UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the year ended December 31, 2010
¨ | 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 000-33103
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 check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act of 1934. Yes ¨ No x
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company x | ||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
State the aggregate market value of voting stock held by non-affiliates of the registrant: Not applicable
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.) Not applicable
The number of Limited Liability Company Units outstanding as of February 28, 2011 was 13,560,188.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Item 1. BUSINESS
General Development of Business
ATEL Capital Equipment Fund VIII, LLC (the “Company” or the “Fund”) was formed under the laws of the State of California on July 31, 1998. The Company was formed for the purpose of acquiring equipment to engage in equipment leasing, lending and sales activities. The Managing Member of the Company is ATEL Financial Services, LLC (“AFS”), a California limited liability company. The Company may continue until December 31, 2019. 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.
The Company conducted a public offering of 15,000,000 Limited Liability Company Units (“Units”), at a price of $10 per Unit. On January 13, 1999, subscriptions for the minimum number of Units (120,000, representing $1.2 million) had been received (excluding subscriptions from Pennsylvania investors) and AFS requested that the subscriptions be released to the Company. On that date, the Company commenced operations in its primary business (acquiring equipment to engage in equipment leasing, lending and sales activities). Gross contributions in the amount of $135.7 million (13,570,188 units) were received as of November 30, 2000, inclusive of $500 of Initial Member’s capital investment and $100 of AFS’ capital investment. The offering was terminated on November 30, 2000. As of December 31, 2010, 13,560,188 Units remain issued and outstanding.
The Company’s principal objectives have been to invest in a diversified portfolio of equipment that (i) preserves, protects and returns the Company’s invested capital; (ii) generates 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”) (defined as six full years following the year the offering was terminated), which ended December 31, 2006 and (iii) provides 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”), as amended.
Pursuant to the Operating Agreement, AFS and/or its affiliates receive compensation and reimbursements for services rendered on behalf of the Company (see Note 6 to the financial statements included in Item 8 of this report). The Company is required to maintain reasonable cash reserves for working capital, the repurchase of Units and contingencies. The repurchase of Units is solely at the discretion of AFS.
The Company has incurred debt to finance the purchase of a portion of its equipment portfolio. The amount of borrowings in connection with any equipment acquisition transaction is determined by, among other things, the credit of the leases, the terms of the lease, the nature of the equipment and the condition of the money market. There is no limit on the amount of debt that may be incurred in connection with any single acquisition of equipment. However the Company may not incur aggregate outstanding indebtedness in excess of 50% of the total cost of all equipment as of the date of the final commitment of the offering proceeds and, thereafter, as of the date of any subsequent indebtedness is incurred. The Company has borrowed amounts within such maximum debt level in order to fund a portion of its equipment acquisitions. All such equipment acquisition debt had been repaid during 2007.
As of December 31, 2010, the Company continues in the liquidation phase of its life cycle as defined in the Operating Agreement.
Narrative Description of Business
The Company had acquired various types of equipment to lease 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. Guidelines provided by the offering indicated that a majority of the aggregate purchase price of equipment would 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 would be invested in equipment acquired from a single manufacturer.
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The Company had purchased equipment under pre-existing leases or for which a lease would be concurrently entered into at the time of the purchase. From inception through December 31, 2010, the Company had purchased and/or capitalized improvements pursuant to lease assets totaling $248.1 million.
The Company’s objective was to lease a minimum of 75% of the equipment acquired with the net proceeds of the offering to lessees that (i) have an average credit rating by Moody’s Investors Service of Baa or better, or the credit equivalent as determined by AFS, with the average 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) was originally leased to lessees with an average credit rating of Baa or better or to such hospitals or municipalities, as described in (ii) above.
During 2010 and 2009, certain lessees generated significant portions (defined as 10% or more) of the Company’s total lease revenues as follows:
Percentage of Total Lease Revenues | ||||||||||
Lessee | Type of Equipment | 2010 | 2009 | |||||||
Exsif Worldwide Inc. | Transportation, other (containers) | 35 | % | 38 | % | |||||
Bee Mar, LLC (Formerly Gulfmark Management, Inc.) | Marine vessel | 20 | % | 13 | % | |||||
Bartlett Grain Company, L.P. | Railcars | 14 | % | 15 | % |
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, type of equipment and creditworthiness of the lessee. The ability of the Company to keep the equipment leased and/or operating and the terms of the reinvestments, leases and dispositions of equipment depends on various factors (many of which are not in the control of AFS or the Company), such as raw material costs to manufacture equipment as well 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.
The business of the Company is not seasonal.
The Company has no full time employees. AFS’ employees and affiliates provide the services the Company requires to effectively operate. The cost of these services is reimbursed by the Company to AFS and affiliates per the Operating Agreement.
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Equipment Leasing Activities – The Company had acquired a diversified portfolio of equipment. The equipment had been leased to lessees in various industries. The following tables set forth the types of equipment acquired and/or improved by the Company through December 31, 2010 and the industries to which the assets were leased (dollars in thousands):
Purchase Price | Percentage of | |||||||
Excluding | Total | |||||||
Asset Types | Acquisition Fees | Acquisitions | ||||||
Transportation, rail | $ | 57,510 | 23.18 | % | ||||
Manufacturing | 47,781 | 19.26 | % | |||||
Transportation, other | 47,614 | 19.20 | % | |||||
Aircraft | 38,535 | 15.53 | % | |||||
Point of sale / office automation | 12,162 | 4.90 | % | |||||
Photo processing equipment | 10,782 | 4.35 | % | |||||
Storage tanks | 7,774 | 3.13 | % | |||||
Materials handling | 7,019 | 2.83 | % | |||||
Marine vessel | 4,333 | 1.75 | % | |||||
Gas compressors | 2,522 | 1.02 | % | |||||
Other | 12,021 | 4.85 | % | |||||
$ | 248,053 | 100.00 | % |
Industry of Lessee | Purchase Price Excluding Acquisition Fees | Percentage of Total Acquisitions | ||||||
Transportation, rail | $ | 60,327 | 24.32 | % | ||||
Transportation, air | 38,535 | 15.53 | % | |||||
Manufacturing, other | 35,204 | 14.19 | % | |||||
Transportation, other | 27,918 | 11.25 | % | |||||
Transportation, containers | 21,229 | 8.56 | % | |||||
Manufacturing, electronics | 20,901 | 8.43 | % | |||||
Retail | 18,056 | 7.28 | % | |||||
Natural gas | 13,848 | 5.58 | % | |||||
Other | 12,035 | 4.86 | % | |||||
$ | 248,053 | 100.00 | % |
Through December 31, 2010, the Company had disposed of certain leased assets as set forth below (in thousands):
Asset Types | Original Equipment Cost Excluding Acquisition Fees | Sale Price | Excess of Rents Over Expense * | |||||||||
Manufacturing | $ | 46,288 | $ | 19,970 | $ | 47,061 | ||||||
Transportation, rail | 41,751 | 31,337 | 19,126 | |||||||||
Aircraft | 38,535 | 8,667 | 16,856 | |||||||||
Transportation, other | 27,575 | 9,705 | 26,473 | |||||||||
Point of sale / office automation | 12,162 | 2,393 | 1,309 | |||||||||
Photo processing equipment | 10,782 | 6,555 | 9,618 | |||||||||
Storage tanks | 7,774 | 7,198 | 2,221 | |||||||||
Materials handling | 7,019 | 2,017 | 6,776 | |||||||||
Gas compressors | 2,522 | 506 | 2,794 | |||||||||
Other | 10,514 | 3,679 | 12,287 | |||||||||
$ | 204,922 | $ | 92,027 | $ | 144,521 | |||||||
* Includes only those expenses directly related to the production of the related rents. |
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Proceeds from sales of lease assets are not expected to be consistent from one period to another. The Company is a finite life equipment leasing fund, which had acquired leasing transactions during the period ended six years after completion of its public offering. On the termination of leases, assets may be re-leased or sold. Sales of assets are not scheduled and are created by opportunities within the marketplace. The Company sought to acquire and lease a wide variety of assets and to enter into leases on a variety of terms. Some assets will be expected to have little or no value for re-lease or sale upon termination of the initial leases, and the anticipated residual values are a key factor in pricing and terms structured for each lease. The Company’s goal is to seek maximum return on its leased assets and will determine when and under what terms to dispose of such assets during the course of its term.
For further information regarding the Company’s equipment lease portfolio as of December 31, 2010, see Note 5 to the financial statements, Investments in equipment and leases, net, as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
Certain of the Company’s lessee customers have international operations. In these instances, the Company is aware that certain equipment, primarily rail and transportation, may periodically exit the country. However, these lessee customers are US-based, and it is impractical for the Company to track, on an asset-by-asset, day-by-day basis, where these assets are deployed. For further information regarding the Company’s geographic revenues and assets, and major customers, see Notes 2 and 3 to the financial statements as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
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, Business.
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 financial position or results of operations. No material legal proceedings are currently pending against the Company or against any of its assets.
Item 4. [RESERVED]
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PART II
Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
There are certain material conditions and restrictions on the transfer of Units imposed by the terms of the Operating Agreement. Consequently, there is no public market for Units and it is not anticipated that a public market for Units will develop. In the absence of a public market for the Units, there is no currently ascertainable fair market value for the Units.
Holders
As of December 31, 2010, a total of 3,377 investors were Unitholders of record 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 December 31, 2010. 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 December 31, 2010. 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 Unitholders on liquidation of the Company, and divided the total so distributable by the number of outstanding Units. As of December 31, 2010, the value of the Company’s assets, calculated on this basis, was approximately $1.77 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 Unitholder 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.
Distributions
The Unitholders of record 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. The Company commenced periodic distributions, based on cash flows from operations, beginning with the month of January 1999.
The monthly distributions were discontinued in 2007 as the Company entered its liquidation phase. Periodic distributions were paid in March and December 2010, and December 2009. The annualized rate for distributions from 2010 and 2009 operations was $0.24 and $0.13 per Unit, respectively. The rates and frequency of periodic distributions paid by the Fund during its liquidation phase are solely at the discretion of the Managing Member.
The following table presents summarized per Unit information regarding distributions to Other Members:
2010 | 2009 | |||||||
Net income per Unit, based on weighted average Units outstanding | $ | 0.13 | $ | 0.08 | ||||
Return of investment | 0.11 | 0.05 | ||||||
Distributions declared per Unit, based on weighted average Other Member Units outstanding | 0.24 | 0.13 | ||||||
Differences due to timing of distributions | - | - | ||||||
Actual distributions paid per Unit | $ | 0.24 | $ | 0.13 |
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Item 6. SELECTED FINANCIAL DATA
A smaller reporting company is not required to present selected financial data in accordance with item 301(c) of Regulation S-K.
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” (“MD&A”) 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. In particular, the economic recession and changes in general economic conditions, including fluctuations in demand for equipment, lease rates, and interest rates, may result in delays in leasing, re-leasing, and disposition of equipment, and reduced returns on invested capital. The Company’s performance is subject to risks relating to lessee defaults and the creditworthiness of its lessees. The Company’s performance is also subject to risks relating to the value of its equipment at the end of its leases, which may be affected by the condition of the equipment, technological obsolescence and the markets for new and used equipment at the end of lease terms. Investors are cautioned not to attribute undue certainty to these forward-looking statements, which speak only as of the date of this Form 10-K. We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events, other than as required by law.
Overview
ATEL Capital Equipment Fund VIII, LLC (the “Company”) is a California limited liability company that was formed in July 1998 for the purpose of engaging in the sale of limited liability investment units and acquiring equipment to generate revenues from equipment leasing and sales activities, primarily in the United States.
The Company conducted a public offering of 15,000,000 Limited Liability Company Units (“Units”), at a price of $10 per Unit. The offering was terminated in November 2000. Total proceeds of the offering were $135.7 million. During early 2001, the Company completed its initial acquisition stage with the investment of the net proceeds from the public offering of Units. Subsequently, throughout the reinvestment period (“Reinvestment Period”) (defined as six full years following the year the offering was terminated), the Company reinvested cash flow in excess of certain amounts required to be distributed to the Other Members and/or utilized its credit facilities to acquire additional equipment.
The Company may continue until December 31, 2019. However, pursuant to the guidelines of the Operating Agreement, the Company began to liquidate its assets and distribute the proceeds thereof after the end of the Reinvestment Period which ended in December 2006.
As of December 31, 2010, the Company continues in its liquidation phase. Accordingly, assets that mature will be returned to inventory and most likely subsequently sold, which will result in decreasing revenue as earning assets decrease. Periodic distributions are paid at the discretion of the Managing Member.
Results of Operations
As of December 31, 2010 and 2009, 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:
2010 | 2009 | |||||||
Transportation, containers | 46 | % | 50 | % | ||||
Transportation, rail | 43 | % | 33 | % |
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As previously indicated, certain lessees generated significant portions (defined as 10% or more) of the Company’s total lease revenues during 2010 and 2009 as follows:
Percentage of Total Lease Revenues | ||||||||||
Lessee | Type of Equipment | 2010 | 2009 | |||||||
Exsif Worldwide Inc. | Transportation, other (containers) | 35 | % | 38 | % | |||||
Bee Mar, LLC (Formerly Gulfmark Management, Inc.) | Marine vessel | 20 | % | 13 | % | |||||
Bartlett Grain Company, L.P. | Railcars | 14 | % | 15 | % |
These percentages are not expected to be comparable in future periods due to the expiration of lessee contracts during the Fund’s liquidation period.
It has been the Company’s objective to maintain a 100% utilization rate for all equipment purchased in any given year. All equipment transactions were acquired subject to binding lease commitments, so equipment utilization remained high throughout the reinvestment stage. Initial lease terms of these leases were generally from 24 to 120 months, and as they expired, the Company attempted to re-lease or sell the equipment; as such, utilization rates may tend to decrease during the liquidation stage of the Company. All of the Company’s equipment on lease was acquired in the years 1999 through 2002. The utilization percentage of existing assets under lease was 94% and 86% as of December 31, 2010 and 2009, respectively.
Cost reimbursements to the Managing Member are based on its costs incurred in performing administrative services for the Company. These costs are allocated to each managed entity based on certain criteria such as total assets, number of investors or contributed capital based upon the type of cost incurred.
The Operating Agreement places an annual limit and a cumulative limit for cost reimbursements to AFS and/or affiliates. Any reimbursable costs incurred by AFS and/or affiliates during the year exceeding the annual and/or cumulative limits cannot be reimbursed in the current year, though such costs may be reimbursable in future years to the extent such amounts may be payable if within the annual and cumulative limits in such future years. As of December 31, 2010 and 2009, the Company had exceeded such limitations by approximately $1.3 million and $1.6 million, respectively (see Note 6 to the financial statements, Related party transactions, as set forth in Part II, Item 8, Financial Statements and Supplementary Data).
2010 versus 2009
The Company had net income of $2.1 million and $1.3 million for the years ended December 31, 2010 and 2009, respectively. The results for 2010 primarily reflect a reduction in total operating expenses when compared to the prior year.
Revenues
Total revenues for 2010 were comparable to those of 2009. Year over year, total revenues decreased by $7 thousand primarily as a result of a $137 thousand decrease in operating lease revenue offset, in part, by a $78 thousand increase in direct financing lease revenue and a $40 thousand increase in gains recognized on sales of lease assets.
The reduction in operating lease revenue was largely due to continued run-off and sales of lease assets and the year over year decline in rental revenues from the Company’s marine vessel and other usage-based assets. These were partially offset by a slight increase in rents during 2010 as certain inventoried assets were returned to revenue-generating deployment under new leasing agreements.
Direct financing lease revenue increased as certain equipment under operating leases were re-leased as direct financing leases during 2009; and, the favorable change in gains recognized on sales of lease assets reflect the year over year change in the mix of assets sold.
Expenses
Total operating expenses for 2010 decreased by $822 thousand, or 17%, as compared to the prior year. The net decrease in total operating expenses was primarily due to reductions in franchise fees and state taxes, railcar maintenance costs, depreciation expense, marine vessel maintenance costs, and interest expense offset, in part, by increases in management fees paid to AFS and other expense.
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The $261 thousand decrease in franchise fees and state taxes was primarily a result of a year over year decline in estimated state franchise and income tax liability, as the 2009 accrual reflects estimated tax obligations related to an approximate $3.0 million of gains recognized on the sale of railcars during 2008.
Railcar maintenance costs declined by $248 thousand as the 2009 amount included repairs and maintenance expenses relative to off-lease railcars which were subsequently re-leased in 2010. Depreciation expense was reduced by $241 thousand largely due to continued run-off and sales of lease assets. In addition, marine vessel maintenance costs decreased by $60 thousand largely due to 2009 incremental costs incurred to prepare a vessel for a new lessee; and, interest expense decreased by $59 thousand as the Company paid off debt outstanding under the receivables funding program during the first half of 2009 as well as its non-recourse debt during the first half of 2010.
Partially offsetting the aforementioned decreases in expenses were increases in management fees paid to AFS and other expense totaling $34 thousand and $20 thousand, respectively. Management fees paid to AFS increased primarily due to the higher amount of distributions of cash from operations paid to investors during 2010 as compared to 2009, which impacted the calculation of management fees. Finally, the net increase in other expense was largely due to higher management fees associated with the marine vessel as well as higher postage and printing fees offset, in part, by lower freight and shipping costs related to the Company’s railcars.
Other
The Company recorded other income, net totaling $0 and $12 thousand for 2010 and 2009, respectively. Prior year other income, net reflects the change in the fair value of the Company’s interest swap contracts, all of which terminated by June 30, 2009.
Capital Resources and Liquidity
At December 31, 2010 and 2009, the Company’s cash and cash equivalents totaled $1.8 million and $2.3 million, respectively. The liquidity of the Company varies, increasing to the extent that 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.
The primary source of liquidity for the Company is its cash flow from leasing activities. As initial lease terms expire, the Company re-leases or sells the equipment. The future liquidity beyond the contractual minimum rentals will depend on the Company’s success in remarketing or selling the equipment as it comes off rental.
In a normal economy, if inflation in the general economy becomes significant, it may affect the Company in as much 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. In addition, if interest rates increase significantly under such circumstances, 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.
The Company currently believes it 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.
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Cash Flows
The following table sets forth summary cash flow data (in thousands):
December 31, | ||||||||
2010 | 2009 | |||||||
Net cash provided by (used in): | ||||||||
Operating activities | $ | 3,012 | $ | 3,277 | ||||
Investing activities | 416 | (58 | ) | |||||
Financing activities | (3,916 | ) | (2,661 | ) | ||||
Net (decrease) increase in cash and cash equivalents | $ | (488 | ) | $ | 558 |
Operating Activities
Cash provided by operating activities during 2010 decreased by $265 thousand as compared to the prior year. The net decrease in cash flow was largely due to decreased collections of receivables, a reduction in unearned rents, and increased payments made against the Company’s accrued liabilities offset, in part, by the year over year increase in net income from operations.
The year over year decrease in collections of receivables was largely attributable to the 2009 collection of aged prior year receivables related to marine vessel rental revenue. The decline in unearned rents was mainly a result of a year over year reduction in prepaid rents and increased amortization of prepayments received in the prior year; and, the increase in payments made against the Company’s accrued liabilities represent higher 2010 payments made on prior year accruals associated with administrative costs payable to AFS.
Investing Activities
Net cash provided by investing activities during 2010 totaled $416 thousand as compared to cash used in investing activities of $58 thousand during 2009, an increase of $474 thousand. Cash flow increased as the 2009 amount included $380 thousand of capitalized improvement costs associated with the Company’s marine vessel. There were no such capitalized costs incurred during 2010.
In addition, payments received on direct financing leases increased by $76 thousand. Such increase was attributable to certain operating leases that were renewed as direct financing leases during 2009.
Financing Activities
Net cash used in financing activities during 2010 increased by $1.3 million as compared to the prior year period. The increase in cash used (decrease in cash flow) represents a $1.6 million year over year increase in distributions paid to both Other Members and the Managing Member offset, in part, by a $358 thousand decrease in scheduled payments on the Company’s non-recourse debt which was fully repaid in June 2010.
The distributions were based on cash available net of any short-term payables and reserves as determined by the Managing Member.
Non-Recourse Long-Term Debt
As of December 31, 2010, the Company had no outstanding non-recourse long term debt. The amount unpaid at December 31, 2009, totaling $398 thousand, matured and was fully settled in June 2010. AFS does not anticipate any future non-recourse borrowings on behalf of the Company. For detailed information on the Company’s debt obligations, see Notes 7 to the financial statements, Non-recourse debt, as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
Distributions
The Company commenced periodic distributions, based on cash flows from operations, beginning with the month of January 1999. See Item 5 and Note 10 to the financial statements, Members’ capital, as set forth in Part II, Item 8, Financial Statements and Supplementary Data for additional information regarding distributions.
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Commitments and Contingencies and Off-Balance Sheet Transactions
Commitments and Contingencies
At December 31, 2010, the Company had no commitments to purchase lease assets. Pursuant to the Operating Agreement, the Company will no longer purchase any new lease assets.
Gain Contingency
ATEL has chosen to litigate a claim on behalf of certain of its Funds for the under-reporting of revenue by a previous fleet manager of its marine vessels. Litigation continues relative to ATEL’s plaintiff position, seeking to recover an estimated total of $2.8 million, of which the Company’s portion approximates $350 thousand, of under-remitted revenues from marine vessel leasing covering years 2005-2007. Such amounts are not considered material to any of the Funds in any given year. While the Funds' recovery with respect to this matter may be substantial, there is no assurance that judgment will be rendered in favor of the Funds. Court proceedings are scheduled to commence during March 2011 and the outcome, either via negotiation or court mandate, is currently indeterminable.
Off-Balance Sheet Transactions
None.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is included in Note 2 to the financial statements, Summary of significant accounting policies, as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
Critical Accounting Policies and Estimates
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 significantly 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.
Use of estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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 relate primarily to the determination of residual values at the end of the lease term and expected future cash flows used for impairment analysis purposes and determination of the allowance for doubtful accounts.
Equipment on operating leases and related revenue recognition:
Equipment subject to operating leases is stated at cost. Depreciation is being recognized on a straight-line method over the terms of the related leases to the equipment’s estimated residual values. Maintenance costs associated with the Fund’s leased assets are expensed as incurred. Major additions and betterments are capitalized.
Operating lease revenue is recognized on a straight-line basis over the term of the underlying leases. The initial lease terms vary as to the type of equipment subject to the leases; the needs of the lessees and the terms to be negotiated, but initial leases were generally from 24 to 120 months. The difference between rent received and rental revenue recognized is recorded as unearned operating lease income on the balance sheet.
Operating leases are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management considers the equipment underlying the lease contracts for impairment and periodically reviews the credit worthiness of all operating lessees with payments outstanding less than 90 days. Based upon management’s judgment, the related operating leases may be placed on non-accrual status. Leases placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable. Until such time, all payments received are applied only against outstanding principal balances.
11
The Company earns revenues from its containers, marine vessel and certain other assets based on utilization of such assets or through fixed term leases. Contingent rentals and the associated expenses are recorded when earned and/or incurred. From time to time, the Company incurs “drydocking” costs on its vessel. Drydocking costs include labor and material costs related to refurbishing, overhauling and/or replacing engine and other major mechanical components of the vessel, hull maintenance and other repairs that bring the vessel into seaworthy compliance with U.S. marine codes in order to have it certified as available for charter. Such drydocking costs are capitalized and depreciated over the period between scheduled drydockings, which generally occur every 24 to 30 months. The Company’s marine vessel was drydocked in January 2011 and was returned to service during the first quarter of 2011. The next scheduled drydock maintenance will occur during the latter half of 2013.
Direct financing leases and related revenue recognition:
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 interest 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 off and collection experience and the collectability of specifically identified lessees and billed and unbilled receivables. Direct financing leases are charged off to the allowance as they are deemed uncollectible.
Direct financing leases are generally placed in a non-accrual status (i.e., no revenue is recognized) and deemed impaired when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of all direct finance lessees with payments outstanding less than 90 days. Based upon management’s judgment, the related direct financing leases may be placed on non-accrual status. Leases placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable. Until such time, all payments received are applied only against outstanding principal balances.
Asset valuation:
Recorded values of the Company’s asset portfolio are periodically reviewed for impairment. 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 a valuation method using discounted estimated future cash flows, third party appraisals or comparable sales of similar assets as applicable based on asset type) of the assets and its carrying value on the measurement date.
Item 8. FINANCIAL STATEMENTS
See the Report of Independent Registered Public Accounting Firm, Financial Statements and Notes to Financial Statements attached hereto at pages 13 through 30.
12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Members
ATEL Capital Equipment Fund VIII, LLC
We have audited the accompanying balance sheets of ATEL Capital Equipment Fund VIII, LLC (the “Company”) as of December 31, 2010 and 2009, and the related statements of income, changes in members’ capital, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s Managing Member. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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 as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Moss Adams LLP |
San Francisco, California
March 28, 2011
13
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
BALANCE SHEETS
DECEMBER 31, 2010 AND 2009
(In Thousands)
2010 | 2009 | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 1,818 | $ | 2,306 | ||||
Accounts receivable, net of allowance for doubtful accounts of $8 as of December 31, 2010 and $4 as of December 31, 2009 | 745 | 739 | ||||||
Prepaid expenses and other assets | 7 | 9 | ||||||
Investments in equipment and leases, net of accumulated depreciation of $34,471 as of December 31, 2010 and $33,664 as of December 31, 2009 | 9,405 | 10,953 | ||||||
Total assets | $ | 11,975 | $ | 14,007 | ||||
LIABILITIES AND MEMBERS’ CAPITAL | ||||||||
Accounts payable and accrued liabilities: | ||||||||
Managing Member | $ | 902 | $ | 856 | ||||
Affiliates | 2 | - | ||||||
Other | 301 | 491 | ||||||
Accrued interest payable | - | 1 | ||||||
Non-recourse debt | - | 398 | ||||||
Unearned operating lease income | 105 | 170 | ||||||
Total liabilities | 1,310 | 1,916 | ||||||
Commitments and contingencies | ||||||||
Members’ capital: | ||||||||
Managing Member | - | - | ||||||
Other Members | 10,665 | 12,091 | ||||||
Total Members’ capital | 10,665 | 12,091 | ||||||
Total liabilities and Members’ capital | $ | 11,975 | $ | 14,007 |
See accompanying notes.
14
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(In Thousands Except for Units and Per Unit Data)
2010 | 2009 | |||||||
Revenues: | ||||||||
Leasing activities: | ||||||||
Operating leases | $ | 6,047 | $ | 6,184 | ||||
Direct financing leases | 131 | 53 | ||||||
Gain on sales of assets | 40 | - | ||||||
Interest | - | 2 | ||||||
Other revenue | 18 | 4 | ||||||
Total revenues | 6,236 | 6,243 | ||||||
Expenses: | ||||||||
Depreciation of operating lease assets | 1,303 | 1,544 | ||||||
Interest expense | 7 | 66 | ||||||
Asset management fees to Managing Member | 289 | 255 | ||||||
Vessel maintenance | 772 | 832 | ||||||
Railcar maintenance | 476 | 724 | ||||||
Cost reimbursements to Managing Member | 679 | 679 | ||||||
Professional fees | 171 | 163 | ||||||
Insurance | 70 | 85 | ||||||
Provision for doubtful accounts | 4 | 4 | ||||||
Taxes on income and franchise fees | (5 | ) | 256 | |||||
Other | 378 | 358 | ||||||
Total operating expenses | 4,144 | 4,966 | ||||||
Net income from operations | 2,092 | 1,277 | ||||||
Other income, net | - | 12 | ||||||
Net income | $ | 2,092 | $ | 1,289 | ||||
Net income: | ||||||||
Managing Member | $ | 264 | $ | 143 | ||||
Other Members | 1,828 | 1,146 | ||||||
$ | 2,092 | $ | 1,289 | |||||
Net income per Limited Liability Company Unit (Other Members) | $ | 0.13 | $ | 0.08 | ||||
Weighted average number of Units outstanding | 13,560,188 | 13,560,188 |
See accompanying notes.
15
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(In Thousands Except for Units and Per Unit Data)
Other Members | Managing | |||||||||||||||
Units | Amount | Member | Total | |||||||||||||
Balance December 31, 2008 | 13,560,188 | $ | 12,707 | $ | - | $ | 12,707 | |||||||||
Distributions to Other Members ($0.13 per Unit) | - | (1,762 | ) | - | (1,762 | ) | ||||||||||
Distributions to Managing Member | - | - | (143 | ) | (143 | ) | ||||||||||
Net income | - | 1,146 | 143 | 1,289 | ||||||||||||
Balance December 31, 2009 | 13,560,188 | 12,091 | - | 12,091 | ||||||||||||
Distributions to Other Members ($0.24 per Unit) | - | (3,254 | ) | - | (3,254 | ) | ||||||||||
Distributions to Managing Member | - | - | (264 | ) | (264 | ) | ||||||||||
Net income | - | 1,828 | 264 | 2,092 | ||||||||||||
Balance December 31, 2010 | 13,560,188 | $ | 10,665 | $ | - | $ | 10,665 |
See accompanying notes.
16
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(In Thousands)
2010 | 2009 | |||||||
Operating activities: | ||||||||
Net income | $ | 2,092 | $ | 1,289 | ||||
Adjustment to reconcile net income to cash provided by operating activities: | ||||||||
Gain on sales of assets | (40 | ) | - | |||||
Depreciation of operating lease assets | 1,303 | 1,544 | ||||||
Amortization of unearned income on direct financing leases | (131 | ) | (53 | ) | ||||
Change in fair value of interest rate swap contracts | - | (12 | ) | |||||
Provision for doubtful accounts | 4 | 4 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (10 | ) | 482 | |||||
Prepaid expenses and other assets | 2 | 3 | ||||||
Accounts payable, Managing Member | 46 | 38 | ||||||
Accounts payable, affiliates | 2 | - | ||||||
Accounts payable, other | (190 | ) | (93 | ) | ||||
Accrued interest payable | (1 | ) | (2 | ) | ||||
Unearned operating lease income | (65 | ) | 77 | |||||
Net cash provided by operating activities | 3,012 | 3,277 | ||||||
Investing activities: | ||||||||
Proceeds from sales of lease assets | 191 | 173 | ||||||
Payments received on direct financing leases | 225 | 149 | ||||||
- | (380 | ) | ||||||
Net cash provided by (used in) investing activities | 416 | (58 | ) | |||||
Financing activities: | ||||||||
Repayments of non-recourse debt | (398 | ) | (756 | ) | ||||
Distributions to Other Members | (3,254 | ) | (1,762 | ) | ||||
Distributions to Managing Member | (264 | ) | (143 | ) | ||||
Net cash used in financing activities | (3,916 | ) | (2,661 | ) | ||||
Net (decrease) increase in cash and cash equivalents | (488 | ) | 558 | |||||
Cash and cash equivalents at beginning of year | 2,306 | 1,748 | ||||||
Cash and cash equivalents at end of year | $ | 1,818 | $ | 2,306 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the year for taxes | $ | 30 | $ | 240 | ||||
Cash paid during the year for interest | $ | 8 | $ | 68 |
See accompanying notes.
17
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
1. Organization and Limited Liability Company matters:
ATEL Capital Equipment Fund VIII, LLC (the “Company” or the “Fund”) was formed under the laws of the State of California on July 31, 1998. The Company was formed for the purpose of acquiring equipment to engage in equipment leasing, lending and sales activities. The Managing Member of the Company is ATEL Financial Services, LLC (“AFS”), a California limited liability company. The Company may continue until December 31, 2019. 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.
The Company conducted a public offering of 15,000,000 Limited Liability Company Units (“Units”), at a price of $10 per Unit. On January 13, 1999, subscriptions for the minimum number of Units (120,000, representing $1.2 million) had been received (excluding subscriptions from Pennsylvania investors) and AFS requested that the subscriptions be released to the Company. On that date, the Company commenced operations in its primary business (acquiring equipment to engage in equipment leasing, lending and sales activities). Gross contributions in the amount of $135.7 million (13,570,188 units) were received as of November 30, 2000, inclusive of $500 of Initial Member’s capital investment and $100 of AFS’ capital investment. The offering was terminated on November 30, 2000. As of December 31, 2010, 13,560,188 Units were issued and outstanding.
The Company’s principal objectives have been to invest in a diversified portfolio of equipment that (i) preserves, protects and returns the Company’s invested capital; (ii) generates 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”) (defined as six full years following the year the offering was terminated), which ended December 31, 2006, and (iii) provides 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”), as amended.
Pursuant to the Operating Agreement, AFS and/or its affiliates receive compensation and reimbursements for services rendered on behalf of the Company (see Note 6). The Company is required to maintain reasonable cash reserves for working capital, the repurchase of Units and contingencies. The repurchase of Units is solely at the discretion of AFS.
As of December 31, 2010, the Company continues in the liquidation phase of its life cycle as defined in the Operating Agreement.
2. Summary of significant accounting policies:
Basis of presentation:
The accompanying balance sheets as of December 31, 2010 and 2009, and the related statements of income, changes in members’ capital, and cash flows for the years then ended, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission.
Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on capital or net income.
Footnote and tabular amounts are presented in thousands, except as to Units and per Unit data.
In preparing the accompanying financial statements, the Company has reviewed, as determined necessary by the Managing Member, events that have occurred after December 31, 2010, up until the issuance of the financial statements. No events were noted which would require disclosure in the footnotes to the financial statements.
18
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued):
Use of estimates:
The preparation of financial statements in conformity with GAAP 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 relate primarily to the determination of residual values at the end of the lease term and expected future cash flows used for impairment analysis purposes and for determination of the allowance for doubtful accounts.
Cash and cash equivalents:
Cash and cash equivalents include cash in banks and cash equivalent investments such as U.S. Treasury instruments with original and/or purchased maturities of ninety days or less.
Credit risk:
Financial instruments that potentially subject the Company to concentrations of credit risk include cash and cash equivalents and accounts receivable. The Company places the majority of its cash deposits and temporary cash investments in U.S. Treasury denominated instruments with the remainder placed in financial institutions with no less than $10 billion in assets, so as to meet ongoing working capital requirements. 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.
Accounts receivable:
Accounts receivable represent the amounts billed under operating and direct financing lease contracts which are currently due to the Company. Allowances for doubtful accounts are typically established based on historical charge off and collection experience and the collectability of specifically identified lessees and invoiced amounts. Accounts receivable deemed uncollectible are charged off to the allowance on a specific identification basis. Amounts recovered that were previously written-off are recorded as other income in the period received.
Equipment on operating leases and related revenue recognition:
Equipment subject to operating leases is stated at cost. Depreciation is being recognized on a straight-line method over the terms of the related leases to the equipment’s estimated residual values. Maintenance costs associated with the Fund’s leased assets are expensed as incurred. Major additions and betterments are capitalized.
Operating lease revenue is recognized on a straight-line basis over the term of the underlying leases. The initial lease terms will vary as to the type of equipment subject to the leases, the needs of the lessees and the terms to be negotiated, but initial leases were generally from 24 to 120 months. The difference between rent received and rental revenue recognized is recorded as unearned operating lease income on the balance sheet.
Operating leases are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management considers the equipment underlying the lease contracts for impairment and periodically reviews the credit worthiness of all operating lessees with payments outstanding less than 90 days. Based upon management’s judgment, the related operating leases may be placed on non-accrual status. Leases placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable. Until such time, all payments received are applied only against outstanding principal balances.
19
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued):
The Company earns revenues from its containers, marine vessel and certain other assets based on utilization of such assets or through fixed term leases. Contingent rentals and the associated expenses are recorded when earned and/or incurred. From time to time, the Company incurs “drydocking” costs on its vessel. Drydocking costs include labor and material costs related to refurbishing, overhauling and/or replacing engine and other major mechanical components of the vessel, hull maintenance and other repairs that bring the vessel into seaworthy compliance with U.S. marine codes in order to have it certified as available for charter. Such drydocking costs are capitalized and depreciated over the period between scheduled drydockings, which generally occur every 24 to 30 months.
Direct financing leases and related revenue recognition:
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 interest 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 off and collection experience and the collectability of specifically identified lessees and billed and unbilled receivables. Direct financing leases are charged off to the allowance as they are deemed uncollectible.
Direct financing leases are generally placed in a non-accrual status (i.e., no revenue is recognized) and deemed impaired when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of all direct finance lessees with payments outstanding less than 90 days. Based upon management’s judgment, the related direct financing leases may be placed on non-accrual status. Leases placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable. Until such time, all payments received are applied only against outstanding principal balances.
Initial direct costs:
In prior years, the Company capitalized initial direct costs (“IDC”) associated with the origination and funding of lease assets. IDC included both internal costs (e.g., the costs of employees’ activities in connection with successful lease and loan originations) and external broker fees incurred with such originations. Remaining IDC is being amortized on a lease by lease basis based on actual lease term using a straight-line method for operating leases and the effective interest rate method for direct finance leases. Upon disposal of the underlying lease assets, both the initial direct costs and the associated accumulated amortization are relieved. Costs related to leases that were not consummated were not eligible for capitalization as initial direct costs. Such amounts were expensed as acquisition expense.
Asset valuation:
Recorded values of the Company’s asset portfolio are periodically reviewed for impairment. 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 a valuation method using discounted estimated future cash flows, third party appraisals or comparable sales of similar assets as applicable based on asset type) of the asset and its carrying value on the measurement date.
20
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued):
Segment reporting:
The Company is not organized by multiple operating segments for the purpose of making operating decisions or assessing performance. Accordingly, the Company operates in one reportable operating segment in the United States.
The Company’s principal decision makers are the Managing Member’s Chief Executive Officer and its Chief Financial Officer and Chief Operating Officer. The Company believes that its equipment leasing business operates as one reportable segment because: a) the Company measures profit and loss at the equipment portfolio level as a whole; b) the principal decision makers do not review information based on any operating segment other than the equipment leasing transaction portfolio; c) the Company does not maintain discrete financial information on any specific segment other than its equipment financing operations; d) the Company has not chosen to organize its business around different products and services other than equipment lease financing; and e) the Company has not chosen to organize its business around geographic areas.
Certain of the Company’s lessee customers have international operations. In these instances, the Company is aware that certain equipment, primarily rail and transportation, may periodically exit the country. However, these lessee customers are US-based, and it is impractical for the Company to track, on an asset-by-asset, day-by-day basis, where these assets are deployed.
The primary geographic regions in which the Company sought leasing opportunities were North America and Europe. Currently, 100% of the Company’s operating revenues are from customers domiciled in North America.
Unearned operating lease income:
The Company records prepayments on operating leases as a liability, unearned operating lease income. The liability is recorded when the prepayments are received and recognized as operating lease revenue ratably over the period to which the prepayments relate.
Income taxes:
The Company is treated as a partnership for federal income tax purposes. Pursuant to the provisions of Section 701 of the Internal Revenue Code, a partnership is not subject to federal income taxes. Accordingly, the Company has provided current income taxes for only those states, which levy income taxes on partnerships. For the year ended December 31, 2010, the Company recorded an estimated income and franchise tax benefit of $5 thousand as compared to an expense of $256 thousand for the year ended December 31, 2009. The Company does not have any entity level uncertain tax positions. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions and is generally subject to examination by U.S. federal (or state and local) income tax authorities for three years from the filing of a tax return.
The tax bases of the Company’s net assets and liabilities vary from the amounts presented in these financial statements at December 31, 2010 and 2009 as follows (in thousands):
2010 | 2009 | |||||||
Financial statement basis of net assets | $ | 10,665 | $ | 12,091 | ||||
Tax basis of net assets (unaudited) | 9,135 | 9,289 | ||||||
Difference | $ | 1,530 | $ | 2,802 |
The primary differences between the tax bases of net assets and the amounts recorded in the financial statements are the result of differences in accounting for syndication costs and differences between the depreciation methods used in the financial statements and the Company’s tax returns.
21
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued):
The following reconciles the net income reported in these financial statements to the income reported on the Company’s federal tax returns (unaudited) for the years ended December 31, 2010 and 2009 (in thousands):
2010 | 2009 | |||||||
Net income per financial statements | $ | 2,092 | $ | 1,289 | ||||
Tax adjustments (unaudited): | ||||||||
Adjustment to depreciation expense | 1,087 | 1,226 | ||||||
Provision for losses and doubtful accounts | 4 | 4 | ||||||
Adjustments to revenues / other expenses | 30 | (70 | ) | |||||
Adjustments to gain on sales of assets | 151 | (39 | ) | |||||
Other | - | 161 | ||||||
Income per federal tax return (unaudited) | $ | 3,364 | $ | 2,571 |
Other income, net:
Other income, net is comprised of fair value adjustments on interest rate swap contracts.
Per unit data:
Net income and distributions per Unit are based upon the weighted average number of Other Members’ Units outstanding during the year.
Recent accounting pronouncements:
In January 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-01, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.” ASU 2011-01 temporarily delays the effective date of the disclosures about troubled debt restructurings in Update 2010-20 for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The Company anticipates that adoption of these additional disclosures will not have a material effect on its financial position or results of operations.
In July 2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU 2010-20 is effective as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period will be required for the Company’s financial statements that include periods beginning on or after December 15, 2010. The adoption of this ASU did not have a material effect on the Company’s financial position or results of operations; however, it did add additional disclosures which have been included in Notes 2 and 4.
In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosure about Fair Value Measurement.” ASU 2010-06 requires additional disclosures related to recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements, and information on purchases, sales, issuances, and settlements in a rollforward reconciliation of Level 3 fair-value measurements. Except for the Level 3 reconciliation disclosures, which are effective for fiscal years beginning after December 15, 2010, the guidance became effective for the Company beginning January 1, 2010 and was adopted during the first quarter of 2010 with no impact on the Company’s financial position, results of operations or cash flows.
22
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
3. 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 to the Company upon default.
As of December 31, 2010 and 2009, 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:
2010 | 2009 | |||||||
Transportation, containers | 46 | % | 50 | % | ||||
Transportation, rail | 43 | % | 33 | % |
During 2010 and 2009, certain lessees generated significant portions (defined as 10% or more) of the Company’s total lease revenues as follows:
Percentage of Total Lease Revenues | ||||||||||
Lessee | Type of Equipment | 2010 | 2009 | |||||||
Exsif Worldwide Inc. | Transportation, other (containers) | 35 | % | 38 | % | |||||
Bee Mar, LLC (Formerly Gulfmark Management, Inc.) | Marine vessel | 20 | % | 13 | % | |||||
Bartlett Grain Company, L.P. | Railcars | 14 | % | 15 | % |
4. Provision for credit losses:
The Company’s provision for credit losses are as follows (in thousands):
Allowance for Doubtful Accounts | ||||
Balance January 1, 2009 | $ | - | ||
Adjustment to provision | 4 | |||
Balance December 31, 2009 | 4 | |||
Adjustment to provision | 4 | |||
Balance December 31, 2010 | $ | 8 |
At December 31, 2010 and 2009, the entire allowance for doubtful accounts represents reserves against operating lease receivables.
23
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
4. Provision for credit losses (continued):
For the year ended December 31, 2010, the Company did not record an allowance for credit losses related to its financing receivables. The Company’s recorded net investment in financing receivables at December 31, 2010 is as follows (in thousands):
Finance Leases | Total | |||||||
Allowance for credit losses: | ||||||||
Ending balance, December 31, 2010 | $ | - | $ | - | ||||
Ending balance: individually evaluated for impairment | $ | - | $ | - | ||||
Ending balance: collectively evaluated for impairment | $ | - | $ | - | ||||
Ending balance: loans acquired with deteriorated credit quality | $ | - | $ | - | ||||
Financing receivables, net: | ||||||||
Ending balance, December 31, 2010 | $ | 381 | $ | 381 | ||||
Ending balance: individually evaluated for impairment | $ | 381 | $ | 381 | ||||
Ending balance: collectively evaluated for impairment | $ | - | $ | - | ||||
Ending balance: loans acquired with deteriorated credit quality | $ | - | $ | - |
The Company evaluates the credit quality of its financing receivables on a scale equivalent to the following quality indicators related to corporate risk profiles:
Pass – Any account whose lessee/debtor, co-lessee/debtor or any guarantor has a credit rating on publicly traded or privately placed debt issues as rated by Moody’s or S&P for either Senior Unsecured debt, Long Term Issuer rating or Issuer rating that are in the tiers of ratings generally recognized by the investment community as constituting an Investment Grade credit rating; or, has been determined by the Manager to be an Investment Grade Equivalent or High Quality Corporate Credit per its Credit Policy or has a Not Rated internal rating by the Manager and the account is not considered by the Chief Credit Officer of the manager to fall into one of the three risk profiles below.
Special Mention – Any traditional corporate type account with potential weaknesses (e.g. large net losses or major industry downturns) or, any growth capital account that has less than three months of cash as of the end of the calendar quarter to fund their continuing operations. These accounts deserve management’s close attention. If left uncorrected, those potential weaknesses may result in deterioration of the Fund’s receivable at some future date.
Substandard – Any account that is inadequately protected by the current worth and paying capacity of the borrower or of the collateral pledged, if any. Accounts that are so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Fund will sustain some loss as the likelihood of fully collecting all receivables may be questionable if the deficiencies are not corrected. Such accounts are on the Manager’s Credit Watch List.
Doubtful – Any account where the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Accordingly, an account that is so classified is on the Manager’s Credit Watch List, and has been declared in default and the Manager has repossessed, or is attempting to repossess, the equipment it financed. This category includes impaired leases as applicable.
24
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
4. Provision for credit losses (continued):
At December 31, 2010, the Company’s financing receivables by credit quality indicator and by class of financing receivables are as follows (in thousands):
Finance Leases | |||||
2010 | |||||
Pass | $ | 381 | |||
Special mention | - | ||||
Substandard | - | ||||
Doubtful | - | ||||
Total | $ | 381 |
At December 31, 2010, net investment in financing receivables is aged as follows (in thousands):
Recorded | ||||||||||||||||||||||||||||
Investment>90 | ||||||||||||||||||||||||||||
30-59 Days | 60-89 Days | Greater Than | Total Past | Total Financing | Days and | |||||||||||||||||||||||
Past Due | Past Due | 90 Days | Due | Current | Receivables | Accruing | ||||||||||||||||||||||
Finance leases | $ | 94 | $ | - | $ | - | $ | 94 | $ | 287 | $ | 381 | $ | - |
There were no impaired financing receivables at both December 31, 2010 and 2009. Likewise, there were no accounts receivable related to net investments in financing receivables placed in nonaccrual status as of December 31, 2010 and 2009.
5. Investments in equipment and leases, net:
The Company’s investment in leases consists of the following (in thousands):
Balance December 31, 2009 | Reclassifications & Additions / Dispositions | Depreciation/ Amortization Expense or Amortization of Leases | Balance December 31, 2010 | |||||||||||||
Net investment in operating leases | $ | 9,740 | $ | 382 | $ | (1,302 | ) | $ | 8,820 | |||||||
Net investment in direct financing leases | 475 | - | (94 | ) | 381 | |||||||||||
Assets held for sale or lease, net | 738 | (533 | ) | (1 | ) | 204 | ||||||||||
Total | $ | 10,953 | $ | (151 | ) | $ | (1,397 | ) | $ | 9,405 |
Impairment of investments in leases and assets held for sale or lease:
Management periodically reviews the carrying values of its assets on leases and assets held for lease or sale. Impairment losses are recorded as an adjustment to the net investment in operating leases. No impairment losses were recorded during 2010 and 2009.
The Company utilizes a straight line depreciation method over the term of the equipment lease for equipment on operating leases currently in its portfolio. Depreciation expense on the Company’s equipment totaled $1.3 million and $1.5 million for the years ended December 31, 2010 and 2009, respectively.
All of the property on lease was acquired during the period 1999 through 2002.
25
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
5. Investments in equipment and leases, net (continued):
Operating leases:
Property on operating leases consists of the following (in thousands):
Balance December 31, 2009 | Additions | Reclassifications or Dispositions | Balance December 31, 2010 | |||||||||||||
Containers | $ | 20,612 | $ | - | $ | (574 | ) | $ | 20,038 | |||||||
Transportation, rail | 12,960 | - | 3,138 | 16,098 | ||||||||||||
Marine vessel | 4,333 | - | - | 4,333 | ||||||||||||
Materials handling | 73 | - | (73 | ) | - | |||||||||||
Other | 640 | - | - | 640 | ||||||||||||
38,618 | - | 2,491 | 41,109 | |||||||||||||
Less accumulated depreciation | (28,878 | ) | (1,302 | ) | (2,109 | ) | (32,289 | ) | ||||||||
Total | $ | 9,740 | $ | (1,302 | ) | $ | 382 | $ | 8,820 |
The average estimated residual value for assets on operating leases was 10% and 11% of the assets’ original cost at December 31, 2010 and December 31, 2009, respectively.
The Company earns revenues from its containers, marine vessel and certain other assets based on utilization of such assets or through fixed term leases. Contingent rentals (i.e., short-term, operating charter hire payments) and the associated expenses are recorded when earned and/or incurred. The revenues associated with these rentals are included as a component of Operating Lease Revenues, and totaled $2.3 million and $2.5 million for the years ended December 31, 2010 and 2009, respectively. In June of 2009, the Company’s marine vessel was leased under a two-year fixed term leasing arrangement.
As of December 31, 2010 and 2009, the Company had no operating leases in non-accrual status.
Direct financing leases:
As of December 31, 2010 and 2009, investment in direct financing leases primarily consists of manufacturing equipment. The following lists the components of the Company’s investment in direct financing leases as of December 31, 2010 and 2009 (in thousands):
2010 | 2009 | |||||||
Total minimum lease payments receivable | $ | 487 | $ | 712 | ||||
Estimated residual values of leased equipment (unguaranteed) | 54 | 54 | ||||||
Investment in direct financing leases | 541 | 766 | ||||||
Less unearned income | (160 | ) | (291 | ) | ||||
Net investment in direct financing leases | $ | 381 | $ | 475 |
There were no net investments in direct financing leases in nonaccrual status as of December 31, 2010 and 2009.
At December 31, 2010, the aggregate amount of future lease payments is as follows (in thousands):
Operating Leases | Direct Financing Leases | Total | ||||||||||
Year ending December 31, 2011 | $ | 2,089 | $ | 239 | $ | 2,328 | ||||||
873 | 200 | 1,073 | ||||||||||
2013 | 474 | 48 | 522 | |||||||||
2014 | 287 | - | 287 | |||||||||
2015 | 179 | - | 179 | |||||||||
Thereafter | 434 | - | 434 | |||||||||
$ | 4,336 | $ | 487 | $ | 4,823 |
26
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
6. Related party transactions:
The terms of the Operating Agreement provide that AFS and/or affiliates are entitled to receive certain fees for equipment management and resale and for management of the Company.
The Operating Agreement allows for the reimbursement of costs incurred by AFS in providing administrative services to the Company. Administrative services provided include Company accounting, finance/treasury, investor relations, legal counsel and lease and equipment documentation. AFS is not reimbursed for services whereby it is entitled to receive a separate fee as compensation for such services, such as management of equipment.
Each of ATEL Leasing Corporation (“ALC”) and AFS is a wholly-owned subsidiary of ATEL Capital Group and performs services for the Company. Acquisition services, equipment management, lease administration and asset disposition services are performed by ALC; investor relations, communications services and general administrative services are performed by AFS.
Cost reimbursements to the Managing Member are based on its costs incurred in performing administrative services for the Company. These costs are allocated to each managed entity based on certain criteria such as total assets, number of investors or contributed capital based upon the type of cost incurred.
AFS and/or affiliates earned fees, commissions and reimbursements, pursuant to the Operating Agreement as follows during each of the years ended December 31, 2010 and 2009 (in thousands):
2010 | 2009 | |||||||
Asset management fees to Managing Member | $ | 289 | $ | 255 | ||||
Cost reimbursements to Managing Member | 679 | 679 | ||||||
$ | 968 | $ | 934 |
The Fund’s Operating Agreement places an annual and cumulative limit for cost reimbursements to AFS and/or its affiliates. Any reimbursable costs incurred by AFS and/or affiliates during the year exceeding the annual and/or cumulative limits cannot be reimbursed in the current year, though such costs may be reimbursable in future years to the extent such amounts may be payable if within the annual and cumulative limits in such future years. The Fund is a finite life and self liquidating entity, and AFS and its affiliates have no recourse against the Fund for the amount of any unpaid excess reimbursable administrative expenses. The Fund will continue to require administrative services from AFS and its affiliates through the end of its term, and will therefore continue to incur reimbursable administrative expenses in each year. The Fund has determined that payment of any amounts in excess of the annual and cumulative limits is not probable, and the date any portion of such amount may be paid, if ever, is uncertain. When the Fund completes its liquidation stage and terminates, any unpaid amount will expire unpaid, with no claim by AFS or its affiliates against any liquidation proceeds or any party for the unpaid balance. Accordingly, the Company has recorded neither an obligation nor an expense for such contingent reimbursement of the approximate $1.3 million and $1.6 million excess reimbursable administrative expenses at December 31, 2010 and 2009, respectively.
7. Non-recourse debt:
Non-recourse debt consisted of a note payable to a financial institution. The note was due in monthly installments. Interest on the note was at a fixed rate of 6.90% per annum. The note was secured by assignments of lease payments and pledges of assets; and matured and was settled on June 15, 2010.
8. Guarantees:
The Company enters into contracts that contain a variety of indemnifications. The Company’s maximum exposure under these arrangements is unknown. However, the Company has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
27
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
8. Guarantees (continued):
The Managing Member knows of no facts or circumstances that would make the Company’s contractual commitments outside standard mutual covenants applicable to commercial transactions between businesses. Accordingly, the Company believes that these indemnification obligations are made in the ordinary course of business as part of standard commercial and industry practice, and that any potential liability under the Company’s similar commitments is remote. Should any such indemnification obligation become payable, the Company would separately record and/or disclose such liability in accordance with GAAP.
9. Gain contingencies:
ATEL has chosen to litigate a claim on behalf of certain of its Funds for the under-reporting of revenue by a previous fleet manager of its marine vessels. Litigation continues relative to ATEL’s plaintiff position, seeking to recover an estimated total of $2.8 million, of which the Company’s portion approximates $350 thousand, of under-remitted revenues from marine vessel leasing covering years 2005-2007. Such amounts are not considered material to any of the Funds in any given year. While the Funds' recovery with respect to this matter may be substantial, there is no assurance that judgment will be rendered in favor of the Funds. Court proceedings are scheduled to commence during March 2011 and the outcome, either via negotiation or court mandate, is currently indeterminable.
10. Members’ capital:
As of December 31, 2010 and 2009, 13,560,188 Units were issued and outstanding. The Company was authorized to issue up to 15,000,000 Units in addition to the Units issued to the initial members (50 Units).
The Company has the right, exercisable at the Managing Member’s discretion, but not the obligation, to repurchase Units of a Unitholder who ceases to be a U.S. Citizen, for a price equal to 100% of the holder’s capital account. The Company is otherwise permitted, but not required, to repurchase Units upon a holder’s request. The repurchase of Fund units is made in accordance with Section 13 of the Amended and Restated Agreement of Limited Company. The repurchase would be at the discretion of the Managing Member on terms it determines to be appropriate under given circumstances, in the event that the Managing Member deems such repurchase to be in the best interest of the Company; provided, the Company is never required to repurchase any Units. Upon the repurchase of any Units by the Fund, the tendered Units are cancelled. Units repurchased in prior periods were repurchased at amounts representing the original investment less cumulative distributions made to the Unitholder with respect to the Units. All Units repurchased during a quarter are deemed to be repurchased effective the last day of the preceding quarter, and are not deemed to be outstanding during, or entitled to allocations of net income, net loss or distributions for the quarter in which such repurchase occurs.
As defined in the 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 2010 and 2009. The amounts allocated were determined so as to bring AFS’s ending capital account balance to zero at the end of the year.
Distributions to the Other Members were as follows (in thousands, except per Unit data):
2010 | 2009 | |||||||
Distributions declared | $ | 3,254 | $ | 1,762 | ||||
Weighted average number of Units outstanding | 13,560,188 | 13,560,188 | ||||||
Weighted average distributions per Unit | $ | 0.24 | $ | 0.13 |
28
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
11. Fair value measurements:
Fair value measurements and disclosures are based on a fair value hierarchy as determined by significant inputs used to measure fair value. The three levels of inputs within the fair value hierarchy are defined as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, generally on a national exchange.
Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market.
Level 3 – Valuation is modeled using significant inputs that are unobservable in the market. These unobservable inputs reflect the Company's own estimates of assumptions that market participants would use in pricing the asset or liability.
At December 31, 2010, the Company had no assets or liabilities that require measurement at fair value on a recurring or non-recurring basis.
The following disclosure of the estimated fair value of financial instruments is made in accordance with the guidance provided by the Financial Instruments Topic of the FASB Accounting Standards Codification. Fair value estimates, methods and assumptions, set forth below for the Company’s financial instruments, are made solely to comply with the requirements of the Financial Instruments Topic and should be read in conjunction with the Company’s financial statements and related notes.
The Company has determined the estimated fair value amounts by using market information and valuation methodologies that it considers appropriate and consistent with the fair value accounting guidance. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize or has realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Cash and cash equivalents
The recorded amounts of the Company’s cash and cash equivalents 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 upon current market borrowing rates for similar types of borrowing arrangements.
Limitations
The fair value estimates presented herein were based on pertinent information available to the Company as of December 31, 2010 and 2009. Although the Company is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
29
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
11. Fair value measurements (continued):
The following table presents estimated fair values of the Company’s financial instruments in accordance with the guidance provided by the Financial Instruments Topic of the FASB Accounting Standards Codification at December 31, 2010 and 2009 (in thousands):
December 31, 2010 | December 31, 2009 | |||||||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||
Financial assets: | ||||||||||||||||
Cash and cash equivalents | $ | 1,818 | $ | 1,818 | $ | 2,306 | $ | 2,306 | ||||||||
Financial liabilities: | ||||||||||||||||
Non-recourse debt | - | - | 398 | 403 |
30
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
The Company’s Managing Member’s President and Chief Executive Officer, and Executive Vice President and Chief Financial Officer and Chief Operating Officer (“Management”), evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on the evaluation of the Company’s disclosure controls and procedures, Management concluded that as of the end of the period covered by this report, the design and operation of these disclosure controls and procedures were effective.
The Company does not control the financial reporting process, and is solely dependent on the Management of the Managing Member, who is responsible for providing the Company with financial statements in accordance with generally accepted accounting principles in the United States. The Managing Member’s disclosure controls and procedures, as they are applicable to the Company, means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
The Management of the Managing Member is responsible for establishing and maintaining adequate internal control over financial reporting as that term is defined in Exchange Act Rule 13a-15(f) for the Company, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2010. The internal control process of the Managing Member, as it is applicable to the Company, was designed to provide reasonable assurance to Management regarding the preparation and fair presentation of published financial statements, and includes those policies and procedures that:
(1) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States, and that the Company’s receipts and expenditures are being made only in accordance with authorization of the Management of the Managing Member; and |
(2) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
All internal control processes, no matter how well designed, have inherent limitations. Therefore, even those processes determined to be effective can provide only reasonable assurance with respect to the reliability of financial statement preparation and presentation. Further, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management of the Managing Member assessed the effectiveness of its internal control over financial reporting, as it is applicable to the Company, as of December 31, 2010. In making this assessment, it used the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its assessment, Management of the Managing Member concluded that the Managing Member’s internal control over financial reporting, as it is applicable to the Company, was effective as of December 31, 2010.
31
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which exempts non-accelerated filers from Section 404(b) of the Sarbanes-Oxley Act of 2002.
Changes in internal control
There were no changes in the Managing Member’s internal control over financial reporting, as it is applicable to the Company, during the quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Managing Member’s internal control over financial reporting, as it is applicable to the Company.
32
Item 10. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The registrant is a Limited Liability Company and has no officers or directors.
ATEL Financial Services, LLC (“AFS”) is the Company’s Managing Member or Manager. AFS is controlled by ATEL Capital Group (“ACG” or “ATEL”), a holding company formed to control ATEL and affiliated companies. The outstanding voting capital stock of ACG is owned 100% by Dean L. Cash.
Each of ATEL Leasing Corporation (“ALC”) and AFS is a subsidiary under the control of ACG and performs services for the Company. Acquisition services, equipment management, lease administration and asset disposition services are performed by ALC; investor relations, communications services and general administrative services are performed by AFS.
The officers and directors of ACG and its affiliates are as follows:
Dean L. Cash | President and Chief Executive Officer of ATEL Financial Services, LLC (Managing Member) | |
Paritosh K. Choksi | Executive Vice President and Chief Financial Officer and Chief Operating Officer of ATEL Financial Services, LLC (Managing Member) | |
Vasco H. Morais | Executive Vice President, Secretary and General Counsel of ATEL Financial Services, LLC (Managing Member) |
Dean L. Cash, age 60, joined ATEL as director of marketing in 1980 and has been a vice president since 1981, executive vice president since 1983 and a director since 1984. He has been President and CEO since April 2001. Prior to joining ATEL, Mr. Cash was a senior marketing representative for Martin Marietta Corporation, data systems division, from 1979 to 1980. From 1977 to 1979, he was employed by General Electric Corporation, where he was an applications specialist in the medical systems division and a marketing representative in the information services division. Mr. Cash was a systems engineer with Electronic Data Systems from 1975 to 1977, and was involved in maintaining and developing software for commercial applications. Mr. Cash received a B.S. degree in psychology and mathematics in 1972 and an M.B.A. degree with a concentration in finance in 1975 from Florida State University. Mr. Cash is an arbitrator with the American Arbitration Association.
Paritosh K. Choksi, age 57, joined ATEL in 1999 as a director, senior vice president and its chief financial officer. He became its executive vice president and CFO/COO in April 2001. Prior to joining ATEL, Mr. Choksi was chief financial officer at Wink Communications, Inc. from 1997 to 1999. From 1977 to 1997, Mr. Choksi was with Phoenix American Incorporated, a financial services and management company, where he held various positions during his tenure, and was senior vice president, chief financial officer and director when he left the company. Mr. Choksi was involved in all corporate matters at Phoenix and was responsible for Phoenix’s capital market needs. He also served on the credit committee overseeing all corporate investments, including its venture lease portfolio. Mr. Choksi was a part of the executive management team which caused Phoenix’s portfolio to increase from $50 million in assets to over $2 billion. Mr. Choksi is a member of the board of directors of Syntel, Inc. Mr. Choksi received a bachelor of technology degree in mechanical engineering from the Indian Institute of Technology, Bombay; and an M.B.A. degree from the University of California, Berkeley.
Vasco H. Morais, age 52, joined ATEL in 1989 as general counsel to provide legal support in the drafting and reviewing of lease documentation, advising on general corporate law matters, and assisting on securities law issues. From 1986 to 1989, Mr. Morais was employed by the BankAmeriLease Companies, Bank of America’s equipment leasing subsidiaries, providing in-house legal support on the documentation of tax-oriented and non-tax oriented direct and leveraged lease transactions, vendor leasing programs and general corporate matters. Prior to the BankAmeriLease Companies, Mr. Morais was with the Consolidated Capital Companies in the corporate and securities legal department involved in drafting and reviewing contracts, advising on corporate law matters and securities law issues. Mr. Morais received a B.A. degree in 1982 from the University of California in Berkeley, a J.D. degree in 1986 from Golden Gate University Law School and an M.B.A. (Finance) in 1997 from Golden Gate University. Mr. Morais has been an active member of the State Bar of California since 1986.
33
Audit Committee
The board of directors of the Managing Member acts as the audit committee of the Company. Dean L. Cash and Paritosh K. Choksi are members of the board of directors of the Managing Member and are deemed to be financial experts. They are not independent of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on a review of Forms 3, 4, and 5, the Company is not aware of any failures to file reports of beneficial ownership required to be filed during or for the year ended December 31, 2010.
Code of Ethics
A Code of Ethics that is applicable to the Company, including the Chief Executive Officer and Chief Financial Officer and Chief Operating Officer of its Managing Member, AFS, or persons acting in such capacity on behalf of the Company, is included as Exhibit 14.1 to this report.
Item 11. EXECUTIVE COMPENSATION
The registrant has no officers or directors.
Set forth hereinafter is a description of the nature of remuneration paid and to be paid to ATEL and its Affiliates. The amount of such remuneration paid in 2010 and 2009 is set forth in Item 8 of this report under the caption “Financial Statements and Supplementary Data - Notes to Financial Statements - Related party transactions,” at Note 6 thereof, which information is hereby incorporated by reference.
Asset Management Fee
The Company pays AFS an Asset Management Fee in an amount equal to 4.5% of Operating Revenues, which includes Gross Lease Revenues and Cash From Sales or Refinancing. The Asset Management Fee is paid on a monthly basis. The amount of the Asset Management Fee payable in any year is reduced for that year to the extent it would otherwise exceed the Asset Management Fee Limit, as described below. The Asset Management Fee is paid for services rendered by AFS and its affiliates in determining portfolio and investment strategies (i.e., establishing and maintaining the composition of the Equipment portfolio as a whole and the Company’s overall debt structure) and generally managing or supervising the management of the Equipment.
AFS supervises performance of among others activities, collection of lease revenues, monitoring compliance by lessees with the lease terms, assuring that Equipment is being used in accordance with all operative contractual arrangements, paying operating expenses and arranging for necessary maintenance and repair of Equipment in the event a lessee fails to do so, monitoring property, sales and use tax compliance and preparation of operating financial data. AFS intends to delegate all or a portion of its duties and the Asset Management Fee to one or more of its affiliates who are in the business of providing such services.
Asset Management Fee Limit:
The Asset Management Fee is subject to the Asset Management Fee Limit. The Asset Management Fee Limit is calculated each year during the Company’s term by calculating the total fees that would be paid to AFS if AFS were to be compensated on the basis of an alternative fee schedule, to include an Equipment Management Fee, Incentive Management Fee, and Equipment Resale/Re-Leasing Fee, plus AFS’s Carried Interest, as described below. To the extent that the amount paid to AFS as the Asset Management Fee plus its Carried Interest for any year would exceed the aggregate amount of fees calculated under this alternative fee schedule for the year, the Asset Management Fee and/or Carried Interest for that year is reduced to equal the maximum aggregate fees under the alternative fee schedule.
To the extent any such fees are reduced, the amount of such reduction will be accrued and deferred, and such accrued and deferred compensation would be paid to AFS in a subsequent period, but only if and to the extent that such deferred compensation would be payable within the Asset Management Fee Limit for the subsequent period. Any deferred fees which cannot be paid under the applicable limitations in any subsequent period through the date of liquidation would be forfeited by AFS upon liquidation.
34
Alternative Fee Schedule:
For purposes of the Asset Management Fee Limit, the Company will calculate an alternative schedule of fees, including a hypothetical Equipment Management Fee, Incentive Management Fee, Equipment Resale/Re- Leasing Fee, and Carried Interest as follows:
An Equipment Management Fee will be calculated to equal the lesser of (i) 3.5% of annual Gross Revenues from Operating Leases and 2% of annual Gross Revenues from Full Payout Leases which contain Net Lease Provisions), or (ii) the fees customarily charged by others rendering similar services as an ongoing public activity in the same geographic location and for similar types of equipment. If services with respect to certain Operating Leases are performed by nonaffiliated persons under the active supervision of AFS or its Affiliate, then the amount so calculated shall be 1% of Gross Revenues from such Operating Leases.
An Incentive Management Fee will be calculated to equal 4% of Distributions of Cash from Operations until Holders have received a return of their Original Invested Capital plus a Priority Distribution, and, thereafter, to equal a total of 7.5% of Distributions from all sources, including Sale or Refinancing Proceeds. In subordinating the increase in the Incentive Management Fee to a cumulative return of a Holder’s Original Invested Capital plus a Priority Distribution, a Holder would be deemed to have received Distributions of Original Invested Capital only to the extent that Distributions to the Holder exceed the amount of the Priority Distribution.
An Equipment Resale Fee will be calculated in an amount equal to the lesser of (i) 3% of the sale price of the Equipment, or (ii) one-half the normal competitive equipment sale commission charged by unaffiliated parties for resale services. Such fee would apply only after the Holders have received a return of their Original Invested Capital plus a Priority Distribution.
An Equipment Re-Leasing Fee, in connection with the releasing of Equipment to lessees other than previous lessees or their affiliates, will be calculated in an amount equal to the lesser of (i) the competitive rate for comparable services for similar equipment, or (ii) 2% of the gross rental payments derived from the re-lease of such Equipment, payable out of each rental payment received by the Company from such re-lease.
In connection with the releasing of Equipment to lessees other than previous lessees or their Affiliates, the fee would be in an amount equal to the lesser of (i) the competitive rate for comparable services for similar equipment, or (ii) 2% of the gross rental payments derived from the re-lease of such Equipment, payable out of each rental payment received by the Company from such re-lease.
Managing Member’s Interest in Operating Proceeds
As defined in the Operating Agreement, the Company’s Net Income, Net Losses, and Distributions are to be allocated 92.5% to the Members and 7.5% to AFS. In accordance with the terms of the Operating Agreement, additional allocations of income were made to AFS in 2010 and 2009. The amounts allocated were determined to bring AFS’s ending capital account balance to zero at the end of each year. See financial statements as set forth in Part II, Item 8, Financial Statements and Supplementary Data, of this report for amounts allocated to AFS in 2010 and 2009.
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Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners
At December 31, 2010, no investor is known to hold beneficially more than 5% of the issued and outstanding Units.
Security Ownership of Management
The parent of AFS is the beneficial owner of Limited Liability Company Units as follows:
(1) | (2) | (3) | (4) | |||
Name and Address of | Amount and Nature of | Percent of | ||||
Title of Class | Beneficial Owner | Beneficial Ownership | Class | |||
Limited Liability Company Units | ATEL Capital Group | Initial Limited Liability | 0.0002% | |||
600 California Street, 6th Floor | Company Units | |||||
San Francisco, CA 94108 | 25 Units ($250) | |||||
(owned by wife) |
Changes in Control
The Members have the right, by vote of the Members owning more than 50% of the outstanding Limited Liability Company Units, to remove the Managing Member.
AFS may at any time call a meeting of the Members or a vote of the Members without a meeting, on matters on which they are entitled to vote, and shall call such meeting or for vote without a meeting following receipt of a written request therefore of Members holding 10% or more of the total outstanding Limited Liability Company Units.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The responses to Item 1 of this report under the caption “Equipment Leasing Activities,” Item 8 of this report under the caption “Financial Statements and Supplementary Data - Notes to Financial Statements - Related party transactions” at Note 6 thereof, and Item 11 of this report under the caption “Executive Compensation,” are hereby incorporated by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
During the most recent two years, the Company incurred audit and other fees with its principal auditors as follows (in thousands):
2010 | 2009 | |||||||
Audit fees | $ | 65 | $ | 61 | ||||
Other | 1 | 1 | ||||||
$ | 66 | $ | 62 |
Audit fees consist of the aggregate fees and expenses billed in connection with the audit of the Company’s annual financial statements and the review of the financial statements included in the Company’s quarterly reports on Form 10-Q.
Other fees represent costs incurred in connection with various Agreed-Upon Procedures engagements.
The board of directors of the Managing Member acts as the audit committee of the Company. Engagements for audit services, audit related services and tax services are approved in advance by the Chief Financial Officer of the Managing Member acting on behalf of the board of directors of the Managing Member in its role as the audit committee of the Company.
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PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) | Financial Statements and Schedules | |
1. | Financial Statements | |
Included in Part II of this report: | ||
Report of Independent Registered Public Accounting Firm | ||
Balance Sheets at December 31, 2010 and 2009 | ||
Statements of Income for the years ended December 31, 2010 and 2009 | ||
Statements of Changes in Members’ Capital for the years ended December 31, 2010 and 2009 | ||
Statements of Cash Flows for the years ended December 31, 2010 and 2009 | ||
Notes to Financial Statements | ||
2. | Financial Statement Schedules | |
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. | ||
(b) | Exhibits | |
(3) and (4) Amended and Restated Limited Liability Company Operating Agreement, included as exhibit B to the Prospectus filed as exhibit 28.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 333-62477), is hereby incorporated herein by reference | ||
(14.1) Code of Ethics | ||
(31.1) Certification of Dean L. Cash pursuant to Rules 13a-14(a)/15d-14(a) | ||
(31.2) Certification of Paritosh K. Choksi pursuant to Rules 13a-14(a)/15d-14(a) | ||
(32.1) Certification of Dean L. Cash pursuant to 18 U.S.C. section 1350 | ||
(32.2) Certification of Paritosh K. Choksi pursuant to 18 U.S.C. section 1350 |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 28, 2011
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 | |||
ATEL Financial Services, LLC (Managing Member) | |||
By: | /s/ Paritosh K. Choksi | ||
Paritosh K. Choksi, | |||
Executive Vice President and Chief Financial Officer and Chief Operating Officer of ATEL Financial Services, LLC (Managing Member) | |||
By: | /s/ Samuel Schussler | ||
Samuel Schussler, | |||
Vice President and Chief Accounting Officer of ATEL Financial Services, LLC (Managing Member) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the persons in the capacities and on the dates indicated.
SIGNATURE | CAPACITIES | DATE | ||
/s/ Dean L. Cash | President and Chief Executive Officer of | March 28, 2011 | ||
Dean L. Cash | ATEL Financial Services, LLC (Managing Member) | |||
/s/ Paritosh K. Choksi | Executive Vice President and Chief Financial Officer and Chief | |||
Paritosh K. Choksi | Operating Officer of ATEL Financial Services, LLC (Managing Member) | March 28, 2011 | ||
/s/ Samuel Schussler | Vice President and Chief Accounting Officer of ATEL Financial | |||
Samuel Schussler | Services, LLC (Managing Member) | March 28, 2011 |
No proxy materials have been or will be sent to security holders. An annual report will be furnished to security holders subsequent to the filing of this report on Form 10-K, and copies thereof will be furnished supplementally to the Commission when forwarded to the security holders.
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