<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 September 30, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
------------ -------------
Commission File Number: 33-69996
COMMONWEALTH INCOME & GROWTH FUND III
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2735641
(State or other jurisdiction of (I.R.S. Employer identification No.)
incorporation or organization)
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 (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days:
YES [ X ] NO [ ]
<PAGE>
COMMONWEALTH INCOME & GROWTH III
BALANCE SHEETS
<TABLE>
<CAPTION>
(AUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $258,217 $507,193
Lease income receivable 71,465 65,729
Other receivables and deposits 9,371 1,912
Computer equipment, at cost 3,219,101 1,453,742
Accumulated depreciation (736,138) (238,240)
---------- ----------
2,482,963 1,215,502
Equipment acquisition costs and deferred expenses,
net of accumulated amortization of $47,295 in
1999 and $20,779 in 1998 95,136 51,748
Organization costs, net of accumulated amortization
of $7,919 in 1999 and $4,248 in 1998 18,706 18,252
---------- ----------
Total Assets $2,935,858 $1,860,336
---------- ----------
---------- ----------
LIABILITIES AND PARTNERS' EQUITY
Accounts payable $39,479 $38,355
Accounts payable - General Partner -- 349
Unearned lease income 43,494 52,192
Notes payable 1,080,411 8,442
---------- ----------
TOTAL LIABILITIES 1,163,384 99,338
Partners' capital:
General partner 1,000 1,000
Limited partner 1,771,474 1,759,998
---------- ----------
Total partners' capital 1,772,474 1,760,998
---------- ----------
Total Liabilities and partners' equity $2,935,858 $1,860,336
---------- ----------
---------- ----------
</TABLE>
See accompanying notes
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------------- -------------------
<S> <C> <C> <C> <C>
Income:
Lease $ 266,838 $123,607 608,837 $ 185,922
Interest and other 4,789 5,412 12,106 32,349
--------- --------- --------- ---------
271,627 129,019 620,943 218,271
Expenses:
Operating, excluding depreciation 89,133 26,187 144,580 29,376
Equipment management fee - General Partner 14,541 6,180 33,714 9,296
Interest 20,917 -- 31,414 --
Depreciation 245,890 108,165 497,898 149,054
Amortization of organization costs, equipment
acquisition costs and deferred expenses 7,569 6,915 46,988 18,037
--------- --------- --------- ---------
378,050 147,447 754,594 205,763
--------- --------- --------- ---------
Net income (loss) $(106,423) $(18,428) $(133,651) $ 12,508
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per equivalent limited
partnership unit $ (0.39) $ (0.18) $ (0.38) $ 0.13
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted Average number of equivalent limited
partnership units outstanding during the period 275,921 102,690 352,979 99,208
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
PARTNER UNITS GENERAL LIMITED
GENERAL LIMITED PARTNER PARTNER TOTAL
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Initial contribution - January 27, 1998 50 25 $ 1,000 $ 500 $ 1,500
Contributions 107,117 2,142,340 2,142,340
Offering costs (234,641) (234,641)
Net income 1,691 16,559 18,250
Distributions (1,691) (164,760) (166,451)
---------- --------- -------- ---------- ----------
Partners' capital - December 31, 1998 50 107,142 1,000 1,759,998 1,760,998
Contributions 19,218 356,915 356,915
Offering costs (40,174) (40,174)
Net income (loss) 1,680 (133,651) (131,971)
Distributions (1,680) (171,614) (173,294)
---------- --------- -------- ---------- ----------
Partners' capital September 30, 1999 50 126,360 $ 1,000 $1,771,474 $1,772,474
</TABLE>
See accompanying notes
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
AND
FROM JANUARY 27, 1998 (COMMENCEMENT OF OPERATIONS) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Operating activities
Net Income (133,651) 12,508
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 544,886 167,091
Other noncash activities included in
determination of net income (246,591) (14,703)
Changes in operating assets and liabilities:
(Increase) decrease in lease income receivable (23,499) 47,966
(Increase) decrease in other receivables (6,966) 2,405
Increase (decrease) in accounts payable 17,436 22,043
Increase (decrease) in accounts payable -
Commonwealth Capital Corp. -- (2,625)
Increase (decrease) in accounts payable -
General Partner -- (3,616)
Increase (decrease) in unearned lease income 15,270 28,228
Organization cost paid to the General Partner -- (22,822)
---------- ------------
Net cash provided by operating activities 166,885 236,475
---------- ------------
Investing activities:
Capital expenditures (507,335) (1,372,178)
Equipment acquisition fees paid to General Partner (66,236) (70,452)
---------- ------------
Net cash provided by investing activities (573,571) (1,442,630)
Financing activities:
Partners' contributions 2,527,203 2,082,527
Offering costs (350,337) (205,105)
Debt placement fees paid to General Partner -- (22,822)
Distributions to partners (342,430) (118,098)
---------- ------------
Net cash used by financing activities 1,834,436 1,736,502
---------- ------------
Net increase (decrease) in cash and equivalents (206,829) (465,046)
Cash and cash equivalents, beginning of year 507,193 -
---------- ------------
Cash and cash equivalents, end of year 258,217 448,718
---------- ------------
---------- ------------
</TABLE>
See accompanying notes
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
BASIS OF PRESENTATION
The financial information presented as of 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, 1998.
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.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Partnership satisfied its minimum offering requirements and commenced
operations on January 27, 1998. On that date, subscribers for 76,284 Units
were admitted as Limited Partners of the Partnership. Through September 30,
1999, subscribers owning an additional 50,076 Units were admitted as Limited
Partners.
The Partnership's primary sources of capital for the nine months ended
September 30, 1999 and 1998 were from Partners' contributions of $356,000 and
$2,081,000, respectively. The primary uses of cash for the nine months ended
September 30, 1999 and 1998 were for the payment of offering costs of
$350,000 and $205,000, respectively, the payment of preferred distributions
to partners of $171,000 and $47,000, respectively, the payment of acquisition
fees of $66,000 and $70,000, respectively, and capital expenditures of
$507,000 for the purchase of computer equipment for the nine months ended
September 30, 1999.
Currently, Partners' contributions from the Partnership's leases are invested
in money market accounts investing 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 September 30, 1999 and December 31, 1998 the Partnership had
approximately $258,000 and $507,000, respectively, 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 September 30, 1999, the Partnership had future minimum
rentals on noncancellable operating leases of $956,000 for the year ending
December 31, 1999 and $3,400,000, thereafter. The Partnership intends to
continue purchasing additional computer equipment with existing cash, as well
as when future cash becomes available.
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 September 30, 1999, the Partnership recognized income
of $271,000 and expenses of $378,000, resulting in net loss of $106,000. For
the quarter ended June 30, 1999, the Partnership recognized income of
$191,000, and expenses of $202,000, resulting in net loss of $11,000.
During the nine months ended September 30, 1999, the Partnership expended
$507,000 and assumed debt of $1,543,000 to acquire five leases, which
generated approximately $78,000 in revenue.
Interest income increased 18% from $4,000 for the quarter ended June 30, 1999
to $4,700 for the quarter ended September 30, 1999, primarily due to improved
cash management.
Operating expenses, excluding depreciation, primarily consist of accounting,
legal and outside service fees. The expense for the nine months ended
September 30, 1999 was approximately $89,000.
The equipment management fee is equal to 5% of the gross lease revenue
attributable to equipment, which is subject to operating leases. The expense
for the nine months ended September 30, 1999, was approximately $34,000.
Depreciation and amortization expenses consist of depreciation on computer
equipment, amortization of organizational costs, and equipment acquisition
fees. The expense for the nine months ended September 30, 1999, was
approximately $528,000.
For the three month period ended September 30, 1999, the Partnership
generated cash flow from operating activities of $167,000, which includes net
loss of $133,000, and depreciation and amortization expenses of $544,000.
Other noncash activities included in the determination of net income include
direct payments of lease income by lessees to banks of $246,000.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
YEAR 2000 ISSUE
The Partnership and the General Partner are not responsible for ensuring that
the computer peripheral equipment that it leases to customers if Year 2000
compliant, however, this equipment may be subject to declines in value or
technological obsolescence. Management has considered these factors in
determining the recovery of its equipment at September 30, 1999, in
accordance with FASB Statement No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-lived Assets to be Disposed Of". Based on its
current assessment, the Partnership does not believe that the reduction in
carrying values of equipment, if any, due to the Year 2000 issues, will have
a significant effect on operations.
Based on recent assessments, the General Partner has determined that it will
be required to modify or replace portions of its own system so that its
operation will function properly with respect to dates in the year 2000 and
thereafter. The General Partner presently believes that with modifications to
existing software and conversions to new software, the Year 2000 issue will
not pose significant operational problems for its computer system. The
General Partner expects that its modifications will be completely operational
by end of 1999 and a percentage of these costs will be charged to the
Partnership. As of September 30, 1999, the General Partner has not incurred
any significant expenses.
<PAGE>
Part II: OTHER INFORMATION
COMMONWEALTH INCOME & GROWTH FUND III
<TABLE>
<S> <C>
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
</TABLE>
<PAGE>
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. Sprinsteen
President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS
FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR TO DATE
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 258,217
<SECURITIES> 0
<RECEIVABLES> 80,836
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 113,842
<PP&E> 3,219,101
<DEPRECIATION> (736,138)
<TOTAL-ASSETS> 2,935,858
<CURRENT-LIABILITIES> 1,163,388
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,772,474
<TOTAL-LIABILITY-AND-EQUITY> 2,935,862
<SALES> 0
<TOTAL-REVENUES> 620,943
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 723,180
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,414
<INCOME-PRETAX> (133,651)
<INCOME-TAX> 0
<INCOME-CONTINUING> (133,651)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (133,651)
<EPS-BASIC> (.38)
<EPS-DILUTED> 0
</TABLE>
