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MACQUARIE EQUIPMENT LEASING FUND, LLC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) 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.
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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.
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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.
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Cash Flows
The following table sets forth summary cash flow data for the years ended
December 31, 2011, and December 31, 2010:
December 31, 2011 December 31, 2010
Net cash (used in) provided by:
Operating activities $ 2,070,889 $ (23,466 )
Investing activities (42,971,751 ) (8,942,742 )
Financing activities 42,259,658 17,931,809
Net increase in cash and cash equivalents $ 1,358,796 $ 8,965,601
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.
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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.
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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.
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