UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. | |
For the year ended December 31, 2014 | ||
o | 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)
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California | 68-0517690 | |
(State or other jurisdiction of incorporation or organization) | (I. R. S. Employer Identification No.) |
The Transamerica Pyramid, 600 Montgomery Street, 9th Floor, San Francisco, California 94111
(Address of principal executive offices)
Registrant’s telephone number, including area code:(415) 989-8800
Securities registered pursuant to section 12(b) of the Act:None
Securities registered pursuant to section 12(g) of the Act:Limited Liability Company Units
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yeso Nox
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act of 1934.Yeso Nox
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.Yesx Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yesx Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filero | Accelerated filero | Non-accelerated filero (Do not check if a smaller reporting company) | Smaller reporting companyx |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yeso Nox
State the aggregate market value of voting stock held by non-affiliates of the registrant: Not applicable
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.) Not applicable
The number of Limited Liability Company Units outstanding as of February 28, 2015 was 13,971,486.
DOCUMENTS INCORPORATED BY REFERENCE
Prospectus dated March 12, 2003, filed pursuant to Rule 424(b) (Commission File No. 333-100452) is hereby incorporated by reference into Part IV hereof.
PART I
Item 1. | BUSINESS |
General Development of Business
ATEL Capital Equipment Fund X, LLC (the “Company” or the “Fund”) was formed under the laws of the State of California on August 12, 2002 for the purpose of engaging in the sale of limited liability company investment units and acquiring equipment to engage in equipment leasing, lending and sales activities, primarily in the United States. The Managing Member of the Company is ATEL Financial Services, LLC (“AFS”), a California limited liability company. The Company may continue until December 31, 2022.
The Company conducted a public offering of 15,000,000 Limited Liability Company Units (“Units”), at a price of $10 per Unit. On April 9, 2003, subscriptions for the minimum number of Units (120,000, representing $1.2 million) had been received (excluding subscriptions from Pennsylvania investors) and AFS requested that the subscriptions be released to the Company. On that date, the Company commenced operations in its primary business. As of March 11, 2005, the offering was terminated. As of that date, subscriptions for 14,059,136 Units ($140.6 million) had been received, of which 87,650 Units ($720 thousand) were subsequently rescinded or repurchased (net of distributions paid and allocated syndication costs, as applicable) by the Company through December 31, 2014. As of December 31, 2014, 13,971,486 Units remain issued and outstanding.
The Company’s principal objectives have been to invest in a diversified portfolio of equipment that (i) preserves, protects and returns the Company’s invested capital; (ii) generates regular distributions to the members of cash from operations and cash from sales or refinancing, with any balance remaining after certain minimum distributions to be used to purchase additional equipment during the reinvestment period (“Reinvestment Period”) (defined as six full years following the year the offering was terminated) which ended on December 31, 2011 and (iii) provides additional distributions following the Reinvestment Period and until all equipment has been sold. The Company is governed by the Limited Liability Company Operating Agreement (“Operating Agreement”), as amended. On January 1, 2012, the Company commenced liquidation phase activities pursuant to the guidelines of the Operating Agreement.
The Company has incurred debt to finance the purchase of a portion of its equipment portfolio. The amount of borrowings in connection with any equipment acquisition transaction was determined by, among other things, the credit of the lessee, the terms of the lease, the nature of the equipment and the condition of the money market. There was no limit on the amount of debt that may be incurred in connection with any single acquisition of equipment. However, the Company may not incur aggregate outstanding indebtedness in excess of 50% of the total cost of all equipment as of the date of the final commitment of the offering proceeds and, thereafter, as of the date of any subsequent indebtedness is incurred. The Company has borrowed amounts equal to such maximum debt level in order to fund a portion of its equipment acquisitions. There can be no assurance that such financing will continue to be available to the Company in the future.
The Company also incurred long-term recourse debt in the form of asset securitization transactions in order to obtain lower interest rates or other more desirable terms than may be available for individual nonrecourse debt transactions. In an “asset securitization,” the lender would receive a security interest in a specified pool of “securitized” Company assets or a general lien against all of the otherwise unencumbered assets of the Company. It had been the intention of AFS to use asset securitization primarily to finance assets leased to those credits which, in the opinion of AFS, had a relatively lower potential risk of lease default than those lessees with equipment financed with nonrecourse debt. AFS expected that an asset securitization financing would involve borrowing at a variable interest rate based on an established reference rate, and sought to limit the Company’s exposure to increases in the interest rate by engaging in hedging transactions that would effectively fix the interest rate obligation. As of April 4, 2013 the amount of such securitized borrowings were repaid in full.
Pursuant to the terms of the Operating Agreement, AFS and its affiliates receives compensation for services rendered and reimbursements for costs incurred on behalf of the Company (See Note 7 to the financial statements included in Item 8 of this report). The Company is required to maintain reasonable cash reserves for working capital, the repurchase of Units and contingencies. The repurchase of Units is solely at the discretion of AFS.
1
Narrative Description of Business
The Company has acquired various types of equipment to lease pursuant to “Operating” leases and “High Payout” leases, whereby “Operating” leases are defined as being leases in which the minimum lease payments during the initial lease term do not recover the full cost of the equipment and “High Payout” leases recover at least 90% of such cost. It was the intention of AFS that a majority of the aggregate purchase price of equipment would represent equipment leased under operating leases upon final investment of the net proceeds of the offering and that no more than 20% of the aggregate purchase price of equipment would be invested in equipment acquired from a single manufacturer.
The Company has only purchased equipment under pre-existing leases or for which a lease would be entered into concurrently at the time of the purchase. Through December 31, 2014, the Company had purchased equipment with a total acquisition price of $193.8 million. The Company also had net investments in notes receivable of which $332 thousand remained outstanding at December 31, 2014.
The Company’s objective has been to lease a minimum of 75% of the equipment acquired with the net proceeds of the offering to lessees that (i) have an aggregate credit rating by Moody’s Investors Service of Baa or better, or the credit equivalent as determined by AFS, with the aggregate rating weighted to account for the original equipment cost for each item leased or (ii) are established hospitals with histories of profitability or municipalities. The balance of the original equipment portfolio may include equipment leased to lessees which, although deemed creditworthy by AFS, would not satisfy the general credit rating criteria for the portfolio. In excess of 75% of the equipment acquired with the net proceeds of the offering (based on original purchase cost) was originally leased to lessees with an aggregate credit rating of Baa or better or to such hospitals or municipalities, as described in (ii) above.
During 2014 and 2013, certain lessees and/or financial borrowers generated significant portions (defined as greater than or equal to 10%) of the Company’s total leasing and lending revenues, excluding gains or losses on disposition of assets, as follows:
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Type of Equipment | Percentage of Total Lease Revenues | |||||||||||
Lessee | 2014 | 2013 | ||||||||||
The Sabine Mining Company | Mining | 24 | % | 20 | % | |||||||
Wal-mart Transportation, LLC | Transportation | 17 | % | 12 | % |
The above percentages are not expected to be comparable in future periods.
The equipment leasing industry is highly competitive. Equipment manufacturers, corporations, partnerships and others offer users an alternative to the purchase of most types of equipment with payment terms that vary widely depending on the lease term, type of equipment and creditworthiness of the lessee. The ability of the Company to keep the equipment leased and/or operating and the terms of the acquisitions, leases and dispositions of equipment depends on various factors (many of which are not in the control of AFS or the Company), such as raw material costs to manufacture equipment as well as general economic conditions, including the effects of inflation or recession, and fluctuations in supply and demand for various types of equipment resulting from, among other things, technological and economic obsolescence.
AFS limited the amount invested in equipment to any single lessee to not more than 20% of the aggregate purchase price of equipment owned at any time during the Reinvestment Period.
The business of the Company is not seasonal. The Company has no full time employees. AFS’ employees provide the services the Company requires to effectively operate. The costs of these services are reimbursed by the Company to AFS per the Operating Agreement.
2
Equipment Leasing Activities
The Company has acquired a diversified portfolio of equipment. The equipment has been leased to lessees in various industries. The following tables set forth the types of equipment acquired by the Company through December 31, 2014 and the industries to which the assets have been leased (dollars in thousands):
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Asset Types | Purchase Price Excluding Acquisition Fees | Percentage of Total Acquisitions | ||||||
Materials handling | $ | 49,467 | 25.52 | % | ||||
Transportation, other | 37,956 | 19.58 | % | |||||
Transportation, rail | 32,123 | 16.57 | % | |||||
Mining equipment | 30,020 | 15.49 | % | |||||
Manufacturing | 15,946 | 8.23 | % | |||||
Construction | 13,059 | 6.74 | % | |||||
Logging and lumber | 4,728 | 2.44 | % | |||||
Petro/natural gas | 2,446 | 1.26 | % | |||||
Other | 8,068 | 4.17 | % | |||||
$ | 193,813 | 100.00 | % |
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Industry of Lessee | Purchase Price Excluding Acquisition Fees | Percentage of Total Acquisitions | ||||||
Mining | $ | 38,670 | 19.95 | % | ||||
Transportation, other | 25,019 | 12.91 | % | |||||
Manufacturing | 20,502 | 10.58 | % | |||||
Transportation, rail | 16,809 | 8.67 | % | |||||
Paper products | 13,570 | 7.00 | % | |||||
Wholesale | 12,887 | 6.65 | % | |||||
Retail | 12,650 | 6.53 | % | |||||
Wood/Lumber products | 12,331 | 6.36 | % | |||||
Health services | 11,474 | 5.92 | % | |||||
Minerals/Metal products | 7,200 | 3.71 | % | |||||
Food products | 6,129 | 3.16 | % | |||||
Industrial machinery | 6,020 | 3.11 | % | |||||
Construction | 5,368 | 2.77 | % | |||||
Other | 5,184 | 2.68 | % | |||||
$ | 193,813 | 100.00 | % |
From inception to December 31, 2014, the Company has disposed of certain leased assets as set forth below (in thousands):
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Asset Types | Original Equipment Cost Excluding Acquisition Fees | Sale Price | Gross Rents | |||||||||
Materials handling | $ | 42,750 | $ | 9,544 | $ | 45,178 | ||||||
Transportation, other | 20,045 | 2,978 | 21,981 | |||||||||
Manufacturing | 15,407 | 3,870 | 17,490 | |||||||||
Construction | 10,963 | 4,509 | 11,471 | |||||||||
Mining equipment | 6,009 | 2,506 | 5,235 | |||||||||
Logging and lumber | 4,728 | 2,032 | 5,216 | |||||||||
Transportation, rail | 2,354 | 1,504 | 1,925 | |||||||||
Other | 5,893 | 1,401 | 5,507 | |||||||||
$ | 108,149 | $ | 28,344 | $ | 114,003 |
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Proceeds from sales of lease assets are not expected to be consistent from one period to another. The Company is a finite life equipment leasing fund, which had acquired leasing transactions during the period ending six years after completion of its public offering. On the termination of leases, assets may be re-leased or sold. Sales of assets are not scheduled and are created by opportunities within the marketplace. The Company sought to acquire and lease a wide variety of assets and to enter into leases on a variety of terms. Some assets are expected to have little or no value for re-lease or sale upon termination of the initial leases, and the anticipated residual values are a key factor in pricing and terms structured for each lease. The Company’s goal is to seek maximum return on its leased assets and will determine when and under what terms to dispose of such assets during the course of its term.
For further information regarding the Company’s equipment lease portfolio as of December 31, 2014 and 2013, see Note 6 to the financial statements, Investments in equipment and leases, net, as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
Notes Receivable Activities
The Company has financed a diversified portfolio of assets in diverse industries. The following tables set forth the types of assets financed by the Company through December 31, 2014 and the industries to which the assets have been financed (dollars in thousands):
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Asset Types | Amount Financed Excluding Acquisition Fees | Percentage of Total Fundings | ||||||
Computers | $ | 8,423 | 45.87 | % | ||||
Aviation | 2,680 | 14.60 | % | |||||
Storage facility | 2,503 | 13.63 | % | |||||
Manufacturing | 950 | 5.17 | % | |||||
Furniture/Fixtures | 499 | 2.72 | % | |||||
Research | 182 | 1.00 | % | |||||
Other | 3,124 | 17.01 | % | |||||
$ | 18,361 | 100.00 | % |
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Industry of Borrower | Amount Financed Excluding Acquisition Fees | Percentage of Total Fundings | ||||||
Business services | $ | 5,138 | 27.98 | % | ||||
Communications | 3,472 | 18.90 | % | |||||
Manufacturing | 3,086 | 16.80 | % | |||||
Health services | 2,708 | 14.75 | % | |||||
Air transportation | 2,680 | 14.60 | % | |||||
Electronics | 778 | 4.24 | % | |||||
Other | 499 | 2.73 | % | |||||
$ | 18,361 | 100.00 | % |
From inception to December 31, 2014, assets financed by the Company that are associated with terminated loans are as follows (in thousands):
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Asset Types | Amount Financed Excluding Acquisition Fees | Disposition Proceeds | Total Payments Received | |||||||||
Computers | $ | 8,423 | $ | 2,182 | $ | 7,121 | ||||||
Aviation | 2,680 | 1,360 | 3,863 | |||||||||
Manufacturing | 950 | 19 | 1,233 | |||||||||
Furniture/Fixtures | 499 | 82 | 493 | |||||||||
Research | 182 | — | 210 | |||||||||
Other | 3,124 | 897 | 2,667 | |||||||||
$ | 15,858 | $ | 4,540 | $ | 15,587 |
4
For further information regarding the Company’s notes receivable portfolio as of December 31, 2014, see Note 4 to the financial statements, Notes receivable, net, as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
The Company operates in one reportable operating segment in the United States. For further information regarding the Company’s geographic revenues and assets, and major customers, see Notes 2 and 3 to the financial statements as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
Item 2. | PROPERTIES |
The Company does not own or lease any real property, plant or material physical properties other than the equipment held for lease as set forth in Item 1, Business.
Item 3. | 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 4. | MINE SAFETY DISCLOSURES |
Not applicable.
5
PART II
Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
There are certain material conditions and restrictions on the transfer of Units imposed by the terms of the Operating Agreement. Consequently, there is no public market for Units and it is not anticipated that a public market for Units will develop. In the absence of a public market for the Units, there is no currently ascertainable fair market value for the Units.
Holders
As of December 31, 2014, a total of 3,316 investors were Unitholders of record in the Company.
Unit Valuation
In order to permit custodial fiduciaries who hold Units to satisfy their annual reporting requirements, AFS estimated the value per Unit of the Company’s assets as of December 31, 2014. AFS calculated the estimated liquidation proceeds that would be realized by the Company, assuming an orderly disposition of all of the Company’s assets as of December 31, 2014, by estimating the aggregate net asset value of the Company. The valuation does not take into account any future business activity of the Company; rather it is a snapshot view of the Fund’s portfolio as of the valuation date.
The estimated values for non-interest bearing items such as any current assets and liabilities, as well as for any investment in securities, were assumed to equal their respective reported balances, which management believes approximate their respective fair values, as adjusted for impairment. And when applicable, the same was applied to loans incurred under the acquisition facility since they also bear variable rates of interest.
A discounted cash flow approach was used to estimate the values of notes receivable, investments in leases and non-recourse debt. Under such approach, the value of a financial instrument was estimated by calculating the present value of the instrument’s expected cash flows. The present value was determined by discounting the cash flows the instrument is expected to generate by discount rates as deemed appropriate by the Manager. In most cases, the discount rates used were based on U.S. Treasury yields reported as of the reporting date, plus a spread to account for the credit risk difference between the instrument being valued and Treasury securities.
After calculating the aggregate estimated disposition proceeds, AFS then calculated the portion of the aggregate estimated value of the Company assets that would be distributed to Unitholders on liquidation of the Company, and divided the total so distributable by the number of outstanding Units. As of December 31, 2014, the value of the Company’s assets, calculated on this basis, was approximately $2.22 per Unit. The aforementioned valuation was performed solely for custodial purposes described above. There is no market for the Units, and, accordingly, this value does not represent an estimate of the amount a Unitholder would receive if he were to seek to sell his Units. Furthermore, there can be no assurance as to the amount the Company may actually receive if and when it seeks to liquidate its assets or the amount of lease payments and equipment disposition proceeds it will actually receive over the remaining term of the Company.
Distributions
The Unitholders of record are entitled to certain distributions as provided under the Operating Agreement.
AFS has sole discretion in determining the amount of distributions; provided, however, that AFS will not reinvest in equipment, but will distribute, subject to payment of any obligations of the Company, such available cash from operations and cash from sales or refinancing as may be necessary to cause total distributions to the Members for each year during the Reinvestment Period to equal an amount of $0.80 per Unit.
The monthly distributions were discontinued in 2012 as the Company entered its liquidation phase. The Company made semi-annual distributions to Other Members in 2014 at a rate of $0.40 per Unit at June 30, 2014 and $0.28 per unit at December 31, 2014. Likewise, the Company made semi-annual distributions in 2013 at a rate of $0.40 per Unit at both June 30, 2013 and December 31, 2013. The rates and frequency of periodic distributions paid by the Fund during its liquidation phase are solely at the discretion of the Manager.
6
The following table presents summarized information regarding distributions to members other than the Managing Member (“Other Members”):
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2014 | 2013 | |||||||
Net income per Unit, based on weighted average Units outstanding | $ | 0.28 | $ | 0.42 | ||||
Return of investment | 0.40 | 0.38 | ||||||
Distributions declared per Unit, based on weighted average Other Member Units outstanding | 0.68 | 0.80 | ||||||
Differences due to timing of distributions | — | — | ||||||
Actual distributions paid per Unit | $ | 0.68 | $ | 0.80 |
Item 6. | SELECTED FINANCIAL DATA |
A smaller reporting company is not required to present selected financial data in accordance with item 301(c) of Regulation S-K.
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Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Statements contained in this Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) and elsewhere in this Form 10-K, which are not historical facts, may be forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. In particular, economic recession and changes in general economic conditions, including fluctuations in demand for equipment, lease rates, and interest rates, may result in delays in investment and reinvestment, delays in leasing, re-leasing, and disposition of equipment, and reduced returns on invested capital. The Company’s performance is subject to risks relating to lessee defaults and the creditworthiness of its lessees. The 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-K. We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events, other than as required by law.
Overview
ATEL Capital Equipment Fund X, LLC (the “Company” or the “Fund”) is a California limited liability company that was formed in August 2002 for the purpose of engaging in the sale of limited liability company investment units and acquiring equipment to generate revenues from equipment leasing, lending and sales activities, primarily in the United States. The Managing Member of the Company is ATEL Financial Services, LLC (“AFS”), a California limited liability company.
The Company conducted a public offering of 15,000,000 Limited Liability Company Units (“Units”), at a price of $10 per Unit. The offering was terminated in March 2005. During 2005, the Company completed its initial acquisition stage with the investment of the net proceeds from the public offering of Units. Subsequently, during the reinvestment period (“Reinvestment Period”) (defined as six full years following the year the offering was terminated), the Company has reinvested cash flow in excess of certain amounts required to be distributed to the Other Members and/or utilized its credit facilities to acquire additional equipment.
The Company may continue until December 31, 2022. However, pursuant to the guidelines of the Limited Liability Company Operating Agreement (“Operating Agreement”), the Company commenced liquidation phase activities subsequent to the end of the Reinvestment Period which ended on December 31, 2011. Periodic distributions will be paid at the discretion of the Managing Member.
Results of Operations
As of December 31, 2014 and 2013, there were concentrations (greater than or equal to 10% as a percentage of total equipment cost) of equipment leased to lessees and/or financed for borrowers in certain industries as follows:
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2014 | 2013 | |||||||
Transportation | 34 | % | 30 | % | ||||
Mining | 29 | % | 24 | % | ||||
Retail | 15 | % | 12 | % | ||||
Manufacturing | * | 17 | % |
* | Less than 10% |
As previously mentioned, certain lessees and/or financial borrowers generated significant portions (defined as greater than or equal to 10%) of the Company’s total leasing and lending revenues, excluding gains or losses on disposition of assets, during 2014 and 2013 as follows:
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Lessee | Type of Equipment | Percentage of Total Lease Revenues | ||||||||||
2014 | 2013 | |||||||||||
The Sabine Mining Company | Mining | 24 | % | 20 | % | |||||||
Wal-mart Transportation, LLC | Transportation | 17 | % | 12 | % |
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The percentages are not expected to be comparable in future periods due to anticipated changes in the mix of investments and/or lessees as a result of normal business activities.
It is the Company’s objective to maintain a 100% utilization rate for all equipment purchased in any given year. All equipment transactions are acquired subject to binding lease commitments, so equipment utilization is expected to remain high throughout the reinvestment stage, which ends six years after the end of the Company’s public offering of Units. Initial lease terms of these leases are generally from 36 to 120 months, and as they expire, the Company will attempt to re-lease or sell the equipment; as such, utilization rates may tend to decrease during the liquidation stage of the Company. All of the Company’s equipment on lease was acquired in the years 2005 through 2011. The utilization percentage of existing assets under lease was 95% and 90% as of December 31, 2014 and 2013, respectively.
Cost reimbursements to the Managing Member are based on its costs incurred in performing administrative services for the Company. These costs are allocated to each managed entity based on certain criteria such as total assets, number of investors or contributed capital based upon 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.
The Operating Agreement places an annual limit and a cumulative limit for cost reimbursements to AFS and/or affiliates. Any reimbursable costs incurred by AFS and/or affiliates during the year exceeding the annual and/or cumulative limits cannot be reimbursed in the current year, though such costs may be reimbursable in future years to the extent such amounts may be payable if within the annual and cumulative limits in such future years. As of December 31, 2014, the Company has not exceeded the annual and/or cumulative limitations discussed above. (See Note 7 to the financial statements, Related party transactions, as set forth in Part II, Item 8, Financial Statements and Supplementary Data).
2014 versus 2013
The Company had net income of $4.6 million and $6.8 million for the years ended December 31, 2014 and 2013, respectively. The results for 2014 reflect a decline in both total revenues and total operating expenses when compared to prior year.
Revenues
Total revenues for 2014 decreased by $5.9 million, or 33%, as compared to the prior year. The net decline in total revenues was primarily attributable to decreases in operating lease revenues, gains on sales of lease assets and early termination of notes, other revenue and direct financing lease revenues. Such decreases in revenues were partially offset by a gain on sales or disposition of securities.
The reduction in operating lease revenues totaled $3.6 million and was primarily a result of run-off and dispositions of lease assets. Gain on sales of lease assets and early termination of notes decreased by $1.1 million largely due to a $633 thousand prior year gain on the sale of leased helicopters, and a change in the mix of assets sold. Other revenue declined by $707 thousand due to a decrease in deferred maintenance fees and late fees charged to certain lessees; and, direct financing lease revenues decreased by $510 thousand primarily due to run-off of the portfolio.
Partially offsetting the aforementioned decreases in revenues was a $74 thousand gain on sales or dispositions of securities and warrants. Such gain was solely related to the net exercise of certain warrants during the current year.
Expenses
Total expenses for 2014 decreased by $3.8 million, or 34%, as compared to the prior year. The net reduction in expenses was primarily due to decreases in depreciation expense, impairment losses on equipment, interest expense, cost reimbursements to AFS, asset management fees paid to AFS and the provision for credit losses.
The decrease in depreciation expense totaled $2.2 million and was primarily attributable to run-off and dispositions of lease assets. Impairment losses decreased by $580 thousand primarily due to a lower amount of fair value adjustments relative to impaired materials handling, manufacturing and research equipment based on information and/or pricing quotes from third party remarketing agents. Interest expense was reduced by $323 thousand as a result of a $5.0 million decrease in outstanding borrowings since December 31, 2013.
9
In addition, cost reimbursements to AFS declined by $257 thousand mainly due to lower costs allocated by the Manager based on the Company’s declining asset base and operations. Asset management fees paid to AFS were lower by $249 thousand due to the continued decline in managed assets and related rents; and, the provision for credit losses decreased by $178 thousand largely due to a reduction in delinquent receivables coupled with a year over year increase in recovery of amounts previously reserved.
Other (expense) income, net
The Company recognized other expense, net of $1 thousand for 2014 as compared to other income, net of $103 thousand for 2013. The $104 thousand change was primarily due to the termination of the Company’s interest rate swap contracts which, during 2013, contributed $76 thousand of other income; and, a $28 thousand decline in net gains from foreign currency translation transactions. Such decline in net gains from foreign currency translation was primarily due to run-off and dispositions of foreign-based leases combined with the strength of the U.S. currency.
Capital Resources and Liquidity
At December 31, 2014 and 2013, the Company’s cash and cash equivalents totaled $4.6 million and $8.5 million, respectively. The liquidity of the Company varies, increasing to the extent cash flows from leases and proceeds of asset sales exceed expenses and decreasing as distributions are made to the Other Members and to the extent expenses exceed cash flows from leases and proceeds from asset sales.
The primary source of liquidity for the Company is its cash flow from leasing activities. As initial lease terms expire, the Company re-leases or sells the equipment. The future liquidity beyond the contractual minimum rentals will depend on the Company’s success in remarketing or selling the equipment as it comes off rental.
If inflation in the general economy becomes significant, it may affect the Company in as much as the residual (resale) values and rates on re-leases of the Company’s leased assets may increase as the costs of similar assets increase. However, the Company’s revenues from existing leases would not increase; as such rates are generally fixed for the terms of the leases without adjustment for inflation. In addition, if interest rates increase significantly under such circumstances, 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.
The Company currently believes it has available adequate reserves to meet its immediate cash requirements and those of the next twelve months, but in the event those reserves were found to be inadequate, the Company would likely be in a position to borrow against its current portfolio to meet such requirements. AFS envisions no such requirements for operating purposes.
Cash Flows
The following table sets forth summary cash flow data (in thousands):
![]() | ![]() | ![]() | ||||||
2014 | 2013 | |||||||
Net cash provided by (used in): | ||||||||
Operating activities | $ | 6,228 | $ | 10,107 | ||||
Investing activities | 7,029 | 9,464 | ||||||
Financing activities | (17,088 | ) | (19,728 | ) | ||||
Net decrease in cash and cash equivalents | $ | (3,831 | ) | $ | (157 | ) |
2014 versus 2013
During 2014 and 2013, the Company’s primary sources of liquidity were cash flows from its portfolio of operating and direct financing lease contracts, and its investments in notes receivable. In addition, the Company realized approximately $4.5 million and $7.2 million of proceeds from the sale or disposition of equipment and early termination of certain notes, and the disposition of securities during the respective years ended December 31, 2014 and 2013. During 2013, the Company also utilized borrowings totaling $2.7 million.
The primary uses of cash during 2014 and 2013 were to pay distributions to both the Other Members and the Managing Member, and to pay down debt. Distributions paid totaled $12.1 million and $13.6 million for 2014 and 2013, respectively; while debt repaid totaled $5.0 million and $8.8 million for the same respective years. In addition, cash was also used to pay invoices related to management fees and expenses, and other payables.
10
Receivable funding program
Prior to April 2013, the Company had an $80 million receivables funding program (the “RF Program”) with a receivables financing company that issued commercial paper rated A1 from Standard and Poor’s and P1 from Moody’s Investors Service. Under the RF Program, the lender held liens against the Company’s assets. The lender was in a first position against certain specified assets and was in either a subordinated or shared position against the remaining assets. The RF Program provided for borrowing at a variable interest rate; and, for the Company to enter into interest rate swap agreements with certain hedge counterparties (also rated A1/P1) to mitigate the interest rate risk associated with a variable interest rate note. The RF Program did not contain any credit risk related default contingencies. As of April 4, 2013, all advances under the RF Program were repaid in full and the program was terminated.
The Company previously had interest rate swap agreements that effectively fixed the variable interest rates on its borrowings. Such interest rate swaps were not designated as hedging instruments and were carried at fair value on the balance sheet with unrealized gain/loss included in the statements of income in other (expense) income, net. The interest paid or received on the swap contracts were accrued as interest rates changed. As of April 4, 2013, all such agreements have terminated.
Interest paid on the RF Program from January 2013 through its termination in April 2013 was nominal. The RF Program discussed above included certain financial and non-financial covenants applicable to the Company as borrower. The Company was in compliance with all covenants during the first quarter of 2013 through the date of program termination.
Non-Recourse Long-Term Debt
As of December 31, 2014 and 2013, the Company had non-recourse long-term debt totaling $9.0 million and $14.0 million, respectively. Such non-recourse notes payable do not contain any material financial covenants. The notes are secured by a specific lien granted by the Company to the non-recourse lenders on (and only on) the discounted lease transactions. The lenders have recourse only to the following collateral: the leased equipment; the related lease chattel paper; the lease receivables; and proceeds of the foregoing items.
The Operating Agreement limits aggregate borrowings to 50% of the total cost of equipment. For detailed information on the Company’s debt obligations, see Notes 8 to 9 to the financial statements as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
Distributions
The Company commenced periodic distributions, based on cash flows from operations, beginning with the month of April 2003. The monthly distributions were discontinued in 2012 as the Company entered its liquidation phase. The rates and frequency of periodic distributions paid by the Fund during its liquidation phase are solely at the discretion of the Manager. See Item 5, Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, for additional information regarding the distributions.
Commitments and Contingencies and Off-Balance Sheet Transactions
Commitments and Contingencies
At December 31, 2014, the Company had no commitments to purchase lease assets or fund investments in notes receivable.
Off-Balance Sheet Transactions
None.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The new
11
revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company evaluated the impact of the new standard on its financial statements and has determined that such impact is virtually non-existent as the new revenue guideline does not affect revenues from leases and loans, which comprise the majority of the Company’s revenues.
In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements — Going Concern (subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The new standard provides guidance relative to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. Management is currently evaluating the standard and its operational and related disclosure requirements.
Critical Accounting Policies and Estimates
The policies discussed below are considered by management of the Company to be critical to an understanding of the Company’s financial statements because their application requires significant complex or subjective judgments, decisions, or assessments, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. The Company also states these accounting policies in the notes to the financial statements and in relevant sections in this discussion and analysis. For all of these policies, management cautions that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment.
Use of estimates:
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Such estimates primarily relate to the determination of residual values at the end of the lease term and expected future cash flows used for impairment analysis purposes and determination of the allowances for doubtful accounts and notes receivable.
Equipment on operating leases and related revenue recognition:
Equipment subject to operating leases is stated at cost. Depreciation is being recognized on a straight-line method over the terms of the related leases to the equipment’s estimated residual values. Off-lease equipment is generally not subject to depreciation. The Company depreciates all lease assets, in accordance with guidelines consistent with ASC 840-20-35-3, over the periods of the lease terms contained in each asset’s respective lease contract to the estimated residual value at the end of the lease contract. All lease assets are purchased only concurrent with the execution of a lease commitment by the lessee. Thus, the original depreciation period corresponds with the term of the original lease. Once the term of an original lease contract is completed, the subject property is typically sold to the existing user, re-leased to the existing user, or, when off-lease, is held for sale. Assets which are re-leased continue to be depreciated using the terms of the new lease agreements and the estimated residual values at the end of the new lease terms, adjusted downward as necessary. Assets classified as held-for-sale are carried at the lower of carrying amount, or the fair value less cost to sell (ASC 360-10-35-43).
The Company does not use the equipment held in its portfolio, but holds it solely for lease and ultimate sale. In the course of marketing equipment that has come off-lease, management may determine at some point that re-leasing the assets may provide a superior return for investors and would then execute another lease. Upon entering into a new lease contract, management will estimate the residual value once again and resume depreciation. If, and when, the Company, at any time, determines that depreciation in value may have occurred with respect to an asset held-for-sale, the Company would review the value to determine whether a material reduction in value had occurred and recognize any appropriate impairment. All lease assets, including off-lease assets, are subject to the Company’s quarterly impairment analysis, as described below. Maintenance costs associated with the Fund’s portfolio of leased assets are expensed as incurred. Major additions and betterments are capitalized.
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 on terms from 36 to 120 months. The difference between rent received and rental revenue recognized is recorded as unearned operating lease income on the balance sheet.
12
Operating leases are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management considers the equipment underlying the lease contracts for impairment and periodically reviews the credit worthiness of all operating lessees with payments outstanding less than 90 days. Based upon management’s judgment, the related operating leases may be placed on non-accrual status. Leases placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable. Until such time, revenues are recognized on a cash basis.
Recorded values of the Company’s leased asset portfolio are reviewed each quarter to confirm the reasonableness of established residual values and to determine whether there is indication that an asset impairment might have taken place. The Company uses a variety of sources and considers many factors in evaluating whether the respective book values of its assets are appropriate. In addition, the company may direct a residual value review at any time if it becomes aware of issues regarding the ability of a lessee to continue to make payments on its lease contract. 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 residual value of the asset at the end of the asset’s lease contract and undiscounted future rents from the existing lease contract. 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 marketplace 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 a valuation method using discounted estimated future cash flows, third party appraisals or comparable sales of similar assets as applicable based on asset type) of the asset and its carrying value on the measurement date. Upward adjustments for impairments recognized in prior periods are not made in any circumstances.
Direct financing leases and related revenue recognition:
Income from direct financing lease transactions is reported using the financing method of accounting, in which the Company’s investment in the leased property is reported as a receivable from the lessee to be recovered through future rentals. The interest income portion of each rental payment is calculated so as to generate a constant rate of return on the net receivable outstanding.
Allowances for losses on direct financing leases are typically established based on historical charge off and collection experience and the collectability of specifically identified lessees and billed and unbilled receivables. Direct financing leases are charged off to the allowance as they are deemed uncollectible.
Direct financing leases are generally placed in a non-accrual status (i.e., no revenue is recognized) and deemed impaired when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of all direct finance lessees with payments outstanding less than 90 days. Based upon management’s judgment, the related direct financing leases may be placed on non-accrual status. Leases placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable. Until such time, all payments received are applied only against outstanding principal balances.
Notes receivable, unearned interest income and related revenue recognition:
The Company records all future payments of principal and interest on notes as notes receivable which is then offset by the amount of any related unearned interest income. For financial statement purposes, the Company reports only the net amount of principal due on the balance sheet. The unearned interest is recognized over the term of the note and the income portion of each note payment is calculated so as to generate a constant rate of return on the net balance outstanding. Any fees or costs related to notes receivable are recorded as part of the net investment in notes receivable and amortized over the term of the loan.
Allowances for losses on notes receivable are typically established based on historical charge off and collection experience and the collectability of specifically identified borrowers and billed and unbilled receivables. Notes are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest when due according to the contractual terms of the note agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest when due. If it is determined that a loan is impaired with regard to scheduled payments, the Company will perform an analysis of the note to determine if an impairment valuation reserve is necessary.
13
This analysis considers the estimated cash flows from the note, or the collateral value of the property underlying the note when note repayment is collateral dependent. Any required valuation reserve is charged to earnings when determined; and notes are charged off to the allowance for losses as they are deemed uncollectible.
Notes receivable are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of companies with note payments outstanding less than 90 days. Based upon management’s judgment, notes may be placed in a non-accrual status. Notes placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid receivable is probable. Until such time, all payments received are applied only against outstanding principal balances.
Initial direct costs:
The Company capitalizes initial direct costs (“IDC”) associated with the origination and funding of lease assets and investments in notes receivable. IDC includes both internal costs (e.g., the costs of employees’ activities in connection with successful lease and loan originations) and external broker fees incurred with such originations. The costs are amortized on a lease by lease (or note by note) basis based on actual contract term using a straight-line method for operating leases and the effective interest rate method for direct financing leases and notes receivable. Upon disposal of the underlying lease and loan assets, both the initial direct costs and the associated accumulated amortization are relieved. Costs related to leases or notes receivable that are not consummated are not eligible for capitalization as initial direct costs and are expensed as acquisition expense.
Acquisition Expense:
Acquisition expense represents costs which include, but are not limited to, legal fees and expenses, travel and communication expenses, cost of appraisals, accounting fees and expenses and miscellaneous expenses related to the selection and acquisition of equipment which are reimbursable to the Managing Member under the terms of the Operating Agreement. As the costs are not eligible for capitalization as initial direct costs, such amounts are expensed as incurred.
Asset valuation:
Recorded values of the Company’s leased asset portfolio are periodically reviewed for impairment. 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 a valuation method using discounted estimated future cash flows, third party appraisals or comparable sales of similar assets as applicable based on asset type) of the asset and its carrying value on the measurement date.
Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
See the Report of Independent Registered Public Accounting Firm, Financial Statements and Notes to Financial Statements attached hereto at pages 15 through 38.
14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Members
ATEL Capital Equipment Fund X, LLC
We have audited the accompanying balance sheets of ATEL Capital Equipment Fund X, LLC (the “Company”) as of December 31, 2014 and 2013, and the related statements of income, changes in members’ capital, and cash flows for the years then ended. These financial statements are the responsibility of the Management of the Company’s Managing Member. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ATEL Capital Equipment Fund X, LLC as of December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ Moss Adams LLP
San Francisco, California
March 27, 2015
15
ATEL CAPITAL EQUIPMENT FUND X, LLC
BALANCE SHEETS
DECEMBER 31, 2014 and 2013
(In Thousands)
![]() | ![]() | ![]() | ||||||
2014 | 2013 | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 4,647 | $ | 8,478 | ||||
Accounts receivable, net of allowance for doubtful accounts of $59 at December 31, 2014 and $138 at December 31, 2013 | 565 | 617 | ||||||
Notes receivable, net of unearned interest income of $22 as of December 31, 2014 and $57 as of December 31, 2013 | 332 | 518 | ||||||
Prepaid expenses and other assets | 115 | 115 | ||||||
Investment in securities | 85 | 85 | ||||||
Investments in equipment and leases, net of accumulated depreciation of $39,462 at December 31, 2014 and $49,542 at December 31, 2013 | 24,420 | 33,207 | ||||||
Total assets | $ | 30,164 | $ | 43,020 | ||||
LIABILITIES AND MEMBERS’ CAPITAL | ||||||||
Accounts payable and accrued liabilities: | ||||||||
Managing Member | $ | 499 | $ | 728 | ||||
Accrued distributions to Other Members | 3,842 | 5,589 | ||||||
Other | 501 | 630 | ||||||
Accrued interest payable | 42 | 63 | ||||||
Non-recourse debt | 9,000 | 14,004 | ||||||
Unearned operating lease income | 375 | 550 | ||||||
Total liabilities | 14,259 | 21,564 | ||||||
Commitments and contingencies | ||||||||
Members’ capital: | ||||||||
Managing Member | — | — | ||||||
Other Members | 15,905 | 21,456 | ||||||
Total Members’ capital | 15,905 | 21,456 | ||||||
Total liabilities and Members’ capital | $ | 30,164 | $ | 43,020 |
See accompanying notes.
16
ATEL CAPITAL EQUIPMENT FUND X, LLC
STATEMENTS OF INCOME
FOR THE YEARS ENDED
DECEMBER 31, 2014 and 2013
(In Thousands Except for Units and Per Unit Data)
![]() | ![]() | ![]() | ||||||
2014 | 2013 | |||||||
Revenues: | ||||||||
Leasing and lending activities: | ||||||||
Operating leases | $ | 7,412 | $ | 11,044 | ||||
Direct financing leases | 2,571 | 3,081 | ||||||
Interest on notes receivable | 35 | 54 | ||||||
Gain on sales of lease assets and early termination of notes | 1,829 | 2,935 | ||||||
Gain on sales or dispositions of securities | 74 | — | ||||||
Unrealized gain on net exercise of warrants | — | 12 | ||||||
Other interest | — | 1 | ||||||
Other | 60 | 767 | ||||||
Total revenues | 11,981 | 17,894 | ||||||
Expenses: | ||||||||
Depreciation of operating lease assets | 3,811 | 5,983 | ||||||
Asset management fees to Managing Member | 674 | 923 | ||||||
Cost reimbursements to Managing Member | 1,007 | 1,264 | ||||||
Amortization of initial direct costs | 32 | 59 | ||||||
Interest expense | 683 | 1,006 | ||||||
Impairment losses on equipment | 4 | 584 | ||||||
Railcar maintenance | 562 | 593 | ||||||
(Reversal of) provision for credit losses | (79 | ) | 99 | |||||
Professional fees | 118 | 140 | ||||||
Franchise fees and taxes | 204 | 163 | ||||||
Outside services | 67 | 75 | ||||||
Other | 252 | 265 | ||||||
Total operating expenses | 7,335 | 11,154 | ||||||
Other (expense) income, net | (1 | ) | 103 | |||||
Net income | $ | 4,645 | $ | 6,843 | ||||
Net income: | ||||||||
Managing Member | $ | 765 | $ | 906 | ||||
Other Members | 3,880 | 5,937 | ||||||
$ | 4,645 | $ | 6,843 | |||||
Net income per Limited Liability Company Unit (Other Members) | $ | 0.28 | $ | 0.42 | ||||
Weighted average number of Units outstanding | 13,971,486 | 13,971,486 |
See accompanying notes.
17
ATEL CAPITAL EQUIPMENT FUND X, LLC
STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL
FOR THE YEARS ENDED
DECEMBER 31, 2014 and 2013
(In Thousands Except for Units and Per Unit Data)
![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||
Other Members | Managing Member | Total | ||||||||||||||
Units | Amount | |||||||||||||||
Balance December 31, 2012 | 13,971,486 | $ | 26,696 | $ | — | $ | 26,696 | |||||||||
Distributions to Other Members ($0.80 per Unit) | — | (11,177 | ) | — | (11,177 | ) | ||||||||||
Distributions to Managing Member | — | — | (906 | ) | (906 | ) | ||||||||||
Net income | — | 5,937 | 906 | 6,843 | ||||||||||||
Balance December 31, 2013 | 13,971,486 | 21,456 | — | 21,456 | ||||||||||||
Distributions to Other Members ($0.68 per Unit) | — | (9,431 | ) | — | (9,431 | ) | ||||||||||
Distributions to Managing Member | — | — | (765 | ) | (765 | ) | ||||||||||
Net income | — | 3,880 | 765 | 4,645 | ||||||||||||
Balance December 31, 2014 | 13,971,486 | $ | 15,905 | $ | — | $ | 15,905 |
See accompanying notes.
18
ATEL CAPITAL EQUIPMENT FUND X, LLC
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2014 and 2013
(In Thousands)
![]() | ![]() | ![]() | ||||||
2014 | 2013 | |||||||
Operating activities: | ||||||||
Net income | $ | 4,645 | $ | 6,843 | ||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
Gain on sales of lease assets and early termination of notes | (1,829 | ) | (2,935 | ) | ||||
Gain on sales or dispositions of securities | (74 | ) | — | |||||
Depreciation of operating lease assets | 3,811 | 5,983 | ||||||
Amortization of initial direct costs | 32 | 59 | ||||||
Impairment losses on equipment | 4 | 584 | ||||||
(Reversal of) provision for credit losses | (79 | ) | 99 | |||||
Change in fair value of interest rate swap contracts | — | (76 | ) | |||||
Unrealized gain on net exercise of warrants | — | (12 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 131 | 21 | ||||||
Prepaid expenses and other assets | — | 11 | ||||||
Accounts payable, Managing Member | (88 | ) | (106 | ) | ||||
Accounts payable, other | (129 | ) | (216 | ) | ||||
Accrued interest payable | (21 | ) | (28 | ) | ||||
Deposits due lessees | — | (52 | ) | |||||
Unearned operating lease income | (175 | ) | (68 | ) | ||||
Net cash provided by operating activities | 6,228 | 10,107 | ||||||
Investing activities: | ||||||||
Purchase of securities | — | (8 | ) | |||||
Proceeds from sales of lease assets and early termination of notes | 4,473 | 7,247 | ||||||
Proceeds from sales or dispositions of securities | 74 | — | ||||||
Principal payments received on direct financing leases | 2,296 | 1,956 | ||||||
Principal payments received on notes receivable | 186 | 269 | ||||||
Net cash provided by investing activities | 7,029 | 9,464 | ||||||
Financing activities: | ||||||||
Borrowings under non-recourse debt | — | 2,693 | ||||||
Repayments under non-recourse debt | (5,004 | ) | (5,520 | ) | ||||
Repayments under receivables funding program | — | (3,308 | ) | |||||
Distributions to Other Members | (11,178 | ) | (12,574 | ) | ||||
Distributions to Managing Member | (906 | ) | (1,019 | ) | ||||
Net cash used in financing activities | (17,088 | ) | (19,728 | ) | ||||
Net decrease in cash and cash equivalents | (3,831 | ) | (157 | ) | ||||
Cash and cash equivalents at beginning of year | 8,478 | 8,635 | ||||||
Cash and cash equivalents at end of year | $ | 4,647 | $ | 8,478 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the year for interest | $ | 704 | $ | 1,034 | ||||
Cash paid during the year for taxes | $ | 171 | $ | 120 | ||||
Schedule of non-cash transactions: | ||||||||
Distributions declared and payable to Managing Members at year-end | $ | 312 | $ | 453 | ||||
Distributions declared and payable to Other Members at year-end | $ | 3,842 | $ | 5,589 | ||||
Securities acquired through conversion of warrants | $ | — | $ | 12 |
See accompanying notes.
19
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
1. 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 engaging in the sale of limited liability company investment units and acquiring equipment to engage in equipment leasing, lending and sales activities, primarily in the United States. The Managing Member of the Company is ATEL Financial Services, LLC (“AFS”), a California limited liability company. The Company may continue until December 31, 2022.
The Company conducted a public offering of 15,000,000 Limited Liability Company Units (“Units”), at a price of $10 per Unit. On April 9, 2003, subscriptions for the minimum number of Units (120,000, representing $1.2 million) had been received (excluding subscriptions from Pennsylvania investors) and AFS requested that the subscriptions be released to the Company. On that date, the Company commenced operations in its primary business. As of March 11, 2005, the offering was terminated. As of that date, subscriptions for 14,059,136 Units ($140.6 million) had been received, of which 87,650 Units ($720 thousand) were subsequently rescinded or repurchased (net of distributions paid and allocated syndication costs, as applicable) by the Company through December 31, 2014. As of December 31, 2014, 13,971,486 Units remain issued and outstanding.
The Company’s principal objectives have been to invest in a diversified portfolio of equipment that (i) preserves, protects and returns the Company’s invested capital; (ii) generates regular distributions to the members of cash from operations and cash from sales or refinancing, with any balance remaining after certain minimum distributions to be used to purchase additional equipment during the reinvestment period (“Reinvestment Period”) (defined as six full years following the year the offering was terminated) which ended on December 31, 2011 and (iii) provides additional distributions following the Reinvestment Period and until all equipment has been sold. The Company is governed by the Limited Liability Company Operating Agreement (“Operating Agreement”), as amended. On January 1, 2012, the Company commenced liquidation phase activities pursuant to the guidelines of the Operating Agreement.
Pursuant to the terms of the Operating Agreement, AFS receives compensation and reimbursements for services rendered on behalf of the Company (See Note 7). The Company is required to maintain reasonable cash reserves for working capital, the repurchase of Units and contingencies. The repurchase of Units is solely at the discretion of AFS.
The Company will pay AFS and affiliates of AFS substantial fees which may result in a conflict of interest. The Company will pay substantial fees to AFS and its affiliates before distributions are paid to investors even if the Company does not produce profits. Therefore, the financial position of the Company could change significantly.
2. Summary of significant accounting policies:
Basis of presentation:
The accompanying balance sheets as of December 31, 2014 and 2013, and the related statements of income, changes in members’ capital, and cash flows for the years then ended, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission. Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no significant effect on the reported financial position or results of operations.
Footnote and tabular amounts are presented in thousands, except as to Units and per Unit data.
In preparing the accompanying financial statements, the Company has reviewed, as determined necessary by the Managing Member, events that have occurred after December 31, 2014, up until the issuance of the financial statements. No events were noted which would require disclosure in the footnotes to the financial statements.
Use of estimates:
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Such estimates primarily relate to the determination of residual values at the end of the lease term and expected future cash flows used for impairment analysis purposes and determination of the allowances for doubtful accounts and notes receivable.
20
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies: - (continued)
Cash and cash equivalents:
Cash and cash equivalents include cash in banks and cash equivalent investments such as U.S. Treasury instruments with original and/or purchased maturities of ninety days or less.
Credit risk:
Financial instruments that potentially subject the Company to concentrations of credit risk include cash and cash equivalents, operating and direct financing lease receivables, notes receivable and accounts receivable. The Company places the majority of its cash deposits in noninterest-bearing accounts with financial institutions that have no less than $10 billion in assets. Such deposits are insured up to $250 thousand. The remainder of the Funds’ cash is temporarily invested in U.S. Treasury denominated instruments. The concentration of such deposits and temporary cash investments is not deemed to create a significant risk to the Company. Accounts and notes receivable represent amounts due from lessees or borrowers in various industries, related to equipment on operating and direct financing leases or notes receivable.
Accounts receivable:
Accounts receivable represent the amounts billed under operating and direct financing lease contracts, and notes receivable which are due to the Company. Allowances for doubtful accounts are typically established based on historical charge off and collection experience and the collectability of specifically identified lessees and invoiced amounts. Accounts receivable deemed uncollectible are charged off to the allowance on a specific identification basis. Amounts recovered that were previously written-off are recorded as other income in the period received.
Equipment on operating leases and related revenue recognition:
Equipment subject to operating leases is stated at cost. Depreciation is being recognized on a straight-line method over the terms of the related leases to the equipment’s estimated residual values. Off-lease equipment is generally not subject to depreciation. The Company depreciates all lease assets, in accordance with guidelines consistent with ASC 840-20-35-3, over the periods of the lease terms contained in each asset’s respective lease contract to the estimated residual value at the end of the lease contract. All lease assets are purchased only concurrent with the execution of a lease commitment by the lessee. Thus, the original depreciation period corresponds with the term of the original lease. Once the term of an original lease contract is completed, the subject property is typically sold to the existing user, re-leased to the existing user, or, when off-lease, is held for sale. Assets which are re-leased continue to be depreciated using the terms of the new lease agreements and the estimated residual values at the end of the new lease terms, adjusted downward as necessary. Assets classified as held-for-sale are carried at the lower of carrying amount, or the fair value less cost to sell (ASC 360-10-35-43).
The Company does not use the equipment held in its portfolio, but holds it solely for lease and ultimate sale. In the course of marketing equipment that has come off-lease, management may determine at some point that re-leasing the assets may provide a superior return for investors and would then execute another lease. Upon entering into a new lease contract, management will estimate the residual value once again and resume depreciation. If, and when, the Company, at any time, determines that depreciation in value may have occurred with respect to an asset held-for-sale, the Company would review the value to determine whether a material reduction in value had occurred and recognize any appropriate impairment. All lease assets, including off-lease assets, are subject to the Company’s quarterly impairment analysis, as described below. Maintenance costs associated with the Fund’s portfolio of leased assets are expensed as incurred. Major additions and betterments are capitalized.
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 on terms from 36 to 120 months. The difference between rent received and rental revenue recognized is recorded as unearned operating lease income on the balance sheet.
Operating leases are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management considers the equipment underlying the lease contracts for impairment and periodically reviews the credit worthiness of all operating lessees with payments outstanding less than
21
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies: - (continued)
90 days. Based upon management’s judgment, the related operating leases may be placed on non-accrual status. Leases placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable. Until such time, revenues are recognized on a cash basis.
Recorded values of the Company’s leased asset portfolio are reviewed each quarter to confirm the reasonableness of established residual values and to determine whether there is indication that an asset impairment might have taken place. The Company uses a variety of sources and considers many factors in evaluating whether the respective book values of its assets are appropriate. In addition, the company may direct a residual value review at any time if it becomes aware of issues regarding the ability of a lessee to continue to make payments on its lease contract. 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 residual value of the asset at the end of the asset’s lease contract and undiscounted future rents from the existing lease contract. 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 marketplace 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 a valuation method using discounted estimated future cash flows, third party appraisals or comparable sales of similar assets as applicable based on asset type) of the asset and its carrying value on the measurement date. Upward adjustments for impairments recognized in prior periods are not made in any circumstances.
Direct financing leases and related revenue recognition:
Income from direct financing lease transactions is reported using the financing method of accounting, in which the Company’s investment in the leased property is reported as a receivable from the lessee to be recovered through future rentals. The interest income portion of each rental payment is calculated so as to generate a constant rate of return on the net receivable outstanding.
Allowances for losses on direct financing leases are typically established based on historical charge off and collection experience and the collectability of specifically identified lessees and billed and unbilled receivables. Direct financing leases are charged off to the allowance as they are deemed uncollectible.
Direct financing leases are generally placed in a non-accrual status (i.e., no revenue is recognized) and deemed impaired when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of all direct finance lessees with payments outstanding less than 90 days. Based upon management’s judgment, the related direct financing leases may be placed on non-accrual status. Leases placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable. Until such time, all payments received are applied only against outstanding principal balances.
Notes receivable, unearned interest income and related revenue recognition:
The Company records all future payments of principal and interest on notes as notes receivable which is then offset by the amount of any related unearned interest income. For financial statement purposes, the Company reports only the net amount of principal due on the balance sheet. The unearned interest is recognized over the term of the note and the income portion of each note payment is calculated so as to generate a constant rate of return on the net balance outstanding. Any fees or costs related to notes receivable are recorded as part of the net investment in notes receivable and amortized over the term of the loan.
Allowances for losses on notes receivable are typically established based on historical charge off and collection experience and the collectability of specifically identified borrowers and billed and unbilled receivables. Notes are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest when due according to the contractual terms of the note agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest when due. If it is determined that a loan is impaired with regard to scheduled payments, the Company will perform an analysis of the note to determine if an impairment valuation reserve is necessary.
22
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies: - (continued)
This analysis considers the estimated cash flows from the note, or the collateral value of the property underlying the note when note repayment is collateral dependent. Any required valuation reserve is charged to earnings when determined; and notes are charged off to the allowance for losses as they are deemed uncollectible.
Notes receivable are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of companies with note payments outstanding less than 90 days. Based upon management’s judgment, notes may be placed in a non-accrual status. Notes placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid receivable is probable. Until such time, all payments received are applied only against outstanding principal balances.
Initial direct costs:
The Company capitalizes initial direct costs (“IDC”) associated with the origination and funding of lease assets and investments in notes receivable. IDC includes both internal costs (e.g., the costs of employees’ activities in connection with successful lease and loan originations) and external broker fees incurred with such originations. The costs are amortized on a lease by lease (or note by note) basis based on actual contract term using a straight-line method for operating leases and the effective interest rate method for direct financing leases and notes receivable. Upon disposal of the underlying lease and loan assets, both the initial direct costs and the associated accumulated amortization are relieved. Costs related to leases or notes receivable that are not consummated are not eligible for capitalization as initial direct costs and are expensed as acquisition expense.
Acquisition expense:
Acquisition expense represents costs which include, but are not limited to, legal fees and expenses, travel and communication expenses, cost of appraisals, accounting fees and expenses and miscellaneous expenses related to the selection and acquisition of equipment which are reimbursable to the Managing Member under the terms of the Operating Agreement. As the costs are not eligible for capitalization as initial direct costs, such amounts are expensed as incurred.
Asset valuation:
Recorded values of the Company’s leased asset portfolio are periodically reviewed for impairment. 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 a valuation method using discounted estimated future cash flows, third party appraisals or comparable sales of similar assets as applicable based on asset type) of the asset and its carrying value on the measurement date.
Segment reporting:
The Company is not organized by multiple operating segments for the purpose of making operating decisions or assessing performance. Accordingly, the Company operates in one reportable operating segment in the United States.
The Company’s principal decision makers are the Managing Member’s Chief Executive Officer and its Chief Financial Officer and Chief Operating Officer. The Company believes that its equipment leasing business operates as one reportable segment because: a) the Company measures profit and loss at the equipment portfolio level as a whole; b) the principal decision makers do not review information based on any operating segment other than the equipment leasing transaction portfolio; c) the Company does not maintain discrete financial information on any specific segment other than its equipment financing operations; d) the Company has not chosen to organize its business around different products and services other than equipment lease financing; and e) the Company has not chosen to organize its business around geographic areas.
23
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies: - (continued)
The primary geographic regions in which the Company seeks leasing and financing opportunities are North America and Europe. The table below summarizes geographic information relating to the sources, by nation, of the total net revenues for the years ended December 31, 2014 and 2013, and long-lived tangible assets as of December 31, 2014 and 2013 (dollars in thousands):
![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||
For The Year Ended December 31, | ||||||||||||||||
2014 | % of Total | 2013 | % of Total | |||||||||||||
Revenue | ||||||||||||||||
United States | $ | 11,907 | 99 | % | $ | 16,780 | 94 | % | ||||||||
United Kingdom | 74 | 1 | % | 390 | 2 | % | ||||||||||
Canada | — | 0 | % | 724 | 4 | % | ||||||||||
Total International | 74 | 1 | % | 1,114 | 6 | % | ||||||||||
Total | $ | 11,981 | 100 | % | $ | 17,894 | 100 | % |
![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||
As of December 31, | ||||||||||||||||
2014 | % of Total | 2013 | % of Total | |||||||||||||
Long-lived assets | ||||||||||||||||
United States | $ | 24,420 | 100 | % | $ | 31,509 | 95 | % | ||||||||
Canada | — | 0 | % | 1,675 | 5 | % | ||||||||||
United Kingdom | — | 0 | % | 23 | 0 | % | ||||||||||
Total International | — | 0 | % | 1,698 | 5 | % | ||||||||||
Total | $ | 24,420 | 100 | % | $ | 33,207 | 100 | % |
Derivative financial instruments:
The Company records all derivatives as either assets or liabilities on the balance sheet, measures those instruments at fair value and recognizes the offsetting gains or losses as adjustments to net income (loss). Credit exposure from derivative financial instruments that are assets arises from the risk of a counterparty default on the derivative contract. The amount of the loss created by the default is the replacement cost or current positive fair value of the defaulted contract.
Foreign currency transactions:
Foreign currency transaction gains and losses are reported in the results of operations as “other income” or “other expense” in the period in which they occur. Currently, the Company does not use derivative instruments to hedge its economic exposure with respect to assets, liabilities and firm commitments as the foreign currency transactions risks to date have not been significant.
Investment in securities:
From time to time, the Company may purchase securities of its borrowers or receive warrants to purchase securities in connection with its lending arrangements.
Purchased securities
Purchased securities are generally not registered for public sale and are carried at cost. Such securities are adjusted to fair value if the fair value is less than the carrying value and such impairment is deemed by the Managing Member to be other than temporary. Factors considered by the Managing Member in determining fair value include, but are not limited to, available financial information, the issuer’s ability to meet its current obligations and indications of the issuer’s subsequent ability to raise capital. Based upon the Company’s review of its portfolio, no fair value adjustment was deemed necessary for both 2014 and 2013. Likewise, there were no investment securities sold or disposed of during 2014 and 2013.
24
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies: - (continued)
Warrants
Warrants owned by the Company are not registered for public sale, but are considered derivatives and are reflected at an estimated fair value on the balance sheet as determined by the Managing Member. At December 31, 2014 and 2013, the Managing Member estimated the fair value of the warrants to be nominal in amount. During 2014, the Company realized gains of $74 thousand on the net exercise of warrants. There were no such gains realized during 2013. However, during 2013, the Company recorded unrealized gains totaling $12 thousand relative to the conversion of warrants associated with shares of a venture company. There were no unrealized gains recorded during 2014.
Unearned operating lease income:
The Company records prepayments on operating leases as a liability under the caption of unearned operating lease income. The liability is recorded when prepayments are received and recognized as operating lease revenue over the period to which the prepayments relate using a straight-line method.
Income taxes:
The Company is treated as a partnership for federal income tax purposes. Pursuant to the provisions of Section 701 of the Internal Revenue Code, a partnership is not subject to federal income taxes. Accordingly, the Company has provided current franchise income taxes for only those states which levy income taxes on partnerships. For the years ended December 31, 2014 and 2013, the related provision for state income taxes was approximately $204 thousand and $163 thousand, respectively. The Company does not have any entity level uncertain tax positions. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions and is generally subject to examination by U.S. federal (or state and local) income tax authorities for three years from the filing of a tax return.
The tax bases of the Company’s net assets and liabilities vary from the amounts presented in these financial statements at December 31, 2014 and 2013 (in thousands):
![]() | ![]() | ![]() | ||||||
2014 | 2013 | |||||||
Financial statement basis of net assets | $ | 15,905 | $ | 21,456 | ||||
Tax basis of net assets (unaudited) | 18,842 | 21,311 | ||||||
Difference | $ | (2,937 | ) | $ | 145 |
The primary differences between the tax bases of net assets and the amounts recorded in the financial statements are the result of differences in accounting for syndication costs and differences between the depreciation methods used in the financial statements and the Company’s tax returns.
The following reconciles the net income reported in these financial statements to the income reported on the Company’s federal tax return (unaudited) for each of the years ended December 31, 2014 and 2013 (in thousands):
![]() | ![]() | ![]() | ||||||
2014 | 2013 | |||||||
Net income per financial statements | $ | 4,645 | $ | 6,843 | ||||
Tax adjustments (unaudited): | ||||||||
Adjustment to depreciation expense | 568 | 155 | ||||||
Provision for losses and doubtful accounts | (78 | ) | 111 | |||||
Adjustments to revenues/other expenses | �� | 2,126 | 2,341 | |||||
Adjustments to gain on sales of assets | 2,352 | 2,814 | ||||||
Other | 2 | — | ||||||
Income per federal tax return (unaudited) | $ | 9,615 | $ | 12,264 |
25
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies: - (continued)
Other (expense) income, net:
Other (expense) income, net consists of fair value changes on interest rate swap contracts and gains and losses on foreign exchange transactions. The table below details the Company’s other (expense) income, net for the years ended December 31, 2014 and 2013 (in thousands):
![]() | ![]() | ![]() | ||||||
2014 | 2013 | |||||||
Change in fair value of interest rate swap contracts | $ | — | $ | 76 | ||||
Foreign currency (loss) gain | (1 | ) | 27 | |||||
Total | $ | (1 | ) | $ | 103 |
Per Unit data:
Net income and distributions per Unit are based upon the weighted average number of Other Members’ Units outstanding during the year.
Recent accounting pronouncements:
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company evaluated the impact of the new standard on its financial statements and has determined that such impact is virtually non-existent as the new revenue guideline does not affect revenues from leases and loans, which comprise the majority of the Company’s revenues.
In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements — Going Concern (subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The new standard provides guidance relative to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. Management is currently evaluating the standard and its operational and related disclosure requirements.
3. Concentration of credit risk and major customers:
The Company leases equipment to lessees and provides debt financing to borrowers in diversified industries. Leases and notes receivable are subject to AFS’s credit committee review. The leases and notes receivable provide for the return of the equipment to the Company upon default.
As of December 31, 2014 and 2013, there were concentrations (greater than or equal to 10% as a percentage of total equipment cost) of equipment leased to lessees and/or financed for borrowers in certain industries as follows:
![]() | ![]() | ![]() | ||||||
2014 | 2013 | |||||||
Transportation | 34 | % | 30 | % | ||||
Mining | 29 | % | 24 | % | ||||
Retail | 15 | % | 12 | % | ||||
Manufacturing | * | 17 | % |
* | Less than 10% |
26
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
3. Concentration of credit risk and major customers: - (continued)
During 2014 and 2013, certain lessees and/or financial borrowers generated significant portions (defined as greater than or equal to 10%) of the Company’s total leasing and lending revenues, excluding gains or losses on disposition of assets, as follows:
![]() | ![]() | ![]() | ![]() | |||||||||
Type of Equipment | Percentage of Total Lease Revenues | |||||||||||
Lessee | 2014 | 2013 | ||||||||||
The Sabine Mining Company | Mining | 24 | % | 20 | % | |||||||
Wal-mart Transportation, LLC | Transportation | 17 | % | 12 | % |
4. Notes receivable, net:
The Company has had various notes receivable from borrowers who have financed the purchase of equipment through the Company. The notes were secured by the equipment financed. As of December 31, 2014, only one note receivable remained unsettled with a net balance of $332 thousand outstanding. Such note bears an annual interest rate of 8.51% and matures in 2016.
The Company had neither notes in non-accrual status nor impaired notes at both December 31, 2014 and 2013.
During the first quarter of 2013, the Company realized a $27 thousand gain on the full settlement of an impaired note prior to its scheduled maturity. Such note was originally deemed impaired during the second quarter of 2012, for which the Company recorded a fair value adjustment of $27 thousand to reduce the cost basis of the impaired note. There have been no additional early terminations of notes receivable subsequent to the first quarter of 2013.
As of December 31, 2014, the minimum future payments receivable are as follows (in thousands):
![]() | ![]() | |||
Year ending December 31, 2015 | $ | 166 | ||
2016 | 188 | |||
354 | ||||
Less: portion representing unearned interest income | (22 | ) | ||
Notes receivable, net | $ | 332 |
The Company recorded $1 thousand of IDC amortization expense related to notes receivable during 2013. Such expense was nominal during 2014.
27
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
5. Allowance for credit losses:
The Company’s allowance for credit losses are as follows (in thousands):
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Accounts Receivable Allowance for Doubtful Accounts | Valuation Adjustments on Financing Receivables | Total Allowance for Credit Losses | ||||||||||||||||||||||
Notes Receivable | Finance Leases | Operating Leases | Notes Receivable | Finance Leases | ||||||||||||||||||||
Balance December 31, 2012 | $ | — | $ | 10 | $ | 17 | $ | 39 | $ | — | $ | 66 | ||||||||||||
Provision (reversal of provision) | — | — | 111 | (12 | ) | — | 99 | |||||||||||||||||
Asset disposal | — | — | — | (27 | ) | — | (27 | ) | ||||||||||||||||
Balance December 31, 2013 | — | 10 | 128 | — | — | 138 | ||||||||||||||||||
Provision (reversal of provision) | — | 3 | (82 | ) | — | — | (79 | ) | ||||||||||||||||
Balance December 31, 2014 | $ | — | $ | 13 | $ | 46 | $ | — | $ | — | $ | 59 |
Accounts Receivable
Accounts receivable represent the amounts billed under operating and direct financing lease contracts, and notes receivable which are currently due to the Company.
Allowances for doubtful accounts are typically established based upon their aging and historical charge off and collection experience and the creditworthiness of specifically identified lessees and borrowers, and invoiced amounts. Accounts receivable deemed uncollectible are generally charged off against the allowance on a specific identification basis. Recoveries of amounts that were previously written-off are recorded as other income in the period received.
Accounts receivable are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of companies with lease or note payments outstanding less than 90 days. Based upon management’s judgment, such leases or notes may be placed in non-accrual status. Leases or notes placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid receivable is probable. Until such time, revenues on operating leases are recognized on a cash basis. All payments received on amounts billed under direct financing leases contracts and notes receivable are applied only against outstanding principal balances.
Financing Receivables
In addition to the allowance established for delinquent accounts receivable, the total allowance related solely to financing receivables also includes anticipated impairment charges on notes receivable and direct financing leases.
Notes are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest when due according to the contractual terms of the note agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest when due. If it is determined that a loan is impaired with regard to scheduled payments, the Company will perform an analysis of the note to determine if an impairment valuation reserve is necessary. This analysis considers the estimated cash flows from the note, or the collateral value of the property underlying the note when note repayment is collateral dependent. Any required valuation reserve is charged to earnings when determined; and notes are charged off to the allowance as they are deemed uncollectible.
The asset underlying a direct financing lease contract is considered impaired if the estimated undiscounted future cash flows of the asset are less than its 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.
28
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
5. Allowance for credit losses: - (continued)
As of December 31, 2014 and 2013, the Company’s allowance for credit losses (related solely to financing receivables) and its recorded investment in financing receivables were as follows (in thousands):
![]() | ![]() | ![]() | ![]() | |||||||||
December 31, 2014 | Notes Receivable | Finance Leases | Total | |||||||||
Allowance for credit losses: | ||||||||||||
Ending balance | $ | — | $ | — | $ | — | ||||||
Ending balance: individually evaluated for impairment | $ | — | $ | — | $ | — | ||||||
Ending balance: collectively evaluated for impairment | $ | — | $ | — | $ | — | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | ||||||
Financing receivables: | ||||||||||||
Ending balance | $ | 332 | $ | 9,030 1 | $ | 9,362 | ||||||
Ending balance: individually evaluated for impairment | $ | 332 | $ | 9,030 | $ | 9,362 | ||||||
Ending balance: collectively evaluated for impairment | $ | — | $ | — | $ | — | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — |
1 | Includes $5 of unamortized initial direct costs. |
![]() | ![]() | ![]() | ![]() | |||||||||
December 31, 2013 | Notes Receivable | Finance Leases | Total | |||||||||
Allowance for credit losses: | ||||||||||||
Ending balance | $ | — | $ | — | $ | — | ||||||
Ending balance: individually evaluated for impairment | $ | — | $ | — | $ | — | ||||||
Ending balance: collectively evaluated for impairment | $ | — | $ | — | $ | — | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | ||||||
Financing receivables: | ||||||||||||
Ending balance | $ | 518 | $ | 11,2502 | $ | 11,768 | ||||||
Ending balance: individually evaluated for impairment | $ | 518 | $ | 11,250 | $ | 11,768 | ||||||
Ending balance: collectively evaluated for impairment | $ | — | $ | — | $ | — | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — |
2 | Includes $13 of unamortized initial direct costs. |
The Company evaluates the credit quality of its financing receivables on a scale equivalent to the following quality indicators related to corporate risk profiles:
Pass – Any account whose lessee/debtor, co-lessee/debtor or any guarantor has a credit rating on publicly traded or privately placed debt issues as rated by Moody’s or S&P for either Senior Unsecured debt, Long Term Issuer rating or Issuer rating that are in the tiers of ratings generally recognized by the investment community as constituting an Investment Grade credit rating; or, has been determined by the Manager to be an Investment Grade Equivalent or High Quality Corporate Credit per its Credit Policy or has a Not Rated internal rating by the Manager and the account is not considered by the Chief Credit Officer of the manager to fall into one of the three risk profiles below.
Special Mention – Any traditional corporate type account with potential weaknesses (e.g. large net losses or major industry downturns) or, any growth capital account that has less than three months of cash as of the end of the calendar quarter to fund their continuing operations. These accounts deserve management’s close attention. If left uncorrected, those potential weaknesses may result in deterioration of the Fund’s receivable at some future date.
29
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
5. Allowance for credit losses: - (continued)
Substandard – Any account that is inadequately protected by the current worth and paying capacity of the borrower or of the collateral pledged, if any. Accounts that are so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Fund will sustain some loss as the likelihood of fully collecting all receivables may be questionable if the deficiencies are not corrected. Such accounts are on the Manager’s Credit Watch List.
Doubtful – Any account where the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Accordingly, an account that is so classified is on the Manager’s Credit Watch List, and has been declared in default and the Manager has repossessed, or is attempting to repossess, the equipment it financed. This category includes impaired notes and leases as applicable.
At December 31, 2014 and 2013, the Company’s financing receivables by credit quality indicator and by class of financing receivables are as follows (excludes initial direct costs) (in thousands):
![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||
Notes Receivable | Finance Leases | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Pass | $ | 332 | $ | 518 | $ | 9,025 | $ | 11,237 | ||||||||
Special mention | — | — | — | — | ||||||||||||
Substandard | — | — | — | — | ||||||||||||
Doubtful | — | — | — | — | ||||||||||||
Total | $ | 332 | $ | 518 | $ | 9,025 | $ | 11,237 |
At December 31, 2014 and 2013, the investment in financing receivables is aged as follows (in thousands):
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | |||||||||||||||||||||
December 31, 2014 | 31 – 60 Days Past Due | 61 – 90 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Financing Receivables | Recorded Investment > 90 Days and Accruing | |||||||||||||||||||||
Notes receivable | $ | — | $ | — | $ | — | $ | — | $ | 332 | $ | 332 | $ | — | ||||||||||||||
Finance leases | — | — | 3 | 3 | 9,022 | 9,025 | 3 | |||||||||||||||||||||
Total | $ | — | $ | — | $ | 3 | $ | 3 | $ | 9,354 | $ | 9,357 | $ | 3 |
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | |||||||||||||||||||||
December 31, 2013 | 31 – 60 Days Past Due | 61 – 90 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Financing Receivables | Recorded Investment > 90 Days and Accruing | |||||||||||||||||||||
Notes receivable | $ | — | $ | — | $ | — | $ | — | $ | 518 | $ | 518 | $ | — | ||||||||||||||
Finance leases | — | — | 22 | 22 | 11,215 | 11,237 | 22 | |||||||||||||||||||||
Total | $ | — | $ | — | $ | 22 | $ | 22 | $ | 11,733 | $ | 11,755 | $ | 22 |
No financing receivables were impaired or in non-accrual status as of December 31, 2014 and 2013.
As of December 31, 2014 and 2013, certain investments in financing receivables with related accounts receivable past due more than 90 days were still on an accrual basis based on management’s assessment of the collectability of such receivables. However, these accounts receivable were fully reserved and included in the allowance for doubtful accounts presented above.
30
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
6. Investment in equipment and leases, net:
The Company’s investment in leases consists of the following (in thousands):
![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||
Balance December 31, 2013 | Reclassifications, Additions/ Dispositions and Impairment Losses | Depreciation/ Amortization Expense or Amortization of Leases | Balance December 31, 2014 | |||||||||||||
Net investment in operating leases | $ | 20,338 | $ | (2,448 | ) | $ | (3,811 | ) | $ | 14,079 | ||||||
Net investment in direct financing leases | 11,237 | 84 | (2,296 | ) | 9,025 | |||||||||||
Assets held for sale or lease, net | 1,579 | (284 | ) | — | 1,295 | |||||||||||
Initial direct costs, net of accumulated amortization of $190 at December 31, 2014 and $236 at December 31, 2013 | 53 | — | (32 | ) | 21 | |||||||||||
Total | $ | 33,207 | $ | (2,648 | ) | $ | (6,139 | ) | $ | 24,420 |
Impairment of investments in leases and assets held for sale or lease:
Recorded values of the Company’s leased asset portfolio are reviewed each quarter to confirm the reasonableness of established residual values and to determine whether there is indication that an asset impairment might have taken place. The Company uses a variety of sources and considers many factors in evaluating whether the respective book values of its assets are appropriate. In addition, the company may direct a residual value review at any time if it becomes aware of issues regarding the ability of a lessee to continue to make payments on its lease contract. 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 residual value of the asset at the end of the asset’s lease contract and undiscounted future rents from the existing lease contract. 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 marketplace 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 a valuation method using discounted estimated future cash flows, third party appraisals or comparable sales of similar assets as applicable based on asset type) of the asset and its carrying value on the measurement date. Upward adjustments for impairments recognized in prior periods are not made in any circumstances.
As a result of these reviews, the Company recorded $4 thousand and $584 thousand of fair value adjustments to reduce the cost basis of certain impaired lease and off-lease materials handling, manufacturing and research equipment during 2014 and 2013, respectively.
The Company utilizes a straight line depreciation method for equipment in all of the categories currently in its portfolio of operating lease transactions. Depreciation expense on the Company’s equipment was approximately $3.8 million and $6.0 million for 2014 and 2013, respectively. IDC amortization expense related to operating leases and direct financing leases totaled $32 thousand and $58 thousand for the respective years ended December 31, 2014 and 2013.
All of the leased property was acquired in the years beginning with 2005 through 2011.
As of December 31, 2014 and 2013, there were no lease contracts placed in non-accrual status. As of the same dates, the Company has certain other leases that have related accounts receivable aged 90 days or more that have not been placed on non-accrual status. In accordance with Company policy, such receivables are fully reserved. Management continues to closely monitor these leases, and all other lease contracts, for any actual change in collectability status and indication of necessary valuation adjustments.
31
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
6. Investment in equipment and leases, net: - (continued)
Operating leases:
Property on operating leases consists of the following (in thousands):
![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||
Balance December 31, 2013 | Additions | Reclassifications or Dispositions | Balance December 31, 2014 | |||||||||||||
Transportation, rail | $ | 25,050 | $ | — | $ | 160 | $ | 25,210 | ||||||||
Transportation, other | 20,374 | — | (5,392 | ) | 14,982 | |||||||||||
Materials handling | 5,778 | — | (2,338 | ) | 3,440 | |||||||||||
Aircraft | 3,026 | — | — | 3,026 | ||||||||||||
Petro/natural gas | 2,446 | — | — | 2,446 | ||||||||||||
Construction | 2,242 | — | (850 | ) | 1,392 | |||||||||||
Manufacturing | 5,756 | — | (5,132 | ) | 624 | |||||||||||
Agriculture | 350 | — | — | 350 | ||||||||||||
Research | 207 | — | (207 | ) | — | |||||||||||
Logging & lumber | 248 | — | (248 | ) | — | |||||||||||
Data processing | 113 | — | (113 | ) | — | |||||||||||
65,590 | — | (14,120 | ) | 51,470 | ||||||||||||
Less accumulated depreciation | (45,252 | ) | (3,811 | ) | 11,672 | (37,391 | ) | |||||||||
Total | $ | 20,338 | $ | (3,811 | ) | $ | (2,448 | ) | $ | 14,079 |
The average estimated residual value for assets on operating leases was 23% and 22% of the assets’ original cost at December 31, 2014 and 2013, respectively. There were no operating leases placed in non-accrual status as of December 31, 2014 and 2013.
Direct financing leases:
As of December 31, 2014 and 2013, investment in direct financing leases generally consists of materials handling, mining, construction and agriculture equipment. The components of the Company’s investment in direct financing leases as of December 31, 2014 and 2013 are as follows (in thousands):
![]() | ![]() | ![]() | ||||||
2014 | 2013 | |||||||
Total minimum lease payments receivable | $ | 8,465 | $ | 13,064 | ||||
Estimated residual values of leased equipment (unguaranteed) | 3,576 | 3,590 | ||||||
Investment in direct financing leases | 12,041 | 16,654 | ||||||
Less unearned income | (3,016 | ) | (5,417 | ) | ||||
Net investment in direct financing leases | $ | 9,025 | $ | 11,237 |
There were no direct financing leases placed in non-accrual status as of December 31, 2014 and 2013.
At December 31, 2014, the aggregate amounts of future minimum lease payments receivable are as follows (in thousands):
![]() | ![]() | ![]() | ![]() | |||||||||
Operating Leases | Direct Financing Leases | Total | ||||||||||
Year ending December 31, 2015 | $ | 2,786 | $ | 4,642 | $ | 7,428 | ||||||
2016 | 1,041 | 3,797 | 4,838 | |||||||||
2017 | 734 | 26 | 760 | |||||||||
2018 | 272 | — | 272 | |||||||||
2019 | 88 | — | 88 | |||||||||
Thereafter | 7 | — | 7 | |||||||||
$ | 4,928 | $ | 8,465 | $ | 13,393 |
32
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
6. Investment in equipment and leases, net: - (continued)
The useful lives for each category of leases is reviewed at a minimum of once per quarter. As of December 31, 2014 and 2013, the respective useful lives of each category of lease assets in the Company’s portfolio are as follows (in years):
![]() | ![]() | |||
Equipment category | Useful Life | |||
Transportation, rail | 35 – 40 | |||
Mining | 30 – 40 | |||
Aircraft | 20 – 30 | |||
Manufacturing | 10 – 15 | |||
Petro/natural gas | 10 – 15 | |||
Agriculture | 7 – 10 | |||
Construction | 7 – 10 | |||
Logging & lumber | 7 – 10 | |||
Materials handling | 7 – 10 | |||
Transportation, other | 7 – 10 | |||
Research | 5 – 7 | |||
Data processing | 3 – 5 |
7. Related party transactions:
The terms of the 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 Operating Agreement allows for the reimbursement of costs incurred by AFS in providing administrative services to the Company. Administrative services provided include Company accounting, finance/treasury, 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. The Company will be liable for certain future costs to be incurred by AFS to manage the administrative services provided to the Company.
Each of ATEL Leasing Corporation (“ALC”) and AFS is a wholly-owned subsidiary of ATEL Capital Group and performs services for the Company. Acquisition services, equipment management, lease administration and asset disposition services are performed by ALC; investor relations, communications services and general administrative services for the Company are performed by AFS.
Cost reimbursements to the Managing Member are based on its costs incurred in performing administrative services for the Company. These costs are allocated to each managed entity based on certain criteria such as total assets, number of investors or contributed capital based upon the type of cost incurred.
During the years ended December 31, 2014 and 2013, AFS and/or affiliates earned fees and reimbursements, pursuant to the Operating Agreement as follows (in thousands):
![]() | ![]() | ![]() | ||||||
2014 | 2013 | |||||||
Costs reimbursed to Managing Member and/or affiliates | $ | 1,007 | $ | 1,264 | ||||
Asset management fees to Managing Member and/or affiliates | 674 | 923 | ||||||
$ | 1,681 | $ | 2,187 |
The Fund’s Operating Agreement places an annual and cumulative limit for cost reimbursements to AFS and/or its affiliates. Any reimbursable costs incurred by AFS and/or affiliates during the year exceeding the annual and/or cumulative limits cannot be reimbursed in the current year, though such costs may be reimbursable in future years to the extent such amounts may be payable if within the annual and cumulative limits in such future years. The Fund is a finite life and self-liquidating entity, and AFS and its affiliates have no recourse against the Fund for the amount of any unpaid excess reimbursable administrative expenses. The Fund will continue to require administrative services from AFS and its affiliates through the end of its term, and will therefore continue to incur reimbursable administrative expenses in each year. The Fund has determined that payment of any amounts in excess of the annual and cumulative
33
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
7. Related party transactions: - (continued)
limits is not probable, and the date any portion of such amount may be paid, if ever, is uncertain. When the Fund completes its liquidation stage and terminates, any unpaid amount will expire unpaid, with no claim by AFS or its affiliates against any liquidation proceeds or any party for the unpaid balance. Accordingly, the Company has recorded neither an obligation nor an expense for such contingent reimbursement of the approximate $144 thousand excess reimbursable administrative expenses at December 31, 2013. There was no such excess at December 31, 2014.
8. Non-recourse debt:
At December 31, 2014, non-recourse debt consists of notes payable to financial institutions. The notes are due in monthly installments. Interest on the notes is at fixed rates ranging from 1.41% to 6.66%. The notes are secured by assignments of lease payments and pledges of assets. At December 31, 2014, gross operating lease rentals and future payments on direct financing leases totaled approximately $9.2 million over the remaining lease terms; and the carrying value of the pledged assets is $11.6 million. The notes mature at various dates from 2015 through 2018.
The non-recourse debt does not contain any material financial covenants. The debt is secured by a specific lien granted by the Company to the non-recourse lenders on (and only on) the discounted lease transactions. The lenders have recourse only to the following collateral: the leased equipment; the related lease chattel paper; the lease receivables; and proceeds of the foregoing items. The non-recourse obligation is payable solely out of the respective specific security and the Company does not guarantee (nor is the Company otherwise contractually responsible for) the payment of the non-recourse debt as a general obligation or liability of the Company. Although the Company does not have any direct or general liability in connection with the non-recourse debt apart from the security granted, the Company is directly and generally liable and responsible for certain representations, warranties, and covenants made to the lenders, such as warranties as to genuineness of the transaction parties’ signatures, as to the genuineness of the respective lease chattel paper or the transaction as a whole, or as to the Company’s good title to or perfected interest in the secured collateral, as well as similar representations, warranties and covenants typically provided by non-recourse borrowers and customary in the equipment finance industry, and are viewed by such industry as being consistent with non-recourse discount financing obligations. Accordingly, as there are no financial covenants or ratios imposed on the Company in connection with the non-recourse debt, the Company has determined that there are no material covenants with respect to the non-recourse debt that warrant footnote disclosure.
Future minimum payments of non-recourse debt are as follows (in thousands):
![]() | ![]() | ![]() | ![]() | |||||||||
Principal | Interest | Total | ||||||||||
Year ending December 31, 2015 | $ | 4,508 | $ | 424 | $ | 4,932 | ||||||
2016 | 3,984 | 142 | 4,126 | |||||||||
2017 | 425 | 5 | 430 | |||||||||
2018 | 83 | — | 83 | |||||||||
$ | 9,000 | $ | 571 | $ | 9,571 |
9. Receivables funding program:
Prior to April 2013, the Company had an $80 million receivables funding program (the “RF Program”) with a receivables financing company that issued commercial paper rated A1 from Standard and Poor’s and P1 from Moody’s Investors Service. Under the RF Program, the lender held liens against the Company’s assets. The lender was in a first position against certain specified assets and was in either a subordinated or shared position against the remaining assets. The RF Program provided for borrowing at a variable interest rate; and, for the Company to enter into interest rate swap agreements with certain hedge counterparties (also rated A1/P1) to mitigate the interest rate risk associated with a variable interest rate note. The RF Program did not contain any credit risk related default contingencies. As of April 4, 2013, all advances under the RF Program were repaid in full and the program was terminated.
The Company previously had interest rate swap agreements that effectively fixed the variable interest rates on its borrowings. Such interest rate swaps were not designated as hedging instruments and were carried at fair value on the balance sheet with unrealized gain/loss included in the statements of income in other (expense) income, net. The interest paid or received on the swap contracts were accrued as interest rates changed. As of April 4, 2013, all such agreements have terminated.
34
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
9. Receivables funding program: - (continued)
Interest paid on the RF Program from January 2013 through its termination in April 2013 was nominal. The RF Program discussed above included certain financial and non-financial covenants applicable to the Company as borrower. The Company was in compliance with all covenants during the first quarter of 2013 through the date of program termination.
10. Commitments:
At December 31, 2014, the Company had no commitments to purchase lease assets or fund investments in notes receivable.
11. 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.
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.
12. Members’ capital:
Units issued and outstanding were 13,971,486 at both December 31, 2014 and 2013. The Company was authorized to issue up to 15,000,000 Units in addition to the Units issued to the initial members (50 Units). The Company ceased offering Units on March 11, 2005.
The Company has the right, exercisable in the Manager’s discretion, but not the obligation, to repurchase Units of a Unitholder who ceases to be a U.S. Citizen, for a price equal to 100% of the holder’s capital account. The Company is otherwise permitted, but not required, to repurchase Units upon a holder’s request. The repurchase of Fund Units is made in accordance with Section 13 of the Amended and Restated Limited Liability Company Operating Agreement. The repurchase would be at the discretion of the Manager on terms it determines to be appropriate under given circumstances, in the event that the Manager deems such repurchase to be in the best interest of the Company; provided, the Company is never required to repurchase any Units. Upon the repurchase of any Units by the Fund, the tendered Units are cancelled. Units repurchased in prior periods were repurchased at amounts representing the original investment less cumulative distributions made to the Unitholder with respect to the Units. All Units repurchased during a quarter are deemed to be repurchased effective the last day of the preceding quarter, and are not deemed to be outstanding during, or entitled to allocations of net income, net loss or distributions for the quarter in which such repurchase occurs.
As defined in the Operating Agreement, the Company’s Net Income, Net Losses, and Distributions are to be allocated 92.5% to the Members and 7.5% to AFS. In accordance with the terms of the Operating Agreement, additional allocations of income were made to AFS in 2014 and 2013. The amounts allocated were determined to bring AFS’s ending capital account balance to zero at the end of each year.
Distributions to the Other Members were as follows (in thousands, except as to Units and per Unit data):
![]() | ![]() | ![]() | ||||||
2014 | 2013 | |||||||
Distributions declared | $ | 9,431 | $ | 11,177 | ||||
Weighted average number of Units outstanding | 13,971,486 | 13,971,486 | ||||||
Weighted average distributions per Unit | $ | 0.68 | $ | 0.80 |
35
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
13. Fair value measurements:
Fair value measurements and disclosures are based on a fair value hierarchy as determined by significant inputs used to measure fair value. The three levels of inputs within the fair value hierarchy are defined as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, generally on a national exchange.
Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market.
Level 3 – Valuation is modeled using significant inputs that are unobservable in the market. These unobservable inputs reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability.
The Company had no assets or liabilities requiring measurement at fair value on a recurring basis as of December 31, 2014 and 2013. However, the Company recorded non-recurring adjustments to reflect the fair values of certain impaired lease and off-lease assets during 2014 and 2013. As of December 31, 2014, assets impaired during 2014 had been disposed. Amounts at December 31, 2013 reflect the fair value of the then existing impaired assets.
The Company’s valuation policy is determined by members of the Asset Management, Credit and Accounting departments. Whenever possible, the policy is to obtain quoted market prices in active markets to estimate fair values for recognition and disclosure purposes. Where quoted market prices in active markets are not available, fair values are estimated using discounted cash flow analyses, broker quotes, information from third party remarketing agents, third party appraisals of collateral and/or other valuation techniques. These techniques are significantly affected by certain of the Company’s assumptions, including discount rates and estimates of future cash flows. Potential taxes and other transaction costs are not considered in estimating fair values. As the Company is responsible for determining fair value, an analysis is performed on prices obtained from third parties. Such analysis is performed by asset management and credit department personnel who are familiar with the Company’s investments in equipment, notes receivable and equity securities of venture companies. The analysis may include a periodic review of price fluctuations and validation of numbers obtained from a specific third party by reference to multiple representative sources.
Such fair value adjustments utilized the following methodology:
Impaired lease and/or off-lease equipment
During 2014, the Company deemed certain lease equipment (assets) to be impaired and recorded fair value adjustments of $4 thousand to reduce the cost basis of the equipment. By comparison, the Company recorded $584 thousand of fair value adjustments relative to impaired lease and off-lease assets during 2013.
The fair value adjustments were non-recurring. Under the Fair Value Measurements Topic of the FASB Accounting Standards Codification, the fair value of impaired lease assets were classified within Level 3 of the valuation hierarchy as the data sources utilized for the valuation of such assets reflect significant inputs that are unobservable in the market. Such valuation utilizes a market approach technique and uses inputs that reflect the sales price of similar assets sold by affiliates and/or information from third party remarketing agents not readily available in the market.
As of December 31, 2014, off-lease assets impaired during 2014 had been disposed.
The following table presents the fair value measurement of assets and liabilities measured at fair value on a recurring and non-recurring basis and the level within the hierarchy in which the fair value measurements fall at December 31, 2013 (in thousands):
![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||
December 31, 2013 | Level 1 Estimated Fair Value | Level 2 Estimated Fair Value | Level 3 Estimated Fair Value | |||||||||||||
Assets measured at fair value on a non-recurring basis: | ||||||||||||||||
Impaired lease and off-lease equipment | $ | 79 | $ | — | $ | — | $ | 79 |
36
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
13. Fair value measurements: - (continued)
The following table summarizes the valuation techniques and significant unobservable inputs used for the Company’s non-recurring fair value adjustments categorized as Level 3 in the fair value hierarchy at December 31, 2013:
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
December 31, 2013 | ||||||||||||||||||||||||
Name | Valuation Frequency | Valuation Technique | Unobservable Inputs | Range of Input Values | ||||||||||||||||||||
Lease Equipment | Non-recurring | Market Approach | Third Party Agents’ Pricing Quotes – per equipment | $ | 1,000 – $25,000 (total of $79,000) | |||||||||||||||||||
Equipment Condition | Poor to Average |
The following disclosure of the estimated fair value of financial instruments is made in accordance with the guidance provided by the Financial Instruments Topic of the FASB Accounting Standards Codification. Fair value estimates, methods and assumptions, set forth below for the Company’s financial instruments, are made solely to comply with the requirements of the Financial Instruments Topic and should be read in conjunction with the Company’s financial statements and related notes.
The Company has determined the estimated fair value amounts by using market information and valuation methodologies that it considers appropriate and consistent with the fair value accounting guidance. Considerable judgment is required to interpret market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Cash and cash equivalents
The recorded amounts of the Company’s cash and cash equivalents approximate fair value because of the liquidity and short-term maturity of these instruments.
Notes receivable
The fair value of the Company’s notes receivable is generally estimated based upon various methodologies deployed by financial and credit management including, but not limited to, credit analysis, third party appraisal and/or discounted cash flow analysis based upon current market valuation techniques and market rates for similar types of lending arrangements, which may consider adjustments for impaired loans as deemed necessary.
Investment in securities
The Company’s investment securities are not registered for public sale and are carried at cost which management believes approximates fair value, as appropriately adjusted for impairment.
Non-recourse debt
The fair value of the Company’s non-recourse debt is estimated using discounted cash flow analyses, based upon current market borrowing rates for similar types of borrowing arrangements.
Commitments and Contingencies
Management has determined that no recognition for the fair value of the Company’s loan commitments is necessary because their terms are made on a market rate basis and require borrowers to be in compliance with the Company’s credit requirements at the time of funding.
The fair value of contingent liabilities (or guarantees) is not considered material because management believes there has been no event that has occurred wherein a guarantee liability has been incurred or will likely be incurred.
37
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
13. Fair value measurements: - (continued)
The following tables present a summary of the carrying value and fair value by level of financial instruments on the Company’s balance sheet at December 31, 2014 and 2013 (in thousands):
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | |||||||||||||||
Fair Value Measurements at December 31, 2014 | ||||||||||||||||||||
Carrying Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 4,647 | $4,647 | $ | — | $ | — | $ | 4,647 | |||||||||||
Notes receivable, net | 332 | — | — | 332 | 332 | |||||||||||||||
Investment in securities | 85 | — | — | 85 | 85 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Non-recourse debt | 9,000 | — | — | 9,196 | 9,196 |
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | |||||||||||||||
Fair Value Measurements at December 31, 2013 | ||||||||||||||||||||
Carrying Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $8,478 | $ | 8,478 | $ | — | $ | — | $ | 8,478 | |||||||||||
Notes receivable, net | 518 | — | — | 518 | 518 | |||||||||||||||
Investment in securities | 85 | — | — | 85 | 85 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Non-recourse debt | 14,004 | — | — | 14,409 | 14,409 |
38
Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS’ ACCOUNTING AND FINANCIAL DISCLOSURES |
None.
Item 9A. | CONTROLS AND PROCEDURES |
Evaluation of disclosure controls and procedures
The Company’s Managing Member’s President and Chief Executive Officer, and Executive Vice President and Chief Financial Officer and Chief Operating Officer (“Management”), evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on the evaluation of the Company’s disclosure controls and procedures, Management concluded that as of the end of the period covered by this report, the design and operation of these disclosure controls and procedures were effective.
The Company does not control the financial reporting process, and is solely dependent on the Management of the Managing Member, who is responsible for providing the Company with financial statements in accordance with generally accepted accounting principles in the United States. The Managing Member’s disclosure controls and procedures, as they are applicable to the Company, means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78aet seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
The Management of the Managing Member is responsible for establishing and maintaining adequate internal control over financial reporting as that term is defined in Exchange Act Rule 13a-15(f) for the Company, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2014. The internal control process of the Managing Member, as it is applicable to the Company, was designed to provide reasonable assurance to Management regarding the preparation and fair presentation of published financial statements, and includes those policies and procedures that:
(1) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States, and that the Company’s receipts and expenditures are being made only in accordance with authorization of the Management of the Managing Member; and |
(2) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
All internal control processes, no matter how well designed, have inherent limitations. Therefore, even those processes determined to be effective can provide only reasonable assurance with respect to the reliability of financial statement preparation and presentation. Further, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management of the Managing Member assessed the effectiveness of its internal control over financial reporting, as it is applicable to the Company, as of December 31, 2014. In making this assessment, it used the criteria set forth inInternal Control — Integrated Framework(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, Management of the Managing Member concluded that the Managing Member’s internal control over financial reporting, as it is applicable to the Company, was effective as of December 31, 2014.
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This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which exempts non-accelerated filers from Section 404(b) of the Sarbanes-Oxley Act of 2002.
Changes in internal control
There were no changes in the Managing Member’s internal control over financial reporting, as it is applicable to the Company, during the quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, the Managing Member’s internal control over financial reporting, as it is applicable to the Company.
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PART III
Item 10. | DIRECTORS AND EXECUTIVE OFFICERS |
The registrant is a Limited Liability Company and, therefore, has no officers or directors.
ATEL Financial Services, LLC (“AFS”) is the Company’s Managing Member or Manager. AFS is controlled by ATEL Capital Group (“ACG” or “ATEL”), a holding company formed to control AFS and affiliated companies. The outstanding voting capital stock of ATEL Capital Group is owned 100% by Dean Cash.
Each of ATEL Leasing Corporation (“ALC”) and AFS is a wholly-owned subsidiary of ACG and performs services for the Company. Acquisition services, equipment management, lease administration and asset disposition services are performed by ALC; and investor relations, communications and general administrative services are performed by AFS.
The officers and directors of ATEL and its affiliates are as follows:
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Dean L. Cash | President and Chief Executive Officer of ATEL Financial Services, LLC (Managing Member) | |
Paritosh K. Choksi | Executive Vice President and Chief Financial Officer and Chief Operating Officer of ATEL Financial Services, LLC (Managing Member) | |
Vasco H. Morais | Executive Vice President, Secretary and General Counsel of ATEL Financial Services, LLC (Managing Member) |
Dean L. Cash, age 64, became chairman, president and chief executive officer of ATEL in April 2001. Mr. Cash joined ATEL as director of marketing in 1980 and served as a vice president since 1981, executive vice president since 1983 and a director since 1984. Prior to joining ATEL, Mr. Cash was a senior marketing representative for Martin Marietta Corporation, data systems division, from 1979 to 1980. From 1977 to 1979, he was employed by General Electric Corporation, where he was an applications specialist in the medical systems division and a marketing representative in the information services division. Mr. Cash was a systems engineer with Electronic Data Systems from 1975 to 1977, and was involved in maintaining and developing software for commercial applications. Mr. Cash received a B.S. degree in psychology and mathematics in 1972 and an M.B.A. degree with a concentration in finance in 1975 from Florida State University. Mr. Cash is an arbitrator with the American Arbitration Association and is qualified as a registered principal with the Financial Industry Regulatory Authority.
Paritosh K. Choksi, age 61, joined ATEL in 1999 as a director, senior vice president and its chief financial officer. He became its executive vice president and CFO/COO in April 2001. Prior to joining ATEL, Mr. Choksi was chief financial officer at Wink Communications, Inc. from 1997 to 1999. From 1977 to 1997, Mr. Choksi was with Phoenix American Incorporated, a financial services and management company, where he held various positions during his tenure, and was senior vice president, chief financial officer and director when he left the company. Mr. Choksi was involved in all corporate matters at Phoenix and was responsible for Phoenix’s capital market needs. He also served on the credit committee overseeing all corporate investments, including its venture lease portfolio. Mr. Choksi was a part of the executive management team which caused Phoenix’s portfolio to increase from $50 million in assets to over $2 billion. Mr. Choksi is a member of the board of directors of Syntel, Inc. Mr. Choksi received a bachelor of technology degree in mechanical engineering from the Indian Institute of Technology, Bombay; and an M.B.A. degree from the University of California, Berkeley.
Vasco H. Morais, age 56, joined ATEL in 1989 as general counsel. Mr. Morais manages ATEL’s legal department, which provides legal and contractual support in the negotiating, documenting, drafting, reviewing and funding of lease transactions. In addition, Mr. Morais advises on general corporate law matters, and assists on securities law issues. From 1986 to 1989, Mr. Morais was employed by the BankAmeriLease Companies, Bank of America’s equipment leasing subsidiaries, providing in-house legal support on the documentation of tax-oriented and non-tax oriented direct and leveraged lease transactions, vendor leasing programs and general corporate matters. Prior to the BankAmeriLease Companies, Mr. Morais was with the Consolidated Capital Companies in the Corporate and Securities Legal Department involved in drafting and reviewing contracts, advising on corporate law matters and securities law issues. Mr. Morais received a B.A. degree in 1982 from the University of California in Berkeley, a J.D. degree in 1986 from Golden Gate University Law School; and an M.B.A. (Finance) degree from Golden Gate University in 1997. Mr. Morais, an active member of the State Bar of California since 1986, served as co-chair of the Uniform Business Law Section of the State Bar of California and was inducted as a fellow of the American College of Commercial Finance Lawyers in 2010.
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Audit Committee
The board of directors of the Managing Member acts as the audit committee of the Company. Dean L. Cash and Paritosh K. Choksi are members of the board of directors of the Managing Member and are deemed to be financial experts. They are not independent of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on a review of Forms 3, 4 and 5, the Company is not aware of any failures to file reports of beneficial ownership required to be filed during or for the year ended December 31, 2014.
Code of Ethics
A Code of Ethics that is applicable to the Company, including the Chief Executive Officer and Chief Financial Officer and Chief Operating Officer of its Managing Member, AFS, or persons acting in such capacity on behalf of the Company, is included as Exhibit 14.1 to this report.
Item 11. | EXECUTIVE COMPENSATION |
The registrant is a Limited Liability Company and, therefore, has no officers or directors.
Set forth hereinafter is a description of the nature of remuneration paid and to be paid to AFS and its affiliates. The amount of such remuneration paid in 2014 and 2013 is set forth in Item 8 of this report under the caption “Financial Statements and Supplementary Data — Notes to Financial Statements — Related party transactions,” at Note 7 thereof, which information is hereby incorporated by reference.
Asset Management Fee
The Company pays AFS an Asset Management Fee in an amount equal to 4% of Operating Revenues, which includes Gross Lease Revenues and Cash from Sales or Refinancing. The Asset Management Fee is paid on a monthly basis. The amount of the Asset Management Fee payable in any year is reduced for that year to the extent it would otherwise exceed the Asset Management Fee Limit, as described below. The Asset Management Fee is paid for services rendered by AFS and its affiliates in determining portfolio and investment strategies (i.e., establishing and maintaining the composition of the Equipment portfolio as a whole and the Company’s overall debt structure) and generally managing or supervising the management of the Equipment.
AFS supervises performance of among others activities, collection of lease revenues, monitoring compliance by lessees with the lease terms, assuring that Equipment is being used in accordance with all operative contractual arrangements, paying operating expenses and arranging for necessary maintenance and repair of Equipment in the event a lessee fails to do so, monitoring property, sales and use tax compliance and preparation of operating financial data. AFS intends to delegate all or a portion of its duties and the Asset Management Fee to one or more of its affiliates who are in the business of providing such services.
Asset Management Fee Limit:
The Asset Management Fee is subject to the Asset Management Fee Limit. The Asset Management Fee Limit is calculated each year during the Company’s term by calculating the total fees that would be paid to AFS if AFS were to be compensated on the basis of an alternative fee schedule, to include an Equipment Management Fee, Incentive Management Fee, and Equipment Resale/Re-Leasing Fee, plus AFS’s Carried Interest, as described below. To the extent that the amount paid to AFS as the Asset Management Fee plus its Carried Interest for any year would exceed the aggregate amount of fees calculated under this alternative fee schedule for the year, the Asset Management Fee and/or Carried Interest for that year is reduced to equal the maximum aggregate fees under the alternative fee schedule.
To the extent any such fees are reduced, the amount of such reduction will be accrued and deferred, and such accrued and deferred compensation would be paid to AFS in a subsequent period, but only if and to the extent that such deferred compensation would be payable within the Asset Management Fee Limit for the subsequent period. Any deferred fees which cannot be paid under the applicable limitations in any subsequent period through the date of liquidation would be forfeited by AFS upon liquidation.
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Alternative Fee Schedule:
For purposes of the Asset Management Fee Limit, the Company will calculate an alternative schedule of fees, including a hypothetical Equipment Management Fee, Incentive Management Fee, Equipment Resale/Re-Leasing Fee, and Carried Interest as follows:
An Equipment Management Fee will be calculated to equal the lesser of (i) 3.5% of annual Gross Revenues from Operating Leases and 2% of annual Gross Revenues from Full Payout Leases which contain Net Lease Provisions, or (ii) the fees customarily charged by others rendering similar services as an ongoing public activity in the same geographic location and for similar types of equipment. If services with respect to certain Operating Leases are performed by nonaffiliated persons under the active supervision of AFS or its affiliate, then the amount so calculated shall be 1% of Gross Revenues from such Operating Leases.
An Incentive Management Fee will be calculated to equal 4% of Distributions of Cash from Operations until Holders have received a return of their Original Invested Capital plus a Priority Distribution, and, thereafter, to equal a total of 7.5% of Distributions from all sources, including Sale or Refinancing Proceeds. In subordinating the increase in the Incentive Management Fee to a cumulative return of a Holder’s Original Invested Capital plus a Priority Distribution, a Holder would be deemed to have received Distributions of Original Invested Capital only to the extent that Distributions to the Holder exceed the amount of the Priority Distribution.
An Equipment Resale/Re-Leasing Fee will be calculated in an amount equal to the lesser of (i) 3% of the sale price of the Equipment, or (ii) one-half the normal competitive equipment sale commission charged by unaffiliated parties for resale services. Such fee would apply only after the Holders have received a return of their Original Invested Capital plus a Priority Distribution.
In connection with the releasing of Equipment to lessees other than previous lessees or their affiliates, the fee would be in an amount equal to the lesser of (i) the competitive rate for comparable services for similar equipment, or (ii) 2% of the gross rental payments derived from the re-lease of such Equipment, payable out of each rental payment received by the Company from such re-lease.
See Note 7 to the financial statements included in Item 8, Financial Statements and Supplementary Data, for amounts paid.
Managing Member’s Interest in Operating Proceeds
As defined in the Limited Liability Company Operating Agreement, the Company’s Net Income, Net Losses, and Distributions are to be allocated 92.5% to the Members and 7.5% to AFS. In accordance with the terms of the Operating Agreement, as amended, additional allocations of income were made to AFS in 2014 and 2013. The amounts allocated were determined to bring AFS’s ending capital account balance to zero at the end of each year. See financial statements as set forth in Part II, Item 8, Financial Statements and Supplementary Data, of this report for amounts allocated to AFS in 2014 and 2013.
Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
Security Ownership of Certain Beneficial Owners
At December 31, 2014, no investor is known to hold beneficially more than 5% of the issued and outstanding Units.
Security Ownership of Management
The parent of AFS is the beneficial owner of Limited Liability Company Units as follows:
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(1) Title of Class | (2) Name and Address of Beneficial Owner | (3) Amount and Nature of Beneficial Ownership | (4) Percent of Class | |||
Limited Liability Company Units | ATEL Capital Group The Transamerica Pyramid 600 Montgomery Street, 9th Floor San Francisco, CA 94111 | Initial Limited Liability Company Units 50 Units ($500) | 0.0004% |
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Changes in Control
The Members have the right, by vote of the Members owning more than 50% of the outstanding Limited Liability Company Units, to remove a Managing Member.
AFS may at any time call a meeting of the Members or a vote of the Members without a meeting, on matters on which they are entitled to vote, and shall call such meeting or for vote without a meeting following receipt of a written request therefore of members holding 10% or more of the total outstanding Limited Liability Company Units.
Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
The responses to Item 1 of this report under the caption “Equipment Leasing Activities,” Item 8 of this report under the caption “Financial Statements and Supplementary Data — Notes to Financial Statements — Related party transactions” at footnote 7 thereof, and Item 11 of this report under the caption “Executive Compensation,” are hereby incorporated by reference.
Item 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
During the years ended December 31, 2014 and 2013, the Company incurred audit fees with its principal auditors totaling $66 thousand and $97 thousand, respectively.
Audit fees consist of the aggregate fees and expenses billed in connection with the audit of the Company’s annual financial statements and the review of the financial statements included in the Company’s quarterly reports on Form 10-Q.
The board of directors of the Managing Member acts as the audit committee of the registrant. Engagements for audit services, audit related services and tax services are approved in advance by the Chief Financial Officer of the Managing Member acting on behalf of the board of directors of the Managing Member in its role as the audit committee of the Company.
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PART IV
Item 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K |
(a) | Financial Statements and Schedules |
1. | Financial Statements |
2. | Financial Statement Schedules |
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(b) | Exhibits |
(3) and (4) Amended and Restated Limited Liability Company Agreement, included as Exhibit B to the Prospectus included in the registrant’s registration statement on form S-1 effective March 12, 2003, (File Number 333-100452) is hereby incorporated herein by reference.
(14.1) | Code of Ethics |
(31.1) | Certification of Dean L. Cash pursuant to Rules 13a-14(a)/15d-14(a) |
(31.2) | Certification of Paritosh K. Choksi pursuant to Rules 13a-14(a)/15d-14(a) |
(32.1) | Certification of Dean L. Cash pursuant to 18 U.S.C. section 1350 |
(32.2) | Certification of Paritosh K. Choksi pursuant to 18 U.S.C. section 1350 |
(101.INS) | XBRL Instance Document |
(101.SCH) | XBRL Taxonomy Extension Schema Document |
(101.CAL) | XBRL Taxonomy Extension Calculation Linkbase Document |
(101.LAB) | XBRL Taxonomy Extension Label Linkbase Document |
(101.PRE) | XBRL Taxonomy Extension Presentation Linkbase Document |
(101.DEF) | XBRL Taxonomy Extension Definition Linkbase Document |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 30, 2015
ATEL Capital Equipment Fund X, LLC
(Registrant)
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By: ATEL Financial Services, LLC |
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By: /s/ Dean L. Cash |
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By: /s/ Paritosh K. Choksi |
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By: /s/ Samuel Schussler |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the persons in the capacities and on the dates indicated.
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SIGNATURE | CAPACITIES | DATE | ||
/s/ Dean L. Cash![]() Dean L. Cash | President and Chief Executive Officer of ATEL Financial Services, LLC (Managing Member) | March 30, 2015 | ||
/s/ Paritosh K. Choksi![]() Paritosh K. Choksi | Executive Vice President and Chief Financial Officer and Chief Operating Officer of ATEL Financial Services, LLC (Managing Member) | March 30, 2015 | ||
/s/ Samuel Schussler![]() Samuel Schussler | Vice President and Chief Accounting Officer of ATEL Financial Services, LLC (Managing Member) | March 30, 2015 |
No proxy materials have been or will be sent to security holders. An annual report will be furnished to security holders subsequent to the filing of this report on Form 10-K, and copies thereof will be furnished supplementally to the Commission when forwarded to the security holders.
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