Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
For the quarterly period ended June 30, 2004
|_| Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
For the transition period from _______ to _______
Commission File Number 333-47196
ATEL Capital Equipment Fund IX, LLC
(Exact name of registrant as specified in its charter)
California 94-3375584
- ---------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
600 California Street, 6th Floor, San Francisco, California 94108-2733
(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 989-8800
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Limited Liability
Company Units
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
The number of Limited Liability Company Units outstanding as of June 30, 2004
was 12,061,516.
DOCUMENTS INCORPORATED BY REFERENCE
None
1
ATEL CAPITAL EQUIPMENT FUND IX, LLC
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheets, June 30, 2004 and December 31, 2003.
Statements of Operations for the six and three month periods ended June 30,
2004 and 2003.
Statements of Changes in Members' Capital for the year ended December 31,
2003 and for the six month period ended June 30, 2004.
Statements of Cash Flows for the six and three month periods ended June 30,
2004 and 2003.
Notes to the Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
ATEL CAPITAL EQUIPMENT FUND IX, LLC
BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003
(Unaudited)
ASSETS
June 30, December 31,
2004 2003
---- ----
(Unaudited)
Cash and cash equivalents $23,376,963 $29,429,383
Accounts receivable, net of allowance
for doubtful accounts of $26,668
in 2004 and $13,000 in 2003 1,119,188 1,323,526
Due from affiliate 469,838 4,142,025
Notes receivable 3,388,577 268,196
Other assets 186,070 310,158
Investments in leases 52,942,274 52,057,199
------------------ ------------------
Total assets $81,482,910 $87,530,487
================== ==================
LIABILITIES AND MEMBERS' CAPITAL
Accounts payable:
Managing Member $ 495,871 $ 18,804
Other 82,215 476,740
Deposits due to lessees 177,433 -
Unearned operating lease income 205,451 128,928
------------------ ------------------
Total liabilities 960,970 624,472
Members' capital 80,521,940 86,906,015
------------------ ------------------
Total liabilities and Members' capital $81,482,910 $87,530,487
================== ==================
See accompanying notes.
3
ATEL CAPITAL EQUIPMENT FUND IX, LLC
STATEMENTS OF OPERATIONS
SIX AND THREE MONTH PERIODS ENDED
JUNE 30, 2004 AND 2003
(Unaudited)
Six Months Three Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues:
Leasing activities:
Operating leases $ 5,014,182 $ 4,530,250 $ 2,512,091 $ 2,380,006
Direct financing leases 293,015 57,791 139,222 9,012
Gain on sales of assets 10,069 104,373 - 104,373
Interest:
Interest earned on cash deposits 170,141 404,894 83,836 238,012
Interest earned on notes receivable 78,240 106,171 77,034 42,298
Other (13,517) 46,179 (16,849) 35,131
------------------ ------------------ ------------------ ------------------
5,552,130 5,249,658 2,795,334 2,808,832
Expenses:
Depreciation of operating lease assets 4,141,587 3,597,453 2,082,860 1,918,909
Amortization of initial direct costs 330,802 203,106 168,540 113,037
Cost reimbursements to Managing Member 314,782 312,058 143,485 192,545
Asset management fees to Managing Member 258,894 256,771 113,269 136,806
Interest expense 250,343 166,803 115,178 82,291
Provision for doubtful accounts 192,000 - 23,000 -
Professional fees 169,946 56,646 67,079 23,812
Impairment losses 95,158 76,634 - -
Franchise fees and state taxes 89,866 72,682 65,687 72,682
Other 133,086 77,195 64,160 28,920
------------------ ------------------ ------------------ ------------------
5,976,464 4,819,348 2,843,258 2,569,002
------------------ ------------------ ------------------ ------------------
Net (loss) income $ (424,334) $ 430,310 $ (47,924) $ 239,830
================== ================== ================== ==================
Net (loss) income:
Managing Member $ 501,017 $ 421,953 $ 280,938 $ 219,169
Other Members (925,351) 8,357 (328,862) 20,661
------------------ ------------------ ------------------ ------------------
$ (424,334) $ 430,310 $ (47,924) $ 239,830
================== ================== ================== ==================
Net (loss) income per Limited Liability Company Unit ($0.08) $0.00 ($0.03) $0.00
Weighted average number of Units outstanding 12,063,266 11,994,974 12,061,516 12,074,561
See accompanying notes.
4
ATEL CAPITAL EQUIPMENT FUND IX, LLC
STATEMENT OF CHANGES IN MEMBERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2003
AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 2004
(Unaudited)
Other Members Managing
Units Amount Member Total
Balance December 31, 2002 11,037,141 $88,816,997 $ - $88,816,997
-
Capital contributions 1,028,125 10,281,250 - 10,281,250
Less selling commissions to affiliates - (976,719) - (976,719)
Other syndication costs to affiliates - (309,377) - (309,377)
Limited Liability Company Units repurchased (250) (1,923) - (1,923)
Distributions to Members - (10,633,086) (862,142) (11,495,228)
Net income (loss) - (271,127) 862,142 591,015
------------------ ------------------ ------------------ ------------------
Balance December 31, 2003 12,065,016 86,906,015 - 86,906,015
Rescissions of capital contributions (1,000) (10,000) - (10,000)
Limited liability company units repurchased (2,500) (22,750) - (22,750)
Syndication costs recovered on rescission - 1,344 - 1,344
Distributions to Members - (5,427,318) (501,017) (5,928,335)
Net income (loss) - (925,351) 501,017 (424,334)
------------------ ------------------ ------------------ ------------------
Balance June 30, 2004 12,061,516 $80,521,940 $ - $80,521,940
================== ================== ================== ==================
See accompanying notes.
5
ATEL CAPITAL EQUIPMENT FUND IX, LLC
STATEMENTS OF CASH FLOWS
SIX AND THREE MONTH PERIODS ENDED
JUNE 30, 2004 AND 2003
(Unaudited)
Six Months Three Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Operating activities:
Net (loss) income $ (424,334) $ 430,310 $ (47,924) $ 239,830
Adjustments to reconcile net (loss) income to
cash provided by operating activities:
Gain on sales of assets (10,069) (104,373) - (104,373)
Depreciation of operating lease assets 4,141,587 3,597,453 2,082,860 1,918,909
Amortization of initial direct costs 330,802 203,106 168,540 113,037
Provision for doubtful accounts 192,000 - 23,000 -
Impairment losses 95,158 76,634 - -
Changes in operating assets and liabilities:
Accounts receivable 12,338 114,848 (438,128) (240,712)
Due from Managing Member - - 63,583 -
Other assets 124,088 29,999 14,999 14,999
Accounts payable, Managing Member 477,067 121,431 495,871 (14,549)
Accounts payable, other (394,525) (1,332) 47,620 47,121
Deposits due to lessees 177,433 - 177,433 -
Unearned operating lease income 76,523 60,738 44,370 42,528
------------------ ------------------ ------------------ ------------------
Net cash provided by operating activities 4,798,068 4,528,814 2,632,224 2,016,790
------------------ ------------------ ------------------ ------------------
6
ATEL CAPITAL EQUIPMENT FUND IX, LLC
STATEMENTS OF CASH FLOWS
(Continued
SIX AND THREE MONTH PERIODS ENDED
JUNE 30, 2004 AND 2003
(Unaudited)
Six Months Three Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Investing activities:
Purchases of equipment on operating leases (4,604,049) (8,779,071) (4,278,262) (5,192,067)
Due from affiliate 3,672,187 - (469,838) -
Note receivable advances (3,406,496) - (3,406,496) -
Purchases of equipment on direct financing leases (1,121,599) (615,949) (1,121,599) 34,051
Reduction of net investment in direct financing
leases 1,014,747 138,425 524,047 (3,110)
Payments of initial direct costs to Managing
Member (615,395) (1,060,498) (430,423) (501,751)
Payments received on notes receivable 129,261 281,376 48,001 151,498
Proceeds from sales of lease assets 40,597 1,087,663 19,499 1,087,663
------------------ ------------------ ------------------ ------------------
Net cash used in investing activities (4,890,747) (8,948,054) (9,115,071) (4,423,716)
------------------ ------------------ ------------------ ------------------
Financing activities:
Distributions to Other Members (5,427,318) (5,204,092) (2,713,008) (2,703,086)
Distributions to Managing Member (501,017) (421,953) (280,938) (219,169)
Repurchase of limited liability company units (22,750) (1,923) (22,750) (1,923)
Rescissions of capital contributions (10,000) - (10,000) -
Syndication costs recovered on rescission 1,344 - 1,344 -
Capital contributions received - 10,281,250 - -
Payment of syndication costs to Managing Member - (1,329,030) - (41,189)
------------------ ------------------ ------------------ ------------------
Net cash (used in) provided by financing
activities (5,959,741) 3,324,252 (3,025,352) (2,965,367)
------------------ ------------------ ------------------ ------------------
Net decrease in cash and cash equivalents (6,052,420) (1,094,988) (9,508,199) (5,372,293)
Cash and cash equivalents at beginning of
period 29,429,383 39,722,496 32,885,162 43,999,801
------------------ ------------------ ------------------ ------------------
Cash and cash equivalents at end of period $23,376,963 $38,627,508 $23,376,963 $38,627,508
================== ================== ================== ==================
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest $ 250,343 $ 166,803 $ 115,178 $ 82,291
================== ================== ================== ==================
See accompanying notes.
7
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
1. Summary of significant accounting policies:
Basis of presentation:
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States (GAAP) for
interim financial information and with instructions to Form 10-Q and Article 10
of Regulation S-X. The unaudited interim financial statements reflect all
adjustments which are, in the opinion of the Managing Member, necessary to a
fair statement of financial position and results of operations for the interim
periods presented. All such adjustments are of a normal recurring nature. The
preparation of financial statements in accordance with GAAP requires management
to make estimates and assumptions that effect reported amounts in the financial
statements and accompanying notes. Therefore, actual results could differ from
those estimates. Operating results for the six months ended June 30, 2004 are
not necessarily indicative of the results for the year ending December 31, 2004.
These unaudited interim financial statements should be read in conjunction with
the financial statements and notes thereto contained in the report on Form 10-K
for the year ended December 31, 2003, filed with the Securities and Exchange
Commission.
2. Organization and Company matters:
ATEL Capital Equipment Fund IX, LLC (the Company) was formed under the laws of
the state of California on September 27, 2000 for the purpose of acquiring
equipment to engage in equipment leasing and sales activities. The Company may
continue until December 31, 2019. The Company's offering was terminated as of
January 15, 2003.
Upon the sale of the minimum amount of Units of Limited Liability Company
interest (Units) of $1,200,000 and the receipt of the proceeds thereof on
February 21, 2001, the Company commenced operations.
The Company does not make a provision for income taxes since all income and
losses will be allocated to the Members for inclusion in their individual tax
returns.
ATEL Financial Services, LLC ("AFS"), an affiliated entity, acts as the Managing
Member of the Company.
Certain prior period amounts have been reclassified to conform to current period
presentation.
The Company is in its acquisition phase and is making distributions on a monthly
or quarterly basis.
8
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
3. Investment in leases:
The Company's investment in leases consists of the following:
Depreciation /
Amortization
Expense or
Balance Amortization of Reclass- Balance
December 31, Direct Financing ifications and June 30,
2003 Additions Leases Dispositions 2004
---- --------- ------ ------------ ----
Net investment in operating
leases $43,443,437 $ 4,604,049 $ (4,141,587) $ (120,228) $43,785,671
Net investment in direct financing
leases 6,357,227 1,121,599 (1,014,747) - 6,464,079
Assets held for sale or lease, net
of accumulated depreciation of
$170,300 in 2004 and
zero in 2003 5,160 - - 151,396 156,556
Initial direct costs, net of
accumulated amortization of
$1,006,041 in 2004 and
$675,238 in 2003 2,251,375 615,395 (330,802) - 2,535,968
----------------- ------------------ ------------------ ------------------ ------------------
$52,057,199 $ 6,341,043 $ (5,487,136) $ 31,168 $52,942,274
================= ================== ================== ================== ==================
Net investment in operating leases:
Property on operating leases consists of the following:
Balance Reclass- Balance
December 31, Additions and ifications and June 30,
2003 Depreciation Dispositions 2004
---- ------------ ------------ ----
Mining $ 25,521,984 $ 417,280 $ - $ 25,939,264
Marine vessels 11,200,000 - - 11,200,000
Manufacturing 10,437,852 287,925 38,633 10,764,410
Materials handling 5,879,564 817,484 (298,632) 6,398,416
Transportation - 3,081,360 - 3,081,360
Communications 3,033,933 - - 3,033,933
Natural gas compressors 621,508 - (52,048) 569,460
Office furniture 562,248 - - 562,248
------------------ ------------------ ------------------ ------------------
57,257,089 4,604,049 (312,047) 61,549,091
Less accumulated depreciation (13,813,652) (4,141,587) 191,819 (17,763,420)
------------------ ------------------ ------------------ ------------------
$ 43,443,437 $ 462,462 $ (120,228) $ 43,785,671
================== ================== ================== ==================
The average assumed residual values for assets on operating leases were 28% at
December 31, 2003 and at June 30, 2004.
9
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
3. Investment in leases (continued):
Net investment in direct financing leases:
As of June 30, 2004, net investment in direct financing leases consists office
furniture and materials handling equipment. The following lists the components
of the Company's net investment in direct financing leases as of June 30, 2004:
Total minimum lease payments receivable $ 6,636,642
Estimated residual values of leased equipment (unguaranteed) 753,359
---------------
Investment in direct financing leases 7,390,001
Less unearned income (925,922)
---------------
Net investment in direct financing leases $ 6,464,079
===============
All of the property on leases was acquired in 2001, 2002, 2003 and 2004.
At June 30, 2004, the aggregate amounts of future minimum lease payments are as
follows:
Direct
Year ending Operating Financing
December 31, Leases Leases Total
------------ ------ ------ -----
Six months ending December 31, 2004 $ 5,379,350 $ 1,457,621 $ 6,836,971
Year ending December 31, 2005 10,757,351 2,057,519 12,814,870
2006 9,161,747 1,471,497 10,633,244
2007 4,447,314 954,725 5,402,039
2008 2,318,473 530,524 2,848,997
2009 1,340,528 164,756 1,505,284
Thereafter 217,729 - 217,729
------------------ ------------------ ------------------
$33,622,492 $ 6,636,642 $40,259,134
================== ================== ==================
4. Notes receivable:
The Company has various notes receivable from parties who have financed the
purchase of equipment through the Company. The terms of the notes receivable are
18 to 60 months and bear interest at rates ranging from 11% to 21%. The notes
are secured by the equipment financed. As of June 30, 2004, the minimum future
payments receivable are as follows:
Year ending
December 31,
Six months ending December 31, 2004 $ 490,256
Year ending December 31, 2005 874,713
2006 617,296
2007 447,024
2008 447,024
2009 1,818,006
------------------
4,694,319
Less portion representing interest (1,305,742)
------------------
$ 3,388,577
==================
10
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
5. Related party transactions:
The terms of the Limited Company Operating Agreement provide that AFS and/or
affiliates are entitled to receive certain fees for equipment acquisition,
management and resale and for management of the Company.
The Limited Liability Company Operating Agreement allows for the reimbursement
of costs incurred by AFS in providing services to the Company. Services provided
include Company accounting, investor relations, legal counsel and lease and
equipment documentation. AFS is not reimbursed for services where it is entitled
to receive a separate fee as compensation for such services, such as acquisition
and management of equipment. Reimbursable costs incurred by AFS are allocated to
the Company based upon an estimate of actual time incurred by employees working
on Company business and an allocation of rent and other costs based on
utilization studies.
Substantially all employees of AFS record time incurred in performing services
on behalf of all of the companies serviced by AFS. AFS believes that the costs
reimbursed are the lower of (i) actual costs incurred on behalf of the Company
or (ii) the amount the Company would be required to pay independent parties for
comparable administrative services in the same geographic location and are
reimbursable in accordance with the Limited Liability Company Operating
Agreement.
During the six and three month periods ended June 30, 2004 and 2003, AFS and/or
affiliates earned fees, commissions and reimbursements, pursuant to the Limited
Liability Company Agreement as follows:
Six Months Three Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Costs reimbursed to AFS $ 314,782 $ 312,058 $ 143,485 $ 192,545
Asset management fees to AFS 258,894 256,771 113,269 136,806
Selling commissions (equal to 9.5% of the selling
price of the Limited Liability Company units,
deducted from Other Members' capital) - 976,719 - -
Reimbursement of other syndication costs to
AFS - 352,311 - 41,189
------------------ ------------------ ------------------ ------------------
$ 573,676 $ 1,897,859 $ 256,754 $ 370,540
================== ================== ================== ==================
11
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
6. Line of credit:
The Company participates with AFS and certain of its affiliates in a $61,945,455
revolving line of credit (comprised of an acquisition facility and a warehouse
facility) with a financial institution that includes certain financial
covenants. During the quarter ended March 31, 2004, the facility was extended
for an additional year. At the same time, the total available under the facility
was increased. The line of credit expires on June 28, 2005. As of June 30, 2004,
borrowings under the facility were as follows:
Amount borrowed by the Company under the acquisition
facility $ -
Amounts borrowed by affiliated partnerships and limited
liability companies under the acquisition facility 18,000,000
------------------
Total borrowings under the acquisition facility 18,000,000
Amounts borrowed by AFS and its sister corporation under
the warehouse facility -
------------------
Total outstanding balance $ 18,000,000
==================
Total available under the line of credit $ 61,945,455
Total outstanding balance (18,000,000)
------------------
Remaining availability $ 43,945,455
==================
Draws on the acquisition facility by any individual borrower are secured only by
that borrower's assets, including equipment and related leases. Borrowings on
the warehouse facility are recourse jointly to certain of the affiliated
partnerships and limited liability companies, the Company and AFS.
The credit agreement includes certain financial covenants applicable to each
borrower. The Company was in compliance with its covenants as of June 30, 2004.
7. Member's capital:
As of June 30, 2003, 12,061,516 Units were issued and outstanding. The Company
is authorized to issue up to 15,000,050 Units, including the 50 Units issued to
the initial members.
The Company's Net Income, Net Losses, and Distributions as defined in the
Limited Liability Company Operating Agreement are to be allocated 92.5% to the
Members and 7.5% to AFS.
Distributions to the Other Members were as follows:
Six Months Three Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Distributions $ 5,427,318 $ 5,204,092 $ 2,713,008 $ 2,703,086
Weighted average number of Units outstanding 12,063,266 11,994,974 12,061,516 12,074,561
Weighted average distributions per Unit $ 0.45 $ 0.43 $ 0.22 $ 0.22
12
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
8. Commitments:
As of June 30, 2004, the Company had outstanding commitments to purchase lease
equipment totaling approximately $32,973,000.
9. Credit facility:
In August 2002, the Company established a $102 million receivables funding
program with a receivables financing company that issues commercial paper rated
A1 from Standard and Poors and P1 from Moody's Investor Services. In this
receivables funding program, the lenders would receive liens against the
Company's assets. The lender will be in a first position against certain
specified assets and will be in either a subordinated or shared position against
the remaining assets. The program provides for borrowing at a variable interest
rate and requires AFS, on behalf of the Company, to enter into interest rate
swap agreements with certain hedge counterparties (also rated A1/P1) to mitigate
the interest rate risk associated with a variable interest rate note.
AFS anticipates that this program will allow the Company to have a more cost
effective means of obtaining debt financing than available for individual
non-recourse debt transactions. As of June 30, 2004, the Company had not
borrowed under the facility. The program requires the Company to pay an annual
standby fee equal to 0.3672% of the unused portion of the program. During the
six month periods ended June 30, 2004 and 2003, the Company paid standby fees of
$197,625 and $131,042, respectively. During the three month periods ended June
30, 2004 and 2003, the Company paid standby fees of $92,820 and $67,292,
respectively.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statements contained in this Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Form 10-Q,
which are not historical facts, may be forward-looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Investors are cautioned not
to attribute undue certainty to these forward-looking statements, which speak
only as of the date of this Form 10-Q. We undertake no obligation to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances after the date of this Form 10-Q or to reflect the occurrence of
unanticipated events, other than as required by law.
Capital Resources and Liquidity
During 2004 and 2003, the Company's primary activity was engaging in equipment
leasing activities. Through January 15, 2003, the Company had received
subscriptions for 12,065,266 Units ($120,652,660). The Company's offering was
terminated as of that date. As of June 30, 2004, 12,061,516 Units ($120,615,160)
were issued and outstanding.
During the funding period, the Company's primary source of liquidity is
subscription proceeds from the public offering of Units. The liquidity of the
Company will vary in the future, increasing to the extent cash flows from leases
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.
As another source of liquidity, the Company has contractual obligations with a
diversified group of lessees for fixed lease terms at fixed rental amounts. As
the initial lease terms expire, the Company will re-lease or sell the equipment.
The future liquidity beyond the contractual minimum rentals will depend on AFS's
success in re-leasing or selling the equipment as it comes off lease.
The Company participates with AFS and certain of its affiliates in a $61,945,455
revolving line of credit (comprised of an acquisition facility and a warehouse
facility) with a financial institution that includes certain financial
covenants. During the quarter ended March 31, 2004, the facility was extended
for an additional year. At the same time, the total available under the facility
was increased. The line of credit expires on June 28, 2005. As of June 30, 2004,
borrowings under the facility were as follows:
Amount borrowed by the Company under the acquisition
facility $ -
Amounts borrowed by affiliated partnerships and limited
liability companies under the acquisition facility 18,000,000
------------------
Total borrowings under the acquisition facility 18,000,000
Amounts borrowed by AFS and its sister corporation under
the warehouse facility -
------------------
Total outstanding balance $ 18,000,000
==================
Total available under the line of credit $ 61,945,455
Total outstanding balance (18,000,000)
------------------
Remaining availability $ 43,945,455
==================
Draws on the acquisition facility by any individual borrower are secured only by
that borrower's assets, including equipment and related leases. Borrowings on
the warehouse facility are recourse jointly to certain of the affiliated
partnerships and limited liability companies, the Company and AFS.
Throughout the reinvestment period, the Company anticipates reinvesting a
portion of lease payments from assets owned in new leasing transactions. Such
reinvestment will occur only after the payment of all obligations, including
debt service (both principal and interest), the payment of management and
acquisition fees to AFS and providing for cash distributions to the members. At
June 30, 2004, the Company had commitments to purchase lease assets totaling
approximately $32,973,000. No other commitments of capital have been made.
14
AFS or an affiliate may purchase equipment in its own name, the name of an
affiliate or the name of a nominee, a trust or otherwise and hold title thereto
on a temporary or interim basis for the purpose of facilitating the acquisition
of such equipment or the completion of manufacture of the equipment or for any
other purpose related to the business of the Company, provided, however that:
(i) the transaction is in the best interest of the Company; (ii) such equipment
is purchased by the Company for a purchase price no greater than the cost of
such equipment to AFS or affiliate (including any out-of-pocket carrying costs),
except for compensation permitted by the Operating Agreement; (iii) there is no
difference in interest terms of the loans secured by the equipment at the time
acquired by AFS or affiliate and the time acquired by the Company; (iv) there is
no benefit arising out of such transaction to AFS or its affiliate apart from
the compensation otherwise permitted by the Operating Agreement; and (v) all
income generated by, and all expenses associated with, equipment so acquired
will be treated as belonging to the Company.
The credit agreement includes certain financial covenants applicable to each
borrower. The Company was in compliance with its covenants as of June 30, 2004.
The Company currently has available adequate reserves to meet contingencies, 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.
No commitments of capital have been or are expected to be made other than for
the acquisition of additional equipment. As of June 30, 2004, such commitments
totaled approximately $32,973,000.
If inflation in the general economy becomes significant, it may affect the
Company inasmuch as the residual (resale) values and rates on re-leases of the
Company's leased assets may increase as the costs of similar assets increase.
However, the Company's revenues from existing leases would not increase, as such
rates are generally fixed for the terms of the leases without adjustment for
inflation.
If interest rates increase significantly, the lease rates that the Company can
obtain on future leases will be expected to increase as the cost of capital is a
significant factor in the pricing of lease financing. Leases already in place,
for the most part, would not be affected by changes in interest rates.
In August 2002, the Company established a $102 million receivables funding
program with a receivables financing company that issues commercial paper rated
A1 from Standard and Poors and P1 from Moody's Investor Services. In this
receivables funding program, the lenders would receive liens against the
Company's assets. The lender will be in a first position against certain
specified assets and will be in either a subordinated or shared position against
the remaining assets. The program provides for borrowing at a variable interest
rate and requires AFS, on behalf of the Company, to enter into interest rate
swap agreements with certain hedge counterparties (also rated A1/P1) to mitigate
the interest rate risk associated with a variable interest rate note.
AFS anticipates that this program will allow the Company to have a more cost
effective means of obtaining debt financing than available for individual
non-recourse debt transactions. As of June 30, 2004, the Company had not
borrowed under the facility. The program requires the Company to pay an annual
standby fee equal to 0.3672% of the unused portion of the program. During the
six month periods ended June 30, 2004 and 2003, the Company paid standby fees of
$197,625 and $131,042, respectively. During the three month periods ended June
30, 2004 and 2003, the Company paid standby fees of $92,820 and $67,292,
respectively.
Cash Flows
During the first half of 2004, the Company's primary source of liquidity was
operating lease rents and the uninvested proceeds of the public offering (which
terminated in 2003). During the first half of 2003, the Company's primary source
of liquidity was the proceeds of its offering of Units which ended January 2003.
In 2004 and 2003, the primary source of cash from operations was rents from
operating leases.
Rents from direct financing leases accounted for as reductions in the Company's
net investment in direct financing leases and payments received on notes
receivable were the primary sources of cash from investing activities in the
first half of 2003. Cash from direct financing leases has increased from
$138,425 in the six month period ended June 30, 2003 to $1,014,747 in the six
month period ended June, 2004. Cash from direct financing leases has increased
from ($3,110) in the three month period ended June 30, 2003 to $524,047 in the
three month period ended June, 2004. The increases were a result of lease asset
acquisitions over the last year. In the first half of 2004, the Company received
payment of asset sales proceeds ($4,142,025) that had been due from an affiliate
as of December 31, 2003. In the first half of 2004, there was also a small
amount of proceeds from sales of assets. Uses of cash for investing activities
consisted of cash used to purchase operating and direct financing lease assets,
payments of initial direct costs associated with the lease asset purchases (2004
and 2003) and advances on notes receivable (2004 only).
15
There were no financing sources of cash in 2004. In the first half of 2003, the
primary source of cash from financing activities was the proceeds of the
Company's public offering of Units of Limited Liability Company interest of
$10,281,250. In 2004, financing uses of cash consisted of distributions to the
members, repurchases of Units and rescissions of capital contributions. In 2003,
financing uses of cash consisted of payments of syndication costs associated
with the offering and making distributions to the members. The amounts of such
distributions in 2004 increased compared to 2003 as a result of sales of Units
in the first quarter of 2003. The increase resulted from the increase in the
weighted average number of Units outstanding in the first half of 2004
(12,063,266 Units - six months and 12,061,516 - three months) compared to the
same period in 2003 (11,994,974 Units - six months and 12,074,561 - three
months).
Results of operations
On February 21, 2001, the Company commenced operations. In 2003, operations
resulted in net income of $430,310 for the six month period ended June 30 and
$239,830 for the three month period then ended. In 2004, operations resulted in
a net loss of $424,334 for the six month period ended June 30 and $47,924 for
the three month period then ended. The Company's primary source of revenues is
from operating leases.
Depreciation of operating lease assets was $4,141,587 and $3,597,453 during the
six month periods ended June 30, 2004 and 2003, respectively. Depreciation of
operating lease assets was $2,082,860 and $1,918,909 during the three month
periods ended June 30, 2004 and 2003, respectively. Depreciation expense is
related to operating lease assets and thus, to operating lease revenues.
Amortization of initial direct costs was $330,802 and $203,106 during the six
month periods ended June 30, 2004 and 2003, respectively. Amortization of
initial direct costs was $168,540 and $113,037 during the three month periods
ended June 30, 2004 and 2003, respectively. Amortization of initial direct costs
has increased in 2004 compared to 2003 as a result of the acquisitions of
equipment that have taken place over the last year. Depreciation and
amortization are expected to increase in future periods as acquisitions
continue.
Asset management fees were $258,894 and $256,771 for the six month periods ended
June 30, 2004 and 2003, respectively. Asset management fees were $113,269 and
$136,806 for the three month periods ended June 30, 2004 and 2003, respectively.
Asset management fees are based on the gross lease rents of the Company plus
proceeds from the sales of lease assets. They are limited to certain percentages
of lease rents, distributions to members and certain other items. As additional
assets are acquired, as lease rents are collected and distributions are made to
the members, these fees are expected to increase.
Interest expense of $250,343 and $166,803 for the six month periods ended June
30, 2004 and 2003, respectively, related primarily to maintaining the
availability of the receivables funding facility established in August 2002.
In the first quarter of 2004, the Company provided $169,000 for doubtful
accounts related to the default of a borrower (Photuris, Inc.) on a note
receivable.
Results of operations in future periods are expected to vary considerably from
those of the first half of 2004 and 2003 as the Company continues to acquire
significant amounts of lease assets.
Item 3. Quantitative and Qualitative Disclosures of Market Risk.
The Company, like most other companies, is exposed to certain market risks,
including primarily changes in interest rates. The Company believes its exposure
to other market risks, including foreign currency exchange rate risk, commodity
risk and equity price risk, are insignificant to both its financial position and
results of operations.
In general, the Company expects to manage its exposure to interest rate risk by
obtaining fixed rate debt. The fixed rate debt is structured so as to match the
cash flows required to service the debt to the payment streams under fixed rate
lease receivables. The payments under the leases are assigned to the lenders in
satisfaction of the debt. Furthermore, AFS has historically been able to
maintain a stable spread between its cost of funds and lease yields in both
periods of rising and falling interest rates. Nevertheless, the Company expects
to frequently fund leases with its floating interest rate line of credit and
will, therefore, be exposed to interest rate risk until fixed rate financing is
arranged, or the floating interest rate line of credit is repaid. As of June 30,
2004, there was no outstanding balance on the floating interest rate line of
credit.
16
Also, the Company entered into a receivables funding facility in 2002. Since
interest on the outstanding balances under the facility will vary, the Company
will be exposed to market risks associated with changing interest rates. To
hedge its interest rate risk, the Company expects to enter into interest rate
swaps, which will effectively convert the underlying interest characteristic on
the facility from floating to fixed. Under the swap agreements, the Company
expects to make or receive variable interest payments to or from the
counterparty based on a notional principal amount. The net differential paid or
received by the Company is recognized as an adjustment to interest expense
related to the facility balances. The amount paid or received will represent the
difference between the payments required under the variable interest rate
facility and the amounts due under the facility at the fixed (hedged) interest
rate. There were no borrowings under this facility as of June 30, 2004.
In general, it is anticipated that these swap agreements will eliminate the
Company's interest rate risk associated with variable rate borrowings. However,
the Company would be exposed to and would manage credit risk associated with the
counterparty by dealing only with institutions it considers financially sound.
Item 4. Controls and procedures.
Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management (ATEL
Financial Services, LLC as Managing Member of the registrant, including the
chief executive officer and chief financial officer), an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures [as defined in Rules 240.13a-14(c) under the Securities Exchange
Act of 1934] was performed as of the date of this report. Based upon this
evaluation, the chief executive officer and the chief financial officer
concluded that, as of the evaluation date, except as noted below, our disclosure
controls and procedures were effective for the purposes of recording,
processing, summarizing, and timely reporting information required to be
disclosed by us in the reports that we file under the Securities Exchange Act of
1934; and that such information is accumulated and communicated to our
management in order to allow timely decisions regarding required disclosure.
As disclosed in the Form 10-K for the year ended December 31, 2003, the chief
executive and chief financial officer of the Managing Member of the Company had
identified certain enhanced controls needed to facilitate a more effective
closing of the Company's financial statements. During the first quarter of 2004
and since the end of the quarter, the Managing Member hired a new controller,
added additional accounting staff personnel, and has instituted or revised
existing procedures in order to ensure that the Company's ability to execute
internal controls in accounting and reconciliation in the closing process is
adequate in all respects. The Managing Member will continue to review its
accounting procedures and practices to determine their effectiveness and
adequacy and will take such steps as deemed necessary in the opinion of the
Managing Member's chief executive and chief financial officers to ensure the
adequacy of the Company's accounting controls and procedures.
The Managing Member's chief executive officer and chief financial officer have
determined that no weakness in financial and accounting controls and procedures
had any material effect on the accuracy and completeness of the Company's
financial reporting and disclosure included in this report.
Changes in internal controls
There have been no significant changes in our internal controls or in other
factors that could significantly affect our disclosure controls and procedures
subsequent to the evaluation date nor were there any significant deficiencies or
material weaknesses in our internal controls, except as described in the prior
paragraphs.
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In the ordinary course of conducting business, there may be certain claims,
suits, and complaints filed against the Company. In the opinion of management,
the outcome of such matters, if any, will not have a material impact on the
Company's financial position or results of operations. No material legal
proceedings are currently pending against the Company or against any of its
assets. The following is a discussion of legal matters involving the Company,
but which do not represent claims against the Company or its assets.
Silicon Access Networks, Inc.:
Silicon Access Networks, Inc. ("SAN") advised AFS on July 8, 2002, that due to a
further decline in expectations of future demand for SAN's products by potential
customers in its target markets, SAN's Board of Directors had directed
management to close a branch office located in North Carolina, which occurred in
July 2002.
In September 2003, SAN defaulted on its note payable to the Company. Essentially
all of the equipment financed was recovered and sold at auction in 2003. Assets
remaining in inventory are carried at the estimated net realizable value of
approximately $5,200. On December 22, 2003, SAN filed for protection under the
Bankruptcy Act. The Company's remaining claims are unsecured. No amounts
relating to the unsecured claims have been included in the financial statements
of the Company as of December 31, 2003 or as of June 30, 2004.
Photuris, Inc.:
Photuris, a debtor of the Company, has ceased operations. As of this date, no
legal action has been initiated against the debtor. The Company also owns Series
C preferred stock of Photuris. The original cost of the stock was $190,158. The
value of the stock has been written off in the first quarter of 2004. The
Company also had a promissory note from Photuris for $300,000. The note has been
written down to the expected value of the collateral (approximately $60,000) in
the first quarter of 2004.
Item 2. Changes in Securities and Use of Proceeds
Inapplicable.
Item 3. Defaults Upon Senior Securities.
Inapplicable.
Item 4. Submission Of Matters To A Vote Of Security Holders.
Inapplicable.
Item 5. Other Information.
Inapplicable.
Item 6. Exhibits And Reports On Form 8-K.
(a) Documents filed as a part of this report
1. Financial Statement Schedules
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore have been omitted.
2. Other Exhibits
31.1 Certification of Paritosh K. Choksi
31.2 Certification of Dean L. Cash
32.1 Certification Pursuant to 18 U.S.C. section 1350 of Dean L. Cash
32.2 Certification Pursuant to 18 U.S.C. section 1350 of Paritosh K.
Choksi
(b) Report on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date:
August 11, 2004
ATEL CAPITAL EQUIPMENT FUND IX, LLC
(Registrant)
By: ATEL Financial Services, LLC
Managing Member of Registrant
By: /s/ Dean L. Cash
------------------
Dean L. Cash
President and Chief Executive
Officer of Managing Member
By: /s/ Paritosh K. Choksi
-------------------------------------
Paritosh K. Choksi
Executive Vice President of
Managing Member, Principal
financial officer of registrant
By: /s/ Donald E. Carpenter
-------------------------------------
Donald E. Carpenter
Principal accounting
officer of registrant
19