Attached files
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 MARCH 31, 2012 or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-62526
COMMONWEALTH INCOME & GROWTH FUND IV
(Exact name of registrant as specified in its charter)
Pennsylvania
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23-3080409
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number)
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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 ¨
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Accelerated filer ¨
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Non-accelerated filer ¨
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Smaller reporting company T
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(Do not check if a smaller reporting company.)
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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
MARCH 31, 2012
TABLE OF CONTENTS
PART I
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||
Item 1.
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Financial Statements
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3 |
Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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9 |
Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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11 |
Item 4.
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Controls and Procedures
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11 |
PART II
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||
Item 1.
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Legal Proceedings
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11 |
Item 1A.
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Risk Factors
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11 |
Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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11 |
Item 3.
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Defaults Upon Senior Securities
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11 |
Item 4.
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Mine Safety Disclosures
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11 |
Item 5.
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Other Information
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11 |
Item 6.
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Exhibits
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11 |
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Commonwealth Income & Growth Fund IV
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||||||||
Condensed Balance Sheets
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||||||||
March 31,
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December 31,
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|||||||
2012
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2011
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|||||||
(unaudited)
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||||||||
ASSETS
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||||||||
Cash and cash equivalents
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$ | 34,765 | $ | 4,457 | ||||
Lease income receivable, net of reserve of approximately $21,000
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||||||||
at March 31, 2012 and December 31, 2011
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14,846 | 20,036 | ||||||
Other receivables
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19,143 | 18,873 | ||||||
Refundable deposits
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1,130 | 1,130 | ||||||
69,884 | 44,496 | |||||||
Net investment in finance leases
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9,321 | 12,368 | ||||||
Equipment, at cost
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2,231,510 | 2,110,145 | ||||||
Accumulated depreciation
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(1,637,068 | ) | (1,592,245 | ) | ||||
594,442 | 517,900 | |||||||
Equipment acquisition costs and deferred expenses, net of
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||||||||
accumulated amortization of approximately $15,000 at
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||||||||
March 31, 2012 and December 31, 2011
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10,341 | 12,496 | ||||||
Prepaid acquisition fees
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33,629 | 33,629 | ||||||
43,970 | 46,125 | |||||||
Total Assets
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$ | 717,617 | $ | 620,889 | ||||
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
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||||||||
LIABILITIES
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||||||||
Accounts payable
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$ | 97,812 | $ | 97,352 | ||||
Accounts payable, General Partner
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263,447 | 263,047 | ||||||
Accounts payable, Commonwealth Capital Corp.
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213,479 | 183,969 | ||||||
Other accrued expenses
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18,458 | 9,894 | ||||||
Unearned lease income
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24,404 | 25,145 | ||||||
Notes payable
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215,781 | 127,739 | ||||||
Total Liabilities
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833,381 | 707,146 | ||||||
PARTNERS' CAPITAL (DEFICIT)
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||||||||
General Partner
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1,000 | 1,000 | ||||||
Limited Partners
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(116,764 | ) | (87,257 | ) | ||||
Total Partners' Capital (Deficit)
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(115,764 | ) | (86,257 | ) | ||||
Total Liabilities and Partners' Capital (Deficit)
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$ | 717,617 | $ | 620,889 | ||||
see accompanying notes to condensed financial statements
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3
Commonwealth Income & Growth Fund IV
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||||||||
Condensed Statements of Operations
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||||||||
(unaudited)
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||||||||
Three Months Ended
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||||||||
March 31,
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March 31,
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|||||||
2012
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2011
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|||||||
Revenue
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||||||||
Lease
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$ | 86,456 | $ | 89,599 | ||||
Interest and other
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512 | 1,428 | ||||||
Gain on sale of computer equipment
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1,368 | 5,291 | ||||||
Total revenue
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88,336 | 96,318 | ||||||
Expenses
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||||||||
Operating, excluding depreciation
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39,045 | 41,813 | ||||||
Interest
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1,176 | 1,265 | ||||||
Depreciation
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63,379 | 63,815 | ||||||
Amortization of equipment acquisition costs and deferred expenses
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2,155 | 2,739 | ||||||
Total expenses
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105,755 | 109,632 | ||||||
Net (loss)
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$ | (17,419 | ) | $ | (13,314 | ) | ||
Net (loss) allocated to Limited Partners
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$ | (17,419 | ) | $ | (13,314 | ) | ||
Net (loss) per equivalent Limited Partnership unit
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$ | (0.02 | ) | $ | (0.02 | ) | ||
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||||||||
Weighted average number of equivalent
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||||||||
Limited Partnership units outstanding during
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||||||||
the year
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747,925 | 748,200 | ||||||
see accompanying notes to condensed financial statements
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4
Commonwealth Income & Growth Fund IV
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||||||||||||||||||||
Condensed Statement of Partners' Capital (Deficit)
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||||||||||||||||||||
For the three months ended March 31, 2012
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(unaudited)
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||||||||||||||||||||
General
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Limited
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|||||||||||||||||||
Partner
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Partner
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General
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Limited
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|||||||||||||||||
Units
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Units
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Partner
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Partners
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Total
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||||||||||||||||
Balance, January 1, 2012
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50 | 747,925 | $ | 1,000 | $ | (87,257 | ) | $ | (86,257 | ) | ||||||||||
Net loss
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- | - | - | (17,419 | ) | (17,419 | ) | |||||||||||||
Capital Contributions - CCC
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- | - | - | 30,373 | 30,373 | |||||||||||||||
Cash Contributions - CCC
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- | - | - | 50,000 | 50,000 | |||||||||||||||
Distributions
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- | - | - | (92,461 | ) | (92,461 | ) | |||||||||||||
Balance, March 31, 2012
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50 | 747,925 | $ | 1,000 | $ | (116,764 | ) | $ | (115,764 | ) | ||||||||||
see accompanying notes to condensed financial statements
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5
Commonwealth Income & Growth Fund IV
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||||||||
Condensed Statements of Cash Flow
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||||||||
(unaudited)
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||||||||
Three months ended March 31,
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||||||||
2012
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2011
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|||||||
Net cash provided by operating activities
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$ | 66,048 | $ | 89,446 | ||||
Cash flows from investing activities
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||||||||
Payments received from finance leases
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2,839 | 3,300 | ||||||
Net proceeds from sale of computer equipment
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3,882 | 8,109 | ||||||
Net cash provided by investing activities
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6,721 | 11,409 | ||||||
Cash flows from financing activities
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||||||||
Cash Contributions - CCC
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50,000 | - | ||||||
Distributions to partners
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(92,461 | ) | (92,494 | ) | ||||
Net cash (used in) financing activities
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(42,461 | ) | (92,494 | ) | ||||
Net increase in cash
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30,308 | 8,361 | ||||||
Cash and cash equivalents at beginning of the period
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4,457 | 192,214 | ||||||
Cash and cash equivalents at end of the period
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$ | 34,765 | $ | 200,575 | ||||
see accompanying notes to condensed financial statements
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6
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Business
Commonwealth Income and Growth Fund IV (“CIGF4”) was formed on April 20, 2001 under the Pennsylvania Revised Uniform Limited Partnership Act. The Partnership offered $15,000,000 of Limited Partnership units to the public on October 19, 2001. The Partnership raised the minimum capital required ($1,150,000) and commenced operations on July 8, 2002. The Partnership was fully subscribed and terminated its offering of units on September 15, 2003 with 749,950 units ($14,967,729) sold.
The Partnership used the proceeds of the offering to acquire, own and lease various types of information technology, medical technology, telecommunications technology, inventory management equipment and other similar capital equipment, which is leased primarily to U.S. corporations and institutions. Commonwealth Capital Corp (“CCC”), on behalf of the Partnership and other affiliated partnerships, acquires equipment subject to associated debt obligations and lease agreements and allocate 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 that is an indirect wholly owned subsidiary of CCC. CCC is a member of the Investment Program Association (IPA), REISA, 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, the Partnership will continue until December 31, 2013.
In an effort to increase cash flow, CCC made a non-cash capital contribution of equipment in the amount of approximately $30,000 and a cash contribution of approximately $50,000. Additionally, our General Partner elected to forgo any distributions and allocations of net income owed to it during the three months ended March 31, 2012.
The General Partner and CCC have committed to fund, either through cash contributions and/or forgiveness of indebtedness, any necessary operational cash shortfalls of the Partnership through December 31, 2012. The General Partner will continue to reassess the funding of limited partner distributions throughout 2012 and will continue to waive certain fees if the General Partner determines it is in the best interest of the Partnership to do so. If available cash flow or net disposition proceeds are insufficient to cover the Partnership expenses and liabilities on a short and long term basis, the Partnership may attempt to obtain additional funds by disposing of or refinancing equipment, or by borrowing within its permissible limits. Since the Partnership’s leases are on a triple-net basis, no reserve for maintenance and repairs is deemed necessary.
2. Summary of Significant Accounting Policies
Basis of Presentation
The financial information presented as of any date other than December 31, 2011 has been prepared from the books and records without audit. Financial information as of December 31, 2011 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, 2011. Operating results for the three months ended March 31, 2012 are not necessarily indicative of financial results that may be expected for the full year ended December 31, 2012.
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 and cash equivalents, receivables, accounts payable and accrued expenses and other liabilities are carried at amounts which reasonably approximate their fair values as of March 31, 2012 and December 31, 2011 due to the short term nature of these financial instruments.
The Partnership’s long-term debt consists of notes payable, which are secured by specific equipment and are nonrecourse liabilities of the Partnership. The estimated fair value of this debt at March 31, 2012 and December 31, 2011 approximates the carrying value of these instruments, due to the interest rates on the debt approximating current market interest rates. The Partnership classifies the fair value of its notes payable within Level 2 of the valuation hierarchy based on the observable inputs used to estimate fair value.
Forgiveness of Related Party Payables
In accordance with ASC Topic 470-50 Debt Modifications and Extinguishments, the Partnership accounts for forgiveness of related party payables as Partners' capital transactions.
Cash and cash equivalents
We consider cash and cash equivalents to be cash on hand and highly liquid investments with the original maturity dates of 90 days or less.
At March 31, 2012, cash was held in three bank accounts maintained at one financial institution with an aggregate balance of approximately $36,000. Bank accounts are federally insured up to $250,000, while pursuant to the Dodd/Frank Act of 2010, some accounts are fully insured by the FDIC. At March 31, 2012, the total cash bank balance was as follows:
At March 31, 2012
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Amount
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|||
Total bank balance
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$
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36,000
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||
FDIC insured
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(36,000
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)
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Uninsured amount
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$
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-
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The Partnership's deposits are fully insured by the FDIC. The Partnership has not experienced any losses in our accounts, and believes it is not exposed to any significant credit risk. The amounts in such accounts will fluctuate throughout 2012 due to many factors, including the pace of additional limited partner contributions, cash receipts, equipment acquisitions and distributions to limited partners.
Recent Accounting Pronouncements
In May 2011, the FASB issued ASU No. 2011-04 (“ASC Update 2011-04”), Amendments to Achieve 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 adopted the provisions of this ASU, and the required changes in presentation and disclosure requirements have been included in the March 31, 2012 financial statements. The adoption did not have a material impact on the Partnership’s financial position, results of operations or cash flows.
In December 2011, the FASB issued ASU No. 2011-11 (“ASC Update 2011-11”), Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. This ASU requires an entity to disclose information about offsetting and related arrangements to enable user of its financial statements to understand the effect of those arrangements on its financial position. The amendments in this update are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Partnership is currently evaluating the effect this ASU will have on its financial statements.
3. Information Technology, Medical Technology, Telecommunications Technology, Inventory Management Equipment (“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. The General Partner believes that this strategy adds value since it entices the leasing company to remain actively involved with the lessees for 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 fee. Remarketing fees incurred in connection with lease extensions are accounted for as operating costs. Remarketing fees incurred in connection with the sale of equipment are included in our gain or loss calculations. For the three months ended March 31, 2012 and 2011, remarketing fees were incurred in the amounts of $9,000 and $7,000, respectively. For the three months ended March 31, 2012 and 2011 remarketing fees were paid in the amount of $8,000 and $7,000, respectively.
The Partnership’s share of the equipment in which it participates with other partnerships at March 31, 2012 was approximately $1,444,000 and is included in the fixed assets on its balance sheet. The Partnership’s share of the outstanding debt associated with this equipment at March 31, 2012 was approximately $216,000. The total cost of the equipment shared by the Partnership with other partnerships at March 31, 2012 was approximately $17,245,000. The total outstanding debt related to the equipment shared by the Partnership at March 31, 2012 was approximately $500,000.
The Partnership’s share of the equipment in which it participates with other partnerships at December 31, 2011 was approximately $1,119,000 and is included in the fixed assets on its balance sheet. The Partnership’s share of the outstanding debt associated with this equipment at December 31, 2011 was approximately $128,000. The total cost of the equipment shared by the Partnership with other partnerships at December 31, 2011 was approximately $16,962,000. The total outstanding debt related to the equipment shared by the Partnership at December 31, 2011 was approximately $340,000.
The following is a schedule of future minimum rentals on noncancellable operating leases at March 31, 2012:
Amount
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||||
Nine months ended December 31, 2012
|
$
|
195,000
|
||
Year Ended December 31, 2013
|
155,000
|
|||
Year Ended December 31, 2014
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77,000
|
|||
$
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427,000
|
Unless sooner terminated or extended pursuant to the terms of the Agreement, the Partnership will continue until December 31, 2013.
7
The following lists the components of the net investment in direct financing leases at March 31, 2012:
Amount
|
||||
Total minimum lease payments to be received
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$
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8,000
|
||
Estimated residual value of leased equipment (unguaranteed)
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2,000
|
|||
Less: unearned income
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(1,000
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)
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||
Net investment in direct finance leases
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$
|
9,000
|
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 includes both general and industry specific qualitative and quantitative metrics. We separately take in to consideration payment history, open lawsuits, liens and judgments. Typically, we will not extend credit to a company that has been in business for less than 5 years or that has filed for bankruptcy within the same period. Our internally based model may classify a company as high risk based on our analysis of their audited financial statements. 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 March 31, 2012:
Risk Level
|
Percent of Total
|
|||
Low
|
-
|
%
|
||
Moderate-Low
|
-
|
%
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||
Moderate
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51
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%
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||
Moderate-High
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49
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%
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||
High
|
-
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%
|
||
Net finance lease receivable
|
100
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%
|
As of March 31, 2012 we determined that we did not have a need for an allowance for uncollectible accounts associated with any of our finance leases, as the customer payment histories with us, associated with these leases, has been positive, with no late payments.
The following is a schedule of future minimum rentals on noncancelable direct financing leases at March 31, 2012:
Amount
|
||||
2012
|
$
|
6,000
|
||
2013
|
2,000
|
|||
$
|
8,000
|
4. Related Party Transactions
As of March 31, 2012 and 2011, the Company’s related party receivables and payables are short term, unsecured and non-interest bearing.
Three months ended March 31,
|
2012
|
2011
|
||||||
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.
|
$
|
24,000
|
$
|
29,000
|
||||
Equipment acquisition fee
|
||||||||
The General Partner earned an equipment acquisition fee of 4% of the purchase price of each item of equipment purchases as compensation for the negotiation of the acquisition of the equipment and lease thereof or sale under a conditional sales contract. At March 31, 2012, the remaining balance of prepaid acquisition fees was approximately $34,000, which is expected to be earned in future periods.
|
$
|
-
|
$
|
2,000
|
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 charges by and independent third party for similar services for similar equipment or (ii) the sum of (a) two percent of (1) the gross lease revenues attributable to equipment which is subject to full payout net leases which contain net lease provisions plus (2) the purchase price paid on conditional sales contracts as received by the Partnership and (b) 5% of the gross lease revenues attributable to equipment which is subject to operating and capital leases. For three months ended March 31, 2012 equipment management fees of approximately $4,000 were earned but were waived by the General Partner. For the three months ended March 31, 2011, equipment management fees of approximately $5,000 were earned and were waived by the General Partner.
|
$
|
-
|
$
|
-
|
5. Notes Payable
Notes payable consisted of the following approximate amounts:
March 31, 2012
|
December 31, 2011
|
|||||||
Installment note payable to bank; interest at 7.50% due in quarterly installments of $6,632, including interest, with final payment in October 2012
|
$
|
19,000
|
$
|
25,000
|
||||
Installment note payable to bank; interest at 3.95% due in quarterly installments of $8,985, including interest, with final payment in September 2014
|
85,000
|
103,000
|
||||||
Installment note payable to bank; interest at 3.95% due in quarterly installments of $9,975, including interest, with final payment in December 2014
|
112,000
|
-
|
||||||
$
|
216,000
|
$
|
128,000
|
The notes are secured by specific equipment and are nonrecourse liabilities of the Partnership. As such, the notes do not contain any debt covenants with which we must comply on either an annual or quarterly basis. Aggregate maturities of notes payable for each of the periods subsequent to March 31, 2012 are as follows:
Amount
|
||||
Nine months ended December 31, 2012
|
$
|
80,000
|
||
Year ended December 31, 2013
|
71,000
|
|||
Year ended December 31, 2014
|
65,000
|
|||
$
|
216,000
|
Unless sooner terminated or extended pursuant to the terms of the Agreement, the Partnership will continue until December 31, 2013. Upon termination of the Partnership, the General Partner will assume the outstanding notes payable and related equipment and minimum rentals.
8
6. Supplemental Cash Flow Information
During the three months ended March 31, 2012, the Partnership wrote-off fully amortized acquisition and finance fees of approximately $2,000.
Other noncash activities included in the determination of net loss are as follows:
Three months ended March 31,
|
2012
|
2011
|
||||||
Lease revenue net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank
|
$
|
24,000
|
$
|
17,000
|
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:
Three months ended March 31,
|
2012
|
2011
|
||||||
Forgiveness of related party payables recorded as a capital contribution
|
$
|
-
|
$
|
30,000
|
||||
Capital Contribution - equipment transfer from CCC
|
$
|
30,000
|
$
|
52,000
|
||||
Equipment acquisition fees earned by General Partner upon purchase of equipment from prepaid acquisition fees
|
$
|
-
|
$
|
2,000
|
||||
Debt assumed in connection with purchase of equipment
|
$
|
112,000
|
$
|
-
|
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, sales of securities, 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, 2011 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 accounting pronouncements.
INFORMATION TECHNOLOGY, MEDICAL TECHNOLOGY, TELECOMMUNICATIONS TECHNOLOGY, INVENTORY MANAGEMENT EQUIPMENT
Commonwealth Capital Corp., on our behalf and on behalf of other affiliated partnerships, acquires 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 equipment for financial statement purposes is based on the straight-line method estimated generally over useful lives of two to four years.
The Equipment Lease 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 1st quarter of 2012 increased 10% relative to the same period of 2011. Credit quality continued to improve as the rate of receivables aged in excess of 30 days declined 20% when compared to data from the 1st quarter of 2011. Additionally, charge-offs declined 46% in the 1st quarter of 2012, relative to the same period in 2011. More than 66% of ELFA reporting members reported submitting more transactions for approval during March, a 62% increase over the previous month. For 2012, the ELFA has forecasted a 4.1% increase in finance volume year over year.
LEASE INCOME RECEIVABLE
Lease income receivable includes current lease income receivable net of allowances for uncollectible amounts. The Partnership monitors lease income receivable to ensure timely and accurate payment by lessees. Its Lease Relations department is responsible for monitoring lease income receivable and, as necessary, resolving outstanding invoices.
The Partnership reviews a customer’s credit history before extending credit. In the event of a default it may establish a provision for uncollectible lease income receivable based upon the credit risk of specific customers, historical trends and other information.
REVENUE RECOGNITION
Through March 31, 2012, the Partnership’s leasing operations consisted of operating and finance leases. 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
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 and is included in depreciation expense in the accompanying financial statements. The fair value of equipment is calculated using income or market approaches.
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LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Our primary sources of cash for the three months ended March 31, 2012 were cash provided by operating activities of approximately $66,000, proceeds from the sale of equipment in the amount of approximately $4,000, payments from finance leases of approximately $3,000 and a cash contribution from CCC of approximately $50,000. This compares to the three months ended March 31, 2011 where our primary sources of cash were cash provided by operating activities of approximately $89,000, proceeds from the sale of equipment of approximately $8,000 and payments from finance leases of approximately $3,000.
Our primary use of cash for the three months ended March 31, 2012 and 2011 was for distributions to our Limited partners in the amount of approximately $92,000 in each period.
While we intend to invest additional capital in equipment during the remainder of 2012, the amount of such additional investment is uncertain, as available funds will first be committed to the payment of investor distributions and operating expenses.
For the three months ended March 31, 2012, cash was provided by operating activities of approximately $66,000, which includes net loss of approximately $17,000, a gain on sale of equipment of approximately $1,000 and depreciation and amortization expenses of approximately $66,000. Other non-cash activities included in the determination of net income include direct payments of lease income by lessees to banks of approximately $24,000.
For the three months ended March 31, 2011, cash was provided by operating activities of approximately $89,000, which includes net loss of approximately $13,000, a gain on sale of equipment of approximately $5,000 and depreciation and amortization expenses of approximately $67,000. Other non-cash activities included in the determination of net income include direct payments of lease income by lessees to banks of approximately $17,000.
We consider cash and cash equivalents to be cash on hand and highly liquid investments with the original maturity dates of 90 days or less.
At March 31, 2012 cash was held in three accounts maintained at one financial institution. 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 March 31, 2012, our total cash bank balance of approximately $36,000 was fully insured.
The Partnership's deposits are fully insured by the FDIC. We deposit our funds with a Moody's Aaa-Rated banking institution which is one of only three Aaa-Rated banks listed on the New York Stock Exchange. We have not experienced any losses in such accounts, and believe that we are not exposed to any significant credit risk. The amount in such accounts will fluctuate throughout 2012 due to many factors, including the pace of additional cash receipts, equipment acquisitions and distributions to investors.
Our investment strategy of acquiring equipment and generally leasing it under triple-net leases to operators who generally meet specified financial standards minimizes our operating expenses. As of March 31, 2012, we had future minimum rentals on non-cancelable leases of approximately $195,000 for the balance of the year ending December 31, 2012 and approximately $232,000 thereafter. As of March 31, 2012, we had future minimum rentals on non-cancelable finance leases of approximately $6,000 for the balance of the year ending December 31, 2012 and approximately $2,000 thereafter.
As of March 31, 2012, our debt was approximately $216,000, with interest rates ranging from 3.95% through 7.50% and will be payable through December 2014.
Unless sooner terminated or extended pursuant to the terms of the Agreement, the Partnership will continue until December 31, 2013.
In an effort to increase cash flow, CCC made a non-cash capital contribution of equipment in the amount of approximately $30,000 and a cash contribution of approximately $50,000. Additionally, our General Partner elected to forgo any distributions and allocations of net income owed to it during the three months ended March 31, 2012 and 2011.
The General Partner and CCC have committed to fund, either through cash contributions and/or forgiveness of indebtedness, any necessary operational cash shortfalls of the Partnership through December 31, 2012. The General Partner will continue to reassess the funding of limited partner distributions throughout 2012 and will continue to waive certain fees if the General Partner determines it is in the best interest of the Partnership to do so. If available cash flow or net disposition proceeds are insufficient to cover the Partnership expenses and liabilities on a short and long term basis, the Partnership may attempt to obtain additional funds by disposing of or refinancing equipment, or by borrowing within its permissible limits. Since the Partnership’s leases are on a triple-net basis, no reserve for maintenance and repairs is deemed necessary.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2012 compared to Three Months Ended March 31, 2011
Lease Revenue
Lease revenue decreased to approximately $86,000 for the three months ended March 31, 2012, from $90,000 for the three months ended March 31, 2011. This decrease was primarily due to more lease agreements terminating versus new lease agreements being acquired during the three months ended March 31, 2012.
Sale of Equipment
We sold equipment with a net book value of approximately $3,000 for the three months ended March 31, 2012, for a net gain of approximately $1,000. We sold equipment with a net book value of approximately $3,000 for the three months ended March 31, 2011, for a net gain of approximately $5,000.
Operating Expenses
Our operating expenses, excluding depreciation, primarily consist of accounting, legal, outside service fees and reimbursement of expenses to CCC, a related party, for administration and operation of the Partnership. These expenses decreased to approximately $39,000 for the three months ended March 31, 2012, compared to $42,000 for the three months ended March 31, 2011 due to decreased maintenance and other administrative expenses, partially offset by higher other outside service fees.
Depreciation and Amortization Expense
Depreciation and amortization expenses consist of depreciation on equipment, including impairment charges, and amortization of equipment acquisition fees. The expenses decreased to approximately $66,000 for the three months ended March 31, 2012, from approximately $67,000 for the three months ended March 31, 2011 due to the higher frequency in the termination of leases as compared to the acquisition of new leases for the three months ended March 31, 2012.
Net Income (Loss)
For the three months ended March 31, 2012, we recognized revenue of approximately $88,000 and expenses of approximately $105,000, resulting in a net loss of approximately $17,000. For the three months ended March 31, 2011, we recognized revenue of approximately $96,000 and expenses of approximately $109,000, resulting in a net loss of approximately $13,000. This net loss is primarily due to the changes in revenue and expenses as described above.
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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 Chief 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 Chief Executive Officer and Principal Financial Officer have concluded that, as of March 31, 2012, our disclosure controls and procedures are effective in ensuring that information relating to us which is required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act of 1934 is (a) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (b) accumulated and communicated to management, including the Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There were no changes in the Partnership’s internal control over financial reporting during the first quarter of 2012 that have materially affected or are reasonably likely to materially affect its internal control over financial reporting.
Part II: OTHER INFORMATION
Item 1.
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Legal Proceedings
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NONE
Item 1A.
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Risk Factors
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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 2011, general worldwide economic conditions experienced a downturn. Although we are experiencing a modest improvement in the global economy in 2012, 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.
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Unregistered Sales of Equity Securities and Use of Proceeds
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N/A
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Item 3.
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Defaults Upon Senior Securities
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N/A
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Item 4.
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Mine Safety Disclosures
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N/A
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Item 5.
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Other Information
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NONE
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Item 6.
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Exhibits
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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 IV
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BY: COMMONWEALTH INCOME & GROWTH FUND, INC., General Partner
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May 15, 2012
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By: /s/ Kimberly A. Springsteen-Abbott
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Date
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Kimberly A. Springsteen-Abbott
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Chief Executive Officer
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May 15, 2012
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By: /s/ Lynn A. Franceschina
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Date
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Lynn A. Franceschina
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Executive Vice President, Chief Operating Officer
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