<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, 1999
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: 33-69996
COMMONWEALTH INCOME & GROWTH FUND II
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2735641
(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)
JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 199,948 $ 136,208
Lease income receivable 148,699 246,930
Other receivables and deposits 21,356 25,237
Computer equipment, at cost 14,784,696 14,085,926
Accumulated depreciation (6,647,785) (4,683,752)
------------ ------------
8,136,911 9,402,174
Equipment acquisition costs and deferred expenses,
net of accumulated amortization of $344,923 in
1999 and $275,691 in 1998 302,555 372,318
Organization costs, net of accumulated amortization
of $75,816 in 1999 and $64,366 in 1998 38,653 50,103
------------ ------------
Total Assets $ 8,848,122 $ 10,232,970
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS' EQUITY
Accounts payable $ 51,661 $ 93,063
Accounts payable - General Partner 4,500 --
Unearned lease income 161,727 177,612
Notes payable 4,081,552 4,769,529
------------ ------------
Total liabilities 4,299,440 5,040,204
Partners' capital:
General partner 1,000 1,000
Limited partner 4,547,682 5,191,766
------------ ------------
Total partners' capital 4,548,682 5,192,766
------------ ------------
Total Liabilities and partners' equity $ 8,848,122 $ 10,232,970
------------ ------------
------------ ------------
</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,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INCOME:
Lease $ 1,157,489 $ 1,144,671 $ 2,291,383 $ 2,064,505
Interest and other 2,685 3,478 5,162 7,852
----------- ----------- ----------- -----------
1,160,174 1,148,149 2,296,545 2,072,357
EXPENSES:
Operating, excluding depreciation 84,339 18,079 111,745 27,926
Equipment management fee - General Partner 64,636 57,234 121,331 103,225
Interest 77,810 55,336 160,585 79,255
Depreciation 989,295 815,104 1,964,033 1,585,784
Amortization of organizastion costs, equipment
acquisition costs and deferred expenses 57,239 50,890 116,453 100,896
Loss on sale of computer equipment 1,053 1,053
----------- ----------- ----------- -----------
1,273,319 997,696 2,474,147 1,898,139
----------- ----------- ----------- -----------
Net income (loss) $ (113,145) $ 120,453 $ (177,602) $ 174,218
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss) per equivalent limited
partnership unit $ (0.25) $ 0.33 $ (0.39) $ 0.38
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted Average numner of equivalent limited
partnership units outstanding during the period 454,824 454,824 454,824 454,824
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND II
STATEMENT OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
PARTNER UNITS
----------------------------- GENERAL LIMITED
GENERAL LIMITED 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) (487,226)
Net income (loss) 6,080 (6,810) (730)
Distribution (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)
Distribution (9,087) (899,627) (908,714)
-------------------------------------------------------------------------------------
Partners' capital - December 31, 1997 50 461,817 1,000 6,516,474 6,517,474
Net income (loss) 9,330 (401,074) (391,744)
Distribution (9,330) (923,634) (932,964)
-------------------------------------------------------------------------------------
Partners' capital - December 31, 1998 50 461,817 1,000 5,191,766 5,192,766
Net income (loss) 4,665 (182,267) (177,602)
Distribution (4,665) (461,817) (466,482)
-------------------------------------------------------------------------------------
Partners' capital - June 30, 1999 50 461,817 $ 1,000 $ 4,547,682 $ 4,548,682
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND II
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) (177,602) 174,218
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,080,486 1,686,680
(Gain) loss on sale of computer equipment -- 1,054
Other noncash activities included in
determination of net income (1,210,642) (614,311)
Changes in operating assets and liabilities:
Accounts receivable - General Partner -- --
(Increase) decrease in lease income receivable 98,231 (288,600)
(Increase) decrease in other receivables 3,881 (34,566)
Increase (decrease) in accounts payable (41,402) (8,537)
Increase (decrease) in accounts payable -
Commonwealth Capital Corp. -- (68,265)
Increase (decrease) in accounts payable -
General Partner 4,500 --
Increase (decrease) in unearned lease income (15,885) (38,886)
---------- ----------
Net cash provided by operating activities 741,567 808,787
---------- ----------
INVESTING ACTIVITIES:
Capital expenditures (90,014) (301,289)
Net proceeds from the sale of property -- 28,909
Equipment acquisition fees paid to General Partner (121,331) (70,343)
---------- ----------
Net cash provided by investing activities (211,345) (342,723)
FINANCING ACTIVITIES:
Distributions to partners (466,482) (466,482)
Debt placement fees paid to General Partner -- (11,748)
---------- ----------
Net cash used by financing activities (466,482) (478,230)
---------- ----------
Net increase (decrease) in cash and equivalents 63,740 (12,166)
Cash and cash equivalents, begining of year 136,208 258,167
---------- ----------
Cash and cash equivalents, end of year 199,948 246,001
---------- ----------
---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND II
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
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, 1998 .
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.
<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,
1999 and 1998 were from cash from operations of $550,000 and $809,000,
respectively. The primary uses of cash for the six months ended June 30, 1999,
and 1998, were for capital expenditures for new equipment totaling $90,000 and
$301,000, respectively, the payment of preferred distributions to partners of
$223,000 for each quarter, the payment of acquisition fees of $28,000 and
$22,000 respectively, and the payment of finance fees of $6,000 and $8,000,
respectively.
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, 1999 and December 31, 1998 the Partnership had
approximately $200,000 and $136,000, 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, 1999, the Partnership had future minimum rentals on noncancellable
operating leases of $4,200,000 for the year ending December 31, 1999 and
$3,400,000 thereafter. At June 30, 1999, the outstanding debt was 4,000,000,
with interest rates ranging from 6.4% to 8.2%, and will be payable through
January, 2002.
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, 1999, the Partnership recognized income of
$1,160,000 and expenses of $1,273,000, resulting in a loss of $113,000. 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.
Lease income increased by 1% from $1,145,000 for the quarter ended June 30,
1998, to $1,157,000 for the quarter ended June 30, 1999, 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, 1999, the Partnership expended $72,000 to acquire one leases,
which will generate approximately $8,400 in revenue.
Interest income decreased 23% from $3,400 for the quarter ended June 30, 1998 to
$2,600 for the quarter ended June 30, 1999, primarily due to a lower monthly
average balance in the money market accounts for the quarter ended June 30,
1999.
Operating expenses, excluding depreciation, primarily consist of accounting,
legal, and outside service fees. The expense increased 367% from approximately
$18,000 for the quarter ended June 30, 1998, to $84,000 for the quarter ended
June 30, 1999, which is primarily attributable to the accrual of accounting
fees.
<PAGE>
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 12% from approximately $57,000 for the quarter ended
June 30, 1998, to $65,000 for the quarter ended June 30, 1999.
Depreciation and amortization expenses consist of depreciation on computer
equipment, amortization of organizational costs, and equipment acquisition fees.
The expenses increased 18% from approximately $815,000 for the quarter ended
June 30, 1998, to $989,000 for the quarter ended June 30, 1999.
For the six month period ended June 30, 1999, the Partnership generated cash
flow from operating activities of $550,000, which includes a net loss of
$113,000, and depreciation and amortization expenses of $1,047,000. Other
noncash activities included in the determination of net income includes direct
payments of lease income by lessees to banks of $1,296,000.
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 incomepaid to
original lesors in lieu of cash payments for computer equipment of $10,000.
YEAR 2000 ISSUE
The Partnership and the General Partner are not responsible for ensuring that
the computer peripheral equipment that it leases to customers is Year 2000
compliant, however, this equipment may be subject to declines in value or
technological obsolescence. Management has considered these factors in
determining the recovery of its equipment at June 30, 1999, in accordance with
FASB Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of". Based on its current assessment, the
Partnership does not believe that the reduction in carrying values of equipment,
if any, due to the Year 2000 issues, will have a significant effect on
operations.
Based on recent assessments, the General Partner has determined that it will be
required to modify or replace portions of its own system so that its operation
will function properly with respect to dates in the year 2000 and thereafter.
The General Partner presently believes that with modifications to existing
software and conversions to new software, the Year 2000 issue will not pose
significant operational problems for its computer system. The General Partner
expects that its modifications will be complete by the third quarter of 1999 and
a percentage of these costs will be charged to the Partnership. As of June 30,
1999, the General Partner has not incurred any significant expenses.
<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
August 12,1999 By: /s/George S. Springsteen
- --------------- ------------------------------
Date George S. Springsteen
President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR TO DATE AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 199,948
<SECURITIES> 0
<RECEIVABLES> 170,055
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 341,208
<PP&E> 17,784,696
<DEPRECIATION> (6,647,785)
<TOTAL-ASSETS> 8,848,122
<CURRENT-LIABILITIES> 4,299,440
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 4,548,682
<TOTAL-LIABILITY-AND-EQUITY> 8,848,122
<SALES> 0
<TOTAL-REVENUES> 2,296,545
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,313,562
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 160,585
<INCOME-PRETAX> (177,602)
<INCOME-TAX> 0
<INCOME-CONTINUING> (177,602)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (177,602)
<EPS-BASIC> (.39)
<EPS-DILUTED> 0
</TABLE>
