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EX-32.1 - CIGF6 EXHIBIT 32.1 09-30-11 - Commonwealth Income & Growth Fund VIex32_1.htm
EX-31.1 - CIGF6 EXHIBIT 31.1 09-30-11 - Commonwealth Income & Growth Fund VIex31_1.htm
EX-32.2 - CIGF6 EXHIBIT 32.2 09-30-11 - Commonwealth Income & Growth Fund VIex32_2.htm
EX-31.2 - CIGF6 EXHIBIT 31.2 09-30-11 - Commonwealth Income & Growth Fund VIex31_2.htm

 
 
 



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q

T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011    or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number:  333-131736

COMMONWEALTH INCOME & GROWTH FUND VI
(Exact name of registrant as specified in its charter)

Pennsylvania
20-4115433
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)

Brandywine Bldg. One, Suite 200
2 Christy Drive
Chadds Ford, PA 19317
(Address, including zip code, of principal executive offices)

(484) 785-1480
(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (ii) has been subject to such filing requirements for the past 90 days: YES  T   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  T    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 T
(Do not check if a smaller reporting company.)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      YES ¨     NO T
  
 


1
 
 
 

 
 
 
 
 
FORM 10-Q
SEPTEMBER 30, 2011

TABLE OF CONTENTS

  PART I
Item 1.
Financial Statements
  3
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
  10
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
  13
Item 4.
Controls and Procedures
  13
  PART II
Item 1.
Legal Proceedings
  13
Item 1A.
Risk Factors
  13
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
  13
Item 3.
Defaults Upon Senior Securities
  13
Item 5.
Other Information
  13
Item 6.
Exhibits
  13

2
 
 
 

 
 
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements

Commonwealth Income & Growth Fund VI
 
Condensed Balance Sheets
 
             
             
 
September 30,
   
December 31,
 
 
2011
   
2010
 
 
(unaudited)
       
             
ASSETS
           
Cash and cash equivalents
  $ 2,265,765     $ 2,114,823  
Lease income receivable, net of reserve of approximately $319,000 and $299,000 at September 30, 2011 and December 31, 2010, respectively
    445,716       483,763  
Accounts receivable, Commonwealth Capital Corp.
    472,121       727,961  
Accounts receivable, General Partner
    33,560       -  
Other receivables
    852       1,133  
Prepaid expenses
    4,974       7,703  
      3,222,988       3,335,383  
                 
Net investment in finance leases
    171,761       234,348  
                 
Technology equipment, at cost
    26,485,927       26,954,695  
Accumulated depreciation
    (14,155,377 )     (10,904,949 )
      12,330,550       16,049,746  
                 
Equipment acquisition costs and deferred expenses, net of accumulated amortization
of approximately $620,000 and $507,000 at September 30, 2011 and December 31, 2010, respectively
    373,610       543,466  
Prepaid acquisition fees
    104,543       167,026  
      478,153       710,492  
                 
Total Assets
  $ 16,203,452     $ 20,329,969  
                 
LIABILITIES AND PARTNERS' CAPITAL
               
LIABILITIES
               
Accounts payable
  $ 108,254     $ 97,520  
Accounts payable, General Partner
    -       30,407  
Other accrued expenses
    38,007       54,219  
Unearned lease income
    385,284       460,891  
Notes payable
    684,864       725,895  
Total Liabilities
    1,216,409       1,368,932  
                 
PARTNERS CAPITAL
               
General Partner
    1,000       1,000  
Limited Partners
    14,986,043       18,960,037  
Total Partners' Capital
    14,987,043       18,961,037  
                 
Total Liabilities and Partners' Capital
  $ 16,203,452     $ 20,329,969  
                 
                 
                 
see accompanying notes to condensed financial statements


3
 
 
 

 

Commonwealth Income & Growth Fund VI
 
Condensed Statements of Operations
 
(unaudited)
 
                         
                         
 
Three Months Ended
   
Nine Months Ended
 
 
September 30,
   
September 30,
 
 
2011
   
2010
   
2011
   
2010
 
Revenue
                       
Lease
  $ 1,800,853     $ 1,819,188       5,482,916       5,643,087  
Interest and other
    10,528       13,973       38,911       42,802  
Gain (loss)on sale of computer equipment
    (33,955 )     (3,897 )     26,416       (3,720 )
Total revenue
    1,777,426       1,829,264       5,548,243       5,682,169  
                                 
Expenses
                               
Operating, excluding depreciation
    250,498       370,115       1,085,602       1,222,003  
Equipment management fee, General Partner
    90,597       91,055       275,807       282,445  
Interest
    9,659       9,018       29,360       20,612  
Depreciation
    1,664,589       1,626,334       5,134,519       4,476,497  
Amortization of equipment acquisition costs and deferred expenses
    82,009       85,250       246,460       233,252  
Bad debt expense
    -       145,479       20,000       210,054  
Total expenses
    2,097,352       2,327,251       6,791,748       6,444,863  
                                 
Net (loss)
  $ (319,926 )   $ (497,987 )   $ (1,243,505 )   $ (762,694 )
                                 
Net (loss) allocated to Limited Partners
  $ (328,969 )   $ (507,036 )   $ (1,269,634 )   $ (789,842 )
                                 
Net (loss) per equivalent limited partnership unit
  $ (0.18 )   $ (0.28 )   $ (0.70 )   $ (0.44 )
                                 
Weighted average number of equivalent limited partnership units outstanding during the period
    1,809,663       1,809,911       1,809,828       1,809,911  
                                 
                                 
see accompanying notes to condensed financial statements

4
 
 

 
 
Commonwealth Income & Growth Fund VI
 
Condensed Statements of Partners' Capital
 
For the nine months ended September 30, 2011
 
(unaudited)
 
                               
                               
   
General
   
Limited
                   
   
Partner
   
Partner
   
General
   
Limited
       
   
Units
   
Units
   
Partner
   
Partners
   
Total
 
Balance, January 1, 2011
    50       1,809,911     $ 1,000     $ 18,960,037     $ 18,961,037  
Net income (loss)
    -       -       26,129       (1,269,634 )     (1,243,505 )
Redemption
    -       (1,397 )             (16,319 )     (16,319 )
Distributions
    -       -       (26,129 )     (2,688,041 )     (2,714,170 )
Balance, September 30, 2011
    50       1,808,514     $ 1,000     $ 14,986,043     $ 14,987,043  
                                         
                                         
                                         
see accompanying notes to condensed financial statements

5
 
 

 
 
Commonwealth Income & Growth Fund VI
 
Condensed Statements of Cash Flow
 
(unaudited)
 
             
   
Nine Months ended
   
Nine Months ended
 
   
September 30, 2011
   
September 30, 2010
 
             
Net cash provided by operating activities
  $ 3,953,027     $ 3,246,302  
                 
Investing activities:
               
Capital expenditures
    (1,654,560 )     (5,438,010 )
Payments from finance leases
    83,032       14,508  
Equipment acquisition fees paid to General Partner
    (11,636 )     (20,568 )
Net proceeds from the sale of computer equipment
    514,052       6,242  
Net cash (used in) investing activities
    (1,069,112 )     (5,437,828 )
                 
Financing activities:
               
Distributions to partners
    (2,714,170 )     (2,714,869 )
Redemptions
    (16,319 )     -  
Debt placement fee paid to General Partner
    (2,484 )     (4,324 )
Net cash (used in) financing activities
    (2,732,973 )     (2,719,193 )
                 
Net increase (decrease) in cash and cash equivalents
    150,942       (4,910,719 )
                 
Cash and cash equivalents beginning of period
    2,114,823       9,026,452  
                 
Cash and cash equivalents end of period
  $ 2,265,765     $ 4,115,733  
                 
                 
                 
see accompanying notes to condensed financial statements

6
 
 

 
 
NOTES TO CONDENSED 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 6, 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 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, acquires technology equipment subject to associated debt obligations and lease agreements and allocates a participation in the cost, debt and lease revenue to the various partnerships that it manages 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 equipment, make final distributions to partners, and to dissolve.  Unless sooner terminated or extended pursuant to the terms of its Limited Partnership Agreement, the Partnership will continue until December 31, 2018.

2. Summary of Significant Accounting Policies

Basis of Presentation

The financial information presented as of any date other than December 31, 2010 has been prepared from the books and records without audit.  Financial information as of December 31, 2010 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, 2010.  Operating results for the nine months ended September 30, 2011 are not necessarily indicative of financial results that may be expected for the full year ended December 31, 2011.

Disclosure of Fair Value 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, receivables, accounts payable and accrued expenses and other liabilities are carried at amounts which reasonably approximate their fair values as of September 30, 2011 and December 31, 2010.

The Partnership’s long-term debt consists of notes payable, which are secured by specific technology equipment and are nonrecourse liabilities of the Partnership. The estimated fair value of this debt at September 30, 2011 and December 31, 2010 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, 2011 and December 31, 2010.  
 
Cash and cash equivalents

We consider cash and cash equivalents to be cash on hand and highly liquid investments with an original maturity of 90 days or less.

At September 30, 2011, cash was held in a total of seven accounts maintained at two separate financial institutions with an aggregate balance of approximately $2,273,000. Bank accounts are federally insured up to $250,000, while pursuant to the Dodd/Frank Act of 2010, some accounts are fully insured by the FDIC.  At September 30, 2011, the total cash balance was as follows:
 
At September 30, 2011
 
Balance
 
Total bank balance
 
$
2,273,000
 
FDIC insured
   
(903,000)
 
Uninsured amount
 
$
1,370,000
 

The Partnership mitigates the risk of holding uninsured deposits 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 2011 due to many factors, including the pace of additional cash receipts, equipment acquisitions and distributions to investors.
 
7
 
 
 

 
 
Recent Accounting Pronouncements

In May of 2011, the FASB issued ASU No. 2011-04 (“ASC Update 2011-04”), Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS. This ASU is intended to update the fair value measurement and disclosure requirements in US GAAP for measuring fair value and for disclosing information about fair value measurements.  Some of the amendments clarify the Board’s intent about application of existing fair value measurement requirements, while others change a particular principle or requirement for measuring or disclosing fair value measurement information.  The amendments in this update are for interim and annual periods beginning after December 15, 2011.  The Partnership is currently evaluating the effect this ASU will have on its financial statements.

 In April of 2011, the FASB issued ASU No. 2011-03 (“ASC Update 2011-03”), Reconsideration of Effective Control for Repurchase Agreements. This ASU is intended to improve financial reporting of repurchase agreements (“repos”) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments in this Update are effective for the fiscal quarters and years that start on or after December 15, 2011. Early adoption is not permitted. The Partnership is currently evaluating the effect this ASU will have on its financial statements.

 In April 2011, the FASB issued ASU No. 2011-02 (“ASC Update 2011-02”) A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.  This ASU provides additional guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties.  The additional guidance is intended to create additional consistency in the application of generally accepted accounting principles (GAAP) for debt restructuring. The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The Partnership adopted this ASU during the third quarter of 2011 and it did not have a material effect on its financial statements.

In January 2011, the FASB issued ASU No. 2011-01 (“ASC Update 2011-01”), Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.  This ASU temporarily delays the effective date for public entities of the disclosures about troubled debt restructurings (TDRs) in ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  This guidance was effective for interim and annual periods ending after June 15, 2011. The Partnership adopted this ASU during the second quarter of 2011 and it did not have a material effect on its financial statements.

3. Information Technology Equipment

The Partnership is the lessor of equipment under leases with periods that generally will 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 and the lessee extends or renews the lease, or the equipment is sold.  The General Partner believes that this strategy adds value since it entices the leasing company to remain actively involved with the lessee and encourages potential 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 up-front fee paid to the leasing company.  Remarketing fees were incurred of approximately $39,000 and $2,500 for the nine months ended September 30, 2011 and 2010, respectively.

The Partnership’s share of the equipment in which it participates with other partnerships at September 30, 2011 was approximately $14,225,000 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, 2011 was approximately $34,784,000. The Partnership’s share of the outstanding debt associated with this equipment at September 30, 2011 was approximately $676,000. The total outstanding debt related to the equipment shared by the Partnership at September 30, 2011 was approximately $1,646,000.
 
The Partnership’s share of the equipment in which it participates with other partnerships at December 31, 2010 was approximately $13,880,000 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 December 31, 2010 was approximately $34,067,000. The Partnership’s share of the outstanding debt associated with this equipment at December 31, 2010 was approximately $707,000. The total outstanding debt related to the equipment shared by the Partnership at December 31, 2010 was approximately $1,916,000.

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 for the remainder of 2011 as the Partnership builds its portfolio.

The following is a schedule of future minimum rentals on non-cancellable operating leases at September 30, 2011:

   
Amount
 
Three Months ended December 31, 2011
 
$
1,793,000
 
Year ended December 31, 2012
   
4,181,000
 
Year ended December 31, 2013
   
1,523,000
 
Year ended December 31, 2014
   
250,000
 
   
$
7,747,000
 

The following lists the components of the net investment in direct financing leases at September 30, 2011:
 
   
Amount
 
Total minimum lease payments to be received
 
$
167,000
 
Estimated residual value of leased equipment (unguaranteed)
   
25,000
 
Less: unearned income
   
(20,000
)
Net investment in direct finance leases
 
$
172,000
 

Our finance lease customers operate in various industries, and we have no significant customer concentration in any one industry. 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 credits 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 include 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. 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. The following table presents the credit risk profile, by creditworthiness category, of our finance lease receivables at September 30, 2011:

 Risk Level
 
Percent of Total
 
Low
   
5
%
Moderate-Low
   
-
%
Moderate
   
38
%
Moderate-High
   
57
%
High
   
-
%
Net finance lease receivable
   
100
%

As of September 30, 2011 we determined that we did not have a need for an allowance for uncollectible accounts associated with any of our finance leases, as there was no material risk of default.

The following is a schedule of future minimum rentals on noncancelable direct financing leases at September 30, 2011:
 
   
Amount
 
Three Months ended December 31, 2011
  $ 28,000  
Year ended December 31, 2012
    103,000  
Year ended December 31, 2013
    36,000  
    $ 167,000  
 
 
8
  
 
 

 
 
4. Related Party Transactions

Receivables/Payables

As of September 30, 2011, the Partnership’s related party receivables and payables are short term, unsecured, and non-interest bearing.
 
Nine months ended September 30,
 
2011
   
2010
 
             
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.
 
$
1,041,000
   
$
1,207,000
 
 
Equipment acquisition fee
           
The General Partner earns 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, 2011, the remaining balance of prepaid acquisition fees was approximately $105,000, which is expected to be earned in future periods.
 
$
76,000
   
$
235,000
 
 
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 leases and 2% of the gross lease revenues attributable to equipment which is subject to finance leases.
 
$
276,000
   
$
282,000
 
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.
 
$
3,000
   
$
4,000
 

5. Notes Payable

Notes payable consisted of the following approximate amounts:

   
September 30, 2011
   
December 31, 2010
 
             
Installment note payable to bank; interest at 5.75% due in quarterly installments of $37,297 including interest, with final payment made in January 2011
 
$
-
   
$
38,000
 
                 
Installment notes payable to bank; interest at 6.21% due in monthly installments of $585 including interest, with final payment in May 2012
   
9,000
     
19,000
 
                 
Installment note payable to bank; interest at 7.50% due in quarterly installments of $8,843 including interest, with final payment made in October 2012
   
42,000
     
65,000
 
                 
Installment notes payable to bank; interest at 5.89% due in monthly installments from $7,104 to $9,514 including interest, with final payments in October 2012
   
209,000
     
331,000
 
                 
Installment notes payable to bank; interest at 7.50% due in monthly installments of $10,665 including interest, with final payments made in April 2013
   
190,000
     
273,000
 
                 
Installment notes payable to bank; interest at 5.25% due in monthly installments of $7,441 including interest, with final payments made in July 2014
   
235,000
     
-
 
   
$
685,000
   
$
726,000
 

The notes are secured by specific technology 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, 2011 are as follows:

   
Amount
 
Three months ending December 31, 2011
 
$
123,000
 
Year ended December 31, 2012
   
385,000
 
Year ended December 31, 2013
   
126,000
 
Year ended December 31, 2014
   
51,000
 
   
$
685,000
 
 
 
9
 
 
 

 
 
6. Supplemental Cash Flow Information

Other noncash activities included in the determination of net loss are as follows:

Nine months ended September 30,
 
2011
   
2010
 
Lease revenue net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank
 
$
289,000
   
$
247,000
 

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,
 
2011
   
2010
 
Debt assumed in connection with purchase of technology equipment
 
$
248,000
   
$
432,000
 
                 
Equipment acquisition fees earned by General Partner upon purchase of equipment
 
$
76,000
   
$
235,000
 

At September 30, 2011, the Partnership wrote-off fully amortized acquisition and finance fees of approximately $133,000.

7. Commitments and Contingencies
 
The bankruptcy proceedings regarding our former lessee, Allied Health Care Services Inc. (“Allied”) and its owner, Charles K. Schwartz, remain ongoing.  Due to the bankruptcy proceedings, management can not determine, at this time, the status of the equipment leased to Allied or the amounts that may ultimately be paid to us from the bankruptcy estates.   The timeline for identifying and recovering assets is uncertain, with resolution depending in large part upon the Trustee’s resolution of certain legal disputes and the cooperation of the various parties involved. Due to the complexity of the alleged fraud and the number of parties involved, we expect that completion of asset recovery by the trustee, and distribution to creditors will take in excess of six additional months from the date of this Form 10Q filing.

Our share of exposure related to the Allied default (if no rent is collected, the equipment is not paid for and/or we are unable to obtain performance under partial personal guaranty) is approximately $1,242,000 as of September 30, 2011 net of a reserve taken against substantially all the Allied receivables.

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD LOOKING STATEMENTS

This section, as well as other portions of this document, includes certain forward-looking statements about our business and our prospects, tax treatment of certain transactions and accounting matters, expenses, cash flows, distributions, investments and operating and capital requirements. Such forward-looking statements include, but are not limited to: acquisition policies of our general partner; the nature of present and future leases; provisions for uncollectible accounts; the strength and sustainability of the U.S. economy; the continued difficulties in the credit markets and their impact on the economy in general; and the level of future cash flow, debt levels, revenues, operating expenses, amortization and depreciation expenses. You can identify those statements by the use of words such as “could,” “should,” “would,” “may,” “will,” “project,” “believe,” “anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,” “intend,” “continue” and “contemplate,” as well as similar words and expressions.

Actual results may differ materially from those in any forward-looking statements because any such statements involve risks and uncertainties and are subject to change based upon various important factors, including, but not limited to, nationwide economic, financial, political and regulatory conditions; the health of debt and equity markets, including interest rates and credit quality; the level and nature of spending in the information, medical and telecommunications technologies markets; and the effect of competitive financing alternatives and lease pricing.

Readers are also directed to other risks and uncertainties discussed in other documents we file with the SEC, including, without limitation, those discussed in Item 1A. “Risk Factors.” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the SEC. We undertake no obligation to update or revise any forward-looking information, whether as a result of new information, future developments or otherwise.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base these 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.

We believe that our critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

See Note 2 to our condensed financial statements included herein, for a discussion of recent accounting pronouncements.
  
INFORMATION TECHNOLOGY EQUIPMENT

CCC, on our behalf and on behalf of other affiliated partnerships, acquires information technology 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 information technology equipment for financial statement purposes is based on the straight-line method estimated generally over useful lives of three to four years.

The Equipment Leasing and Finance Association (“ELFA”) Monthly Leasing and Finance Index which reports economic activity for the $628 billion equipment finance sector, showed overall new business volume for the 3rd Quarter of 2011 increasing 25% relative to the third quarter of 2010.  Credit quality continues to improve as the rate of receivables aged in excess of 30 days has improved on average 32.4% from the 3rd quarter of 2010 through the 2nd quarter of 2011.  Sixty percent of ELFA reporting members reported submitting more transactions for approval during the 3rd quarter 2011 compared to the same period the year prior.  For 2011-2012 ELFA has forecast a 12% increase in finance volume year over year.
 
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ACCOUNTS RECEIVABLE

We monitor our accounts receivable to ensure timely and accurate payment by lessees.  Our Lease Relations department is responsible for monitoring accounts receivable and, as necessary, resolving outstanding invoices.

We review a customer’s credit history before extending credit. In the event of a default, we may establish a provision for uncollectible accounts receivable based upon the credit risk of specific customers, historical trends or other information.

REVENUE RECOGNITION

Through September 30, 2011, the Partnership’s leasing operations consisted of operating and direct finance leases.  Operating lease revenue is recognized on a monthly basis in accordance with the terms of the lease agreement. 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. Interest income is earned on the finance lease receivable over the lease term using the interest method.  As required, at each reporting period, management evaluates the finance lease for impairment and considers any need for an allowance for credit losses.

Our leases do not contain any step-rent provisions or escalation clauses nor are lease revenues adjusted based on any index.

LONG-LIVED ASSETS

We evaluate our long-lived assets when events or circumstances indicate that the value of the asset may not be recoverable.  We determine 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. We determined no impairment analysis was necessary at September 30, 2011 and 2010 as no impairment indicators were noted.

LIQUIDITY AND CAPITAL RESOURCES

Our primary source of cash for the nine months ended September 30, 2011 was cash provided by operating activities of approximately $3,953,000, and proceeds from the sale of equipment, in the amount of approximately $514,000, compared to the nine months ended September 30, 2010 where our primary source of cash was provided by operating activities of approximately $3,246,000.

Our primary use of cash for the nine months ended September 30, 2011 was for the purchase of new information technology equipment of approximately $1,655,000 and also for distributions to partners of approximately $2,714,000.  For the nine months ended September 30, 2010 capital expenditures for new information technology equipment were approximately $5,438,000 and distributions to partners were approximately $2,715,000.

Cash was provided by operating activities for the nine months ended September 30, 2011 of approximately $3,953,000, which includes a net loss of approximately $1,244,000 and depreciation and amortization expenses of approximately $5,381,000.  For the nine months ended September 30, 2010 cash was also provided by operating activities of approximately $3,246,000, which includes a net loss of approximately $763,000 and depreciation and amortization expenses of approximately $4,710,000.

As we increase the size of our equipment portfolio, operating expenses will increase, which reflects the administrative costs of servicing the portfolio, but because of our investment strategy of leasing technology 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 technology equipment to our portfolio.
 
Capital expenditures and distributions are expected to increase during the remainder of 2011, however, as management focuses on additional equipment acquisitions and funding limited partner distributions. We intend to invest approximately $4,000,000 in additional equipment during the remainder of 2011.  The acquisition of this equipment will be funded by the remaining cash which was raised through limited partner contributions during the initial offering period, lease revenues and debt financing. Any debt service will be funded from cash flows from lease rental payments.

At September 30, 2011, cash was held in a total of seven accounts maintained at two separate financial institutions with an aggregate balance of approximately $2,273,000. Bank accounts are federally insured up to $250,000, while pursuant to the Dodd/Frank Act of 2010, some accounts are fully insured by the FDIC.  At September 30, 2011, the total cash balance was as follows:
 
At September 30, 2011
 
Balance
 
Total bank balance
 
$
2,273,000
 
FDIC insured
   
(903,000)
 
Uninsured amount
 
$
1,370,000
 

We mitigate the risk of holding uninsured deposits by depositing funds with more than one institution and by only depositing funds with major financial institutions.  We have not experienced any losses in such accounts, and believe that we are not exposed to any significant credit risk.  The amounts in such accounts will fluctuate throughout 2011 due to many factors, including the pace of additional cash receipts, equipment acquisitions and distributions to investors.

Our investment strategy of acquiring computer equipment and generally leasing it under triple-net leases to operators who generally meet specified financial standards minimizes our operating expenses. As of September 30, 2011, we had future minimum rentals on non-cancelable operating leases of approximately $1,793,000 for the balance of the year ending December 31, 2011 and approximately $5,954,000 thereafter. As of September 30, 2011, we had future minimum rentals on non-cancelable finance leases of approximately $28,000 for the balance of the year ending December 31, 2011 and approximately $139,000 thereafter.

As of September 30, 2011, our debt was approximately $685,000 with interest rates ranging from 5.25% to 7.50% and will be payable through July 2014.
 
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RESULTS OF OPERATIONS

Three months ended September 30, 2011 compared to three months ended September 30, 2010

Revenue

For the three months ended September 30, 2011, we recognized revenue of approximately $1,777,000 and expenses of approximately $2,097,000, resulting in a net loss of approximately $320,000.  For the three months ended September 30, 2010, we recognized revenue of approximately $1,829,000 and expenses of approximately $2,327,000, resulting in a net loss of approximately $498,000.

Our lease revenue decreased to approximately $1,801,000 for the three months ended September 30, 2011, from approximately $1,819,000 for the three months ended September 30, 2010.  This decrease is primarily due to the partnership ceasing to record revenues (starting in July of 2010) associated with Allied Healthcare Services Inc., one of our lessees (See Legal Proceedings, below), and is partially offset by increases due to new lease acquisitions.
 
Operating Expenses

Our 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 to approximately $251,000 for the three months ended September 30, 2011, from approximately $370,000 for the three months ended September 30, 2010.  This decrease is primarily attributable to decreases in administrative expenses charged by CCC to the fund, due to a reduction in personnel costs associated with management of the partnership.

Equipment Management Fee

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. The total equipment management fee stayed consistent over the two nine month periods at approximately $91,000 for the three months ended September 30, 2011and 2010.

Depreciation and Amortization Expense

Depreciation and amortization expenses consist of depreciation on technology equipment and amortization of equipment acquisition fees. These expenses increased to approximately $1,747,000 for the three months ended September 30, 2011, from $1,712,000 for the three months ended September 30, 2010. This increase was due to the acquisition of new equipment associated with the purchase of new leases during 2010.

Sale of Technology Equipment

We sold equipment with a net book value of approximately $137,000 for the three months ended September 30, 2011 for a net loss of approximately $34,000. For the three months ended September 30, 2010, we sold equipment with a net book value of approximately $10,000 for a net loss of approximately $4,000.

Nine months ended September 30, 2011 compared to Nine months ended September 30, 2010

Revenue

For the nine months ended September 30, 2011, we recognized revenue of approximately $5,548,000 and expenses of approximately $6,792,000, resulting in a net loss of approximately $1,244,000.  For the nine months ended September 30, 2010, we recognized revenue of approximately $5,682,000 and expenses of approximately $6,445,000, resulting in a net loss of approximately $763,000.

Our lease revenue decreased to approximately $5,483,000 for the nine months ended September 30, 2011, from approximately $5,643,000 for the nine months ended September 30, 2010.  This decrease is primarily due to the partnership ceasing to record revenues (starting in July of 2010), associated with Allied Healthcare Services Inc, one of our lessees, (See Legal Proceedings, below), and is partially offset by increases in new lease acquisitions.

Operating Expenses

Our 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 to approximately $1,086,000 for the nine months ended September 30, 2011, from approximately $1,222,000 for the nine months ended September 30, 2010.  This decrease is primarily attributable to decreases in administrative expenses charged by CCC to the fund, due to a reduction in personnel costs associated with management of the partnership.

Equipment Management Fee

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. The total equipment management fee decreased to approximately $276,000 for the nine months ended September 30, 2011 from approximately $282,000 for the nine months ended September 30, 2010, which is consistent with the decrease in lease revenue.

Depreciation and Amortization Expense

Depreciation and amortization expenses consist of depreciation on technology equipment and amortization of equipment acquisition fees. These expenses increased to approximately $5,381,000 for the nine months ended September 30, 2011, from $4,710,000 for the nine months ended September 30, 2010. This increase was due to the acquisition of new equipment associated with the purchase of new leases.

Sale of Technology Equipment

We sold equipment with a net book value of approximately $488,000 for the nine months ended September 30, 2011 for a net gain of approximately $26,000. For the nine months ended September 30, 2010 we sold equipment with a net book value of approximately $10,000 for a net loss of approximately $4,000.
 
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Item 3. Quantitative and Qualitative Disclosures About Market Risk

N/A

Item 4.  Controls and Procedures

Our management, under the supervision and with the participation of the principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures related to our reporting and disclosure obligations as of the end of the period covered by this Quarterly  Report on Form 10-Q.  Based on such evaluation, the principal executive officer and principal financial officer have concluded that, as of September 30, 2011, 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 principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. There were no changes in the Partnership’s internal control over financial reporting during the third quarter of 2011 that have materially affected or are reasonably likely to materially affect its internal control over financial reporting

Part II:   OTHER INFORMATION

Item 1.   Legal Proceedings
 
The bankruptcy proceedings regarding our former lessee, Allied Health Care Services Inc. (“Allied”) and its owner, Charles K. Schwartz, remain ongoing.  Due to the bankruptcy proceedings, management can not determine, at this time, the status of the equipment leased to Allied or the amounts that may ultimately be paid to us from the bankruptcy estates.   The timeline for identifying and recovering assets is uncertain, with resolution depending in large part upon the Trustee’s resolution of certain legal disputes and the cooperation of the various parties involved. Due to the complexity of the alleged fraud and the number of parties involved, we expect that completion of asset recovery by the trustee, and distribution to creditors will take in excess of six additional months from the date of this Form 10Q filing.

Our share of exposure related to the Allied default (if no rent is collected, the equipment is not paid for and/or we are unable to obtain performance under partial personal guaranty) is approximately $1,242,000 as of September 30, 2011 net of a reserve taken against substantially all the Allied receivables.

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.  Although we are experiencing a modest improvement in the global economy in 2011, the economic recovery continues to remain somewhat weak, and a prolonged period of economic weakness could result in the following consequences, any of which could materially affect our business: 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 5.   Other Information
 
       N/A
 
Item 6.      Exhibits
 
  
 
13
 
 
 

 
 
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 14, 2011
By: /s/ Kimberly A. Springsteen-Abbott
Date
Kimberly A. Springsteen-Abbott
 
Chief Executive Officer
   
   
November 14, 2011
By: /s/ Lynn A. Franceschina
Date
Lynn A. Franceschina
 
Executive Vice President, Chief Operating Officer