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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 SEPTEMBER 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
September 30, December 31,
2002 2001
------------------------------------------
(unaudited)
Assets
Cash and cash equivalents $ 149,126 $ 14,425
Lease income receivable, net of allowance for doubtful
accounts reserve of $208,534 as of September 30, 2002
and $54,200 as of December 31, 2001 504,524 488,472
Other receivables - Commonwealth Capital Corp - 315,404
Other receivables - Other LP's 11,671 2,761
Prepaid fees 6,200 3,200
------------------------------------------
671,521 824,262
------------------------------------------
Computer equipment, at cost 10,665,351 11,656,085
Accumulated depreciation (7,625,048) (7,769,975)
------------------------------------------
3,040,303 3,886,110
------------------------------------------
Equipment acquisition costs and deferred expenses, net 121,718 148,988
Other receivables - Commonwealth Capital Corp 284,366 -
------------------------------------------
406,084 148,988
------------------------------------------
Total assets $ 4,117,908 $ 4,859,360
==========================================
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 80,813 $ 40,472
Accounts payable - General Partner 56,532 55,675
Unearned lease income 408,296 75,930
Notes payable 1,836,101 2,380,383
------------------------------------------
Total liabilities 2,381,742 2,552,460
------------------------------------------
Partners' Capital
General partner 1,000 1,000
Limited partners 1,735,166 2,305,900
------------------------------------------
Total partners' capital 1,736,166 2,306,900
------------------------------------------
Total liabilities and partners' capital $ 4,117,908 $ 4,859,360
==========================================
see accompanying notes to financial statements
Commonwealth Income & Growth Fund II
Statements of Income
Three Months Ended Nine` Months Ended
September 30 September 30
2002 2001 2002 2001
------------------------------ -----------------------------------
(unaudited) (unaudited)
Income
Lease $ 667,730 $ 748,172 $ 2,056,808 $ 2,324,138
Interest and other 421 2,731 1,214 7,939
Gain on sale of computer equipment - 182,389 - 254,772
------------------------------ ----------------- -----------------
668,151
Total Income 933,292 2,058,022 2,586,849
------------------------------ ----------------- -----------------
Expenses
Operating, excluding depreciation 188,642 75,434 435,833 227,942
Equipment management fee - General Partner 33,402 37,409 102,856 116,119
Interest 36,658 20,342 118,897 75,790
Depreciation 326,326 396,568 1,319,930 1,622,779
Amortization of equipment
acquisition costs and deferred expenses 17,246 16,581 56,335 70,141
Bad debt expense 117,917 - 186,393 -
Loss on sale of computer equipment 611 - 308 -
------------------------------ ----------------- -----------------
720,802
Total expenses 546,334 2,220,552 2,112,771
------------------------------ ----------------- -----------------
Net (loss) income $ (52,651) $ 386,958 $ (162,530) $ 474,078
============================== ================= =================
Net (loss) income per equivalent limited
partnership unit $ (0.11) $ 0.84 $ (0.35) $ 1.03
============================== ================= =================
Weighted Average number of equivalent limited
460,067
partnership units outstanding during the period 460,567 460,145 461,400
============================== ================= =================
see accompanying notes to financial statements
Commonwealth Income & Growth Fund II
Statements of Partners' Capital
For the Nine Months ended September 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) 4,040 (166,570) (162,530)
Redemption (500) - (4,164) (4,164)
Distributions (4,040) (400,000) (404,040)
----------------------------------------------------------------------------------------
Partners' capital - September 30, 2002 50 460,067 $ 1,000 $ 1,735,166 $1,736,166
============= =========== ======= =========== =============
see accompanying notes to financial statements
Commonwealth Income & Growth Fund II
Statements of Cash Flow
For the Nine Months Ended September 30, 2002 and 2001
(unaudited)
2002 2001
--------------- ------------
Operating activities
Net (loss) income $ (162,530) $ 474,078
Adjustments to reconcile net (loss) income to net cash
provided by operating activities
Depreciation and amortization 1,376,265 1,692,920
Amortization of unearned lease income (14,333) -
Loss (gain) on sale of computer equipment 308 (254,772)
Other noncash activities included in
determination of net (loss) income (865,622) (936,003)
Changes in assets and liabilities
(Increase) decrease in assets
Lease income receivable (16,052) 68,313
Other receivable, General Partner - (21,466)
Other receivables - Other LP's (8,910) 19,936
Other receivables - (982)
Prepaid Items (3,000) -
Increase (decrease) in liabilities
Accounts payable 40,341 11,858
Accounts payable, General Partner 857 -
Accounts payable, Common Capital Corp. - (62)
Unearned lease income 117,372 67,841
--------------- ------------
Net cash provided by operating activities 464,696 1,121,661
--------------- ------------
Investing activities:
Capital Expenditures (97,107) (444,847)
Net proceeds from the sale of computer equipment 126,299 364,200
Long term unearned lease income 47,044 -
Equipment acquisition fees paid to General Partner (24,029) (39,552)
--------------- ------------
Net cash provided by (used in) investing activities 52,207 (120,199)
--------------- ------------
Financing activities:
Distributions to partners (404,040) (692,269)
Redemption of partners (4,164) (10,577)
Other receivables-Commonwealth Capital Corp 31,038 (494,324)
Debt Placement fee paid to the General Partner (5,036) (5,439)
--------------- ------------
Net cash (used in) financing activities (382,202) (1,202,609)
--------------- ------------
Net increase (decrease) in cash and equivalents 134,701 (201,147)
Cash and cash equivalents, beginning of period 14,425 277,719
--------------- ------------
Cash and cash equivalents, end of period $ 149,126 $ 76,572
=============== ============
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 agreements 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.
Commonwealth Capital Corp. is a member of the Investment
Program Association (IPA), Financial Planning Association
(FPA), and the Equipment Leasing Association (ELA).
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 than
Policies 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 nine-month period ended September 30, 2002 are
not necessarily indicative of financial results that may be
expected for the full year ended December 31, 2002.
Revenue Recognition
Through September 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
September 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 three months or less to be cash equivalents. At
September 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.
Reimbursable Expenses
Reimbursable expenses, which are charged to the Partnership by
CCC in connection with the administration and operation of the
Partnership, are allocated to the Partnership based upon
several factors including, but not limited to, the number of
investors, compliance issues, and the number of existing
leases.
3. Computer The Partnership is the lessor of equipment under operating
Equipment leases with periods ranging from 14 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 September 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 September 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 September 30, 2002 and December 31, 2001 was
approximately $1,267,000 and $1,581,000, respectively, which
is included in the Partnership's liabilities on the balance
sheet, and the total outstanding debt at September 30, 2002
and December 31, 2001 related to the equipment shared by the
Partnership was approximately $2,219,000 and $2,406,000,
respectively.
The following is a schedule of future minimum rentals on
noncancellable operating leases at September 30, 2002:
Amount
--------------------------------------------------------------
Three Months ended December 31, 2002 $ 386,000
Year Ended December 31, 2003 1,328,000
Year Ended December 31, 2004 782,000
Year Ended December 31, 2005 45,000
--------------------------------------------------------------
$ 2,541,000
==============================================================
4. Related Party Other Receivables
Transactions
At September 30, 2002, the Partnership has a receivable from
Commonwealth Capital Corp ("CCC"), a related party to the
Partnership, in the amount of approximately $284,000. 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 nine months ended September 30, 2002, CCC
has repaid approximately $31,000 to the Partnership.
5. Notes Payable Notes payable consisted of the following:
September 30, December 31,
2002 2001
--------------------------------------------------------------
Installment notes payable to
banks; interest ranging from
6.60% to 9.18%, due in monthly
installments ranging from $152
to $2,578, including interest,
with final payments due from
January through November 2002. $ 818 $ 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. 297,004 490,762
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. 1,393,195 1,807,788
Installment notes payable to
banks; interest ranging from
6.25% to 6.75%, due in monthly
installments ranging from $240
to $1,875, including interest,
with final payments due from
February through April 2005. 145,084 -
---------------------------
$1,836,101 $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 September 30, 2002 are as follows:
Amount
----------
Three months ended December 31, 2002 $ 267,179
Year ended December 31, 2003 996,197
Year ended December 31, 2004 559,406
Year ended December 31, 2005 13,319
----------
$1,836,101
6. Supplemental Other noncash activities included in the determination of net
Cash Flow loss are as follows:
Information
Nine months ended September 30, 2002 2001
- -------------------------------------------------------------------------------
Leaseincome, net of interest expense on
notes payable realized as a result of
direct payment of principal by lessee
to bank $1,047,905 $ 934,241
Lease income paid to original lessor in
lieu of cash payment for computer
equipment acquired $ - $ 1,762
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:
Nine months ended September 30, 2002 2001
- -------------------------------------------------------------------------------
Debt assumed in connection with purchase
of computer equipment $ 503,623 $ 136,524
Debt paid off in connection with extension
of unearned lease income $ 182,283 $ -
===============================================================================
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 $616,000,
which the Partnership believes is fully collectible.
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
fourth quarter of 2002 in connection with the Summary
Judgment.
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.
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
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 September 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 nine months ended September
30, 2002 and 2001 were from cash from operations of $465,000 and $1,122,000,
respectively, payment of an advance made by the Partnership to Commonwealth
Capital Corp ("CCC"), a related party to the Partnership, of approximately
$31,000 as of September 30, 2002, and net proceeds received from sale of
equipment totaling $126,000 for the period ending September 30, 2002 and
$364,000 for the period ending September 30, 2001. The primary uses of cash for
the nine months ended September 30, 2002 and 2001, were for capital expenditures
for new equipment totaling $97,000 and $445,000, an advance to CCC of
approximately $494,000 for the period ending September 30, 2001, and the payment
of preferred distributions to partners for the nine months ended September 30,
2002 and 2001 of $404,000 and $692,000, respectively.
For the nine month period ended September 30, 2002, the Partnership generated
cash flows from operating activities of $465,000, which includes a net loss of
$163,000, depreciation and amortization expenses of $1,376,000, and unearned
income of $117,000. Other noncash activities included in the determination of
net (loss) include direct payments of lease income by lessees to banks of
$866,000.
For the nine month period ended September 30, 2001, the Partnership generated
cash flows from operating activities of $1,122,000, which includes net income of
$474,000, a gain on sale of equipment totaling $255,000, and depreciation and
amortization expenses of $1,693,000. Other noncash activities included in the
determination of net income include direct payments of lease income by lessees
to banks of $936,000.
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 September 30, 2002, the Partnership had approximately $146,000
invested in these money market accounts.
Included in accounts receivable is approximately $617,000 of receivables from
Avon Products Inc., in which the Partnership, through CCC, has initiated a
lawsuit. Management believes we will collect in full the balance due to the
Partnership. 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
fourth quarter of 2002 in connection with the Summary Judgment. Revenue from the
Avon Products, Inc. lease approximates to 17 % of the revenues for the nine
months ended September 30, 2002 and approximates to 15 % for the nine months
ended September 30, 2001.
At September 30, 2002, the Partnership has a receivable from CCC, a related
party to the Partnership, in the amount of approximately $284,000. 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 nine months ended September 30,
2002, CCC has repaid approximately $31,000 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 September 30, 2002, the Partnership had future minimum rentals on
non-cancelable operating leases of $386,000 for the balance of the year ending
December 31, 2002 and $2,155,000 thereafter. At September 30, 2002, the
outstanding debt was $1,836,000, 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 September 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 September 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
September 30, 2002 and December 31, 2001 was approximately $1,267,000 and
$1,581,000, respectively, which is included in the Partnership's liabilities on
the balance sheet, and the total outstanding debt at September 30, 2002 and
December 31, 2001 related to the equipment shared by the Partnership was
approximately $2,219,000 and $2,406,000, respectively.
Results of Operations
Three Months Ended September 30, 2002 compared to Three Months Ended
September 30, 2001
For the quarter ended September 30, 2002, the Partnership recognized income of
$668,000 and expenses of $721,000, resulting in a net loss of $53,000. For the
quarter ended September 30, 2001, the Partnership recognized income of $933,000
and expenses of $546,000, resulting in net income of $387,000.
Lease income decreased by 11% to $668,000 for the quarter ended September 30,
2002, from $748,000 for the quarter ended September 30, 2001, primarily due to
the fact that more lease agreements ended than new lease agreements acquired
since the quarter ended September 30, 2001.
Operating expenses, excluding depreciation, primarily consist of accounting,
legal, and outside service fees. The expense increased 150% to approximately
$189,000 for the quarter ended September 30, 2002, from $75,000 for the quarter
ended September 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 $77,000, and an increase in
outside office services of $5,000, an increase in legal fees of $14,000, an
increase in insurance of $7,000, an increase in due diligence of $5,000, an
increase in postage of $3,000, and an increase in supplies of $3,000. The main
reason there is an increase in operating expenses this quarter related to the
recalculation of the amount charged by CCC, a related party, to the Partnership
for the administration and operation. This increase is necessary to operate the
fund, especially due to the ongoing lawsuit, as mentioned in the litigation
section of this document.
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 $33,000 for the quarter ended
September 30, 2002, from $37,000 for the quarter ended September 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
17% to approximately $344,000 for the quarter ended September 30, 2002, from
$413,000 for the quarter ended September 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 $118,000 related to
disputed accounts receivables balances for the quarter ended September 30, 2002.
The Partnership sold computer equipment with a net book value of $4,000 for the
quarter ended September 30, 2002, for a net loss of $1,000. The Partnership sold
computer equipment with a net book value of $63,000 for the quarter ended
September 30, 2001, for a net gain of $182,000.
Interest expense increased 80% to $37,000 for the quarter ended September 30,
2002 from $20,000 for the quarter ended September 30, 2001, primarily due to the
acquisitions of new computer leases and the outstanding debt associated with it.
Nine Months Ended September 30, 2002 compared to Nine Months Ended
September 30, 2001
For the nine months ended September 30, 2002, the Partnership recognized income
of $2,058,000 and expenses of $2,221,000, resulting in a net loss of $163,000.
For the nine months ended September 30, 2001, the Partnership recognized income
of $2,587,000 and expenses of $2,113,000, resulting in net income of $474,000.
Lease income decreased by 12% to $2,057,000 for the nine months ended September
30, 2002, from $2,324,000 for the nine months ended September 30, 2001,
primarily due to the fact that more lease agreements ended than new lease
agreements acquired since the nine months ended September 30, 2001.
Operating expenses, excluding depreciation, primarily consist of accounting,
legal, and outside service fees. The expense increased 91% to approximately
$436,000 for the nine months ended September 30, 2002, from $228,000 for the
nine months ended September 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 $111,000, an increase in
remarketing fees of $28,000, an increase in promotions/advertising of $2,000, an
increase in legal fees of $23,000, an increase in due diligence of $18,000, an
increase in outside office services of $13,000, an increase in postage/shipping
of $7,000, and an increase in marketing of approximately $6,000. The main reason
there is an increase in operating expenses for 2002 is related to the
recalculation of the amount charged by CCC, a related party, to the Partnership
for the administration and operation. This increase is necessary to operate the
fund, especially due to the ongoing lawsuit, as mentioned in the litigation
section of this document.
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 $103,000 for the nine months ended
September 30, 2002, from $116,000 for the nine months ended September 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 $1,376,000 for the nine months ended September 30, 2002,
from $1,693,000 for the nine months ended September 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 $186,000 related to
disputed accounts receivables balances for the nine months ended September 30,
2002.
The Partnership sold computer equipment with a net book value of $127,000 for
the nine months ended September 30, 2002, for a net loss of $300. The
Partnership sold computer equipment with a net book value of $109,000 for the
nine months ended September 30, 2001, for a net gain of $255,000.
Interest expense increased 57% to $119,000 for the nine months ended September
30, 2002 from $76,000 for the nine months ended September 30, 2001, primarily
due to the acquisitions of new computer leases and the outstanding debt
associated with it.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 146
On July 30, 2002, the FASB issued FASB Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which nullifies EITF Issues No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred an a Restructuring)"
and No. 88-10, Costs Associated with Lease Modification or Termination."
Statement 146 fundamentally changed how a company should account for future
"restructurings." The Partnership believes that the adoption of SFAS 146 will
not have an impact on its financial position and results of operations.
Item 3. 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.
Item 4. Controls and Procedures
The Chief Executive Officer and A Financial Officer of the Partnership have
conducted a review of the Partnership's disclosure controls and procedures as of
September 30, 2002.
The Company's disclosure controls and procedures include the Partnership's
controls and other procedures designed to ensure that information required to be
disclosed in this and other reports filed under the Securities Exchange Act of
1934, as amended (the " Exchange Act") is accumulated and communicated to the
Partnership's management, including its chief executive officer and a financial
officer, to allow timely decisions regarding required disclosure and to ensure
that such information is recorded, processed, summarized and reported with the
required time periods.
Based upon this review, the Partnership's Chief Executive Officer and the A
Financial Officer have concluded that the Partnership's disclosure controls (as
defined in pursuant to Rule 13a-14 c promulgated under the Exchange Act) are
sufficiently effective to ensure that the information required to be disclosed
by the Partnership in the reports it files under the Exchange Act is recorded,
processed, summarized and reported with adequate timeliness.
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, through CCC, 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 fourth 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:
99.1 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 September 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
- -------------------------
George S. Springsteen
Chief Executive Officer
November 27, 2002
99.2 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF PRINCIPAL FINANCIAL 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 September 30, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Kimberly A. Springsteen, Principal Financial 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/ Kimberly A. Springsteen
- ---------------------------
Kimberly A. Springsteen
Principal Financial Officer
November 27, 2002
b) Report on Form 8-K: None
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
November 27, 2002 By: /s/ George S. Springsteen
- ----------------- --------------------------
Date George S. Springsteen
President
CERTIFICATIONS
I, George Springsteen certify that:
1. I have reviewed this quarterly report on Form 10-Q of Commonwealth Income &
Growth Fund II (the Registrant);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure
the material information relating to the Registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the" Evaluation
Date" ); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and the
procedures based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
the Registrant's board of directors ( or persons performing the equivalent
function):
a) all significant deficiencies in the design or the operation
of internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data we have identified for the Registrant's
auditors any material weakness in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ George S. Springsteen
- -------------------------
George S. Springsteen
Chief Executive Officer
November 27, 2002
I, Kimberly A. Springsteen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Commonwealth Income &
Growth Fund II (the Registrant);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure
the material information relating to the Registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the" Evaluation
Date" ); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and the
procedures based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
the Registrant's board of directors ( or persons performing the equivalent
function):
a) all significant deficiencies in the design or the operation
of internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data we have identified for the Registrant's
auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Kimberly A. Springsteen
- ---------------------------
Kimberly A. Springsteen
Principal Financial Officer
November 27, 2002