Form 10-K
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x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
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For the year ended December 31, 2011 | ||
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. | |
For the transition period from to |
(Exact name of registrant as specified in its charter)
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California | 94-3375584 | |
(State or other jurisdiction of incorporation or organization) |
(I. R. S. Employer Identification No.) |
(Address of principal executive offices)
Registrants telephone number, including area code: (415) 989-8800
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Limited Liability Company Units
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o No x
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act of 1934.Yes o No x
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x
State the aggregate market value of voting stock held by non-affiliates of the registrant: Not applicable
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.) Not applicable
The number of Limited Liability Company Units outstanding as of February 29, 2012 was 12,055,016.
Prospectus dated January 16, 2001, filed pursuant to Rule 424(b) (Commission File No. 333-47196) is hereby incorporated by reference into Part IV hereof.
ATEL Capital Equipment Fund IX, LLC (the Company or the Fund) was formed under the laws of the State of California on September 27, 2000 for the purpose of engaging in the sale of limited liability company investment units and acquiring equipment to engage in equipment leasing, lending and sales activities, primarily in the United States. The Managing Member of the Company is ATEL Financial Services, LLC (AFS), a California limited liability company. The Company may continue until December 31, 2020. Contributions in the amount of $600 were received as of December 31, 2000, $100 of which represented AFSs continuing interest, and $500 of which represented the initial Members capital investment.
The Company conducted a public offering of 15,000,000 Limited Liability Company Units (Units), at a price of $10 per Unit. On February 21, 2001, subscriptions for the minimum number of Units (120,000, representing $1.2 million) had been received (excluding subscriptions from Pennsylvania investors) and AFS requested that the subscriptions be released to the Company. On that date, the Company commenced operations in its primary business (acquiring equipment to engage in equipment leasing, lending and sales activities). As of April 3, 2001, the Company had received subscriptions for 753,050 Units ($7.5 million), thus exceeding the $7.5 million minimum requirement for Pennsylvania, and AFS requested that the remaining funds in escrow (from Pennsylvania investors) be released to the Company.
As of January 15, 2003, the offering was terminated. As of that date, the Company had received subscriptions for 12,065,266 Units ($120.7 million). Subsequent to January 15, 2003, Units totaling 10,250 were rescinded or repurchased and funds returned to investors (net of distributions paid and allocated syndication costs, as applicable). As of December 31, 2011, 12,055,016 Units remain issued and outstanding.
The Companys principal objectives have been to invest in a diversified portfolio of equipment that (i) preserves, protects and returns the Companys invested capital; (ii) generates regular distributions to the members of cash from operations and cash from sales or refinancing, with any balance remaining after certain minimum distributions to be used to purchase additional equipment during the reinvestment period (Reinvestment Period) (defined as six full years following the year the offering was terminated), which ended on December 31, 2009 and (iii) provides additional distributions following the Reinvestment Period and until all equipment has been sold. The Company is governed by the Limited Liability Company Operating Agreement (Operating Agreement), as amended. On January 1, 2010, the Company commenced liquidation phase activities pursuant to the guidelines of the Operating Agreement.
The Company has incurred debt to finance the purchase of a portion of its equipment portfolio. The amount of borrowings in connection with any equipment acquisition transaction is determined by, among other things, the credit of the lease, the terms of the lease, the nature of the equipment and the condition of the money market. There is no limit on the amount of debt that may be incurred in connection with any single acquisition of equipment. However the Company may not incur aggregate outstanding indebtedness in excess of 50% of the total cost of all equipment as of the date of the final commitment of the offering proceeds and, thereafter, as of the date of any subsequent indebtedness is incurred. The Company has borrowed amounts within such maximum debt level in order to fund a portion of its equipment acquisitions. There can be no assurance that such financing will continue to be available to the Company in the future.
The Company also incurred long-term recourse debt in the form of asset securitization transactions in order to obtain lower interest rates or other more desirable terms than may be available for individual non-recourse debt transactions. In an asset securitization, the lender would receive a security interest in a specified pool of securitized Company assets or a general lien against all of the otherwise unencumbered assets of the Company. It had been the intention of AFS to use asset securitization primarily to finance assets leased to those credits which, in the opinion of AFS, had a relatively lower potential risk of lease default than those lessees with equipment financed with non-recourse debt. AFS expected that an asset securitization financing would involve borrowing at a variable interest rate based on an established reference rate, and sought to limit the Companys exposure to increases in the interest rate by engaging in hedging transactions that would effectively fix the interest rate obligation. As of August 22, 2011, all advances under such securitized borrowings were repaid in full and the program was terminated. As of December 31, 2010, the amount of such securitized borrowings was $415 thousand.
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Pursuant to the terms of the Operating Agreement, AFS receives compensation and reimbursements for services rendered on behalf of the Company (See Note 7 to the financial statements included in Item 8 of this report). The Company is required to maintain reasonable cash reserves for working capital, the repurchase of Units and contingencies. The repurchase of Units is solely at the discretion of AFS.
The Company has acquired various types of equipment to lease pursuant to Operating leases and High Payout leases, whereby Operating leases are defined as being leases in which the minimum lease payments during the initial lease term do not recover the full cost of the equipment and High Payout leases recover at least 90% of such cost. It is the intention of AFS that a majority of the aggregate purchase price of equipment will represent equipment leased under operating leases upon final investment of the net proceeds of the offering and that no more than 20% of the aggregate purchase price of equipment will be invested in equipment acquired from a single manufacturer.
The Company has only purchased equipment under pre-existing leases or for which a lease will be entered into concurrently at the time of the purchase. Through December 31, 2011, the Company had purchased equipment with a total acquisition price of $177.8 million. The Company also had investments in notes receivable of which $1.7 million remained outstanding at December 31, 2011.
The Companys objective has been to lease a minimum of 75% of the equipment acquired with the net proceeds of the offering to lessees that (i) have an aggregate credit rating by Moodys Investors Service of Baa or better, or the credit equivalent as determined by AFS, with the aggregate rating weighted to account for the original equipment cost for each item leased or (ii) are established hospitals with histories of profitability or municipalities. The balance of the original equipment portfolio may include equipment leased to lessees which, although deemed creditworthy by AFS, would not satisfy the general credit rating criteria for the portfolio. In excess of 75% of the equipment acquired with the net proceeds of the offering (based on original purchase cost) was originally leased to lessees with an aggregate credit rating of Baa or better or to such hospitals or municipalities, as described in (ii) above.
During 2011 and 2010, a certain lessee generated significant portions (defined as 10% or more) of the Companys total leasing and lending revenues as follows:
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Lessee | Type of Equipment | Percentage of Total Leasing and Lending Revenues |
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2011 | 2010 | |||||||||||
The Sabine Mining Company | Mining | 26 | % | 24 | % |
These percentages are not expected to be comparable in future periods.
The equipment leasing industry is highly competitive. Equipment manufacturers, corporations, partnerships and others offer users an alternative to the purchase of most types of equipment with payment terms that vary widely depending on the lease term, type of equipment and creditworthiness of the lessee. The ability of the Company to keep the equipment leased and/or operating and the terms of the acquisitions, leases and dispositions of equipment depends on various factors (many of which are not in the control of AFS or the Company), such as raw material costs to manufacture equipment as well as general economic conditions, including the effects of inflation or recession, and fluctuations in supply and demand for various types of equipment resulting from, among other things, technological and economic obsolescence.
AFS limited the amount invested in equipment to any single lessee to not more than 20% of the aggregate purchase price of equipment owned at any time during the Reinvestment Period.
The business of the Company is not seasonal. The Company has no full time employees. AFS employees provide the services the Company requires to effectively operate. The cost of these services is reimbursed by the Company to AFS per the Operating Agreement.
The Company has acquired a diversified portfolio of equipment. The equipment has been leased to lessees in various industries.
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The following tables set forth the types of equipment acquired by the Company through December 31, 2011 and the industries to which the assets have been leased (dollars in thousands):
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Asset Types | Purchase Price Excluding Acquisition Fees | Percentage of Total Acquisitions | ||||||
Mining equipment | $ | 45,530 | 25.60 | % | ||||
Materials handling | 35,106 | 19.74 | % | |||||
Transportation, other | 17,169 | 9.65 | % | |||||
Construction | 16,352 | 9.20 | % | |||||
Aviation | 13,644 | 7.67 | % | |||||
Transportation, rail | 13,458 | 7.57 | % | |||||
Marine vessels | 13,283 | 7.47 | % | |||||
Computers | 6,143 | 3.45 | % | |||||
Logging/Lumber | 4,176 | 2.35 | % | |||||
Manufacturing | 4,004 | 2.25 | % | |||||
Agriculture | 1,152 | 0.65 | % | |||||
Other | 7,809 | 4.40 | % | |||||
$ | 177,826 | 100.00 | % |
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Industry of Lessee | Purchase Price Excluding Acquisition Fees | Percentage of Total Acquisitions | ||||||
Mining | $ | 44,228 | 24.87 | % | ||||
Transportation, other | 25,960 | 14.60 | % | |||||
Manufacturing | 19,256 | 10.83 | % | |||||
Electronics | 16,926 | 9.52 | % | |||||
Retail | 9,048 | 5.09 | % | |||||
Oil/Gas | 8,709 | 4.90 | % | |||||
Health services | 7,704 | 4.33 | % | |||||
Communications | 7,561 | 4.25 | % | |||||
Transportation, rail | 7,467 | 4.20 | % | |||||
Wood/Lumber products | 7,307 | 4.11 | % | |||||
Transportation, marine | 6,683 | 3.76 | % | |||||
Construction | 5,365 | 3.02 | % | |||||
Paper products | 4,549 | 2.56 | % | |||||
Other | 7,063 | 3.96 | % | |||||
$ | 177,826 | 100.00 | % |
From inception to December 31, 2011, the Company has disposed of certain leased assets as set forth below (in thousands):
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Asset Types | Original Equipment Cost Excluding Acquisition Fees | Sale Price | Gross Rents | |||||||||
Materials handling | $ | 23,535 | $ | 3,106 | $ | 24,897 | ||||||
Mining equipment | 21,103 | 6,454 | 24,502 | |||||||||
Aviation | 12,612 | 9,681 | 8,575 | |||||||||
Construction | 11,955 | 3,049 | 9,927 | |||||||||
Computers | 5,914 | 746 | 5,598 | |||||||||
Manufacturing | 4,809 | 1,303 | 5,043 | |||||||||
Transportation, other | 2,460 | 463 | 2,502 | |||||||||
Marine vessels | 1,025 | | 1,058 | |||||||||
Transportation, rail | 171 | 125 | 88 | |||||||||
Other | 4,958 | 2,209 | 4,198 | |||||||||
$ | 88,542 | $ | 27,136 | $ | 86,388 |
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Proceeds from sales of lease assets are not expected to be consistent from one period to another. The Company is a finite life equipment leasing fund, which had acquired leasing transactions during the period ending six years after completion of its public offering. On the termination of leases, assets may be re-leased or sold. Sales of assets are not scheduled and are created by opportunities within the marketplace. The Company sought to acquire and lease a wide variety of assets and to enter into leases on a variety of terms. Some assets will be expected to have little or no value for re-lease or sale upon termination of the initial leases, and the anticipated residual values are a key factor in pricing and terms structured for each lease. The Companys goal is to seek maximum return on its leased assets. It will determine when and under what terms to dispose of such assets during the course of its term.
For further information regarding the Companys equipment lease portfolio performance, depreciation and impairment experience as of December 31, 2011 and 2010, see Note 6 to the financial statements, Investments in equipment and leases, net, as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
The Company finances a diversified portfolio of assets in diverse industries. The following tables set forth the types of assets financed by the Company through December 31, 2011 and the industries to which the assets have been financed (dollars in thousands):
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Asset Types | Amount Financed Excluding Acquisition Fees | Percentage of Total Acquisitions | ||||||
Computers | $ | 3,880 | 26.81 | % | ||||
Aircraft | 2,680 | 18.52 | % | |||||
Storage facility | 2,503 | 17.29 | % | |||||
Research | 1,977 | 13.66 | % | |||||
Manufacturing | 1,083 | 7.48 | % | |||||
Telecommunications | 503 | 3.48 | % | |||||
Furniture/Fixtures | 320 | 2.21 | % | |||||
Other | 1,528 | 10.55 | % | |||||
$ | 14,474 | 100.00 | % |
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Industry of Borrower | Amount Financed Excluding Acquisition Fees | Percentage of Total Acquisitions | ||||||
Manufacturing | $ | 4,086 | 28.23 | % | ||||
Communications | 3,360 | 23.21 | % | |||||
Transportation | 2,680 | 18.52 | % | |||||
Business services | 1,911 | 13.20 | % | |||||
Health services | 1,440 | 9.95 | % | |||||
Waste and recycling | 500 | 3.45 | % | |||||
Electronics | 350 | 2.42 | % | |||||
Industrial machinery | 147 | 1.02 | % | |||||
$ | 14,474 | 100.00 | % |
From inception to December 31, 2011, assets financed by the Company that are associated with terminated loans are as follows (in thousands):
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Asset Types | Amount Financed Excluding Acquisition Fees | Disposition Proceeds | Total Payments Received | |||||||||
Computers | $ | 3,719 | $ | 264 | $ | 3,255 | ||||||
Research | 1,977 | 79 | 1,752 | |||||||||
Manufacturing | 1,083 | | 1,127 | |||||||||
Telecommunications | 503 | 287 | 374 | |||||||||
Furniture/Fixtures | 320 | | 272 | |||||||||
Other | 528 | 197 | 432 | |||||||||
$ | 8,130 | $ | 827 | $ | 7,212 |
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For further information regarding the Companys notes receivable portfolio as of December 31, 2011, see Note 4 to the financial statements, Notes receivable, net, as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
The Company operates in one reportable operating segment in the United States. For further information regarding the Companys geographic revenues and assets, and major customers, see Notes 2 and 3 to the financial statements as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
The Company does not own or lease any real property, plant or material physical properties other than the equipment held for lease as set forth in Item 1, Business.
In the ordinary course of conducting business, there may be certain claims, suits, and complaints filed against the Company. In the opinion of management, the outcome of such matters, if any, will not have a material impact on the Companys financial position or results of operations. No material legal proceedings are currently pending against the Company or against any of its assets.
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Item 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
There are certain material conditions and restrictions on the transfer of Units imposed by the terms of the Operating Agreement. Consequently, there is no public market for Units and it is not anticipated that a public market for Units will develop. In the absence of a public market for the Units, there is no currently ascertainable fair market value for the Units.
As of December 31, 2011, a total of 3,092 investors were Unitholders of record in the Company.
In order to permit ERISA fiduciaries who hold Units to satisfy their annual reporting requirements, AFS estimated the value per Unit of the Companys assets as of December 31, 2011. AFS calculated the estimated liquidation proceeds that would be realized by the Company, assuming an orderly disposition of all of the Companys assets as of December 31, 2011. The estimates were based on the amount of remaining lease payments on existing Company leases, and the estimated residual values of the equipment held by the Company upon the termination of those leases. This valuation was based solely on AFSs perception of market conditions and the types and amounts of the Companys assets. No independent valuation was sought.
After calculating the aggregate estimated disposition proceeds, AFS then calculated the portion of the aggregate estimated value of the Company assets that would be distributed to Unitholders on liquidation of the Company, and divided the total so distributable by the number of outstanding Units. As of December 31, 2011, the value of the Companys assets, calculated on this basis, was approximately $2.85 per Unit. The foregoing valuation was performed solely for the ERISA purposes described above. There is no market for the Units, and, accordingly, this value does not represent an estimate of the amount a Unitholder would receive if he were to seek to sell his Units. Furthermore, there can be no assurance as to the amount the Company may actually receive if and when it seeks to liquidate its assets or the amount of lease payments and equipment disposition proceeds it will actually receive over the remaining term of the Company.
The Unitholders of record are entitled to certain distributions as provided under the Operating Agreement. AFS has sole discretion in determining the amount of distributions; provided, however, that AFS will not reinvest in equipment, but will distribute, subject to payment of any obligations of the Company. The Company commenced periodic distributions, based on cash flows from operations, beginning with the month of February 2001.
The monthly distributions were discontinued in 2010 as the Company entered its liquidation phase. A total of four periodic distributions were paid in 2011. The rate for each distribution was $0.150 per Unit. The rate for each of the quarterly distributions paid in 2010 was $0.125 per Unit. The rates and frequency of periodic distributions paid by the Fund during its liquidation phase are solely at the discretion of the Manager.
The following table presents summarized information regarding distributions to members other than the Managing Member (Other Members):
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2011 | 2010 | |||||||
Net income per Unit, based on weighted average Units outstanding | $ | 0.40 | $ | 0.39 | ||||
Return of investment | 0.20 | 0.11 | ||||||
Distributions declared per Unit, based on weighted average Other Member Units outstanding | 0.60 | 0.50 | ||||||
Differences due to timing of distributions | | | ||||||
Actual distributions paid per Unit | $ | 0.60 | $ | 0.50 |
A smaller reporting company is not required to present selected financial data in accordance with item 301(c) of Regulation S-K.
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Statements contained in this Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and elsewhere in this Form 10-K, which are not historical facts, may be forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. In particular, economic recession and changes in general economic conditions, including fluctuations in demand for equipment, lease rates, and interest rates, may result in delays in investment and reinvestment, delays in leasing, re-leasing, and disposition of equipment, and reduced returns on invested capital. The Companys performance is subject to risks relating to lessee defaults and the creditworthiness of its lessees. The Funds performance is also subject to risks relating to the value of its equipment at the end of its leases, which may be affected by the condition of the equipment, technological obsolescence and the markets for new and used equipment at the end of lease terms. Investors are cautioned not to attribute undue certainty to these forward-looking statements, which speak only as of the date of this Form 10-K. We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events, other than as required by law.
ATEL Capital Equipment Fund IX, LLC (the Company or the Fund) is a California limited liability company that was formed in September 2000 for the purpose of engaging in the sale of limited liability company investment units and acquiring equipment to generate revenues from equipment leasing, lending and sales activities, primarily in the United States. The Managing Member of the Company is ATEL Financial Services, LLC (AFS), a California limited liability company.
The Company conducted a public offering of 15,000,000 Limited Liability Company Units (Units), at a price of $10 per Unit. The offering was terminated in January 2003. During early 2003, the Company completed its initial acquisition stage with the investment of the net proceeds from the public offering of Units. Subsequently, during the reinvestment period (Reinvestment Period) (defined as six full years following the year the offering was terminated), the Company utilized its credit facilities and reinvested cash flow in excess of certain amounts required to be distributed to the Other Members to acquire additional equipment.
The Company may continue until December 31, 2020. However, pursuant to the guidelines of the Operating Agreement, the Company commenced liquidation phase activities subsequent to the end of the Reinvestment Period which ended on December 31, 2009. Periodic distributions are paid at the discretion of the Managing Member.
As of December 31, 2011 and 2010, there were concentrations (greater than 10% as a percentage of total equipment cost) of equipment leased to lessees and/or financial borrowers in certain industries as follows:
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2011 | 2010 | |||||||
Mining | 25 | % | 30 | % | ||||
Manufacturing | 19 | % | 21 | % | ||||
Rail transportation | 14 | % | 13 | % | ||||
Health Care | 13 | % | 13 | % | ||||
Marine transportation/Transportation, other | * | 12 | % |
* | Less than 10% |
During 2011, one lessee (The Sabine Mining Company) generated 26% of the Companys total leasing and lending revenues. The same lessee generated 24% of the Companys total leasing and lending revenues during 2010. No other lessee generated more than 10% of the Companys total leasing and lending revenues in both 2011 and 2010. The percentages are not expected to be comparable in future periods due to anticipated changes in the mix of investments and/or lessees as a result of normal business activities.
It is the Companys objective to maintain a 100% utilization rate for all equipment purchased in any given year. All equipment transactions are acquired subject to binding lease commitments, so equipment utilization is expected to remain high throughout the reinvestment stage. Initial lease terms of these leases are generally from 36 to 120 months,
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and as they expire, the Company will attempt to re-lease or sell the equipment; as such, utilization rates may tend to decrease during the liquidation stage of the Company. All of the Companys equipment on lease was acquired in the years 2001 through 2010. The utilization percentage of existing assets under lease was 89% and 92% as of December 31, 2011 and 2010, respectively.
Cost reimbursements to the Managing Member are based on its costs incurred in performing administrative services for the Company. These costs are allocated to each managed entity based on certain criteria such as total assets, number of investors or contributed capital based upon the type of cost incurred.
The Operating Agreement places an annual limit and a cumulative limit for cost reimbursements to AFS and/or affiliates. Any reimbursable costs incurred by AFS and/or affiliates during the year exceeding the annual and/or cumulative limits cannot be reimbursed in the current year, though such costs may be recovered in future years to the extent of the cumulative limit. As of December 31, 2011, the Company has not exceeded the annual and/or cumulative limitations discussed above.
The Company had net income of $5.4 million and $5.2 million for the years ended December 31, 2011 and 2010, respectively. The net results for 2011 reflect a decrease in total operating expenses offset, in part, by a decrease in total revenues when compared to the prior year.
Total revenues for 2011 decreased by $1.9 million, or 11%, as compared to the prior year. The net reduction in total revenues was primarily a result of decreases in operating lease revenues, direct financing lease revenues and other revenue offset, in part, by increases in gain on sales of lease assets and in gain on sales or dispositions of investment securities.
The decrease in operating lease revenues totaled $978 thousand and was primarily a result of continued run-off and dispositions of lease assets. Direct financing lease revenues declined by $932 thousand mainly due to run-off of the portfolio, and the early termination of a contract at the end of the second quarter of 2011. Other revenue decreased by $305 thousand largely due to a significant reduction in additional billings for excess wear and tear on returned equipment. In addition, other revenue for 2010 included legal, collection and late fees assessed on certain terminated leases.
Partially offsetting the aforementioned decreases in revenues were increases in gains recognized on sales of lease assets and on sales or dispositions of investment securities totaling $278 thousand and $90 thousand, respectively.
Gain on sales of lease assets increased largely due to a year over year increase in volume and, a change in the mix of assets sold. Gain on sales or dispositions of investment securities increased primarily as a result of the net exercise of warrants associated with shares of a venture company coupled with the disposition of warrants relative to certain notes receivable during the first nine months of 2011. By comparison, there were no warrants exercised or disposed of during the prior year.
Total expenses for 2011 decreased by $2.1 million, or 18%, as compared to the prior year. The net decline in expenses was primarily due to decreases in depreciation, interest expense, provision for credit losses, impairment losses and acquisition expense offset, in part, by an increases in costs reimbursed to AFS and other expense.
The decrease in depreciation expense totaled $1.3 million and was primarily attributable to run-off and sales of lease assets since December 31, 2010. Interest expense was reduced by $299 thousand mainly due to an approximate $4.2 million net decrease in outstanding borrowings since December 31, 2010.
Moreover, the provision for credit losses declined by $297 thousand primarily due to a year over year decrease in delinquent receivables coupled with an increase in recovery of amounts previously reserved. Impairment losses related to certain equipment deemed impaired by the Company declined by $288 thousand as the Companys overall exposure to impairment risk diminished primarily as a result of sales of both leased and off-lease assets. In addition, the carrying values of the Companys remaining equipment at December 31, 2011 were more in line with the market. Finally, acquisition expense was reduced by $197 thousand primarily as a result of the year over year decline in acquisition activity, consistent with a fund in liquidation.
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Partially offsetting the aforementioned decreases in expenses were increases in costs reimbursed to AFS and in other expense totaling $311 thousand and $130 thousand, respectively. Costs reimbursed to AFS increased primarily due to a refinement of cost allocation methodologies employed by the Managing Member to better allocate costs to the Company based upon its current operations; and, other expense increased largely as a result of higher railcar maintenance costs and increases in state taxes and franchise fees, freight and shipping costs, and remarketing fees associated with re-leased railcars.
The Company recorded other expense, net totaling $5 thousand and other income, net totaling $64 thousand for the years 2011 and 2010, respectively. The $69 thousand unfavorable variance reflects the net impact of a $43 thousand unfavorable change in the fair value of the Companys interest rate swap contracts and a $26 thousand unfavorable change in foreign currency transaction gains and losses.
The decline in the value of the interest rate swaps was mostly driven by the lower interest rate environment, which adversely impacts the Company as the fixed rate payer in the swap contracts. All of the Companys interest rate swaps terminated in August 2011. The unfavorable change in foreign currency transaction gains and losses was due to the year over year strength of the U.S. currency against the British pound at the time of the transactions. The Companys foreign currency transactions are primarily denominated in British pounds.
At December 31, 2011 and 2010, the Companys cash and cash equivalents totaled $5.6 million and $2.8 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 Other Members and to the extent expenses exceed cash flows from leases and proceeds from asset sales.
The primary source of liquidity for the Company is its cash flow from leasing activities. As initial lease terms expire, the Company re-leases or sells the equipment. The future liquidity beyond the contractual minimum rentals will depend on the Companys success in remarketing or selling the equipment as it comes off-rental.
If inflation in the general economy becomes significant, it may affect the Company in as much as the residual (resale) values and rates on re-leases of the Companys leased assets may increase as the costs of similar assets increase. However, the Companys revenues from existing leases would not increase; as such leasing rents and payments are generally fixed for the terms of the leases without adjustment for inflation. In addition, if interest rates increase significantly under such circumstances, the lease rates that the Company can obtain on future leases will be expected to increase as the cost of capital is a significant factor in the pricing of lease financing. Leases already in place, for the most part, would not be affected by changes in interest rates.
The Company currently believes it has available adequate reserves to meet its immediate cash requirements and those of the next twelve months, but in the event those reserves were found to be inadequate, the Company would likely be in a position to borrow against its current portfolio to meet such requirements. AFS envisions no such requirements for operating purposes.
The following table sets forth summary cash flow data (in thousands):
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2011 | 2010 | |||||||
Net cash provided by (used in): | ||||||||
Operating activities | $ | 8,945 | $ | 10,425 | ||||
Investing activities | 5,856 | (833 | ) | |||||
Financing activities | (11,990 | ) | (16,999 | ) | ||||
Net increase (decrease) in cash and cash equivalents | $ | 2,811 | $ | (7,407 | ) |
9
During 2011 and 2010, the Companys primary source of liquidity were cash flows from its portfolio of operating and direct financing lease contracts, and its investments in notes receivable. In addition, proceeds from sales or dispositions of lease assets and early termination of notes totaled $3.4 million and $1.7 million for the respective years ended December 31, 2011 and 2010.
During the same comparative years, cash was used to pay distributions to both the Other Members and the Managing Member, totaling a combined $7.8 million for each of the years 2011 and 2010. Moreover, cash was used to partially pay down $4.2 million and $5.5 million of debt during 2011 and 2010, respectively; and, to pay invoices related to management fees and expenses, and other payables. During 2010, an approximate $3.8 million was also used to purchase lease assets. There were no such purchases during the current year consistent with a fund in liquidation. However, the Company used $442 thousand to pay for capitalized improvements on its marine vessel.
As of December 31, 2011, the Company had non-recourse long-term debt totaling $21.4 million. Such non-recourse notes payable do not contain any material financial covenants. The notes are secured by a lien granted by the Company to the non-recourse lenders on (and only on) the discounted lease transactions. The lenders have recourse only to the following collateral: the specific leased equipment; the related lease chattel paper; the lease receivables; and proceeds of the foregoing items.
The Operating Agreement limits aggregate borrowings to 50% of the total cost of equipment. For detailed information on the Companys non-recourse debt obligation, see Note 8 to the financial statements as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
Prior to August 2011, the Company had a $60 million receivables funding program (the RF Program) with a receivables financing company that issued commercial paper rated A1 from Standard and Poors and P1 from Moodys Investors Service. Under the RF Program, the lender held liens against the Companys assets. The lender was in a first position against certain specified assets and was in either a subordinated or shared position against the remaining assets. The ability to draw down on the RF Program terminated on July 31, 2008. As of August 22, 2011, all advances under the RF Program were repaid in full and the program was terminated. At December 31, 2010, the Company had $415 thousand outstanding under the RF Program.
The Company commenced periodic distributions, based on cash flows from operations, beginning with the month of February 2001. The monthly distributions were discontinued in 2010 as the Company entered its liquidation phase. The rates and frequency of periodic distributions paid by the Fund during its liquidation phase are solely at the discretion of the Manager. See Item 5, Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, for additional information regarding the distributions.
Due to the April 2009 bankruptcy of a major lessee, Chrysler Corporation, the Company, in accordance with its accounting policy for allowance for doubtful accounts, placed all operating leases with Chrysler on non-accrual status pending resumption of recurring payment activity. On April 1, 2011, Chrysler accounts were returned to accrual status. As of December 31, 2011, there were no lease contracts placed in non-accrual status. At December 31, 2010, net investment in equipment underlying all lease contracts placed on a cash basis approximated $306 thousand, all of which were related to Chrysler.
At both December 31, 2011 and 2010, the Company has certain other leases that have related receivables aged 90 days or more that have not been placed on non-accrual status. In accordance with Company policy, such receivables are fully reserved. Management continues to closely monitor these leases for any actual change in collectability status and indication of necessary valuation adjustments.
10
At December 31, 2011, the Company had no commitments to purchase lease assets or fund investments in notes receivable.
Gain Contingency
ATEL filed a claim on behalf of certain of its Funds for the under-reporting of revenue by a fleet manager of three marine vessels, seeking to recover an approximate $2.8 million for the years 2005 2007 (of which the Companys portion is an approximate $350 thousand). Such amounts are not considered material to any of the Funds in any given year. While the Funds' recovery with respect to this matter may be substantial, there is no assurance that judgment will be rendered in favor of the Funds. The trial date for this matter has been rescheduled several times, and the suit has recently been assigned to a newly-appointed Federal Judge and a new trial date has been set for June of 2012. The outcome of this claim remains uncertain.
None.
Information regarding recent accounting pronouncements is included in Note 2 to the financial statements, Summary of significant accounting policies, as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
The policies discussed below are considered by management of the Company to be critical to an understanding of the Companys financial statements because their application requires significantly complex or subjective judgments, decisions, or assessments, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. The Company also states these accounting policies in the notes to the financial statements and in relevant sections in this discussion and analysis. For all of these policies, management cautions that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Such estimates primarily relate to the determination of residual values at the end of the lease term and expected future cash flows used for impairment analysis purposes and for determination of the allowance for doubtful accounts and reserve for credit losses on notes receivable.
Equipment subject to operating leases is stated at cost. Depreciation is being recognized on a straight-line method over the terms of the related leases to the equipments estimated residual values. Maintenance costs associated with the Funds portfolio of leased assets are expensed as incurred. Major additions and betterments are capitalized.
Operating lease revenue is recognized on a straight-line basis over the term of the underlying leases. The initial lease terms will vary as to the type of equipment subject to the leases, the needs of the lessees and the terms to be negotiated, but initial leases are generally on terms from 36 to 120 months. The difference between rent received and rental revenue recognized is recorded as unearned operating lease income on the balance sheet.
Operating leases are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management considers the equipment underlying the lease contracts for impairment and periodically reviews the credit worthiness of all operating lessees with payments outstanding less than
11
90 days. Based upon managements judgment, the related operating leases may be placed on non-accrual status. Leases placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable. Until such time, revenues are recognized on a cash basis.
The Company earns revenues from its marine vessel based on charter utilization of the vessel or a fixed term lease. When the vessel is chartered, contingent rentals and the associated expenses are recorded when earned and/or incurred. From time to time, the Company incurs drydocking costs on its vessel. Drydocking costs include labor and material costs related to refurbishing, overhauling and/or replacing engine and other major mechanical components of the vessel, hull maintenance and other repairs that bring the vessel into seaworthy compliance with U.S. marine codes in order to have it certified as available for charter. Such drydocking costs are capitalized and added to the equipment cost and depreciated over the period between scheduled drydockings, which generally occur every 24 to 30 months.
Income from direct financing lease transactions is reported using the financing method of accounting, in which the Companys investment in the leased property is reported as a receivable from the lessee to be recovered through future rentals. The interest income portion of each rental payment is calculated so as to generate a constant rate of return on the net receivable outstanding.
Allowances for losses on direct financing leases are typically established based on historical charge off and collection experience and the collectability of specifically identified lessees and billed and unbilled receivables. Direct financing leases are charged off to the allowance as they are deemed uncollectible.
Direct financing leases are generally placed in a non-accrual status (i.e., no revenue is recognized) and deemed impaired when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of all direct finance lessees with payments outstanding less than 90 days. Based upon managements judgment, the related direct financing leases may be placed on non-accrual status. Leases placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable. Until such time, all payments received are applied only against outstanding principal balances.
The Company records all future payments of principal and interest on notes as notes receivable which is then offset by the amount of any related unearned interest income. For financial statement purposes, the Company reports only the net amount of principal due on the balance sheet. The unearned interest is recognized over the term of the note and the income portion of each note payment is calculated so as to generate a constant rate of return on the net balance outstanding. Any fees or costs related to notes receivable are recorded as part of the net investment in notes receivable and amortized over the term of the loan.
Allowances for losses on notes receivable are typically established based on historical charge off and collection experience and the collectability of specifically identified borrowers and billed and unbilled receivables. Notes are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal 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 payments 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 written off to the allowance for losses as they are deemed uncollectible.
Notes receivable are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of companies with note payments outstanding less than 90 days. Based upon managements judgment, notes may be placed in a non-accrual status. Notes placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid receivable is probable. Until such time, all payments received are applied only against outstanding principal balances.
12
The Company capitalizes initial direct costs (IDC) associated with the origination and funding of lease assets and investments in notes receivable. IDC includes both internal costs (e.g., the costs of employees activities in connection with successful lease and loan originations) and external broker fees incurred with such originations. The costs are amortized on a lease by lease (or note by note) basis based on actual contract term using a straight-line method for operating leases and the effective interest rate method for direct financing leases and notes receivable. Upon disposal of the underlying lease or loan assets, both the initial direct costs and the associated accumulated amortization are relieved. Costs related to leases or notes receivable that are not consummated are not eligible for capitalization as initial direct costs and are expensed as acquisition expense.
Recorded values of the Companys leased asset portfolio are periodically reviewed for impairment. An impairment loss is measured and recognized only if the estimated undiscounted future cash flows of the asset are less than their net book value. The estimated undiscounted future cash flows are the sum of the estimated residual value of the asset at the end of the assets expected holding period and estimates of undiscounted future rents. The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the market place are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. Impairment is measured as the difference between the fair value (as determined by a valuation method using discounted estimated future cash flows, third party appraisals or comparable sales of similar assets as applicable based on asset type) of the assets and its carrying value on the measurement date.
See the Report of Independent Registered Public Accounting Firm, Financial Statements and Notes to Financial Statements attached hereto at pages 14 through 37.
13
The Members
ATEL Capital Equipment Fund IX, LLC
We have audited the accompanying balance sheets of ATEL Capital Equipment Fund IX, LLC (the Company) as of December 31, 2011 and 2010, and the related statements of income, changes in members capital, and cash flows for the years then ended. These financial statements are the responsibility of the Management of the Companys Managing Member. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ATEL Capital Equipment Fund IX, LLC as of December 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Moss Adams LLP
San Francisco, California
March 9, 2012
14
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2011 | 2010 | |||||||
ASSETS |
||||||||
Cash and cash equivalents | $ | 5,593 | $ | 2,782 | ||||
Accounts receivable, net of allowance for doubtful accounts of $70 at December 31, 2011 and $239 at December 31, 2010 | 900 | 1,001 | ||||||
Notes receivable, net of unearned interest income of $255 at December 31, 2011 and $515 at December 31, 2010 | 1,721 | 2,712 | ||||||
Prepaid expenses and other assets | 36 | 39 | ||||||
Investment in securities | | 70 | ||||||
Investments in equipment and leases, net of accumulated depreciation of $41,511 at December 31, 2011 and $42,468 at December 31, 2010 | 31,192 | 40,095 | ||||||
Total assets | $ | 39,442 | $ | 46,699 | ||||
LIABILITIES AND MEMBERS CAPITAL |
||||||||
Accounts payable and accrued liabilities: |
||||||||
Managing Member | $ | 76 | $ | 82 | ||||
Other | 467 | 893 | ||||||
Deposits due lessees | 49 | 90 | ||||||
Non-recourse debt | 21,394 | 25,150 | ||||||
Interest rate swap contracts | | 5 | ||||||
Receivables funding program obligation | | 415 | ||||||
Unearned operating lease income | 259 | 419 | ||||||
Total liabilities | 22,245 | 27,054 | ||||||
Commitments and contingencies |
||||||||
Members capital: |
||||||||
Managing Member | | | ||||||
Other Members | 17,197 | 19,645 | ||||||
Total Members capital | 17,197 | 19,645 | ||||||
Total liabilities and Members capital | $ | 39,442 | $ | 46,699 |
See accompanying notes.
15
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2011 | 2010 | |||||||
Revenues: |
||||||||
Leasing and lending activities: |
||||||||
Operating leases | $ | 9,424 | $ | 10,402 | ||||
Direct financing leases | 4,062 | 4,994 | ||||||
Interest on notes receivable | 244 | 261 | ||||||
Gain on sales of lease assets and early termination of notes | 837 | 559 | ||||||
Gain on sale or disposition of securities | 90 | | ||||||
Other revenue | 201 | 506 | ||||||
Total revenues | 14,858 | 16,722 | ||||||
Expenses: |
||||||||
Depreciation of operating lease assets | 4,927 | 6,242 | ||||||
Asset management fees to Managing Member | 719 | 723 | ||||||
Acquisition expense | (2 | ) | 195 | |||||
Cost reimbursements to Managing Member | 888 | 577 | ||||||
(Reversal of provision) provision for credit losses | (169 | ) | 128 | |||||
Impairment losses | 65 | 353 | ||||||
Provision for losses on investment in securities | 41 | | ||||||
Amortization of initial direct costs | 38 | 84 | ||||||
Other management fees | 91 | 106 | ||||||
Interest expense | 1,524 | 1,823 | ||||||
Professional fees | 133 | 188 | ||||||
Outside services | 47 | 62 | ||||||
Insurance | 81 | 120 | ||||||
Marine vessel maintenance and other operating costs | 716 | 719 | ||||||
Other | 383 | 253 | ||||||
Total operating expenses | 9,482 | 11,573 | ||||||
Other (expense) income, net | (5 | ) | 64 | |||||
Net income | $ | 5,371 | $ | 5,213 | ||||
Net income: |
||||||||
Managing Member | $ | 586 | $ | 489 | ||||
Other Members | 4,785 | 4,724 | ||||||
$ | 5,371 | $ | 5,213 | |||||
Net income per Limited Liability Company Unit (Other Members) | $ | 0.40 | $ | 0.39 | ||||
Weighted average number of Units outstanding | 12,055,016 | 12,055,016 |
See accompanying notes.
16
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Other Members | Managing Member | Total | ||||||||||||||
Units | Amount | |||||||||||||||
Balance December 31, 2009 | 12,055,016 | $ | 20,948 | $ | | $ | 20,948 | |||||||||
Distributions to Other Members ($0.50 per Unit) | | (6,027 | ) | | (6,027 | ) | ||||||||||
Distributions to Managing Member | | | (489 | ) | (489 | ) | ||||||||||
Net income | | 4,724 | 489 | 5,213 | ||||||||||||
Balance December 31, 2010 | 12,055,016 | 19,645 | | 19,645 | ||||||||||||
Distributions to Other Members ($0.60 per Unit) | | (7,233 | ) | | (7,233 | ) | ||||||||||
Distributions to Managing Member | | | (586 | ) | (586 | ) | ||||||||||
Net income | | 4,785 | 586 | 5,371 | ||||||||||||
Balance December 31, 2011 | 12,055,016 | $ | 17,197 | $ | | $ | 17,197 |
See accompanying notes.
17
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||||||
2011 | 2010 | |||||||
Operating activities: |
||||||||
Net income | $ | 5,371 | $ | 5,213 | ||||
Adjustment to reconcile net income to cash provided by operating activities: |
||||||||
Gain on sales of lease assets and early termination of notes | (837 | ) | (559 | ) | ||||
Gain on sales or disposition of securities | (90 | ) | | |||||
Depreciation of operating lease assets | 4,927 | 6,242 | ||||||
Amortization of initial direct costs | 38 | 84 | ||||||
(Reversal of provision) provision for credit losses | (169 | ) | 128 | |||||
Impairment losses | 65 | 353 | ||||||
Provision for losses on investment in securities | 41 | | ||||||
Gain on interest rate swap contracts | (5 | ) | (48 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable | 270 | (315 | ) | |||||
Prepaid expenses and other assets | 3 | 7 | ||||||
Accounts payable, Managing Member | (6 | ) | (146 | ) | ||||
Accounts payable, affiliates | | 79 | ||||||
Accounts payable, other | (426 | ) | (447 | ) | ||||
Deposits due lessees | (41 | ) | | |||||
Unearned operating lease income | (196 | ) | (166 | ) | ||||
Net cash provided by operating activities | 8,945 | 10,425 | ||||||
Investing activities: |
||||||||
Purchases and improvements to operating leases | (442 | ) | (3,784 | ) | ||||
Proceeds from sales of lease assets and early termination of notes | 3,374 | 1,667 | ||||||
Proceeds from sales or dispositions of securities | 119 | | ||||||
Payments of initial direct costs | (2 | ) | (13 | ) | ||||
Principal payments received on direct financing leases | 2,008 | 1,378 | ||||||
Notes receivable advances | | (661 | ) | |||||
Principal payments received on notes receivable | 799 | 580 | ||||||
Net cash provided by (used in) investing activities | 5,856 | (833 | ) | |||||
Financing activities: |
||||||||
Repayments under receivables funding program | (415 | ) | (1,990 | ) | ||||
Repayments of non-recourse debt | (3,756 | ) | (3,513 | ) | ||||
Repayments of amount due to affiliates | | (3,674 | ) | |||||
Distributions to Other Members | (7,233 | ) | (7,236 | ) | ||||
Distributions to Managing Member | (586 | ) | (586 | ) | ||||
Net cash used in financing activities | (11,990 | ) | (16,999 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 2,811 | (7,407 | ) | |||||
Cash and cash equivalents at beginning of year | 2,782 | 10,189 | ||||||
Cash and cash equivalents at end of year | $ | 5,593 | $ | 2,782 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid during the year for interest | $ | 1,545 | $ | 1,784 | ||||
Cash paid during the year for taxes | $ | 139 | $ | 90 |
See accompanying notes.
18
ATEL Capital Equipment Fund IX, LLC (the Company or the Fund) was formed under the laws of the State of California on September 27, 2000 for the purpose of engaging in the sale of limited liability company investment units and acquiring equipment to engage in equipment leasing, lending and sales activities, primarily in the United States. The Managing Member of the Company is ATEL Financial Services, LLC (AFS), a California limited liability company. The Company may continue until December 31, 2020. Contributions in the amount of $600 were received as of December 31, 2000, $100 of which represented AFSs continuing interest, and $500 of which represented the Initial Members capital investment.
The Company conducted a public offering of 15,000,000 Limited Liability Company Units (Units), at a price of $10 per Unit. On February 21, 2001, subscriptions for the minimum number of Units (120,000, representing $1.2 million) had been received (excluding subscriptions from Pennsylvania investors) and AFS requested that the subscriptions be released to the Company. On that date, the Company commenced operations in its primary business (acquiring equipment to engage in equipment leasing, lending and sales activities). As of April 3, 2001, the Company had received subscriptions for 753,050 Units ($7.5 million), thus exceeding the $7.5 million minimum requirement for Pennsylvania, and AFS requested that the remaining funds in escrow (from Pennsylvania investors) be released to the Company.
As of January 15, 2003, the offering was terminated. As of that date, the Company had received subscriptions for 12,065,266 Units ($120.7 million). Subsequent to January 15, 2003, Units totaling 10,250 were rescinded or repurchased and funds returned to investors (net of distributions paid and allocated syndication costs, as applicable). As of December 31, 2011, 12,055,016 Units remain issued and outstanding.
The Companys principal objectives have been to invest in a diversified portfolio of equipment that (i) preserves, protects and returns the Companys invested capital; (ii) generates regular distributions to the members of cash from operations and cash from sales or refinancing, with any balance remaining after certain minimum distributions to be used to purchase additional equipment during the reinvestment period (Reinvestment Period) (defined as six full years following the year the offering was terminated), which ended on December 31, 2009 and (iii) provides additional distributions following the Reinvestment Period and until all equipment has been sold. The Company is governed by the Limited Liability Company Operating Agreement (Operating Agreement), as amended. On January 1, 2010, the Company commenced liquidation phase activities pursuant to the guidelines of the Operating Agreement.
Pursuant to the terms of the Operating Agreement, AFS receives compensation and reimbursements for services rendered on behalf of the Company (See Note 7). The Company is required to maintain reasonable cash reserves for working capital, the repurchase of Units and contingencies. The repurchase of Units is solely at the discretion of AFS.
The accompanying balance sheets as of December 31, 2011 and 2010, and the related statements of income, changes in members capital, and cash flows for the years then ended, have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and the rules and regulations of the Securities and Exchange Commission. Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no significant effect on the reported financial position or results of operations.
During the first quarter 2011, the Company identified a misclassification in the presentation of amortization of unearned income on both direct financing leases and notes receivable on the 2010 statements of cash flows. An adjustment made to reflect proper classification results in a $1.3 million increase in net cash from operating activities and a corresponding decrease in net cash from investing activities for the quarter ended March 31, 2010. The Company incorrectly reported these interest income activities as an increase in the payments received on both direct financing leases and notes receivable.
The appropriate classification of the receipt of interest income on direct financing leases and notes receivable is to record the $1.3 million as an inflow in the operating activities section of the statement of cash flows. Such adjustment totaled $5.3 million for the year ended December 31, 2010. The classification adjustment does not change the Companys financial position, net income or the net reported change in cash for the year ended December 31, 2010, nor does it affect the cash balance previously reported on the balance sheet.
19
The Company does not believe that this classification adjustment is material to cash flows for its previously filed Annual Report on Form 10-K or Quarterly Reports on Form 10-Q for the year ended December 31, 2010. Accordingly, the Company has revised its 2010 statements of cash flows prospectively in the 2011 Quarterly Reports on Form 10-Q and Annual Report on Form 10-K.
Footnote and tabular amounts are presented in thousands, except as to Units and per Unit data.
In preparing the accompanying financial statements, the Company has reviewed, as determined necessary by the Managing Member, events that have occurred after December 31, 2011, up until the issuance of the financial statements. No events were noted which would require disclosure in the footnotes to the financial statements.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Such estimates primarily relate to the determination of residual values at the end of the lease term and expected future cash flows used for impairment analysis purposes and for determination of the allowance for doubtful accounts and reserve for credit losses on notes receivable.
Cash and cash equivalents include cash in banks and cash equivalent investments such as U.S. Treasury instruments with original and/or purchased maturities of ninety days or less.
Financial instruments that potentially subject the Company to concentrations of credit risk include cash and cash equivalents, operating and direct financing lease receivables, notes receivable and accounts receivable. The Company places the majority of its cash deposits in noninterest-bearing transaction accounts which are fully insured, without limit, through December 31, 2012 under the Dodd-Frank amendment to the Federal Deposit Insurance Act. This unlimited coverage is separate from, and in addition to, the coverage provided to depositors with other accounts held at a depository institution insured by the Federal Deposit Insurance Corporation. The remainder of the Funds cash is temporarily invested in U.S. Treasury denominated instruments. The concentration of such deposits and temporary cash investments is not deemed to create a significant risk to the Company. Accounts and notes receivable represent amounts due from lessees or borrowers in various industries, related to equipment on operating and direct financing leases or notes receivable.
Accounts receivable represent the amounts billed under operating and direct financing lease contracts, and notes receivable which are due to the Company. Allowances for doubtful accounts are typically established based on historical charge off and collection experience and the collectability of specifically identified lessees and invoiced amounts. Accounts receivable deemed uncollectible are charged off to the allowance on a specific identification basis. Amounts recovered that were previously written-off are recorded as other income in the period received.
Equipment subject to operating leases is stated at cost. Depreciation is being recognized on a straight-line method over the terms of the related leases to the equipments estimated residual values. Maintenance costs associated with the Funds portfolio of leased assets are expensed as incurred. Major additions and betterments are capitalized.
Operating lease revenue is recognized on a straight-line basis over the term of the underlying leases. The initial lease terms will vary as to the type of equipment subject to the leases, the needs of the lessees and the terms to be negotiated, but initial leases are generally on terms from 36 to 120 months. The difference between rent received and rental revenue recognized is recorded as unearned operating lease income on the balance sheet.
20
Operating leases are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management considers the equipment underlying the lease contracts for impairment and periodically reviews the credit worthiness of all operating lessees with payments outstanding less than 90 days. Based upon managements judgment, the related operating leases may be placed on non-accrual status. Leases placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable. Until such time, revenues are recognized on a cash basis.
The Company earns revenues from its marine vessel based on charter utilization of the vessel or a fixed term lease. When the vessel is chartered, contingent rentals and the associated expenses are recorded when earned and/or incurred. From time to time, the Company incurs drydocking costs on its vessel. Drydocking costs include labor and material costs related to refurbishing, overhauling and/or replacing engine and other major mechanical components of the vessel, hull maintenance and other repairs that bring the vessel into seaworthy compliance with U.S. marine codes in order to have it certified as available for charter. Such drydocking costs are capitalized and added to the equipment cost and depreciated over the period between scheduled drydockings, which generally occur every 24 to 30 months.
Income from direct financing lease transactions is reported using the financing method of accounting, in which the Companys investment in the leased property is reported as a receivable from the lessee to be recovered through future rentals. The interest income portion of each rental payment is calculated so as to generate a constant rate of return on the net receivable outstanding.
Allowances for losses on direct financing leases are typically established based on historical charge off and collection experience and the collectability of specifically identified lessees and billed and unbilled receivables. Direct financing leases are charged off to the allowance as they are deemed uncollectible.
Direct financing leases are generally placed in a non-accrual status (i.e., no revenue is recognized) and deemed impaired when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of all direct finance lessees with payments outstanding less than 90 days. Based upon managements judgment, the related direct financing leases may be placed on non-accrual status. Leases placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable. Until such time, all payments received are applied only against outstanding principal balances.
The Company records all future payments of principal and interest on notes as notes receivable which is then offset by the amount of any related unearned interest income. For financial statement purposes, the Company reports only the net amount of principal due on the balance sheet. The unearned interest is recognized over the term of the note and the income portion of each note payment is calculated so as to generate a constant rate of return on the net balance outstanding. Any fees or costs related to notes receivable are recorded as part of the net investment in notes receivable and amortized over the term of the loan.
Allowances for losses on notes receivable are typically established based on historical charge off and collection experience and the collectability of specifically identified borrowers and billed and unbilled receivables. Notes are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal 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 payments 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 for losses as they are deemed uncollectible.
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Notes receivable are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of companies with note payments outstanding less than 90 days. Based upon managements judgment, notes may be placed in a non-accrual status. Notes placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid receivable is probable. Until such time, all payments received are applied only against outstanding principal balances.
The Company capitalizes initial direct costs (IDC) associated with the origination and funding of lease assets and investments in notes receivable. IDC includes both internal costs (e.g., the costs of employees activities in connection with successful lease and loan originations) and external broker fees incurred with such originations. The costs are amortized on a lease by lease (or note by note) basis based on actual contract term using a straight-line method for operating leases and the effective interest rate method for direct financing leases and notes receivable. Upon disposal of the underlying lease or loan assets, both the initial direct costs and the associated accumulated amortization are relieved. Costs related to leases or notes receivable that are not consummated are not eligible for capitalization as initial direct costs and are expensed as acquisition expense.
Acquisition expense represents costs which include, but are not limited to, legal fees and expenses, travel and communication expenses, cost of appraisals, accounting fees and expenses and miscellaneous expenses related to the selection and acquisition of equipment which are reimbursable to the Managing Member under the terms of the Operating Agreement. As the costs are not eligible for capitalization as initial direct costs, such amounts are expensed as incurred.
Recorded values of the Companys leased asset portfolio are periodically reviewed for impairment. An impairment loss is measured and recognized only if the estimated undiscounted future cash flows of the asset are less than their net book value. The estimated undiscounted future cash flows are the sum of the estimated residual value of the asset at the end of the assets expected holding period and estimates of undiscounted future rents. The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the market place are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. Impairment is measured as the difference between the fair value (as determined by a valuation method using discounted estimated future cash flows, third party appraisals or comparable sales of similar assets as applicable based on asset type) of the asset and its carrying value on the measurement date.
The Company is not organized by multiple operating segments for the purpose of making operating decisions or assessing performance. Accordingly, the Company operates in one reportable operating segment in the United States.
The Companys principal decision makers are the Managing Members Chief Executive Officer and its Chief Financial Officer and Chief Operating Officer. The Company believes that its equipment leasing business operates as one reportable segment because: a) the Company measures profit and loss at the equipment portfolio level as a whole; b) the principal decision makers do not review information based on any operating segment other than the equipment leasing transaction portfolio; c) the Company does not maintain discrete financial information on any specific segment other than its equipment financing operations; d) the Company has not chosen to organize its business around different products and services other than equipment lease financing; and e) the Company has not chosen to organize its business around geographic areas.
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The primary geographic regions in which the Company seeks leasing and lending opportunities are North America and Europe. The table below summarizes geographic information relating to the sources, by nation, of the Companys total revenues for the years ended December 31, 2011 and 2010 and long-lived assets as of December 31, 2011 and 2010 (dollars in thousands):
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For the year ended December 31, | ||||||||||||||||
2011 | % of Total | 2010 | % of Total | |||||||||||||
Revenue |
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United States | $ | 14,023 | 94 | % | $ | 15,517 | 92 | % | ||||||||
United Kingdom | 438 | 3 | % | 768 | 5 | % | ||||||||||
Canada | 397 | 3 | % | 437 | 3 | % | ||||||||||
Total International | 835 | 6 | % | 1,205 | 8 | % | ||||||||||
Total | $ | 14,858 | 100 | % | $ | 16,722 | 100 | % |
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As of December 31, | ||||||||||||||||
2011 | % of Total | 2010 | % of Total | |||||||||||||
Long-lived assets |
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United States | $ | 30,424 | 97 | % | $ | 38,238 | 96 | % | ||||||||
United Kingdom | 182 | 1 | % | 907 | 2 | % | ||||||||||
Canada | 586 | 2 | % | 950 | 2 | % | ||||||||||
Total International | 768 | 3 | % | 1,857 | 4 | % | ||||||||||
Total | $ | 31,192 | 100 | % | $ | 40,095 | 100 | % |
The Company records all derivatives as either assets or liabilities in the balance sheet, measures those instruments at fair value and recognizes the offsetting gains or losses as adjustments to net income (loss). Credit exposure from derivative financial instruments that are assets arises from the risk of a counterparty default on the derivative contract. The amount of the loss created by the default is the replacement cost or current positive fair value of the defaulted contract.
Foreign currency transaction gains and losses are reported in the results of operations as other income or other expense in the period in which they occur. Currently, the Company does not use derivative instruments to hedge its economic exposure with respect to assets, liabilities and firm commitments as the foreign currency transactions risks to date have not been significant. During the years ended December 31, 2011 and 2010, the Company recognized foreign currency losses totaling $10 thousand and foreign currency gains totaling $16 thousand, respectively, which are included in other income, net for each of the reporting years.
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 issuers ability to meet its current obligations and indications of the issuers subsequent ability to raise capital. There was no incremental impairment to investment securities at December 31, 2011. Year-to-date, the Company had previously recorded fair value adjustments totaling $41 thousand which reduced the cost basis of certain investments deemed impaired at
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March 31, 2011. Such investment securities were disposed of during the second quarter of 2011. No impairment was recorded at December 31, 2010. During 2011, the Company recognized $11 thousand of losses on sales and dispositions of investment securities. By comparison, there were no investment securities sold or disposed of during the prior year.
Warrants
Warrants owned by the Company are not registered for public sale, but are considered derivatives and are carried at an estimated fair value on the balance sheet at the end of the year, as determined by the Managing Member. At December 31, 2011 and 2010, the Managing Member estimated the fair value of the warrants to be nominal in amount. During 2011, the Company recognized an approximate $101 thousand gain on the net exercise of warrants. By comparison, there was no warrant activity that generated a gain or loss during the prior year.
The Company records prepayments on operating leases as a liability, unearned operating lease income. The liability is recorded when the prepayments are received and recognized as operating lease revenue ratably over the period to which the prepayments relate.
The Company is treated as a partnership for federal income tax purposes. Pursuant to the provisions of Section 701 of the Internal Revenue Code, a partnership is not subject to federal income taxes. Accordingly, the Company has provided current income taxes for only those states which levy income taxes on partnerships. For the years ended December 31, 2011 and 2010, the related provision for state income taxes was approximately $110 thousand and $50 thousand, respectively. The Company does not have any entity level uncertain tax positions. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions and is generally subject to examination by U.S. federal (or state and local) income tax authorities for three years from the filing of a tax return.
The tax bases of the Companys net assets and liabilities vary from the amounts presented in these financial statements at December 31, 2011 and 2010 as follows (in thousands):
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2011 | 2010 | |||||||
Financial statement basis of net assets | $ | 17,197 | $ | 19,645 | ||||
Tax basis of net assets (unaudited) | 16,939 | 17,611 | ||||||
Difference | $ | 258 | $ | 2,034 |
The primary differences between the tax bases of net assets and the amounts recorded in the financial statements are the result of differences in accounting for syndication costs and differences between the depreciation methods used in the financial statements and the Companys tax returns.
The following reconciles the net income reported in these financial statements to the income reported on the Companys federal tax return (unaudited) for each of the years ended December 31, 2011 and 2010 (in thousands):
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2011 | 2010 | |||||||
Net income per financial statements | $ | 5,371 | $ | 5,213 | ||||
Tax adjustments (unaudited): |
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Adjustment to depreciation expense | (2,039 | ) | (3,441 | ) | ||||
Provision for losses and doubtful accounts | (169 | ) | (36 | ) | ||||
Adjustments to revenues/other expenses | 1,835 | 1,201 | ||||||
Adjustments to gain on sales of assets | 2,048 | 2,150 | ||||||
Other | 101 | (624 | ) | |||||
Income per federal tax return (unaudited) | $ | 7,147 | $ | 4,463 |
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Other (expense) income, net consists of gains and losses on interest rate swap contracts and gains and losses on foreign exchange transactions. The table below details the Companys other (expense) income, net for the years ended December 31, 2011 and 2010 (in thousands):
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2011 | 2010 | |||||||
Foreign currency (loss) gain | $ | (10 | ) | $ | 16 | |||
Change in fair value of interest rate swap contracts | 5 | 48 | ||||||
$ | (5 | ) | $ | 64 |
Net income and distributions per Unit are based upon the weighted average number of Other Members Units outstanding during the period.
In May 2011, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) (collectively the Boards) issued Accounting Standards Update (ASU) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 created a uniform framework for applying fair value measurement principles for companies around the world and clarified existing guidance in US GAAP. ASU 2011-04 is effective for the first reporting annual period beginning after December 15, 2011 and shall be applied prospectively. The Company anticipates that adoption of this update will not have a material impact on its financial position or results of operations.
In April 2011, the FASB issued ASU No. 2011-02, A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring. ASU 2011-02 clarifies guidance on a creditors evaluation of whether it has granted a concession to a borrower and a creditors evaluation of whether a borrower is experiencing financial difficulties. The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. In addition, an entity should disclose the information required by Accounting Standards Codification paragraphs 310-10-50-33 through 50-34, which was deferred by ASU 2011-01, for interim and annual periods beginning on or after June 15, 2011. The amendments in this update were adopted by the Company on July 1, 2011, and for purposes of measuring impairment, were applied retrospectively to January 1, 2011. The Company evaluated the guidance included in 2011-02 and has determined that it does not result in any new troubled debt restructurings that should be reported.
In January 2011, the FASB issued ASU No. 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. ASU 2011-01 temporarily delays the effective date of the disclosures about troubled debt restructurings in Update 2010-20 for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. The guidance became effective for the first interim or annual period beginning on or after June 15, 2011, and was applied retrospectively to the beginning of the annual period of adoption. The adoption of this update did not have a material effect on the Companys financial position or results of operations.
The Company leases equipment to lessees and provides debt financing to borrowers in diversified industries. Leases and notes receivable are subject to AFSs credit committee review. The leases and notes receivable provide for the return of the equipment to the Company upon default.
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As of December 31, 2011 and 2010, there were concentrations (greater than 10% as a percentage of total equipment cost) of equipment leased to lessees and/or financial borrowers in certain industries as follows:
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2011 | 2010 | |||||||
Mining | 25 | % | 30 | % | ||||
Manufacturing | 19 | % | 21 | % | ||||
Rail transportation | 14 | % | 13 | % | ||||
Health Care | 13 | % | 13 | % | ||||
Marine transportation/Transportation, other | * | 12 | % |
* | Less than 10% |
During 2011 and 2010, a certain lessee generated significant portions (defined as 10% or more) of the Companys total leasing and lending revenues as follows:
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Lessee | Type of Equipment | Percentage of Total Leasing and Lending Revenues |
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2011 | 2010 | |||||||||||
The Sabine Mining Company | Mining | 26 | % | 24 | % |
The Company has various notes receivable from borrowers who have financed the purchase of equipment through the Company. At December 31, 2011, the original terms of the notes receivable are 36 to 120 months and bear interest at rates ranging from 8.4% to 16.2%. The notes are secured by the equipment financed. The notes mature from 2013 through 2016. There were no impaired notes at December 31, 2011 and 2010. Likewise, as of the same dates, there were no notes placed in non-accrual status. As of December 31, 2011, the minimum future payments receivable are as follows (in thousands):
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Year ending December 31, 2012 | $ | 832 | ||
2013 | 558 | |||
2014 | 229 | |||
2015 | 166 | |||
2016 | 188 | |||
1,973 | ||||
Less: portion representing unearned interest income | (255 | ) | ||
1,718 | ||||
Unamortized initial direct costs | 3 | |||
Notes receivable, net | $ | 1,721 |
IDC amortization expense related to notes receivable and the Companys operating and direct financing leases for the years ended December 31, 2011 and 2010 are as follows (in thousands):
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2011 | 2010 | |||||||
IDC amortization notes receivable | $ | 5 | $ | 4 | ||||
IDC amortization lease assets | 33 | 80 | ||||||
Total | $ | 38 | $ | 84 |
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The Companys provision for credit losses are as follows (in thousands):
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Accounts Receivable Allowance for Doubtful Accounts |
Valuation Adjustments on Financing Receivables | Total Allowance for Credit Losses | ||||||||||||||||||||||
Notes Receivable | Finance Leases | Operating Leases | Notes Receivable | Finance Leases | ||||||||||||||||||||
Balance December 31, 2009 | $ | 19 | $ | 150 | $ | 106 | $ | | $ | | $ | 275 | ||||||||||||
Provision | | 3 | 125 | | | 128 | ||||||||||||||||||
Charge-offs and/or recoveries | | (107 | ) | (57 | ) | | | (164 | ) | |||||||||||||||
Balance December 31, 2010 | 19 | 46 | 174 | | | 239 | ||||||||||||||||||
Reversal of provision | (19 | ) | (36 | ) | (114 | ) | | | (169 | ) | ||||||||||||||
Balance December 31, 2011 | $ | | $ | 10 | $ | 60 | $ | | $ | | $ | 70 |
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 managements judgment, such leases or notes may be placed in non-accrual status. Leases or notes placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid receivable is probable. Until such time, revenues on operating leases are recognized on a cash basis. All payments received on amounts billed under direct financing leases contracts and notes receivable are applied only against outstanding principal balances.
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 assets expected holding period and estimates of undiscounted future rents. The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the market place are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the
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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 December 31, 2011 and 2010, the Companys allowance for credit losses (related solely to financing receivables) and its recorded investment in financing receivables were as follows (in thousands):
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December 31, 2011 | Notes Receivable | Finance Leases | Total | |||||||||
Allowance for credit losses: |
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Ending balance | $ | | $ | | $ | | ||||||
Ending balance: individually evaluated for impairment | $ | | $ | | $ | | ||||||
Ending balance: collectively evaluated for impairment | $ | | $ | | $ | | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | | $ | | $ | | ||||||
Financing receivables: |
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Ending balance | $ | 1,7211 | $ | 13,8912 | $ | 15,612 | ||||||
Ending balance: individually evaluated for impairment | $ | 1,721 | $ | 13,891 | $ | 15,612 | ||||||
Ending balance: collectively evaluated for impairment | $ | | $ | | $ | | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | | $ | | $ | |
1 Includes $3 of unamortized initial direct costs.
2 Includes $39 of unamortized initial direct costs.
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December 31, 2010 | Notes Receivable | Finance Leases | Total | |||||||||
Allowance for credit losses: |
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Ending balance | $ | | $ | | $ | | ||||||
Ending balance: individually evaluated for impairment | $ | | $ | | $ | | ||||||
Ending balance: collectively evaluated for impairment | $ | | $ | | $ | | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | | $ | | $ | | ||||||
Financing receivables: |
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Ending balance | $ | 2,7123 | $ | 17,2884 | $ | 20,000 | ||||||
Ending balance: individually evaluated for impairment | $ | 2,712 | $ | 17,288 | $ | 20,000 | ||||||
Ending balance: collectively evaluated for impairment | $ | | $ | | $ | | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | | $ | | $ | |
3 Includes $6 of unamortized initial direct costs.
4 Includes $56 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 Moodys or S&P for either Senior Unsecured debt, Long Term Issuer rating or Issuer rating that are in the tiers of ratings generally recognized by the investment community as constituting an Investment Grade credit rating; or, has been determined by the Manager to be an Investment Grade Equivalent or High Quality Corporate Credit per its Credit Policy or has a Not Rated internal rating by the Manager and the account is not considered by the Chief Credit Officer of the manager to fall into one of the three risk profiles below.
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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 managements close attention. If left uncorrected, those potential weaknesses may result in deterioration of the Funds 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 Managers 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 Managers 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 December 31, 2011, the Companys financing receivables by credit quality indicator and by class of financing receivables are as follows (excludes initial direct costs) (in thousands):
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Notes Receivable | Finance Leases | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Pass | $ | 642 | $ | 1,339 | $ | 13,754 | $ | 16,982 | ||||||||
Special mention | 1,076 | 1,367 | 98 | 250 | ||||||||||||
Substandard | | | | | ||||||||||||
Doubtful | | | | | ||||||||||||
Total | $ | 1,718 | $ | 2,706 | $ | 13,852 | $ | 17,232 |
At December 31, 2011 and 2010, the investment in financing receivables is aged as follows (in thousands):
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December 31, 2011 | 30 59 Days Past Due | 60 89 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Financing Receivables | Recorded Investment>90 Days and Accruing | |||||||||||||||||||||
Notes receivable | $ | | $ | | $ | | $ | | $ | 1,718 | $ | 1,718 | $ | | ||||||||||||||
Finance leases | 4 | | 7 | 11 | 13,841 | 13,852 | 7 | |||||||||||||||||||||
Total | $ | 4 | $ | | $ | 7 | $ | 11 | $ | 15,559 | $ | 15,570 | $ | 7 |
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December 31, 2010 | 30 59 Days Past Due | 60 89 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Financing Receivables | Recorded Investment>90 Days and Accruing | |||||||||||||||||||||
Notes receivable | $ | | $ | | $ | | $ | | $ | 2,706 | $ | 2,706 | $ | | ||||||||||||||
Finance leases | 3 | 2 | 54 | 59 | 17,173 | 17,232 | | |||||||||||||||||||||
Total | $ | 3 | $ | 2 | $ | 54 | $ | 59 | $ | 19,879 | $ | 19,938 | $ | |
The Company did not carry an impairment reserve on its financing receivables at both December 31, 2011 and 2010. At December 31, 2011, certain net investments in financing receivables with related accounts receivable past due more than 90 days are still on an accrual basis based on managements assessment of the collectability of such receivables. However, these accounts receivable are fully reserved and included in the allowance for doubtful accounts presented above. There were no accounts receivable related to financing receivables placed in non-accrual status as of December 31, 2010.
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The Companys investment in leases consists of the following (in thousands):
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Balance December 31, 2010 |
Reclassifications, Additions/ Dispositions and Impairment Losses | Depreciation/ Amortization Expense or Amortization of Leases | Balance December 31, 2011 | |||||||||||||
Net investment in operating leases | $ | 21,426 | $ | (853 | ) | $ | (4,916 | ) | $ | 15,657 | ||||||
Net investment in direct financing leases | 17,232 | (1,373 | ) | (2,007 | ) | 13,852 | ||||||||||
Assets held for sale or lease, net | 1,349 | 290 | (11 | ) | 1,628 | |||||||||||
Initial direct costs, net of accumulated amortization of $78 and $86 at December 31, 2011 and 2010, respectively | 88 | | (33 | ) | 55 | |||||||||||
Total | $ | 40,095 | $ | (1,936 | ) | $ | (6,967 | ) | $ | 31,192 |
For the years ended December 31, 2011 and 2010, IDC amortization expense related to operating leases and direct financing leases was $33 thousand and $80 thousand, respectively (See Note 4).
Management periodically reviews the carrying values of its assets on leases and assets held for lease or sale. Impairment losses are recorded as an adjustment to the net investment in operating leases. In both 2011 and 2010, the Company deemed certain operating lease and off-lease assets to be impaired. Accordingly, the Company recorded fair value adjustments of approximately $65 thousand and $353 thousand for the years ended December 31, 2011 and 2010, respectively, to reduce the cost basis of such assets.
On April 30, 2009, a major lessee, Chrysler Corporation filed for bankruptcy protection under Chapter 11. Under a pre-package agreement, a new company was formed to purchase the assets of old Chrysler its plants, brands, land, equipment, as well as its contracts with the union, dealers and suppliers from the bankruptcy court. Under this agreement, the Company had its leases with the old, bankrupt Chrysler assumed by the new Chrysler, Chrysler Group, LLC, which is 54% owned by Fiat. The new Chrysler has remitted payments relative to the affirmed leases. At April 1, 2011, Chrysler accounts were returned to accrual status.
As of December 31, 2011, there were no lease contracts placed in non-accrual status. At December 31, 2010, net investment in equipment underlying all lease contracts placed on a cash basis approximated $306 thousand, all of which were related to Chrysler. The related accounts receivable from such contracts approximated $40 thousand at December 31, 2010. As of the same dates, the Company has certain other leases that have related accounts receivables aged 90 days or more that have not been placed on non-accrual status. In accordance with Company policy, such receivables are fully reserved. Management continues to closely monitor these leases for any actual change in collectability status and indication of necessary valuation adjustments.
The Company utilizes a straight line depreciation method for equipment in all of the categories currently in its portfolio of operating lease transactions. Depreciation expense on the Companys equipment was approximately $4.9 million and $6.2 million for the respective years ended December 31, 2011 and 2010.
All of the leased property was acquired during the years 2001 through 2010.
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Property on operating leases consists of the following (in thousands):
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Balance December 31, 2010 | Additions | Reclassifications, Dispositions and Impairment Losses | Balance December 31, 2011 | |||||||||||||
Transportation, other | $ | 18,001 | $ | | $ | (1,796 | ) | $ | 16,205 | |||||||
Transportation, rail | 13,288 | | (1,388 | ) | 11,900 | |||||||||||
Materials handling | 10,204 | | (1,035 | ) | 9,169 | |||||||||||
Marine vessels | 6,816 | 442 | | 7,258 | ||||||||||||
Manufacturing | 5,014 | | (2,646 | ) | 2,368 | |||||||||||
Natural gas compressors | 1,671 | | | 1,671 | ||||||||||||
Construction | 1,594 | | (10 | ) | 1,584 | |||||||||||
Agriculture | 1,151 | | | 1,151 | ||||||||||||
Office furniture | 159 | | (159 | ) | | |||||||||||
Other | 84 | | | 84 | ||||||||||||
57,982 | 442 | (7,034 | ) | 51,390 | ||||||||||||
Less accumulated depreciation | (36,556 | ) | (4,916 | ) | 5,739 | (35,733 | ) | |||||||||
Total | $ | 21,426 | $ | (4,474 | ) | $ | (1,295 | ) | $ | 15,657 |
The average estimated residual value for assets on operating leases was 18% and 19% of the assets original cost at December 31, 2011 and 2010, respectively. There were no operating leases placed in non-accrual status as of December 31, 2011. By comparison, operating leases in non-accrual status totaled $306 thousand at December 31, 2010.
The Company may earn revenues from its containers, marine vessel and certain other assets based on utilization of such assets or a fixed-term lease. Contingent rentals (i.e., short-term, operating charter hire payments) and the associated expenses are recorded when earned and/or incurred. The revenues associated with these rentals are included as a component of Operating Lease Revenues. Such revenues totaled $201 thousand for the year ended December 31, 2011. By comparison, revenues from contingent rentals during 2010 approximated $16 thousand.
As of December 31, 2011, investment in direct financing leases consists of materials handling and mining equipment as well as office furniture. As of December 31, 2010, such investment consists of materials handling, mining, research and construction equipment. The following lists the components of the Companys investment in direct financing leases as of December 31, 2011 and 2010 (in thousands):
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2011 | 2010 | |||||||
Total minimum lease payments receivable | $ | 21,780 | $ | 29,415 | ||||
Estimated residual values of leased equipment (unguaranteed) | 3,644 | 3,666 | ||||||
Investment in direct financing leases | 25,424 | 33,081 | ||||||
Less unearned income | (11,572 | ) | (15,849 | ) | ||||
Net investment in direct financing leases | $ | 13,852 | $ | 17,232 | ||||
Net investment in direct financing leases placed in non-accrual status | $ | | $ | 54 |
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There was no investment in direct financing lease assets in non-accrual status at December 31, 2011. However, the Company has certain direct financing leases that have related accounts receivables aged 90 days or more that have not been placed on non-accrual status. In accordance with Company policy, such receivables are fully reserved. Management continues to closely monitor these leases for any actual change in collectability status and indication of necessary valuation adjustments.
At December 31, 2011, the aggregate amounts of future minimum lease payments receivable are as follows (in thousands):
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Operating Leases | Direct Financing Leases | Total | ||||||||||
Year ending December 31, 2012 | $ | 5,047 | $ | 4,691 | $ | 9,738 | ||||||
2013 | 3,127 | 4,505 | 7,632 | |||||||||
2014 | 1,831 | 4,450 | 6,281 | |||||||||
2015 | 1,033 | 4,450 | 5,483 | |||||||||
2016 | 195 | 3,684 | 3,879 | |||||||||
Thereafter | 167 | | 167 | |||||||||
$ | 11,400 | $ | 21,780 | $ | 33,180 |
The terms of the Operating Agreement provide that AFS and/or affiliates are entitled to receive certain fees for equipment management and resale and for management of the Company.
The Operating Agreement allows for the reimbursement of costs incurred by AFS for providing administrative services to the Company. Administrative services provided include Company accounting, finance/treasury, investor relations, legal counsel and lease and equipment documentation. AFS is not reimbursed for services whereby it is entitled to receive a separate fee as compensation for such services, such as management of equipment. The Company will be liable for certain future costs to be incurred by AFS to manage the administrative services provided to the Company.
Each of ATEL Leasing Corporation (ALC) and AFS is a wholly-owned subsidiary of ATEL Capital Group and performs services for the Company. Acquisition services, equipment management, lease administration and asset disposition services are performed by ALC; investor relations, communications services and general administrative services for the Company are performed by AFS.
Cost reimbursements to the Managing Member are based on its costs incurred in performing administrative services for the Company. These costs are allocated to each managed entity based on certain criteria such as total assets, number of investors or contributed capital based upon the type of cost incurred. The Operating Agreement places an annual limit and a cumulative limit for cost reimbursements to AFS and/or affiliates. Any reimbursable costs incurred by AFS and/or affiliates during the year exceeding the annual and/or cumulative limits cannot be reimbursed in the current year, though such costs may be recovered in future years to the extent of the cumulative limit. As of December 31, 2011, the Company has not exceeded the annual and/or cumulative limitations discussed above.
AFS and/or affiliates earned fees, commissions and reimbursements, pursuant to the Operating Agreement as follows during each of the years ended December 31, 2011 and 2010 (in thousands):
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2011 | 2010 | |||||||
Costs reimbursed to Managing Member and/or affiliates | $ | 888 | $ | 577 | ||||
Asset management fees to Managing Member | 719 | 723 | ||||||
Acquisition and initial direct costs paid to Managing Member | | 221 | ||||||
$ | 1,607 | $ | 1,521 |
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During December 2009, operating lease assets with an original cost of $2.7 million and investments in notes receivable totaling $1.0 million were transferred to the Company by certain affiliates, resulting in an amount due to affiliates equivalent to the original cost of the assets. Such amounts due to affiliates were paid in January 2010.
At December 31, 2011, non-recourse debt consists of notes payable to financial institutions. The notes are due in monthly installments. Interest on the notes is at fixed rates ranging from 6.16% to 6.66%. The notes are secured by assignments of lease payments and pledges of assets. At December 31, 2011, gross operating lease rentals and future payments on direct financing leases totaled approximately $24.7 million over the remaining lease terms; and the carrying value of the pledged assets is $17.2 million. The notes mature from 2015 through 2017.
The non-recourse debt does not contain any material financial covenants. The debt is secured by liens granted by the Company to the non-recourse lenders on (and only on) the discounted lease transactions. The lenders have recourse only to the following collateral: the specific leased equipment; the related lease chattel paper; the lease receivables; and proceeds of the foregoing items. The non-recourse obligation is payable solely out of the respective specific security and the Company does not guarantee (nor is the Company otherwise contractually responsible for) the payment of the non-recourse debt as a general obligation or liability of the Company. Although the Company does not have any direct or general liability in connection with the non-recourse debt apart from the security granted, the Company is directly and generally liable and responsible for certain representations, warranties, and covenants made to the lenders, such as warranties as to genuineness of the transaction parties' signatures, as to the genuineness of the respective lease chattel paper or the transaction as a whole, or as to the Company's good title to or perfected interest in the secured collateral, as well as similar representations, warranties and covenants typically provided by non-recourse borrowers and customary in the equipment finance industry, and are viewed by such industry as being consistent with non-recourse discount financing obligations. Accordingly, as there are no financial covenants or ratios imposed on the Company in connection with the non-recourse debt, the Company has determined that there are no material covenants with respect to the non-recourse debt that warrant footnote disclosure.
Future minimum payments of non-recourse debt are as follows (in thousands):
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Principal | Interest | Total | ||||||||||
Year ending December 31, 2012 | $ | 4,010 | $ | 1,284 | $ | 5,294 | ||||||
2013 | 4,279 | 1,015 | 5,294 | |||||||||
2014 | 4,568 | 726 | 5,294 | |||||||||
2015 | 4,616 | 420 | 5,036 | |||||||||
2016 | 3,743 | 133 | 3,876 | |||||||||
Thereafter | 178 | 1 | 179 | |||||||||
$ | 21,394 | $ | 3,579 | $ | 24,973 |
Prior to August 2011, the Company had a $60 million receivables funding program (the RF Program) with a receivables financing company that issued commercial paper rated A1 from Standard and Poors and P1 from Moodys Investors Service. Under the RF Program, the lender held liens against the Companys assets. The lender was in a first position against certain specified assets and was in either a subordinated or shared position against the remaining assets. The RF Program provided for borrowing at a variable interest rate; and, for the Company to enter into interest rate swap agreements with certain hedge counterparties (also rated A1/P1) to mitigate the interest rate risk associated with a variable interest rate note. The RF Program did not contain any credit risk related default contingencies. As of August 22, 2011, all advances under the RF Program were repaid in full and the program was terminated. At December 31, 2010, the Company had $415 thousand outstanding under the RF Program.
The Company previously had interest rate swap agreements that effectively fixed the variable interest rates on its borrowings. As of August 22, 2011, all such agreements have terminated. As of December 31, 2010, the Company had interest rate swap agreements to receive or pay interest on a notional principal of $415 thousand based on the difference between nominal rates ranging from 3.75% to 4.81% and the variable rates that ranged from 0.23%
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to 0.35%. No actual borrowing or lending is involved. The termination of the swaps was to coincide with the maturity of the debt. Through the swap agreements, the interest rates have been effectively fixed. The differential to be paid or received was accrued as interest rates change and was recognized as an adjustment to interest expense related to the debt. The interest rate swaps were not designated as hedging instruments and were carried at fair value on the balance sheet with unrealized gain/loss included in the statements of income in other (expense) income, net. The interest paid or received on the swap contracts were accrued as interest rates changed.
During the years ended December 31, 2011 and 2010, the weighted average interest rate on the RF Program, including interest on the swap contracts were 5.33% and 5.25%, respectively. The RF Program discussed above included certain financial and non-financial covenants applicable to the Company as borrower. The Company was in compliance with all covenants during 2010, and 2011 through the date of program termination.
At December 31, 2011, the Company had no commitments to purchase lease assets or fund investments in notes receivable.
ATEL filed a claim on behalf of certain of its Funds for the under-reporting of revenue by a fleet manager of three marine vessels, seeking to recover an approximate $2.8 million for the years 2005 2007 (of which the Companys portion is an approximate $350 thousand). Such amounts are not considered material to any of the Funds in any given year. While the Funds' recovery with respect to this matter may be substantial, there is no assurance that judgment will be rendered in favor of the Funds. The trial date for this matter has been rescheduled several times, and the suit has recently been assigned to a newly-appointed Federal Judge and a new trial date has been set for June of 2012. The outcome of this claim remains uncertain.
The Company enters into contracts that contain a variety of indemnifications. The Companys 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 Companys 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 Companys 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.
As of December 31, 2011 and 2010, 12,055,016 Units were issued and outstanding. The Company was authorized to issue up to 15,000,000 Units in addition to the Units issued to the initial member (50 Units).
The Company has the right, exercisable in the Managers discretion, but not the obligation, to repurchase Units of a Unit holder who ceases to be a U.S. Citizen, for a price equal to 100% of the holders capital account. The Company is otherwise permitted, but not required, to repurchase Units upon a holders request. The repurchase of Fund units is made in accordance with Section 13 of the Amended and Restated Limited Liability Company Operating Agreement. The repurchase would be at the discretion of the Manager on terms it determines to be appropriate under given circumstances, in the event that the Manager deems such repurchase to be in the best interest of the Company; provided, the Company is never required to repurchase any Units. Upon the repurchase of any Units by the Fund, the tendered Units are cancelled. Units repurchased in prior periods were repurchased at amounts representing the original
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investment less cumulative distributions made to the unit-holder with respect to the Units. All Units repurchased during a quarter are deemed to be repurchased effective the last day of the preceding quarter, and are not deemed to be outstanding during, or entitled to allocations of net income, net loss or distributions for the quarter in which such repurchase occurs.
As defined in the Operating Agreement, the Companys Net Income, Net Losses, and Distributions are to be allocated 92.5% to the Members and 7.5% to AFS. In accordance with the terms of the Operating Agreement, additional allocations of income were made to AFS in 2011 and 2010. The amounts allocated were determined to bring AFSs ending capital account balance to zero at the end of each year.
Distributions to the Other Members were as follows (in thousands except Units and per Unit data):
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2011 | 2010 | |||||||
Distributions declared | $ | 7,233 | $ | 6,027 | ||||
Weighted average number of Units outstanding | 12,055,016 | 12,055,016 | ||||||
Weighted average distributions per Unit | $ | 0.60 | $ | 0.50 |
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.
The Company had no assets or liabilities that require measurement at fair value on a recurring or non-recurring basis at December 31, 2011. However, during the first three quarters of 2011, the Company did record adjustments to reflect the fair value of impaired assets which included off-lease equipment and an investment security on a non-recurring basis.
At December 31, 2010, the company measured the fair value of its interest rate swap contracts on a recurring basis. In addition, the Company measured the fair value of impaired operating lease and off-lease equipment on a non-recurring basis.
The measurement methodologies are as follows:
The fair value of interest rate swaps is estimated using a valuation method (discounted cash flow) with inputs that are defined or that can be corroborated by observable market data. The discounted cash flow approach utilizes each swaps notional amount, payment and termination dates, swap coupon, and the prevailing market rate and pricing data to determine the present value of the future swap payments. Accordingly, such swap contracts are classified within Level 2 of the valuation hierarchy.
The Company had no fair value adjustments relative to impaired equipment as of December 31, 2011. During the first three quarters of 2011, the Company had recorded fair value adjustments of $65 thousand which reduced the cost basis of certain off-lease equipment deemed impaired at September 30, 2011.
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As of December 31, 2010, the Company recorded fair value adjustments of approximately $353 thousand which reduced the cost basis of certain operating lease and off-lease equipment deemed impaired at year-end 2010.
The aforementioned fair value adjustments were all non-recurring. Under the Fair Value Measurements Topic of the FASB Accounting Standards Codification, the fair value of such impaired off-lease equipment are classified within Level 3 of the valuation hierarchy as the data sources utilized for the valuation of the assets reflect significant inputs that are unobservable in the market. Such valuation utilizes a market approach technique and uses inputs that reflect the sales price of similar assets sold by affiliates and/or information from third party remarketing agents not readily available in the market.
The Companys investment securities are not registered for public sale and are carried at cost. The investment securities are adjusted for impairment, if any, based upon factors which include, but are not limited to, available financial information, the issuers ability to meet its current obligations and indications of the issuers subsequent ability to raise capital. The Company had no fair value adjustments relative to impaired investment securities as of December 31, 2011 and 2010.
During the first three quarters of 2011, the Company had recorded a fair value adjustment of $41 thousand which reduced the cost basis of an investment security deemed impaired at March 31, 2011. The non-recurring fair value adjustment was a result of an approximate 66% reduction in valuation based upon cash payments received in a private transaction whereby the Fund liquidated its warrant position. Such transaction was pursuant to the investees acquisition by a third party. Under the Fair Value Measurements Topic of the FASB Accounting Standards Codification, the fair value of the impaired investment is classified within Level 3 of the valuation hierarchy as the third partys valuation of the investee included significant inputs that are unobservable in the market.
The following tables present the fair value measurements of assets and liabilities measured at fair value on a recurring and non-recurring basis during 2011 and 2010, and the level within the hierarchy in which the fair value measurements fall at December 31, 2011 and 2010 (in thousands):
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December 31, 2011 | 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: |
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Impaired off-lease assets | $ | 88 | $ | | $ | | $ | 88 |
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December 31, 2010 | 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: |
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Impaired operating lease and off-lease assets | $ | 297 | $ | | $ | | $ | 297 | ||||||||
Liabilities measured at fair value on a recurring basis: |
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Interest rate swaps | $ | 5 | $ | | $ | 5 | $ | |
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 Companys financial instruments, are made solely to comply with the requirements of the Financial Instruments Topic and should be read in conjunction with the Companys financial statements and related notes.
The Company has determined the estimated fair value amounts by using market information and valuation methodologies that it considers appropriate and consistent with the fair value accounting guidance. Considerable judgment is required to interpret market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
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The recorded amounts of the Companys cash and cash equivalents approximate fair value because of the liquidity and short-term maturity of these instruments.
The fair value of the Companys notes receivable is estimated using either third party appraisals of collateral or discounted cash flow analyses based upon current market rates for similar types of lending arrangements, with adjustments for non-accrual loans as deemed necessary.
The Companys investment securities are not registered for public sale and are carried at cost which management believes approximates fair value, as appropriately adjusted for impairment.
The fair value of the Companys non-recourse debt is estimated using discounted cash flow analyses, based upon current market borrowing rates for similar types of borrowing arrangements.
The carrying amount of these variable rate obligations approximate fair value based on current borrowing rates for similar types of borrowings.
Management has determined that the fair value of contingent liabilities (or guarantees) is not considered material because management believes there has been no event that has occurred wherein a guarantee liability has been incurred or will likely be incurred.
The following table presents estimated fair values of the Companys financial instruments in accordance with the guidance provided by the Financial Instruments Topic of the FASB Accounting Standards Codification at December 31, 2011 and 2010 (in thousands):
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December 31, 2011 | December 31, 2010 | |||||||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||
Financial assets: |
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Cash and cash equivalents | $ | 5,593 | $ | 5,593 | $ | 2,782 | $ | 2,782 | ||||||||
Notes receivable | 1,721 | 1,721 | 2,712 | 2,712 | ||||||||||||
Investment in securities | | | 70 | 70 | ||||||||||||
Financial liabilities: |
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Non-recourse debt | 21,394 | 22,674 | 25,150 | 26,076 | ||||||||||||
Receivables funding program | | | 415 | 415 | ||||||||||||
Interest rate swap contracts | | | 5 | 5 |
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Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES |
None.
The Companys Managing Members President and Chief Executive Officer, and Executive Vice President and Chief Financial Officer and Chief Operating Officer (Management), evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on the evaluation of the Companys disclosure controls and procedures, Management concluded that as of the end of the period covered by this report, the design and operation of these disclosure controls and procedures were effective.
The Company does not control the financial reporting process, and is solely dependent on the Management of the Managing Member, who is responsible for providing the Company with financial statements in accordance with generally accepted accounting principles in the United States. The Managing Members 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. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commissions 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 issuers management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
The Management of the Managing Member is responsible for establishing and maintaining adequate internal control over financial reporting as that term is defined in Exchange Act Rule 13a-15(f) for the Company, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2011. The internal control process of the Managing Member, as it is applicable to the Company, was designed to provide reasonable assurance to Management regarding the preparation and fair presentation of published financial statements, and includes those policies and procedures that:
(1) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States, and that the Companys receipts and expenditures are being made only in accordance with authorization of the Management of the Managing Member; and |
(2) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that could have a material effect on the financial statements. |
All internal control processes, no matter how well designed, have inherent limitations. Therefore, even those processes determined to be effective can provide only reasonable assurance with respect to the reliability of financial statement preparation and presentation. Further, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management of the Managing Member assessed the effectiveness of its internal control over financial reporting, as it is applicable to the Company, as of December 31, 2011. In making this assessment, it used the criteria set forth in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, Management of the Managing Member concluded that the Managing Members internal control over financial reporting, as it is applicable to the Company, was effective as of December 31, 2011.
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This annual report does not include an attestation report of the Companys independent registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the Companys independent registered public accounting firm pursuant to Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which exempts non-accelerated filers from Section 404(b) of the Sarbanes-Oxley Act of 2002.
There were no changes in the Managing Members internal control over financial reporting, as it is applicable to the Company, during the quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Managing Members internal control over financial reporting, as it is applicable to the Company.
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The registrant is a Limited Liability Company and, therefore, has no officers or directors.
ATEL Financial Services, LLC (AFS) is the Companys Managing Member or Manager. AFS is controlled by ATEL Capital Group (ACG or ATEL), a holding company formed to control AFS and affiliated companies. The outstanding voting capital stock of ATEL Capital Group is owned 100% by Dean Cash.
Each of ATEL Leasing Corporation (ALC) and AFS is a wholly-owned subsidiary of ACG and performs services for the Company. Acquisition services, equipment management, lease administration and asset disposition services are performed by ALC; and investor relations, communications and general administrative services are performed by AFS.
The officers and directors of ATEL and its affiliates are as follows:
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Dean L. Cash | President and Chief Executive Officer of ATEL Financial Services, LLC (Managing Member) |
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Paritosh K. Choksi | Executive Vice President and Chief Financial Officer and Chief Operating Officer of ATEL Financial Services, LLC (Managing Member) | |
Vasco H. Morais | Executive Vice President, Secretary and General Counsel of ATEL Financial Services, LLC (Managing Member) |
Dean L. Cash, age 61, became chairman, president and chief executive officer of ATEL in April 2001. Mr. Cash joined ATEL as director of marketing in 1980 and served as a vice president since 1981, executive vice president since 1983 and a director since 1984. Prior to joining ATEL, Mr. Cash was a senior marketing representative for Martin Marietta Corporation, data systems division, from 1979 to 1980. From 1977 to 1979, he was employed by General Electric Corporation, where he was an applications specialist in the medical systems division and a marketing representative in the information services division. Mr. Cash was a systems engineer with Electronic Data Systems from 1975 to 1977, and was involved in maintaining and developing software for commercial applications. Mr. Cash received a B.S. degree in psychology and mathematics in 1972 and an M.B.A. degree with a concentration in finance in 1975 from Florida State University. Mr. Cash is an arbitrator with the American Arbitration Association and is qualified as a registered principal with the Financial Industry Regulatory Authority.
Paritosh K. Choksi, age 58, joined ATEL in 1999 as a director, senior vice president and its chief financial officer. He became its executive vice president and CFO/COO in April 2001. Prior to joining ATEL, Mr. Choksi was chief financial officer at Wink Communications, Inc. from 1997 to 1999. From 1977 to 1997, Mr. Choksi was with Phoenix American Incorporated, a financial services and management company, where he held various positions during his tenure, and was senior vice president, chief financial officer and director when he left the company. Mr. Choksi was involved in all corporate matters at Phoenix and was responsible for Phoenixs capital market needs. He also served on the credit committee overseeing all corporate investments, including its venture lease portfolio. Mr. Choksi was a part of the executive management team which caused Phoenixs portfolio to increase from $50 million in assets to over $2 billion. Mr. Choksi is a member of the board of directors of Syntel, Inc. Mr. Choksi received a bachelor of technology degree in mechanical engineering from the Indian Institute of Technology, Bombay; and an M.B.A. degree from the University of California, Berkeley.
Vasco H. Morais, age 53, joined ATEL in 1989 as general counsel. Mr. Morais manages ATELs legal department, which provides legal and contractual support in the negotiating, documenting, drafting, reviewing and funding of lease transactions. In addition, Mr. Morais advises on general corporate law matters, and assists on securities law issues. From 1986 to 1989, Mr. Morais was employed by the BankAmeriLease Companies, Bank of Americas equipment leasing subsidiaries, providing in-house legal support on the documentation of tax-oriented and non-tax oriented direct and leveraged lease transactions, vendor leasing programs and general corporate matters. Prior to the BankAmeriLease Companies, Mr. Morais was with the Consolidated Capital Companies in the Corporate and Securities Legal Department involved in drafting and reviewing contracts, advising on corporate law matters and securities law issues. Mr. Morais received a B.A. degree in 1982 from the University of California in Berkeley, a J.D. degree in 1986 from Golden Gate University Law School; and an M.B.A. (Finance) degree from Golden Gate University in 1997. Mr. Morais, an active member of the State Bar of California since 1986, served as co-chair of the Uniform Business Law Section of the State Bar of California and was inducted as a fellow of the American College of Commercial Finance Lawyers in 2010.
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The board of directors of the Managing Member acts as the audit committee of the Company. Dean L. Cash and Paritosh K. Choksi are members of the board of directors of the Managing Member and are deemed to be financial experts. They are not independent of the Company.
Based solely on a review of Forms 3, 4 and 5, the Company is not aware of any failures to file reports of beneficial ownership required to be filed during or for the year ended December 31, 2011.
A Code of Ethics that is applicable to the Company, including the Chief Executive Officer and Chief Financial Officer and Chief Operating Officer of its Managing Member, AFS, or persons acting in such capacity on behalf of the Company, is included as Exhibit 14.1 to this report.
The registrant is a Limited Liability Company and, therefore, has no officers or directors.
Set forth hereinafter is a description of the nature of remuneration paid and to be paid to AFS and its affiliates. The amount of such remuneration paid in 2011 and 2010 is set forth in Item 8 of this report under the caption Financial Statements and Supplementary Data Notes to Financial Statements Related party transactions, at Note 7 thereof, which information is hereby incorporated by reference.
The Company pays AFS an Asset Management Fee in an amount equal to 4% of Operating Revenues, which includes Gross Lease Revenues and Cash From Sales or Refinancing. The Asset Management Fee is paid on a monthly basis. The amount of the Asset Management Fee payable in any year is reduced for that year to the extent it would otherwise exceed the Asset Management Fee Limit, as described below. The Asset Management Fee is paid for services rendered by AFS and its affiliates in determining portfolio and investment strategies (i.e., establishing and maintaining the composition of the Equipment portfolio as a whole and the Companys overall debt structure) and generally managing or supervising the management of the Equipment.
AFS supervises performance of among others activities, collection of lease revenues, monitoring compliance by lessees with the lease terms, assuring that Equipment is being used in accordance with all operative contractual arrangements, paying operating expenses and arranging for necessary maintenance and repair of Equipment in the event a lessee fails to do so, monitoring property, sales and use tax compliance and preparation of operating financial data. AFS intends to delegate all or a portion of its duties and the Asset Management Fee to one or more of its affiliates who are in the business of providing such services.
The Asset Management Fee is subject to the Asset Management Fee Limit. The Asset Management Fee Limit is calculated each year during the Companys term by calculating the total fees that would be paid to AFS if AFS were to be compensated on the basis of an alternative fee schedule, to include an Equipment Management Fee, Incentive Management Fee, and Equipment Resale/Re-Leasing Fee, plus AFSs Carried Interest, as described below. To the extent that the amount paid to AFS as the Asset Management Fee plus its Carried Interest for any year would exceed the aggregate amount of fees calculated under this alternative fee schedule for the year, the Asset Management Fee and/or Carried Interest for that year is reduced to equal the maximum aggregate fees under the alternative fee schedule.
To the extent any such fees are reduced, the amount of such reduction will be accrued and deferred, and such accrued and deferred compensation would be paid to AFS in a subsequent period, but only if and to the extent that such deferred compensation would be payable within the Asset Management Fee Limit for the subsequent period. Any deferred fees which cannot be paid under the applicable limitations in any subsequent period through the date of liquidation would be forfeited by AFS upon liquidation.
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For purposes of the Asset Management Fee Limit, the Company will calculate an alternative schedule of fees, including a hypothetical Equipment Management Fee, Incentive Management Fee, Equipment Resale/Re-Leasing Fee, and Carried Interest as follows:
An Equipment Management Fee will be calculated to equal the lesser of (i) 3.5% of annual Gross Revenues from Operating Leases and 2% of annual Gross Revenues from Full Payout Leases which contain Net Lease Provisions, or (ii) the fees customarily charged by others rendering similar services as an ongoing public activity in the same geographic location and for similar types of equipment. If services with respect to certain Operating Leases are performed by nonaffiliated persons under the active supervision of AFS or its affiliate, then the amount so calculated shall be 1% of Gross Revenues from such Operating Leases.
An Incentive Management Fee will be calculated to equal 4% of Distributions of Cash from Operations until Holders have received a return of their Original Invested Capital plus a Priority Distribution, and, thereafter, to equal a total of 7.5% of Distributions from all sources, including Sale or Refinancing Proceeds. In subordinating the increase in the Incentive Management Fee to a cumulative return of a Holders Original Invested Capital plus a Priority Distribution, a Holder would be deemed to have received Distributions of Original Invested Capital only to the extent that Distributions to the Holder exceed the amount of the Priority Distribution.
An Equipment Resale/Re-Leasing Fee will be calculated in an amount equal to the lesser of (i) 3% of the sale price of the Equipment, or (ii) one-half the normal competitive equipment sale commission charged by unaffiliated parties for resale services. Such fee would apply only after the Holders have received a return of their Original Invested Capital plus a Priority Distribution. In connection with the releasing of Equipment to lessees other than previous lessees or their affiliates, the fee would be in an amount equal to the lesser of (i) the competitive rate for comparable services for similar equipment, or (ii) 2% of the gross rental payments derived from the re-lease of such Equipment, payable out of each rental payment received by the Company from such re-lease.
A Carried Interest equal to 7.5% of all Distributions of Cash from Operations and Cash from Sales or Refinancing.
See Note 7 to the financial statements included in Item 8, Financial Statements and Supplementary Data, for amounts paid.
As defined in the Limited Liability Company Operating Agreement, the Companys Net Income, Net Losses, and Distributions are to be allocated 92.5% to the Members and 7.5% to AFS. In accordance with the terms of the Operating Agreement, additional allocations of income were made to AFS in 2011 and 2010. The amounts allocated were determined to bring AFSs ending capital account balance to zero at the end of each year. See financial statements as set forth in Part II, Item 8, Financial Statements and Supplementary Data, of this report for amounts allocated to AFS in 2011 and 2010.
At December 31, 2011, no investor is known to hold beneficially more than 5% of the issued and outstanding Units.
The parent of AFS is the beneficial owner of Limited Liability Company Units as follows:
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(1) Title of Class |
(2) Name and Address of Beneficial Owner |
(3) Amount and Nature of Beneficial Ownership |
(4) Percent of Class |
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Limited Liability Company Units | ATEL Capital Group 600 California Street, 6th Floor San Francisco, CA 94108 |
Initial Limited Liability Company Units 50 Units ($500) |
0.0004% |
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The Members have the right, by vote of the Members owning more than 50% of the outstanding Limited Liability Company Units, to remove a Managing Member.
AFS may at any time call a meeting of the Members or a vote of the Members without a meeting, on matters on which they are entitled to vote, and shall call such meeting or for vote without a meeting following receipt of a written request therefore of members holding 10% or more of the total outstanding Limited Liability Company Units.
The responses to Item 1 of this report under the caption Equipment Leasing Activities, Item 8 of this report under the caption Financial Statements and Supplementary Data Notes to Financial Statements Related party transactions at footnote 7 thereof, and Item 11 of this report under the caption Executive Compensation, are hereby incorporated by reference.
During the most recent two years, the Company incurred audit and audit related fees with its principal auditors as follows (in thousands):
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2011 | 2010 | |||||||
Audit fees | $ | 86 | $ | 113 | ||||
Other | 1 | 2 | ||||||
$ | 87 | $ | 115 |
Audit fees consist of the aggregate fees and expenses billed in connection with the audit of the Companys annual financial statements and the review of the financial statements included in the Companys quarterly reports on Form 10-Q.
Other fees represent costs incurred in connection with various Agreed-Upon Procedures engagements.
The board of directors of the Managing Member acts as the audit committee of the registrant. Engagements for audit services, audit related services and tax services are approved in advance by the Chief Financial Officer of the Managing Member acting on behalf of the board of directors of the Managing Member in its role as the audit committee of the Company.
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(a) | Financial Statements and Schedules |
1. | Financial Statements |
2. | Financial Statement Schedules |
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(b) | Exhibits |
(3) and (4) Amended and Restated Limited Liability Company Agreement, included as Exhibit B to the Prospectus included in the registrants registration statement on form S-1 effective January 16, 2001, (File Number 333-47196) is hereby incorporated herein by reference.
(14.1) Code of Ethics
(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
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 9, 2012
ATEL Capital Equipment Fund IX, LLC
(Registrant)
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By: ATEL Financial Services, LLC |
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By: /s/ Dean L. Cash | ||
By: /s/ Paritosh K. Choksi | ||
By: /s/ Samuel Schussler |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the persons in the capacities and on the dates indicated.
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SIGNATURE | CAPACITIES | DATE | ||
/s/ Dean L. Cash![]() |
President and Chief Executive Officer of ATEL Financial Services, LLC (Managing Member) |
March 9, 2012 | ||
/s/ Paritosh K. Choksi![]() |
Executive Vice President and Chief Financial Officer and Chief Operating Officer of ATEL Financial Services, LLC (Managing Member) | March 9, 2012 | ||
/s/ Samuel Schussler![]() |
Vice President and Chief Accounting Officer of ATEL Financial Services, LLC (Managing Member) | March 9, 2012 |
No proxy materials have been or will be sent to security holders. An annual report will be furnished to security holders subsequent to the filing of this report on Form 10-K, and copies thereof will be furnished supplementally to the Commission when forwarded to the security holders.
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EXHIBIT 14.1
This Code of Ethics is applicable to ATEL Capital Equipment Fund IX, LLC (Fund IX), including the Chief Executive Officer and Chief Financial and Operating Officer of its Manager, ATEL Financial Services, LLC (AFS), or persons acting in such capacity (collectively the Covered Officers) on behalf of Fund IX, referred to herein as the Company.
Accordingly, under the Securities and Exchange Commissions interpretation of its disclosure rules, the Board of Directors of AFS functions as the de facto audit committee for the Company with respect to all procedural and disclosure requirements applicable to audit committees under Securities and Exchange Commission rules. The Board of Directors shall have oversight responsibility over the activities of the Company for purposes of this Code of Ethics.
The Company is proud of the values with which it conducts business. It has and will continue to uphold the highest levels of business ethics and personal integrity in all types of transactions and interactions. To this end, this Code of Ethics serves to (1) emphasize the Companys commitment to ethics and compliance with the law; (2) set forth basic standards of ethical and legal behavior; (3) provide reporting mechanisms for known or suspected ethical or legal violations; and (4) help prevent and detect wrongdoing. This Code of Ethics is intended to augment and supplement the standard of ethics and business conduct expected of all Company employees, and its limitation to Covered Officers is not intended to limit the obligation of all Company employees to adhere to the highest standards of business ethics and integrity in all transactions and interactions conducted while in the Companys employ.
Given the variety and complexity of ethical questions that may arise in the course of business of the Company, this Code of Ethics serves only as a rough guide. Confronted with ethically ambiguous situations, the Covered Officers should remember the Companys commitment to the highest ethical standards and seek independent advice, where necessary, to ensure that all actions they take on behalf of the Company honor this commitment.
The Covered Officers shall behave honestly and ethically at all times and with all people. They shall act in good faith, with due care, and shall engage only in fair and open competition, by treating ethically competitors, suppliers, customers, and colleagues. They shall not misrepresent facts or engage in illegal, unethical, or anti-competitive practices for personal or professional gain.
This fundamental standard of honest and ethical conduct extends to the handling of conflicts of interest. The Covered Officers shall avoid any actual, potential, or apparent conflicts of interest with the Company, and any personal activities, investments, or associations that might give rise to such conflicts. They shall not compete with or use the Company, for personal gain, self-deal, or take advantage of any corporate opportunities. They shall act on behalf of the Company free from improper influence or the appearance of improper influence on their judgment or performance of duties. A Covered Officer shall disclose any material transaction or relationship that reasonably could be expected to give rise to such a conflict to the Companys General Counsel or a member of the Companys Board of Directors. No action may be taken with respect to such transaction or party unless and until the Companys Board of Directors has approved such action.
Notwithstanding the foregoing, it is understood, as fully disclosed in the offering documents for the Company, that AFS as managing member of the Company has certain inherent conflicts of interest. The provisions of the Companys Operating Agreement have been drafted to address the obligations, restrictions and limitations on the power and authority of AFS to manage the Companys affairs, including restrictions prohibiting or limiting the terms of any transactions in which conflicts of interest may arise. Furthermore, AFS has a fiduciary duty to the Company as its
manager. It is therefore expressly understood by the Company and the Covered Officers that any and all actions by AFS and its personnel that comply with the provisions of the Companys Operating Agreement, and which are consistent with AFSs fiduciary duty to the Company, will not be considered material transactions or relationships which require disclosure or reporting under this Code of Ethics.
In reports and documents filed with or submitted to the Securities and Exchange Commission and other regulators by the Company and in other public communications made by the Company, the Covered Officers shall make disclosures that are full, fair, accurate, timely, and understandable. The Covered Officers shall provide thorough and accurate financial and accounting data for inclusion in such disclosures. The Covered Officers shall not knowingly conceal or falsify information, misrepresent material facts, or omit material facts necessary to avoid misleading the Companys independent public auditors or investors.
In conducting the business of the Company, the Covered Officers shall comply with applicable governmental laws, rules, and regulations at all levels of government in the United States and in any non-U.S. jurisdiction in which the Company does business, as well as applicable rules and regulations of self-regulatory organizations of which the Company is a member. If the Covered Officer is unsure whether a particular action would violate an applicable law, rule, or regulation, he or she should seek the advice of inside counsel (if available), and, where necessary, outside counsel before undertaking it.
The Covered Officers will promptly bring to the attention of the Companys General Counsel or the Board of Directors any information concerning a material violation of any of the laws, rules or regulations applicable to the Company and the operation of its businesses, by the Company or any agent thereof, or of violation of this Code of Ethics. The Companys General Counsel will investigate reports of violations and the findings communicated to the Companys Board of Directors.
If the Companys Board of Directors determines that this Code of Ethics has been violated, either directly, by failure to report a violation, or by withholding information related to a violation, it may discipline the offending Covered Officer for non-compliance with penalties up to and including termination of employment. Violations of this Code of Ethics may also constitute violations of law and may result in criminal penalties and civil liabilities for the offending Covered Officer and the Company.
EXHIBIT 31.1
I, Dean L. Cash, certify that:
1. | I have reviewed this annual report on Form 10-K of ATEL Capital Equipment Fund IX, LLC; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: March 9, 2012
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/s/ Dean L. Cash![]() President and Chief Executive Officer of ATEL Financial Services, LLC (Managing Member) |
EXHIBIT 31.2
I, Paritosh K. Choksi, certify that:
1. | I have reviewed this annual report on Form 10-K of ATEL Capital Equipment Fund IX, LLC; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: March 9, 2012
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/s/ Paritosh K. Choksi![]() Executive Vice President and Chief Financial Officer and Chief Operating Officer of ATEL Financial Services, LLC (Managing Member) |
EXHIBIT 32.1
In connection with the Annual Report of ATEL Capital Equipment Fund IX, LLC (the Company) on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Dean L. Cash, President and Chief Executive Officer of ATEL Financial Services, LLC, Managing Member of the Company, hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
1. | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: March 9, 2012
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/s/ Dean L. Cash![]() President and Chief Executive Officer of ATEL Financial Services, LLC (Managing Member) |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
In connection with the Annual Report of ATEL Capital Equipment Fund IX, LLC (the Company) on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Paritosh K. Choksi, Executive Vice President and Chief Financial Officer and Chief Operating Officer of ATEL Financial Services, LLC, Managing Member of the Company, hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
1. | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: March 9, 2012
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/s/ Paritosh K. Choksi![]() Executive Vice President and Chief Financial Officer and Chief Operating Officer of ATEL Financial Services, LLC (Managing Member) |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Summary of significant accounting policies
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Summary of significant accounting policies | 2. Summary of significant accounting policies:Basis of presentation:The accompanying balance sheets as of December 31, 2011 and 2010, and the related statements of income, changes in members’ capital, and cash flows for the years then ended, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission. Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no significant effect on the reported financial position or results of operations. During the first quarter 2011, the Company identified a misclassification in the presentation of amortization of unearned income on both direct financing leases and notes receivable on the 2010 statements of cash flows. An adjustment made to reflect proper classification results in a $1.3 million increase in net cash from operating activities and a corresponding decrease in net cash from investing activities for the quarter ended March 31, 2010. The Company incorrectly reported these interest income activities as an increase in the payments received on both direct financing leases and notes receivable. The appropriate classification of the receipt of interest income on direct financing leases and notes receivable is to record the $1.3 million as an inflow in the operating activities section of the statement of cash flows. Such adjustment totaled $5.3 million for the year ended December 31, 2010. The classification adjustment does not change the Company’s financial position, net income or the net reported change in cash for the year ended December 31, 2010, nor does it affect the cash balance previously reported on the balance sheet. The Company does not believe that this classification adjustment is material to cash flows for its previously filed Annual Report on Form 10-K or Quarterly Reports on Form 10-Q for the year ended December 31, 2010. Accordingly, the Company has revised its 2010 statements of cash flows prospectively in the 2011 Quarterly Reports on Form 10-Q and Annual Report on Form 10-K. Footnote and tabular amounts are presented in thousands, except as to Units and per Unit data. In preparing the accompanying financial statements, the Company has reviewed, as determined necessary by the Managing Member, events that have occurred after December 31, 2011, up until the issuance of the financial statements. No events were noted which would require disclosure in the footnotes to the financial statements. Use of estimates:The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Such estimates primarily relate to the determination of residual values at the end of the lease term and expected future cash flows used for impairment analysis purposes and for determination of the allowance for doubtful accounts and reserve for credit losses on notes receivable. Cash and cash equivalents:Cash and cash equivalents include cash in banks and cash equivalent investments such as U.S. Treasury instruments with original and/or purchased maturities of ninety days or less. Credit risk:Financial instruments that potentially subject the Company to concentrations of credit risk include cash and cash equivalents, operating and direct financing lease receivables, notes receivable and accounts receivable. The Company places the majority of its cash deposits in noninterest-bearing transaction accounts which are fully insured, without limit, through December 31, 2012 under the Dodd-Frank amendment to the Federal Deposit Insurance Act. This unlimited coverage is separate from, and in addition to, the coverage provided to depositors with other accounts held at a depository institution insured by the Federal Deposit Insurance Corporation. The remainder of the Funds’ cash is temporarily invested in U.S. Treasury denominated instruments. The concentration of such deposits and temporary cash investments is not deemed to create a significant risk to the Company. Accounts and notes receivable represent amounts due from lessees or borrowers in various industries, related to equipment on operating and direct financing leases or notes receivable. Accounts receivable:Accounts receivable represent the amounts billed under operating and direct financing lease contracts, and notes receivable which are due to the Company. Allowances for doubtful accounts are typically established based on historical charge off and collection experience and the collectability of specifically identified lessees and invoiced amounts. Accounts receivable deemed uncollectible are charged off to the allowance on a specific identification basis. Amounts recovered that were previously written-off are recorded as other income in the period received. Equipment on operating leases and related revenue recognition:Equipment subject to operating leases is stated at cost. Depreciation is being recognized on a straight-line method over the terms of the related leases to the equipment’s estimated residual values. Maintenance costs associated with the Fund’s portfolio of leased assets are expensed as incurred. Major additions and betterments are capitalized. Operating lease revenue is recognized on a straight-line basis over the term of the underlying leases. The initial lease terms will vary as to the type of equipment subject to the leases, the needs of the lessees and the terms to be negotiated, but initial leases are generally on terms from 36 to 120 months. The difference between rent received and rental revenue recognized is recorded as unearned operating lease income on the balance sheet. Operating leases are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management considers the equipment underlying the lease contracts for impairment and periodically reviews the credit worthiness of all operating lessees with payments outstanding less than 90 days. Based upon management’s judgment, the related operating leases may be placed on non-accrual status. Leases placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable. Until such time, revenues are recognized on a cash basis. The Company earns revenues from its marine vessel based on charter utilization of the vessel or a fixed term lease. When the vessel is chartered, contingent rentals and the associated expenses are recorded when earned and/or incurred. From time to time, the Company incurs “drydocking” costs on its vessel. Drydocking costs include labor and material costs related to refurbishing, overhauling and/or replacing engine and other major mechanical components of the vessel, hull maintenance and other repairs that bring the vessel into seaworthy compliance with U.S. marine codes in order to have it certified as available for charter. Such drydocking costs are capitalized and added to the equipment cost and depreciated over the period between scheduled drydockings, which generally occur every 24 to 30 months. Direct financing leases and related revenue recognition:Income from direct financing lease transactions is reported using the financing method of accounting, in which the Company’s investment in the leased property is reported as a receivable from the lessee to be recovered through future rentals. The interest income portion of each rental payment is calculated so as to generate a constant rate of return on the net receivable outstanding. Allowances for losses on direct financing leases are typically established based on historical charge off and collection experience and the collectability of specifically identified lessees and billed and unbilled receivables. Direct financing leases are charged off to the allowance as they are deemed uncollectible. Direct financing leases are generally placed in a non-accrual status (i.e., no revenue is recognized) and deemed impaired when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of all direct finance lessees with payments outstanding less than 90 days. Based upon management’s judgment, the related direct financing leases may be placed on non-accrual status. Leases placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable. Until such time, all payments received are applied only against outstanding principal balances. Notes receivable, unearned interest income and related revenue recognition:The Company records all future payments of principal and interest on notes as notes receivable which is then offset by the amount of any related unearned interest income. For financial statement purposes, the Company reports only the net amount of principal due on the balance sheet. The unearned interest is recognized over the term of the note and the income portion of each note payment is calculated so as to generate a constant rate of return on the net balance outstanding. Any fees or costs related to notes receivable are recorded as part of the net investment in notes receivable and amortized over the term of the loan. Allowances for losses on notes receivable are typically established based on historical charge off and collection experience and the collectability of specifically identified borrowers and billed and unbilled receivables. Notes are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal 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 payments 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 for losses as they are deemed uncollectible. Notes receivable are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of companies with note payments outstanding less than 90 days. Based upon management’s judgment, notes may be placed in a non-accrual status. Notes placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid receivable is probable. Until such time, all payments received are applied only against outstanding principal balances. Initial direct costs:The Company capitalizes initial direct costs (“IDC”) associated with the origination and funding of lease assets and investments in notes receivable. IDC includes both internal costs (e.g., the costs of employees’ activities in connection with successful lease and loan originations) and external broker fees incurred with such originations. The costs are amortized on a lease by lease (or note by note) basis based on actual contract term using a straight-line method for operating leases and the effective interest rate method for direct financing leases and notes receivable. Upon disposal of the underlying lease or loan assets, both the initial direct costs and the associated accumulated amortization are relieved. Costs related to leases or notes receivable that are not consummated are not eligible for capitalization as initial direct costs and are expensed as acquisition expense. Acquisition expense:Acquisition expense represents costs which include, but are not limited to, legal fees and expenses, travel and communication expenses, cost of appraisals, accounting fees and expenses and miscellaneous expenses related to the selection and acquisition of equipment which are reimbursable to the Managing Member under the terms of the Operating Agreement. As the costs are not eligible for capitalization as initial direct costs, such amounts are expensed as incurred. Asset valuation:Recorded values of the Company’s leased asset portfolio are periodically reviewed for impairment. An impairment loss is measured and recognized only if the estimated undiscounted future cash flows of the asset are less than their net book value. The estimated undiscounted future cash flows are the sum of the estimated residual value of the asset at the end of the asset’s expected holding period and estimates of undiscounted future rents. The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the market place are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. Impairment is measured as the difference between the fair value (as determined by a valuation method using discounted estimated future cash flows, third party appraisals or comparable sales of similar assets as applicable based on asset type) of the asset and its carrying value on the measurement date. Segment reporting:The Company is not organized by multiple operating segments for the purpose of making operating decisions or assessing performance. Accordingly, the Company operates in one reportable operating segment in the United States. The Company’s principal decision makers are the Managing Member’s Chief Executive Officer and its Chief Financial Officer and Chief Operating Officer. The Company believes that its equipment leasing business operates as one reportable segment because: a) the Company measures profit and loss at the equipment portfolio level as a whole; b) the principal decision makers do not review information based on any operating segment other than the equipment leasing transaction portfolio; c) the Company does not maintain discrete financial information on any specific segment other than its equipment financing operations; d) the Company has not chosen to organize its business around different products and services other than equipment lease financing; and e) the Company has not chosen to organize its business around geographic areas. The primary geographic regions in which the Company seeks leasing and lending opportunities are North America and Europe. The table below summarizes geographic information relating to the sources, by nation, of the Company’s total revenues for the years ended December 31, 2011 and 2010 and long-lived assets as of December 31, 2011 and 2010 (dollars in thousands):
Derivative financial instruments:The Company records all derivatives as either assets or liabilities in the balance sheet, measures those instruments at fair value and recognizes the offsetting gains or losses as adjustments to net income (loss). Credit exposure from derivative financial instruments that are assets arises from the risk of a counterparty default on the derivative contract. The amount of the loss created by the default is the replacement cost or current positive fair value of the defaulted contract. Foreign currency transactions:Foreign currency transaction gains and losses are reported in the results of operations as “other income” or “other expense” in the period in which they occur. Currently, the Company does not use derivative instruments to hedge its economic exposure with respect to assets, liabilities and firm commitments as the foreign currency transactions risks to date have not been significant. During the years ended December 31, 2011 and 2010, the Company recognized foreign currency losses totaling $10 thousand and foreign currency gains totaling $16 thousand, respectively, which are included in other income, net for each of the reporting years. Investment in securities:Purchased securities Purchased securities are generally not registered for public sale and are carried at cost. Such securities are adjusted to fair value if the fair value is less than the carrying value and such impairment is deemed by the Managing Member to be other than temporary. Factors considered by the Managing Member in determining fair value include, but are not limited to, available financial information, the issuer’s ability to meet its current obligations and indications of the issuer’s subsequent ability to raise capital. There was no incremental impairment to investment securities at December 31, 2011. Year-to-date, the Company had previously recorded fair value adjustments totaling $41 thousand which reduced the cost basis of certain investments deemed impaired at March 31, 2011. Such investment securities were disposed of during the second quarter of 2011. No impairment was recorded at December 31, 2010. During 2011, the Company recognized $11 thousand of losses on sales and dispositions of investment securities. By comparison, there were no investment securities sold or disposed of during the prior year. Warrants Warrants owned by the Company are not registered for public sale, but are considered derivatives and are carried at an estimated fair value on the balance sheet at the end of the year, as determined by the Managing Member. At December 31, 2011 and 2010, the Managing Member estimated the fair value of the warrants to be nominal in amount. During 2011, the Company recognized an approximate $101 thousand gain on the net exercise of warrants. By comparison, there was no warrant activity that generated a gain or loss during the prior year. Unearned operating lease income:The Company records prepayments on operating leases as a liability, unearned operating lease income. The liability is recorded when the prepayments are received and recognized as operating lease revenue ratably over the period to which the prepayments relate. Income taxes:The Company is treated as a partnership for federal income tax purposes. Pursuant to the provisions of Section 701 of the Internal Revenue Code, a partnership is not subject to federal income taxes. Accordingly, the Company has provided current income taxes for only those states which levy income taxes on partnerships. For the years ended December 31, 2011 and 2010, the related provision for state income taxes was approximately $110 thousand and $50 thousand, respectively. The Company does not have any entity level uncertain tax positions. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions and is generally subject to examination by U.S. federal (or state and local) income tax authorities for three years from the filing of a tax return. The tax bases of the Company’s net assets and liabilities vary from the amounts presented in these financial statements at December 31, 2011 and 2010 as follows (in thousands):
The primary differences between the tax bases of net assets and the amounts recorded in the financial statements are the result of differences in accounting for syndication costs and differences between the depreciation methods used in the financial statements and the Company’s tax returns. The following reconciles the net income reported in these financial statements to the income reported on the Company’s federal tax return (unaudited) for each of the years ended December 31, 2011 and 2010 (in thousands):
Other (expense) income, net:Other (expense) income, net consists of gains and losses on interest rate swap contracts and gains and losses on foreign exchange transactions. The table below details the Company’s other (expense) income, net for the years ended December 31, 2011 and 2010 (in thousands):
Per Unit data:Net income and distributions per Unit are based upon the weighted average number of Other Members’ Units outstanding during the period. Recent accounting pronouncements:In May 2011, the Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board (“IASB”) (collectively the “Boards”) issued Accounting Standards Update (“ASU”) No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 created a uniform framework for applying fair value measurement principles for companies around the world and clarified existing guidance in US GAAP. ASU 2011-04 is effective for the first reporting annual period beginning after December 15, 2011 and shall be applied prospectively. The Company anticipates that adoption of this update will not have a material impact on its financial position or results of operations. In April 2011, the FASB issued ASU No. 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” ASU 2011-02 clarifies guidance on a creditor’s evaluation of whether it has granted a concession to a borrower and a creditor’s evaluation of whether a borrower is experiencing financial difficulties. The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. In addition, an entity should disclose the information required by Accounting Standards Codification paragraphs 310-10-50-33 through 50-34, which was deferred by ASU 2011-01, for interim and annual periods beginning on or after June 15, 2011. The amendments in this update were adopted by the Company on July 1, 2011, and for purposes of measuring impairment, were applied retrospectively to January 1, 2011. The Company evaluated the guidance included in 2011-02 and has determined that it does not result in any new troubled debt restructurings that should be reported. In January 2011, the FASB issued ASU No. 2011-01, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.” ASU 2011-01 temporarily delays the effective date of the disclosures about troubled debt restructurings in Update 2010-20 for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. The guidance became effective for the first interim or annual period beginning on or after June 15, 2011, and was applied retrospectively to the beginning of the annual period of adoption. The adoption of this update did not have a material effect on the Company’s financial position or results of operations. |