<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 March 31, 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>
Commonwealth Income & Growth Fund II
Balance Sheets
<TABLE>
<CAPTION>
(Audited)
March 31, December 31,
1998 1997
----------- ------------
Assets
<S> <C> <C>
Cash and cash equivalents............................ $285,836 $258,167
Lease income receivable.............................. 320,062 113,500
Accounts receivable - General Partner................ - 15,821
Other receivables and deposits....................... 2,613 100
----------- ------------
608,511 387,588
Computer equipment, at cost.......................... 12,521,649 11,764,757
Accumulated depreciation............................. (3,946,437) (3,175,757)
----------- ------------
8,575,212 8,589,000
Organization costs and deferred expenses, net of
accumulated amortization of $282,714 for 1998
and $232,708 for 1997.............................. 377,101 379,821
----------- ------------
Total assets......................................... $9,560,824 $9,356,409
----------- ------------
----------- ------------
Liabilities and partners' capital
Accounts payable..................................... $82,386 $96,326
Accounts payable - Commonwealth Capital Corp......... 33,265 68,265
Accounts payable - General Partner................... 48,621 --
Unearned lease income................................ 214,390 217,503
Payables for computer equipment...................... 1,070,018 502,721
Notes payable........................................ 1,804,146 1,954,120
----------- ------------
Total liabilities.................................... 3,252,826 2,838,935
Partners' capital:
General partner................................... 1,000 1,000
Limited partners.................................. 6,306,998 6,516,474
----------- ------------
Total partners' capital.............................. 6,307,998 6,517,474
----------- ------------
Total liabilities and partners' capital.............. $9,560,824 $9,356,409
----------- ------------
----------- ------------
</TABLE>
See accompanying notes.
<PAGE>
Commonwealth Income & Growth Fund II
Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
----------------------
1998 1997
-------- --------
<S> <C> <C>
Income:
Lease............................................... $919,834 $367,955
Interest & other.................................... 4,374 36,955
-------- --------
924,208 404,910
Expenses:
Operating, excluding depreciation................... 9,847 2,318
Equipment management fee - General Partner.......... 45,991 18,398
Depreciation........................................ 770,680 318,649
Amortization of organization costs and deferred
expenses....................................... 50,006 29,502
Interest............................................. 23,919 --
-------- --------
900,443 368,867
-------- --------
Net income............................................. $23,765 $36,043
-------- --------
-------- --------
Net income per equivalent limited partnership unit..... $0.05 $0.08
-------- --------
-------- --------
Weighted average number of equivalent limited
partnership units outstanding during the periods...... 454,824 427,906
-------- --------
-------- --------
</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
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes.
<PAGE>
Commonwealth Income & Growth Fund II
Statements of Cash Flows
For the Three Months Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Operating activities
Net income...................................................... $23,765 $36,043
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.............................. 820,686 348,151
Other non-cash activities included in determination of
net income............................................. (149,974) --
Changes in operating assets and liabilities:
Lease income receivables................................ (194,653) (10,764)
Interest and other receivables........................... 13,308 (15,826)
Accounts payable......................................... (13,940) (30,122)
Accounts payable - Commonwealth Capital Corp............. (35,000) --
Accounts payable - General Partner....................... 48,621 --
Unearned lease income.................................... (3,113) --
---------- ----------
Net cash provided by operating activities....................... 509,700 327,482
Investing activities
Capital expenditures............................................ (201,504) (477,465)
Equipment acquisition fees paid to the General Partner.......... (39,587) (33,349)
---------- ----------
Net cash used in investing activities........................... (241,091) (510,814)
Financing activities
Partners' contributions......................................... -- 752,040
Offering costs.................................................. -- (59,787)
Offering costs paid to the General Partner...................... -- (22,561)
Distributions to Partners....................................... (233,241) (213,154)
Debt placement fee paid to the General Partner.................. (7,699) --
---------- ----------
Net cash provided by (used in) financing activities............. (240,940) 456,538
---------- ----------
Net increase in cash and cash equivalents....................... 27,669 273,206
Cash and cash equivalents at begining of year................... 258,167 2,552,352
---------- ----------
---------- ----------
Cash and cash equivalents at end of period...................... $285,836 $2,825,558
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
<PAGE>
Commonwealth Income & Growth Fund II
Notes to Financial Statements
March 31, 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 three months ended
March 31, 1998, were from cash from operations of $510,000. The Partnership's
primary sources of capital for the three months ended March 31, 1997, were
from Partners' contributions of $752,000 and cash from operations of
$327,000. The primary uses of cash for the three months ended March 31, 1998
and 1997, were for capital expenditures for new equipment totaling $202,000
and $477,000, respectively, the payment of preferred distributions to
partners of $233,000 and $213,000 respectively, and the payment of
acquisition fees of $40,000 and $33,000 respectively. In addition, the
Partnership payed $8,000 of finance fees for the three months ended March 31,
1998, and $82,000 in offering cost for the three months ended March 31, 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 March 31, 1998 and December 31, 1997
the Partnership had approximately $286,000 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 March 31, 1998, the Partnership had future minimum rentals on
noncancellable operating leases of $2,547,000 for the year ending December
31, 1998 and $4,095,000 thereafter. At March 31, 1998, the outstanding debt
was $1,804,000, with interest rates ranging from 6.4% to 8.2%, and will be
payable through September 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 March 31, 1998, the Partnership recognized income
of $924,000 and expenses of $900,000, resulting in net income of $24,000. 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 150% from $368,000 for the quarter ended March
31, 1997, to $920,000 for the quarter ended March 31, 1998, primarily due to
utilizing cash available from Partners' contributions for the purchase of
Equipment, which in turn generated more lease income. During the three months
ended March 31, 1998, the Partnership expended $202,000 and assumed debt and
equipment payable of $1,070,000 to acquire four leases, which generated
approximately $67,000 in revenue.
Interest income decreased 89% from $37,000 for the quarter ended March
31, 1997, to $4,000 for the quarter ended March 31, 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 400% from
approximately $2,000 for the quarter ended March 31, 1997, to $10,000 for the
quarter ended March 31, 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 156% from approximately $18,000 for the quarter
ended March 31, 1997, to $46,000 for the quarter ended March 31, 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 136% from approximately $348,000 for
the quarter ended March 31, 1997, to $821,000 for the quarter ended March 31,
1998, which is attributable to the purchase of approximately $7,264,000 in
additional equipment.
For the three month period ended March 31, 1998, the Partnership
generated cash flow from operating activities of $510,000, which includes net
income of $24,000, and depreciation and amortization expenses of $821,000.
Other noncash activities included in the determination of net income includes
direct payments of lease income by lessees to banks of $150,000.
For the three month period ended March 31, 1997, the Partnership
generated cash flow from operating activities of $327,000, which includes net
income of $36,000, and depreciation and amortization expenses of $348,000.
<PAGE>
Commonwealth Income & Growth Fund II
Part II: OTHER INFORMATION
<TABLE>
<CAPTION>
<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 George S. Springsteen
President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000938322
<NAME> CIGFII
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 285,836
<SECURITIES> 0
<RECEIVABLES> 322,675
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 377,101
<PP&E> 12,521,649
<DEPRECIATION> (3,946,437)
<TOTAL-ASSETS> 9,560,824
<CURRENT-LIABILITIES> 3,252,826
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 6,307,998
<TOTAL-LIABILITY-AND-EQUITY> 9,560,824
<SALES> 0
<TOTAL-REVENUES> 924,208
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 876,524
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,919
<INCOME-PRETAX> 23,765
<INCOME-TAX> 0
<INCOME-CONTINUING> 23,765
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,765
<EPS-PRIMARY> .05
<EPS-DILUTED> 0
</TABLE>
