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, 2003
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 94108-2733
(Address of principal executive offices)
Registrant's telephone number, including area code (415) 989-8800
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Limited Partnership
Units
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark 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
The number of Limited Partnership Units outstanding as of December 31, 2003 was
14,995,550.
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 (AFS). Prior to converting to a limited liability company structure, AFS was
formerly known as ATEL Financial Corporation.
The Partnership conducted a public offering of 15,000,000 Units of Limited
Partnership Interest (Units) at a price of $10 per Unit. On January 7, 1997, 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, 2003, 14,995,550 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 ("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 AFS 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, 2003, 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 AFS, 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 AFS, 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 described in (ii) above.
During 2003, no single lessee generated 10% of the Partnership's lease revenues.
As set forth below, during 2002, one lessee generated 11% the Partnership's
lease revenues. During 2001, no single lessee generated more than 10% of the
Partnership's lease revenues.
Lessee Type of Equipment 2003 2002 2001
- ------ ----------------- ---- ---- ----
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 AFS 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
AFS 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
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, 2003 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%
================ =================
* Individual amounts included in "Other" represent less than 2.5% of the total.
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.
Through December 31, 2003, the Partnership has disposed of certain leased assets
as set forth below:
Excess of
Original Rents Over
Asset Types Equipment Cost Sale Price Expenses *
- ----------- -------------- ---------- ----------
Transportation $29,387,573 $ 9,567,099 $ 24,341,560
Manufacturing 26,498,662 10,655,547 17,142,619
Materials handling 12,290,706 8,229,534 6,257,530
Office automation 11,675,941 1,461,397 11,937,397
Other 5,183,318 601,227 5,691,791
Furniture and fixtures 4,759,285 2,352,872 4,020,720
Aircraft 4,708,142 4,954,738 2,576,835
Mining 4,602,966 1,908,058 4,469,911
Food processing 2,182,333 1,329,201 1,980,738
---------------- ---------------- -----------------
$101,288,926 $ 41,059,673 $ 78,419,101
================ ================ =================
* Includes only those expenses directly related to the production of the related
rents.
For further information regarding the Partnership's equipment lease portfolio as
of December 31, 2003, 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
In the ordinary course of conducting business, there may be certain claims,
suits, and complaints filed against the Partnership. In the opinion of
management, the outcome of such matters, if any, will not have a material impact
on the Partnership's consolidated financial position or results of operations.
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.
Martin Marietta Magnesia Specialties Inc.:
The Partnership has filed a suit against Martin Marietta Magnesia Specialties
Inc. for failure to maintain equipment in accordance with the lease contract.
The Partnership has made a claim for recovery of $179,679 in damages. No amounts
related to this action have been recorded in the financial statements as of
December 31, 2003.
Cargill Inc. / GWI Leasing Corporation:
Cargill Inc. is a lessee of the Partnership. GWI Leasing Corporation manages the
equipment under the Cargill lease on behalf of the Partnership. The Partnership
is seeking unspecified damages from Cargill for failure to perform certain
responsibilities relating to the equipment under the lease agreement. The
Partnership is seeking damages from GWI Leasing Corporation for failure to
enforce the terms of the lease contract. No amounts related to this matter have
been recorded in the financial statements as of December 31, 2003.
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
AFS'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.
Holders
As of December 31, 2003, a total of 5,582 investors were holders of record of
Units in the Partnership.
ERISA Valuation
In order to permit ERISA fiduciaries who hold Units to satisfy their annual
reporting requirements, AFS estimated the value per Unit of the Partnership's
assets as of September 30, 2003. AFS 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, 2004. 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 AFS'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, AFS 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, 2003, the value of the Partnership's assets,
calculated on this basis, was approximately $5.38 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.
4
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.
AFS has sole discretion in determining the amount of distributions; provided,
however, that AFS 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 2003 operations was $0.0833 per Unit.
The distributions were paid in February 2003 through December 2003 and in
January 2004. For each quarterly distribution (paid in April, July and October
2003 and in January 2004) the rate was $0.25 per Unit. Distributions were from
2003 cash flows from operations.
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 following table presents summarized information regarding distributions to
Limited Partners:
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Net income (loss) per Unit, based on
weighted average Units outstanding $ (0.37) $ (0.20) $ 0.01 $ 0.53 $ (0.17)
Return of investment 1.37 1.20 0.99 0.48 1.17
---------------- ---------------- ---------------- ----------------- -----------------
Distributions per Unit, based on
weighted average Units outstanding 1.00 1.00 1.00 1.01 1.00
Differences due to timing of distributions - - - (0.01) -
---------------- ---------------- ---------------- ----------------- -----------------
Actual distribution rates, per Unit $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
================ ================ ================ ================= =================
Item 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of the Partnership at
December 31, 2003, 2002, 2001, 2000 and 1999 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.
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Gross revenues $22,484,703 $ 25,942,773 $ 30,646,525 $ 41,463,919 $ 39,634,771
Net income (loss) $ (4,311,400) $ (1,772,503) $ 2,939,818 $ 9,158,705 $ (2,159,370)
Weighted average Units outstanding 14,995,675 14,996,050 14,996,050 14,996,050 14,996,050
Net income (loss) allocated to
Limited Partners $ (5,551,311) $ (2,976,387) $ 140,295 $ 7,938,589 $ (2,622,996)
Net income (loss) per Unit, based on
weighted average Units outstanding $ (0.37) $ (0.20) $ 0.01 $ 0.53 $ (0.17)
Distributions per Unit, based on
weighted average Units outstanding $ 1.00 $ 1.00 $ 1.00 $ 1.01 $ 1.00
Total Assets $74,812,214 $ 116,223,748 $ 135,853,619 $ 157,600,746 $191,424,300
Non-recourse Debt $ 1,586,403 $ 4,577,308 $ 9,971,225 $ 15,452,741 $ 21,780,420
Other Long-term Debt $15,759,000 $ 33,546,000 $ 38,540,000 $ 44,877,000 $ 53,181,000
Total Partners' Capital $41,406,023 $ 61,218,234 $ 79,492,851 $ 94,163,608 $101,313,784
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.
5
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 AFS's success in re-leasing or selling the equipment as
it comes off lease.
The Partnership participates with AFS and certain of its affiliates in a
$58,627,656 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, 2003,
borrowings under the facility were as follows:
Amount borrowed by the Partnership under the acquisition
facility $ 13,500,000
Amounts borrowed by affiliated partnerships and limited
liability companies under the acquisition facility 9,500,000
-----------------
Total borrowings under the acquisition facility 23,000,000
Amounts borrowed by AFS and its sister corporation under
the warehouse facility -
-----------------
Total outstanding balance $ 23,000,000
=================
Total available under the line of credit $ 58,627,656
Total outstanding balance (23,000,000)
-----------------
Remaining availability $ 35,627,656
=================
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 AFS.
The credit agreement includes certain financial covenants applicable to each
borrower. The Partnership was in compliance with its covenants as of December
31, 2003.
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 AFS and providing for cash
distributions to the Limited Partners. At December 31, 2003, the Partnership had
no commitments to purchase lease assets.
As of December 31, 2003, cash balances consisted of working capital and amounts
reserved for distributions to be paid in January 2004, generated from operations
in 2003.
The Partnership currently has available adequate reserves to meet its immediate
cash requirements and those of the next twelve months, but in the event those
reserves were found to be inadequate, the Partnership would likely be in a
position to borrow against its current portfolio to meet such requirements. AFS
envisions no such requirements for operating purposes.
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 AFS 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. AFS
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 Partnership's ability to borrow under the program expired 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 was 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.
6
AFS 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
2003 vs. 2002:
Cash flows from operations decreased from $19,521,121 in 2002 to $16,452,288 in
2003, a decrease of $3,068,833. Rents from operating leases is the primary
source of operating cash flows. Sales of operating lease assets in 2002 and 2003
led to the decrease in operating lease revenues compared to 2002.
In 2003 and 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 increased from $2,229,481 in
2002 to $15,724,456 in 2003, an increase of $13,494,975. The assets that were
sold in 2002 had an original costs of approximately $14,826,000. The assets sold
in 2003 had an original cost of approximately $33,950,000. A significant portion
of the assets sold in 2003 were still on lease and had higher average values
than those sold in 2002. As a result, sales proceeds were higher in 2003 when
compared to 2002. 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 $836,445 (from $3,032,098 in 2002 to $2,195,653 in 2003) as a
result of sales of lease assets in 2002 and 2003.
In 2003, financing sources of cash consisted of proceeds of a new non-recourse
note payable of $1,489,905 and borrowings on the line of credit. Borrowings on
the line of credit were used to manage short term cash requirements. In 2002,
financing sources of cash consisted of proceeds of other long-term debt and
borrowings on the line of credit. In 2002, the proceeds of other long-term debt
were used to make payments on the line of credit. In 2002, proceeds of other
long-term debt were used as long-term financing on the acquisition of assets. In
2002, borrowings on the line of credit were used to manage short term cash
requirements.
Cash was used to repay $17,787,000 of other long-term debt in 2003. Of the
amount paid, $11,524,000 was due to payments that had been scheduled as of
December 31, 2002 and $6,263,000 represented early repayments made in 2003.
Repayments of non-recourse debt were the result of scheduled payments.
2002 vs. 2001:
Cash flows from operations decreased from $22,972,558 in 2001 to $19,521,121 in
2002, a decrease of $3,451,437. 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 uniqueness 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.
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.
7
Results of Operations
Substantially all employees of AFS track time incurred in performing
administrative services on behalf of the Partnership. AFS 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.
As of December 31, 2003, 2002 and 2001, 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:
2003 2002 2001
Transportation, rail 22% 15% 13%
Manufacturing 21% 24% *
Transportation, other 21% 14% 14%
Municipalities 14% 13% 17%
* Less than 10%
2003 vs. 2002:
Operations resulted in a net loss of $4,311,400 in 2003 compared to $1,772,503
in 2002. The primary reason for the increased loss is due to additional
impairment losses of $5,290,639 in 2003, an increase of $3,179,046 compared to
2002.
Revenues from operating leases decreased from $25,631,019 in 2002 to $20,083,732
in 2003, a decrease of $5,547,287. Decreases resulted from asset sales in 2002
and in 2003. In 2003, the Partnership recorded gains on sales of assets of
$1,449,492 compared to losses of $1,270,985 in 2002, a difference of $2,720,477.
Such gains and losses are not expected to be consistent from one period to
another.
Depreciation expense decreased from $18,424,332 in 2002 to $15,220,612 in 2003
(a decrease of $3,203,720) as a result of sales of depreciable assets in 2002
and 2003.
Interest expense declined as a result of scheduled and early debt payments.
Total debt, including the line of credit, decreased from $51,423,308 at December
31, 2002 to $30,845,403 at December 31, 2003.
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 certain mining equipment and fleets of jumbo covered hopper
cars, petroleum rail tank cars, off shore supply vessels, 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
$5,290,639 for the year ended December 31, 2003. In 2002, impairment losses were
$2,111,593. See additional discussion of the impairment losses recorded in Note
14 in the financial statements included in Part I, Item 8 of this report.
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.
As a result of management's periodic reviews the carrying values of its assets
on leases and assets held for lease or sale, 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. There were no impairment losses in 2001.
8
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, by SFAS No. 138, issued in June 2000 and by
SFAS No. 149, issued in June 2003.
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 Pronouncements
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB 51." The
primary objectives of this interpretation are to provide guidance on the
identification of entities for which control is achieved through means other
than through voting rights ("variable interest entities") and how to determine
when and which business enterprise (the "primary beneficiary") should
consolidate the variable interest entity. This new model for consolidation
applies to an entity in which either (i) the equity investors (if any) do not
have a controlling financial interest; or (ii) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. In addition, FIN 46 requires
that the primary beneficiary, as well as all other enterprises with a
significant variable interest in a variable interest entity, make additional
disclosures. Certain disclosure requirements of FIN 46 were effective for
financial statements issued after January 31, 2003.
In December 2003, the FASB issued FIN No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain
FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN
46-R are as follows:
(i) Special purpose entities ("SPEs") created prior to February 1, 2003. The
company must apply either the provisions of FIN 46 or early adopt the provisions
of FIN 46-R at the end of the first interim or annual reporting period ending
after December 15, 2003.
(ii) Non-SPEs created prior to February 1, 2003. The company is required to
adopt FIN 46-R at the end of the first interim or annual reporting period ending
after March 15, 2004.
(iii) All entities, regardless of whether a SPE, that were created subsequent to
January 31, 2003. The provisions of FIN 46 were applicable for variable
interests in entities obtained after January 31, 2003.
The Partnership is required to adopt FIN 46-R at the end of the first interim or
annual reporting period ending after March 15, 2004. The adoption of the
provisions applicable to SPEs and all other variable interests obtained after
January 31, 2003 did not have a material impact on the Partnership's financial
statements. The Partnership is currently evaluating the impact of adopting FIN
46-R applicable to Non-SPEs created prior to February 1, 2003 but does not
expect a material impact.
In April 2002, the FASB issued FASB Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (Statement No. 145). Among other things, Statement No. 145 rescinds
Statement No. 4, which required that all gains and losses from extinguishment of
debt be reported as an extraordinary item. The adoption of Statement No. 145,
effective January 1, 2003, did not have any effect on the Partnership's
consolidated financial position, consolidated results of operations, or
liquidity.
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.
9
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.
Allowances for losses on direct financing leases are typically established based
on historical charge offs and collections experience and are usually determined
by specifically identified lessees and billed and unbilled receivables.
Direct financing leases are placed in a non-accrual status based on specifically
identified lessees. Such leases are only returned to an accrual status based on
a case by case review of AFS. Direct financing leases are charged off on
specific identification by AFS.
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 Partnership'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, 2003, there was an outstanding balance of $13,500,000 on the
floating rate line of credit and the effective interest rate of the borrowings
ranged from 3.03% to 4.00%.
Also, as described in Item 7 in 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.
10
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, 2003, borrowings on the
facility were $15,759,000 and the associated variable interest rate was 1.5154%
and the average fixed interest rate achieved with the swap agreements was 6.086%
at December 31, 2003.
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, 2003, a hypothetical 1.00% increase or decrease in market interest
rates would increase or decrease the Partnership's 2004 variable interest
expense by approximately $127,500.
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 12 through 32.
11
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, 2003 and 2002, 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, 2003. 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, 2003 and 2002, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2003, in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
San Francisco, California
February 20, 2004
12
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
ASSETS
2003 2002
---- ----
Cash and cash equivalents $ 835,628 $ 2,194,169
Accounts receivable, net of allowance for
doubtful accounts of $524,880 in 2003
and $403,067 in 2002 2,149,089 4,848,736
Due from General Partner - 253,543
Other assets - 10,019
Investments in equipment and leases 71,827,497 108,917,281
----------------- -----------------
Total assets $ 74,812,214 $116,223,748
================= =================
LIABILITIES AND PARTNERS' CAPITAL
Non-recourse debt $ 1,586,403 $ 4,577,308
Other long-term debt 15,759,000 33,546,000
Line of credit 13,500,000 13,300,000
Accounts payable and accruals:
General Partner 481,818 -
Other 650,573 752,459
Accrued interest payable 36,929 192,403
Interest rate swap contracts 886,207 1,624,360
Unearned operating lease income 505,261 1,012,984
----------------- -----------------
33,406,191 55,005,514
Partners' capital:
Accumulated other comprehensive income (886,207) (1,624,360)
Partners' capital 42,292,230 62,842,594
----------------- -----------------
Total Partners' capital 41,406,023 61,218,234
----------------- -----------------
Total liabilities and Partners' capital $ 74,812,214 $116,223,748
================= =================
See accompanying notes.
13
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Revenues: 2003 2002 2001
---- ---- ----
Leasing activities:
Operating leases $ 20,083,732 $ 25,631,019 $ 30,657,648
Direct financing leases 554,655 1,378,498 1,068,368
Gain (loss) on sale of assets 1,449,492 (1,270,985) (1,145,708)
Interest income 4,563 14,000 55,569
Other 392,261 190,241 10,648
---------------- ----------------- -----------------
22,484,703 25,942,773 30,646,525
Expenses:
Depreciation of operating lease assets 15,220,612 18,424,332 19,829,145
Impairment losses 5,290,639 2,111,593 -
Interest 1,916,785 3,206,557 4,029,695
Equipment and incentive management fees to General Partner 889,571 947,568 1,175,912
Cost reimbursements to General Partner 849,984 859,415 851,382
Railcar maintenance 773,875 712,235 727,444
Provision for doubtful accounts 343,000 285,000 118,067
Equipment storage 215,749 - -
Professional fees 176,812 199,993 163,006
Insurance 141,513 - 41,019
Taxes on income and franchise fees 128,178 23,124 6,299
Amortization of initial direct costs 107,916 184,171 194,104
Other 741,469 761,288 570,634
---------------- ----------------- -----------------
26,796,103 27,715,276 27,706,707
---------------- ----------------- -----------------
Net (loss) income $ (4,311,400) $ (1,772,503) $ 2,939,818
================ ================= =================
Net (loss) income:
General Partner $ 1,239,911 $ 1,203,884 $ 2,799,523
Limited Partners (5,551,311) (2,976,387) 140,295
---------------- ----------------- -----------------
$ (4,311,400) $ (1,772,503) $ 2,939,818
================ ================= =================
Net (loss) income per Limited Partnership unit $ (0.37) $ (0.20) $ 0.01
================ ================= =================
Weighted average number of units outstanding 14,995,675 14,996,050 14,996,050
See accompanying notes.
14
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Accumulated
Other
Limited Partners Comprehensive
---------------- General Income
Units Amount Partner (Loss) Total
Balance December 31, 2000 14,996,050 $ 95,678,209 $ (1,514,601) $ - $ 94,163,608
Cumulative effect of change in
accounting principle at
January 1, 2001 - - 281,661 281,661
Unrealized change in value of
interest rate swap contracts - - (1,607,667) (1,607,667)
Distributions to Limited Partners
($1.00 per Unit) (14,999,647) - - (14,999,647)
Distributions to General Partner - (1,284,922) - (1,284,922)
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 change 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
Distributions to Limited Partners
($1.00 per Unit) (14,997,209) - - (14,997,209)
Distributions to General Partner - (1,239,911) - (1,239,911)
Limited partnership units
repurchased (500) (1,844) - - (1,844)
Unrealized change in value of
interest rate swap contracts - - 738,153 738,153
Net income (loss) (5,551,311) 1,239,911 - (4,311,400)
---------------- ---------------- ---------------- ----------------- -----------------
Balance December 31, 2003 14,995,550 $ 42,292,230 $ - $ (886,207) $ 41,406,023
================ ================ ================ ================= =================
See accompanying notes.
15
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
Operating activities:
Net income (loss) $ (4,311,400) $ (1,772,503) $ 2,939,818
Adjustment to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation of operating lease assets 15,220,612 18,424,332 19,829,145
Amortization of initial direct costs 107,916 184,171 194,104
Impairment losses 5,290,639 2,111,593 -
Provision for doubtful accounts 343,000 285,000 118,067
(Gain) loss on sales of assets (1,449,492) 1,270,985 1,145,708
Changes in operating assets and liabilities:
Accounts receivable 1,161,897 (568,946) (850,046)
Due from General Partner 253,543 (253,543) -
Other assets 10,019 97,996 (18,004)
Accounts payable, General Partner 481,818 (580,916) (24,768)
Accounts payable, other (101,886) 241,861 (193,163)
Accrued interest payable (46,655) 44,672 119,226
Unearned operating lease income (507,723) 36,419 (287,529)
---------------- ----------------- -----------------
Net cash provided by operating activities 16,452,288 19,521,121 22,972,558
---------------- ----------------- -----------------
Investing activities:
Proceeds from sales of assets 15,724,456 2,229,481 3,830,077
Reduction of net investment in direct financing leases 2,195,653 3,032,098 2,261,062
Purchases of equipment on direct financing leases - (3,052,582) (4,344,293)
Initial direct lease costs - (107,962) (48,560)
Purchases of equipment on operating leases - (3,959,522) (1,950,111)
---------------- ----------------- -----------------
Net cash provided by (used in) investing activities 17,920,109 (1,858,487) (251,825)
---------------- ----------------- -----------------
Financing activities:
Borrowings under line of credit 21,500,000 19,500,000 12,900,000
Repayments of borrowings under line of credit (21,300,000) (10,300,000) (8,800,000)
Repayments of other long-term debt (17,787,000) (15,094,000) (14,337,000)
Distributions to Limited Partners (14,997,209) (14,999,876) (14,999,647)
Repayments of non-recourse debt (3,394,879) (4,406,894) (4,584,392)
Distributions to General Partner (1,239,911) (1,203,884) (1,284,922)
Proceeds of non-recourse debt 1,489,905 - -
Repurchase of limited partnership units (1,844) - -
Proceeds of other long-term debt - 10,100,000 8,000,000
---------------- ----------------- -----------------
Net cash used in financing activities (35,730,938) (16,404,654) (23,105,961)
---------------- ----------------- -----------------
Net (decrease) increase in cash and cash equivalents (1,358,541) 1,257,980 (385,228)
Cash and cash equivalents at beginning of year 2,194,169 936,189 1,321,417
---------------- ----------------- -----------------
Cash and cash equivalents at end of year $ 835,628 $ 2,194,169 $ 936,189
================ ================= =================
16
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF CASH FLOWS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 1,963,440 $ 3,161,885 $ 3,910,469
================ ================= =================
Schedule of non-cash transactions:
Change in fair value of interest rate swaps contracts $ 738,153 $ (298,354) $ (1,607,667)
================ ================= =================
Offset of accounts receivable and debt service per lease and debt agreement:
Accrued interest payable $ (108,819) $ (207,727) $ (297,626)
Non-recourse debt (1,085,931) (987,023) (897,124)
---------------- ----------------- -----------------
$ (1,194,750) $ (1,194,750) $ (1,194,750)
================ ================= =================
Accounts receivable $ 1,194,750 $ 1,194,750 $ 1,194,750
================ ================= =================
See accompanying notes.
17
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
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. The Partnership may continue until December 31, 2017.
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 ("AFS").
Prior to converting to a limited liability company structure, AFS was formerly
known as ATEL Financial Corporation.
The Partnership's business consists of leasing various types of equipment. As of
December 31, 2003, the original terms of the leases ranged from six months to
ten years.
Pursuant to the Limited Partnership Agreement, AFS receives compensation and
reimbursements for services rendered on behalf of the Partnership (See Note 6).
AFS is required to maintain in the Partnership reasonable cash reserves for
working capital, the repurchase of Units and contingencies.
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.
2. Summary of significant accounting policies:
Cash and cash equivalents:
Cash and cash equivalents include cash in banks and cash equivalent investments
with original maturities of ninety days or less.
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.
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.
18
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
2. Summary of significant accounting policies (continued):
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.
Allowances for losses on direct financing leases are typically established based
on historical charge offs and collections experience and are usually determined
by specifically identified lessees and billed and unbilled receivables.
Direct financing leases are placed in a non-accrual status based on specifically
identified lessees. Such leases are only returned to an accrual status based on
a case by case review of AFS. Direct financing leases are charged off on
specific identification by AFS.
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.
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 Partnership's net assets and liabilities varies from the
amounts presented in these financial statements at December 31 (unaudited):
2003 2002
---- ----
Financial statement basis of net assets $ 41,406,023 $ 61,218,234
Tax basis of net assets (34,616,905) (22,854,898)
---------------- -----------------
Difference $ 76,022,928 $ 84,073,132
================ =================
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 (loss) income reported in these financial
statements to the income (loss) reported on the Partnership's federal tax return
(unaudited) for each of the years ended December 31:
2003 2002 2001
---- ---- ----
Net income (loss) per financial statements $ (4,311,400) $ (1,772,503) $ 2,939,818
Adjustment to depreciation expense 3,927,717 (9,817,508) (18,455,212)
Adjustments to lease revenues 113,208 1,442,714 2,145,833
Provision for doubtful accounts 343,000 285,000 118,067
Provision for losses 5,290,639 2,111,593 -
---------------- ----------------- -----------------
Net income (loss) per federal tax return $ 5,363,164 $ (7,750,704) $(13,251,494)
================ ================= =================
19
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
2. Summary of significant accounting policies (continued):
Per unit data:
Net income and distributions per unit are based upon the weighted average number
of units outstanding during the period.
Asset valuation:
Recorded values of the Partnership'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.
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.
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, 2003, 2002 and 2001.
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, by SFAS No.
138, issued in June 2000 and by SFAS No. 149, issued in June 2003.
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.
20
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
2. Summary of significant accounting policies (continued):
Derivative financial instruments (continued):
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.
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.
Basis of presentation:
The accompanying financial statements 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.
Recent accounting pronouncements:
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB 51." The
primary objectives of this interpretation are to provide guidance on the
identification of entities for which control is achieved through means other
than through voting rights ("variable interest entities") and how to determine
when and which business enterprise (the "primary beneficiary") should
consolidate the variable interest entity. This new model for consolidation
applies to an entity in which either (i) the equity investors (if any) do not
have a controlling financial interest; or (ii) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. In addition, FIN 46 requires
that the primary beneficiary, as well as all other enterprises with a
significant variable interest in a variable interest entity, make additional
disclosures. Certain disclosure requirements of FIN 46 were effective for
financial statements issued after January 31, 2003.
21
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
2. Summary of significant accounting policies (continued):
Recent accounting pronouncements (continued):
In December 2003, the FASB issued FIN No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain
FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN
46-R are as follows:
(i) Special purpose entities ("SPEs") created prior to February 1, 2003. The
company must apply either the provisions of FIN 46 or early adopt the provisions
of FIN 46-R at the end of the first interim or annual reporting period ending
after December 15, 2003.
(ii) Non-SPEs created prior to February 1, 2003. The company is required to
adopt FIN 46-R at the end of the first interim or annual reporting period ending
after March 15, 2004.
(iii) All entities, regardless of whether a SPE, that were created subsequent to
January 31, 2003. The provisions of FIN 46 were applicable for variable
interests in entities obtained after January 31, 2003.
The Partnership is required to adopt FIN 46-R at the end of the first interim or
annual reporting period ending after March 15, 2004. The adoption of the
provisions applicable to SPEs and all other variable interests obtained after
January 31, 2003 did not have a material impact on the Partnership's financial
statements. The Partnership is currently evaluating the impact of adopting FIN
46-R applicable to Non-SPEs created prior to February 1, 2003 but does not
expect a material impact.
In April 2002, the FASB issued FASB Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (Statement No. 145). Among other things, Statement No. 145 rescinds
Statement No. 4, which required that all gains and losses from extinguishment of
debt be reported as an extraordinary item. The adoption of Statement No. 145,
effective January 1, 2003, did not have any effect on the Partnership's
consolidated financial position, consolidated results of operations, or
liquidity.
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
3. Investments in equipment and leases:
The Partnership's investments in equipment and leases consist of the following:
Depreciation /
Amortization
Expense or
Amortization of Reclassi-
December 31, Impairment Direct Financing fications or December 31,
2002 Losses Leases Dispositions 2003
---- ------ ------ ------------ ----
Net investment in operating leases $82,215,309 $ (2,960,323) $ (15,220,612) $(12,380,635) $ 51,653,739
Net investment in direct financing
leases 16,227,117 - (2,195,653) (5,852,903) 8,178,561
Assets held for sale or lease, net of
accumulated depreciation of
$18,795,631 in 2003 and $9,679,501 in
2002 10,263,086 (2,330,316) - 3,958,574 11,891,344
Initial direct costs, net of
accumulated amortization of
$956,767 in 2003 and $905,356 in 2002 211,769 - (107,916) - 103,853
---------------- ---------------- ---------------- ----------------- -----------------
$108,917,281 $ (5,290,639) $ (17,524,181) $(14,274,964) $ 71,827,497
================ ================ ================ ================= =================
Impairments of investments in leases and assets held for sale or lease:
Management periodically reviews the carrying values of its assets on leases and
assets held for lease or sale. As a result of the reviews, 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 values of the assets were
determined based on the sum of the discounted estimated future cash flows of the
assets. Charges to operations were recorded for the declines in value of the
assets in the amounts of $5,290,639 and $2,111,593 for the years ended December
31, 2003 and 2002, respectively.
Impairment losses are recorded as an addition to accumulated depreciation of the
impaired assets. Depreciation expense and impairment losses on property subject
to operating leases and property held for lease or sale consist of the following
for each of the years ended December 31:
2003 2002 2001
---- ---- ----
Depreciation expense $ 15,220,612 $ 18,424,332 $ 19,829,145
Impairment losses 5,290,639 2,111,593 -
---------------- ---------------- -----------------
$ 20,511,251 $ 20,535,925 $ 19,829,145
================ ================ =================
22
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
3. Investment in leases (continued):
Impairments of investments in leases and assets held for sale or lease
(continued):
Due to continued declines in the markets for certain types of assets, during
2003 and 2002 management determined that the value of certain assets were
impaired. There were no impairment losses in 2001. The Partnership recorded
impairment losses as follows for each of the years ended December 31:
2003 2002
---- ----
Locomotives $2,475,000 $ 300,000
Off shore supply vessels 1,022,000 -
Mining equipment 731,619 -
Covered grain hopper cars 457,286 1,135,339
Petroleum rail tank cars 325,462 -
Barges 279,272 676,254
---------------- -----------------
$ 5,290,639 $ 2,111,593
================ =================
All of the property subject to leases was acquired in the years 1997 through
2002.
Operating leases:
Property subject to operating leases consists of the following:
Reclassi-
December 31, Impairment Depreciation fications or December 31,
2002 Losses Expense Dispositions 2003
---- ------ ------- ------------ ----
Transportation $74,889,008 $ - $ - $ (2,724,727) $ 72,164,281
Construction 22,414,263 - - (2,245,270) 20,168,993
Marine vessels / barges 27,030,136 - - (12,052,094) 14,978,042
Mining equipment 9,012,965 - - (602,620) 8,410,345
Manufacturing 9,367,388 - - (4,813,948) 4,553,440
Communications 4,309,885 - - (561,827) 3,748,058
Materials handling 9,009,095 - - (5,450,438) 3,558,657
Office automation 3,604,688 - - (83,642) 3,521,046
Other 6,034,386 - - (2,686,597) 3,347,789
---------------- ---------------- ---------------- ----------------- -----------------
165,671,814 - - (31,221,163) 134,450,651
Less accumulated depreciation (83,456,505) (2,960,323) (15,220,612) 18,840,528 (82,796,912)
---------------- ---------------- ---------------- ----------------- -----------------
$82,215,309 $ (2,960,323) $ (15,220,612) $(12,380,635) $ 51,653,739
================ ================ ================ ================= =================
23
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
3. Investment in leases (continued):
Direct financing leases:
As of December 31, 2003, 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, 2003 and 2002:
2003 2002
---- ----
Total minimum lease payments receivable $ 5,860,231 $ 14,018,775
Estimated residual values of leased equipment (unguaranteed) 4,638,162 6,286,069
---------------- -----------------
Investment in direct financing leases 10,498,393 20,304,844
Less unearned income (2,319,832) (4,077,727)
---------------- -----------------
Net investment in direct financing leases $ 8,178,561 $ 16,227,117
================ =================
At December 31, 2003, 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
------------ ------ ------ -----
2004 $10,031,195 $ 2,114,183 $ 12,145,378
2005 5,400,567 2,114,183 7,514,750
2006 1,954,507 924,286 2,878,793
2007 778,800 513,624 1,292,424
2008 414,600 193,955 608,555
Thereafter 38,400 - 38,400
---------------- ---------------- ----------------
$18,618,069 $ 5,860,231 $ 24,478,300
================ ================ ================
24
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
4. Non-recourse debt:
At December 31, 2003, 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 ranging from 5.5% to
7.0%. The notes are secured by assignments of lease payments and pledges of
assets. At December 31, 2003, the carrying value of the pledged assets is
$2,390,658. During 2003, an additional $1,489,905 was borrowed. The notes mature
from 2004 through 2008.
Future minimum payments of non-recourse debt are as follows:
Year ending
December 31, Principal Interest Total
2004 $ 1,118,695 $ 53,992 $ 1,172,687
2005 251,586 24,182 275,768
2006 101,568 11,462 113,030
2007 90,838 5,141 95,979
2008 23,716 279 23,995
---------------- ---------------- ----------------
$ 1,586,403 $ 95,056 $ 1,681,459
================ ================ ================
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 (1.5154% at December 31, 2003), based
on an index of A1 commercial paper. The Program expired as to new borrowings in
February 2002.
The Program requires AFS, 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, 2003, the Partnership receives or pays interest on a notional
principal of $16,573,550, 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 with the last of the swaps maturing in 2008. Through the swap
agreements, the interest rates have been effectively fixed. 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.
25
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
5. Other long-term debt (continued):
Borrowings under the Program are as follows:
Notional Swap
Original Balance Balance Value Payment Rate on
Amount December 31, December 31, December 31, Interest Swap
Date Borrowed Borrowed 2003 2003 2003 Agreement
------------- -------- ---- ---- ---- ---------
4/1/1998 $ 21,770,000 $ 247,000 $ 374,199 $ (7,341) 6.220%
7/1/1998 25,000,000 2,505,000 2,518,900 (174,821) 6.155%
10/1/1998 20,000,000 3,194,000 3,331,603 (120,158) 5.550%
4/16/1999 9,000,000 1,733,000 1,736,776 (81,050) 5.890%
1/26/2000 11,700,000 4,333,000 4,488,957 (368,637) 7.580%
5/25/2001 2,000,000 904,000 1,009,167 (46,807) 5.790%
9/28/2001 6,000,000 2,674,000 3,113,948 (87,393) 4.360%
1/31/2002 4,400,000 169,000 - - *
2/19/2002 5,700,000 - - - *
----------------- ---------------- ---------------- ----------------
$ 105,570,000 $15,759,000 $ 16,573,550 $ (886,207)
================= ================ ================ ================
* Under the terms of the Program, no interest rate swap agreements were required
for these borrowings.
The long-term debt borrowings mature from 2004 through 2008. Future minimum
principal payments of long-term debt and annual swap notional reductions are as
follows:
Debt Debt Rates on
Year ending Principal Principal Interest Swap
December 31, Swapped Not Swapped Interest Total Agreements**
------- ----------- -------- ----- ------------
2004 $ 6,648,000 $ 114,000 $ 777,674 $ 7,539,674 6.074%-6.135%
2005 5,405,000 12,000 404,456 5,821,456 6.146%-6.450%
2006 2,033,000 43,000 167,037 2,243,037 6.593%-6.897%
2007 901,000 - 75,818 976,818 6.872%-7.028%
2008 603,000 - 18,843 621,843 7.066%-7.580%
----------------- ---------------- ---------------- ----------------
$ 15,590,000 $ 169,000 $ 1,443,828 $ 17,202,828
================= ================ ================ ================
** 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 (1.5154% at December 31, 2003).
In 2003 and 2002, the net effect of the interest rate swaps was to increase
interest expense by $952,386 and $955,401, respectively.
26
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
6. Related party transactions:
The terms of the Limited Partnership Agreement provide that AFS and/or
affiliates are entitled to receive certain fees for equipment management and
resale and for management of the Partnership.
The Limited Partnership Agreement allows for the reimbursement of costs incurred
by AFS in providing administrative services to the Partnership. Administrative
services provided include Partnership accounting, investor relations, legal
counsel and lease and equipment documentation. AFS is not reimbursed for
services whereby it is entitled to receive a separate fee as compensation for
such services, such as disposition of equipment. Reimbursable costs incurred by
AFS are allocated to the Partnership based upon estimated 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 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.
Substantially all employees of AFS record time incurred in performing
administrative services on behalf of all of the Partnerships serviced by AFS.
AFS 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.
Incentive management fees are computed as 4.0% of distributions of cash from
operations, as defined in the Limited Partnership Agreement and equipment
management fees are 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.
AFS earned fees, commissions and reimbursements, pursuant to the Limited
Partnership Agreement as follows during each of the years ended December 31,
2003, 2002 and 2001:
2003 2002 2001
---- ---- ----
Equipment and incentive management fees to General Partner $ 889,571 $ 947,568 $ 1,175,912
Cost reimbursements to General Partner 849,984 859,415 851,382
---------------- ----------------- -----------------
$ 1,739,555 $ 1,806,983 $ 2,027,294
================ ================= =================
The Limited Partnership Agreement places an annual and a cumulative limit for
cost reimbursements to AFS. The cumulative limit increases annually. Any
reimbursable costs incurred by AFS during the year exceeding the annual and/or
cumulative limits cannot be reimbursed in the current year, though may be
reimbursable in future years. As of December 31, 2003, AFS had incurred
approximately $876,000 of costs that are expected to be reimbursed to AFS by the
Partnership in 2004 and 2005.
27
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
7. Partners' capital:
As of December 31, 2003, 14,995,550 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 AFS. In accordance with the terms of
the of Limited Partnership Agreement, additional allocations of income were made
to AFS in 2003, 2002 and 2001. The amounts allocated were determined to bring
AFS's ending capital account balance to zero at the end of each period.
As defined in the Limited Partnership Agreement, available Cash from Operations,
shall be distributed as follows:
First, Distributions of Cash from Operations shall be 88.5% to the Limited
Partners, 7.5% to AFS and 4% to AFS or its affiliate designated as the recipient
of the Incentive Management Fee, until the Limited Partners have received
Aggregate Distributions in an amount equal to their Original Invested Capital,
as defined, plus a 10% per annum cumulative (compounded daily) return on their
Adjusted Invested Capital, as defined in the Limited Partnership Agreement.
Second, 85% to the Limited Partners, 7.5% to AFS and 7.5% to AFS or its
affiliate designated as the recipient of the Incentive Management Fee.
As defined in the Limited Partnership Agreement, available Cash from Sales or
Refinancing, are to be distributed as follows:
First, Distributions of Sales or Refinancings shall be 92.5% to the Limited
Partners and 7.5% to AFS, until the Limited Partners have received Aggregate
Distributions in an amount equal to their Original Invested Capital, as defined,
plus a 10% per annum cumulative (compounded daily) return on their Adjusted
Invested Capital.
Second, 85% to the Limited Partners, 7.5% to AFS and 7.5% to AFS or its
affiliate designated as the recipient of the Incentive Management Fee.
28
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
8. Concentration of credit risk and major customers:
The Partnership leases equipment to lessees in diversified industries. Leases
are subject to AFS's credit committee review. The leases provide for the return
of the equipment upon default.
As of December 31, 2003, 2002 and 2001, 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:
2003 2002 2001
---- ---- ----
Transportation, rail 22% 15% 13%
Manufacturing 21% 24% *
Transportation, other 21% 14% 14%
Municipalities 14% 13% 17%
* Less than 10%
During 2003, no customers comprised 10% of the Partnership's revenues from
leases. During 2002, one customer comprised 11% of the Partnership's revenues
from leases. During 2001, no customers comprised in excess of 10% of the
Partnership's revenues from leases.
9. Line of credit:
The Partnership participates with AFS and certain of its affiliates in a
$58,627,656 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, 2003,
borrowings under the facility were as follows:
Amount borrowed by the Partnership under the acquisition
facility $ 13,500,000
Amounts borrowed by affiliated partnerships and limited
liability companies under the acquisition facility 9,500,000
-----------------
Total borrowings under the acquisition facility 23,000,000
Amounts borrowed by AFS and its sister corporation under
the warehouse facility -
-----------------
Total outstanding balance $ 23,000,000
=================
Total available under the line of credit $ 58,627,656
Total outstanding balance (23,000,000)
-----------------
Remaining availability $ 35,627,656
=================
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 AFS.
29
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
9. Line of credit (continued):
The Partnership borrowed $21,500,000, $19,500,000 and $12,900,000 under the line
of credit during 2003, 2002 and 2001, respectively. Repayments on the line of
credit were $21,300,000, $10,300,000 and $8,800,000 during 2003, 2002 and 2001,
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, 2003 ranged from 3.03% to 4.00%.
The credit agreement includes certain financial covenants applicable to each
borrower. The Partnership was in compliance with its covenants as of December
31, 2003.
10. Fair value of financial instruments:
The recorded amounts of the Company's cash and cash equivalents, accounts
receivable, accounts payable and accruals at December 31, 2003 approximate fair
value because of the liquidity and 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, 2003 is $1,567,030.
Other long-term debt:
The carrying value of the Partnership's other long-term debt approximates its
fair value at December 31, 2003 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, 2003 and 2002.
30
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
11. Comprehensive net income (loss):
For the years ended December 31, 2003, 2002 and in 2001, other comprehensive
income (loss) consisted of the following:
2003 2002 2001
---- ---- ----
Net (loss) income $ (4,311,400) $ (1,772,503) $ 2,939,818
Other comprehensive income:
Cumulative effect of change in accounting principle at January 1, 2001 - - 281,661
Change in value of interest rate swap contracts 738,153 (298,354) (1,607,667)
---------------- ----------------- -----------------
Comprehensive net (loss) income $ (3,573,247) $ (2,070,857) $ 1,613,812
================ ================= =================
There were no other sources of comprehensive net income (loss).
12. Selected quarterly data (unaudited):
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 loss per limited partnership unit $ (0.01) $ (0.09) $ (0.03) $ (0.07)
March 31, June 30, September 30, December 31,
Quarter ended 2003 2003 2003 2003
---- ---- ---- ----
Total revenues $ 7,999,426 $ 4,607,630 $ 5,009,446 $ 4,868,201
Net income (loss) $ 650,136 $ 95,361 $ (3,776,766) $ (1,280,131)
Net income (loss) per limited partnership unit $ 0.02 $ (0.01) $ (0.27) $ (0.11)
13. Commitments:
At December 31, 2003, the Partnership had no commitments to purchase lease
assets.
31
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
14. Reserves, impairment losses and provisions 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, 2000 $ 504,227 $ -
Provision - 118,067
Charge offs - -
---------------- ----------------
Balance December 31, 2001 504,227 118,067
Provision 2,111,593 285,000
Charge offs (2,615,820) -
---------------- ----------------
Balance December 31, 2002 - 403,067
Provision 5,290,639 343,000
Charge offs (5,290,639) (221,187)
---------------- ----------------
Balance December 31, 2003 $ - $ 524,880
================ ================
In 2003 it came to the Company's attention that the amounts recorded for
impairments of covered rail hopper cars as of December 31, 2002 was understated
by $518,000. During the three months ended March 31, 2003, the Company recorded
additional impairment losses of $518,000 to correct the accounting for the
transaction. The Company does not believe that this amount is material to the
period in which it should have been recorded, nor that it is material to the
Company's operating results for the year ending December 31, 2003.
The impact on 2002 would be a reduction of members' equity and an increase of
the net loss of $518,000 ($0.03 per Limited Liability Company unit). Net loss
for the year ended December 31, 2003 would be decreased by $518,000 ($0.03 per
Limited Liability Company unit).
32
Item 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
None
Item 9A. 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) 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 the chief financial officer concluded that, as of the
evaluation date, except as noted below, 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.
Due to the increased scrutiny and reporting requirements of Sarbanes-Oxley, it
came to the attention of the chief executive officer and the chief financial
officer of the Partnership in connection with the audit of the Partnership for
the year ended December 31, 2003, that enhanced internal controls were needed to
facilitate a more effective closing of the Partnership's financial statements,
and that this would require additional skilled personnel. To address this issue
the Partnership has taken steps to upgrade the accounting staff and will take
additional steps in 2004 to add personnel to its accounting department to ensure
that the Partnership's ability to execute internal controls in accounting and
reconciliation in the closing process will be adequate in all respects. It
should be noted that the control issues affecting the closing process and
disclosure did not materially affect the accuracy and completeness of the
Partnership's financial reporting and disclosure reflected in this report, and
the audited financial statements included herein contain no qualification or
limitation on the scope of the auditor's opinion.
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, except as described in the prior
paragraphs.
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 AFS is held by ATEL Capital Group
("ACG"), a holding company formed to control AFS 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
33
Dean L. Cash, age 53, joined ACG 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
ACG, 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 50, joined ACG 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 ACG, 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 55, joined ACG in 1986 as controller. Prior to joining
ACG, 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.
Vasco H. Morais, age 45, joined ACG 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.
Audit Committee
ATEL Leasing Corporation is the managing member of ATEL Financial Services, LLC.
ATEL Financial Services LLC is the General Partner of the registrant. The board
of directors of ATEL Leasing Corporation acts as the audit committee of the
registrant. Dean L. Cash and Paritosh K. Choksi are members of the board of
directors of ALC and are deemed to be financial experts. They are not
independent of the Partnership.
Code of Ethics
ACG on behalf of AFS and ALC has adopted a code of ethics for its Chief
Executive Officer, Chief Financial Officer and Chief Accounting Officer. The
Code of Ethics is included as Exhibit 14.1 to this report.
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 AFS and its Affiliates. The amount of such remuneration paid in 2003,
2002 and 2001 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 AFS. Of
this amount, the majority is expected to be reallowed to other broker/dealers.
34
Through December 31, 1998, $14,250,000 of such commissions (the maximum
allowable amount) had been paid to AFS 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, AFS 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, AFS 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,
shall be distributed as follows:
First, Distributions of Cash from Operations shall be 88.5% to the Limited
Partners, 7.5% to AFS and 4% to AFS or its affiliate designated as the recipient
of the Incentive Management Fee, until the Limited Partners have received
Aggregate Distributions in an amount equal to their Original Invested Capital,
as defined, plus a 10% per annum cumulative (compounded daily) return on their
Adjusted Invested Capital, as defined in the Limited Partnership Agreement.
Second, 85% to the Limited Partners, 7.5% to AFS and 7.5% to AFS or its
affiliate designated as the recipient of the Incentive Management Fee.
Available Cash from Sales or Refinancing, as defined in the Limited Partnership
Agreement, shall be distributed as follows:
First, Distributions of Sales or Refinancings shall be 92.5% to the Limited
Partners and 7.5% to AFS, until the Limited Partners have received Aggregate
Distributions in an amount equal to their Original Invested Capital, as defined,
plus a 10% per annum cumulative (compounded daily) return on their Adjusted
Invested Capital.
Second, 85% to the Limited Partners, 7.5% to AFS and 7.5% to AFS or its
affiliate designated as the recipient of the Incentive Management Fee.
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,
AFS 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, AFS 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 provided that (i) AFS 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) AFS or its affiliates have rendered substantial
re-leasing service in connection with such re-lease and (iv) AFS or its
affiliates are compensated for rendering equipment management service. To date,
none have been accrued or paid.
35
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 AFS. In accordance with the terms of the Limited
Partnership Agreement, additional allocations of income were made to AFS in
2003, 2002 and 2001. The amounts allocated were determined so as to bring AFS's
ending capital account balance to zero at the end of each period. See financial
statements included in Item 8, Part I of this report for amounts allocated to
AFS in 2003, 2002 and 2001.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
At December 31, 2003, no investor is known to hold beneficially more than 5% of
the issued and outstanding Units.
Security Ownership of Management
The ultimate shareholders of AFS 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.
AFS 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.
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. PRINCIPAL ACCOUNTING FEES AND SERVICES
During the most recent two years, the Partnership incurred audit, audit related,
tax and other fees with its principal auditors as follows:
2003 2002
---- ----
Audit fees $ 58,413 $ 56,920
Audit related fees - -
Tax fees 31,600 33,836
Other - -
---------------- ----------------
$ 90,013 $ 90,756
================ ================
ATEL Leasing Corporation is the managing member of ATEL Financial Services, LLC.
ATEL Financial Services LLC is the General Partner of the registrant. The board
of directors of ATEL Leasing Corporation acts as the audit committee of the
registrant. Engagements for audit services, audit related services and tax
services are approved in advance by the Chief Financial Officer of ATEL Leasing
Corporation acting as a member of the board of directors of that company.
36
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, 2003 and 2002
Statements of Operations for the years ended December 31, 2003, 2002
and 2001
Statements of Changes in Partners' Capital for the years ended
December 31, 2003, 2002 and 2001
Statement of Cash Flows for the years ended December 31, 2003, 2002
and 2001
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 2003 Report dated
October 20, 2003
(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).
(14.1) Code of Ethics
(31.1) Certification of Paritosh K. Choksi
(31.2) Certification of Dean L. Cash
(32.1) Certification Pursuant to 18 U.S.C. section 1350 of Dean L.
Cash
(32.2) Certification Pursuant to 18 U.S.C. section 1350 of Paritosh K.
Choksi
37
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: 3/26/2004
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)
38
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 3/26/2004
- -------------------------- Executive officer of ATEL
Dean Cash Financial Services, LLC
/s/ Paritosh K. Choksi Executive Vice President and director 3/26/2004
- -------------------------- 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 3/26/2004
- -------------------------- registrant; principal accounting
Donald E. Carpenter officer 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.
39
EXHIBIT 14.1
ATEL CAPITAL GROUP
CODE OF ETHICS FOR CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL OFFICER AND CHIEF
ACCOUNTING OFFICER
A. SCOPE.
This ATEL Capital Group Code of Ethics is applicable to the ATEL Capital Group's
Chief Executive Officer, Chief Financial Officer and the Chief Accounting
Officer, or persons acting in such capacity (collectively the "Covered
Officers"), each of whom acts in such capacity on behalf of its affiliate, ATEL
Financial Services, LLC, which is the general partner or manager, as the case
may be, of each of the public limited partnerships and limited liability
companies sponsored by the Company. ATEL Capital Group is referred to herein as
the "Company," ATEL Financial Services, LLC is referred to as "AFS" and the
sponsored limited partnerships and limited liability companies are referred to
herein as the "Funds" and each of them as a "Fund." The board of directors of
ATEL Leasing Corporation ("ALC"), an affiliate of the Company that serves as the
managing member of ATEL Financial Services, LLC, ("AFS") the manager or general
partner of each of the Funds, is the first board of directors in management
succession for each Fund.
Accordingly, under the Securities and Exchange Commission's interpretation of
its disclosure rules, the ATEL Leasing Corporation board of directors functions
as the de facto audit committee for each Fund with respect to all procedural and
disclosure requirements applicable to audit committees under Securities and
Exchange Commission rules. The Company's Board of Directors shall have oversight
responsibility over the activities of ALC's Board of Directors for purposes of
this Code of Ethics.
B. PURPOSE.
The Company is proud of the values with which it and its subsidiaries and
affiliates conduct business. It has and will continue to uphold the highest
levels of business ethics and personal integrity in all types of transactions
and interactions. To this end, this Code of Ethics serves to (1) emphasize the
Company's commitment to ethics and compliance with the law; (2) set forth basic
standards of ethical and legal behavior; (3) provide reporting mechanisms for
known or suspected ethical or legal violations; and (4) help prevent and detect
wrongdoing. This Code of Ethics is intended to augment and supplement the
standard of ethics and business conduct expected of all Company employees, and
its limitation to Covered Officers is not intended to limit the obligation of
all Company employees to adhere to the highest standards of business ethics and
integrity in all transactions and interactions conducted while in the Company's
employ.
Given the variety and complexity of ethical questions that may arise in the
course of business of the Company and its subsidiaries, this Code of Ethics
serves only as a rough guide. Confronted with ethically ambiguous situations,
the Covered Officers should remember the Company's commitment to the highest
ethical standards and seek independent advice, where necessary, to ensure that
all actions they take on behalf of the Company and its subsidiaries honor this
commitment.
C. ETHICS STANDARDS.
1. Honest and Ethical Conduct.
The Covered Officers shall behave honestly and ethically at all times and with
all people. They shall act in good faith, with due care, and shall engage only
in fair and open competition, by treating ethically competitors, suppliers,
customers, and colleagues. They shall not misrepresent facts or engage in
illegal, unethical, or anti-competitive practices for personal or professional
gain.
2. Conflicts of Interest.
This fundamental standard of honest and ethical conduct extends to the handling
of conflicts of interest. The Covered Officers shall avoid any actual,
potential, or apparent conflicts of interest with the Company and its
subsidiaries and affiliates, including the Funds, and any personal activities,
investments, or associations that might give rise to such conflicts. They shall
not compete with or use the Company, any of its subsidiaries or a Fund for
personal gain, self-deal, or take advantage of corporate or Fund opportunities.
They shall act on behalf of the Company, its subsidiaries and the Funds free
from improper influence or the appearance of improper influence on their
judgment or performance of duties. A Covered Officer shall disclose any material
transaction or relationship that reasonably could be expected to give rise to
such a conflict to the Company's General Counsel or a member of the Company's
Board of Directors. The board of directors of ATEL Leasing Corporation ("ALC"),
an affiliate of the Company that serves as the managing member of ATEL Financial
Services, LLC, ("AFS") the manager or general partner of each of the Funds, is
the first board of directors in management succession for each Fund.
40
Notwithstanding the foregoing, it is understood, as fully disclosed in the
offering documents for each Fund, that AFS as manager or general partner of the
Fund has certain inherent conflicts of interest. The provisions of each Fund's
Operating Agreement or Limited Partnership Agreement have been drafted to
address the obligations, restrictions and limitations on the power and authority
of AFS to manage each Fund's affairs, including restrictions prohibiting or
limiting the terms of any transactions in which conflicts of interest may arise.
Furthermore, AFS has a fiduciary duty to each Fund as its manager or general
partner. It is therefore expressly understood by the Company and the Covered
Officers that any and all actions by AFS and its personnel that comply with the
provisions of a Fund's Operating Agreement or Limited Partnership Agreement, as
the case may be, and are consistent with AFS's fiduciary duty to the Fund, will
not be considered material transactions or relationships which require
disclosure or reporting under this Code of Ethics.
3. Timely and Truthful Disclosure.
In reports and documents filed with or submitted to the Securities and Exchange
Commission and other regulators by the Company, its subsidiaries or affiliates
or a Fund, and in other public communications made by the Company, its
subsidiaries or affiliates or a Fund, the Covered Officers shall make
disclosures that are full, fair, accurate, timely, and understandable. The
Covered Officers shall provide thorough and accurate financial and accounting
data for inclusion in such disclosures. The Covered Officers shall not knowingly
conceal or falsify information, misrepresent material facts, or omit material
facts necessary to avoid misleading the Company's, any of its subsidiaries' or
affiliates' or a Fund's independent public auditors or investors.
4. Legal Compliance.
In conducting the business of the Company, its subsidiaries and affiliates and
the Funds, the Covered Officers shall comply with applicable governmental laws,
rules, and regulations at all levels of government in the United States and in
any non-U.S. jurisdiction in which the Company, any of its affiliates or
subsidiaries or a Fund does business, as well as applicable rules and
regulations of self-regulatory organizations of which the Company, any of its
affiliates or subsidiaries or a Fund is a member. If the Covered Officer is
unsure whether a particular action would violate an applicable law, rule, or
regulation, he or she should seek the advice of inside counsel (if available),
and, where necessary, outside counsel before undertaking it.
D. VIOLATIONS OF ETHICAL STANDARDS.
1. Reporting Known or Suspected Violations.
The Covered Officers will promptly bring to the attention of the Company's
General Counsel or the Board of Directors any information concerning a material
violation of any of the laws, rules or regulations applicable to the Company and
the operation of its businesses, by the Company or any agent thereof, or of
violation of this Code of Ethics. The Company's General Counsel will investigate
reports of violations and the findings communicated to the Company's Board of
Directors.
2. Accountability for Violations.
If the Company's Board of Directors determines that this Code of Ethics has been
violated, either directly, by failure to report a violation, or by withholding
information related to a violation, it may discipline the offending Covered
Officer for non-compliance with penalties up to and including termination of
employment. Violations of this Code of Ethics may also constitute violations of
law and may result in criminal penalties and civil liabilities for the offending
Covered Officer and the Company, its subsidiaries, affiliates or a Fund.
41
Exhibit 31.1
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 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: 3/26/2004
/s/ Paritosh K. Choksi
- -------------------------
Paritosh K. Choksi
Principal financial officer of registrant, Executive
Vice President of General Partner
42
Exhibit 31.2
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 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: 3/26/2004
/s/ Dean Cash
- ------------------
Dean L. Cash
President and Chief Executive
Officer of General Partner
43
Exhibit 32.1
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, 2003 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: 3/26/2004
/s/ Dean Cash
- -----------------
Dean L. Cash
President and Chief Executive
Officer of General Partner
44
Exhibit 32.2
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, 2003 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: 3/26/2004
/s/ Paritosh K. Choksi
- ------------------------
Paritosh K. Choksi
Executive Vice President of General
Partner, Principal financial officer of registrant
45