 | | |
| x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. | |
| For the year ended December 31, 2017 | ||
| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. | |
| For the transition period from to |
(Exact name of registrant as specified in its charter)
| | |
| California | 20-1357935 | |
| (State or other jurisdiction of incorporation or organization) | (I. R. S. Employer Identification No.) |
(Address of principal executive offices)
Registrant’s telephone number, including area code:(415) 989-8800
Securities registered pursuant to section 12(b) of the Act:None
Securities registered pursuant to section 12(g) of the Act:Limited Liability Company Units
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yeso Nox
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act of 1934.Yeso Nox
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yesx Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yesx Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | |||
| Large accelerated filero | Accelerated filero | Non-accelerated filero | Smaller reporting companyx |
(Do not check if a smaller reporting company)
Emerging growth companyo
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yeso Nox
State the aggregate market value of voting stock held by non-affiliates of the registrant: Not applicable
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.) Not applicable
The number of Limited Liability Company Units outstanding as of February 28, 2018 was 5,209,307.
None.
ATEL Capital Equipment Fund XI, LLC (the “Company” or the “Fund”) was formed under the laws of the State of California on June 25, 2004. The Company was formed for the purpose of acquiring equipment to engage in equipment leasing, lending and sales activities. Also, from time to time, the Company would purchase securities of its borrowers or receive warrants to purchase securities in connection with its lending arrangements. The Managing Member or Manager of the Company is ATEL Financial Services, LLC (“AFS”), a California limited liability company. The Company may continue until December 31, 2025. Each Member’s personal liability for obligations of the Company generally will be limited to the amount of their respective contributions and rights to undistributed profits and assets of the Company.
The Company conducted a public offering of 15,000,000 Limited Liability Company Units (“Units”), at a price of $10 per Unit. On May 31, 2005, subscriptions for the minimum number of Units (120,000, representing $1.2 million) had been received and AFS requested that the subscriptions be released to the Company. On that date, the Company commenced operations in its primary business (acquiring equipment to engage in equipment leasing, lending and sales activities). As of July 13, 2005, the Company had received subscriptions for 958,274 Units ($9.6 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. The Company terminated sales of Units effective April 30, 2006. As of December 31, 2017, cumulative gross contributions, less rescissions and repurchases (net of distributions paid and allocated syndication costs, as applicable), totaling $52.2 million (inclusive of the $500 initial Member’s capital investment) have been received. As of the same date, 5,209,307 Units were issued and outstanding.
The Company’s principal objectives have been to invest in a diversified portfolio of equipment that (i) preserves, protects and returns the Company’s invested capital; (ii) generates regular distributions to the Members of cash from operations and cash from sales or refinancing, with any balance remaining after certain minimum distributions to be used to purchase additional equipment during the reinvestment period (“Reinvestment Period”) (defined as six full years following the year the offering was terminated), which ended December 31, 2012, and (iii) provides additional distributions following the Reinvestment Period and until all equipment has been sold. The Company is governed by its Limited Liability Company Operating Agreement (“Operating Agreement”), as amended.
On January 1, 2013, the Company commenced liquidation phase activities pursuant to the guidelines of the Operating Agreement. Prior thereto, the Company was in its acquisition phase and was making distributions on a monthly and quarterly basis. Periodic distributions commenced in June 2005.
Pursuant to the terms of the Operating Agreement, AFS and its affiliates receive compensation for services rendered and reimbursements for costs incurred on behalf of the Company (See Note 5 to the financial statements included in Item 8 of this report). The Company is required to maintain reasonable cash reserves for working capital, the repurchase of Units and contingencies. The repurchase of Units is solely at the discretion of AFS.
The Company acquired various types of new and used equipment subject to leases and to make loans secured by equipment acquired by its borrowers. The Company’s investment objective was to acquire investments primarily in low-technology, low-obsolescence equipment such as materials handling equipment, manufacturing equipment, mining equipment, and transportation equipment. A portion of the portfolio included some more technology-dependent equipment such as certain types of communications equipment, medical equipment, manufacturing equipment and office equipment.
The Company only purchased equipment under pre-existing leases or for which a lease would be entered into concurrently at the time of the purchase. Through December 31, 2017, the Company purchased equipment with a total acquisition price of $67.5 million. The Company had also loaned $14.5 million for notes receivable secured by various assets.
The Company’s objective was to lease a minimum of 75% of the equipment (by cost), as of the date of the final commitment of its proceeds from the sale of Units, to lessees that the Manager deemed to be high quality corporate credits, of which at least half of the high quality corporate credits satisfying the 75% minimum requirement would have either an average credit rating by Moody’s Investors Service, Inc. of “Baa” or better, or the credit equivalent as
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determined by the Manager, with the average rating weighted to account for the original equipment cost for each item leased; and the balance would be public and private corporations with substantial revenues and histories of profitable operations, as well as established hospitals with histories of profitability or municipalities. The remaining 25% of the initial equipment portfolio could include assets financed for companies which, although deemed creditworthy by the Manager, would not satisfy the specific credit criteria for the portfolio described above. Included in this 25% of the portfolio may be one or more growth capital financing investments. No more than 20% of the initial portfolio, by cost, would consist of these growth capital financing investments.
The equipment leasing industry is highly competitive. Equipment manufacturers, corporations, partnerships and others offer users an alternative to the purchase of most types of equipment with payment terms that vary widely depending on the lease term, type of equipment and creditworthiness of the lessee. The ability of the Company to keep the equipment leased and/or operating and the terms of the acquisitions, leases and dispositions of equipment depends on various factors (many of which are not in the control of AFS or the Company), such as general economic conditions, including the effects of inflation or recession, and fluctuations in supply and demand for various types of equipment resulting from, among other things, technological and economic obsolescence.
The business of the Company is not seasonal.
The Company has no full time employees. AFS’ employees and affiliates provide the services the Company requires to effectively operate. The cost of these services is reimbursed by the Company to AFS and affiliates per the Operating Agreement.
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The Company acquired a diversified portfolio of equipment. The equipment was leased to lessees in various industries. The following tables set forth the types of equipment acquired by the Company through December 31, 2017 and the industries to which the assets have been leased (dollars in thousands):
| | | ||||||
| Asset Types | Purchase Price Excluding Acquisition Fees | Percentage of Total Acquisitions | ||||||
| Materials handling | $ | 20,589 | 30.48 | % | ||||
| Construction | 12,649 | 18.73 | % | |||||
| Transportation, other | 12,290 | 18.19 | % | |||||
| Transportation, rail | 11,924 | 17.65 | % | |||||
| Mining | 2,893 | 4.28 | % | |||||
| Logging and lumber | 2,001 | 2.96 | % | |||||
| Aviation | 1,658 | 2.45 | % | |||||
| Marine vessels | 1,415 | 2.09 | % | |||||
| Manufacturing | 1,172 | 1.74 | % | |||||
| Other | 958 | 1.43 | % | |||||
| $ | 67,549 | 100.00 | % | |||||
| | | ||||||
| Industry Types | Purchase Price Excluding Acquisition Fees | Percentage of Total Acquisitions | ||||||
| Transportation, rail | $ | 11,924 | 17.65 | % | ||||
| Transportation services | 11,460 | 16.97 | % | |||||
| Manufacturing | 9,390 | 13.90 | % | |||||
| Paper products | 8,886 | 13.15 | % | |||||
| Mining | 8,610 | 12.75 | % | |||||
| Health services | 4,967 | 7.35 | % | |||||
| Food products | 3,795 | 5.62 | % | |||||
| Natural gas | 2,893 | 4.28 | % | |||||
| Chemical products | 2,139 | 3.17 | % | |||||
| Wood/Lumber products | 1,677 | 2.48 | % | |||||
| Other | 1,808 | 2.68 | % | |||||
| $ | 67,549 | 100.00 | % | |||||
From inception to December 31, 2017, the Company has disposed of certain leased assets as set forth below (in thousands):
| | | | |||||||||
| Asset Types | Original Equipment Cost Excluding Acquisition Fees | Sale Price | Gross Rents | |||||||||
| Materials handling | $ | 20,202 | $ | 3,768 | $ | 22,693 | ||||||
| Construction | 12,662 | 9,029 | 7,738 | |||||||||
| Transportation, other | 11,122 | 2,079 | 11,947 | |||||||||
| Transportation, rail | 3,910 | 1,120 | 4,308 | |||||||||
| Mining | 2,893 | 1,908 | 2,517 | |||||||||
| Logging and lumber | 2,001 | 739 | 1,805 | |||||||||
| Manufacturing | 953 | 246 | 1,384 | |||||||||
| Other | 723 | 106 | 1,134 | |||||||||
| $ | 54,466 | $ | 18,995 | $ | 53,526 | |||||||
For further information regarding the Company’s equipment lease portfolio as of December 31, 2017, see Note 4 to the financial statements, Investments in equipment and leases, net, as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
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The Company does not own or lease any real property, plant or material physical properties other than the equipment held for lease as set forth in Item 1, Business.
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.
Not applicable.
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| Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
There are certain material conditions and restrictions on the transfer of Units imposed by the terms of the Limited Liability Company Operating Agreement. Consequently, there is no public market for Units and it is not anticipated that a public market for Units will develop. In the absence of a public market for the Units, there is no currently ascertainable fair market value for the Units.
As of December 31, 2017, a total of 1,215 investors were Unitholders of record in the Company.
The Financial Industry Regulatory Authority (“FINRA”), in conjunction with the Securities and Exchange Commission (“SEC”) updated rules for the presentation of account statement values relative to pricing of Direct Placement Program (“DPP”) shares. Under FINRA Notice 15-02 (the “Notice”) the SEC approved amendments to National Association of Securities Dealers (“NASD”) Rule 2340, Customer Account Statements, and FINRA rule 2310, which address a FINRA member firm’s participation in a public offering of a DPP. In summary, the amendments require a FINRA member firm to include in the account statements for customers holding DPP securities a per share value for the DPP. This per share value must be prepared by, or with the material assistance or confirmation of, a third-party valuation expert or service. The results of this valuation must be disclosed in the issuer’s reports filed under the Securities Exchange Act of 1934. A valuation in compliance with the Notice must be undertaken and published on at least an annual basis.
The effective date of the Notice was April 11, 2016.
Broker dealers are required to provide a per share estimated value on the customer account statements for each non-listed DPP security held by their customers. Such estimated value must have been developed in a manner reasonably designed to provide a reliable value. Two valuation methodologies have been defined by FINRA, which by such designation are presumed to be reliable.
The amendments to NASD Rule 2340(c)(1)(A) require “net investment” to be based on the “amount available for investment” percentage disclosed in the “Estimated Use of Proceeds” section of the issuer’s offering prospectus. In essence, such value is equal to the offering price less selling commissions, other offering and organization expenses, and capital reserves. This method may be used for up to 150 days following the second anniversary of a Fund breaking escrow.
As amended, Rule NASD 2340(c)(1)(B) requires that the per share estimated value disclosed in an issuer’s most recent periodic or current report be based upon an appraisal of the assets and liabilities of the program by, or with the material assistance or confirmation of, a third-party valuation expert or service, in conformity with standard industry valuation practice as it relates to both the aforementioned assets and liabilities. No later than 150 days following the second anniversary of the issuer’s break of escrow for its minimum offering, this methodology must be used to establish the required estimated values.
The per Unit valuation estimate forATEL CAPITAL EQUIPMENT FUND XI, LLChas been conducted in compliance with the mandates of the Notice.
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ForATEL CAPITAL EQUIPMENT FUND XI, LLC, its estimated value per Unit reflects the Manager’s estimate of current portfolio valuation of all assets and liabilities of the Fund, calculated on a per Unit basis, and as such, does not represent a market value for the Units and may not accurately reflect the value of the Fund Units to the Unit holders if held over time to Fund maturity.
In connection with any estimate of per Unit value, Unit holders and all parties are reminded that no public market for the Units exists. Additionally, in order to preserve the Fund’s pass-through status for federal income tax purposes, the Fund will not permit a secondary market or the substantial equivalent of a secondary market for the Units. In the absence of a public market for the Units, there is no currently ascertainable fair market value for the Units.
The estimate of per Unit value does not take into account any extraordinary potential future business activity of the Fund; rather the valuation represents a snapshot view of the Fund’s portfolio as of the valuation date. In addition, the Fund does not include any analysis of the distributions that have already been paid by the Fund, nor the anticipated returns to Unit holder over the full course of the Fund life cycle, which will be dependent on many factors.
The estimated value per Unit has been calculated using the “Appraised Value Methodology” described above under “Methodologies” above, as of December 31, 2017.
ATEL CAPITAL EQUIPMENT FUND XI, LLC, will satisfy the disclosure requirements for providing estimated per Unit values pursuant to the Notice as follows:
For these disclosures, subsequent to the Fund’s initial compliance with FINRA 15-02, annual disclosures of estimated per Unit values, through the termination of the Fund, will be accomplished and included on an annual basis in a document filed with the Securities and Exchange Commission available to the public.
| A. | Fund Assets and Liabilities (other than as specifically identified below): The estimated values for non-interest bearing items such as current assets and liabilities are assumed to equal their reported GAAP balances as an appropriate approximation of their fair values. Debt (interest bearing) is assumed to equal the fair values of the debt as disclosed in the footnotes of the financial statements. |
| B. | Investments in Leases (net of fees and expenses): The estimated values for Investments in Leases are based on calculating the present value of the projected future cash flows. Projected future cash flows include both the remaining contractual lease payments, plus assumptions on lease renewals and sale value of the residuals. Projected future cash flows are net of projected future fees and expenses including: |
| • | management fees applicable for the Fund (4.00% of revenue) |
| • | carried interest applicable for the Fund (7.50% of distributions) |
| • | operating expenses which are assumed to be 3% of original equipment costs for the Fund |
Projected future cash flows have been discounted back to present value at discount rates based on like-term U.S. Treasury yields (as of the valuation date) plus a 400 basis point spread, to account for the credit risk differentials between the instrument being valued and U.S. Treasury security yields.
Residual values assumptions used in the cash flow projections are as follows:
For On-Lease and Month-to-Month Lease: Considers realized residual as a percent of book residual of 165.9%, based on ATEL’s historical track record as of December 31, 2017.
For Off-Lease: A fair value of off-lease equipment is based on estimates from ATEL’s seasoned Asset Management Group.
Special Situation Leases: The valuation of certain leases has been performed outside of the above noted protocol based upon specific lease assumptions different than the macro assumptions above, due to the specific situations of those leases.
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A fair market value of off-lease equipment is based upon estimates from ATEL’s seasoned Asset Management Group.
| C. | Investments in Notes Receivable: The estimated values for Investments in Notes Receivable are assumed to approximate the reported GAAP balances. |
| D. | Investments in Securities: The estimated values for Investments in Securities have been based on the estimated net book value as of the valuation date (with impairment adjustments), plus any unrealized gain on equity. The unrealized gain on equity is based on either: a) the most recent round of financing, b) the most recent 409A valuation provided by the underlying companies of the warrants, or c) the Manager’s estimate of the company valuations based on all available information, including company financials, company valuation reports, public press releases, and other sources. |
| E. | Warrants Outstanding: The estimated values for Warrants Outstanding considers the reported GAAP balances to be an appropriate approximation of their fair values. |
| F. | Accrued distributions: Accrued distributions, which are payable to the Unit holders have been removed from the balance sheet liability section because they are not a liability to a third party. |
The Manager’s estimated per Unit value of ATEL CAPITAL EQUIPMENT FUND XI, LLC at December 31, 2017 as determined, and derived under the guidelines of the Appraised Value Methodology, and pursuant to the above specific enumerated component valuation methodologies and calculations, equals $1.06. An independent national public accounting firm with valuation expertise was retained to examine, attest and confirm ATEL CAPITAL EQUIPMENT FUND XI, LLC’s per Unit valuation and its component methodologies and calculation as it relates to compliance with the regulatory mandate defined in the Notice. In this regard, they examined the components of the valuation methodologies and determined them to be reasonable and within industry standards. Other component attributes, including the bases and related key assumptions of the calculation were tested for their completeness, underlying documentation support and mathematical accuracy. Upon completion of their efforts, their attestation report confirmed that the per unit valuation of ATEL CAPITAL EQUIPMENT FUND XI, LLC, and the related notes, in all material respects, was based upon industry practice as described in the Manager’s valuation approach.
The foregoing Fund per Unit valuation has been performed solely for the purpose of providing an estimated value per Unit in accordance with a regulatory mandate, in order to provide the broker dealer and custodian community with a valuation on a reasonable and attested basis for use in assigning an estimation of a Unit holder’s account value. Any report or disclosure of such estimated per Unit valuation is to be accompanied by statements that the value does not represent an estimate of the amount a Unit holder would receive if the Unit holder were to seek to sell the Units, and that the Fund intends to liquidate its assets in the ordinary course of its business and over the Fund’s term. Further, each statement of the Fund’s estimated per Unit valuation is to be accompanied by a disclosure that there can be no assurance as to (1) when the Fund will be fully liquidated, (2) the amount the Fund may actually receive if and when the Fund seeks to liquidate its assets, (3) the amount of lease or loan payments the Fund will actually receive over the remaining term, (4) the amount of asset disposition proceeds the Fund will actually receive over the remaining term, and (5) the amounts that may actually be received in distributions by Unit holders over the course of the remaining term.
The Unitholders of record are entitled to certain distributions as provided under the Operating Agreement.
AFS has sole discretion in determining the amount of distributions; provided, however, that AFS will not cause the Company to reinvest operating revenues in equipment, but will distribute available cash, subject to payment of any obligations of the Company, (i) in an amount sufficient to allow an investor in a 31% federal income tax bracket to meet the federal and state income.
From July 2013 through 2015, the Company made semi-annual distributions consistent with a fund in liquidation. The Company made semi-annual distributions at a rate of $0.15 and $0.25 per Unit at June and December 2015, respectively. In addition, the Company made a special distribution at a rate of $0.30 per Unit in June 2015. The
7
Company made a distribution at a rate of $0.25 per Unit at June 2016. The Company made semi-annual distribution at a rate of $0.25 and $0.10 per Unit at January and June 2017, respectively. The rates and frequency of periodic distributions paid by the Fund during its liquidation phase are solely at the discretion of the Manager.
A smaller reporting company is not required to present selected financial data in accordance with item 301(c) of Regulation S-K.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Statements contained in this Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) and elsewhere in this Form 10-K, which are not historical facts, may be forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. In particular, economic recession and changes in general economic conditions, including fluctuations in demand for equipment, lease rates, and interest rates, may result in delays in investment and reinvestment, delays in leasing, re-leasing, and disposition of equipment, and reduced returns on invested capital. The Company’s performance is subject to risks relating to lessee defaults and the creditworthiness of its lessees. The Company’s performance is also subject to risks relating to the value of its equipment at the end of its leases, which may be affected by the condition of the equipment, technological obsolescence and the markets for new and used equipment at the end of lease terms. Investors are cautioned not to attribute undue certainty to these forward-looking statements, which speak only as of the date of this Form 10-K. We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events, other than as required by law.
ATEL Capital Equipment Fund XI, LLC (the “Company” or the “Fund”) is a California limited liability company that was formed in June 2004 for the purpose of engaging in the sale of limited liability company investment units and acquiring equipment to generate revenues from equipment leasing, lending and sales activities, primarily in the United States.
The 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 April 2006. During 2006, 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 reinvested cash flow in excess of certain amounts required to be distributed to the Other Members and/or utilized its credit facilities to acquire additional equipment.
The Company may continue until December 31, 2025. However, pursuant to the guidelines of the Limited Liability Company Operating Agreement (“Operating Agreement”), the Company commenced liquidation phase activities at the end of the Reinvestment Period on December 31, 2012. Periodic distributions are paid at the discretion of the Managing Member.
It is the Company’s objective to maintain a 100% utilization rate for all equipment. All equipment transactions were acquired subject to binding lease commitments. Initial lease terms were generally from 36 to 120 months, and as they expire, the Company attempts to re-lease or sell the equipment; as such, utilization rates may tend to decrease during the liquidation stage of the Company. All of the Company’s leased property was acquired in the years 2005 through 2011. The utilization percentage of existing assets under lease was 100% as of December 31, 2017 and 2016.
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.
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The Operating Agreement places an annual limit and a cumulative limit for cost reimbursements to AFS and/or affiliates. Any reimbursable costs incurred by AFS and/or affiliates during the year exceeding the annual and/or cumulative limits cannot be reimbursed in the current year, though such costs may be reimbursable in future years to the extent of the cumulative limit. As of December 31, 2017 and 2016, the Company has not exceeded the annual and/or cumulative limitations discussed above.
The Company had net income of $178 thousand and $794 thousand for the years ended December 31, 2017 and 2016, respectively. The net results for 2017 reflects a decrease in total revenues and an increase in total operating expenses when compared to prior year.
Total revenues for 2017 decreased by $587 thousand, or 35%, as compared to prior year. Such decrease was largely attributable to a decrease in the gain on sales of lease assets totaling $409 thousand, or 87%, primarily due to lower volume and a change in the mix of assets sold; a $204 thousand, or 17%, decrease in operating lease revenue, primarily a result of continued run-off of the portfolio of lease assets, offset in part, by a change in the fair value adjustment for warrants of $27 thousand, or 100%.
Total operating expenses for 2017 increased by $34 thousand, or 4%, as compared to prior year. Such net increase was primarily due to a $43 thousand, or 31%, increase in costs reimbursed to AFS and/or affiliates, due to higher costs allocated by the Manager, a result of refinement of cost allocation methodology; a $36 thousand, or 69%, increase in expenditures for outside services, indicative of additional efforts required to comply with certain regulatory requirements; a $33 thousand, or 100%, increase in the provision for credit losses, relating to loss estimate from certain customers; a $30 thousand, or 100%, increase in taxes on income and franchise fees, due to year over year differences in estimated tax liability related to prior year tax payment; an $18 thousand, or 14%, increase in professional fees, due to year over year differences in timing and related billing for professional audit services, offset in part by, an $84 thousand, or 22%, decrease in period over period depreciation expense, the result of continuing run-off of the portfolio of lease assets; and a $39 thousand, or 44%, decrease in asset management fees to Managing Member, directly attributable to a reduced level of assets under management and associated operating lease revenues.
At December 31, 2017 and 2016, the Company’s cash and cash equivalents totaled $586 thousand, and $1.9 million, respectively. The liquidity of the Company varies, increasing to the extent cash flows from leases and proceeds of asset sales exceed expenses and decreasing as distributions are made to the Members and to the extent expenses exceed cash flows from leases and proceeds from asset sales.
The Company currently believes it has adequate reserves available 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. The Managing Member envisions no such requirements for operating purposes.
The following table sets forth summary cash flow data (in thousands):
| | | ||||||
| 2017 | 2016 | |||||||
| Net cash provided by (used in): | ||||||||
| Operating activities | $ | 510 | $ | 836 | ||||
| Investing activities | 120 | 780 | ||||||
| Financing activities | (1,976 | ) | (2,816 | ) | ||||
| Net decrease in cash and cash equivalents | $ | (1,346 | ) | $ | (1,200 | ) | ||
9
During 2017 and 2016, the Company’s primary sources of liquidity were cash flows from its portfolio of operating lease contracts. In addition, the Company realized $120 thousand and $772 thousand of proceeds from sales or dispositions of equipment for the respective years ended December 31, 2017 and 2016.
During 2017 and 2016, cash was primarily used to pay distributions to both the Other Members and the Managing Member, totaling $2.0 million and $2.8 million, respectively. Additionally, during 2017 and 2016, cash was used to pay invoices related to management fees and expenses, and other payables.
The Company commenced periodic distributions, based on cash flows from operations, beginning with the month of June 2005. From July 2013 through 2015, the Company made semi-annual distributions consistent with a fund in liquidation. The rates and frequency of periodic distributions paid by the Fund during its liquidation phase are solely at the discretion of the Manager. See Item 5, Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, for additional information regarding the distributions.
At December 31, 2017, the Company had no commitments to purchase lease assets or to fund loans.
None.
See the Report of Independent Registered Public Accounting Firm, Financial Statements and Notes to Financial Statements attached hereto at pages 11 through 28.
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The Members
ATEL Capital Equipment Fund XI, LLC
We have audited the accompanying balance sheets of ATEL Capital Equipment Fund XI, LLC (the “Company”) as of December 31, 2017 and 2016, the related statements of income, changes in members’ capital, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Management of the Company’s Managing Member. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
| | |
| /s/ Moss Adams LLP | ||
| San Francisco, California March 26, 2018 |
We have served as the Company’s auditor since 2007.
11
DECEMBER 31, 2017 AND 2016
(In Thousands)
| | | ||||||
| 2017 | 2016 | |||||||
| ASSETS | ||||||||
| Cash and cash equivalents | $ | 586 | $ | 1,932 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $33 as of December 31, 2017 and $1 as of December 31, 2016 | 66 | 111 | ||||||
| Investment in securities | 11 | 22 | ||||||
| Investments in equipment and leases, net of accumulated depreciation of $10,716 as of December 31, 2017 and $11,215 as of December 31, 2016 | 1,633 | 2,004 | ||||||
| Prepaid expenses and other assets | 33 | 32 | ||||||
| Total assets | $ | 2,329 | $ | 4,101 | ||||
| LIABILITIES AND MEMBERS’ CAPITAL | ||||||||
| Accounts payable and accrued liabilities: | ||||||||
| Managing Member | $ | 16 | $ | 31 | ||||
| Affiliates | 36 | — | ||||||
| Other | 82 | 78 | ||||||
| Unearned operating lease income | 14 | 13 | ||||||
| Total liabilities | 148 | 122 | ||||||
| Commitments and contingencies | ||||||||
| Members’ capital: | ||||||||
| Managing Member | — | — | ||||||
| Other Members | 2,181 | 3,979 | ||||||
| Total Members’ capital | 2,181 | 3,979 | ||||||
| Total liabilities and Members’ capital | $ | 2,329 | $ | 4,101 | ||||
See accompanying notes.
12
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In Thousands Except for Units and Per Unit Data)
| | | ||||||
| 2017 | 2016 | |||||||
| Revenues: | ||||||||
| Leasing activities: | ||||||||
| Operating leases | $ | 1,001 | $ | 1,205 | ||||
| Direct financing leases | — | 2 | ||||||
| Gain on sales of lease assets | 61 | 470 | ||||||
| Unrealized loss on fair value adjustment for warrants | — | (27 | ) | |||||
| Other | 8 | 7 | ||||||
| Total revenues | 1,070 | 1,657 | ||||||
| Expenses: | ||||||||
| Depreciation of operating lease assets | 306 | 390 | ||||||
| Asset management fees to Managing Member | 49 | 88 | ||||||
| Cost reimbursements to Managing Member and/or affiliates | 183 | 140 | ||||||
| Provision for credit losses | 33 | — | ||||||
| Provision for losses on investment in securities | 11 | 16 | ||||||
| Amortization of initial direct costs | 6 | 8 | ||||||
| Professional fees | 143 | 125 | ||||||
| Outside services | 88 | 52 | ||||||
| Taxes on income and franchise fees | 30 | — | ||||||
| Printing and photocopying | 17 | 9 | ||||||
| Other | 29 | 33 | ||||||
| Total operating expenses | 895 | 861 | ||||||
| Other income (loss), net | 3 | (2 | ) | |||||
| Net income | $ | 178 | $ | 794 | ||||
| Net income: | ||||||||
| Managing Member | $ | 148 | $ | 105 | ||||
| Other Members | 30 | 689 | ||||||
| $ | 178 | $ | 794 | |||||
| Net income per Limited Liability Company Unit (Other Members) | $ | 0.01 | $ | 0.13 | ||||
| Weighted average number of Units outstanding | 5,209,307 | 5,209,307 | ||||||
See accompanying notes.
13
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In Thousands Except for Units and Per Unit Data)
| | | | | ||||||||||||
| Amount | ||||||||||||||||
| Units | Other Members | Managing Member | Total | |||||||||||||
| Balance December 31, 2015 | 5,209,307 | $ | 4,593 | $ | — | $ | 4,593 | |||||||||
| Distributions to Other Members ($0.25 per Unit) | — | (1,303 | ) | — | (1,303 | ) | ||||||||||
| Distributions to Managing Member | — | — | (105 | ) | (105 | ) | ||||||||||
| Net income | — | 689 | 105 | 794 | ||||||||||||
| Balance December 31, 2016 | 5,209,307 | 3,979 | — | 3,979 | ||||||||||||
| Distributions to Other Members ($0.35 per Unit) | — | (1,828 | ) | — | (1,828 | ) | ||||||||||
| Distributions to Managing Member | — | — | (148 | ) | (148 | ) | ||||||||||
| Net income | — | 30 | 148 | 178 | ||||||||||||
| Balance December 31, 2017 | 5,209,307 | $ | 2,181 | $ | — | $ | 2,181 | |||||||||
See accompanying notes.
14
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In Thousands)
| | | ||||||
| 2017 | 2016 | |||||||
| Operating activities: | ||||||||
| Net income | $ | 178 | $ | 794 | ||||
| Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
| Gain on sales of lease assets | (61 | ) | (470 | ) | ||||
| Depreciation of operating lease assets | 306 | 390 | ||||||
| Amortization of initial direct costs | 6 | 8 | ||||||
| Provision for credit losses | 33 | — | ||||||
| Provision for losses on investment in securities | 11 | 16 | ||||||
| Unrealized loss on fair value adjustment for warrants | — | 27 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 12 | 45 | ||||||
| Prepaid expenses and other assets | (1 | ) | (1 | ) | ||||
| Accounts payable, Managing Member | (15 | ) | 30 | |||||
| Accounts payable, affiliates | 36 | — | ||||||
| Accounts payable, other | 4 | (2 | ) | |||||
| Unearned operating lease income | 1 | (1 | ) | |||||
| Net cash provided by operating activities | 510 | 836 | ||||||
| Investing activities: | ||||||||
| Proceeds from sales of lease assets | 120 | 772 | ||||||
| Principal payments received on direct financing leases | — | 8 | ||||||
| Net cash provided by investing activities | 120 | 780 | ||||||
| Financing activities: | ||||||||
| Distributions to Other Members | (1,828 | ) | (2,606 | ) | ||||
| Distributions to Managing Member | (148 | ) | (210 | ) | ||||
| Net cash used in financing activities | (1,976 | ) | (2,816 | ) | ||||
| Net decrease in cash and cash equivalents | (1,346 | ) | (1,200 | ) | ||||
| Cash and cash equivalents at beginning of year | 1,932 | 3,132 | ||||||
| Cash and cash equivalents at end of year | $ | 586 | $ | 1,932 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the year for taxes | $ | 26 | $ | 21 | ||||
See accompanying notes.
15
ATEL Capital Equipment Fund XI, LLC (the “Company” or the “Fund”) was formed under the laws of the State of California on June 25, 2004. The Company was formed for the purpose of acquiring equipment to engage in equipment leasing, lending and sales activities. Also, from time to time, the Company would purchase securities of its borrowers or receive warrants to purchase securities in connection with its lending arrangements. The Managing Member or Manager of the Company is ATEL Financial Services, LLC (“AFS”), a California limited liability company. The Company may continue until December 31, 2025. Each Member’s personal liability for obligations of the Company generally will be limited to the amount of their respective contributions and rights to undistributed profits and assets of the Company.
The Company conducted a public offering of 15,000,000 Limited Liability Company Units (“Units”), at a price of $10 per Unit. On May 31, 2005, subscriptions for the minimum number of Units (120,000, representing $1.2 million) had been received and AFS requested that the subscriptions be released to the Company. On that date, the Company commenced operations in its primary business (acquiring equipment to engage in equipment leasing, lending and sales activities). As of July 13, 2005, the Company had received subscriptions for 958,274 Units ($9.6 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. The Company terminated sales of Units effective April 30, 2006. As of December 31, 2017, cumulative gross contributions, less rescissions and repurchases (net of distributions paid and allocated syndication costs, as applicable), totaling $52.2 million (inclusive of the $500 initial Member’s capital investment) have been received. As of the same date, 5,209,307 Units were issued and outstanding.
The Company’s principal objectives have been to invest in a diversified portfolio of equipment that (i) preserves, protects and returns the Company’s invested capital; (ii) generates regular distributions to the Members of cash from operations and cash from sales or refinancing, with any balance remaining after certain minimum distributions to be used to purchase additional equipment during the reinvestment period (“Reinvestment Period”) (defined as six full years following the year the offering was terminated), which ended December 31, 2012, and (iii) provides additional distributions following the Reinvestment Period and until all equipment has been sold. The Company is governed by its Limited Liability Company Operating Agreement (“Operating Agreement”), as amended.
On January 1, 2013, the Company commenced liquidation phase activities pursuant to the guidelines of the Operating Agreement. Prior thereto, the Company was in its acquisition phase and was making distributions on a monthly and quarterly basis. Periodic distributions commenced in June 2005.
Pursuant to the terms of the Operating Agreement, AFS and its affiliates receives compensation for services rendered and reimbursements for costs incurred on behalf of the Company (See Note 5). The Company is required to maintain reasonable cash reserves for working capital, the repurchase of Units and contingencies. The repurchase of Units is solely at the discretion of AFS.
The accompanying balance sheets as of December 31, 2017 and 2016, and the related statements of income, changes in members’ capital, and cash flows for the years then ended, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission. Certain prior year amounts may have been reclassified to conform to the current year presentation. These reclassifications had no significant effect on the reported financial position or results of operations.
Footnote and tabular amounts are presented in thousands, except as to Units and per Unit data.
In preparing the accompanying financial statements, the Company has reviewed, as determined necessary by the Managing Member, events that have occurred after December 31, 2017, up until the issuance of the financial statements. No events were noted which would require disclosure in the footnotes to the financial statements.
16
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.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Such estimates primarily relate to the determination of residual values at the end of the lease term and expected future cash flows used for impairment analysis purposes and for determination of the allowance for doubtful accounts and reserve for credit losses on notes receivable.
Accounts receivable represent the amounts billed under operating and direct financing lease contracts, and notes receivable which are currently due to the Company. Allowances for doubtful accounts are established based on historical charge off and collection experience and the collectability of specifically identified lessees and invoiced amounts. Accounts receivable deemed uncollectible are charged off against the allowance on a specific identification basis. Recoveries of amounts that were previously written-off are recorded as other income in the period received.
Financial instruments that potentially subject the Company to concentrations of credit risk include cash and cash equivalents, operating and direct financing lease receivables, notes receivable and accounts receivable. The Company places the majority of its cash deposits in noninterest-bearing accounts with financial institutions that have no less than $10 billion in assets. Such deposits are insured up to $250 thousand. The remainder of the Funds’ cash is temporarily invested in U.S. Treasury denominated instruments. 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.
Equipment subject to operating leases is stated at cost. Depreciation is being recognized on a straight-line method over the terms of the related leases to the equipment’s estimated residual values. Off-lease equipment is generally not subject to depreciation. The Company depreciates all lease assets, in accordance with guidelines consistent with ASC 840-20-35-3, over the periods of the lease terms contained in each asset’s respective lease contract to the estimated residual value at the end of the lease contract. All lease assets are purchased only concurrent with the execution of a lease commitment by the lessee. Thus, the original depreciation period corresponds with the term of the original lease. Once the term of an original lease contract is completed, the subject property is typically sold to the existing user, re-leased to the existing user, or, when off-lease, is held for sale. Assets which are re-leased continue to be depreciated using the terms of the new lease agreements and the estimated residual values at the end of the new lease terms, adjusted downward as necessary. Assets classified as held-for-sale are carried at the lower of carrying amount, or the fair value less cost to sell.
The Company does not use the equipment held in its portfolio, but holds it solely for lease and ultimate sale. In the course of marketing equipment that has come off-lease, management may determine at some point that re-leasing the assets may provide a superior return for investors and would then execute another lease. Upon entering into a new lease contract, management will estimate the residual value once again and resume depreciation. If, and when, the Company, at any time, determines that depreciation in value may have occurred with respect to an asset held-for-sale, the Company would review the value to determine whether a material reduction in value had occurred and recognize any appropriate impairment. All lease assets, including off-lease assets, are subject to the Company’s quarterly impairment analysis, as described below. Maintenance costs associated with the Fund’s portfolio of leased assets are expensed as incurred. Major additions and betterments are capitalized.
17
Operating lease revenue is recognized on a straight-line basis over the term of the underlying leases. The initial lease terms will vary as to the type of equipment subject to the leases, the needs of the lessees and the terms to be negotiated, but initial leases are generally on terms from 36 to 120 months. The difference between rent received and rental revenue recognized is recorded as unearned operating lease income on the balance sheet.
Operating leases are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management considers the equipment underlying the lease contracts for impairment and periodically reviews the credit worthiness of all operating lessees with payments outstanding less than 90 days. Based upon management’s judgment, the related operating leases may be placed on non-accrual status. Leases placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable. Until such time, revenues are recognized on a cash basis.
Income from direct financing lease transactions is reported using the financing method of accounting, in which the Company’s investment in the leased property is reported as a receivable from the lessee to be recovered through future rentals. The interest income portion of each rental payment is calculated so as to generate a constant rate of return on the net receivable outstanding.
Allowances for losses on direct financing leases are typically established based on historical charge off and collection experience and the collectability of specifically identified lessees and billed and unbilled receivables. Direct financing leases are charged off to the allowance as they are deemed uncollectible.
Direct financing leases are generally placed in a non-accrual status (i.e., no revenue is recognized) and deemed impaired when payments are more than 90 days past due. Additionally, management periodically reviews the credit worthiness of all direct finance lessees with payments outstanding less than 90 days. Based upon management’s judgment, the related direct financing leases may be placed on non-accrual status. Leases placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable. Until such time, all payments received are applied only against outstanding principal balances.
The Company capitalizes initial direct costs (“IDC”) associated with the origination and funding of lease assets and investments in notes receivable. 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 financing 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.
Acquisition expense represents costs which include, but are not limited to, legal fees and expenses, travel and communication expenses, cost of appraisals, accounting fees and expenses and miscellaneous expenses related to the selection and acquisition of equipment which are reimbursable to the Managing Member under the terms of the Operating Agreement. As the costs are not eligible for capitalization as initial direct costs, such amounts are expensed as incurred.
Recorded values of the Company’s leased asset portfolio are reviewed each quarter to confirm the reasonableness of established residual values and to determine whether there is indication that an asset impairment might have taken place. The Company uses a variety of sources and considers many factors in evaluating whether the respective book
18
values of its assets are appropriate. In addition, the Company may direct a residual value review at any time if it becomes aware of issues regarding the ability of a lessee to continue to make payments on its lease contract. An impairment loss is measured and recognized only if the estimated undiscounted future cash flows of the asset are less than the net book value. The estimated undiscounted future cash flows are the sum of the residual value of the asset at the end of the asset’s lease contract and undiscounted future rents from the existing lease contract. The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the marketplace are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. Impairment is measured as the difference between the fair value (as determined by a valuation method using discounted estimated future cash flows, third party appraisals or comparable sales of similar assets as applicable based on asset type) of the asset and its carrying value on the measurement date. Upward adjustments for impairments recognized in prior periods are not made in any circumstances.
The Company is not organized by multiple operating segments for the purpose of making operating decisions or assessing performance. Accordingly, the Company operates in one reportable operating segment in the United States. The Company’s 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 and financing 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 years ended December 31, 2017 and 2016 and long-lived assets as of December 31, 2017 and 2016 (dollars in thousands):
| | | | | ||||||||||||
| For The Year Ended December 31, | ||||||||||||||||
| 2017 | % of Total | 2016 | % of Total | |||||||||||||
| Revenue | ||||||||||||||||
| United States | $ | 1,070 | 100 | % | $ | 1,639 | 99 | % | ||||||||
| United Kingdom | — | 0 | % | 18 | 1 | % | ||||||||||
| Total | $ | 1,070 | 100 | % | $ | 1,657 | 100 | % | ||||||||
| | | | | ||||||||||||
| As of December 31, | ||||||||||||||||
| 2017 | % of Total | 2016 | % of Total | |||||||||||||
| Long-lived assets | ||||||||||||||||
| United States | $ | 1,633 | 100 | % | $ | 2,002 | 100 | % | ||||||||
| United Kingdom | — | 0 | % | 2 | 0 | % | ||||||||||
| Total | $ | 1,633 | 100 | % | $ | 2,004 | 100 | % | ||||||||
From time to time, the Company may purchase securities of its borrowers or receive warrants to purchase securities in connection with its lending arrangements.
19
Purchased securities are generally not registered for public sale and are carried at cost. Such securities are adjusted to fair value if the fair value is less than the carrying value and such impairment is deemed by the Managing Member to be other than temporary. Factors considered by the Managing Member in determining fair value include, but are not limited to, available financial information, the issuer’s ability to meet its current obligations and indications of the issuer’s subsequent ability to raise capital. Based upon the Company’s review of its portfolio, fair value adjustments of $11 thousand and $16 thousand were recorded during 2017 and 2016, respectively, relative to an impaired investment. There were no sales or dispositions of securities during 2017 and 2016.
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. During 2017 and 2016, respectively, the Company recorded unrealized losses of $0 and $27 thousand on fair value adjustment of its warrants. As of December 31, 2017 and 2016, the Managing Member estimated the fair value of the warrants to be $0. There were no net exercises of warrants during 2017 and 2016.
Foreign currency transaction gains and losses are reported in the results of operations as “other income” or “other loss” 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 risks to date have not been significant. The Company’s foreign currency translations gains and losses were nominal during 2017 and 2016.
The Company records prepayments on operating leases as a liability under the caption of unearned operating lease income. The liability is recorded when prepayments are received and recognized as operating lease revenue over the period to which the prepayments relate using a straight-line method.
The Company is treated as a partnership for federal income tax purposes. Pursuant to the provisions of Section 701 of the Internal Review Code, a partnership is not subject to federal income taxes. Accordingly, the Company has provided current income taxes for only those states, which levy income taxes on partnerships. For the years ended December 31, 2017 and 2016, the current provision for state income taxes was approximately $30 thousand and $0, respectively. The Company does not have any entity level uncertain tax positions. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions and is generally subject to examination by U.S. federal (or state and local) income tax authorities for three years from the filing of a tax return.
The tax bases of the Company’s net assets and liabilities vary from the amounts presented in these financial statements at December 31, 2017 and 2016 as follows (in thousands):
| | | ||||||
| 2017 | 2016 | |||||||
| Financial statement basis of net assets | $ | 2,181 | $ | 3,979 | ||||
| Tax basis of net assets (unaudited) | 8,325 | 9,821 | ||||||
| Difference | $ | (6,144 | ) | $ | (5,842 | ) | ||
The primary differences between the tax bases of net assets and the amounts recorded in the financial statements are the result of differences in accounting for syndication costs and differences between the depreciation methods used in the financial statements and the Company’s tax returns.
20
The following reconciles the net income reported in these financial statements to the income reported on the Company’s federal tax returns (unaudited) for the years ended December 31, 2017 and 2016, respectively (in thousands):
| | | ||||||
| 2017 | 2016 | |||||||
| Net income per financial statements | $ | 178 | $ | 794 | ||||
| Tax adjustments (unaudited): | ||||||||
| Adjustment to depreciation expense | 259 | 226 | ||||||
| Provision for doubtful accounts | 33 | — | ||||||
| Adjustments to revenues | 1 | (154 | ) | |||||
| Adjustments to gain on sales of assets | 59 | 289 | ||||||
| Other | 10 | 16 | ||||||
| Income per federal tax return (unaudited) | $ | 540 | $ | 1,171 | ||||
Other income (loss), net is solely comprised of net gains and losses on foreign currency transactions.
Net income and distributions per Unit are based upon the weighted average number of Other Members Units outstanding during the year.
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2016-15 — Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 addresses specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. This guidance is effective for the Company beginning on January 1, 2018. The adoption of ASU 2016-15 did not have a material impact on its financial statements and disclosures.
In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments — Credit Losses (Topic 326) (“ASU 2016-13”). The main objective of this Update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018. Management is currently evaluating the standard and expects the Update may potentially result in an increase in the allowance for credit losses given the change to estimated losses over the contractual life adjusted for expected prepayments.
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842) (“ASU 2016-02”). The new standard will require lessees to recognize lease assets and lease liabilities arising from operating leases with lease terms greater than 12 months in the statement of financial position. Lessor accounting per ASU 2016-02 is mostly unchanged from the previous lease accounting under GAAP. Certain changes were made to the lessor accounting guidance in order to align the lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. Similar to the previous guidance, lessors will classify leases as operating, direct financing, or sales-type. Lessors in operating leases will continue to recognize the underlying asset and recognize income on a straight-line basis. Lessors determine whether a lease is a sale of the underlying asset based on whether the lessee
21
effectively obtains control of the underlying assets. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. While early adoption is permitted, the Company does not expect to elect that option. The Company expects to adopt the guidance in the first quarter 2019 using the modified retrospective method.
Management is currently evaluating the impact of this standard on the financial statements and its operational and related disclosure requirements, including the impact on the Company’s current lease portfolio from a lessor perspective. Given the limited changes to lessor accounting, Management does not expect material changes to recognition or measurement, but the Company is early in the implementation process and will continue to evaluate the impact.
In January 2016, the FASB issued Accounting Standards Update 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). The new standard provides guidance related to accounting for equity investments and financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, and (v) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This guidance is effective for the Company beginning on January 1, 2018. The adoption of ASU 2016-01 did not have a material impact on its financial statements and disclosures.
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. On July 9, 2015, the FASB approved the deferral of the effective date of ASU 2014-09 by one year and in August 2015, issued Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”). ASU 2015-14 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods within that reporting period. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. This guidance is effective for the Company beginning on January 1, 2018. Management’s evaluation of the impact of such adoption on the financial statements of the Fund indicates that such impact is non-material as the new revenue guideline does not affect revenues from leases and loans, which comprise the majority of the Company’s revenues.
The Company leases equipment to lessees and provides debt financing to borrowers in diversified industries. Leases and notes receivable are subject to AFS’s credit committee review. The leases and notes receivable provide for the return of the equipment to the Company upon default.
As of December 31, 2017 and 2016, there were concentrations (greater than or equal to 10% as a percentage of total equipment cost) of equipment leased to lessees and/or financed for borrowers in certain industries as follows:
| | | ||||||
| 2017 | 2016 | |||||||
| Transportation, rail | 65 | % | 65 | % | ||||
| Manufacturing | 25 | % | 25 | % | ||||
22
During 2017 and 2016, certain lessees and/or financial borrowers generated significant portions (defined as greater than or equal to 10%) of the Company’s total leasing revenues, excluding gains or losses on disposition of assets, as follows:
| | | | |||||||||
| Percentage of Total Leasing Revenues | ||||||||||||
| Lessee | Type of Equipment | 2017 | 2016 | |||||||||
| Union Pacific | Transportation, rail | 34 | % | 31 | % | |||||||
| Kirby Inland Marine, LP | Marine vessels | 19 | % | 21 | % | |||||||
| Aircraft Service International, Inc. | Aviation | 18 | % | 15 | % | |||||||
| Tyson Foods, Inc. | Transportation, other | 16 | % | 13 | % | |||||||
The Company’s investment in leases consists of the following (in thousands):
| | | | | ||||||||||||
| Balance December 31, 2016 | Reclassifications, Additions/ Dispositions | Depreciation/ Amortization Expense or Amortization of Leases | Balance December 31, 2017 | |||||||||||||
| Net investment in operating leases | $ | 1,996 | $ | (58 | ) | $ | (306 | ) | $ | 1,632 | ||||||
| Assets held for sale or lease, net | 1 | (1 | ) | — | — | |||||||||||
| Initial direct costs, net of accumulated amortization of $2 at December 31, 2017 and $36 at December 31, 2016 | 7 | — | (6 | ) | 1 | |||||||||||
| Total | $ | 2,004 | $ | (59 | ) | $ | (312 | ) | $ | 1,633 | ||||||
Management determined that no impairment losses existed during the years ended December 31, 2017 and 2016.
The Company utilizes a straight line depreciation method for equipment in all of the categories currently in its portfolio of operating lease transactions. Depreciation expense on the Company’s equipment was approximately $306 thousand and $390 thousand for the respective years ended December 31, 2017 and 2016. IDC amortization expense related to the Company’s operating and direct financing leases totaled $6 thousand and $8 thousand for the respective years ended December 31, 2017 and 2016.
All of the leased property was acquired during the years 2005 through 2011.
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Property on operating leases consists of the following (in thousands):
| | | | | ||||||||||||
| Balance December 31, 2016 | Additions | Reclassifications or Dispositions | Balance December 31, 2017 | |||||||||||||
| Transportation, rail | $ | 8,499 | $ | — | $ | (484 | ) | $ | 8,015 | |||||||
| Aviation | 1,658 | — | — | 1,658 | ||||||||||||
| Marine vessels | 1,415 | — | — | 1,415 | ||||||||||||
| Transportation, other | 1,349 | — | (126 | ) | 1,223 | |||||||||||
| Materials handling | 156 | — | (129 | ) | 27 | |||||||||||
| Manufacturing | 10 | — | — | 10 | ||||||||||||
| 13,087 | — | (739 | ) | 12,348 | ||||||||||||
| Less accumulated depreciation | (11,091 | ) | (306 | ) | 681 | (10,716 | ) | |||||||||
| Total | $ | 1,996 | $ | (306 | ) | $ | (58 | ) | $ | 1,632 | ||||||
The average estimated residual value for assets on operating leases was 8.0% and 7.7% of the assets’ original cost at December 31, 2017 and 2016, respectively. There were no operating lease contracts placed in non-accrual status at December 31, 2017 and 2016.
At December 31, 2017, the aggregate amounts of future minimum operating lease payments receivable are as follows (in thousands):
| | |||
| Operating Leases | ||||
| Year ending December 31, 2018 | $ | 675 | ||
| 2019 | 310 | |||
| 2020 | 256 | |||
| 2021 | 76 | |||
| $ | 1,317 | |||
The useful lives for each category of leases is reviewed at a minimum of once per quarter. At both December 31, 2017 and 2016, the respective useful lives of each category of lease assets in the Company’s portfolio are as follows (in years):
| | |||
| Equipment category | Useful Life | |||
| Transportation, rail | 35 – 40 | |||
| Marine vessels | 20 – 30 | |||
| Aviation | 15 – 20 | |||
| Manufacturing | 10 – 15 | |||
| Materials handling | 7 – 10 | |||
| Transportation, other | 7 – 10 | |||
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The terms of the Operating Agreement provide that AFS and/or affiliates are entitled to receive certain fees for equipment management and resale, and for management of the Company.
The Operating Agreement allows for the reimbursement of costs incurred by AFS in providing administrative services to the Company. Administrative services provided include Company accounting, finance/treasury, investor relations, legal counsel, and lease and equipment documentation. AFS is not reimbursed for services whereby it is entitled to receive a separate fee as compensation for such services, such as management of equipment.
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; and investor relations, communications services and general administrative services 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.
The Operating Agreement places an annual limit and a cumulative limit for cost reimbursements to AFS and/or affiliates. Any reimbursable costs incurred by AFS and/or affiliates during the year exceeding the annual and/or cumulative limits cannot be reimbursed in the current year, though such costs may be reimbursable in future years to the extent of the cumulative limit. As of December 31, 2017, the Company has not exceeded the annual and/or cumulative limitations discussed above.
AFS and/or affiliates earned fees and billed for reimbursements pursuant to the Operating Agreement as follows during each of the years ended December 31, 2017 and 2016 (in thousands):
| | | ||||||
| 2017 | 2016 | |||||||
| Costs reimbursed to Managing Member and/or affiliates | $ | 183 | $ | 140 | ||||
| Asset management fees to Managing Member | 49 | 88 | ||||||
| $ | 232 | $ | 228 | |||||
At December 31, 2017, the Company had no commitments to either purchase lease assets or to fund loans.
The Company enters into contracts that contain a variety of indemnifications. The Company’s maximum exposure under these arrangements is unknown. However, the Company has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
The Managing Member knows of no facts or circumstances that would make the Company’s contractual commitments outside standard mutual covenants applicable to commercial transactions between businesses. Accordingly, the Company believes that these indemnification obligations are made in the ordinary course of business as part of standard commercial and industry practice, and that any potential liability under the Company’s similar commitments is remote. Should any such indemnification obligation become payable, the Company would separately record and/or disclose such liability in accordance with GAAP.
Units issued and outstanding were 5,209,307 at both December 31, 2017 and 2016. The Company was authorized to issue up to 15,000,000 Units in addition to the Units issued to the initial members (50 Units). The Company terminated sales of Units effective April 30, 2006.
The Company has the right, exercisable in the Manager’s discretion, but not the obligation, to repurchase Units of a Unitholder who ceases to be a U.S. Citizen, for a price equal to 100% of the holder’s capital account. The Company is
25
otherwise permitted, but not required, to repurchase Units upon a holder’s request. The repurchase of Fund Units is made in accordance with Section 13 of the Amended and Restated Limited Liability Company Operating Agreement. The repurchase would be at the discretion of the Manager on terms it determines to be appropriate under given circumstances, in the event that the Manager deems such repurchase to be in the best interest of the Company; provided, the Company is never required to repurchase any Units. Upon the repurchase of any Units by the Fund, the tendered Units are cancelled. Units repurchased in prior periods were repurchased at amounts representing the original investment less cumulative distributions made to the Unitholder with respect to the Units. All Units repurchased during a quarter are deemed to be repurchased effective the last day of the preceding quarter, and are not deemed to be outstanding during, or entitled to allocations of net income, net loss or distributions for the quarter in which such repurchase occurs. There were no Units repurchased during 2017 and 2016.
During the years ended December 31, 2017 and 2016, distributions to the Other Members were as follows (in thousands, except as to Units and per Unit data):
| | | ||||||
| 2017 | 2016 | |||||||
| Distributions | $ | 1,828 | $ | 1,303 | ||||
| Weighted average number of Units outstanding | 5,209,307 | 5,209,307 | ||||||
| Weighted average distributions per Unit | $ | 0.35 | $ | 0.25 | ||||
The rates and frequency of periodic distributions paid by the Fund during its liquidation phase are solely at the discretion of the Manager.
Fair value measurements and disclosures are based on a fair value hierarchy as determined by significant inputs used to measure fair value. The three levels of inputs within the fair value hierarchy are defined as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, generally on a national exchange.
Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market.
Level 3 — Valuation is modeled using significant inputs that are unobservable in the market. These unobservable inputs reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability.
At December 31, 2017 and 2016, only the Company’s warrants were measured on a recurring basis. During the same comparative years, the Company recorded non-recurring adjustments to reduce the cost basis of certain impaired investment securities.
The Company’s valuation policy is determined by members of the Asset Management, Credit and Accounting departments. Whenever possible, the policy is to obtain quoted market prices in active markets to estimate fair values for recognition and disclosure purposes. Where quoted market prices in active markets are not available, fair values are estimated using discounted cash flow analyses, broker quotes, information from third party remarketing agents, third party appraisals of collateral and/or other valuation techniques. These techniques are significantly affected by certain of the Company’s assumptions, including discount rates and estimates of future cash flows. Potential taxes and other transaction costs are not considered in estimating fair values. As the Company is responsible for determining fair value, an analysis is performed on prices obtained from third parties. Such analysis is performed by asset management and credit department personnel who are familiar with the Company’s investments in equipment, notes receivable and equity securities of venture companies. The analysis may include a periodic review of price fluctuations and validation of numbers obtained from a specific third party by reference to multiple representative sources.
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Such fair value adjustments utilized the following methodology:
Warrants owned by the Company are not registered for public sale, but are considered derivatives and are carried on the balance sheet at an estimated fair value at the end of the period. The valuation of the warrants was determined using a Black-Scholes formulation of value based upon the stock price(s), the exercise price(s), the volatility of comparable venture companies, and a risk free interest rate for the term(s) of the warrant exercise(s). As of December 31, 2017 and 2016, the calculated fair value of the Fund’s warrant portfolio was $0. Such valuations are classified within Level 3 of the valuation hierarchy.
The following table reconciles the beginning and ending balances of the Company’s Level 3 recurring assets (in thousands):
| | |||
| Level 3 Assets | ||||
| 2016 | ||||
| Fair value of warrants at beginning of year | $ | 27 | ||
| Unrealized loss on fair value adjustment for warrants | (27 | ) | ||
| Fair value of warrants at end of year | $ | — | ||
The Company’s investment securities are not registered for public sale and are carried at cost. The investment securities are adjusted for impairment, if any, based upon factors which include, but are not limited to, available financial information, the issuer’s ability to meet its current obligations and indications of the issuer’s subsequent ability to raise capital.
During 2017 and 2016, the Company recorded fair value adjustments of $11 thousand and $16 thousand, respectively, to reduce the cost basis of an impaired investment security to zero. The reduction in value was based on a market approach technique and uses inputs that reflect qualitative and quantitative information provided by the management of the investee, which indicated reduced growth opportunity and eventual reduction in cash flows and revenues.
Under the Fair Value Measurements Topic of the FASB Accounting Standards Codification, the fair value of the aforementioned impaired investment securities were classified within Level 3 of the valuation hierarchy.
The following disclosure of the estimated fair value of financial instruments is made in accordance with the guidance provided by the Financial Instruments Topic of the FASB Accounting Standards Codification. Fair value estimates, methods and assumptions, set forth below for the Company’s financial instruments, are made solely to comply with the requirements of the Financial Instruments Topic and should be read in conjunction with the Company’s financial statements and related notes.
The Company has determined the estimated fair value amounts by using market information and valuation methodologies that it considers appropriate and consistent with the fair value accounting guidance. Considerable judgment is required to interpret market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The recorded amounts of the Company’s cash and cash equivalents approximate fair value because of the liquidity and short-term maturity of these instruments.
The Company’s investment securities are not registered for public sale and are carried at cost which management believes approximates fair value, as appropriately adjusted for impairment.
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Management has determined that no recognition for the fair value of the Company’s loan commitments is necessary because their terms are made on a market rate basis and require borrowers to be in compliance with the Company’s credit requirements at the time of funding.
The fair value of contingent liabilities (or guarantees) is not considered material because management believes there has been no event that has occurred wherein a guarantee liability has been incurred or will likely be incurred.
The following table presents estimated fair values of the Company’s financial instruments at December 31, 2017 and 2016 (in thousands):
| | | | | | |||||||||||||||
| Fair Value Measurements at December 31, 2017 | ||||||||||||||||||||
| Carrying Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 586 | $ | 586 | $ | — | $ | — | $ | 586 | ||||||||||
| Investment in securities | 11 | — | — | 11 | 11 | |||||||||||||||
| | | | | | |||||||||||||||
| Fair Value Measurements at December 31, 2016 | ||||||||||||||||||||
| Carrying Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 1,932 | $ | 1,932 | $ | — | $ | — | $ | 1,932 | ||||||||||
| Investment in securities | 22 | — | — | 22 | 22 | |||||||||||||||
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| Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES |
None.
| Item 9A. | CONTROLS AND PROCEDURES |
The Company’s Managing Member’s President and Chief Executive Officer, and Executive Vice President and Chief Financial Officer and Chief Operating Officer (“Management”), evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on the evaluation of the Company’s disclosure controls and procedures, Management concluded that as of the end of the period covered by this report, the design and operation of these disclosure controls and procedures were effective.
The Company does not control the financial reporting process, and is solely dependent on the Management of the Managing Member, 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 they are applicable to the Company, means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78aet seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
The Management of the Managing Member is responsible for establishing and maintaining adequate internal control over financial reporting as that term is defined in Exchange Act Rule 13a-15(f) for the Company, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2017. The internal control process of the Managing Member, as it is applicable to the Company, was designed to provide reasonable assurance to Management regarding the preparation and fair presentation of published financial statements, and includes those policies and procedures that:
| (1) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States, and that the Company’s receipts and expenditures are being made only in accordance with authorization of the Management of the Managing Member; and |
| (2) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
All internal control processes, no matter how well designed, have inherent limitations. Therefore, even those processes determined to be effective can provide only reasonable assurance with respect to the reliability of financial statement preparation and presentation. Further, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management of the Managing Member assessed the effectiveness of its internal control over financial reporting, as it is applicable to the Company, as of December 31, 2017. In making this assessment, it used the criteria set forth inInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its assessment, Management of the Managing Member concluded that the Managing Member’s internal control over financial reporting, as it is applicable to the Company, was effective as of December 31, 2017.
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This annual report does not include an audit report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s internal control over financial reporting was not subject to audit by the Company’s independent registered public accounting firm pursuant to Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which exempts non-accelerated filers from Section 404(b) of the Sarbanes-Oxley Act of 2002.
There were no changes in the Managing Member’s internal control over financial reporting, as it is applicable to the Company, during the year ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Managing Member’s internal control over financial reporting, as it is applicable to the Company.
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| Item 10. | DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT |
The registrant is a Limited Liability Company and has no officers or directors.
ATEL Financial Services, LLC (“AFS”) is the Company’s Managing Member or Manager. AFS is controlled by ATEL Capital Group (“ACG” or “ATEL”), a holding company formed to control AFS and affiliated companies. The outstanding voting capital stock of ACG is owned 100% by Dean L. Cash.
Each of ATEL Leasing Corporation (“ALC”) and AFS is a wholly-owned subsidiary of ACG and performs services for the Company. Acquisition services, equipment management, lease administration and asset disposition services are performed by ALC; and investor relations, communications and general administrative services are performed by AFS.
The officers and directors of ATEL and its affiliates are as follows:
| | |
| Dean L. Cash | President and Chief Executive Officer of ATEL Financial Services, LLC (Managing Member) | |
| Paritosh K. Choksi | Executive Vice President and Chief Financial Officer and Chief Operating Officer of ATEL Financial Services, LLC (Managing Member) | |
| Vasco H. Morais | Executive Vice President, Secretary and General Counsel of ATEL Financial Services, LLC (Managing Member) |
Dean L. Cash, age 67, joined ATEL as director of marketing in 1980 and has been a vice president since 1981, executive vice president since 1983 and a director since 1984. He has been President and CEO since April 2001. Prior to joining ATEL, Mr. Cash was a senior marketing representative for Martin Marietta Corporation, data systems division, from 1979 to 1980. From 1977 to 1979, he was employed by General Electric Corporation, where he was an applications specialist in the medical systems division and a marketing representative in the information services division. Mr. Cash was a systems engineer with Electronic Data Systems from 1975 to 1977, and was involved in maintaining and developing software for commercial applications. Mr. Cash received a B.S. degree in psychology and mathematics in 1972 and an M.B.A. degree with a concentration in finance in 1975 from Florida State University. Mr. Cash is an arbitrator with the American Arbitration Association.
Paritosh K. Choksi, age 64, joined ATEL in 1999 as a director, senior vice president and its chief financial officer. He became its executive vice president and CFO/COO in April 2001. Prior to joining ATEL, Mr. Choksi was chief financial officer at Wink Communications, Inc. from 1997 to 1999. From 1977 to 1997, Mr. Choksi was with Phoenix American Incorporated, a financial services and management company, where he held various positions during his tenure, and was senior vice president, chief financial officer and director when he left the company. Mr. Choksi was involved in all corporate matters at Phoenix and was responsible for Phoenix’s capital market needs. He also served on the credit committee overseeing all corporate investments, including its venture lease portfolio. Mr. Choksi was a part of the executive management team which caused Phoenix’s portfolio to increase from $50 million in assets to over $2 billion. Mr. Choksi is a member of the board of directors of Syntel, Inc. Mr. Choksi received a bachelor of technology degree in mechanical engineering from the Indian Institute of Technology, Bombay; and an M.B.A. degree from the University of California, Berkeley.
Vasco H. Morais, age 59, joined ATEL in 1989 as general counsel to provide legal support in the drafting and reviewing of lease documentation, advising on general corporate law matters, and assisting on securities law issues. From 1986 to 1989, Mr. Morais was employed by the BankAmeriLease Companies, Bank of America’s equipment leasing subsidiaries, providing in-house legal support on the documentation of tax-oriented and non-tax oriented direct and leveraged lease transactions, vendor leasing programs and general corporate matters. Prior to the BankAmeriLease Companies, Mr. Morais was with the Consolidated Capital Companies in the corporate and securities legal department involved in drafting and reviewing contracts, advising on corporate law matters and securities law issues. Mr. Morais received a B.A. degree in 1982 from the University of California in Berkeley, a J.D. degree in 1986 from Golden Gate University Law School and an M.B.A. (Finance) in 1997 from Golden Gate University. Mr. Morais has been an active member of the State Bar of California since 1986.
31
The board of directors of the Managing Member acts as the audit committee of the Company. Dean L. Cash and Paritosh K. Choksi are members of the board of directors of the Managing Member and are deemed to be financial experts. They are not independent of the Company.
Based solely on a review of Forms 3, 4, and 5, the Company is not aware of any failures to file reports of beneficial ownership required to be filed during or for the year ended December 31, 2017.
A Code of Ethics that is applicable to the Company, including the Chief Executive Officer and Chief Financial Officer and Chief Operating Officer of its Managing Member, AFS, or persons acting in such capacity on behalf of the Company, is included as Exhibit 14.1 to this report.
The registrant has no officers or directors.
Set forth hereinafter is a description of the nature of remuneration paid and to be paid to ATEL and its Affiliates. The amount of such remuneration paid for the years ended December 31, 2017 and 2016 is set forth in Item 8 of this report under the caption “Financial Statements and Supplementary Data — Notes to Financial Statements — Related party transactions,” at Note 5 thereof, which information is hereby incorporated by reference.
The Company paid selling commissions in the amount of 9% of Gross Proceeds, as defined, to ASC, an affiliate of AFS.
Through December 31, 2017, $4.7 million of such commissions had been paid to AFS or its affiliate. Of that amount, $3.9 million has been re-allowed to other broker/dealers.
The Company pays AFS an Asset Management Fee in an amount equal to 4% of Operating Revenues, which includes Gross Lease Revenues and Cash from Sales or Refinancing. The Asset Management Fee is paid on a monthly basis. The amount of the Asset Management Fee payable in any year is reduced for that year to the extent it would otherwise exceed the Asset Management Fee Limit, as described below. The Asset Management Fee is paid for services rendered by AFS and its affiliates in determining portfolio and investment strategies (i.e., establishing and maintaining the composition of the Equipment portfolio as a whole and the Company’s overall debt structure) and generally managing or supervising the management of the Equipment.
AFS also receives, as its Carried Interest, an amount equal to 7.5% of all Company Distributions.
AFS supervises performance of all management activities, including, among other activities: the acquisition and financing of the equipment portfolio, collection of lease revenues, monitoring compliance by lessees with the lease terms, assuring that Equipment is being used in accordance with all operative contractual arrangements, paying operating expenses and arranging for necessary maintenance and repair of equipment in the event a lessee fails to do so, monitoring property, sales and use tax compliance and preparation of operating financial data. AFS intends to delegate all or a portion of its duties and the Asset Management Fee to one or more of its affiliates who are in the business of providing such services.
The Fund has adopted a single Asset Management Fee plus the Carried Interest as a means of compensating the Manager for sponsoring the Fund and managing its operations. While this compensation structure is intended to simplify management compensation for purposes of investor’s understanding, state securities administrators use a more complicated compensation structure in their review of equipment program offerings in order to assure that those offerings are fair under the states’ merit review guidelines. The total of all Front End Fees, the Carried Interest and the
32
Asset Management Fee will be subject to the Asset Management Fee Limit in order to assure these state administrators that the Fund will not bear greater fees than permitted under the state merit review guidelines. The North American Securities Administrators Association, Inc. (“NASAA”) is an organization of state securities administrators, those state government agencies responsible for qualifying securities offerings in their respective states. NASAA has established standards for the qualification of a number of different types of securities offerings and investment products, including its Statement of Policy on Equipment Programs (the “NASAA Equipment Leasing Guidelines”). Article IV, Sections C through G of the NASAA Equipment Leasing Guidelines establish the standards for payment of reasonable carried interests, promotional interests and fees for equipment acquisition, management, resale and releasing services to equipment leasing program sponsors. Article IV, Sections C through G of the NASAA Equipment Leasing Guidelines set the maximum compensation payable to the sponsor and its affiliates from an equipment leasing program such as the Fund. The Asset Management Fee Limit will equal the maximum compensation payable under Article IV, Sections C through G of the NASAA Equipment Leasing Guidelines as in effect on the date of the Fund’s prospectus (the “NASAA Fee Limitation”). Under the Asset Management Fee Limit, the Fund will calculate the maximum fees payable under the NASAA Fee Limitation and guarantee that the Asset Management Fee it will pay the Manager and its Affiliates, when added to its Carried Interest, will never exceed the fees and interests payable to a sponsor and its affiliates under the NASAA Fee Limitation.
Asset Management Fee Limit. The Asset Management Fee Limit will be calculated each year during the Fund’s term by calculating the total fees that would be paid to the Manager if the Manager were to be compensated on the basis of the maximum compensation payable under the NASAA Fee Limitation, including the Manager’s Carried Interest, as described below. To the extent that the amount paid as Front End Fees, the Asset Management Fee, and the Carried Interest for any year would cause the total fees to exceed the aggregate amount of fees calculated under the NASAA Fee Limitation for the year, the Asset Management Fee and/or Carried Interest for that year will be reduced to equal the maximum aggregate fees under the NASAA Fee Limitation. To the extent any such fees are reduced, the amount of such reduction will be accrued and deferred, and such accrued and deferred compensation would be paid to the Manager in a subsequent period, but only to the extent that the deferred compensation would be within the Asset Management Fee Limit for that later period. Any deferred fees that cannot be paid under the applicable limitations through the date of liquidation would be forfeited by the Manager at liquidation.
Under the NASAA Equipment Leasing Guidelines, the Fund is required to commit a minimum percentage of the Gross Proceeds to Investment in Equipment, calculated as the greater of: (i) 80% of the Gross Proceeds reduced by 0.0625% for each 1% of indebtedness encumbering the Fund’s equipment; or (ii) 75% of such Gross Proceeds. The Fund intends to incur total indebtedness equal to 50% of the aggregate cost of its equipment. The Operating Agreement requires the Fund to commit at least 85.875% of the Gross Proceeds to Investment in Equipment. Based on the formula in the NASAA Guidelines, the Fund’s minimum Investment in Equipment would equal 76.875% of Gross Proceeds (80% - [50% × .0625%] = 76.875%), and the Fund’s minimum Investment in Equipment would therefore exceed the NASAA Fee Limitation minimum by 9%.
The amount of the Carried Interest permitted the Manager under the NASAA Fee Limitation will be dependent on the amount by which the percentage of Gross Proceeds the Fund ultimately commits to Investment in Equipment exceeds the minimum Investment in Equipment under the NASAA Fee Limitation. The NASAA Fee Limitation permits the Manager and its Affiliates to receive compensation in the form of a carried interest in Fund Net Income, Net Loss and Distributions equal to 1% for the first 2.5% of excess Investment in Equipment over the NASAA Guidelines minimum, 1% for the next 2% of such excess, and 1% for each additional 1% of excess Investment in Equipment. With a minimum Investment in Equipment of 85.875%, the Manager and its Affiliates may receive an additional carried interest equal to 6.5% of Net Profit, Net Loss and Distributions under the foregoing formula (2.5% + 2% + 4.5% = 9%; 1% + 1% + 4.5% = 6.5%). At the lowest permitted level of Investment in Equipment, the NASAA Guidelines would permit the Manager and its Affiliates to receive a promotional interest equal to 5% of Distributions of Cash from Operations and 1% of Distributions of Sale or Refinancing Proceeds until Members have received total Distributions equal to their Original Invested Capital plus an 8% per annum cumulative return on their Adjusted Invested Capital, and, thereafter, the promotional interest may increase to 15% of all Distributions.
With the additional carried interest calculated as described above, the maximum aggregate fees payable to the Manager and Affiliates under the NASAA Guidelines as carried interest and promotional interest would equal 11.5% of Distributions of Cash from Operations (6.5% + 5% = 11.5%), and 7.5% of Distributions of Sale or Refinancing Proceeds (6.5% + 1% = 7.5%), before the subordination level was reached, and 21.5% of all Distributions thereafter. The maximum amounts to be paid under the terms of the Operating Agreement are subject to the application of the Asset Management Fee Limit provided in Section 8.3 of the Agreement, which limits the annual amount payable to the Manager and its Affiliates as the Asset Management Fee and the Carried Interest to an aggregate not to exceed the total amount of fees that would be payable to the Manager and its Affiliates under the NASAA Fee Limitation.
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Upon completion of the offering of Units, final commitment of offering proceeds to acquisition of equipment and establishment of final levels of permanent portfolio debt, the Manager will calculate the maximum carried interest and promotional interest payable to the Manager and its Affiliates under the NASAA Fee Limitation and compare such total permitted fees to the total of the Asset Management Fee and Manager’s Carried Interest. If and to the extent that the Asset Management Fee and Manager’s Carried Interest would exceed the fees calculated under the NASAA Fee Limitation, the fees payable to the Manager and its Affiliates will be reduced by an amount sufficient to cause the total of such compensation to comply with the NASAA Fee Limitation. The adjusted Asset Management Fee Limit will then be applied to the Asset Management Fee and Carried Interest as described above. A comparison of the Front End Fees actually paid by the Fund and the NASAA Fee Limitation maximums will be repeated, and any required adjustments will be made, at least annually thereafter.
See Note 5 to the financial statements as set forth in Part II, Item 8, Financial Statements and Supplementary Data, for amounts paid.
AFS receives an allocation of all 7.5% of all Company net income, net loss and investment tax credits corresponding to its Carried Interest in Distributions and the remaining 92.5% is allocated among the Members. See financial statements as set forth in Part II, Item 8, Financial Statements and Supplementary Data, of this report for amounts allocated to AFS in 2017 and 2016.
| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
At December 31, 2017, no investor is known to hold beneficially more than 5% of the issued and outstanding Units.
The parent of AFS is the beneficial owner of Limited Liability Company Units as follows:
| | | | |||
| (1) Title of Class | (2) Name and Address of Beneficial Owner | (3) Amount and Nature of Beneficial Ownership | (4) Percent of Class | |||
| Limited Liability Company Units | ATEL Capital Group The Transamerica Pyramid 600 Montgomery Street, 9th Floor San Francisco, CA 94111 | Initial Limited Liability Company Units 50 Units ($500) | 0.0010% |
34
The Members have the right, by vote of the Members owning more than 50% of the outstanding Limited Liability Company Units, to remove the Managing Member.
AFS may at any time call a meeting of the Members or a vote of the Members without a meeting, on matters on which they are entitled to vote, and shall call such meeting or for vote without a meeting following receipt of a written request therefore of Members holding 10% or more of the total outstanding Limited Liability Company Units.
The responses to Item 1 of this report under the caption “Equipment Leasing Activities,” Item 8 of this report under the caption “Financial Statements and Supplementary Data — Notes to Financial Statements — Related party transactions” at Note 5 thereof, and Item 11 of this report under the caption “Executive Compensation,” are hereby incorporated by reference.
During the years ended December 31, 2017 and 2016, the Company incurred audit fees with its principal auditors totaling $97 thousand and $79 thousand, respectively.
Audit fees consist of the aggregate fees and expenses billed in connection with the audit of the Company’s annual financial statements and the review of the financial statements included in the Company’s quarterly reports on Form 10-Q.
The board of directors of the Managing Member acts as the audit committee of the registrant. Engagements for audit services, audit related services and tax services are approved in advance by the Chief Financial Officer of the Managing Member acting on behalf of the board of directors of the Managing Member in its role as the audit committee of the Company.
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| (a) | Financial Statements and Schedules |
| 1. | Financial Statements |
| 2. | Financial Statement Schedules |
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
| (b) | Exhibits |
(3) and (4) Amended and Restated Limited Liability Company Operating Agreement, included as exhibit B to the Prospectus effective April 11, 2005 as filed on May 05, 2005 (File Number 333-120276) is hereby incorporated herein by reference.
| | |
| (14.1) | Code of Ethics | |
| (31.1) | Certification of Dean L. Cash pursuant to Rules 13a-14(a)/15d-14(a) | |
| (31.2) | Certification of Paritosh K. Choksi pursuant to Rules 13a-14(a)/15d-14(a) | |
| (32.1) | Certification of Dean L. Cash pursuant to 18 U.S.C. section 1350 | |
| (32.2) | Certification of Paritosh K. Choksi pursuant to 18 U.S.C. section 1350 | |
| (101.INS) | XBRL Instance Document | |
| (101.SCH) | XBRL Taxonomy Extension Schema Document | |
| (101.CAL) | XBRL Taxonomy Extension Calculation Linkbase Document | |
| (101.LAB) | XBRL Taxonomy Extension Label Linkbase Document | |
| (101.PRE) | XBRL Taxonomy Extension Presentation Linkbase Document | |
| (101.DEF) | XBRL Taxonomy Extension Definition Linkbase Document |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 26, 2018
ATEL Capital Equipment Fund XI, LLC
(Registrant)
| | |
By: ATEL Financial Services, LLC |
| | |
By: /s/ Dean L. Cash |
| | |
By: /s/ Paritosh K. Choksi |
| | |
By: /s/ Samuel Schussler |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the persons in the capacities and on the dates indicated.
| | | ||
| SIGNATURE | CAPACITIES | DATE | ||
/s/ Dean L. Cash Dean L. Cash | President and Chief Executive Officer of ATEL Financial Services, LLC (Managing Member) | March 26, 2018 | ||
| /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) | March 26, 2018 | ||
| /s/ Samuel Schussler Samuel Schussler | Senior Vice President and Chief Accounting Officer of ATEL Financial Services, LLC (Managing Member) | March 26, 2018 |
No proxy materials have been or will be sent to security holders. An annual report will be furnished to security holders subsequent to the filing of this report on Form 10-K, and copies thereof will be furnished supplementally to the Commission when forwarded to the security holders.
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