Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended March 31, 2015
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the transition period from to
Commission File number 000-54356
ATEL 14, LLC
(Exact name of registrant as specified in its charter)
California | 26-4695354 | |
(State or other jurisdiction of Incorporation or organization) | (I. R. S. Employer Identification No.) |
The Transamerica Pyramid, 600 Montgomery Street, 9th Floor, San Francisco, California 94111
(Address of principal executive offices)
Registrant’s telephone number, including area code(415) 989-8800
Securities registered pursuant to section 12(b) of the Act:None
Securities registered pursuant to section 12(g) of the Act:Limited Liability Company Units
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yesx Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yesx Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer, large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filero | Accelerated filero | Non-accelerated filero | Smaller reporting companyx |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yeso Nox
The number of Limited Liability Company Units outstanding as of April 30, 2015 was 8,386,015.
DOCUMENTS INCORPORATED BY REFERENCE
None.
ATEL 14, LLC
Index
Part I. Financial Information | 3 | |||
Item 1. Financial Statements (Unaudited) | 3 | |||
Balance Sheets, March 31, 2015 and December 31, 2014 | 3 | |||
Statements of Operations for the three months ended March 31, 2015 and 2014 | 4 | |||
Statements of Changes in Members’ Capital for the year ended December 31, 2014 and for the three months ended March 31, 2015 | 5 | |||
Statements of Cash Flows for the three months ended March 31, 2015 and 2014 | 6 | |||
Notes to the Financial Statements | 7 | |||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 25 | |||
Item 4. Controls and Procedures | 31 | |||
Part II. Other Information | 32 | |||
Item 1. Legal Proceedings | 32 | |||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 32 | |||
Item 3. Defaults Upon Senior Securities | 32 | |||
Item 4. Mine Safety Disclosures | 32 | |||
Item 5. Other Information | 32 | |||
Item 6. Exhibits | 32 |
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
ATEL 14, LLC
BALANCE SHEETS
MARCH 31, 2015 AND DECEMBER 31, 2014
(In Thousands)
March 31, 2015 | December 31, 2014 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 5,797 | $ | 6,646 | ||||
Accounts receivable, net of allowance for doubtful accounts of $2 at March 31, 2015 and $5 at December 31, 2014 | 182 | 175 | ||||||
Notes receivable, net of unearned interest income of $107 and allowance for credit losses of $33 at March 31, 2015 and net of unearned interest income of $209 and allowance for credit losses of $0 at December 31, 2014 | 973 | 1,454 | ||||||
Investment in securities | 333 | 318 | ||||||
Fair value of warrants | 611 | 595 | ||||||
Investments in equipment and leases, net of accumulated depreciation of $27,848 at March 31, 2015 and $25,888 at December 31, 2014 | 46,650 | 49,108 | ||||||
Due from Affiliates | — | 154 | ||||||
Prepaid expenses and other assets | 117 | 105 | ||||||
Total assets | $ | 54,663 | $ | 58,555 | ||||
LIABILITIES AND MEMBERS’ CAPITAL | ||||||||
Accounts payable and accrued liabilities: | ||||||||
Managing Member | $ | 52 | $ | 66 | ||||
Affiliates | 71 | — | ||||||
Accrued distributions to Other Members | 816 | 816 | ||||||
Other | 513 | 285 | ||||||
Deposits due lessees | 25 | 25 | ||||||
Non-recourse debt | 17,161 | 19,279 | ||||||
Long-term debt | 2,068 | 2,068 | ||||||
Unearned operating lease income | 554 | 516 | ||||||
Total liabilities | 21,260 | 23,055 | ||||||
Commitments and contingencies | ||||||||
Members’ capital: | ||||||||
Managing Member | — | — | ||||||
Other Members | 33,403 | 35,500 | ||||||
Total Members’ capital | 33,403 | 35,500 | ||||||
Total liabilities and Members’ capital | $ | 54,663 | $ | 58,555 |
See accompanying notes.
3
ATEL 14, LLC
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
MARCH 31, 2015 AND 2014
(In Thousands Except for Units and Per Unit Data)
(Unaudited)
Three Months Ended March 31, | ||||||||||||
2015 | 2014 | |||||||||||
Revenues: | ||||||||||||
Leasing and lending activities: | ||||||||||||
Operating leases | $ | 3,004 | $ | 3,511 | ||||||||
Direct financing leases | 9 | 16 | ||||||||||
Interest on notes receivable | 30 | 101 | ||||||||||
Gain on sales of lease assets and early termination of notes receivable | 137 | �� | 515 | |||||||||
Gain on sales or dispositions of securities | — | 6 | ||||||||||
Unrealized gain on fair valuation of warrants | 16 | — | ||||||||||
Other | 19 | 14 | ||||||||||
Total revenues | 3,215 | 4,163 | ||||||||||
Expenses: | ||||||||||||
Depreciation of operating lease assets | 2,292 | 2,773 | ||||||||||
Asset management fees to Managing Member | 152 | 196 | ||||||||||
Acquisition expense | — | 85 | ||||||||||
Cost reimbursements to Managing Member and/or affiliates | 366 | 384 | ||||||||||
Provision for (reversal of) credit losses | 30 | (15 | ) | |||||||||
Impairment losses on equipment | — | 44 | ||||||||||
Amortization of initial direct costs | 22 | 31 | ||||||||||
Interest expense | 136 | 180 | ||||||||||
Professional fees | 74 | 75 | ||||||||||
Outside services | 19 | 21 | ||||||||||
Taxes on income and franchise fees | 22 | 7 | ||||||||||
Bank charges | 46 | 49 | ||||||||||
Railcar maintenance | 66 | 116 | ||||||||||
Other | 47 | 53 | ||||||||||
Total expenses | 3,272 | 3,999 | ||||||||||
Net (loss) income | $ | (57 | ) | $ | 164 | |||||||
Net income (loss): | ||||||||||||
Managing Member | $ | 153 | $ | 153 | ||||||||
Other Members | (210 | ) | 11 | |||||||||
$ | (57 | ) | $ | 164 | ||||||||
Net (loss) income per Limited Liability Company Unit (Other Members) | $ | (0.03 | ) | $ | 0.00 | |||||||
Weighted average number of Units outstanding | 8,386,015 | 8,386,015 |
See accompanying notes.
4
ATEL 14, LLC
STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2014
AND FOR THE THREE MONTHS ENDED
MARCH 31, 2015
(In Thousands Except for Units and Per Unit Data)
Other Members | Managing Member | Total | ||||||||||||||
Units | Amount | |||||||||||||||
Balance December 31, 2013 | 8,386,015 | $ | 42,886 | $ | — | $ | 42,886 | |||||||||
Distributions to Other Members ($0.90 per Unit) | — | (7,548 | ) | — | (7,548 | ) | ||||||||||
Distributions to Managing Member | — | — | (612 | ) | (612 | ) | ||||||||||
Net income | — | 162 | 612 | 774 | ||||||||||||
Balance December 31, 2014 | 8,386,015 | 35,500 | — | 35,500 | ||||||||||||
Distributions to Other Members ($0.23 per Unit) | — | (1,887 | ) | — | (1,887 | ) | ||||||||||
Distributions to Managing Member | — | — | (153 | ) | (153 | ) | ||||||||||
Net (loss) income | — | (210 | ) | 153 | (57 | ) | ||||||||||
Balance March 31, 2015 (Unaudited) | 8,386,015 | $ | 33,403 | $ | — | $ | 33,403 |
See accompanying notes.
5
ATEL 14, LLC
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31, 2015 AND 2014
(In Thousands)
(Unaudited)
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Operating activities: | ||||||||
Net (loss) income | $ | (57 | ) | $ | 164 | |||
Adjustment to reconcile net (loss) income to cash provided by operating activities: | ||||||||
Gain on sales of assets and early termination of notes | (137 | ) | (515 | ) | ||||
Depreciation of operating lease assets | 2,292 | 2,773 | ||||||
Amortization of initial direct costs | 22 | 31 | ||||||
Provision for (reversal of) credit losses | 30 | (15 | ) | |||||
Impairment losses on equipment | — | 44 | ||||||
Gain on sales or dispositions of securities | — | (6 | ) | |||||
Unrealized gain on fair valuation of warrants | (16 | ) | — | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (4 | ) | — | |||||
Prepaid expenses and other assets | (12 | ) | 17 | |||||
Accounts payable, Managing Member | (14 | ) | (3 | ) | ||||
Accounts payable, other | 228 | 45 | ||||||
Accrued liabilities, affiliates | 225 | (248 | ) | |||||
Unearned operating lease income | 38 | (128 | ) | |||||
Net cash provided by operating activities | 2,595 | 2,159 | ||||||
Investing activities: | ||||||||
Purchases of equipment and improvements on operating leases | (21 | ) | (44 | ) | ||||
Purchase of securities | (15 | ) | — | |||||
Proceeds from sales of lease assets and early termination of notes receivable | 323 | 1,582 | ||||||
Principal payments received on direct financing leases | 91 | 78 | ||||||
Proceeds from sale of securities | — | 6 | ||||||
Principal payments received on notes receivable | 336 | 704 | ||||||
Net cash provided by investing activities | 714 | 2,326 | ||||||
Financing activities: | ||||||||
Borrowings under non-recourse debt | — | 1,861 | ||||||
Repayments under non-recourse debt | (2,118 | ) | (2,420 | ) | ||||
Distributions to Other Members | (1,887 | ) | (1,887 | ) | ||||
Distributions to Managing Member | (153 | ) | (153 | ) | ||||
Net cash used in financing activities | (4,158 | ) | (2,599 | ) | ||||
Net (decrease) increase in cash and cash equivalents | (849 | ) | 1,886 | |||||
Cash and cash equivalents at beginning of period | 6,646 | 3,090 | ||||||
Cash and cash equivalents at end of period | $ | 5,797 | $ | 4,976 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for interest | $ | 118 | $ | 186 | ||||
Cash paid during the period for taxes | $ | 2 | $ | 2 | ||||
Schedule of non-cash transactions: | ||||||||
Distributions payable to Other Members at period-end | $ | 816 | $ | 816 | ||||
Distributions payable to Managing Member at period-end | $ | 66 | $ | 66 | ||||
Improvements to equipment on operating leases | $ | — | $ | 28 |
See accompanying notes.
6
ATEL 14, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Limited Liability Company matters:
ATEL 14, LLC (the “Company” or the “Fund”) was formed under the laws of the state of California on April 1, 2009 (“Date of Inception”) for the purpose of equipment financing and acquiring equipment to engage in equipment leasing and sales activities. The Managing Member of the Company is ATEL Managing Member, LLC (the “Managing Member” or “Manager”), a Nevada limited liability company. Prior to May 9, 2011, the Manager was named ATEL Associates 14, LLC. The Managing Member is controlled by ATEL Financial Services, LLC (“AFS”), a wholly-owned subsidiary of ATEL Capital Group. The Fund may continue until December 31, 2030. Contributions in the amount of $500 were received as of May 8, 2009, which represented the initial member’s capital investment. As a limited liability company, the liability of any individual member for the obligations of the Fund is limited to the extent of capital contributions to the Fund by the individual member.
The Company conducted a public offering of 15,000,000 Limited Liability Company Units (“Units”), at a price of $10 per Unit. As of December 2, 2009, subscriptions for the minimum number of Units (120,000, representing $1.2 million), excluding subscriptions from Pennsylvania investors, had been received and the Fund requested subscription proceeds to be released from escrow. On that date, the Company commenced initial operations and continued in its development stage activities until transitioning to an operating enterprise during the first quarter of 2010. Pennsylvania subscriptions are subject to a separate escrow and are released to the Fund only when aggregate subscriptions for all investors equal to at least $7.5 million. Total contributions to the Fund exceeded $7.5 million on February 12, 2010, at which time a request was processed to release the Pennsylvania escrowed amounts. The offering was terminated on October 6, 2011.
As of March 31, 2015, cumulative gross contributions, less rescissions and repurchases (net of distributions paid and allocated syndication costs, as applicable), totaling $84.0 million (inclusive of the $500 initial Member’s capital investment) have been received. As of the same date, 8,386,015 Units were issued and outstanding.
The Company’s principal objectives are to invest in a diversified portfolio of investments that will (i) preserve, protect and return the Company’s invested capital; (ii) generate regular cash distributions to Unitholders, with any balance remaining after required minimum distributions to be used to purchase additional investments during the Reinvestment Period (ending six calendar years after the completion of the Company’s public offering of Units) and (iii) provide additional cash distributions following the Reinvestment Period and until all investment portfolio assets has been sold or otherwise disposed. The Company is governed by the ATEL 14, LLC amended and restated limited liability company operating agreement dated October 7, 2009 (the “Operating Agreement”).
Pursuant to the terms of the Operating Agreement, the Managing Member and/or its affiliates receives compensation for services rendered and reimbursements for costs incurred on behalf of the Company (See Note 6). The Company is required to maintain reasonable cash reserves for working capital, the repurchase of Units and contingencies. The repurchase of Units is solely at the discretion of the Managing Member.
These unaudited interim financial statements should be read in conjunction with the financial statements and notes thereto contained in the report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission.
7
ATEL 14, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. Summary of significant accounting policies:
Basis of presentation:
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q as mandated by the Securities and Exchange Commission. The unaudited interim financial statements reflect all adjustments which are, in the opinion of the Managing Member, necessary for a fair statement of financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature.
Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full year. Certain prior period amounts may have been reclassified to conform to the current period presentation. These reclassifications had no significant effect on the reported financial position or results of operations.
Footnote and tabular amounts are presented in thousands, except as to Units and per Unit data.
In preparing the accompanying unaudited financial statements, the Managing Member has reviewed, as determined necessary by the Managing Member, events that have occurred after March 31, 2015, up until the issuance of the financial statements. No events were noted which would require additional disclosure in the footnotes to the financial statements, and adjustments thereto.
Use of estimates:
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Such estimates primarily relate to the determination of residual values at the end of the lease term and expected future cash flows used for impairment analysis purposes and for determination of the allowance for doubtful accounts and reserve for credit losses on notes receivable.
Segment reporting:
The Company is organized into one operating segment for the purpose of making operating decisions or assessing performance. Accordingly, the Company operates in one reportable operating segment in the United States.
The primary geographic region in which the Company seeks leasing opportunities is North America. All of the Company’s current operating revenues and long-lived assets relate to customers domiciled in North America.
Investment in securities:
Purchased securities
Purchased securities are generally not registered for public sale and are carried at cost. Such securities are adjusted to fair value if the fair value is less than the carrying value and such impairment is deemed by the Managing Member to be other than temporary. Factors considered by the Managing Member in determining fair value include, but are not limited to, available financial information, the issuer’s ability to meet its current obligations and indications of the issuer’s subsequent ability to raise capital. The Company had $333 thousand and $318 thousand of purchased securities at March 31, 2015 and December 31, 2014, respectively. There were no sales or dispositions of securities during the respective three months ended March 31, 2015 and 2014.
8
ATEL 14, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. Summary of significant accounting policies: - (continued)
Warrants
Warrants owned by the Company are not registered for public sale, but are considered derivatives and are reflected at an estimated fair value on the balance sheet as determined by the Managing Member. During the three months ended March 31, 2015, the Company recorded unrealized gains of $16 thousand on fair valuation of its warrants. There were no such unrealized gains or losses during the prior year period. The unrealized gains recorded during the current year period increased the estimated fair value of the Company’s portfolio of warrants to $611 thousand at March 31, 2015 from $595 thousand at December 31, 2014. During the prior year period, the Company realized a $6 thousand gain on the net exercise of certain warrants. There were no net exercises of warrants during the current year period.
Per Unit data:
Net income (loss) and distributions per Unit are based upon the weighted average number of Other Members Units outstanding during the period.
Recent Accounting Pronouncements:
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company evaluated the impact of the new standard on its financial statements and has determined that such impact is virtually non-existent as the new revenue guideline does not affect revenues from leases and loans, which comprise the majority of the Company’s revenues.
In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements — Going Concern (subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The new standard provides guidance relative to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. Management is currently evaluating the standard and its operational and related disclosure requirements.
3. Notes receivable, net:
The Company has various notes receivable from borrowers who have financed the purchase of equipment through the Company. The original terms of the notes receivable are from 36 to 42 months and bear interest at rates ranging from 10.96% to 18.00% per annum. The notes are generally secured by the equipment financed. The notes mature from 2015 through 2016.
As of December 31, 2014, the Company had four notes receivable which were on non-accrual status, two of which were fully paid on February 24, 2015 with the remaining two still on non-accrual status at March 31, 2015.
The two notes fully paid in February 2015 were originally placed on nonaccrual status during the second quarter of 2014. Such notes had net recorded investments approximating $85 thousand and $105 thousand as of December 31, 2014 and were considered impaired relative to their payment terms. The terms of these notes were modified to defer the repayment of principal until November 1, 2014 while maintaining interest-only payments at their original rate of 12.00%. Upon the resumption of principal and interest payments in November 2014, the monthly payments were adjusted such that the ultimate total payments would reflect
9
ATEL 14, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. Notes receivable, net: - (continued)
interest earned at a composite rate of 18.00% per annum as related to the entire term of the indebtedness from the original funding date. Payments received on these notes have been fully applied against principal pursuant to the Company’s policy on non-accrual notes. Interest not recorded relative to the original terms of the non-accrual notes approximated $18 thousand from June 2014 to February 2015. The notes have remained current with respect to their restructured terms; and, management has determined that no adjustment was necessary to reflect fair value through their termination dates. The Fund recognized gains totaling $88 thousand from the February 24, 2015 settlement of the two notes on proceeds of $199 thousand.
With regards to the two notes remaining on non-accrual status as of March 31, 2015, their combined net recorded investment totaled $109 thousand and $111 thousand as of March 31, 2015 and December 31, 2014, respectively. Both notes have a rate of 11.73%. As of March 31, 2015, management continued to deem the notes impaired and recorded fair value adjustments totaling $33 thousand to reflect the fair value of such notes at $76 thousand. There were no fair value adjustments at December 31, 2014. Effective January 1, 2015, the terms of these notes were modified to defer the repayment of principal while maintaining interest-only payments at their original rates. As of July 1, 2015, the entire balance outstanding on these notes will be due. The payments will be adjusted such that the ultimate amounts paid will reflect interest earned at a composite rate of 18.00% per annum as related to the entire term of the indebtedness from the original funding date. Payments received on these nonaccrual notes have been fully applied against principal pursuant to the Company’s policy on non-accrual notes. Interest not recorded relative to the original terms of the non-accrual notes approximated $4 thousand from December 2014 to March 2015.
As of March 31, 2015, the minimum future payments receivable are as follows (in thousands):
Nine months ending December 31, 2015 | $ | 710 | ||
Year ending December 31, 2016 | 401 | |||
1,111 | ||||
Less: portion representing unearned interest income | (107 | ) | ||
1,004 | ||||
Unamortized initial direct costs | 2 | |||
Less: allowance for credit losses | (33 | ) | ||
Notes receivable, net | $ | 973 |
Initial direct costs (“IDC”) amortization expense related to notes receivable and the Company’s operating and direct finance leases for the three months ended March 31, 2015 and 2014 are as follows (in thousands):
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
IDC amortization – notes receivable | $ | 1 | $ | 4 | ||||
IDC amortization – lease assets | 21 | 27 | ||||||
Total | $ | 22 | $ | 31 |
10
ATEL 14, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. Allowance for credit losses:
The Company’s allowance for credit losses are as follows (in thousands):
Accounts Receivable Allowance for Doubtful Accounts | Valuation Adjustments on Financing Receivables | Total Allowance for Credit Losses | ||||||||||||||||||||||
Notes Receivable | Finance Leases | Operating Leases | Notes Receivable | Finance Leases | ||||||||||||||||||||
Balance December 31, 2013 | $ | — | $ | — | $ | 15 | $ | — | $ | — | $ | 15 | ||||||||||||
Reversal of provision for credit losses | — | — | (10 | ) | — | — | (10 | ) | ||||||||||||||||
Balance December 31, 2014 | — | — | 5 | — | — | 5 | ||||||||||||||||||
(Reversal of) provision for credit losses | — | — | (3 | ) | 33 | — | 30 | |||||||||||||||||
Balance March 31, 2015 | $ | — | $ | — | $ | 2 | $ | 33 | $ | — | $ | 35 |
Accounts receivable
Accounts receivable represent the amounts billed under operating and direct financing lease contracts, and notes receivable which are currently due to the Company.
Allowances for doubtful accounts are typically established based upon their aging and historical charge off and collection experience and the creditworthiness of specifically identified lessees and borrowers, and invoiced amounts. Accounts receivable deemed uncollectible are generally charged off against the allowance on a specific identification basis. Recoveries of amounts that were previously written-off are recorded as other income in the period received.
Accounts receivable are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of companies with lease or note payments outstanding less than 90 days. Based upon management’s judgment, such leases or notes may be placed in non-accrual status. Leases or notes placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid receivable is probable. Until such time, revenues on operating leases are recognized on a cash basis. All payments received on amounts billed under direct financing leases and notes receivable are applied only against outstanding principal balances.
Financing receivables
In addition to the allowance established for delinquent accounts receivable, the total allowance related solely to financing receivables also includes anticipated impairment charges on notes receivable and direct financing leases.
Notes are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest when due according to the contractual terms of the note agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest when due. If it is determined that a loan is impaired with regard to scheduled payments, the Company will perform an analysis of the note to determine if an impairment valuation reserve is necessary. This analysis considers the estimated cash flows from the note, or the collateral value of the property underlying the note when note repayment is collateral dependent. Any required valuation reserve is charged to earnings when determined; and notes are charged off to the allowance as they are deemed uncollectible.
The asset underlying a direct financing lease contract is considered impaired if the estimated undiscounted future cash flows of the asset are less than its net book value. The estimated undiscounted future cash flows are the sum of the estimated residual value of the asset at the end of the asset’s expected holding period and
11
ATEL 14, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. Allowance for credit losses: - (continued)
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 marketplace are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. Impairment is measured as the difference between the fair value (as determined by a valuation method using discounted estimated future cash flows, third party appraisals or comparable sales of similar assets as applicable based on asset type) of the asset and its carrying value on the measurement date.
As of March 31, 2015 and December 31, 2014, the Company’s allowance for credit losses (related solely to financing receivables) and its recorded investment in financing receivables were as follows (in thousands):
March 31, 2015 | Notes Receivable | Finance Leases | Total | |||||||||
Allowance for credit losses: | ||||||||||||
Ending balance | $ | 33 | $ | — | $ | 33 | ||||||
Ending balance: individually evaluated for impairment | $ | 33 | $ | — | $ | 33 | ||||||
Ending balance: collectively evaluated for impairment | $ | — | $ | — | $ | — | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | ||||||
Financing receivables: | ||||||||||||
Ending balance | $ | 1,0061 | $ | 204 | $ | 1,210 | ||||||
Ending balance: individually evaluated for impairment | $ | 1,006 | $ | 204 | $ | 1,210 | ||||||
Ending balance: collectively evaluated for impairment | $ | — | $ | — | $ | — | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — |
1 | Includes $2 of unamortized initial direct costs. |
December 31, 2014 | Notes Receivable | Finance Leases | Total | |||||||||
Allowance for credit losses: | ||||||||||||
Ending balance | $ | — | $ | — | $ | — | ||||||
Ending balance: individually evaluated for impairment | $ | — | $ | — | $ | — | ||||||
Ending balance: collectively evaluated for impairment | $ | — | $ | — | $ | — | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | ||||||
Financing receivables: | ||||||||||||
Ending balance | $ | 1,4542 | $ | 296 | $ | 1,750 | ||||||
Ending balance: individually evaluated for impairment | $ | 1,454 | $ | 296 | $ | 1,750 | ||||||
Ending balance: collectively evaluated for impairment | $ | — | $ | — | $ | — | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — |
2 | Includes $3 of unamortized initial direct costs. |
The Company evaluates the credit quality of its financing receivables on a scale equivalent to the following quality indicators related to corporate risk profiles:
Pass – Any account whose lessee/debtor, co-lessee/debtor or any guarantor has a credit rating on publicly traded or privately placed debt issues as rated by Moody’s or S&P for either Senior Unsecured debt, Long Term Issuer rating or Issuer rating that are in the tiers of ratings generally recognized by the investment
12
ATEL 14, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. Allowance for credit losses: - (continued)
community as constituting an Investment Grade credit rating; or, has been determined by the Manager to be an Investment Grade Equivalent or High Quality Corporate Credit per its Credit Policy or has a Not Rated internal rating by the Manager and the account is not considered by the Chief Credit Officer of the Manager to fall into one of the three risk profiles below.
Special Mention – Any traditional corporate type account with potential weaknesses (e.g. large net losses or major industry downturns) or, any growth capital account that has less than three months of cash as of the end of the calendar quarter to fund their continuing operations. These accounts deserve management’s close attention. If left uncorrected, those potential weaknesses may result in deterioration of the Fund’s receivable at some future date.
Substandard – Any account that is inadequately protected by the current worth and paying capacity of the borrower or of the collateral pledged, if any. Accounts that are so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Fund will sustain some loss as the likelihood of fully collecting all receivables may be questionable if the deficiencies are not corrected. Such accounts are on the Manager’s Credit Watch List.
Doubtful – Any account where the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Accordingly, an account that is so classified is on the Manager’s Credit Watch List, and has been declared in default and the Manager has repossessed, or is attempting to repossess, the equipment it financed. This category includes impaired notes and leases as applicable.
At March 31, 2015 and December 31, 2014, the Company’s financing receivables by credit quality indicator and by class of financing receivables are as follows (excludes initial direct costs) (in thousands):
Notes Receivable | Finance Leases | |||||||||||||||
March 31, 2015 | December 31, 2014 | March 31, 2015 | December 31, 2014 | |||||||||||||
Pass | $ | 812 | $ | 1,149 | $ | 204 | $ | 296 | ||||||||
Special mention | 83 | 302 | — | — | ||||||||||||
Substandard | 109 | — | — | — | ||||||||||||
Doubtful | — | — | — | — | ||||||||||||
Total | $ | 1,004 | $ | 1,451 | $ | 204 | $ | 296 |
As of March 31, 2015, the Company’s impaired loans were as follows (in thousands):
Impaired Loans | ||||||||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||
With no related allowance recorded Notes receivable | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
With an allowance recorded Notes receivable | 109 | 109 | 33 | 109 | — | |||||||||||||||
Total | $ | 109 | $ | 109 | $ | 33 | $ | 109 | $ | — |
There were no impaired loans as of December 31, 2014.
13
ATEL 14, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. Allowance for credit losses: - (continued)
At March 31, 2015 and December 31, 2014, the investment in financing receivables is aged as follows (in thousands):
March 31, 2015 | 31 – 60 Days Past Due | 61 – 90 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Financing Receivables | Recorded Investment > 90 Days and Accruing | |||||||||||||||||||||
Notes receivable | $ | — | $ | — | $ | — | $ | — | $ | 1,004 | $ | 1,004 | $ | — | ||||||||||||||
Finance leases | — | — | — | — | 204 | 204 | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | 1,208 | $ | 1,208 | $ | — |
December 31, 2014 | 31 – 60 Days Past Due | 61 – 90 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Financing Receivables | Recorded Investment > 90 Days and Accruing | |||||||||||||||||||||
Notes receivable | $ | — | $ | — | $ | — | $ | — | $ | 1,451 | $ | 1,451 | $ | — | ||||||||||||||
Finance leases | — | — | — | — | 296 | 296 | — | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | 1,747 | $ | 1,747 | $ | — |
As of December 31, 2014, the Company had four notes receivable which were on non-accrual status, two of which were fully paid on February 24, 2015 with the remaining two still on non-accrual status at March 31, 2015 (See Note 3).
5. Investments in equipment and leases, net:
The Company’s investment in leases consists of the following (in thousands):
Balance December 31, 2014 | Reclassifications, Additions/ Dispositions and Impairment Losses | Depreciation/ Amortization Expense or Amortization of Leases | Balance March 31, 2015 | |||||||||||||
Net investment in operating leases | $ | 48,600 | $ | (18 | ) | $ | (2,292 | ) | $ | 46,290 | ||||||
Net investment in direct financing leases | 296 | (1 | ) | (91 | ) | 204 | ||||||||||
Assets held for sale or lease, net | 101 | (35 | ) | — | 66 | |||||||||||
Initial direct costs, net of accumulated amortization of $265 at March 31, 2015 and $277 at December 31, 2014 | 111 | — | (21 | ) | 90 | |||||||||||
Total | $ | 49,108 | $ | (54 | ) | $ | (2,404 | ) | $ | 46,650 |
Impairment of investments in leases:
Recorded values of the Company’s leased asset portfolio are reviewed each quarter to confirm the reasonableness of established residual values and to determine whether there is indication that an asset impairment might have taken place. The Company uses a variety of sources and considers many factors in evaluating whether the respective book values of its assets are appropriate. In addition, the company may direct a residual value review at any time if it becomes aware of issues regarding the ability of a lessee to continue to make payments on its lease contract. An impairment loss is measured and recognized only if the estimated undiscounted future cash flows of the asset are less than their net book value. The estimated undiscounted future cash flows are the sum of the residual value of the asset at the end of the asset’s lease contract and undiscounted future rents from the existing lease contract. The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the marketplace are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. Impairment is measured as the difference between the fair value (as determined by a valuation method using
14
ATEL 14, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
5. Investments in equipment and leases, net: - (continued)
discounted estimated future cash flows, third party appraisals or comparable sales of similar assets as applicable based on asset type) of the asset and its carrying value on the measurement date. Upward adjustments for impairments recognized in prior periods are not made in any circumstances.
As a result of these reviews, the Company determined that no impairment losses existed during the three months ended March 31, 2015. During the prior year period, the Company recorded fair value adjustments totaling $44 thousand to reduce the cost basis of certain impaired off-lease equipment.
The Company utilizes a straight line depreciation method over the term of the equipment lease for equipment on operating leases currently in its portfolio. Depreciation expense on the Company’s equipment totaled $2.3 million and $2.8 million for the respective three months ended March 31, 2015 and 2014. IDC amortization expense related to operating leases and direct financing leases totaled $21 thousand and $27 thousand for the respective three months ended March 31, 2015 and 2014 (See Note 3).
Operating leases:
Property on operating leases consists of the following (in thousands):
Balance December 31, 2014 | Additions | Reclassifications or Dispositions | Balance March 31, 2015 | |||||||||||||
Marine vessel | $ | 19,410 | $ | — | $ | — | $ | 19,410 | ||||||||
Transportation, rail | 19,079 | 21 | — | 19,100 | ||||||||||||
Materials handling | 11,074 | — | (220 | ) | 10,854 | |||||||||||
Transportation | 8,028 | — | — | 8,028 | ||||||||||||
Manufacturing | 7,858 | — | (11 | ) | 7,847 | |||||||||||
Construction | 5,353 | — | — | 5,353 | ||||||||||||
Research | 2,250 | — | — | 2,250 | ||||||||||||
Agriculture | 851 | — | — | 851 | ||||||||||||
Air support equipment | 120 | — | — | 120 | ||||||||||||
Office automation | 27 | — | — | 27 | ||||||||||||
Other | 119 | — | — | 119 | ||||||||||||
74,169 | 21 | (231 | ) | 73,959 | ||||||||||||
Less accumulated depreciation | (25,569 | ) | (2,292 | ) | 192 | (27,669 | ) | |||||||||
Total | $ | 48,600 | $ | (2,271 | ) | $ | (39 | ) | $ | 46,290 |
The average estimated residual value for assets on operating leases was 39% of the assets’ original cost at both March 31, 2015 and December 31, 2014. There were no operating leases in non-accrual status at March 31, 2015 and December 31, 2014.
All of the Company’s leased property was acquired during the years from 2010 through 2015.
15
ATEL 14, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
5. Investments in equipment and leases, net: - (continued)
Direct financing leases:
As of March 31, 2015 and December 31, 2014, investment in direct financing leases consists of various types of materials handling, computer-related and cleaning and maintenance equipment. The components of the Company’s investment in direct financing leases as of March 31, 2015 and December 31, 2014 are as follows (in thousands):
March 31, 2015 | December 31, 2014 | |||||||
Total minimum lease payments receivable | $ | 206 | $ | 306 | ||||
Estimated residual values of leased equipment (unguaranteed) | 10 | 11 | ||||||
Investment in direct financing leases | 216 | 317 | ||||||
Less unearned income | (12 | ) | (21 | ) | ||||
Net investment in direct financing leases | $ | 204 | $ | 296 |
As of March 31, 2015 and December 31, 2014, there were no investments in direct financing leases in non-accrual status.
At March 31, 2015, the aggregate amounts of future minimum lease payments receivable are as follows (in thousands):
Operating Leases | Direct Financing Leases | Total | ||||||||||
Nine months ending December 31, 2015 | $ | 6,901 | $ | 185 | $ | 7,086 | ||||||
Year ending December 31, 2016 | 6,030 | 21 | 6,051 | |||||||||
2017 | 4,823 | — | 4,823 | |||||||||
2018 | 3,541 | — | 3,541 | |||||||||
2019 | 1,004 | — | 1,004 | |||||||||
$ | 22,299 | $ | 206 | $ | 22,505 |
The useful lives for each category of leases is reviewed at a minimum of once per quarter. As of March 31, 2015, the respective useful lives of each category of lease assets in the Company’s portfolio are as follows (in years):
Equipment category | Useful Life | |||
Transportation, rail | 35 – 40 | |||
Marine vessel | 20 – 30 | |||
Air support equipment | 15 – 20 | |||
Manufacturing | 10 – 15 | |||
Agriculture | 7 – 10 | |||
Cleaning and Maintenance | 7 – 10 | |||
Construction | 7 – 10 | |||
Materials handling | 7 – 10 | |||
Transportation | 7 – 10 | |||
Research | 5 – 7 | |||
Computers | 3 – 5 | |||
Office automation | 3 – 5 |
16
ATEL 14, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. Related party transactions:
The terms of the Operating Agreement provide that the Managing Member 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 the Managing Member and/or affiliates for providing administrative services to the Company. Administrative services provided include Company accounting, investor relations, legal counsel, and lease and equipment documentation. The Managing Member is not reimbursed for services whereby it is entitled to receive a separate fee as compensation for such services, such as management of investments.
Each of ATEL Financial Services, LLC (“AFS”) and ATEL Leasing Corporation (“ALC”) is a wholly-owned subsidiary of ATEL Capital Group and performs services for the Company on behalf of the Managing Member. Acquisition services, equipment management, lease administration and asset disposition services are performed by ALC; investor relations, communications and general administrative services are performed by AFS.
Cost reimbursements to the Managing Member or its affiliates 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 Managing Member believes that the costs reimbursed are the lower of (i) actual costs incurred on behalf of the Company or (ii) the amount the Company would be required to pay independent parties for comparable administrative services in the same geographic location.
The Managing Member and/or affiliates earned fees and billed for reimbursements of costs and expenses, pursuant to the Operating Agreement, during the three months ended March 31, 2015 and 2014 as follows (in thousands):
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Administrative costs reimbursed to Managing Member and/or affiliates | $ | 366 | $ | 384 | ||||
Asset management fees to Managing Member | 152 | 196 | ||||||
Acquisition and initial direct costs paid to Managing Member | — | 85 | ||||||
$ | 518 | $ | 665 |
7. Non-recourse debt:
At March 31, 2015, non-recourse debt consists of notes payable to financial institutions. The notes are due in monthly installments. Interest on the notes is at fixed rates ranging from 1.44% to 3.00% per annum. The notes are secured by assignments of lease payments and pledges of assets. At March 31, 2015, gross operating lease rentals totaled approximately $17.9 million over the remaining lease terms; and the carrying value of the pledged assets is $38.3 million. The notes mature at various dates from 2015 through 2019.
The non-recourse debt does not contain any material financial covenants. The debt is secured by a specific lien granted by the Company to the non-recourse lenders on (and only on) the discounted lease transactions. The lenders has recourse only to the following collateral: the leased equipment; the related lease chattel paper; the lease receivables; and proceeds of the foregoing items. The non-recourse obligation is payable solely out of the respective specific security and the Company does not guarantee (nor is the Company otherwise contractually responsible for) the payment of the non-recourse debt as a general obligation or liability of the Company. Although the Company does not have any direct or general liability in connection with the non-recourse debt apart from the security granted, the Company is directly and generally liable and responsible for certain representations, warranties, and covenants made to the lenders, such as warranties as to genuineness of the transaction parties’ signatures, as to the genuineness of the respective lease chattel paper or
17
ATEL 14, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
7. Non-recourse debt: - (continued)
the transaction as a whole, or as to the Company’s good title to or perfected interest in the secured collateral, as well as similar representations, warranties and covenants typically provided by non-recourse borrowers and customary in the equipment finance industry, and are viewed by such industry as being consistent with non-recourse discount financing obligations. Accordingly, as there are no financial covenants or ratios imposed on the Company in connection with the non-recourse debt, the Company has determined that there are no material covenants with respect to the non-recourse debt that warrant footnote disclosure.
Future minimum payments of non-recourse debt are as follows (in thousands):
Principal | Interest | Total | ||||||||||
Nine months ending December 31, 2015 | $ | 4,864 | $ | 284 | $ | 5,148 | ||||||
Year ending December 31, 2016 | 4,136 | 270 | 4,406 | |||||||||
2017 | 3,932 | 166 | 4,098 | |||||||||
2018 | 3,233 | 71 | 3,304 | |||||||||
2019 | 996 | 8 | 1,004 | |||||||||
$ | 17,161 | $ | 799 | $ | 17,960 |
8. Long-term debt:
As of March 31, 2015, the $2.1 million of long-term debt consists of a note payable to a lender. Such debt was utilized during the fourth quarter of 2013 to partially fund the marine vessel and related bareboat charter purchased by the Fund and its affiliate, ATEL 15, LLC. The note bears interest at a fixed-rate of 3.5% per annum, to accrue in arrears on a monthly basis. The full pro rata principal amount of $2.1 million plus all outstanding accrued and unpaid interest of approximately $400 thousand shall be paid in one payment of $2.5 million due on May 25, 2019. The note is recourse to the residual value of the vessel which is expected to be well in excess of the note amount. In addition, the lender has recourse to the Fund’s general assets up to $2.5 million. The note does not contain any material financial covenants and is guaranteed as a senior obligation of the Fund.
9. Borrowing facilities:
The Company participates with AFS and certain of its affiliates in a revolving credit facility (the “Credit Facility”) with a syndicate of financial institutions as lenders. The Credit Facility is 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. The Credit Facility was for an amount up to $60 million and set to expire in June 2014. During January 2014, the line was increased to $75 million, an affiliated participant added, and the expiration extended to June 2015. 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. Such Credit Facility includes certain financial covenants.
As of March 31, 2015 and December 31, 2014, borrowings under the Credit Facility were as follows (in thousands):
March 31, 2015 | December 31, 2014 | |||||||
Total available under the financing arrangement | $ | 75,000 | $ | 75,000 | ||||
Amount borrowed by the Company under the acquisition facility | — | — | ||||||
Amounts borrowed by affiliated partnerships and limited liability companies under the venture, acquisition and warehouse facilities | (1,135 | ) | (1,150 | ) | ||||
Total remaining available under the venture, acquisition and warehouse facilities | $ | 73,865 | $ | 73,850 |
18
ATEL 14, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
9. Borrowing facilities: - (continued)
The Company and its affiliates pay an annual commitment fee to have access to this line of credit. As of March 31, 2015, the aggregate amount of 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 March 31, 2015, the Company’s Tangible Net Worth requirement under the Credit Facility was $10.0 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 $33.4 million, 0.58 to 1, and 21.25 to 1, respectively, as of March 31, 2015. As such, as of March 31, 2015, the Company was 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. There were no borrowings outstanding at March 31, 2015 and December 31, 2014.
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 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 March 31, 2015, the investment program participants were the Company, ATEL 15, LLC and ATEL 16, LLC. During the first quarter of 2015, ATEL 12, LLC was removed as a participant of the Credit Facility. 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 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.
There were no borrowings under the Warehouse Facility as of March 31, 2015 and December 31, 2014.
19
ATEL 14, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
10. Commitments:
At March 31, 2015, there were no commitments to fund investments in notes receivable and to purchase lease assets.
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.
12. Members’ capital:
A total of 8,386,015 Units were issued and outstanding at both March 31, 2015 and December 31, 2014, including the 50 Units issued to the initial Member (Managing Member). The Fund was authorized to issue up to 15,000,000 Units in addition to the Units issued to the initial Member.
The Company has the right, exercisable at the Managing Member’s discretion, but not the obligation, to repurchase Units of a Unitholder who ceases to be a U.S. Citizen, for a price equal to 100% of the holder’s capital account. The Company is otherwise permitted, but not required, to repurchase Units upon a holder’s request. The repurchase of Fund Units is made in accordance with Section 13 of the Amended and Restated Limited Liability Company Operating Agreement. The repurchase would be at the discretion of the Managing Member on terms it determines to be appropriate under given circumstances, in the event that the Managing Member deems such repurchase to be in the best interest of the Company; provided, the Company is never required to repurchase any Units. Upon the repurchase of any Units by the Fund, the tendered Units are cancelled. Units repurchased in prior periods were repurchased at amounts representing the original investment less cumulative distributions made to the Unitholder with respect to the Units. All Units repurchased during a quarter are deemed to be repurchased effective the last day of the preceding quarter, and are not deemed to be outstanding during, or entitled to allocations of net income, net loss or distributions for the quarter in which such repurchase occurs.
The Fund’s net income or net losses are to be allocated 100% to the Members. From the commencement of the Fund until the initial closing date, net income and net loss were allocated 99% to the Managing Member and 1% to the initial Other Members. Commencing with the initial closing date, net income and net loss are to be allocated 92.5% to the Other Members and 7.5% to the Managing Member.
Fund distributions are to be allocated 7.5% to the Managing Member and 92.5% to the Other Members. The Company commenced periodic distributions in December 2009.
Distributions to the Other Members for the three months ended March 31, 2015 and 2014 were as follows (in thousands except Units and per Unit data):
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Distributions declared | $ | 1,887 | $ | 1,887 | ||||
Weighted average number of Units outstanding | 8,386,015 | 8,386,015 | ||||||
Weighted average distributions per Unit | $ | 0.23 | $ | 0.23 |
20
ATEL 14, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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, generally on a national exchange.
Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market.
Level 3 – Valuation is modeled using significant inputs that are unobservable in the market. These unobservable inputs reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability.
At March 31, 2015 and December 31, 2014, only the Company’s warrants were measured on a recurring basis. The Company recorded non-recurring adjustments to reflect the fair values of certain impaired notes receivable for the three months ended March 31, 2015 and those of impaired off-lease assets during 2014.
The Company’s valuation policy is determined by members of the Asset Management, Credit and Accounting departments. Whenever possible, the policy is to obtain quoted market prices in active markets to estimate fair values for recognition and disclosure purposes. Where quoted market prices in active markets are not available, fair values are estimated using discounted cash flow analyses, broker quotes, information from third party remarketing agents, third party appraisals of collateral and/or other valuation techniques. These techniques are significantly affected by certain of the Company’s assumptions, including discount rates and estimates of future cash flows. Potential taxes and other transaction costs are not considered in estimating fair values. As the Company is responsible for determining fair value, an analysis is performed on prices obtained from third parties. Such analysis is performed by asset management and credit department personnel who are familiar with the Company’s investments in equipment, notes receivable and equity securities of venture companies. The analysis may include a periodic review of price fluctuations and validation of numbers obtained from a specific third party by reference to multiple representative sources.
Such fair value adjustments utilized the following methodology:
Warrants (recurring)
Warrants owned by the Company are not registered for public sale, but are considered derivatives and are carried on the balance sheet at an estimated fair value at the end of the period. The valuation of the warrants was determined using a Black-Scholes formulation of value based upon the stock price(s), the exercise price(s), the volatility of comparable venture companies, and a risk free interest rate for the term(s) of the warrant exercise(s). As of March 31, 2015 and December 31, 2014, the calculated fair value of the Fund’s warrant portfolio approximated $611 thousand and $595 thousand, respectively. Such valuations are classified within Level 3 of the valuation hierarchy.
The following table reconciles the beginning and ending balances of the Company’s Level 3 recurring assets (in thousands):
Level 3 Assets | ||||
Balance at December 31, 2014 | $ | 595 | ||
Unrealized gain on warrants, net recorded during the period | 16 | |||
Balance at March 31, 2015 | $ | 611 |
21
ATEL 14, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
13. Fair value measurements: - (continued)
Impaired notes receivable
The fair value of the Company’s notes receivable, when impairment adjustments are required, is estimated using either third party appraisals or estimations of the value of collateral (for collateral dependent loans) or discounted cash flow analyses (by discounting estimated future cash flows) using the effective interest rate contained in the terms of the original loan. During the three months ended March 31, 2015, the Company had recorded fair value adjustments totaling $33 thousand relative to two impaired notes. The company had no fair value adjustments relative to impaired notes receivable during the prior year period and the subsequent last three quarters of 2014.
The fair value adjustments were non-recurring and were based upon an estimated valuation of underlying collateral. Under the Fair Value Measurements Topic of the FASB Accounting Standards Codification, the fair value of the impaired notes receivable is classified within Level 3 of the valuation hierarchy. The valuation utilizes a market approach technique and uses inputs from third party appraisers that utilize current market transactions as adjusted for certain factors specific to the underlying collateral.
The following table presents the fair value measurement of impaired assets measured at fair value on a non-recurring basis and the level within the hierarchy in which the fair value measurements fall at March 31, 2015 (in thousands):
March 31, 2015 | 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 notes receivable, net | $ | 76 | $ | — | $ | — | $ | 76 |
Impaired off-lease equipment
During the first three months of 2014, the Company recorded fair value adjustments totaling $44 thousand to reduce the cost basis of certain off-lease equipment (assets) deemed impaired. There were no such adjustments during the first three months of 2015.
The fair value adjustments were non-recurring. Under the Fair Value Measurements Topic of the FASB Accounting Standards Codification, the fair value of impaired lease assets were 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. Such valuation utilizes a market approach technique and uses inputs that reflect the sales price of similar assets sold by affiliates and/or information from third party remarketing agents not readily available in the market. The fair value adjustments recorded during the first quarter of 2014 represents total adjustments for 2014. As of the third quarter of 2014, all previously impaired off-lease equipment had been disposed.
22
ATEL 14, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
13. Fair value measurements: - (continued)
The following tables summarize the valuation techniques and significant unobservable inputs used for the Company’s recurring and non-recurring fair value calculation/adjustments categorized as Level 3 in the fair value hierarchy at March 31, 2015 and December 31, 2014:
March 31, 2015 | ||||||||||||||||
Name | Valuation Frequency | Valuation Technique | Unobservable Inputs | Range of Input Values | ||||||||||||
Warrants | Recurring | Black-Scholes formulation | Stock price | $ | 0.04 – $1,000.00 | |||||||||||
Exercise price | $ | 0.04 – $1,000.00 | ||||||||||||||
Time to maturity (in years) | 1.37 – 7.30 | |||||||||||||||
Risk-free interest rate | 0.36% – 1.74% | |||||||||||||||
Annualized volatility | 15.63% – 100.00% | |||||||||||||||
Notes Receivable | Non-recurring | Market Approach | Third Party Agents’ estimate of the value of collateral | $ | 4,900 – $66,200 | |||||||||||
Condition of collateral (equipment) | Poor to Average |
December 31, 2014 | ||||||||||||||||
Name | Valuation Frequency | Valuation Technique | Unobservable Inputs | Range of Input Values | ||||||||||||
Warrants | Recurring | Black-Scholes formulation | Stock price | $ | 0.05 – $1,000.00 | |||||||||||
Exercise price | $ | 0.05 – $1,000.00 | ||||||||||||||
Time to maturity (in years) | 1.62 – 8.09 | |||||||||||||||
Risk-free interest rate | 0.50% – 2.04% | |||||||||||||||
Annualized volatility | 15.88% – 100.00% |
The following disclosure of the estimated fair value of financial instruments is made in accordance with the guidance provided by the Financial Instruments Topic of the FASB Accounting Standards Codification. Fair value estimates, methods and assumptions, set forth below for the Company’s financial instruments, are made solely to comply with the requirements of the Financial Instruments Topic and should be read in conjunction with the Company’s financial statements and related notes.
The Company determines the estimated fair value amounts by using market information and valuation methodologies that it considers appropriate and consistent with the fair value accounting guidance. Considerable judgment is required to interpret market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Cash and cash equivalents
The recorded amounts of the Company’s cash and cash equivalents approximate fair value because of the liquidity and short-term maturity of these instruments.
Investment in securities
The Company’s investment securities are not registered for public sale and are carried at cost which management believes approximates fair value, as appropriately adjusted for impairment.
Non-recourse debt and Long-term debt
The fair value of the Company’s non-recourse and long-term debt is estimated using discounted cash flow analyses, based upon current market borrowing rates for similar types of borrowing arrangements.
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ATEL 14, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
13. Fair value measurements: - (continued)
Commitments and Contingencies
Management has determined that no recognition for the fair value of the Company’s loan commitments is necessary because their terms are made on a market rate basis and require borrowers to be in compliance with the Company’s credit requirements at the time of funding.
The fair value of contingent liabilities (or guarantees) is not considered material because management believes there has been no event that has occurred wherein a guarantee liability has been incurred or will likely be incurred.
The following tables present estimated fair values of the Company’s financial instruments in accordance with the guidance provided by the Financial Instruments Topic of the FASB Accounting Standards Codification at March 31, 2015 and December 31, 2014 (in thousands):
Fair Value Measurements at March 31, 2015 | ||||||||||||||||||||
Carrying Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 5,797 | $ | 5,797 | $ | — | $ | — | $ | 5,797 | ||||||||||
Notes receivable, net | 973 | — | — | 973 | 973 | |||||||||||||||
Investment in securities | 333 | — | — | 333 | 333 | |||||||||||||||
Fair value of warrants | 611 | — | — | 611 | 611 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Non-recourse debt | 17,161 | — | — | 17,258 | 17,258 | |||||||||||||||
Long-term debt | 2,068 | — | — | 2,217 | 2,217 |
Fair Value Measurements at December 31, 2014 | ||||||||||||||||||||
Carrying Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 6,646 | $ | 6,646 | $ | — | $ | — | $ | 6,646 | ||||||||||
Notes receivable, net | 1,454 | — | — | 1,454 | 1,454 | |||||||||||||||
Investment in securities | 318 | — | — | 318 | 318 | |||||||||||||||
Fair value of warrants | 595 | — | — | 595 | 595 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Non-recourse debt | 19,279 | — | — | 19,287 | 19,287 | |||||||||||||||
Long-term debt | 2,068 | — | — | 2,170 | 2,170 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Statements contained in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Form 10-Q, which are not historical facts, may be forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. In particular, economic recession and changes in general economic conditions, including, fluctuations in demand for equipment, lease rates, and interest rates, may result in delays in investment and reinvestment, delays in leasing, re-leasing, and disposition of equipment, and reduced returns on invested capital. The Company’s performance is subject to risks relating to lessee defaults and the creditworthiness of its lessees. The Company’s performance is also subject to risks relating to the value of its equipment at the end of its leases, which may be affected by the condition of the equipment, technological obsolescence and the market for new and used equipment at the end of lease terms. Investors are cautioned not to attribute undue certainty to these forward-looking statements, which speak only as of the date of this Form 10-Q. We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events, other than as required by law.
Overview
ATEL 14, LLC (the “Company” or the “Fund”) was formed under the laws of the state of California on April 1, 2009 (“Date of Inception”) for the purpose of equipment financing and acquiring equipment to engage in equipment leasing and sales activities.
The Company conducted a public offering of 15,000,000 Limited Liability Company Units (“Units”), at a price of $10 per Unit. As of December 2, 2009, subscriptions for the minimum number of Units (120,000, representing $1.2 million), excluding subscriptions from Pennsylvania investors, had been received and the Fund requested subscription proceeds to be released from escrow. On that date, the Company commenced initial operations and continued in its development stage activities until transitioning to an operating enterprise during the first quarter of 2010. Pennsylvania subscriptions are subject to a separate escrow and are released to the Fund only when aggregate subscriptions for all investors equal to at least $7.5 million. Total contributions to the Fund exceeded $7.5 million on February 12, 2010, at which time a request was processed to release the Pennsylvania escrowed amounts. The offering was terminated on October 6, 2011 with a total of 8,402,515 Units subscribed, representing contributions, net of rescissions and repurchases, approximating $84.0 million. As of March 31, 2015, 8,386,015 Units were issued and outstanding.
During 2011, 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, 2017, 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, 2030. Periodic distributions are paid at the discretion of the Managing Member.
Results of Operations
The three months ended March 31, 2015 versus the three months ended March 31, 2014
The Company had a net loss of $57 thousand and net income of $164 thousand for the three months ended March 31, 2015 and 2014, respectively. Results for the first quarter of 2015 reflect decreases in both total revenues and total expenses when compared to the prior year period.
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Revenues
Total revenues for the first quarter of 2015 decreased by $948 thousand, or 23%, as compared to the prior year period. The net decrease in revenues was largely due to decreases in operating lease revenues, gain on sales of lease assets and early termination of notes receivable, and interest on notes receivable.
The decrease in operating lease revenues totaled $507 thousand and was mainly due to run-off and dispositions of lease assets. Gain on sales of lease assets and early termination of notes receivable decreased by $378 thousand largely due to prior year period gains totaling $430 thousand relative to the sale of railcars for scrap offset, in part, by an $88 thousand current year period gain from an early payoff of certain notes. The early payoff of certain notes, coupled with loan amortization, also resulted in lower interest on notes receivable which declined by $71 thousand.
Expenses
Total expenses for the first quarter of 2015 decreased by $727 thousand, or 18%, as compared to the prior year period. The decrease in total expenses was largely a result of decreases in depreciation expense, acquisition expense, railcar maintenance costs, asset management fees to Managing Member, impairment losses on equipment and interest expense offset, in part, by an increase in provision for credit losses.
The decrease in depreciation expense totaled $481 thousand and was largely a result of run-off and sales of lease assets. Acquisition expense decreased by $85 thousand largely due to a decline in lease acquisition and loan funding activities coupled with a lower level of spending related to identifying potential acquisition and funding transactions. Railcar maintenance costs were lower by $50 thousand primarily due to railcar sales and a decline in required maintenance and repairs on the Fund’s remaining railcars; and asset management fees paid to the Managing Member declined by $44 thousand largely due to the period over period decrease in managed assets and related rents.
Moreover, impairment losses on equipment declined by $44 thousand due to a prior year period fair value adjustment relative to impaired off-lease computer equipment. There were no such adjustments during the first quarter of 2015. Finally, interest expense was reduced by $44 thousand as a result of a $7.8 million decrease in outstanding borrowings since March 31, 2014.
The aforementioned decreases in expenses were partially offset by a $45 thousand increase in the provision for credit losses. Such increase was primarily attributable to $33 thousand of fair value adjustments on impaired notes coupled with a decrease in recovery of accounts receivable amounts previously reserved. There were no impaired notes during the prior year period.
Capital Resources and Liquidity
At March 31, 2015 and December 31, 2014, the Company’s cash and cash equivalents totaled $5.8 million and $6.6 million, respectively. The liquidity of the Company varies, increasing to the extent cash flows from leases and proceeds of asset sales exceed expenses and decreasing as lease assets are acquired, as distributions are made to the Members and to the extent expenses exceed cash flows from leases and proceeds from asset sales.
The Company currently believes it has adequate reserves available to meet its immediate cash requirements and those of the next twelve months, but in the event those reserves were found to be inadequate, the Company would likely be in a position to borrow against its current portfolio to meet such requirements. The Managing Member envisions no such requirements for operating purposes.
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Cash Flows
The following table sets forth summary cash flow data (in thousands):
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Net cash provided by (used in): | ||||||||
Operating activities | $ | 2,595 | $ | 2,159 | ||||
Investing activities | 714 | 2,326 | ||||||
Financing activities | (4,158 | ) | (2,599 | ) | ||||
Net (decrease) increase in cash and cash equivalents | $ | (849 | ) | $ | 1,886 |
The three months ended March 31, 2015 versus the three months ended March 31, 2014
During the three months ended March 31, 2015 and 2014, the Company’s primary sources of liquidity were cash flows from its portfolio of operating and direct financing lease contracts, and its investments in notes receivable. In addition, the Company realized $323 thousand and $1.6 million of proceeds from sales of lease assets and/or the early termination of notes receivable. During the prior year period, the Company also utilized borrowings totaling $1.9 million.
During the same comparative periods, cash was primarily used to repay debt and to pay distributions to both Other Members and the Managing Member. Cash used to repay debt totaled $2.1 million and $2.4 million for the respective three months ended March 31, 2015 and 2014; while distributions paid to both Other Members and Managing Member totaled $2.0 million for each of the aforementioned three month-periods.
Revolving credit facility
Effective June 15, 2010, the Company participated with AFS and certain of its affiliates in a revolving credit facility (the “Credit Facility”) with a syndicate of financial institutions as lenders. The Credit Facility is 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. Such Credit Facility was for an amount up to $60 million and set to expire in June 2014. During January 2014, the line was increased to $75 million, an affiliated participant added, and the expiration extended to June 2015. During the first quarter of 2015, ATEL 12, LLC was removed as a participant of the Credit Facility.
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 was in compliance with all applicable covenants under the Credit Facility as of March 31, 2015. 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.
As of March 31, 2015, the material financial covenants are summarized as follows:
Minimum Tangible Net Worth: $10.0 million
Leverage Ratio (leverage to Tangible Net Worth): Not to exceed 1.25 to 1
Collateral Value: Collateral value under the Warehouse Facility must be no less than the outstanding borrowings under that facility
EBITDA to Interest Ratio: Not to be less than 2 to 1 for the four fiscal quarters just ended
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“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 there from (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 accounting principles generally accepted in the United States of America (“GAAP”), 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. The Company was in compliance with these financial covenants under the Credit Facility with a minimum Tangible Net Worth, leverage ratio and (EBITDA) interest coverage ratio, as calculated per the Credit Facility agreement of $33.4 million, 0.58 to 1, and 21.25 to 1, respectively, as of March 31, 2015. As such, as of March 31, 2015, the Company was 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 net income to EBITDA, as defined in the loan agreement, for the twelve months ended March 31, 2015 (in thousands):
Net income – GAAP basis | $ | 553 | ||
Interest expense | 620 | |||
Depreciation and amortization | 9,840 | |||
Amortization of initial direct costs | 101 | |||
Impairment losses | 23 | |||
Provision for credit losses | 35 | |||
Unrealized loss on fair valuation of warrants | 173 | |||
Principal payments received on direct financing leases | 343 | |||
Principal payments received on notes receivable | 1,484 | |||
EBITDA (for Credit Facility financial covenant calculation only) | $ | 13,172 |
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.
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.
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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.
Non-Recourse Long-Term Debt
As of March 31, 2015 and December 31, 2014, the Company had non-recourse long-term debt totaling $17.2 million and $19.3 million, respectively. Such non-recourse notes payable do not contain any material financial covenants. The notes are secured by a specific lien granted by the Company to the non-recourse lenders on (and only on) the discounted lease transactions. The lenders have recourse only to the following collateral: the leased equipment; the related lease chattel paper; the lease receivables; and proceeds of the foregoing items.
Long-Term Debt
As of March 31, 2015 and December 31, 2014, the Company had long-term debt totaling $2.1 million. The debt was utilized during the fourth quarter of 2013 to partially fund the marine vessel and related bareboat charter purchased by the Fund and its affiliate, ATEL 15, LLC. The full pro rata principal amount of $2.1 million plus all outstanding accrued and unpaid interest of approximately $400 thousand shall be paid in one payment of $2.5 million due on May 25, 2019. The note is recourse to the residual value of the vessel which is expected to be well in excess of the note amount. In addition, the lender has recourse to the Fund’s general assets up to $2.5 million. The note does not contain any material financial covenants and is guaranteed as a senior obligation of the Fund.
For detailed information on the Company’s debt obligations, see Notes 7 through 9 to the financial statements as set forth in Part I, Item 1, Financial Statements (Unaudited).
Distributions
The Unitholders of record are entitled to certain distributions as provided under the Operating Agreement. The Company commenced periodic distributions beginning with the month of December 2009. Additional distributions have been consistently made through March 31, 2015.
Cash distributions were paid by the Fund to Unitholders of record as of February 28, 2015, and paid through March 31, 2015. Distributions may be characterized for tax, accounting and economic purposes as a return of capital, a return on capital (including escrow interest) or a portion of each. Generally, the portion of each cash distribution by a company which exceeds its net income for the fiscal period would constitute a return of capital. The Fund is required by the terms of its Operating Agreement to distribute the net cash flow generated by its investments in certain minimum amounts during the Reinvestment Period before it can reinvest its operating cash flow in additional portfolio assets. See the discussion in the Prospectus under “Income, Losses and Distributions — Reinvestment.” Accordingly, the amount of cash flow from Fund investments distributed to Unitholders will not be available for reinvestment in additional portfolio assets.
Cash distributions were based on current and anticipated gross revenues from the leases and loans acquired. During the Fund’s acquisition and operating stages, the Fund may incur short term borrowing to fund regular distributions of such gross revenues to be generated by newly acquired transactions during their respective initial fixed terms. As such, all Fund periodic cash distributions made during these stages have been, and are expected in the future to be, based on the Fund’s actual and anticipated gross revenues to be generated from the binding initial terms of the leases and loans acquired.
29
The following table summarizes distribution activity for the Fund from inception through March 31, 2015 (in thousands except for Units and Per Unit Data):
Distribution Period(1) | Paid | Return of Capital | Distribution of Income | Total Distribution | Total Distribution per Unit(2) | Weighted Average Units Outstanding(3) | ||||||||||||||||||||||||||||||
Monthly and quarterly distributions | ||||||||||||||||||||||||||||||||||||
Oct 2009 – Feb 2010 | ||||||||||||||||||||||||||||||||||||
(Distribution of escrow interest) | Jan – Mar 2010 | $ | — | $ | — | $ | — | $ | — | n/a | ||||||||||||||||||||||||||
Dec 2009 – Dec 2010 | Jan 2010 – Jan 2011 | 2,003 | — | 2,003 | 0.90 | 2,214,171 | ||||||||||||||||||||||||||||||
Jan 2011 – Nov 2011 | Feb – Dec 2011 | 4,855 | — | 4,855 | 0.87 | 5,597,722 | ||||||||||||||||||||||||||||||
Dec 2011 – Nov 2012 | Jan – Dec 2012 | 7,562 | — | 7,562 | 0.90 | 8,400,238 | ||||||||||||||||||||||||||||||
Dec 2012 – Nov 2013 | Jan – Dec 2013 | 7,550 | — | 7,550 | 0.90 | 8,389,923 | ||||||||||||||||||||||||||||||
Dec 2013 – Nov 2014 | Jan – Dec 2014 | 7,548 | — | 7,548 | 0.90 | 8,386,015 | ||||||||||||||||||||||||||||||
Dec 2014 – Feb 2015 | Jan – Mar 2015 | 1,887 | — | 1,887 | 0.23 | 8,386,015 | ||||||||||||||||||||||||||||||
$ | 31,405 | $ | — | $ | 31,405 | $ | 4.70 | |||||||||||||||||||||||||||||
Source of distributions | ||||||||||||||||||||||||||||||||||||
Lease and loan payments received | $ | 29,405 | 93.63 | % | $ | — | 0.00 | % | $ | 29,405 | 93.63 | % | ||||||||||||||||||||||||
Interest Income | — | 0.00 | % | — | 0.00 | % | — | 0.00 | % | |||||||||||||||||||||||||||
Debt against non-cancellable firm term payments on leases and loans | 2,000 | 6.37 | % | — | 0.00 | % | 2,000 | 6.37 | % | |||||||||||||||||||||||||||
$ | 31,405 | 100.00 | % | $ | — | 0.00 | % | $ | 31,405 | 100.00 | % |
(1) | Investors may elect to receive their distributions either monthly or quarterly (See “Timing and Method of Distributions” on Page 73 of the Prospectus). |
(2) | Total distributions per Unit represents the per Unit distribution rate for those units which were outstanding for all of the applicable period. |
(3) | Balances shown represent weighted average units for the year ended December 31, 2010, and the periods from January 1 — November 30, 2011, December 1, 2011 — November 30, 2012, December 1, 2012 — November 30, 2013, December 1, 2013 — November 30, 2014 and December 1, 2014 — February 28, 2015, respectively. |
Commitments and Contingencies and Off-Balance Sheet Transactions
Commitments and Contingencies
At March 31, 2015, there were no commitments to fund investments in notes receivable and to purchase lease assets.
Off-Balance Sheet Transactions
None.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the
30
date of adoption. The Company evaluated the impact of the new standard on its financial statements and has determined that such impact is virtually non-existent as the new revenue guideline does not affect revenues from leases and loans, which comprise the majority of the Company’s revenues.
In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements — Going Concern (subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The new standard provides guidance relative to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. Management is currently evaluating the standard and its operational and related disclosure requirements.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates, which are based upon historical experiences, market trends and financial forecasts, and upon various other assumptions that management believes to be reasonable under the circumstances and at that certain point in time. Actual results may differ, significantly at times, from these estimates under different assumptions or conditions.
The Company’s critical accounting policies are described in its Annual Report on Form 10-K for the year ended December 31, 2014. There have been no material changes to the Company’s critical accounting policies since December 31, 2014.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures
The Company’s Managing Member’s Chief Executive Officer, and Executive Vice President and Chief Financial and Operating Officer (“Management”), evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on the evaluation of the Company’s disclosure controls and procedures, the Chief Executive Officer and Executive Vice President and Chief Financial and Operating Officer concluded that as of the end of the period covered by this report, the design and operation of these disclosure controls and procedures were effective.
The Company does not control the financial reporting process, and is solely dependent on the Management of the Managing Member, who is responsible for providing the Company with financial statements in accordance with generally accepted accounting principles in the United States. The Managing Member’s disclosure controls and procedures, as they are applicable to the Company, means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78aet seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in internal control
There were no changes in the Managing Member’s internal control over financial reporting, as it is applicable to the Company, during the quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Managing Member’s internal control over financial reporting, as it is applicable to the Company.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In the ordinary course of conducting business, there may be certain claims, suits, and complaints filed against the Managing Member. In the opinion of management, the outcome of such matters, if any, will not have a material impact on the Managing Member’s financial position or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
(a) | Documents filed as a part of this report |
1. | Financial Statement Schedules |
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
2. | Other Exhibits |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Dean L. Cash | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Paritosh K. Choksi | |
32.1 | Certification Pursuant to 18 U.S.C. section 1350 of Dean L. Cash | |
32.2 | Certification Pursuant to 18 U.S.C. section 1350 of Paritosh K. Choksi | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 14, 2015
ATEL 14, LLC
(Registrant)
By: | ATEL Managing Member, LLC Managing Member of Registrant | |||
By: /s/ Dean L. Cash | ||||
By: /s/ Paritosh K. Choksi | ||||
By: /s/ Samuel Schussler |