10-Q 1 ten-q.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, 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

~~MARCH~~JUNE 3130, DECEMBER 31, 2004 2003 ----------- ------------------ (UNAUDITED) ASSETS Cash and cash equivalents $ 564,~~977~~598 $ 37,758 Lease income receivable 85,~~587~~434 4,550 Net investment in direct financing leases ~~131~~116,~~481~~483 146,478 Other receivables - ~~affiliated~~General Partner 6,009 - Other receivables - Affiliated limited partnerships 75,~~888~~839 7,888 Prepaid expenses 85,~~432~~454 3,200 ----------- ------------------ ~~162~~203,~~365~~817 199,874 ----------- ------------------ Computer equipment, at cost 5,~~048~~002,~~476~~531 5,409,223 Accumulated depreciation (34,~~907~~052,~~936~~092) (4,013,668) ----------- ------------------ 1950,~~140,540~~439 1,~~992~~395,~~457~~555 ----------- ------------------ Equipment acquisition costs and deferred expenses, net 3019,~~683~~330 42,906 Accounts receivable, Commonwealth Capital Corp ~~229~~114,~~610~~615 354,122 ----------- ------------------ ~~260~~133,~~293~~945 397,028 ----------- ------------------ TOTAL ASSETS $ 1,~~563~~288,~~198~~201 $ 1,992,457 =========== ================== LIABILITIES AND PARTNERS' CAPITAL LIABILITIES Accounts payable $ 54162,~~479~~717 $ 53,606 Accounts payable - General Partner ~~27,061~~- 20,065 Other accrued expenses ~~3,500~~- 5,938 Unearned lease income 9296,~~996~~231 100,040 Notes payable ~~531~~357,~~198~~439 728,365 ----------- ------------------ TOTAL LIABILITIES ~~709~~616,~~234~~387 908,014 ----------- ------------------ PARTNERS' CAPITAL General partner 1,000 1,000 Limited partners ~~852~~670,~~964~~814 1,083,443 ----------- ------------------ TOTAL PARTNERS' CAPITAL ~~853~~671,~~964~~814 1,084,443 ----------- ------------------ TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 1,~~563~~288,~~198~~201 $ 1,992,457 =========== ==================

see accompanying notes to financial statements

COMMONWEALTH INCOME & GROWTH FUND II STATEMENTS OF OPERATIONS THREE MONTHS ENDED ~~MARCH~~SIX 31MONTHS ENDED JUNE 30, JUNE 30, 2004 2003 2004 2003 ---------------------- ------------------------- (~~unaudited~~UNAUDITED) (UNAUDITED) INCOME Lease $217,069 ~~232~~$409,~~774~~334 $~~542~~ 449,~~526~~843 $ 951,860 Interest and other ~~137~~278 ~~175~~1,298 415 1,473 Gain on sale of computer equipment - 323,511 - 318,319 -------- -------- --------- ---------- TOTAL INCOME ~~232~~217,~~911~~347 ~~542~~734,~~701~~143 450,258 1,271,652 -------- -------- --------- ---------- EXPENSES Operating, excluding depreciation ~~111~~55,~~440~~690 ~~193~~143,~~764~~741 167,130 337,604 Equipment management fee - General Partner 1110,~~639~~853 2720,~~127~~466 22,492 47,593 Interest 117,~~027~~861 2924,~~950~~427 18,888 54,377 Depreciation ~~191~~183,~~730~~422 ~~266~~234,~~262~~607 375,152 500,869 Amortization of equipment acquisition costs and deferred expenses 12,~~223~~370 1615,~~378~~674 24,593 32,052 Loss on sale of computer equipment 913,~~891~~861 5- 23,~~291~~752 - -------- -------- --------- ---------- TOTAL EXPENSES ~~347~~284,~~950~~057 ~~538~~438,~~772~~915 632,007 972,495 -------- -------- --------- ---------- NET (LOSS) INCOME $(~~115~~66,~~039~~710) $295,228 3$(181,~~929~~749) $ 299,157 ======== ======== ========= ========== NET (LOSS) INCOME PER EQUIVALENT LIMITED PARTNERSHIP UNIT $ (0.2515) $ 0.0164 $ (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 ~~THREE~~SIX MONTHS ENDED ~~MARCH~~JUNE 3130, 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) 12,~~154~~309 (~~116~~184,~~193~~058) (~~115~~181,~~039~~749) Distributions (12,~~154~~309) (~~114~~228,~~286~~571) (~~115~~230,~~440~~880) --~~-------------~~ ------- ------- ---------- ----------- PARTNERS' CAPITAL - ~~MARCH~~JUNE 3130, 2004 50 460,067 $ 1,000 $ ~~852~~670,~~964~~814 $ ~~853~~671,~~964~~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 $(~~115~~181,~~039~~749) $ 3299,~~929~~157 Adjustments to reconcile net (loss) income to net cash provided by (used in) ~~provided by~~ operating activities Depreciation and amortization ~~203~~399,~~953~~745 ~~282~~532,~~640~~921 Loss (gain) on sale of computer equipment 923,~~891~~752 5(318,~~291~~319) Other noncash activities included in determination of net (loss) income (~~183~~360,~~325~~331) (~~275~~536,~~213~~047) Changes in assets and liabilities (Increase) decrease in assets Lease income receivable (884) 4,~~037)~~004 ~~692~~ Minimum lease receivables 12,~~155~~310 ~~504~~978 Other receivable, General Partner -81,282 5375,~~669~~270 Other receivables - ~~affiliated~~Affiliated limited partnerships -2,049 (32,~~401)~~959 Prepaid expenses (52,~~232~~254) 3,019 Increase (decrease) in liabilities Accounts payable ~~873 132~~109,~~131~~111 ~~Accounts payable, General Partner 60,674~~ (64,~~318~~602) Other accrued expenses (25,~~438~~938) -(7,362) Unearned lease income (73,~~044~~809) (4174,~~112~~885) --------- --------- NET CASH PROVIDED BY (USED IN) ~~PROVIDED BY~~ OPERATING ACTIVITIES 63,284 (4022,~~569~~907) ~~155,831~~ --------- --------- INVESTING ACTIVITIES: Capital expenditures -(4,049) (15,000) Net proceeds from the sale of computer equipment 5367,~~394~~351 2382,~~800~~317 Equipment acquisition fees paid to General Partner -(846) (600) --------- --------- NET CASH PROVIDED BY ~~(USED IN)~~ INVESTING ACTIVITIES 5362,~~394~~456 ~~(12~~366,~~800)~~717 --------- --------- FINANCING ACTIVITIES: Distributions to partners (~~115~~230,~~440~~880) (~~115~~288,~~440~~601) Other receivables-Commonwealth Capital Corp 70132,~~834~~151 (981,~~998~~287 Debt placement fee paid to the General Partner (171) - --------- --------- NET CASH (USED IN) FINANCING ACTIVITIES (4498,~~606~~900) (~~125~~207,~~438~~314) --------- --------- Net ~~(decrease)~~ increase in cash and equivalents ~~(31~~26,~~781)~~840 17136,~~593~~496 Cash and cash equivalents, beginning of period 37,758 33,361 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 564,~~977~~598 $ 50169,~~954~~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:

~~NOTES~~JUNE ~~TO FINANCIAL STATEMENTS 1. BUSINESS Commonwealth Income & Growth Fund II (the "Partnership") is a limited partnership organized in the Commonwealth of Pennsylvania to acquire~~30, 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.~~2004 2.2003 ~~SUMMARY~~----------------------- OFMinimum ~~BASIS~~lease OFpayments ~~PRESENTATION~~receivable SIGNIFICANT ACCOUNTING The financial information presented as of any date other than December 31 POLICIES 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$139,981 ~~but does not include all disclosures required by generally accepted accounting principles. In the opinion of management~~$176,035 ~~all~~Less: ~~adjustments,~~Unearned ~~consisting~~revenue ~~only of normal recurring adjustments~~23,498 ~~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~~29,557 ~~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 three~~-month period ended March 31, 2004 are not necessarily indicative of financial results that may be expected for the full year ended December 31, 2004. REVENUE RECOGNITION Through March 31, 2004, the Partnership's leasing operations consist substantially of operating leases and seven direct-~~financing~~------------------------------------------------------------------ ~~leases.~~Net ~~Operating~~investment ~~lease revenue is recognized on a monthly basis~~ in ~~accordance with the terms of the lease agreement. Unearned revenue from~~ direct financing ~~agreements~~leases is$116,483 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$146,478 ~~historical trends and other information.~~=====================================================================

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:

~~USE~~JUNE OF30, ~~ESTIMATES~~DECEMBER ~~The~~31, ~~preparation~~2004 of2003 ~~financial~~-------------------------------------------------------- ~~statements~~Installment innotes ~~conformity~~payable ~~with~~to ~~generally~~banks; ~~accepted~~interest ~~accounting~~ranging ~~principles~~from ~~requires~~6.50% ~~management~~ to ~~make~~8.75%, ~~estimates~~due ~~and~~in ~~assumptions~~monthly ~~that~~installments ~~affect~~ranging ~~the~~from ~~reported~~$96 ~~amounts~~to of$22,799, ~~assets~~including ~~and~~interest, ~~liabilities~~with ~~and~~final ~~disclosure~~payments ofdue ~~contingent~~from ~~assets~~February ~~and~~through ~~liabilities~~November at2004. ~~the~~$172,045 ~~date~~$498,520 ofInstallment ~~the~~notes ~~financial~~payable ~~statements~~to ~~and~~banks; ~~the~~interest ~~reported~~ranging ~~amounts~~from ~~of revenues and expenses during the reporting period~~6.00% ~~Actual~~to ~~results could differ from those estimates~~6.75%, ~~LONG-LIVED~~due ~~ASSETS~~in ~~The~~monthly ~~Partnership~~installments ~~evaluates~~ranging ~~its~~from ~~long-lived~~$240 ~~assets~~to ~~when~~$1,875, ~~events~~including orinterest, ~~circumstances~~with ~~indicate~~final ~~that~~payments ~~the~~due ~~value~~from ofFebruary ~~the~~through ~~asset~~June ~~may not be recoverable~~2005. ~~The~~58,965 ~~Partnership~~74,204 ~~determines~~Installment ~~whether~~notes anpayable ~~impairment exists by estimating the undiscounted cash flows~~ to bebanks, ~~generated~~interest byranging ~~each~~from ~~asset~~5.95% Ifto ~~the estimated undiscounted cash flows are less than the carrying value of the asset then an impairment exists~~6.50%: ~~The~~due ~~amount~~in ofmonthly ~~the~~installments ~~impairment~~ranging isfrom ~~determined~~$507 ~~based on the difference between the carrying value and the fair value. The fair value is determined based on estimated discounted cash flows~~ to ~~be generated by the asset. As of March 31~~$1, ~~2004~~892, ~~there~~including isinterest, nowith ~~impairment.~~final ~~Depreciation~~payments ondue ~~computer~~June, ~~equipment for financial statement purposes is based on the straight-line method over estimated useful lives of four years~~2006. ~~INTANGIBLE~~126,429 ~~ASSETS Equipment acquisition costs and deferred expenses~~155,641 ~~are amortized on a straight~~-~~line~~------- ~~basis over two~~-to-~~four~~------ ~~year~~$357,439 ~~lives.~~$728,365 ~~Unamortized~~======================================================== ~~acquisition~~These ~~fees~~notes ~~and deferred expenses~~ are ~~charged~~secured toby ~~amortization~~specific ~~expense~~computer ~~when the associated leased~~ equipment isand ~~sold.~~are ~~CASH~~nonrecourse ~~AND~~liabilities ~~CASH~~of ~~EQUIVALENTS~~the ~~The~~ Partnership. ~~considers~~Aggregate ~~all~~maturities ~~highly~~of ~~liquid~~notes ~~investments~~payable ~~with~~for aeach ~~maturity~~ of ~~three~~the ~~months~~periods orsubsequent ~~less~~ to beJune ~~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~~30, ~~any~~2004 ~~taxable~~are ~~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 afollows: ~~result~~Amount of-------- ~~reporting~~Six ~~certain~~months ~~income~~ending ~~and~~December ~~expense~~31, ~~items~~2004 ~~for~~$240,367 ~~tax~~Year ~~purposes~~ended inDecember ~~periods~~31, ~~other~~2005 ~~than~~84,006 ~~those~~Year ~~used~~ended ~~for~~December ~~financial~~31, ~~statement~~2006 ~~purposes~~33,066 ~~principally~~-------- ~~relating to depreciation~~$357,439 ~~amortization, and lease income.~~--------

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 ------------------------------------------------------------------------- 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 --------------- -------------------------- Date George S. Springsteen President

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 investment in direct DIRECT FINANCING financing leases as of March 31, 2004 and December 31, 2003: LEASES MARCH 31, December 31, 2004 2003 -------- -------- Minimum lease payments receivable $158,008 $176,035 Less: Unearned revenue 26,527 29,557 -------- -------- Net investment in direct financing leases $131,481 $146,478 ======== ======== The following is a schedule of future minimum rentals on noncancellable direct financing leases at March 31, 2004 Amount -------- Nine Months Remaining December 31, 2004 $ 54,081 Year Ended December 31, 2005 70,183 Year Ended December 31, 2006 33,744 -------- $158,008 ========

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