UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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, L.P.
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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 Identification Number)
incorporation or organization)
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 [ ]
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, L.P.
BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2004 2003
----------------------------------
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 3,028 $ 37,758
Lease income receivable 11,731 4,550
Net investment in direct financing leases 101,485 146,478
Other receivables - Affiliated limited partnerships 12,743 7,888
Prepaid expenses 2,827 3,200
----------------------------------
131,814 199,874
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Computer equipment, at cost 3,408,971 5,409,223
Accumulated depreciation (2,732,068) (4,013,668)
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676,903 1,395,555
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Equipment acquisition costs and deferred expenses, net 7,167 42,906
Accounts receivable, Commonwealth Capital Corp - 354,122
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7,167 397,028
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TOTAL ASSETS $ 815,884 $ 1,992,457
==================================
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Accounts payable $ 98,095 $ 53,606
Accounts payable - General Partner 35,070 20,065
Accounts payable - Commonwealth Capital Corp. 46,142 -
Other accrued expenses 2,300 5,938
Unearned lease income 95,011 100,040
Notes payable 194,801 728,365
----------------------------------
TOTAL LIABILITIES 471,419 908,014
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PARTNERS' CAPITAL
General partner 1,000 1,000
Limited partners 343,465 1,083,443
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TOTAL PARTNERS' CAPITAL 344,465 1,084,443
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TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 815,884 $ 1,992,457
==================================
see accompanying notes to financial statements
COMMONWEALTH INCOME & GROWTH FUND II, L.P.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
--------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
INCOME
Lease $ 168,910 $ 300,754 $ 618,753 $ 1,252,614
Interest and other 2,701 379 3,116 1,852
Gain on sale of computer equipment - - - 304,905
--------------------------------------------------------------------
TOTAL INCOME 171,611 301,133 621,869 1,559,371
--------------------------------------------------------------------
EXPENSES
Operating 104,262 90,042 338,469 427,646
Equipment management fee - General Partner 8,446 15,038 30,938 62,631
Interest 4,807 19,417 23,695 73,794
Depreciation 180,020 229,315 555,172 730,184
Amortization of equipment
acquisition costs and deferred expenses 12,163 16,359 36,756 48,411
Loss on sale of computer equipment 6,746 13,414 30,498 -
--------------------------------------------------------------------
TOTAL EXPENSES 316,444 383,585 1,015,528 1,342,666
--------------------------------------------------------------------
NET (LOSS) INCOME $ (144,833) $ (82,452) $ (393,659) $ 216,705
====================================================================
NET (LOSS) INCOME PER EQUIVALENT LIMITED
PARTNERSHIP UNIT $ (0.31) $ (0.18) $ (0.86) $ 0.47
====================================================================
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, L.P.
STATEMENTS OF PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 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) 3,463 (397,122) (393,659)
Distributions (3,463) (342,856) (346,319)
------------------------------------------------------------------------
PARTNERS' CAPITAL - SEPTEMBER 30, 2004 50 460,067 $ 1,000 $ 343,465 $ 344,465
========================================================================
see accompanying notes to financial statements
COMMONWEALTH INCOME & GROWTH FUND II, L.P.
STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
2004 2003
-----------------------------
OPERATING ACTIVITIES (UNAUDITED) (UNAUDITED)
Net (loss) income $ (393,659) $ 216,705
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities
Depreciation and amortization 591,928 778,595
Amortization of unearned lease income - (8,213)
Loss (gain) on sale of computer equipment 30,498 (304,905)
Other noncash activities included in
determination of net (loss) income (507,971) (780,517)
Changes in assets and liabilities
(Increase) decrease in assets
Lease income receivable (7,181) 407,028
Minimum direct finance lease receivables 2,310 2,237
Accounts receivable, General Partner 122,361 2,084
Other receivables - Affiliated limited partnerships (4,855) (3,075)
Prepaid expenses 373 (481)
Increase (decrease) in liabilities
Accounts payable 44,489 (19,650)
Accounts payable - Commonwealth Capital Corp. 46,142 -
Other accrued expenses (3,638) (7,362)
Unearned lease income (5,029) (100,767)
-----------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (84,232) 181,679
-----------------------------
INVESTING ACTIVITIES:
Capital expenditures (4,049) (15,000)
Net proceeds from the sale of computer equipment 154,121 404,175
Long term unearned lease income - 32,586
Equipment acquisition fees paid to General Partner (846) (600)
-----------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 149,226 421,161
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FINANCING ACTIVITIES:
Distributions to partners (346,319) (461,761)
Other receivables-Commonwealth Capital Corp 246,766 91,216
Debt placement fee paid to the General Partner (171) -
-----------------------------
NET CASH (USED IN) FINANCING ACTIVITIES (99,724) (370,545)
-----------------------------
Net (decrease) increase in cash and equivalents (34,730) 232,295
Cash and cash equivalents, beginning of period 37,758 33,361
-----------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,028 $ 265,656
=============================
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 has begun the
liquidation phase - See note 2), 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
accounting principles generally accepted in the
United States. 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 nine-month period ended September 30, 2004 are
not necessarily indicative of financial results that
may be expected for the full year ended December 31,
2004.
REVENUE RECOGNITION
Through September 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 accounting principles generally accepted in the
United States 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 September 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 September 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. The Partnership maintains its
cash balances in a financial institution. At times,
the balances may exceed federally insured limits. The
Partnership has not experienced any losses in such
accounts, and believes it is not exposed to any
significant credit risk.
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 September
LEASES 30, 2004 and December 31, 2003:
SEPTEMBER 30, December 31,
2004 2003
----------------------------
Minimum lease payments receivable $ 121,594 $ 176,035
Less: Unearned revenue 20,469 29,557
--------------------------------------------------------------------------------
Net investment in direct financing leases $ 101,485 $ 146,478
--------------------------------------------------------------------------------
The following is a schedule of future minimum rentals on noncancellable direct
financing leases at September 30, 2004
Amount
------------
Three Months ending December 31, 2004 $ 17,667
Year Ended December 31, 2005 70,183
Year Ended December 31, 2006 33,744
------------
$ 121,594
================================================================================
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
September 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 September 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 September 30, 2004
and December 31, 2003 was approximately $47,000 and
$422,000, respectively, which is included in the
Partnership's notes payables on the balance sheet,
and the total outstanding debt at September 30, 2004
and December 31, 2003 related to the equipment shared
by the Partnership was approximately $69,000 and
$696,000, respectively.
The following is a schedule of future minimum rentals
on noncancellable operating leases at September 30,
2004:
Amount
-----------------------------------------------------
Three Months ending December 31, 2004 $ 75,000
Year Ended December 31, 2005 54,000
Year Ended December 31, 2006 13,000
-----------------------------------------------------
$ 142,000
=====================================================
5. RELATED PARTY OTHER RECEIVABLES
TRANSACTIONS
As of June 30, 2004, the Partnership had an
unsecured, 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 fully reimbursed by CCC in the nine months
ending September 30, 2004 by the offsetting of
equipment management and acquisition fees and
payments by CCC as well as making a cash payments of
approximately $106,000 in September 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 nine months ended September 30, 2004 and
2003, the Partnership recorded $214,000 and $278,000,
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 nine months
ended September 30, 2004 and 2003, equipment
acquisition fees of approximately $1,000 were earned
by the General Partner for both periods. As of
September 30, 2004, the unpaid balance was
approximately $1,000. As of December 31, 2003, there
was no outstanding balance.
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 nine months ended September 30, 2004 and
2003, equipment management fees of approximately
$31,000 and $63,000, respectively, were earned by the
General Partner. As of September 30, 2004, the unpaid
balance was approximately $16,000. As of December 31,
2003, there was no outstanding balance.
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 nine
months ended September 30, 2004 and 2003, equipment
liquidation fees of approximately $5,000 and $23,000,
respectively, were earned by the General Partner. As
of September 30, 2004 and December 31, 2003, the
unpaid balance was approximately $20,000 and $10,000,
respectively.
6. NOTES PAYABLE Notes payable consisted of the following:
SEPTEMBER 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 $ 45,217 $ 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
38,110 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 111,474 155,641
-----------------------------
$ 194,801 $ 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 September 30, 2004 are as follows:
Amount
---------
Three months ending December 31, 2004 $ 78,833
Year ended December 31, 2005 82,902
Year ended December 31, 2006 33,066
---------
$ 194,801
=========
7. SUPPLEMENTAL Other noncash activities included in the
CASH FLOW determination of net loss are as follows:
INFORMATION
Nine months ended September 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 $ 507,971 $ 780,517
===================================================================================================
No interest or principal on notes payable was paid by the Partnership
because direct payment was made by lessee to the bank in lieu of
collection of lease income and payment of interest and principal by
the Partnership.
Noncash investing and financing activities include the following:
Nine months ended September 30, 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 $ 246,766 $ -
===================================================================================================
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 September 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 nine months ended September
30, 2004 and 2003 were net proceeds received from sale of equipment totaling
approximately $154,000 and $404,000, respectively and the repayment of
receivables from CCC of approximately $247,000 and $91,000, respectively and
cash provided from operations of approximately $182,000 for the nine months
ended September 30, 2003. The primary uses of cash for the nine months ended
September 30, 2004 and 2003 were the payment of preferred distributions to
partners of approximately $346,000 and $462,000, respectively, and capital
expenditures for new equipment totaling approximately $4,000 and $15,000,
respectively. The Partnership used cash from operations of approximately $84,000
for the nine months ended September 30, 2004.
For the nine month period ended September 30, 2004, the Partnership used cash
flows from operating activities of approximately $84,000, which includes a net
loss of approximately $394,000 and depreciation and amortization expenses of
approximately $592,000. Other noncash activities included in the determination
of net income include direct payments of lease income by lessees to banks of
approximately $508,000.
For the nine month period ended September 30, 2003, the Partnership generated
cash flows from operating activities of approximately $182,000, which includes
net income of $217,000, a gain on sale of equipment totaling $305,000, and
depreciation and amortization expenses of $779,000. Other noncash activities
included in the determination of net loss include direct payments of lease
income by lessees to banks of $781,000.
As of June 30, 2004, the Partnership had an unsecured, 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 fully reimbursed by CCC in
the nine months ending September 30, 2004 by the offsetting of equipment
management and acquisition fees and payments by CCC as well as making a cash
payments of approximately $106,000 in September 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 September 30, 2004, the Partnership had future minimum rentals on
non-cancelable operating leases of $75,000 for the balance of the year ending
December 31, 2004 and $67,000 thereafter. As of September 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 September 30, 2004, the outstanding debt was $195,000, 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 September 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 September 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 September 30, 2004 and
December 31, 2003 was approximately $47,000 and $422,000, respectively, which is
included in the Partnership's notes payables on the balance sheet, and the total
outstanding debt at September 30, 2004 and December 31, 2003 related to the
equipment shared by the Partnership was approximately $69,000 and $696,000,
respectively.
The Partnership has begun liquidation during the quarter ended September 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 September 30, 2004 compared to
Three Months Ended September 30, 2003
For the quarter ended September 30, 2004, the Partnership recognized income of
approximately $172,000 and expenses of approximately $317,000, resulting in a
net loss of approximately $145,000. For the quarter ended September 30, 2003,
the Partnership recognized income of approximately $301,000 and expenses of
approximately $384,000, resulting in a net loss of approximately $83,000.
Lease income decreased by 44% to approximately $169,000 for the quarter ended
September 30, 2004, from approximately $301,000 for the quarter ended September
30, 2003, primarily due to the fact that more lease agreements ended since the
quarter ended September 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 increased 16% to
approximately $104,000 for the quarter ended September 30, 2004, from
approximately $90,000 for the quarter ended September 30, 2003, which is
primarily attributable to an increase in remarketing fees of approximately
$53,000. There was a decrease in the amount charged by CCC, a related party, to
the Partnership for the administration and operation of approximately $13,000, a
decrease in professional fees of approximately $10,000, a decrease in due
diligence expenses of approximately $6,000, a decrease imprinting services of
approximately $5,000, a decrease in postage/shipping expenses of approximately
$8,000 and a decrease in communications 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 44% to approximately $8,000 for the quarter ended
September 30, 2004, from approximately $15,000 for the quarter ended September
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 $192,000 for the quarter ended September 30, 2004, from
approximately $246,000 for the quarter ended September 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
$94,000 for the quarter ended September 30, 2004, for a net loss of
approximately $7,000. The Partnership sold computer equipment with a net book
value of approximately $35,000 for the quarter ended September 30, 2003, for a
net loss of approximately $13,000.
Interest expense decreased 75% to approximately $5,000 for the quarter ended
September 30, 2004 from approximately $19,000 for the quarter ended September
30, 2003, primarily due to the decrease in debt relating to the purchase of
computer equipment.
Nine Months Ended September 30, 2004 compared to
Nine Months Ended September 30, 2003
For the nine months ended September 30, 2004, the Partnership recognized income
of approximately $622,000 and expenses of approximately $1,016,000, resulting in
a net loss of approximately $394,000. For the nine months ended September 30,
2003, the Partnership recognized income of approximately $1,559,000 and expenses
of approximately $1,342,000, resulting in net income of approximately $217,000.
Lease income decreased by 51% to approximately $619,000 for the nine months
ended September 30, 2004, from approximately $1,253,000 for the nine months
ended September 30, 2003, primarily due to the fact that more lease agreements
ended since the nine months ended September 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 21% to
approximately $338,000 for the nine months ended September 30, 2004, from
approximately $428,000 for the nine months ended September 30, 2003, which is
primarily attributable to a decrease in remarketing fees of approximately
$54,000, a decrease in due diligence expenses of approximately $21,000, a
decrease in postage/shipping expenses of approximately $15,000, a decrease in
conventions of approximately $2,000 and a decrease in printing services of
approximately $11,000, a decrease in communication expenses of approximately
$4,000. There was also an increase in the amount charged by CCC, a related
party, to the Partnership for the administration and operation of approximately
$22,000
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 51% to approximately $31,000 for the nine months ended
September 30, 2004, from approximately $63,000 for the nine months ended
September 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
24% to approximately $592,000 for the nine months ended September 30, 2004, from
approximately $779,000 for the nine months ended September 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
$185,000 for the nine months ended September 30, 2004, for a net loss of
approximately $30,000. The Partnership sold computer equipment with a net book
value of approximately $99,000 for the nine months ended September 30, 2003, for
a net gain of approximately $305,000.
Interest expense decreased 68% to approximately $24,000 for the nine months
ended September 30, 2004 from approximately $74,000 for the nine months ended
September 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
September 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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
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
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
November 15, 2004 By: /s/ George S. Springsteen
- ----------------- --------------------------
Date George S. Springsteen
President