Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
1. Business
Commonwealth Income & Growth Fund VI (the “Partnership”) is a limited partnership organized in the Commonwealth of Pennsylvania on January 6, 2006. The Partnership offered for sale up to 2,500,000 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 May 10, 2007. The offering terminated on March 13, 2009 with 1,810,311 units sold for a total of approximately $36,000,000 in limited partner contributions.
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 will be leased primarily to U.S. corporations and institutions. Commonwealth Capital Corp. (“CCC”), on behalf of the Partnership and other affiliated partnerships, will acquire computer equipment subject to associated debt obligations and lease agreements and allocate 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, extended or pursuant to the terms of its Limited Partnership Agreement, the Partnership will continue until December 31, 2018.
2. Summary of Significant Accounting Policies
Recent Accounting Pronouncements
In June 2009, the FASB issued an accounting standard codified within Accounting Standards Codification (“ASC”) ASC 105, Generally Accepted Accounting Principles, (“ASC 105” and formerly referred to as SFAS No. 168), which establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. As ASC 105 is not intended to change or alter existing GAAP, it will not impact the Partnership’s condensed financial statements. The Partnership has adjusted historical GAAP references in its third quarter 2009 Form 10-Q to reflect accounting guidance references included in the Codification.
In September 2009, the FASB issued Accounting Standards Update No. 2009-07 (“ASC Update 2009-07”) Accounting for Various Topics - Technical Corrections to SEC Paragraphs. This ASU represents technical corrections to various ASC Topics containing SEC guidance. The technical corrections resulted from external comments received, and consisted principally of paragraph referencing and minor wording changes. In the third quarter of 2009, the Partnership adopted this FASB ASU. The adoption of this ASU did not have any impact on the condensed financial statements included herein.
In August 2009, the FASB issued Accounting Standards Update No 2009-05 (“ASC Update 2009-05”), an update to FASB ASC 820, Fair Value Measurements and Disclosures. This update provides amendments to reduce potential ambiguity in financial reporting when measuring the fair value of liabilities. Among other provisions, this update provides clarification that in circumstances, in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the valuation techniques described in ASC Update 2009-05. ASC Update 2009-05 will become effective for the Partnership’s annual financial statements for the year ended December 31, 2009. The Partnership has not determined the impact that this update may have on its financial statements.
In June 2009, the FASB issued FAS 167 “Amendments to FASB Interpretation No.46(R),” which has yet to be codified with the ASC. Once codified, the standard would amend ASC 810, “Consolidation” to address the elimination of the concept of a qualifying special purpose entity. This guidance is effective for the Partnership beginning in the first quarter of fiscal year 2010. The Partnership is currently evaluating the impact that the adoption of ASC 810 will have on its condensed financial statements.
In June 2009, the FASB issued FAS No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.” This pronouncement has not yet been incorporated into the FASB’s codification. This standard will require more information about transferred financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. This standard is effective at the start of a Partnership’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for companies reporting earnings on a calendar-year basis. The Partnership is currently analyzing the impact of this statement, if any, to its condensed financial statements.
In May 2009, the FASB issued an accounting standard codified within ASC 855,” Subsequent Events”, (“ASC 855” and formerly referred to as SFAS No. 165), which modified the subsequent event guidance. The three modifications to the subsequent events guidance are: 1) To name the two types of subsequent events either as recognized or non-recognized subsequent events, 2) To modify the definition of subsequent events to refer to events or transactions that occur after the balance sheet date, but before the financial statement are issued or available to be issued and 3) To require entities to disclose the date through which an entity has evaluated subsequent events and the basis for that date, i.e. whether that date represents the date the financial statements were issued or were available to be issued. This guidance is effective for interim or annual financial periods ending after June 15, 2009, and should be applied prospectively. The Partnership adopted ASC 855 during the quarter ended June 30, 2009 and it did not have a material impact on the Partnership’s condensed financial statements.
In April 2009, the FASB issued an accounting standard codified within ASC 320 (formerly referred to as FSP FAS 115-2, FAS124-2 and EITF 99-20-2), “Recognition and Presentation of Other-Than-Temporary-Impairment.” ASC 320 (i) changes existing guidance for determining whether an impairment is other than temporary to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under ASC 320, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of impairment related to other factors is recognized in other comprehensive income. ASC 320 is effective for interim and annual periods ending after June 15, 2009. The Partnership adopted ASC 320 in the quarter ended June 30, 2009. The adoption did not have a material impact on the Partnership’s condensed financial statements.
In April 2009, the FASB issued an accounting standard codified within ASC 825, “Financial Instruments,” (“ASC 825”), ASC 825-10-65, Transition and Open Effective Date Information, (“ASC 825-10-65” and formerly referred to as FSP FAS No. 107-1 and APB Opinion No. 28-1), which requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This guidance also requires those disclosures in summarized financial information at interim reporting periods. ASC 825-10-65 is effective prospectively for interim reporting periods ending after June 15, 2009. The Partnership adopted ASC 825 in the quarter ended June 30, 2009. Except for the disclosure requirements, the adoption of ASC 825 did not have a material impact on the Partnership’s condensed financial statements.
In April 2009, the FASB issued an accounting standard codified within ASC 820, “Fair Value Measurements and Disclosures,” (“ASC 820” and formerly referred to as FSP FAS 157-4), ASC 820 affirms the objective of fair value when a market is not active, clarifies and includes additional factors for determining whether there has been a significant decrease in market activity, eliminates the presumption that all transactions are distressed unless proven otherwise, and requires an entity to disclose a change in valuation technique. ASC 820 is effective for interim and annual periods ending after June 15, 2009. The Partnership adopted ASC 820 in the quarter ended June 30, 2009. The adoption did not have a material impact on the Partnership’s condensed financial statements
Basis of Presentation
The financial information presented as of any date other than December 31, 2008 has been prepared from the books and records without audit. Financial information as of December 31, 2008 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, 2008. Operating results for the nine months ended September 30, 2009 are not necessarily indicative of financial results that may be expected for the full year ended December 31, 2009.
Pursuant to Statement of ASC 855, “Subsequent Events”, subsequent events have been evaluated through November 12, 2009, the date these financial statements were available to be issued, and there were no subsequent events to be reported.
Disclosure of Fair Value of Financial Instruments
Effective April 2009, the Partnership has adopted ASC 825, Financial Instruments, (“ASC 825”), ASC 825-10-65, Transition and Open Effective Date Information, (“ASC 825-10-65” and formerly referred to as “SFAS 107-1” and “APB 28-1”). This ASC requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This guidance also requires those disclosures in summarized financial information at interim reporting periods.
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. The partnership holds no financial instruments, except notes payable. Cash, receivables, accounts payable, and accrued expenses and other liabilities are carried at amounts which reasonably approximate their fair values as of September 30, 2009 and December 31, 2008.
The Partnership’s long-term debt consists of notes payable, which are secured by specific computer equipment and are nonrecourse liabilities of the Partnership. The estimated fair value of this debt at September 30, 2009 and December 31, 2008 approximates the carrying value of these instruments, due to the interest rates approximating current market values.
Disclosure about fair value of financial instruments is based on pertinent information available to management as of September 30, 2009 and December 31, 2008.
Long-Lived Assets
The Partnership evaluates its long-lived assets when events or circumstances indicate that the value of the asset may not be recoverable. The Partnership determines whether impairment exists by estimating the undiscounted cash flows to be generated by each asset. If the estimated undiscounted cash flows are less than the carrying value of the asset, 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 September 30, 2009 and 2008.
Depreciation on computer equipment for financial statement purposes is based on the straight-line method estimated generally over useful lives of three or 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 September 30, 2009, cash was held in a total of six accounts maintained at two separate financial institutions. The accounts were, in the aggregate, federally insured for up to $250,000 per institution. At September 30, 2009, the total cash balances per institution were as follows:
| At September 30, 2009 | Bank A | | Bank B |
| Total bank balance | $ 4,700,074 | | $ 12,216,333 |
| FDIC insurable limit | $ 250,000 | | $ 250,000 |
| Uninsured amount | $ 4,450,074 | | $ 11,966,333 |
The Partnership mitigates bank failure risk by depositing funds with more than one institution and by only depositing funds with major financial institutions. The Partnership deposits its funds with two institutions that are Moody's Aaa-and Aa3 Rated. The Partnership has not experienced any losses in such accounts, and believes it is not exposed to any significant credit risk. The amounts 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.
Reclassification
Certain prior amounts have been reclassified to conform to the current presentation. The net results of the reclassifications did not have an impact on the Partnership’s previously reported financial position, cash flows, or results of operations.
3. Computer Equipment
The Partnership is the lessor of equipment under operating leases with periods generally ranging from 12 to 48 months. In general, associated costs such as repairs and maintenance, insurance and property taxes are paid by the lessee.
Through September 30, 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 Partnership’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. 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. No such fees were paid for the nine months ended September 30, 2009 and 2008.
The Partnership’s share of the computer equipment in which it participates with other partnerships at September 30, 2009 and December 31, 2008 was approximately $10,988,000 and $3,660,000, respectively, and 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 September 30, 2009 and December 31, 2008 was approximately $28,372,000 and $9,957,000, respectively. The Partnership’s share of the outstanding debt associated with this equipment at September 30, 2009 and December 31, 2008 was approximately $221,000 and $337,000, respectively. The total outstanding debt related to the equipment shared by the Partnership at September 30, 2009 and December 31, 2008 was approximately $738,000 and $1,124,000, respectively.
The following is a schedule of future minimum rentals on non-cancellable operating leases at September 30, 2009:
| | Amount |
| Three Months ended December 31, 2009 | $ 1,594,020 |
| Year ended December 31, 2010 | 5,974,861 |
| Year ended December 31, 2011 | 4,136,198 |
| Year ended December 31, 2012 | 1,377,576 |
| | $ 13,082,655 |
4. Related Party Transactions
Receivables/Payables
As of September 30, 2009, the Partnership’s related party receivables and payables are short term, unsecured, and non-interest bearing.
| Nine Months Ended September 30, | 2009 | 2008 |
| | | |
| 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. See “Summary of Significant Accounting Policies- Reimbursable Expenses, “above. | $ 1,015,000 | $ 1,122,000 |
| | | |
| Syndication Costs | | |
| Syndication 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. During the nine months ended September 30, 2009 and 2008 these costs have been deducted from partnership capital in the accompanying financial statements. | $ 1,016,000 | $ 1,073,000 |
| | | |
| 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 September 30, 2009, the remaining balance of prepaid acquisition fees was approximately $523,000, which will be earned in future periods. | $ 488,000 | $ 142,000 |
| | | |
| 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. | $ - | $ 7,000 |
| | | |
| 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. | $ 163,000 | $ 49,000 |
| | | |
| 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. | $ 6,000 | $ 100 |
5. Notes Payable
Notes payable consisted of the following:
| | September 30, 2009 | December 31, 2008 |
| Installment notes payable to banks; interest ranging from 5.25% to 6.00%, due in quarterly and monthly installments ranging from $1,385 to $4,923, including interest, with final payments in October 2009 | $ 6,218 | $ 24,582 |
| | | |
| Installment note payable to bank; interest at 5.25% due in monthly installments of $8,003 including interest, with final payment in November 2010 | 108,450 | 174,749 |
| | | |
| Installment note payable to bank; interest at 5.75% due in quarterly installments of $37,927 including interest, with final payments in January 2011 | 216,538 | 318,048 |
| | | |
| Installment notes payable to bank; interest at 6.21% due in monthly installments of $585 including interest, with final payment in May 2012 | 34,399 | 42,103 |
| | $ 365,605 | $ 559,482 |
|
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 September 30, 2009 are as follows:
| | Amount |
| Three months ending December 31, 2009 | $ 66,707 |
| Year ended December 31, 2010 | 242,529 |
| Year ended December 31, 2011 | 50,613 |
| Year ended December 31, 2012 | 5,756 |
| | $ 365,605 |
6. Supplemental Cash Flow Information
Other noncash activities included in the determination of net loss are as follows:
| Nine months ended September 30, | 2009 | 2008 |
| Lease income, net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank | $ 193,877 | $ 136,395 |
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:
| Nine months ended September 30, | 2009 | 2008 |
| Debt assumed in connection with purchase of computer equipment | $ - | $ 690,258 |
| Equipment acquisition fees earned by General Partner upon purchase of equipment from prepaid acquisition fees | $ 487,663 | $ 142,145.00 |
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 estimated generally over useful lives of three to four years.
REVENUE RECOGNITION
Through September 30, 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 or 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 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. The 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 September 30, 2009 and 2008.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership’s primary source of cash for the nine months ended September 30, 2009 was from limited partner contributions of approximately $8,501,000. For the nine months ended September 30, 2009 the Partnership incurred and paid syndication costs of approximately $1,016,000. The Partnership’s primary use of cash for the nine months ended September 30, 2009 was for capital expenditures of approximately $12,192,000 and distributions to partners of approximately $2,536,000.
The Partnership’s primary source of cash for the nine months ended September 30, 2008 was from limited partner contributions of approximately $9,218,000. For the nine months ended September 30, 2008 the Partnership incurred and paid syndication costs of approximately $1,073,000. The primary uses of cash for the nine months ended September 30, 2008 were for capital expenditures for new equipment in the amount of approximately $2,530,000 and the payment of distributions to partners of approximately $1,010,000.
For the nine months ended September 30, 2009, cash was provided by operating activities in the amount of approximately $1,680,000, which includes a net loss of approximately $464,000, and depreciation and amortization expenses of approximately $2,593,000. Other noncash activities included in the determination of net income include direct payments by lessees to banks of approximately $194,000.
For the nine months ended September 30, 2008, cash was used in operating activities of approximately $424,000 which includes a net loss of approximately $1,283,000, and depreciation and amortization expenses of approximately $806,000. Other noncash activities included in the determination of net income include direct payments by lessees to banks of approximately $136,000.
The Partnership intends to invest approximately $4,000,000 in additional equipment for the remainder of 2009. The acquisition of this equipment will be funded by limited partner contributions raised during the offering period and debt financing. Any debt service will be funded from cash flows from lease rental payments.
At September 30, 2009 cash was held in a total of six accounts maintained at two separate financial institutions. The accounts were, in the aggregate, federally insured for up to $250,000 per institution. At September 30, 2009, the total cash balances per institution were as follows:
| At September 30, 2009 | Bank A | | Bank B |
| Total bank balance | $ 4,700,074 | | $ 12,216,333 |
| FDIC insurable limit | $ 250,000 | | $ 250,000 |
| Uninsured amount | $ 4,450,074 | | $ 11,966,333 |
The Partnership mitigates bank failure risk by depositing funds with more than one institution and by only depositing funds with major financial institutions. The Partnership deposits its funds with two institutions that are Moody's Aaa-and Aa3 Rated. The Partnership has not experienced any losses in such accounts, and believes it is not exposed to any significant credit risk. The amounts in such accounts will fluctuate throughout 2009 due to many factors, including the pace of additional revenues, equipment acquisitions and 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 September 30, 2009, the Partnership had future minimum rentals on non-cancelable operating leases of approximately $1,594,000 for the balance of the year ending December 31, 2009 and approximately $11,489,000 thereafter. As of September 30, 2009, the Partnership had incurred debt in the amount of approximately $366,000 with interest rates ranging from 5.25% to 6.21% and will be payable through May 2012.
RESULTS OF OPERATIONS
Three months ended September 30, 2009 compared to Three Months ended September 30, 2008
For the three months ended September 30, 2009, the Partnership recognized revenue of approximately $1,526,000 and expenses of approximately $1,540,000 resulting in a net loss of approximately $14,000. For the three months ended September 30, 2008, the Partnership recognized revenue of approximately $402,000 and expenses of approximately $820,000, resulting in a net loss of approximately $418,000.
Lease revenue increased to approximately $1,479,000 for the three months ended September 30, 2009, from approximately $362,000 for the three months ended September 30, 2008. This increase was primarily due to the fact that the Partnership has invested additional capital contributions in leases throughout the past twelve months.
Operating expenses, excluding depreciation, primarily consist of accounting and legal fees, outside service fees and reimbursement of expenses to CCC for administration and operation of the Partnership. These expenses decreased 37% to approximately $289,000 for the three months ended September 30, 2009, from approximately $458,000 for the three months ended September 30, 2008. This decrease is primarily attributable to the Partnership’s offering period drawing to a close during March 2009 therefore decreasing sales, printing, conferences and advertising expenses. This decrease was partially offset by increases in reimbursable expenses, accounting and administrative expenses as operations and further activity within the fund commenced. See “Summary of Significant Accounting Policies Reimbursable Expenses," in note 2.
The Partnership did not pay any organizational costs for the three months ended September 30, 2009. Such costs were approximately $27,000 for the three months ended September 30, 2008. This decrease is primarily attributable to the Partnership’s offering period drawing to a close during March 2009. In accordance with ASC 720-15, costs relating to start-up activities and organization costs (accounting, legal, printing, etc.) are expensed as incurred.
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 to approximately $74,000 for the three months ended September 30, 2009 from approximately $18,000 for the three months ended September 30, 2008, which is consistent with the increase in lease revenue.
Depreciation and amortization expenses consist of depreciation on computer equipment and amortization of equipment acquisition fees. These expenses increased to approximately $1,171,000 for the three months ended September 30, 2009, from $305,000 for the three months ended September 30, 2008. This increase was due to the acquisition of new equipment associated with the purchase of new leases.
The Partnership sold computer equipment with a net book value of approximately $185,000 for the three months ended September 30, 2009, for a gain of approximately $19,000. The Partnership sold computer equipment with a net book value of approximately $9,000 for the three months ended September 30, 2008, for a loss of approximately $6,000.
Nine Months ended September 30, 2009 compared to Nine Months ended September 30, 2008
For the nine months ended September 30, 2009, the Partnership recognized revenue of approximately $3,449,000 and expenses of approximately $3,913,000 resulting in a net loss of approximately $464,000. For the nine months ended September 30, 2008, the Partnership recognized revenue of approximately $1,085,000 and expenses of approximately $2,368,000, resulting in a net loss of approximately $1,283,000.
Lease revenue increased to approximately $3,257,000 for the nine months ended September 30, 2009, from approximately $974,000 for the nine months ended September 30, 2008. This increase was primarily due to the fact that the Partnership has invested additional capital contributions in leases throughout the past twelve months.
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. These expenses decreased 26% to approximately $1,048,000 for the nine months ended September 30, 2009 from approximately $1,410,000 for the nine months ended September 30, 2008. This decrease is primarily attributable to the Partnership’s offering period drawing to a close during March 2009 therefore decreasing sales, printing, conferences and advertising expenses. This decrease was partially offset by increases in reimbursable expenses, accounting and administrative expenses as operations and further activity within the Partnership commenced. See “Summary of Significant Accounting Policies Reimbursable Expenses," in note 2.
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 to approximately $163,000 for the nine months ended September 30, 2009 from approximately $49,000 for the nine months ended September 30, 2008, which is consistent with the increase in lease revenue.
Organizational costs increased to approximately $89,000 for the nine months ended September 30, 2009, from approximately $82,000 for the nine months ended September 30, 2008. No such fees were charged to the Partnership during the second and third quarter of 2009 as the Partnership’s offering period drew to a close in March 2009. In accordance with ASC 720-15, costs relating to start-up activities and organization costs (accounting, legal, printing, etc.) are expensed as incurred.
Depreciation and amortization expenses consist of depreciation on computer equipment and amortization of equipment acquisition fees. These expenses increased to approximately $2,593,000 for the nine months ended September 30, 2009, from approximately $806,000 for the nine months ended September 30, 2008. This increase was due to the acquisition of new equipment associated with the purchase of new leases.
The Partnership sold computer equipment with a net book value of approximately $190,000 for the nine months ended September 30, 2009, for a gain of approximately $15,000. The Partnership sold computer equipment with a net book value of approximately $15,000 for the nine months ended September 30, 200, for a loss of approximately $9,000.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
N/A
Item 4T. Controls and Procedures
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 September 30, 2009 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 effective 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 third quarter of 2009 or subsequent to the date of the evaluation.
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
N/A
Item 1A. Risk Factors
Changes in economic conditions could materially and negatively affect our business.
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. Beginning in 2008 and continuing through the third quarter of 2009, general worldwide economic conditions experienced a downturn due to the sequential effects of the subprime lending crisis, general credit market crisis, collateral effects on the finance and banking industries, increased energy costs, concerns about inflation, slower economic activity, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns. A deterioration in economic conditions, whether caused by national or local concerns, especially within our market area, could result in the following consequences, any of which could hurt business materially: lease delinquencies may increase; problem leases and defaults could increase; and demand for information technology products generally may decrease as businesses attempt to reduce expenses.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
N/A
Item 3. Defaults Upon Senior Securities
N/A
Item 4. Submission of Matters to a Vote of Securities Holders
N/A
Item 5. Other Information
N/A
Item 6. Exhibits
SIGNATURES
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.
| | COMMONWEALTH INCOME & GROWTH FUND VI |
| | BY: COMMONWEALTH INCOME & GROWTH FUND, INC., General Partner |
| November 16, 2009 | By: /s/ Kimberly A. Springsteen-Abbott |
| Date | Kimberly A. Springsteen-Abbott |
| | Chief Executive Officer |
| | |
| | |
| November 16, 2009 | By: /s/ Lynn A. Franceschina |
| Date | Lynn A. Franceschina |
| | Executive Vice President, Chief Operating Officer |
| | |
