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EX-31.2 - EXHIBIT 31.2 - Macquarie Equipment Leasing Fund, LLCv357244_ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - Macquarie Equipment Leasing Fund, LLCv357244_ex32-1.htm
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EX-32.2 - EXHIBIT 32.2 - Macquarie Equipment Leasing Fund, LLCv357244_ex32-2.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

(Mark One)

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2013

 

OR

 

¨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: 000-53904

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   26-3291543
(State or Other Jurisdiction of   (IRS Employer
Incorporation or Organization)   Identification No.)

 

225 Franklin St, 17th Floor, Suite 1700

Boston, Massachusetts 02110

(Address of Principal Executive Offices) (Zip Code)

 

(617) 457-0645

(Registrant’s Telephone Number, Including Area Code)

 

(Former Name, Former Address and Former Fiscal Year if Changed Since Last Report): N/A

 

Indicate by 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 has submitted electronically and posted on its corporate Website, 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     ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer ¨ Accelerated Filer ¨
       
Non-accelerated Filer ¨ Smaller Reporting Company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

There were 9,459,384 shares of limited liability company membership interests outstanding at November 14, 2013.

 

 
 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

Table of Contents

 

Part I. Financial Information  
     
Item 1. Financial Statements  
     
  Balance Sheets as of September 30, 2013 and December 31, 2012 (Unaudited) 3
     
  Statements of Operations for the Three Months and Nine Months Ended September 30, 2013 and 2012 (Unaudited) 4
     
  Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 (Unaudited) 5
     
  Statement of Changes in Members’ Equity for the Nine Months Ended September 30, 2013 (Unaudited) 6
     
  Notes to Financial Statements (Unaudited) 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 13
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
     
Item 4. Controls and Procedures 16
     
Part II. Other Information  
     
Item 1. Legal Proceedings 16
     
Item 1A. Risk Factors 16
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 16
     
Item 3. Defaults Upon Senior Securities 17
     
Item 4. Mine Safety Disclosures 17
     
Item 5. Other Information 17
     
Item 6. Exhibits 17
     
  Signatures 18

 

Macquarie Equipment Leasing Fund, LLC is not an authorized deposit-taking institution for the purposes of the Banking Act 1959 (Commonwealth of Australia) and its obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 (MBL). MBL does not guarantee or otherwise provide assurance in respect of the obligations of Macquarie Equipment Leasing Fund, LLC.

 

2
 

 

Part I. FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

BALANCE SHEETS

(Unaudited)

 

   September 30, 2013   December 31, 2012 
         
ASSETS          
Current Assets          
Cash and cash equivalents  $7,740,786   $32,121,997 
Restricted cash   1,876,366    1,785,172 
Net investment in finance lease   655,395    792,557 
Lease receivables   1,532,117    1,319,633 
Maintenance reserve and other receivables   716,638    410,198 
Total Current Assets   12,521,302    36,429,557 
           
Non-current Assets          
Net investment in finance lease   1,385,761    1,789,347 
Leased equipment at cost (net of accumulated depreciation of $6,917,765 and $3,563,548, respectively)   69,187,627    46,262,573 
Total Non-current Assets   70,573,388    48,051,920 
           
Total Assets  $83,094,690   $84,481,477 
           
LIABILITIES AND MEMBERS’ EQUITY          
Current Liabilities          
Fees payable (related party)  $314,752   $33,784 
Deferred finance and rental income   956,905    215,691 
Distribution payable   622,197    649,885 
Other payables   75,558    176,516 
Maintenance reserve   2,497,787    - 
Total Current Liabilities   4,467,199    1,075,876 
           
Non-current Liabilities          
Maintenance reserves and other payables   582,281    2,354,943 
Total Non-current Liabilities   582,281    2,354,943 
           
Total Liabilities   5,049,480    3,430,819 
           
Commitments and Contingencies          
           
Members' Equity          
Shares of membership interests, $10.00 par value as may be reduced (i) under a distribution reinvestment plan, (ii) for volume discounts, or (iii) for reductions in selling commissions          
Authorized: 15,800,500 shares;          
Issued and outstanding: 9,462,649 shares as of September 30, 2013 and 9,564,814 shares as of December 31, 2012, net of repurchases   65,812,474    72,382,031 
Accumulated surplus   12,232,736    8,668,627 
Total Members’ Equity   78,045,210    81,050,658 
           
Total Liabilities and Members’ Equity  $83,094,690   $84,481,477 

 

See accompanying notes to Financial Statements.

 

3
 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

STATEMENTS OF OPERATIONS

(Unaudited)

 

   Three months ended   Nine months ended 
   September 30, 2013   September 30, 2012   September 30, 2013   September 30, 2012 
                 
REVENUE                    
                     
Participating interest income (related party)  $-   $-   $-   $36,637 
Finance and rental income   3,074,605    1,582,769    7,909,010    6,166,825 
Gain on sale of participating interest (related party)   -    -    -    1,859,964 
Net gain on sale of leased equipment   38,686    -    38,686    4,173,733 
Other income   41,725    4,503    51,349    4,503 
                     
Total revenue   3,155,016    1,587,272    7,999,045    12,241,662 
                     
EXPENSES                    
                     
Operating expenses (related party)   114,719    129,854    290,199    379,695 
Management fees (related party)   166,729    84,459    439,638    308,692 
Depreciation   1,266,916    610,404    3,357,569    2,977,835 
Other expenses   100,265    146,841    347,529    337,970 
                     
Total expenses   1,648,629    971,558    4,434,935    4,004,192 
                     
Net income  $1,506,387   $615,714   $3,564,110   $8,237,470 
                     
Basic and diluted earnings per share  $0.16   $0.06   $0.38   $0.90 
                     
Weighted average number of shares outstanding: basic and diluted   9,471,326    9,576,629    9,501,994    9,166,544 

 

See accompanying notes to Financial Statements.

 

4
 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Nine Months Ended 
   September 30, 2013   September 30, 2012 
Cash flow from operating activities:          
Net income  $3,564,110   $8,237,470 
           
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation   3,357,569    2,977,835 
Gain on sale of participating interest   -    (1,859,964)
Net gain on sale of leased equipment   (38,686)   (4,173,733)
Changes in operating assets and liabilities:          
Fees payable (related party)   280,968    297,275 
Lease receivables   (212,484)   (366,691)
Net investment in finance lease   540,748    266,187 
Other receivables   (27,155)   188,832 
Other payables   (104,906)   (94,137)
Deferred finance and rental income   741,214    (570,551)
Net cash provided by operating activities   8,101,378    4,902,523 
           
Cash flow from investing activities:          
Proceeds from participating interest - Future lease income (related party)   -    165,495 
Proceeds from sale of participating interest (related party)   -    7,299,716 
Proceeds from sale of leased equipment   104,323    8,734,091 
Purchase of equipment   (26,344,312)   (6,965,510)
Restricted cash   (91,194)   (244,874)
Investment in capital leased equipment   -    (669,010)
Security deposit   354,645    - 
Net cash (used in)/provided by investing activities   (25,976,538)   8,319,908 
           
Cash flow from financing activities:          
Proceeds from issuance of shares   -    24,411,556 
Payment of offering related expenses   -    (2,725,652)
Distribution paid to members   (5,707,128)   (4,603,213)
Capital contributions received in advance   -    (10,000)
Repurchase of shares   (890,118)   (749,044)
Maintenance reserves   91,195    244,874 
Net cash (used in)/provided by financing activities   (6,506,051)   16,568,521 
           
Net (decrease)/increase in cash and cash equivalents   (24,381,211)   29,790,952 
           
Cash and cash equivalents, beginning of the period   32,121,997    10,328,871 
           
Cash and cash equivalents, end of the period  $7,740,786   $40,119,823 
           
Supplemental disclosures of cash flow information          
  Non cash investing and financing activities          
Issuance of shares under distribution reinvestment plan  $-   $696,698 
Accrued offering cost  $-   $(473)
Maintenance reserve receivable  $279,285   $269,857 
Accrued purchase of equipment  $3,948   $- 

 

See accompanying notes to Financial Statements.

 

5
 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

STATEMENT OF CHANGES IN MEMBERS' EQUITY

(Unaudited)

 

       Membership interests   Accumulated surplus     
   Members'
shares
   Additional
members (1)
   Managing
member
   Additional
members (1)
   Managing
member
   Total 
                         
Balance at December 31, 2012   9,564,814   $71,301,468   $1,080,564   $8,608,829   $59,797   $81,050,658 
Repurchase of shares   (102,165)   (890,118)   -    -    -    (890,118)
Distribution to members        (5,582,632)   (96,808)   -    -    (5,679,440)
Net income        -    -    3,503,321    60,789    3,564,110 
Balance at September 30, 2013   9,462,649   $64,828,718   $983,756   $12,112,150   $120,586   $78,045,210 

 

 

 

(1)Additional members represent all members other than the Managing member.

 

See accompanying notes to Financial Statements.

 

6
 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

1. ORGANIZATION AND BUSINESS OPERATIONS

 

Macquarie Equipment Leasing Fund, LLC ( the “Fund” or the “Company”), a Delaware limited liability company, was formed on August 21, 2008 for the purpose of being an equipment leasing program that will acquire a diversified portfolio of equipment, equipment leases and other equipment-related investments. The majority of the equipment is expected to be leased to corporate clients. The Fund’s objective is to generate income through the collection of lease rentals and other revenues, as well as through the sale of leased and off lease equipment and other portfolio investments. The Fund’s fiscal year end is December 31.

 

The manager of the Fund is Macquarie Asset Management Inc. (the “Manager” or the “Managing member”), a member of the Macquarie Group of Companies which is comprised of Macquarie Group Limited and its subsidiaries and affiliates worldwide (the “Macquarie Group”). Macquarie Group Limited is headquartered in Australia and is listed on the Australian Stock Exchange. The Manager made an initial capital contribution of $5,000. The Manager made additional capital contributions to the Fund on March 31, 2010 and June 22, 2010 for $500,000 and $1,000,000, respectively. The Manager earns fees by providing or arranging all services necessary and desirable for the operations of the Fund, including those relating to equipment acquisitions and disposals, asset management and administrative, reporting and regulatory services. The Fund reimburses the Manager for costs incurred for managing the Fund and the Fund’s portfolio of equipment, equipment lease and other equipment-related investments.

 

The initial closing date for the Fund was March 5, 2010, the date at which the Fund raised over $2,500,000 and reached the minimum offering amount. The Fund’s offering period ceased on March 19, 2012 and the operating period commenced on that date.

 

As of September 30, 2013, the Fund has received and accepted cumulative subscriptions (including the Distribution Reinvestment Plan, or “DRP Shares”, and net of repurchase of shares) of 9,462,649 shares of limited liability company interest (“shares”) for $83,156,812 net of offering costs, including the capital contributions from the Manager.

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Accounting and Use of Estimates

 

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. This 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. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

The Fund considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents are maintained with one financial institution.

 

Restricted Cash

 

Restricted cash consists of cash collected from the lessee of the CRJ 700 ER aircraft for maintenance costs.

 

Income Taxes

 

The Fund is treated as a partnership for federal and state income tax purposes. As a partnership, the Fund is not subject to federal and state income taxes, while each member will be individually liable for income taxes, if any, on their share of net taxable income from the Fund. Interest, dividends and other income realized by the Fund may be subject to withholding tax in the jurisdiction in which the income is sourced.

 

Leased Equipment at Cost

 

Investment in leased equipment is stated at cost less accumulated depreciation. Leased equipment is depreciated on a straight-line basis over the lease term to the assets’ residual value. Initial direct costs (such as freight, installation, acquisition fees and expenses, legal fees and inspection fees) associated with the leases are capitalized as part of the cost of the leased equipment and depreciated over the lease term.

 

The useful life of an asset is based on an asset’s lease term. Once an asset comes off lease or is re-leased, the Fund reassesses the useful life of the asset.

 

7
 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

The lease term from the acquisition date by the Fund of each item of equipment is as follows:

 

    Lease
    term (in years)
Aircraft engines (2 x CFM56-7B jet engines)   9
Aircraft Bombardier CRJ 700 ER   3
Self-serve checkout equipment   5
Flat bed rail cars   2
Racetrack equipment   4
Smart safes   5
Machine tool equipment   5
Aircraft (Airbus model A320-200)   2.5

 

The residual values are determined by the Fund’s Manager and are calculated using information from both internal (i.e. from affiliates) and external sources, such as trade publications, industry valuers, auction data, internal sales data, equipment dealers, wholesalers and industry experts, as well as inspection of the physical asset and other economic indicators.

 

The residual values of the Fund’s significant assets are reviewed at least annually. If the review results in a lower estimate than had been previously established, the Fund will determine whether the decline in the estimated residual value is other than temporary. If the decline in estimated residual value is judged to be other than temporary, the accounting for the transaction shall be revised using the changed estimate and the resulting reduction in the net investment shall be recognized as a loss in the period in which the estimate is changed. An upward adjustment of a leased asset’s estimated residual value (including any guaranteed portion) shall not be made.

 

Costs incurred in extending the useful life and/or increasing the resale value of leased equipment are capitalized into the cost of an asset. No such costs have been incurred to date.

 

Upon the end of a lease term, if the lessee has not met the return conditions as set out in the lease, the Fund is entitled in certain cases to additional compensation from the lessee. The Fund’s accounting policy for recording such payments is to treat such payments as revenue. No such compensation was received for the nine months period ended September 30, 2013.

 

The lessee is generally responsible for the ongoing maintenance costs of the equipment under net lease arrangements.

 

Net investment in finance lease

 

If a lease meets specific criteria under GAAP at the inception of the lease, then the Fund recognizes the lease as a net investment in finance lease on its Balance Sheets. The amounts recognized for finance leases consist of lease receivables, plus the estimated unguaranteed residual value of the leased equipment on the lease termination date, less the unearned income.

 

Maintenance reserve

 

Under the lease agreement for the Fund’s Bombardier CRJ 700 ER aircraft, the lessee is responsible for the costs of major maintenance on the components of the aircraft, including the engines, airframe and landing gear at an approved maintenance facility in accordance with the manufacturer’s recommended maintenance guidelines. The lessee is required to pay the Fund additional rentals, calculated monthly, which are based on the prior month’s flight hours and flight cycles. These additional rentals are set aside for future maintenance costs and are recognized as restricted cash on the Fund’s Balance Sheets when paid by lessee. As the maintenance is performed, and to the extent that the lessee has met all of its obligations under the lease, the lessee is reimbursed for costs incurred up to, but not exceeding, the related additional rentals the Fund receives from the lessee for maintenance. At the completion of each major maintenance event, the difference between the liability and reimbursement paid to the lessee is recorded as revenue if management is satisfied that the remaining reserve is considered sufficient to cover future maintenance or repairs. During November 2012, one of the two CF 34 8C1 engines from the Bombardier CRJ 700 ER aircraft was sent to a U.S. maintenance shop for maintenance and the maintenance work was completed by March 2013. The Fund does not expect to recognize any revenue nor any additional costs from this shop visit. The lease expires within 12 months; as such the maintenance reserve payable has been reclassified from non-current to current liabilities.

 

Cash is only collected for maintenance costs on the Fund’s CRJ 700 ER aircraft.

 

8
 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

Revenue recognition

 

For finance leases, at inception date, the Fund records the total minimum lease payments receivable from the lessee, the estimated unguaranteed residual value of the equipment at lease termination, the initial direct costs related to the lease and the related unearned income. Unearned income represents the difference between the sum of the minimum lease payments receivable, plus the estimated unguaranteed residual value, minus the cost of the leased equipment. Unearned income is recognized as finance income over the term of the lease using the effective interest rate method.

 

For operating leases, rental income is recognized on a straight-line basis over the lease term.

 

Gains or losses from sales of leased and off lease equipment are recorded on a net basis in the Fund’s Statements of Operations.

 

Certain of the Fund’s leases contain provisions for late fees on past due rent. The Fund recognizes late fees as income when they become chargeable and collection is reasonably assured.

 

Allowance for doubtful accounts

 

The Fund evaluates the collectability of its receivables by analyzing the counterparties’ payment history, general credit worthiness and current economic trends. The Fund records an allowance when the analysis indicates that the probability of full collection is unlikely. No allowance was recorded as at September 30, 2013 and December 31, 2012.

 

Write offs

 

The Fund takes write offs when it determines that a receivable is uncollectible and when all economically sensible means of recovery have been exhausted. No write offs were recorded for the three and nine months ended September 30, 2013 and 2012.

 

Impairments

 

The significant assets in the Fund’s portfolio are reviewed for impairment at least annually or when indicators of impairment exist. An impairment loss will be recognized only if the carrying value of a long-lived asset is not recoverable and exceeds its fair market value. The Manager’s assessment for impairment (i.e. undiscounted cash flows used in the recoverability assessment) includes review of published values for similar assets, recent transactions for similar assets, lease terms, asset condition, adverse changes in market conditions for specific asset types and the occurrence of significant adverse changes in general industry and market conditions that could affect the fair value of the asset. No impairment charges were recorded for the three and nine months ended September 30, 2013 and 2012.

 

3. LEASED EQUIPMENT AT COST

 

Smart Safe Equipment

 

In March and July 2013, as part of a master lease program, the Fund purchased additional new smart safes for $407,037 and $620,905 respectively, including initial direct costs, from a U.S. safe manufacturer. These safes are on lease for a period of 60 months to a company that owns, operates or franchises restaurants. The safes are deployed in restaurants throughout the U.S. No leverage was used to finance this acquisition by the Fund. Rentals of $6,936 and $12,346 are received monthly for the safes purchased in March and July, respectively. The lease term begins when the Fund signs the acceptance certificate and continues over the period of lease. At the end of the lease term, the lessee may return the equipment or continue to rent the equipment under a renewed lease agreement. The lease is recorded as an operating lease with rental income recognized on a straight-line basis over the lease term. The Fund has simultaneously entered into a Service and Remarketing agreement with a major U.S. cash logistics company who has been appointed as the exclusive service provider for the Fund and is responsible for billing, collecting and servicing the safes. In certain circumstances, the service provider has an option to request the purchase of the safes from the Fund at fair market value not exceeding 29% of the asset’s cost, at the end of the lease term of 60 months.

 

On July 31, 2013, the Fund sold 10 smart safes to the lessee for $104,323 and realized a gain on sale of $38,686.

 

Machine Tool Equipment

 

In March 2013, the Fund entered into a sale and leaseback arrangement and purchased a machine tool equipment line for $5,768,966. The equipment is used in the manufacture of aluminum wheels and consists of seventeen individual high volume automated precision machine tool items including a Mori Seiki 5 Axis Milling Center and an Okuma Vertical Turning Center. The equipment is on lease to a U.S. manufacturer and supplier of steel and aluminum wheels for a period of 55 months. No leverage was used to finance this acquisition. Rentals of $118,215 are received monthly. At the end of the lease term, the lessee may continue to rent the equipment under a renewed lease agreement or purchase the equipment. The lease is recorded as an operating lease with rental income recognized on a straight-line basis over the lease term.

 

9
 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

Airbus A320-200 aircraft

 

The Fund acquired an Airbus A320-200 aircraft for $19,551,352 on May 5, 2013. The aircraft is a 2003 vintage Airbus model A320-200 aircraft equipped with two engines. The aircraft is on lease to an airline based in Oceania that operates internationally. Rentals of $705,000 are received quarterly in advance until the end of the lease in September 2015, at which time the airline may return the aircraft or continue to rent it under a renewed lease agreement. No leverage was used to finance this acquisition.

 

Leased equipment at cost consists of the following:

 

   September 30, 2013   December 31, 2012 
Aircraft engines (2 x CFM56-7B jet engines)  $25,338,321   $25,338,321 
Aircraft Bombardier CRJ 700 ER   9,758,734    9,758,734 
Self-serve checkout equipment   2,097,353    2,097,353 
Flat bed rail cars   6,742,510    6,742,510 
Racetrack equipment   3,763,611    3,763,611 
Smart safes   3,084,545    2,125,592 
Machine tool equipment   5,768,966    - 
Aircraft (Airbus model A320-200)   19,551,352    - 
Less: Accumulated depreciation   (6,917,765)   (3,563,548)
   $69,187,627   $46,262,573 

 

Annual minimum future rentals receivable related to the Fund’s operating leases over the next 5 years consist of the following:

 

For the period October 1 to December 31, 2013  $4,412,175 
For the year ending December 31, 2014   9,318,199 
For the year ending December 31, 2015   7,715,016 
For the year ending December 31, 2016   5,233,993 
For the year ending December 31, 2017   4,071,910 
Thereafter   6,429,821 
   $37,181,114 

 

The Fund is exposed to risks under these transactions, including risk associated with a lessee’s creditworthiness and the future market value of the equipment. Although the Fund currently has no reason to believe that the lessee will fail to meet their contractual obligations, a risk of loss to the Fund exists should a lessee fail to meet its payment obligations under the lease. As at September 30, 2013 and December 31, 2012, the Fund did not have a reserve for allowance for credit losses for its lease receivables.

 

A risk of loss or lower than expected returns also exists if the market value of the equipment at the end of the lease term is lower than anticipated.

 

4. NET INVESTMENT IN FINANCE LEASE

 

The Fund’s net investments in finance leases primarily relate to racing track equipment and furniture.

 

Net investment in finance lease (current and non-current) consists of the following:

 

   September 30, 2013   December 31, 2012 
Minimum lease payments receivable  $1,944,878   $2,686,145 
           
Estimated residual values of leased property (unguaranteed)   478,495    478,495 
Less: Unearned income   (382,217)   (582,736)
Net investment in finance lease  $2,041,156   $2,581,904 

 

10
 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

Annual minimum future rentals receivable related to the Fund’s finance leases over the next 5 years consist of the following:

 

For the period October 1 to December 31, 2013  $233,657 
For the year ending December 31, 2014   673,326 
For the year ending December 31, 2015   618,032 
For the year ending December 31, 2016   419,862 
For the year ending December 31, 2017   - 
   $1,944,877 

 

The Fund is exposed to risks under this transaction, including risk associated with the lessee’s creditworthiness and risk associated with the future market value of the equipment. Although the Fund currently has no reason to believe that the lessee will fail to meet their contractual obligations, a risk of loss to the Fund exists should a lessee fail to meet its payment obligations under the lease. As at September 30, 2013 and December 31, 2012, the Fund did not have a reserve for allowance for credit losses for its lease receivables.

 

A risk of loss or lower than expected returns also exists if the market value of the equipment at the end of the lease term is lower than anticipated.

 

5. TRANSACTIONS WITH AFFILIATES

 

As discussed in Note 1, the Fund is required to pay fees to the Manager and its affiliates for providing or arranging all services necessary for its operations, including those relating to equipment acquisitions and disposals, asset management and administrative, reporting and regulatory services.

 

Macquarie Capital (USA) Inc. (the “dealer manager”), a member of the Macquarie Group of companies, acted as dealer manager for the Fund during the Fund offering period and managed a group of selling dealers, including other unaffiliated broker dealers.

 

The Manager and the dealer manager received fees from the Fund for offering services during the offering period (ceased on March 19, 2012) including:

 

Selling commission of up to 7% of the offering proceeds from each share sold by the dealer manager or selling dealers, payable to the dealer manager (and re-allowed to unaffiliated selling dealers);
   
Due diligence expense reimbursement for detailed and itemized bona fide accountable due diligence expenses, payable to the dealer manager (and re-allowed to unaffiliated selling dealers);
   
Dealer manager fees of 3% of the offering proceeds from each share sold, payable to the dealer manager; and
   
Organization and offering expense allowance, which varies based upon the actual organization and offering expenses incurred by the Manager and its affiliates and the number of shares sold, payable to the Manager.

 

The organization and offering expense allowances were required not to exceed the actual fees and expenses incurred by the Manager or its affiliates in connection with the Fund’s organization and offering and were calculated as follows:

 

up to 2.433% of the offering proceeds from each share sold for the first 3,500,000 shares;
   
up to 2.09% of the offering proceeds from each share sold for shares sold that exceed 3,500,000 but amount to 7,500,000 or fewer shares; and
   
up to 1.60% of the offering proceeds from each share sold for shares sold that exceed 7,500,000 shares.

 

The Fund pays the Manager and its affiliates’ fees for operating services performed during the offering period and on an ongoing basis once the Fund has commenced operations, including:

 

Acquisition fees of 3% of the purchase price that the Fund pays for each item of equipment or direct or indirect interest in equipment acquired, including under lease agreements, trading transactions, residual value guarantees, pay per use agreements, forward purchase agreements, total lease return swaps, participation agreements, equipment purchase options, other equipment-related transactions, joint ventures, special purpose vehicles and other Fund arrangements;
   
Asset management fees equal to the lesser of: (a) (i) 5% of gross rental payments from non-full payout leases (except that 1% of gross rental payments shall be payable with respect to non-full payout leases for which management services are performed by non-affiliates under the Manager’s supervision); (ii) 2% of gross rental payments from full payout leases which contain net lease provisions; and (iii) 7% of gross rental payments from equipment for which the Fund provides services in addition to equipment management relating to the continued and active operation of the Fund’s equipment such as, but not limited to, ongoing marketing and re-leasing of equipment and hiring or arranging for the hiring of crews or operating personnel for the Fund’s equipment and similar services; or (b) the amount of fees which are competitive for similar services;

 

11
 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

Remarketing fees equal to the lesser of (i) 3% of the purchase price paid to the Fund by the purchaser of the investment, or (ii) one-half of reasonable, customary and competitive brokerage fees paid for services rendered in connection with the sale of equipment of similar size, type and location. Payment of remarketing fees shall be subordinated until such time when investor return has been achieved. “Investor return” means such time when the aggregate amount of distributions to the members equals, as of any determination date, an amount equal to a pre-tax eight percent (8.0%) per annum internal rate of return compounded daily on all capital contributions of members;

 

Out-performance fees depending upon the extent to which investor return has been achieved prior to the time that investor return is achieved, cash distributions will be made 99.0% to the Fund’s members and 1.0% to the Manager. After the time that investor return is achieved, cash distributions will be made 81.0% to the Fund’s members and 19.0% to the Manager; and

 

Reimbursement of operating expenses depending upon the scope of services the Manager provides to the Fund.

 

For the three and nine months ended September 30, 2013 and 2012, the Fund has accrued, in fees payable (related party) on the Fund’s Balance Sheet, or paid to the Manager or its affiliates the following amounts:

 

         Three months ended   Nine Months ended 
Entity  Capacity  Description  September 30, 2013   September 30, 2012   September 30, 2013   September 30, 2012 
                       
Macquarie Asset Management Inc.  Manager  Organization and Offering expense allowance (1)  $-   $-   $-   $416,837 
Macquarie Capital (USA) Inc.  Dealer Manager  Selling commission and Dealer Manager fees (1)  $-   $-   $-   $549,469 
Macquarie Capital (USA) Inc.  Dealer Manager  Due diligence expense  (1)  $-   $-   $-   $2,103 
Macquarie Asset Management Inc.  Manager  Acquisition fees (2)  $18,085   $-   $766,440   $214,301 
Macquarie Asset Management Inc.  Manager  Management fee (3)  $166,729   $84,459   $439,638   $308,692 
Macquarie Asset Management Inc.  Manager  Operating Expenses (3)  $114,719   $129,854   $290,199   $379,695 
Macquarie Asset Management Inc.  Manager  Outperformance fee (3)  $19,098   $19,330   $57,071   $53,066 

 

 

 

(1)Amount charged directly to member's equity.
(2)Amount is capitalized into the cost of an asset when it is classified as an operating or a finance lease.
(3)Amount charged directly to operations.

 

6. EQUITY CONTRIBUTION

 

The Fund’s offering period finished on March 19, 2012 and the operating period commenced. As at September 30, 2013, the Fund received and accepted subscriptions (including the DRP shares and net of repurchase of shares) of 9,462,649 shares of limited liability company interest for $83,156,812 net of offering costs. The subscriptions received include total contributions of $1,505,000 from the Manager, before offering costs.

 

12
 

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following is a discussion of our current financial position and results of operations. This discussion should be read together with our unaudited financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, the audited financial statements and related notes included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on February 15, 2013, and with our Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on October 15, 2008, as amended (“Registration Statement”). This discussion should also be read in conjunction with the disclosures below regarding “Forward-Looking Statements.”

 

As used in this Quarterly Report on Form 10-Q, references to “we,” “us,” “our” or similar terms include Macquarie Equipment Leasing Fund, LLC (the “Fund”).

 

Forward-Looking Statements

 

Certain statements within this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). These statements are being made pursuant to the PSLRA, with the intention of obtaining the benefits of the “safe harbor” provisions of the PSLRA, and, other than as required by law, we assume no obligation to update or supplement such statements. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. You can identify these statements by the use of words such as “may,” “will,” “could,” “anticipate,” “believe,” “estimate,” “expect,” “continue,” “further,” “plan,” “seek,” “intend,” “predict” or “project” and variations of these words or comparable words or phrases of similar meaning. These forward-looking statements reflect our current beliefs and expectations with respect to future events and are based on assumptions and are subject to risks and uncertainties and other factors outside our control that may cause actual results to differ materially from those projected. We undertake no obligation to update publicly or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

 

Overview

 

Macquarie Equipment Leasing Fund, LLC, a Delaware limited liability company, was formed on August 21, 2008 for the purpose of acquiring a diversified portfolio of equipment and equipment leases. The Fund will also make investments in other equipment-related transactions which will allow it to directly or indirectly participate in the benefits and risks of equipment ownership or usage.

 

The Fund offering was for a total of 15,000,000 Shares at a price of $10.00 per share, subject to certain reductions. The Fund also offered up to 800,000 Shares pursuant to its Distribution Reinvestment Plan (“DRP”) at a public offering price of $9.00 per Share. The Manager has contributed a total of $1,505,000. The Fund’s fiscal year end is December 31.

 

The Fund’s offering period ended on March 19, 2012 and the Fund’s operating period commenced on that date. The Fund will continue to make investments in equipment, equipment leases and other equipment-related transactions. As at September 30, 2013, the Fund has received and accepted subscriptions (including the DRP shares and net of repurchase of shares) of 9,462,649 shares of limited liability company interest for $83,156,812, net of offering costs. The subscriptions received include total contributions of $1,505,000 from the Manager, before offering costs. As at November 14, 2013, the Fund has received and accepted cumulative subscriptions (including the DRP shares and net of repurchase of shares) of 9,459,384 shares for $83,129,586, net of offering costs.

 

Third Quarter Transactions

 

Purchase of additional smart safes

 

In July 2013, as part of a master lease program, the Fund purchased additional new smart safes for $620,905, including initial direct costs, from a U.S. safe manufacturer. These safes are on lease for a period of 60 months to a company that owns, operates or franchises restaurants. The safes are deployed in restaurants throughout the U.S. No leverage was used to finance this acquisition. Rentals of $12,346 are received monthly for the safes. The lease term begins when the Fund sign the acceptance certificate and continues over the period of lease. At the end of the lease term, the lessee may return the equipment or continue to rent the equipment under a renewed lease agreement. The lease is recorded as an operating lease with rental income recognized on a straight-line basis over the lease term. The Fund has simultaneously entered into a Service and Remarketing agreement with a major U.S. cash logistics company who has been appointed as the exclusive service provider for the Fund and is responsible for billing, collecting and servicing the safes. In certain circumstances, the service provider has an option to request the purchase of the safes from the Fund at fair market value not exceeding 29% of the asset’s cost, at the end of the lease term of 60 months.

 

Sale of smart safes

 

On July 31, 2013, the Fund entered into a sale agreement with the lessee to sell 10 smart safes for $104,323 and realized a gain of $38,686 on the sale.

 

13
 

 

Results of Operations for the Three and Nine Months Ended September 30, 2013 and 2012

 

Total revenue for the three months ended September 30, 2013 increased by $1,567,744 compared to the three months ended September 30, 2012 primarily due to an increase in rental income of $1,491,836. This increase is due to additional equipment purchased by the Fund in the last quarter of 2012 and first three quarters of 2013. Total revenue for the nine months ended September 30, 2013 decreased by $4,242,617 compared to the nine months ended September 30, 2012 due to a non-recurring gain on sales of semi conductor equipment and an interest in a portfolio of aircraft engines. Both of these sales took place in the first two quarters of 2012. The decrease is partially offset by the aforementioned increase in rental income.

 

Total expenses for the three months ended September 30, 2013 increased by $677,071 compared to the three months ended September 30, 2012 primarily due to an increase in depreciation expense of $656,512 and asset management fee expense of $82,270. Total expenses for the nine months ended September 30, 2013 increased by $430,743 compared to the nine months ended September 30, 2012 due to an increase in depreciation expense of $379,734 and asset management fee expense of $130,946. The increased expenses were driven by the purchase of additional equipment in the last quarter of 2012 and first three quarters of 2013.

 

As a result, the Fund’s net income for the three and nine months ended September 30, 2013 was $1,506,387 and $3,564,110 respectively.

 

The Fund evaluated a number of equipment transactions during the first nine months of 2013 and closed some of these transactions. To date, the Fund has not used leverage to finance these transactions. The Fund is nearly 100% invested and continues to pursue additional equipment investment as well as debt leverage opportunities on the existing equipment portfolio.

 

Financial Condition

 

This section discusses the major balance sheet variances from September 30, 2013 compared to December 31, 2012.

 

Total Assets

 

Total assets decreased by $1,386,787, from $84,481,477 as at December 31, 2012 to $83,094,690 as at September 30, 2013. The decrease in total assets is related to depreciation expense on the Fund’s leased equipment of $3,357,569. This decrease was offset by increase in rental receipts, rent receivable and maintenance reserve receivable.

 

Total Liabilities

 

Total liabilities increased by $1,618,661, from $3,430,819 as at December 31, 2012 to $5,049,480 as at September 30, 2013. The increase in total liabilities is primarily the result of rental income received in advance for certain of the Fund’s leases, particularly for the Airbus A320-200 aircraft, for which the lessee is required to pay quarterly rentals of $705,000 in advance. Additionally, fees payable to the Manager increased by $280,968 during the nine months ended September 30, 2013 which represents operating expenses of the Fund which the Manager funds and for which it is reimbursed annually in December.

 

Equity

 

Equity decreased by $3,005,448, from $81,050,658 as at December 31, 2012 to $78,045,210 as at September 30, 2013. The decrease in equity is primarily due to distributions of $5,679,440 made to investors and 102,165 shares redeemed during the nine months ended September 30, 2013. This decrease was offset by net income of $3,564,110 for the same period.

 

Liquidity and Capital Resources

 

Cash Flows Summary

 

The following table sets forth summary cash flow data for the nine months ended September 30, 2013 and 2012.

 

   September 30, 2013   September 30, 2012 
Net cash provided by (used in) :          
Operating activities  $8,101,378   $4,902,523 
Investing activities   (25,976,538)   8,319,908 
Financing activities   (6,506,051)   16,568,521 
Net (decrease) increase in cash and cash equivalents  $(24,381,211)  $29,790,952 

 

See Statements of Cash Flows included in “Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for additional information.

 

14
 

 

At September 30, 2013, the Fund had cash and cash equivalents of $7,740,786. The cash provided by operating activities for the nine months ended September 30, 2013 is primarily attributable to increase in collection of equipment rentals due to purchase and lease of additional equipment by the Fund and where applicable, rentals received in advance on some of our leases.

 

The cash used in investing activities for the nine months ended September 30, 2013 is primarily attributable to the purchase of the Airbus model A320-200 aircraft for $19,551,352, purchase of machine tool equipment for $5,768,966 and the purchase of additional new smart safes for $1,027,942. This increase is partially offset by the lease rentals security deposit of $354,645 received from the lessee of the machine tool equipment and due to sale proceeds of $104,323 received on the sale of 10 smart safes.

 

The cash used in financing activities for the nine months ended September 30, 2013 consisted primarily of distributions to members.

 

During November 2012, one of the two CF 34 8C1 engines from the Bombardier CRJ 700 ER aircraft was sent to a U.S. maintenance shop for maintenance. The engine maintenance was completed by March 2013. The Fund will reimburse (only up to the amount of cash already collected from the lessee that relates to the specific maintenance work performed) the lessee for the cost of the maintenance to the extent that the lessee has met its obligations under the lease.

 

Cash and cash equivalents include cash in banks and highly liquid investments with original maturities of three months or less. Until offering proceeds are used for the acquisition or operation of the Fund’s portfolio, the offering proceeds are held in operating and money market accounts at Wells Fargo Bank, N.A.

 

Sources and Uses of Cash

 

Our offering period ended and our operating period commenced on March 19, 2012. As at September 30, 2013, the Fund has received and accepted cumulative subscriptions (including the Distribution Reinvestment Plan, or “DRP Shares” and net of repurchased shares) of 9,462,649 shares of limited liability company interest (“shares”) for $83,156,812, net of offering costs, including the capital contributions from the Manager. Although we raised less than the maximum $157,200,000 capital in the period from the inception of the Fund to the end of our offering period, we believe that the amount raised is sufficient to meet our investment objectives.

 

The rate of our capital raising was initially impacted by poor general economic conditions in the U.S., which produced a number of consequential industry effects which further dampened our rate of capital raising.

 

The Fund’s main activities and our main use of cash has been to acquire a diversified portfolio of equipment, equipment leases and other equipment-related investments which are denominated in US$ and on lease to corporate clients around the world. We will also make investments in other equipment-related transactions which will allow us to directly or indirectly participate in the benefits and risks of equipment ownership or usage.

 

Sources of Liquidity

 

Cash generated from our financing activities was our most significant source of liquidity during our offering period. We believe that cash generated from our financing activities (from debt borrowings, if required), as well as the expected results of our operations, will be sufficient to finance our liquidity requirements for the foreseeable future, including distributions to our members, funding of new investment opportunities, payment of management fees, equipment maintenance events and administrative expense reimbursements. Our ability to generate cash in the future is subject to general economic, financial, competitive, regulatory and other factors that affect us and our lessees’ businesses that are beyond our control.

 

The Fund’s liquidity may be adversely affected by unanticipated or greater than anticipated operating costs or losses, including the inability of a client of the Fund to make timely lease payments. The Fund anticipates that it will fund its operations from cash flow generated by operating and financing activities. The Manager has no intent to permanently fund any cash flow deficit of the Fund or provide other financial assistance to the Fund.

 

The Fund also intends to incur indebtedness in purchasing its portfolio. During periods of general illiquidity in financial markets, it may not be possible for the Manager to source debt on the Fund’s behalf at an appropriate interest rate, on appropriate terms, at appropriate levels or at all.

 

Distributions

 

The Fund began making monthly cash distributions on April 15, 2010 and paid cash distributions to our members in the amount of $1,909,774 and $5,707,128 during the three and nine months ended September 30, 2013, respectively.

 

While the Fund anticipates making monthly cash distributions, it may vary the amount of, or completely suspend making distributions at any time and without notice.

 

15
 

 

Commitments, Contingencies and Off-Balance Sheet Transactions

 

Other than obligations associated with our investing activities or as set forth in our Operating Agreement, we have no contractual obligations and commitments, contingencies or off-balance sheet transactions at September 30, 2013.

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.

 

Accounting Policies, Accounting Changes and Future Application of Accounting Standards

 

See Note 2, “Significant Accounting Policies”, in our financial statements in “Financial Statements and Supplementary Data” in Part I, Item 1, of this Form 10-Q for financial information and further discussions, for a summary of the Company’s significant accounting policies, including a discussion of recently adopted and issued accounting pronouncements.

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk

 

There have been no material changes to the disclosures reported in our Form 10-K, dated February 15, 2013.

 

Item 4.Controls and Procedures

 

Under the direction and with the participation of our Manager’s President and Principal Financial Officer, we evaluated our disclosure controls and procedures (as such term is defined under Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Manager’s President and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2013. There has been no change in our internal controls over financial reporting (as defined in Rule 13a-15(f) or Rule 15d-15(f) of the Exchange Act) that occurred during the three months ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1.Legal Proceedings

 

In the ordinary course of conducting our business, there may be certain claims, suits and complaints filed against us. In the opinion of management, the outcome of such matters, if any, will not have a material impact on our financial position. No material legal proceedings are currently pending or threatened, to our knowledge, against us or against any of our assets.

 

Item 1a.Risk Factors

 

Not applicable.

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

(a) None.

 

(b) We registered 15,800,000 shares of limited liability company interest, (SEC File No. 333-154278, effective June 19, 2009), of which we registered 15,000,000 shares at $10.00 per share to be offered to the public in a primary offering and 800,000 shares offered to our investors pursuant to our DRP Shares at $9.00 per share.

 

16
 

 

As at November 14, 2013 we have used approximately $92,688,828 of the offering and equipment sale proceeds to acquire the following assets:

 

   Total Cost 
Participation interest in commercial jet aircraft engines (sold in March 2012)  $6,500,000 
Aircraft Bombardier CRJ 700 ER   9,758,734 
Self-serve checkout equipment   2,097,353 
ETS-364B semiconductor test system (sold in May 2012)   383,898 
Furniture, office and other related equipment   1,681,853 
Semiconductor manufacturing tools (sold in June 2012)   6,400,800 
Aircraft engines (2 x CFM56-7B jet engines)   25,338,321 
Flat bed rail cars   6,742,510 
Racetrack equipment   5,311,507 
Smart safes   3,153,534 
Machine tool equipment   5,768,966 
Aircraft (Airbus model A320-200)   19,551,352 
   $92,688,828 

 

Item 3.Defaults Upon Senior Securities

 

Not applicable.

 

Item 4.Mine Safety Disclosures

 

Not applicable.

 

Item 5.Other Information

 

None.

 

Item 6.Exhibits

 

An exhibit index has been filed as part of this Report on page E-1.

 

17
 

 

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.

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

 

By: /s/      David Fahy  
Name:  David Fahy  
Title: President of the Manager and Principal Executive  
  Officer of Registrant  
     
  Date: November 14, 2013  
     
By: /s/      JOHN PAPATSOS  
Name: John Papatsos  
Title: Principal Financial Officer of the Manager and Principal  
  Accounting Officer of Registrant  
     
  Date: November 14, 2013  

 

18
 

 

Exhibit Index

 

Exhibit    
Number   Description
     
31.1*   Rule 13a-14(a)/15d-14(a) Certification of President of the Manager and Principal Executive Officer of Registrant.
     
31.2*   Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer of the Manager and Principal Accounting Officer of Registrant
     
32.1*   Section 1350 Certification of President of the Manager and Principal Executive Officer of Registrant
     
32.2*   Section 1350 Certification of Principal Financial Officer of the Manager and Principal Accounting Officer of Registrant
     
101.0**   The following materials from the Quarterly Report on Form 10-Q of Macquarie Equipment Leasing Fund, LLC for the three months ended September 30, 2013, filed on November 14, 2013, formatted in Extensible Business Reporting Language (XBRL): (i) the Balance Sheets as of September 30, 2013 and December 31, 2012 (Unaudited), (ii) the Statement of Operations for the Three Months and Nine Months Ended September 30, 2013 and 2012 (Unaudited), (iii) the Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 (Unaudited) (iv) the Statements of Changes in Members’ Equity for the Nine Months Ended September 30, 2013 (Unaudited) and (v) the Notes to Financial Statements (Unaudited).

 

 

 

*Filed herewith.
**Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

E-1