10-Q 1 fund10q12005.txt REPORT FOR THE QUARTER ENDED 3-31-05 Form 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 |X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended March 31, 2005 |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ____ to ____ Commission File number 000-50687 ATEL Capital Equipment Fund X, LLC (Exact name of registrant as specified in its charter) California 68-0517690 (State or other jurisdiction of (I. R. S. Employer Incorporation or organization) Identification No.) 600 California Street, 6th Floor, San Francisco, California 94108-2733 (Address of principal executive offices) Registrant's telephone number, including area code (415) 989-8800 Securities registered pursuant to section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Limited Liability Company Units Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes |_| No |X| The number of Limited Liability Company Units outstanding as of March 31, 2005 was 14,026,311. DOCUMENTS INCORPORATED BY REFERENCE None 1 ATEL CAPITAL EQUIPMENT FUND X, LLC Index Part I. Financial Information Item 1. Financial Statements (Unaudited) Balance Sheets, March 31, 2005 and December 31, 2004. Statements of Operations for the three month periods ended March 31, 2005 and 2004. Statements of Changes in Members' Capital for the year ended December 31, 2004 and for the three month period ended March 31, 2005. Statements of Cash Flows for the three month periods ended March 31, 2005 and 2004. Notes to the Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II. Other Information Item 1. Legal Proceedings Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits 2 Part I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited). ATEL CAPITAL EQUIPMENT FUND X, LLC BALANCE SHEETS MARCH 31, 2005 AND DECEMBER 31, 2004 ASSETS
March 31, 2005 December 31, ---- (Unaudited) 2004 Cash and cash equivalents $ 61,134,882 $ 50,767,859 Accounts receivable 996,115 575,365 Notes receivable 4,857,204 4,549,389 Due from Managing Member - 123,158 Prepaid syndication costs 80,956 - Other assets 282,782 302,738 Investment in leases 47,095,577 39,208,650 --- ----------------- ---- --------------- Total assets $ 114,447,516 $ 95,527,159 === ================= ==== =============== LIABILITIES AND MEMBERS' CAPITAL Accounts payable: Managing Member $ 348,941 $ - Other 8,235 64,249 Deposits due to lessees 131,017 131,017 Unearned operating lease income 787,074 470,497 --- ---------------- ---- --------------- Total liabilities 1,275,267 665,763 --- ---------------- ---- --------------- Members' capital: 113,172,249 94,861,396 --- ---------------- ---- --------------- Total liabilities and Members' capital $ 114,447,516 $ 95,527,159 === ================ ==== ===============
See accompanying notes. 3 ATEL CAPITAL EQUIPMENT FUND X, LLC STATEMENTS OF OPERATIONS THREE MONTH PERIODS ENDED MARCH 31, 2005 AND 2004 (Unaudited)
Revenues: 2005 2004 ---- ---- Leasing activities: Operating leases $ 1,834,923 $ 652,615 Direct financing leases 65,184 27,537 Interest 314,827 53,760 Other 1,385 851 ---- ---------------- ---- ---------------- 2,216,319 734,763 Expenses: Depreciation of operating lease assets 1,409,634 586,853 Amortization of initial direct costs 122,882 63,968 Asset management fees to Managing Member 95,215 29,427 Cost reimbursements to Managing Member 166,733 51,530 Professional fees 23,490 51,540 Franchise fees and taxes - 25,000 Other 69,200 26,963 ---- ---------------- ---- ---------------- 1,887,154 835,281 ---- ---------------- ---- ---------------- Net income (loss) $ 329,165 $ (100,518) ==== ================ ==== ================ Net income (loss): Managing Member $ 188,829 $ 72,998 Other Members 140,336 (173,516) ---- ---------------- ---- ---------------- $ 329,165 $ (100,518) ==== ================ ==== ================ ==== ================ ==== ================ Net income (loss) per Limited Liability Company Unit (Other Members) $ 0.01 $ (0.03) Weighted average number of Units outstanding 12,788,821 5,178,906
See accompanying notes. 4 ATEL CAPITAL EQUIPMENT FUND X, LLC STATEMENTS OF CHANGES IN MEMBERS' CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2004 AND FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2005 (Unaudited)
Other Members Units Amount Managing Member Total ----- ------ ------ ----- Balance December 31, 2003 4,483,382 $ 37,110,663 $ - $ 37,110,663 Capital Contributions 7,281,891 72,818,910 - 72,818,910 Less selling commissions to affiliates - (6,553,702) - (6,553,702) Other syndication costs to affiliates - (2,126,737) - (2,126,737) Rescissions of capital contributions (39,200) (392,000) - (392,000) Units repurchased (3,250) (29,677) - (29,677) Distributions to other members ($0.48 per Unit) - (5,675,247) - (5,675,247) Distributions to Managing Member - - (460,566) (460,566) Net income (loss) - (290,814) 460,566 169,752 -------------- --- ---------------- --- -------------- --- ----------------- Balance December 31, 2004 11,722,823 94,861,396 - 94,861,396 Capital Contributions 2,313,488 23,134,880 - 23,134,880 Less selling commissions to affiliates - (2,082,139) - (2,082,139) Other syndication costs to affiliates - (454,817) - (454,817) Units repurchased (10,000) (93,446) - (93,446) Distributions to other members ($0.17 per Unit) - (2,333,961) - (2,333,961) Distributions to Managing Member - - (188,829) (188,829) Net income - 140,336 188,829 329,165 -------------- --- ---------------- --- -------------- --- ----------------- Balance March 31, 2005 14,026,311 $ 113,172,249 $ - $ 113,172,249 ============== === ================ === ============== === =================
See accompanying notes. 5 ATEL CAPITAL EQUIPMENT FUND X, LLC STATEMENTS OF CASH FLOWS THREE MONTH PERIODS ENDED MARCH 31, 2005 AND 2004 (Unaudited)
Operating activities 2005 2004 ---- ---- Net income (loss) $ 329,165 $ (100,518) Adjustment to reconcile net income (loss) to net cash provided by operating activities: Depreciation of operating lease assets 1,409,634 586,853 Amortization of initial direct costs 122,882 63,968 Changes in operating assets and liabilities: Accounts receivable (420,750) 3,179 Due from Managing Member 123,158 - Prepaid syndication costs (80,956) (128,378) Accounts payable, Managing Member 348,941 73,195 Accounts payable, other (56,014) (125,241) Other assets 19,956 - Unearned operating lease income 316,577 60,271 --- ---------------- -- ---------------- Net cash provided by operating activities 2,112,593 433,329 --- ---------------- -- ---------------- Investing activities: Purchases of equipment on operating leases (9,134,058) (2,207,363) Investment in notes receivable (593,489) - Due from affiliates - 248,428 Reduction in net investment on notes receivable 285,674 - Payments of initial direct cost to Managing Member, net (478,836) (482,687) Reduction of net investment in direct financing leases 193,451 59,272 --- ---------------- -- ---------------- Net cash used in investing activities (9,727,258) (2,382,350) --- ---------------- -- ---------------- Financing activities: Capital contributions received 23,134,880 15,917,190 Payment of syndication costs to Managing Member (2,536,956) (2,129,171) Repurchase of limited liability company units (93,446) - Distributions to Other Members (2,333,961) (900,304) Distributions to Managing Member (188,829) (72,998) --- ---------------- -- ---------------- Net cash provided by financing activities 17,981,688 12,814,717 --- ---------------- -- ---------------- Net increase in cash and cash equivalents 10,367,023 10,865,696 Cash and cash equivalents at beginning of period 50,767,859 22,680,652 --- ---------------- -- ---------------- Cash and cash equivalents at end of period $ 61,134,882 $ 33,546,348 === ================ == ================
6 ATEL CAPITAL EQUIPMENT FUND X, LLC STATEMENTS OF CASH FLOWS (CONTINUED) THREE MONTH PERIODS ENDED MARCH 31, 2005 AND 2004 (Unaudited)
2005 2004 ---- ---- Supplemental disclosures of cash flow information: Cash paid during the period for interest $ - $ 511 === ================ == ================
See accompanying notes. 7 ATEL CAPITAL EQUIPMENT FUND X, LLC NOTES TO FINANCIAL STATEMENTS MARCH 31, 2005 (Unaudited) 1. Summary of significant accounting policies: Basis of presentation: The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. The unaudited interim financial statements reflect all adjustments which are, in the opinion of the Managing Member, necessary for a fair statement of financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that effect reported amounts in the financial statements and accompanying notes. Therefore, actual results could differ from those estimates. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results for the year ending December 31, 2005. Certain prior period amounts have been reclassified to conform to current period presentation. These unaudited interim financial statements should be read in conjunction with the financial statements and notes thereto contained in the report on Form 10-K for the year ended December 31, 2004, filed with the Securities and Exchange Commission. Equipment on operating leases: Equipment on operating leases is stated at cost. Depreciation is being provided by use of the straight-line method over the terms of the related leases to the equipment's estimated residual values at the end of the leases. Asset Valuation: Recorded values of the Company's asset portfolio are periodically reviewed for impairment in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. An impairment loss is measured and recognized only if the estimated undiscounted future cash flows of the asset are less than their net book value. The estimated undiscounted future cash flows are the sum of the estimated residual value of the asset at the end of the asset's expected holding period and estimates of undiscounted future rents. The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the market place are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. Impairment is measured as the difference between the fair value (as determined by the discounted estimated future cash flows) of the assets and its carrying value on the measurement date. Revenue recognition: Operating leases Operating lease revenue is recognized on a straight-line basis over the term of the underlying leases. The initial lease terms will vary as to the type of equipment subject to the leases, the needs of the lessees and the terms to be negotiated, but initial leases are generally expected to be for 36 to 84 months. Income from step rent provisions, escalation clauses, capital improvement funding provisions or other lease concessions in lease contracts, and lease rates subject to variation based on changes in market indexes or interest rates are recognized on a straight line basis. 8 ATEL CAPITAL EQUIPMENT FUND X, LLC NOTES TO FINANCIAL STATEMENTS MARCH 31, 2005 (Unaudited) 1. Summary of significant accounting policies (continued): Direct finance leases Income from direct financing lease transactions is reported using the financing method of accounting, in which the Company's investment in the leased property is reported as a receivable from the lessee to be recovered through future rentals. The income portion of each rental payment is calculated so as to generate a constant rate of return on the net receivable outstanding. Notes receivable Income from notes receivable is reported using the financing method of accounting. The Company's investment in notes receivable is reported as the present value of the future note payments. The income portion of each note payment is calculated so as to generate a constant rate of return on the net balance outstanding. Initial direct costs: The Company capitalizes initial direct costs associated with the acquisition of lease assets. These costs are amortized over a five year period, which approximates average lease term, using a straight line method. Segment Reporting: The Company adopted the provisions of SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes annual and interim standards for operating segments of a company. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assts and reports revenue, and its major customers. The Company is not organized by multiple operating segments for the purpose of making operating decisions or assessing performance. Accordingly the Company operates in one reportable operating segment in the United States. 2. Organization and Limited Liability Company matters: ATEL Capital Equipment Fund X, LLC (the Company) was formed under the laws of the state of California on August 12, 2002 for the purpose of acquiring equipment to engage in equipment leasing and sales activities. The Company may continue until December 31, 2021. The Company conducted a public offering of 15,000,000 Limited Liability Company Units (Units) at a price of $10 per Unit. Upon the sale of the minimum amount of Units of 120,000 Units ($1,200,000) and the receipt of the proceeds thereof on April 9, 2003, the Company commenced operations. The Company's offering terminated on March 11, 2005. As of March 31, 2005 14,026,311 Units ($140,263,110) were issued and outstanding. As a limited liability company, the liability of any individual member for the obligations of the Fund is limited to the extent of capital contributions to the Fund by the individual member. ATEL Financial Services, LLC (AFS), an affiliated entity, acts as the Managing Member of the Company. 9 ATEL CAPITAL EQUIPMENT FUND X, LLC NOTES TO FINANCIAL STATEMENTS MARCH 31, 2005 (Unaudited) 2. Organization and Limited Liability Company matters (continued): The Company, or AFS on behalf of the Company, will incur costs in connection with the organization, registration and issuance of the Limited Liability Company Units (Units). The amount of such costs to be borne by the Company is limited by certain provisions of the Company's Operating Agreement. The Company's principal objectives are to invest in a diversified portfolio of equipment that will (i) preserve, protect and return the Company's invested capital; (ii) generate regular distributions to the members of cash from operations and cash from sales or refinancing, with any balance remaining after certain minimum distributions to be used to purchase additional equipment during the Reinvestment Period, and (iii) provide additional distributions following the Reinvestment Period and until all equipment has been sold. The Company is governed by its Limited Liability Company Operating Agreement (Operating Agreement). The Company is in its acquisition phase and is making distributions on a monthly and quarterly basis. 3. Investment in equipment leases: The Company's investment in leases consists of the following:
Balance Additions Depreciation/ Balance --------- Amortization Expense or Amortization of December 31, Direct Financing March, 31, 2004 Leases 2005 ---- ------ ---- Net investment in operating leases $ 34,497,392 $ 9,134,058 $ (1,409,634) $ 42,221,816 Net investment in direct financing leases 3,159,401 - (193,451) 2,965,950 Initial direct costs, net of accumulated amortization of $527,323 in 2005 and $404,837 in 2004 1,551,857 478,836 (122,882) 1,907,811 --- --------------- --- ------------- --- -------------- --- -------------- $ 39,208,650 $ 9,612,894 $ (1,725,967) $ 47,095,577 === =============== === ============= === ============== === ==============
All of the property on leases was acquired in 2003, 2004 and 2005. 10 ATEL CAPITAL EQUIPMENT FUND X, LLC NOTES TO FINANCIAL STATEMENTS MARCH 31, 2005 (Unaudited) 3. Investment in equipment leases (continued): Operating leases: Property on operating leases consists of the following:
Balance Additions and Balance March December 31, 2004 Depreciation 31, 2005 ---- ------------ ---- Manufacturing $ 6,537,860 $ 2,319,980 $ 8,857,840 Materials handling 7,267,277 822,581 8,089,858 Mining 16,022,058 - 16,022,058 Data Processing 1,079,722 - 1,079,722 Transportation 7,946,938 - 7,946,938 Transportation, rail - 5,991,497 5,991,497 -- ----------------- --- ---------------- -- ---------------- 38,853,855 9,134,058 47,987,913 Less accumulated depreciation (4,356,463) (1,409,634) (5,766,097) -- ----------------- --- ---------------- -- ---------------- $ 34,497,392 $ 7,724,424 $ 42,221,816 == ================= === ================ == ================
Direct financing leases: The following lists the components of the Company's investment in direct financing leases as of March 31, 2005: Total minimum lease payments receivable $ 3,068,216 Estimated residual values of leased equipment (unguaranteed) 338,680 ---- -------------- Investment in direct financing leases 3,406,896 Less unearned income (440,946) ---- -------------- Net investment in direct financing leases $ 2,965,950 ==== ============== 11 ATEL CAPITAL EQUIPMENT FUND X, LLC NOTES TO FINANCIAL STATEMENTS MARCH 31, 2005 (Unaudited) 3. Investment in leases (continued): At March 31, 2005, the aggregate amounts of future minimum lease payments to be received are as follows:
Operating Leases Direct Financing Total ------ ----- Leases Nine months ending December 31, 2005 $ 6,379,421 $ 774,012 $ 7,153,433 Year ending December 31, 2006 7,546,296 863,430 8,409,726 2007 6,908,337 548,848 7,457,185 2008 6,198,727 483,446 6,682,173 2009 4,237,369 398,480 4,635,849 2010 646,731 - 646,731 -- -------------- -- ------------ -- -------------- $ 31,916,881 $ 3,068,216 $ 34,985,097 == ============== == ============ == ==============
The Company utilizes a straight line depreciation method for equipment in all of the categories currently in its portfolio of lease transactions. The useful lives for investment in leases by category are as follows: Equipment category Useful Life ------------------ ----------- Mining 30 - 40 Manufacturing 10 - 20 Materials Handling 7 - 10 Transportation 7 - 10 Data processing 3 - 5 4. Notes receivable: The Company has various notes receivable from parties who have financed the purchase of equipment through the Company. The terms of the notes receivable are 18 to 60 months and bear interest at rates ranging from 11% to 22%. The notes are secured by the equipment financed. As of March 31, 2005, the minimum future payments receivable are as follows: Nine months ending December 31, 2005 $ 1,350,844 Year ending December 31, 2006 1,455,213 2007 1,045,128 2008 517,890 2009 1,818,006 ----- --------------- 6,187,081 Less portion representing interest (1,329,877) ----- --------------- $ 4,857,204 ===== =============== 12 ATEL CAPITAL EQUIPMENT FUND X, LLC NOTES TO FINANCIAL STATEMENTS MARCH 31, 2005 (Unaudited) 5. Related party transactions: The terms of the Limited Liability Company Operating Agreement provide that AFS and/or affiliates are entitled to receive certain fees for equipment management and resale and for management of the Company. The Limited Liability Company Operating Agreement allows for the reimbursement of costs incurred by AFS in providing administrative services to the Company. Administrative services provided include Company accounting, investor relations, legal counsel and lease and equipment documentation. AFS is not reimbursed for services whereby it is entitled to receive a separate fee as compensation for such services, such as management of equipment. Reimbursable costs incurred by AFS are allocated to the Company based upon estimated time incurred by employees working on Company business and an allocation of rent and other costs based on utilization studies. Each of ATEL Leasing Corporation ("ALC"), ATEL Equipment Corporation ("AEC"), ATEL Investor Services ("AIS") and ATEL Financial Services LLC is a wholly-owned subsidiary of ATEL Capital Group and performs services for the Company. Acquisition services are performed for the Company by ALC, equipment management, lease administration and asset disposition services are performed by AEC, investor relations and communications services are performed by AIS and general administrative services for the Company are performed by AFS. Cost reimbursements to the Managing Member are based on costs incurred by AFS in performing administrative services for the Company that are allocated to each fund that AFS manages based on certain criteria such as existing or new leases, number of investors or equity depending on the type of cost incurred. AFS believes that the costs reimbursed are the lower of (i) actual costs incurred on behalf of the Company or (ii) the amount the Company would be required to pay independent parties for comparable administrative services in the same geographic location. During the three month periods ended March 31, 2005 and 2004, AFS and/or affiliates earned fees, commissions and reimbursements, pursuant to the Limited Liability Company Operating Agreement as follows:
2005 2004 ---- ---- Selling commissions, equal to 9% of the selling price of the Limited Liability Company units, deducted from Other Members' capital) $ 2,082,139 $ 1,432,547 Reimbursement of other syndication costs to AFS, deducted from Others Members' 454,817 696,624 capital Asset management fees to AFS 95,215 29,427 --- ----------------- -- --- ------------- $ 2,632,171 $ 2,158,598 === ================= === =============
The Managing Member makes certain payments to third parties on behalf of the Company for convenience purposes. During the three month periods ended March 31, 2005 and 2004, the Managing Member made such payments of $57,978 and $24,097, respectively. 13 ATEL CAPITAL EQUIPMENT FUND X, LLC NOTES TO FINANCIAL STATEMENTS MARCH 31, 2005 (Unaudited) 6. Members' capital: As of March 31, 2005, 14,026,311 Units were issued and outstanding. The Company is authorized to issue up to 15,000,050 Units, including the 50 Units issued to the Initial Members. The Company's Net Income, Net Losses, and Distributions, as defined in the Limited Liability Company Operating Agreement, are to be allocated 92.5% to the Other Members and 7.5% to AFS. Distributions to the Other Members were as follows: Three Months Ended March 31, 2005 2004 ---- ---- Distributions $ 2,333,961 $ 900,304 Weighted average number of Units outstanding 12,788,821 5,178,906 Weighted average distributions per Unit $ 0.18 $ 0.17 7. Commitments: As of March 31, 2005, the Company had outstanding commitments to purchase lease equipment of approximately $27,479,000. This amount represents contract awards which may be cancelled by the prospective lessee or may not be accepted by the Company. The following table summarizes the expected funding dates for these commitments: Year ending December 31, Amount committed ------------------------- ---------------- 2005 $27,479,000 14 ATEL CAPITAL EQUIPMENT FUND X, LLC NOTES TO FINANCIAL STATEMENTS MARCH 31, 2005 (Unaudited) 8. Financing Arrangement: The Company participates with AFS and certain of its affiliates in a financing arrangement (comprised of a term loan to AFS and a line of credit) with a group of financial institutions that includes certain financial covenants. The financial arrangement is $75,000,000 and expires in June 2006. The availability of borrowings to the Company under this financing arrangement is reduced by the amount AFS has outstanding as a term loan. As of March 31, 2005 borrowings under the facility were as follows: Total amount available under the financing arrangement $ 75,000,000 Term loan to AFS as of March 31, 2005 (1,482,182) -------------- Total available under the acquisition and warehouse facilities 73,517,818 Amount borrowed by the Company under the acquisition facility - Amounts borrowed by affiliated partnerships and limited liability companies under the acquisition facility (16,000,000) -------------- Total remaining available under the acquisition and warehouse facilities $ 57,517,818 ============== Draws on the acquisition facility by any individual borrower are secured only by that borrower's assets, including equipment and related leases. Borrowings on the warehouse facility are recourse jointly to certain of the affiliated Memberships and limited liability companies, the Company and AFS. The credit agreement includes certain financial covenants applicable to each borrower. The Company was in compliance with its covenants as of March 31, 2005. 15 ATEL CAPITAL EQUIPMENT FUND X, LLC NOTES TO FINANCIAL STATEMENTS MARCH 31, 2005 (Unaudited) 9. Guarantees: The Company enters into contracts that contain a variety of indemnifications. The Company's maximum exposure under these arrangements is unknown. However, the Company has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote. In the normal course of business, the Company enters into contracts of various types, including lease contracts, contracts for the sale or purchase of lease assets, management contracts, loan agreements, credit lines and other debt facilities. It is prevalent industry practice for most contracts of any significant value to include provisions that each of the contracting parties - in addition to assuming liability for breaches of the representations, warranties, and covenants that are part of the underlying contractual obligations - also assume an obligation to indemnify and hold the other contracting party harmless for such breaches, for harm caused by such party's gross negligence and willful misconduct, including, in certain instances, certain costs and expenses arising from the contract. The Managing Member has substantial experience in managing similar leasing programs subject to similar contractual commitments in similar transactions, and the losses and claims arising from these commitments have been insignificant, if any. Generally, to the extent these contracts are performed in the ordinary course of business under the reasonable business judgment of the Managing Member, no liability will arise as a result of these provisions. The Managing Member has no reason to believe that the facts and circumstances relating to the Company's contractual commitments differ from those it has entered into on behalf of the prior programs it has managed. The Managing Member knows of no facts or circumstances that would make the Company's contractual commitments outside standard mutual covenants applicable to commercial transactions between businesses. Accordingly, the Company believes that these indemnification obligations are made in the ordinary course of business as part of standard commercial and industry practice, and that any potential liability under the Company's similar commitments is remote. Should any such indemnification obligation become payable, the Company would separately record and/or disclose such liability in accordance with GAAP. 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Statements contained in this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Form 10-Q, which are not historical facts, may be forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially form those projected. In particular, economic recession and changes in general economic conditions, including, fluctuations in demand for equipment, lease rates, and interest rates, may result in delays in investment and reinvestment, delays in leasing, re-leasing, and disposition of equipment, and reduced returns on invested capital. The Company's performance is subject to risks relating to lessee defaults and the creditworthiness of its lessees. The Fund's performance is also subject to risks relating to the value of its equipment at the end of its leases, which may be affected by the condition of the equipment, technological obsolescence and the markets for new and used equipment at the end of lease terms. Investors are cautioned not to attribute undue certainty to these forward-looking statements, which speak only as of the date of this Form 10-Q. We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events, other than as required by law. Capital Resources and Liquidity The Company commenced its offering of Units on March 12, 2003. On April 9, 2003, the Company commenced operations in its primary business (leasing activities). Until the Company's initial portfolio of equipment has been purchased, funds that have been received, but that have not yet been invested in leased equipment, are invested in interest-bearing accounts or high-quality/short-term commercial paper. The Company's public offering provides for a total maximum capitalization of $150,000,000. During the funding period, the Company's primary source of liquidity will be subscription proceeds from the public offering of Units. The liquidity of the Company will vary in the future, increasing to the extent proceeds from the offering, cash flows from leases and proceeds of asset sales exceed expenses, and decreasing as lease assets are acquired, as distributions are made to the Members and to the extent expenses exceed cash flows from leases and proceeds from asset sales. As another source of liquidity, the Company is expected to have contractual obligations with a diversified group of lessees for fixed lease terms at fixed rental amounts. As the initial lease terms expire, the Company will re-lease or sell the equipment. The future liquidity beyond the contractual minimum rentals will depend on AFS's success in re-leasing or selling the equipment as it comes off lease. Throughout the Reinvestment Period (as defined in the Limited Liability Company Operating Agreement), the Company anticipates reinvesting a portion of lease payments from assets owned in new leasing transactions. Such reinvestment will occur only after the payment of all obligations, including debt service (both principal and interest), the payment of management fees to AFS and providing for cash distributions to the Members. The Company participates with AFS and certain of its affiliates in a financing arrangement (comprised of a term loan to AFS and a line of credit) with a group of financial institutions that includes certain financial covenants. The financial arrangement is $75,000,000 and expires in June 2006. The availability of borrowings to the Company under this financing arrangement is reduced by the amount AFS has outstanding as a term loan. As of March 31, 2005 borrowings under the facility were as follows: Total amount available under the financing arrangement $ 75,000,000 Term loan to AFS as of March 31, 2005 (1,482,182) -------------- Total available under the acquisition and warehouse facilities 73,517,818 Amount borrowed by the Company under the acquisition facility - Amounts borrowed by affiliated partnerships and limited liability companies under the acquisition facility (16,000,000) -------------- Total remaining available under the acquisition and warehouse facilities $ 57,517,818 ============== Draws on the acquisition facility by any individual borrower are secured only by that borrower's assets, including equipment and related leases. Borrowings on the warehouse facility are recourse jointly to certain of the affiliated Memberships and limited liability companies, the Company and AFS. 17 To manage the warehousing line of credit for the holding of assets prior to allocation to specific investor programs, a Warehousing Trust Agreement has been entered into by the Company, ATEL Financial Services LLC ("AFS"), ATEL Leasing Corporation ("ALC"), and certain of the affiliated partnerships and limited liability companies. The warehousing line is used to acquire and hold, on a short-term basis, certain lease transactions that meet the investment objectives of each of such entities. Each of the leasing programs sponsored by AFS and ALC currently in its acquisition stage is a pro rata participant in the Warehousing Trust Agreement, as described below. When a program no longer has a need for short term financing provided by the warehousing facility, it is removed from participation, and as new leasing investment entities are formed by AFS and ALC and commence their acquisition stages, these new entities will be added. As of March 31, 2005, the investment program participants were ATEL Cash Distribution Fund VI, L.P., ATEL Capital Equipment Fund VII, L.P., ATEL Capital Equipment Fund VIII, LLC, ATEL Capital Equipment Fund IX, LLC, and ATEL Capital Equipment Fund X, LLC. Pursuant to the Warehousing Trust Agreement, the benefit of the lease transaction assets, and the corresponding liabilities under the warehouse borrowing facility, inure to each of such entities based upon each entity's pro-rata share in the warehousing trust estate. The "pro-rata share" is calculated as a ratio of the net worth of each entity over the aggregate net worth of all entities benefiting from the warehouse trust estate, excepting that the trustees, AFS and ALC, are both liable for their pro-rata shares of the obligations based on their respective net worths, and jointly liable for the pro rata portion of the obligations of each of the affiliated partnerships and limited liability companies participating under the borrowing facility. Transactions are financed through this warehousing line only until the transactions are allocated to a specific program for purchase or are otherwise disposed by AFS and ALC. When a determination is made to allocate the transaction to a specific program for purchase by the program, the purchaser repays the debt associated with the asset, either with cash or by means of the acquisition facility financing, the asset is removed from the warehouse line collateral, and ownership of the asset and any debt obligation associated with the asset are assumed solely by the purchasing entity. The credit agreement includes certain financial covenants applicable to each borrower. The Company was in compliance with its covenants as of March 31, 2005. The Company anticipates reinvesting a portion of lease payments from assets owned in new leasing transactions. Such reinvestment will occur only after the payment of all obligations, including debt service (both principal and interest), the payment of management and acquisition fees to AFS and providing for cash distributions to the Limited Members. AFS or an affiliate may purchase equipment in its own name, the name of an affiliate or the name of a nominee, a trust or otherwise and hold title thereto on a temporary or interim basis for the purpose of facilitating the acquisition of such equipment or the completion of manufacture of the equipment or for any other purpose related to the business of the Company, provided, however that: (i) the transaction is in the best interest of the Company; (ii) such equipment is purchased by the Company for a purchase price no greater than the cost of such equipment to AFS or affiliate (including any out-of-pocket carrying costs), except for compensation permitted by the Operating Agreement; (iii) there is no difference in interest terms of the loans secured by the equipment at the time acquired by AFS or affiliate and the time acquired by the Company; (iv) there is no benefit arising out of such transaction to AFS or its affiliate apart from the compensation otherwise permitted by the Operating Agreement; and (v) all income generated by, and all expenses associated with, equipment so acquired will be treated as belonging to the Company. AFS expects that aggregate borrowings in the future will be approximately 50% of aggregate equipment cost. In any event, the Operating Agreement limits such borrowings to 50% of the total cost of equipment, in aggregate. If inflation in the general economy becomes significant, it may affect the Company inasmuch as the residual (resale) values and rates on re-leases of the Company's leased assets may increase as the costs of similar assets increase. However, the Company's revenues from existing leases would not increase, as such rates are generally fixed for the terms of the leases without adjustment for inflation. If interest rates increase significantly, the lease rates that the Company can obtain on future leases will be expected to increase as the cost of capital is a significant factor in the pricing of lease financing. Leases already in place, for the most part, would not be affected by changes in interest rates. For detailed information on the Company's debt obligations, see Note 8 in the notes to the financial statements in Item 1. As of March 31, 2005, the Company had outstanding commitments to purchase lease equipment of approximately $27,479,000. This amount represents contract awards which may be cancelled by the prospective lessee or may not be accepted by the Company. 18 The following table summarizes the expected funding dates for these commitments: Year ending December 31, Amount committed 2005 $27,479,000 Cash Flows The Company's offer terminated on March 11, 2005. The offering provided $23,134,880 and $15,917,190, in the first quarter of 2005 and 2004, respectively, of the Company's total cash flows. In the first quarters of 2005 and 2004, the primary source of cash from operations was rents from operating leases. Operating leases are expected to remain as the primary source of cash from operations in future periods. During the first quarter of 2005 and 2004, the majority of cash used in investing activities related to the purchase of operating lease assets. Purchases of operating lease assets increased to $9,134,058 in the first quarter of 2005 from $2,207,363 in the first quarter of 2004. Other uses of cash for investing activities consisted of payments of initial direct cost associated with lease asset purchases, and advances on notes receivable. Payments of initial direct cost were $478,836 and $482,687 for the first quarter of 2005 and 2004, respectively. Advances on notes receivable were $593,489 in the first quarter of 2005. No amounts were invested in notes receivable in the first quarter of 2004. The Company acquired $9,134,058 of equipment on operating leases during the three month period ended March 31, 2005. Below is a table that summarizes utilization percentages for assets acquired during the years ended December 31, 2004 and the three month period ended March 31, 2005: Equipment Purchased in: Utilization by Year 2005 2004 2005 100% - 2004 100% 100% It is the Company's objective to maintain a 100% utilization rate for all equipment. As discussed above, the Company remains in an acquisition stage and is continuing to acquire equipment. All equipment transactions are acquired subject to binding lease commitments, so equipment utilization is expected to remain high throughout this acquisition and reinvestment stage, which ends six years after the end of the Company's public offering of Units. Initial lease terms will generally be from 36 to 84 months, and as these initial leases terminate, the Company will attempt to re-lease or sell the equipment. Utilization rates may therefore decrease during the liquidation stage of the Company, which will follow its acquisition and reinvestment stages. Sources of cash from investing activities consisted of rents from direct financing leases and from payments due on advance notes receivables. As noted earlier, proceeds of our public offering of Units was our main source of financing activity for the first quarter of 2005 and 2004. Financing uses of cash included distributions to Members and payment for costs related to the offering. In the first quarter of 2005 and 2004, distributions were made to the Members in the amount of $2,522,790 and $973,302, respectively. Results of Operations As of April 9, 2003, subscriptions for the minimum amount of the offering ($1,200,000) had been received and accepted by the Company. As of that date, the Company commenced operations in its primary business (leasing activities). Because of the fact that the initial portfolio acquisitions were not completed as of March 31, 2005, the results of operations in the first quarter of 2005 and 2004 are not expected to be comparable between quarters or to future periods. After the Company's public offering and its initial asset acquisition stage terminate, the results of operations are expected to change significantly. In the quarter ended March 31, 2005, operations resulted in net income of $329,165 compared to a net loss of $100,518 in the quarter ended March 31, 2004. In the first quarter of 2005 and 2004, our primary source of revenues was from operating leases. In the first quarter of 2005, operating lease rents increased to $1,834,923 from $652,615 in the first quarter of 2004. We expect that operating leases will continue to be the primary source of revenues and that the amounts earned will increase as we continue to acquire additional lease assets. 19 Depreciation expense is directly related to the operating lease assets. Depreciation expense increased to $1,409,634 in the first quarter of 2005 from $586,853 in the first quarter of 2004. We expect that depreciation expense will increase in future periods in relation to operating lease revenues as we continue to acquire more assets. Under the terms of the Limited Liability Company Operating Agreement, AFS is entitled to certain fees and reimbursements of costs. Asset management fees in the first quarter of 2005 and 2004 were $95,215 and $29,427, respectively. Costs reimbursements over the same period were $166,733 and $51,530, respectively. These amounts are expected to increase in future periods as the operations of the Company expand. Item 3. Quantitative and Qualitative Disclosures of Market Risk. The Company, like most other companies, is exposed to certain market risks, including primarily changes in interest rates. The Company believes its exposure to other market risks, including foreign currency exchange rate risk, commodity risk and equity price risk, are insignificant to both its financial position and results of operations. In general, the Company expects to manage its exposure to interest rate risk by obtaining fixed rate debt. The fixed rate debt is structured so as to match the cash flows required to service the debt to the payment streams under fixed rate lease receivables. The payments under the leases are assigned to the lenders in satisfaction of the debt. Furthermore, AFS has historically been able to maintain a stable spread between its cost of funds and lease yields in both periods of rising and falling interest rates. Nevertheless, the Company expects to frequently fund leases with its floating interest rate line of credit and will, therefore, be exposed to interest rate risk until fixed rate financing is arranged, or the floating interest rate line of credit is repaid. As of March 31, 2005 and 2004, there were no outstanding balances on the floating interest rate line of credit. Item 4. Controls and procedures. Evaluation of disclosure controls and procedures Under the supervision and with the participation of our management (ATEL Financial Services, LLC as Managing Member of the registrant, including the chief executive officer and chief financial officer), an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures [as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934] was performed as of March 31, 2005. Based upon this evaluation, the chief executive officer and the chief financial officer concluded that, as of the evaluation date, our disclosure controls and procedures were effective for the purposes of recording, processing, summarizing, and timely reporting information required to be disclosed by us in the reports that we file under the Securities Exchange Act of 1934; and that such information is accumulated and communicated to our management in order to allow timely decisions regarding required disclosure. As disclosed in the Company's annual report on Form 10-K for the year ended December 31, 2003, the chief executive and chief financial officer of the Managing Member had identified certain enhanced controls needed to facilitate a more effective closing of the Company's financial statements. Specifically, the Company's auditors advised management of a material weakness surrounding the financial statement closing process that they believe arose because ATEL's accounting resources were not adequate to complete the closing of the books and preparation of financial statements in a timely manner. However, it should be noted that the financial statements for that period were nevertheless issued with an unqualified opinion. Since the beginning of 2004, ATEL hired a new corporate controller, added two assistant controllers and additional accounting staff personnel, and has instituted new procedures or revised existing procedures to ensure that the Company's ability to execute internal controls in accounting and reconciliation in the closing process is adequate in all respects. In connection with management's review of the effectiveness of internal disclosure controls and procedures of the Company as of March 31, 2005, including communication with its auditors regarding the audit process, ATEL management has determined that it has successfully taken all steps necessary to resolve any outstanding issues with respect to its annual financial statement closing process and that its accounting resources are adequate to perform this process in a timely and accurate manner. In connection with their audit of the Company and related programs for the year ended December 31, 2004, the independent accountants issued a no material weakness letter which indicates that no matters were noted involving internal control and its operation that the auditor considered to be material weaknesses as defined by the Public Company Accounting Oversight Board (United States). Furthermore, all financial statements for the Company and related programs for 2004 were issued with unqualified opinions of the independent accountants. The Managing Member will continue to review its accounting procedures and practices to determine their effectiveness and adequacy and will take any steps deemed necessary in the opinion of the Managing Member's chief executive and chief financial officers to ensure the adequacy of the Company's disclosure and accounting controls and procedures. 20 The Managing Member's chief executive officer and chief financial officer have determined that no weakness in financial and accounting controls and procedures had any material effect on the accuracy and completeness of the Company's financial reporting and disclosure included in this report. Changes in internal controls There have been no significant changes in our internal controls or in other factors that could significantly affect our disclosure controls and procedures subsequent to the evaluation date nor were there any significant deficiencies or material weaknesses in our internal controls, except as described in the prior paragraph PART II. OTHER INFORMATION Item 1. Legal Proceedings. In the ordinary course of conducting business, there may be certain claims, suits, and complaints filed against the Company. In the opinion of management, the outcome of such matters, if any, will not have a material impact on the Company's financial position or results of operations. No material legal proceedings are currently pending against the Company or against any of its assets. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Information provided pursuant to ss. 228.701 (Item 701(f))(formerly included in Form SR): (1) Effective date of the offering: March 12, 2003; File Number: 333-100452 (2) Offering commenced: March 12, 2003 (3) The offering did not terminate before any securities were sold. (4) The offering has not been terminated prior to the sale of all of the securities. (5) The managing underwriter is ATEL Securities Corporation. (6) The title of the registered class of securities is "Units of Limited Liability Company Interest." 21 (7) Aggregate amount and offering price of securities registered and sold as of April 27, 2005:
Aggregate Aggregate price of price of offering offering Amount amount Units amount Title of Security Registered registered sold sold ---------- ---------- ---- ---- Units of Limited Company Interest 15,000,000 $ 150,000,000 14,036,636 $ 140,366,360 (8) Costs incurred for the issuers account in connection with the issuance and distribution of the securities registered for each category listed below: Direct or indirect payments to directors, officers, Managing Members of the issuer or their associates; to persons owning ten percent or more of any class of equity securities of the Direct or indirect issuer; and to affiliates of the issuer payments to others Total --------------------------- ------------------ ----- Underwriting discounts and commissions $ 2,105,495 $ 10,527,477 $ 12,632,972 Other expenses 5,333,218 5,333,218 --- ------------- --- ----------------- --- --------------- Total expenses $ 2,105,495 $ 15,860,695 $ 17,966,190 === ============= === ================= === =============== (9) Net offering proceeds to the issuer after the total expenses in item 8: $ 122,400,170 (10) The amount of net offering proceeds to the issuer used for each of the purposes listed below: Direct or indirect payments to directors, officers, Managing Members of the issuer or their associates; to persons owning ten percent or more of any class of equity securities of the issuer; and to affiliates Direct or indirect ----------- of the issuer payments to others Total ------------- ------ ----- Purchase and installation of machinery and equipment $ 2,435,134 $ 57,020,460 $ 59,455,594 Working capital - 62,944,576 62,944,576 ---- ------------- --- ---------------- ---- ---------------- $ 2,435,134 $ 119,965,036 $ 122,400,170 ==== ============= === ================ ==== ================
(11) The use of the proceeds in Item 10 does not represent a material change in the uses of proceeds described in the prospectus. Item 3. Defaults Upon Senior Securities. Inapplicable. Item 4. Submission Of Matters To A Vote Of Security Holders. Inapplicable. Item 5. Other Information. Inapplicable. Item 6. Exhibits. Documents filed as a part of this report 1. Financial Statement Schedules All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 2. Other Exhibits 31.1 Certification of Paritosh K. Choksi 31.2 Certification of Dean L. Cash 32.1 Certification Pursuant to 18 U.S.C. section 1350 of Dean L. Cash 32.2 Certification Pursuant to 18 U.S.C. section 1350 of Paritosh K. Choksi 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 13, 2005 ATEL CAPITAL EQUIPMENT FUND X, LLC (Registrant) By: ATEL Financial Services LLC Managing Member of Registrant By: /s/ Dean L. Cash_____________ Dean L. Cash President and Chief Executive Officer of Managing Member By: /s/ Paritosh K. Choksi_________ Paritosh K. Choksi Principal Financial Officer of Registrant By: /s/ Donald E. Carpenter________ Donald E. Carpenter Principal Accounting Officer of Registrant By: /s/ Elif A Kuvvetli________ Elif A Kuvvetli Vice President and Corporate Controller 23