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 June 30, 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 0-24175
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 June 30, 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, June 30, 2004 and December 31, 2003.
Statements of Operations for the six and three month periods ended June 30,
2004 and 2003.
Statements of Changes in Members' Capital for the year ended December 31,
2003 and for the six month period ended June 30, 2004.
Statements of Cash Flows for the six and three month periods ended June 30,
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. Changes in 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.
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003
(Unaudited)
ASSETS
June 30,
2004 2003
---- ----
(Unaudited)
Cash and cash equivalents $ 1,554,645 $ 835,628
Accounts receivable, net of allowance for doubtful accounts of $582,880 in 2004
and $524,880 in 2003 1,290,556 2,149,089
Other assets 41,402 -
Investments in leases 61,631,700 71,827,497
----------------- -----------------
Total assets $ 64,518,303 $ 74,812,214
================= =================
LIABILITIES AND PARTNERS' CAPITAL
Long-term debt $ 12,304,000 $ 15,759,000
Non-recourse debt 603,678 1,586,403
Line of credit 13,500,000 13,500,000
Accounts payable:
General Partner 727,149 481,818
Other 318,098 650,573
Accrued interest payable 53,969 36,929
Interest rate swap contracts 495,605 886,207
Unearned operating lease income 587,033 505,261
----------------- -----------------
Total liabilities 28,589,532 33,406,191
Other accumulated comprehensive loss (483,158) (886,207)
Partners' capital 36,411,929 42,292,230
----------------- -----------------
Total Partners' capital 35,928,771 41,406,023
----------------- -----------------
Total liabilities and Partners' capital $ 64,518,303 $ 74,812,214
================= =================
See accompanying notes.
3
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF OPERATIONS
SIX AND THREE MONTH PERIODS ENDED
JUNE 30, 2004 AND 2003
(Unaudited)
Six Months Three Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues:
Leasing activities:
Operating leases $8,012,164 $9,938,031 $ 3,832,595 $4,394,962
Direct financing 238,873 428,758 135,157 154,426
Gain on sales of assets 514,857 2,189,125 606,772 35,680
Interest 1,689 2,441 529 773
Other 119,065 48,701 86,019 21,789
---------------- ----------------- ----------------- -----------------
8,886,648 12,607,056 4,661,072 4,607,630
Expenses:
Depreciation of operating lease assets 5,820,844 7,783,009 2,782,585 3,313,103
Cost reimbursements to General Partner 777,131 803,734 13,259 23,430
Interest expense 765,412 1,088,342 313,035 468,049
Railcar and equipment maintenance 608,979 425,070 223,705 315,580
Impairment losses 455,367 517,926 - -
Equipment and incentive management fees to
General Partner 339,017 471,482 182,805 110,518
Professional fees 244,763 95,318 158,026 59,017
Other management fees 119,400 59,968 53,761 35,744
Storage charges 104,559 32,710 34,827 21,460
Franchise fees and state taxes 94,267 128,178 95,521 128,178
Insurance 91,148 - 18,831 -
Provision for (recovery of) doubtful accounts 71,437 136,000 (5,563) (84,000)
Amortization of initial direct costs 22,311 88,605 11,156 34,894
Other 327,138 231,217 140,875 86,296
---------------- ----------------- ----------------- -----------------
9,841,773 11,861,559 4,022,823 4,512,269
---------------- ----------------- ----------------- -----------------
Net (loss) income $ (955,125) $ 745,497 $ 638,249 $ 95,361
================ ================= ================= =================
Net (loss) income:
General Partner $ 413,851 $ 627,208 $ 199,910 $ 319,070
Limited Partners (1,368,976) 118,289 438,339 (223,709)
---------------- ----------------- ----------------- -----------------
$ (955,125) $ 745,497 $ 638,249 $ 95,361
================ ================= ================= =================
Net (loss) income per Limited Partnership Unit ($0.09) $0.01 $0.03 ($0.01)
Weighted average number of Units outstanding 14,995,550 14,995,883 14,995,550 14,995,717
See accompanying notes.
4
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2003
AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 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
Unrealized change in value of
interest rate swap contracts - - - 403,049 403,049
Distributions to partners - (4,511,325) (413,851) - (4,925,176)
Net (loss) income - (1,368,976) 413,851 - (955,125)
----------------- ---------------- ----------------- ----------------- -----------------
Balance June 30, 2004 14,995,550 $36,411,929 $ - $ (483,158) $ 35,928,771
================= ================ ================= ================= =================
See accompanying notes.
5
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF CASH FLOWS
SIX AND THREE MONTH PERIODS ENDED
JUNE 30, 2004 AND 2003
(Unaudited)
Six Months Three Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Operating activities:
Net (loss) income $ (955,125) $ 745,497 $ 638,249 $ 95,361
Adjustments to reconcile net (loss) income to
cash provided by operating activities:
Gain on sales of assets (514,857) (2,189,125) (606,772) (35,680)
Depreciation of operating lease assets 5,820,844 7,783,009 2,782,585 3,313,103
Amortization of initial direct costs 22,311 88,605 11,156 34,894
Impairment losses 455,367 517,926 - -
Provision for (recovery of) doubtful accounts 71,437 136,000 (5,563) (84,000)
Changes in operating assets and liabilities:
Accounts receivable 787,096 2,014,198 25,814 758,663
Due from General Partner - 219,692 - (33,851)
Other assets (41,402) 10,019 3,495 -
Accounts payable, General Partner 245,331 - 564,372 (909,051)
Accounts payable, other (332,475) (109,661) 64,904 17,901
Accrued interest expense 17,040 (148,838) 23,224 (112,100)
Interest rate swap contracts 12,447 - (57,746) -
Unearned lease income 81,772 (31,806) (213,552) 243,997
---------------- ----------------- ----------------- -----------------
Net cash provided by operating activities 5,669,786 9,035,516 3,230,166 3,289,237
---------------- ----------------- ----------------- -----------------
Investing activities:
Proceeds from sales of assets 3,470,454 14,942,797 2,382,899 253,216
Reduction in net investment in direct financing
leases 941,678 970,677 437,821 409,106
---------------- ----------------- ----------------- -----------------
Net cash provided by investing activities 4,412,132 15,913,474 2,820,720 662,322
---------------- ----------------------------------- -----------------
6
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF CASH FLOWS
(Continued)
SIX AND THREE MONTH PERIODS ENDED
JUNE 30, 2004 AND 2003
(Unaudited)
Six Months Three Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Financing activities:
Borrowings under line of credit 5,900,000 14,500,000 3,100,000 14,000,000
Repayments of borrowings under line of credit (5,900,000) (13,800,000) (4,100,000) -
Distributions to limited partners (4,511,325) (7,497,438) (1,874,612) (3,747,490)
Repayments of long-term debt (3,455,000) (14,602,000) (1,760,000) (11,415,000)
Repayments of non-recourse debt (982,725) (3,484,026) (389,958) (2,219,770)
Distributions to General Partner (413,851) (627,208) (199,910) (319,070)
Repurchase of limited partnership units - (1,844) - (1,844)
---------------- ----------------- ----------------- -----------------
Net cash used in financing activities (9,362,901) (25,512,516) (5,224,480) (3,703,174)
---------------- ----------------- ----------------- -----------------
Net increase (decrease) in cash and cash
equivalents 719,017 (563,526) 826,406 248,385
Cash and cash equivalents at beginning of
period 835,628 2,194,169 728,239 1,382,258
---------------- ----------------- ----------------- -----------------
Cash and cash equivalents at end of period $1,554,645 $1,630,643 $ 1,554,645 $1,630,643
================ ================= ================= =================
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest $ 748,372 $1,237,180 $ 289,811 $ 580,149
================ ================= ================= =================
Schedule of non-cash transactions:
Change in fair value of interest rate swap contracts $ 403,049 $ 503,080 $ 319,850 $ 390,186
================ ================= ================= =================
See accompanying notes.
7
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 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 six months ended June 30, 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
may 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 or quarterly basis.
8
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
3. Investment in leases:
The Partnership's investment in leases consists of the following:
Depreciation /
Amortization
Expense or
Balance Amortization of Reclassi- Balance
December 31, Impairment Direct Financing fications and June 30,
2003 Losses Leases Dispositions 2004
---- ------ ------ - ------------- ----
Net investment in operating
leases $51,653,739 $ - $ (5,820,844) $(4,923,170) $ 40,909,725
Net investment in direct
financing leases 8,178,561 - (941,678) (937,315) 6,299,568
Assets held for sale or lease, net
of accumulated depreciation of
$22,019,643 in 2004 and
$18,795,631 in 2003 11,891,344 (455,367) - 2,904,888 14,340,865
Initial direct costs, net of
accumulated amortization of
$973,712 in 2004 and
$956,767 in 2003 103,853 - (22,311) - 81,542
----------------- ---------------- ----------------- ----------------- -----------------
$71,827,497 $ (455,367) $ (6,784,833) $(2,955,597) $ 61,631,700
================= ================ ================= ================= =================
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
and in the six months ended June 30, 2003 by $0.03 per Unit.
9
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
3. Investment in leases (continued):
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 assets held for lease or sale consist of the following
for the three and six month periods ended June 30:
Six Months Three Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Depreciation of operating lease assets $5,820,844 $7,783,009 $ 2,782,585 $3,313,103
Impairment losses 455,367 517,926 - -
---------------- ----------------- ----------------- -----------------
$6,276,211 $8,300,935 $ 2,782,585 $3,313,103
================ ================= ================= =================
Net investment in operating leases:
Property on operating leases consists of the following:
Balance Reclassi- Balance
December 31, Impairment Depreciation fications and June 30,
2003 Losses Expense Dispositions 2004
---- ------ ------- ------------ ----
Transportation $72,164,281 $ - $ - $(1,083,890) $ 71,080,391
Construction 20,168,993 - - (12,057,934) 8,111,059
Marine vessels/barges 14,978,042 - - (7,509,500) 7,468,542
Mining 8,410,345 - - (3,710,770) 4,699,575
Materials handling 3,558,657 - - (231,595) 3,327,062
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 - - 310,901 3,658,690
----------------- ---------------- ----------------- ----------------- -----------------
134,450,651 - - (27,754,911) 106,695,740
Less accumulated depreciation (82,796,912) - (5,820,844) 22,831,741 (65,786,015)
----------------- ---------------- ----------------- ----------------- -----------------
$51,653,739 $ - $ (5,820,844) $(4,923,170) $ 40,909,725
================= ================ ================= ================= =================
Net investment in direct financing leases:
The following lists the components of the Company's net investment in direct
financing leases as of June 30, 2004:
Total minimum lease payments receivable $ 4,856,457
Estimated residual values of leased equipment (unguaranteed) 3,189,035
--------------
Investment in direct financing leases 8,045,492
Less unearned income (1,745,924)
--------------
Net investment in direct financing leases $ 6,299,568
==============
10
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
3. Investment in leases (continued):
At June 30, 2004, the aggregate amounts of future minimum lease payments are as
follows:
Direct
Operating Financing
Leases Leases Total
Six months ending December 31,2004 $3,957,736 $ 1,459,192 $5,416,928
Year ending December 31, 2005 5,630,129 1,982,568 7,612,697
2006 2,082,787 708,415 2,791,202
2007 956,244 512,748 1,468,992
2008 564,766 193,534 758,300
2009 188,566 - 188,566
Thereafter 375,415 - 375,415
----------------- ----------------- -----------------
$13,755,643 $ 4,856,457 $ 18,612,100
================= ================= =================
All of the property on leases was acquired in 1997, 1998, 1999, 2001 and 2002.
4. Non-recourse debt:
Notes payable to financial institutions are due in varying monthly and quarterly
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 range from 5.5% to 7.0%.
Future minimum principal payments of non-recourse debt are as follows:
Principal Interest Total
Six months ending December 31,2004 $ 135,969 $ 18,915 $ 154,884
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 23,717 277 23,994
----------------- ----------------- -----------------
$ 603,678 $ 59,977 $ 663,655
================= ================= =================
11
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
5. 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 (1.6223% at June 30, 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
June 30, 2004, the Partnership receives or pays interest on a notional principal
of $12,867,040, 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.
Borrowings under the Program are as follows:
Notional Swap Payment Rate
Original Balance Balance Value on Interest
Amount June 30, June 30, June 30, Swap
Date Borrowed Borrowed 2004 2004 2004 Agreement
------------- -------- ---- ---- ---- ---------
4/1/1998 $21,770,000 $ 8,000 $ 72,905 $ (847) 6.220% *
7/1/1998 25,000,000 2,157,000 2,170,818 (106,569) 6.155% *
10/1/1998 20,000,000 2,319,000 2,442,463 (54,770) 5.550% *
4/16/1999 9,000,000 1,369,000 1,372,568 (42,074) 5.890% *
1/26/2000 11,700,000 3,558,000 3,558,623 (228,024) 7.580% *
5/25/2001 2,000,000 718,000 798,750 (24,534) 5.790% *
9/28/2001 6,000,000 2,096,000 2,450,913 (38,787) 4.360% *
1/31/2002 4,400,000 79,000 - - **
2/19/2002 5,700,000 - - - **
----------------- ---------------- ----------------- -----------------
$105,570,000 $12,304,000 $12,867,040 $ (495,605)
================= ================ ================= =================
* 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.
12
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
5. Long-term debt (continued):
The long-term debt borrowings mature from 2004 through 2008. Future minimum
principal and interest payments of long-term debt are as follows:
Swapped Debt Rates on
Debt Principal Interest Swap
Principal Not Swapped Interest Total Agreements***
--------- ----------- -------- ----- -------------
Six months ending December 31, 2004 $ 3,283,000 $ 24,000 $ 337,530 $ 3,644,530 6.099%-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%
----------------- ---------------- ----------------- -----------------
$12,225,000 $ 79,000 $1,003,684 $ 13,307,684
================= ================ ================= =================
*** 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 (1.6223% at June 30, 2004).
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).
13
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
6. Related party transactions (continued):
During the six and three month periods ended June 30, 2004 and 2003, AFS and/or
affiliates earned fees, commissions and reimbursements, pursuant to the Limited
Partnership Agreement as follows:
Six Months Three Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Equipment and incentive management fees to
AFS $ 339,017 $ 471,482 $ 182,805 $ 110,518
Administrative costs reimbursed to AFS 777,131 803,734 13,259 23,430
---------------- ----------------- ----------------- -----------------
$1,116,148 $1,275,216 $ 196,064 $ 133,948
================ ================= ================= =================
7. Line of credit:
The Partnership participates with AFS and certain of its affiliates in a
$61,945,455 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 June 30, 2004,
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 4,500,000
--------------
Total borrowings under the acquisition facility 18,000,000
Amounts borrowed by AFS and its sister corporation under
the warehouse facility -
--------------
Total outstanding balance $ 18,000,000
==============
Total available under the line of credit $ 61,945,455
Total outstanding balance (18,000,000)
--------------
Remaining availability $ 43,945,455
==============
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 June 30,
2004. Interest rates on the balances outstanding at June 30, 2004 ranged from
3.01375% to 3.025%.
14
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
8. Other comprehensive income:
In 2004 and 2003, other comprehensive income consisted of the following:
Six Months Three Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Net (loss) income $ (955,125) $ 745,497 $ 638,249 $ 95,361
Other comprehensive income:
Change in fair value of interest rate swap contracts 403,049 503,080 319,850 390,186
---------------- ----------------- ----------------- -----------------
Comprehensive net (loss) income $ (552,076) $1,248,577 $ 958,099 $ 485,547
================ ================= ================= =================
There were no other sources of comprehensive net (loss) income.
9. Partner's capital:
As of June 30, 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:
Six Months Three Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Distributions $4,511,325 $7,497,438 $ 1,874,612 $3,747,490
Weighted average number of Units outstanding 14,995,550 14,995,883 14,995,550 14,995,717
Weighted average distributions per Unit $ 0.30 $ 0.50 $ 0.13 $ 0.25
15
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 and second quarters of 2004 and 2003, the Partnership's primary
activity was engaging in equipment leasing activities.
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 the General Partner'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
$61,945,455 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 June 30, 2004,
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 4,500,000
--------------
Total borrowings under the acquisition facility 18,000,000
Amounts borrowed by AFS and its sister corporation under
the warehouse facility -
--------------
Total outstanding balance $ 18,000,000
==============
Total available under the line of credit $ 61,945,455
Total outstanding balance (18,000,000)
--------------
Remaining availability $ 43,945,455
==============
The Partnership anticipates reinvesting a portion of lease payments from assets
owned in new leasing transactions. Such reinvestment will occur only after the
payment of all obligations, including debt service (both principal and
interest), the payment of management fees to the General Partner and providing
for cash distributions to the Limited Partners.
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. The General Partner 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
June 30, 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.
16
Cash Flows
During the first half of 2004, the Partnership's primary source of liquidity was
rents from assets on operating leases. During the first half of 2003, the
Partnership's primary sources of cash were the proceeds of lease asset sales and
borrowings under the line of credit. Cash from operating activities was almost
entirely from operating lease rents in both 2003 and in 2002 for both the three
and six month periods.
In the six and three month periods ended June 30, 2004 and 2003, the only
sources of cash from investing activities were 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 six month period ended June 30, 2004, proceeds from sales of lease assets
decreased compared to the same period in 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 two quarters of either 2004 or 2003.
In the six and three month periods ended June 30, 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 six months of 2003 to $5,900,000
in the comparable period in 2004. Most of the proceeds from the sales of lease
assets in the first half of 2003 were used to repay long-term debt.
Results of operations
Operations in 2004 resulted in a net loss of $955,125 (six months) and net
income of $638,249 (three months). Operations in 2003 resulted in net income of
$745,497 (six months) and $95,361 (three months). Net income for the six month
period ended June 30, 2003, was primarily the result of gains of $2,189,125
recognized on the sales of lease assets. The Partnership's primary source of
revenues is from operating leases. This is expected to remain true in future
periods. Operating lease revenues for the six month periods decreased from
$9,938,031 in 2003 to $8,012,164 in 2004. For the three month periods, they
decreased from $4,394,962 in 2003 to $3,832,595 in 2004. The decreases were the
result of asset sales in 2002 and in 2003.
In the six month period ended June 30, 2003, sales of lease assets resulted in a
gain of $2,189,125 compared to $514,857 in 2004. In the three month period ended
June 30, 2003, sales of lease assets resulted in a gain of $35,680 compared to
$606,772 in 2004. Gains and losses are not expected to be consistent from one
period to another.
Depreciation expense is the single largest expense of the Partnership and is
expected to remain so in future periods. As lease assets have been sold over the
last year, operating lease revenues have declined. This has also led to
decreases in depreciation expense.
Total debt has decreased from $34,037,382 at June 30, 2003 to $26,407,678 at
June 30, 2004, a decrease of $7,629,704. This has led to the decrease in
interest expense in 2004 compared to the comparable periods in 2003. For the six
month periods, interest decreased by $322,930. For the three month period, the
decrease was $155,014.
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 $347,716 to $261,304 for the six month periods
ended June 30, 2003 and 2004, respectively. The fees decreased from $128,121 to
$110,436 for the three month periods ended June 30, 2003 and 2004, respectively.
Incentive management fees are based on the levels of distributions to Limited
Partners and the sources of the cash distributed. Incentive management fees have
decreased from $123,765 in the to $77,713 for the six month periods ended June
30, 2003 and 2004, respectively. Incentive management fees have increased from
($17,603) in the to $72,369 for the three month periods ended June 30, 2003 and
2004, respectively.
The decrease in interest expense from $1,088,342 in the six month period ended
June 30, 2003 to $765,412 in the comparable period in 2004 is related to the
reduction of total outstanding debt as a result of scheduled payments and other
debt paydowns. For the three month periods ended June 30, 2003 and 2004,
interest decreased from $468,049 to $313,035. Total debt balances were reduced
from $51,423,308 at December 31, 2002 to $26,407,678 at June 30, 2004, a
decrease of $25,015,630.
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.
17
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. No
similar impairments were noted in the three month periods ended June 30, 2004
and 2003.
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 and equipment maintenance increased from $425,070 to $608,979 for the
six month periods ended 2003 and 2004, respectively. Railcar and equipment
maintenance decreased from $315,580 to $223,705 for the three month periods
ended 2003 and 2004, respectively. The costs were incurred in repairing certain
railcars in order to place them on a new lease.
The provision for doubtful accounts decreased from $136,000 to $71,437 in the
six month periods ended June 30, 2003 and 2004, respectively. The recoveries of
doubtful accounts decreased from $84,000 to $5,563 in the three month periods
ended June 30, 2003 and 2004, respectively. Most of the provision in the first
half 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 June 30, 2004, there was a $13,500,000 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 June 30, 2004, borrowings on the facility
were $12,304,000 and the associated variable interest rate was 1.6223% and the
average fixed interest rate achieved with the swap agreements was 6.12%.
18
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 June 30, 2004.
Item 2. Changes in Securities and Use of Proceeds
Inapplicable.
Item 3. Defaults Upon Senior Securities.
Inapplicable.
Item 4. Submission Of Matters To A Vote Of Security Holders.
Inapplicable.
19
Item 5. Other Information.
Inapplicable.
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
20
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:
August 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
Executive Vice President of
General Partner, Principal
financial officer of registrant
By: /s/ Donald E. Carpenter
------------------------------------
Donald E. Carpenter
Principal accounting
officer of registrant
21