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, 2004
( ) 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12c-2 of the Act): YES [ ] NO [X]
COMMONWEALTH INCOME & GROWTH FUND III
BALANCE SHEETS
JUNE 30, DECEMBER 31,
2004 2003
----------------------------
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 5,400 $ 557
Lease income receivable 2,665 9,181
Other receivables - Commonwealth Capital Corp 60,582 -
Prepaid expenses 457 -
----------------------------
69,104 9,738
----------------------------
Computer equipment, at cost 1,776,632 1,955,197
Accumulated depreciation (1,589,619) (1,635,341)
----------------------------
187,013 319,856
----------------------------
Equipment acquisition costs and deferred expenses, net 4,636 6,867
----------------------------
TOTAL ASSETS $ 260,753 $ 336,461
============================
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Accounts payable $ 93,533 $ 26,762
Accounts payable - Affiliated limited partnerships 28,797 25,707
Accounts payable - General Partner 78,952 134,524
Accounts payable - Commonwealth Capital Corp. - 53,648
Unearned lease income 943 1,636
Notes payable 56,777 91,436
----------------------------
TOTAL LIABILITIES 259,002 333,713
----------------------------
PARTNERS' CAPITAL
General partner 1,000 1,000
Limited partners 751 1,748
----------------------------
TOTAL PARTNERS' CAPITAL 1,751 2,748
----------------------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 260,753 $ 336,461
============================
see accompanying notes to financial statements
COMMONWEALTH INCOME & GROWTH FUND III
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
2004 2003 2004 2003
------------------------------------------------------
(UNAUDITED) (UNAUDITED)
INCOME
Lease $ 38,801 $107,468 $ 92,726 $ 246,975
Interest and other - 25 - 35
Gain on sale of computer equipment 2,928 6,299 4,044 3,317
------------------------------------------------------
TOTAL INCOME 41,729 113,792 96,770 250,327
------------------------------------------------------
EXPENSES
Operating, excluding depreciation 12,088 53,676 19,861 113,519
Equipment management fee - General Partner 1,940 5,374 4,636 12,349
Interest 1,097 3,362 2,445 7,514
Depreciation 54,083 87,875 150,608 218,699
Amortization of equipment
acquisition costs and deferred expenses 1,398 3,586 3,249 7,484
------------------------------------------------------
TOTAL EXPENSES 70,606 153,873 180,799 359,565
------------------------------------------------------
NET (LOSS) $(28,877) $(40,081) $(84,029) $(109,238)
======================================================
NET (LOSS) PER EQUIVALENT LIMITED
PARTNERSHIP UNIT $ (0.19) $ (0.27) $ (0.56) $ (0.72)
======================================================
WEIGHTED AVERAGE NUMBER OF EQUIVALENT LIMITED
PARTNERSHIP UNITS OUTSTANDING DURING THE PERIOD 151,178 151,178 151,178 151,178
======================================================
see accompanying notes to financial statements
COMMONWEALTH INCOME & GROWTH FUND III
STATEMENTS OF PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(UNAUDITED)
GENERAL LIMITED
PARTNER PARTNER GENERAL LIMITED
UNITS UNITS PARTNER PARTNER TOTAL
------------------------------------------------------------
PARTNERS' CAPITAL - DECEMBER 31, 2003 50 151,178 $ 1,000 $ 1,748 $ 2,748
Net income (loss) 1,567 (85,596) (84,029)
Capital contribution 109,616 - 109,616
Forgiveness of payables recorded as
capital contributions 132,165 - 132,165
Transfer of partners' capital (241,781) 241,781 -
Distributions (1,567) (157,182) (158,749)
------------------------------------------------------------
PARTNERS' CAPITAL - JUNE 30, 2004 50 151,178 $ 1,000 $ 751 $ 1,751
============================================================
see accompanying notes to financial statements
COMMONWEALTH INCOME & GROWTH FUND III
STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
2004 2003
-------------------------
OPERATING ACTIVITIES (UNAUDITED)
Net (loss) $ (84,029) $(109,238)
Adjustments to reconcile net (loss) to net cash
provided by operating activities
Depreciation and amortization 153,857 226,183
(Gain) on sale of computer equipment (4,044) (3,317)
Other noncash activities included in
determination of net (loss) (53,220) (93,446)
Changes in assets and liabilities
(Increase) decrease in assets
Lease income receivable 6,516 (3,521)
Prepaid expenses (457) -
Increase (decrease) in liabilities
Accounts payable 66,771 5,711
Accounts payable, General Partner 13,716 54,626
Accounts payable, Commonwealth Capital Corp. (51,353) 74,398
Accounts payable, Affiliated limited partnerships 3,090 15,267
Unearned lease income (693) (34,151)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 50,154 132,512
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures (2,249) -
Net proceeds from the sale of computer equipment 7,089 37,937
Equipment acquisition fees paid to General Partner (832) -
--------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 4,008 37,937
--------- ---------
FINANCING ACTIVITIES:
Contributions 109,616 -
Distributions to partners (158,749) (158,750)
Debt placement fee paid to the General Partner (186) -
--------- ---------
NET CASH (USED IN) FINANCING ACTIVITIES (49,319) (158,750)
--------- ---------
Net increase in cash and cash equivalents 4,843 11,699
Cash and cash equivalents, beginning of period 557 497
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,400 $ 12,196
========= =========
see accompanying notes to financial statements
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS 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 used 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. 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 various partnerships based on certain risk
factors. The Partnership's General Partner is Commonwealth
Income & Growth Fund, Inc. (the "General Partner"), a
Pennsylvania corporation that is an indirect wholly owned
subsidiary of CCC. 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. BUSINESS PLAN The General Partner and CCC have forgiven amounts payable
by the Partnership to them and have deferred payments on
other amounts to allow for distributions to limited
partners. 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, including the amounts necessary to fund, if
any, distributions to limited partners, through December
31, 2004.
The Partnership intends to purchase additional equipment
once funds become available through either future rentals
from existing leases, extensions from those existing
leases, or through sale of equipment.
The General Partner intends to review and reassess the
Partnership's business plan quarterly.
3. SUMMARY OF BASIS OF PRESENTATION
SIGNIFICANT
ACCOUNTING The financial information presented as of any date other
POLICIES than December 31 has been prepared from the books and
records without audit. Financial information as of
December 31 has been derived from the audited financial
statements of the Partnership, but does not include all
disclosures required by generally accepted accounting
principles. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary
for a fair presentation of the financial information for
the periods indicated have been included. For further
information regarding the Partnership's accounting
policies, refer to the financial statements and related
notes included in the Partnership's annual report on Form
10-K for the year ended December 31, 2003. Operating
results for the six-month period ended June 30, 2004 are
not necessarily indicative of financial results that may
be expected for the full year ended December 31, 2004.
REVENUE RECOGNITION
Through June 30, 2004, 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.
The Partnership reviews a customer's credit history before
extending credit and establishes a provision for
uncollectible accounts receivable based upon the credit
risk of specific customers, historical trends and other
information.
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 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. As of June 30, 2004, the
Partnership recorded charges of approximately $28,000 to
record the assets at their estimated fair value. Such
amounts have been included in depreciation expense in the
accompanying financial statements.
Depreciation on computer equipment for financial statement
purposes is based on the straight-line method over
estimated useful lives of four years.
INTANGIBLE ASSETS
Equipment acquisition costs and deferred expenses are
amortized on a straight-line basis over two-to-four year
lives. Unamortized acquisition fees and deferred expenses
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.
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
were 7% of the partners' contributed capital and dealer
manager fees were 2% of partners' contributed capital.
These costs were deducted from partnership capital in the
accompanying financial statements.
NET INCOME (LOSS) PER EQUIVALENT LIMITED PARTNERSHIP UNIT
The net income (loss) per equivalent limited partnership
unit is computed based upon net income (loss) allocated to
the limited partners and the weighted average number of
equivalent units outstanding during the period.
REIMBURSABLE EXPENSES
Reimbursable expenses, which are charged to the
Partnership by CCC in connection with the administration
and operation of the Partnership, are allocated to the
Partnership based upon several factors including, but not
limited to, the number of investors, compliance issues,
and the number of existing leases.
4. COMPUTER The Partnership is the lessor of equipment under operating
EQUIPMENT leases with periods ranging from 24 to 36 months. In
general, the lessee pays associated costs such as repairs
and maintenance, insurance and property taxes.
The Partnership's share of the computer equipment in which
it participates with other partnerships at June 30, 2004
and December 31, 2003 was approximately $137,000 and
$277,000, respectively, which is included in the
Partnership's fixed assets on its balance sheet, and the
total cost of the equipment shared by the Partnership with
other partnerships at June 30, 2004 and December 31, 2003
was approximately $1,859,000 and $2,156,000, respectively.
The Partnership's share of the outstanding debt associated
with this equipment at June 30, 2004 and December 31, 2003
was approximately $8,000 and $37,000, respectively, which
is included in the Partnership's notes payables on the
balance sheet, and the total outstanding debt at June 30,
2004 and December 31, 2003 related to the equipment shared
by the Partnership was approximately $188,000 and
$510,000, respectively.
The following is a schedule of future minimum rentals on
noncancellable operating leases at June 30, 2004:
Amount
------
Six Months ending December 31, 2004 $43,000
Year Ended December 31, 2005 23,000
Year Ended December 31, 2006 6,000
-------
$72,000
=======
5. RELATED PARTY FORGIVENESS OF RELATED PARTY PAYABLES
TRANSACTIONS
During the six months ended June 30, 2004, the General
Partner (approximately $69,000) and one of its affiliates,
CCC (approximately $63,000), forgave payables owed to them
by the Partnership in the amount of approximately
$132,000. During the six months ended June 30, 2004, CCC,
through the General Partner, made a capital contribution
in the amount of approximately $55,000. Also, on June 30,
2004, CCC declared that it would make a capital
contribution to the Partnership, through the General
Partner, in the amount of $65,000. The Partnership has
recorded this amount as a receivable from CCC and a
capital contribution as of June 30, 2004. This was paid to
the Partnership on July 8, 2004.
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 six months ended
June 30, 2004 and 2003, the Partnership recorded $8,000
and $42,000, respectively, for reimbursement of expenses
to the General Partner, which are included in operating
expenses.
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. During the six months ended June 30, 2004 and
2003, equipment management fees of approximately $5,000
and $12,000, respectively, were earned by the General
Partner.
6. NOTES PAYABLE Notes payable consisted of the following:
JUNE 30, DECEMBER 31,
2004 2003
----------------------------------------------------------
Installment notes payable to
banks; interest ranging from
6.75% to 8.00%, due in
monthly installments ranging
from $382 to $3,831, including
interest, with final payments
due from January through
November 2004. $ 7,367 $ 38,222
Installment notes payable to
banks; interest ranging from
6.25% to 6.75%, due in
monthly installments ranging
from $123 to $1,735, including
interest, with final payments
due from February through
April 2005. 32,095 53,214
Installment notes payable to
banks; interest at 6.00%, due in
monthly installments ranging
from $320 to $394, including
interest, with final payments
due from March through
December 2006. 17,315 -
------- --------
$56,777 $ 91,436
======= ========
These notes are secured by specific computer
equipment and are nonrecourse liabilities of
the Partnership. Aggregate maturities of
notes payable for each of the periods
subsequent to June 30, 2004 are as follows:
Amount
------------------------------------------------------
Six months ending December 31, 2004 $32,973
Year ended December 31, 2005 18,276
Year ended December 31, 2006 5,528
-------
$56,777
=======
7. SUPPLEMENTAL Other noncash activities included in the determination of
CASH FLOW net loss are as follows:
INFORMATION
Six months ended June 30, 2004 2003
- ---------------------------------------------------------------------------
Lease income, net of interest expense on
notes payable realized as a result of
direct payment of principal by lessee to
bank $ 53,220 $93,446
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:
Six months ended June 30, 2004 2003
- --------------------------------------------------------------------------------
Forgiveness of related party payables
recorded as a capital contribution $132,165 $ -
- --------------------------------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was released by the Securities and
Exchange Commission, requires all companies to include a discussion of critical
accounting policies or methods used in the preparation of financial statements.
Our significant accounting policies are described in Note 3 of the Notes to the
Financial Statements. The significant accounting policies that we believe are
the most critical to aid in fully understanding our reported financial results
include the following:
COMPUTER EQUIPMENT
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 various
partnerships based on certain risk factors. Depreciation on computer equipment
for financial statement purposes is based on the straight-line method over
estimated useful lives of four years.
REVENUE RECOGNITION
Through June 30, 2004, 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.
The Partnership reviews a customer's credit history 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.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary sources of capital for the six months ended June 30,
2004 and 2003 were cash from operations of approximately $50,000 and $133,000,
respectively, net proceeds received from sales of equipment of approximately
$7,000 and $38,000, respectively and capital contributions from the General
Partner of approximately $110,000 for the six months ended June 30, 2004. The
primary uses of cash for the six months ended June 30, 2004 and 2003 were for
payments of preferred distributions to partners of approximately $159,000 for
both periods and for the purchase of computer equipment of approximately $2,000
for the six months ended June 30, 2004. There was no equipment purchased for the
six months ended June 30, 2003.
For the six-month period ending June 30, 2004, the Partnership generated cash
flow from operating activities of approximately $50,000, which includes net loss
of approximately $84,000, a gain on sale of equipment of approximately $4,000
and depreciation and amortization expenses of approximately $154,000. Other
non-cash activities included in the determination of net loss include direct
payments of lease income by lessees to banks of approximately $53,000.
For the six-month period ended June 30, 2003, the Partnership generated cash
flows from operating activities of $133,000, which includes a net loss of
approximately $109,000 and depreciation and amortization expenses of
approximately $226,000. Other non-cash activities included in the determination
of net loss include direct payments of lease income by lessees to banks of
approximately $93,000.
The Partnership sold computer equipment for the six months ending June 30, 2004
with a net book value of approximately $3,000 for a net gain on sale of
equipment of approximately $4,000. For the six months ended June 30, 2003, the
Partnership sold computer equipment with a net book value of approximately
$35,000 for a net gain on sale of equipment of approximately $3,000.
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, 2004, the Partnership had future minimum rentals on non-cancelable
operating leases of approximately $43,000 for the balance of the year ending
December 31, 2004 and $29,000 thereafter. At June 30, 2004, the outstanding debt
was approximately $57,000, with interest rates ranging from 6.00% to 8.00%, and
will be payable through December 2006.
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, from time to time,
reduce the distributions to its Partners if it deems necessary. Since the
Partnership's leases are on a "triple-net" basis, no reserve for maintenance and
repairs are deemed necessary.
The Partnership's share of the computer equipment in which it participates with
other partnerships at June 30, 2004 and December 31, 2003 was approximately
$137,000 and $277,000, respectively, which is included in the Partnership's
fixed assets on its balance sheet, and the total cost of the equipment shared by
the Partnership with other partnerships at June 30, 2004 and December 31, 2003
was approximately $1,859,000 and $2,156,000, respectively. The Partnership's
share of the outstanding debt associated with this equipment at June 30, 2004
and December 31, 2003 was approximately $8,000 and $37,000, respectively, which
is included in the Partnership's notes payables on the balance sheet, and the
total outstanding debt at June 30, 2004 and December 31, 2003 related to the
equipment shared by the Partnership was approximately $188,000 and $510,000,
respectively.
During the six months ended June 30, 2004, the General Partner (approximately
$69,000) and one of its affiliates, CCC (approximately $63,000), forgave
payables owed to them by the Partnership in the amount of approximately
$132,000. During the six months ended June 30, 2004, CCC, through the General
Partner, made a capital contribution in the amount of approximately $55,000.
Also, on June 30, 2004, CCC declared that it would make a capital contribution
to the Partnership, through the General Partner, in the amount of $65,000. The
Partnership has recorded this amount as a receivable from CCC and a capital
contribution as of June 30, 2004. This was paid to the Partnership on July 8,
2004.
The General Partner and CCC have forgiven amounts payable by the Partnership to
them and have deferred payments on other amounts to allow for distributions to
limited partners. 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, including the amounts necessary to fund, if
any, distributions to limited partners, through December 31, 2004. The
Partnership intends to purchase additional equipment once funds become available
through either future rentals from existing leases, extensions from those
existing leases, or through sale of equipment.
The General Partner intends to review and reassess the Partnership's business
plan annually.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2004 compared to Three Months Ended June 30, 2003
- -----------------------------------------------------------------------------
For the quarter ended June 30, 2004, the Partnership recognized income of
approximately $42,000 and expenses of approximately $71,000, resulting in a net
loss of approximately $29,000. For the quarter ended June 30, 2003, the
Partnership recognized income of approximately $114,000 and expenses of
approximately $154,000, resulting in a net loss of approximately $40,000.
Lease income decreased by 64% to approximately $39,000 for the quarter ended
June 30, 2004, from approximately $107,000 for the quarter ended June 30, 2003,
primarily due to the fact that more lease agreements ended than new lease
agreements were acquired since the quarter ended June 30, 2003.
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 decreased 77% to approximately $12,000 for the quarter
ended June 30, 2004, from $54,000 for the quarter ended June 30, 2003, which is
primarily attributable to a decrease in the amount charged by CCC, a related
party, to the Partnership for administration and operation of approximately
$13,000, a decrease in professional services of approximately $8,000, a decrease
in outside services of approximately $2,000, a decrease in due diligence of
approximately $5,000, a decrease in remarketing fees of approximately $1,000, a
decrease in postage of approximately $2,000, a decrease in printing services of
approximately $5,000 and a decrease in office supplies of approximately $2,000.
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 decreased 64% to approximately $2,000 for the quarter ended June
30, 2004, from approximately $5,000 for the quarter ended June 30, 2003, which
is consistent with the decrease in lease income.
Depreciation and amortization expenses consist of depreciation on computer
equipment and amortization of equipment acquisition fees. The expenses decreased
39% to approximately $55,000 for the quarter ended June 30, 2004, from
approximately $91,000 for the quarter ended June 30, 2003 due to equipment and
acquisition fees being fully depreciated/amortized and not being replaced with
as many new purchases.
The Partnership sold computer equipment for the quarter ended June 30, 2004 with
a net book value of approximately $1,000 for a net gain on sale of equipment of
approximately $3,000. For the quarter ended June 30, 2003, the Partnership sold
computer equipment with a net book value of approximately $30,000 for a net gain
on sale of equipment of approximately $6,000.
Interest expense decreased 67% to approximately $1,000 for the quarter ended
June 30, 2004, from approximately $3,000 for the quarter ended June 30, 2003,
primarily due to the decrease in debt relating to the purchase of computer
equipment.
Six Months Ended June 30, 2004 compared to Six Months Ended June 30, 2003
- -------------------------------------------------------------------------
For the six months ended June 30, 2004, the Partnership recognized income of
approximately $97,000 and expenses of approximately $181,000, resulting in a net
loss of approximately $84,000. For the six months ended June 30, 2003, the
Partnership recognized income of approximately $250,000 and expenses of
approximately $359,000, resulting in a net loss of approximately $109,000.
Lease income decreased by 62% to approximately $93,000 for the six months ended
June 30, 2004, from approximately $247,000 for the six months ended June 30,
2003, primarily due to the fact that more lease agreements ended than new lease
agreements were acquired since the six months ended June 30, 2003.
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 decreased 83% to approximately $20,000 for the six
months ended June 30, 2004, from $114,000 for the six months ended June 30,
2003, which is primarily attributable to a decrease in the amount charged by
CCC, a related party, to the Partnership for administration and operation of
approximately $33,000, a decrease in professional services of approximately
$18,000, a decrease in outside services of approximately $6,000, a decrease in
due diligence of approximately $12,000, a decrease in communication expenses of
approximately $4,000, a decrease in insurance of approximately $8,000 and a
decrease in office supplies of approximately $4,000.
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 decreased 62% to approximately $5,000 for the six months ended
June 30, 2004, from approximately $12,000 for the six months ended June 30,
2003, which is consistent with the decrease in lease income.
Depreciation and amortization expenses consist of depreciation on computer
equipment and amortization of equipment acquisition fees. The expenses decreased
32% to approximately $154,000 for the six months ended June 30, 2004, from
approximately $226,000 for the six months ended June 30, 2003 due to equipment
and acquisition fees being fully depreciated/amortized and not being replaced
with as many new purchases. Included in the June 30, 2004 amount of $154,000 is
a charge of approximately $28,000, which it to record an asset at its estimated
fair value.
The Partnership sold computer equipment with a net book value of approximately
$3,000 for the six months ended June 30, 2004, for a net gain of approximately
$4,000. The Partnership sold computer equipment with a net book value of
approximately $35,000 for the six months ended June 30, 2003, for a net gain of
approximately $3,000.
Interest expense decreased 67% to approximately $2,000 for the six months ended
June 30, 2004, from approximately $8,000 for the six months ended June 30, 2003,
primarily due to the decrease in debt relating to the purchase of computer
equipment.
ITEM 3. 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 and its associated fixed revenue
streams.
ITEM 4. CONTROLS AND PROCEDURES
The Chief Executive Officer and a Financial Officer of the Partnership have
conducted a review of the Partnership's disclosure controls and procedures as of
June 30, 2004.
The Partnership's disclosure controls and procedures include the Partnership's
controls and other procedures designed to ensure that information required to be
disclosed in this and other reports filed under the Securities Exchange Act of
1934, as amended (the " Exchange Act") is accumulated and communicated to the
Partnership's management, including its chief executive officer and a financial
officer, to allow timely decisions regarding required disclosure and to ensure
that such information is recorded, processed, summarized and reported with the
required time quarters.
Based upon this review, the Partnership's Chief Executive Officer and a
Financial Officer have concluded that the Partnership's disclosure controls (as
defined in Rule 13a-14c promulgated under the Exchange Act) are sufficiently
effective to ensure that the information required to be disclosed by the
Partnership in the reports it files under the Exchange Act is recorded,
processed, summarized and reported with adequate timeliness.
PART II: OTHER INFORMATION
COMMONWEALTH INCOME & GROWTH FUND III
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:
31.1 THE RULE 15D-14(A)
31.2 THE RULE 15D-14(A)
32.1 SECTION 1350 CERTIFICATION OF CEO
32.2 SECTION 1350 CERTIFICATION OF CFO
b) Report on Form 8-K: None
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
August 13, 2004 By: /s/ George S. Springsteen
- ------------------ ---------------------------------
Date George S. Springsteen
President