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
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008 or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-26933
COMMONWEALTH INCOME & GROWTH FUND III
(Exact name of registrant as specified in its charter)
| Pennsylvania | 23-2895714 |
| (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)
(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 T 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
FORM 10-Q
SEPTEMBER 30, 2008
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
| Commonwealth Income & Growth Fund III | |
| |
| | |
| | | September 30, | | | December 31, | |
| | | 2008 | | | 2007 | |
| | | (unaudited) | | | | |
| Assets | | | | | | |
| Cash and cash equivalents | | $ | 732 | | | $ | 10,925 | |
Lease income receivable, net of reserves of $0 as of September 30, 2008 and December 31, 2007 | | | 3 | | | | 9,869 | |
| Prepaid expenses | | | 543 | | | | - | |
| | | | 1,278 | | | | 20,794 | |
| | | | | | | | | |
| Computer equipment, at cost | | | 108,624 | | | | 109,296 | |
| Accumulated depreciation | | | (41,826 | ) | | | (42,358 | ) |
| | | | 66,798 | | | | 66,938 | |
| | | | | | | | | |
| Equipment acquisition costs and deferred expenses, net | | | - | | | | 9 | |
| | | | | | | | | |
| Total assets | | $ | 68,076 | | | $ | 87,741 | |
| | | | | | | | | |
| Liabilities and Partners' Capital | | | | | | | | |
| | | | | | | | | |
| Liabilities | | | | | | | | |
| Accounts payable | | $ | 7,379 | | | $ | 13,933 | |
| Accounts payable, Commonwealth Capital Corp. | | | 34,980 | | | | 32,875 | |
| Accounts payable, General Partner | | | 85,216 | | | | 100,943 | |
| Accounts payable, affiliated limited partnerships | | | 53,501 | | | | 68,750 | |
| Other accrued expenses | | | 5,245 | | | | 5,243 | |
| Unearned lease income | | | 1,315 | | | | - | |
| Notes payable | | | - | | | | 1,068 | |
| Total liabilities | | | 187,636 | | | | 222,812 | |
| | | | | | | | | |
| Partners' Capital | | | | | | | | |
| General partner | | | 1,000 | | | | 1,000 | |
| Limited partners | | | (120,560 | ) | | | (136,071 | ) |
| Total Partners' Capital | | | (119,560 | ) | | | (135,071 | ) |
| | | | | | | | | |
| Total Liabilities and Partners' Capital | | $ | 68,076 | | | $ | 87,741 | |
see accompanying notes to condensed financial statements
| Commonwealth Income & Growth Fund III | |
| Condensed Statements of Operations | |
| (unaudited) | |
| | | | | | | | | | | | | |
| | | Three months Ended | | | Nine months Ended | |
| | | September 30, | | | September 30, | |
| | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| Revenue | | | | | | | | | | | | |
| Lease | | $ | 10,869 | | | $ | 9,255 | | | $ | 29,034 | | | $ | 25,707 | |
| Interest and other | | | - | | | | 122 | | | | 7,209 | | | | 134 | |
| Gain on sale of computer equipment | | | - | | | | 7,760 | | | | - | | | | 8,045 | |
| Total revenue | | | 10,869 | | | | 17,137 | | | | 36,243 | | | | 33,886 | |
| | | | | | | | | | | | | | | | | |
| Expenses | | | | | | | | | | | | | | | | |
| Operating | | | 5,693 | | | | 4,649 | | | | 32,013 | | | | 29,366 | |
| Equipment management fee –General Partner | | | - | | | | - | | | | - | | | | 823 | |
| Interest | | | - | | | | 87 | | | | 5 | | | | 389 | |
| Depreciation | | | 5,408 | | | | 5,435 | | | | 18,561 | | | | 13,537 | |
| Amortization of equipment acquisition costs and deferred expenses | | | - | | | | 170 | | | | 10 | | | | 569 | |
| Loss on sale of computer equipment | | | - | | | | - | | | | 1,241 | | | | - | |
| Other | | | 382 | | | | - | | | | 382 | | | | - | |
| Total expenses | | | 11,483 | | | | 10,341 | | | | 52,212 | | | | 44,684 | |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | (614 | ) | | $ | 6,796 | | | $ | (15,969 | ) | | $ | (10,798 | ) |
| | | | | | | | | | | | | | | | | |
| Net income (loss) allocated to limited partners | | $ | (765 | ) | | $ | 6,645 | | | $ | (16,422 | ) | | $ | (11,251 | ) |
| | | | | | | | | | | | | | | | | |
| Net income (loss) per equivalent limited partnership unit | | $ | (0.01 | ) | | $ | 0.04 | | | $ | (0.11 | ) | | $ | (0.07 | ) |
| | | | | | | | | | | | | | | | | |
| Weighted average number of equivalent limited partnership units outstanding during the period | | | 151,178 | | | | 151,178 | | | | 151,178 | | | | 151,178 | |
see accompanying notes to condensed financial statements
Table of Contents
| Commonwealth income & Growth Fund III | |
| Condensed Statements of Partners’ Capital | |
| For the Nine Months ended September 30, 2008 | |
| (unaudited) | |
| | |
| | | | | | | | | | | | | | | | |
| | | General | | | Limited | | | | | | | | | | |
| | | Partner | | | Partner | | | General | | | Limited | | | | |
| | | Units | | | Units | | | Partner | | | Partners | | | Total | |
| Balance, January 1, 2008 | | | 50 | | | | 151,178 | | | $ | 1,000 | | | $ | (136,071 | ) | | $ | (135,071 | ) |
| Net income (loss) | | | - | | | | - | | | | 453 | | | | (16,422 | ) | | | (15,969 | ) |
| Contributions-cash | | | - | | | | - | | | | 41,031 | | | | - | | | | 41,031 | |
| Forgiveness of fees | | | - | | | | - | | | | 15,879 | | | | - | | | | 15,879 | |
| Forgiveness of expenses | | | - | | | | - | | | | 19,927 | | | | - | | | | 19,927 | |
| Transfer of partners' capital | | | - | | | | - | | | | (76,837 | ) | | | 76,867 | | | | - | |
| Distributions | | | - | | | | - | | | | (453 | ) | | | (44,904 | ) | | | (45,357 | ) |
| Balance, September 30, 2008 | | | 50 | | | | 151,178 | | | $ | 1,000 | | | $ | (120,560 | ) | | $ | (119,560 | ) |
see accompanying notes to condensed financial statements
Table of Contents
| | Commonwealth Income & Growth Fund III | |
| | Condensed Statements of Cash Flow | |
| | | |
| | | | Nine Months Ended | |
| | | | September 30, | |
| | | | 2008 | | | 2007 | |
| | | | | |
| | | | | | | | | | |
| | Net cash provided by operating activities | | $ | 13,795 | | | $ | 15,446 | |
| | | | | | | | | | |
| | Investing activities: | | | | | | | | |
| | Capital Expenditures | | | (24,585 | ) | | | (52,873 | ) |
| | Net proceeds from the sale of computer equipment | | | 4,923 | | | | 11,797 | |
| | Net cash (used in) investing activities | | | (19,662 | ) | | | (41,076 | ) |
| | | | | | | | | | |
| | Financing activities: | | | | | | | | |
| | Contributions | | | 41,031 | | | | 90,697 | |
| | Distributions to partners | | | (45,357 | ) | | | (45,357 | ) |
| | Net cash (used in) provided by financing activities | | | (4,326 | ) | | | 45,340 | |
| | | | | | | | | | |
| | Net increase (decrease) in cash and cash equivalents | | | (10,193 | ) | | | 19,710 | |
| | Cash and cash equivalents, beginning of period | | | 10,925 | | | | 2,878 | |
| | | | | | | | | | |
| | Cash and cash equivalents, end of period | | $ | 732 | | | $ | 22,588 | |
see accompanying notes to condensed financial statements
Table of ContentsNOTES TO CONDENSED FINANCIAL STATEMENTS
1. Business
Commonwealth Income & Growth Fund III (the “Partnership”) is a limited partnership organized in the Commonwealth of Pennsylvania on April 17, 1997. The Partnership offered for sale up to 750,000 units of the limited partnership at the purchase price of $20 per unit (the “offering”). The offering was terminated at the close of business on July 31, 2000.
The Partnership uses the proceeds of the offering to acquire, own and lease various types of computer 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 allocates a participation in the cost, debt and lease revenue to the Partnership and other affiliated partnerships it controls based on certain risk factors. 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, 2009.
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. CCC is a member of the Investment Program Association (IPA), Financial Planning Association (FPA), and the Equipment Leasing and Finance Association (ELFA).
2. Business Plan
The Partnership has suffered recurring losses from operations and has a deficit partners’ capital of approximately $120,000 at September 30, 2008. During the nine months ended September 30, 2008, CCC and the General Partner forgave payables owed to them by the Partnership in the amount of approximately $36,000 (See note 5).
The General Partner and CCC have committed to fund, either through cash contributions and/or forgiveness of indebtedness, any necessary cash shortfalls of the Partnership through December 31, 2008. No fees will be charged to the Partnership by CCC and its affiliates during 2008. CCC has committed to fund limited partner distributions through December 2008, at which time CCC will reassess the operations of the Partnership. Additional funds may be utilized to purchase additional equipment during 2008 as available cash flow permits.
3. Summary of Significant Accounting Policies
Recent Accounting Pronouncements
Management’s assessment of the following accounting pronouncements has changed since disclosed in its Form 10K for December 31, 2007
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to Audit Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Partnership is currently evaluating the potential impact, if any, of the adoption of SFAS 162 on its financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities, including an amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to choose, at specified election dates, to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses will be reported on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157 “Fair Value Measurements”. As of January 1, 2008 the Partnership adopted SFAS No.159. The Partnership has not elected the fair value option for any assets or liabilities.
In September 2006, the FASB issued Statement of Financial Accounting Standards 157, “Fair Value Measurements” (“SFAS 157”), which provides guidance on measuring the fair value of assets and liabilities. SFAS 157 applies to other accounting pronouncements that require or permit assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. This standard also requires additional disclosures in both annual and quarterly reports. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and was adopted by the Partnership in the first quarter of its fiscal year 2008. In February 2008, the FASB issued two Staff Positions on SFAS 157: (1) FASB Staff Position No. FAS 157-1 (FAS 157-1), “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement Under Statement 13,” and (2) FASB Staff Position No. FAS 157-2 (FAS 157-2), “Effective Date of FASB Statement No. 157.” FAS 157-1 excludes FASB Statement No. 13, Accounting for Leases, as well as other accounting pronouncements that address fair value measurements on lease classification or measurement under Statement 13, from SFAS 157’s scope. FAS157-2 partially defers Statement 157’s effective date. As of January 1, 2008 the Partnership partially adopted SFAS No. 157 for all financial assets. Adoption of this pronouncement did not impact the financial statements of the Partnership at September 30, 2008. In October 2008, the FASB issued FSP SFAS 157-3 "Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active" ("FSP SFAS 157-3"), which is effective upon issuance for all financial statements that have not been issued. FSP SFAS 157-3 clarifies the application of SFAS 157, in a market that is not active. The Partnership is currently evaluating the potential impact, if any, of the adoption of FSP SFAS 157-3 on its financial statements.
Basis of Presentation
The financial information presented as of any date other than December 31, 2007 has been prepared from the books and records without audit. Financial information as of December 31, 2007 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, 2007.
Operating results for the nine months ended September 30, 2008 are not necessarily indicative of financial results that may be expected for the full year ended December 31, 2008.
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, 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. The Partnership determined that no impairment existed as of September 30, 2008.
Depreciation on computer equipment for financial statement purposes is based on the straight-line method estimated generally over useful lives of three or four years.
Forgiveness of Related Party Payables
In accordance with Accounting Principles Board Opinion No. 26, Early Extinguishment of Debt, the Partnership accounts for forgiveness of related party payables as partner’s capital transactions.
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.
The Partnership is the lessor of equipment under operating leases with periods ranging from 15 to 36 months. In general, associated costs such as repairs and maintenance, insurance and property taxes are paid by the lessee.
Through September 30, 2008, the Partnership has only entered into operating leases. Lease revenue is recognized on a monthly straight-line basis which is generally in accordance with the terms of the operating lease agreements.
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 and the equipment is re-leased or sold. The General Partner believes that this strategy adds value since it entices the leasing company to "stay with the lease" for potential extensions, remarketing, or sale of equipment. This strategy potentially minimizes any conflicts the leasing company may have with a potential new lease and will potentially assist in maximizing overall portfolio performance. The remarketing fee is tied into lease performance thresholds and is factored 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 nine months ended September 30, 2008 the Partnership incurred remarketing fees in the amount of $4,000. For the nine months ended September 30, 2007, remarketing fees were incurred in the amount of $1,000.
The Partnership participates in leases that are shared with other affiliated partnerships. The Partnership’s share of the computer equipment in which it participates with other partnerships at September 30, 2008, was approximately $11,000 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 September 30, 2008, was approximately $23,000. The Partnership had no outstanding debt associated with this equipment at September 30, 2008. The Partnership did not have any equipment in which it participated with other partnerships at September 30, 2007.
The following is a schedule of future minimum rentals on noncancellable operating leases at September 30, 2008:
| | | Amount | |
| Three Months ended December 31, 2008 | | $ | 11,452 | |
| Year Ended December 31, 2009 | | | 30,604 | |
| Year Ended December 31, 2010 | | | 16,870 | |
| Year Ended December 31, 2011 | | | 2,214 | |
| | | $ | 61,140 | |
| | | | | |
5. Related Party Transactions
Forgiveness of Related Party Payables
During the nine months ended September 30, 2008, CCC and the General Partner forgave payables owed to them by the Partnership in the amount of approximately, $36,000. Cash was contributed by CCC in the amount of approximately $41,000 and $91,000 for the nine months ended September 30, 2008 and 2007, respectively.
Reimbursable Expenses
The General Partner and its affiliates are entitled to reimbursement by the Partnership for the cost of supplies and services obtained and used by the General Partner in connection with the administration and operation of the Partnership from third parties unaffiliated with the General Partner. In addition, the General Partner and its affiliates are entitled to reimbursement for certain expenses incurred by the General Partner and its affiliates in connection with the administration and operation of the Partnership. During the nine months ended September 30, 2008, the Partnership recorded approximately $24,000 for reimbursement of expenses to the General Partner. During the nine months ended September 30, 2007, the Partnership recorded approximately $21,000 for reimbursement of expenses to the General Partner.
Equipment Management Fee
The General Partner is entitled to be paid 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) 5% of the gross lease revenues attributable to equipment which is subject to operating and capital leases. For the nine months ended September 30, 2008, the General Partner earned and waived approximately $1,400 in equipment management fees. For the nine months ended September 30, 2007, equipment management fees of approximately $1,300 were earned by the General Partner. Of this amount, approximately $800 was forgiven and approximately $500 was waived by the General Partner
6. Notes Payable
The Partnership had no notes payable as of September 30, 2008.
7. Supplemental Cash Flow Information
Other non-cash activities included in the determination of net loss are as follows:
| Nine months ended September 30, | | 2008 | | | 2007 | |
Lease income, net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank | | $ | 1,069 | | | $ | 9,268 | |
| | | | | | | | | |
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.
Non-cash operating, investing and financing activities include the following:
| Nine months ended September 30, | | 2008 | | | 2007 | |
| Forgiveness of related party payables recorded as a capital contribution | | $ | 35,806 | | | $ | 48,878 | |
| | | | | | | | | |
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,” “expect,” “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
The Partnership's discussion and analysis of its financial condition and results of operations are based upon its financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Partnership to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Partnership bases its 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.
The Partnership believes that its critical accounting policies affect its more significant judgments and estimates used in the preparation of its financial statements.
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 affiliated 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 three or four years.
REVENUE RECOGNITION
Through September 30, 2008, the Partnership has only entered into operating leases. Lease revenue is recognized on a monthly straight-line basis which is generally in accordance with the terms of the operating lease agreements.
The Partnership reviews a customer’s credit history before extending credit, and establishes provisions for uncollectible accounts based upon the credit risk of specific customers, historical trends and other information.
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 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. The Partnership determined that no impairment existed as of September 30, 2008.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership’s primary sources of capital for the nine months ended September 30, 2008 and 2007 were cash contributions in the amount of approximately $41,000 and $91,000, respectively, and cash from operating activities of approximately $14,000 and $15,000, respectively. The Partnership’s primary uses of cash for the nine months ended September 30, 2008 and 2007 were for capital expenditures of approximately $25,000 and $53,000, respectively, and payments of distributions to Partners of approximately $45,000 for both periods.
While the Partnership intends to invest additional capital in equipment during the remainder of 2008, the amount of such additional investment is uncertain. The additional investment will be dependent on multiple factors including the partnership’s available cash flow and the general partner’s ability to purchase leases consistent with the partnership’s objectives
For the nine month period ending September 30, 2008, the Partnership generated cash flow from operating activities of approximately $14,000 which includes a net loss of approximately $16,000 and depreciation and amortization expenses of approximately $19,000. Other non-cash activities included in the determination of net income include direct payments of lease income by lessees to banks of approximately $1,000.
For the nine month period ending September 30, 2007, the Partnership generated cash flow from operating activities of approximately $15,000, which includes a net loss of approximately $11,000 depreciation and amortization expenses of approximately $14,000 and a gain on sale of equipment of $8,000. Other non-cash activities included in the determination of net income include direct payments of lease income by lessees to banks of approximately $9,000.
The Partnership's investment strategy of acquiring computer equipment and leasing it under triple-net leases to operators who generally meet specified financial standards minimizes the Partnership's operating expenses. As of September 30, 2008, the Partnership had future minimum rentals on non-cancelable operating leases of approximately $11,000 for the balance of the year ending December 31, 2008 and approximately $50,000 thereafter. As of September 30, 2008, the Partnership had no outstanding debt.
If available cash flow or net disposition proceeds are insufficient to cover the Partnership expenses and liabilities on a short and long term basis, 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 is deemed necessary.
The General Partner and CCC have forgiven amounts payable by the Partnership to them and have deferred payments on other amounts owed, to allow for distributions to limited partners. During the period ended September 30, 2008, CCC and the General Partner forgave payables owed to them by the Partnership in the amount of approximately $36,000. The General Partner and CCC have committed to fund, either through cash contributions and/or forgiveness of indebtedness, any necessary cash shortfalls of the Partnership through December 31, 2008. No fees will be charged to the fund by CCC and its affiliates during 2008. CCC has committed to fund limited partner distributions through December 2008, at which time CCC will reassess the operations of the fund. Additional funds may be utilized to purchase additional equipment during 2008 as available cash flow permits.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2008 compared to Three Months Ended September 30, 2007
For the three months ended September 30, 2008, the Partnership recognized revenue of approximately $11,000 and expenses of approximately $12,000 resulting in a net loss of approximately $1,000. For the three months ended September 30, 2007, the Partnership recognized revenue of approximately $17,000 and expenses of approximately $10,000 resulting in net income of approximately $7,000.
Lease revenue increased by 17% to approximately $11,000 for the three months ended September 30, 2008, from approximately $9,000 for the three months ended September 30, 2007. This increase was due to more lease agreements being acquired during the three months ended September 30, 2008 compared to the three months ended September 30, 2007.
Operating expenses, excluding depreciation, primarily consist of accounting, legal, outside service fees and reimbursement of expenses to CCC for administration and operation of the Partnership. With the exception of legal and accounting fees, CCC has determined that in the best interest of the Partnership, the majority of shared expenses will not be allocated to the Partnership. The expenses increased 22% to approximately $6,000 for the three months ended September 30, 2008, from $5,000 for the three months ended September 30, 2007. This increase is primarily attributable to an increase in accounting fees and is partially offset by lower outside services expenses.
The equipment management fee is approximately 5% of the gross lease revenue attributable to equipment that is subject to operating leases. The equipment management fee was approximately $500, all of which was waived by the General Partner for the three months ended September 30, 2008 and 2007, respectively.
Depreciation and amortization expenses consist of depreciation on computer equipment. These expenses were approximately $5,000 for both the three months ended September 30, 2008 and 2007. These expenses remained constant due to the steady rate of lease purchases.
The Partnership did not sell any computer equipment for the three months ended September 30, 2008. The Partnership sold computer equipment during the three months ended September 30, 2007 with no net book value for a net gain on sale of equipment of approximately $8,000.
Nine Months Ended September 30, 2008 compared to Nine Months Ended September 30, 2007
For the nine months ended September 30, 2008, the Partnership recognized revenue of approximately $36,000 and expenses of approximately $52,000, resulting in a net loss of approximately $16,000. For the nine months ended September 30, 2007, the Partnership recognized revenue of approximately $34,000 and expenses of approximately $45,000, resulting in a net loss of approximately $11,000.
Lease revenue increased by 13% to approximately $29,000 for the nine months ended September 30, 2008, from approximately $26,000 for the nine months ended September 30, 2007, primarily due to more lease agreements beginning than new lease agreements ending since the nine months ended September 30, 2007.
Operating expenses, excluding depreciation, primarily consist of accounting, legal, outside service fees and reimbursement of expenses to CCC for administration and operation of the Partnership. With the exception of legal and accounting fees, CCC has determined that in the best interest of the Partnership, the majority of shared expenses will not be allocated to the Partnership. The expenses increased 9% to approximately $32,000 for the nine months ended September 30, 2008, from $29,000 for the nine months ended September 30, 2007. This increase is primarily attributable to an increase in accounting and remarketing fees and is partially offset by lower outside services expenses.
The equipment management fee is approximately 5% of the gross lease revenue attributable to equipment that is subject to operating leases. The equipment management fee of approximately $1,400 was waived by the General Partner for the nine months ended September 30, 2008. The equipment management fee was approximately $1,300 for the nine months ended September 30, 2007. Of this amount, approximately $800 was forgiven and approximately $500 was waived by the General Partner.
Depreciation and amortization expenses consist of depreciation on computer equipment and amortization of equipment acquisition fees. The expenses increased 37% to approximately $19,000 for the nine months ended September 30, 2008, from approximately $14,000 for the nine months ended September 30, 2007 due to more leases being acquired.
The Partnership sold computer equipment for the nine months ended September 30, 2008 with a net book value of approximately $6,000 for a net loss on sale of equipment of approximately $1,000. The Partnership sold computer equipment for the nine months ended September 30, 2007 with a net book value of approximately $4,000 for a net gain on sale of equipment of approximately $8,000.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
N/A
Our management, under the supervision and with the participation of the principal executive officer and principal financial offer, have evaluated the effectiveness of our controls and procedures related to our reporting and disclosure obligations as of September 30, 2008 which is the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the principal 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 have been no significant changes in the General Partner’s internal controls or in other factors that could significantly affect our disclosure controls and procedures in the third quarter of 2008 or subsequent to the date of the evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
N/A
N/A
N/A
N/A
N/A
N/A
31.1 THE RULE 15d-14(a) CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER 31.2 THE RULE 15d-14(a) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER 32.1 SECTION 1350 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER 32.2 SECTION 1350 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
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 III |
| | BY: COMMONWEALTH INCOME & GROWTH FUND, INC., General Partner |
| | |
| | |
| November 12, 2008 | By: /s/ Kimberly A. Springsteen-Abbott |
| Date | Kimberly A. Springsteen-Abbott |
| | Chief Executive Officer |
| | |
| | |
| | By: /s/ Lynn A. Franceschina |
| | Lynn A. Franceschina |
| | Executive Vice President, Chief Operating Officer |
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