UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
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For the quarterly period ended September 30, 2015 |
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o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
(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.) |
The Transamerica Pyramid, 600 Montgomery Street, 9th Floor, San Francisco, California 94111
(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 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes o No x
The number of Limited Liability Company Units outstanding as of October 31, 2015 was 12,055,016.
None.
2
Item 1. Financial Statements (Unaudited).
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September 30, 2015 |
December 31, 2014 |
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(Unaudited) | ||||||||
ASSETS |
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Cash and cash equivalents | $ | 2,526 | $ | 4,633 | ||||
Accounts receivable, net of allowance for doubtful accounts of $0 at September 30, 2015 and $7 at December 31, 2014 | 499 | 564 | ||||||
Notes receivable, net of unearned interest income of $4 at September 30, 2015 and $22 at December 31, 2014 | 225 | 332 | ||||||
Prepaid expenses and other assets | 73 | 56 | ||||||
Investment in securities | 5 | 5 | ||||||
Fair value of warrants | 115 | 125 | ||||||
Investments in equipment and leases, net of accumulated depreciation of $25,072 at September 30, 2015 and $25,440 at December 31, 2014 | 12,538 | 15,256 | ||||||
Total assets | $ | 15,981 | $ | 20,971 | ||||
LIABILITIES AND MEMBERS CAPITAL |
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Accounts payable and accrued liabilities: |
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Managing Member | $ | 47 | $ | 175 | ||||
Other | 180 | 207 | ||||||
Non-recourse debt | 4,957 | 8,537 | ||||||
Unearned operating lease income | 103 | 200 | ||||||
Total liabilities | 5,287 | 9,119 | ||||||
Commitments and contingencies |
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Members capital: |
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Managing Member | | | ||||||
Other Members | 10,694 | 11,852 | ||||||
Total Members capital | 10,694 | 11,852 | ||||||
Total liabilities and Members capital | $ | 15,981 | $ | 20,971 |
See accompanying notes.
3
ATEL CAPITAL EQUIPMENT FUND IX, LLC
STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2015 AND 2014
(in thousands, except for units and per unit data)
(Unaudited)
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Three Months Ended September 30, |
Nine Months Ended September 30, |
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2015 | 2014 | 2015 | 2014 | |||||||||||||
Revenues: |
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Leasing and lending activities: |
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Operating leases | $ | 938 | $ | 1,222 | $ | 3,094 | $ | 3,834 | ||||||||
Direct financing leases | 448 | 596 | 1,463 | 1,880 | ||||||||||||
Interest on notes receivable | 5 | 8 | 17 | 28 | ||||||||||||
Gain on sales of lease assets and early termination of notes receivable | 263 | 385 | 356 | 1,466 | ||||||||||||
Unrealized loss on fair valuation of warrants | (30 | ) | (4 | ) | (10 | ) | (96 | ) | ||||||||
Gain on sales or dispositions of investment in securities | | | | 44 | ||||||||||||
Other revenue | 36 | 12 | 61 | 80 | ||||||||||||
Total revenues | 1,660 | 2,219 | 4,981 | 7,236 | ||||||||||||
Expenses: |
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Depreciation of operating lease assets | 197 | 361 | 772 | 1,110 | ||||||||||||
Asset management fees to Managing Member and/or affiliates | 74 | 78 | 233 | 244 | ||||||||||||
Cost reimbursements to Managing Member and/or affiliates | 124 | 137 | 419 | 418 | ||||||||||||
(Reversal of) provision for credit losses | (28 | ) | 2 | (7 | ) | | ||||||||||
Impairment losses | | 37 | | 37 | ||||||||||||
Amortization of initial direct costs | 2 | 2 | 5 | 8 | ||||||||||||
Other management fees | 7 | 7 | 20 | 21 | ||||||||||||
Interest expense | 88 | 166 | 324 | 554 | ||||||||||||
Professional fees | 24 | 21 | 109 | 102 | ||||||||||||
Outside services | 14 | 10 | 46 | 44 | ||||||||||||
Insurance | 14 | 14 | 39 | 40 | ||||||||||||
Marine vessel maintenance and other operating costs | | | 1 | | ||||||||||||
Railcar and equipment maintenance | 25 | 37 | 97 | 115 | ||||||||||||
Franchise fees and state taxes | 13 | 16 | 56 | 18 | ||||||||||||
Other | 43 | 37 | 113 | 121 | ||||||||||||
Total operating expenses | 597 | 925 | 2,227 | 2,832 | ||||||||||||
Other expense, net | (2 | ) | (1 | ) | (3 | ) | (4 | ) | ||||||||
Net income | $ | 1,061 | $ | 1,293 | $ | 2,751 | $ | 4,400 | ||||||||
Net income: |
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Managing Member | $ | 98 | $ | 98 | $ | 293 | $ | 343 | ||||||||
Other Members | 963 | 1,195 | 2,458 | 4,057 | ||||||||||||
$ | 1,061 | $ | 1,293 | $ | 2,751 | $ | 4,400 | |||||||||
Net income per Limited Liability Company Unit (Other Members) | $ | 0.08 | $ | 0.10 | $ | 0.20 | $ | 0.34 | ||||||||
Weighted average number of Units outstanding | 12,055,016 | 12,055,016 | 12,055,016 | 12,055,016 |
See accompanying notes.
4
ATEL CAPITAL EQUIPMENT FUND IX, LLC
STATEMENTS OF CHANGES IN MEMBERS CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2014
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2015
(in thousands, except for units and per unit data)
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Other Members | Managing Member | Total | ||||||||||||||
Units | Amount | |||||||||||||||
Balance December 31, 2013 | 12,055,016 | $ | 12,347 | $ | | $ | 12,347 | |||||||||
Distributions to Other Members ($0.45 per Unit) | | (5,425 | ) | | (5,425 | ) | ||||||||||
Distributions to Managing Member | | | (440 | ) | (440 | ) | ||||||||||
Net income | | 4,930 | 440 | 5,370 | ||||||||||||
Balance December 31, 2014 | 12,055,016 | 11,852 | | 11,852 | ||||||||||||
Distributions to Other Members ($0.30 per Unit) | | (3,616 | ) | | (3,616 | ) | ||||||||||
Distributions to Managing Member | | | (293 | ) | (293 | ) | ||||||||||
Net income | | 2,458 | 293 | 2,751 | ||||||||||||
Balance September 30, 2015 (Unaudited) | 12,055,016 | $ | 10,694 | $ | | $ | 10,694 |
See accompanying notes.
5
ATEL CAPITAL EQUIPMENT FUND IX, LLC
STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2015 AND 2014
(in thousands)
(Unaudited)
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Three Months Ended September 30, |
Nine Months Ended September 30, |
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2015 | 2014 | 2015 | 2014 | |||||||||||||
Operating activities: |
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Net income | $ | 1,061 | $ | 1,293 | $ | 2,751 | $ | 4,400 | ||||||||
Adjustment to reconcile net income to cash provided by operating activities: |
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Gain on sales of lease assets and early termination of notes receivable | (263 | ) | (385 | ) | (356 | ) | (1,466 | ) | ||||||||
Gain on sales or dispositions of investment in securities | | | | (44 | ) | |||||||||||
Unrealized loss on fair valuation of warrants | 30 | 4 | 10 | 96 | ||||||||||||
Depreciation of operating lease assets | 197 | 361 | 772 | 1,110 | ||||||||||||
Amortization of initial direct costs | 2 | 2 | 5 | 8 | ||||||||||||
(Reversal of) provision for credit losses | (28 | ) | 2 | (7 | ) | | ||||||||||
Impairment losses | | 37 | | 37 | ||||||||||||
Changes in operating assets and liabilities: |
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Accounts receivable | 61 | 11 | 72 | 51 | ||||||||||||
Prepaid expenses and other assets | (23 | ) | (9 | ) | (17 | ) | (2 | ) | ||||||||
Accounts payable, Managing Member | (6 | ) | (1 | ) | (128 | ) | 7 | |||||||||
Accounts payable, other | 3 | 16 | (27 | ) | (93 | ) | ||||||||||
Unearned operating lease income | (39 | ) | 2 | (97 | ) | (51 | ) | |||||||||
Net cash provided by operating activities | 995 | 1,333 | 2,978 | 4,053 | ||||||||||||
Investing activities: |
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Proceeds from sales of lease assets and early termination of notes receivable | 307 | 395 | 420 | 2,536 | ||||||||||||
Proceeds from sales or dispositions of investment in securities | | 44 | | 44 | ||||||||||||
Principal payments received on direct financing leases |
664 | 518 | 1,877 | 1,460 | ||||||||||||
Principal payments received on notes receivable | 36 | 47 | 107 | 146 | ||||||||||||
Net cash provided by investing activities | 1,007 | 1,004 | 2,404 | 4,186 | ||||||||||||
Financing activities: |
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Repayments of non-recourse debt | (1,182 | ) | (1,151 | ) | (3,580 | ) | (3,398 | ) | ||||||||
Distributions to Other Members | (1,205 | ) | (1,206 | ) | (3,616 | ) | (4,220 | ) | ||||||||
Distributions to Managing Member | (98 | ) | (98 | ) | (293 | ) | (343 | ) | ||||||||
Net cash used in financing activities | (2,485 | ) | (2,455 | ) | (7,489 | ) | (7,961 | ) | ||||||||
Net (decrease) increase in cash and cash equivalents | (483 | ) | (118 | ) | (2,107 | ) | 278 | |||||||||
Cash and cash equivalents at beginning of period | 3,009 | 5,134 | 4,633 | 4,738 | ||||||||||||
Cash and cash equivalents at end of period | $ | 2,526 | $ | 5,016 | $ | 2,526 | $ | 5,016 | ||||||||
Supplemental disclosures of cash flow information: |
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Cash paid during the period for interest | $ | 95 | $ | 172 | $ | 344 | $ | 572 | ||||||||
Cash paid during the period for taxes | $ | | $ | 3 | $ | 70 | $ | 59 |
See accompanying notes.
6
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 or Manager 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 September 30, 2015, 12,055,016 Units remain issued and outstanding.
The Companys principal objectives are 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 6). The Company is required to maintain reasonable cash reserves for working capital, the repurchase of Units and contingencies. The repurchase of Units is solely at the discretion of AFS.
These unaudited interim financial statements should be read in conjunction with the financial statements and notes thereto contained in the report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission.
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q as mandated by the Securities and Exchange Commission. The unaudited interim financial statements reflect all adjustments which are, in the opinion of the Managing Member, necessary for a fair statement of financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results to be expected for the full year.
7
Certain prior period amounts may have been reclassified to conform to the current period presentation. These reclassifications had no significant impact on the reported financial position or results of operations.
Footnote and tabular amounts are presented in thousands, except as to Units and per Unit data.
In preparing the accompanying unaudited financial statements, the Managing Member has reviewed events that have occurred after September 30, 2015, up until the issuance of the financial statements. No events were noted which would require additional disclosure in the footnotes to the financial statements.
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.
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 primary geographic regions in which the Company seeks leasing opportunities are North America and Europe. The table below summarizes geographic information relating to the sources, by nation, of the Companys total revenues for the nine months ended September 30, 2015 and 2014 and long-lived tangible assets as of September 30, 2015 and December 31, 2014 (dollars in thousands):
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For The Nine Months Ended September 30, | ||||||||||||||||
2015 | % of Total | 2014 | % of Total | |||||||||||||
Revenue |
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United States | $ | 4,950 | 99 | % | $ | 7,161 | 99 | % | ||||||||
United Kingdom | 31 | 1 | % | 75 | 1 | % | ||||||||||
Total International | 31 | 1 | % | 75 | 1 | % | ||||||||||
Total | $ | 4,981 | 100 | % | $ | 7,236 | 100 | % |
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As of September 30, | As of December 31, | |||||||||||||||
2015 | % of Total | 2014 | % of Total | |||||||||||||
Long-lived assets |
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United States | $ | 12,504 | 100 | % | $ | 15,222 | 100 | % | ||||||||
United Kingdom | 34 | 0 | % | 34 | 0 | % | ||||||||||
Total International | 34 | 0 | % | 34 | 0 | % | ||||||||||
Total | $ | 12,538 | 100 | % | $ | 15,256 | 100 | % |
8
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 were neither impaired securities at September 30, 2015 and December 31, 2014 nor investment securities sold or disposed of during the three and nine months ended September 30, 2015 and 2014.
Warrants owned by the Company are not registered for public sale, but are considered derivatives and are reflected at an estimated fair value on the balance sheet as determined by the Managing Member. During the three months ended September 30, 2015 and 2014, the Company recorded unrealized losses of $30 thousand and $4 thousand, respectively, on the fair valuation of its warrant holdings. During the nine months ended September 30, 2015 and 2014, the Company recorded unrealized losses of $10 thousand and of $96 thousand, respectively, on the fair valuation of its warrant holdings. As of September 30, 2015 and December 31, 2014, the estimated fair value of the Companys portfolio of warrants amounted to $115 thousand and $125 thousand, respectively. A gain of $44 thousand was recognized on the net exercise of certain warrants during the second quarter of 2014. Such amount also represents total gain for the first nine months of 2014. By comparison, there was no exercise of warrants, net or otherwise, during the first nine months of 2015.
Other income (expense), net consisted solely of net gains and losses on foreign exchange transactions.
Net income and distributions per Unit are based upon the weighted average number of Other Members Units outstanding during the period.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. On July 9, 2015, the FASB approved the deferral of the effective date of ASU 2014-09 by one year and in August 2015, issued Revenue from Contracts from Customers (Topic 606): Deferral of the Effective Date (ASU 2015-14). ASU 2015-14 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods within that reporting period. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company evaluated the impact of the new standard on its financial statements and has determined that such impact is virtually non-existent as the new revenue guideline does not affect revenues from leases and loans, which comprise the majority of the Companys revenues.
9
In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements Going Concern (subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern (ASU-2014-15). The new standard provides guidance relative to management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. Management does not expect the adoption of ASU 2014-15 to have a material impact on the Companys financial statements or related disclosures.
The Company has had various notes receivable from borrowers who have financed the purchase of equipment through the Company. The notes were secured by the equipment financed. As of September 30, 2015 and December 31, 2014, only one note receivable remained unsettled with a net outstanding balance of $225 thousand and $332 thousand, respectively. Such note bears an annual interest rate of 8.5% and matures in 2016.
The Companys remaining note receivable was not deemed impaired or in non-accrual status as of September 30, 2015 and December 31, 2014.
As of September 30, 2015, the minimum future payments receivable are as follows (in thousands):
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Three months ending December 31, 2015 | $ | 41 | ||
Year ending December 31, 2016 | 188 | |||
229 | ||||
Less: portion representing unearned interest income | (4 | ) | ||
Notes receivable, net | $ | 225 |
The Companys allowance 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 |
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Notes Receivable | Finance Leases | Operating Leases | Notes Receivable | Finance Leases | ||||||||||||||||||||
Balance December 31, 2013 | $ | | $ | | $ | 3 | $ | | $ | | $ | 3 | ||||||||||||
Provision | | | 4 | | | 4 | ||||||||||||||||||
Balance December 31, 2014 | | | 7 | | | 7 | ||||||||||||||||||
Reversal of provision | | | (7 | ) | | | (7 | ) | ||||||||||||||||
Balance September 30, 2015 | $ | | $ | | $ | | $ | | $ | | $ | |
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.
10
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 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 September 30, 2015 and December 31, 2014, 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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September 30, 2015 | 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 | $ | 225 | $ | 6,9271 | $ | 7,152 | ||||||
Ending balance: individually evaluated for impairment | $ | 225 | $ | 6,927 | $ | 7,152 | ||||||
Ending balance: collectively evaluated for impairment | $ | | $ | | $ | | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | | $ | | $ | |
1 | Includes $2 of unamortized initial direct costs |
11
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December 31, 2014 | 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 | $ | 332 | $ | 8,8072 | $ | 9,139 | ||||||
Ending balance: individually evaluated for impairment | $ | 332 | $ | 8,807 | $ | 9,139 | ||||||
Ending balance: collectively evaluated for impairment | $ | | $ | | $ | | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | | $ | | $ | |
2 | Includes $5 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.
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.
12
At September 30, 2015 and December 31, 2014, 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 | |||||||||||||||
September 30, 2015 | December 31, 2014 | September 30, 2015 | December 31, 2014 | |||||||||||||
Pass | $ | 225 | $ | 332 | $ | 6,925 | $ | 8,802 | ||||||||
Special mention | | | | | ||||||||||||
Substandard | | | | | ||||||||||||
Doubtful | | | | | ||||||||||||
Total | $ | 225 | $ | 332 | $ | 6,925 | $ | 8,802 |
At September 30, 2015 and December 31, 2014, the investment in financing receivables is aged as follows (in thousands):
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September 30, 2015 | 31 60 Days Past Due |
61 90 Days Past Due |
Greater Than 90 Days |
Total Past Due |
Current | Total Financing Receivables |
Recorded Investment > 90 Days and Accruing |
|||||||||||||||||||||
Notes receivable | $ | | $ | | $ | | $ | | $ | 225 | $ | 225 | $ | | ||||||||||||||
Finance leases | | | | | 6,925 | 6,925 | | |||||||||||||||||||||
Total | $ | | $ | | $ | | $ | | $ | 7,150 | $ | 7,150 | $ | |
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December 31, 2014 | 31 60 Days Past Due |
61 90 Days Past Due |
Greater Than 90 Days |
Total Past Due |
Current | Total Financing Receivables |
Recorded Investment > 90 Days and Accruing |
|||||||||||||||||||||
Notes receivable | $ | | $ | | $ | | $ | | $ | 332 | $ | 332 | $ | | ||||||||||||||
Finance leases | | | | | 8,802 | 8,802 | | |||||||||||||||||||||
Total | $ | | $ | | $ | | $ | | $ | 9,134 | $ | 9,134 | $ | |
The Company had neither financing receivables in non-accrual status nor impaired financing receivables at both September 30, 2015 and December 31, 2014.
The Companys investment in equipment leases consists of the following (in thousands):
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Balance December 31, 2014 |
Reclassifications, Additions/ Dispositions |
Depreciation/ Amortization Expense or Amortization of Leases |
Balance September 30, 2015 |
|||||||||||||
Net investment in operating leases | $ | 6,196 | $ | (696 | ) | $ | (772 | ) | $ | 4,728 | ||||||
Net investment in direct financing leases | 8,802 | | (1,877 | ) | 6,925 | |||||||||||
Assets held for sale or lease, net | 250 | 632 | | 882 | ||||||||||||
Initial direct costs, net of accumulated amortization of $83 at September 30, 2015 and $90 at December 31, 2014 | 8 | | (5 | ) | 3 | |||||||||||
Total | $ | 15,256 | $ | (64 | ) | $ | (2,654 | ) | $ | 12,538 |
13
Recorded values of the Companys leased asset portfolio are reviewed each quarter to confirm the reasonableness of established residual values and to determine whether there is indication that an asset impairment might have taken place. The Company uses a variety of sources and considers many factors in evaluating whether the respective book values of its assets are appropriate. In addition, the company may direct a residual value review at any time if it becomes aware of issues regarding the ability of a lessee to continue to make payments on its lease contract. An impairment loss is measured and recognized only if the estimated undiscounted future cash flows of the asset are less than their net book value. The estimated undiscounted future cash flows are the sum of the residual value of the asset at the end of the assets lease contract and undiscounted future rents from the existing lease contract. The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the marketplace are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. Impairment is measured as the difference between the fair value (as determined by a valuation method using discounted estimated future cash flows, third party appraisals or comparable sales of similar assets as applicable based on asset type) of the asset and its carrying value on the measurement date. Upward adjustments for impairments recognized in prior periods are not made in any circumstances. As a result of these reviews, management determined that no impairment losses existed during the three and nine months ended September 30, 2015 and 2014.
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 $197 thousand and $361 thousand for the respective three months ended September 30, 2015 and 2014, and was $772 thousand and $1.1 million for the respective nine months ended September 30, 2015 and 2014. Initial direct costs amortization expense related to the Companys operating and direct financing leases totaled $2 thousand for each of the respective three month periods ended September 30, 2015 and 2014, and $5 thousand and $8 thousand for the respective nine month periods ended September 30, 2015 and 2014.
All of the leased property was acquired in years beginning with 2002 through 2010.
Property on operating leases consists of the following (in thousands):
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Balance December 31, 2014 |
Additions | Reclassifications or Dispositions |
Balance September 30, 2015 |
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Transportation, rail | $ | 12,531 | $ | | $ | (40 | ) | $ | 12,491 | |||||||
Marine vessels | 11,200 | | (1,500 | ) | 9,700 | |||||||||||
Transportation, other | 3,932 | | (102 | ) | 3,830 | |||||||||||
Materials handling | 823 | | (173 | ) | 650 | |||||||||||
Manufacturing | 1,417 | | (889 | ) | 528 | |||||||||||
Construction | 565 | | | 565 | ||||||||||||
Agriculture | 1,151 | | (1,151 | ) | | |||||||||||
Other | 16 | | | 16 | ||||||||||||
31,635 | | (3,855 | ) | 27,780 | ||||||||||||
Less accumulated depreciation | (25,439 | ) | (772 | ) | 3,159 | (23,052 | ) | |||||||||
Total | $ | 6,196 | $ | (772 | ) | $ | (696 | ) | $ | 4,728 |
14
The average estimated residual value for assets on operating leases was 16% of the assets original cost at both September 30, 2015 and December 31, 2014. There were no operating leases placed in non-accrual status as of the same dates.
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 and totaled $20 thousand and $51 thousand for the respective three months ended September 30, 2015 and 2014, and $75 thousand and $148 thousand for the respective nine months ended September 30, 2015 and 2014.
As of September 30, 2015 and December 31, 2014, investment in direct financing leases consists of materials handling and mining equipment. The following lists the components of the Companys investment in direct financing leases as of September 30, 2015 and December 31, 2014 (in thousands):
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September 30, 2015 |
December 31, 2014 |
|||||||
Total minimum lease payments receivable | $ | 4,800 | $ | 8,140 | ||||
Estimated residual values of leased equipment (unguaranteed) | 3,543 | 3,543 | ||||||
Investment in direct financing leases | 8,343 | 11,683 | ||||||
Less unearned income | (1,418 | ) | (2,881 | ) | ||||
Net investment in direct financing leases | $ | 6,925 | $ | 8,802 |
There was no investment in direct financing lease assets in non-accrual status at September 30, 2015 and December 31, 2014.
At September 30, 2015, the aggregate amounts of future minimum lease payments receivable are as follows (in thousands):
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Operating Leases |
Direct Financing Leases |
Total | ||||||||||
Three months ending December 31, 2015 | $ | 488 | $ | 1,113 | $ | 1,601 | ||||||
Year ending December 31, 2016 | 1,609 | 3,686 | 5,295 | |||||||||
2017 | 1,289 | 1 | 1,290 | |||||||||
2018 | 544 | | 544 | |||||||||
2019 | 438 | | 438 | |||||||||
2020 | 118 | | 118 | |||||||||
$ | 4,486 | $ | 4,800 | $ | 9,286 |
15
The useful lives for each category of leases is reviewed at a minimum of once per quarter. As of September 30, 2015, the respective useful lives of each category of lease assets in the Companys portfolio are as follows (in years):
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Equipment category | Useful Life | |||
Transportation, rail | 35 40 | |||
Mining | 30 40 | |||
Marine vessels | 20 30 | |||
Manufacturing | 10 15 | |||
Agriculture | 7 10 | |||
Construction | 7 10 | |||
Materials handling | 7 10 | |||
Transportation, other | 7 10 |
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 would be liable for certain future costs to be incurred by AFS to manage the administrative services provided to the Company.
Each of ATEL Leasing Corporation (ALC) and AFS is a wholly-owned subsidiary of ATEL Capital Group and performs services for the Company. Acquisition services, equipment management, lease administration and asset disposition services are performed by ALC; investor relations, communications 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 managed 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 September 30, 2015, the Company has not exceeded the annual and/or cumulative limitations discussed above.
During the three and nine months ended September 30, 2015 and 2014, AFS and/or affiliates earned fees and billed for reimbursements of costs and expenses pursuant to the Operating Agreement as follows (in thousands):
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Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Costs reimbursed to Managing Member and/or affiliates | $ | 124 | $ | 137 | $ | 419 | $ | 418 | ||||||||
Asset management fees to Managing Member and/or affiliates | 74 | 78 | 233 | 244 | ||||||||||||
$ | 198 | $ | 215 | $ | 652 | $ | 662 |
16
At September 30, 2015, non-recourse debt consists of notes payable to financial institutions. The notes are due in monthly installments. Interest on the notes is at fixed rates ranging from 6.58% to 6.66%. The notes are secured by assignments of lease payments and pledges of assets. At September 30, 2015, future payments on direct financing leases totaled approximately $4.8 million over the remaining lease terms; and the carrying value of the pledged assets is $6.9 million. The notes mature from 2016 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 | ||||||||||
Three months ending December 31, 2015 | $ | 1,036 | $ | 76 | $ | 1,112 | ||||||
Year ending December 31, 2016 | 3,743 | 133 | 3,876 | |||||||||
2017 | 178 | 1 | 179 | |||||||||
$ | 4,957 | $ | 210 | $ | 5,167 |
At September 30, 2015, the Company had no commitments to purchase lease assets or fund investments in notes receivable.
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.
17
As of September 30, 2015 and December 31, 2014, 12,055,016 Units were issued and outstanding. The Company was authorized to issue up to 15,000,000 Units in addition to the Units issued to the initial Members (50 Units).
The Company has the right, exercisable at the Managers discretion, but not the obligation, to repurchase Units of a Unitholder who ceases to be a U.S. Citizen, for a price equal to 100% of the 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 investment less cumulative distributions made to the Unitholder with respect to the Units. All Units repurchased during a quarter are deemed to be repurchased effective the last day of the preceding quarter, and are not deemed to be outstanding during, or entitled to allocations of net income, net loss or distributions for the quarter in which such repurchase occurs.
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 during the three and nine months ended September 30, 2015 and 2014. The amounts allocated were determined to bring AFSs ending capital account balance to zero at the end of each period.
Distributions to the Other Members were as follows (in thousands, except as to Units and per Unit data):
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Three Months Ended September 30, |
Nine Months Ended September 30, |
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2015 | 2014 | 2015 | 2014 | |||||||||||||
Distributions declared | $ | 1,205 | $ | 1,206 | $ | 3,616 | $ | 4,220 | ||||||||
Weighted average number of Units outstanding | 12,055,016 | 12,055,016 | 12,055,016 | 12,055,016 | ||||||||||||
Weighted average distributions per Unit | $ | 0.10 | $ | 0.10 | $ | 0.30 | $ | 0.35 |
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.
18
At September 30, 2015 and December 31, 2014, only the Companys warrants were measured on a recurring basis. There was no non-recurring adjustment recorded during the three and nine months ended September 30, 2015. During the third quarter of 2014, the Company recorded non-recurring adjustments during to reflect the fair value of certain impaired off-lease assets, all of which were disposed of by December 31, 2014.
The Companys valuation policy is determined by members of the Asset Management, Credit and Accounting departments. Whenever possible, the policy is to obtain quoted market prices in active markets to estimate fair values for recognition and disclosure purposes. Where quoted market prices in active markets are not available, fair values are estimated using discounted cash flow analyses, broker quotes, information from third party remarketing agents, third party appraisals of collateral and/or other valuation techniques. These techniques are significantly affected by certain of the Companys assumptions, including discount rates and estimates of future cash flows. Potential taxes and other transaction costs are not considered in estimating fair values. As the Company is responsible for determining fair value, an analysis is performed on prices obtained from third parties. Such analysis is performed by asset management and credit department personnel who are familiar with the Companys investments in equipment, notes receivable and equity securities of venture companies. The analysis may include a periodic review of price fluctuations and validation of numbers obtained from a specific third party by reference to multiple representative sources.
The measurement methodologies are as follows:
Warrants owned by the Company are not registered for public sale, but are considered derivatives and are carried on the balance sheet at an estimated fair value at the end of the period. The valuation of the warrants was determined using a Black-Scholes formulation of value based upon the stock price(s), the exercise price(s), the volatility of comparable venture companies, and a risk free interest rate for the term(s) of the warrant exercise(s). As of September 30, 2015 and December 31, 2014, the calculated fair value of the Funds warrant portfolio approximated $115 thousand and $125 thousand, respectively. Such valuations are classified within Level 3 of the valuation hierarchy.
The following table reconciles the beginning and ending balances of the Companys Level 3 recurring assets (in thousands):
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Level 3 Assets |
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Balance at December 31, 2014 | $ | 125 | ||
Unrealized loss on warrants, net recorded during the period | (10 | ) | ||
Balance at September 30, 2015 | $ | 115 |
19
The following tables summarize the valuation techniques and significant unobservable inputs used for the Companys recurring fair value adjustments categorized as Level 3 in the fair value hierarchy at September 30, 2015 and December 31, 2014:
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September 30, 2015 | ||||||||
Name | Valuation Frequency |
Valuation Technique | Unobservable Inputs | Range of Input Values | ||||
Warrants | Recurring | Black-Scholes formulation | Stock price | $1.12 $3.70 | ||||
Exercise price | $0.65 $2.01 | |||||||
Time to maturity (in years) | 0.29 4.75 | |||||||
Risk-free interest rate | 0.00% 1.31% | |||||||
Annualized volatility | 13.88% 100.00% |
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December 31, 2014 | ||||||||
Name | Valuation Frequency |
Valuation Technique | Unobservable Inputs | Range of Input Values | ||||
Warrants | Recurring | Black-Scholes formulation | Stock price | $1.12 $4.48 | ||||
Exercise price | $0.65 $2.01 | |||||||
Time to maturity (in years) | 1.04 5.50 | |||||||
Risk-free interest rate | 0.25% 1.73% | |||||||
Annualized volatility | 16.01% 100.00% |
The Company had no fair value adjustments relative to impaired equipment during the three and nine months ended September 30, 2015. During the third quarter of 2014, the Company deemed certain off-lease equipment (assets) to be impaired and recorded fair value adjustments of $37 thousand to reduce the cost basis of the equipment. The aforementioned adjustments were non-recurring. Under the Fair Value Measurements Topic of the FASB Accounting Standards Codification, the fair values of such impaired 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. As of December 31, 2014, all impaired off-lease equipment was disposed of.
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.
The Company has determined the estimated fair value amounts by using market information and valuation methodologies that it considers appropriate and consistent with the fair value accounting guidance. Considerable judgment is required to interpret market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The recorded amounts of the Companys cash and cash equivalents approximate fair value because of the liquidity and short-term maturity of these instruments.
20
The fair value of the Companys notes receivable is generally estimated based upon various methodologies deployed by financial and credit management including, but not limited to, credit analysis, third party appraisal and/or discounted cash flow analysis based upon current market valuation techniques and market rates for similar types of lending arrangements, which may consider adjustments for impaired 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.
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 tables present 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 September 30, 2015 and December 31, 2014 (in thousands):
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Fair Value Measurements at September 30, 2015 | ||||||||||||||||||||
Carrying Amount |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Financial assets: |
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Cash and cash equivalents | $ | 2,526 | $ | 2,526 | $ | | $ | | $ | 2,526 | ||||||||||
Notes receivable, net | 225 | | | 225 | 225 | |||||||||||||||
Investment in securities | 5 | | | 5 | 5 | |||||||||||||||
Warrants | 115 | | | 115 | 115 | |||||||||||||||
Financial liabilities: |
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Non-recourse debt | 4,957 | | | 5,044 | 5,044 |
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Fair Value Measurements at December 31, 2014 | ||||||||||||||||||||
Carrying Amount |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Financial assets: |
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Cash and cash equivalents | $ | 4,633 | $ | 4,633 | $ | | $ | | $ | 4,633 | ||||||||||
Notes receivable, net | 332 | | | 332 | 332 | |||||||||||||||
Investment in securities | 5 | | | 5 | 5 | |||||||||||||||
Warrants | 125 | | | 125 | 125 | |||||||||||||||
Financial liabilities: |
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Non-recourse debt | 8,537 | | | 8,747 | 8,747 |
21
Statements contained in this Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this Form 10-Q, which are not historical facts, may be forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. In particular, economic recession and changes in general economic conditions, including, fluctuations in demand for equipment, lease rates, and interest rates, may result in delays in investment and reinvestment, delays in leasing, re-leasing, and disposition of equipment, and reduced returns on invested capital. The Companys performance is subject to risks relating to lessee defaults and the creditworthiness of its lessees. The Companys 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-Q. We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events, other than as required by law.
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, 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 Limited Liability Company Operating Agreement (Operating Agreement), the Company commenced liquidation phase activities subsequent to the end of the Reinvestment Period which ended on December 31, 2009. Periodic distributions will be paid at the discretion of the Managing Member.
The Company had net income of $1.1 million and $1.3 million for the three months ended September 30, 2015 and 2014, respectively. The results for the third quarter of 2015 reflect decreases in total revenues and total operating expenses when compared to the prior year period.
Total revenues for the third quarter of 2015 decreased by $559 thousand, or 25%, as compared to the prior year period. The net decline in total revenues was primarily a result of decreases in both operating lease and direct financing lease revenues, and gain on sales of lease assets and early termination of notes receivables, and a period over period increase in unrealized losses recorded on the Funds portfolio of warrants.
The reduction in operating lease revenues totaled $284 thousand and was mainly due to the impact of continued run-off and sales of lease assets as well as a reduction in usage-based rental income. Direct financing lease revenues decreased by $148 thousand largely due to run-off of the portfolio; and, gain on sales of lease assets and early termination of notes receivables declined by $122 thousand primarily as a result of lower volume and a change in the mix of assets sold.
22
The increase in unrealized losses recorded on the Funds portfolio of warrants further reduced revenues by $26 thousand. Such increase was attributable to the required periodic revaluation of the warrants in the Companys portfolio of investments. In this regard, the majority of the increase in unrealized losses is related to the decline in price of one publicly-traded portfolio company.
Total operating expenses for the third quarter of 2015 decreased by $328 thousand, or 35%, as compared to the prior year period. The net decline in operating expenses was primarily due to decreases in depreciation and interest expenses, impairment losses and the provision for credit losses.
Depreciation expense was reduced by $164 thousand largely due to continued run-off and sales of lease assets, and an increase in the number of assets that have been fully depreciated since September 30, 2014. Interest expense declined by $78 thousand primarily as a result of a $4.8 million net reduction in outstanding borrowings since September 30, 2014; and, impairment losses decreased by $37 thousand due to a prior year period fair value adjustment to reduce the fair value of certain off-lease equipment deemed impaired. There was no such adjustment during the current year period. Finally, the provision for credit losses was reduced by $30 thousand due to the receipt of delinquent amounts previously reserved.
The Company had net income of $2.8 million and $4.4 million for the nine months ended September 30, 2015 and 2014, respectively. The results for the first nine months of 2015 reflect decreases in total revenues and total operating expenses when compared to the prior year period.
Total revenues for the first nine months of 2015 decreased by $2.3 million, or 31%, as compared to the prior year period. The net reduction in total revenues was primarily due to decreases in gains recognized on sales of lease assets and early termination of notes receivable, operating lease revenues and direct financing lease revenues partially offset by a period over period decline in unrealized losses recorded on the Funds portfolio of warrants.
The decrease in gain on sales of lease assets and early termination of notes receivable totaled $1.1 million and was primarily due to a $938 thousand gain realized on the sale of two gas compressors during the prior year period. Operating lease revenues declined by $740 thousand mainly due to the impact of continued run-off and sales of lease assets; and, direct financing lease revenues was reduced by $417 thousand largely due to run-off of the portfolio.
Partially offsetting the aforementioned decreases in revenues was an $86 thousand decline in unrealized losses recorded on the Funds warrants. Such decrease was attributable to the required periodic revaluation of the warrants in the Companys portfolio of investments. In this regard, the majority of the reduction in unrealized losses is related to an increase in the Funds population of portfolio companies partially offset by the decline in price of one publicly-traded portfolio company.
Total operating expenses for the first nine months of 2015 decreased by $605 thousand, or 21%, as compared to the prior year period. The net decline in operating expenses was primarily due to decreases in depreciation and interest expenses.
Depreciation expense was reduced by $338 thousand largely due to continued run-off and sales of lease assets, and an increase in the number of assets that have been fully depreciated since September 30, 2014; while interest expense declined by $230 thousand primarily as a result of a $4.8 million net reduction in outstanding borrowings since September 30, 2014.
23
The Companys cash and cash equivalents totaled $2.5 million and $4.6 million at September 30, 2015 and December 31, 2014, respectively. The liquidity of the Company varies, increasing to the extent cash flows from leases and proceeds of asset sales exceed expenses and decreasing as distributions are made to the 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.
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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Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net cash provided by (used in): |
||||||||||||||||
Operating activities | $ | 995 | $ | 1,333 | $ | 2,978 | $ | 4,053 | ||||||||
Investing activities | 1,007 | 1,004 | 2,404 | 4,186 | ||||||||||||
Financing activities | (2,485 | ) | (2,455 | ) | (7,489 | ) | (7,961 | ) | ||||||||
Net (decrease) increase in cash and cash equivalents | $ | (483 | ) | $ | (118 | ) | $ | (2,107 | ) | $ | 278 |
During the three months ended September 30, 2015 and 2014, the Companys primary sources of liquidity were cash flows from its portfolio of operating and direct financing lease contracts, and its investments in notes receivable. In addition, the Company realized $307 thousand and $395 thousand of proceeds from sales or dispositions of equipment and early termination of notes receivable during the respective three months ended September 30, 2015 and 2014.
During the same respective periods, cash was primarily used to pay distributions to both Other Members and the Managing Member, and to pay down debt. Distributions paid to Members totaled $1.3 million and debt paid down totaled $1.2 million for each of the three month periods ended September 30, 2015 and 2014.
During the nine months ended September 30, 2015 and 2014, the Companys primary sources of liquidity were cash flows from its portfolio of operating and direct financing lease contracts, and its investments in notes receivable. In addition, the Company realized $420 thousand and $2.5 million of proceeds from sales or dispositions of equipment and early termination of notes receivable during the respective nine months ended September 30, 2015 and 2014.
During the same respective periods, cash was primarily used to pay distributions to both Other Members and the Managing Member, and to pay down debt. Distributions paid to Members totaled $3.9 million and $4.6 million for the respective nine month periods ended September 30, 2015 and 2014; while cash used to pay down debt totaled $3.6 million and $3.4 million, respectively.
24
As of September 30, 2015 and December 31, 2014, the Company had non-recourse long-term debt totaling $5.0 million and $8.5 million, respectively. 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 7 in Item 1. Financial Statements.
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.
At September 30, 2015, the Company had no commitments to purchase lease assets or fund investments in notes receivable.
None.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. On July 9, 2015, the FASB approved the deferral of the effective date of ASU 2014-09 by one year and in August 2015, issued Revenue from Contracts from Customers (Topic 606): Deferral of the Effective Date (ASU 2015-14). ASU 2015-14 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods within that reporting period. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company evaluated the impact of the new standard on its financial statements and has determined that such impact is virtually non-existent as the new revenue guideline does not affect revenues from leases and loans, which comprise the majority of the Companys revenues.
In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements Going Concern (subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern (ASU-2014-15). The new standard provides guidance relative to management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. Management does not expect the adoption of ASU 2014-15 to have a material impact on the Companys financial statements or related disclosures.
25
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates, which are based upon historical experiences, market trends and financial forecasts, and upon various other assumptions that management believes to be reasonable under the circumstances and at that certain point in time. Actual results may differ, significantly at times, from these estimates under different assumptions or conditions.
The Companys critical accounting policies are described in its Annual Report on Form 10-K for the year ended December 31, 2014. There have been no material changes to the Companys critical accounting policies since December 31, 2014.
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) and 15d-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.
There were no changes in the Managing Members internal control over financial reporting, as it is applicable to the Company, during the quarter ended September 30, 2015 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.
26
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.
None.
None.
Not Applicable.
None.
Documents filed as a part of this report:
1. | Financial Statement Schedules |
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
2. | Other Exhibits |
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31.1 | Certification of Dean L. Cash | |
31.2 | Certification of Paritosh K. Choksi | |
32.1 | Certification Pursuant to 18 U.S.C. section 1350 of Dean L. Cash | |
32.2 | Certification Pursuant to 18 U.S.C. section 1350 of Paritosh K. Choksi | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
27
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 12, 2015
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By: ATEL Financial Services, LLC | ||||
By: | /s/ Dean L. Cash![]() Dean L. Cash President and Chief Executive Officer of ATEL Financial Services, LLC (Managing Member) |
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By: | /s/ Paritosh K. Choksi![]() Paritosh K. Choksi Executive Vice President and Chief Financial Officer and Chief Operating Officer of ATEL Financial Services, LLC (Managing Member) |
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By: | /s/ Samuel Schussler![]() Samuel Schussler Vice President and Chief Accounting Officer of ATEL Financial Services, LLC (Managing Member) |
28
Exhibit 31.1
I, Dean L. Cash, certify that:
1. | I have reviewed this quarterly report on Form 10-Q 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: November 12, 2015
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/s/ Dean L. Cash![]() 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 quarterly report on Form 10-Q 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: November 12, 2015
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/s/ Paritosh K. Choksi![]() Paritosh K. Choksi Executive Vice President and Chief Financial Officer and Chief Operating Officer of ATEL Financial Services, LLC (Managing Member) |
Exhibit 32.1
In connection with the Quarterly Report of ATEL Capital Equipment Fund IX, LLC (the Company) on Form 10-Q for the period ended September 30, 2015 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: November 12, 2015
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/s/ Dean L. Cash![]() 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 Quarterly Report of ATEL Capital Equipment Fund IX, LLC (the Company) on Form 10-Q for the period ended September 30, 2015 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: November 12, 2015
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/s/ Paritosh K. Choksi![]() Paritosh K. Choksi Executive Vice President and Chief Financial Officer and Chief Operating Officer of ATEL Financial Services, LLC (Managing Member) |
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.
Members' Capital (Narrative) (Details) - shares |
9 Months Ended | ||
---|---|---|---|
Sep. 30, 2015 |
Dec. 31, 2014 |
Dec. 31, 2013 |
|
Other Members Capital Account [Line Items] | |||
Members capital account, units issued | 12,055,016 | 12,055,016 | |
Members capital account, units outstanding | 12,055,016 | 12,055,016 | |
Potential repurchase price of Units as percentage of holder's capital account | 100.00% | ||
Other Members [Member] | |||
Other Members Capital Account [Line Items] | |||
Members capital account, units outstanding | 12,055,016 | 12,055,016 | 12,055,016 |
Members capital account, units authorized | 15,000,000 | 15,000,000 | |
Allocation of net income or net losses | 92.50% | ||
Managing Member [Member] | |||
Other Members Capital Account [Line Items] | |||
Members capital account, units issued | 50 | 50 | |
Allocation of net income or net losses | 7.50% |
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