Form 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| Annual report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 (no fee required)
For the Year Ended December 31, 2002
OR
|_| Transition report pursuant to section 13 or 15(d) of
the Securities Exchange Act of 1934 (no fee
required) For the transition period from ____ to
____
Commission File number 0-24175
ATEL Capital Equipment Fund VII, L.P.
California 94-3248318
---------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
600 California Street, 6th Floor, San Francisco, California 94108
-----------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code (415) 989-8800
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Limited
Partnership Units
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
State the aggregate market value of voting stock held by non-affiliates of
the registrant: Inapplicable
DOCUMENTS INCORPORATED BY REFERENCE
Prospectus dated November 29, 1996, filed pursuant to Rule 424(b)
(Commission File No. 333-08879) is hereby incorporated by reference into Part IV
hereof.
1
PART I
Item 1: BUSINESS
General Development of Business
ATEL Capital Equipment Fund VII, L.P. (the Partnership) was formed under
the laws of the state of California in May 1996. The Partnership was formed for
the purpose of acquiring equipment to engage in equipment leasing and sales
activities. The General Partner of the Partnership is ATEL Financial Services
LLC (ATEL). Prior to converting to a limited liability company structure, the
General Partner 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, the
Partnership commenced operations in its primary business (leasing activities).
As of November 27, 1998, the Partnership had received subscriptions for
15,000,000 ($150,000,000) Limited Partnership Units and the offering was
terminated. As of December 31, 2002, 14,996,050 Units were issued and
outstanding.
The Partnership's principal objectives are to invest in a diversified
portfolio of equipment that will (i) preserve, protect and return the
Partnership's invested capital; (ii) generate 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, ending December 31, 2004
and (iii) provide additional distributions following the reinvestment period and
until all equipment has been sold. The Partnership is governed by its Limited
Partnership Agreement.
Narrative Description of Business
The Partnership has acquired and intends to acquire various types of
equipment and to lease such equipment pursuant to "Operating" leases and "High
Payout" leases, whereby "Operating" leases are defined as being leases in which
the minimum lease payments during the initial lease term do not recover the full
cost of the equipment and "High Payout" leases recover at least 90% of such
cost. It is the intention of the General Partner that a majority of the
aggregate purchase price of equipment will represent equipment leased under
"High Payout" leases upon final investment of the net proceeds of the offering
and that no more than 20% of the aggregate purchase price of equipment will be
invested in equipment acquired from a single manufacturer.
The Partnership will generally only purchase equipment for which a lease
exists or for which a lease will be entered into at the time of the purchase.
As of December 31, 2002, the Partnership had purchased equipment with a
total acquisition price of $302,751,046.
The Partnership's objective is to lease a minimum of 75% of the equipment
acquired with the net proceeds of the offering to lessees that (i) have an
aggregate credit rating by Moody's Investor Service, Inc. of Baa or better, or
the credit equivalent as determined by the General Partner, with the aggregate
rating weighted to account for the original equipment cost for each item leased
or (ii) are established hospitals with histories of profitability or
municipalities. The balance of the original equipment portfolio may include
equipment leased to lessees, which although deemed creditworthy by the General
Partner, would not satisfy the general credit rating criteria for the portfolio.
In excess of 75% of the equipment acquired with the net proceeds of the offering
(based on original purchase cost) has been leased to lessees with an aggregate
credit rating of Baa or better or to such hospitals or municipalities.
As set forth below, during 2002, one lessee generated 11% the Partnership's
lease revenues. During 2001and 2000, no single lessee generated more than 10% of
the Partnership's lease revenues.
Lessee Type of Equipment 2002 2001 2000
- ------ ----------------- ---- ---- ----
General Motors Corporation Materials Handling 11% * *
* Less than 10%.
These percentages are not expected to be comparable in future periods.
The equipment leasing industry is highly competitive. Equipment
manufacturers, corporations, partnerships and others offer users an alternative
to the purchase of most types of equipment with payment terms that vary widely
depending on the lease term and type of equipment. The ability of the
Partnership to keep the equipment leased and/or operating and the terms of the
acquisitions, leases and dispositions of equipment depends on various factors
(many of which are not in the control of the General Partner or the
Partnership), such as general economic conditions, including the effects of
inflation or recession, and fluctuations in supply and demand for various types
of equipment resulting from, among other things, technological and economic
obsolescence.
2
The General Partner will seek to limit the amount invested in equipment to
any single lessee to not more than 20% of the aggregate purchase price of
equipment owned at any time during the reinvestment period.
The business of the Partnership is not seasonal.
The Partnership has no full time employees.
Equipment Leasing Activities
Through December 31, 2002, the Partnership has disposed of certain leased
assets as set forth below:
Excess of
Type of Original Rents Over
Equipment Equipment Cost Sale Price Expenses *
--------- -------------- ---------- ----------
Manufacturing $20,322,974 $ 6,609,943 $ 13,332,058
Transportation 22,358,502 8,222,796 17,790,923
Office automation 10,942,274 1,226,848 11,102,974
Aircraft 4,708,142 4,954,738 2,576,835
Other 2,763,000 410,702 1,879,147
Food processing 2,182,333 1,329,201 1,980,738
Furniture and fixtures 1,378,013 769,570 1,095,675
Mining 1,405,029 1,057,869 793,098
Materials handling 1,278,498 164,477 1,385,570
---------------- ---------------- -----------------
---------------- ---------------- -----------------
$67,338,766 $ 24,746,144 $ 51,937,018
================ ================ =================
================ ================ =================
* Includes only those expenses directly related to the production of the related
rents.
The Partnership has acquired a diversified portfolio of equipment. The
equipment has been leased to lessees in various industries. The following tables
set forth the types of equipment acquired by the Partnership through December
31, 2002 and the industries to which the assets have been leased. The
Partnership has purchased certain assets subject to existing non-recourse debt.
For financial statement purposes, non-recourse debt has been offset against the
investment in certain direct finance leases where the right of offset exists.
Purchase Price Excluding Percentage of Total
Asset Types Acquisition Fees Acquisitions
- ----------- ---------------- ------------
Transportation, rail cars $ 64,328,409 21.24%
Manufacturing 45,709,520 15.10%
Mining 30,756,101 10.16%
Transportation, other 26,723,940 8.83%
Transportation, intermodal
containers 26,631,519 8.80%
Marine vessels 22,335,250 7.38%
Materials handling 16,318,944 5.39%
Motor Vehicles 13,148,102 4.34%
Office automation 11,449,934 3.78%
Medical 9,133,951 3.02%
Aircraft 6,310,979 2.08%
Railroad locomotives 5,010,960 1.66%
Other * 24,893,437 8.22%
----------------- -----------------
$ 302,751,046 100.00%
================= =================
Purchase Price Excluding Percentage of Total
Industry of Lessee Acquisition Fees Acquisitions
- ------------------ ---------------- ------------
Transportation, rail $ 73,779,368 24.36%
Municipalities 45,050,058 14.88%
Transportation, other 43,079,361 14.23%
Manufacturing, other 41,295,886 13.64%
Electronics 26,062,302 8.61%
Mining 17,670,967 5.84%
Business services 15,093,493 4.99%
Primary metals 13,251,254 4.38%
Other * 27,468,357 9.07%
----------------- -----------------
$ 302,751,046 100.00%
================= =================
* Individual amounts included in "Other" represent less than 2.5% of the total.
For further information regarding the Partnership's equipment lease
portfolio as of December 31, 2002, see Note 3 to the financial statements,
Investments in equipment and leases, as set forth in Part II, Item 8, Financial
Statements and Supplementary Data.
3
Item 2. PROPERTIES
The Partnership does not own or lease any real property, plant or material
physical properties other than the equipment held for lease as set forth in Item
1.
Item 3. LEGAL PROCEEDINGS
No material legal proceedings are currently pending against the Partnership or
against any of its assets. The following is a discussion of legal matters
involving the Partnership, but which do not represent claims against the
Partnership or its assets.
Applied Magnetics Corporation:
In January 2000, Applied Magnetics Corporation (the Debtor) filed for
protection from creditors under Chapter 11 of the U.S. Bankruptcy Code. The
Partnership had assets with a total net book value of $8,048,095 leased to
Applied Magnetics Corporation at the bankruptcy filing date. On January 31,
2000, the General Partner was appointed to the Official Committee of Unsecured
Creditors and currently serves as the Chairperson of the Committee. Procedures
were quickly undertaken for the liquidation of the Partnership's leased
equipment, which proceeds resulted in recoveries of $1,773,798 or 21.7% of
original equipment cost. As of November 1, 2000, liquidation of the assets was
completed.
The debtor filed a Plan of Reorganization (the "Plan"), which was approved
by a vote of the creditors of the debtor in October 2001. The Plan provided that
the Debtor change its name to "Integrated Micro-Technology," and enter into a
new line of business, the manufacture and production of "micro-machines". As
part of the Plan, the Partnership, along with the other unsecured creditors,
receives a proportionate share of its unsecured claims in the form of ownership
shares and warrants in the newly formed business. The success of this new
business plan is highly uncertain.
On February 13, 2002, the reorganized Debtor filed a notice of objection to
the Partnership's claim due to duplication and an improper liquidated damages
provision. The Partnership disputed this and, as of July 26, 2002, agreement has
been reached between the Partnership and Debtor as to the amount of the
Partnership's claim, and the Debtor's objection to the Partnership's claim was
withdrawn.
The Partnership anticipates additional amounts may be recoverable through
its equity interests in the reorganized lessee's business, however, any
recoveries above the amounts received upon liquidation of the Partnership's
equipment are highly uncertain and speculative.
Pioneer Companies, Inc.:
On July 31, 2001, petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code were filed by the Pioneer Companies, Inc., et al. The
Partnership's Proof of Claim was timely filed on October 14, 2001, with the
Bankruptcy Clerk in Houston. The Partnership is the successor in interest to
First Union Rail Corporation (FURC) under four (4) tank car lease schedules for
36 tank cars with Pioneer Chlor-Alkali Company, Inc. n/k/a Pioneer Americas,
Inc. (together, the "Lease"). FURC manages the Lease for the Partnership. The
Order Confirming Debtor's Joint Plan of Reorganization Under Chapter 11 of the
Bankruptcy Code ("Plan") was entered on November 28, 2001. The Effective Date,
as defined in the Plan, was December 31, 2001. Pursuant to Schedules 6.1(a)(x)
and 6.1(a)(y) of the Plan, the Lease was rejected by the debtor.
Although the equipment was to be returned to FURC by December 31, 2001, the
debtor continued to use and pay for the equipment under the lease on a
month-to-month basis. A letter agreement has been executed by the debtor to
formalize an understanding for debtor's continued use of the equipment under the
terms of the Lease on a month-to-month basis until the cars were returned. The
debtor has also objected to the Partnership's claim, which objection was being
disputed by the Partnership and is likely to be resolved via an amended Proof of
Claim. At this point, all equipment has been returned to the Partnership, and is
in the process of being re-leased and/or sold. The full extent of any recovery
is not known at this time.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S LIMITED PARTNERSHIP UNITS
AND RELATED MATTERS
Market Information
The Units are transferable subject to restrictions on transfers that have
been imposed under the securities laws of certain states. However, as a result
of such restrictions, the size of the Partnership and its investment objectives,
to the General Partner's knowledge, no established public secondary trading
market has developed and it is unlikely that a public trading market will
develop in the future. As a result, there is no currently ascertainable market
value for the Units.
4
Holders
As of December 31, 2002, a total of 5,589 investors were record holders of
Units in the Partnership.
ERISA Valuation
In order to permit ERISA fiduciaries who hold Units to satisfy their annual
reporting requirements, the General Partner estimated the value per Unit of the
Partnership's assets as of September 30, 2002. The General Partner calculated
the estimated liquidation proceeds that would be realized by the Partnership,
assuming an orderly disposition of all of the Partnership's assets as of January
1, 2003. The estimates were based on the amount of remaining lease payments on
existing Partnership leases, and the estimated residual values of the equipment
held by the Partnership upon the termination of those leases. This valuation was
based solely on the General Partner's perception of market conditions and the
types and amounts of the Partnership's assets. No independent valuation was
sought.
After calculating the aggregate estimated disposition proceeds, the General
Partner then calculated the portion of the aggregate estimated value of the
Partnership assets that would be distributed to Unit holders on liquidation of
the Partnership, and divided the total so distributable by the number of
outstanding Units. As of September 30, 2002, the value of the Partnership's
assets, calculated on this basis, was approximately $6.17 per Unit. The
foregoing valuation was performed solely for the ERISA purposes described above.
There is no market for the Units, and, accordingly, this value does not
represent an estimate of the amount a Unit holder would receive if he were to
seek to sell his Units. Furthermore, there can be no assurance as to the amount
the Partnership may actually receive if and when it seeks to liquidate its
assets, or the amount of lease payments and equipment disposition proceeds it
will actually receive over the remaining term of the Partnership.
Dividends
The Partnership does not make dividend distributions. However, the Limited
Partners of the Partnership are entitled to certain distributions as provided
under the Limited Partnership Agreement.
The General Partner has sole discretion in determining the amount of
distributions; provided, however, that the General Partner will not reinvest in
equipment, but will distribute, subject to payment of any obligations of the
Partnership, such available cash from operations and cash from sales or
refinancing as may be necessary to cause total distributions to the Limited
Partners for each year during the reinvestment period to equal $1.00 per Unit.
The reinvestment period ends December 31, 2004.
The rate for monthly distributions from 2002 operations was $0.0833 per
Unit. The distributions were paid in February 2002 through December 2002 and in
January 2003. For each quarterly distribution (paid in April, July and October
2002 and in January 2003) the rate was $0.25 per Unit. Distributions were from
2002 cash flows from operations.
The rate for monthly distributions from 2001 operations was $0.0833 per
Unit. The distributions were paid in February 2001 through December 2001 and in
January 2002. For each quarterly distribution (paid in April, July and October
2001 and in January 2002) the rate was $0.25 per Unit. Distributions were from
2001 cash flows from operations.
The rate for monthly distributions from 2000 operations was $0.0833 per
Unit. The distributions were paid in February 2000 through December 2000 and in
January 2001. For each quarterly distribution (paid in April, July and October
2000 and in January 2001) the rate was $0.25 per Unit. Distributions were from
2000 cash flows from operations.
The following table presents summarized information regarding distributions
to Limited Partners:
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Distributions of net income (loss) $ (0.20) $ 0.01 $ 0.53 $ (0.17) $ 0.46
Return of investment 1.20 0.99 0.48 1.17 0.45
---------------- ----------------- ---------------- ----------------- -----------------
Distributions per Unit 1.00 1.00 1.01 1.00 0.91
Differences due to timing of distributions - - (0.01) - 0.09
---------------- ----------------- ---------------- ----------------- -----------------
Nominal distribution rates from above $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
================ ================= ================ ================= =================
5
Item 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of the Partnership at
December 31, 2002, 2001, 2000, 1999 and 1998 and for the years then ended. This
financial data should be read in conjunction with the financial statements and
related notes included under Part II, Item 8.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Gross revenues $25,942,773 $ 30,646,525 $ 41,463,919 $ 39,634,771 $ 37,195,090
Net income (loss) $ (1,772,503) $ 2,939,818 $ 9,158,705 $ (2,159,370) $ 5,279,496
Weighted average Units outstanding 14,996,050 14,996,050 14,996,050 14,996,050 10,729,510
Net income (loss) allocated to
Limited Partners $ (2,976,387) $ 140,295 $ 7,938,589 $ (2,622,996) $ 4,883,534
Net income (loss) per Unit, based on
weighted average Units outstanding $ (0.20) $ 0.01 $ 0.53 $ (0.17) $ 0.46
Distributions per Unit, based on
weighted average Units outstanding $ 1.00 $ 1.00 $ 1.01 $ 1.00 $ 0.91
Total Assets $116,223,748 $ 135,853,619 $ 157,600,746 $ 191,424,300 $212,456,902
Non-recourse Debt $ 4,577,308 $ 9,971,225 $ 15,452,741 $ 21,780,420 $ 16,599,347
Other Long-term Debt $33,546,000 $ 38,540,000 $ 44,877,000 $ 53,181,000 $ 61,553,000
Total Partners' Capital $61,218,234 $ 79,492,851 $ 94,163,608 $ 101,313,784 $119,711,246
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements contained in this Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and elsewhere in this Form
10-K, 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. Investors are cautioned not
to attribute undue certainty to these forward-looking statements, which speak
only as of the date of this Form 10-K. 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-K or to reflect the occurrence of
unanticipated events, other than as required by law.
Capital Resources and Liquidity
The Partnership's public offering provided for a total maximum
capitalization of $150,000,000. As of November 27, 1998, the offering was
concluded. As of that date, subscriptions for 15,000,000 Units had been received
and accepted.
The liquidity of the Partnership will vary in the future, increasing to the
extent cash flows from leases and proceeds of asset sales exceed expenses, and
decreasing as lease assets are acquired, as distributions are made to the
Limited Partners and to the extent expenses exceed cash flows from leases and
proceeds from asset sales.
As another source of liquidity, the Partnership is expected to have
contractual obligations with a diversified group of lessees for fixed lease
terms at fixed rental amounts. As the initial lease terms expire, the
Partnership will re-lease or sell the equipment. The future liquidity beyond the
contractual minimum rentals will depend on the General Partner's success in
re-leasing or selling the equipment as it comes off lease.
The Partnership participates with the General Partner and certain of its
affiliates in a $55,645,837 revolving line of credit (comprised of an
acquisition facility and a warehouse facility) with a financial institution that
includes certain financial covenants. The line of credit expires on June 28,
2004. As of December 31, 2002, borrowings under the facility were as follows:
Amount borrowed by the Partnership under the acquisition facility $ 13,300,000
Amounts borrowed by affiliated partnerships and limited liability companies under the acquisition
facility 15,700,000
-----------------
Total borrowings under the acquisition facility 29,000,000
Amounts borrowed by the General Partner and its sister corporation under the warehouse facility -
-----------------
Total outstanding balance $ 29,000,000
=================
Total available under the line of credit $ 55,645,837
Total outstanding balance (29,000,000)
-----------------
Remaining availability $ 26,645,837
=================
6
Draws on the acquisition facility by any individual borrower are secured
only by that borrower's assets, including equipment and related leases.
Borrowings on the warehouse facility are recourse jointly to certain of the
affiliated partnerships and limited liability companies, the Partnership and the
General Partner.
The Partnership anticipates reinvesting a portion of lease payments from
assets owned in new leasing transactions. Such reinvestment will occur only
after the payment of all obligations, including debt service (both principal and
interest), the payment of management fees to the General Partner and providing
for cash distributions to the Limited Partners. At December 31, 2002, the
Partnership had no commitments to purchase lease assets.
As of December 31, 2002, cash balances consisted of working capital and
amounts reserved for distributions to be paid in January 2003, generated from
operations in 2002.
The Partnership currently has available adequate reserves to meet its
immediate cash requirements and those of the next twelve months, but in the
event those reserves were found to be inadequate, the Partnership would likely
be in a position to borrow against its current portfolio to meet such
requirements. The General Partner envisions no such requirements for operating
purposes.
In 1998, the Partnership established a $65 million receivables funding
program with a receivables financing company that issues commercial paper rated
A1 from Standard and Poors and P1 from Moody's Investor Services. In this
receivables funding program, the lenders received a general lien against all of
the otherwise unencumbered assets of the Partnership. The program provided for
borrowing at a variable interest rate and required the General Partner to enter
into interest rate swap agreements with certain hedge counterparties (also rated
A1/P1) to mitigate the interest rate risk associated with a variable rate note.
The General Partner anticipated that this program would allow the Partnership to
avail itself of lower cost debt than that available for individual non-recourse
debt transactions. The program expired as to new borrowings in February 2002.
See Item 7a and Note 5 to the financial statements, Other long-term debt,
as set forth in Part II, Item 8, Financial Statements and Supplementary Data,
for additional information regarding this program and related interest rate
swaps.
It is the intention of the Partnership to use the receivables funding
program as its primary source of debt financing. The Partnership will continue
to use its sources of non-recourse secured debt financing on a transaction basis
as a means of mitigating credit risk.
The General Partner expects that aggregate borrowings in the future will be
approximately 50% of aggregate equipment cost. In any event, the Limited
Partnership Agreement limits such borrowings to 50% of the total cost of
equipment, in aggregate.
See Note 4 to the financial statements, Non-recourse debt, as set forth in
Part II, Item 8, Financial Statements and Supplementary Data, for additional
information regarding non-recourse debt.
The Partnership commenced regular distributions, based on cash flows from
operations, beginning with the month of January 1997. See Items 5 and 6 of this
report for additional information regarding distributions.
If inflation in the general economy becomes significant, it may affect the
Partnership inasmuch 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.
If interest rates increase significantly, 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.
Cash Flows
2002 vs. 2001:
Cash flows from operations decreased from $23,869,682 in 2001 to
$20,508,144 in 2002, a decrease of $3,361,538. Rents from operating leases is
the primary source of operating cash flows. Lease terminations and sales of
operating lease assets in 2001 and 2002 led to the decrease in operating lease
revenues compared to 2001.
In 2002, sources of cash from investing activities consisted of proceeds
from the sales of lease assets and from rents from direct financing leases.
Proceeds from the sales of lease assets decreased from $3,830,077 in 2001 to
$2,229,481 in 2002, a decrease of $1,600,596. Proceeds from the sales of lease
assets are not expected to be consistent from one period to another as the sales
of lease assets is subject to various factors such as the timing of lease
terminations, the timing of market demand and the condition and uniquness of the
assets subject to sale. Rents from direct financing leases increased by $771,036
as a result of acquisitions of lease assets in 2001 and 2002.
7
In 2002, financing sources of cash consisted of proceeds of long-term debt
and borrowings on the line of credit. The proceeds of long-term debt were used
to repay the line of credit.
Cash used for distributions to partners did not change significantly.
Non-recourse debt payments scheduled in 2002 were less than those scheduled in
2001. This was the cause of the decrease in debt payments.
Cash used to repay long-term debt increased as a result of the additional
borrowings in 2002.
2001 vs. 2000:
Cash flows from operations decreased from $28,382,888 in 2000 to
$23,869,682 in 2001, a decrease of $4,513,206. Rents from operating leases is
the primary source of operating cash flows. Sales of operating lease assets in
2000 and 2001 led to the decrease in operating lease revenues compared to 2000.
In 2001 and 2000, sources of cash from investing activities consisted of
proceeds from the sales of lease assets and from rents from direct financing
leases. Proceeds from the sales of lease assets decreased from $10,439,849 in
2000 to $3,830,077 in 2001, a decrease of $6,609,772. Proceeds from the sales of
lease assets are not expected to be consistent from one period to another. Rents
from direct financing leases decreased by $293,602 as a result of sales of lease
assets in 2000 and 2001.
In 2001, financing sources of cash consisted of proceeds of long-term debt
and borrowings on the line of credit. In 2000, financing sources of cash
consisted of proceeds of long-term debt, proceeds of non-recourse debt and
borrowings on the line of credit. The proceeds of long-term debt were used to
repay the line of credit. The additional non-recourse debt was assumed as a part
of the acquisition of leased assets in 2001 and 2000.
Cash used to repay long-term debt decreased as a result of a reduction in
scheduled payments, net of the effect of the additional borrowings in 2001.
Overall, average debt balances were lower in 2001 than in 2000 as a result of
making debt payments as scheduled.
Results of Operations
As of January 7, 1997, subscriptions for the minimum amount of the offering
($1,200,000) had been received and accepted by the Partnership. As of that date,
the Partnership commenced operations in its primary business (leasing
activities). There were no operations in 1996.
2002 vs. 2001:
Operations resulted in a loss of $1,772,503 in 2002 compared to net income
of $2,939,818 in 2001. The primary cause of the decrease is the provision for
losses and impairments of $2,111,593 recorded in 2002. There was no such
provision in 2001.
Revenues from leases decreased from $31,726,016 in 2001 to $27,009,517 in
2002, a decrease of $4,716,499. Revenue increases resulting from asset purchases
in 2001 and in 2002 were offset by the effects of income producing asset sales.
Lower lease rates realized on lease renewals has also contributed to the
decrease in lease revenues. Losses on sales of assets increased from $1,145,708
in 2001 to $1,270,985 in 2002, an increase of $125,277. Such gains and losses
are not expected to be consistent from one period to another.
Depreciation expense decreased by $1,404,812 compared to 2001 as a result of the
sales of depreciable assets in 2001 and 2002.
Interest expense declined as a result of scheduled debt payments. These
repayments exceeded the amounts of new borrowings in 2002. Total debt, including
the line of credit, decreased from $52,611,225 at December 31, 2001 to
$51,423,308 at December 31, 2002.
Management periodically reviews the carrying values of its assets on leases
and assets held for lease or sale. As a result of that review, management
determined that the values of fleets of jumbo covered hopper cars, tidewater
barges and diesel electric locomotives had declined in value to the extent that
the carrying values had become impaired. This decline is the result of decreased
long-term demand for these types of assets and a corresponding reduction in the
amounts of rental payments that these assets currently command. Management has
recorded a provision for the decline in value of those assets in the amount of
$2,111,593 for the year ended December 31, 2002.
2001 vs. 2000:
Operations resulted in net income of $2,939,818 in 2001 compared to
$9,158,705 in 2000.
Revenues from leases decreased from $38,849,507 in 2000 to $31,726,016 in
2001, a decrease of $7,123,491. Decreases resulted from asset sales in 2000 and
in 2001. Gains and losses on sales of assets decreased from a gain of $2,381,787
in 2000 to a loss of $1,145,708 in 2001, a change of $3,527,495. Such gains and
losses are not expected to be consistent from one period to another.
8
Depreciation expense decreased in 2001 compared to 2000 as a result of
sales of depreciable assets in 2000 and 2001.
Interest expense declined as a result of scheduled debt payments and the
early extinguishment of the Applied Magnetics debt in 2000. Total debt,
including the line of credit, decreased from $60,329,741 at December 31, 2000 to
$52,611,225 at December 31, 2001.
Derivative Financial Instruments
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, which established new accounting
and reporting standards for derivative instruments. SFAS No. 133 has been
amended by SFAS No. 137, issued in June 1999, and by SFAS No. 138, issued in
June 2000.
SFAS No. 133, as amended, requires the Partnership to recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. It further provides criteria for derivative
instruments to be designated as fair value, cash flow, or foreign currency
hedges, and establishes accounting standards for reporting changes in the fair
value of the derivative instruments.
The Partnership adopted SFAS No. 133, as amended, on January 1, 2001. Upon
adoption, the Partnership recorded interest rate swap hedging instruments at
fair value in the balance sheet and recognized the changes in fair value in net
income or other comprehensive income, in accordance with SFAS No. 133. See Note
5 to the financial statements, Other long-term debt, as set forth in Part II,
Item 8, Financial Statements and Supplementary Data, for additional information.
Recent Accounting Pronouncement
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS 144), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of, and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations, for a
disposal of a segment of a business. SFAS 144 is effective for fiscal years
beginning after December 15, 2001, with earlier application encouraged. The
Partnership adopted SFAS 144 as of January 1, 2002. The adoption of the
Statement did not have a significant impact on the Partnership's financial
position or results of operations.
Internal Controls
As of December 31, 2002, an evaluation was performed under the supervision
and with the participation of the Partnership's management, including the CEO
and CFO of the General Partner, of the effectiveness of the design and operation
of the Partnership's disclosure controls and procedures. Based on that
evaluation, the Partnership's management, including the CEO and CFO of the
General Partner, concluded that the Partnership's disclosure controls and
procedures were effective as of December 31, 2002. There have been no
significant changes in the Partnership's internal controls or in other factors
that could significantly affect internal controls subsequent to December 31,
2002.
Critical Accounting Policies
The policies discussed below are considered by management of the
Partnership to be critical to an understanding of the Partnership's financial
statements because their application requires significant complex or subjective
judgments, decisions, or assessments, with financial reporting results relying
on estimation about the effect of matters that are inherently uncertain.
Specific risks for these critical accounting policies are described in the
following paragraphs. The Partnership also states these accounting policies in
the notes to the financial statements and in relevant sections in this
discussion and analysis. For all of these policies, management cautions that
future events rarely develop exactly as forecast, and the best estimates
routinely require adjustment.
Use of Estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 and expected future cash flows used for impairment
analysis purposes.
9
Asset Valuation:
Recorded values of the Company's asset portfolio are periodically reviewed
for impairment in accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
An impairment loss is measured and recognized only if the estimated undiscounted
future cash flows of the asset are less than their 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.
Impairment is measured as the difference between the fair value (as determined
by the discounted estimated future cash flows) of the assets and its carrying
value on the measurement date.
Item 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership, like most other companies, is exposed to certain market
risks, including primarily changes in interest rates. The Partnership believes
its exposure to other market risks, including foreign currency exchange rate
risk, commodity risk and equity price risk, are insignificant to both its
financial position and results of operations.
In general, the Partnership's strategy is to manage its exposure to
interest rate risk by obtaining fixed rate debt. Current fixed rate debt is
structured so as to match the cash flows required to service the debt to the
payment streams under fixed rate lease receivables. The payments under the
leases are assigned to the lenders in satisfaction of the debt. Furthermore, the
Partnership has historically been able to maintain a stable spread between its
cost of funds and lease yields in both periods of rising and falling interest
rates. Nevertheless, the Partnership frequently funds leases with its floating
rate line of credit and is, therefore, exposed to interest rate risk until fixed
interest rate financing is arranged, or the floating interest rate line of
credit is repaid. As of December 31, 2002, there was an outstanding balance of
$13,300,000 on the floating rate line of credit and the effective interest rate
of the borrowings ranged from 3.29% to 3.31%.
Also, as described in Item 7in the caption "Capital Resources and
Liquidity," the Partnership entered into a receivables funding facility in 1998.
Since interest on the outstanding balances under the facility varies, the
Partnership is exposed to market risks associated with changing interest rates.
To hedge its interest rate risk, the Partnership enters into interest rate
swaps, which effectively convert the underlying interest characteristic on the
facility from floating to fixed.
Under the swap agreements, the Partnership makes or receives variable
interest payments to or from the counterparty based on a notional principal
amount. The net differential paid or received by the Partnership is recognized
as an adjustment to interest expense related to the facility balances. The
amount paid or received represents the difference between the payments required
under the variable interest rate facility and the amounts due under the facility
at the fixed (hedged) interest rate. As of December 31, 2002, borrowings on the
facility were $33,546,000 and the associated variable interest rate was 2.0081%
and the average fixed interest rate achieved with the swap agreements was 5.869%
at December 31, 2002.
In general, these swap agreements eliminate the Partnership's interest rate
risk associated with variable rate borrowings. However, the Partnership is
exposed to and manages credit risk associated with the counterparty to the swap
agreement by dealing only with institutions it considers financially sound. If
these agreements were not in place, based on the Partnership's facility
borrowings at December 31, 2002, a hypothetical 1.00% increase or decrease in
market interest rates would increase or decrease the Partnership's 2003 variable
interest expense by approximately $282,000.
See the Notes to the Financial Statements as set forth in Item 8 for
additional information.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Report of Independent Auditors, Financial Statements and Notes to
Financial Statements attached hereto at pages 11 through 29.
10
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Partners
ATEL Capital Equipment Fund VII, L.P.
We have audited the accompanying balance sheets of ATEL Capital Equipment
Fund VII, L.P. (Partnership) as of December 31, 2002 and 2001, and the related
statements of operations, changes in partners' capital and cash flows for each
of the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ATEL Capital Equipment Fund
VII, L.P. at December 31, 2002 and 2001, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
San Francisco, California
February 7, 2003
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS
2002 2001
---- ----
Cash and cash equivalents $ 2,194,169 $ 936,189
Accounts receivable, net of allowance for
doubtful accounts of $403,067 in 2002
and $118,067 in 2001 4,848,736 5,759,540
Due from General Partner 253,543 -
Other assets 10,019 108,015
Investments in equipment and leases 108,917,281 129,049,875
----------------- -----------------
Total assets $ 116,223,748 $135,853,619
================= =================
LIABILITIES AND PARTNERS' CAPITAL
Non-recourse debt $ 4,577,308 $ 9,971,225
Other long-term debt 33,546,000 38,540,000
Line of credit 13,300,000 4,100,000
Accounts payable and accruals:
General Partner - 580,916
Other 752,459 510,598
Accrued interest payable 192,403 355,458
Interest rate swap contracts 1,624,360 1,326,006
Unearned lease income 1,012,984 976,565
----------------- -----------------
55,005,514 56,360,768
Total partners' capital 61,218,234 79,492,851
----------------- -----------------
Total liabilities and partners' capital $ 116,223,748 $135,853,619
================= =================
See accompanying notes.
11
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Revenues: 2002 2001 2000
---- ---- ----
Leasing activities:
Operating leases $ 25,631,019 $ 30,657,648 $ 37,500,588
Direct financing leases 1,378,498 1,068,368 1,153,226
Leveraged leases - - 195,693
Gain (loss) on sale of assets (1,270,985) (1,145,708) 2,381,787
Interest income 14,000 55,569 157,678
Other 190,241 10,648 74,947
---------------- ----------------- -----------------
25,942,773 30,646,525 41,463,919
Expenses:
Depreciation and amortization 18,608,503 20,023,249 25,306,146
Interest 3,206,557 4,029,695 5,307,064
Provision for losses and impairments 2,111,593 - -
Equipment and incentive management fees to affiliates 947,568 1,175,912 1,770,779
Cost reimbursements to General Partner 859,415 851,382 917,952
Railcar maintenance 710,564 715,826 484,432
Provision for doubtful accounts 285,000 118,067 -
Professional fees 199,993 163,006 86,643
Other 786,083 629,570 488,772
---------------- ----------------- -----------------
27,715,276 27,706,707 34,361,788
---------------- ----------------- -----------------
Income (loss) before extraordinary item (1,772,503) 2,939,818 7,102,131
Extraordinary gain on early extinguishment of debt - - 2,056,574
---------------- ----------------- -----------------
Net income (loss) $ (1,772,503) $ 2,939,818 $ 9,158,705
================ ================= =================
Net income (loss):
General Partner $ 1,203,884 $ 2,799,523 $ 1,220,116
Limited Partners (2,976,387) 140,295 7,938,589
---------------- ----------------- -----------------
$ (1,772,503) $ 2,939,818 $ 9,158,705
================ ================= =================
Income (loss) before extraordinary item per Limited Partnership unit $ (0.20) $ 0.01 $ 0.40
Extraordinary gain on early extinguishment of debt
per Limited Partnership unit - - 0.13
---------------- ----------------- -----------------
Net income (loss) per Limited Partnership unit $ (0.20) $ 0.01 $ 0.53
================ ================= =================
Weighted average number of units outstanding 14,996,050 14,996,050 14,996,050
See accompanying notes.
12
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Accumulated
Other
Limited Partners Comprehensive
---------------- General Income
Units Amount Partner (Loss) Total
----- ------ ------- ------ -----
Balance December 31, 1999 14,996,050 $ 102,828,385 $ (1,514,601) $ - $101,313,784
Distributions to Limited Partners
($1.01 per Unit) (15,088,765) - - (15,088,765)
Distributions to General Partner - (1,220,116) - (1,220,116)
Net income 7,938,589 1,220,116 - 9,158,705
---------------- ----------------- ---------------- ----------------- -----------------
Balance December 31, 2000 14,996,050 95,678,209 (1,514,601) - 94,163,608
Distributions to Limited Partners
($1.00 per Unit) (14,999,647) - - (14,999,647)
Distributions to General Partner - (1,284,922) - (1,284,922)
Cumulative effect of change in
accounting principle at
January 1, 2001 - - 281,661 281,661
Unrealized decrease in value of
interest rate swap contracts - - (1,607,667) (1,607,667)
Net income 140,295 2,799,523 - 2,939,818
---------------- ----------------- ---------------- ----------------- -----------------
Balance December 31, 2001 14,996,050 80,818,857 - (1,326,006) 79,492,851
Distributions to Limited Partners
($1.00 per Unit) (14,999,876) - - (14,999,876)
Distributions to General Partner - (1,203,884) - (1,203,884)
Unrealized decrease in value of
interest rate swap contracts - - (298,354) (298,354)
Net income (loss) (2,976,387) 1,203,884 - (1,772,503)
---------------- ----------------- ---------------- ----------------- -----------------
Balance December 31, 2002 14,996,050 $ 62,842,594 $ - $ (1,624,360) $ 61,218,234
================ ================= ================ ================= =================
See accompanying notes.
13
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
Operating activities:
Net income (loss) $ (1,772,503) $ 2,939,818 $ 9,158,705
Adjustment to reconcile net income (loss) to net cash provided by
operating activities:
Leveraged lease income - - (195,693)
Depreciation and amortization 18,608,503 20,023,249 25,306,146
Provision for losses and impairments 2,111,593 - -
Provision for doubtful accounts 285,000 118,067 -
Loss (gain) on sales of assets 1,270,985 1,145,708 (2,381,787)
Extraordinary gain on early extinguishment of debt - - (2,056,574)
Changes in operating assets and liabilities:
Accounts receivable 625,804 344,704 (596,206)
Due from General Partner (253,543) - -
Other assets 97,996 (18,004) 39,996
Accounts payable, General Partner (580,916) (24,768) (829,967)
Accounts payable, other 241,861 (193,163) 277,865
Accrued interest payable (163,055) (178,400) (180,839)
Unearned lease income 36,419 (287,529) (158,758)
---------------- ----------------- -----------------
Net cash provided by operating activities 20,508,144 23,869,682 28,382,888
---------------- ----------------- -----------------
Investing activities:
Proceeds from sales of assets 2,229,481 3,830,077 10,439,849
Reduction of net investment in direct financing leases 3,032,098 2,261,062 2,554,664
Purchases of equipment on direct financing leases (3,052,582) (4,344,293) (1,678,000)
Initial direct lease costs (107,962) (48,560) (18,370)
Purchases of equipment on operating leases (3,959,522) (1,950,111) -
---------------- ----------------- -----------------
Net cash provided by (used in) investing activities (1,858,487) (251,825) 11,298,143
---------------- ----------------- -----------------
Financing activities:
Distributions to Limited Partners (14,999,876) (14,999,647) (15,088,765)
Distributions to General Partner (1,203,884) (1,284,922) (1,220,116)
Borrowings under line of credit 19,500,000 12,900,000 450,000
Repayments of borrowings under line of credit (10,300,000) (8,800,000) (11,600,000)
Proceeds of other long-term debt 10,100,000 8,000,000 11,700,000
Repayments of other long-term debt (15,094,000) (14,337,000) (17,947,426)
Repayments of non-recourse debt (5,393,917) (5,481,516) (6,912,082)
Proceeds of non-recourse debt - - 584,403
---------------- ----------------- -----------------
Net cash used in financing activities (17,391,677) (24,003,085) (40,033,986)
---------------- ----------------- -----------------
Net increase (decrease) in cash and cash equivalents 1,257,980 (385,228) (352,955)
Cash and cash equivalents at beginning of year 936,189 1,321,417 1,674,372
---------------- ----------------- -----------------
Cash and cash equivalents at end of year $ 2,194,169 $ 936,189 $ 1,321,417
================ ================= =================
14
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF CASH FLOWS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 3,369,612 $ 4,208,095 $ 5,487,903
================ ================= =================
Schedule of non-cash transactions:
Extraordinary gain on early extinguishment of debt $ - $ - $ 2,056,574
================ ================= =================
Change in fair value of interest rate swaps contracts $ (298,354) $ (1,607,667) $ -
================ ================= =================
See accompanying notes.
15
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
1. Organization and Partnership matters:
ATEL Capital Equipment Fund VII, L.P. (the Partnership) 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.
Upon the sale of the minimum amount of Units of Limited Partnership
interest (Units) (120,000 Units) ($1,200,000) and the receipt of the proceeds
thereof on January 7, 1997, the Partnership commenced operations.
The General Partner of the Partnership is ATEL Financial Services LLC
(ATEL). Prior to converting to a limited liability company structure, the
General Partner was formerly known as ATEL Financial Corporation.
The Partnership's business consists of leasing various types of equipment.
As of December 31, 2002, the original terms of the leases ranged from eighteen
months to eleven years.
Pursuant to the Limited Partnership Agreement, the General Partner receives
compensation and reimbursements for services rendered on behalf of the
Partnership (See Note 6). The General Partner is required to maintain in the
Partnership reasonable cash reserves for working capital, the repurchase of
Units and contingencies.
2. Summary of significant accounting policies:
Equipment on operating leases:
Equipment subject to operating leases is stated at cost. Depreciation is
being recognized on a straight-line method over the terms of the related leases
to the equipment's estimated residual values at the end of the leases.
Revenues from operating leases are recognized evenly over the terms of the
related leases.
Direct financing leases:
Income from direct financing lease transactions is reported using the
financing method of accounting, in which the Partnership's investment in the
leased property is reported as a receivable from the lessee to be recovered
through future rentals. The income portion of each rental payment is calculated
so as to generate a constant rate of return on the net receivable outstanding.
Investment in leveraged leases:
Leases that are financed principally with non-recourse debt at lease
inception and that meet certain other criteria are accounted for as leveraged
leases. Leveraged lease contracts receivable are stated net of the related
non-recourse debt service (which includes unpaid principal and aggregate
interest on such debt) plus estimated residual values. Unearned income
represents the excess of anticipated cash flows (after taking into account the
related debt service and residual values) over the investment in the lease and
is amortized using a constant rate of return applied to the net investment when
such investment is positive.
16
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
2. Summary of significant accounting policies (continued):
Accounts receivable:
Accounts receivable represent the amounts billed under lease contracts and
currently due to the Partnership. Allowances for doubtful accounts are typically
established based on historical charge offs and collection experience and are
usually determined by specifically identified lessees and invoiced amounts.
Statements of cash flows:
For purposes of the Statements of Cash Flows, cash and cash equivalents
include cash in banks and cash equivalent investments with original maturities
of ninety days or less.
Income taxes:
The Partnership does not provide for income taxes since all income and
losses are the liability of the individual partners and are allocated to the
partners for inclusion in their individual tax returns.
The tax basis of the Company's net assets and liabilities varies from the
amounts presented in these financial statements (unaudited):
2002 2001
---- ----
Financial statement basis of net assets $ 61,218,234 $ 79,492,851
Tax basis of net assets (22,854,898) (1,474,318)
---------------- -----------------
Difference $ 84,073,132 $ 80,967,169
================ =================
The primary differences between the tax basis of net assets and the amounts
recorded in the financial statements are the result of differences in accounting
for syndication costs and differences between the depreciation methods used in
the financial statements and the Partnership's tax returns.
The following reconciles the net income (loss) reported in these financial
statements to the loss reported on the Partnership's federal tax return
(unaudited):
2002 2001 2000
---- ---- ----
Net income (loss) per financial statements $ (1,772,503) $ 2,939,818 $ 9,158,705
Adjustment to depreciation expense (9,817,508) (18,455,212) (20,229,067)
Adjustments to lease revenues 1,442,714 2,145,833 573,208
Provision for losses 2,396,593 118,067 -
---------------- ----------------- -----------------
Net loss per federal tax return $ (7,750,704) $(13,251,494) $(10,497,154)
================ ================= =================
Per unit data:
Net income and distributions per unit are based upon the weighted average
number of units outstanding during the period.
17
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
2. Summary of significant accounting policies (continued):
Credit risk:
Financial instruments that potentially subject the Partnership to
concentrations of credit risk include cash and cash equivalents, direct finance
lease receivables and accounts receivable. The Partnership places its cash
deposits and temporary cash investments with creditworthy, high quality
financial institutions. The concentration of such deposits and temporary cash
investments is not deemed to create a significant risk to the Partnership.
Accounts receivable represent amounts due from lessees in various industries,
related to equipment on operating and direct financing leases. See Note 8 for a
description of lessees by industry as of December 31, 2002, 2001 and 2000.
Basis of presentation:
The accompanying financial statements as of December 31, 2002 and 2001 and
for the three years ended December 31, 2002 have been prepared in accordance
with accounting principles generally accepted in the United States. Certain
prior year amounts have been reclassified to conform to the current year
presentation.
Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 and expected future cash flows used for impairment
analysis purposes.
Asset valuation:
Recorded values of the Company's asset portfolio are periodically reviewed
for impairment in accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
An impairment loss is measured and recognized only if the estimated undiscounted
future cash flows of the asset are less than their 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.
Impairment is measured as the difference between the fair value (as determined
by the discounted estimated future cash flows) of the assets and its carrying
value on the measurement date.
Derivative financial instruments:
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, which
established new accounting and reporting standards for derivative instruments.
SFAS No. 133 has been amended by SFAS No. 137, issued in June 1999, and by SFAS
No. 138, issued in June 2000.
18
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
2. Summary of significant accounting policies (continued):
SFAS No. 133, as amended, requires the Partnership to recognize all derivatives
as either assets or liabilities in the balance sheet and to carry those
instruments at fair value. It further provides criteria for derivative
instruments to be designated as fair value, cash flow, or foreign currency
hedges, and establishes accounting standards for reporting changes in the fair
value of the derivative instruments. Upon adoption on January 1, 2001, the
Partnership adjusted hedging instruments to fair value in the balance sheet and
recognized the offsetting gains or losses as adjustments to be reported in net
income or other comprehensive income, as appropriate.
The Partnership utilizes cash flow hedges comprised of interest rate swaps. Such
interest rate swaps are linked to and are designed to effectively adjust
the
interest rate sensitivity of specific long-term debt.
The effective portion of the change in fair value of the hedging
derivatives is recorded in equity as a component of Accumulated Other
Comprehensive Income (AOCI) and the ineffective portion (if any) directly in
earnings. Amounts in AOCI are reclassified into earnings in a manner consistent
with the earnings pattern of the underlying hedged item (generally reflected in
interest expense). If a hedged item is dedesignated prior to maturity, previous
adjustments to AOCI are recognized in earnings to match the earnings recognition
pattern of the hedged item (e.g., level yield amortization if hedging interest
bearing instruments). Interest income or expense on most hedging derivatives
used to manage interest rate exposure is recorded on an accrual basis, as an
adjustment to the yield of the link exposures over the periods covered by the
contracts. This matches the income recognition treatment of the exposure (i.e.,
the liabilities, which are carried at historical cost, with interest recorded on
an accrual basis). Credit exposure from derivative financial instruments arises
from the risk of a counterparty default on the derivative contract. The amount
of the loss created by the default is the replacement cost or current positive
fair value of the defaulted contract.
Recent accounting pronouncement:
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS 144), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of, and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations for a
disposal of a segment of a business. SFAS 144 is effective for fiscal years
beginning after December 15, 2001, with earlier application encouraged. The
Partnership adopted SFAS 144 as of January 1, 2002. The adoption of the
Statement did not have a significant impact on the Partnership's financial
position or results of operations.
Initial direct costs:
The Partnership capitalizes initial direct costs associated with the
acquisition of lease assets. The costs are amortized over a five year period
using a straight line method.
19
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
3. Investments in equipment and leases:
The Partnership's investments in equipment and leases consist of the following:
Depreciation
Expense or Reclass-
December 31, Amortization ifications or December 31,
2001 Additions of Leases Dispositions 2002
---- --------- --------- ------------ ----
Net investment in operating leases $101,066,589 $ 3,959,522 $ (18,424,332) $ (2,574,877) $ 84,026,902
Net investment in direct financing
leases 18,931,921 3,052,582 (3,032,098) (2,725,288) 16,227,117
Reserve for losses and impairments (504,227) (2,111,593) - 504,227 (2,111,593)
Assets held for sale or lease 9,267,614 - - 1,295,472 10,563,086
Initial direct costs, net of
accumulated amortization of
$905,356 in 2002 and $726,703 in 2001 287,978 107,962 (184,171) - 211,769
---------------- ----------------- ---------------- ----------------- -----------------
$129,049,875 $ 5,008,473 $ (21,640,601) $ (3,500,466) $108,917,281
================ ================= ================ ================= =================
Management periodically reviews the carrying values of its assets on leases
and assets held for lease or sale. As a result of that review, management
determined that the fair values of fleets of jumbo covered hopper cars,
tidewater barges and diesel electric locomotives had declined in value to the
extent that the carrying values had become impaired. The fair value of the
assets was determined based on the sum of the discounted estimated future cash
flows of the assets. A charge to operations was recorded for the decline in
value of those assets in the amount of $2,111,593 for the year ended December
31, 2002.
Operating leases:
Property subject to operating leases consists of the following:
Reclass-
December 31, ifications or December 31,
2001 Additions Dispositions 2002
---- --------- ------------ ----
Transportation $ 80,788,684 $ - $ (5,899,676) $ 74,889,008
Marine vessels / barges 27,030,136 - - 27,030,136
Construction 22,831,963 - (417,700) 22,414,263
Manufacturing 9,702,801 - (335,413) 9,367,388
Mining 9,012,965 - - 9,012,965
Other 5,813,733 - 220,653 6,034,386
Office automation 5,297,632 - (1,692,944) 3,604,688
Materials handling 5,265,654 3,959,522 (216,081) 9,009,095
Communications 4,387,819 - (77,934) 4,309,885
----------------- ---------------- ----------------- -----------------
170,131,387 3,959,522 (8,419,095) 165,671,814
Less accumulated depreciation (69,064,798) (18,424,332) 5,844,218 (81,644,912)
----------------- ---------------- ----------------- -----------------
$ 101,066,589 $ (14,464,810) $ (2,574,877) $ 84,026,902
================= ================ ================= =================
20
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
3. Investments in equipment and leases (continued):
Direct financing leases:
As of December 31, 2002, investment in direct financing leases consist of
various transportation, manufacturing and medical equipment. The following lists
the components of the Partnership's investment in direct financing leases as of
December 31, 2002 and 2001:
2002 2001
---- ----
Total minimum lease payments receivable $ 14,018,775 $ 15,374,654
Estimated residual values of leased equipment (unguaranteed) 6,286,069 8,678,613
---------------- -----------------
Investment in direct financing leases 20,304,844 24,053,267
Less unearned income (4,077,727) (5,121,346)
---------------- -----------------
Net investment in direct financing leases $ 16,227,117 $ 18,931,921
================ =================
All of the property subject to leases was acquired in the years 1997
through 2002.
At December 31, 2002, the aggregate amounts of future minimum lease
payments to be received under operating and direct financing leases are as
follows:
Direct
Year ending Operating Financing
December 31, Leases Leases Total
------------ ------ ------ -----
2003 $15,666,811 $ 3,935,864 $ 19,602,675
2004 9,975,468 3,850,612 13,826,080
2005 6,682,211 3,779,344 10,461,555
2006 1,567,028 1,706,695 3,273,723
2007 459,000 542,007 1,001,007
Thereafter 463,950 204,253 668,203
---------------- ----------------- ----------------
$34,814,468 $ 14,018,775 $ 48,833,243
================ ================= ================
21
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
3. Investments in equipment and leases (continued):
Reserve for losses and impairments and allowance for doubtful accounts:
Activity in the reserve for losses and impairments and allowances for
doubtful accounts consists of the following:
Reserve for Allowance for
losses and doubtful
impairments accounts
Balance December 31, 1999 $ 6,185,366 $ -
Provision - -
Charge offs (5,681,139) -
----------------- ----------------
Balance December 31, 2000 504,227 -
Provision - 118,067
Charge offs - -
----------------- ----------------
Balance December 31, 2001 504,227 118,067
Provision 2,111,593 285,000
Charge offs (504,227) -
----------------- ----------------
Balance December 31, 2002 $ 2,111,593 $ 403,067
================= ================
At December 31, 2002, the Partnership had no commitments to purchase lease
assets.
4. Non-recourse debt:
At December 31, 2002, non-recourse debt consists of notes payable to
financial institutions. The notes are due in varying monthly, quarterly,
semi-annual and annual payments. Interest on the notes is at fixed rates from
7.4% to 16.6%. The notes are secured by assignments of lease payments and
pledges of assets. At December 31, 2002, the carrying value of the pledged
assets is $16,937,114. The notes mature from 2003 through 2008.
Future minimum payments of non-recourse debt are as follows:
Year ending
December 31, Principal Interest Total
2003 $ 3,624,662 $ 288,831 $ 3,913,493
2004 298,403 67,364 365,767
2005 322,838 42,927 365,765
2006 216,850 20,179 237,029
2007 90,838 5,141 95,979
Thereafter 23,717 277 23,994
---------------- ----------------- ----------------
$ 4,577,308 $ 424,719 $ 5,002,027
================ ================= ================
22
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
5. Other long-term debt:
In 1998, the Partnership entered into a $65 million receivables funding
program (the Program) with a receivables financing company that issues
commercial paper rated A1 by Standard and Poors and P1 by Moody's Investor
Services. Under the Program, the receivables financing company receives a
general lien against all of the otherwise unencumbered assets of the
Partnership. The Program provides for borrowing at a variable interest rate
(2.0081% at December 31, 2002), based on an index of A1 commercial paper.
The Program requires the General Partner, on behalf of the Partnership, to
enter into various interest rate swaps with a financial institution (also rated
A1/P1) to manage interest rate exposure associated with variable rate
obligations under the Program by effectively converting the variable rate debt
to fixed rates. As of December 31, 2002, the Partnership receives or pays
interest on a notional principal of $25,680,000, based on the difference between
nominal rates ranging from 4.36% to 7.58% and the variable rate under the
Program. No actual borrowing or lending is involved. The termination of the
swaps coincides with the maturity of the debt. The differential to be paid or
received is accrued as interest rates change and is recognized currently as an
adjustment to interest expense related to the debt.
Borrowings under the Program are as follows:
Original Balance Payment Rate on
Amount December 31, Interest Swap
Date Borrowed Borrowed 2002 Agreement
------------- -------- ---- ---------
4/1/98 $21,770,000 $ 1,332,000 6.220%
7/1/98 25,000,000 3,469,000 6.155%
10/1/98 20,000,000 6,087,000 5.550%
4/16/99 9,000,000 2,435,000 5.890%
1/26/00 11,700,000 6,699,000 7.580%
5/25/01 2,000,000 1,402,000 5.790%
9/28/01 6,000,000 4,256,000 4.360%
1/31/02 4,400,000 3,455,000 *
2/19/02 5,700,000 4,411,000 *
---------------- -----------------
$105,570,000 $ 33,546,000
================ =================
* Under the terms of the Program, no interest rate swap agreements were required
for these borrowings.
The long-term debt borrowings mature from 2003 through 2009. Future minimum
principal payments of long-term debt and annual swap notional reductions are as
follows:
Swap Notional / Debt Rates on
Year ending Debt Principal Interest Swap
December 31, Principal Not Swapped Interest Total Agreements**
--------- ----------- -------- ----- ------------
2003 $ 8,903,000 $ 2,621,000 $ 1,653,145 $ 13,177,145 5.858%-5.878%
2004 7,186,000 2,272,000 1,041,833 10,499,833 5.871%-5.910%
2005 5,766,000 2,109,000 539,350 8,414,350 5.927%-6.257%
2006 1,946,000 864,000 206,986 3,016,986 6.414%-7.009%
2007 903,000 - 103,979 1,006,979 7.007%-7.211%
2008 635,000 - 46,443 681,443 7.245%-7.480%
2009 341,000 - 12,229 353,229 7.58%
--------------- ---------------- ----------------- ----------------
$ 25,680,000 $ 7,866,000 $ 3,603,965 $ 37,149,965
=============== ================ ================= ================
23
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
5. Other long-term debt (continued):
** Represents the range of monthly weighted average fixed interest rates paid
for amounts maturing in the particular year. The receive-variable rate portion
of the swap represents commercial paper rates (2.0081% at December 31, 2002).
In 2002 and 2001, the net effect of the interest rate swaps was to increase
interest expense by $955,401 and $622,647, respectively.
6. Related party transactions:
The terms of the Limited Partnership Agreement provide that the General
Partner and/or affiliates are entitled to receive certain fees for equipment
acquisition, management and resale and for management of the Partnership.
The Limited Partnership Agreement allows for the reimbursement of costs
incurred by the General Partner in providing administrative services to the
Partnership. Administrative services provided include Partnership accounting,
investor relations, legal counsel and lease and equipment documentation. The
General Partner is not reimbursed for services whereby it is entitled to receive
a separate fee as compensation for such services, such as acquisition and
disposition of equipment. Reimbursable costs incurred by the General Partner are
allocated to the Partnership based upon actual time incurred by employees
working on Partnership business and an allocation of rent and other costs based
on utilization studies.
Each of ATEL Leasing Corporation ("ALC"), ATEL Equipment Corporation
("AEC"), ATEL Investor Services ("AIS") and ATEL Financial Services LLC is a
wholly-owned subsidiary of ATEL Capital Group and performs services for the
Partnership. Acquisition services are performed for the Partnership by ALC,
equipment management, lease administration and asset disposition services are
performed by AEC, investor relations and communications services are performed
by AIS and general administrative services for the Partnership are performed by
ATEL Financial Services, LLC.
Substantially all employees of the General Partner record time incurred in
performing administrative services on behalf of all of the Partnerships serviced
by the General Partner. The General Partner believes that the costs reimbursed
are the lower of (i) actual costs incurred on behalf of the Partnership or (ii)
the amount the Partnership would be required to pay independent parties for
comparable administrative services in the same geographic location and are
reimbursable in accordance with the Limited Partnership Agreement.
The General Partner and/or affiliates earned fees, commissions and
reimbursements, pursuant to the Limited Partnership Agreement as follows during
2002, 2001 and 2000:
2002 2001 2000
---- ---- ----
Incentive management fees (computed as 4.0% of distributions
of cash from operations, as defined in the Limited
Partnership Agreement) and equipment management fees
(computed as 3.5% of gross revenues from operating leases,
as defined in the Limited Partnership Agreement plus 2% of
gross revenues from full payout leases, as defined in the
Limited Partnership Agreement). $ 947,568 $ 1,175,912 $ 1,770,779
Cost reimbursements to General Partner 859,415 851,382 917,952
---------------- ----------------- -----------------
$ 1,806,983 $ 2,027,294 $ 2,688,731
================ ================= =================
24
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
7. Partners' capital:
As of December 31, 2002, 14,996,050 Units were issued and outstanding. The
Partnership is authorized to issue up to 15,000,050 Units, including the 50
Units issued to the Initial Limited Partners, as defined.
The Partnership's Net Profits, Net Losses, and Tax Credits are to be allocated
92.5% to the Limited Partners and 7.5% to the General Partner. In
accordance
with the terms of the of Limited Partnership Agreement, an additional
allocations of income were made to the General Partner in 2002 and 2001. The
amount allocated was determined to bring the General Partner's ending capital
account balance to zero.
As defined in the Limited Partnership Agreement, available Cash from
Operations, is to be distributed as follows:
First, Distributions of Cash from Operations are to be 88.5% to the Limited
Partners, 7.5% to the General Partner and 4% to the General Partner 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
Limited Partnership Agreement.
Second, 85% to the Limited Partners, 7.5% to the General Partner and 7.5%
to the General Partner or its affiliate designated as the recipient of the
Incentive Management Fee.
As defined in the Limited Partnership Agreement, available Cash from Sales
or Refinancing, are to be distributed as follows:
First, Distributions of Sales or Refinancings are to be 92.5% to the
Limited Partners and 7.5% to the General Partner, 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 the General Partner and 7.5%
to the General Partner or its affiliate designated as the recipient of the
Incentive Management Fee.
8. Concentration of credit risk and major customers:
The Partnership leases equipment to lessees in diversified industries.
Leases are subject to the General Partner's credit committee review. The leases
provide for the return of the equipment upon default.
As of December 31, 2002, 2001 and 2000, there were concentrations (defined
as greater than 10%) of equipment leased to lessees in certain industries (as a
percentage of total equipment cost) as follows:
2002 2001 2000
---- ---- ----
Manufacturing 24% * *
Transportation, rail 15% 13% 19%
Transportation, other 14% 14% 12%
Municipalities 13% 17% 16%
* Less than 10%
During 2002, one customer comprised 11% of the Partnership's revenues from
leases. During 2001 and 2000, no customers comprised in excess of 10% of the
Partnership's revenues from leases.
25
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
9. Line of credit:
The Partnership participates with the General Partner and certain of its
affiliates in a $55,645,837 revolving line of credit (comprised of an
acquisition facility and a warehouse facility) with a financial institution that
includes certain financial covenants. The line of credit expires on June 28,
2004. As of December 31, 2002, borrowings under the facility were as follows:
Amount borrowed by the Partnership under the acquisition facility $ 13,300,000
Amounts borrowed by affiliated partnerships and limited liability companies under the acquisition
facility 15,700,000
-----------------
Total borrowings under the acquisition facility 29,000,000
Amounts borrowed by the General Partner and its sister corporation under the warehouse facility -
-----------------
Total outstanding balance $ 29,000,000
=================
Total available under the line of credit $ 55,645,837
Total outstanding balance (29,000,000)
-----------------
Remaining availability $ 26,645,837
=================
Draws on the acquisition facility by any individual borrower are secured
only by that borrower's assets, including equipment and related leases.
Borrowings on the warehouse facility are recourse jointly to certain of the
affiliated partnerships and limited liability companies, the Partnership and the
General Partner.
The Partnership borrowed $19,500,000, $12,900,000 and $450,000 under the
line of credit during 2002, 2001 and 2000, respectively. Repayments on the line
of credit were $10,300,000, $8,800,000 and $11,600,000 during 2002, 2001 and
2000, respectively. Interest on the line of credit is based on either the thirty
day LIBOR rate or the bank's prime rate. The effective interest rate on
borrowings at December 31, 2002 ranged from 3.29% to 3.31%.
The credit agreement includes certain financial covenants applicable to
each borrower. The Partnership was in compliance with its covenants as of
December 31, 2002.
26
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
10. Fair value of financial instruments:
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practical to estimate that
value.
Cash and cash equivalents:
The carrying amount of cash and cash equivalents approximates fair value
because of the short-term maturity of these instruments.
Non-recourse debt:
The fair value of the Partnership's non-recourse debt is estimated using
discounted cash flow analyses, based on the Partnership's current incremental
borrowing rates for similar types of borrowing arrangements. The estimated fair
value of the Partnership's non-recourse debt at December 31, 2002 is $4,373,028.
Other long-term debt:
The carrying value of the Partnership's other long-term debt approximates
its fair value at December 31, 2002 as borrowings are at a variable interest
rate that adjusts to current market interest rates.
Line of credit:
The carrying amounts of the Partnership's variable rate line of credit
approximates fair value.
Interest rate swaps:
The fair value of interest rate swaps is estimated by management based on
independent valuations or discounting the fixed cash flows paid under each swap
using the rate at which the Partnership could enter into new swaps of similar
maturities. Swaps are recorded at fair value at December 31, 2002 and 2001.
11. Extraordinary gain on extinguishment:
In January 2000, one of the Partnership's lessees filed for reorganization
under Chapter 11 of the United States Bankruptcy Code. The Partnership
determined that the assets under operating leases with a net book value of
$8,048,095 at December 31, 1999 leased to this particular lessee were impaired
as of December 31, 1999. The Partnership estimated that the proceeds from the
future sales of those assets, which were financed with non-recourse debt, would
not be sufficient to satisfy the non-recourse lender. The debt balance was
$2,056,574 at December 31, 1999. As a result, the Partnership fully reserved for
those assets as of December 31, 1999. The portion of the assets not financed
with non-recourse debt were written down to their expected net realizable value
as of December 31, 1999.
Upon foreclosure by the lender and upon sale of the financed assets in
2000, the Partnership recognized an extraordinary gain on the extinguishment of
the debt $2,056,574 during the year ended December 31, 2000.
27
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
12. Other comprehensive income (loss):
For the years ended December 31, 2002, 2001 and in 2000, other
comprehensive income (loss) consisted of the following:
2002 2001 2000
---- ---- ----
Net income (loss) $ (1,772,503) $ 2,939,818 $ 9,158,705
Other comprehensive income:
Cumulative effect of change in accounting principle at January 1, 2001 - 281,661 -
Change in value of interest rate swap contracts (298,354) (1,607,667) -
---------------- ----------------- -----------------
Comprehensive net income (loss) $ (2,070,857) $ 1,613,812 $ 9,158,705
================ ================= =================
13. Selected quarterly data (unaudited):
March 31, June 30, September 30, December 31,
Quarter ended 2001 2001 2001 2001
---- ---- ---- ----
Total revenues $ 8,515,731 $ 8,052,672 $ 7,865,481 $ 6,212,641
Net Income (loss) $ 810,179 $ 775,805 $ 1,313,434 $ 40,400
Net income (loss) per limited partnership unit $ 0.04 $ 0.03 $ 0.07 $ (0.13)
March 31, June 30, September 30, December 31,
Quarter ended 2002 2002 2002 2002
---- ---- ---- ----
Total revenues $ 7,075,556 $ 5,277,040 $ 6,713,097 $ 6,877,080
Net Income (loss) $ 219,517 $ (1,047,882) $ (91,256) $ (852,882)
Net income (loss) per limited partnership unit $ (0.01) $ (0.09) $ (0.03) $ (0.07)
28
Item 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
The registrant is a Limited Partnership and, therefore, has no officers or
directors.
All of the outstanding capital stock of ATEL Financial Services LLC (the
General Partner) is held by ATEL Capital Group ("ACG"), a holding company formed
to control ATEL and affiliated companies. The outstanding voting capital stock
of ATEL Capital Group is owned 5% by A. J. Batt and 95% by Dean Cash.
Each of ATEL Leasing Corporation ("ALC"), ATEL Equipment Corporation
("AEC"), ATEL Investor Services ("AIS") and ATEL Financial Services LLC ("AFS")
is a wholly-owned subsidiary of ATEL Capital Group and performs services for the
Partnership. Acquisition services are performed for the Partnership by ALC,
equipment management, lease administration and asset disposition services are
performed by AEC, investor relations and communications services are performed
by AIS and general administrative services for the Partnership are performed by
AFS. ATEL Securities Corporation ("ASC") is a wholly-owned subsidiary of AFS.
The officers and directors of ATEL Capital Group and its affiliates are as
follows:
Dean L. Cash Chairman of the Board of Directors of ACG, AFS, ALC,
AEC, AIS and ASC; President and Chief Executive
Officer of ACG, AFS and AEC
Paritosh K. Choksi Director, Executive Vice President, Chief Operating
Officer and Chief Financial Officer of ACG, AFS,
ALC, AEC and AIS
Donald E. Carpenter Vice President and Controller of ACG, AFS, ALC, AEC
and AIS; Chief Financial Officer of ASC
Vasco H. Morais Senior Vice President, Secretary and General Counsel
for ACG, AFS, ALC, AIS and AEC
Dean L. Cash, age 52, joined ATEL as director of marketing in 1980 and has
been a vice president since 1981, executive vice president since 1983 and a
director since 1984. He has been President and CEO since April 2001. Prior to
joining ATEL, Mr. Cash was a senior marketing representative for Martin Marietta
Corporation, data systems division, from 1979 to 1980. From 1977 to 1979, he was
employed by General Electric Corporation, where he was an applications
specialist in the medical systems division and a marketing representative in the
information services division. Mr. Cash was a systems engineer with Electronic
Data Systems from 1975 to 1977, and was involved in maintaining and developing
software for commercial applications. Mr. Cash received a B.S. degree in
psychology and mathematics in 1972 and an M.B.A. degree with a concentration in
finance in 1975 from Florida State University. Mr. Cash is an arbitrator with
the American Arbitration Association.
Paritosh K. Choksi, age 49, joined ATEL in 1999 as a director, senior vice
president and its chief financial officer. He became its executive vice
president and COO in April 2001. Prior to joining ATEL, Mr. Choksi was chief
financial officer at Wink Communications, Inc. from 1997 to 1999. From 1977 to
1997, Mr. Choksi was with Phoenix American Incorporated, a financial services
and management company, where he held various positions during his tenure, and
was senior vice president, chief financial officer and director when he left the
company. Mr. Choksi was involved in all corporate matters at Phoenix and was
responsible for Phoenix's capital market needs. He also served on the credit
committee overseeing all corporate investments, including its venture lease
portfolio. Mr. Choksi was a part of the executive management team which caused
Phoenix's portfolio to increase from $50 million in assets to over $2 billion.
Mr. Choksi received a bachelor of technology degree in mechanical engineering
from the Indian Institute of Technology, Bombay; and an M.B.A. degree from the
University of California, Berkeley.
Donald E. Carpenter, age 54, joined ATEL in 1986 as controller. Prior to
joining ATEL, Mr. Carpenter was an audit supervisor with Laventhol & Horwath,
certified public accountants in San Francisco, California, from 1983 to 1986.
From 1979 to 1983, Mr. Carpenter was an audit senior with Deloitte, Haskins &
Sells, certified public accountants, in San Jose, California. From 1971 to 1975,
Mr. Carpenter was a Supply Corp officer in the U. S. Navy. Mr. Carpenter
received a B.S. degree in mathematics (magna cum laude) from California State
University, Fresno in 1971 and completed a second major in accounting in 1978.
Mr. Carpenter has been a California certified public accountant since 1981.
29
Vasco H. Morais, age 44, joined ATEL in 1989 as general counsel to provide
legal support in the drafting and reviewing of lease documentation, advising on
general corporate law matters, and assisting on securities law issues. From 1986
to 1989, Mr. Morais was employed by the BankAmeriLease Companies, Bank of
America's equipment leasing subsidiaries, providing in-house legal support on
the documentation of tax-oriented and non-tax oriented direct and leveraged
lease transactions, vendor leasing programs and general corporate matters. Prior
to the BankAmeriLease Companies, Mr. Morais was with the Consolidated Capital
Companies in the corporate and securities legal department involved in drafting
and reviewing contracts, advising on corporate law matters and securities law
issues. Mr. Morais received a B.A. degree in 1982 from the University of
California in Berkeley, a J.D. degree in 1986 from Golden Gate University Law
School and an M.B.A. (Finance) in 1997 from Golden Gate University. Mr. Morais
has been an active member of the State Bar of California since 1986.
Item 11. EXECUTIVE COMPENSATION
The registrant is a Limited Partnership and, therefore, has no officers or
directors.
Set forth hereinafter is a description of the nature of remuneration paid
and to be paid to the General Partner and its Affiliates. The amount of such
remuneration paid in 2002, 2001 and 2000 is set forth in Item 8 of this report
under the caption "Financial Statements and Supplementary Data - Notes to the
Financial Statements - Related party transactions," at Note 6 thereof, which
information is hereby incorporated by reference.
Selling Commissions
The Partnership will pay selling commissions in the amount of 9.5% of Gross
Proceeds, as defined, to ATEL Securities Corporation, an affiliate of the
General Partner. Of this amount, the majority is expected to be reallowed to
other broker/dealers.
Through December 31, 1998, $14,250,000 of such commissions (the maximum
allowable amount) had been paid to the General Partner or its affiliates. Of
that amount, $12,327,297 was reallowed to other broker/dealers. None have been
paid since 1998, nor will any additional amounts be paid in future periods.
Equipment Management Fees
As compensation for its service rendered generally in managing or
supervising the management of the Partnership's equipment and in supervising
other ongoing service and activities including, among others, arranging for
necessary maintenance and repair of equipment, collecting revenue, paying
operating expenses, determining the equipment is being used in accordance with
all operative contractual arrangements, property and sales tax monitoring and
preparation of financial data, the General Partner or its affiliates are
entitled to receive management fees which are payable for each fiscal quarter
and are to be in an amount equal to (i) 3.5% of the gross lease revenues from
"operating" leases and (ii) 2% of gross lease revenues from "full payout" leases
which contain net lease provisions.
See Note 6 to the financial statements included in Item 8 of this report
for amounts paid.
Incentive Management Fees
As compensation for its service rendered in establishing and maintaining
the composition of the Partnership's equipment portfolio and its acquisition and
debt strategies and supervising fund administration including supervision the
preparation of reports and maintenance of financial and operating data of the
Partnership, Securities and Exchange Commission and Internal Revenue service
filings, returns and reports, the General Partner is entitled to receive the
Incentive management fee which shall be payable for each fiscal quarter.
Available Cash from Operations, as defined in the Limited Partnership
Agreement, is to be distributed as follows:
First, Distributions of Cash from Operations are to be 88.5% to the Limited
Partners, 7.5% to the General Partner and 4% to the General Partner 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
Limited Partnership Agreement.
Second, 85% to the Limited Partners, 7.5% to the General Partner and 7.5%
to the General Partner or its affiliate designated as the recipient of the
Incentive Management Fee.
Available Cash from Sales or Refinancing, as defined in the Limited
Partnership Agreement, are to be distributed as follows:
First, Distributions of Sales or Refinancings are to be 92.5% to the
Limited Partners and 7.5% to the General Partner, 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.
30
Second, 85% to the Limited Partners, 7.5% to the General Partner and 7.5%
to the General Partner or its affiliate designated as the recipient of the
Incentive Management Fee.
See Note 6 to the financial statements included in Item 8 of this report
for amounts paid.
Equipment Resale Fees
As compensation for service rendered in connection with the sale of
equipment, the General Partner is entitled to receive an amount equal to the
lesser of (i) 3% of the sales price of the equipment, or (ii) one-half the
normal competitive equipment sales commission charged by unaffiliated parties
for such service. Such fee is payable only after the Limited Partners have
received a return of their adjusted invested capital (as defined in the Limited
Partnership Agreement) plus 10% of their adjusted invested return of their
adjusted invested capital (as defined in the Limited Partnership Agreement) plus
10% of their adjusted invested capital per annum calculated on a cumulative
basis, compounded daily, commencing the last day of the quarter in which the
Limited Partner was admitted to the Partnership. To date, none have been accrued
or paid.
Equipment Re-lease Fee
As compensation for providing re-leasing service, the General Partner is
entitled to receive fees equal to 2% of the gross rentals or the comparable
competitive rate for such service relating to comparable equipment, whichever is
less, derived from the re-lease provide that (i) the General Partner or their
affiliates have and will maintain adequate staff to render such service to the
Partnership, (ii) no such re-lease fee is payable in connection with the
re-lease of equipment to a previous lessee or its affiliates, (iii) the General
Partner or its affiliates have rendered substantial re-leasing service in
connection with such re-lease and (iv) the General Partner or its affiliates are
compensated for rendering equipment management service. To date, none have been
accrued or paid.
General Partner's Interest in Operating Proceeds
Net income, net loss and investment tax credits are allocated 92.5% to the
Limited Partners and 7.5% to the General Partner. In accordance with the terms
of the of Limited Partnership Agreement, an additional allocation of income was
made to the General Partner in 2002 and 2001. The amount allocated was
determined so as to bring the General Partner's ending capital account balance
to zero. See financial statements included in Item 8, Part I of this report for
amounts allocated to the General Partner in 2002, 2001 and 2000.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
At December 31, 2002, no investor is known to hold beneficially more than
5% of the issued and outstanding Units.
Security Ownership of Management
The shareholders of the General Partner are beneficial owners of Limited
Partnership Units as follows:
(1) (2) (3) (4)
Name and Address of Amount and Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
-------------- ---------------- -------------------- --------
Limited Partnership Units A. J. Batt Initial Limited Partner Units 0.00017%
600 California Street, 6th Floor 25 Units ($250)
San Francisco, CA 94108 (owned by wife)
Limited Partnership Units Dean Cash Initial Limited Partner Units 0.00017%
600 California Street, 6th Floor 25 Units ($250)
San Francisco, CA 94108 (owned by wife)
Changes in Control
The Limited Partners have the right, by vote of the Limited Partners owning
more than 50% of the outstanding Limited Partnership units, to remove a General
Partner.
The General Partner may at any time call a meeting of the Limited Partners
or a vote of the Limited Partners without a meeting, on matters on which they
are entitled to vote, and shall call such meeting or for vote without a meeting
following receipt of a written request therefore of Limited Partners holding 10%
or more of the total outstanding Limited Partnership units.
31
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The responses to Item 1 of this report under the caption "Equipment Leasing
Activities," Item 8 of this report under the caption "Financial Statements
and Supplemental Data - Notes to the Financial Statements - Related party
transactions" at Note 6 thereof, and Item 11 of this report under the caption
"Executive Compensation," are hereby incorporated by reference.
Item 14. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management (ATEL
Financial Services, LLC as General Partner of the registrant, including the
chief executive officer and chief financial officer), an evaluation of the
effectiveness of the design and operation of the Partnership's disclosure
controls and procedures [as defined in Rules 240.13a-14(c) and 15d-14(c) under
the Securities Exchange Act of 1934] was performed as of a date within ninety
days before the filing date of this annual report. Based upon this evaluation,
the chief executive officer and chief financial officer concluded that, as of
the evaluation date, our disclosure controls and procedures were effective for
the purposes of recording, processing, summarizing and timely reporting
information required to be disclosed by us in the reports that we file under the
Securities Exchange Act of 1934 and that such information is accumulated and
communicated to our management in order to allow timely decisions regarding
required disclosure.
Changes in internal controls
There have been no significant changes in our internal controls or in other
factors that could significantly affect our disclosure controls and procedures
subsequent to the evaluation date, nor were there any significant deficiencies
or material weaknesses in our internal controls.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) Financial Statements and Schedules
1. Financial Statements
Included in Part II of this report:
Report of Independent Auditors
Balance Sheets at December 31, 2002 and 2001
Statements of Operations for the years ended December 31, 2002, 2001
and 2000 Statements of Changes in Partners' Capital for the years
ended December 31, 2002, 2001 and 2000 Statement of Cash Flows for the
years ended December 31, 2002, 2001 and 2000 Notes to Financial
Statements
2. Financial Statement Schedules
All 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 inapplicable and, therefore,
have been omitted.
(b) Reports on Form 8-K for the fourth quarter of 2002
None
(c) Exhibits
(3) and (4) Agreement of Limited Partnership, included as Exhibit B to
Prospectus (Exhibit 28.1), is incorporated herein by reference to the
report on Form 10K for the period ended December 31, 1996 (File No.
333-08879).
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: 3/26/03
ATEL Capital Equipment Fund VII, L.P.
(Registrant)
By: ATEL Financial Services, LLC,
General Partner of Registrant
By: /s/ Dean Cash
---------------------------------------------------
Dean Cash,
President and Chief Executive Officer of
ATEL Financial Services, LLC (General
Partner)
By: /s/ Paritosh K. Choksi
---------------------------------------------------
Paritosh K. Choksi,
Executive Vice President of ATEL
Financial Services, LLC (General Partner)
33
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the persons in the capacities and on the dates
indicated.
SIGNATURE CAPACITIES DATE
/s/ Dean Cash President, Chairman and Chief Executive 3/26/03
- ------------------------- officer of ATEL Financial Services, LLC
Dean Cash
/s/ Paritosh K. Choksi Executive Vice President and director 3/26/03
- ------------------------- of ATEL Financial Services, LLC,
Paritosh K. Choksi principal financial officer of
registrant; principal financial officer
and director of ATEL Financial
Services, LLC
/s/ Donald E. Carpenter Principal accounting officer of 3/26/03
- ------------------------- registrant; principal accounting officer
Donald E. Carpenter of ATEL Financial Services, LLC
Supplemental Information to be Furnished With Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Securities
Pursuant to Section 12 of the Act:
No proxy materials have been or will be sent to security holders. An annual
report will be furnished to security holders subsequent to the filing of this
report on Form 10-K, and copies thereof will be furnished supplementally to the
Commission when forwarded to the security holders.
34
CERTIFICATIONS
I, Paritosh K. Choksi, certify that:
1. I have reviewed this annual report on Form 10-K of ATEL Cash Distribution
Fund VII, LP;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: 3/26/03
/s/ Paritosh K. Choksi
- -------------------------------------------------------------
Paritosh K. Choksi
Principal financial officer of registrant, Executive
Vice President of General Partner
35
CERTIFICATIONS
I, Dean L. Cash, certify that:
1. I have reviewed this annual report on Form 10-K of ATEL Cash Distribution
Fund VII, LP;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: 3/26/03
/s/ Dean Cash
- -------------------------------------------------------------
Dean L. Cash
President and Chief Executive
Officer of General Partner
36
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual report on Form 10K of ATEL Cash Distribution
Fund VII, LP, (the "Partnership") for the period ended December 31, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), and pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of
the Sarbanes-Oxley Act of 2002, I, Dean L. Cash, Chief Executive Officer of ATEL
Financial Services, LLC, general partner of the Partnership, hereby certify
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: 3/26/03
/s/ Dean Cash
- -------------------------------------------
Dean L. Cash
President and Chief Executive
Officer of General Partner
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual report on Form 10K of ATEL Cash Distribution
Fund VII, LP, (the "Partnership") for the period ended December 31, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), and pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of
the Sarbanes-Oxley Act of 2002, I, Paritosh K. Choksi, Chief Financial Officer
of ATEL Financial Services, LLC, general partner of the Partnership, hereby
certify 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: 3/26/03
/s/ Paritosh K. Choksi
- -------------------------------------------
Paritosh K. Choksi
Executive Vice President of General
Partner, Principal financial officer of registrant
37