . . 33
19.3 SECTION CAPTIONS. . . . . . . . . . . . . . . . . . . . . . . 33
19.4 SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . 33
19.5 RIGHT TO RELY ON GENERAL PARTNER. . . . . . . . . . . . . . . 33
19.6 PENNSYLVANIA LAW. . . . . . . . . . . . . . . . . . . . . . . 33
19.7 COUNTERPART EXECUTION . . . . . . . . . . . . . . . . . . . . 33
19.8 GENDER. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
19.9 INTEGRATED AGREEMENT. . . . . . . . . . . . . . . . . . . . . 33
</TABLE>
I-(iii)
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND II
RESTATED LIMITED PARTNERSHIP AGREEMENT
RESTATED LIMITED PARTNERSHIP AGREEMENT, dated as of _________________, by
and among Commonwealth Income & Growth Fund, Inc., a Pennsylvania corporation
(the "General Partner"), David A. Kintzer (the "Initial Limited Partner"), and
the persons who on or after the execution of this Agreement are admitted as
limited partners of the Partnership.
INTRODUCTION
On January 13, 1995, the General Partner and the Initial Limited Partner,
formed Commonwealth Income & Growth Fund II as a Pennsylvania limited
partnership (the "Partnership") by the filing of a certificate of limited
partnership in the Office of the Department of State of the Commonwealth of
Pennsylvania. The parties desire to effect the withdrawal of the Initial
Limited Partner, and the admission of the purchasers of the Partnership's Units
as limited partners of the Partnership and to restate the agreement of the
Partners to read in its entirety as set forth below. To accomplish this, the
parties agree that (i) the persons whose subscriptions for Units have been
accepted by the General Partner and who are reflected in the records of the
Partnership as purchasing Units on the date hereof are admitted as limited
partners of the Partnership; (ii) the Initial Limited Partner withdraws as a
limited partner of the Partnership and is released from all its obligations to
the Partnership, and the Partnership shall promptly return the Initial Limited
Partner's capital contribution, and (iii) the agreement of the Partners is
hereby restated to read in its entirety as set forth below.
ARTICLE 1
DEFINITIONS
The following terms used in this Agreement shall have the meanings set
forth below.
"Acquisition Expenses" means expenses relating to the prospective selection
and acquisition of or investment in Equipment, whether or not actually acquired,
including, but not limited to, legal fees and expenses, travel and communication
expenses, costs of appraisals, accounting fees and expenses and miscellaneous
expenses.
"Acquisition Fees" means the total of all fees and commissions paid by any
party in connection with the initial purchase of Equipment acquired by the
Partnership. Included in the computation of such fees or commissions shall be
the Equipment Acquisition Fee, any commission, selection fee, construction
supervision fee, financing fee, non-recurring management fee or any fee of a
similar nature, however designated.
"Act" means the Pennsylvania Revised Uniform Limited Partnership Act.
"Adjusted Basis" means the basis, as defined in Section 1011 of the Code,
for determining gain or loss for federal income tax purposes from the sale,
transfer, or other disposition of property.
"Adjusted Capital Contributions" means Capital Contributions of the Limited
Partners reduced to not less than zero by any cash distribution received by the
Limited Partners pursuant to Sections 4.2 or 8.1, to the extent such
distributions exceed any unpaid Cumulative Return as of the date such
distributions were made.
"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
<PAGE>
similar capacity to, the specified Person, or any Person of which the
specified Person is an executive officer or partner or with respect to which the
specified Person serves in a similar capacity, (iii) any Person owning or
controlling 10% or more of the outstanding voting securities of such specified
Person, or (iv) if such Person is an officer, director or partner, any entity
for which such Person acts in such capacity.
"Agreement" means this Restated Limited Partnership Agreement, as amended
from time to time.
"Average Daily Units" means for any period an amount equal to the sum of
the outstanding Limited Partners' Units as of the close of business on each day
in the period, divided by the number of days in the period.
"Bankrupt" or "Bankruptcy" means, when used with reference to a specified
Person, (a) if such Person (i) files any application or petition in any tribunal
for the appointment of a trustee or receiver, or (ii) commences any proceeding
under any bankruptcy or reorganization statute, or under any provision of the
United States Bankruptcy Code, or under any insolvency law, or under any
dissolution or liquidation law whether now or hereafter in effect, or (b) if any
petition or application of the type described in subsection (a) above is
commenced against such Person and is not dismissed within 60 days of filing, or
an order is entered appointing a trustee or receiver for such Person, or an
order for relief is issued in any bankruptcy.
"Capital Account" means the separate account established for each Partner
pursuant to Section 4.1.
"Capital Contributions" means, in the case of the General Partner, the
total amount of money contributed to the Partnership by the General Partner,
and, in the case of the Limited Partners, $20 for each Unit or where the context
requires, the total Capital Contributions of all the Partners.
"Cash Available for Distribution" means Cash Flow plus Net Disposition
Proceeds plus cash funds available for distribution from Partnership reserves,
less such amounts as the General Partner, in accordance with this Agreement,
causes the Partnership to reinvest in Equipment or interests therein, and less
such amounts as the General Partner, in its sole discretion, determines should
be set aside for the restoration or enhancement of Partnership reserves.
"Cash Flow" for any fiscal period means the sum of (i) cash receipts from
operations, including, but not limited to, rents or other revenues arising from
the leasing or operation of the Equipment and interest, if any, earned on funds
on deposit for the Partnership, but not including Net Disposition Proceeds,
minus (ii) all cash expenses and costs incurred and paid in connection with the
ownership, lease, management, use and/or operation of the Equipment, including,
but not limited to, fees for handling and storage; all interest expenses paid
and all repayments of principal regarding borrowed funds; maintenance; repair
costs; insurance premiums; accounting and legal fees and expenses; debt
collection expenses; charges, assessments or levies imposed upon or against the
Equipment; ad valorem, gross receipts and other property taxes levied against
the Equipment; and all costs of repurchasing Units in accordance with this
Agreement; but not including depreciation or amortization of fees or capital
expenditures, or provisions for future expenditures, including, without
limitation, Organizational and Offering Expenses.
"Certificate" means the certificate of limited partnership filed by the
Partnership in the Office of the Department of State of the Commonwealth of
Pennsylvania as may be amended from time to time.
"Closing Date" means the date, as designated by the General Partner, as of
which the Units shall cease being offered to the public pursuant to the
Offering, and shall be no later than the second anniversary of the Effective
Date.
"Code" means the Internal Revenue Code of 1986, as amended, and as may be
amended from time to time by future federal tax statutes. Any reference this
Agreement to a particular provision of the Code shall mean, where appropriate,
the corresponding provision of any successor statute.
I-2
<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.
"Controlling Person" means any person, whatever his or her title,
performing functions for the General Partner or its Affiliates similar to those
of chairman or member of the Board of Directors or executive management (such as
the president, vice president or senior vice president, corporate secretary or
treasurer), senior management (such as the vice president of an operating
division who reports directly to executive management), or any person holding a
five percent or more equity interest in the General Partner or its Affiliates or
having the power to direct or cause the direction of the General Partner or its
Affiliates, whether through the ownership of voting securities, by contract, or
otherwise.
"Cumulative Return" means the amount equal to a return at a rate of 10% per
annum, compounded daily, on the Adjusted Capital Contribution for all
outstanding Units, which amount shall begin accruing at the end of the calendar
quarter in which such Units are sold by the Partnership.
"Debt Placement Fee" means the fee payable to the General Partner in
accordance with Section 6.5 of this Agreement.
"Effective Date" means the date on which the Partnership's registration
statement on Form S-1 with respect to the Units, as filed with the Securities
and Exchange Commission, becomes effective under the Securities Act of 1933, as
amended.
"Equipment" means each item of and all of the computer peripheral and other
similar capital equipment purchased, owned, operated, and/or leased by the
Partnership or in which the Partnership has acquired a direct or indirect
interest, as more fully described in this Agreement, together with all
appliances, parts, instruments, accessories, furnishings, or other equipment
included therein and all substitutions, renewals, or replacements of, and all
additions, improvements, and accessions to, any and all thereof.
"Equipment Acquisition Fee" means the fee payable to the General Partner in
accordance with Section 6.3 of this Agreement.
"Equipment Liquidation Fee" means the fee payable to the General Partner in
accordance with Section 6.4 of this Agreement.
"Equipment Management Fee" means the fee payable to the General Partner in
accordance with Section 6.2 of this Agreement.
"Equipment Management" means personnel and services necessary to the
leasing activities of the Partnership, including but not limited to, leasing and
re-leasing of Equipment, arranging for necessary maintenance and repair of the
Equipment, collecting revenues, paying operating expenses, determining that the
equipment is used in accordance with all operative contractual arrangements and
providing clerical and bookkeeping services necessary to the operation of
Equipment.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means the account at PNC Bank, Philadelphia, Pennsylvania
where Subscriptions will be held until they aggregate the Minimum Subscription
Amount of $2,500,000.
I-3
<PAGE>
"Final Closing" means the last time at which subscribers for Units are
admitted as Limited Partners.
"Front-End Fees" means fees and expenses paid by any Person to any Person
during the Partnership's organizational and acquisition phase including all
Organizational and Offering Expenses (including the Organizational Fee),
Acquisition Fees, Acquisition Expenses, Debt Placement Fees, Leasing Fees, and
other similar fees and expenses; provided, however, any costs or expenses
incurred by the General Partner or its Affiliates (not including the
Partnership) which are not reimbursed by the Partnership, shall not be included
as Front-End Fees.
"Full Payout Net Lease" means an initial Net Lease of the Equipment under
which the non-cancelable rental payments due (and which can be calculated at the
commencement of the Net Lease) during the initial noncancellable fixed term (not
including any renewal or extension period) of the lease or other contract for
the use of the Equipment are at least sufficient to recover the Purchase Price
of the Equipment.
"Funding Date" means the date on which Capital Contributions are released
to the Partnership from the Escrow Account.
"General Partner" means Commonwealth Income & Growth Fund, Inc. and any
additional, substitute or successor general partner of the Partnership.
"Gross Lease Revenues" means Partnership gross receipts from leasing or
other operation of the Equipment, except that, to the extent the Partnership has
leased the Equipment from an unaffiliated party, it shall mean such receipts
less any lease expense.
"Independent Expert" means a Person with no current material or prior
business or personal relationship with the General Partner who is engaged to a
substantial extent in the business of rendering opinions regarding the value of
assets of the type held by the Partnership and who is qualified to perform such
work.
"Initial Closing" means the first time subscribers for Units are admitted
as Limited Partners.
"Investment in Equipment" means the amount of Capital Contributions
actually paid or allocated to the purchase of or investment in Equipment by the
Partnership including working capital reserves (except that working capital
reserves in excess of three percent of Capital Contributions shall not be
included) and other cash payments such as interest and taxes, but excluding
Front-End Fees.
"IRA" means an Individual Retirement Account as described in Section 408 of
the Code.
"Leasing Fees" means the total of all fees and commissions paid by any
party in connection with the initial lease of Equipment acquired by the
Partnership.
"Limited Partner" means a Person who acquires Units and who is admitted to
the Partnership as a limited partner in accordance with the terms of this
Agreement.
"Majority in Interest" means, with respect to the Partnership, Limited
Partners holding more than 50% of the outstanding Units held by all Limited
Partners at the Record Date for any vote or consent of the Limited Partners.
"Minimum Subscription Amount" means an aggregate of $2,500,000 in
subscriptions from Limited Partners.
I-4
<PAGE>
"Net Disposition Proceeds" means the net proceeds realized by the
Partnership from the refinancing, sale or other disposition of Equipment,
including insurance proceeds or lessee indemnity payments arising from the loss
or destruction of Equipment, less such amounts as are used to satisfy
Partnership liabilities.
"Net Lease" means a lease or other contract under which the owner provides
equipment to a lessee or other operator in return for a payment, and the lessee
assumes all obligations and pays for the operation, repair, maintenance, taxes
and insuring of the equipment, so that the non-cancellable rental payments under
the lease are absolutely net to the lessor.
"Net Profits" or "Net Losses" shall be computed in accordance with Section
703(a) of the Code (including all items of income, gain, loss or deduction
required to be stated separately pursuant to Section 703(a)(1) of the Code) for
each taxable year of the Partnership or shorter period prior or subsequent to an
interim closing of the Partnership's books with the following adjustments: (i)
any income of the Partnership that is exempt from federal income tax and not
otherwise taken into account in computing Net Profits and Net Loss pursuant to
this definition shall be added to such taxable income or shall reduce such
taxable loss; (ii) any expenditure of the Partnership described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to
Treasury Regulations Section 1.704-1(b)(2)(iv)(i) and not otherwise taken into
account in computing Net Profits and Net Losses pursuant to this definition
shall be subtracted from such taxable income or loss; (iii) items of income,
gain, loss and deduction specially allocated pursuant to Section 7.3 of this
Agreement shall not be included in the computation of Net Profits or Net Loss;
and if property is reflected on the books of the Partnership at a book value
that differs from the adjusted tax basis of the property in accordance with
Treasury Regulation Section 1.704-1(b)(2)(iv)(d) or (f), depreciation,
amortization, and gain or loss with respect to such property shall be determined
by reference to such book value in a manner consistent with Treasury Regulation
Section 1.704-1(b)(2)(iv)(g). The terms "Net Profit" or "Net Losses" shall
include the Partnership's distributive share of the profit or loss of any
partnership or joint venture in which it is a partner or joint venturer.
"Offering" means the initial public offering of the Units in the
Partnership, as described in the Prospectus.
"Offering Period" means the period commencing the Effective Date and ending
the last day of the calendar month in which the Closing Date occurs.
"Operating Lease" means a lease or other contractual arrangement under
which an unaffiliated party agrees to pay the Partnership, directly or
indirectly, for the use of the Equipment, and which is not a Full Payout Net
Lease.
"Organizational and Offering Expenses" means the expenses incurred in
connection with the organization of the Partnership and in preparation of the
offering for registration and subsequently offering and distributing it to the
public, including Underwriting Commissions, listing fees and advertising
expenses except advertising expenses related to the leasing of the Program's
equipment.
"Organizational Fee" means the fee payable to the General Partner in
accordance with Section 6.1 of this Agreement.
"Partners" means any one or more of the General Partner and the Limited
Partners.
"Partnership" means Commonwealth Income & Growth Fund II, a Pennsylvania
limited partnership.
"Partnership Interest" means the ownership interest of a Partner in the
Partnership, as represented by his Capital Account, including all rights of such
Partner under this Agreement.
"Person" means an individual, partnership, joint venture, corporation,
trust, estate or other entity.
I-5
<PAGE>
"Program" means a limited or general partnership, joint venture,
unincorporated association or similar organization, other than a corporation
formed and operated for the primary purpose of investment in and the operation
of or gain from an interest in Equipment.
"Prospectus" means the Partnership's prospectus contained in the
Registration Statement filed with the Securities and Exchange Commission
("Commission") for the registration of the Units under the Securities Act of
1933, as amended (the "1933 Act"), at effectiveness of such Registration
Statement except that (A) if the Partnership files a post-effective amendment to
the Registration Statement, then the term "Prospectus" shall, from and after the
effectiveness of such post-effective amendment, refer to the amended prospectus
then on file with the Commission and (B) if the Partnership files a form of
prospectus or prospectus supplement pursuant to Rule 424(b) of the regulations
of the Commission under the 1933 Act, then the term "Prospectus" shall refer to
the prospectus as so filed or supplemented from and after the date of such
filing.
"Purchase Price" means, with respect to any Equipment, an amount equal to
the sum of (i) the invoice cost of such Equipment or any other such amount paid
to the seller, (ii) any closing, delivery and installation charges associated
therewith not included in such invoice cost and paid by or on behalf of the
Partnership, (iii) the cost of any capitalized modifications or upgrades paid by
or on behalf of the Partnership in connection with its purchase of the
Equipment, and (iv) the amount of the Equipment Acquisition Fee and any other
Acquisition Fees, but excluding points and prepaid interest.
"Qualified Plan" means a trust established pursuant to the terms of a
pension, profit sharing or stock bonus plan, including Keogh Plans, meeting the
requirements of Section 401 and following of the Code.
"Re-Lease Fee" means the fee to the General Partner in accordance with
Section 6.6 of this Agreement.
"Record Date" means, (a) for purposes of a meeting of, or actions by, the
Limited Partners pursuant to Article 10 of this Agreement, the close of business
on the business day preceding the date on which the written notice referred to
in that Article is given, (b) for purposes of distributions pursuant to Article
8 of this Agreement, the close of business on December 31, March 31, June 30,
and September 30 of each year and (c) for purposes of Article 12 of this
Agreement, the close of business on December 31 and June 30 of each year.
"Retiring General Partner" means a general partner of the Partnership who
or which has been removed or withdrawn as such or is Bankrupt, which has been
involuntarily dissolved, or who has died or had a conservator appointed for the
person or any of the property of such general partner.
"Roll-Up" means a transaction involving the acquisition, merger,
conversion, or consolidation, either directly or indirectly, of the Partnership
and the issuance of securities of a Roll-Up Entity. Such term does not include:
(i) a transaction involving securities if the securities have been listed for
at least twelve months on a national securities exchange or traded through the
NASD Automated Quotation National Market System; or (ii) a transaction
involving the conversion to corporate, trust or association form of only the
Partnership if, as a consequence of the transaction, there will be no
significant adverse change in any of the following: (a) the Limited Partners'
voting rights; (b) the term of existence of the Partnership; (c) compensation of
the General Partner or its Affiliates; or (d) the Partnership's investment
objectives.
"Roll-Up Entity" means the partnership, corporation, trust or other entity
that would be created or would survive after the successful completion of a
proposed Roll-Up transaction.
"Selected Agent" means a member of the National Association of Securities
Dealers, Inc. who will be engaged to sell Units.
"Sponsor" means any Person directly or indirectly instrumental in
organizing, wholly or in part, a Program or any Person who will manage or
participate in the management of a Program, and any Affiliate of any such
Person. Sponsor does not include a Person whose only relation with the Program
is that of an
I-6
<PAGE>
independent equipment manager and whose only compensation is as
such. Sponsor does not include wholly independent third parties such as
attorneys, accountants, and underwriters whose only compensation is for
professional services rendered in connection with the offering of Program
interests.
"Substituted Limited Partner" means any Person admitted to the Partnership
as a Limited Partner pursuant to the provisions of Section 11.2 of this
Agreement.
"Syndication Expenses" means all expenditures classified as syndication
expenses pursuant to Treasury Regulations Section 1.709-2(b). Syndication
Expenses shall be taken into account under this Agreement at the time they would
be taken into account under the Partnership's method of accounting if they were
deductible expenses.
"Term Debt" means debt of the Partnership with a term in excess of twelve
months, incurred with respect to acquiring or investing in Equipment, or
refinancing non-Term Debt, but not debt incurred with respect to refinancing
existing Partnership Term Debt.
"Terminating Event" means the first to occur of the withdrawal, removal,
retirement, resignation, expulsion, Bankruptcy, involuntary dissolution, death,
insanity or appointment of a conservator for the person or any of the assets of
the last remaining general partner of the Partnership.
"Treasury Regulations" means the income tax regulations promulgated under
the Code, as such regulations may be amended from time to time (including
corresponding provisions of successor regulations).
"Underwriting Commissions" mean selling commissions and dealer-manager fees
paid to broker-dealers by the Partnership in connection with the offer and sale
of Units.
"Unit" means a limited partnership interest in the Partnership.
ARTICLE 2
ORGANIZATION
2.1 CONTINUATION. The Partners hereby continue the Partnership as a
limited partnership under the Act.
2.2 NAME. The name of the Partnership shall continue to be "Commonwealth
Income & Growth Fund II" or such other name as may be selected by the General
Partner, who shall give notice of any such other name to the Limited Partners.
2.3 PLACE OF BUSINESS. The principal place of business of the Partnership
shall be 1160 W. Swedesford Road, Suite 340, Berwyn, PA 19312, or at another
location selected by the General Partner, who shall give notice of any such
other location to the Limited Partners. The Partnership may have such
additional offices or places of business as the General Partner may determine.
2.4 REGISTERED OFFICE AND REGISTERED AGENT. The Partnership's registered
office in the Commonwealth of Pennsylvania and its registered agent at such
other office shall be determined by the General Partner.
2.5 BUSINESS. The principal business and purpose of the Partnership is to
purchase, acquire, own, lease, re-lease, maintain, improve, manage, pledge,
finance, convey, assign, dispose and sell Equipment pursuant to such
arrangements as the General Partner in its sole discretion may enter into on
behalf of the Partnership. The purpose and business of the Partnership includes
the realization and distribution of cash
I-7
<PAGE>
from sales or other dispositions of Equipment. The Partnership is authorized
to take any and all actions necessary, appropriate, advisable, incidental to,
convenient for or related to this purpose or for the protection and benefit
of the Partnership, unless expressly prohibited by this Agreement.
2.6 TERM. The Partnership shall exist for a term ending December 31,
2006, at which time it shall be dissolved, unless previously dissolved in
accordance with this Agreement.
ARTICLE 3
CAPITAL CONTRIBUTIONS AND STATUS OF PARTNERS
3.1 GENERAL PARTNER. The General Partner has contributed $1,000 to the
capital of the Partnership. Except as provided in this Section and Section
14.4.3, the General Partner shall have no obligation to make any Capital
Contribution or to loan or otherwise provide funds to the Partnership or any
partnership, joint venture or other entity in which the Partnership has an
interest, even if the failure to do so would or could result in a default by the
Partnership, foreclosure upon the properties of the Partnership or any such
partnership, joint venture or other entity, or any other consequence adverse to
the Partnership or any such partnership, joint venture or other entity.
3.2 LIMITED PARTNERS. Limited Partners shall be those persons whose
subscriptions for Units have been accepted by the General Partner and who are
reflected in the records of the Partnership as purchasing Units from the
Partnership and Substituted Limited Partners where a transfer of Units is made
pursuant to Article 11. The Partnership intends to offer and sell not less than
$2,500,000 nor more than $15,000,000 worth of Units of limited partnership
interests and to admit as Limited Partners the persons who contribute cash to
the capital of the Partnership as the purchase price for the Units.
3.3 CAPITAL CONTRIBUTION OF LIMITED PARTNERS.
3.3.1 Each Limited Partner shall make a capital contribution of
$20.00, (or the subscription price of $20.00 less the volume discount stated in
the Prospectus), as the purchase price for each Unit which he purchases from the
Partnership. The Capital Contributions of the Limited Partners shall be made in
cash. Except as required by the Act, each Unit shall be fully paid and non-
assessable, and no assessments for payments by the Limited Partners will be made
by the General Partner.
3.3.2 Any portion of the net proceeds from sales of the Units
which is not invested or committed for investment in Equipment or for any
Partnership purposes or reserved for necessary operating expenses within 12
months from the Final Closing shall be distributed to the Limited Partners by
the Partnership as a return of capital, without reduction for the General
Partner's Organizational Fee or for any Equipment Acquisition Fee which would
have been payable to the General Partner if such proceeds had been invested.
Funds will be deemed to have been committed to investment and will not be
returned to the Limited Partners to the extent written agreements in principle,
commitment letters, letters of intent or understanding or any similar contracts
or understandings have, at any time before the end of such 12-month period, been
executed, provided that such investments are consummated. Should any such
investment not be consummated, the funds attributable thereto shall be
distributed to the Limited Partners in a timely manner.
3.4 REGISTRATION. Upon the admission of a person as a Limited Partner or
Substituted Limited Partner, such Person shall be registered on the records of
the Partnership as a Limited Partner, together with his address, the number of
Units he owns, and his transferor's Capital Contribution. Each person
registered as a holder of record of Units shall continue to be the holder of
record of such Units until notification of the transfer of any such Units is
given in accordance with the terms of this Agreement. A holder of record shall
be entitled to all distributions and all allocations of Net Profits and Net
Losses with respect to Units registered in his name and to all other rights of a
Limited Partner until his rights in such Units have been transferred
I-8
<PAGE>
and the General Partner has been notified as required herein. The
Partnership shall not be affected by any notice or knowledge of transfer of
any interest in any Unit, except as expressly provided in Article 11. The
payment to the holder of record of any distribution with respect to such
Units shall discharge the Partnership of its obligations in respect thereto.
3.5 WITHDRAWAL OF CAPITAL CONTRIBUTIONS. Except as otherwise provided in
this Agreement, no Partner shall have the right to withdraw or reduce his
Capital Contribution. No Partner shall have the right to bring an action for
partition against the Partnership or to demand or receive property other than
cash in return for his capital contribution. No Limited Partner shall have
priority over any other Limited Partner, either as to the return of his Capital
Contribution or as to Net Profits, Net Losses or distributions.
3.6 ADMISSION OF LIMITED PARTNER. The Initial Closing shall take place
not later than 15 days after the release from the Escrow Account of the
subscribers' funds to the Partnership. Thereafter, subscribers shall be
admitted as Limited Partners not later than the last day of the calendar month
following the date their subscriptions are accepted by the Partnership. The
General Partner shall determine whether subscriptions received after the Initial
Closing will be accepted or rejected within 30 days of their receipt by the
Partnership and, if a subscription is rejected, the subscription funds will be
promptly returned to the subscriber without interest.
3.7 CONTINUATION OF LIMITED PARTNER STATUS. Once admitted as a Limited
Partner, a Person shall, except as otherwise provided in the Agreement, continue
to be a Limited Partner for all purposes of this Agreement and the Certificate
of Limited Partnership, as amended from time to time, until a Substituted
Limited Partner is admitted in place of such person pursuant to the provisions
of Article 11.
3.8 LIMITED LIABILITY OF LIMITED PARTNERS. No Limited Partner, in his
capacity as such, shall be liable for the debts, liabilities, contracts or any
other obligations of the Partnership or any partnership, joint venture or other
entity in which the Partnership has an interest. No Limited Partner shall be
obligated to make any Capital Contribution or to loan or otherwise provide funds
to the Partnership; provided, however, in accordance with the Act, Limited
Partners will be obligated to return any distribution from the Partnership to
the extent that, after giving effect to the distribution, all liabilities of the
Partnership (other than nonrecourse liabilities and liabilities to Limited
Partners on account of their interests in the Partnership) exceed the fair value
of its assets (including, as to assets serving as security for nonrecourse
liabilities, that portion of the fair value of such assets which exceeds the
amount of such nonrecourse liabilities).
ARTICLE 4
PARTNERS' CAPITAL
4.1 CAPITAL ACCOUNTS. A separate Capital Account shall be established and
maintained for each Partner. The Capital Account of each Partner shall be
credited with such Partner's Capital Contribution, plus all Net Profits and
items of income and gain of the Partnership allocated to such Partner pursuant
to Article 7, and shall be debited with the sum of (a) all Net Losses and items
of loss or deduction of the Partnership allocated to such Partner pursuant to
Article 7, and (b) all cash and the fair market value of any property (net of
liabilities of the Partnership assumed by such Partner and the liabilities to
which such property is subject) distributed by the Partnership to such Partner
pursuant to Article 8. The computation of the amount of the Capital Account of
a Partner shall be determined in all events solely in accordance with the rules
set forth in Treasury Regulation Section 1.704-1(b)(2)(iv). Any references in
this Agreement to the Capital Account of a Partner shall be deemed to refer to
such Capital Account as the same may be credited or debited from time to time as
set forth above in this Section 4.1.
4.2 WITHDRAWAL AND RETURN OF CAPITAL. No Limited Partner shall withdraw
any of his capital without the consent of the General Partner and Limited
Partners holding a Majority in Interest of the Units,
I-9
<PAGE>
except upon dissolution or liquidation of the Partnership or as provided in
Article 12. Under circumstances requiring a return of any Capital
Contribution or constituting a withdrawal of a Limited Partner, no Limited
Partner shall have the right to receive property other than cash, except as
may be specifically provided in this Agreement.
4.3 INTEREST ON CAPITAL. No interest shall be paid on any Capital
Contribution made to the Partnership.
ARTICLE 5
PARTNERSHIP EXPENSES
5.1 ORGANIZATION EXPENSES. The General Partner shall bear and pay all
Organizational and Offering Expenses other than (a) Underwriting Commissions and
(b) a non-accountable expense allowance payable to Wheat, First Securities, Inc.
equal to the lesser of (i) one percent of the Offering proceeds or (ii) $50,000.
5.2 OTHER EXPENSES. All expenses of the Partnership, other than the
expenses required to be paid by the General Partner pursuant to Section 5.1,
shall be billed (to the extent practicable) directly to and paid by the
Partnership. Subject to Section 5.1, the General Partner and its Affiliates
shall be reimbursed for the actual cost of goods and materials used for or by
the Partnership and obtained from entities unaffiliated with the General
Partner. Subject to (and only in accordance with) the foregoing, the
Partnership shall pay (or reimburse the General Partner and its Affiliates for)
the lower of the actual cost or the amount the Partnership would have to pay
independent third parties for such services in the same geographic area of all
expenses related to the administration and operation of the Partnership,
including without limitation:
5.2.1 all costs of personnel involved in the business of the
Partnership;
5.2.2 all taxes and assessments on Equipment and other taxes
applicable to the Partnership;
5.2.3 legal, appraisal, audit, accounting and other professional
fees;
5.2.4 printing and other expenses incurred in connection with the
issuance, distribution, transfer, registration and recording of documents
evidencing ownership of Units or in connection with the business of the
Partnership;
5.2.5 fees and expenses paid to independent contractors, mortgage
bankers, equipment brokers, servicers, leasing agents, consultants, equipment
lease brokers, insurance brokers and other agents;
5.2.6 expenses paid to nonaffiliated parties in connection with
the disposition, replacement, alteration, maintenance and repair, leasing, re-
leasing, storage and operation of Equipment (including the costs and expenses
for foreclosures, insurance premiums, equipment lease brokerage and leasing
commissions and of maintenance of Equipment);
5.2.7 subject to Section 9.4.4, expenses in connection with the
acquisition of Equipment other than Equipment acquired through the proceeds of
the offering of the Units;
5.2.8 expenses of organizing, revising, amending, converting,
modifying or terminating the Partnership or this Agreement;
I-10
<PAGE>
5.2.9 the cost of preparation and dissemination of the
informational material and documentation relating to potential sale, leasing,
re-leasing, financing or other disposition of Equipment;
5.2.10 costs incurred in connection with any litigation in which
the Partnership is involved or proceedings conducted by any regulatory agency,
including legal and accounting fees incurred in connection therewith;
5.2.11 costs of any accounting, statistical or bookkeeping
equipment necessary for the maintenance of the books and records of the
Partnership;
5.2.12 costs of investor communications and regulatory reports,
including without limitation initiation, review and approval of reports and
communications to Limited Partners or regulatory agencies; expenses in
connection with distributions made by the Partnership to, and communications,
bookkeeping and clerical work necessary in maintaining relations with, Limited
Partners, including the costs of design, production, printing and mailing of
reports, conducting elections in any circumstance requiring a vote of the
Limited Partners, holding meetings with Limited Partners, and preparing and
mailing reports required to be furnished to Limited Partners for tax reporting
or other purposes or reports which the General Partner deems to be in the best
interests of the Partnership;
5.2.13 expenses of professionals employed by the Partnership in
connection with any of the foregoing, including attorneys, accountants, and
appraisers; and
5.2.14 such other related administrative expenses as are necessary
to the prudent operation of the Partnership.
5.3 EXCLUDED EXPENSES. No reimbursement shall be permitted for services
for which the General Partner is entitled to compensation by way of a separate
fee. Excluded from the allowable reimbursement shall be (i) rent or
depreciation, utilities, capital equipment, other administrative items; and
(ii) salaries, fringe benefits, travel expenses and other administrative items
incurred or allocated to any Controlling Person of the General Partner.
ARTICLE 6
COMPENSATION OF THE GENERAL PARTNER
6.1 ORGANIZATIONAL FEE. For the services and activities of the General
Partner performed and to be performed by the General Partner in connection with
the organization of the Partnership, the General Partner will be paid an
Organizational Fee equal to three percent of the first $10,000,000 of Limited
Partners' Capital Contributions plus two percent of the Limited Partners'
Capital Contributions in excess of $10,000,000. The Organizational Fee will
accrue and be paid as Limited Partners are admitted to the Partnership.
6.2 EQUIPMENT MANAGEMENT FEE. For the services and activities performed
and to be performed by the General Partner and its Affiliates in connection with
Equipment Management, the General Partner shall receive a monthly fee equal to
the lesser of (a) the fees which would be charged by an independent third party
in the same geographic market for similar services and equipment or (b) the sum
of (i) two percent of (A) the Gross Lease Revenues attributable to Equipment
subject to Full Payout Net Leases which contain net lease provisions plus, (B)
the purchase price paid on Conditional Sales Contracts as received by the
Partnership and (ii) five percent of the Gross Lease Revenues attributable to
Equipment subject to Operating Leases. The Equipment Management Fee shall
accrue as funds are received by the Partnership and shall be paid to the General
Partner on conclusion of each calendar month, except such Equipment Management
Fee may be accrued as a debt of the Partnership payable, without interest, out
of future available cash if the Partnership does not generate sufficient cash
from operations to pay the Equipment Management Fee
I-11
<PAGE>
currently, or if the General Partner determines that such action is in the
best interest of the Partnership. Fees or expenses to nonaffiliated parties
for such services and activities shall be paid by the General Partner from
its Equipment Management Fee.
6.3 EQUIPMENT ACQUISITION FEE. For the services and activities performed
and to be performed by the General Partner in connection with the acquisition
and lease of Equipment, the General Partner shall receive an Equipment
Acquisition Fee of four percent of the Purchase Price of each item of Equipment
purchased. The Equipment Acquisition Fee will be paid from the net proceeds of
the Offering which are available to be used to purchase Equipment when such
proceeds are received by the Partnership. To the extent that the Partnership
acquires Equipment at an aggregate Purchase Price exceeding the net proceeds of
the Offering available to be used to purchase Equipment, the Equipment
Acquisition fee will be paid with respect to that Equipment as the Equipment is
acquired.
6.4 EQUIPMENT LIQUIDATION FEE. For the services and activities to be
performed by the General Partner in connection with the disposition of the
Partnership's Equipment (other than by a Conditional Sales Contract), the
General Partner shall receive an Equipment Liquidation Fee equal to the lesser
of (a) 50% of the Competitive Equipment Sale Commission or (b) three percent of
the sales price of such Equipment. The payment of the Equipment Liquidation Fee
shall be made as proceeds of the sale are received and is subordinated to the
receipt by the Limited Partners of (a) a return of their Capital Contributions
plus the Cumulative Return and (b) the Net Disposition Proceeds from such sale.
Such fee will be reduced to the extent any liquidation or resale fees are paid
to unaffiliated parties.
6.5 DEBT PLACEMENT FEE. For the services rendered or to be rendered by
the General Partner's arrangement of Term Debt to finance the acquisition of
Equipment by the Partnership, the General Partner shall receive a Debt Placement
Fee equal to one percent of such indebtedness. Such fee shall be paid when the
proceeds of the Term Debt are received by the Partnership and shall be reduced
to the extent the Partnership incurs such fees to third parties unaffiliated
with the General Partner or the lender with respect to such indebtedness, and no
such fee will be paid with respect to borrowings from the General Partner or its
Affiliates.
6.6 RE-LEASING FEE. As compensation for providing substantial re-leasing
services for any Equipment for which the General Partner has, following the
expiration of the current or most recent lease or other use of the Equipment,
arranged a subsequent lease or other 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 their Affiliates, 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 located in the same
geographic market for comparable services and equipment or (b) two percent of
Gross Lease Revenues derived from such re-lease.
6.7 LIMITATIONS ON FEES. The Partnership shall commit a substantial
portion of Capital Contributions toward Investment in Equipment. The remaining
Capital Contributions may be used to pay Front-End Fees. The Partnership will
commit a percentage of Capital Contributions to Investment in Equipment which is
equal to the greater of (i) 80% of Capital Contributions reduced by .0625% for
each one percent of indebtedness encumbering Equipment or (ii) 75% of Capital
Contributions. To calculate the percent of indebtedness encumbering Equipment,
divide the amount of indebtedness by the Purchase Price (excluding Front-End
Fees) and multiply the quotient by .0625% to determine the percentage to be
deducted from 80%. For example, if the percentage of indebtedness were 50%, the
percentage to be deducted from 80% is 3.125% (50 x .0625) and the percentage to
be committed to Investment in Equipment is 76.875% (80 - 3.125).
I-12
<PAGE>
ARTICLE 7
ALLOCATION OF NET PROFITS, NET LOSSES AND OTHER ITEMS
7.1 NET PROFITS.
7.1.1 Net Profits for each fiscal year of the Partnership (other
than Net Profits arising from transactions in connection with the termination or
liquidation of the Partners) shall be allocated as follows:
(a) to the General Partner, the greater of (i) one percent of
such Net Profits or (ii) Net Profits equal to the excess, if any, of (A)
all distributions to the General Partner pursuant to Section 8.1.2 with
respect to such fiscal year and all prior fiscal years over (B) the total
Net Profits allocated to the General Partner pursuant to this Section
7.1.1(a) for all such prior fiscal years; and
(b) any balance to the Limited Partners.
7.1.2 Net Profits arising from transactions in connection with the
termination or liquidation of the Partnership shall be allocated in the
following order of priority:
(a) Net Profits shall be allocated to each Partner in an amount
equal to the negative amount, if any, of his Capital Account. If the Net
Profits available to be so allocated is less than the sum of all Partners'
negative Capital Accounts, then such Net Profits shall be allocated to the
Partners in proportion to the respective amounts of their negative Capital
Accounts.
(b) An amount of Net Profits equal to the excess of (A) the
proceeds from such transaction that would be distributed to the Partners
pursuant to Section 8.1.2 (without regard to Section 8.1.3) over (B) the
aggregate Capital Accounts (as adjusted to reflect the allocation of Net
Profit pursuant to Section 7.1.2(a)) of all Partners shall be allocated
among such Partners in proportion to their respective shares of such
excess.
(c) Any remaining Net Profits shall be allocated in the same
proportions that cash distributions equal to such remaining Net Profits
would be distributed pursuant to Section 8.1 (without regard to Section
8.1.3).
7.2 NET LOSSES. Net Losses for each fiscal year of the Partnership shall
be allocated 99% to the Limited Partners and one percent to the General Partner.
7.3 REQUIRED ALLOCATIONS. Notwithstanding Sections 7.1 and 7.2:
7.3.1 Beginning in the first year in which the Partnership has
"nonrecourse deductions" (as such term is defined and the amount thereof is
determined in accordance with Treasury Regulation Sections 1.704-2(b)(1)), and
in each year thereafter, if there is a net decrease in "partnership minimum
gain" (as defined in Treasury Regulation Section 1.704-2(d)(1)) during a
Partnership taxable year, then any Partner with a deficit balance in his Capital
Account at the end of such taxable year shall be allocated, before any other
allocation is made of Partnership items for such taxable year, items of income
and gain for such taxable year (and, if necessary, subsequent years) in the
amounts and proportions needed to eliminate such deficit as quickly as possible,
such allocations to be made in accordance with the "minimum gain chargeback"
provisions of Treasury Regulation Section 1.704-(2)(f);
7.3.2 No loss or deduction shall be allocated to a Partner if such
allocation would create a deficit balance in such Partner's Capital Account in
excess of the amount such Partner is obligated to restore to the Partnership or
is treated as being obligated to restore to the Partnership under Treasury
Regulations
I-13
<PAGE>
Sections 1.704-1(b)(2)(ii)(c), 1.704-2(g)(1) or 1.740-2(i)(5). Any
losses or deductions that cannot be allocated to a Partner because of the
foregoing limitation shall be allocated among the Partners in accordance with
their relative ownership of Units, subject to the limitations of this Section
7.3.2.
7.3.3 Any Partner who unexpectedly receives with respect to the
Partnership: (a) an adjustment pursuant to Treasury Regulation 1.704-
1(b)(2)(iv)(k); (b) an allocation of loss or deduction pursuant to Sections
704(e)(2) or 706(d) of the Code or pursuant to Treasury Regulation Section
1.751-1(b)(2)(ii); or (c) a distribution in excess of an offsetting increase to
such Partner's Capital Account reasonably expected to occur during (or prior to)
the Partnership taxable year in which such distribution occurs, will be
allocated, as quickly as possible, items of income and gain in an amount and
manner sufficient to eliminate any resulting deficit balance in his Capital
Account in accordance with the "qualified income offset" provisions of Treasury
Regulations Section 1.704-1(b)(2)(ii)(d);
7.3.4 Loss, deductions, and expenditures attributable to
nonrecourse debt for which a Partner bears the economic risk of loss shall be
determined and allocated to the Partner who bears such economic risk of loss in
accordance with Treasury Regulation Section 1.704-2, and if there is a decrease
in partner "nonrecourse debt minimum gain" (as defined in Treasury Regulation
Section 1.704-2(i)(3)), any Partner with a share of that partner nonrecourse
debt minimum gain shall be allocated items of income and gain in accordance with
the chargeback provisions of Treasury Regulations Section 1.704-2(i)(4);
7.3.5 For purposes of this Section 7.3, a Partner's Capital
Account deficit balance shall be determined by excluding from such Partner's
Capital Account any amount such Partner is obligated to restore to the
Partnership or treated as obligated to restore to the Partnership under Treasury
Regulations Sections 1.704.1(b)(2)(ii)(c), 1.704-2(g)(l) or 1.704-2(i)(5), and
by adjusting such Partner's Capital Account balance for items described in
Treasury Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6); and
7.3.6 If property is reflected on the books of the Partnership at
a book value that differs from the adjusted tax basis of the property in
accordance with Treasury Regulations Section 1.704-1(b)(2)(iv)(d) or (f),
depreciation, amortization, and gain or loss as determined for federal income
tax purposes shall be allocated so as to take into account such difference
between book value and adjusted tax basis in accordance with the principles of
Code Section 704(c). The General Partner shall have the authority to elect the
method to be used by the Partnership for allocating items required by Section
704(c) of the Code and such election shall be binding on the Limited Partners.
7.4 SYNDICATION EXPENSES. Syndication Expenses attributable to the
Underwriting Commissions paid on the Partnership's sale of any Unit shall be
specially allocated to the Limited Partner who owns the Units, and all other
Syndication Expenses shall be allocated to the Limited Partners who are admitted
to the Partnership from time to time so that, to the extent possible, the
cumulative Syndication Expenses (other than Underwriting Commissions) allocated
with respect to each Unit at any time is the same. If the General Partner
determines that such result is not likely to be achieved through future
allocations of Syndication Expenses, the General Partner may allocate a portion
of Net Profits or Net Losses to achieve the same effect on the Capital Accounts
of the Limited Partners.
7.5 RECHARACTERIZATION OF FEES. Any fees paid to the General Partner or
any of its Affiliates which are disallowed as deductible expenses by the
Internal Revenue Service shall constitute special allocations of gross income to
the General Partner for income tax purposes.
7.6 RECAPTURE. If the Partnership recognizes gain on the sale, exchange
or other disposition of any property, any portion of such gain which is treated
as ordinary income pursuant to Code Section 1245 shall be divided between the
General Partner and the Limited Partners in proportion to the aggregate
deductions for cost recovery and depreciation previously allocated to them and
shall be allocated among the Limited Partners in the same proportions as the
gain from such disposition is allocated among them.
I-14
<PAGE>
7.7 ALLOCATIONS AMONG LIMITED PARTNERS. Except as otherwise provided in
this Agreement, Net Profits and Net Losses allocated to the Limited Partners for
any fiscal year shall be divided among them in proportion to their Average Daily
Units for such fiscal year. If an interest of a Partner in the Partnership is
transferred in accordance with Section 11 of this Agreement, the General
Partner, in its sole discretion, may allocate such items of Net Profits, Net
Loss, and credit by closing the books of the Partnership immediately after the
transfer of the interest. All such allocations shall be made without regard to
the date, amount or recipient of any distributions which may have been made with
respect to such transferred interest.
7.8 OTHER ALLOCATIONS. Any allocations not otherwise provided for shall
be divided among the Partners in the same proportions as they share Net Profits
or Net Losses, as the case may be, for the period.
ARTICLE 8
DISTRIBUTIONS
8.1 CASH DISTRIBUTIONS.
8.1.1 Distributions of Cash Available for Distribution, if any,
shall be made, if at all, to the Partners owning Units on the Record Date for
purposes of such distributions.
8.1.2 Except as otherwise provided in this Section 8.1, Cash
Available for Distribution shall be distributed in the following order of
priority:
(a) 99% to the Limited Partners and one percent to the General
Partner until (i) the Limited Partners have received an amount equal to the
excess, if any, of (A) the Cumulative Return from the inception of the
Partnership to the end of the calendar quarter to which the distribution
relates, over (B) the sum of all prior distributions under this Section
8.1.2(a)(i) and (ii) the Limited Partners' Capital Contributions have been
reduced to zero; and
(b) thereafter, 90% to the Limited Partners and ten percent to
the General Partner.
8.1.3 Notwithstanding Section 8.1.2, amounts distributed in
connection with the liquidation of the Partnership or a Partner's interest
(within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)) shall be
distributed in accordance with the Partner's positive Capital Account as
adjusted for all operations and transactions preceding such distribution.
8.1.4 Notwithstanding Section 8.1.2, if the proceeds resulting
from the sale of any Equipment are reinvested in Equipment, sufficient cash will
be distributed to the Partners to pay the additional federal income tax
resulting from such sale for a Partner in a 39.6% federal income tax bracket or,
if lower, the maximum federal income tax rate in effect for individuals for such
taxable year.
8.2 ALLOCATION OF DISTRIBUTIONS TO LIMITED PARTNERS. Distributions to the
Limited Partners with respect to any period other than during the Offering
Period shall be allocated pro rata among the Limited Partners who are Limited
Partners on the Record Date for purposes of such distributions. Distributions
to the Limited Partners during the Offering Period shall be allocated among the
Limited Partners in proportion to their Average Daily Units for that period.
8.3 AMOUNTS WITHHELD. Any amounts withheld pursuant to Section 9.1.16
shall be treated as amounts distributed to the Partners for all purposes under
this Agreement. Amounts treated as distributed to a Partner pursuant to this
Section 8.3 shall reduce the amounts otherwise distributed to such Partner
pursuant to this Agreement.
I-15
<PAGE>
8.4 RETURN OF OFFERING PROCEEDS. If all of the net proceeds of the
Offering are not invested by the Partnership in Equipment or committed to such
investment or otherwise utilized for proper Partnership purposes prior to the
expiration of 12 months from the Closing Date, the net proceeds not so invested,
committed, or set aside as working capital reserves will thereupon be promptly
returned, with a proportionate share of interest at the rate earned by the
Partnership on the investment of such proceeds, to the Limited Partners based
upon their respective numbers of Units and time of purchase, without reduction
for the General Partner's Organizational Fee or for any Equipment Acquisition
Fee which would have been payable to the General Partner if such proceeds had
been invested. For such purpose, funds will be deemed to be committed to
investment and will not be returned to the Limited Partners to the extent
written agreements in principle, commitment letters, letters of intent or
understanding, option agreements, or any similar contracts or understandings
exist, whether or not any such investment is ultimately consummated. Funds will
also be deemed to be committed to the extent: (i) any funds may have been
reserved to make contingent payments in connection with any Equipment already
acquired, whether or not any such payments are ultimately made; (ii) as a
condition to obtaining financing the Partnership is required to maintain funds
as a compensating balance; or (iii) the General Partner decides that an addition
to the working capital reserve is necessary in connection with any Equipment.
In the event any such uninvested funds are distributed to the Limited Partners,
such distribution will be treated as a return of capital.
ARTICLE 9
RIGHTS, POWERS, AND DUTIES OF GENERAL PARTNER
9.1 RIGHTS AND POWERS. Except as otherwise specifically provided in this
Agreement, the General Partner shall exercise complete and exclusive control
over the management of the Partnership business and affairs. In addition to any
other rights and powers which the General Partner may possess under this
Agreement and the Act, the General Partner shall, except to the extent otherwise
provided in this Agreement, have all rights and powers required or appropriate
to its management of the Partnership and the Partnership's business, which by
way of illustration but not by way of limitation, include the following rights
and powers which may be exercised on behalf of, and, subject to Article 5, at
the expense of, the Partnership:
9.1.1 to acquire, purchase, hold, sell, exchange or otherwise
transfer Equipment; to lease Equipment to third parties; to make loans to
manufacturers of Equipment with respect to and secured by Equipment leased
directly by the manufacturer to third parties; and to enter into agreements with
others with respect to such activities, which agreements may contain such
provisions as the General Partner in its sole and absolute discretion shall
approve;
9.1.2 to invest Partnership funds in commercial paper, government
securities, certificates of deposit, time deposits, bankers acceptances, money
market certificates or accounts, or other short-term investments (such as money
market funds) which the General Partner deems appropriate;
9.1.3 subject to Section 17.2.3, to purchase liability, casualty
and other insurance which the General Partner deems appropriate for the
protection of the Equipment or for any purpose convenient or beneficial to the
Partnership, provided that the General Partner will not provide insurance
services to the Partnership;
9.1.4 to delegate all or any of its duties under this Agreement,
and in furtherance of any such delegation to appoint, employ or contract with
any persons, which persons may, under the supervision of the General Partner,
administer or assist in the day-to-day operations of the Partnership; act as
consultants, accountants, correspondents, attorneys, brokers, escrow agents or
in any other capacity deemed by the General Partner necessary or desirable; and
perform such other acts or services for the Partnership as the General Partner
in its sole and absolute discretion may approve;
I-16
<PAGE>
9.1.5 to designate and appoint one or more agents for the
Partnership who shall have authority as may be conferred on them by the General
Partner, and who may perform any of the duties, and exercise any of the powers
and authority, conferred on the General Partner under this Agreement, including,
but not limited to, designation of one or more agents as authorized signatories
on any bank accounts maintained by the Partnership;
9.1.6 to act in its own name as nominee for the Partnership and to
place title to Partnership assets in its own name or the names of others as
nominees or trustees for any purpose convenient or beneficial to the
Partnership;
9.1.7 to collect all amounts due to the Partnership, and otherwise
to enforce all rights of the Partnership including rights under any lease of its
assets, and to retain counsel and institute suits or proceedings, in the name
and on behalf of the Partnership;
9.1.8 to establish and maintain one or more bank accounts for the
Partnership in such bank or banks as the General Partner may, from time to time,
designate as depositaries of the funds of the Partnership;
9.1.9 to make or revoke any elections permitted under the Code;
9.1.10 to determine the appropriate accounting method or methods to
be used by the Partnership;
9.1.11 to offer and sell Units of the Partnership to the public
directly or through Wheat First Butcher Singer or any licensed Affiliate of the
General Partner; to employ personnel, agents and dealers for such purpose; and,
in connection therewith, to cause the Partnership to indemnify Wheat First
Butcher Singer to the extent permitted under federal and state securities laws;
9.1.12 to admit the purchasers of the Units as Limited Partners of
the Partnership, to amend this Agreement and the Certificate to reflect the
addition or substitution of Limited Partners and the reduction of Capital
Accounts on the return of capital to Partners;
9.1.13 to borrow money for Partnership purposes (other than for the
acquisition of Equipment) and as security therefor to mortgage, pledge,
hypothecate or encumber or otherwise place liens upon all or part of the
Equipment and other property of the Partnership, to pledge or encumber the
assets of the Partnership to secure any remarketing rights of vendors or
suppliers of Equipment;
9.1.14 to prepay in whole or in part, refinance, increase, modify,
consolidate, extend or increase any lien or encumbrance affecting any Equipment;
9.1.15 to require in all Partnership obligations that the General
Partner shall not have any personal liability thereon but that the person or
entity contracting with the Partnership is to look solely to the Partnership and
its assets for satisfaction; provided, however, that the inclusion of such
provisions shall not materially affect the cost of the service or material being
supplied;
9.1.16 to withhold income taxes as required or permitted by any
federal, state or local taxing authority, and otherwise to comply with and take
actions necessary or appropriate as a result of provisions of the Code or any
state or other tax law requiring or permitting withholding;
9.1.17 to deal with, or otherwise engage in business with, any
person who has dealt with or engaged in business with or may in the future deal
with or engage in business with the General Partner or its Affiliates; provided
that no such dealing or engaging in business may involve any arrangement which
would
I-17
<PAGE>
circumvent any of the provisions of this Agreement, including the
restrictions against dealing with the General Partner or its Affiliates;
9.1.18 to commence the dissolution and liquidation of the
Partnership in its ninth year of existence in order to terminate the Partnership
by December 31, 2006; and
9.1.19 to prohibit Qualified Plans from acquiring, individually or
in the aggregate, more than 25% of the Units.
9.2 RELIANCE ON CERTIFICATE OF GENERAL PARTNER. Any person dealing with
the Partnership or the General Partner may rely on a certificate signed by the
General Partner as authority with respect to (a) the identity of any General
Partner or Limited Partner; (b) the existence or nonexistence of any fact or
facts which constitute a condition precedent to acts by the General Partner or
in any other manner are germane to the affairs of the Partnership; (c) the
persons who are authorized to execute and deliver any instrument or document of
the Partnership; or (d) any act or failure to act by the Partnership or as to
any other matter involving the Partnership or any Partner.
9.3 INDEPENDENT ACTIVITIES. The General Partner and its Affiliates and
each Limited Partner may, notwithstanding the existence of this Agreement,
engage in whatever activities they choose, whether competitive with the
Partnership or otherwise, without having or incurring any obligation to offer
any interest in such activities to the Partnership or any party hereto. The
General Partner and its Affiliates shall not be obligated to present to the
Partnership any particular investment opportunity which comes to their attention
if the General Partner, in good faith, determines that such opportunity is not
an appropriate investment for the Partnership at that time or if the opportunity
is not presented to the Partnership because it has been presented to other
partnerships sponsored by the General Partner that may have priority based on
criteria established by the General Partner. Subject to the foregoing, neither
this Agreement nor any activity undertaken pursuant hereto shall prevent the
General Partner or its Affiliates from engaging in any activity, or require the
General Partner or its Affiliates to permit the Partnership or any Limited
Partner to participate therein. The General Partner may organize and
participate as a general partner in partnerships which may engage in activities
similar to the activity engaged in by this Partnership and which may use the
name "Commonwealth Income & Growth Fund" or variations of such name. The
General Partner retains the rights to such name and its variations. The General
Partner will give priority to the Limited Partners when the interests of the
Limited Partners conflict with the interests of the General Partner.
If one or more programs affiliated with the General Partner and the
Partnership are in a position to acquire the same Equipment, the General Partner
will determine which program will purchase the Equipment based upon the
objectives of each and the suitability of the acquisition in light of those
objectives. The General Partner will generally afford priority to the program
or entity that has had funds available to purchase Equipment for the longest
period of time. In addition, in order to promote diversification of Equipment
and lessees, when two or more programs are in a position to acquire the same
Equipment, the General Partner may acquire Equipment in joint ventures with
affiliated investor programs. If one or more investor programs affiliated with
the General Partner and the Partnership are in a position to enter into leases
with the same lessee or to sell Equipment to the same purchaser, the General
Partner will generally afford priority to the Equipment which has been available
for lease or sale for the longest period of time.
9.4 DUTIES.
9.4.1 The General Partner shall manage and control the
Partnership, its business and affairs. The General Partner shall devote such
time to the business of the Partnership as in its discretion it determines is
necessary for the efficient carrying on of the business.
I-18
<PAGE>
9.4.2 The General Partner shall be the tax matters partner of the
Partnership as defined under the Code, and as such tax matters partner, shall be
subject to Section 17.2 of this Agreement.
9.4.3 The General Partner shall have fiduciary responsibility for
the safekeeping and use of all funds and assets of the Partnership, whether or
not in the General Partner's immediate possession or control. The General
Partner shall not employ, or permit another to employ, such funds or assets in
any manner except for the exclusive benefit of the Partnership. The Limited
Partners may not contract away the fiduciary duty owed to them by the General
Partner under the common law.
9.4.4 The General Partner shall commit toward Investment in
Equipment at least that portion of the Limited Partners' Capital Contributions
for their Units required by Section 6.7 hereof. If the total amount of Front-
End Fees must be reduced in order to enable the Partnership to commit such
Capital Contributions to Investment in Equipment, the General Partner shall, and
shall cause its Affiliates or other persons to, reimburse the Partnership for
such amount of Front-End Fees and any Acquisition Fees, Debt Placement Fees and
Acquisition Expenses paid in connection with the reinvestment of the
Partnership's funds received by them as is necessary to enable the Partnership
to meet such requirement within 30 days after the need for reimbursement arises.
9.4.5 The General Partner shall maintain reserves in such amount
and for such times and purposes as it deems appropriate.
9.5 RESTRICTIONS ON AUTHORITY. Notwithstanding any other provisions of
this Agreement:
9.5.1 The General Partner shall not have the authority to do any
act in contravention of this Agreement or the Act; possess Partnership property,
or assign rights in specific Partnership property, for other than a Partnership
purpose; admit a person as a General Partner or a Limited Partner, except as
provided in this Agreement; knowingly perform any act that would subject any
Limited Partner to liability as a general partner in any jurisdiction; alter the
purpose or character of the Partnership as set forth in Section 2.5; or confess
a judgment against the Partnership.
9.5.2 Except pursuant to Section 10.2, the General Partner shall
not sell all or substantially all of the assets of the Partnership in a single
sale, except in the winding up and liquidation of the business of the
Partnership or in a final liquidating sale of Equipment remaining after the
disposition in the ordinary course of business of substantially all of the
Partnership's other Equipment.
9.5.3 The Partnership shall not purchase or lease Equipment from
the Sponsor or its Affiliates, including Equipment in which the General Partner
or its Affiliates have an interest, except that the General Partner shall be
permitted to make acquisitions of Equipment in its own name (and assume loans in
connection therewith) and hold title thereto on an interim basis (not in excess
of 60 days) for the purpose of facilitating the acquisition of such Equipment or
the borrowing of money or obtaining of financing, or any other purpose related
to the business of the Partnership provided that (a) such acquisitions are in
the best interest of the Partnership; (b) such Equipment is purchased by the
Partnership for a price no greater than the sum of the actual cost of such
Equipment, accountable Acquisition Expenses payable to third parties, interest
on the Purchase Price (at a rate no greater than that charged by unrelated
lenders on comparable loans) from the date of purchase to the date of transfer
to the Partnership and compensation permitted in accordance with Article 6 of
this Agreement; (c) there is no difference in interest terms of the loans
secured by the Equipment at the time acquired by the General Partner and the
time acquired by the Partnership; and (d) no benefit arises out of such
acquisitions to the General Partner except for the compensation permitted under
this Agreement.
I-19
<PAGE>
9.5.4 The Partnership shall not invest in junior trust deeds
unless received in connection with the sale of an item of Equipment in an
aggregate amount which does not exceed 30% of value of the assets of the
Partnership on the date of the investment.
9.5.5 The Partnership shall not sell or lease Equipment to the
General Partner or its Affiliates.
9.5.6 The Partnership shall not make loans to any Person,
including without limitation, the General Partner or its Affiliates (except to
the extent a Conditional Sales Contract constitutes a loan.
9.5.7 The Partnership shall not acquire Equipment from an
Equipment Program in which the General Partner or its Affiliates have an
interest.
9.5.8 The Partnership shall not acquire Equipment in exchange for
Units.
9.5.9 The Partnership shall not give the General Partner or its
Affiliates an exclusive right to sell or exclusive employment to sell Equipment
for the Partnership.
9.5.10 The Partnership shall not pay, directly or indirectly, a
commission or fee (except as specifically described under this Agreement) to the
General Partner or its Affiliates in connection with the reinvestment or
distribution of Cash Available for Distribution or of the proceeds of the
resale, exchange, or refinancing of the Partnership's Equipment.
9.5.11 No rebates or give-ups may be received by the General
Partner or its Affiliates, nor may the General Partner or its Affiliates
participate in any reciprocal business arrangements which would circumvent any
of the provisions of this Agreement, including the restrictions against dealing
with the General Partner or its Affiliates.
9.5.12 The General Partner and its Affiliates shall not directly or
indirectly pay or award any commissions or other compensation to any person
engaged by a potential Limited Partner for investment advice as an inducement to
such adviser to advise the purchase of Units. This Section 9.5.12, however,
shall not prohibit the payment of Underwriting Commissions to the Dealer Manager
or other properly licensed person for selling Units.
9.5.13 The funds of the Partnership shall not be commingled with
the funds of any other Person. This prohibition shall not apply to investments
meeting the requirements of Section 9.5.14.
9.5.14 Except to the extent that a permitted investment in the
entities referred to in this Section 9.5.14 constitutes "securities" within the
meaning of the Securities Act of 1933, as amended, the Partnership will not
invest in securities, including equipment limited partnerships, general
partnerships or joint ventures, except that (a) the Partnership may invest in
general partnerships or joint ventures with persons other than equipment
Programs formed by the General Partner or its Affiliates, which partnerships or
joint ventures own specific equipment; provided that (i) the Partnership has or
acquires a controlling interest in such ventures or partnerships; (ii) the non-
controlling interest is owned by a non-Affiliate, and (iii) there are no
duplicate fees; and (b) the Partnership may invest in joint venture arrangements
with other equipment Programs formed by the General Partner or its Affiliates if
such action is in the best interests of all Programs and if all the following
conditions are met: (i) all the Programs have substantially identical
investment objectives; (ii) there are no duplicate fees; (iii) the sponsor
compensation is substantially identical in each Program; (iv) the Partnership
has a right of first refusal to buy another Program's interest in a joint
venture if the other Program wishes to sell equipment held in the joint venture;
(v) the investment of each Program is on substantially the same terms and
conditions; and (vi) the joint venture is formed either for the purpose of
effecting appropriate diversification for the Programs or for the purpose of
relieving the General Partner or its Affiliates from a commitment entered into
pursuant to Section 9.5.3.
I-20
<PAGE>
9.5.15 Neither the General Partner nor its Affiliates shall lend
money to the Partnership if interest rates and other financing charges and fees
in connection with such loan are in excess of the lesser of their cost of funds
or the amount which would be charged by unrelated lending institutions on
comparable loans for the same purpose or if such loan contains any prepayment
charge or prepayment penalty. Neither the General Partner nor its Affiliates
shall provide financing for the Partnership unless such financing has a term of
not more than 12 months or carries an interest rate in excess of three percent
over the prime rate of PNC Bank, N.A.
9.5.16 Other than as specifically described in Section 5.2 and
Article 6 of this Agreement and the section "Compensation of the General Partner
and its Affiliates" in the Prospectus at the time it was declared effective by
the Securities and Exchange Commission, the General Partner shall not enter into
any agreement, contract or arrangement on behalf of the Partnership providing
for compensation to the General Partner or its Affiliates for performing
services for, or selling or leasing goods or materials to, the Partnership.
9.5.17 All services or goods for which the General Partner or its
Affiliates are to receive compensation (other than pursuant to this Agreement)
shall be embodied in a written contract which precisely describes the subject
matter thereof and all compensation to be paid, which contract may only be
modified by a vote of a Majority in Interest of the Limited Partners and which
contract shall contain a clause allowing termination by either party without
penalty on 60 days' prior written notice.
9.5.18 In connection with the borrowing of money, recourse for the
payment of which is limited solely to property of the Partnership and which
shall be amortized fully over the initial lease term, no lender shall be granted
or acquire, at any time as a result of making such a loan, any direct or
indirect interest in the profits, capital or property of the Partnership other
than as a secured creditor.
9.5.19 Partnership funds shall not be invested in any financial
institution or entity affiliated with the General Partner and shall not be used
in a compensating balance arrangement for the benefit of any entity other than
the Partnership.
9.5.20 Without the consent of the General Partner and a Majority in
Interest of the Limited Partners, the Partnership shall not convert to another
form of business entity if the conversion results in a significant adverse
change in (a) the voting rights of the Limited Partners, (b) the termination
date of the Partnership, (c) the compensation payable to the General Partner or
its Affiliates or (d) the ability to meet the Partnership's objectives without
materially impairing the rights of Limited Partners.
9.5.21 The Partnership shall not make distributions in kind except
upon dissolution and liquidation, and then only to a liquidating trust which has
been established for the purpose of the liquidation of the assets of the
Partnership and the distribution of cash in accordance with this Agreement.
9.5.22 The Partnership shall not incur debt in excess of 30% of the
expected aggregate cost of the Equipment to be owned or subject to a Conditional
Sales Contract except that the Partnership may not incur indebtedness to acquire
Equipment until the net proceeds of the Offering have been invested, or
committed to investment, in Equipment.
9.5.23 The Partnership shall not purchase Equipment unless such
Equipment is subject to a lease or a Conditional Sales Contract or for which a
lease or a Conditional Sales Contract will be entered into when the Partnership
acquires the Equipment.
9.5.24 The Partnership's leases and other contracts will each
contain a statement that the Partnership has been organized as a limited
partnership under the Act.
I-21
<PAGE>
9.5.25 Without the consent of the General Partner and a Majority in
Interest of the Limited Partners, the Partnership will not change its principal
purpose of acquiring, leasing and selling Equipment.
9.5.26 The Partnership shall not issue equity securities senior to
the Units.
9.6 GENERAL PARTNER'S NET WORTH. The General Partner agrees, represents
and warrants that it will at all times have a net worth in an amount
(i) sufficient in the opinion of counsel to the Partnership to enable the
Partnership either to avoid having the corporate characteristic of limited
liability for federal income tax purposes or to avoid being treated as an
association taxable as a corporation for federal income tax purposes, and
(ii) at least five percent of the gross amount of all direct participation
programs sold by the General Partner within the prior 12 months plus five
percent of the amount of the Capital Contribution to the Partnership, up to
$1,000,000.
ARTICLE 10
RIGHTS OF LIMITED PARTNERS
10.1 NO LIMITED PARTNER IN CONTROL. No Limited Partner, as such, shall
participate in the management or control of the Partnership's business, nor
shall any Limited Partner, as such, have the power to act for or bind the
General Partner or the Partnership.
10.2 VOTING RIGHTS. The Limited Partners by a vote of a Majority in
Interest of the Limited Partners may, without the necessity for concurrence by
the General Partner (a) approve or disapprove a sale of all or substantially all
of the assets of the Partnership, except as otherwise permitted or required
under Section 14.1 or 14.4 of this Agreement; (b) dissolve the Partnership; (c)
subject to Section 10.5, amend this Agreement except that amendment of Articles
6, 7 and 8 shall require the affirmative vote of Limited Partners owning at
least 66 2/3% of the Units owned by all Limited Partners; (d) remove or approve
the withdrawal of the General Partner; or (e) prior to the effective date of a
removal, withdrawal or dissolution of the General Partner, elect an additional,
replacement or successor General Partner to be admitted prior to such effective
date. With respect to any Units owned by the General Partner or its Affiliates,
the General Partner and its Affiliates may not vote or consent on matters
submitted to the Limited Partners regarding removal of the General Partner or
any transaction between the Partnership and the General Partner or its
Affiliates. In determining the required percentage in interest of Units
necessary to approve a matter on which the General Partner and its Affiliates
may not vote or consent, any Units owned by the General Partner or its
Affiliates shall not be included.
10.3 CONVERSIONS AND ROLL-UPS.
10.3.1 CONSENT REQUIRED. Without the approval of the General Partner
and the holders of at least 66-2/3% of all outstanding Units, the Partnership
shall not enter into any Roll-Up. Limited Partners who do not consent to an
approved Roll-Up shall be given the option of (i) accepting the securities of
the Roll-Up Entity offered in the proposed Roll-Up; or (ii) receiving cash in an
amount equal to the non-consenting Limited Partner's pro rata share of the
appraised value of the net assets of the Partnership. The Partnership shall not
reimburse the sponsor of a proposed Roll-Up for the costs of an unsuccessful
proxy contest in the event that the Roll-Up is not approved by the Limited
Partners as required by the first sentence of this Section 10.3.1.
10.3.2 APPRAISAL. The "appraised value of the net assets of the
Partnership" as used in Section 10.3.1 shall be established by means of an
appraisal of the net assets of the Partnership by a competent Independent
Expert, engaged for the benefit of the Partnership and the Limited Partners,
with no current
I-22
<PAGE>
material or prior business or personal relationship with the
General Partner or its Affiliates. Such Independent Expert must be engaged to a
substantial extent in the business of rendering opinions regarding the value of
assets of the type held by the Partnership, and must be qualified to perform
such work. The appraisal shall be based on an evaluation of all relevant
information and shall indicate the value of the Partnership's assets, assuming
an orderly liquidation of such assets over a twelve-month period, as of a date
immediately prior to the date of the proposed Roll-Up. A summary of the
independent appraisal, including all material assumptions underlying the
appraisal, shall be included in a report to the Limited Partners in connection
with a proposed Roll-Up and shall be appraised on a consistent basis. If the
appraisal will be included in a prospectus used to offer the securities of a
Roll-Up Entity, the appraisal shall be filed with the Securities and Exchange
Commission and the states as an exhibit to the registration statement for the
offering and accordingly, in that event, the issuer would be subject to
liability for violations of Section 11 of the Securities Act of 1933 and
comparable provisions under state laws for any material misrepresentations or
material omissions in the appraisal.
10.3.3 PROHIBITED ROLL-UPS. The Partnership shall not participate in
any proposed Roll-Up: (a) which would result in the Limited Partner's having
voting rights and rights to hold meetings which are less than those rights
provided for under Section 10.2; (b) which includes provisions which would
operate to materially impede or frustrate the accumulation of shares by any
purchaser of the securities of the Roll-Up Entity (except to the minimum extent
necessary to preserve the tax status of the Roll-Up Entity); (c) which would
limit the ability of a Limited Partner to exercise the voting rights of its
securities of the Roll-Up Entity on the basis of the number of Units held by
that Limited Partner, and (d) in which the Limited Partners' rights of access to
the records of the Roll-Up Entity will be less than those rights provided for
under Section 15.1 hereof.
10.3.4 With the consent of a Majority in Interest of the Limited
Partners, the Partnership is permitted to convert into another form of business
entity which does not result in a significant adverse change in (a) the voting
rights of the Limited Partners, (b) the termination date of the Partnership
(currently, December 31, 2006, unless terminated earlier in accordance with this
Agreement), (c) the compensation payable to the General Partner or its
Affiliates (provided however that any increase in the compensation payable to
the General Partner and its Affiliates requires the approval of 66-2/3% of all
outstanding Units), or (d) the ability to meet the Partnership's investment
objectives without materially impairing the rights of the Limited Partners.
The General Partner will make the determination as to whether or not any such
conversion will result in a significant adverse change in any of the provisions
listed in Section 10.3.1 based on various factors relevant at the time of the
proposed conversion, including an analysis of the historic and projected
operations of the Partnership; the tax consequences (from the standpoint of the
Limited Partners) of the conversion and of an investment in a limited
partnership as compared to an investment in the type of business entity into
which the Partnership would be converted; and the performance of the equipment
industry in general, and of the computer peripherals segment of the industry in
particular. In general, the General Partner would consider any material
limitation on the voting rights of the Limited Partners or any substantial
increase in the compensation payable to the General Partner or its Affiliates to
be a significant adverse change in the listed provisions.
10.4 MEETINGS.
10.4.1 Meetings of the Limited Partners to vote upon any matters as
to which the Limited Partners are authorized to take action under this
Agreement, as the same may be amended from time to time, may be called at any
time by the General Partner or by one or more Limited Partners holding more than
10% of the then outstanding Units, by delivering written notice, either in
person or by registered mail stating the purpose of the meeting, to the General
Partner. Promptly, but in any event within 10 days following receipt of such
request, the General Partner shall cause a written notice, either in person or
by certified mail, to be delivered to the Limited Partners entitled to vote at
such meeting. The meeting will be held at the time and place specified in the
request, or if none, at a time and place convenient to the Limited Partners,
such meeting
I-23
<PAGE>
to be held not less than 15 days nor more than 60 days after the
mailing of the notice of the meeting. Included with the notice of a meeting
shall be a detailed statement of the action proposed, including a verbatim
statement of the wording of any resolution proposed for adoption by the Limited
Partners and of any proposed amendment to this Agreement. All expenses of the
meeting and notification shall be borne by the Partnership.
10.4.2 A Limited Partner shall be entitled to vote (a) at a meeting,
in person or by a proxy in writing or by a signed writing directing the manner
in which he desires that his vote be cast, which writing must be received by the
General Partner prior to such meeting, or (b) without a meeting, by a signed
writing directing the manner in which he desires that his vote be cast, which
writing must be received by the General Partner prior to the date on which the
votes of Limited Partners are to be counted. Only the votes of persons who were
Limited Partners on the record date, whether at a meeting or otherwise, shall be
counted.
10.5 CERTAIN AMENDMENTS.
10.5.1 In addition to any amendments otherwise authorized herein,
this Agreement may be amended from time to time by the General Partner, without
the consent of any of the Limited Partners (a) to add to the representations,
duties or obligations of the General Partner or surrender any right or power
granted to the General Partner herein, for the benefit of the Limited Partners;
(b) to cure any ambiguity or inconsistency; (c) to delete or add any provisions
required to be so deleted or added by, or to meet the requirements of,
applicable law (including the Code, ERISA and the regulations thereunder); and
(d) to delete or add any provisions required to be so deleted or added by, or to
meet the requirements of, applicable law (including the Code, ERISA and the
regulations thereunder); and (e) to delete or add any provisions required to be
so deleted or added by the staff of the Securities and Exchange Commission or by
a state securities commissioner or similar official, which addition or deletion
is deemed by such person, commissioner or official to be for the benefit or
protection of the Limited Partners.
10.5.2 Notwithstanding anything to the contrary contained in this
Agreement, this Agreement may not be amended without the consent of each Limited
Partner to be affected adversely by an amendment that (a) converts a Limited
Partner into a General Partner; (b) modifies the limited liability of a Limited
Partner; (c) alters the interest of the General Partner or Limited Partners in
Net Profits, Net Losses, or distributions from the Partnership; or (d) adversely
affects the status of the Partnership as a partnership for federal income tax
purposes.
10.5.3 Each Limited Partner shall be notified of any amendment to
this Agreement within 30 days of the effective date of the amendment by means of
first class mail, postage prepaid, to the address of the Limited Partner on the
books of the Partnership.
ARTICLE 11
TRANSFER OF UNITS
11.1 ASSIGNMENT.
11.1.1 No Limited Partner may transfer or assign his Units or any
interest therein except as permitted in this Article 11. Any act in violation
of this Article 11 shall be null and void and shall not be recognized by the
Partnership.
11.1.2 With the prior written consent of the General Partner, a
Limited Partner may transfer or assign part or all of his Units if, and only
if: (a) the assignor and the assignee execute, acknowledge and deliver to the
Partnership such instruments of transfer and assignment and other documents as
may be required by the General Partner; (b) either (i) at least 125 Units
are assigned and at least 125 Units
I-24
<PAGE>
are retained by the assignor or (ii) the Units being assigned are all the
Units of the assignor (except that the General Partner, in its discretion,
may waive this requirement for transfers by gift, inheritance or family
dissolution or transfers to Affiliates of the assignor); (c) the assignee
agrees in writing not to assign such Units other than in accordance with this
Article 11; (d) such assignment complies with any applicable state and
federal securities laws; (e) assignor obtains an opinion of counsel that such
assignment will not result in the termination of the Partnership for federal
income tax purposes and will not result in the Partnership being classified
as a publicly traded partnership or an association taxable as a corporation
for federal income tax purposes.
11.1.3 An assignee, if he does not become a Substituted Limited
Partner pursuant to Section 11.2, shall have no rights of a Limited Partner as a
result of the assignment, but shall only be entitled to receive the
distributions under Article 8 and Sections 3.3.2 and 14.4 to which the assignor
would otherwise be entitled.
11.2 SUBSTITUTED LIMITED PARTNERS. No assignee of Units shall have the
right to become a Substituted Limited Partner in place of his assignor unless
all of the following conditions are first satisfied: (a) the written instrument
of assignment (or another writing) sets forth the intention of the assignor that
the assignee succeed to the assignor's interest as a Substituted Limited Partner
in his place; (b) the assignor and assignee execute, acknowledge and deliver
such instruments as the General Partner may deem necessary or desirable to
effect such substitution, including the written acceptance and adoption by the
assignee of this Agreement; and (c) the written consent of the General Partner
to such substitution is obtained, the granting or denial of which shall be
within the absolute discretion of the General Partner. The Partnership's
records shall be amended to reflect the substitution of Limited Partners at
least once in each calendar quarter.
11.3 TRANSFER FEE. On any assignment of Units, any substitution of an
assignee as a Limited Partner or any redemption of Units, the Partnership may
charge a transfer fee to cover reasonable out-of-pocket expenses in connection
with the substitution.
11.4 GENERAL. No transfer or assignment or redemption of any Units shall
be made if it would result in the Partnership being treated as an association
taxable as a corporation for tax purposes or as a publicly traded partnership.
In addition, no transfer of any Unit will be recognized or effective for any
purpose to the extent that it is determined by the General Partner to be
effectuated through an established securities market or a secondary market (or
the substantial equivalent thereof) within the meaning of Section 7704 of the
Code so as to adversely affect the tax status of the Partnership as a
partnership rather than as an association taxable as a corporation. The
General Partner, in its sole discretion, may impose any restrictions on
transfers or assignments of Units as it deems appropriate to give effect to the
preceding two sentences. In connection therewith, the General Partner shall be
permitted to amend this Agreement without the consent of the Limited Partners.
Assignments and substitutions shall be effective on the first day of the month
following the month in which there has been full compliance with the
requirements of this Article 11. For the purposes of this Article 11 a pledge
of Units shall be deemed to be an assignment of such Units.
ARTICLE 12
REDEMPTION
Upon the conclusion of the 30-month period following the termination of the
Offering, the Partnership may, at the sole discretion of the General Partner,
repurchase a number of the then outstanding Units. On a semi-annual basis, the
General Partner will establish an amount for redemption, generally not to exceed
two percent of the outstanding Units per year, subject to the General Partner's
sole discretion and its good faith determination that such redemptions will not
(a) cause the Partnership to be taxed as a corporation under Section 7704 of the
Code or (b) impair the capital or operations of the Partnership. At the sole
discretion of the General Partner, the Partnership may redeem Units in excess of
the two percent
I-25
<PAGE>
limitation. The redemption price for Units will be 105% of the
selling Limited Partner's Adjusted Capital Contributions attributable to the
Units for sale. Following the determination of the annual redemption amount,
redemptions will occur on a semi-annual basis and all requests for redemption,
which must be made in writing, must be on file as of the Record Date in which
the redemption is to occur. The General Partner will maintain a master list of
requests for redemption with priority being given to Units owned by estates,
followed by IRAs and Qualified Plans. All other Limited Partners will be
treated on a first come, first served basis. Redemption requests made by or on
behalf of Limited Partners who are not affiliated with the General Partner or
its affiliates will be given priority over those made by Limited Partners who
are affiliated with the General Partner or its Affiliates. All redemption
requests will remain in effect until and unless canceled, in writing, by the
requesting Limited Partner(s).
ARTICLE 13
GENERAL PARTNER'S INTEREST
13.1 VOLUNTARY WITHDRAWAL OR ASSIGNMENT. The General Partner shall not
voluntarily withdraw, retire or resign as general partner of the Partnership, or
assign, transfer or otherwise dispose of all or any part of its general
partnership interest unless:
13.1.1 the Limited Partners consent by a Majority in Interest;
13.1.2 in the case of withdrawal, retirement or resignation, it gives
at least 60 days' notice thereof and if there would be no remaining General
Partner, nominates a successor General Partner satisfactory to a Majority in
Interest of the Limited Partners, who becomes a General Partner prior to such
withdrawal, retirement or resignation; and
13.1.3 the Partnership receives an opinion of its counsel to the
effect that such withdrawal, retirement, resignation, assignment, transfer or
other disposition would not subject the Partnership to federal income taxation
as an association taxable as a corporation and would not cause a termination of
the Partnership for federal income tax purposes.
13.2 REMOVAL. Subject to Section 14.3, after the Final Closing the General
Partner may be removed, and shall cease to be General Partner of the
Partnership, on the vote of the Majority in Interest of the Limited Partners.
ARTICLE 14
DISSOLUTION, CONTINUATION AND TERMINATION
14.1 DISSOLUTION. The Partnership shall be dissolved on the occurrence of
any of the following events:
14.1.1 The vote or written consent of a Majority in Interest of the
Limited Partners determines that the Partnership should be dissolved;
14.1.2 The dissolution of the Partnership by judicial decree;
14.1.3 The expiration of 60 days following a Terminating Event,
unless a Majority in Interest of the Limited Partners, elect to continue the
Partnership in accordance with Section 14.2.2 and elect a successor general
partner; or
I-26
<PAGE>
14.1.4 The determination by the General Partner that it is necessary
to commence the liquidation of the Equipment in order for the liquidation of
all the Equipment to be completed in an orderly and business-like fashion
prior to December 31, 2006.
14.2 CONTINUATION.
14.2.1 On the occurrence of the removal, withdrawal, retirement,
resignation, expulsion, involuntary dissolution, or Bankruptcy (or, in the case
of an individual, the death, insanity or appointment of a conservator for the
person or any of his assets) of one or more, but less than all, of the General
Partners, then the remaining General Partners shall have the right to, and
shall, continue the business of the Partnership.
14.2.2 On the occurrence of a Terminating Event, the last remaining
General Partner shall promptly send written notice of such event to all the
Limited Partners, who (subject to Sections 14.2.3 and 14.3) (a) may elect, by a
vote of the Majority in Interest within 60 days thereafter, to reconstitute the
Partnership and continue its business in accordance with this Agreement by
selecting one or more new General Partners who agree in writing to be bound by
this Agreement, and all Limited Partners, as such, shall be bound by such
action, or (b) may continue the business of the Partnership pursuant to Section
8571 of the Act.
14.2.3 The rights to continue the business of the Partnership
provided in this Section 14.2 shall be subject to receipt by the Partnership of
an opinion of counsel to the Partnership that such continuation would not result
in the Partnership's being classified for federal income tax purposes as an
association taxable as a corporation and would not result in the termination of
the Partnership for federal income tax purposes.
14.3 PURCHASE OF INTEREST OF GENERAL PARTNER. On any continuation of the
business of the Partnership under Section 14.2.1 or Section 14.2.2, or any
removal of the General Partner under Section 13.2, the following shall apply:
14.3.1 The General Partner who withdraws (voluntary termination) or
is removed (involuntary termination) shall be paid the then present fair market
value of its interest, determined in the manner described in this Section 14.3.
If the termination is voluntary pursuant to Section 13.1, the terminated General
Partner shall receive a non-interest bearing unsecured promissory note payable,
if at all, from distributions the terminated General Partner would have received
under this Agreement if it had not voluntarily terminated. If the termination
is involuntary pursuant to Section 13.2, such amount shall be paid in no less
than five equal annual installments, the first of which shall be paid one year
from the date of such termination. The unpaid portion of such amount shall bear
simple interest at the rate of 10% per annum from the date of such termination,
such interest to accrue and be paid annually in addition to each such annual
installment. In any event, the method of payment must protect the solvency and
liquidity of the Partnership.
14.3.2 The fair market value of a terminated General Partner's
Partnership interest shall be determined by agreement between the terminated
General Partner and the Partnership, which agreement shall require a vote of the
Majority in Interest of the Limited Partners. If the terminated General Partner
and the Partnership cannot agree on the fair market value of such partnership
interest within 45 days of the continuation, the fair market value thereof shall
be determined by arbitration in accordance with the then current rules of the
American Arbitration Association. The expense of arbitration shall be borne
equally by the terminated General Partner and the Partnership.
14.4 LIQUIDATION.
14.4.1 On any dissolution of the Partnership, absent any continuation
under Section 14.2, the General Partner, or a court-appointed liquidator if
there is no General Partner, shall take full account of
I-27
<PAGE>
the Partnership's assets and liabilities. The assets shall be liquidated as
promptly as is consistent with obtaining the fair market value thereof, and
the proceeds therefrom, to the extent sufficient therefor, shall be applied
in the following order: (a) to the payment of all debts and liabilities of
the Partnership to creditors; (b) to the establishment, for such period as
the liquidator deems reasonably necessary, of such reserves as the liquidator
deems reasonably necessary to provide for contingent and unforseen
liabilities or obligations of the Partnership; and (c) to the Partners in
accordance with Section 8.1.3.
14.4.2 The debts and liabilities of the Partnership shall not include
liabilities or obligations of the Partnership to Partners for distributions or
on account of their contributions or in respect to profits (or other
compensation by way of income) or capital.
14.4.3 Notwithstanding anything to the contrary that may be expressed
or implied in this Agreement, upon the dissolution or termination of the
Partnership, the General Partner, in all events by the end of the Partnership's
taxable year in which the General Partner's interest is liquidated or, if later,
within 90 days of the date of such liquidation, will contribute to the
Partnership an amount of cash equal to the lesser of (a) the deficit balance of
the General Partner's Capital Account or (b) the excess of 1.01% of the total
Capital Contributions of the Limited Partners over the capital previously
contributed by the General Partner and such cash shall be distributed to the
Limited Partners in the ratio of the then credit balances in their Capital
Accounts.
14.4.4 Any capital contribution by the General Partner pursuant to
Section 14.4.3 and any liquidating distribution pursuant to Section 14.4.1 shall
be made no later than the later of (a) the end of the taxable year during which
such liquidation occurs or (b) 90 days after the date of such liquidation.
ARTICLE 15
ACCOUNTING AND FISCAL MATTERS
15.1 PARTNERSHIP RECORDS. The records of the Partnership shall be
maintained at the principal office of the Partnership. Every Limited Partner or
his duly authorized representative shall at any reasonable time have access to
the records of the Partnership and may inspect and copy any of them. An
alphabetical list of the names, addresses, and business telephone numbers of the
Limited Partners of the Partnership along with the number of Units held by each
of them (the "Limited Partner List") shall be maintained as a part of the books
and records of the Partnership and shall be available for inspection by any
Limited Partner or its designated agent at the home office of the Partnership
upon the request of the Limited Partner. The Limited Partner List shall be
updated at least quarterly to reflect changes in the information contained
therein. A copy of the Limited Partner List shall be mailed to any Limited
Partner requesting the Limited Partner List within ten days of the request. The
copy of the Limited Partner List shall be printed in alphabetical order, on
white paper, and in a readily readable type size (in no event smaller than
10-point type). A reasonable charge for copy work may be charged by the
Partnership. The purposes for which a Limited Partner may request a copy of the
Limited Partner List include, without limitation, matters relating to Limited
Partners' voting rights under the Partnership Agreement, and the exercise of the
Limited Partners' rights under federal proxy laws. If the General Partner
neglects or refuses to exhibit, produce, or mail a copy of the Limited Partner
List as requested, the General Partner shall be liable to any Limited Partner
requesting the list for the costs, including attorneys' fees, incurred by that
Limited Partner for compelling the production of the Limited Partner List, and
for actual damages suffered by any Limited Partner by reason of such refusal or
neglect. It shall be a defense that the actual purpose and reason for the
requests for inspection or for a copy of the Limited Partner List is to secure
such list of Limited Partners or other information for the purpose of selling
such list or copies thereof, or of using the same for a commercial purpose other
than in the interest of the applicant as a Limited Partner relative to the
affairs of the Partnership. The General Partner may require the Limited Partner
requesting the Limited Partner List to represent that the list is not requested
for a commercial purpose unrelated to the Limited Partner's interest in the
Partnership. The remedies provided hereunder to the
I-28
<PAGE>
Limited Partners requesting
copies of the Limited Partner List are in addition to, and shall not in any way
limit, other remedies available to the Limited Partners under federal law, or
the laws of any state.
15.2 ACCOUNTING; FISCAL YEAR. The Partnership's books and records shall be
kept on the accrual method of accounting. The fiscal year of the Partnership
shall be the calendar year.
15.3 REPORTS.
15.3.1 The General Partner will deliver to each Limited Partner,
within 120 days after the end of each year, a balance sheet of the Partnership
dated as of December 31 of such year, together with statements of income,
Partners' equity, and the changes in financial position of the Partnership for
such year, prepared in accordance with generally accepted accounting principles
and accompanied by an auditor's report containing an opinion of the
Partnership's independent certified public accountants, as well as an unaudited
Cash Flow statement containing a breakdown of distributions to Limited Partners
for the year, separately identifying distributions from (a) Cash Flow from
operations during the year, (b) Cash Flow from operations during a prior period
which had been held as reserves, (c) proceeds from disposition of Equipment and
investments and (d) reserves from gross proceeds of the Offering originally
obtained from the Limited Partners. The General Partner will within such period
also furnish a report of the activities of the Partnership for the year, which
will include (a) for each item of Equipment acquired by the Partnership which
individually represents at least 10% of the total investment in Equipment, a
status report as part of the annual report, (which status report shall indicate:
(i) condition of Equipment, (ii) how Equipment is being utilized as of the end
of year (leased, operated, held for lease, repair, or sale), (iii) remaining
term of leases, (iv) projected use of Equipment for next year (renew lease,
lease, retire, or sell), and (v) such other information relevant to the value or
utilization of the equipment as the General Partner deems appropriate including
the method used or basis for valuation), (b) a report on distributions to the
Limited Partners during the year and their source, (c) a report on any costs
incurred by the General Partner and its Affiliates in performing administrative
services which are reimbursed by the Partnership during the year which will be
verified by independent public accountants in accordance with generally accepted
accounting principles (the cost of such verification to be so reimbursable only
to the extent that such reimbursement, when added to the reimbursement for
services, does not exceed the competitive rate for such services, excluding the
cost of the verification) and (d) for each item of Equipment sold by the
Partnership in such year, such Equipment's original purchase price, sale price
and aggregate lease revenues. The annual report will contain a breakdown of the
costs reimbursed to the sponsor. Within the scope of the annual audit of the
General Partner's financial statements, the independent certified public
accountants must issue a special report on the allocation of such costs to the
Partnership in accordance with this Partnership Agreement. The special report
shall at a minimum provide: (i) a review of the time records of individual
employees, the costs of whose services were reimbursed; and (ii) a review of the
specific nature of the work performed by each such employee. The special report
shall be in accordance with the American Institute of Certified Public
Accountants United States auditing standards relating to special reports. The
additional costs of such special report will be itemized by said accountants on
a program-by-program basis and may be reimbursed to the General Partner by the
Partnership in accordance with this subparagraph only to the extent that such
reimbursement, when added to the cost for administrative services rendered does
not exceed the competitive rate for such services as determined in this
subsection. Within 60 days after the end of each calendar quarter, the General
Partner will also furnish a report of all services rendered and all fees
received by the General Partners and its Affiliates from the Partnership, an
unaudited balance sheet, a statement of income, a statement of changes in
financial position and a report on the activities of the Partnership, as well as
an unaudited Cash Flow statement.
15.3.2 Until the net proceeds of the Offering are fully invested, the
General Partner will furnish to the Limited Partners, within 60 days after the
end of each calendar quarter, a report of Equipment acquisitions during the
quarter, including the type and manufacturer of each item of Equipment, the
purchase price of the Equipment, and any other material terms of purchase, a
statement of the total amount of cash expended by the Partnership to acquire the
Equipment (including an itemization of all commissions, fees, and
I-29
<PAGE>
expenses and the name of each payee), and a statement of the amount of net
proceeds of the Offering which remain unexpended or uncommitted at the end of
the quarter.
15.3.3 The General Partner will also furnish to all Limited Partners
within 75 days after the end of the year other information regarding the
Partnership to aid them in the preparation of their tax returns.
15.3.4 Within 120 days after the end of the first full fiscal year
for which Form 10-K under the Securities Exchange Act of 1934 is filed with the
Securities and Exchange Commission, the General Partner shall send the financial
statements required by Form 10-K to the Limited Partners.
15.3.5 Until the net proceeds from sales of the Units have been fully
invested or otherwise used for Partnership purposes or been set aside as
reserves or been returned to the Limited Partners under Section 4.2.2, the
reports under Sections 15.3.1 and 15.3.3 shall include a report of material
Equipment acquisitions made during the periods covered by such reports which
have not previously been reported.
15.3.6 The information required to be provided in the various reports
pursuant to this Section 15.3 may be sent earlier than or separately from any of
the other information required pursuant to this Section 15.3, and the
information required to be contained in any of the reports pursuant to this
Section 15.3 may be contained in more than one report.
15.3.7 If the Securities and Exchange Commission or the North
American Securities Administrators Association, Inc. promulgates rules which
allow a reduction in reporting requirements, the Partnership may cease preparing
and filing certain of the aforementioned reports in compliance with such rules
if the General Partner determines such action to be in the best interests of the
Partnership.
15.3.8 On request of the official or agency administering the
securities law of a state in which the Partnership has sold Units, the General
Partner shall submit to such official or agency any report or statement required
to be distributed to Limited Partners pursuant to this Section 15.3.
15.4 BANK ACCOUNTS. The bank accounts of the Partnership shall be
maintained in such banking institutions as the General Partner may determine,
and withdrawals shall be made only in the regular course of Partnership business
on such signatures as the General Partner may determine.
15.5 PARTNERSHIP RETURNS. For each tax year, the General Partner shall,
within the time prescribed by law (including extensions), file on behalf of the
Partnership the annual information return required for federal, state and local
income tax purposes.
ARTICLE 16
POWER OF ATTORNEY
16.1 POWER OF ATTORNEY.
16.1.1 Pursuant to the terms of this Agreement, each purchaser of a
Unit and each transferee of a Unit appoints the General Partner, acting alone,
as the purchaser's or transferee's attorney-in-fact to make, execute, file,
and/or record (a) documents relating to the Partnership and its business
operations requested by or appropriate under the laws of any appropriate
jurisdiction; (b) instruments with respect to any amendment of this Agreement or
the Certificate; (c) instruments or papers required to continue the business of
the Partnership pursuant to this Agreement; (d) instruments relating to the
admission of any Partner to the Partnership; (e) a master list in accordance
with Section 6112 of the Code (or any successor provision), relating to the
Partnership's tax shelter registration; and (f) all other instruments deemed
necessary or
I-30
<PAGE>
advisable to carry out the Partnership's business or the provisions
of this Agreement. The power of attorney is irrevocable, will survive the
death, incompetency, dissolution, disability, incapacity, bankruptcy, or
termination of the granting purchaser or transferee, and will extend to such
person's heirs, successors, and assigns. Each Limited Partner authorizes such
attorney-in-fact to take any further action which such attorney-in-fact shall
consider necessary or advisable in connection with any of the foregoing, hereby
giving such attorney-in-fact power and authority to do and perform each and
every act or thing whatsoever requisite or advisable to be done in and about the
foregoing as fully as such Limited Partner might or could if personally present,
hereby ratifying and confirming all that such attorney-in-fact shall lawfully do
or cause to be done by virtue hereof.
16.1.2 The power of attorney granted in this Section 16.1, (a) is a
special power of attorney coupled with an interest and is irrevocable; (b) may
be exercised by the attorney-in-fact by listing all of the Limited Partners
executing any document with the signature of the attorney-in-fact acting as
attorney-in-fact for all of them; and (c) shall survive the delivery of an
assignment by a Limited Partner of the whole or a portion of his interest in the
Partnership, except that where the assignee is admitted as a substituted Limited
Partner, the power of attorney shall survive the delivery of such assignment for
the sole purpose of enabling such attorney-in-fact to execute, acknowledge and
file any document necessary to effect such substitution.
ARTICLE 17
LIABILITY AND INDEMNIFICATION OF GENERAL PARTNER
17.1 EXCLUSION OF LIABILITY FOR RETURN OF CAPITAL CONTRIBUTIONS. Subject
to the General Partner's compliance with the standards set forth in Section
17.2.1, the General Partner shall not be personally liable for the return of any
of the Capital Contributions of the Limited Partners, it being expressly
understood that any such return shall be made solely from Partnership assets.
17.2 LIMITATION ON LIABILITY OF GENERAL PARTNER; INDEMNIFICATION.
17.2.1 The General Partner and its Affiliates who were acting on
behalf of or performing services for the Partnership and acting within the scope
of the General Partner's authority as set forth in this Agreement (an
"Indemnitee") shall have no liability to the Partnership or to any Partner for
any loss suffered by the Partnership which arises out of any action or inaction
of any Indemnitee if the General Partner, in good faith, determined that such
course of conduct was reasonable and in the best interest of the Partnership and
such course of conduct did not constitute negligence or misconduct of the
General Partner or its Affiliates. The Indemnitees shall be indemnified by the
Partnership against any losses, judgments, liabilities and expenses sustained by
them in connection with the Partnership, provided that the same were not the
result of negligence or misconduct on the part of the Indemnitee, and provided
further that for such indemnification to be made, the General Partner must have
made a good faith determination that the course of conduct involved was
reasonable and in the best interest of the Partnership. Such indemnification or
agreement to hold harmless is recoverable only out of the assets of the
Partnership and not from the Limited Partners.
17.2.2 Notwithstanding anything to the contrary stated in
Section 17.2.1, the Indemnitee and any person acting as a broker-dealer shall
not be indemnified for any losses, liabilities or expenses arising from or out
of an alleged violation of federal or state securities laws unless (a) there has
been a successful adjudication on the merits of each count involving alleged
securities laws violations as to the particular Indemnitee and the court
approved the indemnification of litigation costs, or (b) such claims have been
dismissed with prejudice on the merits by a court of competent jurisdiction as
to the particular Indemnitee and the court approved the indemnification of
litigation costs or (c) a court of competent jurisdiction approves a settlement
of the claims against a particular Indemnitee and finds that indemnification of
the settlement and related costs should be made. In any claim for
indemnification for federal or state securities law violations, the party
seeking indemnification shall place before the court the position of the
Securities and Exchange
I-31
<PAGE>
Commission, the Massachusetts Securities Division, the Pennsylvania
Securities Commission and other applicable state securities commissions with
respect to the issue of indemnification for securities law violations.
17.2.3 The Partnership shall not incur the cost of that portion of
any insurance which insures the Indemnitee for any liability as to which the
Indemnitee is prohibited from being indemnified under this Section 17.2;
however, nothing contained in this Agreement shall preclude the Partnership from
purchasing and paying for such types of insurance, including extended coverage
liability and casualty and workers' compensation, as would be customary for any
person owning comparable assets and engaged in a similar business, or from
naming the Indemnitee as additional insured parties thereunder, provided that
such addition does not add to the premiums payable by the Partnership.
17.2.4 The provision of advances from Partnership funds to the
Indemnitee for legal expenses and other costs incurred as a result of any legal
action initiated against the General Partner by a Limited Partner of the
Partnership is prohibited. The provision of advances from Partnership funds to
the Indemnitee for legal expenses and other costs incurred as a result of a
legal action is permissible if the following three conditions are satisfied:
(a) the legal action relates to the performance of duties or services by the
Indemnitee on behalf of the Partnership; and (b) the legal action is initiated
by a third party who is not a Limited Partner of the Partnership; and (c) the
Indemnitee undertakes to repay the advanced funds to the Partnership with
interest at the rate of 10% per year in cases in which they would not be
entitled to indemnification under Section 17.2.1 and such undertaking is secured
by a full recourse note from the recipient of the advance.
ARTICLE 18
TAX EXEMPT LIMITED PARTNERS
18.1 TAX EXEMPT LIMITED PARTNERS. If any individual retirement accounts,
pension, profit sharing or other tax-qualified retirement plans or other
entities exempt from federal income taxation under the Code (collectively, "Tax
Exempt Limited Partners") become Limited Partners of the Partnership, neither
the General Partner nor the Partnership shall have any liability or
responsibility to any Tax Exempt Limited Partner or any other Limited Partner
for any tax, penalty or other sanction or costs or damages arising as a result
of there being a prohibited transaction or as a result of Partnership assets
being deemed plan assets of a Tax Exempt Limited Partner under the Code or ERISA
or other applicable law.
ARTICLE 19
MISCELLANEOUS
19.1 NOTICES. Any notice, payment, demand, offer or communication required
or permitted to be given by any provision of this Agreement shall be deemed to
have been delivered and given for all purposes (a) if delivered personally to
the party or to an officer of the party to whom it is directed or (b) whether or
not it is actually received, if sent by registered or certified or regular mail,
postage and charges prepaid, addressed as follows: if to the General Partner, at
its business address set forth in Section 2.3 or to such other address as the
General Partner may specify by written notice to the Limited Partners; and if to
a Limited Partner, at such Limited Partner's address set forth on his
Subscription Agreement or to such other address as such Limited Partner may
specify by written notice to the General Partner; and if to the Partnership, at
the address set forth in Section 2.3 or to such other address as the Partnership
may specify by written notice to the Partners. Any such notice shall be deemed
to be given as of the date so delivered personally, or as of the date on which
the same was deposited in a regular receptacle for the deposit of the United
States mail, addressed and sent as aforesaid.
I-32
<PAGE>
19.2 PARTIES IN INTEREST. Subject to Article 11, this Agreement shall bind
and benefit the successors and assigns of the respective parties hereto.
19.3 SECTION CAPTIONS. Section and other captions in this Agreement are
for reference purposes only and are not intended to describe, interpret, define
or limit the scope, extent or intent of this Agreement or any provision hereof.
19.4 SEVERABILITY. Every provision of this Agreement is intended to be
severable. If any term or provision hereof is illegal or invalid for any
reason, such illegality or invalidity shall not affect the validity of the
remainder of this Agreement.
19.5 RIGHT TO RELY ON GENERAL PARTNER. No person dealing with the General
Partner shall be required to determine its authority to make any commitment or
undertaking on behalf of the Partnership, or to determine any fact or
circumstance bearing upon the existence of its authority. In addition, no
purchaser of Partnership property shall be required to determine the sole and
exclusive authority of the General Partner to sign and deliver on behalf of the
Partnership any instrument of transfer, or to see to the application or
distribution of revenues or proceeds paid or credited in connection therewith,
unless such purchasers have received written notice from the Partnership
affecting the same.
19.6 PENNSYLVANIA LAW. This Agreement is made under, and shall be
construed and enforced in accordance with, the laws of the Commonwealth of
Pennsylvania applicable to agreements made and to be performed solely therein,
without giving effect to principles of conflicts of laws.
19.7 COUNTERPART EXECUTION. This Agreement may be executed in any number
of counterparts with the same effect as if all parties hereto had signed the
same document. All counterparts shall be construed together and shall
constitute one Agreement.
19.8 GENDER. Whenever necessary or appropriate in order to construe this
Agreement, the masculine gender shall include the feminine or neuter and vice
versa, and the singular shall include the plural and the plural, the singular.
19.9 INTEGRATED AGREEMENT. This Agreement constitutes the entire
understanding and agreement among the parties hereto with respect to the subject
matter hereof, and there are no agreements, understandings, restrictions,
representations or warranties among the parties other than those set forth
herein.
IN WITNESS WHEREOF, the parties have executed, or have caused their duly
authorized officer to execute, this Agreement on the date first written above.
GENERAL PARTNER: COMMONWEALTH INCOME & GROWTH FUND, INC.
By:_______________________________________________
Name:________________________________________
Title:_______________________________________
INITIAL LIMITED PARTNER: __________________________________________________
DAVID A. KINTZER
I-33
<PAGE>
APPENDIX II
PRIOR PERFORMANCE TABLES
<PAGE>
APPENDIX II
PRIOR PERFORMANCE TABLES
The information in this Appendix II contains certain relevant summary
information concerning prior programs sponsored by the General Partner and
its Affiliates (the "Prior Programs") which have investment objectives
similar to the Partnership. See "Management - Prior Performance."
The investment objectives of the Prior Programs, which are substantially
the same as those of the Partnership, generally include the acquisition,
lease and sale of Equipment to generate revenues sufficient to make
distributions to investors, the preservation and protection of investors'
capital, the potential use of income to purchase additional Equipment, and
the potential for capital appreciation.
THE INFORMATION SET FORTH IN THE FOLLOWING PERFORMANCE TABLES IS INCLUDED
HEREIN SOLELY TO INFORM INVESTORS OF THE PRIOR AND NOT FUTURE PERFORMANCE OF
EQUIPMENT PROGRAMS PREVIOUSLY SPONSORED BY THE GENERAL PARTNER AND ITS
AFFILIATES AND SHOULD NOT BE CONSIDERED AS INDICATIVE OF POSSIBLE CAPITALIZATION
OR OPERATIONS OF THE PARTNERSHIP. PURCHASERS OF UNITS OFFERED HEREBY WILL HAVE
NO INTEREST IN THE PROGRAMS DESCRIBED ON THE FOLLOWING TABLES UNLESS THEY ARE
ALSO INVESTORS IN THOSE PROGRAMS.
DESCRIPTION OF TABLES
The following Tables are included herein:
Table I: Experience in Raising and Investing Funds
Table II: Compensation to General Partners and Affiliates
Table III: Operating Results of Prior Programs
Table V: Sales or Disposals of Property
Unless otherwise indicated in the Tables, all information contained in the
Tables is as of December 31, 1994.
II-1
<PAGE>
EXPERIENCE IN RAISING AND INVESTING FUNDS
AS OF DECEMBER 31, 1994
(TABLE I)
The following table sets forth certain information about the experience of
the General Partner in raising and investing funds for six private equipment
leasing programs and one public equipment leasing program sponsored by the
General Partner and Affiliates which closed in the most recent three years. It
is expected that the prior programs will continue to purchase additional
equipment.
<TABLE>
<CAPTION>
COMMONWEALTH COMMONWEALTH COMMONWEALTH COMMONWEALTH
EQUIPMENT EQUIPMENT EQUIPMENT EQUIPMENT
INCOME FUND INCOME PRIVATE INCOME TRUST INCOME TRUST
VII, L.P. FUND-II, L.P. VIII IX
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Offering Information: *
Amount offered (maximum). . . . . . 3,000,000 1,000,000 3,000,000 3,000,000
Dollar amount sold. . . . . . . . . 2,062,500 1,000,000 3,000,000 3,000,000
Dealer/Manager expenses (1) . . . . 215,707 50,000 305,000 305,000
Offering/Organizational expenses (2) 144,544 40,000 80,188 75,335
------------------------------------------------------------------------
Net Proceeds Available . . . . . . . . 1,702,249 910,000 2,614,812 2,619,665
Total Equipment Purchases:
Equipment purchased with cash (3) . 2,371,667 1,330,472 3,002,556 2,644,117
Equipment financed. . . . . . . . . 2,360,827 1,247,903 2,634,476 2,819,661
Lease income paid to original lessor
in lieu of cash payment . . . . . 32,441 32,688 206,138 299,167
Obligation incurred with regard to
purchase of equipment . . . . . . 0 0 0 0
------------------------------------------------------------------------
4,764,935 2,611,063 5,843,170 5,762,945
% of Equipment financed as of
December 31, 1994. . . . . . . . . . 29.0% 30.2% 26.2% 30.8%
Initial Acquisition Fee (%) (4). . . . 3.2% 2.2% N/A N/A
Date Offering Commenced. . . . . . . . 07/30/91 06/01/92 06/22/92 11/15/92
Date Offering Completed. . . . . . . . 03/02/92 06/23/92 09/18/92 01/21/93
Average Initial Term of Leases
(in months). . . . . . . . . . . . . 32 32 29 31
Months from closing to invest 90%. . . 5 4 6 3
</TABLE>
-------------------------
(*) Programs did not retain reserves.
(1) Dealer/Manager expenses include commissions to brokers, due diligence and
out-of-pocket expenses.
(2) Offering/Organizational expenses consist of legal fees, blue sky filings,
accounting fees, printing charges for prospectuses and the guarantee fee.
(3) Equipment purchased with cash includes cash from net offering proceeds, as
well as, amounts reinvested.
(4) Fees were paid to the General Partner/Managing Trustee at fund closing.
Does not include lease negotiation fees (release fees), and/or acquisition
fees that are related to reinvestments and refinancings, which are
disclosed in Table II.
II-2
<PAGE>
EXPERIENCE IN RAISING AND INVESTING FUNDS
AS OF DECEMBER 31, 1994
(TABLE I)
(Continued)
<TABLE>
<CAPTION>
COMMONWEALTH COMMONWEALTH
EQUIPMENT EQUIPMENT COMMONWEALTH
INCOME TRUST INCOME PRIVATE INCOME &
X FUND-III, L.P. GROWTH FUND I
----------------------------------------------------
<S> <C> <C> <C>
Offering Information: (*)
Amount offered (maximum) . . . . . . . . 4,000,000 1,000,000 15,000,000
Dollar amount sold . . . . . . . . . . . 4,000,000 1,000,000 8,271,983
Dealer/Manager expenses (1). . . . . . . 405,002 50,000 165,440
Offering/Organizational expenses (2) . . 84,989 40,000 248,000
----------------------------------------------------
Net Proceeds Available . . . . . . . . . . . 3,510,009 910,000 7,858,543
Total Equipment Purchases:
Equipment purchased with cash (3) . . . 3,655,337 981,277 4,783,921
Equipment financed . . . . . . . . . . . 2,967,297 433,867 2,023,374
Lease income paid to original lessor
in lieu of cash payment. . . . . . . . 191,430 57,783 251,912
Obligation incurred with regard to
purchase of equipment. . . . . . . . . 0 336,924 0
----------------------------------------------------
6,814,064 1,809,851 7,059,207
% of Equipment financed as of
December 31, 1994. . . . . . . . . . . . . 28.8% 16.4% 23.3%
Initial Acquisition Fees (%) (4) . . . . . . N/A 2.2% 3.4%
Date of Offering Commenced . . . . . . . . . 04/15/93 11/30/93 03/14/94
Date Offering Completed. . . . . . . . . . . 10/20/93 12/06/93 N/A
Average Initial Term of Leases (in months) 32 31 29
Months from closing to invest 90%. . . . . . 2 4 N/A
</TABLE>
-------------------------
(*) Programs did not retain reserves.
(1) Dealer/Manager expenses include commissions to brokers, due diligence and
out-of-pocket expenses.
(2) Offering/Organizational expenses consist of legal fees, blue sky filings,
accounting fees, printing charges for prospectuses and the guarantee fee.
(3) Equipment purchased with cash includes cash from net offering proceeds, as
well as, amounts reinvested.
(4) Fees were paid to the General Partner/Managing Trustee at fund closing.
Does not include lease negotiation fees (release fees), and/or acquisition
fees that are related to reinvestments and refinancings, which are
disclosed in Table II.
II-3
<PAGE>
COMPENSATION TO GENERAL PARTNERS AND AFFILIATES
AS OF DECEMBER 31, 1994
(TABLE II)
The following table sets forth certain information concerning all the
compensation earned by the General Partner and its Affiliates for six prior
private programs and one prior public program sponsored by the General Partner
and Affiliates during the most recent three years. Amounts are from two
sources: (1) proceeds from the offering and (2) gross revenues. Amounts for
operations are cumulative.
<TABLE>
<CAPTION>
COMMONWEALTH COMMONWEALTH COMMONWEALTH COMMONWEALTH
EQUIPMENT EQUIPMENT EQUIPMENT EQUIPMENT
INCOME FUND INCOME PRIVATE INCOME TRUST INCOME TRUST
VII, L.P. FUND-II, L.P. VIII IX
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Date offering commenced. . . . . . . . 07/30/91 06/01/92 06/22/92 11/15/92
Dollar amount raised . . . . . . . . . $2,062,500 $1,000,000 $3,000,000 $3,000,000
Amount paid from the proceeds of
offering:
Initial acquisition fee . . . . . . 65,868 22,000 0 0
Organizational fee. . . . . . . . . 39,015 7,600 40,038 39,067
Cash generated from operations before
deducting payments to the General
Partner and Affiliates . . . . . . . 1,509,073 779,562 1,582,189 1,058,071
Amount paid to the General Partner and
Affiliates from operations and
reinvestments:
Equipment management fee. . . . . . 149,071 71,067 151,069 129,748
Acquisition fee . . . . . . . . . . 122,509 64,451 230,958 218,546
Finance fee . . . . . . . . . . . . 23,558 12,479 26,968 23,463
Dollar amount of equipment sales and
refinancing before deducting payments
to the General Partner and
Affiliates . . . . . . . . . . . . . 344,699 122,850 42,987 117,500
Amount paid to the General Partner
and Affiliates from equipment
sales and refinancing. . . . . . . . 10,341 3,686 1,290 3,525
</TABLE>
II-4
<PAGE>
COMPENSATION TO GENERAL PARTNERS AND AFFILIATES
AS OF DECEMBER 31, 1994
(TABLE II)
(Continued)
<TABLE>
<CAPTION>
COMMONWEALTH COMMONWEALTH
EQUIPMENT EQUIPMENT COMMONWEALTH
INCOME TRUST INCOME PRIVATE INCOME &
X FUND-III, L.P. GROWTH FUND I
----------------------------------------------------
<S> <C> <C> <C>
Date offering commenced. . . . . . . . . . . 04/15/93 11/30/93 03/14/94
Dollar amount raised . . . . . . . . . . . . $4,000,000 $1,000,000 $8,271,983
Amount paid from the proceeds of offering:
Initial acquisition fee. . . . . . . . . 0 22,000 282,000
Organizational fee . . . . . . . . . . . 41,998 7,600 248,000
Cash generated from operations before
deducting payments to the General
Partner and Affiliates . . . . . . . . . . 1,216,088 308,725 368,968
Amount paid to the General and Affiliates
from operations and reinvestments:
Equipment management fee . . . . . . . . 118,803 24,851 56,000
Acquisition fee. . . . . . . . . . . . . 313,932 35,944 0
Finance fee. . . . . . . . . . . . . . . 38,469 4,339 20,000
Dollar amount of equipment sales and
refinancing before deducting payment to the
General Partner and Affiliates . . . . . . 0 0 0
Amount paid to the General Partner and
Affiliates from equipment sales and
refinancing. . . . . . . . . . . . . . . . 0 0 0
</TABLE>
II-5
<PAGE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
The following table sets forth certain information about the operating
results of nine prior private programs and one prior public program sponsored
by the General Partner and its Affiliates during the most recent five years.
This table provides a computation of Net Income, and cash flows, as well as
investment data per a $1,000 investment. It is expected that the prior
programs will continue to purchase additional equipment.
II-6
<PAGE>
COMMONWEALTH EQUIPMENT INCOME FUND V, L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
<TABLE>
<CAPTION>
PROGRAM INCEPTION TO DECEMBER 31, 1994 1990 1991 1992 1993 1994
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMPUTATION OF NET INCOME
Months of Operations 6 12 12 12 12
Gross Revenues 172,335 564,492 909,800 1,032,035 1,174,288
Gain (Loss) on Sale of Equipment 4,002 (31,014)
Less: Operating Expenses 14,570 16,607 22,428 25,559 38,008
Equipment Management Fee 6,470 27,881 45,197 51,417 57,728
Interest Expense 72,687 75,577 58,626
Depreciation and Amortization 79,280 391,976 643,506 767,869 1,233,975
---------------------------------------------------------------
Net Income (Loss) - GAAP Basis 72,035 128,028 129,984 80,599 (214,049)
---------------------------------------------------------------
---------------------------------------------------------------
Federal Taxable Income (Loss) 74,148 174,562 24,907 (49,830) 71,880
Cash Distributions - GAAP Basis (130,745) (255,740) (254,419) (254,419) (254,419)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 72,035 128,028 129,984 80,599 (214,049)
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided by Operating
Activities:
Depreciation and Amortization 79,260 391,976 643,506 767,869 1,233,975
Loss (Gain) on Sale of Equipment (4,002) 31,014 (12,081)
Other Non-Cash Activities Included in
the Determination of Net Income
(Loss)* (52,648) (332,959) (520,257) (679,589)
Net Change in Operating Assets
and Liabilities 6,850 18,014 14,069 (25,239) 64,506
---------------------------------------------------------------
Net Cash Provided by Operating Activities 105,497 538,018 450,598 333,986 392,762
Capital Expenditures (1,436,972) (281,147) (668,699) (267,779) (97,435)
Net Proceeds from Sale of Equipment 526,636 176,479 14,275
Increase in Organization Costs
and Deferred Expenses (141,224) (49,624) (43,341) (49,344) (38,871)
---------------------------------------------------------------
Net Cash Used in Investing Activities (1,578,196) (330,771) (185,404) (140,644) (122,031)
Partners' Contributions 1,938,500
Offering Costs (224,992)
Distributions to Partners (118,176) (268,309) (254,419) (254,419) (254,419)
---------------------------------------------------------------
Net Cash Provided by (Used in)
Financing Activities 1,595,332 (268,309) (254,419) (254,419) (254,419)
Net Increase (Decrease) in Cash 122,633 (61,062) 10,775 (61,077) 16,312
Cash at Beginning of Year 122,633 61,571 72,346 11,269
---------------------------------------------------------------
Cash at End of Year 122,633 61,571 72,346 11,269 27,581
---------------------------------------------------------------
---------------------------------------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income (Loss) - GAAP Basis 37 66 67 42 (110)
Federal Taxable Income (Loss) to Investors 39 88 13 (25) 37
Cash Distributions to Investors -
GAAP Basis (60) (137) (130) (130) (130)
Return of Capital to Investors -
GAAP Basis 30 66 64 89 130
</TABLE>
* The significant component of Other Non-Cash Activities included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented was
caused primarily by the acquisition of more financed equipment.
II-7
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND - I, L.L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
<TABLE>
<CAPTION>
PROGRAM INCEPTION TO DECEMBER 31, 1994 1990 1991 1992 1993 1994
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMPUTATION OF NET INCOME
Months of Operations 3 12 12 12 12
Gross Revenues 26,619 277,934 319,947 544,558 654,979
Gain (Loss) on Sale of Equipment 140,387 622 (5,449)
Less: Operating Expenses 3,522 13,903 13,347 14,015 21,684
Equipment Management Fee 642 13,330 15,474 27,024 32,559
Interest Expense 10,567 25,766 33,320
Depreciation and Amortization 12,096 212,988 277,457 398,152 592,870
---------------------------------------------------------------
Net Income (Loss) - GAAP Basis 10,359 37,713 143,489 80,223 (30,903)
---------------------------------------------------------------
---------------------------------------------------------------
Federal Taxable Income (Loss) 13,177 60,857 65,162 61,027 (55,713)
Cash Distributions - GAAP Basis (32,828) (131,313) (131,313) (131,313) (131,313)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 10,359 37,713 143,489 80,223 (30,903)
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided by Operating
Activities:
Depreciation and Amortization 12,096 212,988 277,457 398,152 592,870
Loss (Gain) on Sale of Equipment (140,387) (622) 5,449
Other Non-Cash Activities Included in
the Determination of Net Income
(Loss)* (9,321) (23,549) (127,400) (209,398) (356,775)
Net Change in Operating Assets
and Liabilities 5,043 (49,553) 50,215 21,456 (22,359)
---------------------------------------------------------------
Net Cash Provided by Operating Activities 18,177 177,599 203,374 289,811 188,282
Capital Expenditures (400,543) (456,306) (538,144) (633,894) (231,738)
Net Proceeds from Sale of Equipment 963,085 12,460 105,479
Increase in Organization Costs
and Deferred Expenses (47,000) (41,737) (50,399) (21,262)
---------------------------------------------------------------
Net Cash Provided by (Used in) Investing
Activities (447,543) (456,306) (383,204) (671,833) (147,521)
Partners' Contributions 1,001,000
Offering Costs (58,000)
Proceeds from Note Payable 87,965
Distributions to Partners (32,828) (131,313) (131,313) (131,313) (131,313)
---------------------------------------------------------------
Net Cash Provided by (Used in)
Financing Activities 910,172 (131,313) (131,313) (131,313) (43,348)
Net Increase (Decrease) in Cash 480,806 (410,020) 455,265 (513,335) (2,587)
Cash at Beginning of Year 480,806 70,786 526,051 12,716
---------------------------------------------------------------
Cash at End of Year 480,806 70,786 526,051 12,716 10,129
---------------------------------------------------------------
---------------------------------------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income (Loss) - GAAP Basis 10 38 143 80 (31)
Federal Taxable Income (Loss) to Investors 13 59 65 60 (58)
Cash Distributions to Investors -
GAAP Basis (32) (130) (130) (130) (130)
Return of Capital to Investors -
GAAP Basis 22 94 51 130
</TABLE>
* The significant component of Other Non-Cash Activities included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented was
caused primarily by the acquisition of more financed equipment.
II-8
<PAGE>
COMMONWEALTH EQUIPMENT INCOME FUND VI, L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
<TABLE>
<CAPTION>
PROGRAM INCEPTION TO DECEMBER 31, 1994 1991 1992 1993 1994
--------------------------------------------------
<S> <C> <C> <C> <C>
COMPUTATION OF NET INCOME
Months of Operations 10 12 12 12
Gross Revenues 420,312 1,071,538 1,280,600 1,472,656
Gain (Loss) on Sale of Equipment (50,485) 27,269 (60,908)
Less: Operating Expenses 12,408 29,258 27,169 40,332
Equipment Management Fee 18,289 52,968 63,449 73,152
Interest Expense 46,789 81,141 75,763
Depreciation and Amortization 272,911 714,551 1,019,607 1,349,421
--------------------------------------------------
Net Income (Loss) - GAAP Basis 116,704 177,487 116,503 (126,920)
--------------------------------------------------
--------------------------------------------------
Federal Taxable Income (Loss) 247,551 (18,821) (70,030) (63,221)
Cash Distributions - GAAP Basis (278,358) (341,413) (341,414) (341,414)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 116,704 177,487 116,503 (126,920)
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided by Operating
Activities:
Depreciation and Amortization 272,911 714,551 1,019,607 1,349,421
(Gain) Loss on Sale of Equipment 50,485 (27,269) 60,908
Other Non-Cash Activities Included in
the Determination of Net Income
(Loss)* (86,745) (240,339) (705,311) (842,060)
Net Change in Operating Assets
and Liabilities 47,725 (349,682) 217,007 84,763
--------------------------------------------------
Net Cash Provided by Operating Activities 350,595 352,502 620,537 526,112
Capital Expenditures (1,649,073) (664,427) (638,045) (202,543)
Equipment Deposit (105,375)
Net Proceeds from Sale of Equipment 419,330 292,750 239,218
Increase in Organization Costs
and Deferred Expenses (174,170) (65,882) (85,978) (60,714)
--------------------------------------------------
Net Cash Used in Investing Activities (1,823,243) (310,979) (536,648) (24,039)
Partners' Contributions 2,601,000
Offering Costs (284,870)
Distributions to Partners (278,358) (341,413) (341,414) (341,414)
--------------------------------------------------
Net Cash Provided by (Used in)
Financing Activities 2,037,772 (341,413) (341,414) (341,414)
Net Increase (Decrease) in Cash 565,124 (299,890) (257,525) 160,659
Cash at Beginning of Year 565,124 265,234 7,709
--------------------------------------------------
Cash at End of Year 565,124 265,234 7,709 168,368
--------------------------------------------------
--------------------------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income (Loss) - GAAP Basis 45 68 45 (49)
Federal Taxable Income (Loss) to Investors 95 (7) (26) (25)
Cash Distributions to Investors -
GAAP Basis (106) (130) (130) (130)
Return of Capital to Investors -
GAAP Basis 62 63 86 130
</TABLE>
* The significant component of Other Non-Cash Activities included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented was
caused primarily by the acquisition of more financed equipment.
II-9
<PAGE>
COMMONWEALTH EQUIPMENT INCOME FUND VII, L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
<TABLE>
<CAPTION>
PROGRAM INCEPTION TO DECEMBER 31, 1994 1991 1992 1993 1994
--------------------------------------------------
<S> <C> <C> <C> <C>
COMPUTATION OF NET INCOME
Months of Operations 2 12 12 12
Gross Revenues 10,378 631,740 1,104,834 1,269,295
Gain (Loss) on Sale of Equipment (35,553)
Less: Operating Expenses 865 12,528 17,572 36,404
Equipment Management Fee 31,021 55,110 62,940
Interest Expense 7,935 62,399 68,431
Depreciation and Amortization 3,843 380,117 897,984 1,267,396
--------------------------------------------------
Net Income (Loss) - GAAP Basis 5,670 200,139 71,769 (201,429)
--------------------------------------------------
--------------------------------------------------
Federal Taxable Income (Loss) 8,358 323,316 262,101 (339,406)
Cash Distributions - GAAP Basis (33,649) (264,541) (270,832) (270,832)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 5,670 200,139 71,769 (201,429)
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided by Operating
Activities:
Depreciation and Amortization 3,843 380,117 897,984 1,267,396
Loss on Sale of Equipment 35,553
Other Non-Cash Activities Included in
the Determination of Net Income
(Loss)* (92,046) (425,191) (755,795)
Net Change in Operating Assets
and Liabilities (4,278) 14,454 (15,532) (22,652)
--------------------------------------------------
Net Cash Provided by Operating Activities 5,235 502,664 529,030 323,073
Capital Expenditures (581,700) (1,254,900) (232,704) (302,363)
Net Proceeds from Sale of Equipment 330,152
Increase in Organization Costs
and Deferred Expenses (91,309) (45,622) (67,240) (42,500)
--------------------------------------------------
Net Cash Used in Investing Activities (673,009) (1,300,522) (299,944) (14,711)
Partners' Contributions 1,776,000 287,500
Offering Costs (227,180) (27,466)
Distributions to Partners (33,649) (264,541) (270,832) (270,832)
--------------------------------------------------
Net Cash Provided by (Used in)
Financing Activities 1,515,171 (4,507) (270,832) (270,832)
Net Increase (Decrease) in Cash 847,397 (802,365) (41,746) 37,530
Cash at Beginning of Year 847,397 45,032 3,286
--------------------------------------------------
Cash at End of Year 847,397 45,032 3,286 40,816
--------------------------------------------------
--------------------------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income (Loss) - GAAP Basis 3 97 35 (98)
Federal Taxable Income (Loss) to Investors 5 159 127 (167)
Cash Distributions to Investors -
GAAP Basis (19) (127) (130) (130)
Return of Capital to Investors -
GAAP Basis 16 31 95 130
</TABLE>
* The significant component of Other Non-Cash Activities included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented was
caused primarily by the acquisition of more financed equipment.
II-10
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND - II, L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
PROGRAM INCEPTION TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
1992 1993 1994
--------- -------- --------
<S> <C> <C> <C>
COMPUTATION OF NET INCOME
Months of Operations 6 12 12
Gross Revenues 139,299 528,396 763,330
Less: Operating Expenses 2,664 12,233 18,758
Equipment Management Fee 6,707 26,338 38,022
Interest Expense 11,112 31,650
Loss on Sale of Computer Equipment 148 54,140
Depreciation and Amortization 91,620 328,145 765,705
--------- -------- --------
Net Income (Loss) - GAAP Basis 38,308 150,420 (144,945)
--------- -------- --------
--------- -------- --------
Federal Taxable Income 71,965 56,931 1,433
Cash Distributions - GAAP Basis (68,534) (131,313) (131,313)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 38,308 150,420 (144,945)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 91,620 328,145 765,705
Other Non-Cash Activities Included in the
Determination of Net Income (Loss)* (18,403) (200,833) (371,925)
Loss on Sale of Computer Equipment 148 54,140
Net Change in Operating Assets and Liabilities (22,618) 55,624 (16,891)
--------- -------- --------
Net Cash Provided by Operating Activities 88,907 333,504 286,084
Capital Expenditures (851,213) (299,704) (179,555)
Net Proceeds from Sale of Computer Equipment 68,400 49,325
Increase in Organization Costs and Deferred Expenses (26,178) (52,374) (25,922)
--------- -------- --------
Net Cash Used in Investing Activities (877,391) (283,678) (156,152)
Partners' Contributions 1,001,000
Offering Costs (60,400)
Distributions to Partners (68,534) (131,313) (131,313)
--------- -------- --------
Net Cash Provided by (Used in) Financing Activities 872,066 (131,313) (131,313)
Net Increase (Decrease) in Cash 83,582 (81,487) (1,381)
Cash at Beginning of Year 83,582 2,095
--------- -------- --------
Cash at End of Year 83,582 2,095 714
--------- -------- --------
--------- -------- --------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income (Loss) - GAAP Basis 38 150 (145)
Federal Taxable Income to Investors 71 56 0.35
Cash Distributions to Investors - GAAP Basis (68) (130) (130)
Return of Capital to Investors - GAAP Basis 30 130
</TABLE>
*The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented was
caused primarily by the acquisition of more financed equipment.
II-11
<PAGE>
COMMONWEALTH EQUIPMENT INCOME TRUST VIII
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
PROGRAM INCEPTION TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
1992 1993 1994
---------- ---------- ---------
<S> <C> <C> <C>
COMPUTATION OF NET INCOME
Months of Operations 3 12 12
Gross Revenues 119,454 1,246,627 1,694,076
Less: Operating Expenses 2,375 19,322 99,634
Equipment Management Fee 5,200 61,525 84,344
Depreciation and Amortization 61,815 756,143 1,563,577
Loss on Sale of Equipment 16,892 96,528
Interest 33,210 67,189
---------- ---------- ---------
Net Income (Loss) - GAAP Basis 50,064 359,535 (217,196)
---------- ---------- ---------
---------- ---------- ---------
Federal Taxable Income (Loss) 49,316 18,450 (137,962)
Cash Distributions - GAAP Basis (112,515) (393,939) (393,939)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 50,064 359,535 (217,196)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 61,815 756,143 1,563,577
Loss on Sale of Equipment 16,892 96,528
Other Non-Cash Activities Included in the
Determination of Net Income (Loss)* (64,081) (501,571) (871,264)
Net Change in Operating Assets and Liabilities 10,355 240 143,083
---------- ---------- ---------
Net Cash Provided by Operating Activities 58,153 631,239 714,728
Capital Expenditures (982,795) (1,546,729) (313,675)
Increase in Organization Costs and Deferred Expenses (95,799) (135,769) (64,940)
Net Proceeds From Sale of Computer Equipment 114,262 41,666
---------- ---------- ---------
Net Cash Used in Investing Activities (1,078,594) (1,568,236) (336,949)
Trust Beneficiaries and Managing Trustee Contributions 3,001,000
Offering Costs (345,150)
Payment of Computer Equipment Payable (159,357)
Distributions to Trust Beneficiaries and Managing
Trustee (112,515) (393,939) (393,939)
---------- ---------- ---------
Net Cash Provided by (Used in) Financing Activities 2,543,335 (393,939) (553,296)
Net Increase (Decrease) in Cash 1,522,894 (1,330,936) (175,517)
Cash at Beginning of Year 1,522,894 191,958
---------- ---------- ---------
Cash at End of Year 1,522,894 191,958 16,441
---------- ---------- ---------
---------- ---------- ---------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income (Loss) - GAAP Basis 17 120 (72)
Federal Taxable Income (Loss) to Investors 16 6 (47)
Cash Distributions to Investors - GAAP Basis (37) (130) (130)
Return of Capital to Investors - GAAP Basis 21 11 130
</TABLE>
*The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented was
caused primarily by the acquisition of more financed equipment.
II-12
<PAGE>
COMMONWEALTH EQUIPMENT INCOME TRUST IX
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
PROGRAM INCEPTION TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
1993 1994
------------------------
<S> <C> <C>
COMPUTATION OF NET INCOME
Months of Operations **12 12
Gross Revenues 1,046,655 1,598,529
Less: Operating Expenses 6,295 41,237
Equipment Management Fee 50,681 79,057
Loss on Sale of Computer Equipment 113,283
Interest 34,897 68,876
Depreciation and Amortization 654,388 1,549,475
------------------------
Net Income (Loss) - GAAP Basis 300,394 (253,409)
------------------------
------------------------
Federal Taxable Income (Loss) 28,736 (339,227)
Cash Distributions - GAAP Basis (385,305) (393,938)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 300,394 (253,409)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating
Activities:
Depreciation and Amortization 654,388 1,549,475
Other Non-Cash Activities Included in the Determination of Net Income (Loss)* (737,271) (739,868)
Loss on Sale of Computer Equipment 113,283
Net Change in Operating Assets and Liabilities 105,157 (63,826)
------------------------
Net Cash Provided by Operating Activities 322,668 605,655
Capital Expenditures (2,381,335) (207,196)
Net Proceeds from Sale of Computer Equipment 112,551
Payment of Computer Equipment Payable (55,588)
Increase in Organization Costs and Deferred Expenses (211,939) (64,138)
------------------------
Net Cash Used in Investing Activities (2,593,274) (214,371)
Trust Beneficiaries & Managing Trustee Contributions 3,001,000
Offering Costs (341,268)
Distributions to Trust Beneficiaries and Managing Trustee (385,305) (393,938)
------------------------
Net Cash Provided by Financing Activities 2,274,427 (393,938)
Net Increase (Decrease) in Cash 3,821 (2,654)
Cash at Beginning of Year -- 3,821
------------------------
Cash at End of Year 3,821 1,167
------------------------
------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income (Loss) - GAAP Basis 100 (84)
Federal Taxable Income (Loss) to Investors 9 (115)
Cash Distributions to Investors - GAAP Basis (127) (130)
Return of Capital to Investors - GAAP Basis 28 130
</TABLE>
*The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented was
caused primarily by the acquisition of more financed equipment.
**Partnership commenced operations on 1/6/93
II-13
<PAGE>
COMMONWEALTH EQUIPMENT INCOME TRUST X
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
PROGRAM INCEPTION TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
1993 1994
-------------------------
<S> <C> <C>
Computation of Net Income
Months of Operations **6 12
Gross Revenues 469,154 1,942,165
Less: Operating Expenses 3,493 45,372
Equipment Management Fee 22,715 96,088
Interest 19,922 111,203
Depreciation and Amortization 290,701 1,738,026
-------------------------
Net Income (Loss) - GAAP Basis 132,323 (48,524)
-------------------------
-------------------------
Federal Taxable Income 84,363 250,199
Cash Distributions - GAAP Basis (189,845) (484,848)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 132,323 (48,524)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating
Activities:
Depreciation and Amortization 290,701 1,738,026
Other Non-Cash Activities Included in the Determination of Net Income (Loss)* (275,249) (921,663)
Net Change in Operating Assets and Liabilities (1,074) 182,745
-------------------------
Net Cash Provided by Operating Activities 146,701 950,584
Capital Expenditures (2,363,652) (1,291,685)
Increase in Organization Costs and Deferred Expenses (233,521) (105,713)
-------------------------
Net Cash Used in Investing Activities (2,597,173) (1,397,398)
Trust Beneficiaries & Managing Trustee Contributions 4,001,000
Offering Costs (427,991)
Distributions to Trust Beneficiaries and Managing Trustee (189,845) (484,848)
-------------------------
Net Cash Provided by Financing Activities 3,383,164 (484,848)
Net Increase (Decrease) in Cash 932,692 (931,662)
Cash at Beginning of Year -- 932,692
-------------------------
Cash at End of Year 932,692 1,030
-------------------------
-------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income (Loss) - GAAP Basis 33 (12)
Federal Taxable Income to Investors 21 62
Cash Distributions to Investors - GAAP Basis (47) (120)
Return of Capital to Investors - GAAP Basis 14 120
</TABLE>
*The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented was
caused primarily by the acquisition of more financed equipment.
**Partnership commenced operations on 7/7/93
II-14
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND - III, L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
PROGRAM INCEPTION TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
1993 1994
-------------------------
<S> <C> <C>
COMPUTATION OF NET INCOME
Months of Operations **1 12
Gross Revenues 12,102 497,829
Less: Operating Expenses 128 18,904
Equipment Management Fee 550 24,301
Interest 21,105
Depreciation and Amortization 6,548 381,105
-------------------------
Net Income - GAAP Basis 4,876 52,414
-------------------------
-------------------------
Federal Taxable Income 8,149 61,991
Cash Distributions - GAAP Basis (2,989) (121,212)
COMPUTATION OF CASH FLOWS
Net Income 4,876 52,414
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 6,548 381,105
Other Non-Cash Activities Included in the
Determination of Net Income* (10,990) (183,329)
Net Change in Operating Assets and Liabilities (4,941) 38,191
-------------------------
Net Cash Provided by (Used in) Operating
Activities (4,507) 288,381
Capital Expenditures (370,110) (611,167)
Increase in Organization Costs and Deferred
Expenses (24,600) (40,332)
-------------------------
Net Cash Used in Investing Activities (394,710) (651,499)
Partners' Contributions 1,001,000
Offering Costs (60,400)
Distributions to Partners (2,989) (121,212)
-------------------------
Net Cash Provided by Financing Activities 937,611 (121,212)
Net Increase (Decrease) in Cash 538,394 (484,330)
Cash at Beginning of Year -- 538,394
-------------------------
Cash at End of Year 538,394 54,064
-------------------------
-------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income - GAAP Basis 5 52
Federal Taxable Income to Investors 8 61
Cash Distributions to Investors - GAAP Basis (3) (120)
Return of Capital to Investors - GAAP Basis 2 68
</TABLE>
*The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented was
caused primarily by the acquisition of more financed equipment.
**Partnership commenced operations on 12/23/93
II-15
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND I
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
PROGRAM INCEPTION TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
1994
-----------
<S> <C>
COMPUTATION OF NET INCOME
Months of Operations 12
Gross Revenues 1,223,900
Less: Operating Expenses 71,556
Equipment Management Fee 56,473
Interest 48,184
Depreciation and Amortization 952,640
-----------
Net Income - GAAP Basis 95,047
-----------
-----------
Federal Taxable Income 363,865
Cash Distributions - GAAP Basis (443,614)
COMPUTATION OF CASH FLOWS
Net Income 95,047
Adjustments to Reconcile Net Increase to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 952,640
Other Non-Cash Activities Included in the
Determination of Net Income* (633,035)
Net Change in Operating Assets and Liabilities (101,684)
-----------
Net Cash Provided by Operating Activities 312,968
Capital Expenditures (4,783,921)
Deferred Expenses Paid to the General Partner (302,673)
Increase in Organization Costs and Deferred
Expenses (102,606)
-----------
Net Cash Used in Investing Activities (5,189,200)
Partners' Contributions 8,271,511
Offering Costs (932,803)
Distributions to Partners (443,614)
-----------
Net Cash Provided by Financing Activities 6,895,094
Net Increase in Cash 2,018,862
Cash at Beginning of Year 1,500
-----------
Cash at End of Year 2,020,362
-----------
-----------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income - GAAP Basis 11
Federal Taxable Income to Investors 42
Cash Distributions to Investors - GAAP Basis (53)
Return of Capital to Investors - GAAP Basis 42
</TABLE>
*The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks, which
occurs when equipment is financed. The increase over the periods presented was
caused primarily by the acquisition of more financed equipment.
**Partnership commenced operations on 3/14/94
II-16
<PAGE>
TABLE V
EQUIPMENT SALES
The following table sets forth the sales and other dispositions of equipment
by four prior private programs sponsored by the General Partner and its
Affiliates during the most recent three year period ending December 31, 1994.
There were no sales or other dispositions of equipment in Commonwealth
Equipment Trust X, Commonwealth Equipment Income Private Fund III, Limited
Partnership, and Commonwealth Income & Growth Fund I.
II-17
<PAGE>
COMMONWEALTH EQUIPMENT INCOME FUND VII, LIMITED PARTNERSHIP
EQUIPMENT SALES
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1994
(TABLE V)
<TABLE>
<CAPTION>
ORIGINAL NET FEDERAL
EQUIPMENT EQUIPMENT YEAR OF YEAR OF ACQUISITION NET BOOK PROCEEDS GAAP NET TAXABLE NET
MANUFACTURER TYPE DESCRIPTION ACQUISITION DISPOSAL COST VALUE RECEIVED GAIN/(LOSS) GAIN/(LOSS)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
IBM (1) 3990 Storage 1992 1994 182,000 44,155 66,372 22,217 (47,054)
controller
IBM (1) 3990 Storage 1992 1994 181,500 42,808 65,259 22,451 (47,856)
controller
IBM (1) 3990 Storage 1992 1994 194,489 53,558 31,040 (22,518) (90,168)
controller
IBM (1) 3745-310 Communications 1992 1994 241,848 80,616 101,650 21,034 (49,073)
controller
IBM (10)7012-340 Workstation 1992 1994 301,705 144,567 65,830 (78,737) (122,435)
</TABLE>
II-18
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND-II, LIMITED PARTNERSHIP
EQUIPMENT SALES
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1994
(TABLE V)
<TABLE>
<CAPTION>
ORIGINAL NET FEDERAL
EQUIPMENT EQUIPMENT YEAR OF YEAR OF ACQUISITION NET BOOK PROCEEDS GAAP NET TAXABLE NET
MANUFACTURER TYPE DESCRIPTION ACQUISITION DISPOSAL COST VALUE RECEIVED GAIN/(LOSS) GAIN/(LOSS)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
IBM (1) 3745 Communications 1992 1993 112,170 68,548 68,400 (148) (28,315)
controller
IBM (9) 7012-340, Workstation 1992 1994 215,925 103,464 49,324 (54,140) (92,610)
(1) 7013-53H
</TABLE>
II-19
<PAGE>
COMMONWEALTH EQUIPMENT INCOME TRUST VIII
EQUIPMENT SALES
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1994
(TABLE V)
<TABLE>
<CAPTION>
ORIGINAL NET FEDERAL
EQUIPMENT EQUIPMENT YEAR OF YEAR OF ACQUISITION NET BOOK PROCEEDS GAAP NET TAXABLE NET
MANUFACTURER TYPE DESCRIPTION ACQUISITION DISPOSAL COST VALUE RECEIVED GAIN/(LOSS) GAIN/(LOSS)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
IBM (1) 3745 Communications 1992 1993 196,735 131,154 114,262 (16,892) (59,468)
controller
IBM (13)7235-002 Workstation 1992 1994 112,896 51,744 3,492 (48,252) (64,020)
IBM (5) 7012-340 Workstation 1992 1994 172,900 86,450 38,174 (48,276) (66,719)
</TABLE>
II-20
<PAGE>
COMMONWEALTH EQUIPMENT INCOME FUND IX, LIMITED PARTNERSHIP
EQUIPMENT SALES
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1994
(TABLE V)
<TABLE>
<CAPTION>
ORIGINAL NET FEDERAL
EQUIPMENT YEAR OF YEAR OF ACQUISITION NET BOOK PROCEEDS GAAP NET TAXABLE NET
MANUFACTURER EQUIPMENT TYPE DESCRIPTION ACQUISITION DISPOSAL COST VALUE RECEIVED GAIN/(LOSS) GAIN/(LOSS)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
IBM (1) 7013-530 Workstation 1993 1994 39,318 24,832 11,400 (13,432) (14,770)
IBM (2) 7013-550 Workstation 1993 1994 88,941 24,535 12,350 (12,185) (46,849)
IBM (1/2)4832-002 Workstation 1993 1994 310,578 176,465 88,800 (87,665) (117,921)
</TABLE>
II-21
<PAGE>
APPENDIX III
SUBSCRIPTION AGREEMENT
<PAGE>
$2,500,000 - MINIMUM
COMMONWEALTH INCOME & GROWTH FUND II
(A PENNSYLVANIA LIMITED PARTNERSHIP)
SUBSCRIPTION AGREEMENT,
SIGNATURE PAGE &
POWER OF ATTORNEY
750,000 Units - $20.00 per Unit
Minimum Purchase - 125 Units ($2,500)
50 Units ($1,000) for IRAs, Keoghs and Pension Plans
(MINIMUM PURCHASE MAY BE HIGHER IN CERTAIN STATES)
PLEASE CAREFULLY READ this Subscription Agreement and the Terms and
Conditions [on the back of the Signature Page] before completing this
document. TO SUBSCRIBE FOR UNITS, please complete and sign the Signature Page
and deliver the Subscription Agreement to your Financial Consultant.
ALL ITEMS ON THIS AGREEMENT MUST BE COMPLETED IN ORDER FOR YOUR SUBSCRIPTION
TO BE PROCESSED, including any additional information necessary to complete
Item 6(e) of the Section entitled "Terms and Conditions."
COMMONWEALTH CAPITAL CORP.
(800) 497-4554
MAILING ADDRESS:
(Regular or Overnight Packages):
Wheat First Butcher Singer
Attn: Direct Investment Department
2 Logan Square, 7th Floor
Philadelphia, PA 19103
Subscription Questions:
(215) 496-7664
(800) 497-4554
III-1
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND II
SUBSCRIPTION AGREEMENT, SIGNATURE PAGE AND POWER OF ATTORNEY
- --------------------------------------------------------------------------------
1. Units Purchased: Units ($20.00 Per Unit) = $ Total Capital Contribution
- --------------------------------------------------------------------------------
INITIAL INVESTMENT / / ADDITIONAL INVESTMENT / /
(IN THIS FUND)
- --------------------------------------------------------------------------------
ARE YOU AN EMPLOYEE OF A SELECTED AGENT, IS THIS A NAV PURCHASE? YES / / NO / /
- --------------------------------------------------------------------------------
2. REGISTRATION INFORMATION - Legal Account Title
INVESTOR ACCOUNT NUMBER ----------------------
- --------------------------------------------------------------------------------
INVESTORS NAME(S) OR
TRUSTEE(S) OR CUSTODIAN(S)
- --------------------------------------------------------------------------------
INVESTOR DATE OF TRUST/IRA
NAME(S) AND/OR IRA NUMBER:
- --------------------------------------------------------------------------------
SOCIAL SECURITY NUMBER: CORPORATE/CUSTODIAL TAX I.D.:
(REQUIRED ALSO FOR IRA/QUALIFIED PLAN INVESTORS)
- --------------------------------------------------------------------------------
LEGAL RESIDENT/BUSINESS/CUSTODIAL ADDRESS:
- --------------------------------------------------------------------------------
CITY/STATE HOME PHONE: BUSINESS/CUSTODIAL
ZIP + 4: PHONE:
- --------------------------------------------------------------------------------
ADDITIONAL MAILING ADDRESS - If Different From Above (Or Investor Address if
Custodial Account) - Must Complete to Receive Copies of Statements & Reports
Street City State Zip + 4
- --------------------------------------------------------------------------------
3. PLEASE INDICATE CITIZENSHIP STATUS: (please review "Investor Suitability
Standards" in the Prospectus)
US CITIZEN / / RESIDENT ALIEN / / NON-RESIDENT ALIEN (attach IRA Form W8) / /
- --------------------------------------------------------------------------------
If corporation or partnership: / / U.S. or / / FOREIGN (Attach IRA Form W8)
- --------------------------------------------------------------------------------
4. TYPE OF REGISTRATION: (CHECK ONE)
/ / INDIVIDUAL / / JOINT TENANTS WITH RIGHT OF SURVIVORSHIP
/ / IRA / / PARTNERSHIP
/ / OTHER TAX-EXEMPT ENTITY / / QUALIFIED PLAN
/ / CORPORATION / / UNIFORM GIFT TO MINORS ACT STATE OF __________
/ / TENANTS IN COMMON / / TRUST (SPECIFY) ______________________________
/ / COMMUNITY PROPERTY / / OTHER (SPECIFY) ______________________________
III-2
<PAGE>
5. SIGNATURE: I certify that (1) I have received the Prospectus relating to
Commonwealth Income & Growth Fund II as supplemented (the "Prospectus"), (2)
I agree to the provisions on the reverse hereof, (3) by executing this
Subscription Agreement, Signature Page and Power of Attorney, subject to the
General Partner's acceptance of this Subscription Agreement, I am entering
into a limited partnership agreement and agreeing to invest money, (4) the
information set forth in this Subscription Agreement is true and correct, (5)
I meet the minimum financial suitability standards described in the
Prospectus under "Investor Suitability Standards", and, I declare under
penalty of perjury that (6) I have entered my correct taxpayer identification
or social security number on this form and (7) I verify that I am not subject
to withholding either because I have not been notified that I am subject to
backup withholding as result of a failure to report all interests or
dividends, or the Internal Revenue Service has notified me that I am no
longer subject to backup withholding (if the undersigned is subject to backup
withholding, he shall strike out the language in clause (7) before signing
below).
- --------------------------------- --------------------------------------------
X X
- --------------------------------- --------------------------------------------
SUBSCRIBER'S SIGNATURE DATE SIGNATURE OF SUBSCRIBER'S OR AUTHORIZED DATE
CUSTODIAL REPRESENTATIVE
If Financial Consultant and Branch Manager are executing the signature page,
both must sign below. Authorized custodian signature required for
IRA/custodian accounts. Financial Consultant and Branch Managers may not sign
on behalf of residents of Florida, Iowa, Maine, Massachusetts, Michigan,
Minnesota, Missouri, Nebraska, North Carolina, Oregon and Tennessee. (NOTE:
Not to be executed until Subscriber(s) has (have) acknowledged receipt of
final Prospectus.)
- -------------------------------------- ---------------------------------------
X X
- -------------------------------------- ---------------------------------------
FINANCIAL CONSULTANT'S SIGNATURE DATE BRANCH MANAGER'S SIGNATURE DATE
- --------------------------------------------------------------------------------
6. SPECIAL PAYMENT INSTRUCTIONS: Payment to other individual or entity as
designated below. Investor must complete this section if they want the cash
distributions made to anyone other than the record holder. Investors
requesting direct deposit of distribution checks to another financial
institution or mutual fund please complete below.
- -------------------------------------- ---------------------------------------
ENTITY/FUND NAME STREET ADDRESS
- -------------------------------------- ---------------------------------------
FOR ACCOUNT OF CITY/STATE/ZIP + 4
- -------------------------------------- ---------------------------------------
ACCOUNT NUMBER (Please indicate fund PHONE NUMBER
number)
- --------------------------------------------------------------------------------
7. BROKER/DEALER DATA: Completed by selling Financial Consultant
(PLEASE DO NOT ENTER YOUR HOME OFFICE ADDRESS HERE)
- -------------------------------------- ---------------------------------------
FINANCIAL CONSULTANT(S) NAME ADDRESS
- -------------------------------------- ---------------------------------------
BROKER/DEALER FIRM NAME CITY/STATE/ZIP + 4
- -------------------------------------- ---------------------------------------
FINANCIAL CONSULTANT'S PHONE NUMBER FAX NUMBER
- --------------------------------------------------------------------------------
8. BY SELLING FINANCIAL CONSULTANT. In compliance with Section 3(b) and 4(d)
of Appendix F of Article III, Section 34 of the NASD Rules of Fair Practice,
I represent that I have reasonable grounds to believe, based on information
from the investor(s) concerning investment objectives, other investments,
financial situation and needs, and any other information known by me, that
investment in the Partnership is suitable for such investor(s) and that I
have informed the investor(s) of the lack of liquidity and marketability of
the investment and confirm that investor(s) signatures appears above.
Signatures of both representatives required if joint account.
- -------------------------------------- ---------------------------------------
X X
- -------------------------------------- ---------------------------------------
FINANCIAL CONSULTANT'S SIGNATURE DATE BRANCH MANAGER'S SIGNATURE DATE
- --------------------------------------------------------------------------------
THIS SUBSCRIPTION AGREEMENT, SIGNATURE ____________________ ___________________
PAGE AND POWER OF ATTORNEY WILL NOT BE RESERVATION NUMBER WFS DATE OF RECEIPT
AN EFFECTIVE AGREEMENT UNTIL IT IS ____________________ ____________________
ACCEPTED BY THE GENERAL PARTNER OF FC NUMBER DATE INTO ESCROW
COMMONWEALTH INCOME & GROWTH FUND II. _______________________ _________________
AGREED TO AND ACCEPTED INVESTOR ACCOUNT NUMBER CLOSING NUMBER
BY: _________________________
(GENERAL PARTNER)
III-3
<PAGE>
SUBSCRIPTION AGREEMENT
COMMONWEALTH INCOME & GROWTH FUND II
TERMS AND CONDITIONS
Each person or entity named as a registered owner on the Subscription
Agreement (the "Subscriber") desires to become a limited partner (a "Limited
Partner") of Commonwealth Income & Growth Fund II, (the "Partnership") and to
purchase units of a limited partnership interest (the "Units") of the
Partnership in accordance with the terms and conditions of the final
prospectus pursuant to which the Partnership will offer Units to the public
including any amendments and supplements thereto (the "Prospectus"), and of
the Partnership's Amended and Restated Agreement of Limited Partnership (the
"Partnership Agreement"), attached as Exhibit 1 to the Prospectus. BY
EXECUTING THIS AGREEMENT, A SUBSCRIBER DOES NOT WAIVE ANY RIGHTS HE MAY HAVE
UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934 or
any State Securities or Blue Sky Law. In connection therewith, the Subscriber
presents, warrants, and agrees as follows:
1. SUBSCRIPTION. The Subscriber agrees to purchase the number of Units
set forth in the space provided on the Signature Page of this Subscription
Agreement and delivers herewith the full amount required to purchase such
Units.
2. ACCEPTANCE. The Subscriber hereby acknowledges and agrees that the
general partner of the Partnership (the "General Partner") may in its sole
and absolute discretion accept or reject the Subscriber's subscription, in
whole or in part, and that, if rejected, the amount of the Subscriber's
subscription which is rejected will be promptly returned to Subscriber,
without interest. The General Partner may not complete the sale of a Unit to
a Subscriber until at least five business days after the date the Subscriber
received the Prospectus.
3. NO REVOCATION. The Subscriber hereby acknowledges and agrees that he
will not be entitled to revoke or withdraw his subscription, except as
provided in the notice below or as set forth in the Prospectus.
4. ADOPTION OF PARTNERSHIP AGREEMENT. The Subscriber hereby accepts,
adopts and agrees to be bound by each and every provision contained in the
Partnership Agreement and agrees to become a Limited Partner thereunder.
5. POWER OF ATTORNEY. The Subscriber hereby irrevocably makes,
constitutes and appoints the General Partner, with full power of substitution
and ratification, its true and lawful attorney-in-fact for the purposes and
in the manner provided in the Partnership Agreement.
6. REPRESENTATION AND WARRANTIES. The Subscriber (which, for this
purpose, includes any Financial Consultant and Branch Manager executing this
Subscription Agreement on behalf of the Subscriber) represents and warrants
to the Partnership, the General Partner, the affiliates, agents and
representatives of the Partnership or the General Partner, and any
broker-dealer involved in the offering of Units for sale that:
(a) the Subscriber has received the Prospectus;
(b) the Subscriber has received the form of Partnership Agreement;
(c) the Subscriber meets the minimum financial suitability standards set
forth in the Prospectus under "Investor Suitability Standards," as well as
any additional minimum financial suitability standards required by state
securities authorities which are applicable to the Subscriber;
(d) the Subscriber is subscribing for Units in his own account or for
the account or benefit of a family member or members or in a fiduciary
capacity for the account of another person; and
(e) the Subscriber has received no representations or warranties from
the Partnership, the General Partner, or any affiliates, agents or
representatives of the Partnership or the General Partner other than those
contained in the Prospectus, except as follows:
The Partnership reserves the right to assert these representations as a
defense in any subsequent litigation in which one or more of the
representations is in issue; provided, however, that the representations
contained in Paragraph 6(e) shall not be binding on any Subscriber resident
in Arizona, Maine, Massachusetts, Minnesota, Missouri, Nebraska, Tennessee,
or Texas.
Subscribers in Arizona, Michigan, and Nebraska are required to sign or
initial each representation contained in Paragraph 6.
NOTICE TO ALL INVESTORS:
(a) The purchase of Units for an IRA or Keogh plan does not itself
create the plan.
(b) Section 1446 of the Internal Revenue Code provides that a
partnership must pay a withholding tax to the Internal Revenue Service with
respect to a partner's allocable share of such partnership's effectively
connected taxable income if the partner is a foreign person, and the
Partnership Agreement authorizes the Partnership to withhold any required
amounts from distribution otherwise payable to any foreign person.
III-4
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND II
Supplement Dated April 2, 1997
To
Prospectus Dated May 12, 1995
This Supplement replaces all Supplements dated prior to April 2, 1997.
Closing of Sale of Additional Units
On September 22, 1995 the Partnership received and accepted subscriptions for
more than 125,000 Units. On November 3, 1995, December 4, 1995, January 10,
1996, February 6, 1996, March 5, 1996, April 2, 1996, May 10, 1996, June 7,
1996, July 2, 1996, August 2, 1996, September 12, 1996, October 7, 1996,
November 5, 1996, December 12, 1996, January 7, 1997, February 6, 1997, and
March 6, 1997, the payments received from subscribers were released from escrow
and have become available to the Partnership for the payment of expenses and
utilization as described under "USE OF PROCEEDS". As of March 6, 1997, the
Partnership has accepted subscriptions from investors totaling approximately
$8,801,000 (440,000 Limited Partnership Units).
Acquisition of Equipment
On November 3, 1995, the Partnership purchased two Storagetek Iceberg Disk
Arrays for approximately $1,370,000. The Equipment is subject to a 36 month
lease with Bellsouth Telecommunications Inc. The monthly rent during the term
of the lease is approximately $30,400.
On December 29, 1995, the Partnership purchased six Storagetek Tape Drives for
approximately $490,000. The Equipment is subject to a 24 month lease with
Chrysler Corp. The monthly rent during the term of the lease is approximately
$7,400 for the first 7 months and $15,600 for the remaining 17 months.
On December 29, 1995, the Partnership purchased 325 Printers which were
manufactured by International Business Machines for approximately $990,000. The
Equipment is subject to a 36 month lease with Southern Pacific Corp. The
monthly rent during the term of the lease is approximately $24,000.
On December 29, 1995, the Partnership purchased 50 Printers which were
manufactured by International Business Machines for approximately $148,000. The
Equipment is subject to a 12 quarter lease with Southern Pacific Corp. The
quarterly rent during the term of the lease is approximately $11,000.
On March 28, 1996, the Partnership purchased 5 Storagetek Tape Drives for
approximately $384,000. The Equipment is subject to a 36 month lease with
Yamaha Motor Corp. The monthly rent during the term of the lease is
approximately $9,000.
<PAGE>
Commonwealth Income & Growth Fund II
Supplement Dated April 2, 1997.
Page 2 of 3.
On May 17, 1996, the Partnership purchased 3 Storagetek Tape Drives for
approximately $406,000. The Equipment is subject to a 36 month lease with
Household International, Inc. The monthly rent during the term of the lease is
approximately $9,100.
On June 28, 1996, the Partnership purchased three IBM Tape Drives for
approximately $179,000. The Equipment is subject to a 36 month lease with
Automatic Data Processing, Inc. The monthly rent during the term of the lease
is approximately $4,300.
On August 14, 1996, the Partnership purchased one Digital Equipment Corporation
Departmental Server for approximately $205,000. The Equipment is subject to a
36 month lease with The Timken Company. The monthly rent during the term of
the lease is approximately $5,300.
On August 14, 1996, the Partnership purchased one Digital Equipment Corporation
Departmental Server for approximately $41,000. The Equipment is subject to a
36 month lease with The Timken Company. The monthly rent during the term of
the lease is approximately $1,100.
On September 5, 1996, the Partnership purchased thirteen Hewlet Packard
Workstation for approximately $305,000. The Equipment is subject to a 36 month
lease with Johnson Controls, Inc. The monthly rent during the term of the
lease is approximately $8,000.
On October 15, 1996, the Partnership purchased one Silicon Graphics Inc.
Enterprise Server for approximately $263,000. The Equipment is subject to a 36
month lease with Honda R&D North America, Inc. The monthly rent during the
term of the lease is approximately $7,100.
On February 28, 1997, the Partnership purchased one IBM Laser Printer for
approximately $477,000. The Equipment is subject to a 36 month lease with AT&T
Corporation. The monthly rent during the term of the lease is approximately
$10,200.
As of April 2, 1997, the Partnership has committed to purchase thirty-eight
IBM Printers for approximately $600,000. The Equipment is subject to a 34
month lease with Federated Department Stores. The monthly rent during the
term of the lease is to be approximately $15,200.
Prior Performance
The General Partner has previously sponsored one Equipment leasing program,
Commonwealth Income & Growth Fund I, a limited partnership, which registered
securities under the Securities Act of 1933 and which has investment objectives
substantially identical to the Partnership. The partnership terminated its
offering of units on May 11, 1995, with $12,624,153 raised from investors. On
December 8, 1995, this partnership's net offering proceeds were fully
utilized in the purchase of computer peripheral equipment. All of the equipment
was new when acquired. 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.
<PAGE>
Commonwealth Income & Growth Fund II
Supplement Dated April 2, 1997.
Page 3 of 3.
Commonwealth Capital Corp. has conducted single investor and leveraged lease
transactions involving a variety of types of Equipment. These transactions
involved arranging for the investment by single investor in Equipment and
simultaneous lease of the Equipment on a single transaction basis. The
investment objectives of these transactions were to provide tax deductions and
cash distributions. In addition, in 1984, Commonwealth Capital Corp. arranged
for end user leases of Equipment in a leveraged lease co-ownership program
involving the private sale of partnership interest to 10 investors. The
investment objectives of that program were to provide tax deductions and cash
distributions.
Affiliates of Commonwealth Capital Corp. have also sponsored 15 prior private
equipment leasing programs with investment objectives similar to the
Partnership. As of December 31, 1995, these programs raised a total of
$30,162,500 from investors in private offerings of securities. Twelve of the
programs were structured as limited partnerships and three were structured as
Delaware business trusts. Interests in the programs were purchased by an
aggregate of 784 investors. As of December 31, 1995, the programs had acquired
from original offering proceeds $25,657,148 in equipment, all of which was
computer peripheral equipment. Approximately 97% of the equipment was new when
acquired by the program and approximately three percent was used, and
approximately 60% of the equipment has been sold. Currently, operating income
for these programs is lower than projected in the prospective financial
statements which were included in the offering document applicable to each such
program primarily because (i) some of the equipment acquired by such programs
has not produced the projected residual value on sale and (ii) lease rates have
been lower than projected as a result of a continuous decrease in interest rates
generally. As a result, while the programs have made all projected
distributions to investors, Commonwealth Capital Corp. and its affiliates
decided to make loans to and/or waive fees from certain programs, some of which
loans were subsequently forgiven, in order for those programs to make such cash
distributions and/or to enable those programs to make additional acquisitions of
equipment. In addition, because of the lower lease rates and sales of equipment
below projected levels, certain programs currently own less equipment than was
anticipated. Commonwealth Capital Corp. has outstanding demand promissory notes
in the amount of $3,016,250 to the general partners or trustees of its prior
private programs. See the prior performance tables attached as "Appendix I" for
further information concerning these prior public and private programs.
<PAGE>
The following is a summary of equipment acquired between January 1, 1993 and
January 1, 1996 by prior Programs which were sponsored by the General Partner
<TABLE>
<CAPTION>
Quantity of
Peripheral Cost of
Equipment Equipment Percent
Program Name Acquired Acquired Leverage
- ---------------------------------------------------- ----------- ------------ --------
<S> <C> <C> <C>
Commonwealth 1987(1 Equipment Income Fund, L.P.) 16 $ 2,259,234 23%
Commonwealth 1988(1 Equipment Income Fund, L.P.) 43 $ 2,243,958 29%
Commonwealth Equipment Income Fund No. 3, L.P. 95 $ 2,208,958 32%
Commonwealth Equipment Income Fund No. 4, L.P. 12 $ 1,780,665 34%
Commonwealth Equipment Income Fund V, L.P. 62 $ 2,300,643 34%
Commonwealth Equipment Income Private Fund I, L.P. 18 $ 1,857,337 25%
Commonwealth Equipment Income Fund VI, L.P. 95 $ 3,036,497 26%
Commonwealth Equipment Income Fund VII, L.P. 72 $ 2,351,031 25%
Commonwealth Equipment Income Private Fund II, L.P. 10 $ 1,341,244 21%
Commonwealth Equipment Income Trust VIII 182 $ 4,073,456 21%
Commonwealth Equipment Income Trust IX 186 $ 5,623,322 20%
Commonwealth Equipment Income Trust X 86 $ 7,665,556 29%
Commonwealth Equipment Income Private Fund III, L.P. 15 $ 2,192,830 19%
Commonwealth Income & Growth Fund I 624 $17,336,193 22%
Commonwealth Equipment Income Private Fund IV, L.P. 53 $ 1,747,750 11%
Commonwealth Equipment Income Private Fund V, L.P. 79 $ 885,061 0%
</TABLE>
<PAGE>
Financial Information
Appendix 1 contains the following:
- - Audited financial statements of Commonwealth Income & Growth Fund II as of
December 31, 1996 and 1995 and for the year ended December 31, 1996 and
for the period September 22, 1995 (commencement of operations) to
December 31, 1995.
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations for the periods ended December 31, 1996.
- - Audited Financial Statements of Commonwealth Capital Corp. as of
February 29, 1996, and February 28, 1995, and for the years then ended.
- - Audited Balance Sheet of Commonwealth Income & Growth Fund, Inc. as of
February 29, 1996, and February 28, 1995.
- - Unaudited Balance Sheet of Commonwealth Capital Corp as of
November 30, 1996.
- - Unaudited Balance Sheet of Commonwealth Income & Growth Fund, Inc. as of
November 30, 1996.
- - Prior Performance Tables - Updated to December 31, 1995.
Use of Proceeds
As indicated above, the Partnership has accepted subscriptions from investors
totaling approximately $8,801,000. To date, the Partnership has paid the
underwriter Selling Commissions of approximately $615,000 and Dealer Manager
Fees of approximately $226,000, which includes a non-accountable expense
allowance of $50,000. The General Partner has been paid approximately $264,000
for Organizational and Offering Expenses, and approximately $296,000 for
Acquisition Fees. The net proceeds available for investment was therefore
approximately $7,400,000. The Partnership has purchased Equipment costing
approximately $5,257,000 from such proceeds. The remaining cash available for
investment is approximately $2,143,000.
Experts
The financial statements of the Partnership, at December 31, 1996 and 1995
and for the year ended December 31, 1996 and for the period September 22,
1995 (commencement of operations) to December 31, 1995, the balance sheets of
the General Partner at February 29, 1996 and February 28, 1995, and the
consolidated financial statements of Commonwealth Capital Corp. as of
February 29, 1996 and February 28, 1995, and for the years then ended,
appearing in Post Effective Amendment No. 8 to the Registration Statement,
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their reports thereon appearing elsewhere herein, and are included in
reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing
Supplement for Texas Investors
Although this Partnership uses the word "Growth" in its title, the assets to be
acquired by the Partnership will not appreciate in value and will in fact lose
value rapidly after acquisition. By using the term "Growth", the sponsor of
this Partnership means that the sponsor will purchase additional equipment with
money that otherwise could be distributed to investors as a return on their
investment.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND II
APPENDIX 1
To the Supplement Dated April 2, 1997
- - Audited financial statements of Commonwealth Income & Growth Fund II as of
December 31, 1996 and 1995 and for the year ended December 31, 1996 and for
the period September 22, 1995 (commencement of operations) to December 31,
1995.
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations for the periods ended December 31, 1996.
- - Audited Financial Statements of Commonwealth Capital Corp. as of
February 29, 1996, and February 28, 1995, and for the years then ended.
- - Audited Balance Sheets of Commonwealth Income & Growth Fund, Inc. as of
February 29, 1996, and February 28, 1995.
- - Unaudited Balance Sheet of Commonwealth Capital Corp. as of
November 30, 1996.
- - Unaudited Balance Sheet of Commonwealth Income & Growth Fund, Inc. as of
November 30, 1996.
- - Prior Performance Tables - Updated to December 31, 1995.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
Commonwealth Income & Growth Fund II
We have audited the accompanying balance sheets of Commonwealth Income &
Growth Fund II as of December 31, 1996 and 1995, and the related statements
of operations, partners' capital, and cash flows for the year ended December
31, 1996 and for the period September 22, 1995 (commencement of operations)
to December 31, 1995. 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 II at December 31, 1996 and 1995, and the results of its operations and
its cash flows for the year ended December 31, 1996 and for the period
September 22, 1995 to December 31, 1995, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
January 24, 1997
1
<PAGE>
Commonwealth Income & Growth Fund II
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
<S> <C> <C>
1996 1995
------------ ------------
Assets
Cash and cash equivalents......................................... $ 2,552,352 $ 251,776
Lease income receivable........................................... 80,014 47,119
Interest and other receivables.................................... 19,551 9,576
Computer equipment, at cost....................................... 4,780,075 2,998,297
Accumulated depreciation.......................................... (1,093,535) (95,827)
------------ ------------
3,686,540 2,902,470
Organization costs and deferred expenses, net of
accumulated amortization of $96,375 for 1996
and $12,130 for 1995............................................ 276,197 162,466
------------ ------------
Total assets...................................................... $ 6,614,654 $ 3,373,407
------------ ------------
------------ ------------
Liabilities and partners' capital
Accounts payable.................................................. $ 92,954 $ 30,999
Accounts payable--Commonwealth Capital Corp....................... -- 148,141
Unearned lease income............................................. 89,780 37,746
------------ ------------
Total liabilities................................................. 182,734 216,886
Partners' capital:
General partner................................................. 1,000 1,000
Limited partners................................................ 6,430,920 3,155,521
------------ ------------
Total partners' capital........................................... 6,431,920 3,156,521
------------ ------------
Total liabilities and partners' capital........................... $ 6,614,654 $ 3,373,407
------------ ------------
------------ ------------
</TABLE>
- ------------------------
See accompanying notes.
2
<PAGE>
Commonwealth Income & Growth Fund II
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 22,
1995
(COMMENCEMENT
OF OPERATIONS)
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ---------------
<S> <C> <C>
Income:
Lease....................................................... $1,123,685 $ 98,538
Interest.................................................... 70,429 25,340
------------ ---------------
1,194,114 123,878
Expenses:
Operating, excluding depreciation........................... 56,707 23,059
Equipment management fee--General Partner................... 56,184 4,927
Depreciation................................................ 997,708 95,827
Amortization of organization costs and deferred
expenses................................................... 84,245 12,130
------------ ---------------
1,194,844 135,943
------------ ---------------
Net loss...................................................... $ (730) $ (12,065)
------------ ---------------
------------ ---------------
Net loss per equivalent limited partnership unit.............. $ (.02) $ (.09)
------------ ---------------
------------ ---------------
Weighted average number of equivalent limited
partnershipunits outstanding during the period.............. 300,982 151,415
------------ ---------------
------------ ---------------
</TABLE>
- ------------------------
See accompanying notes.
3
<PAGE>
Commonwealth Income & Growth Fund II
STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNER GENERAL LIMITED
UNITS UNITS PARTNER PARTNERS TOTAL
------------ ---------- ----------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Contributions--September 22, 1995
through December 31, 1995........... 50 183,947 $ 1,000 $ 3,677,960 $ 3,678,960
Offering costs........................ -- (425,732) (425,732)
Net income (loss)..................... 846 (12,911) (12,065)
Distributions......................... (846) (83,796) (84,642)
------------ ---------- ----------------- ------------ ------------
Partners' capital--December 31, 1995 50 183,947 1,000 3,155,521 3,156,521
Contributions--through December 31,
1996................................ -- 218,572 -- 4,371,440 4,371,440
Offering costs........................ -- (487,266) (487,266)
Net income (loss)..................... 6,080 (6,810) (730)
Distributions......................... (6,080) (601,965) (608,045)
------------ ---------- ----------------- ------------ ------------
Partners' capital--December 31, 1996 50 402,519 $ 1,000 $ 6,430,920 $ 6,431,920
------------ ---------- ----------------- ------------ ------------
------------ ---------- ----------------- ------------ ------------
</TABLE>
- ------------------------
See accompanying notes.
4
<PAGE>
Commonwealth Income & Growth Fund II
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 22,
1995
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO
DECEMBER 31, DECEMBER 31,
1996 1995
----------------- -----------------
<S> <C> <C>
Operating activities
Net loss.................................................... $ (730) $ (12,065)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization........................... 1,081,953 107,957
Other noncash activities included in
determination of net loss............................. (4,290) --
Changes in operating assets and liabilities:
Lease income receivable............................... (32,895) (47,119)
Interest and other receivables........................ (9,975) (9,576)
Accounts payable...................................... 61,955 30,999
Accounts payable--Commonwealth
Capital Corp........................................ (148,141) --
Unearned lease income................................. 52,034 37,746
Organization costs paid to General Partner............ (50,528) (51,491)
----------------- ----------------
Net cash provided by operating activities................... 949,383 56,451
Investing activities
Capital expenditures........................................ (1,777,488) (2,850,156)
Equipment acquisition fees paid to the General Partner...... (147,448) (123,105)
----------------- ----------------
Net cash used in investing activities....................... (1,924,936) (2,973,261)
Financing activities
Partners' contributions..................................... 4,371,440 3,678,960
Offering costs.............................................. (406,651) (366,885)
Offering costs paid to General Partner...................... (80,615) (58,847)
Distributions to partners................................... (608,045) (84,642)
----------------- ----------------
Net cash provided by financing activities................... 3,276,129 3,168,586
----------------- ----------------
Net increase in cash and cash equivalents................... 2,300,576 251,776
Cash and cash equivalents at beginning of period............ 251,776 --
----------------- ---------------
Cash and cash equivalents at end of period.................. $ 2,552,352 $ 251,776
----------------- ---------------
----------------- ---------------
</TABLE>
- ------------------------
See accompanying notes.
5
<PAGE>
Commonwealth Income & Growth Fund II
Notes to Financial Statements
December 31, 1996
1. BUSINESS
Commonwealth Income & Growth Fund II (the "Partnership") is a limited
partnership. The Partnership is currently offering for sale up to 750,000 units
of the limited partnership at the purchase price of $20 per unit. The
Partnership was declared effective by the Securities and Exchange Commission on
May 12, 1995. The Offering will terminate at the close of business on May 12,
1997 unless sooner terminated by the General Partner. The Partnership will use
proceeds of the Offering to acquire, own, lease, and sell various types of
computer peripheral equipment and other similar capital equipment, which will
be leased primarily to U.S. corporations and institutions. The Partnership's
general partner is Commonwealth Income & Growth Fund, Inc. (the "General
Partner"), a Pennsylvania corporation which is an indirect wholly-owned
subsidiary of Commonwealth Capital Corp. Approximately ten years after the
commencement of operations, the Partnership intends to have sold or otherwise
disposed of all of its computer equipment, make final distributions to partners,
and to dissolve. Unless sooner terminated, the Partnership will continue until
December 31, 2006.
Allocations of income and distributions of cash are based on Commonwealth
Income & Growth Fund II, 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. For a limited partner's
unit outstanding for all of 1996, distributions during 1996 reflect a return of
capital in the amount of approximately $2.00 per limited partnership unit. For a
limited partner's unit outstanding from the Offering's first close on September
22, 1995, distributions during 1995 reflected a return of capital in the amount
of approximately $.55 per limited partnership unit. (For a limited partner's
unit acquired during either 1996 or 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.
6
<PAGE>
Commonwealth Income & Growth Fund II
Notes to Financial Statements (continued)
2. ACCOUNTING POLICIES
REVENUE RECOGNITION
Through December 31, 1996, the Partnership has only entered into operating
leases. Lease revenue is recognized on a monthly basis in accordance with the
terms of the operating lease agreements.
USE OF ESTIMATES
The preparation of 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.
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"
(FAS 121). The Partnership evaluates its long-lived assets when events and
circumstances indicate that the value of the asset may not be recoverable. The
Partnership evaluates whether an impairment exists by determining the estimated
undiscounted cash flows to be generated by each asset. If the undiscounted cash
flows are less than the carrying value, then an impairment exists. The amount of
the impairment is determined based on the difference between the carrying value
and the fair value. The fair value is determined based on estimated discounted
cash flows to be generated by the asset. The adoption of FAS 121 had no effect
on the 1996 financial statements.
Depreciation on computer equipment for financial statement purposes is based
on the straight-line method over the estimated useful lives of four 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.
7
<PAGE>
Commonwealth Income & Growth Fund II
Notes to Financial Statements (continued)
2. Accounting Policies (continued)
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, 1996 and 1995, 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.
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 period.
3. COMPUTER EQUIPMENT
The Partnership is the lessor of equipment under operating leases with
periods ranging from 22 to 48 months. In general, associated costs such as
repairs and maintenance, insurance, and property taxes are paid by the lessee.
8
<PAGE>
Commonwealth Income & Growth Fund II
Notes to Financial Statements (continued)
3. Computer Equipment (continued)
The following is a schedule of future minimum rentals on noncancelable
operating leases at December 31, 1996.
1997................................. $1,395,000
1998................................. 1,133,000
1999................................. 238,000
----------
$2,766,000
----------
----------
Lease income from three lessees, each exceeding 10% of lease income,
aggregated 75% of the lease income for the year ended December 31, 1996. Lease
income from two lessees, each exceeding 10% of lease revenue, aggregated 93% of
lease income for the period September 22, 1995 to December 31, 1995.
4. RELATED PARTY TRANSACTIONS
ORGANIZATIONAL FEE
The General Partner is entitled to be paid an Organizational Fee equal to
three percent of the first $10,000,000 of Limited Partners' Capital
Contributions and two percent of the Limited Partners' Capital Contributions in
excess of $10,000,000, as compensation for the organization of the Partnership.
During 1996 and 1995, such organizational fees of approximately $131,000 and
$110,000, respectively, were paid to the General Partner.
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. During
1996 and 1995, no expenses were reimbursed to the General Partner.
9
<PAGE>
Commonwealth Income & Growth Fund II
Notes to Financial Statements (continued)
4. Related Party Transactions (continued)
EQUIPMENT ACQUISITION FEE
The General Partner is entitled to be paid an Equipment Acquisition Fee of
4% of the Purchase Price of each item of Equipment purchased as compensation for
the negotiation of the acquisition of the Equipment and the lease thereof or
sale under a Conditional Sales Contract. The fee will be paid upon closing of
the Offering with respect to the Equipment to be purchased by the Partnership
with the net proceeds for the Offering available for investment in Equipment. If
the Partnership acquires Equipment in an amount exceeding the net proceeds of
the Offering available for investment in Equipment, the fee will be paid when
such Equipment is acquired. During 1996 and 1995, equipment acquisition fees of
approximately $147,000 and $123,000, 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. There were no such fees paid to the General Partner in 1996 and
1995.
EQUIPMENT MANAGEMENT FEE
The General Partner affiliate 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 1996 and 1995, equipment management fees of approximately $56,000
and $5,000, respectively, were paid to the General Partner, as determined
pursuant to section (ii) above.
10
<PAGE>
Commonwealth Income & Growth Fund II
Notes to Financial Statements (continued)
4. Related Party Transactions (continued)
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 or (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 1996 and 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 1996 and 1995.
5. SUPPLEMENTAL CASH FLOW INFORMATION
Other noncash activities included in the determination of net loss are as
follows:
<TABLE>
<CAPTION>
1996 1995
--------- ------
<S> <C> <C>
Lease income paid to original lessor in lieu of
cash payment for computer equipment acquired................ $ 4,290 $ --
-------- ------
-------- ------
</TABLE>
11
<PAGE>
Commonwealth Income & Growth Fund II
Notes to Financial Statements (continued)
5. Supplemental Cash Flow Information (continued)
Noncash investing and financing activities include the following:
<TABLE>
<CAPTION>
1996 1995
----- ----------
<S> <C> <C>
Accounts payable--Commonwealth
Capital Corp. in connection with
the purchase of computer equipment................ $ -- $ 148,141
----- ----------
----- ----------
</TABLE>
6. Reconciliation of Net Loss Reported for Financial Reporting Purposes to
Taxable Income
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net loss for financial reporting purposes............................. $ (730) $ (12,065)
Adjustments:
Depreciation...................................................... 167,614 28,197
Amortization...................................................... 68,035 9,373
Unearned lease income............................................. 22,980 --
---------- ---------
Taxable income........................................................ $ 257,899 $ 25,505
---------- ---------
---------- ---------
</TABLE>
7. SUBSEQUENT EVENT
On January 7, 1997, subscriptions from investors totaling $327,400 were
released by the escrow agent and accepted by the Partnership. The net proceeds
to the Partnership available for investment in computer equipment after payment
of offering expenses and the equipment acquisition fees were $277,031.
8. Events (Unaudited) Subsequent to the Date of the Report of Independent
Auditors
On February 6, 1997 and March 6, 1997 subscriptions from investors totaling
$255,540 and $169,100, respectively, were released by the escrow agent and
accepted by the Partnership. The net proceeds to the Partnership available for
investment in computer equipment after payment of offering expenses and the
equipment acquisition fees were $216,226 and $143,085, respectively.
12
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
For the Period Ended December 31, 1996
Liquidity and Capital Resources
The Partnership satisfied its minimum offering requirements and commenced
operations on September 22, 1995. On that date, subscribers for 126,118 Units
were admitted as Limited Partners of the Partnership. Through December 31,
1996, subscribers owning an additional 276,401 Units were admitted as Limited
Partners.
The Partnership's primary sources of capital for the year ended December 31,
1996 and the period ended December 31, 1995, were from Partners' contributions
of $4,371,000 and $3,679,000, respectively, and cash from operations of $949,000
and $56,000, respectively. The primary uses of cash for the years ended
December 31, 1996 and December 31, 1995, were for capital expenditures for new
equipment totaling $1,777,000 and $2,850,000, respectively, the payment of
acquisition fees of $147,000 in 1996 and $123,000 in 1995, the payment of
preferred distributions to partners of $608,000 and $85,000, respectively, and
for the payment of offering costs totaling $487,000 and $426,000, respectively.
Currently, Partners' contributions and rental income from the Partnership's
leases are invested in money market accounts investing directly in treasury
obligations pending the Partnership's use of such funds to purchase additional
computer equipment, to pay Partnership expenses or to make distributions to the
Partners. At December 31, 1996 and December 31, 1995, the Partnership had
approximately $2,552,000 and $252,000, 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.
As of December 31, 1996, the Partnership had future minimum rentals on
noncancellable operating leases of $1,395,000 for the year ending December 31,
1997 and $1,371,000, thereafter. The Partnership intends to continue purchasing
additional computer equipment with existing cash, as well as when future cash
becomes available. In addition, the Partnership may incur debt in purchasing
computer equipment after the net proceeds of the Offering are fully invested in
Equipment.
The Partnership's cash from operations is expected to continue to be adequate to
cover all operating expenses, liabilities, and preferred distributions to
Partners during the next 12 month period. If available Cash Flow or Net
Disposition Proceeds are insufficient to cover the Partnership expenses and
liabilities on a short and long term basis, the Partnership will attempt to
obtain additional funds by disposing of or refinancing Equipment, or by
borrowing within its permissible limits. The Partnership may also reduce the
distributions to its Partners if it deems necessary. Since the Partnership's
leases are on a "triple-net" basis, no reserve for maintenance and repairs are
deemed necessary.
Results of Operations
For the periods ended December 31, 1996 and December 31, 1995, the Partnership
recognized income of $1,194,000 and $124,000, respectively, and expenses of
$1,195,000 and $136,000, resulting in net loss of $1,000 and $12,000,
respectively.
Lease income increased by 1,035% from December 31, 1995, to December 31, 1996,
primarily due to utilizing cash from Partners' contributions for the purchase of
Equipment, which in turn generated more lease income. During 1995, the
Partnership expended approximately $2,850,000 in cash to acquire 5 leases which
generated approximately $99,000 in revenue. During 1996, the Partnership
expended approximately $1,777,000 to acquire 7 leases which generated
approximately $1,124,000 in revenue.
13
<PAGE>
Interest income increased by 180% from $25,000 for the period ended December 31,
1995, to $70,000 for the year ended December 31, 1996, as a result of capital
contributions temporarily being invested in money market accounts until being
utilized for Equipment purchases.
Operating expenses, excluding depreciation, primarily consist of accounting,
legal, and outside service fees. The 147% increase from approximately $23,000
during the period ended December 31, 1995, to $57,000 during the year ended
December 31, 1996, is attributed to the increase in the Partnership's business
activities.
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 1,040% from approximately $5,000 during the period
ended December 31,1995, to $56,000 during the year ended December 31, 1996,
which is consistent with the increase in lease income.
For the year ended December 31, 1996, the Partnership generated cash flows from
operating activities of $949,000, which included a net loss of $1,000 and
depreciation and amortization expenses totaling $1,082,000.
For the year ended December 31, 1995, the Partnership generated cash flows from
operating activities of $56,000, which included a net loss of $12,000 and
depreciation and amortization expenses totaling $108,000.
14
<PAGE>
Report of Independent Auditors
The Stockholder
Commonwealth Capital Corp.
We have audited the accompanying consolidated balance sheets of Commonwealth
Capital Corp. as of February 29, 1996 and February 28, 1995, and the related
consolidated statements of operations and retained earnings and of cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Commonwealth
Capital Corp. at February 29, 1996 and February 28, 1995, and the consolidated
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
Philadelphia, PA Ernst & Young LLP
March 28, 1996
22
<PAGE>
Commonwealth Capital Corp.
Consolidated Balance Sheets
FEBRUARY 29, FEBRUARY 28,
1996 1995
-----------------------------
ASSETS
Cash and cash equivalents $ 283,806 $ 185,440
Receivables from Income Funds 458,781 435,266
Advances to income funds 223,012 73,432
Notes receivable from Income Funds, net
of allowance of $50,000 in 1995 - 200,000
Other receivables 44,243 51,055
Income taxes receivable 41,300 73,935
Minimum lease payments receivable, net of
unearned interest income of $4,998,828 in
1996 and $5,687,707 in 1995 9,775,605 10,485,605
Deferred tax asset 132,000 308,000
Investment in Income Funds 17,200 15,200
Other assets 12,084 10,504
Office furniture and equipment, net of
accumulated depreciation of $66,986 in 1996
and $51,903 in 1995 40,471 52,768
------------ -------------
Total assets $11,028,502 $11,891,205
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued expenses $ 245,752 $ 115,050
Nonrecourse obligations 9,775,605 10,485,605
------------ -------------
Total liabilities 10,021,357 10,600,655
Stockholder's equity:
Common stock, $1 par value:
Authorized shares - 1,000
Issued and outstanding shares - 10 10 10
Retained earnings 1,007,135 1,290,540
------------ -------------
Total stockholder's equity 1,007,145 1,290,550
------------ -------------
Total liabilities and stockholder's equity $ 11,028,502 $11,891,205
------------ -------------
------------ -------------
SEE ACCOMPANYING NOTES.
23
<PAGE>
Commonwealth Capital Corp.
Consolidated Statements of Operations and Retained Earnings
YEAR ENDED
FEBRUARY 29, FEBRUARY 28,
1996 1995
----------------------------
Income:
Fee income from Income Funds $1,777,398 $1,549,168
Interest income on minimum lease payments
receivable 656,005 707,314
Equity in income of Income Funds 43,425 40,094
Interest and other 23,391 37,894
----------------------------
2,500,219 2,334,470
Expenses:
Personnel 795,894 663,234
General and administrative 364,404 506,594
Selling 188,657 192,014
Interest expense on non-recourse obligations 656,005 707,314
Depreciation 22,075 20,008
Provision for uncollectible advances and
notes receivable from income funds 574,704 50,000
----------------------------
2,601,739 2,139,164
----------------------------
(Loss) income before provision for income taxes (101,520) 195,306
Provision for income taxes 181,885 30,000
----------------------------
Net (loss) income (283,405) 165,306
----------------------------
Retained earnings at beginning of year 1,290,540 1,125,234
----------------------------
Retained earnings at end of year $1,007,135 $1,290,540
----------------------------
----------------------------
SEE ACCOMPANYING NOTES.
24
<PAGE>
Commonwealth Capital Corp.
Consolidated Statements of Cash Flows
YEAR ENDED
FEBRUARY 29, FEBRUARY 28,
1996 1995
----------------------------
OPERATING ACTIVITIES
Net (loss) income $ (283,405) $ 165,306
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation 22,075 20,008
Deferred income tax provision (benefit) 176,000 (6,000)
Write-off of advances and notes receivable
from income funds 574,704 50,000
Loss on disposal of asset 1,984 -
Changes in operating assets and liabilities:
Receivables from Income Funds (23,515) 238,546
Other receivables 6,812 78,765
Income taxes receivable 32,635 (73,935)
Other assets (1,580) 2,625
Accounts payable and accrued expenses 130,702 (102,989)
Income taxes payable - (44,615)
----------------------------
Net cash provided by operating activities 636,412 327,711
INVESTING ACTIVITIES
Net advances to income funds (524,284) (173,432)
Capital expenditures (11,762) (34,483)
Investment in Income Funds (2,000) (1,000)
----------------------------
Net cash used in investing activities (538,046) (208,915)
Net increase in cash and cash equivalents 98,366 118,796
Cash and cash equivalents at beginning of year 185,440 66,644
----------------------------
Cash and cash equivalents at end of year $283,806 $185,440
----------------------------
----------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for income taxes $5,300 $123,157
----------------------------
----------------------------
SEE ACCOMPANYING NOTES.
25
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Financial Statements
February 29, 1996
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 29, 1996, 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. and Commonwealth
Capital Private Fund V, 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 financial statements include the accounts of the
Company, its wholly-owned subsidiary, CDI, and its wholly-owned subsidiaries
(Note 1). All significant intercompany accounts and transactions have been
eliminated in the accompanying consolidated financial statements. Certain
amounts in the 1995 financial statements have been reclassified to conform with
the current year presentation. The balance sheets are presented on an
unclassified basis in accordance with leasing industry practice.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
26
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less to be cash equivalents. At February 29, 1996 and February 28,
1995, cash equivalents were invested in a money market fund investing directly
in treasury obligations.
REVENUE RECOGNITION
The Company recognizes fees as earned in accordance with the various General
Partnership and Trust Agreements. Interest income on minimum lease payments
receivable is recognized as earned.
OFFICE FURNITURE AND EQUIPMENT
Office furniture and equipment are carried at cost and are depreciated over the
estimated useful lives of the related assets ranging from 5 to 7 years using
accelerated methods.
INVESTMENT IN INCOME FUNDS
The Company accounts for these investments by the equity method. Distributions
were received from these Income Funds and approximated the Company's equity in
the income of the Income Funds as reflected in the accompanying income
statement. Results of the Income Funds as of December 31, 1995 and 1994, are as
follows:
1995 1994
---------------------------
Total assets $42,067,000 $38,195,000
Nonrecourse debt 13,561,000 14,482,000
Other liabilities 3,860,000 2,697,000
Partners' capital 24,646,000 21,016,000
Net loss (837,000) (1,415,000)
27
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
The Company has guaranteed the performance of certain non-monetary obligations
of the General Partner Subsidiaries to the respective Income Funds, primarily
the responsibility for management of the Income Funds. In addition, the Company
is responsible for certain capital funding requirements of the General Partner
Subsidiaries and, accordingly, has issued noninterest-bearing demand notes of
approximately $4,016,000 and $3,761,000 at February 29, 1996 and February 28,
1995, respectively. Such notes have been eliminated in the consolidation of the
accompanying financial statements.
The compensation to the Company from the Income Funds includes: 1) Equipment
Acquisition Fees (4% of the purchase price of all equipment purchased by the
Income Funds); 2) Debt Placement Fees (1% of financed equipment by the Income
Funds); 3) Sales Fees Expense (3% of gross proceeds of sold equipment by the
Income Funds); and 4) Equipment Management Fees (5% of the gross operating lease
revenues of the Income Funds). The Company earned approximately $1,777,000 and
$1,549,000 in fees for managing the Income Funds during the years ended
February 29, 1996 and February 28, 1995, respectively.
3. LEASE COMMITMENTS
GSFF acted as lessor in a series of lease purchase transactions whereby the
underlying assets were funded by investors through certificates of participation
in the lease payments. All of GSFF's rights as lessor were assigned to a third-
party agent which administers the collection of rentals paid by the lessee. The
obligations under the certificates are nonrecourse to GSFF. Amounts outstanding
at February 29, 1996 and February 28, 1995 under the leases and certificates of
participation are approximately $9,615,000 and $10,325,000, respectively, of
which $8,170,000 and $8,625,000, respectively, are secured by mortgage insurance
policies maintained by the lessee. These amounts are included in minimum lease
payments receivable and nonrecourse obligations in the accompanying balance
sheets. The certificates mature from 1996 to 2011. The Company recognized
interest income and interest expense in connection with the lease purchase
transactions of $656,005 and $707,314 for fiscal years ended February 29, 1996
and February 28, 1995, respectively.
28
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Financial Statements (continued)
3. LEASE COMMITMENTS (CONTINUED)
The Company entered into a lease transaction whereby the underlying asset was
funded by a note payable to a bank. The Company assigned its rights as lessor to
the bank. The note is a nonrecourse obligation to the Company and is personally
guaranteed by the lessee owners. The lease and note payable approximated
$160,605 at February 29, 1996 and February 28, 1995, and matures in 1997. In
June 1994, the lessee filed for protection from creditors under Chapter 11, and
as a result, they did not make any payments during the years ended February 29,
1996 or February 28, 1995. As this note is a nonrecourse obligation of the
Company, and the Company has been notified by the bank that collection of the
note is expected, the asset and related nonrecourse obligation are reflected in
the accompanying consolidated financial statements.
Future minimum lease payments to be received as of February 29, 1996 are as
follows:
1997 $1,347,605
1998 1,191,000
1999 1,202,000
2000 1,191,000
2001 1,193,000
Thereafter 8,645,000
------------
14,769,605
Less amount representing interest 4,994,000
------------
Total $9,775,605
------------
------------
The Company leases office space under a noncancelable operating lease expiring
in September 1998. On December 4, 1995, the Company leased additional space
under a noncancelable operating lease expiring in February 1999. The leases
currently require monthly payments of $13,733 which increases annually for the
remainder of the leases. Rent expense for the years ended February 29, 1996 and
February 28, 1995 was approximately $112,000 and $73,000, respectively. Future
minimum lease payments under noncancelable operating leases at February 29, 1996
are $171,000 in 1997; $176,000 in 1998; and $138,000 in 1999.
29
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Financial Statements (continued)
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. Profit-sharing expense was approximately $30,000 for each of
the years ended February 29, 1996 and February 28, 1995.
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
and $275,000 at February 29, 1996 and February 28, 1995, respectively. 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 $490,000, which expire during 1996 through
1998.
The Company has a federal deferred tax asset of $298,000 and $308,000 at
February 29, 1996 and February 28, 1995, respectively, arising primarily from
the carryforward of investment tax credits. During 1996, the Company recorded a
valuation allowance of approximately $166,000 because the Company concluded the
future realization of some of the tax benefits underlying the asset could not be
reasonably assured based on current operating results. The Company believes that
the remaining asset of $132,000 is more likely than not to be realized. At
February 29, 1996, the Company has a state deferred tax asset of $49,000;
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 $49,000.
The income tax provision is comprised of the following:
1996 1995
-------------------------
Current federal (net of $43,000 in 1995 of
investment tax credits realized) $ 5,885 $ 36,000
Deferred federal tax provision (benefit) 176,000 (6,000)
-------------------------
$ 181,885 $ 30,000
-------------------------
-------------------------
30
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Financial Statements (continued)
6. RELATED PARTY TRANSACTIONS
For the years ended February 29, 1996 and February 28, 1995, certain of the
General Partner Subsidiaries agreed to waive or forgive the related Income
Funds' obligations to pay certain equipment management, acquisition, selling and
financing fees in the amount of approximately $335,000 and $213,000,
respectively. Accordingly, fee income from Income Funds is reflected net of
these amounts.
At February 28, 1995, two of the General Partner Subsidiaries had noninterest
bearing subordinated notes totaling $200,000 due from two of the Income Funds.
During 1996, the Company determined that these amounts were uncollectible and
wrote off or provided a reserve for the remaining balances.
During 1996 and 1995, the Company made approximately $524,000 and $73,000,
respectively, in cash advances to certain income funds to fund cash
distributions for its limited partners. During 1996, the Company determined that
approximately $375,000 of these advances were uncollectible and were written
off. The remaining advances of $223,012 are due on demand.
7. LINE OF CREDIT
At February 29, 1996 the Company has an unused line of credit agreement with a
bank expiring on June 30, 1996. The line of credit agreement, which is callable
on demand, provides for the payment of interest at the prime rate (8.25% at
February 29, 1996), plus .75%. Borrowings on the line are limited to the lesser
of $500,000 or 80% of eligible accounts receivable as defined in the agreement.
The Company had $216,000 available under the line of credit at February 29,
1996.
8. SUPPLEMENTAL CASH FLOW INFORMATION
Other noncash activities associated with lease purchase transactions:
1996 1995
--------------------
Reduction of minimum lease receivable and repayment
of nonrecourse obligation associated with direct
payment made by lessee to bank $710,000 $879,983
--------------------
--------------------
31
<PAGE>
Report of Independent Auditors
To the Stockholder
Commonwealth Income & Growth Fund, Inc.
We have audited the accompanying balance sheets of Commonwealth Income & Growth
Fund, Inc. (an indirect wholly-owned subsidiary of Commonwealth Capital Corp.),
as of February 29, 1996 and February 28, 1995. These balance sheets are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these balance sheets based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audits of the balance sheets provide a reasonable basis for our
opinion.
In our opinion, the balance sheets referred to above present fairly, in all
material respects, the financial position of Commonwealth Income & Growth Fund,
Inc. at February 29, 1996 and February 28, 1995, in conformity with generally
accepted accounting principles.
Philadelphia, Pennsylvania Ernst & Young LLP
March 28, 1996
32
<PAGE>
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
Balance Sheets
FEBRUARY 29, FEBRUARY 28,
1996 1995
--------------------------
ASSETS
Cash $ 500 $ 500
Receivables from Income Funds 127,798 32,631
Investment in Partnerships 2,000 2,000
---------- ---------
$ 130,298 $ 35,131
---------- ---------
---------- ---------
LIABILITIES
Accounts payable to Commonwealth Capital Corp. $ 129,198 $ 34,031
STOCKHOLDER'S EQUITY
Common stock at $1 stated value:
Authorized shares--1,000
Issued and outstanding shares--100 1,000 1,000
Additional paid-in capital 1,000,100 1,000,100
---------- ---------
1,001,100 1,001,100
Less: note receivable (1,000,000) (1,000,000)
---------- ----------
1,100 1,100
---------- ---------
$ 130,298 $ 35,131
---------- ---------
---------- ---------
SEE ACCOMPANYING NOTES.
33
<PAGE>
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
Notes to Balance Sheets
February 29, 1996 and February 28, 1995
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 (the "Partnerships").
CCC has provided additional capital by means of a noninterest-bearing demand
note in the amount of $1,000,000, so that the Company will at all times have a
net worth (which includes the net equity of the Company and the demand note
receivable from CCC) of at least $1,000,000. In computing the Company's net
worth for this purpose, its interest in the Partnerships and any amounts and
notes receivable from and payable to the Partnerships will be excluded. The
Company's equity has been reduced by the note receivable from CCC resulting in
net equity of $1,100, which may be different for tax purposes. The Company's
operations will be included in the consolidated federal income tax return of
CCC.
2. INVESTMENT IN PARTNERSHIPS
The Company contributed $2,000 in cash to the Partnerships for its general
partner interest. The Company may, at its sole discretion, purchase a limited
partnership interest in the Partnerships ("Units") for an additional capital
contribution of $20 per Unit with a minimum investment of 125 units.
3. RELATED PARTY TRANSACTIONS
The Company and its affiliates receive substantial fees and compensation in
connection with the offering of Units and the management of the Partnerships'
assets. See "Compensation of General Partner and Affiliates," and "Allocations
and Distributions" elsewhere in the Prospectus of Commonwealth Income & Growth
Fund II of the Partnerships 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.
34
<PAGE>
COMMONWEALTH CAPITAL CORP.
Consolidated Balance Sheet
As of November 30, 1996
(Unaudited)
Assets
Cash $ 103,167
Receivables from Income Funds 877,677
Other receivables 15,062
Income tax receivable 41,300
Minimum lease payments receivable
net of unearned interest income 9,253,617
Investment in Income Funds 17,200
Property and equipment, at cost, net of
accumulated depreciation 31,251
Deferred tax asset 132,000
Other assets 11,044
-----------
Total assets $10,482,318
-----------
-----------
Liabilities and stockholder's equity
Accounts payable and accrued expense $ 113,618
Nonrecourse obligations 9,253,617
-----------
Total liabilities 9,367,235
Stockholder's equity:
Common stock, $1 par value:
Authorized shares - 1,000
Issued and outstanding shares - 10 10
Retained earnings 1,115,073
------------
Total stockholder's equity 1,115,083
------------
Total liabilities and stockholder's equity $10,482,318
------------
------------
SEE ACCOMPANYING NOTES.
Note: A purchaser of a unit is not acquiring an interest in this corporation.
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Balance Sheet
November 30, 1996
(Unaudited)
Basis of Presentation
The balance sheet presented has been prepared from the books and records of
the Company without audit. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the balance sheet for the period indicated have been
included. For further information regarding the Company's accounting
policies, refer to the financial statements and related notes at February 29,
1996 and for the year then ended included elsewhere herein.
<PAGE>
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
Balance Sheet
November 30, 1996
(Unaudited)
Assets
Cash $ 500
Receivables from Income Funds 133,379
Investment in Partnership 2,000
-----------
$ 135,879
-----------
-----------
Liabilities and Stockholder's Equity
Accounts payable to Commonwealth Capital Corp. $ 134,779
-----------
134,779
Common stock at stated value, no par value:
Authorized shares--2,000
Issued and outstanding shares--100 1,000
Additional paid-in capital 1,000,100
-----------
1,001,100
Less: note receivable (1,000,000)
-----------
1,100
-----------
$ 135,879
-----------
-----------
SEE ACCOMPANYING NOTES.
Note: A purchaser of a Unit is not acquiring an interest in this corporation.
<PAGE>
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
Notes to Consolidated Balance Sheet
November 30, 1996
(Unaudited)
Basis of Presentation
The balance sheet presented has been prepared from the books and records of
the Company without audit. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the balance sheet for the period indicated have been
included. For further information regarding the Company's accounting
policies, refer to the balance sheet and related notes at February 29, 1996
included elsewhere herein.
<PAGE>
"Prior Performance Tables"
<PAGE>
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
The following table sets forth certain information about the experience of
the General Partner in raising and investing funds for eight private
equipment leasing programs and two public equipment leasing programs
sponsored by the General Partner and Affiliates which closed in the most
recent three years. It is expected that the prior programs will continue to
purchase additional equipment.
<PAGE>
COMMONWEALTH CAPITAL CORP.
EXPERIENCE IN RAISING AND INVESTING FUNDS
as of December 31, 1995
(TABLE I)
<TABLE>
<CAPTION>
COMMONWEALTH COMMONWEALTH COMMONWEALTH COMMONWEALTH
EQUIPMENT EQUIPMENT EQUIPMENT EQUIPMENT
INCOME FUND INCOME PRIVATE INCOME TRUST INCOME TRUST
VII, L.P. FUND - II, L.P. VIII IX
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Offering Information:
Amount offered (maximum) 3,000,000 1,000,000 3,000,000 3,000,000
Dollar Amount Sold 2,062,500 1,000,000 3,000,000 3,000,000
(1) Dealer/Manager Expenses 215,707 50,000 305,000 305,000
(2) Offering/Organizational Expenses 144,544 40,000 80,188 75,335
-----------------------------------------------------------------
Net Proceeds Available 1,702,249 910,000 2,614,812 2,619,665
Total Equipment Purchases:
Equipment purchased with cash 2,462,917 1,393,370 2,960,199 2,654,781
Equipment financed 2,676,335 1,247,903 3,221,959 3,065,482
Rent paid to original lessor in leiu of cash 32,441 32,688 206,138 299,167
Obligation incurred in connection to leased equipment 0 0 0 0
-----------------------------------------------------------------
5,171,693 2,673,961 6,388,296 6,019,430
% of Equipment financed as of December 31, 1995 19.4% 20.8% 22.2% 17.1%
Initial Acquisition Fees (%) (3) 3.2% 2.2% N/A N/A
Date Offering Commenced 07/30/91 06/01/92 06/22/92 11/15/92
Date Offering Completed 03/02/92 06/23/92 09/18/92 01/21/93
Average Initial Term of Leases
(in months) 34 33 30 32
Months from closing to invest 90% 5 4 6 3
COMMONWEALTH COMMONWEALTH COMMONWEALTH
EQUIPMENT EQUIPMENT COMMONWEALTH EQUIPMENT
INCOME TRUST INCOME PRIVATE INCOME & GROWTH INCOME PRIVATE
X FUND - III, L.P. FUND I FUND - IV, L.P.
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Offering Information:
Amount offered (maximum) 4,000,000 1,000,000 15,000,000 1,550,000
Dollar Amount Sold 4,000,000 1,000,000 12,623,682 1,550,000
(1) Dealer/Manager Expenses 405,002 50,000 1,133,377 77,500
(2) Offering/Organizational Expenses 84,989 40,000 402,483 62,000
-----------------------------------------------------------------
Net Proceeds Available 3,510,009 910,000 11,087,822 1,410,500
Total Equipment Purchases:
Equipment purchased with cash 3,912,180 1,036,278 11,137,325 1,243,766
Equipment financed 3,716,046 914,388 5,151,065 199,362
Rent paid to original lessor in leiu of cash 241,344 57,783 301,830 10,653
Obligation incurred in connection to leased equipment 537,254 0 559,473 125,392
-----------------------------------------------------------------
8,406,824 2,008,449 17,149,693 1,579,173
% of Equipment financed as of December 31, 1995 21.5% 18.6% 19.3% 10.7%
Initial Acquisition Fees (%) (3) N/A 2.2% 3.4% 2.2%
Date Offering Commenced 04/15/93 11/30/93 12/17/93 06/23/95
Date Offering Completed 10/20/93 12/06/93 05/11/95 06/23/95
Average Initial Term of Leases
(in months) 33 30 32 35
Months from closing to invest 90% 2 4 5 4
COMMONWEALTH
COMMONWEALTH EQUIPMENT
INCOME & GROWTH INCOME PRIVATE
FUND II FUND - V, L.P.
---------------------------------
<S> <C> <C>
Offering Information:
Amount offered (maximum) 15,000,000 1,000,000
Dollar Amount Sold 3,677,960 1,000,000
(1) Dealer/Manager Expenses 330,105 50,000
(2) Offering/Organizational Expenses 270,224 40,000
---------------------------------
Net Proceeds Available 3,077,631 910,000
Total Equipment Purchases:
Equipment purchased with cash 2,850,156 556,175
Equipment financed 0 0
Rent paid to original lessor in leiu of cash 0 1,510
Obligation incurred in connection to leased equipment 0 73,086
---------------------------------
2,850,156 630,771
% of Equipment financed as of December 31, 1995 0.0% 0.0%
Initial Acquisition Fees (%) (3) 3.4% 2.2%
Date Offering Commenced 05/12/95 09/28/95
Date Offering Completed N/A 09/28/95
Average Initial Term of Leases
(in months) 36 32
Months from closing to invest 90% N/A 3
</TABLE>
(1) Dealer/Manager expenses include commissions to brokers, due diligence and
out-of-pocket expenses.
(2) Offering/Organizational expenses consist of legal fees, blue sky filings,
accounting fees, printing charges for perspective books and the guarantee
fee.
(3) Fees were paid to the General Partner/Management Trustee at fund closing.
<PAGE>
TABLE II
COMPENSATION TO
GENERAL PARTNERS AND AFFILIATES
The following table sets forth certain information concerning all the
compensation earned by the General Partner and its Affiliates for eight prior
private programs and two prior public programs sponsored by the General
Partner and Affiliates during the most recent three years. Amounts are from
two sources: (1) proceeds from the offering and (2) gross revenues. Amounts
for operations are cumulative.
<PAGE>
COMMONWEALTH CAPITAL CORP.
COMPENSATION TO GENERAL PARTNERS AND AFFILITATES
as of December 31, 1995
(TABLE II)
<TABLE>
<CAPTION>
COMMONWEALTH COMMONWEALTH COMMONWEALTH COMMONWEALTH
EQUIPMENT EQUIPMENT EQUIPMENT EQUIPMENT
INCOME FUND INCOME PRIVATE INCOME TRUST INCOME TRUST
VII, L.P. FUND - II, L.P. VIII IX
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Date offering commenced 07/30/91 06/01/92 06/22/92 11/15/92
Dollar amount raised $2,062,500 $1,000,000 $3,000,000 $3,000,000
Amount paid from the proceeds of
offering, reinvestment and/or debt:
Initial Acquisition Fee 65,868 22,000 0 0
Organizational Fee 39,015 7,600 40,038 39,067
Cash generated from operations before
deducting payments to the General
Partner and Affiliates 1,751,626 921,468 2,132,948 1,571,219
Amount paid to the General Partner
and Affiliates from operations:
Equipment Management Fee 201,639 98,193 230,675 214,610
Acquisition Fee 138,779 66,966 260,026 231,029
Finance Fee 26,713 12,479 31,489 25,921
Dollar amount of equipment sales and
refinancing before deducting
payments to the General Partner and
Affiliates 511,867 199,767 284,800 332,233
Amount paid to the General Partner and
Affiliates from equipment sales
and refinancing 15,356 5,993 8,544 9,967
COMMONWEALTH COMMONWEALTH COMMONWEALTH
EQUIPMENT EQUIPMENT COMMONWEALTH EQUIPMENT
INCOME TRUST INCOME PRIVATE INCOME & GROWTH INCOME PRIVATE
X FUND - III, L.P. FUND I FUND - IV, L.P.
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Date offering commenced 04/15/93 11/30/93 03/14/94 06/23/95
Dollar amount raised $4,000,000 $1,000,000 12,624,153 $1,550,000
Amount paid from the proceeds of
offering, reinvestment and/or debt:
Initial Acquisition Fee 0 22,000 426,473 34,100
Organizational Fee 41,998 7,600 140,869 9,590
Cash generated from operations before
deducting payments to the General
Partner and Affiliates 2,137,309 561,449 2,884,546 (28,079)
Amount paid to the General Partner
and Affiliates from operations:
Equipment Management Fee 236,003 59,109 263,000 7,432
Acquisition Fee 377,642 44,139 259,527 1,167
Finance Fee 45,956 5,838 50,000 1,994
Dollar amount of equipment sales and
refinancing before deducting
payments to the General Partner and
Affiliates 243,567 0 0 0
Amount paid to the General Partner and
Affiliates from equipment sales
and refinancing 7307 0 0 0
COMMONWEALTH
COMMONWEALTH EQUIPMENT
INCOME & GROWTH INCOME PRIVATE
FUND II FUND - V, L.P.
--------------------------------
<S> <C> <C>
Date offering commenced 09/22/95 09/29/95
Dollar amount raised 3,677,960 $1,000,000
Amount paid from the proceeds of
offering, reinvestment and/or debt:
Initial Acquisition Fee 123,000 22,000
Organizational Fee 110,000 7,260
Cash generated from operations before
deducting payments to the General
Partner and Affiliates 61,378 30,492
Amount paid to the General Partner
and Affiliates from operations:
Equipment Management Fee 5,000 1,697
Acquisition Fee 0 0
Finance Fee 0 0
Dollar amount of equipment sales and
refinancing before deducting
payments to the General Partner and
Affiliates 0 0
Amount paid to the General Partner and
Affiliates from equipment sales
and refinancing 0 0
</TABLE>
<PAGE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS (unaudited)
The following table sets forth certain information about the operating
results of nine prior private programs and one prior public program sponsored
by the General Partner and its Affiliates during the most recent five years.
This table provides a computation of Net Income, and cash flows, as well as
investment data per a $1,000 investment.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME FUND V, L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
<TABLE>
<CAPTION>
PROGRAM INCEPTION TO DECEMBER 31, 1995 1991 1992 1993 1994 1995
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMPUTATION OF NET INCOME
Months of Operations **12 12 12 12 12
Gross Revenues 564,492 909,800 1,032,035 1,174,288 1,063,381
Gain (Loss) on Sale of Equipment 4,002 (31,014) (24,752)
Less: Operating Expenses 16,607 22,428 25,559 38,008 28,700
Equipment Management Fee 27,881 45,197 51,417 57,728 52,972
Interest Expense 72,687 75,577 58,626 80,939
Depreciation and Amortization 391,976 643,506 767,869 1,233,975 952,590
--------------------------------------------------------
Net Income (Loss) - GAAP Basis 128,028 129,984 80,599 (214,049) (76,572)
--------------------------------------------------------
--------------------------------------------------------
Federal Taxable Income (Loss) 174,562 24,907 (49,830) 71,880 (292,593)
Cash Distributions - GAAP Basis (255,740) (254,419) (254,419) (254,419) (254,419)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 128,028 129,984 80,599 (214,049) (76,572)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 391,976 643,506 767,869 1,233,975 952,590
(Gain) Loss on Sale of Equipment (4,002) 31,014 (12,081) 24,752
Other Non-Cash Activities Included in the
Determination of Net Income (Loss)* (332,959) (520,257) (679,589) (643,373)
Net Change in Operating Assets and Liabilities 18,014 14,069 (25,239) 64,506 (21,732)
--------------------------------------------------------
Net Cash Provided by Operating Activities 538,018 450,598 333,986 392,762 235,665
Capital Expenditures (281,147) (668,699) (267,779) (97,435) (75,000)
Net Proceeds from Sale of Equipment 526,636 176,479 14,275 90,707
Increase in Organization Costs and Deferred Expenses (49,624) (43,341) (49,344) (38,871) (22,324)
--------------------------------------------------------
Net Cash Used in Investing Activities (330,771) (185,404) (140,644) (122,031) (6,617)
Partners' Contributions
Offering Costs
Distributions to Partners (268,309) (254,419) (254,419) (254,419) (254,419)
--------------------------------------------------------
Net Cash Used in Financing Activities (268,309) (254,419) (254,419) (254,419) (254,419)
Net (Decrease) Increase in Cash (61,062) 10,775 (61,077) 16,312 (25,371)
Cash at Beginning of Year 122,633 61,571 72,346 11,269 27,581
--------------------------------------------------------
Cash at End of Year 61,571 72,346 11,269 27,581 2,210
--------------------------------------------------------
--------------------------------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income (Loss) - GAAP Basis 66 67 42 (110) (40)
Federal Taxable Income (Loss) to Investors 88 13 (25) 37 (156)
Cash Distributions to Investors - GAAP Basis (137) (130) (130) (130) (130)
Return of Capital to Investors - GAAP Basis 66 64 89 130 130
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks,
which occurs when equipment is financed. The increase over the periods
presented was caused primarily by the acquisition of more financed equipment.
** Partnership commenced operations on November 1, 1996.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND - I, L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
<TABLE>
<CAPTION>
PROGRAM INCEPTION TO DECEMBER 31, 1995 1991 1992 1993 1994 1995
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMPUTATION OF NET INCOME
Months of Operations 12 12 12 12 12
Gross Revenues 277,934 319,947 544,558 654,979 679,782
Gain (Loss) on Sale of Equipment 140,387 622 (5,449) (8,001)
Less: Operating Expenses 13,903 13,347 14,015 21,684 13,205
Equipment Management Fee 13,330 15,474 27,024 32,559 33,817
Interest Expense 10,567 25,766 33,320 44,263
Depreciation and Amortization 212,988 277,457 398,152 592,870 602,203
---------------------------------------------------
Net Income (Loss) - GAAP Basis 37,713 143,489 80,223 (30,903) (21,707)
---------------------------------------------------
---------------------------------------------------
Federal Taxable Income (Loss) 60,857 65,162 61,027 (55,713) 64,732
Cash Distributions - GAAP Basis (131,313) (131,313) (131,313) (131,313) (131,313)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 37,713 143,489 80,223 (30,903) (21,707)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 212,988 277,457 398,152 592,870 602,203
(Gain) Loss on Sale of Equipment (140,387) (622) 5,449 8,001
Other Non-Cash Activities Included in the
Determination of Net Income (Loss)* (23,549) (127,400) (209,398) (356,775) (390,938)
Net Change in Operating Assets and Liabilities (49,553) 50,215 21,456 (22,359) 28,413
---------------------------------------------------
Net Cash Provided by Operating Activities 177,599 203,374 289,811 188,282 225,972
Capital Expenditures (456,306) (538,144) (633,894) (231,738) (91,250)
Net Proceeds from Sale of Equipment 963,085 12,460 105,479 109,584
Increase in Organization Costs and Deferred Expenses (41,737) (50,399) (21,262) (19,425)
---------------------------------------------------
Net Cash (Used in) Provided by Investing Activities (456,306) 383,204 (671,833) (147,521) (1,091)
Partners' Contributions
Offering Costs
Proceeds from Note Payable 87,965
Distributions to Partners (131,313) (131,313) (131,313) (131,313) (131,313)
---------------------------------------------------
Net Cash Used in Financing Activities (131,313) (131,313) (131,313) (43,348) (131,313)
Net (Decrease) Increase in Cash (410,020) 455,265 (513,335) (2,587) 93,568
Cash at Beginning of Year 480,806 70,786 526,051 12,716 10,129
---------------------------------------------------
Cash at End of Year 70,786 526,051 12,716 10,129 103,697
---------------------------------------------------
---------------------------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income (Loss) - GAAP Basis 38 143 80 (31) (22)
Federal Taxable Income (Loss) to Investors 59 65 60 (58) 68
Cash Distributions to Investors - GAAP Basis (130) (130) (130) (130) (130)
Return of Capital to Investors - GAAP Basis 94 51 130 130
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks,
which occurs when equipment is financed. The increase over the periods
presented was caused primarily by the acquisition of more financed equipment.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME FUND VI, L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
<TABLE>
<CAPTION>
PROGRAM INCEPTION TO DECEMBER 31, 1995 1991 1992 1993 1994 1995
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMPUTATION OF NET INCOME
Months of Operations 10 12 12 12 12
Gross Revenues 420,312 1,071,538 1,280,600 1,472,656 1,265,301
(Loss) Gain on Sale of Equipment (50,485) 27,269 (60,908) (85,354)
Less: Operating Expenses 12,408 29,258 27,169 40,332 31,325
Equipment Management Fee 18,289 52,968 63,449 73,152 62,905
Interest Expense 46,789 81,141 75,763 87,239
Depreciation and Amortization 272,911 714,551 1,019,607 1,349,421 1,105,560
---------------------------------------------------------
Net Income (Loss) - GAAP Basis 116,704 177,487 116,503 (126,920) (107,082)
---------------------------------------------------------
---------------------------------------------------------
Federal Taxable Income (Loss) 247,551 (18,821) (70,030) (63,221) (68,906)
Cash Distributions - GAAP Basis (278,358) (341,413) (341,414) (341,414) (341,414)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 116,704 177,487 116,503 (126,920) (107,082)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 272,911 714,551 1,019,607 1,349,421 1,105,560
Loss (Gain) on Sale of Equipment 50,485 (27,269) 60,908 85,354
Other Non-Cash Activities Included in the
Determination of Net Income (Loss)* (86,745) (240,339) (705,311) (842,060) (842,965)
Net Change in Operating Assets and Liabilities 47,725 (349,682) 217,007 84,763 (88,410)
---------------------------------------------------------
Net Cash Provided by Operating Activities 350,595 352,502 620,537 526,112 152,457
Capital Expenditures (1,649,073) (664,427) (638,045) (202,543) (65,000)
Equipment Deposit (105,375)
Net Proceeds from Sale of Equipment 419,330 292,750 239,218 163,098
Increase in Organization Costs and Deferred Expenses (174,170) (65,882) (85,978) (60,714) (17,500)
---------------------------------------------------------
Net Cash (Used in) Provided by Investing Activities (1,823,243) (310,979) (536,648) (24,039) 80,598
Partners' Contributions 2,601,000
Offering Costs (284,870)
Distributions to Partners (278,358) (341,413) (341,414) (341,414) (341,414)
---------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 2,037,772 (341,413) (341,414) (341,414) (341,414)
Net Increase (Decrease) in Cash 565,124 (299,890) (257,525) 160,659 (108,359)
Cash at Beginning of Year 565,124 265,234 7,709 168,368
---------------------------------------------------------
Cash at End of Year 565,124 265,234 7,709 168,368 60,009
---------------------------------------------------------
---------------------------------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income (Loss) - GAAP Basis 45 68 45 (49) (41)
Federal Taxable Income (Loss) to Investors 95 (7) (26) (25) (27)
Cash Distributions to Investors - GAAP Basis (106) (130) (130) (130) (130)
Return of Capital to Investors - GAAP Basis 62 63 86 130 130
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks,
which occurs when equipment is financed. The increase over the periods
presented was caused primarily by the acquisition of more financed equipment.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME FUND VII, L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
<TABLE>
<CAPTION>
PROGRAM INCEPTION TO DECEMBER 31, 1995 1991 1992 1993 1994 1995
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMPUTATION OF NET INCOME
Months of Operations 2 12 12 12 12
Gross Revenues 10,378 631,740 1,104,834 1,269,295 1,053,749
Loss on Sale of Equipment (35,553) (2,078)
Less: Operating Expenses 865 12,528 17,572 36,404 22,827
Equipment Management Fee 31,021 55,110 62,940 52,568
Interest Expense 7,935 62,399 68,431 65,586
Depreciation and Amortization 3,843 380,117 897,984 1,267,396 1,045,431
----------------------------------------------------
Net Income (Loss) - GAAP Basis 5,670 200,139 71,769 (201,429) (134,741)
----------------------------------------------------
----------------------------------------------------
Federal Taxable Income (Loss) 8,358 323,316 262,101 (339,406) (137,393)
Cash Distributions - GAAP Basis (33,649) (264,541) (270,832) (270,832) (270,832)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 5,670 200,139 71,769 (201,429) (134,741)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 3,843 380,117 897,984 1,267,396 1,045,431
Loss on Sale of Equipment 35,553 2,078
Other Non-Cash Activities Included in the
Determination of Net Income (Loss)* (92,046) (425,191) (755,795) (729,193)
Net Change in Operating Assets and Liabilities (4,278) 14,454 (15,532) (22,652) 6,410
----------------------------------------------------
Net Cash Provided by Operating Activities 5,235 502,664 529,030 323,073 189,985
Capital Expenditures (581,700)(1,254,900) (232,704) (302,363) (91,250)
Net Proceeds from Sale of Equipment 330,152 158,158
Increase in Organization Costs and Deferred Expenses (91,309) (45,622) (67,240) (42,500) (19,425)
----------------------------------------------------
Net Cash (Used in) Provided by Investing Activities (673,009) (1,300,522) (299,944) (14,711) 47,483
Partners' Contributions 1,776,000 287,500
Offering Costs (227,180) (27,466)
Distributions to Partners (33,649) (264,541) (270,832) (270,832) (270,832)
----------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 1,515,171 (4,507) (270,832) (270,832) (270,832)
Net Increase (Decrease) in Cash 847,397 (802,365) (41,746) 37,530 (33,364)
Cash at Beginning of Year 847,397 45,032 3,286 40,816
----------------------------------------------------
Cash at End of Year 847,397 45,032 3,286 40,816 7,452
----------------------------------------------------
----------------------------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income (Loss) - GAAP Basis 3 97 35 (98) (65)
Federal Taxable Income (Loss) to Investors 5 159 127 (167) (68)
Cash Distributions to Investors - GAAP Basis (19) (127) (130) (130) (130)
Return of Capital to Investors - GAAP Basis 16 31 95 130 130
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks,
which occurs when equipment is financed. The increase over the periods
presented was caused primarily by the acquisition of more financed equipment.
** Partnership commenced operations on November 1, 1996.
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND - II, L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
<TABLE>
<CAPTION>
PROGRAM INCEPTION TO DECEMBER 31, 1995 1992 1993 1994 1995
-----------------------------------------
<S> <C> <C> <C> <C>
COMPUTATION OF NET INCOME
Months of Operations **6 12 12 12
Gross Revenues 139,299 528,396 763,330 543,795
Less: Operating Expenses 2,664 12,233 18,758 66,172
Equipment Management Fee 6,707 26,338 38,022 27,126
Interest Expense 11,112 31,650 33,373
Loss on Sale of Computer Equipment 148 54,140 25,713
Depreciation and Amortization 91,620 328,145 765,705 547,525
-----------------------------------------
Net Income (Loss) - GAAP Basis 38,308 150,420 (144,945) (156,114)
-----------------------------------------
-----------------------------------------
Federal Taxable Income 71,965 56,951 1,433 (286,429)
Cash Distributions - GAAP Basis (68,534) (131,313) (131,313) (131,313)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 38,308 150,420 (144,945) (156,114)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 91,620 328,145 765,705 547,525
Other Non-Cash Activities Included in the
Determination of Net Income (Loss)* (18,403) (200,833) (371,925) (338,310)
Loss on Sale of Computer Equipment 148 54,140 25,713
Net Change in Operating Assets and Liabilities (22,618) 55,624 (16,891) 35,966
-----------------------------------------
Net Cash Provided by Operating Activities 88,907 333,504 286,084 114,780
Capital Expenditures (851,213) (299,704) (179,555) (62,898)
Net Proceeds from Sale of Computer Equipment 68,400 49,325 87,352
Increase in Organization Costs amd Deferred Expenses (26,178) (52,374) (25,922) (2,515)
-----------------------------------------
Net Cash (Used in) Provided by Investing Activities (877,391) (283,678) (156,152) 21,939
Partners' Contributions 1,001,000
Offering Costs (60,400)
Distributions to Partners (68,534) (131,313) (131,313) (131,313)
-----------------------------------------
Net Cash Provided by (Used in) Financing Activities 872,066 (131,313) (131,313) (131,313)
Net Increase (Decrease) in Cash 83,582 (81,487) (1,381) 5,406
Cash at Beginning of Year 83,582 2,095 714
-----------------------------------------
Cash at End of Year 83,582 2,095 714 6,120
-----------------------------------------
-----------------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income (Loss) - GAAP Basis 38 150 (145) (156)
Federal Taxable Income to Investors 71 56 0.35 (289)
Cash Distributions to Investors - GAAP Basis (68) (130) (130) (130)
Return of Capital to Investors - GAAP Basis 30 130 130
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks,
which occurs when equipment is financed. The increase over the periods
presented was caused primarily by the acquisition of more financed
equipment.
** Partnership commenced operations on 6/23/92
<PAGE>
COMMONWEALTH EQUIPMENT INCOME TRUST VIII
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
<TABLE>
<CAPTION>
PROGRAM INCEPTION TO DECEMBER 31, 1995 1992 1993 1994 1995
------------------------------------------------
<S> <C> <C> <C> <C>
COMPUTATION OF NET INCOME
Months of Operations **3 12 12 12
Gross Revenues 119,454 1,246,627 1,694,076 1,601,494
Less: Operating Expenses 2,375 19,322 99,634 28,206
Equipment Management Fee 5,200 61,525 84,344 79,606
Depreciation and Amortization 61,815 756,143 1,563,577 1,527,015
Loss on Sale of Equipment 16,892 96,528 62,222
Interest 33,210 67,189 85,160
------------------------------------------------
Net Income (Loss) - GAAP Basis 50,064 359,535 (217,196) (180,715)
------------------------------------------------
------------------------------------------------
Federal Taxable Income (Loss) 49,316 18,450 (137,962) (2,429)
Cash Distributions - GAAP Basis (112,515) (393,939) (393,939) (393,939)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 50,064 359,535 (217,196) (180,715)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 61,815 756,143 1,563,577 1,527,015
Loss on Sale of Equipment 16,892 96,528 62,222
Other Non-Cash Activities Included in the
Determination of Net Income (Loss)* (64,081) (501,571) (871,264) (823,423)
Net Change in Operating Assets and Liabilities 10,355 240 143,083 (86,946)
------------------------------------------------
Net Cash Provided by Operating Activities 58,153 631,239 714,728 498,153
Capital Expenditures (982,795) (1,546,729) (313,675) (117,000)
Increase in Organization Costs and Deferred Expenses (95,799) (135,769) (64,940) (33,589)
Net Proceeds From Sale of Computer Equipment 114,262 41,666 230,734
------------------------------------------------
Net Cash (Used in) Provided by Investing Activities (1,078,594) (1,568,236) (336,949) 80,145
Trust Beneficiaries and Managing Trustee Contributions 3,001,000
Offering Costs (345,150)
Payment of Computer Equipment Payable (159,357)
Distributions to Trust Beneficiaries and Managing Trustee (112,515) (393,939) (393,939) (393,939)
------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 2,543,335 (393,939) (553,296) (393,939)
Net Increase (Decrease) in Cash 1,522,894 (1,330,936) (175,517) 184,359
Cash at Beginning of Year 1,522,894 191,958 16,441
------------------------------------------------
Cash at End of Year 1,522,894 191,958 16,441 200,800
------------------------------------------------
------------------------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income (Loss) - GAAP Basis 17 120 (72) (60)
Federal Taxable Income (Loss) to Investors 16 6 (47) (0.92)
Cash Distributions to Investors - GAAP Basis (37) (130) (130) (130)
Return of Capital to Investors - GAAP Basis 21 11 130 130
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks,
which occurs when equipment is financed. The increase over the periods
presented was caused primarily by the acquisition of more financed
equipment.
** Partnership commenced operations on 9/18/92
<PAGE>
COMMONWEALTH EQUIPMENT INCOME TRUST IX
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
<TABLE>
<CAPTION>
PROGRAM INCEPTION TO DECEMBER 31, 1995
1993 1994 1995
-----------------------------------
<S> <C> <C> <C>
COMPUTATION OF NET INCOME
Months of Operations **12 12 12
Gross Revenues 1,046,655 1,598,529 1,701,131
Less: Operating Expenses 6,295 41,237 30,992
Equipment Management Fee 50,681 79,067 84,862
Loss on Sale of Computer Equipment 113,283 35,784
Interest 34,897 68,876 100,272
Depreciation and Amortization 654,388 1,549,475 1,596,729
-----------------------------------
Net Income (Loss) - GAAP Basis 300,394 (253,409) (147,508)
-----------------------------------
-----------------------------------
Federal Taxable Income (Loss) 28,736 (339,227) 152,888
Cash Distributions - GAAP Basis (385,305) (393,938) (393,938)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 300,394 (253,409) (147,508)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided
by Operating Activities:
Depreciation and Amortization 654,388 1,549,475 1,596,729
Other Non-Cash Activities Included in the Determination
of Net Income (Loss)* (737,271) (739,868) (1,036,766)
Loss on Sale of Computer Equipment 113,283 35,784
Net Change in Operating Assets and Liabilities 105,157 (63,826) (19,953)
-----------------------------------
Net Cash Provided by Operating Activities 322,668 605,655 428,286
Capital Expenditures (2,381,335) (207,196) (66,250)
Net Poceeds from Sale of Computer Equipment 112,551 208,191
Payment of Computer Equipment Payable (55,588)
Increase in Organization Costs and Deferred Expenses (211,939) (64,138) (14,943)
-----------------------------------
Net Cash (Used in) Provided by Investing Activities (2,593,274) (214,371) 126,998
Trust Beneficiaries & Managing Trustee Contributions 3,001,000
Offering Costs (341,268)
Distributions to Trust Beneficiaries and Managing Trustee (385,305) (393,938) (393,938)
-----------------------------------
Net Cash Provided by (Used in) Financing Activities 2,274,427 (393,938) (393,938)
Net Increase (Decrease) in Cash 3,821 (2,654) 161,346
Cash at Beginning of Year - 3,821 1,167
-----------------------------------
Cash at End of Year 3,821 1,167 162,513
-----------------------------------
-----------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income (Loss) - GAAP Basis 100 (84) (49)
Federal Taxable Income (Loss) to Investors 9 (115) 52
Cash Distributions to Investors - GAAP Basis (127) (130) (130)
Return of Capital to Investors - GAAP Basis 28 130 130
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks,
which occurs when equipment is financed. The increase over the periods
presented was caused primarily by the acquisition of more financed
equipment.
** Partnership commenced operations on 1/6/93
<PAGE>
COMMONWEALTH EQUIPMENT INCOME TRUST X
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
<TABLE>
<CAPTION>
PROGRAM INCEPTION TO DECEMBER 31, 1995
1993 1994 1995
----------------------------------------
<S> <C> <C> <C>
COMPUTATION OF NET INCOME
Months of Operations **6 12 12
Gross Revenues 469,154 1,942,165 2,356,253
Less: Operating Expenses 3,493 45,372 27,209
Equipment Management Fee 22,715 96,088 117,200
Loss on Sale of Equipment 247,173
Interest 19,922 111,203 103,563
Depreciation and Amortization 290,701 1,738,026 2,093,524
----------------------------------------
Net Income (Loss) - GAAP Basis 132,323 (48,524) (232,416)
----------------------------------------
----------------------------------------
Federal Taxable Income (Loss) 84,363 250,199 (424,225)
Cash Distributions - GAAP Basis (189,845) (484,848) (484,848)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 132,323 (48,524) (232,416)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided
by Operating Activities:
Depreciation and Amortization 290,701 1,738,026 2,093,524
Loss on Sale of Computer Equipment 247,173
Other Non-Cash Activities Included in the Determination
of Net Income (Loss)* (275,249) (921,663) (1,230,866)
Net Change in Operating Assets and Liabilities (1,074) 182,745 (73,394)
----------------------------------------
Net Cash Provided by Operating Activities 146,701 950,584 804,021
Capital Expenditures (2,363,652) (1,291,685) (256,843)
Net Proceeds from Sale of Equipment 236,246
Increase in Organization Costs and Deferred Expenses (233,521) (105,713) (71,197)
----------------------------------------
Net Cash Used in Investing Activities (2,597,173) (1,397,398) (91,794)
Trust Beneficiaries & Managing Trustee Contributions 4,001,000
Offering Costs (427,991)
Distributions to Trust Beneficiaries and Managing Trustee (189,845) (484,848) (484,848)
----------------------------------------
Net Cash Provided by (Used in) Financing Activities 3,383,164 (484,848) (484,848)
Net Increase (Decrease) in Cash 932,692 (931,662) 227,379
Cash at Beginning of Year - 932,692 1,030
----------------------------------------
Cash at End of Year 932,692 1,030 228,409
----------------------------------------
----------------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income (Loss) - GAAP Basis 33 (12) (58)
Federal Taxable Income to Investors 21 62 (108)
Cash Distributions to Investors - GAAP Basis (47) (120) (120)
Return of Capital to Investors - GAAP Basis 14 120 120
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks,
which occurs when equipment is financed. The increase over the periods
presented was caused primarily by the acquisition of more financed
equipment.
** Partnership commenced operations on 7/7/93
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND - III, L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
<TABLE>
<CAPTION>
PROGRAM INCEPTION TO DECEMBER 31, 1995
1993 1994 1995
---------------------------------
<S> <C> <C> <C>
COMPUTATION OF NET INCOME
Months of Operations **1 12 12
Gross Revenues 12,102 497,829 692,749
Less: Operating Expenses 128 18,904 8,570
Equipment Management Fee 550 24,301 34,258
Interest 21,105 48,772
Depreciation and Amortization 6,548 381,105 552,463
---------------------------------
Net Income - GAAP Basis 4,876 52,414 48,686
---------------------------------
---------------------------------
Federal Taxable Income 8,149 61,991 20,091
Cash Distributions - GAAP Basis (2,989) (121,212) (121,212)
COMPUTATION OF CASH FLOWS
Net Income 4,876 52,414 48,686
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation and Amortization 6,548 381,105 552,463
Other Non-Cash Activities Included in the Determination
of Net Income* (10,990) (183,329) (405,265)
Net Change in Operating Assets and Liabilities (4,941) 38,191 22,582
---------------------------------
Net Cash (Used in) Provided by Operating Activities (4,507) 288,381 218,466
Capital Expenditures (370,110) (611,167) (55,001)
Increase in Organization Costs and Deferred Expenses (24,600) (40,332) (9,442)
---------------------------------
Net Cash Used in Investing Activities (394,710) (651,499) (64,443)
Partners' Contributions 1,001,000
Offering Costs (60,400)
Distributions to Partners (2,989) (121,212) (121,212)
---------------------------------
Net Cash Provided by (Used in) Financing Activities 937,611 (121,212) (121,212)
Net Increase (Decrease) in Cash 538,394 (484,330) 32,811
Cash at Beginning of Year - 538,394 54,064
---------------------------------
Cash at End of Year 538,394 54,064 86,875
---------------------------------
---------------------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income - GAAP Basis 5 52 49
Federal Taxable Income to Investors 8 61 20
Cash Distributions to Investors - GAAP Basis (3) (120) (120)
Return of Capital to Investors - GAAP Basis 2 68 72
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks,
which occurs when equipment is financed. The increase over the periods
presented was caused primarily by the acquisition of more financed
equipment.
** Partnership commenced operations on 12/23/93
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND I
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
<TABLE>
<CAPTION>
PROGRAM INCEPTION TO DECEMBER 31, 1995
1994 1995
---------------------
<S> <C> <C>
COMPUTATION OF NET INCOME
Months of Operations **10 12
Gross Revenues 1,223,900 4,317,522
Less: Operating Expenses 71,556 93,265
Equipment Management Fee 56,473 207,230
Interest 48,184 212,365
Depreciation and Amortization 952,640 3,849,897
---------------------
Net Income (Loss) - GAAP Basis 95,047 (45,235)
---------------------
---------------------
Federal Taxable Income 363,865 326,931
Cash Distributions - GAAP Basis (443,614) (1,195,585)
COMPUTATION OF CASH FLOWS
Net Income (Loss) 95,047 (45,235)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided
by Operating Activities:
Depreciation and Amortization 952,640 3,849,897
Other Non-Cash Activities Included in the Determination
of Net Income (Loss)* (633,035) (1,514,550)
Net Change in Operating Assets and Liabilities (204,290) 121,072
---------------------
Net Cash Provided by Operating Activities 210,362 2,411,184
Capital Expenditures (4,783,921) (6,353,404)
Equipment Acquisition Fees Paid to the General Partner (282,368) (403,549)
---------------------
Net Cash Used in Investing Activities (5,066,289) (6,756,953)
Partners' Contributions 8,271,511 4,352,171
Offering Costs (932,803) (459,421)
Debt Placement Fees (20,305) (29,920)
Distributions to Partners (443,614) (1,195,585)
---------------------
Net Cash Provided by Financing Activities 6,874,789 2,667,245
Net Increase in Cash 2,018,862 (1,678,524)
Cash at Beginning of Year 1,500 2,020,362
---------------------
Cash at End of Year 2,020,362 341,838
---------------------
---------------------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income (Loss) - GAAP Basis 11 (4)
Federal Taxable Income to Investors 42 27
Cash Distributions to Investors - GAAP Basis (53) (94)
Return of Capital to Investors - GAAP Basis 42 94
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks,
which occurs when equipment is financed. The increase over the periods
presented was caused primarily by the acquisition of more financed
equipment.
** Partnership commenced operations on 3/14/94
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND - IV, L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
<TABLE>
<CAPTION>
PROGRAM INCEPTION TO DECEMBER 31, 1995
1995
----------
<S> <C>
COMPUTATION OF NET INCOME
Months of Operations **6
Gross Revenues 168,862
Less: Operating Expenses 10,818
Equipment Management Fee 7,432
Interest 3,850
Depreciation and Amortization 145,570
----------
Net Income - GAAP Basis 1,192
----------
----------
Federal Taxable Income 30,850
Cash Distributions - GAAP Basis (98,829)
COMPUTATION OF CASH FLOWS
Net Income 1,192
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation and Amortization 145,570
Other Non-Cash Activities Included in the Determination
of Net Income* (41,201)
Net Change in Operating Assets and Liabilities (141,072)
----------
Net Cash Used in Operating Activities (35,511)
Capital Expenditures (1,243,766)
Increase in Organization Costs and Deferred Expenses (41,841)
----------
Net Cash Used in Investing Activities (1,285,607)
Partners' Contributions 1,551,000
Offering Costs (95,820)
Distributions to Partners (98,829)
----------
Net Cash Provided by (Used in) Financing Activities 1,356,351
Net Increase (Decrease) in Cash 35,233
Cash at Beginning of Year -
----------
Cash at End of Year 35,233
----------
----------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income - GAAP Basis 0.77
Federal Taxable Income to Investors 20
Cash Distributions to Investors - GAAP Basis (63)
Return of Capital to Investors - GAAP Basis 62
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks,
which occurs when equipment is financed. The increase over the periods
presented was caused primarily by the acquisition of more financed
equipment.
** Partnership commenced operations on 6/23/95
<PAGE>
COMMONWEALTH EQUIPMENT INCOME PRIVATE FUND - V, L.P.
OPERATING RESULTS OF PRIOR PROGRAMS
(Table III)
<TABLE>
<CAPTION>
PROGRAM INCEPTION TO DECEMBER 31, 1995
1995
---------
<S> <C>
COMPUTATION OF NET INCOME
Months of Operations **3
Gross Revenues 42,461
Less: Operating Expenses 7,040
Equipment Management Fee 1,697
Depreciation and Amortization 32,267
---------
Net Income -GAAP Basis 1,457
---------
---------
Federal Taxable Income 13,806
Cash Distributions - GAAP Basis (31,548)
COMPUTATION OF CASH FLOWS
Net Income 1,457
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation and Amortization 32,267
Other Non-Cash Activities Included in the Determination
of Net Income* (1,510)
Net Change in Operating Assets and Liabilities (3,419)
---------
Net Cash Used in Operating Activities 28,795
Capital Expenditures (556,175)
Increase in Organization Costs and Deferred Expenses (24,600)
---------
Net Cash Used in Investing Activities (580,775)
Partners' Contributions 1,001,000
Offering Costs (60,400)
Distributions to Partners (31,548)
---------
Net Cash Provided by Financing Activities 909,052
Net Increase (Decrease) in Cash 357,072
Cash at Beginning of Year -
---------
Cash at End of Year 357,072
---------
---------
INVESTMENT DATA PER $1,000 INVESTMENT
Net Income - GAAP Basis 1
Federal Taxable Income to Investors 11
Cash Distributions to Investors - GAAP Basis (31)
Return of Capital to Investors - GAAP Basis 30
</TABLE>
* The significant component of Other Non-Cash Activities Included in the
Determination of Net Income was direct payments by lessees to banks,
which occurs when equipment is financed. The increase over the periods
presented was caused primarily by the acquisition of more financed
equipment.
** Partnership commenced operations on 9/28/95
<PAGE>
TABLE V
EQUIPMENT SALES
The following table sets forth the sales and other dispositions of equipment
by five prior private programs sponsored by the General Partner and its
Affiliates during the most recent three year period ending December 31, 1995.
There were no sales or other dispositions of equipment in Commonwealth
Equipment Income Private Fund III, Limited Partnership, and Commonwealth
Income & Growth Fund I.
<PAGE>
Commonwealth Equipment Income Fund VII, Limited Partnership
Equipment Sales
For the three year period ended December 31, 1995
(Table V)
<TABLE>
<CAPTION>
Year Year Original Net
Equipment of of Acquisition Net Book Proceeds
Manufacturer Equipment Type Description Acquisition Disposal Cost Value Received
<S> <C> <C> <C> <C> <C> <C> <C>
IBM (1) 3990 Storage controller 1992 1994 182,000 44,155 66,372
IBM (1) 3990 Storage controller 1992 1994 181,500 42,808 65,259
IBM (1) 3990 Storage controller 1992 1994 194,489 53,558 31,040
IBM (1) 3745-310 Communications controller 1992 1994 241,848 80,616 101,650
IBM (10) 7012-340 Workstation 1992 1994 301,705 144,567 65,830
IBM (3) 7013-560 Workstation 1992 1995 212,423 42,002 28,118
IBM (1) 7012-340 Workstation 1992 1995 47,931 18,151 5,905
IBM (4) 7010-130, (1) 7013-550 Workstation 1992 1995 107,331 27,827 33,150
Wallace (4) Lasermax Roll to Fold 1992 1995 356,500 81,271 100,000
Federal
GAAP Taxable
Manufacturer Net Gain/(Loss) Net Gain/(Loss)
<S> <C> <C>
IBM 22,217 (47,054)
IBM 22,451 (47,856)
IBM (22,518) (90,168)
IBM 21,034 (49,073)
IBM (78,737) (122,435)
IBM (13,884) (60,989)
IBM (12,246) (12,495)
IBM 5,323 (14,195)
Wallace 18,729 (987)
</TABLE>
<PAGE>
Commonwealth Equipment Income Private Fund-II, Limited Partnership
Equipment Sales
For the three year period ended December 31, 1995
(Table V)
<TABLE>
<CAPTION>
Year Year Original Net
Equipment of of Acquisition Net Book Proceeds
Manufacturer Equipment Type Description Acquisition Disposal Cost Value Received
<S> <C> <C> <C> <C> <C> <C> <C>
IBM (1) 3745 Communications controller 1992 1993 112,170 68,548 68,400
IBM (9) 7012-340, (1) 7013-53H Workstation 1992 1994 215,925 103,464 49,324
IBM (7) 7012-350 Workstation 1992 1995 291,395 39,230 31,892
IBM (1) 3745-410 Communications controller 1993 1995 139,829 76,142 45,000
EMC (1) 4480-M20, (1) 4416 Control unit/Disk array 1993 1995 227,272 0 12,767
Federal
GAAP Taxable
Manufacturer Net Gain/(Loss) Net Gain/(Loss)
<S> <C> <C>
IBM (148) (28,315)
IBM (54,140) (92,610)
IBM (7,338) (100,908)
IBM (31,142) (12,192)
EMC 12,767 (77,996)
</TABLE>
<PAGE>
Commonwealth Equipment Income Trust VIII
Equipment Sales
For the three year period ended December 31, 1995
(Table V)
<TABLE>
<CAPTION>
Year Year Original Net
Equipment of of Acquisition Net Book Proceeds
Manufacturer Equipment Type Description Acquisition Disposal Cost Value Received
<S> <C> <C> <C> <C> <C> <C> <C>
IBM (1) 3745 Communication controller 1992 1993 196,735 131,154 114,262
IBM (13) 7235-002 Workstation 1992 1994 112,896 51,744 3,492
IBM (5) 7012-340 Workstation 1992 1994 172,900 86,450 38,174
IBM (7) 7012-350 Workstation 1992 1995 249,800 58,266 34,000
Arrow (5) ST424OON Disk drive 1993 1995 11,200 5,696 3,212
IBM (1) 7208-011 Tape drive 1993 1995 6,016 2,552 1,500
IBM (1) 7013-580 Workstation 1993 1995 67,234 43,788 12,200
IBM (1) 7012-350 Workstation 1992 1995 34,054 15,078 5,975
IBM (1) 7013-580 Workstation 1993 1995 213,737 61,884 48,957
IBM (4) 7235-002 Workstation 1992 1995 50,176 18,586 27,187
IBM (1) 7013-2980 Upgrade 1993 1995 1,083 587 750
Sears HJ laser Printer 1993 1995 1,820 897 820
IBM (3) 7013-580, (1) 7012-350 Workstation 1993 1995 199,872 92,877 103,388
Federal
GAAP Taxable
Manufacturer Net Gain/(Loss) Net Gain/(Loss)
<S> <C> <C>
IBM (16,892) (59,468)
IBM (48,252) (64,020)
IBM (48,276) (66,719)
IBM (24,266) (66,607)
Arrow (2,484) (1,340)
IBM (1,052) (619)
IBM (31,588) (14,073)
IBM (9,103) (13,684)
IBM (12,927) (34,869)
IBM 8,601 (1,025)
IBM 163 246
Sears (77) 94
IBM 10,511 31,263
</TABLE>
<PAGE>
Commonwealth Equipment Income Trust IX
Equipment Sales
For the three year period ended December 31, 1995
(Table V)
<TABLE>
<CAPTION>
Year Year Original Net
Equipment of of Acquisition Net Book Proceeds
Manufacturer Equipment Type Description Acquisition Disposal Cost Value Received
<S> <C> <C> <C> <C> <C> <C> <C>
IBM (1) 7013-530 Workstation 1993 1994 39,318 24,832 11,400
IBM (2) 7013-550 Workstation 1993 1994 88,941 24,535 12,350
EMC (1/2) 4832-002 Workstation 1993 1994 310,578 176,465 88,800
IBM (1) 7013-530 Workstation 1993 1995 30,133 4,252 3,200
IBM (1) 7013-550 Workstation 1993 1995 63,281 11,095 10,800
IBM (1) 7013-530 Workstation 1993 1995 51,876 6,548 5,200
IBM (1) 7012-355 Workstation 1993 1995 51,951 22,198 18,400
Roll Systems Roll-fold Seperator 1993 1995 459,690 206,428 177,137
Federal
GAAP Taxable
Manufacturer Net Gain/(Loss) Net Gain/(Loss)
<S> <C> <C>
IBM (13,432) (14,770)
IBM (12,185) (46,849)
EMC (87,665) (117,921)
IBM (1,052) (8,930)
IBM (295) (14,796)
IBM (1,348) (15,778)
IBM (3,798) (2,899)
Roll Systems (29,291) (11,759)
</TABLE>
<PAGE>
Commonwealth Equipment Income Trust X
Equipment Sales
For the three year period ended December 31, 1995
(Table V)
<TABLE>
<CAPTION>
Year Year Original Net
Equipment of of Acquisition Net Book Proceeds
Manufacturer Equipment Type Description Acquisition Disposal Cost Value Received
<S> <C> <C> <C> <C> <C> <C> <C>
EMC (1) 4824-003 Disk array 1993 1995 472,770 224,041 81,000
EMC (1) 4832-002 DASD 1993 1995 455,000 153,352 62,500
Roll Systems Roll-fold Seperator 1993 1995 209,317 68,585 66,132
Roll Systems Roll-fold Seperator 1993 1995 143,685 44,748 33,921
Federal
GAAP Taxable
Manufacturer Net Gain/(Loss) Net Gain/(Loss)
<S> <C> <C>
EMC (143,041) (216,439)
EMC (90,852) (223,295)
Roll Systems (2,453) (66,466)
Roll Systems (10,827) (56,757)
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
TABLE VI - ACQUISITION OF EQUIPMENT BY PRIOR PROGRAMS
The following table sets forth acquisition of equipment by eight prior
private programs and one prior public program sponsored by the General
Partner and its Affiliates during the most recent four year period ending
December 31, 1995.
II-1
<PAGE>
<TABLE>
<CAPTION>
Commonwealth Equipment Income Fund VII Limited Partnership
Summary of Equipment Acquisitions
For the four years ended December 31, 1992, 1993, 1994 and 1995
(Table VI)
YEAR TOTAL
OF RENT IN DEBT OBLIGATIONS EQUIPMENT
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION CASH LIEU ASSUMED INCURRED COST
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IBM (1) 3990 Storage Controller 1992 182,000 0 0 0 182,000
IBM (1) 3990 Storage Controller 1992 181,500 0 0 0 181,500
IBM (1) 3990 Storage Controller 1992 194,489 0 0 0 194,489
IBM (1) 3745-310 Communication Controller 1992 241,848 0 0 0 241,848
IBM (20) 7861, (6) 7868 Modems 1992 104,000 0 0 0 104,000
IBM (4) 7010, (2) 7013 Workstation 1992 38,686 0 122,890 0 161,576
IBM (1) 7012-350
(2) 7013-560 Workstation 1992 212,423 0 0 0 212,423
IBM (2) 7013, (2) 7011,
(2) 7010 Workstation 1992 19,606 0 162,843 0 182,449
IBM (1) 7013-52H,
(1) 7011-22G Workstation 1992 6,430 0 48,718 0 55,148
IBM (10) 7012-340 Workstation 1992 73,918 0 275,718 0 349,636
Wallace (4) Lasermax Unwinder/Folder 1993 76,488 0 280,012 0 356,500
IBM (10) 7012-350,
(10) 7235-002 Workstation 1993 33,839 0 319,516 0 353,355
HDS (1) 7693-032 Disk Array 1993 90,979 0 403,806 0 494,785
HDS (1) 7690-001 Storage Controller 1993 31,398 0 151,279 0 182,677
HDS (1/2) 7693-032 Disk Array 1994 79,733 0 148,106 0 227,839
HDS (1/4) 7690,
(1/4) 7693-32 Disk Array/Stg Controller 1994 28,075 0 122,050 0 150,125
STK (10%) 9200-XJ3
Iceberg Disk Array 1994 136,955 15,050 0 0 152,005
IBM (2) 3995-153,
(1) 3995-113,
(44) 7344 Optical Storage 1994 57,600 0 325,688 0 383,488
STK (1/4) 9200-XJ3,
9210-A21, 9210-B11,
9210-C21 Disk Array 1995 56,250 0 157,332 0 213,582
STK (1) 9490-M34 Tape Drive 1995 35,000 0 158,175 0 193,175
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Commonwealth Equipment Income Private Fund II, Limited Partnership
Summary of Equipment Acquisitions
For the four years ended December 31, 1992, 1993, 1994 and 1995
(Table VI)
YEAR TOTAL
OF RENT IN DEBT OBLIGATIONS EQUIPMENT
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION CASH LIEU ASSUMED INCURRED COST
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wallace (2) Lasermax Roll to Fold 1992 173,627 0 0 0 173,627
Wallace (1) Lasermax Roll to Fold 1992 82,767 2,233 0 0 85,000
Wallace (1) Lasermax Roll to Fold 1992 87,500 0 0 0 87,500
IBM (7) 7012-350 Workstation 1992 291,395 0 0 0 291,395
IBM (9) 7012-340,
(1) 7013-53H Workstation 1992 215,925 0 0 0 215,925
IBM (1) 3745 Communication Controller 1992 96,000 16,170 0 0 112,170
EMC (1) 4416 Disk Array 1993 57,000 0 153,706 0 210,706
STK (2) 4480-M20 Tape Drive 1993 0 0 16,566 0 16,566
IBM (1) 3745-410 Communication Controller 1993 36,235 0 103,594 0 139,829
HDS (1) 7690-001,
(1) 7693-032 Disk Array/Stg. Controller 1993 110,468 0 610,651 0 721,119
IBM (1) 3390-A38 Disk Storage 1994 86,652 14,285 0 0 100,937
IBM (1) 3390-B9C,
(1) 3390-A98 Disk Storage 1994 92,903 0 363,387 0 456,290
IBM (5) 7011-25T Workstation 1995 62,898 0 0 0 62,898
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Commonwealth Equipment Income Trust VIII, Limited Partnership
Summary of Equipment Acquisitions
For the four years ended December 31, 1992, 1993, 1994 and 1995
(Table VI)
YEAR TOTAL
OF RENT IN DEBT OBLIGATIONS EQUIPMENT
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION CASH LIEU ASSUMED INCURRED COST
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IBM (13) 7235-002 Workstation 1992 151,235 11,838 0 0 163,073
IBM (5) 7012-340 Workstation 1992 172,900 0 0 0 172,900
IBM (7) 7012-350 Workstation 1992 249,800 0 0 0 249,800
IBM (1) 7012-350 Workstation 1992 34,054 0 0 0 34,054
IBM (1) 7013-580 Workstation 1992 54,378 0 0 0 54,378
IBM (1) 7013-580 Workstation 1992 54,378 0 0 0 54,378
IBM (1) 7013-580 Workstation 1992 54,097 0 0 0 54,097
IBM (1) 7012-350 Workstation 1992 37,019 0 0 0 37,019
IBM (2) 7013-580,
(1) 7010-130 Workstation 1992 174,934 0 0 0 174,934
IBM (1) 3745 Communication Controller 1992 175,000 21,735 0 0 196,735
IBM (1) 3745-210,
(1) 3746-A11 Communication Controller 1992 197,319 14,881 0 0 212,200
IBM (1) 3745-610,
(1) 3746-A11 Communication Controller 1992 143,026 0 406,989 0 550,015
Wallace (1) Lasermax Unwinder/Folder 1993 100,451 0 0 0 100,451
Wallace (1) Lasermax Unwinder/Folder 1993 158,600 0 0 0 158,600
Wallace (2) Lasermax Unwinder/Folder 1993 167,250 0 0 0 167,250
Roll Systems,
Inc. (1) Roll to Fold Roll to Fold 1993 159,824 0 335,176 0 495,000
IBM (1) 7013-580,
(1) plot server Workstation 1993 28,952 0 184,785 0 213,137
IBM upgrade to 7013-580 Workstation 1993 1,477 343 0 0 1,820
IBM upgrade to 7012-350 Workstation 1993 5,027 989 0 0 6,016
EMC (1/2) 4832-002 Disk Array 1993 199,861 62,338 0 0 262,199
Arrow (5) Arrow drives Workstation 1993 7,510 3,690 0 0 11,200
IBM (3) 2980 Workstation 1993 1,083 0 0 0 1,083
IBM upgrade Workstation 1993 67,234 0 0 0 67,234
IBM 4931 upgrades Communication Controller 1993 5,278 422 0 0 5,700
IBM (5) 7013 Workstation 1993 32,640 4,780 0 0 37,420
HDS (1) 7693-032 Disk Array 1993 96,199 0 359,061 0 455,260
HDS (1) 7690-001,
(1) 7693-001,
(1) 7693-020 Disk Array/Stg. Controller 1993 159,357 62,400 633,483 0 855,240
HDS (1/4) 7690,
(1/4) 7693-32 Disk Array/Stg. Controller 1994 28,075 0 122,050 0 150,125
IBM upgrade Communication Controller 1994 75,816 0 0 0 75,816
IBM (2) 7013-590 Workstation 1994 85,206 22,722 0 0 107,928
IBM (2) 3995-153,
(2) 3995-113
(58) 7344 Optical Storage 1994 70,578 0 399,057 0 469,635
SUN (31) Sun -
Workstations Workstation 1994 54,000 0 193,877 0 247,877
STK (1) 9490-M34 Tape Drive 1995 65,000 0 298,004 0 363,004
SUN (2) Sunsparc 1000 Departmental Server 1995 17,820 0 116,574 0 134,394
SUN (10) Sunsparc 20 Workstation 1995 34,180 0 37,494 0 71,674
HP (50%) (9) HP9000-J200 Workstation 1995 0 0 135,412 22,222 157,635
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Commonwealth Equipment Income Trust IX, Limited Partnership
Summary of Equipment Acquisitions
For the four years ended December 31, 1992, 1993, 1994 and 1995
(Table VI)
YEAR TOTAL
OF RENT IN DEBT OBLIGATIONS EQUIPMENT
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION CASH LIEU ASSUMED INCURRED COST
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IBM (1) 7013-530 Workstation 1993 16,257 0 23,061 0 39,318
IBM (1) 7013-530 Workstation 1993 15,165 0 14,968 0 30,133
IBM (1) 7013-53H,
(10) 7011-22G Workstation 1993 9,833 0 133,921 0 143,754
IBM (1) 7013-560 Workstation 1993 4,858 0 117,052 0 121,910
IBM (1) 7013-550 Workstation 1993 18,466 0 44,815 0 63,281
IBM (1) 7013-550 Workstation 1993 11,366 0 40,510 0 51,876
IBM (2) 7013-550 Workstation 1993 32,353 0 56,588 0 88,941
IBM (1) 7013-550 Workstation 1993 23,702 0 47,161 0 70,863
IBM (1) 3745-310,
(1) 3746-A11 Communication Controller 1993 124,447 0 473,359 0 597,806
EMC (1) 4832-002 Disk Array 1993 609,534 15,700 0 0 625,234
IBM (1) 7012-360,
(1) 7012-355,
(1) 7208-001 Workstation 1993 50,149 1,802 0 0 51,951
HDS (1) 7690-001,
(1) 7693-032,
(1) 7693-016 Disk Array/Stg. Controller 1993 800,581 19,319 0 0 819,900
EMC (1/2) 4832-002 Disk Array 1993 172,908 137,670 0 0 310,578
EMC (1) 4832-002 Disk Array 1993 399,722 124,676 0 0 524,398
HDS (1) 7693-032 Disk Array 1993 84,969 0 354,167 0 439,136
Roll
Systems,
Inc. (2) Roll to Fold Roll to Fold 1993 62,612 0 397,078 0 459,690
HDS (1/4) 7690,
(1/4) 7693-32 Disk Array/Stg. Controller 1994 28,075 0 122,050 0 150,125
SUN (2) Sunsparc 20,
(2) Sunsparc 1000 Workstation/Dept. Server 1994 19,543 0 140,289 0 159,832
IBM (2) 3995-153,
(2) 3995-113,
(58) 7344 Optical Storage 1994 70,577 0 399,057 0 469,634
PYR (1/2) NS100-CL File Server 1994 35,000 0 261,709 0 296,709
SUN (31) Sun -
Workstations Workstation 1994 54,000 0 193,877 0 247,877
STK (1/4) 9200-XJ3,
9210-A21,
9210-B11,
9210-C21 Disk Array 1995 56,250 0 157,332 0 213,582
PYR (50%) NILE R4400 -
DPU Enterprise Server 1995 10,000 0 88,489 0 98,489
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Commonwealth Equipment Income Trust X, Limited Partnership
Summary of Equipment Acquisitions
For the four years ended December 31, 1992, 1993, 1994 and 1995
(Table VI)
YEAR TOTAL
OF RENT IN DEBT OBLIGATIONS EQUIPMENT
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION CASH LIEU ASSUMED INCURRED COST
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IBM (12) 7012-350 Workstation 1993 40,608 0 383,419 0 424,027
EMC (1) 4824-003 Disk Array 1993 429,720 43,050 0 0 472,770
EMC (1) 4832-002 Disk Array 1993 439,935 15,065 0 0 455,000
Roll
Systems, Inc.(1) Roll to Fold Roll to Fold 1993 15,665 0 128,020 0 143,685
Roll
Systems, Inc.(1) Roll to Fold Roll to Fold 1993 28,578 0 180,739 0 209,317
HDS (1) 7690-001,
(1) 7693-032 Disk Array/Stg. Controller 1993 570,085 13,515 0 0 583,600
EMC (1/2) 4832-003 Disk Array 1993 66,500 0 260,218 0 326,718
HDS (1) 7900-006 Semiconductor Disk 1993 365,000 0 0 0 365,000
HDS (1) 7693-032 Disk Array 1993 407,561 33,150 0 0 440,711
HDS (1) 7693-032 Disk Array 1994 92,630 0 361,744 0 454,374
IBM (2) 3745-310 Communication Controller 1994 42,302 0 536,692 0 578,994
EMC (1/4) EMC 5500-3064 Disk Array 1994 48,966 0 233,177 0 282,143
PYR (1/2) Pyramid
85860E File Server 1994 295,000 0 0 0 295,000
SUN (1/2) Sunsparc 2000 Enterprise Server 1994 41,183 0 200,690 0 241,873
IBM (2) 3490-B40 Tape Drive 1994 129,834 16,360 0 0 146,194
IBM (1) 3390-B3C,
(1) 3390-A98,
(1) 3990-006 Disk Storage/Stg Controller 1994 426,491 70,290 0 0 496,781
IBM (5) 9032-002 Escon Director 1994 157,681 0 356,709 0 514,390
IBM (2) 3995-153,
(1) 3995-113,
(44) 7344 Optical Storage 1994 57,600 0 325,888 0 383,488
STK (1) 9490-M34 Tape Drive 1995 35,000 0 158,175 0 193,175
STK (1) 9200-XN3,
6172, 9220-A42,
9220-B42 Disk Array 1995 221,843 0 590,574 0 812,417
PYR (50%) (1) RM600 Enterprise Server 1995 0 49,915 0 537,254 587,169
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Commonwealth Equipment Income Private Fund III, Limited Partnership
Summary of Equipment Acquisitions
For the four year period ended December 31, 1995
(Table VI)
YEAR TOTAL
OF RENT IN DEBT OBLIGATIONS EQUIPMENT
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION CASH LIEU ASSUMED INCURRED COST
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HDS (8) 7693-HDU Disk Array 1994 370,110 10,990 0 0 381,100
EMC (1/4) 5500-3064 Disk Array 1994 48,965 0 233,177 0 282,142
SUN (1/2) Suncparc 2000 Enterprise Server 1994 41,183 0 200,690 0 241,873
PYR (1/2) Pyramid 85860E File Server 1994 295,000 0 0 0 295,000
IBM (1/2) 3990-006 Storage Controller 1994 91,102 11,648 0 0 102,750
IBM (1) 3490-B40 Tape Drive 1994 64,917 8,180 0 0 73,097
IBM (1) 3990-A38,
(2) 3390-B3C Disk Storage 1994 70,000 0 357,600 0 427,600
IBM (1) 3900-001 Printer 1995 55,000 0 149,885 0 204,885
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Commonwealth Income & Growth Fund I
Summary of Equipment Acquisitions
For the four year period ended December 31, 1995
(Table VI)
YEAR TOTAL
OF RENT IN DEBT OBLIGATIONS EQUIPMENT
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION CASH LIEU ASSUMED INCURRED COST
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HDS (2) 7693-032,
(1) 7390-B3C,
(1) 7690-128 Dsk Arry/Stg Cont/Dsk Stg 1994 985,358 59,735 0 0 1,045,093
EMC (1/2) 5500-3064 Disk Array 1994 97,931 0 466,354 0 564,285
HDS upgrade
(1) 7693-8 to 32 Disk Array 1994 268,526 0 0 0 268,526
HDS (1) 7693-032 Disk Array 1994 82,200 0 363,971 0 446,171
HDS (1) 7693-032 Disk Array 1994 620,099 72,200 0 0 692,299
IBM (1) 3390-B3C,
(1) 3390-B9C Disk Storage 1994 399,561 65,845 0 0 465,406
IBM (1/2) 3990-006 Storage Controller 1994 91,098 11,652 0 0 102,750
IBM (3) 3490-A20,
(1) 3490-B40 Tape Drive 1994 337,202 42,480 0 0 379,682
SUN (17) Sunsparc 1000 Dept. Server 1994 153,776 0 0 0 153,776
IBM (8) 9032-002 Escon Director 1994 269,319 0 609,261 0 878,580
SUN (1) Sunsparc 1000 Departmental Server 1994 158,072 0 0 0 158,072
IBM (80%)(1) 9200-XJ3 Disk Array 1994 1,216,040 0 0 0 1,216,040
HDS (1) 7693-032 Disk Array 1994 49,909 0 318,518 0 368,427
IBM (1) 9391-A10
(16) 9392-B13 Disk Array 1994 54,831 0 265,269 0 320,100
SUN (4) Sunsparc 2000 Enterprise Server 1995 305,875 0 0 0 305,875
STK (1/4) 9200-XJ3,
9210-A21,
9210-B11,
9210-C21 Disk Array 1995 56,250 0 157,332 0 213,582
STK (2) 9200-XJ3,
9210-A21 Disk Array 1995 1,144,304 0 0 0 1,144,304
SUN (32) Sunsparc 1000 Deaprtmental Server 1995 277,705 0 0 0 277,705
STK (8) 9490-M34 Tape Drive 1995 260,000 0 1,192,140 0 1,452,140
IBM (2) 9391-A10,
(32) 9392-B13 Disk Array 1995 600,000 0 0 0 600,000
IBM (2) 3829-001 Printer 1995 72,117 0 198,956 0 271,073
IBM/Roll
Systems Inc. (50%) 3900-DW1,
Roll to Fold Printer & Roll to Fold 1995 343,010 0 0 0 343,010
SIEMENS (2) 2240-004 Printer 1995 459,592 0 0 0 459,592
SUN (3) Upgr, to
Sunsparc 1000 Departmental Server 1995 52,731 0 0 0 52,731
STK (1) 9200-XN3,
6172, 9220-A42 Disk Array 1995 582,671 0 0 0 582,671
SGI (80) Indigo 2XZ Workstation 1995 163,000 0 749,710 0 912,710
EMC (1/2) 3200-9024,
3200-9016 Disk Array 1995 293,506 0 0 0 293,506
STK (1) 9200-XN3,
9210-A21,
9210-C21 Disk Array 1995 57,601 0 179,039 0 236,640
IBM (375) 4230-5S3 Printer 1995 1,064,930 0 0 0 1,064,930
IBM (2) 23390-A38,
(4) 3390-B3C Disk Storager 1995 130,000 0 515,102 0 645,102
HP (50%)(9) HP9000-J200 Communication Controller 1995 0 0 135,412 22,222 157,635
STK (2) 4490-M30,
(1) 4490-M34,
(3) 9490-M34 Tape Drive 1995 490,110 0 0 0 490,110
PYR (50%)(1) RM600 Enterprise Server 1995 0 49,916 0 537,253 587,169
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
Commonwealth Equipment Income Private Fund IV, Limited Partnership
Summary of Equipment Acquisitions
For the four year period ended December 31, 1995
(Table VI)
YEAR TOTAL
OF RENT IN DEBT OBLIGATIONS EQUIPMENT
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION CASH LIEU ASSUMED INCURRED COST
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IBM/Roll
Systems,
Inc. (50%) 3900-DW1,
Roll to Fold Printer & Roll To Fold 1995 343,010 0 0 0 343,010
SIEMENS (2) 2240-004 Printer 1995 459,592 0 0 0 459,592
PYR (26) 7000-0354 Enterprise Server 1995 81,713 0 0 0 81,713
STK (1) 9200-XP3,
9220-A22 Disk Array 1995 287,850 0 0 0 287,850
IBM (17) 4230-202 Printer 1995 14,000 0 20,323 0 34,323
STK (1) 9200-XN3,
9210-A21,
9210-C21 Disk Array 1995 57,601 0 179,039 0 236,640
STK (50%)(1) 9490-M34,
4412, 3T43, 9300001 Tape Drive 1995 0 1,510 0 73,086 74,596
STK (1) 9310-301 to
001 Upgr Tape Library 1995 0 9,144 0 52,306 61,450
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
Commonwealth Equipment Income Private Fund V, Limited Partnership
Summary of Equipment Acquisitions
For the four year period ended December 31, 1995
(Table VI)
YEAR TOTAL
OF RENT IN DEBT OBLIGATIONS EQUIPMENT
MANUFACTURER EQUIPMENT TYPE EQUIPMENT DESCRIPTION ACQUISITION CASH LIEU ASSUMED INCURRED COST
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STK (1) 9200-XJ3,
6172, 9220-A22 Disk Array 1995 409,422 0 0 0 409,422
EMC (1/4) 3200-9204,
3200-9016 Disk Array 1995 146,753 0 0 0 146,753
STK (50%)(1) 9490-M34
4412, 3T43, 9300001 Tape Drive 1995 0 1,510 0 73,086 74,596
</TABLE>
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Post-Effective Amendment No. 8 to the
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Berwyn, Commonwealth of
Pennsylvania, on April 2, 1997.
COMMONWEALTH INCOME & GROWTH FUND II
a Pennsylvania Limited Partnership
By: COMMONWEALTH INCOME & GROWTH
FUND, INC., General Partner
By: /s/ George S. Springsteen
--------------------------------
George S. Springsteen, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 8 to the Registration Statement has been signed
by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ George S. Springsteen Chairman, President and Sole April 2, 1997
- --------------------------- Director of Commonwealth
George S. Springsteen Income & Growth Fund, Inc.
(Principal Executive Officer)
/s/ David A. Kintzer Vice President, Chief Financial April 2, 1997
- --------------------------- Officer and Secretary of
David A. Kintzer Commonwealth Income &
Growth Fund, Inc. (Principal
Financial Officer)
/s/ Kathleen S. Enscoe Controller of Commonwealth April 2, 1997
- --------------------------- Income & Growth Fund, Inc.
Kathleen S. Enscoe (Principal Accounting Officer)
</TABLE>
II-11
<PAGE>
EXHIBITS
<PAGE>
EXHIBIT INDEX
Exhibit No. Page No.
- ----------- --------
24.1 Consent of Ernst & Young LLP
27.0 Financial Data Schedule
<PAGE>
Exhibit 24.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports on (i) the balance sheet of Commonwealth Income &
Growth Fund II, at February 7, 1995 dated February 8, 1995 (ii) the financial
statements of Commonwealth Income & Growth Fund II, at December 31, 1996 and
1995 and for the year ended December 31, 1996 and for the period September
22, 1995 to December 31, 1995 dated January 24, 1997 (iii) the balance
sheets of Commonwealth Income & Growth Fund, Inc., at February 28, 1995 and
1994, dated April 11, 1995, (iv) the consolidated financial statements of
Commonwealth Capital Corp., at February 28, 1995 and 1994 and for the years
then ended, dated April 11, 1995, (v) the consolidated financial statements
of Commonwealth Capital Corp., at February 29, 1996 and February 28, 1995 and
for the years then ended, dated March 28, 1996, and (vi) the balance sheets
of Commonwealth Income & Growth Fund, Inc., at February 29, 1996 and February
28, 1995 dated March 28, 1996, all included in Post Effective Amendment No. 8
to the Registration Statement (Form S-1 No. 33-89476) and related Prospectus
of Commonwealth Income & Growth Fund II for the registration of 750,000 units
of Limited Partnership Interests.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 1, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000938322
<NAME> CIGF-II
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,552,352
<SECURITIES> 0
<RECEIVABLES> 99,565
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 276,197
<PP&E> 4,780,075
<DEPRECIATION> 1,093,535
<TOTAL-ASSETS> 6,614,654
<CURRENT-LIABILITIES> 182,734
<BONDS> 0
0
0
<COMMON> 6,431,920
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,614,654
<SALES> 0
<TOTAL-REVENUES> 1,194,114
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,194,844
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (730)
<INCOME-TAX> 0
<INCOME-CONTINUING> (730)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (730)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> 0
</TABLE>
