Blueprint
UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM
10-K
☒
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, 2018 or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File
Number: 333-156357
COMMONWEALTH
INCOME & GROWTH FUND VII, LP
(Exact
name of registrant as specified in its charter)
Pennsylvania
|
26-3733264
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification Number)
|
17755
US Highway 19 North
Suite
400
Clearwater,
FL 33764
(Address,
including zip code, of principal executive offices)
(877)
654-1500
(Registrant’s
telephone number including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
|
Name of
exchange which registered
|
None
|
N/A
|
Securities
registered pursuant to Section 12(g) of the Act:
(Title of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer,
(as defined in Rule 405 of the Act): YES ☐ NO
☒
Indicate
by checkmark if the registrant is not required to file reports
pursuant to Section-13 or Section-15(d) of the Act. YES ☐ NO
☒
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
☒ NO ☐
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of
Regulation
S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to
submit and post such files). YES ☒ 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
☒ NO ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definition of "accelerated filer,
“large accelerated filer" and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer ☐
|
Accelerated
filer ☐
|
Non-accelerated
filer ☐
|
Smaller
reporting company ☒
|
Do not
check if a smaller reporting company.
|
Emerging growth company ☐
|
Indicate by check mark whether the registrant is an emerging growth
company (as defined in Rule 12b-2 of the Exchange Act). YES ☐
NO ☒
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act): YES ☐ NO ☒
State
the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, or the average bid and asked
price of such common equity, as of the last business day of the
Registrant’s most recently completed second fiscal quarter:
N/A
Documents
incorporated by reference: None.
FORM
10-K
DECEMBER
31, 2018
TABLE
OF CONTENTS
PART
I
|
Item
1.
|
Business
|
3
|
|
Item
1A.
|
Risk
Factors
|
11
|
|
Item
1B.
|
Unresolved
Staff Comments
|
11
|
|
Item
2.
|
Properties
|
11
|
|
Item
3.
|
Legal
Proceedings
|
11
|
|
Item
4.
|
Mine
Safety Disclosures
|
12
|
|
|
|
PART
II
|
Item
5.
|
Market
for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
|
13
|
|
Item
6.
|
Selected
Financial Data
|
15
|
|
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
15
|
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
22
|
|
Item
8.
|
Financial
Statements and Supplementary Data
|
22
|
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
22
|
|
Item
9A.
|
Controls
and Procedures
|
22
|
|
Item
9B.
|
Other
Information
|
23
|
|
|
|
|
|
PART
III
|
Item
10.
|
Directors
and Executive Officers and Corporate Governance
|
26
|
|
Item
11.
|
Executive
Compensation
|
29
|
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
29
|
|
Item
13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
29
|
|
Item
14.
|
Principal
Accountant Fees and Services
|
35
|
|
|
|
|
|
PART
IV
|
Item
15.
|
Exhibits
and Financial Statement Schedules
|
36
|
|
|
Index
to Exhibits
|
36
|
|
Item
16.
|
Form
10K Summary
|
36
|
|
Forward-Looking Statements
From
time to time, we and our representatives may provide information,
whether orally or in writing, including certain statements in this
Annual Report on Form 10-K, which are deemed to be
“forward-looking.” These forward-looking statements
reflect our current beliefs and expectations with respect to future
events and are based on assumptions and are subject to risks and
uncertainties and other factors outside our control that may cause
actual results to differ materially from those
projected.
The
words “anticipate,” “believe,”
“estimate,” “expect,” “intend,”
“will,” “should” and similar expressions,
as they relate to us, are intended to identify forward-looking
statements. Such statements reflect our current views with respect
to future events and are subject to certain risks, uncertainties
and assumptions. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended or using
other similar expressions. We do not intend to update these
forward-looking statements, except as required by law.
We are
making investors aware that such forward-looking statements,
because they relate to future events, are by their very nature
subject to many important factors that could cause actual results
to differ materially from those contemplated by the forward-looking
statements contained in this Annual Report on Form 10-K, any
exhibits to this Form 10-K and other public statements we make.
Such factors include, but are not limited to: the outcome of
litigation and regulatory proceedings to which we may be a party;
actions of competitors; changes and developments affecting our
industry; quarterly or cyclical variations in financial results;
development of new products and services; interest rates and cost
of borrowing; our ability to maintain and improve cost efficiency
of operations; changes in economic conditions, political
conditions, trade protection measures; reliance on third parties
for manufacturing of products and provision of services; and other
factors that are set forth in the “Legal Proceedings”
section, the “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” section and
other sections of this Annual Report on Form 10-K, as well as in
our Quarterly Reports on Form 10-Q and Current Reports on Form
8-K.
PART I
ITEM 1: BUSINESS
GENERAL
Commonwealth
Income & Growth Fund VII, LP (the “Partnership”) is
a Pennsylvania limited partnership that was formed on November 14,
2008. Its 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. (“CCC”), and is responsible
for managing the affairs of the Partnership on a day-to-day basis
pursuant to the partnership agreement. The General Partner is also
responsible for identifying and making investments on behalf of the
Partnership. The offering of limited partnership interests,
registered pursuant to a registration statement on Form S-1, was
declared effective by the Securities and Exchange Commission on
November 13, 2009 (the “Effective Date”). As of the
Effective Date, the Partnership received an initial capital
contribution of $1,000 from its General Partner. The offering was
described in detail in the prospectus constituting a part of such
registration statement. The offering was a best-efforts,
minimum/maximum offering, with a minimum requirement of $1,150,000
and a maximum offering of $50,000,000. All proceeds were held in
escrow pending the receipt of the minimum amount. The Partnership
reached the minimum amount in escrow and commenced operations on
March 31, 2010. The Partnership utilized the offering proceeds to
purchase and lease information technology, telecommunications,
medical technology and other similar types of equipment. The
offering terminated on November 22, 2011 with 1,572,900 units sold
for a total of approximately $31,432,000 in limited partner
contributions.
See
“The Glossary” below for the definition of selected
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 information technology and other
similar capital equipment. The Partnership utilized the net
proceeds of the offering to purchase information technology and
other similar capital equipment. The Partnership has utilized
retained proceeds and debt financing (not in excess of 30% of the
aggregate cost of the equipment owned or subject to conditional
sales contract by the Partnership at the time the debt is incurred)
to purchase additional equipment. The Partnership acquires and
leases equipment principally to U.S. corporations and other
institutions pursuant to operating leases. The Partnership retains
the flexibility to enter into full payout net leases and
conditional sales contracts, but has not done so.
The
Partnership’s principal investment objectives are
to:
(a)
acquire, lease and sell equipment to generate revenues from
operations sufficient to provide annual cash distributions to
Limited Partners;
(b)
preserve and protect Limited Partners’ capital;
(c) use
a portion of cash flow and net disposition proceeds derived from
the sale, refinancing or other disposition of equipment to purchase
additional equipment; and
(d)
refinance, sell or otherwise dispose of equipment in a manner that
will maximize the proceeds to the Partnership.
THERE CAN BE NO ASSURANCE THAT ANY OF THESE OBJECTIVES WILL BE
ATTAINED
Limited
Partners do not have the right to vote on or otherwise approve or
disapprove of any particular investment to be made by the
Partnership.
Although
the Partnership generally acquires new equipment, the Partnership
may purchase used equipment. Generally, equipment is acquired from
manufacturers, distributors, leasing companies, agents,
owner-users, owner-lessors, and other suppliers upon terms that
vary depending upon the equipment and supplier involved.
Manufacturers and distributors usually furnish a limited warranty
against defects in material and workmanship and some purchase
agreements for equipment provide for service and replacement of
parts during a limited period. Equipment purchases are also made
through lease brokers and on an ad hoc basis to meet the needs of a
particular lessee.
As of
December 31, 2018, all equipment purchased by the Partnership is
subject to an operating lease or a finance lease. The Partnership
may also engage in sale/leaseback transactions, pursuant to which
the Partnership would purchase equipment from companies that would
then immediately lease the equipment from the Partnership. The
Partnership may also purchase equipment which is leased under full
payout net leases or sold under conditional sales contracts at the
time of acquisition or the Partnership may enter into a full payout
net lease or conditional sales contract with a third party when the
Partnership acquires an item of equipment.
The
Partnership may enter into arrangements with one or more
manufacturers pursuant to which the Partnership purchases equipment
that has previously been leased directly by the manufacturer to
third parties (“vendor leasing agreements”). The
Partnership and manufacturers may agree to obtain non-recourse
loans from the manufacturers, to finance the acquisition of
equipment. Such loans would be secured only by the specific
equipment financed and the receivables due to the manufacturers
from users of such equipment. It is expected that the manufacturers
of equipment will provide maintenance, remarketing and other
services for the equipment subject to such agreements. As of
December 31, 2018, the Partnership has no such
agreements.
The
General Partner has the discretion, consistent with its fiduciary
duty, to change the investment objectives of the Partnership if it
determines that such a change is in the best interest of the
Limited Partners and so long as such a change is consistent with
the Partnership Agreement. The General Partner will notify the
Limited Partners if it makes such a determination to change the
Partnership’s investment objectives.
TYPES OF EQUIPMENT
The
Partnership invests in various types of equipment subject to
leases. Our investment objective is to acquire primarily high
technology equipment including, but not limited to: servers,
desktops, laptops, workstations, printers, copiers, and storage
devices. Our General Partner believes that dealing in high
technology equipment is particularly advantageous due to a robust
aftermarket. Information technology has developed rapidly in recent
years and is expected to continue to do so. Technological advances
have permitted reductions in the cost of computer processing
capacity, speed, and utility. In the future, the rate and nature of
equipment development may cause equipment to become obsolete more
rapidly.
We also
may acquire high technology medical, telecommunications and
inventory management equipment. Our General Partner will seek to
maintain an appropriate balance and diversity in the types of
equipment acquired. The medical equipment we acquire may consist of
IV pumps, long acute care beds, CT scanners, MRIs, flow cytometers,
and other medical technology devices. The telecom equipment we
acquire may include Cisco switches, routers, blade switches,
wireless access points, and video conferencing systems. The
inventory management equipment we acquire may consist of inventory
control systems, lift trucks and tractors. The market for high
technology medical equipment is growing each year. Generally this
type of equipment will have a longer useful life than information
technology equipment. This allows for increased re-marketability,
if it is returned before its economic or announcement cycle is
depleted.
Other Equipment Restrictions. The Partnership generally
acquires information technology, telecommunications and medical
technology equipment. The General Partner is also authorized to
cause the Partnership to invest in other types of
business-essential capital equipment. The Partnership may not
invest in any of such other types of equipment (i) to the extent
that the purchase price of such equipment, together with the
aggregate purchase price of all such other types of equipment then
owned by the Partnership, is in excess of 25% of the total cost of
all of the assets of the Partnership at the time of the
Partnership’s commitment to invest therein and (ii) unless
the General Partner determines that such a purchase is in the best
economic interest of the Partnership at the time of the purchase.
There can be no assurance that any equipment investments can be
found which meet this standard. Accordingly, there can be no
assurance that investments of this type will be made by the
Partnership.
DIVERSIFICATION
Diversification
is generally desirable to minimize the effects of changes in
specific industries, local economic conditions or similar risks.
However, the extent of the Partnership’s diversification, in
the aggregate and within each category of equipment, depends in
part upon the financing which can be assumed by the Partnership or
borrowed from third parties on satisfactory terms. The
Partnership’s policy not to borrow on a recourse basis will
further limit its financing options. Diversification also depends
on the availability of various types of equipment. For the year
ended December 31, 2018, the Partnership has acquired a diversified
equipment portfolio, which it has leased to 12 different companies
located throughout the United States.
The
equipment types comprising the portfolio at December 31, 2018 are
as follows:
Equipment Category
|
Approximate %
|
Desktops - Tier 1/Laptops
|
28%
|
Digital Storage
|
11%
|
High End Servers
|
36%
|
High Volume & Spec Printers
|
4%
|
Inventory Control Systems
|
2%
|
Multifunction Centers
|
6%
|
Servers\Other
|
13%
|
Total
|
100%
|
During
the operational stage of the Partnership, the Partnership may not
at any one point in time lease (or sell pursuant to a conditional
sales contract) more than 25% of the equipment to a single person
or affiliated group of persons.
DESCRIPTION OF LEASES
The
Partnership generally purchases 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 leases most of the equipment purchased by the Partnership
to third parties pursuant to operating or finance leases. Types of
leases which the General Partner may enter into are operating
leases, finance leases, and conditional sales
contracts.
●
Operating leases
are relatively short-term (12 to 48 month) leases under which the
aggregate non-cancellable 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.
●
In a finance lease,
the lessor generally recovers at least 90% of the present value of
the equipment during the lease term.
●
A conditional sales
contract generally provides that the non-cancellable payments to
the seller over the term of the contract are sufficient to recover
the investment in such equipment and to provide a return on such
investment. Under a conditional sales contract, the seller reserves
title to and retains a security interest in, the equipment until
the purchase price of the equipment is paid.
In
general, the terms of the Partnership’s leases, whether the
equipment is leased pursuant to an operating lease or a finance
lease, depend upon a variety of factors, including: the
desirability of each type of lease from both an investment and a
tax point of view; the relative demand among lessees for operating
or full payout 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 finance 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
finance 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
finance lease. Also, the annual rental payments received under an
operating lease are ordinarily higher than those received under a
finance lease.
The
Partnership’s policy is to generally enter into “triple
net leases” (or the equivalent, in the case of a conditional
sales contract) which typically provide that the lessee or some
other party bear the risk of physical loss of the equipment; pay
taxes relating to the lease or use of the equipment; maintain the
equipment; indemnify the Partnership-lessor against any liability
suffered by the Partnership as the result of any act or omission of
the lessee or its agents; maintain casualty insurance in an amount
equal to the greater of the full value of the equipment and a
specified amount set forth in the lease; and maintain liability
insurance naming the Partnership as an additional insured with a
minimum coverage which the General Partner deems appropriate. In
addition, the Partnership may purchase “umbrella”
insurance policies to cover excess liability and casualty losses,
to the extent deemed practicable and advisable by the General
Partner. As of December 31, 2018, all leases that have been entered
into are “triple net leases.”
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, 2018, the Partnership has not entered into
any such agreements.
Remarketing
fees will be 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 remain actively involved
with the lessee and encourages extensions, remarketing or sale of
equipment. This strategy is designed to minimize any conflicts the
leasing company may have with a new lessee and may assist in
maximizing overall portfolio performance. The remarketing fee is
tied into lease performance thresholds and is a factor in the
negotiation of the fee. Remarketing fees incurred in connection
with lease extensions are accounted for as operating costs.
Remarketing fees incurred in connection with the sale of equipment
are included in the gain or loss calculations. For the years ended
December 31, 2018 and 2017, no remarketing fees were incurred
and/or paid.
Investment Criteria
When
evaluating potential lease transactions in which we will invest,
the general partner and the CCC’s management team performs a
detailed credit and risk analysis of both the lessee and the lease
transaction itself. The risk of doing business with the potential
lessee and the economics of each particular transaction must both
be acceptable to our portfolio management team and to the CEO of
the General Partner, who specifically approves each and every lease
transaction. Some of the criteria we evaluate are described
below:
Evaluation of Lessees
The
management team will perform a credit analysis (including a review
of the financial statements, credit history and public debt record)
of all potential lessees to determine the lessee’s ability to
make payments under the lease. We focus our investments in
investment grade to middle market credits meeting our minimum
acceptable fundamental analysis criteria. These criteria involve an
overall fundamental assessment of the lessee, and application of
our own proprietary “rating” model that is tailored to
specific economic criteria that are important to us. In addition to
preparing a detailed credit-write up at the time of initiation of a
transaction, we also re-evaluate a lessee’s credit risk on a
monthly basis, and may review interim and annual lessee financial
statements.
Generally,
we seek lessees that have annual revenue of at least $10 million,
have positive cash flow, and are not start-up entities, i.e., have
been in business for at least five years. We will also apply a
proprietary debt rating analysis when a Moody’s or Standard
& Poor’s rating is not available. This allows us to
create an equivalent, internal rating system without reliance
solely on third-party models and analysis.
Evaluation of Transactions
As
described above under “Description of Leases,” we
prefer our lease investments to have a term of 12 to 36 months, and
will not invest in a lease greater than 48 months. We engage in
“Fair Market Value” lease transactions, which permit
the lessee to purchase the equipment at the end of term for no less
than the then fair market value of the equipment. We seek to limit
or avoid leases that allow for early buyouts or terminations, as
these arrangements reduce the predictability of our
returns.
Our
focus is on Tier 1 (Tier 1 is defined as a large and well-known
vendor, often enjoying national or international recognition and
acceptance. Tier 1 vendors may be both manufacturers and
value-added resellers) information technology, telecommunications,
and medical technology equipment, leased in transactions generally
ranging in size from $50,000 to $1,000,000. We will consider larger
transactions, but for diversification purposes will require such
transactions to be divided among multiple lease schedules, and the
general partner may even assign a portion of such larger
transactions to other affiliated funds to further spread the risk
involved in larger transactions. Also, where the equipment type and
economic analytics are advantageous, we may engage in lease
transactions involving other types of equipment, so long as we feel
it is business-essential equipment for the lessee. Also, we conduct
a detailed analysis, using a third-party consultant, to assess the
residual value of the proposed equipment at the end of the original
lease term. This includes an analysis of the equipment’s
useful life and depreciation schedule, as well as the expected
resale market of that equipment type and availability of
remarketing channels.
Finally,
in assessing whether a proposed lease transaction will fit into our
portfolio criteria, management will consider the amount of exposure
we and our affiliated funds have to (i) the proposed asset type,
(ii) the particular lessee, (iii) the lessee’s industry, and
(iv) the geographic location of the equipment to be
leased.
BORROWING POLICIES
The
General Partner, at its discretion, may cause the Partnership to
incur debt in the maximum aggregate amount of 30% of the aggregate
cost of the equipment owned by the Partnership, or subject to
conditional sales contracts. The Partnership will incur only
non-recourse debt that is secured by equipment and lease income
therefrom. Such leveraging permits the Partnership to increase the
aggregate amount of its depreciable assets, and, as a result,
potentially increases both its lease revenues and its federal
income tax deductions above the levels that would be achieved
without leveraging. There is no limit on the amount of debt that
may be incurred in connection with the acquisition of any single
item of equipment. Any debt incurred is fully amortized over the
term of the initial lease or conditional sales contract to which
the equipment securing the debt is subject. The precise amount
borrowed by the Partnership depends on a number of factors,
including the types of equipment acquired by the Partnership; the
creditworthiness of the lessee; the availability of suitable
financing; and prevailing interest rates. There can be no assurance
that credit will be available to the Partnership in the amount or
at the time desired or on terms considered reasonable by the
General Partner. As of December 31, 2018, the Partnership’s
aggregate nonrecourse outstanding debt of approximately $2,715,000
was approximately 16% of the aggregate cost of the equipment owned.
The notes are secured by specific equipment with a carrying value
of approximately $3,780,000 at December 31, 2018 and are
nonrecourse liabilities of the Partnership.
The
Partnership may purchase some items of equipment without leverage.
If the Partnership purchases an item of equipment without leverage
and thereafter suitable financing becomes available, it may then
obtain the financing, secure the financing with the purchased
equipment and invest any proceeds from such financing in additional
items of equipment. Any such financing will be on terms consistent
with the terms applicable to borrowings in general.
The
General Partner may cause the Partnership to borrow funds, to the
fullest extent practical, at interest rates fixed at the time of
borrowing. However, the Partnership may borrow funds at rates that
vary with the “prime” or “base” rate. If
lease revenues were fixed, a rise in the “prime” or
“base” rate would increase borrowing costs and reduce
the amount of the Partnership’s income and cash available for
distribution. Therefore, the General Partner is permitted to borrow
funds to purchase equipment at fluctuating rates only if the lease
for such equipment provides for fluctuating rental payments
calculated on a similar basis.
Any
additional debt incurred by the Partnership must be nonrecourse.
Nonrecourse debt means that the lender providing the funds can look
for security only to the equipment pledged as security and the
proceeds derived from leasing or selling such equipment. Neither
the Partnership nor any Partner (including the General Partner)
would be liable for repayment of any nonrecourse debt. During 2015,
the General Partner executed a collateralized debt financing
agreement on behalf of certain affiliates for a total shared loan
amount of approximately $847,000, of which the Partnership’s
share was approximately $290,000. The Partnership’s portion
of the current loan amount at December 31, 2018 was approximately
$2,000 and is secured by specific equipment under both operating
and finance leases. The Partnership’s portion of the carrying
value of the secured equipment under operating leases is
approximately $0. The Partnership’s portion of the
carrying value of the secured equipment under finance leases is
approximately $5,000.
Loan
agreements may also require that the Partnership maintain certain
reserves or compensating balances and may impose other obligations
upon the Partnership. Moreover, since a significant portion of the
Partnership’s revenues from the leasing of equipment will be
reserved for repayment of debt, the use of financing reduces the
cash, which might otherwise be available for distributions until
the debt has been repaid and may reduce the Partnership’s
cash flow over a substantial portion of the Partnership’s
operating life. As of December 31, 2018 the Partnership had not
entered into any such agreements.
The
General Partner and any of its affiliates may, but are not required
to, make loans to the Partnership on a short-term basis. If the
General Partner or any of its affiliates makes such a short-term
loan to the Partnership, the General Partner or affiliate may not
charge interest at a rate greater than the interest rate charged by
unrelated lenders on comparable loans for the same purpose in the
same locality. In no event is the Partnership required to pay
interest on any such loan at an annual rate greater than three
percent over the “prime rate" from time to time announced by
PNC Bank, Philadelphia, Pennsylvania. All payments of principal and
interest on any financing provided by the General Partner or any of
its affiliates are due and payable by the Partnership within 12
months after the date of the loan.
REFINANCING POLICIES
Subject
to the limitations set forth in “Borrowing Policies”
above, the Partnership may refinance its debt from time to time.
With respect to a particular item of equipment, the General Partner
will take into consideration such factors as the amount of
appreciation in value, if any, to be realized, the possible risks
of continued ownership, and the anticipated advantages to be
obtained for the Partnership, as compared to selling such
equipment. As of December 31, 2018, the Partnership has not entered
into any debt refinancing transactions.
Refinancing,
if achievable, may permit the Partnership to retain an item of
equipment and at the same time to generate additional funds for
reinvestment in additional equipment or for distribution to the
Limited Partners.
LIQUIDATION POLICIES
The
General Partner intends to cause the Partnership to begin the
liquidation phase approximately 10 years after commencement of
operations. Notwithstanding the Partnership’s objective to
sell all of its assets and dissolve by December 31, 2021, the
General Partner may cause the Partnership to dispose of all its
equipment and dissolve the Partnership sooner, if warranted by
economic conditions.
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 are
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 with respect
to equipment and preparing monthly equipment operating statements
and related reports.
COMPETITION
The
equipment leasing industry is highly competitive. The Partnership
competes with leasing companies, equipment manufacturers and their
affiliated financing companies, distributors and entities similar
to the Partnership (including other programs sponsored by the
General Partner), some of which have greater financial resources
than the Partnership and more experience in the equipment leasing
business than the General Partner. Other leasing companies and
equipment manufacturers, their affiliated financing companies and
distributors may be in a position to offer equipment to prospective
lessees on financial terms, which are more favorable, than those
which the Partnership can offer. They may also be in a position to
offer trade-in privileges, software, maintenance contracts and
other services, which the Partnership may not be able to offer.
Equipment manufacturers and distributors may offer to sell
equipment on terms (such as liberal financing terms and exchange
privileges or service contracts), which will afford benefits to the
purchaser similar to those obtained through leases. Other
competitive factors include pricing, technological innovation and
methods of financing. Certain manufacturer-lessors maintain
advantages through patent protection, where applicable, and through
a policy that combines service and hardware with payment
accomplished through a single periodic charge. As a result of the
advantages, which certain of its competitors may have, the
Partnership may find it necessary to lease its equipment on a less
favorable basis than certain of its competitors.
INVESTMENTS
The
Partnership, through CCC, participates in the purchase of equipment
subject to associated debt obligations and lease agreements. The
purchase price, list price and monthly rentals presented below
represent the Partnership’s share of the total amounts, based
on CCC’s allocation of the equipment to the Partnership, and
in some instances, other affiliated partnerships.
For the
period of January 1, 2018 through April 1, 2019, the Partnership
has purchased, or has made the commitment to purchase, the
following equipment:
|
Equipment Category
|
Purchased Term
|
Pro-rated
Purchase Price
|
|
Laptops
|
36
|
$187,475
|
|
Desktops - Tier
1
|
36
|
$666,483
|
RESERVES
Because
the Partnership’s leases are on a “triple-net”
basis, no permanent reserve for maintenance and repairs has been
established from the offering proceeds. However, the General
Partner, in its sole discretion, may retain a portion of the cash
flow and net disposition proceeds available to the Partnership for
maintenance, repairs and working capital. There are no limitations
on the amount of cash flow and net disposition proceeds that may be
retained as reserves. Since no reserve will be established, if
available cash flow of the Partnership is insufficient to cover the
Partnership’s operating expenses and liabilities, it may be
necessary for the Partnership to obtain additional funds by
refinancing its equipment or borrowing additional
funds.
GENERAL RESTRICTIONS
Under
the Partnership Agreement, the Partnership is not permitted, among
other things, to:
a)
invest in junior
trust deeds unless received in connection with the sale of an item
of equipment in an aggregate amount 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 during 2018 and received
administrative and other services from a related party, CCC, which
had 34 employees as of December 31, 2018.
ITEM 1A: RISK FACTORS
NOT
APPLICABLE
ITEM 1B: UNRESOLVED STAFF COMMENTS
NONE
ITEM 2: PROPERTIES
NONE
ITEM 3: LEGAL PROCEEDINGS
Medshare
In
January 2015, CCC, on behalf of the Funds, entered into a Purchase
Agreement (“Purchase Agreement”) for the sale of the
equipment to Medshare Technologies (“Medshare”) for
approximately $3,400,000. The Partnership’s share of
the sale proceeds was approximately $1,033,000. As of April
1, 2019, the Partnership had received approximately $728,000 of the
approximate $1,033,000 sale proceeds and has recorded a reserve of
$239,000 against the outstanding receivables. On April 3,
2015 Medshare was obligated to make payment in full and failed to
do so. As a result, Medshare defaulted on its purchase
agreement with CCC and was issued a demand letter for full payment
of the equipment. On June 25, 2015, Medshare filed a lawsuit
in Texas state court for breach of contract (“State
Suit”). On June 26, 2015, Commonwealth filed a lawsuit
in the Northern District of Texas against Medshare seeking payment
in full and/or return of the Equipment and
damages.
In July
2016, CCC, on behalf of the Funds, entered into a $1,400,000
binding Settlement Agreement (“Settlement Agreement”)
with Medshare and its principal owner, Chris Cleary (collectively
referred to as “Defendants”), who are held jointly and
severally liable for the entire settlement. On August 2,
2016, the Defendants made payment to CCC of an initial $200,000 to
be followed by 24 structured monthly payments of approximately
$50,000 per month to begin no later than September 15, 2016.
The Partnership’s share of the Settlement Agreement is
approximately $453,000 and is to be applied against the net
Medshare receivable of approximately $350,000 as of the settlement
date. The remaining $103,000 will be applied against the $239,000
reserve and recorded as a bad debt recovery. As of April 1,
2019, the Partnership received approximately $182,000 of the
approximate $453,000 settlement agreement which was applied against
the net Medshare receivable of approximately $350,000 as of the
settlement date. As Defendant defaulted on settlement
agreement, CCC sought and obtained consent judgement from U.S.
District Court for Northern District of Texas, Dallas Division on
July 27, 2017 in the amount of $1.5 million, less $450,000
previously paid plus $6,757 in attorney fees, both the Defendant
and Cleary being jointly and severally liable for the judgement
amount. The court also vacated the September 21, 2016
settlement dismissal.
On July
27, 2017 Defendant filed Chapter 11 in Northern District of Texas
Dallas Division. On July 26, 2017 Legacy Texas Bank, a
secured creditor of the Defendant filed for a TRO in the U.S.
District Court of the Northern District of Texas, Dallas Division.
Included with the TRO filing was a request for appointment of
trustee for operation of Defendant, which was granted and the case
converted to Chapter 7. On December 18, 2018 the Bankruptcy Court
entered final order and issued its last payment to CCC in March
2019 of approximately $43,000, of which the Partnership’s
share was approximately $14,000. Although the trustee’s
final distribution to Commonwealth did not fully satisfy the
judgment, recovery may still be pursued directly against Cleary. As
such, management believes that the foregoing will not result
in any adverse financial impact on the Funds, but no assurance can
be provided until the proceedings are resolved.
FINRA
On May 3, 2013, the FINRA Department of Enforcement filed a
complaint naming Commonwealth Capital Securities Corp.
(“CCSC”) and the owner of the firm, Kimberly
Springsteen-Abbott, as respondents; however on October 22, 2013,
FINRA filed an amended complaint that dropped the allegations
against CCSC and reduced the scope of the allegations against Ms.
Springsteen-Abbott. The sole remaining charge was that Ms.
Springsteen-Abbott had approved the misallocation of some expenses
to certain Funds. Management believes that the expenses at
issue include amounts that were proper and that were properly
allocated to Funds, and also identified a smaller number of
expenses that had been allocated in error, but were adjusted and
repaid to the affected Funds when they were identified in
2012. During the period in question, Commonwealth Capital
Corp. (“CCC”) and Ms. Springsteen-Abbott provided
important financial support to the Funds, voluntarily absorbed
expenses and voluntarily waived fees in amounts aggregating in
excess of any questioned allocations. A Hearing Panel ruled
on March 30, 2015, that Ms. Springsteen-Abbott should be barred
from the securities industry because the Panel concluded that she
allegedly misallocated approximately $208,000 of expenses involving
certain Funds over the course of three years. As such,
management had allocated approximately $87,000 of the $208,000 in
allegedly misallocated expenses back to the affected funds as a
contingency accrual in CCC’s financial statements and a good
faith payment for the benefit of those Income Funds.
The decision of the Hearing Panel was stayed when it was appealed
to FINRA's National Adjudicatory Council (the “NAC”)
pursuant to FINRA Rule 9311. The NAC issued a decision that
upheld the lower panel’s ruling and the bar took effect on
August 23, 2016. Ms. Springsteen-Abbott appealed the
NAC’s decision to the U.S. Securities and Exchange Commission
(the “SEC”). On March 31, 2017, the SEC
criticized that decision as so flawed that the SEC could not even
review it, and remanded the matter back to FINRA for further
consideration consistent with the SEC’s remand, but did not
suggest any view as to a particular outcome.
On July 21, 2017, FINRA reduced the list of 1,840 items totaling
$208,000 to a remaining list of 84 items totaling $36,226 (which
includes approximately $30,000 of continuing education expenses for
personnel providing services to the Funds), and reduced the
proposed fine from $100,000 to $50,000, but reaffirmed its position
on the bar from the securities industry. Respondents promptly
appealed FINRA’s revised ruling to the SEC. That appeal is
pending as of April 1, 2019. All requested or allowed briefs
have been filed with the SEC. Management believes that
whatever final resolution of this may be, it will not result in any
material adverse financial impact on the Funds, although a final
assurance cannot be provided until the legal matter is
resolved.
ITEM 4: MINE SAFETY DISCLOSURES
NOT
APPLICABLE
PART II
ITEM 5: MARKET FOR THE REGISTRANTS 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, 2018, there were 991 unit holders.
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 discretion according to the
Partnership Agreement. 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
The
Partnership may, at the sole discretion of the General Partner,
repurchase a number of the outstanding units pursuant to its
limited redemption plan. On a semi-annual basis, the General
Partner, at its discretion, may establish an amount for redemption,
generally not to exceed two percent of the outstanding units per
year, subject to the General Partner’s good faith
determination that such redemptions will not (a) cause the
Partnership to be taxed as a corporation under Section 7704 of the
Code or (b) impair the capital or operations of the Partnership.
(The Partnership may redeem units in excess of the two percent
limitation if, in the good faith judgment of the General Partner,
the conditions imposed in the preceding sentence would remain
satisfied.) The redemption price for units will be 105% of the
selling Limited Partner’s adjusted capital contributions
attributable to the units for sale. 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 with respect
to which the redemption is to occur. The General Partner will
maintain a master list of requests for redemption with priority
being given to units owned by estates, followed by IRAs and
qualified plans. All other requests will be considered in the order
received. Redemption requests made by or on behalf of Limited
Partners who are not affiliated with the General Partner or its
affiliates will be given priority over those made by Limited
Partners who are affiliated with the General Partner or its
affiliates. All redemption requests will remain in effect until and
unless canceled, in writing, by the requesting Limited
Partner(s).
The
Partnership began accepting redemption requests beginning 30 months
following the termination of the public offering of its units.
There are no limitations on the period of time that a redemption
request may be pending prior to
it
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. Since the
Partnership began to accept redemptions, through December 31, 2018,
the General Partner had granted redemption requests to redeem
approximately 29,000 units. During the year ended December 31, 2018
limited partners redeemed 7,570 units of the partnership for a
total redemption price of approximately $58,000 in accordance with
the terms of the limited partnership agreement. For the year ended
December 31, 2017 limited partners redeemed 7,340 units of the
partnership for a total redemption price of approximately $56,000
in accordance with the terms of the limited partnership
agreement.
EXEMPT TRANSFERS
The
following seven 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 non-liquidating as well as
liquidating distributions by a parent partnership to its partners
of interests in a sub partnership);
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;
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; and
7)
transfers by one or
more partners representing in the aggregate fifty percent (50%) or
more of the total interests in partnership’s capital or
profits in one transaction or a series of related
transactions.
ADDITIONAL RESTRICTIONS ON TRANSFER
Limited
Partners who wish to transfer their units to a new beneficial owner
are required to pay the Partnership up to $50 for each transfer to
cover the Partnership’s cost of processing the transfer
application and take such other actions and execute such other
documents as may be reasonably requested by the General Partner.
There is no charge for re-registration of a unit in the event of a
marriage, divorce, death, or transfer to a trust so long as the
transfer is not a result of a sale of the units.
In
addition, the following restrictions apply to each transfer: (i) no
transfer may be made if it would cause 25% or more of the
outstanding units to be owned by benefit plans; and (ii) no
transfer is permitted unless the transferee obtains such
governmental approvals as may reasonably be required by the General
Partner, including without limitation, the written consents of the
Pennsylvania Securities Commissioner and of any other securities
agency or commission having jurisdiction over the
transfer.
ALLOCATION AND DISTRIBUTION BETWEEN THE GENERAL PARTNER AND THE
LIMITED PARTNERS
Cash
distributions, if any, are made quarterly on March 31, June 30,
September 30, and December 31, of each year. Distributions are made
99% to the Limited Partners and 1% to the General Partner until the
Limited Partners has received an amount equal to their Capital
Contributions plus the Priority Return of 10% per annum;
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 35% federal income tax bracket or, if lower, the
maximum federal income tax rate in effect for individuals for such
taxable year.
Generally,
the General Partner is allocated net profits equal to its cash
distributions (but not less than one percent of net profits) and
the balance is allocated to the Limited Partners. Net profits
arising from transactions in connection with the termination or
liquidation of the Partnership are allocated in the following
order: (1) First, to each Partner in an amount equal to the
negative amount, if any, of his capital account; (2) Second, an
amount equal to the excess of the proceeds which would be
distributed to the Partners based on the operating distributions to
the Partners over the aggregate capital accounts of all the
Partners, to the Partners in proportion to their respective shares
of such excess, and (3) Third, with respect to any remaining net
profits, to the Partners in the same proportions as if the
distributions were operating distributions. Net losses, if any, are
in all cases allocated 99% to the Limited Partners and one percent
to the General Partner.
Net
profits and net losses are computed without taking into account, in
each taxable year of the Partnership, any items of income, gain,
loss or deduction required to be specially allocated pursuant to
Section 704(b) of the Code and the Treasury Regulation promulgated
thereunder. No Limited Partner is required to contribute cash to
the capital of the Partnership in order to restore a closing
capital account deficit, and the General Partner has only a limited
deficit restoration obligation under the Partnership
Agreement.
Distributions
in the following approximate amounts declared to the Limited
Partners for the years ended December 31, 2018 and 2017 were as
follows:
Quarter
Ended
|
|
|
March
31
|
$77,000
|
$154,000
|
June
30
|
77,000
|
154,000
|
September
30
|
76,000
|
75,000
|
December
31
|
76,000
|
77,000
|
|
$306,000
|
$460,000
|
ALLOCATIONS AND DISTRIBUTIONS AMONG THE LIMITED
PARTNERS
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.
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.
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
NOT
APPLICABLE
ITEM 7: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The
following is a discussion of our current financial position and
results of operations. This discussion should be read together with
the Partnership’s financial statements contained under Item 8
of this Annual report on Form 10-K. This discussion should also be
read in conjunction with the disclosures above regarding
“Forward-Looking Statements.”
INTRODUCTION
We were
formed for the purpose of acquiring various types of
business-essential technology equipment, including computer
information technology, telecommunications, medical technology and
other similar capital equipment. We offered for sale up to
2,500,000 units of the limited partnership at the purchase price of
$20 per unit in a public offering that commenced on November 13,
2009 (the “Offering”). We reached the minimum offering
amount, broke escrow and commenced operations on March 31, 2010. A
total of 1,572,900 units were sold in the offering, for a total of
approximately $31,432,000 in limited partner
contributions.
Our
management team consists of the officers of our corporate General
Partner, Commonwealth Income & Growth Fund, Inc. We have
utilized the net proceeds of our public offering to purchase
equipment that is subject to leases with businesses throughout the
United States. We have also utilized debt financing (not in excess
of 30% of the aggregate cost of the equipment owned or subject to
conditional sales contracts at the time the debt is incurred) to
purchase additional equipment. We acquire and lease equipment
principally to U.S. corporations and other institutions pursuant to
operating and finance leases. We retain the flexibility to enter
into full payout net leases and conditional sales contracts, but
have not done so.
COMPETITIVE OUTLOOK
As
discussed in “Competition” in Item 1 above, the
commercial leasing and financing industry is highly competitive and
is characterized by competitive factors that vary based upon
product and geographic region. We compete primarily on the basis of
pricing, terms and structure, particularly on structuring flexible,
responsive, and customized financing solutions for our customers.
Our investments are often made directly rather than through
competition in the open market. This approach limits the
competition for our typical investment, which is intended to
enhance returns. We believe our investment model will represent the
best way for individual investors to participate in investing in
business-essential equipment. Nevertheless, to the extent that our
competitors compete aggressively on any combination of the
foregoing factors, our results could be adversely
impacted.
PRINCIPAL INVESTMENT OBJECTIVES
Our
principal investment objectives are to:
a)
acquire, lease and
sell equipment to generate revenues from operations sufficient to
provide annual cash distributions to our limited
partners;
b)
preserve and
protect limited partners’ capital;
c)
use a portion of
cash flow and net disposition proceeds derived from the sale,
refinancing or other disposition of equipment to purchase
additional equipment; and
d)
refinance, sell or
otherwise dispose of equipment in a manner that will maximize
proceeds.
INDUSTRY OVERVIEW
We
invest in various types of domestic information technology
equipment leases located solely within the United States. Our
investment objective is to acquire primarily high technology
equipment. We believe that dealing in high technology equipment is
particularly advantageous due to a robust aftermarket. Information
technology has developed rapidly in recent years and is expected to
continue to do so. Technological advances have permitted reductions
in the cost of computer processing capacity, speed, and utility. In
the future, the rate and nature of equipment development may cause
equipment to become obsolete more rapidly. In an effort to mitigate
this risk our portfolio manager attempts to diversify our fund
through the acquisition of different types of equipment, staggered
lease maturities, various lessees, and businesses located
throughout the U.S., and industries served.
We also
acquire high technology medical, telecommunications and inventory
management equipment. Our General Partner seeks to maintain an
appropriate balance and diversity in the types of equipment
acquired. The market for high technology medical equipment is
growing each year. Generally, this type of equipment has a longer
useful life. This allows for increased re-marketability, if it is
returned before its economic or announcement cycle is
depleted.
The Equipment
Leasing and Finance Association’s (ELFA) Monthly
Leasing and Finance Index (MLFI-25), which reports economic
activity from 25 companies representing a cross section of the $1
trillion equipment finance sector, showed their overall new
business volume for January was $7.2 billion, up 4% year-over-year
from new business volume in January 2018. Volume was down 43%
month-to-month from $12.7 billion in December, following the
typical end-of-quarter, end-of-year spike in new business activity.
Receivables over 30 days were 1.7%, unchanged from the previous
month and down from 1.9% the same period in 2018. Charge-offs were
0.35%, down from 0.55% the previous month, and virtually unchanged
from the year-earlier period. Credit approvals totaled 76.1% in
January, down from 77.9% in December. Total headcount for equipment
finance companies was flat year over year. Separately, the
Equipment Leasing & Finance Foundation’s Monthly
Confidence Index (MCI-EFI) in February is 56.7, up from the January
index of 53.4. ELFA President and CEO Ralph Petta said,
“2019 gets off to a strong start in the equipment finance
industry, with new business volume increasing 4% over the same
period last year. Credit quality is stable. Business owners
continue to expand their operations and acquire productive assets,
even as interest rates edge up ever so slightly, with the Fed
signaling a cautious wait-and-see posture for additional interest
rate hikes this year.” Dave B. Fate, President and CEO,
Stonebriar Commercial Finance, said, “The equipment finance
industry remains robust with steady to improving metrics as we
start the new year. Multiple factors contributed to an overall
positive impact in the markets, including continued strong reported
corporate earnings, record low unemployment, strong retail sales,
trade talks moving forward in a positive fashion and the Federal
Reserve’s significant change in tone. Stonebriar Commercial
Finance had its fourth consecutive year since inception of record
earnings, originations and no delinquency or credit losses. We
enter 2019 with over $1 billion of new business volume in various
stages in our pipeline. We remain bullish about the prospects in
our industry for 2019.”
Our
business is directly impacted by factors such as economic,
political, and market conditions, broad trends in industry and
finance, legislative and regulatory changes, changes in government
monetary and fiscal policies, and inflation, all of which are
beyond our control. Given these circumstances, we believe companies
overall, will continue to increasingly turn to leasing, as a
financing solution. It is our belief that companies lease
business-essential equipment because leasing can provide many
benefits to a company. The number one benefit of leasing that we
see is that there is no large outlay of cash required. Therefore,
companies can preserve their working capital, lease equipment,
which is an expense item, have the flexibility to upgrade the
equipment when needed, and have no risk of obsolescence. Because we
expect leasing to remain an attractive financing solution for
American businesses during the next 12 months, we feel that our
ability to increase our portfolio size and leasing revenues during
that period will remain strong.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Our
management’s discussion and analysis of our financial
condition and results of operations is based upon our financial
statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation
of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. Management’s estimates
are based 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. We believe
that our critical accounting policies affect our more significant
judgments and complex estimates used in the preparation of our
financial statements.
Revenue Recognition
For the
year ended December 31, 2018, the Partnership’s lease
portfolio consisted of operating leases and finance leases. For
operating leases, lease revenue is recognized on a straight-line
basis in accordance with the terms of the lease
agreement.
Finance
lease interest income is recorded over the term of the lease using
the effective interest method. For finance leases, we record, at
lease inception, unearned finance lease income which is calculated
as follows: total lease payments, plus any residual value and
initial direct costs, less the cost of the leased
equipment.
Upon
the end of the lease term, if the lessee has not met the return
conditions as set out in the lease, the Partnership is entitled in
certain cases to additional compensation from the lessee. The
Partnership’s accounting policy for recording such payments
is to treat them as revenue.
Gains
or losses from sales of leased and off-lease equipment are recorded
on a net basis in the Partnership’s Statement of Operations.
Gains from the termination of leases are recognized when the
lease is modified and terminated concurrently. Our leases do
not contain any step-rent provisions or escalation clauses nor are
lease revenues adjusted based on any index.
Long-Lived Assets
Depreciation
on technology and inventory management equipment for financial
statement purposes is based on the straight-line method estimated
generally over useful lives of two to five years. Once an asset
comes off lease or is released, the Partnership reassesses the
useful life of an asset.
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,
third party appraisals or comparable sales of similar assets, as
applicable, based on asset type.
Residual
values are determined by management and are calculated using
information from both internal and external sources, as well as
other economic indicators.
Reimbursable Expenses
Reimbursable
expenses are comprised of both ongoing operational expenses and
fees associated with the allocation of salaries and benefits,
referred to as other LP 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. For example, if a partnership has more
investors than another program sponsored by CCC, then higher
amounts of expenses related to investor services, including mailing
and printing costs will be allocated to that partnership. Also,
while a partnership is in its offering stage, higher compliance
costs are allocated to it than to a program not in its offering
stage, as compliance resources are utilized to review incoming
investor suitability and proper documentation. Finally, lease
related expenses, such as due diligence, correspondence, collection
efforts and analysis and staff costs, increase as programs purchase
more leases, and decrease as leases terminate and equipment is
sold. All of these factors contribute to CCC’s determination
as to the amount of expenses to allocate to the Partnership or to
other sponsored programs. CCC is not reimbursed for salary and
benefit costs of control persons. For the Partnership, all
reimbursable items are expensed as they are incurred.
Lease Income Receivable
Lease
income receivable includes current lease income receivable net of
allowances for uncollectible amounts, if any. The Partnership
monitors lease income receivable to ensure timely and accurate
payment by lessees. The Partnership’s Lease Relations
department is responsible for monitoring lease income receivable
and, as necessary, resolving outstanding invoices.
The
Partnership reviews a customer’s credit history before
extending credit. When the analysis indicates that the probability
of full collection is unlikely, the Partnership may establish an
allowance for uncollectible lease income receivable based upon the
credit risk of specific customers, historical trends and other
information. The Partnership writes off its lease income receivable
when it determines that it is uncollectible and all economically
sensible means of recovery have been exhausted.
RECENT ACCOUNTING PRONOUNCEMENTS
Information
regarding recent accounting pronouncements is included in Note 2 to
the financial statements, Summary of Significant Accounting
Policies, as set forth in Part II, Item 8, Financial Statements and
Supplementary Data.
LIQUIDITY AND CAPITAL RESOURCES
Our
primary sources of cash for the year ended December 31, 2018, were
cash provided by operating activities of approximately $215,000,
net proceeds from the sale of equipment of approximately $237,000,
payments from finance leases of approximately $68,000 and
distributions from investment in COF 2 of approximately $49,000.
Our primary sources of cash for the year ended December 31, 2017,
were cash from net proceeds from the sale of equipment of
approximately $270,000, payments from finance leases of
approximately $149,000 and distributions from investment in COF 2
of approximately $80,000.
Our primary uses of cash for the year ended December 31, 2018 were
for capital expenditures of approximately $196,000, distributions
to partners of approximately $309,000, limited partner
redemptions of approximately $58,000, equipment acquisition fees
paid to the General Partner of approximately $34,000 and debt
placement fees paid to the General Partner of approximately
$7,000. Our primary uses of
cash for the year ended December 31, 2017 were for capital
expenditures of approximately $733,000, distributions to partners
of approximately $544,000, limited partner redemptions of
approximately $56,000, debt placement fees paid to the General
Partner of approximately $19,000 and equipment acquisition fees paid to
the General Partner of approximately $39,000. The General Partner
intends to invest, through the use of leverage, approximately
$4,000,000 in additional equipment during 2019.
For the
year ended December 31, 2018 cash was provided by operating
activities of approximately $215,000, which includes a net loss of
approximately $757,000 and depreciation and amortization expense of
approximately $1,897,000. Other noncash activities included in the
determination of net loss include direct payments of lease income
by lessees to banks of approximately $1,398,000. For the year ended
December 31, 2017 cash was used in operating activities of
approximately $320,000, which includes a net loss of approximately
$1,382,000 and depreciation and amortization expense of
approximately $2,498,000. Other noncash activities included in the
determination of net loss include direct payments of lease income
by lessees to banks of approximately $1,112,000.
As we
continue to increase the size of our equipment portfolio, operating
expenses are expected to increase, which reflects the
administrative costs of servicing the portfolio, but because of our
investment strategy of leasing equipment primarily through
triple-net leases, we avoid operating expenses related to equipment
maintenance or taxes. Depreciation expenses will likely increase
more rapidly than operating expenses as we add equipment to our
portfolio.
At
December 31, 2018, cash was held in one bank maintained at one
financial institution with an aggregate balance of approximately
$865,000. Bank accounts are federally insured up to $250,000 by the
FDIC. At December 31, 2018 and 2017, the total cash bank balance
was approximately as follows:
Balance at December 31
|
|
|
Total bank
balance
|
$865,000
|
$892,000
|
FDIC
insured
|
(250,000)
|
(250,000)
|
Uninsured
amount
|
$615,000
|
$642,000
|
The Partnership believes it mitigates the risk of holding uninsured
deposits by only depositing funds with major financial
institutions. The Partnership has not experienced any losses in our
accounts, and believes it is not exposed to any significant credit risk. The amounts in
such accounts will fluctuate throughout 2019 due to many factors,
including the pace of cash receipts, equipment acquisitions,
interest rates and distributions to limited
partners.
As of December 31, 2018, we had future minimum rentals on
non-cancellable operating leases of approximately $1,562,000 for
2019 and approximately $1,420,000 thereafter. These amounts
represent scheduled payments on existing leases only, and do not
include expected future revenues on leases that we have not yet
entered into as of December 31, 2018.
As of December 31, 2018, we had future minimum rentals on
non-cancellable finance leases of approximately $2,000 for 2019 and
$0 thereafter. These amounts represent payments on existing leases
only, and do not include expected future revenues on leases that we
have not yet entered into as of December 31,
2018.
The
balance of our non-recourse debt at December 31, 2018 was
approximately $2,715,000 with interest rates ranging from 1.80% to
6.0% which will be payable through August, 2021. We assumed debt in
connection with the purchase of computer equipment of approximately
$658,000 during 2018. Non-recourse debt leases will not generate
current cash flow because the rental payments received from these
leases are used to service the indebtedness associated with
acquiring or financing the lease. For these leases, we anticipate
that the equipment will generate income to the investor either
through an extension of the lease term or from the sale of the
equipment at the end of the lease term. Management does not expect
significant interest rate increases to take place during 2019, and
therefore expects our cost of nonrecourse borrowing to remain
steady over the next 12 months.
During
2015, the General Partner executed a collateralized debt financing
agreement on behalf of certain affiliates for a total shared loan
amount of approximately $847,000, of which the Partnership’s
share was approximately $290,000. The Partnership’s portion
of the current loan amount at December 31, 2018 was approximately
$2,000 and is secured by specific equipment under both operating
and finance leases. The Partnership’s portion of the carrying
value of the secured equipment under operating leases is
approximately $0. The Partnership’s portion of the
carrying value of the secured equipment under finance leases is
approximately $5,000.
CCC, on
our behalf and on behalf of affiliated partnerships, acquires
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 share of the cost of the equipment
in which it participates with other partnerships at December 31,
2018 was approximately $10,206,000 and is included in the
Partnership’s equipment on its balance sheet. The
Partnership’s share of the outstanding debt associated with
this equipment at December 31, 2018 was approximately $1,786,000
and is included in the Partnership’s notes payable on its
balance sheet. The total cost of the equipment shared by the
Partnership with other partnerships at December 31, 2018 was
approximately $23,912,000. The total outstanding debt related to
the equipment shared by the Partnership at December 31, 2018 was
approximately $3,875,000.
As the
Partnership and the other programs managed by the General Partner
increase their overall portfolio size, opportunities for shared
participation are expected to continue. Sharing in the acquisition
of a lease portfolio gives the fund an opportunity to acquire
additional assets and revenue streams, while allowing the fund to
remain diversified and reducing its overall risk with respect to
one portfolio. Thus, total shared equipment and related debt should
continue to trend higher in fiscal 2019, as the Partnership builds
its portfolio.
Our
cash flow from operations is expected to continue to be adequate to
cover all operating expenses, liabilities, and distributions to
limited partners during the next 12-month period. If available cash
flow or net disposition proceeds are insufficient to cover our
expenses and liabilities on a short and long term basis, we will
attempt to obtain additional funds by disposing of or refinancing
equipment, or by borrowing within its permissible limits. We may
also reduce the distributions to limited partners if our management
deems it necessary.
On August 13, 2015, the Partnership purchased 1,648 units for
$1,500,000, of Commonwealth Opportunity Fund 2 (“COF
2”), an affiliate fund of the General Partner. In accordance
with the Partnership Agreement, the Partnership is permitted to
invest in equipment programs formed by the General Partner or its
affiliates. COF 2 is an affiliate program that broke escrow on
August 13, 2015. The General Partner believes this action is in the
best interests of all the Programs. The Partnership accounts for
its investment in COF 2 under the equity method in accordance with
ASC 323. The Partnership’s net investment in COF 2 at
December 31, 2018 and 2017 was approximately $790,000 and $961,000,
respectively. For the year ended December 31, 2018, COF 2 declared
distributions to the Partnership of approximately $49,000 of which
approximately $37,000 was paid in 2018 and approximately $12,000 is
recorded as a receivable from COF 2 at December 31,
2018.
RESULTS FROM OPERATIONS
For the
year ended December 31, 2018, we recognized revenue of
approximately $2,548,000, expenses of approximately $3,183,000 and
other loss of approximately $122,000,
resulting in a net loss of approximately $757,000. For the
year ended December 31, 2017, we recognized revenue of
approximately $2,655,000, expenses of approximately $3,910,000 and
other loss of approximately $127,000,
resulting in a net loss of approximately $1,382,000. The
reduction in net loss is primarily due to an overall reduction in
expenses including but not limited to, depreciation and
amortization expense, equipment management fees and legal fees,
partially offset by a decline in overall revenue.
The
Partnership had 108 active
operating leases that generated lease revenue of approximately
$2,393,000 for the year ended December 31, 2018 and had
96 active operating leases
that generated lease revenue of approximately $2,423,000 for the
year ended December 31, 2017. Management expects to add new leases
to our portfolio throughout 2019. We expect increases in portfolio
size to increase both aggregate lease income and depreciation
expense as new equipment depreciates. The Partnership is
continuously monitoring its lessee concentration to potentially
reduce the risk associated with a high concentration of activity in
a few lessees.
The Partnership’s equipment portfolio consists of
approximately 36% high end servers, 28% desk and lap tops, 11%
digital storage, 6% multifunction centers, 13% servers\other and 6%
inventory control systems\printers. The General Partner
continuously monitors and seeks to decrease the concentration of
equipment by type to diversify the equipment portfolio and
potentially reduce the overall risk to the investor. For the year
ended December 31, 2018, the Partnership had a total of four
lessees that accounted for lease revenue of 10% or greater which
are as follows: 40%, 22%, 12% and 12%. For the year ended December
31, 2017, the Partnership had a total of three lessees that
accounted for lease revenue of 10% or greater which are as follows:
32%, 23% and 11%.
For the
years ended December 31, 2018 and 2017, operating expenses,
excluding depreciation, consisted of accounting, legal, outside
service fees, reimbursement of expenses to CCC and other LP charges
from CCC for administration and operations as discussed in Note 6
of the financial statements. Operating expenses were approximately
$1,017,000 and $1,063,000 in 2018 and 2017, respectively. This
decline is primarily due to decreases in legal fees of
approximately $47,000, accounting fees of approximately $43,000,
investor services award compensation of approximately $29,000,
employee administrative fees of approximately $14,000, tax filing
fees of approximately $11,000 and bank fees of approximately
$6,000; which was offset by an increase in “Other LP”
expenses charged by CCC for the administration of the Partnership
of approximately $114,000.
We pay
an equipment management fee to our General Partner for managing our
equipment portfolio. The equipment management fee is approximately
5% of the gross lease revenue attributable to equipment that is
subject to operating leases and 2% of the gross lease revenue
attributable to equipment that is subject to finance leases. For
the years ended December 31, 2018 and 2017, equipment management
fees were approximately $121,000 and $124,000, respectively, which
is consistent with the decrease in lease revenue. Equipment
management fees are expected to increase throughout 2019 as our
equipment portfolio grows.
Depreciation and amortization expenses consist of depreciation on
equipment and amortization of equipment acquisition fees and
initial direct costs. For the years ended December 31, 2018
and 2017, these expenses were approximately $1,897,000 and
$2,498,000, respectively. This decrease was due to the higher frequency in
the termination of leases and equipment being fully depreciated as
compared to the acquisition of new leases for the year ended
December 31, 2018.
For the
years ended December 31, 2018 and 2017, the Partnership recorded a
gain on the sale of equipment of approximately $151,000 and
$188,000, respectively.
Net loss was approximately $757,000 for the year ended
December 31, 2018. This net
loss was attributable to the changes in revenue and expenses as
discussed above. Net loss was approximately $1,382,000 for
the year ended December 31, 2017.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
NOT
APPLICABLE
ITEM 8: FINANCIAL STATEMENTS
Our
financial statements for the fiscal years ended December 31, 2018
and 2017, and the reports thereon of the independent registered
public accounting firms are included in this annual
report.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
NONE
ITEM 9A: CONTROLS AND PROCEDURES
Our
management, under the supervision and with the participation of the
General Partner’s chief executive officer and principal
financial officer, has evaluated the effectiveness of the design
and operation of our disclosure controls and procedures related to
our reporting and disclosure obligations as of the end of the
period covered by this Annual Report on Form 10-K. Based on such
evaluation, the chief executive officer and principal financial
officer have concluded that, as of December 31, 2018, our
disclosure controls and procedures are effective in ensuring that
information relating to us, which is required to be disclosed in
our periodic reports filed or submitted under the Securities
Exchange Act of 1934 is (a) recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms, and (b) accumulated
and communicated to management, including the chief executive
officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure.
Management's Report on Internal Control over Financial
Reporting. It is the responsibility of the General Partner
to establish and maintain adequate internal control over financial
reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f)
of the Securities Exchange Act of 1934, as amended. The General
Partner’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting
principles generally accepted in the United States of America.
Internal control over financial reporting includes policies and
procedures that (i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of the Partnership; (ii) provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures of the Partnership are being made only in accordance
with authorizations of management and directors of the General
Partner; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or
disposition of the Partnership’s assets that could have a
material effect on the financial statements.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management
assessed the effectiveness of the Partnership’s internal
control over financial reporting at December 31, 2018. Management
based this assessment on criteria for effective internal control
over financial reporting described in “Internal Control
– Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO)”.
Management’s assessment included an evaluation of the design
of the Partnership’s internal control over financial
reporting and testing of the operational effectiveness of its
internal control over financial reporting. Management reviewed the
results of its assessment with the board of directors.
Based
on our assessment, management determined that, at December 31,
2018, the Partnership maintained effective internal control over
financial reporting and the preparation of financial statements for
external reporting purposes in accordance with generally accepted
accounting principles. This annual report does not include an
attestation report of the company's independent registered public
accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by
the Partnership’s independent registered public accounting
firm pursuant to the final rule of the Securities and Exchange
Commission that permits the Partnership to provide only
management's report in this annual report.
Changes in Internal Controls
There
were no changes in the Partnership’s internal control over
financial reporting during the fourth quarter of 2018 that have
materially affected, or are reasonably likely to materially affect,
the Partnership’s internal control over financial
reporting.
ITEM 9B: OTHER INFORMATION
FUND VALUATION
Background to Fund Valuation
The
Financial Industry Regulatory Authority (“FINRA”),
updated rules for the presentation of pricing of Alternative
Investment shares in customer account statements. Under NTM 15-02,
the SEC approved amendments to Rule 2340, Customer Account
Statements and FINRA Rule 2310, which address a FINRA member
firm’s participation in a public offering of an Alternative
Investment. The amendments require a FINRA member firm to include a
per share value of each Alternative Fund. The effective date of the
Notice was April 11, 2016. This per share value must be prepared
by, or with the material assistance or confirmation of, a
third-party valuation expert or service. The results of this
valuation must be disclosed in the issuer’s reports filed
under the Securities Exchange Act of 1934. This valuation must be
performed and published, at a minimum, annually.
Methodologies
Broker
dealers are required to provide a per share estimated value on the
customer account statements for each non-listed Alternative fund
held by their customers. These methods must be reasonably designed
to provide a reliable value. The two methods acceptable are as
follows:
● Net
Investment Methodology – This method must be based on
the “amount available for investment” percentage
disclosed in the “Estimated Use of Proceeds” section of
the issuer’s offering prospectus. The value should equal the
offering price less selling commission and organization and
offering expenses. This method may be used for up to 150 days
following the second anniversary of the “escrow break”
of each fund.
● Appraised
Value Methodology – This method must be disclosed in
an issuer’s most recent periodic or current report based upon
an appraisal of the assets and liabilities of the program by, or
with the material assistance or confirmation of, a third- party
valuation expert or service, in conformity with standard industry
valuation practice as it relates to their specific assets and
liabilities. No later than 150 days following the second
anniversary of the issuer’s break of escrow, this methodology
must be used.
For
Commonwealth Income & Growth Fund VII, it’s estimated per
share value includes the General Partner’s estimate of the
current market value of the fund. This value may not accurately
reflect the value of the Fund Units to the Unit holders if held
over time to Fund maturity. Additionally, there is no public market
for the Units and as a result, there is no currently ascertainable
fair market value for the Units. The estimate does not take into
account any future distributions or returns to Unit holders over
the full course of the Fund life cycle.
Valuation Components & Calculations
A.
Fund Assets and Liabilities (other
than as specifically identified below): The estimated values
for non-interest bearing items such as current assets and
liabilities are assumed to equal their reported GAAP balances as an
appropriate approximation of their fair values. Debt (interest
bearing) is assumed to equal the fair values of the debt as
disclosed in the footnotes of the financial
statements.
B.
Investments in leases (net of fees and
expenses): The estimated values for Investments in leases
are based on a calculation for the projected future cash flows.
Projected future cash flows include both the remaining contractual
lease payments, plus assumptions of lease renewals and sale value
(Equipment Valuation) of the residual assumptions.
Residual
value assumptions used in the cash flow projections are as
follows:
For Leased, Extensions and Month-to-Month
Leases: Considers historical renewal periods for
Commonwealth’s leases over the last five years as of December
31, 2018.
For Off-Lease (Inventory): A realized
residual of 25% of the installed equipment valuation as of the
appraisal date.
Special Situation Leases: The valuation
of certain leases has been performed outside of the above noted
protocol based upon specific lease assumptions different than the
macro assumptions above due to the specific situations of those
leases.
C.
Syndication costs: Syndication
costs for the Funds have been added to the value and are assumed to
be amortized over the expected 10 to 12-year life of the
Fund.
D.
Net Book Value: The Net Book
Value is the unamortized portion left during expected life of the
asset with an inflation rate of 1.5% added to the value times 324%
for the expected Commonwealth Capital return on investment.
Inventory assets do not include the 324% factor.
E.
Cash on Hand: Cash available
for reinvestment as of the appraisal date.
Procedure for December 31, 2018 Fund Valuation
The
Fund valuation for December 31, 2018 for Commonwealth Capital Corp.
was accomplished by using spreadsheet and lease contract data
provided by Commonwealth for the Funds with the following
additional data and updates added to each Fund
spreadsheet:
Columns
added to each Fund spreadsheet (with formula
calculation):
Category: Each lease has an
assigned category based on the type of asset in the lease. i.e. IBM
4250 Server would be valued as a “Server” with a
decline rate for Installed Fair Market Value from 1 month to 96
months. There are 12 separate decline rate tables to value
Commonwealth’s leased assets.
Net Book Value: Prorated
Purchase price/48 month or 36-month. Typically, 12 months beyond
initial term not to exceed 48 months. Calculations as described
earlier.
Age of Asset: Months as of
Valuation Date: The actual age of the asset from installation
date.
Lease, Extension, MTM, Payments as of
Appraisal Date: The number of months remaining in Initial
Term of the lease; number of months remaining in a fixed term
extension; plus, a fixed term based on the Commonwealth historical
return for similar assets over the last five years. All Active, Extension and MTM leases add
10 months to their current term as of the appraisal date except for
certain repeat lessees with long term recurring activity, which
have a fixed 12-month extension added to any of their Active,
Extension or MTM leases.
Other Calculations: Another
calculation is made at the bottom of each spreadsheet for the
equipment off-lease (inventory) and in the Commonwealth warehouse
or other locations. It is “Equity Only” (Inventory) and
is calculated at 25% of the Installed Fair Market Value from the
Category tables.
Commonwealth Income and Growth Fund VII, Unit
Valuation
The
General Partner’s estimated per unit value at December 31,
2018 as determined, and derived under the guidelines of the
Appraised Value Methodology, and pursuant to the above specific
enumerated component valuation methodologies and calculations is
$12.60.
Disclaimer
The
foregoing Fund valuation has been performed solely for the purpose
of providing an estimated value per Unit in accordance with a
regulatory mandate, in order to provide the broker dealer and
custodian community with a valuation on a reasonable basis for use
in assigning an estimation of Unit holder’s account value.
Any statement of such valuations is to be accompanied by statements
that the value so calculated does not represent an estimate of the
amount a Unit holder would receive if the Unit holder were to seek
to sell the Units, and that the Fund intends to liquidate its
assets in the ordinary course of its business and over the
Fund’s term. Further, each Fund’s valuations is to be
accompanied by a disclosure that there can be no assurance as to
(1) when the Fund will be fully liquidated, (2) the amount the Fund
may actually receive if and when the Fund seeks to liquidate its
assets, (3) the amount of lease or loan payments the Fund will
actually receive over the remaining term, (4) the amount of asset
disposition proceeds the Fund will actually receive over the
remaining term, and (5) the amounts that may actually be received
in distributions by Unit holders over the course of the remaining
term.
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
GENERAL
The
Partnership does not have any Directors or executive officers.
Rather, it is managed by the Manager. The directors and
officers of the Manager are required to spend only such time on
Partnership affairs as is necessary for the proper conduct of
Partnership business. Under certain circumstances, such directors
and officers are entitled to indemnification from the Partnership.
The Manager reserves the right to determine now and in the future
which personnel are deemed control persons and, therefore would not
seek reimbursement for personnel costs related to such persons. It
is not intended that every person who carries a title such as
director, vice president, executive vice president, senior vice
president, manager, secretary, controller or treasurer or who holds
a 5% equity interest be considered a Controlling
Person.
The
Board of Directors of the Sponsor has established an Executive
Committee, and the operations of the Manager are effectively
controlled by the Executive Committee of the Sponsor. The Executive
Committee has functional control over all day-to-day activities of
the Sponsor and effectively the Manager. Currently, Kimberly A.
Springsteen-Abbott and Henry J. Abbott are the members of the
Executive Committee. Kimberly A. Springsteen-Abbott is the sole
shareholder of Commonwealth Capital Corp., and thus retains
ultimate control of all Commonwealth entities through her ability
to elect, remove and replace directors. Prior to mid-2011, only Ms.
Springsteen-Abbott was considered a controlling person of the
Commonwealth-sponsored equipment funds and Mr. Abbott is currently
a controlling person with respect to the equipment funds as well,
with the goal being that Executive Committee membership will be
indicative of control over the income funds as well as the Sponsor.
For purposes of our financial operations, we do not currently
consider any other employees to be control persons, and do not
expect to do so in the foreseeable future.
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 IV, Commonwealth Income & Growth Fund V and
Commonwealth Income & Growth Fund VI and is the manager of
several private entities. The principal business office of the
General Partner is 17755 US Highway 19 North, Suite 400,
Clearwater, FL 33764 and its telephone number is (877) 654-1500.
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 and its subsidiary Commonwealth Capital Securities Corp.
("CCSC"), are as follows:
NAME
|
TITLE
|
Kimberly A. Springsteen-Abbott
|
Chairman
of the Board; Chief Executive Officer and Chief Compliance Officer
of CCC, and CIGF, Inc.
|
|
|
Henry J. Abbott
|
Director
of CCC, CCSC & CIGF, Inc.; Chief Executive Officer and Chairman
of CCSC; President of CCC and CIGF, Inc.
|
|
|
Jay Dugan
|
Executive
Vice President and Chief Technology Officer and Director of CCC;
Senior Vice President and Chief Technology Officer of CIGF,
Inc.
|
|
|
Peter Daley
|
Director
of CCC and CIGF, Inc.
|
|
|
James Pruett
|
Compliance
Officer of CCC & CIGF, Inc.; Senior Vice President of CCC, CCSC
and CIGF, Inc.; Secretary to the Board of Directors of CCC; Chief
Compliance Officer and Director of CCSC
|
|
|
Mark Hershenson
|
Senior
Vice President and Broker-Dealer Relations Manager of CCC, CCSC and
CIGF, Inc.
|
|
|
David W. Riggleman
|
Senior
Vice President and Portfolio Manager of CCC and CIGF,
Inc.
|
|
|
Brian Doster
|
Vice
President and General Counsel of CCC, CCSC and CIGF,
Inc.
|
Kimberly A. Springsteen-Abbott, age 60, joined Commonwealth
in April 1997 as a founding registered principal and Chief
Compliance Officer of its broker/dealer, Commonwealth Capital
Securities Corp. Ms. Springsteen-Abbott is the Chief Executive
Officer and Chairman of the Board of Directors of Commonwealth
Capital Corp. (the parent corporation); and Commonwealth Income
& Growth Fund, Inc. (the General Partner), positions she has
held since April 2006. Ms. Springsteen-Abbott is responsible for
general operations of the equipment leasing/portfolio management
side of the business. Ms. Springsteen-Abbott oversees all CCC
operations. Ms. Springsteen-Abbott oversees all corporate daily
operations and training, as well as develops long-term corporate
growth strategies. Ms. Springsteen-Abbott has over 27 years of
experience in the financial services industry, specifically in the
real estate, energy and leasing sectors of alternative investments.
Ms. Springsteen-Abbott is the sole shareholder of Commonwealth
Capital Corp. Ms. Springsteen-Abbott was elected to the Board of
Directors of the parent corporation in 1997 and has also served as
its Executive Vice President and COO. Also in 1997, she founded
Commonwealth Capital Securities Corp., where she was elected to the
Board of Directors and appointed President, COO and Chief
Compliance Officer. Her responsibilities included business
strategy, product development, broker/dealer relations development,
due diligence, and compliance. From 1980 through 1997, Ms.
Springsteen-Abbott was employed with Wheat First Butcher Singer, a
regional broker/dealer located in Richmond, Virginia. At Wheat, she
served as Senior Vice President & Marketing Manager for the
Alternative Investments Division. Ms. Springsteen-Abbott holds her
FINRA Series 7, 63 and 39 licenses. She is a member of the
Equipment Leasing and Finance Association, REISA, the Financial
Planners Association, the National Association of Equipment Leasing
Brokers and has served on the Board of Trustees for the Investment
Program Association. Ms. Springsteen-Abbott is a member of the
Executive Committee and the Disaster Recovery Committee. Ms.
Springsteen-Abbott is the wife of Henry J.
Abbott.
Henry J. Abbott, age 69, joined Commonwealth in August 1998
as a Portfolio Manager, a position he held until April 2006, at
which time he was elected President of CCC and CIGF, Inc., Chief
Executive Officer & Chairman of CCSC, and Director of CCC 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 Disaster Recovery Committee and the Facilities
Committee, and was appointed to the Executive Committee in 2008.
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 FINRA 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 and Finance Association, the
National Association of Equipment Leasing Brokers, REISA and the
Investment Program Association. Mr. Abbott is a member of the
executive committee and the Disaster Recovery Committee. Mr.
Abbott is the husband of Kimberly A.
Springsteen-Abbott.
Jay Dugan, age 71, joined Commonwealth in 2002 as Assistant
Vice President and Network Administrator, and became a Vice
President in December 2002, Senior Vice President in December 2003,
and has been Executive Vice President and Chief Technology Officer
of the parent and its affiliates since December 2004. Mr. Dugan has
also been a director of CCC and CIGF, Inc. since June 2006. Mr.
Dugan is responsible for the information technology vision,
security, 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, a FINRA 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.
Peter Daley, age 79, joined Commonwealth in June 2006 as a
director. Mr. Daley is an Accredited Senior Appraiser for the
discipline of Machinery and Equipment with a specialty in
High-Technology for the valuation of computer equipment. Mr. Daley
has been in the computer business since 1965, first with IBM as a
computer broker/lessor and then with Daley Marketing Corporation
(DMC), a firm he founded in July 1980 to publish reports about
computer equipment, including “Market Value Reports”
and “Residual Value Reports.” In January 2001 Mr. Daley
acquired Computer Economics, merged DMC into CEI and in April 2005
sold the IT Management Company and created a new company focused on
the fair market value business. Additionally, Mr. Daley remains
President of DMC Consulting Group, a separate company that
specializes in writing Appraisals, Portfolio Analysis and Property
Tax Valuation from Fair Market Value to Residual Value valuations.
Mr. Daley has developed a database of “Fair Market
Value” equipment values from 1980 to the present, utilizing a
variety of reports and publications along with the DMC and CEI
Market Value Reports. This database has been successfully used in
the valuation of computer equipment in the settlement of a number
of Virginia tax cases. He has also previously testified in
California, Minnesota, Michigan, New York, and the Virginia Courts
as an expert in the field of valuation of computer equipment. Mr.
Daley has a full repertoire of lectures, seminars, presentations,
and publications that he has conceived and shared with the public.
From 1994 to the present he has been writing computer appraisals
and reports for Fortune 500 companies. From April 2005 to the
present as president of DMC Valuations Group, Mr. Daley has been
publishing, both on the web and in print, fair market values,
residual values, and manufacturer’s price lists to existing
valuation clients around the world. Mr. Daley graduated from
Pepperdine University in 1991 with a Masters of Business
Administration, and from Cal State Northridge with a Bachelor of
Science in Business Administration in 1965. Mr. Daley is also an
Accredited Senior Appraiser with the American Society of
Appraisers.
James Pruett, age 54, joined Commonwealth in 2002 as an
Executive Assistant. Mr. Pruett was named Assistant Vice President
and a Compliance Associate in February 2005, Vice President and
Compliance Manager in December 2005, Senior Vice President and
Compliance Officer of the parent and its affiliates in December
2007 and since August 2016 has served as Senior Vice President,
Chief Compliance Officer and Director of CCSC. Mr. Pruett was also
named Secretary to the parent’s board of directors in
December 2008. Mr. Pruett is responsible for management of
regulatory 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 and the Disaster Recovery Committee. Mr. Pruett
holds his FINRA Series 22, 63 and 39 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 and Finance Association and the Investment Program
Association.
Mark Hershenson, age 54, joined Commonwealth in April 2002
as Broker Services Manager and has served as Senior Vice President
and Broker Dealer Relations Manager of the parent and its
affiliates since December 2007. Mr. Hershenson is responsible for
management of all broker/dealer relationships, and over-sees the
Due Diligence, Marketing, and Broker Services Departments. 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 at MetLife for over 100
registered representatives. Mr. Hershenson attended Stonehill
College and holds a Bachelor’s degree in Psychology, with a
concentration in Marketing/Organizational Behaviorism and engaged
in Master’s level coursework in Financial Planning though
American College. He holds his FINRA Series 6, 7, 39 and 63
licenses. Mr. Hershenson is a member of the Equipment Leasing and
Finance Association and the Investment Program
Association.
David W. Riggleman, age 57, joined Commonwealth in July 2007
as a Business Development Specialist and was named Assistant Vice
President in December 2007, Portfolio Manager in June 2008 and as a
Vice President of CCC and CIGF, Inc. in December 2008. He was named
Senior Vice President of CCC and CIGF, Inc. in December of 2010.
Mr. Riggleman is responsible for lease acquisitions, equipment
research and evaluation, lease pricing, portfolio analysis, and
asset remarketing and disposition. Prior to joining Commonwealth,
Mr. Riggleman served from January 2005 to July 2007 as Vice
President, Investments for Raymond James and Associates in
Cumberland, Maryland. At Raymond James, he served as a Branch Owner
in the Advisor Select Program. He managed branch associates in
addition to managing private client accounts with more than $75
million in assets under management. From July 1994 to December
2004, Mr. Riggleman was Vice President, Investments and Branch
Manager at Legg Mason. While there, he opened and managed a branch
while also managing private client and institutional assets with
assets under management of more than $65 million. He served as a
member of Legg Mason President’s Council in 1998 and served
consecutive terms as member of Legg Mason’s Financial
Services Advisory Panel in 1999 and 2000. From January 1987 to June
1994, he was Vice President, Investments of Wheat First Securities,
where he managed private client and institutional assets totaling
more than $40 million. Mr. Riggleman studied Economics at the
University of Richmond, and also Business Administration at
Frostburg State University.
Brian Doster, age 59, joined Commonwealth Capital Corp. in
February 2017. Mr. Doster is responsible for all legal functions
including Federal, State and local compliance, dispute management,
transactional documentation and enforcement and general legal
matters. Prior to joining Commonwealth, Mr. Doster was SVP and
General Counsel for Checkers Drive-In Restaurants, Inc. in Tampa,
FL (1999 – 2014). Mr. Doster oversaw all legal needs of
Checkers during both its public and private ownership, including
oversight of domestic and international franchising. Prior to
Checkers Mr. Doster served as General Counsel for Amoco Corporation
in Chicago, IL (1985 – 1999). Mr. Doster provided for the
legal needs of its many subsidiaries, including Amoco Oil Company
and as GC and Secretary for Omega Oil Company and Whale Oil, Inc.
Mr. Doster obtained his J.D. from the University of Baltimore and
BS from Towson University. Mr. Doster is past President and
continues to serve as director of Tampa Family Health Clinics, Inc.
and is a past Baldridge Examiner.
Lynn A. Whatley, Effective on October 31, 2018, Lynn A.
Whatley resigned as:
●
Chief Operating
Officer and Executive Vice President of the Issuer, the
Issuer’s General Partner, Commonwealth Income & Growth
Fund Inc. and the Issuer’s Sponsor, Commonwealth Capital
Corp.
●
Chief Operating
Officer, Senior Vice President and Director of the Issuer’s
Broker/Dealer and the fund’s Dealer-Manager, Commonwealth
Capital Securities Corp.
Ms.
Whatley cited personal reasons for her resignation
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 in
Item 401 of Regulation S-K (17 CFR § 229.401) under the
Exchange Act, serving on its audit committee. An audit committee is
not required because the Partnership’s units are not listed
securities (as defined by 17 CFR § 240.10A-3); therefore,
no audit committee financial expert is required.
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 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 RECEIVING COMPENSATION
|
TYPE OF COMPENSATION
|
AMOUNT INCURRED DURING 2018
|
AMOUNT
INCURRED DURING 2017
|
The
General Partner
|
Equipment Acquisition
Fee. The General Partner earned
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. At December 31, 2018, the
prepaid acquisition fees balance was $0. For the year ended
December 31, 2018, equipment acquisition fees earned from operating
and finance leases was approximately $34,000 and $0,
respectively.
|
$34,000
|
$160,000
|
The
General Partner and its Affiliates
|
Reimbursable
Expenses. The General Partner
and its affiliates are entitled to reimbursement by the Partnership
for the cost of goods, supplies or services obtained and used by
the general partner, not including costs of the control persons, as
defined in Item 10, in connection with the administration and
operation of the partnership from third parties unaffiliated with
the General Partner. The amounts set forth on this table do not
include expenses incurred in the offering of units. For the
years ended December 31, 2018 and 2017, the Partnership was charged
approximately $619,000 and $504,000 in other LP expense,
respectively.
|
$1,063,000
|
$983,000
|
The
General Partner
|
Debt Placement
Fee. As compensation for
arranging term debt to finance our acquisition of equipment, we
will pay the general partner a fee equal to one percent of such
indebtedness; provided, however, that such fee shall be reduced to
the extent we incur such fees to third parties unaffiliated with
the general partner or the lender with respect to such
indebtedness. No such fee will be paid with respect to borrowings
from the general partner or its affiliates. We intend to initially
acquire leases on an all cash basis with the proceeds of this
offering, but may borrow funds after the offering proceeds have
been invested. The amount we borrow, and therefore the amount of
the fee, will depend upon interest rates at the time of a loan, and
the amount of leverage we determine is appropriate at the time. We
do not intend to use more than 30% leverage overall in our
portfolio. Fees will increase as the amount of leverage we use
increases, and as turnover in the portfolio increases and
additional equipment is purchased using
leverage.
|
$7,000
|
$33,000
|
The
General Partner
|
Equipment Management
Fee. A monthly fee equal to the
lesser of (a) the fees which would be charged by an independent
third party in the same geographic market for similar services and
similar equipment or (b) the sum of (i) two percent of the gross
lease revenues attributable to equipment subject to full payout net
leases which contain net lease provisions and (ii) five percent of
the gross lease revenues attributable to equipment subject to
operating leases and (iii) two percent of the gross lease revenues
attributable to equipment subject to finance
leases.
|
$122,000
|
$124,000
|
The
General Partner
|
Equipment Liquidation
Fee. With respect to each item
of equipment sold by the general partner, 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
this fee is subordinated to the receipt by the LimitedPartners of
(i) a return of their capital contributions and 10% annum
cumulative return, compounded daily, on adjusted capital
contributions 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.
|
$7,000
|
$8,000
|
The
General Partner
|
Partnership Interest and
Distribution. The General
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%
Cumulative Return and thereafter, the General Partner will receive
10% of Cash Available for Distribution.
|
$3,100
|
$5,000
|
CONFLICTS OF INTEREST
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 potentially in 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 a
lease with the same lessee or sell equipment to the same purchaser,
the General Partner will generally afford priority to the equipment
which has been available for lease or sale for the longest period
of time.
Certain
senior executives of the General Partner and its affiliates also
serve as officers and directors of the other programs and are
required to apportion their time among these entities. The
Partnership is, therefore, in competition with the other programs
for the attention and management time of the General Partner and
affiliates. The officers and directors of the General Partner are
not required to devote all or substantially all of their time to
the affairs of the Partnership.
ACQUISITIONS
CCC and
the General Partner or other affiliates of the General Partner may
acquire equipment for the Partnership provided that (i) the
Partnership has insufficient funds at the time the equipment is
acquired, (ii) the acquisition is in the best interest of the
partnership and (iii) no benefit to the General Partner or its
affiliates arises from the acquisition except for compensation paid
to CCC, the General Partner or such other affiliate as disclosed in
this Report. CCC, the General Partner or their affiliates will not
hold equipment for more than 60 days prior to transfer to the
Partnership. If sufficient funds become available to the
Partnership within such 60 day period, such equipment may be resold
to the Partnership for a price not in excess of the sum of the cost
of the equipment to such entity and any accountable acquisition
expenses payable to third parties which are incurred by such entity
and interest on the purchase price from the date of purchase to the
date of transfer to the Partnership. CCC, the General Partner or
such other affiliate will retain any rent or other payments
received for the equipment, and bear all expenses and liabilities,
other than accountable acquisition expenses payable to third
parties with respect to such equipment, for all periods prior to
the acquisition of the equipment by the Partnership. Except as
described above, there will be no sales of equipment to or from any
affiliate of CCC.
In
certain instances, the Partnership may find it necessary, in
connection with the ordering and acquisition of equipment, to make
advances to manufacturers or vendors with funds borrowed from the
General Partner for such purpose. The Partnership does not borrow
money from the General Partner or any of its affiliates with a term
in excess of twelve months. Interest is paid on loans or advances
(in the form of deposits with manufacturers or vendors of equipment
or otherwise) from the General Partner of its affiliates from their
own funds at a rate equal to that which would be charged by third
party financing institutions on comparable loans from the same
purpose in the same geographic area, but in no event in excess of
the General Partner’s or affiliate’s own cost of funds.
In addition, if the General Partner or its affiliates borrow money
and loan or advance it on a short-term basis to or on behalf of the
Partnership, the General Partner or such affiliates shall receive
no greater interest rate and financing charges from the Partnership
than that which unrelated lenders charge on comparable loans. The
Partnership will not borrow money from the General Partner or any
of its affiliates for a term in excess of twelve
months.
If the
General Partner or any of its affiliates purchases equipment in its
own name and with its own funds in order to facilitate ultimate
purchase by the Partnership, the purchaser is entitled to receive
interest on the funds expended for such purchase on behalf of the
Partnership. Simple interest on any such temporary purchases is
charged on a floating rate basis not in excess of three percent
over the “prime rate” from time to time announced by
PNC Bank, from the date of initial acquisition to the date of
repayment by the Partnership and ownership transfer.
The
Partnership does not invest in equipment limited partnerships,
general partnerships or joint ventures, except that (a) the
Partnership may invest in general partnerships or joint ventures
with persons other than equipment programs formed by the General
Partner or its affiliates, which partnerships or joint ventures
invest in specific equipment; provided that (i) the Partnership has
or acquires a controlling interest in such ventures or
partnerships, (ii) the non-controlling interest is owned by a
non-affiliated, and (iii) there are no duplicate fees; and (b) the
Partnership may invest in joint venture arrangements with other
equipment programs formed by the General Partner or its affiliates
if such action is in the best interest of all programs and if all
the following conditions are met: (i) all the programs have
substantially identical investment objectives; (ii) there are no
duplicate fees; (iii) the sponsor compensation is substantially
identical in each program; (iv) the Partnership has a right of
first refusal to buy another program’s interest in a joint
venture if the other program wishes to sell equipment held in the
joint venture; (v) the investment of each program is on
substantially the same terms and conditions; and (vi) the joint
venture is formed either for the purpose of effecting appropriated
diversification for the programs or for the purpose of relieving
the General Partner or its affiliates from a commitment entered
into pursuant to certain provisions of the Partnership
Agreement.
GLOSSARY
The
following terms used in this report shall (unless otherwise
expressly provided herein or unless the context otherwise requires)
have the meanings set forth below.
“Acquisition
Expenses” means expenses relating to the prospective
selection and acquisition of or investment in equipment by the
Partnership, whether or not actually acquired, including, but not
limited to, legal fees and expenses, travel and communication
expenses, costs of appraisal, accounting fees and expenses and
other related expenses.
“Acquisition
Fees” means the total of all fees and commissions paid by any
party in connection with the initial purchase of equipment acquired
by the Partnership. Included in the computation of such fees or
commissions shall be the equipment acquisition fee and any
commission, selection fee, construction supervision fee, financing
fee, non-recurring management fee or any fee of a similar nature,
however designated.
“Adjusted
Capital Contributions” means capital contributions of the
Limited Partners reduced by any cash distribution received by the
Limited Partners pursuant to Sections 4.1 or 8.1 of 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 separate account established for each
partner pursuant to Section 4.1 of the Partnership
Agreement.
“Capital
Contributions” means in the case of the General Partner, the
total amount of money contributed to the Partnership by the General
Partner, and in the case of Limited Partners, $20 for each unit, or
where the context requires, the total capital contributions of all
the partners.
“Cash
Available for Distribution” means cash flow plus net
disposition proceeds plus cash funds available for distribution
from Partnership reserves, less such amounts as the General
Partner, in accordance with the Partnership Agreement, causes the
Partnership to reinvest in equipment or interests therein, and less
such amounts as the General Partner, in its sole discretion,
determines should be set aside for the restoration or enhancement
of Partnership reserves.
“Cash
Flow” for any fiscal period means the sum of (i) cash
receipts from operations, including, but not limited to, rents or
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.
“Code”
means the Internal Revenue Code of 1986, as amended, and as may be
amended from time to time by future federal tax
statutes.
“Competitive
Equipment Sale Commission” means that brokerage fee paid for
services rendered in connection with the purchase or sale of
equipment, which is reasonable, customary, and competitive in light
of the size, type, and location of the equipment.
“Conditional
Sales Contract” means an agreement to sell equipment to a
buyer in which the seller reserves title to, and retains a security
interest in, the equipment until the purchase price of the
equipment is paid.
“Equipment”
means each item of and all of the technology equipment and other
similar capital equipment (medical technology equipment,
telecommunications technology equipment, inventory management
equipment) purchased, owned, operated, and/or leased by the
Partnership or in which the Partnership has acquired a direct or
indirect interest, as more fully described in the Partnership
Agreement, together with all appliances, parts, instruments,
accessories, furnishings, or other equipment included therein and
all substitutions, renewals, or replacements of, and all additions,
improvements, and accessions to, any and all thereof.
“Finance
Lease” generally means a full-payout, non-cancellable
agreement in which the customer is responsible for maintenance,
taxes and insurance. The term also refers in Article 2A of the
Uniform Commercial Code to a special type of lease in which the
lessor, lessee and the manufacturer have contractual relationships
and the lessor at all times, with the lessee’s
acknowledgement, remains a passive investor where the lessee makes
most equipment decisions directly with the
manufacturer.
“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 non-cancelable 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.
“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
venture.
“Offering”
means the initial public offering of units in the
Partnership.
“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 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 VII, a Pennsylvania
Limited Partnership.
“Partnership
Agreement” means that Limited Partnership Agreement of
Commonwealth Income & Growth Fund VII 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.
“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 ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The
aggregate fees billed and expected to be billed for the fiscal
years ended December 31, 2018 and 2017 for professional services
rendered by the Partnership’s independent registered public
accounting firm for the 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 that fiscal year, was approximately $74,000 and
$103,000, respectively.
AUDIT-RELATED FEES
There
were no aggregate fees billed in the fiscal years ended December
31, 2018 and 2017 for assurance and related services by the
Partnership’s 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.”
TAX FEES
There
were no fees billed in the fiscal years ended December 31, 2018 and
2017 for professional services rendered by the Partnership’s
independent registered public accounting firm for tax compliance,
tax advice and tax planning.
ALL OTHER FEES
There
were no aggregate fees billed in the fiscal years ended December
31, 2018 and 2017 for products and services provided by the
Partnership’s independent registered public accounting firm,
other than the services reported above under other captions of this
Item 14.
PRE-APPROVAL POLICIES AND PROCEDURES
All
audit related services, tax planning and other services were
pre-approved by the Board of Directors of the General Partner,
which concluded that the provision of such services by the
Partnership’s independent registered public accounting firm
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 minimis
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.
There
were no other fees approved by the Board of Directors of the
General Partner or paid by the Partnership, during 2018 and 2017
other than fees related to audit or tax compliance
services.
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 10-K
(a) (1)
|
Financial
Statements
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Balance
Sheets as of December 31, 2018 and 2017
|
F-2
|
|
Statements
of Operations for the years ended December 31, 2018 and
2017
|
F-3
|
|
Statements
of Partners’ Capital for the years ended December 31, 2018
and 2017
|
F-4
|
|
Statements
of Cash Flows for the years ended December 31, 2018 and
2017
|
F-5
|
|
Notes
to Financial Statements
|
F-6
|
(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
|
|
|
|
|
|
*3.2
|
|
|
|
|
|
31.1
|
|
|
|
|
|
31.2
|
|
|
|
|
|
32
|
|
|
|
|
|
*Incorporated
by reference from the Partnership’s Registration Statement on
Form S-1 (Registration No. 333-156357)
|
ITEM 16: FORM 10K SUMMARY
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 April 1, 2019 by the undersigned thereunto duly
authorized.
|
COMMONWEALTH
INCOME & GROWTH FUND VII, LP
|
|
By:
COMMONWEALTH INCOME & GROWTH FUND, INC., General
Partner
|
|
By: /s/
Kimberly A. Springsteen-Abbott
|
|
Kimberly
A. Springsteen-Abbott,
|
|
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
April
1, 2019:
SIGNATURE
|
CAPACITY
|
|
|
/s/
Kimberly A. Springsteen-Abbott
|
Chairman,
Chief Executive Officer,
|
Kimberly
A. Springsteen-Abbott
|
Commonwealth
Income & Growth Fund, Inc.
|
/s/ Henry
J. Abbott
|
Director,
President,
|
Henry
J. Abbott
|
Commonwealth
Income & Growth Fund, Inc.
|
Commonwealth
Income &
Growth
Fund VII
Financial Statements
For the years ended December 31, 2018 and 2017
Report of Independent Registered Public Accounting
Firm
|
F-1
|
|
|
Financial statements
|
|
Balance
Sheets
|
F-2
|
Statements
of Operations
|
F-3
|
Statements
of Partners’ Capital
|
F-4
|
Statements
of Cash Flows
|
F-5
|
|
|
Notes to financial statements
|
F-6
|
Report of Independent Registered Public Accounting
Firm
The Partners
Commonwealth Income & Growth Fund VII
Clearwater, Florida
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Commonwealth
Income & Growth Fund VII (“Partnership”) as of
December 31, 2018 and 2017, the related statements of operations,
Partners’ capital, and cash flows for the years then ended,
and the related notes (collectively referred to as the
“financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial
position of the Partnership at December 31, 2018 and 2017, and the
results of its operations and its cash flows for the years then
ended, in conformity with accounting principles generally accepted
in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the
Partnership’s management. Our responsibility is to express an
opinion on the Partnership’s financial statements based on
our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with
respect to the Partnership in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. The Partnership is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting 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.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits
provide a reasonable basis for our opinion.
/s/BDO USA, LLP
We have
served as the Partnership's auditor since 2012.
Philadelphia, Pennsylvania
April 1, 2019
Commonwealth
Income &
Growth Fund
VII
Balance
Sheets
|
|
|
|
|
ASSETS
|
|
|
Cash and cash
equivalents
|
$853,115
|
$887,167
|
Lease income
receivable, net of reserve
|
284,972
|
365,385
|
Accounts
receivable, Commonwealth Capital Corp, net
|
1,265,023
|
1,510,035
|
Other receivables,
net of reserve of approximately $239,000 for each December 31, 2018
and 2017
|
85,149
|
258,909
|
Receivable from
COF2
|
12,239
|
12,239
|
Prepaid
expenses
|
9,338
|
10,469
|
|
2,509,836
|
3,044,204
|
|
|
|
Net investment in
finance leases
|
4,941
|
121,570
|
|
|
|
Investment in COF
2
|
789,761
|
960,842
|
|
|
|
Equipment, at
cost
|
16,576,406
|
18,511,167
|
Accumulated
depreciation
|
(12,765,256)
|
(13,703,605)
|
|
3,811,150
|
4,807,562
|
Equipment
acquisition costs and deferred expenses, net of accumulated
amortization of approximately $127,000 and $68,000 at December
31, 2018 and 2017, respectively
|
159,497
|
200,808
|
|
159,497
|
200,808
|
Total
Assets
|
$7,275,185
|
$9,134,986
|
|
|
|
LIABILITIES
AND PARTNERS' CAPITAL
|
|
|
LIABILITIES
|
|
|
Accounts
payable
|
$277,274
|
$171,939
|
Accounts payable,
CIGF, Inc.
|
343,446
|
306,756
|
Other accrued
expenses
|
77,426
|
77,803
|
Unearned lease
income
|
36,949
|
174,147
|
Notes
payable
|
2,715,429
|
3,455,653
|
Total
Liabilities
|
3,450,524
|
4,186,298
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
PARTNERS'
CAPITAL
|
|
|
General
Partner
|
1,050
|
1,050
|
Limited
Partners
|
3,823,611
|
4,947,638
|
Total
Partners' Capital
|
3,824,661
|
4,948,688
|
Total
Liabilities and Partners' Capital
|
$7,275,185
|
$9,134,986
|
|
|
|
see
accompanying notes to financial statements
|
Commonwealth
Income &
Growth Fund
VII
Statements
of Operations
|
|
|
|
|
Revenue
|
|
|
Lease
|
$2,393,338
|
$2,423,342
|
Interest and
other
|
3,756
|
43,092
|
Gain on sale of
equipment
|
151,267
|
137,451
|
Total
revenue and gain on sale of equipment
|
2,548,361
|
2,603,885
|
|
|
|
Expenses
|
|
|
Operating,
excluding depreciation and amortization
|
1,016,919
|
1,062,856
|
Equipment
management fee, General Partner
|
120,990
|
124,166
|
Interest
|
148,515
|
57,036
|
Depreciation
|
1,814,918
|
2,421,482
|
Amortization of
equipment acquisition costs and deferred expenses
|
82,051
|
76,658
|
Bad debt
expense
|
-
|
116,225
|
Total
expenses
|
3,183,393
|
3,858,423
|
|
|
|
Other
loss
|
|
|
Gain from insurance
recovery
|
-
|
33,653
|
Loss on equity
investment in COF 2
|
(122,125)
|
(160,623)
|
Total
other loss
|
(122,125)
|
(126,970)
|
|
|
|
Net
loss
|
$(757,157)
|
$(1,381,508)
|
|
|
|
Net
loss allocated to Limited Partners
|
$(760,251)
|
$(1,386,166)
|
|
|
|
Net
loss per equivalent Limited Partnership unit
|
$(0.49)
|
$(0.89)
|
Weighted
average number of equivalent limited
|
|
|
partnership
units outstanding during the year
|
1,547,187
|
1,551,936
|
|
|
|
see
accompanying notes to financial statements
|
Commonwealth Income &
Growth Fund
VII
Statements
of Partners' Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2017
|
50
|
1,557,850
|
$1,050
|
$6,849,536
|
$6,850,586
|
Net income
(loss)
|
-
|
-
|
4,658
|
(1,386,166)
|
(1,381,508)
|
Redemptions
|
-
|
(7,340)
|
-
|
(56,286)
|
(56,286)
|
Distributions
|
-
|
-
|
(4,658)
|
(459,446)
|
(464,104)
|
Balance,
December 31, 2017
|
50
|
1,550,510
|
$1,050
|
$4,947,638
|
$4,948,688
|
Net income
(loss)
|
-
|
-
|
3,094
|
(760,251)
|
(757,157)
|
Redemptions
|
-
|
(7,570)
|
-
|
(57,538)
|
(57,538)
|
Distributions
|
-
|
-
|
(3,094)
|
(306,238)
|
(309,332)
|
Balance,
December 31, 2018
|
50
|
1,542,940
|
$1,050
|
$3,823,611
|
$3,824,661
|
see
accompanying notes to financial statements
|
Commonwealth
Income &
Growth Fund
VII
Statements
of Cash Flows
|
|
|
|
|
Cash
flows from operating activities
|
|
|
Net
loss
|
$(757,157)
|
$(1,381,508)
|
Adjustments to
reconcile net loss to net cash
|
|
|
provided by (used
in) operating activities
|
|
|
Depreciation
and amortization
|
1,896,971
|
2,498,140
|
Amortization
of initial direct costs - finance leases
|
881
|
3,353
|
Gain
on sale of equipment
|
(151,267)
|
(137,451)
|
Bad
debt expense
|
-
|
116,225
|
Loss
on equity in COF 2 investment
|
122,125
|
160,623
|
Other noncash
activities
|
|
|
Lease
revenue net of interest expense, on notes payable,
realized
|
|
|
as
a result of direct payment of principal to the bank by
lessee
|
(1,398,284)
|
(1,111,895)
|
Earned
interest on finance leases
|
(2,689)
|
(10,839)
|
Changes in assets
and liabilities
|
|
|
Lease
income receivable
|
80,413
|
(190,796)
|
Accounts
receivable, Commonwealth Capital Corp., net
|
227,596
|
(542,047)
|
Other
receivables
|
191,176
|
(18,353)
|
Prepaid
expenses
|
1,131
|
(3,147)
|
Accounts
payable
|
105,335
|
20,848
|
Accounts
payable, CIGF, Inc., net
|
36,690
|
219,093
|
Other
accrued expenses
|
(378)
|
809
|
Unearned
lease income
|
(137,133)
|
56,806
|
Net
cash provided by (used in) operating activities
|
215,410
|
(320,139)
|
Cash
flows from investing activities
|
|
|
Capital
expenditures
|
(195,898)
|
(732,606)
|
Payment
from finance leases
|
67,724
|
148,637
|
Equipment
acquisition fees paid to the General Partner
|
(34,158)
|
(38,718)
|
Net
proceeds from the sale of equipment
|
237,365
|
270,079
|
Distributions
from Investment in COF2
|
48,956
|
79,553
|
Net
cash provided by (used in) investing activities
|
123,989
|
(273,055)
|
Cash
flows from financing activities
|
|
|
Redemptions
|
(57,538)
|
(56,286)
|
Debt
placement fee paid to the General Partner
|
(6,581)
|
(19,201)
|
Distributions
to partners
|
(309,332)
|
(544,353)
|
Net cash used in financing
activities
|
(373,451)
|
(619,840)
|
|
|
|
Net
decrease in cash and cash equivalents
|
(34,052)
|
(1,213,034)
|
Cash
and cash equivalents beginning of year
|
887,167
|
2,100,201
|
Cash
and cash equivalents end of year
|
$853,115
|
$887,167
|
see
accompanying notes to financial statements
|
Commonwealth
Income &
Growth
Fund VII
Notes to Financial Statements
1. Business
Commonwealth
Income & Growth Fund VII, LP (the “Partnership”) is
a limited partnership organized in the Commonwealth of Pennsylvania
on November 14, 2008. The Partnership offered for sale up to
2,500,000 units of limited partnership interest at the purchase
price of $20 per unit (the “offering”). The Partnership
reached the minimum amount in escrow and commenced operations on
March 31, 2010. The offering terminated on November 22, 2011 with
1,572,900 units sold for a total of approximately $31,432,000 in
limited partner contributions.
For the
year ended December 31, 2018 and 2017, limited partners redeemed
7,570 and 7,340 units, respectively, of partnership interest for a
total redemption price of approximately $58,000 and $56,000,
respectively, in accordance with the terms of the
Partnership’s Limited Partnership Agreement (the
“Agreement”).
The
Partnership uses the proceeds of the offering to acquire, own and
lease various types of computer information technology equipment
and other similar capital equipment, which is 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 investment objective is to acquire primarily
high technology equipment. Information technology has developed
rapidly in recent years and is expected to continue to do so.
Technological advances have permitted reductions in the cost of
information technology processing capacity, speed, and utility. In
the future, the rate and nature of equipment development may cause
equipment to become obsolete more rapidly. The Partnership also
intends to acquire high technology medical, telecommunications and
inventory management equipment. The Partnership’s general
partner will seek to maintain an appropriate balance and diversity
in the types of equipment acquired. The market for high technology
medical equipment is growing each year. Generally, this type of
equipment will have a longer useful life than other types of
technology equipment. This allows for increased re-marketability,
if it is returned before its economic or announcement cycle is
depleted.
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 CCC. CCC is a member of the Institute for Portfolio
Alternatives (“IPA”) and the Equipment Leasing and
Finance Association (“ELFA”). Approximately ten years
after the commencement of operations, the Partnership intends to
sell or otherwise dispose of all of its equipment, make final
distributions to partners, and to dissolve. Unless sooner
terminated or extended pursuant to the terms of its Limited
Partnership Agreement (the “Agreement”), the
Partnership will continue until December 31, 2021.
Allocations
of income and distributions of cash are based on 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 each of
the years ended December 31, 2018 and 2017, cash distributions to
limited partners for each quarter were made at a rate of
approximately 1.0% and 1.5% of their original contributed capital,
respectively. Distributions during each of the years ended December
31, 2018 and 2017 were made to limited partners in the amount of
approximately $.20 and $.30 per unit, respectively, based on each
investor's number of limited partnership units outstanding during
that year.
Distributions
in the following approximate amounts declared to the Limited
Partners for the years ended December 31, 2018 and 2017 were as
follows:
Quarter
Ended
|
|
|
March
31
|
$77,000
|
$154,000
|
June
30
|
77,000
|
154,000
|
September
30
|
76,000
|
75,000
|
December
31
|
76,000
|
77,000
|
|
$306,000
|
$460,000
|
2. Summary of Significant Accounting Policies
Use of Estimates
The
preparation of financial statements is in conformity with
accounting principles generally accepted in the United States of
America which 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 and those differences could be material. Such
estimates relate primarily to the determination of residual values
at the end of the lease term, the expected future cash flows and
fair value used for impairment analysis purposes and determination
of the allowance for doubtful accounts.
Disclosure of Fair Value of Financial Instruments
Fair Value Measurements
The
Partnership applies the provisions included in the Fair Value
Measurements and Disclosures Topic to all financial and
non-financial assets and liabilities. This Topic emphasizes that
fair value is a market-based measurement, not an entity-specific
measurement. It clarifies that fair value is an exit price,
representing the price that would be received to sell an asset or
paid to transfer a liability in the principal or most advantageous
market in an orderly transaction between market participants on the
measurement date. The Topic requires the use of valuation
techniques to measure fair value that maximize the use of
observable inputs and minimize use of unobservable inputs. These
inputs are prioritized as follows:
●
Level 1: Observable
inputs such as quoted prices in active markets for identical assets
or liabilities.
●
Level 2: Inputs
other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or
indirectly. Level 2 inputs include quoted prices for similar assets
or liabilities in active markets and inputs other than quoted
prices that are observable for the asset or liability, such as
interest rates and yield curves that are observable at commonly
quoted intervals.
●
Level 3:
Unobservable inputs for which there is little or no market data and
which require internal development of assumptions about how market
participants price the asset or liability.
There
were no assets or liabilities measured at fair value on a recurring
basis at December 31, 2018 and 2017. There were no assets measured
on a non-recurring basis at December 31, 2018 and
2017.
Fair Value disclosures of financial instruments
Estimated
fair value was determined by management using available market
information and appropriate valuation methodologies. However,
judgment was necessary to interpret market data and develop
estimated fair value. Cash, other receivables, accounts payable and
other accrued expenses are carried at amounts which reasonably
approximate their fair values as of December 31, 2018 and 2017 due
to the immediate or short-term nature of these financial
instruments.
The
Partnership’s long-term debt consists of notes payable, which
are secured by specific equipment and are nonrecourse liabilities
of the Partnership. The estimated fair value of this debt at
December 31, 2018 and 2017 approximates the carrying value of these
instruments, due to the interest rates on this debt approximating
current market interest rates. The Partnership classifies the fair
value of its notes payable within Level 2 of the valuation
hierarchy based on the observable inputs used to estimate fair
value.
Revenue Recognition
For the
year ended December 31, 2018, the Partnership’s lease
portfolio consisted of operating leases and finance leases. For
operating leases, lease revenue is recognized on a straight-line
basis in accordance with the terms of the lease
agreement.
Finance
lease interest income is recorded over the term of the lease using
the effective interest method. For finance leases, we record, at
lease inception, unearned finance lease income which is calculated
as follows: total lease payments, plus any residual value and
initial direct costs, less the cost of the leased
equipment.
Upon
the end of the lease term, if the lessee has not met the return
conditions as set out in the lease, the Partnership is entitled in
certain cases to additional compensation from the lessee. The
Partnership’s accounting policy for recording such payments
is to treat them as revenue.
Gains
or losses from sales of leased and off-lease equipment are recorded
on a net basis in the Partnership’s Statement of
Operations.
Gains
from the termination of leases are recognized when the lease is
modified and terminated concurrently. Gains from lease termination
included in lease revenue for the years ended December 31, 2018 and
2017 were approximately $0 and $3,000, respectively.
Recent Accounting Pronouncements Not Yet Adopted
In
December 2018, the FASB issued ASU No. 2018-20, Leases (Topic 842): Narrow-Scope Improvements
for Lessors, which is expected to reduce a lessor’s
implementation and ongoing costs associated with applying the new
leases standard. The ASU also clarifies a specific lessor
accounting requirement. Specifically, this ASU addresses
the following issues facing lessors when applying the leases
standard: Sales taxes and other similar taxes collected from
lessees, certain lessor costs paid directly by lessees and
recognition of variable payments for contracts with lease and
non-lease components. Under the new guidance, lessor
accounting is largely unchanged and the Partnership has concluded
that no significant changes are expected to the accounting for
revenues upon adoption of Topic 842.
In
March 2016, the FASB issued Accounting Standards Update No.
2016-02, Leases (Topic 842)
Section A—Leases: Amendments to the FASB Accounting Standards
Codification® Section B—Conforming Amendments Related to
Leases: Amendments to the FASB Accounting Standards
Codification® Section C—Background Information and Basis
for Conclusions- Effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal
years, for any of the following: A public business entity; A
not-for-profit entity that has issued, or is a conduit bond obligor
for, securities that are traded, listed, or quoted on an exchange
or an over-the-counter market; An employee benefit plan that files
financial statements with the U.S. Securities and Exchange
Commission (SEC). The new standard requires the recognition and
measurement of leases at the beginning of the earliest period
presented using a modified retrospective approach, which includes a
number of optional practical expedients that entities may elect to
apply. This guidance also expands the requirements for
lessees to record leases embedded in other arrangements and the
required quantitative and qualitative disclosures surrounding
leases. Additionally, our business involves lease agreements with
our customers whereby we are the lessor in the transaction.
Accounting guidance for lessors is largely unchanged. The
amendments are effective for fiscal years beginning after December
15, 2018, and interim periods within those fiscal
years. The Partnership does not anticipate any material
impact to its financial statements as a result of the new lessee
accounting.
Included within the scope of FASB Accounting Standards
Update No. 2016-02, Leases (Topic
842) is FASB Accounting Standards Update No. 2017-13, Revenue
Recognition (Topic 605), Revenue from Contracts with Customers
(Topic 606), Leases (Topic 840), and Leases (Topic 842);
Accounting Standards Update No. 2017-14, Income Statement—Reporting Comprehensive
Income (Topic 220), Revenue Recognition (Topic 605), and
Revenue from Contracts with
Customers (Topic 606) (SEC Update)(“ASC 606”);
FASB Accounting Standards Update No. 2018-10, Codification Improvements- Leases (Topic
842); FASB Accounting Standards Update No. 2018-11, Leases (Topic 842)Targeted
Improvements. The Partnership has determined that its income
streams fall outside the scope of ASC 606.
Equity Method Investment
The
Partnership accounts for its investment in COF2 under the equity
method in accordance with Accounting Standards Codification
(“ASC”) 323. Under the equity method, the
Partnership records its proportionate share of the Fund’s net
income (loss). Capital contributions, distributions and net
income (loss) of such entities are recorded in accordance with the
terms of the governing documents. An allocation of net income
(loss) may differ from the stated ownership percentage interest in
such entity as a result of distributions and allocation formulas,
if any, as described in such governing documents.
Other Assets
Equipment
acquisition costs and deferred expenses are amortized on a
straight-line basis over two-to-four year lives based on the
original term of the lease and loan, respectively. Unamortized
acquisition costs and deferred expenses are charged to amortization
expense when the associated leased equipment is sold.
Long-Lived Assets
Depreciation
on technology and inventory management equipment for financial
statement purposes is based on the straight-line method estimated
generally over useful lives of two to five years. Once an asset
comes off lease or is released, the Partnership reassesses the
useful life of an asset.
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,
third party appraisals or comparable sales of similar assets, as
applicable, based on asset type.
Residual
values are determined by management and are calculated using
information from both internal and external sources, as well as
other economic indicators.
Reimbursable Expenses
Reimbursable
expenses are comprised of both ongoing operational expenses and
fees associated with the allocation of salaries and benefits,
referred to as other LP 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. For example, if a partnership has more
investors than another program sponsored by CCC, then higher
amounts of expenses related to investor services, including mailing
and printing costs will be allocated to that partnership. Also,
while a partnership is in its offering stage, higher compliance
costs are allocated to it than to a program not in its offering
stage, as compliance resources are utilized to review incoming
investor suitability and proper documentation. Finally, lease
related expenses, such as due diligence, correspondence, collection
efforts and analysis and staff costs, increase as programs purchase
more leases, and decrease as leases terminate and equipment is
sold. All of these factors contribute to CCC’s determination
as to the amount of expenses to allocate to the Partnership or to
other sponsored programs. CCC is not reimbursed for salary and
benefit costs of control persons. For the Partnership, all
reimbursable items are expensed as they are incurred.
Lease Income Receivable
Lease
income receivable includes current lease income receivable net of
allowances for uncollectible amounts, if any. The Partnership
monitors lease income receivable to ensure timely and accurate
payment by lessees. The Partnership’s Lease Relations
department is responsible for monitoring lease income receivable
and, as necessary, resolving outstanding invoices.
The
Partnership reviews a customer’s credit history before
extending credit. When the analysis indicates that the probability
of full collection is unlikely, the Partnership may establish an
allowance for uncollectible lease income receivable based upon the
credit risk of specific customers, historical trends and other
information. The Partnership writes off its lease income receivable
when it determines that it is uncollectible and all economically
sensible means of recovery have been exhausted.
Cash and cash equivalents
We
consider cash and cash equivalents to be cash on hand and highly
liquid investments with the original maturity dates of 90 days or
less.
At
December 31, 2018, cash was held in one bank maintained at one
financial institution with an aggregate balance of approximately
$865,000. Bank accounts are federally insured up to $250,000 by the
FDIC. At December 31, 2018 and 2017, the total cash bank balance
was approximately as follows:
Balance at December 31
|
|
|
Total bank
balance
|
$865,000
|
$892,000
|
FDIC
insured
|
(250,000)
|
(250,000)
|
Uninsured
amount
|
$615,000
|
$642,000
|
The
Partnership believes it mitigates the risk of holding uninsured
deposits by only depositing funds with major financial
institutions. The Partnership has not experienced any losses in our
accounts, and believes it is not exposed
to any
significant credit risk. The amounts in such accounts will
fluctuate throughout 2019 due to many factors, including the pace
of cash receipts, equipment acquisitions, interest rates and
distributions to limited partners.
Income Taxes
Pursuant
to the provisions of Section 701 of the Internal Revenue Code, the
Partnership is not subject to federal or state income taxes. All
income and losses of the Partnership are the liability of the
individual partners and are allocated to the partners for inclusion
in their individual tax returns. The Partnership does not have any
entity-level uncertain tax positions. In addition, the Partnership
believes its tax status as a pass-through entity would be sustained
under U.S. Federal, state or local tax examination. The Partnership
files U.S. federal and various state income tax returns and is
generally subject to examination by federal, state and local income
tax authorities for three years from the filing of a tax
return.
Taxable
income differs from financial statement net income as a result of
reporting certain income and expense items for tax purposes in
periods other than those used for financial statement purposes,
principally relating to depreciation, amortization, and lease
revenue.
Net Loss Per Equivalent Limited Partnership Unit
The net
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 units outstanding during the
year.
3. Information Technology, Medical Technology, Telecommunications
Technology, Inventory Management Equipment and Other
Business-Essential Capital Equipment
(“equipment”)
The
Partnership is the lessor of equipment under leases with periods
that generally range from 12 to 48 months. In general, associated
costs such as repairs and maintenance, insurance and property taxes
are paid by the lessee.
Remarketing
fees will be 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 remain actively involved
with the lessee and encourages extensions, remarketing or sale of
equipment. This strategy is designed to minimize any conflicts the
leasing company may have with a new lessee and may assist in
maximizing overall portfolio performance. The remarketing fee is
tied into lease performance thresholds and is a factor in the
negotiation of the fee. Remarketing fees incurred in connection
with lease extensions are accounted for as operating costs.
Remarketing fees incurred in connection with the sale of equipment
are included in the gain or loss calculations. For the years ended
December 31, 2018 and 2017, there were no remarketing fees paid
with cash or netted against receivables due from such
parties.
The
Partnership’s share of the cost of the equipment in which it
participates with other partnerships at December 31, 2018 was
approximately $10,206,000 and is included in the
Partnership’s equipment on its balance sheet. The
Partnership’s share of the outstanding debt associated with
this equipment at December 31, 2018 was approximately $1,786,000
and is included in the Partnership’s notes payable on its
balance sheet. The total cost of the equipment shared by the
Partnership with other partnerships at December 31, 2018 was
approximately $23,912,000. The total outstanding debt related to
the equipment shared by the Partnership at December 31, 2018 was
approximately $3,875,000.
The
Partnership’s share of the cost of the equipment in which it
participates with other partnerships at December 31, 2017 was
approximately $9,539,000 and is included in the Partnership’s
equipment on its balance sheet. The Partnership’s share of
the outstanding debt associated with this equipment at December 31,
2017 was approximately $1,978,000 and is included in the
Partnership’s notes payable on its balance sheet. The total
cost of the equipment shared by the Partnership with other
partnerships at December 31, 2017 was approximately $22,802,000.
The total outstanding debt related to the equipment shared by the
Partnership at December 31, 2017 was approximately
$4,583,000.
As the
Partnership and the other programs managed by the General Partner
increase their overall portfolio size, opportunities for shared
participation are expected to continue. Sharing in the acquisition
of a lease portfolio gives the fund an opportunity to acquire
additional assets and revenue streams, while allowing the fund to
remain diversified and reducing its overall risk with respect to
one portfolio. As additional investment opportunities arise for
2019, the Partnership expects total shared equipment and related
debt to trend higher as the Partnership builds its
portfolio.
The
following is a schedule of approximate future minimum rentals on
non-cancellable operating leases:
|
|
2019
|
$1,562,000
|
2020
|
1,119,000
|
2021
|
301,000
|
|
$2,982,000
|
Finance Leases:
The
following lists the approximate components of the net investment in
finance leases:
At December 31,
|
|
|
Total minimum lease
payments to be received
|
$2,000
|
$70,000
|
Estimated residual
value of leased equipment (unguaranteed)
|
3,000
|
54,000
|
Initial direct
costs finance leases
|
-
|
1,000
|
Less: unearned
income
|
-
|
(3,000)
|
Net investment in
finance leases
|
$5,000
|
$122,000
|
We
assess credit risk for all of our customers, including those that
lease under finance leases. This credit risk is assessed using an
internally developed model which incorporates credit scores from
third party providers and our own customer risk ratings and is
periodically reviewed. Our internal ratings are weighted based on
the industry that the customer operates in. Factors taken into
consideration when assessing risk includes both general and
industry specific qualitative and quantitative metrics. We
separately take in to consideration payment history, open lawsuits,
liens and judgments. Typically, we will not extend credit to a
company that has been in business for less than 5 years or that has
filed for bankruptcy within the same period. Our internally based
model may classify a company as high risk based on our analysis of
their audited financial statements and their payment history.
Additional considerations of high risk may include history of late
payments, open lawsuits and liens or judgments. In an effort to
mitigate risk, we typically require deposits from those in this
category.
A
reserve for credit losses is deemed necessary when payment has not
been received for one or more months of receivables due on the
equipment held under finance leases. At the end of each period,
management evaluates the open receivables due on this equipment and
determines the need for a reserve based on payment history and any
current factors that would have an impact on payments.
The
following table presents the credit risk profile, by
creditworthiness category, of our finance lease receivables at
December 31, 2018:
|
Percent of Total
|
Risk Level
|
2018
|
2017
|
Low
|
-%
|
-%
|
Moderate-Low
|
-%
|
50%
|
Moderate
|
-%
|
-%
|
Moderate-High
|
100%
|
50%
|
High
|
-%
|
-%
|
Net Finance lease receivable
|
100%
|
100%
|
As of
the year ended December 31, 2018 we determined that we did not have
a need for an allowance for uncollectible accounts associated with
any of our finance leases, as the customer payment histories with
us, associated with these leases, has been positive.
The
Partnership’s share of the net investment in finance leases
in which it participates with other partnerships and is included on
its balance sheets at December 31, 2018 and 2017, was approximately
$0 and $56,000, respectively. The total net investment in finance
leases shared by the Partnership with other partnerships at
December 31, 2018 and 2017 was approximately $0 and $112,000,
respectively.
The
following is a schedule of approximate future minimum rentals on
non-cancelable finance leases:
Years Ended December
31,
|
|
2019
|
$2,000
|
|
$2,000
|
4. Significant Customers
Lessees
equal to or exceeding 10% of lease revenue:
Years Ended December 31,
|
|
2018
|
|
2017
|
Alliant
Techsystems
|
|
40%
|
|
37%
|
Cummins,
Inc.
|
|
22%
|
|
23%
|
Automatic
Data Processing
|
|
12%
|
|
11%
|
Hofstra
University
|
|
12%
|
|
**
|
**
Represents less than 10% of lease revenue
Lessees
equal to or exceeding 10% of lease income receivable:
At December 31,
|
|
2018
|
|
2017
|
Cummins,
Inc.
|
|
34%
|
|
33%
|
Cargill,
Inc.
|
|
**
|
|
26%
|
Advanced
Data Processing
|
|
27%
|
|
**
|
Raytheon
|
|
20%
|
|
13%
|
** Represents less than 10% of lease income
receivable
5. Investment in COF 2
On August 13, 2015, the Partnership purchased 1,648 units for
$1,500,000, of Commonwealth Opportunity Fund 2 (“COF
2”), an affiliate fund of the General Partner. In accordance
with the Partnership Agreement, the Partnership is permitted to
invest in equipment programs formed by the General Partner or its
affiliates. COF 2 is an affiliate program that broke escrow on
August 13, 2015. The General Partner believes this action is in the
best interests of all the Programs. The Partnership accounts for
its investment in COF 2 under the equity method in accordance with
ASC 323. The Partnership’s net investment in COF 2 at
December 31, 2018 and 2017 was approximately $790,000 and $961,000,
respectively (see COF 2 Financial Summary below). For the year
ended December 31, 2018, COF 2 declared distributions to the
Partnership of approximately $49,000 of which approximately $37,000
was paid in 2018 and approximately $12,000 is recorded as a
receivable from COF 2 at December 31, 2018.
COF 2 Summarized Financial Information
|
|
|
|
Assets
|
$3,214,356
|
$3,920,000
|
|
$960,139
|
$1,162,000
|
|
$2,254,217
|
$2,758,000
|
|
$1,318,959
|
$1,331,000
|
|
$1,677,271
|
$1,802,000
|
|
$(358,312)
|
$(471,000)
|
6. Related Party Transactions
Receivables/Payables
As of
December 31, 2018 and 2017, the Partnership’s related party
receivables and payables are short term, unsecured, non-interest
bearing, and are presented net of related party receivables of
approximately $1,265,000 and $1,510,000 at December 31, 2018 and
2017, respectively, and related party payables of approximately
$343,000 and $307,000 at December 31, 2018 and 2017,
respectively.
ENTITY RECEIVING COMPENSATION
|
|
AMOUNT INCURRED DURING 2018
|
AMOUNT
INCURRED DURING 2017
|
The General
Partner
|
Reimbursable Expenses. The General
Partner and its affiliates are entitled to reimbursement by the
Partnership for the cost of goods, supplies or services obtained
and used by the general partner, not including costs of the control
persons, as defined in Item 10, in connection with the
administration and operation of the partnership from third parties
unaffiliated with the General Partner. The amounts set forth on
this table do not include expenses incurred in the offering of
units. For the years ended December 31, 2018 and 2017, the
Partnership was charged approximately $619,000 and $504,000 in
other LP expense, respectively.
|
$1,063,000
|
$983,000
|
The General
Partner and its Affiliates
|
Equipment Acquisition Fee. The General
Partner earned 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. At December 31, 2018,
the prepaid acquisition fees balance was $0. For the year
ended December 31, 2018, equipment acquisition fees earned by the
General Partner for operating and finance leases was approximately
$34,000 and $0, respectively.
|
$34,000
|
$160,000
|
The General
Partner
|
Debt Placement
Fee. As compensation for
arranging term debt to finance our acquisition of equipment, we
will pay the general partner a fee equal to one percent of such
indebtedness; provided, however, that such fee shall be reduced to
the extent we incur such fees to third parties unaffiliated with
the general partner or the lender with respect to such
indebtedness. No such fee will be paid with respect to borrowings
from the general partner or its affiliates. We intend to initially
acquire leases on an all cash basis with the proceeds of this
offering, but may borrow funds after the offering proceeds have
been invested. The amount we borrow, and therefore the amount of
the fee, will depend upon interest rates at the time of a loan, and
the amount of leverage we determine is appropriate at the time. We
do not intend to use more than 30% leverage overall in our
portfolio. Fees will increase as the amount of leverage we use
increases, and as turnover in the portfolio increases and
additional equipment is purchased using
leverage.
|
$7,000
|
$33,000
|
The General
Partner
|
Equipment Management
Fee. A monthly fee equal to the
lesser of (a) the fees which would be charged by an independent
third party in the same geographic market for similar services and
similar equipment or (b) the sum of (i) two percent of the gross
lease revenues attributable to equipment subject to full payout net
leases which contain net lease provisions and (ii) five percent of
the gross lease revenues attributable to equipment subject to
operating leases and (iii) two percent of the gross lease revenues
attributable to equipment subject to finance
leases.
|
$121,000
|
$124,000
|
The General
Partner
|
Equipment Liquidation
Fee. With respect to each item
of equipment sold by the general partner, 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
this 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 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.
|
$7,000
|
$8,000
|
7. Notes
Payable
Notes payable consisted of the following approximate
amounts:
|
|
|
2018
|
|
Installment
note payable to bank; interest at 4.23% due in quarterly
installments ranging from $458, including interest, with final
payment in February 2018
|
-
|
7,000
|
Installment
notes payable to bank; interest at 4.23% due in quarterly
installments ranging from $458, including interest, with final
payment in March 2018
|
-
|
1,000
|
Installment
note payable to bank; interest at 4.85% due in monthly installments
of $1,238, including interest; with final payment in March
2018
|
-
|
4,000
|
Installment
note payable to bank; interest at 3.68% due in monthly installments
of $4,528, including interest; with final payment in May
2018
|
-
|
22,000
|
Installment
notes payable to bank; interest at 4.23% due in quarterly
installments ranging from $266 to $352, including interest, with
final payment in October 2018
|
-
|
2,000
|
Installment
notes payable to bank; interest at 6.00% due in monthly
installments ranging from $351 to $5,522, including interest, with
final payment in October 2018
|
-
|
21,000
|
Installment
note payable to bank; interest at 1.80% due in monthly installments
of $2,533, including interest; with final payment in April
2019
|
10,000
|
40,000
|
Installment
note payable to bank; interest at 1.80% due in monthly installments
of $8,677, including interest; with final payment in May
2019
|
43,000
|
145,000
|
Installment
notes payable to bank; interest at 6.00% due in monthly
installments ranging from $101 to $831, including interest, with
final payment in July 2019
|
2,000
|
11,000
|
Installment
note payable to bank; interest at 4.98% due in monthly installments
of $2,807, including interest, with final payment in September
2019
|
25,000
|
56,000
|
Installment
note payable to bank; interest at 4.37% due in monthly installments
of $16,273, including interest, with final payment in April
2020
|
94,000
|
153,000
|
Installment
note payable to bank; interest at 5.49% due in monthly installments
of $4,177, including interest, with final payment in January
2020
|
53,000
|
99,000
|
Installment
note payable to bank; interest at 5.93% due in monthly installments
of $3,324, including interest, with final payment in February
2020
|
45,000
|
81,000
|
Installment
note payable to bank; interest at 5.25% due in quarterly
installments of $3,836, including interest, with final payment in
March 2020
|
18,000
|
32,000
|
Installment
note payable to bank; interest at 5.25% due in quarterly
installments of $25,557, including interest, with final payment in
April 2020
|
146,000
|
238,000
|
Installment
note payable to bank; interest at 4.88% due in monthly installments
of $1,363, including interest, with final payment in May
2020
|
22,000
|
37,000
|
Installment
note payable to bank; interest at 5.66% due in quarterly
installments of $29,292, including interest, with final payment in
October 2020
|
220,000
|
321,000
|
Installment
note payable to bank; interest at 5.62% due in quarterly
installments of $2,897, including interest, with final payment in
July 2020
|
19,000
|
29,000
|
Installment
note payable to bank; interest at 4.55% due in monthly installments
ranging from $1,723 to $14,777, including interest, with final
payment in August 2020
|
317,000
|
497,000
|
Installment
note payable to bank; interest at 5.25% due in monthly installments
of $2,463, including interest, with final payment in October
2020
|
52,000
|
83,000
|
Installment
note payable to bank; interest at 5.31% due in monthly installments
of $52,336, including interest, with final payment in January
2021
|
441,000
|
624,000
|
Installment
note payable to bank; interest at 6.0% due in quarterly
installments of $74,533, including interest, with final payment in
January 2021
|
623,000
|
952,000
|
Installment
notes payable to bank; interest at 5.33% due in monthly
installments ranging from $4,312 to $15,329, including interest,
with final payment in August 2021
|
585,000
|
-
|
|
$2,715,000
|
$3,455,000
|
The
notes are secured by specific technology equipment with a carrying
value of approximately $3,780,000 and are nonrecourse liabilities
of the Partnership. As such, the notes do not contain any financial
debt covenants with which we must comply on either an annual or
quarterly basis. Aggregate approximate maturities of notes payable
for each of the periods subsequent to December 31, 2018 are as
follows:
Years Ended December 31,
|
|
Amount
|
|
2019
|
|
$
|
1,353,000
|
|
2020
|
|
|
1,083,000
|
|
2021
|
|
|
279,000
|
|
|
|
$
|
2,715,000
|
|
During
2015, the General Partner executed a collateralized debt financing
agreement on behalf of certain affiliates for a total shared loan
amount of approximately $847,000, of which the Partnership’s
share was approximately $290,000. The Partnership’s portion
of the current loan amount at December 31, 2018 was approximately
$2,000 and is secured by specific equipment under both operating
and finance leases. The Partnership’s portion of the carrying
value of the secured equipment under operating leases is
approximately $0. The Partnership’s portion of the
carrying value of the secured equipment under finance leases is
approximately $5,000.
8. Supplemental Cash Flow Information
No
interest or principal on notes payable was paid by the Partnership
during 2018 and 2017 because direct payment was made by lessee to
the bank in lieu of collection of lease income and payment of
interest and principal by the Partnership.
Noncash
investing and financing activities approximately include the
following:
Years Ended December 31,
|
|
|
Debt assumed in
connection with purchase of technology equipment
|
$658,000
|
$3,255,000
|
Accrual for
distribution to partners paid in January 2019
|
$77,000
|
$77,000
|
Equipment
acquisition fees earned by General Partner upon purchase of
equipment from prepaid acquisition fees
|
$34,000
|
$139,000
|
Receivable for
distribution from investment in COF2
|
$12,000
|
$12,000
|
During
the years ended December 31, 2018 and 2017, the Partnership wrote
off fully amortized acquisition and finance fees of approximately
$21,000 and $158,000, respectively.
During
the years ended December 31, 2018 and 2017, the Partnership
wrote-off fully depreciated equipment of approximately $0 and
$1,291,000, respectively.
9. Commitments and Contingencies
Medshare
In
January 2015, CCC, on behalf of the Funds, entered into a Purchase
Agreement (“Purchase Agreement”) for the sale of the
equipment to Medshare Technologies (“Medshare”) for
approximately $3,400,000. The Partnership’s share of
the sale proceeds was approximately $1,033,000. As of April
1, 2019, the Partnership had received approximately $728,000 of the
approximate $1,033,000 sale proceeds and has recorded a reserve of
$239,000 against the outstanding receivables. On April 3,
2015 Medshare was obligated to make payment in full and failed to
do so. As a result, Medshare defaulted on its purchase
agreement with CCC and was issued a demand letter for full payment
of the equipment. On June 25, 2015, Medshare filed a lawsuit
in Texas state court for breach of contract (“State
Suit”). On June 26, 2015, Commonwealth filed a lawsuit
in the Northern District of Texas against Medshare seeking payment
in full and/or return of the Equipment and
damages.
In July
2016, CCC, on behalf of the Funds, entered into a $1,400,000
binding Settlement Agreement (“Settlement Agreement”)
with Medshare and its principal owner, Chris Cleary (collectively
referred to as “Defendants”), who are held jointly and
severally liable for the entire settlement. On August 2,
2016, the Defendants made payment to CCC of an initial $200,000 to
be followed by 24 structured monthly payments of approximately
$50,000 per month to begin no later than September 15, 2016.
The Partnership’s share of the Settlement Agreement is
approximately $453,000 and is to be applied against the net
Medshare receivable of approximately $350,000 as of the settlement
date. The remaining $103,000 will be applied against the $239,000
reserve and recorded as a bad debt recovery. As of April 1,
2019, the Partnership received approximately $182,000 of the
approximate $453,000 settlement agreement which was applied against
the net Medshare receivable of approximately $350,000 as of the
settlement date. As Defendant defaulted on settlement
agreement, CCC sought and obtained consent judgement from U.S.
District Court for Northern District of Texas, Dallas Division on
July 27, 2017 in the amount of $1.5 million, less $450,000
previously paid plus $6,757 in attorney fees, both the Defendant
and Cleary being jointly and severally liable for the judgement
amount. The court also vacated the September 21, 2016
settlement dismissal.
On July
27, 2017 Defendant filed Chapter 11 in Northern District of Texas
Dallas Division. On July 26, 2017 Legacy Texas Bank, a
secured creditor of the Defendant filed for a TRO in the U.S.
District Court of the Northern District of Texas, Dallas Division.
Included with the TRO filing was a request for appointment of
trustee for operation of Defendant, which was granted and the case
converted to Chapter 7. On December 18, 2018 the Bankruptcy Court
entered final order and issued its last payment to CCC in March
2019 of approximately $43,000, of which the Partnership’s
share was approximately $14,000. Although the trustee’s
final distribution to Commonwealth did not fully satisfy the
judgment, recovery may still be pursued directly against Cleary. As
such, management believes that the foregoing will not result
in any adverse financial impact on the Funds, but no assurance can
be provided until the proceedings are resolved.
FINRA
On May 3, 2013, the FINRA Department of Enforcement filed a
complaint naming Commonwealth Capital Securities Corp.
(“CCSC”) and the owner of the firm, Kimberly
Springsteen-Abbott, as respondents; however on October 22, 2013,
FINRA filed an amended complaint that dropped the allegations
against CCSC and reduced the scope of the allegations against Ms.
Springsteen-Abbott. The sole remaining charge was that Ms.
Springsteen-Abbott had approved the misallocation of some expenses
to certain Funds. Management believes that the expenses at
issue include amounts that were proper and that were properly
allocated to Funds, and also identified a smaller number of
expenses that had been allocated in error, but were adjusted and
repaid to the affected Funds when they were identified in
2012. During the period in question, Commonwealth Capital
Corp. (“CCC”) and Ms. Springsteen-Abbott provided
important financial support to the Funds, voluntarily absorbed
expenses and voluntarily waived fees in amounts aggregating in
excess of any questioned allocations. A Hearing Panel ruled
on March 30, 2015, that Ms. Springsteen-Abbott should be barred
from the securities industry because the Panel concluded that she
allegedly misallocated approximately $208,000 of expenses involving
certain Funds over the course of three years. As such,
management had allocated approximately $87,000 of the $208,000 in
allegedly misallocated expenses back to the affected funds as a
contingency accrual in CCC’s financial statements and a good
faith payment for the benefit of those Income Funds.
The decision of the Hearing Panel was stayed when it was appealed
to FINRA's National Adjudicatory Council (the “NAC”)
pursuant to FINRA Rule 9311. The NAC issued a decision that
upheld the lower panel’s ruling and the bar took effect on
August 23, 2016. Ms. Springsteen-Abbott appealed the
NAC’s decision to the U.S. Securities and Exchange Commission
(the “SEC”). On March 31, 2017, the SEC
criticized that decision as so flawed that the SEC could not even
review it, and remanded the matter back to FINRA for further
consideration consistent with the SEC’s remand, but did not
suggest any view as to a particular outcome.
On July 21, 2017, FINRA reduced the list of 1,840 items totaling
$208,000 to a remaining list of 84 items totaling $36,226 (which
includes approximately $30,000 of continuing education expenses for
personnel providing services to the Funds), and reduced the
proposed fine from $100,000 to $50,000, but reaffirmed its position
on the bar from the securities industry. Respondents promptly
appealed FINRA’s revised ruling to the SEC. That appeal is
pending as of April 1, 2019. All requested or allowed briefs
have been filed with the SEC. Management believes that
whatever final resolution of this may be, it will not result in any
material adverse financial impact on the Funds, although a final
assurance cannot be provided until the legal matter is
resolved.
10. Reconciliation of
Amounts Reported for Financial Reporting Purposes to Amounts on the
Federal Partnership Return (Unaudited)
The tax
basis of the Company’s net assets and liabilities vary from
the amounts presented in these financial statements at December 31,
2018 and 2017 as follows:
Years Ended December 31,
|
|
|
Financial statement
basis of net assets
|
$3,824,661
|
$4,948,688
|
Tax basis of net
assets (unaudited)
|
2,216,006
|
4,124,019
|
Difference
(unaudited)
|
$(1,608,655)
|
$(824,669)
|
The
primary differences between the tax basis of net assets and the
amounts recorded in the financial statements are the result of
differences in accounting for impairment losses, syndication costs
and differences between the depreciation methods used in the
financial statements and the Partnership’s tax returns
(unaudited).
Years Ended December 31,
|
|
|
Net
loss for financial reporting purposes to taxable (loss)
income
|
$(757,157)
|
$(1,381,508)
|
Loss on sale of
equipment
|
(32,756)
|
(15,107)
|
Depreciation
|
5,496
|
(1,592,741)
|
Amortization
|
48,372
|
46,575
|
Unearned lease
income
|
(780,028)
|
699,636
|
Penalties
|
(1,977)
|
9,356
|
Bad
debts
|
80,959
|
20,910
|
*Other
|
(103,289)
|
628,854
|
Taxable
(loss) income on the Federal Partnership return
(unaudited)
|
$(1,540,380)
|
$(1,584,025)
|
*Other-
includes financial statement adjustments that will be reflected on
the tax return in the subsequent year.
F-18