Commonwealth Income & Growth Fund VII, LP - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - Commonwealth Income & Growth Fund VII, LP	Financial_Report.xls
EX-31.1 - CIGF7 EXHIBIT 31.1 09-30-12 - Commonwealth Income & Growth Fund VII, LP	ex31_1.htm
EX-31.2 - CIGF7 EXHIBIT 31.2 09-30-12 - Commonwealth Income & Growth Fund VII, LP	ex31_2.htm
EX-32.1 - CIGF7 EXHIBIT 32.1 09-30-12 - Commonwealth Income & Growth Fund VII, LP	ex32_1.htm
EX-32.2 - CIGF7 EXHIBIT 32.2 09-30-12 - Commonwealth Income & Growth Fund VII, LP	ex32_2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012 or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 333-156357

COMMONWEALTH INCOME & GROWTH FUND VII, LP

(Exact name of registrant as specified in its charter)

Pennsylvania	26-3733264
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

Brandywine Bldg. One, Suite 200

2 Christy Drive

Chadds Ford, PA 19317

(Address, including zip code, of principal executive offices)

(484) 785-1480

(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 T NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES T NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "accelerated filer, “large accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company T
(Do not check if a smaller reporting company.)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ¨ NO T

FORM 10-Q

SEPTEMBER 30, 2012

TABLE OF CONTENTS

PART I
Item 1.	Financial Statements	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	12
Item 4.	Controls and Procedures	12
PART II
Item 1.	Legal Proceedings	12
Item 1A.	Risk Factors	12
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	12
Item 3.	Defaults Upon Senior Securities	12
Item 4.	Mine Safety Disclosures	12
Item 5.	Other Information	12
Item 6.	Exhibits	12

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Commonwealth Income & Growth Fund VII
Condensed Balance Sheets


	September 30,				December 31,
	2012				2011
	(unaudited)

ASSETS
Cash and cash equivalents		$	13,298,966			16,126,949
Lease income receivable			139,284			147,592
Accounts receivable, Commonwealth Capital Corp., net			409,647			320,588
Accounts receivable, affiliated limited partnerships			2,563			-
Prepaid expenses			2,351			656
			13,852,811			16,595,785

Net investment in finance leases			485,670			1,047,356

Equipment, at cost			11,629,765			9,019,363
Accumulated depreciation			(4,062,095	)		(2,052,270	)
			7,567,670			6,967,093

Equipment acquisition costs and deferred expenses, net of
accumulated amortization of approximately $217,000 and $109,000 at September 30, 2012 and December 31, 2011, respectively			257,269			259,068
Prepaid acquisition fees			569,882			670,052
			827,151			929,120

Total Assets		$	22,733,302		$	25,539,354

LIABILITIES AND PARTNERS' CAPITAL

LIABILITIES
Accounts payable		$	60,554			45,520
Accounts payable, General Partner			41,807			50,554
Other accrued expenses			26,101			3,321
Unearned lease income			146,175			219,314
Notes payable			498,977			639,628
Total Liabilities			773,614			958,337

PARTNERS' CAPITAL
General Partner			1,050			1,050
Limited Partners			21,958,638			24,579,967
Total Partners' Capital			21,959,688			24,581,017

Total Liabilities and Partners' Capital		$	22,733,302		$	25,539,354



see accompanying notes to condensed financial statements

Commonwealth Income & Growth Fund VII
Condensed Statements of Operations
(unaudited)

	Three Months Ended September 30,							Nine Months Ended September 30,
	2012				2011			2012			2011
Revenue
Lease		$	877,128		$	588,419		$	2,450,846		$	1,508,122
Interest and other			38,433			41,635			101,133			136,283
Gain on sale of finance leases			11,875			-			11,875			1,139
Gain on sale of computer equipment			1,595			-			1,595			-
Total revenue			929,031			630,054			2,565,449			1,645,544

Expenses
Operating, excluding depreciation			281,082			225,282			837,127			596,562
Equipment management fee, General Partner			45,767			32,239			130,088			83,859
Organizational costs			-			42,568			-			144,461
Interest			5,894			981			18,057			3,330
Depreciation			735,605			475,442			2,020,325			1,183,274
Amortization of equipment acquisition costs and deferred expenses			39,265			24,852			108,215			62,567
Total expenses			1,107,613			801,364			3,113,812			2,074,053

Net (loss)		$	(178,582	)	$	(171,310	)	$	(548,363	)	$	(428,509	)

Net (loss) allocated to Limited Partners		$	(185,271	)	$	(176,150	)	$	(569,093	)	$	(440,069	)

Net (loss) per equivalent Limited Partnership unit		$	(0.12	)	$	(0.15	)	$	(0.36	)	$	(0.46	)

Weighted average number of equivalent limited partnership units outstanding during the period			1,572,900			1,189,326			1,572,900			959,144


see accompanying notes to condensed financial statements

Commonwealth Income & Growth Fund VII
Condensed Statement of Partners' Capital
For the nine months ended September 30, 2012
(unaudited)


	General		Limited
	Partner		Partner		General			Limited
	Units		Units		Partner			Partners			Total
Balance, January 1, 2012		50		1,572,900	$	1,050		$	24,579,967		$	24,581,017
Net income (loss)		-		-		20,730			(569,093	)		(548,363	)
Distributions		-		-		(20,730	)		(2,052,236	)		(2,072,966	)
Balance, September 30, 2012		50		1,572,900	$	1,050		$	21,958,638		$	21,959,688



see accompanying notes to condensed financial statements

Commonwealth Income & Growth Fund VII
Condensed Statements of Cash Flow
(unaudited)

	Nine Months Ended September 30,
	2012			2011

Net cash provided by operating activities	$	1,120,927		$	709,134

Cash flows from investing activities
Capital Expenditures		(2,532,286	)		(3,906,468	)
Payments received from finance leases		377,267			422,626
Equipment acquisition fees, General Partner		(5,221	)		(489,796	)
Net proceeds from the sale of finance leases		269,843			2,488
Net proceeds from the sale of computer equipment		15,478			-
Net cash (used in) investing activities		(1,874,919	)		(3,971,150	)

Cash flows from financing activities
Contributions		-			14,131,546
Syndication costs		-			(1,650,209	)
Distributions to partners		(2,072,966	)		(1,185,916	)
Debt placement fee paid to the General Partner		(1,025	)		(2,927	)
Net cash (used in) provided by financing activities		(2,073,991	)		11,292,494

Net (decrease) increase in cash and cash equivalents		(2,827,983	)		8,030,478

Cash and cash equivalents beginning of period		16,126,949			4,565,356

Cash and cash equivalents end of period	$	13,298,966		$	12,595,834



see accompanying notes to condensed financial statements

NOTES TO CONDENSED FINANCIAL STATEMENTS

1. Business

Commonwealth Income & Growth Fund VII, LP (the “Partnership”) is a limited partnership organized in the Commonwealth of Pennsylvania on November 14, 2008. The Partnership offered for sale up to 2,500,000 units of limited partnership interest at the purchase price of $20 per unit (the “offering”). The Partnership reached the minimum amount in escrow and commenced operations on March 31, 2010. The offering terminated on November 22, 2011 with 1,572,900 units sold for a total of approximately $31,432,000 in limited partner contributions.

The Partnership uses the proceeds of the offering to acquire, own and lease various types of computer information technology, medical technology, telecommunications technology, inventory management and other similar capital equipment, which is 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), REISA, Financial Planning Association (FPA), and the Equipment Leasing and Finance Association (ELFA). Approximately ten years after the commencement of operations, the Partnership intends to sell or otherwise dispose of all of its equipment, make final distributions to partners, and to dissolve. Unless sooner terminated or extended pursuant to the terms of its Limited Partnership Agreement, the Partnership will continue until December 31, 2021.

2. Summary of Significant Accounting Policies

Basis of Presentation

The financial information presented as of any date other than December 31, 2011 has been prepared from the books and records without audit. Financial information as of December 31, 2011 has been derived from the audited financial statements of the Partnership, but does not include all disclosures required by generally accepted accounting principles to be included in audited financial statements. 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. Operating results for the nine months ended September 30, 2012 are not necessarily indicative of financial results that may be expected for the full year ending December 31, 2012.

Disclosure of Fair Value of Financial Instruments

Estimated fair value was determined by management using available market information and appropriate valuation methodologies. However, judgment was necessary to interpret market data and develop estimated fair value. Cash and cash equivalents, receivables, accounts payable and accrued expenses and other liabilities are carried at amounts which reasonably approximate their fair values as of September 30, 2012 and December 31, 2011 due to the short term nature of these financial instruments.

The Partnership’s long-term debt consists of notes payable, which are secured by specific equipment and are nonrecourse liabilities of the Partnership. The estimated fair value of this debt at September 30, 2012 and December 31, 2011 approximates the carrying value of these instruments, due to the interest rates on the debt approximating current market interest rates. The Partnership classifies the fair value of its notes payable within Level 2 of the valuation hierarchy based on the observable inputs used to estimate fair value.

Cash and cash equivalents

We consider cash and cash equivalents to be cash on hand and highly liquid investments with the original maturity dates of 90 days or less.

At September 30, 2012, cash was held in two bank accounts maintained at one financial institution with an aggregate balance of approximately $13,304,000. Bank accounts are federally insured up to $250,000, while pursuant to the Dodd/Frank Act of 2010, some accounts are fully insured by the FDIC. At September 30, 2012, the total cash bank balance was as follows:

At September 30, 2012	Amount
Total bank balance	$	13,304,000
FDIC insured		(271,000	)
Uninsured amount	$	13,033,000

The Partnership mitigates the risk of holding uninsured deposits by only depositing funds with major financial institutions. The Partnership has not experienced any losses in our accounts, and believes it is not exposed to any significant credit risk. The amounts in such accounts will fluctuate throughout 2012 due to many factors, including cash receipts, equipment acquisitions and distributions to limited partners.

Recent Accounting Pronouncements

In October 2012, the FASB issued ASU No. 2012-04 (“ASC Update 2012-04), Technical Corrections and Improvements. The amendments in this Update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments in this ASU that will not have transition guidance are effective upon issuance of the ASU, which is the fourth quarter of 2012. The amendments that are subject to transition guidance will be effective for fiscal periods beginning after December 15, 2012. The Partnership does not anticipate any impact on its financial statements as a result of the adoption of this ASU.

In August 2012, the FASB issued ASU No. 2012-03 (“ASC Update 2012-03), Technical Amendments and Corrections to SEC Sections, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 114, Technical Amendments Pursuant to SEC Release NO. 33-9250, and Corrections Related to FASB Accounting Standard Update 2010-22. The amendments in this Update amend various SEC paragraphs within the FASB Accounting Standards Codification (“Codification”) pursuant to the issuance of Staff Accounting Bulletin (SAB) No. 114, SEC Release No. 33-9250, and FASB Accounting Standards Update 2010-22. This ASU was effective in the third quarter of 2012. The Partnership adopted this ASU during the third quarter 2012 and it did not have a material effect on its financial statements.

In May 2011, the FASB issued ASU No. 2011-04 (“ASC Update 2011-04”), Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS. This ASU is intended to update the fair value measurement and disclosure requirements in US GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments in this update are for interim and annual periods beginning after December 15, 2011. The Partnership adopted the provisions of this ASU during the first quarter of 2012, and the required changes in presentation and disclosure requirements have been included in its financial statements and notes thereto. The adoption did not have a material impact on the Partnership’s financial position, results of operations or cash flows.

3. Information Technology, Medical Technology, Telecommunications Technology, Inventory Management and Other Business-Essential Capital Equipment (“Equipment”)

The Partnership is the lessor of equipment under operating leases with periods that generally will range from 12 to 48 months. In general, associated costs such as repairs and maintenance, insurance and property taxes are paid by the lessee.

Remarketing fees will be 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 remain actively involved with lessee and encourages potential extensions, remarketing or sale of equipment. This strategy is designed to minimize any conflicts the leasing company may have with a new lessee and may assist in maximizing overall portfolio performance. The remarketing fee is tied into lease performance thresholds and is a factor 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 equipment are included in the gain or loss calculations. Remarketing fees of approximately $2,000 and $0 were incurred for the nine months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012 and 2011, cash paid for remarketing fees was approximately $2,000 and $0, respectively.

CCC, on behalf of the Partnership and other affiliated partnerships, acquires equipment subject to associated debt obligations and lease agreements and allocates a participation in the cost, debt and lease revenue through a transfer or sale and assignment to the various partnerships based on certain risk factors.

The Partnership’s share of the cost of the equipment in which it participates with other partnerships at September 30, 2012 was approximately $4,213,000 and is included in the Partnership’s equipment on its balance sheet. The Partnership’s share of the outstanding debt associated with this equipment at September 30, 2012 was approximately $245,000 and is included in the Partnership’s notes payable on its balance sheet. The total cost of the equipment shared by the Partnership with other partnerships at September 30, 2012 was approximately $10,972,000. The total outstanding debt related to the equipment shared by the Partnership at September 30, 2012 was approximately $483,000.

The Partnership’s share of the cost of the equipment in which it participates with other partnerships at December 31, 2011 was approximately $4,119,000 and is included in the equipment on its balance sheet. The Partnership’s share of the outstanding debt associated with this equipment at December 31, 2011 was approximately $377,000 and is included in the Partnership’s notes payable on its balance sheet. The total cost of the equipment shared by the Partnership with other partnerships at December 31, 2011 was approximately $10,782,000. The total outstanding debt related to the equipment shared by the Partnership at December 31, 2011 was approximately $853,000.

As the Partnership and the other programs managed by the General Partner increase their overall portfolio size, opportunities for shared participation are expected to continue. Sharing in the acquisition of a lease portfolio gives the fund an opportunity to acquire additional assets and revenue streams, while allowing the fund to remain diversified and reducing its overall risk with respect to one portfolio. Thus, total shared equipment and related debt should continue to trend higher for the remainder of 2012 as the Partnership builds its portfolio.

The following is a schedule of future minimum rentals on non-cancellable operating leases at September 30, 2012:

	Amount
Three Months ended December 31, 2012	$	890,000
Year ended December 31, 2013		3,060,000
Year ended December 31, 2014		1,406,000
Year ended December 31, 2015		254,000
Year ended December 31, 2016		35,000
	$	5,645,000

The following lists the components of the net investment in direct financing leases at September 30, 2012:

	Amount
Total minimum lease payments to be received	$	442,000
Initial Direct Costs		7,000
Estimated residual value of leased equipment (unguaranteed)		75,000
Less: unearned income		(38,000	)
Net investment in direct finance leases	$	486,000

Our finance lease customers operate in various industries, and we have no significant customer concentration in any one industry. We assess credit risk for all of our customers, including those that lease under finance leases. This credit risk is assessed using an internally developed model which incorporates credits scores from third party providers and our own customer risk ratings and is periodically reviewed . Our internal ratings are weighted based on the industry that the customer operates in. Factors taken into consideration when assessing risk includes both general and industry specific qualitative and quantitative metrics. We separately take in to consideration payment history, open lawsuits, liens and judgments. Typically, we will not extend credit to a company that has been in business for less than 5 years or that has filed for bankruptcy within the same period. Our internally based model may classify a company as high risk based on our analysis of their audited financial statements. Additional considerations of high risk may include history of late payments, open lawsuits and liens or judgments. In an effort to mitigate risk, we typically require deposits from those in this category. The following table presents the credit risk profile, by creditworthiness category, of our finance lease receivables at September 30, 2012:

Risk Level	Percent of Total
Low	-		%
Moderate-Low	-		%
Moderate	-		%
Moderate-High		100	%
High		-	%
Net finance lease receivable		100	%

As of September 30, 2012 we determined that we did not have a need for an allowance for uncollectible accounts associated with any of our finance leases, as the customer payment histories with us, associated with these leases, has been positive, with no late payments.

During the third quarter of 2012, due to an early buyout, the partnership sold equipment held under finance leases. The lessee that purchased the equipment, as a part of the terms of the sale agreement, paid the Partnership the present value of the future rentals due at the time of the sale. The net book value of the equipment sold was approximately $258,000. The net gain on the sale of the finance leases was approximately $12,000.

The following is a schedule of future minimum rentals on noncancelable direct financing leases at September 30, 2012:

	Amount
Three Months ended December 31, 2012	$	96,000
Year ended December 31, 2013		268,000
Year ended December 31, 2014		77,000
Year ended December 31, 2015		1,000
	$	442,000

4. Related Party Transactions

Receivables/Payables

As of September 30, 2012, the Partnership’s related party payables are short term, unsecured, and non-interest bearing.

OFFERING AND ORGANIZATION STAGE
Selling commissions and dealer manager fees	For the nine months ended September 30, 2012		For the nine months ended September 30, 2011
We will pay to the dealer manager an amount of up to nine percent of capital contributions as underwriting commissions. The dealer manager will reallow to participating broker-dealers out of underwriting commissions a selling commission of up to seven percent of the capital contributions from units sold by such participating brokers. The Dealer Manager will retain the remaining two percent as a Dealer Manager Fee. The actual amount of the underwriting commissions may vary due to the volume discounts available to investors purchasing certain quantities of units. This amount is included in offering costs of the Partnership on the Statement of Partner’s Capital.	$	-	$	1,242,000

Marketing reallowance
We will pay a marketing reallowance of up to 1% of capital contributions to our dealer manager, all of which is expected to be reallowed to certain participating broker-dealers. The reallowance is designed to reimburse those broker-dealers that meet certain requirements for marketing expenses, such as bona fide training and education seminars and related conferences. The actual amount of marketing reallowance paid will depend upon the number of firms earning the reallowance and the agreed upon percentage paid to each selling firm. In no circumstances are any amounts paid to our dealer manager as a marketing reallowance to be retained by the dealer manager. Any amount of this fee not paid out to participating broker-dealers will be returned by the dealer manager to the Partnership. This amount is included in offering costs of the Partnership on the Statement of Partner’s Capital.		$	-			$	140,000

Organizational expenses
We pay the general partner an organizational fee equal to three percent of the first $25,000,000 of limited partners’ capital contributions and two percent of the limited partners’ capital contributions in excess of $25,000,000, as reimbursement for the organization of the Partnership. It is anticipated that the organizational and offering expenses, which include legal, accounting and printing expenses, various registration and filing fees, miscellaneous expenses related to the organization and formation of the Partnership, bona fide due diligence expenses, other costs of registration and costs incurred in connection with the preparation, printing and distribution of this prospectus and related sales literature will be as high as $1,377,465, of which the general partner will pay up to $1,250,000 out of its organizational fee it receives as units are sold. We will pay any costs above $1,250,000 out of offering proceeds. If costs are below $1,250,000, the general partner will reimburse us for any payments it received during the offering that exceed this amount. This amount is included in offering and organizational costs of the Partnership on the Statement of Partner’s Capital and on the Statement of Operations.	$	-	$	413,000

OPERATIONAL AND SALE OR LIQUIDATION STAGES
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. For the nine months ended September 30, 2012 and 2011, the Partnership was charged approximately $458,000 and $228,000 in other LP expense, respectively.	$	801,000	$	583,000

Equipment acquisition fee
The General Partner earned 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. At September 30, 2012, the remaining balance of prepaid acquisition fees was approximately $570,000, which is expected to be earned in future periods.	$	105,000	$	168,000

Debt placement fee
As compensation for arranging term debt to finance our acquisition of equipment, we will pay the general partner a fee equal to one percent of such indebtedness; provided, however, that such fee shall be reduced to the extent we incur such fees to third parties unaffiliated with the general partner or the lender with respect to such indebtedness. No such fee will be paid with respect to borrowings from the general partner or its affiliates. We intend to initially acquire leases on an all cash basis with the proceeds of this offering, but may borrow funds after the offering proceeds have been invested. The amount we borrow, and therefore the amount of the fee, will depend upon interest rates at the time of a loan, and the amount of leverage we determine is appropriate at the time. We do not intend to use more than 30% leverage overall in our portfolio. Fees will increase as the amount of leverage we use increases, and as turnover in the portfolio increases and additional equipment is purchased using leverage.		$	1,000			$	3,000

Equipment management fee
We pay our general partner a monthly fee equal to the lesser of (a) the fees which would be charged by an independent third party in the same geographic market for similar services and equipment or (b) the sum of (i) two percent of gross lease revenues attributable to equipment subject to full payout net leases which contain net lease provisions and (ii) five percent of the gross lease revenues attributable to equipment subject to operating leases. Our general partner, based on its experience in the equipment leasing industry and current dealings with others in the industry, will use its business judgment to determine if a given fee is competitive, reasonable and customary. The amount of the fee will depend upon the amount of equipment we manage, which in turn will depend upon the amount we raise in this offering. Reductions in market rates for similar services would also reduce the amount of this fee we will receive.		$	130,000			$	84,000

Equipment liquidation fee
Also referred to as a "resale fee." With respect to each item of equipment sold by the general partner, we will pay a fee equal to the lesser of (i) 50% of the competitive equipment sale commission or (ii) three percent of the sales price of the equipment. The payment of this fee is subordinated to the receipt by the limited partners of (i) a return of their capital contributions and a 10% per annum cumulative return, compounded daily, on adjusted capital contributions and (ii) the net disposition proceeds from such sale in accordance with the partnership agreement. Our general partner, based on its experience in the equipment leasing industry and current dealings with others in the industry, uses its business judgment to determine if a given sales commission is competitive, reasonable and customary. Such fee will be reduced to the extent any liquidation or resale fees are paid to unaffiliated parties. The amount of such fees will depend upon the sale price of equipment sold. Sale prices will vary depending upon the type, age and condition of equipment sold. The shorter the terms of our leases, the more often we may sell equipment, which will increase liquidation fees we will potentially receive. As of September 30, 2012, no equipment liquidation fees have been paid to the Partnership by the general partner.		$	9,000			$	-

5. Notes Payable

Notes payable consisted of the following approximate amounts:

	September 30, 2012		December 31, 2011
Installment note payable to bank; interest at 7.5% due in monthly installments of $2,666, including interest, with final payment in April 2013	$	18,000	$	41,000
Installment note payable to bank; interest at 3.95% due in quarterly installments of $30,765, including interest, with final payment in January 2014		178,000		263,000
Installment note payable to bank; interest at 3.95% due in quarterly installments of $29,481, including interest, with final payment in September 2014		226,000		336,000
Installment note payable to bank; interest at 3.95% due in quarterly installments of $8,998, including interest, after an initial payment of $17,240, with final payment in November 2014		77,000		-
	$	499,000	$	640,000

The notes are secured by specific computer equipment and are nonrecourse liabilities of the Partnership. As such, the notes do not contain any debt covenants with which we must comply on either an annual or quarterly basis. Aggregate maturities of notes payable for each of the periods subsequent to September 30, 2012 are as follows:

	Amount
Three months ended December 31, 2012	$	72,000
Year ended December 31, 2013		275,000
Year ended December 31, 2014		152,000
	$	499,000

6. Supplemental Cash Flow Information

Other noncash activities included in the determination of net loss are as follows:

Nine months ended September 30,		2012				2011
Lease revenue net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank		$	243,000			$	21,000

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:

For the nine months ended September 30, 2012:

Nine months ended September 30,	2012		2011
Equipment acquisition fees earned by General Partner upon purchase of equipment from prepaid acquisition fees	$	100,000	$	168,000
Debt assumed in connection with purchase of technology equipment	$	103,000	$	293,000

7. Commitments and Contingencies

SEC and FINRA Review

August 2012, CCC, the Partnership’s Sponsor and parent company of the General Partner, received a communication from the staff of the U.S. Securities and Exchange Commission with respect to the application of the definition of control person in regard to the limits on the reimbursement of certain salaries, benefits, and expenses of personnel who CCC believes are not control persons. The staff has not suggested that these issues involve any element of fraud. The staff of the Financial Industry Regulatory Authority ("FINRA") also has raised similar questions. Clarifying changes have been made in the disclosures in registration documents used by funds. These agencies have indicated that they will not proceed with any potential enforcement action(s) against the Partnership or the General Partner. While management believes that resolution of these issues with these agencies will not result in any adverse financial impact on the Partnership, and CCC is pursuing discussions with staff members regarding their resolution, no assurance can be provided as to the outcome of this matter.

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD LOOKING STATEMENTS

This section, as well as other portions of this document, includes certain forward-looking statements about our business and our prospects, tax treatment of certain transactions and accounting matters, sales of securities, expenses, cash flows, distributions, investments and operating and capital requirements. Such forward-looking statements include, but are not limited to: acquisition policies of our general partner; the nature of present and future leases; provisions for uncollectible accounts; the strength and sustainability of the U.S. economy; the continued difficulties in the credit markets and their impact on the economy in general; and the level of future cash flow, debt levels, revenues, operating expenses, amortization and depreciation expenses. You can identify those statements by the use of words such as “could,” “should,” “would,” “may,” “will,” “project,” “believe,” “anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,” “intend,” “continue” and “contemplate,” as well as similar words and expressions.

Actual results may differ materially from those in any forward-looking statements because any such statements involve risks and uncertainties and are subject to change based upon various important factors, including, but not limited to, nationwide economic, financial, political and regulatory conditions; the health of debt and equity markets, including interest rates and credit quality; the level and nature of spending in the information, medical and telecommunications technologies markets; and the effect of competitive financing alternatives and lease pricing.

Readers are also directed to other risks and uncertainties discussed in other documents we file with the SEC, including, without limitation, those discussed in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed with the SEC. We undertake no obligation to update or revise any forward-looking information, whether as a result of new information, future developments or otherwise.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe that our critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

See Note 2 to our condensed financial statements included herein for a discussion related to accounting pronouncements.

INFORMATION TECHNOLOGY, MEDICAL TECHNOLOGY, TELECOMMUNICATIONS TECHNOLOGY, INVENTORY MANAGEMENT AND OTHER BUSINESS-ESSENTIAL CAPITAL EQUIPMENT

CCC, on our behalf and on behalf of other affiliated partnerships, acquires 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. Depreciation on equipment for financial statement purposes is based on the straight-line method estimated generally over useful lives of two to four years.

The Equipment Lease Finance Association (“ELFA”) Monthly Leasing and Finance Index which reports economic activity for the $628 billion equipment finance sector, showed overall new business volume for the 3rd quarter of 2012 increased 16% relative to the same period of 2011. Credit quality continued to improve as the rate of receivables aged in excess of 30 days declined slightly when compared to data from the 3rd quarter of 2011. Additionally, charge-offs declined 44% in the 3rd quarter of 2012, relative to the same period in 2011. More than 54% of “ELFA” reporting members reported submitting more transactions for approval during September 2012 as compared to the same period 2011. For 2012 the ELFA has forecast a 4.1% increase in finance volume year over year.

SEC AND FINRA REVIEW

LEASE INCOME RECEIVABLE

Lease income receivable includes current lease income receivable net of allowances for uncollectible accounts, if any. The Partnership monitors lease income receivable to ensure timely and accurate payment by lessees. The Partnership’s Lease Relations department is responsible for monitoring lease income receivable and, as necessary, resolving outstanding invoices.

The Partnership reviews a customer’s credit history before extending credit. In the event of a default, the Partnership may establish a provision for uncollectible lease income receivable based upon the credit risk of specific customers, historical trends or other information.

REVENUE RECOGNITION

Through September 30, 2012, the Partnership’s leasing operations consisted of operating and finance leases. Operating lease revenue is recognized on a monthly basis in accordance with the terms of the lease agreement. For finance leases, we record, at lease inception, unearned finance lease income which is calculated as follows: total lease payments, plus any residual value and initial direct costs, less the cost of the leased equipment. Interest income is earned on the finance lease receivable over the lease term using the interest method. As required, at each reporting period, management evaluates the finance lease for impairment and considers any need for an allowance for credit losses.

Our leases do not contain any step-rent provisions or escalation clauses nor are lease revenues adjusted based on any index.

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 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 impairment exists. The amount of the impairment is determined based on the difference between the carrying value and the fair value and is included in depreciation expense in the accompanying financial statements. The fair value of equipment is calculated using income or market approaches.

Depreciation on computer equipment for financial statement purposes is based on the straight-line method estimated generally over useful lives of two to four years.

LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Cash

Our primary sources of cash for the nine months ended September 30, 2012 were provided by operating activities of approximately $1,121,000, payments received from finance leases of approximately $377,000 and proceeds from the sale of finance leases of approximately $270,000, compared to the nine months ended September 30, 2011 where our primary sources of cash were limited partner contributions of approximately $14,132,000, cash provided by operating activities of approximately $709,000 and payments received from finance leases of approximately $423,000. Our primary uses of cash for the nine months ended September 30, 2012 were for the purchase of new equipment of approximately $2,532,000 and distributions to partners of approximately $2,073,000. For the nine months ended September 30, 2011, our primary use of cash was for the purchase of new equipment of approximately $3,906,000, syndication costs of approximately $1,650,000, and distributions to partners of approximately $1,186,000.

Cash was provided by operating activities for the nine months ended September 30, 2012 of approximately $1,121,000, and includes a net loss of approximately $548,000 and depreciation and amortization expenses of approximately $2,129,000. Other noncash activities included in the determination of net loss include direct payments to banks by lessees of approximately $243,000. This compares to the nine months ended September 30, 2011 where cash was provided by operating activities of approximately $709,000, which includes a net loss of approximately $429,000 and depreciation and amortization expenses of approximately $1,246,000. Other noncash activities included in the determination of net loss include direct payments to banks by lessees of approximately $21,000.

As we continue to increase the size of our equipment portfolio, operating expenses will increase, which reflects the administrative costs of servicing the portfolio, but because of our investment strategy of leasing equipment primarily through triple-net leases, we avoid operating expenses related to equipment maintenance or taxes. Depreciation expenses will likely increase more rapidly than operating expenses as we add equipment to our portfolio.

We intend to invest additional funds in equipment during the remainder of 2012. We expect that investment in equipment may be approximately $8,000,000 or more during the remainder of 2012, depending on the availability of investment opportunities. The acquisition of this equipment will be funded by the remaining cash which was raised through limited partner contributions during the initial offering period.

We consider cash and cash equivalents to be cash on hand and highly liquid investments with the original maturity dates of 90 days or less.

At September 30, 2012	Amount
Total bank balance	$	13,304,000
FDIC insured		(271,000	)
Uninsured amount	$	13,033,000

As of September 30, 2012, we had future minimum rentals on non-cancelable operating leases of approximately $890,000 for the balance of the year ending December 31, 2012 and approximately $4,755,000 thereafter. As of September 30, 2012, we had future minimum rentals on non-cancelable finance leases of approximately $96,000 for the balance of the year ending December 31, 2012 and approximately $346,000 thereafter.

As of September 30, 2012, our debt was approximately $499,000 with interest rates ranging from 3.95% through 7.50% and is payable through November 2014.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2012 compared to Three Months Ended September 30, 2011

Lease Revenue

Our lease revenue increased to approximately $877,000 for the three months ended September 30, 2012, from approximately $588,000 for the three months ended September 30, 2011. This increase was primarily due the acquisition of new lease agreements.

Sale of Finance Leases

For the three months ended September 30, 2012, due to an early buyout, the Partnership sold equipment, held under finance leases, with a net book value of approximately $258,000 for a net gain of approximately $12,000. For the three months ended September 30, 2011 the Partnership did not sell any equipment held under finance leases.

Sale of Equipment

For the three months ended September 30, 2012, the Partnership sold equipment, held under operating leases, with a net book value of approximately $14,000 for a net gain of approximately $1,000. For the three months ended September 30, 2011 the Partnership did not sell any equipment held under operating leases.

Operating Expenses

Our operating expenses, excluding depreciation, primarily consist of accounting and legal fees, outside service fees and reimbursement of expenses to CCC for administration and operation of the Partnership. These expenses increased to approximately $281,000 for the three months ended September 30, 2012, from approximately $225,000 for the three months ended September 30, 2011. This increase is primarily attributable to increases in administrative expenses associated with management of the Partnership as the size of the portfolio increases.

Equipment Management Fee

We pay an equipment management fee to our general partner for managing our equipment portfolio. The equipment management fee is approximately 5% of the gross lease revenue attributable to equipment that is subject to operating leases and 2% of the gross lease revenue attributable to equipment that is subject to finance leases. The total equipment management fee increased to approximately $46,000 for the three months ended September 30, 2012 from approximately $32,000 for the three months ended September 30, 2011. This increase is consistent with the increase in lease revenue. As offering proceeds continue to be utilized for the acquisition of equipment, management fees are expected to increase throughout the remainder of 2012 as our equipment and lease portfolio grows.

Organizational Costs

The Partnership did not incur organizational costs for the three months ended September 30, 2012 due to the closing of the offering period during November 2011. The Partnership incurred approximately $43,000 for the three months ended September 30, 2011.

Depreciation and Amortization Expense

Depreciation and amortization expenses consist of depreciation on equipment and amortization of equipment acquisition fees. These expenses increased to approximately $775,000 for the three months ended September 30, 2012, from approximately $500,000 for the three months ended September 30, 2011. This increase was due to the acquisition of new equipment associated with the purchase of new leases.

Net Income (Loss)

For the three months ended September 30, 2012, we recognized revenue of approximately $929,000 and expenses of approximately $1,108,000, resulting in a net loss of approximately $179,000. For the three months ended September 30, 2011, we recognized revenue of approximately $630,000 and expenses of approximately $801,000, resulting in a net loss of approximately $171,000. The change in net loss is a result of the changes in revenue and expenses as described above.

Nine Months Ended September 30, 2012 compared to Nine Months Ended September 30, 2011

Lease Revenue

Our lease revenue increased to approximately $2,451,000 for the nine months ended September 30, 2012, from approximately $1,508,000 for the nine months ended September 30, 2011. This increase was primarily due the acquisition of new lease agreements.

Sale of Finance Leases

For the nine months ended September 30, 2012, due to an early buyout, the Partnership sold equipment, held under finance leases, with a net book value of approximately $258,000 for a net gain of approximately $12,000. For the nine months ended September 30, 2011, we sold equipment, held under finance leases, with a net book value of approximately $1,400 for a net gain of approximately $1,100.

Sale of Equipment

For the nine months ended September 30, 2012, the Partnership sold equipment, held under operating leases, with a net book value of approximately $14,000 for a net gain of approximately $1,000. No equipment held under operating leases was sold for the nine months ended September 30, 2011.

Operating Expenses

Our operating expenses, excluding depreciation, primarily consist of accounting and legal fees, outside service fees and reimbursement of expenses to CCC for administration and operation of the Partnership. These expenses increased to approximately $837,000 for the nine months ended September 30, 2012, from approximately $597,000 for the nine months ended September 30, 2011. This increase is primarily attributable to increases in administrative expenses associated with management of the Partnership as the size of the portfolio increases.

Equipment Management Fee

We pay an equipment management fee to our general partner for managing our equipment portfolio. The equipment management fee is approximately 5% of the gross lease revenue attributable to equipment that is subject to operating leases and 2% of the gross lease revenue attributable to equipment that is subject to finance leases. The total equipment management fee increased to approximately $130,000 for the nine months ended September 30, 2012 from approximately $84,000 for the nine months ended September 30, 2011. This increase is consistent with the increase in lease revenue. As offering proceeds continue to be utilized for the acquisition of equipment, management fees are expected to increase throughout the remainder of 2012 as our equipment and lease portfolio grows.

Organizational Costs

The Partnership did not incur organizational costs for the nine months ended September 30, 2012 due to the closing of the offering period during November 2011. The Partnership incurred approximately $144,000 for the nine months ended September 30, 2011.

Depreciation and Amortization Expense

Depreciation and amortization expenses consist of depreciation on equipment and amortization of equipment acquisition fees. These expenses increased to approximately $2,129,000 for the nine months ended September 30, 2012, from approximately $1,246,000 for the nine months ended September 30, 2011. This increase was due to the acquisition of new equipment associated with the purchase of new leases.

Net Income (Loss)

For the nine months ended September 30, 2012, we recognized revenue of approximately $2,566,000 and expenses of approximately $3,114,000, resulting in a net loss of approximately $548,000. For the nine months ended September 30, 2011, we recognized revenue of approximately $1,646,000 and expenses of approximately $2,074,000, resulting in a net loss of approximately $428,000. The change in net loss is due to the changes in revenue and expenses as described above.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

N/A

Item 4. Controls and Procedures

Our management, under the supervision and with the participation of the Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures related to our reporting and disclosure obligations as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Chief Executive Officer and Principal Financial Officer have concluded that, as of September 30, 2012, our disclosure controls and procedures are effective in ensuring that information relating to us which is required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act of 1934 is (a) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (b) accumulated and communicated to management, including the Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There were no changes in the Partnership’s internal control over financial reporting during the third quarter of 2012 that have materially affected or are reasonably likely to materially affect its internal control over financial reporting.

Part II: OTHER INFORMATION

Item 1. Legal Proceedings

NONE

Item 1A. Risk Factors

N/A

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

N/A

Item 3. Defaults Upon Senior Securities

N/A

Item 4. Mine Safety Disclosures

N/A

Item 5. Other Information

NONE

Item 6. Exhibits

31.1 RULE 15d-14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER

31.2 RULE 15d-14(a) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

32.1 SECTION 1350 CERTIFICATION OF CHIEF EXECUTIVE OFFICER

32.2 SECTION 1350 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

SIGNATURES

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 VII, LP
	BY: COMMONWEALTH INCOME & GROWTH FUND, INC., General Partner

November 14, 2012	By: /s/ Kimberly A. Springsteen-Abbott
Date	Kimberly A. Springsteen-Abbott
	Chief Executive Officer


November 14, 2012	By: /s/ Lynn A. Franceschina
Date	Lynn A. Franceschina
	Executive Vice President, Chief Operating Officer

Attached files

Commonwealth Income & Growth Fund VII, LP Reports

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