10-Q 1 tenq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 33-69996 COMMONWEALTH INCOME & GROWTH FUND I (Exact name of registrant as specified in its charter) Pennsylvania 23-2735641 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 470 John Young Way Suite 300 Exton, Pennsylvania 19341 (Address, including zip code, of principal executive offices) (610) 594-9600 (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 [X] NO [ ] Commonwealth Income & Growth Fund I Balance Sheets

see accompanying notes to financial statements Commonwealth Income & Growth Fund I Statements of Operations

see accompanying notes to financial statements Commonwealth Income & Growth Fund I Statements of Partners' Capital

see accompanying notes to financial statements Commonwealth Income & Growth Fund I Statements of Cash Flows For the Nine Months Ended September 30, 2001 and 2000

see accompanying notes to financial statements NOTES TO FINANCIAL STATEMENTS 1. Business Commonwealth Income & Growth Fund I (the "Partnership") is a limited partnership organized in the Commonwealth of Pennsylvania to acquire, own and lease various types of computer peripheral equipment and other similar capital equipment, which will be leased primarily to U.S. corporations and institutions. 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 Commonwealth Capital Corp. Approximately ten years after the commencement of operations, the Partnership intends to sell or otherwise dispose of all of its computer equipment, make final distributions to partners, and to dissolve. Unless sooner terminated, the Partnership will continue until December 31, 2004. 2. Summary of Significant Accounting Policies Basis of Presentation The financial information presented as of any date other than December 31 has been prepared from the books and records without audit. Financial information as of December 31 has been derived from the audited financial statements of Commonwealth Income & Growth Fund I (the "Partnership"), but does not include all disclosures required by generally accepted accounting principles. 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, 2000. Operating results for the nine-month period ended September 30, 2001 are not necessarily indicative of financial results that may be expected for the full year ended December 31, 2001. Revenue Recognition Through September 30, 2001, the Partnership has only entered into operating leases. Lease revenue is recognized on a monthly basis in accordance with the terms of the operating lease agreements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Long-Lived Assets The Partnership evaluates its long-lived assets when events or circumstances indicate that the value of the asset may not be recoverable. The Partnership determines whether 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 then an 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. As of September 30, 2001, there is no impairment. Depreciation on computer equipment for financial statement purposes is based on the straight-line method over estimated useful lives of four years. Intangible Assets Equipment acquisition costs and deferred expenses are amortized on a straight-line basis over two- to-four year lives. Unamortized acquisition fees are charged to amortization expense when the associated leased equipment is sold. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents. At September 30, 2001, cash equivalents were invested in a money market fund investing directly in Treasury obligations. Income Taxes The Partnership is not subject to federal income taxes; instead, any taxable income (loss) is passed through to the partners and included on their respective income tax returns. Taxable income differs from financial statement net income as a result of reporting certain income and expense items for tax purposes in periods other than those used for financial statement purposes, principally relating to depreciation, amortization, and lease income. Offering Costs Offering costs are payments for selling commissions, dealer manager fees, professional fees and other offering expenses relating to the syndication. Selling commissions are 7% of the partners' contributed capital and dealer manager fees are 2% of the partners' contributed capital. These costs are deducted from partnership capital in the accompanying financial statements. Net Income (Loss) Per Equivalent Limited Partnership Unit The net income (loss) per equivalent limited partnership unit is computed based upon net income (loss) allocated to the limited partners and the weighted average number of equivalent units outstanding during the period. 3. Computer Equipment The Partnership is the lessor of equipment under operating leases with periods ranging from 24 to 36 months. In general, associated costs such as repairs and maintenance, insurance and property taxes are paid by the lessee. The following is a schedule of future minimum rentals on noncancellable operating leases at September 30, 2001: Amount ----------------------------------------------------------- Three months ended December 31, 2001 $ 33,000 Year ended December 31, 2002 62,000 Year ended December 31, 2003 43,000 Year ended December 31, 2004 6,000 -------- $144,000 ======== 4. Related Party Transactions Other Receivables For the period ended September 30, 2001, the Partnership has a receivable from Commonwealth Capital Corp ("CCC"), a related party to the Partnership, in the amount of $90,000. CCC, thru its indirect subsidiaries, including the General Partner of the Partnership, earns fees based on revenues and new lease purchases from this fund and other funds. This is a short-term, non-interest bearing receivable that CCC plans to repay within the next fiscal year. 5. Notes Payable Notes payable consisted of the following: September 30 December 31 --------------------------------------------------------------------------- 2001 2000 Installment note payable to a bank; interest at 7.00%; due in monthly installments of $5,852 including interest. The note was paid in full in September 2001 in relation to the sale of equipment. $ - $67,647 Installment note payable to a bank; interest at 8.40%; due in monthly installments of $696 including interest through January 2003 10,500 - Installment note payable to a Bank, interest at 9.25%; due in Monthly installments of $1,685 Including interest through January, 2004 42,281 - Installment note payable to a bank; interest at 7.30%; due in monthly installments of $1,565 including interest through February 2004 41,492 - Installment note payable to a bank; interest at 6.5%; due in monthly installments of $1,409 including interest through September 2004 46,186 - -------- ------- $140,459 $67,647 ======== ======= These notes are secured by specific computer equipment and are nonrecourse liabilities of the Partnership. 5. Supplemental Cash Flow Information Other noncash activities included in the determination of net income are as follows: Nine months ended September 30, 2001 2000 -------------------------------------------------------------------------------- Lease income, net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank $89,839 $608,094 Lease income paid to original lessor in lieu of cash payment for computer equipment acquired $ 1,564 - 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, 2001 2000 -------------------------------------------------------------------------------- Debt assumed in connection with purchase of computer equipment $164,215 $ -- ================================================================================ 6. Litigation The Partnership, thru Commonwealth Capital Corp, has initiated a lawsuit against a customer for the non-return of leased equipment. Management believes that the Partnership will prevail in this matter; the outcome of this uncertainty will not have a material adverse impact to the financial statements of the Partnership. Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources The Partnership's primary sources of capital for the nine months ended September 30, 2001 and 2000 were cash from operations of $192,000 and $434,000, respectively and proceeds from the sale of equipment of $183,000 and $300,000 respectively. The primary uses of cash for the nine months ended September 30, 2001 and 2000, were for capital expenditures for new equipment totaling $95,000 for the period ended September 30, 2001, and the payment of preferred distributions to partners of $315,000 and $874,000, for the nine months ended September 30, 2001 and 2000, respectively. For the nine month period ended September 30, 2001, the Partnership generated cash flows from operating activities of $192,000, which includes a net gain from the sale of computer equipment of $173,000, and depreciation and amortization expenses of $354,000. Other noncash activities included in the determination of net income include direct payments of lease income by lessees to banks of $91,000. For the nine month period ended September 30, 2000, the Partnership generated cash flows from operating activities of $434,000, which includes a net loss from the sale of computer of $107,000, and depreciation and amortization expenses of $1,260,000. Other noncash activities included in the determination of net income include direct payments of lease income by lessees to banks of $608,000. Cash is invested in money market accounts that invest directly in treasury obligations pending the Partnership's use of such funds to purchase additional computer equipment, to pay Partnership expenses or to make distributions to the Partners. At September 30, 2001, the Partnership had approximately $8,000 invested in these money market accounts. The Partnership's investment strategy of acquiring computer equipment and generally leasing it under "triple-net leases" to operators who generally meet specified financial standards minimizes the Partnership's operating expenses. As of September 30, 2001, the Partnership had future minimum rentals on non-cancelable operating leases of $33,000 for the balance of the year ending December 31, 2001 and $111,000 thereafter. At September 30, 2001, outstanding debt was $140,000, with interest rates ranging from 6.50% to 9.25%, payable through September 2004. The Partnership's cash from operations is expected to continue to be adequate to cover all operating expenses, liabilities and preferred distributions to Partners during the next 12-month period. If available Cash Flow or Net Disposition Proceeds are insufficient to cover the Partnership expenses and liabilities, the Partnership will attempt to obtain additional funds by disposing of or refinancing Equipment, or by borrowing within its permissible limits. The Partnership may also reduce the distributions to its Partners if it deems necessary. Since the Partnership's leases are on a "triple-net" basis, no reserve for maintenance and repairs are deemed necessary. Results of Operations Three Months Ended September 30, 2001 compared to Three Months Ended September 30, 2000 For the quarter ended September 30, 2001, the Partnership recognized income of $383,000 and expenses of $214,000, resulting in net income of $169,000. For the quarter ended September 30, 2000, the Partnership recognized income of $425,000 and expenses of $514,000, resulting in a net (loss) of $89,000. Lease income decreased by 35% to $279,000 for the quarter ended September 30, 2001, from $429,000 for the quarter ended September 30, 2000, primarily due to the fact that more lease agreements terminated than new lease agreements entered into since the quarter ended September 30, 2000. Operating expenses, excluding depreciation, primarily consist of accounting, legal, and outside service fees. The expense increased 4% to approximately $43,000 for the quarter ended September 30, 2001, from $42,000 for the quarter ended September 30, 2000, which is primarily attributable to an increase in outside services of $2,000 for recruiting services relating to the hiring of a new employee. The equipment management fee is equal to 5% of the gross lease revenue attributable to equipment that is subject to operating leases. The equipment management fee decreased 6% to approximately $14,000 for the quarter ended September 30, 2001, from $15,000 for the quarter ended September 30, 2000. Depreciation and amortization expenses consist of depreciation on computer equipment and amortization of equipment acquisition fees. The expenses decreased 71% to approximately $103,000 for the quarter ended September 30, 2001, from $353,000 for the quarter ended September 30, 2000 due to the older equipment becoming fully depreciated and certain acquisition and finance fees being fully amortized and only a small amount of new additions. The Partnership sold computer equipment with a net book value of $8,000 for the quarter ended September 30, 2001, for a net gain of $105,000. The Partnership sold computer equipment with a net book value of $174,000 for the quarter ended September 30, 2000, for a net (loss) of $101,000. The partnership recorded an allowance on accounts receivables of $50,000 related to a disputed accounts receivables balance for the three months ended September 30, 2001. Interest expense increased 27% to $4,300 for the quarter ended September 30, 2001 from $3,400 for the quarter ended September 30, 2000, primarily due to the increase in equipment purchased that carry an outstanding debt. Nine Months Ended September 30, 2001 compared to Nine Months Ended September 30, 2000 For the nine months ended September 30, 2001, the Partnership recognized income of $836,000 and expenses of $591,000, resulting in a net gain of $245,000. For the nine months ended September 30, 2000, the Partnership recognized income of $1,477,000 and expenses of $1,602,000, resulting in a net (loss) of $125,000. Lease income decreased by 55% to $662,000 for the nine months ended September 30, 2001, from $1,474,000 for the nine months ended September 30, 2000, primarily due to the fact more lease agreements ended than new lease agreements entered into since September 30, 2000. Interest income decreased 41% to $1,600 for the nine months ended September 30, 2001 from $2,700 for the nine months ended September 30, 2000, primarily due to lower monthly average balances in the money market accounts. Operating expenses, excluding depreciation, primarily consist of accounting, legal, and outside service fees. The expense increased 4% to approximately $147,000 for the nine months ended September 30, 2001, from $141,000 for the nine months ended September 30, 2000, which is primarily attributable to an increase in outside printing services of approximately $8,000 relating to the refilings of the 10Q's for the 2nd and 3rd six months of 2000 and the 10-K for 1999, and an increase in accounting fees of approximately $15,000, also relating to the refilings. There was a decrease in reimbursable expenses with the administration and operation of the Partnership charged by Commonwealth Capital Corp., a related party, of approximately $16,000 caused by the annual recalculation of the overhead charges. The equipment management fee is equal to 5% of the gross lease revenue attributable to equipment that is subject to operating leases. The equipment management fee decreased 55% to approximately $33,000 for the nine months ended September 30, 2001, from $74,000 for the nine months ended September 30, 2000, consistent with the decrease in lease revenue. Depreciation and amortization expenses consist of depreciation on computer equipment and amortization of equipment acquisition fees. The expenses decreased 72% to approximately $354,000 for the nine months ended September 30, 2001, from $1,260,000 for the nine months ended September 30, 2000 due to the older equipment becoming fully depreciated and certain acquisition and finance fees being fully amortized. The Partnership sold computer equipment with a net book value of $10,000 for the nine months ended September 30, 2001, for a net gain of $173,000. The Partnership sold computer equipment with a net book value of $407,000 for the nine months ended September 30, 2000, for a net (loss) of $107,000. The partnership recorded an allowance on accounts receivables of $50,000 related to a disputed accounts receivables balance for the nine months ended September 30, 2001. Interest expense decreased 65% to $7,000 for the nine months ended September 30, 2001 from $21,000 for the nine months ended September 30, 2000, primarily due to the payoff of outstanding debts. Part II: OTHER INFORMATION Commonwealth Income & Growth Fund I Item 1. Legal Proceedings. On or about May 8, 2000, a complaint captioned Commonwealth Capital Corp V. Gtronics, Inc. was filed by Commonwealth Capital Corp against Gtronics, Inc. (formerly known as Wang Laboratories, Inc.) with the Federal District Court of the Eastern District of Pennsylvania, No. 00-CV-2381. The complaint alleges that the named defendant has not returned the proper equipment stated in the master lease agreement. The defendant has filed for a Summary Judgement on February 20, 2001, and the plaintiff has filed an opposition to this Summary Judgment, and it remains pending. On September 29, 2001, the Federal District Court of the Eastern District of Pennsylvania denied the defendant's request for Summary Judgment. Item 2. Changes in Securities Inapplicable Item 3. Defaults Upon Senior Securities. Inapplicable Item 4. Submission of Matters to a Vote of Securities Holders. Inapplicable Item 5. Other Information. Inapplicable Item 6. Exhibits and Reports on Form 8-K. a) Exhibits: None b) Report on Form 8-K: None Item 7.A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Partnership believes its exposure to market risk is not material due to the fixed interest rate of its long-term debt. SIGNATURE 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 I BY: COMMONWEALTH INCOME & GROWTH FUND, INC. General Partner __________________ By:________________________ Date George S. Springsteen President

COMMONWEALTH INCOME & GROWTH FUND I 10-Q