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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
    
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
  FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
 
    
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 incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
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 (III) has been subject to such filing requirements for the past 90 days:
 
YES      NO  
 
 
Commonwealth Income & Growth Fund III
Balance Sheets
 
 
 
September 30,
2003
 
December 31,
2002
 
 
 
 
 
 
 
(unaudited)
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
1,175
 
$
497
 
Lease income receivable, net of allowance for doubtful accounts reserve of $28,100 as of September 30, 2003 and December 31, 2002
 
 
17,866
 
 
14,161
 
Prepaid expenses
 
 
1,500
 
 
—
 
 
 
 
 
 
 
 
20,541
 
 
14,658
 
 
 
 
 
Computer equipment, at cost
 
 
1,960,853
 
 
2,840,949
 
Accumulated depreciation
 
 
(1,566,954
)
 
(2,108,544
)
 
 
 
 
 
 
 
393,899
 
 
732,405
 
 
 
 
 
Equipment acquisition costs and deferred expenses, net
 
 
9,241
 
 
19,170
 
 
 
 
 
Total assets
 
$
423,681
 
$
766,233
 
 
 
 
 
Liabilities and Partners’ Capital
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Accounts payable
 
$
28,998
 
$
31,149
 
Accounts payable - affiliated limited partnerships
 
 
24,707
 
 
2,173
 
Accounts payable - General Partner
 
 
126,879
 
 
59,116
 
Accounts payable - Commonwealth Capital Corp.
 
 
112,483
 
 
54,451
 
Unearned lease income
 
 
2,528
 
 
37,262
 
Notes payable
 
 
126,185
 
 
253,767
 
 
 
 
 
Total liabilities
 
 
421,780
 
 
437,918
 
 
 
 
 
Partners’ Capital
 
 
 
 
 
 
 
General partner
 
 
1,000
 
 
1,000
 
Limited partners
 
 
901
 
 
327,315
 
 
 
 
 
Total partners’ capital
 
 
1,901
 
 
328,315
 
 
 
 
 
Total liabilities and partners’ capital
 
$
423,681
 
$
766,233
 
 
 
 
 
 
see accompanying notes to financial statements
 
Commonwealth Income & Growth Fund III
Statements of Operations
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
 
2003
 
2002
 
2003
 
2002
 
 
 
 
 
 
 
 
 
(unaudited)
 
(unaudited)
 
Income
 
 
 
 
 
 
 
 
 
 
 
 
 
Lease
 
$
77,429
 
$
178,603
 
$
324,404
 
$
635,446
 
Interest and other
 
 
32
 
 
67
 
 
67
 
 
317
 
Gain (loss) on sale of computer equipment
 
 
13,861
 
 
(4,505
)
 
17,177
 
 
4,612
 
 
 
 
 
 
 
Total income
 
 
91,322
 
 
174,165
 
 
341,648
 
 
640,375
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating, excluding depreciation
 
 
30,516
 
 
77,275
 
 
144,035
 
 
204,204
 
Equipment management fee - General Partner
 
 
3,871
 
 
8,931
 
 
16,220
 
 
31,773
 
Interest
 
 
2,559
 
 
6,231
 
 
10,073
 
 
17,079
 
Depreciation
 
 
76,011
 
 
163,398
 
 
294,710
 
 
537,202
 
Amortization of equipment acquisition costs and deferred expenses
 
 
2,445
 
 
5,714
 
 
9,929
 
 
22,324
 
Uncollectible accounts receivable
 
 
—
 
 
6,035
 
 
—
 
 
30,011
 
 
 
 
 
 
 
Total expenses
 
 
115,402
 
 
267,584
 
 
474,967
 
 
842,593
 
 
 
 
 
 
 
Net (loss)
 
$
(24,080
)
$
(93,419
)
$
(133,319
)
$
(202,218
)
 
 
 
 
 
 
Net (loss) per equivalent limited partnership unit
 
$
(0.16
)
$
(0.62
)
$
(0.88
)
$
(1.34
)
 
 
 
 
 
 
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 Nine Months ended September 30, 2003
 
 
 
(unaudited)
 
 
 
General
Partner
Units
 
Limited
Partner
Units
 
General
Partner
 
Limited
Partner
 
Total
 
 
 
 
 
 
 
 
Partners’ capital - December 31, 2002
 
 
50
 
 
151,178
 
$
1,000
 
$
327,315
 
$
328,315
 
Net income (loss)
 
 
 
 
 
 
 
 
2,349
 
 
(135,668
)
 
(133,319
)
Forgiveness of payables recorded as capital contributions
 
 
 
 
 
 
 
 
45,028
 
 
—
 
 
45,028
 
Transfer of partners’ capital
 
 
 
 
 
 
 
 
(45,028
)
 
45,028
 
 
—
 
Distributions
 
 
 
 
 
 
 
 
(2,349
)
 
(235,774
)
 
(238,123
)
 
 
 
 
 
 
 
Partners’ capital - September 30, 2003
 
 
50
 
 
151,178
 
$
1,000
 
$
901
 
$
1,901
 
 
 
 
 
 
 
 
 
see accompanying notes to financial statements
 
Commonwealth Income & Growth Fund III
Statements of Cash Flow
For the Nine Months Ended September 30, 2003 and 2002
 
 
 
2003
 
2002
 
 
 
 
 
 
 
(unaudited)
 
Operating activities
 
 
 
 
 
 
 
Net (loss)
 
$
(133,319
)
$
(202,218
)
Adjustments to reconcile net (loss) to net cash provided by operating activities
 
 
 
 
 
 
 
Depreciation and amortization
 
 
304,639
 
 
559,526
 
(Gain) on sale of computer equipment
 
 
(17,177
)
 
(4,612
)
Other noncash activities included in determination of net (loss)
 
 
(127,582
)
 
(255,347
)
Changes in assets and liabilities
 
 
 
 
 
 
 
(Increase) decrease in assets
 
 
 
 
 
 
 
Lease income receivable
 
 
(3,705
)
 
17,809
 
Prepaid expenses
 
 
(1,500
)
 
(3,000
)
Increase (decrease) in liabilities
 
 
 
 
 
 
 
Accounts payable
 
 
(2,151
)
 
3,261
 
Accounts payable, General Partner
 
 
76,268
 
 
(67,701
)
Accounts payable, Common Capital Corp.
 
 
94,555
 
 
(706
)
Accounts payable, affiliated limited partnerships
 
 
22,534
 
 
(1,440
)
Unearned lease income
 
 
(34,734
)
 
58,572
 
 
 
 
 
Net cash provided by operating activities
 
 
177,828
 
 
104,144
 
 
 
 
 
Investing activities:
 
 
 
 
 
 
 
Capital expenditures
 
 
—
 
 
(64,989
)
Net proceeds from the sale of computer equipment
 
 
60,973
 
 
208,752
 
Equipment acquisition fees paid to General Partner
 
 
—
 
 
(11,416
)
 
 
 
 
Net cash provided by investing activities
 
 
60,973
 
 
132,347
 
 
 
 
 
Financing activities:
 
 
 
 
 
 
 
Distributions to partners
 
 
(238,123
)
 
(238,124
)
Debt Placement fee paid to the General Partner
 
 
—
 
 
(2,204
)
 
 
 
 
Net cash (used in) financing activities
 
 
(238,123
)
 
(240,328
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
 
678
 
 
(3,837
)
Cash and cash equivalents, beginning of period
 
 
497
 
 
5,105
 
 
 
 
 
Cash and cash equivalents, end of period
 
$
1,175
 
$
1,268
 
 
 
 
 
 
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.
Summary of
Significant
Accounting
Policies
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 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, 2002.  Operating results for the nine-month period ended September 30, 2003 are not necessarily indicative of financial results that may be expected for the full year ended December 31, 2003.
 
 
 
 
Revenue Recognition
 
Through September 30, 2003, 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 September 30, 2003, 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-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.
 
 
 
3.
Computer
Equipment
The Partnership is the lessor of equipment under operating 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 they participate with other partnerships at September 30, 2003 and December 31, 2002 was approximately $277,000 for both periods, 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 September 30, 2003 and December 31, 2002 was approximately $2,156,000 for both periods.  The Partnership’s share of the outstanding debt associated with this equipment at September 30, 2003 and December 31, 2002 was approximately $61,000 and $129,000, respectively, which is included in the Partnership’s liabilities on the balance sheet, and
 
 
 
 
the total outstanding debt at September 30, 2003 and December 31, 2002 related to the equipment shared by the Partnership was approximately $686,000 and $1,197,000, respectively.
 
 
 
 
 
The following is a schedule of future minimum rentals on noncancellable operating leases at September 30, 2003:
 
 
 
Amount
 
 
 
 
Three Months ended December 31, 2003
 
$
62,000
 
Year Ended December 31, 2004
 
 
109,000
 
Year Ended December 31, 2005
 
 
14,000
 
 
 
 
 
 
$
185,000
 
 
 
 
 
4.
Related Party
Transactions
Forgiveness of Related Party Payables
 
During the three months ended September 30, 2003, the General Partner and one of its affiliates, CCC, forgave payables owed to them by the Partnership in the amount of approximately $45,000.  Such amount has been recorded as a contribution to capital.  The General Partner has forgiven sales fees of approximately $8,500.  Also, CCC has forgiven direct reimbursements approximately $36,500. 
 
5.
Notes Payable
Notes payable consisted of the following:
 
 
 
September 30,
2003
 
 
December 31,
2002
 
 
 
 
 
Installment notes were payable to banks; interest ranging from 7.35% to 8.10%; due in monthly installments ranging from $1,162 to $3,465 including interest through June 2003.
 
$
—
 
$
26,968
 
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.
 
 
62,658
 
 
133,292
 
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.
 
 
63,527
 
 
93,507
 
 
 
 
 
 
 
$
126,185
 
$
253,767
 
 
 
 
 
 
 
 
 
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 September 30, 2003 are as follows:
 
 
 
Amount
 
 
 
 
Three months ended December 31, 2003
 
$
34,748
 
Year ended December 31, 2004
 
 
81,135
 
Year ended December 31, 2005
 
 
10,302
 
 
 
 
 
 
$
126,185
 
 
 
 
 
6.
Supplemental
Cash Flow
Information
Other noncash activities included in the determination of net loss are as follows:
 
Nine months ended September 30,
 
2003
 
2002
 
 
 
 
Lease income, net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank
 
$
127,582
 
$
255,347
 
 
 
 
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 operating, investing and financing activities include the following:
 
Nine months ended September 30,
 
2003
 
2002
 
 
 
 
Forgiveness of related party payables recorded as a capital contribution
 
$
45,028
 
$
—
 
 
 
 
 
Debt assumed in connection with purchase of computer equipment
 
$
—
 
$
220,413
 
 
 
 
 
 
 
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 1 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 September 30, 2003, 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 nine months ended September 30, 2003 and 2002 were cash from operations of $178,000 and $104,000, respectively, and net proceeds received from sales of equipment of approximately $61,000 and $209,000, respectively.  The primary uses of cash for the nine months ended September 30, 2003 and 2002 was for payments of preferred distributions to partners of approximately $238,000 for both periods, and for the purchase of new computer equipment of
 
approximately $65,000 for the period ending September 30, 2002.  There was no new equipment purchased in 2003.
 
During the three months ended September 30, 2003, the General Partner and one of its affiliates, CCC, forgave payables owed to them by the Partnership in the amount of approximately $45,000.  Such amount has been recorded as a contribution to capital. 
 
For the period ending September 30, 2003, the Partnership generated cash flow from operating activities of $178,000, which includes net loss of $133,000, a gain on sale of equipment totaling $17,000 and depreciation and amortization expenses of $305,000. Other noncash activities included in the determination of net income include direct payments of lease income by lessees to banks of $128,000.
 
For the nine month period ended September 30, 2002, the Partnership generated cash flows from operating activities of $104,000, which includes a net loss of $202,000, a gain on sale of equipment totaling $5,000, and depreciation and amortization expenses of $560,000. Other noncash activities included in the determination of net loss include direct payments of lease income by lessees to banks of $255,000.
 
The Partnership sold computer equipment for the nine months ending September 30, 2003 with a net book value of approximately $44,000 for a net gain on sale of equipment of approximately $17,000.  For the period ended September 30, 2002, the Partnership sold computer equipment with a net book value of approximately $204,000 for a gain on sale of equipment of approximately $5,000.
 
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 September 30, 2003, the Partnership had future minimum rentals on non-cancelable operating leases of $62,000 for the balance of the year ending December 31, 2003 and $123,000 thereafter.  At September 30, 2003, the outstanding debt was $126,000, with interest rates ranging from 6.25% to 8.00%, and will be payable through April 2005.
 
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 September 30, 2003 and December 31, 2002 was approximately $277,000 for both periods, 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 September 30, 2003 and December 31, 2002 was approximately $2,156,000 for both periods.  The Partnership’s share of the outstanding debt associated with this equipment at September 30, 2003 and December 31, 2002 was approximately
 
$61,000 and $129,000, respectively, which is included in the Partnership’s liabilities on the balance sheet, and the total outstanding debt at September 30, 2003 and December 31, 2002 related to the equipment shared by the Partnership was approximately $686,000 and $1,197,000, respectively.
 
Results of Operations
 
Three Months Ended September 30, 2003 compared to Three Months Ended September 30, 2002
 
For the quarter ended September 30, 2003, the Partnership recognized income of $91,000 and expenses of $115,000, resulting in a net loss of $24,000.   For the quarter ended September 30, 2002, the Partnership recognized income of $174,000 and expenses of $267,000, resulting in a net loss of $93,000.  
 
Lease income decreased by 57% to $77,000 for the quarter ended September 30, 2003, from $179,000 for the quarter ended September 30, 2002, primarily due to the fact that more lease agreements ended than new lease agreements acquired since the quarter ended September 30, 2002.
 
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.  The expenses decreased 61% to approximately $31,000 for the quarter ended September 30, 2003, from $77,000 for the quarter ended September 30, 2002, which is primarily attributable to a decrease in the amount charged by CCC, a related party, to the Partnership for the administration and operation of approximately $22,000, a decrease in accounting fees of approximately $2,000, a decrease in conventions of approximately $2,000, a decrease in due diligence of approximately $3,000, a decrease in insurance of approximately $3,000 and a decrease in miscellaneous office services of approximately $14,000.
 
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 57% to approximately $4,000 for the quarter ended September 30, 2003, from $9,000 for the quarter ended September 30, 2002, 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 54% to approximately $78,000 for the quarter ended September 30, 2003, from $169,000 for the quarter ended September 30, 2002 due to equipment and acquisition fees being fully depreciated/amortized and not being replaced with as many new purchases.
 
The partnership did not record bad debt expenses for the quarter ended September 30, 2003.  The Partnership recorded bad debt expenses of approximately $6,000 related to disputed accounts receivables balances for the quarter ended September 30, 2002.
 
The Partnership sold computer equipment with a net book value of $9,000 for the quarter ended September 30, 2003, for a net gain of $14,000.  The Partnership sold computer
 
equipment with a net book value of approximately $21,000 for the quarter ended September 30, 2002, for a net loss of $5,000. 
 
Interest expense decreased 59% to $3,000 for the quarter ended September 30, 2003 from $6,000 for the quarter ended September 30, 2002, primarily due to the decrease in debt relating to the purchase of computer equipment.
 
Nine Months Ended September 30, 2003 compared to Nine Months Ended September 30, 2002
 
For the nine months ended September 30, 2003, the Partnership recognized income of $342,000 and expenses of $475,000, resulting in a net loss of $133,000.   For the nine months ended September 30, 2002, the Partnership recognized income of $640,000 and expenses of $842,000, resulting in a net loss of $202,000.  
 
Lease income decreased by 49% to $324,000 for the nine months ended September 30, 2003, from $635,000 for the nine months ended September 30, 2002, primarily due to the fact that more lease agreements ended than new lease agreements acquired since the nine months ended September 30, 2002.
 
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.  The expenses decreased 29% to approximately $144,000 for the nine months ended September 30, 2003, from $204,000 for the nine months ended September 30, 2002, which is primarily attributable to a decrease in the amount charged by CCC, a related party, to the Partnership for the administration and operation of approximately $14,000, a decrease of miscellaneous office expenses of approximately $10,000, a decrease in remarketing fees of approximately $2,000, a decrease in conventions of approximately $6,000, a decrease in due diligence of approximately $5,000 and a decrease in accounting fees of approximately $23,000.
 
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 49% to approximately $16,000 for the nine months ended September 30, 2003, from $32,000 for the nine months ended September 30, 2002, 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 46% to approximately $305,000 for the nine months ended September 30, 2003, from $560,000 for the nine months ended September 30, 2002 due to equipment and acquisition fees being fully depreciated/amortized and not being replaced with as many new purchases.
 
The partnership did not record bad debt expense for the quarter ended September 30, 2003.  The Partnership recorded bad debt expenses of approximately $30,000 related to disputed accounts receivables balances for the quarter ended September 30, 2002.
 
The Partnership sold computer equipment with a net book value of $44,000 for the nine months ended September 30, 2003, for a net gain of $17,000.  The Partnership sold
 
computer equipment with a net book value of $204,000 for the nine months ended September 30, 2002, for a net gain of $5,000. 
 
Interest expense decreased 41% to $10,000 for the nine months ended September 30, 2003 from $17,000 for the nine months ended September 30, 2002, 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 September 30, 2003.
 
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.
 
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
 
 
 
 
November 10, 2003
 
 
By: /s/ GEORGE S. SPRINGSTEEN
Date
 
 
George S. Springsteen
 
 
 
President