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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File Number 33-89476
COMMONWEALTH INCOME & GROWTH FUND II
(Exact name of Registrant as specified in its charter)
1160 West Swedesford Road
Pennsylvania Suite 340 23-2795120
(State or other jurisdiction of Berwyn, Pennsylvania 19312 (I.R.S. Employer
incorporation or organization) (Address of principal executive Identification
offices including zip code) Number
(610) 647-6800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
(Title of class)
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership
NONE
(Title of class)
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (ii) has been subject to such filing
requirements for the past 90 days. YES X NO---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified under applicable items herein)
Certain exhibits to the Company's Registration Statement on Form S-1 (File
No. 33-89476) are incorporated by reference as Exhibits in Part IV of this
Report.
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PART I
ITEM 1:BUSINESS
GENERAL
The Partnership was formed on January 13, 1995, under the Pennsylvania
Revised Uniform Limited Partnership Act. The Partnership began offering
$15,000,000 of Units of Limited Partnership ("Units") to the public on May 12,
1995 (the "Offering"). On September 22, 1995, subscribers for 126,118 Units
($2,521,380) were admitted as Limited Partners of the Partnership. As of
March 6, 1997, subscribers for 440,121 units ($8,801,440) had been admitted as
Limited Partners of the Partnership.
See "The Glossary" below for the definition of capitalized terms used
in this report.
PRINCIPAL INVESTMENT OBJECTIVES
The Partnership was formed for the purpose of acquiring various types of
Equipment, including computer peripheral and other similar capital equipment.
The Partnership utilizes a substantial portion of the proceeds of the Offering,
Retained Proceeds and debt financing (not to exceed 30% of the aggregate cost of
the Equipment owned or subject to Conditional Sales Contract by the Partnership
at the time the debt is incurred) to purchase IBM and IBM compatible computer
peripheral and other similar capital equipment. The Partnership acquires
Equipment which is subject to lease principally to U.S. corporations and other
institutions pursuant predominantly to Operating Leases. The Partnership retains
the flexibility to enter into Full Payout Net Leases and Conditional Sales
Contracts, but has not done so.
The Partnership's principal investment objectives are to:
(a) acquire, lease and sell Equipment to generate revenues from
operations sufficient to provide quarterly cash distributions to Limited
Partners;
(b) preserve and protect Limited Partners' capital;
(c) use a portion of Cash Flow and Net Disposition Proceeds derived from
the sale, refinancing or other disposition of Equipment to purchase
additional Equipment; and
(d) refinance, sell or otherwise dispose of Equipment in a manner that
will maximize the proceeds to the Partnership.
THERE CAN BE NO ASSURANCE THAT ANY OF THESE OBJECTIVES WILL BE ATTAINED.
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 the Offering in a single category of computer peripheral and other similar
capital equipment, subject to certain restrictions.
Limited Partners do not have any right to vote on or otherwise approve or
disapprove any particular investment to be made by the Partnership.
Although the Partnership has acquired predominantly new Equipment, the
Partnership may purchase used Equipment. Generally, Equipment is purchased
through lease brokers who charge the Partnership a premium over the cost of the
Equipment to compensate them for their services. Equipment may also be acquired
from manufacturers, distributors, leasing companies, agents, owner-users,
owner-lessors, and other suppliers upon terms that vary depending upon the
Equipment and supplier involved. Manufacturers and distributors usually furnish
a limited warranty against defects in material and workmanship and some purchase
agreements for
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Equipment provide for service and replacement of parts during a limited
period. Equipment purchases are also made through lease brokers and on an ad
hoc basis to meet the needs of a particular lessee.
As of December 31, 1996, all Equipment purchased by the Partnership is
subject to an Operating Lease or an Operating Lease was entered into with a
third party when the Partnership acquired an item of Equipment. The Partnership
may also engage in sale/leaseback transactions, pursuant to which the
Partnership would purchase Equipment from companies that would then immediately
lease the Equipment from the Partnership. The Partnership may also purchase
Equipment which is leased under Full Payout Net Leases or sold under Conditional
Sales Contracts at the time of acquisition or the Partnership may enter into a
Full Payout Net Lease or Conditional Sales Contract with a third party when the
Partnership acquires an item of Equipment.
The Partnership may enter into arrangements with one or more
manufacturers pursuant to which the Partnership purchases from such
manufacturers Equipment which has previously been leased directly by the
manufacturer to third parties ("vendor leasing programs"). The Partnership
and manufacturers may agree to nonrecourse loans to the Partnership from the
manufacturer to finance the acquisition of Equipment secured by the Equipment
and the receivables due to the manufacturers from users of such Equipment. It
is expected that the manufacturers of Equipment will provide maintenance,
remarketing and other services for the Equipment subject to such agreements.
As of December 31, 1996, the Partnership has not entered into any such
agreements.
The General Partner has the discretion consistent with its fiduciary duty to
change the investment objectives of the Partnership if it determines that such a
change is in the best interest of the Limited Partners and so long as such a
change is consistent with the Partnership Agreement. The General Partner will
notify the Limited Partners if it makes such a determination to change the
Partnership's investment objectives.
TYPES OF EQUIPMENT
COMPUTER PERIPHERAL EQUIPMENT. Computer peripheral equipment consists of
devices used to convey information into and out of a central processing unit
(or "mainframe") of a computer system, such as tape drives, disk drives, tape
controllers, disk controllers, printers, terminals and related control units,
all of which are in some way related to the process of storing, retrieving,
and processing information by computer.
The Partnership acquires primarily IBM manufactured or IBM compatible
equipment. The General Partner believes that dealing in IBM and IBM compatible
equipment is particularly advantageous because of the large customer base,
policy of supporting users with software and maintenance services and the large
amount of IBM and IBM compatible equipment in the marketplace.
Computer technology has developed rapidly in recent years and is expected to
continue to do so. Technological advances have permitted continued reductions in
the cost of computer processing capacity, thereby permitting applications not
economically feasible a few years ago. Much of the older IBM and IBM compatible
computer peripheral equipment has not been retired from service, because
software is generally interchangeable between older and newer equipment, and
older equipment is capable of performing many of the same functions as newer
equipment. The General Partner believes that historically values of peripheral
equipment have been affected less dramatically by changes in technology than
have the values of central processing units. An equipment user who upgrades to a
more advanced central processor generally can continue to use his existing
peripheral equipment. Peripheral equipment nevertheless is subject to declines
in value as new, improved models are developed and become available.
Technological advances and other factors have at times caused dramatic reduction
in the market prices of older models of IBM and IBM compatible computer
peripheral equipment from the prices at which they were originally introduced.
OTHER EQUIPMENT-RESTRICTIONS. The Partnership acquires computer
peripheral equipment, such as tape drives, disk drives, tape controllers,
disk controllers, printers, terminals and related control units, all of which
are in some way related to the process of storing, retrieving and processing
information by computer. The Partnership
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expects to invest primarily in computer peripheral Equipment that is
compatible with IBM Equipment. However, the Partnership may acquire
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 is comparable in quality to similiar IBM or IBM compatible
Equipment. The General Partner is also authorized, but does not presently
intend, to cause the Partnership to invest in non IBM compatible computer
peripheral, data processing, telecommunication or medical technology
equipment. The Partnership may not invest in any of such other types of
Equipment 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. There can be no assurance that any Equipment
investments can be found which meet this standard. Accordingly, there can be
no assurance that investments of this type will be made by the Partnership.
DIVERSIFICATION
Diversification is generally desirable to minimize the effects of changes in
specific industries, local economic conditions or similar risks. However, the
extent of the Partnership's diversification, in the aggregate and within each
category of Equipment, depends in part upon the financing which can be assumed
by the Partnership or borrowed from third parties on satisfactory terms. The
Partnership's policy not to borrow on a recourse basis will further limit its
financing options. Diversification also depends on the availability of various
types of Equipment. As of December 31, 1996, the Partnership has acquired a
diversified Equipment portfolio which it has leased to 9 different companies
located throughout the United States. Approximately 31% of the Equipment
acquired by the Partnership consists of tape storage devices. Approximately 28%
of the Equipment consists of "RAID" (Redundant Arrays of Independent/
Inexpensive Disks) technology, which provides a high level of security to
critical data within a computer system and has only been available since October
1994. Approximately 23% of the Equipment consists of printers. The remaining 18%
of the Equipment consists of departmental servers and enterprise servers.
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 to date has purchased, and in the future intends to continue
to purchase only Equipment that is subject to a lease or for which a lease or
similar agreement will be entered into contemporaneously with the consummation
of the Partnership's acquisition of the Equipment. The General Partner to date
has leased, and in the future intends to continue to lease most of the Equipment
purchased by the Partnership to third parties pursuant to Operating Leases.
Operating Leases are relatively short-term (22 to 48 month) leases under which
the aggregate noncancellable rental payments during the original term of the
lease are not sufficient to permit the lessor to recover the purchase price of
the subject Equipment. The Equipment may also be leased pursuant to Full Payout
Net Leases. Full Payout Net Leases are leases under which the aggregate
noncancellable rental payments during the original term of the lease are at
least sufficient to recover the purchase price of the subject Equipment. It is
anticipated that the Partnership will enter into few, if any, Full Payout Net
Leases. The General Partner may also enter into Conditional Sales Contracts for
Equipment. A Conditional Sales Contract generally provides that the
noncancellable payments to the seller over the term of the contract are
sufficient to recover the investment in such Equipment and to provide a return
on such investment. Under a Conditional Sales Contract, the seller reserves
title to, and retains a security interest in, the Equipment until the Purchase
Price of the Equipment is paid. As of December 31, 1996, the Partnership has not
entered into any Full Payout Net Leases or Conditional Sales Contract for
Equipment and does not presently intend to.
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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 represents a greater risk to the Partnership
than a Full Payout Net Lease, because in order to recover the purchase price
of the subject Equipment and earn a return on such investment, it is
necessary to renew or extend the Operating Lease, lease the Equipment to a
third party at the end of the original lease term, or sell the Equipment. On
the other hand, the term of an Operating Lease is generally much shorter than
the term of a Full Payout Net Lease, and the lessor is thus afforded an
opportunity under an Operating Lease to re-lease or sell the subject
Equipment at an earlier stage of the Equipment's life cycle than under a Full
Payout Net Lease. Also, the annual rental payments received under an
Operating Lease are ordinarily higher than those received under a Full Payout
Net Lease.
The Partnership's policy is to generally enter into "triple net leases"
(or the equivalent, in the case of a Conditional Sales Contract) which
typically provide that the lessee or some other party bear the risk of
physical loss of the Equipment; pay taxes relating to the lease or use of the
Equipment; maintain the Equipment; indemnify the Partnership-lessor against
any liability suffered by the Partnership as the result of any act or
omission of the lessee or its agents; maintain casualty insurance in an
amount equal to the greater of the full value of the Equipment and a
specified amount set forth in the lease; and maintain liability insurance
naming the Partnership as an additional insured with a minimum coverage which
the General Partner deems appropriate. In addition, the Partnership has
purchased "umbrella" insurance policies to cover excess liability and
casualty losses, to the extent deemed practicable and advisable by the
General Partner. As of December 31, 1996, all leases that have been entered
into are "triple net leases".
The General Partner has not established any standards for lessees to
which it will lease Equipment and, as a result, there is not an investment
restriction prohibiting the Partnership from doing business with any lessees.
However, a credit analysis of all potential lessees is undertaken by the
General Partner to determine the lessee's ability to make payments under the
proposed lease. The General Partner may refuse to enter into an agreement
with a potential lessee based on the outcome of the credit analysis.
The terms and conditions of the Partnership's leases, or Conditional
Sales Contracts, are each determined by negotiation and may impose
substantial obligations upon the Partnership. Where the Partnership assumes
maintenance or service obligations, the General Partner generally causes the
Partnership to enter into separate maintenance or service agreements with
manufacturers or certified maintenance organizations to provide such
services. Such agreements generally require annual or more frequent
adjustment of service fees. As of December 31, 1996, the Partnership has not
entered into any such agreements and does not intend to.
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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 indebtness to acquire
Equipment until the net proceeds of the Offering are fully invested, or
committed to investment, in Equipment). The Partnership will incur only
non-recourse debt which is secured by Equipment and lease income therefrom.
Such leveraging permits the Partnership to increase the aggregate amount of
its depreciable assets, and, as a result, potentially increases both its
lease revenues and its federal income tax deductions above those levels which
would be achieved without leveraging. There is no limit on the amount of debt
that may be incurred in connection with the acquisition of any single item of
Equipment. Any debt incurred is fully amortized over the term of the initial
lease or Conditional Sales Contract to which the Equipment securing the debt
is subject. The precise amount borrowed by the Partnership depends on a
number of factors, including the types of Equipment acquired by the
Partnership; the creditworthiness of the lessee; the availability of suitable
financing; and prevailing interest rates. The Partnership is flexible in the
degree of leverage it employs, within the permissible limit. There can be no
assurance that credit will be available to the Partnership in the amount or
at the time desired or on terms considered reasonable by the General Partner.
The Partnership will continue to purchase items of Equipment without
leverage until the net proceeds of the offering are fully invested, and may
continue to purchase Equipment without leverage thereafter. Subsequent to the
net offering proceeds being fully invested, the Partnership may purchase an
item of Equipment without leverage and thereafter find suitable financing, it
may then obtain the financing, secure the financing with the purchased
Equipment 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.
After the net proceeds of the offering are fully invested in Equipment,
the General Partner plans to cause the Partnership to borrow funds, to the
fullest extent practicable, at interest rates fixed at the time of borrowing.
However, the Partnership may borrow funds at rates which vary with the
"prime" or "base" rate. If lease revenues were fixed, a rise in the "prime"
or "base" rate would increase borrowing costs and reduce the amount of the
Partnership's income and cash available for distribution. Therefore, the
General Partner is permitted to borrow funds to purchase Equipment at
fluctuating rates only if the lease for such Equipment provides for
fluctuating rental payments calculated on a similar basis.
Any debt incurred by the partnership must be nonrecourse. Nonrecourse
debt, in the context of the business to be conducted by the Partnership,
means that the lender providing the funds can look for security only to the
Equipment pledged as security and the proceeds derived from leasing or
selling such Equipment. Neither the Partnership nor any Partner (including
the General Partner) would be liable for repayment of any nonrecourse debt.
Loan agreements may also require that the Partnership maintain certain
reserves or compensating balances and may impose other obligations upon the
Partnership. Moreover, since a significant portion of the Partnership's
revenues from the leasing of Equipment will be reserved for repayment of
debt, the use of financing 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 is the Partnership required to pay
interest on any such loan at an annual rate greater than three percent over the
"prime rate" from time to time announced by PNC Bank, Philadelphia, Pennsylvania
("PNC Bank"). All payments of principal and
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interest on any financing provided by the General Partner or any of its
affiliates are due and payable by the Partnership within 12 months after the
date of the loan.
REFINANCING POLICIES
Subject to the limitations set forth in "Borrowing Policies" above, the
Partnership may refinance its debt from time to time. With respect to a
particular item of Equipment, the General Partner will take into
consideration such factors as the amount of appreciation in value, if any, to
be realized, the possible risks of continued ownership, and the anticipated
advantages to be obtained for the Partnership, as compared to selling such
Equipment.
Refinancing, if achievable, may permit the Partnership to retain an item
of Equipment and at the same time to generate additional funds for
reinvestment in additional Equipment or for distribution to the Limited
Partners.
LIQUIDATION POLICIES
The General Partner intends to cause the Partnership to begin disposing
of its Equipment by approximately January 2004. Notwithstanding the
Partnership's objective to sell all of its assets and dissolve by
approximately December 31, 2006, the General Partner may at any time cause
the Partnership to dispose of all its Equipment and, dissolve the Partnership
upon the approval of Limited Partners holding a Majority in Interest of Units.
Particular items of Equipment may be sold at any time if, in the judgment of
the General Partner, it is in the best interest of the Partnership to do so. The
determination of whether particular items of Partnership Equipment should be
sold or otherwise disposed of is made by the General Partner after consideration
of all relevant factors (including prevailing general economic conditions,
lessee demand, the General Partner's views of current and future market
conditions, the cash requirements of the Partnership, potential capital
appreciation, cash flow and federal income tax considerations), with a view
toward achieving the principal investment objectives of the Partnership. As
partial payment for Equipment sold, the Partnership may receive purchase money
obligations secured by liens on such Equipment. Subject to the General Partner's
discretion, the Partnership may extend beyond December 31, 2006, if deemed
beneficial to the Partnership.
MANAGEMENT OF EQUIPMENT
Equipment management services for the Partnership's Equipment is provided by
the General Partner and its Affiliates and by persons employed by the General
Partner. Such services will consist of collection of income from the Equipment,
negotiation and review of leases, Conditional Sales Contracts and sales
agreements, releasing and leasing-related services, payment of operating
expenses, periodic physical inspections and market surveys, servicing
indebtedness secured by Equipment, general supervision of lessees to assure that
they are properly utilizing and operating Equipment, providing related services
with respect to Equipment, supervising, monitoring and reviewing services
performed by others in respect to Equipment and preparing monthly Equipment
operating statements and related reports.
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COMPETITION
The equipment leasing industry is highly competitive. The Partnership
competes with leasing companies, equipment manufacturers and their affiliated
financing companies, distributors and entities similar to the Partnership
(including other programs sponsored by the General Partner), some of which
have greater financial resources than the Partnership and more experience in
the equipment leasing business than the General Partner. Other leasing
companies and equipment manufacturers, their affiliated financing companies
and distributors may be in a position to offer equipment to prospective
lessees on financial terms which are more favorable 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 that combines service and
hardware with payment accomplished through a single periodic charge.
The dominant firm in the computer marketplace is International Business
Machines Corporation, and its subsidiary IBM Credit Corporation is the
dominant force in the leasing of IBM equipment. Because of IBM's substantial
resources and dominant position, revolutionary changes with respect to
computer systems, pricing, marketing practices, technological innovation and
the availability of new and attractive financing plans could occur at any
time. Significant action in any of these areas by IBM or IBM Credit
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.
INVESTMENTS
As of March 20, 1997, the Partnership has purchased, or has made the
commitment to purchase, the following Equipment:
LIST PURCHASE MONTHLY LEASE
LESSEE MFG EQUIPMENT DESCRIPTION PRICE PRICE RENT TERM
Bellsouth STK (1) 9200-XN3 3,445,720 787,196 17,467 36
Bellsouth STK (1) 9200-XN3 2,635,720 582,671 12,929 36
Southern Pacific IBM (325) 4230-5S3 1,183,975 990,357 24,160 36
Southern Pacific IBM (50) 4028-NS1 187,200 147,963 3,610 36
Chrysler STK (2) 9490-M34 686,158 490,110 7,350 24
Yamaha STK (1) 9490-M34 1,007,413 383,553 9,025 36
ADP IBM (1) 3490-A20 422,900 178,673 4,290 36
Household Intl. STK3 (3) 9490-M34 671,898 405,628 9,100 36
Timken DEC (1) Alpha Server 2100A 259,507 204,781 5,308 36
Timken DEC (1) Alpha Server 2100A 46,657 40,928 1,062 36
Johnson Cntrl HP (13) HP9000-C110 441,415 304,718 7,961 36
Honda R&D SGI Onyx Infinite Reality DS 323,108 263,498 7,076 36
AT&T IBM (1) 3900 DW1/DW2 746,485 477,466 10,205 36
Federated IBM (38) 3130-020 909,910 600,000 15,162 34
It is not possible to determine the date when any additional net Offering
proceeds, less working capital reserves, will be fully invested in Equipment
by the Partnership or the terms of any additional purchases of Equipment. The
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Partnership will invest any additional net Offering proceeds prior to the
acquisition of Equipment in short-term, highly liquid investments where there
is appropriate safety of principal, such as money market accounts.
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. 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.
RESERVES
Because the Partnership's leases are on a "triple-net" basis, no
permanent reserve for maintenance and repairs has been 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 may be necessary for the Partnership to obtain additional
funds by refinancing its Equipment or borrowing.
GENERAL RESTRICTIONS
Under the Partnership Agreement, the Partnership is not permitted, among
other things, to:
(a) invest in junior trust deeds unless received in connection with
the sale of an item of Equipment in an aggregate amount which does not
exceed 30% of the assets of the Partnership on the date of the
investment;
(b) invest in or underwrite the securities of other issuers;
(c) acquire any Equipment for Units;
(d) issue senior securities (except that the issuance to lenders of
notes or other evidences of indebtedness in connection with the
financing or refinancing of Equipment or the Partnership's business
shall not be deemed to be the issuance of senior securities);
(e) make loans to any Person, including the General Partner or any of
its Affiliates, except to the extent a Conditional Sales Contract
constitutes a loan;
(f) sell or lease any Equipment to, lease any Equipment from, or
enter into any sale-leaseback transactions with, the General Partner or
any of its Affiliates; or
(g) give the General Partner or any of its Affiliates an exclusive right
or employment to sell the Partnership's Equipment.
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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.
ITEM 2: PROPERTIES
Not Applicable
ITEM 3: LEGAL PROCEEDINGS
Not Applicable
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
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PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
There is no public market for the Units nor is it anticipated that one
will develop. As of March 6, 1997, there were 467 holders of Units. The Units
are not listed on any exchange or permitted to trade on any over-the-counter
market. In addition, there are substantial restrictions on the
transferability of Units.
GENERAL LIMITATIONS
Units cannot be transferred without the consent of the General Partner,
which may be withheld in its absolute discretion. The General Partner
monitors transfers of Units in an effort to ensure that all transfers are
within certain safe harbors promulgated by the IRS to furnish guidance
regarding publicly traded partnerships. These safe harbors limit the number
of transfers that can occur in any one year. The General Partner intends to
cause the Partnership to comply with the safe harbor that permits nonexempt
transfers and redemptions of Units of up to five percent of the total
outstanding 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, will
establish an amount for redemption, generally not to exceed two percent of
the outstanding Units per year, subject to the General Partner's good faith
determination that such redemptions will not (a) cause the Partnership to be
taxed as a corporation under Section 7704 of the Code or (b) impair the
capital or operations of the Partnership. (The Partnership may redeem Units
in excess of the two percent limitation if, in the good faith judgment of the
General Partner, the conditions imposed in the preceding sentence would
remain satisfied.) The redemption price for Units will be 105% of the selling
Limited Partner's Adjusted Capital Contributions attributable to the Units
for sale. Following the determination of the annual redemption amount,
redemptions will occur on a semi-annual basis and all requests for
redemption, which must be made in writing, must be on file as of the Record
Date in which the redemption is to occur. The General Partner will maintain a
master list of requests for redemption with priority being given to Units
owned by estates, followed by IRAs and Qualified Plans. All other requests
will be considered in the order received. Redemption requests made by or on
behalf of Limited Partners who are not affiliated with the General Partner or
its Affiliates will be given priority over those made by Limited Partners who
are affiliated with the General Partner or its Affiliates. All redemption
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.
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:
11
<PAGE>
(1) transfers in which the basis of the Unit in the hands of the
transferee is determined, in whole or in part, by reference to its basis in
the hands of the transferor (for example, Units acquired by corporations in
certain reorganizations, contributions to capital, gifts of Units, Units
contributed to another partnership, and nonliquidating as well as
liquidating distributions by a parent partnership to its partners of
interests in a subpartnership);
(2) transfers at death;
(3) transfers between members of a family (which include brothers and
sisters, spouse, ancestors, and lineal descendants);
(4) transfers resulting from the issuance of Units by the Partnership in
exchange for cash, property, or services;
(5) transfers resulting from distributions from Qualified Plans; and
(6) any transfer by a Limited Partner in one or more transactions during
any 30-day period of Units representing in the aggregate more than five
percent of the total outstanding interests in capital or profits of the
Partnership.
ADDITIONAL RESTRICTIONS ON TRANSFER
Limited Partners who wish to transfer their Units to a new beneficial
owner are required to pay the Partnership up to $50 for each transfer to
cover the Partnership's cost of processing the transfer application and take
such other actions and execute such other documents as may be reasonably
requested by the General Partner. There is no charge for re-registration of a
certificate in the event of a marriage, divorce, death, or trust so long as
the transfer is not a result of a sale of the Units.
In addition, the following restrictions apply to each transfer: (i) no
transfer may be made if it would cause 25% or more of the outstanding Units
to be owned by Benefit Plans; and (ii) no transfer is permitted unless the
transferee obtains such governmental approvals as may reasonably be required
by the General Partner, including without limitation, the written consents of
the Pennsylvania Securities Commissioner and of any other state securities
agency or commission having jurisdiction over the transfer.
ALLOCATIONS AND DISTRIBUTIONS BETWEEN THE GENERAL PARTNER AND
THE LIMITED PARTNERS
Cash distributions, if any, are made quarterly on, March 31, June
30, September 30, and December 31 of each year. Distributions are made 99% to
the Limited Partners and one percent to the General Partner until the Limited
Partners have received an amount equal to their Capital Contributions plus
the Priority Return; thereafter, cash distributions will be made 90% to 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 Priority Return is calculated on the Limited Partners' Adjusted
Capital Contributions for their Units. The Adjusted Capital Contributions
will initially be equal to the amount paid by the Limited Partners for their
Units. If distributions at any time exceed the Priority Return, the Adjusted
Capital Contributions will be reduced by the excess, decreasing the base on
which the Priority Return is calculated.
If the proceeds resulting from the sale of any Equipment are reinvested
in Equipment, sufficient cash will be distributed to the Partners to pay the
additional federal income tax resulting from such sale for a Partner in a
39.6% federal income tax bracket or, if lower, the maximum federal income tax
rate in effect for individuals for such taxable year.
12
<PAGE>
Generally, the General Partner is allocated Net Profits equal to its cash
distributions (but not less than one percent of Net Profits) and the balance
is allocated to the Limited Partners. Net Profits arising from transactions
in connection with the termination or liquidation of the Partnership are
allocated in the following order: (1) First, to each Partner in an amount
equal to the negative amount, if any, of his Capital Account; (2) Second, an
amount equal to the excess of the proceeds which would be distributed to the
Partners based on the Operating Distributions to the Partners over the
aggregate Capital Accounts of all the Partners, to the Partners in proportion
to their respective shares of such excess, and (3) Third, with respect to any
remaining Net Profits, to the Partners in the same proportions as if the
distributions were Operating Distributions. Net Losses, if any, are in all
cases allocated 99% to the Limited Partners and one percent to the General
Partner.
Net Profits and Net Losses are computed without taking into account, in
each taxable year of the Partnership, any items of income, gain, loss or
deduction required to be specially allocated pursuant to Section 704(b) of
the Code and the Treasury Regulation promulgated thereunder. No Limited
Partner is required to contribute cash to the capital of the Partnership in
order to restore a closing Capital Account deficit, and the General Partner
has only a limited deficit restoration obligation under the Partnership
Agreement.
Quarterly distributions in the following amounts were declared and paid
to the Limited Parners during 1996 and 1995.
QUARTER ENDED 1996 1995
March 31 $108,647 $ --
June 30 137,297 --
September 30 164,131 --
December 31 191,890 $83,796
---------- ---------
$ 601,965 $83,796
---------- ---------
---------- ---------
ALLOCATIONS AND DISTRIBUTIONS AMONG THE LIMITED PARTNERS
Except during the Offering Period, Cash Available for Distribution which
is allocable to the Limited Partners is apportioned among and distributed to
them solely with reference to the number of Units owned by each as of the
Record Date for each such distribution. During the Offering Period, Cash
Available for Distribution which is allocable to the Limited Partners was
apportioned among and distributed to them with reference to both (i) the
number of Units owned by each as of each Record Date and (ii) the number
of days since the previous Record Date (or, in the case of the first Record
Date, the commencement of the Offering Period) that the Limited Partner owned
the Units.
After the Offering Period, Net Profits, Net Losses and Cash Available for
Distribution allocable to the Limited Partners was apportioned among them in
accordance with the number of Units owned by each. A different convention
were utilized during the Offering Period, whereby Net Profits and Net Losses
allocable to Limited Partners are apportioned among them in the ratio which
the product of the number of Units owned by a Limited Partner multiplied by
the number of days in which the Limited Partner owns such Units during the
period bears to the sum of such products for all Limited Partners.
In addition, where a Limited Partner transfers Units during a taxable
year, the Limited Partner may be allocated Net Profits for a period for which
such Limited Partner does not receive a corresponding cash distribution.
13
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
The following table sets forth, in summary form, certain financial data
for the Partnership for the year ended December 31, 1996 and for the period
September 22, 1995 (commencement of operations) to December 31, 1995. This
table is qualified in its entirety by the more detailed information and
financial statements presented elsewhere in this report, and should be read
in conjunction with the financial statements and related notes thereto
included elsewhere in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and related
notes thereto included elsewhere herein.
FOR THE YEAR ENDED FOR THE PERIOD
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
Lease Income $ 1,123,685 $ 98,538
Net Loss (730) (12,065)
Cash distributions 608,045 84,642
Net loss per Unit (.02) (.09)
Cash distribution per Unit 2.00 .55
Total assets $ 6,614,654 $ 3,373,407
Total liabilities 182,734 216,886
Net income per Unit is computed based upon net income allocated to the
limited partners and the weighted average number of Units outstanding during the
year. Cash distribution per Unit is computed based upon distributions allocated
to the Limited Partners and the weighted average number of equivalent Units
outstanding during the year.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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
limited partnership 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 years ended December
31, 1996 and 1995, were from Partners' contributions of $4,371,000 and
$3,679,000, and cash from operations of $949,000 and $56,000, respectively.
The primary uses of cash for the years ended December 31, 1996 and 1995, were
for capital expenditures for new equipment totaling $1,777,000 and
$2,850,000, the payment of acquisition fees of $147,000 and $123,000, for the
payment of preferred distributions to partners totaling $608,000 and $85,000,
and for the payment of offering costs totaling $487,000 and $426,000,
respectively.
14
<PAGE>
Currently, Partners' contributions and rental income from the
Partnership's leases are invested in money market accounts investing directly
in treaury 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 invested in
these money market accounts respectively.
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 1997,
$1,133,000 in 1998 and $238,000 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 Offering Proceeds 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
The comparison of the results of operations is for the twelve months
ended December 31, 1996, compared to the period from September 22, 1995
(commencement of operations) through December 31, 1995.
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 a net loss income of $1,000
and $12,000, respectively.
Lease income incresed by 1,035% from December 31, 1995, to December 31,
1996, primarily due to utilizing cash from Partners' contributuions 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
together with the leases acquired in 1995 generated approximately $1,124,000
in revenue.
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 increse 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 of $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 of $108,000.
15
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
------------------------
Commonwealth Income & Growth Fund II
Financial Statements
Year ended December 31, 1996
and for the period September 22, 1995
(commencement of operations)
to December 31, 1995
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors............... 17
Audited Financial Statements
Balance Sheets................................ 18
Statements of Operations...................... 19
Statements of Partners' Capital............... 20
Statements of Cash Flows...................... 21
Notes to Financial Statements................. 22
</TABLE>
16
<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
17
<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.
18
<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.
19
<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.
20
<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.
21
<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.
22
<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.
23
<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.
24
<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.
25
<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.
26
<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>
27
<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.
28
<PAGE>
Commonwealth Income &
Growth Fund, Inc.
BALANCE SHEET
As of February 29, 1996
CONTENTS
Report of Independent Auditors.............. 30
Audited Balance Sheet.......................
Balance Sheet............................... 31
Notes to Balance Sheet...................... 32
29
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholder
Commonwealth Income & Growth Fund, Inc.
We have audited the accompanying balance sheet of Commonwealth Income &
Growth Fund, Inc. (an indirect wholly-owned subsidiary of Commonwealth
Capital Corp.), as of February 29, 1996. This balance sheet is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of Commonwealth Income & Growth
Fund, Inc. at February 29, 1996, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 28, 1996
30
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND, INC.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
BALANCE SHEET
February 29, 1996
<TABLE>
<CAPTION>
<S> <C>
Assets
Cash............................................................. $ 500
Receivables from Income Funds.................................... 127,798
Investment in Partnerships....................................... 2,000
---------
$ 130,298
---------
---------
Liabilities
Accounts payable to Commonwealth Capital Corp.................... $ 129,198
Stockholder's equity
Common stock at $1 stated value:
Authorized shares--1,000
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
---------
$ 130,298
---------
---------
</TABLE>
See accompanying notes.
31
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND, INC.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
NOTES TO BALANCE SHEET
February 29, 1996
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.
32
<PAGE>
Commonwealth Capital Corp.
Consolidated Balance Sheet
As of February 29, 1996
Contents
Report of Independent Auditors............................................ 34
Audited Consolidated Balance Sheet
Consolidated Balance Sheet................................................ 35
Notes to Consolidated Balance Sheet....................................... 36
33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Stockholder
Commonwealth Capital Corp.
We have audited the accompanying consolidated balance sheet of Commonwealth
Capital Corp. as of February 29, 1996. This balance sheet is the responsibility
of the Company s management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the consolidated financial position of Commonwealth Capital
Corp. at February 29, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 28, 1996
34
<PAGE>
Commonwealth Capital Corp.
Consolidated Balance Sheet
February 29, 1996
<TABLE>
<S> <C>
Assets
Cash and cash equivalents...................................... $ 283,806
Receivables from Income Funds.................................. 458,781
Advances to income funds....................................... 223,012
Other receivables.............................................. 44,243
Income taxes receivable........................................ 41,300
Minimum lease payments receivable, net of
unearned interest income of $4,998,828....................... 9,775,605
Deferred tax asset............................................. 132,000
Investment in Income Funds..................................... 17,200
Other assets................................................... 12,084
Office furniture and equipment, net of
accumulated depreciation of $66,986.......................... 40,471
-----------
Total assets................................................... $11,028,502
-----------
-----------
Liabilities and stockholder's equity
Accounts payable and accrued expenses.......................... $ 245,752
Nonrecourse obligations........................................ 9,775,605
-----------
Total liabilities.............................................. 10,021,357
Stockholder s equity:
Common stock, $1 par value:
Authorized shares--1,000
Issued and outstanding shares--10.......................... 10
Retained earnings............................................ 1,007,135
-----------
Total stockholder's equity..................................... 1,007,145
-----------
Total liabilities and stockholder s equity..................... $11,028,502
-----------
-----------
</TABLE>
- ------------------------
See accompanying notes.
35
<PAGE>
Commonwealth Capital Corp.
NOTES TO CONSOLIDATED BALANCE SHEET
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 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 balance sheet includes the accounts of the
Company, its wholly-owned subsidiary, CDI, and its wholly-owned subsidiaries
(Note 1). All significant intercompany accounts and transactions have been
eliminated in the accompanying consolidated balance sheet. The balance sheet
is presented on an unclassified basis in accordance with leasing industry
practice.
USE OF ESTIMATES
The preparation of the balance sheet in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the balance sheet and accompanying notes.
Actual results could differ from those estimates.
36
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Balance Sheet (continued)
2. ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less to be cash equivalents. At February 29, 1996, cash equivalents
were invested in a money market fund investing directly in treasury
obligations.
OFFICE FURNITURE AND EQUIPMENT
Office furniture and equipment is carried at cost and is 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. Results of the Income
Funds as of December 31, 1995 are as follows:
1995
--------------------
Total assets............................... $42,067,000
Nonrecourse debt........................... 13,561,000
Other liabilities.......................... 3,860,000
Partners' capital.......................... 24,646,000
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 $4,016,000 at February 29,
1996. Such notes have been eliminated in the consolidation of the
accompanying balance sheet.
37
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Balance Sheet (continued)
2. ACCOUNTING POLICIES (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
$1,777,000 in fees for managing the Income Funds during the year ended
February 29, 1996.
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 under the leases and certificates of
participation are approximately $9,615,000, of which $8,170,000 is 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 sheet. The certificates mature from 1996 to 2011.
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 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 year ended February 29, 1996.
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
balance sheet.
38
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Balance Sheet (continued)
3. LEASE COMMITMENTS (CONTINUED)
Future minimum lease payments to be received, excluding interest, as of
February 29, 1996 are as follows:
1997 $ 730,605
1998 605,000
1999 655,000
2000 685,000
2001 730,000
Thereafter 6,370,000
---------
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. 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.
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.
5. INCOME TAXES
The Company files a consolidated federal income tax return with CDI and its
subsidiaries. The Company has investment tax credits of $266,000 at February 29,
1996. 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.
39
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Balance Sheet (continued)
5. INCOME TAXES (CONTINUED)
The Company has a federal deferred tax asset arising primarily from the
carryforward of investment tax credits of $298,000 at February 29, 1996. 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.
6. 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.
40
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
41
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
GENERAL
The General Partner, a wholly-owned subsidiary of Commonwealth of
Delaware, Inc., a Delaware corporation, which is in turn a wholly-owned
subsidiary of Commonwealth Capital Corp., a Pennsylvania corporation ("Com
Cap Corp."), was incorporated in Pennsylvania on August 26, 1993. The General
Partner also acts as the General Partner of Commonwealth Income & Growth Fund
I. The principal business office of the General Partner is 1160 West
Swedesford Road, Suite 340, Berwyn, Pennsylvania 19312, and its telephone
number is 610-647-6800. The General Partner manages and controls the affairs
of the Partnership and has sole responsibility for all aspects of the
Partnership's operations. The officers of the General Partner devote such
time to the affairs of the Partnership as in the opinion of the General
Partner is necessary to enable it to perform its function as General Partner.
The officers of the General Partner are not required to spend their full time
in meeting their obligations to the Partnership.
The directors and officers of the General Partner 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.
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 62, is President of both Com Cap Corp. and the
General Partner. Mr. Springsteen is also President of the general partners or
controlling entities of several prior programs sponsored by Com Cap Corp.
with objectives similar to the Partnership's. He 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 37, 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 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,
42
<PAGE>
financial, EDP, banking relationships and personnel functions. Prior to 1984,
Mr. Kintzer was employed by the international public accounting firm of Ernst
& Young LLP. Mr. Kintzer is a member of both the American Institute of
Certified Public Accountants and The Pennsylvania Institute of Certified
Public Accountants. Mr. Kintzer received an A.B. degree in accounting from
Franklin & Marshall College in 1981.
Kathleen S. Enscoe, age 31, is Controller of Com Cap Corp. and certain of
its subsidiaries where she has been employed since 1992. Ms. Enscoe is an
active member of the Equipment Leasing Association. From 1988 to 1992, Ms.
Enscoe was employed as a staff accountant in the financial reporting
department of WWF Paper Corporation. Ms. Enscoe received a Bachelor of
Science Business Administration degree in 1988 from Geneva College with dual
majors in accounting and business administration.
Gregory M. Lorenz, age 34, is Vice President of Com Cap Corp. and has
been employed by Com Cap Corp. since April of 1994. From 1985 to 1993, Mr.
Lorenz was employed by Daley Marketing Corp. where he served as Vice
President of Marketing and Director of Sales and Marketing. Mr. Lorenz is a
member of the Equipment Leasing Association and received an Associates of Art
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.
ITEM 11:EXECUTIVE COMPENSATION
The following table summarizes the types, amounts and recipients of
compensation paid by the Partnership directly or indirectly to the General
Partner and its Affiliates. Some of these fees are paid regardless of the
success or profitability of the Partnership's operations and investments.
While such compensation and fees were established by the General Partner and
are not based on arm's-length negotiations, the General Partner believes that
such compensation and fees are comparable to those which would be charged by
an unaffiliated entity or entities for similar services. The Partnership
Agreement limits the liability of the General Partner and its Affiliates to
the Partnership and the Limited Partners and provides indemnification to the
General Partner and its Affiliates under certain circumstances.
43
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AMOUNT
ENTITY RECEIVING INCURRED INCURRED
COMPENSATION TYPE OF COMPENSATION DURING 1996 DURING 1995
- ---------------- --------------------------------------------------- ---------------- -----------
<S> <C> <C> <C>
OFFERING AND ORGANIZATION STAGE
The General Partner Organizational Fee. An Organization Fee $131,000 $110,000
equal to three percent of the first
$10,000,000 of Limited Partners' Capital
Contributions and two percent of the Limited
Partners' Capital Contribution in excess of
$10,000,000, as compensation for the
organization of the Partnership. It is
anticipated that all Organizational and
Offering Expenses which include legal,
accounting and printing expenses; various
registration and filing fees; miscellaneous
expenses related to the organization and
formation of the Partnership; other costs of
registration; and costs incurred in
connection with the preparation, printing
and distribution of this Report and other
sales literature. The General Partner pays
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.
OPERATIONAL AND SALE
OR LIQUIDATION STAGES
The General Partner Reimbursement of Expenses. The General $0 $0
and its Affiliates and its Affiliates Partner 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. 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.
The General Partner Equipment Acquisition Fee. An Equipment $147,000 $123,000
Acquisition Fee of four percent of the Purchase
Price of each item of Equipment purchased as
compensation for the negotiation of the acquisition
of the Equipment and the lease thereof or sale
under a Conditional Sales Contract. The fee
is paid upon closing of the Offering with
respect to the Equipment purchased by the
Partnership with the net proceeds of the
Offering available for investment in Equipment.
If the Partnership acquires Equipment in an amount
exceeding the net proceeds of the
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AMOUNT
ENTITY RECEIVING INCURRED INCURRED
COMPENSATION TYPE OF COMPENSATION DURING DURING
1996 1995
- ----------------- -------------------------------------------------- --------------- --------------
<S> <C> <C> <C>
Offering available for
investment in Equipment, the fee is paid
when such Equipment is acquired
The General Partner Debt Placement Fee. As compensation for $0 $0
arranging Term Debt to finance the
acquisition of Equipment by the Partnership,
a fee equal to one percent of such
indebtedness; provided, however, that such
fee is 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 is paid with respect to
borrowings from the General Partner or its
Affiliates.
The General Partner Equipment Management Fee. A monthly fee $56,000 $5,000
equal to the lesser of (I) the fees which
would be charged by an independent third
party for similar services for similar
equipment or (ii) the sum of (a) two percent
of (1) the Gross Lease Revenues attributable
to Equipment which is subject to Full Payout
Net Leases whcih contain net lease
provisions plus (2) the purchase price paid
on Conditional Sales Contracts as received
by the Partnership and (b) five percent of
the Gross Lease Revenues attributable to
Equipment which is subject to Operating
Leases.
The General Partner Re-Lease Fee. As compensation for providing $0 $0
re-leasing services for any Equipment for
which the General Partner has, following the
expiration of, or default under, the most recent
lease or Conditional Sales Contract, arranged a
subsequent lease or Conditional Sales
Contract for the use of such Equipment to a
lessee or other party, other than the
current or most recent lessee or other
operator of such equipment or its Affiliates
("Re-lease"), the General Partner will
receive, on a monthly basis, a Re-lease Fee
equal to the lesser of (a) the fees which
would be charged by an independent third
party for comparable services for comparable
equipment or (b) two percent of Gross Lease
Revenues derived from such Re-lease.
The General Partner Equipment Liquidation Fee. With respect to $0 $0
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 fo such
Equipment.
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AMOUNT
ENTITY RECEIVING INCURRED INCURRED
COMPENSATION TYPE OF COMPENSATION DURING DURING
1996 1995
- --------------- ---------------------------------------------------- ------------- ----------------
<S> <C> <C> <C>
The payment of such fee is
subordinated to the receipt by the Limited
Partners of (I) a return of their Capital
Contributions and 10% per annum cummmulative
return, compounded daily, on Adjusted
Capital Contributions ("Priority Return")
and (ii) the Net Disposition Proceeds from
such sale in accordance with the Partnership
Agreement. Such fee is reduced to the extend
any liquidation or resale fees are paid to
unaffiliated parties.
INTEREST IN THE PARTNERSHIP
The General Partner Partnership Interest. The General Partner $6,080 $846
has a present and continuing one percent
interest of $1,000 in the Partnership's
items of income, gain, loss, deduction,
credit, and tax preference. In addition, the
General Partner receives one percent of Cash
Available for Distribution until the
Limited Partners have received distributions
of Cash Available for Distribution equal to
their Capital Contributions plus the 10%
Priority Return and thereafter, the General
Partner will receive 10% of Cash Available
for Distribution.
</TABLE>
46
<PAGE>
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not Applicable
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership is subject to various conflicts of interest arising out
of its relationships with the General Partner and its Affiliates. These
conflicts include the following:
Competition with General Partner and Affiliates; Competition for
Management's Time
The General Partner and its Affiliate sponsor other investor programs which
are in potential competition with the Partnership in connection with the
purchase of Equipment as well as opportunities to lease and sell such Equipment.
These programs have each been organized to acquire the same types of Equipment
as are acquired by the Partnership and have acquired all of their Equipment
prior to the Partnership's commencement of its offering of Units. As a
consequence, competition among these programs for initial purchases of Equipment
has been insubstantial, although since each program may reinvest undistributed
cash in additional Equipment, competition for Equipment has occurred and is
likely to occur in the future. The General Partner and its Affiliates may also
form additional investor programs which may be competitive with the Partnership.
If one or more investor programs and the Partnership are in a position to
acquire the same Equipment, the General Partner will determine which program
will purchase the Equipment based upon the objectives of each and the
suitability of the acquisition in light of those objectives. The General Partner
will generally afford priority to the program or entity that has had funds
available to purchase Equipment for the longest period of time. If one or more
investor programs and the Partnership are in a position to enter into 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.
Certain senior executives of the General Partner and its Affiliates also
serve as officers and directors of the other programs and are required to
apportion their time among these entities. The Partnership is, therefore, in
competition with the other programs for the attention and management time of the
General Partner and 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.
ACQUISITIONS
Com Cap Corp. and the General Partner or other Affiliates of the General
Partner may acquire Equipment for the Partnership provided that (i) the
Partnership has insufficient funds at the time the Equipment is acquired,
(ii) the acquisition is in the best interest of the Partnership and (iii) no
benefit to the General Partner or its Affiliates arises from the acquisition
except for compensation paid to Com Cap Corp., the General Partner or such
other Affiliate as disclosed in this Report. Com Cap Corp., the General
Partner or their Affiliates will not hold Equipment for more than 60 days
prior to transfer to the Partnership. If sufficient funds become available to
the Partnership within such 60 day period, such Equipment may be resold to
the Partnership for a price not in excess of the sum of the cost of the
Equipment to such entity and any accountable Acquisition Expenses payable to
third parties which are incurred by such entity and interest on the Purchase
Price from the date of purchase to the date of transfer to the Partnership.
Com Cap Corp., the General Partner or such other Affiliate will retain any
rent or other payments received for the Equipment, and bear all expenses and
liabilities, other than accountable Acquisition Expenses payable to third
parties with respect to such Equipment, for all periods prior to the
acquisition of the Equipment by the Partnership. Except as described above,
there will be no sales of Equipment to or from any Affiliate of Com Cap Corp.
47
<PAGE>
In certain instances, the Partnership finds it necessary, in connection with
the ordering and acquisition of Equipment, to make advances to manufacturers or
vendors with funds borrowed from the General Partner for such purpose. The
Partnership does not borrow money from the General Partner or any of its
Affiliates with a term in excess of twelve months. Interest is paid on loans or
advances (in the form of deposits with manufacturers or vendors of Equipment or
otherwise) from the General Partner 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 receive no greater interest rate and financing
charges from the Partnership than that which the General Partner or such
Affiliates are paying. The Partnership does not loan money to any Person
including the General Partner or its Affiliates except to the extent that a
Conditional Sales Contract constitutes a loan.
If the General Partner or any of its Affiliates purchases Equipment in its
own name and with its own funds in order to facilitate ultimate purchase by the
Partnership, the purchaser is entitled to receive interest on the funds expended
for such purchase on behalf of the Partnership. Simple interest on any such
temporary purchases is charged on a floating rate basis not in excess of three
percent over the "prime rate" from time to time announced by PNC Bank, from the
date of initial acquisition to the date of repayment by the
Partnership/ownership transfer.
The Partnership does not invest in equipment limited partnerships, general
partnerships or joint ventures, except that (a) the Partnership may invest in
general partnerships or joint ventures with persons other 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 certain
provisions of the Partnership Agreement.
GLOSSARY
The following terms used in this Report shall (unless otherwise expressly
provided herein or unless the context otherwise requires) have the meanings set
forth below.
"Acquisition Expenses" means expenses relating to the prospective selection
and acquisition of or investment in Equipment by the Partnership, whether or not
actually acquired, including, but not limited to, legal fees and expenses,
travel and communication expenses, costs of appraisal, accounting fees and
expenses and other related expenses.
"Acquisition Fees" means the total of all fees and commissions paid by any
party in connection with the initial purchase of Equipment acquired by the
Partnership. Included in the computation of such fees or commissions shall be
the Equipment Acquisition Fee and any commission, selection fee, construction
supervision fee, financing fee, non-recurring management fee or any fee of a
similar nature, however designated.
"Adjusted Capital Contributions" means Capital Contributions of the Limited
Partners reduced by any cash distribution received by the Limited Partners
pursuant to the Partnership Agreement, to the extent such distributions exceed
any unpaid Priority Return as of the date such distributions were made.
48
<PAGE>
"Affiliate" means, when used with reference to a specified Person, (i) any
Person, that directly or indirectly through one or more intermediaries controls
or is controlled by or is under common control with the specified Person, (ii)
any Person that is a director or an executive officer of, partner in, or serves
in a similar capacity to, the specified Person, or any Person of which the
specified Person is an executive officer or partner or with respect to which the
specified Person serves in a similar capacity, (iii) any Person owning or
controlling 10% or more of the outstanding voting securities of such specified
Person, or (iv) if such Person is an officer, director or partner, any entity
for which such Person acts in such capacity.
"Capital Account" means the bookkeeping account maintained by the
Partnership for each Partner.
"Capital Contributions" means in the case of the General Partner, the total
amount of money contributed to the Partnership by the General Partner, and in
the case of Limited Partners, $20 for each Unit, or where the context requires,
the total Capital Contributions of all the Partners.
"Cash Available for Distribution" means Cash Flow plus Net Disposition
Proceeds plus cash funds available for distribution from Partnership reserves,
less such amounts as the General Partner, in accordance with the Partnership
Agreement, causes the Partnership to reinvest in Equipment or interests therein,
and less such amounts as the General Partner, in its sole discretion, determines
should be set aside for the restoration or enhancement of Partnership reserves.
"Cash Flow" for any fiscal period means the sum of (i) cash receipts from
operations, including, but not limited to, rents or other revenues arising from
the leasing or operation of the Equipment and interest, if any, earned on funds
on deposit for the Partnership, but not including Net Disposition Proceeds,
minus (ii) all cash expenses and costs incurred and paid in connection with the
ownership, lease, management, use and/or operation of the Equipment, including,
but not limited to, fees for handling and storage; all interest expenses paid
and all repayments of principal regarding borrowed funds; maintenance; repair
costs; insurance premiums; accounting and legal fees and expenses; debt
collection expenses; charges, assessments or levies imposed upon or against the
Equipment; ad valorem, gross receipts and other property taxes levied against
the Equipment; and all costs of repurchasing Units in accordance with the
Partnership Agreement; but not including depreciation or amortization of fees or
capital expenditures, or provisions for future expenditures, including, without
limitation, Organizational and Offering Expenses.
"Closing Date" means 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.
"Competitive Equipment Sale Commission" means that brokerage fee paid for
services rendered in connection with the purchase or sale of Equipment which is
reasonable, customary, and competitive in light of the size, type, and location
of the Equipment.
"Conditional Sales Contract" means an agreement to sell Equipment to a buyer
in which the seller reserves title to, and retains a security interest in, the
Equipment until the Purchase Price of the Equipment is paid.
"Effective Date" means January 13, 1995, the date on which the Partnership's
Registration Statement on Form S-1 was declared effective by the United States
Securities and Exchange Commission.
"Equipment" means each item of and all of the computer peripheral and
other similar capital equipment purchased, owned, operated, and/or leased by
the Partnership or in which the Partnership has acquired a direct or indirect
interest, together with all appliances, parts, instruments, accessories,
furnishings, or other equipment included therein and all substitutions,
renewals, or replacements of, and all additions, improvements, and accessions
to, any and all thereof.
49
<PAGE>
"Full Payout Net Lease" means an initial Net Lease of the Equipment under
which the non-cancelable rental payments due (and which can be calculated at
the commencement of the Net Lease) during the initial noncancellable fixed
term (not including any renewal or extension period) of the lease or other
contract for the use of the Equipment are at least sufficient to recover the
Purchase Price of the Equipment.
"General Partner" means Commonwealth Income & Growth Fund, Inc. and any
additional, substitute or successor general partner of the Partnership.
"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 September 22, 1995, the date after the Minimum
Subscription Amount was received on which funds to acquire Units were released
from the Escrow Account and distributed to the Partnership for the acquisition
of Units by Limited Partners.
"IRS" means the Internal Revenue Service.
"Limited Partner" means a Person who acquires Units and who is admitted
to the Partnership as a limited partner in accordance with the terms of the
Partnership Agreement.
"Majority in Interest" means, with respect to the Partnership, Limited
Partners holding more than 50% of the outstanding Units held by all Limited
Partners at the Record Date for any vote or consent of the Limited Partners.
"Minimum Subscription Amount" means an aggregate of $2,500,000 in
Subscriptions.
"Net Disposition Proceeds" means the net proceeds realized by the
Partnership from the refinancing, sale or other disposition of Equipment,
including insurance proceeds or lessee indemnity payments arising from the
loss or destruction of Equipment, less such amounts as are used to satisfy
Partnership liabilities.
"Net Lease" means a lease or other contract under which the owner
provides equipment to a lessee or other operator in return for a payment, and
the lessee assumes all obligations and pays for the operation, repair,
maintenance and insuring of the equipment.
"Net Profits" or "Net Losses" shall be computed in accordance with
Section 703(a) of the Code (including all items of income, gain, loss or
deduction required to be stated separately pursuant to Section 703(a)(1) of
the Code) for each taxable year of the Partnership or shorter period prior or
subsequent to an interim closing of the Partnership's books with the
following adjustments: (i) any income of the Partnership that is exempt from
federal income tax and not otherwise taken into account in computing Net
Profits and Net Loss pursuant to this definition shall be added to such
taxable income or shall reduce such taxable loss; (ii) any expenditure of the
Partnership described in Code Section 705(a)(2)(B) or treated as Code Section
705(a)(2)(B) expenditures pursuant to Treasury Regulations Section
1.704-1(b)(2)(iv)(i) and not otherwise taken into account in computing Net
Profits and Net Losses pursuant to this definition shall be subtracted from
such taxable income or loss; (iii) items of income, gain, loss and deduction
specially allocated pursuant to Section 7.3 of the Partnership Agreement
shall not be included in the computation of Net Profits or Net Loss; and if
property is reflected on the books of the Partnership at a book value that
differs from the adjusted tax basis of the property in accordance with
Treasury Regulation Section 1.704-1(b)(2)(iv)(d) or (f), depreciation,
amortization, and gain or loss with respect to such property shall be
determined by reference to such book value in a manner consistent with
Treasury Regulation Section 1.704-1(b)(2)(iv)(g). The terms "Net Profit" or
"Net Losses" shall include the Partnership's distributive share of the profit
or loss of any partnership or joint venture in which it is a partner or joint
venturer.
"Offering" means the initial public offering of Units in the Partnership.
50
<PAGE>
"Offering Period" means the period commencing the Effective Date and
ending the last day of the calendar month in which the Closing Date occurs.
"Operating Distributions" means the quarterly distributions made to the
Partners pursuant to Article 8 of the Partnership Agreement.
"Operating Lease" means a lease or other contractual arrangement under
which an unaffiliated party agrees to pay the Partnership, directly or
indirectly, for the use of the Equipment, and which is not a Full Payout Net
Lease.
"Organizational and Offering Expenses" means the expenses incurred in
connection with the organization of the Partnership and in preparation of the
Offering, including Underwriting Commissions, listing fees and advertising
expenses specifically incurred in connection with the distribution of the
Units.
"Partner(s)" means any one or more of the General Partner and the Limited
Partners.
"Partnership" means Commonwealth Income & Growth Fund 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.
"Person" means an individual, partnership, limited liability company,
joint venture, corporation, trust, estate or other entity.
"Priority Return" means an amount equal to a return at a rate of 10% 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.
"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.
"Retained Proceeds" means Cash Available for Distribution, which instead
of being distributed to the Partners is retained by the Partnership for the
purpose of acquiring or investing in Equipment.
"Term Debt" means debt of the Partnership with a term in excess of twelve
months, incurred with respect to acquiring or investing in Equipment, or
refinancing non-Term Debt, but not debt incurred with respect to refinancing
existing Partnership Term Debt.
"Unit" means a limited partnership interest in the Partnership.
51
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS.
Commonwealth Income & Growth Fund II
Report of Independent Auditors
Balance Sheet as of December 31, 1996 and 1995
Statements of Operations for the year ended December 31, 1996 and for
the period September 22, 1995 (commencement of operations)
to December 31, 1995
Statements of Partners' Capital for the year ended December 31, 1996
and for the period September 22, 1995 (commencement of operations)
to December 31, 1995
Statements of Cash Flows for the year ended December 31, 1996, and for
the period September 22, 1995 (commencement of operations)
to December 31, 1995
Notes to Financial Statements
Commonwealth Income & Growth Fund, Inc.
Report of Independent Auditors
Balance Sheet as of February 29, 1996
Notes to Balance Sheet
Commonwealth Capital Corp.
Report of Independent Auditors
Consolidated Balance Sheet as of February 29, 1996
Notes to Consolidated Balance Sheet
(a)(2) SCHEDULES.
Not Applicable
(a)(3) EXHIBITS.
* 3.1 Certificate of Limited Partnership
** 3.2 Agreement of Limited Partnership
** 10.1 Agency Agreement dated as of May 12, 1995 by and
among the Partnership, the General Partner and Wheat,
First Securities, Inc.
* Incorporated by reference from the Partnership's
Registration Statement on Form S-1 (Registration No.
33-89476)
** Incorporated by reference for the Partnership's
Annual Report on Form 10-K for the year ended Decmeber
31, 1995.
(b) REPORTS ON FORM 8-K.
NOT APPLICABLE
(c) EXHIBITS.
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf
on March 20, 1997 by the undersigned thereunto duly authorized.
COMMONWEALTH INCOME & GROWTH FUND II
By: COMMONWEALTH INCOME & GROWTH
FUND, INC., General Partner
By: /s/ George S. Springsteen
George S. Springsteen, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 20, 1997.
SIGNATURE CAPACITY
- ------------------------------ ---------------------------
/s/ GEORGE S. SPRINGSTEEN Chairman, President and Sole Director of
- ------------------------------ Commonwealth Income & Growth Fund, Inc.
George S. Springsteen
/s/ DAVID A. KINTZER Vice President, Chief Financial Officer and
- ------------------------------ Secretary of Commonwealth Income & Growth
David A. Kintzer Fund, Inc.
/s/ KATHLEEN S. ENSCOE Controller of Commonwealth Income & Growth Fund,
- ------------------------------ Inc.
Kathleen S. Enscoe
53
<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>
