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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 MARCH 31, 2003
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 33-69996
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COMMONWEALTH INCOME & GROWTH FUND II
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2795120
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
470 John Young Way Suite 300
Exton, PA 19341
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(Address, including zip code, of principal executive offices)
(610) 594-9600
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(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
March 31 December 31,
2003 2002
------------ ------------
(unaudited)
Assets
Cash and cash equivalents $ 50,954 $ 33,361
Lease income receivable, net of allowance for doubtful
accounts reserve of $421,008 as of March 31, 2003
and December 31, 2002 408,824 409,516
Net investment in direct financing leases 180,171 191,426
Other receivables - affiliated partnerships 11,835 8,434
Prepaid fees 3,200 6,219
------------ ------------
654,984 648,956
------------ ------------
Computer equipment, at cost 10,339,121 10,350,520
Accumulated depreciation (8,070,723) (7,819,423)
------------ ------------
2,268,398 2,531,097
------------ ------------
Equipment acquisition costs and deferred expenses, net 89,247 105,025
Accounts receivable, Commonwealth Capital Corp 317,402 307,404
------------ ------------
406,649 412,429
------------ ------------
Total assets $ 3,330,031 $ 3,592,482
============ ============
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 204,789 $ 72,658
Accounts payable - General Partner 81,126 27,457
Other accrued expenses 1,044 7,362
Unearned lease income 131,580 172,692
Notes payable 1,490,989 1,780,299
------------ ------------
Total liabilities 1,909,528 2,060,468
------------ ------------
Partners' Capital
General partner 1,000 1,000
Limited partners 1,419,503 1,531,014
------------ ------------
Total partners' capital 1,420,503 1,532,014
------------ ------------
Total liabilities and partners' capital $ 3,330,031 $ 3,592,482
============ ============
see accompanying notes to financial statements
Commonwealth Income & Growth Fund II
Statements of Operations
Three Months Ended
March 31
-------------------------------
2003 2002
---------- ----------
(unaudited)
Income
Lease $ 542,526 $ 703,247
Interest and other 175 470
Gain on sale of computer equipment - 1,842
---------- ----------
Total income 542,701 705,559
---------- ----------
Expenses
Operating, excluding depreciation 193,863 110,141
Equipment management fee - General Partner 27,127 35,162
Interest 29,950 39,068
Depreciation 266,262 522,338
Amortization of equipment
acquisition costs and deferred expenses 16,378 21,751
Bad debt expense - 54,417
Loss on sale of computer equipment 5,192 -
---------- ----------
Total expenses 538,772 782,877
---------- ----------
Net income (loss) $ 3,929 $ (77,318)
========== ==========
Net income (loss) per equivalent limited
partnership unit $ 0.01 $ (0.17)
========== ==========
Weighted Average number of equivalent limited
partnership units outstanding during the period 460,067 460,306
========== ==========
see accompanying notes to financial statements
Commonwealth Income & Growth Fund II
Statements of Partners' Capital
For the Three Months Ended March 31, 2003
(unaudited)
General Limited
Partner Partner General Limited
Units Units Partner Partner Total
------- ------- ------- ----------- -----------
Partners' capital - December 31, 2002 50 460,067 $ 1,000 $ 1,531,014 $ 1,532,014
------- ------- ------- ----------- -----------
Net income 1,154 2,775 3,929
Distributions (1,154) (114,286) (115,440)
------- ------- ------- ----------- -----------
Partners' capital - March 31, 2003 50 460,067 $ 1,000 $ 1,419,503 $ 1,420,503
======= ======= ======= =========== ===========
see accompanying notes to financial statements
Commonwealth Income & Growth Fund II
Statements of Cash Flow
For the Three Months Ended March 31, 2003 and 2002
2003 2002
------------ ----------
(unaudited)
Operating activities
Net income (loss) $ 3,929 $ (77,318)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization 282,640 544,089
Allowance for bad debts - 22,800
Loss (gain) on sale of computer equipment 5,291 (1,842)
Other noncash activities included in
determination of net income (loss) (275,213) (306,557)
Changes in assets and liabilities
(Increase) decrease in assets
Lease income receivable 692 (18,452)
Minimum lease receivables 504 -
Other receivable, General Partner 53,669 -
Other receivables - affiliated partnerships (3,401) (377)
Prepaid items 3,019 (3,000)
Increase (decrease) in liabilities
Accounts payable 132,131 30,151
Accounts payable, General Partner (6,318) (41,106)
Unearned lease income (41,112) 11,596
------------ ----------
Net cash provided by operating activities 155,831 159,984
------------ ----------
Investing activities:
Capital Expenditures (15,000) (28,906)
Net proceeds from the sale of computer equipment 2,800 108,196
Equipment acquisition fees paid to General Partner (600) (8,773)
------------ ----------
Net cash (used in) provided by investing activities (12,800) 70,517
------------ ----------
Financing activities:
Distributions to partners (115,440) (173,160)
Redemption of limited partners - (4,164)
Other receivables-Commonwealth Capital Corp (9,998) (9,323)
Debt Placement fee paid to the General Partner - (1,904)
------------ ----------
Net cash (used in) financing activities (125,438) (188,551)
------------ ----------
Net increase in cash and equivalents 17,593 41,950
Cash and cash equivalents, beginning of period 33,361 14,425
------------ ----------
Cash and cash equivalents, end of period $ 50,954 $ 56,375
============ ==========
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 ("CCC"), 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 CCC.
CCC 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 December 31 has been prepared
Policies 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, 2002. Operating results for the three-month
period ended March 31, 2003 are not necessarily indicative of financial results that may be
expected for the full year ended December 31, 2002.
Revenue Recognition
Through March 31, 2003, the Partnership's leasing operations consist substantially of
operating leases and seven direct-financing leases. Operating lease revenue is recognized on
a monthly basis in accordance with the terms of the lease agreement. Unearned revenue from
direct financing agreements is amortized to revenue over the lease term.
The Partnership reviews a customer's credit history before extending credit and establishes
a provision for uncollectible accounts receivable based upon the credit risk of specific
customers, historical trends and other information.
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 March 31, 2003, 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 and deferred expenses are charged
to amortization expense when the associated leased equipment is sold.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three months or
less to be cash equivalents. Cash equivalents have been 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. Net Investment in
Direct Financing The following lists the components of the net investment in direct financing leases as of
Leases March 31, 2003 and December 31, 2002:
March 31, December 31,
2003 2002
-----------------------------
Minimum lease payments receivable $ 220,625 $ 236,208
Less: Unearned revenue 40,454 44,782
---------------------------------------------------------------------------------
Net investment in direct financing leases $ 180,171 $ 191,426
---------------------------------------------------------------------------------
The following is a schedule of future minimum rentals on noncancellable direct financing
leases at March 31, 2003
Amount
-----------------
Nine Months Remaining December 31, 2003 $ 51,905
Year Ended December 31, 2004 67,488
Year Ended December 31, 2005 67,488
Year Ended December 31, 2006 33,744
-----------------
$ 220,625
---------------------------------------------------------------------------------
4. Computer The Partnership is the lessor of equipment under operating leases with periods ranging from
Equipment 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 March 31, 2003 and December 31, 2002 was approximately $1,660,000 and
$1,645,000, 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 March 31, 2003 and December 31, 2002 was approximately $2,813,000 and
$2,765,000, respectively. The Partnership's share of the outstanding debt associated with
this equipment at March 31, 2003 and December 31, 2002 was approximately $801,000 and
$923,000, respectively, which is included in the Partnership's liabilities on the balance
sheet, and the total outstanding debt at March 31, 2003 and December 31, 2002 related to the
equipment shared by the Partnership was approximately $1,353,000 and $1,566,000,
respectively.
The following is a schedule of future minimum rentals on noncancellable operating leases at
March 31, 2003:
Amount
--------------------------------------------------------------------------
Nine Months ended December 31, 2003 $ 1,318,000
Year Ended December 31, 2004 645,000
Year Ended December 31, 2005 81,000
Year Ended December 31, 2006 34,000
--------------------------------------------------------------------------
$ 2,078,000
--------------------------------------------------------------------------
5. Related Party Other Receivables
Transactions
As of March 31, 2003, the Partnership has a non-interest bearing receivable from CCC, a
related party to the Partnership, in the amount of approximately $317,000. This receivable,
as well as any future receivables, was and will be made at the discretion of the General
Partner, per the prospectus, and was substantially advanced in 2001. CCC, through its
indirect subsidiaries, including the General Partner of the Partnership, earns fees based
on revenues and new lease purchases from this fund. CCC intends to repay, through
acquisition and debt placement fees, over approximately the next several years, with a
minimum payment of $5,000 per month, commencing January 1, 2003.
6. Notes Payable Notes payable consisted of the following:
March 31, December 31,
2003 2002
------------------------------------------------------------------------------------
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. $ 145,365 $ 224,172
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. 1,030,451 1,213,397
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. 117,403 131,353
Installment notes payable to banks,
interest ranging from 5.95% to 6.50%:
due in monthly installments ranging from
$507 to $1,892, including interest, with
final payments due June, 2006.
197,770 211,377
----------------------------------
$ 1,490,989 $ 1,780,299
====================================================================================
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
March 31, 2003 are as follows:
Amount
--------------
Nine months ended December 31, 2003 $ 762,624
Year ended December 31, 2004 618,764
Year ended December 31, 2005 76,535
Year ended December 31, 2006 33,066
-------------
$ 1,490,989
-------------
7. Supplemental Other noncash activities included in the determination of net loss are as follows:
Cash Flow
Information
Three months ended March 31, 2003 2002
-------------------------------------------------------------------------------------------
Lease income, net of interest expense on
notes payable realized as a result of
direct payment of principal by lessee to
bank $ 275,213 $ 306,557
===========================================================================================
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:
Three months ended March 31, 2003 2002
-------------------------------------------------------------------------------------------
Debt assumed in connection with purchase
of computer equipment $ - $ 190,419
-------------------------------------------------------------------------------------------
Net book value of equipment converted to direct
financing leases $ 3,346 $ -
===========================================================================================
8. Litigation The Partnership, through CCC, has initiated a lawsuit against a customer for failure to make
monthly lease payments based on the existing lease terms. Management believes that the
Partnership will prevail in this matter and that the outcome of this uncertainty is not
expected to have a material adverse impact to the financial statements of the Partnership.
The Partnership has approximately $404,000 of unreserved accounts receivable relating to
this matter.
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 March 31, 2003, the Partnership's leasing operations consist
substantially of operating leases and seven direct-financing leases. Operating
lease revenue is recognized on a monthly basis in accordance with the terms of
the lease agreement. Unearned revenue from direct financing agreements is
amortized to revenue over the lease term.
The Partnership reviews a customer's credit history before extending credit and
establishes a provision for uncollectible accounts receivable based upon the
credit risk of specific customers, historical trends and other information.
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 three months ended March
31, 2003 and 2002 were from cash from operations of $156,000 and $160,000,
respectively, and net proceeds received from sale of equipment totaling $3,000
and $108,000, respectively. The primary uses of cash for the three months ended
March 31, 2003 and 2002, were for capital expenditures for new equipment
totaling $15,000 and $29,000, respectively, and the payment of preferred
distributions to partners of $115,000 and $173,000, respectively.
For the three month period ended March 31, 2003, the Partnership generated cash
flows from operating activities of $156,000, which includes net income of
$4,000, depreciation and amortization expenses of $282,000. Other noncash
activities included in the determination of net income include direct payments
of lease income by lessees to banks of $275,000.
For the three month period ended March 31, 2002, the Partnership generated cash
flows from operating activities of $160,000, which includes a net loss of
$77,000, a gain on sale of equipment totaling $2,000, and depreciation and
amortization expenses of $544,000. Other noncash activities included in the
determination of net loss include direct payments of lease income by lessees to
banks of $307,000.
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.
Included in accounts receivable is approximately $404,000 of receivables from
Avon Products Inc., in which the Partnership, through CCC, has initiated a
lawsuit against Avon for failure to make monthly lease payments based on the
existing lease terms. Management believes that the Partnership will prevail in
this matter and that the outcome of this uncertainty is not expected to have a
material adverse impact to the financial statements of the Partnership.
As of March 31, 2003, the Partnership has a non-interest bearing receivable
from CCC, a related party to the Partnership, in the amount of approximately
$317,000. This receivable, as well as any future receivables, was and will be
made at the discretion of the General Partner, per the prospectus, and was
substantially advanced in 2001. CCC, through its indirect subsidiaries,
including the General Partner of the Partnership, earns fees based on revenues
and new lease purchases from this fund. CCC intends to repay, through
acquisition and debt placement fees, over approximately the next several years,
with a minimum payment of $5,000 per month, commencing January 1, 2003.
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, 2003, the Partnership had future minimum rentals on non-cancelable
operating leases of $1,318,000 for the balance of the year ending December 31,
2003 and $760,000 thereafter. At March 31, 2003, the outstanding debt was
$1,491,000, with interest rates ranging from 5.95% to 9.75%, and will be payable
through June 2006.
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 March 31, 2003 and December 31, 2002 was approximately
$1,660,000 and $1,645,000, 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 March 31, 2003 and December 31,
2002 was approximately $2,813,000 and $2,765,000, respectively. The
Partnership's share of the outstanding debt associated with this equipment at
March 31, 2003 and December 31, 2002 was approximately $801,000 and $923,000,
respectively, which is included in the Partnership's liabilities on the balance
sheet, and the total outstanding debt at March 31, 2003 and December 31, 2002
related to the equipment shared by the Partnership was approximately $1,353,000
and $1,566,000, respectively.
Results of Operations
Three Months Ended March 31, 2003 compared to Three Months Ended March 31, 2002
For the quarter ended March 31, 2003, the Partnership recognized income of
$543,000 and expenses of $538,000, resulting in net income of $4,000. For the
quarter ended March 31, 2002, the Partnership recognized income of $706,000 and
expenses of $783,000, resulting in a net loss of $77,000.
Lease income decreased by 23% to $543,000 for the quarter ended March 31, 2003,
from $703,000 for the quarter ended March 31, 2002, primarily due to the fact
that more lease agreements ended than new lease agreements acquired since the
quarter ended March 31, 2002.
Operating expenses, excluding depreciation, primarily consist of accounting,
legal, outside service fees and reimbursement of expenses to CCC for
administration and operation of the Partnership. The expense increased 86% to
approximately $194,000 for the quarter ended March 31, 2003, from $110,000 for
the quarter ended March 31, 2002, 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 $20,000, and an increase in
remarketing fees of approximately $77,000 and a decrease in recruiting fees of
approximately $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 23% to approximately $27,000 for the quarter ended
March 31, 2003, from $35,000 for the quarter ended March 31, 2002, 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
48% to approximately $282,000 for the quarter ended March 31, 2003, from
$544,000 for the quarter ended March 31, 2002 due to equipment and acquisition
fees being fully depreciated/amortized and not being replaced with as many new
purchases.
The Partnership sold computer equipment with a net book value of $8,000 for the
quarter ended March 31, 2003, for a net loss of $5,000. The Partnership sold
computer equipment with a net book value of $106,000 for the quarter ended March
31, 2002, for a net gain of $2,000.
Interest expense decreased 23% to $30,000 for the quarter ended March 31, 2003
from $39,000 for the quarter ended March 31, 2002, primarily due to the decrease
in debt relating to the purchase of computer equipment.
RECENT ACCOUNTING PRONOUNCEMENTS
Interpretation No. 46
In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities" ("Interpretation No. 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from the other parties. Interpretation No. 46 is applicable immediately
for variable interest entities created after January 31, 2003. For variable
interest entities created prior to January 31, 2003, the provisions of
Interpretation No. 46 are applicable no later than July 1, 2003. The Partnership
does not expect Interpretation No. 46 to have an effect on the financial
statements.
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 and its associated fixed revenue
streams.
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
March 31, 2003.
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.
Commonwealth Capital Corp filed a complaint on December 21, 2001 with Avon Products, Inc. with the
Federal District Court of the Eastern District of Pennsylvania, No. 01-C2-6915. The complaint alleges
that the defendants illegally purchased/sold leased equipment without the Partnership's authorization,
along with suing for late fees on various lease payments.
In December 2002, the representatives of CCC, along with representatives from El Camino (the original
broker for the Avon lease) and consultants for Avon, met for a reconciliation meeting. This meeting was
designed to reconcile all accounting issues (rentals due) related to the Avon lease. A final
reconciliation was not submitted by all parties until around February 15, 2003. At that time, CCC
reconciled, via payments histories, the amounts owed by each party. A settlement conference with the
judge was then scheduled for March 6, 2003. Prior to the conference, CCC submitted their reconciliation
of amounts due. At the conference, a reasonable settlement could not be reached on various issues
involved in the litigation. Avon was granted another 90 days for discovery, after which a trial date will
be set.
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:
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
May 15, 2003 By: 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.
George S. Springsteen
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George S. Springsteen
Chief Executive Officer
May 15, 2003
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.
Kimberly A. Springsteen
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Kimberly A. Springsteen
Principal Financial Officer
May 15, 2003