10-Q 1 tenq.txt 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 JUNE 30, 2002 ( ) 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 Income

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 Flow For the Six Months Ended June 30, 2002 and 2001

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. Commonwealth Capital Corp, 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. 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 Basis of Presentation Significant Accounting The financial information presented as of any date Policies 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 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, 2001. Operating results for the six-month period ended June 30, 2002 are not necessarily indicative of financial results that may be expected for the full year ended December 31, 2002. Revenue Recognition Through June 30, 2002, 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 June 30, 2002, 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 maturity of three months or less to be cash equivalents. 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 were payments for selling commissions, dealer manager fees, professional fees and other offering expenses relating to the syndication. Selling commissions were 7% of the partners' contributed capital and dealer manager fees were 2% of the partners' contributed capital. These costs have been 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 limited partner units outstanding during the period. 3. Computer The Partnership is the lessor of equipment under Equipment operating leases with periods ranging from 14 to 48 months. In general, associated costs such as repairs and maintenance, insurance and property taxes are paid by the lessee. The Partnership's share of the computer equipment in which they participate with other partnerships at June 30, 2002 and December 31, 2001 was approximately $519,000 and $469,000, respectively, which is included in the Partnership's fixed assets on their balance sheet, and the total cost of the equipment shared by the Partnership with other partnerships at June 30, 2002 and December 31, 2001 was approximately $2,967,000 and $2,867,000, respectively. The Partnership's share of the outstanding debt associated with this equipment at June 30, 2002 and December 31, 2001 was approximately $353,000 and $387,000, respectively, which is included in the Partnership's liabilities on the balance sheet, and the total outstanding debt at June 30, 2002 and December 31, 2001 related to the equipment shared by the Partnership was approximately $2,021,000 and $2,338,000, respectively. The following is a schedule of future minimum rentals on noncancellable operating leases at June 30, 2002:

4. Notes Payable Notes payable consisted of the following:

These notes are secured by specific computer equipment and are nonrecourse liabilities of the Partnership. Aggregate maturities of notes payable for each of the periods subsequent to June 30, 2002 are as follows:

5. Supplemental Other noncash activities included in the Cash Flow determination of net income are as follows: Information

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:

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 CRITICAL ACCOUNTING POLICIES Financial Reporting Release No. 60, which was released by the Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Our significant accounting policies are described in Note 1 of the Notes to the Consolidated Financial Statements. The significant accounting policies that we believe are the most critical to aid in fully understanding our reported financial results include the following: COMPUTER EQUIPMENT Commonwealth Capital Corp, 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. REVENUE RECOGNITION Through June 30, 2002, 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. 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. Depreciation on computer equipment for financial statement purposes is based on the straight-line method over estimated useful lives of four years. Liquidity and Capital Resources The Partnership's primary source of capital for the six months ended June 30, 2002 was net proceeds received from the sale of equipment of approximately $24,000. The primary source of capital for the six months ended June 30, 2001 was cash from operations of approximately $365,000. Net proceeds received from sale of equipment for the six months ended June 30, 2001 was approximately $71,000. The primary use of cash for the six months ended June 30, 2002 and 2001 was for capital expenditures of new equipment of approximately $25,000 and $80,000, respectively. There were payments of preferred distributions to partners of approximately $315,000 for the six months ended June 30, 2001. There were no payments of preferred distributions to partners for the six months ended June 30, 2002. For the six month period ended June 30, 2002, the Partnership generated cash flows from operating activities of $11,000, which includes a net gain from the sale of computer equipment of $18,000, and depreciation and amortization expenses of $152,000. Other noncash activities included in the determination of net income include direct payments of lease income by lessees to banks of $133,000. For the six month period ended June 30, 2001, the Partnership generated cash flows from operating activities of $365,000, which includes a net gain from the sale of computer of $68,000, and depreciation and amortization expenses of $251,000. Other noncash activities included in the determination of net income include direct payments of lease income by lessees to banks of $40,000. 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. 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 June 30, 2002, the Partnership had future minimum rentals on non-cancelable operating leases of $185,000 for the balance of the year ending December 31, 2002 and $516,000 thereafter. At June 30, 2002, outstanding debt was $572,000, with interest rates ranging from 6.25% to 9.50%, payable through December 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, from time to time, 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. The Partnership's share of the computer equipment in which they participate with other partnerships at June 30, 2002 and December 31, 2001 was approximately $519,000 and $469,000, respectively, which is included in the Partnership's fixed assets on their balance sheet, and the total cost of the equipment shared by the Partnership with other partnerships at June 30, 2002 and December 31, 2001 was approximately $2,967,000 and $2,867,000, respectively. The Partnership's share of the outstanding debt associated with this equipment at June 30, 2002 and December 31, 2001 was approximately $353,000 and $387,000, respectively, which is included in the Partnership's liabilities on the balance sheet, and the total outstanding debt at June 30, 2002 and December 31, 2001 related to the equipment shared by the Partnership was approximately $2,021,000 and $2,338,000, respectively. Results of Operations Three Months Ended June 30, 2002 compared to Three Months Ended June 30, 2001 ----------------------------------------------------------------------------- For the quarter ended June 30, 2002, the Partnership recognized income of $122,000 and expenses of $165,000, resulting in a net loss of $43,000. For the quarter ended June 30, 2001, the Partnership recognized income of $217,000 and expenses of $165,000, resulting in net income of $52,000. Lease income decreased by 42% to $109,000 for the quarter ended June 30, 2002, from $190,000 for the quarter ended June 30, 2001, primarily due to the fact that more lease agreements terminated than new lease agreements entered into since the quarter ended June 30, 2001, and that the partnership has stopped recording revenue on its Gtronics lease arrangement, due to the fact that the defendant has returned some equipment, but not the proper equipment as stated in the master lease agreement. Operating expenses, excluding depreciation, primarily consist of accounting, legal, and outside service fees. The expense increased 86%, to approximately $70,000 for the quarter ended June 30, 2002, from $38,000 for the quarter ended June 30, 2001. There was an increase in reimbursable expenses with the administration and operation of the Partnership charged by Commonwealth Capital Corp., a related party, of approximately $11,000, an increase in recruiting fees of approximately $3,000, an increase in insurance of approximately $5,000, an increase in due diligence of approximately $5,000, and an increase in outside office services of approximately $3,000. 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 42% to approximately $5,000 for the quarter ended June 30, 2002, from $9,000 for the quarter ended June 30, 2001, 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. The expenses decreased 34% to approximately $77,000 for the quarter ended June 30, 2002, from $117,000 for the quarter ended June 30, 2001 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 no net book value for the quarter ended June 30, 2002, for a net gain of $12,000. The Partnership sold computer equipment with a net book value of approximately $2,000 for the quarter ended June 30, 2001, for a net gain of $27,000. Interest expense increased to $12,000 for the quarter ended June 30, 2002 from $2,000 for the quarter ended June 30, 2001; primarily due to the increase in equipment purchased that carry an outstanding debt. Six Months Ended June 30, 2002 compared to Six Months Ended June 30, 2001 ------------------------------------------------------------------------- For the six months ended June 30, 2002, the Partnership recognized income of $236,000 and expenses of $321,000, resulting in a net loss of $85,000. For the six months ended June 30, 2001, the Partnership recognized income of $453,000 and expenses of $377,000, resulting in net income of $76,000. Lease income decreased by 44% to $216,000 for the six months ended June 30, 2002, from $383,000 for the six months ended June 30, 2001, primarily due to the fact that more lease agreements terminated than new lease agreements entered into since the six months ended June 30, 2001, and that the partnership has stopped recording revenue on its Gtronics lease arrangement, due to the fact that the defendant has returned some equipment, but not the proper equipment as stated in the master lease agreement. Operating expenses, excluding depreciation, primarily consist of accounting, legal, and outside service fees. The expense increased 32 %, to approximately $137,000 for the six months ended June 30, 2002, from $104,000 for the six months ended June 30, 2001. There was an increase in reimbursable expenses with the administration and operation of the Partnership charged by Commonwealth Capital Corp., a related party, of approximately $22,000, an increase in marketing of approximately $5,000, and an increase in due diligence of approximately $5,000. 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 43% to approximately $11,000 for the six months ended June 30, 2002, from $19,000 for the six months ended June 30, 2001, 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. The expenses decreased 39% to approximately $152,000 for the six months ended June 30, 2002, from $251,000 for the six months ended June 30, 2001 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 $6,000 for the six months ended June 30, 2002, for a net gain of $18,000. The Partnership sold computer equipment with a net book value of $2,000 for the six months ended June 30, 2001, for a net gain of $68,000. Interest expense increased to $20,000 for the six months ended June 30, 2002 from $3,000 for the six months ended June 30, 2001, primarily due to the increase in equipment purchased that carry an outstanding debt. RECENT ACCOUNTING PRONOUNCEMENTS SFAS 145 In April 2002, the FASB issued SFAS No. 145, "Recission of FASB statements No. 4,44 and 64, Amendment of FASB statement No. 13, and Technical Corrections" ("SFAS 145"). FASB No. 4 required that gains and losses from extinguishments of debt that were included in the determination of net income be aggregated and, if material, be classified as an extraordinary item, net of related income tax. Effective January 1, 2003, pursuant to SFAS 145, the treatment of debt is to be included in "Other Income" in the Financial Statements. SFAS 145 has no affect on our financial statements at this time. 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: 1. SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Commonwealth Income & Growth Fund I, (the "Company") on Form 10-Q for the period ending June 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, George S. Springsteen, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ George S. Springsteen --------------------------- George S. Springsteen Chief Executive Officer August 19, 2002 In connection with the Quarterly Report of Commonwealth Income & Growth Fund I, (the "Company") on Form 10-Q for the period ending June 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Salvatore R. Barila, Controller of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Salvatore R. Barila ---------------------------- Salvatore R. Barila Controller August 19, 2002 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 August 19, 2002 By: /s/ George S. Springsteen ------------------ ----------------------------- Date George S. Springsteen President

COMMONWEALTH INCOME & GROWTH FUND I 10-Q