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EX-32.2 - EXHIBIT 32.2 - Macquarie Equipment Leasing Fund, LLCv376972_ex32-2.htm
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EX-32.1 - EXHIBIT 32.1 - Macquarie Equipment Leasing Fund, LLCv376972_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Macquarie Equipment Leasing Fund, LLCv376972_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Macquarie Equipment Leasing Fund, LLCv376972_ex31-1.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 March 31, 2014

 

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 9,432,510 shares of limited liability company membership interests outstanding at May 14, 2014.  

 

 
 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

Table of Contents

 

Part I. Financial Information  
     
Item 1. Financial Statements  
     
  Balance Sheets as of March 31, 2014 and December 31, 2013 (Unaudited) 3
     
  Statements of Operations for the Three Months Ended March 31, 2014 and 2013 (Unaudited) 4
     
  Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 (Unaudited) 5
     
  Statement of Changes in Members’ Equity for the Three Months Ended March 31, 2014 (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 17
     
Item 1A. Risk Factors 17
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
     
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)

 

   March 31, 2014   December 31, 2013 
         
ASSETS          
Current Assets          
Cash and cash equivalents  $7,015,529   $9,090,632 
Restricted cash   2,096,096    2,045,592 
Net investment in finance lease   678,479    614,232 
Lease receivables   1,072,089    1,147,674 
Maintenance reserve and other receivables   740,166    631,918 
Other assets   156,392    23,250 
Total Current Assets   11,758,751    13,553,298 
           
Non-current Assets          
Net investment in finance lease   3,027,498    1,250,307 
Leased equipment at cost (net of accumulated depreciation of $9,420,956 and $8,186,636, respectively)   67,908,347    67,928,650 
Total Non-current Assets   70,935,845    69,178,957 
           
Total Assets  $82,694,596   $82,732,255 
           
LIABILITIES AND MEMBERS’ EQUITY          
Current Liabilities          
Fees payable (related party)  $266,762   $94,996 
Deferred finance and rental income   958,871    953,875 
Distribution payable   641,920    642,721 
Other payables   377,444    236,328 
Maintenance reserve   2,600,327    2,586,632 
Total Current Liabilities   4,845,324    4,514,552 
           
Non-current Liabilities          
Other payables   672,281    582,281 
Total Non-current Liabilities   672,281    582,281 
           
Total Liabilities  $5,517,605   $5,096,833 
           
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: 9,447,594 shares as of March 31, 2014 and 9,459,384 shares as of December 31, 2013, net of repurchases   63,777,597    63,877,823 
           
Accumulated surplus   13,399,394    13,757,599 
Total Members’ Equity   77,176,991    77,635,422 
           
Total Liabilities and Members’ Equity  $82,694,596   $82,732,255 

 

See accompanying notes to Financial Statements.

 

3
 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

STATEMENTS OF OPERATIONS

(Unaudited)

 

   Three Months Ended 
   March 31, 2014   March 31, 2013 
         
REVENUE          
           
Finance and rental income   3,109,708    2,054,037 
Net gain on sale of leased equipment   51,445    - 
Other income   1,099    6,856 
           
Total revenue   3,162,252    2,060,893 
           
EXPENSES          
           
Operating expenses (related party)   123,704    94,710 
Management fees (related party)   166,014    109,156 
Depreciation   1,234,320    906,166 
Other expenses   132,789    123,932 
           
Total expenses   1,656,827    1,233,964 
           
Net income  $1,505,425   $826,929 
           
Basic and diluted earnings per share  $0.16   $0.09 
           
Weighted average number of shares outstanding: basic and diluted   9,449,821    9,534,717 

 

See accompanying notes to Financial Statements.

 

4
 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Three Months Ended 
   March 31, 2014   March 31, 2013 
Cash flow from operating activities:          
Net income  $1,505,425   $826,929 
           
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation   1,234,320    906,166 
Net gain on sale of leased equipment   (51,445)     
Changes in operating assets and liabilities:          
Fees payable (related party)   171,766    70,715 
Lease receivables   75,585    75,888 
Net investment in finance lease   257,786    201,078 
Other receivables   (74,104)   31,910 
Other payables   99,849    119,849 
Deferred finance and rental income   4,996    238,576 
Other assets   (133,142)   (309,320)
Net cash provided by operating activities   3,091,036    2,161,791 
           
Cash flow from investing activities:          
Purchase of equipment   (1,172,750)   (6,176,003)
Restricted cash   (50,504)   (36,698)
Investment in capital leased equipment   (2,118,732)   - 
Security deposit   90,000    354,645 
Net cash used in investing activities   (3,251,986)   (5,858,056)
           
Cash flow from financing activities:          
Distribution paid to members   (1,864,431)   (1,881,602)
Repurchase of shares   (100,226)   (349,633)
Maintenance reserves   50,504    36,698 
Net cash used in financing activities   (1,914,153)   (2,194,537)
           
Net decrease in cash and cash equivalents   (2,075,103)   (5,890,802)
           
Cash and cash equivalents, beginning of the period   9,090,632    32,121,997 
           
Cash and cash equivalents, end of the period  $7,015,529   $26,231,195 
           
Supplemental disclosures of cash flow information          
Non cash investing and financing activities          
Maintenance reserve receivable  $(36,809)  $9,450 
Accrued purchase of equipment  $41,267   $61,257 
Proceeds receivable from sale of equipment  $70,953   $- 
Distribution payable  $641,920   $- 

 

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, 2013   9,459,384   $62,926,691   $951,132   $13,610,932   $146,667   $77,635,422 
Repurchase of shares   (11,790)   (100,226)   -    -    -    (100,226)
Distribution to members   -    -    -    (1,831,715)   (31,915)   (1,863,630)
Net income   -    -    -    1,479,645    25,780    1,505,425 
Balance at March 31, 2014   9,447,594   $62,826,465   $951,132   $13,258,862   $140,532   $77,176,991 

 

(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 THE 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 has made a total of $1,505,000 in capital contributions to the Fund. 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.

 

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 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   5 
Racetrack equipment   4 
Smart safes   5 
Machine tool equipment   5 
Aircraft (Airbus model A320-200)   2.5 

 

7
 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

 

The residual value and useful life 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. Once an asset comes off lease or is re-leased, the Fund reassesses its useful life and residual value.

 

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.

 

At 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 payments were received for the three months ended March 31, 2014 and 2013, respectively.

 

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

 

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 months ended March 31, 2014 and 2013, respectively.

 

Net investment in finance lease

 

If a lease meets specific criteria under ASC 840 at the inception of the lease, then the Fund recognizes the lease as a net investment in finance lease on its Balance Sheet. 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.

 

The residual values of the Fund’s significant finance lease 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.

 

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.

 

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

 

Revenue recognition

 

At the inception of a finance lease 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 total 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.

 

8
 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

 

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 lease 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 of March 31, 2014 or December 31, 2013, respectively.

 

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 months ended March 31, 2014 and 2013.

 

New Accounting Pronouncements

 

In June 2013, the FASB issued new guidance ASU 2013-08, Investment Companies - amendments to the scope, measurement, and disclosure requirements. The new guidance changes the approach to the investment company assessment in ASC 946 to clarify the characteristics of an investment company and provide comprehensive guidance for assessing whether an entity is an investment company. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2013. The Fund did not fall under the amended definition of an investment company, and as such adoption of this guidance did not have an impact on the Fund’s financial statements.

 

3. LEASED EQUIPMENT AT COST

 

Smart Safe Equipment

 

In March 2014, as part of a master lease program, the Fund purchased additional smart safes for $189,066, 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. 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 at the end of the lease term of 60 months. If the Fund consents to the service provider's request, fair market value in this case cannot exceed 29% of the asset’s respective cost.

 

Railcar Portfolio

 

In March 2014, the Fund purchased 45 flat bed rail cars for $1,032,186 including the initial direct costs. The rail cars are on lease to the U.S. subsidiary of a leading global manufacturer of wind turbines for a period of 60 months. No leverage was used to finance this acquisition. At the end of the lease term, the lessee may return, continue to rent or purchase the equipment for its fair market value. The lease is recorded as an operating lease with rental income recognized on a straight-line basis over the lease term.

 

Leased equipment at cost consists of the following:

 

   March 31, 2014   December 31, 2013 
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   7,777,356    6,752,405 
Racetrack equipment   3,763,611    3,763,611 
Smart safes   3,273,610    3,084,544 
Machine tool equipment   5,768,966    5,768,966 
Aircraft (Airbus model A320-200)   19,551,352    19,551,352 
Less: Accumulated depreciation   (9,420,956)   (8,186,636)
   $67,908,347   $67,928,650 

 

9
 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

 

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

 

For the period April 1 to December 31, 2014  $8,202,237 
For the year ending December 31, 2015   9,244,828 
For the year ending December 31, 2016   6,763,805 
For the year ending December 31, 2017   5,527,837 
For the year ending December 31, 2018   3,812,928 
Thereafter   4,142,463 
   $37,694,098 

 

The Fund is exposed to risks under these transactions, including risk associated with a lessee’s creditworthiness, repossession and remarketing and the future market value of the equipment. Although the Fund currently has no reason to believe that the lessees 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 a lease. As of March 31, 2014 and December 31, 2013, the Fund did not have a reserve allowance for credit losses on 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 assumed.

 

4. NET INVESTMENT IN FINANCE LEASE

 

The Fund’s net investments in finance leases primarily relate to racing track equipment, furniture, demo aircrafts and smart safes.

 

GA8-TC320 Airvan Aircraft

 

In January 2014, the Fund entered into a sale and leaseback arrangement with an Australian airline manufacturer where the Fund purchased four GA8-TC320 Airvan aircraft for $2,097,647 including initial direct costs. The lease term is 48 months. The lessee has the option to purchase the aircraft from the Fund at any point during the lease term in certain circumstances for agreed upon amounts. If the repurchase options have not been exercised at the end of the lease, ownership of the aircraft is transferred back to the lessee for $1,272,956 (for all four aircraft). The leases were classified as finance leases on the Fund’s balance sheet. No leverage was used to finance this acquisition.

 

Smart Safe Equipment

 

In connection with the Fund’s acquisition of additional smart safes as described in Note 3, one lease was classified as a finance lease. The cost of the safes classified as a finance lease was $21,084, including initial direct costs. The lease term is 60 months. 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 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 at the end of the lease term of 60 months. If the Fund consents to the service provider's request, fair market value in this case cannot exceed 29% of the asset’s respective cost.

 

Sale of Office Equipment

 

In March 2014, on the expiration of one of the Fund’s leases, the lessee exercised its option to buy the equipment subject to the lease. The lessee paid a purchase price of $70,953 and the Fund recognized a gain of $51,445. The Fund received the sales proceeds in April 2014.

 

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

 

   March 31, 2014   December 31, 2013 
Minimum lease payments receivable  $2,864,085   $1,786,413 
Estimated residual values of leased property (unguaranteed)   1,665,616    406,140 
Less: Unearned income   (823,724)   (328,014)
Net investment in finance lease  $3,705,977   $1,864,539 

 

10
 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO THE 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 April 1 to December 31, 2014  $752,858 
For the year ending December 31, 2015   967,669 
For the year ending December 31, 2016   769,498 
For the year ending December 31, 2017   345,597 
For the year ending December 31, 2018   28,463 
   $2,864,085 

 

The Fund is exposed to risks under these transactions, including risk associated with the lessee’s creditworthiness, repossession and remarketing and risk associated with the future market value of the equipment. Although the Fund currently has no reason to believe that the lessees 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 of March 31, 2014 and December 31, 2013, the Fund did not have a reserve allowance for credit losses on 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.

 

The Fund pays the Manager and its affiliates’ fees for operating services performed 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;

 

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.

 

During the three months ended March 31, 2014, the Fund engaged Macquarie Rail Inc., an affiliate of the Manager, to provide due diligence services for its acquisition of the railcar portfolio described in Note 3. The fees were capitalized as part of the cost of the assets. No such fees were incurred during the three months ended March 31, 2013.

 

For the three months ended March 31, 2014 and 2013, 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:

 

11
 

 

MACQUARIE EQUIPMENT LEASING FUND, LLC

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

 

         Three Months Ended 
Entity  Capacity  Description  March 31, 2014   March 31, 2013 
               
Macquarie Asset Management Inc.  Manager  Acquisition fees (1)  $95,168   $178,355 
Macquarie Asset Management Inc.  Manager  Management fee (2)  $166,014   $109,156 
Macquarie Asset Management Inc.  Manager  Operating Expenses (2)  $123,704   $94,710 
Macquarie Asset Management Inc.  Manager  Outperformance fee (2)  $18,644   $18,816 
Macquarie Rail Inc.  Affiliate  Due dilligence (1)  $41,267   $- 

 

 

(1) Amount is capitalized into the cost of an asset when it is classified as an operating or a finance lease.

(2) Amount charged directly to operations. 

 

6. EQUITY CONTRIBUTION

 

The Fund’s offering period ended on March 19, 2012 and the operating period commenced. As of March 31, 2014, the Fund had 9,447,594 shares of limited liability company interest outstanding (including the DRP shares and net of repurchase of shares). 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 18, 2014, 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 and loans collateralized by 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’s 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 of March 31, 2014, the Fund had 9,447,594 shares of limited liability company interest outstanding (including the DRP shares and net of repurchase of shares).

 

As of May 14, 2014, the Fund had 9,432,510 shares of limited liability company interest outstanding (including the DRP shares and net of repurchase of shares).

 

First Quarter Transactions

 

Smart Safe Equipment

 

In March 2014, as part of a master lease program, the Fund purchased additional smart safes for $210,150, including initial direct costs, from a U.S. safe manufacturer, $189,066 were classified as operating leases and $21,084 as finance leases. 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. 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 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 at the end of the lease term of 60 months. If the Fund consents to the service provider's request, fair market value in this case cannot exceed 29% of the asset’s respective cost.

 

13
 

 

Railcar Portfolio

 

In March 2014, the Fund purchased 45 flat bed rail cars for $1,032,186 including the initial direct costs. The rail cars are on lease to the U.S. subsidiary of a leading global manufacturer of wind turbines for a period of 60 months. No leverage was used to finance this acquisition. At the end of the lease term, the lessee may return, continue to rent, or purchase the equipment for its fair market value. The lease is recorded as an operating lease with rental income recognized on a straight-line basis over the lease term.

 

GA8-TC320 Airvan Aircraft

 

In January 2014, the Fund entered into a sale and leaseback arrangement with an Australian airline manufacturer where the Fund purchased four GA8-TC320 Airvan aircraft for $2,097,647 including initial direct costs. The lease term is 48 months. In certain circumstances, the lessee has the option to repurchase the aircraft from the Fund at any point during the lease term for agreed upon amounts. If the repurchase options have not been exercised at the end of the lease, ownership of the aircraft is transferred back to the lessee for $1,272,956 (for all four aircraft). The leases were classified as finance leases on the Fund’s balance sheet. No leverage was used to finance this acquisition.

 

Sale of Office Equipment

 

In March 2014, on the expiration of one of the Fund’s leases, the lessee exercised its option to buy the equipment subject to the lease. The lessee paid a purchase price of $70,953 and the Fund recognized a gain of $51,445. The Fund received the cash proceeds in April 2014.

 

Results of Operations for the Three Months Ended March 31, 2014 and 2013

 

Total revenue for the three months ended March 31, 2014 increased by $1,101,359 compared to the three months ended March 31, 2013 primarily due to an increase in rental income of $1,055,671. The increase was due to additional equipment purchased by the Fund during 2013 and in the first quarter of 2014. These additional lease transactions include assets such as machine tool equipment, an Airbus A320-200 aircraft, smart safes, four GA8-TC320 Airvan aircraft, and railcars. The Fund also realized a gain of $51,445 from sale of office equipment under lease to the lessee in the first quarter of 2014.

 

Total expenses for the three months ended March 31, 2014 increased by $422,863 compared to the three months ended March 31, 2013 primarily due to an increase in depreciation expense of $328,154 and asset management fee expense of $56,858. The increase in depreciation and management fees were driven by the purchase of additional equipment during 2013 and in the first quarter of 2014.

 

The Fund evaluated a number of equipment transactions during the first three months of 2014 and closed some of these transactions. To date, the Fund has not used leverage to finance these transactions. The Fund 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 March 31, 2014 compared to December 31, 2013.

 

Total Assets

 

Total assets decreased by $37,659, from $82,732,255 as of December 31, 2013 to $82,694,596 as of March 31, 2014. The decrease in total assets was due to the following: cash decreased during the quarter due to the acquisition of leased assets for a total of $3,291,482 and cash distributions to members of $1,864,431, partially offset by rents collected and rentals paid in advance by certain lessees. Operating lease assets increased during the quarter due to the aforementioned acquisitions and was partially offset by depreciation expense of $1,234,320. Net investment in finance leases increased by $1,841,438 during the quarter due to new acquisitions, partially offset by amortization of unearned revenue, the collection of rentals, and the expiration and subsequent sale of a finance lease asset in the first quarter of 2014.

 

Total Liabilities

 

Total liabilities increased by $420,772, from $5,096,833 as of December 31, 2013 to $5,517,605 as of March 31, 2014. The increase in total liabilities is the result of an increase in other payables by $141,116, receipt of a security deposit for $90,000, and an increase in fees payable to related parties of $171,766. Other payables increased due to additional accrued deal expenses while fees payable to related parties increased due to an increase in management fees related to the Fund’s additional asset purchases, and increased operating expenses related to an increase in professional fees incurred during the quarter. Fees payables to the Manager are settled on an annual basis in December.

 

Equity

 

Equity decreased by $458,431, from $77,635,422 as of December 31, 2013 to $77,176,991 as of March 31, 2014. The decrease in equity is primarily due to distributions to investors of $1,863,630, of which $1,221,710 were paid and $641,920 were payable as of March 31, 2014. Additionally, 11,790 shares redeemed for $100,226 during the three months ended March 31, 2014. The decrease was offset by net income of $1,505,425 for the same period.

 

14
 

 

Liquidity and Capital Resources

 

Cash Flows Summary

 

The following table sets forth summary cash flow data for the three months ended March 31, 2014 and 2013.

 

   March 31, 2014   March 31, 2013 
Net cash provided by (used in) :          
Operating activities  $3,091,036   $2,161,791 
Investing activities   (3,251,986)   (5,858,056)
Financing activities   (1,914,153)   (2,194,537)
Net decrease in cash and cash equivalents  $(2,075,103)  $(5,890,802)

 

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

 

As of March 31, 2014, the Fund had cash and cash equivalents of $7,015,529. The amount of cash provided by operating activities for the three months ended March 31, 2014 of $3,091,036 consisted primarily of rentals collected during the quarter from assets on lease.

 

The cash used in investing activities for the three months ended March 31, 2014 is primarily attributable to the purchase of four GA8-TC320 Airvan aircraft for $2,097,647, purchase of additional railcars for $1,032,186 and the purchase of additional smart safes for $210,150. This decrease is partially offset by the security deposit of $90,000 received from the lessee of the GA8-TC320 Airvan aircraft.

 

The cash used in financing activities for the three months ended March 31, 2014 is primarily attributable to distributions to members and share repurchases.

 

Cash and cash equivalents include cash in banks and highly liquid investments with original maturities of three months or less and are held in operating and money market accounts at Wells Fargo Bank, N.A.

 

Sources and Uses of Cash

 

The Fund’s main activities and principal use of cash has been to acquire a diversified portfolio of equipment, equipment leases and other equipment-related investments which are denominated in US dollars and are 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 and make loans collaterized by equipment.

 

As of May 14, 2014 we have used approximately $96,031,471 of the offering and equipment sale proceeds to acquire the following assets:

 

   Purchase Price 
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   811,400 
Furniture, office and other related equipment (sold in Nov 2013 & Mar 2014)   870,453 
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   7,777,356 
Racetrack equipment   5,311,507 
Smart safes   3,294,695 
Smart safes (sold in July 2013)   68,989 
Machine tool equipment   5,768,966 
Aircraft (Airbus model A320-200)   19,551,352 
GA8-TC320 Airvan Aircraft   2,097,647 
   $96,031,471 

 

15
 

 

Sources of Liquidity

 

We believe that cash generated from our operating activities and from debt borrowings, if required, 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 or costs associated with off lease assets or assets available for sale. 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 on future acquisitions for 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 $1,864,431 during the three months ended March 31, 2014.

 

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.

 

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 as of March 31, 2014.

 

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 18, 2014.

 

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 March 31, 2014. 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 March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

16
 

 

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) None.

 

(c) A summary of the share repurchases during the quarter is as follows:

 

   Total Number of
Shares Purchased
   Average Price
Paid per Share
   Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
 
January 1 to January 31, 2014   11,790   $8.50    11,790 
February 1 to February 29, 2014   -    -    - 
March 1 to March 31, 2014   -    -    - 
Total   11,790   $8.50    11,790 

 

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: May 14, 2014  
     
By: /S/      John Papatsos  
Name: John Papatsos  
Title: Principal Financial Officer of the Manager and Principal  
  Accounting Officer of Registrant  
     
  Date: May 14, 2014  

 

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 March 31, 2014, filed on May 14, 2014, formatted in Extensible Business Reporting Language (XBRL): (i) the Balance Sheets as of March 31, 2014 (Unaudited) and December 31, 2013, (ii) the Statement of Operations for the Three Months Ended March 31, 2014 and 2013 (Unaudited), (iii) the Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 (Unaudited) (iv) the Statements of Changes in Members’ Equity for the Three Months Ended March 31, 2014 (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