<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, 1997
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: 33-89476
COMMONWEALTH INCOME & GROWTH FUND II
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2795120
(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>
Part I: FINANCIAL INFORMATION
Item 1: Financial Statements
Commonwealth Income & Growth Fund II
BALANCE SHEETS
<TABLE>
<CAPTION>
(AUDITED)
SEPTEMBER 30, DECEMBER 31,
1997 1996
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<S> <C> <C>
Assets
Cash and cash equivalents........................................................... $ 273,980 $2,552,352
Lease income receivable............................................................. 63,608 80,014
Other receivables and deposits...................................................... 7,268 19,551
Computer equipment, at cost......................................................... 11,237,487 4,780,075
Accumulated depreciation............................................................ (2,461,639) (1,093,535)
------------- ------------
8,775,848 3,686,540
Organization costs and deferred expenses,
net of accumulated amortization of
$186,353 in 1997 and $96,375 in 1996.............................................. 394,247 276,197
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Total assets........................................................................ $ 9,514,951 $6,614,654
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------------- ------------
Liabilities and partners' capital
Accounts payable.................................................................... $ 70,813 $ 92,954
Accounts payable--General Partner................................................... 82,770 --
Unearned lease income............................................................... 157,926 89,780
Computer equipment payable.......................................................... 856,301 --
Notes payable....................................................................... 1,468,098 --
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Total liabilities................................................................... 2,635,908 182,734
Partners' capital:
General partner.................................................................... 1,000 1,000
Limited partners................................................................... 6,878,043 6,430,920
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Total partners' capital............................................................. 6,879,043 6,431,920
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Total liabilities and partners' capital............................................. $ 9,514,951 $6,614,654
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</TABLE>
See accompanying notes.
<PAGE>
Commonwealth Income & Growth Fund II
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
---------- ---------- ------------ ----------
Income:
Lease......................................................... $ 757,629 $ 325,441 $ 1,601,976 $ 771,037
Interest and other............................................ 12,669 22,662 89,108 46,562
---------- ---------- ------------ ----------
770,298 348,103 1,691,084 817,599
Expenses:
Operating, excluding depreciation............................. 950 2,057 16,268 15,093
Equipment management fee--General Partner..................... 37,882 16,272 80,099 38,552
Interest...................................................... 9,942 -- 9,942 --
Depreciation.................................................. 666,605 283,753 1,393,627 698,953
Amortization of organization costs and deferred expenses...... 42,433 22,872 92,701 57,759
Loss on sale of computer equipment............................ -- -- 31,955 --
---------- ---------- ------------ ----------
757,812 324,954 1,624,592 810,357
---------- ---------- ------------ ----------
Net income..................................................... $ 12,486 $ 23,149 $ 66,492 $ 7,242
---------- ---------- ------------ ----------
---------- ---------- ------------ ----------
Net income per equivalent limited partnership unit............. $ 0.03 $ 0.07 $ 0.15 $ 0.03
---------- ---------- ------------ ----------
---------- ---------- ------------ ----------
Weighted average number of equivalent limited partnership units
outstanding during the period................................ 461,817 326,478 448,307 273,882
---------- ---------- ------------ ----------
---------- ---------- ------------ ----------
</TABLE>
See accompanying notes.
<PAGE>
Commonwealth Income & Growth Fund II
STATEMENT OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNER GENERAL LIMITED
UNITS UNITS PARTNER PARTNERS' TOTAL
--------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Partners' capital--December 31, 1995.............. 50 183,947 $ 1,000 $ 3,155,521 $ 3,158,521
Contributions.................................... 218,572 -- 4,371,440 4,371,440
Offering costs................................... -- (487,266) (487,266)
Net income (loss)................................ 6,080 (6,810) (730)
Distributions.................................... (6,080) (601,965) (608,045)
--------- ---------- ---------- ------------ ------------
Partners' capital--December 31, 1996.............. 50 402,519 1,000 6,430,920 6,431,920
Contributions.................................... 37,602 -- 752,040 752,040
Offering costs................................... -- (82,348) (82,348)
Net income....................................... 2,132 33,911 36,043
Distributions.................................... (2,132) (211,022) (213,154)
--------- ---------- ---------- ------------ ------------
Partners' capital--March 31, 1997................. 50 440,121 1,000 6,923,501 6,924,501
Contributions.................................... 21,696 -- 433,745 433,745
Offering costs................................... -- (47,332) (47,332)
Net income....................................... 2,291 15,672 17,963
Distributions.................................... (2,291) (226,788) (229,079)
--------- ---------- ---------- ------------ ------------
Partners' capital--June 30, 1997.................. 50 461,817 1,000 7,098,798 7,099,798
Net income....................................... 2,332 10,154 12,486
Distributions.................................... (2,332) (230,909) (233,241)
--------- ---------- ---------- ------------ ------------
Partners' capital--September 30, 1997............. 50 461,817 1,000 6,878,043 6,879,043
--------- ---------- ---------- ------------ ------------
--------- ---------- ---------- ------------ ------------
</TABLE>
See accompanying notes.
<PAGE>
Commonwealth Income & Growth Fund II
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Operating activities
Net income............................................................................. $ 66,492 $ 7,242
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization......................................................... 1,579,980 756,713
Loss on sale of computer equipment.................................................... 31,955 --
Other noncash activities included in the determination of net income.................. (217,562) (4,290)
Changes in operating assets and liabilities:
Lease income receivable............................................................... 16,406 (41,309)
Other receivables..................................................................... 12,283 (801)
Accounts payable...................................................................... (22,754) 20,187
Accounts payable--General Partner..................................................... 82,770 17,092
Equipment payable..................................................................... -- (7,076)
Unearned lease income................................................................. 68,146 36,997
----------- -----------
Net cash provided by operating activities.............................................. 1,617,716 784,755
Investing activities
Capital expenditures................................................................... (3,982,900) (1,513,990)
Payment of computer equipment payable.................................................. -- (148,141)
Net proceeds from sale of computer equipment........................................... 10,584 --
Increase in organization costs and deferred expenses................................... (106,102) (41,076)
Equipment acquisition fees paid to the General Partner................................. (181,669) (116,981)
----------- -----------
Net cash used in investing activities.................................................. (4,260,087) (1,820,188)
Financing activities
Partners' contributions................................................................ 1,185,785 3,468,260
Offering costs......................................................................... (129,680) (388,698)
Distributions to partners.............................................................. (675,474) (414,216)
Debt placement fees paid to the General Partner........................................ (16,632) --
----------- -----------
Net cash provided by financing activities.............................................. 363,999 2,665,346
----------- -----------
Net increase (decrease) in cash and cash equivalents................................... (2,278,372) 1,629,913
Cash and cash equivalents at beginning of period....................................... 2,552,352 251,776
----------- -----------
Cash and cash equivalents at end of period............................................. $ 273,980 $ 1,881,689
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
<PAGE>
Commonwealth Income & Growth Fund II
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
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 I (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, 1996.
NET INCOME PER EQUIVALENT LIMITED PARTNERSHIP UNIT
The net income per equivalent limited partnership unit is computed based
upon net income allocated to the limited partners and the weighted average
number of equivalent units outstanding during the period.
<PAGE>
Commonwealth Income & Growth Fund II
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 September 22, 1995. On that date, subscribers for 126,118 Units
were admitted as Limited Partners of the Partnership. On May 12, 1997, the
Partnership terminated its offering of Units with 461,817 ($9,235,185) Units
sold.
The Partnership's primary sources of capital for the nine months ended
September 30, 1997 and 1996, were from Partners' contributions of $1,186,000
and $3,468,000, respectively, and cash from operations for the quarter ended
September 30, 1997 and 1996 of $1,618,000 and $785,000 respectively. The
primary uses of cash for the nine months ended September 30, 1997 and 1996
were for capital expenditures for new equipment totaling $3,983,000 and
$1,514,000, respectively, the payment of offering costs of $130,000 and
$389,000, respectively, the payment of preferred distributions to partners of
$675,000 and $414,000 respectively, and the payment of acquisition fees of
$182,000 and $117,000 respectively. For the nine months ended September 30,
1996, the Partnership made a payment of accounts payable of $148,000 to Com
Cap Corp. for the purchase of Equipment.
Currently, Partners' contributions and rental income 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, 1997 and December 31,
1996 the Partnership had approximately $274,000 and $2,552,000, 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, 1997, the Partnership had future minimum
rentals on noncancellable operating leases of $878,000 for the year ending
December 31, 1997 and $5,286,000 thereafter. During the nine month period
ended September 30, 1997, the Partnership incurred debt in connection with
the purchase of computer equipment totaling $1,663,000. At September 30,
1997, the outstanding debt was $1,468,000, with interest rates ranging from
7.47% to 8.20%, and will be payable through July 2000.
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, 1997, the Partnership recognized
income of $770,000 and expenses of $758,000, resulting in net income of
$12,000. For the quarter ended June 30, 1997, the Partnership recognized
income of $516,000 and expenses of $498,000, resulting in net income of
$18,000. For the quarter ended March 31, 1997, the Partnership recognized
income of $405,000 and expenses of $369,000, resulting in net income of
$36,000.
Lease income increased by 133% from $325,000 for the quarter ended
September 30, 1996 to $758,000 for the quarter ended September 30, 1997,
primarily due to utilizing cash available from Partners' contributions for
the purchase of Equipment, which in turn generated more lease income. During
the nine months ended September 30, 1997, the Partnership expended $3,983,000
and assumed debt and equipment payable of $2,520,000 to acquire ten leases,
which generated approximately $228,000 in revenue.
<PAGE>
Commonwealth Income & Growth Fund II
Interest income decreased 43% from $23,000 for the quarter ended
September 30, 1996 to $13,000 for the quarter ended September 30, 1997. This
decrease is the result of capital contributions being utilized for equipment
purchases.
Operating expenses, excluding depreciation, primarily consist of
accounting, legal, and outside service fees. The expense decreased 50% from
approximately $2,000 for the quarter ended September 30, 1996 to $1,000 for
the quarter ended September 30, 1997.
The equipment management fee is equal to 5% of the gross lease revenue
attributable to equipment which is subject to operating leases. The equipment
management fee increased 138% from approximately $16,000 for the quarter
ended September 30, 1996, to $38,000 for the quarter ended September 30,
1997, which is consistent with the increase in lease income.
Depreciation and amortization expenses consist of depreciation on
computer equipment, amortization of organizational costs, and equipment
acquisition fees. The expenses increased 131% from approximately $307,000 for
the quarter ended September 30, 1996, to $709,000 for the quarter ended
September 30, 1997, which is attributable to the purchase of approximately
$6,525,000 in additional equipment.
For the nine month period ended September 30, 1997, the Partnership
generated cash flow from operating activities of $1,618,000, which includes
net income of $66,000, and depreciation and amortization expenses of
$1,580,000. Other noncash activities included in the determination of net
income includes direct payments of lease income by lessees to banks of
$196,000 and lease income paid to original lessors in lieu of cash payments
for computer equipment of $22,000.
For the nine month period ended September 30, 1996, the Partnership
generated cash flows from operating activities of $785,000, which includes
net income of $7,000, and depreciation and amortization expenses of $757,000.
Other noncash activities included in the determination of net income includes
lease income paid to original lessors in lieu of cash payments for computer
equipment of $4,000.
<PAGE>
Commonwealth Income & Growth Fund II
Part II: OTHER INFORMATION
<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 II
BY: COMMONWEALTH INCOME & GROWTH
FUND, INC. General Partner
By:
____________________ _____________________________
Date David A. Kintzer, CPA
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 273,980
<SECURITIES> 0
<RECEIVABLES> 70,876
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 394,247
<PP&E> 11,237,487
<DEPRECIATION> (2,461,639)
<TOTAL-ASSETS> 9,514,951
<CURRENT-LIABILITIES> 2,635,908
<BONDS> 0
0
0
<COMMON> 6,879,043
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 9,514,951
<SALES> 0
<TOTAL-REVENUES> 1,691,084
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,614,650
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,942
<INCOME-PRETAX> 66,492
<INCOME-TAX> 0
<INCOME-CONTINUING> 66,492
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,492
<EPS-PRIMARY> .15
<EPS-DILUTED> 0
</TABLE>
