10-Q 1 tenq.txt 10-Q 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, 2005 ( ) 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] FORM 10-Q JUNE 30, 2005 TABLE OF CONTENTS PART I Item 1. Condensed Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 Item 4. Controls and Procedures 15 PART II Item 1. Legal Proceedings 16 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 16 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Securities Holders 16 Item 5. Other Information 16 Item 6. Index to Exhibits Signatures Certifications 2 COMMONWEALTH INCOME & GROWTH FUND II STATEMENT OF NET ASSETS IN LIQUIDATION JUNE 30, 2005 ------------ (UNAUDITED) ASSETS Cash and cash equivalents $ 63,344 Lease income receivable 30,619 Net investment in direct financing leases 43,783 Other receivables - affiliated partnerships 18,026 Deposits 25 ------------- 155,797 ------------- Computer equipment, at cost 2,416,137 Accumulated depreciation (2,280,748) ------------- 135,389 ------------- Equipment acquisition costs and deferred expenses, net 650 Accounts receivable, Commonwealth Capital Corp 12,783 ------------- 13,433 ------------- TOTAL ASSETS $ 304,619 ============= LIABILITIES AND NET ASSETS LIABILITIES Accounts payable $ 97,660 Accounts payable - General Partner 126,135 Accounts payable - Commonwealth Capital Corp 12,691 Unearned lease income 4,608 Notes payable 63,525 ------------- TOTAL LIABILITIES 304,619 ------------- NET ASSETS IN LIQUIDATION $ - ============= see accompanying notes to condensed financial statements 3 COMMONWEALTH INCOME & GROWTH FUND II STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION THREE MONTHS ENDED JUNE 30, 2005 ------------------ (UNAUDITED) Net Assets in liquidation - April 1, 2005 $ (34,651) Lease income 20,793 Interest and other 193 Gain on sale of computer equipment 31,771 Operating, excluding depreciation (50,335) Equipment management fee - General Partner (2,294) Interest (1,153) Depreciation (91,968) Distributions to Investors (46,187) Changes in estimated liquidation values of assets and liabilities (173,831) ------------- NET ASSETS IN LIQUIDATION - JUNE 30, 2005 $ - ============= see accompanying notes to condensed financial statements 4 COMMONWEALTH INCOME & GROWTH FUND II CONDENSED BALANCE SHEETS DECEMBER 31, 2004 (a) ------------- ASSETS Cash and cash equivalents $ 1,085 Lease income receivable 9,478 Net investment in direct financing leases 86,487 Other receivables - affiliated partnerships 16,792 Deposits 25 ------------- 113,867 ------------- Computer equipment, at cost 2,850,669 Accumulated depreciation (2,460,366) ------------- 390,303 ------------- Equipment acquisition costs and deferred expenses, net 2,601 Accounts receivable, Commonwealth Capital Corp 16,100 ------------- 18,701 ------------- TOTAL ASSETS $ 522,871 ============= LIABILITIES AND PARTNERS' CAPITAL LIABILITIES Accounts payable $ 51,515 Accounts payable - General Partner 79,488 Accounts payable - Commonwealth Capital Corp 42,499 Unearned lease income 94,576 Notes payable 115,967 ------------- TOTAL LIABILITIES 384,045 ------------- PARTNERS' CAPITAL General partner 1,000 Limited partners 137,826 ------------- TOTAL PARTNERS' CAPITAL 138,826 ------------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 522,871 ============= (a) Derived from the audited financial statements as of and for the year ended December 31, 2004 see accompanying notes to condensed financial statements 5 COMMONWEALTH INCOME & GROWTH FUND II CONDENSED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, ~~DECEMBER~~JUNE 3130, JUNE 30, 2005 2004 2004 -------------------------------------------- ------------------ (UNAUDITED) ~~ASSETS~~(UNAUDITED) ~~Cash~~INCOME ~~and~~Lease ~~cash equivalents~~ $ 1228,~~230~~792 $ 1217,~~085~~069 ~~Lease~~$ ~~income receivable 8~~449,~~305~~843 ~~9,478~~Interest ~~Net~~and ~~investment~~other ~~in direct financing leases 58,899 86,487 Other receivables~~ - ~~affiliated~~278 ~~partnerships~~415 ~~6,608 16,792 Deposits 25 25~~ ------------- ------------- ~~86,067 113,867~~ ------------- ------------- ~~Computer equipment, at cost 2,734,602 2,850,669 Accumulated depreciation (2,472,462) (2,460,366)~~ ------------- ---~~----------~~ ~~262~~TOTAL INCOME 28,~~140~~792 ~~390~~217,~~303~~347 450,258 ------------- ------------- ~~Equipment acquisition costs and deferred expenses, net 1,129 2,601 Accounts receivable, Commonwealth Capital Corp 12,783 16,100~~ ------------- ------------- ~~13,912 18,701~~ ------------- ---~~----------~~ ~~TOTAL~~EXPENSES ~~ASSETS~~Operating, $excluding ~~362~~depreciation 83,~~119~~491 $55,690 ~~522~~167,~~871~~130 ~~=============~~Equipment ~~=============~~management ~~LIABILITIES~~fee ~~AND~~- ~~PARTNERS'~~General ~~CAPITAL~~Partner ~~LIABILITIES~~300 ~~Accounts~~10,853 ~~payable~~22,492 $Interest 392,~~529~~093 $7,861 5118,~~515~~888 ~~Accounts~~Depreciation ~~payable~~109,294 -183,422 ~~General~~375,152 ~~Partner~~Amortization ~~107,340~~of ~~79,488~~equipment ~~Accounts~~acquisition ~~payable~~costs -and ~~Commonwealth~~deferred ~~Capital~~expenses ~~Corp~~1,473 7312,~~322~~370 4224,~~499~~593 ~~Unearned~~Loss ~~lease~~on ~~income~~sale ~~92,996~~of ~~94,576~~computer ~~Notes~~equipment ~~payable~~5,618 8313,~~583~~861 ~~115~~23,~~967~~752 ------------- ------------- ~~TOTAL LIABILITIES 396,770 384,045~~ ------------- ----------------------------- ~~PARTNERS'~~TOTAL ~~CAPITAL~~EXPENSES ~~General~~$ ~~partner 1~~202,~~000~~269 1284,~~000~~057 ~~Limited partners (35~~632,~~651)~~007 ~~137,826~~ ------------- ------------- ~~TOTAL PARTNERS' CAPITAL (34,651) 138,826~~ ------------- ----------------------------- ~~TOTAL~~NET ~~LIABILITIES~~(LOSS) ~~AND~~$ ~~PARTNERS'~~(173,477) ~~CAPITAL~~ $ ~~362~~(66,~~119~~710) $ ~~522~~(181,~~871~~749) ==================================================================== NET (LOSS) PER EQUIVALENT LIMITED PARTNERSHIP UNIT $ (0.38) $ (0.15) $ (0.40) ==================================================================== WEIGHTED AVERAGE NUMBER OF EQUIVALENT LIMITED PARTNERSHIP UNITS OUTSTANDING DURING THE PERIOD 460,067 460,067 460,067 ====================================================================

see accompanying notes to condensed financial statements 6 COMMONWEALTH INCOME & GROWTH FUND II CONDENSED STATEMENTS OF CASH FLOW FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND THE SIX MONTHS ENDED JUNE 30, 2004

~~THREE~~2005 ~~MONTHS~~2004 ~~ENDED MARCH 31,~~ -------------------------------- ~~2005~~(UNAUDITED) ~~2004~~NET CASH PROVIDED BY OPERATING ACTIVITIES (5,421) 63,284 ------------- ------------------- ~~(unaudited)~~INVESTING ~~INCOME~~ACTIVITIES: ~~Lease~~Net $proceeds ~~28,792~~from $the ~~232~~sale of computer equipment 13,~~774~~249 ~~Interest~~67,351 ~~and~~Equipment ~~other~~acquisition fees paid to General Partner - ~~137~~(846) Capital Expenditures - (4,049) ------------ -------------------- ~~TOTAL~~NET ~~INCOME~~CASH 28PROVIDED BY INVESTING ACTIVITIES 13,~~792~~249 ~~232~~62,~~911~~456 ------------- ------------------- ~~EXPENSES~~FINANCING ~~Operating,~~ACTIVITIES: ~~excluding~~Distributions ~~depreciation~~to ~~83,491~~partners ~~111~~- (230,~~440~~880) ~~Equipment~~Debt ~~management~~placement fee -paid to General Partner ~~300~~- ~~11,639~~(171) ~~Interest~~Other ~~2,093~~receivables-Commonwealth ~~11,027~~Capital ~~Depreciation~~Corp ~~109~~3,~~294~~317 ~~191~~132,~~730~~151 ~~Amortization~~-------------------------------- ofNET ~~equipment~~CASH ~~acquisition~~PROVIDED ~~costs~~BY ~~and~~(USED ~~deferred~~IN) ~~expenses~~FINANCING ~~1,473~~ACTIVITIES 123,~~223~~317 ~~Loss on sale of computer equipment 5~~(98,~~618~~900) ~~9,891~~ ------------- ------------------- ~~TOTAL~~Net ~~EXPENSES~~increase ~~202~~in cash and equivalents 11,~~269~~145 ~~347~~26,~~950~~840 Cash and cash equivalents, beginning of period 1,085 37,758 ------------- ------------------- ~~NET~~CASH ~~(LOSS)~~AND $CASH ~~(173~~EQUIVALENTS,~~477)~~ $END ~~(115,039)~~OF ~~=============~~PERIOD ~~============= NET (LOSS) PER EQUIVALENT LIMITED PARTNERSHIP UNIT~~ $ ~~(0.38)~~12,230 $ ~~(0.25)~~64,598 ============= ============= ~~WEIGHTED AVERAGE NUMBER OF EQUIVALENT LIMITED PARTNERSHIP UNITS OUTSTANDING DURING THE PERIOD 460,067 460,067~~ ======~~======= =============~~

see accompanying notes to condensed financial statements 7 NOTES TO CONDENSED 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). The Partnership has begun liquidation effective April 1, 2005. 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. 2. SUMMARY OF BASIS OF PRESENTATION SIGNIFICANT ACCOUNTING As a result of the General Partner's approval of the POLICIES plan of liquidation and the imminent nature of such liquidation, we changed our basis of accounting to the liquidation basis effective as of April 1, 2005. This basis of accounting is considered appropriate when, among other things, liquidation of a company is probable and the net realizable value of assets is reasonably determinable. Under the liquidation basis of accounting, assets are stated at their estimated net realizable cash value and liabilities are stated at their anticipated settlement amounts. There are substantial risks and uncertainties associated with carrying out the liquidation of the Partnership. The valuations presented in the accompanying Statement of Net Assets in Liquidation represent estimates, based on present facts and circumstances, of the net realizable values of assets and the costs associated with carrying out the liquidation. The actual costs and values are expected to differ from the amounts shown herein and could be greater or lesser than the amounts recorded. Upon changing to the liquidation basis of accounting, we recorded a $30,000 increase to net assets. This increase represents the present value of future lease payments of leases. We recorded $22,000 of accrued costs of liquidation representing the estimate of the costs to be incurred during liquidation. Unearned revenue was 8 decreased by $82,000, and payables to affiliates were decreased by $84,000 to represent the expected settlement value of these liabilities. The financial information presented as of 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, 2004. 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. The Partnership determined that no impairment had occurred during the six months ended June 30, 2005. Depreciation on computer equipment for financial statement purposes is based on the straight-line method over estimated useful lives of four years. 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. 3. NET INVESTMENT IN DIRECT FINANCING The following lists the components of the net investment LEASES in direct financing leases as of June 30, 2005 and December 31, 2004:

~~FOR~~JUNE ~~THE~~30, ~~THREE~~December ~~MONTHS ENDED MARCH~~ 31, 2005 ~~(UNAUDITED)~~2004 ------------------------- Minimum lease payments receivable $ 66,001 $ 103,927 Less: Unearned revenue 22,218 17,440 -------------------------- ~~GENERAL LIMITED PARTNER PARTNER GENERAL LIMITED UNITS UNITS PARTNER PARTNER TOTAL~~ ------- ------- ------- --------- ------~~---~~ ~~PARTNERS'~~Net ~~CAPITAL~~investment ~~(DEFICIT)~~in -direct ~~DECEMBER~~financing ~~31,~~leases ~~2004~~$ ~~50 460~~43,~~067~~783 $ 186,~~000~~487 $============================================================== ~~137~~The following is a schedule of future minimum rentals on noncancellable direct financing leases at June 30,~~826~~ 2005 Amount ------------ Six Months Remaining December 31, 2005 $ ~~138~~32,~~826~~808 ~~Net~~Year ~~(loss)~~Ended ~~(173~~December 31,~~477)~~ ~~(173~~2006 33,~~477)~~193 ------- ------- ------- --------- --------- ~~PARTNERS' CAPITAL (DEFICIT)~~ ----------------------- ~~MARCH 31, 2005 50 460,067~~ $ 166,~~000~~001 ~~$ (35,651) $ (34,651) ======= ======= ======= ========= =========~~--------------------------------------------------------------

9 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. Through June 30, 2005, 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. Remarketing fees are paid to the leasing companies from which the Partnership purchases leases. These are fees that are earned by the leasing companies when the initial terms of the lease have been met. The General Partner believes that this strategy adds value since it entices the leasing company to "stay with the lease" for potential extensions, remarketing or sale of equipment. This strategy potentially minimizes any conflicts the leasing company may have with a potential new lease and will potentially assist in maximizing overall portfolio performance. The remarketing fee is tied into lease performance thresholds and is factored in the negotiation of the fee. Remarketing fees incurred in connection with lease extensions are accounted for as operating costs. Remarketing fees incurred in connection with the sale of computer equipment are included in our gain or loss calculations. For the six months ended June 30, 2005 and 2004, remarketing fees were paid in the amounts of $15,000 and $2,000, respectively. 10 The Partnership's share of the computer equipment in which they participate with other partnerships at June 30, 2005 and December 31, 2004 was approximately $1,281,000 and $1,307,000, respectively, which is included in the Partnership's fixed assets on their balance sheet. The total cost of the equipment shared by the Partnership with other partnerships at June 30, 2005 and December 31, 2004 was approximately $2,131,000 and $2,249,000, respectively. The Partnership's share of the outstanding debt associated with this equipment at June 30, 2005 and December 31, 2004 was approximately $0 and $700, respectively, which is included in the Partnership's liabilities on the balance sheet, and the total outstanding debt at June 30, 2005 and December 31, 2004 related to the equipment shared by the Partnership was approximately $0 and $1,000, respectively. The following is a schedule of future minimum rentals on noncancellable operating leases at June 30, 2005:

~~2005~~Amount ~~2004~~ -------------- -------------- ~~(UNAUDITED) NET CASH (USED IN) OPERATING ACTIVITIES (5,421) (40,569)~~ -------------- -------------- ~~INVESTING ACTIVITIES: Net proceeds from the sale of computer equipment 13,249 53,394~~ ------~~--------~~ ~~--------------~~Six ~~NET~~Months ~~CASH~~ended ~~PROVIDED~~December BY31, ~~INVESTING~~2005 ~~ACTIVITIES~~$ 1316,~~249~~116 ~~53,394~~Year ~~--------------~~Ended ~~--------------~~December ~~FINANCING ACTIVITIES: Distributions to partners - (115~~31,~~440)~~ ~~Other~~2006 ~~receivables-Commonwealth Capital Corp 3~~14,~~317~~030 ~~70,834~~ -------------- -------------- ~~NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,317 (44,606)~~ -------------- -------------- ~~Net increase (decrease) in cash and equivalents 11,145 (31,781) Cash and cash equivalents, beginning of period 1,085 37,758~~ ------~~--------~~ ~~-------------- CASH AND CASH EQUIVALENTS, END OF PERIOD~~ $ 1230,~~230~~146 ~~$ 5,977~~ ============== ================================================

5. RELATED PARTY REIMBURSABLE EXPENSES TRANSACTIONS 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, 2005 and 2004, the Partnership recorded $62,000 and $110,000, 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. There were no equipment acquisition fees earned by the General Partner during the six months ended June 30, 2005. During the six months ended June 30, 2004, equipment acquisition fees of approximately $1,000 were earned by the General Partner. 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) 2% of (1) the gross lease revenues attributable to equipment which is subject to full payout net leases 11 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, 2005 and 2004, equipment management fees of approximately $2,600 and $23,000, 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) 3% 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, 2005 and June 30, 2004, equipment liquidation fees of approximately $1,000 and $2,000, respectively, were earned by the General Partner. 6. NOTES PAYABLE Notes payable consisted of the following:

~~MARCH~~JUNE 3130, ~~December~~DECEMBER 31, 2005 2004 -------------- ----------------------------------------------- ~~Minimum~~Installment ~~lease~~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 ~~receivable~~due from February through April 2005. $ -0- $ 82,~~790~~902 $Installment ~~103~~notes payable to banks,~~927~~ ~~Less~~interest ranging from 5.0% to 6.50%: ~~Unearned~~due ~~revenue~~in 23monthly installments ranging from $507 to $1,~~891~~736, 17including interest,~~440~~ with final payments due June, 2006. 63,525 33,065 -------------- ----------~~----~~ ~~Net investment in direct financing leases~~ $ 5863,~~899~~525 $ 86115,~~487~~967 ============== ===============================================

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, 2005 are as follows: 12

~~MARCH~~Amount ~~31, DECEMBER 31, 2005 2004~~ ------------ ~~------------~~Six ~~Installment~~months ~~notes~~ended ~~payable~~December ~~to banks; interest ranging from 6.25% to 6.75%~~31, ~~due in monthly installments ranging from $240 to $1,875, including interest, with final payments due from February through April~~ 2005. ~~4,764 82,902 Installment notes payable to banks, interest ranging from 5.95% to 6.50%: due in monthly installments ranging from~~ $~~507~~ ~~to $1~~31,~~892,~~286 ~~including~~Year ~~interest,~~ended ~~with~~December ~~final payments due June~~31, 2006. 7832,~~819~~239 ~~33,065~~ ------------ $ 63,525 -----------~~- $ 83,583 $ 115,967 ============ ============~~

7. SUPPLEMENTAL Other noncash activities included in the determination CASH FLOW of net loss are as follows: INFORMATION Six months ended June 30, 2005 2004 -------------------------------------------------------------------------------- Lease income, net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank $ 12,049 $ 360,331 ================================================================================ 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, 2005 2004 -------------------------------------------------------------------------------- ================================================================================ 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 LIQUIDITY AND CAPITAL RESOURCES As a result of the General Partner's approval of the plan of dissolution and the imminent nature of the liquidation, we changed our basis of accounting to the liquidation basis as of April 1, 2005. This basis of accounting is considered appropriate when, among other things, liquidation of a company is probable and the net realizable value of assets is reasonably determinable. Under the liquidation basis of accounting, assets are stated at their estimated net realizable cash value and liabilities are stated at their anticipated settlement amounts. 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. The Partnership's primary sources of capital for the six months ended June 30, 2005 and 2004 were net proceeds received from sale of equipment totaling approximately $38,000 and $67,000, and the repayment of receivables from CCC of approximately $132,000 for the six months ended June 30, 2004. The primary uses of cash for the six months ended June 30, 2005 and 2004 were for the payment of preferred distributions to partners of approximately $46,187 and $231,000, respectively. There were no capital expenditures for the periods ending June 30, 2005 and June 30, 2004. 13 For the six month period ended June 30, 2005, the Partnership generated cash flows from operating activities of approximately $67,000. This includes a net loss of approximately $253,000, and depreciation and amortization expenses of approximately $203,000. Other noncash activities included in the determination of net income include direct payments of lease income by lessees to banks of approximately $12,000. For the six month period ended June 30, 2004, the Partnership used 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 loss include direct payments of lease income by lessees to banks of approximately $360,000. 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. As of June 30, 2005, the Partnership had future minimum rentals on non-cancelable operating leases of $16,000 for the balance of the year ending December 31, 2005 and $14,000 thereafter. As of June 30, 2005, the Partnership had future minimum rentals on noncancellable capital leases of $33,000 for the balance of the year ending December 31, 2005 and $33,000 thereafter. At June 30, 2005, the outstanding debt was $64,000, with interest rates ranging from 5.00% to 6.5%, and will be payable through June 2006. The Partnership's share of the computer equipment in which they participate with other partnerships at June 30, 2005 and December 31, 2004 was approximately $1,281,000 and $1,307,000, respectively, which is included in the Partnership's fixed assets on their balance sheet. The total cost of the equipment shared by the Partnership with other partnerships at June 30, 2005 and December 31, 2004 was approximately $2,131,000 and $2,249,000, respectively. The Partnership's share of the outstanding debt associated with this equipment at June 30, 2005 and December 31, 2004 was approximately $0 and $700, respectively, which is included in the Partnership's liabilities on the balance sheet, and the total outstanding debt at June 30, 2005 and December 31, 2004 related to the equipment shared by the Partnership was approximately $0 and $1,000, respectively. RESULTS OF OPERATIONS Three Months Ended March 31, 2005 compared to Six Months Ended June 30, 2004 ---------------------------------------------------------------------------- For the quarter ended March 31, 2005, the Partnership recognized income of approximately $29,000 and expenses of approximately $202,000, resulting in a net loss of approximately $173,000. 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. Lease income decreased by 94% to approximately $29,000 for the three months ended March 31, 2004, from approximately $450,000 for the six months ended June 30, 2004, due to the fact that more lease agreements ended since the six months ended June 30, 2004 and no new leases were purchased during that time period. 14 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 operating expenses decreased 50% to approximately $83,000 for the three months ended March 31, 2005, from approximately $167,000 for the six months ended June 30, 2004, 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 the fund and a decrease in professional fees. 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 99% to approximately $300 for the three months ended March 31, 2005, from approximately $22,000 for the six months ended June 30, 2004, 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 72% to approximately $110,000 for the three months ended March 31, 2005, from approximately $400,000 for the six months ended June 30, 2004 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 $19,000 for the three months ended March 31, 2005, for a net loss of approximately $6,000. 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. 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 General Partner have conducted a review of the Partnership's disclosure controls and procedures as of June 30, 2005. 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 General Partner's Chief Executive Officer and 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 15 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. There have been no changes in the General Partner's internal controls or in other factors that could materially affect our disclosure controls and procedures in the quarter ended June 30, 2005, that have materially affected or are reasonably likely to materially affect the General Partner's internal controls over financial reporting. PART II: OTHER INFORMATION COMMONWEALTH INCOME & GROWTH FUND II Item 1. LEGAL PROCEEDINGS. N/A Item 2. CHANGES IN SECURITIES. N/A Item 3. DEFAULTS UPON SENIOR SECURITIES. N/A Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. N/A Item 5. OTHER INFORMATION. N/A 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 16 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 18, 2005 By: /s/ Kimberly A. Springsteen --------------- ------------------------------- Date Kimberly A. Springsteen President 17

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