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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended September 30, 2008
¨ | 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 Incorporation or organization) | (I. R. S. Employer Identification No.) |
600 California Street, 6th Floor, San Francisco, California 94108-2733
(Address of principal executive offices)
Registrant’s telephone number, including area code (415) 989-8800
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Limited Liability Company Units
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is 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 filer ¨ | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company x | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The number of Limited Liability Company Units outstanding as of October 31, 2008 was 12,055,016.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
Index
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Item 1. | Financial Statements (Unaudited). |
ATEL CAPITAL EQUIPMENT FUND IX, LLC
BALANCE SHEETS
SEPTEMBER 30, 2008 AND DECEMBER 31, 2007
(In Thousands)
(Unaudited)
September 30, 2008 | December 31, 2007 | |||||
ASSETS | ||||||
Cash and cash equivalents | $ | 2,917 | $ | 4,326 | ||
Due from affiliate | 8 | — | ||||
Accounts receivable, net of allowance for doubtful accounts of $107 at September 30, 2008 and $144 at December 31, 2007 | 697 | 1,409 | ||||
Notes receivable, net of unearned interest income of $702 at September 30, 2008 and $991 at December 31, 2007 | 3,773 | 4,133 | ||||
Prepaid expenses and other assets | 58 | 48 | ||||
Investment in securities, at cost | 70 | 70 | ||||
Investments in equipment and leases, net of accumulated depreciation of $54,379 at September 30, 2008 and $49,383 at December 31, 2007 | 45,389 | 57,593 | ||||
Total assets | $ | 52,912 | $ | 67,579 | ||
LIABILITIES AND MEMBERS’ CAPITAL | ||||||
Accounts payable and accrued liabilities: | ||||||
Managing Member | $ | 152 | $ | 455 | ||
Accrued distributions to Other Members | 1,209 | 1,208 | ||||
Other | 861 | 1,024 | ||||
Deposits due lessees | 129 | 92 | ||||
Non-recourse debt | 5,427 | 7,198 | ||||
Interest rate swap contracts | 95 | 79 | ||||
Acquisition facility obligation | 1,000 | 1,500 | ||||
Receivables funding program obligation | 9,689 | 15,479 | ||||
Unearned operating lease income | 1,545 | 879 | ||||
Total liabilities | 20,107 | 27,914 | ||||
Members’ capital: | ||||||
Managing Member | — | — | ||||
Other Members | 32,805 | 39,665 | ||||
Total Members’ capital | 32,805 | 39,665 | ||||
Total liabilities and Members’ capital | $ | 52,912 | $ | 67,579 | ||
See accompanying notes.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007
(In Thousands, Except for Units and Per Unit Data)
(Unaudited)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Revenues: | ||||||||||||||||
Leasing activities: | ||||||||||||||||
Operating leases | $ | 4,501 | $ | 5,282 | $ | 13,292 | $ | 16,782 | ||||||||
Direct financing leases | 397 | 360 | 1,366 | 1,057 | ||||||||||||
Interest on notes receivable | 93 | 108 | 289 | 344 | ||||||||||||
Gain on sales of assets | 13 | 907 | 81 | 1,584 | ||||||||||||
Other revenue | 9 | 46 | 153 | 128 | ||||||||||||
Total revenues | 5,013 | 6,703 | 15,181 | 19,895 | ||||||||||||
Expenses: | ||||||||||||||||
Depreciation of operating lease assets | 3,051 | 4,181 | 9,988 | 12,934 | ||||||||||||
Asset management fees to Managing Member | 306 | 365 | 734 | 913 | ||||||||||||
Acquisition expense | — | 5 | — | 18 | ||||||||||||
Cost reimbursements to Managing Member | 150 | 304 | 474 | 943 | ||||||||||||
(Reversal of provision) provision for doubtful accounts | (26 | ) | 33 | (37 | ) | 130 | ||||||||||
Amortization of initial direct costs | 70 | 105 | 228 | 340 | ||||||||||||
Interest expense | 248 | 465 | 849 | 1,488 | ||||||||||||
Professional fees | 14 | 47 | 203 | 580 | ||||||||||||
Outside services | 34 | 100 | 73 | 420 | ||||||||||||
Insurance | 41 | 31 | 70 | 97 | ||||||||||||
Marine vessel maintenance and other operating costs | 268 | 71 | 446 | 423 | ||||||||||||
Other | 56 | 94 | 235 | 168 | ||||||||||||
Total operating expenses | 4,212 | 5,801 | 13,263 | 18,454 | ||||||||||||
Other income (expense), net | 41 | (183 | ) | 19 | (195 | ) | ||||||||||
Net income | $ | 842 | $ | 719 | $ | 1,937 | $ | 1,246 | ||||||||
Net income: | ||||||||||||||||
Managing Member | $ | 220 | $ | 220 | $ | 660 | $ | 660 | ||||||||
Other Members | 622 | 499 | 1,277 | 586 | ||||||||||||
$ | 842 | $ | 719 | $ | 1,937 | $ | 1,246 | |||||||||
Net income per Limited Liability Company Unit (Other Members) | $ | 0.05 | $ | 0.04 | $ | 0.11 | $ | 0.05 | ||||||||
Weighted average number of Units outstanding | 12,055,016 | 12,055,016 | 12,055,016 | 12,055,016 |
See accompanying notes.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2007
AND FOR THE
NINE MONTHS ENDED
SEPTEMBER 30, 2008
(In Thousands, Except for Units and Per Unit Data)
(Unaudited)
Other Members | Managing Member | Total | ||||||||||||
Units | Amount | |||||||||||||
Balance December 31, 2006 | 12,055,016 | $ | 48,273 | $ | — | $ | 48,273 | |||||||
Distributions to Other Members ($0.90 per Unit) | — | (10,849 | ) | — | (10,849 | ) | ||||||||
Distributions to Managing Member | — | — | (880 | ) | (880 | ) | ||||||||
Net income | — | 2,241 | 880 | 3,121 | ||||||||||
Balance December 31, 2007 | 12,055,016 | 39,665 | — | 39,665 | ||||||||||
Distributions to Other Members ($0.67 per Unit) | — | (8,137 | ) | — | (8,137 | ) | ||||||||
Distributions to Managing Member | — | — | (660 | ) | (660 | ) | ||||||||
Net income | — | 1,277 | 660 | 1,937 | ||||||||||
Balance September 30, 2008 | 12,055,016 | $ | 32,805 | $ | — | $ | 32,805 | |||||||
See accompanying notes.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007
(In Thousands)
(Unaudited)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Operating activities: | ||||||||||||||||
Net income | $ | 842 | $ | 719 | $ | 1,937 | $ | 1,246 | ||||||||
Adjustment to reconcile net income to cash provided by operating activities: | ||||||||||||||||
Gain on sales of lease assets | (13 | ) | (907 | ) | (81 | ) | (1,584 | ) | ||||||||
Depreciation of operating lease assets | 3,051 | 4,181 | 9,988 | 12,934 | ||||||||||||
Amortization of initial direct costs | 70 | 105 | 228 | 340 | ||||||||||||
Amortization of unearned income on direct finance leases | (397 | ) | (360 | ) | (1,366 | ) | (1,057 | ) | ||||||||
Amortization of unearned income on notes receivable | (93 | ) | (108 | ) | (289 | ) | (344 | ) | ||||||||
Provision for losses and impairments | — | 42 | — | 42 | ||||||||||||
(Reversal of provision) provision for doubtful accounts | (26 | ) | (9 | ) | (37 | ) | 88 | |||||||||
Change in fair value of interest rate swap contracts | (44 | ) | 183 | 16 | 215 | |||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Due from affiliate | (9 | ) | — | (8 | ) | — | ||||||||||
Accounts receivable | 1,214 | 1,395 | 749 | 301 | ||||||||||||
Prepaid and other assets | (34 | ) | (17 | ) | (10 | ) | 65 | |||||||||
Accounts payable, Managing Member | (38 | ) | (12 | ) | (303 | ) | (370 | ) | ||||||||
Accounts payable, accrued distributions to Other Members | — | — | 1 | — | ||||||||||||
Accounts payable, other | 201 | 187 | (163 | ) | 144 | |||||||||||
Deposits due lessees | — | (5 | ) | 37 | (5 | ) | ||||||||||
178 | 255 | 666 | 708 | |||||||||||||
Net cash provided by operating activities | 4,902 | 5,649 | 11,365 | 12,723 | ||||||||||||
Investing activities: | ||||||||||||||||
Purchases of equipment on operating leases | — | — | — | (82 | ) | |||||||||||
Purchases of equipment on direct financing leases | — | (125 | ) | — | (125 | ) | ||||||||||
Proceeds from sales of lease assets | 205 | 2,119 | 571 | 3,660 | ||||||||||||
Payments of initial direct costs | — | — | — | (8 | ) | |||||||||||
Payments received on direct financing leases | 1,083 | 1,066 | 2,866 | 2,663 | ||||||||||||
Payments received on notes receivable | 210 | 301 | 647 | 950 | ||||||||||||
Net cash provided by investing activities | 1,498 | 3,361 | 4,084 | 7,058 | ||||||||||||
Financing activities: | ||||||||||||||||
Borrowings under acquisition facility | 1,500 | 1,500 | 2,500 | 4,000 | ||||||||||||
Repayments under acquisition facility | (1,000 | ) | (2,000 | ) | (3,000 | ) | (3,500 | ) | ||||||||
Repayments under receivables funding program | (2,385 | ) | (3,019 | ) | (5,790 | ) | (7,731 | ) | ||||||||
Repayments of non-recourse debt | (593 | ) | (558 | ) | (1,771 | ) | (1,650 | ) | ||||||||
Distributions to Other Members | (2,712 | ) | (2,712 | ) | (8,137 | ) | (8,137 | ) | ||||||||
Distributions to Managing Member | (220 | ) | (220 | ) | (660 | ) | (660 | ) | ||||||||
Net cash used in financing activities | (5,410 | ) | (7,009 | ) | (16,858 | ) | (17,678 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents | 990 | 2,001 | (1,409 | ) | 2,103 | |||||||||||
Cash and cash equivalents at beginning of period | 1,927 | 3,296 | 4,326 | 3,194 | ||||||||||||
Cash and cash equivalents at end of period | $ | 2,917 | $ | 5,297 | $ | 2,917 | $ | 5,297 | ||||||||
Supplemental disclosures of cash flow information: | ||||||||||||||||
Cash paid during the period for interest | $ | 255 | $ | 468 | $ | 876 | $ | 1,508 | ||||||||
Cash paid during the period for taxes | $ | 8 | $ | 52 | $ | 143 | $ | 63 | ||||||||
Schedule of non-cash transactions: | ||||||||||||||||
Distributions payable to Other Members at period-end | $ | 1,209 | $ | 1,208 | $ | 1,209 | $ | 1,208 | ||||||||
See accompanying notes.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
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, 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 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. As of September 30, 2008, 12,055,016 Units 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 5). 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 (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 ends 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 Operating Agreement, as amended.
2. Summary of significant accounting policies:
Basis of presentation:
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with instructions to Form 10-Q and Article 8 of Regulation S-X. The unaudited interim financial statements reflect all adjustments which are, in the opinion of the Managing Member, necessary for a fair statement of financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts in the financial statements and accompanying notes. Therefore, actual results could differ from those estimates. Operating results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results for the year ending December 31, 2008.
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, 2007, filed with the Securities and Exchange Commission.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued):
Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on equity or net income.
Footnote and tabular amounts are presented in thousands, except as to Units and per Unit data.
Cash and cash equivalents:
Cash and cash equivalents include cash in banks and cash equivalent investments such as U.S. Treasury instruments with original and/or purchased maturities of ninety days or less.
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 determination of the allowances for doubtful accounts and notes receivable.
Credit risk:
Financial instruments that potentially subject the Company to concentrations of credit risk include cash and cash equivalents, direct financing lease receivables, accounts receivable and notes receivable. The Company places the majority of its cash deposits and temporary cash investments in U.S. Treasury denominated instruments with the remainder placed in creditworthy, high quality financial institutions so as to meet ongoing working capital requirements. 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.
Initial direct costs:
The Company capitalizes initial direct costs (“IDC”) associated with the origination and funding of lease assets and 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., the costs of employees’ activities in connection with successful lease and loan originations) and external broker fees incurred with such originations. The costs are amortized on a lease by lease (or note by note) basis based on actual contract 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 or loan assets, both the initial direct costs and the associated accumulated amortization are relieved. Costs related to leases or notes receivable that are not consummated are not eligible for capitalization as initial direct costs and are expensed as acquisition expense.
Segment reporting:
The Company reports segment information in accordance with 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.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued):
The Company’s principal decision makers are the Managing Member’s Chief Executive Officer and its Chief Financial Officer and Chief Operating 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 principal decision makers do not review 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 total revenues for the nine months ended September 30, 2008 and 2007 and long-lived tangible assets as of September 30, 2008 and December 31, 2007 (in thousands):
For the nine months ended September 30, | ||||||||||||
2008 | % of Total | 2007 | % of Total | |||||||||
Revenue | ||||||||||||
United States | $ | 14,005 | 92 | % | $ | 19,109 | 96 | % | ||||
United Kingdom | 1,014 | 7 | % | 664 | 3 | % | ||||||
Canada | 162 | 1 | % | 122 | 1 | % | ||||||
Total International | 1,176 | 8 | % | 786 | 4 | % | ||||||
Total | $ | 15,181 | 100 | % | $ | 19,895 | 100 | % | ||||
As of September 30, | As of December 31, | |||||||||||
2008 | % of Total | 2007 | % of Total | |||||||||
Long-lived assets | ||||||||||||
United States | $ | 41,422 | 91 | % | $ | 53,809 | 93 | % | ||||
United Kingdom | 3,967 | 9 | % | 3,784 | 7 | % | ||||||
Total International | 3,967 | 9 | % | 3,784 | 7 | % | ||||||
Total | $ | 45,389 | 100 | % | $ | 57,593 | 100 | % | ||||
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 carry value and such impairment is deemed by the Managing Member to be other than temporary. Purchased securities in publicly traded borrowers are carried at fair value. The Company utilizes quoted market prices to value its investments in publicly traded borrowers, and uses the borrowers’ subsequent private placements, on a per share basis, to estimate the fair value of its investments in non-publicly traded borrowers. Such determination of fair value may be adjusted pursuant to other factors which include, but are not limited to, available financial information, the terms and condition of subsequent placements, the issuer’s ability to meet its current obligations and indications of the issuer’s subsequent ability to raise capital. 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. See note 12 for further discussion.
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.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued):
At September 30, 2008 and December 31, 2007, the Managing Member estimated the fair value of the warrants to be nominal in amount. See note 12 for further discussion.
Foreign currency transactions:
Foreign currency transaction gains and losses are reported in the results of operations asother income (expense), net 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. The Company recognized a net foreign currency loss of $3 thousand for the three months ended September 30, 2008. There was no foreign currency gain or loss recognized during the three months ended September 30, 2007. For the nine months ended September 30, 2008 and 2007, the Company recognized net foreign currency gains of $35 thousand and $20 thousand, respectively.
Other income (expense), net:
Other income (expense), net generally 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.
The table below details the Company’s other income (expense), net for the three and nine months ended September 30, 2008 and 2007 (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Foreign currency (loss) gain | $ | (3 | ) | $ | — | $ | 35 | $ | 20 | |||||||
Change in fair value of interest rate swap contracts | 44 | (183 | ) | (16 | ) | (215 | ) | |||||||||
$ | 41 | $ | (183 | ) | $ | 19 | $ | (195 | ) | |||||||
Per Unit data:
Net income (loss) and distributions per Unit are based upon the weighted average number of Other Members’ Units outstanding during the period.
Recent accounting pronouncements:
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”), as an amendment to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 161 requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. The fair value of derivative instruments and their gains and losses will need to be presented in tabular format in order to present a more complete picture of the effects of using derivative instruments. SFAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact of adopting this pronouncement.
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”). SFAS 141R replaces SFAS 141 and establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. This standard is effective for fiscal years beginning after December 15, 2008. The Company does not presently anticipate the adoption of SFAS 141R to significantly impact its financial position, results of operations or cash flows.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued):
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115” (“SFAS 159”). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board’s long-term measurement objectives for accounting for financial instruments. The Company adopted the provisions of SFAS 159 on January 1, 2008. The adoption of SFAS 159 did not have a significant effect on the Company’s financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This standard clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements. The provisions of SFAS 157 were to be effective for fiscal years beginning after November 15, 2007. However, in February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2, which defers the effective date of SFAS 157 as it pertains to fair value measurements of nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. On January 1, 2008, the Company adopted the provisions of SFAS 157 except as it applied to its investment in leases, and other nonfinancial assets and nonfinancial liabilities as noted in FSP No. 157-2. The partial adoption of SFAS 157 did not have a significant effect on the Company’s financial position, results of operations or cash flows. The Company is in the process of evaluating the impact of the deferred provisions of SFAS 157.
3. Notes receivable, net:
The Company has various notes receivable from borrowers who have financed the purchase of equipment through the Company. At September 30, 2008, the original terms of the notes receivable are 36 to 120 months and bear interest at rates ranging from 8.5% to 14.2%. The notes are secured by the equipment financed. The notes mature from 2009 through 2016. There were no impaired notes as of September 30, 2008 and December 31, 2007. As of September 30, 2008, the minimum future payments receivable are as follows (in thousands):
Three months ending December 31, 2008 | $ | 210 | ||||
Year ending December 31, 2009 | 2,211 | |||||
2010 | 393 | |||||
2011 | 393 | |||||
2012 | 393 | |||||
2013 | 295 | |||||
Thereafter | 575 | |||||
4,470 | ||||||
Less: portion representing unearned interest income | (702 | ) | ||||
3,768 | ||||||
Unamortized indirect costs | 5 | |||||
Notes receivable, net | $ | 3,773 | ||||
IDC amortization expense related to notes receivable and the Company’s operating and direct finance leases for the three and six months ended September 30, 2008 and 2007 are as follows (in thousands):
Three months ended September 30, | Nine months ended September 30, | |||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||
IDC amortization - notes receivable | $ | — | $ | 2 | $ | 2 | $ | 9 | ||||
IDC amortization - lease assets | 70 | 103 | 226 | 331 | ||||||||
Total | $ | 70 | $ | 105 | $ | 228 | $ | 340 | ||||
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
4. Investment in equipment and leases, net:
The Company’s investment in equipment leases consists of the following (in thousands):
Balance December 31, 2007 | Reclassifications & Additions / Dispositions | Depreciation/ Amortization Expense or Amortization of Leases | Balance September 30, 2008 | |||||||||||
Net investment in operating leases | $ | 51,431 | $ | (1,365 | ) | $ | (9,988 | ) | $ | 40,078 | ||||
Net investment in direct financing leases | 5,579 | 488 | (1,498 | ) | 4,569 | |||||||||
Assets held for sale or lease, net | 74 | 386 | (1 | ) | 459 | |||||||||
Initial direct costs, net of accumulated amortization of $1,082 at September 30, 2008 and $1,075 at December 31, 2007 | 509 | — | (226 | ) | 283 | |||||||||
Total | $ | 57,593 | $ | (491 | ) | $ | (11,713 | ) | $ | 45,389 | ||||
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. Impairment losses are recorded as an adjustment to the net investment in operating leases. No impairment losses were recorded for the three and nine months ended September 30, 2008 and 2007. Depreciation expense on property subject to operating leases and property held for lease or sale was $3.1 million and $4.2 million for the respective three months ended September 30, 2008 and 2007; and $10.0 million and $12.9 million for the respective nine months ended September 30, 2008 and 2007.
All of the leased property was acquired in years beginning with 2002 through 2007.
Operating leases:
Property on operating leases consists of the following (in thousands):
Balance December 31, 2007 | Additions | Reclassifications or Dispositions | Balance September 30, 2008 | |||||||||||||
Material handling | $ | 26,715 | $ | — | $ | (3,061 | ) | $ | 23,654 | |||||||
Transportation, other | 14,672 | — | 738 | 15,410 | ||||||||||||
Manufacturing | 13,934 | — | 1,213 | 15,147 | ||||||||||||
Transportation, rail | 13,359 | — | (47 | ) | 13,312 | |||||||||||
Mining | 12,651 | — | 1,876 | 14,527 | ||||||||||||
Marine vessels | 10,776 | — | (3,897 | ) | 6,879 | |||||||||||
Office automation | 4,000 | — | (3,365 | ) | 635 | |||||||||||
Construction | 3,319 | — | (1,561 | ) | 1,758 | |||||||||||
Office furniture | 1,174 | — | (334 | ) | 840 | |||||||||||
100,600 | — | (8,438 | ) | 92,162 | ||||||||||||
Less accumulated depreciation | (49,169 | ) | (9,988 | ) | 7,073 | (52,084 | ) | |||||||||
Total | $ | 51,431 | $ | (9,988 | ) | $ | (1,365 | ) | $ | 40,078 | ||||||
The average estimated residual value for assets on operating leases at September 30, 2008 and December 31, 2007 was 24% and 26% of the assets’ original cost, respectively.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
4. Investment in equipment and leases, net (continued):
Direct financing leases:
As of September 30, 2008, investment in direct financing leases consists of material handling equipment and office furniture. The following lists the components of the Company’s investment in direct financing leases as of September 30, 2008 and December 31, 2007 (in thousands):
September 30, 2008 | December 31, 2007 | |||||||
Total minimum lease payments receivable | $ | 7,103 | $ | 8,946 | ||||
Estimated residual values of leased equipment (unguaranteed) | 789 | 821 | ||||||
Investment in direct financing leases | 7,892 | 9,767 | ||||||
Less unearned income | (3,323 | ) | (4,188 | ) | ||||
Net investment in direct financing leases | $ | 4,569 | $ | 5,579 | ||||
At September 30, 2008, the aggregate amounts of future minimum lease payments receivable are as follows (in thousands):
Operating Leases | Direct Financing Leases | Total | |||||||||
Three months ending December 31, 2008 | $ | 2,742 | $ | 412 | $ | 3,154 | |||||
Year ending December 31, 2009 | 10,001 | 2,220 | 12,221 | ||||||||
2010 | 4,163 | 1,401 | 5,564 | ||||||||
2011 | 1,602 | 1,322 | 2,924 | ||||||||
2012 | 1,227 | 1,748 | 2,975 | ||||||||
2013 | 843 | — | 843 | ||||||||
Thereafter | 1,500 | — | 1,500 | ||||||||
$ | 22,078 | $ | 7,103 | $ | 29,181 | ||||||
The Company utilizes a straight line depreciation method for equipment in all of the categories currently in its portfolio of lease transactions. The useful lives for investment in leases by category are as follows (in years):
Equipment category | Useful Life | |
Mining | 30 - 40 | |
Transportation, rail | 30 - 35 | |
Marine vessels | 20 - 30 | |
Manufacturing | 10 - 20 | |
Construction | 7 - 10 | |
Material handling | 7 - 10 | |
Office furniture | 7 - 10 | |
Transportation, other | 7 - 10 | |
Office automation | 5 - 7 |
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
5. 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. 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 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 services 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 total assets, number of investors or contributed capital based upon the type of cost incurred.
During the three and nine months ended September 30, 2008 and 2007, AFS and/or affiliates earned fees, commissions and reimbursements, pursuant to the Operating Agreement as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||
Cost reimbursements to Managing Member | $ | 150 | $ | 304 | $ | 474 | $ | 943 | ||||
Asset management fees to Managing Member | 306 | 365 | 734 | 913 | ||||||||
Acquisition and initial direct costs paid to Managing Member | — | 5 | — | 18 | ||||||||
$ | 456 | $ | 674 | $ | 1,208 | $ | 1,874 | |||||
6. Non-recourse debt
At September 30, 2008, non-recourse debt consists of notes payable to financial institutions. The notes are due in varying quarterly and semi-annual installments. Interest on the notes is at fixed rates ranging from 5.99% to 6.16%. The notes are secured by assignments of lease payments and pledges of assets. At September 30, 2008, gross lease rentals totaled approximately $6.6 million over the remaining lease terms; and the carrying value of the pledged assets is $7.3 million. The notes mature from 2008 through 2015.
Future minimum payments of non-recourse debt are as follows (in thousands):
Principal | Interest | Total | |||||||||||
Three months ending December 31, 2008 | $ | 603 | $ | 80 | $ | 683 | |||||||
Year ending December 31, 2009 | 676 | 278 | 954 | ||||||||||
2010 | 719 | 235 | 954 | ||||||||||
2011 | 650 | 193 | 843 | ||||||||||
2012 | 691 | 152 | 843 | ||||||||||
2013 | 735 | 108 | 843 | ||||||||||
Thereafter | 1,353 | 75 | 1,428 | ||||||||||
$ | 5,427 | $ | 1,121 | $ | 6,548 | ||||||||
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
7. 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 financial arrangement is for $75 million and expires in June 2009. Under the terms of the acquisition facility agreement, ATEL 12, LLC may only participate once its tangible net worth, as therein defined, equals or exceeds $15 million.
As of September 30, 2008 and December 31, 2007, borrowings under the facility were as follows (in thousands):
September 30, 2008 | December 31, 2007 | |||||||
Total available under the financing arrangement | $ | 75,000 | $ | 75,000 | ||||
Amount borrowed by the Company under the acquisition facility | (1,000 | ) | (1,500 | ) | ||||
Amounts borrowed by affiliated partnerships and Limited Liability Companies under the acquisition facility | (5,735 | ) | (7,125 | ) | ||||
Total remaining available under the acquisition and warehouse facilities | $ | 68,265 | $ | 66,375 | ||||
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 was 5% at September 30, 2008 and 6.12% at December 31, 2007. During the three months ended September 30, 2008 and 2007, the weighted average interest rate on borrowings was 4.83% and 6.72%, respectively. The weighted average interest rate on borrowings was 5.66% and 6.63% during the nine months ended September 30, 2008 and 2007. During the fiscal year ended December 31, 2007, the weighted average interest rate on borrowings was 6.60%.
Draws on the acquisition facility by any affiliated partnership and/or limited liability company borrower are secured only by that borrower’s assets, including but not limited to equipment and related leases.
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). The Company and its affiliates pay an annual commitment fee to have access to this line of credit. There were no borrowings under the warehouse facility as of September 30, 2008 and December 31, 2007.
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, 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 are added. As of September 30, 2008, the investment program participants were the Company, ATEL Capital Equipment Fund X, LLC, ATEL Capital Equipment Fund XI, LLC and ATEL 12, 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
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
7. Borrowing facilities (continued):
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.
As of September 30, 2008, the full amount remaining available under the joint acquisition and warehouse facility is potentially available to the Company. However, as amounts are drawn on the facility by each of the Company and the affiliates who are borrowers under the facility, the amount available to all is reduced. As the warehousing facility is a short term bridge facility, any amounts borrowed under the warehousing facility, and then repaid by the affiliated borrowers (including the Company) upon allocation of an acquisition to a specific purchaser, become available under the warehouse facility for further short term borrowing.
The financing arrangement discussed above includes certain financial and non-financial covenants applicable to each borrower. The Company and affiliates were in compliance with all covenants as of September 30, 2008. The financial institutions providing the above discussed financing arrangement have a blanket lien on the Company’s assets as collateral on any and all borrowings.
8. Receivable funding program:
In August 2002, the Company established a $60 million receivables funding program (the “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 Program, the lenders would receive liens against the Company’s assets. The program terminated with respect to new borrowings in January 2006. Under the terms of the Program, the lender will be in first position against certain specified assets and will be in either a subordinated or shared position against the remaining assets. The Program expires August 2011.
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.
As of September 30, 2008 and December 31, 2007, the Company had $9.7 million and $15.5 million outstanding under the Program, respectively. During the three months ended September 30, 2008 and 2007, the Company paid program fees, as defined in the receivables funding agreement, totaling $11 thousand and $18 thousand, respectively. During the nine months ended September 30, 2008 and 2007, such fees totaled $36 thousand and $61 thousand, respectively. The program fees are included in interest expense in the Company’s statement of operations.
As of September 30, 2008, the Company has entered into interest rate swap agreements to receive or pay interest on a notional principal of $9.7 million based on the difference between nominal rates ranging from 3.75% to 4.81% and variable rates that ranged from 2.46% to 4.94% under the Program. As of December 31, 2007, the Company had interest rate swap agreements to receive or pay interest on a notional principal of $15.5 million based on the difference between nominal rates ranging from 3.75% to 4.81% and variable rates that ranged from 5.57% to 6.19% under the 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 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 inother income/(loss), net.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
8. Receivable funding program (continued):
At September 30, 2008 and December 31, 2007, borrowings under the Program are as follows (in thousands):
Date Borrowed | Original Amount Borrowed | Balance September 30, 2008 | Notional Balance September 30, 2008 | Swap Value September 30, 2008 | Payment Rate On Interest Swap Agreement | ||||||||||
February 14, 2005 | $ | 20,000 | $ | 2,885 | $ | 2,885 | $ | (10 | ) | 3.75% | |||||
March 22, 2005 | 9,892 | 2,553 | 2,553 | (29 | ) | 4.31% | |||||||||
December 15, 2005 | 13,047 | 3,249 | 3,249 | (41 | ) | 4.80% | |||||||||
January 9, 2006 | 2,500 | 1,002 | 1,002 | (15 | ) | 4.81% | |||||||||
$ | 45,439 | $ | 9,689 | $ | 9,689 | $ | (95 | ) | |||||||
Date Borrowed | Original Amount Borrowed | Balance December 31, 2007 | Notional Balance December 31, 2007 | Swap Value December 31, 2007 | Payment Rate On Interest Swap Agreement | ||||||||||
February 14, 2005 | $ | 20,000 | $ | 4,837 | $ | 4,837 | $ | 10 | 3.75% | ||||||
March 22, 2005 | 9,892 | 4,180 | 4,180 | (21 | ) | 4.31% | |||||||||
December 15, 2005 | 13,047 | 5,016 | 5,016 | (50 | ) | 4.80% | |||||||||
January 9, 2006 | 2,500 | 1,446 | 1,446 | (18 | ) | 4.81% | |||||||||
$ | 45,439 | $ | 15,479 | $ | 15,479 | $ | (79 | ) | |||||||
At September 30, 2008, the minimum repayment schedule under the accounts receivable funding program is as follows (in thousands):
Three months ending December 31, 2008 | $ | 1,680 | |||||||
Year ending December 31, 2009 | 5,604 | ||||||||
2010 | 1,990 | ||||||||
2011 | 415 | ||||||||
$ | 9,689 | ||||||||
At September 30, 2008, there are specific leases that are identified as collateral under the Program with expected future lease receivables of approximately $10.0 million at their discounted present value.
The weighted average interest rate on the Program was 3.58% and 6.35% during the respective three months ended September 30, 2008 and 2007; and 4.11% and 6.11% during the respective nine months ended September 30, 2008 and 2007.
The Program discussed above includes certain financial and non-financial covenants applicable to each borrower. The Company and affiliates were in compliance with all covenants as of September 30, 2008.
9. Commitments:
As of September 30, 2008, the Company had outstanding commitments to purchase or finance lease equipment of approximately $4.3 million which may be funded during 2008. This amount represents contract awards which may be cancelled by the prospective lessee or may not be accepted by the Company. There were no cancellations subsequent to September 30, 2008.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
10. Guarantees:
The Company enters into contracts that contain a variety of indemnifications. The Company’s maximum exposure under these arrangements is unknown. However, the Company has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
In the normal course of business, the Company enters into contracts of various types, including lease contracts, contracts for the sale or purchase of lease assets, management contracts, loan agreements, credit lines and other debt facilities. It is prevalent industry practice for most contracts of any significant value to include provisions that each of the contracting parties—in addition to assuming liability for breaches of the representations, warranties, and covenants that are part of the underlying contractual obligations—also assume an obligation to indemnify and hold the other contracting party harmless for such breaches, for harm caused by such party’s gross negligence and willful misconduct, including, in certain instances, certain costs and expenses arising from the contract. The Managing Member has substantial experience in managing similar leasing programs subject to similar contractual commitments in similar transactions, and the losses and claims arising from these commitments have been insignificant, if any. Generally, to the extent these contracts are performed in the ordinary course of business under the reasonable business judgment of the Managing Member, no liability will arise as a result of these provisions. The Managing Member has no reason to believe that the facts and circumstances relating to the Company’s contractual commitments differ from those it has entered into on behalf of the prior programs it has managed. The Managing Member knows of no facts or circumstances that would make the Company’s contractual commitments outside standard mutual covenants applicable to commercial transactions between businesses. Accordingly, the Company believes that these indemnification obligations are made in the ordinary course of business as part of standard commercial and industry practice, and that any potential liability under the Company’s similar commitments is remote. Should any such indemnification obligation become payable, the Company would separately record and/or disclose such liability in accordance with GAAP.
11. Member’s capital:
As of September 30, 2008, 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).
As defined in the Operating Agreement, the Company’s net income, net losses, and distributions, are to be allocated 92.5% to the Other Members and 7.5% to AFS. In accordance with the terms of the Operating Agreement, additional allocations of income were made to AFS in 2008 and 2007. The amounts allocated were determined to bring AFS’s ending capital account balance to zero at the end of the period.
Distributions to the Other Members were as follows (in thousands, except as to Units and per Unit data):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||
Distributions declared | $ | 2,712 | $ | 2,712 | $ | 8,137 | $ | 8,137 | ||||
Weighted average number of Units outstanding | 12,055,016 | 12,055,016 | 12,055,016 | 12,055,016 | ||||||||
Weighted average distributions per Unit | $ | 0.22 | $ | 0.22 | $ | 0.67 | $ | 0.67 | ||||
12. Fair value of financial instruments:
On January 1, 2008, the Company adopted SFAS 157, “Fair Value Measurements”. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure requirements for fair value measurements. The Company deferred the application of SFAS 157 for nonfinancial assets and nonfinancial liabilities as provided for by FSP No. 157-2, “Effective Date of FASB Statement No. 157”. Issued in February 2008, FSP No. 157-2 defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for nonfinancial assets and nonfinancial liabilities, except items that are recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually).
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
12. Fair value of financial instruments (continued):
SFAS 157 defines the term “fair value” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.
SFAS 157 established a fair value hierarchy that prioritizes the inputs used to measure fair value into three broad levels, considering the relative reliability of the inputs. The fair value hierarchy assigns the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of an input to the valuation that is significant to the fair value measurement.
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.
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.
Estimation of Fair Value
Fair value is based on quoted prices in an active market when available. In certain cases where a quoted price for an asset or liability is not available, the Company estimates the fair value based on various factors which include original cost, the type and risk characteristics of the asset or liability, expected cash flow and market volatilities. Such estimates of fair value cannot be determined with precision and may not be realized in an actual sale or transfer of the asset or liability in a current market exchange.
The following is a description of the valuation methodologies used for certain assets and liabilities and the general classification of these instruments pursuant to the fair value hierarchy.
Purchased securities
The Company utilizes quoted market prices to value its investments in publicly traded borrowers, and uses the borrowers’ subsequent private placements, on a per share basis, to estimate the fair value of its investments in non-publicly traded borrowers. Such determination of fair value may be adjusted pursuant to other factors which include, but are not limited to, available financial information, the terms and conditions of subsequent placements, the issuer’s ability to meet its current obligations and indications of the issuer’s subsequent ability to raise capital.
Investments in shares of borrowers who have subsequently completed a public offering and are actively traded are classified as Level 1 instruments. Securities where fair value is based on subsequent private placements generally involve unobservable inputs that reflect management’s own assumptions and are classified as Level 3 instruments. At September 30, 2008, the carrying value of purchased securities approximates fair value.
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ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
12. Fair value of financial instruments (continued):
Warrants
Warrants owned by the Company are not registered for public sale. The fair values of the warrants are determined based either upon the Black-Scholes pricing model for warrants with borrowers who are in S-1 registration with industry recognized investment bankers, or the price per share of subsequent private placements. Such determination of fair value may be adjusted pursuant to other factors which include, but are not limited to, available financial information, the terms and conditions of subsequent placements, the issuer’s ability to meet its current obligations and indications of the issuer’s subsequent ability to raise capital.
Warrants on shares of borrowers who are in S-1 registration are generally classified as Level 2 instruments. Warrants where fair value is based on subsequent private placements generally involve unobservable inputs that reflect management’s own assumptions and are classified as Level 3 instruments. At September 30, 2008 and December 31, 2007, the Managing Member estimated the fair value of the warrants to be nominal in amount.
Interest rate swaps
The fair value of interest rate swaps is the estimated amount that the Company would receive or pay to terminate the swap agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. Significant market inputs can be validated through external sources, including brokers, market transactions and third-party pricing services. These instruments fall within Level 2. At September 30, 2008 and December 31, 2007, the value of the Company’s interest rate swap contracts were $95 thousand and $79 thousand, respectively, and were recorded as liabilities on the Company’s balance sheet.
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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 market 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”) 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 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 (“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 has 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. Throughout the Reinvestment Period, which ends December 31, 2009, the Company anticipates continued reinvestment of cash flow in excess of minimum distributions and other obligations.
The Company may continue until December 31, 2020. Periodic distributions are paid at the discretion of the Managing Member.
Capital Resources and Liquidity
The liquidity of the Company varies, 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 primary source of liquidity for the Company is its cash flow from leasing activities. 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 remarketing or selling the equipment as it comes off rental.
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 financial arrangement is for $75 million and expires in June 2009. Under the terms of the acquisition facility agreement, ATEL 12, LLC may only participate once its tangible net worth, as therein defined, equals or exceeds $15 million.
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Borrowings under the financing arrangement as of September 30, 2008, were as follows (in thousands):
Total available under the financing arrangement | $ | 75,000 | ||
Amount borrowed by the Company under the acquisition facility | (1,000 | ) | ||
Amounts borrowed by affiliated partnerships and Limited Liability Companies under the acquisition facility | (5,735 | ) | ||
Total remaining available under the acquisition and warehouse facilities | $ | 68,265 | ||
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 was 5% at September 30, 2008.
Draws on the acquisition facility by any affiliated partnership and/or limited liability company borrower are secured only by that borrower’s assets, including but not limited to equipment and related leases.
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). The Company and its affiliates pay an annual commitment fee to have access to this line of credit. There were no borrowings under the warehouse facility as of September 30, 2008.
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, 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 are added. As of September 30, 2008, the investment program participants were the Company, ATEL Capital Equipment Fund X, LLC, ATEL Capital Equipment Fund XI, LLC and ATEL 12, 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.
As of September 30, 2008, the full amount remaining available under the joint acquisition and warehouse facility is potentially available to the Company. However, as amounts are drawn on the facility by each of the Company and the affiliates who are borrowers under the facility, the amount available to all is reduced. As the warehousing facility is a short term bridge facility, any amounts borrowed under the warehousing facility, and then repaid by the affiliated borrowers (including the Company) upon allocation of an acquisition to a specific purchaser, become available under the warehouse facility for further short term borrowing.
The financing arrangement discussed above includes certain financial and non-financial covenants applicable to each borrower. The Company and affiliates were in compliance with all covenants as of September 30, 2008.
Throughout the reinvestment period, the Company anticipates reinvesting a portion of lease payments from assets owned, and/or payments received on notes receivable, in new leasing or financing 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.
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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.
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 and notes would not increase as such rates are generally fixed for the terms of the leases and notes without adjustment for inflation.
If interest rates increase significantly, the rates that the Company can obtain on future lease or financing transactions will be expected to increase as the cost of capital is a significant factor in the pricing of lease financing and investments in notes receivable. Leases and notes already in place, for the most part, would not be affected by changes in interest rates.
In August 2002, the Company established a $60 million receivables funding program (“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 Program, the lenders would receive liens against the Company’s assets. The Program terminated with respect to new borrowings in January 2006. Under the terms of the Program, the lender will be in 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. As more fully described in Note 8 to the financial statements, Receivables funding program, as set forth in Item 1, Financial Statements, the Company had $9.7 million outstanding under this Program as of September 30, 2008. The Program expires in August 2011.
As of September 30, 2008, the Company has entered into interest rate swap agreements to receive or pay interest on a notional principal of $9.7 million based on the difference between nominal rates ranging from 3.75% to 4.81% and variable rates that ranged from 2.46% to 4.95% under the Program. At September 30, 2008, the fair value of the interest rate swaps totaled $95 thousand and was recorded as a liability on the balance sheet. Net changes in unrealized gain/loss are included in the statement of operations in other income or expense, net.
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. At September 30, 2008, the Company had $5.4 million of outstanding non-recourse debt consisting of notes payable to financial institutions.
AFS expects that aggregate borrowings in the future will approximate 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 September 30, 2008, cash balances consisted of working capital and amounts reserved for distributions to be paid in July 2008.
As of September 30, 2008, the Company had outstanding commitments to purchase or finance lease equipment of approximately $4.3 million which may be funded during 2008. This amount represents contract awards which may be cancelled by the prospective lessee or may not be accepted by the Company. There were no cancellations subsequent to September 30, 2008.
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The Company commenced periodic distributions, based on cash flows from operations, beginning with the month of February 2001. Additional distributions have been consistently made through September 2008.
Cash Flows
The three months ended September 30, 2008 versus the three months ended September 30, 2007
The Company’s primary source of cash from operations has been rents from operating leases. Additionally, its cash flows are impacted by changes in certain operating assets and liabilities.
Cash provided by operating activities decreased by $747 thousand for the third quarter of 2008 as compared to the third quarter of 2007. The net decrease in cash flow was primarily attributable to a decline in operating results as adjusted for non-cash revenue and expense such as gains on sales of assets and depreciation expense, increased levels of accounts receivables and a decline in unearned operating lease income.
The decrease in operating results, as adjusted for non-cash items, reduced cash flow by $456 thousand and was mainly due to a 15% decline in operating lease revenue offset, in part, by decreases interest expense on the Company’s outstanding debt and costs reimbursed to AFS. The increase in accounts receivable reduced cash flow by $181 thousand and was primarily due to the quarter over quarter increase in revenues derived from the increased utilization of the Company’s marine vessels.
Furthermore, the decline in unearned lease income reduced cash flow by $77 thousand and was mainly due to higher amounts of unearned rents realized during the third quarter of 2008 as compared to the prior year period.
Investing Activities
Cash provided by investing activities during the third quarter of 2008 decreased by $1.9 million, or 55%, as compared to the third quarter of 2007. The net decline in cash flow was primarily due to decreases in proceeds from sales of lease assets and payments received on notes receivable offset, in part, by a net increase in payments received on direct financing leases.
Net proceeds from sales of lease assets decreased by $1.9 million as a result of a weak market demand for certain used equipment available for sale during the third quarter of 2008 as compared to the prior year period; and payments received on notes receivable decreased by $91 thousand mainly due to run-off of the Company’s investment in notes receivable since September 30, 2007.
Partially offsetting the above mentioned decreases in cash flow was an increase of $125 thousand attributable to a decline in cash used to acquire direct financing lease assets. The decrease in cash used to acquire assets was a result of the continued decline in acquisition phase activity.
Financing Activities
Net cash used in financing activities during the third quarter of 2008 decreased by $1.6 million, or 23%, as compared to the third quarter of 2007. The net decrease in cash used (increase in cash flows) was due to a period over period reduction in net repayments made on borrowings which have declined by approximately $13.9 million since September 30, 2007.
The nine months ended September 30, 2008 versus the nine months ended September 30, 2007
Operating Activities
Cash provided by operating activities decreased by $1.4 million for the first nine months of 2008 as compared to the first nine months of 2007. The net decrease in cash flow was primarily attributable to a decline operating results as adjusted for non-cash revenue and expense such as gains on sales of assets and depreciation expense, and an increase in payments made against accounts payable and accrued liabilities offset, in part, by an increase in collections of accounts receivable.
The decrease in operating results, as adjusted for non-cash items, reduced cash flow by $1.5 million and was mainly due to a 21% decline in operating lease revenue offset, in part, by decreases in interest expense, professional fees and outside services expense, and costs reimbursed to AFS.
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The net increase in payments made against accounts payable and accrued liabilities (decrease in cash flow) further reduced cash flow by $239 thousand and was primarily due to a refund of a lessee overpayment and higher sales tax payments during the second quarter of 2008. The increased payments made were offset, in part, by the year-to-date increase in liabilities resulting from the incremental change in unidentified cash receipts and duplicate customer payments.
Partially offsetting the aforementioned decreases in cash flow was an increase of $448 thousand resulting from increased collections of accounts receivable. The period over period increase in collections of accounts receivable was primarily due to first quarter 2008 collection of approximately $534 thousand related to 2007 billings. In prior years, such invoices had been settled during the same fiscal quarter of their origination.
Investing Activities
Cash provided by investing activities during the first nine months of 2008 decreased by $3.0 million, or 42%, as compared to the first nine months of 2007. The net decline in cash flow was primarily due to decreases in proceeds from sales of lease assets and payments received on notes receivable offset, in part, by an increase in payments received on direct financing leases and a reduction in cash used to purchase lease assets.
Net proceeds from sales of lease assets decreased by $3.1 million as a result of a weak market demand for certain used equipment available for sale during the first nine months of 2008; and payments received on notes receivable decreased by $303 thousand mainly due to run-off of the Company’s investment in notes receivable since September 30, 2007.
Partially offsetting the above mentioned decreases in cash flow were increases of $207 thousand and $203 thousand related to a reduction in purchases of lease assets and a rise in payments received on direct financing leases, respectively. The decrease in lease asset purchases was a result of the continued decline in acquisition phase activity; and the increase in payments received on direct financing leases was primarily due to certain operating leases that terminated and were renewed as direct finance leases during 2008.
Financing Activities
Net cash used in financing activities during the first nine months 2008 decreased by $820 thousand, or 5%, as compared to the first nine months of 2007. The net decrease in cash used (increase in cash flows) was due to a period over period decline in net repayments made on borrowings which have declined by approximately $13.9 million since September 30, 2007.
Results of Operations
The three months ended September 30, 2008 versus the three months ended September 30, 2007
The Company had net income of $842 thousand and $719 thousand for the three months ended September 30, 2008 and 2007, respectively. Results for the third quarter of 2008 reflect a decrease in total revenues offset, in part, by a decline in total operating expenses.
Revenues
Total revenue for the third quarter of 2008 decreased by $1.7 million, or 25%, as compared to the third quarter of 2007. The net decrease was largely due to reductions in operating lease revenues and gains on sales of lease assets totaling $781 thousand and $894 thousand, respectively.
The decrease in operating lease revenue was attributable to run-off of the lease portfolio and subsequent sales of lease assets. The decline in gains on sale of assets was primarily attributable to weak market demand for certain used equipment available for sale during the third quarter of 2008 when compared to prior year period.
Expenses
Total expenses for the third quarter of 2008 decreased by $1.6 million, or 27%, as compared to the third quarter of 2007. The net decline in expenses was primarily due to decreases in depreciation expense, interest expense, costs reimbursements to AFS, professional fees and outside services expense, asset management fees to AFS and the provision for doubtful accounts offset, in part, by an increase in marine vessel maintenance and operating costs.
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Depreciation expense decreased by $1.1 million primarily as a result of continued run-off of the Company’s lease portfolio as well as lease asset sales since September 30, 2007. Similarly, interest expense declined by $217 thousand mainly due to the continued decline in the Company’s outstanding debt since September 30, 2007. Costs reimbursed to AFS decreased by $154 thousand due to the refinement of cost allocation methodologies employed by the Managing Member which resulted in lower costs allocated to the Fund. The modification of cost allocation methodologies is intended to ensure that Fund management costs are allocated appropriately. This process is continuous and is evaluated, analyzed and modified as necessary.
In addition, professional fees and outside services expense decreased by a combined $99 thousand as a result of the elimination of costs associated with the audit and restatement of the Company’s prior year financial statements, which were completed by the third quarter of 2007. Asset management fees decreased by $59 thousand primarily due to the period over period decline in assets managed by the Managing Member; and the provision for doubtful accounts also decreased by $59 thousand as a result of an adjustment made to reduce the reserve as payments were received on previously reserved delinquent invoices.
Partially offsetting the aforementioned decreases in expense was a $197 thousand increase in marine vessel maintenance and operating costs mainly due to increased utilization of the Company’s marine vessels.
Other
The Company had other income, net totaling $41 thousand during the third quarter of 2008 compared to other expense, net totaling $183 thousand during the second quarter of 2007, a $224 thousand increase. The increase was largely attributable to favorable fair value adjustments on the Company’s interest rate swap contracts resulting from an increase in interest rates during the third quarter of 2008 as compared to the prior year period.
The nine months ended September 30, 2008 versus the nine months ended September 30, 2007
The Company had net income of $1.9 million and $1.2 million for the first nine months of 2008 and 2007, respectively. Results for the first nine months of 2008 reflect a decrease in total operating expenses offset, in part, by a decrease in total revenues.
Revenues
Total revenue for the first nine months of 2008 decreased by $4.7 million, or 24%, as compared to the first nine months of 2007. The net decrease was largely due to a $3.5 million decline in operating lease revenue and a $1.5 million decrease in gains on sales of lease assets offset, in part, by a $309 thousand increase in revenues from direct financing leases.
The decrease in operating lease revenue was attributable to run-off of the lease portfolio and subsequent sales of lease assets. The decline in gains on sale of assets was primarily attributable to weak market demand for certain used equipment available for sale during the first nine months of 2008.
The increase in direct financing lease revenue was primarily due to certain operating leases that terminated and were renewed as direct finance leases during 2008.
Expenses
Total expenses for the first nine months of 2008 decreased by $5.2 million, or 28%, as compared to the first nine months of 2007. The net decline in expenses was primarily due to decreases in depreciation expense, professional fees and outside services expense, interest expense, costs reimbursements to AFS, asset management fees paid to AFS, provision for doubtful accounts and amortization of initial direct costs.
Depreciation expense decreased by $2.9 million primarily as a result of continued run-off of the Company’s lease portfolio as well as lease asset sales since September 30, 2007. Professional fees and outside services expense declined by a combined $724 thousand as a result of the elimination of costs associated with the audit and restatement of the Company’s prior year financial statements, which were completed by the third quarter of 2007. Interest expense decreased by $639 thousand due to the continued declined in the Company’s outstanding debt.
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Further, costs reimbursed to AFS decreased by $469 thousand due to the refinement of cost allocation methodologies employed by the Managing Member which resulted in lower costs allocated to the Fund. The modification of cost allocation methodologies is intended to ensure that Fund management costs are allocated appropriately. Asset management fees decreased by $179 thousand primarily as a result of the period over period decline in assets managed by the Managing Member. The provision for doubtful accounts decreased by $167 thousand as a result of an adjustment made to reduce the reserve as payments were received on previously reserved delinquent invoices; and amortization of initial direct costs declined by $112 thousand primarily due to the reduction in initial direct costs associated with the continued decline in the Company’s acquisition phase activity.
Other
The Company had other income, net totaling $19 thousand during the first nine months of 2008 compared to other expense, net totaling $195 thousand during the first nine months of 2007, a $214 thousand increase. The increase was mainly due to favorable fair value adjustments on the Company’s interest rate swap contracts resulting from higher interest rates during the first nine months 2008 as compared to the prior year period.
Item 4. | 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 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, the Chief Executive Officer and Executive Vice President and Chief Financial Officer and Chief Operating Officer 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, who 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 September 30, 2008 that has materially affected, or is 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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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. | Submission Of Matters To A Vote Of Security Holders. |
None.
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 |
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
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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: November 11, 2008
ATEL CAPITAL EQUIPMENT FUND IX, LLC | ||||||
(Registrant) | ||||||
By: | ATEL Financial Services, LLC | |||||
Managing Member of Registrant | ||||||
By: | /s/ Dean L. Cash | |||||
Dean L. Cash | ||||||
President and Chief Executive Officer of 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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