**Form10-Q**

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington,D.C.  20549**

 

**ý****                                ****Quarterly Report Pursuant toSection 13 or 15(d)of the Securities Exchange Act of 1934.**

**For the quarterly period ended June30, 2005**

 

**o****                                ****Transition Report Pursuant to Section13 or 15(d)of the Securities Exchange Act of 1934.**

**For thetransition period from                 to                 **

 

**Commission File number 000-33103**

 

**ATELCapital Equipment Fund VIII, LLC**(Exact name ofregistrant as specified in its charter)

 

| **California**                                                  | ** ** | **94-3307404**                         |
|-----------------------------------------------------------------|------------|----------------------------------------|
| (State or other jurisdiction of  Incorporation or organization) |       | (I. R. S. EmployerIdentification  No.) |

 

**600 California Street, 6th Floor, SanFrancisco, California 94108**(Address ofprincipal 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 CompanyUnits**

 

Indicate by a check markwhether the registrant (1) has filed all reports required to be filed bysection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes ý No o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theAct). Yes o No ý

 

The number of LimitedLiability Company Units outstanding as of June 30, 2005 was 13,570,188

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

None

 

 

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** **

**ATEL CAPITAL EQUIPMENT FUND VIII, LLC**

 

**Index**

 
| **Part I.**                    | **Financial Information**                                                                                                               |   |
|--------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------|--------|
|                           |                                                                                                                                    |   |
| Item 1.                        | Financial Statements  (Unaudited)                                                                                                       |   |
|                           |                                                                                                                                    |   |
|                           | Balance Sheets, June 30, 2005 and December 31,  2004.                                                                                   |   |
|                           |                                                                                                                                    |   |
|                           | Statements of Operations for the six  and three month periods ended June 30, 2005 and 2004.                                             |   |
|                           |                                                                                                                                    |   |
|                           | Statements of Changes in  Members’ Capital for the year ended December 31, 2004 and for the six month  period ended June 30, 2005. |   |
|                           |                                                                                                                                    |   |
|                           | Statements of Cash Flows for the six and  three month periods ended June 30, 2005 and 2004.                                             |   |
|                           |                                                                                                                                    |   |
|                           | 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.                        | Unregistered Sales of Equity  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

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**Part I.  FINANCIALINFORMATION**

 

**Item 1.  Financial Statements (unaudited).**

 

**ATEL CAPITAL EQUIPMENT FUND VIII, LLC**

 

**BALANCESHEETS**

 

**JUNE 30, 2005 AND DECEMBER 31, 2004**

 
| ** **                                                                                           | ** ** | **June 30,**  | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------|------------|------------------|------------|
| ** **                                                                                           | ** ** | **2005**      | ** ** | **2004**         | ** ** |
| ** **                                                                                           | ** ** | **Unaudited** | ** ** | ** **       | ** ** |
| **ASSETS**                                                                                           |       |          |       |             |       |
|                                                                                                 |       |          |       |             |       |
| Cash and cash equivalents                                                                            |       | $             | 2,516,474  |             | $          | 2,569,911 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $136,630 in 2005 and $52,115 in 2004 |       | 1,330,208     |       | 1,611,290        |       |
| Other assets                                                                                         |       | 56,195        |       | 378,264          |       |
| Investments in equipment and leases, net                                                             |       | 48,553,314    |       | 59,689,715       |       |
| Total assets                                                                                         |       | $             | 52,456,191 |             | $          | 64,249,180 |   |
|                                                                                                 |       |          |       |             |       |
| **LIABILITIES  AND MEMBERS’ CAPITAL**                                                           | ** ** | ** **    | ** ** | ** **       | ** ** |
| ** **                                                                                           | ** ** | ** **    | ** ** | ** **       | ** ** |
| Long-term debt                                                                                       |       | $             | 7,632,000  |             | $          | 13,192,000 |   |
| Non-recourse debt                                                                                    |       | 5,736,096     |       | 6,039,946        |       |
| Accounts payable and accruals:                                                                       |       |          |       |             |       |
| Managing Member                                                                                      |       | 1,620,582     |       | 613,310          |       |
| Other                                                                                                |       | 167,316       |       | 239,038          |       |
| Accrued interest payable                                                                             |       | 83,485        |       | 105,336          |       |
| Interest rate swap contracts                                                                         |       | 904,681       |       | 1,435,454        |       |
| Unearned operating lease income                                                                      |       | 349,503       |       | 436,055          |       |
| Total liabilities                                                                                    |       | 16,493,663    |       | 22,061,139       |       |
|                                                                                                 |       |          |       |             |       |
| Members’ capital:                                                                               |       |          |       |             |       |
| Accumulated other comprehensive loss                                                                 |       | (620,755      | )          | (725,935         | )          |
| Members’ capital                                                                                |       | 36,583,283    |       | 42,913,976       |       |
| Total Members’ capital                                                                          |       | 35,962,528    |       | 42,188,041       |       |
| Total liabilities and Members’ capital                                                          |       | $             | 52,456,191 |             | $          | 64,249,180 |   |

 

See accompanying notes.

 

3

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**ATEL CAPITAL EQUIPMENT FUND VIII, LLC**

 

**STATEMENTSOF OPERATIONS**

 

**SIX AND THREE MONTH PERIODS ENDEDJUNE 30, 2005 AND 2004(Unaudited)**

 
| ** **                                                                   | ** ** | **Six Months**     | ** ** | **Three Months**   | ** ** |
|------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                   | ** ** | **Ended June 30,** | ** ** | **Ended June 30,** | ** ** |
| ** **                                                                   | ** ** | **2005**           | ** ** | **2004**           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                                    | ** ** | ** **         | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Leasing activities:                                                          |       |               |       |               |       |   |   |   |   |
| Operating leases                                                             |       | $                  | 5,859,947  |               | $          | 10,746,150 |   | $ | 2,803,198 |   | $ | 4,801,748 |   |
| Direct financing leases                                                      |       | 102,472            |       | 613,660            |       | 46,138 |   | 272,866 |   |
| Gain on sales of assets                                                      |       | 703,840            |       | 2,177,912          |       | 600,426 |   | 1,728,270 |   |
| Interest income                                                              |       | 19,379             |       | 1,773              |       | 15,427 |   | 847 |   |
| Other                                                                        |       | 8,636              |       | 435,029            |       | 1,590 |   | 420,360 |   |
|                                                                         |       | 6,694,274          |       | 13,974,524         |       | 3,466,779 |   | 7,224,091 |   |
|                                                                         |       |               |       |               |       |   |   |   |   |
| Expenses:                                                                    |       |               |       |               |       |   |   |   |   |
| Depreciation of operating lease assets                                       |       | 4,161,153          |       | 9,018,309          |       | 1,907,483 |   | 4,201,631 |   |
| Interest expense                                                             |       | 766,850            |       | 1,651,396          |       | 373,311 |   | 772,962 |   |
| Asset management fees to Managing Member                                     |       | 288,366            |       | 579,469            |       | 162,029 |   | 307,620 |   |
| Equipment maintenance                                                        |       | 164,097            |       | 266,974            |       | 110,290 |   | 136,527 |   |
| Cost reimbursements to Managing Member                                       |       | 705,519            |       | 719,342            |       | 13,549 |   | 20,127 |   |
| Amortization of initial direct costs                                         |       | 59,796             |       | 137,257            |       | 25,659 |   | 65,242 |   |
| Professional fees                                                            |       | 42,834             |       | 168,469            |       | 4,754 |   | 87,026 |   |
| Outside Services                                                             |       | 44,774             |       | 92,226             |       | 21,891 |   | 40,270 |   |
| Insurance                                                                    |       | 28,838             |       | 85,775             |       | — |   | 43,455 |   |
| Provision for (Recovery of) doubtful  accounts                               |       | 118,600            |       | (135,000           | )          | 85,100 |   | (146,000 | ) |
| Fair value and reclassification adjustments  on interest rate swap contracts |       | (425,593           | )          | —             |       | (40,409 | ) | — |   |
| Franchise fees and taxes                                                     |       | 240,853            |       | 94,061             |       | 240,751 |   | 69,061 |   |
| Other                                                                        |       | 154,967            |       | 194,485            |       | 74,677 |   | 105,466 |   |
|                                                                         |       | 6,351,054          |       | 12,872,763         |       | 2,979,085 |   | 5,703,387 |   |
| Net income                                                                   |       | $                  | 343,220    |               | $          | 1,101,761 |   | $ | 487,694 |   | $ | 1,520,704 |   |
|                                                                         |       |               |       |               |       |   |   |   |   |
| Net income (loss):                                                           |       |               |       |               |       |   |   |   |   |
| Managing Member                                                              |       | $                  | 500,543    |               | 500,581    |   | $ | 250,287 |   | 250,287 |   |
| Other Members                                                                |       | (157,323           | )          | 601,180            |       | 237,407 |   | 1,270,417 |   |
|                                                                         |       | $                  | 343,220    |               | $          | 1,101,761 |   | $ | 487,694 |   | $ | 1,520,704 |   |
|                                                                         |       |               |       |               |       |   |   |   |   |
| Net income (loss) per Limited Liability  Company Unit                        |       | (0.01              | )          | $                  | 0.04       |   | $ | 0.02 |   | $ | 0.09 |   |
| Weighted average number of Units  outstanding                                |       | 13,570,188         |       | 13,570,188         |       | 13,570,188 |   | 13,570,188 |   |

 

See accompanying notes.

 

4

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**ATEL CAPITAL EQUIPMENT FUND VIII, LLC**

 

**STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL**

 

**FOR THE YEAR ENDED DECEMBER 31, 2004AND FOR THESIX MONTH PERIOD ENDED**

 

**JUNE 30, 2005(Unaudited)**

 
| ** **                                                                       | ** ** | ** **        | ** ** | ** **   | ** ** | ** **        | ** ** | **Accumulated**   | ** ** | ** **  | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------|------------|--------------|------------|-------------------|------------|-------------------|------------|-------------|------------|
| ** **                                                                       | ** ** | ** **        | ** ** | ** **   | ** ** | ** **        | ** ** | **Other**         | ** ** | ** **  | ** ** |
| ** **                                                                       | ** ** | **Other Members** | ** ** | **Managing** | ** ** | **Comprehensive** | ** ** | ** **        | ** ** |
| ** **                                                                       | ** ** | **Units**         | ** ** | **Amount**   | ** ** | **Member**        | ** ** | **Income/(Loss)** | ** ** | **Total**   | ** ** |
|                                                                             |       |              |       |         |       |              |       |              |       |        |       |
| Balance December 31, 2003                                                   |       | 13,570,188        |       | $            | 51,040,262 |              | $          | —            |       | (3,143,144  | )          | $ | 47,897,118 |   |
| Distributions to Managing Member                                                 |       | —            |       | —       |       | (1,001,155        | )          | —            |       | (1,001,155  | )          |
| Distributions to Other Members ($0.91 per  Unit)                                 |       | —            |       | (12,347,383  | )          | —            |       | —            |       | (12,347,383 | )          |
| Reclassification adjustment for portion of  swap liability charged to net income |       | —            |       | —       |       | —            |       | 645,068           |       | 645,068     |       |
| Unrealized change in interest rate swap  liability                               |       | —            |       | —       |       | —            |       | 1,772,141         |       | 1,772,141   |       |
| Net income                                                                       |       | —            |       | 4,221,097    |       | 1,001,155         |       |              |       | 5,222,252   |       |
| Balance December 31, 2004                                                   |       | 13,570,188        |       | 42,913,976   |       | —            |       | (725,935          | )          | 42,188,041  |       |
| Distributions to Managing Member                                                 |       | —            |       | —       |       | (500,543          | )          | —            |       | (500,543    | )          |
| Distributions to Other Members ($0.455 per  Unit)                                |       | —            |       | (6,173,370   | )          | —            |       | —            |       | (6,173,370  | )          |
| Reclassification adjustment for portion of  swap liability charged to net income |       | —            |       |         |       |              |       | 105,180           |       | 105,180     |       |
| Net income (loss)                                                                |       | —            |       | (157,323     | )          | 500,543           |       |              |       | 343,220     |       |
| Balance June 30, 2005                                                       |       | 13,570,188        |       | $            | 36,583,283 |              | $          | —            |       | $           | (620,755   | ) | $ | 35,962,528 |   |
|                                                                                  |            |                   |            |              |            |                   |            |                   |            |             |            |  |  |  |  |

 

See accompanying notes

 

5

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**ATEL CAPITAL EQUIPMENT FUND VIII, LLC**

 

**STATEMENTSOF CASH FLOWS**

 

**SIX AND THREE MONTH PERIODS ENDEDJUNE 30, 2005 AND 2004(Unaudited)**

** **
| ** **                                                                    | ** ** | **Six Months**     | ** ** | **Three Months**   | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                    | ** ** | **Ended June 30,** | ** ** | **Ended June 30,** | ** ** |
| ** **                                                                    | ** ** | **2005**           | ** ** | **2004**           | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Operating activities:**                                                     |       |               |       |               |       |   |   |   |   |
| Net income                                                                    |       | $                  | 343,220    |               | $          | 1,101,761 |   | $ | 487,694 |   | $ | 1,520,704 |   |
| Adjustment to reconcile net income to cash provided  by operating activities: |       |               |       |               |       |   |   |   |   |
| Depreciation of operating lease assets                                        |       | 4,161,153          |       | 9,018,309          |       | 1,907,483 |   | 4,201,631 |   |
| Amortization of initial direct costs                                          |       | 59,796             |       | 137,257            |       | 25,659 |   | 65,242 |   |
| Fair value and reclassification adjustments  on interest rate swap contracts  |       | (425,593           | )          | (44,483            | )          | (40,409 | ) | (22,209 | ) |
| Provision for (recovery of) doubtful  accounts                                |       | 118,600            |       | (135,000           | )          | 85,100 |   | (146,000 | ) |
| Gain on sales of lease assets                                                 |       | (703,840           | )          | (2,177,912         | )          | (600,426 | ) | (1,728,270 | ) |
| Changes in operating assets and  liabilities:                                 |       |               |       |               |       |   |   |   |   |
| Accounts receivable, net                                                      |       | 162,482            |       | 715,303            |       | 226,246 |   | 418,442 |   |
| Accounts payable, Managing Member                                             |       | 1,007,272          |       | 201,563            |       | 479,543 |   | 760,695 |   |
| Accounts payable, other                                                       |       | (71,722            | )          | (568,437           | )          | 2,997 |   | 4,770 |   |
| Accrued interest payable                                                      |       | (21,851            | )          | 23,597             |       | 17,916 |   | 11,711 |   |
| Other assets                                                                  |       | (52,215            | )          | 15,000             |       | (52,215 | ) | 7,500 |   |
| Unearned operating lease income                                               |       | (86,552            | )          | (640,296           | )          | (282,678 | ) | (107,739 | ) |
| **Net cash provided by operating activities**                                 |       | 4,490,750          |       | 7,646,662          |       | 2,256,910 |   | 4,986,477 |   |
| ** **                                                                    |       |               |       |               |       |   |   |   |   |
| **Investing activities:**                                                     |       |               |       |               |       |   |   |   |   |
| Reduction of net investment in direct  financing leases                       |       | 555,890            |       | 327,461            |       | 261,775 |   | 200,806 |   |
| Proceeds from sales of lease assets                                           |       | 7,438,247          |       | 10,319,679         |       | 7,163,413 |   | 8,834,020 |   |
| Purchases of equipment on operating leases                                    |       | (561               | )          | —             |       | (983 | ) | — |   |
| **Net cash provided by investing activities**                                 |       | 7,993,576          |       | 10,647,140         |       | 7,424,205 |   | 9,034,826 |   |
|                                                                               |            |                    |            |                    |            |  |  |  |  |  |  |  |  |

 

6

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| ** **                                                | ** ** | **Six Months**     | ** ** | **Three Months**   | ** ** |
|-----------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                | ** ** | **Ended June 30,** | ** ** | **Ended June 30,** | ** ** |
| ** **                                                | ** ** | **2005**           | ** ** | **2004**           | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                      |       |               |       |               |       |   |   |   |   |
| **Financing activities:**                                 |       |               |       |               |       |   |   |   |   |
| Borrowings under the line of credit                       |       | 4,000,000          |       | 7,000,000          |       | 1,000,000 |   | 3,500,000 |   |
| Repayments of borrowings under the line of  credit        |       | (4,000,000         | )          | (12,000,000        | )          | (3,500,000 | ) | (11,000,000 | ) |
| Repayments of long-term debt                              |       | (5,560,000         | )          | (6,530,000         | )          | (1,876,000 | ) | (3,403,000 | ) |
| Repayments of non-recourse debt                           |       | (303,850           | )          | (272,893           | )          | — |   | — |   |
| Distributions to Other Members                            |       | (6,173,370         | )          | (6,173,634         | )          | (3,086,875 | ) | (3,086,873 | ) |
| Distributions to Managing Member                          |       | (500,543           | )          | (500,581           | )          | (250,287 | ) | (250,287 | ) |
| **Net cash used in financing activities**                 |       | (12,537,763        | )          | (18,477,108        | )          | (7,713,162 | ) | (14,240,160 | ) |
|                                                      |       |               |       |               |       |   |   |   |   |
| **Net (decrease) increase in cash and cash  equivalents** |       | (53,437            | )          | (183,306           | )          | 1,967,953 |   | (218,857 | ) |
| **Cash and cash equivalents at beginning of  period**     |       | 2,569,911          |       | 508,584            |       | 548,521 |   | 544,135 |   |
| **Cash and cash equivalents at end of period**            |       | $                  | 2,516,474  |               | $          | 325,278 |   | $ | 2,516,474 |   | $ | 325,278 |   |
|                                                      |       |               |       |               |       |   |   |   |   |
| **Supplemental disclosures of cash flow  information:**   |       |               |       |               |       |   |   |   |   |
| Cash paid during the period for interest                  |       | $                  | 788,701    |               | $          | 1,627,799 |   | $ | 355,395 |   | $ | 761,251 |   |
|                                                      |       |               |       |               |       |   |   |   |   |
| **Schedule of non-cash transactions:**                    |       |               |       |               |       |   |   |   |   |
| Change in fair value of interest rate swap  contracts     |       | $                  | 530,773    |               | $          | 1,144,671 |   | $ | 92,999 |   | $ | 1,020,846 |   |

 

See accompanying notes.

 

7

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**ATEL CAPITAL EQUIPMENT FUND VIII, LLC**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**JUNE 30, 2005(Unaudited)**

 

**1.  Organizationand Limited Liability Company matters:**

 

ATEL Capital Equipment Fund VIII, LLC (the Company) was formed underthe laws of the state of California on July 31, 1998 for the purpose ofacquiring 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 Companyis ATEL Financial Services LLC (AFS), a California limited liabilitycompany.  Prior to converting to alimited liability company structure, AFS was formerly known as ATEL FinancialCorporation.  Each Member’s personalliability for obligations of the Company generally will be limited to theamount of their respective contributions and rights to undistributed profitsand 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 operationsin its primary business (leasing activities).

 

As a limited liability company, the liabilityof any individual member for the obligations of the Fund is limited to theextent of capital contributions to the Fund by the individual member.

 

Pursuant to the Operating Agreement, AFS receives compensation andreimbursements for services rendered on behalf of the Company.  AFS is required to maintain in the Company reasonablecash reserves for working capital, the repurchase of Units and contingencies.

 

The Company’s principal objectives are to invest in a diversifiedportfolio of equipment that will (i) preserve, protect and return the Company’sinvested capital; (ii) generate regular distributions to the members of cashfrom operations and cash from sales or refinancing, with any balance remainingafter certain minimum distributions to be used to purchase additional equipmentduring the Reinvestment Period, ending December 31, 2006 and (iii) provideadditional distributions following the Reinvestment Period and until allequipment has been sold.  The Company isgoverned by its Limited Liability Company Operating Agreement (OperatingAgreement).

 

**2.  Summary ofsignificant accounting policies:**

 

Basis of presentation:

 

The accompanying unaudited financial statements have been prepared inaccordance with accounting principles generally accepted in the United States(GAAP) for interim financial information and with instructions to Form 10-Q andArticle 10 of Regulation S-X.  Theunaudited interim financial statements reflect all adjustments which are, inthe opinion of the Managing Member, necessary for a fair statement of financialposition and results of operations for the interim periods presented.  All such adjustments are of a normal recurringnature.  The preparation of financialstatements in accordance with GAAP requires management to make estimates andassumptions that effect reported amounts in the financial statements andaccompanying notes.  Therefore, actualresults could differ from those estimates.  Operating results for the six months ended June30, 2005 are not necessarily indicative of the results for the year endingDecember 31, 2005.

 

Certain prior year balances have been reclassified to conform to thecurrent period presentation.

 

These unaudited interim financial statements should be read inconjunction with the financial statements and notes thereto contained in thereport on Form 10-K for the year ended December 31, 2004, filed with theSecurities and Exchange Commission.

 

8

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Equipment on operating leases:

 

Equipment on operating leases is stated at cost.  Depreciation is being provided by use of thestraight-line method over the terms of the related leases to the equipment’sestimated residual values at the end of the leases.

 

Asset Valuation:

 

Recorded values of the Company’s asset portfolio are periodicallyreviewed for impairment in accordance with Statement of Financial AccountingStandards (SFAS) No. 144, Accounting for the Impairment or Disposal ofLong-Lived Assets.  An impairment loss ismeasured and recognized only if the estimated undiscounted future cash flows ofthe asset are less than their net book value.  The estimated undiscounted future cash flowsare the sum of the estimated residual value of the asset at the end of theasset’s expected holding period and estimates of undiscounted futurerents.  The residual value assumes, amongother things, that the asset is utilized normally in an open, unrestricted andstable market.  Short-term fluctuationsin the market place are disregarded and it is assumed that there is nonecessity either to dispose of a significant number of the assets, if held inquantity, simultaneously or to dispose of the asset quickly.  Impairment is measured as the differencebetween the fair value (as determined by the discounted estimated future cashflows) of the assets and its carrying value on the measurement date.

 

Revenue recognition:

 

Operating leases

Operating lease revenue is recognized on a straight-line basis over theterm of the underlying leases.  Theinitial lease terms will vary as to the type of equipment subject to theleases, the needs of the lessees and the terms to be negotiated, but initialleases are generally expected to be for 36 to 84 months. Income from step rentprovisions, escalation clauses, capital improvement funding provisions or otherlease concessions in lease contracts, and lease rates subject to variationbased on changes in market indexes or interest rates are recognized on astraight line basis.

 

Direct finance leases

Income from direct financing lease transactions is reported using thefinancing method of accounting, in which the Company’s investment in the leasedproperty is reported as a receivable from the lessee to be recovered throughfuture rentals.  The income portion ofeach rental payment is calculated so as to generate a constant rate of returnon the net receivable outstanding.

 

Notes receivable

Income from notes receivable is reported using the financing method ofaccounting.  The Company’s investment innotes receivable is reported as the present value of the future notepayments.  The income portion of eachnote payment is calculated so as to generate a constant rate of return on thenet balance outstanding.

 

Initial direct costs:

 

The Company capitalizes initial direct costsassociated with the acquisition of lease assets. These costs are amortized overa five year period,which approximates average lease term, using a straight line method.

 

As of June 30, 2005, the company amortizedinitial direct costs over sixty months on a straight line basis.  Effective July 1, 2005, the company ischanging its methodology to amortizing these costs over the lease term eitheras an adjustment to the yield for direct finance leases or on a straight-linebasis for operating leases.  In theopinion of the managing member the impact of the change in prior periods isimmaterial.

 

9

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Segment Reporting:

 

The Company adopted the provisions of SFAS No. 131 Disclosures aboutSegments of an Enterprise and Related Information. SFAS No. 131 establishesannual and interim standards for operating segments of a company. It alsorequires entity-wide disclosures about the products and services an entityprovides, the material countries in which it holds assts and reports revenue,and its major customers. The Company is not organized by multiple operatingsegments for the purpose of making operating decisions or assessingperformance. Accordingly the Company operates in one reportable operatingsegment in the United States.

 

**3.  Investmentin equipment and leases:**

 

The Company’s investment in leases consists of the following:

 
| ** **                                                                                                    | ** ** | **Balance  December 31,  2004** | ** ** | **Depreciation/  Amortization  Expense or  Amortization  of Direct  Financing  Leases** | ** ** | **Reclassifications  &  Additions/  (Dispositions)** | ** ** | **Balance  June 30,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------|------------|
|                                                                                                          |       |                            |       |                                                                                    |       |                                                     |       |                        |       |
| Net investment in operating leases                                                                            |       | $                               | 51,091,946 |                                                                                    | $          | (4,088,868                                               | )          | $                           | (5,171,269 | ) | $ | 41,831,809 |   |
| Net investment in direct financing leases                                                                     |       | 3,092,071                       |       | (555,890                                                                                | )          |                                                     |       | 2,536,181                   |       |
| Assets held for sale or lease, net of accumulated  depreciation of $7,336,546 in 2005 and $16,086,674 in 2004 |       | 5,405,497                       |       | (72,285                                                                                 | )          | (1,188,293                                               | )          | 4,144,919                   |       |
| Initial direct costs, net of accumulated amortization  of $1,449,702 in 2005 and $1,389,906 in 2004           |       | 100,201                         |       | (59,796                                                                                 | )          | —                                                   |       | 40,405                      |       |
|                                                                                                          |       | $                               | 59,689,715 |                                                                                    | $          | (4,776,839                                               | )          | $                           | (6,359,562 | ) | $ | 48,553,314 |   |

 

10

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Impairment losses are recorded as an addition to accumulated depreciationof the impaired assets.  For the six andthree month periods ended June 30, 2005 and 2004, no assets were identified asimpaired.  Depreciation expense on propertysubject to operating leases and property held for lease or sale consist of thefollowing for the six and three month periods ended June 30:

 
| ** **                             | ** ** | **Six Months  Ended June 30,** | ** ** | **Three Months  Ended June 30,** | ** ** |
|----------------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                             | ** ** | **2005**                       | ** ** | **2004**                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| Depreciation of operating lease assets |       | $                              | 4,161,153  |                             | $          | 9,018,309 |   | $ | 1,907,483 |   | $ | 4,201,631 |   |
|                                        |            |                                |            |                                  |            |  |  |  |  |  |  |  |  |

 

*Operating leases:*

 

Property on operating leases consists of the following:

 
| ** **                    | ** ** | ** **       | ** ** | ** **       | ** ** | **Reclassifications** | ** ** | ** **   | ** ** |
|-------------------------------|------------|------------------|------------|------------------|------------|-----------------------|------------|--------------|------------|
| ** **                    | ** ** | **Balance**      | ** ** | ** **       | ** ** | **&**             | ** ** | **Balance**  | ** ** |
| ** **                    | ** ** | **December 31,** | ** ** | **Depreciation** | ** ** | **Additions/**        | ** ** | **June 30,** | ** ** |
| ** **                    | ** ** | **2004**         | ** ** | **Expense**      | ** ** | **(Dispositions)**    | ** ** | **2005**     | ** ** |
| Transportation, rail          |       | $                | 45,148,174 |             | $          | —                |       | $            | 713,503    |   | $ | 45,861,677 |   |
| Containers                    |       | 21,165,000       |       | —           |       | —                |       | 21,165,000   |       |
| Aircraft                      |       | 15,448,037       |       | —           |       | —                |       | 15,448,037   |       |
| Natural gas compressors       |       | 13,541,303       |       | —           |       | (10,781,578           | )          | 2,759,725    |       |
| Manufacturing                 |       | 4,599,823        |       | —           |       | (1,291,960            | )          | 3,307,863    |       |
| Transportation, other         |       | 3,107,988        |       | —           |       | —                |       | 3,107,988    |       |
| Materials handling            |       | 1,090,279        |       | —           |       | —                |       | 1,090,279    |       |
| Other                         |       | 5,313,054        |       | —           |       | —                |       | 5,313,054    |       |
|                          |       | 109,413,658      |       | —           |       | (11,360,035           | )          | 98,053,623   |       |
| Less accumulated depreciation |       | (58,321,712      | )          | (4,088,868       | )          | 6,188,766             |       | (56,221,814  | )          |
|                          |       | $                | 51,091,946 |             | $          | (4,088,868            | )          | $            | (5,171,269 | ) | $ | 41,831,809 |   |

 

The Company utilizes a straight line depreciation method for equipmentin all of the categories currently in its portfolio of lease transactions. Theuseful lives for investment in leases by category are as follows:

 

| **Equipment category**   | ** ** | **Useful Life** | ** ** |
|--------------------------|------------|-----------------|------------|
| Transportation,  rail    |       | 30 - 40         |       |
| Aircraft                 |       | 20 - 30         |       |
| Manufacturing            |       | 10 - 20         |       |
| Materials  handling      |       | 7 - 10          |       |
| Transportation,  other   |       | 7 - 10          |       |
| Natural gas  compressors |       | 7 - 10          |       |
| Containers               |       | 7 - 10          |       |
| Other                    |       | 5 - 7           |       |

 

11

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*Direct financing leases:*

 

As of June 30, 2005, investment in direct financing leases consists of officeautomation equipment, point of sale equipment and refrigerated trailers. Thefollowing lists the components of the Company’s investment in direct financingleases as of June 30, 2005:

 
| Total minimum lease payments receivable                       |   | $         | 1,741,544 |   |
|---------------------------------------------------------------|--------|-----------|-----------|--------|
| Estimated residual values of leases  equipment (unguaranteed) |   | 986,702   |      |
| Investment in direct financing leases                         |   | 2,728,246 |      |
| Less unearned income                                          |   | (192,065  | )         |
| Net investment in direct financing leases                     |   | $         | 2,536,181 |   |

 

All of the equipment on leases was acquired from 1998 through 2002.

 

At June 30, 2005, the aggregate amounts of future minimum leasepayments are as follows:

 

| ** **                           | ** ** | ** **    | ** ** | **Direct**    | ** ** | ** ** | ** ** |
|--------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|
| ** **                           | ** ** | **Operating** | ** ** | **Financing** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Leases**    | ** ** | **Leases**    | ** ** | **Total**  | ** ** |
| Six months  ending December 31, 2005 |       | $             | 2,372,668  |          | $          | 565,896    |       | $ | 2,938,564 |   |
| Year ending  December 31, 2006       |       | 2,657,489     |       | 846,888       |       | 3,504,377  |       |
| 2007                                 |       | 2,456,198     |       | 279,959       |       | 2,736,157  |       |
| 2008                                 |       | 1,371,853     |       | 48,801        |       | 1,420,654  |       |
| 2009                                 |       | 1,029,064     |       | —        |       | 1,029,064  |       |
| Thereafter                           |       | 651,810       |       | —        |       | 651,810    |       |
|                                 |       | $             | 10,539,082 |          | $          | 1,741,544  |       | $ | 12,280,626 |   |

 

12

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**4.  Non-recoursedebt:**

 

Notes payable to financial institutions are due in varying quarterlyand semi-annual installments of principal and interest. The notes are securedby assignments of lease payments and pledges of the assets which were purchasedwith the proceeds of the particular notes. Interest on the notes is at rates ranging from 4.96% to 6.845%.  The notes are secured by assignments of leasepayments and pledges of assets.  At June30, 2005, the carrying value of the pledged assets was $9,738,200.  The notes mature from 2005 through 2007.

 

At June 30, 2005, future minimum payments of non-recourse debt are asfollows:

 
| ** **                           | ** ** | **Principal** | ** ** | **Interest** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|---------------|------------|--------------|------------|-----------|------------|
| Six months  ending December 31, 2005 |       | $             | 4,411,384  |         | $          | 71,380    |       | $ | 4,482,764 |   |
| Year ending  December 31, 2006       |       | 646,128       |       | 57,792       |       | 703,920   |       |
| 2007                                 |       | 678,584       |       | 25,337       |       | 703,921   |       |
|                                 |       | $             | 5,736,096  |         | $          | 154,509   |       | $ | 5,890,605 |   |
|                                      |            |               |            |              |            |           |            |  |  |  |  |  |

 

**5.  Otherlong-term debt:**

 

In 1999, the Company entered into a $70 million receivables fundingprogram (the Program), (which was subsequently increased to $125 million), witha receivables financing company that issues commercial paper rated A1 byStandard and Poor’s and P1 by Moody’s Investor Services. Under the Program, thereceivables financing company receives a general lien against all of theotherwise unencumbered assets of the Company. The Program provides for borrowing at a variable interest rate (3.71% atJune 30, 2005).  The Program expired asto new borrowings in April 2002.  TheCompany had $7,632,000 outstanding under this program as of June 30, 2005.

 

The Program requires AFS, on behalf of the Company, to enter intovarious interest rate swaps with a financial institution (also rated A1/P1) tomanage interest rate exposure associated with variable rate obligations underthe Program by effectively converting the variable rate debt to fixedrates.  As of June 30, 2005, the Companyreceives or pays interest on a notional principal of $20,299,522 based on thedifference between nominal rates ranging from 4.35% to 7.72% and the variablerate under the Program.  No actualborrowing or lending is involved.  Thetermination of the swaps coincides with the maturity of the debt.  Through the swap agreements, the interestrates have been effectively fixed.  Thedifferential to be paid or received is accrued as interest rates change and isrecognized currently as an adjustment to interest expense related to the debt.

 

The Partnership had utilized hedge accounting as prescribed underStatement of Financial Accounting Standards (“SFAS”) No. 133, *Accounting for Derivative Instruments and Hedging Activities,*inprior periods.  Beginning in the quarterended March 31, 2005, the Partnership discontinued hedge accounting and beganrecognizing gain/loss in the statement of operations.  Previous amounts recorded in AccumulatedOther Comprehensive Income (“AOCI”) related to the interest rate swaps will berecognized in earnings when the previously hedged items impact earnings.  For the six and three month periods ended June30, 2005, the reclassification adjustment from AOCI totaled $105,180 and $52,590,respectively.

 

13

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Borrowings under the Program are as follows:

 
| **Dated  Borrowed** | ** ** | **Original  Amount  Borrowed** | ** **  | **Balance  June 30,  2005** | ** ** | **Notional  Balance  June 30,  2005** | ** ** | **Swap  Value  June 30,  2005** | ** ** | **Payment Rate  On Interest  Swap  Agreement** | ** ** |
|---------------------|------------|--------------------------------|-------------|-----------------------------|------------|---------------------------------------|------------|---------------------------------|------------|------------------------------------------------|------------|
| 11/11/1999          |       | $                              | 20,000,000  |                        | $          | 447,000                               |       | $                               | 1,232,320  |                                           | $          | (18,153 | ) | 6.84 | % |
| 12/21/1999          |       | 20,000,000                     |        | 3,958,000                   |       | 9,596,653                             |       | (592,405                        | )          | 7.41                                           | %          |
| 12/24/1999          |       | 25,000,000                     |        | 209,000                     |       | 1,050,374                             |       | (27,987                         | )          | 7.44                                           | %          |
| 4/17/2000           |       | 6,500,000                      |        | 887,000                     |       | 1,099,112                             |       | (29,038                         | )          | 7.45                                           | %          |
| 4/28/2000           |       | 1,900,000                      |        | —                      |       | 137,282                               |       | (4,438                          | )          | 7.72                                           | %          |
| 8/3/2000            |       | 19,000,000                     |        | 365,000                     |       | 4,576,243                             |       | (184,101                        | )          | 7.50                                           | %          |
| 10/31/2000          |       | 7,500,000                      |        | 744,000                     |       | 1,519,688                             |       | (47,618                         | )          | 7.13                                           | %          |
| 1/29/2001           |       | 8,000,000                      |        | —                      |       | —                                |       | —                          |       | 5.91                                           | %          |
| 6/1/2001            |       | 2,000,000                      |        | —                      |       | —                                |       | —                          |       | 5.04                                           | %          |
| 9/1/2001            |       | 9,000,000                      |        | 459,000                     |       | 1,087,850                             |       | (941                            | )          | 4.35                                           | %          |
| 1/31/2002           |       | 3,900,000                      |        | 563,000                     |       | —                                |       | —                          |       |                                           | *          |
|                |       | $                              | 122,800,000 |                        | $          | 7,632,000                             |       | $                               | 20,299,522 |                                           | $          | (904,681 | ) |   |   |

 

----

*  Under the terms of theProgram, no interest rate swap agreement was required for this borrowing.

 

Other long-term debt borrowings mature from 2005 through 2007.  At June 30, 2005, future minimum payments ofother long-term debt are as follows:

 
| ** **                           | ** ** | **Swapped  Debt  Principal** | ** ** | **Debt  Principal  Not  Swapped** | ** ** | **Interest** | ** ** | **Total** | ** ** | **Rates on  Interest Swap  Agreements**** | ** ** |
|--------------------------------------|------------|------------------------------|------------|-----------------------------------|------------|--------------|------------|-----------|------------|-------------------------------------------|------------|
| Six months  ending December 31, 2005 |       | $                            | 2,651,000  |                              | $          | 457,000      |       | $         | 234,166    |                                      | $          | 3,342,166 |   | 6.931%-7.090 | % |
| Year ending  December 31, 2006       |       | 3,349,000                    |       | 60,000                            |       | 229,873      |       | 3,638,873 |       | 7.257%-7.315                              | %          |
| 2007                                 |       | 1,069,000                    |       | 46,000                            |       | 26,606       |       | 1,141,606 |       | 6.898%-7.222                              | %          |
|                                 |       | $                            | 7,069,000  |                              | $          | 563,000      |       | $         | 490,645    |                                      | $          | 8,122,645 |   |   |   |

 

----

**  Represents the range ofmonthly weighted average fixed interest rates paid for amounts maturing in theparticular year. The receive-variable rate portion of the swap representscommercial paper rates (3.71% at June 30, 2005).

 

14

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**6.  Relatedparty transactions:**

 

The terms of the Limited Liability Company Operating Agreement providethat AFS and/or affiliates are entitled to receive certain fees for equipmentacquisition, management and resale and for management of the Company.

 

The Limited Liability Company Operating Agreement allows for thereimbursement of costs incurred by AFS in providing administrative services tothe Company.  Administrative servicesprovided include Company accounting, investor relations, legal counsel andlease and equipment documentation.  AFSis not reimbursed for services where it is entitled to receive a separate feeas compensation for such services, such as acquisition and management ofequipment.  Reimbursable costs incurredby AFS are allocated to the Company based upon actual time incurred byemployees working on Company business and an allocation of rent and other costsbased on utilization studies.

 

Each of ATEL Leasing Corporation (“ALC”), ATEL Equipment Corporation (“AEC”),ATEL Investor Services (“AIS”) and AFS is a wholly-owned subsidiary of ATELCapital Group and performs services for the Company.  Acquisition services are performed for theCompany by ALC, equipment management, lease administration and asset dispositionservices are performed by AEC, investor relations and communications servicesare performed by AIS and general administrative services for the Company areperformed by AFS.

 

Cost reimbursements to the Managing Member are based on costs incurredby AFS in performing administrative services for the Company that are allocatedto each Company that AFS manages based on certain criteria such as existing ornew leases, number of investors or equity depending on the type of costincurred.  AFS believes that the costsreimbursed are the lower of (i) actual costs incurred on behalf of the Companyor (ii) the amount the Company would be required to pay independent parties forcomparable administrative services in the same geographic location.

 

During the six and three month periods ended June 30, 2005 and 2004,AFS and/or affiliates earned fees, commissions and reimbursements, pursuant tothe Limited Liability Company Agreement as follows:

 
| ** **                              | ** ** | **Six Months  Ended June 30,** | ** ** | **Three Months  Ended June 30,** | ** ** |
|-----------------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **2005**                       | ** ** | **2004**                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| Asset management fee to Managing Member |       | $                              | 288,366    |                             | $          | 579,469 |   | $ | 162,029 |   | $ | 307,620 |   |
| Cost reimbursements to Managing Member  |       | 705,519                        |       | 719,342                          |       | 13,549 |   | 20,127 |   |
|                                    |       | $                              | 993,885    |                             | $          | 1,298,811 |   | $ | 175,578 |   | $ | 327,747 |   |
|                                         |            |                                |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |

 

The Managing Member makes certain payments to third parties on behalfof the Company for convenience purposes. During the six month periods ended June 30, 2005 and 2004, the ManagingMember made such payments of $177,694, $279,967, respectively.  During the three month periods ended June 30,2005 and 2004, the Managing Member made such payments of $51,394 and $183,216,respectively.

 

15

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**7.  Members’capital:**

 

As of June 30, 2005, 13,570,188 Units were issued and outstanding.  The Company is authorized to issue up to15,000,000 Units in addition to the Units issued to the initial members (50Units).

 

As defined in the Company’s Operating Agreement, the Company’s NetIncome, Net Losses, and Distributions are to be allocated 92.5% to the Other Membersand 7.5% to AFS.

 

Distributions to the Other Members were as follows:

 
| ** **                                    | ** ** | **Six Months  Ended June 30,** | ** ** | **Three Months  Ended June 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **2005**                       | ** ** | **2004**                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| Distributions                                 |       | $                              | 6,173,370  |                             | $          | 6,173,634 |   | $ | 3,086,875 |   | $ | 3,086,873 |   |
| 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 |   |

 

**8.  FinancingArrangement:**

 

The Company participates with AFS and certain of its affiliates in a financingarrangement (comprised of a term loan to AFS and a line of credit) with a groupof financial institutions that includes certain financial covenants.  The financial arrangement is $75,000,000 andexpires in June 2006.  The availabilityof borrowings to the Company under this financing arrangement is reduced by theamount AFS has outstanding as a term loan. As of June 30, 2005 borrowings under the facility were as follows:

 

| Total amount available under the financing  arrangement                                                     |   | $           | 75,000,000 |   |
|-------------------------------------------------------------------------------------------------------------|--------|-------------|------------|--------|
| Term loan to AFS as of June 30, 2005                                                                        |   | (936,727    | )          |
| Total available under the acquisition and  warehouse facilities                                             |   | 74,063,273  |       |
|                                                                                                        |   |        |       |
| Amount borrowed by the Partnership under  the acquisition facility                                          |   | —      |       |
| Amounts borrowed by affiliated partnerships  and limited liability companies under the acquisition facility |   | (10,500,000 | )          |
| Total remaining available under the  acquisition and warehouse facilities                                   |   | $           | 63,563,273 |   |
|                                                                                                             |        |             |            |        |  |

 

Draws on the acquisition facility by any individual borrower aresecured only by that borrower’s assets, including equipment and related leases.  Borrowings on the warehouse facility are recoursejointly to certain of the affiliated Memberships and limited liabilitycompanies, the Company and AFS.

 

The credit agreement includes certain financial covenants applicable toeach borrower.  The Company was incompliance with its covenants as of June 30, 2005.

 

16

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**9**.  **Guarantees:**

 

The Company enters into contracts that contain a variety ofindemnifications.  The Company’s maximumexposure under these arrangements is unknown. However, the Company has not had prior claims or losses pursuant tothese contracts and expects the risk of loss to be remote.

 

In the normal course of business, the Company enters into contracts ofvarious types, including lease contracts, contracts for the sale or purchase oflease assets, management contracts, loan agreements, credit lines and otherdebt facilities.  It is prevalentindustry practice for most contracts of any significant value to includeprovisions that each of the contracting parties - in addition to assumingliability for breaches of the representations, warranties, and covenants thatare part of the underlying contractual obligations - also assume an obligationto indemnify and hold the other contracting party harmless for such breaches,for harm caused by such party’s gross negligence and willful misconduct,including, in certain instances, certain costs and expenses arising from thecontract.  The Managing Member has substantialexperience in managing similar leasing programs subject to similar contractualcommitments in similar transactions, and the losses and claims arising fromthese commitments have been insignificant, if any.  Generally, to the extent these contracts areperformed in the ordinary course of business under the reasonable businessjudgment of the Managing Member, no liability will arise as a result of theseprovisions.  The Managing Member has noreason to believe that the facts and circumstances relating to the Company’scontractual commitments differ from those it has entered into on behalf of theprior programs it has managed.  TheManaging Member knows of no facts or circumstances that would make the Company’scontractual commitments outside standard mutual covenants applicable tocommercial transactions between businesses. Accordingly, the Company believes that these indemnification obligationsare made in the ordinary course of business as part of standard commercial andindustry practice, and that any potential liability under the Company’s similarcommitments is remote.  Should any such indemnification obligation becomepayable, the Company would separately record and/or disclose such liability inaccordance with GAAP.

 

17

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

Statements contained in this Item 2, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” and elsewhere inthis Form 10-Q, which are not historical facts, may be forward-lookingstatements. Such statements are subject to risks and uncertainties that couldcause actual results to differ materially form those projected.  In particular, economic recession and changesin general economic conditions, including, fluctuations in demand forequipment, lease rates, and interest rates, may result in delays in investmentand reinvestment, delays in leasing, re-leasing, and disposition of equipment,and reduced returns on invested capital. The Company’s performance is subject to risks relating to lesseedefaults and the creditworthiness of its lessees.  The Fund’s performance is also subject torisks relating to the value of its equipment at the end of its leases, whichmay be affected by the condition of the equipment, technological obsolescenceand the markets for new and used equipment at the end of lease terms.  Investors are cautioned not to attribute unduecertainty to these forward-looking statements, which speak only as of the dateof this Form 10-Q. We undertake no obligation to publicly release any revisionsto these forward-looking statements to reflect events or circumstances afterthe date of this Form 10-Q or to reflect the occurrence of unanticipated events,other than as required by law.

 

**CapitalResources and Liquidity**

 

During the first half of 2005 and 2004, theCompany’s primary activity was engaging in equipment leasing and sales activities.

 

During 2005 and 2004, the Company’s primarysources of liquidity were rents from operating leases and proceeds from thesales of lease assets.  The liquidity ofthe Company will vary in the future, increasing to the extent cash flows fromleases exceed expenses, and decreasing as lease assets are acquired, as distributionsare made to the members and to the extent expenses exceed cash flows fromleases.

 

A primary source of liquidity, the Company has contractual obligationswith a diversified group of lessees for fixed lease terms at fixed rentalamounts.  As the initial lease termsexpire, the Company will re-lease or sell the equipment.  The future liquidity beyond the contractualminimum rentals will depend on AFS’s success in re-leasing or selling theequipment as it comes off lease.

 

The Company participates with AFS and certain of its affiliates in afinancing arrangement (comprised of a term loan to AFS and a line of credit)with a group of financial institutions that includes certain financial covenants. The financial arrangement is $75,000,000and expires in June 2006.  Theavailability of borrowings to the Company under this financing arrangement isreduced by the amount AFS has outstanding as a term loan.  As of June 30, 2005 borrowings under thefacility were as follows:

 

| Total amount available under the financing  arrangement                                                     |   | $           | 75,000,000 |   |
|-------------------------------------------------------------------------------------------------------------|--------|-------------|------------|--------|
| Term loan to AFS as of June 30, 2005                                                                        |   | (936,727    | )          |
| Total available under the acquisition and  warehouse facilities                                             |   | 74,063,273  |       |
|                                                                                                        |   |        |       |
| Amount borrowed by the Partnership under  the acquisition facility                                          |   | —      |       |
| Amounts borrowed by affiliated partnerships  and limited liability companies under the acquisition facility |   | (10,500,000 | )          |
| Total remaining available under the  acquisition and warehouse facilities                                   |   | $           | 63,563,273 |   |
|                                                                                                             |        |             |            |        |  |

 

Draws on the acquisition facility by any individual borrower aresecured only by that borrower’s assets, including equipment and related leases. Borrowings on the warehouse facility arerecourse jointly to certain of the affiliated Memberships and limited liabilitycompanies, the Company and AFS.

 

To manage the warehousing line of credit for the holding of assetsprior to allocation to specific investor programs, a Warehousing TrustAgreement has been entered into by the Company, ATEL Financial Services LLC (“AFS”),ATEL Leasing Corporation (“ALC”), and certain of the affiliated partnershipsand limited liability companies.  The

 

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warehousing line is used to acquire and hold, on a short-term basis,certain lease transactions that meet the investment objectives of each of suchentities.  Each of the leasing programssponsored by AFS and ALC currently in its acquisition stage is a pro rataparticipant in the Warehousing Trust Agreement, as described below.  When a program no longer has a need for shortterm financing provided by the warehousing facility, it is removed fromparticipation, and as new leasing investment entities are formed by AFS and ALCand commence their acquisition stages, these new entities will be added.  As of June 30, 2005, the investment programparticipants were ATEL Cash Distribution Fund VI, L.P., ATEL Capital EquipmentFund VII, L.P., ATEL Capital Equipment Fund VIII, LLC, ATEL Capital EquipmentFund IX, LLC, and ATEL Capital Equipment Fund X, LLC.  Pursuant to the Warehousing Trust Agreement,the benefit of the lease transaction assets, and the corresponding liabilitiesunder the warehouse borrowing facility, inure to each of such entities basedupon each entity’s pro-rata share in the warehousing trust estate.  The “pro-ratashare” is calculated as a ratio of the net worth of each entity over theaggregate net worth of all entities benefiting from the warehouse trust estate,excepting that the trustees, AFS and ALC, are both liable for their pro-ratashares of the obligations based on their respective net worths, and jointlyliable for the pro rata portion of the obligations of each of the affiliatedpartnerships and limited liability companies participating under the borrowingfacility.  Transactions are financedthrough this warehousing line only until the transactions are allocated to aspecific program for purchase or are otherwise disposed by AFS and ALC.  When a determination is made to allocate thetransaction to a specific program for purchase by the program, the purchaserrepays the debt associated with the asset, either with cash or by means of theacquisition facility financing, the asset is removed from the warehouse linecollateral, and ownership of the asset and any debt obligation associated withthe asset are assumed solely by the purchasing entity.

 

The credit agreement includes certain financial covenants applicable toeach borrower.  The Company was incompliance with its covenants as of June 30, 2005.

 

The Company anticipates reinvesting a portion of lease payments fromassets owned in new leasing transactions. Such reinvestment will occur onlyafter the payment of all obligations, including debt service (both principaland interest), the payment of management and acquisition fees to AFS andproviding for cash distributions to the Limited Members.

 

AFS or an affiliate may purchase equipment in its own name, the name ofan affiliate or the name of a nominee, a trust or otherwise and hold titlethereto on a temporary or interim basis for the purpose of facilitating the acquisitionof such equipment or the completion of manufacture of the equipment or for anyother purpose related to the business of the Company, provided, however, that:(i) the transaction is in the best interest of the Company; (ii) such equipmentis purchased by the Company for a purchase price no greater than the cost ofsuch equipment to AFS or affiliate (including any out-of-pocket carryingcosts), except for compensation permitted by the Operating Agreement; (iii)there is no difference in interest terms of the loans secured by the equipmentat the time acquired by AFS or affiliate and the time acquired by the Company;(iv) there is no benefit arising out of such transaction to AFS or itsaffiliate apart from the compensation otherwise permitted by the OperatingAgreement; 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 itsimmediate cash requirements and those of the next twelve months, but in theevent those reserves were found to be inadequate, the Company would likely bein a position to borrow against its current portfolio to meet suchrequirements.  AFS envisions no suchrequirements for operating purposes.

 

In 1999, the Company established a $70 million receivables fundingprogram (which was subsequently increased to $125 million) with a receivablesfinancing company that issues commercial paper rated A1 from Standard and Poor’sand P1 from Moody’s Investor Services. In this receivables funding program, the lenders received a general lienagainst all of the otherwise unencumbered assets of the Company.  The program provided for borrowing at avariable interest rate and required AFS on behalf of the Company to enter intointerest rate swap agreements with certain counterparties (also rated A1/P1) tomitigate the interest rate risk associated with a variable rate note.  AFS believes that this program allowed theCompany to avail itself of lower cost debt than that available for individualnon- recourse debt transactions.  Theprogram expired as to new borrowings in April 2002.

 

No commitments of capital have been or are expected to be made otherthan for the acquisition of additional equipment. There were no suchcommitments as of June 30, 2005.

 

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AFS expects that aggregate borrowings in the future will not exceed 50%of aggregate equipment cost.  In anyevent, the Limited Liability Company Operating Agreement limits such borrowingsto 50% of the total cost of equipment, in aggregate.  AFS does not anticipate any futurenon-recourse borrowings.

 

If inflation in the general economy becomes significant, it may affectthe Company inasmuch as the residual (resale) values and rates on re-leases ofthe Company’s leased assets may increase as the costs of similar assetsincrease. However, the Company’s revenues from existing leases would notincrease, as such rates are generally fixed for the terms of the leases withoutadjustment for inflation.

 

If interest rates increase significantly, the lease rates that theCompany can obtain on future leases will be expected to increase as the cost ofcapital is a significant factor in the pricing of lease financing.  Leases already in place, for the most part,would not be affected by changes in interest rates.  For detailed information on the Company’sdebt obligations, see Notes 4, 5, and 8 in the notes to the financialstatements in Item 1.

 

**Cash Flows**

 

During the first half of 2005 and 2004, theCompany’s primary sources of liquidity was operating lease rents and proceedsfrom the sales of lease assets.

 

In the first six months of 2005 and 2004, theprimary source of cash from operations was rents from operating leases. Operatingleases are expected to remain as the primary source of cash from operations infuture periods.

 

In both 2005 and 2004, proceeds from sales ofassets were the primary source of cash from investing activities.  For the six months period ended June 30, 2005,proceeds from the sales of assets decreased to $7,438,247 from $10,319,679 forthe comparable period in 2004.  For thethree month period ended June 30, 2005, proceeds from the sales of assetsdecreased to $7,163,413 from $8,834,020 for the comparable period in 2004.  Proceeds from the sales of lease assets arenot expected to be consistent from one period to another. Sales of assets arenot scheduled and are created by opportunities within the marketplace.  Asset sales are made as leases expire, as purchaserscan be found and as the sales can be negotiated and completed.

 

In the first six months of 2005 and 2004, theonly sources of cash from financing activities were borrowings under the lineof credit.  The Company will borrow fromthe line of credit to cover short term liquidity needs and purchase ofequipment until long term financing can be arranged.  For the six month period ended June 30, 2005the Company borrowed $4,000,000 and repaid $4,000,000 to the line of credit.  For the same period in 2004, the Companyborrowed $7,000,000 and repaid $12,000,000 to the line of credit.  For the three month period ended June 30,2005 the Company borrowed $1,000,000 repaid $3,500,000 to the line of credit.  For the same three months in 2004, theCompany borrowed $3,500,000 and repaid $11,000,000 to the line of credit

 

Other financing uses of cash includedrepayments of non-recourse and other long term debt of $5,863,850 and $6,802,893in the six month periods ended June 30, 2005 and 2004, respectively.  In the three month periods ended June 30, 2005and 2004, debt repayments were $1,876,000 and $3,403,000, respectively.  Distributions were made to Other Members inamounts of $6,173,370 and $6,173,634 and to AFS in the amounts of $500,543 and$500,581 in the six month periods ended June 30, 2005 and 2004,respectively.  Distributions were made toOther Members in amounts of $3,086,875 and $3,086,873 and to AFS in the amountsof $250,287 and $250,287 in the three month periods ended June 30, 2005 and 2004,respectively.  Repayments of debt for thesix and three month periods ended June 30, 2005 decreased from the same periodsin the prior year as a result of the reduction in scheduled repayments.

 

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**Results ofoperations**

 

Operations resulted in net income of $343,220for the six month period ended June 30, 2005 compared to net income of$1,101,761 for the comparable period in 2004. For the three month period ended June 30, 2005, operations resulted innet income of $487,694 compared to net income of $1,520,704 for the comparableperiod in 2004.

 

The Company’s primary source of revenues isfrom operating leases. Operating lease rents decreased to $5,859,947 from$10,746,150 for the six month periods ended June 30, 2005 and 2004,respectively.  Operating lease rentsdecreased to $2,803,198 from $4,801,748 for the three month periods ended June30, 2005 and 2004, respectively.  Thedecrease is primarily a result of sales of assets over the last twelve months.  Depreciation is related to operating leaseassets and thus, to operating lease revenues. Consequently, depreciation expense decreased in 2005 compared to 2004.  For the six month period, depreciationdecreased to $4,161,153 in 2005 from $9,018,309 in 2004, and for the threemonth period, it decreased to $1,907,483 in 2005 from $4,201,631 in 2004.

 

Proceeds from sales of lease assets are notexpected to be consistent from one period to another.  The Company is a finite life equipmentleasing fund, which will sell assets as opportunities arise in themarketplace.  Some assets may have littleor no value upon termination of the related leases, while others may havesubstantial value for re-lease or sale upon termination of the leases.  The anticipated residual values are a keyfactor in pricing and terms structured for each lease.

 

Management periodically reviews the carryingvalue of its assets on leases and assets held for lease or sale.  For the six month periods ended June 30, 2005and 2004, no impairment charges were recognized.

 

Asset management fees are based on the grosslease rents of the Company plus proceeds from the sales of lease assets.  They are limited to certain percentages oflease rents, distributions to members and certain other items.  The decrease in asset management fees to $288,366in the six months ended June 30, 2005 from $579,469 for the six month period in2004 and to $162,029 for the three month period ended June 30, 2005 from$307,620 for the three month period in 2004 are a direct result of decreases inlease revenues.

 

Interest expense has decreased to $766,850 inthe six month period ended June 30, 2005 from $1,651,396 in the six monthperiod ended June 30, 2004.  For the threemonth periods ended June 30, interest expense decreased to $373,311 in 2005 from$772,962 in 2004.  Overall debt hasdecreased to $13,368,096 at June 30, 2005 from $19,231,946 at December 31, 2004.  This decrease in the debt balances hasresulted in the decreased interest charges in 2005 compared to the same periodin 2004.

 

The Company owns and leases a significantnumber of railcars to various lessees. From time to time, costs are incurred in order to be able to place therailcars on a new lease.  These costs donot increase the useful life of the assets or increase their value in themarketplace.  In the six month periodsended June 30, 2005 and 2004, the Company incurred $164,097 and $266,974 ofsuch cost.  In the three month periodsended June 30, 2005 and 2004, the Company incurred $110,290 and $136,527 ofsuch cost.

 

For the six month period ended June 30, 2005,taxes and franchise fees increased to $240,853 from $94,061 for the comparableperiod in 2004.  Taxes and franchise feesare not consistent from period to period as the amount of taxes and fees areusually based on a number of factors such as property location, usage, revenueapportionment and other.  The fund leaseda large number of assets to a single lessee whose business location and tax andfee calculation was the main driver for the increase in taxes and fees.

 

For the six month period ended June 30, 2005,the Company recorded a provision for doubtful accounts of $118,600.  For the comparable period in 2004, theCompany recorded recoveries of doubtful accounts of $135,000.  For the three month period ended June 30, 2005,the Company record a provision of $85,100. For the comparable period in 2004, the Company recorded recoveries of$146,000.  Recoveries and provisions fordoubtful accounts are not expected to be consistent from one period to another.

 

For the six month period ended June 30, 2005, the Company recorded$425,593 as the recognized portion of the unrealized gain on interest rateswaps.

 

As of June 30, 2005, thecompany amortized initial direct costs over sixty months on a straight linebasis. Effective July 1, 2005, the company is changing its methodology toamortizing these costs over the lease term either as an adjustment to the yieldfor direct finance leases or on a straight-line basis for operating leases. Inthe opinion of the managing member the impact of the change in prior periods isimmaterial.

 

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**Item 3. Quantitative and Qualitative 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 othermarket risks, including foreign currency exchange rate risk, commodity risk andequity price risk, are insignificant to both its financial position and resultsof operations.

 

In general, the Company manages its exposure to interest rate risk byobtaining fixed rate debt.  The fixedrate debt is structured so as to match the cash flows required to service thedebt to the payment streams under fixed rate lease receivables.  The payments under the leases are assigned tothe lenders in satisfaction of the debt. Furthermore, the Company has historically been able to maintain a stablespread between its cost of funds and lease yields in both periods of rising andfalling interest rates.  Nevertheless,the Company frequently funds leases with its floating rate line of credit andis, therefore, exposed to interest rate risk until fixed rate financing isarranged, or the floating rate line of credit is repaid.  As of June 30, 2005, there were no borrowingsoutstanding on the floating rate line of credit.

 

Also, the Company entered into a receivables funding facility in1999.  Since interest on the outstandingbalances under the facility varies, the Company is exposed to market risksassociated with changing interest rates. To hedge its interest rate risk, the Company enters into interest rateswaps that effectively convert the underlying interest characteristic on thefacility from floating to fixed.  Underthe swap agreements, the Company makes or receives variable interest paymentsto or from the counterparty based on a notional principal amount.  The net differential paid or received by theCompany is recognized as an adjustment to interest expense related to thefacility balances.  The amount paid orreceived represents the difference between the payments required under thevariable interest rate facility and the amounts due under the facility at thefixed (hedged) interest rate.  As of June30, 2005, borrowings on the facility were $7,632,000 and the associatedvariable interest rate was 3.71%.  Theaverage fixed interest rate achieved with the swap agreements was 6.931%.

 

**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, includingthe chief executive officer and chief financial officer), an evaluation of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures [as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934] was performed as of June 30, 2005.  Based upon this evaluation, the chiefexecutive officer and the chief financial officer concluded that, as of theevaluation date, our disclosure controls and procedures were effective for thepurposes of recording, processing, summarizing, and timely reportinginformation required to be disclosed by us in the reports that we file under theSecurities Exchange Act of 1934; and that such information is accumulated andcommunicated to our management in order to allow timely decisions regardingrequired disclosure.

 

As disclosed in the Company’s annual report on Form 10-K for the yearended December 31, 2003, the chief executive and chieffinancial officer of the Managing Member hadidentified certain enhanced controls neededto facilitate a more effective closing of the Company’s financialstatements.  Specifically, the Company’s auditors advised management of amaterial weakness surrounding the financial statement closing process that theybelieve arose because ATEL’s accounting resources were not adequate to completethe closing of the books and preparation of financial statements in a timelymanner.  However, it should be noted that the financial statements forthat period were nevertheless issued with an unqualified opinion.  Sincethe beginning of 2004, ATEL hired a new corporate controller,added two assistant controllers and additional accounting staffpersonnel, and has instituted new procedures or revised existingprocedures to ensure that the Company’s ability to execute internal controls inaccounting and reconciliation in the closing process is adequate in allrespects.  In connection with management’s review of the effectiveness ofinternal disclosure controls and procedures of the Company as of June 30, 2005,including communication with its auditors regarding the audit process, ATELmanagement has determined that it has successfully taken all steps necessary toresolve any outstanding issues with respect to its annual financial statementclosing process and that its accounting resources are adequate to perform thisprocess in a timely and accurate manner.  In connection

 

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with their audit of the Company and related programs for the year endedDecember 31, 2004, the independent accountants issued a no material weaknessletter which indicates that no matters were noted involving internal controland its operation that the auditor considered to be material weaknesses asdefined by the Public Company Accounting Oversight Board (United States). Furthermore, all financial statements for the Company and relatedprograms for 2004 were issued with unqualified opinions of the independentaccountants.  The Managing Member willcontinue to review its accounting procedures and practices to determine theireffectiveness and adequacy and will take any steps deemed necessary in theopinion of the Managing Member’s chief executive and chief financial officersto ensure the adequacy of the Company’s disclosure and accounting controls andprocedures.  The Managing Member’s chiefexecutive officer and chief financial officer have determined that no weaknessin financial and accounting controls and procedures had any material effect onthe accuracy and completeness of the Company’s financial reporting anddisclosure included in this report.

 

**Changes in internal controls**

 

There have been no significant changes in our internal controls or inother factors that could significantly affect our disclosure controls andprocedures subsequent to the evaluation date nor were there any significantdeficiencies or material weaknesses in our internal controls, except as describedin the prior paragraphs.

 

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**PART II. OTHER INFORMATION**

 

**Item1.  Legal Proceedings.**

 

In the ordinary course of conducting business, there may be certainclaims, suits, and complaints filed against the Company.  In the opinion of management, the outcome ofsuch matters, if any, will not have a material impact on the Company’sfinancial position or results of operations. No material legal proceedings are currently pending against the Companyor against any of its assets.

 

**Item 2.  Unregistered Sales ofEquity 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.

 

**Item 6. Exhibits.**

 

Documentsfiled as a part of this report

 

1.          Financial Statement Schedules

 

Allother schedules for whichprovisionis made intheapplicableaccountingregulationsof theSecuritiesand Exchange Commission are notrequiredunder therelatedinstructions or areinapplicable,and therefore have beenomitted.

 

2.          Other Exhibits

 

31.1 Certification ofParitosh K. Choksi31.2 Certification of Dean L. Cash32.1 Certification Pursuant to 18 U.S.C. section 1350 of Dean L. Cash32.2 Certification Pursuant to 18 U.S.C. section 1350 of Paritosh K. Choksi

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

Date:August 22, 2005

 

 
| **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 |
|                                      | Principal Financial  Officer |
|                                      | of Registrant |
|                                           |  |  |  |

 

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