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Form 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

For the quarterly period ended March 31, 2012

 
o   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 o

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 x No o

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 o   Accelerated filer o   Non-accelerated filer o   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 o No x

The number of Limited Partnership Units outstanding as of April 30, 2012 was 14,985,550.

DOCUMENTS INCORPORATED BY REFERENCE

None.

 


 
 

TABLE OF CONTENTS

ATEL CAPITAL EQUIPMENT FUND VII, L. P.
  
Index

 

Part I.

Financial Information

    3  

Item 1.

Financial Statements (Unaudited)

    3  
Balance Sheets, March 31, 2012 and December 31, 2011     3  
Statements of Operations for the three months ended March 31, 2012 and 2011     4  
Statements of Changes in Partners’ Capital for the year ended December 31, 2011 and for the three months ended March 31, 2012     5  
Statements of Cash Flows for the three months ended March 31, 2012 and 2011     6  
Notes to the Financial Statements     7  

Item 2.

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

    16  

Item 4.

Controls and Procedures

    19  

Part II.

Other Information

    20  

Item 1.

Legal Proceedings

    20  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

    20  

Item 3.

Defaults Upon Senior Securities

    20  

Item 4.

[Removed and Reserved]

    20  

Item 5.

Other Information

    20  

Item 6.

Exhibits

    20  

2


 
 

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).

ATEL CAPITAL EQUIPMENT FUND VII, L.P.
  
BALANCE SHEETS
  
MARCH 31, 2012 AND DECEMBER 31, 2011
(In Thousands)
(Unaudited)

   
  March 31, 2012   December 31, 2011
ASSETS
                 
Cash and cash equivalents   $     1,824     $      1,354  
Accounts receivable, net of allowance for doubtful accounts of $209 as of March 31, 2012 and $11 December 31, 2011     152       307  
Investments in equipment and leases, net of accumulated depreciation of $39,099 as of March 31, 2012 and $39,106 as of December 31, 2011     7,367       7,549  
Other assets     6       6  
Total assets   $ 9,349     $ 9,216  
LIABILITIES AND PARTNERS’ CAPITAL
                 
Accounts payable and accrued liabilities:
                 
General Partner   $ 355     $ 670  
Other     391       416  
Unearned operating lease income     293       247  
Total liabilities     1,039       1,333  
Commitments and contingencies
                 
Partners’ capital:
                 
General Partner            
Limited Partners     8,310       7,883  
Total Partners’ capital     8,310       7,883  
Total liabilities and Partners’ capital   $ 9,349     $ 9,216  

See accompanying notes.

3


 
 

TABLE OF CONTENTS

ATEL CAPITAL EQUIPMENT FUND VII, L.P.
  
STATEMENTS OF OPERATIONS
  
FOR THE THREE MONTHS ENDED
MARCH 31, 2012 AND 2011
(In Thousands except Units and Per Unit Data)
(Unaudited)

   
  Three Months Ended
March 31,
     2012   2011
Revenues:
                 
Leasing activities:
                 
Operating leases   $ 1,090     $ 755  
Direct financing leases     53       75  
Gain on sales of assets     29       28  
Other     6       10  
Total revenues     1,178       868  
Expenses:
                 
Depreciation of operating lease assets     123       386  
Marine vessel maintenance and other operating costs           6  
Cost reimbursements to General Partner     81       750  
Other management fees     44       14  
Equipment and incentive management fees to General Partner     34       30  
Railcar and equipment maintenance     157       143  
Professional fees     41       57  
Insurance     2       5  
Equipment storage     2       37  
Franchise fees and state taxes           19  
Freight and shipping     1       234  
Outside services     19       11  
Provision for doubtful accounts     198        
Property taxes           29  
Postage     5       6  
Printing and photocopying     10       2  
Other     34       26  
Total operating expenses     751       1,755  
Income (loss) from operations     427       (887 ) 
Other loss, net           (7 ) 
Net income (loss)   $ 427     $ (894 ) 
Net income (loss):
                 
General Partner   $     $  
Limited Partners     427       (894 ) 
     $ 427     $ (894 ) 
Net income (loss) per Limited Partnership Unit   $ 0.03     $ (0.06 ) 
Weighted average number of Units outstanding       14,985,550         14,985,550  

See accompanying notes.

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TABLE OF CONTENTS

ATEL CAPITAL EQUIPMENT FUND VII, L.P.
  
STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
  
FOR THE YEAR ENDED DECEMBER 31, 2011
AND FOR THE THREE MONTHS
ENDED MARCH 31, 2012
(In Thousands except Units and Per Unit Data)
(Unaudited)

       
  Limited Partners   General Partner   Total
     Units   Amount
Balance December 31, 2010     14,985,550     $    10,838     $       —     $     10,838  
Distributions to Limited Partners ($0.25 per Unit)           (3,747 )            (3,747 ) 
Distributions to General Partner                 (304 )      (304 ) 
Net income           792       304       1,096  
Balance December 31, 2011     14,985,550       7,883             7,883  
Net income           427             427  
Balance March 31, 2012     14,985,550     $ 8,310     $     $ 8,310  

See accompanying notes.

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TABLE OF CONTENTS

ATEL CAPITAL EQUIPMENT FUND VII, L.P.
  
STATEMENTS OF CASH FLOWS
  
FOR THE THREE MONTHS ENDED
MARCH 31, 2012 AND 2011
(In Thousands)
(Unaudited)

   
  Three Months Ended
March 31,
     2012   2011
Operating activities:
                 
Net income (loss)   $      427     $       (894 ) 
Adjustments to reconcile net income (loss) to cash provided by operating activities:
                 
Gain on sales of assets     (29 )      (28 ) 
Depreciation of operating lease assets     123       386  
Provision for doubtful accounts     198        
Changes in operating assets and liabilities:
                 
Accounts receivable     (43 )      108  
Other assets           3  
Accounts payable:
                 
General Partner     (315 )      303  
Other     (25 )      30  
Unearned lease income     46       102  
Net cash provided by operating activities     382       10  
Investing activities:
                 
Proceeds from sales of lease assets     45       61  
Principal payments received on direct financing leases     43       23  
Net cash provided by investing activities     88       84  
Financing activities:
                 
Net cash provided by financing activities            
Net increase in cash and cash equivalents     470       94  
Cash and cash equivalents at beginning of period     1,354       2,637  
Cash and cash equivalents at end of period   $ 1,824     $ 2,731  
Schedule of non-cash transactions:
                 
Improvements to operating lease equipment   $     $ 150  

See accompanying notes.

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TABLE OF CONTENTS

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 March 31, 2012, 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 for services rendered and reimbursements for costs incurred on behalf of the Partnership (Note 5). 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 March 31, 2012, 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, 2011, 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 months ended March 31, 2012 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 significant effect on the reported financial position or results from operations.

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

In preparing the accompanying unaudited financial statements, the General Partner has reviewed events that have occurred after March 31, 2012, up until the issuance of the financial statements. No events were noted which would require disclosure in the footnotes to the financial statements, or adjustments thereto.

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TABLE OF CONTENTS

ATEL CAPITAL EQUIPMENT FUND VII, L.P.
  
NOTES TO FINANCIAL STATEMENTS
(Unaudited)

2. Summary of significant accounting policies: - (continued)

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.

The table below summarizes geographic information relating to the sources, by nation, of the Partnership’s total revenues for three months ended March 31, 2012 and 2011 and long-lived tangible assets as of March 31, 2012 and December 31, 2011 (dollars in thousands):

       
  For The Three Months Ended March 31,
     2012   % of Total   2011   % of Total
Revenue
                                   
United States   $     1,098              93 %    $      852               98 % 
United Kingdom           0 %      16       2 % 
Canada     80       7 %            0 % 
Total International     80       7 %      16       2 % 
Total   $ 1,178       100 %    $ 868       100 % 

       
  As of March 31,   As of December 31,
     2012   % of Total   2011   % of Total
Long-lived assets
                                   
United States   $     7,127              97 %    $     7,309               97 % 
United Kingdom           0 %            0 % 
Canada     240       3 %      240       3 % 
Total International     240       3 %      240       3 % 
Total   $ 7,367       100 %    $ 7,549       100 % 

Other loss, net:

Other loss, net represents $7 thousand of foreign currency translation losses during the prior year period. The Partnership had no foreign currency translation transactions during the current year period.

Per Unit data:

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

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TABLE OF CONTENTS

ATEL CAPITAL EQUIPMENT FUND VII, L.P.
  
NOTES TO FINANCIAL STATEMENTS
(Unaudited)

3. Allowance for credit losses:

Activity in the allowance for credit losses consists of the following (in thousands):

       
  Accounts Receivable Allowance for
Doubtful Accounts
  Valuation Adjustments on Financing Receivables   Total Allowance
for Credit Losses
     Finance Leases   Operating Leases   Finance
Leases
 
Balance December 31, 2010   $       10     $        1     $       —     $        11  
Provision                        
Balance December 31, 2011     10       1             11  
Provision (reversal of provision)     (9 )      207             198  
Balance as of March 31, 2012   $ 1     $ 208     $     $ 209  

Accounts receivable

Accounts receivable represent the amounts billed under operating and direct financing lease contracts which are currently due to the Partnership.

Allowances for doubtful accounts are typically established based upon their aging and historical charge off and collection experience and the creditworthiness of specifically identified lessees, and invoiced amounts. Accounts receivable deemed uncollectible are generally charged off against the allowance on a specific identification basis. Recoveries of amounts that were previously written-off are recorded as other income in the period received.

Accounts receivable are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of companies with lease payments outstanding less than 90 days. Based upon management’s judgment, such leases may be placed in non-accrual status. Leases placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid receivable is probable. Until such time, all payments received are applied only against outstanding principal balances.

Financing receivables

In addition to the allowance established for delinquent accounts receivable, the total allowance related solely to financing receivables also includes anticipated impairment charges on direct financing leases.

The asset underlying a direct financing lease contract is considered impaired if the estimated undiscounted future cash flows of the asset are less than its net book value. The estimated undiscounted future cash flows are the sum of the estimated residual value of the asset at the end of the asset’s expected holding period and estimates of undiscounted future rents. The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the market place are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly.

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TABLE OF CONTENTS

ATEL CAPITAL EQUIPMENT FUND VII, L.P.
  
NOTES TO FINANCIAL STATEMENTS
(Unaudited)

3. Allowance for credit losses: - (continued)

As of March 31, 2012 and December 31, 2011, the Partnership did not record an allowance for credit losses related to its financing receivables. The Partnership’s recorded investment in financing receivables at March 31, 2012 and December 31, 2011 are as follows (in thousands):

   
March 31, 2012   Finance Leases   Total
Allowance for credit losses:
                 
Ending balance   $       —     $        —  
Ending balance: individually evaluated for impairment   $     $  
Ending balance: collectively evaluated for impairment   $     $  
Ending balance: loans acquired with deteriorated credit quality   $     $  
Financing receivables:
                 
Ending balance   $ 352     $ 352  
Ending balance: individually evaluated for impairment   $ 352     $ 352  
Ending balance: collectively evaluated for impairment   $     $  
Ending balance: loans acquired with deteriorated credit quality   $     $  

   
December 31, 2011   Finance Leases   Total
Allowance for credit losses:
                 
Ending balance   $       —     $        —  
Ending balance: individually evaluated for impairment   $     $  
Ending balance: collectively evaluated for impairment   $     $  
Ending balance: loans acquired with deteriorated credit quality   $     $  
Financing receivables:
                 
Ending balance   $ 405     $ 405  
Ending balance: individually evaluated for impairment   $ 405     $ 405  
Ending balance: collectively evaluated for impairment   $     $  
Ending balance: loans acquired with deteriorated credit quality   $     $  

The Partnership evaluates the credit quality of its financing receivables on a scale equivalent to the following quality indicators related to corporate risk profiles:

Pass – Any account whose lessee/debtor, co-lessee/debtor or any guarantor has a credit rating on publicly traded or privately placed debt issues as rated by Moody’s or S&P for either Senior Unsecured debt, Long Term Issuer rating or Issuer rating that are in the tiers of ratings generally recognized by the investment community as constituting an Investment Grade credit rating; or, has been determined by the General Partner to be an Investment Grade Equivalent or High Quality Corporate Credit per its Credit Policy or has a Not Rated internal rating by the General Partner and the account is not considered by the Chief Credit Officer of the General Partner to fall into one of the three risk profiles below.

Special Mention – Any traditional corporate type account with potential weaknesses (e.g. large net losses or major industry downturns) or, any growth capital account that has less than three months of cash as of the end of the calendar quarter to fund their continuing operations. These accounts deserve management’s close attention. If left uncorrected, those potential weaknesses may result in deterioration of the Fund’s receivable at some future date.

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TABLE OF CONTENTS

ATEL CAPITAL EQUIPMENT FUND VII, L.P.
  
NOTES TO FINANCIAL STATEMENTS
(Unaudited)

3. Allowance for credit losses: - (continued)

Substandard – Any account that is inadequately protected by the current worth and paying capacity of the borrower or of the collateral pledged, if any. Accounts that are so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Fund will sustain some loss as the likelihood of fully collecting all receivables may be questionable if the deficiencies are not corrected. Such accounts are on the General Partner’s Credit Watch List.

Doubtful – Any account where the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Accordingly, an account that is so classified is on the General Partner’s Credit Watch List, and has been declared in default and the General Partner has repossessed, or is attempting to repossess, the equipment it financed. This category includes impaired leases as applicable.

At March 31, 2012 and December 31, 2011, the Partnership’s financing receivables by credit quality indicator and by class of financing receivables are as follows (in thousands):

   
  Finance Leases
     March 31, 2012   December 31, 2011
Pass   $       352     $         405  
Special mention            
Substandard            
Doubtful            
Total   $ 352     $ 405  

At March 31, 2012 and December 31, 2011, investment in financing receivables is aged as follows (in thousands):

             
March 31, 2012   30 – 59 Days Past Due   60 – 89 Days Past Due   Greater Than 90 Days   Total Past Due   Current   Total Financing Receivables   Recorded Investment>90 Days and Accruing
Finance leases   $       —     $       —     $       56     $       56     $      296     $      352     $        56  

             
December 31, 2011   30 – 59 Days Past Due   60 – 89 Days Past Due   Greater Than 90 Days   Total Past Due   Current   Total Financing Receivables   Recorded Investment>90 Days and Accruing
Finance leases   $       —     $       —     $       —     $       —     $     405     $      405     $        —  

The Partnership did not carry an impairment reserve on its financing receivables at March 31, 2012 and December 31, 2011. At March 31, 2012, certain net investments in financing receivables with related accounts receivable past due more than 90 days are still on an accrual basis based on management’s assessment of the collectability of such receivables. However, these accounts receivable are fully reserved and included in the allowance for doubtful accounts presented above. At December 31, 2011, there were no accounts receivable related to net investments in financing receivables placed in non-accrual status.

4. Investment in equipment and leases, net:

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

       
  Balance
December 31, 2011
  Reclassifications & Additions/ Dispositions   Depreciation/ Amortization Expense or Amortization of Leases   Balance
March 31,
2012
Net investment in operating leases   $       7,075     $       (16 )    $       (123 )    $       6,936  
Net investment in direct financing leases     405       (10 )      (43 )      352  
Assets held for sale or lease, net     69       10             79  
Total   $ 7,549     $ (16 )    $ (166 )    $ 7,367  

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TABLE OF CONTENTS

ATEL CAPITAL EQUIPMENT FUND VII, L.P.
  
NOTES TO FINANCIAL STATEMENTS
(Unaudited)

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

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 three months ended March 31, 2012 and 2011.

The Partnership utilizes a straight line depreciation method over the term of the equipment lease for equipment on operating leases currently in its portfolio. Depreciation expense on the Partnership’s equipment was approximately $123 thousand and $386 thousand for the three months ended March 31, 2012 and 2011, respectively.

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, 2011
  Additions   Reclassifications or Dispositions   Balance
March 31,
2012
Transportation   $      29,707     $         —     $       (128 )    $      29,579  
Marine vessels/barges     15,675                   15,675  
Construction     156                   156  
Materials handling     83                   83  
       45,621             (128 )      45,493  
Less: accumulated depreciation     (38,546 )      (123 )      112       (38,557 ) 
Total   $ 7,075     $ (123 )    $ (16 )    $ 6,936  

The average estimated residual value for assets on operating leases was 14% of the assets’ original cost at March 31, 2012 and December 31, 2011.

The Partnership earns revenues from its marine vessels and certain lease assets based on utilization of such assets or through fixed term leases. Contingent rentals (i.e., short-term, operating charter hire payments) and the associated expenses are recorded when earned and/or incurred. The revenues associated with these rentals are included as a component of Operating Lease Revenues. Prior to 2011, the most significant sources of contingent rentals were the Partnership’s two largest marine vessels. Such vessels were converted to fixed term leases in August 2010 and March 2011. There were no contingent rentals for the three months ended March 31, 2012 as compared to $29 thousand for the prior year period

As of March 31, 2012, certain operating leases with a total book value of $148 thousand were placed on non-accrual status as a result of a lessee bankruptcy. No impairment was deemed necessary as the carrying amount of the underlying equipment was well below estimated scrap value.

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ATEL CAPITAL EQUIPMENT FUND VII, L.P.
  
NOTES TO FINANCIAL STATEMENTS
(Unaudited)

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

Direct financing leases:

As of March 31, 2012 and December 31, 2011, investment in direct financing leases primarily consists of various transportation, ground support and manufacturing equipment. The components of the Partnership’s investment in direct financing leases as of March 31, 2012 and December 31, 2011 are as follows (in thousands):

   
  March 31,
2012
  December 31, 2011
Total minimum lease payments receivable   $       436     $         533  
Estimated residual values of leased equipment (unguaranteed)     65       75  
Investment in direct financing leases     501       608  
Less unearned income     (149 )      (203 ) 
Net investment in direct financing leases   $ 352     $ 405  

There were no net investments in direct financing leases in non-accrual status as of March 31, 2012 and December 31, 2011.

At March 31, 2012, the aggregate amounts of future minimum lease payments are as follows (in thousands):

     
  Operating Leases   Direct Financing Leases   Total
Nine months ending December 31, 2012   $       2,218     $        271     $        2,489  
Year ending December 31, 2013     1,077       165       1,242  
2014     341             341  
2015     320             320  
2016     27             27  
     $ 3,983     $ 436     $ 4,419  

5. 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 managed 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.

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ATEL CAPITAL EQUIPMENT FUND VII, L.P.
  
NOTES TO FINANCIAL STATEMENTS
(Unaudited)

5. Related party transactions: - (continued)

During the three months ended March 31, 2012 and 2011, AFS and/or affiliates earned fees and commissions, and billed for reimbursements, pursuant to the Partnership Agreement as follows (in thousands):

   
  Three Months Ended
March 31,
     2012   2011
Equipment and incentive management fees to General Partner   $         34     $         30  
Cost reimbursements to General Partner and/or affiliates     81       750  
     $ 115     $ 780  

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. For the year ending December 31, 2012, it is not anticipated that the amount of reimbursable expenses billed to the Fund will exceed either the annual or the cumulative limitations. Such is reflective of the continued diminishing Fund asset base over which reimbursements are calculated.

6. Gain contingencies:

The Partnership’s vessel activity in the Gulf of Mexico was severely impacted by the British Petroleum (“BP”) “Deep Water Horizon” oil spill of 2010 which severely adversely impacted charter activity in the Gulf region. BP established a program to compensate those businesses and individuals suffering economic hardship and loss as a result of the Deep Water Horizon oil spill. The Partnership has submitted a claim to the BP program administrator seeking an approximate $2.8 million for loss of revenues during the period of the vessel’s diminished activity commencing at the time of the oil spill and continuing through 2010. While BP’s claim administrator reviews the Partnership’s claim, and the Partnership believes such claim to be of merit, the amount of any compensation or award from BP is currently extremely difficult to determine. As such, the potential for compensation or award has not been recorded on the Partnership’s books and records.

ATEL filed a claim on behalf of certain of its Funds for the under-reporting of revenue by a fleet manager of three marine vessels, seeking to recover an approximate $2.8 million for the years 2005 – 2007 (of which the Partnership’s portion is an approximate $1.4 million). Such amounts are not considered material to any of the Funds in any given year. While the Funds’ recovery with respect to this matter may be substantial, there is no assurance that judgment will be rendered in favor of the Funds. The trial date for this matter has been rescheduled several times, and the suit has recently been assigned to a newly-appointed Federal Judge and a new trial date has been set for June of 2012. The outcome of this claim remains uncertain.

7. 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.

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ATEL CAPITAL EQUIPMENT FUND VII, L.P.
  
NOTES TO FINANCIAL STATEMENTS
(Unaudited)

8. Partners’ capital:

As of March 31, 2012 and December 31, 2011, 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 Unitholder 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 Unitholder 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.

There were no distributions to Limited Partners for the three months ended March 31, 2012 and 2011

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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 March 31 2012, 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 March 31, 2012 versus the three months ended March 31, 2011

The Partnership had net income of $427 thousand for the three months ended March 31, 2012 as compared to a net loss of $894 thousand for the prior year period. The results for the first quarter of 2012 reflect a decrease in total operating expenses and an increase in total revenues when compared to the prior year period.

Revenues

Total revenues for the first quarter of 2012 increased by $310 thousand, or 36%, as compared to the prior year period, largely as a result of a $335 thousand increase in operating lease revenues partially offset by a $22 thousand decrease in direct financing lease revenues.

The increase in operating lease revenues was largely a result of the following: i) higher rental income from one of the Fund’s marine vessels, which was in drydock status for a portion of the prior year period, ii) incremental income from certain off-lease assets which have been re-leased under operating leases since March 31, 2011, and iii) a higher negotiated rate on a lease that renewed during the first quarter of 2012. Such increases in operating lease revenues were partially offset by the impact of continued run-off and dispositions of lease assets consistent with a Fund in liquidation.

The decrease in direct financing lease revenues was largely due to the continued run-off of the portfolio.

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Expenses

Total operating expenses for the first quarter of 2012 decreased by $1 million, or 57%, as compared to the prior year period. The net decrease in expenses was primarily a result of decreases in costs reimbursed to AFS, depreciation expense and freight and shipping expense offset, in part, by an increase in the provision for doubtful accounts.

Costs reimbursed to AFS decreased by $669 thousand as the Fund no longer has the accumulation of reimbursable administrative expenses in excess of the limitations as defined in the Operating Agreement. As such, the current quarter’s costs reimbursed to AFS only represent current period charges. It is not anticipated that any further billings to the Fund will equal or exceed the annual or cumulative reimbursable expense limitation. Depreciation expense was reduced by $263 thousand largely due to run-off and sales of lease assets; and, freight and shipping expense declined by $233 thousand as the prior year period amount included costs reimbursed to a rail management company for transferring certain railcars from the United States to Canada as part of a lease deal restructuring.

Partially offsetting the aforementioned decreases in expenses was a $198 thousand increase in the provision for doubtful accounts. The provision increased as the Partnership recorded reserves relative to certain leases placed on non-accrual status as a result of a lessee bankruptcy and to certain other receivables that have been delinquent more than 90 days. By comparison, there was no provision for doubtful accounts during the prior year period.

Capital Resources and Liquidity

At March 31, 2012 and December 31, 2011, the Partnership’s cash and cash equivalents totaled $1.8 million and $1.4 million, respectively. 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 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.

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 believes it 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.

Cash Flows

The following table sets forth summary cash flow data (in thousands):

   
  Three Months Ended
March 31,
     2012   2011
Net cash provided by:
                 
Operating activities   $ 382     $ 10  
Investing activities     88       84  
Financing activities         —            —  
Net increase in cash and cash equivalents   $ 470     $ 94  

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The three months ended March 31, 2012 versus the three months ended March 31, 2011

During the three months ended March 31, 2012 and 2011, the Partnership’s primary sources of liquidity were cash flows from its portfolio of operating lease contracts and direct financing leases. In addition, the Partnership realized proceeds from sales of lease assets totaling $45 thousand and $61 thousand for the three months ended March 31, 2012 and 2011, respectively.

During the same comparative periods, cash was primarily used to pay invoices related to General Partner fees and expenses, and other payables.

As the Fund is in its liquidation phase, any future financing activity is anticipated to only include distributions to Members.

Distributions

The Partnership commenced periodic distributions, based on cash flows from operations, beginning with the month of January 1997. During its liquidation phase, the rates and frequency of periodic distributions paid by the Fund are solely at the discretion of the General Partner.

Commitments and Contingencies and Off-Balance Sheet Transactions

Commitments and contingencies

At March 31, 2012, the Partnership had no commitments to purchase lease assets and pursuant to the Partnership Agreement, the Partnership will no longer purchase any new lease assets.

Gain Contingencies

The Partnership’s vessel activity in the Gulf of Mexico was severely impacted by the British Petroleum (“BP”) “Deep Water Horizon” oil spill of 2010 which severely adversely impacted charter activity in the Gulf region. BP established a program to compensate those businesses and individuals suffering economic hardship and loss as a result of the Deep Water Horizon oil spill. The Partnership has submitted a claim to the BP program administrator seeking an approximate $2.8 million for loss of revenues during the period of the vessel’s diminished activity commencing at the time of the oil spill and continuing through 2010. While BP’s claim administrator reviews the Partnership’s claim, and the Partnership believes such claim to be of merit, the amount of any compensation or award from BP is currently extremely difficult to determine. As such, the potential for compensation or award has not been recorded on the Partnership’s books and records.

Moreover, ATEL filed a claim on behalf of certain of its Funds for the under-reporting of revenue by a fleet manager of three marine vessels, seeking to recover an approximate $2.8 million for the years 2005 – 2007 (of which the Partnership’s portion is an approximate $1.4 million). Such amounts are not considered material to any of the Funds in any given year. While the Funds’ recovery with respect to this matter may be substantial, there is no assurance that judgment will be rendered in favor of the Funds. The trial date for this matter has been rescheduled several times, and the suit has recently been assigned to a newly-appointed Federal Judge and a new trial date has been set for June of 2012. The outcome of this claim remains uncertain.

Off-Balance Sheet Transactions

None.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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. On an on-going basis, the Partnership evaluates its estimates, which are based upon historical experiences, market trends and financial forecasts, and upon various other assumptions that management believes to be reasonable under the circumstances and at that certain point in time. Actual results may differ, significantly at times, from these estimates under different assumptions or conditions.

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The Partnership’s critical accounting policies are described in its Annual Report on Form 10-K for the year ended December 31, 2011. There have been no material changes to the Partnership’s critical accounting policies since December 31, 2011.

Item 4. 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 March 31, 2012 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. [Removed and 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: May 11, 2012

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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