UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 or





FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011





 ̈ 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)





Brandywine Bldg. One, Suite 200


2 Christy Drive


Chadds Ford, PA 19317


(Address, including zip code, of principal executive offices)





(484) 785-1480


(Registrant’s telephone number including area code)





Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (ii) has been subject to such filing requirements for the past 90 days:


YES  T      NO   ̈





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).YES   ̈      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 T(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 T
















1







FORM 10-Q


March 31, 2011





TABLE OF CONTENTS





PART IItem 1.
Financial Statements
3Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
13Item 3.
Quantitative and Qualitative Disclosures About Market Risk
16Item 4.
Controls and Procedures
16PART IIItem 1.
Legal Proceedings
16Item 1A.
Risk Factors
16Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
16Item 3.
Defaults Upon Senior Securities
16Item 5.
Other Information
16Item 6.
Exhibits
16








2














Part I. FINANCIAL INFORMATION


Item 1. Financial Statements





Commonwealth Income & Growth Fund VCondensed Balance SheetsMarch 31,


December 31,2011


2010(unaudited)ASSETSCash and cash equivalents

$
404,288


$
79,118Lease income receivable, net of reserve of approximately $141,000 at March 31, 2011 and December 31, 2010


194,531



287,131Accounts receivable, Commonwealth Capital Corp.


-



75,079Accounts receivable, affiliated limited partnerships


11,973



11,973Prepaid expenses


4,355



4,202615,147



457,503Technology equipment, at cost


16,884,369



17,888,633Accumulated depreciation


(14,387,432
)


(14,834,770
)2,496,937



3,053,863Equipment acquisition costs and deferred expenses, net of accumulated amortization

of approximately $143,000 and $145,000 at March 31, 2011 and December 31, 2010, respectively


76,267



92,705Prepaid acquisition fees


39,210



41,308115,477



134,013Total Assets

$
3,227,561


$
3,645,379LIABILITIES AND PARTNERS' CAPITALLIABILITIESAccounts payable

$
243,705


$
216,721Accounts payable, General Partner


328,883



260,693Accounts payable, Commonwealth Capital Corp.


79,232



-Other accrued expenses


337,583



24,030Unearned lease income


79,688



187,239Notes payable


300,828



356,976Total Liabilities


1,369,919



1,045,659PARTNERS' CAPITALGeneral Partner


1,000



1,000Limited Partners


1,856,642



2,598,720Total Partners' Capital


1,857,642



2,599,720Total Liabilities and Partners' Capital

$
3,227,561


$
3,645,379see accompanying notes to condensed financial statements











Commonwealth Income & Growth Fund VCondensed Statements of Operations(unaudited)Three Months EndedMarch 31, 2011


March 31, 2010RevenueLease

$
409,714


$
937,180Interest and other


3,840



26,394Gain on sale of computer equipment


45,308



82,096Total revenue


458,862



1,045,670ExpensesOperating, excluding depreciation


209,885



268,561Equipment management fee, General Partner


10,243



46,859Interest


4,916



3,701Depreciation


503,812



1,074,139Amortization of equipment acquisition costs and deferred expenses


18,536



34,123Total expenses


747,392



1,427,383Net (loss)

$
(288,530
)

$
(381,713
)Net (loss) allocated to Limited Partners

$
(289,952
)

$
(387,909
)Net (loss) per equivalent limited partnership unit

$
(0.23
)

$
(0.31
)Weighted average number of equivalent limited partnership units outstanding during the period


1,237,425



1,241,923see accompanying notes to condensed financial statements





4











Commonwealth Income & Growth Fund VCondensed Statement of Partners' CapitalFor the three months ended March 31, 2011(unaudited)General Partner Units


Limited Partner Units


General Partner


Limited Partner


TotalBalance, January 1, 2011


50



1,237,440


$
1,000


$
2,598,720


$
2,599,720Net income (loss)


-



-



1,422



(289,952
)


(288,530
)Redemptions


-



(832
)


-



(5,299
)


(5,299
)Distributions


-



-



(1,422
)


(446,827
)


(448,249
)Balance, March 31, 2011


50



1,236,608


$
1,000


$
1,856,642


$
1,857,642see accompanying notes to condensed financial statements








5












Commonwealth Income & Growth Fund VCondensed Statements of Cash Flow(unaudited)Three Months endedMarch 31, 2011


March 31, 2010Net cash provided by operating activities

$
680,295


$
408,613Investing activities:Capital expenditures


(52,451
)


(127,499
)Net proceeds from the sale of computer equipment


150,874



103,047Net cash provided by (used in) investing activities


98,423



(24,452
)Financing activities:Redemptions


(5,299
)


(33,920
)Distributions to partners


(448,249
)


(619,405
)Net cash (used in) financing activities


(453,548
)


(653,325
)Net increase (decrease) in cash


325,170



(269,164
)Cash and cash equivalents at beginning of period


79,118



556,766Cash and cash equivalents at end of period

$
404,288


$
287,602see 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.





During the three months ended March 31, 2011 limited partners redeemed 832 units of the partnership for a total redemption price of approximately $5,000 in accordance with the terms of the limited partnership agreement.





The Partnership used the proceeds of the offering to acquire, own and lease various types of information technology 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 computer equipment subject to associated debt obligations and lease agreements and allocate a participation in the cost, debt and lease revenue to the various partnerships that it manages based on certain risk factors.





The Partnership’s General Partner is Commonwealth Income & Growth Fund, Inc. (the “General Partner”), a Pennsylvania corporation which is an indirect wholly owned subsidiary of CCC.  Approximately ten years after the commencement of operations, the Partnership intends to sell or otherwise dispose of all of its equipment, make final distributions to partners, and to dissolve.  Unless sooner terminated, the Partnership will continue until December 31, 2015.





2. Summary of Significant Accounting Policies





Basis of Presentation





The financial information presented as of any date other than December 31, 2010 has been prepared from the books and records without audit.  Financial information as of December 31, 2010 has been derived from the audited financial statements of the Partnership, but does not include all disclosures required by generally accepted accounting principles to be included in audited financial statements.  In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information for the periods indicated, have been included.  For further information regarding the Partnership’s accounting policies, refer to the financial statements and related notes included in the Partnership’s annual report on Form 10-K for the year ended December 31, 2010.  Operating results for the three months ended March 31, 2011 are not necessarily indicative of financial results that may be expected for the full year ended December 31, 2011.





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, receivables, accounts payable and accrued expenses and other liabilities are carried at amounts which reasonably approximate their fair values as of March 31, 2011 and December 31, 2010.





The Partnership’s long-term debt consists of notes payable, which are secured by specific computer equipment and are nonrecourse liabilities of the Partnership. The estimated fair value of this debt at March 31, 2011 and December 31, 2010 approximates the carrying value of these instruments, due to the interest rates approximating current market values.





Disclosure about fair value of financial instruments is based on pertinent information available to management as of March 31, 2011 and December 31, 2010.











Cash and cash equivalents





At March 31, 2011 cash was held in three accounts maintained at one financial institution with an aggregate balance of approximately $408,000. Bank accounts are federally insured up to $250,000, while pursuant to the Dodd/Frank Act of 2010, some accounts are fully insured by the FDIC.  At March 31, 2011, the total cash bank balance was as follows:





At March 31, 2011Total bank balance

$
408,000FDIC insured


(331,000
)Uninsured amount

$
77,000





The Partnership mitigates the risk of holding uninsured deposits by only depositing funds with major a financial institution.  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 2011 due to many factors, including the pace of additional cash receipts, equipment acquisitions and distributions to investors.





Recent Accounting Pronouncements





In April of 2011, the FASB issued ASU No. 2011-03 (“ASC Update 2011-03”), Reconsideration of Effective Control for Repurchase Agreements.This ASU is intended to improve financial reporting of repurchase agreements (“repos”) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments in this Update are effective for the fiscal quarters and years that start on or after December 15, 2011. Early adoption is not permitted. The Partnership is currently evaluating the effect this ASU will have on its financial statements.





In April 2011, the FASB issued ASU No. 2011-02 (“ASC Update 2011-02”) A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.  This ASU provides additional guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties.  The additional guidance is intended to create additional consistency in the application of generally accepted accounting principles (GAAP) for debt restructuring.  The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The Partnership is currently evaluating the effect this ASU will have on its financial statements.





In January 2011, the FASB issued ASU No. 2011-01 (“ASC Update 2011-01”), Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.  This ASU temporarily delays the effective date for public entities of the disclosures about troubled debt restructurings (TDRs) in ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The Partnership is currently evaluating the effect this ASU will have on its financial statements.











3. Information Technology Equipment





The Partnership is the lessor of equipment under operating leases with periods that generally will range from 12 to 48 months.  In general, associated costs such as repairs and maintenance, insurance and property taxes are paid by the lessee.





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





Remarketing fees are paid to the leasing companies from which the Partnership purchases leases.  These are fees that are earned by the leasing companies when the initial terms of the lease have been met.  The General Partner believes that this strategy adds value since it entices the leasing company to remain actively involved with the lessee and encourages  potential extensions, remarketing or sale of equipment.  This strategy is designed to minimize any conflicts the leasing company may have with a new lessee and may assist in maximizing overall portfolio performance.  The remarketing fee is tied into lease performance thresholds and is a factor in the negotiation of the fee.  Remarketing fees incurred in connection with lease extensions are accounted for as operating costs.  Remarketing fees incurred in connection with the sale of computer equipment are included in our gain or loss calculations.  For the three months ended March 31, 2011 and 2010, the Partnership incurred remarketing fees of approximately $16,000 and $23,000, respectively. For the three months ended March 31, 2011 and 2010 the Partnership paid approximately $30,000 and $12,000, respectively, in such fees.





CCC, on behalf of the Partnership and on behalf of other affiliated partnerships, acquires computer equipment subject to associated debt obligations and lease agreements and allocates a participation in the cost, debt and lease revenue to the various partnerships based on certain risk factors.    The Partnership’s share of the equipment in which it participates with other partnerships at March 31, 2011 was approximately $12,070,000 and is included in the Partnership’s fixed assets on its balance sheet.  The total cost of the equipment shared by the Partnership with other partnerships at March 31, 2011 was approximately $37,429,000.  The Partnership’s share of the outstanding debt associated with this equipment at March 31, 2011 was approximately $282,000. The total outstanding debt related to the equipment shared by the Partnership at March 31, 2011 was approximately $1,130,000.





The Partnership’s share of the equipment in which it participates with other partnerships at December 31, 2010 was approximately $12,017,000 and is included in the Partnership’s fixed assets on its balance sheet.  The total cost of the equipment shared by the Partnership with other partnerships at December 31, 2010 was approximately $37,219,000.   The Partnership’s share of the outstanding debt associated with this equipment at December 31, 2010 was approximately $335,000.  The total outstanding debt related to the equipment shared by the Partnership at December 31, 2010 was approximately $1,374,000.





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 for the remainder of 2011 as the Partnership builds its portfolio.





The following is a schedule of future minimum rentals on non-cancellable operating leases at March 31, 2011:





AmountNine Months ended December 31, 2011

$
808,000Year ended December 31, 2012


342,000Year ended December 31, 2013


63,000$
1,213,000












4. Related Party Transactions





Receivables/Payables





As of March 31, 2011, the Partnership’s related party receivables and payables are short term, unsecured, and non-interest bearing.





Three months ended March 31,

2011


2010Reimbursable expensesReimbursable expenses, which are charged to the Partnership by CCC in connection with the administration and operation of the Partnership, are allocated to the Partnership based upon several factors including, but not limited to, the number of investors, compliance issues, and the number of existing leases.

$
180,000


$
227,000


Equipment acquisition feeThe General Partner earned an equipment acquisition fee of 4% of the purchase price of each item of equipment purchased as compensation for the negotiation of the acquisition of the equipment and lease thereof or sale under a conditional sales contract.   At March 31, 2011, the remaining balance of prepaid acquisition fees was approximately $39,000, which is expected to be earned in future periods.

$
2,000


$
5,000





Equipment management feeThe General Partner is entitled to be paid for managing the equipment portfolio a monthly fee equal to the lesser of (i) the fees which would be charged by an independent third party for similar services for similar equipment or (ii) the sum of (a) two percent of (1) the gross lease revenues attributable to equipment which is subject to full payout net leases which contain net lease provisions plus (2) the purchase price paid on conditional sales contracts as received by the Partnership and (b) 2.5% of the gross lease revenues attributable to equipment which is subject to operating leases. In an effort to increase future cash flow for the fund our General Partner had elected to reduce the percentage of equipment management fees paid to it from 5% to 2.5% of the gross lease revenues attributable to equipment which is subject to operating leases. The reduction was effective beginning in July 2010.

$
10,000


$
47,000





Equipment liquidation feeWith 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.

$
5,000


$
2,500








10








5. Notes Payable





Notes payable consisted of the following amounts:





March 31,

2011

December 31,

2010Installment note payable to bank; interest at 5.75% due in quarterly installments of $22,756 including interest, with final payment in January 2011


-



22,000Installment note payable to bank; interest at 6.21%, due in monthly installments of $1,368, including interest, with final payment in May 2012


18,000



22,000Installment note payable to bank; interest ranging from 5.89% to 7.50%, due in monthly installments of $7,104 and $6,666, including interest, with final payment in April 2013


283,000



313,000$
301,000


$
357,000





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





AmountNine months ending December 31, 2011

$
131,000Year ended December 31, 2012


144,000Year ended December 31, 2013


26,000$
301,000





6. Supplemental Cash Flow Information





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





Three months ended March 31, 2011

2011


2010Lease revenue net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank

$
56,000


$
78,000





No interest or principal on notes payable was paid by the Partnership because direct payment was made by lessee to the bank in lieu of collection of lease income and payment of interest and principal by the Partnership.





Noncash investing and financing activities include the following:





Three months ended March 31, 2011

2011


2010Equipment acquisition fees earned by General Partner, upon purchase of equipment, from prepaid acquisition fees

$
2,000


$
5,000





At March 31, 2011, the Partnership wrote-off fully amortized acquisition and finance fees of approximately $20,000.








11





7. Commitments and Contingencies





Allied Health Care Services





On June 18, 2010, Commonwealth Capital Corp. (the parent of our general partner) filed suit on our behalf against Allied Health Care Services Inc. (“Allied”).  Allied is a lessee of medical equipment, and has failed to make its monthly lease payments since March 2010.  Our suit for breach of contract against Allied and its owner, Charles K. Schwartz, pursuant to a partial personal guaranty, was filed in the U.S. District Court for the District of New Jersey (Case No 2:10-cv-03135), seeking payment of all outstanding rents, the value of leased equipment, and all costs of collection, including attorney’s fees.





On August 19, 2010 our suit was automatically stayed when an involuntary petition for relief under Chapter 7 of the Bankruptcy Code was filed against Allied in the U.S. Bankruptcy Court for the District of New Jersey.  On September 3, 2010, Charles Schwartz, the owner of Allied, was arrested by the FBI for alleged mail fraud in connection with his medical equipment leasing business.  Additionally, Commonwealth was one of the petitioning creditors in an involuntary Chapter 7 bankruptcy petition filed against Mr. Schwartz personally on September 17, 2010, in the same court.





In an effort to reduce potential loss related to the Allied matter, we ceased booking revenues on the Allied leases completely in July 2010, thereby eliminating future equipment management fees on the Allied leases.





Due to the bankruptcy proceedings, management can not determine, at this time, the status of the equipment leased to Allied or the amounts that may ultimately be paid to us from the bankruptcy estates.   The timeline for identifying and recovering assets is uncertain, with resolution depending in large part upon the Trustee’s resolution of certain legal disputes and the cooperation of the various parties involved. Due to the complexity of the alleged fraud and the number of parties involved, we expect that completion of asset recovery and distribution to creditors will take place in excess of twelve months.





Our share of exposure related to the Allied default (if no rent is collected, the equipment is not paid for and/or we are unable to obtain performance under partial personal guaranty) is approximately $637,000 as of March 31, 2011 net of a reserve taken against substantially all the Allied receivables.





City of Tempe





The Partnership’s legal proceedings against the City of Tempe, Arizona remain open in Federal court in the District of Arizona.  During 2010, parties each submitted motions for summary judgment, as well as briefs in support of these motions.  Tempe’s motion for summary judgment was denied, and our motion for summary judgment was granted in part (as to an issue regarding ownership of the equipment) and denied in part by court order dated October 4, 2010. The parties were unable to settle the matter at a mediation held on February 28, 2011 and therefore a trial date of May 16, 2011 has been set by the court.  The only remaining claim is Tempe’s claim against Commonwealth for unjust enrichment, which Commonwealth feels is without merit and intends to defend vigorously.  To date, we have taken reserves against all outstanding rentals. While we believe that an unfavorable outcome in this case is unlikely, we believe that if an adverse judgment were rendered, the judgment could be in the range of $250,000 to $700,000.








12








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,” “estimate,” “expects,” “intend,” “predict” or “project” and variations of these words or comparable words or phrases of similar meaning. These forward-looking statements reflect our current beliefs and expectations with respect to future events and are based on assumptions and are subject to risks and uncertainties and other factors outside our control that may cause actual results to differ materially from those projected.





CRITICAL ACCOUNTING POLICIES





Our discussion and analysis of our financial condition and results of operations are based upon our financial statements which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.





We believe that our critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.





INFORMATION TECHNOLOGY EQUIPMENT





Commonwealth Capital Corp., on our behalf and on behalf of 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 useful lives of two to four years.





ACCOUNTS RECEIVABLE





We monitor our accounts receivable to ensure timely and accurate payment by lessees.  Our Lease Relations department is responsible for monitoring accounts receivable and, as necessary, resolving outstanding invoices.





We review a customer’s credit history before extending credit. 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 or other information.





REVENUE RECOGNITION





Through March 31, 2011, 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 review a customer’s credit history before extending credit. 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 or other information.







13







LONG-LIVED ASSETS





We evaluate our long-lived assets when events or circumstances indicate that the value of the asset may not be recoverable.  We determine 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.  The fair value is determined based on estimated discounted cash flows to be generated by the asset. We determined no impairment analysis was necessary at March 31, 2011 and 2010 as no impairment indicators were noted.





LIQUIDITY AND CAPITAL RESOURCES





Our primary source of cash for the three months ended March 31, 2011 was provided by operating activities of approximately $680,000 and from the proceeds from the sale of equipment of approximately $151,000.  This compares to the three months ended March 31, 2010 where our primary source of cash was from operating activities of approximately $409,000 and proceeds from the sale of equipment were approximately $103,000.





Our primary use of cash for the three months ended March 31, 2011 was for the purchase of new information technology equipment of approximately $52,000 and also for distributions to partners of approximately $448,000.  For the three months ended March 31, 2010 distributions to partners were approximately $619,000, and our capital expenditures were approximately $128,000.





Capital expenditures and distributions are expected to increase overall during the remainder of 2011, as management focuses on additional equipment acquisitions and funding limited partner distributions. We intend to invest approximately $1,950,000 in additional equipment during the remainder of 2011.  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, 2011 of approximately $680,000, which includes a net loss of approximately $289,000 and depreciation and amortization expenses of approximately $522,000. Other non-cash activities included in the determination of net loss include direct payments of lease income by lessees to banks of approximately $56,000. Additionally we had a gain on the sale of equipment in the amount of $45,000.  For the three months ended March 31, 2010 cash was also generated by operating activities 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.





As we continue to increase the size of our equipment portfolio, operating expenses will increase, which reflects the administrative costs of servicing the portfolio, but because of our investment strategy of leasing technology equipment primarily through triple-net leases, we avoid operating expenses related to equipment maintenance or taxes.  Depreciation expenses will likely increase more rapidly than operating expenses as we add technology equipment to our portfolio.





At March 31, 2011 cash was held in three accounts maintained at one financial institution with an aggregate balance of approximately $408,000. Bank accounts are federally insured up to $250,000, while pursuant to the Dodd/Frank Act of 2010, some accounts are fully insured by the FDIC.  At March 31, 2011, the total cash bank balance was as follows:





At March 31, 2011Total bank balance

$
408,000FDIC insured


(331,000
)Uninsured amount

$
77,000





The Partnership mitigates the risk of holding uninsured deposits by only depositing funds with major financial institutions.  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 2011 due to many factors, including the pace of additional limited partner contributions, cash receipts, equipment acquisitions 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 March 31, 2011, we had future minimum rentals on non-cancelable operating leases of approximately $808,000 for the balance of the year ending December 31, 2011 and approximately $405,000 thereafter.





As of March 31, 2011, our debt was approximately $301,000, with interest rates ranging from 5.89% to 7.50%, and will be payable through April 2013.





Our cash from operations is expected to continue to be adequate to cover all operating expenses, liabilities, and distributions to Partners during the next 12-month period.   If available cash flow or net disposition proceeds are insufficient to cover our expenses and liabilities on a short and long term basis, we will attempt to obtain additional funds by disposing of or refinancing equipment, or by borrowing within our permissible limits.  Since our leases are on a triple-net basis, no reserve for maintenance and repairs is deemed necessary.














RESULTS OF OPERATIONS





Three months ended March 31, 2011 compared to three months ended March 31, 2010





Revenue





For the three months ended March 31, 2011, we recognized revenue of approximately $459,000 and expenses of approximately $748,000, resulting in a net loss of approximately $289,000.  This net loss is primarily due to depreciation and amortization expenses for the three months ended March 31, 2011 which were greater than lease revenue for the same period.  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.





Our lease revenue decreased to approximately $410,000 for the three months ended March 31, 2011, from approximately $937,000 for the three months ended March 31, 2010.  This decrease was primarily due to more lease agreements ending versus new lease agreements being acquired during the three months ended March 31, 2011.





Interest and other revenue decreased to approximately $4,000 for the three months ended March 31, 2011 from approximately $26,000 for the three months ended March 31, 2010 due to a lower miscellaneous income attributable to decreased billings for damaged equipment during the three months ended March 31, 2011.




Sale of Information Technology Equipment





We sold equipment with a net book value of approximately $105,000 for the three months ended March 31, 2011, for a net gain of approximately $45,000. This compared to equipment that we sold for the three months ended March 31, 2010 with a net book value of approximately $21,000, for a net gain of approximately $82,000.





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 decreased to approximately $210,000 for the three months ended March 31, 2011, from approximately $269,000 for the three months ended March 31, 2010.  This decrease is primarily attributable to decreases in accounting, legal and various administrative expenses due to enhanced operating efficiencies and a decreased equipment portfolio.





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 $10,000 for the three months ended March 31, 2011 from approximately $47,000 for the three months ended March 31, 2010, which is consistent with the decrease in lease revenue. We also reduced the percentage from 5% to 2.5% from July 2010 going forward, which also contributes to the reduction in equipment management fees for the three months ended March 31, 2011 compared to the three months ended March 31, 2010.





Depreciation and Amortization Expenses





Depreciation and amortization expenses consist of depreciation on computer equipment and amortization of equipment acquisition fees. These expenses decreased to approximately $522,000 for the three months ended March 31, 2011, from $1,108,000 for the three months ended March 31, 2010. This decrease was due to equipment and acquisition fees being fully depreciated/amortized and not being replaced with as many new equipment purchases.





Net Income (Loss)





For the three months ended March 31, 2011, we recognized revenue of approximately $459,000 and expenses of approximately $748,000, resulting in a net loss of approximately $289,000.  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 change in net loss is due to a decrease in depreciation and amortization expenses due to equipment and acquisition fees being fully depreciated/amortized and not being replaced with as many new equipment purchases. The change is also a result of the reduction of equipment management fees from 5% to 2.5% for the three months ended March 31, 2011, as compared to the three months ended March 31, 2010. There is also an overall decrease in operating expenses due to enhanced operating efficiencies and a decreased equipment portfolio.











Item 3. Quantitative and Qualitative Disclosures About Market Risk





N/A





Item 4.  Controls and Procedures





Our management, under the supervision and with the participation of the Chief Executive Officer and Principal Financial Officer, have evaluated the effectiveness of our controls and procedures related to our reporting and disclosure obligations as of March 31, 2011 which is the end of the period covered by this Quarterly Report on Form 10-Q.  Based on that evaluation, the Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures are effective 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, 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 were no changes in the Partnership’s internal control over financial reporting during the first quarter of 2011 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





Allied Health Care Services





On June 18, 2010, Commonwealth Capital Corp. (“Commonwealth”) (the parent of our general partner) filed suit on our behalf against Allied Health Care Services Inc. (“Allied”).  Allied is a lessee of medical equipment, and has failed to make its monthly lease payments since March 2010.  Our suit for breach of contract against Allied and its owner, Charles K. Schwartz, pursuant to a partial personal guaranty, was filed in the U.S. District Court for the District of New Jersey (Case No 2:10-cv-03135), seeking payment of all outstanding rents, the value of leased equipment, and all costs of collection, including attorney’s fees.





On August 19, 2010 our suit was automatically stayed when an involuntary petition for relief under Chapter 7 of the Bankruptcy Code was filed against Allied in the U.S. Bankruptcy Court for the District of New Jersey.  On September 3, 2010, Charles Schwartz, the owner of Allied, was arrested by the FBI for alleged mail fraud in connection with his medical equipment leasing business.  Additionally, Commonwealth was one of the petitioning creditors in an involuntary Chapter 7 bankruptcy petition filed against Mr. Schwartz personally on September 17, 2010, in the same court.





In an effort to reduce potential loss related to the Allied matter, we ceased booking revenues on the Allied leases completely in July 2010, thereby eliminating future equipment management fees on the Allied leases.





Due to the bankruptcy proceedings, management can not determine, at this time, the status of the equipment leased to Allied or the amounts that may ultimately be paid to us from the bankruptcy estates.   The timeline for identifying and recovering assets is uncertain, with resolution depending in large part upon the Trustee’s resolution of certain legal disputes and the cooperation of the various parties involved. Due to the complexity of the alleged fraud and the number of parties involved, we expect that completion of asset recovery and distribution to creditors will take place in excess of twelve months.





Our share of exposure related to the Allied default (if no rent is collected, the equipment is not paid for and/or we are unable to obtain performance under partial personal guaranty) is approximately $637,000 as of March 31, 2011 net of a reserve taken against substantially all the Allied receivables.





City of Tempe





The Partnership’s legal proceedings against the City of Tempe, Arizona remain open in Federal court in the District of Arizona.  During 2010, parties each submitted motions for summary judgment, as well as briefs in support of these motions.  Tempe’s motion for summary judgment was denied, and our motion for summary judgment was granted in part (as to an issue regarding ownership of the equipment) and denied in part by court order dated October 4, 2010. The parties were unable to settle the matter at a mediation held on February 28, 2011 and therefore a trial date of May 16, 2011 has been set by the court.  The only remaining claim is Tempe’s claim against Commonwealth for unjust enrichment, which Commonwealth feels is without merit and intends to defend vigorously.  To date, we have taken reserves against all outstanding rentals. While we believe that an unfavorable outcome in this case is unlikely, we believe that if an adverse judgment were rendered, the judgment could be in the range of $250,000 to $700,000.





Item 1A.   Risk Factors





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





Our business is directly impacted by factors such as economic, political, and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government monetary and fiscal policies, and inflation, all of which are beyond our control.  Beginning in 2008 and continuing through 2010, general worldwide economic conditions experienced a downturn.  Although we have seen a modest improvement in the global economy in 2011, the economic recovery remains weak and a prolonged period of economic weakness could result in the following consequences, any of which could hurt business materially: lease delinquencies may increase; problem leases and defaults could increase; and demand for information technology products generally may decrease as businesses attempt to reduce expenses.





Item 2.
Unregistered Sales of Equity Securities and Use of ProceedsN/AItem 3.
Defaults Upon Senior SecuritiesN/AItem 5.
Other InformationN/AItem 6.
Exhibits








31.1 THE RULE 15d-14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER


31.2 THE RULE 15d-14(a) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER


32.1 SECTION 1350 CERTIFICATION OF CHIEF EXECUTIVE OFFICER


32.2 SECTION 1350 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER















SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





COMMONWEALTH INCOME & GROWTH FUND VBY: COMMONWEALTH INCOME & GROWTH FUND, INC., General Partner


May 16, 2011
By: /s/ Kimberly A. Springsteen-AbbottDate
Kimberly A. Springsteen-AbbottChief Executive OfficerMay 16, 2011
By: /s/  Lynn A. FranceschinaDate
Lynn A. FranceschinaExecutive Vice President, Chief Operating Officer