Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| Quarterly Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act
of 1934. For the quarterly period ended
March 31, 2005
|_| Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934.
For the transition period from ____ to ____
Commission File number 000-50687
ATEL Capital Equipment Fund X, LLC
(Exact name of registrant as specified in its charter)
California 68-0517690
(State or other jurisdiction of (I. R. S. Employer
Incorporation or organization) Identification No.)
600 California Street, 6th Floor, San Francisco, California 94108-2733
(Address of principal executive offices)
Registrant's telephone number, including area code (415) 989-8800
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Limited Liability
Company Units
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
The number of Limited Liability Company Units outstanding as of March 31, 2005
was 14,026,311.
DOCUMENTS INCORPORATED BY REFERENCE
None
1
ATEL CAPITAL EQUIPMENT FUND X, LLC
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheets, March 31, 2005 and December 31, 2004.
Statements of Operations for the three month periods ended March 31, 2005
and 2004.
Statements of Changes in Members' Capital for the year ended December 31,
2004 and for the three month period ended March 31, 2005.
Statements of Cash Flows for the three month periods ended March 31, 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
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited).
ATEL CAPITAL EQUIPMENT FUND X, LLC
BALANCE SHEETS
MARCH 31, 2005 AND DECEMBER 31, 2004
ASSETS
March 31,
2005 December 31,
----
(Unaudited) 2004
Cash and cash equivalents $ 61,134,882 $ 50,767,859
Accounts receivable 996,115 575,365
Notes receivable 4,857,204 4,549,389
Due from Managing Member - 123,158
Prepaid syndication costs 80,956 -
Other assets 282,782 302,738
Investment in leases 47,095,577 39,208,650
--- ----------------- ---- ---------------
Total assets $ 114,447,516 $ 95,527,159
=== ================= ==== ===============
LIABILITIES AND MEMBERS' CAPITAL
Accounts payable:
Managing Member $ 348,941 $ -
Other 8,235 64,249
Deposits due to lessees 131,017 131,017
Unearned operating lease income 787,074 470,497
--- ---------------- ---- ---------------
Total liabilities 1,275,267 665,763
--- ---------------- ---- ---------------
Members' capital: 113,172,249 94,861,396
--- ---------------- ---- ---------------
Total liabilities and Members' capital $ 114,447,516 $ 95,527,159
=== ================ ==== ===============
See accompanying notes.
3
ATEL CAPITAL EQUIPMENT FUND X, LLC
STATEMENTS OF OPERATIONS
THREE MONTH PERIODS ENDED
MARCH 31, 2005 AND 2004
(Unaudited)
Revenues: 2005 2004
---- ----
Leasing activities:
Operating leases $ 1,834,923 $ 652,615
Direct financing leases 65,184 27,537
Interest 314,827 53,760
Other 1,385 851
---- ---------------- ---- ----------------
2,216,319 734,763
Expenses:
Depreciation of operating lease assets 1,409,634 586,853
Amortization of initial direct costs 122,882 63,968
Asset management fees to Managing Member 95,215 29,427
Cost reimbursements to Managing Member 166,733 51,530
Professional fees 23,490 51,540
Franchise fees and taxes - 25,000
Other 69,200 26,963
---- ---------------- ---- ----------------
1,887,154 835,281
---- ---------------- ---- ----------------
Net income (loss) $ 329,165 $ (100,518)
==== ================ ==== ================
Net income (loss):
Managing Member $ 188,829 $ 72,998
Other Members 140,336 (173,516)
---- ---------------- ---- ----------------
$ 329,165 $ (100,518)
==== ================ ==== ================
==== ================ ==== ================
Net income (loss) per Limited Liability Company Unit (Other Members) $ 0.01 $ (0.03)
Weighted average number of Units outstanding 12,788,821 5,178,906
See accompanying notes.
4
ATEL CAPITAL EQUIPMENT FUND X, LLC
STATEMENTS OF CHANGES IN MEMBERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2004
AND FOR THE
THREE MONTH PERIOD ENDED
MARCH 31, 2005
(Unaudited)
Other Members
Units Amount Managing Member Total
----- ------ ------ -----
Balance December 31, 2003 4,483,382 $ 37,110,663 $ - $ 37,110,663
Capital Contributions 7,281,891 72,818,910 - 72,818,910
Less selling commissions to
affiliates - (6,553,702) - (6,553,702)
Other syndication costs to affiliates - (2,126,737) - (2,126,737)
Rescissions of capital contributions (39,200) (392,000) - (392,000)
Units repurchased (3,250) (29,677) - (29,677)
Distributions to other members
($0.48 per Unit) - (5,675,247) - (5,675,247)
Distributions to Managing Member - - (460,566) (460,566)
Net income (loss) - (290,814) 460,566 169,752
-------------- --- ---------------- --- -------------- --- -----------------
Balance December 31, 2004 11,722,823 94,861,396 - 94,861,396
Capital Contributions 2,313,488 23,134,880 - 23,134,880
Less selling commissions to
affiliates - (2,082,139) - (2,082,139)
Other syndication costs to affiliates - (454,817) - (454,817)
Units repurchased (10,000) (93,446) - (93,446)
Distributions to other members
($0.17 per Unit) - (2,333,961) - (2,333,961)
Distributions to Managing Member - - (188,829) (188,829)
Net income - 140,336 188,829 329,165
-------------- --- ---------------- --- -------------- --- -----------------
Balance March 31, 2005 14,026,311 $ 113,172,249 $ - $ 113,172,249
============== === ================ === ============== === =================
See accompanying notes.
5
ATEL CAPITAL EQUIPMENT FUND X, LLC
STATEMENTS OF CASH FLOWS
THREE MONTH PERIODS ENDED
MARCH 31, 2005 AND 2004
(Unaudited)
Operating activities 2005 2004
---- ----
Net income (loss) $ 329,165 $ (100,518)
Adjustment to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation of operating lease assets 1,409,634 586,853
Amortization of initial direct costs 122,882 63,968
Changes in operating assets and liabilities:
Accounts receivable (420,750) 3,179
Due from Managing Member 123,158 -
Prepaid syndication costs (80,956) (128,378)
Accounts payable, Managing Member 348,941 73,195
Accounts payable, other (56,014) (125,241)
Other assets 19,956 -
Unearned operating lease income 316,577 60,271
--- ---------------- -- ----------------
Net cash provided by operating activities 2,112,593 433,329
--- ---------------- -- ----------------
Investing activities:
Purchases of equipment on operating leases (9,134,058) (2,207,363)
Investment in notes receivable (593,489) -
Due from affiliates - 248,428
Reduction in net investment on notes receivable 285,674 -
Payments of initial direct cost to Managing Member, net (478,836) (482,687)
Reduction of net investment in direct financing leases 193,451 59,272
--- ---------------- -- ----------------
Net cash used in investing activities (9,727,258) (2,382,350)
--- ---------------- -- ----------------
Financing activities:
Capital contributions received 23,134,880 15,917,190
Payment of syndication costs to Managing Member (2,536,956) (2,129,171)
Repurchase of limited liability company units (93,446) -
Distributions to Other Members (2,333,961) (900,304)
Distributions to Managing Member (188,829) (72,998)
--- ---------------- -- ----------------
Net cash provided by financing activities 17,981,688 12,814,717
--- ---------------- -- ----------------
Net increase in cash and cash equivalents 10,367,023 10,865,696
Cash and cash equivalents at beginning of period 50,767,859 22,680,652
--- ---------------- -- ----------------
Cash and cash equivalents at end of period $ 61,134,882 $ 33,546,348
=== ================ == ================
6
ATEL CAPITAL EQUIPMENT FUND X, LLC
STATEMENTS OF CASH FLOWS
(CONTINUED)
THREE MONTH PERIODS ENDED
MARCH 31, 2005 AND 2004
(Unaudited)
2005 2004
---- ----
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ - $ 511
=== ================ == ================
See accompanying notes.
7
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(Unaudited)
1. Summary of significant accounting policies:
Basis of presentation:
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
(GAAP) for interim financial information and with instructions to Form 10-Q
and Article 10 of Regulation S-X. The unaudited interim financial statements
reflect all adjustments which are, in the opinion of the Managing Member,
necessary for a fair statement of financial position and results of
operations for the interim periods presented. All such adjustments are of a
normal recurring nature. The preparation of financial statements in
accordance with GAAP requires management to make estimates and assumptions
that effect reported amounts in the financial statements and accompanying
notes. Therefore, actual results could differ from those estimates. Operating
results for the three months ended March 31, 2005 are not necessarily
indicative of the results for the year ending December 31, 2005.
Certain prior period amounts have been reclassified to conform to current
period presentation.
These unaudited interim financial statements should be read in conjunction
with the financial statements and notes thereto contained in the report on
Form 10-K for the year ended December 31, 2004, filed with the Securities and
Exchange Commission.
Equipment on operating leases:
Equipment on operating leases is stated at cost. Depreciation is being
provided by use of the straight-line method over the terms of the related
leases to the equipment's estimated residual values at the end of the leases.
Asset Valuation:
Recorded values of the Company's asset portfolio are periodically reviewed
for impairment in accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. An impairment loss is measured and recognized only if the estimated
undiscounted future cash flows of the asset are less than their net book
value. The estimated undiscounted future cash flows are the sum of the
estimated residual value of the asset at the end of the asset's expected
holding period and estimates of undiscounted future rents. The residual value
assumes, among other things, that the asset is utilized normally in an open,
unrestricted and stable market. Short-term fluctuations in the market place
are disregarded and it is assumed that there is no necessity either to
dispose of a significant number of the assets, if held in quantity,
simultaneously or to dispose of the asset quickly. Impairment is measured as
the difference between the fair value (as determined by the discounted
estimated future cash flows) of the assets and its carrying value on the
measurement date.
Revenue recognition:
Operating leases
Operating lease revenue is recognized on a straight-line basis over the term
of the underlying leases. The initial lease terms will vary as to the type of
equipment subject to the leases, the needs of the lessees and the terms to be
negotiated, but initial leases are generally expected to be for 36 to 84
months. Income from step rent provisions, escalation clauses, capital
improvement funding provisions or other lease concessions in lease contracts,
and lease rates subject to variation based on changes in market indexes or
interest rates are recognized on a straight line basis.
8
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(Unaudited)
1. Summary of significant accounting policies (continued):
Direct finance leases
Income from direct financing lease transactions is reported using the
financing method of accounting, in which the Company's investment in the
leased property is reported as a receivable from the lessee to be recovered
through future rentals. The income portion of each rental payment is
calculated so as to generate a constant rate of return on the net receivable
outstanding.
Notes receivable
Income from notes receivable is reported using the financing method of
accounting. The Company's investment in notes receivable is reported as the
present value of the future note payments. The income portion of each note
payment is calculated so as to generate a constant rate of return on the net
balance outstanding.
Initial direct costs:
The Company capitalizes initial direct costs associated with the acquisition
of lease assets. These costs are amortized over a five year period, which
approximates average lease term, using a straight line method.
Segment Reporting:
The Company adopted the provisions of SFAS No. 131 Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 establishes annual and
interim standards for operating segments of a company. It also requires
entity-wide disclosures about the products and services an entity provides,
the material countries in which it holds assts and reports revenue, and its
major customers. The Company is not organized by multiple operating segments
for the purpose of making operating decisions or assessing performance.
Accordingly the Company operates in one reportable operating segment in the
United States.
2. Organization and Limited Liability Company matters:
ATEL Capital Equipment Fund X, LLC (the Company) was formed under the laws of
the state of California on August 12, 2002 for the purpose of acquiring
equipment to engage in equipment leasing and sales activities. The Company
may continue until December 31, 2021.
The Company conducted a public offering of 15,000,000 Limited Liability
Company Units (Units) at a price of $10 per Unit. Upon the sale of the
minimum amount of Units of 120,000 Units ($1,200,000) and the receipt of the
proceeds thereof on April 9, 2003, the Company commenced operations. The
Company's offering terminated on March 11, 2005.
As of March 31, 2005 14,026,311 Units ($140,263,110) were issued and
outstanding.
As a limited liability company, the liability of any individual member for
the obligations of the Fund is limited to the extent of capital contributions
to the Fund by the individual member.
ATEL Financial Services, LLC (AFS), an affiliated entity, acts as the
Managing Member of the Company.
9
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(Unaudited)
2. Organization and Limited Liability Company matters (continued):
The Company, or AFS on behalf of the Company, will incur costs in connection
with the organization, registration and issuance of the Limited Liability
Company Units (Units). The amount of such costs to be borne by the Company is
limited by certain provisions of the Company's Operating Agreement.
The Company's principal objectives are to invest in a diversified portfolio
of equipment that will (i) preserve, protect and return the Company's
invested capital; (ii) generate regular distributions to the members of cash
from operations and cash from sales or refinancing, with any balance
remaining after certain minimum distributions to be used to purchase
additional equipment during the Reinvestment Period, and (iii) provide
additional distributions following the Reinvestment Period and until all
equipment has been sold. The Company is governed by its Limited Liability
Company Operating Agreement (Operating Agreement).
The Company is in its acquisition phase and is making distributions on a
monthly and quarterly basis.
3. Investment in equipment leases:
The Company's investment in leases consists of the following:
Balance Additions Depreciation/ Balance
---------
Amortization
Expense or
Amortization of
December 31, Direct Financing March, 31,
2004 Leases 2005
---- ------ ----
Net investment in operating
leases $ 34,497,392 $ 9,134,058 $ (1,409,634) $ 42,221,816
Net investment in direct
financing leases 3,159,401 - (193,451) 2,965,950
Initial direct costs, net of
accumulated amortization of
$527,323 in 2005 and
$404,837 in 2004 1,551,857 478,836 (122,882) 1,907,811
--- --------------- --- ------------- --- -------------- --- --------------
$ 39,208,650 $ 9,612,894 $ (1,725,967) $ 47,095,577
=== =============== === ============= === ============== === ==============
All of the property on leases was acquired in 2003, 2004 and 2005.
10
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(Unaudited)
3. Investment in equipment leases (continued):
Operating leases:
Property on operating leases consists of the following:
Balance Additions and Balance March
December 31,
2004 Depreciation 31, 2005
---- ------------ ----
Manufacturing $ 6,537,860 $ 2,319,980 $ 8,857,840
Materials handling 7,267,277 822,581 8,089,858
Mining 16,022,058 - 16,022,058
Data Processing 1,079,722 - 1,079,722
Transportation 7,946,938 - 7,946,938
Transportation, rail - 5,991,497 5,991,497
-- ----------------- --- ---------------- -- ----------------
38,853,855 9,134,058 47,987,913
Less accumulated depreciation (4,356,463) (1,409,634) (5,766,097)
-- ----------------- --- ---------------- -- ----------------
$ 34,497,392 $ 7,724,424 $ 42,221,816
== ================= === ================ == ================
Direct financing leases:
The following lists the components of the Company's investment in direct
financing leases as of March 31, 2005:
Total minimum lease payments receivable $ 3,068,216
Estimated residual values of leased equipment (unguaranteed) 338,680
---- --------------
Investment in direct financing leases 3,406,896
Less unearned income (440,946)
---- --------------
Net investment in direct financing leases $ 2,965,950
==== ==============
11
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(Unaudited)
3. Investment in leases (continued):
At March 31, 2005, the aggregate amounts of future minimum lease payments to
be received are as follows:
Operating Leases Direct Financing Total
------ -----
Leases
Nine months ending December 31, 2005 $ 6,379,421 $ 774,012 $ 7,153,433
Year ending December 31, 2006 7,546,296 863,430 8,409,726
2007 6,908,337 548,848 7,457,185
2008 6,198,727 483,446 6,682,173
2009 4,237,369 398,480 4,635,849
2010 646,731 - 646,731
-- -------------- -- ------------ -- --------------
$ 31,916,881 $ 3,068,216 $ 34,985,097
== ============== == ============ == ==============
The Company utilizes a straight line depreciation method for equipment in all
of the categories currently in its portfolio of lease transactions. The
useful lives for investment in leases by category are as follows:
Equipment category Useful Life
------------------ -----------
Mining 30 - 40
Manufacturing 10 - 20
Materials Handling 7 - 10
Transportation 7 - 10
Data processing 3 - 5
4. Notes receivable:
The Company has various notes receivable from parties who have financed the
purchase of equipment through the Company. The terms of the notes receivable
are 18 to 60 months and bear interest at rates ranging from 11% to 22%. The
notes are secured by the equipment financed. As of March 31, 2005, the minimum
future payments receivable are as follows:
Nine months ending December 31, 2005 $ 1,350,844
Year ending December 31, 2006 1,455,213
2007 1,045,128
2008 517,890
2009 1,818,006
----- ---------------
6,187,081
Less portion representing interest (1,329,877)
----- ---------------
$ 4,857,204
===== ===============
12
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(Unaudited)
5. Related party transactions:
The terms of the Limited Liability Company Operating Agreement provide that
AFS and/or affiliates are entitled to receive certain fees for equipment
management and resale and for management of the Company.
The Limited Liability Company Operating Agreement allows for the reimbursement
of costs incurred by AFS in providing administrative services to the Company.
Administrative services provided include Company accounting, investor
relations, legal counsel and lease and equipment documentation. AFS is not
reimbursed for services whereby it is entitled to receive a separate fee as
compensation for such services, such as management of equipment. Reimbursable
costs incurred by AFS are allocated to the Company based upon estimated time
incurred by employees working on Company business and an allocation of rent
and other costs based on utilization studies.
Each of ATEL Leasing Corporation ("ALC"), ATEL Equipment Corporation ("AEC"),
ATEL Investor Services ("AIS") and ATEL Financial Services LLC is a
wholly-owned subsidiary of ATEL Capital Group and performs services for the
Company. Acquisition services are performed for the Company by ALC, equipment
management, lease administration and asset disposition services are performed
by AEC, investor relations and communications services are performed by AIS
and general administrative services for the Company are performed by AFS.
Cost reimbursements to the Managing Member are based on costs incurred by AFS
in performing administrative services for the Company that are allocated to
each fund that AFS manages based on certain criteria such as existing or new
leases, number of investors or equity depending on the type of cost incurred.
AFS believes that the costs reimbursed are the lower of (i) actual costs
incurred on behalf of the Company or (ii) the amount the Company would be
required to pay independent parties for comparable administrative services in
the same geographic location.
During the three month periods ended March 31, 2005 and 2004, AFS and/or
affiliates earned fees, commissions and reimbursements, pursuant to the
Limited Liability Company Operating Agreement as follows:
2005 2004
---- ----
Selling commissions, equal to 9% of the selling price of the Limited Liability
Company units, deducted from Other Members' capital) $ 2,082,139 $ 1,432,547
Reimbursement of other syndication costs to AFS, deducted from Others Members' 454,817 696,624
capital
Asset management fees to AFS 95,215 29,427
--- ----------------- -- --- -------------
$ 2,632,171 $ 2,158,598
=== ================= === =============
The Managing Member makes certain payments to third parties on behalf of the
Company for convenience purposes. During the three month periods ended March
31, 2005 and 2004, the Managing Member made such payments of $57,978 and
$24,097, respectively.
13
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(Unaudited)
6. Members' capital:
As of March 31, 2005, 14,026,311 Units were issued and outstanding. The
Company is authorized to issue up to 15,000,050 Units, including the 50 Units
issued to the Initial Members.
The Company's Net Income, Net Losses, and Distributions, as defined in the
Limited Liability Company Operating Agreement, are to be allocated 92.5% to
the Other Members and 7.5% to AFS.
Distributions to the Other Members were as follows:
Three Months Ended
March 31,
2005 2004
---- ----
Distributions $ 2,333,961 $ 900,304
Weighted average number of Units outstanding 12,788,821 5,178,906
Weighted average distributions per Unit $ 0.18 $ 0.17
7. Commitments:
As of March 31, 2005, the Company had outstanding commitments to purchase
lease equipment of approximately $27,479,000. This amount represents contract
awards which may be cancelled by the prospective lessee or may not be accepted
by the Company.
The following table summarizes the expected funding dates for these
commitments:
Year ending December 31, Amount committed
------------------------- ----------------
2005 $27,479,000
14
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(Unaudited)
8. Financing Arrangement:
The Company participates with AFS and certain of its affiliates in a financing
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 $75,000,000 and expires in June 2006. The
availability of borrowings to the Company under this financing arrangement is
reduced by the amount AFS has outstanding as a term loan. As of March 31, 2005
borrowings under the facility were as follows:
Total amount available under the financing arrangement $ 75,000,000
Term loan to AFS as of March 31, 2005 (1,482,182)
--------------
Total available under the acquisition and warehouse facilities 73,517,818
Amount borrowed by the Company under the acquisition facility -
Amounts borrowed by affiliated partnerships and limited
liability companies under the acquisition facility (16,000,000)
--------------
Total remaining available under the acquisition and
warehouse facilities $ 57,517,818
==============
Draws on the acquisition facility by any individual borrower are secured only
by that borrower's assets, including equipment and related leases. Borrowings
on the warehouse facility are recourse jointly to certain of the affiliated
Memberships and limited liability companies, the Company and AFS.
The credit agreement includes certain financial covenants applicable to each
borrower. The Company was in compliance with its covenants as of March 31,
2005.
15
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(Unaudited)
9. Guarantees:
The Company enters into contracts that contain a variety of indemnifications.
The Company's maximum exposure under these arrangements is unknown. However,
the Company has not had prior claims or losses pursuant to these contracts and
expects the risk of loss to be remote.
In the normal course of business, the Company enters into contracts of various
types, including lease contracts, contracts for the sale or purchase of lease
assets, management contracts, loan agreements, credit lines and other debt
facilities. It is prevalent industry practice for most contracts of any
significant value to include provisions that each of the contracting parties -
in addition to assuming liability for breaches of the representations,
warranties, and covenants that are part of the underlying contractual
obligations - also assume an obligation to indemnify and hold the other
contracting party harmless for such breaches, for harm caused by such party's
gross negligence and willful misconduct, including, in certain instances,
certain costs and expenses arising from the contract. The Managing Member has
substantial experience in managing similar leasing programs subject to similar
contractual commitments in similar transactions, and the losses and claims
arising from these commitments have been insignificant, if any. Generally, to
the extent these contracts are performed in the ordinary course of business
under the reasonable business judgment of the Managing Member, no liability
will arise as a result of these provisions. The Managing Member has no reason
to believe that the facts and circumstances relating to the Company's
contractual commitments differ from those it has entered into on behalf of the
prior programs it has managed. The Managing Member knows of no facts or
circumstances that would make the Company's contractual commitments outside
standard mutual covenants applicable to commercial transactions between
businesses. Accordingly, the Company believes that these indemnification
obligations are made in the ordinary course of business as part of standard
commercial and industry practice, and that any potential liability under the
Company's similar commitments is remote. Should any such indemnification
obligation become payable, the Company would separately record and/or disclose
such liability in accordance with GAAP.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statements contained in this Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Form
10-Q, which are not historical facts, may be forward-looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially form those projected. In particular, economic
recession and changes in general economic conditions, including, fluctuations
in demand for equipment, lease rates, and interest rates, may result in delays
in investment and reinvestment, delays in leasing, re-leasing, and disposition
of equipment, and reduced returns on invested capital. The Company's
performance is subject to risks relating to lessee defaults and the
creditworthiness of its lessees. The Fund's performance is also subject to
risks relating to the value of its equipment at the end of its leases, which
may be affected by the condition of the equipment, technological obsolescence
and the markets for new and used equipment at the end of lease terms.
Investors are cautioned not to attribute undue certainty to these
forward-looking statements, which speak only as of the date of this Form 10-Q.
We undertake no obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
of this Form 10-Q or to reflect the occurrence of unanticipated events, other
than as required by law.
Capital Resources and Liquidity
The Company commenced its offering of Units on March 12, 2003. On April 9,
2003, the Company commenced operations in its primary business (leasing
activities). Until the Company's initial portfolio of equipment has been
purchased, funds that have been received, but that have not yet been invested
in leased equipment, are invested in interest-bearing accounts or
high-quality/short-term commercial paper. The Company's public offering
provides for a total maximum capitalization of $150,000,000.
During the funding period, the Company's primary source of liquidity will be
subscription proceeds from the public offering of Units. The liquidity of the
Company will vary in the future, increasing to the extent proceeds from the
offering, cash flows from leases and proceeds of asset sales exceed expenses,
and decreasing as lease assets are acquired, as distributions are made to the
Members and to the extent expenses exceed cash flows from leases and proceeds
from asset sales.
As another source of liquidity, the Company is expected to have contractual
obligations with a diversified group of lessees for fixed lease terms at fixed
rental amounts. As the initial lease terms expire, the Company will re-lease
or sell the equipment. The future liquidity beyond the contractual minimum
rentals will depend on AFS's success in re-leasing or selling the equipment as
it comes off lease.
Throughout the Reinvestment Period (as defined in the Limited Liability
Company Operating Agreement), the Company anticipates reinvesting a portion of
lease payments from assets owned in new leasing transactions. Such
reinvestment will occur only after the payment of all obligations, including
debt service (both principal and interest), the payment of management fees to
AFS and providing for cash distributions to the Members.
The Company participates with AFS and certain of its affiliates in a financing
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 $75,000,000 and expires in June 2006. The
availability of borrowings to the Company under this financing arrangement is
reduced by the amount AFS has outstanding as a term loan. As of March 31, 2005
borrowings under the facility were as follows:
Total amount available under the financing arrangement $ 75,000,000
Term loan to AFS as of March 31, 2005 (1,482,182)
--------------
Total available under the acquisition and warehouse facilities 73,517,818
Amount borrowed by the Company under the acquisition facility -
Amounts borrowed by affiliated partnerships and limited
liability companies under the acquisition facility (16,000,000)
--------------
Total remaining available under the acquisition and
warehouse facilities $ 57,517,818
==============
Draws on the acquisition facility by any individual borrower are secured only
by that borrower's assets, including equipment and related leases. Borrowings
on the warehouse facility are recourse jointly to certain of the affiliated
Memberships and limited liability companies, the Company and AFS.
17
To manage the warehousing line of credit for the holding of assets prior to
allocation to specific investor programs, a Warehousing Trust Agreement has
been entered into by the Company, ATEL Financial Services LLC ("AFS"), ATEL
Leasing Corporation ("ALC"), and certain of the affiliated partnerships and
limited liability companies. The warehousing line is used to acquire and hold,
on a short-term basis, certain lease transactions that meet the investment
objectives of each of such entities. Each of the leasing programs sponsored by
AFS and ALC currently in its acquisition stage is a pro rata participant in
the Warehousing Trust Agreement, as described below. When a program no longer
has a need for short term financing provided by the warehousing facility, it
is removed from participation, and as new leasing investment entities are
formed by AFS and ALC and commence their acquisition stages, these new
entities will be added. As of March 31, 2005, the investment program
participants were ATEL Cash Distribution Fund VI, L.P., ATEL Capital Equipment
Fund VII, L.P., ATEL Capital Equipment Fund VIII, LLC, ATEL Capital Equipment
Fund 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 liabilities under the warehouse borrowing facility, inure to
each of such entities based upon each entity's pro-rata share in the
warehousing trust estate. The "pro-rata share" is calculated as a ratio of the
net worth of each entity over the aggregate net worth of all entities
benefiting from the warehouse trust estate, excepting that the trustees, AFS
and ALC, are both liable for their pro-rata shares of the obligations based on
their respective net worths, and jointly liable for the pro rata portion of
the obligations of each of the affiliated partnerships and limited liability
companies participating under the borrowing facility. Transactions are
financed through this warehousing line only until the transactions are
allocated to a specific program for purchase or are otherwise disposed by AFS
and ALC. When a determination is made to allocate the transaction to a
specific program for purchase by the program, the purchaser repays the debt
associated with the asset, either with cash or by means of the acquisition
facility financing, the asset is removed from the warehouse line collateral,
and ownership of the asset and any debt obligation associated with the asset
are assumed solely by the purchasing entity.
The credit agreement includes certain financial covenants applicable to each
borrower. The Company was in compliance with its covenants as of March 31,
2005.
The Company anticipates reinvesting a portion of lease payments from assets
owned in new leasing transactions. Such reinvestment will occur only after the
payment of all obligations, including debt service (both principal and
interest), the payment of management and acquisition fees to AFS and providing
for cash distributions to the Limited Members.
AFS or an affiliate may purchase equipment in its own name, the name of an
affiliate or the name of a nominee, a trust or otherwise and hold title
thereto on a temporary or interim basis for the purpose of facilitating the
acquisition of such equipment or the completion of manufacture of the
equipment or for any other purpose related to the business of the Company,
provided, however that: (i) the transaction is in the best interest of the
Company; (ii) such equipment is purchased by the Company for a purchase price
no greater than the cost of such equipment to AFS or affiliate (including any
out-of-pocket carrying costs), except for compensation permitted by the
Operating Agreement; (iii) there is no difference in interest terms of the
loans secured by the equipment at the time acquired by AFS or affiliate and
the time acquired by the Company; (iv) there is no benefit arising out of such
transaction to AFS or its affiliate apart from the compensation otherwise
permitted by the Operating Agreement; and (v) all income generated by, and all
expenses associated with, equipment so acquired will be treated as belonging
to the Company.
AFS expects that aggregate borrowings in the future will be approximately 50%
of aggregate equipment cost. In any event, the Operating Agreement limits such
borrowings to 50% of the total cost of equipment, in aggregate.
If inflation in the general economy becomes significant, it may affect the
Company inasmuch as the residual (resale) values and rates on re-leases of the
Company's leased assets may increase as the costs of similar assets increase.
However, the Company's revenues from existing leases would not increase, as
such rates are generally fixed for the terms of the leases without adjustment
for inflation.
If interest rates increase significantly, the lease rates that the Company can
obtain on future leases will be expected to increase as the cost of capital is
a significant factor in the pricing of lease financing. Leases already in
place, for the most part, would not be affected by changes in interest rates.
For detailed information on the Company's debt obligations, see Note 8 in the
notes to the financial statements in Item 1.
As of March 31, 2005, the Company had outstanding commitments to purchase
lease equipment of approximately $27,479,000. This amount represents contract
awards which may be cancelled by the prospective lessee or may not be accepted
by the Company.
18
The following table summarizes the expected funding dates for these
commitments:
Year ending December 31, Amount committed
2005 $27,479,000
Cash Flows
The Company's offer terminated on March 11, 2005. The offering provided
$23,134,880 and $15,917,190, in the first quarter of 2005 and 2004,
respectively, of the Company's total cash flows.
In the first quarters of 2005 and 2004, the primary source of cash from
operations was rents from operating leases. Operating leases are expected to
remain as the primary source of cash from operations in future periods.
During the first quarter of 2005 and 2004, the majority of cash used in
investing activities related to the purchase of operating lease assets.
Purchases of operating lease assets increased to $9,134,058 in the first
quarter of 2005 from $2,207,363 in the first quarter of 2004.
Other uses of cash for investing activities consisted of payments of initial
direct cost associated with lease asset purchases, and advances on notes
receivable. Payments of initial direct cost were $478,836 and $482,687 for the
first quarter of 2005 and 2004, respectively. Advances on notes receivable
were $593,489 in the first quarter of 2005. No amounts were invested in notes
receivable in the first quarter of 2004.
The Company acquired $9,134,058 of equipment on operating leases during the
three month period ended March 31, 2005. Below is a table that summarizes
utilization percentages for assets acquired during the years ended December
31, 2004 and the three month period ended March 31, 2005:
Equipment Purchased in: Utilization by Year
2005 2004
2005 100% -
2004 100% 100%
It is the Company's objective to maintain a 100% utilization rate for all
equipment. As discussed above, the Company remains in an acquisition stage and
is continuing to acquire equipment. All equipment transactions are acquired
subject to binding lease commitments, so equipment utilization is expected to
remain high throughout this acquisition and reinvestment stage, which ends six
years after the end of the Company's public offering of Units. Initial lease
terms will generally be from 36 to 84 months, and as these initial leases
terminate, the Company will attempt to re-lease or sell the equipment.
Utilization rates may therefore decrease during the liquidation stage of the
Company, which will follow its acquisition and reinvestment stages. Sources of
cash from investing activities consisted of rents from direct financing leases
and from payments due on advance notes receivables.
As noted earlier, proceeds of our public offering of Units was our main source
of financing activity for the first quarter of 2005 and 2004. Financing uses
of cash included distributions to Members and payment for costs related to the
offering. In the first quarter of 2005 and 2004, distributions were made to
the Members in the amount of $2,522,790 and $973,302, respectively.
Results of Operations
As of April 9, 2003, subscriptions for the minimum amount of the offering
($1,200,000) had been received and accepted by the Company. As of that date,
the Company commenced operations in its primary business (leasing activities).
Because of the fact that the initial portfolio acquisitions were not completed
as of March 31, 2005, the results of operations in the first quarter of 2005
and 2004 are not expected to be comparable between quarters or to future
periods. After the Company's public offering and its initial asset acquisition
stage terminate, the results of operations are expected to change
significantly.
In the quarter ended March 31, 2005, operations resulted in net income of
$329,165 compared to a net loss of $100,518 in the quarter ended March 31,
2004. In the first quarter of 2005 and 2004, our primary source of revenues
was from operating leases. In the first quarter of 2005, operating lease rents
increased to $1,834,923 from $652,615 in the first quarter of 2004. We expect
that operating leases will continue to be the primary source of revenues and
that the amounts earned will increase as we continue to acquire additional
lease assets.
19
Depreciation expense is directly related to the operating lease assets.
Depreciation expense increased to $1,409,634 in the first quarter of 2005 from
$586,853 in the first quarter of 2004. We expect that depreciation expense
will increase in future periods in relation to operating lease revenues as we
continue to acquire more assets.
Under the terms of the Limited Liability Company Operating Agreement, AFS is
entitled to certain fees and reimbursements of costs. Asset management fees in
the first quarter of 2005 and 2004 were $95,215 and $29,427, respectively.
Costs reimbursements over the same period were $166,733 and $51,530,
respectively. These amounts are expected to increase in future periods as the
operations of the Company expand.
Item 3. Quantitative and Qualitative Disclosures of Market Risk.
The Company, like most other companies, is exposed to certain market risks,
including primarily changes in interest rates. The Company believes its
exposure to other market risks, including foreign currency exchange rate risk,
commodity risk and equity price risk, are insignificant to both its financial
position and results of operations. In general, the Company expects to manage
its exposure to interest rate risk by obtaining fixed rate debt. The fixed
rate debt is structured so as to match the cash flows required to service the
debt to the payment streams under fixed rate lease receivables. The payments
under the leases are assigned to the lenders in satisfaction of the debt.
Furthermore, AFS has historically been able to maintain a stable spread
between its cost of funds and lease yields in both periods of rising and
falling interest rates. Nevertheless, the Company expects to frequently fund
leases with its floating interest rate line of credit and will, therefore, be
exposed to interest rate risk until fixed rate financing is arranged, or the
floating interest rate line of credit is repaid. As of March 31, 2005 and
2004, there were no outstanding balances on the floating interest rate line of
credit.
Item 4. Controls and procedures.
Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management (ATEL
Financial Services, LLC as Managing Member of the registrant, including the
chief executive officer and chief financial officer), an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures [as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934] was performed as of March 31, 2005. Based
upon this evaluation, the chief executive officer and the chief financial
officer concluded that, as of the evaluation date, our disclosure controls and
procedures were effective for the purposes of recording, processing,
summarizing, and timely reporting information required to be disclosed by us
in the reports that we file under the Securities Exchange Act of 1934; and
that such information is accumulated and communicated to our management in
order to allow timely decisions regarding required disclosure.
As disclosed in the Company's annual report on Form 10-K for the year ended
December 31, 2003, the chief executive and chief financial officer of the
Managing Member had identified certain enhanced controls needed to facilitate
a more effective closing of the Company's financial statements. Specifically,
the Company's auditors advised management of a material weakness surrounding
the financial statement closing process that they believe arose because ATEL's
accounting resources were not adequate to complete the closing of the books
and preparation of financial statements in a timely manner. However, it should
be noted that the financial statements for that period were nevertheless
issued with an unqualified opinion. Since the beginning of 2004, ATEL hired a
new corporate controller, added two assistant controllers and additional
accounting staff personnel, and has instituted new procedures or revised
existing procedures to ensure that the Company's ability to execute internal
controls in accounting and reconciliation in the closing process is adequate
in all respects. In connection with management's review of the effectiveness
of internal disclosure controls and procedures of the Company as of March 31,
2005, including communication with its auditors regarding the audit process,
ATEL management has determined that it has successfully taken all steps
necessary to resolve any outstanding issues with respect to its annual
financial statement closing process and that its accounting resources are
adequate to perform this process in a timely and accurate manner. In
connection with their audit of the Company and related programs for the year
ended December 31, 2004, the independent accountants issued a no material
weakness letter which indicates that no matters were noted involving internal
control and its operation that the auditor considered to be material
weaknesses as defined by the Public Company Accounting Oversight Board (United
States). Furthermore, all financial statements for the Company and related
programs for 2004 were issued with unqualified opinions of the independent
accountants. The Managing Member will continue to review its accounting
procedures and practices to determine their effectiveness and adequacy and
will take any steps deemed necessary in the opinion of the Managing Member's
chief executive and chief financial officers to ensure the adequacy of the
Company's disclosure and accounting controls and procedures.
20
The Managing Member's chief executive officer and chief financial officer have
determined that no weakness in financial and accounting controls and
procedures had any material effect on the accuracy and completeness of the
Company's financial reporting and disclosure included in this report.
Changes in internal controls
There have been no significant changes in our internal controls or in other
factors that could significantly affect our disclosure controls and procedures
subsequent to the evaluation date nor were there any significant deficiencies
or material weaknesses in our internal controls, except as described in the
prior paragraph
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In the ordinary course of conducting business, there may be certain claims,
suits, and complaints filed against the Company. In the opinion of management,
the outcome of such matters, if any, will not have a material impact on the
Company's financial position or results of operations. No material legal
proceedings are currently pending against the Company or against any of its
assets.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information provided pursuant to ss. 228.701 (Item 701(f))(formerly included
in Form SR):
(1) Effective date of the offering: March 12, 2003; File Number: 333-100452
(2) Offering commenced: March 12, 2003
(3) The offering did not terminate before any securities were sold.
(4) The offering has not been terminated prior to the sale of all of the
securities.
(5) The managing underwriter is ATEL Securities Corporation.
(6) The title of the registered class of securities is "Units of Limited
Liability Company Interest."
21
(7) Aggregate amount and offering price of securities registered and sold as of
April 27, 2005:
Aggregate Aggregate
price of price of
offering offering
Amount amount Units amount
Title of Security Registered registered sold sold
---------- ---------- ---- ----
Units of Limited Company Interest 15,000,000 $ 150,000,000 14,036,636 $ 140,366,360
(8) Costs incurred for the issuers account in connection with the issuance and
distribution of the securities registered for each category listed below:
Direct or indirect payments to
directors, officers, Managing Members of
the issuer or their associates; to persons
owning ten percent or more of
any class of equity securities of the Direct or indirect
issuer; and to affiliates of the issuer payments to others Total
--------------------------- ------------------ -----
Underwriting discounts and commissions $ 2,105,495 $ 10,527,477 $ 12,632,972
Other expenses 5,333,218 5,333,218
--- ------------- --- ----------------- --- ---------------
Total expenses $ 2,105,495 $ 15,860,695 $ 17,966,190
=== ============= === ================= === ===============
(9) Net offering proceeds to the issuer after the total expenses in item 8: $ 122,400,170
(10) The amount of net offering proceeds to the issuer used for each of the
purposes listed below:
Direct or indirect payments to
directors, officers, Managing
Members of the issuer or their
associates; to persons owning
ten percent or more of any
class of equity securities of
the issuer; and to affiliates Direct or indirect
-----------
of the issuer payments to others Total
------------- ------ -----
Purchase and installation of machinery and
equipment $ 2,435,134 $ 57,020,460 $ 59,455,594
Working capital - 62,944,576 62,944,576
---- ------------- --- ---------------- ---- ----------------
$ 2,435,134 $ 119,965,036 $ 122,400,170
==== ============= === ================ ==== ================
(11) The use of the proceeds in Item 10 does not represent a material change in
the uses of proceeds described in the prospectus.
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.
Documents filed as a part of this report
1. Financial Statement Schedules
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore have been omitted.
2. Other Exhibits
31.1 Certification of Paritosh K. Choksi
31.2 Certification of Dean L. Cash
32.1 Certification Pursuant to 18 U.S.C. section 1350 of Dean L. Cash
32.2 Certification Pursuant to 18 U.S.C. section 1350 of Paritosh K.
Choksi
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date:
May 13, 2005
ATEL CAPITAL EQUIPMENT FUND X, 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
By: /s/ Donald E. Carpenter________
Donald E. Carpenter
Principal Accounting
Officer of Registrant
By: /s/ Elif A Kuvvetli________
Elif A Kuvvetli
Vice President and
Corporate Controller
23