UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the year ended December 31, 2009
¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the transition period from to
Commission File number 000-51858
ATEL Capital Equipment Fund XI, LLC
(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.) |
600 California Street, 6th Floor, San Francisco, California 94108-2733
(Address of principal executive offices)
Registrant’s telephone number, including area code: (415) 989-8800
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Limited Liability Company Units
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
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. Yes¨ No x
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant 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). Yes ¨ No ¨
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 filer ¨ | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company x | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
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, 2010 was 5,210,507.
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I
Item 1. | BUSINESS |
General Development of Business
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 may purchase securities of its borrowers or receive warrants to purchase securities in connection with its lending arrangements. The Managing Member 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. Net contributions of $52.2 million were received through December 31, 2009, consisting of approximately $52.8 million in gross contributions from Other Members purchasing Units under the public offering less rescissions and repurchases of $632 thousand. As of December 31, 2009, 5,210,507 Units were issued and outstanding.
The Company’s principal objectives are to invest in a diversified portfolio of equipment that (i) preserves, protects and returns the Company’s invested capital; (ii) generates regular distributions to the Members of cash from operations and cash from sales or refinancing, with any balance remaining after certain minimum distributions to be used to purchase additional equipment during the reinvestment period (“Reinvestment Period”) (defined as six full years following the year the offering was terminated), which ends 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.
The Company, or AFS on behalf of the Company, has incurred costs in connection with the organization, registration and issuance of the Limited Liability Company Units (see Note 7 to the financial statements included in Item 8, Financial Statements and Supplementary Data of this report). The amount of such costs to be borne by the Company is limited by certain provisions of the Company’s Operating Agreement. The Company will pay AFS and affiliates of AFS substantial fees which may result in a conflict of interest. The Company will pay substantial fees to AFS and its affiliates before distributions are paid to investors even if the Company does not produce profits. Therefore, the financial position of the Company could change significantly.
The Company is in its acquisition phase and is making distributions on a monthly and quarterly basis. Periodic distributions commenced in June 2005.
Narrative Description of Business
The Company has acquired and intends to acquire 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 is 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 will include some more technology-dependent equipment such as certain types of communications equipment, medical equipment, manufacturing equipment and office equipment.
The Company only purchases equipment under pre-existing leases or for which a lease will be entered into concurrently at the time of the purchase. Through December 31, 2009, the Company had purchased equipment with a total acquisition price of $63.4 million. The Company had also loaned $15.1 million for notes receivable secured by various assets.
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The Company’s objective is 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 deems to be high quality corporate credits, of which at least half of the high quality corporate credits satisfying the 75% minimum requirement will have either an average credit rating by Moody’s Investors Service, Inc. of “Baa” or better, or the credit equivalent as determined by the Manager, with the average rating weighted to account for the original equipment cost for each item leased; and the balance will 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 may 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, will consist of these growth capital financing investments.
During 2009 and 2008, certain lessees generated significant portions (defined as 10% or more) of the Company’s total operating revenues as follows:
Percentage of Total Lease Revenues | ||||||||
Lessee | Type of Equipment | 2009 | 2008 | |||||
New NGC, Inc. | Materials handling | 15% | 11% | |||||
Union Pacific | Transportation | 13% | 10% | |||||
International Paper Co. | Materials handling | 11% | 10% | |||||
Washington Group International | Construction | * | 12% |
* | Less than 10% |
The above percentages are not expected to be comparable in future periods.
The equipment leasing industry is highly competitive. Equipment manufacturers, corporations, partnerships and others offer users an alternative to the purchase of most types of equipment with payment terms that vary widely depending on the lease term, 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.
AFS will use its best efforts to diversify lessees by geography and industry and to maintain an appropriate balance and diversity in the types of equipment acquired and the types of leases entered into by the Company, and will apply the following policies: (i) AFS will seek to limit the amount invested in equipment leased to any single lessee to not more than 20% of the aggregate purchase price of equipment owned at any time during the reinvestment period following investment of the initial offering proceeds; (ii) in no event will the Company’s equity investment in equipment leased to a single lessee exceed an amount equal to 20% of the maximum capital from the sale of Units (or $30 million); (iii) when all the offering proceeds are committed to equipment and all permanent debt has been put in place, at least a majority of the equipment, based on the aggregate purchase price, will be subject to leases with scheduled lease payments returning at least 90% of the purchase price of the equipment; and (iv) AFS will seek to invest not more than 20% of the aggregate purchase price of equipment in equipment acquired from a single manufacturer. However, this last limitation is a general guideline only, and the Company may acquire equipment from a single manufacturer in excess of the stated percentage during the offering period and before the offering proceeds are fully invested, or if AFS deems such a course of action to be in the Company’s best interest.
The primary geographic regions in which the Company seeks leasing opportunities are North America and Europe. The table below summarizes geographic information relating to the sources, by region, of the Company’s operating revenues for the year ended December 31, 2009 and 2008:
Geographic area | 2009 | 2008 | ||||
North America | 92 | % | 92 | % | ||
Europe | 8 | % | 8 | % |
The business of the Company is not seasonal.
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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.
Equipment Leasing Activities
The Company has acquired a diversified portfolio of equipment. The equipment has been leased to lessees in various industries. The following tables set forth the types of equipment acquired by the Company through December 31, 2009 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 | 32.46 | % | ||
Construction | 12,649 | 19.94 | % | |||
Transportation, rail | 11,924 | 18.80 | % | |||
Transportation, other | 11,066 | 17.45 | % | |||
Logging and lumber | 2,001 | 3.15 | % | |||
Aviation | 1,658 | 2.61 | % | |||
Marine vessels | 1,415 | 2.23 | % | |||
Manufacturing | 1,172 | 1.85 | % | |||
Other | 958 | 1.51 | % | |||
$ | 63,432 | 100.00 | % | |||
Asset Types | Purchase Price Excluding Acquisition Fees | Percentage of Total Acquisitions | ||||
Transportation, rail | $ | 11,924 | 18.80 | % | ||
Transportation services | 11,460 | 18.07 | % | |||
Manufacturing | 9,390 | 14.80 | % | |||
Paper products | 8,886 | 14.01 | % | |||
Mining | 8,610 | 13.57 | % | |||
Health services | 4,967 | 7.83 | % | |||
Food products | 2,571 | 4.05 | % | |||
Chemical products | 2,139 | 3.37 | % | |||
Wood/Lumber products | 1,677 | 2.64 | % | |||
Other | 1,808 | 2.86 | % | |||
$ | 63,432 | 100.00 | % | |||
From inception to December 31, 2009, 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 | ||||||
Logging and lumber | $ | 9,460 | $ | 7,944 | $ | 3,947 | |||
Materials handling | 1,390 | 238 | 1,354 | ||||||
Construction | 851 | 224 | 683 | ||||||
Transportation, rail | 201 | 246 | 6 | ||||||
Transportation, other | 63 | 19 | 51 | ||||||
$ | 11,965 | $ | 8,671 | $ | 6,041 | ||||
For further information regarding the Company’s equipment lease portfolio as of December 31, 2009, see Note 6 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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Notes Receivable Activities
The Company finances a diversified portfolio of assets in diverse industries. The following tables set forth the types of assets financed by the Company through December 31, 2009 and the industries to which the assets have been financed (dollars in thousands):
Asset Types | Amount Financed Excluding Acquisition Fees | Percentage of Total Fundings | ||||
Computer equipment | $ | 7,023 | 48.38 | % | ||
Office furniture/Fixtures and other assets | 4,120 | 28.38 | % | |||
Storage facility | 2,503 | 17.24 | % | |||
Manufacturing | 367 | 2.53 | % | |||
Research | 504 | 3.47 | % | |||
$ | 14,517 | 100.00 | % | |||
Industry of Borrower | Amount Financed Excluding Acquisition Fees | Percentage of Total Fundings | ||||
Business services | $ | 4,326 | 29.80 | % | ||
Communications | 3,369 | 23.21 | % | |||
Manufacturing | 2,503 | 17.24 | % | |||
Health services | 2,833 | 19.52 | % | |||
Electronics | 1,119 | 7.71 | % | |||
Engineering | 367 | 2.52 | % | |||
$ | 14,517 | 100.00 | % | |||
From inception to December 31, 2009, assets financed by the Company that are associated with terminated loans are as follows (in thousands):
Asset Types | Amount Financed Excluding Acquisition Fees | Disposition Proceeds | Total Payments Received | ||||||
Computer equipment | $ | 6,465 | $ | 2,475 | $ | 4,998 | |||
Office furniture/Fixtures and other assets | 2,407 | 617 | 2,149 | ||||||
Research | 504 | — | 612 | ||||||
Manufacturing | 1 | — | 1 | ||||||
$ | 9,377 | $ | 3,092 | $ | 7,760 | ||||
For further information regarding the Company’s notes receivable portfolio as of December 31, 2009, see Note 4 to the financial statements, Notes receivable, net, as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
Item 2. | PROPERTIES |
The Company does not own or lease any real property, plant or material physical properties other than the equipment held for lease as set forth in Item 1, Business.
Item 3. | LEGAL PROCEEDINGS |
In the ordinary course of conducting business, there may be certain claims, suits, and complaints filed against the Company. In the opinion of management, the outcome of such matters, if any, will not have a material impact on the Company’s financial position or results of operations. No material legal proceedings are currently pending against the Company or against any of its assets.
Item 4. | [RESERVED] |
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PART II
Item 5. | MARKET FOR COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
There are certain material conditions and restrictions on the transfer of Units imposed by the terms of the Limited Liability Company Operating Agreement. Consequently, there is no public market for Units and it is not anticipated that a public market for Units will develop. In the absence of a public market for the Units, there is no currently ascertainable fair market value for the Units.
Holders
As of December 31, 2009, a total of 1,178 investors were Unitholders of record in the Company.
Distributions
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 taxes due on income from the operations of the Fund; (ii) through the first full fiscal quarter ending at least six months after termination of the offering of Units, an amount equal to the lesser of: (a) a rate of return on their original capital contribution equal to 2.5% over the average yield on five-year United States Treasury Bonds for the fiscal quarter immediately preceding the date of distribution, as published in a national financial newspaper from time to time (with a minimum of 8% per annum and a maximum of 10% per annum), or (b) 90% of the total amount of cash available for distributions; and (iii) for each quarter during the rest of the reinvestment period, an amount equal to 8% per annum on their original capital contribution.
The rate for monthly distributions from 2009 operations was $0.08 per Unit for the period from January through December 2009. Likewise, the rate for monthly distributions from 2008 operations was $0.08 per Unit for the period from January through December 2007. The rate for each of the quarterly distributions paid in 2009 and 2008 was $0.23 per Unit.
The following table presents summarized information regarding distributions to members other than the Managing Member (“Other Members”):
2009 | 2008 | ||||||
Net income (loss) per Unit, based on weighted average Unit outstanding | $ | 0.13 | $ | (0.24 | ) | ||
Return of investment | 0.79 | 1.16 | |||||
Distributions declared per Unit, based on weighted average Other Member Units outstanding | 0.92 | 0.92 | |||||
Differences due to timing of distributions | — | — | |||||
Actual distributions paid per Unit | $ | 0.92 | $ | 0.92 | |||
Item 6. | SELECTED FINANCIAL DATA |
A smaller reporting company is not required to present selected financial data in accordance with item 301(c) of Regulation S-K.
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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, the 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.
Overview
ATEL Capital Equipment Fund XI, LLC (the “Company”) 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. Throughout the Reinvestment Period, which ends December 31, 2012, the Company anticipates continued reinvestment of cash flow in excess of minimum distributions and other obligations. The Company is governed by its Limited Liability Company Operating Agreement (“Operating Agreement”), as amended.
The Company may continue until December 31, 2025. Periodic distributions are paid at the discretion of the Managing Member.
Results of Operations
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, 2009 and 2008, the Company has not exceeded the annual and/or cumulative limitations discussed above.
As of December 31, 2009 and 2008, there were concentrations (greater than 10% as a percentage of total equipment cost) of equipment leased to lessees and/or financial borrowers in certain industries as follows:
2009 | 2008 | |||||
Manufacturing | 49 | % | 60 | % | ||
Transportation, rail | 24 | % | 19 | % | ||
Transportation services | 16 | % | 13 | % |
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As previously mentioned, certain lessees generated significant portions (defined as 10% or more) of the Company’s total operating revenues during 2009 and 2008 as follows:
Percentage of Total Lease Revenues | ||||||||
Lessee | Type of Equipment | 2009 | 2008 | |||||
New NGC, Inc. | Materials handling | 15% | 11% | |||||
Union Pacific | Transportation | 13% | 10% | |||||
International Paper Co. | Materials handling | 11% | 10% | |||||
Washington Group International | Construction | * | 12% |
* | Less than 10% |
These percentages are not expected to be comparable in future periods due to anticipated changes in the mix of investments and/or lessees as a result of normal business activities.
It is the Company’s objective to maintain a 100% utilization rate for all equipment purchased in any given year. All equipment transactions are acquired subject to binding lease commitments, so equipment utilization is expected to remain high throughout the reinvestment stage. Initial lease terms of these leases are generally from 36 to 120 months, and as they expire, the Company will attempt 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 2008. The utilization percentage of existing assets under lease was 94% and 100% as of December 31, 2009 and 2008, respectively.
2009 vs. 2008
The Company had net income of $1.1 million for the year ended December 31, 2009 and a net loss of $883 thousand for the prior year. Results for 2009 reflect a decrease in operating expenses offset, in part, by a much smaller reduction in total revenues when compared with results for the prior year.
Revenues
Total revenues for 2009 decreased by $946 thousand, or 7%, as compared to the prior year. The net reduction in total revenues was primarily due to decreases in operating lease revenues and interest income on notes receivable, and the loss on the sale or disposition of securities. These decreases were partially offset by an increase in gain on sales of assets and early termination of notes.
Total operating lease revenues declined by $2.2 million primarily as a result of run-off and sales of lease assets. In particular, the Company lost significant rental revenue from mining equipment purchased by a lessee during the second quarter of 2009. Likewise, interest income on notes receivable declined by $265 thousand primarily due to continued run-off and early terminations of certain notes receivable. In addition, the $46 thousand loss related to the write-off of an impaired security during the first quarter of 2009 reduced revenues by $100 thousand when compared to prior year.
As a partial offset to the aforementioned decreases in revenues, net gain on sale of lease assets and early termination of notes increased by $1.6 million primarily due to gains recognized on the sale of mining equipment to a lessee during the second quarter of 2009.
Expenses
Total expenses for 2009 decreased by $2.9 million, or 22%, as compared to the prior year. The net reduction in total expenses was primarily due to decreases in depreciation expense, interest expense, the provision for credit losses, costs reimbursed to AFS and professional fees. These decreases in expense were offset, in part, by an increase in impairment losses, other expense and the provision for losses on investment securities.
Depreciation expense for 2009 decreased by $2.1 million, or 21%, as compared to the prior year, largely due to run-off and sales of lease assets. Interest expense declined by $444 thousand due to the decrease in outstanding debt, which has been reduced by approximately $9.0 million since December 31, 2008 primarily due to an early termination of a significant lease and its corresponding debt combined with continued scheduled payments of outstanding debt.
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Moreover, the provision for credit losses declined by $377 thousand as the 2008 amount included a $496 thousand reserve related to two borrowers that have since defaulted on their respective notes; and the costs reimbursed to AFS decreased by $149 thousand as the 2008 amount reflected the payment of 2007 administrative costs. In addition, professional fees were reduced by $96 thousand primarily as a result of a year over year reduction in tax preparation and audit related fees.
The aforementioned decreases in expenses were partially offset by increases in impairment losses, other expense and the provision for losses on investment securities totaling $245 thousand, $56 thousand and $50 thousand, respectively. The increase in impairment losses was a result of 2009 adjustments made to the cost basis of certain impaired leased and off-lease assets. Other expense increased mainly due to higher estimated state and franchise taxes, and inspection fees. In addition, the increase in the provision for losses on investment securities resulted from the first quarter 2009 recognition of an impairment loss on an investment security.
Other income, net
The Company recorded other income, net totaling $2 thousand and $8 thousand for 2009 and 2008, respectively. Other income, net declined as a result of an unfavorable change in net foreign currency transaction gains recognized during 2009 as compared to the prior year.
The decline in foreign currency gains was largely due to the year over year strength of the U.S. currency against the British pound. The British pound comprises the majority of the Company’s foreign currency transactions.
Capital Resources and Liquidity
The liquidity of the Company varies, increasing to the extent cash flows from leases and proceeds of asset sales exceed expenses and decreasing as lease assets are acquired, as distributions are made to the Members and to the extent expenses exceed cash flows from leases and proceeds from asset sales.
The primary source of liquidity for the Company is its cash flow from leasing activities. As the lease terms expire, the Company will re-lease or sell the equipment. The future liquidity beyond the contractual minimum rentals will depend on AFS’s success in remarketing or selling the equipment as it comes off rental.
The changes in the Company’s cash flow for 2009 when compared to the prior year are as follows:
• | Operating Activities |
Cash provided by operating activities decreased by $829 thousand for the year ended December 31, 2009 as compared to the prior year. The net decrease in cash flow was mostly due to a decline in net operating results, as adjusted for non-cash items such as gains on sales of assets and depreciation expense, and decreased collections of outstanding accounts receivable. These decreases in cash flow were partially offset by increases resulting from reduced payments made against accounts payable and accrued liabilities, and reduced amounts of unearned lease income amortized during 2009 as compared to the prior year.
The year over year decline in net operating results, as adjusted for non-cash items, reduced cash flow by $1.6 million and was mainly attributable to the reduction in revenues from operating leases and interest income from notes receivable. Likewise, the decrease in collection of accounts receivable reduced cash flow by $221 thousand. This change was largely attributable to the first quarter 2008 collection of 2007 year-end revenue billings.
As a partial offset, the decrease in payments made against accounts payable and accrued liabilities improved cash flow by $508 thousand. The decline in payments was primarily due to the 2008 payment of 2007 accruals related to asset purchases and reimbursements to AFS, and a refund of a lessee overpayment during the second quarter of 2008. This change was partially offset by overpayments made by certain lessees during 2009.
In addition, the decrease in amounts of unearned lease income amortized during 2009, as compared to 2008, improved cash flow by $435 thousand and was primarily due to the significantly higher amounts of prepaid rents received in 2007 versus 2008.
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• | Investing Activities |
Cash provided by investing activities for 2009 increased by $6.7 million as compared to the prior year. The increase in cash flow was mainly a result of a combined $6.9 million increase in proceeds from sales of lease assets and early termination of notes receivable and a combined $1.2 million decrease in cash used to purchase lease assets and fund loans. These increases were offset, in part, by a $1.3 million reduction in payments received on notes receivable.
The significant increase in proceeds from sales of lease assets was mostly attributable to an early termination of a lease during the second quarter of 2009; and the decline in cash used to purchase lease assets and fund loans was attributable to the decline in acquisition phase activity as the Fund has approached full investment.
As a partial offset, payments received on notes receivable decreased largely due to the continued run-off of the notes portfolio.
• | Financing Activities |
Net cash used in financing activities increased by $2.4 million during 2009 as compared to the prior year. The net decrease in cash flow was primarily due to a $2.3 million year over year reduction in net proceeds from borrowings combined with a $100 thousand increase in cash used to repurchase Units.
Throughout the Reinvestment Period (as defined in the Operating Agreement), the Company anticipates reinvesting a portion of lease payments from assets owned, and/or payments received on notes receivable, in new leasing or financing transactions. Such reinvestment will occur only after the payment of all obligations, including debt service (both principal and interest), the payment of management fees to AFS and providing for cash distributions to the Members.
In a normal economy, if inflation in the general economy becomes significant, it may affect the Company in as much as the residual (resale) values and rates on re-leases of the Company’s leased assets may increase as the costs of similar assets increase. However, the Company’s revenues from existing leases and notes would not increase as such rates are generally fixed for the terms of the leases and notes without adjustment for inflation. In addition, if interest rates increase significantly under such circumstances, the rates that the Company can obtain on future lease or financing transactions will be expected to increase as the cost of capital is a significant factor in the pricing of leases and investments in notes receivable. Leases and notes already in place, for the most part, would not be affected by changes in interest rates.
The Company currently has available adequate reserves to meet its immediate cash requirements and those of the next twelve months, but in the event those reserves were found to be inadequate, the Company would likely be in a position to borrow against its current portfolio to meet such requirements. AFS envisions no such requirements for operating purposes.
Revolving credit facility
The Company participates with AFS and certain of its affiliates in a revolving credit facility (the “Credit Facility”) comprised of a working capital facility to AFS, an acquisition facility (the “Acquisition Facility”) and a warehouse facility (the “Warehouse Facility”) to AFS, the Company and affiliates, and a venture facility available to an affiliate, with a syndicate of financial institutions.
Compliance with covenants
The Credit Facility includes certain financial and non-financial covenants applicable to each borrower, including the Company. Such covenants include covenants typically found in credit facilities of the size and nature of the Credit Facility, such as accuracy of representations, good standing, absence of liens and material litigation, etc. The Company and affiliates were in compliance with all covenants under the Credit Facility as of December 31, 2009. The Company considers certain financial covenants to be material to its ongoing use of the Credit Facility and these covenants are described below.
Material financial covenants
Under the Credit Facility, the Company is required to maintain a specific tangible net worth, to comply with a leverage ratio and an interest coverage ratio, and to comply with other terms expressed in the Credit Facility, including limitation on the incurrence of additional debt and guaranties, defaults, and delinquencies.
10
The material financial covenants are summarized as follows:
Minimum Tangible Net Worth: $10 million
Leverage Ratio (leverage to Tangible Net Worth): Not to exceed 1.25 to 1
Collateral Value: Collateral value under the Warehouse Facility must exceed outstanding borrowings under that facility.
EBITDA to Interest Ratio: Not to be less than 2 to 1 for the four fiscal quarters just ended.
“EBITDA” is defined under the Credit Facility as, for the relevant period of time (1) gross revenues (all payments from leases and notes receivable) for such period minus (2) expenses deducted in determining net income for such period plus (3) to the extent deducted in determining net income for such period (a) provision for income taxes and (b) interest expense, and (c) depreciation, amortization and other non-cash charges. Extraordinary items and gains or losses on (and proceeds from) sales or dispositions of assets outside of the ordinary course of business are excluded in the calculation of EBITDA. “Tangible Net Worth” is defined as, as of the date of determination, (i) the net worth of the Company, after deducting therefrom (without duplication of deductions) the net book amount of all assets of the Company, after deducting any reserves and other amounts for assets which would be treated as intangibles under GAAP, (U.S Generally Accepted Accounting Principles) and after certain other adjustments permitted under the agreements.
The financial covenants referred to above are applicable to the Company only to the extent that the Company has borrowings outstanding under the Credit Facility. As of December 31, 2009, the Company’s Tangible Net Worth requirement under the Credit Facility was $10 million, the permitted maximum leverage ratio was 1.25 to 1, and the required minimum interest coverage ratio (EBITDA/interest expense) was 2 to 1. The Company was in compliance with each of these financial covenants with a minimum Tangible Net Worth, leverage ratio and (EBITDA) interest coverage ratio, as calculated per the Credit Facility agreement of $21.3 million, 0.42 to 1, and 13.50 to 1, respectively, as of December 31, 2009. As such, as of December 31, 2009, the Company and its affiliates were in compliance with all such material financial covenants.
Reconciliation to GAAP of EBITDA
For purposes of compliance with the Credit Facility covenants, the Company uses a financial calculation of EBITDA, as defined therein, which is a non-GAAP financial performance measure. The EBITDA is utilized by the Company to calculate its debt covenant ratios.
The following is a reconciliation of EBITDA to net income for the year ended December 31, 2009 (in thousands):
Net income - GAAP basis | $ | 1,084 | ||
Interest expense | 854 | |||
Depreciation and amortization | 7,847 | |||
Amortization of initial direct costs | 168 | |||
Impairment losses | 245 | |||
Provision for credit losses | 28 | |||
Provision for losses on investment securities | 50 | |||
Payments received on direct financing leases | 78 | |||
Payments received on notes receivable | 1,560 | |||
Amortization of unearned income on direct financing leases | (58 | ) | ||
Amorization of unearned income on notes receivable | (331 | ) | ||
EBITDA (for Credit Facility financial covenant calculation only) | $ | 11,525 | ||
Events of default, cross-defaults, recourse and security
The terms of the Credit Facility include standard events of default by the Company which, if not cured within applicable grace periods, could give lenders remedies against the Company, including the acceleration of all outstanding borrowings and a demand for repayment in advance of their stated maturity. If a breach of any material term of the Credit Facility should occur, the lenders may, at their option, increase borrowing rates, accelerate the obligations in advance of their stated maturities, terminate the facility, and exercise rights of collection available to them under the express terms of the facility, or by operation of law. The lenders also retain the discretion to waive a violation of any covenant at the Company’s request.
11
The Company is currently in compliance with its obligations under the Credit Facility. In the event of a technical default (e.g., the failure to timely file a required report, or a one-time breach of a financial covenant), the Company believes it has ample time to request and be granted a waiver by the lenders, or, alternatively, cure the default under the existing provisions of its debt agreements, including, if necessary, arranging for additional capital from alternate sources to satisfy outstanding obligations.
The lending syndicate providing the Credit Facility has a blanket lien on all of the Company’s assets as collateral for any and all borrowings under the Acquisition Facility, and on a pro-rata basis under the Warehouse Facility.
The Acquisition Facility is generally recourse solely to the Company, and is not cross-defaulted to any other obligations of affiliated companies under the Credit Facility, except as described in this paragraph. The Credit Facility is cross-defaulted to a default in the payment of any debt (other than non-recourse debt) or any other agreement or condition beyond the period of grace (not exceeding 30 days), the effect of which would entitle the lender under such agreement to accelerate the obligations prior to their stated maturity in an individual or aggregate principal amount in excess of 15% of the Company’s consolidated Tangible Net Worth. Also, a bankruptcy of AFS will trigger a default for the Company under the Credit Facility.
For detailed information on the Company’s debt obligations, see Notes 8 and 9 to the financial statements as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
Due to the bankruptcy of a major lessee, Chrysler Corporation, the Company, in accordance with its accounting policy for allowance for doubtful accounts, has placed all operating leases with Chrysler on non-accrual status pending resumption of recurring payment activity. The Company also considered the equipment underlying the lease contracts for impairment and believes that such equipment is not impaired as of December 31, 2009. At December 31, 2009, the net book value of such equipment was approximately $1.1 million. The new Chrysler has remitted payments relative to the affirmed leases. However, at December 31, 2009, the account remains on cash basis in accordance with Company policy as the short payment history of the new Chrysler does not yet substantiate its ability to maintain accounts current.
As of December 31, 2009, the total net investment in equipment underlying lease contracts placed in non-accrual status, and the related accounts receivable from such contracts approximated $1.7 million and $168 thousand, respectively. As of the same date, management has concluded that the status of these leases will not have a material impact on either of the Company’s capital resources or liquidity. As of December 31, 2008, the total net investment in equipment underlying lease contracts placed in non-accrual status totaled $884 thousand with a related accounts receivable of $144 thousand.
The Company commenced periodic distributions, based on cash flows from operations, beginning with the month of June 2005. Additional distributions have been consistently made through December 31, 2009.
At December 31, 2009, there were no commitments to purchase lease assets or fund investments in notes receivable.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is included in Note 2 to the financial statements, Summary of significant accounting policies, as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
Critical Accounting Policies and Estimates
The policies discussed below are considered by management of the Company to be critical to an understanding of the Company’s financial statements because their application requires significantly complex or subjective judgments, decisions, or assessments, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. The Company also states these accounting policies in the notes to the financial statements and in relevant sections in this discussion and analysis. For all of these policies, management cautions that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment.
12
Use of estimates:
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Such estimates primarily relate to the determination of residual values at the end of the lease term and expected future cash flows used for impairment analysis purposes and for determination of the allowance for doubtful accounts and reserve for credit losses on notes receivable.
Equipment on operating leases and related revenue recognition:
Equipment subject to operating leases is stated at cost. Depreciation is being recognized on a straight-line method over the terms of the related leases to the equipment’s estimated residual values at the end of the leases. Maintenance costs associated with the Fund’s portfolio of leased assets are expensed as incurred. Major additions and betterments are capitalized.
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 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, operating lessees may be placed in a 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.
Direct financing leases and related revenue recognition:
Income from direct financing lease transactions is reported using the financing method of accounting, in which the Company’s investment in the leased property is reported as a receivable from the lessee to be recovered through future rentals. The interest income portion of each rental payment is calculated so as to generate a constant rate of return on the net receivable outstanding.
Allowances for losses on direct financing leases are typically established based on historical charge off and collection experience and the collectability of specifically identified lessees and billed and unbilled receivables. Direct financing leases are written-off as they are deemed uncollectible.
Direct financing 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 periodically reviews the credit worthiness of all direct finance lessees with payments outstanding less than 90 days. Based upon management’s judgment, direct finance lessees may be placed in a non-accrual status. Leases placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable.
Notes receivable, unearned interest income and related revenue recognition:
The Company records all future payments of principal and interest on notes as notes receivable and then offsets the related unearned interest income. For financial statement purposes, the Company reports only the principal due on the balance sheet. The unearned interest is recognized over the term of the note and the income portion of each note payment is calculated so as to generate a constant rate of return on the net balance outstanding. Any fees or costs related to notes receivable are recorded as part of the net investment in notes receivable and amortized over the term of the loan.
Allowances for losses on notes receivable are typically established based on historical charge off and collection experience and the collectability of specifically identified borrowers and billed and unbilled receivables. Notes are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the note agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Notes are written off to the allowance as they are deemed uncollectible.
13
Notes receivable are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management periodically reviews the credit worthiness of companies with note payments outstanding less than 90 days. Based upon management’s judgment, notes may be placed in a non-accrual status. Notes placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid receivable is probable.
Initial direct costs:
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.
Asset valuation:
Recorded values of the Company’s leased asset portfolio are periodically reviewed for impairment. An impairment loss is measured and recognized only if the estimated undiscounted future cash flows of the asset are less than their net book value. The estimated undiscounted future cash flows are the sum of the estimated residual value of the asset at the end of the asset’s expected holding period and estimates of undiscounted future rents. The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the market place are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. Impairment is measured as the difference between the fair value (as determined by 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 assets and its carrying value on the measurement date.
Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
See the Report of Independent Registered Public Accounting Firm, Financial Statements and Notes to Financial Statements attached hereto at pages 15 through 36.
14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2009 and 2008, and the related statements of operations, changes in members’ capital, and cash flows for the years then ended. These financial statements are the responsibility of the Management of the Company’s Managing Member. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ATEL Capital Equipment Fund XI, LLC as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Moss Adams LLP
San Francisco, California
March 26, 2010
15
ATEL CAPITAL EQUIPMENT FUND XI, LLC
BALANCE SHEETS
DECEMBER 31, 2009 AND 2008
(In Thousands)
2009 | 2008 | |||||
ASSETS | ||||||
Cash and cash equivalents | $ | 3,654 | $ | 904 | ||
Accounts receivable, net of allowance for doubtful accounts of $210 as of December 31, 2009 and $178 as of December 31, 2008 | 213 | 254 | ||||
Notes receivable, net of unearned interest income of $472 and allowance for credit losses of $0 as of December 31, 2009 and net of unearned interest income of $896 and allowance for credit losses of $479 as of December 31, 2008 | 2,570 | 3,994 | ||||
Investments in securities | 306 | 421 | ||||
Investments in equipment and leases, net of accumulated depreciation of $25,912 as of December 31, 2009 and $23,524 as of December 31, 2008 | 24,917 | 39,490 | ||||
Other assets | 39 | 36 | ||||
Total assets | $ | 31,699 | $ | 45,099 | ||
LIABILITIES AND MEMBERS’ CAPITAL | ||||||
Accounts payable and accrued liabilities: | ||||||
Managing Member | $ | 87 | $ | 121 | ||
Accrued distributions to Other Members | 551 | 554 | ||||
Other | 412 | 326 | ||||
Non-recourse debt | 8,924 | 17,389 | ||||
Acquisition facility obligation | — | 500 | ||||
Unearned operating lease income | 437 | 695 | ||||
Total liabilities | 10,411 | 19,585 | ||||
Commitments and contingencies | ||||||
Members’ capital: | ||||||
Managing Member | — | — | ||||
Other Members | 21,288 | 25,514 | ||||
Total Members’ capital | 21,288 | 25,514 | ||||
Total liabilities and Members’ capital | $ | 31,699 | $ | 45,099 | ||
See accompanying notes.
16
ATEL CAPITAL EQUIPMENT FUND XI, LLC
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(In Thousands Except for Units and Per Unit Data)
2009 | 2008 | |||||||
Revenues: | ||||||||
Operating lease income | $ | 9,643 | $ | 11,820 | ||||
Direct financing leases | 58 | 3 | ||||||
Notes receivable interest income | 331 | 596 | ||||||
Gain on sale of assets and early termination of notes | 1,657 | 76 | ||||||
(Loss) gain on sale or disposition of securities | (46 | ) | 54 | |||||
Interest income | — | 24 | ||||||
Other | 26 | 42 | ||||||
Total revenues | 11,669 | 12,615 | ||||||
Expenses: | ||||||||
Depreciation of operating lease assets | 7,847 | 9,976 | ||||||
Asset management fees to Managing Member | 656 | 648 | ||||||
Acquisition expense | 4 | 48 | ||||||
Cost reimbursements to Managing Member | 349 | 498 | ||||||
Impairment losses | 245 | — | ||||||
Provision for credit losses | 28 | 405 | ||||||
Provision for losses on investment in securities | 50 | — | ||||||
Amortization of initial direct costs | 168 | 205 | ||||||
Interest expense | 854 | 1,298 | ||||||
Professional fees | 169 | 265 | ||||||
Outside services | 53 | 55 | ||||||
Other | 164 | 108 | ||||||
Total operating expenses | 10,587 | 13,506 | ||||||
Other income, net | 2 | 8 | ||||||
Net income (loss) | $ | 1,084 | $ | (883 | ) | |||
Net income (loss): | ||||||||
Managing Member | $ | 391 | $ | 392 | ||||
Other Members | 693 | (1,275 | ) | |||||
$ | 1,084 | $ | (883 | ) | ||||
Net income (loss) per Limited Liability Company Unit (Other Members) | $ | 0.13 | $ | (0.24 | ) | |||
Weighted average number of Units outstanding | 5,213,137 | 5,230,507 |
See accompanying notes.
17
ATEL CAPITAL EQUIPMENT FUND XI, LLC
STATEMENT OF CHANGES IN MEMBERS’ CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(In Thousands Except for Units and Per Unit Data)
Other Members | Managing Member | Total | |||||||||||||
Units | Amount | ||||||||||||||
Balance December 31, 2007 | 5,230,507 | $ | 31,627 | $ | — | $ | 31,627 | ||||||||
Distributions to Other Members ($0.92 per Unit) | — | (4,838 | ) | — | (4,838 | ) | |||||||||
Distributions to Managing Member | — | — | (392 | ) | (392 | ) | |||||||||
Net (loss) income | — | (1,275 | ) | 392 | (883 | ) | |||||||||
Balance December 31, 2008 | 5,230,507 | 25,514 | — | 25,514 | |||||||||||
Repurchases of capital contributions | (20,000 | ) | (100 | ) | — | (100 | ) | ||||||||
Distributions to Other Members ($0.92 per Unit) | — | (4,819 | ) | — | (4,819 | ) | |||||||||
Distributions to Managing Member | — | — | (391 | ) | (391 | ) | |||||||||
Net income | — | 693 | 391 | 1,084 | |||||||||||
Balance December 31, 2009 | 5,210,507 | $ | 21,288 | $ | — | $ | 21,288 | ||||||||
See accompanying notes.
18
ATEL CAPITAL EQUIPMENT FUND XI, LLC
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(In Thousands)
2009 | 2008 | |||||||
Operating activities: | ||||||||
Net income (loss) | $ | 1,084 | $ | (883 | ) | |||
Adjustment to reconcile net income (loss) to cash provided by operating activities: | ||||||||
Gain on sales of assets and early termination of notes | (1,657 | ) | (76 | ) | ||||
Depreciation of operating lease assets | 7,847 | 9,976 | ||||||
Amortization of initial direct costs | 168 | 205 | ||||||
Amortization of unearned income on direct financing leases | (58 | ) | (3 | ) | ||||
Amortization of unearned income on notes receivable | (331 | ) | (596 | ) | ||||
Impairment losses | 245 | — | ||||||
Provision for credit losses | 28 | 405 | ||||||
Provision for losses on investment in securities | 50 | — | ||||||
Loss (gain) on sale or disposition of securities | 46 | (54 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 33 | 254 | ||||||
Prepaid expenses and other assets | (3 | ) | (4 | ) | ||||
Accounts payable, Managing Member | (34 | ) | (260 | ) | ||||
Accounts payable, other | 86 | (342 | ) | |||||
Accounts payable, affiliates | — | 146 | ||||||
Unearned operating lease income | (258 | ) | (693 | ) | ||||
Net cash provided by operating activities | 7,246 | 8,075 | ||||||
Investing activities: | ||||||||
Purchases of equipment on operating leases | — | (543 | ) | |||||
Purchase of securities | (3 | ) | (76 | ) | ||||
Proceeds from early termination of notes receivable | 172 | 1,223 | ||||||
Proceeds from sales of lease assets | 7,954 | — | ||||||
Payments of initial direct costs | (1 | ) | (12 | ) | ||||
Payments received on direct financing leases | 78 | 10 | ||||||
Note receivable advances | — | (625 | ) | |||||
Proceeds from sale of securities | 22 | 206 | ||||||
Payments received on notes receivable | 1,560 | 2,904 | ||||||
Net cash provided by investing activities | 9,782 | 3,087 | ||||||
Financing activities: | ||||||||
Borrowings under non-recourse debt | — | 2,738 | ||||||
Repayments under non-recourse debt | (8,465 | ) | (5,928 | ) | ||||
Borrowings under acquisition facility | 500 | 3,000 | ||||||
Repayments under acquisition facility | (1,000 | ) | (6,500 | ) | ||||
Distributions to Other Members | (4,822 | ) | (4,838 | ) | ||||
Distributions to Managing Member | (391 | ) | (392 | ) | ||||
Rescissions and repurchases of capital contributions | (100 | ) | — | |||||
Net cash used in financing activities | (14,278 | ) | (11,920 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 2,750 | (758 | ) | |||||
Cash and cash equivalents at beginning of year | 904 | 1,662 | ||||||
Cash and cash equivalents at end of year | $ | 3,654 | $ | 904 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the year for interest | $ | 898 | $ | 1,335 | ||||
Cash paid during the year for taxes | $ | 41 | $ | 35 | ||||
Schedule of non-cash transactions: | ||||||||
Distributions payable to Other Members at year-end | $ | 551 | $ | 554 | ||||
Distributions payable to Managing Member at year-end | $ | 45 | $ | 45 | ||||
See accompanying notes.
19
ATEL CAPITAL EQUIPMENT FUND XI, LLC
NOTES TO FINANCIAL STATEMENTS
1. Organization and Limited Liability Company matters:
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 may purchase securities of its borrowers or receive warrants to purchase securities in connection with its lending arrangements. The Managing Member 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. Net contributions of $52.2 million were received through December 31, 2009, consisting of approximately $52.8 million in gross contributions from Other Members purchasing Units under the public offering less rescissions and repurchases of $632 thousand. As of December 31, 2009, 5,210,507 Units were issued and outstanding.
The Company’s principal objectives are to invest in a diversified portfolio of equipment that (i) preserves, protects and returns the Company’s invested capital; (ii) generates regular distributions to the Members of cash from operations and cash from sales or refinancing, with any balance remaining after certain minimum distributions to be used to purchase additional equipment during the reinvestment period (“Reinvestment Period”) (defined as six full years following the year the offering was terminated), which ends 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.
The Company, or AFS on behalf of the Company, has incurred costs in connection with the organization, registration and issuance of the Limited Liability Company Units (see Note 7 to the financial statements included in Item 8 of this report). The amount of such costs to be borne by the Company is limited by certain provisions of the Company’s Operating Agreement. The Company will pay AFS and affiliates of AFS substantial fees which may result in a conflict of interest. The Company will pay substantial fees to AFS and its affiliates before distributions are paid to investors even if the Company does not produce profits. Therefore, the financial position of the Company could change significantly.
The Company is in its acquisition phase and is making distributions on a monthly and quarterly basis. Periodic distributions commenced in June 2005.
2. Summary of significant accounting policies:
Basis of presentation:
The accompanying balance sheet as of December 31, 2009 and 2008, and the related statements of operations, 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 period amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on equity or net income.
Footnote and tabular amounts are presented in thousands, except as to Units and per Unit data.
20
ATEL CAPITAL EQUIPMENT FUND XI, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued):
In preparing the accompanying financial statements, the Company has reviewed, as determined necessary by the Managing Member, events that have occurred after December 31, 2009, up until the issuance of the financial statements. No events were noted which would require disclosure in the footnotes to the financial statements.
Use of estimates:
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Such estimates primarily relate to the determination of residual values at the end of the lease term and expected future cash flows used for impairment analysis purposes and for determination of the allowance for doubtful accounts and reserve for credit losses on notes receivable.
Cash and cash equivalents:
Cash and cash equivalents include cash in banks and cash equivalent investments such as U.S. Treasury instruments with original and/or purchased maturities of ninety days or less.
Accounts receivable:
Accounts receivable represent the amounts billed under operating and direct financing lease contracts, and notes receivable which are currently due to the Company. Allowances for doubtful accounts are 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 specific identification basis. Recoveries of amounts that were previously written-off are recorded as other income in the period received.
Credit risk:
Financial instruments that potentially subject the Company to concentrations of credit risk include cash and cash equivalents, direct financing lease receivables, notes receivable and accounts receivable. The Company places the majority of its cash deposits and temporary cash investments in U.S. Treasury denominated instruments with the remainder placed in financial institutions where the principal is 100% guaranteed under the Troubled Asset Relief Program Act of 2008 (“TARP”) through June 2010, so as to meet ongoing working capital requirements. The concentration of such deposits and temporary cash investments is not deemed to create a significant risk to the Company. Accounts and notes receivable represent amounts due from lessees or borrowers in various industries, related to equipment on operating and direct financing leases or notes receivable. See Note 3 for a description of lessees and financial borrowers by industry as of December 31, 2009 and 2008.
Equipment on operating leases and related revenue recognition:
Equipment subject to operating leases is stated at cost. Depreciation is being recognized on a straight-line method over the terms of the related leases to the equipment’s estimated residual values at the end of the leases. Maintenance costs associated with the Fund’s portfolio of leased assets are expensed as incurred. Major additions and betterments are capitalized.
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.
21
ATEL CAPITAL EQUIPMENT FUND XI, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued):
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, operating lessees may be placed in a 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.
Direct financing leases and related revenue recognition:
Income from direct financing lease transactions is reported using the financing method of accounting, in which the Company’s investment in the leased property is reported as a receivable from the lessee to be recovered through future rentals. The interest income portion of each rental payment is calculated so as to generate a constant rate of return on the net receivable outstanding.
Allowances for losses on direct financing leases are typically established based on historical charge 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) when payments are more than 90 days past due. Additionally, management periodically reviews the credit worthiness of all direct finance lessees with payments outstanding less than 90 days. Based upon management’s judgment, direct finance lessees may be placed in a non-accrual status. Leases placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable.
Notes receivable, unearned interest income and related revenue recognition:
The Company records all future payments of principal and interest on notes as notes receivable, which is then offset by the amount of any related unearned interest income. For financial statement purposes, the Company reports only the net amount of principal due on the balance sheet. The unearned interest is recognized over the term of the note and the income portion of each note payment is calculated so as to generate a constant rate of return on the net balance outstanding. Any fees or costs related to notes receivable are recorded as part of the net investment in notes receivable and amortized over the term of the loan.
Allowances for losses on notes receivable are typically established based on historical charge off and collection experience and the collectability of specifically identified borrowers and billed and unbilled receivables. Notes are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the note agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Notes are charged off to the allowance as they are deemed uncollectible.
Notes receivable are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of companies with note payments outstanding less than 90 days. Based upon management’s judgment, notes may be placed in a non-accrual status. Notes placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid receivable is probable. The fair value of the Company’s notes receivable is commensurate with the amount at which the asset could be collected in a current transaction, exclusive of transaction costs such as prepayment penalties.
22
ATEL CAPITAL EQUIPMENT FUND XI, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued):
Initial direct costs:
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:
Acquisition expense represents costs which include, but are not limited to, legal fees and expenses, travel and communication expenses, cost of appraisals, accounting fees and expenses and miscellaneous expenses related to the selection and acquisition of equipment which are reimbursable to the Managing Member under the terms of the Operating Agreement. As the costs are not eligible for capitalization as initial direct costs, such amounts are expensed as incurred.
Asset valuation:
Recorded values of the Company’s leased asset portfolio are periodically reviewed for impairment. An impairment loss is measured and recognized only if the estimated undiscounted future cash flows of the asset are less than their net book value. The estimated undiscounted future cash flows are the sum of the estimated residual value of the asset at the end of the asset’s expected holding period and estimates of undiscounted future rents. The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the market place are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. Impairment is measured as the difference between the fair value (as determined by 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.
Segment reporting:
The Company is not organized by multiple operating segments for the purpose of making operating decisions or assessing performance. Accordingly, the Company operates in one reportable operating segment in the United States.
The Company’s principal decision makers are the Managing Member’s Chief Executive Officer and its Chief Financial Officer and Chief Operating Officer. The Company believes that its equipment leasing business operates as one reportable segment because: a) the Company measures profit and loss at the equipment portfolio level as a whole; b) the principal decision makers do not review information based on any operating segment other than the equipment leasing transaction portfolio; c) the Company does not maintain discrete financial information on any specific segment other than its equipment financing operations; d) the Company has not chosen to organize its business around different products and services other than equipment lease financing; and e) the Company has not chosen to organize its business around geographic areas.
The primary geographic regions in which the Company seeks leasing opportunities are North America and Europe.
23
ATEL CAPITAL EQUIPMENT FUND XI, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued):
The table below summarizes geographic information relating to the sources, by nation, of the Company’s total revenues for the years ended December 31, 2009 and 2008 and long-lived assets as of December 31, 2009 and 2008 (in thousands):
For the year ended December 31, | ||||||||||||
2009 | % of Total | 2008 | % of Total | |||||||||
Revenue | ||||||||||||
United States | $ | 10,774 | 92 | % | $ | 11,632 | 92 | % | ||||
United Kingdom | 895 | 8 | % | 983 | 8 | % | ||||||
Total International | 895 | 8 | % | 983 | 8 | % | ||||||
Total | $ | 11,669 | 100 | % | $ | 12,615 | 100 | % | ||||
As of December 31, | ||||||||||||
2009 | % of Total | 2008 | % of Total | |||||||||
Long-lived assets | ||||||||||||
United States | $ | 23,339 | 94 | % | $ | 37,074 | 94 | % | ||||
United Kingdom | 1,578 | 6 | % | 2,416 | 6 | % | ||||||
Total International | 1,578 | 6 | % | 2,416 | 6 | % | ||||||
Total | $ | 24,917 | 100 | % | $ | 39,490 | 100 | % | ||||
Investment in securities:
From time to time, the Company may purchase securities of its borrowers or receive warrants to purchase securities in connection with its lending arrangements.
Purchased securities
Purchased securities are generally not registered for public sale and are carried at cost. Such securities are adjusted to fair value if the fair value is less than the carrying value and such impairment is deemed by the Managing Member to be other than temporary. Factors considered by the Managing Member in determining fair value include, but are not limited to, available financial information, the issuer’s ability to meet its current obligations and indications of the issuer’s subsequent ability to raise capital. Management has concluded that there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the instruments. Accordingly, such investment is stated at cost. At March 31, 2009, the Company deemed an investment security to be impaired. Accordingly, the Company recorded a fair value adjustment of approximately $50 thousand which reduced the cost basis of the investment. The impaired investment security was disposed of during the second quarter of 2009. There were no additional impaired securities at December 31, 2009 and 2008.
Warrants
Warrants owned by the Company are not registered for public sale, but are considered derivatives and are carried at an estimated fair value, as determined by the Managing Member, on the balance sheet as assets or liabilities. At December 31, 2009 and 2008, the Managing Member estimated the fair value of the warrants to be nominal in amount.
Foreign currency transactions:
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 recognized net foreign currency gains of $2 thousand and $8 thousand for 2009 and 2008, respectively.
24
ATEL CAPITAL EQUIPMENT FUND XI, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued):
Unearned operating lease income:
The Company records prepayments on operating leases as a liability, unearned operating lease income. The liability is recorded when the prepayments are received and recognized as operating lease revenue ratably over the period to which the prepayments relate.
Income taxes:
The Company is treated as a partnership for federal income tax purposes. Pursuant to the provisions of Section 701 of the Internal 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, 2009 and 2008, the current provision for state income taxes was approximately $61 thousand and $24 thousand, 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, 2009 and 2008 as follows (in thousands):
2009 | 2008 | |||||
Financial statement basis of net assets | $ | 21,288 | $ | 25,514 | ||
Tax basis of net assets (unaudited) | 20,158 | 23,274 | ||||
Difference | $ | 1,130 | $ | 2,240 | ||
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.
The following reconciles the net income (loss) reported in these financial statements to the income (loss) reported on the Company’s federal tax returns (unaudited) for the years ended December 31, 2009 and 2008, respectively (in thousands):
2009 | 2008 | |||||||
Net income (loss) per financial statements | $ | 1,084 | $ | (883 | ) | |||
Tax adjustments (unaudited): | ||||||||
Adjustment to depreciation expense | 397 | (1,740 | ) | |||||
Provision for doubtful accounts | 32 | 53 | ||||||
Provision for losses | — | 479 | ||||||
Adjustments to revenues | (234 | ) | (691 | ) | ||||
Adjustments to gain on sales of assets | 1,154 | — | ||||||
Other | (236 | ) | — | |||||
Income (loss) per federal tax return (unaudited) | $ | 2,197 | $ | (2,782 | ) | |||
Other income, net:
During the year ended December 31, 2009 and 2008, other income, net was comprised of gains on foreign currency transactions.
Per unit data:
Net income (loss) and distributions per Unit are based upon the weighted average number of Other Members Units outstanding during the period.
25
ATEL CAPITAL EQUIPMENT FUND XI, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued):
Recent accounting pronouncements:
The Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification provides guidance on improving disclosures about fair value measurements. This guidance has new requirements for disclosures related to recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements in a rollforward reconciliation of Level 3 fair-value measurements. This guidance is effective for the first reporting period beginning after December 15, 2009, which will be effective for the Company beginning January 1, 2010. The Level 3 reconciliation disclosures are effective for fiscal years beginning after December 15, 2010. The adoption of the guidance is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
The Generally Accepted Accounting Principles Topic of the FASB Accounting Standards Codification identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. The guidance is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted the guidance for its third quarter 2009 interim reporting period. The adoption of the guidance did not have a significant impact on the Company’s financial position, results of operations or cash flows.
The Subsequent Events Topic of the FASB Accounting Standards Codification establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The guidance is effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively. The Company adopted the guidance for its second quarter 2009 interim reporting period. The adoption of the guidance did not have a significant impact on the Company’s financial position, results of operations or cash flows.
The Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification provides guidance on determining fair value when there is no active market or where the price inputs being used represent distressed sales. The guidance is effective for interim and annual periods ending after June 15, 2009 and has been adopted by the Company for its second quarter 2009 interim reporting period with no impact on its financial position, results of operations or cash flows.
The Financial Instruments Topic of the FASB Accounting Standards Codification increases the frequency of fair value disclosures for financial instruments within the scope of the Topic from an annual basis to a quarterly basis. The guidance is effective for interim reporting periods ending after June 15, 2009. The Company adopted the guidance for its second quarter 2009 interim reporting period without significant effect on the Company’s financial position, results of operations or cash flows.
The Derivatives and Hedging Topic of the FASB Accounting Standards Codification requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. The fair value of derivative instruments and their gains and losses will need to be presented in tabular format in order to present a more complete picture of the effects of using derivative instruments. The guidance is effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company adopted the provisions of the guidance on January 1, 2009. The adoption did not have a significant effect on the Company’s financial position, results of operations or cash flows.
The Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements. The guidance was to be effective for fiscal years beginning after November 15, 2007. However, in February 2008, the FASB deferred the effective date of the guidance as it pertains to fair value measurements of nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. On January 1, 2008, the Company adopted the provisions of the guidance except as it applies to its investment in equipment and leases, and other nonfinancial assets and nonfinancial liabilities. The deferred provisions of the guidance were implemented effective January 1, 2009 without significant effect on the Company’s financial position, results of operations or cash flows.
26
ATEL CAPITAL EQUIPMENT FUND XI, LLC
NOTES TO FINANCIAL STATEMENTS
3. Concentration of credit risk and major customers:
The Company leases equipment to lessees and provides debt financing to borrowers in diversified industries. Leases and notes receivable are subject to AFS’s credit committee review. The leases and notes receivable provide for the return of the equipment to the Company upon default.
As of December 31, 2009 and 2008, there were concentrations (greater than 10% as a percentage of total equipment cost) of equipment leased to lessees and/or financial borrowers in certain industries as follows:
2009 | 2008 | |||||
Manufacturing | 49% | 60% | ||||
Transportation, rail | 24% | 19% | ||||
Transportation services | 16% | 13% |
During 2009 and 2008, certain lessees generated significant portions (defined as 10% or more) of the Company’s total operating revenues as follows:
Percentage of Total Lease Revenues | ||||||
Lessee | Type of Equipment | 2009 | 2008 | |||
New NGC, Inc. | Materials handling | 15% | 11% | |||
Union Pacific | Transportation | 13% | 10% | |||
International Paper Co. | Materials handling | 11% | 10% | |||
Washington Group International | Construction | * | 12% |
* | Less than 10% |
4. Notes receivable, net:
The Company has various notes receivable from borrowers who have financed the purchase of equipment through the Company. The terms of the notes receivable were generally up to 120 months and bear interest at rates ranging from 8.4% to 13.9%. The notes are secured by the equipment financed. The notes mature from 2010 through 2016. There were no impaired notes at December 31, 2009. At December 31, 2008, the Company had a $479 thousand reserve for impairment losses related to a $499 thousand note receivable. The impaired note was subsequently written-off during the third quarter of 2009. There were no notes receivable placed in non-accrual status as of December 31, 2009. As of December 31, 2008, the total amount of notes receivable placed in non-accrual status was nominal in amount.
The minimum future payments receivable as of December 31, 2009 are as follows (in thousands):
Year ending December 31, 2010 | $ | 1,249 | ||||
2011 | 521 | |||||
2012 | 399 | |||||
2013 | 295 | |||||
2014 | 221 | |||||
Thereafter | 354 | |||||
3,039 | ||||||
Less: portion representing unearned interest income | (472 | ) | ||||
2,567 | ||||||
Unamortized indirect costs | 3 | |||||
Notes receivable, net | $ | 2,570 | ||||
27
ATEL CAPITAL EQUIPMENT FUND XI, LLC
NOTES TO FINANCIAL STATEMENTS
4. Notes receivable, net (continued):
IDC amortization expense related to notes receivable and the Company’s operating and direct financing leases for the years ended December 31, 2009 and 2008 are as follows (in thousands):
For the year ended December 31, | ||||||
2009 | 2008 | |||||
IDC amortization - notes receivable | $ | 8 | $ | 21 | ||
IDC amortization - lease assets | 160 | 184 | ||||
Total | $ | 168 | $ | 205 | ||
5. Provision for credit losses:
The Company’s provision for credit losses are as follows (in thousands):
Provision for losses - Notes Receivable | Allowance for Doubtful Accounts | Total | ||||||||||
Balance January 1, 2008 | $ | — | $ | 125 | $ | 125 | ||||||
Provision (reversal of provision) for credit losses | 496 | (91 | ) | 405 | ||||||||
(Charge-offs)/adjustments | (17 | ) | 144 | 127 | ||||||||
Balance December 31, 2008 | 479 | 178 | 657 | |||||||||
Provision for losses | 20 | 8 | 28 | |||||||||
(Charge-offs)/adjustments | (499 | ) | 23 | (476 | ) | |||||||
Balance December 31, 2009 | $ | — | $ | 209 | $ | 209 | ||||||
6. Investments in equipment and leases, net:
The Company’s investment in leases consists of the following (in thousands):
Balance December 31, 2008 | Reclassifications, Additions/ Dispositions and Impairment Losses | Depreciation/ Amortization Expense or Amortization of Leases | Balance December 31, 2009 | |||||||||||
Net investment in operating leases | $ | 39,091 | $ | (7,110 | ) | $ | (7,807 | ) | $ | 24,174 | ||||
Net investment in direct financing leases | 42 | 141 | (20 | ) | 163 | |||||||||
Assets held for sale or lease, net | — | 423 | (40 | ) | 383 | |||||||||
Initial direct costs, net of accumulated amortization of $414 at December 31, 2009 and $368 at December 31, 2008 | 357 | — | (160 | ) | 197 | |||||||||
Total | $ | 39,490 | $ | (6,546 | ) | $ | (8,027 | ) | $ | 24,917 | ||||
Additions to net investment in operating leases are stated at cost and include amounts accrued at December 31, 2008 related to asset purchase obligations. There were no such amounts accrued at December 31, 2009.
28
ATEL CAPITAL EQUIPMENT FUND XI, LLC
NOTES TO FINANCIAL STATEMENTS
6. Investments in equipment and leases, net (continued):
Impairment of investments in leases and assets held for sale or lease:
Management periodically reviews the carrying values of its assets on leases and assets held for lease or sale. Impairment losses are recorded as an adjustment to the net investment in operating leases. During 2009, the Company deemed certain inventoried lease assets to be impaired. Accordingly, the Company recorded a fair value adjustment of approximately $245 thousand which reduced the cost basis of the assets. No impairment losses were recorded in 2008. Depreciation expense on property subject to operating leases and property held for lease or sale was approximately $7.8 million and $10.0 million for the years ended December 31, 2009 and 2008, respectively.
All of the leased property was acquired during the years 2005 through 2008.
Operating leases:
Property on operating leases consists of the following (in thousands):
Balance December 31, 2008 | Additions | Reclassifications or Dispositions | Balance December 31, 2009 | |||||||||||||
Materials handling | $ | 20,444 | $ | — | $ | (4,571 | ) | $ | 15,873 | |||||||
Transportation, rail | 11,723 | — | — | 11,723 | ||||||||||||
Transportation, other | 11,122 | — | (63 | ) | 11,059 | |||||||||||
Construction | 11,881 | — | (8,899 | ) | 2,982 | |||||||||||
Logging and lumber | 2,001 | — | (851 | ) | 1,150 | |||||||||||
Aviation | 1,658 | — | — | 1,658 | ||||||||||||
Manufacturing | 1,499 | — | (328 | ) | 1,171 | |||||||||||
Marine | 1,415 | — | — | 1,415 | ||||||||||||
Research | 725 | — | — | 725 | ||||||||||||
Office furniture | 146 | — | — | 146 | ||||||||||||
62,614 | — | (14,712 | ) | 47,902 | ||||||||||||
Less accumulated depreciation | (23,523 | ) | (7,807 | ) | 7,602 | (23,728 | ) | |||||||||
Total | $ | 39,091 | $ | (7,807 | ) | $ | (7,110 | ) | $ | 24,174 | ||||||
The average estimated residual value for assets on operating leases was 21% and 22% of the assets’ original cost at December 31, 2009 and 2008, respectively.
On April 30, 2009, a major lessee, Chrysler Corporation, filed for bankruptcy protection under Chapter 11. Under a pre-package agreement, a new company was formed to purchase the assets of old Chrysler – its plants, brands, land, equipment, as well as its contracts with the union, dealers and suppliers – from the bankruptcy court. Under this agreement, the Company had its leases with the old, bankrupt Chrysler assumed by the new Chrysler, Chrysler Group, LLC, which is 35% owned by Fiat. The new Chrysler has remitted payments relative to the affirmed leases. However, at December 31, 2009, the account remains on cash basis in accordance with Company policy as the short payment history of the new Chrysler does not yet substantiate its ability to maintain accounts current.
At December 31, 2009, net investment in equipment underlying lease contracts placed in non-accrual status approximated $1.7 million, of which $1.1 million was related to Chrysler. The related accounts receivable from such contracts approximated $168 thousand. At December 31, 2008, such investment totaled $884 thousand with a related accounts receivable of approximately $144 thousand.
29
ATEL CAPITAL EQUIPMENT FUND XI, LLC
NOTES TO FINANCIAL STATEMENTS
6. Investments in equipment and leases, net (continued):
Direct financing leases:
As of December 31, 2009, investment in direct financing leases consists of materials handling equipment. At December 31, 2008, such investment consisted of materials handling equipment and office furniture. The following lists the components of the Company’s investment in direct financing leases as of December 31, 2009 and 2008 (in thousands):
2009 | 2008 | |||||||
Total minimum lease payments receivable | $ | 180 | $ | 37 | ||||
Estimated residual values of leased equipment (unguaranteed) | 35 | 10 | ||||||
Investment in direct financing leases | 215 | 47 | ||||||
Less unearned income | (52 | ) | (5 | ) | ||||
Net investment in direct financing leases | $ | 163 | $ | 42 | ||||
There were no investment in direct financing lease assets in non-accrual status at December 31, 2009 and 2008.
At December 31, 2009, the aggregate amounts of future minimum lease payments receivable are as follows (in thousands):
Operating Leases | Direct Financing Leases | Total | |||||||||
Year ending December 31, 2010 | $ | 7,228 | 130 | $ | 7,358 | ||||||
2011 | 4,191 | 41 | 4,232 | ||||||||
2012 | 2,770 | 9 | 2,779 | ||||||||
2013 | 1,848 | — | 1,848 | ||||||||
2014 | 1,162 | — | 1,162 | ||||||||
Thereafter | 677 | — | 677 | ||||||||
$ | 17,876 | $ | 180 | $ | 18,056 | ||||||
The Company utilizes a straight line depreciation method for equipment in all of the categories currently in its portfolio of operating lease transactions. The useful lives for investment in leases by category are as follows (in years):
Equipment category | Useful Life | |||
Transportation, rail | 30 - 35 | |||
Aviation | 20 -30 | |||
Marine vessels | 20 - 30 | |||
Manufacturing | 10 - 20 | |||
Construction | 7 - 10 | |||
Logging & lumber | 7 - 10 | |||
Materials handling | 7 - 10 | |||
Office furniture | 7 - 10 | |||
Research | 7 - 10 | |||
Transportation, other | 7 - 10 |
30
ATEL CAPITAL EQUIPMENT FUND XI, LLC
NOTES TO FINANCIAL STATEMENTS
7. Related party transactions:
The terms of the Operating Agreement provide that AFS and/or affiliates are entitled to receive certain fees for equipment management and resale, and for management of the Company.
The Operating Agreement allows for the reimbursement of costs incurred by AFS in providing administrative services to the Company. Administrative services provided include Company accounting, finance/treasury, investor relations, legal counsel and lease and equipment documentation. AFS is not reimbursed for services whereby it is entitled to receive a separate fee as compensation for such services, such as management of equipment.
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, 2009, the Company has not exceeded the annual and/or cumulative limitations discussed above.
AFS and/or affiliates earned fees, commissions and reimbursements, pursuant to the Operating Agreement as follows during each of the years ended December 31, 2009 and 2008 (in thousands):
2009 | 2008 | |||||
Costs reimbursed to Managing Member and/or affiliates | $ | 349 | $ | 498 | ||
Asset management fees to Managing Member | 656 | 648 | ||||
Acquisition and initial direct costs paid to Managing Member | 5 | 55 | ||||
$ | 1,010 | $ | 1,201 | |||
8. Non-recourse debt:
At December 31, 2009 and 2008, non-recourse debt consists of notes payable to financial institutions. The notes are due in varying quarterly and semi-annual installments. Interest on the notes is at fixed rates ranging from 4.33% to 6.65%. The notes are secured by assignments of lease payments and pledges of assets. At December 31, 2009, gross lease rentals totaled approximately $10.0 million over the remaining lease terms; and the carrying value of the pledged assets is approximately $12.8 million. The notes mature from 2010 through 2015.
The non-recourse note payable does not contain any material financial covenant. The note is secured by a lien granted by the Company to the non-recourse lender on (and only on) the discounted lease transaction. The lender has recourse only to the following collateral: the specific leased equipment; the related lease chattel paper; the lease receivables; and proceeds of the foregoing items. The non-recourse obligation is payable solely out of this specific security and the Company does not guarantee (nor is the Company otherwise contractually responsible for) the payment of non-recourse note as a general obligation or liability of the Company. Although the Company does not have any direct general liability in connection with the non-recourse note apart from the security granted, the Company is directly and generally liable and responsible for certain representations, warranties, and covenants made to the lender, such as warranties as to genuineness of the transaction parties’ signatures, as to the genuineness of the lease chattel paper or the transaction as a whole, or as to the Company’s good title to or perfected interest in the secured collateral, as well as similar representations, warranties and covenants typically provided by non-recourse borrowers and customary in the equipment finance industry, and are viewed by such industry as being consistent with a non-recourse discount financing obligation. Accordingly, as there are no
31
ATEL CAPITAL EQUIPMENT FUND XI, LLC
NOTES TO FINANCIAL STATEMENTS
8. Non-recourse debt (continued):
financial covenants or ratios imposed on the Company in connection with this non-recourse obligation, the Company has determined that there are no material covenants with respect to the non-recourse note that warrant footnote disclosure.
Future minimum payments of non-recourse debt are as follows (in thousands):
Principal | Interest | Total | |||||||
Year ending December 31, 2010 | $ | 3,151 | $ | 421 | $ | 3,572 | |||
2011 | 1,939 | 270 | 2,209 | ||||||
2012 | 1,312 | 182 | 1,494 | ||||||
2013 | 1,065 | 118 | 1,183 | ||||||
2014 | 818 | 64 | 882 | ||||||
Thereafter | 639 | 17 | 656 | ||||||
$ | 8,924 | $ | 1,072 | $ | 9,996 | ||||
9. Borrowing facilities:
The Company participates with AFS and certain of its affiliates in a revolving credit facility (the “Credit Facility”) comprised of a working capital facility to AFS, an acquisition facility (the “Acquisition Facility”) and a warehouse facility (the “Warehouse Facility”) to AFS, the Company and affiliates, and a venture facility available to an affiliate with a syndicate of financial institutions which Credit Facility includes certain financial covenants. The Credit Facility is for an amount up to $75 million. Originally scheduled to expire in June 2009, the Credit Facility was amended effective December 22, 2008 to extend the term of the agreement through June 2010.
As of December 31, 2009 and 2008, borrowings under the facility were as follows (in thousands):
2009 | 2008 | |||||||
Total available under the financing arrangement | $ | 75,000 | $ | 75,000 | ||||
Amount borrowed by the Company under the acquisition facility | — | (500 | ) | |||||
Amounts borrowed by affiliated partnerships and limited liability companies under the working capital, acquisition and warehouse facilities | (1,750 | ) | (8,323 | ) | ||||
Total remaining available under the working capital, acquisition and warehouse facilities | $ | 73,250 | $ | 66,177 | ||||
The Company and its affiliates pay an annual commitment fee to have access to this line of credit. As of December 31, 2009, there were no borrowings under the Warehouse Facility. As of December 31, 2008, borrowings of $1.3 million were outstanding under the Warehouse Facility. The Company’s maximum obligation on the outstanding warehouse balance at December 31, 2008 was approximately $264 thousand.
As of December 31, 2009, the aggregate amount remaining unutilized under the Credit Facility is potentially available to the Company, subject to certain sub-facility and borrowing-base limitations. However, as amounts are drawn on the Credit Facility by each of the Company and the affiliates who are borrowers under the Credit Facility, the amount remaining available to all borrowers to draw under the Credit Facility is reduced. As the Warehousing Facility is a short term bridge facility, any amounts borrowed under the Warehousing Facility, and then repaid by the affiliated borrowers (including the Company) upon allocation of an acquisition to a specific purchaser, become available under the Warehouse Facility for further short term borrowing.
As of December 31, 2009, the Company’s Tangible Net Worth requirement under the Credit Facility was $10 million, the permitted maximum leverage ratio was not to exceed 1.25 to 1, and the required minimum interest coverage ratio was not to be less than 2 to 1. The Company was in compliance with these financial covenants under the Credit Facility with a minimum Tangible Net Worth, leverage ratio and interest coverage ratio, as calculated per the Credit Facility agreement of $21.3 million, 0.42 to 1, and 13.50 to 1, respectively, as of December 31, 2009.
32
ATEL CAPITAL EQUIPMENT FUND XI, LLC
NOTES TO FINANCIAL STATEMENTS
9. Borrowing facilities (continued):
As such, as of December 31, 2009, the Company and its affiliates were in compliance with all material financial covenants, and with all other material conditions of the Credit Facility. The Company does not anticipate any covenant violations nor does it anticipate that any of these covenants will restrict its operations or its ability to procure additional financing.
Fee and interest terms
The interest rate on the Credit Facility is based on either the LIBOR/Eurocurrency rate of 1-, 2-, 3- or 6-month maturity plus a lender designated spread, or the bank’s Prime rate, which re-prices daily. Principal amounts of loans made under the Credit Facility that are prepaid may be re-borrowed on the terms and subject to the conditions set forth under the Credit Facility. During the second quarter of 2009, the Company has repaid all outstanding borrowings under the Credit Facility. The weighted average interest rate on borrowings was 2.42% and 4.55% for the years ended December 31, 2009 and 2008, respectively.
Warehouse facility
To hold the assets under the Warehousing Facility prior to allocation to specific investor programs, a Warehousing Trust has been entered into by the Company, AFS, ALC, and certain of the affiliated partnerships and limited liability companies. The Warehousing Trust is used by the Warehouse Facility borrowers to acquire and hold, on a short-term basis, certain lease transactions that meet the investment objectives of each of such entities. Each of the leasing programs sponsored by AFS and ALC currently in its acquisition stage is a pro rata participant in the Warehousing Trust, as described below. When a program no longer has a need for short term financing provided by the Warehousing Facility, it is removed from participation, and as new leasing investment entities are formed by AFS and ALC and commence their acquisition stages, these new entities are added.
As of December 31, 2009, the investment program participants were ATEL Capital Equipment Fund X, LLC, the Company and ATEL 12, LLC. Pursuant to the Warehousing Trust, the benefit of the lease transaction assets, and the corresponding liabilities under the Warehouse Facility, inure to each of such entities based upon each entity’s pro-rata share in the Warehousing Trust estate. The “pro-rata share” is calculated as a ratio of the net worth of each entity over the aggregate net worth of all entities benefiting from the Warehousing Trust estate, excepting that the trustees, AFS and ALC, are both jointly and severally liable for the pro rata portion of the obligations of each of the affiliated partnerships and limited liability companies participating under the Warehouse Facility. Transactions are financed through this Warehouse Facility only until the transactions are allocated to a specific program for purchase or are otherwise disposed by AFS and ALC. When a determination is made to allocate the transaction to a specific program for purchase by the program, the purchaser repays the debt associated with the asset, either with cash or by means of proceeds of a draw under the Acquisition Facility, and the asset is removed from the Warehouse Facility collateral, and ownership of the asset and any debt obligation associated with the asset are assumed solely by the purchasing entity.
10. Commitments:
At December 31, 2009, the Company had no outstanding commitments to purchase lease assets or finance loans.
11. Guarantees:
The Company enters into contracts that contain a variety of indemnifications. The Company’s maximum exposure under these arrangements is unknown. However, the Company has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
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.
33
ATEL CAPITAL EQUIPMENT FUND XI, LLC
NOTES TO FINANCIAL STATEMENTS
12. Members’ capital:
As of December 31, 2009 and 2008, 5,210,507 and 5,230,507 Units were issued and outstanding. The Fund 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 Unit holder who ceases to be a U.S. Citizen, for a price equal to 100% of the holder’s capital account. The Company is otherwise permitted, but not required, to repurchase Units upon a holder’s request. The repurchase of Fund units is made in accordance with Section 13 of the Amended and Restated Limited Liability Company Operating Agreement. The repurchase would be at the discretion of the Manager on terms it determines to be appropriate under given circumstances, in the event that the Manager deems such repurchase to be in the best interest of the Company; provided, the Company is never required to repurchase any Units. Upon the repurchase of any Units by the Fund, the tendered Units are cancelled. Units repurchased in prior periods were repurchased at amounts representing the original investment less cumulative distributions made to the unit-holder with respect to the Units. All Units repurchased during a quarter are deemed to be repurchased effective the last day of the preceding quarter, and are not deemed to be outstanding during, or entitled to allocations of net income, net loss or distributions for the quarter in which such repurchase occurs. During the year ended December 31, 2009, the Company repurchased Units totaling 20,000. There were no such repurchases of Units during 2008.
During the years ended December 31, 2009 and 2008, distributions to the Other Members were as follows (in thousands, except as to Units and per Unit data):
2009 | 2008 | |||||
Distributions declared | $ | 4,819 | $ | 4,838 | ||
Weighted average number of Units outstanding | 5,213,137 | 5,230,507 | ||||
Weighted average distributions per Unit | $ | 0.92 | $ | 0.92 | ||
13. Fair value measurements:
Fair value measurements and disclosures are based on a fair value hierarchy as determined by significant inputs used to measure fair value. The three levels of inputs within the fair value hierarchy are defined as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
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, 2009, the Company had no assets or liabilities that require measurement on a recurring basis.
However, the Company deemed certain off-lease assets to be impaired during 2009. Accordingly, the Company recorded a fair value adjustment of approximately $245 thousand which reduced the cost basis of the assets. Such fair value adjustment is non-recurring. Under the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification, the fair value of impaired lease assets are classified within Level 3 of the valuation hierarchy as the data sources utilized for the valuation of such assets reflect significant inputs that are unobservable in the market. There were no impaired lease assets as of December 31, 2008.
34
ATEL CAPITAL EQUIPMENT FUND XI, LLC
NOTES TO FINANCIAL STATEMENTS
13. Fair value measurements (continued):
The following table presents the fair value of off-lease assets measured on a nonrecurring basis as of December 31, 2009 (in thousands):
December 31, 2009 | Level 1 Estimated Fair Value | Level 2 Estimated Fair Value | Level 3 Estimated Fair Value | |||||||||
Assets measured at fair value on a non-recurring basis | ||||||||||||
Impaired off-lease assets | $ | 384 | $ | — | $ | — | $ | 384 |
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. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize or has realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
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.
Cash and cash equivalents
The recorded amounts of the Company’s cash and cash equivalents approximate fair value because of the liquidity and short-term maturity of these instruments.
Notes receivable
The Company’s notes receivable are stated at the amount at which the asset could be collected in a current transaction, exclusive of transaction costs such as prepayment penalties.
Investment in securities
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. At March 31, 2009, the Company deemed an investment security to be impaired. Accordingly, the Company recorded a fair value adjustment of approximately $50 thousand which reduced the cost basis of the investment. The impaired investment security was disposed of during the second quarter of 2009.
At December 31, 2009, management has concluded that there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the remaining securities and that it is not practicable to estimate the fair value of the investment because of its illiquidity. Accordingly, the investment is stated at cost.
Non-recourse debt
The fair value of the Company’s non-recourse debt is estimated using discounted cash flow analyses, based upon the current market borrowing rates for similar types of borrowing arrangements.
Borrowings
Borrowings include the outstanding amounts on the Company’s acquisition facility. The carrying amount of these variable rate obligations approximate fair value based on current borrowing rates for similar types of borrowings.
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ATEL CAPITAL EQUIPMENT FUND XI, LLC
NOTES TO FINANCIAL STATEMENTS
13. Fair value measurements (continued):
Limitations
The fair value estimates presented herein were based on pertinent information available to the Company as of December 31, 2009 and 2008. Although the Company is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
The following table presents estimated fair values of the Company’s financial instruments at December 31, 2009 and 2008 (in thousands):
2009 | 2008 | |||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||
Financial assets: | ||||||||||||
Cash and cash equivalents | $ | 3,654 | $ | 3,654 | $ | 904 | $ | 904 | ||||
Notes receivable | 2,570 | 2,570 | 3,994 | 3,994 | ||||||||
Financial liabilities: | ||||||||||||
Non-recourse debt | 8,924 | 9,244 | 17,389 | 18,457 | ||||||||
Borrowings | — | — | 500 | 500 |
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Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES |
None.
Item 9A(T). | CONTROLS AND PROCEDURES |
Evaluation of disclosure controls and procedures
The Company’s Managing Member’s President and Chief Executive Officer, and Executive Vice President and Chief Financial Officer and Chief Operating Officer (“Management”), evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on the evaluation of the Company’s disclosure controls and procedures, Management concluded that as of the end of the period covered by this report, the design and operation of these disclosure controls and procedures were effective.
The Company does not control the financial reporting process, and is solely dependent on the Management of the Managing Member, who is responsible for providing the Company with financial statements in accordance with generally accepted accounting principles in the United States. The Managing Member’s disclosure controls and procedures, as it is applicable to the Company, were effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Management’s Annual Report on Internal Control over Financial Reporting
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, 2009. 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, 2009. In making this assessment, it used the criteria set forth inInternal Control – Integrated Framework 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, 2009.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in internal control
There were no changes in the Managing Member’s internal control over financial reporting, as it is applicable to the Company, during the quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Managing Member’s internal control over financial reporting, as it is applicable to the Company.
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PART III
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 ATEL 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 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 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 59, 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 56, 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 51, 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.
38
Audit Committee
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.
Section 16(a) Beneficial Ownership Reporting Compliance
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, 2009.
Code of Ethics
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.
Item 11. | EXECUTIVE COMPENSATION |
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, 2009 and 2008 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 7 thereof, which information is hereby incorporated by reference.
Selling Commissions
The Company paid selling commissions in the amount of 9% of Gross Proceeds, as defined, to ASC, an affiliate of AFS.
Through December 31, 2009, $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.
Asset Management Fee and Carried Interest
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.
39
Limitations on Fees
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 Asset Management Fee will be subject to the Asset Management Fee Limit in order to assure these state administrators that 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% x .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.
40
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.
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 7 to the financial statements as set forth in Part II, Item 8, Financial Statements and Supplementary Data, for amounts paid.
Managing Member’s Interest in Operating Proceeds
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 2009 and 2008.
Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Security Ownership of Certain Beneficial Owners
At December 31, 2009, no investor is known to hold beneficially more than 5% of the issued and outstanding Units.
Security Ownership of Management
The parent of AFS is the beneficial owner of Limited Liability Company Units as follows:
(1) 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 600 California Street, 6th Floor San Francisco, CA 94108 | Initial Limited Liability Company Units 50 Units ($500) | 0.0004 | % |
Changes in Control
The Members have the right, by vote of the Members owning more than 50% of the outstanding Limited Liability Company Units, to remove 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.
41
Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
The responses to Item 1 of this report under the caption “Equipment Leasing Activities,” Item 8 of this report under the caption “Financial Statements and Supplementary Data - Notes to Financial Statements - Related party transactions” at Note 7 thereof, and Item 11 of this report under the caption “Executive Compensation,” are hereby incorporated by reference.
Item 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
During the last two years, the Company incurred audit and other fees with its principal auditors as follows (in thousands):
2009 | 2008 | |||||
Audit fees | $ | 110 | $ | 128 | ||
Other | 7 | 33 | ||||
$ | 117 | $ | 161 | |||
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.
Other fees represent costs incurred in connection with various Agreed-Upon Procedures engagements.
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.
PART IV
Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) | Financial Statements and Schedules |
1. | Financial Statements |
Included in Part II of this report:
Report of Independent Registered Public Accounting Firm
Balance Sheets at December 31, 2009 and 2008
Statements of Operations for the years ended December 31, 2009 and 2008
Statements of Changes in Members’ Capital for the years ended December 31, 2009 and 2008
Statements of Cash Flows for the years ended December 31, 2009 and 2008
Notes to Financial Statements
2. | Financial Statement Schedules |
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(b) | Exhibits |
(3) | and (4) Amended and Restated Limited Liability Company 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
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 26, 2010
ATEL Capital Equipment Fund XI, LLC (Registrant) | ||||||
By: | ATEL Financial Services, LLC | |||||
Managing Member of Registrant | ||||||
By: | /s/ Dean L. Cash | |||||
Dean L. Cash, | ||||||
President and Chief Executive Officer of ATEL Financial Services, LLC (Managing Member) | ||||||
By: | /s/ Paritosh K. Choksi | |||||
Paritosh K. Choksi, | ||||||
Executive Vice President and Chief Financial Officer and Chief Operating Officer of ATEL Financial Services, LLC (Managing Member) | ||||||
By: | /s/ Samuel Schussler | |||||
Samuel Schussler, | ||||||
Vice President and Chief Accounting Officer of ATEL Financial Services, LLC (Managing Member) |
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, 2010 | ||
/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, 2010 | ||
/s/ Samuel Schussler Samuel Schussler | Vice President and Chief Accounting Officer of ATEL Financial Services, LLC (Managing Member) | March 26, 2010 |
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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