<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, 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: 33-89476
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,
1999 1998
------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 128,081 $ 136,208
Lease income receivable 134,868 246,930
Accounts receivable - General Partner 20,448 14,510
Other receivables and deposits 20,350 10,727
------------------------------------------
303,747 408,375
Computer equipment, at cost 15,212,742 14,085,926
Accumulated depreciation (6,086,536) (4,683,752)
------------------------------------------
9,126,206 9,402,174
Organization costs and deferred expenses, net of
accumulated amortization of $399,270 for 1999
and $340,057 for 1998 397,247 422,421
------------------------------------------
Total assets $ 9,827,200 $ 10,232,970
------------------------------------------
------------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 60,037 $ 93,063
Unearned lease income 131,404 177,612
Notes payable 4,741,700 4,769,529
------------------------------------------
Total liabilities 4,933,141 5,040,204
Partners' capital:
General partner 1,000 1,000
Limited partners 4,893,059 5,191,766
------------------------------------------
Total partners' capital 4,894,059 5,192,766
------------------------------------------
Total liabilities and partners' capital $ 9,827,200 $ 10,232,970
------------------------------------------
------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND II
Statements of Operations
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---- ----
<S> <C> <C>
INCOME:
Lease $ 1,133,893 $ 919,834
Interest & other 1,427 4,374
-------------------------------------
1,135,320 924,208
EXPENSES:
Operating, excluding depreciation 27,361 9,847
Equipment management fee - General Partner 56,695 45,991
Depreciation 974,737 770,680
Amortization of organization costs and deferred
expenses 59,215 50,006
Interest 82,778 23,919
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1,200,786 900,443
-------------------------------------
Net income $ (65,466) $ 23,765
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-------------------------------------
Net income per equivalent limited partnership unit $ (0.14) $ 0.05
-------------------------------------
-------------------------------------
Weighted average number of equivalent limited
partnership units outstanding during the periods 454,824 454,824
-------------------------------------
-------------------------------------
</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
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<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)
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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)
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Partners' capital - December 31, 1997 50 461,817 1,000 6,516,474 6,517,474
Net income 9,330 (401,074) (391,744)
Distributions (9,330) (923,634) (932,964)
---------------------------------------------------------------------------------
Partners' capital - December 31, 1998 50 461,817 1,000 5,191,766 5,192,766
Net income 2,332 (67,798) (65,466)
Distributions (2,332) (230,909) (233,241)
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Partners' capital - March 31, 1999 50 461,817 1,000 4,893,059 4,894,059
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND II
STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---------------------------------------
<S> <C> <C>
Operating activities
Net income (loss) $ (65,466) $ 23,765
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 1,033,952 820,686
Other non-cash activities included in determination of
net income (636,584) (149,974)
Changes in operating assets and liabilities:
Lease income receivables 112,062 (194,653)
Interest and other receivables (15,561) 13,308
Accounts payable (33,026) (13,940)
Accounts payable - Commonwealth Capital Corp. - (35,000)
Accounts payable - General Partner - 48,621
Unearned lease income (46,208) (3,113)
----------------------------------
Net cash provided by operating activities 349,169 509,700
INVESTING ACTIVITIES
Capital expenditures (90,014) (201,504)
Equipment acquisition fees paid to the General Partner (27,951) (39,587)
----------------------------------
Net cash used in investing activities (117,965) (241,091)
FINANCING ACTIVITIES
Distributions to Partners (233,241) (233,241)
Debt placement fee paid to the General Partner (6,090) (7,699)
----------------------------------
Net cash used in financing activities (239,331) (240,940)
----------------------------------
Net increase (decrease) in cash and cash equivalents (8,127) 27,669
Cash and cash equivalents at begining of year 136,208 258,167
----------------------------------
Cash and cash equivalents at end of period $ 128,081 $ 285,836
----------------------------------
----------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND II
NOTES TO FINANCIAL STATEMENTS
March 31, 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>
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, 1999 and 1998 were from cash from operations of $349,000 and $510,000,
respectively. The primary uses of cash for the three months ended March 31,
1999, and 1998, were for capital expenditures for new equipment totaling $90,000
and $202,000, respectively, the payment of preferred distributions to partners
of $233,000 for each quarter, the payment of acquisition fees of $28,000 and
$40,000 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 March 31, 1999 and December 31, 1998 the Partnership had
approximately $128,000 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 March 31, 1999, the Partnership had future minimum rentals on noncancellable
operating leases of $2,860,000 for the year ending December 31, 1999 and
$2,986,000 thereafter. At March 31, 1999, the outstanding debt was $4,742,000,
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 March 31, 1999, the Partnership recognized income of
$1,135,000 and expenses of $1,200,000, resulting in a loss of $65,000. 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 23% from $920,000 for the quarter ended March 31,
1998, to $1,134,000 for the quarter ended March 31, 1999, 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, 1999, the Partnership expended $90,000 and assumed debt of
$609,000 to acquire two leases, which generated approximately $37,000 in
revenue.
Interest income decreased 75% from $4,000 for the quarter ended March 31, 1998
to $1,000 for the quarter ended March 31, 1999, primarily due to a lower monthly
average balance in the money market accounts for the quarter ended March 31,
1999.
<PAGE>
Operating expenses, excluding depreciation, primarily consist of accounting,
legal, and outside service fees. The expense increased 170% from approximately
$10,000 for the quarter ended March 31, 1998, to $27,000 for the quarter ended
March 31, 1999, 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 24% from approximately $46,000 for the quarter ended
March 31, 1998, to $57,000 for the quarter ended March 31, 1999, 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 26% from approximately $821,000 for the quarter ended
March 31, 1998, to $1,034,000 for the quarter ended March 31, 1999, which is
attributable to the purchase of approximately $2,691,000 in additional
equipment.
For the three month period ended March 31, 1999, the Partnership generated cash
flow from operating activities of $349,000, which includes a net loss of
$65,000, and depreciation and amortization expenses of $1,034,000. Other noncash
activities included in the determination of net income includes direct payments
of lease income by lessees to banks of $637,000.
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.
<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>CIGF2
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 128,081
<SECURITIES> 0
<RECEIVABLES> 175,666
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 397,247
<PP&E> 15,212,742
<DEPRECIATION> (6,086,536)
<TOTAL-ASSETS> 9,827,200
<CURRENT-LIABILITIES> 4,933,141
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 4,894,059
<TOTAL-LIABILITY-AND-EQUITY> 9,827,200
<SALES> 0
<TOTAL-REVENUES> 1,135,320
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,118,008
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82,778
<INCOME-PRETAX> (65,466)
<INCOME-TAX> 0
<INCOME-CONTINUING> (65,466)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (65,466)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> 0
</TABLE>
