UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 2002
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 33-69996
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 Number)
incorporation or organization)
470 John Young Way Suite 300
Exton, PA 19341
(Address, including zip code, of principal executive offices)
(610) 594-9600
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (ii) has been subject to such filing
requirements for the past 90 days:
YES [X] NO [ ]
Commonwealth Income & Growth Fund II
Balance Sheets
June 30 December 31,
2002 2001
-------------------------------
(unaudited)
Assets
Cash and cash equivalents $ 169,722 $ 14,425
Lease income receivable, net of allowance for doubtful
accounts reserve of $91,059 as of June 30, 2002 and
$54,200 as of December 31, 2001 598,662 488,472
Accounts receivables - Commonwealth Capital Corp -- 315,404
Accounts receivables - affiliated limited partnerships 21,843 2,761
Prepaid fees 6,200 3,200
-------------------------------
796,427 824,262
-------------------------------
Computer equipment, at cost 10,680,580 11,656,085
Accumulated depreciation (7,309,509) (7,769,975)
-------------------------------
3,371,071 3,886,110
-------------------------------
Equipment acquisition costs and deferred expenses, net 138,964 148,988
Accounts receivables - Commonwealth Capital Corp 301,038 --
-------------------------------
440,002 148,988
-------------------------------
Total assets $ 4,607,500 $ 4,859,360
===============================
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 189,128 $ 40,472
Accounts payable - General Partner 738 55,675
Unearned lease income 224,600 75,930
Notes payable 2,288,777 2,380,383
-------------------------------
Total liabilities 2,703,243 2,552,460
-------------------------------
Partners' Capital
General partner 1,000 1,000
Limited partners 1,903,257 2,305,900
-------------------------------
Total partners' capital 1,904,257 2,306,900
-------------------------------
Total liabilities and partners' capital $ 4,607,500 $ 4,859,360
===============================
see accompanying notes to financial statements
Commonwealth Income & Growth Fund II
Statements of Income
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
----------------------------- -----------------------------
(unaudited) (unaudited)
Income
Lease $ 685,831 $ 745,767 $ 1,389,078 $ 1,575,966
Interest and other 323 3,199 793 5,208
(Loss) gain on sale of computer equipment (1,539) 95,628 303 72,383
----------- ----------- ---------- -----------
Total Income 684,615 844,594 1,390,174 1,653,557
----------- ----------- ---------- -----------
Expenses
Operating, excluding depreciation 137,050 57,958 247,191 152,508
Equipment management fee - General Partner 34,292 37,200 69,454 78,710
Interest 43,171 24,676 82,239 55,448
Depreciation 471,266 482,441 993,604 1,226,211
Amortization of equipment
acquisition costs and deferred expenses 17,338 25,270 39,089 53,560
Bad debt expense 14,059 -- 68,476 --
----------- ----------- ---------- -----------
Total expenses 717,176 627,545 1,500,053 1,566,437
----------- ----------- ---------- -----------
Net (loss) income $ (32,561) $ 217,049 $ (109,879) $ 87,120
=========== =========== =========== ===========
Net (loss) income per equivalent limited
partnership unit $ (0.07) $ 0.47 $ (0.24) $ 0.19
=========== =========== =========== ===========
Weighted Average number of equivalent limited
partnership units outstanding during the period 460,067 461,817 460,185 461,817
=========== =========== =========== ===========
see accompanying notes to financial statements
Commonwealth Income & Growth Fund II
Statements of Partners' Capital
For the Six Months ended June 30, 2002
(unaudited)
General Limited
Partner Partner General Limited
Units Units Partner Partner Total
-------------------------------------------------------------------------
Partners' capital - December 31, 2001 50 460,567 $ 1,000 $ 2,305,900 $2,306,900
Net income (loss) 2,886 (112,765) (109,879)
Redemption (500) -- (4,164) (4,164)
Distributions (2,886) (285,714) (288,600)
-------------------------------------------------------------------------
Partners' capital - June 30, 2002 50 460,067 $ 1,000 $ 1,903,257 $1,904,257
=========================================================================
see accompanying notes to financial statements
Commonwealth Income & Growth Fund II
Statements of Cash Flow
For the Six Months Ended June 30, 2002 and 2001
2002 2001
----------- -----------
Operating activities (unaudited)
Net (loss) income $ (109,879) $ 87,120
Adjustments to reconcile net (loss) income to net cash
provided by operating activities
Depreciation and amortization 1,032,693 1,279,771
Allowance for bad debts 68,476 --
(Gain) on sale of computer equipment (303) (72,383)
Other noncash activities included in
determination of net income (595,229) (690,687)
Changes in assets and liabilities
(Increase) decrease in assets
Lease income receivable (178,666) 208,396
Prepaid fees (3,000) --
Increase (decrease) in liabilities
Accounts payable 33,216 (13,341)
Accounts payable, Common Capital Corp. -- (62)
Accounts payable, General Partner (54,937) (27,691)
Accounts payable, affiliated limited partnerships (19,082) (5,529)
Unearned lease income 148,670 41,181
----------- -----------
Net cash provided by operating activities 321,959 806,775
----------- -----------
Investing activities:
Capital Expenditures (97,107) (146,678)
Net proceeds from the sale of computer equipment 122,468 119,245
Equipment acquisition fees paid to General Partner (24,029) (8,092)
----------- -----------
Net cash provided by (used in) investing activities 1,332 (35,525)
----------- -----------
Financing activities:
Distributions to partners (173,160) (462,008)
Redemption of limited partner's interest (4,164) --
Other receivables-Commonwealth Capital Corp 14,366 (280,007)
Debt placement fee paid to the General Partner (5,036) (556)
----------- -----------
Net cash (used in) financing activities (167,994) (742,571)
----------- -----------
Net increase in cash and equivalents 155,297 28,679
Cash and cash equivalents, beginning of period 14,425 277,719
----------- -----------
Cash and cash equivalents, end of period 169,722 $ 306,398
=========== ===========
see accompanying notes to financial statements
NOTES TO FINANCIAL STATEMENTS
1. Business Commonwealth Income & Growth Fund II (the "Partnership") is
a limited partnership organized in the Commonwealth of
Pennsylvania to acquire, own and lease various types of
computer peripheral equipment and other similar capital
equipment, which will be leased primarily to U.S.
corporations and institutions. Commonwealth Capital Corp,
on behalf of the Partnership and other affiliated
partnerships, acquires computer equipment subject to
associated debt obligations and lease revenue and allocates
a participation in the cost, debt and lease revenue to the
various partnerships based on certain risk factors. The
Partnership's General Partner is Commonwealth Income &
Growth Fund, Inc. (the "General Partner"), a Pennsylvania
corporation which is an indirect wholly owned subsidiary of
Commonwealth Capital Corp. Approximately ten years after
the commencement of operations, the Partnership intends to
sell or otherwise dispose of all of its computer equipment,
make final distributions to partners, and to dissolve.
Unless sooner terminated, the Partnership will continue
until December 31, 2006.
2. Summary of Basis of Presentation
Significant
Accounting The financial information presented as of any date other
Policies 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 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, 2001. Operating results for the six-month
period ended June 30, 2002 are not necessarily indicative
of financial results that may be expected for the full year
ended December 31, 2002.
Revenue Recognition
Through June 30, 2002, the Partnership has only entered
into operating leases. Lease revenue is recognized on a
monthly basis in accordance with the terms of the operating
lease agreements.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Long-Lived Assets
The Partnership evaluates its long-lived assets when events
or circumstances indicate that the value of the asset may
not be recoverable. The Partnership determines whether an
impairment exists by estimating the undiscounted cash flows
to be generated by each asset. If the estimated
undiscounted cash flows are less than the carrying value of
the asset then an impairment exists. The amount of the
impairment is determined based on the difference between
the carrying value and the fair value. The fair value is
determined based on estimated discounted cash flows to be
generated by the asset. As of June 30, 2002, there is no
impairment.
Depreciation on computer equipment for financial statement
purposes is based on the straight-line method over
estimated useful lives of four years.
Intangible Assets
Equipment acquisition costs and deferred expenses are
amortized on a straight-line basis over two- to-four year
lives. Unamortized acquisition fees are charged to
amortization expense when the associated leased equipment
is sold.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a
maturity of six months or less to be cash equivalents. At
June 30, 2002, cash equivalents were invested in a money
market fund investing directly in Treasury obligations.
Income Taxes
The Partnership is not subject to federal income taxes;
instead, any taxable income (loss) is passed through to the
partners and included on their respective income tax
returns.
Taxable income differs from financial statement net income
as a result of reporting certain income and expense items
for tax purposes in periods other than those used for
financial statement purposes, principally relating to
depreciation, amortization, and lease income.
Offering Costs
Offering costs are payments for selling commissions, dealer
manager fees, professional fees and other offering expenses
relating to the syndication. Selling commissions are 7% of
the partners' contributed capital and dealer manager fees
are 2% of the partners' contributed capital. These costs
have been deducted from partnership capital in the
accompanying financial statements.
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.
3. Computer The Partnership is the lessor of equipment under operating
Equipment leases with periods ranging from 24 to 37 months. In
general, the lessee pays associated costs such as repairs
and maintenance, insurance and property taxes.
The Partnership's share of the computer equipment in which
they participate with other partnerships at June 30, 2002
and December 31, 2001 was approximately $3,211,000 and
$2,969,000, respectively, which is included in the
Partnership's fixed assets on their balance sheet, and the
total cost of the equipment shared by the Partnership with
other partnerships at June 30, 2002 and December 31, 2001
was approximately $6,294,000 and $5,526,000, respectively.
The Partnership's share of the outstanding debt associated
with this equipment at June 30, 2002 and December 31, 2001
was approximately $1,429,000 and $1,581,000, respectively,
which is included in the Partnership's liabilities on the
balance sheet, and the total outstanding debt at June 30,
2002 and December 31, 2001 related to the equipment shared
by the Partnership was approximately $2,478,000 and
$4,895,000, respectively.
The following is a schedule of future minimum rentals on
noncancellable operating leases at June 30, 2002:
Amount
--------------------------------------------------------
Six Months ended December 31, 2002 $ 794,000
Year Ended December 31, 2003 1,338,000
Year Ended December 31, 2004 774,000
Year Ended December 31, 2005 16,000
--------------------------------------------------------
$2,922,000
========================================================
4. Related Party Other Receivables
Transactions
At June 30, 2002, the Partnership has a receivable from
Commonwealth Capital Corp ("CCC"), a related party to the
Partnership, in the amount of approximately $301,000. CCC,
thru its indirect subsidiaries, including the General
Partner of the Partnership, earns fees based on revenues
and new lease purchases from this fund and other funds.
This is a non-interest bearing receivable that CCC plans to
repay over the next two and a half fiscal years from
acquisition and debt placement fees earned by the General
Partner of the Partnership. For the six months ended June
30, 2002, CCC has repaid approximately $14,000 to the
Partnership.
5. Notes Payable Notes payable consisted of the following:
June 30, December 31,
2002 2001
---------------------------------------------------------------------
Installment notes payable
to banks; interest ranging
from 8.50% to 9.18%, due in
monthly installments ranging
from $152 to $2,578, including
interest, with final payments
due from July through
November 2002. $ 9,794 $ 81,833
Installment notes payable to
banks; interest ranging from
7.25% to 9.75%, due in
monthly installments ranging
from $72 to $5,975, including
interest, with final payments
due from February through
December 2003. 368,200 490,762
Installment notes payable to
banks; interest ranging from
6.50% to 8.75%, due in
monthly installments ranging
from $96 to $22,799, including
interest, with final payments
due from February through
December 2004. 1,752,184 1,807,788
Installment notes payable to
banks; interest ranging from
6.25% to 6.80%, due in
monthly installments ranging
from $240 to $1,875, including
interest, with final payments
due from February through
April 2005. 158,599 --
-------------------------
$2,288,777 $2,380,383
=====================================================================
These notes are secured by specific computer equipment and are
nonrecourse liabilities of the Partnership. Aggregate maturities
of notes payable for each of the periods subsequent to June 30,
2002 are as follows:
Amount
-----------------------------------------------------------------
Six months ended December 31, 2002 $ 577,606
Year ended December 31, 2003 1,080,526
Year ended December 31, 2004 617,326
Year ended December 31, 2005 13,319
----------
2,288,777
=================================================================
6. Supplemental Other noncash activities included in the determination of
Cash Flow net loss are as follows:
Information
===============================================================================
Six months ended June 30, 2002 2002 2001
- ----------------------------------------------------------------------------
Lease income, net of interest expense on
notes payable realized as a result of
direct payment of principal by lessee
to bank $ 595,229 $ 690,687
No interest or principal on notes payable was paid by the Partnership
because direct payment was made by lessee to the bank in lieu of
collection of lease income and payment of interest and principal by the
Partnership.
Noncash investing and financing activities include the following:
Six months ended June 30, 2002 2002 2001
- -----------------------------------------------------------------------------
Debt assumed in connection with purchase
of computer equipment $ 503,623 $ 55,631
=============================================================================
7. Litigation The Partnership, through Commonwealth Capital Corp, has
initiated a lawsuit against a customer, for approximately
$750,000 in addition to ongoing monthly rentals, for
failure to make monthly lease payments on the existing
terms. Management believes that the Partnership will
prevail in this matter. The outstanding receivable is
approximately $499,000, which the Partnership believes is
fully collectible.
The Partnership received a rental payment during the second
quarter of 2002 from the above-mentioned broker relating to
a July 2001 invoice, for approximately $37,000.
During June, 2002, in connection with the above matter, the
Partnership filed for Summary Judgment against an unrelated
third party broker to collect payments of approximately
$307,500 made by Avon Products, Inc. to this broker. The
Partnership anticipates a scheduled court date sometime in
the third quarter of 2002 in connection with the Summary
Judgment.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was released by the Securities and
Exchange Commission, requires all companies to include a discussion of critical
accounting policies or methods used in the preparation of financial statements.
Our significant accounting policies are described in Note 1 of the Notes to the
Consolidated Financial Statements. The significant accounting policies that we
believe are the most critical to aid in fully understanding our reported
financial results include the following:
COMPUTER EQUIPMENT
Commonwealth Capital Corp, on behalf of the Partnership and other affiliated
partnerships, acquires computer equipment subject to associated debt obligations
and lease revenue and allocates a participation in the cost, debt and lease
revenue to the various partnerships based on certain risk factors.
REVENUE RECOGNITION
Through June 30, 2002, the Partnership has only entered into operating leases.
Lease revenue is recognized on a monthly basis in accordance with the terms of
the operating lease agreements.
LONG-LIVED ASSETS
The Partnership evaluates its long-lived assets when events or circumstances
indicate that the value of the asset may not be recoverable. The Partnership
determines whether an impairment exists by estimating the undiscounted cash
flows to be generated by each asset. If the estimated undiscounted cash flows
are less than the carrying value of the asset then an impairment exists. The
amount of the impairment is determined based on the difference between the
carrying value and the fair value. Fair value is determined based on estimated
discounted cash flows to be generated by the asset.
Depreciation on computer equipment for financial statement purposes is based on
the straight-line method over estimated useful lives of four years.
Liquidity and Capital Resources
The Partnership's primary sources of capital for the six months ended June 30,
2002 and 2001 were from cash from operations of $322,000 and $807,000,
respectively, and net proceeds received from sale of equipment totaling $122,000
for the period ending June 30, 2002 and $119,000 for the period ending June 30,
2001. The primary use of cash for the six months ended June 30, 2002 and 2001,
was for capital expenditures for new equipment totaling $97,000 and $147,000,
and the payment of preferred distributions to partners for the six months ended
June 30, 2002 and 2001 of $173,000 and $462,000, respectively.
For the six month period ended June 30, 2002, the Partnership generated cash
flows from operating activities of $322,000, which includes a net loss of
$110,000, and depreciation and amortization expenses of $1,033,000. Other
noncash activities included in the determination of net (loss) include direct
payments of lease income by lessees to banks of $595,000.
For the six month period ended June 30, 2001, the Partnership generated cash
flows from operating activities of $807,000, which includes net income of
$87,000, a gain on sale of equipment totaling $72,000, and depreciation and
amortization expenses of $1,280,000. Other noncash activities included in the
determination of net income include direct payments of lease income by lessees
to banks of $691,000.
Cash is invested in money market accounts that invest 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, 2002, the Partnership had approximately $171,000 invested
in these money market accounts.
Included in accounts receivable is approximately $499,000 of receivables from
Avon Products Inc., in which the Partnership has initiated a lawsuit. Management
believes we will collect in full the balance due to the Partnership, therefore,
no reserves have been booked. During June, 2002, in connection with the above
matter, the Partnership filed for Summary Judgment against an unrelated third
party broker to collect payments of approximately $307,500 made by Avon
Products, Inc. to this broker. The Partnership anticipates a scheduled court
date sometime in the third quarter of 2002 in connection with the Summary
Judgment. Revenue from the Avon Products, Inc. lease approximates to 15% of the
revenues for the six months ended June 30, 2002 and 2001.
At June 30, 2002, the Partnership has a receivable from Commonwealth Capital
Corp ("CCC"), a related party to the Partnership, in the amount of approximately
$301,000. CCC, thru its indirect subsidiaries, including the General Partner of
the Partnership, earns fees based on revenues and new lease purchases from this
fund and other funds. This is a non-interest bearing receivable that CCC plans
to repay over the next two an a half fiscal years from acquisition and debt
placement fees earned by the General Partner of the Partnership. For the six
months ended June 30, 2002, CCC has repaid approximately $14,000 to the
Partnership.
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, 2002, the Partnership had future minimum rentals on non-cancelable
operating leases of $794,000 for the balance of the year ending December 31,
2002 and $2,128,000 thereafter. At June 30, 2002, the outstanding debt was
$2,289,000, with interest rates ranging from 6.25% to 9.75%, and will be payable
through April 2005.
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, from time to time,
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.
The Partnership's share of the computer equipment in which they participate with
other partnerships at June 30, 2002 and December 31, 2001 was approximately
$3,211,000 and $2,969,000, respectively, which is included in the Partnership's
fixed assets on their balance sheet, and the total cost of the equipment shared
by the Partnership with other partnerships at June 30, 2002 and December 31,
2001 was approximately $6,294,000 and $5,526,000, respectively. The
Partnership's share of the outstanding debt associated with this equipment at
June 30, 2002 and December 31, 2001 was approximately $1,429,000 and $1,581,000,
respectively, which is included in the Partnership's liabilities on the balance
sheet, and the total outstanding debt at June 30, 2002 and December 31, 2001
related to the equipment shared by the Partnership was approximately $2,478,000
and $4,895,000, respectively.
Results of Operations
Three Months Ended June 30, 2002 compared to Three Months Ended June 30, 2001
- -----------------------------------------------------------------------------
For the quarter ended June 30, 2002, the Partnership recognized income of
$685,000 and expenses of $717,000, resulting in a net loss of $32,000. For the
quarter ended June 30, 2001, the Partnership recognized income of $844,000 and
expenses of $627,000, resulting in net income of $217,000.
Lease income decreased by 8% to $686,000 for the quarter ended June 30, 2002,
from $746,000 for the quarter ended June 30, 2001, primarily due to the fact
that more lease agreements ended than new lease agreements acquired since the
quarter ended June 30, 2001.
Operating expenses, excluding depreciation, primarily consist of accounting,
legal, and outside service fees. The expense increased 136% to approximately
$137,000 for the quarter ended June 30, 2002, from $58,000 for the quarter ended
June 30, 2001, which is primarily attributable to an increase in the amount
charged by CCC, a related party, to the Partnership for the administration and
operation of approximately $17,000, and an increase in remarketing fees of
$28,000, an increase in promotions/advertising of $2,000, an increase in outside
services of $5,000, an increase in recruiting fees of $3,000, an increase in
insurance of $5,000, an increase in due diligence of $11,000, an increase in
postage of $3,000, an increase in supplies of $2,000, and an increase in
equipment shipping cost of $3,000.
The equipment management fee is approximately 5% of the gross lease revenue
attributable to equipment that is subject to operating leases. The equipment
management fee decreased 8% to approximately $34,000 for the quarter ended June
30, 2002, from $37,000 for the quarter ended June 30, 2001, which is consistent
with the decrease in lease income.
Depreciation and amortization expenses consist of depreciation on computer
equipment and amortization of equipment acquisition fees. The expenses decreased
4% to approximately $489,000 for the quarter ended June 30, 2002, from $508,000
for the quarter ended June 30, 2001 due to equipment and acquisition fees being
fully depreciated/amortized and not being replaced with as many new purchases.
The partnership recorded bad debt expenses of approximately $14,000 related to
disputed accounts receivables balances for the quarter ended June 30, 2002.
The Partnership sold computer equipment with a net book value of $16,000 for the
quarter ended June 30, 2002, for a net loss of $2,000. The Partnership sold
computer equipment with a net book value of $10,000 for the quarter ended June
30, 2001, for a net gain of $96,000.
Interest expense increased 75% to $43,000 for the quarter ended June 30, 2002
from $25,000 for the quarter ended June 30, 2001, primarily due to the
acquisitions of new computer leases and the outstanding debt associated with it.
Six Months Ended June 30, 2002 compared to Six Months Ended June 30, 2001
- -------------------------------------------------------------------------
For the six months ended June 30, 2002, the Partnership recognized income of
$1,390,000 and expenses of $1,500,000, resulting in a net loss of $110,000. For
the six months ended June 30, 2001, the Partnership recognized income of
$1,654,000 and expenses of $1,567,000, resulting in net income of $87,000.
Lease income decreased by 12% to $1,389,000 for the six months ended June 30,
2002, from $1,576,000 for the six months ended June 30, 2001, primarily due to
the fact that more lease agreements ended than new lease agreements acquired
since the six months ended June 30, 2001.
Operating expenses, excluding depreciation, primarily consist of accounting,
legal, and outside service fees. The expense increased 61% to approximately
$247,000 for the six months ended June 30, 2002, from $153,000 for the six
months ended June 30, 2001, which is primarily attributable to an increase in
the amount charged by CCC, a related party, to the Partnership for the
administration and operation of approximately $34,000, and an increase in
remarketing fees of $30,000, an increase in promotions/advertising of $2,000, an
increase in legal fees of $8,000, an increase in due diligence of $11,000, an
increase in equipment shipping cost of $4,000, and an increase in marketing of
approximately $5,000.
The equipment management fee is approximately 5% of the gross lease revenue
attributable to equipment that is subject to operating leases. The equipment
management fee decreased 11% to approximately $70,000 for the six months ended
June 30, 2002, from $79,000 for the six months ended June 30, 2001, which is
consistent with the decrease in lease income.
Depreciation and amortization expenses consist of depreciation on computer
equipment and amortization of equipment acquisition fees. The expenses decreased
19% to approximately $1,033,000 for the six months ended June 30, 2002, from
$1,280,000 for the six months ended June 30, 2001 due to equipment and
acquisition fees being fully depreciated/amortized and not being replaced with
as many new purchases.
The partnership recorded bad debt expenses of approximately $68,000 related to
disputed accounts receivables balances for the six months ended June 30, 2002.
The Partnership sold computer equipment with a net book value of $122,000 for
the six months ended June 30, 2002, for a net gain of $300. The Partnership sold
computer equipment with a net book value of $47,000 for the six months ended
June 30, 2001, for a net gain of $72,000.
Interest expense increased 48% to $82,000 for the six months ended June 30, 2002
from $55,000 for the six months ended June 30, 2001, primarily due to the
acquisitions of new computer leases and the outstanding debt associated with it.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 145
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB statements No.
4, 44 and 64, Amendment of FASB statement No. 13, and Technical Corrections"
("SFAS 145"). FASB No. 4 required that gains and losses from extinguishments of
debt that were included in the determination of net income be aggregated and, if
material, be classified as an extraordinary item, net of related income tax.
Effective January 1, 2003, pursuant to SFAS 145, the treatment of debt is to be
included in "Other Income" in the Financial Statements. SFAS 145 has no affect
on our financial statements at this time.
Part II: OTHER INFORMATION
Commonwealth Income & Growth Fund II
Item 1. Legal Proceedings.
On or about December 21, 2001, a complaint captioned Commonwealth
Capital Corp V. Avon Products, Inc. was filed by Commonwealth
Capital Corp against Avon Products Inc. with the Federal District
Court of the Eastern District of Pennsylvania, No. 01-CV-6915. The
initial claim is approximately $750,000, plus ongoing monthly
rentals of approximately $37,000 per month. The complaint alleges
that the named defendant has failed to make monthly payments on
the existing lease terms. The case is still in discovery and no
court date has been set.
On or about April 26, 2002, the Federal District Court of the
Eastern District of Pennsylvania has denied Avon's request for
Summary Judgment to join two brokers in the above-mentioned
lawsuit.
On or about June 15, 2002, in connection with the above matter,
the Partnership filed for Summary Judgment against an unrelated
third party broker to collect payments of approximately $410,000
made by Avon Products, Inc. to this broker. The Partnership
anticipates a scheduled court date sometime in the third quarter
of 2002 in connection with the Summary Judgment.
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:
1. SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Commonwealth Income & Growth Fund II,
(the "Company") on Form 10-Q for the period ending June 30, 2002, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
George S. Springsteen, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ George S. Springsteen
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George S. Springsteen
Chief Executive Officer
August 19, 2002
In connection with the Quarterly Report of Commonwealth Income & Growth Fund II,
(the "Company") on Form 10-Q for the period ending June 30, 2002, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Salvatore R. Barila, Controller of the Company, certify, pursuant to 18 U.S.C.
ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Salvatore R. Barila
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Salvatore R. Barila
Controller
August 19, 2002
b) Report on Form 8-K: None
Item 7.A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership believes its exposure to market risk is not
material due to the fixed interest rate of its long-term debt.
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 19, 2002 By: /s/ George S. Springsteen
- --------------- ------------------------------
Date George S. Springsteen
President