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 MARCH 31, 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 III
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2895714
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1160 West Swedesford Road
Berwyn, Pennsylvania 19312
(Address, including zip code, of principal executive offices)
(610) 647-6800
(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 III
Balance Sheet
March 31, December 31,
2001 2000
--------------------------
(unaudited)
Assets
Cash and cash equivalents $ 13,145 $ 110,730
Lease income receivable 55,296 94,492
Accounts receivable - General Partner -- 16,683
Prepaid Fees -- 10,000
--------------------------
68,441 231,905
--------------------------
Computer equipment, at cost 3,947,907 3,673,656
Accumulated depreciation (1,874,219) (1,636,102)
--------------------------
2,073,688 2,037,554
--------------------------
Equipment acquisition costs and deferred expenses, net 65,727 66,372
--------------------------
Total assets $ 2,207,856 $ 2,335,831
==========================
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 20,391 $ 14,009
Accounts payable - General Partner 30 --
Accounts payable - Commonwealth Capital Corp. -- 21
Unearned lease income 3,936 --
Notes payable 776,384 796,020
--------------------------
Total liabilities 800,741 810,050
--------------------------
Partners' Capital
General partner 1,000 1,000
Limited partners 1,406,115 1,524,781
--------------------------
Total partners' capital 1,407,115 1,525,781
--------------------------
Total Liabilities and partners' capital $ 2,207,856 $ 2,335,831
==========================
see accompanying notes to financial statements
Commonwealth Income & Growth Fund III
Statements of Income
Three Months Ended
March 31,
(unaudited)
2001 2000
--------- ---------
Income
Lease $ 318,604 $ 290,176
Interest and other 2,450 13,041
--------- ---------
Total Income 321,054 303,217
--------- ---------
Expenses
Operating, excluding depreciation 80,049 57,453
Equipment management fee - General Partner 15,931 19,729
Interest 13,431 16,595
Depreciation 238,117 230,992
Amortization of equipment
acquisition costs and deferred expenses 12,817 13,341
--------- ---------
360,345 338,110
--------- ---------
Net (loss) $ (39,291) $ (34,893)
========= =========
Net (loss) per equivalent limited
partnership unit $ (0.26) $ (0.25)
========= =========
Weighted Average number of equivalent limited 151,158 136,891
partnership units outstanding during the period
========= =========
see accompanying notes to financial statements
Commonwealth Income & Growth Fund III
Statement of Partners' Capital
For the Three Months ended March 31, 2001
(unaudited)
Partner Units General Limited
General Limited Partner Partner Total
-------------------------------------------------------------
Partners' capital - December 31, 2000 50 151,158 $1,000 $1,524,781 $1,525,781
Net Income (loss) 783 (40,074) (39,291)
Distributions (783) (78,592) (79,375)
---------------------------------------------------------------
Partners' capital - March 31, 2001 50 151,158 $1,000 $1,406,115 $1,407,115
===============================================================
see accompanying notes to financial statements
Commonwealth Income & Growth Fund III
Statement of Cash Flows
For the Three Months Ended March 31, 2001 and 2000
PAGE 1 of 2
(unaudited)
2001 2000
---------------------
Operating activities
Net (Loss) $ (39,291) $ (34,893)
Adjustments to reconcile net (loss) to net cash
provided by operating activities:
Depreciation and amortization 250,934 244,333
Other noncash activities included in
determination of net income (139,636) (113,474)
Changes in operating assets and liabilities:
Decrease in lease income receivable 39,196 13,177
Decrease in prepaid assets 10,000 --
Increase (decrease) in accounts payable 6,382 (478)
(Decrease) in accounts payable to
Commonwealth Capital Corp. (21) --
Increase in accounts payable -
General Partner 16,713 974
Increase (decrease) in unearned lease income 3,936 (12,753)
---------------------
Net cash provided by operating activities 148,213 96,886
---------------------
Investing activities:
Capital Expenditures (154,251) (106,803)
Equipment acquisition fees paid to General Partner (12,172) (13,845)
---------------------
Net cash provided by investing activities (166,423) (120,648)
---------------------
Commonwealth Income & Growth Fund III
Statement of Cash Flows
For the Three Months Ended March 31, 2001 and 2000
PAGE 2 of 2
(unaudited)
2001 2000
---------------------
Financing activities:
Partners contributions -- 91,817
Offering costs -- (10,629)
Debt Placement fee paid to the General Partner -- (1,633)
Distributions to partners (79,375) (69,051)
---------------------
Net cash provided by financing activities (79,375) 10,504
---------------------
Net (decrease) in cash and cash equivalents (97,585) (13,258)
Cash and cash equivalents, beginning of period 110,730 138,826
---------------------
Cash and cash equivalents, end of period $ 13,145 $ 125,568
=====================
see accompanying notes to financial statements
NOTES TO FINANCIAL STATEMENTS
1. The Partnership Commonwealth Income & Growth Fund III (the
"Partnership") is a limited partnership
organized in the Commonwealth of
Pennsylvania. 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 by the General Partner. The
Partnership uses the proceeds of the
Offering 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,
2009.
2. Summary of Basis of Presentation
Significant
Accounting The financial information presented as of
Policies 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 III (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
three-month period ended March 31, 2001 are
not necessarily indicative of financial
results that may be expected for the full
year ended December 31, 2001.
Revenue Recognition
Through March 31, 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 March 31,
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-five 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 March 31,
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 partners' contributed capital.
These costs are deducted from partnership
capital in the accompanying financial
statements.
Net Income (Loss) Income Per Equivalent
Limited Partnership Unit
The net income (loss) income per equivalent
limited partnership unit is computed based
upon net income (loss) income allocated to
the limited partners and the weighted average
number of equivalent units outstanding during
the period.
3. Computer The Partnership is the lessor of equipment
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
March 31, 2000:
Year ending December 31, Amount
------------------------------------------------------------------------
Nine months ended December 31, 2001 $ 744,000
Year ended December 31, 2002 493,000
Year ended December 31, 2003 185,000
Year ended December 31, 2004 11,000
------------------------------------------------------------------------
$1,433,000
===========
4. Notes Payable Notes payable consisted of the following:
March 31, Dec. 31,
-----------------------------------------------------------------------------
2001 2000
Installment note payable to a bank; interest
at 6.60%; due in monthly installments of
$4,983 including interest through January 2002 $ 48,356 $ 62,352
Installment note payable to a bank; interest
at 6.60%; due in monthly installments of
$9,951 including interest through January 2002 96,571 124,525
Installment note payable to a bank; interest
at 7.12%; due in monthly installments of
$4,685 including interest through March 2002 54,118 67,058
Installment note payable to a bank; interest
at 6.75%; due in monthly installments of
$19,800 including interest through April 2002 247,544 302,151
Installment note payable to a bank; interest
at 7.42% due in monthly installments of $515
including interest through November 2002 9,661 11,010
Installment note payable to a bank; interest
at 7.6% due in monthly installments of $596
including interest through December 2002 11,685 13,231
Installment note payable to a bank; interest
at 7.6% due in monthly installments of $1,573
including interest through February 2003 33,569 37,598
Installment note payable to a bank; interest
at 7.35% due in monthly installments of $1,162
including interest through January 2003 23,848 26,860
Installment note payable to a bank; interest
at 7.55% due in monthly installments of $1,236
including interest through February 2003 26,390 29,560
March 31, Dec. 31,
-----------------------------------------------------------------------------
2001 2000
Installment note payable to a bank;
interest at 8.18% due in monthly
installments of $1,845 including
interest through April 2002 22,878 27,877
Installment note payable to a bank; interest
at 7.6% due in monthly installments of $3,465
including interest through June 2003 85,238 93,798
Installment note payable to a bank; interest
at 7.8% due in monthly installments of $3,831
including interest through February 2004 116,526 ---
-----------------------------------------------------------------------------
$776,384 $ 796,020
-----------------------------------------------------------------------------
These notes are secured by specific computer
equipment and are nonrecourse liabilities of
the Partnership.
6. Supplemental
Cash Flow
Information
Other noncash activities included in the determination of net income are as
follows:
Quarter ended March 31, 2001 2000
- ------------------------------------------------------------------------------------------
Lease income, net of interest expense on
notes payable realized as a result of direct
payment of principal by lessee to bank $ 139,636 $ 113,474
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:
Quarter ended March 31, 2001 2000
- ------------------------------------------------------------------------------------------
Debt assumed in connection with
purchase of computer equipment $ 120,201 $ 163,289
- ------------------------------------------------------------------------------------------
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 three months ended March
31, 2001 and 2000 were from cash from operations of $148,000 and $97,000,
respectively. The primary uses of cash for the three months ended March 31,
2001, and 2000, were for capital expenditures for new equipment totaling
$154,000 and $107,000 respectively, and the payment of preferred distributions
to partners of $79,000 and $69,000 respectively.
For the three month period ended March 31, 2001, the Partnership generated cash
flows from operating activities of $148,000, which includes a net loss of
$39,000, 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 $140,000.
For the three month period ended March 31, 2000, the Partnership generated cash
flows from operating activities of $97,000, which includes a net loss of
$35,000, and depreciation and amortization expenses of $244,000. Other noncash
activities included in the determination of net income include direct payments
of lease income by lessees to banks of $113,000.
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 March 31, 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 March 31, 2001, the Partnership had future minimum rentals on non-cancelable
operating leases of $744,000 for the balance of the year ending December 31,
2001 and $689,000 thereafter. At March 31, 2001, the outstanding debt was
$776,000, with interest rates ranging from 6.6% to 8.2%, and will be payable
through February, 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 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 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
For the quarter ended March 31, 2001, the Partnership recognized income of
$321,000 and expenses of $360,000, resulting in a net loss of $39,000. For the
quarter ended March 31, 2000, the Partnership recognized income of $303,000 and
expenses of $338,000, resulting in a net loss of $35,000.
Lease income increased by 10% to $319,000 for the quarter ended March 31, 2001,
from $290,000 for the quarter ended March 31, 2000, primarily due to the fact
that new lease agreements were made since the quarter ended March 31, 2000,
therefore generating a higher revenue stream.
Interest income decreased 81% to $2,500 for the quarter ended March 31, 2001
from $13,000 for the quarter ended March 31, 2000, primarily due to lower
monthly average balance in the money market accounts for the quarter ended March
31, 2001.
Operating expenses, excluding depreciation, primarily consist of accounting,
legal, and outside service fees. The expense increased 39% to approximately
$80,000 for the quarter ended March 31, 2001, from $57,000 for the quarter ended
March 31, 2000, which is primarily attributable to an increase in reimbursable
expenses with the administration and operation of the Partnership charged by
Commonwealth Capital Corp., and outside office services which consisted of an
allocation of placement fees for 2 new employees.
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 is approximately $16,000 for the quarter ended March 31, 2001,
compared to $20,000 for the quarter ended March 31, 2000.
Depreciation and amortization expenses consist of depreciation on computer
equipment and equipment acquisition fees. The expenses increased 3% to
approximately $251,000 for the quarter ended March 31, 2001, from $244,000 for
the quarter ended March 31, 2000 due to the purchase of new equipment and
related acquisition fees being amortized.
Interest expense decreased 19% to $13,000 for the quarter ended March 31, 2001,
from $17,000 for the quarter ended March 31, 2000 due to the decrease in debt
relating to the purchase of equipment.
Part II: OTHER INFORMATION
Commonwealth Income & Growth Fund II
Item 1. Legal Proceedings.
Inapplicable
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 III
BY: COMMONWEALTH INCOME & GROWTH
FUND, INC. General Partner
By:
- ------------------ ------------------------
Date George S. Springsteen
President