Form 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 |X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 2004 |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from _______ to _______ Commission File Number 333-62477 ATEL Capital Equipment Fund VIII, LLC (Exact name of registrant as specified in its charter) California 94-3307404 - ---------- ---------- (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 600 California Street, 6th Floor, San Francisco, California 94108-2733 (Address of principal executive offices) Registrant's telephone number, including area code: (415) 989-8800 Securities registered pursuant to section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Limited Liability Company Units Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes |_| No |X| The number of Limited Liability Company Units outstanding as of June 30, 2004 was 13,570,188. DOCUMENTS INCORPORATED BY REFERENCE None 1 ATEL CAPITAL EQUIPMENT FUND VIII, LLC Index Part I. Financial Information Item 1. Financial Statements (Unaudited) Balance Sheets, June 30, 2004 and December 31, 2003. Statements of Operations for the six and three month periods ended June 30, 2004 and 2003. Statements of Changes in Members' Capital for the year ended December 31, 2003 and for the six month period ended June 30, 2004. Statements of Cash Flows for the six and three month periods ended June 30, 2004 and 2003. Notes to the Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II. Other Information Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits 2 Part I. FINANCIAL INFORMATION Item 1. Financial Statements. ATEL CAPITAL EQUIPMENT FUND VIII, LLC BALANCE SHEETS JUNE 30, 2004 AND DECEMBER 31, 2003 (Unaudited) ASSETS June 30, December 31, 2004 2003 ---- ---- (Unaudited) Cash and cash equivalents $ 318,553 $ 508,584 Accounts receivable, net of allowance for doubtful accounts of $90,115 in 2004 and $225,115 in 2003 1,544,599 2,124,902 Other assets 10,000 25,000 Investments in leases 89,939,464 107,564,258 ------------------ ------------------- Total assets $ 91,812,616 $ 110,222,744 ================== =================== LIABILITIES AND MEMBERS' CAPITAL Long-term debt $ 33,416,000 $ 39,946,000 Line of credit 4,500,000 9,500,000 Non-recourse debt 6,336,442 6,609,335 Accounts payable: Managing member 1,091,118 889,555 Other 245,637 820,799 Accrued interest payable 139,441 115,844 Interest rate swap contracts 2,018,441 3,207,595 Unearned operating lease income 596,202 1,236,498 ------------------ ------------------- Total liabilities 48,343,281 62,325,626 Other accumulated comprehensive loss (1,998,473) (3,143,144) Members' capital 45,467,808 51,040,262 ------------------ ------------------- Total Members' capital 43,469,335 47,897,118 ------------------ ------------------- Total liabilities and Members' capital $ 91,812,616 $ 110,222,744 ================== =================== See accompanying notes. 3 ATEL CAPITAL EQUIPMENT FUND VIII, LLC STATEMENTS OF OPERATIONS SIX AND THREE MONTH PERIODS ENDED JUNE 30, 2004 AND 2003 (Unaudited) Six Months Three Months Ended June 30, Ended June 30, -------------- -------------- 2004 2003 2004 2003 ---- ---- ---- ---- Revenues: Leasing activities: Operating leases $10,746,150 $14,277,413 $ 4,801,748 $ 6,898,522 Direct financing leases 613,660 333,758 272,866 161,448 Gain on sales of assets 2,177,912 689,655 1,728,270 535,240 Interest 1,773 3,652 847 1,640 Other 435,029 31,545 420,360 13,849 ----------------- ------------------ ------------------ ------------------- 13,974,524 15,336,023 7,224,091 7,610,699 Expenses: Depreciation of operating lease assets 9,018,309 10,401,597 4,201,631 5,064,666 Interest expense 1,651,396 3,154,480 772,962 1,131,836 Cost reimbursements to Managing Member 719,342 753,733 20,127 96,970 Asset management fees to Managing Member 579,469 775,954 307,620 475,384 Railcar maintenance 266,974 806,180 136,527 134,093 Professional fees 168,469 286,000 87,026 104,904 Amortization of initial direct costs 137,257 188,073 65,242 94,037 (Recoveries of) provision for doubtful accounts (135,000) (250,000) (146,000) (50,000) Franchise fees and state taxes 94,061 124,239 69,061 124,239 Outside services 92,226 83,560 40,270 32,744 Insurance 85,775 - 43,455 - Impairment losses (recoveries) - 1,890,861 - (20,000) Aircraft maintenance - 45,500 - 5,500 Other 194,485 109,865 105,466 70,647 ----------------- ------------------ ------------------ ------------------- 12,872,763 18,370,042 5,703,387 7,265,020 ----------------- ------------------ ------------------ ------------------- Net income (loss) $ 1,101,761 $ (3,034,019) $ 1,520,704 $ 345,679 ================= ================== ================== =================== Net income (loss): Managing Member $ 500,581 $ 500,404 $ 250,287 $ 250,117 Other Members 601,180 (3,534,423) 1,270,417 95,562 ----------------- ------------------ ------------------ ------------------- $ 1,101,761 $ (3,034,019) $ 1,520,704 $ 345,679 ================= ================== ================== =================== Net income (loss) per Limited Liability Company Unit $ 0.04 $ (0.26) $ 0.09 $ 0.01 Weighted average number of Units outstanding 13,570,188 13,570,188 13,570,188 13,570,188 See accompanying notes. 4 ATEL CAPITAL EQUIPMENT FUND VIII, LLC STATEMENT OF CHANGES IN MEMBERS' CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2003 AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2004 (Unaudited) Accumulated Other Comprehensive Other Members Managing Income ------------- Units Amount Member (Loss) Total Balance December 31, 2002 13,570,188 $71,908,105 $ - $(5,381,342) $ 66,526,763 Distributions to members - (12,345,603) (1,000,979) - (13,346,582) Reclassification adjustment for portion of swap liability charged to net loss - - - 64,451 64,451 Unrealized change in value of interest rate swap contracts - - - 2,173,747 2,173,747 Net income (loss) - (8,522,240) 1,000,979 - (7,521,261) ------------------ ------------------------------------ ------------------ ------------------ Balance December 31, 2003 13,570,188 51,040,262 - (3,143,144) 47,897,118 Distributions to members - (6,173,634) (500,581) - (6,674,215) Unrealized change in value of interest rate swap contracts - - - 1,144,671 1,144,671 Net income - 601,180 500,581 - 1,101,761 ------------------ ----------------- ------------------ ------------------ ------------------ Balance June 30, 2004 13,570,188 $45,467,808 $ - $(1,998,473) $ 43,469,335 ================== ================= ================== ================== ================== See accompanying notes. 5 ATEL CAPITAL EQUIPMENT FUND VIII, LLC STATEMENTS OF CASH FLOWS SIX AND THREE MONTH PERIODS ENDED JUNE 30, 2004 AND 2003 (Unaudited) Six Months Three Months Ended June 30, Ended June 30, -------------- -------------- 2004 2003 2004 2003 ---- ---- ---- ---- Operating activities: Net income (loss) $ 1,101,761 $ (3,034,019) $ 1,520,704 $ 345,679 Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation of operating lease assets 9,018,309 10,401,597 4,201,631 5,064,666 Amortization of initial direct costs 137,257 188,073 65,242 94,037 Gain on sales of assets (2,177,912) (689,655) (1,728,270) (535,240) Impairment losses (recoveries) - 1,890,861 - (20,000) (Recovery of) provision for doubtful accounts (135,000) (250,000) (146,000) (50,000) Changes in operating assets and liabilities: Accounts receivable 715,303 554,532 418,442 1,600,635 Due from Managing Member - 171,119 - - Other assets 15,000 15,000 7,500 7,500 Accounts payable, Managing Member 201,563 111,073 760,695 (149,575) Accounts payable, other (575,162) 342,473 (1,955) 367,893 Accrued interest expense 23,597 (13,995) 11,711 (42,146) Unearned lease income (640,296) (69,042) (107,739) (315,435) Interest rate swap contracts (44,483) - (22,209) - ----------------- ------------------ ------------------ ------------------- Net cash provided by operations 7,639,937 9,618,017 4,979,752 6,368,014 ----------------- ------------------ ------------------ ------------------- Investing activities: Proceeds from sales of assets 10,319,679 12,256,835 8,834,020 10,235,678 Reduction of net investment in direct financing leases 327,461 908,384 200,806 630,344 ----------------- ------------------ ------------------ ------------------- Net cash provided by investing activities 10,647,140 13,165,219 9,034,826 10,866,022 ----------------- ------------------ ------------------ ------------------- 6 ATEL CAPITAL EQUIPMENT FUND VIII, LLC STATEMENTS OF CASH FLOWS (Continued) SIX AND THREE MONTH PERIODS ENDED JUNE 30, 2004 AND 2003 (Unaudited) Six Months Three Months Ended June 30, Ended June 30, -------------- -------------- 2004 2003 2004 2003 ---- ---- ---- ---- Financing activities: Repayments of line of credit (12,000,000) (10,300,000) (11,000,000) (8,400,000) Borrowings on line of credit 7,000,000 8,200,000 3,500,000 4,300,000 Repayments of long-term debt (6,530,000) (14,903,000) (3,403,000) (9,482,000) Repayments of non-recourse debt (272,893) (167,854) - (167,854) Distributions to other members (6,173,634) (6,171,654) (3,086,873) (3,084,779) Distributions to Managing Member (500,581) (500,404) (250,287) (250,117) ----------------- ------------------ ------------------ ------------------- Net cash used in financing activities (18,477,108) (23,842,912) (14,240,160) (17,084,750) ----------------- ------------------ ------------------ ------------------- Net (decrease) increase in cash and cash equivalents (190,031) (1,059,676) (225,582) 149,286 Cash and cash equivalents at beginning of period 508,584 2,263,479 544,135 1,054,517 ----------------- ------------------ ------------------ ------------------- Cash and cash equivalents at end of period $ 318,553 $ 1,203,803 $ 318,553 $ 1,203,803 ================= ================== ================== =================== Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 1,627,799 $ 3,168,475 $ 761,251 $ 1,173,982 ================= ================== ================== =================== Schedule of non-cash transactions: Change in fair value of interest rate swap contracts $ 1,144,671 $ 1,184,760 $ 1,020,846 $ 873,930 ================= ================== ================== =================== See accompanying notes. 7 ATEL CAPITAL EQUIPMENT FUND VIII, LLC NOTES TO FINANCIAL STATEMENTS JUNE 30, 2004 (Unaudited) 1. Summary of significant accounting policies: Interim financial statements: The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. The unaudited interim financial statements reflect all adjustments which are, in the opinion of the Managing Member, necessary to a fair statement of financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that effect reported amounts in the financial statements and accompanying notes. Therefore, actual results could differ from those estimates. Operating results for the six months ended June 30, 2004 are not necessarily indicative of the results for the year ending December 31, 2004. These unaudited interim financial statements should be read in conjunction with the financial statements and notes thereto contained in the report on Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange Commission. 2. Organization and 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. The Company may continue until December 31, 2019. Upon the sale of the minimum amount of Units of Limited Liability Company interest (Units) of $1,200,000 and the receipt of the proceeds thereof on January 13, 1999, the Company commenced operations. The Company does not make a provision for income taxes since all income and losses will be allocated to the Members for inclusion in their individual tax returns. ATEL Financial Services, LLC (AFS), an affiliated entity, acts as the Managing Member of the Company. Certain prior period amounts have been reclassified to conform to current period presentation. The Company is in its operating phase and is making distributions on a monthly or quarterly basis. 8 ATEL CAPITAL EQUIPMENT FUND VIII, LLC NOTES TO FINANCIAL STATEMENTS JUNE 30, 2004 (Unaudited) 3. Investment in leases: The Company's investment in leases consists of the following: Depreciation / Amortization Expense or Balance Amortization of Reclass- Balance December 31, Direct Financing ifications and June 30, 2003 Leases Dispositions 2004 ---- ------ ------------ ---- Net investment in operating leases $87,112,340 $ (9,018,309) $(7,741,871) $ 70,352,160 Net investment in direct financing leases 11,497,801 (327,461) (5,131,628) 6,038,712 Assets held for sale or lease, net of accumulated depreciation of $25,355,805 in 2004 and $16,874,083 in 2003 8,636,682 - 4,731,732 13,368,414 Initial direct costs, net of accumulated amortization of $1,309,929 in 2004 and $1,345,313 in 2003 317,435 (137,257) - 180,178 ----------------- ------------------ ------------------ ------------------- $107,564,258 $ (9,483,027) $(8,141,767) $ 89,939,464 ================= ================== ================== =================== Management periodically reviews the carrying values of its assets on leases and assets held for lease or sale. As a result of the review during the three month period ended March 31, 2003, management determined that the value of a fleet of covered hopper rail cars had declined in value to the extent that the carrying values had become impaired. This decline was the result of decreased long-term demand for these types of assets and a corresponding reduction in the amounts of rental payments that these assets could command. Management recorded a provision for the decline in value of those assets in the amount of $1,910,861 for the three months ended March 31, 2003. There were no such impairment losses in either the three or six month periods ended June 30, 2004. In 2004 it came to the Company's attention that the Company had incorrectly calculated the amounts of depreciation expense associated with an operating lease from January 2001 through December 31, 2003. During the six months ended June 30, 2004, the Company recorded additional depreciation expense of $538,929 to correct the accounting for the transaction. The Company does not believe that this amount is material to the periods in which it should have been recorded, nor is it expected that this amount will be material to the Company's operating results for the year ending December 31, 2004. However, if this adjustment is ultimately deemed to be material to the Company's operating results for the year ending December 31, 2004, the Company will need to restate prior financial reporting periods, including the current period. The impact on prior financial reporting periods would be a reduction of members' equity of $538,929 ($0.04 per Unit) for all previous periods currently presented. The net loss for the six month period ended June 30, 2003 would be increased by $89,822 ($0.01 per Unit) and net income for the three month period ended June 30, 2003 would be decreased by $44,911 ($0.003 per Unit). Net income for the three and six month periods ended June 30, 2004 would be increased by $538,929 ($0.04 per Unit). 9 ATEL CAPITAL EQUIPMENT FUND VIII, LLC NOTES TO FINANCIAL STATEMENTS JUNE 30, 2004 (Unaudited) 3. Investment in leases (continued): Impairment losses are recorded as an addition to accumulated depreciation of the impaired assets. Depreciation expense and impairment losses on property subject to operating leases and assets held for lease or sale consist of the following for the three and six month periods ended June 30: Six Months Three Months Ended June 30, Ended June 30, -------------- -------------- 2004 2003 2004 2003 ---- ---- ---- ---- Depreciation of operating lease assets $ 9,018,309 $10,401,597 $ 4,201,631 $ 5,064,666 Impairment losses (recoveries) - 1,890,861 - (20,000) ----------------- ------------------ ------------------ ------------------- $ 9,018,309 $ 12,292,458 $ 4,201,631 $ 5,044,666 ================= ================== ================== =================== Net investment in operating leases: Property on operating leases consists of the following: Balance Reclass- Balance December 31, Depreciation ifications and June 30, 2003 Expense Dispositions 2004 ---- ------- ------------ ---- Transportation, rail $ 34,295,402 $ - $ (2,796,816) $ 31,498,586 Manufacturing 41,079,479 - (16,049,848) 25,029,631 Containers 21,165,000 - - 21,165,000 Transportation, other 23,302,778 - (2,509,010) 20,793,768 Aircraft 15,448,037 - - 15,448,037 Natural gas compressors 13,677,449 - (136,146) 13,541,303 Materials handling 7,313,238 - (2,147,764) 5,165,474 Other 10,991,981 - (2,022,382) 8,969,599 ----------------- ------------------ ------------------ ------------------- 167,273,364 - (25,661,966) 141,611,398 Less accumulated depreciation (80,161,024) (9,018,309) 17,920,095 (71,259,238) ----------------- ------------------ ------------------ ------------------- $ 87,112,340 $ (9,018,309) $ (7,741,871) $ 70,352,160 ================= ================== ================== =================== Net investment in direct financing leases: As of June 30, 2004, net investment in direct financing leases consists primarily of railcars and office automation equipment. The following lists the components of the Company's net investment in direct financing leases as of June 30, 2004: Total minimum lease payments receivable $ 7,125,096 Estimated residual values of leased equipment (unguaranteed) 1,279,905 ---------------- Investment in direct financing leases 8,405,001 Less unearned income (2,366,289) ---------------- Net investment in direct financing leases $ 6,038,712 ================ All of the property on leases was acquired in 1999, 2000, 2001 and 2002. 10 ATEL CAPITAL EQUIPMENT FUND VIII, LLC NOTES TO FINANCIAL STATEMENTS JUNE 30, 2004 (Unaudited) 3. Investment in leases (continued): At June 30, 2004, the aggregate amounts of future minimum lease payments are as follows: Direct Operating Financing Leases Leases Total Six months ending December 31, 2004 $ 7,649,564 $ 954,561 $ 8,604,125 Year ending December 31, 2005 12,034,269 1,767,397 13,801,666 2006 5,657,987 1,461,648 7,119,635 2007 3,442,848 894,719 4,337,567 2008 938,628 663,561 1,602,189 2009 588,060 614,760 1,202,820 Thereafter 49,170 768,450 817,620 ------------------ ------------------ ------------------- $30,360,526 $ 7,125,096 $ 37,485,622 ================== ================== =================== 4. Non-recourse debt: At June 30, 2004, 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 fixed at rates ranging from 4.96% to 6.85%. The notes are secured by assignments of lease payments and pledges of assets. The notes mature from 2004 through 2007. Future minimum payments of non-recourse debt are as follows: Principal Interest Total Six months ending December 31, 2004 $ 296,496 $ 116,738 $ 413,234 Year ending December 31, 2005 4,715,234 180,430 4,895,664 2006 646,128 57,792 703,920 2007 678,584 25,337 703,921 ------------------ ------------------ ------------------- $ 6,336,442 $ 380,297 $ 6,716,739 ================== ================== =================== 11 ATEL CAPITAL EQUIPMENT FUND VIII, LLC NOTES TO FINANCIAL STATEMENTS JUNE 30, 2004 (Unaudited) 5. Other long-term debt: In 1999, the Company entered into a $70 million receivables funding program (the Program), (which was subsequently increased to $125 million), with a receivables financing company that issues commercial paper rated A1 by Standard and Poors and P1 by Moody's Investor Services. Under the Program, the receivables financing company receives a general lien against all of the otherwise unencumbered assets of the Company. The Program provides for borrowing at a variable interest rate (1.6223% at June 30, 2004). The Program expired as to new borrowings in March 2002. The Program requires AFS, on behalf of the Company, to enter into various interest rate swaps with a financial institution (also rated A1/P1) to manage interest rate exposure associated with variable rate obligations under the Program by effectively converting the variable rate debt to fixed rates. As of June 30, 2004, the Company receives or pays interest on a notional principal of $32,459,958, based on the difference between nominal rates ranging from 4.35% to 7.72% and the variable rate under the Program. No actual borrowing or lending is involved. The termination of the swaps coincides with the maturity of the debt with the last of the swaps maturing in 2009. Through the swap agreements, the interest rates have been effectively fixed. 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. In 2003, the remaining amount owing on an original borrowing of $8,000,000 was repaid in full, though the associated swap will not mature until January 2005. Borrowings under the Program are as follows: Notional Swap Payment Rate Original Balance Balance Value on Interest Amount June 30, June 30, June 30, Swap Date Borrowed Borrowed 2004 2004 2004 Agreement - ------------- -------- ---- ---- ---- --------- 11/11/1999 $ 20,000,000 $ 2,705,000 $ 2,600,876 $ (103,068) 6.84% 12/21/1999 20,000,000 11,761,000 11,799,339 (1,033,855) 7.41% 12/24/1999 25,000,000 2,643,000 1,879,573 (98,843) 7.44% 4/17/2000 6,500,000 2,224,000 2,193,367 (110,320) 7.45% 4/28/2000 1,900,000 286,000 284,344 (15,141) 7.72% 8/3/2000 19,000,000 7,363,000 7,340,287 (469,072) 7.50% 10/31/2000 7,500,000 2,637,000 2,620,466 (140,402) 7.13% 1/29/2001 8,000,000 - 1,561,672 (19,969)* 5.91% 6/1/2001 2,000,000 - - - 5.04% 9/1/2001 9,000,000 2,211,000 2,180,034 (27,771) 4.35% 1/31/2002 3,900,000 1,586,000 - - ** ------------------ ----------------- ------------------ ------------------ $122,800,000 $33,416,000 $32,459,958 $(2,018,441) ================== ================= ================== ================== * This interest rate swap contract is deemed to be ineffective and the change in value for the six month period ended June 30, 2004 has been charged to operations. ** Under the terms of the Program, no interest rate swap agreement was required for this borrowing. 12 ATEL CAPITAL EQUIPMENT FUND VIII, LLC NOTES TO FINANCIAL STATEMENTS JUNE 30, 2004 (Unaudited) 5. Other long-term debt (continued): Other long-term debt borrowings mature from 2004 through 2009. Future minimum principal payments of long-term debt are as follows: Debt Debt Rates on Principal Principal Interest Swap Swapped Not Swapped Interest Total Agreements* ------- ----------- -------- ----- ----------- Six months ending December 31, 2004 $ 5,603,000 $ 398,000 $ 1,096,204 $ 7,097,204 7.009%-7.018% Year ending December 31, 2005 9,886,000 816,000 1,605,677 12,307,677 7.044%-7.152% 2006 7,130,000 120,000 970,792 8,220,792 7.186%-7.213% 2007 4,529,000 172,000 517,970 5,218,970 7.039%-7.103% 2008 3,013,000 12,000 247,771 3,272,771 6.832%-7.063% 2009 1,669,000 68,000 44,826 1,781,826 6.077%-6.600% ------------------ ----------------- ------------------ ------------------ $ 31,830,000 $ 1,586,000 $ 4,483,240 $ 37,899,240 ================== ================= ================== ================== * Represents the range of monthly weighted average fixed interest rates paid for amounts maturing in the particular year. The receive-variable rate portion of the swap represents commercial paper rates (1.6223% at June 30, 2004). 6. Related party transactions: The terms of the Limited Company Operating Agreement provide that AFS and/or affiliates are entitled to receive certain fees for equipment acquisition, management and resale and for management of the Company. The Limited Liability Company Operating Agreement allows for the reimbursement of costs incurred by AFS in providing services to the Company. Services provided include Company accounting, investor relations, legal counsel and lease and equipment documentation. AFS is not reimbursed for services where it is entitled to receive a separate fee as compensation for such services, such as acquisition and management of equipment. Reimbursable costs incurred by AFS are allocated to the Company based upon an estimate of actual time incurred by employees working on Company business and an allocation of rent and other costs based on utilization studies. Substantially all employees of AFS record time incurred in performing services on behalf of all of the companies serviced by AFS. AFS believes that the costs reimbursed are the lower of (i) actual costs incurred on behalf of the Company or (ii) the amount the Company would be required to pay independent parties for comparable services in the same geographic location and are reimbursable in accordance with the Limited Liability Company Operating Agreement. 13 ATEL CAPITAL EQUIPMENT FUND VIII, LLC NOTES TO FINANCIAL STATEMENTS JUNE 30, 2004 (Unaudited) 6. Related party transactions (continued): AFS and/or affiliates earned fees, commissions and reimbursements, pursuant to the Limited Liability Company Agreement during the six and three month periods ended June 30, 2004 and 2003 as follows: Six Months Three Months Ended June 30, Ended June 30, -------------- -------------- 2004 2003 2004 2003 ---- ---- ---- ---- Administrative costs reimbursed to Managing Member $ 719,342 $ 753,733 $ 20,127 $ 96,970 Asset management fees to Managing Member 579,469 775,954 307,620 475,384 ----------------- ------------------ ------------------ ------------------- $ 1,298,811 $ 1,529,687 $ 327,747 $ 572,354 ================= ================== ================== =================== In 2003, it came to the Company's attention that an affiliated company had under billed the Company in a prior year for interest costs associated with the financing of an asset acquired on its behalf. During the three months ended March 31, 2003, the Company recorded additional interest expense of $742,000 to correct the accounting for the transaction. The Company does not believe that this amount is material to the periods in which it should have been recorded, nor that it is material to the Company's operating results for the year ended December 31, 2003. The effect of the additional interest expense recorded in 2003 was to increase the loss in 2003 by $0.05 per Unit. 7. Member's capital: As of June 30, 2004, 13,570,188 Units were issued and outstanding. The Company's registration statement with the Securities and Exchange Commission became effective December 7, 1998. The offering was concluded on November 30, 2000. The Company is authorized to issue up to 15,000,050 Units, including the 50 Units issued to the initial members. The Company's Net Income, Net Losses, and Distributions as defined in the Limited Liability Company Operating Agreement are to be allocated 92.5% to the Members and 7.5% to AFS. Distributions to the Other Members were as follows: Six Months Three Months Ended June 30, Ended June 30, -------------- -------------- 2004 2003 2004 2003 ---- ---- ---- ---- Distributions $ 6,173,634 $ 6,171,654 $ 3,086,873 $ 3,084,779 Weighted average number of Units outstanding 13,570,188 13,570,188 13,570,188 13,570,188 Weighted average distributions per Unit $ 0.45 $ 0.45 $ 0.23 $ 0.23 14 ATEL CAPITAL EQUIPMENT FUND VIII, LLC NOTES TO FINANCIAL STATEMENTS JUNE 30, 2004 (Unaudited) 8. Line of credit: The Company participates with AFS and certain of its affiliates in a $61,945,455 revolving line of credit (comprised of an acquisition facility and a warehouse facility) with a financial institution that includes certain financial covenants. During the quarter ended March 31, 2004, the facility was extended for an additional year. At the same time, the total available under the facility was increased. The line of credit expires on June 28, 2005. As of June 30, 2004, borrowings under the facility were as follows: Amount borrowed by the Company under the acquisition facility $ 4,500,000 Amounts borrowed by affiliated partnerships and limited liability companies under the acquisition facility 13,500,000 ------------------- Total borrowings under the acquisition facility 18,000,000 Amounts borrowed by AFS and its sister corporation under the warehouse facility - ------------------- Total outstanding balance $ 18,000,000 =================== Total available under the line of credit $ 61,945,455 Total outstanding balance (18,000,000) ------------------- Remaining availability $ 43,945,455 =================== 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 partnerships and limited liability companies, the fund and AFS. The credit agreement includes certain financial covenants applicable to each borrower. The Company was in compliance with its covenants as of June 30, 2004. Interest rates on the balances outstanding at June 30, 2004 ranged from 3.01375% to 3.18%. 9. Commitments: As of June 30, 2004, the Company had no outstanding commitments to purchase lease equipment. 10. Other comprehensive income: In 2004 and 2003, other comprehensive income consisted of the following: Six Months Three Months Ended June 30, Ended June 30, -------------- -------------- 2004 2003 2004 2003 ---- ---- ---- ---- Net income (loss) $ 1,101,761 $ (3,034,019) $ 1,520,704 $ 345,679 Other comprehensive income: Change in fair value of interest rate swap contracts 1,144,671 1,184,760 1,020,846 873,930 ----------------- ------------------ ------------------ ------------------- Comprehensive net income (loss) $ 2,246,432 $ (1,849,259) $ 2,541,550 $ 1,219,609 ================= ================== ================== =================== There were no other sources of comprehensive net income. 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Statements contained in this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Form 10-Q, which are not historical facts, may be forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Investors are cautioned not to attribute undue certainty to these forward-looking statements, which speak only as of the date of this Form 10-Q. We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events, other than as required by law. Capital Resources and Liquidity During the first half of 2004 and 2003, the Company's primary activity was engaging in equipment leasing activities. During 2004 and 2003, the Company's primary sources of liquidity were rents from operating leases and proceeds from the sales of lease assets. The liquidity of the Company will vary in the future, increasing to the extent cash flows from leases exceed expenses, and decreasing as lease assets are acquired, as distributions are made to the members and to the extent expenses exceed cash flows from leases. The Company has 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 the Managing Member's success in re-leasing or selling the equipment as it comes off lease. The Company participates with AFS and certain of its affiliates in a $61,945,455 revolving line of credit (comprised of an acquisition facility and a warehouse facility) with a financial institution that includes certain financial covenants. During the quarter ended March 31, 2004, the facility was extended for an additional year. At the same time, the total available under the facility was increased. The line of credit expires on June 28, 2005. As of June 30, 2004, borrowings under the facility were as follows: Amount borrowed by the Company under the acquisition facility $ 4,500,000 Amounts borrowed by affiliated partnerships and limited liability companies under the acquisition facility 13,500,000 ------------------- Total borrowings under the acquisition facility 18,000,000 Amounts borrowed by AFS and its sister corporation under the warehouse facility - ------------------- Total outstanding balance $ 18,000,000 =================== Total available under the line of credit $ 61,945,455 Total outstanding balance (18,000,000) ------------------- Remaining availability $ 43,945,455 =================== 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 partnerships 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 and acquisition fees to the Managing Member and providing for cash distributions to the members. The Company currently has available adequate reserves to meet contingencies, 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. The Managing Member envisions no such requirements for operating purposes. No commitments of capital have been or are expected to be made other than for the acquisition of additional equipment. There were no such commitments as of June 30, 2004. 16 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 During the first half of 2004 and 2003, the Company's primary sources of liquidity was operating lease rents and proceeds from the sales of lease assets. In the first six months of 2004 and 2003, the primary source of cash from operations was rents from operating leases. Operating leases are expected to remain as the primary source of cash from operations in future periods. In both 2004 and 2003, proceeds from sales of assets was the primary source of cash from investing activities. Proceeds from the sales of lease assets are not expected to be consistent from one period to another. Asset sales are made as leases expire, as purchasers can be found and as the sales can be negotiated and completed. There were no investing uses of cash in 2004 or in 2003. In the first six months of 2004 and 2003, the only sources of cash from financing activities were borrowings under the line of credit. Financing uses of cash included repayments of debt of $6,530,000 and $14,903,000 in the six month periods ended June 30, 2004 and 2003, respectively. In the three month periods ended June 30, 2004 and 2003, debt repayments were $3,403,000 and $9,482,000, respectively. Distributions were made to Other Members in amounts of $6,173,634 and $6,171,654 and to AFS in the amounts of $500,581 and $500,404 in the six month periods ended June 30, 2004 and 2003, respectively. Distributions were made to Other Members in amounts of $3,086,873 and $3,084,779 and to AFS in the amounts of $250,287 and $250,117 in the three month periods ended June 30, 2004 and 2003, respectively. Repayments of debt for the six and three month periods ended June 30, 2004 decreased from the same periods in the prior year as a result of the reduction in scheduled repayments. Results of operations Operations resulted in a net loss of $3,034,019 for the six month period ended June 30, 2003 and net income of $345,679 for the three month period ended June 30, 2003. In 2004, operations resulted in net income of $1,101,761 for the six month period ended June 30 and $1,520,704 for the second quarter then ended. The Company's primary source of revenues is from operating leases. Operating lease rents have decreased in 2004 compared to 2003 as a result of two factors: (1) a larger portion of the Company's assets were off lease during the first six months of 2004 than in 2003; and (2) there have been sales of assets over the last twelve months. Depreciation is related to operating lease assets and thus, to operating lease revenues. Consequently, depreciation expense decreased in 2004 compared to 2003. For the six month periods, depreciation decreased from $10,401,597 in 2003 to $9,018,309 in 2004 and for the three month periods, it decreased from $5,064,666 in 2003 to $4,201,631 in 2004. During the second quarter of 2004, the Company received $406,348 of late payment fees in a settlement with a lessee. There were no similar amounts in 2003. During the first quarter of 2003, the Company entered into negotiations relating to the early termination of an aircraft lease and the sale of the asset to the lessee. The negotiations were concluded in early April 2003 and the asset was sold. As a result, an impairment loss related to the aircraft has been recorded in the first quarter of 2003 in the amount of $1,910,861. This provision is the single largest factor in the increase in the loss realized in the first quarter of 2003. There were no similar impairments recognized in the first half of 2004. Asset management fees are based on the gross lease rents of the Company plus proceeds from the sales of lease assets. They are limited to certain percentages of lease rents, distributions to members and certain other items. The decrease in asset management fees from $775,954 in the six months ended June 30, 2003 to $579,469 for the six month period in 2004 and from $475,384 for the three month period ended June 30, 2003 to $307,620 for the three month period in 2004 are a direct result of decreases in lease revenues. 17 Interest expense has decreased from $1,131,836 in the three month period ended June 30, 2003 to $772,962 in the three month period ended June 30, 2004. For the six month periods ended June 30, interest expense decreased from $3,154,480 in 2003 to $1,651,396 in 2004. In 2003, it came to the Company's attention that an affiliated company had under billed the Company in a prior year for interest costs associated with the financing of an asset acquired on its behalf. During the three months ended March 31, 2003, the Company recorded additional interest expense of $742,000 to correct the accounting for the transaction. There was no similar charge in 2004. Overall debt has decreased from $79,214,855 at December 31, 2002 to $44,252,442 at June 30, 2004. This decrease in the debt balances has resulted in the decreased interest charges in 2004 compared to the same period in 2003. In the six month periods ended June 30, 2004 and 2003, the Company incurred $266,974 and $806,180, respectively for maintenance costs relating to railcars. In the three month periods ended June 30, 2004 and 2003, the Company incurred $136,527 and $134,093, respectively, of such costs. These costs were incurred in order to be able to place the railcars on a new lease. The costs did not increase the useful life of the assets or increase their value in the marketplace. Recoveries of doubtful accounts decreased from $250,000 to $135,000 for the six month periods ended June 30, 2003 and 2004, respectively. For the three month periods ended June 30, 2003 and 2004, recoveries increased from $50,000 to $146,000, respectively. Recoveries and provisions for doubtful accounts are not expected to be consistent from one period to another. Item 3. Quantitative and Qualitative Disclosures of 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 June 30, 2004, there was $4,500,000 outstanding on the floating rate line of credit. Also, 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 June 30, 2004, borrowings on the facility were $33,416,000 and the associated variable interest rate was 1.6223%. The Item 4. 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) under the Securities Exchange Act of 1934] was performed as of the date of this report. Based upon this evaluation, the chief executive officer and the chief financial officer concluded that, as of the evaluation date, except as noted below, 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. 18 As disclosed in the Form 10-K for the year ended December 31, 2003, the chief executive and chief financial officer of the Managing Member of the Company had identified certain enhanced controls needed to facilitate a more effective closing of the Company's financial statements. During the first quarter of 2004 and since the end of the quarter, the Managing Member hired a new controller, added additional accounting staff personnel, and has instituted or revised existing procedures in order to ensure that the Company's ability to execute internal controls in accounting and reconciliation in the closing process is adequate in all respects. The Managing Member will continue to review its accounting procedures and practices to determine their effectiveness and adequacy and will take such steps as deemed necessary in the opinion of the Managing Member's chief executive and chief financial officers to ensure the adequacy of the Company's accounting controls and procedures. The Managing Member's chief executive officer and chief financial officer have determined that no weakness in financial and accounting controls and procedures had any material effect on the accuracy and completeness of the Company's financial reporting and disclosure included in this report. 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, except as described in the prior paragraphs. PART II. OTHER INFORMATION Item 1. Legal Proceedings. In the ordinary course of conducting business, there may be certain claims, suits, and complaints filed against the Company. In the opinion of management, the outcome of such matters, if any, will not have a material impact on the Company's financial position or results of operations. No material legal proceedings are currently pending against the Company or against any of its assets. The following is a discussion of legal matters involving the Company, but which do not represent claims against the Company or its assets. Solectron: This is a matter whereby the Company has declared a lessee in default for failure to pay rent in a timely manner, and for other various defaults. A claim was filed on August 29, 2002, by AFS on behalf of the Company in the amount of $13,332,328. The lessee filed a counter-claim against the Company asserting unfair business practices. In 2003, the Company elected to dismiss its suit and subsequently obtained a corresponding dismissal of Solectron's counter-claim. The Company is continuing to seek resolution of its claims as a negotiated settlement. Item 2. Changes in Securities and Use of Proceeds Inapplicable. Item 3. Defaults Upon Senior Securities. Inapplicable. Item 4. Submission Of Matters To A Vote Of Security Holders. Inapplicable. Item 5. Other Information. Inapplicable. 19 Item 6. Exhibits And Reports On Form 8-K. (a) Documents filed as a part of this report 1. Financial Statement Schedules All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 2. Other Exhibits 31.1 Certification of Paritosh K. Choksi 31.2 Certification of Dean L. Cash 32.1 Certification Pursuant to 18 U.S.C. section 1350 of Dean L. Cash 32.2 Certification Pursuant to 18 U.S.C. section 1350 of Paritosh K. Choksi (b) Report on Form 8-K None 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 11, 2004 ATEL CAPITAL EQUIPMENT FUND VIII, LLC (Registrant) By: ATEL Financial Services, LLC Managing Member of Registrant By: /s/ Dean L. Cash ------------------------------------ Dean L. Cash President and Chief Executive Officer of Managing Member By: /s/ Paritosh K. Choksi ------------------------------------ Paritosh K. Choksi Executive Vice President of Managing Member, Principal financial officer of registrant By: /s/ Donald E. Carpenter ------------------------------------- Donald E. Carpenter Principal accounting officer of registrant 21