Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| Quarterly Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act
of 1934. For the quarterly period ended
March 31, 2004
|_| Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
For the transition period from _______ to _______
Commission File Number 000-24175
ATEL Capital Equipment Fund VII, L.P.
(Exact name of registrant as specified in its charter)
California 94-3248318
- ---------- ----------
(State or other jurisdiction of (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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
The number of Limited Partnership Units outstanding as of March 31, 2004 was
14,995,550.
DOCUMENTS INCORPORATED BY REFERENCE
None
1
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheets, March 31, 2004 and December 31, 2003.
Statements of Operations for the three month periods ended March 31,
2004 and 2003.
Statements of Changes in Partners' Capital for the year ended December
31, 2003 and for the three month period ended March 31, 2004.
Statements of Cash Flows for the three month periods ended March 31,
2004 and 2003. Notes to the Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited).
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
BALANCE SHEETS
MARCH 31, 2004 AND DECEMBER 31, 2003
ASSETS
March 31, December 31,
2004 2003
---- ----
(Unaudited)
Cash and cash equivalents $ 728,239 $ 835,628
Accounts receivable, net of allowance for doubtful accounts of
$601,880 in 2004 and $524,880 in 2003 1,310,807 2,149,089
Other assets 44,897 -
Investments in leases 66,639,389 71,827,497
----------------- ------------------
Total assets $ 68,723,332 $74,812,214
================= ==================
LIABILITIES AND PARTNERS' CAPITAL
Lines of credit $14,500,000 $13,500,000
Other long-term debt 14,064,000 15,759,000
Non-recourse debt 993,636 1,586,403
Accounts payable:
General Partner 162,777 481,818
Other 253,194 650,573
Accrued interest expense 30,745 36,929
Interest rate swap contracts 803,008 886,207
Unearned operating lease income 800,585 505,261
----------------- ------------------
Total liabilities 31,607,945 33,406,191
Partners' capital:
Accumulated other comprehensive loss (732,815) (886,207)
Partners' capital 37,848,202 42,292,230
----------------- ------------------
Total partners' capital 37,115,387 41,406,023
----------------- ------------------
Total liabilities and partners' capital $ 68,723,332 $74,812,214
================= ==================
See accompanying notes.
3
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF OPERATIONS
THREE MONTH PERIODS ENDED
MARCH 31, 2004 AND 2003
(Unaudited)
2004 2003
---- ----
Revenues:
Leasing activities:
Operating leases $ 4,179,569 $ 5,543,069
Direct financing leases 103,716 274,332
(Loss) gain on sales of assets (91,915) 2,153,445
Interest 1,160 1,668
Other 33,046 26,912
----------------- ------------------
4,225,576 7,999,426
Expenses:
Depreciation of operating lease assets 3,038,259 4,472,905
Cost reimbursements to General Partner 763,872 780,304
Impairment losses 455,367 517,926
Interest expense 452,377 620,293
Railcar maintenance 385,274 109,490
Equipment and incentive management fees to General Partner 156,212 360,964
Professional fees 86,737 36,301
Insurance 72,317 -
Storage charges 69,732 11,250
Other management fees 65,639 24,224
Provision for doubtful accounts 77,000 220,000
Amortization of initial direct costs 11,155 50,712
Other 185,009 144,921
----------------- ------------------
5,818,950 7,349,290
----------------- ------------------
Net (loss) income $(1,593,374) $ 650,136
================= ==================
Net income (loss):
General Partner $ 213,941 $ 308,138
Limited Partners (1,807,315) 341,998
----------------- ------------------
$(1,593,374) $ 650,136
================= ==================
Net (loss) income per Limited Partnership Unit $ (0.12) $ 0.02
Weighted average number of Units outstanding 14,995,550 14,996,050
See accompanying notes.
4
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2003
AND FOR THE
THREE MONTH PERIOD ENDED
MARCH 31, 2004
(Unaudited)
Accumulated
Other
Comprehensive
Limited Partners General Income
----------------
Units Amount Partner (Loss) Total
Balance December 31, 2002 14,996,050 $ 62,842,594 $ - $(1,624,360) $61,218,234
Distributions to partners - (14,997,209) (1,239,911) - (16,237,120)
Unrealized decrease in value of
interest rate swap contracts - - - 738,153 738,153
Limited partnership units
repurchased (500) (1,844) - - (1,844)
Net (loss) income - (5,551,311) 1,239,911 - (4,311,400)
----------------- ------------------ ------------------ ----------------- ------------------
Balance December 31, 2003 14,995,550 42,292,230 - (886,207) 41,406,023
Distributions to partners - (2,636,713) (213,941) - (2,850,654)
Unrealized decrease in value of
interest rate swap contracts - - - 83,199 83,199
Reclassification adjustment for
portion of swap liability charged to
net loss 70,193
Net (loss) income - (1,807,315) 213,941 - (1,593,374)
----------------- ------------------ ------------------ ----------------- ------------------
Balance March 31, 2004 14,995,550 $ 37,848,202 $ - $ (732,815) $37,045,194
================= ================== ================== ================= ==================
See accompanying notes.
5
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF CASH FLOWS
THREE MONTH PERIODS ENDED
MARCH 31, 2004 AND 2003
(Unaudited)
2004 2003
---- ----
Operating activities:
Net (loss) income $(1,593,374) $ 650,136
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Loss (gain) on sales of assets 91,915 (2,153,445)
Depreciation of operating lease assets 3,038,259 4,472,905
Amortization of initial direct costs 11,155 50,712
Impairment losses 455,367 517,926
Provision for doubtful accounts 77,000 220,000
Changes in operating assets and liabilities:
Accounts receivable 761,282 1,255,535
Due from General Partner - 253,543
Other assets (44,897) 10,019
Accounts payable, General Partner (319,041) 909,051
Accounts payable, other (397,379) (127,562)
Accrued interest expense (6,184) (36,738)
Interest rate swap contracts 70,193 -
Unearned operating lease income 295,324 (275,803)
----------------- ------------------
Net cash provided by operating activities 2,439,620 5,746,279
----------------- ------------------
Investing activities:
Proceeds from sales of assets 1,087,555 14,689,581
Reduction of net investment in direct financing leases 503,857 561,571
----------------- ------------------
Net cash provided by investing activities 1,591,412 15,251,152
----------------- ------------------
Financing activities:
Borrowings under line of credit 2,800,000 500,000
Distributions to Limited Partners (2,636,713) (3,749,948)
Repayments of borrowings under line of credit (1,800,000) (13,800,000)
Repayments of other long-term debt (1,695,000) (3,187,000)
Repayments of non-recourse debt (592,767) (1,264,256)
Distributions to General Partner (213,941) (308,138)
----------------- ------------------
Net cash used in financing activities (4,138,421) (21,809,342)
----------------- ------------------
Net decrease in cash and cash equivalents (107,389) (811,911)
Cash and cash equivalents at beginning of period 835,628 2,194,169
----------------- ------------------
Cash and cash equivalents at end of period $ 728,239 $ 1,382,258
================= ==================
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 458,561 $ 657,031
================= ==================
Schedule of non-cash transactions:
Change in fair value of interest rate swaps contracts $ 83,199 $ 112,894
================= ==================
See accompanying notes.
6
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004
(Unaudited)
1. Summary of significant accounting policies:
Basis of presentation:
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States (GAAP) for
interim financial information and with instructions to Form 10-Q and Article 10
of Regulation S-X. The unaudited interim financial statements reflect all
adjustments which are, in the opinion of the General Partner, necessary to a
fair statement of financial position and results of operations for the interim
periods presented. All such adjustments are of a normal recurring nature. The
preparation of financial statements in accordance with GAAP requires management
to make estimates and assumptions that effect reported amounts in the financial
statements and accompanying notes. Therefore, actual results could differ from
those estimates. Operating results for the three months ended March 31, 2004 are
not necessarily indicative of the results for the year ending December 31, 2004.
These unaudited interim financial statements should be read in conjunction with
the financial statements and notes thereto contained in the report on Form 10-K
for the year ended December 31, 2003, filed with the Securities and Exchange
Commission.
2. Organization and partnership matters:
ATEL Capital Equipment Fund VII, L.P. (the Partnership), was formed under the
laws of the State of California on July 17, 1996, for the purpose of acquiring
equipment to engage in equipment leasing and sales activities. The Partnership
shall continue until December 31, 2017.
Upon the sale of the minimum amount of Units of Limited Partnership interest
(Units) of $1,200,000 and the receipt of the proceeds thereof on January 7,
1997, the Partnership commenced operations.
The Partnership does not make a provision for income taxes since all income and
losses will be allocated to the Partners for inclusion in their individual tax
returns.
ATEL Financial Services, LLC (AFS), an affiliated entity, acts as the General
Partner of the Partnership.
Certain prior year balances have been reclassified to conform to the current
period presentation.
The Partnership is in its operating phase and is making distributions on a
monthly and quarterly basis.
7
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004
(Unaudited)
3. Investment in leases:
Investment in leases consists of the following:
Depreciation /
Amortization
Expense or
Balance Amortization of Reclassi- Balance
December 31, Impairment Direct Financing fications and March 31,
2003 Losses Leases Dispositions 2004
---- ------ ------ - ------------- ----
Net investment in operating
leases $ 51,653,739 $ - $(3,038,259) $(1,391,093) $47,224,387
Net investment in direct
financing leases 8,178,561 - (503,857) 744,122 8,418,826
Assets held for sale or lease, net
of accumulated depreciation of
$17,766,116 in 2004 and
$18,795,631 in 2003 11,891,344 (455,367) - (532,499) 10,903,478
Initial direct costs, net of
accumulated amortization of
$962,557 in 2004 and $956,767 in
2003 103,853 - (11,155) - 92,698
----------------- ------------------ ------------------ ----------------- ------------------
$ 71,827,497 $ (455,367) $(3,553,271) $(1,179,470) $66,639,389
================= ================== ================== ================= ==================
Management periodically reviews the carrying values of its assets on leases and
assets held for lease or sale. As a result of the reviews during the three month
periods ended March 31, 2004 and 2003, management determined that the value of
certain refuse and other vehicles (in 2004) and jumbo covered hopper rail cars
(in 2003) 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 could command. Management recorded provisions for the
declines in value of those assets in the amounts of $455,367 and $517,926 for
the three months ended March 31, 2004 and 2003, respectively.
The provision of $517,926 recorded for the three months ended March 31, 2003
corrected for an understatement of the provision recorded for the year ended
December 31, 2002 related to jumbo covered hopper rail cars. The Partnership
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 Partnership's operating
results for the year ending December 31, 2003 or three months ending March 31,
2003. The effect of the additional provision recorded in the three months ended
March 31, 2003 was to increase the loss in the three months ended March 31, 2003
by $0.03 per Unit.
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 the three month periods ended March 31:
2004 2003
---- ----
Depreciation expense $ 3,038,259 $ 4,472,905
Impairment losses 455,367 517,926
------------------ -----------------
$ 3,493,626 $ 4,990,831
================== =================
8
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004
(Unaudited)
3. Investment in leases (continued):
Property on operating leases consists of the following:
Balance Reclassi- Balance
December 31, Impairment Depreciation fications and March 31,
2003 Losses Expense Dispositions 2004
---- ------ ------- ------------ ----
Transportation $ 72,164,281 $ - $ - $ (1,433) $72,162,848
Construction 20,168,993 - - (2,986,068) 17,182,925
Marine vessels/barges 14,978,042 - - - 14,978,042
Mining 8,410,345 - - (3,710,770) 4,699,575
Materials handling 3,558,657 - - - 3,558,657
Manufacturing 4,553,440 - - - 4,553,440
Communications 3,748,058 - - (3,472,123) 275,935
Office automation 3,521,046 - - - 3,521,046
Other 3,347,789 - - 139,715 3,487,504
----------------- ------------------ ------------------ ----------------- ------------------
134,450,651 - - (10,030,679) 124,419,972
Less accumulated depreciation (82,796,912) - (3,038,259) 8,639,586 (77,195,585)
----------------- ------------------ ------------------ ----------------- ------------------
$ 51,653,739 $ - $(3,038,259) $(1,391,093) $47,224,387
================= ================== ================== ================= ==================
Direct financing leases:
As of March 31, 2004, investment in direct financing leases consists primarily
rail cars. The following lists the components of the Partnership's investment in
direct financing leases as of March 31, 2004:
Total minimum lease payments receivable $ 7,594,966
Estimated residual values of leased equipment (unguaranteed) 3,458,721
-----------------
Investment in direct financing leases 11,053,687
Less unearned income (2,634,861)
-----------------
Net investment in direct financing leases $ 8,418,826
=================
At March 31, 2004, the aggregate amounts of future minimum lease payments are as
follows:
Direct
Operating Financing
Leases Leases Total
Nine months ending December 31, 2004 $ 6,371,949 $ 2,415,701 $ 8,787,650
Year ending December 31, 2005 5,624,597 2,180,568 7,805,165
2006 2,078,023 906,415 2,984,438
2007 956,243 710,748 1,666,991
2008 564,766 391,534 956,300
Thereafter 563,981 990,000 1,553,981
------------------ ----------------- ------------------
$ 16,159,559 $ 7,594,966 $23,754,525
================== ================= ==================
All of the property on leases was acquired in 1997, 1998, 1999, 2001 and 2002.
9
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004
(Unaudited)
4. Non-recourse debt:
Notes payable to financial institutions are due in varying monthly, quarterly
and semi-annual installments of principal and interest. The notes are secured by
assignments of lease payments and pledges of the assets which were purchased
with the proceeds of the particular notes. Interest rates on the notes are fixed
and range from 5.5% to 7.0%. The notes mature from 2004 through 2008.
Future minimum payments of non-recourse debt are as follows:
Principal Interest Total
Nine months ending December 31, 2004 $ 525,928 $ 32,267 $ 558,195
Year ending December 31, 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
------------------ ----------------- ------------------
$ 993,636 $ 73,331 $ 1,066,967
================== ================= ==================
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 (1.4764% at March 31, 2004), 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
March 31, 2004, the Partnership receives or pays interest on a notional
principal of $14,740,467, 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.
10
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004
(Unaudited)
5. Other long-term debt (continued):
Borrowings under the Program are as follows:
Notional Swap Payment Rate
Original Balance Balance Value on Interest
Amount March 31, March 31, March 31, Swap
Date Borrowed Borrowed 2004 2004 2004 Agreement
------------- -------- ---- ---- ---- ---------
4/1/1998 $ 21,770,000 $ 121,000 $ 224,910 $ (41,817) 6.220% *
7/1/1998 25,000,000 2,332,000 2,346,108 (79,060) 6.155% *
10/1/1998 20,000,000 2,749,000 2,879,849 (3,062) 5.550% *
4/16/1999 9,000,000 1,588,000 1,591,478 (172,542) 5.890% *
1/26/2000 11,700,000 3,957,000 4,009,442 (70,467) 7.580% *
5/25/2001 2,000,000 811,000 904,653 (340,150) 5.790% *
9/28/2001 6,000,000 2,385,000 2,784,027 (95,910) 4.360% *
1/31/2002 4,400,000 121,000 - - **
2/19/2002 5,700,000 - - - **
----------------- ------------------ ------------------ -----------------
$105,570,000 $ 14,064,000 $ 14,740,467 $ (803,008)
================= ================== ================== =================
* A portion of this interest rate swap contract is deemed to be ineffective and
has been charged to operations.
** Under the terms of the Program, no interest rate swap agreements were
required for these borrowings.
Other long-term debt borrowings mature from 2004 through 2008. Future minimum
principal payments are as follows:
Swapped Debt Rates on
Debt Principal Interest Swap
Principal Not Swapped Interest Total Agreements***
--------- ----------- -------- ----- -------------
Nine months ending December 31, 2004 $ 5,001,000 $ 66,000 $ 544,558 $ 5,611,558 6.087%-6.135%
Year ending December 31, 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%
----------------- ------------------ ------------------ -----------------
$ 13,943,000 $ 121,000 $ 1,210,712 $ 15,274,712
================= ================== ================== =================
*** 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 (1.4764% at March 31, 2004).
11
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004
(Unaudited)
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 acquisition,
management and resale and for management of the Partnership.
The Limited Partnership Agreement allows for the reimbursement of costs incurred
by AFS in providing services to the Partnership. Services provided include
Partnership accounting, investor relations, legal counsel and lease and
equipment documentation. AFS is not reimbursed for services where it is entitled
to receive a separate fee as compensation for such services, such as acquisition
and management of equipment. Reimbursable costs incurred by AFS are allocated to
the Partnership based upon an estimate of actual time incurred by employees
working on Partnership business and an allocation of rent and other costs based
on utilization studies.
Substantially all employees of AFS record time incurred in performing 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 services in the same geographic location and
are reimbursable in accordance with the Limited Partnership Agreement.
Incentive management fees (computed as 4% of distributions of cash from
operations, as defined in the Limited Partnership Agreement) and equipment
management fees (computed as 3.5% of gross revenues from operating leases, as
defined in the Limited Partnership Agreement plus 2% of gross revenues from full
payout leases, as defined in the Limited Partnership Agreement)
During the three month periods ended March 31, 2004 and 2003, AFS and/or
affiliates earned fees, commissions and reimbursements, pursuant to the Limited
Partnership Agreement as follows:
2004 2003
---- ----
Costs reimbursed to AFS $ 763,872 $ 780,304
Incentive management fees and equipment management fees to AFS 156,212 360,964
----------------- ------------------
$ 920,084 $ 1,141,268
================= ==================
12
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004
(Unaudited)
7. Line of credit:
The Partnership participates with AFS and certain of its affiliates in a
$61,400,000 revolving line of credit (comprised of an acquisition facility and a
warehouse facility) with a financial institution that includes certain financial
covenants. During the quarter ended March 31, 2004, the facility was extended
for an additional year. At the same time, the total available under the facility
was increased. The line of credit expires on June 28, 2005. As of March 31,
2004, borrowings under the facility were as follows:
Amount borrowed by the Partnership under the acquisition
facility $ 14,500,000
Amounts borrowed by affiliated partnerships and limited
liability companies under the acquisition facility 12,000,000
------------------
Total borrowings under the acquisition facility 26,500,000
Amounts borrowed by AFS and its sister corporation under the
warehouse facility -
------------------
Total outstanding balance $ 26,500,000
==================
Total available under the line of credit $ 61,400,000
Total outstanding balance (26,500,000)
------------------
Remaining availability $ 34,900,000
==================
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 March 31,
2004. Interest rates on the balances outstanding at March 31, 2004 ranged from
2.99% to 3.00%.
8. Comprehensive (loss) income:
For the three month periods ended March 31, 2004 and 2003, other comprehensive
(loss) income consisted of the following:
2004 2003
---- ----
Net (loss) income $(1,593,374) $ 650,136
Other comprehensive income:
Change in value of interest rate swap contracts 83,199 112,894
------------------ -----------------
Comprehensive net (loss) income $(1,510,175) $ 763,030
================== =================
There were no other sources of comprehensive net (loss) income.
13
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004
(Unaudited)
9. Partners' Capital:
As of March 31, 2004, 14,995,550 Units ($149,955,500) were issued and
outstanding (including the 50 Units issued to the Initial Limited Partners).
The Partnership's Net Income, Net Losses, and Distributions, as defined, are to
be allocated 92.5% to the Limited Partners and 7.5% to the General Partner.
Distributions to the Limited Partners were as follows:
Three Months
Ended March 31,
2004 2003
---- ----
Distributions $ 2,636,713 $ 3,749,948
Weighted average number of Units outstanding 14,995,550 14,996,050
Weighted average distributions per Unit $ 0.18 $ 0.25
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statements contained in this Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Form 10-Q,
which are not historical facts, may be forward-looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Investors are cautioned not
to attribute undue certainty to these forward-looking statements, which speak
only as of the date of this Form 10-Q. We undertake no obligation to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances after the date of this Form 10-Q or to reflect the occurrence of
unanticipated events, other than as required by law.
Capital Resources and Liquidity
During the first quarter of 2004 and 2003, the Partnership's primary activity
was engaging in equipment leasing and sales activities.
In the first quarter of 2004, the Partnership's primary source of liquidity was
operating lease rents. In the first quarter of 2003, the Partnership's primary
source of cash flows was from the proceeds of sales of lease assets. The
liquidity of the Partnership will vary in the future, increasing to the extent
cash flows from leases 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.
As another source of liquidity, the Partnership has 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' 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
$61,400,000 revolving line of credit (comprised of an acquisition facility and a
warehouse facility) with a financial institution that includes certain financial
covenants. During the quarter ended March 31, 2004, the facility was extended
for an additional year. At the same time, the total available under the facility
was increased. The line of credit expires on June 28, 2005. As of March 31,
2004, borrowings under the facility were as follows:
Amount borrowed by the Partnership under the acquisition
facility $ 14,500,000
Amounts borrowed by affiliated partnerships and limited
liability companies under the acquisition facility 12,000,000
------------------
Total borrowings under the acquisition facility 26,500,000
Amounts borrowed by AFS and its sister corporation under the
warehouse facility -
------------------
Total outstanding balance $ 26,500,000
==================
Total available under the line of credit $ 61,400,000
Total outstanding balance (26,500,000)
------------------
Remaining availability $ 34,900,000
==================
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 March 31,
2004. Interest rates on the balances outstanding at March 31, 2004 ranged from
2.99% to 3.00%.
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 and acquisition fees to AFS and providing
for cash distributions to the Limited Partners.
15
The Partnership currently has available adequate reserves to meet contingencies,
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.
No commitments of capital have been or are expected to be made other than for
the acquisition of additional equipment. There were no such commitments as of
March 31, 2004.
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
In the first quarter of 2004, the primary source of liquidity was rents from
operating leases. In the first quarter of 2003, the Partnership's primary source
of cash flows was from the proceeds of sales of lease assets. Cash from
operating activities was almost entirely from operating lease rents in both
quarters.
In the first quarter of 2004 and 2003, the only sources of cash from investing
activities was proceeds from sales of assets and rents from direct financing
leases accounted for as reductions of the Partnership's net investment in direct
financing leases. In the first quarter of 2003, a significant portfolio of lease
assets were sold to a third party, subject to the leases that were still in
place. The sales of assets in the quarter generated sales proceeds of
$14,689,581. The proceeds from the sales were used to repay the line of credit
and to make distributions to the partners. In the first quarter of 2004,
proceeds from sales of lease assets decreased compared to the first quarter of
2003 as there were no similar large sales of assets subject to existing leases.
Proceeds from the sales of lease assets are not expected to be consistent from
one period to another. Asset sales are made as leases expire, as purchasers can
be found and as the sales can be negotiated and completed. There were no uses of
cash in investing activities in the first quarters of either 2004 or 2003.
In the first quarters of 2004 and 2003, the only source of cash from financing
activities was borrowings under the line of credit. Repayments of other
long-term debt and non-recourse debt have decreased as a result of scheduled
debt payments. Repayments of borrowings under the line of credit decreased from
$13,800,000 in the first quarter of 2003 to $1,800,000 in the first quarter of
2004. Most of the proceeds from the sales of lease assets in the first quarter
of 2003 were used to repay borrowings on the line of credit.
Results of operations
Operations resulted in net income of $650,136 in the first quarter of 2003
compared to a net loss of $1,523,181 in the first quarter of 2004. The
Partnership's primary source of revenues is from operating leases. This is
expected to remain true in future periods. Operating lease revenues have
decreased quarter to quarter primarily as a result of net asset dispositions.
Lower lease rates realized on renewals have also contributed to the decrease.
Depreciation expense is the single largest expense of the Partnership.
Depreciation is related to operating lease assets and thus, to operating lease
revenues.
In the first quarter of 2003, sales of lease assets resulted in a gain of
$2,153,445 compared to a loss of $91,915 in the first quarter of 2004. Gains and
losses are not expected to be consistent from one period to another.
Equipment management fees are based on the Partnership's rental revenues and
have decreased in relation to decreases in the Partnership's revenues from
leases. Such fees decreased from $219,595 in the first quarter of 2003 to
$150,868 in the first quarter of 2004. Incentive management fees are based on
the levels of distributions to Limited Partners and the sources of the cash
distributed. Such fees have decreased from $141,369 in the first quarter of 2003
to $5,343 in the first quarter of 2004.
16
The decrease in interest expense from $620,293 in the first quarter of 2003 to
$382,184 in the first quarter of 2004 is related to the reduction of total
outstanding debt as a result of scheduled payments and other debt paydowns.
Total debt balances were reduced from $51,423,308 at December 31, 2002 to
$29,557,636 at March 31, 2004, a decrease of $21,865,672.
In 2002 and 2003, the amounts of costs reimbursed to AFS were limited by
provisions of the Agreement of Limited Partnership. Costs that were incurred by
AFS in 2002, but that were not allowed to be reimbursed in that year, have been
included in the first quarter of 2003. The costs amounted to approximately
$626,000. Costs that were incurred by AFS in 2003, but which were not allowed to
be reimbursed in that year, have been included in the first quarter of 2004. The
costs amounted to approximately $750,000.
Management periodically reviews the carrying values of its assets on leases and
assets held for lease or sale. As a result of the reviews during the three month
periods ended March 31, 2004 and 2003, management determined that the value of a
fleet certain refuse and other vehicles (in 2004) and covered hopper rail cars
(in 2003) 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 estimated amounts of
rental payments that these assets could command. Management recorded a provision
for the declines in value of those assets in the amounts of $455,367 and
$517,926 for the three months ended March 31, 2004 and 2003, respectively.
The provision of $517,926 recorded for the three months ended March 31, 2003
corrected for an understatement of the provision recorded for the year ended
December 31, 2002 related to jumbo covered hopper rail cars. The Partnership
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 Partnership's operating
results for the year ending December 31, 2003 or three months ending March 31,
2003. The effect of the additional provision recorded in the three months ended
March 31, 2003 was to increase the loss in the three months ended March 31, 2003
by $0.03 per Unit.
Railcar maintenance increased from $109,490 in the first quarter of 2003 to
$385,274 in the first quarter of 2004. The increase related to costs incurred in
repairing certain railcars in order to place them on a new lease.
The provision for doubtful accounts decreased from $220,000 in the first quarter
of 2003 to $77,000 in the first quarter of 2004. Most of the provision in the
first quarter of 2003 related to the bankruptcy of a single lessee. In 2004,
there were similar circumstances requiring additional allowance for doubtful
accounts.
Item 3. Quantitative and Qualitative Disclosures of 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 March 31, 2004, there was a $14,500,000 outstanding balance on the
floating rate line of credit.
Also, the Partnership entered into a receivables funding facility in 1998. Since
interest on the outstanding balances under the facility varies, the Partnership
is exposed to market risks associated with changing interest rates. To hedge its
interest rate risk, the Partnership enters into interest rate swaps, which
effectively convert the underlying interest characteristic on the facility from
floating to fixed.
Under the swap agreements, the Partnership makes or receives variable interest
payments to or from the counterparty based on a notional principal amount. The
net differential paid or received by the Partnership is recognized as an
adjustment to interest expense related to the facility balances. The amount paid
or received represents the difference between the payments required under the
variable interest rate facility and the amounts due under the facility at the
fixed (hedged) interest rate. As of March 31, 2004, borrowings on the facility
were $14,064,000 and the associated variable interest rate was 1.4764% and the
average fixed interest rate achieved with the swap agreements was 6.102%.
17
Item 4. 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 the date of this 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.
As disclosed in the Form 10-K for the year ended December 31, 2003, the chief
executive and chief financial officer of the General Partner of the Partnership
had identified certain enhanced controls needed to facilitate a more effective
closing of the Partnership's financial statements. During the first quarter of
2004 and since the end of the quarter, the General Partner hired a new
controller, added additional accounting staff personnel, and has instituted or
revised existing procedures in order to ensure that the Partnership's ability to
execute internal controls in accounting and reconciliation in the closing
process is adequate in all respects. The General Partner will continue to review
its accounting procedures and practices to determine their effectiveness and
adequacy and will take such steps as deemed necessary in the opinion of the
General Partner's chief executive and chief financial officers to ensure the
adequacy of the Partnership's accounting controls and procedures.
The General Partner's chief executive officer and chief financial officer have
determined that no weakness in financial and accounting controls and procedures
had any material effect on the accuracy and completeness of the Partnership's
financial reporting and disclosure included in this report.
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 II. OTHER INFORMATION
Item 1. Legal Proceedings.
In the ordinary course of conducting business, there may be certain claims,
suits, and complaints filed against the Partnership. In the opinion of
management, the outcome of such matters, if any, will not have a material impact
on the Partnership's financial position or results of operations. No material
legal proceedings are currently pending against the Partnership or against any
of its assets. 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. The lessee
has declined to settle on terms acceptable to the Partnership and a trial is
scheduled for the fall of 2004. No amounts related to this action have been
recorded in the financial statements as of March 31, 2004.
Item 2. Changes In Securities.
Inapplicable.
Item 3. Defaults Upon Senior Securities.
Inapplicable.
Item 4. Submission Of Matters To A Vote Of Security Holders.
Inapplicable.
Item 5. Other Information.
Inapplicable.
18
Item 6. Exhibits And Reports On Form 8-K.
(a) Documents filed as a part of this report
1. Financial Statement Schedules
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
2. Other Exhibits
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
(b) Report on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date:
May 11, 2004
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
(Registrant)
By: ATEL Financial Services LLC
General Partner of Registrant
By: /s/ Dean L. Cash
---------------------------------
Dean L. Cash
President and Chief Executive Officer
of General Partner
By: /s/ Paritosh K. Choksi
---------------------------------
Paritosh K. Choksi
Principal Financial Officer
of Registrant
By: /s/ Donald E. Carpenter
---------------------------------
Donald E. Carpenter
Principal Accounting
Officer of Registrant
20