Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended June 30, 2012
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o | 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)
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California | 94-3307404 | |
(State or other jurisdiction of Incorporation or organization) | (I. R. S. Employer Identification No.) |
600 California Street, 6th Floor, San Francisco, California 94108-2733
(Address of principal executive offices)
Registrant’s telephone number, including area code(415) 989-8800
Securities registered pursuant to section 12(b) of the Act:None
Securities registered pursuant to section 12(g) of the Act:Limited Liability Company Units
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yesx Noo
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).Yesx Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer, large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting companyx
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yeso Nox
The number of Limited Liability Company Units outstanding as of July 31, 2012 was 13,560,188.
DOCUMENTS INCORPORATED BY REFERENCE
None.
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
Index
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Part I. Financial Information | 3 | |||
Item 1. Financial Statements (Unaudited) | 3 | |||
Balance Sheets, June 30, 2012 and December 31, 2011 | 3 | |||
Statements of Income for the three and six months ended June 30, 2012 and 2011 | 4 | |||
Statements of Changes in Members’ Capital for the year ended December 31, 2011 and for the six months ended June 30, 2012 | 5 | |||
Statements of Cash Flows for the three and six months ended June 30, 2012 and 2011 | 6 | �� | ||
Notes to the Financial Statements | 7 | |||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | |||
Item 4. Controls and Procedures | 19 | |||
Part II. Other Information | 20 | |||
Item 1. Legal Proceedings | 20 | |||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 20 | |||
Item 3. Defaults Upon Senior Securities | 20 | |||
Item 4. Mine Safety Disclosures | 20 | |||
Item 5. Other Information | 20 | |||
Item 6. Exhibits | 20 |
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
BALANCE SHEETS
JUNE 30, 2012 AND DECEMBER 31, 2011
(In Thousands)
(Unaudited)
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June 30, 2012 | December 31, 2011 | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 2,237 | $ | 925 | ||||
Accounts receivable, net of allowance for doubtful accounts of $0, as of June 30, 2012 and $22 as of December 31, 2011 | 824 | 831 | ||||||
Prepaid expenses and other assets | 25 | 14 | ||||||
Investments in equipment and leases, net of accumulated depreciation of $35,534 as of June 30, 2012 and $35,098 as of December 31, 2011 | 7,581 | 8,276 | ||||||
Total assets | $ | 10,667 | $ | 10,046 | ||||
LIABILITIES AND MEMBERS’ CAPITAL | ||||||||
Accounts payable and accrued liabilities: | ||||||||
Managing Member | $ | 692 | $ | 990 | ||||
Other | 108 | 108 | ||||||
Unearned operating lease income | 89 | 98 | ||||||
Total liabilities | 889 | 1,196 | ||||||
Commitments and contingencies | ||||||||
Members’ capital: | ||||||||
Managing Member | — | — | ||||||
Other Members | 9,778 | 8,850 | ||||||
Total Members’ capital | 9,778 | 8,850 | ||||||
Total liabilities and Members’ capital | $ | 10,667 | $ | 10,046 |
See accompanying notes.
3
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2012 AND 2011
(In Thousands Except for Units and Per Unit Data)
(Unaudited)
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenues: | ||||||||||||||||
Leasing activities: | ||||||||||||||||
Operating leases | $ | 1,342 | $ | 1,511 | $ | 2,817 | $ | 2,877 | ||||||||
Direct financing leases | 12 | 30 | 30 | 62 | ||||||||||||
Gain on sales of assets | 20 | 21 | 23 | 211 | ||||||||||||
Other revenue | 1 | 1 | 1 | 1 | ||||||||||||
Total revenues | 1,375 | 1,563 | 2,871 | 3,151 | ||||||||||||
Expenses: | ||||||||||||||||
Depreciation of operating lease assets | 259 | 361 | 571 | 692 | ||||||||||||
Asset management fees to Managing Member | 40 | 48 | 89 | 92 | ||||||||||||
Vessel maintenance | 226 | 178 | 423 | 343 | ||||||||||||
Railcar maintenance | 111 | 160 | 238 | 298 | ||||||||||||
Cost reimbursements to Managing Member | 73 | — | 289 | 679 | ||||||||||||
Other Management Fees | 36 | 37 | 75 | 70 | ||||||||||||
Professional fees | 35 | 17 | 81 | 65 | ||||||||||||
Insurance | 13 | 18 | 26 | 20 | ||||||||||||
Reversal of provision for doubtful accounts | (18 | ) | — | (22 | ) | — | ||||||||||
Taxes on income and franchise fees | 29 | 3 | 41 | 3 | ||||||||||||
Other | 65 | 46 | 132 | 90 | ||||||||||||
Total operating expenses | 869 | 868 | 1,943 | 2,352 | ||||||||||||
Net income | $ | 506 | $ | 695 | $ | 928 | $ | 799 | ||||||||
Net income: | ||||||||||||||||
Managing Member | $ | — | $ | — | $ | — | $ | — | ||||||||
Other Members | 506 | 695 | 928 | 799 | ||||||||||||
$ | 506 | $ | 695 | $ | 928 | $ | 799 | |||||||||
Net income per Limited Liability Company Unit (Other Members) | $ | 0.04 | $ | 0.05 | $ | 0.07 | $ | 0.06 | ||||||||
Weighted average number of Units outstanding | 13,560,188 | 13,560,188 | 13,560,188 | 13,560,188 |
See accompanying notes.
4
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2011
AND FOR THE SIX MONTHS ENDED
JUNE 30, 2012
(In Thousands Except for Units and Per Unit Data)
(Unaudited)
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Other Members | Managing Member | Total | ||||||||||||||
Units | Amount | |||||||||||||||
Balance December 31, 2010 | 13,560,188 | $ | 10,665 | $ | — | $ | 10,665 | |||||||||
Distributions to Other Members ($0.27 per Unit) | — | (3,729 | ) | — | (3,729 | ) | ||||||||||
Distributions to Managing Member | — | — | (302 | ) | (302 | ) | ||||||||||
Net income | — | 1,914 | 302 | 2,216 | ||||||||||||
Balance December 31, 2011 | 13,560,188 | 8,850 | — | 8,850 | ||||||||||||
Net income | — | 928 | — | 928 | ||||||||||||
Balance June 30, 2012 | 13,560,188 | $ | 9,778 | $ | — | $ | 9,778 |
See accompanying notes.
5
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENTS OF CASH FLOWS
FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2012 AND 2011
(In Thousands)
(Unaudited)
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Operating activities: | ||||||||||||||||
Net income | $ | 506 | $ | 695 | $ | 928 | $ | 799 | ||||||||
Adjustment to reconcile net income to cash provided by operating activities: | ||||||||||||||||
Gain on sales of assets | (20 | ) | (21 | ) | (23 | ) | (211 | ) | ||||||||
Depreciation of operating lease assets | 259 | 361 | 571 | 692 | ||||||||||||
Reversal of provision for doubtful accounts | (18 | ) | — | (22 | ) | — | ||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | 54 | (65 | ) | 29 | (141 | ) | ||||||||||
Prepaid expenses and other assets | (6 | ) | 3 | (11 | ) | 6 | ||||||||||
Accounts payable, Managing Member | (29 | ) | (71 | ) | (298 | ) | 118 | |||||||||
Accounts payable, affiliates | — | (2 | ) | — | (2 | ) | ||||||||||
Accounts payable, other | 18 | (377 | ) | — | (130 | ) | ||||||||||
Unearned operating lease income | 25 | (20 | ) | (9 | ) | (26 | ) | |||||||||
Net cash provided by operating activities | 789 | 503 | 1,165 | 1,105 | ||||||||||||
Investing activities: | ||||||||||||||||
Proceeds from sales of lease assets | 49 | 42 | 61 | 299 | ||||||||||||
Principal payments received on direct financing leases | 41 | 28 | 86 | 55 | ||||||||||||
Purchases and additions to equipment on operating leases | — | — | — | (460 | ) | |||||||||||
Net cash provided by (used in) investing activities | 90 | 70 | 147 | (106 | ) | |||||||||||
Financing activities: | ||||||||||||||||
Net cash used in financing activities | — | — | — | — | ||||||||||||
Net increase in cash and cash equivalents | 879 | 573 | 1,312 | 999 | ||||||||||||
Cash and cash equivalents at beginning of period | 1,358 | 2,244 | 925 | 1,818 | ||||||||||||
Cash and cash equivalents at end of period | $ | 2,237 | $ | 2,817 | $ | 2,237 | $ | 2,817 | ||||||||
Supplemental disclosures of cash flow information: | ||||||||||||||||
Cash paid during the period for taxes | $ | 31 | $ | 32 | $ | 33 | $ | 34 |
See accompanying notes.
6
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Limited Liability Company matters:
ATEL Capital Equipment Fund VIII, LLC (the “Company”) was formed under the laws of the State of California on July 31, 1998. The Company was formed for the purpose of acquiring equipment to engage in equipment leasing and sales activities. The Managing Member or Manager 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. 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 June 30, 2012, 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 for services rendered and reimbursements for costs incurred on behalf of the Company (see Note 5). 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 June 30, 2012, the Company continues in the liquidation phase of its life cycle as defined in the Operating Agreement.
These unaudited interim financial statements should be read in conjunction with the financial statements and notes thereto contained in the report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission.
2. Summary of significant accounting policies:
Basis of presentation:
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions toForm 10-Q as mandated by the Securities and Exchange Commission. The unaudited interim financial statements reflect all adjustments which are, in the opinion of the Managing Member, necessary for a fair statement of financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results to be expected for the full year.
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no significant effect on the reported financial position or results of operations.
In preparing the accompanying financial statements, the Company has reviewed, as determined necessary by the Managing Member, events that have occurred after June 30, 2012, up until the issuance of the financial statements. No events were noted which would require disclosure in the footnotes to the financial statements.
7
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. Summary of significant accounting policies: - (continued)
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.
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.
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 region in which the Company sought leasing opportunities was North America. The table below summarizes geographic information relating to the sources, by nation, of the Company’s total revenues for the six months ended June 30, 2012 and 2011 and long-lived tangible assets as of June 30, 2012 and December 31, 2011 (dollars in thousands):
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For The Six Months Ended June 30, | ||||||||||||||||
2012 | % of Total | 2011 | % of Total | |||||||||||||
Revenue | ||||||||||||||||
United States | $ | 2,777 | 97 | % | $ | 3,151 | 100 | % | ||||||||
Canada | 94 | 3 | % | — | 0 | % | ||||||||||
Total International | 94 | 3 | % | — | 0 | % | ||||||||||
Total | $ | 2,871 | 100 | % | $ | 3,151 | 100 | % |
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As of June 30, | As of December 31, | |||||||||||||||
2012 | % of Total | 2011 | % of Total | |||||||||||||
Long-lived assets | ||||||||||||||||
United States | $ | 7,549 | 100 | % | $ | 8,276 | 100 | % | ||||||||
Canada | 32 | 0 | % | — | 0 | % | ||||||||||
Total International | 32 | 0 | % | — | 0 | % | ||||||||||
Total | $ | 7,581 | 100 | % | $ | 8,276 | 100 | % |
Per Unit data:
Net income and distributions per Unit are based upon the weighted average number of Other Members’ Units outstanding during the period.
8
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. Allowance for credit losses:
The Company’s allowance for credit losses are as follows (in thousands):
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Accounts Receivable Allowance for Doubtful Accounts | Valuation Adjustments on Financing Receivables | Total Allowance for Credit Losses | ||||||||||||||
Finance Leases | Operating Leases | Finance Leases | ||||||||||||||
Balance December 31, 2010 | $ | — | $ | 8 | $ | — | $ | 8 | ||||||||
Provision | — | 14 | — | 14 | ||||||||||||
Balance December 31, 2011 | — | 22 | — | 22 | ||||||||||||
Reversal of provision | — | (22 | ) | — | (22 | ) | ||||||||||
Balance June 30, 2012 | $ | — | $ | — | $ | — | $ | — |
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 upon their aging and historical charge off and collection experience and the creditworthiness of specifically identified lessees and borrowers, and invoiced amounts. Accounts receivable deemed uncollectible are generally charged off against the allowance on a specific identification basis. Recoveries of amounts that were previously written-off are recorded as other income in the period received.
Accounts receivable 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 periodically reviews the creditworthiness of companies with lease or note payments outstanding less than 90 days. Based upon management’s judgment, such leases may be placed in 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 receivable is probable. Until such time, revenues on operating leases are recognized on a cash basis. All payments received on amounts billed under direct financing leases contracts are applied only against outstanding principal balances.
Financing receivables
In addition to the allowance established for delinquent accounts receivable, the total allowance related solely to financing receivables also includes anticipated impairment charges on direct financing leases.
The asset underlying a direct financing lease contract is considered impaired if the estimated undiscounted future cash flows of the asset are less than its 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.
9
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. Allowance for credit losses: - (continued)
As of June 30, 2012 and December 31, 2011, the Company’s allowance for credit losses (related solely to financing receivables) and its recorded investment in financing receivables were as follows (in thousands):
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June 30, 2012 | Finance Leases | Total | ||||||
Allowance for credit losses: | ||||||||
Ending balance | $ | — | $ | — | ||||
Ending balance: individually evaluated for impairment | $ | — | $ | — | ||||
Ending balance: collectively evaluated for impairment | $ | — | $ | — | ||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | ||||
Financing receivables: | ||||||||
Ending balance | $ | 167 | $ | 167 | ||||
Ending balance: individually evaluated for impairment | $ | 167 | $ | 167 | ||||
Ending balance: collectively evaluated for impairment | $ | — | $ | — | ||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — |
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December 31, 2011 | Finance Leases | Total | ||||||
Allowance for credit losses: | ||||||||
Ending balance | $ | — | $ | — | ||||
Ending balance: individually evaluated for impairment | $ | — | $ | — | ||||
Ending balance: collectively evaluated for impairment | $ | — | $ | — | ||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | ||||
Financing receivables: | ||||||||
Ending balance | $ | 256 | $ | 256 | ||||
Ending balance: individually evaluated for impairment | $ | 256 | $ | 256 | ||||
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.
10
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. Allowance for credit losses: - (continued)
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.
At June 30, 2012 and December 31, 2011, the Company’s financing receivables by credit quality indicator and by class of financing receivables are as follows (in thousands):
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Finance Leases | ||||||||
June 30, 2012 | December 31, 2011 | |||||||
Pass | $ | 167 | $ | 256 | ||||
Special mention | — | — | ||||||
Substandard | — | — | ||||||
Doubtful | — | — | ||||||
Total | $ | 167 | $ | 256 |
At June 30, 2012 and December 31, 2011, investment in financing receivables is aged as follows (in thousands):
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June 30, 2012 | 30 – 59 Days Past Due | 60 – 89 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Financing Receivables | Recorded Investment >90 Days and Accruing | |||||||||||||||||||||
Finance leases | $ | 60 | $ | — | $ | — | $ | 60 | $ | 107 | $ | 167 | $ | — |
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December 31, 2011 | 30 – 59 Days Past Due | 60 – 89 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Financing Receivables | Recorded Investment >90 Days and Accruing | |||||||||||||||||||||
Finance leases | $ | 84 | $ | — | $ | — | $ | 84 | $ | 172 | $ | 256 | $ | — |
There were no impaired financing receivables at both June 30, 2012 and December 31, 2011. Likewise, there were no financing receivables placed in non-accrual status as of June 30, 2012 and December 31, 2011.
4. Investment in equipment and leases, net:
The Company’s investment in leases consists of the following (in thousands):
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Balance December 31, 2011 | Reclassifications & Additions/ Dispositions | Depreciation/Amortization Expense or Amortization of Leases | Balance June 30, 2012 | |||||||||||||
Net investment in operating leases | $ | 7,867 | $ | (832 | ) | $ | (571 | ) | $ | 6,464 | ||||||
Net investment in direct financing leases | 256 | (3 | ) | (86 | ) | 167 | ||||||||||
Assets held for sale or lease, net | 153 | 797 | — | 950 | ||||||||||||
Total | $ | 8,276 | $ | (38 | ) | $ | (657 | ) | $ | 7,581 |
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 the three and six months ended June 30, 2012 and 2011.
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 $259 thousand and $361 thousand for the respective three months ended June 30, 2012 and 2011, and was $571 thousand and $692 thousand for the respective six months ended June 30, 2012 and 2011.
All of the leased property was acquired during the period from 1999 through 2002.
11
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. Investment in equipment and leases, net: - (continued)
Operating leases:
Property on operating leases consists of the following (in thousands):
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Balance December 31, 2011 | Additions | Reclassifications or Dispositions | Balance June 30, 2012 | |||||||||||||
Containers | $ | 19,678 | $ | — | $ | (170 | ) | $ | 19,508 | |||||||
Transportation, rail | 16,316 | — | (4,318 | ) | 11,998 | |||||||||||
Marine vessel | 4,793 | — | — | 4,793 | ||||||||||||
Other | 640 | — | — | 640 | ||||||||||||
41,427 | — | (4,488 | ) | 36,939 | ||||||||||||
Less accumulated depreciation | (33,560 | ) | (571 | ) | 3,656 | (30,475 | ) | |||||||||
Total | $ | 7,867 | $ | (571 | ) | $ | (832 | ) | $ | 6,464 |
The average estimated residual value for assets on operating leases was 10% of the assets’ original cost at both June 30, 2012 and December 31, 2011.
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 $623 thousand and $581 thousand for the respective three months ended June 30, 2012 and 2011, and was $1.2 million for each of the six months ended June 30, 2012 and 2011.
As of June 30, 2012 and December 31, 2011, the Company had no operating leases in non-accrual status.
Direct financing leases:
As of June 30, 2012, the investment in direct financing leases primarily consists of railcars and manufacturing equipment. At December 31, 2011, such investment consisted of railcars as well as construction and manufacturing equipment.
The components of the Company’s investment in direct financing leases as of June 30, 2012 and December 31, 2011 are as follows (in thousands):
![]() | ![]() | ![]() | ||||||
June 30, 2012 | December 31, 2011 | |||||||
Total minimum lease payments receivable | $ | 128 | $ | 248 | ||||
Estimated residual values of leased equipment (unguaranteed) | 52 | 54 | ||||||
Investment in direct financing leases | 180 | 302 | ||||||
Less unearned income | (13 | ) | (46 | ) | ||||
Net investment in direct financing leases | $ | 167 | $ | 256 |
There were no net investments in direct financing leases in non-accrual status as of June 30, 2012 and December 31, 2011.
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ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. Investment in equipment and leases, net: - (continued)
At June 30, 2012, the aggregate amount of future lease payments is as follows (in thousands):
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Operating Leases | Direct Financing Leases | Total | ||||||||||
Six months ending December 31, 2012 | $ | 842 | $ | 80 | $ | 922 | ||||||
Year ending December 31, 2013 | 1,053 | 48 | 1,101 | |||||||||
2014 | 670 | — | 670 | |||||||||
2015 | 309 | — | 309 | |||||||||
2016 | 179 | — | 179 | |||||||||
2017 | 179 | — | 179 | |||||||||
Thereafter | 75 | — | 75 | |||||||||
$ | 3,307 | $ | 128 | $ | 3,435 |
5. 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 for providing administrative services to the Company. Administrative services provided include Company accounting, investor relations, legal counsel and lease and equipment documentation. AFS is not reimbursed for services 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 on behalf of the Managing Member. Acquisition services, equipment management, lease administration and asset disposition services are performed by ALC; investor relations, communications 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 managed assets, number of investors or contributed capital based upon the type of cost incurred.
During the three and six months ended June 30, 2012 and 2011, AFS and/or affiliates earned fees and commissions, and billed for reimbursements, pursuant to the Operating Agreement as follows (in thousands):
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Asset management fees to Managing Member | $ | 40 | $ | 48 | $ | 89 | $ | 92 | ||||||||
Cost reimbursements to Managing Member | 73 | — | 289 | 679 | ||||||||||||
$ | 113 | $ | 48 | $ | 378 | $ | 771 |
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. For the year ending December 31, 2012, it is not anticipated that the amount of reimbursable expenses billed to the Fund will exceed either the annual or the cumulative limitations. Such is reflective of the continued diminishing Company asset base over which reimbursements are calculated.
13
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. 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.
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.
7. Gain contingencies:
ATEL filed a claim on behalf of certain of its Funds for the under-reporting of revenue by a fleet manager of three marine vessels, seeking to recover an approximate $2.8 million for the years 2005 – 2007 (of which the Company’s portion is an approximate $350 thousand). 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. The trial date for this matter has been rescheduled several times, and the suit has now started trial as of the end of July 2012 under a newly-appointed Federal Judge. The outcome of this claim remains uncertain.
8. Members’ capital:
As of June 30, 2012 and December 31, 2011, 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 Limited Liability Company Operating Agreement. 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.
There were no distributions paid to the Other Members during the three and six months ended June 30, 2012 and 2011.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Statements contained in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Form 10-Q, which are not historical facts, may be forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. 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 Fund’s performance is also subject to risks relating to the value of its equipment at the end of its leases, which may be affected by the condition of the equipment, technological obsolescence and the markets for new and used equipment at the end of lease terms. Investors are cautioned not to attribute undue certainty to these forward-looking statements, which speak only as of the date of this Form 10-Q. We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events, other than as required by law.
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 June 30, 2012, the Company continues in its liquidation phase. Accordingly, assets related to leases that mature will be returned to inventory and most likely will be 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
The three months ended June 30, 2012 versus the three months ended June 30, 2011
The Company had net income of $506 thousand and $695 thousand for the three months ended June 30, 2012 and 2011, respectively. The results for the second quarter of 2012 reflect a decrease in total revenues when compared to the prior year period.
Revenues
Total revenues for the second quarter of 2012 decreased by $188 thousand, or 12%, as compared to the prior year period. The net decrease in total revenues was largely due to decreases in both operating and direct financing lease revenues.
The decrease in operating lease revenues totaled $169 thousand and was primarily attributable to run-off of the portfolio, which included the termination of a significant lease at the end of the first quarter of 2012. Operating lease revenues also declined as a result of lease asset sales since June 30, 2011. The decrease in direct financing lease revenues totaled $18 thousand and was likewise attributable to run-off of the portfolio.
15
Expenses
Total operating expenses for the second quarter of 2012 were virtually unchanged when compared to the prior year period. Certain individual expense items did, however, have significant fluctuations of which the most notable were decreases in depreciation expense and railcar maintenance costs of $102 thousand and $49 thousand, respectively. Such decreases were partially offset by increases in costs reimbursed to AFS, vessel maintenance, and taxes on income and franchise fees totaling $73 thousand, $48 thousand and $26 thousand, respectively.
The decline in depreciation expense was mainly due to an increase in the number of assets that have been fully depreciated since June 30, 2011, combined with run-off and sales of lease assets. Railcar maintenance costs decreased primarily as a result of the increase in the number of railcars moved into off-lease inventory during the current year period.
The increase in costs reimbursed to AFS reflects actual current quarter billing. Whereas in 2011, the maximum amount of allowable annual costs reimbursable to AFS was billed and paid in the first quarter of 2011. As such, the Company did not record an expense during the second quarter of 2011 or for the remainder of that year. Marine vessel operating costs were higher as a result of increased vessel activity; and, taxes on income and franchise fees were higher largely due to a period over period increase in estimated tax payments and liabilities.
The six months ended June 30, 2012 versus the six months ended June 30, 2011
The Company had net income of $928 thousand and $799 thousand for the six months ended June 30, 2012 and 2011, respectively. The results for the first six months of 2012 reflect a decrease in total operating expense offset, in part, by a decrease in total revenues when compared to the prior year period.
Revenues
Total revenues for the first half of 2012 decreased by $280 thousand, or 9%, as compared to the prior year period. The net decrease in total revenues was comprised of decreases in gain on sales of assets and revenues from both operating and direct financing leases.
Gain on sales of lease assets declined by $188 thousand largely due to the lower number of railcars and containers sold during the current year period. The $211 thousand of gains realized during the first six months of 2011 were derived from the sale of 28 railcars and containers. By comparison, only three railcars and eight containers were sold during the current year period.
The decrease in operating lease revenues totaled $60 thousand and was primarily attributable to run-off of the portfolio, which included the termination of a significant lease at the end of the first quarter of 2012. Operating lease revenues also declined as a result of lease asset sales since the beginning of 2011. Such decreases in operating lease revenues were partially offset by higher rental income derived from the Fund’s marine vessel, which was in drydock status for a portion of the prior year period.
Finally, direct financing lease revenues decreased by $32 thousand primarily due to run-off of the portfolio.
Expenses
Total operating expenses for the first half of 2012 decreased by $409 thousand, or 17%, as compared to the prior year period. The net decrease in total operating expenses was primarily due to reductions in cost reimbursements to AFS, depreciation expense, and railcar maintenance costs offset, in part, by increases in vessel maintenance costs, other expense, and taxes on income and franchise fees.
Costs reimbursed to AFS decreased by $390 thousand as the Fund no longer has the accumulation of reimbursable administrative expenses in excess of the limitations as defined in the Operating Agreement. As such, the costs reimbursed to AFS during the first half of 2012 only represent current period charges. It is not anticipated that any further billings to the Fund will equal or exceed the annual or cumulative reimbursable expense limitation. Depreciation expense was reduced by $121 thousand largely due to run-off of the asset portfolio, sales of lease assets and an increase in the number of assets that have been fully depreciated since June 30, 2011. Finally, railcar maintenance costs decreased by $60 thousand primarily as a result of the increase in the number of railcars moved into off-lease inventory during the current year period.
16
The aforementioned decreases in expenses were partially offset by increases in vessel maintenance costs, other expense and taxes on income and franchise fees totaling $80 thousand, $42 thousand and $38 thousand, respectively. The increase in vessel maintenance costs was primarily due to increased marine vessel activity as such vessel was in dry dock status for a portion of the prior year period. Other expense increased largely due to increases in railcar storage fees, railcar inspection fees, and printing and copying costs related to investor communication. Moreover, taxes on income and franchise fees were higher largely due to a period over period increase in estimated tax payments and liabilities.
Capital Resources and Liquidity
At June 30, 2012 and December 31, 2011, the Company’s cash and cash equivalents totaled $2.2 million and $925 thousand, 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 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.
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.
Cash Flows
The following table sets forth summary cash flow data (in thousands):
![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Net cash provided by (used in): | ||||||||||||||||
Operating activities | $ | 789 | $ | 503 | $ | 1,165 | $ | 1,105 | ||||||||
Investing activities | 90 | 70 | 147 | (106 | ) | |||||||||||
Financing activities | — | — | — | — | ||||||||||||
Net increase in cash and cash equivalents | $ | 879 | $ | 573 | $ | 1,312 | $ | 999 |
The three months ended June 30, 2012 versus the three months ended June 30, 2011
During the three months ended June 30, 2012 and 2011, the Company’s primary source of liquidity was cash flow from its portfolio of operating and direct financing lease contracts. In addition, the Company realized proceeds from sales or dispositions of equipment totaling $49 thousand and $42 thousand during the respective three-month periods ended June 30, 2012 and 2011.
During the same comparative periods, cash was primarily used to pay invoices related to management fees and expenses, and other payables. As the Fund is in its liquidation phase, any future financing activity is anticipated to only include distributions to Members.
17
The six months ended June 30, 2012 versus the six months ended June 30, 2011
During the six months ended June 30, 2012 and 2011, the Company’s primary source of liquidity was cash flow from its portfolio of operating and direct financing lease contracts. In addition, the Company realized proceeds from sales or dispositions of equipment totaling $61 thousand and $299 thousand during the respective six months ended June 30, 2012 and 2011.
During the same comparative periods, cash was primarily used to pay invoices related to management fees and expenses, and other payables. During the first half of 2011, the Company used $460 thousand to pay for capitalized improvements on its marine vessel.
Distributions
The Company commenced periodic distributions, based on cash flows from operations, beginning with the month of January 1999. During its liquidation phase, the rates and frequency of periodic distributions paid by the Fund are solely at the discretion of the Managing Member.
Commitments and Contingencies and Off-Balance Sheet Transactions
Commitments and Contingencies
At June 30, 2012, 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 filed a claim on behalf of certain of its Funds for the under-reporting of revenue by a fleet manager of three marine vessels, seeking to recover an approximate $2.8 million for the years 2005 – 2007 (of which the Company’s portion is an approximate $350 thousand). 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. The trial date for this matter has been rescheduled several times, and the suit has now started trial as of the end of July 2012 under a newly-appointed Federal Judge. The outcome of this claim remains uncertain.
Off-Balance Sheet Transactions
None.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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. On an on-going basis, the Company evaluates its estimates, which are based upon historical experiences, market trends and financial forecasts, and upon various other assumptions that management believes to be reasonable under the circumstances and at that certain point in time. Actual results may differ, significantly at times, from these estimates under different assumptions or conditions.
The Company’s critical accounting policies are described in its Annual Report on Form 10-K for the year ended December 31, 2011. There have been no material changes to the Company’s critical accounting policies since December 31, 2011.
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Item 4. 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, which 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 applicable to the Company, were effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
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 June 30, 2012 that have materially affected, or are reasonably likely to materially affect, the Managing Member’s internal control over financial reporting, as is applicable to the Company.
19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In the ordinary course of conducting business, there may be certain claims, suits, and complaints filed against the Company. In the opinion of management, the outcome of such matters, if any, will not have a material impact on the Company’s financial position or results of operations. No material legal proceedings are currently pending against the Company or against any of its assets.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
Documents filed as a part of this report:
1. | Financial Statement Schedules |
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable, and therefore have been omitted.
2. | Other Exhibits |
31.1 Rule 13a-14(a)/ 15d-14(a) Certification of Dean L. Cash
31.2 Rule 13a-14(a)/ 15d-14(a) Certification of Paritosh K. Choksi
32.1 Certification Pursuant to 18 U.S.C. section 1350 of Dean L. Cash
32.2 Certification Pursuant to 18 U.S.C. section 1350 of Paritosh K. Choksi
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 13, 2012
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
(Registrant)
![]() | ![]() | |
By: ATEL Financial Services, LLC |
![]() | ![]() | |
By: /s/ Dean L. Cash | ||
By: /s/ Paritosh K. Choksi | ||
By: /s/ Samuel Schussler |
21