10-K 1 ten-k.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 33-69996 COMMONWEALTH INCOME & GROWTH FUND I (Exact name of registrant as specified in its charter) Pennsylvania 23-2735641 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 470 John Young Way Exton, PA 19341 (Address, including zip code, of principal executive offices) (610) 594-9600 (Registrant's telephone number including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class to Name of exchange on be so registered which each class is to be registered None N/A ---- --- Securities registered pursuant to Section 12(g) of the Act: Units of Limited Partnership Interest ------------------------------------- (Title of Class) Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (ii) has been subject to such filing requirements for the past 90 days: YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: YES [X] NO [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12c-2 of the Act): YES [ ] NO [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): YES [ ] NO [X] Aggregate Market Value of Voting and Non-Voting Common Equity Held by non-affiliates of the Registrant: N/A Indicate by check mark if the registrant is a well-known seasoned issuer, (as defined in Rule 405 of the Act): YES [ ] NO [X] DOCUMENTS INCORPORATED BY REFERENCE (Specific sections incorporated are identified under applicable items herein) Certain exhibits to the Company's Registration Statement on Form S-1 (File No. 33-69996). FORM 10-K DECEMBER 31, 2005 TABLE OF CONTENTS
PART I Item 1. Business 3 Item 1A. Risk Factors 6 Item 1B. Unresolved Staff Comments 7 Item 2. Properties 7 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 7 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 7 Item 6. Selected Financial Data 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 14 Item 8. Financial Statements and Supplementary Data 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14 Item 9A. Controls and Procedures 15 Item 9B. Other Information 15 PART III Item 10. Directors and Executive Officers of the Registrant 15 Item 11. Executive Compensation 18 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 18 Item 13. Certain Relationships and Related Transactions 18 Item 14. Principal Accountant Fees and Services 23 PART IV Item 15. Exhibits and Financial Statement Schedules 24 Index to Exhibits Signatures Certifications
2 PART I ITEM 1: BUSINESS GENERAL Commonwealth Income & Growth Fund I ( the "Partnership") was formed on August 26, 1993 under the Pennsylvania Revised Uniform Limited Partnership Act. The Partnership began offering $15,000,000 of Units of Limited Partnership ("Units") to the public on December 17, 1993 (the "Offerings"). The Partnership terminated its offering of Units on May 11, 1995, with 631,358 Units sold ($12,623,682) and 749 investors admitted as Limited Partners of the Partnership. The Partnership began liquidation effective July 1, 2005. Particular items of equipment may be sold at any time if, in the judgment of the General Partner, it is in the best interest of the Partnership to do so. The determination of whether particular items of partnership equipment should be sold will be made by the General Partner after consideration of all relevant factors (including prevailing economic 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. 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 utilized Retained Proceeds and debt financing (not exceeding 30% of the aggregate cost of the Equipment owned or subject to Conditional Sales Contract by the Partnership at the time the debt was incurred) to purchase additional Equipment. The Partnership acquired and leased equipment principally to U.S. corporations and other institutions pursuant to Operating Leases. Currently, the Partnership's primary objective is the orderly and efficient liquidation of its equipment portfolio. Limited Partners do not have the right to vote on or otherwise approve or disapprove any particular investment to be made by the Partnership or the terms of any sale of equipment in liquidation. 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. 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, historically, that the 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 3 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, 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. DESCRIPTION OF LEASES The Partnership to date has purchased 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 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. 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 retain a security interest in, the Equipment until the Purchase Price of the Equipment is paid. As of December 31, 2005, the Partnership has not entered into any Full Payout Net Leases or Conditional Sales Contracts for Equipment. The Equipment may also be leased pursuant to Capital Leases. Capital Leases are leases under which the Equipment either transfers to the lessee at the end of the lease term, contains a bargain purchase price option, the lease term is equal to 75% or more of the estimated economic life of the Equipment, or the present value at the beginning of the lease term of the minimum lease payments is equal to or exceeds 90% of the excess of the fair value of the Equipment. As of December 31, 2005, we have entered into one Capital Lease. In general, the terms of the Partnership's leases, whether the Equipment is leased pursuant to an Operating lease, Capital 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, Capital Lease or Full Payout Net Leases; the type and use of Equipment and its anticipated residual value; the business of the lessee and its credit rating; the availability and cost of financing; regulatory considerations; the accounting treatment of the lease sought by the lessee or the Partnership; and competitive factors. An Operating Lease generally represents a greater risk to the Partnership than a Capital Lease or 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 Capital Lease or 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 Capital Lease or Full Payout Net Lease. Also, the annual rental payments received under an Operating Lease are ordinarily higher than those received under a Capital Lease or 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 4 cover excess liability and casualty losses, to the extent deemed practicable and advisable by the General Partner. As of December 31, 2005, all leases that have been entered into are "triple net leases". The General Partner has not established any standards for lessees to whom 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, 2005, the Partnership has not entered into any such agreements. Remarketing fees are paid to the leasing companies from which the Partnership purchases leases. These are fees that are earned by the leasing companies when the initial terms of the lease have been met. The General Partner believes that this strategy adds value since it entices the leasing company to "stay with the lease" for potential extensions, remarketing or sale of equipment. This strategy potentially minimizes any conflicts the leasing company may have with a potential new lease and will potentially assist in maximizing overall portfolio performance. The remarketing fee is tied into lease performance thresholds and is factored in the negotiation of the fee. LIQUIDATION POLICIES The Partnership began disposing of its Equipment in July 2005. The Partnership's objective is to sell all of its assets and dissolve by December 31, 2006. Particular items of Equipment may be sold at any time if, in the judgment of the General Partner, it is in the best interest of the Partnership to do so. The determination of whether particular items of Partnership Equipment should be sold or otherwise disposed of is made by the General Partner after consideration of all relevant factors (including prevailing general economic conditions, lessee demand, the General Partner's views of current and future market conditions, the cash requirements of the Partnership, potential capital appreciation, cash flow and federal income tax considerations), with a view toward achieving the principal investment objectives of the Partnership. As partial payment for Equipment sold, the Partnership may receive purchase money obligations secured by liens on such Equipment. 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. GENERAL RESTRICTIONS Under the Partnership Agreement, the Partnership is not permitted, among other things, to: 5 (a) invest in junior trust deeds unless received in connection with the sale of an item of Equipment in an aggregate amount that does not exceed 30% of the assets of the Partnership on the date of the investment; (b) invest in or underwrite the securities of other issuers; (c) acquire any Equipment for Units; (d) issue senior securities (except that the issuance to lenders of notes or other evidences of indebtedness in connection with the financing or refinancing of Equipment or the Partnership's business shall not be deemed to be the issuance of senior securities); (e) make loans to any Person, including the General Partner or any of its Affiliates, except to the extent a Conditional Sales Contract constitutes a loan; (f) sell or lease any Equipment to, lease any Equipment from, or enter into any sale- leaseback transactions with, the General Partner or any of its Affiliates; or (g) give the General Partner or any of its Affiliates an exclusive right or employment to sell the Partnership's Equipment. The General Partner has also agreed in the Partnership Agreement to use its best efforts to assure that the Partnership shall not be deemed an "investment company" as such term is detained in the Investment Company Act of 1940. The General Partner and its Affiliates may engage in other activities, whether or not competitive with the Partnership. The Partnership Agreement provides, however, that neither the General Partner nor any of its Affiliates may receive any rebate or "give up" in connection with the Partnership's activities or participate in reciprocal business arrangements that circumvent the restrictions in the Partnership Agreement against dealings with Affiliates. EMPLOYEES The Partnership had no employees in 2005 and received administrative and other services from a related party, Commonwealth Capital Corp. (CCC), which has 51 employees as of December 31, 2005. ITEM 1A. RISK FACTORS THERE IS NO PUBLIC MARKET FOR THE UNITS, AND YOU MAY BE UNABLE TO SELL OR TRANSFER YOUR UNITS AT A TIME AND PRICE OF YOUR CHOOSING There exists no public market for the units, and the General Partner does not expect a public market for units to develop. The units cannot be pledged or transferred without the consent of the General Partner. The units should be purchased as a long-term investment only. The general partner has sole discretion in deciding whether we will redeem units in the future. Consequently, you may not be able to liquidate your investment in the event of an emergency. You must be prepared to hold your units for the life of the fund. LIMITED PARTNERS DO NOT HAVE THE RIGHT TO VOTE ON OR OTHERWISE APPROVE OR DISAPPROVE OF ANY PARTICULAR INVESTMENT TO BE MADE BY THE PARTNERSHIP OR THE TERMS OF ANY SALE OF EQUIPMENT IN LIQUIDATION. 6 ITEM 1B. UNRESOLVED STAFF COMMENTS NOT APPLICABLE 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 REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES There is no public market for the Units nor is it anticipated that one will develop. As of December 31, 2005, there were 749 holders of Units. The Units are not listed on any exchange or permitted to trade on any over-the-counter market. In addition, there are substantial restrictions on the transferability of Units. GENERAL LIMITATIONS Units cannot be transferred without the consent of the General Partner, which may be withheld in its absolute discretion. The General Partner monitors transfers of Units in an effort to ensure that all transfers are within certain safe harbors promulgated by the IRS to furnish guidance regarding publicly traded partnerships. These safe harbors limit the number of transfers that can occur in any one year. The General Partner intends to cause the Partnership to comply with the safe harbor that permits nonexempt transfers and redemptions of Units of up to five percent of the total outstanding interest in the Partnership's capital or profits in any one year. REDEMPTION PROVISION 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). 7 The Partnership began accepting redemption requests 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. For the twelve months ending December 31, 2005, the General Partner has not redeemed any Units. Additionally, no Limited Partners have requested redemption of their Units. EXEMPT TRANSFERS The following six categories of transfers are exempt transfers for purposes of calculating the volume limitations imposed by the IRS and will generally be permitted by the General Partner: (1) transfers in which the basis of the Unit in the hands of the transferee is determined, in whole or in part, by reference to its basis in the hands of the transferor (for example, Units acquired by corporations in certain reorganizations, contributions to capital, gifts of Units, Units contributed to another partnership, and nonliquidating as well as liquidating distributions by a parent partnership to its partners of interests in a sub partnership); (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. ALLOCATION AND DISTRIBUTION BETWEEN THE GENERAL PARTNER AND THE LIMITED PARTNERS Cash distributions, if any, are made quarterly on March 31, June 30, and September 30, and December 31, of each year. Distributions are made 99% to the Limited Partners and one percent to the General Partner until the Limited Partners have received an amount equal to their Capital Contributions plus the Priority Return; thereafter, cash distributions will be made 90% to 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 excess will reduce the Adjusted Capital Contributions, 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 38.6% federal income tax bracket or, if lower, the maximum federal income tax rate in effect for individuals for such taxable year. 8 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. Distributions in the amount of $31,200 were made to the Limited Partners in 2005. There were no quarterly distributions paid to the Limited Partners during 2004 and 2003. ALLOCATIONS AND DISTRIBUTIONS AMONG THE LIMITED PARTNERS Except during the Offering Period, Cash Available for Distribution that 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, selected financial data for the Partnership as of June 30, 2005 and for each of the four years ending December 31, 2004. This table is qualified in its entirety by the more detailed information and financial statements presented elsewhere in this report, and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes thereto included herein. As described in Note 2 of the accompanying financial statements, the Partnership adopted the liquidation basis of accounting effective July 1, 2005. Information presented at December 31, 2005 follows this basis of accounting. The information for the period ended June 30, 2005 and the four prior years follows the going-concern basis of accounting. 9
YEARS ENDED DECEMBER 31, ------------------------------------------------------------- PERIOD ENDED STATEMENTS OF OPERATIONS DATA: JUNE 30, 2005 2004 2003 2002 2001 ------------------------------ ------------- --------- --------- --------- --------- Lease Income $ 47,452 $ 258,552 $ 331,958 $ 405,772 $ 764,635 Net (Loss) / Income (147,218) (136,479) (114,587) (237,111) 170,529 Cash Distributions to Limited Partners -- -- -- -- 315,490 Net (Loss) / Income Allocated to Limited Partnerrs (147,218) (136,479) (114,587) (237,111) 167,449 Net (Loss) / Income Per Limited Partner Unit (.23) (.22) (.18) (.38) .27 Cash Distribution Per Limited Partner Unit -- -- -- -- .50
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------------- PERIOD ENDED OTHER DATA: JUNE 30, 2005 2004 2003 2002 2001 ------------------------------ ------------- --------- --------- --------- --------- Net cash provided by (used in) operating activities $ 10,183 $ 27,849 $ (64,210) $ (2,263) $ 256,758 Net cash provided by (used in) investing activities 23,795 16,989 65,181 (10,329) 678 Net cash provided by (used in) financing activities -- -- -- 11,948 (320,931)
AS OF DECEMBER 31, -------------------------------------------------------------- 2005 2004 2003 2002 2001 ---------- ---------- ---------- ---------- ---------- Total Assets $ 58,223 $ 303,612 $ 684,151 $ 968,125 $1,108,320 Notes Payable 5,906 17,158 168,343 444,732 500,585 Partners' Capital -- (49,906) 86,573 201,160 438,271 Net assets in liquidation -- -- -- -- --
Net income (loss) per unit is computed based upon net income (loss) allocated to the Limited Partners and the weighted average number of equivalent units outstanding during the year. Cash 10 distribution per Unit is computed based upon distributions allocated to the Limited Partners and the weighted average number of equivalent Units outstanding during the year. ITEM 7: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Partnership's discussion and analysis of its financial condition and results of operations are based upon its financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Partnership to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Partnership bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Partnership believes that its critical accounting policies affect its more significant judgments and estimates used in the preparation of its financial statements. NET ASSETS IN LIQUIDATION As a result of the General Partner's approval of the plan of liquidation as of July 1, 2005, we changed our basis of accounting to the liquidation basis effective on such date. This basis of accounting is considered appropriate when, among other things, liquidation of a company is probable and the net realizable value of assets is reasonably determinable. Under the liquidation basis of accounting, assets are stated at their estimated net realizable cash value and liabilities are stated at their anticipated settlement amounts. There are substantial risks and uncertainties associated with carrying out the liquidation of the Partnership. The valuations presented in the accompanying Statement of Net Assets in Liquidation represent estimates, based on present facts and circumstances, of the net realizable values of assets and the costs associated with carrying out the liquidation. The actual costs and values are expected to differ from the amounts shown herein and could be greater or lesser than the amounts recorded. REVENUE RECOGNITION Through December 31, 2005, the Partnership's leasing operations consist substantially of operating leases and one direct financing lease. Operating lease revenue is recognized on a monthly basis in accordance with the terms of the lease agreement. Unearned revenue from direct financing agreements is amortized to revenue over the lease term. LONG-LIVED ASSETS The Partnership evaluates its long-lived assets when events or circumstances indicate that the value of the asset may not be recoverable. The Partnership determines whether impairment exists by estimating the undiscounted cash flows to be generated by each asset. If the estimated undiscounted cash flows are less than the carrying value of the asset then impairment exists. The amount of the impairment is determined based on the difference between the carrying value and the fair value. Fair value is determined based on estimated discounted cash flows to be generated by the asset. Depreciation on computer equipment for financial statement purposes is based on the straight-line method over estimated useful lives of four years. 11 REIMBURSABLE EXPENSES Reimbursable expenses, which are charged to the Partnership by CCC in connection with the administration and operation of the Partnership, are allocated to the Partnership based upon several factors including, but not limited to, the number of investors, compliance issues, and the number of existing leases. LIQUIDITY AND CAPITAL RESOURCES The Partnership's primary sources of capital for the period ended June 30, 2005 and the year ended December 31, 2004 was cash from operations of $10,000 and 28,000, respectively, and proceeds from the sale of computer equipment of $24,000 and $17,000, respectively. The primary uses of cash for the year ended December 31, 2003 was $64,000 used in operations and capital expenditures for new equipment totaling $5,000. There were no distributions paid during the six months ended June 30, 2005 or the years ended December 31, 2004 and 2003 mainly due to the litigation with Gentronics, declining lease revenues and declining cash from operations. The Partnership's investment strategy of acquiring computer equipment and generally leasing it under triple-net leases to operators, who generally meet specified financial standards, minimizes the Partnership's operating expenses. As of December 31, 2005, future minimum rentals on noncancellable operating and capital leases decreased to $16,000, down from $30,000 in 2004, due to the fact that more lease agreements have expired than new computer equipment leases acquired in 2005. As of December 31, 2005, the Partnership had future minimum rentals on noncancellable operating leases of $10,000 for the year ended 2006. As of December 31, 2005, the Partnership had future minimum rentals on noncancellable capital leases of $6,000 for the year ended 2006. No debt was incurred in 2005, 2004 and 2003. At December 31, 2005, the outstanding debt was $6,000, with an interest rate of 6.5% and will be payable through June 2006. CCC, on behalf of the Partnership and other affiliated partnerships, acquired computer equipment subject to associated debt obligations and lease agreements and allocated a participation in the cost, debt and lease revenue to the various partnerships based on certain risk factors. The Partnership's share of the computer equipment in which they participate at December 31, 2005 and 2004 is approximately $326,000 and $399,000, respectively, which is included in the Partnership's fixed assets on their balance sheet, and the total cost of the equipment shared by the Partnership with other partnerships at December 31, 2005 and 2004 was approximately $1,432,000 and $1,743,000, respectively. There was no outstanding debt associated with this equipment at December 31, 2005 and 2004. RESULTS OF OPERATIONS For the period ended June 30, 2005, the Partnership recognized income of $65,000 and expenses of $212,000, resulting in a net loss of $147,000. For the years ended December 31, 2004 and 2003, the Partnership recognized income of $334,000 and $383,000, and expenses of $471,000 and $498,000, resulting in a net loss of $136,000 and $115,000, in 2004 and 2003, respectively. Lease income decreased by 82% to approximately $47,000 for the six months ended June 30, 2005, down from $259,000 and $332,000 in 2004 and 2003, respectively, primarily due to the fact that more lease agreements terminated than new lease agreements entered into since 2003. The Partnership sold computer equipment with a net book value of approximately $11,000 for the six months ended June 30, 2005, for a net gain of approximately $12,000. The Partnership sold computer equipment with a net book value of $30,000, and $19,000, during the years ended December 31, 2004 and 2003, respectively, for a net (loss) gain of $(13,000), and $51,000 for the years ended December 31, 2004 and 2003, respectively. Operating expenses, excluding depreciation, consist of accounting, legal, outside service fees and reimbursement of expenses to CCC for administration and operation of the Partnership. The operating expenses for the period ended June 30, 2005 totaled approximately $57,000. At December 31, 2004, and 2003 the operating expenses totaled approximately $41,000, and $196,000, respectively. The increase in operating expenses from 2004 to 2005 was primarily due to an increase in accounting fees of $10,000. 12 The equipment management fee is equal to approximately 5% of the gross lease revenue attributable to equipment, which is subject to operating and capital leases. No equipment management fees were charged to the Partnership for 2005 due to the liquidation. The equipment management fee was $2,000 in 2004, down from $17,000 in 2003, which is consistent with the decrease in lease income. Depreciation and amortization expenses consist of depreciation on computer equipment, equipment acquisition fees and debt placement fees. Depreciation and amortization during the period ended June 30, 2005 decreased to $79,000, down from $235,000 and $263,000 in 2004 and 2003, respectively, due to the older equipment becoming fully depreciated and certain acquisition and finance fees being fully amortized and only a minimal amount of new additions. The Partnership has charged bad debt expense of $75,000 and $174,000 as additional allowances against accounts receivable for the period ended June 30, 2005 and the year ending December 31, 2004, rspecitively. There was no bad debt expense recorded for the years ending December 31, 2003. The Partnership identified specific computer equipment and associated equipment acquisition costs, which were reevaluated due to technological changes. The Partnership determined that no impairment existed in 2005 and 2003. In 2004, 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 $11,000 in the fourth quarter of 2004 to record the assets at their estimated fair value. Such amounts have been included in depreciation expense in the accompanying financial statements. NET LOSS Net loss for the period January 1, 2005 to June 30, 2005, increased to $147,000, up from a net loss of $136,000 in 2004 and $115,000 in 2003. The changes in net income (loss) were attributable to the changes in revenues and expenses as discussed above. COMMITMENTS AND CONTINGENCIES CONTRACTUAL CASH OBLIGATIONS The following table presents our contractual cash obligations as of December 31, 2005: TOTAL 2006 --------- --------- Installment notes payable due 2006: Principal 5,906 5,906 Interest 112 112 --------- --------- TOTAL 6,018 $ 6,018 ========= ========= RECENT ACCOUNTING PRONOUNCEMENTS In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154, "Accounting Changes and Error Corrections" (SFAS No. 154) which replaces APB No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements - An Amendment of APB Opinion No. 28." SFAS No. 154 provides guidance on the methods issuers should use to account for and report accounting changes and error corrections. Specifically, this statement requires that 13 issuers retrospectively apply any voluntary change in accounting principles to prior period financial statements, if it is practicable to do so. This principle replaces APB No. 20, which required that most voluntary changes in accounting principle be recognized by including the cumulative effect of the change to the new accounting principle on prior periods in the net income reported by the issuer in the period in which it instituted the change. SFAS No. 154 also redefines the term "restatement" to mean the correction of an error by revising previously issued financial statements. Unless adopted early, SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Partnership does not expect the adoption of SFAS No. 154 to have an impact on its financial position or results of operations. ITEM 7.A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Partnership believes its exposure to market risk is not material due to the fixed interest rate of its long-term debt and its associated fixed revenue streams. ITEM 8: FINANCIAL STATEMENTS Our financial statements for the fiscal years ended December 31, 2005 and 2004, and the report thereon of Asher and Company, Ltd. and the report thereon of BDO Seidman, LLP for the fiscal year ended December 31, 2003, are included in this annual report. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Effective October 11, 2004, the registrant dismissed its principal independent accounting firm, BDO Seidman, LLP. BDO Seidman, LLP's report on the registrant's financial statements for 2003 did not contain any adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. The decision to change accountants was approved by the board of directors of the registrant's general partner. During the registrant's 2003 fiscal year and the interim period prior to such dismissal, the registrant had no disagreements with BDO Seidman, LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of BDO Seidman, LLP, would have caused BDO Seidman, LLP to make reference to the subject matter of the disagreements in connection with its report. Further, during the registrant's 2003 recent fiscal year and the interim period prior to such dismissal, there occurred no reportable events, as set forth in Item 304(a)(1)(v) of Regulation S-K. The registrant provided BDO Seidman, LLP with a copy of this disclosure on or prior to the date hereof and requested BDO Seidman, LLP to provide the registrant with a letter addressed to the Securities and Exchange Commission stating whether it agreed with the statements contained herein. A copy of such letter will be filed by amendment to this report when and if it is received by the registrant. Also effective October 11, 2004, the registrant retained Asher & Company, Ltd. of Philadelphia, Pennsylvania as its principal independent accounting firm. The registrant believes that Asher & Company, Ltd. is an accounting firm of a size and scope of experience better suited to the registrant's current needs than the registrant's former accounting firm. During 2003, we had not consulted with Asher & Company, Ltd. on any matter that (i) involved the application of accounting principles to a specific completed or contemplated transaction, or the type of audit opinion that might be rendered on our financial statements, in each case where written or oral advice was provided, that was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) was either the subject of a disagreement or event, as that term is described in item 304(a)(1)(iv)(A) of Regulation S-X. 14 ITEM 9A: CONTROLS AND PROCEDURES Our management, under the supervision and with the participation of the principal executive officer and principal financial officer, have evaluated the effectiveness of our controls and procedures related to our reporting and disclosure obligations as of December 31, 2005, which is the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, the principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are sufficient to provide that (a) material information relating to us, including our consolidated subsidiaries, is made known to these officers by our and our consolidated subsidiaries other employees, particularly material information related to the period for which this periodic report is being prepared; and (b) this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the rules and forms promulgated by the Securities and Exchange Commission. ITEM 9B: OTHER INFORMATION NOT APPLICABLE ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT GENERAL The Partnership does not have any Directors or executive officers. The General Partner, a wholly owned subsidiary of Commonwealth of Delaware, Inc., a Delaware corporation, which is in turn a wholly-owned subsidiary of CCC, a Pennsylvania corporation, was incorporated in Pennsylvania on August 26, 1993. The General Partner also acts as the General Partner for Commonwealth Income & Growth Fund II, Commonwealth Income & Growth Fund III, Commonwealth Income & Growth Fund IV, Commonwealth Income & Growth Fund V, and Commonwealth Income & Growth Fund VI. The principal business office of the General Partner is 470 John Young Way, Suite 300, Exton, PA 19341, and its telephone number is 610-594-9600. 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 CCC are as follows:
NAME TITLE ----------------------- ------------------------------------------------------------------------------ George S. Springsteen Chairman of the Board, Treasurer and Chief Executive Officer of CCC, CCSC, and Commonwealth Income & Growth Fund, Inc. ("CIGF, Inc.") Kimberly A. Springsteen Director, Secretary, President & Chief Operations Officers of CCC, CCSC and CIGF, Inc. Chief Compliance Officer of CCSC. Henry J. Abbott Director, Senior Vice President & Portfolio Manager of CCC, CCSC and CIGF, Inc. Lynn A. Franceschina Controller, Senior Vice President of CCC, CCSC and CIGF, Inc. Katrina M. Mason Due Diligence Officer, Senior Vice President of CCC, CCSC and CIGF, Inc. Jay Dugan Chief Technology Officer, Senior Vice President of CCC, CCSC and CIGF, Inc. Donald Bachmayer Accounting and Accounting Manager, Vice President of CCC, CCSC, and CIGF, Inc. Mark Hershenson Broker Services Manager, Vice President of CCC, CCSC and CIGF, Inc. James Pruett Compliance Officer, Assistant Vice President of CCC, CCSC, and CIGF, Inc. Donnamarie D. Abbott Investor Services Manager, Assistant Vice President of CCC, and CIGF, Inc.
15 GEORGE S. SPRINGSTEEN, age 71, is a founding stockholder, Chairman of the Board and Chief Executive Officer of the parent leasing company, Commonwealth Capital Corp. since 1978. In addition, Mr. Springsteen serves as Chairman of the Board and Chief Executive Officer and registered principal of the broker/dealer, Commonwealth Capital Securities Corp and the General Partner, Commonwealth Income & Growth Fund Inc. He oversees numerous equipment investment portfolios and is responsible for business development. Mr. Springsteen and his wife, Kim, are the sole shareholders of the parent company and its affiliates. Mr. Springsteen oversees the Portfolio Advisory Committee, the Audit Committee, the Disaster Recovery Committee and the Facilities Committee. Before starting Commonwealth, Mr. Springsteen managed a portfolio of $120 million at Granite Computer Corp., bought their portfolio and founded his own firm. Mr. Springsteen attended the University of Delaware and holds his NASD Series 22, 63 and 39 licenses. Mr. Springsteen is a member of the Equipment Leasing Association and a founding member of the Computer Dealers Leasing Association prior to, as well as a member of the Investment Program Association. (Mr. Springsteen is the spouse of Kimberly A. Springsteen) KIMBERLY A. SPRINGSTEEN, age 46, joined Commonwealth in 1997, as a founding registered principal and Chief Compliance Officer of its broker/dealer, Commonwealth Capital Securities Corp. and serves as Director and Secretary, President and Chief Operating Officer of the parent and its affiliates. Ms. Springsteen is responsible for oversight of daily operations, due diligence and business development. Ms. Springsteen also oversees the Portfolio Advisory Committee, the Audit Committee, the Disaster Recovery Committee and the Facilities Committee. Ms. Springsteen has developed and presented numerous motivational, informational and sales training workshops over the past 25 years. Prior to Commonwealth, Ms. Springsteen served as Senior Vice President & Marketing Manager in the Alternative Investments Department of Wheat First/Butcher & Singer, a broker/dealer headquartered in Richmond, Virginia, where she raised over $450,000,000 of capital in the real estate, equipment leasing, tax credit and energy-related industries. Ms. Springsteen holds her NASD Series 7, 63 and 39 licenses and is a member of the Equipment Leasing Association, the Financial Planners Association and serves on the Board of Trustees for the Investment Program Association. Ms. Springsteen is the wife of George Springsteen and is co-shareholder of the parent and its affiliates. HENRY J. ABBOTT, age 55, joined Commonwealth in 1998, as a Portfolio Manager. Mr. Abbott serves as a Director, Senior Vice President and Portfolio Manager of the parent and its affiliates. Mr. Abbott is a registered principal of the broker/dealer. Mr. Abbott is responsible for lease acquisitions, equipment dispositions and portfolio review. Additionally, Mr. Abbott is also responsible for oversight of residual valuation, due diligence, equipment inspections, negotiating renewal and purchase options and remarketing off lease equipment. Mr. Abbott serves as senior member on the Portfolio Advisory Committee, the Audit Committee, the Disaster Recovery Committee and the Facilities Committee. Prior to Commonwealth, Mr. Abbott has been active in the commercial lending industry, working primarily on asset-backed transactions for more than 30 years. Mr. Abbott attended St. John's University and holds his NASD Series 7, 63 and 24 licenses. Mr. Abbott was a founding partner of Westwood Capital LLC in New York, a Senior Vice President for IBJ Schroeder Leasing Corporation and has managed a group specializing in the provision of operating lease finance programs in the high technology sector. Mr. Abbott brings extensive knowledge and experience in leasing and has managed over $1.5 billion of secured transactions. Mr. Abbott is a member of the Equipment Leasing Association and the Investment Program Association. LYNN A. FRANCESCHINA, age 34, joined Commonwealth in 2001 and serves as Senior Vice President and Controller of the parent and its affiliates. Ms. Franceschina is responsible for the oversight of all accounting, cash management, financial reporting and audit and tax preparation functions. During the period of March 2004 to October 2004, Ms. Franceschina was employed with Wilmington Trust Corp., where she was a part in the development of policies and procedures related to Sarbanes Oxley and its 16 documentation. Prior to Commonwealth, in 1994 until 1999, Ms. Franceschina served as a Senior Accountant with Duquesne University, and from 1999 to 2000, a Senior Financial Analyst for Environ Products. Ms. Franceschina attended Robert Morris University and holds a Bachelor of Science in Accounting. Ms. Franceschina serves on the Portfolio Advisory Committee, the Audit Committee and the Disaster Recovery Committee, as well as a member of the Equipment Leasing Association, the Investment Program Association and the Institute of Management Accountants. KATRINAM. MASON, age 33, joined Commonwealth in 2002 and serves as Senior Vice President, Broker/Dealer Relations Manager and Due Diligence Manager of the parent and its affiliates. Ms. Mason is a registered principal of the broker/dealer. Ms. Mason is responsible for managing due diligence and broker/dealer development, as well as coordination of the national sales and marketing effort, syndication and product development. Ms. Mason serves on the Disaster Recovery Committee and the Website Committee. Prior to Commonwealth, Ms. Mason worked at ICON Securities, an equipment leasing sponsor, from 1997 to 2002 and served as President from 2001 to 2002. Prior to that, Ms. Mason served as a Regional Marketing Director of Textainer Capital, an equipment-leasing sponsor. Ms. Mason attended the University of California at Santa Barbara and holds a Bachelor of Arts and also attended University of San Francisco and holds an MBA. Ms Mason holds her NASD Series 7, 22, 63 & 24 licenses. Ms. Mason is a member of the Equipment Leasing Association, the Financial Planners Association and the Investment Program Association. JAY DUGAN, age 57, joined Commonwealth in 2002 and serves as Senior Vice President and Chief Technology Officer of the parent and its affiliates. Mr. Dugan is responsible for the information technology vision, security and operation and ongoing development, including network configurations, protection of corporate assets and maximizing security and efficiency of information flow. Prior to Commonwealth, Mr. Dugan founded First Securities USA, an NASD member firm, in 1988 and operated that firm through 1998. From 1999 until 2002, Mr. Dugan was an independent due diligence consultant until he came to Commonwealth to develop that area of the firm. Mr. Dugan attended St. Petersburg College and holds an AS Degree in Computer Networking Technology. Mr. Dugan is a Microsoft Certified Systems Engineer, Microsoft Certified Database Administrator and Comp-Tia Certified Computer Technician. Mr. Dugan is a senior member of the Disaster Recovery Committee, as well as oversight member of the Website Committee. DONALD A. BACHMAYER, age 41, joined Commonwealth in 2004 and serves as Vice President and Accounting Manager of the General Partner, CCC and certain of its subsidiaries where he has been employed since 2004. Mr. Bachmayer is responsible for financial reporting and analysis, cash management and tax compliance. He is a member of the Portfolio Advisory Committee. Prior to joining Commonwealth, from 2002 to 2004, Mr. Bachmayer served as Accounting Supervisor for LEAF Financial, an equipment-leasing sponsor, where his responsibilities included cash management, commission and syndication reporting. From 1997 to 2001, Mr. Bachmayer was a senior accountant/auditor with Fishbein & Company, P.C., certified public accountants, with responsibilities including audit, financial reporting, cash management, commission and syndication reporting, and tax preparation. Mr. Bachmayer attended LaSalle University and holds a Bachelor of Science in Accounting. MARK HERSHENSON, age 40, joined Commonwealth in 2002 and serves as Vice President and Broker Services Manager of the parent and its affiliates. Mr. Hershenson is responsible for management of all custodial relationships, broker services in the areas of product education and production goals, wholesaler scheduling/support and internal sales staff. Prior to Commonwealth, Mr. Hershenson served as part of a financial planning practice at American United Life from 1999 through 2002. He has written a book for the Florida Insurance Commissioner on how to sell insurance products. Additionally, in 1991 through 1998, Mr. Hershenson served as sales trainer fat MetLife for over 100 registered representatives. Mr. Hershenson attended Stonehill College and holds a Bachelor's in Psychology, with a concentration in Marketing/Organizational Behaviorism and Master's level coursework in Financial Planning though American College. Mr. Hershenson holds his NASD Series 6, 7 and 63 licenses. Mr. Hershenson is a member of the Equipment Leasing Association and the Investment Program Association. JAMES PRUETT, age 40, joined Commonwealth in 2002 and serves as Assistant Vice President and Compliance Officer of the parent and its affiliates. Mr. Pruett is responsible for management of regulatory 17 policies and procedures, assisting in compliance internal audit, associate regulatory filings, broker/dealer registrations, state and broker/dealer financial regulatory reporting requirements. Mr. Pruett assists in the management of shareholder records and updates. Mr. Pruett is a member of the Website Committee. Mr. Pruett holds his NASD Series 22 and 63 licenses. Prior to joining Commonwealth, Mr. Pruett served as Managing Editor/Associate Publisher for Caliber Entertainment, a publishing and entertainment licensing company. Mr. Pruett's responsibilities included oversight of production of publishing library, as well as serving as Editor-in-Chief for all publications and additionally served as Media Relations Liaison. Mr. Pruett is a member of the Equipment Leasing Association and the Investment Program Association. DONNAMARIE D. ABBOTT, age 47, joined Commonwealth in 2001 and serves as Assistant Vice President and Investor Services Manager of the parent and its affiliates. Ms. Abbott is responsible for management of daily operations in Investor Services, from pre-formation stage through issuance of investors' final distribution, communication, audited financial report, including fund masters, blue sky coordination, subscription processing, distributions, transfers of interest, redemptions, reporting and tax reporting. Ms. Abbott is a member of the Office Development Committee, the Website Committee and the Disaster Recovery Committee. Ms. Abbott holds her NASD Series 22 and 63 licenses. Prior to joining Commonwealth, Ms. Abbott served as a Pennsylvania licensed realtor. Ms. Abbott is a member of the Equipment Leasing Association and a member of the Investment Program 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. The Partnership has no audit committee financial expert, as defined under Section 229.401 of the Exchange Act, serving on its audit committee. An audit committee is not required because the Partnership is not a listed security as defined by Section 240.10A-3; therefore, no audit committee financial expert is required. CODE OF ETHICS In view of the fiduciary obligation that the General Partner has to the Partnership, the General Partner believes an adoption of a formal code of ethics is unnecessary and would not benefit the Partnership, particularly, in light of Partnership's limited business activities. ITEM 11: EXECUTIVE COMPENSATION The Partnership does not have any Directors or executive officers. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT NONE ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The following table summarizes the types, amounts and recipients of compensation to be paid by the Partnership directly or indirectly to the General Partner and its Affiliates. Some of these fees 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 that would be charged by an unaffiliated entity or entities for similar services. The Partnership Agreement limits 18 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.
ENTITY AMOUNT AMOUNT AMOUNT RECEIVING INCURRED INCURRED INCURRED COMPENSATION TYPE OF COMPENSATION DURING 2005 DURING 2004 DURING 2003 ------------------- ---------------------------------------------- ----------- ----------- ----------- The General Partner EQUIPMENT ACQUISITION FEE. An Equipment $ 0 $ 0 $ 1,000 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 Offering available for investment in Equipment, the fee will be paid when such Equipment is acquired. The General Partner REIMBURSABLE EXPENSES. The General $ 18,000 $ 22,000 $ 194,000 and its Affiliates 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 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 MANAGEMENT FEE. A monthly fee $ 0 $ 2,000 $ 17,000 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 EQUIPMENT LIQUIDATION FEE. With respect $ 1,00 $ 500 $ 2,000 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. The payment of such fee is subordinated to the receipt by the Limited Partners of (i) a return of their Capital Contributions and 10% annum cumulative return, compounded daily, on Adjusted Capital Contributions ("Priority Return") and (ii) the Net Disposition Proceeds from such sale in accordance with the Partnership Agreement. Such fee is reduced to the extent any liquidation or resale fees are paid to unaffiliated parties.
19 The General Partner PARTNERSHIP INTEREST. The General $ 300 $ 0 $ 0 Partner has a present and continuing one percent interest of $1,000 in the Partnership's item 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.
The Partnership is subject to various conflicts of interest arising out of its relationships with the General Partner and its Affiliates. These conflicts include the following: COMPETITION WITH GENERAL PARTNER AND AFFILIATES: COMPETITION FOR MANAGEMENT'S TIME The General Partner and its Affiliate sponsor other investor programs, which are in potential competition with the Partnership in connection with the purchase of Equipment as well as opportunities to lease and sell such Equipment. 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. 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. 20 "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. "Capital Leases" are leases under which the Equipment either transfers to the lessee at the end of the lease term, contains a bargain purchase price option, the lease term is equal to 75% or more of the estimated economic life of the Equipment, or the present value at the beginning of the lease term of the minimum lease payments is equal to or exceeds 90% of the excess of the fair value of the Equipment. "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. "Closing Date" means May 11, 1995. "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 December 17, 1993, the date on which the Partnership's Registration Statement on Form S-1 was declared effective by the United States Securities and Exchange Commission. 21 "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. "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. "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. 22 "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. "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. ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES AUDIT FEES The aggregate fees billed for each of the fiscal years ended December 31, 2005 and 2004 for professional services rendered by the independent registered public accounting firm for the audit of our annual financial 23 statements and review of the financial statements included in our Form 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were $16,000 and $3,000, respectively. AUDIT-RELATED FEES The aggregate fees billed in the fiscal years ended December 31, 2005 and 2004 for assurance and related services by the independent registered public accounting firm that are reasonably related to the performance of the audit or review of the registrant's financial statements and are not reported under the paragraph captioned "Audit Fees" above are $0 and $0, respectively. TAX FEES The aggregate fees billed in the fiscal years ended December 31, 2005 and 2004 for professional services rendered by the independent registered public accounting firm for tax compliance, tax advice and tax planning were $0 and $0, respectively. ALL OTHER FEES The aggregate fees billed in the fiscal years ended December 31, 2005 and 2004 for products and services provided by the independent registered public accounting firm, other than the services reported above under other captions of this Item 14 are $0 and $0, respectively. PRE-APPROVAL POLICIES AND PROCEDURES All audit related services, tax planning and other services were pre-approved by the General Partner, which concluded that the provision of such services by the Partnership's auditors was compatible with the maintenance of that firm's independence in the conduct of its auditing functions. The policy of the General Partner provides for pre-approval of these services and all audit related, tax or other services not prohibited under Section 10A(g) of the Securities Exchange Act of 1934, as amended to be performed for us by our independent auditors, subject to the de minimus exception described in Section 10A(i)(1)(B) of the Exchange Act. on an annual basis and on individual engagements if minimum thresholds are exceeded. The percentage of audit-related, tax and other services that were approved by the board of directors is zero (-0-). PART IV ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) (1) Financial Statements Report of Independent Registered Public Accounting Firm F-1 Report of Independent Registered Public Accounting Firm F-2 Statement of Net Assets in Liquidation as of December 31, 2005 F-3 Balance Sheet as of December 31, 2004 F-4 Statement of Changes in Net Assets in Liquidation at December 31, 2005 F-5 Statements of Operations for December 31, 2003 through the six months ended June 30, 2005 F-6 Statements of Partners Capital (Deficit) for December 31, 2003 through the six months ended June 30, 2005 F-7 Statements of Cash Flows for December 31, 2003 through the six months ended June 30, 2005 F-8-9 Notes to Financial Statements F-10-22 Supplemental Schedules F-23 24 (a) (2) Schedules. Schedules are omitted because they are not applicable, not required, or because the required information is included in the financial statements and notes thereto. (a) (3) Exhibits. * 3.1 Certificate of Limited Partnership * 3.2 Agreement of Limited Partnership * Incorporated by reference from the Partnership's Registration Statement on Form S-1 (Registration No. 333-26933) (b) Reports on Form 8-K (c) Exhibits: 31.1 Rule 13a-14(a)/15d-14(a) Certifications by the Principal Executive Officer 31.2 Rule 13a-14(a)/15d-14(a) Certifications by the Principal Financial Officer 32 Section 1350 Certifications by the Principal Executive Officer and Principal Financial Officer 25 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 March 30, 2006 by the undersigned thereunto duly authorized. COMMONWEALTH INCOME & GROWTH FUND I By: COMMONWEALTH INCOME & GROWTH FUND, INC., General Partner By: /s/ George S. Springsteen ------------------------------ George S. Springsteen, Chief Executive Officer 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 30, 2006. SIGNATURE CAPACITY ---------------------------------- -------------------------------------- /s/ GEORGE S. SPRINGSTEEN Chairman, Chief Executive Officer, and ---------------------------------- Sole Director of Commonwealth Income & George S. Springsteen Growth Fund, Inc. /s/ KIMBERLY A. SPRINGSTEEN President, Chief Operating Officer and ---------------------------------- Secretary Kimberly A. Springsteen 26 COMMONWEALTH INCOME & GROWTH FUND I YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003 COMMONWEALTH INCOME & GROWTH FUND I FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 3 FINANCIAL STATEMENTS Statement of net assets in liquidation 4 Balance sheet 5 Statement of changes in net assets in liquidation 6 Statements of operations 7 Statements of partners' capital (deficit) 8 Statements of cash flows 9-10 NOTES TO FINANCIAL STATEMENTS 11-24 SUPPLEMENTAL SCHEDULES Changes in Allowance for doubtful accounts 25 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Partners Commonwealth Income & Growth Fund I Exton, Pennsylvania We have audited the statement of net assets in liquidation of Commonwealth Income & Growth Fund I ("Partnership") as of December 31, 2005, and the related statement of changes in net assets in liquidation for the period from July 1, 2005 to December 31, 2005. In addition, we have audited the balance sheet as of December 31, 2004 and the related statements of operations, Partners' capital and cash flows for the year ended December 31, 2004, and the statements of operations, Partners' capital and cash flows for the period from January 1, 2005 to June 30, 2005. Our audits also included the financial statement schedule of valuation and qualifying accounts as of and for the periods ended December 31, 2005 and June 30, 2005, and as of and for the year ended December 30, 2004. These financial statements and the financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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. As more fully described in Note 2, the Partnership is currently being liquidated. As a result, the Partnership has changed its basis of accounting for periods subsequent to June 30, 2005 from the going-concern basis to the liquidation basis. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets in liquidation of Commonwealth Income & Growth Fund I as of December 31, 2005 and the changes in its net assets in liquidation for the period from July 1, 2005 to December 31, 2005, its financial position as of December 31, 2004, and the results of its operations and cash flows for the year ended December 31, 2004 and for the period from January 1, 2005 to June 30, 2005 in conformity with accounting principles generally accepted in the United States of America applied on the bases described in the preceding paragraph. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. 1 As described in Note 2, these financial statements as of December 31, 2005 and for the period from July 1, 2005 to December 31, 2005 have been prepared on the liquidation basis of accounting, which requires management to make significant assumptions and estimates regarding the fair value of assets and the estimate of liquidating costs to be incurred. Because of the inherent uncertainty related to these estimates and assumptions, there will likely be differences between these estimates and the actual results, and those differences may be material. /s/ ASHER & COMPANY, Ltd. Philadelphia, Pennsylvania March 29, 2006 2 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Partners Commonwealth Income & Growth Fund I Exton, Pennsylvania We have audited the accompanying statements of operations, partners' capital, and cash flows of Commonwealth Income & Growth Fund I for the year ended December 31, 2003. 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 audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. Commonwealth Capital Corp, on behalf of the Partnership, has initiated a lawsuit against a lessee. Due to the ongoing delays in this proceeding, the General Partner feels that it may be in the best interest of the Partnership to begin the liquidation process and, if necessary, transfer the lawsuit and the related lease receivable to a trust on behalf of the Partnership. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Commonwealth Income & Growth Fund I for the year ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. /s/ BDO Seidman, LLP Philadelphia, Pennsylvania March 12, 2004 3 COMMONWEALTH INCOME & GROWTH FUND I STATEMENT OF NET ASSETS IN LIQUIDATION -------------------------------------------------------------------------------- December 31, 2005 ---------------------------------------------------------------- ------------ ASSETS Cash and cash equivalents $ 33,503 Lease income receivable, net of reserves of $7,590 as of December 31, 2005 16,490 Net investment in direct financing lease 4,517 ------------ 54,510 ------------ Computer equipment, at cost 1,143,445 Accumulated depreciation (1,139,743) ------------ 3,702 ------------ Equipment acquisition costs and deferred expenses, net 11 ------------ TOTAL ASSETS $ 58,223 ============ LIABILITIES AND NET ASSETS LIABILITIES Accounts payable $ 13,430 Accounts payable - Affiliated limited partnerships 16,726 Accounts payable - General Partner 3,769 Accounts payable - Commonwealth Capital Corp. 9,613 Unearned lease income 8,779 Notes payable 5,906 ------------ TOTAL LIABILITIES 58,223 ------------ NET ASSETS IN LIQUIDATION $ -- ------------ NET ASSETS IN LIQUIDATION PER EQUIVALENT LIMITED PARTNERSHIP UNIT $ -- ------------ WEIGHTED AVERAGE NUMBER OF EQUIVALENT LIMITED PARTNERSHIP UNITS OUTSTANDING DURING THE YEAR 631,124 ============ See accompanying notes to financial statements. 4 COMMONWEALTH INCOME & GROWTH FUND I BALANCE SHEET -------------------------------------------------------------------------------- December 31, 2004 ---------------------------------------------------------------- ------------ ASSETS Cash and cash equivalents $ 46,246 Lease income receivable, net of reserves of $473,578 at December 31, 2004 95,496 Net investment in direct financing lease 13,551 Other receivables and deposits -- ------------ 155,293 ------------ Computer equipment, at cost 1,345,200 Accumulated depreciation (1,201,517) ------------ 143,683 ------------ EQUIPMENT ACQUISITION COSTS AND DEFERRED EXPENSES, net of accumulated amortization of $928 at December 31, 2004 133 ------------ TOTAL ASSETS $ 299,109 ============ LIABILITIES AND PARTNERS' CAPITAL (DEFICIT) LIABILITIES Accounts payable $ 8,620 Accounts payable, General Partner 229,840 Accounts payable, Commonwealth Capital Corp. 2,886 Accounts payable, affiliated limited partnerships 71,528 Unearned lease income 18,983 Notes payable 17,158 ------------ TOTAL LIABILITIES 349,015 ------------ PARTNERS' CAPITAL (DEFICIT) General Partner 1,000 Limited partners (50,906) ------------ TOTAL PARTNERS' CAPITAL (DEFICIT) (49,906) ------------ TOTAL LIABILITIES AND PARTNERS' CAPITAL (DEFICIT) $ 299,109 ============ See accompanying notes to financial statements. 5 COMMONWEALTH INCOME & GROWTH FUND I STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION -------------------------------------------------------------------------------- For the period July 1 to December 31, 2005 ---------------------------------------------------------------- ------------ Net Assets in liquidation - beginning $ (7,000) Lease income 27,334 Interest and other 1,333 Gain on sale of computer equipment 68 Operating, excluding depreciation (24,047) Interest (301) Depreciation and amortization (40,532) Bad debt (7,590) Loss on sale of computer equipment (4,339) Distributions to Investors (31,557) Contributions from CCC 82,847 ------------ Changes in estimated liquidation values of assets and liabilities 3,784 ------------ NET ASSETS IN LIQUIDATION - ENDING $ -- ============ See accompanying notes to financial statements. 6 COMMONWEALTH INCOME & GROWTH FUND I STATEMENTS OF OPERATIONS --------------------------------------------------------------------------------
Years Ended December 31, PERIOD ENDED ----------------------------- JUNE 30, 2005 2004 2003 ---------------------------------------------------------------- ------------- ------------- ------------- INCOME Lease $ 47,452 $ 258,552 $ 331,958 Interest and other 4,612 75,977 21 Gain on sale of computer equipment 12,636 -- 51,374 ------------- ------------- ------------- TOTAL INCOME 64,700 334,529 383,353 ------------- ------------- ------------- EXPENSES Operating, excluding depreciation 56,714 40,501 195,617 Equipment management fee, General Partner -- 2,302 16,598 Interest 483 5,817 22,999 Depreciation 79,139 227,137 246,000 Amortization of equipment acquisition costs, and deferred expenses 89 8,600 16,726 Provision for uncollectible lease income receivable 75,493 174,000 -- Loss on sale of equipment -- 12,651 -- ------------- ------------- ------------- TOTAL EXPENSES 211,918 471,008 497,940 ------------- ------------- ------------- NET LOSS $ (147,218) $ (136,479) $ (114,587) ============= ============= ============= NET LOSS ALLOCATED TO LIMITED PARTNERS (147,218) (136,479) (114,587) NET LOSS PER EQUIVALENT LIMITED PARTNERSHIP UNIT $ (.23) $ (.22) $ (.18) WEIGHTED AVERAGE NUMBER OF EQUIVALENT LIMITED PARTNERSHIP UNITS OUTSTANDING DURING THE YEAR 631,124 631,124 631,124 ============= ============= =============
See accompanying notes to financial statements. 7 COMMONWEALTH INCOME & GROWTH FUND I STATEMENTS OF PARTNERS' CAPITAL (DEFICIT) --------------------------------------------------------------------------------
General Limited Partner Partner General Limited Units Units Partner Partners Total ------------ ------------ ------------ ------------ ------------ BALANCE, December 31, 2002 50 631,124 $ 1,000 $ 200,160 $ 201,160 Net (loss) -- -- -- (114,587) (114,587) ------------ ------------ ------------ ------------ ------------ BALANCE, December 31, 2003 50 631,124 1,000 85,573 86,573 Net (loss) -- -- -- (136,479) (136,479) ------------ ------------ ------------ ------------ ------------ BALANCE, December 31, 2004 50 631,124 1,000 (50,906) (49,906) Contributions - Forgiveness of fees -- -- 190,124 -- 190,124 Transfer of Partner's Capital -- -- (190,124) 190,124 -- Net (loss) -- -- -- (147,218) (147,218) ------------ ------------ ------------ ------------ ------------ BALANCE, June 30, 2005 50 631,124 $ 1,000 $ (8,000) $ (7,000) ============ ============ ============ ============ ============
See accompanying notes to financial statements. 8 COMMONWEALTH INCOME & GROWTH FUND I STATEMENTS OF CASH FLOWS --------------------------------------------------------------------------------
PERIOD ENDED Year ended Year ended JUNE 30, December 31, December 31, 2005 2004 2003 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (147,218) $ (136,479) $ (114,587) Adjustments to reconcile net loss to net cash (used in) provided by operating activities Depreciation and amortization 79,228 235,738 262,726 (Gain) Loss on sale of computer equipment (12,636) 12,651 (51,374) Provision for uncollectible lease income receivable 75,493 174,000 -- Other noncash activities included in determination of net (loss) (1,018) (142,151) (267,354) Changes in assets and liabilities Lease income receivable 2,455 (18,732) (623) Other receivables 298 200 -- Accounts payable 11,659 6,523 (3,087) Accounts payable, General Partner -- (31,916) 108,643 Accounts payable, Commonwealth Capital Corp. 17,659 (18,334) 3,579 Accounts payable, affiliated limited partnerships (5,005) (52,865) (2,133) Unearned lease income (10,732) (786) -- ------------- ------------- ------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 10,183 27,849 (64,210) ------------- ------------- -------------
9 COMMONWEALTH INCOME & GROWTH FUND I STATEMENTS OF CASH FLOWS --------------------------------------------------------------------------------
PERIOD ENDED Year ended Year ended JUNE 30, December 31, December 31, 2005 2004 2003 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures $ -- $ -- $ (5,000) Net proceeds from sale of computer equipment 23,795 16,989 70,381 Equipment acquisition fees to the General Partner -- -- (200) ------------- ------------- ------------- NET CASH PROVIDED BY INVESTING ACTIVITIES 23,795 16,989 65,181 ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable -- -- -- Debt placement fee to the General Partner -- -- -- ------------- ------------- ------------- NET CASH PROVIDED BY FINANCING ACTIVITIES -- -- -- ------------- ------------- ------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 33,978 44,837 971 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 46,246 1,409 438 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 80,224 $ 46,246 $ 1,409 ============= ============= =============
See accompanying notes to financial statements. 10 COMMONWEALTH INCOME & GROWTH FUND I NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 1. BUSINESS Commonwealth Income & Growth Fund I (the "Partnership") is a limited partnership organized in the Commonwealth of Pennsylvania to acquire, own and lease various types of computer peripheral equipment and other similar capital equipment, which will be leased primarily to U.S. corporations and institutions. Commonwealth Capital Corp ("CCC"), on behalf of the Partnership and other affiliated partnerships, acquires computer equipment subject to associated debt obligations and lease agreements and allocates a participation in the cost, debt and lease revenue to the various partnerships based on certain risk factors. 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. The Partnership began liquidation effective July 1, 2005. Particular items of equipment may be sold at any time if, in the judgment of the General Partner, it is in the best interest of the Partnership to do so. The determination of whether particular items of partnership equipment should be sold will be made by the General Partner after consideration of all relevant factors (including prevailing economic 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. Allocations of income and distributions of cash are based on the Partnership's Limited Partnership Agreement (the "Agreement"). The various allocations under the Agreement 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. During 2005, the Partnership made distributions to the limited partners in the amount of $32,000. During 2004 and 2003 the Partnership did not make any distributions to the limited partners. 2. LIQUIDATION BASIS As a result of the General Partner's approval of the plan of liquidation as of July 1, 2005, we changed our basis of accounting to the liquidation basis effective on such date. This basis of accounting is considered appropriate when, among other things, liquidation of a company is probable and the net realizable value 11 COMMONWEALTH INCOME & GROWTH FUND I NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- of assets is reasonably determinable. Under the liquidation basis of accounting, assets are stated at their estimated net realizable cash value and liabilities are stated at their anticipated settlement amounts. There are substantial risks and uncertainties associated with carrying out the liquidation of the Partnership. The valuations presented in the accompanying Statement of Net Assets in Liquidation represent estimates, based on present facts and circumstances, of the net realizable values of assets and the costs associated with carrying out the liquidation. The actual costs and values are expected to differ from the amounts shown herein and could be greater or lesser than the amounts recorded. In presenting our Statement of Net Assets in Liquidation at December 31, 2005, we recorded a $10,300 increase to assets. This increase represents the present value of future lease payments of leases. Included in the adjustment to net assets recorded in connection with the change from the going-concern to the liquidation basis of accounting, we recorded $6,500 of accrued costs of liquidation representing the estimate of the costs to be incurred during liquidation. Payables to affiliates were decreased by $273,000 to represent the expected settlement value of these liabilities. 3. SUMMARY OF REVENUE RECOGNITION SIGNIFICANT ACCOUNTING Through December 31, 2005, the Partnership's POLICIES leasing operations consist substantially of operating leases and one direct financing lease. Operating lease revenue is recognized on a monthly basis in accordance with the terms of the lease agreement. Unearned revenue from direct financing agreements is amortized to revenue over the lease term. The Partnership reviews a customer's credit history before extending credit and establishes a provision for uncollectible accounts receivable based upon the credit risk of specific customers, historical trends and other information. 12 COMMONWEALTH INCOME & GROWTH FUND I NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards ("SFAS") No.107, Disclosures about Fair Value of Financial Instruments, requires disclosure of the fair value of certain instruments. The carrying values of cash, receivables and payables approximate fair value due to the short term maturity of these instruments. For debt, the carrying amounts approximate fair value because the interest rates approximate current market rates. LONG-LIVED ASSETS The Partnership evaluates its long-lived assets when events or circumstances indicate that the value of the asset may not be recoverable. The Partnership determines whether impairment exists by estimating the undiscounted cash flows to be generated by each asset. If the estimated undiscounted cash flows are less than the carrying value of the asset then impairment exists. The amount of the impairment is determined based on the difference between the carrying value and the fair value. Fair value is determined based on estimated discounted cash flows to be generated by the asset. The Partnership determined that no impairment existed in 2005. In 2004 and 2003, 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 $12,000 and $8,000, respectively in the fourth quarter of 2004 and 2003, to record the assets at their estimated fair value. Such amounts were included in depreciation expense in the accompanying financial statements. 13 COMMONWEALTH INCOME & GROWTH FUND I NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Depreciation on computer equipment for financial statement purposes is based on the straight-line method over estimated useful lives of four years. INTANGIBLE ASSETS Equipment acquisition costs and deferred expenses are amortized on a straight-line basis over two- to-four year lives. Unamortized acquisition fees and deferred expenses are charged to amortization expense when the associated leased equipment is sold. CASH AND CASH EQUIVALENTS The Partnership considers all highly liquid investments with a maturity of three months or less to be cash equivalents. Cash equivalents have been invested in a money market fund investing directly in Treasury obligations. Cash at December 31, 2005 and 2004 was held in the custody of one financial institution. The balance, at times, may exceed federally insured limits. The Partnership mitigates this risk by depositing funds with a major financial institution. The Partnership has not experienced any losses in such accounts, and believes it is not exposed to any significant credit risk. ACCOUNTS RECEIVABLE Accounts receivable includes current accounts receivable, net of allowances and other accruals. The Partnership regularly reviews the collectability of its receivables and the credit worthiness of its customers and adjusts its allowance for doubtful accounts accordingly. 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 14 COMMONWEALTH INCOME & GROWTH FUND I NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- purposes in periods other than those used for financial statement purposes, principally relating to depreciation, amortization, and lease income. NET ASSETS IN LIQUIDATION PER EQUIVALENT LIMITED PARTNERSHIP UNIT In connection with the conversion from the going-concern basis of accounting to the liquidation basis, the net assets in liquidation per equivalent limited partnership unit is computed based upon net assets in liquidation allocated to the limited partners and the weighted average number of equivalent limited partner units outstanding during the period. NET INCOME (LOSS) PER EQUIVALENT LIMITED PARTNERSHIP UNIT The net income (loss) per equivalent limited partnership unit is computed based upon net income (loss) allocated to the limited partners and the weighted average number of equivalent limited partner units outstanding during the year. REIMBURSABLE EXPENSES Reimbursable expenses, which are charged to the Partnership by CCC in connection with the administration and operation of the Partnership, are allocated to the Partnership based upon several factors including, but not limited to, the number of investors, compliance issues, and the number of existing leases. FORGIVENESS OF RELATED PARTY PAYABLES In accordance with Accounting Principles Board Opinion No. 26, Early Extinguishment of Debt, the Partnership accounts for forgiveness of related party payables as partner's capital transactions. RECENT ACCOUNTING PRONOUNCEMENTS In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154, "Accounting Changes and Error 15 COMMONWEALTH INCOME & GROWTH FUND I NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Corrections" (SFAS No. 154) which replaces APB No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements - An Amendment of APB Opinion No. 28." SFAS No. 154 provides guidance on the methods issuers should use to account for and report accounting changes and error corrections. Specifically, this statement requires that issuers retrospectively apply any voluntary change in accounting principles to prior period financial statements, if it is practicable to do so. This principle replaces APB No. 20, which required that most voluntary changes in accounting principle be recognized by including the cumulative effect of the change to the new accounting principle on prior periods in the net income reported by the issuer in the period in which it instituted the change. SFAS No. 154 also redefines the term "restatement" to mean the correction of an error by revising previously issued financial statements. Unless adopted early, SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Partnership does not expect the adoption of SFAS No. 154 to have an impact on its financial position or results of operations. 4. NET INVESTMENT The following lists the components of the net IN DIRECT investment in a direct financing lease as of FINANCING LEASE December 31, 2005 and 2004: December 31, 2005 2004 --------------------------- --------- --------- Minimum lease payments receivable $ 6,018 $ 18,054 Less: Unearned Revenue 1,501 4,503 Net investment in direct financing lease 4,517 $ 13,551 ========= ========= 16 COMMONWEALTH INCOME & GROWTH FUND I NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- The following is a schedule of future minimum rentals on the noncancellable direct financing lease at December 31, 2005: Year ending December 31, Amount --------------------------------------- --------- 2006 $ 6,018 --------- 5. COMPUTER The Partnership is the lessor of equipment under EQUIPMENT operating leases with periods ranging from 12 to 36 months. In general, associated costs such as repairs and maintenance, insurance and property taxes are paid by the lessee. The Partnership participates in leases that are shared with other affiliated Partnerships. The Partnership's share of the computer equipment in which they participate at December 31, 2005 and 2004 was approximately $326,000 and $398,000, respectively, which is included in the Partnership's fixed assets on their balance sheet. The total cost of the equipment shared by the Partnership with other affiliated partnerships at December 31, 2005 and 2004 was approximately $1,432,000 and $1,743,000, respectively. There is no outstanding debt at December 31, 2005 and 2004 related to the equipment shared by the Partnership. The following is a schedule of future minimum rentals on noncancelable operating leases at December 31, 2005: Year ending December 31, Amount --------------------------------------- --------- 2006 $ 10,340 --------- 17 COMMONWEALTH INCOME & GROWTH FUND I NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- SIGNIFICANT Lessees exceeding 10% of lease income for the CUSTOMERS years ended: Lessee 2005 2004 2003 ---------------- -------- -------- -------- Lessee A -- 33% 28% Lessee B 41% 23% 24% Lessee C 25% 12% -- Lessee E 15% -- -- Lessee F 10% -- -- -------- -------- -------- TOTAL % OF LEASE INCOME 91% 68% 52% ======== ======== ======== Lessees exceeding 10% of accounts receivable at December 31, (See Note 9): Lessee 2005 2004 ---------------- -------- -------- Lessee B 36% -- Lessee D -- 79% Lessee F 55% -- -------- -------- TOTAL % OF ACCOUNTS RECEIVABLE 91% 79% ======== ======== 6. RELATED PARTY REIMBURSABLE EXPENSES TRANSACTIONS The General Partner and its affiliates are entitled to reimbursement by the Partnership for the cost of supplies and 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 2005, 2004, and 2003, the Partnership recorded $18,000, $22,000, and $194,000, respectively, for reimbursement of expenses to the General Partner. The amount due to CCC at December 31, 2005 and 2004, for reimburseable expenses was approximately $10,000 and $70,000, respectively. 18 COMMONWEALTH INCOME & GROWTH FUND I NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 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 lease thereof or sale under a conditional sales contract. No equipment acquisition fees were earned by the General Partner in 2005 and 2004. During 2003 equipment acquisition fees of approximately $1,000 were earned by 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. No debt placement fees were earned by the General Partner in 2005, 2004 and 2003. 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 and capital leases. No equipment management fees were earned by the General Partner in 2005. During 2004 and 2003, equipment management fees of approximately $2,000 and $17,000, respectively, were earned by the General Partner as determined pursuant to section (ii) above. 19 COMMONWEALTH INCOME & GROWTH FUND I NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- RELEASE FEE As compensation for providing releasing 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 ("Release"), the General Partner shall receive, on a monthly basis, a Release 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 Release. There were no such fees earned by the General Partner in 2005, 2004, and 2003. 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. During 2005, 2004 and 2003, equipment liquidation fees of approximately $1,000, $500, and $2,000, respectively, were earned by the General Partner. 7. NOTES PAYABLE Notes payable consisted of the following: December 31, 2005 2004 --------------------------- --------- --------- Installment note payable to a bank; interest at 6.5%; due in monthly installments of $1,003 including interest through June 2006. 5,906 17,158 --------- --------- $ 5,906 $ 17,158 ========= ========= 20 COMMONWEALTH INCOME & GROWTH FUND I NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- These notes are secured by specific computer equipment and are nonrecourse liabilities of the Partnership. Aggregate maturities of notes payable for each of the years subsequent to December 31, 2005 are as follows: Year ending December 31, Amount --------------------------------------- --------- 2006 $ 5,906 --------- $ 5,906 ========= 8. SUPPLEMENTAL Other noncash activities included in the CASH FLOW determination of net loss are as follows: INFORMATION
Year ended Year ended PERIOD ENDED December 31, December 31, JUNE 30, 2005 2004 2003 ------------- ------------- ------------- Lease income, net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank $ 1,018 $ 145,654 $ 267,354 ============= ============= =============
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. 21 COMMONWEALTH INCOME & GROWTH FUND I NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 9. RECONCILIATION OF NET (LOSS) REPORTED FOR FINANCIAL REPORTING PURPOSES TO TAXABLE (LOSS) ON THE FEDERAL PARTNERSHIP RETURN
Year ended December 31, 2005 2004 2003 -------------------------------------------------- ------------- ------------- ------------- Net loss for financial reporting purposes $ (195,293) $ (136,479) $ (114,587) Adjustments Gain (loss) on sale of computer equipment (33,953) (5,317) 27,245 Depreciation 41,365 89,947 64,017 Amortization 122 7,200 13,937 Bad debt expense (253,649) -- (14,587) Unearned lease income (2,748) (3,788) (27,665) Other 16,244 (14,574) 17,473 ------------- ------------- ------------- Taxable (loss) on the Federal Partnership return $ (427,912) $ (63,011) $ (34,167) ============= ============= =============
The "Adjustments - Other" includes financial statement adjustments reflected in the tax return in the subsequent year. Adjustment for gain (loss) on sale of equipment is due to longer useful lives for tax reporting purposes. 22 COMMONWEALTH INCOME & GROWTH FUND I NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 10. QUARTERLY RESULTS Summarized quarterly financial data for the years OF OPERATION ended December 31, 2005 and 2004 is as follows: (UNAUDITED)
Quarter ended --------------------------------------------------------- March 31 June 30 September 30 December 31 ------------ ------------ ------------ ------------ 2005 REVENUES Lease and other $ 23,056 $ 29,007 $ 16,973 $ 11,694 Gain (loss) on sale of computer equipment -- 13,116 (4,339) 68 ------------ ------------ ------------ ------------ TOTAL REVENUES 23,056 42,173 12,634 11,762 COSTS AND EXPENSES 76,716 135,731 42,834 29,636 ------------ ------------ ------------ ------------ NET (LOSS) INCOME $ (53,660) $ (93,558) $ (30,200) $ (17,874) ============ ============ ============ ============ (LOSS) INCOME PER LIMITED PARTNER UNIT $ (.09) $ (.15) $ -- $ -- ============ ============ ============ ============ NET ASSETS IN LIQUIDATION PER LIMITED PARTNER UNIT $ -- $ -- $ -- $ -- ============ ============ ============ ============
Liquidation basis effective July 1, 2005 23 COMMONWEALTH INCOME & GROWTH FUND I NOTES TO FINANCIAL STATEMENTS --------------------------------------------------------------------------------
Quarter ended --------------------------------------------------------- March 31 June 30 September 30 December 31 ------------ ------------ ------------ ------------ 2004 REVENUES Lease and other $ 64,953 $ 83,518 $ 62,268 $ 123,790 Gain (loss) on sale of computer equipment -- 949 (10,764) (2,836) ------------ ------------ ------------ ------------ TOTAL REVENUES 64,953 84,467 51,504 120,954 COSTS AND EXPENSES 73,771 65,254 146,710 172,622 ------------ ------------ ------------ ------------ NET (LOSS) INCOME $ (8,818) $ 19,213 $ (95,206) $ (51,668) ============ ============ ============ ============ (LOSS) INCOME PER LIMITED PARTNER UNIT $ (.01) $ .03 $ (.15) $ (.08) ============ ============ ============ ============
The cumulative gain or loss on sale of computer equipment is included in revenues or costs as appropriate. 24 COMMONWEALTH INCOME & GROWTH FUND I SUPPLEMENTAL SCHEDULES --------------------------------------------------------------------------------
BALANCE, ADDITIONS BEGINNING CHARGED TO BALANCE, OF PERIOD OPERATIONS DEDUCTIONS END OF PERIOD ------------ ------------ ------------ ------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: YEAR ENDED DECEMBER 31, 2003 $ 314,164 -- $ 14,586 $ 299,578 ------------ ------------ ------------ ------------- YEAR ENDED DECEMBER 31, 2004 299,578 174,000 -- 473,578 ------------ ------------ ------------ ------------- SIX MONTHS ENDED JUNE 30, 2005 473,578 75,493 549,071 ------------ ------------ ------------ ------------- SIX MONTH PERIOD JULY 1, 2005 TO DECEMBER 31, 2005 549,071 7,590 549,071 7,590 ============ ============ ============ =============
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