Form 10-Q
UNITED STATES
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 September 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 September 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, September 30, 2004 and December 31, 2003.
Statements of Operations for the nine and three month periods ended
September 30, 2004 and 2003.
Statements of Changes in Members' Capital for the year ended December 31,
2003 and for the nine month period ended September 30, 2004.
Statements of Cash Flows for the nine and three month periods ended
September 30, 2004 and 2003.
Notes to 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.
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(Unaudited)
ASSETS
September 30,
2004 2003
---- ----
(Unaudited)
Cash and cash equivalents $ 1,616,107 $ 835,628
Accounts receivable, net of allowance for
doubtful accounts of $576,880 in 2004
and $524,880 in 2003 1,249,630 2,149,089
Other assets 47,135 -
Investments in leases 57,442,005 71,827,497
----------------- ------------------
Total assets $ 60,354,877 $ 74,812,214
================= ==================
LIABILITIES AND PARTNERS' CAPITAL
Long-term debt $ 10,669,000 $ 15,759,000
Non-recourse debt 536,256 1,586,403
Financing arrangement 13,300,000 13,500,000
Accounts payable:
General Partner 546,652 481,818
Other 507,256 650,573
Accrued interest payable 53,763 36,929
Interest rate swap contracts 419,849 886,207
Unearned operating lease income 654,433 505,261
----------------- ------------------
Total liabilities 26,687,209 33,406,191
Other accumulated comprehensive loss (410,663) (886,207)
Partners' capital 34,078,331 42,292,230
----------------- ------------------
Total Partners' capital 33,667,668 41,406,023
----------------- ------------------
Total liabilities and Partners' capital $ 60,354,877 $ 74,812,214
================= ==================
See accompanying notes.
3
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF OPERATIONS
NINE AND THREE MONTH PERIODS ENDED
SEPTEMBER 30, 2004 AND 2003
(Unaudited)
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues:
Leasing activities:
Operating leases $11,466,378 $14,674,318 $ 3,454,214 $ 4,736,287
Direct financing 251,220 475,179 12,347 46,421
(Loss) gain on sales of assets (148,317) 2,285,677 (663,174) 96,552
Interest 2,551 3,713 862 1,272
Other 274,469 177,615 155,404 128,914
---------------- ----------------- ----------------- ------------------
11,846,301 17,616,502 2,959,653 5,009,446
Expenses:
Depreciation of operating lease assets 8,016,975 11,253,710 2,196,131 3,467,701
Interest expense 1,071,643 1,527,850 306,231 439,508
Railcar and equipment maintenance 962,373 513,661 353,394 188,538
Cost reimbursements to General Partner 790,203 828,448 13,072 24,714
Equipment and incentive management fees to
General Partner 456,452 751,255 117,435 279,773
Impairment losses 455,366 4,559,020 - 4,041,094
Professional fees 270,456 117,929 25,693 22,611
Other management fees 170,728 98,624 51,328 38,656
Storage charges 132,795 151,075 28,236 118,365
Insurance 148,332 102,897 57,184 102,897
Franchise fees and state taxes 94,267 128,178 - -
Provision for (recovery of) doubtful accounts 65,437 (3,000) (6,001) (139,000)
Amortization of initial direct costs 31,022 96,761 8,711 11,156
Other 478,709 521,363 151,571 190,199
---------------- ----------------- ----------------- ------------------
13,144,758 20,647,771 3,302,985 8,786,212
---------------- ----------------- ----------------- ------------------
Net loss $ (1,298,457) $ (3,031,269) $ (343,332) $(3,776,766)
================ ================= ================= ==================
Net (loss) income:
General Partner $ 529,203 $ 929,996 $ 115,352 $ 302,788
Limited Partners (1,827,660) (3,961,265) (458,684) (4,079,554)
---------------- ----------------- ----------------- ------------------
$ (1,298,457) $ (3,031,269) $ (343,332) $(3,776,766)
================ ================= ================= ==================
Net loss per Limited Partnership Unit ($0.12) ($0.26) ($0.03) ($0.27)
Weighted average number of Units outstanding 14,995,550 14,995,883 14,995,550 14,995,550
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 NINE MONTH PERIOD ENDED
SEPTEMBER 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 - - - 475,544 475,544
Distributions to partners - (6,386,239) (529,203) - (6,915,442)
Net (loss) income - (1,827,660) 529,203 - (1,298,457)
------------------ ---------------- ----------------- ----------------- ------------------
Balance September 30, 2004 14,995,550 $34,078,331 $ - $ (410,663) $ 33,667,668
================== ================ ================= ================= ==================
See accompanying notes.
5
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF CASH FLOWS
NINE AND THREE MONTH PERIODS ENDED
SEPTEMBER 30, 2004 AND 2003
(Unaudited)
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Operating activities:
Net loss $ (1,298,457) $ (3,031,269) $ (343,332) $(3,776,766)
Adjustments to reconcile net loss to
cash provided by operating activities:
Loss (gain) on sales of assets 148,317 (2,285,677) 663,174 (96,552)
Depreciation of operating lease assets 8,016,975 11,253,710 2,196,131 3,467,701
Amortization of initial direct costs 31,022 96,761 8,711 11,156
Impairment losses 455,366 4,559,020 - 4,041,094
Provision for (recovery of) doubtful accounts 65,437 (3,000) (6,001) (139,000)
Changes in operating assets and liabilities:
Accounts receivable 834,022 2,682,154 46,926 667,956
Due from General Partner - 228,692 - 9,000
Other assets (47,135) 10,019 (5,733) -
Accounts payable, General Partner 64,834 - (180,497) -
Accounts payable, other (143,317) (254,678) 189,158 (145,017)
Accrued interest expense 16,834 (151,282) (206) (2,444)
Interest rate swap contracts 9,186 - (3,261) -
Unearned lease income 149,172 (388,807) 67,400 (357,001)
---------------- ----------------- ----------------- ------------------
Net cash provided by operating activities 8,302,256 12,715,643 2,632,470 3,680,127
---------------- ----------------- ----------------- ------------------
Investing activities:
Proceeds from sales of assets 4,336,144 15,665,275 865,690 722,478
Reduction in net investment in direct financing
leases 1,397,668 1,185,555 455,990 214,878
---------------- ----------------- ----------------- ------------------
Net cash provided by investing activities 5,733,812 16,850,830 1,321,680 937,356
---------------- ----------------------------------- ------------------
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF CASH FLOWS
(Continued)
NINE AND THREE MONTH PERIODS ENDED
SEPTEMBER 30, 2004 AND 2003
(Unaudited)
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Financing activities:
Borrowings under line of credit 8,241,000 17,500,000 2,341,000 3,000,000
Repayments of borrowings under line of credit (8,441,000) (17,800,000) (2,541,000) (4,000,000)
Distributions to limited partners (6,386,239) (11,247,386) (1,874,914) (3,749,948)
Repayments of long-term debt (5,090,000) (16,010,000) (1,635,000) (1,408,000)
Repayments of non-recourse debt (1,050,147) (3,890,642) (67,422) (406,616)
Proceeds of non-recourse debt - 1,489,905 - 1,489,905
Distributions to General Partner (529,203) (929,996) (115,352) (302,788)
Repurchase of limited partnership units - (1,844) - -
---------------- ----------------- ----------------- ------------------
Net cash used in financing activities (13,255,589) (30,889,963) (3,892,688) (5,377,447)
---------------- ----------------- ----------------- ------------------
Net increase (decrease) in cash and cash
equivalents 780,479 (1,323,490) 61,462 (759,964)
Cash and cash equivalents at beginning of
period 835,628 2,194,169 1,554,645 1,630,643
---------------- ----------------- ----------------- ------------------
Cash and cash equivalents at end of period $1,616,107 $ 870,679 $ 1,616,107 $ 870,679
================ ================= ================= ==================
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest $1,054,809 $1,679,132 $ 306,437 $ 441,952
================ ================= ================= ==================
Schedule of non-cash transactions:
Change in fair value of interest rate swap contracts $ 475,544 $ 739,778 $ 72,495 $ 236,698
================ ================= ================= ==================
See accompanying notes.
6
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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 nine months ended September 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.
7
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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 September 30,
2003 Losses Leases Dispositions 2004
---- ------ ------ - ------------- ----
Net investment in operating
leases $51,653,739 $ - $ (8,016,975) $(1,835,459) $ 41,801,305
Net investment in direct
financing leases 8,178,561 - (1,397,668) (1,678,801) 5,102,092
Assets held for sale or lease, net
of accumulated depreciation of
$15,218,657 in 2004 and
$18,795,631 in 2003 11,891,344 (455,366) - (970,201) 10,465,777
Initial direct costs, net of
accumulated amortization of
$982,423 in 2004 and
$956,767 in 2003 103,853 - (31,022) - 72,831
------------------ ---------------- ----------------- ----------------- ------------------
$71,827,497 $ (455,366) $ (9,445,665) $(4,484,461) $ 57,442,005
================== ================ ================= ================= ==================
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 nine month
periods ended September 30, 2004 and 2003, management determined that the value
of certain refuse and other vehicles (in 2004) and jumbo covered hopper rail
cars, locomotives and off shore supply vessels (in 2003) had declined in value
to the extent that the carrying values had become impaired. These declines are
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 $455,366 and $4,559,020 for the nine months ended
September, 2004 and 2003, respectively.
For the nine months ended September 30, 2003 a correcting entry of $517,926
(included in the $4,559,020 above) was recorded 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
nine months ending September 30, 2003. The effect of the additional provision
recorded in the nine months ended September 30, 2003 was to increase the loss in
the nine months ended September 30, 2003 by $0.03 per Unit.
8
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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 nine month periods ended September 30:
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Depreciation of operating lease assets $8,016,975 $11,253,710 $ 2,196,131 $ 3,467,701
Impairment losses 455,366 4,559,020 - 4,041,094
---------------- ----------------- ----------------- ------------------
$8,472,341 $15,812,730 $ 2,196,131 $ 7,508,795
================ ================= ================= ==================
Net investment in operating leases:
Property on operating leases consists of the following:
Balance Reclassi- Balance
December 31, Impairment Depreciation fications and September 30,
2003 Losses Expense Dispositions 2004
---- ------ ------- ------------ ----
Transportation $72,164,281 $ - $ - $ 7,232,739 $ 79,397,020
Construction 20,168,993 - - (12,214,614) 7,954,379
Marine vessels/barges 14,978,042 - - (10,034,750) 4,943,292
Mining 8,410,345 - - (3,710,770) 4,699,575
Materials handling 3,558,657 - - (231,595) 3,327,062
Manufacturing 4,553,440 - - (286,574) 4,266,866
Communications 3,748,058 - - (3,472,123) 275,935
Office automation 3,521,046 - - - 3,521,046
Other 3,347,789 - - 379,391 3,727,180
------------------ ---------------- ----------------- ----------------- ------------------
134,450,651 - - (22,338,296) 112,112,355
Less accumulated depreciation (82,796,912) - (8,016,975) 20,502,837 (70,311,050)
------------------ ---------------- ----------------- ----------------- ------------------
$51,653,739 $ - $ (8,016,975) $(1,835,459) $ 41,801,305
================== ================ ================= ================= ==================
9
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
3. Investment in leases (continued):
Net investment in direct financing leases:
The following lists the components of the Company's net investment in direct
financing leases as of September 30, 2004:
Total minimum lease payments receivable $ 4,160,274
Estimated residual values of leased equipment (unguaranteed) 2,484,464
-----------------
Investment in direct financing leases 6,644,738
Less unearned income (1,542,646)
-----------------
Net investment in direct financing leases $ 5,102,092
=================
At September 30, 2004, the aggregate amounts of future minimum lease payments
are as follows:
Direct
Operating Financing
Leases Leases Total
Three months ending December 31,2004 $1,823,475 $ 763,009 $ 2,586,484
Year ending December 31, 2005 5,722,239 1,982,568 7,704,807
2006 2,095,882 708,415 2,804,297
2007 972,468 512,748 1,485,216
2008 577,178 193,534 770,712
2009 188,566 - 188,566
Thereafter 375,415 - 375,415
---------------- ----------------- -----------------
$11,755,223 $4,160,274 $ 15,915,497
================ ================= =================
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
Three months ending December 31,2004 $ 68,547 $ 8,895 $ 77,442
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
---------------- ----------------- -----------------
$ 536,256 $ 49,957 $ 586,213
================ ================= =================
10
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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 (2.1885% at September 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
September 30, 2004, the Partnership receives or pays interest on a notional
principal of $11,148,664, 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 September 30, September 30, September 30, Swap
Date Borrowed Borrowed 2004 2004 2004 Agreement
- ------------- -------- ---- ---- ---- ---------
4/1/1998 $21,770,000 $ 1,000 $ 29,542 $ (177) 6.220% *
7/1/1998 25,000,000 1,979,000 1,992,993 (101,206) 6.155% *
10/1/1998 20,000,000 1,865,000 1,979,213 (35,118) 5.550% *
4/16/1999 9,000,000 1,219,000 1,222,341 (32,008) 5.890% *
1/26/2000 11,700,000 3,119,000 3,118,561 (202,656) 7.580% *
5/25/2001 2,000,000 623,000 691,440 (19,746) 5.790% *
9/28/2001 6,000,000 1,805,000 2,114,574 (28,938) 4.360% *
1/31/2002 4,400,000 58,000 - - **
2/19/2002 5,700,000 - - - **
------------------ ---------------- ----------------- -----------------
$105,570,000 $10,669,000 $11,148,664 $ (419,849)
================== ================ ================= =================
* 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.
11
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
5. Long-term debt (continued):
The long-term debt borrowings mature from 2004 through 2007. 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***
--------- ----------- -------- ----- -------------
Three months ending December 31,2004 $ 1,669,000 $ 3,000 $ 156,376 $ 1,828,376 6.109%-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 1,504,000 - 16,816 1,520,816 6.872%-6.879%
------------------ ---------------- ----------------- -----------------
$10,611,000 $ 58,000 $ 744,685 $ 11,413,685
================== ================ ================= =================
*** Represents the range of monthly weighted average fixed interest rates paid
for amounts maturing in the particular year. The receive-variable rate portion
of the swap represents commercial paper rates (2.1885% at September 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. 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.
AFS is entitled to receive an incentive management fee (computed as 4% of
distributions of cash from operations, as defined in the Limited Partnership
Agreement) and an equipment management fee (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).
12
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
6. Related party transactions (continued):
During the nine and three month periods ended September 30, 2004 and 2003, AFS
and/or affiliates earned fees, commissions and reimbursements, pursuant to the
Limited Partnership Agreement as follows:
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Equipment and incentive management fees to
AFS $ 456,452 $ 751,255 $ 117,435 $ 279,773
Administrative costs reimbursed to AFS 790,203 828,448 13,072 24,714
Reimbursements of other payments made by
AFS on behalf of the Company 335,208 293,138 90,005 105,080
---------------- ----------------- ----------------- ------------------
$1,581,863 $1,872,841 $ 220,512 $ 409,567
================ ================= ================= ==================
7. Financing arramgement:
The Partnership participates with AFS and certain of its affiliates in a
financing arrangement (comprised of a term loan to AFS, an acquisition facility
and a warehouse facility) with a group of financial institutions that includes
certain financial covenants. The available financing arrangement was amended
during the current quarter and the overall financing arrangement was increased
by $4,300,000 to $70,000,000 and expires in June 2006. The availability of
borrowings available to the Partnership under this financing arrangement is
reduced by the amount AFS has outstanding as a term loan. As of September 30,
2004 borrowings under the facility were as follows:
Total amount available under the financing arrangement $ 70,000,000
Term loan to AFS as of September 30, 2004 (2,809,091)
------------------
Total available under the acquisition and warehouse facilities 67,190,909
Amount borrowed by the Partnership under the acquisition
facility (13,300,000)
Amounts borrowed by affiliated partnerships and limited
liability companies under the acquisition facility (1,000,000)
------------------
Total remaining available under the acquisition and
warehouse facilities $ 52,890,909
==================
Subsequent to quarter end the revolving line of credit was increased $5,000,000
to an overall available credit limit of $75,000,000.
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 September
30, 2004. Interest rates on the balances outstanding at September 30, 2004
ranged from 3.54% to 4.75%.
13
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
8. Other comprehensive income:
In 2004 and 2003, other comprehensive income consisted of the following:
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Net loss $ (1,298,457) $ (3,031,269) $ (343,332) $(3,776,766)
Other comprehensive income:
Change in fair value of interest rate swap contracts 475,544 739,778 72,495 236,698
---------------- ----------------- ----------------- ------------------
Comprehensive net loss $ (822,913) $ (2,291,491) $ (270,837) $(3,540,068)
================ ================= ================= ==================
There were no other sources of comprehensive net loss.
9. Partner's capital:
As of September 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:
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Distributions $6,386,239 $11,247,386 $ 1,874,914 $ 3,749,948
Weighted average number of Units outstanding 14,995,550 14,995,883 14,995,550 14,995,550
Weighted average distributions per Unit $ 0.43 $ 0.75 $ 0.13 $ 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 three 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
financing arrangement (comprised of a term loan to AFS, an acquisition facility
and a warehouse facility) with a group of financial institutions that includes
certain financial covenants. The available financing arrangement was amended
during the current quarter and the overall financing arrangement was increased
by $4,300,000 to $70,000,000 and expires in June 2006. The availability of
borrowings available to the Partnership under this financing arrangement is
reduced by the amount AFS has outstanding as a term loan. As of September 30,
2004 borrowings under the facility were as follows:
Total amount available under the financing arrangement $ 70,000,000
Term loan to AFS as of September 30, 2004 (2,809,091)
------------------
Total available under the acquisition and warehouse facilities 67,190,909
Amount borrowed by the Partnership under the acquisition
facility (13,300,000)
Amounts borrowed by affiliated partnerships and limited
liability companies under the acquisition facility (1,000,000)
------------------
Total remaining available under the acquisition and
warehouse facilities $ 52,890,909
==================
Subsequent to quarter end the revolving line of credit was increased $5,000,000
to an overall available credit limit of $75,000,000.
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
September 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.
15
Cash Flows
During the first three quarters of 2004, the Partnership's primary source of
liquidity was rents from assets on operating leases. During the first three
quarters 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 2004 and in
2003 for both the three and nine month periods ended September 30.
In the three and nine month periods ended September 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 nine month period ended September 30, 2004, proceeds from sales of lease
assets decreased compared to the same period in 2003. 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 three quarters of either 2004 or 2003.
In the three and nine month periods ended September 30, 2004 and 2003, the
sources of cash from financing activities were borrowings under the line of
credit (2004 and 2003) and proceeds from a non-recourse note (2003 only).
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 $17,800,000 in the first nine months of 2003 to $8,441,000
in the comparable period in 2004. Most of the proceeds from the sales of lease
assets in the first three quarters of 2003 were used to repay long-term debt.
Results of operations
Operations in 2004 resulted in a net loss of $1,298,457 (nine months) and
$343,332 (three months). Operations in 2003 resulted in net loss of $3,031,269
(nine months) and $3,776,766 (three months). 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 nine month periods decreased from
$14,674,318 in 2003 to $11,466,378 in 2004. For the three month periods, they
decreased from $4,736,287 in 2003 to $3,454,214 in 2004. The decreases were the
result of asset sales over the last two years.
In the nine month period ended September 30, 2003, sales of lease assets
resulted in a gain of $2,285,677 compared to a loss of $148,317 in 2004. In the
three month period ended September 30, 2003, sales of lease assets resulted in a
gain of $96,552, as compared to a loss of $663,174 for the same period 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 depreciation expense has decreased.
Total debt has decreased from $32,712,571 at September 30, 2003 to $24,505,256
at September 30, 2004, a decrease of $8,207,315. This has led to the
approximately 30% decrease in interest expense in 2004 compared to the
comparable periods in 2003. For the nine month periods ended September 30,
interest expense decreased by $456,207. For the three month periods ended
September 30, the decrease was $133,277.
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 $506,649 to $368,634 between the nine month
periods ended September 30, 2003 and 2004, respectively. The fees decreased from
$158,933 to $107,330 between the three month periods ended September 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 $244,605 to $87,818 between the
nine month periods ended September 30, 2003 and 2004, respectively. Incentive
management fees have decreased from $120,840 to $10,105 for the three month
periods ended September 30, 2003 and 2004, respectively.
In 2004 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.
16
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 nine month
periods ended September 30, 2004 and 2003, management determined that the value
of a fleet certain refuse and other vehicles (in 2004) and covered hopper rail
cars, locomotives and off shore supply vessels (in 2003) had declined in value
to the extent that the carrying values had become impaired. These declines are
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 $455,366 and $4,559,020 for the nine months
ended September 30, 2004 and 2003, respectively. During the three months ended
September 30, 2003, $4,041,094 of the impairment losses were recorded related to
locomotives and other assets. No similar impairments were noted in the three
month period ended September 30, 2004.
For the nine months ended September 30, 2003 a correcting entry of $517,926
(included in the $4,559,020 above) was recorded 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
nine months ending September 30, 2003. The effect of the additional provision
recorded in the nine months ended September 30, 2003 was to increase the loss in
the nine months ended September 30, 2003 by $0.03 per Unit.
Railcar and equipment maintenance increased from $513,661 to $962,373 between
the nine month periods ended September 30, 2003 and 2004, respectively. Railcar
and equipment maintenance increased from $188,538 to $353,394 betweenr the three
month periods ended September 30, 2003 and 2004, respectively. The majority of
costs were incurred in repairing certain railcars in order to place them on a
new lease.
The provision for doubtful accounts increased from ($3,000) to $65,437 between
the nine month periods ended September 30, 2003 and 2004, respectively. The
recoveries of doubtful accounts decreased from $139,000 to $6,001 between the
three month periods ended September 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
allowances 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 September 30, 2004, there was a $13,300,000 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 September 30, 2004, borrowings on the
facility were $10,669,000 and the associated variable interest rate was 2.1885%
and the average fixed interest rate achieved with the swap agreements was
6.135%.
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 settled with Partnership. The Partnership received the $90,000 settlement
during August 2004.
Item 2. Unregistered Sales of Equity 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.
Item 5. Other Information.
Inapplicable.
18
Item 6. Exhibits.
(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
19
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:
November 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
20