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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended June 30, 2010

 

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from              to             

Commission File number 000-24175

ATEL Capital Equipment Fund VII, L.P.

(Exact name of registrant as specified in its charter)

 

California		94-3248318
(State or other jurisdiction of Incorporation or organization)		(I. R. S. Employer Identification No.)

600 California Street, 6th Floor, San Francisco, California 94108-2733

(Address of principal executive offices)

Registrant’s telephone number, including area code (415) 989-8800

Securities registered pursuant to section 12(b) of the Act: None

Securities registered pursuant to section 12(g) of the Act: Limited Partnership Units

Indicate by a check mark whether the registrant (1) 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    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  ¨    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.

 

Large accelerated filer  ¨		Accelerated filer  ¨		Non-accelerated filer  ¨		Smaller reporting company  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The number of Limited Partnership Units outstanding as of July, 31, 2010 was 14,985,550.

DOCUMENTS INCORPORATED BY REFERENCE

None.

 

 

 

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ATEL CAPITAL EQUIPMENT FUND VII, L. P.

Index

 

Part I.		Financial Information
Item 1.		Financial Statements (Unaudited)		3
		Balance Sheets, June 30, 2010 and December 31, 2009		3
		Statements of Operations for the three and six months ended June 30, 2010 and 2009		4
		Statements of Changes in Partners’ Capital for the year ended December 31, 2009 and for the six months ended June 30, 2010		5
		Statements of Cash Flows for the three and six months ended June 30, 2010 and 2009		6
		Notes to the Financial Statements		7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 4T.		Controls and Procedures		18
Part II.		Other Information		19
Item 1.		Legal Proceedings		19
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		19
Item 3.		Defaults Upon Senior Securities		19
Item 4.		[Reserved]		19
Item 5.		Other Information		19
Item 6.		Exhibits		19

 

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Part I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited).

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

BALANCE SHEETS

JUNE 30, 2010 AND DECEMBER 31, 2009

(in thousands)

(Unaudited)

 

		June 30, 2010			December 31, 2009
ASSETS
Cash and cash equivalents		$	1,988		$	3,898
Accounts receivable, net of allowance for doubtful accounts of $11 as of June 30, 2010 and $1 as of December 31, 2009			236			284
Investments in equipment and leases, net of accumulated depreciation of $49,985 as of June 30, 2010 and $50,345 as of December 31, 2009			10,240			11,196
Other assets			2			11
Total assets		$	12,466		$	15,389
LIABILITIES AND PARTNERS’ CAPITAL
Accounts payable and accrued liabilities:
General Partner		$	708		$	432
Due to Affiliates			55			2
Other			727			566
Unearned operating lease income			94			142
Total liabilities			1,584			1,142
Partners’ capital:
General Partner			—			—
Limited Partners			10,882			14,247
Total Partners’ capital			10,882			14,247
Total liabilities and Partners’ capital		$	12,466		$	15,389

See accompanying notes.

 

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ATEL CAPITAL EQUIPMENT FUND VII, L.P.

STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED

JUNE 30, 2010 AND 2009

(in thousands except units and per unit data)

(Unaudited)

 

		Three months ended June 30,								Six months ended June 30,
		2010				2009				2010				2009
Revenues:
Leasing activities:
Operating leases		$	674			$	1,316			$	1,299			$	3,362
Direct financing leases			83				91				171				179
Gain on sales of assets			57				51				123				71
Other			—				—				6				1
Total revenue			814				1,458				1,599				3,613
Expenses:
Depreciation of operating lease assets			411				631				823				1,213
Marine vessel maintenance and other operating costs			48				587				103				1,352
Cost reimbursements to General Partner			—				—				750				750
Equipment and incentive management fees to General Partner			16				61				37				139
Railcar and equipment maintenance			110				120				218				281
Professional fees			44				14				139				88
Insurance			24				55				71				144
Outside services			20				17				36				39
Other management fees			77				103				151				180
Equipment storage			50				14				76				15
Franchise fees and state taxes			—				76				(10	)			120
(Reversal of) provision for doubtful accounts			(1	)			11				11				7
Property taxes			3				14				42				108
Other			43				39				77				70
Total operating expenses			845				1,742				2,524				4,506
Loss from operations			(31	)			(284	)			(925	)			(893	)
Other (expense) income, net			(2	)			1				(10	)			1
Net loss		$	(33	)		$	(283	)		$	(935	)		$	(892	)
Net (loss) income
General Partner		$	—			$	—			$	182			$	—
Limited Partners			(33	)			(283	)			(1,117	)			(892	)
		$	(33	)		$	(283	)		$	(935	)		$	(892	)
Net loss per Limited Partnership Unit		$	0.00			$	(0.02	)		$	(0.07	)		$	(0.06	)
Weighted average number of Units outstanding			14,985,550				14,985,550				14,985,550				14,985,550

See accompanying notes.

 

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ATEL CAPITAL EQUIPMENT FUND VII, L.P.

STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL

FOR THE YEAR ENDED DECEMBER 31, 2009 AND

FOR THE SIX MONTHS ENDED

JUNE 30, 2010

(in thousands except units and per unit data)

(Unaudited)

 

		Limited Partners						General Partner				Total
		Units		Amount
Balance December 31, 2008		14,985,550		$	16,544			$	—			$	16,544
Distributions to Limited Partners ($0.08 per Unit)		—			(1,199	)			—				(1,199	)
Distributions to General Partner		—			—				(97	)			(97	)
Net (loss) income		—			(1,098	)			97				(1,001	)
Balance December 31, 2009		14,985,550			14,247				—				14,247
Distributions to Limited Partners ($0.15 per Unit)		—			(2,248	)			—				(2,248	)
Distributions to General Partner		—			—				(182	)			(182	)
Net (loss) income		—			(1,117	)			182				(935	)
Balance June 30, 2010		14,985,550		$	10,882			$	—			$	10,882

See accompanying notes.

 

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ATEL CAPITAL EQUIPMENT FUND VII, L.P.

STATEMENTS OF CASH FLOWS

FOR THE THREE AND SIX MONTHS ENDED

JUNE 30, 2010 AND 2009

(in thousands)

(Unaudited)

 

		Three months ended June 30,								Six months ended June 30,
		2010				2009				2010				2009
Operating activities:
Net loss		$	(33	)		$	(283	)		$	(935	)		$	(892	)
Adjustments to reconcile net loss to cash provided by operating activities:
Gain on sales of assets			(57	)			(51	)			(123	)			(71	)
Depreciation of operating lease assets			411				631				823				1,213
Amortization of unearned income on direct finance leases			(83	)			(91	)			(171	)			(179	)
(Reversal of) provision for doubtful accounts			(1	)			11				11				7
Changes in operating assets and liabilities:
Accounts receivable			(37	)			680				38				1,974
Other assets			4				42				9				32
Accounts payable:
General Partner			(100	)			(84	)			276				(29	)
Other			85				527				161				593
Affiliates			55				—				53				1
Unearned operating lease income			(82	)			(183	)			(48	)			(183	)
Net cash provided by operating activities			162				1,199				94				2,466
Investing activities:
Proceeds from sales of lease assets			98				101				222				209
Payments received on direct finance leases			97				104				204				204
Improvements to lease equipment			—				(940	)			—				(965	)
Net cash provided by (used in) investing activities			195				(735	)			426				(552	)
Financing activities:
Distributions:
General Partner			—				—				(182	)			—
Limited Partners			—				—				(2,248	)			—
Net cash used in financing activities			—				—				(2,430	)			—
Net increase (decrease) in cash and cash equivalents			357				464				(1,910	)			1,914
Cash and cash equivalents at beginning of period			1,631				3,826				3,898				2,376
Cash and cash equivalents at end of period		$	1,988			$	4,290			$	1,988			$	4,290
Supplemental disclosures of cash flow information:
Cash paid during the period for taxes		$	43			$	110			$	45			$	110

See accompanying notes.

 

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ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Limited Partnership matters:

ATEL Capital Equipment Fund VII, L.P. (the “Partnership” or the “Fund”) was formed under the laws of the State of California on May 17, 1996 for the purpose of acquiring equipment to engage in equipment leasing and sales activities, primarily in the United States. The Partnership may continue until December 31, 2017. The General Partner of the Partnership is ATEL Financial Services, LLC (“AFS”), a California limited liability company. Prior to converting to a limited liability company structure, AFS was formerly known as ATEL Financial Corporation.

The Partnership conducted a public offering of 15,000,000 Units of Limited Partnership Interest (“Units”), at a price of $10 per Unit. On January 7, 1997, subscriptions for the minimum number of Units (120,000, $1.2 million) had been received (excluding subscriptions from Pennsylvania investors) and AFS requested that the subscriptions be released to the Partnership. On that date, the Partnership commenced operations in its primary business. Gross contributions in the amount of $150 million (15,000,000 units) were received as of November 27, 1998, exclusive of $500 of Initial Partners’ capital investment and $100 of AFS’ capital investment. The offering was terminated on November 27, 1998. As of June 30, 2010, 14,985,550 Units remain issued and outstanding.

The Partnership’s principal objectives have been to invest in a diversified portfolio of equipment that (i) preserves, protects and returns the Partnership’s invested capital; (ii) generates regular distributions to the partners of cash from operations and cash from sales or refinancing, with any balance remaining after certain minimum distributions to be used to purchase additional equipment during the reinvestment period (“Reinvestment Period”) (defined as six full years following the year the offering was terminated), which ended December 31, 2004 and (iii) provides additional distributions following the Reinvestment Period and until all equipment has been sold. The Partnership is governed by its Limited Partnership Agreement (“Partnership Agreement”).

Pursuant to the Partnership Agreement, AFS receives compensation and reimbursements for services rendered on behalf of the Partnership (Note 4). The Partnership is required to maintain reasonable cash reserves for working capital, the repurchase of Units and contingencies. The repurchase of Units is solely at the discretion of AFS.

As of June 30, 2010, the Partnership continues to be in the liquidation phase of its life cycle as defined in the Partnership Agreement.

These unaudited interim financial statements should be read in conjunction with the financial statements and notes thereto contained in the report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission.

2. Summary of significant accounting policies:

Basis of presentation:

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q as mandated by the Securities and Exchange Commission. The unaudited interim financial statements reflect all adjustments which are, in the opinion of the General Partner, necessary for a fair statement of financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. Operating results for the three and six months ended June 30, 2010 are not necessarily indicative of the results to be expected for the full year.

Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on equity or net income.

Footnote and tabular amounts are presented in thousands, except as to Units and per Unit data.

 

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ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

2. Summary of significant accounting policies (continued):

 

In preparing the accompanying unaudited financial statements, the General Partner has reviewed events that have occurred after June 30, 2010, up until the issuance of the financial statements. No events were noted which would require disclosure in the footnotes to the financial statements.

Use of estimates:

The preparation of financial statements in conformity with GAAP 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. Such estimates primarily relate to the determination of residual values at the end of the lease term, expected future cash flows used for impairment analysis purposes, and determination of the allowance for doubtful accounts.

Segment reporting:

The Partnership is not organized by multiple operating segments for the purpose of making operating decisions or assessing performance. Accordingly the Partnership operates in one reportable operating segment in the United States.

However, certain of the Partnership’s lessee customers may have international operations. In these instances, the Partnership is aware that certain equipment, primarily rail and transportation, may periodically exit the country. However, these lessee customers are US-based, and it is impractical for the Partnership to track, on an asset-by-asset and day-by-day basis, where these assets are deployed. The primary geographic regions in which the Partnership sought leasing opportunities were North America and Europe. For each of the three and six months ended June 30, 2010 and 2009, 100% of the Partnership’s operating revenues were from customers domiciled in North America.

Other (expense) income, net

Other (expense) income, net represents gains or losses from foreign currency transactions.

Per Unit data:

Net loss and distributions per Unit are based upon the weighted average number of Limited Partnership Units outstanding during the period.

Recent accounting pronouncements:

In July 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU 2010-20 will be effective for the Partnership’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period will be required for the Partnership’s financial statements that include periods beginning on or after January 1, 2011. The Partnership anticipates that adoption of these additional disclosures will not have a material effect on its financial position or results of operations.

In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosure about Fair Value Measurement” (“ASU 2010-06”). ASU 2010-06 requires additional disclosures related to recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements, and information on purchases, sales, issuances, and settlements in a rollforward reconciliation of Level 3 fair-value measurements. Except for the Level 3 reconciliation disclosures, which will be effective for fiscal years beginning after December 15, 2010, the guidance became effective for the Partnership beginning January 1, 2010 and was adopted during the first quarter of 2010 with no impact on the Partnership’s financial position, results of operations or cash flows.

 

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ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

3. Investment in equipment and leases, net:

The Partnership’s investments in equipment and leases consist of the following (in thousands):

 

		Balance December 31, 2009			Reclassifications & Additions / Dispositions				Depreciation/ Amortization Expense or Amortization of Leases				Balance June 30, 2010
Net investment in operating leases		$	10,162		$	(60	)		$	(823	)		$	9,279
Net investment in direct financing leases			592			—				(34	)			558
Assets held for sale or lease, net			442			(39	)			—				403
Total		$	11,196		$	(99	)		$	(857	)		$	10,240

Impairment of investments in leases and assets held for sale or lease:

Management periodically reviews the carrying values of its assets on leases and assets held for lease or sale. Impairment losses are recorded as an adjustment to the net investment in operating leases. No impairment losses were recorded during the six months ended June 30, 2010 and 2009. Depreciation expense on property subject to operating leases and property held for lease or sale totaled $411 thousand and $631 thousand for the three months ended June 30, 2010 and 2009, and was $823 thousand and $1.2 million for the respective six months ended June 30, 2010 and 2009.

All of the property subject to leases was acquired in the years 1997 through 2002.

Operating leases:

Property on operating leases consists of the following (in thousands):

 

		Balance December 31, 2009				Additions				Reclassifications or Dispositions				Balance June 30, 2010
Transportation		$	32,261			$	—			$	(1,127	)		$	31,134
Marine vessels			17,502				—				—				17,502
Mining equipment			4,222				—				—				4,222
Construction			431				—				—				431
Materials handling			83				—				—				83
Other			274				—				—				274
			54,773				—				(1,127	)			53,646
Less: accumulated depreciation			(44,611	)			(823	)			1,067				(44,367	)
Total		$	10,162			$	(823	)		$	(60	)		$	9,279

The average estimated residual value for assets on operating leases was 14% of the assets’ original cost at both June 30, 2010 and December 31, 2009.

The Partnership earns revenues from its marine vessels and certain lease assets based on utilization of such assets. Such contingent rentals (i.e., short-term, operating charter hire payments) and the associated expenses are recorded when earned and/or incurred. The net revenues associated with these rentals are included as a component of Operating Lease Revenues, and totaled $25 thousand and $474 thousand for the respective three months ended June 30, 2010 and 2009, and was $70 thousand and $1.7 million for the respective six months ended June 30, 2010 and 2009.

There were no operating leases in non-accrual status at June 30, 2010 and December 31, 2009.

 

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ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

3. Investment in equipment and leases, net (continued):

 

Direct financing leases:

As of June 30, 2010 and December 31, 2009, investment in direct financing leases consists of various transportation, ground support and manufacturing equipment. The following lists the components of the Partnership’s investment in direct financing leases as of June 30, 2010 and December 31, 2009 (in thousands):

 

		June 30, 2010				December 31, 2009
Total minimum lease payments receivable		$	1,116			$	1,320
Estimated residual values of leased equipment (unguaranteed)			75				75
Investment in direct financing leases			1,191				1,395
Less unearned income			(633	)			(803	)
Net investment in direct financing leases		$	558			$	592

There were no net investments in direct financing leases in non-accrual status as of June 30, 2010 and December 31, 2009.

At June 30, 2010, the aggregate amounts of future minimum lease payments are as follows (in thousands):

 

 

				Operating Leases			Direct Financing Leases			Total
Six months ending December 31, 2010				$	941		$	194		$	1,135
Year ending December 31, 2011					893			389			1,282
2012					664			368			1,032
2013					140			165			305
				$	2,638		$	1,116		$	3,754

The Partnership utilizes a straight line depreciation method for equipment in all of the categories currently in its portfolio of lease transactions. The useful lives for investment in leases by category are as follows (in years):

 

Equipment category		Useful Life
Mining		30 - 40
Transportation, rail		30 - 35
Marine vessels		20 - 30
Materials handling		7 - 10
Transportation, other		7 - 10
Construction		7 - 10

 

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ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

4. Related party transactions:

The terms of the Partnership Agreement provide that AFS and/or affiliates are entitled to receive certain fees for equipment management and resale, and for management of the Partnership.

The Partnership Agreement allows for the reimbursement of costs incurred by AFS in providing administrative services to the Partnership. Administrative services provided include Partnership accounting, investor relations, legal counsel and lease and equipment documentation. AFS is not reimbursed for services whereby it is entitled to receive a separate fee as compensation for such services, such as disposition of equipment. The Partnership would be liable for certain future costs to be incurred by AFS to manage the administrative services provided to the Partnership.

Each of ATEL Leasing Corporation (“ALC”) and AFS is a wholly-owned subsidiary of ATEL Capital Group and performs services for the Partnership. Acquisition services, equipment management, lease administration and asset disposition services are performed by ALC; investor relations, communications services and general administrative services are performed by AFS.

Cost reimbursements to the General Partner are based on its costs incurred in performing administrative services for the Partnership. These costs are allocated to each managed entity based on certain criteria such as total assets, number of investors or contributed capital based upon the type of cost incurred, subject to limitations as described below.

Incentive management fees are computed as 4.0% of distributions of cash from operations, as defined in the Partnership Agreement and equipment management fees are computed as 3.5% of gross revenues from operating leases, as defined in the Partnership Agreement plus 2.0% of gross revenues from full payout leases, as defined in the Partnership Agreement.

During the three and six months ended June 30, 2010 and 2009, AFS and/or affiliates earned fees, commissions and reimbursements, pursuant to the Partnership Agreement as follows (in thousands):

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2010			2009			2010			2009
Equipment and incentive management fees to General Partner		$	16		$	61		$	37		$	139
Cost reimbursements to General Partner and/or affiliates			—			—			750			750
		$	16		$	61		$	787		$	889

The Fund’s Limited Partnership Agreement places an annual and cumulative limit for cost reimbursements to AFS and/or its affiliates. Any reimbursable costs incurred by AFS and/or affiliates during the year exceeding the annual and/or cumulative limits cannot be reimbursed in the current year, though such costs may be reimbursable in future years to the extent such amounts may be payable if within the annual and cumulative limits in such future years. The Fund is a finite life and self liquidating entity, and AFS and its affiliates have no recourse against the Fund for the amount of any unpaid excess reimbursable administrative expenses. The Fund will continue to require administrative services from AFS and its affiliates through the end of its term, and will therefore continue to incur reimbursable administrative expenses in each year. The Fund has determined that payment of any amounts in excess of the annual and cumulative limits is not probable, and the date any portion of such amount may be paid, if ever, is uncertain. When the Fund completes its liquidation stage and terminates, any unpaid amount will expire unpaid, with no claim by AFS or its affiliates against any liquidation proceeds or any party for the unpaid balance. Accordingly, the Partnership has recorded neither an obligation nor an expense for such contingent reimbursement of the approximate $562 thousand and $877 thousand excess reimbursable administrative expenses at June 30, 2010 and December 31, 2009, respectively.

 

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ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

5. Guarantees:

The Partnership enters into contracts that contain a variety of indemnifications. The Partnership’s maximum exposure under these arrangements is unknown. However, the Partnership has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.

The General Partner knows of no facts or circumstances that would make the Partnership’s contractual commitments outside standard mutual covenants applicable to commercial transactions between businesses. Accordingly, the Partnership believes that these indemnification obligations are made in the ordinary course of business as part of standard commercial and industry practice, and that any potential liability under the Partnership’s similar commitments is remote. Should any such indemnification obligation become payable, the Partnership would separately record and/or disclose such liability in accordance with GAAP.

6. Partners’ Capital:

As of June 30, 2010 and December 31, 2009, 14,985,550 Units were issued and outstanding. The Partnership had been authorized to issue up to 15,000,050 Units, including the 50 Units issued to the Initial Limited Partners, as defined.

The Partnership has the right, exercisable at the General Partner’s discretion, but not the obligation, to repurchase Units of a Unit holder who ceases to be a U.S. Citizen, for a price equal to 100% of the holder’s capital account. The Partnership is otherwise permitted, but not required, to repurchase Units upon a holder’s request. The repurchase of Fund units is made in accordance with Section 13 of the Amended and Restated Agreement of Limited Partnership. The repurchase would be at the discretion of the General Partner on terms it determines to be appropriate under given circumstances, in the event that the General Partner deems such repurchase to be in the best interest of the Partnership; provided, the Partnership is never required to repurchase any Units. Upon the repurchase of any Units by the Fund, the tendered Units are cancelled. Units repurchased in prior periods were repurchased at amounts representing the original investment less cumulative distributions made to the unit-holder with respect to the Units. All Units repurchased during a quarter are deemed to be repurchased effective the last day of the preceding quarter, and are not deemed to be outstanding during, or entitled to allocations of net income, net loss or distributions for the quarter in which such repurchase occurs.

As defined in the Partnership Agreement, the Partnership’s Net Income, Net Losses, and Distributions are to be allocated 92.5% to the Limited Partners and 7.5% to AFS.

As defined in the Partnership Agreement, available Cash from Operations shall be distributed as follows:

First, Distributions of Cash from Operations shall be 88.5% to the Limited Partners, 7.5% to AFS and 4% to AFS or its affiliate designated as the recipient of the Incentive Management Fee, until the Limited Partners have received Aggregate Distributions in an amount equal to their Original Invested Capital, as defined, plus a 10% per annum cumulative (compounded daily) return on their Adjusted Invested Capital, as defined in the Partnership Agreement.

Second, 85% to the Limited Partners, 7.5% to AFS and 7.5% to AFS or its affiliate designated as the recipient of the Incentive Management Fee.

As defined in the Partnership Agreement, available Cash from Sales or Refinancing are to be distributed as follows:

First, Distributions of Sales or Refinancing shall be 92.5% to the Limited Partners and 7.5% to AFS, until the Limited Partners have received Aggregate Distributions in an amount equal to their Original Invested Capital, as defined, plus a 10% per annum cumulative (compounded daily) return on their Adjusted Invested Capital.

Second, 85% to the Limited Partners, 7.5% to AFS and 7.5% to AFS or its affiliate designated as the recipient of the Incentive Management Fee.

 

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ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

6. Partners’ Capital (continued):

 

Distributions to Limited Partners were as follows (in thousands, except per Unit data):

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2010			2009			2010			2009
Distributions declared		$	—		$	—		$	2,248		$	—
Weighted average number of Units outstanding			14,985,550			14,985,550			14,985,550			14,985,550
Weighted average distributions per Unit		$	—		$	—		$	0.15		$	—

7. Fair value of financial instruments:

Fair value measurements and disclosures are based on a fair value hierarchy as determined by significant inputs used to measure fair value. The three levels of inputs within the fair value hierarchy are defined as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market.

Level 3 – Valuation is modeled using significant inputs that are unobservable in the market. These unobservable inputs reflect the Partnership’s own estimates of assumptions that market participants would use in pricing the asset or liability.

At June 30, 2010 and December 31, 2009, the Partnership had no assets or liabilities that require measurement on a recurring or non-recurring basis.

The following disclosure of the estimated fair value of financial instruments is made in accordance with the guidance provided by the Financial Instruments Topic of the FASB Accounting Standards Codification. Fair value estimates, methods and assumptions, set forth below for the Partnership’s financial instruments, are made solely to comply with the requirements of the Financial Instruments Topic and should be read in conjunction with the Partnership’s financial statements and related notes.

The Partnership has determined the estimated fair value amounts by using market information and valuation methodologies that it considers appropriate and consistent with the fair value accounting guidance. Considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Partnership could realize or has realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

At June 30, 2010 and December 31, 2009, the only financial instrument reflected on the Partnership’s financial statements is its cash and cash equivalents. Such cash and cash equivalents approximate fair value because of the liquidity and short-term maturity of these instruments.

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Statements contained in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” (“MD&A”) and elsewhere in this Form 10-Q, which are not historical facts, may be forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. In particular, the economic recession and changes in general economic conditions, including, fluctuations in demand for equipment, lease rates, and interest rates, may result in delays in leasing, re-leasing, and disposition of equipment, and reduced returns on invested capital. The Partnership’s performance is subject to risks relating to lessee defaults and the creditworthiness of its lessees. The Partnership’s performance is also subject to risks relating to the value of its equipment at the end of its leases, which may be affected by the condition of the equipment, technological obsolescence and the markets for new and used equipment at the end of lease terms. Investors are cautioned not to attribute undue certainty to these forward-looking statements, which speak only as of the date of this Form 10-Q. We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events, other than as required by law.

Overview

ATEL Capital Equipment Fund VII, L.P. (the “Partnership” or the “Fund”) is a California partnership that was formed in May 1996 for the purpose of engaging in the sale of limited liability investment units and acquiring equipment to generate revenues from equipment leasing and sales activities, primarily in the United States.

The Partnership conducted a public offering of 15,000,000 Units of Limited Partnership Interest (“Units”), at a price of $10 per Unit. The offering was terminated in November 1998. During early 1999, the Partnership completed its initial acquisition stage with the investment of the net proceeds from the public offering of Units. Subsequently, throughout the reinvestment period (“Reinvestment Period”) (defined as six full years following the year the offering was terminated), the Partnership reinvested cash flow in excess of certain amounts required to be distributed to the Limited Partners and/or utilized its credit facilities to acquire additional equipment.

The Partnership may continue until December 31, 2017. However, pursuant to the guidelines of the Limited Partnership Agreement (“Partnership Agreement”), the Partnership began to liquidate its assets and distribute the proceeds thereof after the end of the Reinvestment Period which ended in December 2004.

As of June 30, 2010, the Partnership continues in its liquidation phase. Accordingly, assets that mature will be returned to inventory and most likely will be subsequently sold, which will result in decreasing revenue as earning assets decrease. Periodic distributions are paid at the discretion of the General Partner.

Results of Operations

The three months ended June 30, 2010 versus the three months ended June 30, 2009

The Partnership had net losses of $33 thousand and $283 thousand for the three months ended June 30, 2010 and 2009, respectively. The results for the second quarter of 2010 reflect decreases in both total revenues and total operating expenses when compared to the prior year period.

Revenues

Total revenues for the second quarter of 2010 decreased by $644 million, or 44%, as compared to the prior year period. The net decrease in total revenues was mostly attributable to the $642 thousand reduction in operating lease revenue, which declined largely due to an approximate $449 thousand period over period reduction in usage-based rental revenues from the Partnership’s marine vessels. The decline in usage-based rental revenues was primarily due to the economic downturn which continues to impact demand for such vessels. Moreover, operating lease revenues also declined due to run-off and sales of lease assets consistent with a Fund in liquidation.

Expenses

Total operating expenses for the second quarter of 2010 decreased by $897 thousand, or 51%, as compared to the prior year period. The net decrease in expenses was primarily a result of decreases in marine vessel maintenance and other

 

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operating costs, depreciation expense, franchise fees and state taxes and management fees paid to AFS.

The decrease in vessel maintenance and operating costs totaled $539 thousand and was largely due to increased vessel inactivity during the second quarter of 2010, as compared to the prior year period, resulting from reduced demand for such vessels as previously discussed. Depreciation expense was reduced by $220 thousand mainly due to continued run-off of the lease asset portfolio as well as sales of terminating lease assets. Moreover, franchise and state taxes decreased by $76 thousand primarily as a result of a period over period reduction in estimated tax payments and liabilities; and, management fees paid to AFS decreased by $45 thousand largely due to the continued decline in managed assets and related rents resulting from liquidation stage activities.

Other

The Partnership recorded other expense, net totaling $2 thousand for the second quarter of 2010 and other income, net totaling $1 thousand for the second quarter of 2009, representing gains or losses from foreign currency transactions. The $3 thousand unfavorable change in foreign currency gains or losses was primarily a result of the strength of the U.S. currency against the British pound at the time of the transactions. The British pound comprises the majority of the Partnership’s foreign currency transactions.

The six months ended June 30, 2010 versus the six months ended June 30, 2009

The Partnership had net losses of $935 thousand and $892 thousand for the six months ended June 30, 2010 and 2009, respectively. The results for the first half of 2010 reflect decreases in both total revenues and total operating expenses when compared to the prior year period.

Revenues

Total revenues for the first half of 2010 decreased by $2.0 million, or 56%, as compared to the prior year period. The net decrease in total revenues was mostly attributable to the $2.1 million reduction in operating lease revenue, which declined largely due to an approximate $1.6 million period over period reduction in usage-based rental revenues from the Partnership’s marine vessels. The decline in usage-based rental revenues was primarily due to the economic downturn which continues to impact demand for such vessels. Moreover, operating lease revenues also declined due to run-off and sales of lease assets consistent with a Fund in liquidation.

Expenses

Total operating expenses for the first half of 2010 decreased by $2.0 million, or 44%, as compared to the prior year period. The net decrease in expenses was primarily a result of decreases in marine vessel maintenance and other operating costs, depreciation expense, franchise fees and state taxes, management fees paid to AFS, and insurance expense.

The decrease in vessel maintenance and operating costs totaled $1.2 million and was largely due to increased vessel inactivity during the first half of 2010, as compared to the prior year period, resulting from reduced demand for such vessels as previously discussed. Depreciation expense was lower by $390 thousand mainly due to continued run-off of the lease asset portfolio as well as sales of terminating lease assets. In addition, franchise and state taxes decreased by $130 thousand primarily as a result of a period over period reduction in estimated tax payments and liabilities; and, management fees paid to AFS decreased by $102 thousand largely due to the continued decline in managed assets and related rents resulting from liquidation stage activities. Finally, insurance costs related to the Partnership’s marine vessels decreased by $73 thousand primarily as a result of the change in insurance provider, coupled with vessel inactivity.

Other

The Partnership recorded other expense, net totaling $10 thousand for the first six months of 2010 and other income, net totaling $1 thousand for the prior year period, representing gains or losses from foreign currency transactions. The $11 thousand unfavorable change in foreign currency gains or losses was primarily a result of the strength of the U.S. currency against the British pound at the time of the transactions. The British pound comprises the majority of the Partnership’s foreign currency transactions.

 

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Capital Resources and Liquidity

The liquidity of the Partnership varies, increasing to the extent cash flows from leases and proceeds from lease asset sales exceed expenses and decreasing as distributions are made to the Limited Partners and to the extent expenses exceed cash flows from leases and proceeds from asset sales.

The primary source of liquidity for the Partnership has been its cash flow from leasing activities. As the initial lease terms have expired, the Partnership ventured to re-lease or sell the equipment. Future liquidity will depend on the Partnership’s success in remarketing or selling the equipment as it comes off rental.

The changes in the Partnership’s cash flow for the three and six months ended June 30, 2010 as compared to the three and six months ended June 30, 2009 are as follows:

The three months ended June 30, 2010 versus the three months ended June 30, 2009

 

•

Operating Activities

Cash provided by operating activities during the second quarter of 2010 decreased by $1.0 million as compared to the prior year period. The net decrease in cash flow was primarily attributable to an unfavorable year over year three-month change in accounts receivable and accounts payable activities and accrued liabilities activities. These decreases in cash flow were offset, in part, by an increase in unearned operating lease income.

The unfavorable change in accounts receivable activities reduced cash flow by $717 thousand and was largely due to lower first quarter 2010 period-end billings related to marine vessel activity as compared to first quarter 2009. Accordingly, receivables collected during the current quarter were significantly lower when compared to the prior year period. Likewise, the unfavorable change in accounts payable and accrued liabilities activities reduced cash flow by $403 thousand and was primarily a result of second quarter 2009 period-end accruals related to taxes, vessel operating costs and vessel improvements.

Partially offsetting the aforementioned decreases in cash flow was a favorable change in unearned operating lease income which improved cash flow by $101 thousand. The change was primarily a result of the reduction in amounts of prepaid rent amortized during the second quarter of 2010 as compared to the prior year period.

 

•

Investing Activities

Cash provided by investing activities during the second quarter of 2010 totaled $195 thousand as compared to cash used in investing activities totaling $735 thousand during the prior year period, a $930 thousand increase. The net increase in cash flow was mainly due to a period over period reduction in capital improvements to operating lease assets as the second quarter 2009 amount included an approximate $940 thousand of capitalized improvements made on the Partnership’s marine vessels. There were no such improvements during the second quarter of 2010.

 

•

Financing Activities

The Partnership had no financing activities during the second quarters of 2010 and 2009.

The six months ended June 30, 2010 versus the six months ended June 30, 2009

 

•

Operating Activities

Cash provided by operating activities during the first half of 2010 decreased by $2.4 million as compared to the prior year period. The net decrease in cash flow was primarily attributable to: 1) an unfavorable year over year six-month change in accounts receivable activities, 2) a decrease in net operating results, as adjusted for non-cash revenue and expense items such as gain on sales of assets and depreciation expense, and 3) an unfavorable year over year six-month accounts payable and accrued liabilities activities. These decreases in cash flow were offset, in part, by an increase in unearned operating lease income.

The unfavorable change in accounts receivable activities reduced cash flow by $1.9 million and was largely due to lower 2009 year-end billings and first quarter 2010 period-end billings related to marine vessel activity as compared to year-end 2008 and the first quarter of 2009. Accordingly, receivables collected during the first six months of 2010

 

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were significantly lower when compared to the prior year period. The decrease in net operating results, as adjusted for non-cash items, further reduced cash flow by $473 thousand and was mainly attributable to reduced operating lease revenue offset, in part, by the decrease in vessel maintenance and operating costs. Moreover, the unfavorable change in accounts payable and accrued liabilities activities reduced cash by $75 thousand and was primarily a result of an increase in 2009 period-end accruals related to taxes, vessel operating costs and vessel improvements partially offset by an increase in 2010 period-end accruals related to administrative costs payable to AFS.

Partially offsetting the aforementioned decreases in cash flow was a favorable change in unearned operating lease income which improved cash flow by $135 thousand. The change was largely due to the reduction in amounts of prepaid rent amortized during the first half of 2010 as compared to the prior year period.

 

•

Investing Activities

Cash provided by investing activities during the first half of 2010 totaled $426 thousand as compared to cash used in investing activities totaling $552 thousand during the prior year period, a $978 thousand increase. The net increase in cash flow was mainly due to a period over period reduction in capital improvements to operating lease assets as the first half 2009 amount included an approximate $965 thousand of capitalized improvements made on the Partnership’s marine vessels. There were no such improvements during the first half of 2010.

In addition, cash flow increased by $13 thousand largely due to higher proceeds from sales of lease assets. The increase in such proceeds was primarily a result of an increase in the number of containers and tank cars sold during the first half of 2010 when compared to the prior year period.

 

•

Financing Activities

Cash used in financing activities during the first half of 2010 increased by $2.4 million as compared to the prior year period. The entire increase represents distributions paid to both Limited Partners and the General Partner totaling $2.2 million and $182 thousand, respectively. The Partnership had no financing activities during the first half of 2009.

In a normal economy, if inflation in the general economy becomes significant, it may affect the Partnership in as much as the residual (resale) values and rates on re-leases of the Partnership’s leased assets may increase as the costs of similar assets increase. However, the Partnership’s revenues from existing leases would not increase; as such rates are generally fixed for the terms of the leases without adjustment for inflation. In addition, if interest rates increase significantly under such circumstances, the lease rates that the Partnership can obtain on future leases will be expected to increase as the cost of capital is a significant factor in the pricing of lease financing. Leases already in place, for the most part, would not be affected by changes in interest rates.

The Partnership currently has available adequate reserves to meet its immediate cash requirements and those of the next twelve months, but in the event those reserves were found to be inadequate, the Partnership would likely be in a position to borrow against its current portfolio to meet such requirements. AFS envisions no such requirements for operating purposes.

The Partnership commenced periodic distributions, based on cash flows from operations, beginning with the month of January 1997. At June 30, 2010, the Partnership had no commitments to purchase leased assets and pursuant to the Partnership Agreement, the Partnership will no longer purchase any new leased assets.

 

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Item 4T.

Controls and procedures.

Evaluation of disclosure controls and procedures

The Partnership’s General Partner’s President and Chief Executive Officer, and Executive Vice President and Chief Financial Officer and Chief Operating Officer (“Management”), evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on the evaluation of the Partnership’s disclosure controls and procedures, Management concluded that as of the end of the period covered by this report, the design and operation of these disclosure controls and procedures were effective.

The Partnership does not control the financial reporting process, and is solely dependent on the Management of the General Partner, which is responsible for providing the Partnership with financial statements in accordance with generally accepted accounting principles in the United States. The General Partner’s disclosure controls and procedures, as applicable to the Partnership, were effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.

Changes in internal control

There were no changes in the General Partner’s internal control over financial reporting, as it is applicable to the Partnership, during the quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, the General Partner’s internal control over financial reporting, as it is applicable to the Partnership.

 

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PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings.

In the ordinary course of conducting business, there may be certain claims, suits, and complaints filed against the Partnership. In the opinion of management, the outcome of such matters, if any, will not have a material impact on the Partnership’s financial position or results of operations. No material legal proceedings are currently pending against the Partnership or against any of its assets.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

 

Item 3.

Defaults Upon Senior Securities.

None.

 

Item 4.

[Reserved].

 

Item 5.

Other Information.

None.

 

Item 6.

Exhibits.

Documents filed as a part of this report:

 

1.

Financial Statement Schedules

All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable, and therefore have been omitted.

 

2.

Other Exhibits

31.1    Rule 13a-14(a)/ 15d-14(a) Certification of Dean L. Cash

31.2    Rule 13a-14(a)/ 15d-14(a) Certification of Paritosh K. Choksi

32.1    Certification Pursuant to 18 U.S.C. section 1350 of Dean L. Cash

32.2    Certification Pursuant to 18 U.S.C. section 1350 of Paritosh K. Choksi

 

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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.

Date: August 12, 2010

 

				ATEL CAPITAL EQUIPMENT FUND VII, L.P.
				(Registrant)
By:		ATEL Financial Services, LLC
		General Partner of Registrant
				By:		/s/ Dean L. Cash
						Dean L. Cash
						President and Chief Executive Officer of ATEL Financial Services, LLC (General Partner)
				By:		/s/ Paritosh K. Choksi
						Paritosh K. Choksi
						Executive Vice President and Chief Financial Officer and Chief Operating Officer of ATEL Financial Services, LLC (General Partner)
				By:		/s/ Samuel Schussler
						Samuel Schussler
						Vice President and Chief Accounting Officer of ATEL Financial Services, LLC (General Partner)

 

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