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, 2005
¨ | 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 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 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 ¨ No x
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/A or any amendment to this Form 10-K/A. ¨
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 x
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: Inapplicable
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.) ¨
State the issuer’s revenues for the most recent fiscal year: $13,656,269
The number of Limited Liability Company Units outstanding as of December 31, 2005 was 13,570,188.
DOCUMENTS INCORPORATED BY REFERENCE
Prospectus dated December 7, 1998, filed pursuant to Rule 424(b) (Commission File No. 333-62477) is hereby incorporated by reference into Part IV hereof.
PART I
General Development of Business
ATEL Capital Equipment Fund VIII, LLC (the “Company”) was formed under the laws of the State of California in July 1998. The Company was formed for the purpose of engaging in the sale of limited liability company investment units and acquiring equipment to engage in equipment leasing and sales activities. The Managing Member of the Company is ATEL Financial Services, LLC (“AFS”), a California limited liability corporation. Prior to converting to a limited liability company structure, the Managing Member was formerly known as ATEL Financial Corporation. The Company may continue until December 31, 2019.
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 $1,200,000) 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 (leasing activities). Total gross contributions in the amount of $135,701,880 (13,570,188 units) were received as of November 30, 2000, $500 of which represented the Initial Member’s capital investment, $100 of which represented AFS’ capital investment and $135,701,380 of which represented continuing interest of the Other Members. The offering was terminated on November 30, 2000.
As of December 31, 2005 13,570,188 Units ($135,701,880) were issued and outstanding.
The Company’s principal objectives are to invest in a diversified portfolio of equipment that will (i) preserve, protect and return the Company’s invested capital; (ii) generate regular distributions to the members of cash from operations and cash from sales or refinancing, with any balance remaining after certain minimum distributions to be used to purchase additional equipment during the reinvestment period (“Reinvestment Period”), ending December 31, 2007 and (iii) provide additional distributions following the Reinvestment Period and until all equipment has been sold. The Company is governed by its Limited Liability Company Operating Agreement (“Operating Agreement”).
The Company has the ability to incur debt to finance the purchase of a portion of its equipment portfolio. The amount of borrowings in connection with any equipment acquisition transaction will be 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 intends to borrow amounts equal to such maximum debt level in order to fund a portion of its equipment acquisitions, although there can be no assurance that such financing will continue to be available to the Company in the future.
As of December 31, 2005, the amounts of such equipment acquisition debt was $2,000,000 as discussed above and further discussed in both Management’s Discussion and Analysis of Financial Condition and Results of Operations, Capital Resources and Liquidity, Item 7, and footnote 8 to the financial statements as set forth in Part II, Item 8.
The Company may also incur long-term recourse debt in the form of asset securitization transactions in order to obtain lower interest rates or other more desirable terms than may be available for individual non-recourse debt transactions. In an “asset securitization,” the lender would receive a security interest in a specified pool of “securitized” Company assets or a general lien against all of the otherwise unencumbered assets of the Company. It is the intention of AFS to use asset securitization primarily to finance assets leased to those creditors which, in the opinion of AFS, have a relatively lower potential risk of lease default than those lessees with equipment financed with non-recourse debt. AFS expects that an asset securitization financing would involve borrowing at a variable interest rate based on an established reference rate. AFS would seek to limit the Company’s exposure to increases in the interest rate by engaging in hedging transactions that would effectively fix the interest rate obligation.
As of December 31, 2005, the amount of such securitized borrowings was $4,524,000 as discussed above and further discussed in footnote 9 to the financial statements as set forth in Part II, Item 8.
Narrative Description of Business
The Company has acquired and intends to acquire various types of equipment and to lease such equipment pursuant to “Operating” leases and “High Payout” leases, whereby “Operating” leases are defined as being leases in which the minimum lease payments during the initial lease term do not recover the full cost of the equipment and “High Payout” leases recover at least 90% of such cost. It is the intention of AFS that a majority of the aggregate purchase price of equipment will represent equipment leased under “High Payout” leases upon final investment of the Net Proceeds of the Offering and that no more than 20% of the aggregate purchase price of equipment will be invested in equipment acquired from a single manufacturer.
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The Company’s intent is to only purchase equipment for which a lease exists or for which a lease will be entered into at the time of the purchase.
From inception through December 31, 2005, the Company had purchased equipment with a total acquisition price of $246,539,790.
The Company’s objective is to lease a minimum of 75% of the equipment acquired with the net proceeds of the offering to lessees that (i) have an aggregate credit rating by Moody’s Investor service, Inc. of Baa or better, or the credit equivalent as determined by AFS, with the aggregate rating weighted to account for the original equipment cost for each item leased or (ii) are established hospitals with histories of profitability or municipalities. The balance of the original equipment portfolio may include equipment leased to lessees which, although deemed creditworthy by AFS, would not satisfy the general credit rating criteria for the portfolio. In excess of 75% of the equipment acquired with the net proceeds of the offering (based on original purchase cost) has been leased to lessees with an aggregate credit rating of Baa or better or to such hospitals or municipalities, as described in (ii) above.
During 2005, 2004, and 2003, certain lessees generated significant portions of the Company’s operating lease revenues as follows:
| | | | | | | | | | | |
Lessee | | Type of Equipment | | Percentage of Total Lease Revenues (Restated) | |
| | | | 2005 | | | 2004 | | | 2003 | |
Overnite Transportation Company | | Tractors and trailers | | * | | | 10 | % | | 10 | % |
GE Aircraft Engines | | Manufacturing | | * | | | 10 | % | | * | |
Emery Worldwide Airlines | | Aircraft | | * | | | * | | | 13 | % |
Tal International Container | | Railcars | | 18 | % | | * | | | * | |
These percentages are not expected to be comparable in future periods.
The equipment leasing industry is highly competitive. Equipment manufacturers, corporations, partnerships and others offer users an alternative to the purchase of most types of equipment with payment terms that vary widely depending on the lease term and type of equipment. The ability of the Company to keep the equipment leased and/or operating and the terms of the 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.
AFS will seek to limit the amount invested in equipment to any single lessee to not more than 20% of the aggregate purchase price of equipment owned at any time during the Reinvestment Period.
The business of the Company is not seasonal.
The Company has no full time employees. AFS’ employees provide the services the Company requires to effectively operate. The cost of these services is reimbursed by the Company to AFS per the Operating Agreement.
Equipment Leasing Activities - The Company has acquired a diversified portfolio of equipment. The equipment has been leased to lessees in various industries. The following tables set forth the types of equipment acquired by the Company through December 31, 2005 and the industries to which the assets have been leased. The Company has purchased certain assets subject to existing non-recourse debt. For financial statement purposes, non-recourse debt has been offset against the investment in certain direct finance leases where the right of offset exists.
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| | | | | | |
Asset Types | | Purchase Price Excluding Acquisition Fees | | Percentage of Total Acquisitions | |
Transportation, rail | | $ | 59,802,371 | | 24.25 | % |
Manufacturing | | | 44,048,583 | | 17.87 | % |
Aircraft | | | 38,535,439 | | 15.63 | % |
Transportation, other | | | 46,986,721 | | 19.06 | % |
Gas compressors | | | 13,848,465 | | 5.62 | % |
Materials handling | | | 11,018,547 | | 4.47 | % |
Point of sale / office automation | | | 8,677,566 | | 3.52 | % |
Storage tanks | | | 6,712,090 | | 2.72 | % |
Marine vessels | | | 4,723,409 | | 1.92 | % |
Other | | | 12,186,599 | | 4.94 | % |
| | | | | | |
| | $ | 246,539,790 | | 100.00 | % |
| | | | | | |
Industry of Lessee | | Purchase Price Excluding Acquisition Fees | | Percentage of Total Acquisitions | |
Transportation, rail | | $ | 59,802,371 | | 24.25 | % |
Transportation, air | | | 38,535,439 | | 15.63 | % |
Manufacturing, other | | | 34,889,583 | | 14.15 | % |
Transportation, other | | | 27,245,340 | | 11.05 | % |
Transportation, containers | | | 21,228,750 | | 8.61 | % |
Manufacturing, electronics | | | 20,901,071 | | 8.48 | % |
Retail | | | 18,056,010 | | 7.32 | % |
Natural gas | | | 13,848,465 | | 5.62 | % |
Other | | | 12,032,761 | | 4.88 | % |
| | | | | | |
| | $ | 246,539,790 | | 100.00 | % |
Through December 31, 2005, the Company has disposed of certain leased assets as set forth below:
| | | | | | | | | |
Asset Types | | Original Equipment Cost Excluding Acquisition Fees | | Sale Price | | Excess of Rents Over Expenses * |
Materials Handling | | $ | 6,795,563 | | $ | 2,008,954 | | $ | 6,504,797 |
Transportation, Rail | | | 19,365,239 | | | 18,081,914 | | | 9,817,439 |
Point of Sale/Office Automation | | | 12,161,640 | | | 2,392,541 | | | 13,086,353 |
Manufacturing | | | 39,402,760 | | | 19,110,049 | | | 37,627,061 |
Transportation, Other | | | 20,529,738 | | | 7,577,611 | | | 18,462,655 |
Storage Tanks | | | 6,712,090 | | | 6,800,000 | | | 1,035,726 |
Aircraft | | | 38,535,439 | | | 8,666,648 | | | 16,856,254 |
Photo Processing Equipment | | | 10,781,578 | | | 6,555,101 | | | 9,617,910 |
Other | | | 2,514,658 | | | 1,106,070 | | | 2,195,081 |
| | | | | | | | | |
| | $ | 156,798,705 | | $ | 72,298,888 | | $ | 115,203,276 |
* | Includes only those expenses directly related to the production of the related rents. |
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 will acquire leasing transactions during the period ending 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 will seek 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, 2005, see footnote 5 to the financial statements, Investments in equipment and leases, net, as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
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The Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 131 “Disclosures about Segments of an Enterprise and Related Information.” SFAS No. 131 establishes annual and interim standards for operating segments of a company. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenue, and its major customers. 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 geographic revenues and assets and major customers, see footnote 2 to the financial statements, Summary of significant accounting policies, as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
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.
In the ordinary course of conducting business, there may be certain claims, suits, and complaints filed against the Company. In the opinion of management, the outcome of such matters, if any, will not have a material impact on the Company’s consolidated financial position or results of operations. No material legal proceedings are currently pending against the Company or against any of its assets.
Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
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PART II
Item 5. | MARKET FOR REGISTRANT’S LIMITED LIABILITY COMPANY UNITS AND RELATED MATTERS |
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, 2005, a total of 3,376 investors were holders of record of Units in the Company.
ERISA Valuation
In order to permit ERISA fiduciaries who hold Units to satisfy their annual reporting requirements, AFS estimated the value per Unit of the Company’s assets as of December 31, 2005. AFS calculated the estimated liquidation proceeds that would be realized by the Company, assuming an orderly disposition of all of the Company’s assets as of January 1, 2006. The estimates were based on the amount of remaining lease payments on existing Company leases, and the estimated residual values of the equipment held by the Company upon the termination of those leases. This valuation was based solely on AFS’s perception of market conditions and the types and amounts of the Company’s assets. No independent valuation was sought.
After calculating the aggregate estimated disposition proceeds, AFS then calculated the portion of the aggregate estimated value of the Company assets that would be distributed to Unit holders on liquidation of the Company, and divided the total so distributable by the number of outstanding Units. As of December 31, 2005 the value of the Company’s assets, calculated on this basis, was approximately $4.00 per Unit. The foregoing valuation was performed solely for the ERISA purposes described above. There is no market for the Units, and, accordingly, this value does not represent an estimate of the amount a Unit holder would receive if he were to seek to sell his Units. Furthermore, there can be no assurance as to the amount the Company may actually receive if and when it seeks to liquidate its assets, or the amount of lease payments and equipment disposition proceeds it will actually receive over the remaining term of the Company.
Distributions
The record holders of Units are entitled to certain distributions as provided under the Operating Agreement.
AFS has sole discretion in determining the amount of distributions; provided, however, that AFS will not reinvest in equipment, but will distribute, subject to payment of any obligations of the Company, such available cash from operations and cash from sales or refinancing as may be necessary to cause total distributions to the Members for each year during the Reinvestment Period to equal an amount between $0.80 and $1.00 per Unit, which was to be determined by AFS. In 2001, AFS determined that amount to be $0.91 per Unit. The Company commenced regular distributions, based on cash flows from operations, beginning with the month of January 1999.
The rate for monthly distributions from 2005 operations was $0.0758 per Unit for January through December. The distributions were paid in February through December 2005 and in January 2006. During 2005, the Company declared thirteen distributions beginning in February and ending in December 2005 compared to twelve distributions in 2004 and 2003. The rate for quarterly distribution paid in April, July and October 2005 and in January 2006 was $0.2275 per Unit. Distributions were from 2005 cash flows from operations.
The rate for monthly distributions from 2004 operations was $0.0758 per Unit for January through December. The distributions were paid in February through December 2004 and in January 2005. The rate for quarterly distribution paid in April, July and October 2004 and in January 2005 was $0.2275 per Unit. Distributions were from 2004 cash flows from operations.
The rate for monthly distributions from 2003 operations was $0.0758 per Unit for January through December. The distributions were paid in February through December 2003 and in January 2004. The rate for quarterly distribution paid in April, July and October 2003 and in January 2004 was $0.2275 per Unit. Distributions were from 2003 cash flows from operations.
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The following table presents summarized information regarding distributions to members other than the Managing Member (Other Members).
| | | | | | | | | | | | | | | | | | | |
| | 2005 | | | 2004 | | 2003 | | | 2002 | | | 2001 | |
Net income (loss) per Unit, based on weighted average Unit outstanding | | $ | (0.15 | ) | | $ | 0.29 | | $ | (0.57 | ) | | $ | (0.31 | ) | | $ | (0.03 | ) |
Return of investment | | | 1.16 | | | | 0.62 | | | 1.48 | | | | 1.22 | | | | 0.94 | |
| | | | | | | | | | | | | | | | | | | |
Distributions declared per Unit, based on weighted average Other Member Units outstanding | | | 1.01 | | | | 0.91 | | | 0.91 | | | | 0.91 | | | | 0.91 | |
Differences due to timing of distributions | | | (0.10 | ) | | | — | | | — | | | | — | | | | 0.01 | |
| | | | | | | | | | | | | | | | | | | |
Actual distribution paid per Unit | | $ | 0.91 | | | $ | 0.91 | | $ | 0.91 | | | $ | 0.91 | | | $ | 0.92 | |
| | | | | | | | | | | | | | | | | | | |
Item 6. | SELECTED FINANCIAL DATA |
The following table presents selected financial data of the Company at December 31, 2005, 2004, 2003, 2002, and 2001 and for the years then ended. This financial data should be read in conjunction with the financial statements and related notes included under Part II Item 8.
| | | | | | | | | | | | | | | | | | | |
| | 2005 | | | 2004 | | 2003 | | | 2002 | | | 2001 | |
Gross revenues | | $ | 13,656,269 | | | $ | 28,082,971 | | $ | 28,693,903 | | | $ | 32,783,182 | | | $ | 43,794,097 | |
Net income (loss) | | $ | (863,470 | ) | | $ | 4,975,349 | | $ | (6,742,083 | ) | | $ | (3,178,988 | ) | | $ | 539,152 | |
Weighted average of Other Members’ Units | | | 13,570,188 | | | | 13,570,188 | | | 13,570,188 | | | | 13,570,188 | | | | 13,570,188 | |
Net income (loss) allocated to Other Members | | $ | (1,970,462 | ) | | $ | 3,974,194 | | $ | (7,743,062 | ) | | $ | (4,180,157 | ) | | $ | (465,764 | ) |
Net income (loss) per Other Members’ Units, based on weighted average of Other Members’ Units outstanding | | $ | (0.15 | ) | | $ | 0.29 | | $ | (0.57 | ) | | $ | (0.31 | ) | | $ | (0.03 | ) |
Distributions per Other Members’ Units, based on weighted average of Other Members’ Units outstanding | | $ | 1.01 | | | $ | 0.91 | | $ | 0.91 | | | $ | 0.91 | | | $ | 0.91 | |
Total assets | | $ | 38,100,509 | | | $ | 63,877,176 | | $ | 109,972,043 | | | $ | 153,688,187 | | | $ | 184,765,395 | |
Non-recourse and other long-term debt | | $ | 5,845,767 | | | $ | 19,231,946 | | $ | 46,555,335 | | | $ | 68,614,855 | | | $ | 91,383,964 | |
Total Members’ capital | | $ | 26,481,443 | | | $ | 41,518,905 | | $ | 47,474,885 | | | $ | 65,325,352 | | | $ | 82,533,985 | |
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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, economic recession and changes in general economic conditions, including, fluctuations in demand for equipment, lease rates, and interest rates, may result in delays in investment and reinvestment, 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.
Capital Resources and Liquidity
The Company commenced its offering of Units on December 7, 1998. On January 13, 1999, the Company commenced operations in its primary business (leasing activities). As of November 30, 2000, the offering was concluded. Total proceeds of the offering were $135,701,880. The Company’s public offering provided for a total maximum capitalization of $150,000,000.
The liquidity of the Company will vary in the future, increasing to the extent cash flows from leases and proceeds of asset sales exceed expenses, and decreasing as lease assets are acquired, as distributions are made to the Other Members and to the extent expenses exceed cash flows from leases and proceeds from asset sales.
As another source of liquidity, the Company has and is expected to continue having contractual obligations with a diversified group of lessees for fixed lease terms at fixed rental amounts. 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 re-leasing or selling the equipment as it comes off lease.
Throughout the Reinvestment Period, the Company anticipates reinvesting a portion of lease payments from assets owned in new leasing transactions. Such reinvestment will occur only after the payment of all current obligations, including debt service (both principal and interest), the payment of management fees to AFS and providing for cash distributions to the Other Members.
The Company participates with AFS and certain of its affiliates, as defined in the Operating Agreement, in a financing arrangement (the “Master Terms Agreement”). The Master Terms Agreement is comprised of: (1) a working capital term loan facility to AFS, (2) an acquisition facility, (3) a warehouse facility to AFS, and (4) a venture facility available to an affiliate. The Master Terms Agreement is with a group of financial institutions and includes certain financial and non-financial covenants. The Master Terms Agreement totals $75,000,000 and expires in June 2007. The availability of borrowings to the Company under the Master Terms Agreement is reduced by the amount outstanding on any of the above mentioned facilities. As of December 31, 2005, the Company had borrowed $2,000,000 under the acquisition facility.
As of December 31, 2005 borrowings under the Master Terms Agreement were as follows:
| | | | |
Total amount available under the Master Terms Agreement | | $ | 75,000,000 | |
Amount borrowed by the Company under the acquisition facility | | | (2,000,000 | ) |
Amounts borrowed by affiliated partnerships and limited liability companies under the acquisition facility | | | (10,500,000 | ) |
| | | | |
Total remaining available under the Master Terms Agreement | | $ | 62,500,000 | |
| | | | |
The Company is contingently liable for principal payments under the warehouse facility component of the Master Terms Agreement. The Company is contingently liable because borrowings are recourse, jointly and severally, to the extent of the pro-rata share of the Company’s net worth as compared to the aggregate net worth of certain of: (1) the affiliated partnerships and limited liability companies of the Company, and (2) AFS and ATEL Leasing Corporation (“ALC”) both of which are 100% liable. As of December 31, 2005, there were no borrowings under the warehouse facility, the working capital term loan or the venture facility. However, the Company and its affiliates pay an annual commitment fee to have access to all facilities under the Master Terms Agreement.
The interest rate on the Master Terms Agreement is based on either the LIBOR/Eurocurrency rate of one, two, three, or six month maturities plus a lender designated spread, or the bank’s prime rate (i.e., reference rate), which re-prices daily. Principal amounts of loans made under the Master Terms Agreement that are repaid may be re-borrowed on the terms and subject to the conditions set forth under the Master Terms Agreement. The effective interest rate on borrowings at December 31, 2005 ranged from 5.93% to 7.25%.
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Draws on the acquisition facility by any affiliated partnership and/or limited liability company borrower are secured by a blanket lien on that borrower’s assets, including but not limited to equipment and related leases.
To manage the warehousing facility for the holding of assets prior to allocation to specific investor programs, a Warehousing Trust Agreement has been entered into by the Company, AFS, ALC, and certain of the affiliated partnerships and limited liability companies. The warehousing facility is used to acquire and hold, on a short-term basis, certain lease transactions that meet the investment objectives of each of such entities. Each of the leasing programs sponsored by AFS and ALC currently in its acquisition stage is a pro rata participant in the Warehousing Trust Agreement, as described below. When a program no longer has a need for short term financing provided by the warehousing facility, it is removed from participation, and as new leasing investment entities are formed by AFS and ALC and commence their acquisition stages, these new entities will be added. As of December 31, 2005, the warehousing facility participants were ATEL Capital Equipment Fund VII, L.P., the Company, ATEL Capital Equipment Fund IX, LLC, ATEL Capital Equipment Fund X, LLC and ATEL Capital Equipment Fund XI, LLC. Pursuant to the Warehousing Trust Agreement, the benefit of the lease transaction assets, and the corresponding liabilities under the warehousing facility, inure to each of such entities based upon each entity’s pro-rata share in the warehousing trust estate. The “pro-rata share” is calculated as a ratio of the net worth of each entity over the aggregate net worth of all entities benefiting from the warehouse trust estate, excepting that the trustees, AFS and ALC, are both liable for their pro-rata shares of the obligations based on their respective net worth, and jointly liable for the pro rata portion of the obligations of each of the affiliated partnerships and limited liability companies participating under the warehousing facility. Transactions are financed through this warehousing facility only until the transactions are allocated to a specific program for purchase or are otherwise disposed by AFS and ALC. When a determination is made to allocate the transaction to a specific program for purchase by the program, the purchaser repays the debt associated with the asset, either with cash or by means of the acquisition facility, the asset is removed from the warehouse facility collateral, and ownership of the asset and any debt obligation associated with the asset are assumed solely by the purchasing entity.
The Master Terms Agreement discussed above includes certain financial and non-financial covenants applicable to each borrower. The Company and affiliates were not in compliance with non-financial covenants as of December 31, 2005. The Managing Member, on behalf of all borrowers, requested and received a waiver of this covenant from the financial institutions. The borrowing facility was repaid before the waiver expired and the Company was removed from the borrowing facility.
Throughout the reinvestment period ending December 31, 2007, the Company anticipates reinvesting a portion of lease payments from assets owned in new leasing transactions. Such reinvestment will occur only after the payment of all current obligations including debt service (both principal and interest), the payment of management and acquisition fees to AFS and providing for cash distributions to the other members.
AFS or an affiliate may purchase equipment in its own name, the name of an affiliate or the name of a nominee, a trust or otherwise and hold title thereto on a temporary or interim basis for the purpose of facilitating the acquisition of such equipment or the completion of manufacture of the equipment or for any other purpose related to the business of the Company, provided, however that: (i) the transaction is in the best interest of the Company; (ii) such equipment is purchased by the Company for a purchase price no greater than the cost of such equipment to AFS or affiliate (including any out-of-pocket carrying costs), except for compensation permitted by the Operating Agreement; (iii) there is no difference in interest terms of the loans secured by the equipment at the time acquired by AFS or affiliate and the time acquired by the Company; (iv) there is no benefit arising out of such transaction to AFS or its affiliate apart from the compensation otherwise permitted by the Operating Agreement; and (v) all income generated by, and all expenses associated with, equipment so acquired will be treated as belonging to the Company.
The Company currently has available adequate reserves to meet its immediate cash requirements and those of the next twelve months, but in the event those reserves were found to be inadequate, the Company would likely be in a position to borrow against its current portfolio to meet such requirements. AFS envisions no such requirements for operating purposes.
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.
If interest rates increase significantly, the lease rates that the Company can obtain on future leases will be expected to increase as the cost of capital is a significant factor in the pricing of lease financing. Leases already in place, for the most part, would not be affected by changes in interest rates. For detailed information on the Company’s debt obligations, see footnotes 7, 8 and 9 to the financial statements in Item 8.
Additionally, in 1999, the Company established a $40 million receivables funding program (which was subsequently increased to a maximum of $125 million in July 2000) with a receivables financing company that issues commercial paper rated A1 from Standard and Poor’s and P1 from Moody’s Investor Services. In this receivables funding program, the lenders received a general lien against all of the otherwise unencumbered assets of the Company. The program provided for borrowing at a variable interest
9
rate and requires the Company to enter into interest rate swap agreements with certain counterparties (also rated A1/P1) to mitigate the interest rate risk associated with a variable rate note. AFS believes that this program allowed the Company to avail itself of lower cost debt than that available for individual non-recourse debt transactions. The program expired as to new borrowings in January 2002. The receivables funding program terminated in January 2007.
In order to maintain the availability of the receivables funding program, the Company is required to make standby payments. These fees totaled $40,593 and $155,609 in 2005 and 2004, respectively, and are included in interest expense in the Company’s statement of operations.
Finally, the Company has access to certain sources of non-recourse debt financing, which the Company uses on a transaction basis as a means of mitigating credit risk. The non-recourse debt financing consists of a note payable to a financial institution. The note is due in varying quarterly and semi-annual payments. Interest on the note is at fixed at 4.96%. The note is secured by an assignment of lease payments and pledges of assets. At December 31, 2005, the carrying value of the pledged assets is $2,816,670. The note matures in 2007.
The Operating Agreement limits such borrowings to 50% of the total cost of equipment, in the aggregate.
The Company commenced regular distributions, based on cash flows from operations, beginning with the month of January 1999. See Items 5 and 6 for additional information regarding distributions.
At December 31, 2005, the Company had no commitments to purchase leased assets.
Cash Flows
2005 vs. 2004:
In 2005 and 2004, the Company’s primary source of cash from operations was the rents from operating lease activities. However, cash flow from operations decreased by $4,115,872 from $12,264,913 in 2004 to $8,149,041 in 2005. The decrease was primarily due to a decrease in operating lease and other revenue of $6,956,074 from $18,223,073 in 2004 to $11,266,999 in 2005. This decrease in revenue was offset, in part, by a decrease in cash paid for interest on debt as well as decreases in: (1) asset management fees to Managing Member, (2) insurance, (3) taxes on income and franchise fees, and (4) other expense. In 2005, cash paid for interest on debt decreased by $2,132,187 from $3,478,132 in 2004 to $1,345,945 in 2005. In 2005, asset management fees to Managing Member, insurance, taxes on income and franchise fees and other expense decreased by $1,098,937 to $991,099 from $2,090,036 in 2004.
In 2005 and 2004, the primary source of cash from investing activities was proceeds from sales of lease assets. However, cash provided from investing activities decreased by $23,337,397 from $39,968,341 in 2004 to $16,630,944 in 2005. The decrease was primarily due to a decrease in proceeds from sales of lease assets. In 2004, proceeds from sales of lease assets generated cash of $38,125,051 compared to $16,392,017 in 2005, a decrease of $21,733,034.
In 2005, the Company’s primary source of cash from financing activities was $8,000,000 in borrowings under the borrowing facility (see footnote 8). In 2004, the Company had no sources of cash from financing activities. In both years, the Company used cash in financing activities. However, cash used in financing activities decreased by $25,437,338 from a $50,171,927 use of cash in 2004 to a $24,734,589 use of cash in 2005. The Company used less cash in financing activities primarily due to the increased borrowings discussed above augmented by a net reduction in payments on long term debt, the line of credit and non-recourse debt of $17,437,210 from $36,823,389 of repayments in 2004 to $19,386,179 of repayments in 2005.
2004 vs. 2003:
In 2004 and 2003, the Company’s primary source of cash from operations was the rents from operating lease activities. However, cash flow from operations decreased by $6,728,123 from $18,993,036 in 2003 to $12,264,913 in 2004. The decrease was primarily due to a net decrease in operating lease and other revenue of $9,005,305 from $27,228,378 in 2003 to $18,223,073 in 2004. This net decrease in operating lease and other revenue was offset, in part, by a decrease in cash paid for interest on debt. In 2004, cash paid for interest on debt decreased by $1,772,878 to $3,478,132 in 2004 from $5,251,010 in 2003.
In 2004 and 2003, the primary source of cash from investing activities was proceeds from sales of lease assets. Cash provided from investing activities increased by $24,210,170 from $15,758,171 in 2003 to $39,968,341 in 2004. The increase was primarily due to an increase in proceeds from sales of lease assets. In 2003, proceeds from sales of lease assets generated cash of $13,964,820 compared to 2004 when proceeds generated $38,125,051, an increase of $24,160,231.
There were no new sources of cash from financing activities in 2004. In 2003, sources of cash from financing activities consisted of borrowings on the Company’s borrowing facility (see footnote 8) of $19,500,000 and proceeds from non-recourse debt of $2,563,149 compared to no proceeds in 2004. In 2004, cash used in financing activities increased by $13,665,825 from $36,506,102 in 2003 to $50,171,927 in 2004. This increase in cash usage was primarily due to a decrease in proceeds from borrowings as discussed above, which was offset by a net decrease in repayments on long term debt, the borrowing facility and non-recourse debt of $8,399,280 from $45,222,669 in 2003 to $36,823,389 in 2004.
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Results of Operations
Cost reimbursements to the Managing Member are based on costs incurred by AFS in performing administrative services for the Company that are allocated to each Company that AFS manages based on certain criteria such as existing or new leases, number of investors or equity depending on the type of cost incurred.
As of December 31, 2005 and 2004, 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:
| | | | | | |
| | 2005 | | | 2004 | |
Transportation, rail | | 54 | % | | 38 | % |
Transportation, containers | | 28 | % | | 17 | % |
Transportation, air | | * | | | 12 | % |
Natural gas | | * | | | 11 | % |
Manufacturing, other | | * | | | 10 | % |
The Company had a nominal amount of equipment purchases on operating leases during 2005. Below is a table that summarizes utilization percentages for leased assets during the years ended December 31, 2005, 2004 and 2003:
| | | | | | | | | |
| | 2005 | | | 2004 | | | 2003 | |
Equipment utilization | | 89 | % | | 84 | % | | 88 | % |
It is the Company’s objective to maintain a 100% utilization rate for all equipment purchased in that year. All equipment transactions were acquired subject to binding lease commitments, so equipment utilization is expected to remain high throughout this reinvestment stage, which ends six years after the end of the Company’s public offering. Initial lease terms will generally be from 36 to 120 months, and as these initial leases terminate, the Company will attempt to re-lease or sell the equipment. Utilization rates may therefore decrease during the liquidation stage of the Company, which will follow its reinvestment stage.
2005 vs. 2004:
The primary source of revenues in both years was rents from operating leases and gain on sales of assets. However, rents from operating leases, direct financing leases and gain on sales of assets have continued to decrease. As a result of direct financing leases coming to term, revenues from direct financing leases decreased by $1,001,746 to $176,456 in 2005 from $1,178,202 in 2004. As a result of asset sales, revenues from operating leases decreased by $6,444,476 from $17,699,022 in 2004 to $11,254,546 in 2005. As a result of fewer asset sales in 2005 versus 2004, gain on sales of assets decreased by $6,502,178 from $8,675,502 in 2004 to $2,173,324 in 2005. Operations resulted in a net loss of $863,470 in 2005 versus a net income of $4,975,349 in 2004. This $5,838,819 decrease in operating results was primarily the result of a decrease in total revenue of $14,426,702 from $28,082,971 in 2004 to $13,656,269 in 2005. This reduction in revenue was offset, in part, by a reduction in operating expenses and an increase in other income, net. Operating expenses decreased by $8,245,982 from $23,735,092 in 2004 to $15,489,110 in 2005. The decrease in operating expenses was primarily a result of decreases in depreciation and amortization, interest expense, asset management fees, insurance, taxes on income and franchise fees and other of $10,860,810 from $21,343,692 in 2004 to $10,482,882 in 2005. Additionally, these expense reductions were augmented by the Company generating other income, net of $969,371 in 2005 compared to other income, net of $627,470 in 2004, an increase of $341,901 to operating results. Offsetting these reductions in operating expenses and contribution of other income, net were increases in the provision for doubtful accounts as well as the provision for losses and impairment. The provision for doubtful accounts increased by $223,068 from a net adjustment decreasing the allowance for doubtful accounts of $173,000 in 2004 to a net adjustment increasing the allowance for doubtful accounts of $50,068 in 2005.
Management periodically reviews the carrying values of its assets on leases and assets held for lease or sale. As a result of the review, management determined that the fair value of certain manufacturing equipment and an aircraft had declined in value to the extent that the carrying values had become impaired. The fair value of these assets was determined based on the sum of the discounted estimated future cash flows of the assets. A charge to operations was recorded for the decline in value of certain manufacturing equipment in the amount of $1,273,917 and a certain aircraft in the amount of $2,306,328 for the year ended December 31, 2005. These two provisions totaled $3,580,245, an increase of $2,493,933 from a provision of $1,086,312 in 2004. See footnote 4 to the financial statements, Reserves, impairments and provisions for doubtful accounts as set forth in Part II, Item 8, Financial Statements and Supplementary Data, for additional information regarding impairment losses.
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2004 vs. 2003:
The primary sources of revenues in 2004 were operating lease and gain on sales of assets compared to primarily operating leases in 2003. Rents from operating leases decreased by $9,384,034 from $27,083,056 in 2003 to $17,699,022 in 2004 as a result of asset sales. These asset sales resulted in an increase in gain on sales of assets of $8,080,203 from $595,299 in 2003 to $8,675,502 in 2004. Overall, total revenue decreased by $610,932 from $28,693,903 in 2003 to $28,082,971 in 2004.
Offsetting this decrease in revenue was a decrease of $11,636,443 in operating expenses from $35,371,535 in 2003 to $23,735,092 in 2004. This decrease in operating expenses was augmented by an increase in other income, net of $691,921 from a net loss of $64,451 in 2003 to other income, net of $627,470 in 2004. The combination of these changes resulted in an increase in operating results from a net loss of $6,742,083 in 2003 to net income of $4,975,349 in 2004, an increase of $11,717,432. Most operating expenses decreased from 2004 to 2003. However, this decrease in operating expenses was primarily a result of decreases in depreciation of operating lease assets, provision for losses and impairments and interest expense of $10,877,717 from $30,767,521 in 2003 to $19,889,804 in 2004. These decreases were a result of (1) asset sales, (2) a decrease in interest bearing debt and (3) fewer impairment reserves required in 2004.
Management periodically reviews the carrying values of its assets on leases and assets held for lease or sale. As a result of the review, management determined that the fair value of a certain aircraft had declined in value to the extent that the carrying value had become impaired. The fair value of the aircraft was determined based on the sum of the discounted estimated future cash flows of the assets. A charge to operations was recorded for the decline in value of the aircraft in the amount of $1,050,000 in 2004, which is included in the provision for losses and impairments of 1,086,312. This compares to a charge to operations of $4,401,397 for the decline in fair value of an aircraft in 2003, which is included in the provision for losses and impairments of $5,679,271. See footnote 4 to the financial statements, as set forth in Part II, Item 8, Financial Statements and Supplementary Data, for additional information regarding impairment losses.
Derivative Financial Instruments
In June 1998, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which established new accounting and reporting standards for derivative instruments. SFAS No. 133 has been amended by SFAS No. 137, issued in June 1999, by SFAS No. 138, issued in June 2000 and by SFAS No. 149, issued in June 2003.
SFAS No. 133, as amended, requires the Company to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. It further provides criteria for derivative instruments to be designated as fair value, cash flow, or foreign currency hedges, and establishes accounting standards for reporting changes in the fair value of the derivative instruments. If derivative financial instruments are utilized, the Company will be required to record derivative instruments at fair value in the balance sheet and recognize the offsetting gains or losses as adjustments to net income or other comprehensive income, as appropriate.
The Company adopted SFAS No. 133, as amended, on January 1, 2001. Upon adoption, the Company recorded interest rate swap hedging instruments at fair value in the balance sheet and recognized the offsetting gains or losses in net income or other comprehensive income, as appropriate. See footnote 9 to the financial statements in Item 8, Receivables Funding Program, for additional information.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement on Financial Accounting Standards No. 157, “Fair Value Measurements” (FAS 157). This standard clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. As of December 31, 2005, the Fund does not believe the adoption of FAS 157 will impact the amounts reported in the financial statements, however, additional disclosures will be required about the inputs used to develop the measurements of fair value and the effect of certain of the measurements reported in the statement of operations for a fiscal period.
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FAS 109, Accounting for Income Taxes” (“FIN 48”), to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on deregulation, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 as of January 1, 2007, as required. The cumulative effect of adopting FIN 48 will be recorded in retained earnings and other accounts as applicable. The Company has not determined the effect, if any, the adoption of FIN 48 will have on the Company’s financial position and results of operations.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” which replaces Accounting Principles Board Opinion (“APB”) No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Changes in Interim Financial
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Statements.” SFAS 154 changes the accounting for and reporting of a change in accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. SFAS 154 is effective for accounting changes and corrections of errors in fiscal years beginning after December 15, 2005 and will only affect the Company’s financial statements upon adoption of a voluntary change in accounting principle by the Company.
Critical Accounting Policies
The policies discussed below are considered by management of the Company to be critical to an understanding of the Company’s financial statements because their application requires significant complex or subjective judgments, decisions, or assessments, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. The Company also states these accounting policies in the notes to the financial statements and in relevant sections in this discussion and analysis. For all of these policies, management cautions that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment.
Use of estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Such estimates primarily relate to the determination of residual values at the end of the lease term and expected future cash flows used for impairment analysis purposes and determination of provisions 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 at the end of the leases.
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 are generally be 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.
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 offs and collections experience and are usually determined by specifically identified lessees and billed and unbilled receivables. Direct financing leases are written-off on a case by case basis.
Direct financing leases are automatically 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 credit worthiness of all direct finance lessees with payments outstanding less than 90 days. Based upon management’s judgment, direct finance lessees may be placed in a non-accrual status. Leases placed on non-accrual status are only returned to an accrual status on a case by case basis.
Initial direct costs:
In prior years, the Company capitalized initial direct costs (“IDC”) associated with the acquisition of lease assets and funding of investments in notes receivable (as defined in SFAS No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases”). Capitalized IDC included both internal costs (e.g., labor and overhead) and external broker fees incurred with the acquisition. 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. The Company has no notes receivable. 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.
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Asset valuation:
Recorded values of the Company’s asset portfolio are periodically reviewed for impairment in accordance with Statement of Financial Accounting Standards “SFAS” No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” An impairment loss is measured and recognized only if the estimated undiscounted future cash flows of the asset are less than their net book value. The estimated undiscounted future cash flows are the sum of the estimated residual value of the asset at the end of the asset’s expected holding period and estimates of undiscounted future rents. The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the market place are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. Impairment is measured as the difference between the fair value (as determined by the discounted estimated future cash flows) of the assets and its carrying value on the measurement date.
Restatement of Prior Periods Presented
After receipt of an SEC comment letter by an affiliate of the Company in April 2005, the Company’s Managing Member determined a restatement of previous SEC filings was required. This Form 10-K reflects the restatement, in accordance with the provisions of APB No. 20, “Accounting Changes”, of ATEL Capital Equipment Fund VIII, LLC Financial Statements for the following periods:
| • | | March 31, 2005 and for the three months ended March 31, 2005 |
| • | | June 30, 2005 and for the three and six months ended June 30, 2005 |
Revenue
The Company’s Managing Member determined that the accounting methodology relating to certain utilization leases must be modified to comply with SFAS No. 13, “Accounting for Leases.” The Managing Member concluded that revenue was being inappropriately recognized on a straight-line basis over the term of the lease for utilization-based leases versus on a per diem basis. As a result, the Company restated operating lease revenue, accounts receivable and members’ capital.
Accrued liabilities
The Company’s Managing Member determined that certain liabilities had not been recorded in the correct periods through a detailed review of cash disbursements. As a result of this review, the Company restated several of its asset, liability, members’ capital and expense accounts.
Amortization of Initial Direct Costs to Originate or Acquire Loans and Leases Capitalized in Prior years
The Company’s Managing Member determined that the accounting methodology relating to the amortization of incremental initial direct cost (“IDC”) and fees capitalized in prior years must be modified to comply with SFAS No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Cost of Leases.” As a result, the Managing Member concluded that they were not appropriately amortizing IDC capitalized in prior years. IDC is now amortized over the underlying lease term.
Accumulated Other Comprehensive Loss
The Company’s Managing Member determined that amounts in accumulated other comprehensive loss had not been properly reclassified into interest expense in accordance with SFAS No. 133. As a result of this review, the Company restated interest expense and accumulated other comprehensive loss.
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Item 7a. | QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK |
The Company, like most other companies, is exposed to certain market risks, including primarily changes in interest rates. The Company believes its exposure to other market risks, including foreign currency exchange rate risk, commodity risk and equity price risk, are insignificant to both its financial position and results of operations.
In general, the Company expects to manage its exposure to interest rate risk by obtaining fixed rate debt. The fixed rate debt is structured so as to match the cash flows required to service the debt to the payment streams under fixed rate lease receivables. The payments under the leases are assigned to the lenders in satisfaction of the debt. Furthermore, the Company has historically been able to maintain a stable spread between its cost of funds and lease yields in both periods of rising and falling interest rates. Nevertheless, the Company expects to frequently fund leases with its floating interest rate line of credit and will, therefore, be exposed to interest rate risk until fixed rate financing is arranged, or the floating interest rate acquisition facility is repaid. As of December 31, 2005, there was an outstanding balance of $2,000,000 on the floating rate acquisition facility and the effective interest rate of the borrowings ranged from 5.93% to 7.25%.
Also, as described in the caption “Capital Resources and Liquidity,” the Company entered into a receivables funding program facility in 1999. Since interest on the outstanding balances under the facility will vary, the Company will be exposed to market risks associated with changing interest rates. To reduce its interest rate risk, the Company is required by the terms of the receivable funding program to enter into interest rate swap agreements, which effectively convert the underlying interest characteristic on the facility from floating to fixed. Although the formal hedge accounting ceased in 2004, the interest rate swaps provide an economic hedge to the remaining indebtedness under the receivables funding facility. To the extent the notional amounts under the interest rate swaps exceed the remaining indebtedness, such interest rate swaps are speculative in nature. Under the swap agreements, the Company makes or receives variable interest payments to or from the counterparty based on a notional principal amount. The net differential paid or received by the Company is recognized as an adjustment to interest expense related to the facility balances. The amount paid or received will represent the difference between the payments required under the variable interest rate facility and the amounts due under the facility at the fixed interest rate. At December 31, 2005, there was $4,524,000 in borrowings under this accounts receivable program.
In general, these swap agreements are designed to reduce the Company’s interest rate risk associated with variable rate borrowings. However, the Company is exposed to and manages the credit risk associated with the counterparty by dealing only with institutions it considers financially sound.
Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
See the Report of Independent Registered Public Accounting Firm, Financial Statements and Notes to Financial Statements attached hereto at pages 17 through 41.
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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, 2005 and 2004, and the related statements of operations, changes in members’ capital, and cash flows for each of the three years in the period ended December 31, 2005. 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 audit 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ATEL Capital Equipment Fund VIII, LLC at December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
San Francisco, California
April 2, 2007
16
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
| | | | | | | | |
| | 2005 | | | 2004 | |
ASSETS | | | | | | | | |
Cash and cash equivalents | | $ | 2,615,307 | | | $ | 2,569,911 | |
Accounts receivable, net of allowance for doubtful accounts of $68,099 in 2005 and $52,115 in 2004 | | | 1,041,404 | | | | 1,182,382 | |
Prepaid expenses and other assets | | | 58,552 | | | | 47,602 | |
Investments in equipment and leases, net of accumulated depreciation, amortization and impairment loss reserve of $54,461,231 in 2005 and $76,597,252 in 2004 | | | 34,385,246 | | | | 60,077,281 | |
| | | | | | | | |
Total assets | | $ | 38,100,509 | | | $ | 63,877,176 | |
| | | | | | | | |
| | |
LIABILITIES AND MEMBERS’ CAPITAL | | | | | | | | |
Accounts payable and accrued liabilities: | | | | | | | | |
Managing Member | | $ | 1,018,484 | | | $ | 660,890 | |
Accrued distributions to Other Members | | | 1,305,708 | | | | — | |
Other | | | 710,738 | | | | 439,322 | |
Accrued interest payable | | | 60,279 | | | | 154,604 | |
Non-recourse debt | | | 1,321,767 | | | | 6,039,946 | |
Acquisition facility obligation | | | 2,000,000 | | | | — | |
Receivables funding program obligation | | | 4,524,000 | | | | 13,192,000 | |
Interest rate swap contracts | | | 466,082 | | | | 1,435,454 | |
Unearned operating lease income | | | 212,008 | | | | 436,055 | |
| | | | | | | | |
Total liabilities | | | 11,619,066 | | | | 22,358,271 | |
| | |
Commitments and contingencies | | | | | | | | |
| | |
Members’ capital: | | | | | | | | |
Accumulated other comprehensive loss | | | (139,942 | ) | | | (725,935 | ) |
Managing Member | | | — | | | | — | |
Other Members’ | | | 26,621,385 | | | | 42,244,840 | |
| | | | | | | | |
Total Members’ capital | | | 26,481,443 | | | | 41,518,905 | |
| | | | | | | | |
Total liabilities and Members’ capital | | $ | 38,100,509 | | | $ | 63,877,176 | |
| | | | | | | | |
See accompanying notes.
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ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003
| | | | | | | | | | | | |
| | 2005 | | | 2004 | | | 2003 | |
Revenues: | | | | | | | | | | | | |
Leasing activities: | | | | | | | | | | | | |
Operating leases | | $ | 11,254,546 | | | $ | 17,699,022 | | | $ | 27,083,056 | |
Direct financing leases | | | 176,456 | | | | 1,178,202 | | | | 864,509 | |
Gain on sales of assets | | | 2,173,324 | | | | 8,675,502 | | | | 595,299 | |
Interest | | | 39,490 | | | | 6,194 | | | | 5,717 | |
Other | | | 12,453 | | | | 524,051 | | | | 145,322 | |
| | | | | | | | | | | | |
Total revenue | | | 13,656,269 | | | | 28,082,971 | | | | 28,693,903 | |
| | | |
Expenses: | | | | | | | | | | | | |
Depreciation of operating lease assets | | | 7,578,618 | | | | 14,730,692 | | | | 20,664,339 | |
Provision for losses and impairments | | | 3,580,245 | | | | 1,086,312 | | | | 5,679,271 | |
Interest expense | | | 1,837,613 | | | | 4,072,800 | | | | 4,423,911 | |
Asset management fees to Managing Member | | | 447,641 | | | | 1,057,355 | | | | 1,517,259 | |
Railcar maintenance | | | 439,137 | | | | 482,050 | | | | 791,868 | |
Cost reimbursements to Managing Member | | | 731,264 | | | | 752,161 | | | | 666,005 | |
Amortization of initial direct costs | | | 75,552 | | | | 450,164 | | | | 453,716 | |
Professional fees | | | 205,514 | | | | 243,877 | | | | 475,195 | |
Insurance | | | 55,996 | | | | 196,711 | | | | 182,739 | |
Provision for doubtful accounts | | | 50,068 | | | | (173,000 | ) | | | 30,000 | |
Aircraft inspection and maintenance | | | — | | | | — | | | | 132,510 | |
Taxes on income and franchise fees | | | 113,000 | | | | 264,377 | | | | 70,684 | |
Other | | | 374,462 | | | | 571,593 | | | | 284,038 | |
| | | | | | | | | | | | |
| | | 15,489,110 | | | | 23,735,092 | | | | 35,371,535 | |
| | | | | | | | | | | | |
Net income (loss) from operations | | | (1,832,841 | ) | | | 4,347,879 | | | | (6,677,632 | ) |
Other income (loss), net | | | 969,371 | | | | 627,470 | | | | (64,451 | ) |
| | | | | | | | | | | | |
Net income (loss) | | $ | (863,470 | ) | | $ | 4,975,349 | | | $ | (6,742,083 | ) |
| | | | | | | | | | | | |
Net income (loss): | | | | | | | | | | | | |
Managing Member | | $ | 1,106,992 | | | $ | 1,001,155 | | | $ | 1,000,979 | |
Other Members | | | (1,970,462 | ) | | | 3,974,194 | | | | (7,743,062 | ) |
| | | | | | | | | | | | |
| | $ | (863,470 | ) | | $ | 4,975,349 | | | $ | (6,742,083 | ) |
| | | | | | | | | | | | |
Net income (loss) per Limited Liability Company Unit (Other Members) | | $ | (0.15 | ) | | $ | 0.29 | | | $ | (0.57 | ) |
Weighted average number of Units outstanding (Other Members) | | | 13,570,188 | | | | 13,570,188 | | | | 13,570,188 | |
See accompanying notes.
18
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENT OF CHANGES IN MEMBERS’ CAPITAL
FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003
| | | | | | | | | | | | | | | | | | |
| | Other Members | | | Managing Member | | | Accumulated Other Comprehensive Loss | | | Total | |
| | Units | | Amount | | | | | | | | | | |
Balance December 31, 2002 | | 13,570,188 | | $ | 70,706,694 | | | $ | — | | | $ | (5,381,342 | ) | | $ | 65,325,352 | |
Distributions to Other Members ($0.91 per Unit) | | — | | | (12,345,603 | ) | | | — | | | | — | | | | (12,345,603 | ) |
Distributions to Managing Member | | — | | | — | | | | (1,000,979 | ) | | | — | | | | (1,000,979 | ) |
Unrealized decrease in interest rate swap liability | | — | | | — | | | | — | | | | 2,173,747 | | | | 2,173,747 | |
Reclassification for portion of swap liability charged to net loss | | — | | | — | | | | — | | | | 64,451 | | | | 64,451 | |
Net income (loss) | | — | | | (7,743,062 | ) | | | 1,000,979 | | | | — | | | | (6,742,083 | ) |
| | | | | | | | | | | | | | | | | | |
Balance December 31, 2003 | | 13,570,188 | | | 50,618,029 | | | | — | | | | (3,143,144 | ) | | | 47,474,885 | |
Distributions to Other Members ($0.91 per Unit) | | — | | | (12,347,383 | ) | | | — | | | | — | | | | (12,347,383 | ) |
Distributions to Managing Member | | — | | | — | | | | (1,001,155 | ) | | | — | | | | (1,001,155 | ) |
Unrealized decrease in interest rate swap liability | | — | | | — | | | | — | | | | 1,144,671 | | | | 1,772,141 | |
Reclassification for portion of swap liability charged to net loss | | — | | | — | | | | — | | | | 1,272,538 | | | | 645,068 | |
Net income | | — | | | 3,974,194 | | | | 1,001,155 | | | | — | | | | 4,975,349 | |
| | | | | | | | | | | | | | | | | | |
Balance December 31, 2004 | | 13,570,188 | | | 42,244,840 | | | | — | | | | (725,935 | ) | | | 41,518,905 | |
Distributions to Other Members ($1.01 per Unit) | | — | | | (13,652,993 | ) | | | — | | | | — | | | | (13,652,993 | ) |
Distributions to Managing Member | | — | | | — | | | | (1,106,992 | ) | | | — | | | | (1,106,992 | ) |
Reclassification for portion of swap liability charged to net loss | | — | | | — | | | | — | | | | 585,993 | | | | 585,993 | |
Net income (loss) | | — | | | (1,970,462 | ) | | | 1,106,992 | | | | — | | | | (863,470 | ) |
| | | | | | | | | | | | | | | | | | |
Balance December 31, 2005 | | 13,570,188 | | $ | 26,621,385 | | | $ | — | | | $ | (139,942 | ) | | $ | 26,481,443 | |
| | | | | | | | | | | | | | | | | | |
See accompanying notes.
19
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003
| | | | | | | | | | | | |
| | 2005 | | | 2004 | | | 2003 | |
Operating activities: | | | | | | | | | | | | |
Net income (loss) | | $ | (863,470 | ) | | $ | 4,975,349 | | | $ | (6,742,083 | ) |
Adjustments to reconcile net income (loss) to cash provided by operating activities: | | | | | | | | | | | | |
Gain on sales of assets | | | (2,173,324 | ) | | | (8,675,502 | ) | | | (595,299 | ) |
Depreciation of operating lease assets | | | 7,578,618 | | | | 14,730,692 | | | | 20,664,339 | |
Amortization of initial direct costs | | | 75,552 | | | | 450,164 | | | | 453,716 | |
Interest rate swap contracts | | | 585,993 | | | | 1,272,538 | | | | 64,451 | |
Realized decrease in interest swap liability | | | (969,371 | ) | | | (627,470 | ) | | | — | |
Provision for doubtful accounts | | | 50,068 | | | | (173,000 | ) | | | 30,000 | |
Provision for losses and impairments | | | 3,580,245 | | | | 1,086,312 | | | | 5,679,271 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Accounts receivable | | | 90,910 | | | | 1,115,520 | | | | (217,384 | ) |
Due from Managing Member | | | — | | | | — | | | | 171,119 | |
Prepaid expenses and other assets | | | (10,950 | ) | | | (346,333 | ) | | | 17,316 | |
Accounts payable, Managing Member | | | 251,726 | | | | (291,823 | ) | | | 740,715 | |
Accounts payable, other | | | 271,416 | | | | (418,289 | ) | | | (199,162 | ) |
Accrued interest payable | | | (94,325 | ) | | | (32,802 | ) | | | (762,648 | ) |
Unearned lease income | | | (224,047 | ) | | | (800,443 | ) | | | (311,315 | ) |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 8,149,041 | | | | 12,264,913 | | | | 18,993,036 | |
| | | |
Investing activities: | | | | | | | | | | | | |
Proceeds from sales of lease assets | | | 16,392,017 | | | | 38,125,051 | | | | 13,964,820 | |
Reduction of net investment in direct financing leases | | | 1,047,805 | | | | 1,843,290 | | | | 1,793,351 | |
Purchases of equipment on operating leases | | | (803,340 | ) | | | — | | | | — | |
Additions and adjustment to initial direct costs | | | (5,538 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Net cash provided by investing activities | | | 16,630,944 | | | | 39,968,341 | | | | 15,758,171 | |
| | | |
Financing activities: | | | | | | | | | | | | |
Repayments of receivables funding program obligation | | | (8,668,000 | ) | | | (26,754,000 | ) | | | (22,966,000 | ) |
Repayments of acquisition facility | | | (6,000,000 | ) | | | (9,500,000 | ) | | | (20,600,000 | ) |
Borrowings under acquisition facility | | | 8,000,000 | | | | — | | | | 19,500,000 | |
Proceeds of non-recourse debt | | | — | | | | — | | | | 2,563,149 | |
Repayments of non-recourse debt | | | (4,718,179 | ) | | | (569,389 | ) | | | (1,656,669 | ) |
Distributions to Other Members | | | (12,347,286 | ) | | | (12,347,383 | ) | | | (12,345,603 | ) |
Distributions to Managing Member | | | (1,001,124 | ) | | | (1,001,155 | ) | | | (1,000,979 | ) |
| | | | | | | | | | | | |
Net cash used in financing activities | | | (24,734,589 | ) | | | (50,171,927 | ) | | | (36,506,102 | ) |
| | | |
Net increase (decrease) in cash and cash equivalents | | | 45,396 | | | | 2,061,327 | | | | (1,754,895 | ) |
Cash and cash equivalents at beginning of year | | | 2,569,911 | | | | 508,584 | | | | 2,263,479 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 2,615,307 | | | $ | 2,569,911 | | | $ | 508,584 | |
| | | | | | | | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | | |
Cash paid during the year for taxes | | $ | 293,214 | | | $ | 94,061 | | | $ | 124,239 | |
| | | | | | | | | | | | |
Cash paid during the year for interest | | $ | 1,345,945 | | | $ | 2,833,064 | | | $ | 5,251,010 | |
| | | | | | | | | | | | |
Schedule of non-cash transactions: | | | | | | | | | | | | |
Unrealized decrease in interest rate swap liability | | $ | — | | | $ | 1,144,671 | | | $ | 2,173,747 | |
| | | | | | | | | | | | |
Distributions declared to Managing Member at year-end | | $ | 105,868 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
Distributions declared to Other Members at year-end | | $ | 1,305,708 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
See accompanying notes.
20
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
1. | Organization and Limited Liability Company matters: |
ATEL Capital Equipment Fund VIII, LLC (the “Company”) was formed under the laws of the State of California on July 31, 1998 for the purpose of engaging in the sale of limited liability investment units and acquiring equipment to engage in equipment leasing and sales activities, primarily in the United States. The Company may continue until December 31, 2019. The Managing Member of the Company is ATEL Financial Services, LLC (“AFS”), a California limited liability company. Prior to converting to a limited liability company structure, AFS was formerly known as ATEL Financial Corporation.
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, $1,200,000) 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 (leasing activities). Total gross contributions in the amount of $135,701,880 (13,570,188 units) were received as of November 30, 2000, $500 of which represented the Initial Member’s capital investment, $100 of which represented AFS’ capital investment and $135,701,380 of which represented continuing interest of the Other Members. The offering was terminated on November 30, 2000.
As of December 31, 2005, 13,570,188 Units ($135,701,880) were issued and outstanding.
As a limited liability company, the liability of any individual member for the obligations of the Company is limited to the extent of capital contributions to the Company by the individual member.
Pursuant to the terms of the Limited Liability Company Operating Agreement (“Operating Agreement”), AFS receives compensation and reimbursements for services rendered on behalf of the Company. AFS is required to maintain in the Company reasonable cash reserves for working capital, the repurchase of Units and contingencies.
The Company’s principal objectives are to invest in a diversified portfolio of equipment that will (i) preserve, protect and return the Company’s invested capital; (ii) generate regular distributions to the members of cash from operations and cash from sales or refinancing, with any balance remaining after certain minimum distributions to be used to purchase additional equipment during the Reinvestment Period, ending December 31, 2006 and (iii) provide additional distributions following the Reinvestment Period and until all equipment has been sold. The Company is governed by the Operating Agreement.
2. | Summary of significant accounting policies: |
Basis of presentation:
The accompanying balance sheets as of December 31, 2005 and 2004 and the related statements of operations, changes in members’ capital, and cash flows for each of the three years ended December 31, 2005 have been prepared in accordance with accounting principles generally accepted in the United States, (“GAAP”). Certain prior year amounts have been reclassified to conform to the current year presentation.
Use of estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Such estimates primarily relate to the determination of residual values at the end of the lease term, expected future cash flows used for impairment analysis purposes, and determination of provisions for doubtful accounts.
21
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
2. | Summary of significant accounting policies (continued): |
Cash and cash equivalents:
Cash and cash equivalents include cash in banks and cash equivalent investments with original 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, direct finance lease receivables and accounts receivable. The Company places its cash deposits and temporary cash investments with creditworthy, high quality financial institutions. The concentration of such deposits and temporary cash investments is not deemed to create a significant risk to the Company. Accounts receivable represent amounts due from lessees in various industries, related to equipment on operating leases and direct financing leases. See footnote 3 for a description of lessees and financial borrowers by industry as of December 31, 2005 and 2004.
Accounts receivable:
Accounts receivable represent the amounts billed under operating and direct finance lease contracts and currently due to the Company. Allowances for doubtful accounts are typically established based on historical charge offs and collection experience and are usually determined by specifically identified lessees and invoiced amounts. Accounts receivable are charged off to expense on specific identification basis. Amounts recovered that were previously written-off are recorded as other income in the period received.
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 offs and collections experience and are usually determined by specifically identified lessees and billed and unbilled receivables. Direct financing leases are charged off to expense on a specific identification basis.
Direct financing leases are automatically 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 credit worthiness of all direct finance lessees with payments outstanding less than 90 days. Based upon management’s judgment, direct finance lessees may be placed in a non-accrual status. Leases placed on non-accrual status are only returned to an accrual status on a case by case basis.
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 at the end of the leases.
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 are generally be 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.
22
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
2. | Summary of significant accounting policies (continued): |
Initial direct costs:
In prior years, the Company capitalized initial direct costs (“IDC”) associated with the acquisition of lease assets (as defined in Statement of Financial Accounting Standards “SFAS” No. 91 “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases”). Capitalized IDC included both internal costs (e.g., labor and overhead) and external broker fees incurred with the acquisition. 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 in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” An impairment loss is measured and recognized only if the estimated undiscounted future cash flows of the asset are less than their net book value. The estimated undiscounted future cash flows are the sum of the estimated residual value of the asset at the end of the asset’s expected holding period and estimates of undiscounted future rents. The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the market place are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity simultaneously, or to dispose of the asset quickly. Impairment is measured as the difference between the fair value (as determined by the discounted estimated future cash flows) of the asset and its carrying value on the measurement date. See footnotes 4 and 5.
Segment reporting:
The Company adopted the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” SFAS No. 131 establishes annual and interim standards for operating segments of a company. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenue, and its major customers. 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 chief operating decision makers are the Managing Member’s Chief Operating Officer and its Chief Executive 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 chief operating 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.
However, 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.
Derivative financial instruments:
In June 1998, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which established new accounting and reporting standards for derivative instruments. SFAS No. 133 has been amended by SFAS No. 137, issued in June 1999, by SFAS No. 138, issued in June 2000 and by SFAS No. 149, issued in June 2003.
23
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
2. | Summary of significant accounting policies (continued): |
SFAS No. 133, as amended, requires the Company to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. It further provides criteria for derivative instruments to be designated as fair value, cash flow, or foreign currency hedges, and establishes accounting standards for reporting changes in the fair value of the derivative instruments. Upon adoption on January 1, 2001, the Company recorded its interest rate swap hedging instruments at fair value in the balance sheet, designated the interest rate swaps as cash flow hedges, and recognized the offsetting gains or losses as adjustments to be reported in net income or other comprehensive income, as appropriate. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change. Such interest rate swaps are linked to and adjust effectively the interest rate sensitivity of specific long-term debt.
The effective portion of the change in fair value of the interest rate swaps is recorded in Accumulated Other Comprehensive Income (“AOCI”) and the ineffective portion (if any) directly in earnings. Amounts in AOCI are reclassified into earnings in a manner consistent with the earnings pattern of the underlying hedged item (generally reflected in interest expense). If a hedged item is de-designated prior to maturity, previous adjustments to AOCI are recognized in earnings to match the earnings recognition pattern of the hedged item (e.g., level yield amortization if hedging an interest bearing instruments). Interest income or expense on most hedging derivatives used to manage interest rate exposure is recorded on an accrual basis as an adjustment to the yield of the link exposures over the periods covered by the contracts. This matches the income recognition treatment of the exposure (i.e., the liabilities, which are carried at historical cost, with interest recorded on an accrual basis).
Credit exposure from derivative financial instruments, which are assets, arises from the risk of a counterparty default on the derivative contract. The amount of the loss created by the default is the replacement cost or current positive fair value of the defaulted contract.
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 and franchise taxes for only those states which levy taxes on partnerships. For the years ended December 31, 2005, 2004, and 2003, the current provision for state income taxes was approximately $113,000, $264,377 and $70,684, respectively.
The tax basis of the Company’s net assets and liabilities varies from the amounts presented in these financial statements at December 31:
| | | | | | |
| | 2005 | | 2004 |
Financial statement basis of net assets | | $ | 26,481,443 | | $ | 41,518,905 |
Tax basis of net assets (unaudited) | | | 13,478,258 | | | 19,582,706 |
| | | | | | |
Difference | | $ | 13,003,185 | | $ | 21,936,199 |
| | | | | | |
The primary differences between the tax basis of the net assets and the amounts recorded in the financial statements are the result of differences in accounting for syndication costs and differences in depreciation methods used in the financial statements and the Company’s tax returns.
24
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
2. | Summary of significant accounting policies (continued): |
The following reconciles the net income (loss) reported in these financial statements to the loss reported on the Company’s federal tax return (unaudited) for each of the years ended December 31:
| | | | | | | | | | | | |
| | 2005 | | | 2004 | | | 2003 | |
Net income (loss) per financial statements | | $ | (863,470 | ) | | $ | 4,975,349 | | | $ | (6,742,083 | ) |
Reconciling item – impact due to prior year restatement | | | — | | | | 246,903 | | | | (779,178 | ) |
Tax adjustments (unaudited): | | | | | | | | | | | | |
Adjustment to depreciation expense | | | 1,429,651 | | | | 335,960 | | | | (4,676,068 | ) |
Provision for doubtful accounts and losses | | | 3,580,245 | | | | (422,738 | ) | | | 5,499,271 | |
Adjustments to lease revenues | | | 1,378,944 | | | | 22,178,232 | | | | (1,150,757 | ) |
Other | | | 1,718,501 | | | | — | | | | — | |
| | | | | | | | | | | | |
Net income (loss) per federal tax return (unaudited) | | $ | 7,243,871 | | | $ | 27,313,706 | | | $ | (7,848,815 | ) |
| | | | | | | | | | | | |
Per unit data:
Net income (loss) and distributions per unit are based upon the weighted average number of Other Members’ units outstanding during the period.
Other income (loss), net:
Other income (loss) consists of amounts received as settlement from former customers previously written off as well as gains and losses on interest rate swap contracts. During the fiscal year ended December 31, 2005 and 2004, other income, net was comprised of favorable fair value adjustments on interest rate swap contracts of $969,371 and $626,470, respectively. For the year ended December 31, 2003, other loss, net was comprised of unfavorable fair value adjustments on interest rate swap contracts of $64,451.
Recent accounting pronouncements:
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement on Financial Accounting Standards No. 157, “Fair Value Measurements” (FAS 157). This standard clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. As of December 31, 2005, the Fund does not believe the adoption of FAS 157 will impact the amounts reported in the financial statements, however, additional disclosures will be required about the inputs used to develop the measurements of fair value and the effect of certain of the measurements reported in the statement of operations for a fiscal period.
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FAS 109, Accounting for Income Taxes” (“FIN 48”), to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on deregulation, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 as of January 1, 2007, as required. The cumulative effect of adopting FIN 48 will be recorded in retained earnings and other accounts as applicable. The Company has not determined the effect, if any, the adoption of FIN 48 will have on the Company’s financial position and results of operations.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which replaces Accounting Principles Board Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Changes in Interim Financial Statements.” SFAS 154 changes the accounting for and reporting of a change in accounting principle and corrections of errors. SFAS 154 requires retrospective application to prior periods’ financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. SFAS 154 is effective for accounting changes and corrections of errors in fiscal years beginning after December 15, 2005 and will only affect the Company’s financial statements upon adoption of a voluntary change in accounting principle by the Company.
25
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
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 upon default.
As of December 31, 2005, 2004 and 2003, 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:
| | | | | | | | | |
| | 2005 | | | 2004 | | | 2003 | |
Transportation, rail | | 54 | % | | 38 | % | | 20 | % |
Transportation, containers | | 28 | % | | 17 | % | | 11 | % |
Transportation, air | | * | | | 12 | % | | * | |
Natural gas | | * | | | 11 | % | | * | |
Manufacturing, other | | * | | | 10 | % | | 18 | % |
Transportation, other | | * | | | * | | | 13 | % |
During 2005, one customer comprised 18% of the Company’s revenues from leases. During 2004, two customers comprised 10% and 10% of the Company’s revenues from leases. During 2003, two customers comprised 13% and 10% of the Company’s revenues from leases.
4. | Reserves, impairments and provisions for doubtful accounts: |
Activity in the reserve for losses and impairments and allowances for doubtful accounts consists of the following:
| | | | | | | | |
| | Reserve for losses and Impairments | | | Allowance for doubtful accounts | |
Balance December 31, 2002 | | | — | | | | 306,365 | |
Provision (recoveries) | | | 5,679,271 | | | | 30,000 | |
Charge offs | | | (5,679,271 | ) | | | (111,250 | ) |
| | | | | | | | |
Balance December 31, 2003 | | | — | | | | 225,115 | |
Provision (recoveries) | | | 1,086,312 | | | | (173,000 | ) |
Charge offs | | | (1,086,312 | ) | | | — | |
| | | | | | | | |
Balance December 31, 2004 | | | — | | | | 52,115 | |
Provision (recoveries) | | | 3,580,245 | | | | 50,068 | |
Charge offs | | | (2,306,328 | ) | | | (34,084 | ) |
| | | | | | | | |
Balance December 31, 2005 | | $ | 1,273,917 | | | $ | 68,099 | |
| | | | | | | | |
5. | Investments in equipment and leases, net: |
The Company’s investments in equipment and leases consist of the following:
| | | | | | | | | | | | | | | | | | | | | |
| | Balance December 31, 2004 | | Additions | | Impairment Losses | | | Depreciation / Amortization Expense or Amortization of Direct Financing Leases | | | Reclassi- fications or Dispositions | | | Balance December 31, 2005 |
Investment in operating lease equipment | | $ | 51,470,210 | | $ | 803,340 | | $ | (2,306,328 | ) | | $ | (7,506,066 | ) | | $ | (12,495,072 | ) | | $ | 29,966,084 |
Net investment in direct financing leases, as restated | | | 3,092,071 | | | — | | | — | | | | — | | | | (1,047,805 | ) | | | 2,044,266 |
Assets held for sale or lease | | | 5,405,497 | | | — | | | (1,273,917 | ) | | | (72,552 | ) | | | (1,723,621 | ) | | | 2,335,407 |
Initial direct costs | | | 109,503 | | | — | | | — | | | | (75,552 | ) | | | 5,538 | | | | 39,489 |
| | | | | | | | | | | | | | | | | | | | | |
| | $ | 60,077,281 | | $ | 803,340 | | $ | (3,580,245 | ) | | $ | (7,654,170 | ) | | $ | (15,260,960 | ) | | $ | 34,385,246 |
| | | | | | | | | | | | | | | | | | | | | |
26
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
5. | Investments in equipment and leases, net (continued): |
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. As a result of those reviews, management determined that the fair value of certain assets declined in value to the extent that the carrying values had become impaired. The fair value of the assets was determined based on the sum of the discounted estimated future cash flows of the assets. The Company recorded impairment losses as follows for each of the years ended December 31:
| | | | | | | | | |
| | 2005 | | 2004 | | 2003 |
Aircraft | | $ | 2,306,328 | | $ | 1,050,000 | | $ | 4,401,397 |
Office automation | | | — | | | 36,312 | | | — |
Locomotives | | | — | | | — | | | 760,000 |
Rail car auto racks | | | — | | | — | | | 268,373 |
Manufacturing equipment | | | 1,273,917 | | | — | | | 249,501 |
| | | | | | | | | |
| | $ | 3,580,245 | | $ | 1,086,312 | | $ | 5,679,271 |
| | | | | | | | | |
Impairment losses are recorded as an addition to accumulated depreciation of the impaired assets. Depreciation expense and impairment losses on property subject to operating leases and assets held for sale or lease consist of the following for the years ended December 31:
| | | | | | | | | |
| | 2005 | | 2004 | | 2003 |
Depreciation expense | | $ | 7,578,618 | | $ | 14,730,692 | | $ | 20,664,339 |
Impairment losses | | | 3,580,245 | | | 1,086,312 | | | 5,679,271 |
| | | | | | | | | |
| | $ | 11,158,863 | | $ | 15,817,004 | | $ | 26,343,610 |
| | | | | | | | | |
All of the property on lease was acquired during the period from 1999 through 2002.
Operating leases:
Equipment on operating leases consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2004 | | | Additions | | Impairment Provision | | | Depreciation Expense | | | Reclassi- fications or Dispositions | | | December 31, 2005 | |
Transportation, rail | | $ | 45,523,019 | | | $ | — | | $ | — | | | $ | — | | | $ | (4,642,838 | ) | | $ | 40,880,181 | |
Containers | | | 21,165,000 | | | | — | | | — | | | | — | | | | (63,750 | ) | | | 21,101,250 | |
Aircraft | | | 15,448,037 | | | | — | | | — | | | | — | | | | (15,448,037 | ) | | | — | |
Natural gas compressors | | | 13,541,303 | | | | — | | | — | | | | — | | | | (10,864,857 | ) | | | 2,676,446 | |
Manufacturing | | | 4,599,823 | | | | — | | | — | | | | — | | | | (3,105,165 | ) | | | 1,494,658 | |
Transportation, other | | | 3,111,407 | | | | 803,340 | | | — | | | | — | | | | — | | | | 3,914,747 | |
Materials handling | | | 1,090,279 | | | | — | | | — | | | | — | | | | — | | | | 1,090,279 | |
Other | | | 5,313,054 | | | | — | | | — | | | | — | | | | — | | | | 5,313,054 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | 109,791,922 | | | | 803,340 | | | — | | | | — | | | | (34,124,647 | ) | | | 76,470,615 | |
Less accumulated depreciation and reserves for losses and impairments | | | (58,321,712 | ) | | | — | | | (2,306,328 | ) | | | (7,506,066 | ) | | | 21,629,575 | | | | (46,504,531 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 51,470,210 | | | $ | 803,340 | | $ | (2,306,328 | ) | | $ | (7,506,066 | ) | | $ | (12,495,072 | ) | | $ | 29,966,084 | |
| | | | | | | | | | | | | | | | | | | | | | | |
27
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
5. | Investments in equipment and leases, net (continued): |
Direct financing leases:
As of December 31, 2005 and 2004, investment in direct financing leases consists of rail cars, anhydrous ammonia storage tanks, office automation equipment, point of sale equipment, refrigerated trailers and laundry equipment. The following lists the components of the Company’s investment in direct financing leases as of December 31, 2005 and 2004:
| | | | | | | | |
| | 2005 | | | 2004 | |
Total minimum lease payments receivable | | $ | 1,175,648 | | | $ | 2,399,904 | |
Estimated residual values of leased equipment (unguaranteed) | | | 986,699 | | | | 986,704 | |
| | | | | | | | |
Investment in direct financing leases | | | 2,162,347 | | | | 3,386,608 | |
Less unearned income | | | (118,081 | ) | | | (294,537 | ) |
| | | | | | | | |
Net investment in direct financing leases | | $ | 2,044,266 | | | $ | 3,092,071 | |
| | | | | | | | |
At December 31, 2005, the aggregate amounts of future minimum lease payments are as follows:
| | | | | | | | | |
Year ending December 31, | | Operating Leases | | Direct Financing Leases | | Total |
2006 | | $ | 4,447,998 | | $ | 846,888 | | $ | 5,294,886 |
2007 | | | 3,736,023 | | | 279,959 | | | 4,015,982 |
2008 | | | 2,492,749 | | | 48,801 | | | 2,541,550 |
2009 | | | 2,090,549 | | | — | | | 2,090,549 |
2010 | | | 799,555 | | | — | | | 799,555 |
Thereafter | | | 677,628 | | | — | | | 677,628 |
| | | | | | | | | |
| | $ | 14,244,502 | | $ | 1,175,648 | | $ | 15,420,150 |
| | | | | | | | | |
The Company utilizes a straight-line depreciation method over the term of the equipment lease for equipment on operating leases currently in its portfolio. The useful lives for investment in leases by category are as follows:
| | | | | | |
| | Equipment category | | Useful Life (Yrs) | | |
| | Transportation, Rail | | 30-35 | | |
| | Aircraft | | 20-25 | | |
| | Construction | | 7-10 | | |
| | Manufacturing | | 10-20 | | |
| | Materials Handling | | 7-10 | | |
| | Natural Gas Compressors | | 7-10 | | |
| | Transportation, Other | | 7-10 | | |
6. | Related party transactions: |
The terms of the Operating Agreement provide that AFS and/or affiliates are entitled to receive certain fees for equipment acquisition, management and resale and for management of the Company.
The Operating Agreement allows for the reimbursement of costs incurred by AFS in providing administrative services to the Company. Administrative services provided include Company accounting, investor relations, legal counsel and lease and equipment documentation. AFS is not reimbursed for services where it is entitled to receive a separate fee as compensation for such services, such as management of equipment. Reimbursable costs incurred by AFS are allocated to the Company based upon estimated time incurred by employees working on Company business and an allocation of rent and other costs based on utilization studies. The Company is contingently liable for certain future costs to be incurred by AFS to manage the administrative services provided to the Company.
28
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
6. | Related party transactions (continued): |
Each of ATEL Leasing Corporation (“ALC”); ATEL Equipment Corporation (“AEC”); ATEL Investor Services (“AIS”); and AFS is a wholly-owned subsidiary of ATEL Capital Group, the Parent of the Managing Member, and performs services for the Company. During the acquisition period, acquisition services were performed for the Company by ALC; equipment management, lease administration and asset disposition services are performed by AEC; investor relations and communications services are performed by AIS; and general administrative services for the Company are performed by AFS.
Cost reimbursements to Managing Member are based on costs incurred by AFS in performing administrative services for the Company that are allocated to each fund that AFS manages based on certain criteria such as existing leases, number of investors or equity depending on the type of cost incurred.
AFS and/or affiliates earned fees and reimbursements, pursuant to the Operating Agreement as follows during each of the years ended December 31:
| | | | | | | | | |
| | 2005 | | 2004 | | 2003 |
Equipment Management Fees | | $ | 447,641 | | $ | 1,057,355 | | $ | 1,517,259 |
Partnership Administration | | | 678,510 | | | 752,161 | | | 666,005 |
Non-Admin Cost Reimbursements | | | 52,754 | | | — | | | — |
| | | | | | | | | |
| | $ | 1,178,905 | | $ | 1,809,516 | | $ | 2,183,264 |
| | | | | | | | | |
The Managing Member makes certain payments to third parties on behalf of the Company for convenience purposes. During the years ended December 31, 2005, 2004, 2003, the Managing Member made payments of $367,076, $455,634, and $341,269, respectively.
The Operating Agreement places an annual and a cumulative limit for cost reimbursements to AFS. The cumulative limit increases annually. Any reimbursable costs incurred by AFS during the year exceeding the annual and/or cumulative limits cannot be reimbursed in the current year, though may be reimbursable in future years. As of December 31, 2005, AFS had incurred approximately $1,308,000 of costs that are expected to be reimbursed to AFS by the Company in 2006 and 2007.
At December 31, 2005, non-recourse debt consists of a note payable to a financial institution. The note is due in semi-annual installments. Interest on the note is at a fixed rate of 4.96%. The note is secured by assignments of lease payments and pledges of assets. At December 31, 2005, the carrying value of the pledged assets is $2,816,670. The note matures in 2007.
Future minimum payments of non-recourse debt are as follows:
| | | | | | | | | |
Year ending December 31, | | Principal | | Interest | | Total |
2006 | | $ | 644,697 | | $ | 57,663 | | $ | 702,360 |
2007 | | | 677,070 | | | 25,290 | | | 702,360 |
| | | | | | | | | |
| | $ | 1,321,767 | | $ | 82,953 | | $ | 1,404,720 |
| | | | | | | | | |
The Company participates with AFS and certain of its affiliates, as defined in the Operating Agreement, in a financing arrangement (the “Master Terms Agreement”). The Master Terms Agreement is comprised of: (1) a working capital term loan facility to AFS, (2) an acquisition facility, (3) a warehouse facility to AFS, and (4) a venture facility available to an affiliate. The Master Terms Agreement is with a group of financial institutions and includes certain financial and non-financial covenants. The Master Terms Agreement totals $75,000,000 and expires in June 2007. The availability of borrowings to the Company under the Master Terms Agreement is reduced by the amount outstanding on any of the above mentioned facilities. As of December 31, 2005, the Company had borrowed $2,000,000 under the acquisition facility.
29
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
8. | Borrowing facilities (continued): |
As of December 31, 2005 borrowings under the facility were as follows:
| | | | |
Total available under the financing facility | | $ | 75,000,000 | |
Amount borrowed by the Company under the acquisition facility | | | (2,000,000 | ) |
Amounts borrowed by affiliated partnerships and limited liability companies under the acquisition facility | | | (10,500,000 | ) |
| | | | |
Total remaining available under the acquisition and warehouse facilities | | $ | 62,500,000 | |
| | | | |
The Company is contingently liable for principal payments under the warehouse facility component of the Master Terms Agreement. The Company is liable because borrowings are recourse, jointly and severally, to the extent of the pro-rata share of the Company’s net worth as compared to the aggregate net worth of certain of: (1) the affiliated partnerships and limited liability companies of the Company, and (2) AFS and ATEL Leasing Corporation (“ALC”) who are 100% liable. As of December 31, 2005, there were no borrowings under either the warehouse facility, the working capital term loan or the venture facility. However, the Company and its affiliates pay an annual commitment fee to have access to all facilities under the Master Terms Agreement.
As of December 31, 2005, the Company had $2,000,000 outstanding under the acquisition facility. The interest rate on the Master Terms Agreement is based on either the LIBOR/Eurocurrency rate of one, two, three, or six month maturities plus a lender designated spread, or the bank’s prime rate (i.e., reference rate), which re-prices daily. Principal amounts of loans made under the Master Terms Agreement that are repaid may be re-borrowed on the terms and subject to the conditions set forth under the Master Terms Agreement. The effective interest rate on borrowings at December 31, 2005 ranged from 5.93% to 7.25%.
Draws on the acquisition facility by any affiliated partnership and/or limited liability company borrower are secured by a blanket lien on that borrower’s assets, including but not limited to equipment and related leases.
To manage the warehousing facility for the holding of assets prior to allocation to specific investor programs, a Warehousing Trust Agreement has been entered into by the Company, AFS, ALC, and certain of the affiliated partnerships and limited liability companies. The warehousing facility is used to acquire and hold, on a short-term basis, certain lease transactions that meet the investment objectives of each of such entities. Each of the leasing programs sponsored by AFS and ALC currently in its acquisition stage is a pro rata participant in the Warehousing Trust Agreement, as described below. When a program no longer has a need for short term financing provided by the warehousing facility, it is removed from participation, and as new leasing investment entities are formed by AFS and ALC and commence their acquisition stages, these new entities will be added. As of December 31, 2005, the warehousing facility participants were ATEL Capital Equipment Fund VII, L.P., the Company, ATEL Capital Equipment Fund IX, LLC, ATEL Capital Equipment Fund X, LLC and ATEL Capital Equipment Fund XI, LLC. Pursuant to the Warehousing Trust Agreement, the benefit of the lease transaction assets, and the corresponding liabilities under the warehousing facility, inure to each of such entities based upon each entity’s pro-rata share in the warehousing trust estate. The “pro-rata share” is calculated as a ratio of the net worth of each entity over the aggregate net worth of all entities benefiting from the warehouse trust estate, excepting that the trustees, AFS and ALC, are both liable for their pro-rata shares of the obligations based on their respective net worth, and jointly liable for the pro rata portion of the obligations of each of the affiliated partnerships and limited liability companies participating under the warehousing facility. Transactions are financed through this warehousing facility only until the transactions are allocated to a specific program for purchase or are otherwise disposed by AFS and ALC. When a determination is made to allocate the transaction to a specific program for purchase by the program, the purchaser repays the debt associated with the asset, either with cash or by means of the acquisition facility, the asset is removed from the warehouse facility collateral, and ownership of the asset and any debt obligation associated with the asset are assumed solely by the purchasing entity.
The Master Terms Agreement discussed above includes certain financial and non-financial covenants applicable to each borrower. The Company and affiliates were not in compliance with non-financial covenants as of December 31, 2005. The Managing Member, on behalf of all borrowers, requested and received a waiver of this covenant from the financial institutions. The borrowing facility was repaid before the waiver expired and the Company was removed from the borrowing facility
30
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
9. | Receivables funding program: |
In 1999, the Company established a $40 million receivables funding program (which was subsequently increased to a maximum of $125 million in July 2000) with a receivables financing company that issues commercial paper rated A1 from Standard and Poor’s and P1 from Moody’s Investor Services. In this receivables funding program, the lenders received a general lien against all of the otherwise unencumbered assets of the Company. The program provided for borrowing at a variable interest rate and required the Company to enter into interest rate swap agreements with certain counterparties (also rated A1/P1) to mitigate the interest rate risk associated with a variable rate note. AFS believes that this program allowed the Company to avail itself of lower cost debt than that available for individual non-recourse debt transactions. The program expired as to new borrowings in January 2002. The receivables funding program terminated in January 2007.
The receivables funding program provides for borrowing at a variable interest rate and requires the Company, to enter into interest rate swap agreements with certain hedge counterparties (also rated A1/P1) to mitigate the interest rate risk associated with a variable interest rate note. These swaps expire between September 2006 to March 2009. The Company anticipates that this program will allow a more cost effective means of obtaining debt financing than available for individual non-recourse debt transactions.
As of December 31, 2005, the Company receives or pays interest on a notional principal of $15,861,648, based on the difference between nominal rates ranging from 4.35% to 7.72% and the variable rate under the Program of 4.82% at December 31, 2005. No actual borrowing or lending is involved. The termination of swaps was to coincide with the maturity of the debt. The differential to be paid or received is accrued as interest rates change and is recognized currently as an adjustment to interest expense related to the debt. Through the swap agreements, the interest rates on the borrowings have been effectively fixed. The interest rate swaps are carried at fair value on the balance sheet with unrealized gain/loss included in the statement of operations in other income/loss.
The interest rate swaps were originally designated as cash flow hedges of the interest payment on the long term debt. During August 2004, an additional repayment of debt was made under the receivables funding program. As a result of this payment and subsequent additional repayments, the swaps were deemed to be partially ineffective and the Company de-designated the original hedge relationships effective September 30, 2004. Prior to this de-designation, changes in the fair value of the swaps of $1,144,671 were recognized in accumulated other comprehensive loss (“AOCL”). Subsequent to this de-designation, changes in fair value of the swaps were reflected in the statement of operations in other income/loss, net. In addition, amounts remaining in AOCL subsequent to the de-designation of the swaps are to be reclassified into earning in a manner consistent with the earnings pattern of the underlying hedged item. During the year ended December 31, 2005 and 2004, AOCL decreased by $585,993 and $1,272,538, respectively, related to the reclassification of AOCL to earnings (included in interest expense).
The Company realized total comprehensive income (loss) of ($277,277), $7,392,558 and ($4,503,885) for the years ended December 31, 2005, 2004 and 2003.
As of December 31, 2005, the Company had $4,524,000 outstanding under this receivables funding program. In order to maintain the availability of the program, the Company is required to make payments of standby fees. These fees totaled $40,593 and $155,609 in 2005 and 2004, respectively, and are included in interest expense in the Company’s statement of operations.
31
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
9. | Receivables funding program (continued): |
Borrowings under the Program are as follows:
| | | | | | | | | | | | | | | | |
Date Borrowed | | Original Amount Borrowed | | Balance December 31, 2005 | | Notional Balance December 31, 2005 | | Swap Value December 31, 2005 | | | Payment Rate on Interest Swap Agreement | |
11/11/1999 | | $ | 20,000,000 | | $ | 28,000 | | $ | 532,457 | | $ | (3,636 | ) | | 6.84 | % |
12/21/1999 | | | 20,000,000 | | | 2,798,000 | | | 8,437,073 | | | (338,791 | ) | | 7.41 | % |
12/24/1999 | | | 25,000,000 | | | 167,000 | | | 708,164 | | | (9,902 | ) | | 7.44 | % |
4/17/2000 | | | 6,500,000 | | | 566,000 | | | 742,315 | | | (10,084 | ) | | 7.45 | % |
4/28/2000 | | | 1,900,000 | | | — | | | 99,807 | | | (1,762 | ) | | 7.72 | % |
8/3/2000 | | | 19,000,000 | | | 293,000 | | | 3,637,613 | | | (87,527 | ) | | 7.50 | % |
10/31/2000 | | | 7,500,000 | | | 566,000 | | | 1,115,114 | | | (20,338 | ) | | 7.13 | % |
1/29/2001 | | | 8,000,000 | | | — | | | — | | | — | | | 5.91 | % |
6/1/2001 | | | 2,000,000 | | | — | | | — | | | — | | | 5.04 | % |
9/1/2001 | | | 9,000,000 | | | — | | | 589,105 | | | 5,958 | | | 4.35 | % |
1/31/2002 | | | 3,900,000 | | | 106,000 | | | — | | | — | | | * | |
| | | | | | | | | | | | | | | | |
| | $ | 122,800,000 | | $ | 4,524,000 | | $ | 15,861,648 | | $ | (466,082 | ) | | | |
| | | | | | | | | | | | | | | | |
* | Under the terms of the Program, no interest rate swap agreement was required for this borrowing. |
The long-term debt borrowings mature from 2006 through 2007. Future minimum principal payments of long-term debt and annual swap notional reductions are as follows:
| | | | | | | | | | | | |
Year ending December 31, | | Debt Principal Swapped | | Debt Principal Not Swapped | | Interest | | Total |
2006 | | $ | 3,349,000 | | $ | 60,000 | | $ | 229,873 | | $ | 3,638,873 |
2007 | | | 1,069,000 | | | 46,000 | | | 6,686 | | | 1,121,686 |
| | | | | | | | | | | | |
| | $ | 4,418,000 | | $ | 106,000 | | $ | 236,559 | | $ | 4,760,559 |
| | | | | | | | | | | | |
At December 31, 2005, there are specific leases that are identified as collateral under the receivables funding program with expected future lease receivables of approximately $22,090,115 at their discounted present value.
During the fiscal year ended December 31, 2005, the weighted average interest rate on the receivables funding program was 7.28%. The receivables funding program discussed above includes certain financial and non-financial covenants applicable to each borrower. The Company and affiliates were in compliance with all covenants as of December 31, 2005. In 2006, the receivables funding program was repaid.
At December 31, 2005, the Company had no commitments to purchase lease assets.
32
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
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.
In the normal course of business, the Company enters into contracts of various types, including lease contracts, contracts for the sale or purchase of lease assets, management contracts, loan agreements, credit lines and other debt facilities. It is prevalent industry practice for most contracts of any significant value to include provisions that each of the contracting parties — in addition to assuming liability for breaches of the representations, warranties, and covenants that are part of the underlying contractual obligations — also assume an obligation to indemnify and hold the other contracting party harmless for such breaches, for harm caused by such party’s gross negligence and willful misconduct, including, in certain instances, certain costs and expenses arising from the contract. The Managing Member has substantial experience in managing similar leasing programs subject to similar contractual commitments in similar transactions, and the losses and claims arising from these commitments have been insignificant, if any. Generally, to the extent these contracts are performed in the ordinary course of business under the reasonable business judgment of the Managing Member, no liability will arise as a result of these provisions. The Managing Member has no reason to believe that the facts and circumstances relating to the Company’s contractual commitments differ from those it has entered into on behalf of the prior programs it has managed. 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.
As of December 31, 2005, 13,570,188 Units were issued and outstanding. The Company is authorized to issue up to 15,000,000 Units in addition to the Units issued to the initial members (50 Units).
As defined in the 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 2005, 2004, and 2003. The amounts allocated were determined so as to bring AFS’s ending capital account balance to zero at the end of each year.
13. | Fair value of financial instruments: |
The recorded amounts of the Company’s cash and cash equivalents, accounts receivable, accounts payable and accruals at December 31, 2005 and 2004 approximate fair value because of the liquidity and short-term maturity of these instruments.
Non-recourse debt:
The fair value of the Company’s non-recourse debt is estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The estimated fair value of the Company’s non-recourse debt at December 31, 2005 is $1,321,767.
Acquisition facility obligation:
The carrying value of the Company’s acquisition facility obligation approximates its fair value at December 31, 2005 as borrowings are at a variable interest rate that adjusts to current market interest rates.
Receivables funding program obligation:
The carrying amount of the Company’s receivables funding program obligation approximates fair value.
Interest rate swaps:
The fair value of interest rate swaps is estimated by management based on independent valuations or discounting the fixed cash flows paid under each swap using the rate at which the Company could enter into new swaps of similar maturities. Swaps are recorded on the balance sheet at fair value at December 31, 2005 and 2004.
33
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
14. | Selected quarterly data (unaudited): |
The Company’s 2004 and 2005 unaudited selected quarterly financial information is as follows:
| | | | | | | | | | | | | | |
Quarter ended | | March 31, 2004 | | | June 30, 2004 | | September 30, 2004 | | | December 31, 2004 |
Total revenues | | $ | 6,750,433 | | | $ | 7,224,091 | | $ | 7,771,649 | | | $ | 6,336,798 |
Net income (loss) | | $ | (375,332 | ) | | $ | 1,449,787 | | $ | 833,168 | | | $ | 3,067,726 |
Net income (loss) per Other Members’ Limited Liability Company Unit | | $ | (0.05 | ) | | $ | 0.09 | | $ | 0.04 | | | $ | 0.21 |
| | | | |
Quarter ended | | March 31, 2005 Restated | | | June 30, 2005 Restated | | September 30, 2005 | | | December 31, 2005 |
Total revenues | | $ | 3,020,479 | | | $ | 3,522,576 | | $ | 2,800,037 | | | $ | 4,313,177 |
Net income (loss) | | $ | (535,282 | ) | | $ | 685,339 | | $ | (1,979,651 | ) | | $ | 966,124 |
Net income (loss) per Other Members’ Limited Liability Company Unit | | $ | (0.07 | ) | | $ | 0.03 | | $ | (0.16 | ) | | $ | 0.05 |
After receipt of an SEC comment letter by an affiliate of the Company in April 2005, the Company’s Managing Member determined a restatement of previous SEC filings was required. This Form 10-K reflects the restatement, in accordance with the provisions of Accounting Principles Board Opinion No. 20, “Accounting Changes” of ATEL Capital Equipment Fund VIII, LLC previously filed financial statements for the following periods:
| • | | March 31, 2005 and for the three months ended March 31, 2005 |
| • | | June 30, 2005 and for the three and six months ended June 30, 2005 |
34
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
14. | Selected quarterly data (unaudited) (continued): |
Revenue
The Company’s Managing Member determined that the accounting methodology relating to certain utilization leases must be modified to comply with SFAS No. 13, “Accounting for Leases.” The Managing Member concluded that revenue was inappropriately recognized on a straight-line basis over the term of the lease for utilization-based leases versus on a per diem basis. As a result the Company restated operating lease revenue, accounts receivable and members’ capital.
Accrued liabilities
The Company’s Managing Member determined that certain liabilities had not been recorded in the correct periods through a detailed review of cash disbursements. As a result of this review, the Company restated several of its asset, liability, members’ capital and expense accounts.
Amortization of Initial Direct Costs to Originate or Acquire Loans and Leases Capitalized in Prior Years
The Company’s Managing Member determined that the accounting methodology relating to the amortization of incremental initial direct cost (“IDC”) and fees capitalized in prior years must be modified to comply with SFAS No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Cost of Leases.” As a result, the Managing Member concluded that they were not appropriately amortizing IDC capitalized in prior years. As a result of this restatement, IDC is amortized over the underlying lease term.
Accumulated Other Comprehensive Loss
The Company’s Managing Member determined that amounts in accumulated other comprehensive loss had not been properly reclassified into interest expense in accordance with SFAS No. 133. As a result of this review, the Company restated interest expense and other accumulated comprehensive loss.
35
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
14. | Selected quarterly data (unaudited) (continued): |
Summary of restatement adjustments for the three months ended March 31, 2005 and the three and six months ended June 30, 2005:
| | | | | | | | | | | | |
| | Adjustment to net income increase (decrease) for the Three Months Ended March 31, 2005 | | | Adjustment to net income increase (decrease) for the Three Months Ended June 30, 2005 | | | Adjustment to net income increase (decrease) for the Six Months Ended June 30, 2005 | |
Revenue: | | | | | | | | | | | | |
Operating leases | | $ | (207,016 | ) | | $ | 55,797 | | | $ | (151,219 | ) |
Interest expense | | | (240,615 | ) | | | 513 | | | | (240,102 | ) |
Asset management fees to Managing Member | | | (6,266 | ) | | | (33,899 | ) | | | (40,165 | ) |
Equipment maintenance | | | 53,807 | | | | 110,290 | | | | 164,097 | |
Railcar maintenance | | | (56,227 | ) | | | (106,215 | ) | | | (162,442 | ) |
Cost reimbursements to Managing Member | | | 1,406 | | | | 8,467 | | | | 9,873 | |
Amortization of initial direct costs | | | 5,996 | | | | 4,325 | | | | 10,321 | |
Professional fees | | | 2,387 | | | | (1,015 | ) | | | 1,372 | |
Outside services | | | 22,883 | | | | 21,891 | | | | 44,774 | |
Insurance | | | 27,947 | | | | (21,793 | ) | | | 6,154 | |
Taxes on income and franchise fees | | | — | | | | 140,500 | | | | 140,500 | |
Other | | | 4,890 | | | | 18,784 | | | | 23,674 | |
| | | | | | | | | | | | |
Net change in net income and in net loss | | | (390,808 | ) | | | 197,645 | | | | (193,163 | ) |
| | | |
Other adjustments to Members’ Capital: | | | | | | | | | | | | |
Accrued distributions payable, Managing Member | | | (105,874 | ) | | | 31 | | | | (105,843 | ) |
Accrued distributions payable, Other Members | | | (1,305,784 | ) | | | (90 | ) | | | (1,305,874 | ) |
Reclassification of accumulated other comprehensive loss to interest expense | | | 287,250 | | | | — | | | | 287,250 | |
| | | |
Net change in Members’ capital: | | | | | | | | | | | | |
Accumulated other comprehensive loss | | | 287,250 | | | | — | | | | 287,250 | |
Managing Member | | | (105,874 | ) | | | 31 | | | | (105,843 | ) |
Other Members | | | (1,696,592 | ) | | | 197,555 | | | | (1,499,037 | ) |
| | | | | | | | | | | | |
Total Members’ capital | | $ | (1,515,216 | ) | | $ | 197,586 | | | $ | (1,317,630 | ) |
| | | | | | | | | | | | |
Net change in Other Members’ capital per Limited Liability Company Unit | | $ | (0.13 | ) | | $ | 0.02 | | | $ | (0.11 | ) |
| | | | | | | | | | | | |
36
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
14. | Selected quarterly data (unaudited) (continued): |
Revenue
For the three months ended March 31, 2005, an adjustment was made to restate operating lease revenue. This adjustment resulted in decreasing operating lease revenue by $207,016 with a corresponding decrease in accounts receivable.
For the three months ended June 30, 2005, an adjustment was made to restate operating lease revenue. This adjustment resulted increasing operating lease revenue by $55,797 with a corresponding increase in accounts receivable .
For the six months ended June 30, 2005, an adjustment was made to restate operating lease revenue. This adjustment resulted in decreasing operating lease revenue by $151,219 with a corresponding decrease in accounts receivable.
Accrued liabilities
For the three months ended March 31, 2005, adjustments were made to restate certain operating expenses and Other Members’ capital. These adjustments resulted in: (1) decreasing interest expense, equipment maintenance, outside services and insurance expense by $151,272 and (2) increasing railcar maintenance and asset management fees to Managing Member by $62,493. Additionally, adjustments were made to accrue for certain distributions payable, per the Operating Agreement, to both the managing member and other members paid during the three months ended March 31, 2005. These adjustments resulted in a decrease of $1,305,784 and $105,874 in other Members’ and Managing Member’s Capital, respectively with corresponding increases in accrued distributions payable, Other Members and accrued distributions payable, Managing Member.
For the three months ended June 30, 2005, adjustments were made to restate certain operating expenses and other members’ capital. These adjustments resulted in: (1) decreasing equipment maintenance , outside services, taxes on income and franchise fees by $272,681 with a corresponding decrease in accounts payable other, and (2) increasing asset management fees to Managing Member, railcar maintenance, and insurance by $161,907 with a corresponding increase in accounts payable, Managing Member and accounts payable, other.
For the six months ended June 30, 2005, adjustments were made to restate certain operating expenses and other members’ capital. These adjustments resulted in: (1) decreasing interest expense, equipment maintenance, outside services, taxes on income and franchise fees and other expense by $420,193 with a corresponding decrease in accounts payable, other, and (2) increasing asset management fees to Managing Member and railcar maintenance by $202,607 with corresponding increases to both accounts payable, Managing Member and accounts payable, other. Additionally, adjustments were made to accrue for certain distributions payable, per the Operating Agreement, to both the managing member and other members paid during the three months ended June 30, 2005. These adjustments resulted in a decrease of $1,305,874 and $105,843 in other Members’ and Managing Member’s Capital, respectively with corresponding increases in accrued distributions payable, Other Members and accrued distributions payable, Managing Member.
Amortization of IDC
For the three months ended March 31, 2005 as well as the three and six months ended June 30, 2005, the adjustments made to amortization of IDC expense and related accumulated amortization resulting from restating IDC costs in prior years were nominal.
Accumulated Other Comprehensive Loss
For the three months ended March 31, 2005 as well as the six months ended June 30, 2005, an adjustment was made to reclassify amounts in accumulated other comprehensive loss to interest expense. The adjustment resulted in decreasing accumulated other comprehensive loss by $287,250 with a corresponding increase to interest expense.
Effect to net income/loss and Members’ capital
For the three months ended March 31, 2005, the above adjustments to revenue and period-end accrued liabilities had the effect of (1) decreasing the three month net income by $390,808, (2) decreasing Managing Member’s capital by $105,874, and (3) decreasing Other Members’ capital by $1,696,592 at March 31, 2005 or $0.13 per Limited Liability Company Unit (Other Members).
For the three months ended June 30, 2005, the above adjustments to period-end accrued liabilities had the effect of: (1) increasing the three month net income by $197,645 (2) nominally increasing Managing Member’s capital and (3) increasing Other Members’ capital by $197,555 at June 30, 2005 or $0.02 per Limited Liability Company Unit (Other Members).
For the six months ended June 30, 2005, the above adjustments to revenue and period-end accrued liabilities had the effect of: (1) decreasing six month net income by $193,163, (2) decreasing Managing Member’s capital by $105,843, (3) decreasing accumulated other comprehensive loss by $287,250, and (4) decreasing Other Members’ capital by $1,499,037 or $0.11 per Limited Liability Company Unit (Other Members).
37
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
14. | Selected quarterly data (unaudited) (continued): |
Cumulative effect of restatement adjustments prior to January 1, 2005
As more fully discussed in footnote 3 of the Company’s 2004 Form 10-K/A, the Company restated periods prior to January 1, 2005. The nature of the revenue, accrued liabilities and amortization of IDC restatement adjustments that impact the six months ended June 30, 2005, also impacted prior year periods. In addition, prior periods were impacted by other adjustments related to: (1) certain of AFS’ labor costs incurred to syndicate subscriptions for the Company’s Units that had not been reimbursed to AFS as per the Operating Agreement, (2) depreciation on assets. As a result, the Company restated Other Members’ capital and accounts payable Managing Member. For all periods prior to January 1, 2005, the adjustments as discussed above had the effect of decreasing members capital by $669,136 at December 31, 2004 from $42,188,041 as originally reported to $41,518,905.
The following tables reflect the impacted financial statement line items resulting from the restatement for the three months ended March 31, 2005 and the three and six months ended June 30, 2005:
Balance Sheets line items that have been restated as of:
| | | | | | | | | | | | | | | | |
| | March 31, 2005 | | | June 30, 2005 | |
| | As Reported | | | Restated | | | As Reported | | | Restated | |
Assets: | | | | | | | | | | | | | | | | |
Accounts receivable | | $ | 1,641,554 | | | $ | 1,005,630 | | | $ | 1,330,208 | | | $ | 750,081 | |
Prepaids and other assets | | | 3,980 | | | | 77,703 | | | | 56,195 | | | | 107,398 | |
Investments in equipment and leases, net | | | 57,310,234 | | | | 57,325,533 | | | | 48,553,314 | | | | 48,572,937 | |
Total assets | | | 59,504,289 | | | | 58,957,387 | | | | 52,456,191 | | | | 51,946,890 | |
| | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Accounts payable Managing Member | | | 1,141,038 | | | | 1,267,541 | | | | 1,620,582 | | | | 1,741,535 | |
Accrued distributions to Other Members: | | | — | | | | 1,305,784 | | | | — | | | | 1,305,874 | |
Accounts payable Other | | | 164,319 | | | | 366,849 | | | | 167,316 | | | | 215,924 | |
Accrued interest payable | | | 65,569 | | | | 68,202 | | | | 83,485 | | | | 85,605 | |
Total liabilities | | | 20,744,883 | | | | 22,382,333 | | | | 16,493,663 | | | | 17,971,128 | |
Accumulated other comprehensive Loss | | | (673,345 | ) | | | (386,095 | ) | | | (620,755 | ) | | | (333,505 | ) |
| | | | |
Other Members’ capital | | | 39,432,751 | | | | 37,961,149 | | | | 36,583,283 | | | | 34,309,267 | |
Total Members’ capital | | | 38,759,406 | | | | 36,575,054 | | | | 35,962,528 | | | | 33,975,762 | |
Total liabilities and Members’ capital | | $ | 59,504,289 | | | $ | 58,957,387 | | | $ | 52,456,191 | | | $ | 51,946,890 | |
38
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
14. | Selected quarterly data (unaudited) (continued): |
Statements of Operations line items that have been restated for the following periods:
| | | | | | | | |
| | Three Months Ended March 31, 2005 | |
| | As Reported | | | Restated | |
Revenue: | | | | | | | | |
Operating leases | | | 3,056,749 | | | | 2,849,733 | |
Total Revenues | | | 3,227,495 | | | | 3,020,479 | |
| | |
Expenses: | | | | | | | | |
Interest | | | 393,539 | | | | 634,154 | |
Asset management fees to Managing Member | | | 126,337 | | | | 132,603 | |
Equipment maintenance | | | 53,807 | | | | — | |
Railcar maintenance | | | — | | | | 56,227 | |
Cost reimbursements to Managing Member | | | 691,970 | | | | 690,564 | |
Amortization of initial direct costs | | | 34,137 | | | | 28,141 | |
Professional fees | | | 38,080 | | | | 35,693 | |
Outside service | | | 22,883 | | | | — | |
Insurance | | | 28,838 | | | | 891 | |
Fair value and reclassification adjustments on interest rate swap contracts | | | (385,184 | ) | | | — | |
Other | | | 80,290 | | | | 75,400 | |
| | |
Total expenses | | | 3,371,969 | | | | 3,940,945 | |
| | |
Reclassification adjustments | | | | | | | | |
Other income (expense), net | | | — | | | | 385,184 | |
| | |
Net loss | | | (144,474 | ) | | | (535,282 | ) |
| | |
Net income (loss): | | | | | | | | |
Managing Member | | | 250,256 | | | | 356,130 | |
Other Members | | | (394,730 | ) | | | (891,412 | ) |
Net income (loss) per Limited Liability Company Unit | | $ | (0.03 | ) | | $ | (0.07 | ) |
39
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
14. | Selected quarterly data (unaudited) (continued): |
Statements of Cash Flows line items that have been restated for the following periods:
| | | | | | | | |
| | Three Months Ended March 31, 2005 | |
| | As Reported | | | Restated | |
Operating activities: | | | | | | | | |
Net loss | | $ | (144,474 | ) | | $ | (535,282 | ) |
Adjustment to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Gain on sale of assets | | | (103,414 | ) | | | (102,430 | ) |
Interest rate swap contracts | | | — | | | | 287,250 | |
Amortization of initial direct costs | | | 34,137 | | | | 28,141 | |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | (63,764 | ) | | | 143,252 | |
Prepaids and other assets | | | — | | | | (26,682 | ) |
Accounts payable, Managing Member | | | 527,729 | | | | 500,777 | |
Accounts payable, other | | | (74,719 | ) | | | (72,473 | ) |
Accrued interest payable | | | (39,767 | ) | | | (86,402 | ) |
| | |
Net cash provided by operating activities | | | 2,233,840 | | | | 2,234,264 | |
| | |
Investing activities: | | | | | | | | |
Purchases of equipment on operating lease | | | 422 | | | | — | |
| | |
Net cash provided by investing activities | | | 569,371 | | | | 568,948 | |
| | |
Schedule of non-cash transactions: | | | | | | | | |
Distributions declared and payable at March 31: | | | | | | | | |
Managing Member | | | — | | | | 105,874 | |
Other Member | | | — | | | | 1,305,784 | |
40
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
14. | Selected quarterly data (unaudited) (continued): |
Statements of Operations line items that have been restated for the following periods:
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2005 | | Six Months Ended June 30, 2005 | |
| | As Reported | | | Restated | | As Reported | | | Restated | |
Revenue: | | | | | | | | | | | | | | | |
Operating leases | | | 2,803,198 | | | | 2,858,995 | | | 5,859,947 | | | | 5,708,728 | |
Total Revenues | | | 3,466,779 | | | | 3,522,576 | | | 6,694,274 | | | | 6,543,055 | |
| | | | |
Expenses: | | | | | | | | | | | | | | | |
Interest expense | | | 373,311 | | | | 372,798 | | | 766,850 | | | | 1,006,952 | |
Asset management fees to Managing Member | | | 162,029 | | | | 195,928 | | | 288,366 | | | | 328,531 | |
Equipment maintenance | | | 110,290 | | | | — | | | 164,097 | | | | — | |
Railcar maintenance | | | — | | | | 106,215 | | | — | | | | 162,442 | |
Cost reimbursement to Managing Member | | | 13,549 | | | | 5,082 | | | 705,519 | | | | 695,646 | |
Amortization of initial direct costs | | | 25,659 | | | | 21,334 | | | 59,796 | | | | 49,475 | |
Professional fees | | | 4,754 | | | | 5,769 | | | 42,834 | | | | 41,462 | |
Outside services | | | 21,891 | | | | — | | | 44,774 | | | | — | |
Insurance | | | — | | | | 21,793 | | | 28,838 | | | | 22,684 | |
Fair value and reclassification adjustments on interest rate swap contracts | | | (40,409 | ) | | | — | | | (425,593 | ) | | | — | |
Taxes on income and franchise fees | | | 240,751 | | | | 100,251 | | | 240,853 | | | | 100,353 | |
Other | | | 74,677 | | | | 55,893 | | | 154,967 | | | | 131,293 | |
| | | | |
Total expenses | | | 2,979,085 | | | | 2,877,646 | | | 6,351,054 | | | | 6,818,591 | |
| | | | |
Reclassification adjustments | | | | | | | | | | | | | | | |
Other income (expense), net | | | — | | | | 40,409 | | | — | | | | 425,593 | |
| | | | |
Net income | | | 487,694 | | | | 685,339 | | | 343,220 | | | | 150,057 | |
| | | | |
Net income (loss): | | | | | | | | | | | | | | | |
Managing Manger | | | 250,287 | | | | 250,256 | | | 500,543 | | | | 606,386 | |
Other Members | | | 237,407 | | | | 435,083 | | | (157,323 | ) | | | (456,329 | ) |
Net income (loss) per Limited Liability Company Unit | | $ | 0.02 | | | $ | 0.03 | | $ | (0.01 | ) | | $ | (0.04 | ) |
41
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
14. | Selected quarterly data (unaudited) (continued): |
Statements of Cash Flows line items that have been restated for the following periods:
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2005 | | | Six Months Ended June 30, 2005 | |
| | As Reported | | | Restated | | | As Reported | | | Restated | |
Operating activities: | | | | | | | | | | | | | | | | |
Net income | | $ | 487,694 | | | $ | 685,339 | | | $ | 343,220 | | | $ | 150,057 | |
Adjustment to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | |
Depreciation of operating lease assets | | | | | | | | | | | | | | | | |
Amortization of initial direct costs | | | 25,659 | | | | 21,334 | | | | 59,796 | | | | 49,475 | |
Interest rate swap contracts | | | — | | | | — | | | | — | | | | 287,250 | |
Gain on sale of assets | | | | | | | | | | | (703,840 | ) | | | (702,856 | ) |
Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | |
Prepaids and other assets | | | (52,215 | ) | | | (29,695 | ) | | | (52,215 | ) | | | (56,377 | ) |
Accounts receivable | | | 311,346 | | | | 255,549 | | | | 162,482 | | | | 313,701 | |
Accounts payable, Managing Member | | | 479,543 | | | | 473,994 | | | | 1,007,272 | | | | 974,802 | |
Accounts payable, other | | | 2,997 | | | | (150,925 | ) | | | (71,722 | ) | | | (223,487 | ) |
Accrued interest payable | | | 17,916 | | | | 17,403 | | | | (21,851 | ) | | | (68,999 | ) |
| | | | |
Net cash provided by operating activities | | | 2,256,910 | | | | 2,256,969 | | | | 4,490,750 | | | | 4,491,174 | |
| | | | |
Investing activities: | | | | | | | | | | | | | | | | |
Proceeds from sale of lease assets and notes receivable | | | 7,163,413 | | | | 7,162,432 | | | | 7,438,247 | | | | 7,437,265 | |
Purchase of equipment on operating leases | | | (983 | ) | | | — | | | | (561 | ) | | | — | |
Net reduction of investment in DFLs | | | 261,775 | | | | 261,773 | | | | 555,890 | | | | 555,888 | |
Proceeds from sale of investment securities | | | | | | | | | | | | | | | | |
Payments of initial direct costs to Managing Member | | | | | | | | | | | | | | | | |
| | | | |
Net cash provided by investing activities | | | 7,424,205 | | | | 7,424,205 | | | | 7,993,576 | | | | 7,993,153 | |
| | | | |
Schedule of non-cash transactions: | | | | | | | | | | | | | | | | |
Distributions declared and payable at March 31: | | | | | | | | | | | | | | | | |
Managing Member | | | — | | | | (31 | ) | | | — | | | | 105,843 | |
Other Member | | | — | | | | 90 | | | | — | | | | 1,305,874 | |
42
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 Chief Executive Officer, and Executive Vice President and Chief Financial and Operating Officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) during and as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and Executive Vice President and Chief Financial and Operating Officer concluded that for the years ended December 31, 2005, 2004 and 2003, certain material weaknesses existed in the Company’s internal control over financial reporting.
The Company does not control the financial reporting process, and is dependent on the Managing Member, who is responsible for providing the Company with financial statements in accordance with generally accepted accounting principles. The Managing Member’s disclosure controls and procedures over the: a) application of generally accepted accounting principles for leasing transactions (specifically, timely identification and recording of impairment in leased assets, accumulating and capitalizing costs for initiating leases (“IDC”), and properly amortizing costs associated with the initiation of a lease); b) allocation of costs incurred by the Managing Member on behalf of the Company; c) process of identifying and estimating liabilities in the correct period; d) proper accounting and related disclosures for derivatives in accordance with SFAS No. 133, as amended by SFAS 137, 138 and 149; and e) financial statement close process, including evaluating the relative significance of misstatements and preparation of financial statements and related disclosures, were determined to be ineffective and constitute material weaknesses in internal control over financial reporting.
Changes in internal control
The Managing Member has reviewed the material weaknesses and believes that the following corrective actions taken as a whole will address the material weaknesses in its disclosure controls and procedures described above. These corrective actions are as follows:
With regard to the timely identification and recording of impairment of leased assets, the Managing Member has strengthened its quarterly impairment analysis through additional management review of the analysis.
With regard to IDC, the accounting guidance has been reviewed, and a standard cost model (the “Model”) has been developed that includes quarterly reviews by management. Information from the Model drives the amounts to be capitalized on a lease by lease basis. IDC is amortized over the term of the lease based on a straight-line basis for operating leases and on the effective interest method for direct finance leases and notes receivable.
With regard to the allocations of costs and expenses incurred by the Managing Member, the allocation process has been reviewed and the costs and expenses have been properly allocated in accordance with the Limited Liability Company Operating Agreement.
With regard to identifying and estimating liabilities in the correct periods, the Managing Member has performed a detailed review to identify and record the liabilities, in the correct period. A standardized quarterly review process has been implemented to ensure the identification and estimation of the liabilities.
With regard to the propriety of accounting and disclosures for derivatives, the Managing Member has reviewed the accounting guidance and restated interest expense and accumulated other comprehensive loss for the three months ended March 31, 2005, and has prescribed that future accounting for derivatives reflect changes in fair value in earnings. At December 31, 2005, the Managing Member implemented the prescribed accounting treatment and believes that this will eliminate the potential for future material misstatements.
The Managing Member has taken the following steps to mitigate the weakness regarding its financial statement close process: a Chief Accounting Officer has been hired and the controller position has been split into two separate roles to ensure proper management of the Managing Member and the managed Funds’ accounting operations. Controls and job functions are being redesigned to increase the documentation of processes and transparency of procedures going forward.
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PART III
Item 10. | DIRECTORS AND EXECUTIVE OFFICERS |
The registrant is a Limited Liability Company and, therefore, 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, through its subsidiaries, ATEL Leasing Corporation (“ALC”), AFS’s managing member, and ATEL Business Credit, Inc. (“ABC”), the other member of AFS. ALC and ABC are AFS’s only members. The outstanding voting capital stock of ATEL Capital Group is owned 100% by Dean Cash.
Each of ALC, ATEL Equipment Corporation (“AEC”), ATEL Investor Services (“AIS”) and ATEL Financial Services, LLC (“AFS”) is a subsidiary under the control of ATEL Capital Group and performs services for the Company. Acquisition services are performed for the Company by ALC, equipment management, lease administration and asset disposition services are performed by AEC, investor relations and communications services are performed by AIS and general administrative services for the Company are performed by AFS. ATEL Securities Corporation (“ASC”) is a wholly-owned subsidiary of AFS which performed distribution services in connection with the Company’s public offering of its Units.
The officers and directors of ATEL Capital Group 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 and Operating Officer of ATEL Financial Services, LLC (Managing Member) |
| |
Vasco H. Morais | | Senior Vice President, Secretary and General Counsel of ATEL Financial Services, LLC (Managing Member) |
Dean L. Cash, age 55, 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 52, 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 48, 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.
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Audit Committee
ATEL Leasing Corporation is the managing member of ATEL Financial Services, LLC. ATEL Financial Services, LLC is the Managing Member of the registrant. The board of directors of ATEL Leasing Corporation acts as the audit committee of the registrant. Dean L. Cash and Paritosh K. Choksi are members of the board of directors of ALC and are deemed to be financial experts. They are not independent of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
During March 2006, each of the executive officers and directors of the registrant’s Managing Member, Dean Cash, Paritosh Choksi and Vasco Morais, filed a statement of beneficial ownership of Units on Form 3 under Section 16. These statements were due at the time the registrant filed its Form 8A registration statement under the Securities Exchange Act of 1934. Based solely on a review of Forms 3, 4 and 5, the Company is not otherwise aware of any failures to file reports of beneficial ownership required to be filed during or for the year ended December 31, 2005.
Code of Ethics
ACG on behalf of AFS and ALC has adopted a code of ethics for its Chief Executive Officer and Chief Financial and Operating Officer. The Code of Ethics is included as Exhibit 14.1 to this report.
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Item 11. | EXECUTIVE COMPENSATION |
The registrant is a Limited Liability Company and, therefore, has no officers or directors.
Set forth hereinafter is a description of the nature of remuneration paid and to be paid to AFS and its Affiliates. The amount of such remuneration paid in 2005, 2004 and 2003 is set forth in Item 8 of this report under the caption “Financial Statements and Supplementary Data - Notes to the Financial Statements - Related party transactions,” at footnote 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% 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.
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.
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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 Limited Liability Company Operating Agreement (“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 2005, 2004 and 2003. The amounts allocated were determined to bring AFS’s ending capital account balance to zero at the end of each year. See financial statements included in Item 8, Part I of this report for amounts allocated to AFS in 2005, 2004 and 2003.
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Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
Security Ownership of Certain Beneficial Owners
At December 31, 2005, 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) |
Title of Class | | Name and Address of Beneficial Owner | | Amount and Nature of Beneficial Ownership | | Percent of Class |
Limited Liability Company Units | | Dean Cash 600 California Street, 6th Floor San Francisco, CA 94108 | | Initial Limited Liability Company Units 25 Units ($250) (owned by wife) | | 0.0002% |
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 a 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 Supplemental Data - Notes to the Financial Statements - Related party transactions” at footnote 7 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 last two years, the Company incurred audit, audit related, tax and other fees with its principal auditors as follows:
| | | | | | |
| | 2005 | | 2004 |
Audit fees | | $ | 162,033 | | $ | 177,899 |
Audit related fees | | | — | | | — |
Tax fees | | | 27,242 | | | 23,219 |
Other | | | — | | | — |
| | | | | | |
| | $ | 189,275 | | $ | 201,118 |
| | | | | | |
The Company restated its audited financial statements for the years ended December 31, 2004 and 2003, as well as the unaudited interim statements for the first and second quarters of 2005. The audit fees incurred in 2005 for auditing the restated financial statements for the years ended December 31, 2004 and 2003 are $91,685.
ATEL Leasing Corporation is the managing member of ATEL Financial Services, LLC. ATEL Financial Services, LLC is the Managing Member of the registrant. The board of directors of ATEL Leasing Corporation acts as the audit committee of the registrant. Engagements for audit services, audit related services and tax services are approved in advance by the Chief Financial Officer of ATEL Leasing Corporation acting on behalf the board of directors of ATEL Leasing Corporation in its role as the audit committee of the Company.
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PART IV
Item 15. | FINANCIAL STATEMENT SCHEDULES AND EXHIBITS |
(a) | Financial Statements and Schedules |
Included in Part II of this report:
Report of Independent Registered Public Accounting Firm
Balance Sheets at December 31, 2005 and 2004
Statements of operations for the years ended December 31, 2005, 2004 and 2003
Statements of Changes in Members’ Capital for the years ended December 31, 2005, 2004 and 2003
Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
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.
(3) and (4) Amended and Restated Limited Liability Company Agreement, included as Exhibit B to the Prospectus included in the registrant’s registration statement on form S-1 effective December 7, 1998, (File Number 333-62477) is hereby incorporated herein by reference this reference.
(14.1) Code of Ethics
(31.1) Rule 13a-14(a)/ 15d-14(a) Certification of Paritosh K. Choksi
(31.2) Rule 13a-14(a)/ 15d-14(a) Certification of Dean L. Cash
(32.1) Certification Pursuant to 18 U.S.C. section 1350 of Dean L. Cash
(32.2) Certification Pursuant to 18 U.S.C. section 1350 of Paritosh K. Choksi
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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: April 17, 2007
| | | | | | | | | | |
| | | | ATEL Capital Equipment Fund X, LLC |
| | | | (Registrant) |
| | | |
| | | | By: | | ATEL Financial Corporation |
| | | | | | Managing Member of Registrant |
| | | | | |
| | | | | | | | By: | | /s/ Dean Cash |
| | | | | | | | | | Dean 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 and Operating 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 |
| | President and Chief Executive Officer of ATEL Financial Services, LLC | | |
/s/ Dean L. Cash | | (Managing Member) | | April 17, 2007 |
Dean Cash | | | | |
| | |
/s/ Paritosh K. Choksi | | Executive Vice President and Chief Financial and Operating Officer of | | April 17, 2007 |
Paritosh K. Choksi | | ATEL Financial Services, LLC (Managing Member) | | |
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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