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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 33-89476
COMMONWEALTH INCOME & GROWTH FUND II
(Exact name of registrant as specified in its charter)
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Pennsylvania 23-2795120
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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1160 West Swedesford Road
Berwyn, Pennsylvania 19312
(Address, including zip code, of principal executive offices)
(610) 647-6800
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (I) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (ii) has been subject to such filing requirements
for the past 90 days:
YES /X/ NO / /
Indicate by check mark if disclosure of delinquent fillers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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.
YES /X/ NO / /
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
Commonwealth Income and Growth Fund II (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 "Offerings"). On September 22, 1995,
$2,521,380 in subscriptions from investors were released by the escrow agent and
126,118 Units were admitted as Limited Partners of the Partnership. The
Partnership terminated its offering of Units on May 12, 1997, with 461,817 Units
($9,235,185) admitted as Limited Partners of the Partnership.
See "The Glossary" below for the definition of capitalized terms not otherwise
defined in the text of this report.
PRINCIPAL INVESTMENT OBJECTIVES
The Partnership was formed for the purpose of acquiring various types of
Equipment, including computer peripheral and other similar capital equipment.
The Partnership utilized the net proceeds of the Offering to purchase IBM and
IBM compatible computer peripheral and other similar capital equipment. The
Partnership utilizes Retained Proceeds and debt financing (not to exceed 30% of
the aggregate cost of the Equipment owned or subject to Conditional Sales
Contract by the Partnership at the time the debt is incurred) to purchase
additional Equipment. The Partnership acquires Equipment which is subject to
lease principally to U.S. corporations and other institutions pursuant
predominantly to Operating Leases. The Partnership retains the flexibility to
enter into Full Payout Net Leases and Conditional Sales Contracts, but has not
done so.
The Partnership's principal investment objectives are to;
(a) acquire, lease and sell Equipment to generate revenues from operations
sufficient to provide quarterly cash distributions to Limited Partners;
(b) preserve and protect Limited Partners' capital;
(c) use a portion of Cash Flow and Net Disposition Proceeds derived from
the sale, refinancing or other disposition of Equipment to purchase
additional Equipment; and
(d) refinance, sell or otherwise dispose of Equipment in a manner that will
maximize the proceeds to the Partnership.
THERE CAN BE NO ASSURANCE THAT ANY OF THESE OBJECTIVES WILL BE ATTAINED.
Limited Partners do not have the right to vote on or otherwise approve or
disapprove any particular investment to be made by the Partnership.
Although the Partnership has acquired predominately new Equipment, the
Partnership may purchase used Equipment. Generally, Equipment is acquired from
manufacturers, distributors, leasing companies, agents, owner-users,
owner-lessors, and other suppliers upon terms that vary depending upon the
Equipment and supplier involved. Manufacturers and distributors usually furnish
a limited warranty against defects in material and workmanship and some purchase
agreements for Equipment provide for service and replacement of parts during a
limited period. Equipment purchases are also made through lease brokers and on
an ad hoc basis to meet the needs of a particular lessee.
As of December 31, 1998, all Equipment purchased by the Partnership is subject
to an Operating Lease or an Operating Lease was entered into with a third party
when the Partnership acquired an item of
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Equipment. The Partnership may also engage in sale/leaseback transactions,
pursuant to which the Partnership would purchase Equipment from companies that
would then immediately lease the Equipment from the Partnership. The Partnership
may also purchase Equipment which is leased under Full Payout Net Leases or sold
under Conditional Sales Contracts at the time of acquisition or the Partnership
may enter into a Full Payout Net Lease or Conditional Sales Contract with a
third party when the Partnership acquires an item of Equipment.
The Partnership may enter into arrangements with one or more manufacturers
pursuant to which the Partnership purchases from such manufacturers Equipment
which has previously been leased directly by the manufacturer to third parties
("vendor leasing agreements"). The Partnership and manufacturers may agree to
nonrecourse loans to the Partnership from the manufacturers to finance the
acquisition of Equipment secured by the Equipment and the receivables due to the
manufacturers from users of such Equipment. It is expected that the
manufacturers of Equipment will provide maintenance, remarketing and other
services for the Equipment subject to such agreements. As of December 31, 1998,
the Partnership has not entered into any such agreements.
The General Partner has the discretion consistent with its fiduciary duty to
change the investment objectives of the Partnership if it determines that such a
change is in the best interest of the Limited Partners and so long as such a
change is consistent with the Partnership Agreement. The General Partner will
notify the Limited Partners if it makes such a determination to change the
Partnership's investment objectives.
TYPES OF EQUIPMENT
COMPUTER PERIPHERAL EQUIPMENT. Computer peripheral equipment consists of devices
used to convey information into and out of a central processing unit (or
"mainframe") of a computer system, such as tape drives, disk drives, tape
controllers, disk controllers, printers, terminals and related control units,
all of which are in some way related to the process of storing, retrieving, and
processing information by computer.
The Partnership acquires primarily IBM manufactured or IBM compatible equipment.
The General Partner believes that dealing in IBM or IBM compatible equipment is
particularly advantageous because of the large IBM customer base, policy of
supporting users with software and maintenance services and the large amount of
IBM and IBM compatible equipment in the marketplace.
Computer technology has developed rapidly in recent years and is expected to
continue to do so. Technological advances have permitted continued reductions in
the cost of computer processing capacity, thereby permitting applications not
economically feasible a few years ago. Much of the older IBM and IBM compatible
computer peripheral equipment has not been retired from service, because
software is generally interchangeable between older and newer equipment, and
older equipment is capable of performing many of the same functions as newer
equipment. The General Partner believes that historically values of peripheral
equipment have been affected less dramatically by changes in technology than
have the values of central processing units. An equipment user who upgrades to a
more advanced central processor generally can continue to use his existing
peripheral equipment. Peripheral equipment nevertheless is subject to declines
in value as new, improved models are developed and become available.
Technological advances and other factors, including year 2000 issues discussed
below in Management Discussion and Analysis, have at times caused dramatic
reduction in the market prices of older models of IBM and IBM compatible
computer peripheral equipment from the prices at which they were originally
introduced.
OTHER EQUIPMENT-RESTRICTIONS. The Partnership acquires computer peripheral
equipment, such as tape drives, disk drives, tape controllers, disk controllers,
printers, terminals and related control units, all of which are in some way
related to the process of storing, retrieving and processing information by
computer. The General Partner is also authorized, but does not presently intend,
to cause the Partnership to invest in non IBM compatible computer peripheral,
data processing, telecommunication or medical technology equipment. The
Partnership may not invest in any of such other types of Equipment (i) to the
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extent that the purchase price of such Equipment, together with the aggregate
Purchase Price of all such other types of Equipment then owned by the
Partnership, is in excess of 25% of the total cost of all of the assets of the
Partnership at the time of the Partnership's commitment to invest therein and
(ii) unless the General Partner determines that such purchase is in the best
economic interest of the Partnership at the time of the purchase and, in the
case of non-IBM compatible peripheral Equipment, that such Equipment is
comparable in quality to similar IBM or IBM compatible Equipment. There can be
no assurance that any Equipment investments can be found which meet this
standard. Accordingly, there can be no assurance that investments of this type
will be made by the Partnership.
DIVERSIFICATION
Diversification is generally desirable to minimize the effects of changes in
specific industries, local economic conditions or similar risks. However, the
extent of the Partnership's diversification, in the aggregate and within each
category of Equipment, depends in part upon the financing which can be assumed
by the Partnership or borrowed from third parties on satisfactory terms. The
Partnership's policy not to borrow on a recourse basis will further limit its
financing options. Diversification also depends on the availability of various
types of Equipment. As of December 31, 1998, the Partnership has acquired a
diversified Equipment portfolio which it has leased to 21 different companies
located throughout the United States. Approximately 18% of the Equipment
acquired by the Partnership consists of Printers. Approximately another 26% of
the Equipment acquired by the Partnership consists of Workstations.
Approximately 28% of the Equipment acquired by the Partnership consists of tape
storage. Approximately 23% of the Equipment acquired by the Partnership consists
of escon drivers. Approximately 5% of the Equipment acquired by the Partnership
consists of communication controllers. During the operational stage of the
Partnership, the Partnership may not at any one point in time to lease (or sell
pursuant to a Conditional Sales Contract) more than 25% of the Equipment to a
single Person or Affiliated group of Persons.
DESCRIPTION OF LEASES
The Partnership to date has purchased, and in the future intends to continue to
purchase only Equipment that is subject to a lease or for which a lease or
similar agreement will be entered into contemporaneously with the consummation
of the Partnership's acquisition of the Equipment. The General Partner to date
has leased and in the future intends to lease most of the Equipment purchased by
the Partnership to third parties pursuant to Operating Leases. Operating Leases
are relatively short-term (12 to 48 month) leases under which the aggregate
noncancellable rental payments during the original term of the lease are not
sufficient to permit the lessor to recover the purchase price of the subject
Equipment. The Equipment may also be leased pursuant to Full Payout Net Leases.
Full Payout Net Leases are leases under which the aggregate noncancellable
rental payments during the original term of the lease are at least sufficient to
recover the purchase price of the subject Equipment. It is anticipated that the
Partnership will enter into few, if any, Full Payout net Leases. The General
Partner may also enter into Conditional Sales Contracts for Equipment. A
Conditional Sales Contract generally provides that the noncancellable payments
to the seller over the term of the contract are sufficient to recover the
investment in such Equipment and to provide a return on such investment. Under a
Conditional Sales Contract, the seller reserves title to, and retains a security
interest in, the Equipment until the Purchase Price of the Equipment is paid. As
of December 31, 1998, the Partnership has not entered into any Full Payout Net
Leases or Conditional Sales Contracts for Equipment and does not presently
intend to do so.
In general, the terms of the Partnership's leases, whether the Equipment is
leased pursuant to an Operating lease or a Full Payout Net Lease, depend upon a
variety of factors, including: the desirability of each type of lease from both
an investment and a tax point of view; the relative demand among lessees for
Operating or Full Payout Net Leases; the type and use of Equipment and its
anticipated residual value; the business of the lessee and its credit rating;
the availability and cost of financing; regulatory considerations; the
accounting treatment of the lease sought by the lessee or the Partnership; and
competitive factors.
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An Operating Lease generally represents a greater risk to the Partnership than a
Full Payout Net Lease, because in order to recover the purchase price of the
subject Equipment and earn a return on such investment, it is necessary to renew
or extend the Operating Lease, lease the Equipment to a third party at the end
of the original lease term, or sell the Equipment. On the other hand, the term
of an Operating Lease is generally much shorter than the term of a Full Payout
Net Lease, and the lessor is thus afforded an opportunity under an Operating
Lease to re-lease or sell the subject Equipment at an earlier stage of the
Equipment's life cycle than under a Full Payout Net Lease. Also, the annual
rental payments received under an Operating Lease are ordinarily higher than
those received under a Full Payout Net Lease.
The Partnership's policy is to generally enter into "triple net leases" (or the
equivalent, in the case of a Conditional Sales Contract) which typically provide
that the lessee or some other party bear the risk of physical loss of the
Equipment; pay taxes relating to the lease or use of the Equipment; maintain the
Equipment; indemnify the Partnership-lessor against any liability suffered by
the Partnership as the result of any act or omission of the lessee or its
agents; maintain casualty insurance in an amount equal to the greater of the
full value of the Equipment and a specified amount set forth in the lease; and
maintain liability insurance naming the Partnership as an additional insured
with a minimum coverage which the General Partner deems appropriate. In
addition, the Partnership may purchase "umbrella" insurance policies to cover
excess liability and casualty losses, to the extent deemed practicable and
advisable by the General Partner. As of December 31, 1998, all leases that have
been entered into are "triple net leases".
The General Partner has not established any standards for lessees to which it
will lease Equipment and, as a result, there is not an investment restriction
prohibiting the Partnership from doing business with any lessees. However, a
credit analysis of all potential lessees 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, 1998, the Partnership has not entered into any such agreements.
BORROWING POLICIES
The General Partner, at its discretion, may cause the Partnership to incur debt
in the maximum aggregate amount of 30% of the aggregate cost of the Equipment
owned, or subject to Conditional Sales Contract (except that the Partnership may
not incur any indebtedness to acquire Equipment until the net proceeds of the
Offering are fully invested, or committed to investment, in Equipment). The
Partnership will incur only non-recourse debt which is secured by Equipment and
lease income therefrom. Such leveraging permits the Partnership to increase the
aggregate amount of its depreciable assets, and, as a result, potentially
increases both its lease revenues and its federal income tax deductions above
those levels which would be achieved without leveraging. There is no limit on
the amount of debt that may be incurred in connection with the acquisition of
any single item of Equipment. Any debt incurred is fully amortized over the term
of the initial lease or Conditional Sales Contract to which the Equipment
securing the debt is subject. The precise amount borrowed by the Partnership
depends on a number of factors, including the types of Equipment acquired by the
Partnership; the creditworthiness of the lessee; the availability of suitable
financing; and prevailing interest rates. The Partnership is flexible in the
degree of leverage it employs, within the permissible limit. There can be no
assurance that credit will be available to the Partnership in the amount or at
the time desired or on terms considered reasonable by the General Partner. As of
December 31, 1998, the aggregate nonrecourse debt outstanding of $4,770,000 was
33% of the aggregate cost of the Equipment owned.
The Partnership may continue to purchase some items of Equipment without
leverage. If the Partnership purchases an item of Equipment without leverage and
thereafter suitable financing becomes available, it may then obtain the
financing, secure the financing with the purchased Equipment to the extent
practicable
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and invest any proceeds from such financing in additional items of Equipment, or
it may distribute some or all of such proceeds to the Limited Partners. Any such
later financing will be on terms consistent with the terms applicable to
borrowings generally. As of December 31, 1998, the Partnership has not exercised
this option.
After the net proceeds of the offering are fully invested in Equipment, the
General Partner plans to continue to cause the Partnership to borrow funds, to
the fullest extent practicable, at interest rates fixed at the time of
borrowing.. However, the Partnership may borrow funds at rates which vary with
the "prime" or "base" rate. If lease revenues were fixed, a rise in the "prime"
or "base" rate would increase borrowing costs and reduce the amount of the
Partnership's income and cash available for distribution. Therefore, the General
Partner is permitted to borrow funds to purchase Equipment at fluctuating rates
only if the lease for such Equipment provides for fluctuating rental payments
calculated on a similar basis.
Any additional debt incurred by the Partnership must be nonrecourse. Nonrecourse
debt, in the context of the business to be conducted by the Partnership, means
that the lender providing the funds can look for security only to the Equipment
pledged as security and the proceeds derived from leasing or selling such
Equipment. Neither the Partnership nor any Partner (including the General
Partner) would be liable for repayment of any nonrecourse debt.
Loan agreements may also require that the Partnership maintain certain reserves
or compensating balances and may impose other obligations upon the Partnership.
Moreover, since a significant portion of the Partnership's revenues from the
leasing of Equipment will be reserved for repayment of debt, the use of
financing reduces the cash which might otherwise be available for distributions
until the debt has been repaid and may reduce the Partnership's Cash Flow over a
substantial portion of the Partnership's operating life. As of December 31,
1998, no such agreements existed.
The General Partner and any of its Affiliates may, but are not required to, make
loans to the Partnership on a short-term basis. If the General Partner or any of
its Affiliates makes such a short-term loan to the Partnership, the General
Partner of Affiliate may not charge interest at a rate greater that the interest
rate charged by unrelated lenders on comparable loans for the same purpose in
the same locality. In no event is the Partnership required to pay interest on
any such loan at an annual rate greater than three percent over the "prime rate'
from time to time announced by PNC Bank, Philadelphia, Pennsylvania ("PNC
Bank"). All payments of principal and interest on any financing provided by the
General Partner or any of its affiliates are due and payable by the Partnership
within 12 months after the date of the loan.
REFINANCING POLICIES
Subject to the limitations set forth in "Borrowing Policies" above, the
Partnership may refinance its debt from time to time. With respect to a
particular item of Equipment, the General Partner will take into consideration
such factors as the amount of appreciation in value, if any, to be realized, the
possible risks of continued ownership, and the anticipated advantages to be
obtained for the Partnership, as compared to selling such Equipment. As of
December 31, 1998, the Partnership has not refinanced any of its debt.
Refinancing, if achievable, may permit the Partnership to retain an item of
Equipment and at the same time to generate additional funds for reinvestment in
additional Equipment or for distribution to the Limited Partners.
LIQUIDATION POLICIES
The General Partner intends to cause the Partnership to begin disposing of its
Equipment in approximately January 2006. Notwithstanding the Partnership's
objective to sell all of its assets and dissolve by 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
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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.
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 of from IBM.
INVESTMENTS
As of March 31, 1999, the Partnership has purchased, or has made the commitment
to purchase, the following Equipment:
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EQUIPMENT LIST PURCHASE MONTHLY LEASE
LESSEE MFG DESCRIPTION PRICE PRICE RENT TERM
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Chrysler STK (2) 9490-M34 686,158 490,110 12,001 48
ADP IBM (1) 3490-A20 422,900 178,673 4,290 36
Household Intl. STK (3) 9490-M34 671,898 405,628 9,100 36
Timken DEC (1) Alpha server 259,507 204,781 5,308 36
Timken DEC (1) Alpha server 46,657 40,928 1,062 36
Johnson Control HP (13) HP9000-C110 441,415 304,718 7,961 36
Honda R&D SGI Onyx Infinite Reality 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
Lucent SUN (1)E6000 server 642,452 461,207 12,042 36
Lucent upgrade SUN Upgrade to server 97,000 69,559 2,046 34
AT&T STK (9) 9490-M34 2,015,694 1,268,909 31,144 36
Avon IBM (75%) (8) 3900-OW1 2,002,710 1,542,485 37,058 36
Chrysler IBM (2) ES3000 1,146,500 778,454 22,844 24
Allied Signal HP (20) C180 workstations 838,339 362,615 11,775 24
Transamerica SUN (2) ES3000 servers 212,730 154,965 3,976 36
Computer Science Corp. SGI (50%) (141) workstations 2,055,893 822,455 21,031 36
Charles Schwab IBM (2) 9032-003 845,043 523,399 11,910 36
Charles Schwab IBM (20%)(6)9032-003 2,479,443 1,509,981 6,989 36
Equitable Life SUN (2)E3000 336,220 244,673 6,491 36
Chase SUN (3) E45D 358,562 249,501 8,386 24
Aetna STK (2) 9490-M34 535,932 194,272 4,395 36
Equitable Life SUN 6000 server 617,310 466,946 12,186 36
Chrysler STK Redwood tape drives 466,140 275,094 6,313 36
Chrysler STK Redwood tape drives 310,760 183,396 4,209 36
Depository Trust ESCON (4) 9032 directors 1,644,436 1,312,867 33,376 31
Depository Trust ESCON (4) 9032 directors 1,644,436 1,225,784 33,376 27
Pitney Bowes IBM (1) 3590 1,846,080 1,026,634 20,045 40
Lucent SUN (1) 4500 server 184,897 120,701 3,091 36
Kaiser IBM (7) RS6000 770,611 560,621 14,928 36
Kaiser BIM (2) RS170 209,445 138,149 3,666 36
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RESERVES
Because the Partnership's leases are on a "triple-net" basis, no permanent
reserve for maintenance and repairs will be established from the Offering
proceeds. However, the General Partner, in its sole discretion, may retain a
portion of the Cash Flow and Net Disposition Proceeds available to the
Partnership for maintenance, repairs and working capital. There are no
limitations on the amount of Cash Flow and Net Disposition Proceeds that may be
retained as reserves. Since no reserve will be established if available Cash
Flow of the Partnership is insufficient to cover the Partnership's operating
expenses and liabilities, it may be necessary for the Partnership to obtain
additional funds by refinancing its Equipment or borrowing.
GENERAL RESTRICTIONS
Under the Partnership Agreement, the Partnership is not permitted, among
other things, to:
(a) invest in junior trust deeds unless received in connection with the
sale of an item of Equipment in an aggregate amount which does not exceed
30% of the assets of the Partnership on the date of the investment;
(b) invest in or underwrite the securities of other issuers;
(c) acquire any Equipment for Units;
(d) issue senior securities (except that the issuance to lenders of notes
or other evidences of indebtedness in connection with the financing or
refinancing of Equipment or the Partnership's business shall not be
deemed to be the issuance of senior securities);
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(e) make loans to any Person, including the General Partner or any of its
Affiliates, except to the extent a Conditional Sales Contract
constitutes a loan;
(f) sell or lease any Equipment to, lease any Equipment from, or enter into
any sale-leaseback transactions with, the General Partner or any of its
Affiliates; or
(g) give the General Partner or any of its Affiliates an exclusive right or
employment to sell the Partnership's Equipment.
The General Partner has also agreed in the Partnership Agreement to use its best
efforts to assure that the Partnership shall not be deemed an "investment
company" as such term is detained in the Investment Company Act of 1940.
The General Partner and its Affiliates may engage in other activities, whether
or not competitive with the Partnership. The Partnership Agreement provides,
however, that neither the General Partner nor any of its Affiliates may receive
any rebate or "give up" in connection with the Partnership's activities or
participate in reciprocal business arrangements that circumvent the restrictions
in the Partnership Agreement against dealings with Affiliates.
EMPLOYEES
The Partnership has no employees and receives administrative and other services
from the General Partner which has 12 employees.
ITEM 2: PROPERTIES
NOT APPLICABLE
ITEM 3: LEGAL PROCEEDINGS
NOT APPLICABLE
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NOT APPLICABLE
PART II
ITEM 5: MARKET FOR THE REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
There is no public market for the Units nor is it anticipated that one will
develop. As of December 31, 1998, there were 501 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
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and redemptions of Units of up to five percent of the total outstanding interest
in the Partnership's capital or profits in any one year.
REDEMPTION PROVISION
Upon the conclusion of the 30 month period following the termination of the
Offering, the Partnership may, at the sole discretion of the General Partner,
repurchase a number of the outstanding Units. After such 30 month period, on a
semi-annual basis, the General Partner, at its discretion, will establish an
amount for redemption, generally not to exceed two percent of the outstanding
Units per year, subject to the General Partner's good faith determination that
such redemptions will not (a) cause the Partnership to be taxed as a corporation
under Section 7704 of the Code or (b) impair the capital or operations of the
Partnership. (The Partnership may redeem Units in excess of the two percent
limitation if, in the good faith judgment of the General Partner, the conditions
imposed in the preceding sentence would remain satisfied.) The redemption price
for Units will be 105% of the selling Limited Partner's Adjusted Capital
Contributions attributable to the Units for sale. Following the determination of
the annual redemption amount, redemptions will occur on a semi-annual basis and
all requests for redemption, which must be made in writing, must be on file as
of the Record Date in which the redemption is to occur. The General Partner will
maintain a master list of requests for redemption with priority being given to
Units owned by estates, followed by IRAs and Qualified Plans. All other requests
will be considered in the order received. Redemption requests made by or on
behalf of Limited Partners who are not affiliated with the General Partner or
its Affiliates will be given priority over those made by Limited Partners who
are affiliated with the General Partner or its Affiliates. All redemption
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:
(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.
10
<PAGE>
ADDITIONAL RESTRICTIONS ON TRANSFER
Limited Partners who wish to transfer their Units to a new beneficial owner are
required to pay the Partnership up to $50 for each transfer to cover the
Partnership's cost of processing the transfer application and take such other
actions and execute such other documents as may be reasonably requested by the
General Partner. There is no charge for re-registration of a certificate in the
event of a marriage, divorce, death, or trust so long as the transfer is not a
result of a sale of the Units.
In addition, the following restrictions apply to each transfer: (i) no transfer
may be made if it would cause 25% or more of the outstanding Units to be owned
by benefit plans; and (ii) no transfer is permitted unless the transferee
obtains such governmental approvals as may reasonably be required by the General
Partner, including without limitation, the written consents of the Pennsylvania
Securities Commissioner and of any other state securities agency or commission
having jurisdiction over the transfer.
ALLOCATION AND DISTRIBUTION BETWEEN THE GENERAL PARTNER AND THE LIMITED PARTNERS
Cash distributions, if any, are made quarterly on December 31, March 31, June
30, and September 30 of each year. Distributions are made 99% to the Limited
Partners and one percent to the General Partner until the Limited Partners have
received an amount equal to their Capital Contributions plus the Priority
Return; thereafter, cash distributions will be made 90% to Limited Partners and
10% to the General Partner. Distributions made in connection with the
liquidation of the Partnership or a Partner's Units will be made in accordance
with the Partner's positive Capital Account balance as determined under the
Partnership Agreement and Treasury Regulations.
The Priority Return is calculated on the Limited Partners' Adjusted Capital
Contributions for their Units. The Adjusted Capital Contributions will initially
be equal to the amount paid by the Limited Partners for their Units. If
distributions at any time exceed the Priority Return, the Adjusted Capital
Contributions will be reduced by the excess, decreasing the base on which the
Priority Return is calculated.
If the proceeds resulting from the sale of any Equipment are reinvested in
Equipment, sufficient cash will be distributed to the Partners to pay the
additional federal income tax resulting from such sale for a Partner in a 39.6%
federal income tax bracket or, if lower, the maximum federal income tax rate in
effect for individuals for such taxable year.
Generally, the General Partner is allocated Net Profits equal to its cash
distributions (but not less than one percent of Net Profits) and the balance is
allocated to the Limited Partners. Net Profits arising from transactions in
connection with the termination or liquidation of the Partnership are allocated
in the following order: (1) First, to each Partner in an amount equal to the
negative amount, if any, of his Capital Account; (2) Second, an amount equal to
the excess of the proceeds which would be distributed to the Partners based on
the Operating Distributions to the Partners over the aggregate Capital Accounts
of all the Partners, to the Partners in proportion to their respective shares of
such excess, and (3) Third, with respect to any remaining Net Profits, to the
Partners in the same proportions as if the distributions were Operating
Distributions. Net Losses, if any, are in all cases allocated 99% to the Limited
Partners and one percent to the General Partner.
Net Profits and Net Losses are computed without taking into account, in each
taxable year of the Partnership, any items of income, gain, loss or deduction
required to be specially allocated pursuant to Section 704(b) of the Code and
the Treasury Regulation promulgated thereunder. No Limited Partner is required
to contribute cash to the capital of the Partnership in order to restore a
closing Capital Account deficit, and the General Partner has only a limited
deficit restoration obligation under the Partnership Agreement.
Quarterly distributions in the following amounts were declared and paid to the
Limited Partners during 1998, 1997 and 1996.
11
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED 1998 1997 1996
- ------------- -------------- ------------ -----------
<S> <C> <C> <C>
March 31 $230,908 $211,022 $108,647
June 30 230,908 226,789 137,297
September 30 230,909 230,908 164,131
December 31 230,904 230,908 191,890
--------------------------------------------
$923,634 $899,627 $601,965
--------------------------------------------
--------------------------------------------
</TABLE>
ALLOCATIONS AND DISTRIBUTIONS AMONG THE LIMITED PARTNERS
Except during the Offering Period, Cash Available for Distribution which is
allocable to the Limited Partners is apportioned among and distributed to them
solely with reference to the number of Units owned by each as of the Record Date
for each such distribution. During the Offering Period, Cash Available for
Distribution which is allocable to the Limited Partners was apportioned among
and distributed to them with reference to both (i) the number of Units owned by
each as of each Record Date and (ii) the number of days since the previous
Record Date (or, in the case of the first Record Date, the commencement of the
Offering Period) that the Limited Partner owned the Units.
After the Offering Period, Net Profits, Net Losses and Cash Available for
Distribution allocable to the Limited Partners is apportioned among them in
accordance with the number of Units owned by each. A different convention was
utilized during the Offering Period, whereby Net Profits and Net Losses
allocable to Limited Partners were apportioned among them in the ratio which the
product of the number of Units owned by a Limited Partner multiplied by the
number of days in which the Limited Partner owns such Units during the period
bears to the sum of such products for all Limited Partners.
In addition, where a Limited Partner transfers Units during a taxable year, the
Limited Partner may be allocated Net Profits for a period for which such Limited
Partner does not receive a corresponding cash distribution.
ITEM 6: SELECTED FINANCIAL DATA The following table sets forth, in summary
form, certain financial data for the Partnership for the year ended December
31, 1998, 1997, 1996 and for the period ended December 31, 1995. This table
is qualified in its entirely by the more detailed information and financial
statements presented elsewhere in this report, and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and related notes
thereto included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 PERIOD ENDED
----------------------------------------------------------------------- ------------
1998 1997 1996 1995
----------------------------------------------------------------------- ------------
<S> <C> <C> <C> <C>
Lease Income $4,212,862 $2,444,661 $1,123,685 $ 95,538
Net Loss (541,744) (61,837) (730) (12,065)
Cash Distributions 932,964 908,714 608,045 84,642
Net Loss per Limited
Partnership Unit (1.19) (.16) (.02) (.09)
Cash Distribution per
Limited Partnership Unit 2.00 2.00 2.00 .55
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997 1996 1995
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Assets $10,082,970 $9,356,409 $6,614,654 $3,373,407
Notes Payable 4,769,529 1,954,120 -- --
</TABLE>
Net loss per Limited Partnership unit is computed based upon net loss
allocated to the Limited Partners and the weighted average number of
equivalent Limited Partnership Units outstanding during the year. Cash
distribution per Limited Partnership Unit is computed based upon
distributions allocated to the Limited Partners and the weighted average
number of equivalent Limited Partnership Units outstanding during the year.
ITEM 7: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary sources of capital for the years ended December 31,
1998, 1997 and 1996, were from cash from operations of $1,924,000, $1,957,000,
and $949,000, respectively, and from Partners' contributions of $1,186,000 and
$4,371,000, respectively, for the years ended December 31, 1997 and 1996. The
primary uses of cash for the years ended December 31, 1998, 1997 and 1996, were
for capital expenditures for new equipment totaling $1,702,000, $4,179,000, and
$1,777,000, the payment of acquisition fees of $223,000, $203,000, and $147,000,
for the payment of preferred distributions to partners totaling $933,000,
$909,000, and $608,000, respectively, and for the payment of offering costs
totaling $130,000, and $487,000, respectively, for the years ended December 31,
1997 and 1996.
Cash is invested in money market accounts that invest directly in treasury
obligations pending the Partnership's use of such funds to purchase additional
computer equipment, to pay Partnership expenses or to make distributions to the
Partners. At December 31, 1998 and 1997 the Partnership had approximately
$136,000 and $258,000, respectively, invested in these money market accounts.
The Partnership's investment strategy of acquiring computer equipment and
generally leasing it under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
Future minimum rentals on noncancellable operating leases decreased by 6%
from December 31, 1997 to December 31, 1998, due to computer equipment leases
with expiration dates in 1999. This particular industry has experienced a
decrease in lease rates during this period due to an ongoing decrease in
interest rates. As of December 31, 1998, the Partnership had future minimum
rentals on noncancellable operating leases of $3,969,000 for the year ended
1999 and $2,978,000 thereafter. During 1998 and 1997, the Partnership
incurred debt in connection with the purchase of computer equipment totaling
$4,352,000 and $2,359,000, respectively. At December 31, 1998, the
outstanding debt was $4,770,000, with interest rates ranging from 6.4% to
8.2% and will be payable through December 2001. The Partnership intends to
continue purchasing additional computer equipment with existing cash, as well
as when future cash becomes available. In addition, the Partnership may incur
debt in purchasing computer equipment in the future.
The Partnership's cash flow from operations is expected to continue to be
adequate to cover all operating expenses, liabilities, and preferred
distributions to Partners during the next 12 month period. If available Cash
Flow or Net Disposition Proceeds are insufficient to cover the Partnership
expenses and liabilities on a short and long term basis, the Partnership will
attempt to obtain additional funds by disposing of or refinancing Equipment, or
by borrowing within its permissible limits. The Partnership may also reduce the
13
<PAGE>
distributions to its Partners if it deems necessary. Since the Partnership's
leases are on a "triple-net" basis, no reserve for maintenance and repairs are
deemed necessary.
RESULTS OF OPERATIONS
1998 AND 1997 OPERATING RESULTS
For the years ended December 31, 1998 and 1997, the Partnership recognized
income of $4,246,000 and $2,540,000 and expenses of $4,787,000 and
$2,602,000, resulting in net loss of $542,000 and $62,000 for the years ended
December 31, 1998, and 1997.
Lease income increased by 72% over 1997 primarily due to the addition of
operating leases in 1998. In 1998 the partnership expended approximately
$1,702,000 in cash and assumed debt of $4,352,000 to acquire 12 additional
leases.
Interest income decreased 65% from $95,000 for the year ended December 31, 1997
to $33,000 for the year ended December 31, 1998, as a result of the capital
contributions and rental income being used to purchase additional computer
equipment.
Operating expenses, excluding depreciation, consist of accounting, legal,
outside service fees and reimbursement of expenses to Com Cap Corp. for
administration and operation of the Partnership. The 43% decrease from
approximately $164,000 during the year ended December 31, 1997 to $94,000
during the year ended December 31, 1998 is primarily attributable to a
decrease in the reimbursable expenses to Com Cap Corp. for costs incurred in
connection with the administration and operation of the Partnership. Certain
administration and operational expenses were not charged to the Partnership
by Com Cap. Corp. in 1996 for third party costs incurred for certain periodic
filings of the Partnership. These cost were charged to the Partnership in
1997.
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 73% from approximately $122,000 during the year ended
December 31, 1997 to $211,000 during the year ended December 31, 1998, which is
consistent with the increase in lease income.
The Partnership identified specific computer equipment and associated
equipment acquisition costs which were evaluated due to technological
changes. The Partnership recorded a charge of $578,000 to depreciation
expense to record certain assets at their estimated fair value at December
31, 1998.
Depreciation and amortization expenses consist of depreciation on computer
equipment, amortization of organization costs, equipment acquisition fees and
debt placement fees. The 90% increase from approximately $2,247,000 during the
year ended December 31, 1997 to $4,279,000 during the year ended December 31,
1998 is attributable to the 23% increase in the computer equipment portfolio
being leased and the $578,000 charge related to the write down of computer
equipment in 1998.
The Partnership sold computer equipment with a net book value of $851,000 during
the year ended December 31, 1998, for a net gain of $500.
For the year ended December 31, 1998, the Partnership generated cash flow
from operating activities of $1,924,000, which includes a net loss of $542,000
reduced by depreciation and amortization expenses of $4,279,000. Other
noncash activities included in the determination of net income includes
direct payments of lease income by lessees to banks of $1,537,000.
1997 and 1996 OPERATING RESULTS
14
<PAGE>
For the year ended December 31, 1997 and 1996, the Partnership recognized income
of $2,602,000 and $1,194,000 and expenses of $2,569,000 and $1,195,000,
resulting in net loss of $62,000 and $1,000, respectively.
Lease income increased by 118% over 1996 primarily due to the addition of
operating leases in 1997. In 1997 the Partnership expended approximately
$4,179,000 in cash and assumed debt of $2,359,000 to acquire 11 additional
leases.
Interest income increased 36% from $70,000 for the year ended December 31, 1996
to $95,000 for the year ended December 31, 1997, as a result of the capital
contributions and rental income being temporarily invested in money market
accounts.
Operating expenses, excluding depreciation, consist of accounting, legal,
outside service fees and reimbursement of expenses to Com Cap Corp. for
administration and operation of the Partnership. The 128% increase from
approximately $57,000 during the year ended December 31, 1996 to $164,000
during the year ended December 31, 1997 is primarily attributable to an
increase in the reimbursable expenses to Com Cap Corp. for costs incurred in
connection with the administration and operation of the Partnership which
were not charged by Com Cap Corp. in 1996 and for third party costs incurred
for certain periodic filings of the Partnership.
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 118% from approximately $56,000 during the year ended
December 31, 1996 to $122,000 during the year ended December 31, 1997, which is
consistent with the increase in lease income.
Depreciation and amortization expenses consist of depreciation on computer
equipment, amortization of organization costs, equipment acquisition fees and
debt placement fees. The 108% increase from approximately $1,082,000 during the
year ended December 31, 1996 to $2,247,000 during the year ended December 31,
1997 is attributable to the 146% increase in the computer equipment portfolio
being leased.
The Partnership sold computer equipment with a net book value of $43,000 during
the year ended December 31, 1997, for a net loss of $32,000.
In 1996, the Partnership adopted FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and
identified specific computer equipment and associated equipment acquisition
costs which were evaluated due to technological changes. The adoption of FAS 121
had no effect on the 1997 or 1996 financial statements.
For the year ended December 31, 1997, the Partnership generated cash flow from
operating activities of $1,957,000, which includes a net loss of $62,000 reduced
by depreciation and amortization expenses of $2,247,000. Other noncash
activities included in the determination of the net loss includes direct
payments of lease income by lesses to banks of $405,000
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer programs
that have time-sensitive software may recognize a date using "00" as the year
1990 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Partnership does not have any computer programs or systems as all services
required for the management of the Partnership are provided by the General
Partner which receives fees and certain reimbursements for these services.
Based on a recent assessment, the General Partner determined that
it will be required to modify or replace portions of its software so that its
computer systems will function property with respect to dates in the year 2000
and thereafter. The General Partner presently believes that with modifications
to existing software and conversions to new software, the Year 2000 Issue will
not pose significant operational problems for its computer systems. The General
Partner expects that its modifications will be completed by the third quarter
of 1999. The costs are not expected to exceed $15,000 and only a small
percentage of these costs would be charged to the Partnership. As of December
31, 1998, the General Partner has not incurred any significant expense.
15
<PAGE>
The Partnership and the General Partner are not responsible for ensuring that
the computer peripheral equipment that it leases to customers is Year 2000
compliant, however, this equipment may be subject to declines in value or
technological obsolescence due to the equipment not being Year 2000 compliant.
The Year 2000 issue may also affect the carrying value of the equipment when it
comes off of lease or be detrimental in negotiating release rates which may lead
to equipment write downs or else than favorable lease recoveries. Management has
considered these factors in determining the recovery of its equipment at
December 31, 1998, in accordance with FASB Statement No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
Based on its current assessment the Partnership does not believe that the
amounts, if any, for the reduction in carrying values of equipment due to the
Year 2000 issue will have a significant effect on operations.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership believes its exposure to market risk is not material due to
the fixed interest rates of its long term debt.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<PAGE>
Commonwealth Income & Growth Fund II
Financial Statements
Years ended December 31, 1998, 1997 and 1996
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors.........................................1
Audited Financial Statements
Balance Sheets.........................................................2
Statements of Operations...............................................3
Statements of Partners' Capital........................................4
Statements of Cash Flows...............................................5
Notes to Financial Statements..........................................6
</TABLE>
<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, 1998 and 1997, and the related statements of
operations, partners' capital, and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Commonwealth Income & Growth
Fund II at December 31, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Philadelphia, Pennsylvania
January 23, 1999
1
<PAGE>
Commonwealth Income & Growth Fund II
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------ -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 136,208 $ 258,167
Lease income receivable 246,930 113,500
Accounts receivable - General Partner 14,510 15,821
Interest and other receivables 10,727 100
Computer equipment, at cost 14,085,926 11,764,757
Accumulated depreciation (4,683,752) (3,175,757)
------------ -------------
9,402,174 8,589,000
Equipment acquisition costs and deferred expenses, net
of accumulated amortization of $275,691 for 1998
and $191,242 for 1997 372,318 306,818
Organization costs, net of accumulated amortization of
$64,366 for 1998 and $41,466 for 1997 50,103 73,003
------------ -------------
Total assets $ 10,232,970 $ 9,356,409
------------ -------------
------------ -------------
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 93,063 $ 96,326
Accounts payable - Commonwealth Capital Corp. -- 68,265
Unearned lease income 177,612 217,503
Equipment payable -- 502,721
Notes payable 4,769,529 1,954,120
------------ -------------
Total liabilities 5,040,204 2,838,935
Partners' capital:
General partner 1,000 1,000
Limited partners 5,191,766 6,516,474
------------ -------------
Total partners' capital 5,192,766 6,517,474
------------ -------------
Total liabilities and partners' capital $ 10,232,970 $ 9,356,409
------------ -------------
------------ -------------
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
Commonwealth Income & Growth Fund II
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Income:
Lease $ 4,212,862 $ 2,444,661 $ 1,123,685
Interest and other 32,798 95,346 70,429
----------- ----------- -----------
4,245,660 2,540,007 1,194,114
Expenses:
Operating, excluding depreciation 93,840 163,749 56,707
Equipment management fee paid to
General Partner 210,643 122,233 56,184
Depreciation 3,908,603 2,107,744 997,708
Amortization of organization costs,
equipment acquisition costs, and
deferred expenses 220,296 139,057 84,245
Interest 204,022 37,106 --
Loss on sale of computer equipment -- 31,955 --
----------- ----------- -----------
4,637,404 2,601,844 1,194,844
----------- ----------- -----------
Net loss $ (391,744) $ (61,837) $ (730)
----------- ----------- -----------
----------- ----------- -----------
Net loss per equivalent limited
partnership unit $ (.87) $ (.16) $ (.02)
----------- ----------- -----------
----------- ----------- -----------
Weighted average number of equivalent
limited partnership units outstanding
during the period 461,817 451,712 300,982
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Commonwealth Income & Growth Fund II
Statements of Partners' Capital
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNER GENERAL LIMITED
UNITS UNITS PARTNER PARTNERS TOTAL
--------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Partners' capital -
December 31, 1995 50 183,947 $ 1,000 $ 3,155,521 $ 3,156,521
Contributions -- 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
Contributions -- 59,298 -- 1,185,785 1,185,785
Offering costs -- -- -- (129,680) (129,680)
Net income (loss) -- -- 9,087 (70,924) (61,837)
Distributions -- -- (9,087) (899,627) (908,714)
--------- ---------- ---------- ---------- ------------
Partners' capital -
December 31, 1997 50 461,817 1,000 6,516,474 6,517,474
Net income (loss) -- -- 9,330 (401,074) (391,744)
Distributions -- -- (9,330) (923,634) (932,964)
--------- ---------- ---------- ---------- ------------
Partners' capital -
December 31, 1998 50 461,817 $ 1,000 $5,191,766 $ 5,192,766
--------- ---------- ---------- ---------- ------------
--------- ---------- ---------- ---------- ------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
Commonwealth Income & Growth Fund II
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (391,744) $ (61,837) $ (730)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 4,128,899 2,246,801 1,081,953
(Gain) loss on sale of computer
equipment (493) 31,955 --
Other noncash activities included in
determination of net loss (1,558,644) (416,823) (4,290)
Changes in operating assets and
liabilities:
Lease income receivable (133,430) (33,486) (32,895)
Accounts receivable - General Partner 1,311 (15,821) --
Interest and other receivables (10,627) 19,451 (9,975)
Accounts payable (3,263) 3,372 61,955
Accounts payable - Commonwealth
Capital Corp. (68,265) 68,265 (148,141)
Unearned lease income (39,891) 127,723 52,034
Organization costs paid to the
General Partner -- (12,451) (50,528)
------------ ------------ ------------
Net cash provided by operating activities 1,923,853 1,957,149 949,383
INVESTING ACTIVITIES
Capital expenditures (1,701,559) (4,179,080) (1,777,488)
Net proceeds from sale of computer equipment 851,607 10,585 --
Equipment acquisition fees paid to the
General Partner (222,916) (202,760) (147,448)
------------ ------------ ------------
Net cash used in investing activities (1,072,868) (4,371,255) (1,924,936)
FINANCING ACTIVITIES
Partners' contributions -- 1,185,785 4,371,440
Offering costs -- (106,556) (406,651)
Offering costs paid to the General Partner -- (23,124) (80,615)
Distributions to partners (932,964) (908,714) (608,045)
Debt placement fee paid to the General Partner (39,980) (27,470) --
------------ ------------ ------------
------------ ------------ ------------
Net cash (used in) provided by financing activities
(972,944) 119,921 3,276,129
------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents (121,959) (2,294,185) 2,300,576
Cash and cash equivalents at beginning
of year 258,167 2,552,352 251,776
------------ ------------ ------------
------------ ------------ ------------
Cash and cash equivalents at end of year $ 136,208 $ 258,167 $ 2,552,352
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
Commonwealth Income & Growth Fund II
Notes to Financial Statements
December 31, 1998
1. BUSINESS
Commonwealth Income & Growth Fund II (the "Partnership") is a limited
partnership organized in the Commonwealth of Pennsylvania to acquire, own,
lease, and sell various types of computer peripheral equipment and other similar
capital equipment, which will be leased primarily to U.S. corporations and
institutions. The Partnership's general partner is Commonwealth Income & Growth
Fund, Inc. (the "General Partner"), a Pennsylvania corporation which is an
indirect wholly-owned subsidiary of Commonwealth Capital Corp. Approximately ten
years after the commencement of operations, the Partnership intends to have sold
or otherwise disposed of all of its computer equipment, make final distributions
to partners, and to dissolve. Unless sooner terminated, the Partnership will
continue until December 31, 2006.
Allocations of income and distributions of cash are based on the Commonwealth
Income & Growth Fund II, Limited Partnership Agreement (the "Agreement"). The
various allocations prevent any limited partner's capital account from being
reduced below zero and ensure the capital accounts reflect the anticipated
sharing ratios of cash distributions, as defined in the Agreement. Annual cash
distributions to limited partners have been made at a rate of 10% (Preferred
Distribution) of their original contributed capital. Distributions during 1998,
1997 and 1996 reflect an annual return of capital in the amount of approximately
$2.00 per limited partnership unit for units which were outstanding for the
entire year. 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.
2. ACCOUNTING POLICIES
REVENUE RECOGNITION
Through December 31, 1998, the Partnership has only entered into operating
leases. Lease revenue is recognized on a monthly basis in accordance with the
terms of the operating lease agreements.
6
<PAGE>
Commonwealth Income & Growth Fund II
Notes to Financial Statements (continued)
2. ACCOUNTING POLICIES (Continued)
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
LONG-LIVED ASSETS
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.
During 1998, the Partnership identified specific computer equipment and
associated equipment acquisition costs which were evaluated due to technological
changes. The Partnership determined that the carrying amount of certain assets
was greater than the undiscounted cash flows to be generated by these assets.
The Partnership recorded charges of $428,000 in the fourth quarter of 1998 to
record the assets at their estimated fair value. Such amounts have been included
in depreciation expense in the accompanying financial statements. There were no
adjustments during 1997 or 1996.
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.
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, 1998 and 1997, cash
equivalents were invested in a money market fund investing directly in Treasury
obligations.
7
<PAGE>
Commonwealth Income & Growth Fund II
Notes to Financial Statements (continued)
2. ACCOUNTING POLICIES (Continued)
INCOME TAXES
The Partnership is not subject to federal income taxes; instead, any taxable
income (loss) is passed through to the partners and included on their respective
income tax returns.
Taxable income differs from financial statement net income as a result of
reporting certain income and expense items for tax purposes in periods other
than those used for financial statement purposes, principally relating to
depreciation, amortization, and lease income.
OFFERING COSTS
Offering costs are 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 year.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1998, Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up
Activities," was issued which requires that the costs associated with such
activities be expensed as incurred. SOP 98-5 is required to be adopted in the
first quarter of 1999 and will result in the write-off of $50,000 of unamortized
organization costs.
8
<PAGE>
Commonwealth Income & Growth Fund II
Notes to Financial Statements (continued)
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.
The following is a schedule of future minimum rentals on noncancelable operating
leases at December 31, 1998.
<TABLE>
<CAPTION>
<S> <C>
1999 $3,969,000
2000 2,450,000
2001 528,000
-----------
$ 6,947,000
-----------
-----------
</TABLE>
Lease income from three lessees, each exceeding 10% of lease revenue, aggregated
33% of lease income for the year ended December 31, 1998. Lease income from four
lessees, each exceeding 10% of lease income, aggregated 55% of the lease income
for the year ended December 31, 1997. Lease income from three lessees, each
exceeding 10% of lease revenue, aggregated 75% of lease income for the year
ended December 31, 1996.
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
1997, and 1996, such organizational fees of approximately $36,000, and $131,000,
respectively, were paid to the General Partner. No organizational fees were paid
during 1998.
9
<PAGE>
Commonwealth Income & Growth Fund II
Notes to Financial Statements (continued)
4. RELATED PARTY TRANSACTIONS (Continued)
REIMBURSEMENT OF EXPENSES
The General Partner and its Affiliates are entitled to reimbursement by the
Partnership for the cost of goods, supplies, or services obtained and used by
the General Partner in connection with the administration and operation of the
Partnership from third parties unaffiliated with the General Partner. In
addition, the General Partner and its affiliates are entitled to reimbursement
for certain expenses incurred by the General Partner and its affiliates in
connection with the administration and operation of the Partnership. During 1998
and 1997, $30,000 and $110,000, respectively, of expenses were reimbursed to the
General Partner. No expenses were reimbursed in 1996.
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 was paid upon each 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 1998, 1997, and 1996, equipment acquisition fees
of approximately $223,000, $203,000, and $147,000, respectively, were paid to
the General Partner.
DEBT PLACEMENT FEE
As compensation for arranging term debt to finance the acquisition of equipment
by the Partnership, the General Partner is paid a fee equal to 1% of such
indebtedness; provided, however, that such fee shall be reduced to the extent
the Partnership incurs such fees to third parties, unaffiliated with the General
Partner or the lender, with respect to such indebtedness and no such fee will be
paid with respect to borrowings from the General Partner or its Affiliates.
During 1998 and 1997, debt placement fees of approximately $40,000 and $27,000,
respectively, were paid to the General Partner. There were no such fees paid to
the General Partner in 1996.
10
<PAGE>
Commonwealth Income & Growth Fund II
Notes to Financial Statements (continued)
4. RELATED PARTY TRANSACTIONS (Continued)
EQUIPMENT MANAGEMENT FEE
The General Partner is entitled to be paid a monthly fee equal to the lesser of
(i) the fees which would be charged by an independent third party for similar
services for similar equipment or (ii) the sum of (a) two percent of (1) the
gross lease revenues attributable to equipment which is subject to full payout
net leases which contain net lease provisions plus (2) the purchase price paid
on conditional sales contracts as received by the Partnership and (b) 5% of the
gross lease revenues attributable to equipment which is subject to operating
leases. During 1998, 1997, and 1996, equipment management fees of approximately
$211,000, $122,000, and $56,000, respectively, were paid to the General Partner,
as determined pursuant to section (ii) above.
RE-LEASE FEE
As compensation for providing re-leasing services for any equipment for which
the General Partner has, following the expiration of, or default under, the most
recent lease or conditional sales contract, arranged a subsequent lease or
conditional sales contract for the use of such equipment to a lessee or other
party, other than the current or most recent lessee or other operator of such
equipment or its Affiliates ("Re-lease"), the General Partner shall receive, on
a monthly basis, a Re-lease Fee equal to the lesser of (a) the fees which would
be charged by an independent third party for comparable services for comparable
equipment or (b) two percent of gross lease revenues derived from such Re-lease.
There were no such fees paid to the General Partner in 1998, 1997, or 1996.
EQUIPMENT LIQUIDATION FEE
With respect to each item of equipment sold by the General Partner (other than
in connection with a conditional sales contract), a fee equal to the lesser of
(i) 50% of the competitive equipment sale commission or (ii) three percent of
the sales price for such equipment is payable to the General Partner. The
payment of such fee is subordinated to the receipt by the Limited Partners of
the Net Disposition Proceeds from such sale in accordance with the Partnership
Agreement. Such fee will be reduced to the extent any liquidation or resale fees
are paid to unaffiliated parties. There were no such fees paid to the General
Partner in 1998, 1997, or 1996.
11
<PAGE>
Commonwealth Income & Growth Fund II
Notes to Financial Statements (continued)
5. NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------
<S> <C> <C>
Installment note payable to a bank; interest at 7.5%;due in monthly installments
of $22,844 including interest through June 1999 $ 134,127 $ 387,852
Installment note payable to a bank; interest at 7.5%; due in monthly
installments of $31,144 including interest through May 2000 500,883 823,908
Installment note payable to a bank; interest at 8.2%;due in monthly installments
of $3,976 including interest through June 2000 67,126 107,518
Installment note payable to a bank; interest at 6.4%;due in monthly installments
of $21,028 including interest through September 2000 416,767 634,842
Installment note payable to a bank; interest at 6.5%; due in monthly
installments of $11,910 including interest through November 2000 256,927 -
Installment note payable to a bank; interest at 7.0%; due in monthly
installments of $6,491 including interest through February 2001 156,170 -
Installment note payable to a bank; interest at 7.5%; due in monthly
installments of $4,395 including interest through February 2001 105,741 -
Installment note payable to a bank; interest at 6.5%; due in monthly
installments of $6,989 including interest through November 2000 150,770 -
Installment note payable to a bank; interest at 7.0%; due in monthly
installments of $8,386 including interest through February 2000 112,424 -
Installment note payable to a bank; interest at 7.0%; due in monthly
installments of $33,736 including interest through December 2000 748,005 -
</TABLE>
12
<PAGE>
Commonwealth Income & Growth Fund II
Notes to Financial Statements (continued)
5. NOTES PAYABLE (Continued)
<TABLE>
<CAPTION>
1998 1997
-------------------------------------
<S> <C> <C>
Installment note payable to a bank; interest at 7.0%; due in monthly
installments of $33,736 including interest through April 2001 $ 845,760 $ -
Installment note payable to a bank; interest at 6.6%; due in monthly
installments of $6,314 including interest through August 2001 184,925 -
Installment note payable to a bank; interest at 6.4%; due in monthly
installments of $4,209 including interest through June 2001 116,473 -
Installment note payable to a bank; interest at 7.0%; due in monthly
installments of $20,045 including interest through December 2001 649,571 -
Installment note payable to a bank; interest at 7.1%; due in monthly
installments of $12,186 including interest through May 2001 323,860 -
-------------------------------------
$ 4,769,529 $ 1,954,120
-------------------------------------
-------------------------------------
</TABLE>
These notes are secured by specific computer equipment and are nonrecourse
liabilities of the Partnership. Aggregate maturities of notes payable for each
of the three years subsequent to December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 2,337,193
2000 1,939,550
2001 492,786
------------
$ 4,769,529
------------
------------
</TABLE>
The fair market value of debt approximates its carrying value at December 31,
1998 and 1997.
13
<PAGE>
Commonwealth Income & Growth Fund II
Notes to Financial Statements (continued)
6. SUPPLEMENTAL CASH FLOW INFORMATION
Other noncash activities included in the determination of net loss are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------
<S> <C> <C> <C>
Lease income, net of interest expense on notes payable realized as a result of
direct payment of principal by lessee to bank $ 1,536,818 $ 404,913 $ -
Lease income paid to original lessor in lieu of cash payment for computer
equipment acquired 21,826 11,910 4,290
------------------------------------------------
------------------------------------------------
Total adjustment to net loss from other noncash activities
$ 1,558,644 $ 416,823 $ 4,290
------------------------------------------------
------------------------------------------------
</TABLE>
No interest or principal on notes payable was paid by the Partnership because
direct payment was made by lessee to the bank in lieu of collection of lease
income and payment of interest and principal by the Partnership.
Noncash investing and financing activities include the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------
<S> <C> <C> <C>
Debt assumed in connection with the
purchase of computer equipment $ 4,352,228 $ 2,359,033 $ -
------------------------------------------------------------
------------------------------------------------------------
Accounts payable in connection with the
purchase of computer equipment $ - $ 502,721 $ -
------------------------------------------------------------
------------------------------------------------------------
Computer equipment payable converted to
a note payable $ 502,721 $ - $ -
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
7. RECONCILIATION OF NET LOSS REPORTED FOR FINANCIAL REPORTING PURPOSES TO
TAXABLE INCOME ON THE FEDERAL PARTNERSHIP RETURN
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------
<S> <C> <C> <C>
Net loss for financial reporting purposes $ (391,744) $ (61,837) $ (730)
Adjustments:
Depreciation 1,060,451 387,081 167,614
Amortization 179,834 112,007 68,035
Unearned lease income (65,610) 71,392 22,980
Loss on sale of computer equipment (455,968) (7,011) -
Other (19,753) 33,265 -
------------------------------------------------------------
------------------------------------------------------------
Taxable income on the Federal
Partnership Return $ 307,210 $ 534,897 $ 257,899
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
14
<PAGE>
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
Balance Sheet
February 28, 1998
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.................................................1
Balance Sheet..................................................................2
Notes to Balance Sheet.........................................................3
</TABLE>
<PAGE>
Report of Independent Auditors
To the Stockholder
Commonwealth Income & Growth Fund, Inc.
We have audited the accompanying balance sheet of Commonwealth Income & Growth
Fund, Inc. (an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
as of February 28, 1998. This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Commonwealth Income & Growth Fund,
Inc. at February 28, 1998, in conformity with generally accepted accounting
principles.
Philadelphia, PA /s/ Ernst & Young LLP
April 3, 1998
1
<PAGE>
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
Balance Sheet
February 28, 1998
<TABLE>
<S> <C>
ASSETS
Cash $ 500
Investment in Partnerships 3,000
---------------
$ 3,500
---------------
---------------
LIABILITIES
Accounts payable to Income Funds and
Commonwealth Capital Corp. $ 2,400
STOCKHOLDERS' EQUITY Common stock at $1 stated value:
Authorized shares--1,000
Issued and outstanding shares--100 100
Additional paid-in capital 1,001,000
---------------
1,001,100
Less: note receivable (1,000,000)
---------------
1,100
---------------
$ 3,500
---------------
---------------
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
Notes to Balance Sheet
February 28, 1998
1. THE COMPANY
Commonwealth Income & Growth Fund, Inc. (the "Company") is a wholly-owned
subsidiary of Commonwealth of Delaware, Inc. which in turn is a wholly-owned
subsidiary of Commonwealth Capital Corp. ("CCC"). The Company is the sole
General Partner of Commonwealth Income & Growth Fund I, a Pennsylvania limited
partnership, the sole General Partner of Commonwealth Income & Growth Fund II, a
Pennsylvania limited partnership, and the sole General Partner of Commonwealth
Income & Growth Fund III, a Pennsylvania limited partnership. The three limited
partnerships described above are collectively referred to herein as the
"Partnerships."
CCC has provided additional capital by means of a noninterest-bearing demand
note in the amount of $1,000,000, so that the Company will at all times have a
net worth (which includes the net equity of the Company and the demand note
receivable from CCC) of at least $1,000,000. In computing the Company's net
worth for this purpose, its interest in the Partnerships and any amounts and
notes receivable from and payable to the Partnerships will be excluded. The
Company's equity has been reduced by the note receivable from CCC resulting in
net equity of $1,100, which may be different for tax purposes. The Company's
operations will be included in the consolidated federal income tax return of
CCC.
2. INVESTMENT IN PARTNERSHIPS
The Company contributed $3,000 in cash to the Partnerships for its general
partner interest. The Company may, at its sole discretion, purchase a limited
partnership interest in the Partnerships ("Units") for an additional capital
contribution of $20 per Unit with a minimum investment of 125 Units.
3. RELATED PARTY TRANSACTIONS
The Company and its affiliates receive substantial fees and compensation in
connection with the offering of Units and the management of the Partnerships'
assets.
3
<PAGE>
Commonwealth Capital Corp.
Consolidated Balance Sheet
February 28, 1998
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors................................................1
Consolidated Balance Sheet....................................................2
Notes to Consolidated Balance Sheet...........................................3
</TABLE>
<PAGE>
Report of Independent Auditors
The Stockholder
Commonwealth Capital Corp.
We have audited the accompanying consolidated balance sheet of Commonwealth
Capital Corp. as of February 28, 1998. This balance sheet is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the consolidated financial position of Commonwealth Capital
Corp. at February 28, 1998 in conformity with generally accepted accounting
principles.
Philadelphia, Pennsylvania /s/ Ernst & Young LLP
April 3, 1998
1
<PAGE>
Commonwealth Capital Corp.
Consolidated Balance Sheet
February 28, 1998
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents $ 143,089
Receivables from Income Funds 190,749
Advances to Income Funds 232,000
Other receivables 114,607
Income taxes receivable 50,000
Minimum lease payments receivable, net of
unearned interest income of $2,480,187 5,785,000
Investment in Income Funds 15,200
Other assets 11,731
Office furniture and equipment, net of
accumulated depreciation of $97,926 19,926
Deferred offering costs 223,670
------------------
Total assets $ 6,785,972
------------------
------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued expenses $ 252,987
Due to Income Funds 46,113
Nonrecourse obligations 5,785,000
------------------
Total liabilities 6,084,100
Stockholder's equity:
Common stock, $1 par value:
Authorized shares - 1,000
Issued and outstanding shares - 10 10
Retained earnings 701,862
------------------
Total stockholder's equity 701,872
------------------
Total liabilities and stockholder's equity $ 6,785,972
------------------
------------------
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Balance Sheet
February 28, 1998
3
1. BUSINESS
Commonwealth Capital Corp. (the Company), through its subsidiary, Commonwealth
of Delaware, Inc. (CDI), is primarily engaged in leasing various types of
computer peripheral equipment and other similar equipment, which are leased
primarily to U.S. corporations and institutions. Certain subsidiaries of CDI
were formed for the purpose of functioning as general partners/managing trustees
which own a 1% interest in limited partnerships/trusts (the "Income Funds"),
which were organized to acquire, own and act as lessor with respect to certain
computer equipment. As of February 28, 1998, the subsidiaries include
Commonwealth Capital Fund 1987-I, Inc., Commonwealth Capital Fund 1988-I, Inc.,
Commonwealth Capital Fund No. 3, Inc., Commonwealth Capital Fund No. 4, Inc.,
Commonwealth Capital Fund V, Inc., Commonwealth Capital Private Fund-I, Inc.,
Commonwealth Capital Fund VI, Inc., Commonwealth Capital Fund VII, Inc.,
Commonwealth Capital Private Fund - II, Inc., Commonwealth Capital Trustee VIII,
Inc., Commonwealth Capital Trustee IX, Inc., Commonwealth Capital Trustee X,
Inc., Commonwealth Capital Private Fund-III, Inc., Commonwealth Income and
Growth Fund, Inc., Commonwealth Capital Private Fund IV, Inc., Commonwealth
Capital Private Fund V, Inc., and Commonwealth Capital Private Fund VI, Inc.
(collectively the "General Partner Subsidiaries"), Commonwealth Capital
Securities Corp., Garden State Facilities Funding, Inc. (GSFF) and Commonwealth
Capital Delaware Trustee, Inc.
All of the Company's fee income is derived from the Income Funds within the
leasing industry. Commission income is derived from Commonwealth Capital
Securities Corp. which sells units of its affiliated partnerships through broker
dealer firms to their respective customers throughout the United States.
2. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated balance sheet includes the accounts of the
Company, its wholly-owned subsidiary, CDI, and its wholly-owned subsidiaries
(Note 1). All significant intercompany accounts and transactions have been
eliminated in the accompanying consolidated balance sheet. The balance sheet is
presented on an unclassified basis in accordance with leasing industry practice.
3
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Balance Sheet (continued)
2. ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of the balance sheet in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the balance sheet and accompanying notes. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. At February 28, 1998, cash
equivalents were invested in a money market fund investing directly in treasury
obligations.
OFFICE FURNITURE AND EQUIPMENT
Office furniture and equipment are carried at cost and are depreciated over the
estimated useful lives of the related assets ranging from 5 to 7 years using
accelerated methods.
INVESTMENT IN INCOME FUNDS
The Company accounts for its 1% interests in the Income Funds by the equity
method. In 1998, certain Income Funds had liabilities in excess of their assets.
As the Company, which serves the General Partner, is obligated to fund any
liabilities in excess of assets, the Company reduced its investment in Income
Funds and recorded a Due to Income Funds of $46,113 at February 28, 1998.
Financial information of the Income Funds as of December 31, 1997, is as
follows:
<TABLE>
<S> <C>
Total assets $ 29,851,000
Nonrecourse debt 10,903,000
Other liabilities 2,281,000
Partners' capital 16,667,000
Net income (loss) 280,000
</TABLE>
4
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Balance Sheet (continued)
2. ACCOUNTING POLICIES (CONTINUED)
The Company has guaranteed the performance of certain non-monetary obligations
of the General Partner Subsidiaries to the respective Income Funds, primarily
the responsibility for management of the Income Funds. In addition, the Company
is responsible for certain capital funding requirements of the General Partner
Subsidiaries and, accordingly, holds noninterest-bearing demand notes of
approximately $4,166,000 at February 28, 1998. Such notes have been eliminated
in the consolidation of the accompanying balance sheet.
The compensation to the Company from the Income Funds includes: (1) Equipment
Acquisition Fees (4% of the purchase price of all equipment purchased by the
Income Funds); (2) Debt Placement Fees (1% of financed equipment by the Income
Funds); (3) Sales Fees Expense (3% of gross proceeds of sold equipment by the
Income Funds); and (4) Equipment Management Fees (5% of the gross operating
lease revenues of the Income Funds).
Fees from two Income Funds for the year ended February 28, 1998, each exceeding
10% of total fee income for the year, aggregated 66%.
3. LEASE COMMITMENTS
GSFF acted as lessor in a series of lease purchase transactions whereby the
underlying assets were funded by investors through certificates of participation
in the lease payments. All of GSFF's rights as lessor were assigned to a
third-party agent which administers the collection of rentals paid by the
lessee. The obligations under the certificates are nonrecourse to GSFF.
Accordingly, any reduction in the minimum lease payments receivable for
uncollectible accounts would result in an equal reduction of the nonrecourse
obligations. Amounts outstanding at February 28, 1998 under the leases and
certificates of participation are approximately $5,785,000. These amounts are
included in minimum lease payments receivable and nonrecourse obligations in the
accompanying balance sheet. Of these amounts, $4,530,000 are secured by mortgage
insurance policies maintained by the lessee. The certificates mature from 1998
to 2011.
5
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Balance Sheet (continued)
3. LEASE COMMITMENTS (CONTINUED)
Future minimum lease payments to be received as of February 28, 1998 are as
follows:
<TABLE>
<S> <C>
1999 $ 920,374
2000 903,828
2001 906,935
2002 683,324
2003 684,490
Thereafter 4,166,236
---------------
8,265,187
Less amount representing interest 2,480,187
---------------
Total $ 5,785,000
---------------
---------------
</TABLE>
The Company leases an automobile, certain office equipment and office space
under noncancelable operating leases expiring in 1999 through 2001. Future
minimum lease payments under noncancelable operating leases at February 28, 1998
are $150,000 in 1999; $11,000 in 2000; and $4,000 in 2001.
4. PROFIT-SHARING PLAN
The Company has a profit-sharing plan covering all employees with one year of
service and 21 years of age. Profit-sharing contributions are made at the
discretion of management. It is the Company's policy to fund profit-sharing
costs as accrued. There was no profit-sharing contribution for the year ended
February 28, 1998.
5. INCOME TAXES
The Company files a consolidated federal income tax return with CDI and its
subsidiaries.
The Company has a net deferred tax asset of $237,000 at February 28, 1998,
arising primarily from investment tax credits and net operating loss
carryforwards. The deferred tax asset is net of deferred tax liabilities
associated with ownership of general partnership interests in the various
operating Income Funds of $53,000 at February 28, 1998. The Company has recorded
a valuation allowance of approximately $237,000 because the Company concluded
the future realization of the assets could not be reasonably assured based on
current and expected operating results.
6
<PAGE>
Commonwealth Capital Corp.
Notes to Consolidated Balance Sheet (continued)
5. INCOME TAXES (CONTINUED)
The Company has investment tax credit carryforwards of $129,000 at February 28,
1998 which expire in 1999 through 2001. The Company has federal net operating
loss carryforwards of $1,512,000, which expire in 1999 through 2001.
6. RELATED PARTY TRANSACTIONS
During 1998, the Company made $697,000, in cash advances to certain Income Funds
to fund cash distributions to limited partners. The Company determined that
approximately $176,000 of these advances were uncollectible and such amounts
were written off. The remaining advances of $232,000 are due on demand.
During 1998, the Company determined that $12,750 in receivables from certain
Income Funds were uncollectible and such amounts were written off.
7. LEGAL SETTLEMENT
In fiscal 1998, the Company was a plaintiff in a lawsuit against a company that
provided office space and administrative support services in prior years. In
fiscal 1998, the Company was awarded a $50,000 judgment against this company
which has been included in other income. The entire balance is included in other
receivables at February 28, 1998.
7
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NOT APPLICABLE
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
GENERAL
The General Partner, a wholly-owned subsidiary of Commonwealth of Delaware,
Inc., a Delaware corporation, which is in turn a wholly-owned subsidiary of
Commonwealth Capital Corp., a Pennsylvania corporation ("Com Cap Corp."), was
incorporated in Pennsylvania on August 26, 1993. The General Partner also acts
as the General Partner for Commonwealth Income and Growth Fund I and
Commonwealth Income and Growth Fund III. The principal business office of the
General Partner is 1160 West Swedesford Road, Suite 340, Berwyn, PA 19312, and
its telephone number is 610-647-6800. The General Partner manages and controls
the affairs of the Partnership and has sole responsibility for all aspects of
the Partnership's operations. The officers of the General Partner devote such
time to the affairs of the Partnership as in the opinion of the General Partner
is necessary to enable it to perform its function as General Partner. The
officers of the General Partner are not required to spend their full time in
meeting their obligations to the Partnership.
The directors and officers of the General Partner and key employees of Com Cap
Corp. are as follows:
<TABLE>
<CAPTION>
NAME TITLE
<S> <C>
George S. Springsteen Chairman of the Board of Directors and President of the General Partner and
Com Cap Corp.
Kimberly A. MacDougall Executive Vice President, Chief Operating Officer and Secretary of the General
Partner and Com Cap Corp.
Kathleen S. Enscoe Vice President and Controller of the General Partner and Com Cap Corp.
Magdalia Cruz Assistant Vice President of Com Cap Corp.
16
<PAGE>
Henry J. Abbott Vice President and Portfolio Manager of Com Cap Corp.
</TABLE>
George S. Springsteen, age 64, is President of both Com Cap Corp. and the
General Partner. Mr. Springsteen is also President of the general partners or
controlling entities of several prior programs sponsored by Com Cap Corp. with
objectives similar to the Partnership's. He has been the sole shareholder and
director of Com Cap Corp. since its formation in 1978. From 1971 to 1978, Mr.
Springsteen was involved in the computer leasing business of Granite Computer
Corporation. Mr. Springsteen served as Vice President of Marketing, in addition
to other capacities, and managed a portfolio of approximately $120,000,000 of
IBM computers and peripherals. In 1978, Granite Computer Corporation sold its
equipment portfolio and left the equipment leasing business. Mr. Springsteen
acquired a portion of Granite's portfolio, client base, employees and corporate
offices in Jenkintown, Pennsylvania. The new company began operations as Com Cap
Corp. in May of 1978. Mr. Springsteen received a Bachelor of Science degree from
the University of Delaware in 1957.
Kimberly A. MacDougall, age 39, is Executive Vice President, Chief Operating
Officer and Secretary of Com Cap Corp. and the General Partner and joined Com
Cap Corp. in 1997. She is also the President of Commonwealth Capital Securities
Corp. From 1980 to 1997, Ms. MacDougall was employed with Wheat First Butcher
Singer, a broker/dealer headquartered in Richmond, Virginia. While at Wheat
First Butcher Singer, Ms. MacDougall, Senior Vice President, served as Marketing
Manager for the Direct Investments Department, with over $450,000,000 of
investments under management in real estate, equipment leasing and
energy-related industries. Ms. MacDougall holds Series 7, 63 and 39 NASD
licenses and is a member of the Equipment Leasing Association, Investment
Partnership Association, and International Association for Financial Planning.
Kathleen S. Enscoe, age 33, is Assistant Vice President and Controller of Com
Cap Corp. and certain of its subsidiaries where she has been employed since
1992. Ms. Enscoe is an active member of the Equipment Leasing Association. From
1988 to 1992, Ms. Enscoe was employed as a staff accountant in the financial
reporting department of WWF Paper Corporation. Ms. Enscoe received a B.S.B.A.
degree in 1988 from Geneva College with dual majors in accounting and business
administration.
Magdalia Cruz, age 30, is Assistant Vice President of Com Cap Corp. and Vice
President of Commonwealth Capital Securities Corp. Ms. Cruz has been employed by
Com Cap Corp. since 1993. From 1990 to 1993, Ms. Cruz was employed as Marketing
Coordinator for Shaffer DeSouza Brown. Prior to that, as a Computer Equipment
Analyst for the Defense Industrial Supply Center, a government agency based in
Philadelphia. She is completing her studies for a B.S. in Business Management
and Marketing at Chestnut Hill College. Ms. Cruz is a member of the Equipment
Leasing Association, Investment Partnership Association, and holds her Series
22, 63 and 39 NASD licenses.
Henry J. Abott, age 48, is Vice President and Portfolio manager of Com Cap Corp.
and has been employed by Com Cap Corp. since 1998. Mr. Abbott has been active in
the commercial lending industry, working primarily on asset-backed transactions
for more than twenty-seven years. Before joining Com Cap Corp., Mr. Abbott was a
founding partner of Westwood Capital LLC, in New York. Prior to that, as Senior
Vice President for IBJ Schroder Leasing Corporation where he managed a group
specializing in providing operating lease financing programs in the high
technology sector. Mr. Abbott brings extensive knowledge and experience in all
facets of asset-backed financing and has successfully managed $1.5 billion of
secured transactions. Mr. Abbott attended St. John's University. Mr. Abbott is a
member of the Equipment Leasing Association.
The directors and officers of the General Partner are required to spend only
such time on the Partnership's affairs as is necessary in the sole discretion of
the directors of the General Partner for the proper conduct of the Partnership's
business. A substantial amount of time of such directors and officers is
expected to be spent on matters unrelated to the Partnership, particularly after
the Partnership's investments have been selected. Under certain circumstances,
such directors and officers are entitled to indemnification from the
Partnership.
17
<PAGE>
ITEM 11: EXECUTIVE COMPENSATION
The following table summarized 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.
<TABLE>
<CAPTION>
AMOUNT AMOUNT AMOUNT
ENTITY RECEIVING INCURRED INCURRED INCURRED
COMPENSATION TYPE OF COMPENSATION DURING 1998 DURING 1997 DURING 1996
- ----------------- -------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OFFERING AND ORGANIZATION STAGE
The General Partner Organizational Fee. An Organization Fee -- $36,000 $131,000
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 $30,000 $110,000 $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. In addition, the General Partner
and its affiliates are entitled to reimbursement
of certain expenses incurred by the General
Partner and its affiliates in connection with
the administration and operation of the
Partnership. The amounts set forth on this
table do not include expenses incurred in the
offering of Units.
The General Partner Equipment Acquisition Fee. An Equipment $223,000 $203,000 $147,000
Acquisition Fee of four percent of the Purchase
Price of each item of Equipment purchased as
compensation for the negotiation of the acquisition
of the Equipment and the lease thereof or sale
under a Conditional Sales Contract. The fee
was paid upon each 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>
18
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AMOUNT AMOUNT
ENTITY RECEIVING INCURRED INCURRED INCURRED
COMPENSATION TYPE OF COMPENSATION DURING 1998 DURING 1997 DURING 1996
- ----------------- -------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Offering available for
investment in Equipment, the fee will
be paid when such Equipment is acquired
The General Partner Debt Placement Fee. As compensation for $40,000 $27,000 $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 $211,000 $122,000 $56,000
equal to the lesser of (I) the fees which
would be charged by an independent third
party for similar services for similar
equipment or (ii) the sum of (a) two percent
of (1) the Gross Lease Revenues attributable
to Equipment which is subject to Full Payout
Net Leases which contain net lease
provisions plus (2) the purchase price paid
on Conditional Sales Contracts as received
by the Partnership and (b) five percent of
the Gross Lease Revenues attributable to
Equipment which is subject to Operating
Leases.
The General Partner Re-Lease Fee. As compensation for providing $0 $0 $0
re-leasing services for any Equipment for
which the General Partner has, following the
expiration of, or default under, the most recent
lease or Conditional Sales Contract, arranged a
subsequent lease or Conditional Sales
Contract for the use of such Equipment to a
lessee or other party, other than the
current or most recent lessee or other
operator of such equipment or its Affiliates
("Re-lease"), the General Partner will
receive, on a monthly basis, a Re-lease Fee
equal to the lesser of (a) the fees which
would be charged by an independent third
party for comparable services for comparable
equipment or (b) two percent of Gross Lease
Revenues derived from such Re-lease.
The General Partner Equipment Liquidation Fee. With respect to $0 $0 $0
each item of Equipment sold by the General
Partner (other than in connection with a
Conditional Sales Contract), a fee equal to
the lesser of (I) 50% of the Competitive
Equipment Sale Commission or (ii) three
percent of the sales price fo such
Equipment.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AMOUNT AMOUNT
ENTITY RECEIVING INCURRED INCURRED INCURRED
COMPENSATION TYPE OF COMPENSATION DURING 1998 DURING 1997 DURING 1996
- ----------------- -------------------------------------------------- ----------- ----------- -----------
<S> <C> <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 $9,330 $9,087 $6,080
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>
20
<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 on interest arising out of its
relationships with the General Partner and its Affiliates. These conflicts
include the following:
COMPETITION WITH GENERAL PARTNER AND AFFILIATES: COMPETITION FOR MANAGEMENT'S
TIME
The General Partner and its Affiliate sponsor other investor programs which are
in potential competition with the Partnership in connection with the purchase of
Equipment as well as opportunities to lease and sell such Equipment. Competition
for Equipment has occurred and is likely to occur in the future. The General
Partner and its Affiliates may also form additional investor programs which may
be competitive with the Partnership.
If one or more investor programs and the Partnership are in a position to
acquire the same Equipment, the General Partner will determine which program
will purchase the Equipment based upon the objectives of each and the
suitability of the acquisition in light of those objectives. The General Partner
will generally afford priority to the program or entity that has had funds
available to purchase Equipment for the longest period of time. If one or more
investor programs and the Partnership are in a position to enter into lease with
the same lessee or sell Equipment to the same purchaser, the General Partner
will generally afford priority to the Equipment which has been available for
lease or sale for the longest period of time.
Certain senior executives of the General Partner and its Affiliates also serve
as officers and directors of the other programs and are required to apportion
their time among these entities. The Partnership is, therefore, in competition
with the other programs for the attention and management time of the General
Partner and Affiliates. The officers and directors of the General Partner are
not required to devote all or substantially all of their time to the affairs of
the Partnership.
ACQUISITIONS
Com Cap Corp. and the General Partner or other Affiliates of the General Partner
may acquire Equipment for the Partnership provided that (i) the Partnership has
insufficient funds at the time the Equipment is acquired, (ii) the acquisition
is in the best interest of the partnership and (iii) no benefit to the General
Partner or its Affiliates arises from the acquisition except for compensation
paid to Com Cap Corp., the General Partner or such other Affiliate as disclosed
in this Report. Com Cap Corp., the General Partner or their Affiliates will not
hold Equipment for more than 60 days prior to transfer to the Partnership. If
sufficient funds become available to the Partnership within such 60 day period,
such Equipment may be resold to the Partnership for a price not in excess of the
sum of the cost of the Equipment to such entity and any accountable Acquisition
Expenses payable to third parties which are incurred by such entity and
21
<PAGE>
interest on the Purchase Price from the date of purchase to the date of transfer
to the Partnership. Com Cap Corp., the General Partner or such other Affiliate
will retain any rent or other payments received for the Equipment, and bear all
expenses and liabilities, other than accountable Acquisition Expenses payable to
third parties with respect to such Equipment, for all periods prior to the
acquisition of the Equipment by the Partnership. Except as described above,
there will be no sales of Equipment to or from any Affiliate of Com Cap Corp.
In certain instances, the Partnership finds it necessary, in connection with the
ordering and acquisition of Equipment, to make advances to manufacturers or
vendors with funds borrowed from the General Partner for such purpose. The
Partnership does not borrow money from the General Partner or any of its
Affiliates with a term in excess of twelve months. Interest is paid on loans or
advances (in the form of deposits with manufacturers or vendors of Equipment or
otherwise) from the General Partner of its Affiliates from their own funds at a
rate equal to that which would be charged by third party financing institutions
on comparable loans from the same purpose in the same geographic area, but in no
event in excess of the General Partner's or Affiliate's own cost of funds. In
addition, if the General Partner or its Affiliates borrow money and loan or
advance it on a short-term basis to or on behalf of the Partnership, the General
Partnership than that which the General Partner or such Affiliates are paying.
The Partnership does not loan money to any Person including the General Partner
or its Affiliates except to the extent that a Conditional Sales Contract
constitutes a loan.
If the General Partner or any of its Affiliates purchases Equipment in its own
name and with its own funds in order to facilitate ultimate purchase by the
Partnership, the purchaser is entitled to receive interest on the funds expended
for such purchase on behalf of the Partnership. Simple interest on any such
temporary purchases is charged on a floating rate basis not in excess of three
percent over the "prime rate" from time to time announced by PNC Bank, from the
date of initial acquisition to the date of repayment by the
Partnership/ownership transfer.
The Partnership does not invest in equipment Limited Partnerships, general
partnerships or joint ventures, except that (a) the Partnership may invest in
general partnerships or joint ventures with persons other that equipment
Programs formed by the General Partner or its Affiliates, which partnerships or
joint ventures own specific equipment; provided that (i) the Partnership has or
acquires a controlling interest in such ventures or partnerships, (ii) the
non-controlling interest is owned by a non-Affiliated, and (iii) the are no
duplicate fees; and (b) the Partnership may invest in joint venture arrangements
with other equipment Programs formed by the General Partner or its Affiliates if
such action is in the best interest of all Programs and if all the following
conditions are met: (i) all the Programs have substantially identical investment
objectives; (ii) there are no duplicate fees; (iii) the sponsor compensation is
substantially identical in each Program; (iv) the Partnership has a right of
first refusal to buy another Program's interest in a joint venture if the other
Program wishes to sell equipment held in the joint venture; (v) the investment
of each Program is on substantially the same terms and conditions; and (vi) the
joint venture is formed either for the purpose of effecting appropriated
diversification for the Programs or for the purpose of relieving the General
Partner or its Affiliates from a commitment entered into pursuant to certain
provisions of the Partnership Agreement.
As of December 31, 1997, the Partnership was indebted to Com Cap Corp. for
approximately $68,000 in connection with the Partnership's reimbursable
expenses. The entire debt was satisfied in January 1998.
22
<PAGE>
GLOSSARY
The following terms used in this Report shall (unless otherwise expressly
provided herein or unless the context otherwise requires) have the meanings set
forth below.
"Acquisition Expenses" means expenses relating to the prospective selection and
acquisition of or investment in Equipment by the Partnership, whether or not
actually acquired, including, but not limited to, legal fees and expenses,
travel and communication expenses, costs of appraisal, accounting fees and
expenses and other related expenses.
"Acquisition Fees" means the total of all fees and commissions paid by any party
in connection with the initial purchase of Equipment acquired by the
Partnership. Included in the computation of such fees or commissions shall be
the Equipment Acquisition Fee and any commission, selection fee, construction
supervision fee, financing fee, non-recurring management fee or any fee of a
similar nature, however designated.
"Adjusted Capital Contributions" means Capital Contributions of the Limited
Partners reduced by any cash distribution received by the Limited Partners
pursuant to the Partnership Agreement, to the extent such distributions exceed
any unpaid Priority Return as of the date such distributions were made.
"Affiliate" means, when used with reference to a specified Person, (i) any
person, that directly or indirectly through one or more intermediaries controls
or is controlled by or is under common control with the specified Person, (ii)
any Person that is a director or an executive officer of, partner in, or serves
in a similar capacity to, the specified Person, or any Person of which the
specified Person is an executive officer or partner or with respect to which the
specified Person serves in a similar capacity, (iii) any Person owning or
controlling 10% or more of the outstanding voting securities of such specified
Person, or (iv) if such Person is an officer, director or partner, any entity
for which such Person acts in such capacity.
"Capital Account" means the bookkeeping account maintained by the Partnership
for each Partner.
"Capital Contributions" means in the case of the General Partner, the total
amount of money contributed to the Partnership by the General Partner, and in
the case of Limited Partners, $20 for each Unit, or where the context requires,
the total Capital Contributions of all the Partners.
"Cash Available for Distribution" means Cash Flow plus Net Disposition Proceeds
plus cash funds available for distribution from Partnership reserves, less such
amounts as the General Partner, in accordance with the Partnership Agreement,
causes the Partnership to reinvest in Equipment or interests therein, and less
such amounts as the General Partner, in its sole discretion, determines should
be set aside for the restoration or enhancement of Partnership reserves.
"Cash Flow" for any fiscal period means the sum of (i) cash receipts from
operations, including, but not limited to, rents or 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.
23
<PAGE>
"Closing Date" means May 12, 1997.
"Code" means the Internal Revenue Code of 1986, as amended, and as may be
amended from tine 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.
"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 noncancelable 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 Dispositions 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.
24
<PAGE>
"Net Lease" means a lease or other contract under which the owner provides
equipment to a lessee or other operator in return for a payment, and the lessee
assumes all obligations and pays for the operation, repair, maintenance 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 to an interim
closing of the Partnership's books with the following adjustments: (I) any
income of the Partnership that is exempt from federal income tax and not
otherwise taken into account in computing Net Profits and Net Loss pursuant to
this definition shall be added to such taxable income or shall reduce such
taxable loss; (ii) any expenditure of the Partnership described in Code Section
705(a) (2) (B) or treated as Code Section 705(a) (2) (B) expenditures pursuant
to Treasury Regulations section 1.704-1(b) (2) (iv) (i) and not otherwise taken
into account in computing Net Profits and Net Losses pursuant to this definition
shall be subtracted from such taxable income or loss; (iii) items of income,
gain, loss and deduction specially allocated pursuant to Section 7.3 of the
Partnership Agreement shall not be included in the computation of Net Profits or
Net Loss; and if property is reflected on the books of the Partnership at a book
value that differs from the adjusted tax basis of the property in accordance
with Treasury Regulation Section 1.704-1(b) (2) (iv) (d) or (f), depreciation,
amortization, and gain or loss with respect to such property shall be determined
by reference to such book value in a manner consistent with Treasury Regulation
Section 1.704-1(b) (2) (iv) (g). The terms "Net Profit" or "Net Losses" shall
include the Partnership's distributive share of the profit or loss of any
partnership or joint venture in which it is a partner or joint venturer.
"Offering" means the initial public offering of Units in the Partnership.
"Offering Period" means the period commencing the Effective Date and ending the
last day of the calendar month in which the Closing Date occurs.
"Operating Distributions" means the quarterly distributions made to the Partners
pursuant to Article 8 of the Partnership Agreement.
"Operating Lease" means a lease or other contractual arrangement under which an
unaffiliated party agrees to pay the Partnership, directly or indirectly, for
the use of the Equipment, and which is not a Full Payout Net Lease.
"Organizational and Offering Expenses" means the expenses incurred in connection
with the organization of the Partnership and in preparation of the Offering,
including Underwriting Commissions, listing fees and advertising expenses
specifically incurred in connection with the distribution of the Units.
"Partner (s)" means any one or more of the General Partner and the Limited
Partners.
"Partnership" means Commonwealth Income & Growth Fund I, a Pennsylvania limited
partnership.
"Partnership Agreement" means that Limited Partnership Agreement of Commonwealth
Income & Growth Fund I by and among the General Partner and the Limited
Partners, pursuant to which the Partnership is governed.
"Person" means an individual, partnership, limited liability company, joint
venture, corporation, trust, estate or other entity.
"Priority Return" means an amount equal to a return at a rate of 10% 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.
25
<PAGE>
"Program" means a limited or general partnership, joint venture, unincorporated
association or similar organization, other than a corporation formed and
operated for the primary purpose of investment in and the operation of or gain
from an interest in Equipment.
"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
on or 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.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON 8-K
(a) (1) Financial Statements.
Commonwealth Income & Growth Fund II
Report of Independent Auditors
Balance Sheets as of December 31, 1998 and 1997.
Statements of Operations for each of the years ended December 31, 1998,
1997 and 1996.
Statements of Partners' Capital for each of the three years ended
December 31, 1998, 1997 and 1996.
Statements of Cash Flows for each of the three years ended December 31,
1998, 1997 and 1996.
Notes to Financial Statements
Commonwealth Income & Growth Fund, Inc.
Report of Independent Auditors
Balance Sheet as of February 28, 1998
Notes to Balance Sheet
Commonwealth Capital Corp.
Report of Independent Auditors
Consolidated Balance Sheet as of February 28, 1998
Notes to Consolidated Balance Sheet
(a) (2) Schedules.
Schedules are omitted because they are not applicable, not required, or
because the required information is included in the financial
statements and notes thereto.
(a) (3) Exhibits.
26
<PAGE>
* 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.
27 Financial Data Schedule
--------------------------
* 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 December 31, 1995.
(b) Reports on Form 8-K
NOT APPLICABLE
(c) Exhibits.
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 29, 1999 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 29, 1999.
SIGNATURE CAPACITY
/S/ GEORGE S. SPRINGSTEEN Chairman, President and Sole Director of
- ------------------------- Commonwealth Income & Growth Fund, Inc.
George S. Springsteen
/S/ KIMBERLY A. MACDOUGALL Executive Vice President Chief Operating
- -------------------------- Officer and Secretary
Kimberly A. MacDougall
/S/ KATHLEEN S. ENSCOE Vice President and Controller of Commonwealth
- ---------------------- Income & Growth Fund, Inc.
Kathleen S. Enscoe
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 136,208
<SECURITIES> 0
<RECEIVABLES> 272,167
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 422,421
<PP&E> 14,085,926
<DEPRECIATION> (4,683,752)
<TOTAL-ASSETS> 10,232,970
<CURRENT-LIABILITIES> 5,040,204
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 5,192,766
<TOTAL-LIABILITY-AND-EQUITY> 10,232,970
<SALES> 0
<TOTAL-REVENUES> 4,245,660
<CGS> 0
<TOTAL-COSTS> 4,637,404
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (391,744)
<INCOME-TAX> 0
<INCOME-CONTINUING> (391,744)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (391,744)
<EPS-PRIMARY> (.87)
<EPS-DILUTED> 0
</TABLE>
