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 or
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012
¨ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-108057
COMMONWEALTH INCOME & GROWTH FUND V
(Exact name of registrant as specified in its charter)
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Pennsylvania
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65-1189593
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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):
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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
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PART I
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||
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Item 1.
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Financial Statements
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3 |
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Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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9 |
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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10 |
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Item 4.
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Controls and Procedures
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10 |
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PART II
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||
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Item 1.
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Legal Proceedings
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10 |
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Item 1A.
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Risk Factors
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11 |
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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11 |
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Item 3.
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Defaults Upon Senior Securities
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11 |
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Item 4.
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Mine Safety Disclosures
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11 |
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Item 5.
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Other Information
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11 |
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Item 6.
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Exhibits
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11 |
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
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Commonwealth Income & Growth Fund V
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||||||||
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Condensed Balance Sheets
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||||||||
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March 31,
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December 31,
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|||||||
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2012
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2011
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|||||||
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(unaudited)
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||||||||
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ASSETS
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||||||||
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Cash and cash equivalents
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$ | 94,903 | $ | 203,066 | ||||
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Lease income receivable, net of reserve of approximately $154,000 at March 31, 2012 and December 31, 2011
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110,036 | 109,177 | ||||||
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Other receivables
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30,173 | 26,395 | ||||||
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Escrow - Restricted Cash
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960,000 | 960,000 | ||||||
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Prepaid expenses
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413 | 620 | ||||||
| 1,195,525 | 1,299,258 | |||||||
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Equipment, at cost
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11,796,691 | 10,972,410 | ||||||
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Accumulated depreciation
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(9,583,981 | ) | (9,402,459 | ) | ||||
| 2,212,710 | 1,569,951 | |||||||
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Equipment acquisition costs and deferred expenses, net of accumulated amortization
of approximately $118,000 and $130,000 at March 31, 2012 and December 31, 2011, respectively
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81,438 | 55,461 | ||||||
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Prepaid acquisition fees
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15,495 | 20,224 | ||||||
| 96,933 | 75,685 | |||||||
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Total Assets
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$ | 3,505,168 | $ | 2,944,894 | ||||
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LIABILITIES AND PARTNERS' CAPITAL
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||||||||
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LIABILITIES
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||||||||
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Accounts payable
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$ | 126,467 | $ | 209,667 | ||||
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Accounts payable, General Partner
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448,840 | 410,180 | ||||||
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Accounts payable, Commonwealth Capital Corp.
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467,288 | 358,090 | ||||||
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Contingency accrual
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564,000 | 564,000 | ||||||
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Payable to Affiliate
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516,068 | 512,114 | ||||||
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Other accrued expenses
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12,262 | 38,186 | ||||||
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Unearned lease income
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57,704 | 55,169 | ||||||
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Notes payable
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914,017 | 358,090 | ||||||
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Total Liabilities
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3,106,646 | 2,505,496 | ||||||
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PARTNERS' CAPITAL
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||||||||
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General Partner
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1,000 | 1,000 | ||||||
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Limited Partners
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397,522 | 438,398 | ||||||
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Total Partners' Capital
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398,522 | 439,398 | ||||||
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Total Liabilities and Partners' Capital
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$ | 3,505,168 | $ | 2,944,894 | ||||
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see accompanying notes to condensed financial statements
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||||||||
3
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Commonwealth Income & Growth Fund V
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Condensed Statements of Operations
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(unaudited)
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Three Months Ended
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||||||||
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March 31, 2012
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March 31, 2011
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|||||||
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Revenue
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||||||||
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Lease
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$ | 289,824 | $ | 409,714 | ||||
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Interest and other
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175 | 3,840 | ||||||
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Gain on sale of equipment
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2,691 | 45,308 | ||||||
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Total revenue
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292,690 | 458,862 | ||||||
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Expenses
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||||||||
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Operating, excluding depreciation
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63,854 | 197,747 | ||||||
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Equipment management fee, General Partner
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7,658 | 10,243 | ||||||
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Legal
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124 | 12,138 | ||||||
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Interest
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7,764 | 4,916 | ||||||
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Depreciation
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235,790 | 503,812 | ||||||
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Amortization of equipment acquisition costs and deferred expenses
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15,568 | 18,536 | ||||||
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Other
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2,808 | - | ||||||
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Total expenses
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333,566 | 747,392 | ||||||
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Net loss
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$ | (40,876 | ) | $ | (288,530 | ) | ||
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Net loss allocated to Limited Partners
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$ | (40,876 | ) | $ | (289,952 | ) | ||
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Net loss per equivalent Limited Partnership unit
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$ | (0.03 | ) | $ | (0.23 | ) | ||
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Weighted average number of equivalent Limited Partnership units outstanding during the period
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1,236,608 | 1,237,425 | ||||||
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||||||||
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see accompanying notes to condensed financial statements
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4
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Commonwealth Income & Growth Fund V
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Condensed Statement of Partners' Capital
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For the three months ended March 31, 2012
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(unaudited)
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General Partner Units
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Limited Partner Units
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General Partner
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Limited Partner
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Total
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||||||||||||||||
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Balance, January 1, 2012
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50 | 1,236,608 | $ | 1,000 | $ | 438,398 | $ | 439,398 | ||||||||||||
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Net loss
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- | - | - | (40,876 | ) | (40,876 | ) | |||||||||||||
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Balance, March 31, 2012
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50 | 1,236,608 | $ | 1,000 | $ | 397,522 | $ | 398,522 | ||||||||||||
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see accompanying notes to condensed financial statements
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||||||||||||||||||||
5
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Commonwealth Income & Growth Fund V
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Condensed Statements of Cash Flow
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||||||||
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(unaudited)
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||||||||
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Three Months ended
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||||||||
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March 31, 2012
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March 31, 2011
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Net cash provided by operating activities
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$ | 181,125 | $ | 680,295 | ||||
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Investing activities:
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||||||||
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Capital expenditures
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(259,409 | ) | (52,451 | ) | ||||
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Equipment acquisition fees, General Partner
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(30,583 | ) | - | |||||
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Net proceeds from the sale of computer equipment
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6,938 | 150,874 | ||||||
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Net cash (used in) provided by investing activities
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(283,054 | ) | 98,423 | |||||
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Financing activities:
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||||||||
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Redemptions
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- | (5,299 | ) | |||||
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Debt placement fee paid to the General Partner
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(6,234 | ) | - | |||||
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Distributions to partners
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- | (448,249 | ) | |||||
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Net cash (used in) financing activities
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(6,234 | ) | (453,548 | ) | ||||
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Net (decrease) increase in cash
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(108,163 | ) | 325,170 | |||||
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Cash and cash equivalents at beginning of period
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203,066 | 79,118 | ||||||
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Cash and cash equivalents at end of period
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$ | 94,903 | $ | 404,288 | ||||
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see accompanying notes to condensed financial statements
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||||||||
6
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Business
Commonwealth Income & Growth Fund V (the “Partnership”) is a limited partnership organized in the Commonwealth of Pennsylvania in May 2003. The Partnership offered for sale up to 1,250,000 units of the limited partnership at the purchase price of $20 per unit (the “offering”). The Partnership reached the minimum amount in escrow and commenced operations on March 14, 2005. As of February 24, 2006, the Partnership was fully subscribed.
The Partnership used the proceeds of the offering to acquire, own and lease various types of information technology, 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 which is an indirect wholly owned subsidiary of CCC. 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 February 4, 2017.
As a result of a jury’s verdict in favor of the City of Tempe, (see Note 7), the Partnership has temporarily suspended distributions, beginning with the second quarter of 2011 and continuing through first quarter 2012. The General Partner will continue to reassess the funding of limited partner distributions throughout the remainder of 2012. If available cash flow or net disposition proceeds are insufficient to cover the Partnership expenses and liabilities on a short or long term basis, the Partnership may attempt to obtain additional funds by refinancing equipment, or by borrowing within its permissible limits.
The General Partner and CCC will determine if related party payables owed to them by the Partnership may be deferred (if deemed necessary) in an effort to increase the Partnership’s cash flow.
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.
Cash and cash equivalents
At March 31, 2012, cash was held in three accounts maintained at one financial institution with an aggregate balance of approximately $97,000. Bank accounts are federally insured up to $250,000, while pursuant to the Dodd/Frank Act of 2010, some accounts are fully insured by the FDIC. At March 31, 2012, the total cash bank balance was as follows:
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At March 31, 2012
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Amount
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|||
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Total bank balance
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$
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97,000
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||
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FDIC insured
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(97,000
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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 bank balances are fully insured by the FDIC. The Partnership deposits its 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. The Partnership has not experienced any losses in such accounts, and believes it is not exposed to any significant credit risk. The amount in such accounts will fluctuate throughout 2012 due to many factors, including the pace of additional cash receipts, equipment acquisitions, interest rates and distributions to investors.
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 and other Business-Essential Capital Equipment
The Partnership is the lessor of equipment under operating 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.
The Partnership’s leases do not contain any step-rent provisions or escalation clauses nor are lease revenues adjusted based on any index.
Remarketing fees are paid to the leasing companies from which the Partnership purchases leases. These are fees that are earned by the leasing companies when the initial terms of the lease have been met. The General Partner believes that this strategy adds value since it entices the leasing company to 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 fee. Remarketing fees incurred in connection with lease extensions are accounted for as operating costs. Remarketing fees incurred in connection with the sale of computer equipment are included in our gain or loss calculations. For the three months ended March 31, 2012 and 2011, the Partnership incurred remarketing fees of approximately $9,000 and $16,000, respectively. For the three months ended March 31, 2012 and 2011 the Partnership paid approximately $10,000 and $30,000, respectively, in such fees.
CCC, on behalf of the Partnership and on behalf of other affiliated partnerships, acquires equipment subject to associated debt obligations and lease agreements and allocates a participation in the cost, debt and lease revenue to the various partnerships based on certain risk factors. The Partnership’s share of the equipment in which it participates with other partnerships at March 31, 2012 was approximately $9,597,000 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 March 31, 2012 was approximately $30,406,000. The Partnership’s share of the outstanding debt associated with this equipment at March 31, 2012 was approximately $504,000. The total outstanding debt related to the equipment shared by the Partnership at March 31, 2012 was approximately $1,207,000.
The Partnership’s share of the equipment in which it participates with other partnerships at December 31, 2011 was approximately $9,280,000 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, 2011 was approximately $29,772,000. The Partnership’s share of the outstanding debt associated with this equipment at December 31, 2011 was approximately $351,000. The total outstanding debt related to the equipment shared by the Partnership at December 31, 2011 was approximately $952,000.
As the Partnership and the other programs managed by the General Partner continue to acquire new equipment for the portfolio, opportunities for shared participation are expected to continue. Sharing in the acquisition of a lease portfolio gives the fund an opportunity to acquire additional assets and revenue streams, while allowing the fund to remain diversified and reducing its overall risk with respect to one portfolio.
The following is a schedule of future minimum rentals on non-cancellable operating leases at March 31, 2012:
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Amount
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||||
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Nine Months ended December 31, 2012
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$
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770,000
|
||
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Year ended December 31, 2013
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736,000
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|||
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Year ended December 31, 2014
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563,000
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|||
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Year ended December 31, 2015
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44,000
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|||
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$
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2,113,000
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|||
7
4. Related Party Transactions
Receivables/Payables
As of March 31, 2012, the Partnership’s related party receivables and payables are short term, unsecured, and non-interest bearing.
During the year ended December 31, 2011, the Partnership recorded a payable to an affiliate in the amount of approximately $512,000, including interest. This payable is approximately $516,000 as of March 31, 2012. The payable carries an annual interest rate of 6.25%. The payable is expected to be paid back during 2012.
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Three months ended March 31,
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2012
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2011
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||||||
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Reimbursable expenses
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||||||||
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Reimbursable expenses, including legal fees, which are charged to the Partnership by CCC in connection with the administration and operation of the Partnership, are allocated to the Partnership based upon several factors including, but not limited to, the number of investors, compliance issues, and the number of existing leases.
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$
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62,000
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$
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180,000
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||||
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Equipment acquisition fee
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||||||||
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The General Partner earned an equipment acquisition fee of 4% of the purchase price of each item of equipment purchased as compensation for the negotiation of the acquisition of the equipment and lease thereof or sale under a conditional sales contract. At March 31, 2012, the remaining balance of prepaid acquisition fees was approximately $15,000, which is expected to be earned in future periods.
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$
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35,000
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$
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2,000
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||||
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Debt placement fee
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||||||||
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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.
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$ | 6,000 | $ | - | ||||
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Equipment management fee
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||||||||
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The General Partner is entitled to be paid for managing the equipment portfolio 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) 2.5% of the gross lease revenues attributable to equipment which is subject to operating leases. In an effort to increase future cash flow for the fund our General Partner had elected to reduce the percentage of equipment management fees paid to it from 5% to 2.5% of the gross lease revenues attributable to equipment which is subject to operating leases. The reduction was effective beginning in July 2010.
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$
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8,000
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$
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10,000
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||||
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Equipment liquidation fee
|
||||||||
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With respect to each item of equipment sold by the General Partner (other than in connection with a conditional sales contract), a fee equal to the lesser of (i) 50% of the competitive equipment sale commission or (ii) three percent of the sales price for such equipment is payable to the General Partner. The payment of such fee is subordinated to the receipt by the limited partners of (i) a return of their net capital contributions and a 10% per annum cumulative return, compounded daily, on adjusted capital contributions and (ii) the net disposition proceeds from such sale in accordance with the Partnership Agreement. Such fee will be reduced to the extent any liquidation or resale fees are paid to unaffiliated parties. During the three months ended, the General Partner waived approximately $200 of equipment liquidation fees.
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$
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-
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$
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5,000
|
||||
5. Notes Payable
Notes payable consisted of the following approximate amounts:
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March 31,
2012
|
December 31,
2011
|
|||||||
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Installment note payable to bank; interest at 6.21% due in monthly installments of $1,368, including interest, with final payment in May 2012
|
$
|
3,000
|
$
|
7,000
|
||||
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Installment notes payable to bank; interest rates ranging from 5.89% to 7.50%, due in monthly installments of $6,666 and $7,104, respectively, including interest, with final payment in April 2013
|
132,000
|
163,000
|
||||||
|
Installment notes payable to bank; interest at 3.95%, due in quarterly installments ranging from $6,824 to $9,657, including interest, with final payment in July 2014
|
156,000
|
188,000
|
||||||
|
Installment notes payable to bank; interest at 3.95%, due in quarterly installments ranging from $8,280 to $9,795, including interest, with final payment in December 2014
|
303,000
|
-
|
||||||
|
Installment notes payable to bank: interest at 5.25%, due in monthly installments of $4,813, including interest, with final payment in March 2015
|
320,000
|
-
|
||||||
|
$
|
914,000
|
$
|
358,000
|
|||||
These notes are secured by specific computer equipment and are nonrecourse liabilities of the Partnership. As such, the notes do not contain any debt covenants with which we must comply on either an annual or quarterly basis. Aggregate maturities of notes payable for each of the periods subsequent to March 31, 2012 are as follows:
|
Amount
|
||||
|
Nine months ending December 31, 2012
|
$
|
111,000
|
||
|
Year ended December 31, 2013
|
398,000
|
|||
|
Year ended December 31, 2014
|
364,000
|
|||
|
Year ended December 31, 2015
|
41,000
|
|||
|
$
|
914,000
|
|||
6. Supplemental Cash Flow Information
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
|
$
|
67,000
|
$
|
56,000
|
||||
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
|
||||||
|
Equipment acquisition fees earned by General Partner, upon purchase of equipment, from prepaid acquisition fees
|
$
|
5,000
|
$
|
2,000
|
||||
|
Debt assumed in conjunction with purchase of equipment
|
$
|
623,000
|
$
|
-
|
||||
At March 31, 2012 and 2011, the Partnership wrote-off fully amortized acquisition and finance fees of approximately $28,000 and $20,000, respectively.
8
7. Commitments and Contingencies
MobilePro Corp./City of Tempe, AZ
Commonwealth Capital Corp. ("Commonwealth") has settled the litigation in which it was involved on the Partnership's behalf with the City of Tempe, Arizona related to a default by a lessee, MobilePro Corp. MobilePro was a lessee that had defaulted on its lease of wi-fi equipment installed throughout the City of Tempe as part of a municipal broadband wireless network. Due to a dispute between Commonwealth and Tempe regarding ownership of and access to the wi-fi equipment post-default, Commonwealth and Tempe sued each other for the equipment and various amounts of damages. A jury trial of Case No. CV09-00274 was held in U.S. District Court for the District of Arizona on May 16-18 and May 24-25, 2011. On May 25, 2011, judgment was entered in accordance with the jury’s verdict in favor of the City of Tempe and against Commonwealth in the amount of $1,808,904. The Partnership’s share of the judgment, based upon its proportionate participation in the MobilePro lease transaction, was $866,217. Commonwealth. filed a Notice of Appeal to the U.S. Court of Appeals for the Ninth Circuit on September 23, 2011 requiring that the Partnership contribute its proportionate share ($960,000) to a $2,000,000 letter of credit required to post an appeal bond and commence the appeal. Commonwealth and the City of Tempe agreed to settle the dispute at a mediation held on March 9, 2012, with Commonwealth agreeing to pay a reduced judgment of $1,175,000, of which the Partnership’s share is approximately $564,000. The final settlement agreement was signed in March 30, 2012, and payment made to the City of Tempe on April 3, 2012. The remainder of the bond collateral, after payment of banking fees, will be returned to Commonwealth and the Partnership’s proportionate share (approximately $395,000) will be allocated back to the Partnership.
Allied Health Care Services
As previously disclosed in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2011, management had fully impaired all equipment and reserved for all accounts receivable related to the lease to Allied Health Care Services, Inc. (“Allied”), due to the bankruptcy of Allied and the criminal conviction of its founder for fraud. There have been no material changes in the status of Allied’s bankruptcy or in the likelihood of recovering available assets since the date of the Partnership’s annual report. The bankruptcy trustee has not yet indicated whether he will pursue adversary claims against creditors seeking the return of pre-petition payments made by Allied, and therefore the Partnership’s exposure to such potential claims remains indeterminable at this time.
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD LOOKING STATEMENTS
Certain statements within this Quarterly Report on Form 10-Q may constitute forward-looking statements. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. You can identify these statements by the use of words such as “may,” “will,” “could,” “anticipate,” “believe,” “estimate,” “expects,” “intend,” “predict” or “project” and variations of these words or comparable words or phrases of similar meaning. These forward-looking statements reflect our current beliefs and expectations with respect to future events and are based on assumptions and are subject to risks and uncertainties and other factors outside our control that may cause actual results to differ materially from those projected.
CRITICAL ACCOUNTING POLICIES
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.
INFORMATION TECHNOLOGY, MEDICAL TECHNOLOGY, TELECOMMUNICATIONS TECHNOLOGY, INVENTORY MANAGEMENT EQUIPMENT AND OTHER BUSINESS-ESSENTIAL CAPITAL 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.
Lease Income Receivable
Lease income receivable includes current lease income receivable net of allowances for uncollectible accounts, if any. 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. Lease revenue is recognized on a monthly straight-line basis which is in accordance with the terms of the lease agreement.
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, we have solely entered into operating leases. Lease revenue is recognized on a monthly straight-line basis which is in accordance with the terms of the lease agreement.
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.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of cash for the three months ended March 31, 2012 was provided by operating activities of approximately $181,000 and from the proceeds from the sale of equipment of approximately $7,000. This compares to the three months ended March 31, 2011 where our primary source of cash was from operating activities of approximately $680,000 and proceeds from the sale of equipment were approximately $151,000.
Our primary use of cash for the three months ended March 31, 2012 was for the purchase of new equipment of approximately $259,000 and for equipment acquisition fees of approximately $31,000. For the three months ended March 31, 2011, our primary uses of cash were for distributions to partners of approximately $448,000, and for capital expenditures of approximately $52,000.
Capital expenditures are expected to occur during the remainder of 2012, as management focuses on additional equipment acquisitions. We intend to invest approximately $1,200,000 in additional equipment during the remainder of 2012. The acquisition of this equipment will be primarily funded by debt financing. Any debt service will be funded from cash flows from lease rental payments, and not from public offering proceeds.
As we continue to acquire equipment for the equipment portfolio, operating expenses may increase, but because of our investment strategy of leasing equipment primarily through triple-net leases, we avoid operating expenses related to equipment maintenance or taxes.
Cash was provided by operating activities for the three months ended March 31, 2012 of approximately $181,000, which includes a net loss of approximately $41,000 and depreciation and amortization expenses of approximately $251,000. Other non-cash activities included in the determination of net loss include direct payments of lease income by lessees to banks of approximately $67,000. Additionally we had a gain on the sale of equipment in the amount of approximately $3,000. For the three months ended March 31, 2011 cash was also generated by operating activities of approximately $680,000, which includes a net loss of approximately $289,000 and depreciation and amortization expenses of approximately $522,000. Other non-cash activities included in the determination of net loss include direct payments of lease income by lessees to banks of approximately $56,000. Additionally we had a gain on the sale of equipment in the amount of $45,000.
At March 31, 2012, cash was held in three accounts maintained at one financial institution with an aggregate balance of approximately $97,000. Bank accounts are federally insured up to $250,000, while pursuant to the Dodd/Frank Act of 2010, some accounts are fully insured by the FDIC. At March 31, 2012, the total cash bank balance was as follows:
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At March 31, 2012
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Amount
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Total bank balance
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$
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97,000
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FDIC insured
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(97,000
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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 bank balances 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, interest rates and distributions to limited partners.
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 operating leases of approximately $770,000 for the balance of the year ending December 31, 2012 and approximately $1,343,000 thereafter.
As of March 31, 2012, our debt was approximately $914,000, with interest rates ranging from 3.95% to 7.50%, and will be payable through March 2015.
Our cash from operations is expected to continue to be adequate to cover all operating expenses, liabilities, and distributions to Partners during the next 12-month period. If available cash flow or net disposition proceeds are insufficient to cover our expenses and liabilities on a short and long term basis, we will attempt to obtain additional funds by disposing of or refinancing equipment, or by borrowing within our permissible limits. As a result of the litigation with the City of Tempe, the Partnership had temporarily suspended distributions, beginning with the second quarter of 2011. The General Partner will continue to reassess the funding of limited partner distributions throughout the remainder of 2012. The General Partner and CCC will determine if related party payables owed to them by the Partnership may be deferred (if deemed necessary) in an effort to increase the Partnership’s cash flow.
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RESULTS OF OPERATIONS
Three months ended March 31, 2012 compared to three months ended March 31, 2011
Revenue
Our lease revenue decreased to approximately $290,000 for the three months ended March 31, 2012, from approximately $410,000 for the three months ended March 31, 2011. This decrease was primarily due to more lease agreements ending versus new lease agreements being acquired during the three months ended March 31, 2012.
Interest and other revenue decreased to approximately $200 for the three months ended March 31, 2012 from approximately $4,000 for the three months ended March 31, 2011 due to a lower miscellaneous income attributable to decreased billings for damaged equipment during the three months ended March 31, 2012.
Sale of Equipment
We sold equipment with a net book value of approximately $4,000 for the three months ended March 31, 2012, for a net gain of approximately $3,000. This compared to equipment that we sold for the three months ended March 31, 2011 with a net book value of approximately $105,000, for a net gain of approximately $45,000.
Operating and Legal 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 $64,000 for the three months ended March 31, 2012, from approximately $210,000 for the three months ended March 31, 2011. This decrease is primarily attributable to a decrease in various administrative expenses, as well as a decrease in legal expenses due to the settlement in 2012 of the MobilePro/Tempe litigation. See note 7 – Commitments and Contingencies for additional information.
Equipment Management Fees
We pay an equipment management fee to our general partner for managing our equipment portfolio. The equipment management fee is approximately 2.5% of the gross lease revenue attributable to equipment that is subject to operating leases. The equipment management fee decreased to approximately $8,000 for the three months ended March 31, 2012 from approximately $10,000 for the three months ended March 31, 2011, which is consistent with the decrease in lease revenue.
Depreciation and Amortization Expenses
Depreciation and amortization expenses consist of depreciation on equipment and amortization of equipment acquisition fees. These expenses decreased to approximately $251,000 for the three months ended March 31, 2012, from $522,000 for the three months ended March 31, 2011. This decrease was due to equipment and acquisition fees being fully depreciated/amortized and not being replaced with as many new equipment purchases.
Net Income (Loss)
For the three months ended March 31, 2012, we recognized revenue of approximately $293,000 and expenses of approximately $334,000, resulting in a net loss of approximately $41,000. For the three months ended March 31, 2011, we recognized revenue of approximately $459,000 and expenses of approximately $748,000, resulting in a net loss of approximately $289,000. This change in net loss is due to the changes in revenue and expenses as described above.
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. Legal Proceedings
MobilePro Corp./City of Tempe, AZ
Commonwealth Capital Corp. ("Commonwealth") has settled the litigation in which it was involved on the Partnership's behalf with the City of Tempe, Arizona related to a default by a lessee, MobilePro Corp. MobilePro was a lessee that had defaulted on its lease of wi-fi equipment installed throughout the City of Tempe as part of a municipal broadband wireless network. Due to a dispute between Commonwealth and Tempe regarding ownership of and access to the wi-fi equipment post-default, Commonwealth and Tempe sued each other for the equipment and various amounts of damages. A jury trial of Case No. CV09-00274 was held in U.S. District Court for the District of Arizona on May 16-18 and May 24-25, 2011. On May 25, 2011, judgment was entered in accordance with the jury’s verdict in favor of the City of Tempe and against Commonwealth in the amount of $1,808,904. The Partnership’s share of the judgment, based upon its proportionate participation in the MobilePro lease transaction, was $866,217. Commonwealth. filed a Notice of Appeal to the U.S. Court of Appeals for the Ninth Circuit on September 23, 2011 requiring that the Partnership contribute its proportionate share ($960,000) to a $2,000,000 letter of credit required to post an appeal bond and commence the appeal. Commonwealth and the City of Tempe agreed to settle the dispute at a mediation held on March 9, 2012, with Commonwealth agreeing to pay a reduced judgment of $1,175,000, which has been paid to the City of Tempe. The remainder of the bond collateral will be returned to Commonwealth and the Partnership’s proportionate share (approximately $395,000) will be allocated back to the Partnership.
Allied Health Care Services
As previously disclosed in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2011, management had fully impaired all equipment and reserved for all accounts receivable related to the lease to Allied Health Care Services, Inc. (“Allied”), due to the bankruptcy of Allied and the criminal conviction of its founder for fraud. There have been no material changes in the status of Allied’s bankruptcy or in the likelihood of recovering available assets since the date of the Partnership’s annual report.
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Item 1A. Risk Factors
Changes in economic conditions could materially and negatively affect our business.
Our business is directly impacted by factors such as economic, political, and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government monetary and fiscal policies, and inflation, all of which are beyond our control. Beginning in 2008 and continuing through 2011, general worldwide economic conditions experienced a downturn. Although we have seen a modest improvement in the global economy in 2012, the economic recovery remains weak and a prolonged period of economic weakness could result in the following consequences, any of which could hurt business materially: lease delinquencies may increase; problem leases and defaults could increase; and demand for information technology products generally may decrease as businesses attempt to reduce expenses.
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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.
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COMMONWEALTH INCOME & GROWTH FUND V
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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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