Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended March 31, 2014
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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)
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California | 94-3375584 | |
(State or other jurisdiction of Incorporation or organization) | (I. R. S. Employer Identification No.) |
The Transamerica Pyramid, 600 Montgomery Street, 9th Floor, San Francisco, California 94111
(Address of principal executive offices)
Registrant’s telephone number, including area code(415) 989-8800
Securities registered pursuant to section 12(b) of the Act:None
Securities registered pursuant to section 12(g) of the Act:Limited Liability Company Units
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yesx Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yesx Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer, large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filero Accelerated filero Non-accelerated filero Smaller reporting companyx
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yeso Nox
The number of Limited Liability Company Units outstanding as of April 30, 2014 was 12,055,016.
DOCUMENTS INCORPORATED BY REFERENCE
None.
ATEL CAPITAL EQUIPMENT FUND IX, LLC
Index
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Part I. Financial Information | ||||
Item 1. Financial Statements (Unaudited) | 3 | |||
Balance Sheets, March 31, 2014 and December 31, 2013 | 3 | |||
Statements of Income for the three months ended March 31, 2014 and 2013 | 4 | |||
Statements of Changes in Members’ Capital for the year ended December 31, 2013 and for the three months ended March 31, 2014 | 5 | |||
Statements of Cash Flows for the three months ended March 31, 2014 and 2013 | 6 | |||
Notes to the Financial Statements | 7 | |||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22 | |||
Item 4. Controls and Procedures | 25 | |||
Part II. Other Information | ||||
Item 1. Legal Proceedings | 26 | |||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 26 | |||
Item 3. Defaults Upon Senior Securities | 26 | |||
Item 4. Mine Safety Disclosures | 26 | |||
Item 5. Other Information | 26 | |||
Item 6. Exhibits | 26 |
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
ATEL CAPITAL EQUIPMENT FUND IX, LLC
BALANCE SHEETS
MARCH 31, 2014 AND DECEMBER 31, 2013
(in thousands)
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March 31, 2014 | December 31, 2013 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 5,471 | $ | 4,738 | ||||
Accounts receivable, net of allowance for doubtful accounts of $3 at March 31, 2014 and $3 at December 31, 2013 | 501 | 585 | ||||||
Notes receivable, net of unearned interest income of $47 at March 31, 2014 and net of unearned interest income of $57 at December 31, 2013 | 473 | 526 | ||||||
Prepaid expenses and other assets | 53 | 58 | ||||||
Investment in securities | 5 | 5 | ||||||
Fair value of warrants | 160 | 177 | ||||||
Investments in equipment and leases, net of accumulated depreciation of $26,704 at March 31, 2014 and $28,006 at December 31, 2013 | 18,257 | 19,890 | ||||||
Total assets | $ | 24,920 | $ | 25,979 | ||||
LIABILITIES AND MEMBERS’ CAPITAL | ||||||||
Accounts payable and accrued liabilities: | ||||||||
Managing Member | $ | 68 | $ | 35 | ||||
Other | 249 | 306 | ||||||
Non-recourse debt | 11,991 | 13,105 | ||||||
Unearned operating lease income | 153 | 186 | ||||||
Total liabilities | 12,461 | 13,632 | ||||||
Commitments and contingencies | ||||||||
Members’ capital: | ||||||||
Managing Member | — | — | ||||||
Other Members | 12,459 | 12,347 | ||||||
Total Members’ capital | 12,459 | 12,347 | ||||||
Total liabilities and Members’ capital | $ | 24,920 | $ | 25,979 |
See accompanying notes.
3
ATEL CAPITAL EQUIPMENT FUND IX, LLC
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
MARCH 31, 2014 AND 2013
(in thousands, except for units and per unit data)
(Unaudited)
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Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Revenues: | ||||||||
Leasing and lending activities: | ||||||||
Operating leases | $ | 1,353 | $ | 1,442 | ||||
Direct financing leases | 656 | 770 | ||||||
Interest on notes receivable | 10 | 20 | ||||||
Gain on sales of lease assets and early termination of notes receivable | 1,032 | 230 | ||||||
Unrealized loss on fair valuation of warrants | (17 | ) | — | |||||
Gain on sales or dispositions of securities and warrants | — | 1 | ||||||
Other revenue | 20 | 109 | ||||||
Total revenues | 3,054 | 2,572 | ||||||
Expenses: | ||||||||
Depreciation of operating lease assets | 380 | 687 | ||||||
Asset management fees to Managing Member and/or affiliates | 86 | 94 | ||||||
Cost reimbursements to Managing Member and/or affiliates | 140 | 183 | ||||||
Amortization of initial direct costs | 3 | 5 | ||||||
Other management fees | 8 | 13 | ||||||
Interest expense | 203 | 274 | ||||||
Professional fees | 63 | 50 | ||||||
Outside services | 20 | 14 | ||||||
Insurance | 15 | 16 | ||||||
Marine vessel maintenance and other operating costs | — | 102 | ||||||
Railcar and equipment maintenance | 41 | 59 | ||||||
Franchise fees and state taxes | (15 | ) | 40 | |||||
Other | 40 | 62 | ||||||
Total operating expenses | 984 | 1,599 | ||||||
Other (expense) income, net | (3 | ) | 1 | |||||
Net income | $ | 2,067 | $ | 974 | ||||
Net income: | ||||||||
Managing Member | $ | 147 | $ | 147 | ||||
Other Members | 1,920 | 827 | ||||||
$ | 2,067 | $ | 974 | |||||
Net income per Limited Liability Company Unit (Other Members) | $ | 0.16 | $ | 0.07 | ||||
Weighted average number of Units outstanding | 12,055,016 | 12,055,016 |
See accompanying notes.
4
ATEL CAPITAL EQUIPMENT FUND IX, LLC
STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2013
AND FOR THE THREE MONTHS ENDED
MARCH 31, 2014
(in thousands, except for units and per unit data)
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Other Members | Managing Member | Total | ||||||||||||||
Units | Amount | |||||||||||||||
Balance December 31, 2012 | 12,055,016 | $ | 14,940 | $ | — | $ | 14,940 | |||||||||
Distributions to Other Members ($0.60 per Unit) | — | (7,233 | ) | — | (7,233 | ) | ||||||||||
Distributions to Managing Member | — | — | (586 | ) | (586 | ) | ||||||||||
Net income | — | 4,640 | 586 | 5,226 | ||||||||||||
Balance December 31, 2013 | 12,055,016 | 12,347 | — | 12,347 | ||||||||||||
Distributions to Other Members ($0.15 per Unit) | — | (1,808 | ) | — | (1,808 | ) | ||||||||||
Distributions to Managing Member | — | — | (147 | ) | (147 | ) | ||||||||||
Net income | — | 1,920 | 147 | 2,067 | ||||||||||||
Balance March 31, 2014 (Unaudited) | 12,055,016 | $ | 12,459 | $ | — | $ | 12,459 |
See accompanying notes.
5
ATEL CAPITAL EQUIPMENT FUND IX, LLC
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31, 2014 AND 2013
(in thousands)
(Unaudited)
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Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Operating activities: | ||||||||
Net income | $ | 2,067 | $ | 974 | ||||
Adjustment to reconcile net income to cash provided by operating activities: | ||||||||
Gain on sales of lease assets and early termination of notes receivable | (1,032 | ) | (230 | ) | ||||
Gain on sales or dispositions of securities and warrants | — | (1 | ) | |||||
Unrealized loss on fair valuation of warrants | 17 | — | ||||||
Depreciation of operating lease assets | 380 | 687 | ||||||
Amortization of initial direct costs | 3 | 5 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 84 | 112 | ||||||
Prepaid expenses and other assets | 5 | 5 | ||||||
Accounts payable, Managing Member | 33 | (1 | ) | |||||
Accounts payable, other | (57 | ) | (1 | ) | ||||
Unearned operating lease income | (33 | ) | (78 | ) | ||||
Net cash provided by operating activities | 1,467 | 1,472 | ||||||
Investing activities: | ||||||||
Proceeds from sales of lease assets and early termination of notes receivable | 1,826 | 892 | ||||||
Proceeds from sales or dispositions of securities and warrants | — | 1 | ||||||
Principal payments received on direct financing leases | 456 | 379 | ||||||
Principal payments received on notes receivable | 53 | 128 | ||||||
Net cash provided by investing activities | 2,335 | 1,400 | ||||||
Financing activities: | ||||||||
Repayments of non-recourse debt | (1,114 | ) | (1,043 | ) | ||||
Distributions to Other Members | (1,808 | ) | (1,808 | ) | ||||
Distributions to Managing Member | (147 | ) | (147 | ) | ||||
Net cash used in financing activities | (3,069 | ) | (2,998 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 733 | (126 | ) | |||||
Cash and cash equivalents at beginning of period | 4,738 | 5,217 | ||||||
Cash and cash equivalents at end of period | $ | 5,471 | $ | 5,091 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for interest | $ | 209 | $ | 280 | ||||
Cash paid during the period for taxes | $ | 6 | $ | — |
See accompanying notes.
6
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Limited Liability Company matters:
ATEL Capital Equipment Fund IX, LLC (the “Company” or the “Fund”) 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, lending and sales activities, primarily in the United States. The Managing Member or Manager of the Company is ATEL Financial Services, LLC (“AFS”), a California limited liability company. The Company may continue until December 31, 2020. 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 $1.2 million) had been received (excluding subscriptions from Pennsylvania investors) and AFS requested that the subscriptions be released to the Company. On that date, the Company commenced operations in its primary business (acquiring equipment to engage in equipment leasing, lending and sales activities). As of April 3, 2001, the Company had received subscriptions for 753,050 Units ($7.5 million), thus exceeding the $7.5 million 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 ($120.7 million). Subsequent to January 15, 2003, Units totaling 10,250 were rescinded or repurchased and funds returned to investors (net of distributions paid and allocated syndication costs, as applicable). As of March 31, 2014, 12,055,016 Units remain issued and outstanding.
The Company’s principal objectives are to invest in a diversified portfolio of equipment that (i) preserves, protects and returns the Company’s invested capital; (ii) generates regular distributions to the members of cash from operations and cash from sales or refinancing, with any balance remaining after certain minimum distributions to be used to purchase additional equipment during the reinvestment period (“Reinvestment Period”) (defined as six full years following the year the offering was terminated), which ended on December 31, 2009 and (iii) provides additional distributions following the Reinvestment Period and until all equipment has been sold. The Company is governed by the Limited Liability Company Operating Agreement (“Operating Agreement”), as amended. On January 1, 2010, the Company commenced liquidation phase activities pursuant to the guidelines of the Operating Agreement.
Pursuant to the terms of the Operating Agreement, AFS receives compensation and reimbursements for services rendered on behalf of the Company (See Note 6). The Company is required to maintain reasonable cash reserves for working capital, the repurchase of Units and contingencies. The repurchase of Units is solely at the discretion of AFS.
These unaudited interim financial statements should be read in conjunction with the financial statements and notes thereto contained in the report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission.
2. Summary of significant accounting policies:
Basis of presentation:
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q as mandated by the Securities and Exchange Commission. The unaudited interim financial statements reflect all adjustments which are, in the opinion of the Managing Member, necessary for a fair statement of financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for the full year.
7
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. Summary of significant accounting policies: - (continued)
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no significant impact on the reported financial position or results of operations.
Footnote and tabular amounts are presented in thousands, except as to Units and per Unit data.
In preparing the accompanying unaudited financial statements, the Managing Member has reviewed events that have occurred after March 31, 2014, up until the issuance of the financial statements. No events were noted which would require disclosure in the footnotes to the financial statements.
Use of estimates:
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Such estimates primarily relate to the determination of residual values at the end of the lease term and expected future cash flows used for impairment analysis purposes and for determination of the allowance for doubtful accounts and reserve for credit losses on notes receivable.
Segment reporting:
The Company is not organized by multiple operating segments for the purpose of making operating decisions or assessing performance. Accordingly, the Company operates in one reportable operating segment in the United States.
The 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 total revenues for the three months ended March 31, 2014 and 2013 and long-lived tangible assets as of March 31, 2014 and December 31, 2013 (dollars in thousands):
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For the three months ended March 31, | ||||||||||||||||
2014 | % of Total | 2013 | % of Total | |||||||||||||
Revenue | ||||||||||||||||
United States | $ | 3,028 | 99 | % | $ | 2,505 | 97 | % | ||||||||
Canada | — | 0 | % | 64 | 3 | % | ||||||||||
United Kingdom | 26 | 1 | % | 3 | 0 | % | ||||||||||
Total International | 26 | 1 | % | 67 | 3 | % | ||||||||||
Total | $ | 3,054 | 100 | % | $ | 2,572 | 100 | % |
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As of March 31, | As of December 31, | |||||||||||||||
2014 | % of Total | 2013 | % of Total | |||||||||||||
Long-lived assets | ||||||||||||||||
United States | $ | 18,170 | 100 | % | $ | 19,803 | 100 | % | ||||||||
United Kingdom | 87 | 0 | % | 87 | 0 | % | ||||||||||
Total International | 87 | 0 | % | 87 | 0 | % | ||||||||||
Total | $ | 18,257 | 100 | % | $ | 19,890 | 100 | % |
8
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. Summary of significant accounting policies: - (continued)
Investment in securities:
Purchased securities
Purchased securities are generally not registered for public sale and are carried at cost. Such securities are adjusted to fair value if the fair value is less than the carrying value and such impairment is deemed by the Managing Member to be other than temporary. Factors considered by the Managing Member in determining fair value include, but are not limited to, available financial information, the issuer’s ability to meet its current obligations and indications of the issuer’s subsequent ability to raise capital. There were neither impaired securities at March 31, 2014 and December 31, 2013 nor investment securities sold or disposed of during the three months ended March 31, 2014 and 2013.
Warrants
Warrants owned by the Company are not registered for public sale, but are considered derivatives and are carried at an estimated fair value on the balance sheet at the end of the period, as determined by the Managing Member. At March 31, 2014 and December 31, 2013, the Company’s portfolio of warrants had an estimated fair value of $160 thousand and $177 thousand, respectively. There were no net exercises of warrants during the first quarter of 2014. During the first three months of 2013, the Company realized nominal gains on the net exercise of certain warrants.
Other (expense) income, net:
Other (expense) income, net consisted solely of net losses and gains on foreign exchange transactions for the respective three months ended March 31, 2014 and 2013.
Per Unit data:
Net income and distributions per Unit are based upon the weighted average number of Other Members’ Units outstanding during the period.
Recent accounting pronouncements:
Recent accounting standards updates as issued by the Financial Accounting Standards Board (FASB) were evaluated and determined to be not applicable to the Company.
3. Notes receivable, net:
In recent years, the Company has executed various notes receivable with borrowers to finance the purchase of equipment through the Company. The notes were secured by the equipment financed. As of March 31, 2014, only one note receivable remained unsettled with a net balance of $473 thousand outstanding. Such note bears an annual interest rate of 8.5% and matures in 2016.
There were no notes receivable deemed impaired or in non-accrual status as of March 31, 2014 and December 31, 2013.
During the first quarter of 2013, the Company realized a $54 thousand gain on the full settlement of an impaired note prior to its scheduled maturity. Such note was originally deemed impaired during the second quarter of 2012, for which the Company recorded a fair value adjustment of $54 thousand to reduce the cost basis of the impaired note.
9
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. Notes receivable, net: - (continued)
As of March 31, 2014, the minimum future payments receivable are as follows (in thousands):
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Nine months ending December 31, 2014 | $ | 166 | ||
Year ending December 31, 2015 | 166 | |||
2016 | 188 | |||
520 | ||||
Less: portion representing unearned interest income | (47 | ) | ||
Notes receivable, net | $ | 473 |
4. Allowance for credit losses:
The Company’s allowance for credit losses are as follows (in thousands):
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Accounts Receivable Allowance for Doubtful Accounts | Valuation Adjustments on Financing Receivables | Total Allowance for Credit Losses | ||||||||||||||||||||||||||||||||||
Notes Receivable | Finance Leases | Operating Leases | Notes Receivable | Finance Leases | ||||||||||||||||||||||||||||||||
Balance December 31, 2012 | $ | — | $ | 7 | $ | 48 | $ | 54 | $ | — | $ | 109 | ||||||||||||||||||||||||
Reversal of provision | — | (7 | ) | (45 | ) | — | — | (52 | ) | |||||||||||||||||||||||||||
Asset disposal | — | — | — | (54 | ) | — | (54 | ) | ||||||||||||||||||||||||||||
Balance December 31, 2013 | — | — | 3 | — | — | 3 | ||||||||||||||||||||||||||||||
Reversal of provision | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Balance March 31, 2014 | $ | — | $ | — | $ | 3 | $ | — | $ | — | $ | 3 | ||||||||||||||||||||||||
Accounts receivable
Accounts receivable represent the amounts billed under operating and direct financing lease contracts, and notes receivable which are currently due to the Company.
Allowances for doubtful accounts are typically established based upon their aging and historical charge off and collection experience and the creditworthiness of specifically identified lessees and borrowers, and invoiced amounts. Accounts receivable deemed uncollectible are generally charged off against the allowance on a specific identification basis. Recoveries of amounts that were previously written-off are recorded as other income in the period received.
Accounts receivable are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of companies with lease or note payments outstanding less than 90 days. Based upon management’s judgment, such leases or notes may be placed in non-accrual status. Leases or notes placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid receivable is probable. Until such time, revenues on operating leases are recognized on a cash basis. All payments received on amounts billed under direct financing leases contracts and notes receivable are applied only against outstanding principal balances.
10
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. Allowance for credit losses: - (continued)
Financing receivables
In addition to the allowance established for delinquent accounts receivable, the total allowance related solely to financing receivables also includes anticipated impairment charges on notes receivable and direct financing leases.
Notes are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest when due according to the contractual terms of the note agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest when due. If it is determined that a loan is impaired with regard to scheduled payments, the Company will perform an analysis of the note to determine if an impairment valuation reserve is necessary. This analysis considers the estimated cash flows from the note, or the collateral value of the property underlying the note when note repayment is collateral dependent. Any required valuation reserve is charged to earnings when determined; and notes are charged off to the allowance as they are deemed uncollectible.
The asset underlying a direct financing lease contract is considered impaired if the estimated undiscounted future cash flows of the asset are less than its net book value. The estimated undiscounted future cash flows are the sum of the estimated residual value of the asset at the end of the asset’s expected holding period and estimates of undiscounted future rents. The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the market place are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. Impairment is measured as the difference between the fair value (as determined by a valuation method using discounted estimated future cash flows, third party appraisals or comparable sales of similar assets as applicable based on asset type) of the asset and its carrying value on the measurement date.
As of March 31, 2014 and December 31, 2013, the Company’s allowance for credit losses (related solely to financing receivables) and its recorded investment in financing receivables were as follows (in thousands):
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March 31, 2014 | Notes Receivable | Finance Leases | Total | |||||||||
Allowance for credit losses: | ||||||||||||
Ending balance | $ | — | $ | — | $ | — | ||||||
Ending balance: individually evaluated for impairment | $ | — | $ | — | $ | — | ||||||
Ending balance: collectively evaluated for impairment | $ | — | $ | — | $ | — | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | ||||||
Financing receivables: | ||||||||||||
Ending balance | $ | 473 | $ | 10,3651 | $ | 10,838 | ||||||
Ending balance: individually evaluated for impairment | $ | 473 | $ | 10,365 | $ | 10,838 | ||||||
Ending balance: collectively evaluated for impairment | $ | — | $ | — | $ | — | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — |
1 | Includes $11 of unamortized initial direct costs |
11
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. Allowance for credit losses: - (continued)
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December 31, 2013 | Notes Receivable | Finance Leases | Total | |||||||||
Allowance for credit losses: | ||||||||||||
Ending balance | $ | — | $ | — | $ | — | ||||||
Ending balance: individually evaluated for impairment | $ | — | $ | — | $ | — | ||||||
Ending balance: collectively evaluated for impairment | $ | — | $ | — | $ | — | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | ||||||
Financing receivables: | ||||||||||||
Ending balance | $ | 526 | $ | 10,8232 | $ | 11,349 | ||||||
Ending balance: individually evaluated for impairment | $ | 526 | $ | 10,823 | $ | 11,349 | ||||||
Ending balance: collectively evaluated for impairment | $ | — | $ | — | $ | — | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — |
2 | Includes $13 of unamortized initial direct costs |
The Company evaluates the credit quality of its financing receivables on a scale equivalent to the following quality indicators related to corporate risk profiles:
Pass – Any account whose lessee/debtor, co-lessee/debtor or any guarantor has a credit rating on publicly traded or privately placed debt issues as rated by Moody’s or S&P for either Senior Unsecured debt, Long Term Issuer rating or Issuer rating that are in the tiers of ratings generally recognized by the investment community as constituting an Investment Grade credit rating; or, has been determined by the Manager to be an Investment Grade Equivalent or High Quality Corporate Credit per its Credit Policy or has a Not Rated internal rating by the Manager and the account is not considered by the Chief Credit Officer of the Manager to fall into one of the three risk profiles below.
Special Mention – Any traditional corporate type account with potential weaknesses (e.g. large net losses or major industry downturns) or, any growth capital account that has less than three months of cash as of the end of the calendar quarter to fund their continuing operations. These accounts deserve management’s close attention. If left uncorrected, those potential weaknesses may result in deterioration of the Fund’s receivable at some future date.
Substandard – Any account that is inadequately protected by the current worth and paying capacity of the borrower or of the collateral pledged, if any. Accounts that are so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Fund will sustain some loss as the likelihood of fully collecting all receivables may be questionable if the deficiencies are not corrected. Such accounts are on the Manager’s Credit Watch List.
Doubtful – Any account where the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Accordingly, an account that is so classified is on the Manager’s Credit Watch List, and has been declared in default and the Manager has repossessed, or is attempting to repossess, the equipment it financed. This category includes impaired notes and leases as applicable.
12
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. Allowance for credit losses: - (continued)
At March 31, 2014 and December 31, 2013, the Company’s financing receivables by credit quality indicator and by class of financing receivables are as follows (excludes initial direct costs) (in thousands):
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Notes Receivable | Finance Leases | |||||||||||||||
March 31, 2014 | December 31, 2013 | March 31, 2014 | December 31, 2013 | |||||||||||||
Pass | $ | 473 | $ | 526 | $ | 10,354 | $ | 10,810 | ||||||||
Special mention | — | — | — | — | ||||||||||||
Substandard | — | — | — | — | ||||||||||||
Doubtful | — | — | — | — | ||||||||||||
Total | $ | 473 | $ | 526 | $ | 10,354 | $ | 10,810 |
At March 31, 2014 and December 31, 2013, the investment in financing receivables is aged as follows (in thousands):
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | |||||||||||||||||||||
March 31, 2014 | 31 – 60 Days Past Due | 61 – 90 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Financing Receivables | Recorded Investment >90 Days and Accruing | |||||||||||||||||||||
Notes receivable | $ | — | $ | — | $ | — | $ | — | $ | 473 | $ | 473 | $ | — | ||||||||||||||
Finance leases | — | — | — | — | 10,354 | 10,354 | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | 10,827 | $ | 10,827 | $ | — |
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | |||||||||||||||||||||
December 31, 2013 | 31 – 60 Days Past Due | 61 – 90 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Financing Receivables | Recorded Investment >90 Days and Accruing | |||||||||||||||||||||
Notes receivable | $ | — | $ | — | $ | — | $ | — | $ | 526 | $ | 526 | $ | — | ||||||||||||||
Finance leases | — | — | — | — | 10,810 | 10,810 | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | 11,336 | $ | 11,336 | $ | — |
The Company had neither financing receivables in non-accrual status nor impaired financing receivables at both March 31, 2014 and December 31, 2013. Likewise, there were no investments in financing receivables with related accounts receivable past due more than 90 days which were still on an accrual basis at March 31, 2014 and December 31, 2013.
5. Investment in equipment and leases, net:
The Company’s investment in equipment leases consists of the following (in thousands):
![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||
Balance December 31, 2013 | Reclassifications, Additions/ Dispositions and Impairment Losses | Depreciation/ Amortization Expense or Amortization of Leases | Balance March 31, 2014 | |||||||||||||
Net investment in operating leases | $ | 8,406 | $ | (712 | ) | $ | (380 | ) | $ | 7,314 | ||||||
Net investment in direct financing leases | 10,810 | — | (456 | ) | 10,354 | |||||||||||
Assets held for sale or lease, net | 656 | (82 | ) | — | 574 | |||||||||||
Initial direct costs, net of accumulated amortization of $86 at March 31, 2014 and $83 at December 31, 2013 | 18 | — | (3 | ) | 15 | |||||||||||
Total | $ | 19,890 | $ | (794 | ) | $ | (839 | ) | $ | 18,257 |
13
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
5. 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. The fair value of the assets is determined based on the sum of the discounted estimated future cash flows of the assets. Impairment losses are recorded as an adjustment to the net investment in operating leases. As a result of these reviews, management determined that no impairment losses existed during the three months ended March 31, 2014 and 2013.
As of March 31, 2014 and December 31, 2013, there were no lease contracts placed in non-accrual status. As of the same dates, the Company had certain other leases that have related accounts receivables aged 90 days or more that had not been placed on non-accrual status. In accordance with Company policy, the related accounts receivables are fully reserved. Management continues to closely monitor these leases for any actual change in collectability status and indication of necessary valuation adjustments.
The Company utilizes a straight line depreciation method for equipment in all of the categories currently in its portfolio of operating lease transactions. Depreciation expense on the Company’s equipment was approximately $380 thousand and $687 thousand for the respective three months ended March 31, 2014 and 2013. Initial direct costs amortization expense related to the Company’s operating and direct financing leases totaled $3 thousand and $5 thousand for the three months ended March 31, 2014 and 2013, respectively.
All of the leased property was acquired in years beginning with 2002 through 2010.
Operating leases:
Property on operating leases consists of the following (in thousands):
![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||
Balance December 31, 2013 | Additions | Reclassifications or Dispositions | Balance March 31, 2014 | |||||||||||||
Transportation, rail | $ | 11,635 | $ | — | $ | 328 | $ | 11,963 | ||||||||
Marine vessels | 11,200 | — | — | 11,200 | ||||||||||||
Transportation, other | 4,639 | — | — | 4,639 | ||||||||||||
Manufacturing | 2,174 | — | (457 | ) | 1,717 | |||||||||||
Materials handling | 1,383 | — | — | 1,383 | ||||||||||||
Agriculture | 1,151 | — | — | 1,151 | ||||||||||||
Construction | 759 | — | — | 759 | ||||||||||||
Natural gas compressors | 1,671 | — | (1,671 | ) | — | |||||||||||
Other | 57 | — | — | 57 | ||||||||||||
34,669 | — | (1,800 | ) | 32,869 | ||||||||||||
Less accumulated depreciation | (26,263 | ) | (380 | ) | 1,088 | (25,555 | ) | |||||||||
Total | $ | 8,406 | $ | (380 | ) | $ | (712 | ) | $ | 7,314 |
The average estimated residual value for assets on operating leases was 15% and 17% of the assets’ original cost at March 31, 2014 and December 31, 2013, respectively. There were no operating leases placed in non-accrual status as of March 31, 2014 and December 31, 2013.
The Company may earn revenues from its containers, marine vessel and certain other assets based on utilization of such assets or a fixed-term lease. Contingent rentals (i.e., short-term, operating charter hire payments) and the associated expenses are recorded when earned and/or incurred. The revenues associated with these rentals are included as a component of Operating Lease Revenues and totaled $42 thousand and $13 thousand for the respective three months ended March 31, 2014 and 2013.
14
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
5. Investment in equipment and leases, net: - (continued)
Direct financing leases:
As of March 31, 2014 and December 31, 2013, investment in direct financing leases consists of mining equipment. The following lists the components of the Company’s investment in direct financing leases as of March 31, 2014 and December 31, 2013 (in thousands):
![]() | ![]() | ![]() | ||||||
March 31, 2014 | December 31, 2013 | |||||||
Total minimum lease payments receivable | $ | 11,472 | $ | 12,584 | ||||
Estimated residual values of leased equipment (unguaranteed) | 3,542 | 3,542 | ||||||
Investment in direct financing leases | 15,014 | 16,126 | ||||||
Less unearned income | (4,660 | ) | (5,316 | ) | ||||
Net investment in direct financing leases | $ | 10,354 | $ | 10,810 |
There was no investment in direct financing lease assets in non-accrual status at March 31, 2014 and December 31, 2013.
At March 31, 2014, the aggregate amounts of future minimum lease payments receivable are as follows (in thousands):
![]() | ![]() | ![]() | ![]() | |||||||||
Operating Leases | Direct Financing Leases | Total | ||||||||||
Nine months ending December 31, 2014 | $ | 2,594 | $ | 3,338 | $ | 5,932 | ||||||
Year ending December 31, 2015 | 2,049 | 4,450 | 6,499 | |||||||||
2016 | 372 | 3,684 | 4,056 | |||||||||
2017 | 344 | — | 344 | |||||||||
2018 | 182 | — | 182 | |||||||||
2019 | 182 | — | 182 | |||||||||
Thereafter | 46 | — | 46 | |||||||||
$ | 5,769 | $ | 11,472 | $ | 17,241 |
6. 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 for providing administrative services to the Company. Administrative services provided include Company accounting, finance/treasury, investor relations, legal counsel and lease and equipment documentation. AFS is not reimbursed for services whereby it is entitled to receive a separate fee as compensation for such services, such as management of equipment. The Company would be liable for certain future costs to be incurred by AFS to manage the administrative services provided to the Company.
Each of ATEL Leasing Corporation (“ALC”) and AFS is a wholly-owned subsidiary of ATEL Capital Group and performs services for the Company. Acquisition services, equipment management, lease administration and asset disposition services are performed by ALC; investor relations, communications and general administrative services for the Company are performed by AFS.
Cost reimbursements to the Managing Member are based on its costs incurred in performing administrative services for the Company. These costs are allocated to each managed entity based on certain criteria such as managed assets, number of investors or contributed capital based upon the type of cost incurred. The
15
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. Related party transactions: - (continued)
Operating Agreement places an annual limit and a cumulative limit for cost reimbursements to AFS and/or affiliates. Any reimbursable costs incurred by AFS and/or affiliates during the year exceeding the annual and/or cumulative limits cannot be reimbursed in the current year, though such costs may be recovered in future years to the extent of the cumulative limit. As of March 31, 2014, the Company has not exceeded the annual and/or cumulative limitations discussed above.
During the three months ended March 31, 2014 and 2013, AFS and/or affiliates earned fees and billed for reimbursements pursuant to the Operating Agreement as follows (in thousands):
![]() | ![]() | ![]() | ||||||
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Costs reimbursed to Managing Member and/or affiliates | $ | 140 | $ | 183 | ||||
Asset management fees to Managing Member and/or affiliates | 86 | 94 | ||||||
$ | 226 | $ | 277 |
7. Non-recourse debt:
At March 31, 2014, non-recourse debt consists of notes payable to financial institutions. The notes are due in monthly installments. Interest on the notes is at fixed rates ranging from 6.16% to 6.66%. The notes are secured by assignments of lease payments and pledges of assets. At March 31, 2014, gross operating lease rentals and future payments on direct financing leases totaled approximately $12.7 million over the remaining lease terms; and the carrying value of the pledged assets is $12.9 million. The notes mature from 2015 through 2017.
The non-recourse debt does not contain any material financial covenants. The debt is secured by liens granted by the Company to the non-recourse lenders on (and only on) the discounted lease transactions. The lenders have recourse only to the following collateral: the specific leased equipment; the related lease chattel paper; the lease receivables; and proceeds of the foregoing items. The non-recourse obligation is payable solely out of the respective specific security and the Company does not guarantee (nor is the Company otherwise contractually responsible for) the payment of the non-recourse debt as a general obligation or liability of the Company. Although the Company does not have any direct or general liability in connection with the non-recourse debt apart from the security granted, the Company is directly and generally liable and responsible for certain representations, warranties, and covenants made to the lenders, such as warranties as to genuineness of the transaction parties' signatures, as to the genuineness of the respective lease chattel paper or the transaction as a whole, or as to the Company's good title to or perfected interest in the secured collateral, as well as similar representations, warranties and covenants typically provided by non-recourse borrowers and customary in the equipment finance industry, and are viewed by such industry as being consistent with non-recourse discount financing obligations. Accordingly, as there are no financial covenants or ratios imposed on the Company in connection with the non-recourse debt, the Company has determined that there are no material covenants with respect to the non-recourse debt that warrant footnote disclosure.
Future minimum payments of non-recourse debt are as follows (in thousands):
![]() | ![]() | ![]() | ![]() | |||||||||
Principal | Interest | Total | ||||||||||
Nine months ending December 31, 2014 | $ | 3,454 | $ | 517 | $ | 3,971 | ||||||
Year ending December 31, 2015 | 4,616 | 420 | 5,036 | |||||||||
2016 | 3,743 | 133 | 3,876 | |||||||||
2017 | 178 | 1 | 179 | |||||||||
$ | 11,991 | $ | 1,071 | $ | 13,062 |
16
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
8. Commitments and Contingencies:
At March 31, 2014, the Company had no commitments to purchase lease assets or fund investments in notes receivable.
Gain Contingency
ATEL filed a claim on behalf of the Company and certain affiliated entities in Federal court in New Orleans for the under-reporting of revenue by a fleet manager of three marine vessels, seeking to recover an approximate amount of 10% of gross proceeds, which in the aggregate for all affiliated entities represents $2.8 million for the years 2005-2007 (of which the Company’s portion is an approximate $350 thousand). The annual allocable portion of the claim is not considered material to the Company in any given year. The trial was concluded during the first week of August 2012. In October 2012, the matter was remitted to the Federal Judge to render a decision on both the law and the facts. The decision of the Court was rendered at the end of June 2013 and the court found in favor of the defendants. The Company filed an appeal of the court’s decision and remains hopeful for a recovery of all or portion of its asserted claims. As a result of the ruling, the defendants filed a claim for legal fees and costs, however, this was denied. Oral arguments for the appeal of the case in substance are scheduled for June 2, 2014. The outcome of the Company’s claim remains uncertain as of this date.
9. Guarantees:
The Company enters into contracts that contain a variety of indemnifications. The Company’s maximum exposure under these arrangements is unknown. However, the Company has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
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.
10. Members’ capital:
As of March 31, 2014 and December 31, 2013, 12,055,016 Units were issued and outstanding. The Company was authorized to issue up to 15,000,000 Units in addition to the Units issued to the initial Members (50 Units).
The Company has the right, exercisable at the Manager’s discretion, but not the obligation, to repurchase Units of a Unitholder who ceases to be a U.S. Citizen, for a price equal to 100% of the holder’s capital account. The Company is otherwise permitted, but not required, to repurchase Units upon a holder’s request. The repurchase of Fund Units is made in accordance with Section 13 of the Amended and Restated Limited Liability Company Operating Agreement. The repurchase would be at the discretion of the Manager on terms it determines to be appropriate under given circumstances, in the event that the Manager deems such repurchase to be in the best interest of the Company; provided, the Company is never required to repurchase any Units. Upon the repurchase of any Units by the Fund, the tendered Units are cancelled. Units repurchased in prior periods were repurchased at amounts representing the original investment less cumulative distributions made to the Unit holder with respect to the Units. All Units repurchased during a quarter are deemed to be repurchased effective the last day of the preceding quarter, and are not deemed to be outstanding during, or entitled to allocations of net income, net loss or distributions for the quarter in which such repurchase occurs.
17
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
10. Members’ capital: - (continued)
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 during the three months ended March 31, 2014 and 2013. The amounts allocated were determined to bring AFS’s ending capital account balance to zero at the end of each period.
Distributions to the Other Members were as follows (in thousands, except as to Units and per Unit data):
![]() | ![]() | ![]() | ||||||
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Distributions declared | $ | 1,808 | $ | 1,808 | ||||
Weighted average number of Units outstanding | 12,055,016 | 12,055,016 | ||||||
Weighted average distributions per Unit | $ | 0.15 | $ | 0.15 |
11. Fair value measurements:
Fair value measurements and disclosures are based on a fair value hierarchy as determined by significant inputs used to measure fair value. The three levels of inputs within the fair value hierarchy are defined as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, generally on a national exchange.
Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market.
Level 3 – Valuation is modeled using significant inputs that are unobservable in the market. These unobservable inputs reflect the Company's own estimates of assumptions that market participants would use in pricing the asset or liability.
At March 31, 2014 and December 31, 2013, only the Company’s warrants were measured on a recurring basis. There were no non-recurring fair value adjustments as of March 31, 2014. By comparison, the Company recorded non-recurring adjustments to reflect the fair values of certain impaired lease and off-lease assets during 2013. Amounts at December 31, 2013 reflect the fair value of the then existing impaired assets.
The Company’s valuation policy is determined by members of the Asset Management, Credit and Accounting departments. Whenever possible, the policy is to obtain quoted market prices in active markets to estimate fair values for recognition and disclosure purposes. Where quoted market prices in active markets are not available, fair values are estimated using discounted cash flow analyses, broker quotes, information from third party remarketing agents, third party appraisals of collateral and/or other valuation techniques. These techniques are significantly affected by certain of the Company’s assumptions, including discount rates and estimates of future cash flows. Potential taxes and other transaction costs are not considered in estimating fair values. As the Company is responsible for determining fair value, an analysis is performed on prices obtained from third parties. Such analysis is performed by asset management and credit department personnel who are familiar with the Company’s investments in equipment, notes receivable and equity securities of venture companies. The analysis may include a periodic review of price fluctuations and validation of numbers obtained from a specific third party by reference to multiple representative sources.
18
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
11. Fair value measurements: - (continued)
The measurement methodologies are as follows:
Warrants (recurring)
Warrants owned by the Company are not registered for public sale, but are considered derivatives and are carried on the balance sheet at an estimated fair value at the end of the period. The valuation of the warrants was determined using a Black-Scholes formulation of value based upon the stock price(s), the exercise price(s), the volatility of comparable venture companies, and a risk free interest rate for the term(s) of the warrant exercise(s). As of March 31, 2014 and December 31, 2013, the calculated fair value of the Fund’s warrant portfolio approximated $160 thousand and $177 thousand, respectively. Such valuations are classified within Level 3 of the valuation hierarchy.
The following table reconciles the beginning and ending balances of the Company’s Level 3 recurring assets (in thousands):
![]() | ![]() | |||
Level 3 Assets | ||||
Balance at December 31, 2013 | $ | 177 | ||
Unrealized loss on warrants, net recorded during the period | (17 | ) | ||
Balance at March 31, 2014 | $ | 160 |
Impaired off-lease equipment (non-recurring)
The Company had no fair value adjustments relative to impaired equipment during the three months ended March 31, 2014 and 2013. Subsequent to the first quarter of 2013, the Company recorded $219 thousand of fair value adjustments to reduce the fair value of certain impaired lease and off-lease equipment. The adjustments were non-recurring. Under the Fair Value Measurements Topic of the FASB Accounting Standards Codification, the fair values of such impaired equipment are classified within Level 3 of the valuation hierarchy as the data sources utilized for the valuation of the assets reflect significant inputs that are unobservable in the market. Such valuation utilizes a market approach technique and uses inputs that reflect the sales price of similar assets sold by affiliates and/or information from third party remarketing agents not readily available in the market. As of December 31, 2013, all impaired lease equipment was either disposed of or were re-categorized to off-lease equipment.
The following table presents the fair value measurement of assets measured at fair value on a non-recurring basis and the level within the hierarchy in which the fair value measurements fall at December 31, 2013 (in thousands):
![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||
December 31, 2013 | Level 1 Estimated Fair Value | Level 2 Estimated Fair Value | Level 3 Estimated Fair Value | |||||||||||||
Assets measured at fair value on a non-recurring basis: | ||||||||||||||||
Impaired off-lease equipment | $ | 3 | $ | — | $ | — | $ | 3 |
19
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
11. Fair value measurements: - (continued)
The following tables summarize the valuation techniques and significant unobservable inputs used for the Company’s recurring and non-recurring fair value adjustments categorized as Level 3 in the fair value hierarchy at March 31, 2014 and December 31, 2013:
![]() | ![]() | ![]() | ![]() | ![]() | ||||
March 31, 2014 | ||||||||
Name | Valuation Frequency | Valuation Technique | Unobservable Inputs | Range of Input Values | ||||
Warrants | Recurring | Black-Scholes Model | Stock price | $1.12 – $50.94 | ||||
Exercise price | $0.16 – $50.94 | |||||||
Time to maturity (in years) | 0.37 – 6.75 | |||||||
Risk-free interest rate | 0.06% – 2.23% | |||||||
Annualized volatility | 17.12% – 100.00% |
![]() | ![]() | ![]() | ![]() | ![]() | ||||
December 31, 2013 | ||||||||
Name | Valuation Frequency | Valuation Technique | Unobservable Inputs | Range of Input Values | ||||
Warrants | Recurring | Black-Scholes Model | Stock price | $1.12 – $50.94 | ||||
Exercise price | $0.16 – $50.94 | |||||||
Time to maturity (in years) | 0.62 – 7.00 | |||||||
Risk-free interest rate | 0.11% – 2.28% | |||||||
Annualized volatility | 17.80% – 100.00% | |||||||
Off-lease Equipment | Non-recurring | Market Approach | Third Party Agents' Pricing Quotes – per equipment | $500 (total of $2,500) | ||||
Equipment Condition | Poor to Average |
The following disclosure of the estimated fair value of financial instruments is made in accordance with the guidance provided by the Financial Instruments Topic of the FASB Accounting Standards Codification. Fair value estimates, methods and assumptions, set forth below for the Company’s financial instruments, are made solely to comply with the requirements of the Financial Instruments Topic.
The Company has determined the estimated fair value amounts by using market information and valuation methodologies that it considers appropriate and consistent with the fair value accounting guidance. Considerable judgment is required to interpret market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Cash and cash equivalents
The recorded amounts of the Company’s cash and cash equivalents approximate fair value because of the liquidity and short-term maturity of these instruments.
Notes receivable
The fair value of the Company’s notes receivable is generally estimated based upon various methodologies deployed by financial and credit management including, but not limited to, credit analysis, third party appraisal and/or discounted cash flow analysis based upon current market valuation techniques and market rates for similar types of lending arrangements, which may consider adjustments for impaired loans as deemed necessary.
20
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
11. Fair value measurements: - (continued)
Investment in securities
The Company’s investment securities are not registered for public sale and are carried at cost which management believes approximates fair value, as appropriately adjusted for impairment.
Non-recourse debt
The fair value of the Company’s non-recourse debt is estimated using discounted cash flow analyses, based upon current market borrowing rates for similar types of borrowing arrangements.
Commitments and Contingencies
Management has determined that the fair value of contingent liabilities (or guarantees) is not considered material because management believes there has been no event that has occurred wherein a guarantee liability has been incurred or will likely be incurred.
The following tables present estimated fair values of the Company’s financial instruments in accordance with the guidance provided by the Financial Instruments Topic of the FASB Accounting Standards Codification at March 31, 2014 and December 31, 2013 (in thousands):
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | |||||||||||||||
Fair Value Measurements at March 31, 2014 | ||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 5,471 | $ | 5,471 | $ | — | $ | — | $ | 5,471 | ||||||||||
Notes receivable, net | 473 | — | — | 473 | 473 | |||||||||||||||
Investment in securities | 5 | — | — | 5 | 5 | |||||||||||||||
Warrants | 160 | — | — | 160 | 160 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Non-recourse debt | 11,991 | — | — | 12,384 | 12,384 |
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | |||||||||||||||
Fair Value Measurements at December 31, 2013 | ||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 4,738 | $ | 4,738 | $ | — | $ | — | $ | 4,738 | ||||||||||
Notes receivable, net | 526 | — | — | 526 | 526 | |||||||||||||||
Investment in securities | 5 | — | — | 5 | 5 | |||||||||||||||
Warrants | 177 | — | — | 177 | 177 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Non-recourse debt | 13,105 | — | — | 13,575 | 13,575 |
21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Statements contained in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Form 10-Q, which are not historical facts, may be forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially 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 Company’s performance is also subject to risks relating to the value of its equipment at the end of its leases, which may be affected by the condition of the equipment, technological obsolescence and the markets for new and used equipment at the end of lease terms. Investors are cautioned not to attribute undue certainty to these forward-looking statements, which speak only as of the date of this Form 10-Q. We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events, other than as required by law.
Overview
ATEL Capital Equipment Fund IX, LLC (the “Company” or the “Fund”) is a California limited liability company that was formed in September 2000 for the purpose of engaging in the sale of limited liability company investment units and acquiring equipment to generate revenues from equipment leasing, lending and sales activities, primarily in the United States. The Managing Member of the Company is ATEL Financial Services, LLC (“AFS”), a California limited liability company.
The Company conducted a public offering of 15,000,000 Limited Liability Company Units, at a price of $10 per Unit. The offering was terminated in January 2003. During early 2003, the Company completed its initial acquisition stage with the investment of the net proceeds from the public offering of Units. Subsequently, during the reinvestment period (“Reinvestment Period”) (defined as six full years following the year the offering was terminated), the Company utilized its credit facilities and reinvested cash flow in excess of certain amounts required to be distributed to the Other Members to acquire additional equipment.
The Company may continue until December 31, 2020. However, pursuant to the guidelines of the Limited Liability Company Operating Agreement (“Operating Agreement”), the Company commenced liquidation phase activities subsequent to the end of the Reinvestment Period which ended on December 31, 2009. Periodic distributions will be paid at the discretion of the Managing Member.
Results of Operations
The three months ended March 31, 2014 versus the three months ended March 31, 2013
The Company had net income of $2.1 million and $974 thousand for the three months ended March 31, 2014 and 2013, respectively. The results for the first quarter of 2014 reflect a decrease in total operating expenses and an increase in total revenues when compared to the prior year period.
Revenues
Total revenues for the first quarter of 2014 increased by $482 thousand, or 19%, as compared to the prior year period. The net increase in total revenues was primarily due to an increase in gain on sales of lease assets and early termination of notes receivable offset, in part, by decreases in direct financing and operating lease revenues, and in other revenue.
The increase in gain on sales of lease assets and early termination of notes receivable totaled $802 thousand and was primarily due to a $938 thousand gain realized on the sale of two gas compressors during the current year period.
Partially offsetting the aforementioned increase in revenue were decreases in direct financing and operating lease revenues, and in other revenue totaling $114 thousand, $89 thousand and $89 thousand, respectively. The
22
decrease in direct financing lease revenue was attributable to run-off of the portfolio; while the decline in operating lease revenue was largely due to the impact of continued run-off and dispositions of lease assets. Other revenue was reduced as the prior year period amount included fees associated with the termination of the marine vessel lease.
Expenses
Total expenses for the first quarter of 2014 decreased by $615 thousand, or 38%, as compared to the prior year period. The net decline in expenses was primarily due to reductions in depreciation expense, marine vessel maintenance and other operating costs, interest expense, franchise fees and state taxes and cost reimbursements to AFS.
The decrease in depreciation expense totaled $307 thousand and was primarily a result of continued run-off and sales of lease assets, and an increase in the number of assets that have been fully depreciated since the first quarter of 2013. The decrease in vessel maintenance costs totaled $102 thousand and was attributable to first quarter 2013 costs of relocating the Fund’s marine vessel to a storage facility at the end of its charter in December 2012. There have been no maintenance costs relative to the Fund’s vessel since the first quarter of 2013.
Moreover, interest expense was reduced by $71 thousand mainly due to an approximate $4.4 million net decrease in outstanding borrowings since March 31, 2013; and, franchise tax fees decreased by $55 thousand due to a period over period reduction in estimated tax liability. Finally, cost reimbursements to AFS decreased by $43 thousand largely due to lower costs allocated by the Manager based on the Company’s declining asset base and operations, consistent with a Fund in liquidation.
Capital Resources and Liquidity
The Company’s cash and cash equivalents totaled $5.5 million and $4.7 million at March 31, 2014 and December 31, 2013, respectively. The liquidity of the Company varies, increasing to the extent cash flows from leases and proceeds of asset sales exceed expenses and decreasing as distributions are made to the Other Members and to the extent expenses exceed cash flows from leases and proceeds from asset sales.
The primary source of liquidity for the Company is its cash flow from leasing activities. As initial lease terms expire, the Company re-leases or sells the equipment. The future liquidity beyond the contractual minimum rentals will depend on the Company’s success in remarketing or selling the equipment as it comes off-rental.
If inflation in the general economy becomes significant, it may affect the Company in as much as the residual (resale) values and rates on re-leases of the Company’s leased assets may increase as the costs of similar assets increase. However, the Company’s revenues from existing leases would not increase; as such leasing rents and payments are generally fixed for the terms of the leases without adjustment for inflation. In addition, if interest rates increase significantly under such circumstances, the lease rates that the Company can obtain on future leases will be expected to increase as the cost of capital is a significant factor in the pricing of lease financing. Leases already in place, for the most part, would not be affected by changes in interest rates.
The Company currently believes it has available adequate reserves to meet its immediate cash requirements and those of the next twelve months, but in the event those reserves were found to be inadequate, the Company would likely be in a position to borrow against its current portfolio to meet such requirements. AFS envisions no such requirements for operating purposes.
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Cash Flows
The following table sets forth summary cash flow data (in thousands):
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Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Net cash provided by (used in): | ||||||||
Operating activities | $ | 1,467 | $ | 1,472 | ||||
Investing activities | 2,335 | 1,400 | ||||||
Financing activities | (3,069 | ) | (2,998 | ) | ||||
Net increase (decrease) in cash and cash equivalents | $ | 733 | $ | (126 | ) |
The three months ended March 31, 2014 versus the three months ended March 31, 2013
During the three months ended March 31, 2014 and 2013, the Company’s primary source of liquidity has been cash flows from its portfolio of operating and direct financing lease contracts, and its investments in notes receivable. In addition, the Company realized $1.8 million and $892 thousand of proceeds from sales or dispositions of equipment and early termination of notes receivable during the first quarters of 2014 and 2013, respectively.
During the same respective periods, cash was primarily used to pay distributions to both Other Members and the Managing Member and to pay down debt. Distribution paid to Members totaled $2.0 million for each of the three-month periods ended March 31, 2014 and 2013, while cash used to pay down debt totaled $1.1 million and $1.0 million for the first quarters of 2014 and 2013, respectively.
Non-Recourse Long-Term Debt
As of March 31, 2014 and December 31, 2013, the Company had non-recourse long-term debt totaling $12.0 million and $13.1 million, respectively. Such non-recourse notes payable do not contain any material financial covenants. The notes are secured by a lien granted by the Company to the non-recourse lenders on (and only on) the discounted lease transactions. The lenders have recourse only to the following collateral: the specific leased equipment; the related lease chattel paper; the lease receivables; and proceeds of the foregoing items.
The Operating Agreement limits aggregate borrowings to 50% of the total cost of equipment. For detailed information on the Company’s non-recourse debt obligation, see Note 7 in Item 1. Financial Statements.
Distributions
The Company commenced periodic distributions, based on cash flows from operations, beginning with the month of February 2001. The monthly distributions were discontinued in 2010 as the Company entered its liquidation phase. The rates and frequency of periodic distributions paid by the Fund during its liquidation phase are solely at the discretion of the Manager.
Commitments and Contingencies and Off-Balance Sheet Transactions
Commitments and Contingencies
At March 31, 2014, the Company had no commitments to purchase lease assets or fund investments in notes receivable.
Gain Contingency
ATEL filed a claim on behalf of the Company and certain affiliated entities in Federal court in New Orleans for the under-reporting of revenue by a fleet manager of three marine vessels, seeking to recover an approximate amount of 10% of gross proceeds, which in the aggregate for all affiliated entities represents $2.8 million for the years 2005-2007 (of which the Company’s portion is an approximate $350 thousand). The annual allocable portion of the claim is not considered material to the Company in any given year. The trial was concluded during the first week of August 2012. In October 2012, the matter was remitted to the Federal Judge to render a decision on both the law and the facts. The decision of the Court was rendered at the end of
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June 2013 and the court found in favor of the defendants. The Company filed an appeal of the court’s decision and is hopeful for a recovery of all or portion of its asserted claims, but the outcome of the litigation remains uncertain as of such date. As a result of the ruling, the defendants filed a claim for legal fees and costs, however, this was denied. Oral arguments for the appeal of the case in substance are scheduled for June 2, 2014. The outcome of the Company’s claim remains uncertain as of this date.
Off-Balance Sheet Transactions
None.
Recent Accounting Pronouncements
Recent accounting standards updates as issued by the Financial Accounting Standards Board (FASB) were evaluated and determined to be not applicable to the Company.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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. On an on-going basis, the Company evaluates its estimates, which are based upon historical experiences, market trends and financial forecasts, and upon various other assumptions that management believes to be reasonable under the circumstances and at that certain point in time. Actual results may differ, significantly at times, from these estimates under different assumptions or conditions.
The Company’s critical accounting policies are described in its Annual Report on Form 10-K for the year ended December 31, 2013. There have been no material changes to the Company’s critical accounting policies since December 31, 2013.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures
The Company’s Managing Member’s President and Chief Executive Officer, and Executive Vice President and Chief Financial Officer and Chief Operating Officer (“Management”), evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on the evaluation of the Company’s disclosure controls and procedures, Management concluded that as of the end of the period covered by this report, the design and operation of these disclosure controls and procedures were effective.
The Company does not control the financial reporting process, and is solely dependent on the Management of the Managing Member, which is responsible for providing the Company with financial statements in accordance with generally accepted accounting principles in the United States. The Managing Member’s disclosure controls and procedures, as it is applicable to the Company, were effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Changes in internal control
There were no changes in the Managing Member’s internal control over financial reporting, as it is applicable to the Company, during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, the Managing Member’s internal control over financial reporting, as it is applicable to the Company.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In the ordinary course of conducting business, there may be certain claims, suits, and complaints filed against the Company. In the opinion of management, the outcome of such matters, if any, will not have a material impact on the Company’s financial position or results of operations. No material legal proceedings are currently pending against the Company or against any of its assets.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
Documents filed as a part of this report:
1. | Financial Statement Schedules |
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
2. | Other Exhibits |
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31.1 | Certification of Dean L. Cash | |
31.2 | Certification of Paritosh K. Choksi | |
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 | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 13, 2014
ATEL CAPITAL EQUIPMENT FUND IX, LLC
(Registrant)
![]() | ![]() | ![]() | ||
By: ATEL Financial Services, LLC | ||||
By: | /s/ Dean L. Cash![]() Dean L. Cash President and Chief Executive Officer of ATEL Financial Services, LLC (Managing Member) | |||
By: | /s/ Paritosh K. Choksi![]() Paritosh K. Choksi Executive Vice President and Chief Financial Officer and Chief Operating Officer of ATEL Financial Services, LLC (Managing Member) | |||
By: | /s/ Samuel Schussler![]() Samuel Schussler Vice President and Chief Accounting Officer of ATEL Financial Services, LLC (Managing Member) |
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