Washington, D.C. 20549
Brandywine Bldg. One, Suite 200
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
| Commonwealth Income & Growth Fund V | |
| Condensed Statements of Partners’ Capital | |
| For the Three Months ended March 31, 2008 | |
| (unaudited) | |
| | |
| | | | | | | | | | | | | | | | |
| | | General | | | Limited | | | | | | | | | | |
| | | Partner | | | Partner | | | General | | | Limited | | | | |
| | | Units | | | Units | | | Partner | | | Partners | | | Total | |
| Balance, January 1, 2008 | | | 50 | | | | 1,249,951 | | | $ | 1,000 | | | $ | 14,880,274 | | | $ | 14,881,274 | |
| Net income (loss) | | | - | | | | - | | | | 6,250 | | | | (98,861 | ) | | | (92,611 | ) |
| Distributions | | | - | | | | - | | | | (6,250 | ) | | | (618,724 | ) | | | (624,974 | ) |
| Balance, March 31, 2008 | | | 50 | | | | 1,249,951 | | | $ | 1,000 | | | $ | 14,162,689 | | | $ | 14,163,689 | |
see accompanying notes to condensed financial statements
| Commonwealth Income & Growth Fund V | |
| Condensed Statements of Cash Flow | |
| | |
| | | Three Months Ended | |
| | | March 31, | |
| | | 2008 | | | 2007 | |
| | | (unaudited) | |
| | | | | | | |
| | | | | | | |
| Net cash provided by operating activities | | $ | 734,134 | | | $ | 1,311,737 | |
| | | | | | | | | |
| Capital expenditures | | | (512,509 | ) | | | (887,764 | ) |
| Prepaid acquisition fees | | | 20,500 | | | | 32,097 | |
| Net proceeds from the sale of computer equipment | | | 4,856 | | | | - | |
| Equipment acquisition fees paid to General Partner | | | (20,500 | ) | | | (58,463 | ) |
| Net cash (used in) provided by investing activities | | | (507,653 | ) | | | 914,130 | |
| | | | | | | | | |
| Distributions to partners | | | (624,974 | ) | | | (624,974 | ) |
| Debt Placement fees paid to General Partner | | | - | | | | (5,738 | ) |
| Net cash (used in) financing activities | | | (624,974 | ) | | | (630,712 | ) |
| | | | | | | | | |
| Net decrease in cash and cash equivalents | | | (398,493 | ) | | | (233,105 | ) |
| Cash and cash equivalents, beginning of period | | | 4,114,953 | | | | 7,071,792 | |
| | | | | | | | | |
| Cash and cash equivalents, end of period | | $ | 3,716,460 | | | $ | 6,838,687 | |
| Commonwealth Income & Growth Fund V | |
| Condensed Statements of Partners' Capital | |
| For the three months ended March 31, 2009 | |
| (unaudited) | |
| | |
| | | General Partner Units | | | Limited Partner Units | | | General Partner | | | Limited Partner | | | Total | |
| Balance, January 1, 2009 | | | 50 | | | | 1,245,852 | | | $ | 1,000 | | | $ | 11,288,864 | | | $ | 11,289,864 | |
| Net Income (loss) | | | - | | | | - | | | | 6,227 | | | | (380,887 | ) | | | (374,660 | ) |
| Redemptions | | | - | | | | (2,000 | ) | | | - | | | | (22,249 | ) | | | (22,249 | ) |
| Distributions | | | - | | | | - | | | | (6,227 | ) | | | (616,363 | ) | | | (622,589 | ) |
| Balance, March 31, 2009 | | | 50 | | | | 1,243,852 | | | $ | 1,000 | | | $ | 10,269,365 | | | $ | 10,270,365 | |
see accompanying notes to condensed financial statements
| Commonwealth Income & Growth Fund V | |
| Condensed Statements of Cash Flow | |
| | | | | | | |
| | | Three Months ended | | | Three Months ended | |
| | | March 31, | | | March 31, | |
| | | 2009 | | | 2008 | |
| | | (unaudited) | | | (unaudited) | |
| | | | | | | |
| Net cash provided by operating activities | | $ | 627,014 | | | $ | 734,134 | |
| | | | | | | | | |
| Investing activities: | | | | | | | | |
| Capital Expenditures | | | (1,124,779 | ) | | | (512,509 | ) |
| Prepaid acquisition fees | | | 44,991 | | | | 20,500 | |
| Net proceeds from the sale of computer equipment | | | 10,979 | | | | 4,856 | |
| Equipment acquisition fees, General Partner | | | (44,991 | ) | | | (20,500 | ) |
| Net cash (used in) investing activities | | | (1,113,800 | ) | | | (507,653 | ) |
| | | | | | | | | |
| Financing activities: | | | | | | | | |
| Redemptions | | | (22,249 | ) | | | - | |
| Distributions to partners | | | (622,590 | ) | | | (624,974 | ) |
| Net cash (used in) financing activities | | | (644,839 | ) | | | (624,974 | ) |
| | | | | | | | | |
| Net (decrease) in cash | | | (1,131,625 | ) | | | (398,493 | ) |
| Cash beginning of period | | | 3,053,703 | | | | 4,114,953 | |
| | | | | | | | | |
| Cash end of period | | $ | 1,922,078 | | | $ | 3,716,460 | |
see accompanying notes to condensed financial statements
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Business
Commonwealth Income & Growth Fund V (the “Partnership”) is a limited partnership organized in the Commonwealth of Pennsylvania on May 19, 2003. The Partnership offered for sale up to 1,250,000 units of the limited partnership at the purchase price of $20 per unit (the “Offering”). The Partnership reached the minimum amount in escrow and commenced operations on March 14, 2005. As of February 24, 2006, the Partnership was fully subscribed.
The Partnership used the proceeds of the Offering to acquire, own and lease various types of information technology (I.T.) 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 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 Investment Program Association (IPA), Financial Planning Association (FPA), 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 computer equipment, make final distributions to partners and to dissolve. Unless sooner terminated, the Partnership will continue until December 31, 2015.
2. Summary of Significant Accounting Policies
Recent Accounting Pronouncements
Management’s assessment of the following accounting pronouncements has changed since disclosed in its Form 10K for December 31, 2007.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities, including an amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to choose, at specified election dates, to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses will be reported on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157 “Fair Value Measurements” (“SFAS No. 157”). As of January 1, 2008 the Partnership adopted SFAS No. 159. The Partnership has not elected the fair value option for any financial assets or liabilities.
In September 2006, the FASB issued Statement of Financial Accounting Standards 157, “Fair“Fair Value Measurements” (“SFAS 157”), which provides guidance on measuring the fair value of assets and liabilities. SFAS 157 applies to other accounting pronouncements that require or permit assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. This standard also requires additional disclosures in both annual and quarterly reports. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and will be adopted by the Partnership in the first quarter of its fiscal year 2008. In February 2008, the FASB issued two Staff Positions on SFAS 157: (1) FASB Staff Position No. FAS 157-1 (FAS 157-1), “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement Under Statement 13,” and (2) FASB Staff Position No. FAS 157-2 (FAS 157-2),“Effective Date of FASB Statement No 157.” FAS 157-1 excludes FASB Statement No. 13, Accounting for Leases, as well as other accounting pronouncements that address fair value measurements on lease classification or measurement under Statement 13, from SFAS 157’s scope. FAS157-2 partially defers Statement 157’s effective date. As of January 1, 2008 the Partnership partially adopted SFAS No. 157 for all financial assets. Adoption of this pronouncement did not impact the 2008 financial statements of the PartnershipPartnership. In February 2008, FASB issued FSP FAS 157-2 to provide a one-year deferral of the effective date of Statement 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed in financial statements at March 31,fair value on a recurring basis (that is, at least annually). The adoption of SFAS 157-2 on January 1, 2009 did not have a material impact on the Partnership’s financial statements.
In January 2009, FASB issued FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20 (“FSP EITF 99-20-1”). FSP EITF 99-20-1 is effective for interim and annual periods ending after December 15, 2008. Retroactive application is not permitted. The adoption of FSP EITF 99-20-1 did not have a significant impact on the Partnership’s financial position or results of operations.
In April 2009, the FASB issued FASB Staff Position No. 107-1 (“FSP FAS 107-1”) and APB 28-1 (“APB 28-1”), which amends FASB Statement No. 107, Disclosures about Fair Value of ContentsFinancial Instruments and APB Opinion NO. 28, Interim Financial Reporting, to require disclosures about the fair value of financial instruments for interim reporting periods. FSP FAS 107-1 and APB 28-1 will be effective for interim reporting periods ending after June 15, 2009. The adoption of this staff position is not expected to have a material impact on the Partnership’s financial position or results of operation
Basis of Presentation
The financial information presented as of any date other than December 31, 20072008 has been prepared from the books and records without audit. Financial information as of December 31, 20072008 has been derived from the audited financial statements of the Partnership, but does not include all disclosures required by generally accepted accounting principles to be included in audited financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information for the periods indicated, have been included. For further information regarding the Partnership’s accounting policies, refer to the financial statements and related notes included in the Partnership’s annual report on Form 10-K for the year ended December 31, 2007.2008. Operating results for the three months ended March 31, 20082009 are not necessarily indicative of financial results that may be expected for the full year ended December 31, 2008.2009.
Long-Lived Assets
The Partnership evaluates its long-lived assets when events or circumstances indicate that the value of the asset may not be recoverable. The Partnership determines whether an 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 an impairment exists. The amount of the impairment is determined based on the difference between the carrying value and the fair value. Fair value is determined based on estimated discounted cash flows to be generated by the asset. The Partnership determined that no impairment existed as ofat March 31, 20082009 and March 31, 2007.2008.
Depreciation on computer equipment for financial statement purposes is based on the straight-line method estimated generally over estimated useful lives of three to four years.
Reimbursable Expenses
Reimbursable expenses, which are charged to the Partnership by CCC in connection with the administration and operation of the Partnership, are allocated to the Partnership based upon several factors including, but not limited to, the number of investors, compliance issues, and the number of existing leases. For example, if the Partnership has more investors than another program sponsored by CCC, then higher amounts of expenses related to investor services, mailing and printing costs will be allocated to the 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 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. For the Partnership, all reimbursable expenses are expensed as they are incurred.
Cash
At March 31, 2009 cash was held in two accounts maintained at one financial institution. The accounts were, in the aggregate, federally insured for up to $250,000. At March 31, 2009, the total cash balance was as follows:
| At March 31, 2009 | | | |
| Total balance Bank | | $ | 2,442,071 | |
| FDIC insurable limit | | $ | 250,000 | |
| Exceeded FDIC limit by | | $ | 2,192,071 | |
| | | | | |
The Partnership can mitigate this risk by depositing funds with more than one institution and by only depositing funds with major financial institutions. The Partnership has not experienced any losses in such accounts, and believes it is not exposed to any significant credit risk. The amount in such accounts will fluctuate throughout 2009 due to many factors, including the pace of additional revenues, equipment acquisitions and distributions.
Net Income (Loss) Per Equivalent Limited Partnership Unit
The net income (loss) per equivalent limited partnership unit is computed based upon net income (loss) allocated to the limited partners and the weighted average number of equivalent units outstanding during the period.
3. Computer Equipment
The Partnership is the lessor of equipment under operating leases with periods generally ranging from 1112 to 3648 months. In general, associated costs such as repairs and maintenance, insurance and property taxes are paid by the lessee.
Through March 31, 2008,2009, the Partnership has only entered into operating leases. Lease revenue is recognized on the monthly straight-line basis which is generally in accordance with the terms of the operating lease agreements. The company’s leases do not contain any step-rent provisions or escalation clauses nor are lease revenues adjusted based on any index.
Remarketing fees are paid to the leasing companies from which the Partnership purchases leases. These are fees that are earned by the leasing companies when the initial terms of the lease have been met and the equipment is re-leased or sold. The General Partner believes that this strategy adds value since it entices the leasing company to "stay with the lease" for potential extensions, remarketing or sale of equipment. This strategy potentially minimizes any conflicts the leasing company may have with a potential new lease and will potentially assist in maximizing overall portfolio performance. The remarketing fee is tied into lease performance thresholds and is factored in the negotiation of the fee. Remarketing fees incurred in connection with lease extensions are accounted for as operating costs. Remarketing fees incurred in connection with the sale of computer equipment are included in our gain or loss calculations. For the three months ended March 31, 2009 and 2008, the Partnership incurred remarketing fees were incurred in the amount of approximately $3,000.$7,000 and $2,600, respectively. For the three months ended March 31, 2009 the Partnership paid approximately $5,000 in such fees. No remarketingsuch fees were incurredpaid for the three months ended March 31, 2007.2008.
The Partnership’s share of the computer equipment in which it participates with other partnerships at March 31, 20082009 and December 31, 20072008 was approximately $8,693,000$9,920,000 and $8,381,000,$9,480,000, respectively, which is included in the Partnership’s fixed assets on its balance sheet. The total cost of the equipment shared by the Partnership with other partnerships at March 31, 20082009 and December 31, 20072008 was approximately $19,172,000$25,068,000 and $17,371,000,$23,272,000, respectively. The Partnership’s share of the outstanding debt associated with this equipment at March 31, 20082009 and December 31, 20072008 was $1,456,000$923,000 and $1,683,000,$1,183,000, respectively. The total outstanding debt related to the equipment shared by the Partnership at March 31, 20082009 and December 31, 20072008 was $2,745,000approximately $2,728,000 and $3,187,000,$3,349,000, respectively.
The following is a schedule of future minimum rentals on noncancellable operating leases at March 31, 2008:2009:
| | | Amount | |
| | | | |
| NiNine months ending December 31, 2008 | | $ | 4,848,685 | |
| Year ended December 31, 2009 | | | 3,383,955 | |
| Year ended December 31, 2010 | | | 436,992 | |
| Year ended December 31, 2011 | | | 8,481 | |
| | | $ | 8,678,113 | |
| | | | | |
| | | Amount | |
| | | | |
| Nine months ended December 31, 2009 | | $ | 3,746,203 | |
| Year ended December 31, 2010 | | | 1,330,970 | |
| Year ended December 31, 2011 | | | 569,544 | |
| Year ended December 31, 2012 | | | 112,855 | |
| | | $ | 5,759,572 | |
| | | | | |
4. Related Party Transactions
Receivables/Payables
As of March 31, 2008,2009, the Partnership’s related party receivables and payables are short term, unsecured, and non-interest bearing.
Reimbursable Expenses
The General Partner and its affiliates are entitled to reimbursement by the Partnership for the costSee “Summary of supplies and services obtained and used by the General Partner in connection with the administration and operation of the Partnership from third parties unaffiliated with the General Partner. In addition, the General Partner and its affiliates are entitled to reimbursement for certain expenses incurred by the General Partner and its affiliates in connection with the administration and operation of the Partnership.Significant Accounting Policies- Reimbursable Expenses,” above. During the three months ended March 31, 20082009 and 2007,2008, the Partnership recorded approximately $376,000$341,000 and $163,000,$376,000, respectively, for reimbursement of expenses to the General Partner.
Offering Costs
Offering costs are payments for selling commissions, dealer manager fees, professional fees and other offering expenses relating to the syndication of the Partnership’s units. Selling commissions are 8% of the partners’ contributed capital and dealer manager fees are 2% of the partners’ contributed capital. These costs have been deducted from partnership capital in the accompanying financial statements.
Equipment Acquisition Fee
The General Partner is entitled to be paid an equipment acquisition fee of 4% of the purchase price of each item of equipment purchased as compensation for the negotiation of the acquisition of the equipment and lease thereof or sale under a conditional sales contract. For the three months ended March 31, 20082009 and 2007,2008, equipment acquisition fees of approximately $20,000$45,000 and $58,000,$20,000, respectively, were earned. The remaining balance of approximately $135,000 will be earned by the General Partner.in future periods.
Debt Placement Fee
As compensation for arranging term debt to finance the acquisition of equipment by the Partnership, the General Partner is paid a fee equal to 1% of such indebtedness; provided, however, that such fee shall be reduced to the extent the Partnership incurs such fees to third parties, unaffiliated with the General Partner or the lender, with respect to such indebtedness and no such fee will be paid with respect to borrowings from the General Partner or its affiliates. There were no debt placement fees earned by the General Partner for the three months ended March 31, 2009 and 2008. For the three months ended March 31, 2007 debt placement fees of approximately $6,000, were earned by the General Partner.
Equipment Management Fee
The General Partner is entitled to be paid a monthly fee equal to the lesser of (i) the fees which would be charged by an independent third party for similar services for similar equipment or (ii) the sum of (a) two percent of (1) the gross lease revenues attributable to equipment which is subject to full payout net leases which contain net lease provisions plus (2) the purchase price paid on conditional sales contracts as received by the Partnership and (b) 5% of the gross lease revenues attributable to equipment which is subject to operating and capital leases. For the three months ended March 31, 2008,2009, and 2007,2008, equipment management fees of approximately $86,000,$77,000, and $69,000,$86,000, respectively, were earned by the General Partner.
Equipment Liquidation Fee
With respect to each item of equipment sold by the General Partner (other than in connection with a conditional sales contract), a fee equal to the lesser of (i) 50% of the competitive equipment sale commission or (ii) three percent of the sales price for such equipment is payable to the General Partner. The payment of such fee is subordinated to the receipt by the limited partners of (i) a return of their net capital contributions and a 10% per 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 will be reduced to the extent any liquidation or resale fees are paid to unaffiliated parties. For the three months ended March 31, 2009 and 2008, equipment liquidation fees of approximately $300 and $200, respectively, were earned by the General Partner. For the three months ended March 31, 2007 there were no equipment liquidation fees earned by the General Partner.
5. Notes Payable
Notes payable consisted of the following:
| | | March 31, 2008 | | | December 31, 2007 | |
| Installment notes payable to banks; interest ranging from 4.65% to 6.3%, due in monthly installments ranging from $1,095 to $14,239, including interest, with final payments from February through October 2008. | | $ | 165,772 | | | $ | 275,143 | |
| | | | | | | | | |
| Installment notes payable to banks; interest ranging from 5.85% to 6.2% due in monthly installments ranging from $8,945 to $134,671, including interest, with final payments from January through October 2009. | | | 2,001,668 | | | | 2,337,462 | |
| | | | | | | | | |
| Installment note payable to bank; interest ranging from 5.40% to 5.85%, due in monthly installments ranging from $23,643 to $31,661, including interest, with final payments from January 2010 through October 2010. | | | 471,599 | | | | 521,613 | |
| | | $ | 2,639,039 | | | $ | 3,134,218 | |
| | | | | | | | | |
| | | March 31, 2009 | | | December 31, 2008 | |
| | | | | | | |
| Installment notes payable to banks; interest ranging from 5.25% to 6.20% due in quarterly or monthly installments ranging from $6,588 to $134,671, including interest, with final payments from February through October 2009 | | $ | 626,766 | | | $ | 989,358 | |
| | | | | | | | | |
| Installment notes payable to banks; interest ranging from 5.40% to 5.85% due in quarterly installments ranging from $23,643 to $31,661, including interest, with final payments from January through July 2010 | | | 271,402 | | | | 322,037 | |
| | | | | | | | | |
| Installment note payable to bank; interest at 5.75% due in quarterly installments of $22,756 including interest, with final payment in January 2011 | | | 170,816 | | | | 190,829 | |
| | | | | | | | | |
| Installment note payable to bank; interest at 6.21%, due in monthly installments of $1,368, including interest, with final payment in May 2012. | | | 47,073 | | | | 49,253 | |
| | | $ | 1,116,057 | | | $ | 1,551,477 | |
|
These
The notes are secured by specific computer equipment and are nonrecourse liabilities of the Partnership. As such, the notes do not contain any debt covenants with which we must comply on either an annual or quarterly basis. Aggregate maturities of notes payable for each of the periods subsequent to March 31, 20082009 are as follows:
| | | Amount | |
| | | | |
| Nine months ending December 31, 2008 | | $ | 1,351,859 | |
| Year ended December 31, 2009 | | | 1,171,402 | |
| Year ended December 31, 2010 | | | 115,778 | |
| | | $ | 2,639,039 | |
| | | | | |
| | | Amount | |
| | | | |
| Nine months ending December 31, 2009 | | $ | 855,070 | |
| Year ended December 31, 2010 | | | 216,350 | |
| Year ended December 31, 2011 | | | 37,903 | |
| Year ended December 31, 2012 | | | 6,734 | |
| | | $ | 1,116,057 | |
| | | | | |
At March 31, 2009 and December 31, 2008, the estimated fair value of our debt approximates the carrying value of such instruments due to the interest rates on such debt approximating current market rates.
6. Supplemental Cash Flow Information
Other noncash activities included in the determination of net loss are as follows:
| Three months ended March 31, | | 2008 | | | 2007 | |
| | | | | | | |
| Lease income, net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank | | $ | 495,179 | | | $ | 325,292 | |
| | | | | | | | | |
| Three months ended March 31, | | 2009 | | | 2008 | |
| Lease income, net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank | | $ | 435,421 | | | $ | 495,179 | |
No interest or principal on notes payable was paid by the Partnership because direct payment was made by lessee to the bank in lieu of collection of lease income and payment of interest and principal by the Partnership.
Noncash investing and financing activities include the following:
| Three months ended March 31, | | 2008 | | | 2007 | |
| Debt assumed in connection with purchase of computer equipment | | $ | - | | | $ | 573,817 | |
| Equipment acquisition fees earned by General Partner upon purchase of equipment from prepaid acquisition fees | | $ | 20,500 | | | $ | 32,097 | |
| | | | | | | | | |
| Three months ended March 31, | | 2009 | | | 2008 | |
| Equipment acquisition fees earned by General Partner upon purchase of equipment from prepaid acquisition fees | | $ | 44,991 | | | $ | 20,500 | |
|
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD LOOKING STATEMENTS
Certain statements within this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). These statements are being made pursuant to the PSLRA, with the intention of obtaining the benefits of the “safe harbor” provisions of the PSLRA, and, other than as required by law, we assume no obligation to update or supplement such statements. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. You can identify these statements by the use of words such as “may,” “will,” “could,” “anticipate,” “believe,” “estimate,” “expects,” “intend,” “predict” or “project” and variations of these words or comparable words or phrases of similar meaning. 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.
CRITICAL ACCOUNTING POLICIES
The Partnership's discussion and analysis of its financial condition and results of operations are based upon its financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Partnership to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Partnership bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Partnership believes that its critical accounting policies affect its more significant judgments and estimates used in the preparation of its financial statements.
COMPUTER EQUIPMENT
Commonwealth Capital Corp., on behalf of the Partnership and other affiliated partnerships, acquires computer equipment subject to associated debt obligations and lease revenue and allocates a participation in the cost, debt and lease revenue to the various partnerships based on certain risk factors. Depreciation on computer equipment for financial statement purposes is based on the straight-line method over estimated useful lives of four years.
REVENUE RECOGNITION
Through March 31, 2008,2009, the Partnership has only entered into operating leases. Lease revenue is recognized on a monthly straight-line basis which is generally in accordance with the terms of the operating lease agreement. The Partnership’s leases do not contain any step-rent provisions or escalation clauses nor are lease revenues adjusted based on any index.
The Partnership reviews a customer’s credit history before extending credit and establishes a provision for uncollectible accounts receivable based upon the credit risk of specific customers, historical trends and other information.
LONG-LIVED ASSETS
The Partnership evaluates its long-lived assets when events or circumstances indicate that the value of the asset may not be recoverable. The Partnership determines whether an 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, an impairment exists. The amount of the impairment is determined based on the difference between the carrying value and the fair value. Fair value is determined based on estimated discounted cash flows to be generated by the asset. The Partnership determined that no impairment existed as of March 31, 20082009 and March 31, 2007.2008.
Depreciation on computer equipment for financial statement purposes is based on the straight-line method estimated generally over useful lives of three to four years.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership’s primary source of capitalcash for the three months ended March 31, 20082009 and 20072008 was cash provided by operating activities of approximately $734,000$627,000 and $1,312,000,$734,000, respectively. During the three months ended March 31, 20082009 and 2007,2008, equipment was purchased in the amount of approximately $513,000$1,125,000 and $887,000,$513,000, respectively, and distributions were paidmade to partners in the amount of approximately $623,000 and $625,000, for each period.respectively.
The Partnership intends to invest approximately $2,500,000$2,000,000 in additional equipment for the remainder of 2008.2009. The acquisition of this equipment will be funded by debt financing and cash flows from lease rental payments.
For the three months ended March 31, 2009, the Partnership generated cash flows from operating activities of approximately $627,000, which includes a net loss of approximately $375,000 and depreciation and amortization expenses of approximately $1,438,000. Other non-cash activities included in the determination of net income include direct payments of lease income by lessees to banks of approximately $435,420.
For the three months ended March 31, 2008, the Partnership generated cash flows from operating activities in the amount of approximately $734,000, which includes a net loss of approximately $93,000, loss on sale of computer equipment of approximately $5,000 and depreciation and amortization expenses of approximately $1,441,000. Other non-cash activities included in the determination of net income include direct payments of lease income by lessees to banks of approximately $495,000.
For the three months endedAt March 31, 2007, the Partnership generated2009, cash flows from operating activitieswas held in two accounts maintained at one financial institution. The accounts were, in the aggregate, federally insured for up to $250,000. At March 31, 2009, the total cash balance was as follows:
| At March 31, 2009 | | | |
| Total balance Bank | | $ | 2,442,071 | |
| FDIC insurable limit | | $ | 250,000 | |
| Exceeded FDIC limit by | | $ | 2,192,071 | |
| | | | | |
The Partnership can mitigate this risk by depositing funds with more than one institution and by only depositing funds with major financial institutions. The Partnership has not experienced any losses in such accounts, and believes it is not exposed to any significant credit risk. The amount in such accounts will fluctuate throughout 2009 due to many factors, including the pace of $1,312,000, which includes a net loss of approximately $29,000,additional revenues, equipment acquisitions and depreciation and amortization expenses of approximately $1,098,000. Other non-cash activities included in the determination of net income include direct payments lessees to banks of approximately $325,000.distributions.
The Partnership's investment strategy of acquiring computer equipment and generally leasing it under “triple-net leases” to operators who generally meet specified financial standards minimizes the Partnership's operating expenses. As of March 31, 2008,2009, the Partnership had future minimum rentals on non-cancelable operating leases of approximately $4,849,000$3,746,000 for the balance of the year ending December 31, 20082009 and approximately $3,829,000$2,013,000 thereafter. As of March 31, 2008,2009, the Partnership’s outstanding debt was approximately $2,639,000$1,116,000 with interest rates ranging from 4.65%5.25% to 6.3%6.21%, and will be payable through October 2010.May 2012.
The Partnership’s cash from operations is expected to continue to be adequate to cover all operating expenses, liabilities, and preferred distributions to Partners during the next 12-month period. If available cash flow or net disposition proceeds are insufficient to cover the Partnership expenses and liabilities on a short and long term basis, the Partnership will attempt to obtain additional funds by disposing of or refinancing equipment, or by borrowing within its permissible limits. The Partnership may, from time to time, reduce the distributions to its Partners if it deems necessary. Since the Partnership’s leases are on a “triple-net” basis, no reserve for maintenance and repairs is considereddeemed necessary.
RESULTS OF OPERATIONS
Three months ended March 31, 20082009 compared to Threethree months ended March 31, 20072008
For the three months ended March 31, 2009, the Partnership recognized revenue of approximately $1,550,000 and expenses of approximately $ 1,925,000, resulting in a net loss of approximately $ 375,000. For the three months ended March 31, 2008, the Partnership recognized revenue of approximately $1,856,000 and expenses of approximately $1,949,000, resulting in a net loss of approximately $93,000. For
Lease revenue decreased 16 % to approximately $1,528,000 for the three months ended March 31, 2007, the Partnership recognized revenue of approximately $1,453,000 and expenses of approximately $1,481,000, resulting in net loss of approximately $28,000.
Lease income increased by 33% to2009, from approximately $1,828,000 for the three months ended March 31, 2008, from approximately $1,378,000 for the three months ended March 31, 2007.2008. This increasedecrease was primarily due toattributable more lease agreements commencingending versus lease agreements ending,new leases commencing, during the three months ended March 31, 2008.2009.
Operating expenses, excluding depreciation, primarily consist of accounting, legal, outside service fees and reimbursement of expenses to CCC for administration and operation of the Partnership. TheThese expenses increased 32% toof approximately $1,949,000$375,000 remained relatively consistent for the three months ended March 31, 2009 and 2008 from $1,481,000 forprimarily due to the three months ended March 31, 2007. This increase is primarily attributable to an increase in other Limited Partner expenses, which was partially offset by a decrease in accounting fees, and outside office services.steady continuing operation of the Partnership, without the occurrence of any unusual or unexpected expenses.
The equipment management fee is approximately 5% of the gross lease revenue attributable to equipment that is subject to operating leases. The equipment management fee increased 25%decreased 11 % to approximately $77,000 for the three months ended March 31, 2009, from approximately $86,000 for the three months ended March 31, 2008, from $69,000 for the three months ended March 31, 2007, which is consistent with the increasedecrease in lease income.revenue.
Depreciation and amortization expenses consist of depreciation on computer equipment and amortization of equipment acquisition fees. These expenses increased 31%slightly decreased to approximately $1,438,000 for the three months ended March 31, 2009, from $1,441,000 for the three months ended March 31, 2008, from $1,098,0002008. This decrease is primarily attributable to equipment being fully amortized and depreciated and not being replaced with as many new leases.
The Partnership sold computer equipment with a net book value of approximately $9,500 for the three months ended March 31, 2007. This increase was due to2009, for a net gain of approximately $1,500. The Partnership sold computer equipment with a net book value of approximately $10,000 for the acquisitionthree months ended March 31, 2008, for a net loss of new equipment associated with the purchase of new leases.approximately $5,000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our management, under the supervision and with the participation of the principal executive officer and principal financial offer, have evaluated the effectiveness of our controls and procedures related to our reporting and disclosure obligations as of March 31, 20082009 which is the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effectivesufficient to provide that (a) material information relating to us, including our consolidated affiliates is made known to these officers by us and our consolidated affiliates’ other employees, particularly material information related to the period for which this periodic report is being prepared; and (b) this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the rules and forms promulgated by the Securities and Exchange Commission. There have been no significant changes in the General Partner’s internal controls or in other factors that could significantly affect our disclosure controls and procedures in the first quarter of 20082009 or subsequent to the date of the evaluation.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.