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COMMONWEALTH INCOME & GROWTH FUND VI - 10-Q/A - : Management's Discussion and Analysis of Financial Condition and Results of Operations

April 24, 2014

FORWARD LOOKING STATEMENTS

Certain statements within this Quarterly Report on Form 10-Q may constitute forward-looking 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.

INDUSTRY OVERVIEW

The Equipment Lease Finance Association ("ELFA") Monthly Leasing and Finance Index which reports economic activity for the $725 billion equipment finance sector, showed overall new business volume for the year end increased 3% relative to the same period of 2012. Credit quality continued to improve as the rate of receivables aged in excess of 30 days decreased to below 2.8% from the same period last year. Additionally, charge-offs declined to the all-time low of 0.3%. More than 50% of ELFA reporting members reported submitting more transactions for approval during the month of March. According to the Equipment Lease Foundation, growth for 2013 is forecast at 2.9%.

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.

See Note 2 to our condensed financial statements included herein for a discussion related to recent accounting pronouncements.

LEASE INCOME RECEIVABLE

Lease income receivable includes current lease income receivable net of allowances for uncollectible amounts, if any. The Partnership monitors lease income receivable to ensure timely and accurate payment by lessees. The Partnership's Lease Relations department is responsible for monitoring lease income receivable and, as necessary, resolving outstanding invoices.

The Partnership reviews a customer's credit history before extending credit. When the analysis indicates that the probability of full collection is unlikely, the Partnership may establish an allowance for uncollectible lease income receivable based upon the credit risk of specific customers, historical trends and other information. The Partnership writes off its lease income receivable when it determines that it is uncollectible and all economically sensible means of recovery have been exhausted.

REVENUE RECOGNITION

Through March 31, 2013, the Partnership's lease portfolio consisted of operating leases and finance leases. For operating leases, lease revenue is recognized on a straight-line basis in accordance with the terms of the lease agreement.

Finance lease interest income is recorded over the term of the lease using the effective interest method. For finance leases, we record, at lease inception, unearned finance lease income which is calculated as follows: total lease payments, plus any residual value and initial direct costs, less the cost of the leased equipment.

Upon the end of the lease term, if the lessee has not met the return conditions as set out in the lease, the Partnership is entitled in certain cases to additional compensation from the lessee. The Partnership's accounting policy for recording such payments is to treat them as revenue.

Gain or losses from sales of leased and off lease equipment are recorded on a net basis in the Fund's condensed Statement of Operations.

LONG-LIVED ASSETS

Depreciation on technology and inventory management equipment for financial statement purposes is based on the straight-line method estimated generally over useful lives of two to four years. Once an asset comes off lease or is released, the Partnership reassesses the useful life of an asset.

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 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. Fair value is determined based on estimated discounted cash flows to be generated by the asset.

Residual values are determined by management and are calculated using information from both internal and external sources, as well as other economic indicators.

RESTATEMENT

As discussed elsewhere in this report, management determined that approximately $85,000 of revenue was recognized during the first quarter of 2013, but should have been recognized during the fourth quarter of 2012. Management, as of December 31, 2013, has implemented additional procedures and controls and believes that the financial statements in this report are presented fairly, in all material respects. Management believes that the additional control procedures will result in effective internal control over financial reporting moving forward. The accompanying financial statements have been restated to reflect the corrections. The restatement had no impact on partners' capital at March 31, 2013.

LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Cash

Our primary sources of cash for the three months ended March 31, 2013 were cash provided by operating activities of approximately $822,000 and net proceeds from the sale of equipment of approximately $29,000, compared to the three months ended March 31, 2012 where our primary sources of cash were provided by operating activities of approximately $1,343,000, net proceeds from the sale of equipment of approximately $76,000 and from payments due on finance leases of approximately $28,000. Our primary uses of cash for the three months ended March 31, 2013 were for the purchase of new equipment of approximately $224,000, distributions to partners of approximately $898,000 and redemptions of approximately $40,000. For the three months ended March 31, 2012, capital expenditures were approximately $959,000, distributions to partners were approximately $903,000 and redemptions of were approximately $44,000.

Cash was provided by operating activities for the three months ended March 31, 2013 of approximately $822,000, which includes a net loss of approximately $217,000 (restated) and depreciation and amortization expenses of approximately $1,139,000. Other noncash activities included in the determination of net loss include direct payments to banks by lessees of approximately $72,000. For the three months ended March 31, 2012, cash was provided by operating activities of approximately $1,343,000, which includes a net loss of approximately $94,000 and depreciation and amortization expenses of approximately $1,410,000. Other noncash activities included in the determination of net loss include direct payments to banks by lessees of approximately $93,000.

As we continue to increase the size of our equipment portfolio in this phase of the operating cycle, operating expenses will increase, which reflects the administrative costs of servicing the portfolio, but because of our investment strategy of leasing equipment primarily through triple-net leases, we avoid operating expenses related to equipment maintenance or taxes.

CCC, on our behalf and on behalf of other affiliated partnerships, acquires 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. Capital expenditures and distributions are expected to continue to increase overall during the remainder of 2013 as management focuses on additional equipment acquisitions and funding limited partner distributions. We intend to invest approximately $2,700,000 in additional equipment during the remainder of 2013, primarily through debt financing.

We consider cash equivalents to be highly liquid investments with an original maturity of 90 days or less.

At March 31, 2013, cash was held in three accounts maintained at one financial institution with an aggregate balance of approximately $542,000. Bank accounts are federally insured up to $250,000 by the FDIC. At March 31, 2013, the total cash balance was as follows:

At March 31, 2013 Balance Total bank balance $ 542,000FDIC insured (250,000 ) Uninsured amount $ 292,000



The Partnership believes it mitigates the risk of holding uninsured deposits by depositing funds with more than one institution and by only depositing funds with major financial institutions. The Partnership deposits its funds with two institutions that are Moody's Aaa-and Aa3 Rated. The Partnership has not experienced any losses in such accounts, and believes it is not exposed to any significant credit risk. The amounts in such accounts will fluctuate throughout 2013 due to many factors, including cash receipts, equipment acquisitions, interest rates and distributions to investors.

The Partnership's investment strategy of acquiring 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, 2013, the Partnership had future minimum rentals on non-cancelable operating leases of approximately $2,845,000 (restated) for the balance of the year ending December 31, 2013 and approximately $2,189,000 thereafter. As of March 31, 2013, the Partnership had future minimum rentals on non-cancelable finance leases of approximately $44,000 for the balance of the year ending December 31, 2013 and approximately $1,000 thereafter.

The Partnership is in negotiations with a significant lessee in related to the buy-out of several operating and direct financing leases. The amount of future rentals from operating and direct financing leases will be affected by the ongoing negotiations with the lessee. If settlement is reached, the Partnership will not record future revenue on the equipment being leased to the lessee. Therefore, there is a potential impact on future revenue and cash flows, with an offset by a potential cash settlement. The impact of the potential settlement cannot be determined at this time.

As of March 31, 2013, our non-recourse debt was approximately $223,000 with interest rates ranging from 4.23% to 7.50% and will be payable through September 2015.

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RESULTS OF OPERATIONS

Three months ended March 31, 2013 compared to three months ended March 31, 2012

Lease Revenue

Our lease revenue decreased to approximately $1,254,000 (restated) for the three months ended March 31, 2013, from approximately $1,746,000 for the three months ended March 31, 2012. This decrease was primarily due to fewer acquisitions of new leases during the three months ended March 31, 2013 compared to the termination of leases.

The Partnership had 256 (restated) active operating leases that generated lease revenue of approximately $1,254,000 at March 31, 2013. The Partnership had 312 active operating leases that generated lease revenue of approximately $1,746,000 at March 31, 2012. Management expects to continue to add new leases to the Partnership's portfolio throughout 2013, primarily through debt financing.

Sale of Equipment

We sold equipment with a net book value of approximately $6,000 for a net gain of approximately $23,000 for the three months ended March 31, 2013. This compares to the three months ended March 31, 2012, when we sold equipment with a net book value of approximately $62,000 for a net gain of approximately $14,000. The increase is primarily due to a decrease in the amount of assets sold.

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 $299,000 for the three months ended March 31, 2013, from approximately $322,000 for the three months ended March 31, 2012. This decrease is primarily attributable to decreases in administrative, office, and storage expenses.

Equipment Management Fees

We pay an equipment management fee to our general partner for managing our equipment portfolio. The equipment management fee is approximately 5% of the gross lease revenue attributable to equipment that is subject to operating leases and approximately 2% of the gross lease revenue attributable to equipment that is subject to direct financing leases. The equipment management fee decreased to approximately $67,000 for the three months ended March 31, 2013 from approximately $88,000 for the three months ended March 31, 2012, which is consistent with the decrease in lease revenue.

Depreciation and Amortization Expense

Depreciation and amortization expenses consist of depreciation on equipment and amortization of equipment acquisition fees. These expenses decreased to approximately $1,139,000 for the three months ended March 31, 2013, from approximately $1,410,000 for the three months ended March 31, 2012. This decrease was due to the higher frequency in the termination of leases and equipment being fully depreciated as compared to the acquisition of new leases for the three months ended March 31, 2013.

Net Income (Loss)

For the three months ended March 31, 2013, we recognized revenue of approximately $1,291,000 (restated) and expenses of approximately $1,508,000, resulting in a net loss of approximately $217,000 (restated). For the three months ended March 31, 2012, we recognized revenue of approximately $1,764,000 and expenses of approximately $1,858,000, resulting in a net loss of approximately $94,000. This change in net loss is due to the changes in revenue and expenses as described above.


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Source: Edgar Glimpses