10-Q 1 form10-q.txt 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, 2005 ( ) 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] 1 FORM 10-Q MARCH 31, 2005 TABLE OF CONTENTS

2 COMMONWEALTH INCOME & GROWTH FUND III CONDENSED BALANCE SHEETS

see accompanying notes to condensed financial statements 3 COMMONWEALTH INCOME & GROWTH FUND III CONDENSED STATEMENTS OF OPERATIONS

see accompanying notes to condensed financial statements 4 COMMONWEALTH INCOME & GROWTH FUND III CONDENSED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)

see accompanying notes to condensed financial statements 5 COMMONWEALTH INCOME & GROWTH FUND III CONDENSED STATEMENTS OF CASH FLOW FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

see accompanying notes to condensed financial statements 6 NOTES TO CONDENSED 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 Partnership has suffered recurring losses from operations and has a deficit partners' capital of approximately $285,000 at March 31, 2005. 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. (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, including the amounts necessary to fund, if any, distributions to limited partners, through March 31, 2005. Due to the recurring losses from operations, the General Partner feels that it may be in the best interest of the Partnership to start the liquidation process in 2005 and run out naturally all remaining leases in the portfolio, making distributions when possible, after expenses have been satisfied. The General Partner intends to review and reassess the Partnership's business plan on a quarterly basis during 2005. 7 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, 2004. Operating results for the three-month period ended March 31, 2005 are not necessarily indicative of financial results that may be expected for the full year ended December 31, 2005. 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 March 31, 2005. Depreciation on computer equipment for financial statement purposes is based on the straight-line method over estimated useful lives of four years. 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. 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. Through March 31, 2005, 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. 8 The Partnership's share of the computer equipment in which they participate with other partnerships at March 31, 2005 and December 31, 2004 was approximately $89,000 and $137,000, respectively, which is included in the Partnership's fixed assets on their balance sheet, and the total cost of the equipment shared by the Partnership with other partnerships at March 31, 2005 and December 31, 2004 was approximately $1,741,000 and $1,859,000, respectively. The Partnership's share of the outstanding debt associated with this equipment at March 31, 2005 and December 31, 2004 was approximately $0 for both periods, and the total outstanding debt at March 31, 2005 and December 31, 2004 related to the equipment shared by the Partnership was approximately $0 and $1,000, respectively. The following is a schedule of future minimum rentals on noncancellable operating leases at March 31, 2005: Amount --------------------------------------------- --------- Nine Months ended December 31, 2005 $ 32,000 Year Ended December 31, 2006 18,000 Year Ended December 31, 2007 13,000 Year Ended December 31, 2008 1,000 --------- $ 64,000 ========================================================== 5. RELATED PARTY FORGIVENESS OF RELATED PARTY PAYABLES TRANSACTIONS During the three months ended March 31, 2005, CCC forgave payables owed to them by the Partnership in the amount of approximately $53,000. During the three months ended March 31, 2005, CCC, through the General Partner, made a capital contribution in the amount of approximately $70,000. 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 three months ended March 31, 2005 and 2004, the Partnership recorded $7,000 and $4,000, respectively, 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. During the three months ended March 31, 2005 and 2004, equipment management fees of approximately $1,000 and $3,000, respectively, were earned by the General Partner. 9 6. NOTES PAYABLE Notes payable consisted of the following:

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 March 31, 2005 are as follows: Amount -------------------------------------------------------- Nine months ended December 31, 2005 $ 15,324 Year ended December 31, 2006 17,307 Year ended December 31, 2007 12,443 Year ended December 31, 2008 1,068 --------- $ 46,142 ========= 10 7. SUPPLEMENTAL Other noncash activities included in the determination of CASH FLOW net loss are as follows: INFORMATION Three months ended March 31, 2005 2004 -------------------------------------------------------------------------------- Lease income, net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank $ 14,102 $ 27,685 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: Three months ended March 31, 2005 2004 -------------------------------------------------------------------------------- Forgiveness of related party payables recorded as a capital contribution $ 52,500 $ - ================================================================================ ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. 11 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 March 31, 2005, 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 source of capital for the three months ended March 31, 2005 was a capital contribution from the General Partner of approximately $70,000. The Partnership's primary source of capital for the three months ended March 31, 2004 was cash from operations of approximately $35,000 and a capital contribution from the General Partner of $42,000. The primary use of cash for the three months ended March 31, 2005 and 2004 was for payments of preferred distributions to partners of approximately $79,000 for both periods. For the three month period ending March 31, 2005, the Partnership generated cash flow from operating activities of approximately $7,000, which includes net loss of approximately $37,000, a loss on sale of equipment of approximately $10,000 and depreciation and amortization expenses of approximately $24,000. Other non-cash activities included in the determination of net income include direct payments of lease income by lessees to banks of approximately $14,000. For the three month period ending March 31, 2004, the Partnership generated cash flow from operating activities of approximately $35,000, which includes net loss of approximately $55,000, a gain on sale of equipment of approximately $1,000 and depreciation and amortization expenses of approximately $98,000. Other non-cash activities included in the determination of net income include direct payments of lease income by lessees to banks of approximately $28,000. 12 The Partnership sold computer equipment for the three months ending March 31, 2005 with a net book value of approximately $11,000 for a net loss on sale of equipment of approximately $10,000. For the period ended March 31, 2004, the Partnership sold computer equipment with a net book value of approximately $2,000 for a net gain on sale of equipment of approximately $1,000. 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 March 31, 2005, the Partnership had future minimum rentals on non-cancelable operating leases of $32,000 for the balance of the year ending December 31, 2005 and $32,000 thereafter. At March 31, 2005, the outstanding debt was $46,000, with interest rates ranging from 5.5% to 6.25%, and will be payable through January 2008. 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 they participate with other partnerships at March 31, 2005 and December 31, 2004 was approximately $89,000 and $137,000, respectively, which is included in the Partnership's fixed assets on their balance sheet, and the total cost of the equipment shared by the Partnership with other partnerships at March 31, 2005 and December 31, 2004 was approximately $1,741,000 and $1,859,000, respectively. The Partnership's share of the outstanding debt associated with this equipment at March 31, 2005 and December 31, 2004 was approximately $0 for both periods, and the total outstanding debt at March 31, 2005 and December 31, 2004 related to the equipment shared by the Partnership was approximately $0 and $1,000, respectively. During the period ended March 31, 2005 CCC, forgave payables owed to them by the Partnership in the amount of approximately $53,000. CCC has also made a capital contribution in the amount of approximately $70,000. The General Partner and CCC have forgiven amounts payable by the Partnership to them and have deferred payments on other amounts owing 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 March 31, 2005. 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 on a quarterly basis in 2005. 13 RESULTS OF OPERATIONS Three Months Ended March 31, 2005 compared to Three Months Ended March 31, 2004 For the quarter ended March 31, 2005, the Partnership recognized income of approximately $27,000 and expenses of approximately $64,000, resulting in a net loss of approximately $37,000. For the quarter ended March 31, 2004, the Partnership recognized income of approximately $54,000 and expenses of approximately $110,000, resulting in a net loss of approximately $55,000. Lease income decreased by 50% to approximately $27,000 for the quarter ended March 31, 2005, from approximately $54,000 for the quarter ended March 31, 2004, primarily due to the fact that more lease agreements ended than new lease agreements acquired since the quarter ended March 31, 2004. 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 258% to approximately $28,000 for the quarter ended March 31, 2005, from $7,000 for the quarter ended March 31, 2004, which is primarily attributable to an increase in accounting fees of approximately $8,000 and an increase in remarketing fees of approximately $8,000. 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 50% to approximately $1,000 for the quarter ended March 31, 2005, from approximately $3,000 for the quarter ended March 31, 2004, 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 42% to approximately $23,000 for the quarter ended March 31, 2005, from approximately $96,000 for the quarter ended March 31, 2004 due to equipment and acquisition fees being fully depreciated/amortized and not being replaced with as many new purchases. Included in the March 31, 2004 amount of $98,000 is a charge of approximately $28,000, which is to record assets at their estimated fair value. The Partnership sold computer equipment with a net book value of approximately $11,000 for the quarter ended March 31, 2005, for a net loss of approximately $10,000. The Partnership sold computer equipment with a net book value of approximately $2,000 for the quarter ended March 31, 2004, for a net gain of approximately $1,000. 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. 14 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 March 31, 2005. The Company'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 periods. Based upon this review, the Partnership's Chief Executive Officer and the a Financial Officer have concluded that the Partnership's disclosure controls (as defined in pursuant to Rule 13a-14 c 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. There have been no changes in the General Partner's internal controls or in other factors that could materially affect our disclosure controls and procedures in the quarter ended March 31, 2005, that have materially affected or are reasonably likely to materially affect the General Partner's internal controls over financial reporting. PART II: OTHER INFORMATION COMMONWEALTH INCOME & GROWTH FUND III Item 1. LEGAL PROCEEDINGS. N/A Item 2. CHANGES IN SECURITIES. N/A Item 3. DEFAULTS UPON SENIOR SECURITIES. N/A Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. N/A Item 5. OTHER INFORMATION. N/A 15 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 May 16, 2005 By: /s/ George S. Springsteen ------------ ------------------------- Date George S. Springsteen President 16

COMMONWEALTH INCOME & GROWTH FUND III 10-Q