<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 June 30, 1998
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)
June 30, December 31,
1998 1997
--------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 246,001 $ 258,167
Lease income receivable 402,100 113,500
Accounts receivable - General Partner 17,587 15,821
Interest and other receivables 32,900 100
--------------------------------------------------------
698,588 387,588
Computer equipment, at cost 13,388,047 11,764,757
Accumulated depreciation (4,711,603) (3,175,757)
--------------------------------------------------------
8,676,444 8,589,000
Organization costs and deferred expenses, net of
accumulated amortization of $330,408 for 1998
and $232,708 for 1997 361,016 379,821
--------------------------------------------------------
Total assets $ 9,736,048 $ 9,356,409
--------------------------------------------------------
--------------------------------------------------------
Liabilities and partners' capital
Accounts payable $ 87,789 $ 96,326
Accounts payable - Commonwealth Capital Corp. - 68,265
Unearned lease income 178,617 217,503
Payables for computer equipment 719,596 502,721
Notes payable 2,524,836 1,954,120
--------------------------------------------------------
Total liabilities 3,510,838 2,838,935
Partners' capital:
General partner 1,000 1,000
Limited partners 6,224,210 6,516,474
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Total partners' capital 6,225,210 6,517,474
--------------------------------------------------------
Total liabilities and partners' capital $ 9,736,048 $ 9,356,409
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
See accompanying notes.
<PAGE>
Commonwealth Income & Growth Fund II
Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
--------------------------------------------------
<S> <C> <C> <C> <C>
Income:
Lease $1,144,671 $ 476,392 $2,064,505 $ 844,347
Interest & other 3,478 39,484 7,852 76,439
--------------------------------------------------
1,148,149 515,876 2,072,357 920,786
Expenses:
Operating, excluding depreciation 18,079 13,000 27,926 15,318
Equipment management fee - General Partner 57,234 23,819 103,225 42,217
Interest 55,336 0 79,255 0
Depreciation 815,104 408,373 1,585,784 727,022
Amortization of organization costs and deferred
expenses 50,890 20,766 100,896 50,268
Loss on sale of computer equipment 1,053 31,955 1,053 31,955
--------------------------------------------------
997,696 497,913 1,898,139 866,780
--------------------------------------------------
Net income $ 150,453 $ 17,963 $ 174,218 $ 54,006
--------------------------------------------------
--------------------------------------------------
Net income per equivalent limited partnership unit $ 0.33 $ 0.04 $ 0.38 $ 0.12
--------------------------------------------------
--------------------------------------------------
Weighted average number of equivalent limited
partnership units outstanding during the periods 454,824 454,824 454,824 441,440
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</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 Partner Total
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Partners' capital - December 31, 1995 50 183,947 $ 1,000 $3,155,521 $3,156,521
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 -- 59,298 -- 1,185,785 1,185,785
Offering costs -- (129,680) (129,680)
Net income (loss) 9,087 (70,924) (61,837)
Distributions (9,087) (899,627) (908,714)
--------------------------------------------------------------
Partners' capital - December 31, 1997 50 461,817 1,000 6,516,474 6,517,474
Net income 2,332 21,433 23,765
Distributions (2,332) (230,909) (233,241)
--------------------------------------------------------------
Partners' capital - March 31, 1998 50 461,817 1,000 6,306,998 6,307,998
Net income 2,332 148,121 150,453
Distributions (2,332) (230,909) (233,241)
--------------------------------------------------------------
Partners' capital - June 30, 1998 50 461,817 $ 1,000 $6,224,210 $6,225,210
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>
<PAGE>
Commonwealth Income & Growth Fund II
Statements of Cash Flows
For the Six Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------------------------
<S> <C> <C>
Net income $ 174,218 $ 54,006
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,686,680 777,290
Loss on sale of computer equipment 1,054 31,955
Other non-cash activities included in determination of
net income (614,311) (77,968)
Changes in operating assets and liabilities:
Lease income receivables (288,600) (36,997)
Interest and other receivables (34,566) (71,892)
Accounts payable (8,537) (36,771)
Accounts payable - Commonwealth Capital Corp. (68,265) -
Unearned lease income (38,886) 5,102
Organization cost paid to the General Partner - (12,451)
----------------------------
Net cash provided by operating activities 808,787 632,274
Investing activities
Capital expenditures (301,289) (1,077,466)
Net proceeds from sale of computer equipment 28,909 10,585
Equipment acquisition fees paid to the General Partner (70,343) (79,855)
----------------------------
Net cash used in investing activities (342,723) (1,146,736)
Financing activities
Partners' contributions - 1,185,785
Offering costs - (129,680)
Offering costs paid to the General Partner - (23,123)
Distributions to Partners (466,482) (442,233)
Debt placement fee paid to the General Partner (11,748) -
----------------------------
Net cash provided by (used in) financing activities (478,230) 590,749
----------------------------
Net increase (decrease) in cash and cash equivalents (12,166) 76,287
Cash and cash equivalents at beginning of year 258,167 2,552,352
----------------------------
Cash and cash equivalents at end of period $ 246,001 $ 2,628,639
----------------------------
----------------------------
</TABLE>
See accompanying notes.
<PAGE>
Commonwealth Income & Growth Fund II
Notes to Financial Statements
June 30, 1998
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, 1997.
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 six months ended June 30,
1998, were from cash from operations of $809,000. The Partnership's primary
sources of capital for the six months ended June 30, 1997, were from Partners'
contributions of $1,186,000 and cash from operations of $632,000. The primary
uses of cash for the six months ended June 30, 1998 and 1997, were for capital
expenditures for new equipment totaling $301,000 and $1,077,000, respectively,
the payment of preferred distributions to partners of $466,000 and $442,000
respectively, and the payment of acquisition fees of $70,000 and $80,000
respectively. In addition, the Partnership paid $12,000 of finance fees for the
six months ended June 30, 1998, and $153,000 in offering cost for the six months
ended June 30, 1997.
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 June 30, 1998 and December 31, 1997 the Partnership had
approximately $246,000 and $258,000, 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 June 30, 1998, the Partnership had future minimum rentals on noncancellable
operating leases of $1,861,000 for the year ending December 31, 1998 and
$4,667,000 thereafter. At June 30, 1998, the outstanding debt was $2,525,000,
with interest rates ranging from 6.4% to 8.2%, and will be payable through
February 2001.
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 June 30, 1998, the Partnership recognized income of
$1,148,000 and expenses of $998,000, resulting in net income of $150,000. For
the quarter ended March 31, 1998, the Partnership recognized income of $924,000
and expenses of $900,000, resulting in net income of $24,000.
Lease income increased by 141% from $476,000 for the quarter ended June 30,
1997, to $1,145,000 for the quarter ended June 30, 1998, primarily due to
utilizing cash available from Partners' contributions for the purchase of
Equipment, which in turn generated more lease income. During the six months
ended June 30, 1998, the Partnership expended $301,000 and assumed debt and
equipment payable of $1,380,000 to acquire seven leases, which generated
approximately $148,000 in revenue.
Interest income decreased 92% from $39,000 for the quarter ended June 30, 1997,
to $3,000 for the quarter ended June 30, 1998. This decrease is the result of
capital contributions being utilized for equipment purchases.
<PAGE>
Commonwealth Income & Growth Fund II
Operating expenses, excluding depreciation, primarily consist of accounting,
legal, and outside service fees. The expense increased 38% from approximately
$13,000 for the quarter ended June 30, 1997, to $18,000 for the quarter ended
June 30, 1998, which is primarily attributable to the accrual of accounting
fees.
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 148% from approximately $23,000 for the quarter ended
June 30, 1997, to $57,000 for the quarter ended June 30, 1998, 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 102% from approximately $429,000 for the quarter ended
June 30, 1997, to $866,000 for the quarter ended June 30, 1998, which is
attributable to the purchase of approximately $4,369,000 in additional
equipment.
For the six month period ended June 30, 1998, the Partnership generated cash
flow from operating activities of $809,000, which includes net income of
$174,000, and depreciation and amortization expenses of $1,687,000. Other
noncash activities included in the determination of net income includes direct
payments of lease income by lessees to banks of $604,000 and lease income paid
to original lessors in lieu of cash payments for computer equipment of $10,000.
For the six month period ended June 30, 1997, the Partnership generated cash
flow from operating activities of $645,000, which includes net income of
$54,000, and depreciation and amortization expenses of $777,000. 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
$78,000.
<PAGE>
Commonwealth Income & Growth Fund II
Part II: OTHER INFORMATION
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
<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 George S. Springsteen
President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000938322
<NAME> CIGF II
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 246,001
<SECURITIES> 0
<RECEIVABLES> 452,587
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 361,016
<PP&E> 13,388,047
<DEPRECIATION> (4,711,603)
<TOTAL-ASSETS> 9,736,048
<CURRENT-LIABILITIES> 3,510,838
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 6,225,210
<TOTAL-LIABILITY-AND-EQUITY> 9,736,048
<SALES> 0
<TOTAL-REVENUES> 2,072,357
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,794,914
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 103,225
<INCOME-PRETAX> 174,218
<INCOME-TAX> 0
<INCOME-CONTINUING> 174,218
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 174,218
<EPS-PRIMARY> .12
<EPS-DILUTED> 0
</TABLE>
