<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, 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)
September 30, December 31,
1998 1997
---------------- ---------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 336,441 $ 258,167
Lease income receivable 370,693 113,500
Accounts receivable - General Partner - 15,821
Interest and other receivables 2,452 100
Computer equipment, at cost 14,736,504 11,764,757
Accumulated depreciation (4,731,309) (3,175,757)
---------------- ---------------
10,005,195 8,589,000
Organization costs and deferred expenses, net of
accumulated amortization of $335,040
in 1998 and $232,708 in 1997 429,644 379,821
---------------- ---------------
Total assets $ 11,144,425 $ 9,356,409
---------------- ---------------
---------------- ---------------
Liabilities and partners' capital
Accounts payable $ 113,560 $ 96,326
Accounts payable - Commonwealth Capital Corp. - 68,265
Accounts payable - General Partner 3,156 -
Unearned lease income 196,475 217,503
Computer equipment payable 2,491,138 502,721
Notes payable 2,215,632 1,954,120
---------------- ---------------
Total liabilities 5,019,961 2,838,935
Partners' capital:
General partner 1,000 1,000
Limited partners 6,123,464 6,516,474
---------------- ---------------
Total partners' capital 6,124,464 6,517,474
---------------- ---------------
Total liabilities and partners' capital $ 11,144,425 $ 9,356,409
---------------- ---------------
---------------- ---------------
</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,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Lease $ 1,043,818 $ 757,629 $ 3,108,323 $ 1,601,976
Interest and other 12,893 12,669 20,745 89,108
Gain on sale of computer equipment 165,769 - 164,716 -
------------ ---------- ------------ ------------
1,222,480 770,298 3,293,784 1,691,084
Expenses:
Operating, excluding depreciation 49,422 950 77,348 16,268
Equipment management fee - General Partner 52,191 37,882 155,416 80,099
Interest 42,394 9,942 121,649 9,942
Depreciation 886,391 666,605 2,472,175 1,393,627
Amortization of organization costs and deferred
expenses 59,587 42,433 160,483 92,701
Loss on sale of computer equipment - - - 31,955
------------ ---------- ------------ ------------
1,089,985 757,812 2,987,071 1,624,592
------------ ---------- ------------ ------------
Net income $ 132,495 $ 12,486 $ 306,713 $ 66,492
------------ ---------- ------------ ------------
------------ ---------- ------------ ------------
Net income per equivalent limited
partnership unit $ 0.29 $ 0.03 $ 0.66 $ 0.15
------------ ---------- ------------ ------------
------------ ---------- ------------ ------------
Weighted average number of equivalent limited
partnership units outstanding during the period 461,817 461,817 461,817 448,307
------------ ---------- ------------ ------------
------------ ---------- ------------ ------------
</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 $ 3,156,521
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
Net income 2,332 130,163 132,495
Distributions (2,332) (230,909) (233,241)
---------- ---------- ------------- ----------- ------------
Partners' capital - September 30, 1998 50 461,817 $ 1,000 $ 6,123,464 $6,124,464
---------- ---------- ------------- ----------- ------------
---------- ---------- ------------- ----------- ------------
</TABLE>
See accompanying notes.
<PAGE>
Commonwealth Income & Growth Fund II
Statements of Cash Flows
For the nine months ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Operating activities
Net income $ 306,713 $ 66,492
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,632,658 1,579,980
Loss (gain) on sale of computer equipment (164,716) 31,955
Other noncash activities included in the
determination of net income (1,059,637) (217,562)
Changes in operating assets and liabilities:
Lease income receivable (257,193) 16,406
Other receivables 13,469 12,283
Accounts payable (51,031) (22,754)
Accounts payable - General Partner 3,156 82,770
Equipment payable 502,721 -
Unearned lease income (21,028) 68,146
----------- -----------
Net cash provided by operating activities 1,905,112 1,617,716
Investing activities
Capital expenditures (1,115,991) (3,982,900)
Payment of computer equipment payable (502,721) -
Net proceeds from sale of computer equipment 701,903 10,584
Increase in organization costs and deferred expenses - (106,102)
Equipment acquisition fees paid to the General Partner (198,558) (181,669)
----------- -----------
Net cash used in investing activities (1,115,367) (4,260,087)
Financing activities
Partners' contributions - 1,185,785
Offering costs - (129,680)
Distributions to partners (699,723) (675,474)
Debt placement fees paid to the General Partner (11,748) (16,632)
----------- -----------
Net cash provided by (used in) financing activities (711,471) 363,999
----------- -----------
Net increase (decrease) in cash and cash equivalents 78,274 (2,278,372)
Cash and cash equivalents at beginning of period 258,167 2,552,352
----------- -----------
Cash and cash equivalents at end of period $ 336,441 $ 273,980
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
<PAGE>
Commonwealth Income & Growth Fund II
Notes to Financial Statements
September 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 nine months ended September
30, 1998, were from cash from operations of $1,905,000. The Partnership's
primary sources of capital for the nine months ended September 30, 1997, were
from Partners' contributions of $1,186,000 and cash from operations of
$1,618,000. The primary uses of cash for the nine months ended September 30,
1998 and 1997, were for capital expenditures for new equipment totaling
$1,116,000 and $3,983,000, respectively, the payment of preferred distributions
to partners of $700,000 and $675,000 respectively, the payment of acquisition
fees of $199,000 and $182,000 respectively, and the payment of finance fees of
$12,000 and $17,000, respectively. In addition, the Partnership paid $130,000 in
offering cost for the nine months ended September 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 September 30, 1998 and December 31, 1997 the Partnership had
approximately $336,000 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 September 30, 1998, the Partnership had future minimum rentals on
noncancellable operating leases of $1,026,000 for the year ending December 31,
1998 and $6,075,000 thereafter. At September 30, 1998, the outstanding debt was
$2,216,000, 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 September 30, 1998, the Partnership recognized income of
$1,222,000 and expenses of $1,090,000, resulting in net income of $132,000. 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 38% from $757,000 for the quarter ended September 30,
1997, to $1,044,000 for the quarter ended September 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 nine months
ended September 30, 1998, the Partnership expended $1,116,000 and assumed debt
and equipment payable of $3,310,000 to acquire ten leases, which generated
approximately $607,000 in revenue.
<PAGE>
Commonwealth Income & Growth Fund II
Interest income remained constant at $13,000 for the quarters ended September
30, 1998 and 1997.
Operating expenses, excluding depreciation, primarily consist of accounting,
legal, and outside service fees. The expense increased 4,800% from approximately
$1,000 for the quarter ended September 30, 1997, to $49,000 for the quarter
ended September 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 37% from approximately $38,000 for the quarter ended
September 30, 1997, to $52,000 for the quarter ended September 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 33% from approximately $709,000 for the quarter ended
September 30, 1997, to $946,000 for the quarter ended September 30, 1998, which
is attributable to the purchase of approximately $4,426,000 in additional
equipment.
For the nine month period ended September 30, 1998, the Partnership generated
cash flow from operating activities of $1,905,000, which includes net income of
$307,000, and depreciation and amortization expenses of $2,633,000. Other
noncash activities included in the determination of net income includes direct
payments of lease income by lessees to banks of $913,000 and lease income paid
to original lessors in lieu of cash payments for computer equipment of $147,000.
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 1,000, 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 $196,00 and lease income paid to
original lessors in lieu of cash payments for computer equipment of $22,000.
<PAGE>
Part II: OTHER INFORMATION
Commonwealth Income & Growth Fund II
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
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 336,441
<SECURITIES> 0
<RECEIVABLES> 373,145
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 429,644
<PP&E> 14,736,504
<DEPRECIATION> (4,731,309)
<TOTAL-ASSETS> 11,144,425
<CURRENT-LIABILITIES> 5,019,961
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 6,124,464
<TOTAL-LIABILITY-AND-EQUITY> 11,144,425
<SALES> 0
<TOTAL-REVENUES> 3,293,784
<CGS> 0
<TOTAL-COSTS> 2,865,422
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 121,649
<INCOME-PRETAX> 306,713
<INCOME-TAX> 0
<INCOME-CONTINUING> 306,713
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 306,713
<EPS-PRIMARY> .66
<EPS-DILUTED> 0
</TABLE>
