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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
þ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the year ended December 31, 2005
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the transition period from to
Commission File number 000-50210
ATEL Capital Equipment Fund IX, LLC
(Exact name of registrant as specified in its charter)
California | 94-3375584 | |
(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)
(Address of principal executive offices)
Registrant’s telephone number, including area code:(415) 989-8800
Securities registered pursuant to section 12(b) of the Act:None
Securities registered pursuant to section 12(g) of the Act:Limited Liability Company Units
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso Noþ
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Act of 1934. Yeso Noþ
15(d) of the Securities Act of 1934. Yeso Noþ
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. Yeso Noþ
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filero Accelerated filero Non-accelerated filerþ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
State the aggregate market value of voting stock held by non-affiliates of the registrant: Not applicable
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.)o Not applicable
State the issuer’s revenues for the most recent fiscal year: $23,980,085.
The number of Limited Liability Company Units outstanding as of December 31, 2005 was 12,055,016.
DOCUMENTS INCORPORATED BY REFERENCE
Prospectus dated January 16, 2001, filed pursuant to Rule 424(b) (Commission File No. 333-47196) is hereby incorporated by reference into Part IV hereof.
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PART I
Item 1. BUSINESS
General Development of Business
ATEL Capital Equipment Fund IX, LLC (the “Company”) was formed under the laws of the State of California in September 2000. The Company was formed for the purpose of engaging in the sale of limited liability company investment units and 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. Prior to converting to a limited liability company structure, the Managing Member was formerly known as ATEL Financial Corporation.
The Company conducted a public offering of 15,000,000 Limited Liability Company Units (“Units”), at a price of $10 per Unit. On February 21, 2001, subscriptions for the minimum number of Units (120,000, representing $1,200,000) had been received (excluding subscriptions from Pennsylvania investors) and AFS requested that the subscriptions be released to the Company. On that date, the Company commenced operations in its primary business (leasing activities). As of April 3, 2001, the Company had received subscriptions for 753,050 Units ($7,530,500), 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. As of January 15, 2003, the Company’s offering was terminated. Subscriptions for a total of 12,065,266 ($120,652,660) Units had been received and accepted. Subsequent to January 15, 2003, units totaling 10,250 were rescinded and funds returned to investors.
As of December 31, 2005, 12,055,016 Units ($120,550,160) 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 December 31, 2009 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 has incurred debt to finance the purchase of a portion of its equipment portfolio. The amount of borrowings in connection with any equipment acquisition transaction will be determined by, among other things, the credit of the lease, the terms of the lease, the nature of the equipment and the condition of the money market. There is no limit on the amount of debt that may be incurred in connection with any single acquisition of equipment. However the Company may not incur aggregate outstanding indebtedness in excess of 50% of the total cost of all equipment as of the date of the final commitment of the offering proceeds and, thereafter, as of the date of any subsequent indebtedness is incurred. The Company intends to borrow amounts equal to such maximum debt level in order to fund a portion of its equipment acquisitions, although there can be no assurance that such financing will continue to be available to the Company in the future.
The Company may also incur long-term recourse debt in the form of asset securitization transactions in order to obtain lower interest rates or other more desirable terms than may be available for individual nonrecourse debt transactions. In an “asset securitization,” the lender would receive a security interest in a specified pool of “securitized” Company assets or a general lien against all of the otherwise unencumbered assets of the Company. It is the intention of AFS to use asset securitization primarily to finance assets leased to those credits which, in the opinion of AFS, have a relatively lower potential risk of lease default than those lessees with equipment financed with nonrecourse debt. AFS expects that an asset securitization financing would involve borrowing at a variable interest rate based on an established reference rate. AFS would seek to limit the Company’s exposure to increases in the interest rate by engaging in hedging transactions that would effectively fix the interest rate obligation.
As of December 31, 2005, the amount of such securitized borrowings was $36,502,000.
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’s intent is to only purchase equipment for which a lease exists or for which a lease will be entered into at the time of the purchase.
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As of December 31, 2005, the Company had purchased equipment with a total acquisition price of $152,134,060. The Company has also invested $10,752,976 in notes receivable of which $6,144,325 remained outstanding at December 31, 2005.
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 2005, 2004 and 2003, certain lessees generated significant portions of the Company’s total lease revenues as follows:
Lessee | Type of Equipment | 2005 | 2004 | 2003 | ||||||||||
Ford Motor Company | Material Handling | 12 | % | * | * | |||||||||
Basin Electric | Walking dragline | * | 14 | % | 14 | % | ||||||||
Graham Offshore Inc. | Off shore supply vessels | * | 10 | % | 11 | % | ||||||||
General Electric Aircraft Engines | Machine tools | * | * | 15 | % |
* | Less than 10% |
These percentages are not expected to be comparable in future periods.
The equipment leasing industry is highly competitive. Equipment manufacturers, corporations, partnerships and others offer users an alternative to the purchase of most types of equipment with payment terms that vary widely depending on the lease term 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 raw material costs to manufacture equipment as well as general economic conditions, including the effects of inflation or recession, and fluctuations in supply and demand for various types of equipment resulting from, among other things, technological and economic obsolescence.
AFS 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. AFS’ employees provide the services the Company requires to effectively operate. The cost of these services are reimbursed by the Company to AFS per the Operating Agreement.
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, 2005 and the industries to which the assets have been leased.
Purchase Price Excluding | Percentage of Total | |||||||
Asset Types | Acquisition Fees | Acquisitions | ||||||
Mining equipment | $ | 34,172,058 | 22 | % | ||||
Materials handling | 34,741,309 | 19 | % | |||||
Manufacturing | 22,126,408 | 15 | % | |||||
Rail Transportation | 13,458,439 | 9 | % | |||||
Construction | 12,896,394 | 8 | % | |||||
Transportation | 12,728,745 | 8 | % | |||||
Marine vessels | 11,200,000 | 7 | % | |||||
Office Automation | 10,177,870 | 7 | % | |||||
Furniture and fixtures | 2,363,419 | 2 | % | |||||
Aircraft | 2,680,000 | 2 | % | |||||
Test equipment | 1,000,466 | 1 | % | |||||
Natural gas compressors | 696,451 | 0 | % | |||||
Communications | 301,620 | 0 | % | |||||
$ | 158,543,179 | 100 | % | |||||
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Purchase Price Excluding | Percentage of Total | |||||||
Industry of Lessee | Acquisition Fees | Acquisitions | ||||||
Manufacturing | $ | 61,603,200 | 36 | % | ||||
Mining | 29,137,836 | 19 | % | |||||
Land transportation | 24,754,791 | 16 | % | |||||
Electric utilities | 11,930,290 | 8 | % | |||||
Marine transportation | 11,200,000 | 7 | % | |||||
Communications | 8,431,692 | 6 | % | |||||
Health care | 6,295,867 | 4 | % | |||||
Air transportation | 3,315,150 | 2 | % | |||||
Retail | 1,177,902 | 1 | % | |||||
Oil and gas | 696,451 | 1 | % | |||||
$ | 158,543,179 | 100 | % | |||||
From inception to December 31, 2005, the Company has disposed of certain leased assets as set forth below:
Original | Excess of Rents | |||||||||||
Asset Types | Equipment Cost | Sale Price | Over Expenses* | |||||||||
Manufacturing | $ | 6,301,283 | $ | 5,289,515 | $ | 2,224,101 | ||||||
Test equipment | 1,454,642 | 74,807 | 1,837,570 | |||||||||
Office automation | 2,791,196 | 1,069,052 | 2,279,391 | |||||||||
Mining | 3,791,357 | 2,694,237 | 2,495,519 | |||||||||
Furniture and fixtures | 1,073,043 | 482,892 | 1,263,886 | |||||||||
Other | 1,124,593 | 456,444 | 1,243,473 | |||||||||
$ | 16,536,114 | $ | 10,066,947 | $ | 11,343,940 | |||||||
* | Includes only those expenses directly related to the production of the related rents. |
Proceeds from sales of lease assets are not expected to be consistent from one period to another. The Company is a finite life equipment leasing fund, which will acquire leasing transactions during the period ending six years after completion of its public offering. On the termination of leases, assets may be re-leased or sold. Sales of assets are not scheduled and are created by opportunities within the marketplace. The Company will seek to acquire and lease a wide variety of assets and to enter into leases on a variety of terms. Some assets will be expected to have little or no value for re-lease or sale upon termination of the initial leases, and the anticipated residual values are a key factor in pricing and terms structured for each lease. The Company’s goal is to seek maximum return on its leased assets and will determine when and under what terms to dispose of such assets during the course of its term.
For further information regarding the Company’s equipment lease portfolio as of December 31, 2005, see footnote 6 to the financial statements, Investments in equipment and leases, net, as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
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 assets and reports revenue, and its major customers. For further information regarding the Company geographic revenues and assets, see footnote 2 to the financial statements, Summary of significant accounting policies, 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.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT’S LIMITED LIABILITY COMPANY UNITS AND RELATED MATTERS
Market Information
There are certain material conditions and restrictions on the transfer of Units imposed by the terms of the Limited Liability Company Operating Agreement (“Operating Agreement”). Consequently, there is no public market for Units and it is not anticipated that a public market for Units will develop. In the absence of a public market for the Units, there is no currently ascertainable fair market value for the Units.
Holders
As of December 31, 2005, a total of 3,077 investors were record holders of Units in the Company.
Distributions
The record holders of Units 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 between $0.90 and $1.10 per Unit which will be determined by AFS.
The rate for monthly distributions from 2005 operations was $0.075 per Unit for January through December 2005. During 2005, the Company made thirteen distributions beginning in February and ending in December 2005 compared to twelve distributions in 2004 and 2003. The rate for quarterly distributions paid in April, July, October 2005 and January 2006 was $0.225 per Unit. Distributions were from 2005 cash flows from operations.
The rate for monthly distributions from 2004 operations was $0.075 per Unit for January through December 2004. The distributions were paid in February through December 2004 and in January 2005. The rate for quarterly distributions paid in April, July, October 2004 and January 2005 was $0.225 per Unit. Distributions were from 2004 cash flows from operations.
The rate for monthly distributions from 2003 operations was $0.075 per Unit for January through December 2003. The distributions were paid in February through December 2003 and in January 2004. The rate for quarterly distributions paid in April, July, October 2003 and January 2004 was $0.225 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”):
2005 | 2004 | 2003 | ||||||||||
Net income (loss) per Unit, based on weighted average Units outstanding | $ | 0.04 | $ | (0.16 | ) | $ | (0.09 | ) | ||||
Return of investment | 0.96 | 1.06 | 0.97 | |||||||||
Distributions declared per Unit, based on weighted average Units outstanding | 1.00 | 0.90 | 0.88 | |||||||||
Differences due to timing of distributions | (0.10 | ) | — | 0.02 | ||||||||
Actual distribution rates, per Unit | $ | 0.90 | $ | 0.90 | $ | 0.90 | ||||||
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Item 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of the Company at December 31, 2005, 2004, 2003, 2002 and 2001 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.
2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||
Revenues | $ | 23,980,085 | $ | 12,716,209 | $ | 11,531,560 | $ | 7,073,495 | $ | 3,393,685 | ||||||||||
Net (loss) income | $ | 1,456,697 | $ | (1,034,432 | ) | $ | (225,230 | ) | $ | (50,850 | ) | $ | 625,132 | |||||||
Weighted average Units outstanding | 12,057,893 | 12,062,469 | 12,035,095 | 7,280,533 | 2,167,171 | |||||||||||||||
Net (loss) income allocated to Other Members | $ | 478,665 | $ | (1,914,481 | ) | $ | (1,087,372 | ) | $ | (538,604 | ) | $ | 526,753 | |||||||
Net (loss) income per Unit, based on weighted average Units outstanding | $ | 0.04 | $ | (0.16 | ) | $ | (0.09 | ) | $ | (0.07 | ) | $ | 0.24 | |||||||
Distributions declared per Unit, based on weighted average Units outstanding | $ | 1.00 | $ | 0.90 | $ | 0.88 | $ | 0.83 | $ | 0.56 | ||||||||||
Total Assets | $ | 112,234,202 | $ | 91,160,186 | $ | 86,533,350 | $ | 88,973,776 | $ | 36,933,834 | ||||||||||
Total Members’ Capital | $ | 60,355,772 | $ | 71,960,299 | $ | 84,762,125 | $ | 87,549,292 | $ | 36,349,172 |
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements contained in this Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) and elsewhere in this Form 10-K, which are not historical facts, may be forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. In particular, economic recession and changes in general economic conditions, including, fluctuations in demand for equipment, lease rates, and interest rates, may result in delays in investment and reinvestment, delays in leasing, re-leasing, and disposition of equipment, and reduced returns on invested capital. The Company’s performance is subject to risks relating to lessee defaults and the creditworthiness of its lessees. The Fund’s performance is also subject to risks relating to the value of its equipment at the end of its leases, which may be affected by the condition of the equipment, technological obsolescence and the markets for new and used equipment at the end of lease terms. Investors are cautioned not to attribute undue certainty to these forward-looking statements, which speak only as of the date of this Form 10-K. We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events, other than as required by law.
Capital Resources and Liquidity
The Company’s public offering provided for a total maximum capitalization of $150,000,000. As of January 15, 2003, the offering was concluded. As of that date, subscriptions for 12,065,266 Units had been received. Subsequent to January 15, 2003, Units totaling 10,250 were rescinded and funds returned to investors. The liquidity of the Company will vary in the future, increasing to the extent 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.
The Company participates with AFS and certain of its affiliates, as defined in the Operating Agreement, in a financing arrangement ((the “Master Terms Agreement”) comprised of a working capital facility to AFS, an acquisition facility and a warehouse facility to AFS, the Company and affiliates, and a venture facility available to an affiliate) with a group of financial institutions that includes certain financial and non-financial covenants. The financing arrangement is $75,000,000 and expires in June 2007. The availability of borrowings available to the Company under this financing arrangement is reduced by the amount outstanding on any of the above mentioned facilities.
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Borrowings under the financing arrangement as of December 31, 2005, were as follows:
Total amount available under the financing arrangement | $ | 75,000,000 | ||
Amount borrowed by the Company under the acquisition facility | (4,000,000 | ) | ||
Amount borrowed by affiliated partnerships and limited liability companies under the acquisition facility | (8,500,000 | ) | ||
Total available under the above mentioned facilities | $ | 62,500,000 | ||
The Company is contingently liable for principal payments under the warehouse facility as borrowings are recourse jointly and severally to the extent of the pro-rata share of the Company’s net worth as compared to the aggregate net worth of certain of the affiliated partnerships and limited liability companies of the Company and including AFS and ATEL Leasing Corporation (which latter two entities are 100% liable). There were no borrowings under the warehouse facility as of December 31, 2005, and the Company and its affiliates pay an annual commitment fee to have access to this line of credit.
The interest rate on the Master Terms Agreement is based on either the LIBOR/Eurocurrency rate of 1-, 2-, 3- or 6-month maturity plus a lender designated spread, or the bank’s Prime rate, which re-prices daily. Principal amounts of loans made under the Master Terms Agreement that are prepaid may be re-borrowed on the terms and subject to the conditions set forth under the Master Terms Agreement. The effective interest rate on borrowings at December 31, 2005 ranged from 5.93% to 7.25%.
Draws on the acquisition facility by any affiliated partnership and/or limited liability company borrower are secured by a blanket lien on that borrower’s assets, including but not limited to equipment and related leases.
To manage the warehousing facility 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, ATEL Leasing Corporation (“ALC”), and certain of the affiliated partnerships and limited liability companies. The warehousing facility 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 December 31, 2005, the investment program participants were ATEL Capital Equipment Fund VII, L.P., ATEL Capital Equipment Fund VIII, LLC, the Company, ATEL Capital Equipment Fund X, LLC and ATEL Capital Equipment Fund XI, 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 worth, 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 facility 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 facility collateral, and ownership of the asset and any debt obligation associated with the asset are assumed solely by the purchasing entity.
The financing arrangement discussed above includes certain financial and non-financial covenants applicable to each borrower. The Company and affiliates were not in compliance with non-financial covenants as of December 31, 2005. The Managing Member, on behalf of all borrowers, requested and received a waiver of this covenant from the lenders.
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 current obligations including debt (both principal and interest), the payment of management and acquisition fees to AFS and providing for cash distributions to the 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 an 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. AFS envisions no such requirements for operating purposes.
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If inflation in the general economy becomes significant, it may affect the Company in as much as the residual (resale) values and rates on re-leases of the Company’s leased assets may increase as the costs of similar assets increase. However, the Company’s revenues from existing leases would not increase, as such rates are generally fixed for the terms of the leases without adjustment for inflation.
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 footnotes 8 and 9 in the notes to the financial statements in Item 8.
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.
At December 31, 2005, the Company had a $60 million receivables funding program with a receivables financing company that issues commercial paper rated A1 from Standard and Poor’s and P1 from Moody’s Investor Services. In this receivables funding program, the lenders would receive liens against the Company’s assets. The lender will be in a first position against certain specified assets and will be in either a subordinated or shared position against the remaining assets. The program provides for borrowing at a variable interest rate and requires AFS, on behalf of the Company, to enter into interest rate swap agreements with certain hedge counterparties (also rated A1/P1) to mitigate the interest rate risk associated with a variable interest rate note. AFS anticipates that this program will allow the Company to have a more cost effective means of obtaining debt financing than available for individual non-recourse debt transactions. As more fully described in Item 8 footnote 9, the Company had $36,502,000 outstanding under this receivables funding program as of December 31, 2005. The receivables funding program expires in August 2011.
It is the intention of the Company to use the receivables funding program as its primary source of debt financing. The Company also has access to certain sources of non-recourse debt financing, which the Company will use on a transaction basis as a means of mitigating credit risk.
In order to maintain the availability of the program, the Company is required to make payments of standby fees. These fees totaled $362,508 and $385,000 in 2005 and 2004, respectively, and are included in interest expense in the Company’s statement of operations.
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.
As of December 31, 2005, cash balances consisted of working capital and amounts reserved for distributions to be paid in January 2006, generated from operations in 2005.
At December 31, 2005, there were commitments to purchase lease assets totaling approximately $9,984,525. This amount represents contract awards which may be canceled by the prospective lessee or may not be accepted by the Company. Of the $9,984,525 at December 31, 2005, $2,965,727 was canceled subsequent to year-end. Of the $7,018,798 remaining commitments, the expected funding will be in 2006.
The Company announced the commencement of regular distributions, based on cash flows from operations, beginning with the month of February 2001. The first distribution payment was made in April 2001 and additional monthly and/or quarterly distributions have been consistently made through December 2005. See Items 5 and 6 of this report for additional information regarding distributions.
Cash Flows
2005 vs. 2004
In both 2005 and 2004, the Company’s primary source of cash from operations was rents from operating leases. Cash flows from operations increased by $17,102,185 from $8,498,134 in 2004 to $25,600,319 in 2005. The increase is primarily the result of increases in operating lease revenues. Operating lease revenues increased $9,298,032 from $11,490,794 in 2004 to $20,788,826 in 2005. Augmenting the operating lease revenue increase were a reduction in spending on prepaids and other assets of $1,225,400, an increase in accounts receivable collections of $684,459, and leveraging payables to non-members of $7,656,160.
In 2005 and 2004, the usages of cash from investing activities consisted primarily of purchases of equipment on operating leases, direct financing leases and investments in notes receivable of $44,001,449 and $47,971,618, respectively. The primary increases to sources of cash from investing activities were: (1) increased proceeds on sales of lease assets of $3,792,517 from $95,571 in 2004 to $3,888,088 in 2005, and (2) an increase in payments received on notes receivable of $636,254 from $530,537 in 2004 to
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$1,166,791 in 2005. The primary decreases to sources of cash from investing activities were: (1) a decrease in payments from affiliates of $4,133,210 from $4,133,210 in 2004 to zero in 2005, (2) an increase in payments made to the Managing Member for lease origination costs of $190,426 from $748,750 in 2004 to $939,176 in 2005, and (3) a decrease in the reduction of direct financing leases of $158,656 from $2,494,197 in 2004 to $2,335,541 in 2005.
In both 2005 and 2004, the Company’s primary source of cash from financing activities was from borrowings under various debt agreements. Cash provided by financing activities increased by $6,417,317 from $5,232,606 in 2004 to $11,649,923 in 2005. The increase is primarily due to an increase of $6,502,000 in borrowings under various debt facilities from $17,000,000 in 2004 to $23,502,000 in 2005.
Proceeds from sales of lease assets are not expected to be consistent from one period to another. The Company is a finite life equipment leasing fund, which will acquire leasing transactions during the period ending six years after completion of its public offering. On the termination of leases, assets may be re-leased or sold. Sales of assets are not scheduled and are created by opportunities within the marketplace. The Company will seek to acquire and lease a wide variety of assets and to enter into leases on a variety of terms. Some assets will be expected to have little or no value upon termination of the related leases, while others will be expected to have substantial value for re-lease or sale upon termination of the initial leases, and the anticipated residual values are a key factor in pricing and terms structured for each lease. The Company’s goal is to seek maximum return on its leased assets and will determine when and under what terms to dispose such assets during the course of its term.
2004 vs. 2003:
In both 2004 and 2003, the Company’s primary source of cash from operations was rents from operating leases. Cash flows from operations increased by $511,528 from $7,986,606 in 2003 to $8,498,134 in 2004. The increase is largely the result of increases in operating lease revenues. Operating lease revenues increased $1,728,069 from $9,762,725 in 2003 to $11,490,794 in 2004. Offsetting this increase in operating lease revenue was increased cash used to purchase additional other assets of $572,021, an increase in accounts receivable of $323,605 compared to 2003 and a net increase in non-member payables of $1,243,307.
In 2004 and 2003, usages of cash from investing activities consisted of purchases of equipment on operating and direct financing leases and advances on notes receivable. Equipment purchases on operating and direct financing leases increased by $24,731,786 from $17,829,513 in 2003 to $42,561,299 in 2004. Advances in notes receivables leases increased by $5,364,123 from $46,196 in 2003 to $5,410,319 in 2004. The primary sources of cash from investing activities were payments received from: (1) AFS for the sale of certain assets, and (2) customers on direct financing leases. At December 31, 2003, the Company had a receivable from AFS of $4,142,025 with respect to the sale of certain assets. AFS subsequently paid the Company in 2004. The sale was part of a larger sale of assets to a third party. Customer payments on direct financing leases increased $1,564,229 from $929,968 in 2003 to $2,494,197 in 2004. In addition to the above uses and sources, proceeds from sale of lease assets decreased by $5,275,315 from $5,370,886 in 2003 to $95,571 in 2004.
In 2004, the main source of cash from financing activities was $17,000,000 of draw downs on the acquisition facility. In 2003, the only source of cash from financing activities was the proceeds of $10,281,250 from the public offering of the Company’s Units. The offering was concluded in January 2003. Cash from the public offering proceeds in 2003 was used to pay the costs of the offering in the amount of $1,346,037. In 2004, the borrowings under the line of credit were used to acquire additional lease assets.
Results of Operations
As of February 21, 2001, 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, 2005, the results of operations in 2005, 2004 and 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.
Cost reimbursements to Managing Member are based on costs incurred by AFS in performing administrative services for the Company that are allocated to each Company 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.
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As of December 31, 2005, 2004 and 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:
2005 | 2004 | 2003 | ||||||||||
Manufacturing | 35 | % | 36 | % | 40 | % | ||||||
Mining | 14 | % | 26 | % | 17 | % | ||||||
Rail Transportation | 11 | % | * | * | ||||||||
Electric utilities | 10 | % | 15 | % | 23 | % | ||||||
Marine transportation | * | 11 | % | 17 | % |
* | Less than 10% |
The Company acquired $41,048,835 of equipment on operating leases and $402,785 of equipment on direct finance leases during 2005. Below is a table that summarizes utilization percentages for assets acquired during the years ended December 31, 2005, 2004, 2003:
Utilization of equipment purchased by year | 2005 | 2004 | 2003 | 2002 | ||||||||||||
2005 | 100 | % | — | — | — | |||||||||||
2004 | 100 | % | 99 | % | — | — | ||||||||||
2003 | 100 | % | 100 | % | 100 | % | — | |||||||||
2002 | 99 | % | 100 | % | 100 | % | 100 | % |
It is the Company’s objective to maintain a 100% utilization rate for all equipment purchased in that year. As discussed above, the Company remains in its 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 120 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.
2005 vs. 2004
The company generated net income of $1,456,697 in 2005 compared to a net loss of $1,034,432 in 2004. The Company generated income primarily as a result of: (1) an increase in revenues of $11,263,876 from $12,716,209 in 2004 to $23,980,085 in 2005, which represents an increase of 89% year-over-year; and (2) expenses growing at a slower pace than revenues. Expenses increased by $8,992,316 from $13,761,732 in 2004 to $22,754,048 in 2005, which represents an increase of 65% year-over-year.
The increase in revenues was driven primarily by increases in: (1) operating leases revenues of $9,298,032 from $11,490,794 in 2004 to $20,788,826 in 2005; and (2) generating gains on sales of assets of $2,131,413 in 2005 compared to losses on sales of assets of $30,313 in 2004.
The Company’s largest expense is depreciation on owned assets. It is directly related to operating lease assets and the revenues earned on them. Continued acquisitions of these assets have led to the increases in revenues noted above and to the increase in depreciation expense of $7,613,323 from $9,477,669 in 2004 to $17,090,992 in 2005.
The Company’s second largest expense in 2005 was interest expense. Interest expense is directly related to the increase in purchases of equipment on operating leases and direct financing leases because the company typically borrows on a portion of the cost of the purchased assets. Consistent with continued increases in total debt, interest expense increased by $1,046,101 from $552,914 in 2004 to $1,599,015 in 2005.
During 2005, certain other operating expenses increased as revenues increased. The Company had increases totaling $1,306,653 in asset management fees paid to the Managing Member, cost reimbursements to Managing Member for administrative services, amortization of initial direct costs and professional fees. Increases in these expenses as a percent were comparable to the increase in revenue growth.
During 2005, certain other operating expenses decreased as revenues increased. The Company had decreases totaling $814,680 in acquisition expenses and its provision for losses and doubtful accounts. Acquisition expenses decreased by $513,980 from $1,026,784 in 2004 to $512,804 in 2005 because: (1) a greater portion of total acquisition costs qualified for capitalization of IDC in 2005 versus 2004 and (2) the Company purchased $7,597,074 less equipment on leases. As defined by the Company’s Operating Agreement, acquisition expense shall mean expenses including, but not limited to, legal fees and expenses, travel and communication expenses, costs of appraisals, accounting fees and expenses, and miscellaneous expenses relating to selection and
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acquisition of equipment, whether or not acquired. The provision for losses and doubtful accounts decreased by $300,700 from $293,868 in 2004 to a credit of $6,832 in 2005 as a result of essentially no amounts outstanding over 90 days.
During 2005, Other income increased by $219,569 from $11,091 in 2004 to $230,660 in 2005. The increase in other income was primarily a result of: (1) a favorable fair value adjustment on interest rate swap contracts of $271,000; and (2) recoveries of doubtful accounts of $101,124 with a foreign currency loss of $141,464 offsetting the adjustment and recovery.
As detailed in footnote 15, Unaudited Selected Quarterly Data, revenue increased by $3,923,892, or 98%, from $3,990,967 in the three months ended December 31, 2004 to $7,914,859 in the three months ended December 31, 2005. The increase in revenue was primarily a result of increased operating lease revenue and gain on sales of assets. Operating lease revenue increased by $2,410,148 from $3,654,493 in the three months ended December 31, 2004 to $6,064,641 for the three months ended December 31, 2005. Operating lease revenue increased primarily as a result of a large volume of acquisition activity in the fourth quarter of 2004 that added approximately $30 million of equipment cost to the operating lease portfolio in 2005. Gain on sales of assets increased by $2,041,727 from a loss of $43,921 in the three months ended December 31, 2004 to a gain of $1,997,806 for the three months ended December 31, 2005. Gain on sales of assets increased primarily as a result of a large gain on one transaction that was sold in the fourth quarter 2005, resulting in a gain of $1,966,297.
Net income increased by $1,612,865 from a net loss of $160,880, or (4%) of total revenue, in the three months ended December 31, 2004 to net income of $1,451,985, or 18% of total revenue, in the three months ended December 31, 2005. This increase in net income represents a year-over-year increase of 22%. As discussed above, gain on sales of assets increased from a loss representing (1%) of total revenue in the three months ended December 31, 2004 to a gain representing 25% of total revenue in the three months ended December 31, 2005. This increase in gain on sales of assets represents a year-over-year increase of 24% and essentially accounts for the increase in net income.
2004 vs. 2003:
Although revenues increased by $1,184,649 from $11,531,560 in 2003 to $12,716,209 in 2004, the net loss increased by $809,202 from $225,230 in 2003 to $1,034,432 in 2004. Net loss increased primarily as a result of increases in depreciation expense of $1,617,625, interest expense of $183,518 and other expenses, which are comprised of third party services such as investor communications/mailings, bank charges, printing and photocopying. Other expenses increased $241,882 from $199,736 in 2003 to $441,618 in 2004. Factors attributing to this increase over the prior period are franchise taxes, outside services costs and bank charges. These increases were offset by a decrease in the Company’s provision for losses and doubtful accounts of $140,767.
The increase in revenues was driven primarily by an increase in the net investment in operating lease assets of $28,227,499, an increase in the net investment in notes receivable of $4,589,582 and an increase in the net investment in direct finance leases of $1,986,049. These investments resulted in an increase in revenues of $1,728,069 from operating lease, $289,476 in direct finance leases and $158,503 from interest income on notes receivable.
The Company’s largest expense is depreciation. It is directly related to operating lease assets and the revenues earned on them. Continued acquisitions of these assets have led to the increases in revenues noted above and to the increase in depreciation expense of $1,679,337 from $7,798,332 in 2003 to $9,477,669 in 2004.
Acquisition expenses remained relatively constant from 2003 to 2004 increasing by $18,672 from $1,008,112 in 2003 to $1,026,784 in 2004 primarily because the Company has been in the acquisition phase and the consistency of the expense year over year is reflective of the constant acquisition activity which is required in order for the Company to initiate leases.
In 2004, the Company provided $293,868 for losses and doubtful accounts, which was $140,767 less than the amount provided in 2003. In 2004, the amounts provided related to marketable securities available for sale $95,158; accounts receivable $12,000; assets held for lease or sale $16,710; and notes receivable $170,000 compared to 2003 when $434,635 was provided consisting of: marketable securities available for sale, included in other assets in the balance sheet $95,000; accounts receivable $13,000; and notes receivable $326,635.
Management periodically reviews the carrying values of its assets on leases and assets held for lease or sale. As a result of the reviews, management determined that due to continuing declines in markets for certain types of assets during 2003, the value of certain office equipment held for sale or lease was impaired. The fair values of the assets were determined based on the sum of the discounted estimated future cash flows of the assets. A charge to operations was recorded for the decline in value of the assets in the amounts of $16,710 and $61,712 for the years ended December 31, 2004 and 2003, respectively.
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The Company is continuing to acquire significant amounts of lease assets. As a result, results of operations in future periods are not expected to be comparable to 2004 or 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 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.
The Company adopted SFAS No. 133, as amended, on January 1, 2001, which had no impact in 2004 and 2003 as the Company did not utilize derivatives in those years. In 2005, the Company entered into interest rate swap agreements and recorded a gain to net income of $271,000. The Company is accounting for the swaps at fair market value with all changes reflected in the Statement of Operations.
Recent Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which replaces APB No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Changes in Interim Financial Statements.” SFAS 154 changes the accounting for and reporting of a change in accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. SFAS 154 is effective for accounting changes and corrections of errors in fiscal years beginning after December 15, 2005 and will only affect the Company’s financial statements upon adoption of a voluntary change in accounting principle by the Company.
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.
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 and expected future cash flows used for impairment analysis purposes and determination of provisions for doubtful accounts and notes receivable.
Direct financing leases and related revenue recognition:
Income from direct financing lease transactions is reported using the financing method of accounting, in which the Company’s investment in the leased property is reported as a receivable from the lessee to be recovered through future rentals. The interest income portion of each rental payment is calculated so as to generate a constant rate of return on the net receivable outstanding.
Allowances for losses on direct financing leases are typically established based on historical charge offs and collections experience and are usually determined by specifically identified lessees and billed and unbilled receivables. Direct financing lease are written-off on a case by case basis.
Direct financing leases are automatically placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management periodically reviews the credit worthiness of all direct finance lessees with payments outstanding less than 90 days. Based upon management’s judgment, direct finance lessees may be placed in a non-accrual status. Leases placed on non-accrual status are only returned to an accrual status on a case by case basis.
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Equipment on operating leases and related revenue recognition:
Equipment subject to operating leases is stated at cost. Depreciation is being recognized on a straight-line method over the terms of the related leases to the equipment’s estimated residual values at the end of the 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 be from 36 to 120 months. The difference between rent received and rental revenue recognized is recorded as unearned operating lease income on the balance sheet.
Notes receivable, unearned interest income and related revenue recognition:
The Company records all future payments of principal and interest on notes as notes receivable and then offsets the related unearned interest income. For financial statement purposes the Company reports only the net amount of principal due on the balance sheet. The unearned interest is recognized over the term of the note and the income portion of each note payment is calculated so as to generate a constant rate of return on the net balance outstanding. Any fees or costs related to notes receivable are recorded as part of the net investment in notes receivable and amortized over the term of the loan.
Allowances for losses on notes receivable are typically established based on historical charge offs and collections experience and are usually determined by specifically identified borrowers and billed and unbilled receivables. Notes are written off on a case by case basis.
Notes receivable are automatically placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management periodically reviews the credit worthiness of companies with note payments outstanding less than 90 days. Based upon management’s judgment, notes may be placed in a non-accrual status. Notes placed on non-accrual status are only returned to an accrual status on a case by case basis.
Initial direct costs:
The Company capitalizes initial direct costs (“IDC”) associated with the acquisition of lease assets and funding of investments in notes receivable (as defined in Statement of Financial Accounting Standards No. 91 (“SFAS No. 91”) “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases”). IDC includes both internal costs (e.g., labor and overhead) and external broker fees incurred with the acquisition. The costs are amortized on a lease by lease basis based on actual lease term using a straight-line method for operating leases and the effective interest rate method for direct finance leases and notes receivable. Upon disposal of the underlying lease assets, both the initial direct costs and the associated accumulated amortization are relieved. Costs related to leases that are not consummated are not eligible for capitalization as initial direct costs, such amounts are expensed as acquisition expense.
Acquisition Expense:
Acquisition expense represents costs which include, but are not limited to, legal fees and expenses, travel and communication expenses, cost of appraisals, accounting fees and expenses and miscellaneous expenses related to the selection and acquisition of equipment which are reimbursable to the Managing Member under the terms of the Operating Agreement. As the costs are not eligible for capitalization as initial direct costs, such amounts are expensed as incurred.
Asset valuation:
Recorded values of the Company’s asset portfolio are periodically reviewed for impairment in accordance with Statement of Financial Accounting Standards 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.
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Restatement of Prior Periods Presented
After receipt of an SEC comment letter in April 2005, the Company’s Managing Member determined a restatement of previous SEC filings was required. This Form 10-K reflects the restatement, in accordance with the provisions of Accounting Principles Board Opinion No. 20 “Accounting Changes” of ATEL Capital Equipment Fund IX, LLC Financial Statements for the following periods:
• | March 31, 2005 and for the three months ended March 31, 2005 | ||
• | June 30, 2005 and for the three and six months ended June 30, 2005 |
Initial Direct Costs to Originate or Acquire Loans and Leases
The Company’s Managing Member determined that the accounting methodology relating to the capitalization of incremental initial direct cost (“IDC”) and fees must be modified to comply with Statement of Financial Accounting Standards No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Cost of Leases.” As a result, the Managing Member concluded that they were not appropriately identifying, capitalizing or amortizing amounts as IDC. As a result of this restatement, only costs that are associated with successful lease bids are capitalized and amortized over the underlying lease term.
Accrued liabilities
The Company’s Managing Member determined that certain liabilities had not been recorded in the correct periods through a detailed review of cash disbursements. As a result of this review, the Company restated several of its asset, liabilities, members’ capital and expense accounts.
Depreciation of operating lease assets
The Company’s Managing Member determined that a certain asset had not been properly depreciated through a review of all depreciable assets. As a result, the Company restated depreciation expense and accumulated depreciation.
The impact on the quarterly financial results of the periods discussed above is detailed in Item 8, footnote 15 to the Financial Statements contained in this Form 10-K.
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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 to be 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 December 31, 2005, there was an outstanding balance of $4,000,000 on the floating rate line of credit and the effective interest rate of the borrowings ranged from 5.93% to 7.25%.
Also, as described in the caption “Capital Resources and Liquidity,” the Company entered into a receivables funding facility in 2002. Since interest on the outstanding balances under the facility will vary, the Company will be exposed to market risks associated with changing interest rates. To reduce its interest rate risk, the Company expects to enter into interest rate swaps, which will effectively convert the underlying interest characteristic on the facility from floating to fixed. Under the swap agreements, the Company expects to make or receive variable interest payments to or from the counterparty based on a notional principal amount. The net differential paid or received by the Company is recognized as an adjustment to other income related to the facility balances. The amount paid or received will represent the difference between the payments required under the variable interest rate facility and the amounts due under the facility at the fixed interest rate. There were $36,502,000 in borrowings under this facility at December 31, 2005.
In general, it is anticipated that these swap agreements will eliminate the Company’s interest rate risk associated with variable rate borrowings. However, the Company would be exposed to and would manage credit risk associated with the counterparty by dealing only with institutions it considers financially sound.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Report of Independent Registered Public Accounting Firm, Financial Statements and Notes to Financial Statements attached hereto at pages 16 through 46.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Members
ATEL Capital Equipment Fund IX, LLC
ATEL Capital Equipment Fund IX, LLC
We have audited the accompanying balance sheets of ATEL Capital Equipment Fund IX, LLC (the “Company”) as of December 31, 2005 and 2004, and the related statements of operations, changes in members’ capital, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s Managing Member. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our 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 IX, LLC at December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
San Francisco, California
December 18, 2006
December 18, 2006
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
2005 | 2004 | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 1,479,839 | $ | 1,779,803 | ||||
Due from affiliate | — | 8,815 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $9,835 in 2005 and $16,667 in 2004 | 1,566,974 | 1,782,230 | ||||||
Notes receivable, net of unearned interest income of $2,002,225 in 2005 and $1,404,068 in 2004 | 6,144,325 | 4,857,778 | ||||||
Prepaids and other assets | 162,386 | 838,548 | ||||||
Interest rate swap contracts | 271,000 | — | ||||||
Investment in securities, at cost | 62,498 | 62,498 | ||||||
Investment in equipment and leases, net of depreciation and amortization of $36,906,538 in 2005 and $23,082,445 in 2004 | 102,547,180 | 81,830,514 | ||||||
Total assets | $ | 112,234,202 | $ | 91,160,186 | ||||
LIABILITIES AND MEMBERS’ CAPITAL | ||||||||
Accounts payable and accrued liabilities: | ||||||||
Managing Member | $ | 1,797,169 | $ | 1,326,061 | ||||
Accrued distributions to Other Members | 1,209,147 | — | ||||||
Other | 7,351,653 | 276,764 | ||||||
Deposits due lessees | 110,977 | 131,017 | ||||||
Acquisition facility obligation | 4,000,000 | 17,000,000 | ||||||
Receivables funding program obligation | 36,502,000 | — | ||||||
Unearned operating lease income | 907,484 | 466,045 | ||||||
Total liabilities | 51,878,430 | 19,199,887 | ||||||
Commitments and contingencies | ||||||||
Members’ capital: | ||||||||
Managing Member | — | — | ||||||
Other Members | 60,355,772 | 71,960,299 | ||||||
Total Members’ capital | 60,355,772 | 71,960,299 | ||||||
Total liabilities and Members’ capital | $ | 112,234,202 | $ | 91,160,186 | ||||
See accompanying notes.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004 AND 2003
DECEMBER 31, 2005, 2004 AND 2003
2005 | 2004 | 2003 | ||||||||||
Revenues: | ||||||||||||
Leasing activities: | ||||||||||||
Operating leases | $ | 20,788,826 | $ | 11,490,794 | $ | 9,762,725 | ||||||
Direct financing leases | 421,216 | 605,277 | 315,801 | |||||||||
Gain (loss) on sales of assets | 2,131,413 | (30,313 | ) | 658,865 | ||||||||
Interest on notes receivable | 533,233 | 348,490 | 189,987 | |||||||||
Other revenue | 105,397 | 301,961 | 604,182 | |||||||||
Total revenues | 23,980,085 | 12,716,209 | 11,531,560 | |||||||||
Expenses: | ||||||||||||
Depreciation of operating lease assets | 17,090,992 | 9,477,669 | 7,860,044 | |||||||||
Asset management fees to Managing Member | 1,174,983 | 620,104 | 686,013 | |||||||||
Acquisition expense | 512,804 | 1,026,784 | 1,008,112 | |||||||||
Cost reimbursements to Managing Member | 910,403 | 658,265 | 615,089 | |||||||||
Provision for losses and doubtful accounts | (6,832 | ) | 293,868 | 434,635 | ||||||||
Amortization of initial direct costs | 587,414 | 367,537 | 345,264 | |||||||||
Amortization of loan fee | 6,000 | 6,000 | 6,000 | |||||||||
Interest expense | 1,599,015 | 552,914 | 369,396 | |||||||||
Professional fees | 403,577 | 123,818 | 112,769 | |||||||||
Outside services | 101,380 | 120,796 | 58,888 | |||||||||
Insurance | 68,197 | 72,359 | 60,844 | |||||||||
Other | 306,115 | 441,618 | 199,736 | |||||||||
Total operating expense | 22,754,048 | 13,761,732 | 11,756,790 | |||||||||
Other income, net | 230,660 | 11,091 | — | |||||||||
Net income (loss) | $ | 1,456,697 | $ | (1,034,432 | ) | $ | (225,230 | ) | ||||
Net income (loss): | ||||||||||||
Managing Member | $ | 978,032 | $ | 880,049 | $ | 862,142 | ||||||
Other Members | 478,665 | (1,914,481 | ) | (1,087,372 | ) | |||||||
$ | 1,456,697 | $ | (1,034,432 | ) | $ | (225,230 | ) | |||||
Net income (loss) per Limited Liability Company Unit (Other Members) | $ | 0.04 | $ | (0.16 | ) | $ | (0.09 | ) | ||||
Weighted average number of Units outstanding | 12,057,893 | 12,062,469 | 12,035,095 |
See accompanying notes.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL
FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004 AND 2003
Other Members | Managing | |||||||||||||||
Units | Amount | Member | Total | |||||||||||||
Balance December 31, 2002 | 11,037,141 | $ | 87,549,292 | $ | — | $ | 87,549,292 | |||||||||
Capital contributions | 1,028,125 | 10,281,250 | — | 10,281,250 | ||||||||||||
Less selling commissions to affiliates | — | (976,719 | ) | — | (976,719 | ) | ||||||||||
Other syndication costs to affiliates | — | (369,317 | ) | — | (369,317 | ) | ||||||||||
Limited Liability Company Units repurchased | (250 | ) | (1,923 | ) | — | (1,923 | ) | |||||||||
Distributions to Other Members ($0.88 per Unit) | — | (10,633,086 | ) | — | (10,633,086 | ) | ||||||||||
Distributions to Managing Member | — | — | (862,142 | ) | (862,142 | ) | ||||||||||
Net income (loss) | (1,087,372 | ) | 862,142 | (225,230 | ) | |||||||||||
Balance December 31, 2003 | 12,065,016 | 84,762,125 | — | 84,762,125 | ||||||||||||
Other syndication costs to affiliates | — | 22,684 | — | 22,684 | ||||||||||||
Limited Liability Company Units repurchased | (6,500 | ) | (56,094 | ) | — | (56,094 | ) | |||||||||
Distributions to Other Members ($0.90 per Unit) | — | (10,853,935 | ) | — | (10,853,935 | ) | ||||||||||
Distributions to Managing Member | — | — | (880,049 | ) | (880,049 | ) | ||||||||||
Net income (loss) | (1,914,481 | ) | 880,049 | (1,034,432 | ) | |||||||||||
Balance December 31, 2004 | 12,058,516 | 71,960,299 | — | 71,960,299 | ||||||||||||
Limited Liability Company Units repurchased | (3,500 | ) | (20,795 | ) | — | (20,795 | ) | |||||||||
Distributions to Other Members ($1.00 per Unit) | — | (12,062,397 | ) | — | (12,062,397 | ) | ||||||||||
Distributions to Managing Member | — | — | (978,032 | ) | (978,032 | ) | ||||||||||
Net income | — | 478,665 | 978,032 | 1,456,697 | ||||||||||||
Balance December 31, 2005 | 12,055,016 | $ | 60,355,772 | $ | — | $ | 60,355,772 | |||||||||
See accompanying notes.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004 AND 2003
2005 | 2004 | 2003 | ||||||||||
Operating activities: | ||||||||||||
Net income (loss) | $ | 1,456,697 | $ | (1,034,432 | ) | $ | (225,230 | ) | ||||
Adjustments to reconcile net income (loss) to cash provided by operating activities: | ||||||||||||
(Gain) on securities sales and foreign exchange | — | (53,875 | ) | — | ||||||||
(Gain) loss on sales of lease assets | (2,131,413 | ) | 30,313 | (658,865 | ) | |||||||
Depreciation of operating lease assets | 17,090,992 | 9,477,669 | 7,860,044 | |||||||||
Amortization of initial direct costs | 587,414 | 367,537 | 345,264 | |||||||||
Amortization of loan fees | 6,000 | 6,000 | 6,000 | |||||||||
Provision for losses and doubtful accounts | (6,832 | ) | 293,868 | 434,635 | ||||||||
Gain on interest rate swap contracts | (271,000 | ) | — | — | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Due from affiliate | 8,815 | — | — | |||||||||
Accounts receivable | 222,088 | (462,371 | ) | (138,766 | ) | |||||||
Prepaids and other assets | 670,162 | (555,238 | ) | 16,783 | ||||||||
Accounts payable, Managing Member | 471,108 | 541,800 | (367,179 | ) | ||||||||
Accounts payable, other | 7,074,889 | (581,271 | ) | 662,036 | ||||||||
Deposits due lessees | (20,040 | ) | 131,017 | — | ||||||||
Unearned operating lease income | 441,439 | 337,117 | 51,884 | |||||||||
Net cash provided by operating activities | 25,600,319 | 8,498,134 | 7,986,606 | |||||||||
Investing activities: | ||||||||||||
Purchases of equipment on operating leases | (40,970,559 | ) | (38,082,346 | ) | (12,050,633 | ) | ||||||
Purchases of equipment on direct financing leases | (402,785 | ) | (4,478,953 | ) | (5,778,880 | ) | ||||||
Proceeds from sales of lease assets | 3,888,087 | 95,571 | 5,370,886 | |||||||||
Receipts from (payments made to) affiliates | — | 4,133,210 | (4,142,025 | ) | ||||||||
Payments of initial direct costs | (939,176 | ) | (748,750 | ) | (507,875 | ) | ||||||
Reduction of net investment in direct financing leases | 2,335,541 | 2,494,197 | 929,968 | |||||||||
Payments received on notes receivable | 1,166,791 | 530,537 | 506,974 | |||||||||
Note receivable advances | (2,628,105 | ) | (5,410,319 | ) | (46,196 | ) | ||||||
Purchases of securities | — | (62,500 | ) | — | ||||||||
Proceeds from sale of securities | — | 53,875 | — | |||||||||
Write-off of securities | — | 95,158 | — | |||||||||
Net cash used in investing activities | (37,550,206 | ) | (41,380,320 | ) | (15,717,781 | ) | ||||||
Financing activities: | ||||||||||||
Borrowings (repayments) under acquisition facility | (13,000,000 | ) | 17,000,000 | — | ||||||||
Borrowings under receivables funding program | 36,502,000 | — | — | |||||||||
Capital contributions received | — | — | 10,281,250 | |||||||||
(Payment) refund of syndication costs (to) from Managing Member | — | 22,683 | (1,346,037 | ) | ||||||||
Distributions to Other Members | (10,853,250 | ) | (10,853,935 | ) | (10,633,086 | ) | ||||||
Distributions to Managing Member | (978,032 | ) | (880,049 | ) | (862,142 | ) | ||||||
Limited Liability Company Units repurchased | (20,795 | ) | (56,093 | ) | (1,923 | ) | ||||||
Net cash provided by (used in) financing activities | 11,649,923 | 5,232,606 | (2,561,938 | ) | ||||||||
20
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
STATEMENTS OF CASH FLOWS
(CONTINUED)
(CONTINUED)
FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004 AND 2003
DECEMBER 31, 2005, 2004 AND 2003
2005 | 2004 | 2003 | ||||||||||
Net (decrease) increase in cash and cash equivalents | (299,964 | ) | (27,649,580 | ) | (10,293,113 | ) | ||||||
Cash and cash equivalents at beginning of period | 1,779,803 | 29,429,383 | 39,722,496 | |||||||||
Cash and cash equivalents at end of period | $ | 1,479,839 | $ | 1,779,803 | $ | 29,429,383 | ||||||
Supplemental disclosures of cash flow information: | ||||||||||||
Cash paid during the period for interest | $ | 1,559,001 | $ | 498,054 | $ | 349,319 | ||||||
Cash paid during the period for taxes | $ | 68,273 | $ | 94,195 | $ | 72,682 | ||||||
Schedule of non-cash transactions: | ||||||||||||
Distributions declared and payable to other members at year-end | $ | 1,209,147 | — | — | ||||||||
Accrued equipment purchases at year end | $ | 78,276 | — | — | ||||||||
Change in fair value of interest rate swap contracts | $ | 271,000 | $ | — | $ | — | ||||||
See accompanying notes.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
1. Organization and Limited Liability Company matters:
ATEL Capital Equipment Fund IX, LLC (the “Company”) was formed under the laws of the State of California on September 27, 2000 for the purpose of engaging in the sale of limited liability company investment units and acquiring equipment to engage in equipment leasing and sales activities, primarily in the United States. The Managing Member of the Company is ATEL Financial Services, LLC (“AFS”), a California limited liability corporation. The Company may continue until December 31, 2019. Contributions in the amount of $600 were received as of December 31, 2000, $100 of which represented AFS’s continuing interest, and $500 of which represented the Initial Member’s capital investment.
The Company conducted a public offering of 15,000,000 Limited Liability Company Units (“Units”), at a price of $10 per Unit. On February 21, 2001, subscriptions for the minimum number of Units (120,000, representing $1,200,000) had been received (excluding subscriptions from Pennsylvania investors) and AFS requested that the subscriptions be released to the Company. On that date, the Company commenced operations in its primary business (leasing activities). As of April 3, 2001, the Company had received subscriptions for 753,050 Units ($7,530,500), 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.
As of January 15, 2003, the offering was terminated. As of that date, the Company had received subscriptions for 12,065,266 Units ($120,652,660). Subsequent to January 15, 2003, units totaling 10,250 were rescinded and funds returned to investors.
As of December 31, 2005, 12,055,016 units ($120,550,160) were issued and outstanding.
Pursuant to the terms of the Limited Liability Company Operating Agreement (“Operating Agreement”), AFS receives compensation and reimbursements for services rendered on behalf of the Company (Note 7). AFS is required to maintain in the Company reasonable cash reserves for working capital, the repurchase of Units and contingencies.
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 December 31, 2009 and (iii) provide additional distributions following the Reinvestment Period and until all equipment has been sold. The Company is governed by the Operating Agreement.
2. Summary of significant accounting policies:
Basis of presentation:
The accompanying balance sheets as of December 31, 2005 and 2004 and the related statements of operations and changes in members’ capital and cash flows for each of the three years in the period ended December 31, 2005 have been prepared in accordance with accounting principles generally accepted in the United States, (“GAAP”). Certain prior year amounts have been reclassified to conform to the current year presentation.
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 and expected future cash flows used for impairment analysis purposes and determination of provisions for doubtful accounts and notes receivable.
Cash and cash equivalents:
Cash and cash equivalents include cash in banks and cash equivalent investments with original maturities of ninety days or less.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
2. Summary of significant accounting policies (continued):
Credit risk:
Financial instruments that potentially subject the Company to concentrations of credit risk include cash and cash equivalents, direct finance lease receivables, notes receivable 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 and notes receivable represent amounts due from lessees or borrowers in various industries, related to equipment on operating and direct financing leases or notes receivable. See footnote 3 for a description of lessees and financial borrowers by industry as of December 31, 2005 and 2004.
Accounts receivable:
Accounts receivable represent the amounts billed under operating and direct financing 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 to expense on specific identification basis. Amounts recovered that were previously written-off are recorded as other income in the period received.
Direct financing leases and related revenue recognition:
Income from direct financing lease transactions is reported using the financing method of accounting, in which the Company’s investment in the leased property is reported as a receivable from the lessee to be recovered through future rentals. The interest income portion of each rental payment is calculated so as to generate a constant rate of return on the net receivable outstanding.
Allowances for losses on direct financing leases are typically established based on historical charge offs and collections experience and are usually determined by specifically identified lessees and billed and unbilled receivables. Direct financing lease are charged-off to expense on specific identification basis.
Direct financing leases are automatically placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management periodically reviews the credit worthiness of all direct finance lessees with payments outstanding less than 90 days. Based upon management’s judgment, direct finance lessees may be placed in a non-accrual status. Leases placed on non-accrual status are only returned to an accrual status on a case by case basis.
Equipment on operating leases and related revenue recognition:
Equipment subject to operating leases is stated at cost. Depreciation is being recognized on a straight-line method over the terms of the related leases to the equipment’s estimated residual values at the end of the 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 on terms from 36 to 120 months. The difference between rent received and rental revenue recognized is recorded as unearned operating lease income on the balance sheet.
Notes receivable, unearned interest income and related revenue recognition:
The Company records all future payments of principal and interest on notes as notes receivable, which is then offset by the amount of any related unearned interest income. For financial statement purposes, the Company reports only the net amount of principal due on the balance sheet. The unearned interest is recognized over the term of the note and the income portion of each note payment is calculated so as to generate a constant rate of return on the net balance outstanding. Any fees or costs related to notes receivable are recorded as part of the net investment in notes receivable and amortized over the term of the loan.
Allowances for losses on notes receivable are typically established based on historical charge offs and collections experience and are usually determined by specifically identified borrowers and billed and unbilled receivables. Notes are charged off to expense on specific identification basis.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
2. Summary of significant accounting policies (continued):
Notes receivable are automatically placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management periodically reviews the credit worthiness of companies with note payments outstanding less than 90 days. Based upon management’s judgment, notes may be placed in a non-accrual status. Notes placed on non-accrual status are only returned to an accrual status on a case by case basis.
Initial direct costs:
The Company capitalizes initial direct costs (“IDC”) associated with the acquisition of lease assets and funding of investments in notes receivable (as defined in Statement of Financial Accounting Standards (“SFAS”) No. 91 (“SFAS No. 91”) “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases”. IDC includes both internal costs (e.g., labor and overhead) and external broker fees incurred with the acquisition. The costs are amortized on a lease by lease basis based on actual lease term using a straight-line method for operating leases and the effective interest rate method for direct finance leases and notes receivable. Upon disposal of the underlying lease assets, both the initial direct costs and the associated accumulated amortization are relieved. Costs related to leases that are not consummated are not eligible for capitalization as initial direct costs and are expensed as acquisition expense.
Acquisition expense:
Acquisition expense represents costs which include, but are not limited to, legal fees and expenses, travel and communication expenses, cost of appraisals, accounting fees and expenses and miscellaneous expenses related to the selection and acquisition of equipment which are reimbursable to the Managing Member under the terms of the Operating Agreement. As the costs are not eligible for capitalization as initial direct costs, such amounts are expensed as incurred.
Asset valuation:
Recorded values of the Company’s asset portfolio are periodically reviewed for impairment in accordance with 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 asset and its carrying value on the measurement date.
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 assets 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.
The Company’s chief operating decision makers are the Managing Member’s Chief Operating Officer and its Chief Executive Officer. The Company believes that its equipment leasing business operates as one reportable segment because: a) the Company measures profit and loss at the equipment portfolio level as a whole; b) the chief operating decision makers do not review
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Table of Contents
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
2. Summary of significant accounting policies (continued):
information based on any operating segment other than the equipment leasing transaction portfolio; c) the Company does not maintain discrete financial information on any specific segment other than its equipment financing operations; d) the Company has not chosen to organize its business around different products and services other than equipment lease financing; and e) the Company has not chosen to organize its business around geographic areas.
The primary geographic regions in which the Company seeks leasing opportunities are North America and Europe. The table below summarizes geographic information relating to the sources, by nation, of the Company’s operating revenues for the years ended December 31:
% of | % of | % of | ||||||||||||||||||||||
2005 | total | 2004 | total | 2003 | total | |||||||||||||||||||
Revenue: | ||||||||||||||||||||||||
United States | $ | 22,566,603 | 94 | % | $ | 12,475,328 | 98 | % | $ | 11,531,560 | 100 | % | ||||||||||||
United Kingdom | 1,133,758 | 5 | % | 19,216 | 0 | % | — | 0 | % | |||||||||||||||
Canada | 279,724 | 1 | % | 221,665 | 2 | % | — | 0 | % | |||||||||||||||
Total International | 1,413,482 | 6 | % | 240,881 | 2 | % | — | 0 | % | |||||||||||||||
Total | $ | 23,980,085 | 100 | % | $ | 12,716,209 | 100 | % | $ | 11,531,560 | 100 | % | ||||||||||||
Long-lived tangible assets: | ||||||||||||||||||||||||
United States | $ | 100,957,552 | 93 | % | $ | 82,415,995 | 95 | % | ||||||||||||||||
United Kingdom | 5,332,373 | 5 | % | 1,703,416 | 2 | % | ||||||||||||||||||
Canada | 2,401,580 | 2 | % | 2,568,881 | 3 | % | ||||||||||||||||||
Total International | 7,733,953 | 7 | % | 4,272,297 | 5 | % | ||||||||||||||||||
Total | $ | 108,691,505 | 100 | % | $ | 86,688,292 | 100 | % | ||||||||||||||||
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.
Credit exposure from derivative financial instruments, which are assets, arises from the risk of a counterparty default on the derivative contract. The amount of the loss created by the default is the replacement cost or current positive fair value of the defaulted contract.
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Table of Contents
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
2. Summary of significant accounting policies (continued):
Foreign currency transactions:
Foreign currency transaction gains and losses are reported in the results of operations as other income in the period in which they occur. Currently, the Company does not use derivative instruments to hedge its economic exposure with respect to assets, liabilities and firm commitments as the foreign currency transactions and risks to date have not been significant. During the year ended December 31, 2005, the Company recognized a foreign currency loss of $141,464, which is included in other income, net.
Investment in securities:
Purchased securities
Purchased securities are not registered for public sale and are carried at lower of cost or market at the end of the period as determined by the Managing Member. Factors considered by the Managing Member in determining fair value include cost, the type of investment, subsequent purchases of the same or similar investments by the Company or other investors, the current financial position and operating results of the company issuing the securities and such other factors as may be deemed relevant. The Managing Member’s estimate and assumption of fair value of the private securities may differ significantly from the values that would have been used had a ready market existed, and the differences could be material.
Purchased securities are not registered for public sale and are carried at lower of cost or market at the end of the period as determined by the Managing Member. Factors considered by the Managing Member in determining fair value include cost, the type of investment, subsequent purchases of the same or similar investments by the Company or other investors, the current financial position and operating results of the company issuing the securities and such other factors as may be deemed relevant. The Managing Member’s estimate and assumption of fair value of the private securities may differ significantly from the values that would have been used had a ready market existed, and the differences could be material.
Warrants
Warrants owned by the Company are not registered for public sale and are carried at an estimated fair value on the balance sheet at the end of the period, as determined by the Managing Member. Factors considered by the Managing Member in determining fair value include cost, the type of investment, subsequent purchases of the same or similar investments by the Company or other investors, the current financial position and operating results of the company issuing the securities and such other factors as may be deemed relevant. The Managing Member’s estimate and assumption of fair value of the private securities may differ significantly from the values that would have been used had a ready market existed, and the differences could be material. At December 31, 2005, the Managing Member determined estimated fair value of the warrants to be nominal in amount.
Warrants owned by the Company are not registered for public sale and are carried at an estimated fair value on the balance sheet at the end of the period, as determined by the Managing Member. Factors considered by the Managing Member in determining fair value include cost, the type of investment, subsequent purchases of the same or similar investments by the Company or other investors, the current financial position and operating results of the company issuing the securities and such other factors as may be deemed relevant. The Managing Member’s estimate and assumption of fair value of the private securities may differ significantly from the values that would have been used had a ready market existed, and the differences could be material. At December 31, 2005, the Managing Member determined estimated fair value of the warrants to be nominal in amount.
Unearned operating lease income:
The Company records prepayments on operating leases as a liability, unearned operating lease income. The liability is recorded when the prepayments are received and recognized as operating lease revenue ratably over the period to which the prepayments relate.
Income taxes:
The Company is treated as a partnership for federal income tax purposes. Pursuant to the provisions of Section 701 of the Internal Revenue Code, a partnership is not subject to federal income taxes. Accordingly, the Company has provided current income and franchise taxes for only those states which levy income taxes on partnerships. For the years ended December 31, 2005, 2004 and 2003, the current provision for state income taxes was approximately $127,000, $0 and $0, respectively.
The tax basis of the Company’s net assets and liabilities varies from the amounts presented in these financial statements at December 31:
2005 | 2004 | |||||||
Financial statement basis of net assets | $ | 60,355,772 | $ | 71,960,299 | ||||
Tax basis of net assets (unaudited) | 60,379,776 | 76,841,325 | ||||||
Difference | $ | 24,004 | $ | 4,881,026 | ||||
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
2. Summary of significant accounting policies (continued):
The primary differences between the tax basis of the net assets and the amounts recorded in the financial statements are the result of differences in accounting for syndication costs and differences in depreciation methods used in the financial statements and the Company’s tax returns.
The following reconciles the net income (loss) reported in these financial statements to the loss reported on the Company’s federal tax return (unaudited) for each of the years ended December 31:
2005 | 2004 | 2003 | ||||||||||
Net income (loss) per financial statements | $ | 1,456,697 | $ | (1,034,432 | ) | $ | (225,230 | ) | ||||
Reconciling item – impact due to prior year restatement | 775,290 | 816,245 | ||||||||||
Tax adjustments (unaudited): | ||||||||||||
Adjustment to depreciation expense | (7,030,082 | ) | (8,062,206 | ) | (6,258,019 | ) | ||||||
Provision for losses and doubtful accounts | 6,832 | 98,825 | 496,347 | |||||||||
Adjustments to revenues | 643,472 | 2,645,101 | 1,450,188 | |||||||||
Other | 215,571 | — | — | |||||||||
Net loss per federal tax return (unaudited) | $ | (4,707,510 | ) | $ | (5,577,422 | ) | $ | (3,720,469 | ) | |||
Other income, net:
Other income consists of amounts received as settlement from former customers previously written off, gains and losses on interest rate swap contracts and gains and losses on foreign exchange transactions. During the fiscal year ended December 31, 2005, other income was comprised primarily of a favorable fair value adjustment on interest rate swap contracts of $271,000, recoveries of doubtful accounts of $101,124, and a foreign currency loss of $141,464.
Per unit data:
Net income and loss and distributions per unit are based upon the weighted average number of Other Members’ units outstanding during the period.
Recent accounting pronouncements:
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which replaces APB No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Changes in Interim Financial Statements.” SFAS 154 changes the accounting for and reporting of a change in accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. SFAS 154 is effective for accounting changes and corrections of errors in fiscal years beginning after December 15, 2005 and will only affect the Company’s financial statements upon adoption of a voluntary change in accounting principle by the Company.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
3. Concentration of credit risk and major customers:
The Company leases equipment to lessees and provides debt financing to borrowers in diversified industries. Leases and notes receivable are subject to AFS’s credit committee review. The leases and notes receivable provide for the return of the equipment to the Company upon default.
As of December 31, 2005 and 2004, there were concentrations (greater than 10% as a percentage of total equipment cost) of equipment leased to lessees and/or financial borrowers in certain industries as follows:
2005 | 2004 | |||||||
Manufacturing | 35 | % | 36 | % | ||||
Mining | 14 | % | 26 | % | ||||
Rail Transportation | 11 | % | * | |||||
Electric utilities | 10 | % | 15 | % | ||||
Marine transportation | * | 11 | % |
* Less than 10%
During 2005, one customer comprised 12% of the Company’s revenues from leases. During 2004, two customers comprised 14% and 10% of the Company’s revenues from leases. During 2003, three customers comprised 15%, 14% and 11% of the Company’s revenues from leases.
4. Notes receivable net:
The Company has various notes receivable from parties who have financed their purchase of equipment through the Company. The terms of the notes receivable are 18 to 120 months and bear interest at rates ranging from 9% to 22%. The notes are secured by the equipment financed. As of December 31, 2005, the minimum future payments receivable are as follows:
Year Ending | ||||
December 31, | ||||
2006 | $ | 1,687,826 | ||
2007 | 1,305,763 | |||
2008 | 856,408 | |||
2009 | 2,211,134 | |||
2010 | 393,128 | |||
Thereafter | 1,655,774 | |||
8,110,033 | ||||
Initial direct costs paid to Managing Member, net of accumulated amortization of $65,517 | 36,517 | |||
Less: portion representing interest | (2,002,225 | ) | ||
$ | 6,144,325 | |||
For the year 2005, IDC amortization expense related to notes receivable was $53,069. Together with IDC amortization expense related to operating leases and direct finance leases (discussed in footnote 6) of $534,345, total IDC amortization expense was $587,414 for 2005.
For the year ended December 31, 2005, capitalized IDC was $31,559 related to notes funded.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
5. Reserves, impairment losses and provisions for doubtful accounts:
The Company’s allowance for doubtful accounts and losses are as follows:
Notes | Accounts | |||||||||||||||||||
Reserve for | Realized | Receivable - | Receivable - | |||||||||||||||||
losses on | losses on | allowance for | allowance for | |||||||||||||||||
assets held for | marketable | Doubtful | Doubtful | |||||||||||||||||
sale or lease | securities | Accounts | Accounts | Total | ||||||||||||||||
Balance December 31, 2003 | $ | — | $ | — | $ | — | $ | 13,000 | $ | 13,000 | ||||||||||
Provision for losses and doubtful accounts | 16,710 | 95,158 | 170,000 | 12,000 | 293,868 | |||||||||||||||
(Write-offs) Recoveries | (16,710 | ) | (95,158 | ) | (170,000 | ) | (8,333 | ) | (290,201 | ) | ||||||||||
Balance December 31, 2004 | — | — | — | 16,667 | 16,667 | |||||||||||||||
Provision for losses and doubtful accounts | — | — | — | (6,832 | ) | (6,832 | ) | |||||||||||||
(Write-offs) Recoveries | — | — | — | — | — | |||||||||||||||
Balance December 31, 2005 | $ | — | $ | — | $ | — | $ | 9,835 | $ | 9,835 | ||||||||||
6. Investment in equipment and leases, net:
The Company’s investment in leases consists of the following:
Depreciation / | ||||||||||||||||||||
Amortization | ||||||||||||||||||||
Expense or | ||||||||||||||||||||
Amortization of | Reclassi- | |||||||||||||||||||
December 31, | Direct Financing | fications or | December 31, | |||||||||||||||||
2004 | Additions | Leases | Dispositions | 2005 | ||||||||||||||||
Net investment in operating leases | $ | 71,982,630 | $ | 41,048,835 | $ | (17,090,992 | ) | $ | (911,803 | ) | $ | 95,028,670 | ||||||||
Net investment in direct financing leases | 8,343,277 | 402,785 | (2,335,541 | ) | (711,863 | ) | 5,698,658 | |||||||||||||
Assets held for sale or lease | 255,159 | — | — | — | 255,159 | |||||||||||||||
Initial direct costs, net of accumulated amortization of $1,111,410 in 2005 and $923,928 in 2004 | 1,249,448 | 921,857 | (534,345 | ) | (72,267 | ) | 1,564,693 | |||||||||||||
$ | 81,830,514 | $ | 42,373,477 | $ | (19,960,878 | ) | $ | (1,695,933 | ) | $ | 102,547,180 | |||||||||
Additions to net investment in operating leases are stated at cost and include amounts accrued at December 31, 2005 for asset purchase commitments.
For the year 2005, IDC amortization expense related to operating and direct finance leases was $534,345. Together with IDC amortization expense related to notes receivable (as discussed in note 4) of $53,069, total IDC amortization expense was $587,414 for 2005.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
6. Investment in equipment and leases, net (Continued):
Impairment of investments in leases and assets held for sale or lease:
Management periodically reviews the carrying values of its assets on leases and assets held for lease or sale. As a result of the reviews, management determined that due to continuing declines in markets for certain types of assets, during 2003, the value of certain office equipment held for sale or lease was impaired. The fair values of the assets were determined based on the sum of the discounted estimated future cash flows of the assets. A charge to operations was recorded for the decline in value of the assets in the amount of $61,712 for the year ended December 31, 2003 and $111,868 for the year ended December 31, 2004. No impairment losses were recorded in 2005.
Impairment losses are recorded as an addition to accumulated depreciation of the impaired assets. Depreciation expense and impairment losses on property subject to operating leases and property held for lease or sale consist of the following for each of the years ended December 31:
2005 | 2004 | 2003 | ||||||||||
Depreciation expense | $ | 17,090,992 | $ | 9,365,801 | $ | 7,798,332 | ||||||
Impairment losses | — | 111,868 | 61,712 | |||||||||
$ | 17,090,992 | $ | 9,477,669 | $ | 7,860,044 | |||||||
All of the property on leases was acquired in 2005, 2004, 2003, 2002 and 2001.
Operating leases:
Property on operating leases consists of the following:
Reclassi- | ||||||||||||||||
December 31, | fications or | December 31, | ||||||||||||||
2004 | Additions | Dispositions | 2005 | |||||||||||||
Mining | $ | 40,293,704 | $ | — | $ | (22,531,308 | ) | $ | 17,762,396 | |||||||
Manufacturing | 14,014,799 | 5,864,534 | 15,711,790 | 35,591,123 | ||||||||||||
Materials handling | 13,251,773 | 12,772,346 | 2,736,818 | 28,760,937 | ||||||||||||
Marine vessels | 11,200,000 | 740,139 | 2,127 | 11,942,266 | ||||||||||||
Transportation | 7,381,919 | 5,036,209 | (50,672 | ) | 12,367,456 | |||||||||||
Communications | 7,124,351 | — | (6,855,198 | ) | 269,153 | |||||||||||
Office furniture | 1,229,069 | 506,954 | — | 1,736,023 | ||||||||||||
Natural gas compressors | 569,460 | — | — | 569,460 | ||||||||||||
Office Automation | — | 2,050,396 | 4,090,418 | 6,140,814 | ||||||||||||
Construction | — | 619,818 | 2,764,780 | 3,384,598 | ||||||||||||
Transportation, Rail | — | 13,458,439 | (47,457 | ) | 13,410,982 | |||||||||||
95,065,075 | 41,048,835 | (4,178,702 | ) | 131,935,208 | ||||||||||||
Less accumulated depreciation | (23,082,445 | ) | (17,090,992 | ) | 3,266,899 | (36,906,538 | ) | |||||||||
$ | 71,982,630 | $ | 23,957,843 | $ | (911,803 | ) | $ | 95,028,670 | ||||||||
The average assumed residual value for assets on operating leases at December 31, 2005 and 2004 were 21% and 26% of the assets’ original cost, respectively.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
6. Investment in equipment and leases, net (Continued):
Direct financing leases:
As of December 31, 2005, investment in direct financing leases consists of materials handling equipment and office furniture. The following lists the components of the Company’s investment in direct financing leases as of December 31, 2005 and 2004:
2005 | 2004 | |||||||
Total minimum lease payments receivable | $ | 5,310,261 | $ | 8,248,342 | ||||
Estimated residual values of leased equipment (unguaranteed) | 889,088 | 1,048,243 | ||||||
Investment in direct financing leases | 6,199,349 | 9,296,585 | ||||||
Less unearned income | (500,691 | ) | (953,308 | ) | ||||
Net investment in direct financing leases | $ | 5,698,658 | $ | 8,343,277 | ||||
At December 31, 2005, the aggregate amounts of future minimum lease payments receivable are as follows:
Direct | ||||||||||||
Year ending | Operating | Financing | ||||||||||
December 31, | Leases | Leases | Total | |||||||||
2006 | $ | 24,316,237 | $ | 2,120,227 | $ | 26,436,464 | ||||||
2007 | 18,605,053 | 1,633,865 | 20,238,918 | |||||||||
2008 | 14,048,809 | 1,055,294 | 15,104,103 | |||||||||
2009 | 9,514,999 | 492,659 | 10,007,658 | |||||||||
2010 | 3,781,987 | 8,216 | 3,790,203 | |||||||||
Thereafter | 5,097,850 | — | 5,097,850 | |||||||||
$ | 75,364,935 | $ | 5,310,261 | $ | 80,675,196 | |||||||
The Company utilizes a straight line depreciation method for equipment in all of the categories currently in its portfolio of operating lease transactions. The useful lives for investment in leases by category are as follows:
Equipment category | Useful Life | |||
Mining | 30 – 40 | |||
Transporation, rail | 30 – 35 | |||
Marine Vessels | 20 – 30 | |||
Manufacturing | 10 – 20 | |||
Materials Handling | 7 – 10 | |||
Transportation | 7 – 10 | |||
Construction | 7 – 10 | |||
Office Furniture | 7 – 10 | |||
Natural Gas Compressors | 7 – 10 | |||
Communications | 3 – 5 | |||
Office automation | 3 – 5 |
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
7. Related party transactions:
The terms of the Operating Agreement provide that AFS and/or affiliates are entitled to receive certain fees for equipment management and resale and for management of the Company.
The Operating Agreement allows for the reimbursement of costs incurred by AFS in providing administrative services to the Company. Administrative services provided include Company accounting, finance/treasury, investor relations, legal counsel and lease and equipment documentation. AFS is not reimbursed for services whereby it is entitled to receive a separate fee as compensation for such services, such as management of equipment. 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. The Company is contingently liable for certain future costs to be incurred by AFS to manage the administrative services provided to the Company.
Each of ATEL Leasing Corporation (“ALC”); 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 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 and/or affiliates earned fees, commissions and reimbursements, pursuant to the Operating Agreement as follows during each of the years ended December 31:
2005 | 2004 | 2003 | ||||||||||
Selling commissions (equal to 9.5% of the selling price of the Limited Liability Company units, deducted from Other Members’ capital) | $ | — | $ | — | $ | 976,719 | ||||||
Reimbursement (or refund) of other syndication costs to Managing Member | — | (22,683 | ) | 369,318 | ||||||||
Administrative costs reimbursed to Managing Member | 910,403 | 658,266 | 615,089 | |||||||||
Acquisition costs paid to Managing Member | 512,804 | 1,026,784 | 1,008,112 | |||||||||
Initial direct costs paid to Managing Member | 580,844 | 414,907 | 432,051 | |||||||||
Asset management fees to Managing Member | 1,174,983 | 620,104 | 686,013 | |||||||||
$ | 3,179,034 | $ | 2,697,378 | $ | 4,087,302 | |||||||
The Managing Member makes certain payments to third parties on behalf of the Company for convenience purposes. During the years ended December 31, 2005, 2004, and 2003, the Managing Member made such payments of $419,154, $461,697 and $325,920, respectively.
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 next business day.
During November 2005, an operating lease asset was purchased and a lease entered into by an affiliate of the Company with an original cost of $7,466,942. In December 2005, the asset and associated lease were transferred to the Company from the affiliate for a total payment of $7,383,056.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
8. Borrowing facilities:
The Company participates with AFS and certain of its affiliates in a financing arrangement ((the “Master Terms Agreement”) comprised of a working capital facility to AFS, an acquisition facility and a warehouse facility to AFS, the Company and affiliates and a venture facility available to an affiliate) with a group of financial institutions that includes certain financial and non-financial covenants. The financing arrangement is $75,000,000 and expires in June 2007. The availability of borrowings available to the Company under this financing arrangement is reduced by the amount outstanding on any of the above mentioned facilities.
As of December 31, 2005 borrowings under the facility were as follows:
Total amount available under the financing arrangement | $ | 75,000,000 | ||
Amount borrowed by the Company under the acquisition facility | (4,000,000 | ) | ||
Amounts borrowed by affiliated partnerships and limited liability companies under the acquisition facility | (8,500,000 | ) | ||
Total remaining available under the acquisition and warehouse facilities | $ | 62,500,000 | ||
The Company is contingently liable for principal payments under the warehouse facility as borrowings are recourse jointly and severally to the extent of the pro-rata share of the Company’s net worth as compared to the aggregate net worth of certain of the affiliated partnerships and limited liability companies of the Company and including AFS and ALC (which latter two entities are 100% liable). There were no borrowings under the warehouse facility as of December 31, 2005, and the Company and its affiliates pay an annual commitment fee to have access to this line of credit.
The interest rate on the Master Terms Agreement is based on either the LIBOR/Eurocurrency rate of 1-, 2-, 3- or 6-month maturity plus a lender designated spread, or the bank’s Prime rate, which re-prices daily. Principal amounts of loans made under the Master Terms Agreement that are prepaid may be re-borrowed on the terms and subject to the conditions set forth under the Master Terms Agreement. The effective interest rate on borrowings at December 31, 2005 ranged from 5.93% to 7.25%. During the fiscal year ended December 31, 2005, the weighted average interest rate on borrowings was 5.10%.
Draws on the acquisition facility by any affiliated partnership and/or limited liability company borrower are secured by a blanket lien on that borrower’s assets, including but not limited to equipment and related leases.
To manage the warehousing facility for the holding of assets prior to allocation to specific investor programs, a Warehousing Trust Agreement has been entered into by the Company, AFS and ALC, and certain of the affiliated partnerships and limited liability companies. The warehousing facility 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 December 31, 2005, the investment program participants were ATEL Capital Equipment Fund VII, L.P., ATEL Capital Equipment Fund VIII, LLC, the Company, ATEL Capital Equipment Fund X, LLC and ATEL Capital Equipment Fund XI, 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
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
8. Borrowing facilities (Continued):
respective net worth, 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 facility 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 facility collateral, and ownership of the asset and any debt obligation associated with the asset are assumed solely by the purchasing entity.
The financing arrangement discussed above includes certain financial and non-financial covenants applicable to each borrower. The Company and affiliates were not in compliance with non-financial covenants as of December 31, 2005. The Managing Member, on behalf of all borrowers, requested and received a waiver of this covenant from the lenders.
As of December 31, 2005, the Company had $4,000,000 outstanding under the acquisition facility. Interest on the line of credit is based on either the thirty day LIBOR rate or the bank’s prime rate. The carrying amount of the Company’s acquisition facility obligation approximates fair value.
9. Receivables funding program:
As of December 31, 2005, the Company had a $60 million receivables funding program with a receivables financing company that issues commercial paper rated A1 from Standard and Poor’s and P1 from Moody’s Investor Services. In this receivables funding program, the lenders would receive liens against the Company’s assets. The lender will be in a first position against certain specified assets and will be in either a subordinated or shared position against the remaining assets. This receivables funding program expires August 2011.
The receivable funding program provides for borrowing at a variable interest rate and requires AFS, on behalf of the Company, to enter into interest rate swap agreements with certain hedge counterparties (also rated A1/P1) to mitigate the interest rate risk associated with a variable interest rate note. AFS anticipates that this program will allow the Company to have a more cost effective means of obtaining debt financing than available for individual non-recourse debt transactions.
As of December 31, 2005, the Company had $36,502,000 outstanding under this receivables funding program. In order to maintain the availability of the program, the Company is required to make payments of standby fees. These fees totaled $362,508 and $385,000 in 2005 and 2004, respectively, and are included in interest expense in the Company’s statement of operations.
As of December 31, 2005, the Company has entered into interest rate swap agreements to receive or pay interest on a notional principal of $36,502,000 based on the difference between nominal rates ranging from 3.75% to 4.80% and the variable rates that ranged from 2.88% to 4.64% under the receivables funding program. No actual borrowing or lending is involved. The termination of the swaps coincides with the maturity of the debt. Through the swap agreements, the interest rates on the borrowings have been effectively fixed. The differential to be paid or received is accrued as interest rates change and is recognized currently as an adjustment to interest expense related to the debt. The interest rate swaps are carried at fair value on the balance sheet with unrealized gain/loss included in the statement of operations in other income/(loss).
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
9. Receivables funding program (Continued):
Borrowings under the Program are as follows:
Notional | Swap | Payment Rate | ||||||||||||||||||
Original | Balance | Balance | Value | On Interest | ||||||||||||||||
Dated | Amount | December 31, | December 31, | December 31, | Swap | |||||||||||||||
Borrowed | Borrowed | 2005 | 2005 | 2005 | Agreement | |||||||||||||||
02/14/2005 | $ | 20,000,000 | $ | 15,218,000 | $ | 15,218,000 | $ | 218,000 | 3.75 | % | ||||||||||
03/22/2005 | 9,892,000 | 8,237,000 | 8,237,000 | 72,000 | 4.31 | % | ||||||||||||||
12/15/05 | 13,047,000 | 13,047,000 | 13,047,000 | (19,000 | ) | 4.80 | % | |||||||||||||
$ | 42,939,000 | $ | 36,502,000 | $ | 36,502,000 | $ | 271,000 | |||||||||||||
At December 31, 2005, the minimum repayment schedule under the receivables funding program is as follows:
Year Ending | ||||
December 31, | ||||
2006 | $ | 13,013,000 | ||
2007 | 9,456,000 | |||
2008 | 6,872,000 | |||
2009 | 5,106,000 | |||
2010 | 1,668,000 | |||
Thereafter | 387,000 | |||
$ | 36,502,000 | |||
At December 31, 2005, there are specific leases that are identified as collateral under the receivables funding program with expected future lease receivables of approximately $44,447,000 at their discounted present value.
During the fiscal year ended December 31, 2005, the weighted average interest rate on the receivables funding program was 5.95%.
The receivables funding program discussed above includes certain financial and non-financial covenants applicable to each borrower. The Company and affiliates were not in compliance with certain non-financial covenants as of December 31, 2005. The Managing Member, on behalf of all borrowers, requested and received a waiver of this covenant from the lenders.
10. Commitments:
At December 31, 2005, there were commitments to purchase lease asset totaling approximately $9,984,525. This amount represents contract awards which may be canceled by the prospective lessee or may not be accepted by the Company. Of the $9,984,525 at December 31, 2005, $2,965,727 was canceled subsequent to year-end.
11. Guarantees:
The Company enters into contracts that contain a variety of indemnifications. The Company’s maximum exposure under these arrangements is unknown. However, the Company has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
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
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
11. Guarantees (Continued):
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.
12. Members’ capital:
As of December 31, 2005, 12,055,016 Units were issued and outstanding. The Company is authorized to issue up to 15,000,000 Units in addition to the Units issued to the initial members (50 Units).
As defined in the Operating Agreement, the Company’s Net Income, Net Losses, and Distributions are to be allocated 92.5% to the Members and 7.5% to AFS. In accordance with the terms of the Operating Agreement, additional allocations of income were made to AFS in 2005, 2004 and 2003. The amounts allocated were determined to bring AFS’s ending capital account balance to zero at the end of each year.
13. Fair value of financial instruments:
Cash and cash equivalents:
The recorded amounts of the Company’s cash and cash equivalents, accounts receivable, accounts payable and accruals at December 31, 2005 and 2004 approximate fair value because of the liquidity and short-term maturity of these instruments.
Notes receivable:
The fair value of the Company’s notes receivable is estimated using discounted cash flow analyses, based on the Company’s current incremental lending rates for similar types of lending arrangements. The estimated fair value of the Company’s notes receivable were $6,144,325 and $4,857,778 at December 31, 2005 and 2004, respectively.
Acquisition facility and receivables funding program:
The carrying amount of the Company’s variable rate obligations approximate fair value based on current borrowing rates for similar types of borrowings.
Interest rate swap contracts:
At December 31, 2005, the fair value of the Company’s interest rate swap contracts was $271,000.
14. Subsequent Event:
In March 2006, the Company entered into two separate promissory notes and security agreements totaling $10,874,297. The debt is non-recourse to the Company and is collateralized by the underlying leased equipment and related lease payments. The terms of the debt require the Company to make monthly payments for principal and interest starting in April 2006 and continuing until September 2015. The fixed interest rate on the debt ranges from 5.99% to 6.16% with an average effective rate of 6.1%.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
15. Selected quarterly data (unaudited):
The Company’s 2004 and 2005 unaudited selected quarterly financial information is as follows:
March 31, | June 30, | September 30, | December 31, | |||||||||||||
Quarter ended | 2004 | 2004 | 2004 | 2004 | ||||||||||||
Total revenues | $ | 2,756,796 | $ | 2,795,334 | $ | 3,173,112 | $ | 3,990,967 | ||||||||
Net income (loss) | $ | (406,620 | ) | $ | (351,652 | ) | $ | (115,280 | ) | $ | (160,880 | ) | ||||
Net income (loss) per Limited Liability Company Unit (Other members) | $ | (0.05 | ) | $ | (0.04 | ) | $ | (0.02 | ) | $ | (0.04 | ) |
March 31, | June 30, | |||||||||||||||
2005 – | 2005 – | September 30, | December 31, | |||||||||||||
Quarter ended | Restated | Restated | 2005 | 2005 | ||||||||||||
Total revenues | $ | 5,119,482 | $ | 5,392,460 | $ | 5,553,284 | $ | 7,914,859 | ||||||||
Net income (loss) | $ | 298,055 | $ | (224,742 | ) | $ | (68,601 | ) | $ | 1,451,985 | ||||||
Net income (loss) per Limited Liability Company Unit (Other members) | $ | 0.01 | $ | (0.04 | ) | $ | (0.02 | ) | $ | 0.10 |
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
15. Selected quarterly data (unaudited) (Continued):
After receipt of an SEC comment letter in April 2005, the Company’s Managing Member determined a restatement of previous SEC filings was required. This Form 10-K reflects the restatement, in accordance with the provisions of Accounting Principles Board Opinion No. 20, “Accounting Changes”, of ATEL Capital Equipment Fund IX, LLC financial statements for the following periods:
• | March 31, 2005 and the three months ended March 31, 2005 | ||
• | June 30, 2005 and the three and six months ended June 30, 2005 |
Revenue
The Company’s Managing Member determined that revenue related to a certain lease had not been recognized in the correct period. As a result, the Company restated operating lease revenue and members’ capital.
Initial Direct Costs to Originate or Acquire Loans and Leases
The Company’s Managing Member determined that the accounting methodology relating to the capitalization of incremental initial direct cost (“IDC”) and fees must be modified to comply with Statement of Financial Accounting Standards No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Cost of Leases.” As a result, the Managing Member concluded that they were not appropriately identifying, capitalizing or amortizing amounts as IDC. As a result of this restatement, only costs that are associated with successful lease bids are capitalized and amortized over the underlying lease term.
Accrued liabilities
The Company’s Managing Member determined that certain liabilities had not been recorded in the correct periods through a detailed review of cash disbursements. As a result of this review, the Company restated several of its asset, liabilities, members’ capital and expense accounts.
Depreciation of operating lease assets
The Company’s Managing Member determined that a certain asset had not been properly depreciated through a review of all depreciable assets. As a result, the Company restated depreciation expense and accumulated depreciation.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
15. Selected quarterly data (unaudited) (Continued):
Summary of restatement adjustments for the three months ended March 31, 2005 and the three and six months ended June 30, 2005:
Adjustment to | Adjustment to | Adjustment to | ||||||||||
net income | net income | net income | ||||||||||
increase | increase | increase | ||||||||||
(decrease) | (decrease) | (decrease) | ||||||||||
for the | for the | for the | ||||||||||
Three Months | Three Months | Six Months | ||||||||||
Ended | Ended | Ended | ||||||||||
March 31, 2005 | June 30, 2005 | June 30, 2005 | ||||||||||
Revenue | $ | 368,650 | $ | (58,117 | ) | $ | 310,533 | |||||
Acquisition expenses | (213,296 | ) | (143,143 | ) | (356,439 | ) | ||||||
Depreciation of operating lease assets | (287,195 | ) | (287,195 | ) | (574,390 | ) | ||||||
Amortization of initial direct costs | 120,121 | 127,055 | 247,176 | |||||||||
Cost reimbursement to Managing Member | (1,170 | ) | (5,648 | ) | (6,818 | ) | ||||||
Amortization of loan fee | (1,500 | ) | (1,500 | ) | (3,000 | ) | ||||||
Interest expense | 47,100 | — | 47,100 | |||||||||
Professional fees | 593 | (755 | ) | (162 | ) | |||||||
Outside services | (24,000 | ) | (23,819 | ) | (47,819 | ) | ||||||
Insurance | (8,504 | ) | (20,091 | ) | (28,595 | ) | ||||||
Franchise fees and state taxes | — | 66,520 | 66,520 | |||||||||
Other expense | 52,773 | 25,351 | 78,124 | |||||||||
Net change in net income and in net loss | $ | 53,572 | $ | (321,341 | ) | $ | (267,769 | ) | ||||
Other adjustments to Members’ Capital: | ||||||||||||
Accrued distributions payable, Managing Member | (98,148 | ) | (98,148 | ) | ||||||||
Accrued distributions payable, Other Members | (1,210,234 | ) | 22 | (1,210,212 | ) | |||||||
Total accrued distributions | (1,308,382 | ) | 22 | (1,308,360 | ) | |||||||
Net change in Members’ capital: | ||||||||||||
Managing Member | $ | (98,148 | ) | $ | — | $ | (98,148 | ) | ||||
Other Members | (1,156,662 | ) | (321,319 | ) | (1,477,981 | ) | ||||||
Total Members’ capital | $ | (1,254,810 | ) | $ | (321,319 | ) | $ | (1,576,129 | ) | |||
Net change in Other Members’ capital per Limited Liability Company Unit | $ | (0.10 | ) | $ | (0.03 | ) | $ | (0.13 | ) | |||
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
15. Selected quarterly data (unaudited) (Continued):
Revenue
For the three months ended March 31, 2005, an adjustment was made to restate revenue and members’ capital. This revenue adjustment resulted in increasing revenue by $368,650 with a corresponding increase to members’ capital.
For the three months ended June 30, 2005, an adjustment was made to restate revenue and members’ capital. This revenue adjustment resulted in decreasing revenue by $58,117 with a corresponding decrease to members’ capital.
For the six months ended June 30, 2005, an adjustment was made to restate revenue and members’ capital. This revenue adjustment resulted in increasing revenue by $310,533 with a corresponding increase to members’ capital.
IDC
For the three months ended March 31, 2005, adjustments were made to restate IDC costs and related IDC amortization expense. These IDC adjustments resulted in: (1) decreasing IDC costs by $213,296 with a corresponding increase in acquisition expense; and (2) decreasing IDC amortization expense by $120,121 with a corresponding decrease in accumulated amortization.
For the three months ended June 30, 2005, adjustments were made to restate IDC costs and related IDC amortization expense. These IDC adjustments resulted in: (1) decreasing IDC costs by $143,143 with a corresponding increase in acquisition expense; and (2) decreasing IDC amortization expense by $127,055 with a corresponding decrease in accumulated amortization.
For the six months ended June 30, 2005, adjustments were made to restate IDC costs and related IDC amortization expense. These IDC adjustments resulted in: (1) decreasing IDC costs by $356,439 with a corresponding increase in acquisition expense; and (2) decreasing IDC amortization expense by $247,176 with a corresponding decrease in accumulated amortization.
Accrued liabilities
For the three months ended March 31, 2005, adjustments were made to restate certain operating expenses and other members’ capital. These adjustments resulted in: (1) decreasing interest expense and other expense by $47,100 and $52,773, respectively, with a corresponding decrease in accounts payable other; and (2) increasing outside services and insurance expense by $24,000 and $8,504, respectively, with a corresponding increase in accounts payable other. Additionally, an adjustment was made to accrue for certain distributions payable, per the Operating Agreement, to both the Managing Member and other members paid during the three months ended June 30, 2005. This adjustment resulted in a decrease in members’ capital of $1,308,382 and corresponding increases in accounts payable Managing Member of $98,148 and accounts payable other of $1,210,234.
For the three months ended June 30, 2005, adjustments were made to restate certain operating expenses and other members’ capital. These adjustments resulted in: (1) decreasing franchise fees and state taxes and other expense by $66,520 and $25,351, respectively, with a corresponding decrease in accounts payable other; and (2) increasing outside services and insurance expense by $23,819 and $20,091, respectively, with a corresponding increase in accounts payable other.
For the six months ended June 30, 2005, adjustments were made to restate certain operating expenses and other members’ capital. These adjustments resulted in: (1) decreasing interest expense, franchise fees and state taxes as well as other expense by $47,100, $66,520 and $78,124, respectively, with a corresponding decrease in accounts payable other; and (2) increasing outside services and insurance expense by $47,819 and $28,595, respectively, with a corresponding increase in accounts payable other. Additionally, an adjustment was made to accrue for certain distributions payable, per the Operating Agreement, to both the managing member and other members paid during the three months ended September 30, 2005. This adjustment resulted in a decrease in other members’ capital of $1,308,360 and corresponding increases in accounts payable Managing Member of $98,148 and accounts payable other of $1,210,212 at June 30, 2005.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
15. Selected quarterly data (unaudited) (Continued):
Depreciation of operating lease assets:
For the three months ended March 31, 2005, an adjustment was made to restate depreciation expense and other members’ capital. This adjustment resulted in increasing depreciation expense by $287,195 with a corresponding increase in accumulated depreciation.
For the three months ended June 30, 2005, an adjustment was made to restate depreciation expense and other members’ capital. This adjustment resulted in increasing depreciation expense by $287,195 with a corresponding increase in accumulated depreciation.
For the six months ended June 30, 2005, an adjustment was made to restate depreciation expense and other members’ capital. This adjustment resulted in increasing depreciation expense by $574,390 with a corresponding increase in accumulated depreciation.
Effect to net income/(loss) and Members’ capital
For the three months ended March 31, 2005, the above adjustments to revenue, IDC cost and related amortization as well as period-end accrued liabilities and depreciation expense had the effect of increasing the three months ended March 31, 2005 net income by $53,572 or $0.00 per Limited Liability Company Unit (other members). Members’ capital was reduced by $1,308,382 or $0.10 per Limited Liability Company Unit (other members) at March 31, 2005 for the accrual of certain distributions payable, as discussed above.
For the three months ended June 30, 2005, the above adjustments to revenue, IDC cost and related amortization as well as period-end accrued liabilities and depreciation expense had the effect of decreasing the three month net income by $321,341 or $0.03 per Limited Liability Company Unit (other members).
For the six months ended June 30, 2005, the above adjustments to IDC cost and related amortization as well as period-end accrued liabilities and depreciation expense had the effect of decreasing the six month net income by $267,769 or $0.03 per Limited Liability Company Unit (other members). Members’ capital was further reduced by $1,308,360 or $0.10 per Limited Liability Company Unit (other members) at June 30, 2005 for the accrual of certain distributions payable, as discussed above.
Cumulative effect of restatement adjustments prior to January 1, 2005
As previously reported in Form 10-K/A for the year ended December 31, 2004, the Company restated periods prior to January 1, 2005. The nature of the IDC and accrued liabilities restatement adjustments that impact the six months ended June 30, 2005, also impacted prior year periods. In addition, prior periods were impacted by another adjustment related to certain of AFS’ labor costs incurred to syndicate subscriptions for the Company’s Units that had not been reimbursed to AFS as per the Operating Agreement. As a result, the Company restated other members’ capital and accounts payable Managing Member. For all periods prior to January 1, 2005, the adjustments as discussed above had the effect of decreasing members capital by $2,919,180 at December 31, 2004 from $74,879,479 as originally reported to $71,960,299.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
15. Selected quarterly data (unaudited) (Continued):
The following tables reflect the impacted financial statement line items resulting from the restatement for the three months ended March 31, 2005 and the three and six months ended June 30, 2005:
Balance Sheets line items that have been restated as of:
March 31, 2005 | June 30, 2005 | |||||||||||||||
As reported | Restated | As reported | Restated | |||||||||||||
Assets: | ||||||||||||||||
Accounts receivable | 1,676,250 | 2,044,901 | 2,589,753 | 2,900,286 | ||||||||||||
Notes receivable | $ | 4,668,064 | $ | 4,736,387 | $ | 4,161,849 | $ | 4,211,034 | ||||||||
Other assets | 860,634 | 918,618 | 188,569 | 226,799 | ||||||||||||
Investments in equipment and leases, net | 90,623,926 | 88,279,466 | 89,509,858 | 86,898,199 | ||||||||||||
Total assets | 104,261,908 | 102,412,406 | 99,593,244 | 97,379,533 | ||||||||||||
Liabilities: | ||||||||||||||||
Accounts payable Managing Member: | 802,208 | 1,746,122 | 209,101 | 1,157,163 | ||||||||||||
Accounts payable Other | 82,780 | 1,463,354 | 712,447 | 2,045,983 | ||||||||||||
Total liabilities | 32,071,025 | 34,395,513 | 30,238,842 | 32,520,440 | ||||||||||||
Members’ capital: | ||||||||||||||||
Other Members | 72,190,883 | 68,016,893 | 69,354,402 | 64,859,093 | ||||||||||||
Total Members’ capital | 72,190,883 | 68,016,893 | 69,354,402 | 64,859,093 | ||||||||||||
Total liabilities and Members’ capital | $ | 104,261,908 | $ | 102,412,406 | $ | 99,593,244 | $ | 97,379,533 |
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
15. Selected quarterly data (unaudited) (Continued):
Statements of Operations line items that have been restated for the following periods:
Three Months Ended | ||||||||
March 31, 2005 | ||||||||
As reported | Restated | |||||||
Operating lease revenue | $ | 4,454,579 | $ | 4,823,229 | ||||
Reclassification adjustments | (33,033 | ) | ||||||
Total Revenues | 4,783,865 | 5,119,482 | ||||||
Expenses: | ||||||||
Acquisition expense | — | 213,296 | ||||||
Depreciation of operating lease assets | 3,487,660 | 3,774,855 | ||||||
Amortization of initial direct costs | 264,139 | 144,018 | ||||||
Cost reimbursement to Managing Member | 200,811 | 201,981 | ||||||
Amortization of loan fee | — | 1,500 | ||||||
Interest expense | 287,887 | 240,787 | ||||||
Professional fees | 35,101 | 34,508 | ||||||
Outside services | — | 24,000 | ||||||
Insurance | — | 8,504 | ||||||
Other | 110,448 | 57,675 | ||||||
Total expenses before reclassifications | 4,539,382 | 4,854,460 | ||||||
Reclassification adjustments | 123,000 | |||||||
Total expenses | 4,977,460 | |||||||
Other income (expense), net before reclassifications | — | |||||||
Reclassification adjustments | 156,033 | |||||||
Total other income (expense), net | 156,033 | |||||||
Net income (loss) | 244,483 | 298,055 | ||||||
Net income (loss): | ||||||||
Other Members | 24,502 | 78,074 | ||||||
Net income (loss) per Limited Liability Company Unit | $ | 0.00 | $ | 0.00 |
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
15. Selected quarterly data (unaudited) (Continued):
Statements of Cash Flows line items that have been restated for the following periods:
Three Months Ended | ||||||||
March 31, 2005 | ||||||||
As reported | Restated | |||||||
Operating activities: | ||||||||
Net income (loss) | $ | 244,483 | $ | 298,055 | ||||
Adjustment to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Amortization of initial direct costs | 264,139 | 144,018 | ||||||
Depreciation of operating lease assets | 3,487,660 | 3,774,855 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 100,980 | (267,671 | ) | |||||
Other assets | (2,170 | ) | (17,573 | ) | ||||
Accounts payable, Managing Member | 605,490 | 420,061 | ||||||
Accounts payable, other | (3,960 | ) | 1,222,470 | |||||
Net cash provided by operating activities | 5,597,717 | 6,475,311 | ||||||
Investing activities: | ||||||||
Purchases of equipment on operating leases | (10,449,039 | ) | (10,448,500 | ) | ||||
Payments of initial direct costs to Managing Member | (756,672 | ) | — | |||||
(Payments) recoveries of initial direct lease costs | — | (326,423 | ) | |||||
Payments received on notes receivable | 316,109 | — | ||||||
Reduction (increase) in net investment in notes receivable | — | 451,319 | ||||||
Note receivable advances | (126,395 | ) | (261,605 | ) | ||||
Net cash used in investing activities | (10,677,222 | ) | (10,246,434 | ) | ||||
Financing activities: | ||||||||
Distributions declared and payable to Other Members | (2,713,098 | ) | (3,923,332 | ) | ||||
Distribution to Managing Member | (219,981 | ) | (318,129 | ) | ||||
Net cash provided by (used in) financing activities | $ | 9,600,921 | $ | 8,292,539 |
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
15. Selected quarterly data (unaudited) (Continued):
Statements of Operations line items that have been restated for the following periods:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, 2005 | June 30, 2005 | |||||||||||||||
As reported | Restated | As reported | Restated | |||||||||||||
Operating leases | $ | 5,138,795 | $ | 5,080,678 | $ | 9,593,374 | $ | 9,903,908 | ||||||||
Reclassification adjustments | 79,494 | 46,461 | ||||||||||||||
Total Revenues | 5,371,083 | 5,392,460 | 10,154,948 | 10,511,942 | ||||||||||||
Expenses: | ||||||||||||||||
Acquisition expense | — | 143,143 | — | 356,439 | ||||||||||||
Amortization of initial direct costs | 271,866 | 144,811 | 536,005 | 288,829 | ||||||||||||
Depreciation of operating lease assets | 3,899,919 | 4,187,114 | 7,387,579 | 7,961,969 | ||||||||||||
Cost reimbursement to Managing Member | 223,511 | 229,159 | 424,322 | 431,140 | ||||||||||||
Amortization of loan fee | — | 1,500 | — | 3,000 | ||||||||||||
Interest expense | 406,492 | 406,492 | 694,379 | 647,279 | ||||||||||||
Professional fees | 28,609 | 29,364 | 63,710 | 63,872 | ||||||||||||
Outside services | — | 23,819 | — | 47,819 | ||||||||||||
Franchise fees and state taxes | 66,520 | — | 68,274 | — | ||||||||||||
Insurance | — | 20,091 | — | 28,595 | ||||||||||||
Other | 84,986 | 59,635 | 193,680 | 117,309 | ||||||||||||
Total expenses before reclassifications | 5,274,484 | 5,537,709 | 9,813,866 | 10,392,169 | ||||||||||||
Reclassification adjustments | (91,700 | ) | 31,300 | |||||||||||||
Total expenses | 5,446,009 | 10,423,469 | ||||||||||||||
Other income (expense), net before reclassifications | — | — | — | |||||||||||||
Reclassification adjustments | (171,193 | ) | — | (15,160 | ) | |||||||||||
Total other income (expense), net | (171,193 | ) | — | (15,160 | ) | |||||||||||
Net income (loss) | 96,599 | (224,742 | ) | 341,082 | 73,313 | |||||||||||
Net income (loss): | ||||||||||||||||
Other Members | (123,382 | ) | (444,723 | ) | (98,880 | ) | (366,649 | ) | ||||||||
Net income (loss) per Limited Liability Company Unit | $ | (0.01 | ) | $ | (0.04 | ) | $ | (0.01 | ) | $ | (0.04 | ) |
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
15. Selected quarterly data (unaudited) (Continued):
Statements of Cash Flows line items that have been restated for the following periods:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, 2005 | June 30, 2005 | |||||||||||||||
As reported | Restated | As reported | Restated | |||||||||||||
Operating activities: | ||||||||||||||||
Net income (loss) | $ | 96,599 | $ | (224,743 | ) | $ | 341,082 | $ | 73,312 | |||||||
Adjustment to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||
Amortization of initial direct costs | 271,866 | 144,811 | 536,005 | 288,829 | ||||||||||||
Depreciation of operating lease assets | 3,899,919 | 4,187,114 | 7,387,579 | 7,961,969 | ||||||||||||
Gain on sale of securities | — | (6,250 | ) | — | (6,250 | ) | ||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (898,836 | ) | 840,719 | (797,856 | ) | (1,108,390 | ) | |||||||||
Other assets | 672,065 | 691,821 | 669,895 | 674,248 | ||||||||||||
Accounts payable, Managing Member | (593,107 | ) | (588,958 | ) | 12,383 | (168,897 | ) | |||||||||
Accounts payable, other | 629,668 | 582,628 | (625,708 | ) | 1,805,098 | |||||||||||
Net cash provided by operating activities | 3,595,050 | 3,471,395 | 9,192,767 | 9,946,706 | ||||||||||||
Investing activities: | ||||||||||||||||
Purchases of equipment on operating leases | (3,805,229 | ) | (3,769,816 | ) | (14,254,268 | ) | (14,218,316 | ) | ||||||||
Proceeds from sale of leased assets and notes receivable | 633,915 | 649,668 | 633,915 | 649,668 | ||||||||||||
(Payments) recoveries of initial direct lease costs | (201,462 | ) | (75,264 | ) | (958,134 | ) | (401,687 | ) | ||||||||
Reduction of net investment in direct financing leases | 561,757 | 513,694 | 1,275,712 | 1,227,649 | ||||||||||||
Payments received on notes receivable | 294,930 | — | 611,039 | — | ||||||||||||
Reduction (increase) in net investment in notes receivable | — | 291,828 | — | 743,147 | ||||||||||||
Proceeds from sale of securities | — | 6,250 | 6,250 | |||||||||||||
Investment in notes receivable | — | — | (126,395 | ) | — | |||||||||||
Net cash used in investing activities | (2,507,274 | ) | (2,383,640 | ) | (13,184,496 | ) | (12,630,074 | ) | ||||||||
Financing activities: | ||||||||||||||||
Distributions to Other Members | (2,713,099 | ) | (2,713,099 | ) | (5,426,197 | ) | (6,636,431 | ) | ||||||||
Distribution to Managing Member | (219,981 | ) | (219,960 | ) | (439,962 | ) | (538,089 | ) | ||||||||
Net cash provided by (used in) financing activities | $ | (4,277,080 | ) | $ | (4,277,059 | ) | $ | 5,323,841 | $ | 4,015,480 |
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Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS’ ACCOUNTING AND FINANCIAL DISCLOSURES |
None.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
The Company’s Managing Member’s Chief Executive Officer, and Executive Vice President and Chief Financial and Operating Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) during and as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and Executive Vice President and Chief Financial and Operating Officer concluded that for the years ended December 31, 2005, 2004 and 2003, certain material weaknesses existed in the Company’s internal control over financial reporting.
The Company does not control the financial reporting process, and is dependent on the Managing Member, who is responsible for providing the Company with financial statements in accordance with generally accepted accounting principles. The Managing Member’s disclosure controls and procedures over the: a) application of generally accepted accounting principles for leasing transactions (specifically, timely identification and recording of impairment in leased assets, accumulating and capitalizing costs for initiating leases (“IDC”), and properly amortizing costs associated with the initiation of a lease); b) allocation of costs incurred by the Managing Member on behalf of the Company; c) process of identifying and estimating liabilities in the correct period; d) proper accounting for investments in warrants (specifically, determining the appropriate carrying amount and proper disclosures for warrants, including classification of these investments as derivatives and the related accounting in accordance with SFAS No. 133. amended by SFAS Nos. 137, 138 and 149); and e) financial statement close process, including evaluating the relative significance of misstatements and preparation of financial statements and related disclosures, were determined to be ineffective and constitute material weaknesses in internal control over financial reporting.
Changes in internal control
The Managing Member has reviewed the material weaknesses and believes that the following corrective actions taken as a whole will address the material weaknesses in its disclosure controls and procedures described above. These corrective actions are as follows:
With regard to the timely identification and recording of impairment of leased assets, the Managing Member has strengthened its quarterly impairment analysis through additional management review of the analysis.
With regard to IDC, the accounting guidance has been reviewed, and a standard cost model (the “Model”) has been developed that includes quarterly reviews from management. Information from the model drives the rates to be capitalized on a lease by lease basis. IDC is amortized over the term of the lease based on a straight-line basis for operating leases and on the effective interest method for direct finance leases and notes receivable.
With regard to the allocations of costs and expenses incurred by the Managing Member, the allocation process has been reviewed and the costs and expenses have been properly allocated in accordance with the Limited Liability Company Operating Agreement.
With regard to identifying and estimating liabilities in the correct periods, the Managing Member has performed a detailed review to identify and record the liabilities, in the correct period. A standardized quarterly review process has been implemented to ensure the identification and estimation of the liabilities.
With regard to the proper accounting and related disclosures of the Company’s investment in warrants, the Managing Member has reviewed the accounting guidance, and a policy has been developed. This policy includes: (1) obtaining, when possible, directly from portfolio companies data on the per share value of their latest round of funding, (2) searching publicly available databases to determine status of initial public offerings by the portfolio companies, and (3) when required per policy, running the Black-Scholes option pricing model to determine carrying values on certain warrants where values are not determined based upon a contract between both parties.
The Managing Member has taken the following steps to mitigate the weakness regarding its financial statement close process: a Chief Accounting Officer has been hired; the controller position has been split into two separate roles to ensure proper management of the Managing Member and the managed Funds’ accounting operations; and a financial reporting supervisor has been hired. Controls and job functions are being redesigned to increase the documentation of processes and transparency of procedures going forward.
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PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
The registrant is a Limited Liability Company and, therefore, has no officers or directors.
ATEL Financial Services, LLC (“AFS”) is the Company’s Managing Member or Manager. AFS is controlled by ATEL Capital Group (“ACG” or “ATEL”), a holding company formed to control ATEL and affiliated companies, through its subsidiaries, ATEL Leasing Corporation (“ALC”), AFS’s managing member, and ATEL Business Credit, Inc. (“ABC”), the other member of AFS. ALC and ABC are AFS’s only members. The outstanding voting capital stock of ATEL Capital Group is owned 100% by Dean Cash.
Each of ALC, ATEL Equipment Corporation (“AEC”), ATEL Investor Services (“AIS”) and ATEL Financial Services, LLC (“AFS”) is a subsidiary under the control 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 which performed distribution services in connection with the Company’s public offering of its Units.
The officers and directors of ATEL Capital Group and its affiliates are as follows:
Dean L. Cash | President and Chief Executive Officer of ATEL Financial Services, LLC (Managing Member) | |
Paritosh K. Choksi | Executive Vice President and Chief Financial and Operating Officer of ATEL Financial Services, LLC (Managing Member) | |
Vasco H. Morais | Senior Vice President, Secretary and General Counsel of ATEL Financial Services, LLC (Managing Member) |
Dean L. Cash, age 55, 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 52, joined ATEL in 1999 as a director, senior vice president and its chief financial officer. He became its executive vice president and CFO/COO in April 2001. Prior to joining ATEL, Mr. Choksi was chief financial officer at Wink Communications, Inc. from 1997 to 1999. From 1977 to 1997, Mr. Choksi was with Phoenix American Incorporated, a financial services and management company, where he held various positions during his tenure, and was senior vice president, chief financial officer and director when he left the company. Mr. Choksi was involved in all corporate matters at Phoenix and was responsible for Phoenix’s capital market needs. He also served on the credit committee overseeing all corporate investments, including its venture lease portfolio. Mr. Choksi was a part of the executive management team which caused Phoenix’s portfolio to increase from $50 million in assets to over $2 billion. Mr. Choksi is a member of the board of directors of Syntel, Inc. Mr. Choksi received a bachelor of technology degree in mechanical engineering from the Indian Institute of Technology, Bombay; and an M.B.A. degree from the University of California, Berkeley.
Vasco H. Morais, age 47, 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.
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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.
Section 16(a) Beneficial Ownership Reporting Compliance
During March 2006, each of the executive officers and directors of the registrant’s Managing Member, Dean Cash, Paritosh Choksi and Vasco Morais, filed a statement of beneficial ownership of Units on Form 3 under Section 16. These statements were due at the time the registrant filed its Form 8A registration statement under the Securities Exchange Act of 1934. Based solely on a review of Forms 3, 4 and 5, the Company is not otherwise aware of any failures to file reports of beneficial ownership required to be filed during or for the year ended December 31, 2005.
Code of Ethics
ACG on behalf of AFS and ALC has adopted a code of ethics for its Chief Executive Officer, Chief Financial and Operating Officer and Senior Vice President and General Counsel. 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 AFS and its Affiliates. The amount of such remuneration paid in 2005, 2004 and 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 7 thereof, which information is hereby incorporated by reference.
Asset Management Fee
The Company pays AFS an Asset Management Fee in an amount equal to 4% of Operating Revenues, which includes Gross Lease Revenues and Cash From Sales or Refinancing. The Asset Management Fee is paid on a monthly basis. The amount of the Asset Management Fee payable in any year is reduced for that year to the extent it would otherwise exceed the Asset Management Fee Limit, as described below. The Asset Management Fee is paid for services rendered by AFS and its affiliates in determining portfolio and investment strategies (i.e., establishing and maintaining the composition of the Equipment portfolio as a whole and the Company’s overall debt structure) and generally managing or supervising the management of the Equipment.
AFS supervises performance of among others activities, collection of lease revenues, monitoring compliance by lessees with the lease terms, assuring that Equipment is being used in accordance with all operative contractual arrangements, paying operating expenses and arranging for necessary maintenance and repair of Equipment in the event a lessee fails to do so, monitoring property, sales and use tax compliance and preparation of operating financial data. AFS intends to delegate all or a portion of its duties and the Asset Management Fee to one or more of its affiliates who are in the business of providing such services.
Asset Management Fee Limit:
The Asset Management Fee is subject to the Asset Management Fee Limit. The Asset Management Fee Limit is calculated each year during the Company’s term by calculating the total fees that would be paid to AFS if AFS were to be compensated on the basis of an alternative fee schedule, to include an Equipment Management Fee, Incentive Management Fee, and Equipment Resale/Re-Leasing Fee, plus AFS’s Carried Interest, as described below. To the extent that the amount paid to AFS as the Asset Management Fee plus its Carried Interest for any year would exceed the aggregate amount of fees calculated under this alternative fee schedule for the year, the Asset Management Fee and/or Carried Interest for that year is reduced to equal the maximum aggregate fees under the alternative fee schedule.
To the extent any such fees are reduced, the amount of such reduction will be accrued and deferred, and such accrued and deferred compensation would be paid to AFS in a subsequent period, but only if and to the extent that such deferred compensation would be payable within the Asset Management Fee Limit for the subsequent period. Any deferred fees which cannot be paid under the applicable limitations in any subsequent period through the date of liquidation would be forfeited by AFS upon liquidation.
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Alternative Fee Schedule:
For purposes of the Asset Management Fee Limit, the Company will calculate an alternative schedule of fees, including a hypothetical Equipment Management Fee, Incentive Management Fee, Equipment Resale/Re-Leasing Fee, and Carried Interest as follows:
An Equipment Management Fee will be calculated to equal the lesser of (i) 3.5% of annual Gross Revenues from Operating Leases and 2% of annual Gross Revenues from Full Payout Leases which contain Net Lease Provisions), or (ii) the fees customarily charged by others rendering similar services as an ongoing public activity in the same geographic location and for similar types of equipment. If services with respect to certain Operating Leases are performed by nonaffiliated persons under the active supervision of AFS or its Affiliate, then the amount so calculated shall be 1% of Gross Revenues from such Operating Leases.
An Incentive Management Fee will be calculated to equal 4% of Distributions of Cash from Operations until Holders have received a return of their Original Invested Capital plus a Priority Distribution, and, thereafter, to equal a total of 7.5% of Distributions from all sources, including Sale or Refinancing Proceeds. In subordinating the increase in the Incentive Management Fee to a cumulative return of a Holder’s Original Invested Capital plus a Priority Distribution, a Holder would be deemed to have received Distributions of Original Invested Capital only to the extent that Distributions to the Holder exceed the amount of the Priority Distribution.
An Equipment Resale/Re-Leasing Fee will be calculated in an amount equal to the lesser of (i) 3% of the sale price of the Equipment, or (ii) one-half the normal competitive equipment sale commission charged by unaffiliated parties for resale services. Such fee would apply only after the Holders have received a return of their Original Invested Capital plus a Priority Distribution. In connection with the releasing of Equipment to lessees other than previous lessees or their Affiliates, the fee would be in an amount equal to the lesser of (i) the competitive rate for comparable services for similar equipment, or (ii) 2% of the gross rental payments derived from the re-lease of such Equipment, payable out of each rental payment received by the Company from such re-lease.
A Carried Interest equal to 7.5% of all Distributions of Cash from Operations and Cash from Sales or Refinancing.
See Note 7 to the financial statements included in Item 8 for amounts paid.
Managing Member’s Interest in Operating Proceeds
As defined in the Limited Liability Company Operating Agreement, the Company’s Net Income, Net Losses, and Distributions are to be allocated 92.5% to the Members and 7.5% to AFS. In accordance with the terms of the Operating Agreement, additional allocations of income were made to AFS in 2005, 2004 and 2003. The amounts allocated were determined to bring AFS’s ending capital account balance to zero at the end of each year. See financial statements included in Item 8, Part I of this report for amounts allocated to AFS in 2005, 2004 and 2003.
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Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
At December 31, 2005, 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 Beneficial | Amount and Nature of Beneficial | |||||||
Title of Class | Owner | Ownership | Percent of Class | |||||
Limited Liability | ATEL Capital Group | Initial Limited Liability | 0.0004 | % | ||||
Company Units | 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 footnote 7 thereof, and Item 11 of this report under the caption “Executive Compensation”, are hereby incorporated by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
During the most recent two years, the Company incurred audit, audit related, tax and other fees with its principal auditors as follows:
2005 | 2004 | |||||||
Audit fees | $ | 331,113 | $ | 155,243 | ||||
Audit related fees | — | — | ||||||
Tax fees | 46,328 | 29,838 | ||||||
Other | — | — | ||||||
$ | 377,441 | $ | 185,081 | |||||
The Company restated its audited financial statements for the years ended December 31, 2004 and 2003, as well as the unaudited interim statements for the first and second quarters of 2005. The audit fees incurred in 2005 for auditing the restated financial statements for the years ended December 31, 2004 and 2003 are $185,258.
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 on behalf the board of directors of ATEL Leasing Corporation in its role as the audit committee of the Company.
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PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) | Financial Statements and Schedules | |
1. | Financial Statements | |
Included in Part II of this report: | ||
Report of Independent Registered Public Accounting Firm | ||
Balance Sheets at December 31, 2005 and 2004 | ||
Statements of operations for the years ended December 31, 2005, 2004 and 2003 | ||
Statements of Changes in Members’ Capital for the years ended December 31, 2005, 2004 and 2003 | ||
Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 | ||
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) | Exhibits | |
(3) and (4) Amended and Restated Limited Liability Company Agreement, included as Exhibit B to the Prospectus included in the registrant’s registration statement on form S-1 effective January 16, 2001, (File Number 333-47196) is hereby incorporated herein by reference this reference. | ||
(14.1) Code of Ethics | ||
(31.1) Rule 13a-14(a)/ 15d-14(a) Certification of Paritosh K. Choksi | ||
(31.2) Rule 13a-14(a)/ 15d-14(a) 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 |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: December 21, 2006
ATEL Capital Equipment Fund IX, LLC | ||||||||
(Registrant) | ||||||||
By: | ATEL Financial Services, LLC, Managing Member of Registrant | |||||||
By: | /s/ Dean L. Cash | |||||||
President and Chief Executive Officer of | ||||||||
ATEL Financial Services, LLC (Managing Member) | ||||||||
By: | /s/ Paritosh K. Choksi | |||||||
Executive Vice President and Chief Financial and Operating Officer of | ||||||||
ATEL Financial Services, LLC (Managing Member) |
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 and Chief Executive Officer of ATEL Financial Services, LLC (Managing Member) | 12/21/2006 | ||
/s/ Paritosh K. Choksi | Executive Vice President and Chief Financial and Operating Officer of ATEL Financial Services, LLC (Managing Member) | 12/21/2006 |
No proxy materials have been or will be sent to security holders. An annual report will be furnished to security holders subsequent to the filing of this report on Form 10-K, and copies thereof will be furnished supplementally to the Commission when forwarded to the security holders.
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