Blueprint
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
☒ QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016 or
☐ 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)
Pennsylvania
|
65-1189593
|
(State or other
jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification Number)
|
17755 US Highway 19 North
Suite 400
Clearwater, FL 33764
(Address, including zip code, of principal executive
offices)
(877) 654-1500
(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 ☒ 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
☒ NO ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See definition of "accelerated
filer, “large accelerated filer" and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer ☐
|
Accelerated
filer ☐
|
Non-accelerated
filer ☐
|
Smaller
reporting company ☒
|
(Do not
check if a smaller reporting company.)
|
|
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). YES
☐ NO ☒
FORM 10-Q
September 30, 2016
TABLE OF CONTENTS
PART I
|
Item
1.
|
Financial
Statements
|
3
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
17
|
Item
3.
|
Quantitative and
Qualitative Disclosures About Market Risk
|
23
|
Item
4.
|
Controls and
Procedures
|
23
|
PART
II
|
Item
1.
|
Legal
Proceedings
|
23
|
Item
1A.
|
Risk
Factors
|
25
|
Item
2.
|
Unregistered Sales
of Equity Securities and Use of Proceeds
|
25
|
Item
3.
|
Defaults Upon
Senior Securities
|
25
|
Item
4.
|
Mine
Safety Disclosures
|
25
|
Item
5.
|
Other
Information
|
25
|
Item
6.
|
Exhibits
|
25
|
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
Cash and cash
equivalents
|
$1,001
|
$51,344
|
Lease income
receivable, net of reserve of approximately
|
|
|
$10,000 at
September 30, 2016 and December 31, 2015
|
113,334
|
51,456
|
Accounts
receivable, Commonwealth Capital Corp, net
|
-
|
24,704
|
Other
receivables
|
9,667
|
8,500
|
Prepaid
expenses
|
165
|
165
|
|
124,167
|
136,169
|
|
|
|
Net investment in
finance leases
|
74,960
|
98,345
|
|
|
|
Equipment, at
cost
|
6,728,695
|
7,277,433
|
Accumulated
depreciation
|
(6,079,747)
|
(6,367,333)
|
|
648,948
|
910,100
|
|
|
|
Total
Assets
|
$848,075
|
$1,144,614
|
|
|
|
LIABILITIES
AND PARTNERS' (DEFICIT) CAPITAL
|
|
|
LIABILITIES
|
|
|
Accounts
payable
|
$122,980
|
$112,238
|
Accounts payable,
CIGF, Inc., net
|
152,748
|
382,664
|
Accounts payable,
Commonwealth Capital Corp., net
|
320,700
|
-
|
Other accrued
expenses
|
6,458
|
10,108
|
Unearned lease
income
|
30,109
|
34,378
|
Notes
payable
|
323,822
|
501,545
|
Total
Liabilities
|
956,817
|
1,040,933
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
PARTNERS'
(DEFICIT) CAPITAL
|
|
|
General
Partner
|
1,000
|
1,000
|
Limited
Partners
|
(109,742)
|
102,681
|
Total
Partners' (Deficit) Capital
|
(108,742)
|
103,681
|
|
|
|
Total
Liabilities and Partners' (Deficit) Capital
|
$848,075
|
$1,144,614
|
|
|
|
see
accompanying notes to condensed financial statements
|
Commonwealth Income & Growth
Fund V
|
Condensed
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
Lease
|
$179,717
|
$214,132
|
$537,534
|
$707,980
|
Interest and
other
|
1,407
|
2,099
|
4,869
|
6,922
|
Gain on sale of
equipment
|
-
|
1,485
|
35,000
|
776
|
Total
revenue and gain on sale of equipment
|
181,124
|
217,716
|
577,403
|
715,678
|
|
|
|
|
|
Expenses
|
|
|
|
|
Operating,
excluding depreciation and amortization
|
97,145
|
19,996
|
322,888
|
86,572
|
Equipment
management fee, General Partner
|
-
|
5,542
|
4,633
|
18,238
|
Interest
|
3,978
|
5,244
|
14,276
|
17,302
|
Depreciation
|
126,083
|
244,727
|
447,548
|
741,106
|
Amortization of
equipment acquisition costs and deferred expenses
|
-
|
-
|
-
|
3,195
|
Loss on sale of
equipment
|
491
|
-
|
-
|
-
|
Total
expenses
|
227,697
|
275,509
|
789,345
|
866,413
|
|
|
|
|
|
Net
loss
|
$(46,573)
|
$(57,793)
|
$(211,942)
|
$(150,735)
|
|
|
|
|
|
Net
loss allocated to Limited Partners
|
$(46,573)
|
$(57,793)
|
$(211,942)
|
$(150,735)
|
|
|
|
|
|
Net
loss per equivalent Limited Partnership unit
|
$(0.04)
|
$(0.05)
|
$(0.17)
|
$(0.12)
|
|
|
|
|
|
Weighted
average number of equivalent Limited Partnership units outstanding
during the period
|
1,236,608
|
1,236,608
|
1,236,608
|
1,236,608
|
|
|
|
|
|
see
accompanying notes to condensed financial statements
|
Commonwealth
Income & Growth Fund V
|
Condensed
Statement of Partners' Capital
|
For
the nine months ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2016
|
50
|
1,236,608
|
$1,000
|
$102,681
|
$103,681
|
Net
loss
|
-
|
-
|
-
|
(211,942)
|
(211,942)
|
Distributions
|
-
|
-
|
-
|
(481)
|
(481)
|
Balance,
September 30, 2016
|
50
|
1,236,608
|
$1,000
|
$(109,742)
|
$(108,742)
|
|
|
|
|
|
|
see
accompanying notes to condensed financial statements
|
Commonwealth
Income & Growth Fund V
|
Condensed
Statements of Cash Flow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by operating activities
|
$(44,756)
|
$144,744
|
|
|
|
Cash
flows from investing activities
|
|
|
Capital
expenditures
|
(74,089)
|
(89,602)
|
Purchase of finance
leases
|
-
|
(36,795)
|
Payments received
from finance leases
|
28,170
|
26,946
|
Net proceeds from
the sale of equipment
|
40,813
|
29,390
|
|
|
|
Net
cash used in investing activities
|
(5,106)
|
(70,061)
|
|
|
|
Cash
flows from financing activities
|
|
|
Distributions to
partners
|
(481)
|
(183,484)
|
Net
cash used in financing activities
|
(481)
|
(183,484)
|
|
|
|
Net
decrease in cash and cash equivalents
|
(50,343)
|
(108,801)
|
|
|
|
Cash
and cash equivalents at beginning of period
|
51,344
|
118,212
|
|
|
|
Cash
and cash equivalents at end of period
|
$1,001
|
$9,411
|
|
|
|
see
accompanying notes to condensed financial statements
|
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Business
Commonwealth Income & Growth Fund V (the
“Partnership”) is a limited partnership organized in
the Commonwealth of Pennsylvania 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 investment objective is to acquire
primarily high technology equipment. Information technology has
developed rapidly in recent years and is expected to continue to do
so. Technological advances have permitted reductions in the cost of
information technology processing capacity, speed, and utility. In
the future, the rate and nature of equipment development may cause
equipment to become obsolete more rapidly. The Partnership also
acquires high technology medical, telecommunications and inventory
management equipment. The Partnership’s general partner will
seek to maintain an appropriate balance and diversity in the types
of equipment acquired. The market for high technology medical
equipment is growing each year. Generally, this type of equipment
will have a longer useful life than other types of technology
equipment. This allows for increased re-marketability, if it is
returned before its economic or announcement cycle is
depleted.
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 “operational phase”), the
Partnership intended to sell or otherwise dispose of all of its
equipment; make final distributions to partners, and to dissolve.
The Partnership was originally scheduled to end its operational
phase on February 4, 2017. During the year ended December 31, 2015,
the operational phase was officially extended to December 31, 2020
through an investor proxy vote. The Partnership is expected to
terminate on December 31, 2022.
For the nine months ended September 30, 2016, the General Partner
elected to forgo distributions and allocations of net income owed
to it and suspended limited partner distributions. The General
Partner will reassess the funding of limited partner distributions
on a quarterly basis, throughout 2016. The General Partner and CCC
will also determine if related party payables owed to them by the
Partnership may be deferred (if deemed necessary) in an effort to
further increase the Partnership’s cash flow.
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, 2016. The General Partner will continue to reassess
the funding of limited partner distributions throughout 2016 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.
2. Summary of Significant Accounting Policies Basis of
Presentation
The financial information presented as of any date other than
December 31, 2015 has been prepared from the books and records
without audit. The following unaudited condensed financial
statements have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission. Financial information as
of December 31, 2015 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. Operating results for
the nine months ended September 30, 2016 are not necessarily
indicative of financial results that may be expected for the full
year ended December 31, 2016.
Recently Adopted Accounting Pronouncements
In June 2015, the FASB issued Accounting Standards Update No.
2015-10, Technical Corrections and
Improvements- Transition
guidance varies based on the amendments in this Update. The
amendments in this Update that require transition guidance are
effective for all entities for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2015. Early
adoption is permitted, including adoption in an interim period. All
other amendments will be effective upon the issuance of this
Update. The Partnership is currently evaluating the effect that
this ASU will have on its financial statements. This was adopted
January 1, 2016; however, adoption of this ASU had no impact on the
Partnership’s financial statements during the nine months
ended September 30, 2016.
In January 2015, the FASB issued Accounting Standards Update No.
2015-01, Income
Statement—Extraordinary and Unusual Items (Subtopic 225-20):
Simplifying Income Statement Presentation by Eliminating the
Concept of Extraordinary Items. Effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2015. A
reporting entity may apply the amendments prospectively. A
reporting entity also may apply the amendments retrospectively to
all prior periods presented in the financial statements. Early
adoption is permitted provided that the guidance is applied from
the beginning of the fiscal year of adoption. The effective date is
the same for both public business entities and all other entities.
The Partnership is currently evaluating the effect that this ASU
will have on its financial statements. This was adopted January 1,
2016; however, adoption of this ASU had no impact on the
Partnership’s financial statements since there were no
extraordinary and unusual items to report during the nine months
ended September 30, 2016.
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 September 30, 2016 and December 31, 2015
due to the short term nature of these financial
instruments.
The Partnership’s 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 September
30, 2016 and December 31, 2015 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 equivalents to be highly liquid investments with
the original maturity dates of 90 days or less.
At September 30, 2016, cash was held in two accounts maintained at
one financial institution with an aggregate balance of
approximately $2,000. Bank accounts are federally insured up to
$250,000 by the FDIC. At September 30, 2016, the total cash bank
balance was as follows:
At September 30, 2016
|
|
Total bank
balance
|
$2,000
|
FDIC
insured
|
(2,000)
|
Uninsured
amount
|
$-
|
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 2016 due to many factors, including cash
receipts, equipment acquisitions, interest rates, and distribution
to limited partners.
Recent Accounting Pronouncements
In August 2016, the FASB issued Accounting Standards Update
2016-15—Statement of Cash Flows (Topic
230): Classification of Certain Cash Receipts and Cash
Payments- The amendments in
this Update apply to all entities, including both business entities
and not-for-profit entities that are required to present a
statement of cash flows under Topic 230. The amendments in this
Update are effective for public business entities for fiscal years
beginning after December 15, 2017, and interim periods within those
fiscal years. For all other entities, the amendments are effective
for fiscal years beginning after December 15, 2018, and interim
periods within fiscal years beginning after December 15, 2019.
Early adoption is permitted, including adoption in an interim
period. The Partnership is currently evaluating the effect that
this ASU will have on its financial statements.
In
March, April and May 2016, the FASB issued Accounting Standards
Update- Revenue from Contracts
with Customers (Topic 606): No. 2016-12, Narrow-Scope Improvements and Practical
Expedients, No. 2016-10, Identifying Performance Obligations and
Licensing and No. 2016-08, Principal versus Agent Considerations
(Reporting Revenue Gross versus Net,
respectively. The
amendments in this Update affect the guidance in Accounting
Standards Update 2014-09, Revenue
from Contracts with Customers (Topic 606), which is not yet
effective. The effective date and transition requirements for the
amendments in this Update are the same as the effective date and
transition requirements for Topic 606 (and any other Topic amended
by Update 2014-09). Accounting Standards Update 2015-14,
Revenue from Contracts with
Customers (Topic 606): Deferral of the Effective Date,
defers the effective date of Update 2014-09 by one year. Public
business entities, certain not-for-profit entities, and certain
employee benefit plans should apply the guidance in Update 2014-09
to annual reporting periods beginning after December 15, 2017,
including interim reporting periods within that reporting period.
Earlier application is permitted only as of annual reporting
periods beginning after December 15, 2016, including interim
reporting periods within that reporting period. The Partnership is
currently evaluating the effect that this ASU will have on its
financial statements.
In February 2016, the FASB issued Accounting Standards Update No.
2016-02, Leases (Topic 842) Section
A—Leases: Amendments to the FASB Accounting Standards
Codification® Section B—Conforming Amendments Related to
Leases: Amendments to the FASB Accounting Standards
Codification® Section C—Background Information and Basis
for Conclusions- Effective for
fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years, for any of the following: A
public business entity; A not-for-profit entity that has issued, or
is a conduit bond obligor for, securities that are traded, listed,
or quoted on an exchange or an over-the-counter market; An employee
benefit plan that files financial statements with the U.S.
Securities and Exchange Commission (SEC). For all other entities,
the amendments in this Update are effective for fiscal years
beginning after December 15, 2019, and interim periods within
fiscal years beginning after December 15, 2020. The Partnership is
currently evaluating the effect that this ASU will have on its
financial statements.
In January 2016, the FASB issued Accounting Standards Update No.
2016-01, Financial
Instruments—Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial
Liabilities- the amendments in
this Update are effective for fiscal years beginning after December
15, 2017, including interim periods within those fiscal years. For
all other entities including not-for-profit entities and employee
benefit plans within the scope of Topics 960 through 965 on plan
accounting, the amendments in this Update are effective for fiscal
years beginning after December 15, 2018, and interim periods within
fiscal years beginning after December 15, 2019. All entities that
are not public business entities may adopt the amendments in this
Update earlier as of the fiscal years beginning after December 15,
2017, including interim periods within those fiscal years. The
Partnership is currently evaluating the effect that this ASU will
have on its financial statements.
In August 2015, the FASB issued Accounting Standards Update No.
2015-14, Revenue from Contracts with
Customers (Topic 606): Deferral of the Effective
Date- The amendments in this
Update defer the effective date of Update 2014-09 for all entities
by one year. Public business entities, certain not-for-profit
entities, and certain employee benefit plans should apply the
guidance in Update 2014-09 to annual reporting periods beginning
after December 15, 2017, including interim reporting periods within
that reporting period. Earlier application is permitted only as of
annual reporting periods beginning after December 15, 2016,
including interim reporting periods within that reporting period.
The Partnership is currently evaluating the effect that this ASU
will have on its financial statements.
In August 2014, the FASB issued Accounting Standards Update No.
2014 -15, Disclosure of Uncertainties
about an Entity’s Ability to Continue as a Going
Concern, requires management to
determine whether substantial doubt exists regarding the
entity’s going concern presumption. If substantial
doubt exists but is not alleviated by management’s plans, the
footnotes must specifically state that “there is substantial
doubt about the entity’s ability to continue as a going
concern within one year after the financial statements are
issued.” In addition, if substantial doubt exists,
regardless of whether such doubt was alleviated, entities must
disclose (a) principal conditions or events that raise substantial
doubt about the entity’s ability to continue as a going
concern (before consideration of management’s plans, if any);
(b) management’s evaluation of the significance of those
conditions or events in relation to the entity’s ability to
meet its obligations; and (c) management’s plans that are
intended to mitigate the conditions or events that raise
substantial doubt, or that did alleviate substantial doubt, about
the entity’s ability to continue as a going concern. If
substantial doubt has not been alleviated, these disclosures should
become more extensive in subsequent reporting periods as additional
information becomes available. In the period that substantial
doubt no longer exists (before or after considering
management’s plans), management should disclose how the
principal conditions and events that originally gave rise to
substantial doubt have been resolved. The ASU applies
prospectively to all entities for annual periods ending after
December 15, 2016, and to annual and interim periods
thereafter. Early adoption is permitted. The
Partnership is currently evaluating the effect that this ASU will
have on its financial statements.
In May 2014, the FASB issued Accounting Standards Update No.
2014-09, Revenue from Contracts with
Customers (ASU 2014-09), which
supersedes nearly all existing revenue recognition guidance under
U.S. GAAP. The core principle of ASU 2014-09 is to recognize
revenues when promised goods or services are transferred to
customers in an amount that reflects the consideration to which an
entity expects to be entitled for those goods or services. ASU
2014-09 defines a five step process to achieve this core principle
and, in doing so, more judgment and estimates may be required
within the revenue recognition process than are required under
existing U.S. GAAP. The standard is effective for annual periods
beginning after December 15, 2017, and interim periods therein,
using either of the following transition methods: (i) a full
retrospective approach reflecting the application of the standard
in each prior reporting period with the option to elect certain
practical expedients, or (ii) a retrospective approach with the
cumulative effect of initially adopting ASU 2014-09 recognized at
the date of adoption (which includes additional footnote
disclosures). The Partnership is currently evaluating
the effect that this ASU will have on its financial
statements.
3. Information Technology, Medical Technology, Telecommunications
Technology, Inventory Management Equipment and other
Business-Essential Capital Equipment
(“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.
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 equipment
are included in the gain or loss calculations. For the nine
months ended September 30, 2016 and 2015, no remarketing fees were
incurred or paid.
CCC, on behalf of the Partnership and on behalf of other affiliated
companies and partnerships (“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 companies based on certain risk
factors.
The Partnership’s share of the cost of the equipment in which
it participates with other partnerships at September 30, 2016 was
approximately $4,535,000 and is included in the Partnership’s
equipment on its balance sheet. The total cost of the equipment
shared by the Partnership with other partnerships at September 30,
2016 was approximately $11,563,000. The Partnership’s
share of the outstanding debt associated with this equipment at
September 30, 2016 was approximately $117,000 and is included in
the Partnership’s notes payable on its balance sheet.
The total outstanding debt related to the equipment shared by
the Partnership at September 30, 2016 was approximately
$397,000.
The Partnership’s share of the cost of the equipment in which
it participates with other partnerships at December 31, 2015 was
approximately $4,611,000 and is included in the Partnership’s
equipment on its balance sheet. The total cost of the equipment
shared by the Partnership with other partnerships at December 31,
2015 was approximately $11,855,000. The Partnership’s share
of the outstanding debt associated with this equipment at December
31, 2015 was approximately $290,000 and is included in the
Partnership’s notes payable on its balance sheet. The total
outstanding debt related to the equipment shared by the Partnership
at December 31, 2015 was approximately $857,000.
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 September 30,
2016:
Periods Ended December 31,
|
|
Three months ended
December 31, 2016
|
$131,000
|
Year Ended December
31, 2017
|
198,000
|
Year Ended December
31, 2018
|
85,000
|
Year Ended December
31, 2019
|
12,000
|
|
$426,000
|
|
|
Finance Leases:
The following lists the components of the net investment in direct
financing leases at:
|
|
|
Total minimum lease
payments to be received
|
$64,000
|
$92,000
|
Estimated residual
value of leased equipment (unguaranteed)
|
17,000
|
17,000
|
|
(6,000)
|
(11,000)
|
Net investment in
finance leases
|
$75,000
|
$98,000
|
We assess credit risk for all of our customers, including those
that lease under finance leases. This credit risk is assessed using
an internally developed model which incorporates credits scores
from third party providers and our own customer risk ratings and is
periodically reviewed. Our internal ratings are weighted based on
the industry that the customer operates in. Factors taken into
consideration when assessing risk include both general and industry
specific qualitative and quantitative metrics. We separately take
in to consideration payment history, open lawsuits, liens and
judgments. Typically, we will not extend credit to a company that
has been in business for less than 5 years or that has filed for
bankruptcy within the same period. Our internally based model may
classify a company as high risk based on our analysis of their
audited financial statements. Additional considerations of high
risk may include history of late payments, open lawsuits and liens
or judgments. In an effort to mitigate risk, we typically require
deposits from those in this category.
A reserve for credit losses is deemed necessary when payment has
not been received for one or more months of receivables due on the
equipment held under finance leases. At the end of each period,
management evaluates the open receivables due on this equipment and
determines the need for a reserve based on payment history and any
current factors that would have an impact on payments.
The following table presents the credit risk profile, by
creditworthiness category, of our direct finance lease receivables
at September 30, 2016:
Risk Level
|
|
Low
|
-%
|
Moderate-Low
|
-%
|
Moderate
|
-%
|
Moderate-High
|
100%
|
High
|
-%
|
Net finance lease
receivable
|
100%
|
As of September 30, 2016 and December 31, 2015, 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.
The following is a schedule of future minimum rentals on
non-cancellable finance leases at September 30, 2016:
|
|
Three months ended
December 31, 2016
|
$9,000
|
2017
|
33,000
|
2018
|
20,000
|
2019
|
2,000
|
Total
|
$64,000
|
The Partnership was originally scheduled to end its operational
phase on February 4, 2017. During the year ended December 31, 2015,
the operational phase was officially extended to December 31, 2020
through an investor proxy vote (see note 1). The Partnership is
expected to terminate on December 31, 2022. If the Partnership
should terminate, CCC will assume all remaining active leases at
their fair market value and related remaining revenue stream and
any associated debt obligation for the duration of the remaining
lease term.
4. Related Party Transactions
Receivables/Payables
During the nine months ended September 30, 2016 and 2015, CCC
forgave approximately $0 and $20,000 of payables owed to it by the
Partnership, respectively.
As of September 30, 2016 and December 2015, the Partnership’s
related party receivables and payables are short term, unsecured,
and non-interest bearing.
Nine months ended September 30,
|
|
|
Reimbursable Expenses
|
|
|
The General Partner
and its affiliates are entitled to reimbursement by the Partnership
for the cost of goods, supplies or services obtained and used by
the General Partner in connection with the administration and
operation of the Partnership from third parties unaffiliated with
the General Partner. In addition, the General Partner and its
affiliates are entitled to reimbursement of certain expenses
incurred by the General Partner and its affiliates in connection
with the administration and operation of the Partnership. For
the nine months ended September 30, 2016 and 2015, the General
Partner waived certain reimbursable expenses due to it by the
Partnership. For the nine months ended September 30, 2016
“Other LP” expense was charged to the Partnership of
approximately $98,000. For the nine months ended September 30,
2015, no “Other LP” expense was charged to the
Partnership and the Fund was allocated approximately $11,000 from
CCC and recorded it as a reduction in operating expenses (see Note
7).
|
$308,000
|
$91,000
|
|
|
|
Equipment Acquisition Fee
|
|
|
The General Partner
earned an equipment acquisition fee of 4% of the purchase price of
each item of equipment purchased as compensation for the
negotiation of the acquisition of the equipment and lease thereof
or sale under a conditional sales contract. At September 30, 2016,
all prepaid equipment acquisition fees were earned by the General
Partner. For the nine months ended September 30, 2016 and 2015,
approximately $8,000 and $12,000 of acquisition fees were waived by
the General Partner, respectively.
|
$-
|
$-
|
|
|
|
Debt Placement Fee
|
|
|
As compensation for
arranging term debt to finance our acquisition of equipment, we
will pay the general partner a fee equal to one percent of such
indebtedness; provided, however, that such fee shall be reduced to
the extent we incur such fees to third parties unaffiliated with
the general partner or the lender with respect to such
indebtedness. No such fee will be paid with respect to borrowings
from the general partner or its affiliates. We intend to initially
acquire leases on an all cash basis with the proceeds of this
offering, but may borrow funds after the offering proceeds have
been invested. The amount we borrow, and therefore the amount of
the fee, will depend upon interest rates at the time of a loan, and
the amount of leverage we determine is appropriate at the time. We
do not intend to use more than 30% leverage overall in our
portfolio. Fees will increase as the amount of leverage we use
increases, and as turnover in the portfolio increases and
additional equipment is purchased using leverage. For both nine
month periods ending September 30, 2016 and 2015, the General
Partner earned but waived approximately $2,000 of debt placement
fees.
|
$-
|
$-
|
|
|
|
Equipment Management Fee
|
|
|
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) 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 and
remained in effect for the nine months ended September 30, 2016 and
2015. For the nine months ended September 30, 2016, equipment
management fees of approximately $9,000 were earned but were waived
by the General Partner.
|
$5,000
|
$18,000
|
|
|
|
Equipment liquidation fee
|
|
|
With respect to
each item of equipment sold by the General Partner (other than in
connection with a conditional sales contract), a fee equal to the
lesser of (i) 50% of the competitive equipment sale commission or
(ii) three percent of the sales price for such equipment is payable
to the General Partner. The payment of such fee is subordinated to
the receipt by the limited partners of (i) a return of their net
capital contributions and a 10% per annum cumulative return,
compounded daily, on adjusted capital contributions and (ii) the
net disposition proceeds from such sale in accordance with the
Partnership Agreement. Such fee will be reduced to the extent any
liquidation or resale fees are paid to unaffiliated parties. During
the nine months ended September 30, 2016 and 2015, the General
Partner waived approximately $1,000 and $1,000 of equipment
liquidation fees, respectively.
|
$-
|
$-
|
5. Notes Payable
Notes payable consisted of the following approximate
amounts:
|
|
|
Installment
note payable to bank; interest at 4.23% due in quarterly
installments of $12,780, including interest, with final payment in
July 2016
|
$-
|
$38,000
|
Installment
note payable to bank; interest at 5.50%, due in monthly
installments of $7,910, including interest, with final payment in
August 2016
|
-
|
62,000
|
Installment
note payable to bank; interest at 4.23%, due in quarterly
installments of $6,153, including interest, with final payment in
August 2016
|
-
|
18,000
|
Installment
notes payable to bank; interest at 6.00%, due in monthly
installments ranging from $152 to $1,321, including interest, with
final payment in October 2016
|
-
|
10,000
|
Installment
note payable to bank; interest at 4.23%, due in quarterly
installments of $2,740, including interest, with final payment in
December 2016
|
3,000
|
11,000
|
Installment
note payable to bank; interest at 4.23%, due in quarterly
installments of $478, including interest, with final payment in
February 2017
|
2,000
|
5,000
|
Installment
notes payable to bank; interest at 4.23%, due in quarterly
installments ranging from $951 to $1,327, including interest, with
final payment in March 2017
|
4,000
|
11,000
|
Installment
note payable to bank; interest at 4.85%, due in monthly
installments of $922, including interest, with final payment in
March 2017
|
5,000
|
13,000
|
Installment
note payable to bank; interest at 1.60%, due in monthly
installments of $2,286, including interest, with final payment in
May 2017
|
18,000
|
38,000
|
Installment
note payable to bank; interest at 4.23%, due in quarterly
installments of $1,991, including interest, with final payment in
June 2017
|
6,000
|
12,000
|
Installment
note payable to bank; interest at 4.23%, due in quarterly
installments of $2,711, including interest, with final payment in
May 2017
|
8,000
|
16,000
|
Installment
notes payable to bank; interest at 6.00%, due in monthly
installments ranging from $132 to $663, including interest, with
final payment in August 2017
|
6,000
|
12,000
|
Installment
note payable to bank; interest at 4.85%, due in quarterly
installments of $1,751, including interest, with final payment in
September 2017
|
7,000
|
12,000
|
Installment
note payable to bank; interest at 4.88%, due in quarterly
installments of $1,852, including interest, with final payment in
October 2017
|
23,000
|
39,000
|
Installment
note payable to bank; interest at 4.23%, due in quarterly
installments of $9,663, including interest, with final payment in
February 2018
|
56,000
|
82,000
|
Installment
notes payable to bank; interest at 4.23%, due in quarterly
installments of $278, including interest, with final payment in
March 2018
|
3,000
|
5,000
|
Installment
notes payable to bank; interest at 4.23%, due in quarterly
installments of $278, including interest, with final payment in
April 2018
|
6,000
|
8,000
|
Installment
note payable to bank; interest at 4.23% due in quarterly
installments of $2,797, including interest, with final payment in
June 2018
|
19,000
|
26,000
|
Installment
note payable to bank; interest at 4.23% due in quarterly
installments of $296 to $458, including interest, with final
payment in September 2018
|
6,000
|
5,000
|
Installment
notes payable to bank; interest at 6.00% due in monthly
installments ranging from $132 to $1,479, including interest, with
final payment in September 2018
|
26,000
|
38,000
|
Installment
notes payable to bank; interest at 6.00%, due in monthly
installments ranging from $803 to $1,216, including interest, with
final payment in February 2019
|
32,000
|
41,000
|
Installment
notes payable to bank; interest at 4.23%, due in quarterly
installments of $458, including interest, with final payment
in
October
2018
|
12,000
|
-
|
Installment
note payable to bank; interest at 4.23% due in quarterly
installments of $208, including interest, with final payment in
November 2018
|
2,000
|
-
|
Installment
note payable to bank; interest at 1.80% due in monthly installments
of $2,116, including interest, with final payment in February
2019
|
60,000
|
-
|
Installment
note payable to bank; interest at 1.80% due in monthly installments
of $175, including interest, with final payment in March
2019
|
5,000
|
-
|
Installment
note payable to bank; interest at 1.80% due in monthly installments
ranging from $121 to $175, including interest, with final payment
in April 2019
|
14,000
|
-
|
|
$323,000
|
$502,000
|
These notes are secured by specific equipment with a carrying value
of approximately $530,000 as of September 30, 2016 and are
nonrecourse liabilities of the Partnership. As such, the
notes do not contain any financial debt covenants with which we
must comply on either an annual or quarterly basis. Aggregate
maturities of notes payable for each of the periods subsequent to
September 30, 2016 are as follows:
|
|
Three months ended
December 31, 2016
|
$59,000
|
Year ended December
31, 2017
|
178,000
|
Year ended December
31, 2018
|
78,000
|
Year ended December
31, 2019
|
8,000
|
|
$323,000
|
The Partnership was originally scheduled to end its operational
phase on February 4, 2017. During the year ended December 31, 2015,
the operational phase was officially extended to December 31, 2020
through an investor proxy vote (see note 1). The Partnership is
expected to terminate on December 31, 2022. When the Partnership
terminates, CCC will assume the obligation related to any remaining
notes payable for the duration of the remaining lease
term.
During 2015, the General Partner executed a collateralized debt
financing agreement on behalf of certain affiliates for a total
shared loan amount of approximately $847,000, of which the
Partnership’s share was approximately $101,000. The
Partnership’s portion of the current loan amount at September
30, 2016 was approximately $65,000 and is secured by specific
equipment under both operating and finance leases. The carrying
value of the secured equipment under operating leases is
approximately $16,000. The carrying value of the secured
equipment under finance leases is approximately
$81,000.
6. Supplemental Cash Flow Information
Other noncash activities included in the determination of
net loss are as follows:
Nine months ended September 30,
|
|
|
Lease revenue net
of interest expense on notes payable realized as a result of direct
payment of principal by lessee to bank
|
$296,000
|
$311,000
|
No interest or principal on notes payable was paid by the
Partnership because direct payment was made by lessee to the bank
in lieu of collection of lease income and payment of interest and
principal by the Partnership.
Noncash investing and financing activities include the
following:
Nine months ended September 30,
|
|
|
Debt assumed in
conjunction with purchase of equipment
|
$118,000
|
$126,000
|
Accrual for
purchase of lease equipment acquired, but funded in
October
|
$-
|
$39,000
|
Forgiveness of
related party payables recorded as a capital
contribution
|
$-
|
$20,000
|
During the nine months ended September 30, 2016 and 2015, the
Partnership wrote-off fully amortized equipment acquisition and
deferred finance fees of approximately $0 and $51,000,
respectively.
During the nine months ended September 30, 2016 and 2015, the
Partnership wrote-off fully depreciated equipment of approximately
$0 and $6,000, respectively.
7. Commitments and Contingencies
Investor Complaint
On November 10, 2015, certain investors (the
“Claimants”) of the Partnership and Commonwealth Income
& Growth Private Fund III (“CIGPF3”) (Collectively
referred to as the “Funds”), filed an investor
complaint with FINRA naming CCSC and Ms. Springsteen-Abbott (the
“Respondents”). The Claimants, at the advice and
recommendation of their personal financial advisors, purchased
limited partnership units in the Partnership between February 2005
and February 2006 and in CIGPF3 between April 2005 and February
2007. The Claimants allege that the Respondents did not
properly perform their duties as fund manager. The Funds are
not members of FINRA and/or subject to its jurisdiction. The
Respondents filed a complaint on December 23, 2015, against the
Claimants in the United States District Court for the District of
Maryland to enjoin the Claimants from proceeding with the
arbitration and requiring its dismissal. The Claimants
withdrew its complaint with FINRA on July 27, 2016. On August
1, 2016, the Respondents were granted voluntary dismissal in
federal court given the withdrawal of the FINRA
claim.
On September 28, 2016, 23 investors, in addition to the original
Claimants (the “Florida Claimants”) filed a complaint
in the United States District Court for the Middle District of
Florida, Albers et al. v.
Commonwealth Capital Corp. et al., Case No. 6:16-cv-01713-Orl-37DCI, against the
Partnership, Commonwealth Income & Growth Private Fund I,
Commonwealth Income & Growth Private Fund II, CIGPF3,
Commonwealth Income & Growth Private Fund IV and Commonwealth
Income & Growth Fund IV. The allegation consists of
breach of contract, securities fraud, misstatement in the
prospectus, fraudulent concealment, negligence, common law fraud
(the “Original Complaint”). On October 18, 2016,
the judge dismissed the Original Complaint without prejudice with
leave to refile. The judge dismissed the Original Complaint for
procedural failures. On October 28, 2016, the Florida Claimants
filed an amended complaint that included the original claims with
the addition of claims for negligent supervision and breach of
industry standards (“Amended Complaint’). The
Respondents’ counsel believes the allegations in the Amended
Complaint fail to meet procedural requirements and are without
merit, including the lapse of the statute of limitations on certain
claims. The Respondents intend to file a motion to dismiss.
Management believes that resolution of the matter will not
result in any adverse financial impact 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, 2014, management wrote
off the fully reserved accounts receivable and fully impaired
assets related to the lease to Allied Health Care Services, Inc.
(“Allied”), due to the bankruptcy of Allied and the
criminal conviction of its founder, Mr. Schwartz, 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
deadline for the bankruptcy trustee to pursue adversary claims
against certain creditors has expired, including extensions. The
bankruptcy trustee cannot seek to claim the Partnership's payments
received from Allied; therefore the Partnership has no exposure to
such potential claims. Commonwealth continues to pursue all of our
rights against both Allied and Mr. Schwartz to recover any
available assets to the greatest extent possible. During 2015,
Commonwealth received an Allied bankruptcy settlement of
approximately $448,000. The Partnership’s portion was
approximately $90,000, which is included as a bad debt recovery in
the 2015 fourth quarter statement of financial operations. The
bankruptcy proceedings have been finalized and no further recovery
is expected.
FINRA
On May
3, 2013, the FINRA Department of Enforcement filed a complaint
naming Commonwealth Capital Securities Corp. (“CCSC”)
and the owner of the firm, Kimberly Springsteen-Abbott, as
respondents; however on October 22, 2013, FINRA filed an amended
complaint that dropped the allegations against CCSC and reduced the
scope of the allegations against Ms. Springsteen-Abbott. The
sole remaining charge was that Ms. Springsteen-Abbott had approved
the misallocation of some expenses to certain Funds. Management
believes that the expenses at issue include amounts that were
proper and that were properly allocated to Funds, and also
identified a smaller number of expenses that had been allocated in
error, but were adjusted and repaid to the affected Funds when they
were identified in 2012. During the period in question,
Commonwealth Capital Corp. (“CCC”) and Ms.
Springsteen-Abbott provided important financial support to the
Funds, voluntarily absorbed expenses and voluntarily waived fees in
amounts aggregating in excess of any questioned allocations.
That Panel ruled on March 30, 2015, that Ms.
Springsteen-Abbott should be barred from the securities industry
because the Panel concluded that she allegedly misallocated
$208,000 of expenses involving certain Funds over the course of
three years. As such, management has allocated approximately
$87,000 of the $208,000 in allegedly misallocated expenses back to
the affected funds as a contingency accrual in CCC’s
financial statements and a good faith payment for the benefit of
those Income Funds. Decisions issued by FINRA's Office of
Hearing Officers may be appealed to FINRA's National Adjudicatory
Council (NAC) pursuant to FINRA Rule 9311. The NAC Decision
upheld the Panel’s ruling. Ms. Springsteen-Abbott has
appealed the NAC Decision to the SEC. While a decision is on
appeal with the SEC, the sanctions for disgorgement and fines are
not enforced against the individual. The bar took effect on
August 23, 2016. Management believes that resolution of the
appeal will not result in any material adverse financial impact on
the Funds, but no assurance can be provided until the FINRA matter
is resolved.
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, 2015 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.
INDUSTRY OVERVIEW
The Equipment Leasing and Finance Association's (ELFA) Monthly
Leasing and Finance Index (MLFI-25), which reports economic
activity from 25 companies representing a cross section of the $1
trillion equipment finance sector, showed their overall new
business volume for September was $9.4 billion, up 12%
year-over-year from new business volume in September 2015. Volume
was up 22% month-to-month from $7.7 billion in August. Year to
date, cumulative new business volume decreased 4% compared to
2015.
ELFA President and CEO Ralph Petta said, "September new business
volume was strong, showing the first double-digit increase in many
months. Perhaps the Fed's decision to keep interest rates low has
contributed to this favorable environment for equipment investment
by businesses. The uncertainty caused by the upcoming Presidential
election, which has acted as a drag on overall economic growth and
low capital spending for most of this year, seems to have waned- at
least in the short term. It will be interesting to see if this
scenario continues into the final quarter.”
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 related to recent accounting
pronouncements.
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. When the analysis indicates that the probability
of full collection is unlikely, the Partnership may establish an
allowance for uncollectible lease income receivable based upon the
credit risk of specific customers, historical trends and other
information. The Partnership writes off its lease income receivable
when it determines that it is uncollectible and all economically
sensible means of recovery have been exhausted.
REVENUE RECOGNITION
As of September 30, 2016, the Partnership’s lease portfolio
consisted of operating and finance leases. For operating leases,
lease revenue is recognized on a straight-line basis in accordance
with the terms of the lease agreements.
Finance lease interest income is recorded over the term of the
lease using the effective interest method. For finance leases, we
record, at lease inception, unearned finance lease income which is
calculated as follows: total lease payments, plus any residual
values and initial direct costs, less the cost of the leased
equipment.
Upon the end of the lease term, if the lessee has not met the
return conditions as set out in the lease, the Partnership is
entitled, in certain cases, to additional compensation from the
lessee. The Partnership’s accounting policy for recording
such payments is to treat them as revenue.
Gain or losses from sales of leased and off lease equipment are
recorded on a net basis in the Fund’s condensed Statement of
Operations.
Our leases do not contain any step-rent provisions or escalation
clauses nor are lease revenues adjusted based on any
index.
Gains from the termination of leases are recognized when the lease
is modified and terminated concurrently. Gains from lease
termination included in lease revenue for the nine months ended
September 30, 2016 and 2015 were approximately $500 and $7,000,
respectively.
LONG-LIVED ASSETS
Depreciation on equipment for financial statement purposes is based
on the straight-line method estimated generally over useful lives
of two to four years. Once an asset comes off lease or is
re-leased, the Partnership reassesses the useful life of an
asset.
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. Fair value is determined based
on estimated discounted cash flows to be generated by the asset,
third party appraisals or comparable sales of similar assets, as
applicable, based on asset type.
Residual values are determined by management and are calculated
using information from both internal and external sources, as well
as other economic indicators.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of cash for the nine months ended September 30,
2016 were provided by payments received from finance leases of
approximately $28,000 and proceeds from the sale of equipment of
approximately $41,000. This compares to the nine months ended
September 30, 2015 where our primary sources of cash were provided
by operating activities of approximately $145,000, payments
received from finance leases of approximately $27,000 and proceeds
from the sale of equipment of approximately $29,000.
Our primary uses of cash for the nine months ended September 30,
2016 were operating activities of approximately $45,000 and for the
purchase of new equipment of approximately $74,000. For the
nine months ended September 30, 2015, our primary uses of cash were
for the purchase of new equipment of approximately $90,000, the
purchase of finance leases of approximately $37,000 and
distributions to partners of approximately $183,000.
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.
For the nine months ended September 30, 2016 cash was used in
operating activities of approximately $45,000, which includes a net
loss of approximately $212,000 and depreciation and amortization
expenses of approximately $448,000. Other non-cash activities
included in the determination of net loss include direct payments
of lease income by lessees to banks of approximately $296,000 and a
gain on sale of equipment in the amount of approximately $35,000.
For the nine months ended September 30, 2015, cash was
provided by operating activities of approximately $145,000, which
includes a net loss of approximately $151,000 and depreciation and
amortization expenses of approximately $744,000. Other
non-cash activities included in the determination of net loss
include direct payments of lease income by lessees to banks of
approximately $311,000 and a gain on sale of equipment in the
amount of approximately $1,000.
During 2015, the General Partner executed a collateralized debt
financing agreement on behalf of certain affiliates for a total
shared loan amount of approximately $847,000, of which the
Partnership’s share was approximately $101,000. The
Partnership’s portion of the current loan amount at September
30, 2016 was approximately $65,000 and is secured by specific
equipment under both operating and finance leases. The carrying
value of the secured equipment under operating leases is
approximately $16,000. The carrying value of the secured
equipment under finance leases is approximately
$81,000.
We consider cash equivalents to be highly liquid investments with
the original maturity dates of 90 days or less. At September 30,
2016, cash was held in two accounts maintained at one financial
institution with an aggregate balance of approximately $2,000. Bank
accounts are federally insured up to $250,000 by the FDIC. At
September 30, 2016, the total cash bank balance was as
follows:
At September 30, 2016
|
|
Total bank
balance
|
$2,000
|
FDIC
insured
|
(2,000)
|
Uninsured
amount
|
$-
|
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 2016 due to many factors,
including 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 September 30, 2016, we had future minimum rentals on
non-cancelable operating leases of approximately $131,000 for the
balance of the year ending December 31, 2016 and approximately
$295,000 thereafter. As of September 30, 2016, we had
future minimum rentals on non-cancelable finance leases of
approximately $9,000 for the balance of the year ending December
31, 2016 and approximately $55,000 thereafter.
As of September 30, 2016, our non-recourse debt was approximately
$323,000, with interest rates ranging from 1.60% to 6.00%, and will
be payable through April 2019.
The Partnership was originally scheduled to end its operational
phase on February 4, 2017. During the year ended December 31,
2015, the operational phase was officially extended to December 31,
2020 through an investor proxy vote. The Partnership is expected to
terminate on December 31, 2022. As such, the Partnership will
continue to report its financial statements on a going concern
basis until a formal plan of liquidation is approved by the General
Partner.
As the Partnership and the other programs managed by the General
Partner increase their overall portfolio size, opportunities for
shared participation are expected to continue. Sharing in the
acquisition of a lease portfolio gives the fund an opportunity to
acquire additional assets and revenue streams, while allowing the
fund to remain diversified and reducing its overall risk with
respect to one portfolio. Thus, total shared equipment and related
debt should continue to trend higher in fiscal 2016, as the
Partnership builds its portfolio.
Our cash flow from operations is expected to continue to be
adequate to cover all operating expenses and liabilities 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 its permissible limits.
The General Partner elected to forgo distributions and allocations
of net income owed to it, and suspended limited partner
distributions for the nine months ended September 30, 2016. The
General Partner will continue to reassess the funding of limited
partner distributions throughout 2016 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.
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, 2016. The General Partner will continue to reassess
the funding of limited partner distributions throughout 2016 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. Additionally, the Partnership will
seek to enhance portfolio returns and maximize cash flow through
the use of leveraged lease transactions; the acquisition of lease
equipment through financing. This strategy allows the
General Partner to acquire additional revenue generating leases
without the use of investor funds, thus maximizing overall
return.
RESULTS OF OPERATIONS
Three months ended September 30, 2016 compared to three months
ended September 30, 2015
Lease Revenue
Our lease revenue decreased to approximately $180,000 for the three
months ended September 30, 2016, from approximately $214,000 for
the three months ended September 30, 2015. This decrease is
primarily due to more lease agreements ending versus new lease
agreements being acquired.
The Partnership had 84 and 82 operating leases during the three
months ended September 30, 2016 and 2015, respectively. The
decline in number of active leases is consistent with the overall
decrease in lease revenue. Management expects to add new leases to
our portfolio throughout the remainder of 2016, funded primarily
through debt financing.
Sale of Equipment
For the three months ended September 30, 2016, the Partnership sold
equipment with a net book value of approximately $4,000 for a net
loss of approximately $500. For the three months ended
September 30, 2015, the Partnership sold equipment with net book
value of approximately $27,000 for a net gain of approximately
$1,500.
Operating Expenses
Our operating expenses, excluding depreciation, primarily consist
of accounting and legal fees, outside service fees and
reimbursement of expenses to CCC for administration and operation
of the Partnership. These expenses increased to approximately
$97,000 for the three months ended September 30, 2016, from
approximately $20,000 for the three months ended September 30,
2015. This increase is primarily attributable to an increase
in other LP expenses of approximately $29,000. In addition, legal
fees associated with the investor complaint (see Note 7) resulted
in an increase of approximately $45,000.
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 was waived for the three months ended September 30,
2016 as compared to approximately $6,000 earned for the three
months ended September 30, 2015.
Depreciation and Amortization Expenses
Depreciation and amortization expenses consist of depreciation on
equipment and amortization of equipment acquisition fees. These
expenses decreased to approximately $126,000 for the three months
ended September 30, 2016, from approximately $245,000 for the three
months ended September 30, 2015. This decrease is primarily
due to significant leases that became fully depreciated, partially
offset by new equipment acquisitions.
Net Loss
For the three months ended September 30, 2016, we recognized
revenue of approximately $181,000 and expenses of approximately
$228,000, resulting in a net loss of approximately $47,000.
For the three months ended September 30, 2015, we recognized
revenue of approximately $218,000 and expenses of approximately
$276,000, resulting in a net loss of approximately $58,000. This
change in net loss is due to the changes in revenue and expenses as
described above.
Nine months ended September 30, 2016 compared to nine months ended
September 30, 2015
Lease Revenue
Our lease revenue decreased to approximately $538,000 for the nine
months ended September 30, 2016, from approximately $708,000 for
the nine months ended September 30, 2015. This decline was
primarily due to fewer acquisitions of new leases during the nine
months ended September 30, 2016 compared to the termination of
leases.
The Partnership had 82 and 95 operating leases during the
nine months ended September
30,
2016 and 2015, respectively. The decline in number of active
leases is consistent with the overall decrease in lease revenue.
Management expects to add new leases to our portfolio throughout
the remainder of 2016, funded primarily through debt
financing.
Sale of Equipment
The Partnership sold equipment
with net book value of approximately $6,000 for the nine months
ended September 30, 2016 for a net gain of approximately $35,000.
This compared to equipment sold for the nine months ended
September 30, 2015 with net book value of approximately $28,000,
for a net gain of approximately $1,000.
Operating Expenses
Our operating expenses, excluding depreciation, primarily consist
of accounting and legal fees, outside service fees and
reimbursement of expenses to CCC for administration and operation
of the Partnership. These expenses increased to approximately
$323,000 for the nine months ended September 30, 2016, from
approximately $87,000 for the nine months ended September 30, 2015.
This increase is primarily attributable to an increase in
other LP expenses of approximately $98,000, legal fees associated
with the investor complaint (see Note 7) of approximately $113,000
and an allocation from CCC of approximately $11,000 recorded
in 2015 as a reduction in operating expenses.
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 $5,000 for the nine
months ended September 30, 2016 from approximately $18,000 for the
nine months ended September 30, 2015. This decline is
consistent with the decrease in overall lease revenue and the
waiving of equipment management fees by the General Partner
effective in the second quarter of 2016.
Depreciation and Amortization Expenses
Depreciation and amortization expenses consist of depreciation on
equipment and amortization of equipment acquisition fees. These
expenses decreased to approximately $448,000 for the nine months
ended September 30, 2016, from $744,000 for the nine months ended
September 30, 2015. This decrease is primarily due to
significant leases that became fully depreciated, partially offset
by new equipment acquisitions.
Net Loss
For the nine months ended September 30, 2016, we recognized revenue
of approximately $577,000 and expenses of approximately $789,000,
resulting in a net loss of approximately $212,000. For the nine
months ended September 30, 2015, we recognized revenue of
approximately $716,000 and expenses of approximately $867,000,
resulting in a net loss of approximately $151,000. 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 General Partner’s 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
General Partner’s Chief Executive Officer and Principal
Financial Officer have concluded that, as of September 30, 2016,
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 General
Partner’s 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 third quarter of 2016 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
Investor Complaint
On November 10, 2015, certain investors (the
“Claimants”) of the Partnership and Commonwealth Income
& Growth Private Fund III (“CIGPF3”) (Collectively
referred to as the “Funds”), filed an investor
complaint with FINRA naming CCSC and Ms. Springsteen-Abbott (the
“Respondents”). The Claimants, at the advice and
recommendation of their personal financial advisors, purchased
limited partnership units in the Partnership between February 2005
and February 2006 and in CIGPF3 between April 2005 and February
2007. The Claimants allege that the Respondents did not
properly perform their duties as fund manager. The Funds are
not members of FINRA and/or subject to its jurisdiction. The
Respondents filed a complaint on December 23, 2015, against the
Claimants in the United States District Court for the District of
Maryland to enjoin the Claimants from proceeding with the
arbitration and requiring its dismissal. The Claimants
withdrew its complaint with FINRA on July 27, 2016. On August
1, 2016, the Respondents were granted voluntary dismissal in
federal court given the withdrawal of the FINRA
claim.
On September 28, 2016, 23 investors, in addition to the original
Claimants (the “Florida Claimants”) filed a complaint
in the United States District Court for the Middle District of
Florida, Albers et al. v.
Commonwealth Capital Corp. et al., Case No. 6:16-cv-01713-Orl-37DCI, against the
Partnership, Commonwealth Income & Growth Private Fund I,
Commonwealth Income & Growth Private Fund II, CIGPF3,
Commonwealth Income & Growth Private Fund IV and Commonwealth
Income & Growth Fund IV. The allegation consists of
breach of contract, securities fraud, misstatement in the
prospectus, fraudulent concealment, negligence, common law fraud
(the “Original Complaint”). On October 18, 2016,
the judge dismissed the Original Complaint without prejudice with
leave to refile. The judge dismissed the Original Complaint for
procedural failures. On October 28, 2016, the Florida Claimants
filed an amended complaint that included the original claims with
the addition of claims for negligent supervision and breach of
industry standards (“Amended Complaint’). The
Respondents’ counsel believes the allegations in the Amended
Complaint fail to meet procedural requirements and are without
merit, including the lapse of the statute of limitations on certain
claims. The Respondents intend to file a motion to dismiss.
Management believes that resolution of the matter will not
result in any adverse financial impact 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, 2014, management wrote
off the fully reserved accounts receivable and fully impaired
assets related to the lease to Allied Health Care Services, Inc.
(“Allied”), due to the bankruptcy of Allied and the
criminal conviction of its founder, Mr. Schwartz, 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
deadline for the bankruptcy trustee to pursue adversary claims
against certain creditors has expired, including extensions. The
bankruptcy trustee cannot seek to claim the Partnership's payments
received from Allied; therefore the Partnership has no exposure to
such potential claims. Commonwealth continues to pursue all of our
rights against both Allied and Mr. Schwartz to recover any
available assets to the greatest extent possible. During 2015,
Commonwealth received an Allied bankruptcy settlement of
approximately $448,000. The Partnership’s portion was
approximately $90,000, which is included as a bad debt recovery in
the 2015 fourth quarter statement of financial operations. The
bankruptcy proceedings have been finalized and no further recovery
is expected.
FINRA
On May
3, 2013, the FINRA Department of Enforcement filed a complaint
naming Commonwealth Capital Securities Corp. (“CCSC”)
and the owner of the firm, Kimberly Springsteen-Abbott, as
respondents; however on October 22, 2013, FINRA filed an amended
complaint that dropped the allegations against CCSC and reduced the
scope of the allegations against Ms. Springsteen-Abbott. The
sole remaining charge was that Ms. Springsteen-Abbott had approved
the misallocation of some expenses to certain Funds. Management
believes that the expenses at issue include amounts that were
proper and that were properly allocated to Funds, and also
identified a smaller number of expenses that had been allocated in
error, but were adjusted and repaid to the affected Funds when they
were identified in 2012. During the period in question,
Commonwealth Capital Corp. (“CCC”) and Ms.
Springsteen-Abbott provided important financial support to the
Funds, voluntarily absorbed expenses and voluntarily waived fees in
amounts aggregating in excess of any questioned allocations.
That Panel ruled on March 30, 2015, that Ms.
Springsteen-Abbott should be barred from the securities industry
because the Panel concluded that she allegedly misallocated
$208,000 of expenses involving certain Funds over the course of
three years. As such, management has allocated approximately
$87,000 of the $208,000 in allegedly misallocated expenses back to
the affected funds as a contingency accrual in CCC’s
financial statements and a good faith payment for the benefit of
those Income Funds. Decisions issued by FINRA's Office of
Hearing Officers may be appealed to FINRA's National Adjudicatory
Council (NAC) pursuant to FINRA Rule 9311. The NAC Decision
upheld the Panel’s ruling. Ms. Springsteen-Abbott has
appealed the NAC Decision to the SEC. While a decision is on
appeal with the SEC, the sanctions for disgorgement and fines are
not enforced against the individual. The bar took effect on
August 23, 2016. Management believes that resolution of the
appeal will not result in any material adverse financial impact on
the Funds, but no assurance can be provided until the FINRA matter
is resolved.
Item 1A. Risk Factors
N/A
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
N/A
Item 3. Defaults Upon Senior Securities
N/A
Item 4. Mine Safety Disclosures
N/A
Item 5. Other Information
NONE
Item 6. Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly
authorized.
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COMMONWEALTH INCOME
& GROWTH FUND V
|
|
BY:
COMMONWEALTH INCOME & GROWTH FUND, INC., General
Partner
|
November 14, 2016
|
By:
/s/ Kimberly A.
Springsteen-Abbott
|
Date
|
Kimberly A.
Springsteen-Abbott
|
|
Chief
Executive Officer
Commonwealth Income
& Growth Fund, Inc.
|
|
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November 14, 2016
|
By:
/s/ Lynn A.
Franceschina
|
Date
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Lynn A.
Franceschina
|
|
Executive Vice
President, Chief Operating Officer
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