Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| Quarterly Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act
of 1934. For the quarterly period ended
March 31, 2003
|_| 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 March 31, 2003 was
14,996,050
DOCUMENTS INCORPORATED BY REFERENCE
None
1
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited).
2
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
BALANCE SHEETS
MARCH 31, 2003 AND DECEMBER 31, 2002
(Unaudited)
ASSETS
2003 2002
---- ----
Cash and cash equivalents $ 1,382,258 $ 2,194,169
Accounts receivable, net of allowance for
doubtful accounts of $608,150 in 2003
and $403,067 in 2002 3,373,201 4,848,736
Due from General Partner - 253,543
Other assets - 10,019
Investments in leases 90,778,031 108,917,281
----------------- ------------------
Total assets $ 95,533,490 $116,223,748
================= ==================
LIABILITIES AND PARTNERS' CAPITAL
Other long-term debt $30,359,000 $33,546,000
Non-recourse debt 3,313,052 4,577,308
Lines of credit - 13,300,000
Accounts payable:
General Partner 909,051 -
Other 624,897 752,459
Accrued interest expense 155,665 192,403
Interest rate swap contracts 1,511,466 1,624,360
Unearned operating lease income 737,181 1,012,984
----------------- ------------------
Total liabilities 37,610,312 55,005,514
Partners' capital 57,923,178 61,218,234
----------------- ------------------
Total liabilities and partners' capital $ 95,533,490 $116,223,748
================= ==================
See accompanying notes.
3
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
INCOME STATEMENTS
THREE MONTH PERIODS ENDED
MARCH 31, 2003 AND 2002
(Unaudited)
2003 2002
---- ----
Revenues:
Leasing activities:
Operating leases $ 5,543,069 $ 6,710,984
Direct financing leases 274,332 403,680
Gain (loss) on sales of assets 2,153,445 (47,336)
Interest 1,668 6,117
Other 26,912 2,111
----------------- ------------------
7,999,426 7,075,556
Expenses:
Depreciation and amortization 4,523,617 4,423,512
Cost reimbursements to General Partner 780,304 564,026
Interest expense 620,293 889,598
Impairment losses 517,926 -
Equipment and incentive management fees to General Partner 360,964 282,352
Provision for doubtful accounts 220,000 300,000
Railcar maintenance 109,490 153,210
Professional fees 36,301 93,529
Other 180,395 149,812
----------------- ------------------
7,349,290 6,856,039
----------------- ------------------
Net income $ 650,136 $ 219,517
================= ==================
Net income (loss):
General Partner $ 308,138 $ 296,307
Limited Partners 341,998 (76,790)
----------------- ------------------
$ 650,136 $ 219,517
================= ==================
Net income (loss) per Limited Partnership Unit $ 0.02 $ (0.01)
Weighted average number of Units outstanding 14,996,050 14,996,050
See accompanying notes.
4
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
THREE MONTH PERIOD ENDED
MARCH 31, 2003
(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 - (3,749,948) (308,138) - (4,058,086)
Unrealized decrease in value of
interest rate swap contracts - - - 112,894 112,894
Net income - 341,998 308,138 - 650,136
----------------- ------------------ ----------------- ----------------- ------------------
Balance March 31, 2003 14,996,050 $ 59,434,644 $ - $(1,511,466) $57,923,178
================= ================== ================= ================= ==================
See accompanying notes.
5
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENT OF CASH FLOWS
THREE MONTH PERIODS ENDED
MARCH 31, 2003 AND 2002
2003 2002
---- ----
Operating activities:
Net income $ 650,136 $ 219,517
Adjustments to reconcile net income to cash provided by operating activities:
(Gain) loss on sales of assets (2,153,445) 47,336
Depreciation and amortization 4,523,617 4,423,512
Impairment losses 517,926 -
Provision for doubtful accounts 220,000 300,000
Changes in operating assets and liabilities:
Accounts receivable 1,255,535 1,337,952
Due from General Partner 253,543 -
Other assets 10,019 67,999
Accounts payable, General Partner 909,051 (293,828)
Accounts payable, other (127,562) 256,778
Accrued interest expense (36,738) (71,471)
Unearned lease income (275,803) 44,132
----------------- ------------------
Net cash provided by operations 5,746,279 6,331,927
----------------- ------------------
Investing activities:
Proceeds from sales of assets 14,689,581 240,881
Reduction of net investment in direct financing leases 561,571 809,865
Purchases of equipment on operating leases - (3,959,522)
Purchases of equipment on direct financing leases - (3,059,140)
Initial direct costs paid to General Partner - (107,961)
----------------- ------------------
Net cash provided by (used in) investing activities 15,251,152 (6,075,877)
----------------- ------------------
Financing activities:
Repayments of borrowings under line of credit (13,800,000) (9,800,000)
Distributions to limited partners (3,749,948) (3,749,948)
Repayments of other long-term debt (3,187,000) (4,596,000)
Repayments of non-recourse debt (1,264,256) (1,756,537)
Borrowings under line of credit 500,000 9,700,000
Distributions to General Partner (308,138) (296,307)
Proceeds of other long-term debt - 10,100,000
----------------- ------------------
Net cash used in financing activities (21,809,342) (398,792)
----------------- ------------------
Net decrease in cash and cash equivalents (811,911) (142,742)
Cash and cash equivalents at beginning of period 2,194,169 936,189
----------------- ------------------
Cash and cash equivalents at end of period $ 1,382,258 $ 793,447
================= ==================
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 657,031 $ 961,069
================= ==================
See accompanying notes.
6
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2003
(Unaudited)
1. Summary of significant accounting policies:
Basis of presentation:
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles 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. 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,
2002, filed with the Securities and Exchange Commission.
2. Organization and partnership matters:
ATEL Capital Equipment Fund VII, L.P. (the Fund), 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.
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 Fund 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, an affiliated entity, acts as the General Partner
of the Fund.
3. Investment in leases:
The Fund's investment in leases consists of the following:
Depreciation
Balance Expense and Reclassi- Balance
December 31, Impairment Amortization fications and March 31,
2002 Losses of Leases Dispositions 2003
---- ------ --------- - ------------- ----
Net investment in operating
leases $ 84,026,902 $ (517,926) $(4,472,905) $(11,542,016) $67,494,055
Net investment in direct
financing leases 16,227,117 - (561,571) (5,921,317) 9,744,229
Assets held for sale or lease 10,563,086 - - 2,815,604 13,378,690
Reserve for losses (2,111,593) - - 2,111,593 -
Initial direct costs, net of
accumulated amortization of
$899,563 in 2003 and $905,356 in
2002 211,769 - (50,712) - 161,057
----------------- ------------------ ----------------- ----------------- ------------------
$108,917,281 $ (517,926) $(5,085,188) $(12,536,136) $90,778,031
================= ================== ================= ================= ==================
7
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2003
(Unaudited)
3. Investment in leases (continued):
Property on operating leases consists of the following:
Balance Reclassi- Balance
December 31, Impairment Depreciation fications and March 31,
2002 Losses Expense Dispositions 2003
---- ------ ------- ------------ ----
Transportation $ 74,889,008 $ - $ - $ 1,654,985 $76,543,993
Construction 22,414,263 - - (1,165,750) 21,248,513
Marine vessels/barges 27,030,136 - - (7,335,250) 19,694,886
Mining 9,012,965 - - (369,793) 8,643,172
Materials handling 9,009,095 - - (4,058,323) 4,950,772
Manufacturing 9,367,388 - - (4,813,948) 4,553,440
Communications 4,309,885 - - (561,827) 3,748,058
Office automation 3,604,688 - - (83,642) 3,521,046
Other 6,034,386 - - (2,654,831) 3,379,555
----------------- ------------------ ----------------- ----------------- ------------------
165,671,814 - - (19,388,379) 146,283,435
Less accumulated depreciation (81,644,912) (517,926) (4,472,905) 7,846,363 (78,789,380)
----------------- ------------------ ----------------- ----------------- ------------------
$ 84,026,902 $ (517,926) $(4,472,905) $(11,542,016) $67,494,055
================= ================== ================= ================= ==================
All of the property on leases was acquired in 1997, 1998, 1999, 2001 and 2002.
At March 31, 2003, the aggregate amounts of future minimum lease payments are as
follows:
Direct
Operating Financing
Leases Leases Total
Nine months ending December 31, 2003 $ 8,801,270 $ 1,715,260 $ 10,516,530
Year ending December 31, 2004 8,135,719 2,135,616 10,271,335
2005 5,040,196 2,135,616 7,175,812
2006 828,759 945,719 1,774,478
2007 57,600 535,056 592,656
Thereafter 96,000 204,253 300,253
------------------ ----------------- -----------------
$ 22,959,544 $ 7,671,520 $ 30,631,064
================== ================= =================
Direct financing leases:
As of March 31, 2003, investment in direct financing leases consists primarily
rail cars. The following lists the components of the Company's investment in
direct financing leases as of March 31, 2003:
Total minimum lease payments receivable $ 7,671,520
Estimated residual values of leased equipment (unguaranteed) 5,102,772
--------------
Investment in direct financing leases 12,774,292
Less unearned income (3,030,063)
--------------
Net investment in direct financing leases $ 9,744,229
==============
8
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2003
(Unaudited)
4. Non-recourse debt:
Notes payable to financial institutions are due in varying monthly, quarterly
and semi-annual installments of principal and interest. The notes are secured by
assignments of lease payments and pledges of the assets which were purchased
with the proceeds of the particular notes. Interest rates on the notes vary from
7.0% to 16.6%.
Future minimum payments of non-recourse debt are as follows:
Principal Interest Total
Nine months ending December 31, 2003 $ 2,344,935 $ 220,882 $ 2,565,817
Year ending December 31, 2004 313,874 67,654 381,528
2005 322,838 42,927 365,765
2006 216,850 20,179 237,029
2007 90,838 5,141 95,979
Thereafter 23,717 278 23,995
------------------ ----------------- -----------------
$ 3,313,052 $ 357,061 $ 3,670,113
================== ================= =================
5. Other long-term debt:
In 1998, the Fund 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 Fund. The Program provides for borrowing at
a variable interest rate (1.3447% at March 31, 2003). As of March 31, 2002, the
program was closed as to any additional borrowings.
The Program requires the General Partner to enter into various interest rate
swaps with a financial institution (also rated A1/P1) to manage interest rate
exposure associated with variable rate obligations under the Program by
effectively converting the variable rate debt to fixed rates. As of March 31,
2003, the Fund receives or pays interest on a notional principal of $23,155,000,
based on the difference between nominal rates ranging from 4.36% to 7.58% and
the variable rate under the Program. No actual borrowing or lending is involved.
The last of the swaps terminates in 2009. 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.
9
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2003
(Unaudited)
5. Other long-term debt (continued):
Borrowings under the Program are as follows:
Original Balance Rate on
Amount March 31, Interest Swap
Date Borrowed Borrowed 2003 Agreement
------------- -------- ---- ---------
4/1/98 $ 21,770,000 $ 995,000 6.220%
7/1/98 25,000,000 3,065,000 6.155%
10/1/98 20,000,000 5,305,000 5.550%
4/16/99 9,000,000 2,300,000 5.890%
1/26/00 11,700,000 6,252,000 7.580%
5/25/01 2,000,000 1,303,000 5.790%
9/28/01 6,000,000 3,935,000 4.360%
1/31/02 4,400,000 3,192,000 *
2/19/02 5,700,000 4,012,000 *
------------------ -----------------
$105,570,000 $ 30,359,000
================== =================
* Under the terms of the Program, no interest rate swap agreements were required
for these borrowings.
The long-term debt borrowings mature from 2004 through 2009. Future minimum
principal payments of long-term debt are as follows:
Swap Notional / Debt Rates on
Debt Principal Interest Swap
Principal Not Swapped Interest Total Agreements**
--------- ----------- -------- ----- ------------
Nine months ending December 31, 2003 $ 6,378,000 $ 1,959,000 $ 1,175,239 $ 9,512,239 5.860%-5.878%
Year ending December 31, 2004 7,186,000 2,272,000 1,041,833 10,499,833 5.871%-5.910%
2005 5,766,000 2,109,000 539,350 8,414,350 5.927%-6.257%
2006 1,946,000 864,000 206,986 3,016,986 6.414%-7.009%
2007 903,000 - 103,979 1,006,979 7.007%-7.211%
2008 635,000 - 46,443 681,443 7.245%-7.480%
2009 341,000 - 12,229 353,229 7.58%
----------------- ------------------ ----------------- -----------------
$ 23,155,000 $ 7,204,000 $ 3,126,059 $ 33,485,059
================= ================== ================= =================
** 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 (1.3447% at March 31, 2003).
10
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2003
(Unaudited)
6. Related party transactions:
The terms of the Limited Partnership Agreement provide that the General Partner
and/or Affiliates are entitled to receive certain fees for equipment
acquisition, management and resale and for management of the Fund.
The Limited Partnership Agreement allows for the reimbursement of costs incurred
by the General Partner in providing services to the Fund. Services provided
include Fund accounting, investor relations, legal counsel and lease and
equipment documentation. The General Partner 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 the General Partner are allocated to the Fund based upon actual time
incurred by employees working on Fund business and an allocation of rent and
other costs based on utilization studies.
Substantially all employees of the General Partner record time incurred in
performing services on behalf of all of the Funds serviced by the General
Partner. The General Partner believes that the costs reimbursed are the lower of
(i) actual costs incurred on behalf of the Fund or (ii) the amount the Fund
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.
The General Partner and/or Affiliates earned fees, commissions and
reimbursements, pursuant to the Limited Partnership Agreement as follows:
2003 2002
---- ----
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) $ 360,964 $ 282,352
Costs reimbursed to General Partner 780,304 564,026
----------------- ------------------
$ 1,141,268 $ 846,378
================= ==================
11
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2003
(Unaudited)
7. Line of credit:
The Fund participates with the General Partner and certain of its affiliates in
a $56,191,292 revolving line of credit (comprised of an acquisition facility and
a warehouse facility) with a financial institution that includes certain
financial covenants. The line of credit expires on June 28, 2004. As of March
31, 2003, borrowings under the facility were as follows:
Amount borrowed by the Fund under the acquisition facility $ -
Amounts borrowed by affiliated partnerships and limited facility 17,200,000
----------------
Total borrowings under the acquisition facility 17,200,000
Amounts borrowed by the General Partner and its sister
corporation under the warehouse facility -
----------------
Total outstanding balance $ 17,200,000
================
Total available under the line of credit $ 56,191,292
Total outstanding balance (17,200,000)
----------------
Remaining availability $ 38,991,292
================
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 Fund and the General Partner.
The credit agreement includes certain financial covenants applicable to each
borrower. The Fund was in compliance with its covenants as of March 31, 2003.
8. Other comprehensive income:
For the three month periods ended March 31, 2003 and 2002, other comprehensive
income consisted of the following:
2003 2002
---- ----
Net income $ 650,136 $ 219,517
Other comprehensive income:
Change in value of interest rate swap contracts 112,894 241,121
--------------- ---------------
Comprehensive net income $ 763,030 $ 460,638
=============== ===============
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statements contained in this Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Form 10-Q,
which are not historical facts, may be forward-looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Investors are cautioned not
to attribute undue certainty to these forward-looking statements, which speak
only as of the date of this Form 10-Q. We undertake no obligation to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances after the date of this Form 10-Q or to reflect the occurrence of
unanticipated events, other than as required by law.
Capital Resources and Liquidity
During the first quarter of 2003 and 2002, the Partnership's primary activity
was engaging in equipment leasing and sales activities.
In the first quarter of 2003, the Fund's primary source of cash flows was from
the proceeds of sales of lease assets. In the first quarter of 2002, the Fund's
primary source of liquidity was operating lease rents. The liquidity of the Fund
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 Fund has contractual obligations with a
diversified group of lessees for fixed lease terms at fixed rental amounts. As
the initial lease terms expire the Fund 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 Fund participates with the General Partner and certain of its affiliates in
a $56,191,292 revolving line of credit (comprised of an acquisition facility and
a warehouse facility) with a financial institution that includes certain
financial covenants. The line of credit expires on June 28, 2004. As of March
31, 2003, borrowings under the facility were as follows:
Amount borrowed by the Fund under the acquisition facility $ -
Amounts borrowed by affiliated partnerships and limited facility 17,200,000
----------------
Total borrowings under the acquisition facility 17,200,000
Amounts borrowed by the General Partner and its sister
corporation under the warehouse facility -
----------------
Total outstanding balance $ 17,200,000
================
Total available under the line of credit $ 56,191,292
Total outstanding balance (17,200,000)
----------------
Remaining availability $ 38,991,292
================
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 Fund and the General Partner.
The Fund anticipates reinvesting a portion of lease payments from assets owned
in new leasing transactions. Such reinvestment will occur only after the payment
of all obligations, including debt service (both principal and interest), the
payment of management and acquisition fees to the General Partner and providing
for cash distributions to the Limited Partners.
The Fund currently has available adequate reserves to meet contingencies, but in
the event those reserves were found to be inadequate, the Fund 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
March 31, 2003.
If inflation in the general economy becomes significant, it may affect the Fund
inasmuch as the residual (resale) values and rates on re-leases of the Fund's
leased assets may increase as the costs of similar assets increase. However, the
Fund'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 Fund 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.
13
Cash Flows
In the first quarter of 2003, the Fund's primary source of cash flows was from
the proceeds of sales of lease assets. In the first quarter of 2002, the primary
source of liquidity was rents from operating leases. Cash from operating
activities was almost entirely from operating lease rents in both quarters.
In the first quarter of 2003 and 2002, the only sources of cash from investing
activities was proceeds from sales of assets and rents from direct financing
leases accounted for as reductions of the Fund's net investment in direct
financing leases. In the first quarter of 2003, proceeds from sales of lease
assets increased compared to the first quarter of 2002. Proceeds from such sales
are not expected to be consistent from one year to another. In 2002 the primary
investing uses of cash were the purchase of assets on operating and direct
financing leases. There were no uses of cash in investing activities in the
first quarter of 2003.
In the first quarter of 2002, sources of cash from financing activities
consisted of amounts borrowed under the line of credit and under the other
long-term debt facility. In the first quarter of 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
increased from $9,800,000 in the first quarter of 2002 to $13,800,000 in the
first quarter of 2003. Most of the proceeds from the sales of lease assets in
the first quarter of 2003 were used to repay borrowings on the line of credit.
Results of operations
Operations resulted in a net income of $650,136 in the first quarter of 2003
compared to $219,517 in the first quarter of 2002. The Fund's primary source of
revenues is from operating leases. This is expected to remain true in future
periods. Depreciation expense is the single largest expense of the Fund.
Depreciation is related to operating lease assets and thus, to operating lease
revenues. Operating lease revenues have decreased quarter to quarter primarily
as a result of net asset dispositions. Increases in the amounts of equipment off
lease and lower lease rates realized on renewals have also contributed to the
decrease.
In the first quarter of 2003, sales of lease assets resulted in a gain of
$2,153,445 compared to a loss of $47,336 in the first quarter of 2002. Gains and
losses are not expected to be consistent from one period to another.
Equipment management fees are based on the Fund's rental revenues and have
decreased in relation to decreases in the Fund's revenues from leases. Such fees
decreased from $282,352 in the first quarter of 2002 to $219,595 in the first
quarter of 2003. Incentive management fees are based on the levels of
distributions to limited partners and the sources of the cash distributed. Such
fees have increased from zero in the first quarter of 2002 to $141,369 in the
first quarter of 2003.
The decrease in interest expense from $889,598 in the first quarter of 2002 to
$620,293 in the first quarter of 2003 is related to the reduction of total
outstanding debt as the result of scheduled payments and other debt paydowns.
In 2001 and 2002, the amounts of costs reimbursed to the General Partner were
limited by provisions of the Agreement of Limited Partnership. Costs that were
incurred by the General Partner in 2001, but that were not allowed in that year,
have been included in the first quarter of 2002. The costs amounted to
approximately $274,000. Costs that were incurred by the General Partner in 2002,
but which were not allowed in that year, have been included in the first quarter
of 2003. The costs amounted to approximately $626,000.
Item 3. Quantitative and Qualitative Disclosures of Market Risk.
The Fund, like most other companies, is exposed to certain market risks,
including primarily changes in interest rates. The Fund 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 Fund'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 Fund 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 Fund
frequently funds leases with its floating rate line of credit and is, therefore,
exposed to interest rate risk until fixed interest rate financing is arranged,
or the floating interest rate line of credit is repaid. As of March 31, 2003,
there was no outstanding balance on the floating rate line of credit.
Also, the Fund entered into a receivables funding facility in 1998. Since
interest on the outstanding balances under the facility varies, the Fund is
exposed to market risks associated with changing interest rates. To hedge its
interest rate risk, the Fund enters into interest rate swaps, which effectively
convert the underlying interest characteristic on the facility from floating to
fixed.
14
Under the swap agreements, the Fund 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 Fund is recognized as an adjustment to
interest expense related to the facility balances. The amount paid or received
represents the difference between the payments required under the variable
interest rate facility and the amounts due under the facility at the fixed
(hedged) interest rate. As of March 31, 2003, borrowings on the facility were
$30,359,000 and the associated variable interest rate was 1.3447% and the
average fixed interest rate achieved with the swap agreements was 5.87% at March
31, 2003.
Item 4. Controls and procedures.
Internal Controls
As of March 31, 2003, an evaluation was performed under the supervision and with
the participation of the Fund's management, including the CEO and CFO of the
General Partner, of the effectiveness of the design and operation of the Fund's
disclosure controls and procedures. Based on that evaluation, the Fund's
management, including the CEO and CFO of the General Partner, concluded that the
Fund's disclosure controls and procedures were effective as of March 31, 2003.
There have been no significant changes in the Fund's internal controls or in
other factors that could significantly affect internal controls subsequent to
March 31, 2003.
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.
Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management, including
the CEO and CFO, an evaluation of the effectiveness of the design and operation
of the Fund's disclosure controls and procedures, as defined in Rules
240.13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 was
performed as of a date within ninety days before the filing date of this
quarterly report. Based upon this evaluation, the CEO and CFO of the General
Partner concluded that, as of the evaluation date, our disclosure controls and
procedures were effective for the purposes of recording, processing, summarizing
and timely reporting information required to be disclosed by us in the reports
that we file under the Securities Exchange Act of 1934 and that such information
is accumulated and communicated to our management in order to allow timely
decisions regarding required disclosure.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
No material legal proceedings are currently pending against the Fund or against
any of its assets. The following is a discussion of legal matters involving the
Fund, but which do not represent claims against the Fund or its assets.
Applied Magnetics Corporation:
In January 2000, Applied Magnetics Corporation (the "Debtor") filed for
protection from creditors under Chapter 11 of the U.S. Bankruptcy Code. The Fund
had assets with a total net book value of $8,048,095 leased to Applied Magnetics
Corporation at the bankruptcy filing date. On January 31, 2000, the General
Partner was appointed to the Official Committee of Unsecured Creditors and
currently serves as the Chairperson of the Committee. Procedures were quickly
undertaken for the liquidation of the Fund's leased equipment, which proceeds
resulted in recoveries of $1,773,798 or 21.7% of original equipment cost. As of
November 1, 2000, liquidation of the assets was completed.
The debtor filed a Plan of Reorganization (the "Plan"), which was approved by a
vote of the creditors of the Debtor in October 2001. The Plan provided that the
Debtor change its name to Integrated Micro-Technology (IMT), and enter into a
new line of business, the manufacture and production of "micro-machines." As
part of the Plan, the Fund, along with the other unsecured creditors, receives a
proportionate share of its unsecured claims in the form of ownership shares and
warrants in the newly formed business. The success of this new business plan is
highly uncertain.
On February 13, 2002, the reorganized Debtor filed a notice of objection to the
Fund's claim due to duplication and an improper liquidated damages provision.
The Fund disputed this and, as of July 26, 2002, agreement has been reached
between the Fund and Debtor as to the amount of the Fund's claim, and the
Debtor's objection to the Fund's claim was withdrawn.
On April 28, 2003, the Fund received 139,133 shares of IMT stock. The Fund
anticipates additional amounts may be recoverable through its equity interests
in the reorganized lessee's business, however, any recoveries above the amounts
received upon liquidation of the Fund's equipment are highly uncertain and
speculative.
15
Pioneer Companies, Inc.:
On July 31, 2001, petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code were filed by the Pioneer Companies, Inc., et al (the "Debtor").
The Fund's Proof of Claim was timely filed on October 14, 2001, with the
Bankruptcy Clerk in Houston. The Fund is the successor in interest to First
Union Rail Corporation (FURC) under four (4) tank car lease schedules for 36
tank cars with Pioneer Chlor-Alkali Company, Inc. n/k/a Pioneer Americas, Inc.
(together, the "Lease"). FURC manages the Lease for the Fund. The Order
Confirming Debtor's Joint Plan of Reorganization Under Chapter 11 of the
Bankruptcy Code ("Plan") was entered on November 28, 2001. The Effective Date,
as defined in the Plan, was December 31, 2001. Pursuant to Schedules 6.1(a)(x)
and 6.1(a)(y) of the Plan, the Lease was rejected by the Debtor.
Although the equipment was to be returned to FURC by December 31, 2001, the
Debtor continued to use and pay for the equipment under the lease on a
month-to-month basis. A letter agreement has been executed by the Debtor to
formalize an understanding for debtor's continued use of the equipment under the
terms of the Lease on a month-to-month basis until the cars were returned. The
Debtor has also objected to the Fund's claim, which objection was disputed by
the Fund and has been resolved with the debtor allowing the Fund an allowed
secured claim in the amount of $193,765 via a stipulation was filed with the
court in April 2003. At this point, all equipment has been returned to the Fund,
and is in the process of being re-leased and/or sold. The full extent of any
recovery is not known at this time as the unsecured claim amount is being paid
out in the form of stock, which, while publicly traded, has a low valuation.
Fund intends to hold onto the stock received until such time as the market price
improves.
Item 2. Changes In Securities.
Inapplicable.
Item 3. Defaults Upon Senior Securities.
Inapplicable.
Item 4. Submission Of Matters To A Vote Of Security Holders.
Inapplicable.
Item 5. Other Information.
Inapplicable.
Item 6. Exhibits And Reports On Form 8-K.
(a) Documents filed as a part of this report
1. Financial Statements
Included in Part I of this report: Balance Sheets, March 31, 2003 and
December 31, 2002.
Income Statements for the three month periods ended March 31, 2003 and
2002. Statement of Changes in Partners' Capital for the three months
ended March 31, 2003. Statements of Cash Flows for the three month
periods ended March 31, 2003 and 2002. Notes to the Financial
Statements.
2. 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.
(b) Report on Form 8-K
None
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date:
May 13, 2003
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
(Registrant)
By: ATEL Financial Corporation
General Partner of Registrant
By: /s/ Dean L. Cash
-----------------------------------
Dean L. Cash
President and Chief Executive Officer
of General Partner
By: /s/ Paritosh K. Choksi
-----------------------------------
Paritosh K. Choksi
Principal Financial Officer
of Registrant
By: /s/ Donald E. Carpenter
-----------------------------------
Donald E. Carpenter
Principal Accounting
Officer of Registrant
17
CERTIFICATIONS
I, Paritosh K. Choksi, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ATEL Cash Distribution
Fund VII, LP;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ Paritosh K. Choksi
- -----------------------------------------
Paritosh K. Choksi
Principal Financial Officer of Registrant, Executive
Vice President of General Partner
18
CERTIFICATIONS
I, Dean L. Cash, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ATEL Cash Distribution
Fund VII, LP;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ Dean L. Cash
- -----------------------------------------
Dean L. Cash
President and Chief Executive
Officer of General Partner
19
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly report on Form 10-Q of ATEL Cash Distribution
Fund VII, LP, (the "Fund") for the period ended March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), and
pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002, I, Dean L. Cash, Chief Executive Officer of ATEL
Financial Services, LLC, General Partner of the Fund, hereby certify that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Fund.
Date: May 13, 2003
/s/ Dean L. Cash
- -----------------------------------------
Dean L. Cash
President and Chief Executive
Officer of General Partner
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly report on Form 10-Q of ATEL Cash Distribution
Fund VII, LP, (the "Fund") for the period ended March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), and
pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002, I, Paritosh K. Choksi, Chief Financial Officer of
ATEL Financial Services, LLC, General Partner of the Fund, hereby certify that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Fund.
Date: May 13, 2003
/s/ Paritosh K. Choksi
- -----------------------------------------
Paritosh K. Choksi
Executive Vice President of General
Partner, Principal Financial Officer of Registrant
20