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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, 2004
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 33-89476
COMMONWEALTH INCOME & GROWTH FUND II
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2795120
(State or other jurisdiction of (I.R.S. Employer Identification 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12c-2 of the Act): YES [ ] NO [X]
COMMONWEALTH INCOME & GROWTH FUND II
BALANCE SHEETS
JUNE 30, DECEMBER 31,
2004 2003
-----------------------------
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 64,598 $ 37,758
Lease income receivable 5,434 4,550
Net investment in direct financing leases 116,483 146,478
Other receivables - General Partner 6,009 -
Other receivables - Affiliated limited partnerships 5,839 7,888
Prepaid expenses 5,454 3,200
-----------------------------
203,817 199,874
-----------------------------
Computer equipment, at cost 5,002,531 5,409,223
Accumulated depreciation (4,052,092) (4,013,668)
-----------------------------
950,439 1,395,555
-----------------------------
Equipment acquisition costs and deferred expenses, net 19,330 42,906
Accounts receivable, Commonwealth Capital Corp 114,615 354,122
-----------------------------
133,945 397,028
-----------------------------
TOTAL ASSETS $ 1,288,201 $ 1,992,457
=============================
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Accounts payable $ 162,717 $ 53,606
Accounts payable - General Partner - 20,065
Other accrued expenses - 5,938
Unearned lease income 96,231 100,040
Notes payable 357,439 728,365
-----------------------------
TOTAL LIABILITIES 616,387 908,014
-----------------------------
PARTNERS' CAPITAL
General partner 1,000 1,000
Limited partners 670,814 1,083,443
-----------------------------
TOTAL PARTNERS' CAPITAL 671,814 1,084,443
-----------------------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 1,288,201 $ 1,992,457
=============================
see accompanying notes to financial statements
COMMONWEALTH INCOME & GROWTH FUND II
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
---------------------- -------------------------
(UNAUDITED) (UNAUDITED)
INCOME
Lease $217,069 $409,334 $ 449,843 $ 951,860
Interest and other 278 1,298 415 1,473
Gain on sale of computer equipment - 323,511 - 318,319
-------- -------- --------- ----------
TOTAL INCOME 217,347 734,143 450,258 1,271,652
-------- -------- --------- ----------
EXPENSES
Operating, excluding depreciation 55,690 143,741 167,130 337,604
Equipment management fee - General Partner 10,853 20,466 22,492 47,593
Interest 7,861 24,427 18,888 54,377
Depreciation 183,422 234,607 375,152 500,869
Amortization of equipment
acquisition costs and deferred expenses 12,370 15,674 24,593 32,052
Loss on sale of computer equipment 13,861 - 23,752 -
-------- -------- --------- ----------
TOTAL EXPENSES 284,057 438,915 632,007 972,495
-------- -------- --------- ----------
NET (LOSS) INCOME $(66,710) $295,228 $(181,749) $ 299,157
======== ======== ========= ==========
NET (LOSS) INCOME PER EQUIVALENT LIMITED
PARTNERSHIP UNIT $ (0.15) $ 0.64 $ (0.40) $ 0.65
======== ======== ========= ==========
WEIGHTED AVERAGE NUMBER OF EQUIVALENT LIMITED
PARTNERSHIP UNITS OUTSTANDING DURING THE PERIOD 460,067 460,067 460,067 460,067
======== ======== ========= ==========
see accompanying notes to financial statements
COMMONWEALTH INCOME & GROWTH FUND II
STATEMENTS OF PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(UNAUDITED)
GENERAL LIMITED
PARTNER PARTNER GENERAL LIMITED
UNITS UNITS PARTNER PARTNER TOTAL
--------------------------------------------------------------------
PARTNERS' CAPITAL - DECEMBER 31, 2003 50 460,067 $ 1,000 $1,083,443 $1,084,443
Net income (loss) 2,309 (184,058) (181,749)
Distributions (2,309) (228,571) (230,880)
-- ------- ------- ---------- ----------
PARTNERS' CAPITAL - JUNE 30, 2004 50 460,067 $ 1,000 $ 670,814 $ 671,814
== ======= ======= ========== ==========
see accompanying notes to financial statements
COMMONWEALTH INCOME & GROWTH FUND II
STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
2004 2003
--------- ---------
OPERATING ACTIVITIES (UNAUDITED)
Net (loss) income $(181,749) $ 299,157
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities
Depreciation and amortization 399,745 532,921
Loss (gain) on sale of computer equipment 23,752 (318,319)
Other noncash activities included in
determination of net (loss) income (360,331) (536,047)
Changes in assets and liabilities
(Increase) decrease in assets
Lease income receivable (884) 4,004
Minimum lease receivables 2,310 978
Other receivable, General Partner 81,282 75,270
Other receivables - Affiliated limited partnerships 2,049 2,959
Prepaid expenses (2,254) 3,019
Increase (decrease) in liabilities
Accounts payable 109,111 (4,602)
Other accrued expenses (5,938) (7,362)
Unearned lease income (3,809) (74,885)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 63,284 (22,907)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures (4,049) (15,000)
Net proceeds from the sale of computer equipment 67,351 382,317
Equipment acquisition fees paid to General Partner (846) (600)
--------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 62,456 366,717
--------- ---------
FINANCING ACTIVITIES:
Distributions to partners (230,880) (288,601)
Other receivables-Commonwealth Capital Corp 132,151 81,287
Debt placement fee paid to the General Partner (171) -
--------- ---------
NET CASH (USED IN) FINANCING ACTIVITIES (98,900) (207,314)
--------- ---------
Net increase in cash and equivalents 26,840 136,496
Cash and cash equivalents, beginning of period 37,758 33,361
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 64,598 $ 169,857
========= =========
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
POLICIES 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, 2003. Operating results
for the six-month period ended June 30, 2004 are
not necessarily indicative of financial results
that may be expected for the full year ended
December 31, 2004.
REVENUE RECOGNITION
Through June 30, 2004, 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 using the straight-line method.
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.
LIQUIDATION POLICIES
The Partnership has begun liquidation during the
quarter ended June 30, 2004. Particular items of
equipment may be sold at any time if, in the
judgment of the General Partner, it is in the
best interest of the Partnership to do so. The
determination of whether particular items of
partnership equipment should be sold will be made
by the General Partner after consideration of all
relevant factors (including prevailing economic
conditions, the cash requirements of the
Partnership, potential capital appreciation, cash
flow and federal income tax considerations), with
a view toward achieving the principal investment
objectives of the Partnership.
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, 2004, 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 were 7% of the
partners' contributed capital and dealer manager
fees were 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 The following lists the components of the net
DIRECT FINANCING investment in direct financing leases as of June
LEASES 30, 2004 and December 31, 2003:
JUNE 30, December 31,
2004 2003
-----------------------
Minimum lease payments
receivable $139,981 $176,035
Less: Unearned revenue 23,498 29,557
---------------------------------------------------------------------
Net investment in direct financing
leases $116,483 $146,478
=====================================================================
The following is a schedule of future minimum
rentals on noncancellable direct financing
leases at June 30, 2004
Amount
--------
Six Months ending December 31, 2004 $ 36,054
Year Ended December 31, 2005 70,183
Year Ended December 31, 2006 33,744
--------
$139,981
================================================
4. COMPUTER The Partnership is the lessor of equipment under
EQUIPMENT operating leases with periods ranging from 24 to
48 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, 2004 and December 31, 2003 was
approximately $1,660,000 for both period ends,
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, 2004 and December
31, 2003 was approximately $2,813,000 for both
period ends. The Partnership's share of the
outstanding debt associated with this equipment
at June 30, 2004 and December 31, 2003 was
approximately $165,000 and $422,000,
respectively, which is included in the
Partnership's notes payables on the balance
sheet, and the total outstanding debt at June 30,
2004 and December 31, 2003 related to the
equipment shared by the Partnership was
approximately $251,000 and $696,000,
respectively.
The following is a schedule of future minimum
rentals on noncancellable operating leases at
June 30, 2004:
Amount
------------------------------------------------
Six Months ending December 31, 2004 $248,000
Year Ended December 31, 2005 54,000
Year Ended December 31, 2006 13,000
------------------------------------------------
$315,000
================================================
5. RELATED PARTY OTHER RECEIVABLES
TRANSACTIONS
As of June 30, 2004, the Partnership has a
non-interest bearing receivable from CCC, a
related party to the Partnership, in the amount
of approximately $115,000. CCC, through its
indirect subsidiaries, including the General
Partner of the Partnership, earns fees based on
revenues and new lease purchases from this fund.
This receivable has been reduced by approximately
$240,000 in the six months ending June 30, 2004
by the offsetting of equipment management and
acquisition fees and payments by CCC. CCC intends
to repay the balance of the receivable, through
acquisition and debt placement fees, over
approximately the next fiscal year, with a
minimum payment of $10,000 per month, commencing
March 1, 2004.
REIMBURSABLE EXPENSES
The General Partner and its affiliates are
entitled to reimbursement by the Partnership for
the cost of supplies and services obtained and
used by the General Partner in connection with
the administration and operation of the
Partnership from third parties unaffiliated with
the General Partner. In addition, the General
Partner and its affiliates are entitled to
reimbursement for certain expenses incurred by
the General Partner and its affiliates in
connection with the administration and operation
of the Partnership. During the six months ended
June 30, 2004 and 2003, the Partnership recorded
$110,000 and $153,000, respectively, for
reimbursement of expenses to the General Partner.
EQUIPMENT ACQUISITION FEE
The General Partner is entitled to be paid an
equipment acquisition fee of 4% of the purchase
price of each item of equipment purchased as
compensation for the negotiation of the
acquisition of the equipment and lease thereof or
sale under a conditional sales contract. During
the six months ended June 30, 2004 and 2003,
equipment acquisition fees of approximately
$1,000 were earned by the General Partner for
both periods.
EQUIPMENT MANAGEMENT FEE
The General Partner is entitled to be paid a
monthly fee equal to the lesser of (i) the fees
which would be charged by an independent third
party for similar services for similar equipment
or (ii) the sum of (a) two percent of (1) the
gross lease revenues attributable to equipment
which is subject to full payout net leases which
contain net lease provisions plus (2) the
purchase price paid on conditional sales
contracts as received by the Partnership and (b)
5% of the gross lease revenues attributable to
equipment which is subject to operating and
capital leases. During the six months ended June
30, 2004 and 2003, equipment management fees of
approximately $23,000 and $48,000, respectively,
were earned by the General Partner.
EQUIPMENT LIQUIDATION FEE
With respect to each item of equipment sold by
the General Partner (other than in connection
with a conditional sales contract), a fee equal
to the lesser of (i) 50% of the competitive
equipment sale commission or (ii) three percent
of the sales price for such equipment is payable
to the General Partner. The payment of such fee
is subordinated to the receipt by the limited
partners of the net disposition proceeds from
such sale in accordance with the Partnership
Agreement. Such fee will be reduced to the extent
any liquidation or resale fees are paid to
unaffiliated parties. During the six months ended
June 30, 2004 and 2003, equipment liquidation
fees of approximately $2,000 and $22,000,
respectively, were earned by the General Partner.
6. NOTES PAYABLE Notes payable consisted of the following:
JUNE 30, DECEMBER 31,
2004 2003
--------------------------------------------------------
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. $172,045 $498,520
Installment notes payable to
banks; interest ranging from
6.00% to 6.75%, due in
monthly installments ranging
from $240 to $1,875, including
interest, with final payments
due from February through
June 2005. 58,965 74,204
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. 126,429 155,641
-------- --------
$357,439 $728,365
========================================================
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, 2004 are as
follows:
Amount
--------
Six months ending December 31, 2004 $240,367
Year ended December 31, 2005 84,006
Year ended December 31, 2006 33,066
--------
$357,439
--------
7. SUPPLEMENTAL Other noncash activities included in the
CASH FLOW determination of net loss are as follows:
INFORMATION
Six months ended June 30, 2004 2003
- -----------------------------------------------------------------------------
Lease income, net of interest expense on
notes payable realized as a result of
direct payment of principal by lessee to
bank
$360,331 $536,047
=============================================================================
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, 2004 2003
- ---------------------------------------------------------------------------
Debt assumed in connection with purchase
of computer equipment $ 17,090 $ -
===========================================================================
Net book value of equipment converted to
direct financing leases $ - $3,346
===========================================================================
Offsetting of receivables from CCC with
payables to General Partner $107,356 $ -
===========================================================================
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 2 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, 2004, 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 six months ended June 30,
2004 and 2003 were net proceeds received from sale of equipment totaling
approximately $67,000 and $382,000, respectively, and cash provided from
operations of approximately $63,000 and the repayment of receivables from CCC of
approximately $132,000 for the period ending June 30, 2004. The primary uses of
cash for the six months ended June 30, 2004 and 2003 were the payment of
preferred distributions to partners of approximately $231,000 and $289,000,
respectively, and capital expenditures for new equipment totaling approximately
$4,000 and $15,000, respectively. The Partnership used cash from operations of
approximately $23,000 for the six months ended June 30, 2003.
For the six month period ended June 30, 2004, the Partnership generated cash
flows from operating activities of approximately $63,000, which includes a net
loss of approximately $182,000 and depreciation and amortization expenses of
approximately $400,000. Other noncash activities included in the determination
of net income include direct payments of lease income by lessees to banks of
approximately $360,000.
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.
As of June 30, 2004, the Partnership has a non-interest bearing receivable from
CCC, a related party to the Partnership, in the amount of approximately
$115,000. CCC, through its indirect subsidiaries, including the General Partner
of the Partnership, earns fees based on revenues and new lease purchases from
this fund. This receivable has been reduced by approximately $240,000 in the six
months ending June 30, 2004 by the offsetting of equipment management and
acquisition fees and payments by CCC. CCC intends to repay the balance of the
receivable, through acquisition and debt placement fees, over approximately the
next fiscal year, with a minimum payment of $10,000 per month, commencing March
1, 2004.
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, 2004, the Partnership had future minimum rentals on non-cancelable
operating leases of $248,000 for the balance of the year ending December 31,
2004 and $67,000 thereafter. As of June 30, 2004, the Partnership had future
minimum rentals on noncancellable capital leases of $36,000 for the balance of
the year ending December 31, 2004 and $104,000 thereafter. At June 30, 2004, the
outstanding debt was $357,000, with interest rates ranging from 5.95% to 8.75%,
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, 2004 and December 31, 2003 was approximately
$1,660,000 for both period ends, 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, 2004 and December 31, 2003 was
approximately $2,813,000 for both period ends. The Partnership's share of the
outstanding debt associated with this equipment at June 30, 2004 and December
31, 2003 was approximately $165,000 and $422,000, respectively, which is
included in the Partnership's notes payables on the balance sheet, and the total
outstanding debt at June 30, 2004 and December 31, 2003 related to the equipment
shared by the Partnership was approximately $251,000 and $696,000, respectively.
The Partnership has begun liquidation during the quarter ended June 30, 2004.
Particular items of equipment may be sold at any time if, in the judgment of the
General Partner, it is in the best interest of the Partnership to do so. The
determination of whether particular items of partnership equipment should be
sold will be made by the General Partner after consideration of all relevant
factors (including prevailing economic conditions, the cash requirements of the
Partnership, potential capital appreciation, cash flow and federal income tax
considerations), with a view toward achieving the principal investment
objectives of the Partnership.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2004 compared to Three Months Ended June 30, 2003
-----------------------------------------------------------------------------
For the quarter ended June 30, 2004, the Partnership recognized income of
approximately $217,000 and expenses of approximately $284,000, resulting in a
net loss of approximately $67,000. For the quarter ended June 30, 2003, the
Partnership recognized income of approximately $734,000 and expenses of
approximately $439,000, resulting in net income of approximately $295,000.
Lease income decreased by 47% to approximately $217,000 for the quarter ended
June 30, 2004, from approximately $409,000 for the quarter ended June 30, 2003,
primarily due to the fact that more lease agreements ended since the quarter
ended June 30, 2003.
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 decreased 61% to
approximately $56,000 for the quarter ended June 30, 2004, from approximately
$144,000 for the quarter ended June 30, 2003, which is primarily attributable to
a decrease in the amount charged by CCC, a related party, to the Partnership for
the administration and operation of approximately $19,000, a decrease in
remarketing fees of approximately $28,000, a decrease in professional fees of
approximately $14,000, a decrease in due diligence expenses of approximately
$9,000, a decrease in postage/shipping expenses of approximately $6,000, a
decrease in conventions of approximately $2,000 and a decrease in office
equipment rental of approximately $2,000.
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 47% to approximately $11,000 for the quarter ended June
30, 2004, from approximately $21,000 for the quarter ended June 30, 2003, 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
22% to approximately $196,000 for the quarter ended June 30, 2004, from
approximately $250,000 for the quarter ended June 30, 2003 due to equipment and
acquisition fees being fully depreciated/amortized and not being replaced with
new purchases.
The Partnership sold computer equipment with a net book value of approximately
$28,000 for the quarter ended June 30, 2004, for a net loss of approximately
$14,000. The Partnership sold computer equipment with a net book value of
approximately $56,000 for the quarter ended June 30, 2003, for a net gain of
approximately $324,000.
Interest expense decreased 68% to approximately $8,000 for the quarter ended
June 30, 2004 from approximately $24,000 for the quarter ended June 30, 2003,
primarily due to the decrease in debt relating to the purchase of computer
equipment.
Six Months Ended June 30, 2004 compared to Six Months Ended June 30, 2003
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For the six months ended June 30, 2004, the Partnership recognized income of
approximately $450,000 and expenses of approximately $632,000, resulting in a
net loss of approximately $182,000. For the six months ended June 30, 2003, the
Partnership recognized income of approximately $1,272,000 and expenses of
approximately $973,000, resulting in net income of approximately $299,000.
Lease income decreased by 53% to approximately $450,000 for the six months ended
June 30, 2004, from approximately $952,000 for the six months ended June 30,
2003, primarily due to the fact that more lease agreements ended since the six
months ended June 30, 2003.
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 decreased 50% to
approximately $167,000 for the six months ended June 30, 2004, from
approximately $338,000 for the six months ended June 30, 2003, which is
primarily attributable to a decrease in the amount charged by CCC, a related
party, to the Partnership for the administration and operation of approximately
$33,000, a decrease in remarketing fees of approximately $108,000, a decrease in
due diligence expenses of approximately $15,000, a decrease in postage/shipping
expenses of approximately $7,000, a decrease in conventions of approximately
$2,000 and a decrease in printing services of approximately $6,000, a decrease
in communication expenses 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 53% to approximately $22,000 for the six months ended
June 30, 2004, from approximately $48,000 for the six months ended June 30,
2003, 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
25% to approximately $400,000 for the six months ended June 30, 2004, from
approximately $533,000 for the six months ended June 30, 2003 due to equipment
and acquisition fees being fully depreciated/amortized and not being replaced
with new purchases.
The Partnership sold computer equipment with a net book value of approximately
$91,000 for the six months ended June 30, 2004, for a net loss of approximately
$24,000. The Partnership sold computer equipment with a net book value of
approximately $64,000 for the six months ended June 30, 2003, for a net gain of
approximately $318,000.
Interest expense decreased 65% to approximately $19,000 for the six months ended
June 30, 2004 from approximately $54,000 for the six months ended June 30, 2003,
primarily due to the decrease in debt relating to the purchase of computer
equipment.
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
June 30, 2004.
The Partnership'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 quarters.
Based upon this review, the Partnership's Chief Executive Officer and a
Financial Officer have concluded that the Partnership's disclosure controls (as
defined in Rule 13a-14c 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.
Inapplicable
Item 2. CHANGES IN SECURITIES.
Inapplicable
Item 3. DEFAULTS UPON SENIOR SECURITIES.
Inapplicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
Inapplicable
Item 5. OTHER INFORMATION.
Inapplicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
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
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
August 13, 2004 By: /s/ George S. Springsteen
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Date George S. Springsteen
President