Form 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| Annual report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 (fee required)
For the Year Ended December 31, 2003
OR
|_| Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 (no fee required)
For the transition period from ____ to ____
Commission File number 333-62477
ATEL Capital Equipment Fund VIII, LLC
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
(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: None
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
State the aggregate market value of voting stock held by non-affiliates of the
registrant: Inapplicable
The number of Limited Liability Company Units outstanding as of December 31,
2003 was 13,570,188.
DOCUMENTS INCORPORATED BY REFERENCE
Prospectus dated December 7, 1998, filed pursuant to Rule 424(b) (Commission
File No. 33-62477) is hereby incorporated by reference into Part IV hereof.
1
PART I
Item 1: BUSINESS
General Development of Business
ATEL Capital Equipment Fund VIII, LLC (the Company) was formed under the laws of
the state of California in July 1998. The Company was formed for the purpose of
acquiring equipment to engage in equipment leasing and sales activities. The
Managing Member of the Company is ATEL Financial Services LLC (AFS), a
California limited liability corporation. Prior to converting to a limited
liability company structure, AFS was formerly known as ATEL Financial
Corporation.
The Company conducted a public offering of 15,000,000 of Limited Liability
Company Units (Units), at a price of $10.00 per Unit. On January 13, 1999,
subscriptions for the minimum number of Units (120,000, $1,200,000) had been
received and AFS requested that the subscriptions, except those received from
Pennsylvania investors (7,500 Units, $75,000), be released to the Company. On
that date, the Company commenced operations in its primary business (leasing
activities). As of November 30, 2000, the Company had received subscriptions for
13,570,138 ($135,701,380) Units in addition to the Initial Members' Units and
the offering was terminated. All of the Units were issued and outstanding as of
December 31, 2003.
The Company's principal objectives are to invest in a diversified portfolio of
equipment that will (i) preserve, protect and return the Company's invested
capital; (ii) generate regular distributions to the members of cash from
operations and cash from sales or refinancing, with any balance remaining after
certain minimum distributions to be used to purchase additional equipment during
the reinvestment period ("Reinvestment Period"), ending December 31, 2006 and
(iii) provide additional distributions following the Reinvestment Period and
until all equipment has been sold. The Company is governed by its Limited
Liability Company Operating Agreement (Operating Agreement).
Narrative Description of Business
The Company has acquired and intends to acquire various types of equipment and
to lease such equipment pursuant to "Operating" leases and "High Payout" leases,
whereby "Operating" leases are defined as being leases in which the minimum
lease payments during the initial lease term do not recover the full cost of the
equipment and "High Payout" leases recover at least 90% of such cost. It is the
intention of AFS that a majority of the aggregate purchase price of equipment
will represent equipment leased under "High Payout" leases upon final investment
of the Net Proceeds of the Offering and that no more than 20% of the aggregate
purchase price of equipment will be invested in equipment acquired from a single
manufacturer.
The Company will only purchase equipment for which a lease exists or for which a
lease will be entered into at the time of the purchase.
As of December 31, 2003, the Company had purchased equipment with a total
acquisition price of $245,736,450.
The Company's objective is to lease a minimum of 75% of the equipment acquired
with the net proceeds of the offering to lessees that (i) have an aggregate
credit rating by Moody's Investor service, Inc. of Baa or better, or the credit
equivalent as determined by AFS, with the aggregate rating weighted to account
for the original equipment cost for each item leased or (ii) are established
hospitals with histories of profitability or municipalities. The balance of the
original equipment portfolio may include equipment leased to lessees which,
although deemed creditworthy by AFS, would not satisfy the general credit rating
criteria for the portfolio. In excess of 75% of the equipment acquired with the
net proceeds of the offering (based on original purchase cost) has been leased
to lessees with an aggregate credit rating of Baa or better or to such hospitals
or municipalities (as described above).
During 2003, 2002 and 2001, certain lessees generated significant portions of
the Company's total lease revenues as follows:
Lessee Type of Equipment 2003 2002 2001
- ------ ----------------- ---- ---- ----
Emery Worldwide Airlines Aircraft 13% * *
Overnite Transportation Company Tractors and trailers 10% 10% *
Union Pacific Railroad Railcars * * 16%
* Less than 10%
These percentages are not expected to be comparable in future periods.
The equipment leasing industry is highly competitive. Equipment manufacturers,
corporations, partnerships and others offer users an alternative to the purchase
of most types of equipment with payment terms that vary widely depending on the
lease term and type of equipment. The ability of the Company to keep the
equipment leased and/or operating and the terms of the acquisitions, leases and
dispositions of equipment depends on various factors (many of which are not in
the control of AFS or the Company), such as general economic conditions,
including the effects of inflation or recession, and fluctuations in supply and
demand for various types of equipment resulting from, among other things,
technological and economic obsolescence.
2
AFS will seek to limit the amount invested in equipment to any single lessee to
not more than 20% of the aggregate purchase price of equipment owned at any time
during the Reinvestment Period.
The business of the Company is not seasonal.
The Company has no full time employees.
Equipment Leasing Activities
The Company has acquired a diversified portfolio of equipment. The equipment has
been leased to lessees in various industries. The following tables set forth the
types of equipment acquired by the Company through December 31, 2003 and the
industries to which the assets have been leased. The Company has purchased
certain assets subject to existing non-recourse debt. For financial statement
purposes, non-recourse debt has been offset against the investment in certain
direct finance leases where the right of offset exists.
Purchase Price Excluding Percentage of Total
Asset Types Acquisition Fees Acquisitions
- ----------- ---------------- ------------
Transportation, rail $59,769,940 24.32%
Manufacturing 44,048,583 17.93%
Aircraft 38,535,439 15.68%
Transportation, other 25,757,971 10.48%
Transportation, intermodal
containers 21,228,750 8.64%
Gas compressors 13,848,465 5.64%
Materials handling 11,018,547 4.48%
Point of sale / office
automation 8,677,566 3.53%
Storage tanks 6,712,090 2.73%
Marine vessels 3,952,500 1.61%
Other * 12,186,599 4.96%
---------------- -----------------
$245,736,450 100.00%
================ =================
* Individual asset types included in "Other" represent less than 2% of the
total.
Purchase Price Excluding Percentage of Total
Industry of Lessee Acquisition Fees Acquisitions
- ------------------ ---------------- ------------
Transportation, rail $59,769,940 24.31%
Transportation, air 38,535,439 15.68%
Manufacturing, other 34,889,583 14.20%
Transportation, other 27,245,340 11.09%
Transportation, containers 21,228,750 8.64%
Manufacturing, electronics 20,901,071 8.51%
Retail 18,056,010 7.35%
Natural gas 13,848,465 5.64%
Other * 11,261,852 4.58%
---------------- -----------------
$245,736,450 100.00%
================ =================
* Individual lessee industries included in "Other" represent less than 2% of the
total.
Through December 31, 2003, the Company has disposed of certain leased assets as
set forth below:
Excess of
Type of Original Rents Over
Equipment Equipment Cost Sale Price Expenses *
- --------- -------------- ---------- ----------
Aircraft $ 14,123,602 $ 3,980,000 $ 5,829,737
Transportation, rail 10,602,408 9,180,712 3,883,785
Point of sale / office automation 7,693,006 1,971,275 8,122,613
Manufacturing 4,501,890 2,039,344 3,106,859
Transportation, other 334,948 249,263 173,413
Other 773,543 362,203 570,911
----------------- ------------------ -----------------
$ 38,029,397 $ 17,782,797 $ 21,687,318
================= ================== =================
* Individual asset types included in "Other" represent less than 2% of the
total.
For further information regarding the Company's equipment lease portfolio as of
December 31, 2003, see Note 3 to the financial statements, Investments in
equipment and leases, as set forth in Part II, Item 8, Financial Statements and
Supplementary Data.
3
Item 2. PROPERTIES
The Company does not own or lease any real property, plant or material physical
properties other than the equipment held for lease as set forth in Item 1.
Item 3. LEGAL PROCEEDINGS
In the ordinary course of conducting business, there may be certain claims,
suits, and complaints filed against the Company. In the opinion of management,
the outcome of such matters, if any, will not have a material impact on the
Company's consolidated 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 to seek resolution of its claims as a negotiated
settlement.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S LIMITED LIABILITY COMPANY UNITS AND RELATED
MATTERS
Market Information
The Units are transferable subject to restrictions on transfers which have been
imposed under the securities laws of certain states. However, as a result of
such restrictions, the size of the Company and its investment objectives, to
AFS's knowledge, no established public secondary trading market has developed
and it is unlikely that a public trading market will develop in the future. As a
result, there is no currently ascertainable market value for the Units.
Holders
As of December 31, 2003, a total of 3,683 investors were holders of record of
Units in the Company.
ERISA Valuation
In order to permit ERISA fiduciaries who hold Units to satisfy their annual
reporting requirements, AFS estimated the value per Unit of the Company's assets
as of September 30, 2003. AFS calculated the estimated liquidation proceeds that
would be realized by the Company, assuming an orderly disposition of all of the
Company's assets as of January 1, 2004. The estimates were based on the amount
of remaining lease payments on existing Company leases, and the estimated
residual values of the equipment held by the Company upon the termination of
those leases. This valuation was based solely on AFS's perception of market
conditions and the types and amounts of the Company's assets. No independent
valuation was sought.
After calculating the aggregate estimated disposition proceeds, AFS then
calculated the portion of the aggregate estimated value of the Company assets
that would be distributed to Unit holders on liquidation of the Company, and
divided the total so distributable by the number of outstanding Units. As of
September 30, 2003, the value of the Company's assets, calculated on this basis,
was approximately $7.71 per Unit. The foregoing valuation was performed solely
for the ERISA purposes described above. There is no market for the Units, and,
accordingly, this value does not represent an estimate of the amount a Unit
holder would receive if he were to seek to sell his Units. Furthermore, there
can be no assurance as to the amount the Company may actually receive if and
when it seeks to liquidate its assets, or the amount of lease payments and
equipment disposition proceeds it will actually receive over the remaining term
of the Company.
Dividends
The Company does not make dividend distributions. However, the Members of the
Company are entitled to certain distributions as provided under the Operating
Agreement.
AFS has sole discretion in determining the amount of distributions; provided,
however, that AFS will not reinvest in equipment, but will distribute, subject
to payment of any obligations of the Company, such available cash from
operations and cash from sales or refinancing as may be necessary to cause total
distributions to the Members for each year during the Reinvestment Period to
equal an amount between $0.80 and $1.00 per Unit, which was to be determined by
AFS. In 2001, AFS determined that amount to be $0.91 per Unit. The Company's
Reinvestment Period ends December 31, 2006.
4
Investors may elect to receive distributions either on a monthly or quarterly
basis.
The rate for distributions from 2003 operations was $0.0758 per Unit per month.
The distributions were paid in February through December 2003 and in January
2004. For each quarterly distribution (paid in April, July and October 2003 and
in January 2004) the rate was $0.2275 per Unit. Distributions were from 2003
cash flows from operations.
The rate for distributions from 2002 operations was $0.0758 per Unit per month.
The distributions were paid in February through December 2002 and in January
2003. For each quarterly distribution (paid in April, July and October 2002 and
in January 2003) the rate was $0.2275 per Unit. Distributions were from 2002
cash flows from operations.
The rate for distributions from 2001 operations was $0.0767 per Unit per month
for January through June 2001. The distributions were paid in February through
July 2001. The rate for the distributions for July through December 2001 was
$0.0758. The distributions were paid in August through December 2001 and in
January 2002. For each quarterly distribution (paid in April and July 2001) the
rate was $0.2300 per Unit. For the quarterly distributions paid in October 2001
and January 2002, the rate was $0.2275. Distributions were from 2001 cash flows
from operations.
The following table presents summarized information regarding distributions to
members other than AFS (Other Members:)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Net income (loss) per Unit, based on
weighted average Units outstanding $ (0.6300) $ (0.2800) $ (0.0600) $ (0.2900) $ 0.0600
Return of investment 1.5400 1.1900 0.9700 1.2100 0.5500
----------------- ---------------- ------------------ ----------------- -----------------
Distributions per unit 0.9100 0.9100 0.9100 0.9200 0.6100
Differences per Unit due to timing
of distributions - - 0.0050 0.0275 0.2900
----------------- ---------------- ------------------ ----------------- -----------------
Actual distribution rates per Unit $ 0.9100 $ 0.9100 $ 0.9150 $ 0.9475 $ 0.9000
================= ================ ================== ================= =================
Item 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of the Company at December
31, 2003, 2002, 2001, 2000 and 1999 and for the years then ended. This financial
data should be read in conjunction with the financial statements and related
notes included under Item 8 of this report.
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Gross revenues $ 28,549,271 $32,929,975 $ 43,794,097 $ 31,047,485 $ 8,660,653
Net income (loss) $ (7,521,261) $ (2,805,544) $ 132,672 $ (2,305,631) $ 438,835
Weighted average Units 13,570,188 13,570,188 13,570,188 10,634,792 4,025,294
Net income (loss) allocated to
Other Members $ (8,522,240) $ (3,806,713) $ (872,244) $ (3,100,640) $ 239,420
Net income (loss) per Unit, based on
weighted average Units outstanding $ (0.63) $ (0.28) $ (0.06) $ (0.29) $ 0.06
Distributions per Unit, based on
weighted average Units outstanding $ 0.91 $ 0.91 $ 0.91 $ 0.92 $ 0.61
Total Assets $ 110,222,744 $153,464,672 $184,421,674 $ 198,832,652 $ 145,663,336
Non-recourse and Other Long-term Debt $ 46,555,335 $68,614,855 $ 91,383,964 $ 93,993,744 $ 71,848,617
Total Members' Capital $ 47,897,118 $66,526,763 $ 83,361,952 $ 101,338,501 $ 64,130,010
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements contained in this Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Form 10-K,
which are not historical facts, may be forward-looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially 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-K. We undertake no obligation to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances after the date of this Form 10-K or to reflect the occurrence of
unanticipated events, other than as required by law.
5
Capital Resources and Liquidity
The Company commenced its offering of Units on December 7, 1998. On January 13,
1999, the Company commenced operations in its primary business (leasing
activities). The offering was terminated on November 30, 2000. Total proceeds of
the offering was $135,701,880. The Company's public offering provided for a
total maximum capitalization of $150,000,000.
The liquidity of the Company will vary in the future, increasing to the extent
cash flows from leases and proceeds of asset sales exceed expenses, and
decreasing as lease assets are acquired, as distributions are made to the Other
Members and to the extent expenses exceed cash flows from leases and proceeds
from asset sales.
As another source of liquidity, the Company is expected to have contractual
obligations with a diversified group of lessees for fixed lease terms at fixed
rental amounts. As the initial lease terms expire, the Company will re-lease or
sell the equipment. The future liquidity beyond the contractual minimum rentals
will depend on AFS's success in re-leasing or selling the equipment as it comes
off lease.
The Company participates with AFS and certain of its affiliates in a $58,627,656
floating rate 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 December
31, 2003, borrowings under the facility were as follows:
Amount borrowed by the Company under the acquisition facility $ 9,500,000
Amounts borrowed by affiliated partnerships and limited
liability companies under the acquisition facility 13,500,000
-----------------
Total borrowings under the acquisition facility 23,000,000
Amounts borrowed by AFS and its sister corporation under the
warehouse facility -
-----------------
Total outstanding balance $ 23,000,000
=================
Total available under the line of credit $ 58,627,656
Total outstanding balance (23,000,000)
-----------------
Remaining availability $ 35,627,656
=================
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 limited
partnerships and limited liability companies, the Company and AFS.
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 fees to AFS and providing for cash
distributions to the Other Members. At December 31, 2003, there were no
commitments to purchase lease assets.
AFS or an affiliate may purchase equipment in its own name, the name of an
affiliate or the name of a nominee, a trust or otherwise and hold title thereto
on a temporary or interim basis for the purpose of facilitating the acquisition
of such equipment or the completion of manufacture of the equipment or for any
other purpose related to the business of the Company, provided, however, that:
(i) the transaction is in the best interest of the Company; (ii) such equipment
is purchased by the Company for a purchase price no greater than the cost of
such equipment to AFS or affiliate (including any out-of-pocket carrying costs),
except for compensation permitted by the Operating Agreement; (iii) there is no
difference in interest terms of the loans secured by the equipment at the time
acquired by AFS or affiliate and the time acquired by the Company; (iv) there is
no benefit arising out of such transaction to AFS or its affiliate apart from
the compensation otherwise permitted by the Operating Agreement; and (v) all
income generated by, and all expenses associated with, equipment so acquired
will be treated as belonging to the Company.
The Company currently has available adequate reserves to meet its immediate cash
requirements and those of the next twelve months, but in the event those
reserves were found to be inadequate, the Company would likely be in a position
to borrow against its current portfolio to meet such requirements. AFS envisions
no such requirements for operating purposes.
In 1999, the Company established a $70 million receivables funding program
(which was subsequently increased to $125 million) with a receivables financing
company that issues commercial paper rated A1 from Standard and Poors and P1
from Moody's Investor Services. In this receivables funding program, the lenders
received a general lien against all of the otherwise unencumbered assets of the
Company. The program provided for borrowing at a variable interest rate and
required AFS on behalf of the Company to enter into interest rate swap
agreements with certain counterparties (also rated A1/P1) to mitigate the
interest rate risk associated with a variable rate note. AFS believes that this
program allowed the Company to avail itself of lower cost debt than that
available for individual non-recourse debt transactions. The program expired as
to new borrowings in April 2002.
6
See Item 7a and Note 5 to the financial statements, Other long-term debt, as set
forth in Part II, Item 8, Financial Statements and Supplementary Data, for
additional information regarding this program and related interest rate swaps.
It is the intention of the Company to use the receivables funding program as its
primary source of debt financing. The Company will continue to use its sources
of non-recourse secured debt financing on a transaction basis as a means of
mitigating credit risk.
AFS expects that aggregate borrowings in the future will be approximately 50% of
aggregate equipment cost. In any event, the Operating Agreement limits such
borrowings to 50% of the total cost of equipment, in aggregate.
See Note 4 to the financial statements, Non-recourse debt, as set forth in Part
II, Item 8, Financial Statements and Supplementary Data, for additional
information regarding non-recourse debt.
The Company commenced regular distributions, based on cash flows from
operations, beginning with the month of January 1999. See Item 5 and 6 for
additional information regarding distributions.
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.
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
2003 vs. 2002:
In 2003 and 2002, our primary source of cash flows was rents we received from
operating leases. In both years, this was also our largest source of cash flows
from operating activities.
In both 2003 and 2002, we had two sources of cash flows from investing
activities, proceeds from sales of lease assets and cash flows from direct
financing leases. Proceeds from sales of lease assets increased from $2,403,934
in 2003 to $13,964,820 in 2003, an increase of $11,560,886. Assets sold in 2003
consisted largely of aircraft, rail transportation and manufacturing equipment.
Assets sold in 2002, consisted primarily of office automation equipment. In
2002, assets with an original cost of approximately $5,585,000 were sold. In
2003, that increased to approximately $24,469,000. It was this increase that
gave rise to the increase in cash flows from asset sales. Investing activities
also included cash flows from direct financing leases in both 2002 and 2003.
Cash received on these leases decreased from $2,134,026 in 2002 to $1,793,351 in
2003, a decrease of $340,675.
In 2003, our sources of cash from financing activities consisted of borrowings
on the line of credit ($19,500,000) and the proceeds of a new $2,563,149
non-recourse note payable. In 2002, our financing sources of cash were
borrowings on the line of credit ($12,400,000) and the proceeds of other
long-term debt ($3,900,000). We used cash in investing activities in both 2002
and 2003 to make payments on the line of credit, non-recourse debt and other
long-term debt and to make distributions to the members.
2002 vs. 2001:
In 2002 and 2001, the Company's primary source of cash was operating lease
revenues. This was also the primary source of cash flows from operations in both
years. Cash flows from operations decreased from $30,662,797 in 2001 to
$23,805,426 in 2002, primarily as a result of decreases in operating lease
revenues partially off set by a decline in interest expense.
Rents from direct financing leases and proceeds from asset sales were the only
sources of cash from investing activities in either 2002 or in 2001. In both
years, uses of cash in investing activities included purchases of assets on
operating and direct financing leases and payment of initial direct costs
associated with those leases. As of December 31, 2001, the Company had nearly
completed the acquisition of its portfolio of lease assets. After 2001, asset
acquisitions are not expected to be as significant. Proceeds from the sales of
lease assets are not expected to be consistent from one period to another as the
amounts of such proceeds are dependent on a number of factors including the
timing of lease terminations, types of assets being sold and the markets for the
various equipment types at the times they are sold.
In 2002 and 2001, sources of cash from financing activities consisted of
long-term debt proceeds and borrowings under the line of credit. Amounts of
long-term debt proceeds decreased from $19,000,000 in 2001 to $3,900,000 in
2002. After the borrowings in 2002, the debt facility was closed as it related
to new borrowings.
7
Results of Operations
As of January 13, 1999, subscriptions for the minimum amount of the offering
($1,200,000) had been received and accepted by the Company. As of that date, the
Company commenced operations in its primary business (leasing activities).
Because of the timing of the commencement of operations and the fact that the
initial portfolio acquisitions were not been completed until 2001, the results
of operations in 2001 are not expected to be comparable to future periods.
Substantially all employees of AFS track time incurred in performing
administrative services on behalf of the Company. 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 administrative services in the same geographic location.
As of December 31, 2003, 2002 and 2001 there were concentrations (defined as
greater than 10%) of equipment leased to lessees in certain industries (as a
percentage of total equipment cost) as follows:
2003 2002 2001
---- ---- ----
Transportation, rail 20% 14% 18%
Manufacturing, other 18% 17% 15%
Transportation, other 13% 12% 12%
Transportation, containers 11% 11% *
Transportation, air * 17% 17%
Manufacturing, electronics * 10% *
* Less than 10%
2003 vs. 2002:
Our operations resulted in net losses of $7,521,261 in 2003 and $2,805,544 in
2002.The primary reason for the increased loss is due to additional impairment
losses of $5,290,639 in 2003, an increase of $3,179,046 compared to 2002. Our
primary source of revenues in both years was rents from operating leases. Rents
from operating leases have continued to decrease from $31,638,196 in 2002 to
$26,938,424 in 2003, a decrease of $4,699,772. Our operating lease rents have
decreased as a result of asset sales over the last two years, consistent with
the Company's maturing lease portfolio.
Our largest expense is depreciation of operating lease assets. Depreciation has
decreased from $22,784,103 in 2002 to $20,337,442 in 2003, a decrease of
$2,446,661. This decrease is a result of the asset sales we noted above.
Railcar maintenance costs have increased from $215,009 in 2002 to $1,008,874 in
2003, an increase of $793,865. Most of the increase (approximately $722,000)
related to costs incurred in order to prepare rail cars to be placed on new
leases.
Interest expense has decreased from $6,148,759 in 2002 to $5,270,675 in 2003, a
decrease of $878,084. The decrease resulted from scheduled repayments of our
non-recourse and other long-term debt. The reduction in interest expense
attributable to reduced average outstanding balances was partially offset by
additional interest charges related to prior period asset acquisitions as more
fully described in Note 6 in the financial statements included in Part I, Item 8
of this report.
In 2002 we provided $475,000 for an allowance for doubtful accounts. A large
portion of the accounts provided for in 2002 related to the bankruptcy of
National Steel Corporation, a lessee of the Company. In 2003, we recovered
$180,000 of the amounts we had provided for in 2002.
Management periodically reviews the carrying values of its assets on leases and
assets held for lease or sale. As a result of the review, management determined
that the fair values of a fleet of diesel electric locomotives, railroad auto
racks, manufacturing equipment and an aircraft had declined in value to the
extent that the carrying values had become impaired. The fair value of the
assets was determined based on the sum of the discounted estimated future cash
flows of the assets. A charge to operations was recorded for the decline in
value of those assets in the amount of $5,679,271 for the year ended December
31, 2003.
2002 vs. 2001:
Operations in 2002 resulted in a net loss of $2,805,544. Operations in 2001
resulted in net income of $132,672. The primary reason for the loss is due to
impairment losses of $2,612,500 in 2002, there was no such provision in 2001.
Revenues from operating leases and direct finance leases decreased significantly
in 2002 compared to 2001. These decreases were the result of asset sales over
the last two years, lower lease rates on renewals and an increase in the amount
of the Company's assets that are off lease.
Depreciation expense also decreased as a result of the sales of lease assets in
2002 and 2001.
Average debt balances decreased in 2002 compared to 2001 as a result of making
scheduled payments on the Company's existing debt. This led to the decrease in
interest expense compared to 2001.
8
In 2002 we provided $475,000 for an allowance for doubtful accounts. A large
portion of the accounts provided for in 2002 related to the bankruptcy of
National Steel Corporation, a lessee of the Company. There were no similar large
provisions in 2001.
Management fees are related to the Company's revenues. As the Company's revenues
decline, as a result of asset sales, the management fees also decrease.
As a result of our periodic review of the carrying values of our assets on
leases and assets held for lease or sale, management determined that the fair
values of a fleet of diesel electric locomotives and an aircraft had declined in
value to the extent that the carrying values had become impaired. The fair value
of the assets was determined based on the sum of the discounted estimated future
cash flows of the assets. A charge to operations was recorded for the decline in
value of those assets in the amount of $2,612,500 for the year ended December
31, 2002.
Derivative Financial Instruments
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, which established new accounting and
reporting standards for derivative instruments. SFAS No. 133 has been amended by
SFAS No. 137, issued in June 1999, by SFAS No. 138, issued in June 2000 and by
SFAS No. 149, issued in June 2003.
SFAS No. 133, as amended, requires the Company to recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. It further provides criteria for derivative instruments to be
designated as fair value, cash flow, or foreign currency hedges, and establishes
accounting standards for reporting changes in the fair value of the derivative
instruments.
The Company adopted SFAS No. 133, as amended, on January 1, 2001. Upon adoption,
the Company recorded interest rate swap hedging instruments at fair value in the
balance sheet and recognized the offsetting gains or losses in net income or
other comprehensive income, as appropriate. See Note 5 to the financial
statements, Other long-term debt, as set forth in Part II, Item 8, Financial
Statements and Supplementary Data, for additional information.
Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB 51." The
primary objectives of this interpretation are to provide guidance on the
identification of entities for which control is achieved through means other
than through voting rights ("variable interest entities") and how to determine
when and which business enterprise (the "primary beneficiary") should
consolidate the variable interest entity. This new model for consolidation
applies to an entity in which either (i) the equity investors (if any) do not
have a controlling financial interest; or (ii) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. In addition, FIN 46 requires
that the primary beneficiary, as well as all other enterprises with a
significant variable interest in a variable interest entity, make additional
disclosures. Certain disclosure requirements of FIN 46 were effective for
financial statements issued after January 31, 2003.
In December 2003, the FASB issued FIN No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain
FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN
46-R are as follows:
(i) Special purpose entities ("SPEs") created prior to February 1, 2003. The
company must apply either the provisions of FIN 46 or early adopt the provisions
of FIN 46-R at the end of the first interim or annual reporting period ending
after December 15, 2003.
(ii) Non-SPEs created prior to February 1, 2003. The company is required to
adopt FIN 46-R at the end of the first interim or annual reporting period ending
after March 15, 2004.
(iii) All entities, regardless of whether a SPE, that were created subsequent to
January 31, 2003. The provisions of FIN 46 were applicable for variable
interests in entities obtained after January 31, 2003.
The company is required to adopt FIN 46-R at the end of the first interim or
annual reporting period ending after March 15, 2004. The adoption of the
provisions applicable to SPEs and all other variable interests obtained after
January 31, 2003 did not have a material impact on the company's financial
statements. The company is currently evaluating the impact of adopting FIN 46-R
applicable to Non-SPEs created prior to February 1, 2003 but does not expect a
material impact.
In April 2002, the FASB issued FASB Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (Statement No. 145). Among other things, Statement No. 145 rescinds
Statement No. 4, which required that all gains and losses from extinguishment of
debt be reported as an extraordinary item. The adoption of Statement No. 145,
effective January 1, 2003, did not have any effect on the Company's consolidated
financial position, consolidated results of operations, or liquidity.
9
Critical Accounting Policies
The policies discussed below are considered by management of the Company to be
critical to an understanding of the Company's financial statements because their
application requires significant complex or subjective judgments, decisions, or
assessments, with financial reporting results relying on estimation about the
effect of matters that are inherently uncertain. Specific risks for these
critical accounting policies are described in the following paragraphs. The
Company also states these accounting policies in the notes to the financial
statements and in relevant sections in this discussion and analysis. For all of
these policies, management cautions that future events rarely develop exactly as
forecast, and the best estimates routinely require adjustment.
Equipment on operating leases:
Equipment on operating leases is stated at cost. Depreciation is being provided
by use of the straight-line method over the terms of the related leases to the
equipment's estimated residual values at the end of the leases. Revenues from
operating leases are recognized evenly over the lives of the related leases.
Direct financing leases:
Income from direct financing lease transactions is reported using the financing
method of accounting, in which the Company's investment in the leased property
is reported as a receivable from the lessee to be recovered through future
rentals. The income portion of each rental payment is calculated so as to
generate a constant rate of return on the net receivable outstanding.
Allowances for losses on direct financing leases are typically established based
on historical charge offs and collections experience and are usually determined
by specifically identified lessees and billed and unbilled receivables.
Direct financing leases are placed in a non-accrual status based on specifically
identified lessees. Such leases are only returned to an accrual status based on
a case by case review by AFS. Direct financing leases are charged off on
specific identification by AFS.
Use of estimates:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Such
estimates primarily relate to the determination of residual values at the end of
the lease term.
Asset Valuation:
Recorded values of the Company's asset portfolio are periodically reviewed for
impairment in accordance with Statement of Financial Accounting Standards (SFAS)
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. An
impairment loss is measured and recognized only if the estimated undiscounted
future cash flows of the asset are less than their net book value. The estimated
undiscounted future cash flows are the sum of the estimated residual value of
the asset at the end of the asset's expected holding period and estimates of
undiscounted future rents. The residual value assumes, among other things, that
the asset is utilized normally in an open, unrestricted and stable market.
Short-term fluctuations in the market place are disregarded and it is assumed
that there is no necessity either to dispose of a significant number of the
assets, if held in quantity, simultaneously or to dispose of the asset quickly.
Impairment is measured as the difference between the fair value (as determined
by the discounted estimated future cash flows) of the assets and its carrying
value on the measurement date.
The Company adopted SFAS 144 as of January 1, 2002. The adoption of the
Statement did not have a significant impact on the Company's financial position
and results of operations.
Item 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT 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 revolving line of credit and is,
therefore, exposed to interest rate risk until fixed rate financing is arranged,
or the floating rate revolving line of credit is repaid. As of December 31,
2003, there was $9,500,000 outstanding on the floating rate revolving line of
credit and the effective interest rate of the borrowings ranged from 3.03% to
4.00%.
10
Also, as described in Item 7 in the caption "Capital Resources and Liquidity,"
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 December 31, 2003, borrowings on the facility
In general, these swap agreements eliminate the Company's interest rate risk
associated with variable interest rate borrowings. However, the Company is
exposed to and manages credit risk associated with the counterparty to the swap
agreement by dealing only with institutions it considers financially sound. If
these agreements were not in place, based on the Company's facility borrowings
at December 31, 2003, a hypothetical 1.00% increase or decrease in market
interest rates would increase or decrease the Company's 2004 variable interest
expense by approximately $337,800.
See the Notes to the financial statements as set forth in Part II, Item 8 for
additional information.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Report of Independent Auditors, Financial Statements and Notes to
Financial Statements attached hereto at pages 12 through 30.
11
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Members
ATEL Capital Equipment Fund VIII, LLC
We have audited the accompanying balance sheets of ATEL Capital Equipment Fund
VIII, LLC (Company) as of December 31, 2003 and 2002, and the related statements
of operations, changes in members' capital and cash flows for each of the three
years in the period ended December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ATEL Capital Equipment Fund
VIII, LLC at December 31, 2003 and 2002, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2003, in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
San Francisco, California
February 20, 2004
12
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
ASSETS
2003 2002
---- ----
Cash and cash equivalents $ 508,584 $ 2,263,479
Accounts receivable, net of allowance for doubtful accounts of
$225,115 in 2003 and $516,365 in 2002 2,124,902 1,874,311
Due from Managing Member - 171,119
Other assets 25,000 55,000
Investments in equipment and leases 107,564,258 149,100,763
----------------- -----------------
Total assets $ 110,222,744 $ 153,464,672
================= =================
LIABILITIES AND MEMBERS' CAPITAL
Long-term debt $ 39,946,000 $ 62,912,000
Non-recourse debt 6,609,335 5,702,855
Line of credit 9,500,000 10,600,000
Accounts payable and accruals:
Managing Member 889,555 -
Other 820,799 697,720
Accrued interest payable 115,844 96,179
Interest rate swap contracts 3,207,595 5,381,342
Unearned operating lease income 1,236,498 1,547,813
----------------- -----------------
Total liabilities 62,325,626 86,937,909
Members' capital:
Accumulated other comprehensive income (3,143,144) (5,381,342)
Members' capital 51,040,262 71,908,105
----------------- -----------------
Total Members' capital 47,897,118 66,526,763
----------------- -----------------
Total liabilities and Members' capital $ 110,222,744 $ 153,464,672
================= =================
See accompanying notes.
13
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31, 2003, 2002 AND 2001
Revenues: 2003 2002 2001
---- ---- ----
Leasing activities:
Operating leases $ 26,938,424 $ 31,638,196 $ 40,911,071
Direct financing leases 864,509 807,678 920,026
Gain on sales of assets 595,299 271,751 1,801,292
Interest 5,717 15,547 131,575
Other 145,322 196,803 30,133
------------------ ----------------- ------------------
28,549,271 32,929,975 43,794,097
Expenses:
Depreciation of operating lease assets 20,337,442 22,784,103 30,867,668
Provision for losses and impairments 5,679,271 2,612,500 -
Interest expense 5,270,675 6,148,759 9,058,622
Asset management fees to Managing Member 1,517,259 1,481,576 1,849,335
Railcar maintenance 1,008,874 215,009 -
Cost reimbursements to Managing Member 820,571 832,539 924,375
Amortization of initial direct costs 356,920 378,445 375,978
Professional fees 506,698 179,562 215,450
Insurance 186,393 - -
(Recovery of) provision for doubtful accounts (180,000) 475,000 82,615
Aircraft inspection and maintenance 137,510 211,268 -
Franchise fees and taxes on income 124,239 72,843 70,349
Other 304,680 343,915 217,033
------------------ ----------------- ------------------
36,070,532 35,735,519 43,661,425
------------------ ----------------- ------------------
Net (loss) income $ (7,521,261) $ (2,805,544) $ 132,672
================== ================= ==================
Net (loss) income:
Managing Member $ 1,000,979 $ 1,001,169 $ 1,004,916
Other Members (8,522,240) (3,806,713) (872,244)
------------------ ----------------- ------------------
$ (7,521,261) $ (2,805,544) $ 132,672
================== ================= ==================
Net loss per Limited Liability Company Unit (Other Members) $ (0.63) $ (0.28) $ (0.06)
Weighted average number of Units outstanding 13,570,188 13,570,188 13,570,188
See accompanying notes.
14
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENT OF CHANGES IN MEMBERS' CAPITAL
FOR THE YEARS ENDED
DECEMBER 31, 2003, 2002 AND 2001
Accumulated
Other
Other Members Comprehensive
------------- Managing Income
Units Amount Member (Loss) Total
Balance December 31, 2000 13,570,188 $101,338,501 $ - $ - $ 101,338,501
Distributions to Managing Member - (1,004,916) - (1,004,916)
Distributions to Other Members
($0.91 per Unit) (12,403,683) - - (12,403,683)
Cumulative effect of change in
accounting principle at
January 1, 2001 - - (821,196) (821,196)
Unrealized increase in interest rate
swap liability - - (3,879,426) (3,879,426)
Net income (loss) (872,244) 1,004,916 132,672
----------------- ---------------- ------------------ ----------------- -----------------
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
($0.91 per Unit) (12,347,756) - - (12,347,756)
Unrealized increase in interest rate
swap liability - - (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
Distributions to Managing Member - (1,000,979) - (1,000,979)
Distributions to Other Members
($0.91 per Unit) (12,345,603) - - (12,345,603)
Unrealized decrease in interest rate
swap liability - - 2,173,747 2,173,747
Reclassification adjustment for
portion of swap liability charged to
net loss - - 64,451 64,451
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
================= ================ ================== ================= =================
See accompanying notes.
15
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
Operating activities:
Net (loss) income $ (7,521,261) $ (2,805,544) $ 132,672
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Gain on sales of assets (595,299) (271,751) (1,801,292)
Depreciation of operating lease assets 20,337,442 22,784,103 30,867,668
Amortization of initial direct costs 356,920 378,445 375,978
Interest rate swap contracts 64,451 - -
(Recovery of) provision for doubtful accounts (180,000) 475,000 82,615
Provision for losses and impairments 5,679,271 2,612,500 -
Changes in operating assets and liabilities:
Accounts receivable (70,591) 907,216 2,000,427
Due from Managing Member 171,119 (171,119) -
Other assets 30,000 30,000 30,000
Accounts payable, Managing Member 889,555 - (695,548)
Accounts payable, other 123,079 48,182 163,643
Accrued interest 19,665 19,199 (190,843)
Unearned lease income (311,315) (200,805) (302,523)
------------------ ----------------- -----------------
Net cash provided by operating activities 18,993,036 23,805,426 30,662,797
------------------ ----------------- -----------------
Investing activities:
Proceeds from sales of lease assets 13,964,820 2,403,934 7,348,063
Reduction of net investment in direct financing leases 1,793,351 2,134,026 2,806,236
Purchases of equipment on direct financing leases - (293,570) (810,271)
Payment of initial direct costs to Managing Member - (37,440) (147,721)
Purchases of equipment on operating leases - - (26,556,373)
------------------ ----------------- -----------------
Net cash provided by (used in) investing activities 15,758,171 4,206,950 (17,360,066)
------------------ ----------------- -----------------
Financing activities:
Repayments of other long-term debt (22,966,000) (26,357,000) (20,299,000)
Repayments of line of credit (20,600,000) (4,300,000) (21,056,335)
Borrowings under line of credit 19,500,000 12,400,000 23,556,335
Distributions to Other Members (12,345,603) (12,347,756) (12,403,683)
Proceeds of non-recourse debt 2,563,149 - -
Repayments of non-recourse debt (1,656,669) (312,109) (1,310,780)
Distributions to Managing Member (1,000,979) (1,001,169) (1,004,916)
Proceeds of other long-term debt - 3,900,000 19,000,000
------------------ ----------------- -----------------
Net cash used in financing activities (36,506,102) (28,018,034) (13,518,379)
------------------ ----------------- -----------------
Net decrease in cash and cash equivalents (1,754,895) (5,658) (215,648)
Cash and cash equivalents at beginning of year 2,263,479 2,269,137 2,484,785
------------------ ----------------- -----------------
Cash and cash equivalents at end of year $ 508,584 $ 2,263,479 $ 2,269,137
================== ================= =================
16
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENTS OF CASH FLOWS
(CONTINUED)
FOR THE YEARS ENDED
DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 5,251,010 $ 6,129,560 $ 9,249,465
================== ================= =================
Schedule of non-cash transactions:
Change in fair value of interest rate swaps contracts $ 2,173,747 $ (680,720) $ (3,879,426)
================== ================= =================
See accompanying notes.
17
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
1. Organization and Limited Liability 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, primarily in the United
States. The Company may continue until December 31, 2019. The Managing Member of
the Company is ATEL Financial Services LLC (AFS), a California limited liability
company. Prior to converting to a limited liability company structure, AFS was
formerly known as ATEL Financial Corporation. Each Member's personal liability
for obligations of the Company generally will be limited to the amount of their
respective contributions and rights to undistributed profits and assets of the
Company.
On January 13, 1999, subscriptions for the minimum number of Units (120,000,
$1,200,000) had been received. On that date, the Company commenced operations in
its primary business (leasing activities).
The Company's business consists of leasing various types of equipment. As of
December 31, 2003, the original terms of the leases ranged from one to ten
years.
Pursuant to the Operating Agreement, AFS receives compensation and
reimbursements for services rendered on behalf of the Company (see Note 6). AFS
is required to maintain in the Company reasonable cash reserves for working
capital, the repurchase of Units and contingencies.
The Company's principal objectives are to invest in a diversified portfolio of
equipment that will (i) preserve, protect and return the Company's invested
capital; (ii) generate regular distributions to the members of cash from
operations and cash from sales or refinancing, with any balance remaining after
certain minimum distributions to be used to purchase additional equipment during
the Reinvestment Period, ending December 31, 2006 and (iii) provide additional
distributions following the Reinvestment Period and until all equipment has been
sold. The Company is governed by its Limited Liability Company Operating
Agreement (Operating Agreement).
2. Summary of significant accounting policies:
Cash and cash equivalents:
Cash and cash equivalents includes cash in banks and cash equivalent investments
with original maturities of ninety days or less.
Accounts receivable:
Accounts receivable represent the amounts billed under lease contracts and
currently due to the Company. Allowances for doubtful accounts are typically
established based on historical charge offs and collection experience and are
usually determined by specifically identified lessees and invoiced amounts.
Equipment on operating leases:
Equipment on operating leases is stated at cost. Depreciation is being provided
by use of the straight-line method over the terms of the related leases to the
equipment's estimated residual values at the end of the leases. Revenues from
operating leases are recognized evenly over the lives of the related leases.
18
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
2. Summary of significant accounting policies (continued):
Direct financing leases:
Income from direct financing lease transactions is reported using the financing
method of accounting, in which the Company's investment in the leased property
is reported as a receivable from the lessee to be recovered through future
rentals. The income portion of each rental payment is calculated so as to
generate a constant rate of return on the net receivable outstanding.
Allowances for losses on direct financing leases are typically established based
on historical charge offs and collections experience and are usually determined
by specifically identified lessees and billed and unbilled receivables.
Direct financing leases are placed in a non-accrual status based on specifically
identified lessees. Such leases are only returned to an accrual status based on
a case by case review of AFS. Direct financing leases are charged off on
specific identification by AFS.
Initial direct costs:
The Company capitalizes initial direct costs associated with the acquisition of
lease assets. The costs are amortized over a five year period using a straight
line method.
Income taxes:
The Company does not provide for income taxes since all income and losses are
the liability of the individual members and are allocated to the members for
inclusion in their individual tax returns.
The tax basis of the Company's net assets and liabilities varies from the
amounts presented in these financial statements (unaudited) as of December 31:
2003 2002
---- ----
Financial statement basis of net assets $ 47,897,118 $ 66,526,763
Tax basis of net assets 2,409,944 26,812,934
------------------ -----------------
Difference $ 45,487,174 $ 39,713,829
================== =================
The primary differences between the tax basis of net assets and the amounts
recorded in the financial statements are the result of differences in accounting
for bad debts, impairment losses, syndication costs and differences between the
depreciation methods used in the financial statements and the Company's tax
returns.
The following reconciles the net (loss) income reported in these financial
statements to the loss reported on the Company's federal tax return (unaudited)
for each of the years ended December 31:
2003 2002 2001
---- ---- ----
Net income (loss) per financial statements $ (7,521,261) $ (2,805,544) $ 132,672
Adjustment to depreciation expense (4,676,068) (14,111,240) (19,612,115)
Provisions for doubtful accounts and losses 5,499,271 3,087,500 82,615
Adjustments to lease revenues (1,150,757) 1,616,517 3,898,290
------------------ ----------------- -----------------
Net loss per federal tax return $ (7,848,815) $ (12,212,767) $ (15,498,538)
================== ================= =================
19
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
2. Summary of significant accounting policies (continued):
Per unit data:
Net income (loss) and distributions per unit are based upon the weighted average
number of units outstanding during the period.
Asset valuation:
Recorded values of the Company's asset portfolio are periodically reviewed for
impairment in accordance with Statement of Financial Accounting Standards (SFAS)
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. An
impairment loss is measured and recognized only if the estimated undiscounted
future cash flows of the asset are less than their net book value. The estimated
undiscounted future cash flows are the sum of the estimated residual value of
the asset at the end of the asset's expected holding period and estimates of
undiscounted future rents. The residual value assumes, among other things, that
the asset is utilized normally in an open, unrestricted and stable market.
Short-term fluctuations in the market place are disregarded and it is assumed
that there is no necessity either to dispose of a significant number of the
assets, if held in quantity, simultaneously or to dispose of the asset quickly.
Impairment is measured as the difference between the fair value (as determined
by the discounted estimated future cash flows) of the assets and its carrying
value on the measurement date.
The Company adopted SFAS 144 as of January 1, 2002. The adoption of the
Statement did not have a significant impact on the Company's financial position
and results of operations.
Credit risk:
Financial instruments that potentially subject the Company to concentrations of
credit risk include cash and cash equivalents, direct finance lease receivables
and accounts receivable. The Company places its cash deposits and temporary cash
investments with creditworthy, high quality financial institutions. The
concentration of such deposits and temporary cash investments is not deemed to
create a significant risk to the Company. Accounts receivable represent amounts
due from lessees in various industries, related to equipment on operating and
direct financing leases. See Note 8 for a description of lessees by industry as
of December 31, 2003, 2002 and 2001.
Derivative financial instruments:
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, which
established new accounting and reporting standards for derivative instruments.
SFAS No. 133 has been amended by SFAS No. 137, issued in June 1999, by SFAS No.
138, issued in June 2000 and by SFAS No 149, issued in June 2003.
SFAS No. 133, as amended, requires the Company to recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. It further provides criteria for derivative instruments to be
designated as fair value, cash flow, or foreign currency hedges, and establishes
accounting standards for reporting changes in the fair value of the derivative
instruments. Upon adoption on January 1, 2001, the Company recorded its interest
rate swap hedging instruments at fair value in the balance sheet and recognized
the offsetting gains or losses as adjustments to be reported in net income or
other comprehensive income, as appropriate.
The Company utilizes cash flow hedges comprised of interest rate swaps (hedges
of variable rate interest bearing debt instruments). Such interest rate swaps
are linked to and adjust effectively the interest rate sensitivity of specific
long-term debt.
20
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
2. Summary of significant accounting policies (continued):
Derivative financial instruments (continued):
The effective portion of the change in fair value of the interest rate swaps is
recorded in Accumulated Other Comprehensive Income (AOCI) and the ineffective
portion (if any) directly in earnings. Amounts in AOCI are reclassified into
earnings in a manner consistent with the earnings pattern of the underlying
hedged item (generally reflected in interest expense). If a hedged item is
dedesignated prior to maturity, previous adjustments to AOCI are recognized in
earnings to match the earnings recognition pattern of the hedged item (e.g.,
level yield amortization if hedging an interest bearing instruments). Interest
income or expense on most hedging derivatives used to manage interest rate
exposure is recorded on an accrual basis as an adjustment to the yield of the
link exposures over the periods covered by the contracts. This matches the
income recognition treatment of the exposure (i.e., the liabilities, which are
carried at historical cost, with interest recorded on an accrual basis).
Credit exposure from derivative financial instruments arises from the risk of a
counterparty default on the derivative contract. The amount of the loss created
by the default is the replacement cost or current positive fair value of the
defaulted contract.
Use of estimates:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Such
estimates primarily relate to the determination of residual values at the end of
the lease term.
Basis of presentation:
The accompanying financial statements as of December 31, 2003 and 2002 and for
the three years ended December 31, 2003 have been prepared in accordance with
accounting principles generally accepted in the United States. Certain prior
year amounts have been reclassified to conform to the current year presentation.
Recent accounting pronouncements:
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB 51." The
primary objectives of this interpretation are to provide guidance on the
identification of entities for which control is achieved through means other
than through voting rights ("variable interest entities") and how to determine
when and which business enterprise (the "primary beneficiary") should
consolidate the variable interest entity. This new model for consolidation
applies to an entity in which either (i) the equity investors (if any) do not
have a controlling financial interest; or (ii) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. In addition, FIN 46 requires
that the primary beneficiary, as well as all other enterprises with a
significant variable interest in a variable interest entity, make additional
disclosures. Certain disclosure requirements of FIN 46 were effective for
financial statements issued after January 31, 2003.
In December 2003, the FASB issued FIN No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain
FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN
46-R are as follows:
(i) Special purpose entities ("SPEs") created prior to February 1, 2003. The
company must apply either the provisions of FIN 46 or early adopt the provisions
of FIN 46-R at the end of the first interim or annual reporting period ending
after December 15, 2003.
21
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
2. Summary of significant accounting policies (continued):
Recent accounting pronouncements (continued):
(ii) Non-SPEs created prior to February 1, 2003. The company is required to
adopt FIN 46-R at the end of the first interim or annual reporting period ending
after March 15, 2004.
(iii) All entities, regardless of whether a SPE, that were created subsequent to
January 31, 2003. The provisions of FIN 46 were applicable for variable
interests in entities obtained after January 31, 2003.
The company is required to adopt FIN 46-R at the end of the first interim or
annual reporting period ending after March 15, 2004. The adoption of the
provisions applicable to SPEs and all other variable interests obtained after
January 31, 2003 did not have a material impact on the company's financial
statements. The company is currently evaluating the impact of adopting FIN 46-R
applicable to Non-SPEs created prior to February 1, 2003 but does not expect a
material impact.
In April 2002, the FASB issued FASB Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (Statement No. 145). Among other things, Statement No. 145 rescinds
Statement No. 4, which required that all gains and losses from extinguishment of
debt be reported as an extraordinary item. The adoption of Statement No. 145,
effective January 1, 2003, did not have any effect on the Company's consolidated
financial position, consolidated results of operations, or liquidity.
3. Investments in equipment and leases:
The Company's investments in equipment and leases consist of the following:
Depreciation /
Amortization
Expense or
Amortization of Reclassi-
December 31, Impairment Direct Financing fications or December 31,
2002 Losses Leases Dispositions 2003
---- ------ ------ ------------ ----
Net investment in operating leases $ 119,404,269 $ (4,140,362) $ (20,337,442) $ (7,814,125) $ 87,112,340
Net investment in direct financing leases 11,233,604 - (1,793,351) 2,057,548 11,497,801
Assets held for sale or lease, net of
accumulated depreciation of
$16,874,083 in 2003 and $13,981,447
in 2002 17,788,535 (1,538,909) - (7,612,944) 8,636,682
Initial direct costs, net of accumulated
amortization of $249,737 in 2003 and
$1,075,687 in 2002 674,355 - (356,920) - 317,435
----------------- ---------------- ------------------ ----------------- -----------------
$ 149,100,763 $ (5,679,271) $ (22,487,713) $ (13,369,521) $ 107,564,258
================= ================ ================== ================= =================
22
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
3. Investments in equipment and leases (continued):
Management periodically reviews the carrying values of its assets on leases and
assets held for lease or sale. As a result of those reviews, management
determined that the fair values of a fleet of diesel electric locomotives, rail
car auto racks, manufacturing equipment and an aircraft had, as detailed below,
declined in value to the extent that the carrying values had become impaired.
The fair value of the assets was determined based on the sum of the discounted
estimated future cash flows of the assets. Charges to operations were recorded
for the declines in value of those assets in the amounts of $5,679,271 and
$2,612,500 for the years ended December 31, 2003 and 2002, respectively.
Impairment of investments in leases and assets held for sale or lease:
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 sale or lease consist of the following
for the years ended December 31:
2003 2002 2001
---- ---- ----
Depreciation expense $20,337,442 $ 22,784,103 $ 30,867,668
Impairment losses 5,679,271 2,612,500 -
---------------- ------------------ -----------------
$26,016,713 $ 25,396,603 $ 30,867,668
================ ================== =================
Due to continued declines in markets for certain types of assets, during 2002
and 2003, management determined that the values of certain assets were impaired.
The Company recorded impairment losses as follows for each of the years ended
December 31:
2003 2002
---- ----
Aircraft $ 4,401,397 $ 2,212,500
Locomotives 760,000 400,000
Rail car auto racks 268,373 -
Manufacturing equipment 249,501 -
---------------- ------------------
$ 5,679,271 $ 2,612,500
================ ==================
All of the property on leases was acquired in 2002, 2001, 2000 and 1999.
Operating leases:
Property on operating leases consists of the following:
Reclassi-
December 31, Impairment Depreciation fications or December 31,
2002 Losses Expense Dispositions 2003
---- ------ ------- ------------ ----
Manufacturing $ 49,700,635 $ - $ - $ (8,621,156) $ 41,079,479
Aircraft 32,810,139 - - (17,362,102) 15,448,037
Transportation, rail 21,054,669 - - 13,240,733 34,295,402
Transportation, other 23,438,156 - - (135,378) 23,302,778
Containers 21,207,500 - - (42,500) 21,165,000
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 - - (3,126,421) 10,991,981
----------------- ---------------- ------------------ ----------------- -----------------
183,761,822 - - (16,488,458) 167,273,364
Less accumulated depreciation (64,357,553) (4,140,362) (20,337,442) 8,674,333 (80,161,024)
----------------- ---------------- ------------------ ----------------- -----------------
$ 119,404,269 $ (4,140,362) $ (20,337,442) $ (7,814,125) $ 87,112,340
================= ================ ================== ================= =================
23
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
3. Investments in equipment and leases (continued):
Direct financing leases:
As of December 31, 2003 and 2002, investment in direct financing leases consists
of rail cars, anhydrous ammonia storage tanks, office automation equipment,
point of sale equipment, refrigerated trailers and laundry equipment. The
following lists the components of the Company's investment in direct financing
leases as of December 31, 2003 and 2002:
2003 2002
---- ----
Total minimum lease payments receivable $ 10,461,599 $ 8,634,652
Estimated residual values of leased equipment (unguaranteed) 4,496,939 4,510,520
------------------ -----------------
Investment in direct financing leases 14,958,538 13,145,172
Less unearned income (3,460,737) (1,911,568)
------------------ -----------------
Net investment in direct financing leases $ 11,497,801 $ 11,233,604
================== =================
At December 31, 2003, the aggregate amounts of future minimum lease payments are
as follows:
Direct
Year ending Operating Financing
December 31, Leases Leases Total
------------ ------ ------ -----
2004 $ 12,766,608 $ 2,620,844 $ 15,387,452
2005 9,844,593 2,577,630 12,422,223
2006 5,392,208 2,321,635 7,713,843
2007 3,436,648 894,719 4,331,367
2008 942,588 663,561 1,606,149
Thereafter 641,520 1,383,210 2,024,730
---------------- ------------------ -----------------
$ 33,024,165 $ 10,461,599 $ 43,485,764
================ ================== =================
4. Non-recourse debt:
At December 31, 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 fixed rates ranging from 4.96% to 7.98%. The notes
are secured by assignments of lease payments and pledges of assets. At December
31, 2003, the carrying value of the pledged assets is $12,771,509. The notes
mature from 2004 through 2007.
Future minimum payments of non-recourse debt are as follows:
Year ending
December 31, Principal Interest Total
2004 $ 4,663,440 $ 142,640 $ 4,806,080
2005 617,125 88,955 706,080
2006 648,113 57,967 706,080
2007 680,657 25,423 706,080
----------------- ---------------- ------------------
$ 6,609,335 $ 314,985 $ 6,924,320
================= ================ ==================
24
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
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 (1.5154% at December 31, 2003), based on an index of A1
commercial paper. The Program expired as to new borrowings in April 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 December 31,
2003, the Company receives or pays interest on a notional principal of
$40,311,324, 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 coincide with the maturity of the debt.
The differential to be paid or received is accrued as interest rates change and
is recognized currently as an adjustment to interest expense related to the
debt.
Borrowings under the Program are as follows:
Notional Swap Payment Rate
Original Balance Balance Value on Interest
Amount December 31, December 31, December 31, Swap
Date Borrowed Borrowed 2003 2003 2003 Agreement
------------- -------- ---- ---- ---- ---------
11/11/1999 $ 20,000,000 $ 3,604,000 $ 3,499,006 $ (193,076) 6.84%
12/21/1999 20,000,000 12,806,000 12,845,059 (1,493,722) 7.41%
12/24/1999 25,000,000 3,302,000 3,235,809 (175,200) 7.44%
4/17/2000 6,500,000 2,801,000 2,770,624 (193,519) 7.45%
4/28/2000 1,900,000 369,000 366,443 (26,481) 7.72%
8/3/2000 19,000,000 9,028,000 9,005,393 (754,010) 7.50%
10/31/2000 7,500,000 3,276,000 3,259,596 (236,016) 7.13%
1/29/2001 8,000,000 - 2,568,210 (64,451)* 5.91%
6/1/2001 2,000,000 78,000 50,600 (306) 5.04%
9/1/2001 9,000,000 2,696,000 2,710,584 (70,814) 4.35%
1/31/2002 3,900,000 1,986,000 - - **
----------------- ---------------- ------------------ -----------------
$ 122,800,000 $39,946,000 $ 40,311,324 $ (3,207,595)
================= ================ ================== =================
* This interest rate swap contract is deemed to be ineffective and has been
charged to operations.
** Under the terms of the Program, no interest rate swap agreement was required
for this borrowing.
25
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
5. Other long-term debt (continued):
The long-term debt borrowings mature from 2003 through 2009. Future minimum
principal payments of long-term debt and annual swap notional reductions are as
follows:
Debt Debt Rates on
Year ending Principal Principal Interest Swap
December 31, Swapped Not Swapped Interest Total Agreements*
------------ ------- ----------- -------- ----- -----------
2004 $ 12,253,000 $ 798,000 $ 2,362,294 $ 15,413,294 6.975%-7.008%
2005 9,586,000 816,000 1,576,595 11,162,595 7.034%-7.144%
2006 6,830,000 120,000 964,030 7,794,030 7.180%-7.206%
2007 4,529,000 172,000 519,280 5,048,280 6.964%-7.055%
2008 3,013,000 12,000 249,081 3,262,081 6.667%-6.972%
2009 1,749,000 68,000 45,481 1,794,481 5.766%-6.383%
----------------- ---------------- ------------------ -----------------
$ 37,960,000 $ 1,986,000 $ 5,716,761 $ 44,474,761
================= ================ ================== =================
* 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 (1.5154% at December 31, 2003).
In 2003 and 2002, the net effect of the interest rate swaps was to increase
interest expense by $2,780,673 and $1,818,380, respectively.
6. Related party transactions:
The terms of the Limited 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 administrative services to the Company.
Administrative 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, such as acquisition and management of equipment. Reimbursable costs
incurred by AFS 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.
Each of ATEL Leasing Corporation ("ALC"), ATEL Equipment Corporation ("AEC"),
ATEL Investor Services ("AIS") and AFS is a wholly-owned subsidiary of ATEL
Capital Group and performs services for the Company. Acquisition services are
performed for the Company by ALC, equipment management, lease administration and
asset disposition services are performed by AEC, investor relations and
communications services are performed by AIS and general administrative services
for the Company are performed by AFS.
Substantially all employees of AFS record time incurred in performing
administrative services on behalf of all of the Companies serviced by AFS. AFS
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.
26
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
6. Related party transactions (continued):
AFS and/or affiliates earned fees, commissions and reimbursements, pursuant to
the Limited Liability Company Agreement as follows:
2003 2002 2001
---- ---- ----
Asset management fees to Managing Member $ 1,517,259 $ 1,481,576 $ 1,849,335
Costs reimbursements to Managing Member 820,571 832,539 924,375
Initial direct costs paid to Managing Member - 37,440 147,721
------------------ ----------------- -----------------
$ 2,337,830 $ 2,351,555 $ 2,921,431
================== ================= =================
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 ending
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.
The Limited Partnership Agreement places an annual and a cumulative limit for
cost reimbursements to AFS. The cumulative limit increases annually. Any
reimbursable costs incurred by AFS during the year exceeding the annual and/or
cumulative limits cannot be reimbursed in the current year, though may be
reimbursable in future years. As of December 31, 2003, AFS had incurred
approximately $1,175,000 of costs that are expected to be reimbursed to AFS by
the Partnership in 2004 and 2005.
7. Members' capital:
As of December 31, 2003, 13,570,188 Units were issued and outstanding. The
Company is authorized to issue up to 15,000,000 Units in addition to the Units
issued to the initial members (50 Units).
As defined in the Company's Operating Agreement, the Company's Net Income, Net
Losses, and Distributions are to be allocated 92.5% to the Other Members and
7.5% to AFS. In accordance with the terms of the Operating Agreement, additional
allocations of income were made to AFS in 2003, 2002 and 2001. The amounts
allocated were determined so as to bring AFS's ending capital account balance to
zero at the end of each year.
27
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
8. Concentration of credit risk and major customers:
The Company leases equipment to lessees in diversified industries. Leases are
subject to AFS's credit committee review. The leases provide for the return of
the equipment upon default.
As of December 31, 2003, 2002 and 2001 there were concentrations (defined as
greater than 10%) of equipment leased to lessees in certain industries (as a
percentage of total equipment cost) as follows:
2003 2002 2001
---- ---- ----
Transportation, rail 20% 14% 18%
Manufacturing, other 18% 17% 15%
Transportation, other 13% 12% 12%
Transportation, containers 11% 11% *
Transportation, air * 17% 17%
Manufacturing, electronics * 10% *
* Less than 10%
During 2003, two customers comprised 13% and 10% of the Company's revenues.
During 2002, one customer comprised 10% of the Company's revenues from leases.
During 2001, one customer comprised 16% of the Company's revenues from leases.
9. Line of credit:
The Company participates with AFS and certain of its affiliates in a $58,627,656
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 December 31, 2003,
borrowings under the facility were as follows:
Amount borrowed by the Company under the acquisition facility $ 9,500,000
Amounts borrowed by affiliated partnerships and limited
liability companies under the acquisition facility 13,500,000
-----------------
Total borrowings under the acquisition facility 23,000,000
Amounts borrowed by AFS and its sister corporation under the
warehouse facility -
-----------------
Total outstanding balance $ 23,000,000
=================
Total available under the line of credit $ 58,627,656
Total outstanding balance (23,000,000)
-----------------
Remaining availability $ 35,627,656
=================
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
Companies and limited liability companies, the Company and AFS.
The Company borrowed $19,500,000, $12,400,000 and $23,556,335 under the line of
credit during 2003, 2002 and 2001, respectively. Repayments on the line of
credit were $20,600,000, $4,300,000 and $21,056,335 during 2003, 2002 and 2001,
respectively. At December 31, 2003, $9,500,000 remained outstanding. Interest on
the line of credit is based on either the thirty day LIBOR rate or the bank's
prime rate. The effective interest rates on borrowings at December 31, 2003
ranged from 3.03% to 4.00%.
28
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
9. Line of credit (continued):
The credit agreement includes certain financial covenants applicable to each
borrower. The Company was in compliance with its covenants as of December 31,
2003.
10. Fair value of financial instruments:
The recorded amounts of the Company's cash and cash equivalents, accounts
receivable, accounts payable and accruals at December 31, 2003 approximate fair
value because of the liquidity and short-term maturity of these instruments.
Non-recourse debt:
The fair value of the Company's non-recourse debt is estimated using discounted
cash flow analyses, based on the Company's current incremental borrowing rates
for similar types of borrowing arrangements. The estimated fair value of the
Company's non-recourse debt at December 31, 2003 is $6,506,804.