Form 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
For the quarterly period ended September 30, 2004
|_| Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
For the transition period from _______ to _______
Commission File Number 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
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Limited Liability
Company Units
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
The number of Limited Liability Company Units outstanding as of September 30,
2004 was 13,570,188.
DOCUMENTS INCORPORATED BY REFERENCE
None
1
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheets, September 30, 2004 and December 31, 2003.
Statements of Operations for the nine and three month periods ended
September 30, 2004 and 2003.
Statements of Changes in Members' Capital for the year ended December 31,
2003 and for the nine month period ended September 30, 2004.
Statements of Cash Flows for the nine and three month periods ended
September 30, 2004 and 2003.
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(Unaudited)
ASSETS
September 30, December 31,
2004 2003
---- ----
(Unaudited)
Cash and cash equivalents $ 354,371 $ 508,584
Accounts receivable, net of allowance for doubtful accounts of $115,115 in 2004
and $225,115 in 2003 1,725,951 2,124,902
Other assets 2,500 25,000
Investments in leases 66,249,626 107,564,258
----------------- --------------------
Total assets $ 68,332,448 $ 110,222,744
================= ====================
LIABILITIES AND MEMBERS' CAPITAL
Long-term debt $ 15,222,000 $ 39,946,000
Financing arrangement 1,000,000 9,500,000
Non-recourse debt 6,039,946 6,609,335
Accounts payable:
Managing member 707,890 889,555
Other 241,972 820,799
Accrued interest payable 91,228 115,844
Interest rate swap contracts 1,864,852 3,207,595
Unearned operating lease income 862,317 1,236,498
----------------- --------------------
Total liabilities 26,030,205 62,325,626
Other accumulated comprehensive loss (954,330) (3,143,144)
Members' capital 43,256,573 51,040,262
----------------- --------------------
Total Members' capital 42,302,243 47,897,118
----------------- --------------------
Total liabilities and Members' capital $ 68,332,448 $ 110,222,744
================= ====================
See accompanying notes.
3
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENTS OF OPERATIONS
NINE AND THREE MONTH PERIODS ENDED
SEPTEMBER 30, 2004 AND 2003
(Unaudited)
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues:
Leasing activities:
Operating leases $14,708,872 $20,664,386 $ 3,962,722 $ 6,386,973
Direct financing leases 799,723 607,527 186,063 273,769
Gain on sales of assets 5,775,106 749,759 3,597,194 60,104
Interest 4,577 5,106 2,804 1,454
Other 457,895 46,538 22,866 14,993
------------------ ------------------ ----------------- --------------------
21,746,173 22,073,316 7,771,649 6,737,293
Expenses:
Depreciation of operating lease assets 12,303,855 15,303,869 3,285,546 4,902,273
Interest expense 3,175,740 4,277,728 1,524,344 1,123,248
Impairment losses 1,050,000 5,049,770 1,050,000 3,158,909
Cost reimbursements to Managing Member 738,928 789,166 19,586 35,433
Asset management fees to Managing Member 750,662 1,097,980 171,193 322,026
Railcar maintenance 621,648 954,559 354,674 148,379
Professional fees 179,117 367,255 10,648 81,255
Amortization of initial direct costs 177,245 281,499 39,988 93,425
Outside services 145,267 (10,086) 53,041 (93,665)
Insurance 139,678 143,688 53,903 143,688
(Recoveries of) provision for doubtful accounts (110,000) (237,000) 25,000 13,000
Franchise fees and state taxes 94,061 124,239 - -
Aircraft maintenance - 137,510 - 92,010
Other 252,285 199,748 57,800 89,902
------------------ ------------------ ----------------- --------------------
19,518,486 28,479,925 6,645,723 10,109,883
------------------ ------------------ ----------------- --------------------
Net income (loss) $ 2,227,687 $ (6,406,609) $ 1,125,926 $ (3,372,590)
================== ================== ================= ====================
Net income (loss):
Managing Member $ 750,868 $ 750,691 $ 250,287 $ 250,287
Other Members 1,476,819 (7,157,300) 875,639 (3,622,877)
------------------ ------------------ ----------------- --------------------
$ 2,227,687 $ (6,406,609) $ 1,125,926 $ (3,372,590)
================== ================== ================= ====================
Net income (loss) per Limited Liability
Company Unit $ 0.11 $ (0.53) $ 0.06 $ (0.27)
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
STATEMENT OF CHANGES IN MEMBERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2003
AND FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2004
(Unaudited)
Accumulated
Other
Comprehensive
Other Members Managing Income
-------------
Units Amount Member (Loss) Total
Balance December 31, 2002 13,570,188 $71,908,105 $ - $(5,381,342) $ 66,526,763
Distributions to members - (12,345,603) (1,000,979) - (13,346,582)
Reclassification adjustment for
portion of swap liability charged
to net loss - - - 64,451 64,451
Unrealized change in value of
interest rate swap contracts - - - 2,173,747 2,173,747
Net income (loss) - (8,522,240) 1,000,979 - (7,521,261)
----------------- ------------------------------------- ----------------- --------------------
Balance December 31, 2003 13,570,188 51,040,262 - (3,143,144) 47,897,118
Distributions to members - (9,260,508) (750,868) - (10,011,376)
Reclassification adjustment for
portion of swap liability charged
to net income - - - 846,071 846,071
Unrealized change in value of
interest rate swap contracts - - - 1,342,743 1,342,743
Net income - 1,476,819 750,868 - 2,227,687
----------------- ------------------ ------------------ ----------------- --------------------
Balance September 30, 2004 13,570,188 $43,256,573 $ - $ (954,330) $ 42,302,243
================= ================== ================== ================= ====================
See accompanying notes.
5
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENTS OF CASH FLOWS
NINE AND THREE MONTH PERIODS ENDED
SEPTEMBER 30, 2004 AND 2003
(Unaudited)
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Operating activities:
Net income (loss) $ 2,227,687 $ (6,406,609) $ 1,125,926 $ (3,372,590)
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation of operating lease assets 12,303,855 15,303,869 3,285,546 4,902,273
Amortization of initial direct costs 177,245 281,499 39,988 93,425
Gain on sales of assets (5,775,106) (749,759) (3,597,194) (60,104)
Impairment losses (recoveries) 1,050,000 5,049,770 1,050,000 3,158,909
(Recovery of) provision for doubtful accounts (110,000) (237,000) 25,000 13,000
Changes in operating assets and liabilities:
Accounts receivable 508,951 177,839 (206,352) (376,693)
Due from Managing Member - 171,119 - -
Other assets 22,500 22,500 7,500 7,500
Accounts payable, Managing Member (181,665) 121,372 (383,228) 10,299
Accounts payable, other (578,827) (61,523) (3,665) (403,996)
Accrued interest expense (24,616) (27) (48,211) 13,968
Unearned lease income (374,181) 67,905 266,115 136,947
Interest rate swap contracts 846,071 - 890,552 -
------------------ ------------------ ----------------- --------------------
Net cash provided by operations 10,091,914 13,740,955 2,451,977 4,122,938
------------------ ------------------ ----------------- --------------------
Investing activities:
Proceeds from sales of assets 32,931,008 12,870,512 22,611,329 613,677
Reduction of net investment in direct financing
leases 627,630 1,108,178 300,169 199,794
------------------ ------------------ ----------------- --------------------
Net cash provided by investing activities 33,558,638 13,978,690 22,911,498 813,471
------------------ ------------------ ----------------- --------------------
6
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENTS OF CASH FLOWS
(Continued)
NINE AND THREE MONTH PERIODS ENDED
SEPTEMBER 30, 2004 AND 2003
(Unaudited)
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Financing activities:
Repayments of line of credit (17,400,000) (14,800,000) (5,400,000) (4,500,000)
Borrowings on line of credit 8,900,000 15,500,000 1,900,000 7,300,000
Repayments of long-term debt (24,724,000) (18,381,000) (18,194,000) (3,478,000)
Proceeds of non-recourse debt - 2,563,149 - 2,563,149
Repayments of non-recourse debt (569,389) (1,602,855) (296,496) (1,435,001)
Distributions to other members (9,260,508) (9,258,529) (3,086,874) (3,086,875)
Distributions to Managing Member (750,868) (750,691) (250,287) (250,287)
------------------ ------------------ ----------------- --------------------
Net cash used in financing activities (43,804,765) (26,729,926) (25,327,657) (2,887,014)
------------------ ------------------ ----------------- --------------------
Net (decrease) increase in cash and cash
equivalents (154,213) 989,719 35,818 2,049,395
Cash and cash equivalents at beginning of
period 508,584 2,263,479 318,553 1,203,803
------------------ ------------------ ----------------- --------------------
Cash and cash equivalents at end of period $ 354,371 $ 3,253,198 $ 354,371 $ 3,253,198
================== ================== ================= ====================
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest $ 2,354,285 $ 4,277,755 $ 726,486 $ 1,109,280
================== ================== ================= ====================
Schedule of non-cash transactions:
Change in fair value of interest rate swap
contracts $ 1,342,743 $ 1,992,116 $ 198,072 $ 807,356
================== ================== ================= ====================
See accompanying notes.
7
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(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 nine months ended September 30, 2004
are not necessarily indicative of the results for the year ending December 31,
2004.
These unaudited interim financial statements should be read in conjunction with
the financial statements and notes thereto contained in the report on Form 10-K
for the year ended December 31, 2003, filed with the Securities and Exchange
Commission.
2. Organization and 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. The Company may
continue until December 31, 2019.
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.
ATEL Financial Services, LLC (AFS), an affiliated entity, acts as the Managing
Member of the Company.
Certain prior period amounts have been reclassified to conform to current period
presentation.
The Company is in its operating phase and is making distributions on a monthly
or quarterly basis.
8
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
3. Investment in leases:
The Company's investment in leases consists of the following:
Depreciation /
Amortization
Expense or
Balance Amortization of Reclass- Balance
December 31, Impairment Direct Financing ifications and September 30,
2003 Losses Leases Dispositions 2004
---- ------ ------ ------------ ----
Net investment in operating
leases $ 87,112,340 $ - $ (12,303,855) $(20,910,530) $ 53,897,955
Net investment in direct
financing leases 11,497,801 - (627,630) (5,084,696) 5,785,475
Assets held for sale or lease,
net of accumulated deprec-
iation of $18,268,514 in 2004
and $16,874,083 in 2003 8,636,682 (1,050,000) - (1,160,676) 6,426,006
Initial direct costs, net of
accumulated amortization of
$1,349,917 in 2004 and
$1,345,313 in 2003 317,435 - (177,245) - 140,190
------------------ ------------------ ------------------ ----------------- --------------------
$107,564,258 $ (1,050,000) $ (13,108,730) $(27,155,902) $ 66,249,626
================== ================== ================== ================= ====================
Management periodically reviews the carrying values of its assets on leases and
assets held for lease or sale. As a result of a review during the nine month
period ended September 30, 2003, management determined that the value of various
assets had declined in value to the extent that the carrying values had become
impaired. These declines were the result of decreased long-term demand for these
types of assets and a corresponding reduction in the amounts of rental payments
that these assets could command. Management recorded a provision for the decline
in value of those assets in the amount of $5,049,770 for the nine months ended
September 30, 2003.
During the nine months ended September 30, 2004, management determined that the
value of an aircraft currently off lease was impaired and a provision was made
against income in the amount of $1,050,000.
In 2004 it came to the Company's attention that the Company had incorrectly
calculated the amounts of depreciation expense associated with an operating
lease from January 2001 through December 31, 2003. During the six months ended
June 30, 2004, the Company recorded additional depreciation expense of $538,929
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, 2004. However, if this adjustment is
ultimately deemed to be material to the Company's operating results for the year
ending December 31, 2004, the Company will need to restate prior financial
reporting periods, including the current period.
9
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
3. Investment in leases (continued):
The impact on prior financial reporting periods would be a reduction of members'
equity of $538,929 ($0.04 per Unit) for all previous periods currently
presented. The net loss for the nine month period ended September 30, 2003 would
be increased by $134,733 ($0.01 per Unit) and net income for the three month
period ended September 30, 2003 would be decreased by $44,911 ($0.003 per Unit).
Net income for the nine month period ended September 30, 2004 would be increased
by $538,929 ($0.04 per Unit).
In August 2004, the Company sold operating leases with original cost of
$42,339,763 and net book value of $18,916,260 resulting in sales proceeds of
$22,499,128. Portions of the proceeds were used to pay down Other Long-Term Debt
of $15,956,000 and Financing Arrangement of $5,400,000.
Impairment losses are recorded as an addition to accumulated depreciation of the
impaired assets. Depreciation expense and impairment losses on property subject
to operating leases and assets held for lease or sale consist of the following
for the three and nine month periods ended September 30:
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Depreciation of operating lease assets $12,303,855 $15,303,869 $ 3,285,546 $ 4,902,273
Impairment losses 1,050,000 5,049,770 1,050,000 3,158,909
------------------ ------------------ ----------------- --------------------
$ 13,353,855 $ 20,353,639 $ 4,335,546 $ 8,061,182
================== ================== ================= ====================
Net investment in operating leases:
Property on operating leases consists of the following:
Balance Reclass- Balance
December 31, Depreciation ifications and September 30,
2003 Expense Dispositions 2004
---- ------- ------------ ----
Transportation, rail $ 34,295,402 $ - $ 10,304,272 $ 44,599,674
Containers 21,165,000 - - 21,165,000
Aircraft 15,448,037 - - 15,448,037
Natural gas compressors 13,677,449 - (136,146) 13,541,303
Transportation, other 23,302,778 - (16,892,830) 6,409,948
Manufacturing 41,079,479 - (36,479,656) 4,599,823
Materials handling 7,313,238 - (5,905,848) 1,407,390
Other 10,991,981 - (5,678,926) 5,313,055
------------------ ------------------ ----------------- --------------------
167,273,364 - (54,789,134) 112,484,230
Less accumulated depreciation (80,161,024) (12,303,855) 33,878,604 (58,586,275)
------------------ ------------------ ----------------- --------------------
$ 87,112,340 $ (12,303,855) $(20,910,530) $ 53,897,955
================== ================== ================= ====================
10
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
3. Investment in leases (continued):
Net investment in direct financing leases:
As of September 30, 2004, net investment in direct financing leases consists
primarily of railcars and office automation equipment. The following lists the
components of the Company's net investment in direct financing leases as of
September 30, 2004:
Total minimum lease payments receivable $ 6,746,289
Estimated residual values of leased equipment (unguaranteed) 1,241,016
-----------------
Investment in direct financing leases 7,987,305
Less unearned income (2,201,830)
-----------------
Net investment in direct financing leases $ 5,785,475
=================
All of the property on leases was acquired in 1999, 2000, 2001 and 2002.
At September 30, 2004, the aggregate amounts of future minimum lease payments
are as follows:
Operating Financing
Leases Leases Total
Three months ending December 31, 2004 $ 2,419,530 $ 504,137 $ 2,923,667
Year ending December 31, 2005 6,838,093 1,839,014 8,677,107
2006 2,595,791 1,461,648 4,057,439
2007 1,984,626 894,719 2,879,345
2008 1,165,740 663,561 1,829,301
2009 997,480 614,760 1,612,240
Thereafter 651,810 768,450 1,420,260
------------------ ------------------ -----------------
$16,653,070 $ 6,746,289 $ 23,399,359
================== ================== =================
4. Non-recourse debt:
At September 30, 2004, 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 fixed at rates ranging from 4.96% to 6.85%. The notes
are secured by assignments of lease payments and pledges of assets. The notes
mature from 2005 through 2007.
Future minimum payments of non-recourse debt are as follows:
Principal Interest Total
Three months ending December 31, 2004 $ - $ 30,470 $ 30,470
Year ending December 31, 2005 4,715,234 180,430 4,895,664
2006 646,128 57,792 703,920
2007 678,584 25,337 703,921
------------------ ------------------ -----------------
$ 6,039,946 $ 294,029 $ 6,333,975
================== ================== =================
11
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
5. Other long-term debt:
In 1999, the Company entered into a $70 million receivables funding program (the
Program), (which was subsequently 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 (2.1885% at September 30, 2004). The Program expired as
to new borrowings in March 2002.
The Program requires AFS, on behalf of the Company, to enter into various
interest rate swaps with a financial institution (also rated A1/P1) to manage
interest rate exposure associated with variable rate obligations under the
Program by effectively converting the variable rate debt to fixed rates. As of
September 30, 2004, the Company receives or pays interest on a notional
principal of $29,180,273, based on the difference between nominal rates ranging
from 4.35% to 7.72% and the variable rate under the Program. No actual borrowing
or lending is involved. The termination of the swaps were to coincide 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.
In 2003, the remaining amount owing on an original borrowing of $8,000,000 was
repaid in full, though the associated swap will not mature until January 2005.
During August 2004, an additional repayment of debt ($15,956,000) was made. As a
result of this payment, as of September 30, 2004 all of the swaps are deemed to
be partially ineffective and the Company de-designated the original hedge
relationship. During the year, Accumulated Other Comprehensive Income ("AOCI")
decreased by approximately $2,189,000 of which approximately $1,343,000 was
related to the decrease in the fair value of the interest rate swap and
approximately $846,000 was related to the reclassification of AOCI to earnings
(included in interest expense) due to hedge ineffectiveness. Amounts remaining
in AOCI are to be reclassified into earnings in a manner consistent with the
earnings pattern of the underlying hedged item (generally reflected in interest
expense).
Borrowings under the Program are as follows:
Notional Swap Payment Rate
Original Balance Balance Value on Interest
Amount September 30, September 30, September 30, Swap
Date Borrowed Borrowed 2004 2004 2004 Agreement
- ------------- -------- ---- ---- ---- ---------
11/11/1999 $ 20,000,000 $ 1,148,000 $ 2,243,231 $ (78,851) 6.84%
12/21/1999 20,000,000 7,624,000 11,262,813 (1,030,917) 7.41%
12/24/1999 25,000,000 283,000 1,641,493 (81,543) 7.44%
4/17/2000 6,500,000 1,471,000 1,897,151 (88,926) 7.45%
4/28/2000 1,900,000 92,000 242,173 (12,282) 7.72%
8/3/2000 19,000,000 851,000 6,641,488 (417,591) 7.50%
10/31/2000 7,500,000 1,128,000 2,292,890 (121,658) 7.13%
1/29/2001 8,000,000 - 1,048,123 (7,551) 5.91%
6/1/2001 2,000,000 - - - 5.04%
9/1/2001 9,000,000 1,130,000 1,910,911 (25,533) 4.35%
1/31/2002 3,900,000 1,495,000 - - *
------------------ ------------------ ------------------ -----------------
$122,800,000 $15,222,000 $29,180,273 $(1,864,852)
================== ================== ================== =================
* Under the terms of the Program, no interest rate swap agreement was required
for this borrowing.
12
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
5. Other long-term debt (continued):
Other long-term debt borrowings mature from 2004 through 2007. Future minimum
principal payments of long-term debt are as follows:
Debt Debt Rates on
Principal Principal Interest Swap
Swapped Not Swapped Interest Total Agreements*
------- ----------- -------- ----- -----------
Three months ending December 31, 2004 $ 1,614,000 $ 416,000 $ 253,967 $ 2,283,967 6.805%-6.830%
Year ending December 31, 2005 5,700,000 973,000 724,594 7,397,594 6.878%-7.172%
2006 3,362,000 60,000 377,573 3,799,573 7.337%-7.348%
2007 3,051,000 46,000 18,932 3,115,932 7.336%
------------------ ------------------ ------------------ -----------------
$ 13,727,000 $ 1,495,000 $ 1,375,066 $ 16,597,066
================== ================== ================== =================
* Represents the range of monthly weighted average fixed interest rates paid for
amounts maturing in the particular year. The receive-variable rate portion of
the swap represents commercial paper rates (2.1885% at September 30, 2004).
6. Related party transactions:
The terms of the Limited Liability Company Operating Agreement provide that AFS
and/or 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 AFS in providing services to the Company. Services provided
include Company accounting, investor relations, legal counsel and lease and
equipment documentation. AFS is not reimbursed for services where it is entitled
to receive a separate fee as compensation for such services. Reimbursable costs
incurred by AFS are allocated to the Company based upon an estimate of actual
time incurred by employees working on Company business and an allocation of rent
and other costs based on utilization studies.
Substantially all employees of AFS record time incurred in performing services
on behalf of all of the companies serviced by AFS. AFS believes that the costs
reimbursed are the lower of (i) actual costs incurred on behalf of the Company
or (ii) the amount the Company would be required to pay independent parties for
comparable services in the same geographic location and are reimbursable in
accordance with the Limited Liability Company Operating Agreement.
13
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
6. Related party transactions (continued):
AFS and/or affiliates earned fees, commissions and reimbursements, pursuant to
the Limited Liability Company Agreement during the nine and three month periods
ended September 30, 2004 and 2003 as follows:
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Administrative costs reimbursed to Managing
Member $ 738,928 $ 789,166 $ 19,586 $ 35,433
Reimbursements of other costs initially paid by
AFS on behalf of the Company 361,506 294,662 81,539 101,146
Asset management fees to Managing Member 750,662 1,097,980 171,193 322,026
------------------ ------------------ ----------------- --------------------
$ 1,851,096 $ 2,181,808 $ 272,318 $ 458,605
================== ================== ================= ====================
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 that it is material to the Company's operating results for the year ended
December 31, 2003. The effect of the additional interest expense recorded in
2003 was to increase the loss in 2003 by $0.05 per Unit.
7. Member's capital:
As of September 30, 2004, 13,570,188 Units were issued and outstanding. The
Company's registration statement with the Securities and Exchange Commission
became effective December 7, 1998. The offering was concluded on November 30,
2000. 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 in the
Limited Liability Company Operating Agreement are to be allocated 92.5% to the
Members and 7.5% to AFS.
Distributions to the Other Members were as follows:
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Distributions $ 9,260,508 $ 9,258,529 $ 3,086,874 $ 3,086,875
Weighted average number of Units outstanding 13,570,188 13,570,188 13,570,188 13,570,188
Weighted average distributions per Unit $ 0.68 $ 0.68 $ 0.23 $ 0.23
14
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
8. Financing arrangement:
The Company participates with AFS and certain of its affiliates in a financing
arrangement (comprised of a term loan to AFS, an acquisition facility and a
warehouse facility) with a group of financial institutions that includes certain
financial covenants. The available financing arrangement was amended during the
current quarter and the overall financing arrangement was increased by
$4,300,000 to $70,000,000 and expires in June 2006. The availability of
borrowings available to the Company under this financing arrangement is reduced
by the amount AFS has outstanding as a term loan. As of September 30, 2004
borrowings under the facility were as follows:
Total amount available under the financing arrangement $ 70,000,000
Term loan to AFS as of September 30, 2004 (2,809,091)
---------------
Total available under the acquisition and warehouse facilities 67,190,909
Amount borrowed by the Company under the acquisition facility (1,000,000)
Amounts borrowed by affiliated partnerships and limited
liability companies under the acquisition facility (13,300,000)
---------------
Total remaining available under the acquisition and
warehouse facilities $ 52,890,909
===============
Subsequent to quarter end the revolving line of credit was increased $5,000,000
to an overall available credit limit of $75,000,000.
Draws on the acquisition facility by any individual borrower are secured only by
that borrower's assets, including equipment and related leases. Borrowings on
the warehouse facility are recourse jointly to certain of the affiliated
partnerships and limited liability companies, the fund and AFS.
The credit agreement includes certain financial covenants applicable to each
borrower. The Company was in compliance with its covenants as of September 30,
2004. The interest rate on the balance outstanding at September 30, 2004 was
3.74%.
9. Commitments:
As of September 30, 2004, the Company had no outstanding commitments to purchase
lease equipment.
10. Other comprehensive income:
In 2004 and 2003, other comprehensive income consisted of the following:
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss) $ 2,227,687 $ (6,406,609) $ 1,125,926 $ (3,372,590)
Other comprehensive income:
Change in fair value of interest rate swap contracts 1,342,743 1,992,116 198,072 807,356
------------------ ------------------ ----------------- --------------------
Comprehensive net income (loss) $ 3,570,430 $ (4,414,493) $ 1,323,998 $ (2,565,234)
================== ================== ================= ====================
There were no other sources of comprehensive net income.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statements contained in this Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Form 10-Q,
which are not historical facts, may be forward-looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Investors are cautioned not
to attribute undue certainty to these forward-looking statements, which speak
only as of the date of this Form 10-Q. We undertake no obligation to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances after the date of this Form 10-Q or to reflect the occurrence of
unanticipated events, other than as required by law.
Capital Resources and Liquidity
During the first nine months of 2004 and 2003, the Company's primary activity
was engaging in equipment leasing activities.
During 2004 and 2003, the Company's primary sources of liquidity were rents from
operating leases and proceeds from the sales of lease assets. The liquidity of
the Company 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.
The Company has contractual obligations with a diversified group of lessees for
fixed lease terms at fixed rental amounts. As the initial lease terms expire,
the Company will re-lease or sell the equipment. The future liquidity beyond the
contractual minimum rentals will depend on the Managing Member's success in
re-leasing or selling the equipment as it comes off lease.
The Company participates with AFS and certain of its affiliates in a financing
arrangement (comprised of a term loan to AFS, an acquisition facility and a
warehouse facility) with a group of financial institutions that includes certain
financial covenants. The available financing arrangement was amended during the
current quarter and the overall financing arrangement was increased by
$4,300,000 to $70,000,000 and expires in June 2006. The availability of
borrowings available to the Company under this financing arrangement is reduced
by the amount AFS has outstanding as a term loan. As of September 30, 2004
borrowings under the facility were as follows:
Total amount available under the financing arrangement $ 70,000,000
Term loan to AFS as of September 30, 2004 (2,809,091)
---------------
Total available under the acquisition and warehouse facilities 67,190,909
Amount borrowed by the Company under the acquisition facility (1,000,000)
Amounts borrowed by affiliated partnerships and limited
liability companies under the acquisition facility (13,300,000)
---------------
Total remaining available under the acquisition and
warehouse facilities $ 52,890,909
===============
Subsequent to quarter end the revolving line of credit was increased $5,000,000
to an overall available credit limit of $75,000,000.
Draws on the acquisition facility by any individual borrower are secured only by
that borrower's assets, including equipment and related leases. Borrowings on
the warehouse facility are recourse jointly to certain of the affiliated
partnerships and limited liability companies, the Company and the Managing
Member.
The Company anticipates reinvesting a portion of lease payments from assets
owned in new leasing transactions. Such reinvestment will occur only after the
payment of all obligations, including debt service (both principal and
interest), the payment of management and acquisition fees to the Managing Member
and providing for cash distributions to the members.
The Company currently has available adequate reserves to meet contingencies, but
in the event those reserves were found to be inadequate, the Company would
likely be in a position to borrow against its current portfolio to meet such
requirements. The Managing Member envisions no such requirements for operating
purposes.
No commitments of capital have been or are expected to be made other than for
the acquisition of additional equipment. There were no such commitments as of
September 30, 2004.
If inflation in the general economy becomes significant, it may affect the
Company inasmuch as the residual (resale) values and rates on re-leases of the
Company's leased assets may increase as the costs of similar assets increase.
However, the Company's revenues from existing leases would not increase, as such
rates are generally fixed for the terms of the leases without adjustment for
inflation.
16
If interest rates increase significantly, the lease rates that the Company 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
During the first nine months of 2004 and 2003, the Company's primary sources of
liquidity was operating lease rents and proceeds from the sales of lease assets.
In the first nine months of 2004 and 2003, the primary source of cash from
operations was rents from operating leases. Operating leases are expected to
remain as the primary source of cash from operations in future periods.
In both 2004 and 2003, proceeds from sales of assets was the primary source of
cash from investing activities. Proceeds from the sales of lease assets are not
expected to be consistent from one period to another. Asset sales are made as
leases expire, as purchasers can be found and as the sales can be negotiated and
completed. There were no investing uses of cash in 2004 or in 2003.
In the first nine months of 2004 and 2003, the only source of cash from
financing activities was borrowings under the line of credit. Financing uses of
cash included repayments of debt of $24,724,000 and $18,381,000 in the nine
month periods ended September 30, 2004 and 2003, respectively. In the three
month periods ended September 30, 2004 and 2003, debt repayments were
$18,194,000 and $3,478,000, respectively. Distributions were made to Other
Members in amounts of $9,260,508 and $9,258,529 in the nine month periods ended
September 30, 2004 and 2003, respectively and $3,086,874 and $3,086,875 in the
three month periods ended September 30, 2004 and 2003, respectively.
Distributions were made to AFS in the amounts of $750,868 and $750,691 in the
nine month periods ended September 30, 2004 and 2003, respectively and $250,287
in the three month periods ended both September 30, 2004 and 2003. Repayments of
debt for the nine and three month periods ended September 30, 2004 decreased
from the same periods in the prior year as a result of the reduction in
scheduled repayments.
In August 2004, the Company sold operating leases with original cost of
$42,339,763 and net book value of $18,916,260 resulting in sales proceeds of
$22,499,128. Portions of the proceeds were used to pay down Other Long-Term Debt
of $15,956,000 and Financing Arrangement of $5,400,000.
Results of operations
Operations resulted in a net loss of $6,406,609 for the nine month period ended
September 30, 2003 and $3,372,590 for the three month period ended September 30,
2003. In 2004, operations resulted in net income of $2,227,687 for the nine
month period ended September 30 and $1,125,926 for the third quarter then ended.
The Company's primary source of revenues is from operating leases. Operating
lease rents have decreased in 2004 compared to 2003 as a result of two factors:
(1) a larger portion of the Company's assets were off lease during the first
nine months of 2004 than in 2003; and (2) there have been sales of assets over
the last twelve months. Depreciation is related to operating lease assets and
thus, to operating lease revenues. Consequently, depreciation expense decreased
in 2004 compared to 2003. For the nine month periods, depreciation decreased
from $15,303,869 in 2003 to $12,303,855 in 2004 and for the three month periods,
it decreased from $4,902,273 in 2003 to $3,285,546 in 2004. During the second
quarter of 2004, the Company received $406,348 of late payment fees included in
other income in a settlement with a lessee. There were no similar amounts in
2003.
During the third quarter of 2004, the Company sold significant amounts of lease
assets. These sales resulted in gains of $5,775,106 for the nine months ended
September 30, 2004 compared to $749,759 in the comparable period in 2003. During
the nine month period ended September 30, 2003, the Company recognized
impairment losses of $5,049,770. In the comparable period in 2004, impairment
losses were $1,050,000. Neither gains on sales of lease assets or impairment
losses are expected to be consistent from one period to another. These factors
are the primary reasons for the fluctuation of net income (loss) between 2003
and 2004.
Asset management fees are based on the gross lease rents of the Company plus
proceeds from the sales of lease assets. They are limited to certain percentages
of lease rents, distributions to members and certain other items. The decrease
in asset management fees from $1,097,980 in the nine months ended September 30,
2003 to $750,662 for the nine month period in 2004 and from $322,026 for the
three month period ended September 30, 2003 to $171,193 for the three month
period in 2004 are a direct result of decreases in lease revenues.
Interest expense has increased from $1,123,248 in the three month period ended
September 30, 2003 to $1,524,344 in the three month period ended September 30,
2004. For the nine month periods ended September 30, interest expense decreased
from $4,277,728 in 2003 to $3,175,740 in 2004. 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.
17
Due to unscheduled payments of other long-term debt in August 2004, the
Company's swap agreements were deemed to be ineffective. This resulted in an
additional charge to interest expense in the third quarter of $890,552. This is
the cause of the increase in interest expense for the three month period ended
September 30, 2004 compared to the comparable period in 2003. This one time
expense was partially offset by the effects of the lower overall debt balances
in 2004 compared to 2003. Overall debt has decreased from $79,214,855 at
December 31, 2002 to $22,261,946 at September 30, 2004. This decrease in the
debt balances has resulted in the decreased interest charges in 2004 compared to
the same period in 2003.
In the nine month periods ended September 30, 2004 and 2003, the Company
incurred $621,648 and $954,559, respectively for maintenance costs relating to
railcars. In the three month periods ended September 30, 2004 and 2003, the
Company incurred $354,674 and $148,379, respectively, 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.
Recoveries of doubtful accounts decreased from $237,000 to $110,000 for the nine
month periods ended September 30, 2003 and 2004, respectively. For the three
month periods ended September 30, 2003 and 2004, provisions for doubtful
accounts increased from $13,000 to $25,000, respectively. Recoveries and
provisions for doubtful accounts are not expected to be consistent from one
period to another.
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, 2004, there was
$1,000,000 outstanding on the floating rate line of credit.
Also, 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, 2004, borrowings on the
facility were $15,222,000 and the associated variable interest rate was 2.1885%.
Item 4. Controls and procedures.
Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management (ATEL
Financial Services, LLC as Managing Member of the registrant, including the
chief executive officer and chief financial officer), 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) under the Securities Exchange
Act of 1934] was performed as of the date of this report. Based upon this
evaluation, the chief executive officer and the chief financial officer
concluded that, as of the evaluation date, except as noted below, our disclosure
controls and procedures were effective for the purposes of recording,
processing, summarizing, and timely reporting information required to be
disclosed by us in the reports that we file under the Securities Exchange Act of
1934; and that such information is accumulated and communicated to our
management in order to allow timely decisions regarding required disclosure.
18
As disclosed in the Form 10-K for the year ended December 31, 2003, the chief
executive and chief financial officer of the Managing Member of the Company had
identified certain enhanced controls needed to facilitate a more effective
closing of the Company's financial statements. During the first quarter of 2004
and since the end of the quarter, the Managing Member hired a new controller,
added additional accounting staff personnel, and has instituted or revised
existing procedures in order to ensure that the Company's ability to execute
internal controls in accounting and reconciliation in the closing process is
adequate in all respects. The Managing Member will continue to review its
accounting procedures and practices to determine their effectiveness and
adequacy and will take such steps as deemed necessary in the opinion of the
Managing Member's chief executive and chief financial officers to ensure the
adequacy of the Company's accounting controls and procedures.
The Managing Member's chief executive officer and chief financial officer have
determined that no weakness in financial and accounting controls and procedures
had any material effect on the accuracy and completeness of the Company's
financial reporting and disclosure included in this report.
Changes in internal controls
There have been no significant changes in our internal controls or in other
factors that could significantly affect our disclosure controls and procedures
subsequent to the evaluation date nor were there any significant deficiencies or
material weaknesses in our internal controls, except as described in the prior
paragraphs.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In the ordinary course of conducting business, there may be certain claims,
suits, and complaints filed against the Company. In the opinion of management,
the outcome of such matters, if any, will not have a material impact on the
Company's financial position or results of operations. 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.
Solectron:
This is a matter whereby the Company has declared 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 AFS 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. In 2003, the Company elected to dismiss its suit and
subsequently obtained a corresponding dismissal of Solectron's counter-claim.
The Company is continuing has now settled this matter for $406,348.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Inapplicable.
Item 3. Defaults Upon Senior Securities.
Inapplicable.
Item 4. Submission Of Matters To A Vote Of Security Holders.
Inapplicable.
Item 5. Other Information.
Inapplicable.
Item 6. Exhibits.
(a) Documents filed as a part of this report
1. Financial Statement Schedules
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore have been omitted.
2. Other Exhibits
31.1 Certification of Paritosh K. Choksi
31.2 Certification of Dean L. Cash
32.1 Certification Pursuant to 18 U.S.C. section 1350 of Dean L. Cash
32.2 Certification Pursuant to 18 U.S.C. section 1350 of Paritosh K.
Choksi
(b) Report on Form 8-K
None
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date:
November 11, 2004
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
(Registrant)
By: ATEL Financial Services, LLC
Managing Member of Registrant
By: /s/ Dean L. Cash
-------------------------------------
Dean L. Cash
President and Chief Executive
Officer of Managing Member
By: /s/ Paritosh K. Choksi
-------------------------------------
Paritosh K. Choksi
Executive Vice President of
Managing Member, Principal
financial officer of registrant
By: /s/ Donald E. Carpenter
--------------------------------------
Donald E. Carpenter
Principal accounting officer of
registrant
20