Form 10K-A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| Annual report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 (fee required)
For the Year Ended December 31, 2003
OR
|_| Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 (no fee required)
For the transition period from _______ to _______
Commission File number 333-100452
ATEL Capital Equipment Fund X, LLC
California 68-0517690
---------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
600 California Street, 6th Floor, San Francisco, California 94108
(Address of principal executive offices)
Registrant's telephone number, including area code (415) 989-8800
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: None
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
State the aggregate market value of voting stock held by non-affiliates of the
registrant: Inapplicable
The number of Limited Liability Company Units outstanding as of December 31,
2003 was 4,483,382.
This amendment is being filed in order to correct the format of the
certifications included as Exhibits 31.1 and 31.2.
1
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
Item 1: BUSINESS
General Development of Business
ATEL Capital Equipment Fund X, LLC (the Company) was formed under the laws of
the state of California on August 12, 2002. The Company was formed for the
purpose of acquiring equipment to engage in equipment leasing and sales
activities. The Managing Member of the Company is ATEL Financial Services LLC
(AFS), a California limited liability corporation.
The Company conducted a public offering of 15,000,000 Limited Liability Company
Units (Units), at a price of $10 per Unit. On April 9, 2003, subscriptions for
the minimum number of Units (120,000, representing $1,200,000) had been received
and AFS requested that the subscriptions be released to the Company. On that
date, the Company commenced operations in its primary business (leasing
activities). As of June 2, 2003, the Company had received subscriptions for
774,383 Units ($7,743,830), thus exceeding the $7,500,000 minimum requirement
for Pennsylvania, and AFS requested that the remaining funds in escrow (from
Pennsylvania investors) be released to the Company. The offering is scheduled to
terminate on or before March 11, 2005.
As of December 31, 2003, 4,483,382 Units ($44,833,820) were issued and
outstanding.
The Company's principal objectives are to invest in a diversified portfolio of
equipment that will (i) preserve, protect and return the Company's invested
capital; (ii) generate regular distributions to the members of cash from
operations and cash from sales or refinancing, with any balance remaining after
certain minimum distributions to be used to purchase additional equipment during
the reinvestment period ("Reinvestment Period"), ending six calendar years after
the termination of the offering (which will be no later than March 11, 2011) and
(iii) provide additional distributions following the Reinvestment Period and
until all equipment has been sold. The Company is governed by its Limited
Liability Company Operating Agreement (Operating Agreement).
Narrative Description of Business
The Company has acquired and intends to acquire various types of equipment and
to lease such equipment pursuant to "Operating" leases and "High Payout" leases,
whereby "Operating" leases are defined as being leases in which the minimum
lease payments during the initial lease term do not recover the full cost of the
equipment and "High Payout" leases recover at least 90% of such cost. It is the
intention of AFS that a majority of the aggregate purchase price of equipment
will represent equipment leased under "High Payout" leases upon final investment
of the Net Proceeds of the Offering and that no more than 20% of the aggregate
purchase price of equipment will be invested in equipment acquired from a single
manufacturer.
The Company will only purchase equipment for which a lease exists or for which a
lease will be entered into at the time of the purchase.
Through December 31, 2003, the Company had purchased equipment with a total
acquisition price of $14,482,433.
The Company's objective is to lease a minimum of 75% of the equipment acquired
with the net proceeds of the offering to lessees that (i) have an aggregate
credit rating by Moody's Investor Service, Inc. of Baa or better, or the credit
equivalent as determined by AFS, with the aggregate rating weighted to account
for the original equipment cost for each item leased or (ii) are established
hospitals with histories of profitability or municipalities. The balance of the
original equipment portfolio may include equipment leased to lessees which,
although deemed creditworthy by AFS, would not satisfy the general credit rating
criteria for the portfolio. In excess of 75% of the equipment acquired with the
net proceeds of the offering (based on original purchase cost) has been leased
to lessees with an aggregate credit rating of Baa or better or to such hospitals
or municipalities as described in (ii) above.
During 2003, certain lessees generated significant portions of the Company's
total lease revenues as follows:
Lessee Type of Equipment
Colowyo Coal Company L.P. Mining 37%
Ball Corporation Materials handling 26%
ARYx Therapeutics, Inc. Telecommunications 14%
These percentages are not expected to be comparable in future periods.
2
The equipment leasing industry is highly competitive. Equipment manufacturers,
corporations, partnerships and others offer users an alternative to the purchase
of most types of equipment with payment terms that vary widely depending on the
lease term and type of equipment. The ability of the Company to keep the
equipment leased and/or operating and the terms of the acquisitions, leases and
dispositions of equipment depends on various factors (many of which are not in
the control of AFS or the Company), such as general economic conditions,
including the effects of inflation or recession, and fluctuations in supply and
demand for various types of equipment resulting from, among other things,
technological and economic obsolescence.
AFS will seek to limit the amount invested in equipment to any single lessee to
not more than 20% of the aggregate purchase price of equipment owned at any time
during the Reinvestment Period.
The business of the Company is not seasonal.
The Company has no full time employees.
Equipment Leasing Activities
The Company has acquired a diversified portfolio of equipment. The equipment has
been leased to lessees in various industries. The following tables set forth the
types of equipment acquired by the Company through December 31, 2003 and the
industries to which the assets have been leased. The Company has purchased
certain assets subject to existing non-recourse debt.
Purchase Price Excluding Percentage of Total
Asset Types Acquisition Fees Acquisitions
- ----------- ---------------- ------------
Manufacturing $ 6,270,943 42.25%
Materials handling 4,827,588 32.53%
Mining equipment 2,000,000 13.47%
Office automation 1,743,902 11.75%
----------------- ------------------
$14,842,434 100.00%
================= ==================
Purchase Price Excluding Percentage of Total
Industry of Lessee Acquisition Fees Acquisitions
- ------------------ ---------------- ------------
Manufacturing $11,796,000 79.48%
Mining 2,000,000 13.47%
Health Care 1,046,434 7.05%
----------------- ------------------
$14,842,434 100.00%
================= ==================
For further information regarding the Company's equipment lease portfolio as of
December 31, 2003, see Note 3 to the financial statements, Investment in leases,
as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
Item 2. PROPERTIES
The Company does not own or lease any real property, plant or material physical
properties other than the equipment held for lease as set forth in Item 1.
Item 3. LEGAL PROCEEDINGS
In the ordinary course of conducting business, there may be certain claims,
suits, and complaints filed against the Company. In the opinion of management,
the outcome of such matters, if any, will not have a material impact on the
Company's consolidated financial position or results of operations. No material
legal proceedings are currently pending against the Company or against any of
its assets.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5. MARKET FOR REGISTRANT'S LIMITED LIABILITY COMPANY UNITS
AND RELATED MATTERS
Market Information
The Units are transferable subject to restrictions on transfers that have been
imposed under the securities laws of certain states. However, as a result of
such restrictions, the size of the Company and its investment objectives, to
AFS's knowledge, no established public secondary trading market has developed
and it is unlikely that a public trading market will develop in the future. As a
result, there is no currently ascertainable market value for the Units.
Holders
As of December 31, 2003, a total of 1,205 investors were record holders of Units
in the Company.
3
Dividends
The Company does not make dividend distributions. However, the Members of the
Company are entitled to certain distributions as provided under the Operating
Agreement.
AFS has sole discretion in determining the amount of distributions; provided,
however, that AFS will not reinvest in equipment, but will distribute, subject
to payment of any obligations of the Company, such available cash from
operations and cash from sales or refinancing as may be necessary to cause total
distributions to the Members for each year during the Reinvestment Period to
equal an amount of $0.80 per Unit.
The rate for monthly distributions from 2003 operations was $0.0667 per Unit for
April through December 2003. The distributions were paid in May through December
2003 and in January 2004. The rate for quarterly distributions paid in July,
October 2003 and January 2004 was $0.20, per Unit. Distributions were from 2003
cash flows from operations.
The following table presents summarized information regarding distributions to
members other than the Managing Member ("Other Members"):
2003
Net loss per Unit, based on weighted
average Units outstanding $ (0.12)
Return of investment 0.54
-----------------
-----------------
Distributions per Unit, based on weighted average
Units outstanding 0.42
Differences due to timing of distributions 0.18
-----------------
-----------------
Actual distribution rates per Unit $ 0.60
=================
Information provided pursuant to ss. 228.701 (Item 701(f))(formerly included in
Form SR):
(1) Effective date of the offering: March 12, 2003; File Number: 333-100452
(2) Offering commenced: March 12, 2003
(3) The offering did not terminate before any securities were sold.
(4) The offering has not been terminated prior to the sale of all of the
securities.
(5) The managing underwriter is ATEL Securities Corporation.
(6) The title of the registered class of securities is "Units of Limited
Liability Company interest."
(7) Aggregate amount and offering price of securities registered and sold as of
February 29, 2004:
Aggregate Aggregate
price of price of
offering offering
Amount amount Amount amount
Title of Security Registered registered sold sold
----------------- ---------- ---------- ---- ----
Units of Limited Liability Company interest 15,000,000 $150,000,000 5,334,224 $ 53,342,240
4
(8) Costs incurred for the issuers account in connection with the issuance and
distribution of the securities registered for each category listed below:
Direct or
indirect
payments to
directors,
officers,
Managing Member
of the issuer or
their
associates; to
persons owning
ten percent or more of any Direct or
class of equity securities of indirect
the issuer; and to affiliates of payments to
the issuer others Total
---------- ------ -----
Underwriting discounts and
commissions $ 800,134 $ 4,000,668 $ 4,800,802
Other expenses - 2,917,112 2,917,112
----------------- ----------------- ----------------
Total expenses $ 800,134 $ 6,917,780 $ 7,717,914
================= ================= ================
(9) Net offering proceeds to the issuer after the total expenses in item 8: $ 45,624,326
(10) The amount of net offering proceeds to the issuer used for each of the
purposes listed below:
Direct or
indirect
payments to
directors,
officers,
Managing Member
of the issuer or
their
associates; to
persons owning
ten percent or more of any Direct or
class of equity securities of indirect
the issuer; and to affiliates of payments to
the issuer others Total
---------- ------ -----
Purchase and installation of
machinery and equipment $ 1,115,615 $ 44,242,000 $ 45,357,615
Working capital - 266,711 266,711
----------------- ------------------ ----------------
$ 1,115,615 $ 44,508,711 $ 45,624,326
================= ================== ================
(11) The use of the proceeds in Item 10 does not represent a material change in
the uses of proceeds described in the prospectus.
Item 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of the Company at December
31, 2003 and 2002 and for the periods then ended. This financial data should be
read in conjunction with the financial statements and related notes included
under Part II Item 8.
2003 2002
---- ----
Gross revenues $ 907,914 $ -
Net loss $ (183,013) $ -
Weighted average Units 2,229,909 10
Net loss allocated to Other Members $ (258,926) $ -
Net loss per Unit, based on weighted
average Units outstanding ($0.12) $0.00
Distributions per Unit, based on weighted average
Units outstanding $ 0.42 $ -
Total Assets $37,815,563 $ 600
Total Members' Capital $37,110,663 $ 600
5
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements contained in this Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Form 10-K,
which are not historical facts, may be forward-looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Investors are cautioned not
to attribute undue certainty to these forward-looking statements, which speak
only as of the date of this Form 10-K. We undertake no obligation to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances after the date of this Form 10-K or to reflect the occurrence of
unanticipated events, other than as required by law.
Capital Resources and Liquidity
The Company commenced its offering of Units on March 12, 2003. On April 9, 2003,
the Company commenced operations in its primary business (leasing activities).
Until the Company's initial portfolio of equipment has been purchased, funds
that have been received, but that have not yet been invested in leased
equipment, are invested in interest-bearing accounts or high-quality/short-term
commercial paper. The Company's public offering provides for a total maximum
capitalization of $150,000,000.
During the funding period, the Company's primary source of liquidity will be
subscription proceeds from the public offering of Units. The liquidity of the
Company will vary in the future, increasing to the extent proceeds from the
offering, cash flows from leases and proceeds of asset sales exceed expenses,
and decreasing as lease assets are acquired, as distributions are made to the
Other Members and to the extent expenses exceed cash flows from leases and
proceeds from asset sales.
As another source of liquidity, the Company is expected to have contractual
obligations with a diversified group of lessees for fixed lease terms at fixed
rental amounts. As the initial lease terms expire, the Company will re-lease or
sell the equipment. The future liquidity beyond the contractual minimum rentals
will depend on AFS's success in re-leasing or selling the equipment as it comes
off lease.
Throughout the Reinvestment Period, the Company anticipates reinvesting a
portion of lease payments from assets owned in new leasing transactions. Such
reinvestment will occur only after the payment of all obligations, including
debt service (both principal and interest), the payment of management fees to
AFS and providing for cash distributions to the Other Members. At December 31,
2003, the Company had commitments to purchase lease assets totaling
approximately $1,605,000.
AFS or an affiliate may purchase equipment in its own name, the name of an
affiliate or the name of a nominee, a trust or otherwise and hold title thereto
on a temporary or interim basis for the purpose of facilitating the acquisition
of such equipment or the completion of manufacture of the equipment or for any
other purpose related to the business of the Company, provided, however that:
(i) the transaction is in the best interest of the Company; (ii) such equipment
is purchased by the Company for a purchase price no greater than the cost of
such equipment to AFS or affiliate (including any out-of-pocket carrying costs),
except for compensation permitted by the Operating Agreement; (iii) there is no
difference in interest terms of the loans secured by the equipment at the time
acquired by AFS or affiliate and the time acquired by the Company; (iv) there is
no benefit arising out of such transaction to AFS or its affiliate apart from
the compensation otherwise permitted by the Operating Agreement; and (v) all
income generated by, and all expenses associated with, equipment so acquired
will be treated as belonging to the Company.
The Company currently has available adequate reserves to meet its immediate cash
requirements and those of the next twelve months, but in the event those
reserves were found to be inadequate, the Company would likely be in a position
to borrow against its current portfolio to meet such requirements. ATEL
envisions no such requirements for operating purposes.
AFS expects that aggregate borrowings in the future will be approximately 50% of
aggregate equipment cost. In any event, the Operating Agreement limits such
borrowings to 50% of the total cost of equipment, in aggregate.
The Company commenced regular distributions, based on cash flows from
operations, beginning with the month of April 2003. The distribution was made in
May 2003 and additional distributions have been consistently made through
December 2003.
If inflation in the general economy becomes significant, it may affect the
Company inasmuch as the residual (resale) values and rates on re-leases of the
Company's leased assets may increase as the costs of similar assets increase.
However, the Company's revenues from existing leases would not increase, as such
rates are generally fixed for the terms of the leases without adjustment for
inflation.
If interest rates increase significantly, the lease rates that the Company can
obtain on future leases will be expected to increase as the cost of capital is a
significant factor in the pricing of lease financing. Leases already in place,
for the most part, would not be affected by changes in interest rates.
6
Cash Flows
The Company is currently conducting a public offering of its Units. In 2003, the
offering provided most of the Company's cash flows.
In 2003, our primary source of cash from operating sources was rents from
operating leases.
During 2003, we used cash in investing activities to purchase operating and
direct financing lease assets and to pay initial direct costs to AFS. Sources of
cash from investing activities consisted of rents from direct financing leases
and proceeds from sales of lease assets.
In 2003, financing sources of cash flows consisted solely of the proceeds of our
public offering of Units. We used cash to pay for the costs of the offering and
to make distributions to the Members.
Results of Operations
As of April 9, 2003, subscriptions for the minimum amount of the offering
($1,200,000) had been received and accepted by the Company. As of that date, the
Company commenced operations in its primary business (leasing activities).
Because of the timing of the commencement of operations and the fact that the
initial portfolio acquisitions were not completed at December 31, 2003, the
results of operations in 2003 are not expected to be comparable to future
periods. After the Company's public offering and its initial asset acquisition
stage terminate, the results of operations are expected to change significantly.
As of December 31, 2003, there were concentrations (greater than 10%) of
equipment leased to lessees and/or financial borrowers in certain industries (as
a percentage of total equipment cost) as follows:
Manufacturing 79%
Mining 14%
In 2003, operations resulted in a net loss of $183,013. Our primary source of
revenues is operating leases. We expect that operating leases will continue to
be the primary source of revenues and that the amounts earned will increase as
we continue to acquire additional lease assets. Our depreciation expense is
directly related to the assets we have on operating leases. We also expect that
depreciation expense will increase in future periods in relation to operating
lease revenues as we acquire more assets.
Substantially all employees of AFS track time incurred in performing
administrative services on behalf of the Company. AFS believes that the costs
reimbursed are the lower of (i) actual costs incurred on behalf of the Company
or (ii) the amount the Company would be required to pay independent parties for
comparable administrative services in the same geographic location.
Under the terms of the Limited Liability Company Operating Agreement, AFS is
entitled certain fees and reimbursements of costs. Management fees in 2003 were
$48,550 and costs reimbursements were $48,235. These amounts are expected to
increase in future periods as the operations of the Company expand.
Derivative Financial Instruments
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, which established new accounting and
reporting standards for derivative instruments. SFAS No. 133 has been amended by
SFAS No. 137, issued in June 1999, by SFAS No. 138, issued in June 2000 and by
SFAS No. 149, issued in June 2003.
SFAS No. 133, as amended, requires the Company to recognize all derivatives as
either assets or liabilities in 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. If derivative financial instruments are utilized, the Company will
be required to record derivative instruments at fair value in the balance sheet
and recognize the offsetting gains or losses as adjustments to net income or
other comprehensive income, as appropriate.
Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB 51." The
primary objectives of this interpretation are to provide guidance on the
identification of entities for which control is achieved through means other
than through voting rights ("variable interest entities") and how to determine
when and which business enterprise (the "primary beneficiary") should
consolidate the variable interest entity. This new model for consolidation
applies to an entity in which either (i) the equity investors (if any) do not
have a controlling financial interest; or (ii) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. In addition, FIN 46 requires
that the primary beneficiary, as well as all other enterprises with a
significant variable interest in a variable interest entity, make additional
disclosures. Certain disclosure requirements of FIN 46 were effective for
financial statements issued after January 31, 2003.
7
In December 2003, the FASB issued FIN No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain
FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN
46-R are as follows:
(i) Special purpose entities ("SPEs") created prior to February 1, 2003. The
company must apply either the provisions of FIN 46 or early adopt the provisions
of FIN 46-R at the end of the first interim or annual reporting period ending
after December 15, 2003.
(ii) Non-SPEs created prior to February 1, 2003. The company is required to
adopt FIN 46-R at the end of the first interim or annual reporting period ending
after March 15, 2004.
(iii) All entities, regardless of whether a SPE, that were created subsequent to
January 31, 2003. The provisions of FIN 46 were applicable for variable
interests in entities obtained after January 31, 2003.
The company is required to adopt FIN 46-R at the end of the first interim or
annual reporting period ending after March 15, 2004. The adoption of the
provisions applicable to SPEs and all other variable interests obtained after
January 31, 2003 did not have a material impact on the company's financial
statements. The company is currently evaluating the impact of adopting FIN 46-R
applicable to Non-SPEs created prior to February 1, 2003 but does not expect a
material impact.
In April 2002, the FASB issued FASB Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (Statement No. 145). Among other things, Statement No. 145 rescinds
Statement No. 4, which required that all gains and losses from extinguishment of
debt be reported as an extraordinary item. The adoption of Statement No. 145,
effective January 1, 2003, did not have any effect on the Company's consolidated
financial position, consolidated results of operations, or liquidity.
Critical Accounting Policies
The policies discussed below are considered by management of the Company to be
critical to an understanding of the Company's financial statements because their
application requires significant complex or subjective judgments, decisions, or
assessments, with financial reporting results relying on estimation about the
effect of matters that are inherently uncertain. Specific risks for these
critical accounting policies are described in the following paragraphs. The
Company also states these accounting policies in the notes to the financial
statements and in relevant sections in this discussion and analysis. For all of
these policies, management cautions that future events rarely develop exactly as
forecast, and the best estimates routinely require adjustment.
Equipment on operating leases:
Equipment on operating leases is stated at cost. Depreciation is being provided
by use of the straight-line method over the terms of the related leases to the
equipment's estimated residual values at the end of the leases. Revenues from
operating leases are recognized evenly over the lives of the related leases.
Direct financing leases:
Income from direct financing lease transactions is reported using the financing
method of accounting, in which the Company's investment in the leased property
is reported as a receivable from the lessee to be recovered through future
rentals. The income portion of each rental payment is calculated so as to
generate a constant rate of return on the net receivable outstanding.
Allowances for losses on direct financing leases are typically established based
on historical charge offs and collections experience and are usually determined
by specifically identified lessees and billed and unbilled receivables.
Direct financing leases are placed in a non-accrual status based on specifically
identified lessees. Such leases are only returned to an accrual status based on
a case by case review of AFS. Direct financing leases are charged off on
specific identification by AFS.
Use of Estimates:
The preparation of 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Such
estimates primarily relate to the determination of residual values at the end of
the lease term.
8
Asset Valuation:
Recorded values of the Company's asset portfolio are periodically reviewed for
impairment in accordance with Statement of Financial Accounting Standards (SFAS)
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. An
impairment loss is measured and recognized only if the estimated undiscounted
future cash flows of the asset are less than their net book value. The estimated
undiscounted future cash flows are the sum of the estimated residual value of
the asset at the end of the asset's expected holding period and estimates of
undiscounted future rents. The residual value assumes, among other things, that
the asset is utilized normally in an open, unrestricted and stable market.
Short-term fluctuations in the market place are disregarded and it is assumed
that there is no necessity either to dispose of a significant number of the
assets, if held in quantity, simultaneously or to dispose of the asset quickly.
Impairment is measured as the difference between the fair value (as determined
by the discounted estimated future cash flows) of the assets and its carrying
value on the measurement date.
Item 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, like most other companies, is exposed to certain market risks,
including primarily changes in interest rates. The Company believes its exposure
to other market risks, including foreign currency exchange rate risk, commodity
risk and equity price risk, are insignificant to both its financial position and
results of operations.
In general, the Company expects to manage its exposure to interest rate risk by
obtaining fixed rate debt. The fixed rate debt is structured so as to match the
cash flows required to service the debt to the payment streams under fixed rate
lease receivables. The payments under the leases are assigned to the lenders in
satisfaction of the debt. Furthermore, AFS, in conjunction with other companies
it manages, has historically been able to maintain a stable spread between its
cost of funds and lease yields in both periods of rising and falling interest
rates. Nevertheless, the Company expects to frequently fund leases with a
floating interest rate revolving line of credit and will, therefore, be exposed
to interest rate risk until fixed rate financing is arranged, or the floating
interest rate revolving line of credit is repaid. As of December 31, 2003, the
Company has not been included in the floating rate revolving line of credit as a
borrower and there were no variable rate borrowings as of that date.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Report of Independent Auditors, Financial Statements and Notes to
Financial Statements attached hereto at pages 10 through 21.
9
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Members
ATEL Capital Equipment Fund X, LLC
We have audited the accompanying balance sheets of ATEL Capital Equipment Fund
X, LLC (the Compay) as of December 31, 2003 and 2002, and the related statements
of operations, changes in members' capital and cash flows for the year ended
December 31, 2003 and for the period from August 12, 2002 (inception) through
December 31, 2002. These financial statements are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits 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 financial statements are free
from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ATEL Capital Equipment Fund X,
LLC at December 31, 2003 and 2002, and the results of its operations and cash
flows for the year ended December 31, 2003 and for the period from August 12,
2002 (inception) through December 31, 2002, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
San Francisco, California
February 20, 2004
10
ATEL CAPITAL EQUIPMENT FUND X, LLC
BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
ASSETS
2003 2002
---- ----
Cash and cash equivalents $ 22,680,652 $ 600
Due from affiliate 248,428 -
Accounts receivable 3,179 -
Prepaid syndication costs 156,624 -
Investments in leases 14,726,680 -
------------------ ----------------
Total assets $ 37,815,563 $ 600
================== ================
LIABILITIES AND MEMBERS' CAPITAL
Accounts payable:
Managing Member $ 472,041 $ -
Other 127,131 -
Unearned operating lease income 105,728 -
------------------ ----------------
Total liabilities 704,900 -
Members' capital 37,110,663 600
------------------ ----------------
Total liabilities and Members' capital $ 37,815,563 $ 600
================== ================
See accompanying notes.
11
ATEL CAPITAL EQUIPMENT FUND X, LLC
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM AUGUST 22, 2002 (INCEPTION)
TO DECEMBER 31, 2002
AND FOR THE
YEAR ENDED DECEMBER 31, 2003
2003 2002
---- ----
Revenues:
Leasing activities:
Operating leases $ 786,291 $ -
Direct finance leases 44,134 -
Gain on sales of assets 10,991 -
Interest 66,325 -
Other 173 -
------------------ ----------------
907,914 -
Expenses:
Depreciation 796,842 -
Amortization 66,861 -
Asset management fees to Managing Member 48,550 -
Cost reimbursements to Managing Member 48,235 -
Professional fees 33,563 -
Postage 19,156 -
Interest expense 8,045 -
Other 69,675 -
------------------ ----------------
1,090,927 -
------------------ ----------------
Net loss $ (183,013) $ -
================== ================
Net income (loss):
Managing Member $ 75,913 -
Other Members (258,926) -
------------------ ----------------
$ (183,013) $ -
================== ================
Net loss per Limited Liability Company Unit ($0.12) $0.00
Weighted average number of Units outstanding 2,229,909 10
See accompanying notes.
12
ATEL CAPITAL EQUIPMENT FUND X, LLC
STATEMENTS OF CHANGES IN MEMBERS' CAPITAL
FOR THE PERIOD FROM AUGUST 22, 2002 (INCEPTION)
TO DECEMBER 31, 2002
AND FOR THE YEAR ENDED
DECEMBER 31, 2003
Other Members Managing
Units Amount Member Total
Initial capital contributions 50 $ 500 $ 100 $ 600
----------------- ----------------- ------------------ ----------------
Balance December 31, 2002 50 500 100 600
Capital contributions 4,483,332 44,833,320 - 44,833,320
Less selling commissions to affiliates - (4,034,999) - (4,034,999)
Other syndication costs to affiliates - (2,491,736) - (2,491,736)
Distributions to Other Members ($0.42 per Unit) - (937,496) (76,013) (1,013,509)
Net income (loss) - (258,926) 75,913 (183,013)
----------------- ----------------- ------------------ ----------------
Balance December 31, 2003 4,483,382 $ 37,110,663 $ - $ 37,110,663
================= ================= ================== ================
See accompanying notes.
13
ATEL CAPITAL EQUIPMENT FUND X, LLC
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM AUGUST 22, 2002 (INCEPTION)
TO DECEMBER 31, 2002
AND FOR THE YEAR ENDED
DECEMBER 31, 2003
2003 2002
---- ----
Operating activities:
Net loss $ (183,013) $ -
Adjustments to reconcile net loss to cash provided by operating
activities:
Gain on sales of assets (10,991)
Depreciation 796,842 -
Amortization 66,861
Changes in operating assets and liabilities:
Accounts receivable (3,179) -
Prepaid syndication costs (156,624) -
Accounts payable, Managing Member 472,041 -
Accounts payable, other 127,131 -
Unearned operating lease income 105,728 -
------------------ ----------------
Net cash provided by operations 1,214,796 -
------------------ ----------------
Investing activities:
Purchases of equipment on operating leases (14,144,965) -
Proceeds from sales of assets 257,206 -
Due from affiliate (248,428) -
Purchases of equipment on direct financing leases (697,468) -
Payments of initial direct costs to Managing Member (1,092,193) -
Reduction of net investment in direct financing leases 98,028 -
------------------ ----------------
Net cash used in investing activities (15,827,820) -
------------------ ----------------
Financing activities:
Capital contributions received 44,833,320 600
Payment of syndication costs to Managing Member (6,526,735) -
Distributions to Other Members (937,496) -
Distributions to Managing Member (76,013) -
------------------ ----------------
Net cash provided by financing activities 37,293,076 600
------------------ ----------------
Net increase in cash and cash equivalents 22,680,052 600
Cash and cash equivalents at beginning of period 600 -
------------------ ----------------
Cash and cash equivalents at end of period $ 22,680,652 $ 600
================== ================
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 8,045 $ -
================== ================
See accompanying notes.
14
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
1. Organization and Limited Liability Company matters:
ATEL Capital Equipment Fund X, LLC (the Company) was formed under the laws of
the state of California on August 12, 2002 for the purpose of acquiring
equipment to engage in equipment leasing and sales activities. The Company may
continue until December 31, 2021.
The Company is conducting a public offering of 15,000,000 Limited Liability
Company Units (Units), at a price of $10 per Unit. Upon the sale of the minimum
amount of Units of Limited Liability Company interest (Units) of 120,000 Units
($1,200,000) and the receipt of the proceeds thereof on April 9, 2003, the
Company commenced operations. As of December 31, 2001, the Company had received
subscriptions for 4,483,382 ($44,833,820) Units, including the Initial Members'
Units. All of the Units were issued and outstanding as of December 31, 2003. The
Company's offering will terminate on or before March 11, 2005.
ATEL Financial Services, LLC (AFS), an affiliated entity, acts as the Managing
Member of the Company.
The Company, or AFS on behalf of the Company, will incur costs in connection
with the organization, registration and issuance of the Limited Liability
Company Units (Units) (Note 4). The amount of such costs to be borne by the
Company is limited by certain provisions of the Company's Operating Agreement.
The Company's principal objectives are to invest in a diversified portfolio of
equipment that will (i) preserve, protect and return the Company's invested
capital; (ii) generate regular distributions to the members of cash from
operations and cash from sales or refinancing, with any balance remaining after
certain minimum distributions to be used to purchase additional equipment during
the Reinvestment Period (ending six calendar years after the completion of the
Company's public offering of Units) and (iii) provide additional distributions
following the Reinvestment Period and until all equipment has been sold. The
Company is governed by its Limited Liability Company Operating Agreement
(Operating Agreement).
2. Summary of significant accounting policies:
Cash and cash equivalents:
Cash and cash equivalents includes cash in banks and cash equivalent investments
with original maturities of ninety days or less.
Accounts receivable:
Accounts receivable represent the amounts billed under lease contracts and
currently due to the Company. Allowances for doubtful accounts are typically
established based on historical charge offs and collection experience and are
usually determined by specifically identified lessees and invoiced amounts.
Accounts receivable are charged off on specific identification by AFS.
Investment in notes receivable:
Income from notes receivable is reported using the financing method of
accounting. The Company's investment in notes receivable is reported as the
present value of the future note payments. The income portion of each note
payment is calculated so as to generate a constant rate of return on the net
balance outstanding. Notes receivable are charged off on specific identification
by AFS. To date, the Company has made no provisions for losses on notes
receivable nor has the Company written off any notes receivables. Notes
receivable are to be charged off on specific identification by AFS.
15
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
2. Summary of significant accounting policies (continued):
Equipment on operating leases:
Equipment on operating leases is stated at cost. Depreciation is being provided
by use of the straight-line method over the terms of the related leases to the
equipment's estimated residual values at the end of the leases. Revenues from
operating leases are recognized evenly over the lives of the related leases.
Direct financing leases:
Income from direct financing lease transactions is reported using the financing
method of accounting, in which the Company's investment in the leased property
is reported as a receivable from the lessee to be recovered through future
rentals. The income portion of each rental payment is calculated so as to
generate a constant rate of return on the net receivable outstanding.
Allowances for losses on direct financing leases are typically established based
on historical charge offs and collections experience and are usually determined
by specifically identified lessees and billed and unbilled receivables.
Direct financing leases are placed in a non-accrual status based on specifically
identified lessees. Such leases are only returned to an accrual status based on
a case by case review of AFS. Direct financing leases are charged off on
specific identification by AFS.
Initial direct costs:
The Company capitalizes initial direct costs associated with the acquisition of
lease assets. The costs are amortized over a five year period using the straight
line method.
Income taxes:
The Company 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.
The tax basis of the Company's net assets and liabilities varies from the
amounts presented in these financial statements at December 31 (unaudited):
2003 2002
---- ----
Financial statement basis of net assets $ 37,815,563 $ 600
Tax basis of net assets 43,059,556 600
----------------- ------------------
Difference $ 5,243,993 $ -
================= ==================
The primary differences between the tax basis of net assets and the amounts
recorded in the financial statements are the result of differences in accounting
for syndication costs and differences between the depreciation methods used in
the financial statements and the Company's tax returns.
16
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
2. Summary of significant accounting policies (continued):
Income taxes (continued):
The following reconciles the net loss reported in these financial statements to
the loss reported on the Company's federal tax return (unaudited) for the year
ended December 31, 2003:
Net loss per financial statements $ (183,013)
Adjustment to depreciation expense (778,726)
Adjustments to lease revenues 200,884
-----------------
Net loss per federal tax return $ (760,855)
=================
Per unit data:
Net income and distributions per unit are based upon the weighted average number
of units outstanding during the period.
Asset valuation:
Recorded values of the Company's asset portfolio are periodically reviewed for
impairment in accordance with Statement of Financial Accounting Standards (SFAS)
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. An
impairment loss is measured and recognized only if the estimated undiscounted
future cash flows of the asset are less than their net book value. The estimated
undiscounted future cash flows are the sum of the estimated residual value of
the asset at the end of the asset's expected holding period and estimates of
undiscounted future rents. The residual value assumes, among other things, that
the asset is utilized normally in an open, unrestricted and stable market.
Short-term fluctuations in the market place are disregarded and it is assumed
that there is no necessity either to dispose of a significant number of the
assets, if held in quantity, simultaneously or to dispose of the asset quickly.
Impairment is measured as the difference between the fair value (as determined
by the discounted estimated future cash flows) of the assets and its carrying
value on the measurement date.
Credit risk:
Financial instruments that potentially subject the Company to concentrations of
credit risk include cash and cash equivalents, direct finance lease receivables
and accounts receivable. The Company 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 the Company. Accounts receivable represent amounts
due from lessees in various industries, related to equipment on operating and
direct financing leases. See Note 7 for a description of lessees by industry as
of December 31, 2003.
Derivative financial instruments:
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, which established new accounting and
reporting standards for derivative instruments. SFAS No. 133 has been amended by
SFAS No. 137, issued in June 1999, by SFAS No. 138, issued in June 2000 and by
SFAS No. 149, issued June 2003.
SFAS No. 133, as amended, requires the Company to recognize all derivatives as
either assets or liabilities in 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.
17
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
2. Summary of significant accounting policies (continued):
Use of estimates:
The preparation of 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Such
estimates primarily relate to the determination of residual values at the end of
the lease term.
Basis of presentation:
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States.
Recent accounting pronouncements:
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB 51." The
primary objectives of this interpretation are to provide guidance on the
identification of entities for which control is achieved through means other
than through voting rights ("variable interest entities") and how to determine
when and which business enterprise (the "primary beneficiary") should
consolidate the variable interest entity. This new model for consolidation
applies to an entity in which either (i) the equity investors (if any) do not
have a controlling financial interest; or (ii) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. In addition, FIN 46 requires
that the primary beneficiary, as well as all other enterprises with a
significant variable interest in a variable interest entity, make additional
disclosures. Certain disclosure requirements of FIN 46 were effective for
financial statements issued after January 31, 2003.
In December 2003, the FASB issued FIN No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain
FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN
46-R are as follows:
(i) Special purpose entities ("SPEs") created prior to February 1, 2003. The
company must apply either the provisions of FIN 46 or early adopt the provisions
of FIN 46-R at the end of the first interim or annual reporting period ending
after December 15, 2003.
(ii) Non-SPEs created prior to February 1, 2003. The company is required to
adopt FIN 46-R at the end of the first interim or annual reporting period ending
after March 15, 2004.
(iii) All entities, regardless of whether a SPE, that were created subsequent to
January 31, 2003. The provisions of FIN 46 were applicable for variable
interests in entities obtained after January 31, 2003.
The company is required to adopt FIN 46-R at the end of the first interim or
annual reporting period ending after March 15, 2004. The adoption of the
provisions applicable to SPEs and all other variable interests obtained after
January 31, 2003 did not have a material impact on the company's financial
statements. The company is currently evaluating the impact of adopting FIN 46-R
applicable to Non-SPEs created prior to February 1, 2003 but does not expect a
material impact.
18
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
2. Summary of significant accounting policies (continued):
Recent accounting pronouncements (continued):
In April 2002, the FASB issued FASB Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (Statement No. 145). Among other things, Statement No. 145 rescinds
Statement No. 4, which required that all gains and losses from extinguishment of
debt be reported as an extraordinary item. The adoption of Statement No. 145,
effective January 1, 2003, did not have any effect on the Company's consolidated
financial position, consolidated results of operations, or liquidity.
3. Investment in leases:
The Company's investment in leases consists of the following:
Depreciation /
Amortization
Expense or Net
Balance Amortization of Reclassi- Balance
December 31, Direct Financing fications or December 31,
2002 Additions Leases Dispositions 2003
---- --------- ------ ------------ ----
Net investment in operating leases $ - $14,144,965 $ (796,842) $ (380,860) $ 12,967,263
Net investment in direct financing leases - 697,468 (98,028) 136,011 735,451
Initial direct costs - 1,092,193 (66,861) (1,366) 1,023,966
---------------- ----------------- ----------------- ------------------ ----------------
$ - $15,934,626 $ (961,731) $ (246,215) $ 14,726,680
================ ================= ================= ================== ================
All of the property on leases was acquired in 2003.
Operating leases:
Property on operating leases consists of the following:
Net
Balance Reclassi- Balance
December 31, Depreciation fications or December 31,
2002 Expense Additions Dispositions 2003
---- ------- --------- ------------ ----
Manufacturing $ - $ - $ 6,270,943 $ (422,435) $ 5,848,508
Materials handling - - 4,827,588 - 4,827,588
Mining - - 2,000,000 - 2,000,000
Data processing - - 1,046,434 - 1,046,434
---------------- ----------------- ----------------- ------------------ ----------------
- - 14,144,965 (422,435) 13,722,530
Less accumulated depreciation - (796,842) - 41,575 (755,267)
---------------- ----------------- ----------------- ------------------ ----------------
$ - $ (796,842) $ 14,144,965) $ (380,860) $12,967,263)
================ ================= ================= ================== ================
The average assumed residual values for assets on operating leases was 20% at
December 31, 2003.
19
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
3. Investment in leases (continued):
Direct financing leases:
The following lists the components of the Company's investment in direct
financing leases as of December 31, 2003:
Total minimum lease payments receivable $ 885,790
Estimated residual values of leased equipment (unguaranteed) 9,106
----------------
Investment in direct financing leases 894,896
Less unearned income (159,445)
----------------
Net investment in direct financing leases $ 735,451
================
At December 31, 2003, the aggregate amounts of future minimum lease payments to
be received are as follows:
Direct
Year ending Operating Financing
December 31, Leases Leases Total
2004 $ 2,592,323 $ 341,552 $ 2,933,875
2005 2,592,323 337,764 2,930,087
2006 2,031,673 206,474 2,238,147
2007 1,773,716 - 1,773,716
2008 1,476,311 - 1,476,311
Thereafter 470,851 - 470,851
----------------- ----------------- ------------------
$10,937,197 $ 885,790 $ 11,822,987
================= ================= ==================
4. Related party transactions:
The terms of the Limited Company Operating Agreement provide that AFS and/or
affiliates are entitled to receive certain fees for equipment acquisition,
management and resale and for management of the Company.
The Limited Liability Company Operating Agreement allows for the reimbursement
of costs incurred by AFS in providing services to the Company. Services provided
include Company accounting, investor relations, legal counsel and lease and
equipment documentation. AFS is not reimbursed for services where it is entitled
to receive a separate fee as compensation for such services, such as acquisition
and management of equipment. Reimbursable costs incurred by AFS are allocated to
the Company based upon estimated time incurred by employees working on Company
business and an allocation of rent and other costs based on utilization studies.
Each of ATEL Leasing Corporation ("ALC"), ATEL Equipment Corporation ("AEC"),
ATEL Investor Services ("AIS") and ATEL Financial Services LLC is a wholly-owned
subsidiary of ATEL Capital Group and performs services for the Company.
Acquisition services are performed for the Company by ALC, equipment management,
lease administration and asset disposition services are performed by AEC,
investor relations and communications services are performed by AIS and general
administrative services for the Company are performed by AFS.
Substantially all employees of AFS record time incurred in performing services
on behalf of all of the Companies serviced by AFS. AFS believes that the costs
reimbursed are the lower of (i) actual costs incurred on behalf of the Company
or (ii) the amount the Company would be required to pay independent parties for
comparable administrative services in the same geographic location and are
reimbursable in accordance with the Limited Liability Company Operating
Agreement.
20
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
4. Related party transactions (continued):
AFS and/or affiliates earned fees, commissions and reimbursements, pursuant to
the Limited Liability Company Operating Agreement as follows for the year ended
December 31, 2003:
Selling commissions (equal to 9% of the selling price of the
Limited Liability Company Units, deducted from Other
Members' capital) $ 4,034,999
Reimbursement of other syndication costs to Managing Member,
deducted from Other Members' capital 2,491,736
Asset management fees to AFS 48,550
Costs reimbursed to AFS 48,235
---------------
$ 6,623,520
===============
On December 31, 2003, the Company sold certain assets subject to operating
leases and direct financing leases to the lessee. The assets being sold were a
part of a larger sale involving the sale of assets belonging to an affiliate of
the Company. On December 31, 2003, the lessee/purchaser sent the proceeds of the
sale by wire transfer to the account of the Company's affiliate. The funds
belonging to the Company were transferred to the Company on the Company's next
business day.
5. Members' capital:
As of December 31, 2003, 4,483,382 Units were issued and outstanding. The
Company is authorized to issue up to 15,000,050 Units.
As defined in the Limited Liability Company Operating Agreement, the Company's
Net Income, Net Losses, and Distributions are to be allocated 92.5% to the
Members and 7.5% to ATEL. In accordance with the terms of the of Operating
Agreement, an additional allocation of income was made to AFS in 2003. The
amount allocated was determined to bring AFS's ending capital account balance to
zero at the end of 2003.
6. Commitments:
As of December 31, 2003, the Company had outstanding commitments to purchase
lease equipment totaling approximately $1,605,000.
21
ATEL CAPITAL EQUIPMENT FUND X, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
7. Concentration of credit risk and major customers:
The Company leases equipment to lessees and provides debt financing to borrowers
in diversified industries. Leases and notes receivable are subject to AFS's
credit committee review. The leases and notes receivable provide for the return
of the equipment upon default.
As of December 31, 2003, there were concentrations (greater than 10%) of
equipment leased to lessees and/or financial borrowers in certain industries (as
a percentage of total equipment cost) as follows:
Manufacturing 79%
Mining 14%
During 2003, three customers comprised 37%, 26% and 14% of the Company's
revenues from leases.
8. Selected quarterly data (unaudited):
March 31, June 30, September 30, December 31,
Quarter ended 2003 2003 2003 2003
---- ---- ---- ----
Total revenues $ - $ 114,291 $ 239,996 $ 553,627
Net loss $ - $ (67,686) $ (103,187) $ (12,140)
Net loss per Limited Liability Company Unit $ - $ (0.12) $ (0.05) $ (0.00)
9. Fair value of financial instruments:
The recorded amounts of the Company's cash and cash equivalents, accounts
receivable, accounts payable and accruals at December 31, 2003 approximate fair
value because of the liquidity and short-term maturity of these instruments.
22
Item 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
None.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management (ATEL
Financial Services, LLC as Managing Member of the registrant, including the
chief executive officer and chief financial officer), an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures [as defined in Rules 240.13a-14(c) under the Securities Exchange
Act of 1934] was performed as of a date within ninety days before the filing
date of this annual report. Based upon this evaluation, the chief executive
officer and the chief financial officer concluded that, as of the evaluation
date, except as noted below, our disclosure controls and procedures were
effective for the purposes of recording, processing, summarizing, and timely
reporting information required to be disclosed by us in the reports that we file
under the Securities Exchange Act of 1934; and that such information is
accumulated and communicated to our management in order to allow timely
decisions regarding required disclosure.
Due to the increased scrutiny and reporting requirements of Sarbanes-Oxley, it
came to the attention of the chief executive officer and the chief financial
officer of the Company in connection with the audit of the Company for the year
ended December 31, 2003, that enhanced internal controls were needed to
facilitate a more effective closing of the Company's financial statements, and
that this would require additional skilled personnel. To address this issue the
Company has taken steps to upgrade the accounting staff and will take additional
steps in 2004 to add personnel to its accounting department to ensure that the
Company's ability to execute internal controls in accounting and reconciliation
in the closing process will be adequate in all respects. It should be noted that
the control issues affecting the closing process and disclosure did not
materially affect the accuracy and completeness of the Company's financial
reporting and disclosure reflected in this report, and the audited financial
statements included herein contain no qualification or limitation on the scope
of the auditor's opinion.
Changes in internal controls
There have been no significant changes in our internal controls or in other
factors that could significantly affect our disclosure controls and procedures
subsequent to the evaluation date nor were there any significant deficiencies or
material weaknesses in our internal controls, except as described in the prior
paragraphs.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
The registrant is a Limited Liability Company and, therefore, has no officers or
directors.
All of the outstanding capital stock of AFS is held by ATEL Capital Group ("ACG"
or "ATEL"), a holding company formed to control ATEL and affiliated companies.
The outstanding voting capital stock of ATEL Capital Group is owned 5% by A. J.
Batt and 95% by Dean Cash.
Each of ATEL Leasing Corporation ("ALC"), ATEL Equipment Corporation ("AEC"),
ATEL Investor Services ("AIS") and ATEL Financial Services LLC ("AFS") is a
wholly-owned subsidiary of ATEL Capital Group and performs services for the
Company. Acquisition services are performed for the Company by ALC, equipment
management, lease administration and asset disposition services are performed by
AEC, investor relations and communications services are performed by AIS and
general administrative services for the Company are performed by AFS. ATEL
Securities Corporation ("ASC") is a wholly-owned subsidiary of AFS.
The officers and directors of ATEL Capital Group and its affiliates are as
follows:
Dean L. Cash Chairman of the Board of Directors of ACG, AFS, ALC,
AEC, AIS and ASC; President and Chief Executive
Officer of ACG, AFS and AEC
Paritosh K. Choksi Director, Executive Vice President, Chief Operating
Officer and Chief Financial Officer of ACG, AFS,
ALC, AEC and AIS
Donald E. Carpenter Vice President and Controller of ACG, AFS, ALC, AEC
and AIS; Chief Financial Officer of ASC
Vasco H. Morais Senior Vice President, Secretary and General Counsel
for ACG, AFS, ALC, AIS and AEC
23
Dean L. Cash, age 53, joined ATEL as director of marketing in 1980 and has been
a vice president since 1981, executive vice president since 1983 and a director
since 1984. He has been President and CEO since April 2001. 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.
Paritosh K. Choksi, age 50, joined ATEL in 1999 as a director, senior vice
president and its chief financial officer. He became its executive vice
president and COO in April 2001. Prior to joining ATEL, Mr. Choksi was chief
financial officer at Wink Communications, Inc. from 1997 to 1999. From 1977 to
1997, Mr. Choksi was with Phoenix American Incorporated, a financial services
and management company, where he held various positions during his tenure, and
was senior vice president, chief financial officer and director when he left the
company. Mr. Choksi was involved in all corporate matters at Phoenix and was
responsible for Phoenix's capital market needs. He also served on the credit
committee overseeing all corporate investments, including its venture lease
portfolio. Mr. Choksi was a part of the executive management team which caused
Phoenix's portfolio to increase from $50 million in assets to over $2 billion.
Mr. Choksi received a bachelor of technology degree in mechanical engineering
from the Indian Institute of Technology, Bombay; and an M.B.A. degree from the
University of California, Berkeley.ksi received a bachelor of technology degree
in mechanical engineering from th
Donald E. Carpenter, age 55, joined ATEL in 1986 as controller. Prior to joining
ATEL, Mr. Carpenter was an audit supervisor with Laventhol & Horwath, certified
public accountants in San Francisco, California, from 1983 to 1986. From 1979 to
1983, Mr. Carpenter was an audit senior with Deloitte, Haskins & Sells,
certified public accountants, in San Jose, California. From 1971 to 1975, Mr.
Carpenter was a Supply Corp 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.
Vasco H. Morais, age 45, joined ATEL in 1989 as general counsel to provide legal
support in the drafting and reviewing of lease documentation, advising on
general corporate law matters, 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) in 1997 from Golden Gate University. Mr. Morais
has been an active member of the State Bar of California since 1986.
Audit Committee
ATEL Leasing Corporation is the managing member of ATEL Financial Services, LLC.
ATEL Financial Services LLC is the Managing Member of the registrant. The board
of directors of ATEL Leasing Corporation acts as the audit committee of the
registrant. Dean L. Cash and Paritosh K. Choksi are members of the board of
directors of ALC and are deemed to be financial experts. They are not
independent of the Company.
Code of Ethics
ACG on behalf of AFS and ALC has adopted a code of ethics for its Chief
Executive Officer, Chief Financial Officer and Chief Accounting Officer. The
Code of Ethics is included as Exhibit 14.1 to this report.
Item 11. EXECUTIVE COMPENSATION
The registrant is a Limited Liability Company and, therefore, has no officers or
directors.
Set forth hereinafter is a description of the nature of remuneration paid and to
be paid to ATEL and its Affiliates. The amount of such remuneration paid in 2003
is set forth in Item 8 of this report under the caption "Financial Statements
and Supplementary Data - Notes to the Financial Statements - Related party
transactions," at Note 5 thereof, which information is hereby incorporated by
reference.
Selling Commissions
The Company paid selling commissions in the amount of 9.0% of Gross Proceeds, as
defined, to ATEL Securities Corporation, an affiliate of ATEL.
24
Through December 31, 2003, $4,034,999 of such commissions had been paid to AFS
or its affiliates. Of that amount, $3,362,499 has been re-allowed to other
broker/dealers.
Asset Management Fee
The Company will pay AFS an Asset Management Fee in an amount equal to 4% of
Operating Revenues, which will include Gross Lease Revenues and Cash From Sales
or Refinancing. 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
AFS and its affiliates in determining portfolio and investment strategies (i.e.,
establishing and maintaining the composition of the Equipment portfolio as a
whole and the Company's overall debt structure) and generally managing or
supervising the management of the Equipment.
AFS will supervise performance of among others activities, collection of lease
revenues, monitoring compliance by lessees with the lease terms, assuring that
Equipment is being used in accordance with all operative contractual
arrangements, paying operating expenses and arranging for necessary maintenance
and repair of Equipment in the event a lessee fails to do so, monitoring
property, sales and use tax compliance and preparation of operating financial
data. AFS intends to delegate all or a portion of its duties and the Asset
Management Fee to one or more of its affiliates who are in the business of
providing such services.
Asset Management Fee Limit:
The Asset Management Fee will be subject to the Asset Management Fee Limit. The
Asset Management Fee Limit will be calculated each year during the Company's
term by calculating the total fees that would be paid to AFS if AFS were to be
compensated on the basis of an alternative fee schedule, to include an Equipment
Management Fee, Incentive Management Fee, and Equipment Resale/Re-Leasing Fee,
plus AFS's Carried Interest, as described below. To the extent that the amount
paid to AFS as the Asset Management Fee plus its Carried Interest for any year
would exceed the aggregate amount of fees calculated under this alternative fee
schedule for the year, the Asset Management Fee and/or Carried Interest for that
year will be reduced to equal the maximum aggregate fees under the alternative
fee schedule.
To the extent any such fees are reduced, the amount of such reduction will be
accrued and deferred, and such accrued and deferred compensation would be paid
to AFS in a subsequent period, but only if and to the extent that such deferred
compensation would be payable within the Asset Management Fee Limit for the
subsequent period. Any deferred fees which cannot be paid under the applicable
limitations in any subsequent period through the date of liquidation would be
forfeited by AFS upon liquidation.
Alternative Fee Schedule:
For purposes of the Asset Management Fee Limit, the Company will calculate an
alternative schedule of fees, including a hypothetical Equipment Management Fee,
Incentive Management Fee, Equipment Resale/Re- Leasing Fee, and Carried Interest
as follows:
An Equipment Management Fee will be calculated to equal the lesser of (i) 3.5%
of annual Gross Revenues from Operating Leases and 2% of annual Gross Revenues
from Full Payout Leases which contain Net Lease Provisions), or (ii) the fees
customarily charged by others rendering similar services as an ongoing public
activity in the same geographic location and for similar types of equipment. If
services with respect to certain Operating Leases are performed by nonaffiliated
persons under the active supervision of AFS or its Affiliate, then the amount so
calculated shall be 1% of Gross Revenues from such Operating Leases.
An Incentive Management Fee will be calculated to equal 4% of Distributions of
Cash from Operations until Holders have received a return of their Original
Invested Capital plus a Priority Distribution, and, thereafter, to equal a total
of 7.5% of Distributions from all sources, including Sale or Refinancing
Proceeds. In subordinating the increase in the Incentive Management Fee to a
cumulative return of a Holder's Original Invested Capital plus a Priority
Distribution, a Holder would be deemed to have received Distributions of
Original Invested Capital only to the extent that Distributions to the Holder
exceed the amount of the Priority Distribution.
An Equipment Resale/Re-Leasing Fee will be calculated in an amount equal to the
lesser of (i) 3% of the sale price of the Equipment, or (ii) one-half the normal
competitive equipment sale commission charged by unaffiliated parties for resale
services. Such fee would apply only after the Holders have received a return of
their Original Invested Capital plus a Priority Distribution. In connection with
the releasing of Equipment to lessees other than previous lessees or their
Affiliates, the fee would be in an amount equal to the lesser of (i) the
competitive rate for comparable services for similar equipment, or (ii) 2% of
the gross rental payments derived from the re-lease of such Equipment, payable
out of each rental payment received by the Company from such re-lease.
A Carried Interest equal to 7.5% of all Distributions of Cash from Operations
and Cash from Sales or Refinancing.
See Note 4 to the financial statements included in Item 8 for amounts paid.
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Managing Member's Interest in Operating Proceeds
Net income, net loss and investment tax credits are allocated 92.5% to the
Members and 7.5% to AFS. See financial statements included in Item 8, Part I of
this report for amounts allocated to AFS in 2003.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
At December 31, 2003, no investor is known to hold beneficially more than 5% of
the issued and outstanding Units.
Security Ownership of Management
The parent of AFS is the beneficial owner of Limited Liability Company Units as
follows:
(1) (2) (3) (4)
Name and Address of Amount and Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
Limited Liability ATEL Capital Group Initial Limited Liability 0.0011%
600 California Street, 6th Floor Company Units
San Francisco, CA 94108 50 Units ($500)
Changes in Control
The Members have the right, by vote of the Members owning more than 50% of the
outstanding Limited Liability Company Units, to remove a Managing Member.
AFS may at any time call a meeting of the Members or a vote of the Members
without a meeting, on matters on which they are entitled to vote, and shall call
such meeting or for vote without a meeting following receipt of a written
request therefore of Members holding 10% or more of the total outstanding
Limited Liability Company Units.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The responses to Item 1 of this report under the caption "Equipment Leasing
Activities," Item 8 of this report under the caption "Financial Statements and
Supplemental Data - Notes to the Financial Statements - Related party
transactions" at Note 4 thereof, and Item 11 of this report under the caption
"Executive Compensation," are hereby incorporated by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Since inception, the Company incurred audit, audit related, tax and other fees
with its principal auditors as follows:
2003 2002
---- ----
Audit fees $ 14,360 $ -
Audit related fees - -
Tax fees - -
Other - -
----------------- -----------------
$ 14,360 $ -
================= =================
ATEL Leasing Corporation is the managing member of ATEL Financial Services, LLC.
ATEL Financial Services LLC is the Managing Member of the registrant. The board
of directors of ATEL Leasing Corporation acts as the audit committee of the
registrant. Engagements for audit services, audit related services and tax
services are approved in advance by the Chief Financial Officer of ATEL Leasing
Corporation acting as a member of the board of directors of that company.
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PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a)Financial Statements and Schedules
1. Financial Statements
Included in Part II of this report:
Report of Independent Auditors
Balance Sheets at December 31, 2003 and 2002
Statements of operations for the year ended December 31, 2003 and for
the period from August 12, 2002 (inception) through December 31, 2002
Statements of Changes in Members' Capital for the year ended December
31, 2003 and for the period from August 12, 2002 (inception) through
December 31, 2002
Statements of Cash Flows for the year ended December 31, 2003 and for
the period from August 12, 2002 (inception) through December 31, 2002
Notes to Financial Statements
2. Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and, therefore,
have been omitted.
(b)Reports on Form 8-K for the fourth quarter of 2003 None.
(c)Exhibits
(3) and (4) Limited Liability Company Operating Agreement, included as
Exhibit B to Prospectus
(14.1) Code of Ethics
(28.1) Prospectus (
31.1) Certification of Paritosh K. Choksi
(31.2) Certification of Dean L. Cash
(32.1) Certification Pursuant to 18 U.S.C. section 1350 of Dean L.
Cash
(32.2) Certification Pursuant to 18 U.S.C. section 1350 of Paritosh K.
Choksi
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: 3/26/2004
ATEL Capital Equipment Fund X, LLC
(Registrant)
By: ATEL Financial Corporation,
Managing Member of Registrant
By: /s/ Dean L. Cash
------------------------
Dean Cash
President of ATEL Financial Services LLC (Managing Member)
By: /s/ Paritosh K. Choksi
--------------------------
Paritosh K. Choksi
Executive Vice President of ATEL Financial
Services LLC (Managing Member)
28
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the persons in the capacities and on the dates
indicated.
SIGNATURE CAPACITIES DATE
/s/ Dean L. Cash President, Chairman and Chief Executive 3/26/2004
- --------------------------- Officer of ATEL Financial Services LLC
Dean Cash
/s/ Paritosh K. Choksi Executive Vice President and director 3/26/2004
- --------------------------- of ATEL Financial Services LLC,
Paritosh K. Choksi Principal financial officer of
registrant; principal financial officer
and director of ATEL Financial
Services LLC
/s/ Donald E. Carpenter Principal accounting officer of 3/26/2004
- --------------------------- registrant; principal accounting
Donald E. Carpenter officer of ATEL Financial Services LLC
Supplemental Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act:
No proxy materials have been or will be sent to security holders. An annual
report will be furnished to security holders subsequent to the filing of this
report on Form 10-K, and copies thereof will be furnished supplementally to the
Commission when forwarded to the security holders.
29