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, 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 Identification Number)
incorporation or organization)
470 John Young Way Suite 300
Exton, PA 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 III
Balance Sheets
June 30, December 31,
2001 2000
----------------------------------------
(unaudited)
Assets
Cash and cash equivalents $ 30,954 $ 110,730
Lease income receivable 35,692 94,492
Other receivable - General Partner - 16,683
Prepaid Fees - 10,000
----------------------------------------
66,646 231,905
----------------------------------------
Computer equipment, at cost 3,941,410 3,673,656
Accumulated depreciation (2,116,145) (1,636,102)
----------------------------------------
1,825,265 2,037,554
----------------------------------------
Equipment acquisition costs and deferred expenses, net 54,336 66,372
----------------------------------------
Total assets $ 1,946,247 $ 2,335,831
========================================
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 27,248 $ 14,009
Accounts payable - General Partner 28,764 -
Accounts payable - Commonwealth Capital Corp. - 21
Notes payable 628,562 796,020
----------------------------------------
Total liabilities 684,574 810,050
----------------------------------------
Partners' Capital
General partner 1,000 1,000
Limited partners 1,260,673 1,524,781
----------------------------------------
Total partners' capital 1,261,673 1,525,781
----------------------------------------
Total liabilities and partners' capital $ 1,946,247 $ 2,335,831
========================================
see accompanying notes to financial statements
Commonwealth Income & Growth Fund III
Statements of Income
(unaudited)
Three Months Ended Six Months Ended
June 30 June 30
2001 2000 2001 2000
-----------------------------------------------------------
Income
Lease $ 252,920 $ 307,330 $ 571,524 $ 597,506
Interest and other 1,407 (7,066) 3,857 5,975
-----------------------------------------------------------
Total Income 254,327 300,264 575,381 603,481
-----------------------------------------------------------
Expenses
Operating, excluding depreciation 41,516 41,542 121,565 98,995
Equipment management fee - General Partner 12,454 10,122 28,385 29,851
Interest 13,108 17,540 26,539 34,135
Depreciation 241,926 226,489 480,043 457,481
Amortization of equipment
acquisition costs and deferred expenses 11,391 14,085 24,208 27,426
-----------------------------------------------------------
Total expenses 320,395 309,778 680,740 647,888
-----------------------------------------------------------
Net (loss) $ (66,068) $ (9,514) $ (105,359) $ (44,407)
===========================================================
Net (loss) per equivalent limited
partnership unit $ (0.44) $ (0.07) $ (0.70) $(0.32)
===========================================================
Weighted Average number of equivalent limited
partnership units outstanding during the period 151,158 138,750 151,158 138,750
===========================================================
see accompanying notes to financial statements
Commonwealth Income & Growth Fund III
Statements of Partners' Capital
For the Six Months ended June 30, 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) 1,567 (106,926) (105,359)
Distributions (1,567) (157,182) (158,749)
------------------------------------------------------------------
Partners' capital - June 30, 2001 50 151,158 $1,000 $1,260,673 $1,261,673
==================================================================
see accompanying notes to financial statements
Commonwealth Income & Growth Fund III
Statements of Cash Flows
For the Six Months Ended June 30, 2001 and 2000
(unaudited)
2001 2000
----------- ---------
Operating activities
Net (loss) $ (105,359) $ (44,407)
Adjustments to reconcile net (loss) to net cash
provided by operating activities
Depreciation and amortization 504,251 484,907
Other noncash activities included in
determination of net income (287,659) (24,909)
Changes in assets and liabilities
(Increase) decrease in assets
Lease income receivable 58,800 (3,373)
Other receivables-Commonwealth Capital Corp 16,683 -
Other receivables 10,000 -
Increase (decrease) in liabilities
Accounts payable 13,239 (4,603)
Accounts payable, Common Capital Corp. (21) -
Accounts payable, General Partner 28,764 20,360
Organization Cost, General Partner - (1,221)
Unearned lease income - 4,912
----------- ---------
Net cash provided by operating activities 238,698 431,666
----------- ---------
Investing activities:
Capital Expenditures (147,553) (318,345)
Equipment acquisition fees paid to General Partner (10,970) (44,179)
----------- --------
Net cash (used in) investing activities (158,523) (362,524)
----------- --------
Financing activities:
Distributions to partners (158,749) (142,563)
Partners' contributions - 116,318
Offering Costs - (12,737)
Debt Placement fee paid to the General Partner (1,202) (4,227)
----------- ---------
Net cash (used in) financing activities (159,951) (43,209)
----------- ---------
Net increase (decrease) in cash and cash equivalents (79,776) 25,933
Cash and cash equivalents, beginning of period 110,730 138,826
----------- ---------
Cash and cash equivalents, end of period $ 30,954 $ 164,759
=========== =========
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 any
Policies 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 six-month
period ended June 30, 2001 are not
necessarily indicative of financial results
that may be expected for the full year ended
December 31, 2001.
Revenue Recognition
Through June 30, 2001, the Partnership has
only entered into operating leases. Lease
revenue is recognized on a monthly basis in
accordance with the terms of the operating
lease agreements.
Use of Estimates
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make
estimates and assumptions that affect the
reported amounts of assets and liabilities
and disclosure of contingent assets and
liabilities at the date of the financial
statements and the reported amounts of
revenues and expenses during the reporting
period. Actual results could differ from
those estimates.
Long-Lived Assets
The Partnership evaluates its long-lived
assets when events or circumstances indicate
that the value of the asset may not be
recoverable. The Partnership determines
whether an impairment exists by estimating
the undiscounted cash flows to be generated
by each asset. If the estimated undiscounted
cash flows are less than the carrying value
of the asset then an impairment exists. The
amount of the impairment is determined based
on the difference between the carrying value
and the fair value. Fair value is determined
based on estimated discounted cash flows to
be generated by the asset. As of June 30,
2001, there is no impairment.
Depreciation on computer equipment for
financial statement purposes is based on the
straight-line method over estimated useful
lives of four years.
Intangible Assets
Equipment acquisition costs and deferred
expenses, are amortized on a straight-line
basis over two- to-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 June 30,
2001, cash equivalents were invested in a
money market fund investing directly in
Treasury obligations.
Income Taxes
The Partnership is not subject to federal
income taxes; instead, any taxable income
(loss) is passed through to the partners and
included on their respective income tax
returns.
Taxable income differs from financial
statement net income as a result of reporting
certain income and expense items for tax
purposes in periods other than those used for
financial statement purposes, principally
relating to depreciation, amortization, and
lease income.
Offering Costs
Offering costs are payments for selling
commissions, dealer manager fees,
professional fees and other offering expenses
relating to the syndication. Selling
commissions are 7% of the partners'
contributed capital and dealer manager fees
are 2% of 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
June 30, 2001:
Amount
--------------------------------------------------------------------------------
Six months ended December 31, 2001 $ 485,000
Year ended December 31, 2002 493,000
Year ended December 31, 2003 194,000
Year ended December 31, 2004 11,000
--------------------------------------------------------------------------------
$ 1,183,000
==============
4. Notes Payable Notes payable consisted of the following:
June 30, December 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 $ 34,127 $ 62,352
Installment note payable to a bank;
interest at 6.60%; due in monthly
installments of $9,951 including
interest through January 2002 68,154 124,525
Installment note payable to a bank;
interest at 7.12%; due in monthly
installments of $4,685 including
interest through March 2002 40,946 67,058
Installment note payable to a bank;
interest at 6.75%; due in monthly
installments of $19,800 including
interest through April 2002 192,010 302,151
Installment note payable to a bank;
interest at 7.42% due in monthly
installments of $515 including
interest through November 2002 8,286 11,010
Installment note payable to a bank;
interest at 7.6% due in monthly
installments of $596 including
interest through December 2002 10,109 13,231
Installment note payable to a bank;
interest at 7.6% due in monthly
installments of $1,573 including
interest through February 2003 29,462 37,598
Installment note payable to a bank;
interest at 7.35% due in monthly
installments of $1,162 including
interest through January 2003 20,782 26,860
Installment note payable to a bank;
interest at 7.55% due in monthly
installments of $1,236 including
interest through February 2003 23,160 29,560
June 30, December 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 17,777 27,877
Installment note payable to a bank;
interest at 7.6% due in monthly
installments of $3,465 including
interest through June 2003 76,504 93,798
Installment note payable to a bank;
interest at 7.8% due in monthly
installments of $3,831 including
interest through January 2004 107,245 ---
---------------------------------------------------------------------------------
$ 628,562 $ 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:
Six months ended June 30, 2001 2000
- ------------------------------------------------------------------------------------------
Lease income, net of interest expense on
notes payable realized as a result of direct
payment of principal by lessee to bank $ 287,659 $ 24,909
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:
Six months ended June 30, 2001 2000
- ------------------------------------------------------------------------------------------
Debt assumed in connection with
purchase of computer equipment $ 120,201 $ 204,287
==========================================================================================
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 six months ended June 30,
2001 and 2000 were cash from operations of $239,000 and $432,000, respectively
and contributions from partners of $116,000 for the six months ended June 30,
2000. The primary uses of cash for the six months ended June 30, 2001, and 2000,
were for capital expenditures for new equipment totaling $148,000 and $318,000
respectively, and the payment of preferred distributions to partners of $159,000
and $143,000 respectively.
For the six month period ended June 30, 2001, the Partnership generated cash
flows from operating activities of $239,000, which includes a net loss of
$105,000, and depreciation and amortization expenses of $504,000. Other noncash
activities included in the determination of net income include direct payments
of lease income by lessees to banks of $288,000.
For the six month period ended June 30, 2000, the Partnership generated cash
flows from operating activities of $432,000, which includes a net loss of
$44,000, and depreciation and amortization expenses of $485,000. Other noncash
activities included in the determination of net income include direct payments
of lease income by lessees to banks of $25,000.
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 June 30, 2001, the Partnership had approximately $25,000 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 June 30, 2001, the Partnership had future minimum rentals on non-cancelable
operating leases of $485,000 for the balance of the year ending December 31,
2001 and $698,000 thereafter. At June 30, 2001, the outstanding debt was
$629,000, with interest rates ranging from 6.6% to 8.2%, and will be payable
through January, 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
Three Months Ended June 30, 2001 compared to Three Months Ended June 30, 2000
- -----------------------------------------------------------------------------
For the quarter ended June 30, 2001, the Partnership recognized income of
$254,000 and expenses of $320,000, resulting in a net loss of $66,000. For the
quarter ended June 30, 2000, the Partnership recognized income of $300,000 and
expenses of $310,000, resulting in a net loss of $10,000.
Lease income decreased by 18% to $253,000 for the quarter ended June 30, 2001,
from $307,000 for the quarter ended June 30, 2000, primarily due to the fact
that more lease agreements ended than new lease agreements acquired since the
quarter ended June 30, 2000.
Operating expenses, excluding depreciation, primarily consist of accounting,
legal, and outside service fees. The expense for the quarters ended June 30,
2001 and 2000 did not change, the expense being approximately $42,000 each
quarter.
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 $12,000 for the quarter ended June 30, 2001,
compared to $10,000 for the quarter ended June 30, 2000.
Depreciation and amortization expenses consist of depreciation on computer
equipment and equipment acquisition fees. The expenses increased 5% to
approximately $253,000 for the quarter ended June 30, 2001, from $241,000 for
the quarter ended June 30, 2000 due to the purchase of new equipment and related
acquisition fees being amortized.
Interest expense decreased 25% to $13,000 for the quarter ended June 30, 2001,
from $18,000 for the quarter ended June 30, 2000 due to the decrease in debt
relating to the purchase of equipment.
Six Months Ended June 30, 2001 compared to Six Months Ended June 30, 2000
- -------------------------------------------------------------------------
For the six months ended June 30, 2001, the Partnership recognized income of
$575,000 and expenses of $680,000, resulting in a net loss of $105,000. For the
six months ended June 30, 2000, the Partnership recognized income of $603,000
and expenses of $648,000, resulting in a net loss of $45,000.
Lease income decreased by 4% to $572,000 for the six months ended June 30, 2001,
from $598,000 for the six months ended June 30, 2000, primarily due to the fact
that more lease agreements ended than new lease agreements acquired since the
six months ended June 30, 2000.
Operating expenses, excluding depreciation, primarily consist of accounting,
legal, and outside service fees. The expense increased 23% to approximately
$122,000 for the six months ended June 30, 2001, from $99,000 for the six months
ended June 30, 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 $28,000 for the six months ended June 30, 2001,
compared to $30,000 for the six months ended June 30, 2000.
Depreciation and amortization expenses consist of depreciation on computer
equipment and equipment acquisition fees. The expenses increased 4% to
approximately $504,000 for the six months ended June 30, 2001, from $485,000 for
the six months ended June 30, 2000 due to the purchase of new equipment and
related acquisition fees being amortized.
Interest expense decreased 22% to $27,000 for the six months ended June 30,
2001, from $34,000 for the six months ended June 30, 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