Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
For the quarterly period ended September 30, 2003
|_| Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
For the transition period from _______ to _______
Commission File Number 333-62477
ATEL Capital Equipment Fund VIII, LLC
(Exact name of registrant as specified in its charter)
California 94-3307404
(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
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
The number of Limited Liability Company Units outstanding as of September 30,
2003 was 13,570,188.
DOCUMENTS INCORPORATED BY REFERENCE
None
1
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
2
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
BALANCE SHEETS
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(Unaudited)
ASSETS
September 30, December 31,
2003 2002
(Unaudited)
Cash and cash equivalents $ 3,253,198 $ 2,263,479
Accounts receivable, net of allowance for
doubtful accounts of $223,115 in 2003
and $516,365 in 2002 1,933,472 1,874,311
Due from Managing Member - 171,119
Other assets 32,500 55,000
Investments in leases 115,236,694 149,100,763
----------------- ------------------
Total assets $120,455,864 $153,464,672
================= ==================
LIABILITIES AND MEMBERS' CAPITAL
Long-term debt $ 44,531,000 $ 62,912,000
Line of credit 11,300,000 10,600,000
Non-recourse debt 6,663,149 5,702,855
Accounts payable:
Managing Member 121,372 -
Other 636,197 697,720
Accrued interest payable 96,152 96,179
Interest rate swap contracts 3,389,226 5,381,342
Unearned operating lease income 1,615,718 1,547,813
----------------- ------------------
Total liabilities 68,352,814 86,937,909
----------------- ------------------
Members' capital 52,103,050 66,526,763
----------------- ------------------
Total liabilities and members' capital $120,455,864 $153,464,672
================= ==================
See accompanying notes.
3
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENTS OF OPERATIONS
NINE AND THREE MONTH PERIODS ENDED
SEPTEMBER 30, 2003 AND 2002
(Unaudited)
Nine Months Three Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
Revenues:
Leasing activities:
Operating leases $20,664,386 $23,862,863 $ 6,386,973 $ 7,493,350
Direct financing leases 607,527 625,944 273,769 212,708
Gain (loss) on sales of assets 749,759 230,089 60,104 (26,782)
Interest 5,106 12,495 1,454 3,460
Other 46,538 185,097 14,993 1,947
------------------ ------------------ ----------------- ------------------
22,073,316 24,916,488 6,737,293 7,684,683
Expenses:
Depreciation and amortization 15,585,368 17,635,864 4,995,698 5,711,172
Impairment losses 5,049,770 400,000 3,158,909 400,000
Interest expense 4,277,728 4,719,523 1,123,248 1,461,310
Asset management fees to Managing Member 1,097,980 1,152,763 322,026 382,140
Aircraft and railcar maintenance 1,092,069 123,516 240,389 123,516
Cost reimbursements to Managing Member 789,166 793,772 35,433 35,893
Professional fees 367,255 116,922 81,255 6,367
(Recovery of) provision for doubtful accounts (237,000) 475,000 13,000 -
Franchise fees and income taxes 124,239 62,902 - 62,902
Other 333,350 404,970 139,925 25,120
------------------ ------------------ ----------------- ------------------
28,479,925 25,885,232 10,109,883 8,208,420
------------------ ------------------ ----------------- ------------------
Net loss $ (6,406,609) $ (968,744) $(3,372,590) $ (523,737)
================== ================== ================= ==================
Net income (loss):
Managing Member $ 750,691 $ 750,882 $ 250,287 $ 250,290
Other Members (7,157,300) (1,719,626) (3,622,877) (774,027)
------------------ ------------------ ----------------- ------------------
$ (6,406,609) $ (968,744) $(3,372,590) $ (523,737)
================== ================== ================= ==================
Net loss per Limited Liability Company Unit $ (0.53) $ (0.13) $ (0.27) $ (0.06)
Weighted average number of Units outstanding 13,570,188 13,570,188 13,570,188 13,570,188
See accompanying notes.
4
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENTS OF CHANGES IN MEMBERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2002
AND FOR THE
NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2003
(Unaudited)
Accumulated
Other
Other Members Managing Comprehensive
Units Amount Member Income (Loss) Total
Balance December 31, 2001 13,570,188 $88,062,574 $ - $(4,700,622) $ 83,361,952
Distributions to Managing Member - (1,001,169) - (1,001,169)
Distributions to Other Members (12,347,756) - - (12,347,756)
Unrealized decrease in value of
interest rate swap contracts - - (680,720) (680,720)
Net income (loss) (3,806,713) 1,001,169 - (2,805,544)
------------------ ------------------ ------------------ ----------------- ------------------
Balance December 31, 2002 13,570,188 71,908,105 - (5,381,342) 66,526,763
Unrealized decrease in value of
interest rate swap contracts - - 1,992,116 1,992,116
Distributions to Managing Member - (750,691) - (750,691)
Distributions to Other Members (9,258,529) - - (9,258,529)
Net (loss) income (7,157,300) 750,691 - (6,406,609)
------------------ ------------------ ------------------ ----------------- ------------------
Balance September 30, 2003 13,570,188 $55,492,276 $ - $(3,389,226) $ 52,103,050
================== ================== ================== ================= ==================
See accompanying notes.
5
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENTS OF CASH FLOWS
NINE AND THREE MONTH PERIODS ENDED
SEPTEMBER 30, 2003 AND 2002
(Unaudited)
Nine Months Three Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
Operating activities:
Net loss $ (6,406,609) $ (968,744) $(3,372,590) $ (523,737)
Adjustments to reconcile net loss to
cash provided by operating activities:
(Gain) loss on sales of assets (749,759) (230,089) (60,104) 26,782
Depreciation 15,585,368 17,635,864 4,995,698 5,711,172
Impairment losses 5,049,770 400,000 3,158,909 400,000
(Recovery of) provision for doubtful accounts (237,000) 475,000 13,000 -
Changes in operating assets and liabilities:
Accounts receivable 177,839 335,381 (376,693) (552,136)
Due from Managing Member 171,119 - - -
Other assets 22,500 22,500 7,500 7,500
Accounts payable, Managing Member 121,372 - 10,299 (263,652)
Accounts payable, other (61,523) (325,617) (403,996) 19,747
Accrued interest payable (27) 63,648 13,968 40,460
Unearned lease income 67,905 520,387 136,947 594,889
------------------ ------------------ ----------------- ------------------
Net cash provided by operations 13,740,955 17,928,330 4,122,938 5,461,025
------------------ ------------------ ----------------- ------------------
Investing activities:
Proceeds from sales of assets 12,870,512 1,292,530 613,677 147,204
Reduction of net investment in direct financing
leases 1,108,178 2,294,372 199,794 256,905
Purchases of equipment on direct financing leases - (293,750) - (293,750)
Payment of initial direct costs - (37,439) - (37,439)
------------------ ------------------ ----------------- ------------------
Net cash provided by investing activities 13,978,690 3,255,713 813,471 72,920
------------------ ------------------ ----------------- ------------------
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENTS OF CASH FLOWS
(Continued)
NINE AND THREE MONTH PERIODS ENDED
SEPTEMBER 30, 2003 AND 2002
(Unaudited)
Nine Months Three Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
Financing activities:
Borrowings under line of credit 15,500,000 8,900,000 7,300,000 3,100,000
Repayments of line of credit (14,800,000) (4,300,000) (4,500,000) -
Proceeds of long-term debt - 3,900,000 - -
Repayments of long-term debt (18,381,000) (20,308,000) (3,478,000) (5,602,000)
Proceeds of non-recourse debt 2,563,149 - 2,563,149 -
Repayments of non-recourse debt (1,602,855) (152,248) (1,435,001) -
Distributions to other members (9,258,529) (9,260,881) (3,086,875) (3,086,911)
Distributions to Managing Member (750,691) (750,882) (250,287) (250,290)
------------------ ------------------ ----------------- ------------------
Net cash used in financing activities (26,729,926) (21,972,011) (2,887,014) (5,839,201)
------------------ ------------------ ----------------- ------------------
Net increase (decrease) in cash and cash
equivalents 989,719 (787,968) 2,049,395 (305,256)
Cash and cash equivalents at beginning of
period 2,263,479 2,269,137 1,203,803 1,786,425
------------------ ------------------ ----------------- ------------------
Cash and cash equivalents at end of period $ 3,253,198 $ 1,481,169 $ 3,253,198 $ 1,481,169
================== ================== ================= ==================
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest $ 4,277,755 $ 4,719,523 $ 1,109,280 $ 1,484,498
================== ================== ================= ==================
Schedule of non-cash transactions:
Change in fair value of interest rate swap contracts $ 1,992,116 $ 1,106,992 $ 807,356 $ 390,965
================== ================== ================= ==================
See accompanying notes.
6
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
1. Summary of significant accounting policies:
Interim financial statements:
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States (GAAP) for
interim financial information and with instructions to Form 10-Q and Article 10
of Regulation S-X. The unaudited interim financial statements reflect all
adjustments which are, in the opinion of the Managing Member, necessary to a
fair statement of financial position and results of operations for the interim
periods presented. All such adjustments are of a normal recurring nature. The
preparation of financial statements in accordance with GAAP requires management
to make estimates and assumptions that effect reported amounts in the financial
statements and accompanying notes. Therefore, actual results could differ from
those estimates. Operating results for the three and nine months ended September
30, 2003 are not necessarily indicative of the results for the year ending
December 31, 2003.
These unaudited interim financial statements should be read in conjunction with
the financial statements and notes thereto contained in the report on Form 10-K
for the year ended December 31, 2002, filed with the Securities and Exchange
Commission.
2. Organization and Company matters:
ATEL Capital Equipment Fund VIII, LLC (the Company), was formed under the laws
of the State of California on July 31, 1998, for the purpose of acquiring
equipment to engage in equipment leasing and sales activities. Contributions in
the amount of $600 were received as of October 7, 1998, $100 of which
represented the Managing Member's (ATEL Financial Services LLC's) continuing
interest, and $500 of which represented the Initial Members' capital investment.
Upon the sale of the minimum amount of Units of Limited Liability Company
interest (Units) of $1,200,000 and the receipt of the proceeds thereof on
January 13, 1999, the Company commenced operations.
The Company does not make a provision for income taxes since all income and
losses will be allocated to the Members for inclusion in their individual tax
returns.
Certain prior year balances have been reclassified to conform to the current
year presentation.
7
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
3. Investment in leases:
The Company's investment in leases consists of the following:
Depreciation /
Amortization
Expense or
Balance Amortization of Reclassi- Balance
December 31, Impairment Direct Financing fications or September 30,
2002 Losses Leases Dispositions 2003
Net investment in operating leases $ 119,404,269 $ (3,890,861) $ (15,303,869) $ (7,438,663) $ 92,770,876
Net investment in direct financing
leases 11,233,604 - (1,108,178) 2,109,953 12,235,379
Assets held for sale or lease 17,788,535 (1,158,909) - (6,792,043) 9,837,583
Initial direct costs, net of
accumulated amortization 674,355 - (281,499) - 392,856
------------------ ------------------ ------------------ ----------------- ------------------
$ 149,100,763 $ (5,049,770) $ (16,693,546) $(12,120,753) $ 115,236,694
================== ================== ================== ================= ==================
Operating leases:
Property on operating leases consists of the following:
Depreciation
Balance Expense and Reclassi- Balance
December 31, Impairment fications or September 30,
2002 Losses Dispositions 2003
Manufacturing $ 49,700,635 $ - $ (8,040,266) $ 41,660,369
Aircraft 32,810,139 - (17,362,102) 15,448,037
Transportation, other 23,438,156 - (135,378) 23,302,778
Containers 21,207,500 - - 21,207,500
Transportation, rail 21,054,669 - 11,215,817 32,270,486
Natural gas compressors 14,051,601 - (374,152) 13,677,449
Materials handling 7,380,720 - (67,482) 7,313,238
Other 14,118,402 - (685,135) 13,433,267
------------------ ------------------ ----------------- ------------------
183,761,822 - (15,448,698) 168,313,124
Less accumulated depreciation, including
impairment losses (64,357,553) (19,194,730) 8,010,035 (75,542,248)
------------------ ------------------ ----------------- ------------------
$ 119,404,269 $ (19,194,730) $ (7,438,663) $ 92,770,876
================== ================== ================= ==================
8
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
3. Investment in leases (continued):
Operating leases (continued):
Impairment losses on operating lease assets are recorded as an addition to
accumulated depreciation of the impaired assets. Depreciation expense and
impairment losses for the nine months ended September 30, 2003 consist of the
following:
Depreciation expense $ 15,303,869
Impairment losses 3,890,861
------------------
$ 19,194,730
==================
Direct financing leases:
As of September 30, 2003, investment in direct financing leases consists of
office automation equipment. The following lists the components of the Company's
investment in direct financing leases:
September 30, December 31,
2003 2002
Total minimum lease payments receivable $ 11,402,754 $ 8,634,652
Estimated residual values of leased equipment (unguaranteed) 4,556,760 4,510,520
----------------- ------------------
Investment in direct financing leases 15,959,514 13,145,172
Less unearned income (3,724,135) (1,911,568)
----------------- ------------------
Net investment in direct financing leases $ 12,235,379 $ 11,233,604
================= ==================
All of the property on leases was acquired in 1999, 2000, 2001 and 2002.
At September 30, 2003, the aggregate amounts of future minimum lease payments
are as follows:
Direct
Operating Financing
Leases Leases Total
Three months ending December 31, 2003 $ 5,730,027 $ 900,233 $ 6,630,260
Year ending December 31, 2004 15,063,612 2,632,004 17,695,616
2005 12,449,825 2,588,790 15,038,615
2006 8,308,528 2,332,796 10,641,324
2007 6,352,968 902,160 7,255,128
2008 3,856,748 663,561 4,520,309
Thereafter 1,370,060 1,383,210 2,753,270
------------------ ----------------- ------------------
$ 53,131,768 $ 11,402,754 $ 64,534,522
================== ================= ==================
9
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
3. Investment in leases (continued):
Impairments of investments in leases and assets held for sale or lease:
During the first nine months of 2003, the Company recognized impairment losses
on aircraft, autoracks and locomotives as set forth below. The impairments
resulted from continued declines in the markets for the equipment.
Aircraft $ 4,401,397
Locomotives 380,000
Autoracks 268,373
------------------
$ 5,049,770
==================
During the first quarter of 2003, the Company entered into negotiations relating
to the early termination of an aircraft lease and the sale of the asset to the
lessee. The negotiations were concluded in early April 2003 and the asset was
sold. As a result, an impairment loss related to the aircraft was recorded in
the first quarter of 2003 in the amount of $1,890,861.
Due to continued declines in the markets for certain types of assets, during the
third quarter, management determined that the value of an aircraft currently on
lease was impaired and a provision was made against income in the amount of
$1,980,000. In addition, for the same reasons, management also determined that
various locomotives, auto racks and aircraft that were off lease, were also
impaired. The Company recorded an additional provision for impairments relating
to those assets in the third quarter of 2003 in the amount of $1,178,909.
4. Non-recourse debt:
At September 30, 2003, non-recourse debt consists of notes payable to financial
institutions. The notes are due in varying quarterly and semi-annual payments.
Interest on the notes is at rates from 4.96% to 7.98%. The notes are secured by
assignments of lease payments and pledges of assets. The notes mature from 2003
through 2007.
Future minimum payments of non-recourse debt are as follows:
Principal Interest Total
Three months ending December 31, 2003 $ - $ 82,704 $ 82,704
Year ending December 31, 2004 4,717,254 142,641 4,859,895
2005 617,125 88,955 706,080
2006 648,113 57,967 706,080
2007 680,657 25,423 706,080
------------------ ----------------- ------------------
$ 6,663,149 $ 397,690 $ 7,060,839
================== ================= ==================
10
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
5. Other long-term debt:
In 1999, the Company entered into a $70 million receivables funding program (the
Program) (which has been increased to $125 million) with a receivables financing
company that issues commercial paper rated A1 by Standard and Poors and P1 by
Moody's Investor Services. Under the Program, the receivables financing company
receives a general lien against all of the otherwise unencumbered assets of the
Company. The Program provides for borrowing at a variable interest rate (1.1071%
at September 30, 2003).
The Program requires the Managing Member to enter into various interest rate
swaps with a financial institution (also rated A1/P1) to manage interest rate
exposure associated with variable rate obligations under the Program by
effectively converting the variable rate debt to fixed rates. As of September
30, 2003, the Company receives or pays interest on a notional principal of
$44,531,000, based on the difference between nominal rates ranging from 3.60% to
7.72% and the variable rate under the Program. No actual borrowing or lending is
involved. The last of the swaps terminates in 2009. The differential to be paid
or received is accrued as interest rates change and is recognized currently as
an adjustment to interest expense related to the debt.
Borrowings under the Program are as follows:
Original Balance Rate on
Amount September 30, Interest Swap
Date Borrowed Borrowed 2003 Agreement
11/11/1999 $20,000,000 $ 4,212,000 6.84%
12/21/1999 20,000,000 13,316,000 7.41%
12/24/1999 25,000,000 4,607,000 7.44%
4/17/2000 6,500,000 3,082,000 7.45%
4/28/2000 1,900,000 408,000 7.72%
8/3/2000 19,000,000 9,848,000 7.50%
10/31/2000 7,500,000 3,587,000 7.13%
1/29/2001 8,000,000 - 5.91%
6/1/2001 2,000,000 171,000 5.04%
9/1/2001 9,000,000 2,957,000 4.35%
1/31/2002 3,900,000 2,343,000 3.60%
------------------ ------------------
$122,800,000 $44,531,000
================== ==================
11
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
5. Other long-term debt (continued):
Other long-term debt borrowings mature from 2003 through 2009. Future minimum
principal payments of long-term debt are as follows:
Rates on
Interest Swap
Principal Interest Total Agreements*
Three months ending December 31, 2003 $ 4,585,000 $ 751,313 $ 5,336,313 6.973%-6.976%
Year ending December 31, 2004 13,051,000 2,362,294 15,413,294 6.975%-7.008%
2005 10,402,000 1,576,595 11,978,595 7.034%-7.144%
2006 6,950,000 964,030 7,914,030 7.180%-7.206%
2007 4,701,000 519,280 5,220,280 6.964%-7.055%
2008 3,025,000 249,081 3,274,081 6.667%-6.972%
2009 1,817,000 45,481 1,862,481 6.378%-6.383%
------------------ ------------------ -----------------
$44,531,000 $ 6,468,074 $ 50,999,074
================== ================== =================
* Represents the range of monthly weighted average fixed interest rates paid for
amounts maturing in the particular year. The receive-variable rate portion of
the swap represents commercial paper rates (1.1071% at September 30, 2003).
6. Related party transactions:
The terms of the Limited Company Operating Agreement provide that the Managing
Member and/or its affiliates (Affiliates) are entitled to receive certain fees
for equipment acquisition, management and resale and for management of the
Company.
The Limited Liability Company Operating Agreement allows for the reimbursement
of costs incurred by the Managing Member in providing administrative services to
the Company. Administrative services provided include Company accounting,
investor relations, legal counsel and lease and equipment documentation. The
Managing Member is not reimbursed for services where it is entitled to receive a
separate fee as compensation for such services, such as acquisition and
management of equipment. Reimbursable costs incurred by the Managing Member are
allocated to the Company based upon estimated time incurred by employees working
on Company business and an allocation of rent and other costs based on
utilization studies.
Substantially all employees of the Managing Member record time incurred in
performing administrative services on behalf of all of the Companies serviced by
the Managing Member. The Managing Member believes that the costs reimbursed are
the lower of actual costs incurred on behalf of the Company or the amount the
Company would be required to pay independent parties for comparable
administrative services in the same geographic location and are reimbursable in
accordance with the Limited Liability Company Operating Agreement.
12
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
6. Related party transactions (continued):
The Managing Member and/or Affiliates earned fees, commissions and
reimbursements, pursuant to the Limited Liability Company Agreement as follows:
Nine Months Three Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
Incentive management fees and equipment
management fees $ 1,097,980 $ 1,152,763 $ 322,026 $ 382,140
Administrative costs reimbursed to Managing
Member 789,166 793,772 35,433 35,893
------------------ ------------------ ----------------- ------------------
$ 1,887,146 $ 1,946,535 $ 357,459 $ 418,033
================== ================== ================= ==================
In 2003 it came to the Company's attention that an affiliated company had under
billed the Company in a prior year for interest costs associated with the
financing of an asset acquired on its behalf. During the three months ended
March 31, 2003, the Company recorded additional interest expense of $742,000 to
correct the accounting for the transaction. The Company does not believe that
this amount is material to the periods in which it should have been recorded,
nor is it expected that this amount will be material to the Company's operating
results for the year ending December 31, 2003. However, if this adjustment is
ultimately deemed to be material to the Company's operating results for the year
ending December 31, 2003, the Company will need to restate prior financial
reporting periods, including the current period.
The impact on prior financial reporting periods would be a reduction of members'
equity of $742,000 for all previous periods currently presented. Net loss for
the nine months ended September 30, 2003 and for the three months ended March
31, 2003 would be decreased by $742,000 ($0.05 per Limited Liability Company
unit).
7. Member's capital:
As of September 30, 2003, 13,570,188 Units ($135,701,880) were issued and
outstanding. The Company's registration statement with the Securities and
Exchange Commission became effective December 7, 1998. The Company is authorized
to issue up to 15,000,050 Units, including the 50 Units issued to the initial
members.
The Company's Net Income, Net Losses, and Distributions, as defined, are to be
allocated 92.5% to the Other Members and 7.5% to the Managing Member.
Distributions to the Other Members were as follows in 2003 and 2002:
Nine Months Three Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
Distributions $ 9,258,529 $ 9,260,881 $ 3,086,875 $ 3,086,911
Weighted average number of Units outstanding 13,570,188 13,570,188 13,570,188 13,570,188
Weighted average distributions per Unit $0.682 $0.682 $0.227 $0.227
13
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
8. Line of credit:
The Company participates with the Managing Member and certain of its affiliates
in a $56,282,201 revolving line of credit (comprised of an acquisition facility
and a warehouse facility) with a financial institution that includes certain
financial covenants. The line of credit expires on June 28, 2004. As of
September 30, 2003, borrowings under the facility were as follows:
Amount borrowed by the Company under the acquisition facility $ 11,300,000
Amounts borrowed by affiliated partnerships and limited
liability companies under the acquisition facility 13,000,000
---------------
Total borrowings under the acquisition facility 24,300,000
Amounts borrowed by the Managing Member and its sister
corporation under the warehouse facility -
---------------
Total outstanding balance $ 24,300,000
===============
Total available under the line of credit $ 57,282,201
Total outstanding balance (24,300,000)
---------------
Remaining availability $ 32,982,201
===============
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 Company and the Managing
Member.
The credit agreement includes certain financial covenants applicable to each
borrower. The Company was in compliance with its covenants as of September 30,
2003.
9. Commitments:
As of September 30, 2003, the Company had no outstanding commitments to purchase
lease equipment.
10. Other comprehensive income (loss):
In 2003 and 2002, other comprehensive income (loss) consisted of the following:
Nine Months Three Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
Net income (loss) $ (6,406,609) $ (968,744) $(3,372,590) $ (523,737)
Other comprehensive income:
Change in fair value of interest rate swap contracts 1,992,116 1,106,992 807,356 390,965
------------------ ------------------ ----------------- ------------------
Comprehensive net (loss) income $ (4,414,493) $ 138,248 $(2,565,234) $ (132,772)
================== ================== ================= ==================
There were no other sources of comprehensive net income (loss).
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statements contained in this Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Form 10-Q,
which are not historical facts, may be forward-looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Investors are cautioned not
to attribute undue certainty to these forward-looking statements, which speak
only as of the date of this Form 10-Q. We undertake no obligation to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances after the date of this Form 10-Q or to reflect the occurrence of
unanticipated events, other than as required by law.
Capital Resources and Liquidity
During the first nine months of 2003 and 2002, our primary activity was engaging
in equipment leasing activities.
Our liquidity will vary in the future, increasing to the extent cash flows from
leases exceed expenses, and decreasing as lease assets are acquired, as
distributions are made to the members and to the extent expenses exceed cash
flows from leases.
As another source of liquidity, we have contractual obligations with a
diversified group of lessees for fixed lease terms at fixed rental amounts. As
the initial lease terms expire, we will re-lease or sell the equipment. Our
future liquidity beyond the contractual minimum rentals will depend on our
success in re-leasing or selling the equipment as it comes off lease.
The Company participates with the Managing Member and certain of its affiliates
in a $56,282,201 revolving line of credit (comprised of an acquisition facility
and a warehouse facility) with a financial institution that includes certain
financial covenants. The line of credit expires on June 28, 2004. As of
September 30, 2003, borrowings under the facility were as follows:
Amount borrowed by the Company under the acquisition facility $ 11,300,000
Amounts borrowed by affiliated partnerships and limited
liability companies under the acquisition facility 13,000,000
---------------
Total borrowings under the acquisition facility 24,300,000
Amounts borrowed by the Managing Member and its sister
corporation under the warehouse facility -
---------------
Total outstanding balance $ 24,300,000
===============
Total available under the line of credit $ 57,282,201
Total outstanding balance (24,300,000)
---------------
Remaining availability $ 32,982,201
===============
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 Company and the Managing
Member.
We anticipate reinvesting a portion of lease payments from assets owned in new
leasing transactions. We will reinvest only after the payment of all
obligations, including debt service (both principal and interest), the payment
of management and acquisition fees to the Managing Member and providing for cash
distributions to the Other Members.
We currently have available adequate reserves to meet contingencies, but in the
event those reserves were found to be inadequate, we would likely be in a
position to borrow against our current portfolio to meet such requirements. We
envision no such requirements for operating purposes.
We have not made any commitments of capital, nor do we expect to make any
commitments, except for the acquisition of additional equipment. We had made no
such commitments as of September 30, 2003.
If inflation in the general economy becomes significant, it may affect us in
that the residual (resale) values and rates on re-leases of our leased assets
may increase as the costs of similar assets increase. However, our 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 we 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. Our leases already in
place, for the most part, would not be affected by changes in interest rates.
15
Cash Flows
During the first nine months of 2003 and 2002, our primary source of liquidity
was operating lease rents.
Our primary source of cash flows from operating activities was operating lease
revenues in both 2003 and on 2002.
In 2003, our most significant source of cash from investing activities was
proceeds from the sales of lease assets.
Direct financing lease assets have decreased from $14,181,674 at the beginning
of 2002 to $11,233,604 at December 31, 2002 and $12,235,379 at September 30,
2003. Our cash flows from direct finance leases decreased in 2003 compared to
2002 as a result of this decrease in direct financing lease assets. In 2002,
rents from direct financing leases were the most significant source of cash from
investing activities.
In 2003, our only sources of cash from financing activities were proceeds of
non-recourse debt and borrowings on the line of credit. In 2002, our only
financing sources of cash were borrowings under the line of credit and proceeds
of long-term debt. Our repayments of debt have decreased due to scheduled
reductions in the amounts of such debt that was due in 2003 compared to 2002.
Results of operations
In 2002, our operations resulted in a net loss of $968,744 for the nine month
period and $523,737 for the three month period. In 2003, our operations resulted
in a net loss of $6,406,609 for the nine month period and $3,372,590 for the
three month period. Our primary source of revenues is from operating leases. In
future periods, we also expect that operating leases will be our most
significant source of revenues. Depreciation is related to operating lease
assets and thus, to operating lease revenues. We expect it to decrease in future
periods as leases mature and as we sell the related lease assets. Our lease
rents and depreciation have decreased compared to 2002 as a result of sales over
the last year.
Asset management fees are based on our gross lease rents plus the proceeds we
receive from the sales of lease assets. They are limited to certain percentages
of lease rents, distributions to members and certain other items. As assets are
sold, lease rents are collected and distributions are made to the members, we
expect these fees to decrease. These factors gave rise to the decrease in fees
compared to 2002.
At September 30, 2002, we had total outstanding interest bearing debt of
$81,923,716. As a result of scheduled debt payments, we have reduced that
balance to $62,494,149 at September 30, 2003. This reduction in debt has caused
our interest expense to decrease compared to 2002.
During the first quarter of 2003, the Company entered into negotiations relating
to the early termination of an aircraft lease and the sale of the asset to the
lessee. The negotiations were concluded in early April 2003 and the asset was
sold. As a result, an impairment loss related to the aircraft was recorded in
the first quarter of 2003 in the amount of $1,890,861.
Due to continued declines in the markets for certain types of assets, during the
third quarter of 2003, we determined that the value of an aircraft currently on
lease was impaired and a provision was made against income in the amount of
$1,980,000. In addition, for the same reasons, we also determined that various
locomotives, auto racks and aircraft that were off lease, were also impaired as
of September 30, 2003. We recorded an additional provision for impairments
relating to those assets in the third quarter of 2003 in the amount of
$1,178,909.
In the nine months ended September 30, 2003, the Company incurred $954,559 of
maintenance costs relating to railcars. In the third quarter of 2003, the
Company incurred $148,379 of such costs. These costs were incurred in order to
be able to place the railcars on a new lease. The costs did not increase the
useful life of the assets or increase their value in the marketplace. No similar
costs were incurred during the comparable periods ended September 30, 2002.
Item 3. Quantitative and Qualitative Disclosures of Market Risk.
The Company, like most other companies, is exposed to certain market risks,
including primarily changes in interest rates. The Company believes its exposure
to other market risks, including foreign currency exchange rate risk, commodity
risk and equity price risk, are insignificant to both its financial position and
results of operations.
In general, the Company manages its exposure to interest rate risk by obtaining
fixed rate debt. The 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 Company 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 Company
frequently funds leases with its floating rate line of credit and is, therefore,
exposed to interest rate risk until fixed rate financing is arranged, or the
floating rate line of credit is repaid. As of September 30, 2003, there was
$11,300,000 outstanding on the floating rate line of credit.
16
The Company entered into a receivables funding facility in 1999. Since interest
on the outstanding balances under the facility varies, the Company is exposed to
market risks associated with changing interest rates. To hedge its interest rate
risk, the Company enters into interest rate swaps that effectively convert the
underlying interest characteristic on the facility from floating to fixed. Under
the swap agreements, the Company 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 Company is recognized as an adjustment to
interest expense related to the facility balances. The amount paid or received
represents the difference between the payments required under the variable
interest rate facility and the amounts due under the facility at the fixed
(hedged) interest rate.
As of September 30, 2003, borrowings on the facility were $44,531,000 and the
associated variable interest rate was 1.1071%. The average fixed interest rate
achieved with the swap agreements was 6.976% at September 30, 2003. As of
September 30, 2003, the estimated fair value of the interest rate swaps was a
$3,389,226 liability.
Item 4. Controls and procedures.
Internal Controls
As of September 30, 2003, an evaluation was performed under the supervision and
with the participation of the Company's management, including the CEO and CFO of
the Managing Member, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Company's management, including the CEO and CFO of the Managing Member,
concluded that the Company's disclosure controls and procedures were effective
as of September 30, 2003. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to September 30, 2003.
Changes in internal controls
There have been no significant changes in our internal controls or in other
factors that could significantly affect our disclosure controls and procedures
subsequent to the evaluation date, nor were there any significant deficiencies
or material weaknesses in our internal controls.
Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management, including
the CEO and CFO, an evaluation of the effectiveness of the design and operation
of the Company's disclosure controls and procedures, as defined in Rules
240.13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 was
performed as of a date within ninety days before the filing date of this
quarterly report. Based upon this evaluation, the CEO and CFO of the Managing
Member concluded that, as of the evaluation date, our disclosure controls and
procedures were effective for the purposes of recording, processing, summarizing
and timely reporting information required to be disclosed by us in the reports
that we file under the Securities Exchange Act of 1934 and that such information
is accumulated and communicated to our management in order to allow timely
decisions regarding required disclosure.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
No material legal proceedings are currently pending against the Company or
against any of its assets. The following is a discussion of legal matters
involving the Company but which do not represent claims against the Company or
its assets.
Emery Worldwide Airways, Inc.:
On January 25, 2002, the Company filed a complaint against its lessee, Emery
Worldwide Airways, Inc., for failure by the lessee to properly maintain the
condition and airworthiness of the aircraft on lease to the lessee, and for
certain other breaches and defaults by the lessee as alleged in the complaint.
The Company has claimed stipulated loss value damages in the amount of
$5,648,173 as a result of the breaches and defaults under the lease by the
lessee. A motion for summary judgment on the Company's claims was filed the
summer of 2002, and an unfavorable ruling on the motion was handed down in the
fourth quarter of 2002. In March 2003, ATEL settled with Emery for an amount
equal to $1,300,000, plus the value of the aircraft. ATEL is currently taking
steps to remarket the aircraft.
17
American Aircraft Consulting:
This is a suit filed by ATEL Equipment Corporation ("AEC") on behalf of the
Company for breach of contract, negligence, rescission and restitution as a
result of a lien and claim by an aircraft inspection firm for approximately
$160,000. The claim was for fees filed against an aircraft owned by the Company,
and against the Company itself, for services allegedly provided by the aircraft
inspection company. AEC successfully had the lien removed from the aircraft by
the FAA, and pursued its claims against the inspection company for a release of
all current and future claims. AEC remained confident of its ultimate success in
this matter, and in fact, settled the matter with a mutual dismissal of claims,
with prejudice.
Solectron:
This is a matter where the Company has declared Solectron (a lessee) in default
for failure to pay rent in a timely manner, and for other various defaults. A
claim was filed on August 29, 2002, by the Managing Member, on behalf of the
Company, in the amount of $13,332,328. The lessee filed a counter-claim against
the Company asserting unfair business practices. An additional demand letter was
issued by the Company on March 27, 2003, alleging the failure of the lessee to
properly maintain the equipment it leased from the Company. As a result of an
adverse decision on a separate matter with a similar legal principle at issue,
the Compay elected to dismiss its suit, and subsequently obtained a
corresponding dismissal of Solectron's counter-claim The Company continues to
seek resolution of its claims with the lessee as a negotiated settlement. The
Company believes that it has a reasonable basis for success of some of its
claims in this matter.
Item 2. Changes In Securities.
Inapplicable.
Item 3. Defaults Upon Senior Securities.
Inapplicable.
Item 4. Submission Of Matters To A Vote Of Security Holders.
Inapplicable.
Item 5. Other Information.
Inapplicable.
Item 6. Exhibits And Reports On Form 8-K.
(a) Documents filed as a part of this report
1. Financial Statements
Included in Part I of this report:
Balance sheets, September 30, 2003 and December 31, 2002.
Statements of operations for the nine and three month periods
ended September 30, 2003 and 2002.
Statements of changes in members' capital for the year ended
December 31, 2002 and for the nine month period ended September
30, 2003.
Statements of cash flows for the nine and three month periods
ended September 30, 2003 and 2002.
Notes to the financial statements
2. Financial Statement Schedules
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable, and therefore have been omitted.
3. Other Exhibits
99.1 Certification of Paritosh K. Choksi
99.2 Certification of Dean L. Cash
99.3 Certification Pursuant to 18 U.S.C. section 1350 of Dean L.
Cash
99.4 Certification Pursuant to 18 U.S.C. section 1350 of Paritosh
K. Choksi
(b) Report on Form 8-K
None
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date:
November 12, 2003
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
(Registrant)
By: ATEL Financial Services LLC
Managing Member of Registrant
By: /s/ DEAN L. CASH
-------------------------------------
Dean Cash
President and Chief Executive Officer
of Managing Member
By: /s/ PARITOSH K. CHOKSI
-------------------------------------
Paritosh K. Choksi
Executive Vice President of
Managing Member and Principal
financial officer of registrant
By: /s/ DONALD E. CARPENTER
--------------------------------------
Donald E. Carpenter
Principal accounting
officer of registrant
19
Exhibit 99.1
CERTIFICATIONS
I, Paritosh K. Choksi, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ATEL Capital Equipment
Fund VIII, LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 12, 2003
/s/ PARITOSH K. CHOKSI
- -----------------------------
Paritosh K. Choksi
Principal financial officer of registrant, Executive Vice President of
Managing Member
20
Exhibit 99.2
CERTIFICATIONS
I, Dean L. Cash, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ATEL Capital Equipment
Fund VIII, LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 12, 2003
/s/ DEAN L. CASH
- -----------------------------
Dean L. Cash
President and Chief Executive Officer of
Managing Member
21
Exhibit 99.3
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly report on Form 10Q of ATEL Capital Equipment
Fund VIII, LLC, (the "Company") for the period ended September 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
and pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002, I, Dean L. Cash, Chief Executive Officer of ATEL
Financial Services, LLC, managing member of the Company, hereby certify that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: November 12, 2003
/s/ DEAN L. CASH
- -----------------------------
Dean L. Cash
President and Chief Executive
Officer of Managing Member
22
Exhibit 99.4
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly report on Form 10Q of ATEL Capital Equipment
Fund VIII, LLC, (the "Company") for the period ended September 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
and pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002, I, Paritosh K. Choksi, Chief Financial Officer of
ATEL Financial Services, LLC, managing member of the Company, hereby certify
that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: November 12, 2003
/s/ PARITOSH K. CHOKSI
- -----------------------------
Paritosh K. Choksi
Executive Vice President of Managing
Member, Principal financial officer of registrant
23