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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. |
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For the transition period from to |
(Exact name of registrant as specified in its charter)
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California | 20-1357935 | |
(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 5,209,307.
None.
ATEL Capital Equipment Fund XI, LLC (the Company or the Fund) was formed under the laws of the State of California on June 25, 2004. The Company was formed for the purpose of acquiring equipment to engage in equipment leasing, lending and sales activities. Also, from time to time, the Company may purchase securities of its borrowers or receive warrants to purchase securities in connection with its lending arrangements. The Managing Member of the Company is ATEL Financial Services, LLC (AFS), a California limited liability company. The Company may continue until December 31, 2025. Each Members personal liability for obligations of the Company generally will be limited to the amount of their respective contributions and rights to undistributed profits and assets of the Company.
The Company conducted a public offering of 15,000,000 Limited Liability Company Units (Units), at a price of $10 per Unit. On May 31, 2005, subscriptions for the minimum number of Units (120,000, representing $1.2 million) had been received and AFS requested that the subscriptions be released to the Company. On that date, the Company commenced operations in its primary business (acquiring equipment to engage in equipment leasing, lending and sales activities). As of July 13, 2005, the Company had received subscriptions for 958,274 Units ($9.6 million), thus exceeding the $7.5 million minimum requirement for Pennsylvania, and AFS requested that the remaining funds in escrow (from Pennsylvania investors) be released to the Company. The Company terminated sales of Units effective April 30, 2006. Life-to-date net contributions through June 2010 totaled $52.2 million, consisting of approximately $52.8 million in gross contributions from Other Members purchasing Units under the public offering less rescissions and repurchases (net of distributions paid and allocated syndication costs, as applicable) of $636 thousand. As of December 31, 2011, 5,209,307 Units were 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 ends December 31, 2012, and (iii) provides additional distributions following the Reinvestment Period and until all equipment has been sold. The Company is governed by its Limited Liability Company Operating Agreement (Operating Agreement), as amended.
The Company, or AFS on behalf of the Company, has incurred costs in connection with the organization, registration and issuance of the Limited Liability Company Units (see Note 7 to the financial statements included in Item 8, Financial Statements and Supplementary Data of this report). The amount of such costs to be borne by the Company is limited by certain provisions of the Companys Operating Agreement. The Company will pay AFS and affiliates of AFS substantial fees which may result in a conflict of interest. The Company will pay substantial fees to AFS and its affiliates before distributions are paid to investors even if the Company does not produce profits. Therefore, the financial position of the Company could change significantly.
The Company is in its acquisition phase and is making distributions on a monthly and quarterly basis. Periodic distributions commenced in June 2005.
The Company has acquired and intends to acquire various types of new and used equipment subject to leases and to make loans secured by equipment acquired by its borrowers. The Companys investment objective is to acquire investments primarily in low-technology, low-obsolescence equipment such as materials handling equipment, manufacturing equipment, mining equipment, and transportation equipment. A portion of the portfolio will include some more technology-dependent equipment such as certain types of communications equipment, medical equipment, manufacturing equipment and office equipment.
The Company only purchases equipment under pre-existing leases or for which a lease will be entered into concurrently at the time of the purchase. Through December 31, 2011, the Company had purchased equipment with a total acquisition price of $67.5 million. The Company had also loaned $14.5 million for notes receivable secured by various assets.
1
The Companys objective is to lease a minimum of 75% of the equipment (by cost), as of the date of the final commitment of its proceeds from the sale of Units, to lessees that the Manager deems to be high quality corporate credits, of which at least half of the high quality corporate credits satisfying the 75% minimum requirement will have either an average credit rating by Moodys Investors Service, Inc. of Baa or better, or the credit equivalent as determined by the Manager, with the average rating weighted to account for the original equipment cost for each item leased; and the balance will be public and private corporations with substantial revenues and histories of profitable operations, as well as established hospitals with histories of profitability or municipalities. The remaining 25% of the initial equipment portfolio may include assets financed for companies which, although deemed creditworthy by the Manager, would not satisfy the specific credit criteria for the portfolio described above. Included in this 25% of the portfolio may be one or more growth capital financing investments. No more than 20% of the initial portfolio, by cost, will consist of these growth capital financing investments.
During 2011 and 2010, certain lessees generated significant portions (defined as 10% or more) of the Companys total leasing and lending revenues as follows:
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Percentage of Total Leasing and Lending Revenues |
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Lessee | Type of Equipment | 2011 | 2010 | |||||||||
Union Pacific | Transportation | 20 | % | 19 | % | |||||||
New NGC, Inc. | Materials handling | 13 | % | 17 | % | |||||||
International Paper Co. | Materials handling | * | 10 | % | ||||||||
East Midlands Ambulance Service NHS Trust | Transportation | * | 10 | % |
* | Less than 10% |
The above percentages are not expected to be comparable in future periods.
The equipment leasing industry is highly competitive. Equipment manufacturers, corporations, partnerships and others offer users an alternative to the purchase of most types of equipment with payment terms that vary widely depending on the lease term, type of equipment and creditworthiness of the lessee. The ability of the Company to keep the equipment leased and/or operating and the terms of the acquisitions, leases and dispositions of equipment depends on various factors (many of which are not in the control of AFS or the Company), such as general economic conditions, including the effects of inflation or recession, and fluctuations in supply and demand for various types of equipment resulting from, among other things, technological and economic obsolescence.
AFS will use its best efforts to diversify lessees by geography and industry and to maintain an appropriate balance and diversity in the types of equipment acquired and the types of leases entered into by the Company, and will apply the following policies: (i) AFS will seek to limit the amount invested in equipment leased to any single lessee to not more than 20% of the aggregate purchase price of equipment owned at any time during the reinvestment period following investment of the initial offering proceeds; (ii) in no event will the Companys equity investment in equipment leased to a single lessee exceed an amount equal to 20% of the maximum capital from the sale of Units (or $30 million); (iii) when all the offering proceeds are committed to equipment and all permanent debt has been put in place, at least a majority of the equipment, based on the aggregate purchase price, will be subject to leases with scheduled lease payments returning at least 90% of the purchase price of the equipment; and (iv) AFS will seek to invest not more than 20% of the aggregate purchase price of equipment in equipment acquired from a single manufacturer. However, this last limitation is a general guideline only, and the Company may acquire equipment from a single manufacturer in excess of the stated percentage during the offering period and before the offering proceeds are fully invested, or if AFS deems such a course of action to be in the Companys best interest.
The primary geographic regions in which the Company seeks leasing and financing opportunities are North America and Europe. The table below summarizes geographic information relating to the sources, by region, of the Companys total revenues for the years ended December 31, 2011 and 2010:
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Geographic area | 2011 | 2010 | ||||||
North America | 93 | % | 91 | % | ||||
Europe | 7 | % | 9 | % |
The business of the Company is not seasonal.
2
The Company has no full time employees. AFS employees and affiliates provide the services the Company requires to effectively operate. The cost of these services is reimbursed by the Company to AFS and affiliates per the Operating Agreement.
The Company has acquired a diversified portfolio of equipment. The equipment has been leased to lessees in various industries. The following tables set forth the types of equipment acquired by the Company through December 31, 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 |
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Materials handling | $ | 20,589 | 30.48 | % | ||||
Construction | 12,649 | 18.73 | % | |||||
Transportation, other | 12,290 | 18.19 | % | |||||
Transportation, rail | 11,924 | 17.65 | % | |||||
Mining | 2,893 | 4.28 | % | |||||
Logging and lumber | 2,001 | 2.96 | % | |||||
Aviation | 1,658 | 2.45 | % | |||||
Marine vessels | 1,415 | 2.09 | % | |||||
Manufacturing | 1,172 | 1.74 | % | |||||
Other | 958 | 1.43 | % | |||||
$ | 67,549 | 100.00 | % |
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Industry Types | Purchase Price Excluding Acquisition Fees |
Percentage of Total Acquisitions |
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Transportation, rail | $ | 11,924 | 17.65 | % | ||||
Transportation services | 11,460 | 16.97 | % | |||||
Manufacturing | 9,390 | 13.90 | % | |||||
Paper products | 8,886 | 13.15 | % | |||||
Mining | 8,610 | 12.75 | % | |||||
Health services | 4,967 | 7.35 | % | |||||
Food products | 3,795 | 5.62 | % | |||||
Natural gas | 2,893 | 4.28 | % | |||||
Chemical products | 2,139 | 3.17 | % | |||||
Wood/Lumber products | 1,677 | 2.48 | % | |||||
Other | 1,808 | 2.68 | % | |||||
$ | 67,549 | 100.00 | % |
From inception to December 31, 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 | |||||||||
Construction | $ | 10,420 | $ | 8,248 | $ | 4,856 | ||||||
Materials handling | 6,966 | 1,178 | 6,473 | |||||||||
Transportation, other | 2,319 | 628 | 2,306 | |||||||||
Logging and lumber | 1,220 | 489 | 822 | |||||||||
Transportation, rail | 201 | 246 | 6 | |||||||||
$ | 21,126 | $ | 10,789 | $ | 14,463 |
For further information regarding the Companys equipment lease portfolio as of December 31, 2011, 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.
3
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 Fundings |
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Computer equipment | $ | 7,023 | 48.38 | % | ||||||||
Office furniture/Fixtures and other assets | 4,120 | 28.38 | % | |||||||||
Storage facility | 2,503 | 17.24 | % | |||||||||
Research | 504 | 3.47 | % | |||||||||
Manufacturing | 367 | 2.53 | % | |||||||||
$ | 14,517 | 100.00 | % |
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Industry of Borrower | Amount Financed Excluding Acquisition Fees |
Percentage of Total Fundings |
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Business services | $ | 4,326 | 29.80 | % | ||||||||
Communications | 3,369 | 23.21 | % | |||||||||
Health services | 2,833 | 19.52 | % | |||||||||
Manufacturing | 2,503 | 17.24 | % | |||||||||
Electronics | 1,119 | 7.71 | % | |||||||||
Engineering | 367 | 2.52 | % | |||||||||
$ | 14,517 | 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 |
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Computer equipment | $ | 7,239 | $ | 2,475 | $ | 5,901 | ||||||
Office furniture/Fixtures and other assets | 3,843 | 883 | 3,654 | |||||||||
Research | 504 | | 612 | |||||||||
Manufacturing | 367 | 19 | 424 | |||||||||
$ | 11,953 | $ | 3,377 | $ | 10,591 |
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 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.
4
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 Limited Liability Company Operating Agreement. Consequently, there is no public market for Units and it is not anticipated that a public market for Units will develop. In the absence of a public market for the Units, there is no currently ascertainable fair market value for the Units.
As of December 31, 2011, a total of 1,204 investors were Unitholders of record in the Company.
As noted above, there is no public market for Units and, in order to preserve the Companys status for federal income tax purposes, the Company will not permit a secondary market or the substantial equivalent of a secondary market for the Units. In the absence of a public market for the Units, there is no currently ascertainable fair market value for the Units.
Nevertheless, in order to provide an estimated per Unit value for those Unitholders who seek valuation information, AFS has calculated an estimated value per Unit as of December 31, 2011. AFS estimates the Companys per unit value by first estimating the aggregate net asset value of the Company. The valuation does not take into account any future business activity of the Company; rather it is a snapshot view of the Funds portfolio as of the valuation date.
The estimated values for non-interest bearing items such as any current assets and liabilities, as well as for any investment in securities, were assumed to equal their reported balances, which management believes approximate their fair values, as adjusted for impairment. The same was applied to loans incurred under the acquisition facility since they bear variable rates of interest.
A discounted cash flow approach was used to estimate the values of notes receivable, investments in leases, non-recourse debt and interest rate swaps. Under such approach, the value of a financial instrument was estimated by calculating the present value of the instruments expected cash flows. The present value was determined by discounting the cash flows the instrument is expected to generate by discount rates as deemed appropriate by the Manager. In most cases, the discount rates used were based on U.S. Treasury yields reported as of the reporting date, plus a spread to account for the credit risk difference between the instrument being valued and Treasury securities.
After calculating the aggregate estimated net asset value of the Company, AFS then calculated the portion of the aggregate estimated value that would be distributed to Unitholders on liquidation of the Company, and divided the total that would be so distributable by the number of outstanding Units as of the December 31, 2011 valuation date. As of December 31, 2011, the value of the Companys assets, calculated on this basis, was approximately $5.24 per Unit.
The foregoing valuation was performed solely for the purpose of providing an estimated liquidation value per Unit for those Unitholders who seek valuation information. It is important to note again that 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. The Company will liquidate its assets in the ordinary course of its business and investment cycle. Furthermore, there can be no assurance as to when the Company will be fully liquidated, the amount the Company may actually receive if and when it seeks to liquidate its assets, the amount of lease payments and equipment disposition proceeds the Company will actually receive over the remaining term of the Company, or the amounts that may actually be received in distributions by Unitholders over the course of the Companys remaining term.
5
The Unitholders of record are entitled to certain distributions as provided under the Operating Agreement.
AFS has sole discretion in determining the amount of distributions; provided, however, that AFS will not cause the Company to reinvest operating revenues in equipment, but will distribute available cash, subject to payment of any obligations of the Company, (i) in an amount sufficient to allow an investor in a 31% federal income tax bracket to meet the federal and state income taxes due on income from the operations of the Fund; (ii) through the first full fiscal quarter ending at least six months after termination of the offering of Units, an amount equal to the lesser of: (a) a rate of return on their original capital contribution equal to 2.5% over the average yield on five-year United States Treasury Bonds for the fiscal quarter immediately preceding the date of distribution, as published in a national financial newspaper from time to time (with a minimum of 8% per annum and a maximum of 10% per annum), or (b) 90% of the total amount of cash available for distributions; and (iii) for each quarter during the rest of the reinvestment period, an amount equal to 8% per annum on their original capital contribution.
The rate for monthly distributions from 2011 operations was approximately $0.08 per Unit for the period from January through December 2011. Likewise, the rate for monthly distributions from 2010 operations was approximately $0.08 per Unit for the period from January through December 2010. The rate for each of the quarterly distributions paid in 2011 and 2010 was approximately $0.23 per Unit.
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 (loss) per Unit, based on weighted average Unit outstanding | $ | 0.20 | $ | (0.02 | ) | |||
Return of investment | 0.73 | 0.95 | ||||||
Distributions declared per Unit, based on weighted average Other Member Units outstanding |
0.93 | 0.93 | ||||||
Differences due to timing of distributions | | | ||||||
Actual distributions paid per Unit | $ | 0.93 | $ | 0.93 |
A smaller reporting company is not required to present selected financial data in accordance with item 301(c) of Regulation S-K.
6
Item 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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, the economic recession and changes in general economic conditions, including fluctuations in demand for equipment, lease rates, and interest rates, may result in delays in investment and reinvestment, delays in leasing, re-leasing, and disposition of equipment, and reduced returns on invested capital. The 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-K. We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events, other than as required by law.
ATEL Capital Equipment Fund XI, LLC (the Company) is a California limited liability company that was formed in June 2004 for the purpose of engaging in the sale of limited liability company investment units and acquiring equipment to generate revenues from equipment leasing, lending and sales activities, primarily in the United States.
The Company conducted a public offering of 15,000,000 Limited Liability Company Units (Units), at a price of $10 per Unit. The offering was terminated in April 2006. During 2006, the Company completed its initial acquisition stage with the investment of the net proceeds from the public offering of Units. Subsequently, during the reinvestment period (Reinvestment Period) (defined as six full years following the year the offering was terminated), the Company has reinvested cash flow in excess of certain amounts required to be distributed to the Other Members and/or utilized its credit facilities to acquire additional equipment. Throughout the Reinvestment Period, which ends December 31, 2012, the Company anticipates continued reinvestment of cash flow in excess of minimum distributions and other obligations. The Company is governed by its Limited Liability Company Operating Agreement (Operating Agreement), as amended.
The Company may continue until December 31, 2025. Periodic distributions are paid at the discretion of the Managing Member.
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 | |||||||
Manufacturing | 44 | % | 48 | % | ||||
Transportation, rail | 26 | % | 22 | % | ||||
Transportation services | 13 | % | 14 | % |
As previously mentioned, certain lessees generated significant portions (defined as 10% or more) of the Companys total leasing and lending revenues during 2011 and 2010 as follows:
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Percentage of Total Leasing and Lending Revenues |
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Lessee | Type of Equipment | 2011 | 2010 | |||||||||
Union Pacific | Transportation | 20 | % | 19 | % | |||||||
New NGC, Inc. | Materials handling | 13 | % | 17 | % | |||||||
International Paper Co. | Materials handling | * | 10 | % | ||||||||
East Midlands Ambulance Service NHS Trust | Transportation | * | 10 | % |
* | Less than 10% |
These percentages are not expected to be comparable in future periods due to anticipated changes in the mix of investments and/or lessees as a result of normal business activities.
7
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, 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 leased property was acquired in the years 2005 through 2011. The utilization percentage of existing assets under lease was 99% and 97% 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 reimbursable in future years to the extent of the cumulative limit. As of December 31, 2011 and 2010, the Company has not exceeded the annual and/or cumulative limitations discussed above.
The Company had net income of $1.4 million and $310 thousand for the years ended December 31, 2011 and 2010, respectively. Results for 2011 reflect a decrease in total operating expenses offset, in part, by a reduction in total revenues when compared with results for the prior year.
Total revenues for 2011 declined by $798 thousand, or 9%, as compared to the prior year. The net reduction in total revenues was largely attributable to decreases in operating lease revenues, gain on sale of assets and early termination of notes, other revenue and interest income on notes receivable.
Total operating lease revenues decreased by $503 thousand primarily as a result of continued run-off and sales of lease assets. Gain on sale of assets and early termination of notes declined by $144 thousand reflecting a change in the mix of assets sold during the current year. Other revenue decreased by $76 thousand primarily due to a year over year reduction in additional billings for late fees and excess wear and tear on returned equipment; and, interest income on notes receivable decreased by $62 thousand largely as a result of continued run-off of the notes receivable portfolio.
Total expenses for 2011 decreased by $1.9 million, or 24%, as compared to the prior year. The net reduction in total expenses was primarily due to decreases in depreciation expense, acquisition expense, amortization of initial direct costs and interest expense.
Depreciation expense decreased by $1.7 million, or 28%, primarily due to run-off and sales of lease assets; and, acquisition expense declined by $79 thousand mainly due to a year over year decrease in purchases and deployment of lease assets coupled with a reduction in allocated costs related to business development efforts. Moreover, amortization of initial direct costs related to asset purchases declined by $75 thousand largely due to continued run-off of the lease and loan portfolios offset, in part, by lease asset purchases totaling $1.2 million during 2011. Finally, interest expense decreased by $72 thousand largely due to an approximate $2.5 million year over year decline in outstanding borrowings.
Other income, net is comprised of gains and losses from foreign currency transactions. During 2011, the Company did not record other income or loss on a net basis as its currency gains of $155 thousand were fully offset by foreign currency losses of the same amount.
By comparison, the Company recorded other income, net totaling $17 thousand during 2010 related to net gains and losses from foreign currency transactions. Such net gains was largely due to the weakness of the U.S. currency at the time of the transactions as the Companys foreign currency transactions are primarily denominated in British pounds.
8
At December 31, 2011 and 2010, the Companys cash and cash equivalents totaled $1.4 million and $3.0 million, respectively. The liquidity of the Company varies, increasing to the extent cash flows from leases and proceeds of asset sales exceed expenses and decreasing as lease assets are acquired, as distributions are made to the Members and to the extent expenses exceed cash flows from leases and proceeds from asset sales.
The primary source of liquidity for the Company is its cash flow from leasing activities. As the lease terms expire, the Company will re-lease or sell the equipment. The future liquidity beyond the contractual minimum rentals will depend on AFSs success in remarketing or selling the equipment as it comes off-rental.
Throughout the Reinvestment Period (as defined in the Operating Agreement), the Company anticipates reinvesting a portion of lease payments from assets owned, and/or payments received on notes receivable, in new leasing or financing transactions. Such reinvestment will occur only after the payment of all obligations, including debt service (both principal and interest), the payment of management fees to AFS and providing for cash distributions to the Members.
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 and notes would not increase as such rates are generally fixed for the terms of the leases and notes without adjustment for inflation. In addition, if interest rates increase significantly under such circumstances, the rates that the Company can obtain on future lease or financing transactions will be expected to increase as the cost of capital is a significant factor in the pricing of leases and investments in notes receivable. Leases and notes already in place, for the most part, would not be affected by changes in interest rates.
The Company currently 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): |
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Operating activities | $ | 5,602 | $ | 6,069 | ||||
Investing activities | 523 | (626 | ) | |||||
Financing activities | (7,701 | ) | (6,105 | ) | ||||
Net decrease in cash and cash equivalents | $ | (1,576 | ) | $ | (662 | ) |
During 2011 and 2010, the Companys primary source of liquidity was cash flow from its portfolio of operating and direct financing lease contracts, and its investments in notes receivable. Moreover, the Company realized cash flow from the sale or disposition of equipment and the early termination of certain notes.
During the same comparative years, cash was primarily used to pay distributions to both the Other Members and the Managing Member, totaling a combined $5.2 million for each of the years ended December 31, 2011 and 2010. In addition, cash was used to partially pay down $2.5 million and $3.2 million of debt during 2011 and 2010, respectively; and to purchase lease assets totaling $1.2 million in 2011 and $2.9 million in 2010. Finally, cash was also used to pay invoices related to management fees and expenses during 2011, and to pay other payables during 2010.
The Company participates with AFS and certain of its affiliates in a revolving credit facility (the Credit Facility) comprised of a working capital facility to AFS, an acquisition facility (the Acquisition Facility) and a warehouse facility (the Warehouse Facility) to AFS, the Company and affiliates, and a venture facility available to an affiliate, with a syndicate of financial institutions.
9
Compliance with covenants
The Credit Facility includes certain financial and non-financial covenants applicable to each borrower, including the Company. Such covenants include covenants typically found in credit facilities of the size and nature of the Credit Facility, such as accuracy of representations, good standing, absence of liens and material litigation, etc. The Company and affiliates were in compliance with all covenants under the Credit Facility as of December 31, 2011. The Company considers certain financial covenants to be material to its ongoing use of the Credit Facility and these covenants are described below.
Material financial covenants
Under the Credit Facility, the Company is required to maintain a specific tangible net worth, to comply with a leverage ratio and an interest coverage ratio, and to comply with other terms expressed in the Credit Facility, including limitation on the incurrence of additional debt and guaranties, defaults, and delinquencies.
The material financial covenants are summarized as follows:
Minimum Tangible Net Worth: $10 million
Leverage Ratio (leverage to Tangible Net Worth): Not to exceed 1.25 to 1
Collateral Value: Collateral value under the Warehouse Facility must exceed outstanding borrowings under that facility.
EBITDA to Interest Ratio: Not to be less than 2 to 1 for the four fiscal quarters just ended.
EBITDA is defined under the Credit Facility as, for the relevant period of time (1) gross revenues (all payments from leases and notes receivable) for such period minus (2) expenses deducted in determining net income for such period plus (3) to the extent deducted in determining net income for such period (a) provision for income taxes and (b) interest expense, and (c) depreciation, amortization and other non-cash charges. Extraordinary items and gains or losses on (and proceeds from) sales or dispositions of assets outside of the ordinary course of business are excluded in the calculation of EBITDA. Tangible Net Worth is defined as, as of the date of determination, (i) the net worth of the Company, after deducting therefrom (without duplication of deductions) the net book amount of all assets of the Company, after deducting any reserves and other amounts for assets which would be treated as intangibles under accounting principles generally accepted in the United States of America (GAAP), and after certain other adjustments permitted under the agreements.
The financial covenants referred to above are applicable to the Company only to the extent that the Company has borrowings outstanding under the Credit Facility. As of December 31, 2011, the Companys Tangible Net Worth requirement under the Credit Facility was $10 million, the permitted maximum leverage ratio was 1.25 to 1, and the required minimum interest coverage ratio (EBITDA/interest expense) was 2 to 1. The Company was in compliance with each of these financial covenants with a minimum Tangible Net Worth, leverage ratio and (EBITDA) interest coverage ratio, as calculated per the Credit Facility agreement of $12.6 million, 0.44 to 1, and 17.04 to 1, respectively, as of December 31, 2011. As such, as of December 31, 2011, the Company was in compliance with all such material financial covenants.
Reconciliation to GAAP of EBITDA
For purposes of compliance with the Credit Facility covenants, the Company uses a financial calculation of EBITDA, as defined therein, which is a non-GAAP financial performance measure. The EBITDA is utilized by the Company to calculate its debt covenant ratios.
The following is a reconciliation of net income to EBITDA for the year ended December 31, 2011 (in thousands):
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Net income GAAP basis | $ | 1,411 | ||
Interest expense | 410 | |||
Depreciation of operating lease assets | 4,415 | |||
Amortization of initial direct costs | 43 | |||
Provision for credit losses | 36 | |||
Provision for losses on investment securities | 57 | |||
Impairment losses on equipment | 37 | |||
Principal payments received on direct financing leases | 182 | |||
Principal payments received on notes receivable | 397 | |||
EBITDA (for Credit Facility financial covenant calculation only) | $ | 6,988 |
10
Events of default, cross-defaults, recourse and security
The terms of the Credit Facility include standard events of default by the Company which, if not cured within applicable grace periods, could give lenders remedies against the Company, including the acceleration of all outstanding borrowings and a demand for repayment in advance of their stated maturity. If a breach of any material term of the Credit Facility should occur, the lenders may, at their option, increase borrowing rates, accelerate the obligations in advance of their stated maturities, terminate the facility, and exercise rights of collection available to them under the express terms of the facility, or by operation of law. The lenders also retain the discretion to waive a violation of any covenant at the Companys request.
The Company is currently in compliance with its obligations under the Credit Facility. In the event of a technical default (e.g., the failure to timely file a required report, or a one-time breach of a financial covenant), the Company believes it has ample time to request and be granted a waiver by the lenders, or, alternatively, cure the default under the existing provisions of its debt agreements, including, if necessary, arranging for additional capital from alternate sources to satisfy outstanding obligations.
The lending syndicate providing the Credit Facility has a blanket lien on all of the Companys assets as collateral for any and all borrowings under the Acquisition Facility, and on a pro-rata basis under the Warehouse Facility.
The Acquisition Facility is generally recourse solely to the Company, and is not cross-defaulted to any other obligations of affiliated companies under the Credit Facility, except as described in this paragraph. The Credit Facility is cross-defaulted to a default in the payment of any debt (other than non-recourse debt) or any other agreement or condition beyond the period of grace (not exceeding 30 days), the effect of which would entitle the lender under such agreement to accelerate the obligations prior to their stated maturity in an individual or aggregate principal amount in excess of 15% of the Companys consolidated Tangible Net Worth. Also, a bankruptcy of AFS will trigger a default for the Company under the Credit Facility.
As of December 31, 2011, the Company had non-recourse long-term debt totaling $5.5 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.
For detailed information on the Companys debt obligations, see Notes 8 and 9 to the financial statements as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
The Company commenced periodic distributions, based on cash flows from operations, beginning with the month of June 2005. Additional distributions have been consistently made through December 31, 2011. 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 $612 thousand, all of which were related to Chrysler. As of December 31, 2010, the Company also considered the equipment underlying the lease contracts placed on a cash basis for impairment and deemed that such equipment was not impaired. At both December 31, 2011 and 2010, 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, and all other lease contracts, for any actual change in collectability status and indication of necessary valuation adjustments.
11
At December 31, 2011, the Company had no commitments to purchase lease assets or fund investments in notes receivable.
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 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.
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.
12
Allowances for losses on direct financing leases are typically established based on historical charge off and collection experience and the collectability of specifically identified lessees and billed and unbilled receivables. Direct financing leases are charged off to the allowance as they are deemed uncollectible.
Direct financing leases are generally placed in a non-accrual status (i.e., no revenue is recognized) and deemed impaired when payments are more than 90 days past due. Additionally, management periodically reviews the credit worthiness of all direct finance lessees with payments outstanding less than 90 days. Based upon 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 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 credit worthiness 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.
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
13
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 15 through 39.
14
The Members
ATEL Capital Equipment Fund XI, LLC
We have audited the accompanying balance sheets of ATEL Capital Equipment Fund XI, LLC (the Company) as of December 31, 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 XI, 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.
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/s/ Moss Adams LLP | ||
San Francisco, California March 15, 2012 |
15
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2011 | 2010 | |||||||
ASSETS |
||||||||
Cash and cash equivalents | $ | 1,416 | $ | 2,992 | ||||
Accounts receivable, net of allowance for doubtful accounts of $58 as of December 31, 2011 and $24 as of December 31, 2010 | 411 | 351 | ||||||
Notes receivable, net of unearned interest income of $191 and allowance for credit losses of $2 at December 31, 2011 and net of unearned interest income of $299 and allowance for credit losses of $0 at December 31, 2010 | 1,095 | 1,495 | ||||||
Investment in securities | 200 | 298 | ||||||
Investments in equipment and leases, net of accumulated depreciation of $27,956 as of December 31, 2011 and $27,904 as of December 31, 2010 | 16,144 | 20,615 | ||||||
Prepaid expenses and other assets | 10 | 20 | ||||||
Total assets | $ | 19,276 | $ | 25,771 | ||||
LIABILITIES AND MEMBERS CAPITAL |
||||||||
Accounts payable and accrued liabilities: |
||||||||
Managing Member | $ | 111 | $ | 198 | ||||
Accrued distributions to Other Members | 551 | 551 | ||||||
Other | 321 | 228 | ||||||
Non-recourse debt | 5,542 | 8,033 | ||||||
Unearned operating lease income | 166 | 377 | ||||||
Total liabilities | 6,691 | 9,387 | ||||||
Commitments and contingencies |
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Members capital: |
||||||||
Managing Member | | | ||||||
Other Members | 12,585 | 16,384 | ||||||
Total Members capital | 12,585 | 16,384 | ||||||
Total liabilities and Members capital | $ | 19,276 | $ | 25,771 |
See accompanying notes.
16
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2011 | 2010 | |||||||
Revenues: |
||||||||
Leasing and lending activities: |
||||||||
Operating leases | $ | 7,273 | $ | 7,776 | ||||
Direct financing leases | 102 | 134 | ||||||
Interest on notes receivable | 108 | 170 | ||||||
Gain on sales of lease assets and early termination of notes | 56 | 200 | ||||||
Gain on sales or dispositions of securities | 52 | 33 | ||||||
Other | 36 | 112 | ||||||
Total revenues | 7,627 | 8,425 | ||||||
Expenses: |
||||||||
Depreciation of operating lease assets | 4,415 | 6,094 | ||||||
Asset management fees to Managing Member | 364 | 412 | ||||||
Acquisition expense | 97 | 176 | ||||||
Cost reimbursements to Managing Member | 474 | 477 | ||||||
Provision (reversal of provision) for credit losses | 36 | (18 | ) | |||||
Impairment losses on equipment | 37 | 17 | ||||||
Provision for losses on investment in securities | 57 | 15 | ||||||
Amortization of initial direct costs | 43 | 118 | ||||||
Interest expense | 410 | 482 | ||||||
Professional fees | 106 | 172 | ||||||
Outside services | 36 | 66 | ||||||
Other | 141 | 121 | ||||||
Total operating expenses | 6,216 | 8,132 | ||||||
Other income, net | | 17 | ||||||
Net income | $ | 1,411 | $ | 310 | ||||
Net income (loss): |
||||||||
Managing Member | $ | 391 | $ | 391 | ||||
Other Members | 1,020 | (81 | ) | |||||
$ | 1,411 | $ | 310 | |||||
Net income (loss) per Limited Liability Company Unit (Other Members) | $ | 0.20 | $ | (0.02 | ) | |||
Weighted average number of Units outstanding | 5,209,307 | 5,209,711 |
See accompanying notes.
17
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Other Members | Managing Member |
Total | ||||||||||||||
Units | Amount | |||||||||||||||
Balance December 31, 2009 | 5,210,507 | $ | 21,288 | $ | | $ | 21,288 | |||||||||
Repurchases of Units | (1,200 | ) | (4 | ) | | (4 | ) | |||||||||
Distributions to Other Members ($0.93 per Unit) | | (4,819 | ) | | (4,819 | ) | ||||||||||
Distributions to Managing Member | | | (391 | ) | (391 | ) | ||||||||||
Net (loss) income | | (81 | ) | 391 | 310 | |||||||||||
Balance December 31, 2010 | 5,209,307 | 16,384 | | 16,384 | ||||||||||||
Distributions to Other Members ($0.93 per Unit) | | (4,819 | ) | | (4,819 | ) | ||||||||||
Distributions to Managing Member | | | (391 | ) | (391 | ) | ||||||||||
Net income | | 1,020 | 391 | 1,411 | ||||||||||||
Balance December 31, 2011 | 5,209,307 | $ | 12,585 | $ | | $ | 12,585 |
See accompanying notes.
18
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2011 | 2010 | |||||||
Operating activities: |
||||||||
Net income | $ | 1,411 | $ | 310 | ||||
Adjustment to reconcile net income to cash provided by operating activities: |
||||||||
Gain on sales of lease assets and early termination of notes | (56 | ) | (200 | ) | ||||
Depreciation of operating lease assets | 4,415 | 6,094 | ||||||
Amortization of initial direct costs | 43 | 118 | ||||||
Impairment losses on equipment | 37 | 17 | ||||||
Provision (reversal of provision) for credit losses | 36 | (18 | ) | |||||
Provision for losses on investment in securities | 57 | 15 | ||||||
Gain on sale or disposition of securities | (52 | ) | (33 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable | (94 | ) | (120 | ) | ||||
Prepaid expenses and other assets | 10 | 19 | ||||||
Accounts payable, Managing Member | (87 | ) | 111 | |||||
Accounts payable, other | 93 | (184 | ) | |||||
Unearned operating lease income | (211 | ) | (60 | ) | ||||
Net cash provided by operating activities | 5,602 | 6,069 | ||||||
Investing activities: |
||||||||
Purchases of equipment on operating leases | (1,224 | ) | (2,893 | ) | ||||
Purchase of securities | | (7 | ) | |||||
Proceeds from sales of lease assets and early termination of notes | 1,077 | 1,326 | ||||||
Payments of initial direct costs | (2 | ) | | |||||
Proceeds from sales or dispositions of securities | 93 | 33 | ||||||
Principal payments received on direct financing leases | 182 | 110 | ||||||
Principal payments received on notes receivable | 397 | 805 | ||||||
Net cash provided by (used in) investing activities | 523 | (626 | ) | |||||
Financing activities: |
||||||||
Borrowings under non-recourse debt | | 2,320 | ||||||
Repayments under non-recourse debt | (2,491 | ) | (3,211 | ) | ||||
Distributions to Other Members | (4,819 | ) | (4,819 | ) | ||||
Distributions to Managing Member | (391 | ) | (391 | ) | ||||
Repurchases of Units | | (4 | ) | |||||
Net cash used in financing activities | (7,701 | ) | (6,105 | ) | ||||
Net decrease in cash and cash equivalents | (1,576 | ) | (662 | ) | ||||
Cash and cash equivalents at beginning of year | 2,992 | 3,654 | ||||||
Cash and cash equivalents at end of year | $ | 1,416 | $ | 2,992 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid during the year for interest | $ | 415 | $ | 492 | ||||
Cash paid during the year for taxes | $ | 31 | $ | 50 | ||||
Schedule of non-cash transactions: |
||||||||
Distributions payable to Other Members at year-end | $ | 551 | $ | 551 | ||||
Distributions payable to Managing Member at year-end | $ | 45 | $ | 45 |
See accompanying notes.
19
ATEL Capital Equipment Fund XI, LLC (the Company or the Fund) was formed under the laws of the State of California on June 25, 2004. The Company was formed for the purpose of acquiring equipment to engage in equipment leasing, lending and sales activities. Also, from time to time, the Company may purchase securities of its borrowers or receive warrants to purchase securities in connection with its lending arrangements. The Managing Member of the Company is ATEL Financial Services, LLC (AFS), a California limited liability company. The Company may continue until December 31, 2025. Each Members personal liability for obligations of the Company generally will be limited to the amount of their respective contributions and rights to undistributed profits and assets of the Company.
The Company conducted a public offering of 15,000,000 Limited Liability Company Units (Units), at a price of $10 per Unit. On May 31, 2005, subscriptions for the minimum number of Units (120,000, representing $1.2 million) had been received and AFS requested that the subscriptions be released to the Company. On that date, the Company commenced operations in its primary business (acquiring equipment to engage in equipment leasing, lending and sales activities). As of July 13, 2005, the Company had received subscriptions for 958,274 Units ($9.6 million), thus exceeding the $7.5 million minimum requirement for Pennsylvania, and AFS requested that the remaining funds in escrow (from Pennsylvania investors) be released to the Company. The Company terminated sales of Units effective April 30, 2006. Life-to-date net contributions through December 31, 2011 totaled $52.2 million, consisting of approximately $52.8 million in gross contributions from Other Members purchasing Units under the public offering less rescissions and repurchases (net of distributions paid and allocated syndication costs, as applicable) of $636 thousand. As of December 31, 2011, 5,209,307 Units were 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 ends December 31, 2012, and (iii) provides additional distributions following the Reinvestment Period and until all equipment has been sold. The Company is governed by its Limited Liability Company Operating Agreement (Operating Agreement), as amended.
The Company, or AFS on behalf of the Company, has incurred costs in connection with the organization, registration and issuance of the Limited Liability Company Units (see Note 7 to the financial statements included in Item 8 of this report). The amount of such costs to be borne by the Company is limited by certain provisions of the Companys Operating Agreement. The Company will pay AFS and affiliates of AFS substantial fees which may result in a conflict of interest. The Company will pay substantial fees to AFS and its affiliates before distributions are paid to investors even if the Company does not produce profits. Therefore, the financial position of the Company could change significantly.
The Company is in its acquisition phase and is making distributions on a monthly and quarterly basis. Periodic distributions commenced in June 2005.
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.
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.
20
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.
Accounts receivable represent the amounts billed under operating and direct financing lease contracts, and notes receivable which are currently due to the Company. Allowances for doubtful accounts are established based on historical charge off and collection experience and the collectability of specifically identified lessees and invoiced amounts. Accounts receivable deemed uncollectible are charged off against the allowance on a specific identification basis. Recoveries of amounts that were previously written-off are recorded as other income in the period received.
Financial instruments that potentially subject the Company to concentrations of credit risk include cash and cash equivalents, operating and direct financing lease receivables, notes receivable and accounts receivable. The Company places the majority of its cash deposits in noninterest-bearing 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.
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 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.
21
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 credit worthiness 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 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.
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.
22
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.
The primary geographic regions in which the Company seeks leasing and financing opportunities are North America and Europe.
23
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 | $ | 7,069 | 93 | % | $ | 7,682 | 91 | % | ||||||||
United Kingdom | 558 | 7 | % | 743 | 9 | % | ||||||||||
Total International | 558 | 7 | % | 743 | 9 | % | ||||||||||
Total | $ | 7,627 | 100 | % | $ | 8,425 | 100 | % |
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As of December 31, | ||||||||||||||||
2011 | % of Total | 2010 | % of Total | |||||||||||||
Long-lived assets |
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United States | $ | 15,782 | 98 | % | $ | 19,738 | 96 | % | ||||||||
United Kingdom | 362 | 2 | % | 877 | 4 | % | ||||||||||
Total International | 362 | 2 | % | 877 | 4 | % | ||||||||||
Total | $ | 16,144 | 100 | % | $ | 20,615 | 100 | % |
From time to time, the Company may purchase securities of its borrowers or receive warrants to purchase securities in connection with its lending arrangements.
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. During 2011, the Company had deemed certain investment securities to be impaired and recorded fair value adjustments totaling $2 thousand and $55 thousand at June 30, 2011 and March 31, 2011, respectively. Such adjustments reduced the cost basis of the investments. No additional fair value adjustment was deemed necessary at December 31, 2011. At December 31, 2010, the Company recorded a fair value adjustment of approximately $15 thousand which reduced the cost basis of an impaired investment which was subsequently disposed of in January 2011.
Warrants owned by the Company are not registered for public sale, but are considered derivatives and are carried at an estimated fair value, as determined by the Managing Member, on the balance sheet as assets or liabilities. At both December 31, 2011 and 2010, the Managing Member estimated the fair value of the warrants to be nominal in amount. Gains recognized on the net exercise of certain warrants totaled $52 thousand and $33 thousand for the years ended December 31, 2011 and 2010, respectively.
Foreign currency transaction gains and losses are reported in the results of operations as other income or other loss in the period in which they occur. Currently, the Company does not use derivative instruments to hedge its economic exposure with respect to assets, liabilities and firm commitments as the foreign currency transactions risks to
24
date have not been significant. During 2011, the Company did not record other income or loss on a net basis as its currency gains of $155 thousand were fully offset by foreign currency losses of the same amount. By comparison, the Company recorded other income, net totaling $17 thousand during 2010 related to net gains and losses from foreign currency transactions.
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 Review Code, a partnership is not subject to federal income taxes. Accordingly, the Company has provided current income taxes for only those states, which levy income taxes on partnerships. For the years ended December 31, 2011 and 2010, the current provision for state income taxes was approximately $37 thousand and $26 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 | $ | 12,585 | $ | 16,384 | ||||
Tax basis of net assets (unaudited) | 12,069 | 15,735 | ||||||
Difference | $ | 516 | $ | 649 |
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 returns (unaudited) for the years ended December 31, 2011 and 2010, respectively (in thousands):
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2011 | 2010 | |||||||
Net income per financial statements | $ | 1,411 | $ | 310 | ||||
Tax adjustments (unaudited): |
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Adjustment to depreciation expense | (549 | ) | 827 | |||||
Provision for doubtful accounts | 35 | (186 | ) | |||||
Adjustments to revenues | 95 | (5 | ) | |||||
Adjustments to gain on sales of assets | 603 | 9 | ||||||
Other | (51 | ) | (164 | ) | ||||
Income per federal tax return (unaudited) | $ | 1,544 | $ | 791 |
Other income, net consists of gains and losses on foreign exchange transactions. During the year ended December 31, 2011, foreign currency gains were fully offset by like amounts of foreign currency transaction losses. During 2010, other income, net was comprised of net gains on foreign currency transactions.
25
Net income and distributions per Unit are based upon the weighted average number of Other Members Units outstanding during the year.
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 will be 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 impact 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.
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 | |||||||
Manufacturing | 44 | % | 48 | % | ||||
Transportation, rail | 26 | % | 22 | % | ||||
Transportation services | 13 | % | 14 | % |
26
During 2011 and 2010, certain lessees generated significant portions (defined as 10% or more) of the Companys total leasing and lending revenues as follows:
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Percentage of Total Leasing and Lending Revenues |
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Lessee | Type of Equipment | 2011 | 2010 | |||||||||
Union Pacific | Transportation | 20 | % | 19 | % | |||||||
New NGC, Inc. | Materials handling | 13 | % | 17 | % | |||||||
International Paper Co. | Materials handling | * | 10 | % | ||||||||
East Midlands Ambulance Service NHS Trust | Transportation | * | 10 | % |
* | Less than 10% |
The Company has various notes receivable from borrowers who have financed the purchase of equipment through the Company. The terms of the notes receivable were generally up to 120 months and bear interest at rates ranging from 8.4% to 11.58%. The notes are secured by the equipment financed. The notes mature from 2012 through 2016.
As of December 31, 2010, two notes receivable with a combined net book value approximating $96 thousand were on non-accrual status and were considered impaired relative to their payment terms. Of these non-accrual status notes, a note for $73 thousand was restructured pursuant to a forbearance agreement at graduated default interest-only payment terms followed by a balloon payment of unpaid principal scheduled for October 2011. The default interest rates increase started at 12.50% and graduated up to 18.00%. Such note was paid in full in September 2011. The remaining non-accrual note, for $23 thousand, was modified to defer the repayment of principal until April 2012 while maintaining interest-only payments at the original rate of 11.58%. As of December 31, 2011, this note continues in non-accrual status and reflects a principal balance outstanding of $20 thousand. While the note has been current with respect to its restructured terms, management has determined that a $2 thousand adjustment was necessary to reflect fair value at September 30, 2011. No incremental adjustment was deemed necessary as of December 31, 2011.
The minimum future payments receivable as of December 31, 2011 are as follows (in thousands):
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Year ending December 31, 2012 | $ | 418 | ||
2013 | 295 | |||
2014 | 221 | |||
2015 | 166 | |||
2016 | 188 | |||
1,288 | ||||
Less: portion representing unearned interest income | (191 | ) | ||
1,097 | ||||
Less: Reserve for impairment | (2 | ) | ||
Notes receivable, net | $ | 1,095 |
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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For the Year Ended December 31, |
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2011 | 2010 | |||||||
IDC amortization notes receivable | $ | 1 | $ | 3 | ||||
IDC amortization lease assets | 42 | 115 | ||||||
Total | $ | 43 | $ | 118 |
27
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 |
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Notes Receivable |
Finance Leases |
Operating Leases |
Notes Receivable |
Finance Leases |
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Balance December 31, 2009 | $ | | $ | | $ | 209 | $ | | $ | | $ | 209 | ||||||||||||
Provision (reversal of provision) for credit losses | 6 | | (24 | ) | (18 | ) | ||||||||||||||||||
(Charge-offs)/adjustments | | | (167 | ) | | | (167 | ) | ||||||||||||||||
Balance December 31, 2010 | 6 | | 18 | | | 24 | ||||||||||||||||||
(Reversal of provision) provision for credit losses | (6 | ) | | 40 | 2 | | 36 | |||||||||||||||||
Balance December 31, 2011 | $ | | $ | | $ | 58 | $ | 2 | $ | | $ | 60 |
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 asset quickly.
28
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 | $ | 2 | $ | | $ | 2 | ||||||
Ending balance: individually evaluated for impairment | $ | 2 | $ | | $ | 2 | ||||||
Ending balance: collectively evaluated for impairment | $ | | $ | | $ | | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | | $ | | $ | | ||||||
Financing receivables: |
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Ending balance | $ | 1,097 | $ | 237 | $ | 1,334 | ||||||
Ending balance: individually evaluated for impairment | $ | 1,097 | $ | 237 | $ | 1,334 | ||||||
Ending balance: collectively evaluated for impairment | $ | | $ | | $ | | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | | $ | | $ | |
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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 | $ | 1,4951 | $ | 243 | $ | 1,738 | ||||||
Ending balance: individually evaluated for impairment | $ | 1,495 | $ | 243 | $ | 1,738 | ||||||
Ending balance: collectively evaluated for impairment | $ | | $ | | $ | | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | | $ | | $ | |
1 | Includes $1 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.
29
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 and 2010, 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 | $ | | $ | 54 | $ | 188 | $ | 243 | ||||||||
Special mention | 1,097 | 1,367 | 49 | | ||||||||||||
Substandard | | 73 | | | ||||||||||||
Doubtful | | | | | ||||||||||||
Total | $ | 1,097 | $ | 1,494 | $ | 237 | $ | 243 |
At December 31, 2011 and 2010, 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 |
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Notes receivable | $ | | $ | | $ | | $ | | $ | 1,097 | $ | 1,097 | $ | | ||||||||||||||
Finance leases | 12 | 6 | 41 | 59 | 178 | 237 | 41 | |||||||||||||||||||||
Total | $ | 12 | $ | 6 | $ | 41 | $ | 59 | $ | 1,275 | $ | 1,334 | $ | 41 |
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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 |
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Notes receivable | $ | 116 | $ | 26 | $ | | $ | 142 | $ | 1,352 | $ | 1,494 | $ | | ||||||||||||||
Finance leases | | | | | 243 | 243 | | |||||||||||||||||||||
Total | $ | 116 | $ | 26 | $ | | $ | 142 | $ | 1,595 | $ | 1,737 | $ | |
As discussed in Note 4, one of the Companys note receivable continues to be in non-accrual status at December 31, 2011 and was considered impaired relative to its payment terms. While the note has been current with respect to its restructured terms, management has determined that a $2 thousand adjustment was necessary to reflect fair value at September 30, 2011. No incremental adjustment was deemed necessary at December 31, 2011.
At December 31, 2011, certain 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. At December 31, 2010, there were no accounts receivable related to net investments in financing receivables placed in non-accrual status.
30
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 |
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Net investment in operating leases | $ | 20,028 | $ | (35 | ) | $ | (4,415 | ) | $ | 15,578 | ||||||
Net investment in direct financing leases | 243 | 176 | (182 | ) | 237 | |||||||||||
Assets held for sale or lease, net | 262 | 25 | | 287 | ||||||||||||
Initial direct costs, net of accumulated amortization of $137 at December 31, 2011 and $370 at December 31, 2010 | 82 | 2 | (42 | ) | 42 | |||||||||||
Total | $ | 20,615 | $ | 168 | $ | (4,639 | ) | $ | 16,144 |
Management periodically reviews the carrying values of its assets on leases and assets held for lease or sale. Impairment losses are recorded as an adjustment to the net investment in operating leases. During 2011 and 2010, the Company deemed certain off-lease assets to be impaired, and accordingly, recorded fair value adjustments of $37 thousand and $17 thousand, respectively, which reduced the cost basis of such assets.
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 $4.4 million and $6.1 million for the respective years ended December 31, 2011 and 2010.
All of the leased property was acquired during the years 2005 through 2011.
Property on operating leases consists of the following (in thousands):
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Balance December 31, 2010 |
Additions | Reclassifications or Dispositions |
Balance December 31, 2011 |
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Transportation, rail | $ | 11,723 | $ | | $ | | $ | 11,723 | ||||||||
Materials handling | 13,609 | | (2,235 | ) | 11,374 | |||||||||||
Transportation, other | 10,778 | 1,224 | (2,346 | ) | 9,656 | |||||||||||
Mining | 2,893 | | | 2,893 | ||||||||||||
Construction | 2,336 | | (95 | ) | 2,241 | |||||||||||
Aviation | 1,658 | | | 1,658 | ||||||||||||
Marine vessels | 1,415 | | | 1,415 | ||||||||||||
Manufacturing | 953 | | | 953 | ||||||||||||
Logging and lumber | 781 | | | 781 | ||||||||||||
Research | 402 | | (402 | ) | | |||||||||||
Office furniture | 146 | | (146 | ) | | |||||||||||
46,694 | 1,224 | (5,224 | ) | 42,694 | ||||||||||||
Less accumulated depreciation | (26,666 | ) | (4,415 | ) | 3,965 | (27,116 | ) | |||||||||
Total | $ | 20,028 | $ | (3,191 | ) | $ | (1,259 | ) | $ | 15,578 |
The average estimated residual value for assets on operating leases was 21% of the assets original cost at both December 31, 2011 and 2010.
31
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 operating lease contracts placed in non-accrual status. At December 31, 2010, the total net investment in equipment underlying lease contracts placed in non-accrual status totaled $612 thousand. Such contracts had related accounts receivable approximating $33 thousand at December 31, 2010. 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, and all other lease contracts, for any actual change in collectability status and indication of necessary valuation adjustments.
As of December 31, 2011 and 2010, investment in direct financing leases primarily consists of materials handling and research 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 | $ | 261 | $ | 331 | ||||
Estimated residual values of leased equipment (unguaranteed) | 46 | 51 | ||||||
Investment in direct financing leases | 307 | 382 | ||||||
Less unearned income | (70 | ) | (139 | ) | ||||
Net investment in direct financing leases | $ | 237 | $ | 243 |
There were no investment in direct financing lease assets in non-accrual status at December 31, 2011 and 2010.
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 | $ | 3,843 | $ | 195 | $ | 4,038 | ||||||
2013 | 2,671 | 66 | 2,737 | |||||||||
2014 | 1,823 | | 1,823 | |||||||||
2015 | 835 | | 835 | |||||||||
2016 | 158 | | 158 | |||||||||
Thereafter | 237 | | 237 | |||||||||
$ | 9,567 | $ | 261 | $ | 9,828 |
The terms of the Operating Agreement provide that AFS and/or affiliates are entitled to receive certain fees for equipment management and resale, and for management of the Company.
The Operating Agreement allows for the reimbursement of costs incurred by AFS in providing administrative services to the Company. Administrative services provided include Company accounting, finance/treasury, investor relations, legal counsel and lease and equipment documentation. AFS is not reimbursed for services whereby it is entitled to receive a separate fee as compensation for such services, such as management of equipment.
32
Each of ATEL Leasing Corporation (ALC) and AFS is a wholly-owned subsidiary of ATEL Capital Group and performs services for the Company. Acquisition services, equipment management, lease administration and asset disposition services are performed by ALC; and investor relations, communications services and general administrative services are performed by AFS.
Cost reimbursements to the Managing Member are based on its costs incurred in performing administrative services for the Company. These costs are allocated to each managed entity based on certain criteria such as total assets, number of investors or contributed capital based upon the type of cost incurred.
The Operating Agreement places an annual limit and a cumulative limit for cost reimbursements to AFS and/or affiliates. Any reimbursable costs incurred by AFS and/or affiliates during the year exceeding the annual and/or cumulative limits cannot be reimbursed in the current year, though such costs may be reimbursable in future years to the extent of the cumulative limit. As of December 31, 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 | $ | 474 | $ | 477 | ||||
Asset management fees to Managing Member and/or affiliates | 364 | 412 | ||||||
Acquisition and initial direct costs paid to Managing Member | 100 | 176 | ||||||
$ | 938 | $ | 1,065 |
At December 31, 2011 and 2010, 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 4.33% to 5.95%. The notes are secured by assignments of lease payments and pledges of assets. At December 31, 2011, gross lease rentals totaled approximately $6.0 million over the remaining lease terms; and the carrying value of the pledged assets is approximately $8.3 million. The notes mature from 2012 through 2015.
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 Companys 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.
33
Future minimum payments of non-recourse debt are as follows (in thousands):
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Principal | Interest | Total | ||||||||||
Year ending December 31, 2012 | $ | 1,890 | $ | 245 | $ | 2,135 | ||||||
2013 | 1,700 | 155 | 1,855 | |||||||||
2014 | 1,313 | 73 | 1,386 | |||||||||
2015 | 639 | 17 | 656 | |||||||||
$ | 5,542 | $ | 490 | $ | 6,032 |
The Company participates with AFS and certain of its affiliates in a revolving credit facility (the Credit Facility) comprised of a working capital facility to AFS, an acquisition facility (the Acquisition Facility) and a warehouse facility (the Warehouse Facility) to AFS, the Company and affiliates, and a venture facility available to an affiliate with a syndicate of financial institutions which Credit Facility includes certain financial covenants. The Credit Facility is for an amount up to $75 million and expires in June 2012. The lending syndicate providing the Credit Facility has a blanket lien on all of the Companys assets as collateral for any and all borrowings under the Acquisition Facility, and on a pro-rata basis under the Warehouse Facility.
As of December 31, 2011 and 2010, borrowings under the facility were as follows (in thousands):
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2011 | 2010 | |||||||
Total available under the financing arrangement | $ | 75,000 | $ | 75,000 | ||||
Amount borrowed by the Company under the acquisition facility | | | ||||||
Amounts borrowed by affiliated partnerships and Limited Liability Companies under the venture, acquisition and warehouse facilities | (7,476 | ) | (5,345 | ) | ||||
Total remaining available under the venture, acquisition and warehouse facilities | $ | 67,524 | $ | 69,655 |
The Company and its affiliates pay an annual commitment fee to have access to this line of credit. As of December 31, 2011, the aggregate amount remaining unutilized under the Credit Facility is potentially available to the Company, subject to certain sub-facility and borrowing-base limitations. However, as amounts are drawn on the Credit Facility by each of the Company and the affiliates who are borrowers under the Credit Facility, the amount remaining available to all borrowers to draw under the Credit Facility is reduced. As the Warehousing Facility is a short term bridge facility, any amounts borrowed under the Warehousing Facility, and then repaid by the affiliated borrowers (including the Company) upon allocation of an acquisition to a specific purchaser, become available under the Warehouse Facility for further short term borrowing.
As of December 31, 2011, the Companys Tangible Net Worth requirement under the Credit Facility was $10 million, the permitted maximum leverage ratio was not to exceed 1.25 to 1, and the required minimum interest coverage ratio was not to be less than 2 to 1. The Company was in compliance with these financial covenants under the Credit Facility with a minimum Tangible Net Worth, leverage ratio and interest coverage ratio, as calculated per the Credit Facility agreement of $12.6 million, 0.44 to 1, and 17.04 to 1, respectively, as of December 31, 2011. As such, as of December 31, 2011, the Company was in compliance with all material financial covenants, and with all other material conditions of the Credit Facility. The Company does not anticipate any covenant violations nor does it anticipate that any of these covenants will restrict its operations or its ability to procure additional financing.
34
Fee and interest terms
The interest rate on the Credit Facility is based on either the LIBOR/Eurocurrency rate of 1-, 2-, 3- or 6-month maturity plus a lender designated spread, or the banks Prime rate, which re-prices daily. Principal amounts of loans made under the Credit Facility that are prepaid may be re-borrowed on the terms and subject to the conditions set forth under the Credit Facility. At both December 31, 2011 and 2010, the Company had no outstanding borrowings under the acquisition facility.
Warehouse facility
To hold the assets under the Warehousing Facility prior to allocation to specific investor programs, a Warehousing Trust has been entered into by the Company, AFS, ALC, and certain of the affiliated partnerships and limited liability companies. The Warehousing Trust is used by the Warehouse Facility borrowers to acquire and hold, on a short-term basis, certain lease transactions that meet the investment objectives of each of such entities. Each of the leasing programs sponsored by AFS and ALC currently in its acquisition stage is a pro rata participant in the Warehousing Trust, as described below. When a program no longer has a need for short term financing provided by the Warehousing Facility, it is removed from participation, and as new leasing investment entities are formed by AFS and ALC and commence their acquisition stages, these new entities are added.
As of December 31, 2011, the investment program participants were ATEL Capital Equipment Fund X, LLC, the Company, ATEL 12, LLC and ATEL 14, LLC. Pursuant to the Warehousing Trust, the benefit of the lease transaction assets, and the corresponding liabilities under the Warehouse Facility, inure to each of such entities based upon each entitys pro-rata share in the Warehousing Trust estate. The pro-rata share is calculated as a ratio of the net worth of each entity over the aggregate net worth of all entities benefiting from the Warehousing Trust estate, excepting that the trustees, AFS and ALC, are both jointly and severally liable for the pro rata portion of the obligations of each of the affiliated partnerships and limited liability companies participating under the Warehouse Facility. Transactions are financed through this Warehouse Facility only until the transactions are allocated to a specific program for purchase or are otherwise disposed by AFS and ALC. When a determination is made to allocate the transaction to a specific program for purchase by the program, the purchaser repays the debt associated with the asset, either with cash or by means of proceeds of a draw under the Acquisition Facility, and the asset is removed from the Warehouse Facility collateral, and ownership of the asset and any debt obligation associated with the asset are assumed solely by the purchasing entity.
Borrowings of $5.6 million and $4.8 million were outstanding under the Warehouse Facility as of December 31, 2011 and 2010, respectively. The Companys maximum contingent obligation on the outstanding warehouse balances at December 31, 2011 and 2010 were approximately $590 thousand and $1.1 million, respectively.
At December 31, 2011, 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.
35
Units issued and outstanding were 5,209,307 at both December 31, 2011 and 2010, respectively. The Company was authorized to issue up to 15,000,000 Units in addition to the Units issued to the initial members (50 Units). The Company terminated sales of Units effective April 30, 2006.
The Company has the right, exercisable in the 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.
The Company repurchased 1,200 Units during 2010. By comparison, there were no Units repurchased during 2011.
During the years ended December 31, 2011 and 2010, distributions to the Other Members were as follows (in thousands, except as to Units and per Unit data):
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2011 | 2010 | |||||||
Distributions | $ | 4,819 | $ | 4,819 | ||||
Weighted average number of Units outstanding | 5,209,307 | 5,209,711 | ||||||
Weighted average distributions per Unit | $ | 0.93 | $ | 0.93 |
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 Companys own estimates of assumptions that market participants would use in pricing the asset or liability.
At December 31, 2011 and 2010, the Company had no assets or liabilities that require measurement at fair value on a recurring basis. During the first three quarters of 2011, the Company recorded adjustments to reflect the fair value of impaired assets including: off-lease assets, notes receivable and investment securities on a non-recurring basis. As of December 31, 2011, no additional fair value adjustments were deemed necessary. At December 31, 2010, the Company measured impaired off-lease equipment and investment securities at fair value on a non-recurring basis. The measurement methodologies are as follows:
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. There were no fair value adjustments relative to impaired notes receivable at both December 31, 2011 and 2010.
36
During the first three quarters of 2011, the Company had previously recorded a fair value adjustment totaling $2 thousand which reduced the cost basis of an impaired note receivable at September 30, 2011. Under the Fair Value Measurements Topic of the FASB Accounting Standards Codification, the fair value of the impaired notes receivable was classified within Level 3 of the valuation hierarchy at September 30, 2011. Such valuation utilized a market approach technique and used inputs from third party appraisers that utilize current market transactions as adjusted for certain factors specific to the underlying collateral.
The Company had no fair value adjustments relative to impaired equipment as of December 31, 2011. Year-to-date, the Company had recorded fair value adjustments of $37 thousand which reduced the cost basis of certain off-lease equipment deemed impaired at June 30, 2011. Such impaired off-lease equipment were disposed of during the second half of 2011.
As of December 31, 2010, the Company recorded fair value adjustments of approximately $17 thousand which reduced the cost basis of certain 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. Year-to-date, the Company had recorded fair value adjustments of $2 thousand and $55 thousand which reduced the cost basis of investments deemed impaired at June 30, 2011 and March 31, 2011, respectively. The non-recurring fair value adjustment at June 30, 2011 was based on an approximate 25% reduction in valuation based on the expected value of shares of the venture company as contemplated in its merger agreement terms; and, the non-recurring fair value adjustment at March 31, 2011 was based on an approximate 87% reduction in valuation as determined by investee cash burn and potential for additional venture investors. Under the Fair Value Measurements Topic of the FASB Accounting Standards Codification, the fair value of both impaired investment securities are classified within Level 3 of the valuation hierarchy due to the significant inputs that are unobservable in the market.
At December 31, 2010, the Company recorded a non-recurring fair value adjustment of approximately $15 thousand. Under the Fair Value Measurements Topic of the FASB Accounting Standards Codification, the fair value of the impaired investment security is classified within Level 1 of the valuation hierarchy as the security is actively traded on the Canadian national exchange. Accordingly, there is sufficient trading frequency and volume to provide pricing information on an ongoing basis. The impaired security was disposed of in January 2011.
37
The following tables present the fair value measurements of impaired assets 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 |
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Assets measured at fair value on a non-recurring basis |
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Impaired notes receivable | $ | 18 | $ | | $ | | $ | 18 | ||||||||
Impaired investment securities | 15 | | | 15 |
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December 31, 2010 |
Level 1 Estimated Fair Value |
Level 2 Estimated Fair Value |
Level 3 Estimated Fair Value |
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Assets measured at fair value on a non-recurring basis |
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Impaired off-lease equipment | $ | 50 | $ | | $ | | $ | 50 | ||||||||
Impaired investment securities | 41 | 41 | | |
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.
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 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 the current market borrowing rates for similar types of borrowing arrangements.
Management has determined that no recognition for the fair value of the Companys loan commitments is necessary because their terms are made on a market rate basis and require borrowers to be in compliance with the Companys credit requirements at the time of funding.
The fair value of contingent liabilities (or guarantees) is not considered material because management believes there has been no event that has occurred wherein a guarantee liability has been incurred or will likely be incurred.
38
The following table presents estimated fair values of the Companys financial instruments 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 |
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Financial assets: |
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Cash and cash equivalents | $ | 1,416 | $ | 1,416 | $ | 2,992 | $ | 2,992 | ||||||||
Notes receivable | 1,095 | 1,095 | 1,495 | 1,495 | ||||||||||||
Investment in securities | 200 | 200 | 298 | 298 | ||||||||||||
Financial liabilities: |
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Non-recourse debt | 5,542 | 5,825 | 8,033 | 8,332 |
39
Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES |
None.
Item 9A. | CONTROLS AND PROCEDURES |
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 (COSO). 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.
40
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.
41
Item 10. | DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT |
The registrant is a Limited Liability Company and has no officers or directors.
ATEL Financial Services, LLC (AFS) is the 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 ACG is owned 100% by Dean L. Cash.
Each of ATEL Leasing Corporation (ALC) and AFS is a wholly-owned subsidiary of ACG and performs services for the Company. Acquisition services, equipment management, lease administration and asset disposition services are performed by ALC; and investor relations, communications and general administrative services are performed by AFS.
The officers and directors of ATEL and its affiliates are as follows:
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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, joined ATEL as director of marketing in 1980 and has been a vice president since 1981, executive vice president since 1983 and a director since 1984. He has been President and CEO since April 2001. Prior to joining ATEL, Mr. Cash was a senior marketing representative for Martin Marietta Corporation, data systems division, from 1979 to 1980. From 1977 to 1979, he was employed by General Electric Corporation, where he was an applications specialist in the medical systems division and a marketing representative in the information services division. Mr. Cash was a systems engineer with Electronic Data Systems from 1975 to 1977, and was involved in maintaining and developing software for commercial applications. Mr. Cash received a B.S. degree in psychology and mathematics in 1972 and an M.B.A. degree with a concentration in finance in 1975 from Florida State University. Mr. Cash is an arbitrator with the American Arbitration Association.
Paritosh K. Choksi, age 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 to provide legal support in the drafting and reviewing of lease documentation, advising on general corporate law matters, and assisting on securities law issues. From 1986 to 1989, Mr. Morais was employed by the BankAmeriLease Companies, Bank of 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) in 1997 from Golden Gate University. Mr. Morais has been an active member of the State Bar of California since 1986.
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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 has no officers or directors.
Set forth hereinafter is a description of the nature of remuneration paid and to be paid to ATEL and its Affiliates. The amount of such remuneration paid for the years ended December 31, 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 paid selling commissions in the amount of 9% of Gross Proceeds, as defined, to ASC, an affiliate of AFS.
Through December 31, 2011, $4.7 million of such commissions had been paid to AFS or its affiliate. Of that amount, $3.9 million has been re-allowed to other broker/dealers.
The Company pays AFS an Asset Management Fee in an amount equal to 4% of Operating Revenues, which includes Gross Lease Revenues and Cash from Sales or Refinancing. The Asset Management Fee is paid on a monthly basis. The amount of the Asset Management Fee payable in any year is reduced for that year to the extent it would otherwise exceed the Asset Management Fee Limit, as described below. The Asset Management Fee is paid for services rendered by AFS and its affiliates in determining portfolio and investment strategies (i.e., establishing and maintaining the composition of the Equipment portfolio as a whole and the Companys overall debt structure) and generally managing or supervising the management of the Equipment.
AFS also receives, as its Carried Interest, an amount equal to 7.5% of all Company Distributions.
AFS supervises performance of all management activities, including, among other activities: the acquisition and financing of the equipment portfolio, collection of lease revenues, monitoring compliance by lessees with the lease terms, assuring that Equipment is being used in accordance with all operative contractual arrangements, paying operating expenses and arranging for necessary maintenance and repair of equipment in the event a lessee fails to do so, monitoring property, sales and use tax compliance and preparation of operating financial data. AFS intends to delegate all or a portion of its duties and the Asset Management Fee to one or more of its affiliates who are in the business of providing such services.
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The Fund has adopted a single Asset Management Fee plus the Carried Interest as a means of compensating the Manager for sponsoring the Fund and managing its operations. While this compensation structure is intended to simplify management compensation for purposes of investors understanding, state securities administrators use a more complicated compensation structure in their review of equipment program offerings in order to assure that those offerings are fair under the states merit review guidelines. The total of all Front End Fees, the Carried Interest and the Asset Management Fee will be subject to the Asset Management Fee Limit in order to assure these state administrators that the Fund will not bear greater fees than permitted under the state merit review guidelines. The North American Securities Administrators Association, Inc. (NASAA) is an organization of state securities administrators, those state government agencies responsible for qualifying securities offerings in their respective states. NASAA has established standards for the qualification of a number of different types of securities offerings and investment products, including its Statement of Policy on Equipment Programs (the NASAA Equipment Leasing Guidelines). Article IV, Sections C through G of the NASAA Equipment Leasing Guidelines establish the standards for payment of reasonable carried interests, promotional interests and fees for equipment acquisition, management, resale and releasing services to equipment leasing program sponsors. Article IV, Sections C through G of the NASAA Equipment Leasing Guidelines set the maximum compensation payable to the sponsor and its affiliates from an equipment leasing program such as the Fund. The Asset Management Fee Limit will equal the maximum compensation payable under Article IV, Sections C through G of the NASAA Equipment Leasing Guidelines as in effect on the date of the Funds prospectus (the NASAA Fee Limitation). Under the Asset Management Fee Limit, the Fund will calculate the maximum fees payable under the NASAA Fee Limitation and guarantee that the Asset Management Fee it will pay the Manager and its Affiliates, when added to its Carried Interest, will never exceed the fees and interests payable to a sponsor and its affiliates under the NASAA Fee Limitation.
Asset Management Fee Limit. The Asset Management Fee Limit will be calculated each year during the Funds term by calculating the total fees that would be paid to the Manager if the Manager were to be compensated on the basis of the maximum compensation payable under the NASAA Fee Limitation, including the Managers Carried Interest, as described below. To the extent that the amount paid as Front End Fees, the Asset Management Fee, and the Carried Interest for any year would cause the total fees to exceed the aggregate amount of fees calculated under the NASAA Fee Limitation for the year, the Asset Management Fee and/or Carried Interest for that year will be reduced to equal the maximum aggregate fees under the NASAA Fee Limitation. To the extent any such fees are reduced, the amount of such reduction will be accrued and deferred, and such accrued and deferred compensation would be paid to the Manager in a subsequent period, but only to the extent that the deferred compensation would be within the Asset Management Fee Limit for that later period. Any deferred fees that cannot be paid under the applicable limitations through the date of liquidation would be forfeited by the Manager at liquidation.
Under the NASAA Equipment Leasing Guidelines, the Fund is required to commit a minimum percentage of the Gross Proceeds to Investment in Equipment, calculated as the greater of: (i) 80% of the Gross Proceeds reduced by 0.0625% for each 1% of indebtedness encumbering the Funds equipment; or (ii) 75% of such Gross Proceeds. The Fund intends to incur total indebtedness equal to 50% of the aggregate cost of its equipment. The Operating Agreement requires the Fund to commit at least 85.875% of the Gross Proceeds to Investment in Equipment. Based on the formula in the NASAA Guidelines, the Funds minimum Investment in Equipment would equal 76.875% of Gross Proceeds (80% [50% × .0625%] = 76.875%), and the Funds minimum Investment in Equipment would therefore exceed the NASAA Fee Limitation minimum by 9%.
The amount of the Carried Interest permitted the Manager under the NASAA Fee Limitation will be dependent on the amount by which the percentage of Gross Proceeds the Fund ultimately commits to Investment in Equipment exceeds the minimum Investment in Equipment under the NASAA Fee Limitation. The NASAA Fee Limitation permits the Manager and its Affiliates to receive compensation in the form of a carried interest in Fund Net Income, Net Loss and Distributions equal to 1% for the first 2.5% of excess Investment in Equipment over the NASAA Guidelines minimum, 1% for the next 2% of such excess, and 1% for each additional 1% of excess Investment in Equipment. With a minimum Investment in Equipment of 85.875%, the Manager and its Affiliates may receive an additional carried interest equal to 6.5% of Net Profit, Net Loss and Distributions under the foregoing formula (2.5% + 2% + 4.5% = 9%; 1% + 1% + 4.5% = 6.5%). At the lowest permitted level of Investment in Equipment, the NASAA Guidelines would permit the Manager and its Affiliates to receive a promotional interest equal to 5% of Distributions of Cash from Operations and 1% of Distributions of Sale or Refinancing Proceeds until Members have received total Distributions equal to their Original Invested Capital plus an 8% per annum cumulative return on their Adjusted Invested Capital, and, thereafter, the promotional interest may increase to 15% of all Distributions.
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With the additional carried interest calculated as described above, the maximum aggregate fees payable to the Manager and Affiliates under the NASAA Guidelines as carried interest and promotional interest would equal 11.5% of Distributions of Cash from Operations (6.5% + 5% = 11.5%), and 7.5% of Distributions of Sale or Refinancing Proceeds (6.5% + 1% = 7.5%), before the subordination level was reached, and 21.5% of all Distributions thereafter. The maximum amounts to be paid under the terms of the Operating Agreement are subject to the application of the Asset Management Fee Limit provided in Section 8.3 of the Agreement, which limits the annual amount payable to the Manager and its Affiliates as the Asset Management Fee and the Carried Interest to an aggregate not to exceed the total amount of fees that would be payable to the Manager and its Affiliates under the NASAA Fee Limitation.
Upon completion of the offering of Units, final commitment of offering proceeds to acquisition of equipment and establishment of final levels of permanent portfolio debt, the Manager will calculate the maximum carried interest and promotional interest payable to the Manager and its Affiliates under the NASAA Fee Limitation and compare such total permitted fees to the total of the Asset Management Fee and Managers Carried Interest. If and to the extent that the Asset Management Fee and Managers Carried Interest would exceed the fees calculated under the NASAA Fee Limitation, the fees payable to the Manager and its Affiliates will be reduced by an amount sufficient to cause the total of such compensation to comply with the NASAA Fee Limitation. The adjusted Asset Management Fee Limit will then be applied to the Asset Management Fee and Carried Interest as described above. A comparison of the Front End Fees actually paid by the Fund and the NASAA Fee Limitation maximums will be repeated, and any required adjustments will be made, at least annually thereafter.
See Note 7 to the financial statements as set forth in Part II, Item 8, Financial Statements and Supplementary Data, for amounts paid.
AFS receives an allocation of all 7.5% of all Company net income, net loss and investment tax credits corresponding to its Carried Interest in Distributions and the remaining 92.5% is allocated among the Members. See financial statements as set forth in Part II, Item 8, Financial Statements and Supplementary Data, of this report for amounts allocated to AFS in 2011 and 2010.
Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
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 the Managing Member.
AFS may at any time call a meeting of the Members or a vote of the Members without a meeting, on matters on which they are entitled to vote, and shall call such meeting or for vote without a meeting following receipt of a written request therefore of Members holding 10% or more of the total outstanding Limited Liability Company Units.
The responses to Item 1 of this report under the caption Equipment Leasing Activities, Item 8 of this report under the caption Financial Statements and Supplementary Data Notes to Financial Statements Related party transactions at Note 7 thereof, and Item 11 of this report under the caption Executive Compensation, are hereby incorporated by reference.
During the years ended December 31, 2011 and 2010, the Company incurred audit and other fees with its principal auditors as follows (in thousands):
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2011 | 2010 | |||||||
Audit fees | $ | 63 | $ | 107 | ||||
Other | 3 | 24 | ||||||
$ | 66 | $ | 131 |
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 Operating Agreement, included as exhibit B to the Prospectus effective April 11, 2005 as filed on May 05, 2005 (File Number 333-120276) is hereby incorporated herein by reference.
(14.1) Code of Ethics
(31.1) Certification of Dean L. Cash pursuant to Rules 13a-14(a)/15d-14(a)
(31.2) Certification of Paritosh K. Choksi pursuant to Rules 13a-14(a)/15d-14(a)
(32.1) Certification of Dean L. Cash pursuant to 18 U.S.C. section 1350
(32.2) Certification of Paritosh K. Choksi pursuant to 18 U.S.C. section 1350
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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 15, 2012
ATEL Capital Equipment Fund XI, LLC
(Registrant)
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By: ATEL Financial Services, LLC |
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By: /s/ Dean L. Cash |
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By: /s/ Paritosh K. Choksi |
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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 15, 2012 | ||
/s/ Paritosh K. Choksi![]() |
Executive Vice President and Chief Financial Officer and Chief Operating Officer of ATEL Financial Services, LLC (Managing Member) | March 15, 2012 | ||
/s/ Samuel Schussler![]() |
Vice President and Chief Accounting Officer of ATEL Financial Services, LLC (Managing Member) |
March 15, 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 XI, LLC (Fund XI), 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 XI, 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 XI, 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 15, 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 XI, 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 15, 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 XI, 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 15, 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 XI, 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 15, 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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Dec. 31, 2011
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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. 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. Accounts receivable:Accounts receivable represent the amounts billed under operating and direct financing lease contracts, and notes receivable which are currently due to the Company. Allowances for doubtful accounts are established based on historical charge off and collection experience and the collectability of specifically identified lessees and invoiced amounts. Accounts receivable deemed uncollectible are charged off against the allowance on a specific identification basis. Recoveries of amounts that were previously written-off are recorded as other income in the period received. Credit risk:Financial instruments that potentially subject the Company to concentrations of credit risk include cash and cash equivalents, 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. 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. 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 credit worthiness of all direct finance lessees with payments outstanding less than 90 days. Based upon management’s judgment, the related direct financing leases may be placed on non-accrual status. Leases placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable. Until such time, all payments received are applied only against outstanding principal balances. 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 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. 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 financing opportunities are North America and Europe. The table below summarizes geographic information relating to the sources, by nation, of the Company’s total revenues for the years ended December 31, 2011 and 2010 and long-lived assets as of December 31, 2011 and 2010 (dollars in thousands):
Investment in securities:From time to time, the Company may purchase securities of its borrowers or receive warrants to purchase securities in connection with its lending arrangements. Purchased securitiesPurchased 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. During 2011, the Company had deemed certain investment securities to be impaired and recorded fair value adjustments totaling $2 thousand and $55 thousand at June 30, 2011 and March 31, 2011, respectively. Such adjustments reduced the cost basis of the investments. No additional fair value adjustment was deemed necessary at December 31, 2011. At December 31, 2010, the Company recorded a fair value adjustment of approximately $15 thousand which reduced the cost basis of an impaired investment which was subsequently disposed of in January 2011. WarrantsWarrants owned by the Company are not registered for public sale, but are considered derivatives and are carried at an estimated fair value, as determined by the Managing Member, on the balance sheet as assets or liabilities. At both December 31, 2011 and 2010, the Managing Member estimated the fair value of the warrants to be nominal in amount. Gains recognized on the net exercise of certain warrants totaled $52 thousand and $33 thousand for the years ended December 31, 2011 and 2010, respectively. Foreign currency transactions:Foreign currency transaction gains and losses are reported in the results of operations as “other income” or “other loss” in the period in which they occur. Currently, the Company does not use derivative instruments to hedge its economic exposure with respect to assets, liabilities and firm commitments as the foreign currency transactions risks to date have not been significant. During 2011, the Company did not record other income or loss on a net basis as its currency gains of $155 thousand were fully offset by foreign currency losses of the same amount. By comparison, the Company recorded other income, net totaling $17 thousand during 2010 related to net gains and losses from foreign currency transactions. Unearned operating lease income:The Company records prepayments on operating leases as a liability, unearned operating lease income. The liability is recorded when the prepayments are received and recognized as operating lease revenue ratably over the period to which the prepayments relate. Income taxes:The Company is treated as a partnership for federal income tax purposes. Pursuant to the provisions of Section 701 of the Internal Review Code, a partnership is not subject to federal income taxes. Accordingly, the Company has provided current income taxes for only those states, which levy income taxes on partnerships. For the years ended December 31, 2011 and 2010, the current provision for state income taxes was approximately $37 thousand and $26 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 returns (unaudited) for the years ended December 31, 2011 and 2010, respectively (in thousands):
Other income, net:Other income, net consists of gains and losses on foreign exchange transactions. During the year ended December 31, 2011, foreign currency gains were fully offset by like amounts of foreign currency transaction losses. During 2010, other income, net was comprised of net gains on foreign currency transactions. Per unit data:Net income and distributions per Unit are based upon the weighted average number of Other Members Units outstanding during the year. 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 will be 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 impact on the Company’s financial position or results of operations. |