Form 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| Annual report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 (fee required) For
the Year Ended December 31, 2002
OR
|_| Transition report pursuant to section 13 or 15(d) of
the Securities Exchange Act of 1934 (no fee
required) For the transition period from ____ to
____
Commission File number 333-62477
ATEL Capital Equipment Fund VIII, LLC
California 94-3307404
---------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
600 California Street, 6th Floor, San Francisco, California 94108
(Address of principal executive offices)
Registrant's telephone number, including area code (415) 989-8800
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: None
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
State the aggregate market value of voting stock held by non-affiliates of
the registrant. Inapplicable
DOCUMENTS INCORPORATED BY REFERENCE
Prospectus dated December 7, 1998, filed pursuant to Rule 424(b)
(Commission File No. 33-62477) is hereby incorporated by reference into Part IV
hereof.
1
PART I
Item 1: BUSINESS
General Development of Business
ATEL Capital Equipment Fund VIII, LLC (the Company) was formed under the
laws of the state of California in July 1998. The Company was formed for the
purpose of acquiring equipment to engage in equipment leasing and sales
activities. The Managing Member of the Company is ATEL Financial Services LLC
(ATEL), 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 conducted a public offering of 15,000,000 of 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 and ATEL requested that the subscriptions, except those received from
Pennsylvania investors (7,500 Units, $75,000), be released to the Company. On
that date, the Company commenced operations in its primary business (leasing
activities). As of February 18, 1999, the Company had received subscriptions for
775,777 Units ($7,757,770) and ATEL requested that the remaining funds in escrow
(from Pennsylvania investors) be released to the Company. As of November 30,
2000, the Company had received subscriptions for 13,570,138 ($135,701,380) Units
in addition to the Initial Members' Units and the offering was terminated. All
of the Units were issued and outstanding as of December 31, 2002.
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 partners 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 72 months after the end of the year in which the
Final Closing occurs (which will be December 31, 2006) and (iii) provide
additional distributions following the reinvestment period and until all
equipment has been sold. The Company is governed by its Limited Liability
Company Operating Agreement (Operating Agreement).
Narrative Description of Business
The Company has acquired and intends to acquire various types of equipment
and to lease such equipment pursuant to "Operating" leases and "High Payout"
leases, whereby "Operating" leases are defined as being leases in which the
minimum lease payments during the initial lease term do not recover the full
cost of the equipment and "High Payout" leases recover at least 90% of such
cost. It is the intention of ATEL that a majority of the aggregate purchase
price of equipment will represent equipment leased under "High Payout" leases
upon final investment of the Net Proceeds of the Offering and that no more than
20% of the aggregate purchase price of equipment will be invested in equipment
acquired from a single manufacturer.
The Company will only purchase equipment for which a lease exists or for
which a lease will be entered into at the time of the purchase.
As of December 31, 2002, the Company had purchased equipment with a total
acquisition price of $245,736,450.
The Company's objective is to lease a minimum of 75% of the equipment
acquired with the net proceeds of the offering to lessees that (i) have an
aggregate credit rating by Moody's Investor service, Inc. of Baa or better, or
the credit equivalent as determined by ATEL, 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 the Managing Member, 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.
During 2002, 2001 and 2000, certain lessees generated significant portions
of the Company's total lease revenues as follows:
Lessee Type of Equipment 2002 2001 2000
- ------ ----------------- ---- ---- ----
Overnite Transportation Company Tractors and trailers 10% * *
Union Pacific Railroad Railcars * 16% *
Burlington Northern Santa Fe Railroad Locomotives and Auto Racks * * 10%
* Less than 10%
These percentages are not expected to be comparable in future periods.
2
The equipment leasing industry is highly competitive. Equipment
manufacturers, corporations, partnerships and others offer users an alternative
to the purchase of most types of equipment with payment terms that vary widely
depending on the lease term and type of equipment. The ability of the Company to
keep the equipment leased and/or operating and the terms of the acquisitions,
leases and dispositions of equipment depends on various factors (many of which
are not in the control of ATEL or the Company), such as general economic
conditions, including the effects of inflation or recession, and fluctuations in
supply and demand for various types of equipment resulting from, among other
things, technological and economic obsolescence.
ATEL will seek to limit the amount invested in equipment to any single
lessee to not more than 20% of the aggregate purchase price of equipment owned
at any time during the reinvestment period.
The business of the Company is not seasonal.
The Company has no full time employees.
Equipment Leasing Activities
Through December 31, 2002, the Company has disposed of certain leased
assets as set forth bel
Excess of
Type of Original Rents Over
Equipment Equipment Cost Sale Price Expenses *
- --------- -------------- ---------- ----------
Transportation, rail $ 7,128,678 $ 7,464,886 $ 1,887,775
Office automation 5,854,367 1,744,052 5,099,209
Manufacturing 376,423 99,322 279,808
Transportation, other 21,250 22,398 2,490
----------------- ----------------- -----------------
----------------- ----------------- -----------------
$ 13,380,718 $ 9,330,658 $ 7,269,282
================= ================= =================
================= ================= =================
* Individual asset types included in "Other" represent less than 2% of the
total.
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,
2002 and the industries to which the assets have been leased. The Company has
purchased certain assets subject to existing non-recourse debt. For financial
statement purposes, non-recourse debt has been offset against the investment in
certain direct finance leases where the right of offset exists.
Purchase Price Excluding Percentage of Total
Asset Types Acquisition Fees Acquisitions
- ----------- ---------------- ------------
Transportation, rail $59,769,940 24.32%
Manufacturing 44,048,583 17.93%
Transportation, other 25,757,971 10.48%
Aircraft 38,535,439 15.68%
Transportation, intermodal
containers 21,228,750 8.64%
Gas compressors 13,848,465 5.64%
Point of sale / office automation 8,677,566 3.53%
Materials handling 11,018,547 4.48%
Storage tanks 6,712,090 2.73%
Marine vessels 3,952,500 1.61%
Other * 12,186,599 4.96%
---------------- ------------------
$245,736,450 100.00%
================ ==================
* Individual asset types included in "Other" represent less than 2% of the
total.
Purchase Price Excluding Percentage of Total
Industry of Lessee Acquisition Fees Acquisitions
- ------------------ ---------------- ------------
Transportation, rail $59,769,940 24.31%
Transportation, air 38,535,439 15.68%
Manufacturing, other 34,889,583 14.20%
Transportation, other 27,245,340 11.09%
Transportation, containers 21,228,750 8.64%
Manufacturing, electronics 20,901,071 8.51%
Retail 18,056,010 7.35%
Natural gas 13,848,465 5.64%
Other * 11,261,852 4.58%
---------------- ------------------
$245,736,450 100.00%
================ ==================
* Individual lessee industries included in "Other" represent less than 2% of the
total.
3
For further information regarding the Company's equipment lease portfolio
as of December 31, 2002, see Note 3 to the financial statements, Investments in
equipment and leases, as set forth in Part II, Item 8, Financial Statements and
Supplementary Data.
Item 2. PROPERTIES
The Company does not own or lease any real property, plant or material
physical properties other than the equipment held for lease as set forth in Item
1.
Item 3. LEGAL PROCEEDINGS
No material legal proceedings are currently pending against the Company or
against any of its assets. The following is a discussion of legal matters
involving the Company, but which do not represent claims against the Company or
its assets.
Emery Worldwide Airways, Inc.:
On January 25, 2002, the Company filed a complaint against its lessee,
Emery Worldwide Airways, Inc., for failure by the lessee to properly maintain
the condition and airworthiness of the aircraft on lease to the lessee, and for
certain other breaches and defaults by the lessee as alleged in the complaint.
The Company has claimed stipulated loss value damages in the amount of
$5,648,173 as a result of the breaches and defaults under the lease by the
lessee. A motion for summary judgment on the Company's claims was filed the
summer of 2002, and an unfavorable ruling on the motion was handed down in the
fourth quarter of 2002. A trial date for this matter had been set for May 2003,
but was delayed until September 2003. In March 2003, ATEL settled with Emery for
an amount equal to $1,300,000, plus the value of the aircraft. ATEL is currently
taking steps to remarket the aircraft.
Burlington Northern Santa Fe Corporation:
This complaint was filed for the recovery of $300,000 in damages for the
"Agreed Value" of a destroyed locomotive, where THE CIT Group/Equipment
Financing, Inc., acting as agent for the Company, agreed to "swap" the
locomotive unit with Burlington Northern Santa Fe Corporation, without first
obtaining the Company's consent to do so, as required by the agreement. An
additional claim for holdover rent was informally asserted. A satisfactory
agreement for settlement has been reached in this matter and payment of $483,653
in the settlement was received in the first quarter of 2003.
Solectron:
This is a matter whereby the Company has declared a lessee in default for
failure to pay rent in a timely manner, and for other various defaults. A claim
was filed on August 29, 2002, by the Manager on behalf of the Company in the
amount of $13,332,328. The lessee filed a counter-claim against the Company
asserting unfair business practices. The Company believes that it has a
reasonable basis for success of some, if not all, of its claims in this matter.
Ingersoll International:
At December 31, 2002, ATEL had commenced action against Ingersoll
International ("the Lessee) as we had declared them in default for making an
unauthorized assignment of part of the leased equipment. Subsequent to December
31, 2002, ATEL, the Lessee and the unauthorized party reached an agreement in
principal to have the unauthorized party assume the lease. Documents have been
prepared by ATEL and sent to the other parties for signature and the Company
expects all documents to be signed and this matter resolved by March 31, 2003.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S LIMITED LIABILITY COMPANY UNITS
AND RELATED MATTERS
Market Information
The Units are transferable subject to restrictions on transfers which have
been imposed under the securities laws of certain states. However, as a result
of such restrictions, the size of the Company and its investment objectives, to
ATEL's knowledge, no established public secondary trading market has developed
and it is unlikely that a public trading market will develop in the future. As a
result, there is no currently ascertainable market value for the Units.
Holders
As of December 31, 2002, a total of 3,656 investors were record holders of
Units in the Company.
4
ERISA Valuation
In order to permit ERISA fiduciaries who hold Units to satisfy their annual
reporting requirements, the Managing Member estimated the value per Unit of the
Company's assets as of September 30, 2002. The Managing Member 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, 2003. 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
the Managing Member'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, the
Managing Member then calculated the portion of the aggregate estimated value of
the Company assets that would be distributed to Unit holders on liquidation of
the Company, and divided the total so distributable by the number of outstanding
Units. As of September 30, 2002, the value of the Company's assets, calculated
on this basis, was approximately $8.24 per Unit. The foregoing valuation was
performed solely for the ERISA purposes described above. There is no market for
the Units, and, accordingly, this value does not represent an estimate of the
amount a Unit holder would receive if he were to seek to sell his Units.
Furthermore, there can be no assurance as to the amount the Company may actually
receive if and when it seeks to liquidate its assets, or the amount of lease
payments and equipment disposition proceeds it will actually receive over the
remaining term of the Company.
Dividends
The Company does not make dividend distributions. However, the Members of
the Company are entitled to certain distributions as provided under the
Operating Agreement.
ATEL has sole discretion in determining the amount of distributions;
provided, however, that the Managing Member 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 the Managing Member. In 2001, the Managing Member
determined that amount to be $0.91 per Unit.
Investors may elect to receive distributions either on a monthly or
quarterly basis.
The rate for distributions from 2002 operations was $0.07583 per Unit per
month. The distributions were paid in February through December 2002 and in
January 2003. For each quarterly distribution (paid in April, July and October
2002 and in January 2003) the rate was $0.2275 per Unit. Distributions were from
2002 cash flows from operations.
The rate for distributions from 2001 operations was $0.076667 per Unit per
month for January through June 2001. The distributions were paid in February
through July 2001. The rate for the distributions for July through December 2001
was $0.075833. The distributions were paid in August through December 2001 and
in January 2002. For each quarterly distribution (paid in April and July 2001)
the rate was $0.23 per Unit. For the quarterly distributions paid in October
2001 and January 2002, the rate was $0.2275. Distributions were from 2001 cash
flows from operations.
The rate for monthly distributions from 2000 operations was $0.075 for
January through October 2000. The distributions were paid in February through
November 2000. The rate for the distribution for November 2000 was $0.079167.
The rate for the distribution for December 2000 was $0.07667. An additional
distribution was paid in December 2000. The amount of the distribution was
calculated for each Unit so as to bring the average of all monthly distributions
received to a total of $0.079167 per Unit per month for the period from February
through November 2000. For each quarterly distribution (made in April, July and
October 2000) the rate was $0.225 per Unit. For the quarterly distribution paid
in January 2001, the rate was $0.235. An additional distribution was paid in
December 2000. The amount of the distribution was calculated for each Unit so as
to bring the average of all quarterly distributions received to a total of
$0.2375 per Unit per quarter for the period from February through October 2000.
Distributions were from 2000 cash flows from operations.
The following table presents summarized information regarding distributions
to members other than the Managing Member (Other Members:)
2002 2001 2000 1999
---- ---- ---- ----
Distributions of net income (loss) $ (0.2800) $ (0.0600) $ (0.2900) $ 0.0600
Return of investment 1.1900 0.9700 1.2100 0.5500
---------------- ----------------- ------------------ -----------------
Distributions per unit 0.9100 0.9100 0.9200 0.6100
Differences due to timing of distributions - 0.0050 0.0275 0.2900
---------------- ----------------- ------------------ -----------------
Nominal distribution rates from above $ 0.9100 $ 0.9150 $ 0.9475 $ 0.9000
================ ================= ================== =================
5
Item 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of the Company at
December 31, 2002, 2001, 2000, 1999 and 1998 and for the years then ended. This
financial data should be read in conjunction with the financial statements and
related notes included under Item 8 of this report.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Gross revenues $ 32,929,975 $43,794,097 $ 31,047,485 $ 8,660,653 $ -
Net income (loss) $ (2,805,544) $ 132,672 $ (2,305,631) $ 438,835 $ -
Weighted average Units 13,570,188 13,570,188 10,634,792 4,025,294 50
Net income (loss) allocated to
Other Members $ (3,806,713) $ (872,244) $ (3,100,640) $ 239,420 $ -
Net income (loss) per Unit, based on
weighted average Units outstanding $ (0.28) $ (0.06) $ (0.29) $ 0.06 $ -
Distributions per Unit, based on
weighted average Units outstanding $ 0.91 $ 0.91 $ 0.92 $ 0.61 $ -
Total Assets $ 153,464,672 $184,421,674 $198,832,652 $ 145,663,336 $ 600
Non-recourse and Other Long-term Debt $ 68,614,855 $91,383,964 $ 93,993,744 $ 71,848,617 $ -
Total Members' Capital $ 66,526,763 $83,361,952 $101,338,501 $ 64,130,010 $ 600
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statements contained in this Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and elsewhere in this Form
10-K, which are not historical facts, may be forward-looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Investors are cautioned not
to attribute undue certainty to these forward-looking statements, which speak
only as of the date of this Form 10-K. We undertake no obligation to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances after the date of this Form 10-K or to reflect the occurrence of
unanticipated events, other than as required by law.
Capital Resources and Liquidity
The Company commenced its offering of Units on December 7, 1998. On January
13, 1999, the Company commenced operations in its primary business (leasing
activities). The offering was terminated on November 30, 2000. Total proceeds of
the offering was $135,701,880. Until the Company's initial portfolio of
equipment was purchased, funds which had been received, but which had not yet
been invested in leased equipment, were invested in interest-bearing accounts or
high-quality/short-term commercial paper. The Company's public offering provided
for a total maximum capitalization of $150,000,000.
During the funding period, the Company's primary source of liquidity was
subscription proceeds from the public offering of Units. The liquidity of the
Company will vary in the future, increasing to the extent cash flows from leases
and proceeds of asset sales exceed expenses, and decreasing as lease assets are
acquired, as distributions are made to the Other Members and to the extent
expenses exceed cash flows from leases and proceeds from asset sales.
As another source of liquidity, the Company is expected to have contractual
obligations with a diversified group of lessees for fixed lease terms at fixed
rental amounts. As the initial lease terms expire, the Company will re-lease or
sell the equipment. The future liquidity beyond the contractual minimum rentals
will depend on ATEL's success in re-leasing or selling the equipment as it comes
off lease.
The Company participates with the Managing Member and certain of its
affiliates in a $55,645,837 revolving line of credit (comprised of an
acquisition facility and a warehouse facility) with a financial institution that
includes certain financial covenants. The line of credit expires on June 28,
2004. As of December 31, 2002, borrowings under the facility were as follows:
Amount borrowed by the Company under the acquisition facility $ 10,600,000
Amounts borrowed by affiliated partnerships and limited liability companies under the acquisition
facility 18,400,000
-----------------
Total borrowings under the acquisition facility 29,000,000
Amounts borrowed by the Managing Member and its sister corporation under the warehouse facility -
-----------------
Total outstanding balance $ 29,000,000
=================
Total available under the line of credit $ 55,645,837
Total outstanding balance (29,000,000)
-----------------
Remaining availability $ 26,645,837
=================
6
Draws on the acquisition facility by any individual borrower are secured
only by that borrower's assets, including equipment and related leases.
Borrowings on the warehouse facility are recourse jointly to certain of the
affiliated Companies and limited liability companies, the Company and the
Managing Member.
The Company anticipates reinvesting a portion of lease payments from assets
owned in new leasing transactions. Such reinvestment will occur only after the
payment of all obligations, including debt service (both principal and
interest), the payment of management fees to the Managing Member and providing
for cash distributions to the Other Members. At December 31, 2002, there were no
commitments to purchase lease assets.
ATEL 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 ATEL 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 ATEL or affiliate and the time acquired by the Company;
(iv) there is no benefit arising out of such transaction to ATEL 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. ATEL
envisions no such requirements for operating purposes.
In 1999, the Company established a $70 million receivables funding program
(which was subsequently increased to $125 million) with a receivables financing
company that issues commercial paper rated A1 from Standard and Poors and P1
from Moody's Investor Services. In this receivables funding program, the lenders
received a general lien against all of the otherwise unencumbered assets of the
Company. The program provided for borrowing at a variable interest rate and
required the Managing Member on behalf of the Company to enter into interest
rate swap agreements with certain counterparties (also rated A1/P1) to mitigate
the interest rate risk associated with a variable rate note. The Managing Member
believes that this program allowed the Company to avail itself of lower cost
debt than that available for individual non-recourse debt transactions. The
program expired as to new borrowings in April 2002.
See Item 7a and Note 5 to the financial statements, Other long-term debt,
as set forth in Part II, Item 8, Financial Statements and Supplementary Data,
for additional information regarding this program and related interest rate
swaps.
It is the intention of the Company to use the receivables funding program
as its primary source of debt financing. The Company will continue to use its
sources of non-recourse secured debt financing on a transaction basis as a means
of mitigating credit risk.
ATEL expects that aggregate borrowings in the future will be approximately
50% of aggregate equipment cost. In any event, the Operating Agreement limits
such borrowings to 50% of the total cost of equipment, in aggregate.
See Note 4 to the financial statements, Non-recourse debt, as set forth in
Part II, Item 8, Financial Statements and Supplementary Data, for additional
information regarding non-recourse debt.
The Company commenced regular distributions, based on cash flows from
operations, beginning with the month of January 1999. See Item 5 and 6 for
additional information regarding distributions.
If inflation in the general economy becomes significant, it may affect the
Company inasmuch as the residual (resale) values and rates on re-leases of the
Company's leased assets may increase as the costs of similar assets increase.
However, the Company's revenues from existing leases would not increase, as such
rates are generally fixed for the terms of the leases without adjustment for
inflation.
If interest rates increase significantly, the lease rates that the Company
can obtain on future leases will be expected to increase as the cost of capital
is a significant factor in the pricing of lease financing. Leases already in
place, for the most part, would not be affected by changes in interest rates.
Cash Flows
2002 vs. 2001:
In 2002 and 2001, the Company's primary source of cash was operating lease
revenues. This was also the primary source of cash flows from operations in both
years.
7
Rents from direct financing leases and proceeds from asset sales were the
only sources of cash from investing activities in either 2002 or in 2001. In
both years, uses of cash in investing activities included purchases of assets on
operating and direct financing leases and payment of initial direct costs
associated with those leases.
In 2002 and 2001, sources of cash from financing activities consisted of
long-term debt proceeds and borrowings under the line of credit.
2001 vs. 2000:
In 2001, operating lease rents were the primary source of cash flows. In
both 2001 and 2000, it was the Company's primary source of cash from operations.
Sources of cash from investing activities consisted of the proceeds from
sales of lease assets and cash flows from direct financing leases. In 2001,
sales proceeds consisted largely of the proceeds from the sale of a fleet of
railroad box cars. There was no similar sale in 2000.
Financing sources of cash in 2001 consisted of borrowings on the line of
credit and the proceeds of long-term debt. The Company's offering was concluded
in 2000 and, therefore, there were no offering proceeds and related costs in
2001 comparable to those in 2000.
Results of Operations
As of January 13, 1999, subscriptions for the minimum amount of the
offering ($1,200,000) had been received and accepted by the Company. As of that
date, the Company commenced operations in its primary business (leasing
activities). Because of the timing of the commencement of operations and the
fact that the initial portfolio acquisitions were not been completed until 2001,
the results of operations in 2001, 2000 and 1999 are not expected to be
comparable to future periods. With the Company's public offering and its initial
asset acquisition stage terminated, the future results of operations are
expected to change significantly.
Substantially all employees of ATEL track time incurred in performing
administrative services on behalf of the Company. ATEL believes that the costs
reimbursed are the lower of (i) actual costs incurred on behalf of the Company
or (ii) the amount the Company would be required to pay independent parties for
comparable administrative services in the same geographic location.
2002 vs. 2001:
Operations in 2002 resulted in a net loss of $2,805,544. Operations in 2001
resulted in net income of $132,672.
Revenues from operating leases and direct finance leases decreased
significantly in 2002 compared to 2001. These decreases were the result of asset
sales over the last two years, lower lease rates on renewals and an increase in
the amount of the Company's assets that are off lease. Revenues are expected to
decrease again in 2003.
Depreciation expense also decreased as a result of the sales of lease
assets in 2002 and 2001.
Average debt balances decreased in 2002 compared to 2001. This led to the
decrease in interest expense compared to 2001.
Management fees are related to the Company's revenues. As the Company's
revenues decline, as a result of asset sales, the management also decrease.
Management periodically reviews the carrying values of its assets on leases
and assets held for lease or sale. As a result of that review, management
determined that the fair values of a fleet of diesel electric locomotives and an
aircraft had declined in value to the extent that the carrying values had become
impaired. The fair value of the assets was determined based on the sum of the
discounted estimated future cash flows of the assets. A charge to operations was
recorded for the decline in value of those assets in the amount of $2,612,500
for the year ended December 31, 2002.
2001 vs. 2000:
In 2001, operations resulted in net income of $132,672 compared to a loss
of $2,305,631 in 2000. Operating lease rents increased substantially compared to
2000 as a result of acquisitions in 2000 and in 2001. These rent increases were
largely offset by increased depreciation expense associated with the
acquisitions and interest expense on the additional debt that was used to
finance them.
Income increased for the most part as a result of an increase in the
amounts of gains realized on the sales of assets in 2001 compared to 2000. These
gains increased by $1,799,839 compared to 2000.
Recent developments
In March 2003, the Company began preliminary discussions to terminate an
aircraft operating lease with Emery Worldwide. The lease had been scheduled to
continue through December 31, 2004. The carrying value of the aircraft at
December 31, 2002 was $10,624,043 and the proposed amount of the settlement is
$8,100,000. This is expected to result in a loss of $2,524,043 on the sale of
the aircraft if this transaction is consumated. The sale is expected to take
place on March 31, 2003 or early in the second quarter of 2003.
8
Derivative Financial Instruments
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, which established new accounting
and reporting standards for derivative instruments. SFAS No. 133 has been
amended by SFAS No. 137, issued in June 1999, and by SFAS No. 138, issued in
June 2000.
SFAS No. 133, as amended, requires the Company to recognize all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. It further provides criteria for derivative
instruments to be designated as fair value, cash flow, or foreign currency
hedges, and establishes accounting standards for reporting changes in the fair
value of the derivative instruments.
The Company adopted SFAS No. 133, as amended, on January 1, 2001. Upon
adoption, the Company recorded interest rate swap hedging instruments at fair
value in the balance sheet and recognized the offsetting gains or losses in net
income or other comprehensive income, as appropriate. See Note 5 to the
financial statements, Other long-term debt, as set forth in Part II, Item 8,
Financial Statements and Supplementary Data, for additional information.
Recent Accounting Pronouncement
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations, for a disposal of a
segment of a business. SFAS 144 is effective for fiscal years beginning after
December 15, 2001, with earlier application encouraged. The Company adopted SFAS
144 as of January 1, 2002. The adoption of the Statement did not have a
significant impact on the Company's financial position and results of
operations.
Internal Controls
As of December 31, 2002, an evaluation was performed under the supervision
and with the participation of the Company's management, including the CEO and
CFO of the Managing Member, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures. Based on that evaluation, the
Company's management, including the CEO and CFO of the Managing Member,
concluded that the Company's disclosure controls and procedures were effective
as of December 31, 2002. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to December 31, 2002.
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.
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.
9
Item 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, like most other companies, is exposed to certain market risks,
including primarily changes in interest rates. The Company believes its exposure
to other market risks, including foreign currency exchange rate risk, commodity
risk and equity price risk, are insignificant to both its financial position and
results of operations.
In general, the Company manages its exposure to interest rate risk by
obtaining fixed rate debt. The fixed rate debt is structured so as to match the
cash flows required to service the debt to the payment streams under fixed rate
lease receivables. The payments under the leases are assigned to the lenders in
satisfaction of the debt. Furthermore, the Company has historically been able to
maintain a stable spread between its cost of funds and lease yields in both
periods of rising and falling interest rates. Nevertheless, the Company
frequently funds leases with its floating rate line of credit and is, therefore,
exposed to interest rate risk until fixed rate financing is arranged, or the
floating rate line of credit is repaid. As of December 31, 2002, there was
$10,600,000 outstanding on the floating rate line of credit and the effective
interest rate of the borrowings ranged from 3.29% to 3.30%.
Also, as described in Item 7 in the caption "Capital Resources and
Liquidity," the Company entered into a receivables funding facility in 1999.
Since interest on the outstanding balances under the facility varies, the
Company is exposed to market risks associated with changing interest rates. To
hedge its interest rate risk, the Company enters into interest rate swaps that
effectively convert the underlying interest characteristic on the facility from
floating to fixed. Under the swap agreements, the Company makes or receives
variable interest payments to or from the counterparty based on a notional
principal amount. The net differential paid or received by the Company is
recognized as an adjustment to interest expense related to the facility
balances. The amount paid or received represents the difference between the
payments required under the variable interest rate facility and the amounts due
under the facility at the fixed (hedged) interest rate. As of December 31, 2002,
borrowings on the facility were $62,912,000 and the associated variable interest
rate was 2.0081%. The average fixed interest rate achieved with the swap
agreements was 6.861% at December 31, 2002.
In general, these swap agreements eliminate the Company's interest rate
risk associated with variable interest rate borrowings. However, the Company is
exposed to and manages credit risk associated with the counterparty to the swap
agreement by dealing only with institutions it considers financially sound. If
these agreements were not in place, based on the Company's facility borrowings
at December 31, 2002, a hypothetical 1.00% increase or decrease in market
interest rates would increase or decrease the Company's 2003 variable interest
expense by approximately $528,500.
See the Notes to the financial statements as set forth in Part II, Item 8
for additional information.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Report of Independent Auditors, Financial Statements and Notes to
Financial Statements attached hereto at pages 11 through 28.
10
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Members
ATEL Capital Equipment Fund VIII, LLC
We have audited the accompanying balance sheets of ATEL Capital Equipment
Fund VIII, LLC (Company) as of December 31, 2002 and 2001, 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, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ATEL Capital Equipment Fund
VIII, LLC at December 31, 2002 and 2001, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
San Francisco, California
February 7, 2003
11
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS
2002 2001
---- ----
Cash and cash equivalents $ 2,263,479 $ 2,269,137
Accounts receivable, net of allowance for doubtful accounts of
$516,365 in 2002 and $41,365 in 2001 1,874,311 3,256,527
Due from Managing Member 171,119 -
Other assets 55,000 85,000
Investments in equipment and leases 149,100,763 178,811,010
------------------ -----------------
Total assets $ 153,464,672 $ 184,421,674
================== =================
LIABILITIES AND MEMBERS' CAPITAL
Long-term debt $ 62,912,000 $ 85,369,000
Non-recourse debt 5,702,855 6,014,964
Line of credit 10,600,000 2,500,000
Accounts payable 697,720 649,538
Accrued interest payable 96,179 76,980
Interest rate swap contracts 5,381,342 4,700,622
Unearned operating lease income 1,547,813 1,748,618
------------------ -----------------
Total liabilities 86,937,909 101,059,722
Members' capital 66,526,763 83,361,952
------------------ -----------------
Total liabilities and members' capital $ 153,464,672 $ 184,421,674
================== =================
See accompanying notes.
12
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Revenues: 2002 2001 2000
---- ---- ----
Leasing activities:
Operating leases $ 31,638,196 $ 40,911,071 $ 29,965,693
Direct financing leases 807,678 920,026 810,501
Gain on sales of assets 271,751 1,801,292 1,453
Interest 15,547 131,575 175,029
Other 196,803 30,133 94,809
---------------- ------------------------------------
32,929,975 43,794,097 31,047,485
Expenses:
Depreciation and amortization 23,162,548 31,243,646 22,588,276
Interest expense 6,148,759 9,058,622 7,365,041
Asset management fees to Managing Member 1,481,576 1,849,335 1,465,566
Cost reimbursements to Managing Member 832,539 924,375 1,408,523
Provision for doubtful accounts 475,000 82,615 -
Provision for losses and impairments 2,612,500 - -
Railcar maintenance 215,009 - -
Aircraft inspection and maintenance 211,268 - -
Professional fees 179,562 215,450 127,345
Other 416,758 287,382 398,365
---------------- ------------------------------------
35,735,519 43,661,425 33,353,116
---------------- ------------------------------------
Net income (loss) $ (2,805,544) $ 132,672 $ (2,305,631)
================ ====================================
Net income (loss):
Managing Member $ 1,001,169 $ 1,004,916 $ 795,009
Other Members (3,806,713) (872,244) (3,100,640)
---------------- ------------------------------------
$ (2,805,544) $ 132,672 $ (2,305,631)
================ ====================================
Net (loss) per Limited Liability Company Unit (Other Members) $ (0.28) $ (0.06) $ (0.29)
Weighted average number of Units outstanding 13,570,188 13,570,188 10,634,792
See accompanying notes.
13
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENT OF CHANGES IN MEMBERS' CAPITAL
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Accumulated
Other
Comprehensive
Other Members Managing Income
-------------
Units Amount Member (Loss) Total
----- ------ ------ ------ -----
Balance December 31, 1999 7,744,326 $ 64,130,010 $ - $ - $64,130,010
Capital contributions 5,825,862 58,258,620 - - 58,258,620
Less selling commissions to affiliates (5,534,569) - - (5,534,569)
Other syndication costs to affiliates (2,619,534) - - (2,619,534)
Distributions to Managing Member - (795,009) - (795,009)
Distributions to Other Members
($0.92 per Unit) (9,795,386) - - (9,795,386)
Net income (loss) (3,100,640) 795,009 (2,305,631)
----------------- ---------------- ----------------- ------------------ -----------------
Balance December 31, 2000 13,570,188 101,338,501 - - 101,338,501
Distributions to Managing Member - (1,004,916) - (1,004,916)
Distributions to Other Members
($0.91 per Unit) (12,403,683) - - (12,403,683)
Cumulative effect of change in
accounting principle at
January 1, 2001 - - (821,196) (821,196)
Unrealized decrease in value of
interest rate swap contracts - - (3,879,426) (3,879,426)
Net income (loss) (872,244) 1,004,916 - 132,672
----------------- ---------------- ----------------- ------------------ -----------------
Balance December 31, 2001 13,570,188 88,062,574 - (4,700,622) 83,361,952
Distributions to Managing Member - (1,001,169) - (1,001,169)
Distributions to Other Members
($0.91 per Unit) (12,347,756) - - (12,347,756)
Unrealized decrease in value of
interest rate swap contracts - - (680,720) (680,720)
Net income (loss) (3,806,713) 1,001,169 - (2,805,544)
----------------- ---------------- ----------------- ------------------ -----------------
Balance December 31, 2002 13,570,188 $71,908,105 $ - $ (5,381,342) $ 66,526,763
================= ================ ================= ================== =================
See accompanying notes.
14
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
Operating activities:
Net income (loss) $ (2,805,544) $ 132,672 $ (2,305,631)
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Gain on sales of assets (271,751) (1,801,292) (1,453)
Depreciation and amortization 23,162,548 31,243,646 22,588,276
Provision for doubtful accounts 475,000 82,615 -
Provision for losses and impairments 2,612,500 - -
Changes in operating assets and liabilities:
Accounts receivable 907,216 2,000,427 (3,214,783)
Due from Managing Member (171,119) - -
Other assets 30,000 30,000 30,000
Accounts payable, Managing Member - (695,548) (115,739)
Accounts payable, other 48,182 163,643 484,772
Accrued interest 19,199 (190,843) 153,221
Unearned lease income (200,805) (302,523) 793,444
----------------- ------------------ -----------------
Net cash provided by operating activities 23,805,426 30,662,797 18,412,107
----------------- ------------------ -----------------
Investing activities:
Purchases of equipment on operating leases - (26,556,373) (66,010,813)
Purchases of equipment on direct financing leases (293,570) (810,271) (9,367,277)
Reduction of net investment in direct financing leases 2,134,026 2,806,236 2,154,474
Payment of initial direct costs to Managing Member (37,440) (147,721) (844,058)
Proceeds from sales of assets 2,403,934 7,348,063 7,761
----------------- ------------------ -----------------
Net cash provided by (used in) investing activities 4,206,950 (17,360,066) (74,059,913)
----------------- ------------------ -----------------
Financing activities:
Borrowings under line of credit 12,400,000 23,556,335 28,555,729
Repayments of line of credit (4,300,000) (21,056,335) (36,055,729)
Proceeds of other long-term debt 3,900,000 19,000,000 34,900,000
Repayments of other long-term debt (26,357,000) (20,299,000) (12,906,000)
Distributions to Other Members (12,347,756) (12,403,683) (9,795,386)
Distributions to Managing Member (1,001,169) (1,004,916) (795,009)
Repayments of non-recourse debt (312,109) (1,310,780) (2,186,487)
Proceeds of non-recourse debt - - 2,337,614
Capital contributions received - - 58,258,620
Payment of selling commissions and other syndication costs to
Managing Member - - (8,154,103)
----------------- ------------------ -----------------
Net cash (used in) provided by financing activities (28,018,034) (13,518,379) 54,159,249
----------------- ------------------ -----------------
Net decrease in cash and cash equivalents (5,658) (215,648) (1,488,557)
Cash and cash equivalents at beginning of year 2,269,137 2,484,785 3,973,342
----------------- ------------------ -----------------
Cash and cash equivalents at end of year $ 2,263,479 $ 2,269,137 $ 2,484,785
================= ================== =================
15
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
STATEMENTS OF CASH FLOWS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 6,129,560 $ 9,249,465 $ 6,571,597
================= ================== =================
Schedule of non-cash transactions:
Change in fair value of interest rate swaps contracts $ (680,720) $ (3,879,426) $ -
================= ================== =================
See accompanying notes.
16
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
1. Organization and Limited Liability Company matters:
ATEL Capital Equipment Fund VIII, LLC (the Company) was formed under the
laws of the state of California on July 31, 1998 for the purpose of acquiring
equipment to engage in equipment leasing and sales activities, primarily in the
United States. The Company may continue until December 31, 2019. The Managing
Member of the Company is ATEL Financial Services LLC (ATEL), a California
corporation. Prior to converting to a limited liability company structure, the
Managing Member was formerly known as ATEL Financial Corporation. Each Member's
personal liability for obligations of the Company generally will be limited to
the amount of their respective contributions and rights to undistributed profits
and assets of the Company.
On January 13, 1999, subscriptions for the minimum number of Units
(120,000, $1,200,000) had been received. On that date, the Company commenced
operations in its primary business (leasing activities).
The Company's business consists of leasing various types of equipment. As
of December 31, 2002, the original terms of the leases ranged from six months to
nine years.
Pursuant to the Operating Agreement, the Managing Member receives
compensation and reimbursements for services rendered on behalf of the Company
(see Note 6). The Managing Member is required to maintain in the Company
reasonable cash reserves for working capital, the repurchase of Units and
contingencies.
2. Summary of significant accounting policies:
Equipment on operating leases:
Equipment on operating leases is stated at cost. Depreciation is being
provided by use of the straight-line method over the terms of the related leases
to the equipment's estimated residual values at the end of the leases.
Revenues from operating leases are recognized evenly over the lives of the
related leases.
Direct financing leases:
Income from direct financing lease transactions is reported using the
financing method of accounting, in which the Company's investment in the leased
property is reported as a receivable from the lessee to be recovered through
future rentals. The income portion of each rental payment is calculated so as to
generate a constant rate of return on the net receivable outstanding.
17
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
2. Summary of significant accounting policies (continued):
Statements of cash flows:
For purposes of the Statements of Cash Flows, cash and cash equivalents
includes cash in banks and cash equivalent investments with original maturities
of ninety days or less.
Income taxes:
The Company does not provide for income taxes since all income and losses
are the liability of the individual members and are allocated to the members for
inclusion in their individual tax returns.
The tax basis of the Company's net assets and liabilities varies from the
amounts presented in these financial statements (unaudited):
2002 2001
---- ----
Financial statement basis of net assets $ 66,526,763 $ 83,361,952
Tax basis of net assets 26,812,937 50,905,460
----------------- ------------------
Difference $ 39,713,826 $ 32,456,492
================= ==================
The primary differences between the tax basis of net assets and the amounts
recorded in the financial statements are the result of differences in accounting
for bad debts, impairment losses, syndication costs and differences between the
depreciation methods used in the financial statements and the Company's tax
returns.
The following reconciles the net income reported in these financial
statements to the loss reported on the Company's federal tax return (unaudited):
2002 2001 2000
---- ---- ----
Net income (loss) per financial statements $ (2,805,544) $ 132,672 $ (2,305,631)
Adjustment to depreciation expense (14,111,240) (19,612,115) (29,978,571)
Provisions for doubtful accounts and losses 3,087,500 82,615 -
Adjustments to lease revenues 1,616,517 3,898,290 3,265,841
----------------- ------------------ -----------------
Net loss per federal tax return $ (12,212,767) $ (15,498,538) $ (29,018,361)
================= ================== =================
Per unit data:
Net income (loss) and distributions per unit are based upon the weighted
average number of units outstanding during the period.
18
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
2. Summary of significant accounting policies (continued):
Credit risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk include cash and cash equivalents, direct finance
lease receivables and accounts receivable. The Company places its cash deposits
and temporary cash investments with creditworthy, high quality financial
institutions. The concentration of such deposits and temporary cash investments
is not deemed to create a significant risk to the Company. Accounts receivable
represent amounts due from lessees in various industries, related to equipment
on operating and direct financing leases. See Note 8 for a description of
lessees by industry as of December 31, 2002, 2001 and 2000.
Basis of presentation:
The accompanying financial statements as of December 31, 2002 and 2001 and
for the three years ended December 31, 2002 have been prepared in accordance
with accounting principles generally accepted in the United States. Certain
prior year amounts have been reclassified to conform to the current year
presentation.
Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Such estimates primarily relate to the determination of residual values at the
end of the lease term.
Asset valuation:
Recorded values of the Company's asset portfolio are periodically reviewed
for impairment in accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
An impairment loss is measured and recognized only if the estimated undiscounted
future cash flows of the asset are less than their net book value. The estimated
undiscounted future cash flows are the sum of the estimated residual value of
the asset at the end of the asset's expected holding period and estimates of
undiscounted future rents. The residual value assumes, among other things, that
the asset is utilized normally in an open, unrestricted and stable market.
Short-term fluctuations in the market place are disregarded and it is assumed
that there is no necessity either to dispose of a significant number of the
assets, if held in quantity, simultaneously or to dispose of the asset quickly.
Impairment is measured as the difference between the fair value (as determined
by the discounted estimated future cash flows) of the assets and its carrying
value on the measurement date.
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, and by SFAS
No. 138, issued in June 2000.
19
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
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 and recognized the offsetting gains or losses as adjustments to be
reported in net income or other comprehensive income, as appropriate.
The Company utilizes cash flow hedges comprised of interest rate swaps
(hedges of variable rate interest bearing debt instruments). Such interest rate
swaps are linked to and adjust effectively the interest rate sensitivity of
specific long-term debt.
The effective portion of the change in fair value of the interest rate
swaps is recorded in Accumulated Other Comprehensive Income (AOCI) and the
ineffective portion (if any) directly in earnings. Amounts in AOCI are
reclassified into earnings in a manner consistent with the earnings pattern of
the underlying hedged item (generally reflected in interest expense). If a
hedged item is dedesignated prior to maturity, previous adjustments to AOCI are
recognized in earnings to match the earnings recognition pattern of the hedged
item (e.g., level yield amortization if hedging an interest bearing
instruments). Interest income or expense on most hedging derivatives used to
manage interest rate exposure is recorded on an accrual basis as an adjustment
to the yield of the link exposures over the periods covered by the contracts.
This matches the income recognition treatment of the exposure (i.e., the
liabilities, which are carried at historical cost, with interest recorded on an
accrual basis).
Credit exposure from derivative financial instruments arises from the risk
of a counterparty default on the derivative contract. The amount of the loss
created by the default is the replacement cost or current positive fair value of
the defaulted contract.
Recent accounting pronouncement:
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS 144), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of, and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations, for a
disposal of a segment of a business. SFAS 144 is effective for fiscal years
beginning after December 15, 2001, with earlier application encouraged. The
Company adopted SFAS 144 as of January 1, 2002. The adoption of the Statement
did not have a significant impact on the Company's financial position and
results of operations.
Initial direct costs:
The Company capitalizes initial direct costs associated with the
acquisition of lease assets. The costs are amortized over a five year period
using a straight line method.
Accounts receivable:
Accounts receivable represent the amounts billed under lease contracts and
currently due to the Partnership. 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.
20
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
3. Investments in equipment and leases:
The Company's investments in equipment and leases consist of the following:
Depreciation
Expense or Reclass-
December 31, Amortization ifications or December 31,
2001 Additions of Leases Dispositions 2002
---- --------- --------- ------------ ----
Net investment in operating leases $ 157,558,157 $ - $ (22,784,103) $ (15,369,785) $ 119,404,269
Net investment in direct financing leases 14,181,674 293,570 (2,134,026) (1,107,614) 11,233,604
Assets held for sale or lease 6,055,819 - - 14,345,216 20,401,035
Reserves for losses and impairments - (2,612,500) - - (2,612,500)
Initial direct costs, net of accumulated
amortization of $1,075,687 in 2002 and
730,615 in 2001 1,015,360 37,440 (378,445) - 674,355
---------------- --------------- ----------------- ------------------ -----------------
$ 178,811,010 $ (2,281,490) $ (25,296,574) $ (2,132,183) $ 149,100,763
================ =============== ================= ================== =================
Management periodically reviews the carrying values of its assets on leases
and assets held for lease or sale. As a result of that review, management
determined that the fair values of a fleet of diesel electric locomotives and an
aircraft had declined in value to the extent that the carrying values had become
impaired. The fair value of the assets was determined based on the sum of the
discounted estimated future cash flows of the assets. A charge to operations was
recorded for the decline in value of those assets in the amount of $2,612,500
for the year ended December 31, 2002.
Operating leases:
Property on operating leases consists of the following:
Reclass-
December 31, ifications or December 31,
2001 Additions Dispositions 2002
---- --------- ------------ ----
Manufacturing $ 49,186,963 $ - $ 513,672 $ 49,700,635
Aircraft 38,535,439 - (5,725,300) 32,810,139
Transportation, rail 37,626,277 - (16,571,608) 21,054,669
Transportation, other 23,438,156 - - 23,438,156
Containers 21,228,750 - (21,250) 21,207,500
Natural gas compressors 14,051,601 - - 14,051,601
Materials handling 7,662,557 - (281,837) 7,380,720
Marine vessel 4,314,031 - (4,314,031) -
Other 12,743,053 - 1,375,349 14,118,402
----------------- ---------------- ----------------- ------------------
208,786,827 - (25,025,005) 183,761,822
Less accumulated depreciation (51,228,670) (22,784,103) 9,655,220 (64,357,553)
----------------- ---------------- ----------------- ------------------
$ 157,558,157 $ (22,784,103) $ (15,369,785) $ 119,404,269
================= ================ ================= ==================
21
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
3. Investments in equipment and leases (continued):
Direct financing leases:
As of December 31, 2002 and 2001, investment in direct financing leases
consists of 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, 2002 and 2001:
2002 2001
---- ----
Total minimum lease payments receivable $ 8,634,652 $ 12,119,703
Estimated residual values of leased equipment (unguaranteed) 4,510,520 4,785,886
----------------- ------------------
Investment in direct financing leases 13,145,172 16,905,589
Less unearned income (1,911,568) (2,723,915)
----------------- ------------------
Net investment in direct financing leases $ 11,233,604 $ 14,181,674
================= ==================
All of the property on leases was acquired in 2002, 2001, 2000 and 1999.
At December 31, 2002, the aggregate amounts of future minimum lease
payments are as follows:
Direct
Year ending Operating Financing
December 31, Leases Leases Total
------------ ------ ------ -----
2003 $ 25,180,670 $ 2,524,494 $ 27,705,164
2004 15,717,391 2,063,877 17,781,268
2005 11,386,580 1,976,473 13,363,053
2006 7,219,524 1,727,378 8,946,902
2007 5,200,244 293,628 5,493,872
Thereafter 4,002,677 48,802 4,051,479
---------------- ----------------- ------------------
$ 68,707,086 $ 8,634,652 $ 77,341,738
================ ================= ==================
At December 31, 2002, there were no commitments to purchase lease assets.
Reserves for losses and impairments and allowance for doubtful accounts:
Activity in the reserve for losses and impairments and allowances for
doubtful accounts consists of the following:
Reserve for Allowance for
losses and doubtful
impairments accounts
Balance December 31, 1999 $ - $ -
Provision - -
---------------- -----------------
Balance December 31, 2000 - -
Provision 82,615
Charge offs - (41,250)
---------------- -----------------
Balance December 31, 2001 - 41,365
Provision 2,612,500 475,000
---------------- -----------------
Balance December 31, 2002 $ 2,612,500 $ 516,365
================ =================
22
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
4. Non-recourse debt:
At December 31, 2002, non-recourse debt consists of notes payable to
financial institutions. The notes are due in varying quarterly and semi-annual
payments. Interest on the notes is at fixed rates ranging from 7.98% to 10.00%.
The notes are secured by assignments of lease payments and pledges of assets. At
December 31, 2002, the carrying value of the pledged assets is $17,682,618. The
notes mature from 2003 through 2006.
Future minimum payments of non-recourse debt are as follows:
Year ending
December 31, Principal Interest Total
2003 397,915 483,617 $ 881,532
2004 4,425,556 170,437 4,595,993
2005 418,256 77,737 495,993
2006 461,128 34,866 495,994
----------------- ---------------- -----------------
$ 5,702,855 $ 766,657 $ 6,469,512
================= ================ =================
5. Other long-term debt:
In 1999, the Company entered into a $70 million receivables funding program
(the Program) (which was subsequently increased to $125 million) with a
receivables financing company that issues commercial paper rated A1 by Standard
and Poors and P1 by Moody's Investor Services. Under the Program, the
receivables financing company receives a general lien against all of the
otherwise unencumbered assets of the Company. The Program provides for borrowing
at a variable interest rate (2.0081% at December 31, 2002), based on an index of
A1 commercial paper.
The Program requires the Managing Member on behalf of the Company to enter
into various interest rate swaps with a financial institution (also rated A1/P1)
to manage interest rate exposure associated with variable rate obligations under
the Program by effectively converting the variable rate debt to fixed rates. As
of December 31, 2002, the Company receives or pays interest on a notional
principal of $62,912,000, based on the difference between nominal rates ranging
from 3.60% to 7.72% and the variable rate under the Program. No actual borrowing
or lending is involved. The termination of the swaps coincide with the maturity
of the debt. The differential to be paid or received is accrued as interest
rates change and is recognized currently as an adjustment to interest expense
related to the debt.
23
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
5. Other long-term debt (continued):
Borrowings under the Program are as follows:
Original Balance Payment Rate on
Amount December 31, Interest Swap
Date Borrowed Borrowed 2002 Agreement
------------- -------- ---- ---------
11/11/99 $ 20,000,000 $ 6,005,000 6.84%
12/21/99 20,000,000 14,792,000 7.41%
12/24/99 25,000,000 8,471,000 7.44%
4/17/00 6,500,000 3,785,000 7.45%
4/28/00 1,900,000 612,000 7.72%
8/3/00 19,000,000 12,100,000 7.50%
10/31/00 7,500,000 4,450,000 7.13%
1/29/01 8,000,000 4,923,000 5.91%
6/1/01 2,000,000 776,000 5.04%
9/1/01 9,000,000 4,048,000 4.35%
1/31/02 3,900,000 2,950,000 3.60%
----------------- ----------------
$ 122,800,000 $62,912,000
================= ================
The long-term debt borrowings mature from 2003 through 2009. Future minimum
principal payments of long-term debt and annual swap notional reductions are as
follows:
Swap Notional / Rates on
Year ending Debt Interest Swap
December 31, Principal Interest Total Agreements*
------------ --------- -------- ----- -----------
2003 $ 21,073,000 $ 3,636,621 $ 24,709,621 6.861%-6.901%
2004 15,092,000 2,394,241 17,486,241 6.896%-6.962%
2005 11,351,000 1,507,894 12,858,894 6.985%-7.137%
2006 6,950,000 884,435 7,834,435 7.172%-7.203%
2007 4,701,000 439,685 5,140,685 6.896%-7.028%
2008 3,025,000 169,486 3,194,486 6.214%-6.887%
2009 720,000 9,149 729,149 5.042%-5.068%
----------------- ---------------- -----------------
$ 62,912,000 $ 9,041,511 $ 71,953,511
================= ================ =================
* Represents the range of monthly weighted average fixed interest rates paid for
amounts maturing in the particular year. The receive-variable rate portion of
the swap represents commercial paper rates (2.0081% at December 31, 2002).
In 2002 and 2001, the net effect of the interest rate swaps was to increase
interest expense by $1,818,380 and $2,166,018, respectively.
24
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
6. Related party transactions:
The terms of the Limited Company Operating Agreement provide that the
Managing Member and/or affiliates are entitled to receive certain fees for
equipment acquisition, management and resale and for management of the Company.
The Limited Liability Company Operating Agreement allows for the
reimbursement of costs incurred by the Managing Member in providing
administrative services to the Company. Administrative services provided include
Company accounting, investor relations, legal counsel and lease and equipment
documentation. The Managing Member is not reimbursed for services where it is
entitled to receive a separate fee as compensation for such services, such as
acquisition and management of equipment. Reimbursable costs incurred by the
Managing Member are allocated to the Company based upon actual time incurred by
employees working on Company business and an allocation of rent and other costs
based on utilization studies.
Each of ATEL Leasing Corporation ("ALC"), ATEL Equipment Corporation
("AEC"), ATEL Investor Services ("AIS") and ATEL Financial Services LLC is a
wholly-owned subsidiary of ATEL Capital Group and performs services for the
Company. Acquisition services are performed for the Company by ALC, equipment
management, lease administration and asset disposition services are performed by
AEC, investor relations and communications services are performed by AIS and
general administrative services for the Company are performed by ATEL Financial
Services LLC.
Substantially all employees of the Managing Member record time incurred in
performing administrative services on behalf of all of the Companies serviced by
the Managing Member. The Managing Member believes that the costs reimbursed are
the lower of actual costs incurred on behalf of the Company or the amount the
Company would be required to pay independent parties for comparable
administrative services in the same geographic location and are reimbursable in
accordance with the Limited Liability Company Operating Agreement.
The Managing Member and/or affiliates earned fees, commissions and
reimbursements, pursuant to the Limited Liability Company Agreement as follows:
2002 2001 2000
---- ---- ----
Asset management fees to Managing Member $ 1,481,576 $ 1,849,335 $ 1,465,566
Administrative costs reimbursed to Managing Member 832,539 924,375 1,408,523
Initial direct costs paid to Managing Member 37,440 147,721 844,058
Selling commissions (equal to 9.5% of the selling price of the Limited
Liability Company units, deducted from Other Members' capital) - - 5,534,569
Reimbursement of other syndication costs to Managing Member - - 2,619,534
----------------- ------------------ -----------------
$ 2,351,555 $ 2,921,431 $ 11,872,250
================= ================== =================
7. Members' capital:
As of December 31, 2002, 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 difined in the Company's Operating Agreement, the Company's Net Income,
Net Losses, and Distributions are to be allocated 92.5% to the Other Members and
7.5% to ATEL. In accordance with the terms of the of Operating Agreement,
additional allocations of income was made to the Managing Member in 2002, 2001
and 2000. The amount allocated was determined to bring the Managing Member's
ending capital account balance to zero at the end of each year.
25
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
8. Concentration of credit risk and major customers:
The Company leases equipment to lessees in diversified industries. Leases
are subject to the Managing Member's credit committee review. The leases provide
for the return of the equipment upon default.
As of December 31, 2002, 2001 and 2000 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:
2002 2001 2000
---- ---- ----
Transportation, rail 14% 18% 20%
Transportation, air 17% 17% 15%
Manufacturing, other 17% 15% 15%
Transportation, other 12% 12% 13%
Transportation, containers 11% * 10%
Manufacturing, electronics 10% * 10%
* Less than 10%
During 2002, one customer comprised 10% of the Company's revenues from
leases. During 2001, one customer comprised 16% of the Company's revenues from
leases. During 2000, one customer comprised 10% of the Company's revenues from
leases.
9. Line of credit:
The Company participates with the Managing Member and certain of its
affiliates in a $55,645,837 revolving line of credit (comprised of an
acquisition facility and a warehouse facility) with a financial institution that
includes certain financial covenants. The line of credit expires on June 28,
2004. As of December 31, 2002, borrowings under the facility were as follows:
Amount borrowed by the Company under the acquisition facility $ 10,600,000
Amounts borrowed by affiliated partnerships and limited liability companies under the acquisition
facility 18,400,000
-----------------
Total borrowings under the acquisition facility 29,000,000
Amounts borrowed by the Managing Member and its sister corporation under the warehouse facility -
-----------------
Total outstanding balance $ 29,000,000
=================
Total available under the line of credit $ 55,645,837
Total outstanding balance (29,000,000)
-----------------
Remaining availability $ 26,645,837
=================
Draws on the acquisition facility by any individual borrower are secured
only by that borrower's assets, including equipment and related leases.
Borrowings on the warehouse facility are recourse jointly to certain of the
affiliated Companies and limited liability companies, the Company and the
Managing Member.
26
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
9. Line of credit (continued):
The Company borrowed $12,400,000, $23,556,335 and $28,555,729 under the
line of credit during 2002, 2001 and 2000, respectively. Repayments on the line
of credit were $4,300,000, $21,056,335 and $36,055,729 during 2002, 2001 and
2000, respectively. At December 31, 2002, $10,600,000 remained outstanding.
Interest on the line of credit is based on either the thirty day LIBOR rate or
the bank's prime rate. The effective interest rates on borrowings at December
31, 2002 ranged 3.29% to 3.30%.
The credit agreement includes certain financial covenants applicable to
each borrower. The Company was in compliance with its covenants as of December
31, 2002.
10. Fair value of financial instruments:
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to estimate
that value.
Cash and cash equivalents:
The carrying amount of cash and cash equivalents approximates fair value
because of the 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, 2002 is $5,918,609.
Other long-term debt:
The carrying value of the Partnership's other long-term debt approximates
its fair value at December 31, 2002 as borrowings are at a variable interest
rate that adjusts to current market interest rates.
Line of credit:
The carrying amounts of the Company's variable interest rate line of credit
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, 2002.
27
ATEL CAPITAL EQUIPMENT FUND VIII, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
11. Other comprehensive income (loss):
For the years ended December 31, 2002, 2001 and in 2000, other comprehensive
income (loss) consisted of the following:
2002 2001 2000
---- ---- ----
Net income (loss) $ (2,805,544) $ 132,672 $ (2,305,631)
Other comprehensive income:
Cumulative effect of change in accounting principle at January 1, 2001 - (821,196) -
Increase (decrease) in value of interest rate swap contracts during the year (680,720) (3,879,426) -
---------------- ------------------ -----------------
Comprehensive net income (loss) $ (3,486,264) $ (4,567,950) $ (2,305,631)
================ ================== =================
12. Selected quarterly data (unaudited):
March 31, June 30, September 30, December 31,
Quarter ended 2001 2001 2001 2001
---- ---- ---- ----
Total revenues $15,961,653 $ 9,205,063 $ 9,505,505 $ 9,121,876
Net income (loss) $ 4,225,174 $ (1,010,900) $ (3,306,950) $ 225,348
Net income (loss) per limited partnership unit $ 0.29 $ (0.09) $ (0.26) $ 0.00
March 31, June 30, September 30, December 31,
Quarter ended 2002 2002 2002 2002
---- ---- ---- ----
Total revenues $ 9,071,677 $ 8,160,128 $ 7,684,683 $ 8,013,487
Net income (loss) $ (79,008) $ (365,999) $ (523,737) $ (1,836,800)
Net income (loss) per limited partnership unit $ (0.02) $ (0.08) $ (0.06) $ (0.12)
28
Item 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
The registrant is a Limited Liability Company and, therefore, has no
officers or directors.
All of the outstanding capital stock of ATEL Financial Services LLC (the
Managing Member) is held by ATEL Capital Group ("ACG"), a holding company formed
to control ATEL and affiliated companies. The outstanding voting capital stock
of ATEL Capital Group is owned 5% by A. J. Batt and 95% by Dean Cash.
Each of ATEL Leasing Corporation ("ALC"), ATEL Equipment Corporation
("AEC"), ATEL Investor Services ("AIS") and ATEL Financial Services LLC ("AFS")
is a wholly-owned subsidiary of ATEL Capital Group and performs services for the
Partnership. Acquisition services are performed for the Partnership 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 Partnership are performed by
AFS. ATEL Securities Corporation ("ASC") is a wholly-owned subsidiary of AFS.
The officers and directors of ATEL Capital Group and its affiliates are as
follows:
Dean L. Cash Chairman of the Board of Directors of ACG, AFS,
ALC, AEC, AIS and ASC; President and Chief
Executive Officer of ACG, AFS and AEC
Paritosh K. Choksi Director, Executive Vice President, Chief Operating
Officer and Chief Financial Officer of ACG, AFS,
ALC, AEC and AIS
Donald E. Carpenter Vice President and Controller of ACG, AFS, ALC, AEC
and AIS; Chief Financial Officer of ASC
Vasco H. Morais Senior Vice President, Secretary and General Counsel
for ACG, AFS, ALC, AIS and AEC
Dean L. Cash, age 52, 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 49, joined ATEL in 1999 as a director, senior vice
president and its chief financial officer. He became its executive vice
president and 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 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.
Donald E. Carpenter, age 54, joined ATEL in 1986 as controller. Prior to
joining ATEL, Mr. Carpenter was an audit supervisor with Laventhol & Horwath,
certified public accountants in San Francisco, California, from 1983 to 1986.
From 1979 to 1983, Mr. Carpenter was an audit senior with Deloitte, Haskins &
Sells, certified public accountants, in San Jose, California. From 1971 to 1975,
Mr. Carpenter was a Supply Corp officer in the U. S. Navy. Mr. Carpenter
received a B.S. degree in mathematics (magna cum laude) from California State
University, Fresno in 1971 and completed a second major in accounting in 1978.
Mr. Carpenter has been a California certified public accountant since 1981.
29
Vasco H. Morais, age 44, 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.
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 ATEL and its Affiliates. The amount of such remuneration paid
in 2001, 2000 and 1999 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 Note 6 thereof, which information is hereby
incorporated by reference.
Selling Commissions
The Company paid selling commissions in the amount of 9.5% of Gross
Proceeds, as defined, to ATEL Securities Corporation, an affiliate of ATEL.
Through December 31, 2000, $12,891,631 of such commissions had been paid to
ATEL or its affiliates. Of that amount, $11,050,485 was re-allowed to other
broker/dealers. There are no further amounts to be paid.
Asset Management Fee
The Company will pay ATEL an Asset Management Fee in an amount equal to
4.5% of Operating Revenues, which will include Gross Lease Revenues and Cash
From Sales or Refinancing. The Asset Management Fee will be paid on a monthly
basis. The amount of the Asset Management Fee payable in any year will be
reduced for that year to the extent it would otherwise exceed the Asset
Management Fee Limit, as described below. The Asset Management Fee will be paid
for services rendered by ATEL 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.
ATEL will supervise 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. ATEL 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 will be subject to the Asset Management Fee Limit.
The Asset Management Fee Limit will be calculated each year during the Company's
term by calculating the total fees that would be paid to ATEL if the Managing
Member 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 ATEL's Carried Interest, as described below. To the
extent that the amount paid to ATEL 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 will be 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 ATEL 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 ATEL 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:
30
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 ATEL 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/Re-Leasing 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. 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.
A Carried Interest equal to 7.5% of all Distributions of Cash from
Operations and Cash from Sales or Refinancing.
See Note 6 to the financial statements included in Part II, Item 8 for
amounts paid.
Managing Member's Interest in Operating Proceeds
Net income, net loss and investment tax credits are allocated 92.5% to the
Other Members and 7.5% to ATEL. See financial statements included in Item 8,
Part I of this report for amounts allocated to the Managing Member in 2002, 2001
and 2000.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Security Ownership of Certain Beneficial Owners
At December 31, 2002, no investor is known to hold beneficially more than
5% of the issued and outstanding Units.
Security Ownership of Management
The shareholders of ATEL are beneficial owners of Limited Liability Company
Units as follows:
(1) (2) (3) (4)
Name and Address of Amount and Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
-------------- ---------------- -------------------- --------
Limited Liability Company Units A. J. Batt Initial Limited Liability 0.0002%
600 California Street, 6th Floor Company Units
San Francisco, CA 94108 25 Units ($250)
(owned by wife)
Limited Liability Company Units Dean Cash Initial Limited Liability 0.0002%
600 California Street, 6th Floor Company Units
San Francisco, CA 94108 25 Units ($250)
(owned by wife)
Changes in Control
The Members have the right, by vote of the Members owning more than 50% of
the outstanding Limited Liability Company Units, to remove a Managing Member.
ATEL 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 Limited Partners holding 10% or more of the total
outstanding Limited Liability Company Units.
31
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 Note 6 thereof, and Item 11 of this report under the caption
"Executive Compensation," are hereby incorporated by reference.
Item 14. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management (ATEL
Financial Services, LLC as Managing Member of the registrant, including the
chief executive officer and chief financial officer), an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures [as defined in Rules 240.13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934] was performed as of a date within ninety days
before the filing date of this annual report. Based upon this evaluation, the
chief executive officer and chief financial officer concluded that, as of the
evaluation date, our disclosure controls and procedures were effective for the
purposes of recording, processing, summarizing and timely reporting information
required to be disclosed by us in the reports that we file under the Securities
Exchange Act of 1934 and that such information is accumulated and communicated
to our management in order to allow timely decisions regarding required
disclosure.
Changes in internal controls
There have been no significant changes in our internal controls or in other
factors that could significantly affect our disclosure controls and procedures
subsequent to the evaluation date, nor were there any significant deficiencies
or material weaknesses in our internal controls.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a)Financial Statements and Schedules
1. Financial Statements
Included in Part II of this report:
Report of Independent Auditors
Balance Sheets at December 31, 2002 and 2001
Statements of Operations for the years ended December 31, 2002, 2001
and 2000 Statements of Changes in Members' Capital for the years ended
December 31, 2002, 2001 and 2000 Statements of Cash Flows for the
years ended December 31, 2002, 2001 and 2000 Notes to Financial
Statements
2. Financial Statement Schedules
Allschedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and,
therefore, have been omitted.
(b) Reports on Form 8-K for the fourth quarter of 2002
None
(c)Exhibits
(3)and (4) Agreement of Limited Liability Company, included as
Exhibit B to Prospectus, is incorporated herein by reference to the
report on Form 10K for the period ended December 31, 1998 (File
Number 333-62477) (Exhibit 28.1)
32
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: 3/26/03
ATEL Capital Equipment Fund VIII, LLC
(Registrant)
By: ATEL Financial Services LLC,
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 of ATEL Financial Services LLC
(Managing Member)
33
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the persons in the capacities and on the dates
indicated.
SIGNATURE CAPACITIES DATE
/s/ Dean Cash President, Chairman and Chief Executive 3/26/03
- ------------------------ Officer of ATEL Financial Services LLC
Dean Cash
/s/ Paritosh K. Choksi Executive Vice President and director of 3/26/03
- ------------------------ ATEL Financial Services LLC, Principal
Paritosh K. Choksi financial officer of registrant; principal
financial officer and director of ATEL
Financial Services LLC
/s/ Donald E. Carpenter Principal accounting officer of 3/26/03
- ------------------------ registrant; principal accounting officer
Donald E. Carpenter of ATEL Financial Services LLC
Supplemental Information to be Furnished With Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Securities
Pursuant to Section 12 of the Act:
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.
34
CERTIFICATIONS
I, Paritosh K. Choksi, certify that:
1. I have reviewed this annual report on Form 10-K of ATEL Cash Distribution
Fund VIII, LLC;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: 3/26/03
/s/ Paritosh K. Choksi
- -------------------------------------------------------------
Paritosh K. Choksi
Principal financial officer of registrant, Executive
Vice President of Managing Member
35
CERTIFICATIONS
I, Dean L. Cash, certify that:
1. I have reviewed this annual report on Form 10-K of ATEL Cash Distribution
Fund VIII, LLC;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: 3/26/03
/s/ Dean Cash
- -------------------------------------------------------------
Dean L. Cash
President and Chief Executive
Officer of Managing Member
36
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual report on Form 10K of ATEL Cash Distribution
Fund VIII, LLC, (the "Company") for the period ended December 31, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
and pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002, I, Dean L. Cash, Chief Executive Officer of ATEL
Financial Services, LLC, managing member of the Company, hereby certify that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934 ; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: 3/26/03
/s/ Dean Cash
- ------------------------------------------
Dean L. Cash
President and Chief Executive
Officer of Managing Member
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual report on Form 10K of ATEL Cash Distribution
Fund VIII, LP, (the "Company") for the period ended December 31, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
and pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002, I, Paritosh K. Choksi, Chief Financial Officer of
ATEL Financial Services, LLC, managing member of the Company, hereby certify
that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934 ; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: 3/26/03
/s/ Paritosh K. Choksi
- ------------------------------------------
Paritosh K. Choksi
Executive Vice President of General
Partner, Principal financial officer of registrant
37