UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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| x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
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| For the quarterly period ended March 31, 2014 | ||
| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
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| 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)
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| California | 94-3248318 | |
| (State or other jurisdiction of Incorporation or organization) |
(I. R. S. Employer Identification No.) |
The Transamerica Pyramid, 600 Montgomery Street, 9th Floor, San Francisco, California 94111
(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.
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| 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, 2014 was 14,985,550.
DOCUMENTS INCORPORATED BY REFERENCE
None.
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
Index
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
BALANCE SHEETS
MARCH 31, 2014 AND DECEMBER 31, 2013
(In Thousands)
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| March 31, 2014 |
December 31, 2013 |
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| ASSETS |
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| Cash and cash equivalents | $ | 1,841 | $ | 1,662 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $147 as of March 31, 2014 and $150 as of December 31, 2013 | 163 | 167 | ||||||
| Investments in equipment and leases, net of accumulated depreciation of $33,402 as of March 31, 2014 and $33,625 as of December 31, 2013 | 5,582 | 5,643 | ||||||
| Prepaid expenses and other assets | 17 | 22 | ||||||
| Total assets | $ | 7,603 | $ | 7,494 | ||||
| LIABILITIES AND PARTNERS’ CAPITAL |
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| Accounts payable and accrued liabilities: |
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| General Partner | $ | 135 | $ | 190 | ||||
| Other | 332 | 347 | ||||||
| Unearned operating lease income | 26 | 28 | ||||||
| Total liabilities | 493 | 565 | ||||||
| Commitments and contingencies |
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| Partners’ capital: |
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| General Partner | — | — | ||||||
| Limited Partners | 7,110 | 6,929 | ||||||
| Total Partners’ capital | 7,110 | 6,929 | ||||||
| Total liabilities and Partners’ capital | $ | 7,603 | $ | 7,494 | ||||
See accompanying notes.
3
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
MARCH 31, 2014 AND 2013
(In Thousands except Units and Per Unit Data)
(Unaudited)
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| Three Months Ended March 31, |
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| 2014 | 2013 | |||||||
| Revenues: |
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| Leasing activities: |
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| Operating leases | $ | 612 | $ | 762 | ||||
| Direct financing leases | — | 22 | ||||||
| Gain on sales of assets | 64 | 39 | ||||||
| Total revenues | 676 | 823 | ||||||
| Expenses: |
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| Depreciation of operating lease assets | 34 | 114 | ||||||
| Marine vessel maintenance and other operating costs | — | 61 | ||||||
| Cost reimbursements to General Partner | 46 | 65 | ||||||
| Equipment and incentive management fees to General Partner | 15 | 26 | ||||||
| Railcar and equipment maintenance | 193 | 129 | ||||||
| Professional fees | 63 | 35 | ||||||
| Insurance | 28 | 16 | ||||||
| Outside services | 28 | 24 | ||||||
| Other management fees | 24 | 24 | ||||||
| Equipment storage | 3 | 2 | ||||||
| Franchise fees and state taxes | 12 | 1 | ||||||
| Freight and shipping | 4 | 6 | ||||||
| (Reversal of) provision for credit losses | (3 | ) | 113 | |||||
| Property taxes | 7 | 12 | ||||||
| Postage | 4 | 6 | ||||||
| Printing and photocopying | 7 | 12 | ||||||
| Other | 30 | 43 | ||||||
| Total expenses | 495 | 689 | ||||||
| Net income | $ | 181 | $ | 134 | ||||
| Net income: |
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| General Partner | $ | — | $ | — | ||||
| Limited Partners | 181 | 134 | ||||||
| $ | 181 | $ | 134 | |||||
| Net income per Limited Partnership Unit | $ | 0.01 | $ | 0.01 | ||||
| Weighted average number of Units outstanding | 14,985,550 | 14,985,550 | ||||||
See accompanying notes.
4
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2013 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2014
(In Thousands except Units and Per Unit Data)
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| Limited Partners | General Partner |
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| Units | Amount | |||||||||||||||
| Balance December 31, 2012 | 14,985,550 | $ | 7,181 | $ | — | $ | 7,181 | |||||||||
| Distributions to Limited Partners ($0.25 per Unit) | — | (3,747 | ) | — | (3,747 | ) | ||||||||||
| Distributions to General Partner | — | — | (304 | ) | (304 | ) | ||||||||||
| Net income | — | 3,495 | 304 | 3,799 | ||||||||||||
| Balance December 31, 2013 | 14,985,550 | 6,929 | — | 6,929 | ||||||||||||
| Net income | — | 181 | — | 181 | ||||||||||||
| Balance March 31, 2014 (Unaudited) | 14,985,550 | $ | 7,110 | $ | — | $ | 7,110 | |||||||||
See accompanying notes.
5
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31, 2014 AND 2013
(In Thousands)
(Unaudited)
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| Three Months Ended March 31, |
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| 2014 | 2013 | |||||||
| Operating activities: |
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| Net income | $ | 181 | $ | 134 | ||||
| Adjustments to reconcile net income to cash provided by operating activities: |
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| Gain on sales of assets | (64 | ) | (39 | ) | ||||
| Depreciation of operating lease assets | 34 | 114 | ||||||
| (Reversal of) provision for credit losses | (3 | ) | 113 | |||||
| Changes in operating assets and liabilities: |
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| Accounts receivable | 7 | 88 | ||||||
| Prepaid expenses and other assets | 5 | 3 | ||||||
| Accounts payable: |
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| General Partner | (55 | ) | (153 | ) | ||||
| Other | (15 | ) | (111 | ) | ||||
| Unearned lease income | (2 | ) | 61 | |||||
| Net cash provided by operating activities | 88 | 210 | ||||||
| Investing activities: |
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| Proceeds from sales of lease assets | 91 | 62 | ||||||
| Principal payments received on direct financing leases | — | 67 | ||||||
| Net cash provided by investing activities | 91 | 129 | ||||||
| Financing activities: |
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| Net cash provided by financing activities | — | — | ||||||
| 179 | 339 | |||||||
| Cash and cash equivalents at beginning of period | 1,662 | 686 | ||||||
| Cash and cash equivalents at end of period | $ | 1,841 | $ | 1,025 | ||||
| Supplemental disclosures of cash flow information: |
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| Cash paid during the period for taxes | $ | 2 | $ | 1 | ||||
See accompanying notes.
6
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 (acquiring equipment to engage in equipment leasing and sales activities). 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, 2014, 14,985,550 Units were 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 and costs incurred on behalf of the Partnership (See 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, 2014, the Partnership continues 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, 2013, 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, 2014 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.
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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 March 31, 2014, 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.
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 the three months ended March 31, 2014 and 2013 and long-lived tangible assets as of March 31, 2014 and December 31, 2013 (dollars in thousands):
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| For The Three Months Ended March 31, | ||||||||||||||||
| 2014 | % of Total | 2013 | % of Total | |||||||||||||
| Revenue |
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| United States | $ | 623 | 92 | % | $ | 743 | 90 | % | ||||||||
| Canada | 53 | 8 | % | 80 | 10 | % | ||||||||||
| Total International | 53 | 8 | % | 80 | 10 | % | ||||||||||
| Total | $ | 676 | 100 | % | $ | 823 | 100 | % | ||||||||
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| As of March 31, | As of December 31, | |||||||||||||||
| 2014 | % of Total | 2013 | % of Total | |||||||||||||
| Long-lived assets |
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| United States | $ | 5,342 | 96 | % | $ | 5,403 | 96 | % | ||||||||
| Canada | 240 | 4 | % | 240 | 4 | % | ||||||||||
| Total International | 240 | 4 | % | 240 | 4 | % | ||||||||||
| Total | $ | 5,582 | 100 | % | $ | 5,643 | 100 | % | ||||||||
Per Unit data:
Net income and distributions per Unit are based upon the weighted average number of Limited Partnership Units outstanding during the period.
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ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. Summary of significant accounting policies: - (continued)
Recent accounting pronouncements:
Recent accounting standards updates as issued by the Financial Accounting Standards Board (FASB) were evaluated and determined to be not applicable to the Partnership.
3. Allowance for credit losses:
The Partnership’s allowance for credit losses are as follows (in thousands):
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| Accounts Receivable Allowance for Doubtful Accounts |
Valuation Adjustments on Financing Receivables |
Total Allowance for Credit Losses |
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| Finance Leases | Operating Leases | Finance Leases | ||||||||||||||
| Balance December 31, 2012 | $ | — | $ | 133 | $ | — | $ | 133 | ||||||||
| Provision | — | 17 | — | 17 | ||||||||||||
| Balance December 31, 2013 | — | 150 | — | 150 | ||||||||||||
| Reversal of provision | — | (3 | ) | — | (3 | ) | ||||||||||
| Balance March 31, 2014 | $ | — | $ | 147 | $ | — | $ | 147 | ||||||||
The allowance for credit losses at both March 31, 2014 and December 31, 2013 were related to delinquent operating lease receivables. As of March 31, 2014 and December 31, 2013, the Partnership had no financing lease receivables, as its remaining finance lease matured on July 1, 2013.
4. Investment in equipment and leases, net:
The Partnership’s investments in equipment and leases consist of the following (in thousands):
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| Balance December 31, 2013 |
Reclassifications & Additions/ Dispositions |
Depreciation/ Amortization Expense or Amortization of Leases |
Balance March 31, 2014 |
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| Net investment in operating leases | $ | 3,162 | $ | (15 | ) | $ | (34 | ) | $ | 3,113 | ||||||
| Assets held for sale or lease, net | 2,481 | (12 | ) | — | 2,469 | |||||||||||
| Total | $ | 5,643 | $ | (27 | ) | $ | (34 | ) | $ | 5,582 | ||||||
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. The fair value of the assets is determined based on the sum of the discounted estimated future cash flows of the assets. 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, 2014 and 2013.
The Partnership utilizes a straight line depreciation method for equipment in all of the categories currently in its portfolio of operating lease transactions. Depreciation expense on the Partnership’s equipment totaled $34 thousand and $114 thousand for the respective three months ended March 31, 2014 and 2013.
All of the remaining property subject to leases was acquired in the years 1997 to 1998.
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ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. Investment in equipment and leases, net: - (continued)
Operating leases:
Property on operating leases consists of the following (in thousands):
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| Balance December 31, 2013 |
Additions | Reclassifications or Dispositions |
Balance March 31, 2014 |
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| Transportation | $ | 22,757 | $ | — | $ | (189 | ) | $ | 22,568 | |||||||
| Materials handling | 83 | — | — | 83 | ||||||||||||
| 22,840 | — | (189 | ) | 22,651 | ||||||||||||
| Less accumulated depreciation | (19,678 | ) | (34 | ) | 174 | (19,538 | ) | |||||||||
| Total | $ | 3,162 | $ | (34 | ) | $ | (15 | ) | $ | 3,113 | ||||||
The average estimated residual value for assets on operating leases was 13% of the assets’ original cost at both March 31, 2014 and December 31, 2013. There were no operating leases in non-accrual status at March 31, 2014 and December 31, 2013.
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 and totaled $10 thousand and $15 thousand for the respective three months ended March 31, 2014 and 2013, respectively.
Direct financing leases:
As of March 31, 2014 and December 31, 2013, the Partnership had no investment in direct financing leases, as its remaining finance lease matured on July 1, 2013.
At March 31, 2014, the aggregate amounts of future minimum lease payments are as follows (in thousands):
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| Operating Leases |
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| Nine months ending December 31, 2014 | $ | 980 | ||
| Year ending December 31, 2015 | 808 | |||
| 2016 | 514 | |||
| 2017 | 311 | |||
| 2018 | 78 | |||
| $ | 2,691 | |||
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ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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 will 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 months ended March 31, 2014 and 2013, AFS and/or affiliates earned fees and billed for reimbursements pursuant to the Partnership Agreement as follows (in thousands):
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| Three Months Ended March 31, |
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| Cost reimbursements to General Partner | $ | 46 | $ | 65 | ||||
| Equipment and incentive management fees to General Partner | 15 | 26 | ||||||
| $ | 61 | $ | 91 | |||||
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. For the year ending December 31, 2014, 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.
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ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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 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. The BP claim administrator denied the Partnership’s claim on the basis that the Partnership suffered damages as a result of the President’s moratorium on oil drilling subsequent to the Deep Water Horizon accident. The Partnership believes its claim continues to be of merit, and has opted out of the BP claims fund, and is pursuing a claim in a collective action with other similarly situated plaintiffs. Currently, the amount of any compensation or award from BP is 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 the Partnership and certain affiliated entities in Federal court in New Orleans for the under-reporting of revenue by a fleet manager of three marine vessels, seeking to recover an approximate amount of 10% of gross proceeds, which in the aggregate for all affiliated entities represents $2.8 million for the years 2005 – 2007 (of which the Partnership’s portion is an approximate $1.4 million). The annual allocable portion of the claim is not considered material to the Partnership in any given year. The trial was concluded during the first week of August 2012. In October 2012, the matter was remitted to the Federal Judge to render a decision on both the law and the facts. The decision of the Court was rendered at the end of June 2013 and the court found in favor of the defendants. The Partnership filed an appeal of the court’s decision and remains hopeful for a recovery of all or portion of its asserted claims. As a result of the ruling, the defendants filed a claim for legal fees and costs, however, this was denied. Oral arguments for the appeal of the case in substance are scheduled for June 2, 2014. The outcome of the Partnership’s claim remains uncertain as of this date.
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.
8. Partners’ capital:
As of March 31, 2014 and December 31, 2013, 14,985,550 Units were issued and outstanding. The Partnership was authorized to issue up to 15,000,000 Units, in addition to the 50 Units issued to the initial Partners.
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
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ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
8. Partners’ capital: - (continued)
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 declared or paid during the three months ended March 31, 2014 and 2013.
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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, 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 Fund’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 partnership 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, 2014, 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, 2014 versus the three months ended March 31, 2013
The Partnership had net income of $181 thousand and $134 thousand for the three months ended March 31, 2014 and 2013, respectively. The results for the first quarter of 2014 reflect decreases in total expenses and total revenues when compared to the prior year period.
Revenues
Total revenues for the first quarter of 2014 decreased by $147 thousand, or 18%, as compared to the prior year period. The decrease in total revenues was largely due to a $150 thousand decrease in operating lease revenues.
The reduction in operating lease revenue was mainly due to the termination of a charter relative to one of the Fund’s marine vessels during the second quarter of 2013, and the impact of continued run-off and dispositions of lease assets.
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Expenses
Total expenses for the first quarter of 2014 decreased by $194 thousand, or 28%, as compared to the prior year period. The net reduction in expenses was primarily a result of decreases in the provision for credit losses, depreciation expense, and marine vessel maintenance and other operating costs. Such decreases in expenses were partially offset by an increase in railcar and equipment maintenance costs.
The decrease in the provision for credit losses totaled $116 thousand and was largely due to an increase in collection of accounts receivable amounts previously reserved. Depreciation expense declined by $80 thousand primarily due to lease asset sales and continued run-off of the lease portfolio; and, marine vessel maintenance and other operating costs decreased by $61 thousand due to prior year period costs incurred to repair vessel propellers.
Partially offsetting the aforementioned decreases in expenses was a $64 thousand increase in railcar and equipment maintenance costs. The increase in railcar and equipment maintenance costs was primarily attributable to the aging of the Fund’s railcar inventory and incremental wear and tear.
Capital Resources and Liquidity
At March 31, 2014 and December 31, 2013, the Partnership’s cash and cash equivalents totaled $1.8 million and $1.7 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 adequate reserves available 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):
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| Three Months Ended March 31, |
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| 2014 | 2013 | |||||||
| Net cash provided by: |
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| Operating activities | $ | 88 | $ | 210 | ||||
| Investing activities | 91 | 129 | ||||||
| Financing activities | — | — | ||||||
| Net increase in cash and cash equivalents | $ | 179 | $ | 339 | ||||
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The three months ended March 31, 2014 versus the three months ended March 31, 2013
During the three months ended March 31, 2014 and 2013, the Partnership’s primary source of liquidity had been cash flows from its portfolio of operating lease contracts. During the prior year period, liquidity was derived from cash flows from both the Partnership’s portfolio of operating lease contracts and its direct financing leases. In addition, the Fund realized $91 thousand and $62 thousand of proceeds from sales of equipment during the respective three months ended March 31, 2014 and 2013.
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 Partners.
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. There were no distributions declared or paid during the three months ended March 31, 2014 and 2013.
Commitments and Contingencies and Off-Balance Sheet Transactions
Commitments and contingencies
At March 31, 2014, the Partnership had no commitments to purchase lease assets or fund investments in notes receivable 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 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. The BP claim administrator denied the Partnership’s claim on the basis that the Partnership suffered damages as a result of the President’s moratorium on oil drilling subsequent to the Deep Water Horizon accident. The Partnership believes its claim continues to be of merit, and has opted out of the BP claims fund, and is pursuing a claim in a collective action with other similarly situated plaintiffs. Currently, the amount of any compensation or award from BP is 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 the Partnership and certain affiliated entities in Federal court in New Orleans for the under-reporting of revenue by a fleet manager of three marine vessels, seeking to recover an approximate amount of 10% of gross proceeds, which in the aggregate for all affiliated entities represents $2.8 million for the years 2005 – 2007 (of which the Partnership’s portion is an approximate $1.4 million). The annual allocable portion of the claim is not considered material to the Partnership in any given year. The trial was concluded during the first week of August 2012. In October 2012, the matter was remitted to the Federal Judge to render a decision on both the law and the facts. The decision of the Court was rendered at the end of June 2013 and the court found in favor of the defendants. The Partnership filed an appeal of the court’s decision and is hopeful for a recovery of all or portion of its asserted claims. As a result of the ruling, the defendants filed a claim for legal fees and costs, however, this was denied. Oral arguments for the appeal of the case in substance are scheduled for June 2, 2014. The outcome of the Partnership’s claim remains uncertain as of this date.
Off-Balance Sheet Transactions
None.
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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.
The Partnership’s critical accounting policies are described in its Annual Report on Form 10-K for the year ended December 31, 2013. There have been no material changes to the Partnership’s critical accounting policies since December 31, 2013.
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, 2014 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. Mine Safety Disclosures.
Not Applicable.
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 |
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| 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 | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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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 13, 2014
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
(Registrant)
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By: ATEL Financial Services, LLC | ||||
| By: | /s/ Dean L. Cash Dean L. Cash President and Chief Executive Officer of ATEL Financial Services, LLC (General Partner) |
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| 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) |
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| By: | /s/ Samuel Schussler Samuel Schussler Vice President and Chief Accounting Officer of ATEL Financial Services, LLC (General Partner) |
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Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dean L. Cash, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of ATEL Capital Equipment Fund VII, L.P.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 13, 2014
/s/ Dean L. Cash
Dean L. Cash
President and Chief Executive Officer of
ATEL Financial Services, LLC (General Partner)
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Paritosh K. Choksi, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of ATEL Capital Equipment Fund VII, L.P.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 13, 2014
/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)
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
§906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of ATEL Capital Equipment Fund VII, L.P. (the “Partnership”) on Form 10-Q for the period ended March 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dean L. Cash, President and Chief Executive Officer of ATEL Financial Services, LLC, General Partner of the Partnership, hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. |
Date: May 13, 2014
/s/ Dean L. Cash
Dean L. Cash
President and Chief Executive Officer of
ATEL Financial Services, LLC (General Partner)
A signed original of this written statement required by Section 906 has been provided to the Partnership and will be retained by the Partnership and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
§906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of ATEL Capital Equipment Fund VII, L.P. (the “Partnership”) on Form 10-Q for the period ended March 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Paritosh K. Choksi, Executive Vice President and Chief Financial Officer and Chief Operating Officer of ATEL Financial Services, LLC, General Partner of the Partnership, hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. |
Date: May 13, 2014
/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)
A signed original of this written statement required by Section 906 has been provided to the Partnership and will be retained by the Partnership and furnished to the Securities and Exchange Commission or its staff upon request.