UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
|X| Annual report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 (no fee required)
For the Year Ended December 31, 2004
OR
|_| Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 (no fee required)
For the transition period from ____ to ____
Commission File number 0-24175
ATEL Capital Equipment Fund VII, L.P.
California 94-3248318
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
600 California Street, 6th Floor, San Francisco, California 94108-2733
(Address of principal executive offices)
Registrant's telephone number, including area code (415) 989-8800
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Limited Partnership
Units
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
State the aggregate market value of voting stock held by non-affiliates of the
registrant: Inapplicable
The number of Limited Partnership Units outstanding as of December 31, 2004 was
14,995,550.
DOCUMENTS INCORPORATED BY REFERENCE
Prospectus dated November 29, 1996, filed pursuant to Rule 424(b) (Commission
File No. 333-08879) is hereby incorporated by reference into Part IV hereof.
1
PART I
Item 1: BUSINESS
General Development of Business
ATEL Capital Equipment Fund VII, L.P. (the Partnership) was formed under the
laws of the state of California in May 1996. The Partnership was formed for the
purpose of acquiring equipment to engage in equipment leasing and sales
activities. The General Partner of the Partnership is ATEL Financial Services
LLC (AFS). Prior to converting to a limited liability Partnership structure, AFS
was formerly known as ATEL Financial Corporation.
The Partnership conducted a public offering of 15,000,000 Units of Limited
Partnership Interest (Units) at a price of $10 per Unit. On January 7, 1997, the
Partnership commenced operations in its primary business (leasing activities).
As of November 27, 1998, the Partnership had received subscriptions for
15,000,000 ($150,000,000) Limited Partnership Units and the offering was
terminated. As of December 31, 2004, 14,995,550 Units were issued and
outstanding.
The Partnership's principal objectives are to invest in a diversified portfolio
of equipment that will (i) preserve, protect and return the Partnership's
invested capital; (ii) generate regular distributions to the partners of cash
from operations and cash from sales or refinancing, with any balance remaining
after certain minimum distributions to be used to purchase additional equipment
during the reinvestment period ("Reinvestment Period"), ending December 31, 2004
and (iii) provide additional distributions following the Reinvestment Period and
until all equipment has been sold. The Partnership is governed by its Limited
Partnership Agreement.
Narrative Description of Business
The Partnership has acquired and intends to acquire various types of equipment
and to lease such equipment pursuant to "Operating" leases and "High Payout"
leases, whereby "Operating" leases are defined as being leases in which the
minimum lease payments during the initial lease term do not recover the full
cost of the equipment and "High Payout" leases recover at least 90% of such
cost. It is the intention of AFS that a majority of the aggregate purchase price
of equipment will represent equipment leased under "High Payout" leases upon
final investment of the net proceeds of the offering and that no more than 20%
of the aggregate purchase price of equipment will be invested in equipment
acquired from a single manufacturer.
The Partnership will generally only purchase equipment for which a lease exists
or for which a lease will be entered into at the time of the purchase.
As of December 31, 2004, the Partnership had purchased equipment with a total
acquisition price of $302,751,046.
The Partnership's objective is to lease a minimum of 75% of the equipment
acquired with the net proceeds of the offering to lessees that (i) have an
aggregate credit rating by Moody's Investor Service, Inc. of Baa or better, or
the credit equivalent as determined by AFS, with the aggregate rating weighted
to account for the original equipment cost for each item leased or (ii) are
established hospitals with histories of profitability or municipalities. The
balance of the original equipment portfolio may include equipment leased to
lessees, which although deemed creditworthy by AFS, would not satisfy the
general credit rating criteria for the portfolio. In excess of 75% of the
equipment acquired with the net proceeds of the offering (based on original
purchase cost) has been leased to lessees with an aggregate credit rating of Baa
or better or to such hospitals or municipalities as described in (ii) above.
During 2004, one lessee generated 16% the Partnership's lease revenues. During
2003, no single lessee generated 10% of the Partnership's lease revenues. During
2002, one lessee generated 11% the Partnership's lease revenues.
Lessee Type of Equipment 2004 2003 2002
Transamerica Leasing International Containers 16% * *
General Motors Corporation Materials Handling * * 11%
* Less than 10%.
These percentages are not expected to be comparable in future periods.
2
The equipment leasing industry is highly competitive. Equipment manufacturers,
corporations, partnerships and others offer users an alternative to the purchase
of most types of equipment with payment terms that vary widely depending on the
lease term and type of equipment. The ability of the Partnership to keep the
equipment leased and/or operating and the terms of the acquisitions, leases and
dispositions of equipment depends on various factors (many of which are not in
the control of AFS or the Partnership), such as general economic conditions,
including the effects of inflation or recession, and fluctuations in supply and
demand for various types of equipment resulting from, among other things,
technological and economic obsolescence.
AFS will seek to limit the amount invested in equipment to any single lessee to
not more than 20% of the aggregate purchase price of equipment owned at any time
during the Reinvestment Period.
The business of the Partnership is not seasonal.
The Partnership has no full time employees.
Equipment Leasing Activities
The Partnership has acquired a diversified portfolio of equipment. The equipment
has been leased to lessees in various industries. The following tables set forth
the types of equipment acquired by the Partnership through December 31, 2004 and
the industries to which the assets have been leased. The Partnership has
purchased certain assets subject to existing non-recourse debt. For financial
statement purposes, non-recourse debt has been offset against the investment in
certain direct finance leases where the right of offset exists.
Purchase Price Excluding Percentage of Total
Asset Types Acquisition Fees Acquisitions
Transportation $ 135,842,930 44.87%
Manufacturing 45,709,520 15.10%
Mining 30,756,101 10.16%
Marine vessels 22,335,250 7.38%
Materials handling 16,318,944 5.39%
Office automation 11,449,934 3.78%
Medical 9,133,951 3.02%
Aircraft 6,310,979 2.08%
Other * 24,893,437 8.22%
----------------- -----------------
$ 302,751,046 100.00%
================= =================
* Individual amounts included in "Other" represent less than 2.5% of the total.
Purchase Price Excluding Percentage of Total
Industry of Lessee Acquisition Fees Acquisitions
Transportation, rail $ 73,779,368 24.36%
Municipalities 45,050,058 14.88%
Transportation, other 43,079,361 14.23%
Manufacturing, other 41,295,886 13.64%
Electronics 26,062,302 8.61%
Mining 17,670,967 5.84%
Business services 15,093,493 4.99%
Primary metals 13,251,254 4.38%
Other * 27,468,357 9.07%
----------------- -----------------
$ 302,751,046 100.00%
================= =================
* Individual amounts included in "Other" represent less than 2.5% of the total.
Through December 31, 2004, the Partnership has disposed of certain leased assets
as set forth below:
Excess of
Original Rents Over
Asset Types Equipment Cost Sale Price Expenses *
Mining $38,745,966 $ 11,086,865 $ 35,092,518
Transportation 27,172,154 10,877,022 17,864,099
Marine vessels 16,459,061 3,056,241 17,057,837
Office automation 15,535,652 1,502,508 16,797,085
Medical 12,809,895 8,416,248 6,772,818
Aircraft 10,982,354 3,757,240 10,798,091
Other 4,876,844 560,000 4,140,528
Manufacturing 4,759,285 2,352,872 4,020,720
Materials handling 4,708,142 4,954,738 2,576,835
---------------- ---------------- -----------------
$136,049,353 $ 46,563,734 $115,120,531
================ ================ =================
* Includes only those expenses directly related to the production of the related
rents.
3
For further information regarding the Partnership's equipment lease portfolio as
of December 31, 2004, see Note 3 to the financial statements, Investments in
equipment and leases, as set forth in Part II, Item 8, Financial Statements and
Supplementary Data.
Item 2. PROPERTIES
The Partnership does not own or lease any real property, plant or material
physical properties other than the equipment held for lease as set forth in Item
1.
Item 3. LEGAL PROCEEDINGS
In the ordinary course of conducting business, there may be certain claims,
suits, and complaints filed against the Partnership. In the opinion of
management, the outcome of such matters, if any, will not have a material impact
on the Partnership's consolidated financial position or results of operations.
No material legal proceedings are currently pending against the Partnership or
against any of its assets. The following is a discussion of legal matters
involving the Partnership, but which do not represent claims against the
Partnership or its assets.
Martin Marietta Magnesia Specialties Inc.:
The Partnership had filed a suit against Martin Marietta Magnesia Specialties
Inc. for failure to maintain equipment in accordance with the lease contract.
The Partnership had made a claim for recovery of $179,679 in damages. During the
year ended December 31, 2004, the Partnership settled this lawsuit and received
$90,000.
Cargill Inc. / GWI Leasing Corporation:
Cargill Inc. is a lessee of the Partnership. GWI Leasing Corporation ("GWI")
manages the equipment under the Cargill lease on behalf of the Partnership. The
Partnership was seeking unspecified damages from Cargill for failure to perform
certain responsibilities relating to the equipment under the lease agreement.
The Partnership was also seeking damages from GWI for failure to enforce the
terms of the lease contract. At December 31, 2004, the Partnership settled this
matter with respect to Cargill and is pursuing a settlement with GWI.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S LIMITED PARTNERSHIP UNITS
AND RELATED MATTERS
Market Information
There are certain material conditions and restrictions on the transfer of Units
imposed by the terms of the Limited Partnership Agreement. Consequently, there
is no public market for Units and it is not anticipated that a public market for
Units will develop. In the absence of a public market for the Units, there is no
currently ascertainable fair market value for the Units.
Holders
As of December 31, 2004, a total of 5,523 investors were holders of record of
Units in the Partnership.
ERISA Valuation
In order to permit ERISA fiduciaries who hold Units to satisfy their annual
reporting requirements, AFS estimated the value per Unit of the Partnership's
assets as of September 30, 2004. AFS calculated the estimated liquidation
proceeds that would be realized by the Partnership, assuming an orderly
disposition of all of the Partnership's assets as of January 1, 2005. The
estimates were based on the amount of remaining lease payments on existing
Partnership leases, and the estimated residual values of the equipment held by
the Partnership upon the termination of those leases. This valuation was based
solely on AFS's perception of market conditions and the types and amounts of the
Partnership's assets. No independent valuation was sought.
4
After calculating the aggregate estimated disposition proceeds, AFS then
calculated the portion of the aggregate estimated value of the Partnership
assets that would be distributed to Unit holders on liquidation of the
Partnership, and divided the total so distributable by the number of outstanding
Units. As of September 30, 2004, the value of the Partnership's assets,
calculated on this basis, was approximately $4.05 per Unit. The foregoing
valuation was performed solely for the ERISA purposes described above. There is
no market for the Units, and, accordingly, this value does not represent an
estimate of the amount a Unit holder would receive if he were to seek to sell
his Units. Furthermore, there can be no assurance as to the amount the
Partnership may actually receive if and when it seeks to liquidate its assets,
or the amount of lease payments and equipment disposition proceeds it will
actually receive over the remaining term of the Partnership.
Dividends
The Partnership does not make dividend distributions. However, the Limited
Partners of the Partnership are entitled to certain distributions as provided
under the Limited Partnership Agreement.
AFS has sole discretion in determining the amount of distributions; provided,
however, that AFS will not reinvest in equipment, but will distribute, subject
to payment of any obligations of the Partnership, such available cash from
operations and cash from sales or refinancing as may be necessary to cause total
distributions to the Limited Partners for each year during the Reinvestment
Period to equal $1.00 per Unit. The Reinvestment Period ended December 31, 2004.
Distributions for the year ended in December 31, 2004 were reduced to $0.50 per
Unit as determined by AFS.
The rate for monthly distributions from 2004 operations was $0.0416 per Unit.
The distributions were paid in February 2004 through December 2004 and in
January 2005. For each quarterly distribution (paid in April, July and October
2004 and in January 2005) the rate was $0.125 per Unit. Distributions were from
2004 cash flows from operations.
The rate for monthly distributions from 2003 operations was $0.0833 per Unit.
The distributions were paid in February 2003 through December 2003 and in
January 2004. For each quarterly distribution (paid in April, July and October
2003 and in January 2004) the rate was $0.25 per Unit. Distributions were from
2003 cash flows from operations.
The rate for monthly distributions from 2002 operations was $0.0833 per Unit.
The distributions were paid in February 2002 through December 2002 and in
January 2003. For each quarterly distribution (paid in April, July and October
2002 and in January 2003) the rate was $0.25 per Unit. Distributions were from
2002 cash flows from operations.
The following table presents summarized information regarding distributions to
Limited Partners:
2004 2003 2002 2001 2000
Net income (loss) per Unit, based on
weighted average Units outstanding $ (0.16) $ (0.37) $ (0.20) $ 0.01 $ 0.53
Return of investment 0.71 1.37 1.20 0.99 0.48
---------------- ----------------- ---------------- ----------------- -----------------
Distributions per Unit, based on
weighted average Units outstanding 0.55 1.00 1.00 1.00 1.01
Differences due to timing of distributions (0.05) - - - (0.01)
---------------- ----------------- ---------------- ----------------- -----------------
Actual distribution rates, per Unit $ 0.50 $ 1.00 $ 1.00 $ 1.00 $ 1.00
================ ================= ================ ================= =================
5
Item 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of the Partnership at
December 31, 2004, 2003, 2002, 2001 and 2000 and for the years then ended. This
financial data should be read in conjunction with the financial statements and
related notes included under Part II, Item 8.
2004 2003 2002 2001 2000
Gross revenues $15,165,578 $ 22,484,703 $ 25,942,773 $ 30,646,525 $ 41,463,919
Net income (loss) $ (1,678,535) $ (4,311,400) $ (1,772,503) $ 2,939,818 $ 9,158,705
Weighted average Units outstanding 14,995,550 14,995,675 14,996,050 14,996,050 14,996,050
Net income (loss) allocated to
Limited Partners $ (2,360,499) $ (5,551,311) $ (2,976,387) $ 140,295 $ 7,938,589
Net income (loss) per Unit, based on
weighted average Units outstanding $ (0.16) $ (0.37) $ (0.20) $ 0.01 $ 0.53
Distributions per Unit, based on
weighted average Units outstanding $ 0.55 $ 1.00 $ 1.00 $ 1.00 $ 1.01
Total Assets $56,090,044 $ 74,812,214 $ 116,223,748 $ 135,853,619 $157,600,746
Non-recourse Debt $ 467,709 $ 1,586,403 $ 4,577,308 $ 9,971,225 $ 15,452,741
Other Long-term Debt $ 8,997,000 $ 15,759,000 $ 33,546,000 $ 38,540,000 $ 44,877,000
Total Partners' Capital $31,382,533 $ 41,406,023 $ 61,218,234 $ 79,492,851 $ 94,163,608
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements contained in this Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Form 10-K,
which are not historical facts, may be forward-looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially form those projected. In particular, economic
recession and changes in general economic conditions, including, fluctuations in
demand for equipment, lease rates, and interest rates, may result in delays in
investment and reinvestment, delays in leasing, re-leasing, and disposition of
equipment, and reduced returns on invested capital. The Company's performance is
subject to risks relating to lessee defaults and the creditworthiness of its
lessees. The Fund's performance is also subject to risks relating to the value
of its equipment at the end of its leases, which may be affected by the
condition of the equipment, technological obsolescence and the markets for new
and used equipment at the end of lease terms. Investors are cautioned not to
attribute undue certainty to these forward-looking statements, which speak only
as of the date of this Form 10-K. We undertake no obligation to publicly release
any revisions to these forward-looking statements to reflect events or
circumstances after the date of this Form 10-K or to reflect the occurrence of
unanticipated events, other than as required by law.
Capital Resources and Liquidity
The Partnership's public offering provided for a total maximum capitalization of
$150,000,000. As of November 27, 1998, the offering was concluded. As of that
date, subscriptions for 15,000,000 Units had been received and accepted.
The liquidity of the Partnership will vary in the future, increasing to the
extent cash flows from leases and proceeds of asset sales exceed expenses, and
decreasing as lease assets are acquired, as distributions are made to the
Limited Partners and to the extent expenses exceed cash flows from leases and
proceeds from asset sales.
As another source of liquidity, the Partnership is expected to have contractual
obligations with a diversified group of lessees for fixed lease terms at fixed
rental amounts. As the initial lease terms expire, the Partnership will re-lease
or sell the equipment. The future liquidity beyond the contractual minimum
rentals will depend on AFS's success in re-leasing or selling the equipment as
it comes off lease.
6
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 financial arrangement is $75,000,000 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 December 31, 2004 borrowings under the
facility were as follows:
Total amount available under the financing arrangement $ 75,000,000
Term loan to AFS as of December 31, 2004 (2,027,636)
-----------------
Total available under the acquisition and warehouse facilities 72,972,364
Amount borrowed by the Partnership under the acquisition facility (13,500,000)
Amounts borrowed by affiliated partnerships and limited liability companies
under the
acquisition facility (17,000,000)
-----------------
Total remaining available under the acquisition and warehouse facilities $ 42,472,364
=================
Draws on the acquisition facility by any individual borrower are secured only by
that borrower's assets, including equipment and related leases. Borrowings on
the warehouse facility are recourse jointly to certain of the affiliated
partnerships and limited liability companies, the Partnership and AFS.
The credit agreement includes certain financial covenants applicable to each
borrower. The Partnership was in compliance with its covenants as of December
31, 2004.
The Partnership anticipates reinvesting a portion of lease payments from assets
owned in new leasing transactions. Such reinvestment will occur only after the
payment of all obligations, including debt service (both principal and
interest), the payment of management fees to AFS and providing for cash
distributions to the Limited Partners. At December 31, 2004, the Partnership had
no commitments to purchase lease assets.
As of December 31, 2004, cash balances consisted of working capital and amounts
reserved for distributions to be paid in January 2005, generated from operations
in 2004.
The Partnership currently has available adequate reserves to meet its immediate
cash requirements and those of the next twelve months, but in the event those
reserves were found to be inadequate, the Partnership would likely be in a
position to borrow against its current portfolio to meet such requirements. AFS
envisions no such requirements for operating purposes.
In 1998, the Partnership established a $65 million receivables funding program
with a receivables financing company that issues commercial paper rated A1 from
Standard and Poors and P1 from Moody's Investor Services. In this receivables
funding program, the lenders received a general lien against all of the
otherwise unencumbered assets of the Partnership. The program provided for
borrowing at a variable interest rate and required AFS to enter into interest
rate swap agreements with certain hedge counterparties (also rated A1/P1) to
mitigate the interest rate risk associated with a variable rate note. AFS
anticipated that this program would allow the Partnership to avail itself of
lower cost debt than that available for individual non-recourse debt
transactions. The Partnership's ability to borrow under the program expired in
February 2002. As of December 31, 2004, the Partnership had $8,997,000
outstanding under the receivables funding program. See Item 7a and Note 5 to the
financial statements, Other long-term debt, as set forth in Part II, Item 8,
Financial Statements and Supplementary Data, for additional information
regarding this program and related interest rate swaps.
It was the intention of the Partnership to use the receivables funding program
as its primary source of debt financing. The Partnership will continue to use
its sources of non-recourse secured debt financing on a transaction basis as a
means of mitigating credit risk.
AFS expects that aggregate borrowings in the future will be approximately 50% of
aggregate equipment cost. In any event, the Limited Partnership Agreement limits
such borrowings to 50% of the total cost of equipment, in aggregate.
See Note 4 to the financial statements, Non-recourse debt, as set forth in Part
II, Item 8, Financial Statements and Supplementary Data, for additional
information regarding non-recourse debt.
The Partnership commenced regular distributions, based on cash flows from
operations, beginning with the month of January 1997. See Items 5 and 6 of this
report for additional information regarding distributions.
7
If inflation in the general economy becomes significant, it may affect the
Partnership inasmuch as the residual (resale) values and rates on re-leases of
the Partnership's leased assets may increase as the costs of similar assets
increase. However, the Partnership's revenues from existing leases would not
increase, as such rates are generally fixed for the terms of the leases without
adjustment for inflation.
If interest rates increase significantly, the lease rates that the Partnership
can obtain on future leases will be expected to increase as the cost of capital
is a significant factor in the pricing of lease financing. Leases already in
place, for the most part, would not be affected by changes in interest rates.
Cash Flows
2004 vs. 2003:
Cash flows from operations decreased from $16,626,082 in 2003 to $9,828,946 in
2004, a decrease of $6,797,136. Rents from operating leases is the primary
source of operating cash flows. Sales of operating lease assets due to the
liquidation phase entered in 2004, led to the decrease in operating lease
revenues compared to 2003.
In 2004 and 2003, sources of cash from investing activities consisted of
proceeds from the sales of lease assets and from rents from direct financing
leases. Proceeds from the sales of lease assets decreased from $15,724,456 in
2003 to $5,503,961 in 2004, a decline of $10,220,495. The assets that were sold
in 2004 had an original cost of approximately $34,760,000. The assets sold in
2003 had an original cost of approximately $33,950,000. A significant portion of
the assets sold in 2003 were still on lease and had higher average values than
those sold in 2004. As a result, sales proceeds were higher in 2003 when
compared to 2004. Proceeds from the sales of lease assets are not expected to be
consistent from one period to another. Rents from direct financing leases
decreased by $43,331 (from $2,021,859 in 2003 to $1,978,528 in 2004) as a result
of sales of lease assets in 2003 and 2004.
In 2004, the main financing source of cash comprised of a $21,500,000 borrowing
under the line of credit. In 2003, financing sources of cash consisted of
proceeds of a new non-recourse note payable of $1,489,905 and borrowings on the
line of credit. Borrowings on the line of credit were used to manage short term
cash requirements. In 2004 and 2003, financing uses of cash involved repayments
of borrowings under the line of credit, other long-term debt, and non-recourse
debt, as well as distributions made to Limited Partners and the General Partner.
In 2004, repayments of $21,500,000, $6,762,000, and $1,118,694 were applied to
the line of credit, other long-term debt and non-recourse debt, respectively.
2003 vs. 2002:
Cash flows from operations decreased from $19,521,121 in 2002 to $16,626,082 in
2003, a decrease of $2,895,039. Rents from operating leases is the primary
source of operating cash flows. Sales of operating lease assets in 2002 and 2003
led to the decrease in operating lease revenues compared to 2002.
In 2003 and 2002, sources of cash from investing activities consisted of
proceeds from the sales of lease assets and from rents from direct financing
leases. Proceeds from the sales of lease assets increased from $2,229,481 in
2002 to $15,724,456 in 2003, an increase of $13,494,975. The assets that were
sold in 2002 had an original costs of approximately $14,826,000. The assets sold
in 2003 had an original cost of approximately $33,950,000. A significant portion
of the assets sold in 2003 were still on lease and had higher average values
than those sold in 2002. As a result, sales proceeds were higher in 2003 when
compared to 2002. Proceeds from the sales of lease assets are not expected to be
consistent from one period to another. Rents from direct financing leases
decreased by $1,010,239 (from $3,032,098 in 2002 to $2,021,859 in 2003) as a
result of sales of lease assets in 2002 and 2003.
In 2003, financing sources of cash consisted of proceeds of a new non-recourse
note payable of $1,489,905 and borrowings on the line of credit. Borrowings on
the line of credit were used to manage short term cash requirements. In 2002,
financing sources of cash consisted of proceeds of other long-term debt and
borrowings on the line of credit. In 2002, the proceeds of other long-term debt
were used to make payments on the line of credit. In 2002, proceeds of other
long-term debt were used as long-term financing on the acquisition of assets. In
2002, borrowings on the line of credit were used to manage short term cash
requirements.
Cash was used to repay $17,787,000 of other long-term debt in 2003. Of the
amount paid, $11,524,000 was due to payments that had been scheduled as of
December 31, 2002 and $6,263,000 represented early repayments made in 2003.
Repayments of non-recourse debt were the result of scheduled payments.
8
Results of Operations
Cost reimbursements to General Partner are based on costs incurred by AFS in
performing administrative services for the Partnership that are allocated to
each Partnership that AFS manages based on certain criteria such as existing or
new leases, number of investors or equity depending on the type of cost
incurred. AFS believes that the costs reimbursed are the lower of (i) actual
costs incurred on behalf of the Partnership or (ii) the amount the Partnership
would be required to pay independent parties for comparable administrative
services in the same geographic location.
As of December 31, 2004 and 2003, there were concentrations (defined as greater
than 10%) of equipment leased to lessees in certain industries (as a percentage
of total equipment cost) as follows:
2004 2003
Transportation, rail 30% 22%
Transportation, other 26% 21%
Manufacturing 14% 21%
Municipalities 13% 14%
2004 vs. 2003:
Operations resulted in a net loss of $1,678,535 in 2004 compared to $4,311,400
in 2003. The primary reason for the decreased loss is due to the absence of
large impairment losses such as the $5,290,639 recognized in 2003, a drop of
$4,835,273 compared to 2004.
Revenues from operating leases decreased from $20,083,732 in 2003 to $14,801,309
in 2004, a decrease of $5,282,423. The declines resulted from asset sales in
2003 and in 2004. In 2003, the Partnership recorded gains on sales of assets of
$1,449,492 compared to losses of $674,254 in 2004, a difference of $2,123,746.
Such gains and losses are not expected to be consistent from one period to
another.
Depreciation expense decreased from $15,220,612 in 2003 to $10,416,101 in 2004 (
a decrease of $4,804,511) as a result of sales of depreciable assets in 2003 and
2004.
Interest expense declined as a result of scheduled payments. Total debt,
including the line of credit, decreased from $30,845,403 at December 31, 2003 to
$22,964,709 at December 31, 2004.
Management periodically reviews the carrying values of its assets on leases and
assets held for lease or sale. As a result of that review, management determined
that the values of certain refuse vehicles and other transportation related
assets on lease to one particular lessee had declined in value to the extent
that the carrying values had become impaired. This decline is the result of
decreased long-term demand for these types of assets and a corresponding
reduction in the amounts of rental payments that these assets currently command.
Management has recorded a provision for the decline in value of those assets in
the amount of $455,366 for the year ended December 31, 2004. In 2003, impairment
losses were $5,290,639. See additional discussion of the impairment losses
recorded in Note 14 in the financial statements included in Part I, Item 8 of
this report.
2003 vs. 2002:
Operations resulted in a net loss of $4,311,400 in 2003 compared to $1,772,503
in 2002. The primary reason for the increased loss is due to additional
impairment losses of $5,290,639 in 2003, an increase of $3,179,046 compared to
2002.
Revenues from operating leases decreased from $25,631,019 in 2002 to $20,083,732
in 2003, a decrease of $5,547,287. Decreases resulted from asset sales in 2002
and in 2003. In 2003, the Partnership recorded gains on sales of assets of
$1,449,492 compared to losses of $1,270,985 in 2002, a difference of $2,720,477.
Such gains and losses are not expected to be consistent from one period to
another.
Depreciation expense decreased from $18,424,332 in 2002 to $15,220,612 in 2003 (
a decrease of $3,203,720) as a result of sales of depreciable assets in 2002 and
2003.
Interest expense declined as a result of scheduled and early debt payments.
Total debt, including the line of credit, decreased from $51,423,308 at December
31, 2002 to $30,845,403 at December 31, 2003.
9
Management periodically reviews the carrying values of its assets on leases and
assets held for lease or sale. As a result of that review, management determined
that the values of certain mining equipment and fleets of jumbo covered hopper
cars, petroleum rail tank cars, off shore supply vessels, tidewater barges and
diesel electric locomotives had declined in value to the extent that the
carrying values had become impaired. This decline is the result of decreased
long-term demand for these types of assets and a corresponding reduction in the
amounts of rental payments that these assets currently command. Management has
recorded a provision for the decline in value of those assets in the amount of
$5,290,639 for the year ended December 31, 2003. In 2002, impairment losses were
$2,111,593. See additional discussion of the impairment losses recorded in Note
14 in the financial statements included in Part I, Item 8 of this report.
Derivative Financial Instruments
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, which established new accounting and
reporting standards for derivative instruments. SFAS No. 133 has been amended by
SFAS No. 137, issued in June 1999, by SFAS No. 138, issued in June 2000 and by
SFAS No. 149, issued in June 2003.
SFAS No. 133, as amended, requires the Partnership to recognize all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. It further provides criteria for derivative
instruments to be designated as fair value, cash flow, or foreign currency
hedges, and establishes accounting standards for reporting changes in the fair
value of the derivative instruments.
The Partnership adopted SFAS No. 133, as amended, on January 1, 2001. Upon
adoption, the Partnership recorded interest rate swap hedging instruments at
fair value in the balance sheet and recognized the changes in fair value in net
income or other comprehensive income, in accordance with SFAS No. 133. See Note
5 to the financial statements, Other long-term debt, as set forth in Part II,
Item 8, Financial Statements and Supplementary Data, for additional information.
Recent Accounting Pronouncements
On October 13, 2004, the FASB concluded that SFAS No. 123R, Share-Based Payment
("SFAS 123R"), which requires all companies to measure compensation cost for all
share-based payments (including stock options and employee stock purchase plans)
at fair value, will be effective for public companies for interim or annual
periods beginning after June 15, 2005. Nonpublic companies will be required to
adopt the new statement at the beginning of the first annual period beginning
after December 15, 2005. The Partnership does not expect the adoption of SFAS
123R to have a material impact on its financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB 51." The
primary objectives of this interpretation are to provide guidance on the
identification of entities for which control is achieved through means other
than through voting rights ("variable interest entities") and how to determine
when and which business enterprise (the "primary beneficiary") should
consolidate the variable interest entity. This new model for consolidation
applies to an entity in which either (i) the equity investors (if any) do not
have a controlling financial interest; or (ii) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. In addition, FIN 46 requires
that the primary beneficiary, as well as all other enterprises with a
significant variable interest in a variable interest entity, make additional
disclosures. Certain disclosure requirements of FIN 46 were effective for
financial statements issued after January 31, 2003.
In December 2003, the FASB issued FIN No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain
FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN
46-R are as follows:
(i) Special purpose entities ("SPEs") created prior to February 1, 2003. The
company must apply either the provisions of FIN 46 or early adopt the provisions
of FIN 46-R at the end of the first interim or annual reporting period ending
after December 15, 2003.
(ii) Non-SPEs created prior to February 1, 2003. The company is required to
adopt FIN 46-R at the end of the first interim or annual reporting period ending
after March 15, 2004.
(iii) All entities, regardless of whether a SPE, that were created subsequent to
January 31, 2003. The provisions of FIN 46 were applicable for variable
interests in entities obtained after January 31, 2003.
The Partnership adopted FIN 46-R as of March 31, 2004. The adoption of FIN 46-R
did not have a material impact on the Partnership's financial position, results
of operations, or liquidity.
10
Critical Accounting Policies
The policies discussed below are considered by management of the Partnership to
be critical to an understanding of the Partnership's financial statements
because their application requires significant complex or subjective judgments,
decisions, or assessments, with financial reporting results relying on
estimation about the effect of matters that are inherently uncertain. Specific
risks for these critical accounting policies are described in the following
paragraphs. The Partnership also states these accounting policies in the notes
to the financial statements and in relevant sections in this discussion and
analysis. For all of these policies, management cautions that future events
rarely develop exactly as forecast, and the best estimates routinely require
adjustment.
Equipment on operating leases:
Equipment subject to operating leases is stated at cost. Depreciation is being
recognized on a straight-line method over the terms of the related leases to the
equipment's estimated residual values at the end of the leases. Revenues from
operating leases are recognized on a straight line basis over the terms of the
related leases.
Direct financing leases:
Income from direct financing lease transactions is reported using the financing
method of accounting, in which the Partnership's investment in the leased
property is reported as a receivable from the lessee to be recovered through
future rentals. The income portion of each rental payment is calculated so as to
generate a constant rate of return on the net receivable outstanding.
Allowances for losses on direct financing leases are typically established based
on historical charge offs and collections experience and are usually determined
by specifically identified lessees and billed and unbilled receivables.
Direct financing leases are placed in a non-accrual status (no revenue
recognized) based on specifically identified lessees. Such leases are only
returned to an accrual status based on a case by case review by AFS. Direct
financing leases are charged off on specific identification by AFS.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Such
estimates primarily relate to the determination of residual values at the end of
the lease term and expected future cash flows used for impairment analysis
purposes.
Asset Valuation:
Recorded values of the Partnership's asset portfolio are periodically reviewed
for impairment in accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
An impairment loss is measured and recognized only if the estimated undiscounted
future cash flows of the asset are less than their net book value. The estimated
undiscounted future cash flows are the sum of the estimated residual value of
the asset at the end of the asset's expected holding period and estimates of
undiscounted future rents. The residual value assumes, among other things, that
the asset is utilized normally in an open, unrestricted and stable market.
Short-term fluctuations in the market place are disregarded and it is assumed
that there is no necessity either to dispose of a significant number of the
assets, if held in quantity, simultaneously or to dispose of the asset quickly.
Impairment is measured as the difference between the fair value (as determined
by the discounted estimated future cash flows) of the assets and its carrying
value on the measurement date.
Item 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership, like most other companies, is exposed to certain market risks,
including primarily changes in interest rates. The Partnership believes its
exposure to other market risks, including foreign currency exchange rate risk,
commodity risk and equity price risk, are insignificant to both its financial
position and results of operations.
11
In general, the Partnership's strategy is to manage its exposure to interest
rate risk by obtaining fixed rate debt. Current fixed rate debt is structured so
as to match the cash flows required to service the debt to the payment streams
under fixed rate lease receivables. The payments under the leases are assigned
to the lenders in satisfaction of the debt. Furthermore, the Partnership has
historically been able to maintain a stable spread between its cost of funds and
lease yields in both periods of rising and falling interest rates. Nevertheless,
the Partnership frequently funds leases with its floating rate line of credit
and is, therefore, exposed to interest rate risk until fixed interest rate
financing is arranged, or the floating interest rate line of credit is repaid.
As of December 31, 2004, there was an outstanding balance of $13,500,000 on the
floating rate line of credit and the effective interest rate of the borrowings
ranged from 4.18% to 5.25%.
Also, as described in Item 7 in the caption "Capital Resources and Liquidity,"
the Partnership entered into a receivables funding facility in 1998. Since
interest on the outstanding balances under the facility varies, the Partnership
is exposed to market risks associated with changing interest rates. To hedge its
interest rate risk, the Partnership enters into interest rate swaps, which
effectively convert the underlying interest characteristic on the facility from
floating to fixed.
Under the swap agreements, the Partnership makes or receives variable interest
payments to or from the counterparty based on a notional principal amount. The
net differential paid or received by the Partnership is recognized as an
adjustment to interest expense related to the facility balances. The amount paid
or received represents the difference between the payments required under the
variable interest rate facility and the amounts due under the facility at the
fixed (hedged) interest rate. As of December 31, 2004, borrowings on the
facility were $8,997,000 and the associated variable interest rate was 2.860%
and the average fixed interest rate achieved with the swap agreements was 6.153%
at December 31, 2004.
In general, these swap agreements eliminate the Partnership's interest rate risk
associated with variable rate borrowings. However, the Partnership is exposed to
and manages credit risk associated with the counterparty to the swap agreement
by dealing only with institutions it considers financially sound. If these
agreements were not in place, based on the Partnership's facility borrowings at
December 31, 2004, a hypothetical 1.00% increase or decrease in market interest
rates would increase or decrease the Partnership's 2004 variable interest
expense by approximately $64,680.
See the Notes to the Financial Statements as set forth in Item 8 for additional
information.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Report of Independent Registered Public Accounting Firm, Financial
Statements and Notes to Financial Statements attached hereto at pages 13 through
34.
12
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Partners
ATEL Capital Equipment Fund VII, L.P.
We have audited the accompanying balance sheets of ATEL Capital Equipment Fund
VII, L.P. (Partnership) as of December 31, 2004 and 2003, and the related
statements of operations, changes in partners' capital and cash flows for each
of the three years in the period ended December 31, 2004. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Partnership's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Partnership's internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ATEL Capital Equipment Fund
VII, L.P. at December 31, 2004 and 2003, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2004, in conformity with U.S. generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Francisco, California
March 9, 2005
13
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
ASSETS
2004 2003
Cash and cash equivalents $ 1,222,623 $ 835,628
Accounts receivable, net of allowance for
doubtful accounts of $540,880 in 2004
and $524,880 in 2003 1,380,733 2,149,089
Other assets 626,784 -
Investments in equipment and leases 52,859,904 71,827,497
----------------- -----------------
Total assets $ 56,090,044 $ 74,812,214
================= =================
LIABILITIES AND PARTNERS' CAPITAL
Non-recourse debt $ 467,709 $ 1,586,403
Other long-term debt 8,997,000 15,759,000
Line of credit 13,500,000 13,500,000
Accounts payable and accruals:
General Partner 458,460 481,818
Other 531,037 650,573
Accrued interest payable 61,723 36,929
Interest rate swap contracts 292,886 886,207
Unearned operating lease income 398,696 505,261
----------------- -----------------
Total liabilities 24,707,511 33,406,191
Partners' capital:
Accumulated other comprehensive loss (287,766) (886,207)
Partners' capital 31,670,299 42,292,230
----------------- -----------------
Total Partners' capital 31,382,533 41,406,023
----------------- -----------------
Total liabilities and Partners' capital $ 56,090,044 $ 74,812,214
================= =================
See accompanying notes.
14
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Revenues: 2004 2003 2002
Leasing activities:
Operating leases $ 14,801,309 $ 20,083,732 $ 25,631,019
Direct financing leases 618,823 728,449 1,378,498
Gain (loss) on sale of assets (674,254) 1,449,492 (1,270,985)
Interest income 5,047 4,563 14,000
Other 414,653 392,261 190,241
---------------- ----------------- -----------------
15,165,578 22,658,497 25,942,773
Expenses:
Depreciation of operating lease assets 10,416,101 15,220,612 18,424,332
Interest 1,371,978 1,916,785 3,206,557
Cost reimbursements to General Partner 801,634 849,984 859,415
Railcar maintenance 689,450 773,875 712,235
Equipment and incentive management fees to General Partner 634,486 889,571 947,568
Impairment losses 455,366 5,290,639 2,111,593
Professional fees 346,085 176,812 199,993
Marine vessel maintenance 323,993 - -
Provision for doubtful accounts 313,892 516,794 285,000
Insurance 210,607 141,513 -
Equipment storage 150,705 215,749 -
Taxes on income and franchise fees 94,267 128,178 23,124
Amortization of initial direct costs 39,733 107,916 184,171
Other 995,816 741,469 761,288
---------------- ----------------- -----------------
16,844,113 26,969,897 27,715,276
---------------- ----------------- -----------------
Net loss $ (1,678,535) $ (4,311,400) $ (1,772,503)
================ ================= =================
Net income (loss):
General Partner $ 681,964 $ 1,239,911 $ 1,203,884
Limited Partners (2,360,499) (5,551,311) (2,976,387)
---------------- ----------------- -----------------
$ (1,678,535) $ (4,311,400) $ (1,772,503)
================ ================= =================
Net loss per Limited Partnership unit $ (0.16) $ (0.37) $ (0.20)
================ ================= =================
Weighted average number of units outstanding 14,995,550 14,995,675 14,996,050
See accompanying notes.
15
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Accumulated
Other
Limited Partners General Comprehensive
Units Amount Partner Loss Total
Balance December 31, 2001 14,996,050 $ 80,818,857 $ - $ (1,326,006) $ 79,492,851
Unrealized change in value of
interest rate swap contracts - - (298,354) (298,354)
Distributions to Limited Partners
($1.00 per Unit) (14,999,876) - - (14,999,876)
Distributions to General Partner - (1,203,884) - (1,203,884)
Net income (loss) (2,976,387) 1,203,884 - (1,772,503)
---------------- ----------------- ---------------- ----------------- -----------------
Balance December 31, 2002 14,996,050 62,842,594 - (1,624,360) 61,218,234
Distributions to Limited Partners
($1.00 per Unit) (14,997,209) - - (14,997,209)
Distributions to General Partner - (1,239,911) - (1,239,911)
Limited partnership units
repurchased (500) (1,844) (1,844)
Unrealized change in value of
interest rate swap contracts - - 738,153 738,153
Net income (loss) (5,551,311) 1,239,911 - (4,311,400)
---------------- ----------------- ---------------- ----------------- -----------------
Balance December 31, 2003 14,995,550 42,292,230 - (886,207) 41,406,023
Distributions to Limited Partners
($0.55 per Unit) (8,261,432) - - (8,261,432)
Distributions to General Partner - (681,964) - (681,964)
Reclassification adjustment for portion
of swap liability charged to net income - - 5,120 5,120
Unrealized change in value of
interest rate swap contracts - - 593,321 593,321
Net income (loss) (2,360,499) 681,964 - (1,678,535)
---------------- ----------------- ---------------- ----------------- -----------------
Balance December 31, 2004 14,995,550 $ 31,670,299 $ - $ (287,766) $ 31,382,533
================ ================= ================ ================= =================
See accompanying notes.
16
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
Operating activities:
Net loss $ (1,678,535) $ (4,311,400) $ (1,772,503)
Adjustment to reconcile net loss to net cash provided by
operating activities:
Depreciation of operating lease assets 10,416,101 15,220,612 18,424,332
Amortization of initial direct costs 39,733 107,916 184,171
Impairment losses 455,366 5,290,639 2,111,593
Provision for doubtful accounts 313,892 516,794 285,000
(Gain) loss on sales of assets 674,254 (1,449,492) 1,270,985
Recognized portion of unrealized loss on interest rate swaps 5,120 - -
Changes in operating assets and liabilities:
Accounts receivable 454,464 1,161,897 (568,946)
Due from General Partner - 253,543 (253,543)
Other assets (626,784) 10,019 97,996
Accounts payable, General Partner (23,358) 481,818 (580,916)
Accounts payable, other (119,536) (101,886) 241,861
Accrued interest payable 24,794 (46,655) 44,672
Unearned operating lease income (106,565) (507,723) 36,419
---------------- ----------------- -----------------
Net cash provided by operating activities 9,828,946 16,626,082 19,521,121
---------------- ----------------- -----------------
Investing activities:
Proceeds from sales of assets 5,503,961 15,724,456 2,229,481
Reduction of net investment in direct financing leases 1,878,178 2,021,859 3,032,098
Purchases of equipment on direct financing leases - - (3,052,582)
Initial direct lease costs - - (107,962)
Purchases of equipment on operating leases - - (3,959,522)
---------------- ----------------- -----------------
Net cash provided by/(used in) investing activities 7,382,139 17,746,315 (1,858,487)
---------------- ----------------- -----------------
Financing activities:
Borrowings under line of credit 21,500,000 21,500,000 19,500,000
Repayments of borrowings under line of credit (21,500,000) (21,300,000) (10,300,000)
Repayments of other long-term debt (6,762,000) (17,787,000) (15,094,000)
Distributions to Limited Partners (8,261,432) (14,997,209) (14,999,876)
Repayments of non-recourse debt (1,118,694) (3,394,879) (4,406,894)
Distributions to General Partner (681,964) (1,239,911) (1,203,884)
Proceeds of non-recourse debt - 1,489,905 -
Repurchase of limited partnership units - (1,844) -
Proceeds of other long-term debt - - 10,100,000
---------------- ----------------- -----------------
Net cash used in financing activities (16,824,090) (35,730,938) (16,404,654)
---------------- ----------------- -----------------
Net (decrease) increase in cash and cash equivalents 386,995 (1,358,541) 1,257,980
Cash and cash equivalents at beginning of year 835,628 2,194,169 936,189
---------------- ----------------- -----------------
Cash and cash equivalents at end of year $ 1,222,623 $ 835,628 $ 2,194,169
================ ================= =================
See accompanying notes.
17
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
STATEMENTS OF CASH FLOWS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 1,347,184 $ 1,963,440 $ 3,161,885
================ ================= =================
Schedule of non-cash transactions:
Change in fair value of interest rate swaps contracts $ 593,321 $ 738,153 $ (298,354)
================ ================= =================
Offset of accounts receivable and debt service per lease and debt agreement:
Accrued interest payable $ - $ (108,819) $ (207,727)
Non-recourse debt - (1,085,931) (987,023)
---------------- ----------------- -----------------
$ - $ (1,194,750) $ (1,194,750)
================ ================= =================
Accounts receivable $ - $ 1,194,750 $ 1,194,750
================ ================= =================
See accompanying notes.
18
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
1. Organization and Partnership matters:
ATEL Capital Equipment Fund VII, L.P. (the Partnership) was formed under the
laws of the state of California on May 17, 1996 for the purpose of acquiring
equipment to engage in equipment leasing and sales activities, primarily in the
United States. The Partnership may continue until December 31, 2017.
Upon the sale of the minimum amount of Units of Limited Partnership interest
(Units) (120,000 Units) ($1,200,000) and the receipt of the proceeds thereof on
January 7, 1997, the Partnership commenced operations.
The General Partner of the Partnership is ATEL Financial Services LLC ("AFS").
Prior to converting to a limited liability company structure, AFS was formerly
known as ATEL Financial Corporation.
The Partnership's business consists of leasing various types of equipment. As of
December 31, 2004, the original terms of the leases ranged from six months to
ten years.
Pursuant to the Limited Partnership Agreement, AFS receives compensation and
reimbursements for services rendered on behalf of the Partnership (See Note 6).
AFS is required to maintain in the Partnership reasonable cash reserves for
working capital, the repurchase of Units and contingencies.
The Partnership's principal objectives are to invest in a diversified portfolio
of equipment that will (i) preserve, protect and return the Partnership's
invested capital; (ii) generate regular distributions to the partners of cash
from operations and cash from sales or refinancing, with any balance remaining
after certain minimum distributions to be used to purchase additional equipment
during the Reinvestment Period, ended December 31, 2004 and (iii) provide
additional distributions following the Reinvestment Period and until all
equipment has been sold. The Partnership is governed by its Limited Partnership
Agreement.
2. Summary of significant accounting policies:
Cash and cash equivalents:
Cash and cash equivalents include cash in banks and cash equivalent investments
with original maturities of ninety days or less.
Accounts receivable:
Accounts receivable represent the amounts billed under lease contracts and
currently due to the Partnership. Allowances for doubtful accounts are typically
established based on historical charge offs and collection experience and are
usually determined by specifically identified lessees and invoiced amounts.
Equipment on operating leases:
Equipment subject to operating leases is stated at cost. Depreciation is being
recognized on a straight-line method over the terms of the related leases to the
equipment's estimated residual values at the end of the leases. Revenues from
operating leases are recognized on a straight line basis over the terms of the
related leases.
19
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
2. Summary of significant accounting policies (continued):
Direct financing leases:
Income from direct financing lease transactions is reported using the financing
method of accounting, in which the Partnership's investment in the leased
property is reported as a receivable from the lessee to be recovered through
future rentals. The income portion of each rental payment is calculated so as to
generate a constant rate of return on the net receivable outstanding.
Allowances for losses on direct financing leases are typically established based
on historical charge offs and collections experience and are usually determined
by specifically identified lessees and billed and unbilled receivables.
Direct financing leases are placed in a non-accrual status (no revenue
recognized) based on specifically identified lessees. Such leases are only
returned to an accrual status based on a case by case review of AFS. Direct
financing leases are charged off on specific identification by AFS.
Initial direct costs:
The Partnership capitalizes initial direct costs associated with the acquisition
of lease assets. The costs are amortized over a five year period using a
straight line method.
Income taxes:
The Partnership does not provide for income taxes since all income and losses
are the liability of the individual partners and are allocated to the partners
for inclusion in their individual tax returns.
The tax basis of the Partnership's net assets and liabilities varies from the
amounts presented in these financial statements at December 31 :
2004 2003
Financial statement basis of net assets $ 31,382,533 $ 41,406,023
Tax basis of net assets (unaudited) (33,380,850) (34,616,905)
---------------- -----------------
Difference $ 64,763,383 $ 76,022,928
================ =================
The primary differences between the tax basis of net assets and the amounts
recorded in the financial statements are the result of differences in accounting
for syndication costs and differences between the depreciation methods used in
the financial statements and the Partnership's tax returns.
The following reconciles the net (loss) income reported in these financial
statements to the income (loss) reported on the Partnership's federal tax return
(unaudited) for each of the years ended December 31:
2004 2003 2002
Net income (loss) per financial statements $ (1,678,535) $ (4,311,400) $ (1,772,503)
Adjustment to depreciation expense 5,592,580 3,927,717 (9,817,508)
Adjustments to lease revenues 5,810,609 (60,586) 1,442,714
Provision for doubtful accounts 300,455 516,794 285,000
Provision for losses (731,865) 5,290,639 2,111,593
---------------- ----------------- -----------------
Net income (loss) per federal tax return $ 9,293,244 $ 5,363,164 $ (7,750,704)
================ ================= =================
20
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
2. Summary of significant accounting policies (continued):
Per unit data:
Net income and distributions per unit are based upon the weighted average number
of units outstanding during the period.
Asset valuation:
Recorded values of the Partnership's asset portfolio are periodically reviewed
for impairment in accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
An impairment loss is measured and recognized only if the estimated undiscounted
future cash flows of the asset are less than their net book value. The estimated
undiscounted future cash flows are the sum of the estimated residual value of
the asset at the end of the asset's expected holding period and estimates of
undiscounted future rents. The residual value assumes, among other things, that
the asset is utilized normally in an open, unrestricted and stable market.
Short-term fluctuations in the market place are disregarded and it is assumed
that there is no necessity either to dispose of a significant number of the
assets, if held in quantity, simultaneously or to dispose of the asset quickly.
Impairment is measured as the difference between the fair value (as determined
by the discounted estimated future cash flows) of the assets and its carrying
value on the measurement date.
The Partnership adopted SFAS 144 as of January 1, 2002. The adoption of the
Statement did not have a significant impact on the Partnership's financial
position or results of operations.
Credit risk:
Financial instruments that potentially subject the Partnership to concentrations
of credit risk include cash and cash equivalents, direct finance lease
receivables and accounts receivable. The Partnership places its cash deposits
and temporary cash investments with creditworthy, high quality financial
institutions. The concentration of such deposits and temporary cash investments
is not deemed to create a significant risk to the Partnership. Accounts
receivable represent amounts due from lessees in various industries, related to
equipment on operating and direct financing leases. See Note 8 for a description
of lessees by industry as of December 31, 2004 and 2003.
Derivative financial instruments:
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, which
established new accounting and reporting standards for derivative instruments.
SFAS No. 133 has been amended by SFAS No. 137, issued in June 1999, by SFAS No.
138, issued in June 2000 and by SFAS No. 149, issued in June 2003.
SFAS No. 133, as amended, requires the Partnership to recognize all derivatives
as either assets or liabilities in the balance sheet and to carry those
instruments at fair value. It further provides criteria for derivative
instruments to be designated as fair value, cash flow, or foreign currency
hedges, and establishes accounting standards for reporting changes in the fair
value of the derivative instruments. Upon adoption on January 1, 2001, the
Partnership adjusted hedging instruments to fair value in the balance sheet,
designated the interest rate swaps as cash flow hedges, and recognized the
offsetting gains or losses as adjustments to be reported in net income or other
comprehensive income, as appropriate. For derivative instruments not designated
as hedging instruments, the gain or loss is recognized in current earnings
during the period of change. Such interest rate swaps are linked to and are
designed to effectively adjust the interest rate sensitivity of specific
long-term debt.
21
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
2. Summary of significant accounting policies (continued):
Derivative financial instruments (continued):
The effective portion of the change in fair value of the hedging derivatives is
recorded in equity as a component of Accumulated Other Comprehensive Income
(AOCI) and the ineffective portion (if any) directly in earnings. Amounts in
AOCI are reclassified into earnings in a manner consistent with the earnings
pattern of the underlying hedged item (generally reflected in interest expense).
If a hedged item is dedesignated prior to maturity, previous adjustments to AOCI
are recognized in earnings to match the earnings recognition pattern of the
hedged item (e.g., level yield amortization if hedging interest bearing
instruments). Interest income or expense on most hedging derivatives used to
manage interest rate exposure is recorded on an accrual basis, as an adjustment
to the yield of the link exposures over the periods covered by the contracts.
This matches the income recognition treatment of the exposure (i.e., the
liabilities, which are carried at historical cost, with interest recorded on an
accrual basis).
Credit exposure from derivative financial instruments, which are assets, arises
from the risk of a counterparty default on the derivative contract. The amount
of the loss created by the default is the replacement cost or current positive
fair value of the defaulted contract.
Use of estimates:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Such
estimates primarily relate to the determination of residual values at the end of
the lease term and expected future cash flows used for impairment analysis
purposes.
Basis of presentation:
The accompanying financial statements have been prepared in accordance with U.S.
generally accepted accounting principles. Certain prior year amounts have been
reclassified to conform to the current year presentation.
Recent accounting pronouncements:
On October 13, 2004, the FASB concluded that SFAS No. 123R, Share-Based Payment
("SFAS 123R"), which requires all companies to measure compensation cost for all
share-based payments (including stock options and employee stock purchase plans)
at fair value, will be effective for public companies for interim or annual
periods beginning after June 15, 2005. Nonpublic companies will be required to
adopt the new statement at the beginning of the first annual period beginning
after December 15, 2005. The Partnership does not expect the adoption of SFAS
123R to have a material impact on its financial statements.
22
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
2. Summary of significant accounting policies (continued):
Recent accounting pronouncements (continued):
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB 51." The
primary objectives of this interpretation are to provide guidance on the
identification of entities for which control is achieved through means other
than through voting rights ("variable interest entities") and how to determine
when and which business enterprise (the "primary beneficiary") should
consolidate the variable interest entity. This new model for consolidation
applies to an entity in which either (i) the equity investors (if any) do not
have a controlling financial interest; or (ii) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. In addition, FIN 46 requires
that the primary beneficiary, as well as all other enterprises with a
significant variable interest in a variable interest entity, make additional
disclosures. Certain disclosure requirements of FIN 46 were effective for
financial statements issued after January 31, 2003.
In December 2003, the FASB issued FIN No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain
FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN
46-R are as follows:
(i) Special purpose entities ("SPEs") created prior to February 1, 2003. The
company must apply either the provisions of FIN 46 or early adopt the provisions
of FIN 46-R at the end of the first interim or annual reporting period ending
after December 15, 2003.
(ii) Non-SPEs created prior to February 1, 2003. The company is required to
adopt FIN 46-R at the end of the first interim or annual reporting period ending
after March 15, 2004.
(iii) All entities, regardless of whether a SPE, that were created subsequent to
January 31, 2003. The provisions of FIN 46 were applicable for variable
interests in entities obtained after January 31, 2003.
The Partnership adopted FIN 46-R as of March 31, 2004. The adoption of FIN 46-R
did not have a material impact on the Partnership's financial position, results
of operations, or liquidity.
23
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
3. Investments in equipment and leases:
The Partnership's investments in equipment and leases consist of the following:
Depreciation /
Amortization
Expense or
Amortization of Reclassi-
December 31, Impairment Direct Financing fications or December 31,
2003 Losses Leases Dispositions 2004
Net investment in operating leases $51,653,739 $ (455,366) $ (10,416,101) $ 5,891,776 $ 46,674,048
Net investment in direct financing
leases 8,178,561 - (1,878,178) (3,554,664) 2,745,719
Assets held for sale or lease, net of
accumulated depreciation of
$4,796,259 in 2004 and $18,795,631 in
2003 11,891,344 - - (8,515,327) 3,376,017
Initial direct costs, net of
accumulated amortization of
$991,134 in 2004 and $956,767 in 2003 103,853 - (39,733) - 64,120
---------------- ----------------- ---------------- ----------------- -----------------
$71,827,497 $ (455,366) $ (12,334,012) $ (6,178,215) $ 52,859,904
================ ================= ================ ================= =================
Impairments of investments in leases and assets held for sale or lease:
Management periodically reviews the carrying values of its assets on leases and
assets held for lease or sale. As a result of the reviews, management determined
that the fair values of fleets of jumbo covered hopper cars, tidewater barges
and diesel electric locomotives had declined in value to the extent that the
carrying values had become impaired. The fair values of the assets were
determined based on the sum of the discounted estimated future cash flows of the
assets. Charges to operations were recorded for the declines in value of the
assets in the amounts of $455,366, $5,290,639, and $2,111,593 for the years
ended December 31, 2004, 2003, and 2002, respectively.
Impairment losses are recorded as an addition to accumulated depreciation of the
impaired assets. Depreciation expense and impairment losses on property subject
to operating leases and property held for lease or sale consist of the following
for each of the years ended December 31:
2004 2003 2002
Depreciation expense $ 10,416,101 $ 15,220,612 $ 18,424,332
Impairment losses 455,366 5,290,639 2,111,593
----------------- ---------------- -----------------
$ 10,871,467 $ 20,511,251 $ 20,535,925
================= ================ =================
24
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
3. Investment in leases (continued):
Impairments of investments in leases and assets held for sale or lease
(continued):
Due to declines in the markets for certain types of assets, during 2004, 2003
and 2002 management determined that the value of certain assets were impaired.
The Partnership recorded impairment losses as follows for each of the years
ended December 31:
2004 2003 2002
Locomotives $ - $2,475,000 $300,000
Off shore supply vessels - 1,022,000 -
Mining equipment - 731,619 -
Covered grain hopper cars - 457,286 1,135,339
Petroleum rail tank cars - 325,462 -
Barges - 279,272 676,254
Refuse trucks and other vehicles 455,366 - -
--------------- --------------- ----------------
$ 455,366 $ 5,290,639 $ 2,111,593
================ ============== ================
All of the property subject to leases were acquired in the years 1997 through
2002.
Operating leases:
Property subject to operating leases consists of the following:
Reclassi-
December 31, Impairment Depreciation fications or December 31,
2003 Losses Expense Dispositions 2004
Transportation $72,164,281 $ - $ - $ 22,810,806 $ 94,975,087
Construction 20,168,993 - - (12,214,614) 7,954,379
Marine vessels / barges 14,978,042 - - (9,313,250) 5,664,792
Mining equipment 8,410,345 - - (3,710,770) 4,699,575
Manufacturing 4,553,440 - - (683,092) 3,870,348
Communications 3,748,058 - - (3,607,678) 140,380
Materials handling 3,558,657 - - (111,345) 3,447,312
Office automation 3,521,046 - - - 3,521,046
Other 3,347,789 - - 608,677 3,956,466
---------------- ----------------- ---------------- ----------------- -----------------
134,450,651 - - (6,221,266) 128,229,385
Less accumulated depreciation (82,796,912) (455,366) (10,416,101) 12,113,042 (81,555,337)
---------------- ----------------- ---------------- ----------------- -----------------
$51,653,739 $ (455,366) $ (10,416,101) $ 5,891,776 $ 46,674,048
================ ================= ================ ================= =================
25
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
3. Investment in leases (continued):
Direct financing leases:
As of December 31, 2004, investment in direct financing leases consist of
various transportation, manufacturing and medical equipment. The following lists
the components of the Partnership's investment in direct financing leases as of
December 31, 2004 and 2003:
2004 2003
Total minimum lease payments receivable $ 2,804,615 $ 5,860,231
Estimated residual values of leased equipment (unguaranteed) 1,133,398 4,638,162
---------------- -----------------
Investment in direct financing leases 3,938,013 10,498,393
Less unearned income (1,192,294) (2,319,832)
---------------- -----------------
Net investment in direct financing leases $ 2,745,719 $ 8,178,561
================ =================
At December 31, 2004, the aggregate amounts of future minimum lease payments to
be received under operating and direct financing leases are as follows:
Direct
Year ending Operating Financing
December 31, Leases Leases Total
2005 $ 8,808,052 $ 1,389,918 $ 10,197,970
2006 5,185,604 708,415 5,894,019
2007 3,936,979 512,748 4,449,727
2008 3,468,889 193,534 3,662,423
2009 3,075,627 - 3,075,627
Thereafter 375,415 - 375,415
---------------- ----------------- ----------------
$24,850,566 $ 2,804,615 $ 27,655,181
================ ================= ================
26
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
4. Non-recourse debt:
At December 31, 2004, non-recourse debt consists of notes payable to financial
institutions. The notes are due in varying monthly, quarterly, semi-annual and
annual payments. Interest on the notes is at fixed rates ranging from 5.5% to
7.0%. The notes are secured by assignments of lease payments and pledges of
assets. At December 31, 2004, the carrying value of the pledged assets is
$857,414. During 2003, an additional $1,489,905 was borrowed. The notes mature
from 2005 through 2008.
Future minimum payments of non-recourse debt are as follows:
Year ending
December 31, Principal Interest Total
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
---------------- ----------------- ----------------
$ 467,709 $ 41,062 $ 508,771
================ ================= ================
5. Other long-term debt:
In 1998, the Partnership entered into a $65 million receivables funding program
(the Program) with a receivables financing company that issues commercial paper
rated A1 by Standard and Poor's 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 (2.860% at December 31, 2004), based
on an index of A1 commercial paper. The Program expired as to new borrowings in
February 2002. As of December 31, 2004 and 2003, the Partnership had $8,997,000
and $15,759,000 outstanding under the program, respectively.
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. The
interest rate swaps were designated as cash flow hedges of he interest payment
on the long term debt. As of December 31, 2004, the Partnership receives or pays
interest on a notional principal of $9,381,285, 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 were to 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.
During the year, Accumulated Other Comprehensive Income ("AOCI") decreased by
appproximately $598,000 of which approximately $593,000 was related to the
decrease in the fair value of the interest rate swap and approximately $5,000
was related to the reclassification of AOCI to earnings (included in interest
expense) due to hedge ineffectiveness and upon the discontinuance of the cash
flow hedges because of debt prepayments. The Company redesignated a
proportionate share of the interest rate swaps as cash flow hedges in relation
to the remaining outstanding long-term debt. The change in fair value of the
portion of interest rate swaps not designated as hedges will be recognized in
earnings.
27
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
5. Other long-term debt (continued):
Borrowings under the Program are as follows:
Notional Swap
Original Balance Balance Value Payment Rate on
Amount December 31, December 31, December 31, Interest Swap
Date Borrowed Borrowed 2004 2004 2004 Agreement
4/1/1998 $ 21,770,000 $ - $ - $ - *
7/1/1998 25,000,000 1,811,000 1,824,322 (75,010) 6.155%
10/1/1998 20,000,000 1,425,000 1,530,182 (17,886) 5.550%
4/16/1999 9,000,000 995,000 998,434 (19,447) 5.890%
1/26/2000 11,700,000 2,672,000 2,670,664 (153,984) 7.580%
5/25/2001 2,000,000 527,000 582,705 (12,538) 5.790%
9/28/2001 6,000,000 1,512,000 1,774,978 (14,021) 4.360%
1/31/2002 4,400,000 55,000 - - *
2/19/2002 5,700,000 - - - *
----------------- ---------------- ----------------- ----------------
$ 105,570,000 $ 8,997,000 $ 9,381,285 $ (292,886)
================= ================ ================= ================
* 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 2007. Future minimum
principal payments of long-term debt and annual swap notional reductions are as
follows:
Debt Debt Rates on
Year ending Principal Principal Interest Swap
December 31, Swapped Not Swapped Interest Total Agreements**
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%
----------------- ---------------- ----------------- ----------------
$ 8,942,000 $ 55,000 $ 588,309 $ 9,585,309
================= ================ ================= ================
** 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 (2.860% at December 31, 2004).
In 2004, 2003 and 2002, the net effect of the interest rate swaps increased
interest expense by $609,601, $952,386, and $955,401 respectively.
28
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 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 management and
resale and for management of the Partnership.
The Limited Partnership Agreement allows for the reimbursement of costs incurred
by AFS in providing administrative services to the Partnership. Administrative
services provided include Partnership accounting, investor relations, legal
counsel and lease and equipment documentation. AFS is not reimbursed for
services whereby it is entitled to receive a separate fee as compensation for
such services, such as disposition of equipment. Reimbursable costs incurred by
AFS are allocated to the Partnership based upon estimated time incurred by
employees working on Partnership business and an allocation of rent and other
costs based on utilization studies.
Each of ATEL Leasing Corporation ("ALC"), ATEL Equipment Corporation ("AEC"),
ATEL Investor Services ("AIS") and AFS is a wholly-owned subsidiary of ATEL
Capital Group and performs services for the Partnership. Acquisition services
are performed for the Partnership by ALC, equipment management, lease
administration and asset disposition services are performed by AEC, investor
relations and communications services are performed by AIS and general
administrative services for the Partnership are performed by AFS.
Cost reimbursements to General Partner are based on costs incurred by AFS in
performing administrative services for the Partnership that are allocated to
each Partnership that AFS manages based on certain criteria such as existing or
new leases, number of investors or equity depending on the type of cost
incurred. AFS believes that the costs reimbursed are the lower of (i) actual
costs incurred on behalf of the Partnership or (ii) the amount the Partnership
would be required to pay independent parties for comparable administrative
services in the same geographic location.
Incentive management fees are computed as 4.0% of distributions of cash from
operations, as defined in the Limited Partnership Agreement and equipment
management fees are computed as 3.5% of gross revenues from operating leases, as
defined in the Limited Partnership Agreement plus 2% of gross revenues from full
payout leases, as defined in the Limited Partnership Agreement.
AFS earned fees, commissions and reimbursements, pursuant to the Limited
Partnership Agreement as follows during each of the years ended December 31,
2004, 2003 and 2002:
2004 2003 2002
Equipment and incentive management fees to General Partner $ 634,486 $ 889,571 $ 947,568
Cost reimbursements to General Partner 801,634 849,984 859,415
---------------- ----------------- -----------------
$ 1,436,120 $ 1,739,555 $ 1,806,983
================ ================= =================
The General Partner makes certain payments to third parties on behalf of the
Partnership for convenience purposes. During the years ended December 31, 2004,
2003, and 2002, the General Partner made such payments of $431,490, $353,570,
and $194,447, respectively.
The Limited Partnership Agreement places an annual and a cumulative limit for
cost reimbursements to AFS. The cumulative limit increases annually. Any
reimbursable costs incurred by AFS during the year exceeding the annual and/or
cumulative limits cannot be reimbursed in the current year, though may be
reimbursable in future years. As of December 31, 2004, AFS had incurred
approximately $926,000 of costs that are expected to be reimbursed to AFS by the
Partnership in 2005 and 2006.
29
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
7. Partners' capital:
As of December 31, 2004, 14,995,550 Units were issued and outstanding. The
Partnership is authorized to issue up to 15,000,050 Units, including the 50
Units issued to the Initial Limited Partners, as defined.
The Partnership's Net Profits, Net Losses, and Tax Credits are to be allocated
92.5% to the Limited Partners and 7.5% to AFS. In accordance with the terms of
the of Limited Partnership Agreement, additional allocations of income were made
to AFS in 2004, 2003 and 2002. The amounts allocated were determined to bring
AFS's ending capital account balance to zero at the end of each period.
As defined in the Limited Partnership Agreement, available Cash from Operations,
shall be distributed as follows:
First, Distributions of Cash from Operations shall be 88.5% to the Limited
Partners, 7.5% to AFS and 4% to AFS or its affiliate designated as the recipient
of the Incentive Management Fee, until the Limited Partners have received
Aggregate Distributions in an amount equal to their Original Invested Capital,
as defined, plus a 10% per annum cumulative (compounded daily) return on their
Adjusted Invested Capital, as defined in the Limited Partnership Agreement.
Second, 85% to the Limited Partners, 7.5% to AFS and 7.5% to AFS or its
affiliate designated as the recipient of the Incentive Management Fee.
As defined in the Limited Partnership Agreement, available Cash from Sales or
Refinancing, are to be distributed as follows:
First, Distributions of Sales or Refinancings shall be 92.5% to the Limited
Partners and 7.5% to AFS, until the Limited Partners have received Aggregate
Distributions in an amount equal to their Original Invested Capital, as defined,
plus a 10% per annum cumulative (compounded daily) return on their Adjusted
Invested Capital.
Second, 85% to the Limited Partners, 7.5% to AFS and 7.5% to AFS or its
affiliate designated as the recipient of the Incentive Management Fee.
30
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
8. Concentration of credit risk and major customers:
The Partnership leases equipment to lessees in diversified industries. Leases
are subject to AFS's credit committee review. The leases provide for the return
of the equipment upon default.
As of December 31, 2004 and 2003, there were concentrations (defined as greater
than 10%) of equipment leased to lessees in certain industries (as a percentage
of total equipment cost) as follows:
2004 2003
Transportation, rail 30% 22%
Transportation, other 26% 21%
Manufacturing 14% 21%
Municipalities 13% 14%
During 2004, one customer comprised 16% of the Partnership's revenues from
leases. During 2003, no customer comprised in excess of 10% of the Partnership's
revenues from leases. During 2002, one customer comprised 11% of the
Partnership's revenues from leases.
9. Line of credit:
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 financial arrangement is $75,000,000 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 December 31, 2004 borrowings under the
facility were as follows:
Total amount available under the financing arrangement $ 75,000,000
Term loan to AFS as of December 31, 2004 (2,027,636)
-----------------
Total available under the acquisition and warehouse facilities 72,972,364
Amount borrowed by the Partnership under the acquisition facility (13,500,000)
Amounts borrowed by affiliated partnerships and limited liability companies
under the
acquisition facility (17,000,000)
-----------------
Total remaining available under the acquisition and warehouse facilities $ 42,472,364
=================
Draws on the acquisition facility by any individual borrower are secured only by
that borrower's assets, including equipment and related leases. Borrowings on
the warehouse facility are recourse jointly to certain of the affiliated
partnerships and limited liability companies, the Partnership and AFS.
The credit agreement includes certain financial covenants applicable to each
borrower. The Partnership was in compliance with its covenants as of December
31, 2004.
31
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
9. Line of credit (continued):
The Partnership borrowed $21,500,000, $21,500,000 and $19,500,000 under the line
of credit during 2004, 2003 and 2002, respectively. Repayments on the line of
credit were $21,500,000, $21,300,000 and $10,300,000 during 2004, 2003 and 2002,
respectively. Interest on the line of credit is based on either the thirty day
LIBOR rate or the bank's prime rate. The effective interest rate on borrowings
at December 31, 2004 ranged from 4.18% to 5.25%.
10. Fair value of financial instruments:
The recorded amounts of the Company's cash and cash equivalents, accounts
receivable, accounts payable and accruals at December 31, 2004 approximate fair
value because of the liquidity and short-term maturity of these instruments.
Non-recourse debt:
The fair value of the Partnership's non-recourse debt is estimated using
discounted cash flow analyses, based on the Partnership's current incremental
borrowing rates for similar types of borrowing arrangements. The estimated fair
value of the Partnership's non-recourse debt at December 31, 2004 is $461,929.
Other long-term debt:
The carrying value of the Partnership's other long-term debt approximates its
fair value at December 31, 2004 as borrowings are at a variable interest rate
that adjusts to current market interest rates.
Line of credit:
The carrying amounts of the Partnership's variable rate line of credit
approximates fair value.
Interest rate swaps:
The fair value of interest rate swaps is estimated by management based on
independent valuations or discounting the fixed cash flows paid under each swap
using the rate at which the Partnership could enter into new swaps of similar
maturities. Swaps are recorded at fair value at December 31, 2004 and 2003.
32
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
11. Comprehensive loss:
For the years ended December 31, 2004, 2003 and in 2002, other comprehensive
loss consisted of the following:
2004 2003 2002
Net loss $ (1,678,535) $ (4,311,400) $ (1,772,503)
Other comprehensive income:
Reclassification adjustment for portion of swap liability charged
to net loss 5,120 - -
Change in value of interest rate swap contracts 593,321 738,153 (298,354)
---------------- ----------------- -----------------
Comprehensive net loss $ (1,080,094) $ (3,573,247) $ (2,070,857)
================ ================= =================
There were no other sources of comprehensive net income (loss).
12. Selected quarterly data (unaudited):
March 31, June 30, September 30, December 31,
Quarter ended 2003 2003 2003 2003
Total revenues $ 7,999,426 $ 4,607,630 $ 5,009,446 $ 4,868,201
Net income (loss) $ 650,136 $ 95,361 $ (3,776,766) $ (1,280,131)
Net income (loss) per Limited Partnership unit $ 0.02 $ (0.01) $ (0.27) $ (0.11)
March 31, June 30, September 30, December 31,
Quarter ended 2004 2004 2004 2004
Total revenues $ 4,225,576 $ 4,661,072 $ 2,959,653 $ 3,319,277
Net income (loss) $ (1,593,374) $ 638,249 $ (343,332) $ (380,078)
Net income (loss) per Limited Partnership unit $ (0.12) $ 0.03 $ (0.03) $ (0.04)
13. Commitments:
At December 31, 2004, the Partnership had no commitments to purchase lease
assets.
33
ATEL CAPITAL EQUIPMENT FUND VII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
14. Reserves, impairment losses and provision for doubtful accounts:
Activity in the reserve for losses and impairments and allowances for doubtful
accounts consists of the following:
Reserve for Allowance for
losses and doubtful
impairments accounts
Balance December 31, 2001 $ 504,227 $ 118,067
Provision 2,111,593 285,000
Charge offs (2,615,820) -
----------------- ----------------
Balance December 31, 2002 - 403,067
Provision 5,290,639 516,794
Charge offs (5,290,639) (394,981)
----------------- ----------------
Balance December 31, 2003 - 524,880
Provision 455,366 313,892
Charge offs (455,366) (297,892)
----------------- ----------------
Balance December 31, 2004 $ - $ 540,880
================= ================
In 2003 it came to the Partnership's attention that the amounts recorded for
impairments of covered rail hopper cars as of December 31, 2002 was understated
by $518,000. During the three months ended March 31, 2003, the Partnership
recorded additional impairment losses of $518,000 to correct the accounting for
the transaction. 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.
The impact on 2002 would be a reduction of members' equity and an increase of
the net loss of $518,000 ($0.03 per Limited Partnership unit). Net loss for the
year ended December 31, 2003 would be decreased by $518,000 ($0.03 per Limited
Partnership unit).
15. Guarantees:
The Partnership enters into contracts that contain a variety of
indemnifications. The Partnership's maximum exposure under these arrangements is
unknown. However, the Partnership has not had prior claims or losses pursuant to
these contracts and expects the risk of loss to be remote.
16. Subsequent Events:
During the year ended December 31, 2004, the Partnership settled a legal dispute
with Cargill Inc. in which the Partnership was seeking unspecified damages from
Cargill, Inc. for failure to perform certain responsibilities relating to the
equipment under the lease agreement. Subsequent to the year end, the Partnership
received a court order to receive $625,000 under this settlement.
34
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None
Item 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management (ATEL
Financial Services, LLC as General Partner of the registrant, including the
chief executive officer and chief financial officer), an evaluation of the
effectiveness of the design and operation of the Partnership's disclosure
controls and procedures [as defined in Rules 240.13a-14(c) under the Securities
Exchange Act of 1934] was performed as of a date within ninety days before the
filing date of this annual report. Based upon this evaluation, the chief
executive officer and the chief financial officer concluded that, as of the
evaluation date, 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.
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.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
The registrant is a Limited Partnership and, therefore, has no officers or
directors.
All of the outstanding capital stock of AFS is held by ATEL Capital Group
("ACG"), a holding company formed to control AFS and affiliated companies. The
outstanding voting capital stock of ATEL Capital Group is owned 100% by Dean
Cash.
Each of ATEL Leasing Corporation ("ALC"), ATEL Equipment Corporation ("AEC"),
ATEL Investor Services ("AIS") and ATEL Financial Services LLC ("AFS") is a
wholly-owned subsidiary of ATEL Capital Group and performs services for the
Partnership. Acquisition services are performed for the Partnership by ALC,
equipment management, lease administration and asset disposition services are
performed by AEC, investor relations and communications services are performed
by AIS and general administrative services for the Partnership are performed by
AFS. ATEL Securities Corporation ("ASC") is a wholly-owned subsidiary of AFS.
The officers and directors of ATEL Capital Group and its affiliates are as
follows:
Dean L. Cash Chairman of the Board of Directors of ACG, AFS, ALC,
AEC, AIS and ASC; President and Chief Executive
Officer of ACG, AFS and AEC
Paritosh K. Choksi Director, Executive Vice President, Chief Operating
Officer and Chief Financial Officer of ACG, AFS,
ALC, AEC and AIS
Donald E. Carpenter Vice President and Controller of ACG, AFS, ALC, AEC
and AIS; Chief Financial Officer of ASC
Vasco H. Morais Senior Vice President, Secretary and General Counsel
for ACG, AFS, ALC, AIS and AEC
Dean L. Cash, age 54, joined ACG as director of marketing in 1980 and has been a
vice president since 1981, executive vice president since 1983 and a director
since 1984. He has been President and CEO since April 2001. Prior to joining
ACG, Mr. Cash was a senior marketing representative for Martin Marietta
Corporation, data systems division, from 1979 to 1980. From 1977 to 1979, he was
employed by General Electric Corporation, where he was an applications
specialist in the medical systems division and a marketing representative in the
information services division. Mr. Cash was a systems engineer with Electronic
Data Systems from 1975 to 1977, and was involved in maintaining and developing
software for commercial applications. Mr. Cash received a B.S. degree in
psychology and mathematics in 1972 and an M.B.A. degree with a concentration in
finance in 1975 from Florida State University. Mr. Cash is an arbitrator with
the American Arbitration Association.
35
Paritosh K. Choksi, age 51, joined ACG in 1999 as a director, senior vice
president and its chief financial officer. He became its executive vice
president and COO in April 2001. Prior to joining ACG, Mr. Choksi was chief
financial officer at Wink Communications, Inc. from 1997 to 1999. From 1977 to
1997, Mr. Choksi was with Phoenix American Incorporated, a financial services
and management company, where he held various positions during his tenure, and
was senior vice president, chief financial officer and director when he left the
company. Mr. Choksi was involved in all corporate matters at Phoenix and was
responsible for Phoenix's capital market needs. He also served on the credit
committee overseeing all corporate investments, including its venture lease
portfolio. Mr. Choksi was a part of the executive management team which caused
Phoenix's portfolio to increase from $50 million in assets to over $2 billion.
Mr. Choksi received a bachelor of technology degree in mechanical engineering
from the Indian Institute of Technology, Bombay; and an M.B.A. degree from the
University of California, Berkeley.
Donald E. Carpenter, age 56, joined ACG in 1986 as controller. Prior to joining
ACG, Mr. Carpenter was an audit supervisor with Laventhol & Horwath, certified
public accountants in San Francisco, California, from 1983 to 1986. From 1979 to
1983, Mr. Carpenter was an audit senior with Deloitte, Haskins & Sells,
certified public accountants, in San Jose, California. From 1971 to 1975, Mr.
Carpenter was a Supply Corp officer in the U. S. Navy. Mr. Carpenter received a
B.S. degree in mathematics (magna cum laude) from California State University,
Fresno in 1971 and completed a second major in accounting in 1978. Mr. Carpenter
has been a California certified public accountant since 1981.
Vasco H. Morais, age 46, joined ACG in 1989 as general counsel to provide legal
support in the drafting and reviewing of lease documentation, advising on
general corporate law matters, and assisting on securities law issues. From 1986
to 1989, Mr. Morais was employed by the BankAmeriLease Companies, Bank of
America's equipment leasing subsidiaries, providing in-house legal support on
the documentation of tax-oriented and non-tax oriented direct and leveraged
lease transactions, vendor leasing programs and general corporate matters. Prior
to the BankAmeriLease Companies, Mr. Morais was with the Consolidated Capital
Companies in the corporate and securities legal department involved in drafting
and reviewing contracts, advising on corporate law matters and securities law
issues. Mr. Morais received a B.A. degree in 1982 from the University of
California in Berkeley, a J.D. degree in 1986 from Golden Gate University Law
School and an M.B.A. (Finance) in 1997 from Golden Gate University. Mr. Morais
has been an active member of the State Bar of California since 1986.
Audit Committee
ATEL Leasing Corporation is the managing member of ATEL Financial Services, LLC.
ATEL Financial Services LLC is the General Partner of the registrant. The board
of directors of ATEL Leasing Corporation acts as the audit committee of the
registrant. Dean L. Cash and Paritosh K. Choksi are members of the board of
directors of ALC and are deemed to be financial experts. They are not
independent of the Partnership.
Code of Ethics
ACG on behalf of AFS and ALC has adopted a code of ethics for its Chief
Executive Officer, Chief Financial Officer and Chief Accounting Officer. The
Code of Ethics is included as Exhibit 14.1 to this report.
Item 11. EXECUTIVE COMPENSATION
The registrant is a Limited Partnership and, therefore, has no officers or
directors.
Set forth hereinafter is a description of the nature of remuneration paid and to
be paid to AFS and its Affiliates. The amount of such remuneration paid in 2004,
2003 and 2002 is set forth in Item 8 of this report under the caption "Financial
Statements and Supplementary Data - Notes to the Financial Statements - Related
party transactions," at Note 6 thereof, which information is hereby incorporated
by reference.
Equipment Management Fees
As compensation for its service rendered generally in managing or supervising
the management of the Partnership's equipment and in supervising other ongoing
service and activities including, among others, arranging for necessary
maintenance and repair of equipment, collecting revenue, paying operating
expenses, determining the equipment is being used in accordance with all
operative contractual arrangements, property and sales tax monitoring and
preparation of financial data, AFS or its affiliates are entitled to receive
management fees which are payable for each fiscal quarter and are to be in an
amount equal to (i) 3.5% of the gross lease revenues from "operating" leases and
(ii) 2% of gross lease revenues from "full payout" leases which contain net
lease provisions.
36
Incentive Management Fees
As compensation for its service rendered in establishing and maintaining the
composition of the Partnership's equipment portfolio and its acquisition and
debt strategies and supervising fund administration including supervision the
preparation of reports and maintenance of financial and operating data of the
Partnership, Securities and Exchange Commission and Internal Revenue service
filings, returns and reports, AFS is entitled to receive the Incentive
management fee which shall be payable for each fiscal quarter.
See Note 6 to the financial statements included in Item 8 of this report for
amounts paid for equipment management fees and incentive management fees.
Available Cash from Operations, as defined in the Limited Partnership Agreement,
shall be distributed as follows:
First, Distributions of Cash from Operations shall be 88.5% to the Limited
Partners, 7.5% to AFS and 4% to AFS or its affiliate designated as the recipient
of the Incentive Management Fee, until the Limited Partners have received
Aggregate Distributions in an amount equal to their Original Invested Capital,
as defined, plus a 10% per annum cumulative (compounded daily) return on their
Adjusted Invested Capital, as defined in the Limited Partnership Agreement.
Second, 85% to the Limited Partners, 7.5% to AFS and 7.5% to AFS or its
affiliate designated as the recipient of the Incentive Management Fee.
Available Cash from Sales or Refinancing, as defined in the Limited Partnership
Agreement, shall be distributed as follows:
First, Distributions of Sales or Refinancings shall be 92.5% to the Limited
Partners and 7.5% to AFS, until the Limited Partners have received Aggregate
Distributions in an amount equal to their Original Invested Capital, as defined,
plus a 10% per annum cumulative (compounded daily) return on their Adjusted
Invested Capital.
Second, 85% to the Limited Partners, 7.5% to AFS and 7.5% to AFS or its
affiliate designated as the recipient of the Incentive Management Fee.
See Note 7 to the financial statements included in Item 8 of this report for
amounts paid.
Equipment Resale Fees
As compensation for service rendered in connection with the sale of equipment,
AFS is entitled to receive an amount equal to the lesser of (i) 3% of the sales
price of the equipment, or (ii) one-half the normal competitive equipment sales
commission charged by unaffiliated parties for such service. Such fee is payable
only after the Limited Partners have received a return of their adjusted
invested capital (as defined in the Limited Partnership Agreement) plus 10% of
their adjusted invested return of their adjusted invested capital (as defined in
the Limited Partnership Agreement) plus 10% of their adjusted invested capital
per annum calculated on a cumulative basis, compounded daily, commencing the
last day of the quarter in which the Limited Partner was admitted to the
Partnership. To date, none have been accrued or paid.
Equipment Re-lease Fee
As compensation for providing re-leasing service, AFS is entitled to receive
fees equal to 2% of the gross rentals or the comparable competitive rate for
such service relating to comparable equipment, whichever is less, derived from
the re-lease provided that (i) AFS or their affiliates have and will maintain
adequate staff to render such service to the Partnership, (ii) no such re-lease
fee is payable in connection with the re-lease of equipment to a previous lessee
or its affiliates, (iii) AFS or its affiliates have rendered substantial
re-leasing service in connection with such re-lease and (iv) AFS or its
affiliates are compensated for rendering equipment management service. To date,
$35,140 has been accrued and is unpaid.
General Partner's Interest in Operating Proceeds
Net income, net loss and investment tax credits are allocated 92.5% to the
Limited Partners and 7.5% to AFS. In accordance with the terms of the Limited
Partnership Agreement, additional allocations of income were made to AFS in
2004, 2003 and 2002. The amounts allocated were determined so as to bring AFS's
ending capital account balance to zero at the end of each period. See financial
statements included in Item 8, Part II of this report for amounts allocated to
AFS in 2004, 2003 and 2002.
37
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Security Ownership of Certain Beneficial Owners
At December 31, 2004, no investor is known to hold beneficially more than 5% of
the issued and outstanding Units.
Security Ownership of Management
The ultimate shareholders of AFS are beneficial owners of Limited Partnership
Units as follows:
(1) (2) (3) (4)
Name and Address of Amount and Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
Limited Partnership Units Dean Cash Initial Limited Partner Units 0.0002%
600 California Street, 6th Floor 25 Units ($250)
San Francisco, CA 94108 (owned by wife)
Changes in Control
The Limited Partners have the right, by vote of the Limited Partners owning more
than 50% of the outstanding Limited Partnership units, to remove a General
Partner.
AFS may at any time call a meeting of the Limited Partners or a vote of the
Limited Partners without a meeting, on matters on which they are entitled to
vote, and shall call such meeting or for vote without a meeting following
receipt of a written request therefore of Limited Partners holding 10% or more
of the total outstanding Limited Partnership units.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The responses to Item 1 of this report under the caption "Equipment Leasing
Activities," Item 8 of this report under the caption "Financial Statements and
Supplemental Data - Notes to the Financial Statements - Related party
transactions" at Note 6 thereof, and Item 11 of this report under the caption
"Executive Compensation," are hereby incorporated by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
During the most recent two years, the Partnership incurred audit, audit related,
tax and other fees with its principal auditors as follows:
2004 2003
Audit fees $ 161,017 $ 58,413
Audit related fees - -
Tax fees 31,478 31,600
Other - -
----------------- ----------------
$ 192,495 $ 90,013
================= ================
ATEL Leasing Corporation is the managing member of ATEL Financial Services, LLC.
ATEL Financial Services LLC is the General Partner of the registrant. The board
of directors of ATEL Leasing Corporation acts as the audit committee of the
registrant. Engagements for audit services, audit related services and tax
services are approved in advance by the Chief Financial Officer of ATEL Leasing
Corporation acting on behalf the board of directors of ATEL Leasing Corporation
in its role as the audit committee of the Partnership.
38
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) Financial Statements and Schedules
1. Financial Statements
Included in Part II of this report:
Report of Independent Registered Public Accounting Firm
Balance Sheets at December 31, 2004 and 2003
Statements of Operations for the years ended December 31, 2004, 2003
and 2002
Statements of Changes in Partners' Capital for the years ended
December 31, 2004, 2003 and 2002
Statement of Cash Flows for the years ended December 31, 2004, 2003
and 2002
Notes to Financial Statements
2. Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and, therefore,
have been omitted.
(b) Reports on Form 8-K for the fourth quarter of 2004
(c) Exhibits
(3) and (4) Agreement of Limited Partnership, included as Exhibit B to
Prospectus (Exhibit 28.1), is incorporated herein by reference to the
report on Form 10K for the period ended December 31, 1996 (File No.
333-08879).
(14.1) Code of Ethics
(31.1) Certification of Paritosh K. Choksi
(31.2) Certification of Dean L. Cash
(32.1) Certification Pursuant to 18 U.S.C. section 1350 of Dean L.
Cash
(32.2) Certification Pursuant to 18 U.S.C. section 1350 of Paritosh K.
Choksi
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: 3/29/2005
ATEL Capital Equipment Fund VII, L.P.
(Registrant)
By: ATEL Financial Services, LLC,
General Partner of Registrant
By: /s/ Dean Cash
-----------------------------------------
Dean Cash,
President and Chief Executive Officer of
ATEL Financial Services, LLC (General
Partner)
By: /s/ Paritosh K. Choksi
-----------------------------------------
Paritosh K. Choksi,
Executive Vice President of ATEL
Financial Services, LLC (General Partner)
40
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the persons in the capacities and on the dates
indicated.
SIGNATURE CAPACITIES DATE
/s/ Dean Cash President, Chairman and Chief Executive 3/29/2005
- ------------------------- officer of ATEL Financial Services, LLC
Dean Cash
/s/ Paritosh K. Choksi Executive Vice President and director of 3/29/2005
- ------------------------- ATEL Financial Services, LLC, principal
Paritosh K. Choksi financial officer of registrant; principal
financial officer and director of ATEL
Financial Services, LLC
/s/ Donald E. Carpenter Principal accounting officer of registrant; 3/29/2005
- ------------------------- principal accounting officer of ATEL
Donald E. Carpenter Financial Services, LLC
No proxy materials have been or will be sent to security holders. An annual
report will be furnished to security holders subsequent to the filing of this
report on Form 10-K, and copies thereof will be furnished supplementally to the
Commission when forwarded to the security holders.
41