Item 1. Business
Except as otherwise specified, “we,” “us,” and “our” refer to Macquarie Equipment Leasing Fund, LLC (the “Fund” or the “Company”), a Delaware limited liability company. “Manager” refers to our manager, Macquarie Asset Management Inc., a Delaware limited liability company.
The Establishment of Macquarie Equipment Leasing Fund, LLC
Macquarie Equipment Leasing Fund, LLC, 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, through the sale of leased equipment and through other portfolio investments. The Fund’s year end is December 31.
The manager of the Fund is Macquarie Asset Management Inc., 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 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. Further, 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 Fund filed Post-Effective Amendment No. 5 to Registration Statement on Form S-1 (the “Registration Statement on Form S-1”) with the Securities and Exchange Commission on December 16, 2011. The Fund is considered to be a development stage enterprise as limited operations have commenced since its first effectiveness order received on June 19, 2009. 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 Fund is offering membership interests with the intention of raising up to $157,200,000 of equity. The Fund expects the share offering period to last until March 19, 2012.
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. For the period from inception through December 31, 2011, the Fund has received and accepted cumulative subscriptions for 7,109,357 (including the Distribution Reinvestment Plan, or “DRP”, shares and net of repurchase of shares) of limited liability company interest (“shares”) for $62,357,789 net of offering costs, including the capital contributions from the Manager.
Investment Objectives
The Fund’s principal investment objectives are to:
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Preserve, protect and return invested capital. The Fund is building a portfolio of equipment, equipment leases and other equipment-related investments with the objective of preserving, protecting and returning invested capital.
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Generate regular monthly cash distributions. The Fund is developing a portfolio of varied equipment types, transaction types, clients and transaction durations with the objective of receiving regular cash from its investments. The Fund generates cash through rental payments from its clients, and will generate additional cash from the sale of equipment, from the sale of leases and from other investments. In turn, the Fund has been making regular monthly cash distributions beginning the month after the initial closing date of its offering and intends to continue making these distributions up to the end of its operating period.
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Reduce the Fund’s overall risk through diversification of its portfolio. The Fund will continue to diversify its portfolio by acquiring, directly or indirectly, different types of assets, by entering into or acquiring leases of different durations and by acquiring equipment and investing in other equipment-related transactions in different geographies and industries. Diversification of the Fund’s portfolio will reduce its risk of changes in any particular market sector or of any particular client’s willingness or ability to make payments under a lease.
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Generate investment returns that are not correlated to returns from listed stock and bond markets. The Fund intends to generate investment returns for its members that will not be correlated to listed stock and bond markets. The Fund’s Shares will not be traded on any listed exchange and the value of the Shares will not be subject to fluctuations on those exchanges.
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Generate a favorable total return on investments. The Fund’s portfolio has been and will continue to be structured with the objective of providing its members with a favorable total return on their investment.
The Fund has contemplated investing in equipment classes which include rail equipment, such as freight cars or locomotives, maritime equipment, aviation equipment, such as commercial jet engines and aircraft, road transportation equipment, manufacturing
equipment, mining and construction equipment, technological and communications equipment, utilities equipment and/or other types of equipment that the Manager determines may meet the Fund’s investment objectives. The Fund has to date invested in equipment located both within and outside the U.S. All equipment purchased by the Fund so far is leased to corporate clients.
When contemplating investments in equipment, the Manager may consider a range of factors including the remaining economic useful life of the equipment, the anticipated residual value of the equipment, whether the equipment is new or used and the condition of the equipment, equipment registration and regulatory considerations, portfolio diversification, client considerations such as available financial information about the client and how essential the equipment is to the operations of the client, the cash flow profile of the equipment and the depth of the equipment market and exit mechanisms.
The Manager
The Fund’s manager is Macquarie Asset Management Inc. The Fund’s investment decisions are made by the Manager’s investment committee or by the Manager’s board of directors.
The Manager is a member of the Macquarie Group. The Macquarie Group, whose predecessor, Hill Samuel Australia Limited, was founded as a subsidiary of the U.K. merchant bank, Hill Samuel & Co., in 1969, is a diversified international provider of banking, financial, leasing, advisory and investment services. Headquartered in Sydney, Australia, the parent entity of the Macquarie Group, Macquarie Group Limited, is listed on the Australian Stock Exchange. As of December 31, 2011, the Macquarie Group operated in more than 70 offices in 28 countries and had approximately 14,600 employees, over 3,500 of whom were located across 27 offices in North America. The Macquarie Group operates a diversified range of financial services activities. These activities include banking services, leasing services, retail and institutional funds management services, corporate advisory services, real estate services, securities research and brokerage services and treasury and commodity services.
As of December 31, 2011, the Macquarie Group had assets under management of approximately $335 billion. These assets are either held by the Macquarie Group or by various listed and unlisted funds managed by the Macquarie Group.
The Manager forms part of the division responsible for the majority of the Macquarie Group’s equipment leasing activities. As of December 31, 2011, the Macquarie Group’s equipment leasing division had approximately $12 billion of equipment leases under management for its own account with approximately 950 employees located in North America, Europe, Asia and Australia / New Zealand.
These employees variously specialize in:
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lease origination across various equipment classes and industries;
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residual value investment determination and management;
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physical remarketing of equipment;
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technical assessment of equipment;
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client and asset management;
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equipment leasing technology platforms; and
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accounting, legal, tax and compliance services for equipment leases.
Examples of equipment currently or previously financed by the Macquarie Group under various lease structures include railcars, locomotives and trams, railway infrastructure, commercial jet aircraft engines, aircraft, semiconductor manufacturing equipment, maritime vessels, information technology equipment, utility equipment, telecommunications equipment, medical equipment, road transportation equipment, power stations, electricity grids, marshalling yards, handling equipment, environmental and energy equipment and construction equipment.
In managing the Fund, the Manager has access to the experienced leasing, funds management and other resources of the Macquarie Group. While the directors of the Manager have relevant experience in equipment leasing for the Macquarie Group, the Manager is a newly formed entity which has never previously managed a private or public equipment leasing fund or program.
Industry
Both in the U.S. and abroad, the equipment leasing industry is large, segmented and highly competitive. The Fund anticipates doing business in the U.S. as well as in foreign jurisdictions. The following figures as published by World Leasing Yearbook 2011 and Euromoney Yearbooks as of 2009, provide an overview of features of the equipment leasing industry:
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Annual world leasing volume is in excess of $557 billion.
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North America comprises approximately 34.2% of annual world leasing volume, Europe 37.9% and Asia 20.2%.
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The top 15 countries, measured by way of annual leasing volume (in parentheses), are as follows: U.S. ($174 billion), Germany ($55 billion), Japan ($53 billion), China ($41 billion), France ($32 billion), Italy ($27 billion), Brazil ($23 billion), United Kingdom ($15 billion), Canada ($13 billion), Russia ($9 billion), Sweden ($8 billion) Spain ($8 billion), the Netherlands ($8 billion), Poland ($7 billion) and South Korea ($6 billion).
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Since 1988, the global aggregate annual leasing volume has grown from $194 billion to over $557 billion.
The Fund operates across a number of segments within the equipment leasing industry. The equipment leasing industry and its participants may be categorized in numerous ways. These categories often overlap. The Fund is primarily a global leasing company with a focus on providing primarily non-full payout (operating) leases to mainly corporate clients across numerous equipment classes, although it has and will continue to enter into small ticket type transactions. Its returns are influenced by competitive conditions existing within the equipment leasing industry, including general economic conditions and its ability to provide lease pricing which is attractive versus competitors.
Existing Portfolio - Status Report
The Fund commenced leasing activities in March 2010. As at December 31, 2011, our portfolio is represented by the investments as described below, aggregating to a total investment amount of $51.49 million. The Fund did not dispose of any assets during the year ended December 31, 2011. As of December 31, 2011 and 2010, there were concentrations (greater than 10% as a percentage of total equipment cost) of equipment in certain industries as follows:
* Less than 10%
** Not in existence
Equipment Leasing Activities
The Fund has acquired a diversified portfolio of equipment. The following tables set forth the transactions entered into by the Fund from inception through to December 31, 2011 and the types of asset financed:
During the year ended December 31, 2011 and for the period from March 24, 2010 (the date the Fund made its first leasing investment) through December 31, 2010, certain lessees generated significant portions (defined as 10% or more) of the Company’s total leasing revenues as follows:
* Less than 10%
** Not in existence
These percentages are not expected to be comparable in future periods.
Employees
The Fund has no direct employees. The Manager has full and exclusive control over the Fund’s management and operations.
Available Information
Our Annual Report on Form 10-K, our most recent Quarterly Reports on Form 10-Q and any amendments to those reports and our Current Reports on Form 8-K and any amendments to those reports are available free of charge on our Manager’s internet website at http://www.macquarie.com/mami following their electronic filing with the Securities and Exchange Commission (the “SEC”). The information contained on our Manager’s website is not deemed part of this Annual Report on Form 10-K. Our reports are also available on the SEC’s website at http://www.sec.gov.
Item 1A.
Item 1A. Risk Factors
Not Applicable.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
The Fund does not own or lease any real property, plant or material physical properties other than the equipment that may be held for lease or resale from time to time as contemplated in Item 1 of this annual report on Form 10-K.
Item 3.
Item 3. Legal Proceedings
None.
Item 4.
Item 4. Mine Safety Disclosures
Not Applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
There are certain material conditions and restrictions on the transfer of Shares imposed by the terms of the Fund’s operating agreement between the Fund and the Manager. Consequently, there is no public market for Shares and it is not anticipated that a public market for Shares will develop.
Members
As of December 31, 2011, the Fund had a total of 1,962 members.
Distributions
The Fund began making monthly cash distributions on April 15, 2010. We paid cash distributions to our members in the amount of $2,164,843 for the year ended December 31, 2011.
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. Each distribution may contain a return of capital.
Use of Proceeds from Registered Securities
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 at $9.00 per share. This excludes an initial 500 shares issued to the Manager. The Fund is currently in its offering period, which commenced on June 19, 2009 and is anticipated to end in March 2012.
From inception through February 15, 2012, we received capital contributions in the amount of $69,988,042, net of offering costs. From inception through February 15, 2012, we have paid or accrued sales commissions to third parties of $5,348,382, organization and offering expenses to our Manager of $1,784,150, and dealer manager and selling commissions to Macquarie Capital (USA) Inc. of $1,802,791
As of February 15, 2012 we have used approximately $51.49 million of the offering proceeds to acquire a portfolio of commercial jet aircraft engines, self-serve kiosks, a commercial aircraft, semiconductor manufacturing and testing equipment and various items of furniture and other related equipment. Equipment acquired for the year ended December 31, 2011 is described further under Management’s Discussion and Analysis of Financial Condition and Results of Operations - Recent Transactions.
Share Valuation
In order for Financial Industry Regulatory Authority, Inc. (“FINRA”) members and their associated persons to participate in the offering and sale of shares pursuant to our offering or to participate in any future offering of our shares, we are required pursuant to FINRA Rule 2310(b)(5) to disclose in each annual report distributed to our members a “per share” estimated value of our shares, the method by which we developed the estimated value, and the date used to develop the estimated value. In addition, our Manager prepares statements of our estimated share values to assist fiduciaries of retirement plans subject to the annual reporting requirements of Employee Retirement Income Security Act (“ERISA”) in the preparation of their reports relating to an investment in our shares. For these purposes, the estimated value of our shares is deemed to be $10.00 per share as of December 31, 2011. This estimated value is provided to assist plan fiduciaries in fulfilling their annual valuation and reporting responsibilities and should not be used for any other purpose. Because this is only an estimate, we may subsequently revise this valuation.
During the offering of our shares, the value of our shares is estimated to be the offering price of $10.00 per share (without regard to purchase price discounts for certain categories of purchasers), as adjusted for any special distribution of net sales proceeds. Our shares are currently being offered and no special distribution of net sales proceeds has been made; therefore, the value of our shares is estimated to be $10.00 per share.
Following the termination of the offering of our shares, the estimated value of our shares will be based on the estimated amount that a holder of a share would receive if all of our assets were sold in an orderly liquidation as of the close of our fiscal year and all proceeds from such sales, without reduction for transaction costs and expenses, together with any cash held by us, were distributed to the members upon liquidation. To estimate the amount that our members would receive upon such liquidation, we calculate the sum of (i) the fair market value of our leases, equipment held for sale or lease, and other assets, and (ii) our cash on hand. From this amount, we then subtract our total debt outstanding and other liabilities and then divide that sum by the total number of shares outstanding.
The foregoing valuation is an estimate only. The methodology utilized by our management in estimating our per share value is subject to various limitations and are based on a number of assumptions and estimates that may or may not be accurate or complete. No liquidity discounts or discounts relating to the fact that we are currently externally managed were applied to our estimated per share valuation, and no attempt was made to value us as an enterprise.
As noted above, the foregoing valuation was performed solely for the ERISA and FINRA purposes described above and was based solely on our Manager’s perception of market conditions and the types and amounts of our assets as of the reference date for such valuation and should not be viewed as an accurate reflection of the value of our shares or our assets. No independent valuation was sought. In addition, as stated above, as there is no significant public trading market for our shares at this time and none is expected to develop, there can be no assurance that limited partners could receive $10.00 per share if such a market did exist and they sold their shares or that they will be able to receive such amount for their shares in the future. Furthermore, there can be no assurance:
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as to the amount limited partners may actually receive if and when we seek to liquidate our assets or the amount of lease payments and asset disposition proceeds we will actually receive over our remaining term; the total amount of distributions our members may receive may be less than $10.00 per share primarily due to the fact that the funds initially available for investment were reduced from the gross offering proceeds in order to pay selling commissions, underwriting fees, organizational and offering expenses, and acquisition or formation fees;
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that the foregoing valuation, or the method used to establish value, will satisfy the technical requirements imposed on plan fiduciaries under ERISA; or
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that the foregoing valuation, or the method used to establish value, will not be subject to challenge by the IRS if used for any tax (income, estate, gift or otherwise) valuation purposes as an indicator of the current value of the Interests.
The repurchase price we offer in our repurchase plan utilizes a different methodology than that which we use to determine the current value of our shares for the ERISA and FINRA purposes described above and, therefore, the $10.00 per share does not reflect the amount that a member would currently receive under our repurchase plan. In addition, there can be no assurance that a member will be able to redeem its shares under our repurchase plan.
Item 6.
Item 6. Selected Financial Data
Not applicable.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of the Fund’s current financial position and results of operations. This discussion should be read together with the Fund’s financial statements contained under Item 8 of this annual report on Form 10-K.
Overview
The Fund is a Delaware limited liability company formed on August 21, 2008. The Fund anticipates that its operations will continue for at least eight years from June 19, 2009.
The Fund’s operations are divided into three phases. The first phase, called the “offering period,” will last for 33 months from June 19, 2009. The Fund is currently in this phase. During this period, member’s capital is being raised and investments are being made by the Fund. As of December 31, 2011, the Fund has received and accepted cumulative subscriptions for 7,109,357 shares (including the Distribution Reinvestment Plan, or “DRP”, shares and net of repurchase of shares) of limited liability company interest (“shares”) for $62,357,789, net of offering costs, including the capital contributions from the Manager. The second phase, called the “operating period,” is anticipated to last for 51 months from the end of the offering period, but may last longer. During this period, the Fund will invest and re-invest in equipment, equipment leases and other equipment-related transactions. The third phase, called the “liquidation period,” is anticipated to last one year from the end of the operating period, but not more than three years from the end of the operating period. During this period, the Fund will dispose of the remainder of its portfolio and make final distributions to its members.
The Fund is managed by its Manager, Macquarie Asset Management Inc., a member of the Macquarie Group of companies.
Recent Transactions
We engaged in the following transactions during 2011:
Commercial Jet Aircraft Engines
In October 2011, the Fund entered into a sale and leaseback arrangement with a leading Dubai airline over two new CFM56-7B aircraft jet engines (“Engines”) to power the airline’s fleet of 737NG aircraft. The Engines are on lease for a 108 month period. The purchase price for the Engines, including the estimated initial direct costs, was $25,338,321. The first engine was delivered in October 2011, and the second engine was delivered in December 2011. Rentals will be received by the Fund monthly in U.S. dollars. At the end of the lease term, the lessee may return the Engines, purchase them at their then fair market value, or continue to rent them, however, given the remaining life of the Fund, it is expected that the Fund will sell the leases before the lease end date. Certain maintenance reserves will also accrue to the Fund in the form of two irrevocable Letters of Credit. No leverage was used to finance this acquisition by the Fund.
Commercial Aircraft
In March 2011, the Fund entered into an agreement to purchase a 2002 vintage Bombardier CRJ-700ER aircraft (“the Aircraft”). The Aircraft is fitted with two General Electric engines and has a maximum range with 70 passengers of 1,732 nautical miles. The Aircraft is on lease until April, 2014 to an airline which is wholly owned by the Government of India and will be used by the airline for its domestic routes in India. The purchase price for the aircraft, including the estimated initial direct costs was $9,758,734. The Fund also inherited the related maintenance reserve of $1,236,497, which is recorded as a liability on the Balance Sheet. No leverage was used to finance this acquisition by the Fund. Rentals will be received by the Fund monthly in U.S. dollars. At the end of the lease term, the lessee may return or continue to rent the equipment. In addition to the inherited maintenance reserve balance, the Fund is entitled to receive additional rentals based on the usage of the aircraft during the lease term. Cash received for the additional rentals is presented as Restricted Cash in the Fund’s Balance Sheet and will be used to reimburse the lessee for the maintenance of the aircraft.
Semiconductor Tool Portfolio
In July 2011, the Fund acquired a new ETS-364B Test System, being an item of semiconductor testing equipment manufactured by Teradyne. This equipment is on lease to the U.S. subsidiary of a semiconductor manufacturing company for a 36 month period and equipment will be used in the client’s facilities in the U.S. The purchase price for the equipment, including the initial direct costs was $383,898. No leverage was used to finance this acquisition by the Fund. Rentals are paid monthly. At the end of the lease term, the lessee may return the equipment, continue to rent the equipment, or request to purchase the equipment for its then fair market value.
In September 2011, the Fund acquired eleven semiconductor manufacturing tools of various makes, on lease to a major global manufacturer of semiconductor products for a 10 month period. These tools, which are located in the U.S., are used in the manufacture of memory storage components including DRAM, NAND Flash and NOR Flash memory used in leading edge computing, consumer, networking, embedded and mobile products. At the time of purchase, these tools were approximately four years old. The tools, together with rights under the associated lease, were purchased from a major equipment financier in the U.S., via an affiliate of the Manager. The purchase price for the equipment, including the estimated initial direct costs was $6,400,800. No leverage was used to finance this acquisition by the Fund. Rentals are paid quarterly, with four rental payments to be received during the initial lease term. At the end of the lease term, the lessee may return the equipment, continue to rent the equipment, or request to purchase the equipment for its then fair market value.
Retirement Community Equipment
During the first quarter of 2011, the Fund acquired additional items of furniture, office and other related equipment for use in model display apartments and administrative offices. This equipment is on lease to the operator of senior housing and retirement communities for a period between 36-38 months. The purchase price for the equipment, including the estimated initial direct costs was $166,972. No leverage was used to finance this acquisition by the Fund. Rentals are received quarterly by the Fund. At the end of the lease term, the lessee may return the equipment, continue to rent the equipment, or purchase the equipment for its then fair market value.
During the second quarter of 2011, the Fund acquired items of office equipment for use in the administrative offices of an existing client. The client is a leading U.S. owner and operator of senior housing and retirement communities, and the equipment is on lease for a period of 39 months. The purchase price for the equipment, including the estimated initial direct costs was $58,045. No leverage was used to finance this acquisition by the Fund. Rentals are to be received quarterly by the Fund. At the end of the lease term, the lessee may return the equipment, continue to rent the equipment, or purchase the equipment for its then fair market value.
During the third quarter of 2011, the Fund acquired items of office equipment for use in the administrative offices of an existing client. The client is a leading U.S. owner and operator of senior housing and retirement communities, and the equipment is on lease for a period of 39 months. The purchase price for the equipment, including the estimated initial direct costs was $84,345. No leverage was used to finance this acquisition by the Fund. Rentals are to be received quarterly by the Fund. At the end of the lease term, the lessee may return the equipment, continue to rent the equipment, or purchase the equipment for its then fair market value.
Results of Operations for the Year Ended December 31, 2011
Revenue earned for the years ended December 31, 2011, December 31, 2010 and December 31, 2009, totaled $3,930,370, $226,924 and $0, respectively, which primarily represent lease and participating interest income. Expenses incurred for the years ended December 31, 2011, December 31, 2010 and December 31, 2009, totaled $3,295,939, $1,156,878 and $410, respectively, which primarily related to the Fund’s operating expenses and depreciation charges against leased equipment. Refer to ‘Recent Transactions’ for further detail.
Liquidity and Capital Resources
Sources and Uses of Cash
At December 31, 2011 and December 31, 2010, the Fund had cash and cash equivalents of $10,328,871 and $8,970,075, respectively. Cash and cash equivalents as December 31, 2011 primarily represent uninvested capital contributions from our members. The Fund’s cash is held at a financial institution.
We are offering our shares with the intention of raising up to $157,200,000. As additional shares are sold, we have experienced a relative increase in liquidity as cash is received and then a relative decrease in liquidity as cash is expended to make investments. We have used the net proceeds of the offering to acquire a diversified portfolio of equipment and equipment leases. We may 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, such as trading transactions, residual value guarantees, forward purchase agreements, total lease return swaps, participation agreements, equipment purchase options and joint ventures.
Our offering period ends on March 19, 2012. Although we had intended to raise up to $157,200,000 in total capital in the period from the inception of the Fund to the end of our offering period, we do not presently anticipate raising that full amount. The rate of our capital raising has been 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. We anticipate that our total capital raise will amount to between $85,000,000 and $100,000,000. We believe that this amount is sufficient to meet our investment objectives. This anticipated amount is subject to change, and may be higher or lower than we currently expect.
As of December 31, 2011, the Fund has received and accepted cumulative subscriptions for 7,109,357 shares (including the Distribution Reinvestment Plan, or “DRP”, shares and net of repurchase of shares) of limited liability company interest (“shares”) for $62,357,789, net of offering costs, including the capital contributions from the Manager. As of December 31, 2011 the Fund has 1,962 members. For the period from the commencement of operations through December 31, 2011, we have paid or accrued sales commissions to third parties of $4,774,826 and dealer manager fees to Macquarie Capital (USA) Inc. of $1,611,880. In addition, due diligence and organizational and offering expenses of $1,626,235 were paid or incurred by the Fund.
Cash Flows
The following table sets forth summary cash flow data for the years ended December 31, 2011, and December 31, 2010:
See the Statements of Cash Flows included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for additional information.
Operating Activities
Cash provided/(used) by operating activities of $2,070,889 and $(23,466) for the years ended December 31, 2011 and December 31, 2010, respectively, primarily relates to a significant increase in finance and rental income from the assets on lease. Consistent with the growth of the size of the portfolio was an increase in administrative charges related to the management of such assets.
Investing Activities
Cash used in investing activities of $42,971,751 and $8,942,742 for the years ended December 31, 2011 and December 31, 2010, respectively, relates to the purchase of equipment as part of our investing activities.
Financing Activities
Cash provided by financing activities of $42,259,658 for the year ended December 31, 2011 primarily relates to sale of shares in the amount of $48,516,347, which was partially offset by sales and offering expenses paid in the amount of $5,572,760 and cash distributions to members in the amount of $2,164,843. Cash provided by financing activities of $17,931,809 for the year ended December 31, 2010, primarily relates to sale of shares in the amount of $20,752,144, which was partially offset by sales and offering expenses paid in the amount of $2,351,369 and cash distributions to members in the amount of $496,916.
Sources of Liquidity
Cash generated from the sale of shares pursuant to our offering have to date been the most significant source of liquidity during our offering period. We believe that cash generated from the sale of shares pursuant to our offering and other financing activities, as well as the expected results of our operations, will be sufficient, barring unexpected events, to finance our liquidity requirements for the foreseeable future, including distributions to our members, general and administrative expenses, new investment opportunities, management fees 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’ and borrowers’ businesses that are beyond our control.
Financings and Borrowings
The Fund may incur indebtedness in purchasing its portfolio. During periods of general illiquidity in financial markets, such as existed during 2008 and beyond, 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. As at December 31, 2011, the Fund had incurred no indebtedness in purchasing its portfolio.
Distributions
The Fund began making monthly cash distributions on April 15, 2010. We paid cash distributions to our members in the amount of $ 2,164,843 for the year ended December 31, 2011 and $496,916 for the period ended December 31, 2010.
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. Each distribution may contain both a return on, as well as a return of, capital.
Accounting Policies, Accounting Changes and Future Application of Accounting Standards
Basis of Accounting and Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheets. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Fund considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents are maintained with one financial institution.
Income Taxes
The Fund is treated as a partnership for federal and state income tax purposes. As a partnership, the Fund itself 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 associated with the leases are included in the leased equipment cost and depreciated over the lease term. 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, auction data, internal sales data, equipment dealers, wholesalers and industry experts, as well as inspection of the physical asset and other economic indicators
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.
Maintenance reserve
Where the lessee is responsible for maintenance and repairs, including major maintenance events over the term of the lease, the lessee pays additional rentals based on the usage of the equipment. This is recognized as a liability on the Fund’s Balance Sheet. As the maintenance is performed, the lessee is reimbursed for costs incurred up to, but not exceeding, the related additional rentals the Fund receives from the lessee. For each maintenance event, the difference between the liability and reimbursement paid to the lessee is recorded as revenue when management is satisfied that the remaining reserve is considered sufficient to cover future maintenance or repairs.
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. No impairment charges were deemed necessary as at December 31, 2011 and 2010.
Allowance for doubtful accounts
The Fund evaluates the collectability of its receivable by analyzing the borrowers’ creditworthiness and current economic trends. The Fund records an allowance when the analysis indicates that the probability of full collection is unlikely. No allowance was deemed necessary as at December 31, 2011 and 2010.
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 deemed necessary as at December 31, 2011 and 2010.
Development Stage Enterprise
The Fund complies with the reporting requirements of Accounting Standards Codification (“ASC”) 915, Development Stage Entities.
New Accounting Pronouncements
In July 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, an amended guidance for disclosures about the credit quality of financing receivables and the allowance for credit losses. This update amends existing guidance by requiring more robust and disaggregated disclosures by an entity about the credit quality of its financing receivables and its allowance for credit losses. These disclosures will provide financial statement users with additional information about the nature of credit risks inherent in a company’s financing receivables, how a company analyzes and assesses credit risk in determining its allowance for credit losses, and the reasons for any changes a company may make in its allowance for credit losses. The disclosure as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010; however, certain aspects of the update pertaining to activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The adoption of the new guidance had no significant effect on the Fund’s financial statements.
In May 2011, the FASB issued new guidance ASU 2011-4, Fair Value Measurements - amendments to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. This new guidance amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of this new guidance, in the first quarter of 2012 is not expected to have a significant impact on the Fund’s financial statements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As of March 5, 2010, the Fund received the minimum offering amount of $2,500,000 and commenced making investments in equipment, equipment leases and other equipment-related transactions. Since that time, the Fund has been, and will continue to be, exposed to certain risks. Among these are the risks that equipment the Fund purchases will be worth less than anticipated at the end of the term of the lease; the risk that the Fund’s clients will fail to pay rent as required under its leases; and the risk that the Fund may not be able to source appropriate or attractive investments given the highly competitive nature of the equipment leasing industry.
To date, all of the Fund’s investments are subject to fixed interest rate leases and all are denominated in U.S. dollars. We believe that our exposure to foreign currency exchange rate risk, commodity risk (other than our residual value investments in equipment) and equity price risk are insignificant at this time to both our financial position and our results of operations. As of December 31, 2011, the Fund has no exposure to derivative financial instruments and has not incurred any debt in the acquisition of its investments, though it is likely to incur debt in the future.
Item 8.
Item 8. Financial Statements and Supplementary Data
MACQUARIE EQUIPMENT LEASING FUND, LLC
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members of
Macquarie Equipment Leasing Fund, LLC:
In our opinion, the accompanying balance sheets and the related statements of operations, changes in members’ equity and of cash flows present fairly, in all material respects, the financial position of Macquarie Equipment Leasing Fund, LLC (a development stage enterprise) at December 31, 2011 and December 31, 2010, and the results of its operations and its cash flows for the period from August 21, 2008 (inception of the Company) to December 31, 2011 and for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 15, 2012
MACQUARIE EQUIPMENT LEASING FUND, LLC
(a development stage enterprise )
BALANCE SHEETS
See accompanying notes to the Financial Statements
MACQUARIE EQUIPMENT LEASING FUND, LLC
(a development stage enterprise)
STATEMENTS OF OPERATIONS
See accompanying notes to the Financial Statements
MACQUARIE EQUIPMENT LEASING FUND, LLC
(a development stage enterprise)
STATEMENTS OF CASH FLOWS
See accompanying notes to the Financial Statements
MACQUARIE EQUIPMENT LEASING FUND, LLC
(a development stage enterprise)
STATEMENT OF CHANGES IN MEMBERS’ EQUITY
Period from August 21, 2008 (inception of the Fund) to December 31, 2011
(1) Additional members represent all members other than the Managing member.
See accompanying notes to the Financial Statements
MACQUARIE EQUIPMENT LEASING FUND, LLC
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
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, through the sale of leased equipment and through other portfolio investments. The Fund’s fiscal year end is December 31.
The manager of the Fund is Macquarie Asset Management Inc. (the “Manager”), 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 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. Further, 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 Fund filed Post-Effective Amendment No. 5 to Registration Statement on Form S-1 (the “Registration Statement on Form S-1”) with the Securities and Exchange Commission on December 16, 2011. The Fund is considered to be a development stage enterprise as limited operations have commenced since its first effectiveness order received on June 19, 2009. 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 Fund is offering membership interests with the intention of raising up to $157,200,000 of equity. The Fund expects the share offering period to last until March 19, 2012.
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. For the period from inception through December 31, 2011, the Fund has received and accepted cumulative subscriptions for 7,109,357 shares (including the Distribution Reinvestment Plan, or “DRP”, shares and net of repurchase of shares) of limited liability company interest (“shares”) for $62,357,789 net of offering costs, including the capital contributions from the Manager.
2. SUMMARY OF 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 an original maturity of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents are maintained with one financial institution.
Income Taxes
The Fund is treated as a partnership for federal and state income tax purposes. As a partnership, the Fund itself 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 cost associated with the leases are included as cost of the component and depreciated over the lease term. 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, auction data, internal sales data, equipment dealers, wholesalers and industry experts, as well as inspection of the physical asset and other economic indicators.
Maintenance reserve
Where the lessee is responsible for maintenance and repairs, including major maintenance events over the term of the lease, the lessee pays additional rentals based on the usage of the equipment. This is recognized as a liability on the Fund’s Balance Sheet. As the maintenance is performed, the lessee is reimbursed for costs incurred up to, but not exceeding, the related additional rentals the Fund receives from the lessee. For each maintenance event, the difference between the liability and reimbursement paid to the lessee is recorded as revenue when management is satisfied that the remaining reserve is considered sufficient to cover future maintenance or repairs.
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.
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. No impairment charges were deemed necessary as at December 31, 2011 and 2010.
Allowance for doubtful accounts
The Fund evaluates the collectability of its receivable by analyzing the borrowers’ creditworthiness and current economic trends. The Fund records an allowance when the analysis indicates that the probability of full collection is unlikely. No allowance was deemed necessary as at December 31, 2011 and 2010.
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 deemed necessary as at December 31, 2011 and 2010.
Development Stage Enterprise
The Fund complies with the reporting requirements of Accounting Standards Codification (“ASC”) 915, Development Stage Entities.
New Accounting Pronouncements
In July 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, an amended guidance for disclosures about the credit quality of financing receivables and the allowance for credit losses. This update amends existing guidance by requiring more robust and disaggregated disclosures by an entity about the credit quality of its financing receivables and its allowance for credit losses. These disclosures will provide financial statement users with additional information about the nature of credit risks inherent in a company’s financing receivables, how a company analyzes and assesses credit risk in determining its allowance for credit losses, and the reasons for any changes a company may make in its allowance for credit losses. The disclosure as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010; however, certain aspects of the update pertaining to activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The adoption of the new guidance had no significant effect on the Fund’s financial statements.
In May 2011, the FASB issued new guidance ASU 2011-4, Fair Value Measurements - amendments to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. This new guidance amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of this new guidance, in the first quarter of 2012 is not expected to have a significant impact on the Fund’s financial statements.
Reclassifcations
Certain reclassifications were made to the financial statements for the prior period to conform to current year presentation.
3. PARTICIPATING INTEREST (RELATED PATY)
In March 2010, the Fund entered into a participation agreement with Macquarie Bank Limited (“MBL”) a member of the Macquarie Group of companies, to acquire an economic interest of up to 10% ($6,500,000) in a sale leaseback transaction. Pursuant to the participation agreement, the Fund made installment payments to, and will receive monthly payments from, MBL in a manner which mirrors the cash flows arising in connection with the commercial aircraft engines leased by a third party (“the underlying airline”) which are subject to leases of between 51 to 69 months. MBL will pay the Fund approximately 10% (consistent with the investment percentage) of the monthly lease payments received from the third party and approximately 10% of the engine sales proceeds, remaining maintenance reserves and damages and insurance proceeds (collectively referred to as “residual value”), at the end of the lease term when the engines have been successfully remarketed. Under a separate agreement, the Fund shall pay Macquarie Aviation Capital Limited, a member of the Macquarie Group of companies, via its Fund manager, a fee (5% of the lease rental receipts) for the ongoing management of the engines and for the collection and remittance of rentals.
The Fund has paid MBL $6,500,000 (approximately 10% of the transaction value). The Fund is entitled to receive cash payments of $57,752 per month and approximately 10% of the residual value. The $6,500,000 investment has been bifurcated on the face of the balance sheet into two assets based upon relative fair value in accordance with the accounting guidance described below:
1) Participating Interest-Engine residual value: Representing the present value of the residual engine value as of the time of investment. The recognition of the asset upon investment is in accordance with ASC 360-10-25 Acquisition of the Residual Value in Leased Asset by a Third Party for an acquisition of the residual value in leased assets by a third party. This asset is tested for impairment as in accordance with ASC 360-10-35 Subsequent Measurement. To date, no losses have been recorded.
2) Participating Interest-Future lease income: Representing the present value of the discounted future cash flows as of each balance sheet date based on the accounting guidance of ASC 470-10-25 Sales of Future Revenues or Various Other Measures of Income.
On September 26, 2011, MBL entered into a conditional sale agreement to sell the engines that the Fund has the participating interest in. The sale is expected to be completed by February 29, 2012. The Fund will continue to classify the non-current portion of the participating interest as a non-current asset until the sale is completed by MBL.
The Fund is exposed to the credit risk of the underlying airline. Neither MBL nor any other member of the Macquarie Group guarantees the payment obligations of the airline, and the Fund has no recourse against any member of the Macquarie Group in the event the airline fails to meet its payment obligations. Although the Fund currently has no reason to believe that the airline will fail to meet its contractual obligations, a risk of loss to the Fund exists to the extent that the airline fails to meet its payment obligations and the net remarketing proceeds from the sale of (repossessed) equipment are not sufficient to reimburse the Fund for its investment in the transaction. The Fund also faces risk of loss should MBL fail to meet its payment obligation under the participation agreement.
4. LEASED EQUIPMENT AT COST
In October 2010, the Fund acquired 451 new NCR Self-Serv kiosks (customer self-service terminals). These customer self-service terminals are on lease to a leading U.S. retailer for a period of 59 months and will be used in the retailer’s stores across the U.S. The retailer is an existing client of an entity affiliated with the Fund’s Manager. The acquisition of the equipment was facilitated by the entity affiliated with the Fund’s manager purchasing the equipment and then simultaneously selling it to the Fund. The purchase price for the equipment, including the estimated initial direct costs was $2,097,353, paid directly by the Fund to the manufacturer of the equipment. The Fund also paid acquisition fees to its Manager for this transaction. No leverage was used to finance this acquisition by the Fund. Rentals of $38,361 are paid monthly and at the end of the lease term, the lessee may return the equipment, continue to rent the equipment, or purchase the equipment for its then fair market value.
In March 2011, the Fund entered into an agreement to purchase a 2002 vintage Bombardier CRJ-700ER aircraft (“the Aircraft”). The Aircraft is on lease until April 2014 to an airline which is wholly owned by the Government of India and will be used by the airline for its domestic routes in India. The purchase price for the aircraft, including the estimated initial direct costs was $9,758,734. The Fund also inherited the related maintenance reserve of $1,236,497, which is recorded as a liability on the Balance Sheet. No leverage was used to finance this acquisition by the Fund. At the end of the lease term, the lessee may return or continue to rent the equipment. Rentals of $181,000 are received monthly by the Fund. In addition to the inherited maintenance reserve balance, the Fund is entitled to receive additional rentals based on the usage of the aircraft during the lease term. Cash received for the additional rentals is presented as restricted cash in the Fund’s Balance Sheet and will be used to reimburse the lessee for the maintenance of the aircraft.
In July 2011, the Fund acquired an ETS-364B Test System, an item of semiconductor testing equipment manufactured by Teradyne, Inc. This equipment is on lease to the U.S. subsidiary of a semiconductor manufacturing company headquartered in Germany. The lease is for 36 months and the equipment will be used in the client’s U.S. facilities. The purchase price for the equipment, including the initial direct cost, was $383,898. No leverage was used to finance this acquisition by the Fund. The first rental was $92,729, including an amount of revenue which will be deferred for accounting purposes. For the subsequent monthly rental periods, rentals of $8,211 are to be received by the Fund. At the end of the lease term, the lessee may return the equipment, continue to rent the equipment, or purchase the equipment for its then fair market value. The lease will be recorded as an operating lease with rental income recognized on a straight-line basis over the lease term.
In September 2011, the Fund entered into a sale and assignment agreement with Macquarie Electronics USA Inc. (“MEUI”), a member of the Macquarie group of companies, to acquire semiconductor manufacturing tools of various makes on lease to a major global manufacturer of semiconductor products. The remaining term of the lease is for 10 months and the equipment will be used in the client’s U.S. facilities. The purchase price for the equipment, including the initial direct cost, was $6,400,800. No leverage was used to finance this acquisition by the Fund. The first rental was $699,129, including an amount of revenue which will be deferred for accounting purposes. For the subsequent quarterly rental periods, rentals of $699,129 are to be received by the Fund. At the end of the lease term, the lessee may return the equipment, continue to rent the equipment, or purchase the equipment for its then fair market value. The lease will be recorded as an operating lease with rental income recognized on a straight-line basis over the lease term.
In October 2011, the Fund agreed to enter into a sale and leaseback arrangement with a leading Dubai airline over two new CFM56-7B aircraft jet engines (“Engines”) to power the airline’s fleet of 737NG aircraft. The Engines are on lease for a 108 month period. The purchase price for the Engines, including the estimated initial direct costs was $25,338,321. No leverage was used to finance this acquisition by the Fund. The first engine was delivered in October 2011, and the second engine was delivered in December 2011. Rentals of $186,131 are received monthly by the Fund in U.S. dollars. At the end of the lease term, the lessee may return the Engines, purchase them at their then fair market value, or continue to rent them. No leverage was used to finance this acquisition by the Fund.
Leased equipment at cost consisted of the following:
Annual minimum future rentals receivable over the next 5 years consist of the following:
The Fund is exposed to risks under these transactions, including risk associated with a leasing client’s creditworthiness and risk associated with the future market value of the equipment. Although the Fund currently has no reason to believe that their clients will fail to meet their contractual obligations, a risk of loss to the Fund exists should a client fail to meet its payment obligations under the lease. As at December 31, 2011 and December 31, 2010, 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. NET INVESTMENT IN FINANCE LEASE
In November 2010, the Fund entered into a lease agreement with a U.S. owner and operator of senior housing and retirement communities, to provide various items of furniture and other related equipment for use in model display apartments and office equipment for use in the administrative offices. To date, $1,012,843 has been purchased which is subject to leases of between 36 and 39 months. For the assets acquired and leased out during the year ended December 31, 2011, the quarterly rentals are $5,410, $7,861 and $15,481 and for the asset acquired and leased out during the year ended 31 December 2010, the monthly rental is $21,646. No leverage was used to finance the above acquisitions by the Fund. At the end of the lease term, the lessee may return the equipment, continue to rent the equipment, or purchase the equipment for its then fair market value.
Net investment in finance lease (current and non-current) consisted of the following:
Unearned income is recognized over the term of the lease. Annual minimum future rentals receivable over the next 5 years consist of the following:
The Fund is exposed to risks under this transaction, including risk associated with the leasing client’s creditworthiness and risk associated with the future market value of the equipment. Although the Fund currently has no reason to believe that the client will fail to meet its contractual obligations, a risk of loss to the Fund exists should the client fail to meet its payment obligations under the lease. As at December 31, 2011 and December 31, 2010, 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.
6. 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, will act as dealer manager for the Fund and will manage a group of selling dealers, including other unaffiliated broker dealers.
The Manager and the Dealer Manager will receive fees from the Fund for offering services during the offering period 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 allowance will not exceed the actual fees and expenses incurred by the Manager or its affiliates in connection with the Fund’s organization and offering and will be 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 will pay the Manager and its affiliate’s 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;
•
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 years ended December 31, 2011 and December 31, 2010, the Fund has accrued, in commissions and fees payable (related party) in the Fund’s Balance Sheet, or paid to the Manager or its affiliates the following amounts:
(1) Amount charged directly to member’s equity.
(2) Amount either charged directly to operations or capitalized and amortized.
(3) Amount charged directly to operations.
7. EQUITY CONTRIBUTION
As of December 31, 2011, the Fund has received and accepted subscriptions for 7,109,357 shares of Limited Liability Company interest (including the DRP shares and net of repurchase of shares) for $62,357,789, net of offering costs. The subscriptions received include total contributions of $1,505,000 from the Manager, excluding the offering costs.
8. SUBSEQUENT EVENTS
From January 1, 2012 through February 15, 2012 the Fund has raised and accepted additional cumulative subscription for 865,546 shares of limited liability company interest for $7,630,251, net of offering cost.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the direction and with the participation of the Manager’s President and Principal Financial Officer, the Fund evaluated its disclosure controls and procedures (as such term is defined under Rule 13a-15(e) or 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 the Fund’s disclosure controls and procedures were effective as of December 31, 2011.
Management’s Annual Report on Internal Controls over Financial Reporting
The management of the Manager is responsible for establishing and maintaining adequate internal control over financial reporting as that term is defined in Exchange Act Rule 13a-15(f) for the Fund, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2011. All internal control processes, no matter how well designed, have inherent limitations. Therefore, even those processes determined to be effective can provide only reasonable assurance with respect to the reliability of financial statement preparation and presentation. Further, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management of the Manager assessed the effectiveness of the Fund’s internal control over financial reporting as of December 31, 2011. In making this assessment; it used the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its assessment, management of the Manager concluded that the Fund’s internal control over financial reporting was effective as of December 31, 2011.
This annual report does not include an attestation report of the Fund’s independent registered public accounting firm regarding internal control over financial reporting. Management’s assessment was not subject to attestation by the Fund’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Fund to provide only management’s assessment in this annual report.
Changes in Internal Control
There has been no change in the Fund’s internal control over financial reporting during the quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Fund’s internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The Fund is a manager-managed limited liability company and has no directors or executive officers. The Fund’s Manager is Macquarie Asset Management Inc. The Fund’s investment decisions will be made by the Manager’s investment committee, which at the date of this annual report on Form 10-K was comprised of David Fahy and Scott Wilson, or by the Manager’s board of directors, which at the date of this annual report on Form 10-K is comprised of David Fahy, Tom O’Neill and James A. Pitts. The Manager and the persons making the Fund’s investment decisions can be contacted at:
•
the Manager’s principal office at 225 Franklin St, 17th Floor, Suite 1700, Boston, Massachusetts, 02110; or
•
the Manager’s telephone number, 866-965-7622.
The Manager is a member of the Macquarie Group. In managing the Fund, the Manager will have access to the experienced leasing, funds management and other resources of the Macquarie Group. While the directors of the Manager have relevant experience in equipment leasing for the Macquarie Group, the Manager is a newly formed entity which has never managed a private or public equipment leasing fund or program.
The following table provides information regarding the members of the board of directors and the executive officers of the Manager.
David Fahy has been President of the Manager since its inception on August 21, 2008. Mr. Fahy has been with the Macquarie Group since joining its equipment leasing division in September 1998. Since June 2006, Mr. Fahy has been responsible for global equipment leasing investment and co-investment opportunities for both institutional and retail investors. Mr. Fahy is situated in Sydney, Australia, and is in frequent attendance at our Manager’s office in Boston. From July 2001 to June 2006, Mr. Fahy was responsible for the Macquarie Group’s structured technology syndication investments business. Prior to joining Macquarie, Mr. Fahy was employed at Coopers and Lybrand in Sydney, Australia from January 1987 to September 1998 in a number of roles, including that of Tax Director, and at Ernst & Young in Dublin, Ireland from September 1982 to December 1986 in a number of roles, including that of chartered accountant. Mr. Fahy holds a Bachelor of Commerce from University College Galway, Ireland and is a Fellow of the Institute of Chartered Accountants in Ireland and a member of the Institute of Chartered Accountants in Australia.
Tom O’Neill, Director and Vice President of the Fund’s manager, joined the Macquarie Group in July 2008 as a Senior Vice President, and is currently head of distribution for the Macquarie Equipment Leasing Fund. As of September 5, 2011, Mr. O’ Neill was appointed as an officer and director of Macquarie Asset Management Inc., the entity serving as fund manager. Prior to joining the Macquarie Group, Mr. O’Neill was employed as Senior Vice President of Operations at Realty Capital Securities, LLC, from October 2007 until July 2008, where he was responsible for overseeing operations, due diligence and product management and at Boston Capital Securities, from August 2003 until June 2007 in a number of roles including Sales Desk Manager, Assistant Vice President, and Vice President, Director of Sales and Operations. From January 1998 until August 2003 he was employed as a Financial Advisor at Merrill Lynch & Co. Mr. O’Neill currently resides west of Boston. He earned a Diploma in Business Studies from the Institute of Technology, Carlow, in Ireland, and holds FINRA securities licenses 7, 63, 24, 99 and 79.
James A. Pitts, Independent Director of our Manager, joined the board of directors of our Manager in March, 2009. Situated in Boston, Mr. Pitts was a Director of Wainwright Bank & Trust Company, a NASDAQ listed community bank, from May 2005 until November 2010, when the bank was sold. Mr. Pitts had been Chair of Wainwright Bank & Trust Company’s Audit Committee since January 2008 and had been a rotating member of its Executive Committee since April 2006. Mr. Pitts served as a Director of the National Association of Corporate Directors New England Chapter and the Chair of its Audit Committee from June of 2005 until June of 2011 at which time he was elected to the organization’s newly formed Senior Advisory Board. During the period of March 2009 until October 2010, Mr. Pitts was the sole independent member of the Advisory Board of Boston Coach, a Fidelity Company. From 1996 to May 2004, Mr. Pitts served as the Chief Financial Officer and Treasurer of The Boston Foundation, a $650 million community foundation, and from June 2004 to August 2004, Mr. Pitts served as the Chief Investment Officer and Treasurer of The Boston Foundation. From 1988 to 1996, Mr. Pitts held positions including Executive Vice President and Chief Financial Officer of Clean Harbors, Inc., a NASDAQ listed environmental disposal and service firm, as well as Chief Financial
Officer of Bain and Company, an international consulting firm. Prior to that time, Mr. Pitts also held senior financial roles in publicly traded multinational corporations where he held wide responsibilities for SEC reporting, financial statement preparation, internal audit, risk management and compliance and regulatory matters. In his roles as Chief Financial Officer, Mr. Pitts has reviewed and overseen various equipment leasing transactions. Mr. Pitts holds a MBA from the University of Connecticut and a BBA from Niagara University, New York. Mr. Pitts is a Certified Public Accountant and holds a Certificate of Director Education.
Scott Wilson, member of our manager’s investment committee, joined the Macquarie Group in April 2007. Based in New York and in frequent attendance at our manager’s office in Boston, Mr. Wilson has advised various Macquarie Group companies on numerous successful acquisitions of lease equipment, portfolios, and leasing companies, including Macquarie Group’s acquisition of CIT Systems Leasing in December 2007 and of a portfolio of commercial jet aircraft from ILFC in April 2010. Mr. Wilson is part of the Macquarie Group’s Corporate and Asset Finance Division in the USA. Prior to joining Macquarie, Mr. Wilson was employed at Procter & Gamble in Sydney and Melbourne, Australia in a range of corporate finance roles. Mr. Wilson holds a Bachelor of Engineering from the University of Melbourne.
Under the Fund’s operating agreement, the board of directors of the Manager must consist of at least one independent director, except for a period of 90 days after the death, removal or resignation of an independent director. An independent director may not, directly or indirectly (including through a member of his or her immediate family), be associated with the Manager or its affiliates within the last two years before becoming a director and at such time an independent director may not own any interest in, be employed by, have any material business or professional relationship with, serve as an officer or director of the Manager’s affiliates or perform services (other than as an independent director) for the Fund.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on a review of Forms 3, 4 and 5, the Fund is not aware of any failures to file reports of beneficial ownership required to be filed during or for the year ended December 31, 2011.
Code of Ethics
The Manager of the Fund has adopted a code of ethics that applies to the Manager’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The code of ethics contains written standards that are reasonably designed to deter wrongdoing and to promote: (1) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (2) full, fair, accurate, timely, and understandable disclosure in reports and documents that the Fund files with, or submits to, the SEC and in other public communications made by the Fund; (3) compliance with applicable governmental laws, rules and regulations; (4) the prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and (5) accountability for adherence to the code. The code of ethics is available without charge upon request from our Manager, 225 Franklin St, 17th Floor, Suite 1700, Boston, Massachusetts, 02110.
Item 11.
Item 11. Executive Compensation
The Fund is a manager-managed limited liability company and has no directors or executive officers.
Our Manager and its affiliates were paid compensation and reimbursement for costs and expenses. The amount of such expenses for the period from August 21, 2008 (Date of Inception) through December 31, 2011 is set forth in Item 8 of this report under the caption “Financial Statements and Supplementary Data-Notes to Financial Statements-Transactions with Affiliates,” at Note 6 thereof, which information is hereby incorporated by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a) We do not have any securities authorized for issuance under any equity compensation plan.
(b) Upon our formation, we were initially capitalized by our Manager’s purchase of 500 of our shares at $10.00 per share ($5,000). In March and June of 2010, our Manager purchased an additional 53,763 and 107,527 of our shares at $9.30 per share ($1,500,000). As of December 31, 2011, our Manager owned approximately 2% of our shares. No person of record owns, or is known by us to own, beneficially more than 5% of any class of our securities.
(c) As of December 31, 2011, no directors or officers of our Manager own any of our equity securities.
(d) Neither we nor our Manager are aware of any arrangements with respect to our securities, the operation of which may at a subsequent date result in a change of control of us.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
See Item 11 to this annual report on Form 10-K for a discussion of compensation and reimbursement to the Manager. See Note 6 to the Fund’s financial statements contained under Item 8 of this annual report on Form 10-K for a discussion of the Fund’s transactions with the Manager and its affiliates.
Item 14.
Item 14. Principal Accountant Fees and Services
During the years ended December 31, 2011 and 2010, the Manager incurred audit, audit-related and other fees with its principal auditors, PricewaterhouseCoopers LLP, as follows:
Audit fees consist of the aggregate fees and expenses billed in connection with the audit of the Fund’s annual financial statements and the review of the financial statements included in the Fund’s quarterly reports on Form 10-Q. Audit fees for 2011 of $148,750 was calculated on an accrual basis. Audit fees also represent costs incurred pursuant to the Fund’s registration statement on Form S-1.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
(a) Financial Statements and Schedules
The financial statements contained in Item 8 of this annual report on Form 10-K and schedule listed in the accompanying exhibit index are filed as part of this report.
(b) Exhibits
(1) Incorporated by reference to the Fund’s Registration Statement on Form S-1 (No. 333-154278), as amended.
(2) 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.
 Filed herewith.
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
David Fahy
President of the Manager and Principal Executive
Officer of Registrant.
By:
/S/ FRANK V. SARACINO
Frank V. Saracino
Principal Financial Officer of the Manager and Principal
Accounting Officer of Registrant
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.