ATEL
CAPITAL EQUIPMENT FUND XI, LLC
Limited Liability Company Units
ATEL Capital Equipment Fund XI, LLC will buy a diversified portfolio of
primarily low-technology equipment leased to corporations. ATEL Financial
Services, LLC is the Fund's Manager. The Fund will collect lease payments and
eventually sell the equipment. Its objective will be to distribute to investors
the lease payments and sales proceeds remaining after it pays its expenses and
fees. The Fund intends to use approximately 87% of the capital it raises from
the sale of Units to purchase its investments in equipment. At least an
additional one-half of one percent of its initial capital will be held as
capital reserves. Of the remaining capital, 9% will be used to pay selling
commissions and up to 3.5% will be used to pay other offering and organization
expenses.
A PURCHASE OF UNITS INVOLVES SIGNIFICANT RISKS. See "Risk Factors" on page 9.
Risks include:
o Most of the Fund's distributions will be, and most of the prior ATEL programs'
distributions have been, a return of capital;
o Economic recession and changes in general economic conditions, including,
fluctuations in demand for equipment, lease rates, and interest rates may, and
in certain past programs have, resulted in delays in investment and
reinvestment, delays in leasing, re-leasing and disposition of equipment, and
reduced returns on invested capital;
o The Fund's performance is subject to risks relating to lessee defaults;
The Fund's performance is subject to risks relating to the value of equipment
at the end of its leases;
o The Fund will borrow to buy equipment and, if Fund revenues are
insufficient to repay borrowed funds, the Fund could incur a loss of equipment
used as collateral;
o No market exists for the Units, and an investor may be unable to sell his
Units or able to sell the Units only at a significant discount;
o Except as may be set forth in a supplement to this Prospectus, the Fund has
not specified any of its equipment investments, so that investors cannot
evaluate the risks or potential returns from such investments;
o Investors must rely on ATEL to manage the Fund;
o The Fund will pay ATEL substantial fees; and
o The Fund does not guarantee its distributions or the return of investors'
capital.
The Fund is offering a total of 15,000,000 of its Units of limited liability
company interest for a price of $10 per Unit. An investor must purchase a
minimum of 500 Units. No Units will be sold unless a minimum of $1,200,000 in
cash is received within one year from the start of the offering. If the minimum
funding is achieved, the offering will continue until the earlier of sale of all
15,000,000 Units or April 11, 2007, unless the offering is terminated earlier in
the discretion of the Manager. The Fund will deposit its subscriptions in a bank
escrow account until that amount is received. Upon the earlier of termination of
the offering or satisfaction of the escrow condition, any interest which accrues
on funds held in escrow will be distributed to subscribers and allocated among
them on the basis of the respective amounts of the subscriptions and the number
of days that such amounts were on deposit in the escrow account. Rejected
subscriptions will be returned without interest or reduction within 30 days of
receipt. The offering will be made by unaffiliated broker dealers in a selling
group managed by ATEL Securities Corporation, a broker dealer affiliated with
the Manager, acting as Dealer Manager. The brokers selling the Units are not
required to sell any specific number of Units, but will use their best efforts
to sell Units.
Selling Proceeds
Price to Public Commissions to Fund
----------------- ------------- --------------
Per Unit $ 10 $ 0.90 $ 9.10
Total Minimum $ 1,200,000 $ 108,000 $ 1,092,000
Total Maximum $150,000,000 $13,500,000 $136,500,000
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities nor has any state
securities commission passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
THE DATE OF THIS PROSPECTUS IS APRIL 11, 2005
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. ANY REPRESENTATIONS TO THE
CONTRARY AND ANY PREDICTIONS, WRITTEN OR ORAL, AS TO THE AMOUNT OR CERTAINTY OF
ANY PRESENT OR FUTURE CASH BENEFIT OR TAX CONSEQUENCE WHICH MAY FLOW FROM AN
INVESTMENT IN THIS PROGRAM IS NOT PERMITTED.
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2
TABLE OF CONTENTS
SUMMARY OF THE OFFERING........................................................7
The Fund.......................................................................7
Management.....................................................................7
Risk Factors...................................................................7
Who Should Invest..............................................................8
Use of Capital.................................................................8
ATEL's Fees....................................................................9
Borrowing Policies.............................................................9
Income, Losses and Distributions...............................................9
Income Tax Consequences........................................................9
Summary of the Operating Agreement.............................................9
Plan of Distribution..........................................................10
Glossary......................................................................10
RISK FACTORS..................................................................11
Most of the Fund's distributions from lease revenues are expected to be a
return of capital.........................................................11
The success of the Fund will be subject to risks inherent in the equipment
leasing business that may adversely affect the ability of the Fund to
acquire, lease and sell equipment, and to finance its portfolio, on terms
which will permit it to generate profitable rates of return for investors.11
The Fund may be harmed if a lessee defaults on its lease and the Fund is
unable to collect the lease revenue anticipated from the defaulted leases.11
The amount of the Fund's profit will depend in part on the value of its
equipment when the leases end.............................................12
The Fund will borrow to buy equipment and will bear the risks of borrowing,
including the potential loss of equipment used as collateral for Fund debt
in the event the Fund is unable to satisfy its debt obligations...........12
There are significant limitations on the transferability of units.........12
Except as may be set forth in a supplement to this prospectus, the Fund has
not identified any of its equipment and lessees...........................12
Investors will have limited voting rights and must rely on management for
the success of the Fund...................................................13
The Manager will receive substantial compensation which may result in
conflicts of interest.....................................................13
The Fund does not guarantee its distributions or the return of investors'
capital...................................................................13
The Fund may lease equipment outside of the United States and foreign leases
may involve greater difficulty in enforcing lease terms and a less
predictable legal system..................................................13
If lease payments or other lease terms involve payments in foreign
currency, the Fund will be subject to the risk of currency exchange rate
fluctuations, which could reduce the Fund's overall profit on an
investment................................................................13
Demand for equipment fluctuates and periods of weak demand could adversely
affect the lease rates and resale prices the Fund may realize on its
equipment lease investment portfolio while periods of high demand could
adversely affect the prices the Fund has to pay to acquire its
investments...............................................................13
The equipment leasing industry is highly competitive and competitive forces
could adversely affect the lease rates and resale prices the Fund may
realize on its equipment lease investment portfolio and the prices the
Fund has to pay to acquire its investments................................13
Many Fund lease investments may depend for profit on the equipment value at
the end of the lease......................................................14
Equipment may be damaged or lost..........................................14
Some types of equipment are under special government regulation which may
make the equipment more costly to acquire, own, maintain under lease and
sell......................................................................14
Certain types of equipment, such as railcars, marine vessels and aircraft,
are subject to extensive safety and operating regulations imposed by
government and/or industry organizations which may make these types of
equipment more costly to acquire, own, maintain under lease and sell......14
3
A portion of the Fund's equipment portfolio will consist of financing
provided to entities without substantial operating histories or records of
profitability which may pose a greater risk of lessee or borrower default.14
Lending activities involve a risk that a court could deem the Fund's
financing rates usurious and unenforceable................................15
The Fund will be subject to the risk of claims asserting theories of
"lender liability" resulting in Fund liability for damages incurred by
borrowers.................................................................15
The Fund may not be able to register aircraft or marine vessels, which
could limit the Fund's ability to invest in these types of assets or could
affect the value realized by the Fund from such investments...............15
The manager is subject to certain potential conflicts of interest that
could result in the manager acting in its interest rather than that of the
Fund......................................................................15
The amount and terms of debt available to the Fund for the purchase of
equipment may also determine the amount of cash distributed to investors
and the amount of tax benefits they receive...............................15
The Fund may borrow on terms that provide for a lump sum payment on the
due date, which might increase the risk of default by the Fund............15
The amount of capital actually raised by the Fund may determine its
diversification and profitability.........................................16
The Fund is a newly-formed entity.........................................16
A delay in the investment could affect the Fund's ability to meet its
investment objectives.....................................................16
Investment by the Fund in joint ownership of equipment may involve risks
in coordinating its interests with those of its joint venture partner.....16
Risks Relating to Tax Matters.................................................16
Retirement Plan Risks.........................................................17
WHO SHOULD INVEST.............................................................18
ESTIMATED USE OF PROCEEDS.....................................................21
MANAGEMENT COMPENSATION.......................................................23
Summary Table.................................................................23
Narrative Description of Compensation.........................................23
Limitations on Fees...........................................................25
Defined Terms Used in Description of Compensation.............................27
INVESTMENT OBJECTIVES AND POLICIES............................................27
Principal Investment Objectives...............................................27
General Policies..............................................................28
Types of Equipment............................................................30
Prior Program Diversification.................................................34
Borrowing Policies............................................................38
Description of Lessees........................................................39
Foreign Leases................................................................40
Description of Leases.........................................................40
Growth Capital Equipment Financing............................................42
Leasing Industry and Competition..............................................43
Joint Venture Investments.....................................................45
General Restrictions..........................................................45
Changes in Investment Objectives and Policies.................................46
CONFLICTS OF INTEREST.........................................................46
ORGANIZATIONAL DIAGRAM........................................................48
FIDUCIARY DUTY OF THE MANAGER.................................................48
MANAGEMENT....................................................................49
The Manager...................................................................49
Management of the Fund's Operations and Administration........................52
Management Compensation.......................................................53
Changes in Management.........................................................53
4
The Dealer Manager............................................................54
PRIOR PERFORMANCE SUMMARY.....................................................54
INCOME, LOSSES AND DISTRIBUTIONS..............................................58
Allocations of Net Income and Net Loss........................................58
Timing and Method of Distributions............................................58
Allocations of Distributions..................................................59
Reinvestment..................................................................59
Return of Unused Capital......................................................60
Cash from Capital Reserve Account.............................................60
Sources of Distributions - Accounting Matters.................................61
CAPITALIZATION................................................................61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION...................61
FEDERAL INCOME TAX CONSEQUENCES...............................................62
Opinions of Derenthal & Dannhauser LLP........................................63
Classification as a Partnership...............................................63
Allocations of Profits and Losses.............................................64
Income Recognition............................................................65
Taxation of Investors.........................................................66
Limitation on Deduction of Losses.............................................66
Tax Basis.................................................................66
At Risk Rules.............................................................66
Passive Loss Limitation...................................................67
Hobby Losses..............................................................67
Tax Status of Leases..........................................................68
Cost Recovery.................................................................68
Tax Consequences Respecting Equity Interests..................................68
Deductibility of Management Fees..............................................69
Tax Liabilities in Later Years................................................69
Sales or Exchanges of Fund Equipment..........................................69
Disposition of Units..........................................................70
Liquidation of the Fund.......................................................70
Fund Elections................................................................71
Treatment of Gifts of Units...................................................71
Investment by Qualified Retirement Plans and IRAs.............................71
Individual Tax Rates..........................................................72
Alternative Minimum Tax.......................................................72
Fund Tax Returns and Tax Information..........................................74
Audit of Tax Returns..........................................................74
Tax Shelters and Reportable Transactions......................................75
Penalties and Interest........................................................75
Miscellaneous Fund Tax Aspects................................................76
Foreign Tax Considerations for U.S. Investors.................................76
U.S. Taxation of Foreign Persons..............................................77
Future Federal Income Tax Changes.............................................77
State and Local Taxes.........................................................77
Need for Independent Advice...................................................78
ERISA CONSIDERATIONS..........................................................78
Prohibited Transactions Under ERISA and the Code..............................78
Plan Assets...................................................................78
Other ERISA Considerations....................................................79
5
SUMMARY OF THE OPERATING AGREEMENT............................................80
The Duties of the Manager.....................................................80
Liability of Holders..........................................................80
Term and Dissolution..........................................................80
Voting Rights of Members......................................................81
Dissenters' Rights and Limitations on Mergers and Roll-Ups....................82
Meetings......................................................................82
Books of Account and Records..................................................82
Status of Units...............................................................83
Transferability of Units......................................................83
Repurchase of Units...........................................................85
Indemnification of the Manager................................................85
PLAN OF DISTRIBUTION..........................................................86
Distribution..................................................................86
Selling Compensation and Certain Expenses.....................................87
Escrow Arrangements...........................................................87
Investments by Certain Persons................................................88
State Requirements............................................................88
REPORTS TO HOLDERS............................................................89
SUPPLEMENTAL SALES MATERIAL...................................................90
LEGAL OPINIONS................................................................90
EXPERTS.......................................................................91
FORWARD-LOOKING STATEMENTS....................................................91
ADDITIONAL INFORMATION........................................................91
GLOSSARY......................................................................92
FINANCIAL STATEMENTS.........................................................F-1
Exhibit A - Prior Performance Information....................................A-1
Exhibit B - Amended and Restated Operating Agreement.........................B-1
Exhibit C - Subscription Instructions and Documents..........................C-1
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. ANY REPRESENTATIONS TO THE
CONTRARY AND ANY PREDICTIONS, WRITTEN OR ORAL, AS TO THE AMOUNT OR CERTAINTY OF
ANY PRESENT OR FUTURE CASH BENEFIT OR TAX CONSEQUENCE WHICH MAY FLOW FROM AN
INVESTMENT IN THIS PROGRAM IS NOT PERMITTED.
6
SUMMARY OF THE OFFERING
This summary outlines the main points of the offering. The summary does not
replace the more detailed information found in the remainder of this Prospectus.
All prospective investors are urged to read this Prospectus in its entirety.
The Fund: The Fund is a California limited liability company, which intends
to invest in a variety of types of equipment and to lease the equipment to
corporations. The Fund expects to acquire mostly low-technology equipment such
as the basic equipment used by companies in the manufacturing, mining and
transportation industries. The portfolio will also include some more
high-technology equipment, such as communications equipment, medical equipment
and office equipment. The Fund will seek to buy equipment and leases that will
produce lease payments and eventual sales prices that will provide a favorable
return on its investments and cash distributions to its investors. The Fund's
equipment will primarily be leased to major publicly owned corporations. Some of
its equipment investments will finance capital equipment for other public and
private companies, including emerging growth companies. In some of these
investments, the Fund may acquire equity interests and warrants and rights to
purchase equity interests in these companies.
Management: The Manager of the Fund is ATEL Financial Services, LLC. ATEL
and its family of related ATEL companies will provide various services to the
Fund, including asset management and company administration. ATEL will be
responsible for supervising all of the Fund's business and affairs. ATEL will
act as a fiduciary to the Fund, and, consequently, is required to exercise good
faith and integrity in all dealings with respect to Fund affairs. The Fund will
have no direct employees, though it will reimburse the Manager and its
affiliates for the cost of their personnel engaged in the business of the Fund.
The Manager and its Affiliates will make all business decisions on behalf of the
Fund. The offices of the Fund and ATEL are located at 600 California Street, 6th
Floor, San Francisco, California 94108, and its telephone numbers are (415)
989-8800 and (800) 543-ATEL (2835).
Risk Factors: An investment in Units involves risks, including the
following:
-- Most of the Fund's distributions will be, and most of the prior ATEL
programs' distributions have been, a return of capital. The portion of
total distributions that will be a return of capital and the portion
that will be investment income at the end of the Fund will depend on a
number of factors in the Fund's operations, and cannot be determined
until all of its equipment is sold and an investor can compare the
total amount of all cash distributions to the total capital invested.
In this regard, investors should note that prior completed ATEL
programs have made aggregate distributions over the course of their
eight to ten year terms in amounts equal to 100% of investors' capital
plus additional returns on invested capital equal to from 21% to 32%
of investors' capital (not annually, but over their entire terms).
-- The Fund's performance will be subject to risks relating to changes in
general economic conditions, including fluctuations in demand for
equipment, lease rates and interest rates. These changes may, and in
certain past programs have, resulted in delays in investment and
reinvestment, delays in leasing, re-leasing and disposition of
equipment, and reduced returns on invested capital. The success of the
Fund will be subject to these risks inherent in the equipment leasing
business that may adversely affect the ability of the Fund to acquire,
lease and sell equipment, and to finance its portfolio, on terms which
will permit it to generate profitable rates of return for investors.
-- The Fund's performance is subject to risks relating to lessee
defaults. The Fund may be harmed if a lessee defaults on its lease and
the Fund is unable to collect the lease revenue anticipated from the
defaulted leases.
-- The Fund's performance is subject to risks relating to the value of
equipment at the end of its leases. In negotiating leases, the Manager
7
will assume a value for the equipment at the end of the lease. The
Fund cannot assure that its value assumptions will be accurate or that
the equipment will not lose value more rapidly than anticipated.
-- The Fund will borrow to buy equipment investments and, if Fund
revenues are insufficient to repay borrowed funds, the Fund could
incur a loss of equipment used as collateral. The Fund can expect to
make a profit on equipment purchased with debt only if the equipment
produces more than enough cash from lease payments and sales price to
pay the principal and interest on the debt, recover the purchase price
and cover fees and other operating expenses.
-- No market exists for the Units, and an investor may be unable to sell
his Units or able to sell the Units only at a significant discount.
Investors will probably not be able to sell their Units for full value
if they need to in an emergency. Consequently, investors should
consider the purchase of Units only as a long-term investment.
-- Except as may be set forth in a supplement to this Prospectus, the
Fund has not specified any of its equipment investments, so that
investors cannot evaluate the risks or potential returns from such
investments. An investor cannot assess all of the potential risks of
an investment in Units because all of the equipment to be purchased
and the lessees to whom the equipment will be leased have not been
identified.
-- Investors must rely on ATEL to manage the Fund's business. The success
of the Fund will, to a large extent, depend on the quality of its
management, particularly decisions on the purchase, leasing and sale
of its equipment.
-- The Fund will pay ATEL substantial fees which may result in conflicts
of interest. The Fund will pay substantial fees to the Manager and its
related companies before distributions are paid to investors even if
the Fund does not produce profits.
-- The Fund does not guarantee its distributions or the return of
investors' capital. Accordingly, investors must rely on the
performance of the Fund's equipment leasing portfolio investments to
generate distributions in return of capital and a return on their
invested capital.
See the discussion under "Risk Factors" for a more complete description of these
and other risks relating to an investment in Units.
Who Should Invest: The Units are a long-term investment, with a primary
objective of regular cash distributions. Investors must satisfy minimum net
worth and income requirements, which require, generally, that investors have
either:
-- an annual gross income of at least $45,000 and a net worth (exclusive
of home, home furnishings and automobiles) of at least $45,000; or
-- a net worth (determined with the same exclusions) of at least $150,000.
See the discussion under "Who Should Invest" below for the suitability standards
imposed by certain states for investors in their respective jurisdictions.
Use of Capital: The Fund expects to invest approximately 87% of its capital
in the cash portion of the purchase price of equipment. It intends to retain an
additional 0.5% as reserves for general working capital purposes, and to use the
balance to pay selling commissions equal to 9%, and other offering and
organization expenses in the estimated amount of from 2.5% to 3.5%.
8
ATEL's Fees: The Fund will pay ATEL and its family of related companies
substantial fees and compensation in connection with this offering and the
operation of the Fund's business, including the following:
-- ATEL Securities Corporation will organize and manage the group of
broker-dealers selling the Units. It will receive selling commissions,
most of which it will pay to the participating broker dealers. ATEL
Securities Corporation may retain up to 1.5% of the sale price of
Units.
-- The Fund will pay ATEL an annual asset management fee equal to 4% of
the revenues from leases and sales of the Fund's equipment, subject to
fee limits.
-- ATEL will have an interest equal to 7.5% of all of the Fund's income,
loss and cash distributions.
The Fund will also reimburse ATEL for offering expenses and administrative
expenses ATEL incurs on behalf of the Fund, subject to some limitations.
Borrowing Policies: The Fund expects to borrow a total amount equal to 50%
of the aggregate cost of its portfolio investments, the maximum permitted under
the Operating Agreement, regardless of the amount of equity capital raised from
the sale of Units.
Income, Losses and Distributions: Fund income and loss for tax purposes and
cash distributions will be allocated 92.5% to investors and 7.5% to ATEL. The
Fund intends to distribute all cash revenues remaining after the Fund
-- pays its expenses, including fees paid to ATEL,
-- establishes or restores its capital reserves, and
-- to the extent permitted, sets aside amounts for reinvestment in
additional equipment.
Until the end of a six-year period following the end of the offering of
Units, the Fund may invest its revenues in additional equipment. Before it can
reinvest its revenues, though, it must first satisfy conditions which, after the
end of the offering period, include distributions to each investor for the year
equal to at least 8% of the purchase price of the Units.
Income Tax Consequences: This Prospectus has a discussion of federal income
tax consequences relating to an investment in Units under the caption "Federal
Income Tax Consequences." Investors should consult with their tax and financial
advisors to determine whether an investment in Units is suitable for their
portfolio.
Summary of the Operating Agreement: The Operating Agreement that will
govern the relationship between the investors and ATEL is a complex legal
document. The following is a brief summary of certain provisions of the
Operating Agreement discussed in greater detail under "Summary of the Operating
Agreement."
-- Voting Rights of Members. Each investor will become a member of the
Fund, and will be entitled to cast one vote for each Unit owned as of
the record date for any vote of all the members. The members are
entitled to vote on only certain fundamental organizational matters
affecting the Fund, and have no voice in Fund operations or policies.
-- Meetings. ATEL or Members holding 10% or more of the total outstanding
Units may call a meeting of the Members or a vote of the Members
without a meeting, on matters on which they are entitled to vote.
-- Dissenters' Rights and Limitations on Mergers and Roll-ups. The
Operating Agreement provides Members with protection in a proposed
reorganization in which the investors would be issued new securities in
the resulting entity.
9
-- Transferability of Units. ATEL may condition any proposed transfer of
Units on, among other things, legal opinions confirming that the
proposed transfer does not violate securities laws and will not result
in adverse tax consequences to the Fund. The Manager will take such
actions as may be deemed necessary to assure that no public trading
market develops for the Units in order to protect the anticipated tax
consequences of an investment in the Fund. The Fund will not permit any
transfer which does not follow the rules in the Operating Agreement.
-- Liability of Investors. Under the Operating Agreement and California
law, an investor complying with the Operating Agreement will not
personally be liable for any debt of the Fund.
-- Status of Units. Under the Operating Agreement, each Unit will be fully
paid and nonassessable and all Units have equal voting and other
rights, except there are limitations on the voting of Units held by
ATEL.
-- Term and Dissolution. The Fund intends to begin selling its assets and
distributing all available cash to its Members beginning after the end
of the sixth full year following the end of the offering, with the
final distribution expected approximately ten to eleven years after the
termination of the offering. In any event, the Fund must end no later
than December 31, 2025.
-- Books of Account and Records. ATEL is responsible under the Operating
Agreement for keeping books of account and records of the Fund showing
all of the contributions to the capital of the Fund and all of the
expenses and transactions of the Fund. These books of account and
records will be kept at the principal place of business of the Fund in
the State of California, and each Member and his authorized
representatives shall have, at all times during reasonable business
hours, free access to and the right to inspect and copy at their
expense the books of the Fund, and each Member shall have the right to
compel the Fund to deliver copies of certain of these records on
demand.
-- Indemnification of ATEL. The Operating Agreement provides that ATEL and
its related companies who perform services for the Fund will be
indemnified against certain liabilities.
Plan of Distribution: The Units will be offered through ATEL Securities
Corporation, the dealer manager, who will organize a group of other
broker-dealers who are members of the National Association of Securities
Dealers, Inc. ("NASD").
Until subscriptions for a total of 120,000 Units are received and accepted,
all offering proceeds will be deposited in an escrow account. Upon receipt and
acceptance of subscriptions to a minimum of 120,000 Units, the subscription
proceeds will be released to the Fund. The offering will terminate not later
than two years from the date of this Prospectus.
Glossary: See the definitions listed in "Glossary" below for a complete
list of defined terms used in this Prospectus and the Operating Agreement.
10
RISK FACTORS
The purchase of Units involves various risks. Therefore, investors should
consider the following material risk factors before making a decision to
purchase Units.
Most of the Fund's distributions from lease revenues are expected to be a
return of capital. The portion of total distributions that will be a return of
capital and the portion that will be investment income at the end of the Fund
will depend on a number of factors in the Fund's operations, and cannot be
determined until all of its equipment is sold and an investor can compare the
total amount of all cash distributions to the total capital invested. In this
regard, investors should note that prior completed ATEL programs have made
aggregate distributions over the course of their eight to ten year terms in
amounts equal to 100% of investors' capital plus additional returns on invested
capital equal to from 21% to 32% of investors' capital (not annually, but over
their entire terms).
The success of the Fund will be subject to risks inherent in the equipment
leasing business that may adversely affect the ability of the Fund to acquire,
lease and sell equipment, and to finance its portfolio, on terms which will
permit it to generate profitable rates of return for investors. A number
economic conditions and market factors could threaten the Fund's ability to
operate profitably. These include:
-- changes in economic conditions, including fluctuations in demand
for equipment, lease rates, interest rates and inflation rates,
-- the timing of purchases and the ability to forecast technological
advances for equipment,
-- technological and economic obsolescence, and
-- increases in Fund expenses (including labor, energy, taxes and
insurance expenses).
Fluctuations in demand for equipment may affect the ability of a leasing program
to invest its capital in a timely manner. Equipment lessors experienced a more
difficult market in which to make suitable investments during recent periods of
reduced growth and recession in the U.S. economy as a result of the softening
demand for capital equipment during these periods. Adverse economic conditions
during 1999 through 2003 affected the timing and terms of leasing, remarketing
and re-leasing efforts by certain of the prior ATEL programs. An extended
remarketing cycle and lower lease rates have limited the ability of certain of
these programs, which, like the Fund, require minimum distributions to investors
prior to reinvestment of cash flow, to generate sufficient cash flow to permit
such reinvestment of cash flow in significant amounts. Economic recession
resulting in lower levels of capital expenditure by businesses may result in
more used equipment becoming available on the market and downward pressure on
prices and lease rates due to excess inventory. Recent periods of low interest
rates exerted downward pressure on lease rates and resulted in less demand for
lease financing. There can be no assurance as to what future developments may
occur in the economy in general or in the demand for equipment and lease
financing in particular.
The Fund may be harmed if a lessee defaults on its lease and the Fund is
unable to collect the lease revenue anticipated from the defaulted leases. If a
lessee does not make lease payments to the Fund when they are due under its
lease or violates the terms of its lease contract in another important way, the
Fund may be forced to cancel the lease and recover the equipment. The Fund may
do this at a time when the Manager may be unable to arrange for a new lease or
the sale of such equipment right away. The Fund would then lose the expected
lease revenues and might not be able to recover the entire amount of its
original investment. If a lessee files for protection under the bankruptcy laws,
the Fund may experience difficulties and delays in recovering the equipment from
the defaulting lessee. The equipment may be returned in poor condition and the
Fund may be unable to enforce important lease provisions against an insolvent
lessee, including the contract provisions that require the lessee to return the
equipment in good condition. In some cases, a lessee's deteriorating financial
condition may make trying to recover what the lessee owes the Fund impractical.
The costs of recovering equipment upon a lessee's default, enforcing the
lessee's obligations under the lease, and transporting, storing, repairing and
finding a new lessee or purchaser for the equipment may be high and may affect
the Fund's profits.
11
The amount of the Fund's profit will depend in part on the value of its
equipment when the leases end. In general, leased equipment loses value over a
lease term. In negotiating leases, the Manager will assume a value for the
equipment at the end of the lease. The Manager will seek lease payments plus
equipment value at the end of the lease which is enough to return the Fund's
investment in the equipment and provide a profit. The value of the equipment at
the end of a lease will depend on a number of factors, including:
-- the condition of the equipment;
-- the cost of similar new equipment;
-- the supply of and demand for similar equipment; and
-- whether the equipment has become obsolete.
The Fund cannot assure that its value assumptions will be accurate or that the
equipment will not lose value more rapidly than anticipated.
The Fund will borrow to buy equipment and will bear the risks of borrowing,
including the potential loss of equipment used as collateral for fund debt in
the event the Fund is unable to satisfy its debt obligations. The Fund will
borrow to finance the acquisition of its portfolio. The Fund expects to borrow a
total amount equal to 50% of the aggregate cost of its equipment, the maximum
permitted under the Operating Agreement, regardless of the amount of equity
capital raised from the sale of Units. The Fund can expect to make a profit on
equipment purchased with debt only if the equipment produces more than enough
cash from lease payments and sales price to pay the principal and interest on
the debt, recover the purchase price and cover fees and other operating
expenses.
The Fund intends to use both:
-- debt in which only the asset financed by the lender is collateral
securing the obligation, and
-- debt in which all of the Fund's assets or a selected pool of the assets
are collateral securing the obligation.
When a borrower defaults on a secured loan, the lender usually has the
right to immediate payment of the entire debt and to sell the collateral to pay
the debt. In this way, the Fund's borrowing may involve a greater risk of loss
than if no debt were used, because the Fund must meet its fixed payment
obligations regardless of the amount of revenue it receives from the equipment.
At the same time, the use of debt increases the potential size of the Fund's
equipment portfolio, the amount of lease revenues and potential sale proceeds.
Greater amounts of debt would also increase the total fees payable to the
Manager, because its asset management fees are determined as a percentage of the
Fund's total revenues.
There are significant limitations on the transferability of Units. The
Manager will take steps to assure that no public trading market develops for the
Units. If a public trading market were to develop, the Fund could suffer a very
unfavorable change in the way it is taxed under the federal tax laws. Investors
will probably not be able to sell their Units for full value if they need to in
an emergency. Units may also not be accepted as collateral for a loan.
Consequently, investors should consider the purchase of Units only as a
long-term investment.
Except as may be set forth in a Supplement to this Prospectus, the Fund has
not identified any of its equipment and lessees. An investor cannot assess all
of the potential risks of an investment in Units because all of the equipment to
be purchased and the lessees to whom the equipment will be leased have not been
identified. A prospective investor will not have complete information as to the
manufacturers of the Fund's equipment, the number of leases to be entered into,
the specific types and models of equipment to be acquired, or the identity,
financial condition and creditworthiness of the companies who will lease its
equipment. Investors must rely upon the judgment and ability of the Manager in
its selection of equipment to purchase, the evaluation of equipment
manufacturers, the selection of lessees and the negotiation of leases.
12
Investors will have limited voting rights and must rely on management for
the success of the Fund. ATEL, as the Manager, will make all decisions in the
management of the Fund. The success of the Fund will, to a large extent, depend
on the quality of its management, particularly decisions on the purchase,
leasing and sale of its equipment. Investors are not permitted to take part in
the management of the Fund and have only limited voting rights. An affirmative
vote by holders of a majority of the Units is required to remove the Manager. No
person should purchase Units unless he is willing to entrust all aspects of
management of the Fund to the Manager and has evaluated the Manager's
capabilities to perform such functions.
The Manager will receive substantial compensation which may result in
conflicts of interest. The Fund will pay substantial fees to the Manager and its
related companies before distributions are paid to investors even if the Fund
does not produce profits.
The Fund does not guarantee its distributions or the return of investors'
capital. Accordingly, investors must rely on the performance of the Fund's
equipment leasing portfolio investments to generate distributions in return of
capital and a return on their invested capital.
The Fund may lease equipment outside of the United States and foreign
leases may involve greater difficulty in enforcing lease term and a less
predictable legal system. The Fund may lease equipment to foreign subsidiaries
of United States corporations and to foreign lessees. The Fund may also lease
equipment to U.S. lessees, which is to be used outside the United States. The
Manager will seek to limit the Fund's total cash investment in equipment under
foreign leases or used primarily outside the United States to not more than 20%
of its capital. The laws, courts and tax authorities of a foreign country may
govern the Fund's equipment leased or used in that country. The Fund will
attempt to require foreign lessees to consent to the jurisdiction of U.S. courts
if disputes should arise under the lease. Even if the Fund is successful in this
effort, if a foreign lessee defaults, the Fund may find it difficult or
impossible to enforce judgments against foreign lessees, recover leased
equipment or enforce the Fund's rights under the lease. Also, the use and
operation of equipment in foreign countries may result in unanticipated taxes or
confiscation without fair compensation. See "Investment Objectives and Policies
- - Foreign Leases."
If lease payments or other lease terms involve payments in foreign
currency, the Fund will be subject to the risk of currency exchange rate
fluctuations, which could reduce the Fund's overall profit on an investment.
Many countries also have laws regulating the transfer and exchange of
currencies, and these laws may affect a foreign lessee's ability to comply with
lease terms. Finally, certain depreciation or cost recovery methods used in
calculating taxable income may not be available for equipment leased by a
foreign lessee or "used predominantly outside the United States."
Demand for equipment fluctuates and periods of weak demand could adversely
affect the lease rates and resale prices the Fund may realize on its equipment
lease investment portfolio while periods of high demand could adversely affect
the prices the Fund has to pay to acquire its investments. The Fund's ability to
keep the equipment leased and the terms of its purchase, lease and sale of
equipment depend on various factors, many of which neither the Manager nor the
Fund can control. Factors that have an effect on the demand for equipment
include the effects of inflation or recession, and fluctuations in supply and
demand resulting from, among other things, technological and economic
obsolescence. In this regard, it should be noted that the total investment in
equipment by U.S. businesses and the total volume of equipment leasing financing
declined in 2001, from an all time high in 2000, and declined again in 2002 from
the volume of investment and leasing in 2001. There was a slight increase in the
volume of investment and leasing in 2003, and ATEL management anticipates there
will be a modest increase in 2004. (See "Leasing Industry and Competition.")
There can be no assurance that demand for equipment may not decline further in
future years.
The equipment leasing industry is highly competitive and competitive
forces could adversely affect the lease rates and resale prices the Fund may
realize on its equipment lease investment portfolio and the prices the Fund has
to pay to acquire its investments. Equipment manufacturers, corporations,
13
partnerships and others offer users an alternative to the purchase of most types
of equipment with payment terms that vary widely depending on the lease term and
type of equipment. In seeking leases, the Fund will compete with financial
institutions, manufacturers and public and private leasing companies, many of
which may have greater financial resources than the Fund.
Many Fund lease investments may depend for profit on the equipment value at
the end of the lease. Most of the Fund's leases will provide for total lease
payments that are less than the original price of the equipment. At the end of
these leases, the Fund must either renew the lease, find a new lessee or sell
the equipment to cover its investment and make a profit.
Equipment may be damaged or lost. Fire, weather, accident, theft or other
events can cause the damage or loss of equipment. Not all potential casualties
can be insured, and, if insured, the insurance proceeds may not be sufficient to
cover a loss.
Some types of equipment are under special government regulation which may
make the equipment more costly to acquire, own, maintain under lease and sell.
The use, maintenance and ownership of certain types of equipment are regulated
by federal, state and/or local authorities. Regulations may impose restrictions
and financial burdens on the Fund's ownership and operation of equipment.
Changes in government regulations, industry standards or deregulation may also
affect the ownership, operation and resale value of equipment.
Certain types of equipment, such as railcars, marine vessels and aircraft,
are subject to extensive safety and operating regulations imposed by government
and/or industry organizations which may make these types of equipment more
costly to acquire, own, maintain under lease and sell. These agencies or
organizations may require changes or improvements to equipment and the Fund may
have to spend its own capital to comply. These changes may also require the
equipment to be removed from service for a period of time. The terms of leases
may provide for rent reductions if the equipment must remain out of service for
an extended period or is removed from service. The Fund may then have reduced
operating revenues from the leases for these items of equipment. If the Fund did
not have the capital to make a required change, it might be required to sell the
affected equipment or to sell other items of its equipment in order to obtain
the necessary cash; in either event, the Fund could suffer a loss on its
investment and might lose future revenues, and the Fund might also have adverse
tax consequences.
A portion of the Fund's equipment portfolio will consist of financing
provided to entities without substantial operating histories or records of
profitability which may pose a greater risk of lessee or borrower default. The
Fund will primarily lease equipment to large and established corporations.
However, the Fund may invest a portion of its capital in providing financing to
companies that do not have substantial operating histories or records of
profitability, and that are developing products or services prior to bringing
them to market, including development of some new and untested technologies.
Because of their stage of development and the types of products and technologies
they are seeking to develop, these companies will be more subject to changes and
fluctuations in financial, technology and product markets. These lessees and
borrowers therefore will involve greater risks of default than financing, and
investment in, more established, profitable or investment grade entities.
Lending activities involve a risk that a court could deem the Fund's
financing rates usurious and unenforceable. In addition to credit risks, the
Fund may be subject to other risks in equipment financing transactions in which
it is deemed to be a lender. Some courts have held that certain loan features,
such as equity interests, constitute additional interest. State laws determine
what rates of interest are deemed usurious, when the applicable rate of interest
is determined and how it is calculated. Although the Fund will generally seek
assurances and or opinions to the effect that its transactions do not violate
applicable usury laws, a finding that an equity interest is additional interest
could result in a court determining that the rate of interest charged by the
Fund is usurious, the "interest" obligation under the Fund's loan could be
declared void, and the Fund could be deemed liable for damages or penalties
under the applicable state law.
14
The Fund will be subject to the risk of claims asserting theories of
"lender liability" resulting in Fund liability for damages incurred by
borrowers. Various common law and statutory theories have been advanced to hold
lenders liable to their borrowers. The general principle underlying this theory
of liability is that lenders have a form of duty similar to a quasi fiduciary
duty to their borrowers, regardless of the terms of the loan agreements and
other financing documents. Breach of that duty by the lender can lead to
liability for damages to the borrower. The Fund and its Manager intend to act in
good faith in all dealings with the Fund's borrowers and in a manner designed to
mitigate any potential for such liability, and to date no prior investment
programs managed the Manager and its Affiliates has incurred any such liability
nor has any prior program been otherwise adversely affected by the imposition of
duties to borrowers. Nevertheless, this area of law is rapidly changing and
there can be no assurance that actions the Fund believes are appropriate to take
in protecting the Fund's interests as lender might not cause it to be liable for
a deemed breach of a duty to a borrower.
The Fund may not be able to register aircraft or marine vessels, which
could limit the Fund's ability to invest in these types of assets or could
affect the value realized by the Fund from such investments. The Fund may invest
in aircraft or marine vessels. Aircraft or marine vessels operated in the United
States must be registered with the Federal Aviation Administration ("FAA") or
the U.S. Coast Guard ("USCG"), which limit registration to aircraft or marine
vessels owned by U.S. Citizens and Resident Aliens. The FAA's and USCG's Rules
are not clear on the status of certain forms of entity that own aircraft or
marine vessels. The Fund will acquire aircraft or marine vessels only if they
are appropriately registered. If registration were later revoked for any reason,
the aircraft or marine vessel could not be operated in the United States
airspace or territorial waters, and the Fund would be subject to resulting
risks, including a possible forced sale of the aircraft or marine vessel,
possible uninsured casualties, the loss of benefits of the central recording
system under federal law and a breach by the Fund of leases or financing
agreements.
The Manager is subject to certain potential conflicts of interest that
could result in the Manager acting in its interest rather than that of the Fund.
These include potential conflicts relating to the following matters:
-- The Manager engages in other, potentially competing activities
-- The Fund may be in competition for investments with prior programs
sponsored by the Manager
-- The Fund expects to borrow up to 50% of the aggregate cost of
equipment, and this will result in higher Asset Management Fees than if
less debt were incurred
-- Agreements between the Fund and the Manager and its Affiliates are not
at arm's length
-- No independent managing underwriter has been engaged for the
distribution of Units
-- The Fund, the Manager and prospective holders are not represented by
separate counsel
-- The Fund may, under certain conditions and restrictions, enter into
joint ventures with other programs affiliated with the Manager
See the discussion under "Conflicts of Interest" for a more complete description
of the foregoing matters.
The amount and terms of debt available to the Fund for the purchase of
equipment may also determine the amount of cash distributed to investors and the
amount of tax benefits they receive. The Fund has not entered into any loan
agreements, and it cannot guarantee the availability or terms of any possible
debt financing.
The Fund may borrow on terms that provide for a lump sum payment on the due
date, which might increase the risk of default by the Fund. The Fund may have
debt that is not repaid in regular installments over the term of the loan, but
requires a large payment of principal and interest on the final due date. This
"balloon payment" debt is riskier than debt that is repaid in regular
installments over the term of the loan, because the Fund's ability to repay the
loan when it becomes due may depend on its ability to find a new loan or a buyer
when the lump sum payment is due. If the economy is not favorable at that time
or the value of the equipment has fallen, the Fund might default on its loan and
lose the equipment.
15
The amount of capital actually raised by the Fund may determine its
diversification and profitability. The Fund's offering will be not less than
$1,200,000 nor more than $150,000,000. If the Fund receives only the minimum
capital, it will be more difficult to diversify its equipment and lessees, and
any single lease transaction will have a greater impact on its potential
profits. The Fund has no minimum number of lease transactions nor is there any
restriction on the percentage of the minimum capital that it may use to buy
equipment of a single type or equipment leased to a single lessee.
The Fund is a newly-formed entity. The Fund was formed in June 2004, and
has no operating history.
A delay in the investment could affect the Fund's ability to meet its
investment objectives. Any overall decline in corporate expansion or demand for
capital goods could delay investment of the Fund's capital, and its production
of lease revenues. As of September 30, 2004, the most recent prior ATEL program,
ATEL Capital Equipment Fund X, LLC had a total of approximately $22,055,000
available to invest in equipment but not yet committed to any identified
transactions. The Manager cannot predict the course of the U.S. economy, and
there can be no assurance that the Fund will not experience delays in investment
should demand for equipment decline or fail to recover in the future.
Investment by the Fund in joint ownership of equipment may involve risks in
coordinating its interests with those of its joint venture partner. Some of the
Fund's investments may be owned by joint ventures between the Fund and
unaffiliated third parties or, under certain circumstances, programs related to
the Fund or the Manager, or as co-owners with such parties. The investment by
the Fund in joint ownership of equipment, instead of investing in the equipment
directly or as the sole owner, may involve risks such as:
-- the Fund's co-venturer might become bankrupt,
-- the co-venturer may have interests or goals that are inconsistent with
those of the Fund,
-- the parties may reach an impasse on joint venture decisions,
-- the co-venturer may be in a position to take action contrary to the
instructions or the requests of the Fund or contrary to the Fund's
policies or objectives, or
-- actions by a co-venturer might have the result of subjecting equipment
owned by the joint venture to liabilities in excess of those
contemplated by the terms of the joint venture agreement or might have
other adverse consequences for the Fund.
Risks Relating to Tax Matters
In determining whether to invest in the Units, a prospective investor
should consider possible tax consequences, which may include:
-- the Fund could be taxed as a corporation. If so, the yield to an
investor would be substantially reduced. See "Federal Income Tax
Consequences - Classification as a Partnership."
-- the IRS could disallow or reduce the Fund's deductions. If so, Fund
income would increase or Fund losses would decrease. See "Federal
Income Tax Consequences."
-- the IRS could reallocate Fund income, gain, deduction and loss in a
manner that is different from the provisions of the operating
agreement. If so, an investor's share of such items would be different
from that described in this prospectus. See "Federal Income Tax
Consequences - Allocations of Profits and Losses."
-- a tax-exempt organization will have unrelated business taxable income
from an investment in the Fund. IRAs and other retirement plans are
tax-exempt entities. See "Federal Income Tax Consequences - Investment
by Qualified Retirement Plans and IRAs."
-- changes in the tax law or regulations may adversely affect the Fund,
the investors and the value of the Fund's equipment. See "Federal
Income Tax Consequences - Future Federal Income Tax Changes."
16
-- the opinion of tax counsel is limited in scope and qualified by certain
assumptions. There can be no assurance that the IRS will not challenge
the Fund's tax positions. An IRS challenge, if successful, could have a
detrimental effect on the Fund's ability to realize its investment
objectives. See "Preface" and "Opinion of Derenthal & Dannhauser LLP"
in "Federal Income Tax Consequences."
-- investors may have tax liability greater than their distributions.
See "Federal Income Tax Consequences."
-- an investor's share of losses incurred by the Fund will be subject to
the passive loss limitation on deductibility. An investor may be unable
to deduct Fund losses until termination of the Fund. See "Federal
Income Tax Consequences - Limitation on Deduction of Losses."
-- investors may have tax liability from Fund portfolio income. Portfolio
income may not be offset by passive activity losses. See "Federal
Income Tax Consequences - Limitation on Deduction of Losses."
-- an audit of an investor's tax return could result from the audit of the
Fund's tax return. See "Federal Income Tax Consequences - Audit of Tax
Returns."
-- investors may be required to file tax returns and pay state, local
and/or foreign taxes as a result of an investment in the Fund. See
"Federal Income Tax Consequences - State and Local Taxes."
-- investors may be subject to withholding. See "Federal Income Tax
Consequences - State and Local Taxes."
Each investor is urged to consult his tax advisor regarding his own tax
situation and potential changes in the tax law.
Retirement Plan Risks
There are special considerations that apply to pension or profit sharing trusts
or IRAs investing in Units. An investment in Units by a retirement plan must
meet the fiduciary and other standards under ERISA or the Internal Revenue Code.
If not, the investment could be subject to penalties.
Retirement plans investing the assets of a pension, profit sharing, 401(k),
Keogh or other qualified retirement plan or the assets of an IRA in Units should
be satisfied that the investment will not constitute a prohibited transaction
under Section 406 of ERISA or Section 4975 of the Internal Revenue Code. Civil
penalties and excise taxes may be imposed on prohibited transactions.
Failure to satisfy the fiduciary standards of conduct and other applicable
requirements of ERISA and the Internal Revenue Code may result in imposition of
civil and criminal penalties, and can subject the fiduciary to equitable
remedies. Fiduciary standards include the following:
-- whether the investment is made in accordance with the documents and
instruments governing the retirement plan;
-- whether the investment satisfies the prudence and diversification
requirements of ERISA and the Internal Revenue Code;
-- whether the investment will impair the liquidity of the retirement
plan;
-- whether the investment will produce "unrelated business taxable
income" for the retirement plan; and
-- whether the assets of the plan can be valued annually.
For a discussion of these matters please see "ERISA Considerations."
17
WHO SHOULD INVEST
The Units represent a long-term investment, the primary benefit of which is
expected to be cash distributions. A purchase of Units is suitable only for
persons who meet the financial suitability standards described below and who
have no need for liquidity from this investment. In order to subscribe for
Units, each investor must execute a Subscription Agreement, a specimen of which
is attached as Exhibit C. The Subscription Agreement provided to the investor
for execution must be accompanied by a copy of this Prospectus, and each
subscriber has the right to cancel his subscription during a period of five
business days after the subscriber has submitted the executed Subscription
Agreement to the broker-dealer through which the Units are sold. The Fund and/or
the selling broker-dealer will send each investor a written confirmation of the
acceptance of the investor's subscription for Units upon admission to the Fund.
The Fund has established suitability standards which require that an
investor:
-- have an annual gross income of at least $45,000 and a net worth
(exclusive of home, home furnishings and automobiles) of at least
$45,000; or
-- have a net worth (determined with the same exclusions) of at least
$150,000.
Certain state securities commissioners have established suitability
standards different from the above for their states. The following states have
imposed additional conditions on investments in such jurisdictions:
Arizona. Each Arizona investor must (i) have an annual gross income of at
least $60,000 and a net worth (exclusive of home, home furnishings and
automobiles) of at least $60,000 in excess of his Original Invested Capital; or
(ii) have a net worth (determined with the same exclusions) of at least
$225,000.
California. Each California investor must (i) have an annual gross income
of at least $50,000 and a net worth (exclusive of home, home furnishings and
automobiles) of a least $75,000; or (ii) have a net worth (determined with the
same exclusions) of at least $150,000. California investors may not invest in
Units an amount in excess of 10% of the investor's net worth, determined
exclusive of the investor's home, home furnishings and automobiles.
Indiana. Each Indiana investor must (i) have an annual gross income of at
least $60,000 and a net worth (exclusive of home, home furnishings and
automobiles) of at least $60,000 in excess of his Original Invested Capital; or
(ii) have a net worth (determined with the same exclusions) of at least $225,000
in excess of his Original Invested Capital.
Iowa. Each Iowa investor must (i) have an annual gross income of at least
$60,000 and a net worth (exclusive of home, home furnishings and automobiles) of
at least $60,000 in excess of his Original Invested Capital; or (ii) have a net
worth (determined with the same exclusions) of at least $225,000.
Kansas. Each Kansas investor must (i) have an annual gross income of at
least $60,000 and a net worth (exclusive of home, home furnishings and
automobiles) of at least $60,000 in excess of his Original Invested Capital; or
(ii) have a net worth (determined with the same exclusions) of at least $225,000
in excess of his Original Invested Capital. No Kansas investor may invest in
Units an amount in excess of 10% of the investor's liquid net worth.
Massachusetts. Each Massachusetts investor must (i) have an annual gross
income of at least $60,000 and a net worth (exclusive of home, home furnishings
and automobiles) of at least $60,000 in excess of his Original Invested Capital;
or (ii) have a net worth (determined with the same exclusions) of at least
$225,000 in excess of his Original Invested Capital.
Michigan. Each Michigan investor must (i) have an annual gross income of at
least $60,000 and a net worth (exclusive of home, home furnishings and
automobiles) of at least $60,000 in excess of his Original Invested Capital; or
(ii) have a net worth (determined with the same exclusions) of at least $225,000
in excess of his Original Invested Capital. An investor in Michigan may not
invest in Units any amount in excess of 10% of the investor's net worth
(exclusive of home, home furnishings and automobiles).
18
Missouri. Each Missouri investor must (i) have an annual gross income of at
least $60,000 and a net worth (exclusive of home, home furnishings and
automobiles) of at least $60,000 in excess of his Original Invested Capital; or
(ii) have a net worth (determined with the same exclusions) of at least $225,000
in excess of his Original Invested Capital. No Missouri investor may invest in
Units an amount in excess of 10% of the investor's liquid net worth.
New Hampshire. Each New Hampshire investor must (i) have an annual gross
income of at least $50,000 and a net worth (exclusive of home, home furnishings
and automobiles) of at least $125,000 in excess of his Original Invested
Capital; or (ii) a net worth (exclusive of home, home furnishings and
automobiles) of at least $250,000 in excess of his Original Invested Capital.
North Carolina. Each North Carolina investor must (i) have an annual gross
income of at least $60,000 and a net worth (exclusive of home, home furnishings
and automobiles) of at least $60,000 in excess of his Original Invested Capital;
or (ii) have a net worth (determined with the same exclusions) of at least
$225,000 in excess of his Original Invested Capital.
Ohio. An Ohio investor may not invest in Units an amount in excess of 10%
of the investor's liquid net worth.
Oregon. Each Oregon investor must (i) have an annual gross income of at
least $60,000 and a net worth (exclusive of home, home furnishings and
automobiles) of at least $60,000 in excess of his Original Invested Capital; or
(ii) have a net worth (determined with the same exclusions) of at least $225,000
in excess of his Original Invested Capital.
Pennsylvania. In addition to the investor suitability standards set forth
under "Who Should Invest," an investor in Pennsylvania may not invest in Units
an amount in excess of 10% of the investor's net worth (with such net worth
calculated exclusive of home, home furnishings and automobiles). Furthermore,
Pennsylvania subscriptions will be subject to a separate escrow and will be
released to the Fund only when the Fund has received aggregate subscriptions
from all investors equal to not less than $7.5 million.
By executing the Subscription Agreement, an investor represents that he
meets the suitability standards applicable to him, and agrees that such
standards may be applied to any proposed transferee of his Units. Each
participating broker-dealer who sells Units has the affirmative duty, confirmed
in the Selected Dealer Agreement entered into with the Dealer Manager, to
determine prior to the sale of Units that an investment in Units is a suitable
investment for its subscribing customer, must execute a representation in the
Subscription Agreement regarding such suitability, and must maintain information
concerning suitability for at least six years following the date of investment.
The selling broker and the sponsor must make every reasonable effort to
determine that the purchase of Units is a suitable and appropriate investment
for each purchaser, based on relevant information concerning the investor,
including the investor's age, investment objectives, investment experience,
income, net worth, financial situation, and other investments, as well as any
other pertinent factors.
The minimum number of Units that an investor may purchase is 500,
representing a total minimum investment of $5,000. Additional investments may be
made in a minimum amount of 50 Units ($500) per subscription, and minimum
additional increments of one Unit ($10). Investors seeking to acquire additional
Units after their initial subscription need not complete a second subscription
agreement. In addition to restrictions on transfer imposed by the Fund, an
investor seeking to transfer his Units after his initial investment may be
subject to the securities or "Blue Sky" laws of the state in which the transfer
is to take place.
Fund income realized by an IRA or a qualified pension plan, profit-sharing
plan, stock bonus plan or Keogh Plan will be taxable to the plan as "unrelated
business taxable income" under the Internal Revenue Code. In considering an
investment in the Fund, plan fiduciaries should consider, among other things,
the diversification requirements of Section 401(a)(1)(C) of the Internal Revenue
19
Code, additional legal requirements under the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") and the prudent investment standards
generally imposed on plan fiduciaries. Also, in certain circumstances, the
assets of an entity in which a Qualified Plan or IRA has made an equity
investment may constitute "plan assets." To the extent necessary to avoid this
result, the Fund will limit the sale and transfer of Units to any IRA or a
qualified pension plan, profit-sharing plan, stock bonus plan or Keogh Plan so
that less than 25% of the total outstanding Units are held by these investors at
all times. Each investor must make a representation at the time of his
subscription as to the record and beneficial ownership of the Units subscribed.
Investors should also note that the Fund is required by the Operating
Agreement to distribute its available cash to the extent necessary to allow a
Holder in a 31% federal income tax bracket to pay the federal income taxes due
on his income from the Fund for the year. So it is possible that a Holder in a
higher tax bracket might not receive enough cash from the Fund to pay his tax
liabilities. However, the Manager is also required to make cash distributions in
certain minimum amounts prior to any reinvestment in equipment and must
distribute all available revenues after the sixth year following the year the
offering closes. The Manager expects distributions will be in amounts that will
exceed the expected tax liabilities resulting from allocations of income
regardless of the investors' tax brackets. Distributions to nonresident or
foreign investors may be subject to withholding taxes, which would reduce the
amount of cash actually received by such investors.
Under federal law, certain types of equipment, including aircraft and
marine vessels, may not be operated unless they are owned by United States
Citizens or Resident Aliens. To assure that the Fund will not exceed relevant
federal limits on foreign ownership, the Manager will not permit more than 20%
of the outstanding Units to be held by persons other than U.S. Citizens and
Resident Aliens, and may deny or condition any proposed subscription or transfer
in order to comply with such limitation. Furthermore, any Holder who ceases to
be a United States Citizen or Resident Alien may be required to tender his Units
to the Fund for repurchase at a price determined pursuant to the formula
described under "Summary of Operating Agreement -- Repurchase of Units." A UNIT
HOLDER WHO FAILS TO CONFORM TO HIS REPRESENTATIONS ABOUT CITIZENSHIP OR
MISREPRESENTS HIS CITIZENSHIP MAY FORFEIT AND NO LONGER BE ENTITLED TO CASH
DISTRIBUTIONS, TAX ALLOCATIONS, RECEIPT OF REPORTS AND VOTING PRIVILEGES,
ALTHOUGH HE MAY REALIZE PROCEEDS UPON THE TRANSFER OF HIS UNITS TO AN ELIGIBLE
INVESTOR, WHO WOULD BE ENTITLED TO THE FULL ECONOMIC BENEFITS AND OTHER
PRIVILEGES ATTRIBUTABLE TO SUCH UNITS.
20
ESTIMATED USE OF PROCEEDS
Many of the figures set forth below, such as the amount of offering and
organization expenses and capital reserves, are only estimates and not
statements of expenditures already incurred. The actual amounts will depend on
the course of the offering of the Units and the operations of the Fund. The Fund
expects to commit approximately 87% of the Gross Proceeds of this offering to
the cash portion of the purchase price of Equipment. At least an additional
one-half of one percent of its initial capital will be held as capital reserves.
Minimum Offering Maximum Offering
------------------------- -------------------------
Amount Percent Amount Percent
--------------- --------- --------------- ---------
Gross Offering Proceeds $1,200,000 100.00% $150,000,000 100.00%
Less Offering and Organization Expenses:
Selling Commissions 108,000 9.00% 13,500,000 9.00%
Other Offering and Organization Expenses 30,000 2.50% 5,250,000 3.50%
--------------- --------- --------------- ---------
Net Offering Proceeds 1,062,000 88.50% 131,250,000 87.50%
Capital Reserves 6,000 0.50% 750,000 0.50%
--------------- --------- --------------- ---------
Amount Available for Cash Payments for Equipment $1,056,000 88.00% $130,500,000 87.00%
=============== ========= =============== =========
The Fund will pay selling commissions equal to 9% of the selling price of
Units to ATEL Securities Corporation, a subsidiary of the Manager acting as the
dealer manager for the group of selling broker-dealers. ATEL Securities
Corporation will in turn pay to participating broker-dealers selling commissions
equal to 7.5% of the price of Units sold by them, retaining the balance of 1.5%.
Total selling commissions, disbursements and reimbursements to participating
broker-dealers may not exceed an amount equal to 10% of the Gross Proceeds,
except that an additional 0.5% of the Gross Proceeds may be paid for
accountable, bona fide due diligence expenses. Bona fide due diligence expenses
will include actual costs incurred by broker-dealers to review the business,
financial statements, transactions, and investments of ATEL and its prior
programs to determine the accuracy and completeness of information provided in
this Prospectus, the suitability of the investment for their clients and the
integrity and management expertise of ATEL and its personnel. Costs may include
telephone, postage and similar communication costs incurred in communicating
with ATEL personnel and ATEL's outside accountants and counsel in this pursuit;
travel and lodging costs incurred in visiting the ATEL offices, reviewing ATEL's
books and records and interviewing key ATEL personnel; the cost of outside
counsel, accountants and other due diligence investigation specialists engaged
by the broker-dealer; and the internal costs of time and materials expended by
broker-dealer personnel in this due diligence effort. ATEL will require full
itemized documentation of any claimed due diligence expenditure and will
determine whether the expenditure can be fairly allocated to bona fide due
diligence investigation before permitting reimbursement.
Certain persons, including the Manager, the Dealer Manager or the
broker-dealers engaged by the Dealer Manager to sell the Units, or any of their
Affiliates or employees, and others may purchase Units in this offering with
reduced selling commissions under specific circumstances described under "Plan
of Distribution - Investments By Certain Persons." In such event, the amount of
"Gross Offering Proceeds" and "Selling Commissions" would be reduced, but such
reduced commissions would not affect the amount of "Net Offering Proceeds."
Other offering and organization expenses are expenses incurred in the
organization of the Fund, legal, accounting and escrow fees, printing costs,
filing and qualification fees and disbursements and reimbursements to
broker-dealers participating in the sale of Units. The Manager has agreed to pay
all Organization and Offering Expenses, without reimbursement from the Fund,
that exceed an amount equal to:
-- 15% of the offering proceeds up to $25,000,000, and
-- 14% of the offering proceeds in excess of $25,000,000.
21
If the Fund's final offering proceeds are less than $2,000,000, the Manager has
agreed to pay all Organization and Offering Expenses that exceed an amount equal
to 12% of the total. Payment of these expenses by the Manager will be without
reimbursement by the Fund.
The Fund will initially establish capital reserves in an amount equal to
0.5% of offering proceeds for general working capital purposes. This amount may
fluctuate from time to time as the Manager determines the level of reserves
necessary for the proper operation of the Fund in the exercise of its business
judgment. Any net offering proceeds not used to acquire portfolio investments or
needed as capital reserves will be returned to Unit holders as described under
"Investment Objectives and Policies - General Policies" below.
The line item for "Amounts Available for Cash Payments for Equipment" is
the amount available to pay the cash portion of the purchase price of equipment
plus related acquisition expenses, which are treated for tax and accounting
purposes as capitalized costs added to the basis of the items of equipment to
which they relate.
22
MANAGEMENT COMPENSATION
Summary Table
The following table includes estimates of the maximum amounts of all
compensation and other payments that the Manager and its Affiliates will
receive, directly or indirectly, in connection with the operations of the Fund,
all of which are described more completely below under "Narrative Description of
Compensation." The terms of the Manager's compensation were not determined by
arm's-length negotiation. The Operating Agreement does not permit the Manager or
its related entities to receive more than the maximum fees or expenses stated
for each type of compensation by reclassifying such items under a different
category.
Entity Receiving Estimated Amount Assuming
Compensation Type of Compensation Maximum Units Sold
- ------------------------- ------------------------- -------------------------
The Dealer Manager Selling Commissions (Up to 1.5% Total selling commissions to be
of offering proceeds to be retained retained by the Dealer Manager are
by the Dealer Manager) not expected to exceed $2,250,000.
Manager and Affiliates Reimbursement of Organization $5,250,000
and Offering Expenses (when
added to selling commissions, not
to exceed a total equal to 15% of
all offering proceeds up to $25
million and 14% of any additional
offering proceeds)
OPERATIONAL STAGE
Manager and Affiliates Asset Management Fee (a fee equal Not determinable at this time
to 4% of Operating Revenues,
subject to limitations based on
Fund operations)
Manager and Affiliates Reimbursement of Operating Not determinable at this time
Expenses, subject to certain
limitations
CARRIED INTEREST IN FUND
Manager and Affiliates Interest equal to 7.5% of all Fund Not determinable at this time
taxable income, tax losses and cash
distributions
Narrative Description of Compensation
Selling Commissions. The Dealer Manager will receive selling
commissions on all sales of Units equal to 9% of Gross Proceeds. The Dealer
Manager will reallow to participating broker-dealers 7.5% of the Gross Proceeds
from Units sold by them. It is not anticipated that the Dealer Manager or other
Affiliates of the Manager will directly effect any sales of the Units, although
the Dealer Manager will provide certain wholesaling services.
Reimbursement of Organization and Offering Expenses. The Manager and
its Affiliates will be reimbursed for certain expenses in connection with the
23
organization of the Fund and the offering of Units. Total Organization and
Offering Expenses payable or reimbursable by the Fund, including selling
commissions payable directly by the Fund, may not exceed:
-- 15% of all offering proceeds up to $25,000,000, plus
-- 14% of all offering proceeds in excess of $25,000,000.
Asset Management Fee. The Fund will pay the Manager an Asset Management Fee
in an amount equal to 4% of all:
-- revenues from the Equipment, other than security deposits paid by
lessees, and
-- cash remaining from the sale or refinancing of any equipment after
payment of all expenses related to the transaction.
The Asset Management Fee will be paid on a monthly basis. The amount of the
Asset Management Fee payable in any year will be reduced for that year to the
extent it would otherwise exceed the Asset Management Fee Limit, as described
below. The Asset Management Fee will be paid for services rendered by the
Manager and its Affiliates in determining portfolio and investment strategies
and generally managing or supervising the management of the equipment. The
Manager will supervise performance of all management activities, including,
among other activities: the acquisition and financing of the equipment
portfolio; the 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.
Reimbursement of Operating Expenses. The Fund will reimburse the Manager
and its Affiliates for expenses it pays on the Fund's behalf. These
reimbursements will include:
-- the actual cost to the Manager or its Affiliates of services, goods and
materials used for and by the Fund and obtained from unaffiliated
parties; and
-- the cost of administrative services provided by Affiliates of the
Manager and necessary to the prudent operation of the Fund, provided
that reimbursement for administrative services will be at the lower of
-- the actual cost of such services, or
-- the amount that the Fund would be required to pay to independent
parties for comparable services.
Beginning with the first full year after the termination of this
offering, the total and annual amount of Reimbursable Administrative Expenses
payable by the Fund for the remainder of its term will in no event exceed, as of
any date, the sum of 1% per annum of the total capital raised.
The Manager estimates that the total amount of Reimbursable Administrative
Expenses during the Fund's first full year of operations after completion of the
offering, assuming receipt of the maximum Gross Proceeds, will be approximately
$650,000 to $750,000.
Carried Interest in Fund Net Income, Net Loss and Distributions. The Fund
Manager will have a Carried Interest in the Fund as a Member equal to 7.5% of
all allocations of Net Income, Net Loss and Distributions. The Carried Interest
in the Fund will compensate the Manager for organizing the Fund and arranging
for supervision of Fund administration (e.g., investor communications and
services, regulatory reporting, accounting and transfers of Units). The relative
capital contributions and interests in Fund Net Income, Net Loss and
Distributions is set forth in the following bar chart (Figure 1):
24
Figure 1
[GRAPHIC OMITTED]
Limitations on Fees
The Fund has adopted a single Asset Management Fee plus the Carried
Interest as a means of compensating the Manager for sponsoring the Fund and
managing its operations. While this compensation structure is intended to
simplify management compensation for purposes of investors' understanding, state
securities administrators use a more complicated compensation structure in their
review of equipment program offerings in order to assure that those offerings
are fair under the states' merit review guidelines. The total of all Front End
Fees, the Carried Interest and the Asset Management Fee will be subject to the
Asset Management Fee Limit in order to assure these state administrators that
Fund will not bear greater fees than permitted under the state merit review
guidelines. The North American Securities Administrators Association, Inc.
("NASAA") is an organization of state securities administrators, those state
government agencies responsible for qualifying securities offerings in their
respective states. NASAA has established standards for the qualification of a
number of different types of securities offerings and investment products,
including its Statement of Policy on Equipment Programs (the "NASAA Equipment
Leasing Guidelines"). Article IV, Sections C through G of the NASAA Equipment
Leasing Guidelines establish the standards for payment of reasonable carried
interests, promotional interests and fees for equipment acquisition, management,
resale and releasing services to equipment leasing program sponsors. Article IV,
Sections C through G of the NASAA Equipment Leasing Guidelines set the maximum
compensation payable to the sponsor and its affiliates from an equipment leasing
program such as the Fund. The Asset Management Fee Limit will equal the maximum
compensation payable under Article IV, Sections C through G of the NASAA
Equipment Leasing Guidelines as in effect on the date of the Fund's prospectus
(the "NASAA Fee Limitation"). Under the Asset Management Fee Limit, the Fund
will calculate the maximum fees payable under the NASAA Fee Limitation and
guarantee that the Asset Management Fee it will pay the Manager and its
Affiliates, when added to its Carried Interest, will never exceed the fees and
interests payable to a sponsor and its affiliates under the NASAA Fee
Limitation.
Asset Management Fee Limit. The Asset Management Fee Limit will be
calculated each year during the Fund's term by calculating the total fees that
25
would be paid to the Manager if the Manager were to be compensated on the basis
of the maximum compensation payable under the NASAA Fee Limitation, including
the Manager's Carried Interest, as described below. To the extent that the
amount paid as Front End Fees, the Asset Management Fee, and the Carried
Interest for any year would cause the total fees to exceed the aggregate amount
of fees calculated under the NASAA Fee Limitation for the year, the Asset
Management Fee and/or Carried Interest for that year will be reduced to equal
the maximum aggregate fees under the NASAA Fee Limitation . 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 the
Manager in a subsequent period, but only to the extent that the deferred
compensation would be within the Asset Management Fee Limit for that later
period. Any deferred fees that cannot be paid under the applicable limitations
through the date of liquidation would be forfeited by the Manager at
liquidation.
Under the NASAA Equipment Leasing Guidelines, the Fund is required to
commit a minimum percentage of the Gross Proceeds to Investment in Equipment,
calculated as the greater of: (i) 80% of the Gross Proceeds reduced by 0.0625%
for each 1% of indebtedness encumbering the Fund's equipment; or (ii) 75% of
such Gross Proceeds. The Fund intends to incur total indebtedness equal to 50%
of the aggregate cost of its equipment. The Operating Agreement requires the
Fund to commit at least 85.875% of the Gross Proceeds to Investment in
Equipment. Based on the formula in the NASAA Guidelines, the Fund's minimum
Investment in Equipment would equal 76.875% of Gross Proceeds (80% - [50% x
..0625%] = 76.875%), and the Fund's minimum Investment in Equipment would
therefore exceed the NASAA Fee Limitation minimum by 9%.
The amount of the Carried Interest permitted the Manager under the NASAA
Fee Limitation will be dependent on the amount by which the percentage of Gross
Proceeds the Fund ultimately commits to Investment in Equipment exceeds the
minimum Investment in Equipment under the NASAA Fee Limitation. The NASAA Fee
Limitation permits the Manager and its Affiliates to receive compensation in the
form of a carried interest in Fund Net Income, Net Loss and Distributions equal
to 1% for the first 2.5% of excess Investment in Equipment over the NASAA
Guidelines minimum, 1% for the next 2% of such excess, and 1% for each
additional 1% of excess Investment in Equipment. With a minimum Investment in
Equipment of 85.875%, the Manager and its Affiliates may receive an additional
carried interest equal to 6.5% of Net Profit, Net Loss and Distributions under
the foregoing formula (2.5% + 2% + 4.5% = 9%; 1% + 1% + 4.5% = 6.5%). At the
lowest permitted level of Investment in Equipment, the NASAA Guidelines would
permit the Manager and its Affiliates to receive a promotional interest equal to
5% of Distributions of Cash from Operations and 1% of Distributions of Sale or
Refinancing Proceeds until Members have received total Distributions equal to
their Original Invested Capital plus an 8% per annum cumulative return on their
adjusted invested capital, as calculated under the NASAA Guidelines and,
thereafter, the promotional interest may increase to 15% of all Distributions.
With the additional carried interest calculated as described above, the
maximum aggregate fees payable to the Manager and Affiliates under the NASAA
Guidelines as carried interest and promotional interest would equal 11.5% of
Distributions of Cash from Operations (6.5% + 5% = 11.5%), and 7.5% of
Distributions of Sale or Refinancing Proceeds (6.5% + 1% = 7.5%), before the
subordination level was reached, and 21.5% of all Distributions thereafter. The
maximum amounts to be paid under the terms of the Operating Agreement are
subject to the application of the Asset Management Fee Limit provided in Section
8.3 of the Agreement, which limits the annual amount payable to the Manager and
its Affiliates as the Asset Management Fee and the Carried Interest to an
aggregate not to exceed the total amount of fees that would be payable to the
Manager and its Affiliates under the NASAA Fee Limitation.
Upon completion of the offering of Units, final commitment of offering
proceeds to acquisition of equipment and establishment of final levels of
permanent portfolio debt, the Manager will calculate the maximum carried
interest and promotional interest payable to the Manager and its Affiliates
under the NASAA Fee Limitation and compare such total permitted fees to the
total of the Asset Management Fee and Manager's Carried Interest. If and to the
extent that the Asset Management Fee and Manager's Carried Interest would exceed
the fees calculated under the NASAA Fee Limitation, the fees payable to the
Manager and its Affiliates will be reduced by an amount sufficient to cause the
total of such compensation to comply with the NASAA Fee Limitation. The adjusted
Asset Management Fee Limit will then be applied to the Asset Management Fee and
26
Carried Interest as described above. A comparison of the Front End Fees actually
paid by the Fund and the NASAA Fee Limitation maximums will be repeated, and any
required adjustments will be made, at least annually thereafter.
Defined Terms Used in Description of Compensation
Definitions of certain capitalized terms used in the foregoing narrative
description of compensation payable to the Manager, and used in the alternative
fee schedule for purpose of calculating the Asset Management Fee Limitation, are
as follows:
"Asset Management Fee Limit" means the total fees calculated pursuant
to the NASAA Fee Limitation plus the Carried Interest, determined in the
manner described therein.
"Carried Interest" or "Interest in Distributions" means the allocable
share of Fund Distributions of Cash from Operations and Cash from Sales or
Refinancing payable to the Manager, as a Member, pursuant to Sections 10.4
and 10.5 of the Operating Agreement.
"Distributions" means any cash distributed to Holders and the Manager
arising from their respective interests in the Fund.
"Front-End Fees" shall mean fees and expenses paid by any party for
any services rendered during the Fund's organization and acquisition phase
including organization and offering expenses, leasing fees, acquisition
fees, acquisition expenses, and any other similar fees, however designated.
Notwithstanding the foregoing, Front-End Fees shall not include any
acquisition fees or acquisition expenses paid by a manufacturer of
equipment to any of its employees unless such persons are Affiliates of the
Manager.
"Net Income" or "Net Loss" means the taxable income or taxable loss of
the Fund as determined for federal income tax purposes, computed by taking
into account each item of Fund income, gain, loss, deduction or credit not
already included in the computation of taxable income and taxable loss, but
does not mean Distributions.
"Operating Revenues" means the total for any period of all Gross Lease
Revenues plus all Cash from Sales or Refinancing.
"Reimbursable Administrative Expenses" means the ordinary and
annually recurring administration expenses incurred by the Manager and
reimbursed by the Fund. Such expenses do not include interest,
depreciation, equipment maintenance or repair, third party services or
other non-administrative expenses.
INVESTMENT OBJECTIVES AND POLICIES
Principal Investment Objectives
The Fund's principal objectives are to invest in a diversified portfolio of
primarily low-technology, low-obsolescence equipment that will:
(i) preserve, protect and return the Fund's invested capital;
(ii) generate regular cash distributions to Unit holders, any balance
remaining after required minimum distributions to be used to purchase
additional equipment during the first six years after the year the offering
terminates; and
(iii) provide additional cash distributions after the end of the
reinvestment period and until all equipment has been sold.
Distributions will be made only if cash is available after payment of Fund
obligations (including payment of administrative expenses, debt service and the
Asset Management Fee) and allowance for necessary capital reserves.
Distributions are expected to begin as of the quarter in which the minimum
offering amount is achieved. However, there can be no assurance as to the timing
of distributions, or that any specific level of distributions or any other
objectives will be attained.
27
General Policies
The Fund intends to acquire various types of new and used equipment subject
to leases. The Fund's investment objective is to acquire primarily
low-technology, low-obsolescence equipment such as materials handling equipment,
manufacturing equipment, mining equipment, and transportation equipment. A
portion of the portfolio will include some more technology-dependent equipment
such as certain types of communications equipment, medical equipment,
manufacturing equipment and office equipment.
While there is no widely understood definition of "high technology" versus
"low obsolescence, low technology" types of equipment, the Fund uses these terms
to distinguish between those types of equipment which can be expected to retain
little or no residual value after completion of the lease term (so called "high
technology" equipment) and those types of equipment which may be expected to
retain some material value for extended useful lives (so called "low technology,
low obsolescence" equipment). Some "low technology, low obsolescence" equipment
may involve relatively sophisticated technology, but would be included in this
category because the technology involved would not be considered as rendering
the equipment vulnerable to the same type of rapid obsolescence as would be the
case with equipment in the "high technology" category. It should also be noted
that equipment cannot always be clearly characterized as in one category or the
other, but will fall somewhere on a scale of relative technology and
vulnerability to obsolescence
In a lease of high technology equipment, the lessor must negotiate a lease
rate that both recovers the full capital investment plus the target rate of
return before the lease expires or the asset reaches the end of its useful life
due to obsolescence. With low technology, low obsolescence equipment, the lessor
can structure lease terms and rates based on an assumed residual value, and can
seek to acquire equipment that will enjoy a strong resale market in order to
achieve the return of invested capital plus targeted profit on the investment.
The Operating Agreement does not limit the Fund's ability to invest in
high-technology equipment, but the Manager estimates that approximately 20% of
the Fund's portfolio, by equipment cost, will consist of high technology
equipment types.
Like most goods, new equipment generally has a higher market value than
comparable used equipment, and capital equipment tends to lose value as it is
used over a period of time. An equipment lessor, such as the Fund, tries to
negotiate lease terms based in part on its estimate of the value the leased
equipment will have when the lease ends. The lessor will negotiate a lease rate
designed to generate enough rental revenues over the term of the lease so that,
when the total lease payments are added to the estimated value of the equipment
upon lease termination, the lessor will receive both a return of the capital
used to purchase the equipment plus an overall profit on the investment. There
can be no assurance, however, that the Fund's assumptions regarding the residual
value of the equipment will be accurate or that its objective will be achieved.
The Fund will be subject to fluctuations in interest rates and inflation as
it establishes its portfolio. Lease rates tend to move in concert with interest
rates, so the Fund's lease rates may reflect changes in interest rates. To the
extent that rates drop over the course of the Fund's term, favorable lease rates
will typically be locked in for the balance of the lease term. On the other
hand, if interest rates rise, the rates available to the Fund on reinvestment of
its cash flow or on lease renewals and re-leases upon lease expirations will
provide a hedge against rising interest rates as the lease rates may be expected
to rise accordingly. As the portfolio will consist substantially of capital
assets, the residual values of these assets may be expected to rise with
increases in the rate of inflation during the Fund's term. While this may cause
equipment prices to increase for new portfolio acquisitions, the existing
portfolio will act as a hedge against the effects of inflation as the residual
values realized by the Fund on the renewal, re-lease and sale of equipment upon
the termination of leases may be expected to keep pace with increases in the
prices for new and used equipment generally.
The Manager will seek to maintain an appropriate balance and diversity in
the types of equipment acquired and the types of leases entered into by the
Fund. Its guidelines will include the following policies:
-- When all the offering proceeds are committed to equipment and all
permanent debt has been put in place, at least a majority of the
equipment, based on the aggregate purchase price, will be subject to
leases with scheduled lease payments returning at least 90% of the
purchase price of the equipment.
28
-- The Manager will seek to invest not more than 20% of the aggregate
purchase price of equipment in equipment acquired from a single
manufacturer. However, this limitation is a general guideline only, and
the Fund may acquire equipment from a single manufacturer in excess of
the stated percentage during the offering period and before the
offering proceeds are fully invested, or if the Manager deems such a
course of action to be in the Fund's best interest.
A number of factors will determine the actual composition of the Fund's
equipment portfolio; for example, the amount of offering proceeds actually
received will be a significant factor in determining the Fund's ability to
diversify its portfolio. Furthermore, the Manager cannot anticipate what types
of equipment will be available and at what prices at the time the Fund is ready
to invest its capital.
In structuring leases, the Fund's lease rate and return on investment
objectives will vary based on:
-- the type of equipment,
-- the terms of the lease,
-- the credit quality of the lessee, and
-- prevailing lease and financial market conditions.
The Manager will commit to a particular lease transaction only if it
believes that, in the context of the Fund's overall equipment portfolio, the
transaction will contribute to the satisfaction of the Fund's investment
objectives. The Fund does not have any specific "minimum rate of return." As
noted above, the Fund's objectives are to acquire a diversified portfolio of
equipment that will generate sufficient net cash flow to permit regular
distributions to investors and additional funds to reinvest in equipment.
Reinvestment of revenues is permitted only after certain minimum rates of
distributions are made.
The Manager will seek to structure a portfolio that is:
-- diversified as to equipment type, industry, lessee and geographic
location;
-- capable of generating sufficient net cash flow to meet the minimum
distribution requirements to permit reinvestment; and
-- capable of generating sufficient cash flow to provide funds for
additional investment in equipment.
The rates of return necessary to meet these objectives through the end of
the reinvestment period will depend on a number of variables that cannot be
predicted this far in advance.
As set forth above under "Principal Investment Objectives," it will be the
Fund's objective to reinvest in additional equipment any revenues remaining
after payment of certain minimum distributions during the reinvestment period.
The Fund will not acquire equipment after the reinvestment period, ending six
years after the offering is completed, except if necessary to satisfy
obligations entered into prior to the end of the reinvestment period or to
maintain or improve equipment already owned at that time.
Other than as set forth in any supplement to this Prospectus, the Fund has
not invested in or committed to purchase any equipment, and, as a result, there
can be no assurance as to when the proceeds from the offering will be fully
invested. Furthermore, prospective investors may not have an opportunity prior
to investing to evaluate all of the equipment to be acquired.
Before completing any acquisition of a single item of equipment that has a
contract purchase price more than $1,000,000, the Fund will obtain a future
value appraisal for the equipment from a qualified independent third party
appraiser. The Manager may also, in its discretion, obtain appraisals for
certain smaller acquisitions if it deems an appraisal to be appropriate because
of the type of equipment, the size of a transaction or otherwise. It should be
noted, however, that appraisals represent only the appraiser's opinion of the
value of the equipment, and do not necessarily represent the actual amount the
Fund might receive on sale of the equipment.
29
The Manager may purchase equipment in its own name, the name of a related
entity or the name of a nominee, a trust , or other special purpose entity, or
otherwise and hold title to the equipment temporarily (generally not more than
six months) for any purpose related to the business of the Fund, provided,
however that:
-- the transaction is in the best interest of the Fund;
-- the equipment is purchased by the Fund for a purchase price no greater
than the cost to the Manager or Affiliate (including any out-of-pocket
carrying costs), except for compensation permitted by the Operating
Agreement;
-- there is no difference in interest terms of the loans secured by the
equipment at the time acquired by the Manager or Affiliate and the time
acquired by the Fund;
-- there is no benefit arising out of such transaction to the Manager or
its Affiliate apart from the compensation otherwise permitted by the
Operating Agreement; and
-- all income generated by, and all expenses associated with, equipment so
acquired shall be treated as belonging to the Fund.
Any offering proceeds received by the Fund during the first twelve months
of the offering that have not been committed to investment in equipment by a
date eighteen months after the beginning of the offering, and any offering
proceeds received during a second year of the offering that have not been
committed to investment by a date six months after the end of the offering
(except for amounts used to pay operating expenses or required as capital
reserves) will be returned pro rata by the Fund to investors. In addition, in
order to refund to investors the amount of Front End Fees attributable to any
returned capital, the Manager has agreed to contribute to the Fund, and the Fund
shall distribute to investors pro rata, the amount by which (x) the amount of
unused capital so distributed, divided by (y) the percentage of Gross Proceeds
remaining after payment of all Front End Fees, exceeds the unused capital so
distributed. The Fund's capital will be available for general use during the
offering period and may be expended in operating equipment that has been
acquired. Offering proceeds will not be segregated or held separate from other
capital of the Fund pending investment, and no interest will be payable to
investors if uninvested offering proceeds are returned to them. Offering
proceeds will be deemed to have been committed to investment and will not be
returned to the Holders to the extent written agreements in principle or letters
of understanding were executed at any time prior to the end of these periods,
regardless of whether the investment is eventually consummated, and also to the
extent any funds have been reserved to make contingent payments in connection
with any equipment, regardless of whether any such payments are ever made.
Types of Equipment
The Fund intends to acquire and lease a diversified portfolio of equipment.
The Fund intends to invest primarily in what it deems to be relatively
low-technology, low-obsolescence types of equipment. These types of equipment
would include a variety of items that are not dependent on high-technology
design or applications for their usefulness to lessees, and are expected to be
less subject to rapid obsolescence than types that are so dependent.
Equipment acquisition will be subject to the Manager or its agents
obtaining information and reports, and undertaking inspections and surveys the
Manager deems appropriate to determine the probable economic life, reliability
and productivity of the equipment, its competitive position with respect to
other equipment and its suitability and desirability as compared with other
equipment. Purchases of new equipment for lease will typically be made directly
from a manufacturer or its authorized dealers, either under a purchase agreement
for large quantities of such equipment, through lease brokers, or on an ad hoc
basis to meet the needs of a particular lessee. There can be no assurance that
favorable purchase agreements can be negotiated with equipment manufacturers or
their authorized dealers or lease brokers. In addition, the Fund may enter into
sale/leaseback transactions in which the Fund will purchase equipment from
companies that will then simultaneously lease the equipment from the Fund. In
some cases, the Fund may purchase equipment jointly with other Affiliates or
with unaffiliated third parties, and hold title directly or through special
purpose entities, in which case the Fund would co-own the special purpose entity
with such other Affiliates of unaffiliated third parties. See "Joint Venture
Investments" under this caption below.
30
The following is a more detailed description of the various types of
equipment that the Fund may purchase and lease. The types of equipment are
listed in alphabetical order, and the discussion is not intended to imply any
order of emphasis in the Fund's acquisition policies. The final mix of equipment
types in the Fund's portfolio will depend on the factors discussed above under
"General Policies."
Aircraft. The Fund may invest in cargo and freight aircraft, corporate
aircraft and aircraft used for medical evacuation and rescue purposes. The
Manager anticipates that the Fund's cash investments in all types of aircraft
will not exceed an amount equal to 20% of the maximum offering amount (or
$30,000,000). Cargo and freight aircraft are used by commercial freight carriers
and national and international mail and package delivery services exclusively
for the hauling of cargo. Corporate aircraft, including both helicopters and
fixed-wing aircraft, are used by many businesses to move employees from city to
city or to locations without scheduled air service and for the express delivery
of personnel, components and products at various manufacturing and service
facilities. The Fund may invest in commercial passenger aircraft, but not more
than 10% of its maximum offering amount (or $15,000,000) will be committed to
the purchase of commercial passenger aircraft and any debt used to acquire or
maintain commercial passenger aircraft will either be secured by the obligations
of an "investment grade" lessee, or will not involve the other assets of the
Fund as collateral. Commercial passenger aircraft consist of aircraft used in
the day to day operation of scheduled passenger air carriers.
All domestic corporate and commercial aircraft are registered with the
Federal Aviation Administration ("FAA"). Under the Federal Aviation Act of 1958,
as amended (the "Act"), it is unlawful to operate an unregistered aircraft in
the United States. In order to be eligible for registration, the rules and
regulations of the FAA provide, in effect, that aircraft is eligible for
registration only if it is owned by a United States Citizen or a Resident Alien.
A literal reading of the Act could lead to the conclusion that aircraft in which
the Fund has an interest are not eligible for registration because the term
United States Citizen is defined in the Act to include a partnership in which
each member is an "individual" who is a citizen of the United States or one of
its possessions, and the Fund has a corporate Manager. The FAA has indicated
informally that it will permit registration of an aircraft under the Act and the
regulations thereunder in the name of a trustee of a trust in which a
partnership is the sole beneficiary if the partnership's partners are United
States Citizens (whether or not they are all individuals) or Resident Aliens.
However, such representations are not binding on the FAA; therefore, the
possibility exists that the FAA would challenge such a registration. In
addition, a registration may be challenged and rendered invalid if a Member is
not, contrary to his representation to the Fund, a United States Citizen or a
Resident Alien or if a Member ceases to be a United States Citizen or a Resident
Alien. Any challenge, if successful, could result in an inability to operate the
aircraft, substantial penalties, the premature sale of the aircraft, the loss of
the benefits of the central recording system under federal law thereby leaving
the aircraft exposed to liens or other interests not of record with the FAA, and
a breach by the Fund of lease agreements entered into in connection with the
aircraft. Accordingly, the Manager will limit the ownership of Units or
interests therein by any persons who are not United States Citizens or Resident
Aliens to not more than 20% of the outstanding Units.
It is anticipated that any aircraft lease will provide, as a condition
precedent to the transaction, that application for registration shall have been
duly made and that the prospective lessee will have temporary or permanent
authority to operate the aircraft. If such authority were not obtainable because
of failure of registration, the lessee might be entitled to void the transaction
and the lease would not take effect.
Computer and Computer-related High Technology Equipment. This type of
equipment includes a variety of items including:
Small Computer Systems, Personal Computers and Workstations. Small
computer systems and personal computers are used alone or in networks by a
variety of businesses for various functions, including accounting, sales
management, administration and inventory control. Workstations are
generally high performance engineering and design systems that are more
complex than small computer systems and personal computers.
31
Computer Peripheral Equipment. Devices used with a computer system's
mainframe or central processing unit.
Mainframe Computers. Large central processing units, typically
manufactured by IBM and compatible with software designed by IBM.
CAE/CAD/CAM Equipment. Computer aided engineering, design and
manufacturing systems housing advanced computer and communications
technologies and sophisticated product data management software.
Construction Equipment. Construction equipment includes bulldozers,
haulers, cranes, graders, backhoes, front-end loaders, scrapers and asphalt and
cement spreaders used in a wide variety of applications including building
construction and road, bridge and other civil engineering construction projects.
Energy Equipment. Energy equipment includes cogeneration facilities,
transmission lines, generation facilities, compression and pumping equipment and
other processing and treatment equipment, as well as energy management systems.
General Purpose Plant/Office Equipment. Plant/office equipment includes
racking, shelving, storage bins, portable steel storage sheds, furniture,
fixtures, tables, counters, desks, chairs, cabinets and numerous other items
generally used in manufacturing plants, storage and distribution facilities and
offices.
Graphic Processing Equipment. Graphic processing equipment includes print
setters, printing presses, automatic drafting machines and all equipment that is
used for the visual display of designs, drawings and printed matter. Printing
presses come in a variety of sizes depending on the applications for which they
are used. Some printing presses are of a single color, whereas others can apply
up to eight colors. Phototype setters are used for the setting of type for
publications such as newspapers and magazines. Computerized type-setters have
become common in recent years, as they simplify type-setting, correction of
mistakes and lay-out of printed pages. Automatic drafting machines are computer
controlled visual displays of drawings, which enable designers to make changes
in engineering drawings without the time required to make a completely new
drawing by hand.
Machine Tools and Manufacturing Equipment. Machine tools and manufacturing
equipment include a wide variety of metalworking machinery, such as lathes,
drilling presses, turning mills, grinders, metal bending equipment, metal
slitting equipment and other metal forming equipment used in the production of a
variety of machinery and equipment. Some form of machine tool is used in
virtually every production process of a metal product or component. While some
machine tools and metalworking equipment are built for a particular end product,
the majority of machine tools can be used in a variety of applications.
Manufacturing equipment can also include some high technology equipment.
Maritime Equipment. Maritime equipment is widely used in the shipping
industry as the most cost-effective way of transporting large quantities of
commodities. Marine vessels include tankers, which are designed to carry liquid
commodities, and dry bulk carriers, which are designed to carry homogenous
commodities. In addition, certain vessels have been designed as combination
carriers that have the capacity to carry both liquid and dry cargoes. Such
equipment also includes supply vessels, tug boats, hopper barges, tank barges
and intermodal containers.
Marine vessels may be registered in countries other than the United States
and may operate in international and foreign seas and waterways. Certain types
of marine vessels must be registered prior to operation in the waterways of the
United States. Marine vessel registration can be challenged and rendered invalid
under circumstances similar to those discussed with regard to aircraft above.
Any successful challenge with respect to a marine vessel may result in
substantial penalties, including the forced sale of the vessel, the potential
for uninsured casualties, and a breach by the Partnership of the lease or
financing agreements related to the vessel.
In addition, certain U.S. federal statutes and regulations provide for the
forfeiture to the U.S. Government of transportation equipment, including marine
vessels, found to be used in the transportation of illegal drugs and other
32
contraband. Upon the acquisition of vessels, the Manager will seek to cause the
vessel owner to enter into the Sea Carrier Initiative Agreement with the U.S.
Customs Service, whereby the vessel owner agrees to take affirmative steps to
deter illegal access to and use of such vessels by those engaged in trafficking
of items deemed to be illegal contraband, including illegal drugs. The law
provides for an exception with respect to the owners of vessels, whereby the
illegal activity has occurred without the owner's knowledge, consent or willful
blindness. However, there can be no assurance that if a marine vessel owned by
the Fund and leased to a third party was found to be engaged in such illegal
activities, that it would not be seized or detained by the U.S. Government. In
that event, the Fund's insurance coverage may mitigate its loss of income or
pecuniary damages.
Materials Handling Equipment. Materials handling equipment includes many
varieties of fork lift trucks. They are either battery-powered or gas-powered,
and are used in warehouses and factories for the movement of products and
materials from one work station to another or from a warehouse to a truck for
shipment, or for the storing of products and materials. The equipment comes in a
variety of styles, depending on the design of the items to be moved and the
design of the shipping or warehouse facility. However, this type of equipment is
generally of standard design and can be used by a variety of industries.
Medical Equipment. Medical equipment includes a wide variety of testing and
diagnostic equipment including:
Radiology Equipment. This category includes x-ray equipment, CAT and
MRI scanners (i.e., body and head scanners) and other equipment to be used
in the radiology departments of hospitals and clinics.
Laboratory Equipment. This category includes blood analysis equipment
and other automated medical laboratory equipment.
Other Medical Equipment. This general category includes equipment
using ultrasound technology, patient monitoring systems and a variety of
other equipment used in hospitals, clinics and medical laboratories.
Photocopying Equipment. The Fund may acquire and lease photocopying and
other document duplicating or reproduction equipment.
Plant and Production Facilities. Plant and production facilities for
manufacturing, such as, air separation plants, production lines, bottling lines,
storage tanks. Large facility lease financing are likely to include an interest
in the underlying real property where the equipment is located, and in certain
cases, the cash flows generated from the project and the value of the equipment
will become a significant factor in the credit analysis and investment decision
by the Fund.
Railroad Rolling Stock. Railroad rolling stock includes gondolas, tank
cars, boxcars, hopper cars, flatcars, locomotives and various other equipment
used by railroads in the maintenance of their tracks. Flatcars and boxcars have
a variety of designs, some of which are general purpose and some of which are
special purpose. Special purpose flatcars and boxcars are used for the shipment
of specific products whereas a general purpose car can be used for the shipment
of a wide variety of products. Many electric utilities lease hopper cars for the
shipment of coal from the mine to the generating plant. Tank cars are used to
transport liquids. Locomotives are the engines, generally diesel powered, that
drive trains of railcars from one location to another. Locomotives come in a
variety of designs, which vary in the amount of horsepower produced.
Research and Experimentation Equipment. Research and experimentation
equipment includes various types of analyzers, spectrometers, oscilloscopes,
measuring instruments, gas and liquid chromatographs, physical testing
centrifuges, graphic plotters and printers, laser equipment, digital-aided
design systems, scanning electron microscopes, dissolution sampling systems, and
other general laboratory instruments and equipment used in businesses for the
development of ongoing research programs.
33
Telephone and Telecommunications Equipment. Communications equipment is
used for voice and data transmission. Its applications include, but are not
limited to, telephone communication, radio and television broadcasting, cable
television and satellite communications. The Fund may acquire and lease
communications equipment including telephone equipment and systems, data
communication terminals, cables, transmission wires, transmitters, control and
amplification equipment, repeaters, monitoring equipment, teleprinters,
connector and switching equipment, satellite and microwave transmission
facilities and support equipment.
Tractors, Trailers and Trucks. Tractors, trailers and trucks are used for
the shipment of various products and goods from one location to another.
Tractor-trailer rigs are often used for longer shipments and delivery of larger
pieces; whereas heavy-duty trucks are generally used for the more local delivery
of large products. A "tractor" refers to the power unit of a tractor-trailer
combination. The tractor cab is generally manufactured by one company and the
engine and drive train by another. The engine may use gasoline or diesel fuel.
Trailers are the container portion of a tractor-trailer rig and come in a
variety of sizes and designs depending on the product to be shipped. Trailers
may be designed for intermodal use so they can either be pulled by tractors or
transported on railroad flatcars. Trailers may be up to 45 feet long in most
states and most commonly have a set of twin axles (eight wheels) to carry the
load. A trailer may be enclosed on a flatbed for the shipment of large or
oversized products, and may be refrigerated for the shipment of perishable
products. The Fund intends to invest in trailers that can be used for the
shipment of a wide variety of goods and are not limited to specific
applications. Heavy-duty trucks are large trucks in which the engine and load
carrying components are mounted on a single frame. The trucks can be used for
the local delivery of large products or for the hauling of construction
materials.
Miscellaneous Equipment. The Fund may also acquire various other types of
equipment, including, but not limited to, oil drilling equipment, mining and
ore-processing equipment, electronic test equipment, office automation
equipment, furniture and fixtures, automobiles, dairy production equipment,
video projection and production equipment, store fixtures, display cases and
freezers.
Incidental Property Acquisitions. Incidental to an acquisition of
equipment, the Fund may acquire certain rights (including, by way of example,
puts, calls, options or warrants), interests in real property, mineral rights or
other tangible or intangible property or financial instruments. The Fund may
acquire ownership of an item of equipment by acquiring the beneficial interests
of a trust or the equity interest in a special purpose entity formed for the
purpose of holding title to leased equipment, which special purpose entity could
be in the form of a limited partnership, limited liability company, or
corporation. Nothing in the Operating Agreement prohibits the Fund from
acquiring any such incidental property rights or indirect ownership interest,
provided that the primary purpose and objective is the acquisition and leasing
of equipment as described herein, the acquisition of the incidental rights does
not alter the essential character of the transaction as an acquisition and lease
which otherwise satisfies the investment objectives and policies of the Fund,
and the acquisition does not otherwise violate or circumvent any provision of
the Operating Agreement.
Prior Program Diversification
The prior public equipment leasing programs sponsored by the Manager and
its Affiliates have had equipment portfolio objectives substantially identical
to those of the Fund. The first chart set forth below (Figure 2) represents the
actual equipment portfolio diversification by equipment type for all prior ATEL
public programs as of December 31, 2004; the second chart set forth below
(Figure 3) represents the actual equipment portfolio diversification by lessee
industry for all prior ATEL public programs as of December 31, 2004; and the
third chart set forth below (Figure 4) represents the actual portfolio
diversification by the lessees' geographic location for all prior ATEL public
programs as of December 31, 2004. Diversification of the Fund's portfolio will
depend on a number of variables, including the amount of capital raised and
market conditions, which cannot be predicted in advance. Although there can be
no assurance that the Fund will achieve diversification similar to that of the
prior programs, achieving such diversification will be one of the primary
investment objectives and policies of the Fund.
34
[GRAPHIC OMITTED]
Figure 2
35
[GRAPHIC OMITTED]
Figure 3
[GRAPHIC OMITTED]
Figure 4
Diversification of an investor's portfolio across several asset classes can
reduce overall investment portfolio risk in the same manner as accomplished by
ATEL Funds with respect to their equipment portfolios by diversifying among
equipment type, industry and geographic location. Ibbotson Associates, Inc. has
published the following graph (Figure 5) representing reduction of investment
portfolio risk, measured by standard deviation, based on the number of randomly
selected assets in a portfolio.
36
[GRAPHIC OMITTED]
Figure 5
Furthermore, many investment professionals believe asset allocation is one of
the most important factors in determining the performance of an investor's
investment portfolio. The following graphic (Figure 6) illustrates the results
of one study of investment portfolio performance published in 2004.
[GRAPHIC OMITTED]
Figure 6
37
Borrowing Policies
The Fund expects to incur debt to finance the purchase of a portion of its
equipment portfolio. The amount of borrowing in connection with any equipment
acquisition transaction will be 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 is no limit on the amount of debt that may
be incurred in connection with any single acquisition of equipment. However, the
Fund 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 offering
proceeds and, thereafter, as of the date any subsequent indebtedness is
incurred. The Fund intends to borrow amounts equal to such maximum debt level in
order to finance its equipment portfolio, regardless of the amount of equity
capital raised from the sale of Units. While the Manager maintains short-term
lines of credit, there can be no assurance that such short-term credit or
permanent financing will be available to the Fund in the amounts desired or on
terms considered reasonable by the Manager at the time the Fund seeks to finance
a specific acquisition.
Financing for the Fund may consist of both recourse and nonrecourse debt.
Nonrecourse borrowing, in the context of the type of business to be conducted by
the Fund, means that the lender providing the funds would only be able to look
to the equipment purchased with such funds and the proceeds derived from the
leasing or reselling of such equipment as security. Recourse debt, in the
context of the type of business to be conducted by the Fund, means that the
lender can look beyond the specific asset financed by the loan to all of the
assets of the borrower, or a specified pool of assets, as collateral for
repayment of its debt obligation. The Fund anticipates that a significant
portion of its debt will be recourse debt incurred using all or a portion of its
equipment portfolio as collateral. The Fund may participate with other
affiliated programs and the Manager in a common recourse debt facility to
provide temporary or short-term bridge financing of transactions approved for
acquisition by the Fund and such Affiliates. In such instances, lease
transactions may be held in the name of an Affiliate of ATEL for convenience,
notwithstanding that the transaction has been approved for one or more
participants. The ultimate acquisition of the financed transaction will depend
on many factors, including without limitation, the Fund's available cash,
portfolio makeup and investment objectives at the time of closing.
The Fund may also incur 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" Fund assets or a general lien
against all of the otherwise unencumbered assets of the Fund. The Manager
expects that an asset securitization financing would involve borrowing at a
variable interest rate based on an established reference rate. The Manager would
seek to limit the Fund's exposure to increases in the interest rate by engaging
in hedging transactions that would effectively fix the interest rate obligation
of the Fund.
Other than short-term bridge financing or asset securitization financing,
the Manager will seek to avoid borrowing under terms which provide for a rate of
interest that may vary with the prime or reference rate of interest of a lender.
The Manager will attempt to limit any other variable interest rate borrowing to
those instances in which the lessee agrees to bear the cost of any increase in
the interest rate. If such debt is incurred without a corresponding variable
lease payment obligation, the Fund's interest obligations could increase while
lease revenues remain fixed. Accordingly, a rise in the prime or reference rate
may increase borrowing costs and reduce the amount of income and cash available
for distributions. Historically, the prime rates charged by major banks have
fluctuated; as a result, the precise amount of interest that the Fund may be
charged under such circumstances cannot be predicted.
In the case of any recourse bridge financing or asset securitization, the
lender would not be entitled to look to the individual assets of any investor,
or, in many cases, of the Manager, for repayment of such loans. If, under tax
principles, it is determined that the Manager or one of its Affiliates bears the
economic risk of loss for such recourse debt, then the recourse debt will be
allocated to the Manager or its Affiliate for tax basis purposes and all
deductions attributable to the recourse debt will be allocated to the Manager or
its Affiliate.
Fund indebtedness may provide for amortization of the principal balance
over the term of the loan through regular payments of principal and interest or
may provide that all or a substantial portion of the principal due will be
38
payable in a single "balloon payment" upon maturity. Such balloon payment
indebtedness involves greater risks than fully amortizing debt.
In the event that the Fund does not have sufficient funds to purchase an
item of equipment at the time it is acquired, the Fund may borrow from third
parties on a short-term basis, and repay the loans out of the proceeds from the
subsequent sale of Units. Any short-term loans may be unsecured or secured by
the assets acquired and/or other assets of the Fund.
Although the Operating Agreement does not prohibit the Manager or its
related entities from lending to the Fund, the Fund does not have any intention
or arrangements to borrow from these parties. If the Fund were to borrow from
the Manager or its related companies, the terms may not permit the Manager or
its affiliates to receive a rate of interest or other terms that are more
favorable than those generally available from commercial lenders under the
circumstances. Neither the Manager nor its affiliates may provide financing to
the Fund with a term in excess of twelve months.
Description of Lessees
The Fund will only purchase equipment for which a lease exists or for which
a lease will be entered into at the time of purchase.
The Fund's objective is to lease a minimum of 75% of the equipment (by
cost), as of the date of the final commitment of its proceeds from the sale of
Units, to lessees that the Manager deems to be high quality corporate credits,
of which:
-- at least half of the high quality corporate credits satisfying the 75%
minimum requirement will have either an average credit rating by
Moody's Investors Service, Inc. of "Baa" or better, or the credit
equivalent as determined by the Manager, with the average rating
weighted to account for the original equipment cost for each item
leased; and
-- the balance will be public and private corporations with substantial
revenues and histories of profitable operations, as well as established
hospitals with histories of profitability or municipalities.
The Manager may determine that the credit equivalent of a Moody's Baa
rating applies to those lessees that are not rated by Moody's, but which:
-- have comparable credit ratings as determined by other nationally
recognized credit rating services;
-- although not rated by nationally recognized credit rating services, are
believed by the Manager to have comparable creditworthiness; or
-- in the Manager's opinion, as a result of guarantees provided,
collateral given, deposits made or other security interests granted,
have provided such safeguards of the Fund's interest in the equipment
that the risk is equivalent to that involved in a lease to a company
with a credit rating of Baa.
The remaining 25% of the initial equipment portfolio may include equipment
financed for companies which, although deemed creditworthy by the Manager, would
not satisfy the specific credit criteria for the portfolio described above.
Included in this 25% of the portfolio may be one or more growth capital leasing
investments, which are described below under "Growth Capital Equipment
Financing." No more than 20% of the initial portfolio, by cost, will consist of
these growth capital leasing investments.
In arranging lease transactions on behalf of corporate investors and
securing institutional financing for such transactions, the Manager and its
Affiliates have been required to analyze and evaluate the creditworthiness of
potential lessees. However, neither the Manager nor any of its Affiliates is in
the business of regularly providing credit rating analyses as an independent
activity. In order to analyze whether a prospective lessee's credit risk is
comparable or equivalent to a Moody's Baa rating, the Manager will attempt to
39
apply the standards applicable to securities qualifying for the Baa rating. Such
securities are generally deemed to be of "investment grade," neither highly
protected nor poorly secured, with earnings and asset protection which appear
adequate at present, but which may be questionable over any great length of
time. Notwithstanding the Manager's best efforts to assure the lessees'
creditworthiness, there can be no assurance that lease defaults will not occur.
It is not anticipated that the Fund's lessees will be located primarily in
any given geographic area. The Manager will use its best efforts to diversify
lessees by geography and industry, and will apply the following policies:
-- The Manager will seek to limit the amount invested in equipment leased
to any single lessee to not more than 20% of the aggregate purchase
price of equipment owned at any time during the reinvestment period;
and
-- In no event will the Fund's equity investment in equipment leased to a
single lessee exceed an amount equal to 20% of the maximum capital from
the sale of Units (or $30,000,000).
Foreign Leases
There is no limit on the amount of equipment that may be leased to foreign
subsidiaries of United States corporations, to foreign lessees or that may
otherwise be permitted to be used predominantly outside the United States. The
Manager does not have any specific objective with regard to the amount of
equipment to be subject to foreign leases, but intends to pursue desirable
foreign leasing opportunities for the Fund to the extent consistent with the
Fund's overall investment objectives.
Of the total purchase price of equipment leased to foreign lessees, the
Manager will require that a minimum of 75% must represent equipment leased to
lessees which have a credit risk equivalent to a credit rating by Moody's
Investors Service, Inc. of "Baa" (investment grade) or better, as determined by
a credit rating agency which is generally recognized in the financial services
industry or, if no such credit rating is available, as determined by the
Manager. Any leases to foreign lessees that do not meet the foregoing credit
standard will either be guaranteed by a U.S. parent company of the lessee, or
will involve lessees that have assets located in the United States with a value
equal to or greater than the original purchase cost of the equipment subject to
the lease.
The Manager will seek to limit the aggregate amount of the Fund's equity
invested in all equipment leased to foreign lessees or that is otherwise to be
used primarily outside the United States to not more than 20% of the Gross
Proceeds. For this purpose, a lessee under a lease guaranteed by a United States
corporation will not be deemed a foreign lessee.
Furthermore, in order to attempt to mitigate certain risks relating to
foreign leases, the Fund will attempt to negotiate lease provisions, which
require:
-- payment in U.S. currency;
-- reimbursement for any foreign taxes billed to the Fund; and
-- insurance covering the risk of confiscation.
There can be no assurance, however, that the Fund will be successful in
negotiating such provisions.
Description of Leases
Generally, in a lease involving new equipment, the lessee will express an
interest in lease financing for equipment and the Manager will attempt to create
a lease package for the prospective lessee. In formulating the lease package,
the Manager will consider the following factors, among others:
-- the type of equipment;
-- the anticipated residual value of the equipment;
-- the business of the lessee;
-- the lessee's credit rating;
40
-- the cost of alternative financing services; and
-- competitive pricing and other market factors.
The initial lease terms will vary as to the type of equipment, but will
generally be for 36 months to 84 months. The Fund may lease some equipment to
federal, state or local governments, or agencies thereof. Many of such leases
will be subject to renewal each year, because many governmental lessees must
obtain appropriations for funds for their leases on an annual basis. In
addition, the Fund may, under appropriate circumstances, engage in other
short-term or "per diem" leases when the Manager deems it in the best interest
of the Fund and consistent with its overall objectives.
The equipment will be leased to third parties primarily pursuant to leases
with scheduled rents that will return less than the purchase price of the
equipment during the initial term of the lease. These include leases where
rental payments are based upon equipment usage. However, as of the date the
final offering proceeds are committed and all permanent debt is placed, a
majority of the leases, based on equipment purchase price, will provide for
lease payments and other payments by the lessee equal to at least 90% of the
original equipment purchase price. Lease rentals during comparable terms are
ordinarily higher under leases that provide rents that are less than the full
purchase price than those that return the full purchase price to the lessor. As
a result, the Manager believes that well-structured leases of this type will
help the Fund satisfy its investment objectives.
The Fund will seek initial lease terms during which a lessee may not cancel
the lease or avoid the lease obligation. However, where the Manager deems it to
be in the Fund's best interest, because of favorable lease terms, anticipated
high demand for particular items of equipment or otherwise, it may permit an
appropriate cancellation clause.
The Manager believes that the Fund will be able to lease or sell its
equipment profitably after the initial lease terms although no assurances can be
given that it will. Many of the Fund's initial lessees may be expected to renew
their leases or purchase the equipment they are leasing and using in their
business. See Figure 10 in Exhibit A for a graphic presentation of prior
programs' experience in this regard. Because of potential replacement costs on
the open market, and the costs avoided by continuing to use the equipment they
already have under lease, a lessee may generally be expected to pay
substantially greater than the wholesale value of the equipment on a re-lease or
purchase of the equipment under lease. The Fund's ability to renew or extend the
terms of its leases or to re-lease or sell the equipment on expiration of the
initial lease terms is dependent on many factors, including possible economic or
technological obsolescence of the equipment, competitive practices and
conditions and generally prevailing economic conditions.
The Fund's leases will generally be "net leases," which provide that the
lessee must bear the risk of loss of the equipment, provide adequate insurance,
pay taxes on the equipment, maintain the equipment and indemnify the Fund
against any liability that may arise from any act or omission by the lessee or
its agents. In some leases, the Fund may be responsible for certain of these
obligations, such as certain insurance and maintenance expenses, but generally
only during a period when the equipment is not under lease.
Most of the Fund's lease agreements will require the lessees to maintain:
-- casualty insurance in an amount equal to the greater of the full
value of the equipment or a specified amount set forth in
the lease, and
-- liability insurance naming the Fund as an additional insured with a
minimum limit of $1,000,000 in coverage.
The Fund may enter into remarketing agreements with manufacturers of
equipment on terms that are customary in the industry. A remarketing agreement
is an agreement whereby the manufacturer agrees with the lessor to assist the
lessor in finding a new lessee at the termination of the original lease. The
41
Manager will determine, in its sole discretion, whether to enter into such
agreements and with which manufacturers to do so. Most remarketing agreements
call for the manufacturer to find a second user only on a "best efforts" basis.
Thus, a remarketing agreement does not assure the lessor that the equipment can
or will be re-leased at the end of the initial lease term. The monthly rental
payments under a new lease or the sale price of such equipment would be subject
to the final approval of the Manager. Under a remarketing agreement, the
manufacturer would participate with the Fund in revenues on an incentive basis.
The manufacturer would typically receive a percentage of the revenue derived by
the Fund from the equipment under the agreement, which would increase after the
Fund received a specified return on its investment.
Growth Capital Equipment Financing
At least 75% of the Fund's equipment portfolio, by cost, as of the final
commitment of offering proceeds, will consist of transactions financing
equipment for high quality corporate lessees. In the rest of its portfolio, the
Fund intends to finance some equipment for a variety of public and non-public
companies, and to obtain terms from some non-public lessees and borrowers that
may include, as consideration to the party providing financing, the granting of
warrants, options or other rights to purchase equity securities of the lessee or
borrower, or the opportunity to purchase such equity securities outright (such
rights to purchase equity interests and direct equity investments are referred
to in this Prospectus as the "equity interests"). Growing young companies often
have more difficulty obtaining financing for equipment essential to the
development and growth of their business, and, as a result, must offer lessors
and lenders substantial cash deposits, equity participation or other
extraordinary consideration to obtain financing for the equipment. The Fund
intends to focus up to 20% of its initial portfolio in this market to achieve
investment returns from both its direct lease and loan revenues and gains it may
realize from the equity interests.
The Manager will look for those companies that show solid potential for
consistent profitability within a specific time period, and that have obtained
or are expected to attract sufficient equity venture capital to finance their
operations through expected profitability. The Manager will seek to identify
potential lessees that are at an early enough stage in their capitalization to
require these types of financing solutions, but which demonstrate the potential
to both satisfy their lease terms and provide attractive equity participation to
the Fund as lessor. The Manager will also seek to identify more mature,
privately-held companies that seek creative financing solutions involving the
granting of equity interests to the Fund. The Fund would expect these
transactions to involve as collateral more high technology, low residual value
equipment than the leases in the primary portion of its portfolio. As noted
above, the Fund's equipment portfolio will consist primarily of low obsolescence
equipment that will be expected to retain significant residual value upon
expiration of the initial leases. In contrast, the portion of the Fund's
portfolio invested in growth capital financing transactions is expected to be
relatively high-technology equipment, and to return invested capital and a
targeted return on investment through the regular cash payments due during the
initial lease term.
The Fund will only acquire equity interests in conjunction with the Fund's
secured financing transactions, including leases and loans to the issuer of the
equity interests or to a parent, subsidiary or affiliate of the issuer. In many
cases, the Fund expects to acquire equity interests, such as warrants and
options to purchase securities, in consideration of its financing and without
any other cash investment by the Fund at the time it acquires such rights (such
rights granted as part of the financing transaction are referred to here as
"warrant coverage"). In such cases, cash investment by the Fund would be made
upon exercise of the rights, and the Fund expects to use operating cash flow to
fund such exercises. In other cases, the Fund may obtain the right to make a
direct cash investment in the lessee's or borrower's securities at the time the
equipment financing is provided, for which the Fund would use proceeds from the
offering of Units. In order to assure that the Fund will not be deemed an
"investment company" under the Investment Company Act of 1940, the Manager will
in no event during the life of the Fund permit the aggregate value of the equity
interests and any other investment securities held by the Fund to exceed 40% of
the value of the Fund's total assets.
In addition to true lease financing, the Fund's growth capital leasing
investments may be in the form of "leases intended for security" and secured
loan transactions with equipment and other assets as the collateral. In a true
42
lease transaction, the Fund as lessor would be considered the owner of the
equipment for tax purposes, and is therefore entitled to cost recovery
deductions allocable to the equipment. A "lease intended for security" or
finance lease may be nominally structured as a lease, but is analogous to an
installment sale contract or loan agreement, and is treated as a loan for tax
purposes, with the "lessor" as lender and the "lessee" as the borrower. In a
secured loan agreement, the Fund would be the lender and the user of the
equipment would be the borrower. In each case, the borrower would be deemed the
owner of the equipment for tax purposes and would retain, as part of the
economic structure of the lease, all of the rights to cost recovery deductions
and other tax aspects of ownership. In these transactions, the borrower will
typically have an obligation to make fixed periodic installments of principal
and interest over a specified term. The Manager will attempt to structure these
transactions so that the payments of principal and interest, together with any
equity interests involved, will return the Fund's investment and provide a
desirable rate of return on investment in view of the associated financing
risks. In addition to financing equipment, the Fund's secured loan transactions
may also provide working capital to a borrower.
In finance leases and secured loans, the Fund will have a security interest
in any equipment financed in the transaction, as well as receivables and
proceeds under any lease or rental agreement relating to the equipment.
Collateral for the Fund's secured loan transactions may also include the
borrower's receivables or its other tangible or intangible assets. The Fund's
security interest may be a senior lien on the financed assets, providing the
Fund with the right, on any default under the financing arrangement, to
foreclose on the assets that are collateral, and to take possession and or sell
the assets in order to satisfy the borrower's obligation. The Fund may also
provide financing as a junior or subordinate lender under appropriate
circumstances. In such cases, the Fund's right to enforce its obligations
against the collateral would be subject to the priority of any senior lender's
rights. To secure working capital loans, the Fund will generally seek a blanket
lien on all of a borrower's assets, or all assets except certain excluded
assets. Borrowers may need to exclude intellectual property rights as collateral
in order to comply with the terms of other outstanding or future financing
obligations.
In conjunction with its lease of equipment to lessees, the Fund will
negotiate the acquisition from the lessees, or their parents or affiliates,
rights to purchase the equity securities of such entities, or, in some cases,
the securities themselves. The equity interests may be in the form of warrants
or options to purchase equity securities, common shares, preferred shares,
convertible equity, convertible debt, or any other form of interest which is
structured to give the Fund the right to benefit from growth in the market value
of the lessee's equity capital. At some time in the future, typically at the
time of, or soon after, the lessee's equity securities become publicly
registered or tradeable, generally through an initial public offering, merger or
reorganization, the Fund would exercise its rights represented by the equity
interests, acquire the lessee's publicly-traded securities and seek to dispose
of the securities at a profit. The equity interests may also mature upon the
negotiated sale of the lessee through the sale of all of the lessee's equity
securities or a sale of all its assets and liquidation of the proceeds to the
equity holders.
The Fund's management will determine when and whether to exercise rights to
convert or acquire securities subject to the equity interests. To exercise
warrant or option rights the Fund will pay an exercise price, which may be
financed out of the disposition proceeds to be realized upon an immediate resale
of the purchased securities. There can be no assurance that the issuers of the
equity interests will achieve capital growth and that the equity interests will
generate any profit, or that such growth and profits will be achieved during the
Fund's anticipated holding period.
Leasing Industry and Competition
Leasing has become one of the major methods by which American businesses
finance their capital equipment needs. According to information published by the
Equipment Leasing Association (the "ELA"), a leasing industry trade association,
total U.S. business investment in equipment increased annually from $376.2
billion in 1992 to a peak of $796 billion in 2000, before declining to $668
billion in 2003 and an estimated $709 billion in 2004. The ELA estimates that
43
over 80% of U.S. companies lease some or all of their capital equipment. The
total U.S. equipment leasing volume, according to the ELA, increased annually
from $121.7 billion in 1992 to a peak of $247 billion in 2000, before declining
to $208 billion in 2003 and an estimated $218 billion in 2004. The volume of
equipment lease financing reflects general economic conditions, and as the
economy slows or builds momentum, the demand for productive equipment generally
slows or builds, and equipment lease financing volume generally decreases or
increases. The U.S. economy experienced recession during 2001 and 2002 and the
volume of equipment financing contracted as a result.
In addition to fluctuations in demand for equipment, investment returns
from equipment leasing may be affected by prevailing interest rates, as
alternative financing structures and costs affect lease pricing. The U.S.
economy has recently experienced a period of relatively low interest rates.
While low interest rates may initially enhance the value of existing long term
lease investments with higher locked in lease rates, lower interest rates will
potentially reduce the lease rates available on new lease financing
transactions.
Although ATEL anticipates growth in the economy and in demand for equipment
in the future, many uncertainties may affect the equipment financing industry.
These uncertainties range from the potential near term effects of conflict in
the Middle East, to the potential long term effects of the many new accounting
and disclosure rules and regulations imposed on public companies by Congress,
the Securities and Exchange Commission and accounting regulators in the wake of
highly publicized business failures and accounting scandals. ATEL is unable to
predict what, if any, effect these and other developments will have on the
economy in general and on capital investment in equipment by U.S. business and
lease financing in particular.
See Figure 7 for a graphic presentation of the components of U.S. corporate
financing and the role played by equipment leasing (according to the ELA).
Please note that this chart reflects equipment lease financing from all sources,
including manufacturers, financial institutions and private and public lease
financing companies, and not just public equipment leasing programs such as the
Fund. Public programs like the Fund represent only a relatively small portion of
the total lease financing industry. The ELA estimates that each increase of $1
billion in equipment investment by U.S. industry reflects an increase of
approximately 30,000 jobs.
[GRAPHIC OMITTED]
Figure 7
In obtaining lessees, the Fund will compete with manufacturers of equipment
that provide leasing programs and with established leasing companies and
equipment brokers. Manufacturers of equipment may offer certain incentives
including maintenance services and trade-in or replacement privileges that the
Fund cannot offer. The Fund may also be competing with manufacturers and others
who offer leases that provide for longer terms and lower rates than leases that
the Fund will offer. There are numerous other potential entities, including
entities organized and managed similarly to the Fund, seeking to purchase
equipment subject to leases. Major national and international leasing companies
are much larger than the Fund and the manager, with greater financial and
personnel resources, and may therefore be able to offer lessees a broader range
of lease and financing options than the Fund. The Fund, on the other hand, may
be able to react more quickly and flexibly to lessee needs than larger leasing
organizations.
44
Joint Venture Investments
The Fund may purchase certain of its equipment by acquiring a controlling
interest in a partnership, equipment trust or other form of joint venture with a
non-Affiliate, which owns the equipment. The controlling interest requirement
may be satisfied by ownership of more than 50% of the venture's capital or
profits or from provisions in the governing agreement giving the Fund certain
basic rights. For example, control may take the form of the right to make or
veto certain management decisions or provide for certain predetermined benefits
for the Fund in the event that any other party to the venture should decide to
sell, refinance or change the assets owned by the venture. The Fund may not
acquire equipment jointly with others unless:
(i) the joint venture agreement does not authorize or require the Fund
to do anything with respect to the equipment that the Fund, or the Manager,
could not do directly because of the policies set forth in the Operating
Agreement, and
(ii) the transaction does not result in payment of duplicate fees.
The Fund may also acquire equipment by joint venture or as co-owner with an
Affiliate if the following conditions are met:
(i) the Affiliate will be required to have substantially identical
investment objectives to those of the Fund;
(ii) there are no duplicate fees;
(iii) the Affiliate must make its investment on substantially the same
terms and conditions as the Fund;
(iv) the Affiliate must have a compensation structure substantially
identical to that of the Fund;
(v) the venture must be entered into in order to obtain
diversification or to relieve the Manager or Affiliates from commitments
entered into under Section 15.2.15 of the Operating Agreement or similar
provisions governing the Affiliate; and
(vi) the Fund has a right of first refusal should a co-venturer decide
to sell the property owned by the venture.
Because both the Fund and its Affiliate will be required to approve
decisions pertaining to the equipment, a management impasse may develop. If one
party, but not the other, wishes to sell the equipment, the party not desiring
to sell will have a right of first refusal to purchase the other party's
interest in the equipment. The Fund may not, however, be able to exercise its
right of first refusal unless it has the financial resources to do so, and there
can be no assurances that it will.
General Restrictions
The Fund will not: (i) issue any Units after the offering terminates or
issue Units in exchange for property, (ii) make loans to the Manager or its
Affiliates, (iii) invest in or underwrite the securities of other issuers, (iv)
operate in such a manner as to be classified as an "investment company" for
purposes of the Investment Company Act of 1940, (v) except as set forth herein,
purchase or lease any equipment from nor sell or lease property to the Manager
or its Affiliates, or (vi) except as expressly provided herein, grant the
Manager or any of its Affiliates any rebates or give-ups or participate in any
reciprocal business arrangements with such parties that would circumvent the
restrictions in the Operating Agreement, including the restrictions applicable
to transactions with Affiliates.
The Manager and its Affiliates, including their officers and directors, may
engage in other businesses or ventures that own, finance, lease, operate,
manage, broker or develop equipment, as well as businesses unrelated to
equipment leasing.
45
Changes in Investment Objectives and Policies
Unit holders have no right to vote on the establishment or implementation
of the investment objectives and policies of the Fund, all of which are the
responsibility of the Manager. However, the Manager cannot make any material
changes in the investment objectives and policies described above without first
obtaining the written consent or approval of Members owning more than 50% of the
total outstanding Units entitled to vote.
CONFLICTS OF INTEREST
The Fund is subject to various conflicts of interest arising out of its
relationship with the Manager and Affiliates of the Manager. These conflicts
include, but are not limited to, the following:
The Manager engages in other, potentially competing, activities. The
Manager serves in the capacity of manager or general partner in other public
programs engaged in the equipment leasing business, and it and its Affiliates
also engage in the business of purchasing and selling equipment and arranging
leases for their own account and for the accounts of others. The Manager will
have conflicts of interest in allocating management time, services and functions
among the prior programs, the Fund, any future investment programs and
activities for its own account. The Manager believes that it has or can employ
sufficient staff, equipment and other resources to discharge fully their
responsibilities to each such activity. This conflict results in a potential
benefit to the Manager and its Affiliates by permitting them to make more
efficient use of their personnel and resources, but may impose a burden on them
by requiring the Manager and its Affiliates to maintain sufficient staff to
discharge their responsibilities to all parties.
Competition for Investments. The Manager will have conflicts of interest to
the extent that its prior or future investment programs may compete with the
Fund for opportunities in the acquisition and leasing of equipment. Prior public
programs currently in operation and expected to acquire additional equipment
investments include: ATEL Capital Equipment Fund VII, L.P. ("ACEF VII"); ATEL
Capital Equipment Fund VIII, LLC ("ACEF VIII"); ATEL Capital Equipment Fund IX,
LLC ("ACEF IX"); and ATEL Capital Equipment Fund X, LLC ("ACEF X") (together
collectively referred to as "Prior Programs"). The Prior Programs have
investment objectives substantially identical to those of the Fund and may have
funds available for investment in additional equipment at a time when the Fund
is also active in seeking to invest or reinvest in equipment. Certain of the
equipment owned and to be acquired by the Prior Programs and the Fund may be
similar and may be purchased from the same manufacturers. Furthermore, the
Manager and its Affiliates may in the future form additional investment programs
having similar objectives, and accordingly, the Fund may be in competition with
any such future programs formed by the Manager.
Any time two or more investment programs (including the Fund) affiliated
with the Manager have capital available to acquire and lease the same types of
equipment, conflicts of interest may arise as to which of the programs should
proceed to acquire available items of equipment. In such situations, the Manager
will analyze the equipment already purchased by, and investment objectives of,
each program involved, and will determine which program will purchase the
equipment based upon such factors, among others, as:
(i) the amount of cash available in each program for such acquisition and
the length of time such funds have been available,
(ii) the current and long-term liabilities of each program,
(iii) the effect of such acquisition on the diversification of each
program's equipment portfolio,
(iv) the estimated income tax consequences to the investors in each
program from such acquisition, and
(v) the cash distribution objectives of each program.
46
If after analyzing the foregoing and any other appropriate factors, the Manager
determines that such acquisition would be equally suitable for more than one
program, then the Manager will purchase such equipment for the programs on the
basis of rotation with the order of priority determined by the length of time
each program has had funds available for investment, with the available
equipment allocated first to the program that has had funds available for
investment the longest. This potential conflict may represent a benefit to the
Manager and its Affiliates as the availability of a number of different
investment programs may permit the Manager to more aggressively seek leasing
transactions which may be suitable for a variety of portfolios. It may also
result in difficulty in determining which program will participate in which
transactions.
The Manager and Affiliates will receive substantial fees and other
compensation. Fund operations will result in certain compensation to the Manager
and its Affiliates. The Manager has absolute discretion in all decisions on Fund
operations. Because the amount of such fees may depend, in part, on the debt
structure of equipment acquisitions and the timing of these transactions, the
Manager and its Affiliates may have conflicts of interest. For example, the
acquisition, retention, re-lease or sale of equipment and the terms of a
proposed transaction may be less favorable to the Fund and more favorable to the
Manager under certain circumstances. It should be noted that the Manager intends
to cause the Fund to incur aggregate acquisition debt in an amount approximately
equal to 50% of the total cost of equipment.
In all cases where the Manager or its Affiliate may have a conflict of
interest in determining the terms or timing of a transaction by the Fund, the
Manager or its Affiliate will exercise its discretion strictly in accordance
with its fiduciary duty to the Fund and the Holders. The ability to determine
the amount or timing of a transaction could nevertheless be a benefit to the
Manager and increase the costs incurred by the Fund.
Agreements are not Arm's-Length. Agreements between the Fund and the
Manager or any of its Affiliates are not the result of arm's-length negotiations
and performance by the Manager and its Affiliates will not be supervised or
enforced at arm's-length. This is a benefit to the Manager, as it has
unilaterally determined the terms of such agreements. It could be adverse to the
interests of Unit holders, as they will not have the opportunity to negotiate
terms or change terms of such agreements.
No independent managing underwriter has been engaged for the distribution
of the Units. ATEL Securities Corporation is an Affiliate of the Manager and
will perform wholesaling services for the Fund as the Dealer Manager. It may not
be expected to have performed due diligence in the same manner as an independent
broker-dealer. The Dealer Manager has acted in the same capacity in prior
offerings sponsored by the Manager and its Affiliates and is expected to do so
in any future offerings that the Manager and its Affiliates may conduct.
The Fund, the Manager and prospective Holders have not been represented by
separate counsel. In the formation of the Fund, drafting of the Operating
Agreement and the offering of Units, the attorneys, accountants and other
professionals who perform services for the Fund all perform similar services for
the Manager and its Affiliates. The Fund expects that this dual representation
will continue in the future. However, should a dispute arise between the Fund
and the Manager, the Manager will cause the Fund to retain separate counsel.
The Fund may enter into joint ventures with programs managed by the Manager
or its Affiliates. The Manager may face conflicts of interest as it may control
and owe fiduciary duties to both the Fund and the affiliated co-venturer. For
example, because of the differing financial positions of the co-venturers, it
may be in the best interest of one entity to sell the jointly-held equipment at
a time when it is in the best interest of the other to hold the equipment.
Nevertheless, these joint ventures are restricted to circumstances whereby the
co-venturer's investment objectives are comparable to the Fund's, the Fund's
investment is on substantially the same terms as the co-venturer and the
compensation to be received by the Manager and its Affiliates from each
co-venturer is substantially identical.
47
ORGANIZATIONAL DIAGRAM
The following diagram (Figure 8) shows the relationships among the Fund,
the Manager and certain Affiliates of the Manager that may perform services for
the Fund (solid lines denote ownership and control and dotted lines denote other
relationships).
Figure 8
-----------------------------------------------------------
ATEL Capital Group ("ACG")
-----------------------------------------------------------
|
|
-------------------------------------------------------------------------------------------------
| | | |
| | | |
- -------------------------- --------------------------- -------------------------- -------------------------
ATEL Equipment ATEL Financial Services, ATEL Investor Services ATEL Leasing
Corporation (AEC") LLC ("Manager") ("AIS") Corporation ("ALC")
- -------------------------- --------------------------- -------------------------- -------------------------
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| --------------------------------------- | | |
| ATEL Securities Corporation | | |
| (the "Dealer Manager") | | |
| --------------------------------------- | | |
| | | |
| | | |
| | | |
| | | |
| ----------------------------------------------------------- |
| |
|--------------------------- ATEL Capital Equipment Fund XI, LLC ----------------------|
(the "Fund")
-----------------------------------------------------------
Dean L. Cash holds 100% of ATEL Capital Group's outstanding voting stock. ATEL
Capital Group controls 100% of the outstanding capital stock of each of the
Manager, ALC, AIS and AEC. The Manager owns 100% of the outstanding capital
stock of the Dealer Manager. See "Management" for further information concerning
the above entities and their respective officers and directors.
FIDUCIARY DUTY OF THE MANAGER
The Manager is accountable to the Fund as a fiduciary and, consequently, is
required to exercise good faith and integrity in all dealings with respect to
Fund affairs.
Under California law and subject to certain conditions, a Member may file a
lawsuit on behalf of the Fund (a derivative action) to recover damages from a
third party or to recover damages resulting from a breach by a Manager of its
fiduciary duty. In addition, a Member may sue on behalf of himself and all other
Members (a class action) to recover damages for a breach by a Manager of its
fiduciary duty, subject to class action procedural rules. This area of the law
is complex and rapidly changing, and investors who have questions regarding the
duties of a Manager and the remedies available to Members should consult with
their counsel.
The Operating Agreement does not excuse the Manager from liability or
provide it with any defenses for breaches of its fiduciary duty. However, the
fiduciary duty owed by a Manager is similar in many respects to the fiduciary
duty owed by directors of a corporation to its shareholders, and is subject to
the same rule, commonly referred to as the "business judgment rule," that
directors are not liable for mistakes in the good faith exercise of honest
business judgment or for losses incurred in the good faith performance of their
duties when performed with such care as an ordinarily prudent person would use.
As a result of the business judgment rule, a manager may not be held liable for
mistakes made or losses incurred in the good faith exercise of reasonable
business judgment. Accordingly, provision has been made in the Operating
Agreement that the Manager has no liability to the Fund for losses arising out
of any act or omission by the Manager, provided that the Manager determined in
48
good faith that its conduct was in the best interest of the Fund and, provided
further, that its conduct did not constitute fraud, negligence or misconduct. As
a result, purchasers of Units may have a more limited right of action in certain
circumstances than they would in the absence of such a provision in the
Operating Agreement specifically defining the Manager's standard of care.
The Operating Agreement also provides that, to the extent permitted by law,
the Fund is to indemnify the Manager and its Affiliates providing services to
the Fund against liability and related expenses (including attorneys' fees)
incurred in dealings with third parties, provided that the conduct of the
Manager is consistent with the standards described in the preceding paragraph. A
successful claim for such indemnification would deplete Fund assets by the
amount paid. The Manager will not be indemnified against any liabilities arising
under the Securities Act of 1933. In addition, the Fund will not pay for any
insurance covering liability of the Manager or any other persons for actions or
omissions for which indemnification is not permitted by the Operating Agreement.
Subject to the fiduciary relationship, the Manager has broad discretionary
powers to manage the affairs of the Fund under the terms of the Operating
Agreement and under California law. Generally, actions taken by the Manager are
not subject to vote or review by the Holders, except to the limited extent
provided in the Operating Agreement and under California law.
MANAGEMENT
The Manager
The Manager is ATEL Financial Services, LLC (the "Manager" or "AFS"),
formed as a California corporation in 1977 under the name All Type Equipment
Leasing, Inc., and converted to a limited liability company in 2001 as described
below. The Manager's offices are located at 600 California Street, 6th Floor,
San Francisco, California 94108, and its telephone numbers are 415/989-8800 and
800/543-ATEL. Its officers have extensive experience with transactions involving
the acquisition, leasing, financing and disposition of equipment, as more fully
described below and in Exhibit A hereto. The Manager and its Affiliates are
sometimes collectively referred to below as "ATEL" for convenience. The Fund
itself will have no employees, but will use the services of ATEL and its
Affiliates and their employees to fulfill the Fund's administrative and
operating needs.
Since its organization in 1977, ATEL has been active in several areas
within the equipment leasing industry, including: (i) originating and financing
leveraged and single investor lease transactions for corporate investors, (ii)
acting as a broker/packager by arranging equity and debt participants for
equipment lease transactions originated by other leasing companies, and (iii)
consulting on the pricing and structuring of equipment lease transactions for
banks, leasing companies and corporations.
The Manager has organized ten prior public programs to acquire and lease
equipment. During the past 20 years, ATEL has participated in structuring and/or
arranging lease transactions involving aggregate equipment costs in excess of
$1.8 billion.
In April 2001, ATEL Financial Corporation converted from a California
corporation to a California limited liability company, and changed its name to
ATEL Financial Services, LLC ("AFS" or "Manager"). AFS remains a subsidiary of
ATEL Capital Group ("ACG"), with all of the equity interest in AFS indirectly
controlled by ACG through its subsidiaries. The managing member of AFS is ATEL
Leasing Corporation ("ALC"), and its members are ALC and ATEL Business Credit,
Inc. ("ABC"). Each of ALC, ABC, ATEL Equipment Corporation ("AEC") and ATEL
Investor Services ("AIS") is a wholly-owned subsidiary of ATEL Capital Group.
ALC, AEC and AIS will perform services for the Fund under the direction of the
Manager. Acquisition services will be performed for the Fund by ALC, equipment
49
management and asset disposition services will be performed by AEC, and AIS will
perform partnership management, administration and investor services. Finally,
the Dealer Manager, ATEL Securities Corporation ("ASC"), is a wholly-owned
subsidiary of AFS. ACG had a net worth as of July 31, 2002, its most recent
fiscal year end, well in excess of the NASAA Guidelines minimum of $1,000,000.
ACG is responsible for all aspects of the performance by its affiliates of
services necessary to the operation of the Fund and for the facilities,
personnel, equipment, financial and other resources used by its affiliates in
the performance of those services.
The officers and directors of ACG, AFS and their Affiliates are as follows:
Name Positions
- ---- ---------
Dean L. Cash Chairman of the Board, President and Chief Executive
Officer of ACG, AFS and AEC; Director, President and
Chief Executive Officer of ALC, AIS and ASC
Paritosh K. Choksi Director, Executive Vice President, Chief Financial
Officer and Chief Operating Officer of ACG, AFS, ALC,
AIS and AEC
Vasco H. Morais Senior Vice President and General Counsel for ACG, AFS,
ALC, AIS and AEC
Philip Litchenstein Senior Vice President of ALC
Donald E. Carpenter Controller of ACG, AFS, ALC, AEC and AIS; Chief
Financial Officer of ASC
Elif A. Kuvvetli Corporate Controller of ACG, AFS, ALC, AEC and AIS
Russell H. Wilder Vice President, Chief Credit Officer of ACG, AFS, ALC
and AEC
Steven R. Rea Executive Vice President of ATEL Ventures, Inc.
Thomas P. Monroe, Jr. Senior Vice President of AEC
Merriah Harkins Executive Vice President of ASC
Ernest C. Goggio Director of ACG
Dean L. Cash, age 54, 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. He has been a director of the Dealer Manager
since its organization and its president since 1986. 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
NASD.
Paritosh K. Choksi, age 51, joined ATEL in 1999 as a director, senior vice
president and its chief financial officer, and has been its chief financial
officer, executive vice president and chief operating officer since 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 growth capital lease
portfolio. Mr. Choksi was part of the executive management team which caused
Phoenix's portfolio to grow from $50 million in assets to over $2 billion. Mr.
Choksi has served as a member of the board of directors of Syntel, a public
company, since 1997. Mr. Choksi received a Bachelor of Technology degree in
mechanical engineering from the Indian Institute of Technology, Bombay in 1975;
and an M.B.A. degree from the University of California, Berkeley in 1977.
Vasco H. Morais, age 46, joined ATEL in 1989 as general counsel. Mr. Morais
manages ATEL's legal department, which provides legal and contractual support in
the negotiating, drafting, documenting, reviewing and funding of lease
transactions. In addition, Mr. Morais advises on general corporate law matters,
50
and assisting on securities law issues. From 1986 to 1989, Mr. Morais was
employed by the BankAmeriLease Companies, Bank of America's equipment leasing
subsidiaries, providing in-house legal support on the documentation of
tax-oriented and non-tax oriented direct and leveraged lease transactions,
vendor leasing programs and general corporate matters. Prior to the
BankAmeriLease Companies, Mr. Morais was with the Consolidated Capital Companies
in the Corporate and Securities Legal Department involved in drafting and
reviewing contracts, advising on corporate law matters and securities law
issues. Mr. Morais received a B.A. degree in 1982 from the University of
California in Berkeley; a J.D. degree in 1986 from Golden Gate University Law
School; and an M.B.A. (Finance) degree from Golden Gate University in 1997. Mr.
Morais, an active member of the State Bar of California since 1986, currently
serves as co-chair of the Uniform Commercial Code Committee of the Business Law
Section of the State Bar of California.
Philip Litchenstein, age 56, joined ATEL in 2004 and is Senior Vice
President of ATEL Leasing Corporation. He is responsible for managing the
national sales and sydications teams. Prior to joining ATEL, Mr. Litchenstein
was an Executive Vice President at Security Pacific Leasing, from 1975 to 1992,
where he headed the big ticket, aviation and syndications groups. After Security
Pacific Leasing merged with Bank of America in 1992, Mr. Litchenstein became a
Managing Director of Bank of America Leasing & Capital Corp. where he managed
the Energy and Utilities sales team until 2002. From 2003, until joining ATEL,
Mr. Litchenstein was Western Regional Manager at GMAC Commercial Finance. He
received his B.A. in Economics from the University of California at Berkeley in
1970, and his M.B.A. from San Francisco State University in 1975.
Donald E. Carpenter, age 55, joined ATEL in 1986 as controller. Prior to
joining ATEL, Mr. Carpenter was employed as an audit supervisor with Laventhol &
Horwath, certified public accountants in San Francisco, California, from 1983 to
1986. From 1979 to 1983, Mr. Carpenter was employed by Deloitte Haskins & Sells,
certified public accountants in San Jose, California. From 1971 to 1975, Mr.
Carpenter was a supply officer in the U.S. Navy. Mr. Carpenter received a B.S.
degree in mathematics (magna cum laude) from California State University, Fresno
in 1971 and completed a second major in accounting in 1978. Mr. Carpenter has
been a California certified public accountant since 1981. He is qualified as a
registered principal with the NASD.
Elif A. Kuvvetli, age 35 joined ATEL in 2004 as corporate controller. Prior
to joining ATEL, Ms. Kuvvetli worked at Epicentric, Inc. as corporate
controller, from 2002 to 2003. From 2001 to 2002, Ms. Kuvvetli was employed as
corporate controller at Repeater Technologies, Inc. From 1991 to 2001 Ms.
Kuvvetli held various audit positions (audit senior to audit manager) in
Assurance and Business Advisory Services Group of PricewaterhouseCoopers LLP.
Ms. Kuvvetli received a BA in business majoring in accounting and finance from
Istanbul University. Ms. Kuvvetli has been an Associate Chartered Accountant of
the Institute of Chartered Accountants in Australia since 1993.
Russell H. Wilder, age 51, joined ATEL in 1992 as Vice President of ATEL
Business Credit, Inc. and in 1995 became its Senior Vice President of
Operations. He has also served as Chief Credit Officer to ATEL Financial
Corporation since October 1992. From 1990 to 1992 Mr. Wilder was a personal
property broker specializing in equipment leasing and financing and an outside
contractor in the areas of credit and collections. Prior to 1990, Mr. Wilder had
numerous assignments in the credit and operations departments for small,
mid-size and big ticket lease transactions with Westinghouse Credit, Wells Fargo
Leasing and Fireside Thrift Co., a Teledyne subsidiary. Mr. Wilder holds a BS
with Honors in Agricultural Economics and Business Management from the
University of California at Davis. He has been awarded the Certified Lease
Professional designation by the United Association of Equipment Lessors.
Steven R. Rea, age 37, joined ATEL in 2000 and serves as Executive Vice
President of ATEL Ventures, Inc. Prior to joining ATEL, Mr. Rea was employed at
Imperial Bank (now Comerica) from 1999 to 2000, where he managed the venture
leasing department for the emerging growth division. From 1997 to 1999, Mr. Rea
was employed at LINC Capital, Inc., a specialty finance and venture leasing
company, where he was responsible for originating, structuring and negotiating
equipment leasing and other asset-backed financing for emerging growth
companies. From 1994 to 1997, Mr. Rea was an Account Executive and later Vice
51
President of Business Development at Interlease Group Ltd., a diversified
financial services company, specializing in financings for venture backed
companies. From 1992 to 1994, Mr. Rea was with Automatic Data Processing as a
senior district sales manager. Mr. Rea received a B. S. degree in finance from
San Diego State University in 1991.
Thomas P. Monroe, Jr., age 40, joined ATEL in 1998 as a portfolio manager
in the asset management department. In July 2002, Mr. Monroe was named Vice
President and in 2004 Senior Vice President of ATEL Equipment Corporation. In
this function, Mr. Monroe manages ATEL's asset management department, which is
responsible for residual valuation, due diligence, equipment inspections,
negotiating renewal and purchase options and remarketing offlease equipment.
Prior to joining ATEL, Mr. Monroe was employed by GE Capital for six years as a
portfolio manager in the computer leasing division. Mr. Monroe received a B.A.
degree in Psychology from the University of California, Berkeley in 1987 and an
M.B.A. degree with a concentration in International Marketing from the
University of Notre Dame in 1990. Mr. Monroe is a candidate member of the
American Society of Appraisers and has successfully completed four course levels
required for the Machinery and Equipment Valuation specialty.
Merriah Harkins, age 34, joined ATEL in February of 2002 and as
Executive Vice President of ATEL Securities Corporation is responsible for
managing the securities division of ATEL Capital Group. Ms. Harkins started with
ATEL as Senior Vice President of the northwest region. She began her financial
services career in 1994 with Mass Mutual as an advisor, and in 1995 joined The
Vanguard Group and held various managerial positions with Aetna Retirement
Services (now part of ING) in 1996. Ms. Harkins' most recent position prior to
joining ATEL was with Charles Schwab in 1999. As a Director of Institutional
Services she was responsible for the national sales support teams for advisors
with greater than $250 million under management at Schwab and she specialized in
Schwab's managed account products. She holds the Series 7, 9, 10, 6, 63 and 26
qualifications. She attended the University of Georgia and has a BSBA in
Finance.
Ernest C. Goggio, age 81, joined the board of ATEL in April of 2001. Since
June 1988, he has been chairman at Invivo Corp., a publicly held medical device
company. Since June, 1966, he has served as chairman and has been a major
stockholder in Pillar Corp., PHSI and other privately held companies. Mr. Goggio
has been active for many years in the startup, acquisition and investment in a
variety of privately held companies primarily in the manufacturing sector. He is
also currently managing a portfolio of passive investments. Prior to starting
his own companies he held management positions with Westinghouse Electric and
Louis Allis (a division of Litton Industries). Mr. Goggio graduated with a
degree in Math and Physics from the University of Toronto in 1944, and
subsequently served as a radar officer in the Pacific theater while attached to
the British Navy during World War II.
Management of the Fund's Operations and Administration
ATEL Leasing Corporation has the primary responsibility for selecting and
negotiating potential acquisitions and leases of equipment, subject to the
Manager's supervision and approval. The Manager's Investment Committee will
approve any acquisition before it is consummated. The Investment Committee with
respect to standard lease portfolio investments currently consists of Dean L.
Cash, Paritosh K. Choksi, Donald E. Carpenter and Russell Wilder. The Investment
Committee for growth capital portfolio investments currently consists of Dean L.
Cash, Paritosh K. Choksi and Russell Wilder
ATEL Equipment Corporation will manage the Fund's portfolio of equipment,
subject to the Manager's supervision. Management services to be provided by AEC
include collection of lease payments from the lessees of equipment, re-leasing
services upon termination of leases, inspection of equipment, acting as a
liaison between lessees and vendors, general supervision of lessees and vendors
to ensure that the equipment is being properly used and operated by lessees,
arranging for maintenance and related services with respect to the equipment and
the supervision, monitoring and review of others performing services for the
Fund. Third parties who are not Affiliates of the Manager may participate in
managing or may separately manage equipment for which they will receive a fee
from the Fund which is in addition to the fees paid to the Manager. AEC will be
responsible for supervision, monitoring and review of all such third party
management services.
52
The Manager will be primarily responsible for Fund administration and reporting.
The Manager will be responsible for the design and operation of the Fund's
disclosure controls and procedures to comply with federal securities law
reporting requirements, and will be responsible for performing periodic
evaluations of these controls and procedures. As disclosed in all active prior
programs' annual reports on Form 10-K for the year ended December 31, 2003, the
chief executive and chief financial officers of the Manager had identified
certain enhanced controls needed to facilitate a more effective closing of these
programs' financial statements. Specifically, the programs' auditors advised
management of a material weakness surrounding the financial statement closing
process that they believe arose because ATEL's accounting resources were not
adequate to complete the closing of the books and preparation of financial
statements in a timely manner. However, it should be noted that all of these
financial statements were issued with unqualified opinions. Since the beginning
of 2004, ATEL hired a new corporate controller, added two assistant controllers
and additional accounting staff personnel, and has instituted new procedures or
revised existing procedures to ensure that these programs' and the Fund's
ability to execute internal controls in accounting and reconciliation in the
closing process is adequate in all respects. In connection with management's
review of the effectiveness of internal disclosure controls and procedures of
the Fund and prior programs as of December 31, 2004, including communication
with its auditors regarding the audit process, ATEL management has determined
that it has successfully taken all steps necessary to resolve any outstanding
issues with respect to its annual financial statement closing process and that
its accounting resources are adequate to perform this process in a timely and
accurate manner. In connection with their audit of the Fund and prior programs
for the year ended December 31, 2004, the independent accountants issued a no
material weakness letter which indicates that no matters were noted involving
internal control and its operation that the auditor considered to be material
weaknesses as defined by the public company accounting oversight board (United
States). Furthermore, all financial statements for the Fund and prior programs
for 2004 were issued with unqualified opinions of the independent accountants.
The Manager will continue to review its accounting procedures and practices to
determine their effectiveness and adequacy and will take any steps deemed
necessary in the opinion of the Manager's chief executive and chief financial
officers to ensure the adequacy of the Fund's disclosure and accounting controls
and procedures.
Management Compensation
The Fund does not pay the officers or directors of the Manager or its
Affiliates any compensation. However, the Fund will pay the Manager and its
Affiliates the fees and other compensation described under "Management
Compensation" above in this Prospectus. . Furthermore, the Fund will reimburse
the Manager and its Affiliates for certain costs incurred on behalf of the Fund,
including the cost of certain personnel (excluding controlling persons of the
Manager) who will be engaged by the Manager to perform administrative,
accounting, secretarial, transfer and other services required by the Fund. Such
individuals may also perform similar services for the Manager, its Affiliates
and other investment programs to be formed in the future.
Changes in Management
The Operating Agreement provides that the Manager may be removed as Manager
at any time upon the vote of Holders owning more than 50% of the total
outstanding Units entitled to vote, and Holders have the right to elect a
successor Manager in place of the removed Manager by a similar vote. The Manager
may only withdraw voluntarily from the Fund with the approval of Holders owning
in excess of 50% of the Units entitled to vote on Fund matters. The Holders have
no voice in the election of directors or appointment of officers of the Manager
or its parent, ATEL Capital Group, and the capital stock of such entities can be
transferred without the consent of the Fund or the Holders.
The by-laws of the Manager provide for a maximum of three directors. The
by-laws can be amended to increase the number of directors either by a vote of
stockholders or of directors. In the event of a vacancy or increase in the
number of members of the board of directors, the remaining directors may elect
the members to serve until the next annual meeting of directors. Directors are
otherwise elected annually by vote of the stockholders, and the directors
appoint corporate officers to serve at the will of the board.
53
The Dealer Manager
ATEL Securities Corporation (the "Dealer Manager") was organized in October
1985 principally for the purpose of assisting in the distribution of securities
of programs to be sponsored by the Manager and its Affiliates. The Dealer
Manager became a member of the NASD in February 1986. The Dealer Manager is a
wholly-owned subsidiary of ATEL. The Dealer Manager will provide certain
wholesaling services to the Fund in connection with the distribution of the
Units offered hereby.
PRIOR PERFORMANCE SUMMARY
THE INFORMATION PRESENTED IN THIS SECTION AND IN THE TABLES INCLUDED AS
EXHIBIT A TO THIS PROSPECTUS REPRESENTS HISTORICAL RESULTS OF PRIOR EQUIPMENT
LEASING PROGRAMS SPONSORED BY THE MANAGER AND ITS AFFILIATES. INVESTORS IN THE
FUND SHOULD NOT ASSUME THAT THEY WILL EXPERIENCE INVESTMENT RESULTS COMPARABLE
TO THOSE EXPERIENCED BY INVESTORS IN PRIOR PROGRAMS.
Since July 28, 1977, the Manager and its Affiliates have financed,
structured or arranged equity and debt participation for equipment leasing
transactions involving total equipment costs in excess of $1.8 billion. The
Manager has sponsored and syndicated ten prior public equipment leasing programs
(collectively referred to as the "Prior Programs"). In addition, ATEL has
sponsored three prior privately placed equipment leasing programs, including two
formed to engage exclusively in "growth capital leasing," a different primary
investment objective than that of the Fund or the Prior Programs.
The first Prior Program, ATEL Cash Distribution Fund ("ACDF"), commenced a
public offering of up to $10,000,000 of its equity interests on March 11, 1986.
ACDF terminated its offering on December 18, 1987 after raising a total of
$10,000,000 in offering proceeds from a total of approximately 1,000 investors,
all of which proceeds were committed to equipment acquisitions, organization and
offering expenses and capital reserves. ACDF acquired a variety of types of
equipment with a total purchase cost of approximately $11,133,679. All of such
equipment had been sold and the partnership was terminated as of December 31,
1997. Through its liquidation, ACDF made cash distributions to its investors in
the aggregate amount of $1,121.03 per $1,000 invested. Of this amount a total of
$244.89 represents investment income and $876.14 represents return of capital.
The second Prior Program, ATEL Cash Distribution Fund II ("ACDF II"),
commenced a public offering of up to $25,000,000 (with an option to increase the
offering to $35,000,000) of its equity interests on January 4, 1988. ACDF II
terminated its offering on January 3, 1990 after raising a total of $35,000,000
in offering proceeds from a total of approximately 3,100 investors, all of which
proceeds were committed to equipment acquisitions, organization and offering
expenses and capital reserves. ACDF II acquired a variety of types of equipment
with a total purchase cost of approximately $52,270,536. All of such equipment
had been sold and the partnership was terminated as of December 31, 1998. ACDF
II made total cash distributions to its investors in the aggregate amount of
$1,222.63 per $1,000 invested. Of this amount a total of $335.43 represents
investment income and $887.20 represents return of capital.
The third Prior Program, ATEL Cash Distribution Fund III ("ACDF III"),
commenced a public offering of up to $50,000,000 (with an option to increase the
offering to $75,000,000) of its equity interests on January 4, 1990. ACDF III
terminated its offering on January 3, 1992 after raising a total of $73,855,840
in offering proceeds from a total of approximately 4,822 investors, all of which
proceeds were committed to equipment acquisitions, estimated organization and
offering expenses and capital reserves. ACDF III acquired a variety of types of
equipment with a total purchase cost of approximately $99,629,942. All of such
equipment had been sold and the partnership was terminated as of December 31,
2000. ACDF III made cash distributions to its investors in the aggregate amount
of $1,329.76 per $1,000 invested. Of this amount a total of $379.10 represents
investment income and $950.66 represents return of capital.
54
The fourth Prior Program, ATEL Cash Distribution Fund IV ("ACDF IV"),
commenced a public offering of up to $75,000,000 of its limited partnership
interests on February 4, 1992. ACDF IV terminated its offering on February 3,
1993 after raising a total of $75,000,000 in offering proceeds from a total of
approximately 4,873 investors, all of which proceeds were committed to equipment
acquisitions, organization and offering expenses and capital reserves. ACDF IV
acquired a variety of types of equipment with a total purchase cost of
$108,734,880. Of such equipment, items representing an original purchase cost of
$103,274,568 had been sold as of September 30, 2004. Through September 30, 2004,
ACDF IV had made cash distributions to its investors in the aggregate amount of
$1,216.49 per $1,000 invested. Of this amount a total of $320.17 represents
investment income and $896.32 represents return of capital.
The fifth Prior Program, ATEL Cash Distribution Fund V ("ACDF V"),
commenced a public offering of up to $125,000,000 of its limited partnership
interests on February 22, 1993. ACDF V terminated its offering on November 15,
1994. As of that date, $125,000,000 of offering proceeds had been received from
approximately 7,217 investors. All of the proceeds were committed to equipment
acquisitions, organization and offering expenses and capital reserves. ACDF V
acquired a variety of types of equipment with a total purchase cost of
$186,995,157 as of September 30, 2004. Of such equipment, items representing an
original purchase cost of $145,817,223 had been sold as of September 30, 2004.
Through September 30, 2004, ACDF V had made cash distributions to its investors
in the aggregate amount of $989.88 per $1,000 invested. Of this amount a total
of $188.55 represents investment income and $801.33 represents return of
capital.
The sixth Prior Program, ATEL Cash Distribution Fund VI ("ACDF VI"),
commenced a public offering of up to $125,000,000 of its limited partnership
interests on November 23, 1994. ACDF VI terminated its offering on November 22,
1996. As of that date, $125,000,000 of offering proceeds had been received from
approximately 6,401 investors. All of the proceeds were committed to equipment
acquisitions, organization and offering expenses and capital reserves. ACDF VI
acquired a variety of types of equipment with a total purchase cost of
$208,275,158. Of such equipment, items representing an original purchase cost of
$149,031,165 had been sold as of September 30, 2004. Through September 30, 2004,
ACDF VI had made cash distributions to its investors in the aggregate amount of
$829.60 per $1,000 invested. Of this amount a total of $109.03 represents
investment income and $720.57 represents return of capital.
The seventh Prior Program, ATEL Capital Equipment Fund VII ("ACEF
VII"), commenced a public offering of up to $150,000,000 of its limited
partnership interests on November 29, 1996. ACEF VII terminated its offering on
November 29, 1998. As of that date, $150,000,000 of offering proceeds had been
received from approximately 5,386 investors. All of the proceeds were committed
to equipment acquisitions, organization and offering expenses and capital
reserves. ACEF VII had acquired a variety of types of equipment with a total
purchase cost of $302,698,648. Of such equipment, items representing an original
purchase cost of $119,102,193 had been sold as of September 30, 2004. Through
September 30, 2004, ACEF VII had made cash distributions to its investors in the
aggregate amount of $713.88 per $1,000 invested. Of this amount a total of
$99.39 represents investment income and $614.49 represents return of capital.
See Table III - "Operating Results of Prior Programs" in Exhibit A for further
information concerning such distributions. See Table V - "Acquisition of
Equipment by Prior Programs" in Exhibit A for further information concerning the
types of equipment acquired by ACEF VII. See Table VI - "Sales or Disposals of
Equipment" in Exhibit A for further information concerning the equipment
disposed of by ACEF VII.
The eighth Prior Program, ATEL Capital Equipment Fund VIII ("ACEF VIII"),
commenced a public offering of up to $150,000,000 of its limited liability
company member interests on December 7, 1998. ACEF VIII terminated its offering
on November 30, 2000. As of that date, $135,701,380 of offering proceeds had
been received from approximately 3,625 investors. All of the proceeds were
committed to equipment acquisitions, organization and offering expenses and
capital reserves. ACEF VIII had acquired a variety of types of equipment with a
total purchase cost of $249,040,775 as of September 30, 2004. Of such equipment,
items representing an original purchase cost of approximately $99,918,539 had
been sold as of September 30, 2004. Through September 30, 2004, ACEF VIII had
made cash distributions to its investors in the aggregate amount of $494.85 per
54
$1,000 invested. Of this amount a total of $22.37 represents investment income
and $472.38 represents return of capital. See Table III - "Operating Results of
Prior Programs" in Exhibit A for further information concerning such
distributions. See Table V - "Acquisition of Equipment by Prior Programs" in
Exhibit A for further information concerning the types of equipment acquired by
ACEF VIII. See Table VI - "Sales or Disposals of Equipment" in Exhibit A for
further information concerning the equipment disposed of by ACEF VIII.
The ninth Prior Program, ATEL Capital Equipment Fund IX ("ACEF IX"),
commenced a public offering of up to $150,000,000 of its limited liability
company member interests on January 16, 2001. ACEF IX terminated its offering as
of January 15, 2003. As of that date, $120,652,160 of offering proceeds had been
received from approximately 3,238 investors. All of the proceeds were committed
to equipment acquisitions, organization and offering expenses and capital
reserves. ACEF IX had acquired a variety of types of equipment with a total
purchase cost of $87,892,538 as of September 30, 2004. Of such equipment, items
representing an original purchase cost of approximately $8,426,990had been sold
as of September 30, 2004. Through September 30 2004, ACEF IX had made cash
distributions to its investors in the aggregate amount of $294.46 per $1,000
invested. Of this amount a total of $24.01 represents investment income and
$270.45 represents return of capital. See Table III - "Operating Results of
Prior Programs" in Exhibit A for further information concerning such
distributions. See Table V - "Acquisition of Equipment by Prior Programs" in
Exhibit A for further information concerning the types of equipment acquired by
ACEF IX. See Table VI - "Sales or Disposals of Equipment" in Exhibit A for
further information concerning the equipment disposed of by ACEF IX.
The tenth prior public program, ATEL Capital Equipment Fund X ("ACEF X"),
commenced a public offering of up to $150,000,000 of its limited liability
company member interests on March 12, 2003. As of September 30, 2004, the
offering was still in progress. As of that date, $97,932,450 of offering
proceeds had been received. All of the proceeds were committed to equipment
acquisitions, organization and offering expenses, working capital and capital
reserves. ACEF X terminated its offering on March 12, 2005. ACEF X had acquired
a variety of types of equipment and invested in notes receivable with a total
purchase cost of $26,623,768 as of September 30, 2004. Sales of such equipment
were not significant as of September 30, 2004. Through September 30 2004, ACEF X
had made cash distributions to its investors in the aggregate amount of $95.09
per $1,000 invested. All of this amount represents return of capital. See Table
III - "Operating Results of Prior Programs" in Exhibit A for further information
concerning such distributions. See Table V - "Acquisition of Equipment by Prior
Programs" in Exhibit A for further information concerning the types of equipment
acquired by ACEF IX. See Table VI - "Sales or Disposals of Equipment" in Exhibit
A for further information concerning the equipment disposed of by ACEF X.
As discussed elsewhere in this Prospectus, fluctuations in demand for
equipment may affect the ability of a leasing program to invest and reinvest its
capital in a timely manner. ACEF IX is in the process of leveraging its gross
offering proceeds for the purchase of its initial equipment portfolio. ACEF X is
in the process of committing the balance of its gross offering proceeds to its
initial equipment portfolio. Equipment lessors experienced a more difficult
market in which to make suitable investments during recent periods of reduced
growth and recession in the U.S. economy as a result of the softening demand for
capital equipment during these periods. Delays in investment may have a negative
impact on ACEF IX and ACEF X. The Manager believes that it has identified
industry segments, lease markets and potential transaction structures that will
permit ACEF IX and ACEF X to pursue their investment objectives.
Each of the Prior Programs has had, as an investment objective, the
reinvestment of cash flow after payment of debt service and certain minimum
distributions. Reinvestment is intended to increase the size, diversification
and return on their equipment portfolios. Adverse economic conditions during
1999 through 2003 affected the timing and terms of remarketing and re-leasing
efforts by these Prior Programs. An extended remarketing cycle and lower lease
rates have limited the ability of ACDF V, ACDF VI, ACEF VII and ACEF VIII to
generate sufficient cash flow to permit significant reinvestment. In the future,
adverse conditions in the general economy and equipment demand may also result
in delays in leasing, re-leasing and disposition of equipment, and in reduced
returns on invested capital. Factors which have in the recent past adversely
affected the leasing market include: economic recession resulting in lower
56
levels of capital expenditure by businesses; economic conditions have resulted
in more used equipment becoming available on the market in turn resulting in
downward pressure on prices and lease rates due to excess inventory; and,
finally, the lowest interest rates in forty years have exerted downward pressure
on lease rates and resulted in less demand for lease financing. In any event,
there can be no assurance as to what future developments may occur in the
economy in general or in the demand for equipment and lease financing in
particular. These general economic factors and the stages in Prior Programs'
investment and disposition cycles have also affected the rates of distributions
by Prior Programs. In particular, during the liquidation stages of Prior
Programs, rates of distributions have varied from their operating stages and
distributions have in some cases been suspended while a program's debt is repaid
from disposition proceeds before remaining net disposition proceeds are
available to be distributed to investors.
As of September 30, 2004, the Prior Programs have acquired equipment
with a total purchase cost of approximately $1.34 billion during a period of
over 18 years since the date the first Prior Program commenced operations.
Aggregate losses from material lessee defaults on these transactions have been
approximately $7 million, or approximately 0.53% of the assets acquired,
substantially less than the amount assumed by the Manager and its Affiliates in
structuring these portfolios as the losses to be anticipated in the ordinary
course of leasing business. There is no identifiable trend in the frequency or
amount of lessee defaults experienced by prior programs.
The Prior Programs have investment objectives that are similar to those of
the Fund. The factors considered by the Manager in determining that the
investment objectives of the prior programs were similar to those of the Fund
include the types of equipment to be acquired, the structure of the leases to
such equipment, the credit criteria for lessees, the intended investment cycles,
the reinvestment policies and the investment goals of each program. Therefore,
all of the information set forth in the tables included in Exhibit A -- "Prior
Performance Information" may be deemed to relate to programs with investment
objectives similar to those of the Fund.
In Tables I through III, information is presented with respect to all Prior
Programs sponsored by the Manager and its Affiliates that completed their
offerings of interests within the five-year period ended December 31, 2003,
except that ACDF X had not completed its offering as of that date, so the
tabular information concerning ACDF X does not reflect results of an operating
period after completion of its funding. Table IV includes information concerning
the three Prior Programs that had completed their respective operations as of
September 30, 2004. Table V includes information regarding all acquisitions of
equipment by the three most recently formed Prior Programs. Table VI includes
information regarding all dispositions of equipment by Prior Programs during the
five year period ended September 30, 2004.
The following is a list of the tables set forth in Exhibit A:
Table I -- Experience in Raising and Investing Funds
Table II -- Compensation to the Manager and Affiliates
Table III -- Operating Results of Prior Programs
Table IV -- Results of Completed Programs
Table V -- Acquisition of Equipment by Prior Programs
Table VI -- Sales or Disposals of Equipment
The Manager will provide to any investor, upon written request and without
charge, copies of the most recent Annual Reports on Form 10-K filed with the
Securities and Exchange Commission by each of the Prior Programs, and will
provide to any investor, for a reasonable fee, copies of the exhibits to such
reports. Investors may request such information by writing to ATEL Investor
Services, Inc. at 600 California Street, 6th Floor, San Francisco, California
94108 or by calling the Manager at (415) 989-8800.
In addition to the Prior Programs, the Manager and its Affiliates have
during the past ten years sponsored two private programs with investment
objectives that are significantly different than those of the Prior Programs.
Both of these prior private programs were formed to engage exclusively in growth
capital leasing.
57
ATEL Venture Fund ("AVF"), commenced a private placement of up to $25,000,000
of its limited liability company member interests in September, 1999. AVF
terminated its placement as of August 31, 2001. As of that date, $8,846,000 of
offering proceeds had been received from approximately 147 investors. All of the
proceeds were committed to financing transactions, organization and offering
expenses and capital reserves. AVF had acquired financing transactions with a
total purchase cost of $11,011,489 as of September 30, 2004. Of such equipment,
items representing an original purchase cost of approximately $7,523,517 had
been sold as of September 30, 2004.
ATEL Growth Capital Fund ("AGCF"), commenced a private placement of up to
$25,000,000 of its limited liability company member interests on June 1, 2003.
As of the date of the prospectus, the placement was still in progress. As of
September 30, 2004, $7,781,000 of offering proceeds had been received from
approximately 129 investors. All of the proceeds were committed to financing
transactions, organization and offering expenses and capital reserves. AGCF had
acquired financing transactions with a total purchase cost of $5,290,400 as of
September 30, 2004. None of such financing transactions had been sold as of
September 30, 2004.
INCOME, LOSSES AND DISTRIBUTIONS
The taxable income and taxable loss of the Fund (the "Net Income and Net
Loss") and all Fund cash distributions shall be allocated 92.5% to investors and
7.5% to the Manager as the Carried Interest.
Allocations of Net Income and Net Loss
The Fund will close its books as of the end of each quarter and allocate
Net Income, Net Loss and cash distributions on a daily basis, i.e., Fund items
will be allocated to the investors in the ratio in which the number of Units
held by each of them bears to the total number of Units held by all as of the
last day of the fiscal quarter with respect to which such Net Income, Net Loss
and cash distributions are attributable; provided, however, that, with respect
to Net Income, Net Loss and cash distributions attributable to the offering
period of the Units (including the full quarter in which the offering
terminates), such Net Income, Net Loss and cash distributions shall be
apportioned in the ratio in which (i) the number of Units held by each investor
multiplied by the number of days during the period the investor owned the Units
bears to (ii) the amount obtained by totaling the number of Units outstanding on
each day during such period. No Net Income, Net Loss and cash distributions with
respect to any quarter will be allocated to Units repurchased by the Fund during
such quarter, and such Units will not be deemed to have been outstanding during
such quarter for purposes of the foregoing allocations. Transfers of Member
interests will not be effective for any purpose until the first day of the
following quarter.
Timing and Method of Distributions
Fund cash distributions are generally made and allocated to Holders on a
quarterly basis. However, the Manager will determine amounts available for
distributions on a monthly rather than quarterly basis. All investors will be
entitled to elect to receive distributions monthly rather than quarterly by
designating such election in a written request delivered to the Manager. An
initial election to receive monthly rather than quarterly distributions may be
made at the time of subscription by designating such election on the
Subscription Agreement. Thereafter, each investor may, during each fiscal
quarter, designate an election to change the timing of distributions payable to
the investor for the ensuing fiscal quarter by delivering to the Manager a
written request. Investors who have previously elected monthly distributions may
at such time elect to return to quarterly distributions and those receiving
quarterly distributions may elect monthly distributions for the following
quarter. Distributions will be made by check payable to the record Holder unless
another payee is designated in writing executed by the Holder. Holders may elect
in writing to have distributions paid by wire transfer to designated accounts.
Wire transfer instructions may be given upon subscription or may be provided at
any time thereafter for subsequent distributions.
58
Allocations of Distributions
Distributions will be allocated among investors on the same basis as Net
Income and Net Loss. Amounts to be distributed will be determined after payment
of Fund operating expenses, establishment or restoration of capital reserves
deemed appropriate by the Manager, and, to the extent permitted, reinvestment in
additional equipment.
The Fund anticipates that income taxes on a portion of its distributions
will be deferred by depreciation available from its equipment. To the extent Net
Income is reduced by depreciation deductions, distributions will be considered
return of capital for tax purposes and income tax will be deferred until
subsequent years. Until investors receive total distributions equal to their
original investment, a portion of each distribution will be deemed a return of
capital rather than a return on capital. Notwithstanding the foregoing, however,
the Manager intends to make distributions only out of cash from operations and
cash from sales or refinancing and not out of capital reserves or offering
proceeds held pending investment.
The Fund is intended to be self-liquidating. After the sixth year following
the end of the offering, the Fund will distribute all available cash, other than
reserves deemed required for the proper operation of its business, including
reserves for the upgrading of equipment to preserve its value or to purchase
equipment the Fund has committed to buy prior to the end of the reinvestment
period. During this liquidation stage, rates of distributions may vary and
distributions may be suspended while Fund debt is repaid from disposition
proceeds before net disposition proceeds are distributed to Unit holders.
When the Fund liquidates, and after the Fund pays its creditors (including
investors who may be creditors), the Fund will distribute any remaining proceeds
of liquidation in accordance with each Member's positive Capital Account
balance. As a result, if cash distributions are made during the period between
the date investors are first admitted to the Fund and the end of the offering of
Units, it is likely that different amounts would be distributable upon
liquidation to the different investors, depending on their then Capital Account
balances. This difference will be substantially reduced or eliminated by the
special allocation to investors of gain from the sale of equipment, which could
equalize their Capital Account balances. In particular, if distributions made
during the offering period to investors who were admitted at the initial
admission date reflect a return of capital (or to the extent that such investors
receive allocations of net losses relating to the offering period), such
investors will receive less on liquidation of the Fund than those who were
admitted at the final admission date. Furthermore, to the extent that those
investors who were admitted at the first admission date receive allocations of
net profits relating to the offering period in excess of the distributions of
cash for that same period, such investors will receive more distributions on
liquidation than those investors who are admitted at end of the offering. As
noted above, any differences would be substantially reduced or eliminated to the
extent the Manager equalizes Capital Accounts through special allocations of
gain from the sale of equipment.
Reinvestment
The Fund has the right to reinvest revenues during the period ending six
years after the offering ends. Before the Fund can reinvest in equipment,
however, the Fund must, at a minimum, distribute
(i) enough cash to allow an investor in a 31% federal income tax
bracket to meet the federal and state income taxes due on income from the
operations of the Fund;
(ii) through the first full fiscal quarter ending at least six months
after termination of the offering of Units, an amount equal to the lesser
of:
(a) a rate of return on their original capital contribution equal
to 2.5% over the average yield on five-year United States Treasury
Bonds for the fiscal quarter immediately preceding the date of
distribution, as published in a national financial newspaper from time
to time (with a minimum of 8% per annum and a maximum of 10% per
annum, or
(b) 90% of the total amount of cash available for distributions;
and
(iii) for each quarter during the rest of the reinvestment period, an
amount equal to 8% per annum on their original capital contribution.
59
The following chart (Figure 9) illustrates the anticipated cycle of
distributions to investors during the Fund's three basic stages, funding,
operations and liquidation. The amount of distributions is expected to vary
during the initial funding stage of the Fund, as it raises equity capital
through the sale of Units, acquires its initial equipment leasing transaction
portfolio and leverages its portfolio. Then, distributions are expected to
become level as the Fund is required during its six year operations stage to
make minimum distributions to investors prior to any reinvestment of the Fund's
operating cash flow. There can be no assurance, however, as to the rate or
availability of distributions during any period, or the rate of reinvestment, if
any, during the operations stage. The availability of cash for distributions,
and the rate of distributions, if any, during all stages will be dependent
on the success of Fund operations and the Fund's need to pay operating expenses,
to repay debt, the terms of which may require suspension of distributions during
some periods, and to establish necessary capital reserves. After the operations
stage, the Fund is expected to enter into a two to four year liquidation stage
during which all cash flow not required for Fund obligations, including
repayment of debt and establishment of capital reserves, will be distributed to
investors. Distributions during this period are expected to fluctuate as amounts
vary depending on the rate of liquidation of the portfolio, the residual values
realized upon expiration of leases, the amount of remaining lease revenues, the
amount of operating expenses incurred, the need to repay portfolio debt, and the
establishment of necessary capital reserves. Investors should note that there
can be no assurance as to the amount or timing of any distributions, which, as
described above, will depend on a number of factors affecting Fund operations.
[GRAPHIC OMITTED]
Figure 9
Return of Unused Capital
Any net offering proceeds received by the Fund during the first twelve
months of the offering not committed to investment in equipment by eighteen
months after the beginning of the offering, and any offering proceeds received
in a second year of the offering not committed to investment by a date six
months after the end of the offering (except amounts used to pay operating
expenses or required as capital reserves) will be distributed to investors pro
rata as a return of capital. In addition, in order to refund to the investors
the amount of Front End Fees attributable to such returned capital, the Manager
has agreed to contribute to the Fund, and the Fund will distribute to investors
pro rata, the amount by which the unused capital so distributed, divided by the
percentage of offering proceeds remaining after payment of all Front End Fees,
exceeds the amount of unused capital distributed.
Cash from Capital Reserve Account
The Operating Agreement requires that the Fund initially establish a cash
reserve for general working capital purposes in an amount equal to not less than
1/2 of 1% of the offering proceeds (equal to $6,000 if the minimum Units are
sold and $750,000 if the maximum Units are sold). Any cash reserves used need
not be restored, and, if restored, may be restored from the operating revenues
of the Fund. Distributions of cash reserves will be allocated and distributed in
the same manner as cash proceeds from sales of equipment. Cash reserves that the
Manager deems no longer required as capital reserves may be distributed or
invested by the Fund.
60
Sources of Distributions -- Accounting Matters
The amount of cash the Fund will distribute to investors each year is not
the same as the amount of taxable income that is passed through to the investor.
For example, the Fund may have tax deductions that do not represent direct cash
expenses, so the Fund may have more cash available to distribute than it has
taxable income. When an investor receives a distribution of more cash in a year
than his share of income, he will be deemed to be receiving a return of his
invested capital rather than investment income. Distributions by the Fund may be
characterized differently for tax, accounting and economic purposes as a return
of capital, investment income or a portion of each.
CAPITALIZATION
The capitalization of the Fund, as of the date of this Prospectus and as
adjusted to reflect the issuance and sale of the Units offered hereby assuming
the minimum 120,000 Units and the maximum 15,000,000 Units are sold, is as
follows:
As of Minimum Maximum
the Date 120,000 15,000,000
hereof Units Units
---------- ----------- -----------
Units of Member Interest ($10 per Unit) 500 1,200,500 150,000,500
==== ============== =============
Total Capitalization $ 500 $1,200,500 $150,000,500
Less Estimated Organization and Offering Expenses -- 138,000 18,750,000
---- -------------- -------------
Net Capitalization $ 500 $1,062,000 $131,250,500
==== ============== =============
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
Until receipt and acceptance of subscriptions for 120,000 Units, the Fund
will not commence active operations.
After the minimum capital is received, subscription proceeds will be
released to the Fund from escrow and applied to the payment or reimbursement of
Organization and Offering Expenses, leaving estimated net proceeds available for
investment and operations of $1,062,000. As additional subscriptions for Units
are received, the Fund will experience a relative increase in liquidity and a
relative decrease in liquidity as capital is expended in the purchase and lease
of equipment.
The Fund will acquire equipment with cash and debt. The Fund may borrow on
a secured or unsecured basis amounts up to 50% of the aggregate purchase price
of equipment, and intends to borrow the maximum amount permitted. The Fund
currently has no arrangements with, or commitments from, any lender with respect
to debt financing. The Manager anticipates that any acquisition financing or
other borrowing will be obtained from institutional lenders. Except as discussed
below in connection with asset securitization financing, the Fund does not
currently anticipate that it will engage in any material hedging transactions.
Until required for the acquisition or operation of equipment, the offering
proceeds will be held in short-term, liquid investments. The Fund is required by
the Operating Agreement to establish an initial working capital reserve in the
amount of 1/2 of 1% of the Gross Proceeds.
For financial reporting purposes, equipment on operating leases will
generally be depreciated using the straight-line method, over periods equal to
the terms of the related leases to the equipment, down to an amount equal to the
estimated residual value of the equipment at the end of the related leases. The
treatment for financial reporting purposes differs from cost recovery for tax
purposes in which the IRS prescribes certain useful lives for each type of
equipment and the Code provides specific accelerated rates of depreciation over
those useful lives.
61
The potential effects of inflation on the Fund are difficult to predict. If
the general economy experiences significant rates of inflation, however, it
could affect the Fund in a number of ways. The cost of equipment acquisitions
could increase with inflation, but cost increases could be offset by the Fund's
ability to increase lease rates in an inflationary market. Revenues from
existing leases would not generally increase with inflation, as the Fund does
not expect to provide for rent escalation clauses tied to inflation in its
leases. Nevertheless, the anticipated residual values to be realized upon the
sale or re-lease of equipment upon lease terminations (and thus the overall cash
flow from the Fund's leases) may be expected to increase with inflation as the
cost of similar new and used equipment increases.
Fluctuations in prevailing interest rates could also affect the Fund. The
cost of capital reflected in interest rates is a significant factor in
determining market lease rates and the pricing of lease financing generally.
Higher interest rates could affect the cost of Fund borrowing, reducing its
yield on leveraged investments or reducing the desirability of leverage. The
Fund would also expect that increases or decreases in prevailing interest rates
would generally result in corresponding increases or decreases in available
lease rates on new leases. Except as discussed below, interest rate fluctuations
would generally have little or no effect on existing leases, as rates on such
leases would generally be fixed without any adjustment related to interest
rates.
The Fund may incur short-term bridge financing bearing a variable interest
rate, but this borrowing would involve little exposure to increased interest
rates because of its limited term. However, the Manager expects that any asset
securitization financing by the Fund will involve borrowing at a variable
interest rate based on an established reference rate. The Manager would seek to
mitigate the Fund's exposure to increases in the interest rate by engaging in
hedging transactions that would effectively fix the interest rate obligation of
the Fund. The Manager's policy will be to incur variable rate financing only
under conditions and terms which limit the potential adverse effect on the
Fund's anticipated return on the related lease transactions. Other than in
short-term bridge financing or asset securitization financing, the Manager will
seek to avoid borrowing under terms which provide for a rate of interest which
may vary. The Manager will attempt to limit any other variable interest rate
borrowing to those instances in which the lessee agrees to bear the cost of any
increase in the interest rate. If such debt is incurred without a corresponding
variable lease payment obligation, the Fund's interest obligations could
increase while lease revenues remain fixed. Accordingly, a rise in interest
rates may increase borrowing costs and reduce the amount of income and cash
available for Distributions. Historically, the interest rates charged by major
banks have fluctuated; as a result, the precise amount of interest which the
Fund may be charged under such circumstances cannot be predicted.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes all material federal income tax
considerations which may be relevant to the offering of Units.
Derenthal & Dannhauser LLP has reviewed this section of the Prospectus.
Derenthal & Dannhauser LLP believes that, to the extent the summary of Federal
income tax consequences to the investors set forth in this section involves
matters of law, such statements are accurate in all material respects under the
Internal Revenue Code, Treasury Regulations and existing interpretations thereof
and address fairly the principal aspects of each material Federal income tax
issue relating to an investment in the Fund. It is impractical to set forth in
this Prospectus all aspects of federal, state, local and foreign tax law which
may affect an investment in the Fund. Furthermore, the discussion of various
aspects of federal, state, local and foreign taxation and of counsel's opinion
contained herein is based on the Internal Revenue Code, existing laws, judicial
decisions and administrative regulations, rulings and practice, all of which are
subject to change. Prospective investors are urged to consult their own tax
advisers, attorneys and/or accountants with specific reference to their own tax
situations and the effect thereon of an investment in the Units.
The Fund's management will prepare its income tax information returns. The
Fund will make a number of decisions on such tax matters as the expensing or
capitalizing of particular items, the proper period over which capital costs may
62
be depreciated or amortized, the allocation of acquisition costs between
equipment and management fees, and other similar items. Such matters will be
handled by the Fund. Tax counsel to the Fund will not prepare or review the
Fund's income tax information returns.
Opinions of Derenthal & Dannhauser LLP
Based on the assumptions and representations described herein, and as more
fully set forth hereinafter, Derenthal & Dannhauser LLP is of the opinion that
for Federal income tax purposes:
-- the Fund will be classified as a partnership and not as an association
taxable as a corporation;
-- the Fund will not be treated as a publicly traded partnership;
-- it is more likely than not that the allocations of profits and losses
included in the operating agreement would not be significantly modified
if challenged by the IRS;
-- to the extent the Fund enters into true leases, such activities will
constitute passive activities.
The opinions of Derenthal & Dannhauser LLP are based upon the facts
described in this Prospectus, ATEL's representation of facts to Derenthal &
Dannhauser LLP, and the assumption that the Fund will operate its business as
described in this Prospectus. Any alteration of the facts may adversely affect
the opinions rendered.
Each prospective investor should note that the opinions described herein
represent only Derenthal & Dannhauser LLP's best legal judgment. They have no
binding effect or official status of any kind. The Fund has not requested an IRS
ruling on any matter. There can be no assurance that the IRS will not challenge
any of Derenthal & Dannhauser LLP's opinions.
Treasury Regulations impose standards regarding tax shelter opinions. For
this purpose, a tax shelter is an investment that has, as a significant or
intended feature, the generation of tax losses or tax credits to shelter taxable
income or tax liability from other sources. The Fund is not a tax shelter within
that meaning. Derenthal & Dannhauser LLP's opinion does not follow the standards
applicable to tax shelter opinions.
There are certain issues upon which Derenthal & Dannhauser LLP cannot
express an opinion because:
-- the issue is subject to facts that are not presently known and cannot
readily be determined,
-- the issue is subject to future events, or
-- there is insufficient judicial or other authority upon which a
conclusive opinion can be based.
Such factual determinations may include:
-- whether a lease is a true lease or a financing or other type of
arrangement; or
-- the tax treatment resulting from the receipt, the holding or the
disposition of equity interests.
Classification as a Partnership
The Fund will not apply for an IRS ruling regarding its classification for
Federal income tax purposes. ATEL has represented that the Fund will not elect
to be treated as a corporation for Federal income tax purposes under the
Internal Revenue Code Section 7701 Treasury Regulations. Derenthal & Dannhauser
LLP has rendered its opinion that the Fund will be classified as a partnership
and will not be treated as an association taxable as a corporation for Federal
income tax purposes. Derenthal & Dannhauser LLP's opinion is based upon the
foregoing representation of ATEL and the continued effectiveness of the Treasury
Regulations. If the Treasury Department were to amend its Regulations, it is
possible that the Fund would not qualify as a partnership under the amended
regulations.
63
Notwithstanding the preceding, if Units are considered publicly traded the
Fund will be treated as a corporation under the publicly traded partnership
provisions of Internal Revenue Code Section 7704. The Fund will be treated as
publicly traded if Units are traded on an established securities market, or
readily tradable on a secondary market or the substantial equivalent thereof. An
established securities market includes a securities exchange as well as a
regular over-the-counter market. Treasury Regulations under Internal Revenue
Code Section 7704 state that a secondary market for an entity's interests
generally is indicated by the existence of a person standing ready to make a
market in the interests, or where the holder of an interest has a readily
available, regular and ongoing opportunity to sell or exchange his interest
through a public means of obtaining or providing information on offers to buy,
sell or exchange interests. Complicity or participation of the entity is
relevant in determining whether there is public trading of its interests. A
partnership will be considered as participating in public trading where trading
in its interests is in fact taking place and the partnership's governing
documents impose no meaningful limitation on the holders' ability to readily
transfer their interests. A partnership's right to refuse to recognize transfers
is not a meaningful limitation unless such right actually is exercised.
Whether the Units will become readily tradable on a secondary market or the
substantial equivalent thereof cannot be predicted with certainty. The Units
will not be deemed readily tradable on a secondary market or the substantial
equivalent thereof if any of the safe harbors included in the Treasury
Regulations is satisfied. One of these is the 2% safe harbor. If the sum of the
interests in Fund capital or profits that are sold or otherwise transferred
during a tax year does not exceed 2% of the total interests in capital or
profits, then a secondary market or its equivalent in Units will not exist.
Neither the Fund nor ATEL will have any control over an independent third
person establishing a secondary market in Units. However, the Fund's operating
agreement requires that an investor obtain the consent of ATEL prior to any
transfers of Units. ATEL intends to exercise its discretion in granting and
withholding its consent to transfers so as to fall within the parameters of the
2% safe harbor. If the Fund complies with the 2% safe-harbor provision of the
Treasury Regulations, Derenthal & Dannhauser LLP is of the opinion that the Fund
will not be considered a publicly traded partnership.
If the Fund were treated for federal income tax purposes as a corporation
in any year, (i) instead of there being no tax at the Fund level, the Fund would
be required to pay federal income taxes upon its taxable income; (ii) state and
local income taxes could be imposed on the Fund; (iii) losses of the Fund would
not be reportable by the investors on their personal income tax returns; (iv)
any distributions would be taxable to an investor as (a) ordinary income to the
extent of current or accumulated earnings and profits, and (b) gain from the
sale of the investor's Units to the extent any distribution exceeded such
earnings and profits and the tax basis of such Units; (v) distributions would be
classified as portfolio income which would not be available to offset passive
activity losses. See "Limitation on Deduction of Losses -- Passive Loss
Limitation" below. Also, a change in status from a partnership to a corporation
could result in taxable income to an investor. The amount of taxable income
would equal his share of the liabilities of the Fund over the adjusted basis of
his Units.
Any of the foregoing would substantially reduce the effective yield on an
investment in Units.
The following discussion is based upon the assumption that the Fund will be
classified as a partnership for federal income tax purposes.
Allocations of Profits and Losses
In general, a partner's distributive share of partnership income, gain,
deduction or loss will be determined in accordance with the operating or
partnership agreement. However, if such allocations do not have substantial
economic effect, distributive shares will be determined in accordance with the
partners' interests in the partnership.
An allocation has economic effect under the Treasury Regulations if: (i)
each partner's share of partnership items is reflected by an increase or
decrease in the partner's capital account; (ii) liquidation proceeds are
64
distributed in accordance with capital account balances; and (iii) any partner
with a capital account deficit following the distribution of liquidation
proceeds is required to restore such deficit.
An allocation can have economic effect even if a partner is not required to
restore a deficit balance in his capital account, but only (i) to the extent the
allocation does not reduce his capital account balance below zero; and (ii) if
the operating or partnership agreement contains a qualified income offset. An
agreement contains a qualified income offset if it provides that a partner who
unexpectedly receives an adjustment, allocation or distribution that reduces his
capital account below zero will be allocated income or gain in an amount and
manner sufficient to eliminate his deficit capital account balance as quickly as
possible.
Special rules apply to the allocation of deductions attributable to
nonrecourse debt. Such allocations will be respected under the Treasury
Regulations if the partners who are allocated the deductions bear the burden of
the future income related to the previous deductions. In particular, the
following additional elements must be satisfied: (i) the operating or
partnership agreement must provide for allocations of nonrecourse deductions in
a manner consistent with allocations of some other significant partnership item
related to the property securing the nonrecourse debt, provided such other
allocations have substantial economic effect; (ii) all other material
allocations and capital account adjustments under the operating or partnership
agreement are recognized under the Treasury Regulations, and (iii) the operating
or partnership agreement contains a minimum gain chargeback.
A minimum gain chargeback provides that, if there is a net decrease in
partnership minimum gain during a tax year, all partners will be allocated items
of partnership income and gain in proportion to, and to the extent of, an amount
equal to the portion of such partner's share of the net decrease in partnership
minimum gain. The amount of partnership minimum gain is determined by computing
the amount of gain, if any, that would be realized by the partnership if it
disposed of the property subject to the nonrecourse liability in full
satisfaction thereof.
The Fund's operating agreement prohibits losses from being allocated to an
investor that would cause a deficit capital account in excess of the investor's
share of Fund minimum gain. Nonrecourse deductions will be allocated in the same
manner as operating profits and losses. The operating agreement contains a
minimum gain chargeback provision and a qualified income offset provision that
are intended to comply with the provisions of the Treasury Regulations. The
operating agreement provides that capital accounts will be maintained in
accordance with the provisions of the Treasury Regulations. The operating
agreement also provides that proceeds on liquidation will be distributed in
accordance with positive capital account balances. Therefore, Derenthal &
Dannhauser LLP is of the opinion that it is more likely than not that the
allocations included in the operating agreement would not be significantly
modified if challenged by the IRS.
The economic effect of the Fund allocations also must be "substantial." The
meaning and scope of the substantiality requirements under the Treasury
Regulations are unclear at this time. Based on current Treasury Regulations,
Derenthal & Dannhauser LLP does not believe the Fund allocations present any
material substantiality issues. Consequently, as stated above, Derenthal &
Dannhauser LLP is of the opinion that it is more likely than not that the Fund's
allocations would not be significantly modified by the IRS. However, no
assurance can be given that the IRS will not disagree. If the IRS were
successful in challenging the Fund's allocations, the investors' shares of tax
loss could decrease or their shares of taxable income could increase.
Income Recognition
The Fund will prepare its tax returns using the accrual method of
accounting. Under the accrual method, the Fund will include in income items such
as interest and rentals as and when earned by the Fund, whether or not received.
Thus, the Fund may be required to recognize income sooner than would be the case
under the cash receipts and disbursements method of accounting.
Some leases provide for varying rental payments over the years. Section 467
of the Internal Revenue Code can require a lessor to take such rental payments
into income as if the rent accrued at a constant level rate. This provision
applies to certain sale-leaseback transactions and certain long-term leases.
Certain of the Fund's leases may provide for varying rental payments. If so,
65
Section 467 requires the Fund to accrue the rental payments on such leases at a
constant level rate. This could result in investors receiving increased
allocations of taxable income or reduced allocations of loss in earlier years,
without any increase in distributions until subsequent years. An additional
consequence could be a conversion of a portion of the Fund's rental income from
any such lease to interest income. Rental income generally constitutes passive
income. Interest income generally constitutes portfolio income. See "Limitation
on Deduction of Losses -- Passive Loss Limitation."
Taxation of Investors
As long as the Fund is treated as a partnership for federal income tax
purposes, it will not be subject to any federal income taxes. Nonetheless, the
Fund will file federal partnership information tax returns for each calendar
year.
Each investor will be required to report on his own federal income tax
return his share of Fund items of income, gain, loss, deduction or credit. An
investor will be subject to tax on his distributive share of Fund income whether
or not any distribution is made to him.
If the amount of a distribution to an investor for any year exceeds the
investor's share of the Fund's taxable income for the year, the excess will
constitute a return of capital. A return of capital is applied first to reduce
the tax basis of the investor's Units. Any amounts in excess of such tax basis
generally will be taxable as a gain from the sale of a capital asset. However,
all or a portion of a distribution to an investor in exchange for:
(i) an interest in inventory items which have substantially
appreciated in value, or
(ii) unrealized receivables
will generally result in the receipt of ordinary income. The terms inventory
items and unrealized receivables are specially defined for this purpose. The
term unrealized receivables includes depreciation recapture.
Limitation on Deduction of Losses
There are limitations on an investor's ability to deduct his distributive
share of Fund losses. Among them are: (i) losses will be limited to the extent
of the investor's tax basis in his Units; (ii) losses will be limited to the
amounts for which the investor is deemed at risk; and (iii) losses will be
limited to the investor's income from passive activities. Deduction of losses
attributable to activities not engaged in for profit also are limited.
Tax Basis. Initially, an investor's tax basis for his Units will be equal
to the price paid for the Units. Each investor will increase the tax basis for
his Units by (i) his allocable share of the Fund's taxable income, and (ii) any
increase in his share of the Fund's nonrecourse liabilities, and will decrease
the tax basis for his Units by
-- his allocable share of the Fund's tax loss,
-- the amount of any distributions, and
-- any reduction in his share of Fund nonrecourse liabilities.
If the tax basis of an investor should be reduced to zero, the amount of any
distributions and any reduction in Fund nonrecourse liabilities will be treated
as gain from the sale or exchange of the investor's Units.
Subject to the other limitations discussed below, on his own federal income
tax return an investor may deduct his share of the Fund's tax loss to the extent
of the tax basis for his Units. Fund losses which exceed his tax basis may be
carried over indefinitely and, subject to the limitations discussed below,
deducted in any year to the extent his tax basis is increased above zero.
At Risk Rules. Under Internal Revenue Code Section 465, the amount of
losses which may be claimed by an individual or a closely-held corporation from
equipment leasing activities cannot exceed the amount which the investor has at
risk with respect to such activities. A closely-held corporation is a
corporation more than 50% of which is owned directly or indirectly by not more
than five individuals.
66
The amount at risk is generally equal to the sum of money invested in the
activity. In addition, an investor will be at risk with respect to any qualified
nonrecourse financing used in the investment. An investor's at risk amount will
be decreased by his share of Fund losses and distributions. An investor's at
risk amount will be increased by his share of Fund income.
The total amount of money paid by each investor for his Units will be
considered at risk. Fund indebtedness is not expected to be considered at risk.
Accordingly, an investor will only be able to deduct his share of Fund losses
under the at risk rules in an amount equal to the purchase price of his Units,
as adjusted for Fund income, losses and distributions. Any losses in excess of
an investor's at risk amount will be treated as a deduction in succeeding
taxable years, again subject to the at risk limitations. An investor must
recapture previously allowed losses if the investor's amount at risk at the end
of the year is reduced below zero.
Even if an investor can claim Fund losses under the at risk rules, the
investor is still subject to the other limits on deduction discussed herein.
Under the Internal Revenue Code, the Fund will be permitted to aggregate
its equipment leasing activities only with respect to equipment placed in
service during the same taxable year. This could limit an investor's deduction
for losses with respect to certain equipment, even though the investor must
recognize income with respect to other equipment.
Passive Loss Limitation. Internal Revenue Code Section 469 limits the
amount of losses that individuals and certain other taxpayers may claim from an
activity in which the taxpayer does not materially participate. Under this
limitation, net losses from a passive activity may only be deducted against net
income from passive activities. Passive activity losses may not be used to
offset compensation income or other forms of active income. Also, passive
activity losses may not be used to offset interest, dividends and other forms of
portfolio income.
To the extent the Fund enters into true leases for Federal income tax
purposes, the equipment leasing activities of the Fund will be passive
activities. See "Tax Status of Leases" below in this section. Fund losses from
passive activities are considered to be passive activity losses. Most investors
will only be able to deduct their share of Fund passive activity losses to the
extent they have passive income from other sources. Any excess Fund passive
activity losses will be suspended and carried forward indefinitely. Suspended
passive activity losses may be used to offset passive activity income in future
years. Suspended passive activity losses also may be claimed in full against all
types of income if an investor disposes of all of his Units in a fully taxable
transaction to an unrelated person.
The Fund will have portfolio income:
-- to the extent its investments constitute financing leases or secured
loans, rather than true leases, and
-- to the extent of any dividends it receives from equity interests in
growth capital lease investments.
The Fund's receipt of the equity interests themselves may constitute a taxable
event. The income therefrom could be passive or portfolio, depending upon the
circumstances. Therefore, investors may be required to recognize taxable
portfolio income and pay tax thereon in years in which they also are allocated
passive losses which cannot be used by them. Counsel has rendered no opinion
regarding the classification of financing leases, secured loans or equity
interests.
The passive loss limitation is applied after the at risk limitation. Thus,
if a loss is disallowed under the at risk rules for a particular year, it will
not again be disallowed by the passive loss limitation for such year. Rather,
for the year in which the investor becomes at risk in the activity, the
suspended at risk loss will become subject to the passive loss limitation.
Hobby Losses. Section 183 of the Internal Revenue Code limits deduction of
losses from activities not engaged in for profit. Whether an activity is engaged
in for profit is based on the facts and circumstances from time to time.
Although one of the objectives of the Fund is to provide investors with
distributions, there can be no assurance that the Fund will be deemed to be
67
engaged in an activity for profit. It is conceivable that the IRS may assert
that the Fund is not engaged in an activity for profit. Prospective investors
should consult their own tax advisers regarding the impact of Internal Revenue
Code Section 183 on their particular situations.
Tax Status of Leases
Whether a specific lease is categorized as a lease rather than as a sale or
a financing for federal income tax purposes involves a factual determination.
Accordingly, no assurance can be given that the Fund's leases of equipment will
be treated as leases by the IRS. If they are treated as sales or financings
rather than leases, the Fund and the investors would not be entitled to cost
recovery deductions with respect to such leases. On the other hand, a portion of
the lease rental payments would be deemed to constitute amortization of such
financing or sales proceeds which would not be taxable to the Fund.
The Fund does not intend to apply to the IRS for a ruling that any leases
of equipment will be treated as leases for federal income tax purposes. No
opinion of counsel has been rendered in this regard.
Cost Recovery
MACRS. Under the Modified Accelerated Cost Recovery System, the cost of
depreciable personal property placed in service after 1986 may be recovered
using specified recovery methods over specified recovery periods.
Under MACRS the cost of most recovery property is recovered using the 200%
declining balance method. For some recovery property, the 150% declining balance
method is utilized. The recovery periods generally range from three to 20 years.
The Internal Revenue Code contains provisions to prevent taxpayers from
utilizing MACRS on property placed in service prior to January 1, 1987. The cost
of such property is recovered under the Accelerated Cost Recovery System in
effect prior to 1987. In such cases, cost recovery deductions could be less in
the early years and greater in later years than the cost recovery deductions
allowable under MACRS.
The amount by which cost recovery deductions using the 200% declining
balance method exceeds the amount that would have been allowed using the 150%
declining balance method will be an item of tax preference. See "Alternative
Minimum Tax."
Recapture. All cost recovery deductions claimed by Fund investors will be
subject to recapture at ordinary income rates upon the disposition of the
equipment or the investor's Units.
Limitations on the Use of MACRS. Under certain circumstances, in addition
to those set forth above, a taxpayer is required to recover the cost of property
over a period longer than its MACRS recovery period. These circumstances
include:
-- property used predominantly outside the United States,
-- property used by a foreign or tax-exempt entity, and
-- property owned by a partnership which has both a tax-exempt entity and
a person who is not a tax-exempt entity as holders, unless certain
exceptions apply.
Tax Consequences Respecting Equity Interests
The Internal Revenue Code includes a myriad of rules respecting the tax
treatment of stock, stock options, stock warrants and similar items. A
discussion of those provisions is beyond the scope of this prospectus. Investors
should consult with their own tax advisors if they desire more information in
that regard.
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The Fund will have taxable income on the receipt of cash lease payments.
Similarly, the Fund could have taxable income on the receipt of equity
interests. However, the Fund's receipt of equity interests will not provide cash
for distribution to the investors. Any tax liability would be paid from an
investor's own funds.
Whether the Fund's receipt of equity interests will result in income
recognition will depend upon various factors, including
-- whether or not the transfer of the equity interests by the Fund is
subject to restriction, and
-- the nature of the equity interests. For example, the receipt of
marketable stock for no payment would almost always result in the
recognition of income.
These factors will also determine the amount of income, if any, and its
character for purposes of the passive activity rules. See "Limitation on
Deduction of Losses -- Passive Loss Limitation" above.
The Fund's exercise of stock options, warrants and similar securities could
result in the recognition of income.
No opinion of counsel has been rendered with regard to the tax treatment of
equity interests.
Deductibility of Management Fees
The Fund will pay asset management fees for services to be rendered by
ATEL. The Fund intends to deduct the asset management fees. It is possible that
the IRS may challenge the deductibility of all or a portion of the asset
management fees on the basis that
-- the amount thereof is excessive,
-- all or a portion thereof is payment for other services performed by, or
other value provided by, the recipient thereof, or
-- payments for such services is not deductible.
If such a challenge by the IRS were successful, the asserted deductions would be
reduced or eliminated.
Tax Liabilities in Later Years
It is possible that after some years of Fund operations an investor's tax
liabilities may exceed cash distributions to him in corresponding years. Such a
situation would typically arise if the Fund's nondeductible loan amortization
payments on its equipment exceeded its depreciation deductions. It is possible
in such a situation that an investor's tax liabilities could exceed cash
distributions. If so, such excess would be a nondeductible out-of-pocket expense
to an investor. Based on historical experience with similar programs, ATEL does
not believe these events are likely to occur.
Sales or Exchanges of Fund Equipment
On the disposition of equipment, the Fund will realize gain in an amount
equal to the proceeds received minus the basis in the equipment. As a result of
cost recovery deductions, most equipment is expected to have a zero basis.
Proceeds received include any debt assumed by the transferee.
Gain realized by the Fund on a disposition of equipment will be taxed as
ordinary income to the extent of prior cost recovery deductions taken by the
Fund on the equipment. Unless the Fund is a dealer in the property sold, any
other gain generally will be treated as capital gain.
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A dealer is one who holds property primarily for sale to customers in the
ordinary course of business. Whether property is so held as dealer property
depends upon all of the facts and circumstances of the particular transactions.
The Fund intends:
-- to purchase equipment for investment only,
-- to engage in the business of owning and operating such equipment, and
-- to make occasional sales thereof.
Accordingly, the Fund does not anticipate that it will be treated as a dealer
with respect to any of its equipment. However, there is no assurance that the
IRS will not take the contrary position.
As stated above, the Fund's gain on a disposition of equipment will be
measured by the difference between the disposition proceeds, and the Fund's
basis in the equipment. Disposition proceeds include the amount of any debt
encumbering the property. Consequently, the amount of tax payable by an investor
as a result of the disposition may exceed his share of the cash proceeds
therefrom. In the event of a foreclosure of a debt on equipment owned by the
Fund, the Fund would realize gain equal to the excess of such indebtedness over
its adjusted tax basis of the equipment. In such event the investors would
realize taxable income although they may not receive any cash distributions as a
result of the foreclosure.
Disposition of Units
The amount of gain which an investor will realize upon the disposition of
his Units will equal the excess of
-- the amount realized by the investor, over
-- the investor's tax basis in the Units.
Conversely, the amount of loss which an investor will realize upon the
disposition of his Units will equal the excess of
-- the investor's tax basis, over
-- the amount realized for the Units.
The amount realized on the sale of the Units will include the investor's share
of any Fund liabilities. As a result, a disposition of Units may result in a tax
liability in excess of the cash proceeds.
Such gain or loss generally will be capital gain or loss. In the case of an
individual, any such gain will be subject to tax at a maximum rate of 15%, if
the Units have been held for more than 12 months. However, any gain realized on
the disposition of a Unit by an investor which is attributable to unrealized
receivables or inventory items will be taxed at ordinary income rates.
Unrealized receivables would include the investor's share of previous Fund cost
recovery deductions. An investor must recognize such cost recovery recapture in
the year of disposition, regardless of the amount of proceeds received in the
year of disposition.
Liquidation of the Fund
The operating agreement provides that on liquidation of the Fund its assets
will be sold. The sale proceeds will be distributed pursuant to the terms of the
operating agreement. Each investor will realize his share of the gain or loss on
the sale of Fund assets. In addition, each investor will recognize gain or loss
measured by the difference between the cash he receives in liquidation and the
adjusted tax basis of his Units. The cash an investor receives will include the
cash constructively received as a result of relief of liabilities. Gain or loss
recognized generally will constitute capital gain or loss. However, gain
attributable to the recapture of cost recovery deductions will be taxable as
ordinary income. See "Sales or Exchanges of Fund Equipment." It is anticipated
that all or substantially all of any gains will be attributable to such
deductions and taxed as ordinary income.
70
Fund Elections
Section 754 of the Internal Revenue Code permits an entity such as the Fund
to elect to adjust the tax basis of its property
-- upon the transfer of units by sale or exchange or on the death of a
holder, and
-- upon the distribution of property by the fund to a holder.
This is known as a Section 754 election. If the Fund were to make such an
election, then transferees of Units would be treated, for the purpose of
depreciation and gain, as though they had acquired a direct interest in Fund
assets. Furthermore, under certain circumstances, the Fund would be required to
make the foregoing adjustments.
A Section 754 election is complex. A Section 754 election increases the
expense of tax accounting. As a result, ATEL does not intend to cause the Fund
to make a Section 754 election, unless required to do so. If not, then an
investor may have greater difficulty in selling his Units.
The Internal Revenue Code includes other elections. The Fund may make
various elections for federal tax reporting purposes which could result in
various items of income, gain, loss, deduction and credit being treated
differently for tax purposes than for accounting purposes.
Treatment of Gifts of Units
Generally, no gain or loss is recognized for federal income tax purposes as
a result of a gift of property. There are exceptions to the general rule. If a
gift of a Unit were made at a time when the investor's allocable share of the
Fund's nonrecourse indebtedness exceeded the adjusted tax basis of his Unit,
such investor would realize gain for federal income tax purposes upon the
transfer of such Unit to the extent of such excess. A charitable contribution of
Units also would result in income or gain to the extent that the transferor's
share of nonrecourse liabilities exceeded the adjusted tax basis in his Units.
Gifts of Units may also result in gift tax liability pursuant to the rules
applicable to all gifts of property.
Investment by Qualified Retirement Plans and IRAs
Qualified pension, profit-sharing, stock bonus plans, Keogh Plans and IRAs
are generally exempt from taxation. A qualified retirement plan or an IRA will
have tax liability to the extent that its unrelated business taxable income
exceeds $1,000 during any fiscal year. Unrelated business taxable income is
determined in accordance with Sections 511-514 of the Internal Revenue Code. The
Fund will be engaged in the business of equipment leasing. The share of a
qualified retirement plan or an IRA of the Fund's business income will
constitute unrelated business taxable income. A qualified retirement plan or IRA
will be required to report its pro rata share of the Fund's business income as
unrelated business taxable income if and to the extent that the investor's
unrelated business taxable income from all sources exceeds $1,000 in any taxable
year.
A portion of the gain from the sale of equipment subject to acquisition
indebtedness also will be included in the unrelated business income of a
tax-exempt entity. Indebtedness is acquisition indebtedness if it was incurred
directly or indirectly in connection with the acquisition or improvement of the
equipment. In addition,
-- gain which is characterized as ordinary income due to the recapture of
cost recovery, or
-- gain from equipment which is inventory or property held primarily for
sale to customers in the ordinary course of a trade or business
will be unrelated business taxable income.
If a qualified retirement plan or IRA has unrelated business taxable income
in excess of $1,000 for any year,
-- it is subject to income tax on the excess, and
-- it is obligated to file a tax return for such year.
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Notwithstanding the preceding, a charitable remainder trust that recognizes
unrelated business taxable income will be required to pay tax on all income
recognized, whether or not such other income is unrelated business taxable
income. Any tax due should be paid directly from the tax-exempt entity. Payment
of the tax by the beneficiary could have other adverse tax consequences.
All tax-exempt entities are urged to obtain the advice of a qualified tax
advisor on the effect of an investment in Units.
Individual Tax Rates
General. The highest individual tax rate currently is 35%.
Capital Gains and Losses. The excess of net long-term capital gains over
short-term capital losses is referred to in the Internal Revenue Code as net
capital gain. Net capital gain of individuals is taxed at a 15% maximum rate for
most types of capital assets.
Capital losses of individuals may offset capital gains plus only $3,000 of
ordinary income in a year. Capital losses of corporations may offset capital
gains only. Any remaining capital loss may be carried forward indefinitely.
Two Percent Floor on Miscellaneous Itemized Deductions. Noncorporate
investors may deduct itemized expenses only to the extent they exceed 2% of
adjusted gross income. Itemized deductions include expenses paid or incurred
-- for the production or collection of income,
-- for the management, conservation, or maintenance of property held for
the production of income, or
-- in connection with the determination, collection or refund of a tax.
Alternative Minimum Tax
In addition to the regular income tax, the Internal Revenue Code includes
an alternative minimum tax for noncorporate and corporate taxpayers. The base
upon which the alternative minimum tax is imposed is equal to
-- the taxpayer's taxable income,
-- subject to alternative minimum tax adjustments,
-- increased by items of tax preference, and
-- reduced by an exemption,
all as described below.
Under the alternative minimum tax, depreciation deductions on personal
property are computed using the 150% declining balance method rather than the
200% declining balance method. A less favorable net operating loss deduction is
used in lieu of the regular tax net operating loss deduction.
The itemized deductions allowable in computing alternative minimum taxable
income include the following:
-- charitable contributions,
-- medical deductions in excess of 10% of adjusted gross income,
-- casualty losses,
-- interest on personal housing, and
-- other interest to the extent of net investment income.
72
No standard deduction is allowed, but an exemption amount is available as
discussed below.
The Internal Revenue Code eliminates an incentive for married taxpayers to
file separate returns by increasing the amount of alternative minimum taxable
income by the lesser of:
-- 25% of the excess of alternative minimum taxable income over
$165,000, or
-- $22,500.
For corporations, the Internal Revenue Code requires an addition to taxable
income of 75% of the amount by which adjusted current earnings exceeds
alternative minimum taxable income.
In addition to the adjustments described above, alternative minimum taxable
income is increased by the amount of items of tax preference. Tax preferences
include excess depletion deductions, excess intangible drilling costs,
tax-exempt interest, and the difference between the fair market value and the
exercise price of stock acquired by exercise of an incentive stock option. No
deduction is allowed for losses from a tax shelter farm activity.
Most tax credits cannot be used to offset alternative minimum tax. Any
excess tax credits are first carried back one year and then forward 20 years.
The alternative minimum tax for individuals is equal to:
-- 26% of so much of the taxable excess as does not exceed $175,000,
plus
-- 28% of so much of the taxable excess as exceeds $175,000.
For this purpose, taxable excess means the amount by which alternative minimum
taxable income exceeds the exemption amount. Subject to special increases for
2005, the exemption amounts are:
-- $45,000 for a married couple filing a joint return or a surviving
spouse,
-- $33,750 for a single individual, and
-- $22,500 for a married individual filing a separate return or for an
estate or trust.
However, the exemption is reduced by 25% of the amount by which the
alternative minimum taxable income exceeds:
-- $150,000 in the case of a married couple filing a joint return,
-- $112,500 in the case of a single individual, and
-- $75,000 in the case of a married individual filing a separate return
or for an estate or trust.
The corporate alternative minimum tax is the amount, if any, by which:
-- 20% of the excess of
-- the corporation's alternative minimum taxable income, over
-- the exemption amount, exceeds
-- the corporation's regular tax for the year.
The corporate exemption amount is $40,000. However, this exemption is reduced by
25% of the amount by which alternative minimum taxable income exceeds $150,000.
The corporate alternative minimum tax does not apply to corporations which have
elected to be subject to Subchapter S of the Internal Revenue Code. Rather, the
alternative minimum tax applies to the shareholders of an S corporation.
73
The corporate alternative minimum tax has been repealed for small business
corporations. A corporation that had average annual gross receipts of less than
$5,000,000 for the three-year period beginning after December 31, 1993 is a
small business corporation for its first taxable year beginning after December
31, 1997. A corporation that meets the $5,000,000 gross receipts test will
continue to be treated as a small business corporation so long as its average
gross receipts do not exceed $7,500,000.
Because the impact of the alternative minimum tax is dependent upon each
investor's particular tax situation, each prospective investor is urged to
consult his own tax adviser as to the effect an investment in the Fund will have
on the calculation of his alternative minimum tax liability.
Fund Tax Returns and Tax Information
The Fund will use the accrual method of accounting. The Fund will adopt the
calendar year as its tax year. The Fund's operating agreement requires the Fund
to provide tax information to the investors within 75 days after the close of
each Fund tax year. Some investors may be required to file their tax returns on
or before March 15. If so, they may have to obtain an extension to file.
Each investor must file his tax return either
-- consistently with the information provided on the Fund's informational
return or
-- in a manner which notifies the IRS of any inconsistency.
Otherwise, the IRS could automatically assess and collect the tax, if any,
attributable to the inconsistent treatment.
An investor will be required to inform the Fund of the sale or exchange of
his Units within the earlier of
-- 30 days of the transaction, or
-- January 15 of the calendar year following the calendar year in which the
transaction occurs.
The Fund will be required to inform the IRS of each such transfer. The failure
of an investor or of the Fund to file these notices may result in substantial
penalties. The Fund also must inform both the seller and the buyer of Units of
the proportionate interest of the transferred Units in the unrealized
receivables and inventory items of the Fund. This notification must be made
prior to February 1 of the calendar year following the calendar year in which
the transaction occurs.
Audit of Tax Returns
The IRS could audit the Fund's tax information returns. Any such audit
could result in the audit of an investor's tax return. An audit of an investor's
return could result in adjustments to items related to the Fund as well as items
not related to the Fund.
The Internal Revenue Code treats a partnership as a separate entity for
purposes of audit, settlement and judicial review. Thus, the IRS may audit and
make a single determination of the propriety of a partnership's treatment of
partnership tax items at the partnership level. In general, a partnership's tax
matters partner represents the partnership and its partners in the event of an
audit of the partnership's tax returns. ATEL is the Fund's tax matters partner.
All partners are nevertheless entitled to participate in an audit and each
partner may enter into a settlement agreement on his own behalf with the IRS.
If the IRS proposes any adjustments to the tax returns filed by the Fund or
an investor, substantial legal and accounting expenses and deficiency interest
and penalties may be incurred. The Fund will not bear any expense that may be
incurred by an investor in connection with:
-- the investor's participation in an audit of the Fund,
74
-- the audit of his tax returns, or
-- the determination or redetermination of his tax liability even though
resulting solely from adjustments to the Fund's tax returns.
Tax Shelters and Reportable Transactions
Under the American Jobs Creation Act of 2004, the rules requiring tax
shelter registration have been repealed. Instead, "material advisers" to
"reportable transactions" are required to file an information return for each
reportable transaction. The information return must include a description of the
transaction, a description of the potential tax benefits expected therefrom, and
other information required by the Treasury Department. A "material advisor" is a
person who (i) provides material aid, assistance or advice in organizing,
managing, promoting, selling, implementing, carrying out, or insuring a
reportable transaction, and (ii) derives gross income in excess of $250,000 or
another amount as prescribed by the Treasury Department.
In addition, taxpayers must report on their individual returns or
statements any information with respect to a reportable transaction which is
required under Section 6011 of the Code.
Under current Regulations, a "reportable transaction" is one which
satisfies any of the following:
(a) A listed transaction, which a transaction that is the same as or
substantially similar to a type of transaction that the IRS has
identified by notice, regulation or other form of published guidance,
to be a tax avoidance transaction.
(b) A confidential transaction, which is one that is offered by an advisor
who places a limitation on disclosure by the taxpayer of the tax
treatment or tax structure of the transaction and the limitation on
disclosure protects the confidentiality of the advisor's tax
strategies.
(c) A transaction with contractual protection, which is one for which the
taxpayer or a related party has the right to a full or partial refund
of fees if all or part of the intended tax consequences from the
transaction are not sustained.
(d) A loss transaction, which is any transaction resulting in the taxpayer
claiming a loss under Code Section 165 of at least (1) $10 million in
any single year or $20 million in any combination of years for
corporations; (2) $10 million in any single year or $20 million in any
combination of years for partnerships that have only corporations as
partners, or $2 million in any single year or $4 million in any
combination of years for all other partnerships; (3) $2 million in any
single year or $4 million in any combination of years for individuals,
S corporations, or trusts; or (4) $50,000 in any single year for
individuals or trusts if the loss arises from foreign currency
transactions.
(e) A transaction with a significant book-tax difference, which is a
transaction where the amount for tax purposes of any item or items of
income, gain, expense, or loss from the transaction differs by more
than $10 million on a gross basis from the amount of the item for book
purposes.
(f) A transaction involving a brief holding period, which is a transaction
resulting in the taxpayer claiming a tax credit exceeding $250,000 if
the underlying asset giving rise to the credit is held by the taxpayer
for 45 days or less.
The Fund Manager does not believe that investment in the Fund will
constitute a reportable transaction pursuant to the foregoing.
Penalties and Interest
The penalty for a taxpayer's failure to disclose a reportable transaction
is $10,000 for a natural person and $50,000 for other persons, provided that for
reportable transactions which are listed transactions, the foregoing amounts are
increased to $100,000 and $200,000, respectively. These amounts are payable
75
whether or not the transaction results in an underpayment of tax. In addition to
such monetary penalty for failure to report, taxpayers subject to the reporting
requirements of the Securities and Exchange Act of 1934 would be required to
disclose in those reports such failure to report the reportable transaction, as
well as any understatement penalty or gross valuation misstatement penalty (as
described below) that result from the failure to report the listed or reportable
transaction.
Additionally, Section 6662 of the Code provides for uniform penalties at a
flat rate of 20% in cases of negligence, substantial underpayments of tax and
substantial valuation overstatements. In particular, a penalty may be imposed on
any "substantial understatement of tax liability" equal to 20% of the amount of
the underpayment of tax attributable to the understatement. For a corporation, a
substantial understatement occurs when the understated tax liability exceeds the
lesser of 10% of the correct tax required to be shown on the return (or if
greater, $10,000), or $10,000,000.
In applying the 10%/$10,000,000 test (or in calculating any resulting
penalty), the tax attributable to a particular item will generally not be
included if (a) there is, or was, substantial authority for the tax treatment of
that item by the taxpayer, or (b) the relevant facts affecting the item's tax
treatment were adequately disclosed in the return or in a statement attached to
the return on the required IRS Form and there is a reasonable basis for the tax
treatment. Treasury Regulations provide that substantial authority exists with
respect to the treatment of an item only if the weight of the authority
supporting the treatment is substantial in relation to the weight of authorities
supporting contrary treatment. Regulations also provide that reasonable basis is
a relatively high standard of tax reporting, that is significantly higher than
not frivolous or not patently improper.
Neither the substantial authority nor the full disclosure exceptions are
applicable to deductions attributable to investments in a tax shelter claimed by
corporations. For this purpose, a "tax shelter" includes a partnership if a
significant purpose of the partnership is the avoidance or evasion of federal
income tax. The Fund Manager does not believe that the principal purpose of the
Fund is or will be the avoidance or evasion of federal income tax. If the Fund
is found to be a "tax shelter" for purposes of Section 6662, the tax under
Section 6662 would be operative unless, as required by Code Section 6664, there
was reasonable cause for taking the position relating to the understatement and
the Member acted in good faith with respect to that position. Regulations under
Section 6662 provide that receipt of advice of a professional tax advisor may
constitute reasonable cause.
The foregoing provisions of Section 6662 do not apply, and the more
stringent reasonable cause and good faith rules of new Section 6662A apply, in
the case of an understatement resulting from an adequately disclosed listed
transaction or reportable avoidance transaction. Taxpayers who do not adequately
disclose the transaction would be not be eligible for the reasonable cause
exception and would be subject to a strict liability penalty equal to 30% of the
understatement.
Interest rates for an underpayment of tax are set quarterly at the federal
short-term rate plus 3%, except that the interest rate is set at the federal
short-term rate plus 5% in the case of certain underpayments of tax by a C
corporation. The rate for refunds on overpayments is set quarterly at the
federal short-term rate plus 2%. Interest on underpayments or refunds is
compounded daily. The Code provides that interest will be imposed on penalties
from the due date of the return (without regard to extensions) which gave rise
to the penalty.
Miscellaneous Fund Tax Aspects
-- Fees for the syndication of the Fund must be permanently capitalized.
-- Fund organization fees must be capitalized and may be amortized over a
180-month period.
-- Fund start-up expenditures must be capitalized and may be amortized
over a period of 180 months, beginning with the date on which the
business begins.
Foreign Tax Considerations for U.S. Investors
As noted above, the Fund may acquire equipment which is operated outside
the United States. If so, investors may be required to file returns and pay
taxes in foreign jurisdictions with respect to the income from such equipment.
76
The income taxed by the foreign jurisdiction would be calculated according to
the tax laws of the foreign jurisdiction. These tax laws may or may not
correspond with applicable United States standards.
Investors who have foreign tax liabilities as a result of the purchase of
Units may be entitled to a credit or a deduction for foreign taxes on their U.S.
tax returns. The calculation of the foreign tax credit is quite complex. No
assurance can be given that a credit or a deduction will be available. For
example, a taxpayer generally cannot claim a credit for taxes on foreign source
income in an amount greater than the taxes which would have been due had the
taxes been computed under U.S. law. This could result in higher taxes for income
from equipment located in a foreign jurisdiction than income from equipment
located in the U.S. Each investor should consult his own tax advisor regarding
the applicability of foreign taxes to his own situation.
U.S. Taxation of Foreign Persons
Special rules govern the U.S. federal income taxation of
-- nonresident alien individuals,
-- foreign corporations,
-- foreign partnerships, and
-- other foreign investors.
The rules are complex. No attempt is made herein to discuss the relevant rules.
Foreign investors should consult their own tax advisors to fully determine the
impact to them of United States federal, state and local income tax laws,
including laws requiring withholding on Partnership income and/or
distributions.
Future Federal Income Tax Changes
No one can predict what additional legislation, if any, may be proposed by
-- members of Congress
-- the current Administration, or
-- any subsequent administration.
No one can predict which proposals, if any, might ultimately be enacted.
Moreover, no one can predict what changes may be made to existing Treasury
Regulations, or what revisions may occur in IRS ruling policies. Any such
changes may have a retroactive effect. Consequently, no assurance can be given
that the federal income tax consequences of an investment in Units will continue
to be as described in this Prospectus.
State and Local Taxes
In addition to the federal income tax considerations described above,
prospective investors should consider applicable state and local taxes which may
be imposed by various jurisdictions. An investor's distributive share of the
income, gain or loss of the Fund will be required to be included in determining
his reportable income for state or local tax purposes in the jurisdiction in
which he is a resident. Moreover, California and a number of other states in
which the Fund may do business impose taxes on nonresident investors. The tax on
nonresident investors generally is determined with reference to the pro rata
share of Fund income derived from such states. Any tax losses associated with an
investment in the Fund from operations in one state may not be available to
offset income from other sources taxable in a different state.
California and a number of other states have adopted a withholding tax
procedure in order to facilitate the collection of taxes from nonresident and
foreign investors. Any amounts withheld would be deemed to be a distribution to
the investor. The deemed distribution would decrease the amount of any actual
subsequent distribution. Investors may be allowed a credit for the amount
withheld against any income tax imposed by their state of residency. The Fund
cannot estimate the percentage of its income that will be from states which have
adopted such withholding tax procedures. Therefore, the Fund cannot estimate the
required withholding tax, if any.
77
Estate or inheritance taxes might be payable in any of the jurisdictions
outlined above upon the death of an investor.
Investors may be subject to state tax rules which are less favorable than
federal tax rules.
Need for Independent Advice
The foregoing summary is not intended as a substitute for careful tax
planning. The income tax consequences associated with an investment in the Fund
are complex and certain of them will not be the same for all taxpayers.
Accordingly, each prospective purchaser of Units is strongly urged to consult
his own tax advisors with specific reference to his own tax situation.
ERISA CONSIDERATIONS
Prohibited Transactions Under ERISA and the Code
Section 4975 of the Code (which applies to all Qualified Plans and IRAs)
and Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") (which does not apply to IRAs or to certain Qualified Plans
that are not subject to ERISA's fiduciary rules) prohibit Qualified Plans and
IRAs from engaging in certain transactions involving "plan assets" with parties
that are "disqualified persons" under the Code. "Disqualified persons" include
fiduciaries of the Qualified Plan or IRA, officers, directors, shareholders and
other owners of the company sponsoring the Qualified Plan and natural persons
and legal entities sharing certain family or ownership relationships with other
"disqualified persons."
"Prohibited transactions" include any direct or indirect transfer or use of
a Qualified Plan's or IRA's assets to or for the benefit of a disqualified
person, any act by a fiduciary that involves the use of a Qualified Plan's or
IRA's assets in the fiduciary's individual interest or for the fiduciary's own
account, and any receipt by a fiduciary of consideration for his or her own
personal account from any party dealing with a Qualified Plan or IRA. Under
ERISA, a disqualified person that engages in a prohibited transaction will be
required to disgorge any profits made in connection with the transaction and
will be required to compensate any Qualified Plan that was a party to the
prohibited transaction for any losses sustained by the Qualified Plan. Section
4975 of the Code imposes excise taxes on a disqualified person that engages in a
prohibited transaction with a Qualified Plan or IRA. Section 408(e)(2) of the
Code provides that an IRA will cease to be an IRA and will be treated as having
immediately distributed all of its assets, if it engages in a prohibited
transaction.
Plan Assets
If the Fund's assets were determined under ERISA or the Code to be "plan
assets" of Qualified Plans and/or IRAs holding Units, fiduciaries of such
Qualified Plans and IRAs might under certain circumstances be subject to
liability for actions taken by the Manager or its Affiliates, and certain of the
transactions described in this Prospectus in which the Fund might engage,
including certain transactions with Affiliates of the Fund, might constitute
prohibited transactions under the Code and ERISA with respect to such Qualified
Plans and IRAs, even if their acquisition of Units did not originally constitute
a prohibited transaction. Moreover, Qualified Plans (other than IRAs) might be
deemed to have delegated their fiduciary responsibility to the Manager in
violation of ERISA.
Although under certain circumstances ERISA and the Code, as interpreted by
the Department of Labor in currently effective regulations, apply a
"look-through" rule under which the assets of an entity in which a Qualified
Plan or IRA has made an equity investment may generally constitute "plan
assets," the applicable regulations except from the application of the
"look-through" principle investments in entities in which equity participation
in the entity by benefit plan investors is not significant.
78
In order to qualify for the exception described above, "benefit plan
investors" must at all times hold less than 25% of the value of any class of
equity interest in the entity. For this purpose, the value of any equity
interests held by a person (other than a "benefit plan investor") who has
discretionary authority or control with respect to the assets of an entity or
any person who provides investment advice for a fee (direct or indirect) with
respect to such assets, or any affiliate of such a person, is disregarded. A
"benefit plan investor" is any of the following:
-- any employee benefit plan (as defined in Section 3(3) of ERISA, which
definition includes Qualified Plans), whether or not it is subject to
the provisions of Title I of ERISA,
-- any plan described in Section 4975(e)(1) of the Code (which description
includes Qualified Plans and IRAs), and
-- any entity (such as a common or collective trust fund of a bank) whose
underlying assets include plan assets by reason of a plan's investment
in the entity.
The sale of Units during this offering and the subsequent transfer of Units will
be limited to the extent that the Manager deems it necessary to qualify for this
exception. Therefore, the Fund's assets should not be "plan assets" of any
Qualified Plan or IRA investor; and no prohibited transaction should occur based
on treatment of the Fund's underlying assets as "plan assets" of Qualified Plan
or IRA investors.
Other ERISA Considerations
In addition to the above considerations in connection with the "plan asset"
question, a fiduciary's decision to cause a Qualified Plan or IRA to acquire
Units should involve, among other factors, considerations that include whether
-- the investment is in accordance with the documents and instruments
governing the Qualified Plan or IRA,
-- the purchase is prudent in light of the potential difficulties that may
exist in liquidating Units,
-- the investment will provide sufficient cash distributions in light of
the Qualified Plan's likely required benefit payments,
-- after an acquisition of Units, the Qualified Plan's investments taken
as a whole are sufficiently diversified so as to minimize the risk of
large losses,
-- the investment is made solely in the interests of plan participants,
and
-- the fair market value of Units will be sufficiently ascertainable, with
sufficient frequency, to enable the Qualified Plan to value its assets
on an annual basis in accordance with the Qualified Plan's rules and
policies.
Prospective Qualified Plan investors should note that, with respect to the
diversification of assets requirement, the legislative history of ERISA and a
Department of Labor advisory opinion indicate that in determining whether the
assets of a Qualified Plan that has invested in an entity such as the Fund are
sufficiently diversified, it may be relevant to look through the Qualified
Plan's interest in the entity to the underlying portfolio of assets owned by the
entity, regardless of whether the entity's underlying assets are treated as
"plan assets" for the purpose of ERISA's and the Code's prohibited transaction
and other fiduciary duty rules.
79
SUMMARY OF THE OPERATING AGREEMENT
The Operating Agreement (attached as Exhibit B) is the governing instrument
establishing the Fund's right under the laws of the State of California to
operate as a limited liability company, and contains the rules under which the
Fund will be operated. The Operating Agreement will be executed on behalf of
each subscriber upon his admission to the Fund by the Manager acting pursuant to
the power of attorney contained in the Subscription Agreement.
The following is a brief summary of the material provisions of the
Operating Agreement. It is a summary only and it is recommended that each
prospective investor review the Operating Agreement carefully in its entirety.
Aspects of the Operating Agreement relating to allocations of Net Income, Net
Loss and Distributions to Holders and reports to the Members are summarized
elsewhere in this Prospectus (See the discussions in this Prospectus under the
captions "Income, Losses and Distributions" above and "Reports to Holders"
below.)
The Duties of the Manager
ATEL Financial Services, LLC is Manager of the Fund and has the exclusive
management and control of all aspects of the business of the Fund. Affiliates of
the Manager will perform certain equipment acquisition, leasing, management and
disposition services, as well as certain administrative services, for the Fund.
In the course of its management, the Manager may, in its absolute discretion,
acquire, hold title to, sell, re-lease or otherwise dispose of equipment and
interests therein when and upon such terms as it determines to be in the best
interest of the Fund and employ such persons, including Affiliates of the
Manager, as it deems necessary for the efficient operation of the Fund. However,
prior to the sale or other disposition of Substantially All of the Assets of the
Fund in any single 12-month period, except upon liquidation of the Fund, Holders
owning more than 50% of the total outstanding Units must consent to such sale or
other disposition. In addition, Section 15.4 imposes a variety of other
restrictions on the Manager's authority in governing the Funds operations,
including limits on transactions between the Manager and its Affiliates and the
Fund, limits on Fund borrowing, and limits on Fund investments and reinvestment
of cash flow,
The Manager may not voluntarily withdraw from the Fund without the approval
of Members holding more than 50% of the total outstanding Units entitled to
vote. The Manager may be removed upon a vote of Holders owning more than 50% of
the total outstanding Units entitled to vote.
Liability of Holders
A Holder's capital is subject to the risks of the Fund's business. He is
not permitted to take any part in the management or control of the business and
he may not be required to contribute additional capital at any time. Under the
California Act, a Holder will not be liable for Fund obligations in excess of
his unreturned capital contribution and share of undistributed profits.
Notwithstanding the foregoing, a Holder will be liable to the Fund in an amount
equal to any Distribution made by the Fund to such Holder to the extent that,
immediately after the Distribution is made, all liabilities of the Fund, other
than liabilities to Members on account of their interest in the Fund and
liabilities as to which recourse of creditors is limited to specified property
of the Fund, exceed the fair value of the Fund assets, provided that the fair
value of any property that is subject to a liability as to which recourse of
creditors is so limited is included in the Fund assets only to the extent that
the fair value of the property exceeds such liability.
Term and Dissolution
The Fund will continue for a maximum period ending December 31, 2025, but
may be dissolved at an earlier date if certain contingencies occur. The Fund
intends to liquidate its assets and distribute the proceeds thereof beginning
after the Reinvestment Period expires (at the end of the sixth calendar year
following the Final Closing Date) with final liquidation expected to occur
approximately ten to eleven years after the Final Closing Date. A Holder may not
80
withdraw from the Fund prior to dissolution, but may assign his Units to others
or may, under certain circumstances, request that the Fund repurchase his Units.
See "Repurchase of Units" below under this caption. The contingencies whereupon
the Fund may be dissolved are as follows:
-- The Fund becomes insolvent or bankrupt;
-- The removal, adjudication of bankruptcy, insolvency, disability or
incompetence or dissolution or death of the Manager unless (i) there
is a remaining Manager, and the remaining Manager, within 45 days of
the date of such event, elects to continue the business of the Fund or
(ii) if, upon removal of the last remaining Manager, the Members
holding in excess of 50% of the outstanding Units elect a successor
Manager prior to the effective date of removal and such successor
Manager elects to continue the business of the Fund;
-- An election to dissolve upon the vote of Members owning more than 50%
of the total outstanding Units; or
-- The disposition of all interests in equipment and other assets of the
Fund and the receipt by the Fund of the proceeds of such disposition.
In order to effect an orderly liquidation of the Fund's assets in its
liquidation stage, the Manager may cause the Fund to sell Equipment to a
liquidating trust, or to the Manager or an Affiliate (other than another
investor program), either in its own name, or as a trustee of a liquidating
trust, provided that, in any sale to the Manager or an affiliate, all of the
following conditions have been met:
-- the Fund has obtained, at its cost, two independent appraisals of the
fair market value of the item or items of Equipment to be sold;
-- the sales price of the Equipment is at least equal to the average of
the two appraised values;
-- the original cost of the Equipment sold in this manner does not
represent in excess of 10% of the original cost of all Equipment
acquired by the Fund during the term of the Fund;
-- such sale is effected in the best interests of the Fund and its
Members for purposes of facilitating liquidation; and
--- the Equipment so sold is not resold to another investor program
sponsored by the Manager or its Affiliates.
Voting Rights of Members
In any vote of the Members, each Member will be entitled to cast one vote
for each Unit which such Member owns as of the date designated as the record
date for such vote. Notwithstanding the foregoing, Units held by the Manager or
any Affiliate of the Manager will not be entitled to vote, and will not be
deemed to be "outstanding" for purposes of any vote, upon matters which involve
a conflict between the interests of the Manager and the Fund, including, but not
limited to, any vote on the proposed removal or withdrawal of the Manager as
Manager or any proposed amendment to the Operating Agreement which would expand
or extend the rights, authorities or powers of the Manager. The Members have the
right, by vote of Members owning more than 50% of the total outstanding Units,
to vote upon:
(a) Removal or voluntary withdrawal of the Manager;
(b) Election of a successor Manager;
(c) Termination and dissolution of the Fund;
(d) Amendment of the Operating Agreement, provided such amendment is
not for the purpose of reflecting the addition or substitution of Members,
the reduction of Capital Accounts or for any other purposes prohibited
under the Operating Agreement as described below;
81
(e) The sale or other disposition of Substantially All of the Assets
in a single sale, or in multiple sales in the same twelve-month period,
except in the liquidation and winding up of the business of the Fund upon
its termination and dissolution; and
(f) The extension of the term of the Fund.
Without the consent of the Members to be adversely affected by the
amendment, the Operating Agreement may not be amended so as to
-- convert a Holder into a Manager;
-- modify the limited liability of a Holder;
-- alter the interest of the Members in Net Income, Net Loss and
Distributions; or
-- affect the status of the Fund as a partnership for federal income
tax purposes.
Dissenters' Rights and Limitations on Mergers and Roll-ups
Section 16.7 of the Operating Agreement provides that Members holding not
less than 90% of the outstanding Units must approve any proposal that involves
an acquisition, conversion, merger or consolidation transaction in which the
Holders are issued new securities in the resulting entity. The rights of any
dissenting Holders will be as provided under Section 16.7 and Sections 17600
through 17613 of the California Act. Such provisions generally give a dissenting
Member the right, subject to certain procedural requirements, to require that
the company repurchase the dissenting Member's interest at a price equal to its
fair market value.
Meetings
The Manager 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 a vote without a meeting following receipt of a
written request therefore of Members holding 10% or more of the total
outstanding Units. Upon such written request of Members holding 10% or more of
the total outstanding Units, such Members may propose a vote by all Members on
any matter on which Members are entitled to vote under the Operating Agreement.
Books of Account and Records
The Manager is responsible for keeping books of account and records of the
Fund reflecting all of the contributions to the capital of the Fund and all of
the expenses and transactions of the Fund. Such books of account and records
will include the following:
(i) A current list of the full name and last known business or
residence address of each Member set forth in alphabetical order together
with the Original Invested Capital, the Units held and the share in Net
Income and Net Loss of each Member;
(ii) A copy of the articles of organization and all amendments;
(iii) Copies of the Fund's federal, state and local income tax or
information returns and reports, if any, for the six most recent taxable
years;
(iv) Copies of the original of the Operating Agreement and all
amendments;
(v) Financial statements of the Fund for the six most recent fiscal
years; and
(vi) The Fund's books and records for at least the current and past
three fiscal years.
Such books of account and records will be kept at the principal place of
business of the Fund in the State of California, and each Member and his
authorized representatives shall have, at all times during reasonable business
hours, free access to and the right to inspect and copy at their expense such
82
books of account and all records of the Fund. Upon the request of a Member, the
Manager shall promptly deliver to such Member at the expense of the Fund a copy
of the information described in (i), (ii) and (iv) above. In the event a Member
is required to compel the Manager to produce the foregoing records as a result
of the Manager's breach of its obligation to deliver such information, the
Manager shall reimburse the Member for all reasonable costs actually incurred in
compelling production.
Status of Units
Each Unit will be fully paid and non-assessable and all Units have equal
voting and other rights, except as noted above with respect to the voting of
Units held by the Manager or its Affiliates.
Transferability of Units
The Fund may charge a reasonable transfer fee for processing requests for
transfer of Units, and may condition the effectiveness of any proposed transfer
of Units or an interest in Units on such representations, warranties, opinions
of counsel, and other assurances as it considers appropriate as to:
(i) such assignment or transfer not resulting, in the opinion of
counsel for the Fund, in the Fund being considered to have terminated
within the meaning of Section 708 of the Code;
(ii) the transferee not being a minor or an incompetent;
(iii) the transfer or assignment not violating federal or state
securities laws;
(iv) the transferor or the transferee not holding Units representing
Original Invested Capital of less than $5,000;
(v) such assignee or transferee being a Citizen of the United States;
(vi) such assignment or transfer not constituting a transfer "on a
secondary market (or the substantial equivalent thereof)" within the
meaning of Section 7704 of the Code or otherwise adversely affecting the
tax status of the Fund;
(vii) such assignment or transfer not causing Fund assets to be deemed
Plan Assets under ERISA; and
(viii) the transferor filing with the Fund a duly executed and
acknowledged counterpart of the instrument effecting such assignment or
transfer, which instrument evidences the written acceptance by the assignee
or transferee of all of the terms and provisions of the Operating
Agreement, contains a representation that such assignment or transfer was
made in accordance with all applicable laws and regulations (including any
investor suitability requirements) and in all other respects is
satisfactory in form and substance to the Manager.
In connection with state securities laws restrictions on transfer, Section
260.141.11 of the Rules of the California Commissioner of Corporations states:
(a) The issuer of any security upon which a restriction on transfer
has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 of
the Rules of the California Corporations Commissioner shall cause a copy of
this section to be delivered to each issuee or transferee of such security
at the time the certificate evidencing the security is delivered to the
issuee or transferee.
(b) It is unlawful for the holder of any such security to consummate a
sale or transfer of such security, or any interest therein, without the
prior written consent of the Commissioner (until this condition is removed
pursuant to Section 260.141.12 of the Rules of the California Corporations
Commissioner), except: (1) to the issuer; (2) pursuant to the order or
process of any court; (3) to any person described in Subdivision (i) of
Section 25102 of the Corporations Code of the State of California or
Section 260.105.14 of the Rules of the California Corporations
Commissioner; (4) to the transferor's ancestors, descendants, or spouse, or
any custodian or trustee for the account of the transferor or the
83
transferor's ancestors, descendants, or spouse; or to a transferee by a
trustee or custodian for the account of the transferee or the transferee's
ancestors, descendants, or spouse; (5) to holders of securities of the same
class of the same issuer; (6) by way of gift or donation inter vivos or on
death; (7) by or through a broker-dealer licensed under the Corporations
Code of the State of California (either acting as such or as a finder) to a
resident of a foreign state, territory, or country who is neither domiciled
in the State of California to the knowledge of the broker-dealer, nor
actually present in the State of California if the sale of such securities
is not in violation of any securities law of the foreign state, territory,
or country concerned; (8) to a broker-dealer licensed under the
Corporations Code of the State of California in a principal transaction, or
as an underwriter or member of an underwriting syndicate or selling group;
(9) if the interest sold or transferred is a pledge or other lien given by
the purchaser to the seller upon a sale of the security for which the
California Corporations Commissioner's written consent is obtained or is
not required under Section 260.141.11 of the Rules of the California
Corporations Commissioner; (10) by way of a sale qualified under Section
25111, 25112, 25113, or 25121 of the Corporations Code of the State of
California, of the securities to be transferred, provided that no order
under Section 25140 or subdivision (a) of Section 25143 of the Corporations
Code of the State of California is in effect with respect to such
qualification; (11) by a corporation to a wholly-owned subsidiary of such
corporation, or by a wholly-owned subsidiary of a corporation to such
corporation; (12) by way of an exchange qualified under Section 25111,
25112, or 25113 of the Corporations Code of the State of California,
provided that no order under Section 25140 or subdivision (a) of Section
25143 of the Corporations Code of the State of California is in effect with
respect to such qualification; (13) between residents of foreign states,
territories, or countries who are neither domiciled nor actually present in
the State of California; (14) to the California State Controller pursuant
to the Unclaimed Property Law or to the administrator of the unclaimed
property law of another state; or (15) by the California State Controller
pursuant to the Unclaimed Property Law or by the administrator of the
unclaimed property law of another state if, in either such case, such
person (i) discloses to potential purchasers at the sale that transfer of
the securities is restricted under Section 260.141.11 of the Rules of the
California Corporations Commissioner, (ii) delivers to each purchaser a
copy of Section 260.141.11 of the Rules of the California Corporations
Commissioner, and (iii) advises the California Corporations Commissioner of
the name of each purchaser; (16) by a trustee to a successor trustee when
such transfer does not involve a change in the beneficial ownership of the
securities; provided that any such transfer is on the condition that any
certificate evidencing the security issued to such transferee shall contain
the legend required by Section 260.141.11 of the Rules of the California
Corporations Commissioner; or (17) by way of an offer and sale of
outstanding securities in an issuer transaction that is subject to the
qualification requirement of Section 25110 of the Corporations Code but
exempt from that qualification requirement by subdivision (f) of Section
25102.
(c) The certificates representing such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as
follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE
PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF
CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
Any assignment, sale, exchange or other transfer in contravention of any of
the provisions of the Operating Agreement shall be void and ineffectual, and
shall not bind or be recognized by the Fund.
An Assignee of Record will be entitled to receive allocations and
Distributions from the Fund attributable to the Units acquired by reason of such
assignment from and after the effective date of the assignment of such Units to
him; provided, however, the Fund and the Manager will be entitled to treat the
assignor of such Units as the absolute owner thereof in all respects, and will
incur no liability for allocations of Net Income, Net Loss or Distributions, or
transmittal of reports and notices requested to be given to Holders which are
made in good faith to such assignor until such time as the written instrument of
assignment has been received by the Fund and recorded on its books and the
effective date of an assignment of Units has passed. The effective date of an
84
assignment of Units and the date on which the Assignee shall be deemed an
Assignee of Record shall be the first day of the month following the later of
(i) the date set forth on the written instrument of assignment, or (ii) the date
on which the Fund has actual notice of the assignment.
All costs and expenses incurred by the Fund in connection with the transfer
of a Unit shall be paid by the transferring Holder.
An Assignee may only be substituted as a Member in the place of the
assignor with the prior consent of the Manager, which consent may be withheld in
the Manager's sole discretion. Any substituted Member must also agree to be
bound by the provisions of the Operating Agreement. The Manager shall cause the
Operating Agreement to be amended to reflect the substitution of Members at
least once in each fiscal quarter.
The Manager will, with respect to any Units owned by it, enjoy all of the
rights, other than the right to request that the Fund repurchase any such Units,
and be subject to all of the obligations and duties of a Member, except as noted
above under "Voting Rights of Members."
Repurchase of Units
In the event a Holder ceases to be a United States Citizen or Resident
Alien for any reason, he must immediately notify the Fund and may be required to
tender his Units to the Fund for repurchase in order to protect the Fund's
interest in certain leases. The Fund will have the absolute right, but no
obligation, to repurchase the Units for a price equal to the Unit Holder's
capital account, computed in accordance with federal tax accounting principles,
allocable to the repurchased Units as of the last day of the quarter during
which the precipitating event occurs.
The Manager may, in its discretion and on such terms as it deems
appropriate, repurchase Units upon the request of a Unit holder in the event
that it deems such repurchase in the best interests of the Fund, but the Fund is
in no event required to make any such repurchase. No such repurchase may be
effected if it would impair the capital of the Fund or cause the Fund or any
remaining Unit holder to suffer a material adverse tax consequence. It is the
Fund's intention that any voluntary redemption would be for a price equal to the
original capital invested in the redeemed Units less the amount of cash
distributed on the Units prior to redemption. The Fund may, however, redeem
Units on any other terms it may deem appropriate and in the best interests of
the Fund under the circumstances surrounding the redemption. Unit Holders will
have no right to any redemption. There will be no appraisal of Units, no fixed
order for redemption, with redemption in the discretion of the Manager in the
exercise of its fiduciary duty, and no redemption of any Units held by the
Manager and its Affiliates until all Member requests have been met. Only
available Fund cash flow and reserves will be used to redeem Units. Redemption
of a Member's Units will be deemed a disposition of the investment and the
consequences of dispositions of Units are discussed under "Federal Income Tax
Consequences - Disposition of Units" above in this Prospectus. There are no time
periods for consideration of redemption requests, though the Manager will
attempt to respond promptly to any inquiry in this regard. There is no procedure
for allocating funds for multiple requests, and no specific formal procedure for
requesting redemption, though all such requests must be in writing.
Upon any repurchase of Units by the Fund, the Units will be canceled and
will no longer be deemed to represent an interest in the Fund, and the interests
of all other Unit holders will be adjusted accordingly.
Indemnification of the Manager
The Operating Agreement provides that the Manager and its affiliates who
perform services for the Fund will be indemnified against any liability or loss
arising out of any act or omission by any such Person when acting in connection
with the business of the Fund, provided that such Person determines in good
faith that its conduct was in the best interest of the Fund and, provided
further, that its conduct did not constitute fraud, negligence, breach of
85
fiduciary duty or misconduct. The Operating Agreement also provides that, to the
extent permitted by law, the Fund will indemnify the Manager against liability
and related expenses (including attorneys' fees) incurred in dealing with third
parties, provided that the conduct of the Manager is consistent with the
standards described in the preceding sentence. A successful claim for such
indemnification would deplete the Fund's capital assets by the amount paid.
The Manager will not be indemnified against liabilities arising under the
Securities Act of 1933. Furthermore, the Manager has agreed to indemnify the
Fund against any loss or liability it may incur as a result of any violation of
state or federal securities laws by the Manager or its Affiliates. The Fund will
not pay for any insurance covering liability of the Manager or any other persons
for actions or omissions for which indemnification is not permitted by the
Operating Agreement, provided, however, that this will not preclude the naming
of the Manager or any Affiliates as additional insured parties on policies
obtained for the benefit of the Fund to the extent that there is no additional
cost to the Fund.
The Manager will have fiduciary responsibility for the safekeeping and use
of all funds and assets of the Fund.
PLAN OF DISTRIBUTION
Distribution
The Units will be offered and sold on a "best efforts minimum/maximum"
basis through ATEL Securities Corporation (the "Dealer Manager"), a
broker-dealer which is an Affiliate of the Manager (see "Conflicts of Interest"
and "Management"), and through other participating broker-dealers who are
members of the National Association of Securities Dealers, Inc. ("NASD"). The
Dealer Manager will manage the selling group and provide certain wholesaling
services. Although the Dealer Manager may participate in the offering on the
same basis as other broker-dealers, it has not in the past effected, nor does it
anticipate in this offering directly effecting, any significant sales of the
Units. The Dealer Manager is a wholly-owned subsidiary of ATEL formed solely to
manage offerings sponsored by ATEL and its Affiliates.
The minimum offering amount is $1,200,000 (120,000 Units) and the maximum
is $150,000,000 (15,000,000 Units).
The minimum subscription is 500 Units ($5,000). Additional investments may
subsequently be made in a minimum amount of 50 Units ($500), and additional
one-Unit ($10) increments.
The broker-dealers are not obligated to obtain any subscriptions, and there
is no assurance that any Units will be sold.
Subscriptions will be effective only on acceptance by the Manager and the
right is reserved to reject any subscription in whole or in part. The Fund will
advise the subscriber of the acceptance or rejection of the subscription as soon
as practicable after receipt of the subscription, but in no event more than 30
days following receipt. The Subscription Agreement provided to the investor for
execution must be accompanied by a copy of this Prospectus, and each subscriber
has the right to cancel his or her subscription during a period of five business
days after the subscriber has submitted the executed Subscription Agreement to
the broker-dealer through which the Units are sold. The Fund and/or the selling
broker-dealer will send each investor a written confirmation of the acceptance
of the investor's subscription for Units upon admission to the Fund.
The offering will terminate on a date not later than two years from the
date of this Prospectus. The offering of Units after the end of one year from
the date hereof will be subject to renewal or re-qualification in all those
jurisdictions requiring such renewal or requalification. However, the offering
may be terminated at any time by the Manager. If subscriptions for a minimum of
120,000 Units have not been received and accepted prior to a date one year from
the date hereof, all funds received will be promptly returned together with any
interest earned thereon.
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Selling Compensation and Certain Expenses
The Dealer Manager will receive selling commissions in an amount equal to
9% of the Gross Proceeds, and will reallow to participating broker-dealers
selling commissions equal to 7.5% of the Gross Proceeds attributable to Units
sold by them. Out of the 1.5% of the selling commissions retained by the Dealer
Manager, it will pay wholesaling compensation in the form of salaries and
commissions to its personnel.
The Fund (up to a maximum amount equal to 1% of the Gross Proceeds) may pay
or reimburse the Dealer Manager and participating dealers a portion of their
expenses incurred in presenting sales seminars and meetings in connection with
this offering. The Fund may pay or reimburse participating dealers for their
bona fide, accountable due diligence expenses. Subject to NASD approval and
compliance with Rule 2810(b)(4)(E) of the NASD's Conduct Rules, the Fund, the
Manager or the Dealer Manager may establish noncash sales incentive programs for
sales representatives of participating dealers, provided that the aggregate
value of any noncash incentive awards to any individual by the Manager or any of
its Affiliates during any year does not exceed the sum of $100. The total of all
selling compensation, including sales commissions, wholesaling salaries and
commissions, retail and wholesaling expense reimbursements, seminar expenses,
non-cash incentive payments and any other forms of compensation paid to the
Dealer Manager or participating broker-dealers, will not exceed 10% of the Gross
Proceeds, except that up to an additional 0.5% of the Gross Proceeds may be paid
in connection with accountable, bona fide due diligence activities. Bona fide
due diligence expenses will include actual costs incurred by broker-dealers to
review the business, financial statements, transactions, and investments of ATEL
and its prior programs to determine the accuracy and completeness of information
provided in this Prospectus, the suitability of the investment for their clients
and the integrity and management expertise of ATEL and its personnel. Costs may
include telephone, postage and similar communication costs incurred in
communicating with ATEL personnel, and ATEL's outside accountants and counsel in
this pursuit; travel and lodging costs incurred in visiting the ATEL offices,
reviewing ATEL's books and records and interviewing key ATEL personnel; the cost
of outside counsel, accountants and other due diligence investigation
specialists engaged by the broker-dealer; and the internal costs of time and
materials expended by broker-dealer personnel in this due diligence effort. ATEL
will require full itemized documentation of any claimed due diligence
expenditure and will determine whether the expenditure can be fairly allocated
to bona fide due diligence investigation before permitting reimbursement.
The Manager has agreed to indemnify the participating broker-dealers,
including the Dealer Manager, against certain liabilities arising under the
Securities Act of 1933, as amended.
The Fund will not pay referral or similar fees to any accountants,
attorneys or other persons in connection with the distribution of Units.
Escrow Arrangements
Until the minimum number of subscriptions are received and the initial
subscribers are admitted to the Fund, subscription checks will be made payable
to, and subscription funds will be held in an escrow account at, U.S. Bank Trust
National Association, San Francisco, California (the "Bank"). Until such time
all participating broker-dealers will forward subscription checks to the Dealer
Manager promptly but in no event later than noon of the next business day
following receipt thereof, and the Dealer Manager will forward such
subscriptions to the bank escrow agent promptly, but in no event later than noon
of the second business day following receipt thereof by the Dealer Manager.
Subscription proceeds held in the escrow account will be invested in United
States government securities, including Treasury bills, securities issued or
guaranteed by United States government agencies, certificates of deposit and
time or demand deposits in banks and savings and loan associations which are
insured by United States government agencies or deposits in members of the
Federal Home Loan Bank System, as directed by the Manager. Subscribers may not
withdraw funds from the escrow account. Upon the earlier of termination of the
offering or satisfaction of the escrow condition, any interest which accrues on
funds held in escrow will be distributed to subscribers and allocated among them
on the basis of the respective amounts of the subscriptions and the number of
days that such amounts were on deposit in the escrow account.
87
Notwithstanding the foregoing, subscriptions received from Pennsylvania
subscribers will be placed in a separate escrow account and will not be counted
toward satisfaction of the minimum escrow condition. Instead, such Pennsylvania
subscriptions will be released to the Fund only at such time as total
subscription proceeds received by the Fund from all subscribers, including the
escrowed Pennsylvania subscriptions, equal not less than $7.5 million in Gross
Proceeds.
The Original Invested Capital of the initial subscribers will be
transferred from escrow to the Fund at any time after subscriptions for the
minimum of 120,000 Units have been accepted by the Manager and received and
collected by the bank escrow agent, and such subscribers will be admitted to the
Fund within 15 days thereafter. Subsequent subscribers will have their
subscriptions accepted or rejected within 30 days after receipt. Investors whose
subscriptions are accepted will be admitted to the Fund promptly after such
acceptance, but not later than 30 days thereafter. Rejected subscription funds
will be promptly returned.
The Bank's sole role in this offering is that of escrow holder and as such
it has not reviewed any of the offering materials and makes no representations
whatsoever as to the nature of this offering or its compliance or lack thereof
with any applicable state or federal laws, rules or regulations. The Bank
neither endorses, recommends nor guarantees the purchase, value or repayment or
any other aspect of an investment in the Units. The Bank does not represent the
interests of the Members or potential investors. Its duties are limited as
expressly set forth in the Escrow Agreement and interested parties may request a
copy of the Escrow Agreement from the Manager. Pursuant to the terms of the
Escrow Agreement, the Fund has directed the Bank to distribute to the
subscribers any interest earned on funds held in escrow as described above under
this caption.
Investments by Certain Persons
The Manager and its Affiliates may, but do not currently intend to, acquire
such number of Units as they determine. Except as noted below, any Units
purchased by the Manager or its Affiliates will be purchased on the same terms
as the other Units offered hereby. Such Units will be acquired solely for
investment and not with a view to or for distribution. Any Units acquired by
such Persons will not be applied to the requirement that a minimum of 120,000
Units be purchased by all subscribers. Units purchased by participating broker
dealers or their Affiliates will be counted in determining satisfaction of the
minimum offering amount.
The Manager, the Dealer Manager or the broker-dealers engaged by the Dealer
Manager to sell the Units, or any of their Affiliates or employees, may purchase
Units in this offering net of the 7.5% retail selling commissions at a per Unit
price of $9.25. In addition, clients of an investment advisor which is
registered under the Investment Advisors Act of 1940 may also purchase Units
with reduced selling commissionsif
-- the client has been advised by such advisor over a continuous course of
time on investments other than the purchase of Units,
-- the client is not being charged by the advisor or its Affiliates,
other than as described herein, for the advice rendered by such
advisor specifically in connection with the purchase of Units; and
-- either (i) the investment advisor is an Affiliate of a participating
broker-dealer, and the transaction has the express approval of such
participating broker-dealer Affiliate, or (ii) the investment advisor
is not affiliated with any participating broker dealer and the Dealer
Manager agrees to act as broker of record for the investment advisor's
client with respect to the investment in Units.
In no event will the net contribution to the Fund by such persons be less than
$9.25 per Unit. The Dealer Manager may require that any investor claiming the
right to purchase on the foregoing terms demonstrate the basis for such right
through reasonable documentation and certification. Sales to any such purchasers
on such terms would be for investment purposes only, and the Fund and the
Manager would not recognize any attempted transfer of such Units unless the
Manager is satisfied that the original purchase was not made with a view to
distribution of the securities and that any proposed transfer was in compliance
with all applicable laws and regulations, including the NASD's Rules of Fair
Practice.
88
State Requirements
In addition to the investor suitability and minimum investment standards
established by the Fund and described under "Who Should Invest" above, the
securities administrators of certain states have imposed more restrictive
standards on investments in Units effected within their jurisdictions. Any such
additional requirements imposed after the date of this Prospectus will be
reflected in a supplement hereto, and investors are urged to review any such
supplement to ascertain whether more restrictive standards are applicable to
their investment.
REPORTS TO HOLDERS
The Fund fiscal year will be the calendar year; provided, however, that the
Manager may, subject to the approval of applicable taxing authorities, adopt
another fiscal year if they deem it to be in the Fund's best interest.
The Manager shall have prepared and distributed to the Holders at least
annually, at Fund expense, financial statements (each of which shall include a
balance sheet, statement of income or loss, statement of Members' equity, and
statement of cash flow) prepared in accordance with generally accepted
accounting principles and accompanied by a report thereon containing an opinion
of an independent certified public accounting firm. Such opinion shall also
state that reported "Cash from Operations" is consistent with the definition of
Cash from Operations herein. Copies of such statements and report shall be
distributed to each Holder within 120 days after the close of each taxable year
of the Fund.
The Manager shall have prepared and distributed to the Holders at least
annually, at Fund expense: (i) a statement of cash flow, (ii) Fund information
necessary in the preparation of the Holders' and Assignees' federal income tax
returns; (iii) a report of the business of the Fund, which shall include for
each piece of Equipment which individually represents at least 10% of the Fund's
total investment in Equipment, a status report to indicate: (a) the condition of
the Equipment, (b) how the Equipment is being used as of the end of the year
(leased, operated, held for lease, repair, or sale), (c) the remaining term of
the Equipment leases, (d) the projected use of Equipment for the next year
(renewal of lease, re-lease, retirement, or sale), and (e) such other
information relevant to the value or use of the Equipment as the Manager deems
appropriate, including the method used as basis for valuation; (iv) a statement
as to the compensation received by the Manager and its Affiliates from the Fund
during the year, which statement shall set forth the services rendered or to be
rendered by the Manager and its Affiliates and the amount of fees received; (v)
a report identifying Distributions from: (a) Cash from Operations for that year,
(b) Gross Revenues of prior years held in reserves, (c) Cash from Sales or
Refinancing, and (d) Cash from Reserve Account and other sources; and (vi) a
special report prepared in accordance with the American Institute of Certified
Public Accountants United States Auditing Standards relating to special reports,
containing an opinion of an independent certified public accounting firm, to
report the breakdown of the costs reimbursed by the Fund to the Manager or its
Affiliates. Such special report shall at a minimum provide: (a) a review of the
time records of individual employees, the costs of whose services were
reimbursed, and (b) a review of the specific nature of the work performed by
each such employee. The additional costs of such special report shall be
itemized by the auditors among all programs sponsored by the Manager and its
Affiliates on a program-by-program basis and may be reimbursed to the Manager or
its Affiliates to the extent that such reimbursement, when added to the cost for
administrative services rendered, does not exceed the competitive rate for
comparable services performed by independent parties in the same geographic
location. Copies of the reports hereunder shall be distributed to each Holder
within 120 days after the close of each taxable year of the Fund; provided,
however, that all Fund information necessary in the preparation of the Holders'
and Assignees' federal income tax returns shall be distributed to each Holder
and Assignee not later than 75 days after the close of each taxable year of the
Fund. In addition to the foregoing, the Manager will disclose in each annual
report distributed to investors pursuant to Section 13(a) of the Securities
Exchange Act of 1934 an estimated value per Unit as of the end of the year that
is the subject of the report, the method by which the value has been estimated,
and the date of the data used to develop the estimated value.
89
The Manager shall have prepared quarterly, at Fund expense, commencing
with the first full quarter after the Closing Date: (i) a statement as to the
compensation received by the Manager during such quarter from the Fund which
statement shall set forth the services rendered or to be rendered by the Manager
during such quarter from the Fund and the amount of fees received, and (ii)
other relevant information. Copies of such statements shall be distributed to
each Holder within 45 days after the end of each quarterly period.
The Manager shall have prepared, at Fund expense, a quarterly report
covering each of the first three quarters of Fund operations in each calendar
year, unaudited financial statements (each of which shall include a balance
sheet, statement of income or loss for said quarterly period and statement of
Cash from Operations and Cash from Sales or Refinancing for said quarterly
period) and a statement of other pertinent information regarding the Fund and
its activities during the quarterly period covered by the report. Copies of such
statements and other pertinent information shall be distributed to each Holder
within 60 days after the close of the quarterly period covered by the report of
the Fund.
The Manager shall have prepared, at Fund expense, after the end of each
quarter in which equipment is acquired and until the Net Proceeds are fully
invested or returned to investors, a notice which shall describe therein: (i) a
statement of the actual purchase price of the Equipment, including the terms of
the purchase, (ii) a statement of the total amount of cash expended by the Fund
to acquire such items of equipment (including and itemizing all commissions,
fees, expenses and the name of each payee), and (iii) a statement of the amount
of proceeds in the Fund which remain unexpended or uncommitted. Copies of such
notice shall be distributed to each Holder within 45 days after the end of such
quarter. If deemed appropriate by the Manager such notice may be prepared and
distributed to each Holder more frequently than quarterly.
The Manager, at Fund expense, shall cause income tax returns for the
Fund to be prepared and timely filed with appropriate authorities.
The Manager, at Fund expense, shall cause to be prepared and timely
filed with appropriate federal and state regulatory and administrative bodies,
all reports required to be filed with such entities under then current
applicable laws, rules and regulations. Such reports shall be prepared on the
accounting or reporting basis required by such regulatory bodies. Any Holder
shall be provided with a copy of any such report upon request without expense to
him.
SUPPLEMENTAL SALES MATERIAL
In addition to and apart from this Prospectus, the Fund may use certain
sales material in connection with the offering of Units. In certain
jurisdictions such sales material may not be available. This material will
include information relating to this offering, the Manager and its Affiliates
and brochures and articles and publications concerning equipment leasing.
The Fund will use only sales material which has been approved by such
appropriate regulatory bodies as may be required. The offering is made only by
means of this Prospectus. Although the information contained in such sales
material does not conflict with any of the information contained in this
Prospectus, and is required to present a balanced discussion of the risks and
rewards of investing in the Fund, such material does not purport to be complete,
and should not be considered as part of this Prospectus or the registration
statement of which this Prospectus is a part, or as incorporated by reference in
this Prospectus or said registration statement or as forming the basis of the
offering of Units which are offered hereby.
LEGAL OPINIONS
The legality of the Units has been passed upon and the statements under the
captions "Income Tax Consequences" and "ERISA Considerations" as they relate to
federal income tax and ERISA matters have been reviewed and passed upon by
Derenthal & Dannhauser LLP, San Francisco, California.
90
EXPERTS
Ernst & Young LLP, independent registered public accounting firm, have
audited the Fund's balance sheet as of December 31, 2004, and the related
statements of changes in members' capital and cash flows for the period from
June 25, 2004 (inception) through December 31, 2004, as set forth in their
report. The Fund has included its financial statements in the prospectus in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
Ernst & Young LLP, independent registered public accounting firm, have
audited the consolidated balance sheet of ATEL Financial Services LLC as of July
31, 2004, as set forth in their report. The Fund has included the consolidated
balance sheet in the prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements concerning the Fund's
objectives, plans, intentions, strategies, expectations, and predictions
concerning the Fund's future investment activities, results of operations and
other future events or conditions based on views and opinions of the Manager.
For this purpose, any statements contained herein that are not of historical
fact may be deemed to be forward-looking statements. Without limiting the
generality of the foregoing, words such as "believes," "may," "will," "could,"
"intends," "estimates," "expects" or "might," or the negative or other
variations thereof or comparable terminology are intended to identify
forward-looking statements.
It is important to note that actual results or activities or actual events
or conditions could differ materially from those estimated or anticipated in
such forward-looking statements, due to a variety of factors, some of which may
be beyond the control of the Fund. See "RISK FACTORS" and "MANAGEMENT -
Conflicts of Interest" for a discussion of certain material factors which could
cause the actual results or activities or actual events or conditions to differ
from those anticipated. Although estimates and assumptions concerning potential
investments are believed by the Manager to be reasonable, such estimates and
assumptions are uncertain and unpredictable. To the extent that actual events
differ materially from the Manager's assumptions and estimates, actual results
will differ from those expected.
ADDITIONAL INFORMATION
The Fund has filed with the Securities and Exchange Commission, Washington,
D.C., a registration statement under the Securities Act of 1933, as amended,
with respect to the Units offered pursuant to this Prospectus. For further
information, reference is made to the registration statement and the exhibits
thereto which are available for inspection at no fee in the principal office of
the Commission and its Public Reference Room at 450 Fifth Street, Northwest,
Washington, D.C. 20549. The Fund is subject to the informational requirements of
the Securities Exchange Act of 1934 and in accordance therewith files annual,
quarterly and current reports and other information with the Securities and
Exchange Commission. Such reports, the registration statement and other
information are available for inspection and copying at the above address, and
are also available to be viewed and retrieved without charge on the Commission's
electronic data gathering and retrieval (EDGAR) system, at its internet web site
at http://www.sec.gov. In addition, photostatic copies of the material
containing this information may be obtained from the Commission upon paying of
the fees prescribed by the rules and regulations of the Commission. This
Prospectus contains a fair summary of the material provisions of the exhibits
filed with the Commission. This Prospectus does not knowingly contain any untrue
statement of a material fact or omit to state any material fact required to be
stated herein or necessary to make the statements herein not misleading.
91
GLOSSARY
The following terms used in this Prospectus shall (unless otherwise
expressly provided herein or unless the context otherwise requires) have the
following respective meanings:
"Acquisition Expenses" shall mean expenses including, but not limited to,
legal fees and expenses, travel and communication expenses, costs of appraisals,
accounting fees and expenses, and miscellaneous expenses relating to selection
and acquisition of Equipment, whether or not acquired.
"Acquisition Fees" shall mean the total of all fees and commissions paid by
any party in connection with the initial purchase or manufacture of Equipment.
Included in the computation of such fees or commissions shall be any commission,
selection fee, financing fee, nonrecurring management fee, or any fee of a
similar nature, however designated.
"Affiliate" of a Person shall mean
-- any Person directly or indirectly controlling, controlled by or under
common control with such Person;
-- any Person owning or controlling 10% or more of the outstanding voting
securities or beneficial interests of such Person;
-- any officer, director, trustee or partner of such Person; and
-- if such Person is an officer, director, trustee, partner or holder of
10% or more of the voting securities or beneficial interests of such
Person, any other company for which such Person acts in such capacity.
However, such term shall not include a Person who is a partner in a
partnership or joint venture with the Fund if such Person is not
otherwise an Affiliate.
"Asset Management Fee" shall mean the fee payable to the Manager and its
Affiliates under the provisions of Section 8.2 of the Operating Agreement.
"Asset Management Fee Limit" means the limit on fees calculated pursuant to
Section 8.3 of the Operating Agreement.
"Assignee" shall mean a Person who has acquired a beneficial interest in
one or more Units from a third party but who is neither a substituted Holder nor
an Assignee of Record.
"Assignee of Record" shall mean an Assignee who has acquired a beneficial
interest in one or more Units whose ownership has been recorded on the books of
the Fund and which ownership is the subject of a written instrument of
assignment, the effective date of which assignment has passed.
"ATEL" shall mean ATEL Financial Services, LLC, a California limited
liability company.
"California Act" shall mean the Beverly-Killea Limited Liability Company
Act, Title 2.5, Chapters 1-15, of the California Corporations Code, as it may be
amended from time to time.
"Capital Account" shall mean, with respect to any Member, such Member's
Capital Account determined in accordance with Section 6.7 of the Operating
Agreement.
"Carried Interest" shall mean the allocable share of Fund Distributions of
Cash from Operations and Cash from Sales or Refinancing payable to the Manager,
as a Member, pursuant to Sections 10.4 and 10.5 of the Agreement, for which cash
consideration has neither been paid nor is to be paid.
92
"Cash from Operations" shall mean the excess of Gross Revenues (which
excludes revenues from equipment sales or refinancing) over cash disbursements
(including the Equipment Management Fee and amounts reinvested by the Fund in
Equipment) without reduction for depreciation and amortization of intangibles
such as organization and underwriting costs but after a reasonable allowance for
cash for repairs, replacements, contingencies and anticipated obligations, as
determined by the Manager.
"Cash from Reserve Account" shall mean that portion of the Net Proceeds not
utilized in the acquisition of equipment, including cash maintained according to
the provisions of Section 9.4 of the Operating Agreement.
"Cash from Sales or Refinancing" shall mean the net cash realized by the
Fund from the sale, refinancing or other disposition of any equipment after
payment of all expenses related to the transaction.
"Closing Date" shall mean such date designated by the Manager for the
termination of the offering of Units, but not later than April 11, 2007.
Extension of the offering beyond one year from the date of the Prospectus shall
be subject to the qualification of the offering for any such extension in those
jurisdictions which may limit the offering period to one year. "Initial Closing
Date" shall mean the date on which subscribers for Units, other than the initial
Holder, are first admitted to the Fund as Holders. "Final Closing Date" shall
mean the last date on which subscribers for Units are admitted to the Fund as
Holders.
"Code" shall mean the Internal Revenue Code of 1986, as amended, or
corresponding provisions of subsequent federal revenue laws.
"Distributions" shall mean any cash distributed to Holders and the Manager
arising from their respective interests in the Fund.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Equipment Management" shall mean personnel and services necessary to the
leasing activities of the program, including but not limited to leasing and
releasing of program equipment, arranging for necessary maintenance and repair
of the equipment, collecting revenues, paying operating expenses, determining
that the equipment is used in accordance with all operative contractual
arrangements and providing clerical and bookkeeping services necessary to the
operation of the program equipment.
"Front-End Fees" shall mean fees and expenses paid by any party for any
services rendered during the Fund's organization and acquisition phase including
Organization and Offering Expenses, Leasing Fees, Acquisition Fees, Acquisition
Expenses, and any other similar fees, however designated. Notwithstanding the
foregoing, Front-End Fees shall not include any Acquisition Fees or Acquisition
Expenses paid by a manufacturer of Equipment to any of its employees unless such
Persons are Affiliates of the Manager.
"Full Payout Lease" shall mean a lease under which the non-cancellable
rental payments due during the initial term of the lease are at least sufficient
to cover the purchase price of the Equipment leased.
"Fund" shall mean ATEL CAPITAL EQUIPMENT FUND XI, LLC, the California
limited liability company created under the Operating Agreement.
"Fund Manager" or "Manager" shall mean ATEL Financial Services, LLC
("ATEL"), a California limited liability company, or any other Person or Persons
which succeed it in such capacity. The Manager is referred to throughout the
Prospectus as "ATEL" or the "Manager."
"Fund Minimum Gain" shall have the meaning set forth in Regulations Section
1.704-2(d)(1).
93
"Gross Proceeds" shall mean the aggregate total of the Original Invested
Capital of the initial and all of the additional Holders.
"Gross Lease Revenues" shall mean all revenues attributable to the
equipment other than from security deposits paid by lessees thereof. The term
"Gross Revenues" shall not include revenues from the sale, refinancing or other
disposition of equipment.
"Holders" shall mean owners of Units who are either Members or Assignees of
Record, and reference to a "Holder" shall be to any one of them. The Manager
shall not be considered to be a Holder except to the extent it also owns Units.
"IRA" shall mean an individual retirement account qualifying under Section
408 of the Code.
"Investment in Equipment" shall mean the amount of Gross Proceeds actually
paid or allocated to the purchase of Equipment acquired by the Fund, any amount
of Gross Proceeds reserved pursuant to Section 9.4 of the Operating Agreement up
to a maximum of 3% of Gross Proceeds and other cash payments such as interest
and taxes, but excluding Front-End Fees.
"Members" shall mean the initial Members and any other Persons who are
admitted to the Fund as additional or substituted Members. Reference to a
"Member" shall refer to any one of them.
"Net Income" or "Net Loss" shall mean the taxable income or taxable loss of
the Fund as determined for federal income tax purposes, computed by taking into
account each item of Fund income, gain, loss, deduction or credit not already
included in the computation of taxable income and taxable loss, but does not
mean Distributions.
"Net Proceeds" shall mean the total Gross Proceeds less Organization and
Offering Expenses.
"Operating Lease" shall mean a lease under which the aggregate rental
payments due during the initial term of the lease are less than the purchase
price of the equipment leased.
"Operating Revenues" means the total for any period of all Gross Lease
Revenues plus all Cash from Sales or Refinancing.
"Organization and Offering Expenses" shall mean those expenses incurred in
connection with preparing the Fund for registration and subsequently offering
and distributing Units to the public, including selling commissions and all
advertising expenses except advertising expenses related to the leasing of
equipment.
"Original Invested Capital" shall mean the original gross purchase price of
the Units contributed by each Member to the capital of the Fund for his interest
in the Fund, which amount shall be attributed to Units in the hands of a
subsequent Holder.
94
"Operating Agreement" or "Agreement" shall mean the Amended and Restated
Limited Liability Company Operating Agreement of ATEL CAPITAL EQUIPMENT FUND XI,
LLC, as it may be amended from time to time.
"Person" shall mean any natural person, partnership, corporation,
association or other legal entity.
"Prospectus" shall mean the final prospectus filed in connection with the
registration of the Units with the Securities and Exchange Commission on Form
S-1, as amended, together with any supplement thereto which may be subsequently
filed with such Commission.
"Purchase Price of Equipment" shall mean the price paid upon the purchase
or sale of a particular item of equipment including all liens and mortgages on
the equipment, but excluding points and prepaid interest.
"Qualified Plan" shall mean employee trusts (or employer individual
retirement accounts), Keogh Plans and corporate retirement plans qualifying
under Section 401(a) of the Code.
"Regulations" or "Treasury Regulations" shall mean the income tax
regulations promulgated under the Code, as such regulations may be amended from
time to time (including corresponding provisions of succeeding regulations).
"Reinvestment Period" shall mean the period commencing with the Initial
Closing Date and ending six calendar years after the Final Closing Date occurs.
"Reimbursable Administrative Expenses" shall mean the ordinary and annually
recurring administration expenses incurred by the Manager and reimbursed by the
Fund. Such expenses shall not include interest, depreciation, equipment
maintenance or repair, third party services or other non-administrative
expenses.
"Resident Alien" shall mean a resident alien as defined within the Federal
Aviation Act of 1958, as amended from time to time, or any successor statute, or
any regulations adopted pursuant to such Act or any successor statute.
"Roll-Up" shall mean a transaction involving the acquisition, merger,
conversion or consolidation, either directly or indirectly, of the Fund and the
issuance of securities of a Roll-Up Entity. Such term does not include:
(a) any transaction if the securities of the Fund have been for at
least twelve months traded through the National Association of Securities
Dealers, Inc. Automated Quotation National Market System; or
(b) a transaction involving the conversion to corporate, trust or
association form of only the Fund, if, as a consequence of the transaction,
there will be no significant adverse change in any of the following
(i) the Members' voting rights;
(ii) the term of existence of the Fund;
(iii) the terms of compensation of the Manager and its Affiliates; or
(iv) the Fund's investment objectives.
"Service" shall mean the United States Internal Revenue Service or its
successor.
"Substantially All of the Assets" shall mean, unless the context otherwise
dictates, equipment representing 66 2/3% or more of the net book value of all
equipment as of the end of the most recently completed fiscal quarter.
"Unit" shall mean the interest in the Fund representing Original Invested
Capital in the amount of $10 and shall entitle the Holder thereof to the rights
herein provided.
"United States Citizen" shall mean a "citizen of the United States" as
defined within the Federal Aviation Act of 1958, as amended from time to time,
or any successor statute, or any regulations adopted pursuant to such Act or any
successor statute.
95
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FINANCIAL STATEMENTS
Set forth below are the following financial statements:
ATEL Capital Equipment Fund XI, LLC
- -----------------------------------
Report of Ernst & Young LLP, Independent Auditors . . . . . . . . . . . .F - 2
Balance Sheet, December 31, 2004 . . . . . . . . . . . . . . . . . . . . .F - 3
Statement of Changes in Members' Capital for the period from
June 25, 2004 (inception) to December 31, 2004 . . . . . . . . . . . . F - 3
Statement of Cash Flows for the period from June 25, 2004
(inception) to December 31, 2004 . . . . . . . . . . . . . . . . . . . F - 3
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . F - 4
ATEL Financial Services, LLC
- ----------------------------
Report of Ernst & Young LLP, Independent Auditors. . . . . . . . . . . . .F - 5
Consolidated Balance Sheet, July 31, 2004. . . . . . . . . . . . . . . . .F - 6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . F - 7
F - 1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Members
ATEL Capital Equipment Fund XI, LLC
We have audited the accompanying balance sheet of ATEL Capital Equipment Fund
XI, LLC (a development stage enterprise) (the Company) as of December 31, 2004,
and the related statements of changes in members' capital and cash flows for the
period from June 25, 2004 (inception) through December 31, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
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, and
evaluating the overall financial statement presentation. We believe that our
audit provides 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
XI, LLC (a development stage enterprise) at December 31, 2004, and the related
statements of changes in member's capital and cash flows for the period from
June 25, 2004 (inception) through December 31, 2004, in conformity with U. S.
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Francisco, California
March 1, 2005
F - 2
ATEL CAPITAL EQUIPMENT FUND XI, LLC
(A Development Stage Enterprise)
BALANCE SHEET
DECEMBER 31, 2004
ASSETS
Cash $600
========
MEMBERS' CAPITAL
Members' capital:
Managing Member $100
Initial Member 500
--------
Total members' capital $600
========
STATEMENT OF CHANGES IN MEMBERS' CAPITAL
FOR THE PERIOD FROM JUNE 25, 2004 (INCEPTION)
THROUGH DECEMBER 31, 2004
Initial Member Managing
--------------
Units Amount Member Total
Members' Capital as of June 25, 2004
(inception) - $ - $ - $ -
Capital contributions 50 500 100 600
----------------- ----------------- ------------------ -----------------
Members' capital as of December 31, 2004 50 $500 $100 $600
================= ================= ================== =================
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JUNE 25, 2004 (INCEPTION)
THROUGH DECEMBER 31, 2004
Financing activities:
Capital contributions received $600
------
Net increase in cash 600
Cash at inception -
------
Cash at end of period $600
======
See accompanying notes.
F - 3
ATEL CAPITAL EQUIPMENT FUND XI, LLC
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
1. Organization and Limited Liability Company matters:
ATEL Capital Equipment Fund XI, LLC (a development stage enterprise) (the
"Fund") was formed under the laws of the state of California on June 25, 2004
for the purpose of acquiring equipment to engage in equipment leasing and sales
activities. The Fund shall continue until December 31, 2025. Contributions in
the amount of $600 were received as of December 31, 2004, $100 of which
represented the Managing Member's (ATEL Financial Services, LLC's) continuing
interest, and $500 of which represented the Initial Member's capital investment.
As a limited liability company, the liability of any individual member for the
obligations of the Fund is limited to the extent of capital contributions to the
Fund by the individual member.
As of December 31, 2004, the Fund had not commenced operations other than
those relating to organizational matters. The Fund, or the Managing Member on
behalf of the Fund, will incur costs in connection with the organization,
registration and issuance of the Limited Liability Company Units (Units). The
amount of such costs to be borne by the Fund is limited by certain provisions of
the ATEL Capital Equipment Fund XI, LLC limited liability company operating
agreement dated October 24, 2004 (the "Operating Agreement").
Cash:
Cash is maintained in a standard non-interest bearing checking account.
Use of estimates:
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated balance sheet. Actual results could differ from those
estimates.
2. Income taxes:
The Fund does not provide for income taxes since all income and losses are the
liability of the individual members and are allocated to the members for
inclusion in their individual tax returns.
3. Members' capital:
As of December 31, 2004, 50 Units ($500) were issued and outstanding. The
Fund is authorized to issue up to 15,000,000 additional Units.
The Fund Net Income, Net Losses, and Distributions are to be allocated 92.5% to
the Members and 7.5% to the Managing Member.
4. Commitments and management:
The terms of the Operating Agreement provide that the Managing Member and/or
affiliates are entitled to receive certain fees, in addition to the allocations
described above, which are more fully described in Section 8 of the Operating
Agreement. The additional fees to management include fees for equipment
management and resale.
F - 4
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Members
ATEL Financial Services LLC
We have audited the accompanying consolidated balance sheet of ATEL Financial
Services LLC (the "Company") and subsidiary as of July 31, 2004. This balance
sheet is the responsibility of the Company's management. Our responsibility is
to express an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the consolidated financial position of ATEL
Financial Services LLC at July 31, 2004, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
October 15, 2004
San Francisco, California
F - 5
ATEL FINANCIAL SERVICES LLC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JULY 31, 2004
ASSETS
Cash and cash equivalents $1,856,352
Amounts due from affiliated programs 6,156,692
Property and equipment, net of accumulated depreciation of $425,558 908,998
Leasehold improvements, net of accumulated amortization of $172,794 1,179,005
Goodwill, net of accumulated amortization of $879,520 23,286,883
Other assets 150,284
-------------
Total Assets $33,538,214
=============
LIABILITIES AND MEMBERS' EQUITY
Liabilities:
Term loan $ 2,809,091
Subordinated convertible promissory note, due to related party 1,000,000
Other long-term debt 850,000
Amounts due to affiliated companies 18,196,405
Accounts payable and accrued liabilities 1,463,442
Derivative - interest rate swap 150,177
-------------
Total liabilities 24,469,115
Members' equity:
Accumulated other comprehensive income (60,670)
Members' equity 9,129,769
-------------
Total Members' equity 9,069,099
-------------
Total liabilities and Members' equity $33,538,214
=============
See accompanying notes.
F - 6
ATEL FINANCIAL SERVICES LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET
JULY 31, 2004
1. Organization and summary of significant accounting policies:
Organization and principles of consolidation:
The consolidated balance sheet includes the accounts of ATEL Financial Services
LLC ("ATEL") and its wholly owned subsidiary, ATEL Securities Corporation
("ASC"). ATEL is an indirect wholly owned subsidiary of ATEL Capital Group
("ACG") and the financial position of ATEL would be significantly different if
ATEL was autonomous.
ATEL is a California limited liability company that was formed in March 2001 to
carry on the business activities that had been previously performed through that
date by ATEL Financial Corporation ("AFC"), an affiliated wholly owned
subsidiary of ACG. Accordingly, all the assets and liabilities of AFC were
contributed by the parent, ACG, into ATEL at book value in exchange for an
indirect wholly owned interest in ATEL's members' equity. The assets and
liabilities contributed by ACG into ATEL included deferred tax assets and
liabilities of AFC. Pursuant to Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes these deferred tax assets and
liabilities of ATEL were then transferred to ACG to reflect ATEL's non-taxable
status as a limited liability company.
In April 2001, ATEL acquired a 71% interest in ACG (734.938 shares of common
stock) from the then controlling shareholder of ACG. In exchange for the common
stock of ACG, ATEL paid $18,020,000 in cash with the balance of the
consideration consisting primarily of lease receivables transferred to the
seller. ATEL financed a portion of the purchase price utilizing a term loan and
a convertible note (discussed in Note 4). This transaction has been accounted
for as a change in control leveraged buyout transaction utilizing the purchase
method of accounting. All of the purchase price was allocated to goodwill. ATEL
recorded goodwill of $24,166,403 related to this transaction and amortized
$879,520 of this amount through July 31, 2001, at which time amortization ceased
as a result of the adoption of SFAS No 142 "Goodwill and Other Intangible
Assets".
On April 16, 2004, ATEL entered into a stock redemption agreement with the
former controlling shareholder of ACG to acquire the remaining five percent
interest in the Company. A cash consideration of $610,000 was paid for the
transaction. After the transaction ATEL immediately retired such shares. This
transaction was accounted for under the treasury stock method.
ATEL organizes and sponsors limited partnerships and limited liability companies
(the "affiliated programs" or the "programs") engaged in equipment leasing and
sales activities. It also acts as the corporate general partner or managing
member in these affiliated programs. Through these programs, ACG derives various
fees and also receives reimbursements for expenses incurred on behalf of these
entities, of which certain fees and expense reimbursements are allocated to
ATEL, with the balance allocated to various other affiliates. The basis for
determination of the types and amounts of these fees and reimbursements are
provided in agreements with the various programs.
F - 7
ATEL FINANCIAL SERVICES LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET
JULY 31, 2004
A portion of the fees mentioned above are subordinated to the limited partners'
and other members' full recovery of their initial invested capital contributions
plus a specified return on their investments. No earnings or equity interests
from such subordinated interests have been recognized through July 31, 2004.
ATEL will continue in full force and effect until such time as the member elects
to dissolve ATEL or ATEL is otherwise dissolved. As a limited liability company,
the liability of any individual member for the obligations of ATEL is limited to
the extent of capital contributions to the company by the individual member.
Cash and cash equivalents:
Cash and cash equivalents include cash in banks and cash equivalent investments
with original maturities of ninety days or less.
Property and equipment:
Property and equipment is stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the respective assets,
which range from three to seven years.
Leasehold improvements:
Leasehold improvements are stated at cost. Amortization is calculated using the
straight-line method over the lives of the related leases or estimated lives,
whichever is shorter.
Fair value of financial instruments:
ATEL considers amounts presented for financial instruments on the consolidated
balance sheet to approximate fair value.
Credit risk:
Financial instruments that potentially subject ATEL to concentrations of credit
risk include cash and cash equivalents. ATEL places its cash deposits and
temporary cash investments with creditworthy, high quality financial
institutions. The concentration of such deposits and temporary cash investments
is not deemed to create a significant risk to ATEL.
Use of estimates:
The preparation of the consolidated balance sheet in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated balance sheet. Actual results could differ from those
estimates. The significant estimates were made in relation to the useful lives
of property and equipment and leasehold improvements and goodwill impairment.
F - 8
ATEL FINANCIAL SERVICES LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET
JULY 31, 2004
Investments in affiliated programs:
ATEL accounts for its interest as a corporate general partner (or as the
managing member) in the affiliated programs at cost, or under the equity method
of accounting, based on the terms of the individual affiliated partnership or
operating agreements.
Investments in affiliated programs accounted for at cost do not provide for
general partner distributions in the partnership agreements. Certain investments
in affiliated programs accounted for at cost do not require ATEL to make
additional capital contributions, and, hence, ATEL records all distributions
received from these programs as income based on the cost method of accounting.
The partnership/operating agreements for investments in affiliated programs
accounted for under the equity method of accounting provide for general partner
(or managing member) distributions, subject to limitations in the respective
partnership agreements (or operating agreement). Upon dissolution of these
programs, if the general partner (or managing member) has a deficiency in its
capital account at the program level, a special allocation of income may be made
to the general partner from the limited partners in an amount sufficient to
bring the capital accounts to zero, based on the provisions of the partnership
agreement (or operating agreement).
If the general partner (or managing member) has a positive capital account
balance at the program level upon the dissolution of the program, a special
allocation of income is made from the general partner (or managing member) to
the limited partners in an amount sufficient to bring the capital accounts to
zero, based on the terms of the partnership agreements (or operating
agreements).
Income taxes:
ATEL does not provide for income taxes since all income and losses are allocated
to the members for inclusion in their respective tax returns.
Amounts due to affiliated companies:
Amounts due to affiliated companies represent net amounts advanced to or
received from affiliated companies for operations on behalf of ACG and its
subsidiaries.
F - 9
ATEL FINANCIAL SERVICES LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET
JULY 31, 2004
1. Organization and summary of significant accounting policies (continued):
Derivative financial instruments:
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities as amended ("SFAS 133")
established new accounting and reporting standards for derivative instruments.
SFAS No. 133, as amended, requires ATEL to recognize all derivatives as either
assets or liabilities on the balance sheet and measure those instruments at fair
value. It further provides criteria for derivative instruments to be designated
as fair value, cash flow, or foreign currency hedges, and establishes accounting
standards for reporting changes in the fair value of the derivative instruments.
In accordance with SFAS No. 133, ATEL records derivative hedging instruments at
fair value on the balance sheet and recognizes the offsetting gains or losses as
adjustments to be reported in net income or other comprehensive income, as
appropriate.
ATEL utilizes a cash flow hedge comprised of an interest rate swap. The interest
rate swap is linked to and adjusts effectively the interest rate sensitivity of
specific long-term debt. The effective portion of the change in fair value of
the hedging derivative is recorded as the only item in Accumulated Other
Comprehensive Income (AOCI) and the ineffective portion (if any) directly in
earnings. Amounts in AOCI are reclassified into earnings in a manner consistent
with the earnings pattern of the underlying hedged item (generally reflected in
interest expense). If a hedged item is dedesignated prior to maturity, previous
adjustments to AOCI are recognized in earnings to match the earnings recognition
pattern of the hedged item (e.g., level yield amortization if hedging interest
bearing instruments). Interest income or expense on the hedging derivative used
to manage interest rate exposure is recorded on an accrual basis, as an
adjustment to the yield of the hedged item over the periods covered by the
contract.
Credit exposure from derivative financial instruments arises from the risk of a
counterparty default on the derivative contract. The amount of the loss created
by the default is the replacement cost or current positive fair value of the
defaulted contract.
2. Goodwill:
Goodwill of $24,166,403 was recorded in connection with the leveraged buyout of
the principal shareholder of ACG in April 2001 (see Note 1). At July 31, 2004,
accumulated amortization of goodwill was $879,520. In accordance with SFAS No.
142, Goodwill and Other Intangible Assets, no amortization of goodwill was
recorded during the period ended July 31, 2004. On an annual basis, management
reviews goodwill and other amortizable assets and evaluates events or changes in
circumstances that may indicate impairment in the carrying amount of such
assets. In such instances, impairment, if any, is measured on a discounted
future cash flow basis. As a result of management's review, no impairment of
goodwill existed during the period ended July 31, 2004.
F - 10
ATEL FINANCIAL SERVICES LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET
JULY 31, 2004
3. Property, equipment and leasehold improvements, net:
The following is a summary by category of the depreciable assets at July 31,
2004:
Category
Leasehold improvements $ 1,351,799
Accumulated amortization (172,794)
----------------
Leasehold improvements, net $ 1,179,005
===============
Other equipment 417,660
Furniture and fixture 790,368
Computer equipment 126,528
Accumulated depreciation (425,558)
----------------
Furniture, fixture and equipment, net $ 908,998
===============
4. Long-term debt:
Term loan
ATEL assumed two separate notes in association with the leveraged buyout (see
Note 1). The first is a $12,000,000 term loan with a financial institution
maturing in October 2006, the balance of which was $2,809,091 as of July 31,
2004. The effective fixed interest rate on this note is 7.88%. Principal and
interest are to be paid quarterly over twenty-two consecutive quarters. A
financial covenant exists whereby an amount equal to 40% of excess cash flow, as
defined, is payable within 10 days after the due date of the year-end financial
statements and is applied as a reduction of principal. Excess cash flow is
defined as the consolidated net profit of ACG and its consolidated subsidiaries
less certain distributions. ATEL was in compliance with this financial covenant
as of July 31, 2004.
ATEL has entered into an interest rate swap with a financial institution to
manage the interest rate exposure associated with the variable rate term loan by
effectively converting the variable rate to a fixed rate. During the term of the
interest rate swap ATEL receives or pays interest on a notional principal
(generally equal to the outstanding principal of the term note) based on the
difference between the nominal payment rate of 5.380% and the variable receive
rate indexed to a three month libor of 2.25% in July 2004. No actual borrowing
or lending is involved. The termination of the swap coincides with the maturity
of the debt, which is October 2, 2006. As a result of the excess cash flow
principal payment made as of July 31, 2004, the notional amount of the swap of
$5,454,545 exceeded the principal amount of the hedged debt of $2,809,091 by
$2,645,454 as of July 31, 2004. During the year, AOCI decreased by approximately
$266,000 of which approximately $250,000 was related to the decrease in the fair
value of the interest rate swap and approximately $16,000 was related to the
reclassification of AOCI to earnings due to hedge ineffectiveness.
Future minimum payments on long-term debt are as follows at July 31, 2004:
Principal Interest Total
Year ending July 31, Payments Payments Payments
- -------------------- --------- - --------- - --------
2005 2,181,818 138,437 2,320,255
2006 627,273 13,969 641,242
--------------- ----------------- ----------------
$2,809,091 $152,406 $2,961,497
=============== ================= ================
F - 11
ATEL FINANCIAL SERVICES LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET
JULY 31, 2004
4. Long-term debt (continued):
Subordinated convertible promissory note
The second note assumed in association with the leveraged buyout is a
subordinated convertible promissory note (subordinate to the $12,000,000 term
loan) for $4,000,000 from a related party. Interest is accrued at a rate of 8%
per annum paid quarterly, with an additional interest of the greater of 2% of
the principal amount payable at year-end or 15% of excess cash flows as defined.
In July 2004, a principal paydown of $3,000,000 was made. All outstanding
principal and interest is due on December 31, 2006. Upon maturity of the term
loan, the holder will have the option for a period of thirty days, to convert
the outstanding principal amount of this note into 53.1538 shares of either
Series A preferred stock of ACG or, if ATEL elects prior to the maturity date of
the term loan to be treated as common stock of ACG. In addition, thirty-one days
after the repayment date of the term loan, ATEL has the option for a period of
thirty days, to convert the principal amount of this note into the conversion
shares.
Future minimum payments on the convertible subordinated promissory note are as
follows at July 31, 2004:
Principal Interest Total
Year ending July 31, Payments Payments Payments
-------------------- --------- - --------- - --------
2005 $ - $ 137,500 $ 137,500
2006 - 100,000 100,000
2007 1,000,000 41,667 1,041,667
--------------- ----------------- ----------------
$1,000,000 $279,167 $1,279,167
=============== ================= ================
5. Line of credit:
ATEL participates with ACG, certain other subsidiaries of ACG, and with certain
affiliated programs in a $67,190,909 revolving credit agreement with a group of
financial institutions which expires June 28, 2005. The agreement includes an
acquisition facility, a lease warehouse facility and a venture lease facility,
which are used to provide bridge financing for assets on leases. Draws on the
acquisition facility by any individual borrower are secured only by that
borrower's assets, including equipment and related leases. Borrowings on the
warehouse facility are recourse jointly to certain of the affiliated programs,
ACG and ATEL. As of July 31, 2004, no draws were outstanding on the warehouse
facility. Borrowings available on the warehouse facility at July 31, 2004 total
$48,890,909. Also included in this line of credit facility is $1,000,000
available for operations and working capital. There were no draws under this
facility during the year ended July 31, 2004.
These facilities, when used, are collateralized by (i) leases and equipment
owned by the specific borrower and financed by the lines and (ii) all other
assets owned by the specific borrower except equipment, lease receipts and
residual values specifically pledged to other equipment funding sources. ATEL's
borrowings under the facility are guaranteed by ACG and/or its shareholders.
The credit agreement includes certain financial covenants applicable to each
borrower. ATEL and ACG were in compliance with such covenants as of July 31,
2004.
F - 12
ATEL FINANCIAL SERVICES LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET
JULY 31, 2004
6. Other long-term debt:
ATEL entered into a loan and security agreement with a lender on July 30, 2003.
Under the loan and security agreement ATEL may borrow up to $1,000,000 for
equipment purchases, which was borrowed in September 2004. The loan will be paid
in 60 equal monthly installments of principal and interest payments that
commenced on November 29, 2003 and will cease upon termination of the loan on
October 31, 2008. The interest rate is 5.01% and is fixed.
Future minimum payments on other long term debt are as follows:
Principal Interest Total
Year ending July 31, Payments Payments Payments
-------------------- --------- --------- --------
2005 $ 216,667 $ 40,707 $ 257,374
2006 200,000 27,138 227,138
2007 200,000 17,118 217,118
2008 200,000 7,098 207,098
2009 33,333 209 33,542
--------------- --------------- -----------------
$ 850,000 $ 92,270 $ 942,270
=============== =============== =================
7. Equity investments in affiliated programs:
Certain investments in affiliated programs are accounted for under the equity
method of accounting. Summarized information about these affiliates as of
December 31, 2003 and for the year then ended are included in the following
table:
ATEL Cash ATEL Capital ATEL Capital ATEL Capital ATEL Capital
Distribution Equipment Equipment Equipment Equipment
Fund VI, L.P. Fund VII, L.P. Fund VIII, LLC Fund IX, LLC Fund X, LLC
------------- -------------- -------------- ------------ ------------
Total Assets $ 25,410,604 $ 74,812,214 $ 110,222,744 $ 87,530,487 $ 37,815,563
Total Liabilities $ 1,627,341 $ 33,406,191 $ 62,325,626 $ 624,472 $ 704,900
Net Income (Loss) $ 1,585,834 $ (4,311,400) $ (7,521,261) $ 591,015 $ (183,013)
ATEL has a 1% carried interest in ATEL Cash Distribution Fund VI, L.P. and a
7.5% carried interest in ATEL Capital Equipment Fund VII, L.P., ATEL Capital
Equipment Fund VIII, LLC., ATEL Capital Equipment Fund IX, LLC, and ATEL Capital
Equipment Fund X, LLC.
8. Commitments and contingencies:
Office lease:
ACG occupies office space under an operating lease expiring January 2013. Future
minimum lease payments to be allocated to ATEL are, $644,259 in years 2005
through 2012, and $322,130 in 2013.
F - 13
ATEL FINANCIAL SERVICES LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET
JULY 31, 2004
9. Reimbursements of operating costs:
The Limited Partnership Agreements and Operating Agreements of the affiliated
programs allow for the reimbursement of costs incurred by ACG and its
subsidiaries in providing administrative services to the programs, of which a
portion of such amounts is allocated to ATEL. Administrative services provided
include program accounting, investor relations, legal counsel and lease and
equipment documentation. ACG and its subsidiaries are not reimbursed for
services whereby they are entitled to receive a separate fee as compensation for
such services, such as acquiring and overseeing the management of equipment.
Reimbursable operating costs incurred by ACG and its subsidiaries are allocated
to the programs based upon actual time incurred by employees working on program
business and an allocation of rent and other costs based on utilization studies.
As of July 31, 2004, $6,156,692 remained outstanding from affiliated programs
for reimbursable operating and syndication costs and management fees.
10. Financial information of affiliated programs (unaudited):
ATEL serves as the general partner or managing member of a series of ten
publicly held limited partnerships and limited liability companies, as well as
two privately held limited liability companies (the "Funds") which report their
results on a calendar year basis. As of December 31, 2001, the first three of
those Funds had ceased operations. As of July 31, 2004, ATEL is the general
partner or managing member of the nine remaining Funds. During the year ended
December 31, 2003, ATEL received management and other fees from the nine Funds
for services provided. These Funds own and lease equipment to third parties. The
Funds' equipment is not available to creditors or the members of ATEL. The
following financial data is presented for purposes of additional analysis to
provide information about the portfolio under management. Presented below is the
unaudited combined, capsulated balance sheet for the nine Funds existing as of
December 31, 2003:
Financial position:
Cash $59,440,697
Accounts receivable, net and other assets 12,081,292
Investments in equipment and leases 286,020,540
-----------------
Total assets $357,542,529
=================
Long-term and non-recourse debt $88,187,429
Accounts payable and other liabilities 11,627,331
Partners' capital 257,727,769
-----------------
Total liabilities and partners' capital $357,542,529
=================
Presented below is unaudited combined aggregate amounts of future minimum lease
payments from the programs' lease portfolios for each year ending December 31:
2004 $52,893,140
2005 36,568,328
2006 23,102,951
2007 11,767,731
2008 5,752,416
Thereafter 3,800,403
-----------------
$133,884,969
=================
F - 14
EXHIBIT A
- --------------------------------------------------------------------------------
PRIOR PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
ATEL Financial Services LLC ("ATEL"), the Manager of the Fund, and its
affiliates have extensive experience in the equipment leasing industry,
including: (i) originating and financing leveraged and single investor lease
transactions for corporate investors, (ii) acting as a broker/packager by
arranging equity and debt participants for equipment leasing transactions
originated by other companies, (iii) consulting on the pricing and structuring
of equipment lease transactions for banks, leasing companies and corporations,
(iv) organizing and offering individual ownership and limited partnership
investment leasing programs and (v) supervising and arranging for the
supervision of equipment management and marketing on leasing transactions
involving total equipment costs in excess of $1.34 billion.
In addition to the Fund, ATEL has sponsored ten prior public and three private
equipment leasing programs. See "Prior Performance Summary" for a summary of
information regarding the prior public programs.
The first prior public program, ATEL Cash Distribution Fund ("ACDF"), commenced
a public offering of up to $10,000,000 of its limited partnership interests on
March 1, 1986. ACDF terminated its offering on December 18, 1987 after raising a
total of $10,000,000 in offering proceeds from a total of approximately 1,000
investors, all of which proceeds were committed to equipment acquisitions,
organization and offering expenses and capital reserves. ACDF acquired a variety
of types of equipment with a total purchase cost of $11,133,679. All such
equipment had been sold as of December 31, 1997.
Through December 31, 1997, ACDF had made cash distributions to its investors in
the aggregate amount of $1,121.03 per $1,000 invested. Of this amount a total of
$244.89 represents investment income and $876.14 represents return of capital.
The second prior public program, ATEL Cash Distribution Fund II ("ACDF II"),
commenced a public offering of up to $25,000,000 (with an option to increase the
offering to $35,000,000) of its limited partnership interests on January 4,
1988. ACDF II terminated its offering on January 3, 1990 after raising a total
of $35,000,000 in offering proceeds from a total of approximately 3,100
investors, all of which proceeds were committed to equipment acquisitions,
organization and offering expenses and capital reserves. ACDF II acquired a
variety of types of equipment with a total purchase cost of $52,270,536. All
such equipment had been sold as of December 31, 1998.
Through December 31, 1998, ACDF II had made cash distributions to its investors
in the aggregate amount of $1,222.63 per $1,000 invested. Of this amount a total
of $335.43 represents investment income and $887.20 represents return of
capital.
The third prior public program, ATEL Cash Distribution Fund III ("ACDF III"),
commenced a public offering of up to $50,000,000 (with an option to increase the
offering to $75,000,000) of its limited partnership interests on January 4,
1990. ACDF III terminated its offering on January 3, 1992 after raising a total
of $73,855,840 in offering proceeds from a total of approximately 4,822
investors, all of which proceeds were committed to equipment acquisitions,
organization and offering expenses and capital reserves. ACDF III acquired a
variety of types of equipment with a total purchase cost of $99,629,942. All
such equipment had been sold as of December 31, 2000.
Through December 31, 2000, ACDF III had made cash distributions to its investors
in the aggregate amount of $1,329.76 per $1,000 invested. Of this amount a total
of $379.10 represents investment income and $950.66 represents return of
capital.
A-1
Past performance is not necessarily indicative of future performance.
The fourth prior public program, ATEL Cash Distribution Fund IV ("ACDF IV"),
commenced a public offering of up to $75,000,000 of its limited partnership
interests on February 4, 1992. ACDF IV terminated its offering on February 3,
1993 after raising a total of $75,000,000 in offering proceeds from a total of
approximately 4,873 investors, all of which proceeds were committed to equipment
acquisitions, organization and offering expenses and capital reserves. ACDF IV
acquired a variety of types of equipment with a total purchase cost of
$108,734,880. Of such equipment, items representing an original purchase cost of
$103,274,568 had been sold as of September 30, 2004.
Through September 30, 2004, ACDF IV had made cash distributions to its investors
in the aggregate amount of $1,216.49 per $1,000 invested. Of this amount a total
of $320.17 represents investment income and $896.32 represents return of
capital.
The fifth prior public program, ATEL Cash Distribution Fund V ("ACDF V"),
commenced a public offering of up to $125,000,000 of its limited partnership
interests on February 22, 1993. ACDF V terminated its offering on November 15,
1994. As of that date, $125,000,000 of offering proceeds had been received from
approximately 7,217 investors. All of the proceeds were committed to equipment
acquisitions, organization and offering expenses and capital reserves. ACDF V
acquired a variety of types of equipment with a total purchase cost of
$186,995,157 as of September 30, 2004. Of such equipment, items representing an
original purchase cost of $145,817,223 had been sold as of September 30, 2004.
Through September 30, 2004, ACDF V had made cash distributions to its investors
in the aggregate amount of $989.88 per $1,000 invested. Of this amount a total
of $188.55 represents investment income and $801.33 represents return of
capital.
The sixth prior public program, ATEL Cash Distribution Fund VI ("ACDF VI"),
commenced a public offering of up to $125,000,000 of its limited partnership
interests on November 23, 1994. ACDF VI terminated its offering on November 22,
1996. As of that date, $125,000,000 of offering proceeds had been received from
approximately 6,401 investors. All of the proceeds were committed to equipment
acquisitions, organization and offering expenses and capital reserves. ACDF VI
acquired a variety of types of equipment with a total purchase cost of
$208,275,158. Of such equipment, items representing an original purchase cost of
$149,031,165 had been sold as of September 30, 2004.
Through September 30, 2004, ACDF VI had made cash distributions to its investors
in the aggregate amount of $829.60 per $1,000 invested. Of this amount a total
of $109.03 represents investment income and $720.57 represents return of
capital.
The seventh prior public program, ATEL Capital Equipment Fund VII ("ACEF VII"),
commenced a public offering of up to $150,000,000 of its limited partnership
interests on November 29, 1996. ACEF VII terminated its offering on November 29,
1998. As of that date, $150,000,000 of offering proceeds had been received from
approximately 5,386 investors. All of the proceeds were committed to equipment
acquisitions, organization and offering expenses and capital reserves. ACEF VII
had acquired a variety of types of equipment with a total purchase cost of
$302,698,648. Of such equipment, items representing an original purchase cost of
$119,102,193 had been sold as of September 30, 2004.
Through September 30, 2004, ACEF VII had made cash distributions to its
investors in the aggregate amount of $713.88 per $1,000 invested. Of this amount
a total of $99.39 represents investment income and $614.49 represents return of
capital.
The eighth prior public program, ATEL Capital Equipment Fund VIII ("ACEF VIII"),
commenced a public offering of up to $150,000,000 of its limited partnership
interests on December 7, 1998. ACEF VIII terminated its offering on November 30,
A-2
Past performance is not necessarily indicative of future performance.
2000. As of that date, $135,701,380 of offering proceeds had been received from
approximately 3,625 investors. All of the proceeds were committed to equipment
acquisitions, organization and offering expenses and capital reserves. ACEF VIII
had acquired a variety of types of equipment with a total purchase cost of
$249,040,775 as of September 30, 2004. Of such equipment, items representing an
original purchase cost of approximately $99,918,539 had been sold as of
September 30, 2004.
Through September 30, 2004, ACEF VIII had made cash distributions to its
investors in the aggregate amount of $494.85 per $1,000 invested. Of this amount
a total of $22.37 represents investment income and $472.38 represents return of
capital. See Table III - "Operating Results of Prior Programs" in this Exhibit A
for further information concerning such distributions. See Table V - "Sales or
Disposals of Equipment" in Exhibit A for further information concerning the
equipment disposed of by ACEF VIII. See Table VI - "Acquisition of Equipment by
Prior Programs" in Exhibit A for further information concerning the types of
equipment acquired by ACEF VIII.
The ninth prior public program, ATEL Capital Equipment Fund IX ("ACEF IX"),
commenced a public offering of up to $150,000,000 of its limited partnership
interests on January 16, 2001. ACEF IX terminated its offering as of January 15,
2003. As of that date, $120,652,160 of offering proceeds had been received from
approximately 3,238 investors. All of the proceeds were committed to equipment
acquisitions, organization and offering expenses and capital reserves. ACEF IX
had acquired a variety of types of equipment with a total purchase cost of
$87,892,538 as of September 30, 2004. Of such equipment, items representing an
original purchase cost of approximately $8,426,990 had been sold as of September
30, 2004.
Through September 30 2004, ACEF IX had made cash distributions to its investors
in the aggregate amount of $294.46 per $1,000 invested. Of this amount a total
of $24.01 represents investment income and $270.45 represents return of capital.
See Table III - "Operating Results of Prior Programs" in this Exhibit A for
further information concerning such distributions. See Table V - "Sales or
Disposals of Equipment" in Exhibit A for further information concerning the
equipment disposed of by ACEF IX. See Table VI - "Acquisition of Equipment by
Prior Programs" in Exhibit A for further information concerning the types of
equipment acquired by ACEF IX.
The tenth prior public program, ATEL Capital Equipment Fund X ("ACEF X"),
commenced a public offering of up to $150,000,000 of its limited partnership
interests on March 12, 2003. As of September 30, 2004, the offering was still in
progress. As of that date, $97,932,450 of offering proceeds had been received.
All of the proceeds were committed to equipment acquisitions, organization and
offering expenses, working capital and capital reserves. ACEF X had acquired a
variety of types of equipment and invested in notes receivable with a total
purchase cost of $26,623,768 as of September 30, 2004. Sales of such equipment
were not significant as of September 30, 2004.
Through September 30, 2004, ACEF X had made cash distributions to its investors
in the aggregate amount of $95.09 per $1,000 invested. All of this amount
represents return of capital. See Table III - "Operating Results of Prior
Programs" in this Exhibit A for further information concerning such
distributions. See Table V - "Sales or Disposals of Equipment" in Exhibit A for
further information concerning the equipment disposed of by ACEF X. See Table VI
- - "Acquisition of Equipment by Prior Programs" in Exhibit A for further
information concerning the types of equipment acquired by ACEF X.
As discussed elsewhere in this Prospectus, fluctuations in demand for equipment
may affect the ability of a leasing program to invest its capital in a timely
manner. ACEF IX is in the process of leveraging its gross offering proceeds for
the purchase of its initial equipment portfolio. ACEF X is in the process of
committing the balance of its gross offering proceeds to its initial equipment
portfolio. Equipment lessors have experienced a more difficult market in which
to make suitable investments during the past three years of reduced growth and
A-3
Past performance is not necessarily indicative of future performance.
recession in the U.S. economy as a result of the softening demand for capital
equipment during this period. Delays in investment may have a negative impact on
ACEF IX and ACEF X. The Manager believes that it has identified industry
segments, lease markets and potential transaction structures that will permit
ACEF IX and ACEF X to fully pursue their investment objectives.
Each of the Prior Programs has had, as an investment objective, the reinvestment
of cash flow after payment of debt service and certain minimum distributions.
Reinvestment is intended to increase the size, diversification and return on
their equipment portfolios. Adverse economic conditions during the past three
years have affected the timing and terms of remarketing and re-leasing efforts
by these Prior Programs. An extended remarketing cycle and lower lease rates
have limited the ability of ACDF V, ACDF VI, ACEF VII and ACEF VIII to generate
sufficient cash flow to permit significant reinvestment. In the future, adverse
conditions in the general economy and equipment demand may also result in delays
in leasing, re-leasing and disposition of equipment, and in reduced returns on
invested capital. In any event, there can be no assurance as to what future
developments may occur in the economy in general or in the demand for equipment
and lease financing in particular.
As of September 30, 2004, the Prior Programs have acquired equipment with a
total purchase cost of approximately $1.33 billion during a period of over 18
years since the date the first Prior Program commenced operations. Aggregate
losses from material lessee defaults on these transactions have been
approximately $7 million, or approximately 0.53% of the assets acquired,
substantially less than the amount assumed by the Manager and its Affiliates in
structuring these portfolios as the losses to be anticipated in the ordinary
course of leasing business. There is no identifiable trend in the frequency or
amount of lessee defaults experienced by prior programs.
Although certain of the Prior Programs have experienced lessee defaults in the
ordinary course of business, none of the Prior Programs has experienced an
unanticipated rate of default or major adverse business developments which the
Fund Manager believes will impair its ability to meet its investment objectives.
All of the prior public programs (the "Prior Public Programs") have investment
objectives that are similar to those of the Fund. The prior private programs,
ATEL Lease Income Fund 1985-A (ALIF), ATEL Venture Fund, LLC ("AVF") and ATEL
Growth Capital Fund, LLC ("AGCF") have substantially different investment
objectives than those of the Fund, so tabular information concerning these prior
private programs has been omitted from this presentation. ALIF invested in
equipment without the use of any debt financing; AVF and ACGF invested in
portfolios with different transaction structures, including significant emphasis
on finance leases, different credit criteria, targeting development stage
lessees, and different investment goals, including more accelerated recovery of
initial capital. The Fund and the Prior Public Programs invest in equipment with
moderate amounts of leverage, acquire operating leases with equipment leased
primarily to investment grade and equivalent credits, and have more emphasis on
low technology, longer-lived equipment. Accordingly, only the Prior Public
Programs are deemed to have investment objectives similar to those of the Fund.
The factors considered by the Manager in determining that the investment
objectives of the Prior Public Programs were similar to those of the Fund
include the types of equipment to be acquired, the structure of the leases to
such equipment, the credit criteria for lessees, the intended investment cycles,
the reinvestment policies and the investment goals of each program. Therefore
all of the information set forth in Tables included in this Exhibit A - "Prior
Performance Information" may be deemed to relate to programs with investment
objectives similar to those of the Fund.
In Tables I through III, information is presented with respect to all Prior
Programs sponsored by the Manager and its Affiliates that completed their
offerings of interests within the five-year period ended September 30, 2004. It
should be noted that the tabular information concerning ACDF X does not reflect
results of an operating period after completion of its funding. Table IV
A-4
Past performance is not necessarily indicative of future performance.
includes information concerning the three Prior Programs that had completed
their respective operations as of September 30, 2004. Table V includes
information regarding all dispositions of equipment by Prior Programs through
September 30, 2004. Table VI includes information regarding all acquisitions of
equipment through September 30, 2004 by the three Prior Programs that completed
their offerings of interests within the five year period then ended.
In addition to Tables I through VI, a summary chart is set forth below.
Figure 10 below illustrates the disposition of equipment after expiration of
the initial lease term for equipment coming off lease through December 31, 2004
for all Prior Public Programs that had completed their offerings as of such
date. The dispositions are characterized as (i) short term renewals by the
lessees (for terms of less than 12 months), (ii) long term renewals by the
lessees (for terms of at least 12 months), (iii) equipment purchased by the
lessee and (iv) equipment returned by the lessee to the Prior Public Program
for sale or lease to another party.
[GRAPHIC OMITTED]
The following is a list of the tables set forth in Exhibit A:
TABLE I Experience in Raising and Investing Funds
TABLE II Compensation to the General Partner/Managing Member
TABLE III Operating Results of Prior Programs
TABLE IV Results of Completed Programs
TABLE V Sales or Disposals of Equipment by Prior Programs
TABLE VI Acquisition of Equipment by Prior Programs
ATEL will provide to any investor, upon written request and without charge,
copies of the most recent Annual Reports on Form 10-K filed with the Securities
and Exchange Commission by each Prior Public Program and will provide to any
investor, for a reasonable fee, copies of the exhibits to such reports.
INVESTORS IN THE PARTNERSHIP WILL HAVE NO INTEREST IN THE INVESTMENTS DESCRIBED
IN THE FOLLOWING TABLES. PROSPECTIVE INVESTORS SHOULD NOT CONSTRUE THE INCLUSION
OF THIS INFORMATION AS INDICATIVE OF THE POSSIBLE OPERATIONS OF THE PARTNERSHIP.
A-5
Past performance is not necessarily indicative of future performance.
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
(on a percentage basis)
September 30, 2004
(Unaudited)
The following Table sets forth certain information concerning the experience of
the General Partner/Managing Member in raising and investing funds. A percentage
analysis of the application of the proceeds raised is presented.
ATEL Capital ATEL Capital ATEL Capital
Equipment Equipment Equipment
Fund VIII Fund IX Fund X
EQUITY PROCEEDS
Dollar amount of equity offered $ 150,000,000 $150,000,000 $150,000,000
Dollar amount of equity raised $ 135,701,380 $120,652,160 $ 97,932,450 (6)
----------------- ----------------- -----------------
Less: Offering expenses:
Selling commissions 9.50% 9.50% 9.00%
Organization and program expenses (1) 4.68% 3.93% 4.11%
Reserves 0.50% 0.50% 0.50%
----------------- ----------------- -----------------
Percent available for investment 85.32% 86.07% 86.39%
Acquisition costs:
Purchase price (2) 85.32% 86.07% 86.39%
Acquisition fees - - -
----------------- ----------------- -----------------
85.32% 86.07% 86.39%
----------------- ----------------- -----------------
Percent leverage (3) 53.13% 0.00% 0.00%
================= ================= =================
Date offering commenced: Dec. 7, 1998 Jan. 16, 2001 Mar. 12, 2003
Length of offering 24 Months 24 Months N/A (6)
Months to invest 90% of amount available for
investment (measured from beginning of offering) 24 Months (4) 30 Months (5) N/A (6)
FOOTNOTES:
(1) Includes organization, legal, accounting, printing, binding, delivery and
other costs incurred by the General Partner/Managing Member.
(2) Represents amounts paid to unrelated third parties for purchase of equipment
under leases.
(3) The percentage leverage is calculated by dividing the initial principal
amount of debt incurred by the program through the date of this table by the
aggregate original cost of all equipment purchased by the program through such
date. It should be noted, however, that each program has acquired assets, has
made or will make principal amortizing debt service payments and/or has disposed
or will dispose of assets over a period of time extending from its first
investment in equipment. As a result, for each program the total cost of the
assets in its portfolio and the total principal amount of debt outstanding have
fluctuated from time to time. The percentage figure, therefore, does not reflect
the current leverage ratio or the debt ratio at any one point in time, but
constitutes an aggregate ratio for the life of the program through the date of
the table.
(4) As of November 30, 2000, the Fund's offering of Limited Liability Company
Units was completed. As of that date, the proceeds of the offering had been
fully committed.
(5) As of January 15, 2003, the Fund's offering of Limited Liability Company
Units was completed. As of September 30, 2003, the proceeds of the offering had
been fully committed.
(6) As of September 30, 2004, the offering had not been completed.
A-6
Past performance is not necessarily indicative of future performance.
TABLE II
COMPENSATION TO THE SPONSOR
September 30, 2004
(Unaudited)
The following Table sets forth certain information concerning the compensation
derived by the General Partner/Managing Member. Amounts paid are from two
sources: proceeds of the offering and gross revenues.
ATEL Capital ATEL Capital ATEL Capital
Equipment Equipment Equipment
Fund VIII Fund IX Fund X
Date offering commenced Dec. 7, 1998 Jan. 16, 2001 Mar. 12, 2003
Date offering closed Nov. 30, 2000 Jan. 15, 2003 N/A
Dollar amount raised $ 135,701,380 $120,652,160 $ 97,932,450
Amounts paid to General Partner / Managing
Member from proceeds of offering:
Acquisition fees / Reimbursements of initial direct costs $ 1,782,826 $ 3,543,008 $ 1,746,879
Selling commissions $ 12,891,631 $ 11,461,955 $ 8,813,921
Organization and program costs $ 6,354,458 $ 4,750,879 $ 2,116,029
Dollar amount of cumulative cash generated
from operations before deducting payments
to the General Partner/Managing Member $ 120,709,188 $ 26,701,268 $ 3,817,754
Cumulative amount paid to the General
Partner/Managing
Member from operations:
Management fees $ 7,508,341 $ 1,472,211 $ 180,485
Reimbursement of payroll costs $ 4,978,366 $ 1,326,960 $ 170,097
Other operating expenses $ 513,956 $ 524,744 $ 100,971
Aggregate payments to General
Partner / Managing Member:(1)
1999 $ 13,056,922
2000 11,872,250
2001 2,921,431 $ 7,131,876
2002 2,351,555 10,270,778
2003 2,337,830 4,115,416 $ 7,715,713
2004 1,489,590 1,561,687 5,412,668
----------------- ----------------- -----------------
$ 34,029,578 $ 23,079,757 $ 13,128,381
================= ================= =================
FOOTNOTES:
(1) As of September 30, 2004. Includes payments of management fees,
reimbursements of syndication costs to General Partner/Managing Member (and
affiliates), acquisition fees, initial direct costs on leases and reimbursements
of administrative costs.
A-7
Past performance is not necessarily indicative of future performance.
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
September 30, 2004
(Unaudited)
The following Table summarizes the operating results of Prior Programs ( ACEF
VIII, ACEF IX and ACEF X). The Prior Programs' records are maintained in
accordance with generally accepted accounting principles for financial statement
purposes.
ATEL Capital Equipment Fund VIII
Period Ended
December 31,
1999 2000 2001
Months of operations 12 12 12
Gross revenue - lease and other $ 8,657,636 $ 31,046,332 $ 41,992,805
- gain (loss) on sales of assets 3,017 1,453 1,801,292
--------------- -------------- ---------------
8,660,653 31,047,785 43,794,097
Less Operating Expenses: (1)
Depreciation and amortization expense 5,392,504 22,588,276 31,243,646
Provision for losses and doubtful accounts - - 82,615
Interest expense 1,340,804 7,365,041 9,058,622
Administrative costs and reimbursements 767,386 1,408,523 924,375
Legal/Professional fees 155,743 127,345 215,450
Other 121,438 398,365 287,382
Management fee 443,943 1,465,566 1,849,335
--------------- -------------- ---------------
8,221,818 33,353,116 43,661,425
--------------- -------------- ---------------
Net income (loss) - GAAP basis $ 438,835 $ (2,305,331) $ 132,672
=============== ============== ===============
Taxable income (loss) from operations $ (13,620,427) $ (29,018,361) $ (15,498,538)
=============== ============== ===============
Cash generated by (used in) operations (2) $ 5,743,245 $ 18,412,107 $ 30,662,797
Cash generated from sales 38,178 7,761 7,348,063
Cash generated from refinancing -
Cash generated from other (2) 951,549 2,154,474 2,806,236
--------------- -------------- ---------------
6,732,972 20,574,342 40,817,096
Less cash distributions to investors:
From operating cash flow 2,460,684 9,795,386 12,403,683
From sales - - -
From refinancing - - -
From other - - -
--------------- -------------- ---------------
Total distributions 2,460,684 9,795,386 12,403,683
--------------- -------------- ---------------
Cash generated (deficiency) after cash distributions $ 4,272,288 $ 10,778,956 $ 28,413,413
=============== ============== ===============
Tax and distribution data per $1,000
limited partner investment:
Federal Income Tax Results:
Ordinary income (loss):
Operations $ (312.53) $ (252.40) $ (105.64)
Recapture
Capital gain (loss)
Cash distributions to investors on a GAAP basis:
- Investment income $ 5.95 $ - $ -
- Return of capital 55.18 92.11 91.40
--------------- -------------- ---------------
$ 61.13 $ 92.11 $ 91.40
=============== ============== ===============
Sources (on a cash basis)
Sales
Refinancing
Operations $ 61.13 $ 92.11 $ 91.40
Other - - -
--------------- -------------- ---------------
Total $ 61.13 $ 92.11 $ 91.40
=============== ============== ===============
Amount invested in program equipment (cost, excluding
acquisition fees) $142,755,301 $ 218,029,699 $ 237,646,671
Amount invested in program equipment (book value) $139,420,208 $ 190,893,298 $ 178,999,739
Amount remaining invested in program equipment (Cost
of equipment owned at end of period as a percentage of
cost of all equipment purchased by the program) (3) 57.32% 87.55% 95.42%
A-8
Past performance is not necessarily indicative of future performance.
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
September 30, 2004
(Unaudited)
ATEL Capital Equipment Fund VIII
Period Ended
December 31, September 30,
2002 2003 2004
Months of operations 12 12 9
Gross revenue - lease and other $ 32,658,224 $ 27,953,972 $ 15,971,067
- gain (loss) on sales of assets 271,751 595,299 5,775,106
--------------- -------------- ---------------
32,929,975 28,549,271 21,746,173
Less Operating Expenses: (1)
Depreciation and amortization expense 23,162,548 20,694,362 12,481,100
Provision for losses and doubtful accounts 3,087,500 5,499,271 (110,000)
Interest expense 6,148,759 5,270,675 3,175,740
Administrative costs and reimbursements 832,539 820,571 738,928
Legal/Professional fees 179,562 506,698 179,117
Other 843,035 1,761,696 2,302,939
Management fee 1,481,576 1,517,259 750,662
--------------- -------------- ---------------
35,735,519 36,070,532 19,518,486
--------------- -------------- ---------------
Net income (loss) - GAAP basis $ (2,805,544) $ (7,521,261) $ 2,227,687
=============== ============== ===============
Taxable income (loss) from operations $ (12,212,767) $ (9,525,065) $ (2,250,000) (4)
=============== ============== ===============
Cash generated by (used in) operations (2) $ 23,805,426 $ 18,993,036 $ 10,091,914
Cash generated from sales 2,403,934 13,964,820 32,931,008
Cash generated from refinancing - 2,563,149 -
Cash generated from other (2) 2,134,026 1,793,351 627,630
--------------- -------------- ---------------
28,343,386 37,314,356 43,650,552
Less cash distributions to investors:
From operating cash flow 12,347,756 12,345,603 9,260,508
From sales - - -
From refinancing - - -
From other - - -
--------------- -------------- ---------------
Total distributions 12,347,756 12,345,603 9,260,508
--------------- -------------- ---------------
Cash generated (deficiency) after cash distributions $ 15,995,630 $ 24,968,753 $ 34,390,044
=============== ============== ===============
Tax and distribution data per $1,000
limited partner investment:
Federal Income Tax Results:
Ordinary income (loss):
Operations $ (83.25) $ (64.93) $ (15.34)
Recapture
Capital gain (loss)
Cash distributions to investors on a GAAP basis:
- Investment income $ - $ - $ 16.42
- Return of capital 90.99 90.98 51.82
--------------- -------------- ---------------
$ 90.99 $ 90.98 $ 68.24
=============== ============== ===============
Sources (on a cash basis)
Sales
Refinancing
Operations $ 90.99 $ 90.98 $ 68.24
Other - - -
--------------- -------------- ---------------
Total $ 90.99 $ 90.98 $ 68.24
=============== ============== ===============
Amount invested in program equipment (cost, excluding
acquisition fees) $232,355,732 $ 210,621,824 $ 149,122,236
Amount invested in program equipment (book value) $149,100,763 $ 107,564,258 $ 66,249,626
Amount remaining invested in program equipment (Cost
of equipment owned at end of period as a percentage of
cost of all equipment purchased by the program) (3) 93.30% 85.71% 59.88%
A-9
Past performance is not necessarily indicative of future performance.
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
September 30, 2004
(Unaudited)
ATEL Capital Equipment Fund IX
Period Ended
December 31, September 30,
2001 2002 2003 2004
Months of operations 12 12 12 9
Gross revenue - lease and other $ 3,393,685 $ 6,966,142 $ 10,872,695 $ 8,711,634
- gain (loss) on sales of assets - 107,353 658,865 13,608
-------------- --------------- -------------- ---------------
3,393,685 7,073,495 11,531,560 8,725,242
Less Operating Expenses: (1)
Depreciation and amortization expense 2,078,895 5,178,087 8,289,708 7,026,031
Provision for losses and doubtful accounts - - 496,347 204,000
Interest expense 199,230 336,696 349,319 358,163
Administrative costs and reimbursements 374,507 343,120 627,320 506,757
Legal/Professional fees 39,384 99,730 106,167 186,945
Other 34,152 248,390 385,671 415,981
Management fee 83,341 264,322 686,013 438,535
-------------- --------------- -------------- ---------------
2,809,509 6,470,345 10,940,545 9,136,412
-------------- --------------- -------------- ---------------
Net income (loss) - GAAP basis $ 584,176 $ 603,150 $ 591,015 $ (411,170)
============== =============== ============== ===============
Taxable income (loss) from operations $ 107,619 $ (3,947,950) $ (4,526,988) $ (6,000,000) (4)
============== =============== ============== ===============
Cash generated by (used in) operations (2) $ 1,744,270 $ 5,521,904 $ 8,661,683 $ 7,449,496
Cash generated from sales - 749,408 5,370,886 50,598
Cash generated from refinancing - - - -
Cash generated from other (2) 673,907 1,178,949 1,436,942 445,520
-------------- --------------- -------------- ---------------
2,418,177 7,450,261 15,469,511 7,945,614
Less cash distributions to investors:
From operating cash flow 1,213,341 5,521,904 8,661,683 7,449,496
From sales - - - -
From refinancing - - - -
From other - 493,723 1,971,403 691,191
-------------- --------------- -------------- ---------------
Total distributions 1,213,341 6,015,627 10,633,086 8,140,687
-------------- --------------- -------------- ---------------
Cash generated (deficiency) after cash distributions $ 1,204,836 $ 1,434,634 $ 4,836,425 $ (195,073)
============== =============== ============== ===============
Tax and distribution data per $1,000
limited partner investment:
Federal Income Tax Results:
Ordinary income (loss):
Operations $ 4.59 $ (50.16) $ (34.79) $ (46.01)
Recapture
Capital gain (loss)
Cash distributions to investors on a GAAP basis:
- Investment income $ 22.42 $ 1.58 $ 0.00 $ 0.00
- Return of capital 33.57 81.05 88.35 67.49
-------------- --------------- -------------- ---------------
$ 55.99 $ 82.63 $ 88.35 $ 67.49
============== =============== ============== ===============
Sources (on a cash basis)
Sales
Refinancing - -
Operations $ 55.99 $ 75.85 71.97 61.76
Other - 6.78 16.38 5.73
-------------- --------------- -------------- ---------------
Total $ 55.99 $ 82.63 $ 88.35 $ 67.49
============== =============== ============== ===============
Amount invested in program equipment (cost, excluding
acquisition fees) $22,844,529 $ 49,667,555 $ 64,762,921 $ 79,465,548
Amount invested in program equipment (book value) $21,091,372 $ 46,798,202 $ 52,057,199 $ 57,735,563
Amount remaining invested in program equipment (Cost
of equipment owned at end of period as a percentage of
cost of all equipment purchased by the program) (3)25.99% 56.51% 93.20% 90.41%
A-10
Past performance is not necessarily indicative of future performance.
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
September 30, 2004
(Unaudited)
ATEL Capital Equipment Fund X
Period Ended
December 31, September 30,
2003 2004
Months of operations 12 9
Gross revenue - lease and other $ 896,923 $ 3,083,352
- gain (loss) on sales of assets 10,991 -
-------------- ---------------
907,914 3,083,352
Less Operating Expenses: (1)
Depreciation and amortization expense 863,703 2,534,122
Provision for losses and doubtful accounts - -
Interest expense 8,045 615
Administrative costs and reimbursements 48,235 222,833
Legal/Professional fees 33,563 79,949
Other 88,831 136,174
Management fee 48,550 131,935
-------------- ---------------
1,090,927 3,105,628
-------------- ---------------
Net income (loss) - GAAP basis $ (183,013) $ (22,276)
============== ===============
Taxable income (loss) from operations $ (831,185) $ (3,000,000) (4)
============== ===============
Cash generated by (used in) operations (2) $ 1,214,796 $ 2,151,405
Cash generated from sales 257,206 -
Cash generated from refinancing - -
Cash generated from other (2) 98,028 488,607
-------------- ---------------
1,570,030 2,640,012
Less cash distributions to investors:
From operating cash flow 937,496 2,151,405
From sales - -
From refinancing - -
From other - 1,550,224
-------------- ---------------
Total distributions 937,496 3,701,629
-------------- ---------------
Cash generated (deficiency) after cash distributions $ 632,534 $ (1,061,617)
============== ===============
Tax and distribution data per $1,000
limited partner investment:
Federal Income Tax Results:
Ordinary income (loss):
Operations $ (34.48) $ (39.77)
Recapture
Capital gain (loss)
Cash distributions to investors on a GAAP basis:
- Investment income $ - $ -
- Return of capital 42.04 53.05
-------------- ---------------
$ 42.04 $ 53.05
============== ===============
Sources (on a cash basis)
Sales $0.00 $0.00
Refinancing - -
Operations 42.04 30.83
Other 0.00 22.22
-------------- ---------------
Total $ 42.04 $ 53.05
============== ===============
Amount invested in program equipment (cost, excluding
acquisition fees) $ 14,602,123 $ 26,383,458
Amount invested in program equipment (book value) $ 14,726,680 $ 20,298,132
Amount remaining invested in program equipment (Cost
of equipment owned at end of period as a percentage of
cost of all equipment purchased by the program) (3) 98.38% 99.10%
A-11
Past performance is not necessarily indicative of future performance.
FOOTNOTES:
(1) Operating expenses include reimbursements to the General Partner/Managing
Member as follows:
ATEL Capital ATEL Capital ATEL Capital
Equipment Equipment Equipment
Fund VIII Fund IX Fund X
Year ended December 31, 1999 $ 767,386
2000 1,408,523
2001 924,375 $ 374,507
2002 832,539 343,120
2003 820,571 627,320 $ 48,235
2004 738,928 506,757 222,833
-------------------- -------------------- ---------------
$ 5,492,322 $ 1,851,704 $ 271,068
==================== ==================== ===============
(2) Cash generated by (used in) operations does not include the principal
portion of lease rentals received under direct financing leases or principal
payments received on notes receivable. In the Funds' statements of cash flows
(under generally accepted accounting principles), these amounts are included in
the investing activities section.
(3) The percentage is calculated as a fraction, the numerator of which is the
amount invested in program equipment (at cost) as of the end of the indicated
period and the denominator of which is the cumulative total of the cost of all
equipment acquired by the program through the end of the latest period shown.
(4) Estimated as of September 30, 2004.
A-12
Past performance is not necessarily indicative of future performance.
TABLE IV
RESULTS OF COMPLETED PROGRAMS
September 30, 2004
(Unaudited)
Program name:
ATEL Cash ATEL Cash ATEL Cash
Distribution Fund Distribution Fund II Distribution Fund III
Dollar amount of equity raised $ 10,000,000 $ 35,000,000 $ 73,855,840
Assets purchased $ 11,133,679 $ 52,270,536 $ 99,629,942
Date of Closing of Offering December 18, 1987 January 3, 1990 January 3, 1992
Date of first sale of property May 1, 1989 July 1, 1994 December 1, 1992
Date of final sale of property December 31, 1997 December 31, 1998 December 31, 2000
Tax and distribution data per
$1,000 limited partner investment
through December 31, 2000:
Federal Income Tax Results:
Ordinary income (loss):
Operations $ 192.40 $ 154.95 $ (12.08)
Recapture
Capital gain (loss)
Cash distributions to investors
on a GAAP basis:
- Investment income $ 244.89 $ 335.43 $ 379.10
- Return of capital 876.14 887.20 950.66
----------------------- ------------------------- ------------------------
1,121.03 1,222.63 1,329.76
Cash available for distribution, reinvested
for investors' accounts 89.05 48.75 -
----------------------- ------------------------- ------------------------
Total $ 1,210.08 $ 1,271.38 $ 1,329.76
======================= ========================= ========================
Sources (on a cash basis):
Sales $ 136.03 $ 159.92 $ 169.34
Refinancing
Operations 969.59 987.33 975.75
Other 104.46 124.13 184.67
----------------------- ------------------------- ------------------------
Total $ 1,210.08 $ 1,271.38 $ 1,329.76
======================= ========================= ========================
A-13
Past performance is not necessarily indicative of future performance.
TABLE V
SALES OR DISPOSALS OF EQUIPMENT
ATEL Capital Equipment Fund VIII and ATEL Capital Equipment Fund IX have
disposed of equipment in their portfolios as of September 30, 2004. As of that
date, disposals of equipment from ATEL Capital Equipment Fund X were not
significant. Set forth below is a summary of equipment sales and dispositions as
of such date. Sales were for consideration unless otherwise noted. Interim rent
(rent paid prior to formal commencement of a lease), hold-over rent (rent
received after termination of the initial lease term, but before formal
extension or disposition) and extension rent (rent paid after formal extension
of a lease) are included in the "Excess of Rents Over Expenses" column.
"Equipment Acquisition Price" includes acquisition fees. Dispositions are shown
on a per asset basis.
Excess of
Equipment Rents Over
Acquisition Acquisition Sale Expenses
Lessee Type of Equipment Date (1) Price (2) Sale Date Price (3) (4)
ATEL CAPITAL EQUIPMENT FUND VIII
Burlington Northern & Santa Fe Locomotives Nov-99 $ 587,500 Mar-03 $ 483,653 $ 221,406
Burlington Northern & Santa Fe Railroad Sep-99 to Nov-99 1,634,002 Nov-03 to Dec-03 154,700 1,346,436
Burlington Northern & Santa Fe Railroad Sep-99 107,737 Jan-04 to Mar-04 15,380 88,776
Celestica Corporation Manufacturing Dec-00 1,573,285 Jul-03 491,000 1,224,300
Celestica Corporation Manufacturing Dec-00 1,324,384 Feb-04 to Apr-04 121,500 1,489,474
CSX Transportation, Inc. Box Cars Sep-99 6,782,075 Jan-01 7,112,100 1,749,525
CVS Pharmacy, Inc. Office Automation Dec-99 106,156 Feb-02 23,850 103,907
CVS Pharmacy, Inc. Material Handling Feb-01 20,250 Jul-03 20,250 10,137
CVS Pharmacy, Inc. Computers Aug-00 to Feb-01 959,538 May-03 166,999 982,759
CVS Pharmacy, Inc. Telecommunications Dec-99 to Mar-01 1,870,903 Aug-04 386,602 1,978,865
CVS Pharmacy, Inc. Office Automation Jul-99 to Mar-00 150,925 Oct-01 23,700 64,466
CVS Pharmacy, Inc. Material Handling Jul-99 to Mar-01 4,471,590 Aug-04 1,424,785 4,499,736
CVS Pharmacy, Inc. Food Processing Mar-00 to Aug-00 68,680 Aug-04 15,736 68,700
DDB Needham Chicago Inc. Electronics Sep-98 43,589 Oct-02 13,462 40,829
DDB Needham Chicago Inc. Office Automation Sep-98 41,294 Feb-03 445 54,150
Equip.
Emery Worldwide Airlines Cargo Plane Jun-00 14,123,602 Apr-03 3,980,000 9,419,761
Firstunion-Archer Daniels Railroad Dec-99 20,151 Dec-03 20,725 8,419
Midland
GE Aircraft Engines Tilt Axis Table Mar-00 31,130 Apr-01 31,130 5,054
GE Aircraft Engines Material Handling Aug-00 128,976 Aug-04 to Sep-04 51,329 120,357
GE Aircraft Engines Manufacturing Jul-00 to Jan-01 1,085,135 Jun-03 904,522 470,714
GE Aircraft Engines Manufacturing Mar-99 to Aug-01 20,793,207 Aug-04 13,529,850 21,465,878
Great American Management Boxcars Oct-99 203,250 Apr-03 106,877 69,854
Services
Great American Management Pullman Box Car Oct-99 15,635 Nov-99 15,780 -
Services
Hallsmith-Sysco Food Services Trucks And Trailers Aug-99 64,906 Jul-03 46,141 64,906
Hallsmith-Sysco Food Services Trucks And Trailers Sep-00 70,914 Nov-03 54,033 35,342
IMC Phosphates Company Storage Facility Jun-00 6,712,090 Jun-04 6,800,000 1,035,726
Kansas City Southern Railway Railroad Dec-99 40,302 Jun-04 39,358 29,290
Kansas City Southern Railway Covered Hopper Dec-99 40,302 Jul-03 42,322 20,719
Railcars
Lafarge North America Material Handling Jul-00 to Jan-01 1,469,117 Mar-04 to Jul-04 428,000 1,198,221
National Steel Corporation Construction Nov-99 1,135,900 Jan-04 400,000 1,110,654
Overnite Transportation Trucks And Trailers Aug-00 135,378 Feb-03 95,920 78,648
Company
Overnite Transportation Trucks And Trailers Aug-99 to Sep-00 14,455,990 Aug-04 6,930,188 13,046,875
Company
Solectron Corporation Manufacturing Aug-99 1,467,047 Oct-03 to Nov-03 544,500 1,166,009
Solectron Corporation Manufacturing Nov-99 5,840,188 Mar-04 to Aug-04 2,143,800 4,791,410
Staples. Inc. Office Automation Dec-98 2,410,939 May to Aug-02 1,356,830 1,711,188
TASC, Inc. Office Automation Jun-99 5,412 Nov-01 1,082 4,276
TASC, Inc. Office Automation Sep-99 9,652 Mar-00 9,520 1,601
TASC, Inc. Electronics Jun-99 to Sep-99 80,982 Sep-02 to Dec-02 8,480 80,500
TASC, Inc. Computers Mar-99 to Sep-99 1,031,896 Sep-02 to Mar-03 50,747 1,034,637
A-14
Past performance is not necessarily indicative of future performance.
TASC, Inc. Office Automation May to Jun-99 41,977 Jul-02 8,622 43,797
The DDB Needham Worldwide Office Automation Sep-98 884,900 Jan to Jul-02 81,819 897,546
Companies
The DDB Needham Worldwide Office Automation Sep-98 780,130 Nov-01 157,667 795,275
Companies
The DDB Needham Worldwide Furniture & Fixtures Sep-98 5,754 Oct-03 863 5,816
Companies
Tracy Locke Partnership Furniture & Fixtures Sep-98 316,222 Nov-03 47,433 319,596
Transamerica Leasing Inc. Containers Dec-98 42,500 Nov-03 30,770 26,767
Transamerica Leasing Inc. Standard 20' Imo1 Dec-98 21,250 Nov-99 22,398 2,490
Tank Container
Union Pacific Railroad Company Covered Hopper Dec-99 503,776 Apr-03 634,135 239,147
Railcars
Union Pacific Railroad Company Gondola Cars Dec-99 367,935 Nov-02 to Jun-03 140,335 588,332
Union Pacific Railroad Company Railroad Dec-99 43,662 Dec-03 13,289 22,980
Union Pacific Railroad Company Covered Hopper Dec-99 261,964 Nov-02 301,980 106,590
Railcars
Universal City Development Point Of Sale Mar-99 668,474 Sep-04 23,000 726,283
Partners Equipment
Universal City Florida Partners Computers Jun-00 156,442 Oct-03 to Dec-03 15,114 165,353
Universal City Florida Partners Computers Jul-00 125,667 Apr-04 200 132,825
Universal City Florida Partners Computers May-99 to Mar-00 989,174 Nov-02 to Aug-03 52,937 1,231,602
Vanguard Car Rental USA Inc. Motor Vehicles Nov-00 to Dec-00 2,436,840 Jun-04 - 2,165,218
Watco Companies,Inc. Covered Hopper Dec-99 60,453 Apr-03 77,901 1,117
Railcars
Watco Companies,Inc. Covered Hopper Dec-99 60,453 Dec-03 60,296 3,750
Railcars
Watco Companies,Inc. Railroad Dec-99 40,302 Feb-04 39,571 4,050
Whirlpool Corporation Manufacturing Dec-98 72,763 Jan to Apr-02 17,752 56,523
Williams Distributed Power Electrical Dec-99 to Sep-00 374,152 Jun-03 293,145 288,612
Services Generation
Williams Distributed Power Electrical Sep-00 136,145 Feb-04 97,507 132,603
Services Generation
Xerox Corporation Material Handling Feb-99 52,880 Oct-03 2 62,435
Xerox Corporation Material Handling Dec-99 83,900 Mar-04 to May-04 14,200 70,767
Xerox Corporation Material Handling Dec-98 to Feb-99 276,815 Oct-02 to Jan-03 50,950 221,663
-------------- -------------- -------------
$ 99,918,539 $ 50,227,182 $ 79,204,642
============== ============== =============
ATEL CAPITAL EQUIPMENT FUND IX
GE Aircraft Engines Mazak Horizontal NC Dec-02 $ 997,875 Jun-03 $ 1,021,939 $ 84,857
Lathe
GE Aircraft Engines Manufacturing Apr-02 4,375,396 Dec-03 4,142,025 1,215,632
General Motors Corporation Material Handling Mar-02 23,467 Sep-04 10,000 20,507
Photuris, Inc. Office Automation Mar-01 1,000,000 Apr-04 - 188,792
Equip., Furniture
& Fixtures
Quick Study Radiology, Inc. Computers Mar-03 20,920 Sep-03 19,479 4,586
Silicon Access Networks, Inc. Computers and Jul-01 to Mar-02 749,388 Nov-03 to Dec-03 50,522 895,747
Research
Equipment
Sony Pictures Office Automation Jan-02 762,524 May-02 749,408 121,255
Entertainment, Inc.
Williams Distributed Power Electrical Feb-01 52,048 Feb-04 40,598 28,411
Services Generation
Williams Distributed Power Capstone Micro Feb-01 74,943 Jun-03 65,725 35,451
Services Turbine System
Zeevo, Inc. Computers and Aug-01 to Mar-02 370,429 Sep-03 to Dec-03 24,959 436,745
Research
Equipment
-------------- -------------- -------------
$ 8,426,990 $ 6,124,655 $ 3,031,983
============== ============== =============
TOTALS OF ALL FUNDS: $ 108,345,529 $ 56,351,838 $ 82,236,625
============== ============== =============
A-15
Past performance is not necessarily indicative of future performance.
TABLE V SALES OR DISPOSALS OF EQUIPMENT FOOTNOTES
(1) "Acquisition Date" is the date the Equipment was acquired by the prior
program.
(2) "Equipment Acquisition Price" is the actual cost of the item of Equipment,
including Acquisition Fees, and any other expenditures incurred by the prior
program in the acquisition of the Equipment.
(3) "Sale Price" is the actual cash received for the purchase, early termination
or casualty of the Equipment upon Lease termination, net of any direct
out-of-pocket closing costs incurred by the prior program as a result of such
termination.
(4) "Excess of Rents Over Expenses" is a total amount of Lease rents, less any
applicable direct out-of-pocket costs incurred by the prior program during the
term of the Lease for the particular Lease transaction.
A-16
Past performance is not necessarily indicative of future performance.
TABLE VI
ACQUISITION OF EQUIPMENT
BY PRIOR PROGRAMS
The following is a summary of Equipment acquisitions and Lessees by the three
most recent prior publicly-registered programs sponsored by ATEL Financial
Services, LLC and its affiliates. Information concerning the prior programs'
Equipment acquisition is current through September 30, 2004.
Lease
Commence Acquisition Percent Lease Type
Lessee Notes Equipment Type Date(s) (1) Cost (2) Leverage (3) Term (4) (5)
ATEL Capital Equipment Fund VIII
American Oncologic Hospital, Inc. MRI Scanner Jul-00 $ 1,871,181 60 OL
ANC Rental Corporation 23 Mini Buses Jan-01 1,860,020 36 FP
ANC Rental Corporation 23 City Buses Jan-01 1,506,459 60 FP
ANC Rental Corporation 23 City Buses Jan-01 1,168,509 60 FP
ANC Rental Corporation 23 Mini Buses Jan-01 576,820 36 FP
BJ's Wholesale Club, Inc. 6 Forklifts Apr-99 594,748 60 HP
Burlington Northern and Santa Locomotives Dec-99 11,750,000 19 OL
Fe Railroad Company
Burlington Northern and Santa Tri-Level Auto Racks Sep-99 1,741,739 40 OL
Fe Railroad Company
Celestica Corporation Chip Placers, Stencil Jan-01 2,955,623 33 OL
Printers
Consolidated Diesel Company Siemens Telephone Feb-99 406,030 55 HP
System
Consolidated Rail Corporation Railroad Gondolas and Jan-00 12,922,864 23.79% 36 OL
Ballast Cars
CSX Transportation, Inc. Rail Boxcars Sep-99 6,782,075 15 OL
CVS Corporation Material Handling Apr-00 1,977,438 60 HP / FP
Equipment
CVS Corporation Material Handling Apr-01 1,356,483 60 HP / FP
Equipment
CVS Corporation Material Handling Jan-01 1,274,563 60 HP / FP
Equipment
CVS Corporation Telecommunications Jan-00 to Apr-00 1,065,848 60 HP
Equipment
CVS Corporation Telecommunications Jul-00 to Oct-00 780,243 60 HP
Equipment
CVS Corporation Handheld Radio Units Apr-01 636,065 36 HP
CVS Corporation Handheld Inventory Oct-00 323,473 60 HP
Control Units
CVS Corporation Phone Equipment Apr-01 130,968 60 HP
CVS Corporation Telecommunications Oct-99 102,961 60 HP
Equipment
E.I.duPont de Nemours & Company Okuma Lathe Jul-00 324,805 72 FP
Emery Worldwide Airlines, Inc. MD Cargo Aircraft Nov-99 5,725,300 1 OL
Emery Worldwide Airlines, Inc. Used McDonnell Jul-00 14,123,602 54 OL
Douglas DC8-71F
Cargo Aircraft
Finnair OYJ 7 McDonnell Douglas Dec-99 15,448,037 26.54% 50 OL
Passenger Aircraft
General Electric Company 8 Lathes, Machining Oct-00 4,843,887 84 FP
Centers
General Electric Company 8 Turning Lathes Jul-00 2,747,940 84 FP
General Electric Company 8 Milling Machine Dec-99 to Feb-00 1,140,264 84 FP
General Electric Company 8 Grinding Machine Dec-99 to Mar-00 1,060,293 84 FP
General Electric Company 8 Turbolisk Dec-00 999,775 84 FP
General Electric Company 8 Vertical Machining Apr-00 788,675 84 FP
Centers
General Electric Company 8 Machining Center Feb-01 733,600 84 FP
General Electric Company 8 Vertical Machining Mar-01 709,545 84 OL
Center
General Electric Company 8 Grinding Machines Aug-00 660,444 84 FP
General Electric Company 8 Monarch Machining Sep-00 644,886 84 FP
Center
General Electric Company 8 Machine Tools Jun-01 643,106 84 FP
General Electric Company 8 VTX Machining Oct-99 to Dec-99 626,699 84 HP/FP
Centers
General Electric Company 8 Rebuilt Producto Dec-00 593,500 84 FP
Drilling Machine
General Electric Company 8 Rebuilt Omni-Mill Jun-01 563,939 84 FP
General Electric Company 8 Deckel Maho DMU May-99 546,500 84 OL
Machine
General Electric Company 8 Grinding Machine Jan-00 510,756 84 FP
General Electric Company 8 Fadal Machining Jun-00 483,900 84 FP
Centers
A-17
Past performance is not necessarily indicative of future performance.
General Electric Company 8 Rebuilt CNC Lathe Aug-00 476,458 84 OL
General Electric Company 8 CNC Grinding Machine Oct-00 363,400 84 FP
General Electric Company 8 LeBlond Lathe Jan-00 352,350 84 HP
General Electric Company 8 Machine Center Mar-99 352,000 84 OL
General Electric Company 8 Grit Blast System Jul-00 351,536 84 FP
General Electric Company 8 Grinding Machine Jun-00 330,222 84 FP
General Electric Company 8 Rebuilt Bullard VTL Feb-01 299,706 84 FP
General Electric Company 8 Radio Graphic Sep-99 219,377 84 FP
Inspection Facility
General Electric Company 8 Rebuilt Vacuum Mar-00 to Apr-00 213,820 84 FP
Blazing Machine
General Electric Company 8 Used Forging Machine Jan-00 177,410 84 FP
General Electric Company 8 Forklifts Aug-00 128,976 36 - 60 OL/FP
General Electric Company 8 VTX Machining Centers May-99 124,172 84 OL
General Electric Company 8 Data Visualization May-00 101,374 84 FP
System
General Electric Company 8 Laser Engraving System May-00 80,159 84 FP
General Electric Company 8 Air Flow Tester Nov-99 61,960 60 FP
General Electric Company 8 Power Trak Jan-00 39,975 60 OL
General Electric Company 8 Pinstamp Marking System May-00 39,115 84 FP
General Electric Company 8 Film Processor Oct-99 35,000 84 FP
General Electric Company 8 Equipment Add-On Aug-00 23,530 69 - 81 FP
General Electric Company 8 Add-on Equipment Oct-00 18,000 80 FP
General Electric Company 8 Radio Graphic Jan-00 6,500 80 FP
Inspection Facility
Upgrade
General Electric Company 8 Add-on Equipment Sep-01 7,660 60 FP
General Electric Company 9 Injection Molding Oct-00 1,305,371 36 OL
Machine
General Electric Company 9 Prism Extruders Nov-00 to Jul-01 668,252 60 FP
General Electric Company 9 Extruder Systems May-99 281,595 60 OL
Georgia Gulf Corporation Quad Hopper Cars Sep-99 1,416,678 58 OL
Great American Management Rail Boxcars Oct-99 3,627,223 30 OL
Services, Inc.
IMC-Agrico Company 10 Storage Facility Jun-00 6,712,090 78 OL
Ingersoll International, Inc. Vertical Machine Oct-00 540,794 84 FP
Centers
Ispat Inland Inc. Coil Carriers May-00 867,000 60 OL
Lafarge Gypsum, a division of 24 Forklifts Oct-00 766,805 36 OL
Lafarge Corporation
Lafarge Gypsum, a division of 24 Forklift Trucks Feb-01 702,312 36 OL
Lafarge Corporation
Lafarge Gypsum, a division of 24 Wheel Loader Jan-01 317,111 60 OL
Lafarge Corporation
Minteq International, Inc. Laser Profiling Nov-99 303,211 36 HP
System
National Gypsum Company CAT Loaders / Dozers Oct-00 1,147,259 36 OL
National Gypsum Company CAT Loader Jan-01 437,732 60 OL
National Steel Corporation CAT Loaders Jan-00 1,135,900 36 OL
NVR, INC. Home Manufacturing Aug-99 193,414 84 FP
Equipment
Omnicom Group, Inc. 11 Office Automation Oct-98 1,749,913 36 HP
Omnicom Group, Inc. 11 Office Furniture Oct-98 321,976 60 FP
Overnite Transportation Company Conventional Tractors Jan-00 7,061,889 48 OL
Overnite Transportation Company Conventional Tractors Jul-00 3,103,308 48 OL
Overnite Transportation Company Tractors and Trailers Oct-00 2,921,394 48 OL
Overnite Transportation Company Conventional Tractors Apr-99 2,080,400 48 OL
Overnite Transportation Company Trailers Jul-00 2,054,380 96 FP
Overnite Transportation Company Conventional Tractors Oct-99 1,104,976 48 OL
Seamex International Ltd. 12, 13 Anchor Handler Tug Dec-98 3,952,500 44 OL
Supply Vessel
Sebastiani Vineyards, Inc. Bottle Filler Jan-00 365,913 84 FP
Sematech, Inc. Manufacturing Equipment Apr-00 1,230,000 36 OL
Seven Hills Paperboard, LLC Neles Control Systems Jan-01 1,178,588 60 OL
Signature Flight Support Refueler Truck Jan-00 290,000 60 FP
Corporation
A-18
Past performance is not necessarily indicative of future performance.
Solectron Corporation Chip Placers Dec-99 15,366,268 48 OL
Solectron Corporation Chip Placers Sep-99 1,496,388 48 OL
Solectron Corporation Fuji QP Module Jun-00 92,228 45 OL
Southwest Airlines Company 14 Boeing 737 Aircraft Mar-99 3,238,500 50 OL
Staples, Inc. Point of Sale Equipment Jan-99 2,410,939 60 FP
Staples, Inc. Point of Sale Equipment Apr-99 681,910 60 FP
Staples, Inc. Point of Sale Equipment Sep-99 511,079 60 OL
Staples, Inc. Point of Sale Equipment May-99 204,571 60 FP
Staples, Inc. Forklifts May-99 101,480 48 OL
Staples, Inc. Material Handling Oct-99 68,030 48 OL
Equipment
Stewart & Stevenson Gas Compressors Jul-99 6,272,782 78 HP
Services, Inc.
Stewart & Stevenson Gas Compressors Oct-99 4,508,796 84 HP
Services, Inc.
Sysco Food Services Albany Tractors Sep-00 965,311 84 FP
Sysco Food Services Albany Refrigerated Trailers Jun-00 760,188 96 FP
Sysco Food Services Albany Refrigerated Trailers Sep-99 519,620 96 FP
Sysco Food Services Albany Refrigerated Trailers Feb-00 220,012 96 FP
TASC, Inc. Office Automation Oct-99 675,132 36 FP
TASC, Inc. Office Automation Jul-99 494,787 36 FP
Transamerica Leasing Inc. 15 Intermodal Containers Dec-98 21,250,000 120 FP
Union Pacific Railroad Company Covered Hopper Cars Feb-00 16,523,854 24 OL
Union Pacific Railroad Company Fixed-end Gondola Dec-99 5,021,142 72 OL
Railcars
Universal City Development Point of Sale Equipment Apr-99 668,474 60 FP
Partners
Universal City Florida Hotel Hotel Laundry Equipment Sep-99 3,882,463 84 FP
Venture
Universal City Florida Hotel Laundry Equipment Mar-01 174,207 66 FP
Venture
Universal City Florida Hotel Laundry Equipment Aug-02 293,570 67 FP
Venture
Universal City Florida Partners Office Automation Jul-99 487,909 36 HP
Equipment
Universal City Florida Partners Office Automation Jul-00 282,109 36 HP
Equipment
Universal City Florida Partners Office Automation Oct-99 248,838 36 HP
Equipment
Universal City Florida Partners Office Automation Apr-00 134,872 36 HP
Equipment
Universal City Florida Partners Office Automation Jan-00 117,555 36 HP
Equipment
Whirlpool Corporation Hydraulic Traveling Jan-99 72,763 60 OL
Gantry Crane
Williams Distributed Power 16 Micro Turbine Systems Oct-00 1,230,020 60 OL
Services, Inc.
Williams Distributed Power 16 Micro Turbine Systems Jan-00 1,056,690 60 OL
Services, Inc.
Williams Distributed Power 16 Micro Turbine Systems Apr-00 865,522 60 OL
Services, Inc.
Williams Distributed Power 16 Micro Turbine Systems Apr-01 215,895 60 OL
Services, Inc.
Xerox Corporation Material Handling Dec-98 to Mar-99 378,964 44 OL
Equipment
Xerox Corporation Material Handling Dec-99 108,572 44 OL
Equipment
Xerox Corporation Material Handling Sep-99 47,858 44 OL
Equipment
Xerox Corporation Material Handling Nov-99 47,232 44 OL
Equipment
------------------
ATEL Capital Equipment Fund VIII total: $ 249,040,775
==================
ATEL Capital Equipment Fund IX
Arbinet-Thexchange, Inc. Storage Array System Jul-03 $ 495,474 36 FP
ARYx Therapeutics Testing & Lab Equipment Mar-03 174,668 24 HP
Arsenal Digital Solutions Computer Hardware Jun-04 171,041.35 36 FP
Worldwide, Inc.
Arsenal Digital Solutions Office Furniture Aug-04 74,243.30 36 FP
Worldwide, Inc.
Arsenal Digital Solutions Computer Hardware & Jul-04 73,395.55 36 FP
Worldwide, Inc. Phone System
Arsenal Digital Solutions Computer Software Jan-04 44,137.50 24 FP
Worldwide, Inc.
ARYx Therapeutics, Inc. Computer Equipment Jul-04 115,278.75 24 FP
Ball Corporation Bulk Boxes & Pallets Aug-03 1,049,039 71 FP
Basin Electric Power Cooperative 17 Walking Drag Line Jul-00 6,786,284 72 OL
Basin Electric Power Cooperative 17 Walking Drag Line Jan-01 4,529,113 66 OL
Bayer Corporation Lab Equipment Jul-04 333,370.00 36 OL
Bayer Corporation Backhoe Aug-04 28,500.00 36 OL
Bayer Corporation Lab Equipment Oct-04 19,900.00 24 OL
Boingo Wireless, Inc. Computer Equipment Sep-04 102,517.97 30 FP
Cedar Point Communications, Inc. Computer Equipment Aug-04 185,617.58 36 FP
A-19
Past performance is not necessarily indicative of future performance.
Cedar Point Communications, Inc. Computer Equip & Sep-04 73,111.70 36 FP
Office Furniture
Colowyo Coal Company L.P. 1985 Walking Electric Apr-03 3,791,357 32 OL
Dragline
CVS Pharmacy, Inc. 18 Phone System Jan-02 326,231 60 FP
CVS Pharmacy, Inc. 18 Material Handling Jul-01 207,486 60 FP
CVS Pharmacy, Inc. 18 Printing / Graphic Arts Jan-02 196,345 60 OL
CVS Pharmacy, Inc. 18 Phone System Oct-01 72,808 60 FP
Dorado Network Systems Computer Equipment Jul-04 89,065.85 18 FP
Corporation
Dorado Network Systems Office Furniture Sep-04 87,430.01 18 FP
Corporation
Dorado Network Systems Computer Equipment Aug-04 48,083.66 18 FP
Corporation
Ford Motor Company Material Handling Mar-04 to Oct-04 4,331,885.32 36 - 60 FP, HP
Equipment
Ford Motor Company Material Handling Aug-03 2,878,521 30 - 58 OL/HP/FP
Equipment
Ford Motor Company Batteries and Fork Oct-03 120,901 34 - 60 OL/HP/FP
Lifts
GE Aircraft Engines Atmosphere Furnace Apr-04 27,812 84 FP
General Electric Company 8 Lathes Apr-02 2,240,326 84 OL
General Electric Company 8 Grinders and Sputtering Apr-02 2,033,697 84 OL
Machine
General Electric Company 8 Toshulin Powerturn Aug-02 1,705,500 84 OL
Machine
General Electric Company 8 Remfg Bullard Vt Lathe Dec-02 to Aug-03 1,127,926 84 FP
General Electric Company 8 CNC Grinding Machine May-02 960,432 84 OL
General Electric Company 8 Mazak Horizontal Nc Dec-02 746,775 84 FP
Lathe
General Electric Company 8 Rosler Vertical Spindle Sep-03 678,164 84 FP
General Electric Company 8 Blohm Cnc Grinding Aug-03 599,000 84 FP
Machine
General Electric Company 8 Grinder Mar-01 561,697 84 FP
General Electric Company 8 Remfg Sundstrand Mar-03 461,179 84 FP
Omnimill
General Electric Company 8 Sundstrand Omnimill Jul-02 461,179 84 OL
General Electric Company 8 Remfg Bullard Mill Sep-03 386,000 84 FP
Machine (90%)
General Electric Company 8 Tube Benders Feb-03 343,738 84 FP
General Electric Company 8 Projection Welder Oct-02 251,100 84 FP
General Electric Company 8 Argon Atomsphere Sep-03 250,308 84 FP
Furnaces
General Electric Company 8 Toshulin Powerturn Aug-02 189,500 84 FP
Cat 50
General Electric Company 8 Wire EDM Jul-02 172,392 84 OL
General Electric Company 8 Electrolytic Cutoff Nov-02 119,935 84 FP
Machine
General Electric Company 8 Newall Cnc Grinding Jan-03 106,715 84 FP
Machine
General Electric Company 8 Indel Small Sep-02 101,374 84 FP
Sputtering Machine
General Electric Company 8 Fryer Mb-15 Bed Oct-02 43,950 84 FP
Milling Machine
General Electric Company 9 Crane Feb-02 282,050 60 OL
General Electric Company 9 Molding Machine Dec-00 260,000 36 OL
General Electric Company 9 Molding Machine Apr-01 168,012 60 FP
General Electric Company 19 Drilling Machine Jul-02 234,000 60 FP
General Motors Corporation Material Handling Mar-02 2,910,436 26 - 70 FP
Graham Offshore, LLC 20 Crew and Supply Boats Jan-02 9,500,000 60 OL
Helijet International Inc. Helicopters Apr-04 2,680,000 60 OL
InSite One, Inc. Computer Equipment Aug-04 375,000 24 FP
Johnson Technology, Inc. 21 EDM Speed Drillers Apr-02 1,221,500 84 FP
Johnson Technology, Inc. 21 EDM Speed Drillers May-02 716,000 84 FP
Johnson Technology, Inc. 21 EDM Machines Sep-02 261,710 84 FP
Johnson Technology, Inc. 21 Material Handling Feb-02 14,700 84 FP
Johnson Technology, Inc. Edm Speed Driller Oct-02 358,000 84 FP
Lightship Holding, Inc. & Telecommunications, Jul-04 375,000.00 24 FP
Lightship Telecom, LLC Office Furniture
Mastec North America, Inc. Various Construction Jan-03 2,392,924 60 HP
Equipment
Mastec North America, Inc. Kubota Excavators Apr-03 238,320 36 OL
W/Bucket
A-20
Past performance is not necessarily indicative of future performance.
Mastec North America, Inc. 2001 Manitowoc 28-Ton Apr-03 125,000 36 OL
Boom Truck
Mead Westvaco Corporation Lumber Milling Jan-05 2,570,178.79 60 - 84 HP
Equipment
Memgen Corporation Computer, Software & Sep-03 350,000 24 FP
Lab Equip
National Gypsum Company CAT Equipment Jul-02 1,382,558 60 HP
National Gypsum Company Roll Crusher Jul-02 884,757 60 HP
National Gypsum Company CAT Equipment Jul-01 853,074 60 OL
National Gypsum Company Tractor Apr-01 662,273 60 OL
National Gypsum Company Wheel loader and Jan-02 383,208 48 - 60 OL
tractor
National Gypsum Company CAT Equipment Oct-01 207,266 60 OL
National Gypsum Company Dump trailer Sep-02 24,959 60 HP
National Gypsum Company CAT Equipment Aug-02 8,375 47 OL
New NGC, Inc. Caterpillar Wheel Jul-03 827,415 60 HP
Loader
New NGC, Inc. 2004 Freightliner Jul-03 229,438 60 - 72 FP
Tractors
New NGC, Inc. dba National Caterpillar Quarry Jul-04 417,280.00 60 OL
Gypsum Company Truck
New NGC, Inc. dba National Freightliner Tractor Aug-04 79,328.32 72 FP
Gypsum Company
New NGC, Inc. dba National Freightliner Tractor Sep-04 79,328.32 72 FP
Gypsum Company
Nortel Networks, Inc. Office Furniture Mar-01 1,065,692 83 FP
On24, Inc. Computer Equipment Sep-04 53,316.79 36 FP
Overnite Transportation Company Over-the-road Tractors Jul-04 3,081,360.00 60 OL
Peabody Holding Company Joy Mining Equipment Oct-02 5,083,396 60 FP
Peabody Holding Company, Inc. Joy Continuous Miner Oct-02 28,039 60 FP
& Haulers
Proficient Networks, Inc. 22 Computer Equipment Apr-03 to Aug-03 121,141 24 FP
Quick Study Radiology, Inc. Computer Related Apr-03 20,920 26 FO
Equipment
Rubicon Technology, Inc. Lapping & Polishing Sep-03 300,000 18 FP
Machine
Rubicon Technology, Inc. Surface Analyzer Dec-03 200,000 24 FP
Ryder Integrated Logistics, Inc. Material Handling Jun-04 146,874.00 36 OL
Equipment
Ryder Integrated Logistics, Inc. Material Handling Sep-04 99,280.00 36 HP
Equipment
SEACOR Marine Inc. 20 Supply boat Jan-02 1,700,000 60 OL
Seven Hills Paperboard, Llc Wheel Loader & Oct-03 136,355 36 HP
Forklifts
Silverpop Systems, Inc. Networking & Computer Sep-04 116,985.75 24 FP
Equipment
Sony Pictures Entertainment, Inc. Digital recorders Nov-01 762,524 36 FP
StarCite, Inc. Working Capital Loan Jul-04 175,000.00 24 FP
U.S. Telepacific Corp. Networking Equipment Oct-03 599,272 18 FP
U.S. Telepacific Corp. Titan System Materials Sep-03 345,944 18 FP
U.S. Telepacific Corp. Networking Equipment Oct-03 54,784 18 FP
and Office Furniture
Visteon Corporation Bulk Storage Silos Jan-04 20,512.50 60 HP
Whirlpool Corporation Material Handling Jan-04 to Oct-04 2,017,189.90 36 - 60 OL/HP/FP
Equipment
Williams Distributed Power 16 Micro Turbine Systems Apr-01 717,356 60 OL
Services, Inc
------------------
ATEL Capital Equipment Fund IX total: $87,892,538
==================
A-21
Past performance is not necessarily indicative of future performance.
ATEL Capital Equipment Fund X
Arbinet-thexchange Telecom Switch Aug-03 $ 654,526 36 FP
Arsenal Digital Solutions Software Licenses Jan-04 42,943 24 FP
Worldwide, Inc.
Arsenal Digital Solutions Computer Software Sep-04 44,138 24 FP
Worldwide, Inc.
Arsenal Digital Solutions Computer Hardware Jun-04 171,041 36 FP
Worldwide, Inc.
Arsenal Digital Solutions Computer Hardware and Jul-04 73,396 36 FP
Worldwide, Inc. Phone System
Arsenal Digital Solutions Office Furniture Aug-04 74,243 36 FP
Worldwide, Inc.
ARYx Therapeutics Testing equipment Apr-03 182,125 30 FP
ARYx Therapeutics Computer Equipment Jul-04 115,279 24 FP
Ball Corporation Bulk boxes, Pallets & Sep-03 2,793,225 59 FP
Tiers
Ball Corporation Bulk boxes, Pallets & Oct-03 631,118 60 FP
Tiers
Ball Corporation Bulk boxes, Pallets & Nov-03 408,800 60 FP
Tiers
Boingo Wireless, Inc. Computer Equipment Sep-04 102,518 30 FP
Cedar Point Communications, Inc. Computer Equipment Aug-04 185,618 36 FP
Cedar Point Communications, Inc. Computer Equipment and Sep-04 73,112 36 FP
Office Furniture
Colowyo Coal Company L.P. Walking Drag Line Apr-03 2,000,000 32 OL
Daimler Chrysler Corporation Materials Handling Oct-04 1,491,667 60 FP
Dorado Network Systems Office Furniture Jun-04 87,430 18 FP
Corporation
Dorado Network Systems Computer Equipment Jul-04 89,066 18 FP
Corporation
Dorado Network Systems Computer Equipment Aug-04 48,084 18 FP
Corporation
General Electric Company / Machine Tools Dec-03 6,088,818 62 - 75 OL, HP
GE Aircraft Engines
Helijet International, Inc. Helicopters Apr-04 2,680,000 60 OL
International Paper Company Dozer Apr-04 593,560 60 OL
International Paper Company Lift Trucks, Loader Jun-04 to Aug-04 267,750 36 - 60 HP
International Paper Company Loader, Carrier Jun-04 233,840 60 HP
Kaiser Foundation Hospitals Information Storage Oct-03 538,742 36 HP
Equipment
Kaiser Foundation Hospitals Information Storage Dec-03 110,814 34 HP
Equipment
Kaiser Foundation Hospitals Information Storage Jan-04 105,488 34 HP
Equipment
Kaiser Foundation Hospitals Information Storage Nov-03 291,390 36 HP
Equipment
Kaiser Foundation Hospitals Information Stroage Jun-04 33,288 29 HP
Upgrade
Lafarge North America, Inc. Forklifts Apr-04 836,266 36 OL
Lafarge North America, Inc. Forklifts Jul-04 1,091,782 36 OL
Lightship Holding, Inc. & Telecommuni- cations & Jul-04 375,000 24 FP
Lightship Telecom, LLC Office Furniture
New NGC, Inc. dba National Cat Tractor & Shovel Apr-04 1,371,097 42 - 66 OL
Gypsum Company
On24, Inc. Computer Equipment Sep-04 53,317 36 FP
Overnite Transportation Company Over-the-road Tractors Apr-04 848,881 60 OL
Overnite Transportation Company Over-the-road Tractors May-04 1,543,420 60 OL
Silverpop Systems, Inc. Networking & Computer Sep-04 116,985.75 24 FP
Equipment
Starcite, Inc. Working Capital Loan Jul-04 175,000 24 NR
------------------
ATEL Capital Equipment Fund X total: $ 26,623,768
==================
TOTAL OF ALL FUNDS: $363,557,081
==================
A-22
Past performance is not necessarily indicative of future performance.
TABLE VI ACQUISITION OF EQUIPMENT FOOTNOTES
(1) In many cases, a Lease transaction is funded over a period of time according
to the Lessee's requirements. Therefore "Commencement Date(s)" expressed as a
range represents multiple commencement dates occurring or anticipated under the
same Lease line.
(2) "Acquisition Cost" includes either amounts committed to Lessees for funding
by the program, or the actual Equipment acquisition cost, less any Acquisition
Fees. All figures are rounded.
(3) "Percent Leverage" represents the percent ratio of the original principal
amount of the debt acquired or assumed by the program, to the Acquisition Cost
of the Equipment. The Equipment may be "leveraged" (where a portion of the
Equipment Acquisition Cost is financed using non-recourse debt financing) at the
time of, or subsequent to, the acquisition of the Equipment by the program.
Therefore, actual leverage ratios may be more or less than indicated due to the
timing of the acquisition of the Equipment in relation to the amortization of
the principal amounts of the debt.
(4) "Lease Term" is expressed in terms of months, although the actual Lease Term
may be expressed as monthly, quarterly, semiannual or annual.
(5) A designation of "FP" indicates that the aggregate rents to be received
during the Term equal or exceed the Acquisition Price of the Equipment. A
designation of "HP" indicates that the aggregate rents to be received during the
Term equal or exceed 90% of the Acquisition Price of the Equipment. A
designation of "OL" indicates that the aggregate rents to be received during the
Term are less than 90% of the Acquisition Price of the Equipment. A designation
of "NR" indicates that the transaction is a note receivable.
(6) A division of Waban, Inc.
(7) Aircraft is based out of the Republic of Finland.
(8) Lessee is General Electric Company, by its division GE Aircraft Engines.
(9) Lessee is General Electric Company, by its division GE Plastics.
(10) Asset is held in a trust. A 20% beneficial interest in the trust is held by
Fund 7, with the remaining 80% beneficial interest in the trust held by Fund 8.
(11) Guaranteed by Omnicom Group, Inc. Actual lessees are various subsidiaries
of Omnicom Group Inc.: The DDB Needham Worldwide Communications Group Inc.;
Griffin Bacal Inc.; DDB Needham Chicago, Inc.; DDB Needham Dallas, Inc.; PGC
Advertising, Inc.; The Focus Agency, LP.; Elgin DDB Inc.; Group Management
Services and TLP, Inc.
(12) Asset is held by a special purpose entity. Acquisition cost represents 51%
of the total cost. The remaining 49% is owned by an unaffiliated program but
continues to be managed by an affiliate.
(13) Guaranteed 40% by Seacor Smit, Inc. and 60% by Transportacion Maritima
Mexicana.
(14) Asset is held in a trust. A majority beneficial interest in the trust is
held by the program, with the remaining beneficial interest in the trust held by
an unaffiliated program managed by an affiliate.
(15) Assets are on short-term sub-leases with various sub-lessees.
(16) Guaranteed by Williams Companies, Inc.
(17) Asset held in a trust with Bank of New York as Trustee. Two distinct
beneficial interests in the trust estate, representing an aggregate 42.5%
interest of the total trust estate, purchased in two separate transactions. The
remaining 57.5% of the trust estate is owned by an unaffiliated institutional
investor. Trustee may only act upon unanimous instructions of all beneficial
owners in the trust estate.
(18) Guaranteed by CVS Corporation.
(19) Lessee is acting through its division, GE Engine Services, Inc.
(20) Guaranteed by SEACOR Smit Inc. Graham Offshore LLC changed from Graham
Offshore, Inc on December 31, 2003. Seacor Marine LLC changed from Seacor
Marine, Inc. on December 31, 2003.
(21) Guaranteed by General Electric Company acting through its division GE
Aircraft Engines operating division.
(22) Merged with and now named Infiniroute Networks as of April 2004.
(23) Lessee filed for protection under Chapter 11 of the U.S. Bankruptcy Act.
All original lease payments were made. The lease was assumed by Vanguard Car
Rental on November 11, 2003.
(24) Name changed to LaFarge North America, Inc.
A-23
Past performance is not necessarily indicative of future performance.
[THIS PAGE INTENTIONALLY LEFT BLANK]
EXHIBIT B
ATEL CAPITAL EQUIPMENT FUND XI, LLC
AMENDED AND RESTATED
LIMITED LIABILITY COMPANY
OPERATING AGREEMENT
APRIL 11, 2005
ATEL CAPITAL EQUIPMENT FUND XI, LLC
AMENDED AND RESTATED
LIMITED LIABILITY COMPANY
OPERATING AGREEMENT
TABLE OF CONTENTS
Page
1. NAME AND PRINCIPAL PLACE OF BUSINESS..................................B-1
2. DEFINITIONS...........................................................B-1
3. BUSINESS AND PURPOSE..................................................B-6
4. TERM..................................................................B-6
5. MANAGER...............................................................B-6
6. INITIAL AND ADDITIONAL MEMBERS........................................B-6
Section 6.1 Initial Member.........................................B-6
Section 6.2 Additional Members.....................................B-6
Section 6.3 Conditions to Admission................................B-6
Section 6.4 Admission as a Member..................................B-6
Section 6.5 Limitation on Additional Issuance......................B-6
Section 6.6 Escrow.................................................B-6
Section 6.7 Capital Account........................................B-7
7. LIABILITY AND STATUS OF MEMBERS.......................................B-7
8. COMPENSATION TO THE MANAGER AND/OR AFFILIATES.........................B-7
Section 8.1 General Limitation.....................................B-7
Section 8.2 Asset Management Fee...................................B-7
Section 8.3 Asset Management Fee Limit ............................B-7
Section 8.4 Other Services.........................................B-8
Section 8.5 Payment of Fees on Removal.............................B-8
Section 8.6 Employment of Broker-Dealers...........................B-8
9. FUND EXPENSES AND RESERVES............................................B-8
Section 9.1 Reimbursement of Manager...............................B-8
Section 9.2 Limitation on Reimbursement............................B-8
Section 9.3 Fund Expenses..........................................B-9
Section 9.4 Reserves...............................................B-9
10. ALLOCATION OF INCOME, LOSS AND
DISTRIBUTIONS.......................................................B-9
Section 10.1 Allocation of Net Income and Net
Loss Prior to Initial Closing Date..................B-9
Section 10.2 Allocation of Net Income and Net
Loss After Initial Closing Date.....................B-9
Section 10.3 Special Allocations.................................B-10
Section 10.4 Distribution of Cash From Operations................B-11
Section 10.5 Distribution of Cash From Sales or Refinancing......B-11
Section 10.6 Distributions of Cash From Reserve Account..........B-11
Section 10.7 Determination of Amounts to be Distributed..........B-11
Section 10.8 Consent to Allocations..............................B-12
Section 10.9 Limitation on Distributions.........................B-12
Section 10.10 Allocation to Manager...............................B-12
Section 10.11 Return of Unused Capital............................B-12
Section 10.12 Distributions in Kind...............................B-12
Section 10.13 Withholding Taxes...................................B-12
B-ii
11. ASSIGNMENT OF FUND INTERESTS.........................................B-13
Section 11.1 Limitations on Transfer..............................B-13
Section 11.2 Distributions and Effective Date of Transfer.........B-13
Section 11.3 Governmental Restrictions............................B-14
Section 11.4 Non-Complying Transfers..............................B-14
Section 11.5 Misrepresentations and Forfeit.......................B-14
12. SUBSTITUTED MEMBERS..................................................B-14
Section 12.1 Limitations on Substitution..........................B-14
Section 12.2 Consent to Admission.................................B-14
Section 12.3 Amendment of Agreement...............................B-15
13. REPURCHASE OF FUND INTERESTS.........................................B-15
14. BOOKS, RECORDS, ACCOUNTINGS AND REPORTS..............................B-15
Section 14.1 Books of Account and Records.........................B-15
Section 14.2 Audited Annual Financial Statements..................B-16
Section 14.3 Other Annual Reporting...............................B-16
Section 14.4 Quarterly Reports....................................B-17
Section 14.5 Unaudited Quarterly Financial Statements.............B-17
Section 14.6 Other Quarterly Reports..............................B-17
Section 14.7 Tax Returns..........................................B-17
Section 14.8 Governmental Reports.................................B-17
Section 14.9 Maintenance of Suitability Records...................B-17
15. RIGHTS, AUTHORITY, POWERS AND RESPONSIBILITIES
OF THE MANAGER.................................................B-17
Section 15.1 Services of the Manager..............................B-17
Section 15.2 Authority of the Manager.............................B-18
Section 15.3 General Powers and Fiduciary Duty....................B-20
Section 15.4 Limitations on Manager's Authority...................B-20
Section 15.5 Limitation on Manager's Liability....................B-23
Section 15.6 Tax Matters Member...................................B-23
Section 15.7 Minimum Investment in Equipment/Maximum Front-End
Fees.................................................B-23
Section 15.8 Reliance on Manager's Authority......................B-24
16. RIGHTS, POWERS AND VOTING RIGHTS OF THE MEMBERS......................B-24
Section 16.1 Limitation on Member Authority.......................B-24
Section 16.2 Voting Rights........................................B-24
Section 16.3 Voting Procedures....................................B-24
Section 16.4 Limitations on Member Rights.........................B-25
Section 16.5 Limitations on Power to Amend Agreement..............B-26
Section 16.6 Member List..........................................B-26
Section 16.7 Dissenters' Rights and Limitations on Mergers and
Roll-ups.............................................B-26
17. TERMINATION OF A MANAGER AND TRANSFER OF THE
MANAGER'S INTEREST.................................................B-27
Section 17.1 Removal or Withdrawal................................B-27
Section 17.2 Other Terminating Events.............................B-27
Section 17.3 Election of Successor Manager; Continuation of
Fund Business........................................B-27
Section 17.4 Admission of Successor or Additional Manager.........B-27
Section 17.5 Effect of a Terminating Event........................B-28
Section 17.6 Election of Additional Manager.......................B-28
Section 17.7 Assignment of Manager's Interest.....................B-28
Section 17.8 Members' Participation in Manager's Bankruptcy.......B-28
18. CERTAIN TRANSACTIONS.................................................B-29
B-iii
19. TERMINATION AND DISSOLUTION OF THE FUND..............................B-29
Section 19.1 Termination and Dissolution..........................B-29
Section 19.2 Accounting and Liquidation...........................B-29
20. SPECIAL POWER OF ATTORNEY............................................B-30
Section 20.1 Execution of Power of Attorney.......................B-30
Section 20.2 Special Power of Attorney............................B-30
21. INDEMNIFICATION......................................................B-30
Section 21.1 Indemnification of the Manager.......................B-30
Section 21.2 Limitations on Indemnification.......................B-31
Section 21.3 Insurance............................................B-31
22. MISCELLANEOUS........................................................B-31
Section 22.1 Counterparts.........................................B-31
Section 22.2 Successors and Assigns...............................B-31
Section 22.3 Severability.........................................B-31
Section 22.4 Notices..............................................B-31
Section 22.5 Captions.............................................B-31
Section 22.6 Number and Pronouns..................................B-31
Section 22.7 Manager Address......................................B-32
Section 22.8 Member Address.......................................B-32
Section 22.9 Construction.........................................B-32
Section 22.10 Qualification to Do Business.........................B-33
EXHIBIT I...................................................................B-34
B-iv
AMENDED AND RESTATED
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
OF ATEL CAPITAL EQUIPMENT FUND XI, LLC
THE LIMITED LIABILITY COMPANY OPERATING AGREEMENT (the "Agreement") entered into
as of the 14th day of October, 2004, by and between ATEL Financial Services, LLC
("ATEL"), a California limited liability company, as the Managing Member (the
"Manager"), and ATEL Capital Group as the initial Member, whereby the parties
together agreed to form a limited liability company pursuant to the California
Limited Liability Company Act is hereby amended and restated in its entirety as
of April 11, 2005, on the terms set forth herein.
1. NAME AND PRINCIPAL PLACE OF BUSINESS
The name of the Fund shall be ATEL CAPITAL EQUIPMENT FUND XI, LLC or
such other name as the Manager shall hereafter designate in writing to the
Members. The Fund's principal place of business shall be 600 California Street,
6th Floor, San Francisco, California 94108, or such other place or places in the
State of California as the Manager may hereafter determine.
2. DEFINITIONS
The following terms used in this Agreement shall (unless otherwise
expressly provided herein or unless the context otherwise requires) have the
following respective meanings:
"Acquisition Expenses" shall mean expenses including, but not limited
to, legal fees and expenses, travel and communication expenses, costs of
appraisals, accounting fees and expenses, and miscellaneous expenses relating to
selection and acquisition of Equipment, whether or not acquired.
"Acquisition Fees" shall mean the total of all fees and commissions
paid by any party in connection with the initial purchase or manufacture of
Equipment. Included in the computation of such fees or commissions shall be any
commission, selection fee, financing fee, nonrecurring management fee, or any
fee of a similar nature, however designated.
"Adjusted Capital Account Deficit" shall mean, with respect to any
Member, the deficit balance if any, in such Member's Capital Account as of the
end of the Fund taxable year, after giving effect to the following adjustments:
(a) Crediting to such Capital Account any amounts which such Member is obligated
to restore or is deemed to be obligated to restore pursuant to Regulations
Sections 1.704-2(g)(1) and 1.704-2(i)(5); and (b) Debiting from such Capital
Account the items described in Regulations Section 1.704-1(b)(2)(ii)(d)(4),(5)
and (6). This definition is intended to comply with the provisions of Section
1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently
therewith.
"Affiliate" of a Person shall mean (i) any Person directly or
indirectly controlling, controlled by or under common control with such Person;
(ii) any Person owning or controlling 10% or more of the outstanding voting
securities or beneficial interests of such Person, (iii) any officer, director,
trustee or partner of such Person and (iv) if such Person is an officer,
director, trustee, partner or holder of 10% or more of the voting securities or
beneficial interests of such Person, any other company for which such Person
acts in such capacity. However, such term shall not include a Person who is a
partner in a partnership or joint venture with the Fund if such Person is not
otherwise an Affiliate.
"Asset Management Fee" shall mean the fee payable to the Manager and
its Affiliates under the provisions of Section 8.2 of this Agreement.
"Asset Management Fee Limit" means the limit on the Asset Management
Fee calculated pursuant to Section 8.3 of this Agreement.
B-1
"Assignee" shall mean a Person who has acquired a beneficial interest
in one or more Units from a third party but who is neither a substituted Holder
nor an Assignee of Record.
"Assignee of Record" shall mean an Assignee who has acquired a
beneficial interest in one or more Units whose ownership has been recorded on
the books of the Fund and which ownership is the subject of a written instrument
of assignment, the effective date of which assignment has passed.
"ATEL" shall mean ATEL Financial Services, LLC, a California limited
liability company.
"California Act" or "California Limited Liability Company Act" shall
mean the Beverly-Killea Limited Liability Company Act, Title 2.5, Chapters 1-15,
of the California Corporations Code, as it may be amended from time to time.
"Capital Account" shall mean, with respect to any Member, such Member's
Capital Account determined in accordance with Section 6.7.
"Carried Interest" shall mean the allocable share of Fund Distributions
of Cash from Operations and Cash from Sales or Refinancing payable to the
Manager, as Manager, pursuant to Sections 10.4 and 10.5 of this Agreement, for
which cash consideration has neither been paid nor is to be paid.
"Cash from Operations" shall mean the excess of Gross Lease Revenues
over cash disbursements (including the Asset Management Fee, debt service and
amounts reinvested by the Fund in Equipment in compliance with Section 15.4.18)
without reduction for depreciation and amortization of intangibles such as
organization and underwriting costs but after a reasonable allowance for cash
for repairs, replacements, contingencies and anticipated obligations, as
determined by the Manager. Cash from Operations shall not include Cash from
Sales or Refinancing or Cash from Reserve Account.
"Cash from Reserve Account" shall mean that portion of the Net Proceeds
not utilized in the acquisition of Equipment, including cash maintained
according to the provisions of Section 9.4.
"Cash from Sales or Refinancing" shall mean the net cash realized by
the Fund from the sale, refinancing or other disposition of any Equipment
(including insurance proceeds or lessee indemnity payments arising from the loss
or destruction of any Equipment through casualty) after payment of all expenses
and liabilities related to the transaction; provided, however that Cash from
Sales or Refinancing shall not include Cash from Reserve Account or Cash from
Operations.
"Closing Date" shall mean such date designated by the Manager for the
termination of the offering of Units, but not later than April 11, 2007.
Extension of the offering beyond one year from the date of the Prospectus shall
be subject to the qualification of the offering for any such extension in those
jurisdictions which may limit the offering period to one year. "Initial Closing
Date" shall mean the date on which subscribers for Units, other than the initial
Holders, are first admitted to the Fund as Holders. "Final Closing Date" shall
mean the last date on which subscribers for Units are admitted to the Fund as
Holders.
"Code" shall mean the Internal Revenue Code of 1986, as amended, or
corresponding provisions of subsequent federal revenue laws.
"Distributions" shall mean any cash, tax credits or other property
allocated to or distributed to Holders and the Manager arising from their
respective interests in the Fund, but shall not include any compensation payable
to the Manager under the provisions of Article 8 or Article 9, except as
otherwise provided herein.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
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"Equipment" shall mean the equipment acquired and owned by the Fund to
be leased by the Fund to others as well as any Fund interest in equipment,
including without limitation its rights, whether direct or indirect, in all
trusts, joint ventures, leases, chattel paper, options and other contract rights
with respect to equipment.
"Equipment Management" shall mean personnel and services necessary to
the leasing activities of the program, including but not limited to leasing and
releasing of program equipment, arranging for necessary maintenance and repair
of the equipment, collecting revenues, paying operating expenses, determining
that the equipment is used in accordance with all operative contractual
arrangements and providing clerical and bookkeeping services necessary to the
operation of the program equipment.
"Front-End Fees" shall mean fees and expenses paid by any party for
any services rendered during the Fund's organization and acquisition phase
including Organization and Offering Expenses, Leasing Fees, Acquisition Fees,
Acquisition Expenses, and any other similar fees, however designated.
Notwithstanding the foregoing, Front-End Fees shall not include any Acquisition
Fees or Acquisition Expenses paid by a manufacturer of Equipment to any of its
employees unless such Persons are Affiliates of the Manager.
"Fund" shall mean the limited liability company created under this
Agreement.
"Fund Minimum Gain" shall have the meaning ascribed to the term
"partnership minimum gain" in Regulations Section 1.704-2(d)(1).
"Gross Income" shall mean the gross income of the Fund within the
meaning of section 61(a) of the Code.
"Gross Proceeds" shall mean the aggregate total of the Original
Invested Capital of the initial and all of the additional Holders.
"Gross Lease Revenues" shall mean all revenues attributable to the
Equipment other than from security deposits paid by lessees thereof. The term
"Gross Lease Revenues" shall not include revenues from the sale, refinancing or
other disposition of Equipment.
"High Payout Lease" shall mean a lease under which the noncancellable
rental payments and other payment obligations of the lessee due through the
initial term of the lease are equal to at least 90% of the original purchase
price paid by the Fund for the Equipment.
"Holders" shall mean owners of Units who are either Members or
Assignees of Record, and reference to a "Holder" shall be to any one of them.
The Manager shall not be considered to be a Holder except to the extent it also
owns Units.
"Independent Expert" shall mean a person with no current material or
prior business or personal relationship with the Manager or any of its
Affiliates who is engaged to a substantial extent in the business of rendering
opinions regarding the value of assets of the type held by the Fund, and who is
qualified to perform such work.
"IRA" shall mean an individual retirement account qualifying under
Section 408 of the Code.
"Investment in Equipment" shall mean the amount of Gross Proceeds
actually paid or allocated to the purchase of Equipment acquired by the Fund,
any amount of Gross Proceeds reserved pursuant to Section 9.4 hereof up to a
maximum of 3% of Gross Proceeds and other cash payments such as interest and
taxes, but excluding Front-End Fees.
"Leasing Fees" shall mean the total of all fees and commissions paid by
any party in connection with the initial lease of equipment acquired by the
Fund.
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"Manager" or "Managing Member" shall mean ATEL Financial Services, LLC
("ATEL"), a California limited liability company, or any other Person or Persons
which succeed it in such capacity.
"Members" shall mean the Manager, the initial Members and any other
Persons who are admitted to the Fund as additional or substituted Members.
Reference to a "Member" shall refer to any one of them.
"Member Nonrecourse Debt" has the meaning ascribed to the term "partner
nonrecourse debt" in Regulations Section 1.704-2(b)(4).
"Member Nonrecourse Debt Minimum Gain" shall have the meaning ascribed
to the term "partner nonrecourse debt minimum gain" in Regulations Sections
1.704-2(i)(2).
"Net Income" or "Net Loss" shall mean the taxable income or taxable
loss of the Fund (including the Fund's share of income or loss of any
partnership, venture or other entity which owns a particular item of Equipment),
as determined for federal income tax purposes, computed by taking into account
each item of Fund income, gain, loss, deduction or credit not already included
in the computation of taxable income and taxable loss.
"Net Proceeds" shall mean the total Gross Proceeds less Organization
and Offering Expenses.
"Nonrecourse Deductions" shall mean items of Fund loss, deductions or
Code Section 705(a)(2)(B) expenditures which are attributable to Nonrecourse
Liabilities.
"Nonrecourse Liability" means a Fund liability with respect to which no
Member or Related Person bears the economic risk of loss.
"Operating Agreement" or "Agreement" shall mean this Amended and
Restated Limited Liability Company Operating Agreement of ATEL CAPITAL EQUIPMENT
FUND XI, LLC, as it may be amended from time to time.
"Operating Revenues" means the total for any period of all Gross Lease
Revenues plus all Cash from Sales or Refinancing.
"Organization and Offering Expenses" shall mean those expenses incurred
in connection with preparing the Fund for registration and subsequently offering
and distributing Units to the public, including selling commissions and all
advertising expenses except advertising expenses related to the leasing of
Equipment.
"Original Invested Capital" shall mean the original gross purchase
price of the Units contributed by each Member to the capital of the Fund for his
interest in the Fund, which amount shall be attributed to Units in the hands of
a subsequent Holder.
"Person" shall mean any natural person, partnership, corporation,
association or other legal entity.
"Prospectus" shall mean the final prospectus filed in connection with
the registration of the Units with the Securities and Exchange Commission on
Form S-1, as amended, together with any supplement thereto which may be
subsequently filed with such Commission.
"Purchase Price of Equipment" shall mean the price paid upon the
purchase or sale of a particular item of equipment, including the amount of
Acquisition Fees and all liens and mortgages on the equipment, but excluding
points and prepaid interest.
"Qualified Plan" shall mean employee trusts (or employer individual
retirement accounts), Keogh Plans and corporate retirement plans qualifying
under Section 401(a) of the Code.
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"Regulations" shall mean the income tax regulations promulgated under
the Code, as such regulations may be amended from time to time (including
corresponding provisions of succeeding regulations).
"Reimbursable Administrative Expenses" shall mean the ordinary and
annually recurring administration expenses incurred by the Manager and
reimbursed by the Fund. Such expenses shall not include interest, depreciation,
equipment maintenance or repair, third party services or other
non-administrative expenses.
"Reinvestment Period" shall mean the period commencing with the Initial
Closing Date and ending on a date six calendar years after the Final Closing
Date occurs.
"Related Person" means a Person having a relationship with a Member
that is described in Regulations Section 1.752-4(b).
"Resident Alien" shall mean a resident alien as defined within the
Federal Aviation Act of 1958, as amended from time to time, or any successor
statute, or any regulations adopted pursuant to such Act or any successor
statute.
"Roll-Up" shall mean a transaction involving the acquisition, merger,
conversion or consolidation, either directly or indirectly, of the Fund and the
issuance of securities of a Roll-Up Entity. Such term does not include:
(a) any transaction if the securities of the Fund have been for at
least twelve months traded through the National Association of Securities
Dealers, Inc. Automated Quotation National Market System; or
(b) a transaction involving the conversion to corporate, trust or
association form of only the Fund, if, as a consequence of the transaction,
there will be no significant adverse change in any of the following:
(i) the Members voting rights;
(ii) the term of existence of the Fund;
(iii) the terms of compensation of the Manager
and its Affiliates; or
(iv) the Fund's investment objectives.
"Roll-Up Entity" means the partnership, trust, corporation or other
entity that would be created or would survive after the successful completion of
a proposed Roll-Up transaction.
"Service" shall mean the United States Internal Revenue Service or its
successor.
"Sponsor" shall mean any Person directly or indirectly instrumental in
organizing, wholly or in part, a Program or any Person who will manage or
participate in the management of a Program, and any Affiliate of any such
Person. Sponsor does not include the Program itself or a Person whose only
relation with the Program is that of an independent equipment manager and whose
only compensation is as such. Sponsor does not include wholly independent third
parties such as attorneys, accountants and underwriters whose only compensation
is for professional services rendered in connection with the offering of Program
interests.
"Substantially All of the Assets" shall mean, unless the context
otherwise dictates, Equipment representing 66 2/3% or more of the net book value
of all Equipment as of the end of the most recently completed fiscal quarter.
"Unit" shall mean the interest in the Fund representing Original
Invested Capital in the amount of $10 and shall entitle the Holder thereof to
the rights herein provided.
"United States Citizen" shall mean a "citizen of the United States" as
defined within the Federal Aviation Act of 1958, as amended from time to time,
or any successor statute, or any regulations adopted pursuant to such Act or any
successor statue.
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3. BUSINESS AND PURPOSE
The primary purpose of the Fund is to purchase, own, lease and sell
various types of Equipment pursuant to such arrangements as the Manager in its
discretion may enter into on behalf of the Fund. The Fund may enter into
ventures, partnerships and other business arrangements with respect to Equipment
to the extent deemed prudent by the Manager in order to achieve successful
operations for the Fund, subject to the provisions of Section 15.4.8. The Fund
may also engage in such other lawful activities as may be deemed by the Manager
to be incident to its primary purpose or prudent and in the Fund's best
interest. The Fund's investment objectives shall be those set forth in the
Prospectus, and the Manager may not make any material change to such investment
objectives without first obtaining the written consent or approval of Members
owning more than 50% of the total outstanding Units entitled to vote.
4. TERM
The Fund commenced as of the 25th day of June, 2004 and shall continue
until the 31st day of December, 2025, unless previously terminated in accordance
with the provisions of this Agreement.
5. MANAGER
The Manager has contributed $100 in cash to the Fund and at all times
during the existence of the Fund the Manager shall have a present and continuing
interest in Net Income, Net Losses and Distributions according to the provisions
of Article 10.
6. INITIAL AND ADDITIONAL MEMBERS
6.1 Initial Member. ATEL Capital Group, as the initial Member, has
contributed the sum of $500 to the capital of the Fund and has received 50 Units
in return therefor.
6.2 Additional Members. The Fund intends to sell and issue to Holders
not less than 120,000 nor more than 15,000,000 additional Units and to admit as
additional Members the Persons who contribute cash to the capital of the Fund
for such Units.
6.3 Conditions to Admission. Subject to the provisions of Section 6.6,
each Person who acquires any such additional Units shall become a Member in the
Fund at such time as he has: (i) purchased 500 or more Units, (ii) contributed
the sum of $10 in cash for each Unit purchased (or such lesser net amount as may
be provided in accordance with the terms described in the Prospectus under "Plan
of Distribution"), (iii) executed and filed with the Fund a written instrument
which sets forth an intention to become a Member and requests admission to the
Fund in that capacity, together with such other instruments as the Manager may
deem necessary or desirable to effect such admission, including the written
acceptance and adoption by such Person of the provisions of this Agreement, and
the execution, acknowledgment and delivery to the Manager of a special power of
attorney, the form, style and content of which are more fully described herein,
and (iv) the Manager accepts such Person as a Member in the Fund.
6.4 Admission as a Member. Each Person who subscribes for Units under
Section 6.2 shall be admitted to the Fund promptly after the Manager's
acceptance of such subscription, but, except as provided in Section 6.6, in no
event later than 30 days after the receipt by the Fund of such subscription.
6.5 Limitation on Additional Issuance. The Fund shall not issue any
additional Units after the Final Closing Date.
6.6 Escrow. All Original Invested Capital of Holders shall be received
by the Fund in trust, and shall be deposited in an escrow account with a banking
institution designated by the Manager as escrow holder for the Original Invested
Capital, until such time as subscriptions for a total of 120,000 Units, in
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addition to the Unit purchased by the initial Holder, representing Original
Invested Capital of $1,200,000 have been deposited therein. Not less than 15
days after receipt of a minimum of $1,200,000 of such additional Original
Invested Capital, the Fund will admit subscribers into the Fund as additional
Holders. At the time a subscriber is admitted as a Holder, the escrow holder
shall transfer the subscriber's Original Invested Capital to the Fund. If the
$1,200,000 minimum is not obtained on or before a date one year from the date of
the Prospectus, all Original Invested Capital will be promptly refunded to the
investors. In any event, any interest earned on Original Invested Capital while
in escrow shall be paid to investors.
6.7 Capital Account. An individual Capital Account shall be maintained
for each Member. The Capital Account of a Member shall consist of the Original
Invested Capital of such Member, increased by (i) any additional contributions
to capital and (ii) such Member's share of Fund Net Income, and decreased by (i)
Distributions to such Member and (ii) such Member's share of Fund Net Loss. In
the event a Member transfers all or a portion of his Units, the Assignee shall
succeed to the Capital Account of the transferor (as adjusted for all events
preceding the date the transferee is deemed admitted to the Fund under Section
10.3.1) according to the number of Units, and the allocable portion of the
transferor's Capital Account, so transferred. No Holder shall have the
obligation to restore any deficit in his Capital Account upon termination or
dissolution of the Fund. The foregoing provisions of this Section 6.7 are
intended to comply with Regulation Section 1.704-1(b), and shall be interpreted
and applied in a manner consistent with such Regulations.
7. LIABILITY AND STATUS OF MEMBERS
Holders shall not be bound by, or be personally liable for, the
expenses, liabilities or obligations of the Fund, except to the extent, but only
to the extent, a Holder would be required to return any Distribution from the
Fund pursuant to Section 17254(e) of the California Act.
8. COMPENSATION TO THE MANAGER AND/OR AFFILIATES
8.1 General Limitation. The Manager and its Affiliates shall receive
compensation only as specified by this Agreement. In addition to the
compensation provided herein, the Manager will hold the Carried Interest and be
entitled to receive Distributions as provided in Article 10, and receive
reimbursement of costs and expenses advanced as provided in Article 9. The
Manager may delegate to its Affiliates all or a portion of its management duties
hereunder, and may assign all or a portion of its compensation hereunder to one
or more such Affiliates or other parties in its discretion.
8.2 Asset Management Fee. The Fund will pay the Manager an Asset
Management Fee in an amount equal to 4% of Operating Revenues as compensation
for the Manager's services in supervising management of the Fund's portfolio of
Equipment and its operations. The Asset Management Fee will be paid on a monthly
basis. The amount of the Asset Management Fee payable in any year will be
reduced for that year to the extent it would otherwise exceed the Asset
Management Fee Limit.
8.3 Asset Management Fee Limit. The Asset Management Fee Limit will be
calculated each year during the Fund's term by calculating the maximum amount of
fees that would be payable to the Manager for the year in question under Article
IV, Sections C through G of the North American Securities Administrators
Association, Inc. Statement of Policy on Equipment Programs in effect as of the
initial effective date of the Fund's public offering of its Units (the "NASAA
Guidelines"). To the extent that the total amount paid to the Manager for the
year as the Asset Management Fee and the Carried Interest would cause the total
compensation to exceed the aggregate amount of fees that would have been payable
as calculated under the NASAA Guidelines for that year, the Asset Management Fee
and/or Carried Interest for that year will be reduced to equal the maximum
aggregate fees under the NASAA Guidelines. The limitations set forth in this
Section 8.3 will be subject to adjustment pursuant to the limitations imposed
under Section 15.7 relating to the Minimum Investment in Equipment. Under
Section 15.7, a separate calculation will be performed upon completion of the
offering of Units, final commitment of Net Proceeds to acquisition of Equipment
B-7
and establishment of final levels of permanent portfolio debt encumbering such
Equipment, and then annually thereafter. To the extent required under the
provisions of Section 15.7, the maximum amount of fees payable under the NASAA
Guidelines will be adjusted as provided therein.
8.4 Other Services. Except as set forth in this Article 8 and Article 9
hereof, no other services may be performed by the Manager or its Affiliates for
the Fund except in extraordinary circumstances (which shall be defined as an
emergency situation requiring immediate action by the Manager or its Affiliate
and the service is not immediately available from an unaffiliated party). Any
such other services must meet the following criteria: (i) the compensation,
price or fee therefor must be comparable and competitive with the compensation,
price or fee of any other Person who is rendering comparable services or selling
or leasing comparable goods which could reasonably be made available to the Fund
and shall be on competitive terms, (ii) the fees and other terms of the contract
shall be fully disclosed to Holders, (iii) the Manager or its Affiliates must be
previously engaged in the business of rendering such services or selling or
leasing such goods, independently of the Fund and as an ordinary and ongoing
business and at least 75% of such Person's gross revenues from such activity
must be derived from other than Affiliates of the Manager, and (iv) all services
for which the Manager or its Affiliates are to receive compensation shall be
embodied in a written contract which precisely describes the services to be
rendered and all compensation to be paid, which contract may only be modified by
a vote of the majority of the Holders. Said contract shall contain a clause
allowing termination without penalty on 60 days notice.
8.5 Payment of Fees on Removal. Should the Manager be removed from the
Fund according to provisions of Article 17, any portion of any fee payable to
the Manager according to the provisions of this Article 8 which is then accrued
and due, but not yet paid, shall be paid by the Fund to the Manager in cash
within 30 days of the date of expulsion as stated in the written notice of
expulsion.
8.6 Employment of Broker-Dealers. The Fund may employ underwriters and
selected broker-dealers, including Affiliates of the Manager as set forth in the
Prospectus, for the sale of Units.
9. FUND EXPENSES AND RESERVES
9.1 Reimbursement of Manager. Except as set forth in this Article 9,
all of the Fund's expenses shall be billed directly to and paid by the Fund. The
Manager and its Affiliates may be reimbursed for the following Fund expenses:
(i) Organization and Offering Expenses not in excess of 15% of Gross Proceeds up
to $25,000,000 plus 14% of all Gross Proceeds in excess of $25,000,000 (or an
amount equal to 12% of the Gross Proceeds if, upon termination of the offering
of Units, the total Gross Proceeds are in an amount less than $2,000,000); (ii)
the actual cost of goods and materials used for and by the Fund and obtained
from entities unaffiliated with the Manager; and (iii) administrative services
necessary to the prudent operation of the Fund, provided that such reimbursement
for administrative services will be at the lower of (A) the actual cost of such
services, or (B) the amount which the Fund would be required to pay independent
parties for comparable administrative services in the same geographic location;
provided further that, beginning with the first full calendar year after the
termination of the offering of Units, the total amount of Reimbursable
Administrative Expenses payable by the Fund for the remainder of its term may
not exceed a cumulative limit. This cumulative limit on such Reimbursable
Administrative Expenses will equal, as of any date, a maximum of 1% per annum of
the total Gross Proceeds from the first day of the first full calendar year
following the termination of the offering of Units.
9.2 Limitation on Reimbursement. The Manager and its Affiliates will
not be reimbursed by the Fund for the following expenses:
9.2.1 Services for which the Manager or its Affiliates are
entitled to compensation in the form of a separate fee pursuant to Article 8
hereof;
9.2.2 Rent or depreciation, utilities or capital equipment and
other administrative items of the Sponsor;
9.2.3 Salaries, fringe benefits, travel expenses or
administrative items incurred by or allocated to any Controlling Person of the
Manager or its Affiliates. For purposes of this subparagraph, "Controlling
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Person" shall mean any person, regardless of title, who performs executive or
senior management functions for the Manager or its Affiliates similar to those
of executive management or senior management, and directors, or those holding 5%
or more equity interest in the Manager or its Affiliates; or persons having the
power to direct or cause the direction of the Manager or Affiliates through
ownership of voting securities, by contract or otherwise. It is not intended
that every person who carries a title such as vice president, senior vice
president, secretary, controller or treasurer be considered a Controlling
Person;
9.2.4 Organization and Offering Expenses of the Fund to the
extent such Organization and Offering Expenses exceed 15% of the Gross Proceeds
up to $25,000,000 plus 14% of all Gross Proceeds in excess of $25,000,000 (or an
amount equal to 12% of the Gross Proceeds if, upon termination of the offering
of Units, the total Gross Proceeds are in an amount less than $2,000,000), and
the Manager guarantees payment of any such excess expenses, which guarantee is
without recourse to, or reimbursement by, the Fund; and
9.2.5 All other expenses which are unrelated to the business
of the Fund.
9.3 Fund Expenses. Subject to Sections 9.1 and 9.2, the Fund shall pay
all expenses of the Fund which may include, but are not limited to: (i) all
costs of personnel employed by the Fund and involved in the business of the Fund
(which may include personnel who are employed by a Manager or one or more
Affiliates), (ii) all taxes and assessments on Equipment and other taxes
applicable to the Fund, (iii) legal, appraisal, audit, accounting, brokerage and
other fees, (iv) printing, engraving and other expenses and taxes incurred in
connection with the issuance, distribution, transfer, registration and recording
of documents evidencing ownership of an interest in the Fund or in connection
with the business of the Fund, (v) Front End Fees, subject to the limitation set
forth in Section 15.7 requiring a minimum Investment in Equipment, and other
fees and expenses paid to independent contractors, brokers and servicers,
leasing agents, consultants, equipment lease brokers, insurance brokers and
other agents, (vi) expenses in connection with the ownership and operation of
the Equipment, (vii) the cost of insurance as required in connection with the
business of the Fund, (viii) expenses of organizing, revising, amending,
converting, modifying or terminating the Fund, (ix) the cost of preparation and
dissemination of the informational material and documentation relating to
potential sale or other disposition of Equipment, (x) costs incurred in
connection with any litigation in which the Fund is involved, as well as the
examination, investigation or other proceedings conducted by any regulatory
agency, including legal and accounting fees incurred in connection therewith,
(xi) costs of any computer equipment or services used for or by the Fund, (xii)
costs of any accounting, or statistical bookkeeping equipment necessary for the
maintenance of the books and records of the Fund, and (xiii) the costs of
supervision and expenses of professionals employed by the Fund in connection
with any of the foregoing, including attorneys, accountants and appraisers.
9.4 Reserves. The Fund shall initially establish a cash reserve for
general working capital purposes in an amount equal to at least one-half of 1%
of the Gross Proceeds. Upon the disposition of each item of Equipment, any cash
reserve which was specifically allocated to that Equipment need not be
maintained thereafter, but may be applied as reserves for other Equipment. Any
cash reserve used as aforesaid need not be restored and if restored, may be
restored out of Gross Lease Revenues.
10. ALLOCATION OF INCOME, LOSS AND DISTRIBUTIONS
10.1 Allocation of Net Income and Net Loss Prior to Initial Closing
Date. From the commencement of the Fund until the Initial Closing Date Net
Income and Net Loss shall be allocated 99% to the Manager and 1% to the initial
Holders.
10.2 Allocation of Net Income and Net Loss After Initial Closing Date.
10.2.1 Commencing with the Initial Closing Date, Net Income
and Net Loss shall be allocated 92.5% to the Holders and 7.5% to the Manager.
10.2.2 Notwithstanding Section 10.2.1 of this Agreement, items
of Net Loss arising out of the Fund's payment of expenditures classified as
syndication expenses pursuant to Regulations section 1.709-2(b) with respect to
each Unit shall be specially allocated to the Holder who acquires such Unit.
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10.3 Special Allocations
10.3.1 Except as provided in section 10.3.2, Net Income, Net
Loss and Distributions allocable to the Holders shall be determined on a
quarterly basis and shall be allocated among the Holders in the ratio in which
the number of Units held by each of them bears to the total number of Units held
by all Holders as of the last day of the fiscal quarter with respect to which
such Net Income, Net Loss and Distributions are attributable; provided, however,
that, with respect to Net Income, Net Loss and Distributions attributable to the
offering period of the Units (including the full quarter in which the offering
terminates), such Net Income, Net Loss and Distributions shall be apportioned
among the Holders in the ratio in which (i) the number of Units held by each
Holder multiplied by the number of days during such period that such Holder was
the owner of such Units bears to (ii) the amount obtained by totaling the number
of Units outstanding on each day during such period. No Net Income, Net Loss or
Distributions with respect to any quarter shall be allocated to Units
repurchased by the Fund during such quarter, and such Units shall not be deemed
to have been outstanding during such quarter for purposes of the foregoing
allocations.
10.3.2 Notwithstanding anything in this Agreement to the
contrary, the following items of Fund income and loss shall be specially
allocated to the Members in the manner described below:
(i) Gain characterized as recapture income under Sections 1245
or 1250 of the Code shall be allocated to those Members who
claimed the deductions giving rise to such recapture income.
(ii) Except as provided in Section 10.3.2(iii) and 10.3.2(iv),
in the event any Member unexpectedly receives any adjustments,
allocations or distributions described in Sections
1.704-1(b)(2)(ii)(d)(4), (5) or (6) of the Regulations or any
other event creates an Adjusted Capital Account Deficit for
such Member, items of Fund gross income and gain (consisting
of a pro rata portion of each item of the Fund's income,
including gross income, and gain for such year) shall be
allocated to such Member in an amount and manner sufficient to
eliminate, to the extent required by Regulations, the Adjusted
Capital Account Deficit created by such adjustments,
allocations or distributions as quickly as possible. This
Section 10.3.2(ii) is intended to comply with the qualified
income offset requirement in Section 1.704-1(b)(2)(ii)(d) of
the Regulations and shall be interpreted consistently
therewith.
(iii) If there is a net decrease in Member Nonrecourse Debt
Minimum Gain, each Member with a share of the Member
Nonrecourse Debt Minimum Gain (as determined in accordance
with Regulations Section 1.704-2(i)(5)) shall be specially
allocated items of Fund income and gain for such year (and, if
necessary, subsequent years) in proportion to, and to the
extent of, an amount equal to the portion of such Member's
share of the net decrease in Member Nonrecourse Debt Minimum
Gain during such year. The items to be so allocated shall be
determined in accordance with Regulations Section
1.704-2(i)(4). This Section 10.3.2(iii) is intended to comply
with the minimum gain chargeback requirement in Section
1.704-2(i)(4) of the Regulations and shall be interpreted
consistently therewith.
(iv) If there is a net decrease in Fund Minimum Gain during
any Fund taxable year, each Member shall be specially
allocated items of Fund income and gain for such year (and, if
necessary, subsequent years) in proportion to, and to the
extent of, an amount equal to the portion of such Member's
share of the net decrease in Fund Minimum Gain during such
year (within the meaning of Section 1.704-2(g)(2) of the
Regulations). The items to be so allocated shall be determined
in accordance with Section 1.704-2(f) of the Regulations. This
Section 10.3.2(iv) is intended to comply with the minimum gain
chargeback requirement contained in Section 1.704-2(f) of the
Regulations and shall be interpreted consistently therewith.
(v) After giving effect to the allocations set forth in
Sections 10.3.2(ii), (iii) and (iv), in the event any Member
receives any actual or deemed distribution (i.e., under
section 752 of the Code) during a taxable year which exceeds
the adjusted tax basis of such Member's Units at the end of
such taxable year (determined immediately before giving effect
to such distribution), such Member shall be allocated an
amount of gross income or gain equal to such excess.
(vi) In the event any fee to which the Manager or an Affiliate
thereof is entitled is treated as a Fund distribution by the
Service, a special allocation of Fund gross income shall be
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made annually to the Manager or an Affiliate thereof in an
amount equal to any such recharacterized fee for that taxable
year.
(vii) The Manager will specifically allocate items of gain
from the sale or other disposition of items of Equipment for
any year in which the sale or disposition of any item of
Equipment occurs (and, if necessary, subsequent years) to any
Holder in such amounts and in such manner so as to equalize
the Capital Account balances of the Holders; provided,
however, that such allocations are reasonably consistent with,
and reasonably supportable under, the Code.
(viii) Net Loss shall not be allocated to any Holder if such
allocation would cause or increase an Adjusted Capital Account
Deficit for such Holder at the end of any Fund taxable year,
and any such Net Loss shall instead be allocated to the
Manager. This limitation shall be applied on a Holder by
Holder basis so as to allocate the maximum permissible Net
Loss to each Holder under Section 1.704-1(b)(2)(ii)(d) of the
Regulations.
(ix) To the extent an adjustment is made to the adjusted tax
basis of any Fund asset pursuant to Code Section 734(b) or
Code Section 743(b), the Members' Capital Accounts shall be
adjusted as provided in Regulations Section
1.704-1(b)(2)(iv)(m).
(x) Except as otherwise provided herein, Nonrecourse
Deductions shall be allocated 92.5% to the Holders and 7.5% to
the Manager.
(xi) Any deduction attributable to Member Nonrecourse Debt
shall be allocated to the Members that bear the economic risk
of loss for the Member Nonrecourse Debt.
10.4 Distribution of Cash From Operations. Cash from Operations shall
be distributed 92.5% to the Holders and 7.5% to the Manager.
10.5 Distribution of Cash From Sales or Refinancing. Cash from Sales
or Refinancing shall be distributed 92.5% to the Holders and 7.5% to the
Manager.
Notwithstanding anything to the contrary herein, however, no cash
Distribution shall be made to a Holder to the extent that, after giving effect
to all allocations under sections 10.1, 10.2 and 10.3 which would accompany such
Distribution (including allocations of gross income and gain under section
10.3.2(iv)), such Distribution would exceed the tax basis of the Holder to whom
such Distribution is otherwise payable.
10.6 Distributions of Cash from Reserve Account. Distributions of Cash
from Reserve Account, if any, shall be distributed in the same manner as Cash
from Sales or Refinancing.
10.7 Determination of Amounts to be Distributed. The Manager shall have
sole discretion in determining the amount of any Distributions. Subject to
provisions of Section 15.4.18 of this Agreement, the Manager may use any funds
of the Fund not distributed to Holders to purchase additional Equipment during
the Reinvestment Period or otherwise as permitted by this Agreement; provided,
however, that the Manager will not reinvest in Equipment, but will distribute,
subject to payment of any obligations of the Fund, such available Cash from
Operations and Cash from Sales or Refinancing as may be necessary to cause total
Distributions to Holders to equal the following amounts for the specified
periods:
10.7.1 Through the first full fiscal quarter ending at least
six months after termination of the offering of Units, an amount equal to the
lesser of
(a) a rate of return on their original capital contribution equal
to 2.5% over the average yield on five-year United States Treasury Bonds for the
fiscal quarter immediately preceding the date of distribution, as published in a
national financial newspaper from time to time (with a minimum of 8% per annum
and a maximum of 10% per annum), or
(b) 90% of the total amount of cash available for distributions; and
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10.7.2 For each quarter during the balance of the Reinvestment
Period, an amount equal to 8% per annum on their original capital contribution.
10.7.3 Such amounts with respect to each year which are
sufficient to allow a Holder in a 31% federal income tax bracket (but not a
higher bracket) to pay the federal income taxes and state income taxes due with
respect to Net Income derived by him from the Fund for such year.
10.8 Consent to Allocations. The methods hereinabove set forth by which
Distributions and allocations of Net Income and Net Loss are made and
apportioned are hereby expressly consented to by each Member as an express
condition to becoming a Member.
10.9 Limitation on Distributions. All Distributions are subject to the
payment of Fund expenses and to maintenance and repair of Equipment.
10.10 Allocation to Manager. To the extent that the Fund shall be
entitled to any deduction for federal income tax purposes as a result of any
interest in Net Income or Net Loss granted to a Manager, such deduction shall be
allocated for federal income tax purposes to such Manager.
10.11 Return of Unused Capital. In the event that any portion of the
Net Proceeds received by the Fund during the first twelve months after the date
of the Prospectus is not invested or committed for investment within eighteen
months of the date of the Prospectus, or in the event any portion of the Net
Proceeds received by the Fund thereafter is not invested or committed for
investment within six months from the Final Closing Date (except for any amounts
used to pay Fund operating expenses, including amounts set aside for reserves as
set forth in Section 9.4), such portion of the Net Proceeds shall be distributed
to the Holders pro rata by the Fund as a return of capital. In addition, the
Manager shall contribute to the Fund, and the Fund shall distribute pro rata to
the Holders, the amount by which (x) the amount of unused capital distributed
pursuant to the foregoing sentence, divided by (y) the percentage of the Gross
Proceeds which remain after payment of all Front End Fees, exceeds the unused
capital so distributed. For the purposes of this Section 10.11, funds will be
deemed to have been committed to investment and will not be returned to the
Holders to the extent written agreements in principle or letters of
understanding were executed at any time prior to the end of said period,
regardless of whether any such investment is actually consummated, and to the
extent any funds have been reserved to make contingent payments in connection
with any Equipment, regardless of whether any such payment is actually made.
10.12 Distributions in Kind. Distributions in kind shall not be
permitted except upon dissolution and liquidation, and then only to a
liquidating trust which has been established for the purpose of the liquidation
of the assets of the Fund, and the distribution of cash in accordance with the
terms of the Agreement.
10.13 Withholding Taxes.
10.13.1 In the event the Fund pays to any federal, state or
local government authority any amount of tax, penalty, interest, fee or other
expenditure which is attributable to the particular status of one or more
Holders including, without limitation, the status of a Holder as a nonresident
of California or any other state imposing such a charge, the Manager shall treat
such tax, penalty, interest or fee, and in its discretion may treat other
related Fund expenditures, as a distribution of Cash from Operations or Cash
from Sales or Refinancing as appropriate, to such Holders. Such a distribution
shall reduce the amount of Cash from Operations or Cash from Sales or
Refinancing otherwise payable by the Fund to such Holders. Such Holders shall be
distributed any refund of any such tax, penalty, interest or other amounts
received by the Fund; provided, however, that the distribution due such Holders
shall be reduced by any Fund expenses (and such expenses shall be specially
allocated to such Holders) incurred in connection with the payment or obtaining
of the refund of such taxes, penalties, interest or other amounts and the Fund
shall have no duty or obligation to seek to obtain or collect any such refund or
expend any amount to reduce the amount of any withholding, penalty, interest or
other amount otherwise payable to any government authority. The Manager may
require from a Holder the appropriate documentation with respect to any
distribution hereunder.
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10.13.2 As security for any withholding tax or other amount
referred to in section 10.14.1 or other liability or obligation to which the
Fund may be subject as a result of any act or status of any Holder, the Fund
shall have (and each Holder hereby grants to the Fund) a security interest in
all Cash from Operations or Cash from Sales or Refinancing distributable to such
Holder to the extent of the amount of such withholding tax or other liability or
obligation. The Fund shall have a right of set-off against any such
distributions of Cash from Operations or Cash from Sales or Refinancing in the
amount of such withholding tax or other liability or obligation.
11. ASSIGNMENT OF FUND INTERESTS
11.1 Limitations on Transfer. A Holder may not transfer all or part of
his legal and equitable interest in his Units except in compliance with the
provisions of this Agreement. The Fund may charge a reasonable transfer fee for
processing requests for transfer of Units, and may condition any proposed
transfer on receipt by the Fund of such representations and warranties of the
transferor and the assignee, opinions of counsel for the Fund and other
assurances as it may deem necessary and appropriate to ensure that:
11.1.1 such assignments or transfers do not result, in the
opinion of counsel for the Fund, in the Fund being considered to have terminated
within the meaning of Section 708 of the Code;
11.1.2 the assignee is not a minor or an incompetent;
11.1.3 the transfer or assignment does not violate federal or
state securities laws;
11.1.4 the transferor or the assignee does not hold Units
representing Original Invested Capital of less than $5,000;
11.1.5 such assignee is a Citizen of the United States;
11.1.6 such assignment or transfer does not cause the assets
of the Fund to be deemed "plan assets" for ERISA
purposes;
11.1.7 such assignment or transfer does not constitute a
transfer "on a secondary market (or the substantial equivalent thereof)" within
the meaning of Section 7704 of the Code or otherwise adversely affecting the tax
status of the Fund; and
11.1.8 the transferor files with the Fund a duly executed and
acknowledged counterpart of the instrument effecting such assignment or
transfer, which instrument evidences the written acceptance by the assignee or
transferee of all of the terms and provisions of this Agreement, contains a
representation that such assignment or transfer was made in accordance with all
applicable laws and regulations (including any investor suitability
requirements) and in all other respects being satisfactory in form and substance
to the Manager.
11.2 Distributions and Effective Date of Transfer. An Assignee of
Record shall be entitled to receive Distributions from the Fund attributable to
the Units acquired by reason of such assignment from and after the effective
date of the assignment of such Units; provided, however, that notwithstanding
anything herein to the contrary, the Fund and the Manager shall be entitled to
treat the assignor of such Units as the absolute owner thereof in all respects,
and shall incur no liability for allocations of Net Income, Net Loss or
Distributions, or transmittal of reports and notices required to be given to
Holders hereunder, which are made in good faith to such assignor until such time
as the written instrument of assignment has been received by the Fund and
recorded on its books and the effective date of the assignment has passed. The
effective date of such assignment on which the Assignee shall be deemed an
Assignee of Record shall be the last day of the first full calendar month
following the later of (i) the date set forth on the written instrument of
assignment or (ii) the date on which the Fund has actual notice of the
assignment of Units and has received complete documentation of the assignment.
Notwithstanding anything to the contrary contained herein, no Distributions
shall be made in any calendar quarter with respect to Units repurchased by the
Fund during such calendar quarter.
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11.3 Governmental Restrictions. No assignment, sale, transfer, exchange
or other disposition of Units may be made except in compliance with the then
applicable rules of any other applicable governmental authority. All Units
originally issued pursuant to qualification under the California Corporate
Securities Law of 1968 shall be subject to, and all documents of assignment and
transfer evidencing such securities shall bear, the following legend condition:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
No transfer of any such Unit shall be made unless the transferor shall have
obtained, if necessary, the written consent of the California Commissioner of
Corporations to such transfer.
11.4 Non-Complying Transfers. Any assignment, sale, exchange or other
transfer in contravention of any of the provisions of this Article 11 shall be
void and shall not bind or be recognized by the Fund.
11.5 Misrepresentation and Forfeit. Subject to the discretion of the
Manager, in the event a Holder who originally obtained Units in the Fund's
offering misrepresented that he was a Citizen of the United States, or that it
was not an IRA or Qualified Plan or purchasing on behalf of an IRA or Qualified
Plan, such person fails to remain a Citizen of the United States, or a
subsequent transferee of Units is not or fails to remain a Citizen of the United
States, such Person may, in the Manager's discretion if it deems that the Fund
will fail certain citizenship requirements with respect to its Equipment, be
required to forfeit such Units to the Fund and no longer be entitled to cash
Distributions or allocations of the Fund, receipt of Fund reports and voting
privileges, although he may realize proceeds upon the transfer of his Units to a
Citizen of the United States, which subsequent transferee would be entitled to
the full economic benefits and other privileges attributable to such Units.
12. SUBSTITUTED MEMBERS
12.1 Limitations on Substitution. No Assignee shall have the right to
become a substituted Member of the Fund in place of his assignor unless all of
the following conditions are first satisfied:
12.1.1 A duly executed and acknowledged written instrument of
assignment covering no less than 500 Units shall have been filed with the Fund,
which instrument shall specify the number of Units being assigned and set forth
the intention of the assignor that the Assignee succeed to the assignor's
interest as a substituted Member.
12.1.2 The assignor and Assignee shall have executed and
acknowledged such other instruments as the Manager may deem necessary or
desirable to effect such substitution, including the written acceptance and
adoption by the Assignee of the provisions of this Agreement, as the same may be
amended and his execution, acknowledgment and delivery to the Manager of a
special power of attorney, the form and content of which are described herein;
12.1.3 The written consent of the Manager to such substitution
shall have been obtained, the granting of which may be withheld by the Manager
in its sole discretion, and any exercise of such discretion intended to preserve
the tax consequences of Unit ownership shall presumptively be deemed reasonable;
12.1.4 A transfer fee not to exceed $100 shall have been paid
to the Fund to cover all reasonable expenses connected with such substitution;
and
12.1.5 The provisions of Section 11.1 and 11.3 of this
Agreement are complied with.
12.2 Consent to Admission. By executing or adopting this Agreement,
each Holder hereby consents to the admission of additional or substituted
Holders by the Manager and to any Assignee becoming a substituted Holder, in
accordance with the provisions herein.
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12.3 Amendment of Agreement. The Manager shall cause this Agreement to
be amended to reflect the admission and/or substitution of Members at least once
in each fiscal quarter.
13. REPURCHASE OF FUND INTERESTS
13.1 In the event a Holder ceases to be a United States Citizen or
Resident Alien for any reason whatsoever, he may be required, in the Manager's
discretion, to tender his Units to the Fund for repurchase as of the date of
such event. The Fund will have the absolute right to purchase such Units at a
price equal to 100% of the Holder's Capital Account as of such date, in all
cases determined as of the last day of the quarter prior to the fiscal quarter
during which such Units are repurchased. IT SHOULD BE NOTED THAT THE FUND WILL
NOT BE OBLIGATED TO PURCHASE UNITS FROM HOLDERS WHO CEASE TO BE UNITED STATES
CITIZENS OR RESIDENT ALIENS.
13.2 The Manager may otherwise use available Reserves to repurchase
Units, in its discretion and on terms it determines to be appropriate under
given circumstances, in the event the Fund Manager deems such repurchase to be
in the best interest of the Fund; provided, the Fund shall never be required to
repurchase any Units. Upon the repurchase of any Units by the Fund, the tendered
Units shall be canceled and shall no longer be deemed to represent an interest
in the Fund; and, provided further, that any such repurchase shall not impair
the capital of the Fund, or cause the Fund or any of its remaining Members to
incur an adverse tax consequence as a result of such repurchase.
13.3 The Manager shall cause this Agreement to be amended to reflect
the change in the interests of the Holders (including the person whose Units
were repurchased) in the Net Income, Net Loss and Distributions of the Fund at
least once in each fiscal quarter.
13.4 Neither the Manager nor its Affiliates may request the Fund to
repurchase any Units owned by them.
14. BOOKS, RECORDS, ACCOUNTINGS AND REPORTS
14.1 Books of Account and Records. The Manager shall, for income tax
purposes, keep on an accrual basis adequate books of account and records of the
Fund wherein shall be recorded and reflected all of the contributions to the
capital of the Fund and all of the expenses and transactions of the Fund.
14.1.1 Such books of account and records shall include the
following:
(i) A current list of the full name and last known
business or residence address and business telephone
number of each Member set forth in alphabetical order
together with the Original Invested Capital, the
Units held and the share in Net Income and Net Loss
of each Member, which list shall be updated at least
quarterly to reflect changes in the information
contained therein;
(ii) A copy of the Articles of Organization and all
amendments, together with executed copies of any
powers of attorney pursuant to which any certificate
has been executed;
(iii) Copies of the Fund's federal, state and local
income tax or information returns and reports, if
any, for the six most recent taxable years;
(iv) Copies of the original of this Agreement and all
amendments;
(v) Financial statements of the Fund for the six most
recent fiscal years; and
(vi) The Fund's books and records for at least the
current and past three fiscal years.
14.1.2 Such books of account and records shall be kept at the
principal place of business of the Fund in the State of California, and each
Member and his authorized representatives shall have, at all times during normal
business hours and at any other reasonable time, free access to and the right to
inspect and copy at their expense such books of account and all records of the
Fund.
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14.1.3 Upon the request of a Member, the Manager shall mail to
such Member within ten days of the request a copy of the information described
in Section 14.1.1(i), (ii) and (iv). The information described in Section
14.1.1(i) shall be printed in alphabetical order, on white paper, and in a
readily readable type size (in no event smaller than ten-point type). The Fund
may require payment of a reasonable charge for copy work.
14.1.4 If the Manager neglects or refuses to exhibit, produce
or mail a copy of the information in Section 14.1.1(i) above as requested and
required under this Agreement, the Manager shall be liable to the Member
requesting the information for the costs, including attorneys' fees, incurred by
the Member for compelling production of the information and for actual damages
suffered by the Member by reason of such refusal or neglect. It shall be a
defense that the actual purpose and reason for the requests for inspection or
for a copy of the information is to secure the list of Members or other
information for the purpose of selling such list or copies thereof, or of using
the same for a commercial purpose other than in the interest of the requesting
person as a Member relative to the affairs of the Fund. The Manager may require
that a Member requesting the information in Section 14.1.1(i) above represent
that the list is not requested for a commercial purpose unrelated to the
Member's interest in the Fund. The remedies provided hereunder to Members
requesting copies of the information in Section 14.1.1(i) above are in addition
to, and shall not in any way limit, other remedies available to Members under
federal law or the laws of any state.
14.1.5 Subject to any change pursuant to Section 15.2.8, all
books and records of the Fund shall be kept on the basis of an annual accounting
period ending December 31, except for the final accounting period which shall
end on the dissolution or termination of the Fund. All references herein to a
"year of the Fund" are to such an annual accounting period, and all references
to a Fund "quarter" shall refer to a calendar quarter unless and until such
periods are changed by an amendment hereto. Accelerated methods of depreciation
with respect to Fund assets and other elections available to the Fund may be
used by the Fund for purposes of reporting federal or state income taxes.
14.2 Audited Annual Financial Statements. The Manager shall have
prepared and distributed to the Holders at least annually, at Fund expense,
financial statements (each of which shall include a balance sheet, statement of
income or loss, statement of Members' equity, and statement of cash flow)
prepared in accordance with generally accepted accounting principles and
accompanied by a report thereon containing an opinion of an independent
certified public accounting firm. Such opinion shall also state that reported
"Cash from Operations" is consistent with the definition of Cash from Operations
herein. Copies of such statements and report shall be distributed to each Holder
within 120 days after the close of each taxable year of the Fund.
14.3 Other Annual Reporting. The Manager shall have prepared and
distributed to the Holders at least annually, at Fund expense: (i) a statement
of cash flow, (ii) Fund information necessary in the preparation of the Holders'
and Assignees' federal income tax returns; (iii) a report of the business of the
Fund, which shall include for each piece of Equipment which individually
represents at least 10% of the Fund's total investment in Equipment, a status
report to indicate: (a) the condition of the Equipment, (b) how the Equipment is
being used as of the end of the year (leased, operated, held for lease, repair,
or sale), (c) the remaining term of the Equipment leases, (d) the projected use
of Equipment for the next year (renewal of lease, re-lease, retirement, or
sale), and (e) such other information relevant to the value or use of the
Equipment as the Manager deems appropriate, including the method used as basis
for valuation; (iv) a statement as to the compensation received by the Manager
and its Affiliates from the Fund during the year, which statement shall set
forth the services rendered or to be rendered by the Manager and its Affiliates
and the amount of fees received; (v) a report identifying Distributions from:
(a) Cash from Operations for that year, (b) Gross Revenues of prior years held
in reserves, (c) Cash from Sales or Refinancing, and (d) Cash from Reserve
Account and other sources; and (vi) a special report prepared in accordance with
the American Institute of Certified Public Accountants United States Auditing
Standards relating to special reports, containing an opinion of an independent
certified public accounting firm, to report the breakdown of the costs
reimbursed by the Fund to the Manager or its Affiliates. Such special report
shall at a minimum provide: (a) a review of the time records of individual
employees, the costs of whose services were reimbursed, and (b) a review of the
specific nature of the work performed by each such employee. The additional
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costs of such special report shall be itemized by the auditors among all
programs sponsored by the Manager and its Affiliates on a program-by-program
basis and may be reimbursed to the Manager or its Affiliates to the extent that
such reimbursement, when added to the cost for administrative services rendered,
does not exceed the competitive rate for comparable services performed by
independent parties in the same geographic location. Copies of the reports
hereunder shall be distributed to each Holder within 120 days after the close of
each taxable year of the Fund; provided, however, that all Fund information
necessary in the preparation of the Holders' and Assignees' federal income tax
returns shall be distributed to each Holder and Assignee not later than 75 days
after the close of each taxable year of the Fund. In addition to the foregoing,
the Manager will disclose in each annual report distributed to investors
pursuant to Section 13(a) of the Securities Exchange Act of 1934 an estimated
value per Unit as of the end of the year that is the subject of the report, the
method by which the value has been estimated, and the date of the data used to
develop the estimated value.
14.4 Quarterly Reports. The Manager shall have prepared quarterly, at
Fund expense, commencing with the first full quarter after the Closing Date: (i)
a statement as to the compensation received by the Manager during such quarter
from the Fund which statement shall set forth the services rendered or to be
rendered by the Manager during such quarter from the Fund and the amount of fees
received, and (ii) other relevant information. Copies of such statements shall
be distributed to each Holder within 60 days after the end of each quarterly
period.
14.5 Unaudited Quarterly Financial Statements. The Manager shall have
prepared, at Fund expense, a quarterly report covering each of the first three
quarters of Fund operations in each calendar year, unaudited financial
statements (each of which shall include a balance sheet, statement of income or
loss for said quarterly period and statement of Cash from Operations and Cash
from Sales or Refinancing for said quarterly period) and a statement of other
pertinent information regarding the Fund and its activities during the quarterly
period covered by the report. Copies of such statements and other pertinent
information shall be distributed to each Holder within 45 days after the close
of the quarterly period covered by the report of the Fund.
14.6 Other Quarterly Reports. The Manager shall have prepared, at Fund
expense, after the end of each quarter in which Equipment is acquired and until
the Net Proceeds are fully invested or returned to investors, a notice which
shall describe therein: (i) a statement of the actual purchase price of the
Equipment, including the terms of the purchase, (ii) a statement of the total
amount of cash expended by the Fund to acquire such items of Equipment
(including and itemizing all commissions, fees, expenses and the name of each
payee), and (iii) a statement of the amount of proceeds in the Fund which remain
unexpended or uncommitted. Copies of such notice shall be distributed to each
Holder within 45 days after the end of such quarter. If deemed appropriate by
the Manager such notice may be prepared and distributed to each Holder more
frequently than quarterly.
14.7 Tax Returns. The Manager, at Fund expense, shall cause income tax
returns for the Fund to be prepared and timely filed with appropriat
authorities.
14.8 Governmental Reports. The Manager, at Fund expense, shall cause to
be prepared and timely filed with appropriate federal and state regulatory and
administrative bodies, all reports required to be filed with such entities under
then current applicable laws, rules and regulations. Such reports shall be
prepared on the accounting or reporting basis required by such regulatory
bodies. Any Holder shall be provided with a copy of any such report upon request
without expense to him.
14.9 Maintenance of Suitability Records. The Manager, at Fund expense,
shall maintain for a period of at least six years, a record of the information
obtained to indicate that a Holder meets the suitability standards set forth in
the Prospectus.
15. RIGHTS, AUTHORITY, POWERS AND RESPONSIBILITIES OF THE MANAGER.
15.1 Services of the Manager. The Manager shall be responsible for
providing the following services to the Fund:
15.1.1 Supervising the organization of the Fund and the
offering and sale of Units;
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15.1.2 Supervising Fund management, which includes (i)
establishing policies for the operation of the Fund; (ii) causing the Fund's
agents or employees to arrange for the provision of services necessary to the
operation of the Fund (including Equipment management and investor, accounting
and legal services, and services relating to Distributions by the Fund); (iii)
approving actions to be taken by the Fund; (iv) providing advice, consultation,
analysis and supervision with respect to the functions of the Fund as an owner
of the Equipment (including, without limitation, decisions regarding adjustments
to rental schedules, the sale or disposition of Equipment and compliance with
federal, state and local regulatory requirements and procedures); (v) executing
documents on behalf of the Fund; (vi) having a fiduciary responsibility for the
safekeeping and use of all funds of the Fund, whether or not in the Manager's
immediate possession or control; and (vii) making all decisions as to accounting
matters; and
15.1.3 Approval of the terms of the sale or other disposition
of Equipment, including establishing the terms for and arranging any such
transaction.
15.2 Authority of the Manager. The conduct of the Fund's business shall
be controlled solely by the Manager in accordance with this Agreement. The
Manager shall have fiduciary responsibility for the safekeeping and use of all
funds and assets of the Fund, whether or not in its immediate possession or
control, and shall have all authority, rights and powers conferred by law and
those required or appropriate to the management of the Fund business which, by
way of illustration but not by way of limitation, shall, subject only to the
provisions of Section 15.4, include the right, authority and power:
15.2.1 To acquire, lease, sell, hold and dispose of Equipment,
interests therein or appurtenances thereto, as well as personal or mixed
property connected therewith, including the purchase, lease, improvement,
maintenance, exchange, trade or sale of such Equipment, at such price, rental or
amount, for cash, securities (in compliance with appropriate securities
regulations) or other property, and upon such terms, as the Manager deems in its
sole discretion, to be in the best interest of the Fund; provided that, as of
the date of the final investment of Net Proceeds and completion of the permanent
financing of the Equipment portfolio, at least 50% of the Fund's Equipment, by
aggregate purchase cost, shall be subject to initial leases which are High
Payout Leases.
15.2.2 To place record title to, or the right to use Fund
assets in, the name or names of a nominee or nominees, trustee or trustees for
any purpose convenient or beneficial to the Fund;
15.2.3 To acquire and enter into any contract of insurance
which the Manager deems necessary or appropriate for the protection of the Fund
and the Manager, for the conservation of Fund assets, or for any purpose
convenient or beneficial to the Fund;
15.2.4 To employ Persons in the operation and management of
the business of the Fund including, but not limited to, supervisory managing
agents, insurance brokers and equipment lease brokers and Persons to perform, on
behalf of the Fund, the activities enumerated in Section 15.2.1, on such terms
and for such compensation as the Manager shall determine, subject, however, to
the limitations with respect thereto as set forth in Article 8; provided that no
Person is employed to provide duplicative services; and provided further that
agreements with the Manager or its Affiliates for the services set forth in
Article 8 shall contain the terms and limitations as to fees and expenses as set
forth in said Article 8 and any of such agreements shall be terminable
immediately upon dissolution of the Fund under Section 19.1;
15.2.5 To prepare or cause to be prepared reports, statements
and other relevant information for distribution to Holders, as provided in
Article 14 and as they otherwise deem appropriate;
15.2.6 To open accounts and deposit and maintain funds in the
name of the Fund in banks or savings and loan associations; provided, however,
that the Fund funds shall not be commingled with the funds of any other Person;
15.2.7 To cause the Fund to make or revoke any of the
elections referred to in the Code;
15.2.8 To select as the Fund's accounting year a calendar
year or such fiscal year as approved by the Service;
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15.2.9 To determine the appropriate accounting method or
methods to be used by the Fund;
15.2.10 To offer and sell Units in the Fund directly or
through any licensed Affiliate of the Manager or nonaffiliate and to employ
personnel, agents and dealers for such purpose;
15.2.11 To amend this Agreement to reflect the addition or
substitution of Holders, the reduction of capital accounts upon the return of
capital to Members or the change in the interests of the Holders in the Net
Income, Net Loss and Distributions of the Fund after the repurchase of Units;
15.2.12 To require in all Fund obligations that the Manager
shall not have any personal liability thereon but that the Person contracting
with the Fund is to look solely to the Fund and its assets for satisfaction of
such obligations; and in the event that the Manager has personal liability with
respect to any such obligation, the Manager may require its satisfaction prior
to obligations with respect to which the Manager has no personal liability;
provided, however, that the inclusion of the aforesaid provisions shall not
materially affect the cost of the service or material being supplied and all
Fund obligations are satisfied in accordance with prudent business practices as
to the time and manner of payment;
15.2.13 To execute and file certificates of amendment and
cancellation of the articles of organization, and certificates of dissolution of
the Fund;
15.2.14 Subject to the provisions of Article 10, to determine
the amount of Cash from Operations and Cash from Sales or Refinancing used to
purchase additional Equipment and to make Distributions;
15.2.15 To purchase Equipment in its own name, the name of an
Affiliate or in the name of a nominee, a trust or a corporation or otherwise and
hold title thereto on a temporary or interim basis (generally not in excess of
six months) for the purpose of facilitating the acquisition of such Equipment or
completion of manufacture of the Equipment, or any other purpose related to the
business of the Fund; provided, however that: (i) the transaction is in the best
interest of the Fund; (ii) such Equipment is purchased by the Fund for a
purchase price no greater than the cost of such Equipment to the Manager or
Affiliate (including any out-of-pocket carrying costs), except for compensation
permitted by this Agreement; (iii) there is no difference in interest terms of
the loans secured by the Equipment at the time acquired by the Manager or
Affiliate and the time acquired by the Fund; (iv) there is no benefit arising
out of such transaction to the Manager or its Affiliate apart from the
compensation otherwise permitted by this Agreement; and (v) all income generated
by, and all expenses associated with, Equipment so acquired shall be treated as
belonging to the Fund; and, in order to effect an orderly liquidation of the
Fund's assets in its liquidation stage, to cause the Fund to sell Equipment to a
liquidating trust, or to the Manager or an Affiliate (other than another
investor program), either in its own name, or as a trustee of a liquidating
trust, provided that, in any sale to the Manager or an Affiliate, all of the
following conditions have been met: (vi) the Fund has obtained, at its cost, two
independent appraisals of the fair market value of the item or items of
Equipment to be sold; (vii) the sales price of the Equipment is at least equal
to the average of the two appraised values; (viii) the original cost of the
Equipment sold pursuant to this provision does not represent in excess of 10% of
the original cost of all Equipment acquired by the Fund during the term of the
Fund; (ix) such sale is effected in the best interests of the Fund and its
Members for purposes of facilitating liquidation; and (x) the Equipment so sold
is not resold to another investor program sponsored by the Manager or its
Affiliates.
15.2.16 Subject to Sections 15.4.21 and 15.4.22, to borrow
money and, if security is required therefor, to mortgage or subject any
Equipment to any other security device, to obtain replacements of any mortgage
or other security device, and to prepay, in whole or in part, refinance,
increase, modify, consolidate or extend any mortgage or other security device,
all of the foregoing at such terms and in such amounts as the Manager, in its
sole discretion, deems to be in the best interests of the Fund;
15.2.17 To invest (i) the Gross Proceeds or Net Proceeds
temporarily prior to investment in Equipment, (ii) other funds of the Fund prior
to the investment in Equipment or the distribution to Holders and (iii) the
Fund's capital reserves, in short-term, highly liquid investments where there is
appropriate safety of principal;
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15.2.18 In addition to any amendments otherwise authorized
herein, this Agreement may be amended from time to time by the Manager, without
the consent of any of the Holders
(i) to add to the representations, duties or obligations of
the Manager or its Affiliates or surrender any right or power
granted to the Manager or its Affiliates herein, for the
benefit of the Holders;
(ii) to cure any ambiguity, to correct or supplement any
provision herein which may be inconsistent with any other
provision herein, or to make any other provisions with respect
to matters or questions arising under this Agreement which
will not be inconsistent with the provisions of this Agreement
provided that no amendment hereunder will change the voting
rights of Holders;
(iii) to delete or add any provision of this Agreement
required to be so deleted or added by the staff of the
Securities and Exchange Commission or by a state "Blue Sky"
administrator or similar such official, which addition or
deletion is deemed by such staff or official to be for the
benefit or protection of the Holders; or
(iv) to amend the provisions of Article 10 of this Agreement
relating to the allocations of Net Income, Net Loss and
Distributions among Members or any other provisions hereof if
the Fund is advised at any time by the Fund's accountants or
legal counsel that the allocations or such other provisions
set forth in this Agreement are unlikely to be respected,
either because of promulgation of Regulations under Sections
704 or 706 of the Code or other developments in the law, but
only to the minimum extent necessary in accordance with such
advice of accountants and/or counsel to cause such provisions
of this Agreement to be respected. Such amendment or
amendments made by the Manager in reliance upon the advice of
the accountants or counsel described above shall be deemed to
be made pursuant to the fiduciary obligation of the Manager to
the Fund and the Holders, and no such amendment or amendments
shall give rise to any claim or cause of action by any Holder.
15.2.19 To execute, acknowledge and deliver any and all
instruments to effectuate the foregoing, and to take all such action in
connection therewith as the Manager shall deem necessary or appropriate.
15.3 General Powers and Fiduciary Duty. The Manager shall, except as
otherwise provided in this Agreement, have all the rights and powers and shall
be subject to all the restrictions and liabilities provided for the manager of a
limited liability company under the California Act. Notwithstanding any other
provision of this Agreement, in no event may the Manager modify or compromise,
by contract or otherwise, its fiduciary duty to the Fund or the Holders, whether
such duty is imposed under the common law or by statute.
15.4 Limitations on Manager's Authority. Neither the Manager nor any
Affiliate shall have the authority to:
15.4.1 Enter into contracts with the Fund which would bind the
Fund after the expulsion, adjudication of bankruptcy or insolvency of a Manager,
or continue the business of the Fund with Fund assets after the occurrence of
such an event;
15.4.2 Grant to the Manager or any Affiliate an exclusive
listing for the sale of Fund assets, including Equipment;
15.4.3 Sell Substantially All of the Assets in a single sale,
or in multiple sales in the same twelve-month period, except in the orderly
liquidation and winding up of the business of the Fund upon its termination and
dissolution;
15.4.4 Pledge or encumber Substantially All of the Assets in a
single transaction or in multiple transactions in the same twelve-month period
other than in connection with the acquisition or improvement of assets or the
refinancing of existing obligations;
15.4.5 Alter the primary purpose of the Fund as set forth in
Article 3;
15.4.6 Receive from the Fund a rebate or give-up or
participate in any reciprocal business arrangements which would circumvent the
provisions of this Agreement, nor shall any such person permit any reciprocal
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business arrangement which would circumvent the restrictions herein against
dealing with the Manager and its Affiliates;
15.4.7 Sell or lease any Equipment to any entity in which a
Manager or any Affiliate has an interest, other than a joint venture or similar
program which complies with the conditions set forth in Section 15.4.8 hereof or
in a transaction that complies with the conditions set forth in Section 15.2.15;
15.4.8 Cause the Fund to invest in any program, partnership or
other venture unless: (i) the other Member or joint owner is not a Manager (but
it may be an Affiliate of a Manager, provided the Affiliate is formed and
operated for the primary purpose of investment in and operation of or gain from
an interest in equipment, and has substantially identical investment objectives
to those of the Fund); (ii) such joint venture owns and operates particular
Equipment and the Fund or the Fund and Affiliate, as the case may be, acquire
the controlling interest in such partnership, or joint venture; (iii) the
agreement of joint venture does not authorize the Fund to do anything as a
Member or joint venturer with respect to the Equipment which the Fund, or a
Manager, could not do directly because of the provisions of this Agreement; (iv)
the Fund's investment is on substantially the same terms and conditions as the
investment of any Affiliate; (v) no compensation (other than as provided for by
this Agreement) is received in connection therewith by the Manager or any of its
Affiliates, there are no duplicate equipment management or any other duplicate
fees and such investment shall not result in the impairment, abrogation or
circumvention of any of the terms or provisions of this Agreement; (vi) the
joint venture is in the best interest of both co-venturers; and (vii) in joint
venture arrangements with an Affiliate of a Manager, if all of the following
additional conditions are met: the compensation of the Manager is substantially
identical to that received by the sponsor of such Affiliate, the Fund has a
right of first refusal to buy, if such Affiliate wishes to sell, equipment held
in the joint venture, and the joint venture is established either for the
purpose of effecting appropriate diversification of the Fund's investment
portfolio or for the purpose of relieving the Manager or its Affiliates or
nominees from a commitment entered into pursuant to Section 15.2.15 of this
Agreement; for the purposes of this Section, a controlling interest shall
include: (1) ownership of more than 50% of the venture's capital or profits; or
(2) provisions in the venture agreement giving the Fund effective control;
15.4.9 Except as provided in the Sections 15.2.15, 15.4.7 and
15.4.8, purchase or lease Equipment from the Fund or sell or lease Equipment to
the Fund;
15.4.10 Cause the Fund to loan any funds or property to any
Manager or Affiliate of a Manager;
15.4.11 Cause the Fund to borrow from any of the Manager or
its Affiliates on terms which provide for interest, financing charges or fees in
excess of the amounts charged by unrelated lending institutions on comparable
loans for the same purpose, or in excess of the ledger's cost of funds, or, in
any event, to cause the Fund to obtain "permanent financing" (defined as
financing with a term in excess of 12 months) from any such Person;
15.4.12 Cause the Fund to exchange Units for property other
than cash;
15.4.13 Do any action in contravention of this Agreement or
which would make it impossible to carry on the ordinary business of the Fund;
15.4.14 Confess a judgment against the Fund in connection
with any threatened or pending legal action;
15.4.15 Possess any Equipment or assign the rights of the
Fund in specific Equipment for other than a Fund purpose;
15.4.16 Admit a Person as a Manager except with the consent
of the Holders as provided in Article 17 hereof;
15.4.17 Perform any act (other than an act required by this
Agreement or any act taken in good faith reliance upon counsel's opinion) which
would, at the time such act occurred, subject any Holder to liability as a
Manager in any jurisdiction;
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15.4.18 Reinvest any funds of the Fund after the end of the
Reinvestment Period other than to invest in Equipment pursuant to commitments
entered into prior to the expiration of the Reinvestment Period or in Equipment
to be used in connection with Equipment under an existing lease, or reinvest any
funds of the Fund during the Reinvestment Period unless such reinvestment is
effected for all Holders on the same terms and is otherwise in compliance with
Section 10.7 hereof;
15.4.19 Invest any of the Gross Proceeds in Equipment which
is non-income producing;
15.4.20 Employ, or permit any Person to employ, the funds or
assets of the Fund in any manner except for the exclusive benefit of the Fund;
this provision shall not prohibit the Manager from causing Fund funds to be
deposited in a separate Fund account with a bank or other financial institution
which aggregates all funds held on behalf of the Manager and its Affiliates in
calculating qualifying balances for purposes of discounts on service charges or
other account benefits, provided that the Fund benefits on a pro rata basis from
any such discounts or other favorable terms, and, provided further, that no
creditor of any party other than the Fund shall have any recourse to funds held
in the Fund's separate account;
15.4.21 Incur any indebtedness wherein the lender will have or
acquire, at any time as a result of making the loan, any direct or indirect
interest in the profit, capital or property of the Fund other than as a secured
creditor; or incur any indebtedness specifically for the purpose of funding
operating distributions, provided however that the Fund may enter into
refinancing transactions with respect to its Equipment and distribute net
proceeds from any such refinancing to the extent consistent with its investment
objectives;
15.4.22 Incur aggregate Fund borrowings which, as of the date
of the final investment of the Net Proceeds and, thereafter, on the date any
subsequent indebtedness is incurred, are in excess of 50% of the purchase price
of all Equipment on a combined basis. "Purchase price" for purposes of this
Section 15.4.22 shall mean the sum of the cash downpayment and any indebtedness
incurred in connection with the acquisition of an item of Equipment by the Fund,
or to which the Equipment is taken subject, plus any Acquisition Fees paid, but
does not include loan points, prepaid interest, or other prepaid expenses;
15.4.23 Commingle Fund funds with those of any other Person;
15.4.24 Except as otherwise provided herein, cause the Fund to
enter into any transaction with any other partnership in which a Manager or any
of its Affiliates have an interest, including, but not limited to, any
transaction involving the sale, lease or purchase of any Equipment to or from
the Fund, the rendering of services to or from the Fund, or the lending of any
monies or other property to or from the Fund;
15.4.25 Directly or indirectly pay or award any finder's fees,
commissions or other compensation to any Person engaged by a potential investor
for investment advice as an inducement to such advisor to advise the purchaser
regarding the purchase of Units; provided, however, that the Manager shall not
be prohibited from paying the normal sales commissions payable to a registered
broker-dealer or other properly-licensed Person for selling Units;
15.4.26 Operate the Fund in such a manner as to have the Fund
classified as an "investment company" for purposes of the Investment Company Act
of 1940;
15.4.27 Except as provided herein, invest any of the Gross
Proceeds in units of limited partnership interest, junior mortgages, deeds of
trust or other similar instruments or obligations;
15.4.28 Cause the Fund to enter into any agreements with a
Manager or any Affiliate of a Manager which are not subject to termination
without penalty by either party upon not more than 60 days' written notice,
except for agreements which comply with the provisions of Section 15.2.15 or
those which comply with the provisions of Section 15.4.8 and relate to the
purchase of Equipment by the Fund and an Affiliate as joint venturers;
15.4.29 Cause the Fund to acquire any single item of Equipment
that has a contract purchase price in excess of $1,000,000 unless prior to final
funding of the acquisition it obtains a future value appraisal of the Equipment
from a qualified independent third party appraiser;
B-22
15.4.30 Cause the Fund to invest cash in an aggregate amount
in excess of $30,000,000 in Equipment leased to a single lessee.
15.5 Limitation on Manager's Liability. The Manager shall have no
personal liability for the repayment of the Original Invested Capital of any
Holder or to repay the Fund any portion or all of any negative balance in its
Capital Account.
15.6 Tax Matters Member. ATEL is hereby designated as the "Tax Matters
Member" in accordance with Section 6231(a)(7) of the Code and, in connection
therewith and in addition to all other powers given therein, shall have all
other powers needed to perform fully hereunder including, without limitation,
the power to retain all attorneys and accountants of its choice and the right to
settle any audits without the consent of Members. The designation made in this
paragraph is hereby consented to by each Member as an express condition to
becoming a Member. The Fund hereby indemnifies ATEL from and against any damages
or losses (including attorney's fees) arising out of or incurred in connection
with any action taken or omitted to be taken by it in carrying out its
responsibilities as tax matters Member, subject to the same conditions under
which indemnification is provided the Manager in Article 21 hereof.
15.7 Minimum Investment in Equipment / Maximum Front-End Fees. The
Manager must commit not less than 85.875% of the Gross Proceeds to Investment in
Equipment, with the balance thereof available to pay Organization and Offering
Expenses and Front End Fees, however designated. Under the North American
Securities Administrators Association, Inc. ("NASAA") Statement of Policy
concerning Equipment Programs, as amended through October 24, 1991 (referred to
herein as the "NASAA Guidelines"), the Fund is required to commit a minimum
percentage of the Gross Proceeds to Investment in Equipment, calculated as the
greater of: (i) 80% of the Gross Proceeds reduced by 0.0625% for each 1% of
indebtedness encumbering the Fund's Equipment; or (ii) 75% of such Gross
Proceeds. Based on the formula in the NASAA Guidelines, with 50% portfolio
leverage the Fund's minimum Investment in Equipment would equal 76.875% of Gross
Proceeds (80% - [50% x .0625%] = 76.875%), and the Fund's minimum Investment in
Equipment would therefore exceed the NASAA Guideline minimum by 9%. The NASAA
Guidelines permit the Manager and its Affiliates to receive compensation in the
form of a carried interest in Fund Net Income, Net Loss and Distributions equal
to 1% for the first 2.5% of excess Investment in Equipment over the NASAA
Guidelines minimum, 1% for the next 2% of such excess, and 1% for each
additional 1% of excess Investment in Equipment. With a minimum Investment in
Equipment of 85.875% and 50% leverage, the Manager and its Affiliates may
receive an additional carried interest equal to 6.5% of Net Profit, Net Loss and
Distributions under the foregoing formula (2.5% + 2% + 4.5% = 9%; 1% + 1% + 4.5%
= 6.5%]. At the lowest permitted level of minimum Investment in Equipment, the
NASAA Guidelines would permit the Manager and its Affiliates to receive a
promotional interest equal to 5% of Distributions of Cash from Operations and 1%
of Distributions of Sale or Refinancing Proceeds until Members have received
total Distributions equal to their Original Invested Capital plus an 8% per
annum cumulative return on their adjusted invested capital, as calculated under
the NASAA Guidelines and, thereafter, the promotional interest could
increase to 15% of all Distributions. With the additional carried interest
calculated as described above, the maximum aggregate fees payable to the Manager
and Affiliates under the NASAA Guidelines as carried interest and promotional
interest would equal 11.5% of Distributions of Cash from Operations (6.5% + 5% =
11.5%), and 7.5% of Distributions of Sale or Refinancing Proceeds (6.5% + 1% =
7.5%), before the subordination level was reached, and 21.5% of all
Distributions thereafter. The maximum amounts to be paid under the terms of this
Agreement are subject to the application of the Asset Management Fee Limit
provided in Section 8.3, which limits the annual amount payable to the Manager
and its Affiliates as the Asset Management Fee and the Carried Interest to an
aggregate not to exceed the maximum amount of fees that would be payable to the
Manager under specified provisions of the NASAA Guidelines. Upon completion of
the offering of Units, final commitment of Net Proceeds to acquisition of
Equipment and establishment of final levels of permanent portfolio debt
encumbering such Equipment, the Manager shall calculate the maximum carried
interest and promotional interest payable to the Manager and its Affiliates
under the NASAA Guidelines and compare such total permitted fees to the total of
the Asset Management Fee and Carried Interest. If and to the extent that the
fees exceed the Asset Management Fee Limit provided in Section 8.3, the fees
payable to the Manager and its Affiliates shall be reduced as described herein.
B-23
In such event, Section 8.3 of this Agreement shall be amended immediately to
reduce the amounts calculated as the Carried Interest by an amount sufficient to
cause the total of such compensation to comply with the limitations in the NASAA
Guidelines on the aggregate of promotional interests and carried interests. A
comparison of the Front End Fees actually paid by the Fund and the NASAA
Guideline maximums shall be repeated, and any required adjustments shall be
made, at least annually thereafter.
15.8 Reliance on Manager's Authority. The Manager shall conduct the
business of the Fund, devoting such time thereto as it, in its sole discretion,
shall determine to be necessary to manage the Fund business and affairs in an
efficient manner. Any Person dealing with the Fund or the Manager may rely upon
a certificate signed by the Manager as authority with respect to: (i) the
identity of the Manager or any Holder hereof; (ii) the existence or
non-existence of any fact or facts which constitute a condition precedent to
acts by the Manager or are in any other manner germane to the affairs of the
Fund; (iii) the Persons who are authorized to execute and deliver any instrument
or document on behalf of the Fund; or (iv) any act or failure to act by the Fund
as to any other matter whatsoever involving the Fund or any Members.
16. RIGHTS, POWERS AND VOTING RIGHTS OF THE MEMBERS
16.1 Limitation on Member Authority. Members shall take no part in the
control, conduct or operation of the Fund and shall have no right or authority
to act for or bind the Fund except as expressly provided herein.
16.2 Voting Rights. Members shall have the right, by the vote of
Members who own more than 50% of the total outstanding Units entitled to vote (a
"majority-in-interest"), to approve the following matters affecting the basic
structure of the Fund:
16.2.1 Removal or withdrawal of a Manager;
16.2.2 Subject to the further requirements of Article 17,
continuation of the Fund and election of a successor Manager upon the
termination of a Manager;
16.2.3 Termination and dissolution of the Fund;
16.2.4 Amendment of this Agreement, provided such amendment is
not for any of the purposes set forth in Sections 16.4 or 16.5, and provided,
further, that the Members shall have the right to approve or disapprove by
separate vote each proposed amendment to this Agreement;
16.2.5 The pledge or granting of a security interest in, or
sale of, Substantially All of the Assets in a single transaction, or in multiple
transactions in the same twelve-month period, except in the liquidation and
winding up of the business of the Fund upon its termination and dissolution; and
16.2.6 The extension of the term of the Fund.
16.3 Voting Procedures. In any vote of the Members, each Member shall
be entitled to cast one vote for each Unit which he owns as of the designated
record date. Notwithstanding any other provision of this Agreement, any Units
held by a Manager or an Affiliate of a Manager will not be entitled to vote, and
will not be considered to be "outstanding" Units for purposes of any vote, upon
matters which involve a conflict between the interests of such Manager and the
Fund, including, but not limited to, any vote on the proposed removal or
withdrawal of such Manager or on any proposed amendment to this Agreement which
would expand or extend the rights, authorities or powers of such Manager.
16.3.1 Meetings of the Members to vote upon any matters as to
which the Members are authorized to take action under this Agreement, as the
same may be amended from time to time, may be called at any time by the Manager
or by one or more Members holding more than 10% of the outstanding Units by
delivering written notice, either in person or by registered mail, of such
meeting to the Manager. Promptly, but in any event within 10 days following
receipt of such request, the Manager shall cause a written notice, either in
B-24
person or by certified mail, to be given to the Members entitled to vote at such
meeting, which notice shall state that a meeting will be held at a time and
place fixed by the Manager, which is to be convenient to the Members as a group,
and which is not less than 15 days nor more than 60 days after the mailing of
the notice of the meeting; provided, however, that such maximum period for the
giving of notice and the holding of meetings may be extended for an additional
60 days if such extension is necessary to obtain the qualification with the
California Commissioner of Corporations of the matters to be acted upon at such
meeting, the clearance by the Securities and Exchange Commission or other
appropriate governing agency of the solicitation materials to be forwarded to
Members in connection with such meeting or any other administrative
authorizations which may be required. Included with the notice of a meeting
shall be a detailed statement of the action proposed, including a verbatim
statement of the wording of any resolution proposed for adoption by the Members
and of any proposed amendment to this Agreement. All expenses of the meeting and
notification shall be borne by the Fund.
16.3.2 In order to establish the Members of record entitled to
act upon matters by vote or written consent, the Manager or Members holding more
than 10% of the Units may fix in advance a record date (the "Record Date") which
is not more than 60 nor less than 10 days prior to the date of the meeting or
the date upon which written consents are to be delivered. If no Record Date is
fixed in the notice of meeting or action by written consent, the Record Date
shall be deemed to be at the close of business on the business day next
preceding the date on which notice is given. A new Record Date shall be fixed if
a meeting is adjourned for more than 45 days from the date set for the original
meeting.
16.3.3 Upon adjournment of a meeting to another time or place,
notice of the new time or place shall be announced at the meeting at which
adjournment is taken. If the adjournment is for more than 45 days or if, after
the adjournment, a new Record Date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each Member of record entitled to
vote at the meeting.
16.3.4 Personal presence of the Members at a meeting shall not
be required, provided that sufficient Units are represented at the meeting, by
Members appearing in person and/or by duly executed proxies, to take any action
proposed for a vote at such meeting. Attendance by a Member at any meeting and
voting in person shall revoke any proxies of such Member submitted with respect
to action proposed to be taken at such meeting. Submission of a later proxy with
respect to any action shall revoke an earlier one as to such action. Only the
votes, whether in person or by proxy, of Members holding Units as of the Record
Date established for such meeting shall be counted.
16.3.5 Any matter as to which the Members are authorized to
take action under this Agreement or under law may be taken by the Members
without a meeting and shall be as valid and effective as action taken by the
Members at a meeting duly assembled, if written consents to such action by the
Members are (i) signed by the Members entitled to vote upon such action at a
meeting who held, as of the Record Date for such actions, the number of Units
required to authorize such action and (ii) delivered to the Manager as of the
date set for such action. Any action taken without a meeting shall be effective
15 days after the required minimum number of Members have signed the consent and
shall be effective immediately if the Manager and Limited Members holding at
least 90% of the outstanding Units as of the Record Date have signed the
consent.
16.3.6 In the event that there shall be no Manager, the
Members may take action without a meeting by the written consent of Members
having the requisite voting power of the Members entitled to vote.
16.4 Limitations on Member Rights. No Holder shall have the right or
power to: (i) withdraw or reduce his contribution to the capital of the Fund
except as a result of the repurchase of the Units as provided in Article 13, the
dissolution of the Fund or as otherwise provided by law, (ii) bring an action
for partition against the Fund, (iii) cause the termination and dissolution of
the Fund by court decree or otherwise, except as set forth in this Agreement, or
(iv) demand or receive property other than cash in return for his contribution.
No Holder shall have priority over any other Holder either as to the return of
contributions of capital or as to Net Income, Net Loss or Distributions. Other
than upon the termination and dissolution of the Fund as provided by this
Agreement there has been no time agreed upon when the contribution of each
Holder may be returned.
B-25
16.5 Limitations on Power to Amend Agreement. Except as provided in
Section 15.2.18, and notwithstanding anything to the contrary contained in this
Agreement, this Agreement may not, without the consent of each of the Members
who would be adversely affected thereby, be amended to:
16.5.1 Convert a Holder into a Manager;
16.5.2 Modify the limited liability of a Holder;
16.5.3 Alter the interest of any Member in Net Income, Net
Loss or Distributions; or
16.5.4 Affect the status of the Fund as a partnership for
federal income tax purposes.
16.6 Member List. Upon the written request of a Member and for any
non-commercial purpose reasonably related to the exercise of rights under this
Agreement, the Manager will furnish to such Member or his representative, at his
expense, a list containing the name and address of, and the Units held of record
by, each Member, as provided in Section 14.1.3.
16.7 Dissenters' Rights and Limitations on Mergers and Roll-ups.
16.7.1 Any proposal that the Fund enter into a Roll-Up will
require approval by Members of not less than 90% of the outstanding Units.
Members who dissent with respect to a Roll-Up proposal will have the rights of a
dissenting Member as provided under Sections 15679.1 through 15679.14 of the
California Act. The Fund shall not reimburse the sponsor of a proposed Roll-Up
for the costs of its proxy contest or any other costs of the transaction in the
event the Roll-Up is not approved by the Members as provided herein.
16.7.2 In connection with a proposed Roll-Up, an appraisal of
all Fund assets shall be obtained from a competent, independent expert (defined
as a Person with no current material or prior business or personal relationship
with the Manager or its Affiliates who is engaged to a substantial extent in the
business of rendering opinions regarding the value of assets of the type held by
the Fund, and who is qualified to perform such work). If the appraisal will be
included in a Prospectus used to offer the securities of a Roll-Up Entity, the
appraisal shall be filed with the SEC and the states as an Exhibit to the
Registration Statement for the offering. Accordingly, an issuer using the
appraisal shall be subject to liability for violation of Section 11 of the
Securities Act of 1933 and comparable provisions under state laws for any
material misrepresentations or material omissions in the appraisal. Fund assets
shall be appraised on a consistent basis. The appraisal shall be based on an
evaluation of all relevant information, and shall indicate the value of the
Fund's assets as of a date immediately prior to the announcement of the proposed
Roll-Up transaction. The appraisal shall assume an orderly liquidation of Fund
assets over a 12-month period. The terms of the engagement of the Independent
Expert shall clearly state that the engagement is for the benefit of the Fund
and its Holders. A summary of the independent appraisal, indicating all material
assumptions underlying the appraisal, shall be included in a report to the
Holders in connection with a proposed Roll-Up transaction.
16.7.3 In connection with a proposed Roll-Up, the Person
sponsoring the Roll-Up transaction shall offer to Holders who vote "no" on the
proposal the choice of:
(a) accepting the securities offered in the proposed Roll-Up
transaction; or
(b) one of the following:
(i) remaining as Holders in the Fund, and preserving
their interests therein on the same terms and
conditions as existed previously; or
(ii) receiving cash in an amount equal to the
Holders' pro-rata share of the appraised value of the net
assets of the Fund.
16.7.4 The Fund shall not participate in any proposed Roll-Up
transaction which would result in Holders having democracy rights which are less
than those provided for under this Agreement. If the resulting entity is a
corporation, the voting rights of Holders shall correspond to the voting rights
provided for in this Agreement to the greatest extent possible.
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16.7.5 The Fund shall not participate in any proposed Roll-Up
transaction which includes provisions which would operate to materially impede
or frustrate the accumulation of shares by any purchaser of the securities of
the Roll-Up Entity (except to the minimum extent necessary to preserve the tax
status of the entity). The Fund shall not participate in any proposed Roll-Up
transaction which would limit the ability of a Holder to exercise the voting
rights of the securities of the Roll-Up Entity on the basis of the number of
Units held by that Holder.
16.7.6 The Fund shall not participate in any proposed Roll-Up
Transaction in which Holders' rights of access to the records of the Roll-Up
Entity will be less than those provided for under this Agreement.
17. TERMINATION OF A MANAGER AND TRANSFER OF THE MANAGER'S INTEREST
17.1 Removal or Withdrawal. The following conditions shall govern the
voluntary withdrawal or removal of the Manager:
17.1.1 The Manager may not voluntarily withdraw from the Fund
without the approval of Members holding more than 50% of the total outstanding
Units entitled to vote.
17.1.2 The Manager may be removed upon a vote of Holders
owning more than 50% of the total outstanding Units entitled to vote. Written
notice of removal of the Manager shall be served either by certified or by
registered mail, return receipt requested, or by personal service. Such notice
shall set forth the date upon which the removal is to become effective.
17.2 Other Terminating Events. In the event of the adjudication of
bankruptcy, filing of a certificate of dissolution, death or adjudication of
insanity or incompetency of the Manager (each of such events, as well as
removal, resignation and withdrawal of a Manager, being herein referred to as a
"Terminating Event"), the Fund shall be dissolved and shall be liquidated under
the provisions of Article 19, subject to the provisions of Section 17.3.
17.3 Election of Successor Manager; Continuation of Fund Business. The
following provisions shall govern the election of a successor Manager and
continuation of the business of the Fund upon the occurrence of a Terminating
Event with respect to a Manager (the "Retiring Manager"):
17.3.1 If at the time of a Terminating Event the Fund has one
or more Managers other than the Retiring Manager, any remaining Manager or a
majority-in-interest of the Limited Members may elect, within 90 days
thereafter, to continue the Fund business, in which case the Fund shall not
dissolve. So long as there is at least one remaining Manager which so elects, or
if a majority-in-interest of the Members so elect and a remaining Manager does
not so elect, any remaining Manager which is not willing to elect to continue
the Fund business will be deemed to have been removed from the Fund by vote of
the Members.
17.3.2 If at the time of a Terminating Event the Retiring
Manager is the sole remaining Manager, the Fund shall be dissolved unless a
majority-in-interest of the Members elect to continue the Fund business. In the
event of such election, the Fund business may be continued if the Members making
such election, within 90 days after the occurrence of the Terminating Event,
elect a successor Manager and continue the Fund's business on the same terms and
conditions as are contained herein, but with a name which does not include or in
any way refer to the name of any Retiring Manager.
17.4 Admission of Successor or Additional Manager. The following
conditions shall be satisfied before any Person shall become a successor Manager
or an additional Manager:
17.4.1 Such Person shall have been elected in accordance with
Section 17.3 or 17.6;
17.4.2 Such Person shall have accepted and agreed to be bound
by all the terms and provisions of this Agreement;
17.4.3 If such Person is a corporation, it shall have provided
the Fund with evidence satisfactory to counsel for the Fund of its authority to
become a Manager and to be bound by this Agreement; and
B-27
17.4.4 Any amendments and filings required or appropriate
under the California Act shall have been made.
17.5 Effect of a Terminating Event. Upon the occurrence of a
Terminating Event, the following provisions shall be applicable:
17.5.1 The Retiring Manager shall immediately cease to be a
Manager and shall not have any right to participate in the management of the
affairs of the Fund or to receive any fees under this Agreement not already paid
or earned; provided, however, that the Retiring Manager shall receive all
amounts then accrued and payable by the Fund and shall be, and shall remain,
liable as a Manager for all obligations and liabilities incurred by the Fund
prior to the effective date of the Terminating Event, but shall be free from any
obligation or liability incurred on account of the activities of the Fund from
and after such time.
17.5.2 If the business of the Fund is continued, as aforesaid,
the Retiring Manager shall be entitled to receive from the Fund the then present
fair market value of its interest in the Fund, determined by agreement of the
Retiring Manager and the remaining or new Managers, or, if they cannot agree, by
arbitration in accordance with the then current rules of the American
Arbitration Association. The expense of such arbitration shall be borne equally
by the Fund and the Retiring Manager, and such arbitration shall be conducted in
San Francisco, California unless otherwise agreed by both parties. The Fund
shall forthwith pay to the Retiring Manager an amount equal to the then present
fair market value of the interest so determined. If the Retiring Manager has
voluntarily withdrawn from the Fund, payment shall be in the form of a
non-interest bearing unsecured promissory note with principal payable, if at
all, out of Distributions the Retiring Manager would otherwise have received
under this Agreement had such Manager not been terminated. If the Retiring
Manager has been terminated involuntarily, the payment shall be in the form of
an interest bearing promissory note payable in equal annual installments over a
term of not less than five years. Such payment when made shall constitute
complete and full discharge of all amounts to which the Retiring Manager is
entitled in respect to such interest.
17.5.3 All executory contracts between the Fund and the
Retiring Manager or any Affiliate thereof (unless such Affiliate is also an
Affiliate of the remaining or new Manager or Members) may be terminated by the
Fund effective upon written notice to the party so terminated. The Retiring
Manager or any Affiliate thereof (unless such Affiliate is also an Affiliate of
the remaining or new Manager or Members) may also terminate and cancel any such
executory contract effective upon 60 days' prior written notice of such
termination and cancellation given to the remaining or new Manager or Members,
if any, or to the Fund.
17.6 Election of Additional Manager. Members owning in excess of 50% of
the outstanding Units may at any time and from time to time elect an additional
Manager, and, upon satisfaction of the conditions set forth in Section 17.4, the
Person so elected shall be admitted as an additional Manager. Admission of an
additional Manager shall not cause dissolution of the Fund.
17.7 Assignment of Manager's Interest. The Manager may not transfer its
Membership in the Fund without the consent of Members owning in excess of 50% of
the total outstanding Units, unless such an assignment is to an entity which
succeeds to all of the assets of the assigning Manager and of which at least 80%
of the voting and beneficial interest is controlled by Persons controlling 80%
or more of the voting and beneficial interest of the assigning Manager. Any
entity to which the entire interest of a Manager in the Fund is assigned in
compliance with this Section 17.7 shall be substituted as a Manager by the
filing of appropriate amendments to this Agreement. Notwithstanding the
foregoing, the Manager may delegate to any of its subsidiaries or other
Affiliates responsibility for specific services to be performed for the Fund and
may assign all or a portion of the compensation due the Manager to such
subsidiaries or other Affiliates.
17.8 Members' Participation in Manager's Bankruptcy. In the event the
Manager is subject to a voluntary or involuntary petition for reorganization or
liquidation under the federal Bankruptcy Act, the Manager will cause separate
counsel to be retained on behalf of the Fund, at Fund expense, to represent the
Members' interests in the bankruptcy action. In such event, the Fund will also
bear any reasonable and necessary expenses of a duly appointed committee of
Members incurred while acting on behalf of all of the Members as a group in
connection with such bankruptcy action.
B-28
18. CERTAIN TRANSACTIONS
18.1 The Manager and its Affiliates, the Holders, any shareholder,
officer, director, Member or employee thereof, or any Person owning a legal or
beneficial interest therein, may engage in or possess an interest in any other
business or venture of every nature and description, independently or with
others, including, but not limited to, the ownership, financing, leasing,
operation, management and brokerage of equipment. Except as described in the
Prospectus, and subject to their fiduciary duties to the Fund, neither the
Manager nor its Affiliates shall be obligated to present to the Fund any
particular investment opportunity, regardless of whether such opportunity is of
such character that the Fund could take advantage thereof if it were presented
to the Fund, and the Manager and its Affiliates shall have the right to take for
their own accounts (individually or otherwise) or to recommend to others any
such investment opportunity.
19. TERMINATION AND DISSOLUTION OF THE FUND
19.1 Termination and Dissolution. The Fund shall be terminated and
dissolved upon the earliest to occur of the following:
19.1.1 The withdrawal, removal, adjudication of bankruptcy,
insolvency, insanity or incompetency, death or dissolution of a Manager unless a
remaining Manager or a majority-in-interest of the Members, within 90 days of
the date of such event, elects to continue the business of the Fund, and, if
necessary, elects a replacement Manager, in the manner provided in Article 17;
provided that expenses incurred on behalf of the Manager and/or Members in the
continuation or reformation, or attempted continuation or reformation, of the
Fund hereunder shall be deemed expenses of the Fund;
19.1.2 The Members owning more than 50% of the total
outstanding Units vote in favor of dissolution and termination of the Fund;
19.1.3 The term of the Fund expires; or
19.1.4 The Fund disposes of all interests in Equipment and its
other assets and receives final payment in cash of the proceeds of such
dispositions.
19.2 Accounting and Liquidation. Upon the dissolution and termination
of the Fund for any reason, the Manager shall take full account of the Fund
assets and liabilities, shall liquidate the assets as promptly as is consistent
with obtaining the fair value thereof, and shall apply and distribute the
proceeds therefrom in the following order:
19.2.1 To the payment of creditors of the Fund but excluding
secured creditors whose obligations will be assumed or otherwise transferred on
the liquidation of Fund assets;
19.2.2 To the repayment of any outstanding loans made by the
Manager to the Fund; and
19.2.3 To the Manager and Holders in accordance with their
respective Capital Account balances, after giving effect to all allocations
described in Article 10 of this Agreement; provided, however, that prior to any
allocation under Section 10 of this Agreement, Gross Income shall be specially
allocated to the Manager to the extent, if any, necessary to cause its Capital
Account balance to be zero as of the close of such final taxable year (after
crediting the Manager's Capital Account with the Manager's share of Fund Minimum
Gain). For purposes of making the foregoing allocation, Net Income and Net Loss
for the final taxable year of the Fund shall first tentatively be computed by
including all Gross Income as an element thereof; then, to the extent, if any,
that the Capital Account balance of the Manager is negative as of the close of
such final taxable year (after giving effect to all Fund distributions), Gross
Income shall be separately stated and allocated away from the Holders and to the
Manager pursuant to this Section 19.2.3.
19.2.4 Distributions in liquidation shall be made by the end
of the taxable year in which the liquidation occurs or, if later, within 90 days
of the liquidating event and shall otherwise comply with Regulations Section
1.704-1(b).
B-29
20. SPECIAL POWER OF ATTORNEY
20.1 Execution of Power of Attorney. By executing this Agreement, each
Holder is hereby granting to the Manager a special power of attorney irrevocably
making, constituting and appointing ATEL, its duly appointed officers, and any
one of them, as the attorney-in-fact for such Holder, with power and authority
to act alone in his name and on his behalf to execute, acknowledge and swear to
the execution, acknowledgement and filing of the following documents:
20.1.1 This Agreement, the Articles of Organization, any
separate certificates, as well as any amendments to the foregoing which, under
the laws of the State of California or the laws of any other state, are required
to be filed or which the Manager deems advisable to file;
20.1.2 Any other instrument or document which may be required
to be filed by the Fund under the laws of any state or by any governmental
agency, or which the Manager deems advisable to file; and
20.1.3 Any instrument or document which may be required to
effect the continuation of the Fund, the admission of an additional or
substituted Holder, or the dissolution and termination of the Fund (provided
such continuation, admission or dissolution and termination are in accordance
with the terms of this Agreement), or to reflect any reductions in amount of
contributions of Members.
20.2 Special Power of Attorney. The special power of attorney being
granted hereby:
20.2.1 Is a special power of attorney coupled with an
interest, is irrevocable, shall survive the death or legal incapacity of the
granting Holder, and is limited to those matters herein set forth;
20.2.2 May be exercised by the Manager acting alone for each
Holder by a facsimile signature of such Manager or by one of its officers, or by
listing all of the Holders executing any instrument with a single signature of a
Manager, or of one of the Manager's officers, acting as attorney-in-fact; and
20.2.3 Shall survive an assignment by a Holder of all or any
portion of his Units except that, where the Assignee of the Units owned by a
Holder has been approved by the Manager for admission to the Fund as a
substituted Holder, the special power of attorney shall survive such assignment
for the sole purpose of enabling the Manager to execute, acknowledge and file
any instrument or document necessary to effect such substitution.
21. INDEMNIFICATION
21.1 Indemnification of the Manager. The Fund, its receiver or its
trustee, shall indemnify, save harmless and pay all judgments and claims against
the Manager and any of its Affiliates who perform services for the Fund from any
liability, loss or damage incurred by them or the Fund by reason of any act
performed or omitted to be performed by them when acting in connection with the
business of the Fund, including costs and attorneys' fees and any amounts
expended in the settlement of any claims or liability, loss or damage; provided,
however, that, if such liability, loss or claim arises out of any action or
inaction of the Manager or Affiliates who perform services for the Fund, the
Manager or Affiliates who perform services for the Fund must have determined, in
good faith, that such course of conduct was in the best interest of the Fund and
did not constitute fraud, negligence, breach of fiduciary duty or misconduct by
the Manager or Affiliates who perform services for the Fund; and provided
further, that any such indemnification shall be recoverable only from the assets
of the Fund and not from the assets of the Holders. All judgments against the
Fund and the Manager, wherein a Manager is entitled to indemnification, must
first be satisfied from Fund assets before such Manager may be held responsible.
Persons entitled to indemnification hereunder shall be entitled to receive
advances for attorney's fees and other legal costs and expenses arising out of
claims made against them, provided that (i) no such advances may be made for
such fees, costs or expenses resulting from claims made by Holders; and (ii)
advances for such fees and expenses relating to claims made by parties other
than Holders may only be made if the action relates to the performance of duties
or services by the indemnified party on behalf of the Fund, the indemnified
party obtains an opinion of independent counsel that such party will be entitled
to indemnification pursuant to this Agreement under the specific circumstances
of the claim in question, and the indemnified party undertakes in writing prior
B-30
to receipt of such advances that such party will repay in full any such advanced
funds together with interest thereon in the event that, upon the ultimate
disposition of the claim, the party would not be entitled to indemnification
hereunder. Nothing contained herein shall constitute a waiver by a Holder of any
right which he may have against any party under federal or state securities
laws.
21.2 Limitations on Indemnification. Notwithstanding anything to the
contrary contained in the foregoing Section 21.1, neither the Manager nor any of
its Affiliates performing services for the Fund nor any party acting as a
broker-dealer shall be indemnified from any liability, loss or damage incurred
by them in connection with (i) any claim or settlement involving violations of
state or federal securities laws by the Manager or by any Affiliate performing
services for the Fund; or (ii) any liability imposed by law, such as liability
for fraud, bad faith or negligence; provided, however, that indemnification will
be allowed for settlements and related expenses of lawsuits alleging securities
law violations, and for expenses incurred in successfully defending such
lawsuits, provided that a court either (x) approves the settlement and finds
that indemnification of any payment in settlement and related costs should be
made; or (y) approves indemnification of litigation costs if a successful
defense is made, or a dismissal with prejudice is obtained, as to the indemnitee
on the merits of each count involving alleged securities law violations; and (z)
the parties seeking indemnification apprise the court of the positions of the
securities law administrators of any state in which the Units were offered or
sold, including the Massachusetts Securities Division, and the Securities and
Exchange Commission with respect to indemnification for securities laws
violations before seeking court approval for indemnification. Furthermore, the
Manager shall indemnify the Fund against any loss or liability which it may
incur as a result of the violation by the Manager or any of its Affiliates
performing services for the Fund of any state or federal securities laws.
21.3 Insurance. The Fund shall not pay for any insurance covering
liability of the Manager or any of its Affiliates for actions or omissions for
which indemnification is not permitted hereunder; provided, however, that
nothing contained herein shall preclude the Fund from purchasing and paying for
such types of insurance, including extended coverage liability and casualty and
worker's compensation, as would be customary for any Person owning comparable
Equipment and engaged in a similar business or from naming the Manager and any
of its Affiliates as additional insured parties thereunder, provided that such
addition does not add to the premiums payable by the Fund.
22. MISCELLANEOUS
22.1 Counterparts. This Agreement may be executed in several
counterparts and all so executed shall constitute one Agreement, binding on all
parties hereto, notwithstanding that all of the parties are not signatory to the
original or the same counterpart.
22.2 Successors and Assigns. The terms and provisions of this Agreement
shall be binding upon and shall inure to the benefit of the successors and
assigns of the respective Members.
22.3 Severability. In the event any sentence or paragraph of this
Agreement is declared by a court of competent jurisdiction to be void, such
sentence or paragraph shall be deemed severed from the remainder of this
Agreement and the balance of this Agreement shall remain in effect.
22.4 Notices. All notices under this Agreement shall be in writing and
shall be given to the Person entitled thereto, by personal service or by mail,
posted to the address maintained by the Fund for such Person or at such other
address as he may specify in writing.
22.5 Captions. Article and section titles or captions contained in this
Agreement are inserted only as a matter of convenience and for reference. Such
titles and captions in no way define, limit, extend or describe the scope of
this Agreement nor the intent of any provision hereof.
22.6 Number and Pronouns. Whenever required by the context hereof, the
singular shall include the plural, and vice-versa; the masculine gender shall
include the feminine and neuter genders, and vice-versa.
B-31
22.7 Manager Address. The address of the Manager is:
ATEL Financial Services, LLC
600 California Street, 6th Floor
San Francisco, California 94108
22.8 Member Addresses. The names, addresses and capital contributions
of the Members are set forth on Exhibit I attached hereto, which exhibit shall
be maintained at the principal place of business of the Fund.
22.9 Construction. Notwithstanding the place where this Agreement may
be executed by any of the parties hereto, the parties expressly agree that all
the terms and provisions hereof shall be construed under the laws of the State
of California and that the Fund shall be governed by the California Act, as
amended, governing limited liability companies formed under California law.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
B-32
22.10 Qualification to Do Business. In the event the business of the
Fund is carried on or conducted in states in addition to the State of
California, then the parties agree that this Fund shall exist under the laws of
each state in which business is actually conducted by the Fund, and they
severally agree to execute such other and further documents as may be required
or requested in order that the Manager may qualify the Fund to conduct business
in such states. The power of attorney granted to the Manager by each Holder in
Article 20 shall constitute authority for the Manager to perform the ministerial
duty of qualifying the Fund under the laws of any state in which it is necessary
to file documents or instruments of qualification. A Fund office or principal
place of business in a state may be designated from time to time by the Manager.
INITIAL MEMBERS:
ATEL FINANCIAL SERVICES, LLC, Manager
By ATEL LEASING CORPORATION, Manager
By: /s/ DEAN L. CASH
----------------------------
Dean L. Cash, President
ATEL CAPITAL GROUP, Initial Member
By: /s/ DEAN L. CASH
----------------------------
Dean L. Cash, President
B-33
EXHIBIT I
Schedule of Members
Capital
Name Address Contribution
ATEL Capital Group $500/50 Units
600 California Street
6th Floor
San Francisco, CA 94108
ATEL Financial Services, LLC $100
600 California Street
6th Floor
San Francisco, CA 94108
B-34
EXHIBIT C
HOW TO INVEST
TO THE INVESTOR:
Prior to the satisfaction of the escrow condition (sale of 120,000 Units), make
your check payable to "U.S. Bank - ACEF XI Escrow." Thereafter, make your check
payable to"ATEL Capital Equipment Fund XI". Investments must be made in
increments of $10, with a minimum of $5,000 in most states. See the discussion
under "Who Should Invest - State Requirements" in the Prospectus for exceptions.
IMPORTANT INSTRUCTIONS:
- ----------------------
Fully complete sections 1, 2, and 3 of the Subscription Agreement.
All subscribers must:
1) sign each appropriate section where indicated,
2) initial each appropriate section (sections 3A - 3D) where indicated on
the bottom of the subscription agreement.
If you would like your distributions sent to an address other than your own
(mutual fund, bank, etc.), please fill in the Distribution Instructions section
(section 6).
ADD-ON INVESTMENTS
The Subscription Agreement accompanying additional investments in Fund XI must
have an authorized signature of a Registered Principal or Branch Manager of the
Broker/Dealer, but does not require the signature of the investor. Add-on
investments must bear the exact name in which the previous investment was
registered, or a new signed Subscription Agreement will be required.
FOREIGN INVESTOR OPTION
As described in the Prospectus, the Manager has elected to permit limited
investment in Units by nonresident alien investors. In section 1 of the
Subscription Agreement there are three boxes, one of which must be checked to
indicate whether an investor is a resident alien, nonresident alien or U.S.
citizen residing outside the United States. If none of the three boxes is
checked, the executed Subscription Agreement will constitute the investor's
representation that he or she is a U.S. citizen residing in the United States.
TO THE SELLING REPRESENTATIVE:
Please complete the Broker/Dealer Information section (Box 7) using your office
address rather than the home office address. This section must be completed for
all investments, including add-on investments by previous subscribers. Please
make sure that the exact same name is used for the registered owner if the
investment is an additional subscription. Also please make sure that the
investor satisfies any other special investment standards imposed by the state
in which he or she resides, as set forth in the Prospectus under the caption
"Who Should Invest - State Requirements."
Please have the Subscription Agreement signed by your branch manager or other
authorized signatory.
Retain the blue copy for the Broker/Dealer and the green copy for the investor
unless otherwise specified by your Broker/Dealer. All IRA investments must be
submitted directly to the Custodian for completion - the Custodian will forward
the Subscription Agreement to ATEL. Mail the original white copy and pink and
yellow copies to ATEL at:
ATEL SECURITIES CORPORATION
SUBSCRIPTION PROCESSING DESK
600 CALIFORNIA STREET, Suite 600
SAN FRANCISCO, CA 94108
(415) 989-8800
(800) 543-ATEL
E-mail: securities@atel.com
C-1
ATEL CAPITAL EQUIPMENT FUND XI, LLC
The investor whose signature appears in Section 2 on the reverse side hereof
(the "Investor") hereby subscribes for the number of Units of ATEL Capital
Equipment Fund XI, LLC (the "Fund") set forth in Section I of this Subscription
Agreement in the manner described in the Prospectus to which this agreement is
an exhibit (the "Prospectus"). Prior to the satisfaction of the escrow condition
(sale of 120,000 Units), there is transmitted herewith as the subscription price
a check payable to "U.S. Bank - ACEF X Escrow" in the amount required to
purchase such Units ($10 per Unit). Such funds will be promptly transmitted (as
defined in Rule 15c2-4 under the Securities Exchange Act of 1934 and NASD Notice
to members 84-64). No subscription funds will be released to the Fund unless and
until subscriptions for a minimum of 120,000 units have been received and
collected by the escrow agent prior to a date 12 months after the date of the
Prospectus. After the escrow condition of 120,000 Units sold has been satisfied,
checks should be made payable to "ATEL Capital Equipment Fund XI". Minimum
initial investment is 500 Units.
The Investor agrees that if this subscription is accepted it will be held,
together with the accompanying payment, on the terms described in the Prospectus
and that, if accepted as a holder of the Units ("Holder"), the Investor shall be
bound by the terms and conditions of the Operating Agreement set forth as
Exhibit B to the Prospectus, including the special power of attorney set forth
therein. The subscription may be canceled by the subscriber at any time during a
period of five days after the subscriber has submitted this executed
Subscription Agreement to the Fund. The Fund will advise the subscriber of the
acceptance or rejection of the subscription as soon as practicable after receipt
of the subscription, but in no event more than 30 days following receipt.
The assignability and transferability of the Units will be governed by the
Agreement and all applicable laws, and the Investor must have adequate means of
providing for his current needs and personal contingencies and must have no need
for liquidity in this investment.
The Investor may not be able to consummate a sale or transfer of the Units, or
any interest therein, or receive any consideration therefor, without the prior
written consent of the Commissioner of Corporations of the State of California,
except as permitted in the Commissioner's Rules, and the Units, or any document
of assignment or transfer evidencing the Units, will bear a legend reflecting
the substance of the foregoing understanding if such Units have been issued
pursuant to qualification under the California Corporate Securities Law of 1968.
The undersigned acknowledges that U.S. Bank Trust National Association is acting
only as an escrow agent in connection with the offering of the Units, and has
not endorsed, recommended or guaranteed the purchase, value or repayment of such
Units.
INSTRUCTIONS FOR COMPLETING THE SUBSCRIPTION AGREEMENT
Note- Please type or print legibly when completing the Subscription Agreement.
Section 1: Units Purchased.
o Fill in the total dollar amount and the number of Units to be acquired.
Please note there are no fractional Units. All purchases must be in
increments of $10.
o Indicate whether this is an original investment in the Fund or an
additional investment to an existing Fund account with the exact same
registration by checking the appropriate box. Please note the minimum
requirements. Only the dollar amount, subscriber name and broker/dealer
information sections of the subscription forms need be completed for
additional subscriptions by the same investor.
Section 2: Registered Owner.
o Fill in the name(s) and addresses for the investment as they should
appear in the registration.
o Check the applicable citizenship status boxes.
o Enter the appropriate taxpayer identification number for this
investment, depending on the type of ownership. For IRAs and Keoghs
please include both the custodian's taxpayer identification and
investor's social security number.
o Check whether monthly or quarterly distributions are desired.
o Please read the Subscription Agreement, then sign and date the form.
o Single Ownership - one signature required o Joint Tenants - all parties
must sign
o Community Property - one signature required
o Tenants in Common - all parties must sign
o Tenants in Entirety - one signature required
o In all other cases, the custodian, trustee, general partner or
authorized corporate officer must sign. Where the documents
establishing such representative capacity require more than one
signature for execution of instruments on behalf of the represented
entity, then all signatures required by such documents are required
here.
Section 3: Subscriber Information
o Each item must be initialed.
Section 4: Legal Form of Ownership.
o Mark only one box. Fill in any information requested and note whose
signature(s) is (are) required in Section 2.
Section 5: Investor Mailing Address.
o Fill in name and address if different from Section 1, as with IRAs and Keoghs.
Section 6: Distribution Instructions.
o Complete this section only if you want your distribution checks mailed
to an address other than that shown in Section 2.
Section 7: Broker/Dealer Information.
o Fill in the name of the licensed Broker/Dealer firm, the name of the
Account Executive, and the telephone number and mailing address of the
Account Executive. The name, address and phone number of the Account
Executive are required so he/she can receive copies of all investor
communications.
o An authorized Branch Manager or Registered Principal of the
Broker/Dealer firm must sign the form. Orders cannot be accepted
without Broker/Dealer authorization.
Mailing Address.
o Mail the completed form with a check payable as indicated in Section
1 to:
ATEL Securities Corporation
Attention: Subscription Processing Desk
600 California Street, Suite 600
San Francisco, CA 94108
If you have any additional questions about completing
this Subscription Agreement, please call
ATEL Securities Corporation Subscription Processing Desk
at (800) 543-ATEL.
C-2
ATEL CAPITAL EQUIPMENT FUND XI, LLC - SUBSCRIPTION AGREEMENT
Please type or print the following information:
1.UNITS PURCHASED
Make checks payable to "ATEL Capital Equipment Fund XI"
$_________ is for the purchase, as a Holder, of _______ Units and should be
registered as indicated in the Registered Owner section below.
2. REGISTERED OWNER.
Name(s) and addresses will be recorded exactly as printed below. (Include
custodial address if applicable.) ___Mr. ___Ms. ___Mr. and Mrs. ___Mrs.
Investor(s) Name and/or
Custodian/Nominee_________________________________________________________
Investor Name(s)__________________________________________________________
Address___________________________________________________________________
City______________________________________State_____ZipCode_______________
Investor Phone Number (____)______________E-mail__________________________
Investor Account # (if any)_______________________________________________
X______________________________________________Date_______________________
Subscriber's Signature
X______________________________________________Date_______________________
Subscriber/Custodian/Nominee or Authorized Signature
___ INITIAL INVESTMENT $10 per unit ($5,000/500 Unit Minimum, unless a higher
minimum is required in the investor's state - see the Prospectus)
___ ADDITIONAL INVESTMENT ($500/50 Units, unless a higher minimum is required in
the investor's state - see the Prospectus)
___ Check if you are a resident alien.
___ Check if you are a nonresident alien (please include W-8 form).
___ Check if you are a U.S. citizen residing outside the U.S.
TAXPAYER IDENTIFICATION NUMBER
Note: If the account is in more than one name, the number should be that of the
first person listed.
Include BOTH numbers for IRAs and Keoghs.
SOCIAL SECURITY NUMBER
- -- -- -- -- -- -- -- -- --
HAVE YOU INVESTED IN ANY PRIOR ATEL FUND?
___YES ___NO
PRIVACY ELECTION (check if desired)
____ By checking this box the undersigned directs the Manager to treat all
information concerning the undersigned as confidential, and not to disseminate
any such information to any party, without the undersigned's consent, except as
may be required under an applicable statute or regulation or by the order of a
court or governmental agency.
No representations should be relied upon other than those contained in the
Prospectus, as amended and/or supplemented. The subscriber represents, warrants
and agrees as set forth on the reverse side of this signature page; further, the
undersigned declares under penalty of perjury that to the best of his knowledge
the information supplied above is true and correct and may be relied upon by the
Manager and the Fund in connection with his investment as a Holder in the Fund.
The subscriber hereby subscribe(s) for the purchase of fully-paid and
nonassessable Units of the Fund as indicated.
3. SUBSCRIBER INFORMATION (EACH ITEM MUST BE INITIALED):
In order to induce the Manager to accept this subscription, the Investor hereby
represents to you as follows (initial in the space provided):
A. The Investor has (a) a net worth of at least $150,000 in excess of his
investment in Units, or (b) has a net worth of at least $45,000 in excess of his
investment in Units and had during the last tax year or estimates that he will
have during the current tax year a minimum of $45,000 annual gross income. In
all cases net worth is exclusive of home, home furnishings and automobiles. The
Investor further represents that he/she satisfies any other minimum income and
/or net worth standards imposed by the jurisdiction in which he/she resides, if
any different standards are set forth in the Prospectus or any supplement
thereto. The Investor further represents that the Investor has received a copy
of the Prospectus. The Investor acknowledges that an investment in Units is not
liquid.
INITIAL HERE________
B. If the undersigned is acting in a representative capacity for a corporation,
partnership, trust or other entity, or as agent for any person or entity, he
hereby represents and warrants that he has full authority to enter into this
agreement in such capacity.
INITIAL HERE________
C. If the undersigned is purchasing the Units subscribed for hereby in a
fiduciary capacity, the representations and warranties herein shall be deemed to
have been made on behalf of the person or persons for whom the undersigned is so
purchasing.
INITIAL HERE________
D. Under the penalties of perjury, the undersigned certifies that (l) the number
provided herein is his correct Taxpayer Identification Number; and (2) he is not
subject to backup withholding either because he has not been notified that he is
subject to backup withholding as a result of a failure to report all interest or
dividends, or the Internal Revenue Service has notified him that he is no longer
subject to backup withholding. (If the undersigned is currently subject to
backup withholding, he has stricken the language under clause (2) above before
signing).
INITIAL HERE________
4. LEGAL FORM OF OWNERSHIP (Check Only One)
___ Single Ownership
___ Joint Tenants With Rights of Survivorship
___ Husband and Wife as Community Property
___ Tenants in Common
___ Tenants in Entirety
___ Sep IRA
___ IRA __regular __rollover
___ Trust - Trust Date (Month/Day/Year) ___/___/___
___ Custodian
___ Custodian for___________________________________
___ UGMA / UTMA - State of:_______
___ Pension Plan
___ Profit Sharing Plan
___ Corporation
___ Partnership
___ Non-Profit Organization
___ Other__________________
5. INVESTOR MAILING ADDRESS
(if different from above, as with IRAs and Keoghs)
Name________________________________________________________________________
Name________________________________________________________________________
Address_____________________________________________________________________
City__________________________________________State_____Zip Code____________
Investor Phone Number (_____)_______________________________________________
6. DISTRIBUTION INSTRUCTIONS
___ Please deposit directly into the following account: __ Checking __ Savings
(for direct deposit, enclose a voided check and complete instructions below)
___ Send distributions to a party other than the registered owner
___ Send distributions to registered owner's address above.
Receiving Entity____________________________________________________________
Address_____________________________________________________________________
City__________________________________________State_____Zip Code____________
Account Number______________________________ABA Number______________________
7. BROKER/DEALER INFORMATION The Broker/Dealer must sign below to complete
order. Broker/Dealer hereby warrants that it is a duly licensed Broker/Dealer
and may lawfully offer Units in the state designated as the Investor's residence
and, further, that it has reasonable grounds to believe, based on information
obtained from the Subscriber concerning his investment objectives, other
investments, financial situation and needs and any other information known by
the Broker/Dealer, that investment in the Fund is suitable for the Subscriber in
light of his/her financial position, net worth and other suitability
characteristics, and that the Broker/Dealer has informed the Subscriber as to
the limited liquidity and marketability of the Units. The undersigned
Broker/Dealer warrants that a current Prospectus was delivered to the
Subscriber.
Licensed Firm Name__________________________________________________________
Account Executive Name_________________________________B/D Rep #____________
A/E Mailing Address____________________________________________Suite#_______
City__________________________________________State_____Zip Code____________
Telephone(____)____________________ NumberFax(____)_________________________
E-mail______________________________________________________________________
X_____________________________________________________Date__________________
Authorized signature (Branch Manager or Registered Principal).
Order cannot be accepted without signature.
This transaction, for Blue Sky purposes, took place in the State of ______.
ACCEPTANCE BY MANAGER - FOR MANAGER'S USE ONLY
Received and Subscription Accepted
ATEL Financial Services, LLC, Manager
By ATEL Leasing Corporation, Manager
By ____________________________________
Amount___________________________ Date______________ B/D Rep #______________
RETURN TOP 3 COPIES: WHITE - ATEL COPY, YELLOW - BROKER/DEALER COPY,
PINK - INVESTOR COPY RETAIN: BLUE - BROKER/DEALER COPY,
GREEN - INVESTOR COPY
ATEL SECURITIES CORPORATION
600 CALIFORNIA STREET - 6th FLOOR - SAN FRANCISCO, CA 94108
(800) 543-2835 - E-Mail: AIS@atel.com
C-3
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[Outside Back Cover]
The Fund has not authorized anyone to give any information or to make any
representations other than those contained in this Prospectus in connection with
the offer of its Units, and unauthorized information or representations must not
be relied upon. This Prospectus is not an offer or solicitation by anyone in any
state or other jurisdiction in which the offer or solicitation is not authorized
or in which the person making an offer is not qualified to do so or to any
person to whom it is unlawful to make an offer or solicitation. Neither the
delivery of this Prospectus or any Supplement nor any sale made hereunder shall,
under any circumstances, create an implication that there has been no change in
the facts set forth herein since the date hereof; however, if any material
change not contemplated hereby occurs while this Prospectus is required to be
delivered, this Prospectus will be amended or supplemented accordingly.
Until a date 90 days after the effective date of this Prospectus, all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution may be required to deliver a Prospectus. This
is in addition to the obligation of dealers to deliver a Prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
ATEL CAPITAL EQUIPMENT FUND XI, LLC is not a mutual fund or any other type
of investment company within the meaning of the Investment Company Act of 1940
and is not regulated by that Act.
ATEL SECURITIES CORPORATION
600 CALIFORNIA STREET, 6th FLOOR
SAN FRANCISCO, CA 94108
1.800.543.ATEL - FAX 415.989.2536
EMAIL ASC@ATEL.COM - www.atel.com