Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
For the quarterly period ended September 30, 2004
|_| Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
For the transition period from _______ to _______
Commission File Number 333-47196
ATEL Capital Equipment Fund IX, LLC
(Exact name of registrant as specified in its charter)
California 94-3375584
---------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
600 California Street, 6th Floor, San Francisco, California 94108-2733
(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 989-8800
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Limited Liability
Company Units
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes |_| No |X|
The number of Limited Liability Company Units outstanding as of September 30,
2004 was 12,058,516.
DOCUMENTS INCORPORATED BY REFERENCE
None
1
ATEL CAPITAL EQUIPMENT FUND IX, LLC
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheets, September 30, 2004 and December 31, 2003.
Statements of Operations for the nine and three month periods ended
September 30, 2004 and 2003.
Statements of Changes in Members' Capital for the year ended December 31,
2003 and for the nine month period ended September 30, 2004.
Statements of Cash Flows for the nine and three month periods ended
September 30, 2004 and 2003.
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
ATEL CAPITAL EQUIPMENT FUND IX, LLC
BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(Unaudited)
ASSETS
September 30, December 31,
2004 2003
---- ----
(Unaudited)
Cash and cash equivalents $15,547,317 $ 29,429,383
Accounts receivable, net of allowance for doubtful accounts of $38,667 in 2004 and
$13,000 in 2003 710,686 1,323,526
Due from affiliate - 4,142,025
Notes receivable 4,121,687 268,196
Other assets 171,070 310,158
Investments in leases 57,735,563 52,057,199
---------------- ---------------
Total assets $78,286,323 $ 87,530,487
================ ===============
LIABILITIES AND MEMBERS' CAPITAL
Accounts payable:
Managing Member $ 179,360 $ 18,804
Other 82,732 476,740
Deposits due to lessees 187,291 -
Unearned operating lease income 176,246 128,928
---------------- ---------------
Total liabilities 625,629 624,472
Members' capital 77,660,694 86,906,015
---------------- ---------------
Total liabilities and Members' capital $78,286,323 $ 87,530,487
================ ===============
See accompanying notes.
3
ATEL CAPITAL EQUIPMENT FUND IX, LLC
STATEMENTS OF OPERATIONS
NINE AND THREE MONTH PERIODS ENDED
SEPTEMBER 30, 2004 AND 2003
(Unaudited)
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues:
Leasing activities:
Operating leases $ 7,836,301 $ 7,105,252 $ 2,822,119 $2,575,002
Direct financing leases 451,417 148,133 158,402 90,342
Gain on sales of assets 13,608 106,694 3,539 2,321
Interest:
Interest earned on cash deposits 223,709 468,676 53,568 63,782
Interest earned on notes receivable 202,206 139,969 123,966 33,798
Other (1,999) 82,821 11,518 36,642
---------------- ---------------- ---------------- ---------------
8,725,242 8,051,545 3,173,112 2,801,887
Expenses:
Depreciation of operating lease assets 6,515,295 5,671,618 2,373,708 2,074,165
Amortization of initial direct costs 510,736 340,733 179,934 137,627
Cost reimbursements to Managing Member 506,757 454,199 191,975 142,141
Asset management fees to Managing Member 438,535 401,404 179,641 144,633
Interest expense 358,163 289,519 107,820 122,716
Provision for doubtful accounts 204,000 250,000 12,000 250,000
Professional fees 186,945 70,749 16,998 14,103
Impairment losses 95,158 76,634 - -
Franchise fees and state taxes 91,620 72,682 1,754 -
Insurance 23,430 97,780 23,344 97,780
Other 205,773 149,582 72,771 72,387
---------------- ---------------- ---------------- ---------------
9,136,412 7,874,900 3,159,945 3,055,552
---------------- ---------------- ---------------- ---------------
Net income (loss) $ (411,170) $ 176,645 $ 13,167 $ (253,665)
================ ================ ================ ===============
Net income (loss):
Managing Member $ 660,055 $ 642,048 $ 159,038 $ 220,095
Other Members (1,071,225) (465,403) (145,871) (473,760)
---------------- ---------------- ---------------- ---------------
$ (411,170) $ 176,645 $ 13,167 $ (253,665)
================ ================ ================ ===============
Net loss per Limited Liability Company Unit ($0.09) ($0.04) ($0.01) ($0.04)
Weighted average number of Units outstanding 12,061,766 12,021,795 12,058,516 12,065,016
See accompanying notes.
4
ATEL CAPITAL EQUIPMENT FUND IX, LLC
STATEMENT OF CHANGES IN MEMBERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2003
AND FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2004
(Unaudited)
Other Members Managing
Units Amount Member Total
Balance December 31, 2002 11,037,141 $88,816,997 $ - $ 88,816,997
Capital contributions 1,028,125 10,281,250 - 10,281,250
Less selling commissions to affiliates - (976,719) - (976,719)
Other syndication costs to affiliates - (309,377) - (309,377)
Limited Liability Company Units repurchased (250) (1,923) - (1,923)
Distributions to Members - (10,633,086) (862,142) (11,495,228)
Net income (loss) - (271,127) 862,142 591,015
---------------- ---------------- ---------------- ---------------
Balance December 31, 2003 12,065,016 86,906,015 - 86,906,015
Rescissions of capital contributions (1,000) (10,000) - (10,000)
Limited liability company units repurchased (5,500) (46,093) - (46,093)
Syndication costs recovered on rescission - 1,344 - 1,344
Syndication costs reimbursed - 21,340 - 21,340
Distributions to Members - (8,140,687) (660,055) (8,800,742)
Net income (loss) - (1,071,225) 660,055 (411,170)
---------------- ---------------- ---------------- ---------------
Balance September 30, 2004 12,058,516 $77,660,694 $ - $ 77,660,694
================ ================ ================ ===============
See accompanying notes.
5
ATEL CAPITAL EQUIPMENT FUND IX, LLC
STATEMENTS OF CASH FLOWS
NINE AND THREE MONTH PERIODS ENDED
SEPTEMBER 30, 2004 AND 2003
(Unaudited)
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Operating activities:
Net income (loss) $ (411,170) $ 176,645 $ 13,167 $ (253,665)
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Gain on sales of assets (13,608) (106,694) (3,539) (2,321)
Depreciation of operating lease assets 6,515,295 5,671,618 2,373,708 2,074,165
Amortization of initial direct costs 510,736 340,733 179,934 137,627
Provision for doubtful accounts 204,000 250,000 12,000 250,000
Impairment losses 95,158 76,634 - -
Changes in operating assets and liabilities:
Accounts receivable 408,840 394,071 396,501 279,223
Other assets 139,088 44,999 15,000 15,000
Accounts payable, Managing Member 160,556 (308,305) (316,512) (429,736)
Accounts payable, other (394,008) (19,204) 517 (17,872)
Deposits due to lessees 187,291 - 9,858 -
Unearned operating lease income 47,318 164,470 (29,205) 103,732
---------------- ---------------- ---------------- ---------------
Net cash provided by operating activities 7,449,496 6,684,967 2,651,429 2,156,153
---------------- ---------------- ---------------- ---------------
6
ATEL CAPITAL EQUIPMENT FUND IX, LLC
STATEMENTS OF CASH FLOWS
(Continued)
NINE AND THREE MONTH PERIODS ENDED
SEPTEMBER 30, 2004 AND 2003
(Unaudited)
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Investing activities:
Purchases of equipment on operating leases (10,257,100) (10,731,246) (5,653,051) (1,952,175)
Due from affiliate 4,142,025 - 469,838 -
Note receivable advances (4,405,267) (46,196) (998,771) (46,196)
Purchases of equipment on direct financing leases (2,998,913) (4,693,865) (1,877,315) (4,077,916)
Reduction of net investment in direct financing
leases 1,701,063 417,345 686,316 278,920
Payments of initial direct costs to Managing
Member (1,124,739) (1,462,748) (509,344) (402,250)
Payments received on notes receivable 394,922 445,249 265,661 163,873
Proceeds from sales of lease assets 50,598 1,107,143 10,001 19,480
---------------- ---------------- ---------------- ---------------
Net cash used in investing activities (12,497,411) (14,964,318) (7,606,665) (6,016,264)
---------------- ---------------- ---------------- ---------------
Financing activities:
Distributions to Other Members (8,140,687) (7,918,514) (2,713,369) (2,714,422)
Distributions to Managing Member (660,055) (642,048) (159,038) (220,095)
Repurchase of limited liability company units (46,093) (1,923) (23,343) -
Rescissions of capital contributions (10,000) - - -
Syndication costs recovered on rescission 1,344 - - -
Syndication costs reimbursed 21,340 21,340
Capital contributions received - 10,281,250 - -
Payment of syndication costs to Managing Member - (1,286,096) - 42,934
---------------- ---------------- ---------------- ---------------
Net cash (used in) provided by financing
activities (8,834,151) 432,669 (2,874,410) (2,891,583)
---------------- ---------------- ---------------- ---------------
Net decrease in cash and cash equivalents (13,882,066) (7,846,682) (7,829,646) (6,751,694)
Cash and cash equivalents at beginning of
period 29,429,383 39,722,496 23,376,963 38,627,508
---------------- ---------------- ---------------- ---------------
Cash and cash equivalents at end of period $15,547,317 $31,875,814 $15,547,317 $ 31,875,814
================ ================ ================ ===============
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest $ 358,163 $ 289,519 $ 107,820 $ 122,716
================ ================ ================ ===============
See accompanying notes.
7
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
1. Summary of significant accounting policies:
Basis of presentation:
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States (GAAP) for
interim financial information and with instructions to Form 10-Q and Article 10
of Regulation S-X. The unaudited interim financial statements reflect all
adjustments which are, in the opinion of the Managing Member, necessary to a
fair statement of financial position and results of operations for the interim
periods presented. All such adjustments are of a normal recurring nature. The
preparation of financial statements in accordance with GAAP requires management
to make estimates and assumptions that effect reported amounts in the financial
statements and accompanying notes. Therefore, actual results could differ from
those estimates. Operating results for the nine months ended September 30, 2004
are not necessarily indicative of the results for the year ending December 31,
2004.
These unaudited interim financial statements should be read in conjunction with
the financial statements and notes thereto contained in the report on Form 10-K
for the year ended December 31, 2003, filed with the Securities and Exchange
Commission.
2. Organization and Company matters:
ATEL Capital Equipment Fund IX, LLC (the Company) was formed under the laws of
the state of California on September 27, 2000 for the purpose of acquiring
equipment to engage in equipment leasing and sales activities. The Company may
continue until December 31, 2019. The Company's offering was terminated as of
January 15, 2003.
Upon the sale of the minimum amount of Units of Limited Liability Company
interest (Units) of $1,200,000 and the receipt of the proceeds thereof on
February 21, 2001, the Company commenced operations.
The Company does not make a provision for income taxes since all income and
losses will be allocated to the Members for inclusion in their individual tax
returns.
ATEL Financial Services, LLC ("AFS"), an affiliated entity, acts as the Managing
Member of the Company.
Certain prior period amounts have been reclassified to conform to current period
presentation.
The Company is in its acquisition phase and is making distributions on a monthly
or quarterly basis.
8
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
3. Investment in leases:
The Company's investment in leases consists of the following:
Depreciation /
Amortization
Expense or
Balance Amortization of Reclass- Balance
December 31, Direct Financing ifications and September 30,
2003 Additions Leases Dispositions 2004
---- --------- ------ ------------ ----
Net investment in operating
leases $ 43,443,437 $10,257,100 $ (6,515,295) $ (126,690) $ 47,058,552
Net investment in direct financing
leases 6,357,227 2,998,913 (1,701,063) - 7,655,077
Assets held for sale or lease, net
of accumulated depreciation of
$170,300 in 2004 and
zero in 2003 5,160 - - 151,396 156,556
Initial direct costs, net of
accumulated amortization of
$1,185,975 in 2004 and
$675,238 in 2003 2,251,375 1,124,739 (510,736) - 2,865,378
------------------ ---------------- ---------------- ---------------- ---------------
$ 52,057,199 $14,380,752 $ (8,727,094) $ 24,706 $ 57,735,563
================== ================ ================ ================ ===============
Net investment in operating leases:
Property on operating leases consists of the following:
Balance Reclass- Balance
December 31, Additions and ifications and September 30,
2003 Depreciation Dispositions 2004
Mining $ 25,521,984 $ 575,937 $ - $ 26,097,921
Marine vessels 11,200,000 - - 11,200,000
Manufacturing 10,437,852 2,570,179 38,633 13,046,664
Materials handling 5,879,564 3,676,354 (322,099) 9,233,819
Transportation - 3,081,360 - 3,081,360
Communications 3,033,933 - - 3,033,933
Natural gas compressors 621,508 - (52,048) 569,460
Furniture and Equipment 562,248 353,270 - 915,518
---------------- ---------------- ---------------- ---------------
57,257,089 10,257,100 (335,514) 67,178,675
Less accumulated depreciation (13,813,652) (6,515,295) 208,824 (20,120,123)
---------------- ---------------- ---------------- ---------------
$ 43,443,437 $ 3,741,805 $ (126,690) $ 47,058,552)
================ ================ ================ ===============
The average assumed residual values for assets on operating leases were 28% at
December 31, 2003 and 27% at September 30, 2004.
9
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
3. Investment in leases (continued):
Net investment in direct financing leases:
As of September 30, 2004, net investment in direct financing leases consists of
office furniture and materials handling equipment. The following lists the
components of the Company's net investment in direct financing leases as of
September 30, 2004:
Total minimum lease payments receivable $ 7,724,007
Estimated residual values of leased equipment (unguaranteed) 919,338
----------------
Investment in direct financing leases 8,643,345
Less unearned income (988,268)
----------------
Net investment in direct financing leases $ 7,655,077
================
All of the property on leases was acquired in 2001, 2002, 2003 and 2004.
At September 30, 2004, the aggregate amounts of future minimum lease payments
are as follows:
Direct
Year ending Operating Financing
December 31, Leases Leases Total
Three months ending December 31, 2004 $ 2,438,232 $ 840,394 $ 3,278,626
Year ending December 31, 2005 11,416,214 2,501,316 13,917,530
2006 9,818,423 1,915,294 11,733,717
2007 4,945,912 1,311,613 6,257,525
2008 2,650,343 830,712 3,481,055
2009 1,542,137 324,678 1,866,815
Thereafter 235,265 - 235,265
---------------- ---------------- ----------------
$33,046,526 $ 7,724,007 $40,770,533
================ ================ ================
4. Notes receivable:
The Company has various notes receivable from parties who have financed the
purchase of equipment through the Company. The terms of the notes receivable are
18 to 60 months and bear interest at rates ranging from 11% to 22%. The notes
are secured by the equipment financed. As of September 30, 2004, the minimum
future payments receivable are as follows:
Year ending
December 31,
Three months ending December 31, 2004 $ 344,198
Year ending December 31, 2005 1,367,186
2006 983,967
2007 535,210
2008 447,024
2009 1,818,006
----------------
5,495,591
Less portion representing interest (1,373,904)
----------------
$ 4,121,687
================
10
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
5. Related party transactions:
The terms of the Limited Company Operating Agreement provide that AFS and/or
affiliates are entitled to receive certain fees for equipment acquisition,
management and resale and for management of the Company.
The Limited Liability Company Operating Agreement allows for the reimbursement
of costs incurred by AFS in providing services to the Company. Services provided
include Company accounting, investor relations, legal counsel and lease and
equipment documentation. AFS is not reimbursed for services where it is entitled
to receive a separate fee as compensation for such services. Reimbursable costs
incurred by AFS are allocated to the Company based upon an estimate of actual
time incurred by employees working on Company business and an allocation of rent
and other costs based on utilization studies.
Substantially all employees of AFS record time incurred in performing services
on behalf of all of the companies serviced by AFS. AFS believes that the costs
reimbursed are the lower of (i) actual costs incurred on behalf of the Company
or (ii) the amount the Company would be required to pay independent parties for
comparable administrative services in the same geographic location and are
reimbursable in accordance with the Limited Liability Company Operating
Agreement.
During the nine and three month periods ended September 30, 2004 and 2003, AFS
and/or affiliates earned fees, commissions and reimbursements, pursuant to the
Limited Liability Company Agreement as follows:
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Payments of initial direct costs to AFS $ 1,124,739 $ 1,462,748 $ 509,344 $ 402,250
Costs reimbursed to AFS 506,757 454,199 191,975 142,141
Asset management fees to AFS 438,535 401,404 179,641 144,633
Reimbursements of other payments made by
the Managing Member on behalf of the Company 342,984 264,898 85,368 138,618
Selling commissions (equal to 9.5% of the selling
price of the Limited Liability Company units,
deducted from Other Members' capital) - 976,719 - -
Reimbursement of other syndication costs to
AFS (22,684) 309,377 (21,340) (42,934)
---------------- ---------------- ---------------- ---------------
$ 2,390,331 $ 3,869,345 $ 944,988 $ 784,708
================ ================ ================ ===============
11
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
6. Financing arrangement:
The Company participates with AFS and certain of its affiliates in a financing
arrangement (comprised of a term loan to AFS, an acquisition facility and a
warehouse facility) with a group of financial institutions that includes certain
financial covenants. The available financing arrangement was amended during the
current quarter and the overall financing arrangement was increased by
$4,300,000 to $70,000,000 and expires in June 2006. The availability of
borrowings available to the Company under this financing arrangement is reduced
by the amount AFS has outstanding as a term loan. As of September 30, 2004
borrowings under the facility were as follows:
Total amount available under the financing arrangement $ 70,000,000
Term loan to AFS as of September 30, 2004 (2,809,091)
---------------
Total available under the acquisition and warehouse facilities 67,190,909
Amount borrowed by the Company under the acquisition facility -
Amounts borrowed by affiliated partnerships and limited
liability companies under the acquisition facility (14,300,000)
---------------
Total remaining available under the acquisition and
warehouse facilities $ 52,890,909
===============
Subsequent to quarter end the revolving line of credit was increased $5,000,000
to an overall available credit limit of $75,000,000.
Draws on the acquisition facility by any individual borrower are secured only by
that borrower's assets, including equipment and related leases. Borrowings on
the warehouse facility are recourse jointly to certain of the affiliated
partnerships and limited liability companies, the Company and AFS.
The credit agreement includes certain financial covenants applicable to each
borrower. The Company was in compliance with its covenants as of September 30,
2004.
7. Member's capital:
As of September 30, 2004, 12,058,516 Units were issued and outstanding. The
Company is authorized to issue up to 15,000,050 Units, including the 50 Units
issued to the initial members.
The Company's Net Income, Net Losses, and Distributions as defined in the
Limited Liability Company Operating Agreement are to be allocated 92.5% to the
Members and 7.5% to AFS.
Distributions to the Other Members were as follows:
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Distributions $ 8,140,687 $ 7,918,514 $ 2,713,369 $2,714,422
Weighted average number of Units outstanding 12,061,766 12,021,795 12,058,516 12,065,016
Weighted average distributions per Unit $ 0.67 $ 0.66 $ 0.23 $ 0.22
12
ATEL CAPITAL EQUIPMENT FUND IX, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
8. Commitments:
As of September 30, 2004, the Company had outstanding commitments to purchase
lease equipment totaling approximately $53,407,000.
9. Credit facility:
In August 2002, the Company established a $102 million receivables funding
program with a receivables financing company that issues commercial paper rated
A1 from Standard and Poors and P1 from Moody's Investor Services. In this
receivables funding program, the lenders would receive liens against the
Company's assets. The lender will be in a first position against certain
specified assets and will be in either a subordinated or shared position against
the remaining assets. The program provides for borrowing at a variable interest
rate and requires AFS, on behalf of the Company, to enter into interest rate
swap agreements with certain hedge counterparties (also rated A1/P1) to mitigate
the interest rate risk associated with a variable interest rate note.
AFS anticipates that this program will allow the Company to have a more cost
effective means of obtaining debt financing than available for individual
non-recourse debt transactions. As of September 30, 2004, the Company had not
borrowed under the facility. The program requires the Company to pay an annual
standby fee equal to 0.3672% of the unused portion of the program. During the
nine month periods ended September 30, 2004 and 2003, the Company paid standby
fees of $290,445 and $195,500, respectively. During the three month periods
ended September 30, 2004 and 2003, the Company paid standby fees of $92,820 and
$64,458, respectively.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statements contained in this Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Form 10-Q,
which are not historical facts, may be forward-looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Investors are cautioned not
to attribute undue certainty to these forward-looking statements, which speak
only as of the date of this Form 10-Q. We undertake no obligation to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances after the date of this Form 10-Q or to reflect the occurrence of
unanticipated events, other than as required by law.
Capital Resources and Liquidity
During 2004 and 2003, the Company's primary activity was engaging in equipment
leasing activities. Through January 15, 2003, the Company had received
subscriptions for 12,065,266 Units ($120,652,660). The Company's offering was
terminated as of that date. As of September 30, 2004, 12,058,516 Units
($120,585,160) were issued and outstanding.
During the funding period, the Company's primary source of liquidity is
subscription proceeds from the public offering of Units. The liquidity of the
Company will vary in the future, increasing to the extent cash flows from leases
exceed expenses, and decreasing as lease assets are acquired, as distributions
are made to the members and to the extent expenses exceed cash flows from
leases.
As another source of liquidity, the Company has contractual obligations with a
diversified group of lessees for fixed lease terms at fixed rental amounts. As
the initial lease terms expire, the Company will re-lease or sell the equipment.
The future liquidity beyond the contractual minimum rentals will depend on AFS's
success in re-leasing or selling the equipment as it comes off lease.
The Company participates with AFS and certain of its affiliates in a financing
arrangement (comprised of a term loan to AFS, an acquisition facility and a
warehouse facility) with a group of financial institutions that includes certain
financial covenants. The available financing arrangement was amended during the
current quarter and the overall financing arrangement was increased by
$4,300,000 to $70,000,000 and expires in June 2006. The availability of
borrowings available to the Company under this financing arrangement is reduced
by the amount AFS has outstanding as a term loan. As of September 30, 2004
borrowings under the facility were as follows:
Total amount available under the financing arrangement $ 70,000,000
Term loan to AFS as of September 30, 2004 (2,809,091)
---------------
Total available under the acquisition and warehouse facilities 67,190,909
Amount borrowed by the Company under the acquisition facility -
Amounts borrowed by affiliated partnerships and limited
liability companies under the acquisition facility (14,300,000)
---------------
Total remaining available under the acquisition and
warehouse facilities $ 52,890,909
===============
Subsequent to quarter end the revolving line of credit was increased $5,000,000
to an overall available credit limit of $75,000,000.
Draws on the acquisition facility by any individual borrower are secured only by
that borrower's assets, including equipment and related leases. Borrowings on
the warehouse facility are recourse jointly to certain of the affiliated
partnerships and limited liability companies, the Company and AFS.
Throughout the reinvestment period, the Company anticipates reinvesting a
portion of lease payments from assets owned in new leasing transactions. Such
reinvestment will occur only after the payment of all obligations, including
debt service (both principal and interest), the payment of management and
acquisition fees to AFS and providing for cash distributions to the members. At
September 30, 2004, the Company had commitments to purchase lease assets
totaling $53,407,000. No other commitments of capital have been made.
AFS or an affiliate may purchase equipment in its own name, the name of an
affiliate or the name of a nominee, a trust or otherwise and hold title thereto
on a temporary or interim basis for the purpose of facilitating the acquisition
of such equipment or the completion of manufacture of the equipment or for any
other purpose related to the business of the Company, provided, however that:
(i) the transaction is in the best interest of the Company; (ii) such equipment
is purchased by the Company for a purchase price no greater than the cost of
such equipment to AFS or affiliate (including any out-of-pocket carrying costs),
except for compensation permitted by the Operating Agreement; (iii) there is no
difference in interest terms of the loans secured by the equipment at the time
acquired by AFS or affiliate and the time acquired by the Company; (iv) there is
no benefit arising out of such transaction to AFS or its affiliate apart from
the compensation otherwise permitted by the Operating Agreement; and (v) all
income generated by, and all expenses associated with, equipment so acquired
will be treated as belonging to the Company.
14
The credit agreement includes certain financial covenants applicable to each
borrower. The Company was in compliance with its covenants as of September 30,
2004.
The Company currently has available adequate reserves to meet contingencies, but
in the event those reserves were found to be inadequate, the Company would
likely be in a position to borrow against its current portfolio to meet such
requirements. AFS envisions no such requirements for operating purposes.
If inflation in the general economy becomes significant, it may affect the
Company inasmuch as the residual (resale) values and rates on re-leases of the
Company's leased assets may increase as the costs of similar assets increase.
However, the Company's revenues from existing leases would not increase, as such
rates are generally fixed for the terms of the leases without adjustment for
inflation.
If interest rates increase significantly, the lease rates that the Company can
obtain on future leases will be expected to increase as the cost of capital is a
significant factor in the pricing of lease financing. Leases already in place,
for the most part, would not be affected by changes in interest rates.
In August 2002, the Company established a $102 million receivables funding
program with a receivables financing company that issues commercial paper rated
A1 from Standard and Poors and P1 from Moody's Investor Services. In this
receivables funding program, the lenders would receive liens against the
Company's assets. The lender will be in a first position against certain
specified assets and will be in either a subordinated or shared position against
the remaining assets. The program provides for borrowing at a variable interest
rate and requires AFS, on behalf of the Company, to enter into interest rate
swap agreements with certain hedge counterparties (also rated A1/P1) to mitigate
the interest rate risk associated with a variable interest rate note.
AFS anticipates that this program will allow the Company to have a more cost
effective means of obtaining debt financing than available for individual
non-recourse debt transactions. As of September 30, 2004, the Company had not
borrowed under the facility. The program requires the Company to pay an annual
standby fee equal to 0.3672% of the unused portion of the program. During the
nine month periods ended September 30, 2004 and 2003, the Company paid standby
fees of $290,445 and $195,500, respectively. During the three month periods
ended September 30, 2004 and 2003, the Company paid standby fees of $92,820 and
$64,458, respectively.
Cash Flows
During the first three quarters of 2004, the Company's primary source of
liquidity was operating lease rents and the uninvested proceeds of the public
offering (which terminated in 2003). During the first three quarters of 2003,
the Company's primary source of liquidity was the proceeds of its offering of
Units which ended January 2003.
In 2004 and 2003, the primary source of cash from operations was rents from
operating leases.
Rents from direct financing leases accounted for as reductions in the Company's
net investment in direct financing leases and payments received on notes
receivable were the primary sources of cash from investing activities in the
first nine months of 2003. Cash from direct financing leases increased from
$417,345 in the nine month period ended September 30, 2003 to $1,701,063 in the
nine month period ended September, 2004. Cash from direct financing leases has
increased from $278,920 in the three month period ended September 30, 2003 to
$686,316 in the three month period ended September, 2004. The increases were a
result of lease asset acquisitions over the last year.
In the first three quarters of 2004, the Company received asset sales proceeds
($4,142,025) that had been due from an affiliate as of December 31, 2003.
Proceeds from sales of lease assets for the nine month period in 2004 were
$50,598, as compared to $1,107,143 in the comparable period in 2003. Proceeds
from asset sales were not significant during the three month periods ended
September 30, 2004 and 2003. Uses of cash for investing activities consisted of
cash used to purchase operating and direct financing lease assets, payments of
initial direct costs associated with the lease asset purchases and advances on
notes receivable in both years.
There were no significant financing sources of cash in 2004. In the first three
quarters of 2003, the primary source of cash from financing activities was the
proceeds of the Company's public offering of Units of Limited Liability Company
interest of $10,281,250. In 2004, financing uses of cash consisted of
distributions to the members, repurchases of Units and rescissions of capital
contributions. In 2004, financing uses of cash consisted of payments of
syndication costs associated with the offering and making distributions to the
members. The amounts of such distributions in 2004 increased compared to 2003 as
a result of sales of Units in the first quarter of 2003. The increase resulted
from the increase in the weighted average number of Units outstanding in the
first three quarters of 2004 (12,061,766 Units - nine months and 12,058,516 -
three months) compared to the same period in 2003 (12,021,795 Units - nine
months and 12,065,016 - three months).
15
Results of operations
On February 21, 2001, the Company commenced operations. In 2003, operations
resulted in net income of $176,645 for the nine month period ended September 30
and net loss of $253,665 for the three month period then ended. In 2004,
operations resulted in a net loss of $411,170 for the nine month period ended
September 30 and net income of $13,167 for the three month period then ended.
The Company's primary source of revenues is from operating leases.
Depreciation of operating lease assets was $6,515,295 and $5,671,618 during the
nine month periods ended September 30, 2004 and 2003, respectively. Depreciation
of operating lease assets was $2,373,708 and $2,074,165 during the three month
periods ended September 30, 2004 and 2003, respectively. Depreciation expense is
related to operating lease assets and thus, to operating lease revenues.
Amortization of initial direct costs was $510,736 and $340,733 during the nine
month periods ended September 30, 2004 and 2003, respectively. Amortization of
initial direct costs was $179,934 and $137,627 during the three month periods
ended September 30, 2004 and 2003, respectively. Amortization of initial direct
costs and depreciation expense have increased in 2004 compared to 2003 as a
result of the acquisitions of equipment that have taken place over the last
year. Depreciation and amortization are expected to increase in future periods
as acquisitions continue.
Asset management fees were $438,535 and $401,404 for the nine month periods
ended September 30, 2004 and 2003, respectively. Asset management fees were
$179,641 and $144,633 for the three month periods ended September 30, 2004 and
2003, respectively. Asset management fees are based on the gross lease rents of
the Company plus proceeds from the sales of lease assets. They are limited to
certain percentages of lease rents, distributions to members and certain other
items. As additional assets are acquired, as lease rents are collected and
distributions are made to the members, these fees are expected to increase.
Interest expense of $358,163 and $289,519 for the nine month periods ended
September 30, 2004 and 2003, respectively, related primarily to maintaining the
availability of the receivables funding facility established in August 2002.
In the first quarter of 2004, the Company provided $169,000 for doubtful
accounts related to the default of a borrower (Photuris, Inc.) on a note
receivable. The Company has provided for an additional allowance for doubtful
accounts, related to other accounts receivable, in the amounts of $23,000 and
$12,000 for the quarters ending June 30 and September 30, 2004, respectively.
Results of operations in future periods are expected to vary considerably from
those of the first three quarters of 2004 and 2003 as the Company continues to
acquire significant amounts of lease assets.
Item 3. Quantitative and Qualitative Disclosures of Market Risk.
The Company, like most other companies, is exposed to certain market risks,
including primarily changes in interest rates. The Company believes its exposure
to other market risks, including foreign currency exchange rate risk, commodity
risk and equity price risk, are insignificant to both its financial position and
results of operations.
In general, the Company expects to manage its exposure to interest rate risk by
obtaining fixed rate debt. The fixed rate debt is structured so as to match the
cash flows required to service the debt to the payment streams under fixed rate
lease receivables. The payments under the leases are assigned to the lenders in
satisfaction of the debt. Furthermore, AFS has historically been able to
maintain a stable spread between its cost of funds and lease yields in both
periods of rising and falling interest rates. Nevertheless, the Company expects
to frequently fund leases with its floating interest rate line of credit and
will, therefore, be exposed to interest rate risk until fixed rate financing is
arranged, or the floating interest rate line of credit is repaid. As of
September 30, 2004, there was no outstanding balance on the floating interest
rate line of credit.
Also, the Company entered into a receivables funding facility in 2002. Since
interest on the outstanding balances under the facility will vary, the Company
will be exposed to market risks associated with changing interest rates. To
hedge its interest rate risk, the Company expects to enter into interest rate
swaps, which will effectively convert the underlying interest characteristic on
the facility from floating to fixed. Under the swap agreements, the Company
expects to make or receive variable interest payments to or from the
counterparty based on a notional principal amount. The net differential paid or
received by the Company is recognized as an adjustment to interest expense
related to the facility balances. The amount paid or received will represent the
difference between the payments required under the variable interest rate
facility and the amounts due under the facility at the fixed (hedged) interest
rate. There were no borrowings under this facility as of September 30, 2004.
In general, it is anticipated that these swap agreements will eliminate the
Company's interest rate risk associated with variable rate borrowings. However,
the Company would be exposed to and would manage credit risk associated with the
counterparty by dealing only with institutions it considers financially sound.
16
Item 4. Controls and procedures.
Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management (ATEL
Financial Services, LLC as Managing Member of the registrant, including the
chief executive officer and chief financial officer), an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures [as defined in Rules 240.13a-14(c) under the Securities Exchange
Act of 1934] was performed as of the date of this report. Based upon this
evaluation, the chief executive officer and the chief financial officer
concluded that, as of the evaluation date, except as noted below, our disclosure
controls and procedures were effective for the purposes of recording,
processing, summarizing, and timely reporting information required to be
disclosed by us in the reports that we file under the Securities Exchange Act of
1934; and that such information is accumulated and communicated to our
management in order to allow timely decisions regarding required disclosure.
As disclosed in the Form 10-K for the year ended December 31, 2003, the chief
executive and chief financial officer of the Managing Member of the Company had
identified certain enhanced controls needed to facilitate a more effective
closing of the Company's financial statements. During and since the first
quarter of 2004, the Managing Member hired a new controller, added additional
accounting staff personnel, and has instituted or revised existing procedures in
order to ensure that the Company's ability to execute internal controls in
accounting and reconciliation in the closing process is adequate in all
respects. The Managing Member will continue to review its accounting procedures
and practices to determine their effectiveness and adequacy and will take such
steps as deemed necessary in the opinion of the Managing Member's chief
executive and chief financial officers to ensure the adequacy of the Company's
accounting controls and procedures.
The Managing Member's chief executive officer and chief financial officer have
determined that no weakness in financial and accounting controls and procedures
had any material effect on the accuracy and completeness of the Company's
financial reporting and disclosure included in this report.
Changes in internal controls
There have been no significant changes in our internal controls or in other
factors that could significantly affect our disclosure controls and procedures
subsequent to the evaluation date nor were there any significant deficiencies or
material weaknesses in our internal controls, except as described in the prior
paragraphs.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In the ordinary course of conducting business, there may be certain claims,
suits, and complaints filed against the Company. In the opinion of management,
the outcome of such matters, if any, will not have a material impact on the
Company's financial position or results of operations. No material legal
proceedings are currently pending against the Company or against any of its
assets. The following is a discussion of legal matters involving the Company,
but which do not represent claims against the Company or its assets.
Silicon Access Networks, Inc.:
Silicon Access Networks, Inc. ("SAN") advised AFS on July 8, 2002, that due to a
further decline in expectations of future demand for SAN's products by potential
customers in its target markets, SAN's Board of Directors had directed
management to close a branch office located in North Carolina, which occurred in
July 2002.
In September 2003, SAN defaulted on its note payable to the Company. Essentially
all of the equipment financed was recovered and sold at auction in 2003. Assets
remaining in inventory are carried at the estimated net realizable value of
approximately $5,200. On December 22, 2003, SAN filed for protection under the
Bankruptcy Act. The Company's remaining claims are unsecured. No amounts
relating to the unsecured claims have been included in the financial statements
of the Company as of December 31, 2003 or as of September 30, 2004.
Photuris, Inc.:
Photuris, a debtor of the Company, has ceased operations. As of this date, no
legal action has been initiated against the debtor. The Company also owns Series
C preferred stock of Photuris. The original cost of the stock was $190,158. The
value of the stock was written off in the first quarter of 2004. The Company
also had a promissory note from Photuris for $300,000. The note has been written
down to the expected value of the collateral (approximately $60,000) in the
first quarter of 2004.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Inapplicable.
Item 3. Defaults Upon Senior Securities.
Inapplicable.
Item 4. Submission Of Matters To A Vote Of Security Holders.
Inapplicable.
Item 5. Other Information.
Inapplicable.
17
Item 6. Exhibits.
(a) Documents filed as a part of this report
1. Financial Statement Schedules
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore have been omitted.
2. Other Exhibits
31.1 Certification of Paritosh K. Choksi
31.2 Certification of Dean L. Cash
32.1 Certification Pursuant to 18 U.S.C. section 1350 of Dean L. Cash
32.2 Certification Pursuant to 18 U.S.C. section 1350 of Paritosh K.
Choksi
(b) Report on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date:
November 11, 2004
ATEL CAPITAL EQUIPMENT FUND IX, LLC
(Registrant)
By: ATEL Financial Services, LLC
Managing Member of Registrant
By: /s/ Dean L. Cash
------------------
Dean L. Cash
President and Chief Executive
Officer of Managing Member
By: /s/ Paritosh K. Choksi
------------------------------------
Paritosh K. Choksi
Executive Vice President of
Managing Member, Principal
financial officer of registrant
By: /s/ Donald E. Carpenter
------------------------------------
Donald E. Carpenter
Principal accounting
officer of registrant
19