Attached files
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EX-31.1 - EXHIBIT 31.1 - ATEL 12, LLC | v393291_exhx31x1.htm |
EX-31.2 - EXHIBIT 31.2 - ATEL 12, LLC | v393291_exhx31x2.htm |
EX-32.2 - EXHIBIT 32.2 - ATEL 12, LLC | v393291_exhx32x2.htm |
EX-32.1 - EXHIBIT 32.1 - ATEL 12, LLC | v393291_exhx32x1.htm |
EXCEL - IDEA: XBRL DOCUMENT - ATEL 12, LLC | Financial_Report.xls |
Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended September 30, 2014
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the transition period from to
Commission File number 000-53618
ATEL 12, LLC
(Exact name of registrant as specified in its charter)
California | 20-8712853 | |
(State or other jurisdiction of Incorporation or organization) |
(I. R. S. Employer Identification No.) |
The Transamerica Pyramid, 600 Montgomery Street, 9th Floor, San Francisco, California 94111
(Address of principal executive offices)
Registrants telephone number, including area code (415) 989-8800
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Limited Liability Company Units
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The number of Limited Liability Company Units outstanding as of October 31, 2014 was 2,992,482.
DOCUMENTS INCORPORATED BY REFERENCE
None.
ATEL 12, LLC
Index
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
ATEL 12, LLC
BALANCE SHEETS
SEPTEMBER 30, 2014 AND DECEMBER 31, 2013
(In Thousands)
September 30, 2014 |
December 31, 2013 |
|||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Cash and cash equivalents | $ | 770 | $ | 857 | ||||
Accounts receivable, net of allowance for doubtful accounts of $9 at September 30, 2014 and $3 at December 31, 2013 | 1,989 | 55 | ||||||
Notes receivable, net of unearned interest income of $123 at September 30, 2014 and $255 as of December 31, 2013 | 953 | 1,701 | ||||||
Investment in securities | 258 | 275 | ||||||
Fair value of warrants | 376 | 555 | ||||||
Investments in equipment and leases, net of accumulated depreciation of $10,594 at September 30, 2014 and $11,046 at December 31, 2013 | 6,548 | 10,653 | ||||||
Prepaid expenses and other assets | 32 | 30 | ||||||
Total assets | $ | 10,926 | $ | 14,126 | ||||
LIABILITIES AND MEMBERS CAPITAL |
||||||||
Accounts payable and accrued liabilities: |
||||||||
Managing Member | $ | 75 | $ | 55 | ||||
Accrued distributions to Other Members | 230 | 230 | ||||||
Other | 255 | 211 | ||||||
Non-recourse debt | 2,203 | 3,958 | ||||||
Unearned operating lease income | 77 | 101 | ||||||
Total liabilities | 2,840 | 4,555 | ||||||
Commitments and contingencies |
||||||||
Members capital: |
||||||||
Managing Member | | | ||||||
Other Members | 8,086 | 9,571 | ||||||
Total Members capital | 8,086 | 9,571 | ||||||
Total liabilities and Members capital | $ | 10,926 | $ | 14,126 |
See accompanying notes.
3
ATEL 12, LLC
STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2014 AND 2013
(In Thousands Except for Units and Per Unit Data)
(Unaudited)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Revenues: |
||||||||||||||||
Leasing and lending activities: |
||||||||||||||||
Operating leases | $ | 808 | $ | 980 | $ | 2,655 | $ | 2,900 | ||||||||
Direct financing leases | 20 | 29 | 67 | 96 | ||||||||||||
Interest on notes receivable | 29 | 32 | 118 | 114 | ||||||||||||
Gain on sales of lease assets and early termination of notes | 565 | 1 | 710 | 64 | ||||||||||||
Gain on sales or dispositions of securities | | | 30 | 5 | ||||||||||||
Unrealized loss on fair valuation of warrants | (5 | ) | | (179 | ) | | ||||||||||
Other | 1 | 44 | 5 | 82 | ||||||||||||
Total revenues | 1,418 | 1,086 | 3,406 | 3,261 | ||||||||||||
Expenses: |
||||||||||||||||
Depreciation of operating lease assets | 554 | 705 | 1,809 | 2,109 | ||||||||||||
Asset management fees to Managing Member | 34 | 40 | 113 | 125 | ||||||||||||
Acquisition expense | 22 | 46 | 48 | 84 | ||||||||||||
Cost reimbursements to Managing Member and/or affiliates |
73 | 97 | 234 | 285 | ||||||||||||
Provision for (reversal of) credit losses | 9 | (5 | ) | 6 | (21 | ) | ||||||||||
Impairment losses on equipment | | | 226 | | ||||||||||||
Amortization of initial direct costs | 6 | 8 | 20 | 26 | ||||||||||||
Interest expense | 13 | 30 | 53 | 91 | ||||||||||||
Professional fees | 13 | 12 | 91 | 63 | ||||||||||||
Outside services | 5 | 8 | 25 | 28 | ||||||||||||
Other | 25 | 29 | 79 | 96 | ||||||||||||
Total expenses | 754 | 970 | 2,704 | 2,886 | ||||||||||||
Net income | $ | 664 | $ | 116 | $ | 702 | $ | 375 | ||||||||
Net income: |
||||||||||||||||
Managing Member | $ | 55 | $ | 55 | $ | 164 | $ | 164 | ||||||||
Other Members | 609 | 61 | 538 | 211 | ||||||||||||
$ | 664 | $ | 116 | $ | 702 | $ | 375 | |||||||||
Net income per Limited Liability Company Unit (Other Members) | $ | 0.20 | $ | 0.02 | $ | 0.18 | $ | 0.07 | ||||||||
Weighted average number of Units outstanding | 2,992,482 | 2,993,482 | 2,993,141 | 2,993,482 |
See accompanying notes.
4
ATEL 12, LLC
STATEMENTS OF CHANGES IN MEMBERS CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2013
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2014
(In Thousands Except for Units and Per Unit Data)
Other Members | Managing Member |
|||||||||||||||
Units | Amount | Total | ||||||||||||||
Balance December 31, 2012 | 2,993,482 | $ | 11,491 | $ | | $ | 11,491 | |||||||||
Distributions to Other Members ($0.90 per Unit) | | (2,694 | ) | | (2,694 | ) | ||||||||||
Distributions to Managing Member | | | (218 | ) | (218 | ) | ||||||||||
Net income | | 774 | 218 | 992 | ||||||||||||
Balance December 31, 2013 | 2,993,482 | 9,571 | | 9,571 | ||||||||||||
Repurchases of Units | (1,000 | ) | (3 | ) | | (3 | ) | |||||||||
Distributions to Other Members ($0.67 per Unit) | | (2,020 | ) | | (2,020 | ) | ||||||||||
Distributions to Managing Member | | | (164 | ) | (164 | ) | ||||||||||
Net income | | 538 | 164 | 702 | ||||||||||||
Balance September 30, 2014 (Unaudited) | 2,992,482 | $ | 8,086 | $ | | $ | 8,086 |
See accompanying notes.
5
ATEL 12, LLC
STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2014 AND 2013
(In Thousands)
(Unaudited)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Operating activities: |
||||||||||||||||
Net income | $ | 664 | $ | 116 | $ | 702 | $ | 375 | ||||||||
Adjustment to reconcile net income to cash provided by operating activities: |
||||||||||||||||
Gain on sales of lease assets and early termination of notes | (565 | ) | (1 | ) | (710 | ) | (64 | ) | ||||||||
Depreciation of operating lease assets | 554 | 705 | 1,809 | 2,109 | ||||||||||||
Amortization of initial direct costs | 6 | 8 | 20 | 26 | ||||||||||||
Provision for (reversal of) credit losses | 9 | (5 | ) | 6 | (21 | ) | ||||||||||
Impairment losses on equipment | | | 226 | | ||||||||||||
Gain on sales or dispositions of securities | | | (30 | ) | (5 | ) | ||||||||||
Unrealized loss on fair valuation of warrants | 5 | | 179 | | ||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||
Accounts receivable | (57 | ) | 14 | (32 | ) | 14 | ||||||||||
Prepaid expenses and other assets | (9 | ) | (14 | ) | (2 | ) | (7 | ) | ||||||||
Accounts payable, Managing Member | 17 | 75 | 20 | 27 | ||||||||||||
Accounts payable, other | 17 | (36 | ) | 44 | 58 | |||||||||||
Accrued liabilities, affiliates | | | | | ||||||||||||
Unearned operating lease income | 1 | 57 | (24 | ) | (1 | ) | ||||||||||
Net cash provided by operating activities | 642 | 919 | 2,208 | 2,511 | ||||||||||||
Investing activities: |
||||||||||||||||
Purchases of equipment on operating leases | | | | (895 | ) | |||||||||||
Purchase of securities | | (1 | ) | (24 | ) | (1 | ) | |||||||||
Proceeds from sales of lease assets and early termination of notes | 535 | 158 | 1,047 | 684 | ||||||||||||
Payments of initial direct costs | | | (5 | ) | (3 | ) | ||||||||||
Note receivable advances | | (1 | ) | | (93 | ) | ||||||||||
Proceeds from sale of securities | | | 71 | 21 | ||||||||||||
Principal payments received on direct financing leases | 21 | 22 | 78 | 93 | ||||||||||||
Principal payments received on notes receivable | 111 | 154 | 480 | 526 | ||||||||||||
Net cash provided by investing activities | 667 | 332 | 1,647 | 332 | ||||||||||||
Financing activities: |
||||||||||||||||
Borrowings under non-recourse debt | | | 197 | 2,734 | ||||||||||||
Repayments under non-recourse debt | (752 | ) | (578 | ) | (1,952 | ) | (1,594 | ) | ||||||||
Distributions to Other Members | (673 | ) | (674 | ) | (2,020 | ) | (2,021 | ) | ||||||||
Distributions to Managing Member | (55 | ) | (55 | ) | (164 | ) | (164 | ) |
See accompanying notes.
6
ATEL 12, LLC
STATEMENTS OF CASH FLOWS (continued)
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2014 AND 2013
(In Thousands)
(Unaudited)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Repurchases of Units | | | (3 | ) | | |||||||||||
Net cash used in financing activities | (1,480 | ) | (1,307 | ) | (3,942 | ) | (1,045 | ) | ||||||||
Net (decrease) increase in cash and cash equivalents | (171 | ) | (56 | ) | (87 | ) | 1,798 | |||||||||
Cash and cash equivalents at beginning of period | 941 | 2,173 | 857 | 319 | ||||||||||||
Cash and cash equivalents at end of period | $ | 770 | $ | 2,117 | $ | 770 | $ | 2,117 | ||||||||
Supplemental disclosures of cash flow information: |
||||||||||||||||
Cash paid during the period for interest | $ | 14 | $ | 32 | $ | 56 | $ | 94 | ||||||||
Cash paid during the period for taxes | $ | | $ | | $ | 3 | $ | 4 | ||||||||
Schedule of non-cash transactions: |
||||||||||||||||
Distributions payable to Other Members at period-end |
$ | 230 | $ | 230 | $ | 230 | $ | 230 | ||||||||
Distributions payable to Managing Member at period-end | $ | 19 | $ | 19 | $ | 19 | $ | 19 | ||||||||
Amount due from sale of lease assets | $ | 1,908 | $ | | $ | 1,908 | $ | |
See accompanying notes.
7
ATEL 12, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Limited Liability Company matters:
ATEL 12, LLC (the Company or the Fund) was formed under the laws of the state of California on January 25, 2007 for the purpose of equipment financing and acquiring equipment to engage in equipment leasing and sales activities, as well as in real estate, growth capital investment activities and green technologies (the principal operations). From its inception into the third quarter of 2013, the Companys Managing Member was ATEL Associates 12, LLC (AA12), a Nevada limited liability company. Effective September 30, 2013, AA12 was merged into ATEL Financial Services, LLC (AFS) (the Managing Member or Manager), a California limited liability company, which assumed the role of Managing Member of the Company. The Fund may continue until December 31, 2030. As a limited liability company, the liability of any individual member for the obligations of the Fund is limited to the extent of capital contributions to the Fund by the individual member.
The Company conducted a public offering of 20,000,000 Limited Liability Company Units (Units), at a price of $10 per Unit. On January 24, 2008, subscriptions for the minimum number of Units (120,000, representing $1.2 million), excluding subscriptions from Pennsylvania investors, had been received and the Fund requested subscription proceeds to be released from escrow. On that date, the Company commenced initial operations and continued in its development stage activities until transitioning to an operating enterprise during the second quarter of 2008. Pennsylvania subscriptions were subject to a separate escrow to be released to the Fund only when the Fund had received aggregate subscriptions for all investors equal to at least $7.5 million. Total contributions to the Fund exceeded $7.5 million on July 15, 2008. The offering was terminated on September 25, 2009.
As of September 30, 2014, cumulative contributions, net of rescissions and/or redemptions, totaling $29.9 million (inclusive of the $500 initial Members capital investment) have been received and 2,992,482 Units were issued and outstanding.
The Fund, or Managing Member and/or affiliates on behalf of the Fund, has incurred costs in connection with the organization, registration and issuance of the Units. The amount of such costs to be borne by the Fund is limited by certain provisions of the ATEL 12, LLC Limited Liability Company Operating Agreement dated April 3, 2007 (the Operating Agreement).
The Companys principal objectives are to invest in a diversified portfolio of investments that (i) preserves, protects and returns the Companys invested capital; (ii) generates regular cash distributions to Unitholders, any balance remaining after required minimum distributions to be used to purchase additional investments during the Reinvestment Period (ending six calendar years after the completion of the Companys public offering of Units) which ends on December 31, 2015 and (iii) provides additional cash distributions following the Reinvestment Period and until all investment portfolio assets have been sold or otherwise disposed. The Company is governed by its Operating Agreement, as amended.
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, 2013, filed with the Securities and Exchange Commission.
2. Summary of significant accounting policies:
Basis of presentation:
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q as mandated by the Securities and Exchange Commission. The unaudited interim financial statements reflect all adjustments which are, in the opinion of the Managing Member, necessary for a fair statement of financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year.
8
ATEL 12, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
2. Summary of significant accounting policies: - (continued)
Certain prior period amounts may have been reclassified to conform to the current period presentation. These reclassifications had no significant effect on the reported financial position or results from operations.
Footnote and tabular amounts are presented in thousands, except as to Units and per Unit data.
In preparing the accompanying unaudited financial statements, the Company has reviewed, as determined necessary by the Managing Member, events that have occurred after September 30, 2014, up until the issuance of the financial statements. No events were noted which would require additional disclosure in the footnotes to the financial statements.
Use of estimates:
The preparation of the 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 the 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 determination of the allowances for doubtful accounts and reserve for credit losses on 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 equipments estimated residual values. Off-lease equipment is generally not subject to depreciation. The Company depreciates all lease assets, in accordance with guidelines consistent with ASC 840-20-35-3, over the periods of the lease terms contained in each assets respective lease contract to the estimated residual value at the end of the lease contract. All lease assets are purchased only concurrent with the execution of a lease commitment by the lessee. Thus, the original depreciation period corresponds with the term of the original lease. Once the term of an original lease contract is completed, the subject property is typically sold to the existing user, re-leased to the existing user, or, when off-lease, is held for sale. Assets which are re-leased continue to be depreciated using the terms of the new lease agreements and the estimated residual values at the end of the new lease terms, adjusted downward as necessary. Assets classified as held-for-sale are carried at the lower of carrying amount, or the fair value less cost to sell (ASC 360-10-35-43).
The Company does not use the equipment held in its portfolio, but holds it solely for lease and ultimate sale. In the course of marketing equipment that has come off-lease, management may determine at some point that re-leasing the assets may provide a superior return for investors and would then execute another lease. Upon entering into a new lease contract, management will estimate the residual value once again and resume depreciation. If, and when, the Company, at any time, determines that depreciation in value may have occurred with respect to an asset held-for-sale, the Company would review the value to determine whether a material reduction in value had occurred and recognize any appropriate impairment. All lease assets, including off-lease assets, are subject to the Companys quarterly impairment analysis, as described in Note 5. 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.
9
ATEL 12, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
2. Summary of significant accounting policies: - (continued)
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.
Segment reporting:
The Company is organized into one operating segment for the purpose of making operating decisions or assessing performance. Accordingly, the Company operates in one reportable operating segment in the United States.
The primary geographic regions in which the Company sought leasing opportunities were North America and Europe. For the nine months ended September 30, 2014 and 2013, and as of September 30, 2014 and December 31, 2013, 100% of the Companys operating revenues and long-lived assets relate to customers domiciled in North America.
Investment in securities:
Purchased securities
Purchased securities are generally not registered for public sale and are carried at cost. Such securities are adjusted to fair value if the fair value is less than the carrying value and such impairment is deemed by the Managing Member to be other than temporary. Factors considered by the Managing Member in determining fair value include, but are not limited to, available financial information, the issuers ability to meet its current obligations and indications of the issuers subsequent ability to raise capital. Based upon the Companys review of its portfolio, no fair value adjustment was deemed necessary for the three and nine months ended September 30, 2014 and 2013. Purchased securities totaled $258 thousand and $275 thousand at September 30, 2014 and December 31, 2013, respectively. The Company recognized gains of $14 thousand and $5 thousand on the disposition of certain purchased securities during the respective nine-month periods ended September 30, 2014 and 2013. None of such gains were recognized during the three-month periods ended September 30, 2014 and 2013.
Warrants
Warrants owned by the Company are not registered for public sale, but are considered derivatives and are reflected at an estimated fair value on the balance sheet as determined by the Managing Member. During the three and nine months ended September 30, 2014, the Company recorded unrealized losses of $5 thousand and $179 thousand, respectively, on fair valuation of its warrants. There were no unrealized gains or losses recorded during the three and nine months ended September 30, 2013. As of September 30, 2014 and December 31, 2013, the estimated fair value of the Companys portfolio of warrants amounted to $376 thousand and $555 thousand, respectively. During the nine months ended September 30, 2014, the Company realized gains of $16 thousand on the net exercise of certain warrants. None of such realized gains were related to the third quarter. There were no net exercises of warrants during the three and nine months ended September 30, 2013.
Per Unit data:
Net income and distributions per Unit are based upon the weighted average number of Other Members Units outstanding during the period.
10
ATEL 12, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
2. Summary of significant accounting policies: - (continued)
Recent accounting pronouncements:
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company evaluated the impact of the new standard on its financial statements and has determined that such impact is virtually non-existent as the new revenue guideline does not affect revenues from leases and loans, which comprise the majority of the Companys revenues.
In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements Going Concern (subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern. The new standard provides guidance relative to managements responsibility to evaluate whether there is substantial doubt about an entitys ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. Management is currently evaluating the standard and its operational and related disclosure requirements.
3. Notes receivable, net:
The Company has various notes receivable from borrowers who have financed the purchase of equipment through the Company. At September 30, 2014, the terms of the notes receivable are from 36 to 42 months and bear interest at rates ranging from 11.37% to 14.30% per annum. The notes are generally secured by the equipment financed and have maturity dates ranging from 2015 through 2017. The Company had neither notes in non-accrual status nor impaired notes at both September 30, 2014 and December 31, 2013.
As of September 30, 2014, the minimum future payments receivable are as follows (in thousands):
Three months ending December 31, 2014 | $ | 141 | ||
Year ending December 31, 2015 | 490 | |||
2016 | 400 | |||
2017 | 40 | |||
1,071 | ||||
Less: portion representing unearned interest income | (123 | ) | ||
948 | ||||
Unamortized initial direct costs | 5 | |||
Notes receivable, net | $ | 953 |
Initial direct costs (IDC) amortization expense related to notes receivable and the Companys operating and direct financing leases for the three and nine months ended September 30, 2014 and 2013 are as follows (in thousands):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
IDC amortization notes receivable | $ | 1 | $ | 1 | $ | 5 | $ | 5 | ||||||||
IDC amortization lease assets | 5 | 7 | 15 | 21 | ||||||||||||
Total | $ | 6 | $ | 8 | $ | 20 | $ | 26 |
11
ATEL 12, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
4. Allowance for credit losses:
The Companys allowance for credit losses are as follows (in thousands):
Accounts Receivable Allowance for Doubtful Accounts |
Valuation Adjustments on Financing Receivables |
Total Allowance for Credit Losses |
||||||||||||||||||||||
Notes Receivable |
Finance Leases |
Operating Leases |
Notes Receivable |
Finance Leases |
||||||||||||||||||||
Balance December 31, 2012 | $ | | $ | 12 | $ | 10 | $ | 49 | $ | | $ | 71 | ||||||||||||
Reversal of provision | | (12 | ) | (7 | ) | (22 | ) | | (41 | ) | ||||||||||||||
Asset disposal | | | | (27 | ) | | (27 | ) | ||||||||||||||||
Balance December 31, 2013 | | | 3 | | | 3 | ||||||||||||||||||
Provision | | 5 | 1 | | | 6 | ||||||||||||||||||
Balance September 30, 2014 | $ | | $ | 5 | $ | 4 | $ | | $ | | $ | 9 |
Accounts receivable
Accounts receivable represent the amounts billed under operating and direct financing lease contracts, and notes receivable which are currently due to the Company.
Allowances for doubtful accounts are typically established based upon their aging and historical charge off and collection experience and the creditworthiness of specifically identified lessees and borrowers, and invoiced amounts. Accounts receivable deemed uncollectible are generally charged off against the allowance on a specific identification basis. Recoveries of amounts that were previously written-off are recorded as other income in the period received.
Accounts receivable are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of companies with lease or note payments outstanding less than 90 days. Based upon 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 and notes receivable are applied only against outstanding principal balances.
Financing receivables
In addition to the allowance established for delinquent accounts receivable, the total allowance related solely to financing receivables also includes anticipated impairment charges on notes receivable and direct financing leases.
Notes are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest when due according to the contractual terms of the note agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest when due. If it is determined that a loan is impaired with regard to scheduled payments, the Company will perform an analysis of the note to determine if an impairment valuation reserve is necessary. This analysis considers the estimated cash flows from the note, or the collateral value of the property underlying the note when note repayment is collateral dependent. Any required valuation reserve is charged to earnings when determined; and notes are charged off to the allowance as they are deemed uncollectible.
12
ATEL 12, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
4. Allowance for credit losses: - (continued)
The asset underlying a direct financing lease contract is considered impaired if the estimated undiscounted future cash flows of the asset are less than its net book value. The estimated undiscounted future cash flows are the sum of the estimated residual value of the asset at the end of the assets expected holding period and estimates of undiscounted future rents. The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the market place are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. Impairment is measured as the difference between the fair value (as determined by a valuation method using discounted estimated future cash flows, third party appraisals or comparable sales of similar assets as applicable based on asset type) of the asset and its carrying value on the measurement date.
The Companys allowance for credit losses (related solely to financing receivables) and its recorded investment in financing receivables as of September 30, 2014 and December 31, 2013 were as follows (in thousands):
September 30, 2014 | Notes Receivable | Finance Leases | Total | |||||||||
Allowance for credit losses: |
||||||||||||
Ending balance | $ | | $ | | $ | | ||||||
Ending balance: individually evaluated for impairment | $ | | $ | | $ | | ||||||
Ending balance: collectively evaluated for impairment | $ | | $ | | $ | | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | | $ | | $ | | ||||||
Financing receivables: |
||||||||||||
Ending balance | $ | 9531 | $ | 128 | $ | 1,081 | ||||||
Ending balance: individually evaluated for impairment | $ | 953 | $ | 128 | $ | 1,081 | ||||||
Ending balance: collectively evaluated for impairment | $ | | $ | | $ | | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | | $ | | $ | |
1 | Includes $5 of unamortized initial direct costs. |
December 31, 2013 | Notes Receivable | Finance Leases | Total | |||||||||
Allowance for credit losses: |
||||||||||||
Ending balance | $ | | $ | | $ | | ||||||
Ending balance: individually evaluated for impairment | $ | | $ | | $ | | ||||||
Ending balance: collectively evaluated for impairment | $ | | $ | | $ | | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | | $ | | $ | | ||||||
Financing receivables: |
||||||||||||
Ending balance | $ | 1,7012 | $ | 200 | $ | 1,901 | ||||||
Ending balance: individually evaluated for impairment | $ | 1,701 | $ | 200 | $ | 1,901 | ||||||
Ending balance: collectively evaluated for impairment | $ | | $ | | $ | | ||||||
Ending balance: loans acquired with deteriorated credit quality | $ | | $ | | $ | |
2 | Includes $5 of unamortized initial direct costs. |
13
ATEL 12, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
4. Allowance for credit losses: - (continued)
The Company evaluates the credit quality of its financing receivables on a scale equivalent to the following quality indicators related to corporate risk profiles:
Pass Any account whose lessee/debtor, co-lessee/debtor or any guarantor has a credit rating on publicly traded or privately placed debt issues as rated by Moodys or S&P for either Senior Unsecured debt, Long Term Issuer rating or Issuer rating that are in the tiers of ratings generally recognized by the investment community as constituting an Investment Grade credit rating; or, has been determined by the Manager to be an Investment Grade Equivalent or High Quality Corporate Credit per its Credit Policy or has a Not Rated internal rating by the Manager and the account is not considered by the Chief Credit Officer of the Manager to fall into one of the three risk profiles below.
Special Mention Any traditional corporate type account with potential weaknesses (e.g., large net losses or major industry downturns) or, any growth capital account that has less than three months of cash as of the end of the calendar quarter to fund their continuing operations. These accounts deserve managements close attention. If left uncorrected, those potential weaknesses may result in deterioration of the Funds receivable at some future date.
Substandard Any account that is inadequately protected by the current worth and paying capacity of the borrower or of the collateral pledged, if any. Accounts that are so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Fund will sustain some loss as the likelihood of fully collecting all receivables may be questionable if the deficiencies are not corrected. Such accounts are on the Managers Credit Watch List.
Doubtful Any account where the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Accordingly, an account that is so classified is on the Managers Credit Watch List, and has been declared in default and the Manager has repossessed, or is attempting to repossess, the equipment it financed. This category includes impaired notes and leases as applicable.
At September 30, 2014 and December 31, 2013, the Companys financing receivables by credit quality indicator and by class of financing receivables are as follows (excludes initial direct costs) (in thousands):
Notes Receivable | Finance Leases | |||||||||||||||
September 30, 2014 | December 31, 2013 | September 30, 2014 | December 31, 2013 | |||||||||||||
Pass | $ | 948 | $ | 1,696 | $ | 128 | $ | 200 | ||||||||
Special mention | | | | | ||||||||||||
Substandard | | | | | ||||||||||||
Doubtful | | | | | ||||||||||||
Total | $ | 948 | $ | 1,696 | $ | 128 | $ | 200 |
At September 30, 2014 and December 31, 2013, investment in financing receivables is aged as follows (in thousands):
September 30, 2014 | 31 60 Days Past Due |
61 90 Days Past Due |
Greater Than 90 Days |
Total Past Due |
Current | Total Financing Receivables |
Recorded Investment > 90 Days and Accruing |
|||||||||||||||||||||
Notes receivable | $ | | $ | | $ | | $ | | $ | 948 | $ | 948 | $ | | ||||||||||||||
Finance leases | 8 | 60 | 2 | 70 | 58 | 128 | 2 | |||||||||||||||||||||
Total | $ | 8 | $ | 60 | $ | 2 | $ | 70 | $ | 1,006 | $ | 1,076 | $ | 2 |
14
ATEL 12, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
4. Allowance for credit losses: - (continued)
December 31, 2013 | 31 60 Days Past Due |
61 90 Days Past Due |
Greater Than 90 Days |
Total Past Due |
Current | Total Financing Receivables |
Recorded Investment > 90 Days and Accruing |
|||||||||||||||||||||
Notes receivable | $ | | $ | | $ | | $ | | $ | 1,696 | $ | 1,696 | $ | | ||||||||||||||
Finance leases | 87 | | | 87 | 113 | 200 | | |||||||||||||||||||||
Total | $ | 87 | $ | | $ | | $ | 87 | $ | 1,809 | $ | 1,896 | $ | |
The Company had neither financing receivables in non-accrual status nor impaired financing receivables at both September 30, 2014 and December 31, 2013. As of September 30, 2014, certain investments in financing receivables with related accounts receivable past due more than 90 days were still on an accrual basis based on managements assessment of the collectability of such receivables. However, these accounts receivable were fully reserved and included in the allowance for doubtful accounts presented above. As of December 31, 2013, there were no investments in financing receivables with related accounts receivable past due more than 90 days which were still on an accrual basis.
5. Investments in equipment and leases, net:
The Companys investment in leases consists of the following (in thousands):
Balance December 31, 2013 |
Reclassifications, Additions/ Dispositions and Impairment Losses |
Depreciation/ Amortization Expense or Amortization of Leases |
Balance September 30, 2014 |
|||||||||||||
Net investment in operating leases | $ | 9,592 | $ | (1,983 | ) | $ | (1,809 | ) | $ | 5,800 | ||||||
Net investment in direct financing leases | 200 | 6 | (78 | ) | 128 | |||||||||||
Assets held for sale or lease, net | 835 | (226 | ) | | 609 | |||||||||||
Initial direct costs, net of accumulated amortization of $73 at September 30, 2014 and $85 at December 31, 2013 | 26 | | (15 | ) | 11 | |||||||||||
Total | $ | 10,653 | $ | (2,203 | ) | $ | (1,902 | ) | $ | 6,548 |
Impairment of investments in leases:
Recorded values of the Companys leased asset portfolio are reviewed each quarter to confirm the reasonableness of established residual values and to determine whether there is indication that an asset impairment might have taken place. The Company uses a variety of sources and considers many factors in evaluating whether the respective book values of its assets are appropriate. In addition, the company may direct a residual value review at any time if it becomes aware of issues regarding the ability of a lessee to continue to make payments on its lease contract. An impairment loss is measured and recognized only if the estimated undiscounted future cash flows of the asset are less than their net book value. The estimated undiscounted future cash flows are the sum of the residual value of the asset at the end of the assets lease contract and undiscounted future rents from the existing lease contract. The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the marketplace are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. Impairment is measured as the difference between the fair value (as determined by a valuation method using discounted estimated future cash flows, third party appraisals or comparable sales of similar assets as applicable based on asset type) of the asset and its carrying value on the measurement date. Upward adjustments for impairments recognized in prior periods are not made in any circumstances.
15
ATEL 12, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
5. Investments in equipment and leases, net: - (continued)
As a result of these reviews, the Company recorded fair value adjustments of $226 thousand during the nine months ended September 30, 2014 to reduce the cost basis of certain impaired off-lease equipment. There were no such adjustments during the three months ended September 30, 2014 or the three and nine months ended September 30, 2013.
The Company utilizes a straight line depreciation method for equipment in all of the categories currently in its portfolio of lease transactions. Depreciation expense on the Companys equipment totaled $554 thousand and $705 thousand for the respective three months ended September 30, 2014 and 2013, and was $1.8 million and $2.1 million for the respective nine months ended September 30, 2014 and 2013.
IDC amortization expense related to the Companys operating and direct financing leases totaled $5 thousand and $7 thousand for the respective three months ended September 30, 2014 and 2013, and $15 thousand and $21 thousand for the respective nine months ended September 30, 2014 and 2013 (See Note 3).
All of the Companys leased property was acquired in the years 2008 through 2013.
Operating leases:
Property on operating leases consists of the following (in thousands):
Balance December 31, 2013 |
Additions | Reclassifications or Dispositions |
Balance September 30, 2014 |
|||||||||||||
Transportation | $ | 4,935 | $ | | $ | | $ | 4,935 | ||||||||
Construction | 2,989 | | | 2,989 | ||||||||||||
Manufacturing | 3,269 | | (835 | ) | 2,434 | |||||||||||
Aviation | 2,167 | | | 2,167 | ||||||||||||
Materials handling | 1,902 | | (414 | ) | 1,488 | |||||||||||
Computer | 139 | | (20 | ) | 119 | |||||||||||
Mining | 2,893 | | (2,893 | ) | | |||||||||||
Other | 90 | | (82 | ) | 8 | |||||||||||
18,384 | | (4,244 | ) | 14,140 | ||||||||||||
Less accumulated depreciation | (8,792 | ) | (1,809 | ) | 2,261 | (8,340 | ) | |||||||||
Total | $ | 9,592 | $ | (1,809 | ) | $ | (1,983 | ) | $ | 5,800 |
The average estimated residual value for assets on operating leases was 26% and 29% of the assets original cost at September 30, 2014 and December 31, 2013, respectively.
There were no operating leases in non-accrual status at September 30, 2014 and December 31, 2013.
Direct financing leases:
As of September 30, 2014, investment in direct financing leases consists of materials handling equipment. Such investment consisted of materials handling and manufacturing equipment at December 31, 2013. The components of the Companys investment in direct financing leases as of September 30, 2014 and December 31, 2013 are as follows (in thousands):
September 30, 2014 |
December 31, 2013 |
|||||||
Total minimum lease payments receivable | $ | 172 | $ | 297 | ||||
Estimated residual values of leased equipment (unguaranteed) | 3 | 12 | ||||||
Investment in direct financing leases | 175 | 309 | ||||||
Less unearned income | (47 | ) | (109 | ) | ||||
Net investment in direct financing leases | $ | 128 | $ | 200 |
16
ATEL 12, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
5. Investments in equipment and leases, net: - (continued)
There were no investments in direct financing leases in non-accrual status at September 30, 2014 and December 31, 2013.
At September 30, 2014, the aggregate amounts of future minimum lease payments receivable are as follows (in thousands):
Operating Leases |
Direct Financing Leases |
Total | ||||||||||
Three months ending December 31, 2014 | $ | 476 | $ | 37 | $ | 513 | ||||||
Year ending December 31, 2015 | 1,146 | 117 | 1,263 | |||||||||
2016 | 489 | 17 | 506 | |||||||||
2017 | 471 | 1 | 472 | |||||||||
2018 | 109 | | 109 | |||||||||
$ | 2,691 | $ | 172 | $ | 2,863 |
The useful lives for each category of leases is reviewed at a minimum of once per quarter. As of September 30, 2014 and December 31, 2013, the respective useful lives of each category of lease assets in the Companys portfolio are as follows (in years):
Equipment category | Useful Life | |||
Aviation | 15 20 | |||
Manufacturing | 10 15 | |||
Mining | 10 15 | |||
Construction | 7 10 | |||
Materials handling | 7 10 | |||
Transportation | 7 10 | |||
Computer | 3 5 |
6. Related party transactions:
The terms of the Operating Agreement provide that the Managing Member and/or affiliates are entitled to receive certain fees for equipment management and resale and for management of the Company.
The Operating Agreement allows for the reimbursement of costs incurred by Managing Member and/or affiliates for providing administrative services to the Company. Administrative services provided include Company accounting, investor relations, legal counsel and lease and equipment documentation. The Managing Member is not reimbursed for services whereby it is entitled to receive a separate fee as compensation for such services, such as management of investments. The Company would be liable for certain future costs to be incurred by the Managing Member to manage the administrative services provided to the Company.
Each of AFS and ATEL Leasing Corporation (ALC) is a wholly-owned subsidiary of ATEL Capital Group and performs services for the Company on behalf of the Managing Member. Acquisition services, equipment management, lease administration and asset disposition services are performed by ALC; investor relations, communications and general administrative services are performed by AFS.
Cost reimbursements to the Managing Member or its affiliates are based on its costs incurred in performing administrative services for the Company. These costs are allocated to each managed entity based on certain criteria such as managed assets, number of investors or contributed capital based upon the type of cost incurred. The Managing Member believes that the costs reimbursed are the lower of (i) actual costs incurred on behalf of the Company or (ii) the amount the Company would be required to pay independent parties for comparable administrative services in the same geographic location.
17
ATEL 12, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
6. Related party transactions: - (continued)
During the three and nine months ended September 30, 2014 and 2013, the Managing Member and/or affiliates earned fees and billed for reimbursements pursuant to the Operating Agreement as follows (in thousands):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Administrative costs reimbursed to Managing Member and/or affiliates | $ | 73 | $ | 97 | $ | 234 | $ | 285 | ||||||||
Asset management fees to Managing Member | 34 | 40 | 113 | 125 | ||||||||||||
Acquisition and initial direct costs paid to Managing Member and/or affiliates | 22 | 46 | 53 | 87 | ||||||||||||
$ | 129 | $ | 183 | $ | 400 | $ | 497 |
7. Non-recourse debt:
At September 30, 2014, non-recourse debt consists of notes payable to financial institutions. The notes are due in monthly installments. Interest on the notes is at fixed rates ranging from 1.41% to 2.75% per annum. The notes are secured by assignments of lease payments and pledges of assets. At September 30, 2014, gross lease rentals totaled approximately $2.3 million over the remaining lease terms; and the carrying value of the pledged assets is approximately $3.9 million. The notes mature at various dates from 2015 through 2018.
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.
Future minimum payments of non-recourse debt are as follows (in thousands):
Principal | Interest | Total | ||||||||||
Three months ending December 31, 2014 | $ | 309 | $ | 11 | $ | 320 | ||||||
Year ending December 31, 2015 | 873 | 30 | 903 | |||||||||
2016 | 454 | 17 | 471 | |||||||||
2017 | 464 | 7 | 471 | |||||||||
2018 | 103 | 1 | 104 | |||||||||
$ | 2,203 | $ | 66 | $ | 2,269 |
18
ATEL 12, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
8. Borrowing facilities:
The Company participates with AFS and certain of its affiliates in a revolving credit facility (the Credit Facility) with a syndicate of financial institutions. The Credit Facility is comprised of a working capital facility to AFS, an acquisition facility (the Acquisition Facility) and a warehouse facility (the Warehouse Facility) to AFS, the Company and affiliates, and a venture facility available to an affiliate. The Credit Facility was for an amount up to $60 million and set to expire in June 2014. During January 2014, the line was increased to $75 million, an affiliated participant added, and the expiration extended to June 2015. The lending syndicate providing the Credit Facility has a blanket lien on all of the Companys assets as collateral for any and all borrowings under the Acquisition Facility, and on a pro-rata basis under the Warehouse Facility. Such Credit Facility includes certain financial covenants.
As of September 30, 2014 and December 31, 2013, borrowings under the Credit Facility were as follows (in thousands):
September 30, 2014 | December 31, 2013 |
|||||||
Total available under the financing arrangement | $ | 75,000 | $ | 60,000 | ||||
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 | (2,857 | ) | (7,310 | ) | ||||
Total remaining available under the venture, acquisition and warehouse facilities | $ | 72,143 | $ | 52,690 |
The Company and its affiliates pay an annual commitment fee to have access to this line of credit. As of September 30, 2014, the aggregate amount of the Credit Facility is potentially available to the Company, subject to certain sub-facility and borrowing-base limitations. However, as amounts are drawn on the Credit Facility by each of the Company and the affiliates who are borrowers under the Credit Facility, the amount remaining available to all borrowers to draw under the Credit Facility is reduced. As the Warehousing Facility is a short term bridge facility, any amounts borrowed under the Warehousing Facility, and then repaid by the affiliated borrowers (including the Company) upon allocation of an acquisition to a specific purchaser, become available under the Warehouse Facility for further short term borrowing.
As of September 30, 2014, the Companys Tangible Net Worth requirement under the Credit Facility was $7.5 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 $8.1 million, 0.27 to 1, and 56.47 to 1, respectively, as of September 30, 2014. As such, as of September 30, 2014, the Company was in compliance with all material financial covenants, and with all other material conditions of the Credit Facility. The Company does not anticipate any covenant violations nor does it anticipate that any of these covenants will restrict its operations or its ability to procure additional financing.
Fee and interest terms
The interest rate on the Credit Facility is based on either the LIBOR/Eurocurrency rate of 1-, 2-, 3- or 6-month maturity plus a lender designated spread, or the 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. There were no borrowings outstanding at September 30, 2014 and December 31, 2013.
19
ATEL 12, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
8. Borrowing facilities: - (continued)
Warehouse facility
To hold the assets under the Warehousing Facility prior to allocation to specific investor programs, a Warehousing Trust has been entered into by the Company, AFS, ALC, and certain of the affiliated partnerships and limited liability companies. The Warehousing Trust is used by the Warehouse Facility borrowers to acquire and hold, on a short-term basis, certain lease transactions that meet the investment objectives of each of such entities. Each of the leasing programs sponsored by AFS and ALC is a pro rata participant in the Warehousing Trust, as described below. When a program no longer has a need for short-term financing provided by the Warehousing Facility, it is removed from participation, and as new leasing investment entities are formed by AFS and ALC and commence their acquisition stages, these new entities are added.
As of September 30, 2014, the investment program participants were the Company, ATEL 14, LLC, ATEL 15, LLC and ATEL 16, 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 limited liability companies participating under the Warehouse Facility. Transactions are financed through this Warehouse Facility only until the transactions are allocated to a specific program for purchase or are otherwise disposed by AFS and ALC. When a determination is made to allocate the transaction to a specific program for purchase by the program, the purchaser repays the debt associated with the asset, either with cash or by means of proceeds of a draw under the Acquisition Facility, and the asset is removed from the Warehouse Facility collateral, and ownership of the asset and any debt obligation associated with the asset are assumed solely by the purchasing entity.
There were no borrowings under the Warehouse Facility as of September 30, 2014 and December 31, 2013.
9. Commitments:
At September 30, 2014, the Company had no commitments to purchase lease assets or fund investments in notes receivable.
10. Guarantees:
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.
11. Members capital:
A total of 2,992,482 and 2,993,482 Units were issued and outstanding as of September 30, 2014 and December 31, 2013, respectively. The Fund was authorized to issue up to 20,000,000 total Units.
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
20
ATEL 12, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
11. Members capital: - (continued)
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 Funds net income or net losses are to be allocated 100% to the Members. From the commencement of the Fund until the initial closing date, as defined in the Companys Operating Agreement, net income and net loss shall be allocated 99% to the Managing Member and 1% to the initial Other Members. Commencing with the initial closing date, net income and net loss shall be allocated 92.5% to the Other Members and 7.5% to the Managing Member.
Fund distributions are to be allocated 7.5% to the Managing Member and 92.5% to the Other Members. Distributions to the Other Members were as follows (in thousands, except as to Units and per Unit data):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Distributions | $ | 673 | $ | 674 | $ | 2,020 | $ | 2,021 | ||||||||
Weighted average number of Units outstanding | 2,992,482 | 2,993,482 | 2,993,141 | 2,993,482 | ||||||||||||
Weighted average distributions per Unit | $ | 0.22 | $ | 0.23 | $ | 0.67 | $ | 0.68 |
12. Fair value measurements:
Fair value measurements and disclosures are based on a fair value hierarchy as determined by significant inputs used to measure fair value. The three levels of inputs within the fair value hierarchy are defined as follows:
Level 1 Quoted prices in active markets for identical assets or liabilities. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, generally on a national exchange.
Level 2 Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market.
Level 3 Valuation is modeled using significant inputs that are unobservable in the market. These unobservable inputs reflect the Companys own estimates of assumptions that market participants would use in pricing the asset or liability.
At September 30, 2014 and December 31, 2013, only the Companys warrants were measured on a recurring basis. However, during the first nine months of 2014, the Company recorded non-recurring adjustments to reflect the fair values of certain impaired off-lease assets. There were no such adjustments recorded during 2013. Amounts at September 30, 2014 reflect the fair value of the then existing impaired assets.
The Companys valuation policy is determined by members of the Asset Management, Credit and Accounting departments. Whenever possible, the policy is to obtain quoted market prices in active markets to estimate fair values for recognition and disclosure purposes. Where quoted market prices in active markets are not available, fair values are estimated using discounted cash flow analyses, broker quotes, information from
21
ATEL 12, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
12. Fair value measurements: - (continued)
third party remarketing agents, third party appraisals of collateral and/or other valuation techniques. These techniques are significantly affected by certain of the Companys assumptions, including discount rates and estimates of future cash flows. Potential taxes and other transaction costs are not considered in estimating fair values. As the Company is responsible for determining fair value, an analysis is performed on prices obtained from third parties. Such analysis is performed by asset management and credit department personnel who are familiar with the Companys investments in equipment, notes receivable and equity securities of venture companies. The analysis may include a periodic review of price fluctuations and validation of numbers obtained from a specific third party by reference to multiple representative sources.
The fair value adjustments utilized the following methodology:
Warrants (recurring)
Warrants owned by the Company are not registered for public sale, but are considered derivatives and are carried on the balance sheet at an estimated fair value at the end of the period. The valuation of the warrants was determined using a Black-Scholes formulation of value based upon the stock price(s), the exercise price(s), the volatility of comparable venture companies, and a risk free interest rate for the term(s) of the warrant exercise(s). As of September 30, 2014 and December 31, 2013, the calculated fair values of the Funds warrant portfolio approximated $376 thousand and $555 thousand, respectively. Such valuations are classified within Level 3 of the valuation hierarchy.
The following table reconciles the beginning and ending balances of the Companys Level 3 recurring assets (in thousands):
Level 3 Assets |
||||
Balance at December 31, 2013 | $ | 555 | ||
Unrealized loss on warrants, net recorded during the period | (179 | ) | ||
Balance at September 30, 2014 | $ | 376 |
Impaired off-lease equipment (non-recurring)
During the first nine months of 2014, the Company deemed certain off-lease equipment to be impaired and recorded fair value adjustments of $226 thousand to reduce the cost basis of the impaired equipment. None of such adjustments were related to the third quarter. By comparison, the Company did not record non-recurring fair value adjustments to impair equipment during 2013.
The fair value adjustments recorded during the first nine months of 2014 were non-recurring. Under the Fair Value Measurements Topic of the FASB Accounting Standards Codification, the fair value of impaired lease assets were classified within Level 3 of the valuation hierarchy as the data sources utilized for the valuation of such assets reflect significant inputs that are unobservable in the market. Such valuation utilizes a market approach technique and uses inputs that reflect the sales price of similar assets sold by affiliates and/or information from third party remarketing agents not readily available in the market.
The following table presents the fair value measurement of assets measured at fair value on a non-recurring basis and the level within the hierarchy in which the fair value measurements fall at September 30, 2014 (in thousands):
September 30, 2014 |
Level 1 Estimated Fair Value |
Level 2 Estimated Fair Value |
Level 3 Estimated Fair Value |
|||||||||||||
Impaired off-lease equipment | $ | 610 | $ | | $ | | $ | 610 |
22
ATEL 12, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
12. Fair value measurements: - (continued)
The following tables summarize the valuation techniques and significant unobservable inputs used for the Companys recurring fair value calculation categorized as Level 3 in the fair value hierarchy at September 30, 2014 and December 31, 2013:
September 30, 2014 | ||||||||||||||||
Name | Valuation Frequency |
Valuation Technique | Unobservable Inputs | Range of Input Values | ||||||||||||
Warrants | Recurring | Black-Scholes formulation | Stock price | $0.05 $25.76 | ||||||||||||
Exercise price | $0.05 $25.76 | |||||||||||||||
Time to maturity (in years) | 1.21 9.23 | |||||||||||||||
Risk-free interest rate | 0.24% 2.45% |
|||||||||||||||
Annualized volatility | 16.04% 100.00% |
|||||||||||||||
Lease Equipment | Non-recurring | Market Approach | Third Party Agents Pricing Quotes per equipment |
$5,000 $150,000 (total of $610,000) |
||||||||||||
Equipment Condition | Poor to Average |
December 31, 2013 | ||||||||||||||||
Name | Valuation Frequency |
Valuation Technique | Unobservable Inputs | Range of Input Values | ||||||||||||
Warrants | Recurring | Black-Scholes formulation | Stock price | $0.05 $25.76 | ||||||||||||
Exercise price | $0.05 $25.76 | |||||||||||||||
Time to maturity (in years) | 1.96 9.98 | |||||||||||||||
Risk-free interest rate | 0.38% 3.04% |
|||||||||||||||
Annualized volatility | 17.80% 100.00% |
The following disclosure of the estimated fair value of financial instruments is made in accordance with the guidance provided by the Financial Instruments Topic of the FASB Accounting Standards Codification. Fair value estimates, methods and assumptions, set forth below for the 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. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize or has realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Cash and cash equivalents
The recorded amounts of the Companys cash and cash equivalents approximate fair value because of the liquidity and short-term maturity of these instruments.
Notes receivable
The fair value of the Companys notes receivable is generally estimated based upon various methodologies deployed by financial and credit management including, but not limited to, credit analysis, third party appraisal and/or discounted cash flow analysis based upon current market valuation techniques and market rates for similar types of lending arrangements, which may consider adjustments for impaired loans as deemed necessary.
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ATEL 12, LLC
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
12. Fair value measurements: - (continued)
Investment in securities
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.
Non-recourse debt
The fair value of the Companys non-recourse debt is estimated using discounted cash flow analyses, based upon current market borrowing rates for similar types of borrowing arrangements.
Commitments and Contingencies
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.
The following tables present estimated fair values of the Companys financial instruments in accordance with the guidance provided by the Financial Instruments Topic of the FASB Accounting Standards Codification at September 30, 2014 and December 31, 2013 (in thousands):
Fair Value Measurements at September 30, 2014 | ||||||||||||||||||||
Carrying Value |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Financial assets: |
||||||||||||||||||||
Cash and cash equivalents | $ | 770 | $ | 770 | $ | | $ | | $ | 770 | ||||||||||
Notes receivable, net | 953 | | | 953 | 953 | |||||||||||||||
Investment in securities | 258 | | | 258 | 258 | |||||||||||||||
Fair value of warrants | 376 | | | 376 | 376 | |||||||||||||||
Financial liabilities: |
||||||||||||||||||||
Non-recourse debt | 2,203 | | | 2,191 | 2,191 |
Fair Value Measurements at December 31, 2013 | ||||||||||||||||||||
Carrying Value |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Financial assets: |
||||||||||||||||||||
Cash and cash equivalents | $ | 857 | $ | 857 | $ | | $ | | $ | 857 | ||||||||||
Notes receivable, net | 1,701 | | | 1,701 | 1,701 | |||||||||||||||
Investment in securities | 275 | | | 275 | 275 | |||||||||||||||
Fair value of warrants | 555 | | | 555 | 555 | |||||||||||||||
Financial liabilities: |
||||||||||||||||||||
Non-recourse debt | 3,958 | | | 3,940 | 3,940 |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Statements contained in this Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this Form 10-Q, which are not historical facts, may be forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. In particular, economic recession and changes in general economic conditions, including, fluctuations in demand for equipment, lease rates, and interest rates, may result in delays in investment and reinvestment, delays in leasing, re-leasing, and disposition of equipment, and reduced returns on invested capital. The Companys performance is subject to risks relating to lessee defaults and the creditworthiness of its lessees. The Companys performance is also subject to risks relating to the value of its equipment at the end of its leases, which may be affected by the condition of the equipment, technological obsolescence and the market for new and used equipment at the end of lease terms. Investors are cautioned not to attribute undue certainty to these forward-looking statements, which speak only as of the date of this Form 10-Q. We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events, other than as required by law.
Overview
ATEL 12, LLC (the Company or the Fund) is a California limited liability company that was formed in January 2007 for the purpose of equipment financing and acquiring equipment to engage in equipment leasing and sales activities, as well as in real estate, growth capital investment activities and green technologies (the principal operations), primarily in the United States.
The Company conducted a public offering of 20,000,000 Limited Liability Company Units (Units), at a price of $10 per Unit. On January 24, 2008, subscriptions for the minimum number of Units (120,000, representing $1.2 million), excluding subscriptions from Pennsylvania investors, had been received and the Fund requested subscription proceeds to be released from escrow. On that date, the Company commenced initial operations and continued in its development stage activities until transitioning to an operating enterprise during the second quarter of 2008. Pennsylvania subscriptions were subject to a separate escrow to be released to the Fund only when the Fund had received aggregate subscriptions for all investors equal to at least $7.5 million. Total contributions to the Fund exceeded $7.5 million on July 15, 2008. As of September 25, 2009, the offering was terminated.
During 2009, 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 utilized its credit facilities and reinvested cash flow in excess of certain amounts required to be distributed to the Other Members to acquire additional equipment and/or to fund financing transactions. Throughout the Reinvestment Period, which ends December 31, 2015, the Company anticipates continued reinvestment of cash flow in excess of minimum distributions and other obligations. The Company is governed by its Limited Liability Company Operating Agreement (Operating Agreement), as amended.
The Company may continue until December 31, 2030. Periodic distributions are paid at the discretion of the Managing Member.
Results of Operations
The three months ended September 30, 2014 versus the three months ended September 30, 2013
The Company had net income of $664 thousand and $116 thousand for the three months ended September 30, 2014 and 2013, respectively. Results for the third quarter of 2014 reflect an increase in total revenues and a decrease in total expenses when compared to the prior year period.
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Revenues
Total revenues for the third quarter of 2014 increased by $332 thousand, or 31%, as compared to the prior year period. The increase was primarily due to an increase in gain on sales of lease assets and early termination of notes offset, in part, by decreases in operating lease revenues and other revenue.
The increase in gain on sales of lease assets and early termination of notes totaled $564 thousand and was largely attributable to a $407 thousand gain realized on the sale of two drill rigs associated with a terminated lease during the current three-month period, and a change in the mix of assets sold.
Partially offsetting the aforementioned increase in revenue were decreases in operating lease revenues and other revenue totaling $172 thousand and $43 thousand, respectively. Operating lease revenues declined as a result of run-off and sales of lease assets; and, other revenue was lower due to a period over period decrease in deferred maintenance fees and late fees charged to certain lessees.
Expenses
Total expenses for the third quarter of 2014 decreased by $216 thousand, or 22%, as compared to the prior year period. The net decrease in expenses was primarily the result of reductions in depreciation expense, cost reimbursements to AFS and acquisition expense.
The decrease in depreciation expense totaled $151 thousand and was largely a result of run-off and sales of lease assets. Cost reimbursements to AFS declined by $24 thousand due to lower costs allocated by the Manager based on the Companys declining asset base; and, acquisition expense also decreased by $24 thousand largely due to a lower level of spending related to identifying potential lease and funding transactions.
The nine months ended September 30, 2014 versus the nine months ended September 30, 2013
The Company had net income of $702 thousand and $375 thousand for the nine months ended September 30, 2014 and 2013, respectively. Results for the first nine months of 2014 reflect a decrease in total expenses and an increase in total revenues when compared to the prior year period.
Revenues
Total revenues for the first nine months of 2014 increased by $145 thousand, or 4%, as compared to the prior year period. The increase was largely due to an increase in gain on sales of lease assets and early termination of notes offset, in part, by a decline in operating lease revenues, an unrealized loss on fair valuation of warrants and a decrease in other revenue.
The increase in gain on sales of lease assets and early termination of notes totaled $646 thousand and was largely attributable to a $407 thousand gain realized on the sale of two drill rigs associated with a terminated lease during the current year period, and a change in the mix of assets sold.
Partially offsetting the aforementioned increase in revenue was a $245 thousand decrease in operating lease revenues, a $179 thousand unrealized loss on fair valuation of warrants and a $77 thousand decline in other revenue. Operating lease revenues decreased due to run-off and sales of lease assets. The unrealized loss on fair valuation of warrants was a result of the revaluation of certain warrant positions in the Funds portfolio. Finally, other revenue declined due to a period over period decrease in deferred maintenance fees and late fees charged to certain lessees.
Expenses
Total operating expenses for the first nine months of 2014 decreased by $182 thousand, or 6%, as compared to the prior year period. The decrease was largely attributable to reductions in depreciation expense, cost reimbursements to AFS, interest and acquisition expenses partially offset by impairment losses recorded during the current year period.
The reduction in depreciation expense totaled $300 thousand and was largely a result of run-off and sales of lease assets. Cost reimbursements to AFS declined by $51 thousand due to lower costs allocated by the
26
Manager based on the Companys declining asset base; and, interest expense decreased by $38 thousand as a result of a $2.3 million reduction in borrowings since September 30, 2013. Finally, acquisition expense declined by $36 thousand due to a lower level of spending related to identifying potential lease and funding transactions.
Partially offsetting the aforementioned decreases in expenses was $226 thousand of impairment losses recognized during the first nine months of 2014 to reduce the cost basis of certain off-lease research equipment deemed impaired. There were no such impairments during the first nine months of 2013.
Capital Resources and Liquidity
At September 30, 2014 and December 31, 2013, the Companys cash and cash equivalents totaled $770 thousand and $857 thousand, 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 has been its cash flow from fixed-term 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 the Companys 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 the Manager 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 available to meet its immediate cash requirements and those of the next twelve months, but in the event those reserves were found to be inadequate, the Company would likely be in a position to borrow against its current portfolio to meet such requirements. The Managing Member envisions no such requirements for operating purposes.
Cash Flows
The following table sets forth summary cash flow data (in thousands):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net cash provided by (used in): |
||||||||||||||||
Operating activities | $ | 642 | $ | 919 | $ | 2,208 | $ | 2,511 | ||||||||
Investing activities | 667 | 332 | 1,647 | 332 | ||||||||||||
Financing activities | (1,480 | ) | (1,307 | ) | (3,942 | ) | (1,045 | ) | ||||||||
Net (decrease) increase in cash and cash equivalents | $ | (171 | ) | $ | (56 | ) | $ | (87 | ) | $ | 1,798 |
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The three months ended September 30, 2014 versus the three months ended September 30, 2013
During the three months ended September 30, 2014 and 2013, the Companys primary sources of liquidity were cash flows from its portfolio of operating and direct financing lease contracts, and its investments in notes receivable. Moreover, the Company realized $535 thousand and $158 thousand of proceeds from the sales of lease assets and/or the early termination of notes receivable.
During the same respective periods, cash was primarily used to pay distributions to both Other Members and the Managing Member totaling $728 thousand and $729 thousand; and, to pay down $752 thousand and $578 thousand of debt.
The nine months ended September 30, 2014 versus the nine months ended September 30, 2013
During the nine months ended September 30, 2014 and 2013, the Companys primary sources of liquidity were cash flows from its portfolio of operating and direct financing lease contracts, and its investments in notes receivable. Moreover, the Company realized $1.0 million and $684 thousand of proceeds from the sales of lease assets and/or the early termination of notes receivable, and utilized borrowings totaling $197 thousand and $2.7 million during the respective nine months ended September 30, 2014 and 2013.
During the same respective periods, cash was primarily used to pay distributions to both Other Members and the Managing Member and pay down debt. Total distributions paid to Members amounted to $2.2 million for each of the nine months ended September 30, 2014 and 2013; while cash used to pay down debt totaled $2.0 million and $1.6 million for the nine months ended September 30, 2014 and 2013, respectively. During the first nine months of 2013, cash was also used to purchase $895 thousand of equipment and to fund $93 thousand of investments in notes receivable. There was no such purchase or funding activity during the current year period.
Revolving credit facility
The Company participates with AFS and certain of its affiliates in a revolving credit facility (the Credit Facility) with a syndicate of financial institutions. The Credit Facility is comprised of a working capital facility to AFS, an acquisition facility (the Acquisition Facility) and a warehouse facility (the Warehouse Facility) to AFS, the Company and affiliates, and a venture facility available to an affiliate. Such Credit Facility was for an amount up to $60 million and set to expire in June 2014. During January 2014, the line was increased to $75 million, an affiliated participant added, and expiration extended to June 2015.
Compliance with covenants
The Credit Facility includes certain financial and non-financial covenants applicable to each borrower, including the Company. Such covenants include covenants typically found in credit facilities of the size and nature of the Credit Facility, such as accuracy of representations, good standing, absence of liens and material litigation, etc. The Company was in compliance with all covenants under the Credit Facility as of September 30, 2014. 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: $7.5 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
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(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. 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 $8.1 million, 0.27 to 1, and 56.47 to 1, respectively, as of September 30, 2014. As such, as of September 30, 2014, the Company was in compliance with all such material financial covenants.
Reconciliation to GAAP of EBITDA
For purposes of compliance with the Credit Facility covenants, the Company uses a financial calculation of EBITDA, as defined therein, which is a non-GAAP financial performance measure. The EBITDA is utilized by the Company to calculate its debt covenant ratios.
The following is a reconciliation of net income to EBITDA, as defined in the loan agreement, for the twelve months ended September 30, 2014 (in thousands):
Net income GAAP basis | $ | 1,319 | ||
Interest expense | 79 | |||
Depreciation and amortization | 2,467 | |||
Amortization of initial direct costs | 27 | |||
Impairment losses | 226 | |||
Reversal of provision for credit losses | (14 | ) | ||
Unrealized gain on fair valuation of warrants | (376 | ) | ||
Principal payments received on direct finance leases | 102 | |||
Principal payments received on notes receivable | 631 | |||
EBITDA (for Credit Facility financial covenant calculation only) | $ | 4,461 |
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.
29
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.
Non-Recourse Long-Term Debt
As of September 30, 2014 and December 31, 2013, the Company had non-recourse long-term debt totaling $2.2 million and $4.0 million, respectively. Such non-recourse notes payable do not contain any material financial covenants. The notes are secured by a lien granted by the Company to the non-recourse lenders on (and only on) the discounted lease transactions. The lenders have recourse only to the following collateral: the specific leased equipment; the related lease chattel paper; the lease receivables; and proceeds of the foregoing items.
For detailed information on the Companys debt obligations, see Notes 7 and 8 to the financial statements as set forth in Part I, Item 1, Financial Statements (Unaudited).
Distributions
The Company commenced periodic distributions, based on cash flows from operations, beginning with the month of February 2008. Such distributions have been consistently made through September 30, 2014.
Commitments and Contingencies and Off-Balance Sheet Transactions
Commitments and Contingencies
At September 30, 2014, the Company had no commitments to purchase lease assets or fund investments in notes receivable.
Off-Balance Sheet Transactions
None.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company evaluated the impact of the new standard on its financial statements and has determined that such impact is virtually non-existent as the new revenue guideline does not affect revenues from leases and loans, which comprise the majority of the Companys revenues.
In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements Going Concern (subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern. The new standard provides guidance relative to management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. Management is currently evaluating the standard and its operational and related disclosure requirements.
30
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates, which are based upon historical experiences, market trends and financial forecasts, and upon various other assumptions that management believes to be reasonable under the circumstances and at that certain point in time. Actual results may differ, significantly at times, from these estimates under different assumptions or conditions.
The Companys critical accounting policies are described in its Annual Report on Form 10-K for the year ended December 31, 2013. There have been no material changes to the Companys critical accounting policies since December 31, 2013.
Item 4. Controls and Procedures.
Evaluation of disclosure 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) and 15-15(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.
Changes in internal control
There were no changes in the Managing Members internal control over financial reporting, as it is applicable to the Company, during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Managing Members internal control over financial reporting, as it is applicable to the Company.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In the ordinary course of conducting business, there may be certain claims, suits, and complaints filed against the Managing Member. In the opinion of management, the outcome of such matters, if any, will not have a material impact on the Managing Members financial position or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
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 not applicable, and therefore have been omitted.
2. | Other Exhibits |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Dean L. Cash | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Paritosh K. Choksi | |
32.1 | Certification Pursuant to 18 U.S.C. section 1350 of Dean L. Cash | |
32.2 | Certification Pursuant to 18 U.S.C. section 1350 of Paritosh K. Choksi | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
32
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: November 13, 2014
ATEL 12, LLC
(Registrant)
By: | ATEL Financial Services, LLC Managing Member of Registrant |
By: /s/ Dean L. Cash | ||
By: /s/ Paritosh K. Choksi | ||
By: /s/ Samuel Schussler |
33