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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 JUNE 30, 2003
( ) 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,
2003 2002
------------------------------------------
(unaudited)
Assets
Cash and cash equivalents $ 169,857 $ 33,361
Lease income receivable 405,512 409,516
Net investment in direct financing leases 165,585 191,426
Other Receivables - affiliated limited partnerships 5,475 8,434
Prepaid Fees 3,200 6,219
------------------------------------------
749,629 648,956
------------------------------------------
Computer equipment, at cost 6,337,633 10,350,520
Accumulated depreciation (4,359,749) (7,819,423)
------------------------------------------
1,977,884 2,531,097
------------------------------------------
Equipment acquisition costs and deferred expenses, net 73,573 105,025
Accounts receivable, Commonwealth Capital Corp 226,117 307,404
------------------------------------------
299,690 412,429
------------------------------------------
Total assets $ 3,027,203 $3,592,482
==========================================
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 68,056 $ 72,658
Accounts payable - General Partner 102,727 27,457
Other accrued expenses - 7,362
Unearned lease income 97,807 172,692
Notes payable 1,216,043 1,780,299
------------------------------------------
Total liabilities 1,484,633 2,060,468
------------------------------------------
Partners' Capital
General partner 1,000 1,000
Limited partners 1,541,570 1,531,014
------------------------------------------
Total partners' capital 1,542,570 1,532,014
------------------------------------------
Total liabilities and partners' capital $ 3,027,203 $3,592,482
==========================================
see accompanying notes to financial statements
Commonwealth Income & Growth Fund II
Statements of Operations
Three Months Ended Six Months Ended
June 30 June 30
2003 2002 2003 2002
-------- -------- ---------- ----------
(unaudited) (unaudited)
Income
Lease $409,334 $685,831 $ 951,860 $1,389,078
Interest and other 1,298 323 1,473 793
Gain (loss) on sale of computer equipment 323,511 (1,539) 318,319 303
-------- -------- ---------- ----------
Total Income 734,143 684,615 1,271,652 1,390,174
-------- -------- ---------- ----------
Expenses
Operating, excluding depreciation 143,741 137,050 337,604 247,191
Equipment management fee - General Partner 20,466 34,292 47,593 69,454
Interest 24,427 43,171 54,377 82,239
Depreciation 234,607 471,266 500,869 993,604
Amortization of equipment
acquisition costs and deferred expenses 15,674 17,338 32,052 39,089
Bad debt expense - 14,059 - 68,476
-------- -------- ---------- ----------
Total expenses 438,915 717,176 972,495 1,500,053
-------- -------- ---------- ----------
Net income (loss) $295,228 $(32,561) $ 299,157 $ (109,879)
======== ======== ========== ==========
Net income (loss) per equivalent limited
partnership unit $ 0.64 $ (0.07) $ 0.65 $ (0.24)
======== ======== ========== ==========
Weighted Average number of equivalent limited
partnership units outstanding during the period 460,067 460,067 460,067 460,185
======== ======== ========== ==========
see accompanying notes to financial statements
Commonwealth Income & Growth Fund II
Statements of Partners' Capital
For the Six Months Ended June 30, 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 2,886 296,271 299,157
Distributions (2,886) (285,715) (288,601)
--- ------- -------- ---------- ----------
Partners' capital - June 30, 2003 50 460,067 $ 1,000 $1,541,570 $1,542,570
=== ======= ======= ========== ==========
see accompanying notes to financial statements
Commonwealth Income & Growth Fund II
Statements of Cash Flow
For the Six Months Ended June 30, 2003 and 2002
2003 2002
--------- ----------
Operating activities (unaudited)
Net income (loss) $ 299,157 $ (109,879)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities
Depreciation and amortization 532,921 1,032,693
Allowance for bad debts - 68,476
Gain on sale of computer equipment (318,319) (303)
Other noncash activities included in
determination of net income (536,047) (595,229)
Changes in assets and liabilities
(Increase) decrease in assets
Lease income receivable 4,004 (178,666)
Other receivables - affiliated limited partnerships 2,959 (19,082)
Minimum lease receivables 978 -
Prepaid Items 3,019 (3,000)
Increase (decrease) in liabilities
Accounts payable (4,602) 148,656
Accounts payable, General Partner 75,270 (54,937)
Other accrued expenses (7,362) -
Unearned lease income (74,885) 148,670
--------- ----------
Net cash (used in) provided by operating activities (22,907) 437,399
--------- ----------
Investing activities:
Capital Expenditures (15,000) (97,107)
Net proceeds from the sale of computer equipment 382,317 122,468
Equipment acquisition fees paid to General Partner (600) (24,029)
--------- ----------
Net cash provided by investing activities 366,717 1,332
--------- ----------
Financing activities:
Distributions to partners (288,601) (288,600)
Redemption of limited partners - (4,164)
Accounts receivables-Commonwealth Capital Corp 81,287 14,366
Debt placement fee paid to the General Partner - (5,036)
--------- ----------
Net cash (used in) financing activities (207,314) (283,434)
--------- ----------
Net increase in cash and equivalents 136,496 155,297
Cash and cash equivalents, beginning of period 33,361 14,425
--------- ----------
Cash and cash equivalents, end of period $ 169,857 $ 169,722
========= ==========
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
Policies any date other than December 31 has been
prepared from the books and records without
audit. Financial information as of December
31 has been derived from the audited
financial statements of 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 six-month
period ended June 30, 2003 are not
necessarily indicative of financial results
that may be expected for the full year ended
December 31, 2003.
Revenue Recognition
Through June 30, 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.
Gains or losses on the sales of equipment are
recognized on the date of the sale agreement.
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
June 30, 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
Leases investment in direct financing leases as of
June 30, 2003 and December 31, 2002:
June 30, December 31,
2003 2002
-----------------------------
Minimum lease payments
receivable $203,264 $236,208
Less: Unearned revenue 37,679 44,782
----------------------------------------------------------------------
Net investment in direct financing
leases $165,585 $191,426
----------------------------------------------------------------------
The following is a schedule of future minimum
rentals on noncancellable direct financing
leases at June 30, 2003:
Amount
--------
Six Months Remaining December 31, 2003 $ 34,544
Year Ended December 31, 2004 67,488
Year Ended December 31, 2005 67,488
Year Ended December 31, 2006 33,744
--------
$203,264
----------------------------------------------------------------------
4. Computer The Partnership is the lessor of equipment
Equipment under operating 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 June 30, 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 June
30, 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 June 30, 2003 and December 31,
2002 was approximately $676,000 and $801,000,
respectively, which is included in the
Partnership's liabilities on the balance
sheet, and the total outstanding debt at June
30, 2003 and December 31, 2002 related to the
equipment shared by the Partnership was
approximately $1,137,000 and $1,353,000,
respectively.
The following is a schedule of future minimum
rentals on noncancellable operating leases at
June 30, 2003:
Amount
----------------------------------------------------------------------
Six Months ended December 31, 2003 $ 553,000
Year Ended December 31, 2004 657,000
Year Ended December 31, 2005 46,000
Year Ended December 31, 2006 13,000
----------
$1,269,000
----------------------------------------------------------------------
5. Related Party Other Receivables
Transactions
As of June 30, 2003, the Partnership has a
non-interest bearing receivable from CCC, a
related party to the Partnership, in the
amount of approximately $226,000. This
receivable, as well as any potential 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 the receivable via the
offsetting of acquisition and debt placement
fees, over the next several fiscal years,
with a minimum payment of $5,000 per month,
commencing January 1, 2003.
6. Notes Payable Notes payable consisted of the following:
June 30, 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 $5,408,
including interest, with final payments due from
February through December 2003. $ 84,562 224,172
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 November 2004. 844,302 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. 103,231 131,353
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. 183,948 211,377
---------------------------------
$1,216,043 $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 June 30, 2003 are as follows:
Amount
----------
Six months ended December 31, 2003 $ 487,678
Year ended December 31, 2004 618,764
Year ended December 31, 2005 76,535
Year ended December 31, 2006 33,066
----------
$1,216,043
--------------------------------------------------------------------------------------
7. Supplemental Other noncash activities included in the
Cash Flow determination of net loss are as follows:
Information
Six months ended June 30, 2003 2002
- -------------------------------------------------------------------------------
Lease income, net of interest expense on
notes payable realized as a result of
direct payment of principal by lessee to
bank $536,047 $595,229
- -------------------------------------------------------------------------------
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, 2003 2002
- -------------------------------------------------------------------------------
Net book value of equipment converted to direct
financing leases $ 3,346 $ -
- -------------------------------------------------------------------------------
8. Litigation In June 2003, the Partnership, through CCC,
reached a favorable settlement in a lawsuit
against a customer for failure to make
monthly lease payments based on the existing
lease terms. The settlement did not have a
material adverse impact to the financial
statements of the Partnership. As of December
31, 2002, the Partnership had recorded a
receivable from the customer of approximately
$404,000, net of an allowance of
approximately $330,000. In July 2003, the
Partnership has received approximately
$405,000 in proceeds relating to this
receivable.
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 June 30, 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. Gains or losses on the sales of
equipment are recognized on the date of the sale agreement.
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 six months ended June 30,
2003 and June 30, 2002 were from net proceeds received from sale of equipment
totaling $382,000 and $122,000, respectively, and cash from operations of
$437,000 for the six months ended June 30, 2002. The primary uses of cash for
the six months ended June 30, 2003 and June 30, 2002, were for capital
expenditures for new equipment totaling $15,000 and $97,000, respectively, the
payment of preferred distributions to partners of $289,000 for both periods and
operating activities of $23,000 for the six months ended June 30, 2003.
For the six month period ended June 30, 2003, the Partnership used cash flows
from operating activities of $23,000, which includes net income of $299,000, a
gain on sale of equipment totaling $318,000, and depreciation and amortization
expenses of $533,000. Other noncash activities included in the determination of
net loss include direct payments of lease income by lessees to banks of
$536,000.
For the six month period ended June 30, 2002, the Partnership generated cash
flows from operating activities of $437,000, 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.
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.
In June 2003, the Partnership, through CCC, reached a favorable settlement in a
lawsuit against a customer for failure to make monthly lease payments based on
the existing lease terms. The settlement did not have a material adverse impact
to the financial statements of the Partnership. As of December 31, 2002, the
Partnership had recorded a receivable from the customer of approximately
$404,000, net of an allowance of approximately $330,000. In July 2003, the
Partnership has received approximately $405,000 in proceeds relating to this
receivable.
As of June 30, 2003, the Partnership has a non-interest bearing receivable from
CCC, a related party to the Partnership, in the amount of approximately
$226,000. 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 the receivable via
the offsetting of acquisition and debt placement fees, over the next several
fiscal 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 June 30, 2003, the Partnership had future minimum rentals on non-cancelable
operating leases of $553,000 for the balance of the year ending December 31,
2003 and $716,000 thereafter. At June 30, 2003, the outstanding debt was
$1,216,000, 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 June 30, 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 June 30, 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
June 30, 2003 and December 31, 2002 was approximately $676,000 and $801,000,
respectively, which is included in the Partnership's liabilities on the balance
sheet, and the total outstanding debt at June 30, 2003 and December 31, 2002
related to the equipment shared by the Partnership was approximately $1,137,000
and $1,353,000, respectively.
Results of Operations
Three Months Ended June 30, 2003 compared to Three Months Ended June 30, 2002
- -----------------------------------------------------------------------------
For the quarter ended June 30, 2003, the Partnership recognized income of
$734,000 and expenses of $439,000, resulting in net income of $295,000. For the
quarter ended June 30, 2002, the Partnership recognized income of $684,000 and
expenses of $717,000, resulting in a net loss of $33,000.
Lease income decreased by 40% to $409,000 for the quarter ended June 30, 2003,
from $686,000 for the quarter ended June 30, 2002, primarily due to the fact
that more lease agreements ended than new lease agreements acquired since the
quarter ended June 30, 2002.
The Partnership sold computer equipment with a net book value of $56,000 for the
quarter ended June 30, 2003, for a net gain of $324,000. 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.
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 5% to
approximately $144,000 for the quarter ended June 30, 2003, from $137,000 for
the quarter ended June, 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 $2,000, and an decrease in
remarketing fees of approximately $5,000, an increase in accounting fees of
approximately $5,000 and an increase in legal fees of approximately $7,000.
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 40% to approximately $20,000 for the quarter ended June
30, 2003, from $34,000 for the quarter ended June 30, 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
49% to approximately $250,000 for the quarter ended June 30, 2003, from $489,000
for the quarter ended June 30, 2002 due to equipment and acquisition fees being
fully depreciated/amortized and not being replaced with as many new purchases.
Interest expense decreased 43% to $24,000 for the quarter ended June 30, 2003
from $43,000 for the quarter ended June 30, 2002, primarily due to the decrease
in debt relating to the purchase of computer equipment.
Six Months Ended June 30, 2003 compared to Six Months Ended June 30, 2002
- -------------------------------------------------------------------------
For the six months ended June 30, 2003, the Partnership recognized income of
$1,272,000 and expenses of $973,000, resulting in net income of $299,000. 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.
Lease income decreased by 31% to $952,000 for the six months ended June 30,
2003, from $1,389,000 for the six months ended June 30, 2002, primarily due to
the fact that more lease agreements ended than new lease agreements acquired
since the six months ended June 30, 2002.
The Partnership sold computer equipment with a net book value of $64,000 for the
six months ended June 30, 2003, for a net gain of $318,000. 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 $1,000.
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 37% to
approximately $338,000 for the six months ended June 30, 2003, from $247,000 for
the six months ended June, 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 $22,000 and an increase in
remarketing fees of approximately $73,000.
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 31% to approximately $48,000 for the six months ended
June 30, 2003, from $69,000 for the six months ended June 30, 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 $533,000 for the six months ended June 30, 2003, from
$1,033,000 for the six months ended June 30, 2002 due to equipment and
acquisition fees being fully depreciated/amortized and not being replaced with
as many new purchases.
Interest expense decreased 34% to $54,000 for the six months ended June 30, 2003
from $82,000 for the six months ended June 30, 2002, primarily due to the
decrease in debt relating to the purchase of computer equipment.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 150
In May 2003, the FASB issued FASB Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity, which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS is applicable immediately for
financial instruments entered into or modified after May 31, 2003 and otherwise
shall be effective at the beginning of the first interim period beginning after
June 15, 2003. The Partnership believes that the adoption of SFAS 150 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 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
June 30, 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.
As of December 31, 2002, the Partnership had recorded
a receivable from Avon of approximately $404,000, net
of an allowance of approximately $330,000. In June
2003, a settlement was reached between all parties.
As part of the settlement, title to the equipment was
transferred to Avon. In July 2003, the Partnership
has received approximately $405,000 in proceeds
relating to this receivable. The checks were received
on July 3, 2003 and July 14, 2003.
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:
31.1 THE RULE 15d-14(a)
31.2 THE RULE 15d-14(a)
32.1 SECTION 1350 CERTIFICATION OF CEO
32.2 SECTION 1350 CERTIFICATION OF CFO
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMMONWEALTH INCOME & GROWTH FUND II
BY: COMMONWEALTH INCOME & GROWTH
FUND, INC. General Partner
August 12, 2003 By: /s/ George S. Springsteen
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Date George S. Springsteen
President