Attached files
file | filename |
---|---|
EX-31.1 - EXHIBIT 31.1 - ATEL 12, LLC | v484681_exh31x1.htm |
EX-32.2 - EXHIBIT 32.2 - ATEL 12, LLC | v484681_exh32x2.htm |
EX-32.1 - EXHIBIT 32.1 - ATEL 12, LLC | v484681_exh32x1.htm |
EX-31.2 - EXHIBIT 31.2 - ATEL 12, LLC | v484681_exh31x2.htm |
EX-14.1 - EXHIBIT 14.1 - ATEL 12, LLC | v484681_exh14x1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
|
For the year ended December 31, 2017 |
||
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 check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o No x
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act of 1934. Yes o No x
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company x |
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
State the aggregate market value of voting stock held by non-affiliates of the registrant: Not applicable
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.) Not applicable
The number of Limited Liability Company Units outstanding as of February 28, 2018 was 2,992,482
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I
Item 1. BUSINESS
General Development of Business
ATEL 12, LLC (the Company or the Fund) was formed under the laws of the state of California on January 25, 2007 (Date of Inception) for the purpose of equipment financing and acquiring equipment to engage in equipment leasing and sales activities. 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 or Managing Member or Manager), a wholly-owned subsidiary of ATEL Capital Group. 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. As of 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 are subject to a separate escrow and are released to the Fund only when 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, at which time a request was processed to release the Pennsylvania escrowed amounts. The offering was terminated on September 25, 2009.
As of December 31, 2017, cumulative gross contributions, less rescissions and repurchases (net of distributions paid and allocated syndication costs, as applicable), totaling $29.9 million (inclusive of the $500 initial Members capital investment) have been received. As of the same date, 2,992,482 Units were issued and outstanding.
The Companys principal objectives have been to invest in a diversified portfolio of investments that will (i) preserve, protect and return the Companys invested capital; (ii) generate regular cash distributions to Unitholders, with 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) and (iii) provide additional cash distributions following the Reinvestment Period and until all investment portfolio assets has been sold or otherwise disposed. The Company is governed by the ATEL 12, LLC amended and restated Limited Liability Company Operating agreement dated April 3, 2007 (the Operating Agreement).
Pursuant to the terms of the Operating Agreement, the Managing Member and/or its affiliates receives compensation for services rendered and reimbursements for costs incurred on behalf of the Company (See Note 6, Related party transactions, as set forth in Part II, Item 8, Financial Statements and Supplementary Data). The Company is required to maintain reasonable cash reserves for working capital, the repurchase of Units and contingencies. The repurchase of Units is solely at the discretion of the Managing Member.
On January 1, 2016, the Company commenced liquidation phase activities pursuant to the guidelines of the Operating Agreement. Prior thereto, the Company was in its acquisition phase and was making distributions on a monthly and quarterly basis. During the liquidation phase, periodic distributions are paid at the discretion of the Managing Member.
Narrative Description of Business
The Company had acquired various types of new and used equipment subject to leases and made loans secured by equipment acquired by its borrowers. The Companys primary investment objective was to acquire investments primarily in low-technology, low-obsolescence equipment such as the core operating equipment used by companies in the manufacturing, mining and transportation industries. A portion of the portfolio would include some more technology-dependent equipment such as certain types of communications equipment, medical equipment, manufacturing equipment and office equipment. The Company sought investments in equipment or financing of equipment and business involving green technologies such as those involved in the following activities: materials recycling, water purification, sewage treatment pollution radiation, gas and other emission treatment, solid waste management, renewable energy generation, as well as many other similar industries and activities.
1
The Company purchased equipment under pre-existing leases or for which a lease was entered into concurrently at the time of the purchase. Through December 31, 2017, the Company had purchased equipment with a total acquisition price of $28.6 million. The Company had also funded investments in notes receivable totaling $5.4 million through December 31, 2017.
The Companys objective was to have at least 60% of its investment portfolio (by cost) consist of equipment leased to lessees that the Manager deems to be high quality corporate credits and/or leases guaranteed by such high quality corporate credits. High quality corporate credits were lessees or guarantors who have a credit rating by Moodys Investors Service, Inc. of Baa or better, or the credit equivalent as determined by the Manager, or were public and private corporations with substantial revenues and histories of profitable operations, as well as established hospitals with histories of profitability or municipalities. The remaining 40% of the initial investment portfolio would include equipment lease transactions, real property single tenant net leases and other financing for companies which, although deemed creditworthy by the Manager, would not satisfy the specific credit criteria for the portfolio described above. Included in this 40% of the portfolio may be growth capital financing investments. No more than 20% of the initial portfolio, by cost, would consist of these growth capital financing investments and no more than 20% of the portfolio, by cost, would consist of real estate investments. The Companys objective was to invest approximately 25% of its capital in assets that involve green technologies or applications as discussed above.
The equipment financing industry is highly competitive. Equipment manufacturers, corporations, partnerships and others offer users an alternative to the purchase of most types of equipment with payment terms that vary widely depending on the type of financing, the lease or loan term and type of equipment. The ability of the Company to keep the equipment leased and the terms of purchase, lease and sale of equipment depends on various factors (many of which neither the Managing Member nor the Company can control), such as general economic conditions, including the effects of inflation or recession, and fluctuations in supply and demand for various types of equipment resulting from, among other things, technological and economic obsolescence.
The Managing Member will use its best efforts to diversify lessees by geography and industry and to maintain an appropriate balance and diversity in the types of equipment acquired and the types of leases entered into by the Company, and will apply the following policies: (i) The Managing Member will seek to limit the amount invested in equipment or property leased to any single lessee to not more than 20% of the aggregate purchase price of investments as of the final commitment of net offering proceeds; (ii) in no event will the Companys equity investment in equipment or property leased to a single lessee exceed an amount equal to 20% of the maximum capital from the sale of Units (or $30,000,000); and (iii) the Managing Member will seek to invest not more than 20% of the aggregate purchase price of equipment in equipment acquired from a single manufacturer. However, this last limitation is a general guideline only, and the Company may acquire equipment from a single manufacturer in excess of the stated percentage during the offering period and before the offering proceeds are fully invested, or if the Managing Member deems such a course of action to be in the Companys best interest.
The primary geographic region in which the Company seeks leasing opportunities is North America. All of the Companys current operating revenues and long-lived assets relate to customers domiciled in United States.
The business of the Company is not seasonal. The Company has no full time employees. Employees of the Managing Member and affiliates provide the services the Company requires to effectively operate. The cost of these services is reimbursed by the Company to the Managing Member and affiliates per the Operating Agreement.
For further information refer to the financial statements and footnotes.
2
Equipment Leasing Activities
The Company has acquired a diversified portfolio of equipment. The equipment, all currently located in the United States, has been leased to lessees in various industries. The following tables set forth the types of equipment acquired by the Company through December 31, 2017 and the industries to which the assets have been leased (dollars in thousands):
Asset Types | Purchase Price Excluding Acquisition Fees | Percentage of Total Acquisitions |
||||||
Materials handling | $ | 7,801 | 27.24 | % | ||||
Transportation | 4,934 | 17.23 | % | |||||
Research | 3,963 | 13.84 | % | |||||
Manufacturing | 3,518 | 12.29 | % | |||||
Construction | 2,989 | 10.44 | % | |||||
Mining | 2,893 | 10.10 | % | |||||
Aviation | 2,167 | 7.57 | % | |||||
Other | 370 | 1.29 | % | |||||
$ | 28,635 | 100.00 | % |
Industry of Lessee | Purchase Price Excluding Acquisition Fees |
Percentage of Total Acquisitions |
||||||
Business services | $ | 6,569 | 22.94 | % | ||||
Gas/Coal products | 4,684 | 16.36 | % | |||||
Retail | 2,903 | 10.14 | % | |||||
Food products | 2,877 | 10.05 | % | |||||
Rubber/Miscellaneous plastics | 2,764 | 9.65 | % | |||||
Air transportation | 2,167 | 7.57 | % | |||||
Lumber/Wood products | 1,680 | 5.87 | % | |||||
Transportation services | 1,644 | 5.74 | % | |||||
Manufacturing | 895 | 3.13 | % | |||||
Chemical products | 863 | 3.01 | % | |||||
Industrial machinery | 783 | 2.73 | % | |||||
Other | 806 | 2.81 | % | |||||
$ | 28,635 | 100.00 | % |
From inception to December 31, 2017, the Company has disposed of certain leased assets as set forth below (in thousands):
Asset Types | Original Equipment Cost Excluding Acquisition Fees |
Sale Price | Gross Rents | |||||||||
Materials handling | $ | 6,977 | $ | 1,375 | $ | 7,906 | ||||||
Research | 3,964 | 713 | 3,425 | |||||||||
Mining | 2,893 | 1,908 | 2,517 | |||||||||
Manufacturing | 1,780 | 1,185 | 1,345 | |||||||||
Construction | 833 | 112 | 979 | |||||||||
Transportation | 388 | 123 | 403 | |||||||||
Aviation | 90 | 8 | 97 | |||||||||
Other | 227 | 69 | 440 | |||||||||
$ | 17,152 | $ | 5,493 | $ | 17,112 |
For further information regarding the Companys equipment lease portfolio as of December 31, 2017, see Note 4, Investments in equipment and leases, net, as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
3
Notes Receivable Activities
The Company finances assets in diverse industries. The following tables set forth the types of assets financed by the Company through December 31, 2017 and the industries to which the assets have been financed (dollars in thousands):
Asset Types | Amount Financed Excluding Acquisition Fees | Percentage of Total Fundings |
||||||||||
Miscellaneous office equipment | $ | 3,484 | 65.05 | % | ||||||||
Research | 804 | 15.01 | % | |||||||||
Computers | 599 | 11.18 | % | |||||||||
Manufacturing | 400 | 7.47 | % | |||||||||
Other | 69 | 1.29 | % | |||||||||
$ | 5,356 | 100.00 | % |
Industry of Borrower | Amount Financed Excluding Acquisition Fees |
Percentage of Total Fundings |
||||||
Health services | $ | 1,569 | 29.29 | % | ||||
Electronics | 1,055 | 19.70 | % | |||||
Manufacturing | 805 | 15.03 | % | |||||
Engineering/Management | 750 | 14.00 | % | |||||
Business services | 578 | 10.79 | % | |||||
Lab equipment | 399 | 7.45 | % | |||||
Chemicals/Allied products | 200 | 3.74 | % | |||||
$ | 5,356 | 100.00 | % |
From inception to December 31, 2017, assets financed by the Company that are associated with terminated loans are as follows (in thousands):
Asset Types | Amount Financed Excluding Acquisition Fees |
Early Termination of Notes Proceeds |
Total Payments Received |
|||||||||
Miscellaneous office equipment | $ | 3,484 | $ | 606 | $ | 3,040 | ||||||
Research | 804 | 258 | 716 | |||||||||
Computers | 599 | | 760 | |||||||||
Manufacturing | 400 | | 498 | |||||||||
Other | 69 | 53 | 28 | |||||||||
$ | 5,356 | $ | 917 | $ | 5,042 |
As of December 31, 2017 and 2016, the Company had no notes receivable.
Item 2. PROPERTIES
The Company does not own or lease any real property, plant or material physical properties other than the equipment held for lease as set forth in Item 1.
Item 3. LEGAL PROCEEDINGS
In the ordinary course of conducting business, there may be certain claims, suits, and complaints filed against the Company. In the opinion of management, the outcome of such matters, if any, will not have a material impact on the Companys financial position or results of operations. No material legal proceedings are currently pending against the Company or against any of its assets.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
4
PART II
Item 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
There are certain material conditions and restrictions on the transfer of Units imposed by the terms of the Operating Agreement. Consequently, there is no public market for Units and it is not anticipated that a public market for Units will develop. In the absence of a public market for the Units, there is no currently ascertainable fair market value for the Units.
Fund Valuation
Background to Fund Valuation
The Financial Industry Regulatory Authority (FINRA), in conjunction with the Securities and Exchange Commission (SEC) updated rules for the presentation of account statement values relative to pricing of Direct Placement Program (DPP) shares. Under FINRA Notice 15-02 (the Notice) the SEC approved amendments to National Association of Securities Dealers (NASD) Rule 2340, Customer Account Statements, and FINRA rule 2310, which address a FINRA member firms participation in a public offering of a DPP. In summary, the amendments require a FINRA member firm to include in the account statements for customers holding DPP securities a per share value for the DPP. This per share value must be prepared by, or with the material assistance or confirmation of, a third-party valuation expert or service. The results of this valuation must be disclosed in the issuers reports filed under the Securities Exchange Act of 1934. A valuation in compliance with the Notice must be undertaken and published on at least an annual basis.
The effective date of the Notice was April 11, 2016.
Methodologies
Broker dealers are required to provide a per share estimated value on the customer account statements for each non-listed DPP security held by their customers. Such estimated value must have been developed in a manner reasonably designed to provide a reliable value. Two valuation methodologies have been defined by FINRA, which by such designation are presumed to be reliable.
Net Investment Methodology
The amendments to NASD Rule 2340(c)(1)(A) require net investment to be based on the amount available for investment percentage disclosed in the Estimated Use of Proceeds section of the issuers offering prospectus. In essence, such value is equal to the offering price less selling commissions, other offering and organization expenses, and capital reserves. This method may be used for up to 150 days following the second anniversary of a Fund breaking escrow.
Appraised Value Methodology
As amended, Rule NASD 2340(c)(1)(B) requires that the per share estimated value disclosed in an issuers most recent periodic or current report be based upon an appraisal of the assets and liabilities of the program by, or with the material assistance or confirmation of, a third-party valuation expert or service, in conformity with standard industry valuation practice as it relates to both the aforementioned assets and liabilities. No later than 150 days following the second anniversary of the issuers break of escrow for its minimum offering, this methodology must be used to establish the required estimated values.
Unit Valuation
The per Unit valuation estimate for ATEL 12, LLC has been conducted, and the results disclosed herein, in compliance with the mandates of the Notice.
For ATEL 12, LLC, its estimated value per Unit reflects the Managers estimate of current portfolio valuation of all assets and liabilities of the Fund, calculated on a per Unit basis, and as such, does not represent a market value for the Units and may not accurately reflect the value of the Fund Units to the Unit holders if held over time to Fund maturity.
5
In connection with any estimate of per Unit value, Unit holders and all parties are reminded that no public market for the Units exists. Additionally, in order to preserve the Funds pass-through status for federal income tax purposes, the Fund will not permit a secondary market or the substantial equivalent of a secondary market for the Units. In the absence of a public market for the Units, there is no currently ascertainable fair market value for the Units.
The estimate of per Unit value does not take into account any extraordinary potential future business activity of the Fund; rather the valuation represents a snapshot view of the Funds portfolio as of the valuation date. In addition, the Fund does not include any analysis of the distributions that have already been paid by the Fund, nor the anticipated returns to Unit holder over the full course of the Fund life cycle, which will be dependent on many factors.
Disclosure
The estimated value per Unit reported in this Form 10-K has been calculated using the Appraised Value Methodology described above under Methodologies above, as of December 31, 2017.
ATEL 12, LLC, will satisfy the disclosure requirements for providing estimated per Unit values pursuant to the Notice as follows:
For these disclosures, subsequent to the Fund's initial compliance with FINRA 15-02, annual disclosures of estimated per Unit values, through the termination of the Fund; will be accomplished and included on an annual basis in a document filed with the Securities and Exchange Commission available to the public.
Specifics Underlying Valuation Methodology:
Notes and Explanation of Valuation Components and Calculation
A. | Fund Assets and Liabilities (other than as specifically identified below): The estimated values for non-interest bearing items such as current assets and liabilities are assumed to equal their reported GAAP balances as an appropriate approximation of their fair values. Debt (interest bearing) is assumed to equal the fair values of the debt as disclosed in the footnotes of the financial statements. |
B. | Investments in Leases (net of fees and expenses): The estimated values for Investments in Leases are based on calculating the present value of the projected future cash flows. Projected future cash flows include both the remaining contractual lease payments, plus assumptions on lease renewals and sale value of the residuals. Projected future cash flows are net of projected future fees and expenses including: |
| management fees applicable for the Fund (4.00% of revenue) |
| carried interest applicable for the Fund (7.50% of distributions) |
| operating expenses which are assumed to be 3% of original equipment costs for the Fund |
Projected future cash flows have been discounted back to present value at discount rates based on like-term U.S. Treasury yields (as of the valuation date) plus a 400 basis point spread, to account for the credit risk differentials between the instrument being valued and U.S. Treasury security yields.
Residual values assumptions used in the cash flow projections are as follows:
For On-Lease and Month-to-Month Lease: Considers realized residual as a percent of book residual of 165.9%, based on ATELs historical track record as of December 31, 2017.
For Off-Lease: A fair value of off-lease equipment is based on estimates from ATELs seasoned Asset Management Group.
Special Situation Leases: The valuation of certain leases has been performed outside of the above noted protocol based upon specific lease assumptions different than the macro assumptions above, due to the specific situations of those leases.
C. | Investments in Notes Receivable: The estimated values for Investments in Notes Receivable are assumed to approximate the reported GAAP balances. |
6
D. | Investments in Securities: The estimated values for Investments in Securities have been based on the estimated net book value as of the valuation date (with impairment adjustments), plus any unrealized gain on equity. The unrealized gain on equity is based on either: a) the most recent round of financing, b) the most recent 409A valuation provided by the underlying companies of the warrants, or c) the Managers estimate of the company valuations based on all available information, including company financials, company valuation reports, public press releases, and other sources. |
E. | Warrants Outstanding: The estimated values for Warrants Outstanding considers the reported GAAP balances to be an appropriate approximation of their fair values. |
F. | Syndication Costs: Syndication costs for the Fund have been added to the value, estimated based on 15% of gross equity raised, and are assumed to be amortized over the expected 12-year life of the Fund. The remaining unamortized portion has been added to the Funds balance sheet as an asset. |
G. | Accrued distributions: Accrued distributions, which are payable to the Unit holders have been removed from the balance sheet liability section because they are not a liability to a third party. |
ATEL 12, LLC Unit Valuation
The Managers estimated per Unit value of ATEL 12, LLC at December 31, 2017 as determined, and derived under the guidelines of the Appraised Value Methodology, and pursuant to the above specific enumerated component valuation methodologies and calculations, equals $1.63. An independent national public accounting firm with valuation expertise was retained to examine, attest and confirm ATEL 12, LLCs per Unit valuation and its component methodologies and calculation as it relates to compliance with the regulatory mandate defined in the Notice. In this regard, they examined the components of the valuation methodologies and determined them to be reasonable and within industry standards. Other component attributes, including the bases and related key assumptions of the calculation were tested for their completeness, underlying documentation support and mathematical accuracy. Upon completion of their efforts, their attestation report confirmed that the per unit valuation of ATEL 12, LLC, and the related notes, in all material respects, was based upon industry practice as described in the Managers valuation approach.
Disclaimer
The foregoing Fund per Unit valuation has been performed solely for the purpose of providing an estimated value per Unit in accordance with a regulatory mandate, in order to provide the broker dealer and custodian community with a valuation on a reasonable and attested basis for use in assigning an estimation of a Unit holders account value. Any report or disclosure of such estimated per Unit valuation is to be accompanied by statements that the value does not represent an estimate of the amount a Unit holder would receive if the Unit holder were to seek to sell the Units, and that the Fund intends to liquidate its assets in the ordinary course of its business and over the Funds term. Further, each statement of the Funds estimated per Unit valuation is to be accompanied by a disclosure that there can be no assurance as to (1) when the Fund will be fully liquidated, (2) the amount the Fund may actually receive if and when the Fund seeks to liquidate its assets, (3) the amount of lease or loan payments the Fund will actually receive over the remaining term, (4) the amount of asset disposition proceeds the Fund will actually receive over the remaining term, and (5) the amounts that may actually be received in distributions by Unit holders over the course of the remaining term.
Distributions
The Unitholders of record are entitled to certain distributions as provided under the Operating Agreement. The Company commenced periodic distributions beginning with the month of February 2008. Additional distributions have been consistently made through December 31, 2017.
Cash distributions were paid by the Fund to Unitholders of record as of November 30, 2017, and paid through December 31, 2017. Distributions may be characterized for tax, accounting and economic purposes as a return of capital, a return on capital (including escrow interest) or a portion of each. Generally, the portion of each cash distribution by a company which exceeds its net income for the fiscal period would constitute a return of capital. The Fund is required by the terms of its Operating Agreement to distribute the net cash flow generated by its investments in certain minimum amounts during the Reinvestment Period before it can reinvest its operating cash flow in additional portfolio assets. See the discussion in the ATEL 12, LLC Prospectus dated September 26, 2007 (Prospectus) under Income, Losses and Distributions Reinvestment. Accordingly, the amount of cash flow from Fund investments distributed to Unitholders will not be available for reinvestment in additional portfolio assets.
7
Cash distributions were based on current and anticipated gross revenues from the leases and loans acquired. During the Funds acquisition and operating stages, the Fund may incur short term borrowing to fund regular distributions of such gross revenues to be generated by newly acquired transactions during their respective initial fixed terms. As such, all Fund periodic cash distributions made during these stages have been, and are expected in the future to be, based on the Funds actual and anticipated gross revenues to be generated from the binding initial terms of the leases and loans acquired.
The following table presents summarized information regarding distributions to other members:
2017 | 2016 | |||||||
Net (loss) income per Unit, based on weighted average Units outstanding | $ | (0.02 | ) | $ | 0.12 | |||
Return of investment | 0.29 | 0.78 | ||||||
Distributions declared per Unit, based on weighted average Other Member Units outstanding | 0.27 | 0.90 | ||||||
Differences due to timing of distributions | | | ||||||
Actual distributions paid per Unit | $ | 0.27 | $ | 0.90 |
Item 6. | SELECTED FINANCIAL DATA |
A smaller reporting company is not required to present selected financial data in accordance with item 301(c) of Regulation S-K.
Item 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Statements contained in this Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and elsewhere in this Form 10-K, which are not historical facts, may be forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. In particular, economic recession and changes in general economic conditions, including fluctuations in demand for equipment, lease rates, and interest rates, may result in delays in investment and reinvestment, delays in leasing, re-leasing, and disposition of equipment, and reduced returns on invested capital. The Companys performance is subject to risks relating to lessee defaults and the creditworthiness of its lessees. The Companys performance is also subject to risks relating to the value of its equipment at the end of its leases, which may be affected by the condition of the equipment, technological obsolescence and the markets for new and used equipment at the end of lease terms. Investors are cautioned not to attribute undue certainty to these forward-looking statements, which speak only as of the date of this Form 10-K. We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events, other than as required by law.
Overview
ATEL 12, LLC (the Company or the Fund) was formed under the laws of the state of California on January 25, 2007 (Date of Inception) for the purpose of equipment financing and acquiring equipment to engage in equipment leasing and sales activities.
The Company conducted a public offering of 20,000,000 Limited Liability Company Units (Units), at a price of $10 per Unit. As of 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 are subject to a separate escrow and are released to the Fund only when 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, at which time a request was processed to release the Pennsylvania escrowed amounts. The offering was terminated on September 25, 2009 with a total of 2,999,482 Units subscribed, representing contributions, net of rescissions and repurchases, approximating $29.9 million. As of December 31, 2017, 2,992,482 Units were issued and outstanding.
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 reinvested cash flow in excess of certain
8
amounts required to be distributed to the members and/or utilized its credit facilities to acquire additional equipment. Throughout the Reinvestment Period, which ended December 31, 2015, the Company reinvested 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. However, pursuant to the guidelines of the Operating Agreement, the Company commenced liquidation phase activities on January 1, 2016. Periodic distributions are paid at the discretion of the Managing Member.
Results of Operations
It is the Companys objective to maintain a 100% utilization rate for all equipment purchased in any given year. All equipment transactions are acquired subject to binding lease commitments, so equipment utilization is expected to remain high during the funding period and throughout the reinvestment stage. Initial lease terms of these leases are generally from 36 to 120 months, and as they expire, the Company will attempt to re-lease or sell the equipment. All of the Companys equipment on lease was purchased in the years 2008 through 2013. The utilization percentage of existing assets under lease was 99% and 98% at December 31, 2017 and 2016, respectively.
Cost reimbursements to the Managing Member and/or 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 total assets, number of investors or contributed capital based upon the type of cost incurred.
2017 versus 2016
The Company had net loss of $192 thousand and net income of $583 thousand for the years ended December 31, 2017 and 2016, respectively. The net results for 2017 reflect a decrease in total revenue and an increase in total operating expenses when compared to the prior year.
Revenues
Total revenues for 2017 declined by $181 thousand, or 11%, as compared to the prior year period. Such decrease was largely due to a $349 thousand, or 21%, reduction in operating lease revenues, mainly the result of dispositions of lease assets; a $114 thousand, or 90%, decrease in other revenue related to deferred maintenance fees previously collected on certain returned equipment in the prior period; and a $15 thousand decrease in interest on notes receivable, offset, in part, by a $158 thousand, or 94%, favorable change on the fair value adjustment for warrants; a $128 thousand, or 121%, favorable change on the gain on sales of lease assets and early termination of notes receivable; and a $13 thousand, or 21%, increase in gain on sales of investment in securities.
Expenses
Total expenses for 2017 increased by $594 thousand, or 58%, as compared to the prior year period. Such increase in expenses was primarily the result of a $281 thousand increase in impairment losses recognized on equipment; a $219 thousand increase in impairment losses on investment in securities during the current year period; a $37 thousand, or 88%, increase in outside services, indicative of additional efforts required to comply with certain regulatory requirements; a $32 thousand increase in an adjustment for provision for credit losses, due to increased delinquent accounts; a $20 thousand or 16%, increase in professional fees related to a year over year difference in timing and related billings for professional audit and tax services; an $18 thousand, or 3%, increase in depreciation expense, mainly the result of a lease contract renewal and a reduction in residual value on certain equipment; offset in part, by an $11 thousand, or 23%, decrease in asset management fees to the managing member, related to lower revenue from leases.
Capital Resources and Liquidity
At December 31, 2017 and 2016, the Companys cash and cash equivalents totaled $479 thousand and $1.0 million, respectively. The liquidity of the Company varies, increasing to the extent cash flows from leases and proceeds of asset sales exceed expenses and decreasing as lease assets are acquired, as distributions are made to the Members and to the extent expenses exceed cash flows from leases and proceeds from asset sales.
9
The Company currently believes it has 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):
2017 | 2016 | |||||||
Net cash provided by (used in): |
||||||||
Operating activities | $ | 812 | $ | 1,424 | ||||
Investing activities | 230 | 635 | ||||||
Financing activities | (1,596 | ) | (3,366 | ) | ||||
Net decrease in cash and cash equivalents | $ | (554 | ) | $ | (1,307 | ) |
2017 versus 2016
During 2017 and 2016, the Companys primary sources of liquidity were cash flows from its portfolio of operating and direct financing lease contracts, and its investments in notes receivable. In addition, the Company realized $229 thousand and $319 thousand of proceeds from sales or dispositions of investment in securities and sales of lease assets and/or the early termination of notes receivable, in 2017 and 2016 respectively. Principal payments received on notes receivable were $0 and $309 thousand for the years ended 2017 and 2016, respectively.
During the same comparative years, cash was primarily used to pay distributions and repay debt. Distributions paid to both other members and the Managing Member totaled $1.1 million and $2.9 million for 2017 and 2016, respectively; while cash used to repay non-recourse debt totaled $463 thousand and $455 thousand, respectively.
Non-Recourse Long-Term Debt
As of December 31, 2017 and 2016, the Company had non-recourse long-term debt totaling $103 thousand and $566 thousand, respectively. Such non-recourse notes payable do not contain any material financial covenants. The notes are secured by a specific 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 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 Note 7 to the financial statements as set forth in Part II, Item 8, Financial Statements and Supplementary Data.
Distributions
The Company commenced periodic distributions beginning with the month of February 2008. Additional distributions have been consistently made through December 31, 2017. See Item 5, Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, for additional information regarding the distributions.
Commitments and Contingencies and Off-Balance Sheet Transactions
Commitments and Contingencies
At December 31, 2017, there were no commitments to purchase lease assets and fund investments in notes receivable.
Off-Balance Sheet Transactions
None.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Report of Independent Registered Public Accounting Firm, Financial Statements and Notes to Financial Statements attached hereto at pages 11 through 30.
10
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Members
ATEL 12, LLC
We have audited the accompanying balance sheets of ATEL 12, LLC (the Company) as of December 31, 2017 and 2016, the related statements of operations, changes in members capital, and cash flows for the years then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Management of the Companys Managing Member. Our responsibility is to express an opinion on the Companys financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Moss Adams LLP
San Francisco, California
March 26, 2018
We have served as the Companys auditor since 2007.
11
ATEL 12, LLC
BALANCE SHEETS
DECEMBER 31, 2017 AND DECEMBER 31, 2016
(In Thousands)
2017 | 2016 | |||||||
ASSETS |
||||||||
Cash and cash equivalents | $ | 479 | $ | 1,033 | ||||
Accounts receivable, net of allowance for doubtful accounts of $37 at December 31, 2017 and $4 at December 31, 2016 | 42 | 78 | ||||||
Investment in securities | 27 | 272 | ||||||
Warrants, fair value | 149 | 159 | ||||||
Investments in equipment and leases, net of accumulated depreciation of $8,417 at December 31, 2017 and $8,230 at December 31, 2016 | 1,924 | 2,885 | ||||||
Due from Managing Member | 10 | | ||||||
Prepaid expenses and other assets | 25 | 26 | ||||||
Total assets | $ | 2,656 | $ | 4,453 | ||||
LIABILITIES AND MEMBERS CAPITAL |
||||||||
Accounts payable and accrued liabilities: |
||||||||
Managing Member | $ | | $ | 70 | ||||
Affiliates | 36 | | ||||||
Accrued distributions to Other Members | | 230 | ||||||
Other | 257 | 266 | ||||||
Non-recourse debt | 103 | 566 | ||||||
Unearned operating lease income | 37 | 22 | ||||||
Total liabilities | 433 | 1,154 | ||||||
Commitments and contingencies |
||||||||
Members capital: |
||||||||
Managing Member | | | ||||||
Other Members | 2,223 | 3,299 | ||||||
Total Members capital | 2,223 | 3,299 | ||||||
Total liabilities and Members capital | $ | 2,656 | $ | 4,453 |
See accompanying notes.
12
ATEL 12, LLC
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In Thousands Except for Units and Per Unit Data)
2017 | 2016 | |||||||
Revenues: |
||||||||
Leasing and lending activities: |
||||||||
Operating leases | $ | 1,328 | $ | 1,677 | ||||
Direct financing leases | | 2 | ||||||
Interest on notes receivable | | 15 | ||||||
Gain (loss) on sales of lease assets and early termination of notes receivable | 22 | (106 | ) | |||||
Gain on sales or dispositions of investment in securities | 75 | 62 | ||||||
Unrealized loss on fair value adjustment for warrants | (10 | ) | (168 | ) | ||||
Other | 13 | 127 | ||||||
Total revenues | 1,428 | 1,609 | ||||||
Expenses: |
||||||||
Depreciation of operating lease assets | 570 | 552 | ||||||
Asset management fees to Managing Member | 37 | 48 | ||||||
Cost reimbursements to Managing Member and/or affiliates | 169 | 160 | ||||||
Provision for credit losses | 33 | 1 | ||||||
Impairment losses on equipment | 281 | | ||||||
Impairment losses on investment in securities | 219 | | ||||||
Amortization of initial direct costs | 1 | 1 | ||||||
Interest expense | 7 | 17 | ||||||
Professional fees | 145 | 125 | ||||||
Outside services | 79 | 42 | ||||||
Taxes on income and franchise fees | 38 | 27 | ||||||
Printing and photocopying | 16 | 15 | ||||||
Other | 25 | 38 | ||||||
Total expenses | 1,620 | 1,026 | ||||||
Net (loss) income | $ | (192 | ) | $ | 583 | |||
Net income (loss): |
||||||||
Managing Member | $ | 66 | $ | 218 | ||||
Other Members | (258 | ) | 365 | |||||
$ | (192 | ) | $ | 583 | ||||
Net (loss) income per Limited Liability Company Unit (Other Members) | $ | (0.09 | ) | $ | 0.12 | |||
Weighted average number of Units outstanding | 2,992,482 | 2,992,482 |
See accompanying notes.
13
ATEL 12, LLC
STATEMENTS OF CHANGES IN MEMBERS CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In Thousands Except for Units and Per Unit Data)
Amount | ||||||||||||||||
Units | Other Members | Managing Member | Total | |||||||||||||
Balance December 31, 2015 | 2,992,482 | $ | 5,627 | $ | | $ | 5,627 | |||||||||
Distributions to Other Members ($0.90 per Unit) | | (2,693 | ) | | (2,693 | ) | ||||||||||
Distributions to Managing Member | | | (218 | ) | (218 | ) | ||||||||||
Net income | | 365 | 218 | 583 | ||||||||||||
Balance December 31, 2016 | 2,992,482 | 3,299 | | 3,299 | ||||||||||||
Distributions to Other Members ($0.27 per Unit) | | (818 | ) | | (818 | ) | ||||||||||
Distributions to Managing Member | | | (66 | ) | (66 | ) | ||||||||||
Net (loss) income | | (258 | ) | 66 | (192 | ) | ||||||||||
Balance December 31, 2017 | 2,992,482 | $ | 2,223 | $ | | $ | 2,223 |
See accompanying notes.
14
ATEL 12, LLC
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In Thousands)
2017 | 2016 | |||||||
Operating activities: |
||||||||
Net (loss) income | $ | (192 | ) | $ | 583 | |||
Adjustment to reconcile net (loss) income to cash provided by operating activities: |
||||||||
(Gain) loss on sales of lease assets and early termination of notes receivable | (22 | ) | 106 | |||||
Depreciation of operating lease assets | 570 | 552 | ||||||
Amortization of initial direct costs | 1 | 1 | ||||||
Provision for credit losses | 33 | 1 | ||||||
Provision for losses on investment in securities | 219 | | ||||||
Impairment losses on equipment | 281 | | ||||||
Gain on sales or dispositions of investment in securities | (75 | ) | (62 | ) | ||||
Unrealized loss on fair value adjustment for warrants | 10 | 168 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable | 3 | (38 | ) | |||||
Prepaid expenses and other assets | 1 | | ||||||
Accounts payable, Managing Member | (61 | ) | 49 | |||||
Accounts payable, other | (7 | ) | 82 | |||||
Accrued liabilities, affiliates | 36 | | ||||||
Unearned operating lease income | 15 | (18 | ) | |||||
Net cash provided by operating activities | 812 | 1,424 | ||||||
Investing activities: |
||||||||
Purchase of investment in securities | | (9 | ) | |||||
Proceeds from sales of lease assets and early termination of notes receivable | 130 | 220 | ||||||
Proceeds from sales or dispositions of investment in securities | 99 | 99 | ||||||
Principal payments received on direct financing leases | 1 | 16 | ||||||
Principal payments received on notes receivable | | 309 | ||||||
Net cash provided by investing activities | 230 | 635 | ||||||
Financing activities: |
||||||||
Repayments under non-recourse debt | (463 | ) | (455 | ) | ||||
Distributions to Other Members | (1,048 | ) | (2,693 | ) | ||||
Distributions to Managing Member | (85 | ) | (218 | ) | ||||
Net cash used in financing activities | (1,596 | ) | (3,366 | ) | ||||
Net decrease in cash and cash equivalents | (554 | ) | (1,307 | ) | ||||
Cash and cash equivalents at beginning of year | 1,033 | 2,340 | ||||||
Cash and cash equivalents at end of year | $ | 479 | $ | 1,033 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid during the year for interest | $ | 7 | $ | 17 | ||||
Cash paid during the year for taxes | $ | 29 | $ | 35 | ||||
Schedule of non-cash transactions: |
||||||||
Distributions payable to Other Members at year-end | $ | | $ | 230 | ||||
Distributions payable to Managing Member at year-end | $ | | $ | 19 |
See accompanying notes.
15
ATEL 12, LLC
NOTES TO FINANCIAL STATEMENTS
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 (Date of Inception) for the purpose of equipment financing and acquiring equipment to engage in equipment leasing and sales activities. From its inception into the third quarter of 2013, the Managing Member was ATEL Associates 12, (AA12), a Nevada limited liability company. Effective September 30, 2013, AA12 was merged into ATEL Financial Services, LLC (AFS or Managing Member or Manager), a wholly-owned subsidiary of ATEL Capital Group. 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. As of 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 are subject to a separate escrow and are released to the Fund only when 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, at which time a request was processed to release the Pennsylvania escrowed amounts. The offering was terminated on September 25, 2009.
As of December 31, 2017, cumulative gross contributions, less rescissions and repurchases (net of distributions paid and allocated syndication costs, as applicable), totaling $29.9 million (inclusive of the $500 initial Members capital investment) have been received. As of the same date, 2,992,482 Units were issued and outstanding.
The Companys principal objectives have been to invest in a diversified portfolio of investments that will (i) preserve, protect and return the Companys invested capital; (ii) generate regular cash distributions to Unitholders, with 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) and (iii) provide additional cash distributions following the Reinvestment Period and until all investment portfolio assets has been sold or otherwise disposed. The Company is governed by the ATEL 12, LLC amended and restated Limited Liability Company Operating Agreement dated April 3, 2007 (the Operating Agreement).
Pursuant to the terms of the Operating Agreement, the Managing Member and/or its affiliates receives compensation for services rendered and reimbursements for costs incurred on behalf of the Company (See Note 6, Related party transactions). The Company is required to maintain reasonable cash reserves for working capital, the repurchase of Units and contingencies. The repurchase of Units is solely at the discretion of the Managing Member.
2. Summary of significant accounting policies:
Basis of presentation:
The accompanying balance sheets as of December 31, 2017 and 2016, and the related statements of operations, changes in members capital, and cash flows for the years then ended, have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and the rules and regulations of the Securities and Exchange Commission. Certain prior year amounts may have been reclassified to conform to the current year 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 financial statements, the Company has reviewed, as determined necessary by the Managing Member, events that have occurred after December 31, 2017, up until the issuance of the financial statements. No events were noted which would require additional disclosure in the footnotes to the financial statements, and adjustments thereto.
16
ATEL 12, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies: - (continued)
Cash and cash equivalents:
Cash and cash equivalents include cash in banks and cash equivalent investments such as U.S. Treasury instruments with original and/or purchased maturities of ninety days or less.
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 for determination of the allowance for doubtful accounts and reserve for credit losses on notes receivable.
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 on historical charge off and collection experience and the collectability 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.
Credit risk:
Financial instruments that potentially subject the Company to concentrations of credit risk include cash and cash equivalents, operating and direct financing lease receivables, notes receivable and accounts receivable. The Company places the majority of its cash deposits in noninterest-bearing accounts with financial institutions that have no less than $10 billion in assets. Such deposits are insured up to $250 thousand. The remainder of the Funds cash is temporarily invested in U.S. Treasury denominated instruments. The concentration of such deposits and temporary cash investments is not deemed to create a significant risk to the Company. Accounts and notes receivable represent amounts due from lessees or borrowers in various industries, related to equipment on operating and direct financing leases or notes receivable.
Equipment on operating leases and related revenue recognition:
Equipment subject to operating leases is stated at cost. Depreciation is 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 were 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.
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
17
ATEL 12, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies: - (continued)
any appropriate impairment. All lease assets, including off-lease assets, are subject to the Companys quarterly impairment analysis, as described below. Maintenance costs associated with the Funds portfolio of leased assets are expensed as incurred. Major additions and betterments are capitalized.
Operating lease revenue is recognized on a straight-line basis over the term of the underlying leases. The initial lease terms will vary as to the type of equipment subject to the leases, the needs of the lessees and the terms to be negotiated, but initial leases are generally on terms from 36 to 120 months. The difference between rent received and rental revenue recognized is recorded as unearned operating lease income on the balance sheet.
Operating leases are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management considers the equipment underlying the lease contracts for impairment and periodically reviews the credit worthiness of all operating lessees with payments outstanding less than 90 days. Based upon managements judgment, the related operating leases may be placed on non-accrual status. Leases placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable. Until such time, revenues are recognized on a cash basis.
Direct financing leases and related revenue recognition:
Income from direct financing lease transactions is reported using the financing method of accounting, in which the Companys investment in the leased property is reported as a receivable from the lessee to be recovered through future rentals. The interest income portion of each rental payment is calculated so as to generate a constant rate of return on the net receivable outstanding.
Allowances for losses on direct financing leases are typically established based on historical charge-off and collection experience and the collectability of specifically identified lessees and billed and unbilled receivables. Direct financing leases are charged off to the allowance as they are deemed uncollectible.
Direct financing leases are generally placed in a non-accrual status (i.e., no revenue is recognized) and deemed impaired when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of all direct finance lessees with payments outstanding less than 90 days. Based upon managements judgment, the related direct financing leases may be placed on non-accrual status. Leases placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable. Until such time, all payments received are applied only against outstanding principal balances.
Notes receivable, unearned interest income and related revenue recognition:
The Company records all future payments of principal and interest on notes as notes receivable, which are then offset by the amount of any related unearned interest income. For financial statement purposes, the Company reports only the net amount of principal due on the balance sheet. The unearned interest is recognized over the term of the note and the income portion of each note payment is calculated so as to generate a constant rate of return on the net balance outstanding. Any fees or costs related to notes receivable are recorded as part of the net investment in notes receivable and amortized over the term of the loan.
Allowances for losses on notes receivable are typically established based on historical charge off and collection experience and the collectability of specifically identified borrowers and billed and unbilled receivables. Notes are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest when due according to the contractual terms of the note agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. If it is determined that a loan is impaired with regard to scheduled payments, the Company will perform an analysis of the note to determine if an impairment valuation reserve is necessary. This analysis considers the estimated cash flows from the note, or the collateral value of the property underlying the note when note repayment is collateral dependent. Any required valuation reserve is charged to earnings when determined; and notes are charged off to the allowance as they are deemed uncollectible.
18
ATEL 12, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies: - (continued)
Notes receivable are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of companies with note payments outstanding less than 90 days. Based upon managements judgment, the related notes may be placed on non-accrual status. Notes placed on non-accrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid receivable is probable. Until such time, all payments received are applied only against outstanding principal balances.
Initial direct costs:
The Company capitalizes initial direct costs (IDC) associated with the origination and funding of lease assets and investments in notes receivable. IDC includes both internal costs (e.g., the costs of employees activities in connection with successful lease and loan originations) and external broker fees incurred with such originations. The costs are amortized on a lease by lease (or note by note) basis based on actual lease term using a straight-line method for operating leases and the effective interest rate method for direct financing leases and notes receivable. Upon disposal of the underlying lease assets and notes receivable, both the initial direct costs and the associated accumulated amortization are relieved. Costs related to leases or notes receivable that are not consummated are not eligible for capitalization as initial direct costs and are expensed as acquisition expense.
Acquisition expense:
Acquisition expense represents costs which include, but are not limited to, legal fees and expenses, travel and communication expenses, cost of appraisals, accounting fees and expenses and miscellaneous expenses related to the selection and acquisition of equipment which are reimbursable to the Managing Member under the terms of the Operating Agreement. As the costs are not eligible for capitalization as initial direct costs, such amounts are expensed as incurred.
Asset valuation:
Recorded values of the 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 the 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.
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 Companys principal decision makers are the Managing Members Chief Executive Officer and its Chief Financial Officer and Chief Operating Officer. The Company believes that its equipment leasing business operates as one reportable segment because: a) the Company measures profit and loss at the equipment portfolio level as a whole; b) the principal decision makers do not review information based on any operating segment other than the equipment
19
ATEL 12, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies: - (continued)
leasing transaction portfolio; c) the Company does not maintain discrete financial information on any specific segment other than its equipment financing operations; d) the Company has not chosen to organize its business around different products and services other than equipment lease financing; and e) the Company has not chosen to organize its business around geographic areas.
The primary geographic region in which the Company seeks leasing opportunities is North America. As of and for the years ended December 31, 2017 and 2016, all of the Companys current operating revenues and long-lived assets relate to customers domiciled in the United States.
Investment in securities:
From time to time, the Company may purchase securities of its borrowers or receive warrants to purchase securities in connection with its lending arrangements.
Purchased 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. The Company had $27 thousand and $272 thousand of purchased securities at December 31, 2017 and 2016, respectively. Based upon the Companys review of its portfolio, the Company recorded fair value adjustments on investment in securities totaling $219 thousand and $0 during 2017 and 2016, respectively. The Company recognized gains of $75 thousand and $62 thousand on sales of investment in securities during the years ended December 31, 2017 and 2016, respectively.
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. The Company recorded unrealized losses of $10 thousand and $168 thousand on fair value adjustment of its warrants during 2017 and 2016, respectively. The unrealized losses recorded during 2017 reduced the estimated fair value of the Companys portfolio of warrants to $149 thousand at December 31, 2017 from $159 thousand at December 31, 2016. The Company realized gains of $2 thousand on the net exercise of certain warrants in 2017. The Company realized no gains or losses from the net exercise of warrants during 2016.
Unearned operating lease income:
The Company records prepayments on operating leases as a liability under the caption of unearned operating lease income. The liability is recorded when prepayments are received and recognized as operating lease revenue over the period to which the prepayments relate using a straight-line method.
Income Taxes:
The Company is treated as a partnership for federal income tax purposes. Pursuant to the provisions of Section 701 of the Internal Revenue Code, a partnership is not subject to federal income taxes. Accordingly, the Company has provided current franchise income taxes for only those states which levy income taxes on partnerships. For the years ended December 31, 2017 and 2016, the related provision for state income taxes was approximately $38 thousand and $27 thousand, respectively. The Company does not have any entity level uncertain tax positions. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions and is generally subject to examination by U.S. federal (or state and local) income tax authorities for three years from the filing of a tax return.
20
ATEL 12, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies: - (continued)
The tax bases of the Companys net assets and liabilities vary from the amounts presented in these financial statements at December 31, 2017 and 2016 as follows (in thousands):
2017 | 2016 | |||||||
Financial statement basis of net assets | $ | 2,223 | $ | 3,299 | ||||
Tax basis of net assets (unaudited) | 5,672 | 5,854 | ||||||
Difference (unaudited) | $ | (3,449 | ) | $ | (2,555 | ) |
The primary differences between the tax bases of net assets and the amounts recorded in the financial statements are the result of differences in accounting for syndication costs and differences between the depreciation methods used in the financial statements and the Companys tax returns.
The following reconciles the net (loss) income reported in these financial statements to the income reported on the Companys federal tax return (unaudited) for the years ended December 31, 2017 and 2016 (in thousands):
2017 | 2016 | |||||||
Net (loss) income per financial statements | $ | (192 | ) | $ | 583 | |||
Tax adjustments (unaudited): |
||||||||
Adjustment to depreciation expense | 466 | (6 | ) | |||||
Provision for losses and doubtful accounts | 33 | 1 | ||||||
Adjustments to revenues/other expenses | 26 | 68 | ||||||
Adjustments to gain on sales of assets | 105 | 297 | ||||||
Other | 300 | (3 | ) | |||||
Income per federal tax return (unaudited) | $ | 738 | $ | 940 |
Per Unit data:
Net income and distributions per Unit are based upon the weighted average number of Other Members Units outstanding during the year.
Recent accounting pronouncements:
In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). ASU 2016-15 addresses specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. This guidance is effective for the Company beginning on January 1, 2018. The adoption of ASU 2016-15 did not have a material impact on its financial statements and disclosures.
In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments Credit Losses (Topic 326) (ASU 2016-13). The main objective of this Update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018. Management is currently evaluating the standard and expects the Update may potentially result in an increase in the allowance for credit losses given the change to estimated losses over the contractual life adjusted for expected prepayments.
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842) (ASU 2016-02). The new standard will require lessees to recognize lease assets and lease liabilities arising from operating leases with lease
21
ATEL 12, LLC
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies: - (continued)
terms greater than 12 months in the statement of financial position. Lessor accounting per ASU 2016-02 is mostly unchanged from the previous lease accounting under GAAP. Certain changes were made to the lessor accounting guidance in order to align the lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. Similar to the previous guidance, lessors will classify leases as operating, direct financing, or sales-type. Lessors in operating leases will continue to recognize the underlying asset and recognize income on a straight-line basis. Lessors determine whether a lease is a sale of the underlying asset based on whether the lessee effectively obtains control of the underlying assets. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. While early adoption is permitted, the Company does not expect to elect that option. The Company expects to adopt the guidance in the first quarter 2019 using the modified retrospective method.
Management is currently evaluating the impact of this standard on the financial statements and its operational and related disclosure requirements, including the impact on the Companys current lease portfolio from a lessor perspective. Given the limited changes to lessor accounting, Management does not expect material changes to recognition or measurement, but the Company is early in the implementation process and will continue to evaluate the impact.
In January 2016, the FASB issued Accounting Standards Update 2016-01, Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). The new standard provides guidance related to accounting for equity investments and financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, and (v) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This guidance is effective for the Company beginning on January 1, 2018. The adoption of ASU 2016-01 did not have a material impact on its financial statements and disclosures.
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. On July 9, 2015, the FASB approved the deferral of the effective date of ASU 2014-09 by one year and in August 2015, issued Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (ASU 2015-14). ASU 2015-14 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods within that reporting period. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. This guidance is effective for the Company beginning on January 1, 2018. Managements evaluation of the impact of such adoption on the financial statements of the Fund indicates that such impact is non-material as the new revenue guideline does not affect revenues from leases and loans, which comprise the majority of the Companys revenues.
22
ATEL 12, LLC
NOTES TO FINANCIAL STATEMENTS
3. Concentration of credit risk and major customers:
The Company leases equipment to lessees and provides debt financing to borrowers in diversified industries. Leases and notes receivable are subject to the Managing Members credit committee review. The leases and notes receivable provide for the return of the equipment to the Company upon default.
As of December 31, 2017 and 2016, there were concentrations (greater than or equal to 10% as a percentage of total equipment cost) of equipment leased to lessees and/or financed for borrowers in certain industries as follows:
Industry | 2017 | 2016 | ||||||
Air transportation | 23 | % | 19 | % | ||||
Retail | 22 | % | 19 | % | ||||
Food products | 18 | % | 14 | % | ||||
Gas/Coal | 17 | % | 14 | % | ||||
Business services | * | 10 | % |
* | Less than 10% |
During 2017 and 2016, certain lessees and/or financial borrowers generated significant portions (defined as greater than or equal to 10%) of the Companys total leasing and lending revenues, excluding gains or losses on disposition of assets, as follows:
Percentage of Total Leasing and Lending Revenues |
||||||||||||
Lessee | Type of Equipment | 2017 | 2016 | |||||||||
Aircraft Service International, Inc. | Aviation | 25 | % | 20 | % | |||||||
Wal-Mart Transportation, LLC | Transportation | 21 | % | 17 | % | |||||||
Tyson Sales & Distribution, Inc. | Transportation | 15 | % | 12 | % | |||||||
IBM Corporation | Research | * | 13 | % |
* | Less than 10% |
These percentages are not expected to be comparable in future periods due to anticipated changes in the mix of investments and/or lessees as a result of normal business activities.
4. Investments in equipment and leases, net:
Balance December 31, 2016 |
Reclassifications, Additions/ Dispositions and Impairment Losses |
Depreciation/ Amortization Expense or Amortization of Leases |
Balance December 31, 2017 |
|||||||||||||
Net investment in operating leases | $ | 2,583 | $ | (361 | ) | $ | (570 | ) | $ | 1,652 | ||||||
Net investment in direct financing leases | 1 | | (1 | ) | | |||||||||||
Assets held for sale or lease, net | 300 | (28 | ) | | 272 | |||||||||||
Initial direct costs, net of accumulated amortization of $3 at December 31, 2017 and $4 at December 31, 2016 | 1 | | (1 | ) | | |||||||||||
Total | $ | 2,885 | $ | (389 | ) | $ | (572 | ) | $ | 1,924 |
23
ATEL 12, LLC
NOTES TO FINANCIAL STATEMENTS
4. Investments in equipment and leases, net: - (continued)
Impairment of investments in leases:
The Company recorded $281 thousand and $0 of fair value adjustments for impairment losses on its investments in equipment and leases during 2017 and 2016, respectively.
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 the 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, if any. The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the marketplace are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. Impairment is measured as the difference between the fair value (as determined by a valuation method using discounted estimated future cash flows, third party appraisals or comparable sales of similar assets as applicable based on asset type) of the asset and its carrying value on the measurement date. Upward adjustments for impairments recognized in prior periods are not made in any circumstances. As a result of these reviews, management determined that a $281 thousand impairment loss on equipment was deemed necessary for the year ended December 31, 2017. The Company recorded no fair value adjustments for impairment losses on its investments in equipment and leases during 2016.
The Company utilizes a straight line depreciation method over the term of the equipment lease for equipment on operating leases currently in its portfolio. Depreciation expense on the Companys equipment totaled $570 thousand and $552 thousand for the years ended December 31, 2017 and 2016, respectively.
All of the Companys lease asset purchases and capital improvements were made during the years from 2008 through 2013.
Operating leases:
Property on operating leases consists of the following (in thousands):
Balance December 31, 2016 |
Additions | Reclassifications or Dispositions |
Balance December 31, 2017 |
|||||||||||||
Transportation | $ | 3,963 | $ | | $ | | $ | 3,963 | ||||||||
Construction | 2,740 | | 1 | 2,741 | ||||||||||||
Aviation | 2,167 | | (90 | ) | 2,077 | |||||||||||
Materials handling | 254 | | (196 | ) | 58 | |||||||||||
Computer | 87 | | (41 | ) | 46 | |||||||||||
Manufacturing | 664 | | (664 | ) | | |||||||||||
Other | 1 | | (1 | ) | | |||||||||||
9,876 | | (991 | ) | 8,885 | ||||||||||||
Less accumulated depreciation | (7,293 | ) | (570 | ) | 630 | (7,233 | ) | |||||||||
Total | $ | 2,583 | $ | (570 | ) | $ | (361 | ) | $ | 1,652 |
The average estimated residual value for assets on operating leases was 19% and 22% of the assets original cost at December 31, 2017 and 2016, respectively. There were no operating leases in non-accrual status at both December 31, 2017 and 2016.
24
ATEL 12, LLC
NOTES TO FINANCIAL STATEMENTS
4. Investments in equipment and leases, net: - (continued)
Direct financing leases:
As of December 31, 2016, investment in direct financing leases consisted of various types of materials handling equipment.
The components of the Companys investment in direct financing leases as of December 31, 2016 were as follows (in thousands):
2016 | ||||
Total minimum lease payments receivable | $ | 1 | ||
Estimated residual values of leased equipment (unguaranteed) | | |||
Investment in direct financing leases | 1 | |||
Less unearned income | | |||
Net investment in direct financing leases | $ | 1 |
As of December 31, 2016, there were no investments in direct financing leases in non-accrual status.
At December 31, 2017, the aggregate amounts of future minimum operating lease payments receivable are $313 thousand, all of which are due and receivable during 2018.
The useful lives for each category of leases is reviewed at a minimum of once per quarter. As of December 31, 2017 and 2016, 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 | |||
Construction | 7 10 | |||
Materials handling | 7 10 | |||
Transportation | 7 10 | |||
Computer | 3 5 |
5. Allowance for credit losses:
The Company's allowance for credit losses totaled $37 thousand and $4 thousand at December 31, 2017 and December 31, 2016, respectively. All of such allowance were related to delinquent operating lease receivables.
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 the 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.
Each of AFS and ATEL Leasing Corporation (ALC) is a wholly-owned subsidiary of ATEL Capital Group, Inc. 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 total 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.
25
ATEL 12, LLC
NOTES TO FINANCIAL STATEMENTS
6. Related party transactions: - (continued)
The Managing Member and/or affiliates earned fees and billed for reimbursements, pursuant to the Operating Agreement, during the years ended December 31, 2017 and 2016 as follows (in thousands):
2017 | 2016 | |||||||
Administrative costs reimbursed to Managing Member and/or affiliates |
$ | 169 | $ | 160 | ||||
Asset management fees to Managing Member | 37 | 48 | ||||||
$ | 206 | $ | 208 |
7. Non-recourse debt:
At December 31, 2017, 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 1.97% to 2.39% per annum. The notes are secured by assignments of lease payments and pledges of assets. At December 31, 2017, gross operating lease rentals totaled approximately $109 thousand over the remaining lease terms; and the carrying value of the pledged assets is $657 thousand. The notes mature at various dates in 2018.
The non-recourse debt does not contain any material financial covenants. The debt is secured by a specific lien granted by the Company to the non-recourse lender on (and only on) the discounted lease transactions. The lender has recourse only to the following collateral: the 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 lender, 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.
The remaining future minimum payments of non-recourse debt total $104 thousand, all of which are due and payable during 2018. The payments are comprised of principal payments totaling $103 thousand and interest payments totaling $1 thousand.
8. Commitments:
At December 31, 2017, there were no commitments to purchase lease assets and fund investments in notes receivable.
9. 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.
26
ATEL 12, LLC
NOTES TO FINANCIAL STATEMENTS
10. Members capital:
A total of 2,992,482 Units were issued and outstanding at December 31, 2017 and 2016, including the 50 Units issued to the initial Member (Managing Member). The Fund was authorized to issue up to 20,000,000 Units in addition to the Units issued to the initial Member.
The Company has the right, exercisable at the Managing Members discretion, but not the obligation, to repurchase Units of a Unitholder who ceases to be a U.S. Citizen, for a price equal to 100% of the holders capital account. The Company is otherwise permitted, but not required, to repurchase Units upon a holders request. The repurchase of Fund units is made in accordance with Section 13 of the Amended and Restated Limited Liability Company Operating Agreement. The repurchase would be at the discretion of the Managing Member on terms it determines to be appropriate under given circumstances, in the event that the Managing Member 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. No units were repurchased during 2017 or 2016.
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, net income and net loss were allocated 99% to the Managing Member and 1% to the initial members. Commencing with the initial closing date, net income and net loss are to 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. The Company commenced periodic distributions in December 2008.
Distributions to the Other Members for the years ended December 31, 2017 and 2016 were as follows (in thousands except Units and per Unit data):
2017 | 2016 | |||||||
Distributions | $ | 818 | $ | 2,693 | ||||
Weighted average number of Units outstanding | 2,992,482 | 2,992,482 | ||||||
Weighted average distributions per Unit | $ | 0.27 | $ | 0.90 |
11. 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 December 31, 2017 and 2016, only the Companys warrants were measured on a recurring basis. During 2017 and 2016, the Company had non-recurring adjustments to reduce the cost basis of certain assets deemed impaired.
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
27
ATEL 12, LLC
NOTES TO FINANCIAL STATEMENTS
11. Fair value measurements: - (continued)
estimated using discounted cash flow analyses, broker quotes, information from third party remarketing agents, third party appraisals of collateral and/or other valuation techniques. These techniques are significantly affected by certain of the Companys assumptions, including discount rates and estimates of future cash flows. Potential taxes and other transaction costs are not considered in estimating fair values. As the Company is responsible for determining fair value, an analysis is performed on prices obtained from third parties. Such analysis is performed by asset management and credit department personnel who are familiar with the Companys investments in equipment, notes receivable and equity securities of venture companies. The analysis may include a periodic review of price fluctuations and validation of numbers obtained from a specific third party by reference to multiple representative sources.
Such 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 December 31, 2017 and 2016, the calculated fair value of the Funds warrant portfolio approximated $149 thousand and $159 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):
2017 | 2016 | |||||||
Fair value of warrants at beginning of year | $ | 159 | $ | 327 | ||||
Unrealized loss on fair valuation of warrants | (10 | ) | (168 | ) | ||||
Fair value of warrants at end of year | $ | 149 | $ | 159 |
Impaired investment securities (non-recurring)
The Companys investment securities are not registered for public sale and are carried at cost. The investment securities are adjusted for impairment, if any, based upon factors which include, but are not limited to, available financial information, the issuers ability to meet its current obligations and indications of the issuers subsequent ability to raise capital.
During 2017 and 2016, the Company recorded a fair value adjustment of $219 thousand and $0 to reduce the cost basis of an impaired investment security, respectively. The reduction in value was based on a market approach technique and uses inputs that reflect qualitative and quantitative information provided by the management of the investee. Such information indicated reduced growth opportunity and eventual reduction in cash flows and revenues. Under the Fair Value Measurements Topic of the FASB Accounting Standards Codification, the fair value of the aforementioned impaired investment securities were classified within Level 3 of the valuation hierarchy.
Impaired off-lease equipment (non-recurring)
During 2017, the Company deemed certain off-lease equipment (assets) to be impaired and recorded fair value adjustments of $281 thousand to reduce the cost basis of the equipment. During 2016, the Company had no fair value adjustments relative to impaired equipment.
The aforementioned adjustments were non-recurring. Under the Fair Value Measurements Topic of the FASB Accounting Standards Codification, the fair values of such impaired equipment are classified within Level 3 of the valuation hierarchy as the data sources utilized for the valuation of the assets reflect significant inputs that are unobservable in the market. Such valuation utilizes a market approach technique and uses inputs that reflect the sales price of similar assets sold by affiliates and/or information from third party remarketing agents not readily available in the market.
28
ATEL 12, LLC
NOTES TO FINANCIAL STATEMENTS
11. Fair value measurements: - (continued)
The table below presents the fair value measurement of assets and liabilities measured at fair value on a non-recurring basis and the level within the hierarchy in which the fair value measurements fall at December 31, 2017 (in thousands):
December 31, 2017 |
Level 1 Estimated Fair Value |
Level 2 Estimated Fair Value |
Level 3 Estimated Fair Value |
|||||||||||||
Assets measured at fair value on a non-recurring basis |
||||||||||||||||
Impaired off-lease equipment | $ | 273 | $ | | $ | | $ | 273 | ||||||||
Impaired investment securities | $ | 219 | $ | | $ | | $ | 219 |
The following tables summarize the valuation techniques and significant unobservable inputs used for the Companys recurring and non-recurring fair value calculation/adjustments categorized as Level 3 in the fair value hierarchy at December 31, 2017 and 2016:
December 31, 2017 | ||||||||
Name | Valuation Frequency | Valuation Technique | Unobservable Inputs | Range of Input Values | ||||
Warrants | Recurring | Black-Scholes formulation | Stock price | $0.02 $14.75 | ||||
Exercise price | $0.36 $25.76 | |||||||
Time to maturity (in years) | 0.75 5.84 | |||||||
Risk-free interest rate | 1.65% 2.25% | |||||||
Annualized volatility | 48.32% 83.30% | |||||||
Impaired off-lease equipment | Non-recurring | Market Approach | Third Party Agents pricing Quotes Per Equipment | $72,525 $200,000 | ||||
Equipment Condition | Good | |||||||
Investment Securities | Non-recurring | Market Approach | Qualitative and quantitative | Not Applicable |
December 31, 2016 | ||||||||
Name | Valuation Frequency | Valuation Technique | Unobservable Inputs | Range of Input Values | ||||
Warrants | Recurring | Black-Scholes formulation | Stock price | $0.01 $14.75 | ||||
Exercise price | $0.14 $25.76 | |||||||
Time to maturity (in years) | 0.13 6.84 | |||||||
Risk-free interest rate | 0.48% 2.22% | |||||||
Annualized volatility | 49.69% 103.87% |
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 determines the estimated fair value amounts by using market information and valuation methodologies that it considers appropriate and consistent with the fair value accounting guidance. Considerable judgment is required to interpret market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
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.
29
ATEL 12, LLC
NOTES TO FINANCIAL STATEMENTS
11. Fair value measurements: - (continued)
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.
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 and Long-term debt
The fair value of the Companys non-recourse and long-term 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 December 31, 2017 and 2016 (in thousands):
Fair Value Measurements at December 31, 2017 | ||||||||||||||||||||
Carrying Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Financial assets: |
||||||||||||||||||||
Cash and cash equivalents | $ | 479 | $ | 479 | $ | | $ | | $ | 479 | ||||||||||
Investment in securities | 27 | | | 27 | 27 | |||||||||||||||
Warrants, fair value | 149 | | | 149 | 149 | |||||||||||||||
Financial liabilities: |
||||||||||||||||||||
Non-recourse debt | 103 | | | 102 | 102 |
Fair Value Measurements at December 31, 2016 | ||||||||||||||||||||
Carrying Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Financial assets: |
||||||||||||||||||||
Cash and cash equivalents | $ | 1,033 | $ | 1,033 | $ | | $ | | $ | 1,033 | ||||||||||
Investment in securities | 272 | | | 272 | 272 | |||||||||||||||
Warrants, fair value | 159 | | | 159 | 159 | |||||||||||||||
Financial liabilities: |
||||||||||||||||||||
Non-recourse debt | 566 | | | 566 | 566 |
30
Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES |
None.
Item 9A. | CONTROLS AND PROCEDURES |
Evaluation of disclosure controls and procedures
The Companys Managing Members Chief Executive Officer, and Executive Vice President and Chief Financial and Operating Officer (Management), evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on the evaluation of the Companys disclosure controls and procedures, the Chief Executive Officer and Executive Vice President and Chief Financial and Operating Officer 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.
Managements Annual Report on Internal Control over Financial Reporting
The Management of the Managing Member is responsible for establishing and maintaining adequate internal control over financial reporting as that term is defined in Exchange Act Rule 13a-15(f) for the Company, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2017. The internal control process of the Managing Member, as it is applicable to the Company, was designed to provide reasonable assurance to Management regarding the preparation and fair presentation of published financial statements, and includes those policies and procedures that:
(1) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States, and that the Companys receipts and expenditures are being made only in accordance with authorization of the Management of the Managing Member; and |
(2) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that could have a material effect on the financial statements. |
All internal control processes, no matter how well designed, have inherent limitations. Therefore, even those processes determined to be effective can provide only reasonable assurance with respect to the reliability of financial statement preparation and presentation. Further, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management of the Managing Member assessed the effectiveness of its internal control over financial reporting, as it is applicable to the Company, as of December 31, 2017. In making this assessment, it used the criteria set forth in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its assessment, Management of the Managing Member concluded that the Managing Members internal control over financial reporting, as it is applicable to the Company, was effective as of December 31, 2017.
31
This annual report does not include an audit report of the Companys independent registered public accounting firm regarding internal control over financial reporting. Managements internal control over financial reporting was not subject to audit by the Companys independent registered public accounting firm pursuant to Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which exempts non-accelerated filers from Section 404(b) of the Sarbanes-Oxley Act of 2002.
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 year ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, the Managing Members internal control over financial reporting, as it is applicable to the Company.
32
PART III
Item 10. | DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT |
The registrant is a Limited Liability Company and has no officers or directors.
ATEL Financial Services, LLC (AFS or Managing Member or Manager) is the Companys Managing Member, and is, a wholly-owned subsidiary of ATEL Capital Group (ACG or ATEL). The outstanding voting capital stock of ATEL is owned 100% by Dean L. Cash.
Each of AFS and ATEL Leasing Corporation (ALC) is a wholly-owned subsidiary of ACG 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 and communications services, and general administrative services are performed by AFS. ATEL Securities Corporation (ASC), a wholly-owned subsidiary of AFS, performs distribution services in connection with the Companys public offering of its Units.
The officers and directors of ATEL and its affiliates are as follows:
Dean L. Cash | Chairman of the Board, President and Chief Executive Officer of ATEL Managing Member, LLC (Managing Member) |
|
Paritosh K. Choksi | Director, Executive Vice President and Chief Financial Officer and Chief Operating Officer of ATEL Managing Member, LLC (Managing Member) |
|
Vasco H. Morais | Executive Vice President, Secretary and General Counsel of ATEL Managing Member, LLC (Managing Member) |
Dean L. Cash, age 67, became chairman, president and chief executive officer of ATEL in April 2001. Mr. Cash joined ATEL as director of marketing in 1980 and served as a vice president since 1981, executive vice president since 1983 and a director since 1984. Prior to joining ATEL, Mr. Cash was a senior marketing representative for Martin Marietta Corporation, data systems division, from 1979 to 1980. From 1977 to 1979, he was employed by General Electric Corporation, where he was an applications specialist in the medical systems division and a marketing representative in the information services division. Mr. Cash was a systems engineer with Electronic Data Systems from 1975 to 1977, and was involved in maintaining and developing software for commercial applications. Mr. Cash received a B.S. degree in psychology and mathematics in 1972 and an M.B.A. degree with a concentration in finance in 1975 from Florida State University. Mr. Cash is an arbitrator with the American Arbitration Association and is qualified as a registered principal with the Financial Industry Regulatory Authority.
Paritosh K. Choksi, age 64, joined ATEL in 1999 as a director, senior vice president and its chief financial officer. He became its executive vice president and CFO/COO in April 2001. Prior to joining ATEL, Mr. Choksi was chief financial officer at Wink Communications, Inc. from 1997 to 1999. From 1977 to 1997, Mr. Choksi was with Phoenix American Incorporated, a financial services and management company, where he held various positions during his tenure, and was senior vice president, chief financial officer and director when he left the company. Mr. Choksi was involved in all corporate matters at Phoenix and was responsible for Phoenixs capital market needs. He also served on the credit committee overseeing all corporate investments, including its venture lease portfolio. Mr. Choksi was a part of the executive management team which caused Phoenixs portfolio to increase from $50 million in assets to over $2 billion. Mr. Choksi is a member of the board of directors of Syntel, Inc. Mr. Choksi received a bachelor of technology degree in mechanical engineering from the Indian Institute of Technology, Bombay; and an M.B.A. degree from the University of California, Berkeley.
Vasco H. Morais, age 59, joined ATEL in 1989 as general counsel. Mr. Morais manages ATELs legal department, which provides legal and contractual support in the negotiating, documenting, drafting, reviewing and funding of lease transactions. In addition, Mr. Morais advises on general corporate law matters, and assists on securities law issues. From 1986 to 1989, Mr. Morais was employed by the BankAmeriLease Companies, Bank of Americas equipment leasing subsidiaries, providing in-house legal support on the documentation of tax-oriented and non-tax oriented direct and leveraged lease transactions, vendor leasing programs and general corporate matters. Prior to the BankAmeriLease Companies, Mr. Morais was with the Consolidated Capital Companies in the Corporate and Securities Legal Department involved in drafting and reviewing contracts, advising on corporate law matters and securities law issues. Mr. Morais received a B.A. degree in 1982 from the University of California in Berkeley, a J.D. degree in 1986 from
33
Golden Gate University Law School; and an M.B.A. (Finance) degree from Golden Gate University in 1997. Mr. Morais, an active member of the State Bar of California since 1986, served as co-chair of the Uniform Business Law Section of the State Bar of California and was inducted as a fellow of the American College of Commercial Finance Lawyers in 2010.
Audit Committee
The board of directors of the Managing Member acts as the audit committee of the Company. Dean L. Cash and Paritosh K. Choksi are members of the board of directors of the Managing Member and are deemed to be financial experts. They are not independent of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on a review of Forms 3, 4, and 5, the Company is not aware of any failures to file reports of beneficial ownership required to be filed during or for the year ended December 31, 2017.
Code of Ethics
A Code of Ethics that is applicable to the Company, including the Chief Executive Officer and Chief Financial Officer and Chief Operating Officer of its Manager, ATEL Financial Services, LLC, or persons acting in such capacity on behalf of the Company, is included as Exhibit 14.1 to this report.
Item 11. EXECUTIVE COMPENSATION
The registrant has no officers or directors.
Set forth hereinafter is a description of the nature of remuneration paid and to be paid to the Manager and its affiliates. The amount of such remuneration paid for the years ended December 31, 2017 and 2016 is set forth in Item 8 of this report under the caption Financial Statements and Supplementary Data Notes to Financial Statements Related party transactions, at Note 7 thereof, which information is hereby incorporated by reference.
Asset Management Fee and Carried Interest
The Company pays the Manager an annual Asset Management Fee in an amount equal to 4% of Gross Operating Lease Revenues and Cash from Sales or Refinancing. The Asset Management Fee is paid on a monthly basis. The amount of the Asset Management Fee payable in any year is reduced for that year to the extent it would otherwise exceed the Asset Management Fee Limit, as described below. The Asset Management Fee is paid for services rendered by the Manager and its affiliates in determining portfolio and investment strategies and generally managing or supervising the management of the investment portfolio.
The Manager supervises performance of all management activities, including, among other activities: the acquisition and financing of the investment portfolio, collection of lease and loan revenues, monitoring compliance by lessees borrowers with their contract terms, assuring that investment assets are being used in accordance with all operative contractual arrangements, paying operating expenses and arranging for necessary maintenance and repair of equipment and property in the event a lessee fails to do so, monitoring property, sales and use tax compliance and preparation of operating financial data. The Manager intends to delegate all or a portion of its duties and the Asset Management Fee to one or more of its affiliates who are in the business of providing such services.
The Manager also receives, as its Carried Interest, an amount equal to 7.5% of all Company Distributions.
Limitations on Fees
The Fund has adopted a single Asset Management Fee plus the Carried Interest as a means of compensating the Manager for sponsoring the Fund and managing its operations. While this compensation structure is intended to simplify management compensation for purposes of investors understanding, state securities administrators use a more complicated compensation structure in their review of equipment program offerings in order to assure that those offerings are fair under the states merit review guidelines. The total of all Front End Fees, the Carried Interest and the Asset Management Fee will be subject to the Asset Management Fee Limit in order to assure these state administrators that the Fund will not bear greater fees than permitted under the state merit review guidelines. The North American Securities Administrators Association, Inc. (NASAA) is an organization of state securities administrators, those state government agencies responsible for qualifying securities offerings in their respective states. NASAA has established
34
standards for the qualification of a number of different types of securities offerings and investment products, including its Statement of Policy on Equipment Programs (the NASAA Equipment Leasing Guidelines). Article IV, Sections C through G of the NASAA Equipment Leasing Guidelines establish the standards for payment of reasonable carried interests, promotional interests and fees for equipment acquisition, management, resale and releasing services to equipment leasing program sponsors. Article IV, Sections C through G of the NASAA Equipment Leasing Guidelines set the maximum compensation payable to the sponsor and its affiliates from an equipment leasing program such as the Fund. The Asset Management Fee Limit will equal the maximum compensation payable under Article IV, Sections C through G of the NASAA Equipment Leasing Guidelines as in effect on the date of the Funds prospectus (the NASAA Fee Limitation). Under the Asset Management Fee Limit, the Fund will calculate the maximum fees payable under the NASAA Fee Limitation and guarantee that the Asset Management Fee it will pay the Manager and its Affiliates, when added to its Carried Interest, will never exceed the fees and interest payable to a sponsor and its affiliates under the NASAA Fee Limitation.
Asset Management Fee Limit. The Asset Management Fee Limit will be calculated each year during the Funds term by calculating the total fees that would be paid to the Manager if the Manager were to be compensated on the basis of the maximum compensation payable under the NASAA Fee Limitation, including the Managers Carried Interest, as described below. To the extent that the amount paid as Front End Fees, the Asset Management Fee, and the Carried Interest for any year would cause the total fees to exceed the aggregate amount of fees calculated under the NASAA Fee Limitation for the year, the Asset Management Fee and/or Carried Interest for that year will be reduced to equal the maximum aggregate fees under the NASAA Fee Limitation. To the extent any such fees are reduced, the amount of such reduction will be accrued and deferred, and such accrued and deferred compensation would be paid to the Manager in a subsequent period, but only to the extent that the deferred compensation would be within the Asset Management Fee Limit for that later period. Any deferred fees that cannot be paid under the applicable limitations through the date of liquidation would be forfeited by the Manager at liquidation.
Under the NASAA Equipment Leasing Guidelines, the Fund is required to commit a minimum percentage of the Gross Proceeds to Investment in Equipment, calculated as the greater of: (i) 80% of the Gross Proceeds reduced by 0.0625% for each 1% of indebtedness encumbering the Funds equipment; or (ii) 75% of such Gross Proceeds. The Fund intends to incur total indebtedness equal to 50% of the aggregate cost of its equipment. The Operating Agreement requires the Fund to commit at least 85.875% of the Gross Proceeds to Investment in Equipment. Based on the formula in the NASAA Guidelines, the Funds minimum Investment in Equipment would equal 76.875% of Gross Proceeds (80% - [50% × .0625%] = 76.875%), and the Funds minimum Investment in Equipment would therefore exceed the NASAA Fee Limitation minimum by 9%.
The amount of the Carried Interest permitted the Manager under the NASAA Fee Limitation will be dependent on the amount by which the percentage of Gross Proceeds the Fund ultimately commits to Investment in Equipment exceeds the minimum Investment in Equipment under the NASAA Fee Limitation. The NASAA Fee Limitation permits the Manager and its Affiliates to receive compensation in the form of a carried interest in Fund Net Income, Net Loss and Distributions equal to 1% for the first 2.5% of excess Investment in Equipment over the NASAA Guidelines minimum, 1% for the next 2% of such excess, and 1% for each additional 1% of excess Investment in Equipment. With a minimum Investment in Equipment of 85.875%, the Manager and its Affiliates may receive an additional carried interest equal to 6.5% of Net Profit, Net Loss and Distributions under the foregoing formula (2.5% + 2% + 4.5% = 9%; 1% + 1% + 4.5% = 6.5%). At the lowest permitted level of Investment in Equipment, the NASAA Guidelines would permit the Manager and its Affiliates to receive a promotional interest equal to 5% of Distributions of Cash from Operations and 1% of Distributions of Sale or Refinancing Proceeds until Members have received total Distributions equal to their Original Invested Capital plus an 8% per annum cumulative return on their Adjusted Invested Capital, and, thereafter, the promotional interest may increase to 15% of all Distributions.
With the additional carried interest calculated as described above, the maximum aggregate fees payable to the Manager and Affiliates under the NASAA Guidelines as carried interest and promotional interest would equal 11.5% of Distributions of Cash from Operations (6.5% + 5% = 11.5%), and 7.5% of Distributions of Sale or Refinancing Proceeds (6.5% + 1% = 7.5%), before the subordination level was reached, and 21.5% of all Distributions thereafter. The maximum amounts to be paid under the terms of the Operating Agreement are subject to the application of the Asset Management Fee Limit provided in Section 8.3 of the Agreement, which limits the annual amount payable to the Manager and its Affiliates as the Asset Management Fee and the Carried Interest to an aggregate not to exceed the total amount of fees that would be payable to the Manager and its Affiliates under the NASAA Fee Limitation.
Upon completion of the offering of Units, final commitment of offering proceeds to acquisition of equipment and establishment of final levels of permanent portfolio debt, the Manager will calculate the maximum carried interest and promotional interest payable to the Manager and its Affiliates under the NASAA Fee Limitation and compare such total permitted fees to the total of the Asset Management Fee and Managers Carried Interest. If and to the extent that the
35
Asset Management Fee and Managers Carried Interest would exceed the fees calculated under the NASAA Fee Limitation, the fees payable to the Manager and its Affiliates will be reduced by an amount sufficient to cause the total of such compensation to comply with the NASAA Fee Limitation. The adjusted Asset Management Fee Limit will then be applied to the Asset Management Fee and Carried Interest as described above. A comparison of the Front End Fees actually paid by the Fund and the NASAA Fee Limitation maximums will be repeated, and any required adjustments will be made, at least annually thereafter.
See Note 6 to the financial statements as set forth in Part II, Item 8, Financial Statements and Supplementary Data, for amounts paid.
Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Security Ownership of Certain Beneficial Owners
At December 31, 2017, no investor is known to hold beneficially more than 5% of the issued and outstanding Units.
Security Ownership of Management
The parent of ATEL Financial Services, LLC is the beneficial owner of Limited Liability Company Units as follows:
(1) Title of Class |
(2) Name and Address of Beneficial Owner |
(3) Amount and Nature of Beneficial Ownership |
(4) Percent of Class |
|||
Limited Liability Company Units | ATEL Capital Group The Transamerica Pyramid 600 Montgomery Street, 9th Floor San Francisco, CA 94111 |
Initial Limited Liability Company Units 50 Units ($500) |
0.0017% |
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 8 of this report under the caption Financial Statements and Supplementary Data Notes to Financial Statements Related party transactions at Note 6 thereof.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
During the years ended December 31, 2017 and 2016, the Company incurred audit fees with its principal auditors totaling $97 thousand and $82 thousand, respectively.
Audit fees consist of the aggregate fees and expenses billed in connection with the audit of the Companys annual financial statements and the review of the financial statements included in the Companys quarterly reports on Form 10-Q.
The board of directors of the Managing Member acts as the audit committee of the registrant. Engagements for audit services, audit related services and tax services are approved in advance by the Chief Financial Officer of the Managing Member acting on behalf of the board of directors of the Managing Member in its role as the audit committee of the Company.
36
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) | Financial Statements and Schedules |
1. | Financial Statements |
2. | Financial Statement Schedules |
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(b) | Exhibits |
(3) and (4) Amended and Restated Limited Liability Company Operating Agreement, included as exhibit B to the Prospectus effective September 26, 2007 as filed on October 2, 2007 (File Number 333-142034) is hereby incorporated herein by reference
(14.1) | Code of Ethics | |
(31.1) | Certification of Dean L. Cash pursuant to Rules 13a-14(a)/15d-14(a) | |
(31.2) | Certification of Paritosh K. Choksi pursuant to Rules 13a-14(a)/15d-14(a) | |
(32.1) | Certification of Dean L. Cash pursuant to 18 U.S.C. section 1350 | |
(32.2) | Certification of Paritosh K. Choksi pursuant to 18 U.S.C. section 1350 | |
(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 |
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 26, 2018
ATEL 12, LLC (Registrant)
By: ATEL Financial Services, LLC |
By: /s/ Dean L. Cash |
By: /s/ Paritosh K. Choksi |
By: /s/ Samuel Schussler |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the persons in the capacities and on the dates indicated.
SIGNATURE | CAPACITIES | DATE | ||
/s/ Dean L. Cash Dean L. Cash |
Chairman of the Board, President and Chief Executive Officer of ATEL Financial Services, LLC, (Managing Member) |
March 26, 2018 | ||
/s/ Paritosh K. Choksi Paritosh K. Choksi |
Director, Executive Vice President and Chief Financial Officer and Chief Operating Officer of ATEL Financial Services, LLC (Managing Member) |
March 26, 2018 | ||
/s/ Samuel Schussler Samuel Schussler |
Vice President and Chief Accounting Officer of ATEL Financial Services, LLC (Managing Member) | March 26, 2018 |
No proxy materials have been or will be sent to security holders. An annual report will be furnished to security holders subsequent to the filing of this report on Form 10-K, and copies thereof will be furnished supplementally to the Commission when forwarded to the security holders.
38