Notes payable consisted of the following approximate amounts:

These notes are secured by specific technologycomputer equipment and are nonrecourse liabilities of the Partnership.  As such, the notes do not contain any debt covenants with which we must comply on either an annual or quarterly basis.  Aggregate maturities of notes payable for each of the periods subsequent to September 30, 2011March 31, 2012 are as follows:

 

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.

Noncash investing and financing activities include the following:

During the nine months ended September 30,At March 31, 2012 and 2011, and 2010 , the Partnership wrote-off fully amortized acquisition and finance fees of approximately $42,000$28,000 and $282,000$20,000, respectively.

As previously disclosed in the Partnership’s Annual Report on Form 10-K for the bond. The Partnership has recordedyear ended December 31, 2011, management had fully impaired all equipment and reserved for all accounts receivable related to the lease to Allied Health Care Services, Inc. (“Allied”), due to the bankruptcy of Allied and the criminal conviction of its sharefounder 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 collateral, $960,000, as restricted cash in our condensed balance sheet, asPartnership’s annual report. The bankruptcy trustee has not yet indicated whether he will pursue adversary claims against creditors seeking the return of September 30, 2011.  Management has determined a range of probable loss associated withpre-petition payments made by Allied, and therefore the Partnership’s exposure to such potential claims remains indeterminable at this litigation, in light of the uncertain nature of the appeal, and has accrued a loss contingency in the amount of $176,000 as of September 30, 2011.  It remains reasonably possible that the loss exposure could ultimately remain at approximately $866,000 if we are wholly unsuccessful upon appeal, or are unable to reach a settlement.time.

This section, as well as other portions ofCertain statements within this document, includes certainQuarterly Report on Form 10-Q may constitute forward-looking statements. Forward-looking statements about our business and our prospects, tax treatment of certain transactions and accounting matters, expenses, cash flows, distributions, investments and operating and capital requirements. Such forward-looking statementsare those that do not relate solely to historical fact. They include, but are not limited to: acquisition policies of our general partner; the nature of present andto, any statement that may predict, forecast, indicate or imply 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.results, performance, achievements or events. You can identify thosethese statements by the use of words such as “could,” “should,” “would,” “may,” “will,” “project,“could,” “anticipate,” “believe,” “anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,“expects,” “intend,” “continue”“predict” or “project” and “contemplate,” as well asvariations of these words or comparable words or phrases of similar wordsmeaning. These forward-looking statements reflect our current beliefs and expressions.

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.

 

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

We monitor ourLease 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.  OurIts Lease Relations department is responsible for monitoring accountslease 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.

We reviewThe Partnership reviews a customer’s credit history before extending credit. In the event of a default weit may establish a provision for uncollectible accountslease income receivable based upon the credit risk of specific customers, historical trends orand other information.

Through September 30, 2011,March 31, 2012, we have solely entered into operating leases.  Lease revenue is recognized on a monthly straight-line basis which is in accordance with the terms of the lease agreement.

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

We evaluate ourThe Partnership evaluates its long-lived assets when events or circumstances indicate that the value of the asset may not be recoverable.  We determineThe 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.value and is included in depreciation expense in the accompanying financial statements.  The fair value of equipment is determined based on estimated discounted cash flows to be generated by the asset. We determined no impairment analysis was necessary at September 30, 2011 and 2010 as no impairment indicators were noted.calculated using income or market approaches.

Our primary sourcessource of cash for the ninethree months ended September 30, 2011 wereMarch 31, 2012 was provided by operating activities that generated  approximately $838,000, borrowing from affiliate of approximately $506,000$181,000 and from the proceeds from the sale of equipment of approximately $403,000, compared$7,000.  This compares to the ninethree months ended September 30, 2010March 31, 2011 where our primary sourcessource of cash werewas from operating activities that generatedof approximately $1,518,000$680,000 and proceeds from the sale of equipment ofwere approximately $318,000.$151,000.

Our primary usesuse of cash for the ninethree months ended September 30,March 31, 2012 was for the purchase of new equipment of approximately $259,000 and for equipment acquisition fees of approximately $31,000.  For the three months ended March 31, 2011, our primary uses of cash were for distributions to partners of approximately $448,000, escrow –restricted cashand for capital expenditures of approximately $960,000 and the purchase of new information technology equipment of approximately $237,000.  For the nine months ended September 30, 2010 distributions to partners were approximately $1,857,000, and our capital expenditures were approximately $333,000.$52,000.

As a resultwe continue to acquire equipment for the equipment portfolio, operating expenses may increase, but because of a jury’s verdict in favorour investment strategy of the City of Tempe, (see  Part II:  Item 1, Legal Proceedings), management has suspended distributionsleasing equipment primarily through triple-net leases, we avoid operating expenses related to investors until at least the first quarter of 2012, and we may also refinanceequipment maintenance or leverage equipment to meet our cash flow needs, if necessary.taxes.

Cash was provided by operating activities for the ninethree months ended September 30, 2011March 31, 2012 of approximately $838,000,$181,000, which includes a net loss of approximately $876,000, a gain on sale of equipment of approximately $63,000$41,000 and depreciation and amortization expenses of approximately $1,208,000.$251,000. Other non-cash activities included in the determination of net loss include direct payments of lease income by lessees to banks of approximately $138,000.

At September 30, 2011March 31, 2012, cash was held in three accounts maintained at one financial institution with an aggregate balance of approximately $178,000.$97,000. Bank accounts are federally insured up to $250,000, while pursuant to the Dodd/Frank Act of 2010, some accounts are fully insured by the FDIC.  At September 30, 2011,March 31, 2012, the total cash bank balance was as follows:

The Partnership’s bank balances are fully insured by the FDIC.  The Partnership has not experienced any losses in our accounts, and believes it is not exposed to any significant credit risk.  The amounts in such accounts will fluctuate throughout 20112012 due to many factors, including the pace of additional limited partner contributions, cash receipts, equipment acquisitions, payment of operating expenses and other liabilities,interest rates and distributions to limited partners.

Our investment strategy of acquiring information technology equipment and generally leasing it under triple-net leases to operators who generally meet specified financial standards minimizes our operating expenses.  As of September 30, 2011,March 31, 2012, we had future minimum rentals on non-cancelable operating leases of approximately $312,000$770,000 for the balance of the year ending December 31, 20112012 and approximately $578,000$1,343,000 thereafter.  

As of September 30, 2011,March 31, 2012, our debt was approximately $219,000,$914,000, with interest rates ranging from 5.89%3.95% to 7.50%, and will be payable in monthly installments through April 2013. In addition, the Partnership had a payable to an affiliate of approximately $506,000 with an interest rate of prime plus 3% and is payable on demand.March 2015.

Our cash from operations is expected to continue to be adequate to cover all operating expenses, liabilities, and liabilitiesdistributions to Partners during the next 12-month period.   If available cash flow or net equipment disposition proceeds are insufficient to cover our expenses and liabilities on a short and long term basis, we will attempt to obtain additional funds by disposing of or refinancing equipment, or by borrowing within our permissible limits.  Since our leases are triple-net leases,As a result of the litigation with the City of Tempe, the Partnership had temporarily suspended distributions, beginning with the second quarter of 2011. The General Partner will continue to reassess the funding of limited partner distributions throughout the remainder of 2012. The General Partner and therefore no reserve for maintenance and repairs isCCC will determine if related party payables owed to them by the Partnership may be deferred (if deemed necessary.necessary) in an effort to increase the Partnership’s cash flow.

 

 

 

Our lease revenue decreased to approximately $350,000$290,000 for the three months ended September 30, 2011,March 31, 2012, from $562,000approximately $410,000 for the three months ended September 30, 2010.March 31, 2011.  This decrease was primarily due to more lease agreements ending versus new lease agreements being acquired during the three months ended September 30, 2011.March 31, 2012.

Interest and other revenue from cash held at financial institutions decreased to approximately $2,000$200 for the three months ended September 30, 2011March 31, 2012 from approximately $6,000$4,000 for the three months ended September 30, 2010 which is consistent with the decrease in cash due to new equipment purchases and distributions for the same period. The amounts in such accounts that generate interest revenue will fluctuate throughoutMarch 31, 2011 due to many factors, includinga lower miscellaneous income attributable to decreased billings for damaged equipment during the pacethree months ended March 31, 2012.

We sold equipment acquisitions and distributionswith a net book value of approximately $4,000 for the three months ended March 31, 2012, for a net gain of approximately $3,000. This compared to limited partners.equipment that we sold for the three months ended March 31, 2011 with a net book value of approximately $105,000, for a net gain of approximately $45,000.

Our operating expenses, excluding depreciation, primarily consist of accounting and legal fees, outside service fees and reimbursement of expenses to CCC for administration and operation of the Partnership.  These expenses decreased to approximately $56,000$64,000 for the three months ended September 30, 2011,March 31, 2012, from approximately $130,000$210,000 for the three months ended September 30, 2010March 31, 2011.  This decrease is primarily attributable to a decrease in various administrative expenses, as well as a decrease in legal expenses due to lower expenses from CCC including the waiving of certain administrative expenses, associated with the operationsettlement in 2012 of the Partnership.  MobilePro/Tempe litigation. See note 7 – Commitments and Contingencies for additional information.

 

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 $28,000$8,000 for the ninethree months ended September 30, 2011March 31, 2012 from approximately $100,000$10,000 for the ninethree months ended September 30, 2010,March 31, 2011, which is consistent with the decrease in lease revenue. Additionally, our General Partner  reduced the percentage from 5% to 2.5% from July 2010 going forward, which also contributed to the reduction in equipment management fees for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.

Depreciation and amortization expenses consist of depreciation on information technology equipment and amortization of equipment acquisition fees. These expenses decreased to approximately $1,208,000$251,000 for the ninethree months ended September 30, 2011,March 31, 2012, from $3,026,000$522,000 for the ninethree months ended September 30, 2010.March 31, 2011. This decrease was due to equipment and acquisition fees being fully depreciateddepreciated/amortized and not being replaced with as many new equipment and to the full amortization of acquisition fees.purchases.

SaleFor the three months ended March 31, 2012, we recognized revenue of Technology Equipment

Our management, under the supervision and with the participation of the principal executive officerChief Executive Officer and principal financial officer,Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures related to our reporting and disclosure obligations as of the end of the period covered by this Quarterly Report on Form 10-Q.  Based on such evaluation, the principal executive officerChief Executive Officer and principal financial officerPrincipal Financial Officer have concluded that, as of September 30, 2011,March 31, 2012, our disclosure controls and procedures are effective in ensuring that information relating to us which is required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act of 1934 is (a) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (b) accumulated and communicated to management, including the principal executive officerChief Executive Officer and principal financial officer,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 thirdfirst quarter of 20112012 that have materially affected or are reasonably likely to materially affect its internal control over financial reportingreporting.

Our business is directly impacted by factors such as restricted casheconomic, 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 condensed balance sheet, as of September 30, 2011.  Management has determinedcontrol.  Beginning in 2008 and continuing through 2011, general worldwide economic conditions experienced a range of probable loss associated with this litigation, in light of the uncertain nature of the appeal, and has accrueddownturn.  Although we have seen a loss contingencymodest improvement in the amountglobal economy in 2012, the economic recovery remains weak and a prolonged period of $176,000economic weakness could result in the following consequences, any of which could hurt business materially: lease delinquencies may increase; problem leases and defaults could increase; and demand for information technology products generally may decrease as of September 30, 2011.  It remains reasonably possible that the loss exposure could ultimately remain at approximately $866,000 if we are wholly unsuccessful upon appeal, or are unablebusinesses attempt to reach a settlement.

 

 

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.