see accompanying notes to condensed financial statements

 

 

see accompanying notes to condensed financial statements

4. Related Party Transactions

Receivables/Payables

As of March 31, 2009,2010, the Partnership’s related party receivables and payables are short term, unsecured, and non-interest bearing.

 

Notes payable consisted of the following:following amounts:

6. Supplemental Cash Flow Information

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

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.

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

FORWARD LOOKING STATEMENTS

Certain statements within this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). These statements are being made pursuant to the PSLRA, with the intention of obtaining the benefits of the “safe harbor” provisions of the PSLRA, and, other than as required by law, we assume no obligation to update or supplement such statements. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. You can identify these statements by the use of words such as “may,” “will,” “could,” “anticipate,” “believe,“b elieve,” “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.

The Partnership'sOur discussion and analysis of itsour financial condition and results of operations are based upon itsour financial statements which have been prepared in accordance with generally accepted accounting principles generally accepted in the United States. The preparation of these financial statements requires the Partnershipus to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Partnership bases itsWe 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.

The Partnership believesWe believe that itsour critical accounting policies affect itsour more significant judgments and estimates used in the preparation of itsour financial statements.

COMPUTER EQUIPMENT

 

Commonwealth Capital Corp., on our behalf and on behalf of the Partnership and other affiliated partnerships, acquires computer equipment subject to associated debt obligations and lease revenue and allocates a participation in the cost, debt and lease revenue to the various partnerships based on certain risk factors.  Depreciation on computer equipment for financial statement purposes is based on the straight-line method estimated generally over estimated useful lives of two to four years.

REVENUE RECOGNITION

Through March 31, 2009, the Partnership has only2010, we have solely entered into operating leases.  Lease revenue is recognized on a monthly straight-line basis which is generally in accordance with the terms of the operating lease agreement. The Partnership’s

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

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

LONG-LIVED ASSETS

The Partnership evaluates itsWe evaluate our long-lived assets when events or circumstances indicate that the value of the asset may not be recoverable.  The Partnership determinesWe determine whether an 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 anthen impairment exists.  The amount of the impairment is determined based on the difference between the carrying value and the fair value.  FairThe fair value is determined based on estimated discounted cash flows to be generated by the asset. The PartnershipWe determined that no impairment existed as ofanalysis was necessary at March 31, 2010 and 2009 and 2008.as no impairment indicators were noted.

LIQUIDITY AND CAPITAL RESOURCES

The Partnership’sOur primary source of cash for the three months ended March 31, 2009 and 20082010 was cash provided by operating activities of approximately $627,000$409,000 and $734,000, respectively.  Duringfrom the proceeds from the sale of equipment of approximately $103,000.  This compares to the three months ended March 31, 2009 and 2008, equipmentwhere our primary source of cash was purchased in the amountfrom operating activities of approximately $1,125,000$627,000 and $513,000, respectively,proceeds from the sale of equipment were approximately $11,000.

Our primary use of cash for the three months ended March 31, 2010 was for the purchase of new information technology equipment of approximately $128,000 and also for distributions were made to partners in the amount of approximately $623,000 and $625,000, respectively.

Capital expenditures and distributions are expected to increase overall during the Partnership generatedremainder of 2010, as management focuses on additional equipment acquisitions and funding limited partner distributions. We intend to invest approximately $1,350,000 in additional equipment during the remainder of 2010.  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.

Cash was provided by operating activities for the three months ended March 31, 2010 of approximately $409,000, which includes a net loss of approximately $382,000 and depreciation and amortization expenses of approximately $1,108,000. Other non-cash activities included in the determination of net loss include direct payments of lease income by lessees to banks of approximately $78,000. Additionally we had a gain on the sale of equipment in the amount of $82,000 and an increase in receivables of lease revenue of $72,000.  For the three months ended March 31, 2009 cash was also generated by operating activities of approximately $627,000, which includes a net loss of approximately $375,000 and depreciation and amortization expenses of approximately $1,438,000. Other non-cash activities included in the determination of net income includeloss incl ude direct payments of lease income by lessees to banks of approximately $435,420.$435,000.

ForAs we continue to increase the three months ended March 31, 2008,size of our equipment portfolio, operating expenses will increase, which reflects the Partnership generated cash flows fromadministrative costs of servicing the portfolio, but because of our investment strategy of leasing technology equipment primarily through triple-net leases, we avoid operating activities of approximately $734,000, which includes a net loss of approximately $93,000, loss on sale of computerexpenses related to equipment of approximately $5,000 and depreciation and amortizationmaintenance or taxes.  Depreciation expenses of approximately $1,441,000.  Other non-cash activities included in the determination of net income include direct payments of lease income by lesseeswill likely increase more rapidly than operating expenses as we add technology equipment to banks of approximately $495,000.our portfolio.

At March 31, 2009,2010 cash was held in two accounts maintained at one financial institution. The accounts were, in the aggregate, federally insured for up to $250,000.  At March 31, 2009,2010, the total cash balance was as follows:

 

The Partnership canWe mitigate thisthe risk by depositing funds with more than one institution andof holding uninsured deposits by only depositing funds with major a financial institutions. The Partnership hasinstitution.  We deposit our funds with a Moody's Aaa-Rated banking institution which is one of only three Aaa-Rated banks listed on the New York Stock Exchange.  We have not experienced any losses in such accounts, and believes it is not exposed to any significant credit risk. The amount in such accounts will fluctuate throughout 20092010 due to many factors, including the pace of additional revenues,cash receipts, equipment acquisitions and distributions. distributions to investors.

The Partnership'sOur investment strategy of acquiring computer equipment and generally leasing it under “triple-net leases”triple-net leases to operators who generally meet specified financial standards minimizes the Partnership'sour operating expenses.  As of March 31, 2009, the Partnership2010, we had future minimum rentals on non-cancelable operating leases of approximately $3,746,000$1,651,000 for the balance of the year ending December 31, 20092010 and approximately $2,013,000$1,494,000 thereafter.  

As of March 31, 2009, the Partnership’s outstanding2010, our debt was approximately $1,116,000$183,000, with interest rates ranging from 5.25%5.40% to 6.21%, and will be payable through May 2012.

 

RESULTS OF OPERATIONS

Three months ended March 31, 20092010 compared to three months ended March 31, 20082009

For the three months ended March 31, 2010, we recognized revenue of approximately $1,046,000 and expenses of approximately $1,428,000, resulting in a net loss of approximately $382,000.  This net loss is primarily due to depreciation and amortization expenses for the three months ended March 31, 2010 which were greater than lease revenue for the same period.  For the three months ended March 31, 2009, the Partnershipwe recognized revenue of approximately $1,550,000 and expenses of approximately $ 1,925,000, resulting in a net loss of approximately $ 375,000.  For

Our lease revenue decreased to approximately $937,000 for the three months ended March 31, 2008, the Partnership recognized revenue of approximately $1,856,000 and expenses of approximately $1,949,000, resulting in a net loss of approximately $93,000.

Interest and other revenue increased to $26,000 for the three months ended March 31, 2008.  This decrease was primarily attributable more lease agreements ending versus new leases commencing, during2010 from $21,000 for the three months ended March 31, 2009.2009 due to an increase in other income from our lessees, related to damaged equipment, partially offset by lower interest income attributable to decreased cash balances held in financial institutions. The amounts in our bank accounts that generate interest revenue will fluctuate throughout 2010 due to many factors, including the pace of cash receipts, equipment acquisitions and distributions to limited partners.

OperatingOur 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 ofdecreased to approximately $375,000 remained relatively consistent$269,000 for the three months ended March 31, 20092010, from approximately $375,000 for the three months ended March 31, 2009.  This decrease is primarily attributable to decreases in accounting, legal and 2008 primarilyvarious administrative expenses due to the steady continuing operation of the Partnership, without the occurrence of any unusual or unexpected expenses.enhanced operating efficiencies.

We pay an equipment management fee to our general partner for managing our equipment portfolio. The equipment management fee is approximately 5% of the gross lease revenue attributable to equipment that is subject to operating leases. The equipment management fee decreased 11 % to approximately $47,000 for the three months ended March 31, 2010 from approximately $77,000 for the three months ended March 31, 2009, from approximately $86,000 for the three months ended March 31, 2008, which is consistent with the decrease in lease revenue.

Depreciation and amortization expenses consist of depreciation on computer equipment and amortization of equipment acquisition fees. These expenses slightly decreased to approximately $1,108,000 for the three months ended March 31, 2010, from $1,438,000 for the three months ended March 31, 2009, from $1,441,000 for the three months ended March 31, 2008.2010. This decrease is primarily attributablewas due to equipment and acquisition fees being fully depreciated/amortized and depreciated and not being replaced with as many new leases.equipment purchases.

The PartnershipWe sold computer equipment with a net book value of approximately $21,000 for the three months ended March 31, 2010, for a net gain of approximately $82,000. This compared to equipment that we sold for the three months ended March 31, 2009 with a net book value of approximately $9,500, for the three months ended March 31, 2009, for a net gain of approximately $1,500.  The Partnership sold computer equipment with a net book value of approximately $10,000 for the three months ended March 31, 2008, for a net loss of approximately $5,000.  

Item 4T.  Controls and Procedures

Our management, under the supervision and with the participation of the principal executive officer and principal financial offer, have evaluated the effectiveness of our controls and procedures related to our reporting and disclosure obligations as of March 31, 20092010 which is the end of the period covered by this Quarterly Report on Form 10-Q.  Based on that evaluation, the principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are sufficienteffective to provide that (a) material information relating to us, including our consolidated affiliates is made known to these officers by us and our consolidated affiliates’ other employees, particularly material information related to the period for which this periodic report is being prepared; and (b) this information is recorded,recorde d, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the rules and forms promulgated by the Securities and Exchange Commission.  There have been no significant changes in the General Partner’s internal controls or in other factors that could significantly affect our disclosure controls and procedures in the first quarter of 20092010 or subsequent to the date of the evaluation.

Part II:   OTHER INFORMATION

Changes in economic conditions could materially and negatively affect our business.

 

Our business is directly impacted by factors such as economic, political, and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government monetary and fiscal policies, and inflation, all of which are beyond our control.  Beginning in 2008 and continuing through the first quarter of 2009,2010, general worldwide economic conditions experienced a downturn due to the sequential effects of the subprime lending crisis, general credit market crisis, collateral effects on the finance and banking industries, increased energy costs, concerns about inflation, slower economic activity, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns.  A deterioration in economic conditions, whether caused by national or locallo cal concerns, especially within our market area, could result in the following consequences, any of which could hurt business materially: lease delinquencies may increase; problem leases and defaults could increase; and demand for information technology products generally may decrease as businesses attempt to reduce expenses.

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.