The following is a discussion of our 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. This discussion should also be read in conjunction with the disclosures above regarding "Forward-Looking Statements." Overview
Macquarie Equipment Leasing Fund, LLC, a Delawarelimited liability company, was formed on August 21, 2008for the purpose of acquiring a diversified portfolio of equipment and equipment leases. The Fund will also make investments in other equipment-related transactions which will allow it to directly or indirectly participate in the benefits and risks of equipment ownership or usage or make loans secured by equipment collateral. The Fund offering was for a total of 15,000,000 Shares for a price of $10.00per share, subject to certain reductions. The Fund offered up to 800,000 Shares pursuant to its Distribution Reinvestment Plan ("DRP") at a public offering price of $9.00per Share. The Manager has contributed a total of $1,505,000. The Fund's fiscal year end is December 31. The Fund's offering period ended on March 19, 2012and the Fund's operating period commenced on that date. The Fund will continue to acquire and dispose of equipment, equipment leases and other equipment-related transactions or make loans secured by equipment collateral during the operating period. During the operating period, the Fund generates cash from equipment leases. In addition, as owned equipment comes off lease, the Fund will either sell or re-lease that equipment. Thus, the Fund also generates cash through the sale of owned equipment. The Fund intends to reinvest equipment sale proceeds and cash generated from equipment investments into additional equipment during the operating period to the extent that the cash is not required to pay distributions and expenses or be set aside as reserves. The Fund's revenue is impacted by the timing of when sales proceeds can be invested in new equipment transactions. During any fiscal period, the Fund's revenue may be higher or lower depending on when equipment comes off lease and the time it takes to re-lease or sell the equipment. Equipment leasing activity levels are impacted by general activity in the global and local economies and more specifically business appetite for investment in new and used equipment. The availability of liquidity to finance equipment for counterparties on satisfactory terms as well as business confidence to invest in equipment throughout the cycles impacts on the equipment leasing volumes and pricing in the marketplace. Pricing in the global market has become more competitive in recent years in line with the reduction in interest rates as the U.S. and the Eurozone attempt to address their fiscal and debt crises and stimulate economic growth. 9 Recent Transactions
We engaged in the following transactions during 2013:
Purchase of additional smart safe equipment
In March and
July 2013, as part of a master lease program, the Fund purchased additional new smart safes for $407,037and $620,905respectively, including initial direct costs, from a U.S. safe manufacturer. These safes are on lease for a period of 60 months to a company that owns, operates or franchises restaurants. The safes are deployed in restaurants throughout the U.S. No leverage was used to finance this acquisition by the Fund. Rentals of $6,936and $12,346are received monthly for the safes purchased in March and July, respectively. The lease term begins when the Fund signs the acceptance certificate and continues over the period of lease. At the end of the lease term, the lessee may return the equipment or continue to rent the equipment under a renewed lease agreement. The lease is recorded as an operating lease with rental income recognized on a straight-line basis over the lease term. The Fund has simultaneously entered into a Service and Remarketing agreement with a major U.S. cash logistics company who has been appointed as the exclusive service provider for the Fund and is responsible for billing, collecting and servicing the safes. In certain circumstances, the service provider has an option to request the purchase of the safes from the Fund at fair market value at the end of the lease term of 60 months. Fair market value in this case cannot exceed 29% of the asset's cost. No leverage was used to finance this acquisition.
Purchase of machine tool equipment
March 2013, the Fund entered into a sale and leaseback arrangement and purchased a machine tool equipment line for $5,768,966. The equipment is used in the manufacture of aluminum wheels and consists of seventeen individual high volume automated precision machine tool items including a Mori Seiki 5 Axis Milling Center and an Okuma Vertical Turning Center. The equipment is on lease to a U.S. manufacturer and supplier of steel and aluminum wheels for a period of 55 months. No leverage was used to finance this acquisition. Rentals of $118,215are received monthly. At the end of the lease term, the lessee may continue to rent the equipment under a renewed lease agreement or purchase the equipment. The lease is recorded as an operating lease with rental income recognized on a straight-line basis over the lease term. No leverage was used to finance this acquisition.
Purchase of Airbus A320-200 aircraft
The Fund acquired an Airbus A320-200 aircraft for
$19,551,352on May 5, 2013. The aircraft is a 2003 vintage Airbus model A320-200 aircraft equipped with two engines. The aircraft is on lease to an airline based in Oceaniathat operates internationally. Rentals of $705,000are received quarterly in advance until the end of the lease in September 2015, at which time the airline may return the aircraft or continue to rent it under a renewed lease agreement. No leverage was used to finance this acquisition.
Sale of furniture and fixtures equipment
November 2013, the Fund entered into a sale agreement with the lessee to sell part of furniture and fixtures equipment for $297,626. The Fund received the sales proceeds in December 2013and realized a gain of $225,272. Renewal of railcar portfolio In October 2013, the Fund renewed the leases for its railcar portfolio consisting of 300 flat bed railcars which was initially acquired in April 2012. These railcars are on lease to the U.S. subsidiary of a leading global manufacturer of wind turbines. The lease was extended for a period of five years with monthly rentals of $108,000. At the end of the lease term, the lessee may return the equipment or continue to rent the equipment. The lease is recorded as an operating lease with rental income recognized on a straight-line basis over the lease term.
Results of Operations for the Year Ended
Our offering period ended on
March 19, 2012and our operating period commenced on that date. During our operating period, we have made and will continue to reinvest the cash generated from our investments to the extent that the cash is not used for expenses, reserves and distributions. We expect to incur gains or losses on our investments compared to the carrying value during our operating period.
Total revenue for the year ended
December 31, 2013decreased by $2,778,695compared to the year ended December 31, 2012primarily due to non-recurring gains of $4,173,733from sale of semi conductor equipment and of $1,859,964from sale of an interest in a portfolio of aircraft engines on lease in Australiain the year ended December 31, 2012. This decrease is partially offset by an increase in rental income of $3,012,783from additional equipment purchased by the Fund during 2013. These additional lease transactions include assets such as various items of machine tool equipment, an Airbus A320-200 aircraft, and smart safes. The Fund also realized a gain of $264,101from sale of furniture and fixtures and smart safes during 2013. 10
Total expenses for the year ended
December 31, 2013increased by $1,096,790compared to the year ended December 31, 2012primarily due to an increase in depreciation expense of $896,840and asset management fee expense of $192,901. The increase in expenses and related increase in revenue was driven by the purchase of additional equipment during 2013.
As a result, the Fund's net income for the year ended
The Fund evaluated a number of equipment transactions during 2013 and closed some of these transactions. To date, the Fund has not used leverage to finance these transactions. The Fund is almost fully invested and continues to pursue additional equipment investment opportunities as well as debt leverage opportunities on the existing equipment portfolio. Financial Condition
This section discusses the major balance sheet variances from 2013 compared to 2012.
Total Assets Total assets decreased by
$1,749,222, from $84,481,477as of December 31, 2012to $82,732,255as of December 31, 2013. The decrease in total assets was due to the following: cash decreased during the year due to the acquisition of leased assets for a total of $26,349,422and cash distributions to members of $(7,594,029), partially offset by an increase in rents collected. Operating lease assets increased during the year due to the aforementioned acquisitions and was partially offset by depreciation expense of $4,626,584. Net investment in finance leases decreased by $717,365during the year due to the amortization of unearned revenue, the collection of rentals, and the expiration and subsequent sale of a finance lease asset during 2013. Total Liabilities Total liabilities increased by $1,666,014, from $3,430,819as of December 31, 2012to $5,096,833as of December 31, 2013. The increase in total liabilities is primarily the result of rental income received in advance for certain of the Fund's leases, particularly for the Airbus A320-200 aircraft, for which the lessee is required to pay quarterly rentals of $705,000in advance. Liabilities were further increased by the receipt of a security deposit for $354,645and an increase in maintenance reserves of $459,325during 2013. Equity
Equity decreased by
$3,415,236, from $81,050,658as of December 31, 2012to $77,635,422as of December 31, 2013. The decrease in equity is primarily due to distributions of $7,586,865made to investors and 105,430 shares which were redeemed for $917,344during the year ended December 31, 2013. This decrease was offset by net income of $5,088,973for the same period.
Liquidity and Capital Resources
Cash Flows Summary The following table sets forth summary cash flow data for the year ended
December 31, 2013and 2012. December 31, 2013 December 31, 2012 Net cash provided by (used in) : Operating activities $ 11,072,837$ 6,062,059 Investing activities (25,853,248 ) 1,110,445 Financing activities (8,250,954 ) 14,620,622 Net increase in cash and cash equivalents $ (23,031,365 ) $ 21,793,126
See Statements of Cash Flows included in "Item 1. Financial Statements" of this Yearly Report on Form 10-K for additional information.
December 31, 2013, the Fund had cash and cash equivalents of $9,090,632. The amount of cash provided by operating activities for the year ended December 31, 2013of $11,072,837is primarily attributable to an increase in equipment rentals and where applicable, rentals received in advance on certain leases. The cash used in investing activities for the year ended December 31, 2013is primarily attributable to the purchase of the Airbus A320-200 aircraft for $19,551,352, purchase of machine tool equipment for $5,768,966and the purchase of additional new smart safes for $1,027,942. This is partially offset by the lease rentals security deposit of $354,645received from the lessee of the machine tool equipment and due to sale proceeds of $297,626received from the sale of furniture and fixtures and $104,323received from the sale of smart
The cash used in financing activities for the year ended
Cash and cash equivalents include cash in banks and highly liquid investments with original maturities of three months or less. Until offering proceeds are used for the acquisition or operation of the Fund's portfolio, the offering proceeds are held in operating and money market accounts at
Wells Fargo Bank, N.A.Sources and Uses of Cash Our offering period ended and our operating period commenced on March 19, 2012. During our offering period we were focused on receiving and accepting subscriptions of our shares. As of December 31, 2013, the Fund had 9,459,384 shares outstanding. The Fund's main activities and our main use of cash has been to acquire a diversified portfolio of equipment, equipment leases and other equipment-related investments which are denominated in US dollars and are on lease to corporate clients around the world. We will also make investments in other equipment-related transactions which will allow us to directly or indirectly participate in the benefits and risks of equipment ownership or usage.
Asset Type Purchase Price Participation interest in Commercial jet aircraft engines (sold in March 2012)
$ 6,500,000Aircraft Bombardier CRJ 700 ER 9,758,734 Self-serve checkout equipment 2,097,353 ETS-364B semiconductor test system (sold in May 2012) 383,898 Furniture, office and other related equipments 978,372 Furniture, office and other related equipments (sold in Nov 2013) 703,481 Semiconductor manufacturing tools (sold in June 2012) 6,400,800 Aircraft engines (2 x CFM56-7B jet engines) 25,338,321 Flat bed rail cars 6,765,170 Racetrack equipment 5,311,507 Smart safes 3,084,545 Smart safes (sold in July 2013) 68,989 Machine tool equipment 5,768,966 Aircraft (Airbus model A320-200) 19,551,352 GA8-TC320 Airvan Aircraft 2,098,928 $ 94,810,416Sources of Liquidity Cash generated from our financing activities was our most significant source of liquidity during our offering period. We believe that cash generated from our operating activities and from debt borrowings, if required, will be sufficient to finance our liquidity requirements for the foreseeable future, including distributions to our members, funding of new investment opportunities, payment of management fees, equipment maintenance events, and administrative expense reimbursements. Our ability to generate cash in the future is subject to general economic, financial, competitive, regulatory and other factors that affect us and our lessees' businesses that are beyond our control. The Fund's liquidity may be adversely affected by unanticipated or greater than anticipated operating costs or losses, including the inability of a client of the Fund to make timely lease payments or costs associated with off lease assets or assets available for sale. The Fund anticipates that it will fund its operations from cash flow generated by operating and financing activities. The Manager has no intent to permanently fund any cash flow deficit of the Fund or provide other financial assistance to the Fund. The Fund also intends to incur indebtedness in purchasing its portfolio. During periods of general illiquidity in financial markets, it may not be possible for the Manager to source debt on the Fund's behalf at an appropriate interest rate, on appropriate terms, at appropriate levels or at all. Distributions
The Fund began making monthly cash distributions on
April 15, 2010and paid cash distributions to our members in the amount of $7,594,029during the year ended December 31, 2013. 12 While the Fund anticipates making monthly cash distributions, it may vary the amount of, or completely suspend making distributions at any time and without notice.
Commitments, Contingencies and Off-Balance Sheet Transactions
Other than obligations associated with our investing activities or as set forth in our Operating Agreement, we have no contractual obligations and commitments, contingencies or off-balance sheet transactions as of
December 31, 2013.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions. A summary of our significant accounting policies is presented in Note 2, "Significant Accounting Policies", in our consolidated financial statements in "Financial Statements and Supplementary Data" in Part II, Item 8, of this Form 10-K for a summary of the Company's significant accounting policies, including a discussion of recently adopted and issued accounting pronouncements. We believe the following critical accounting policies could have a significant impact on our results of operations, financial position and financial statement disclosures, and may require subjective and complex estimates and judgments. Leased Equipment at Cost
Leased equipment at cost represents our largest asset class. We depreciate leased equipment using the straight-line method over an asset's lease term to its estimated residual value. Any change in the residual value changes the depreciation expense and could have a significant impact on our results for any one period. The Fund's significant assets and their residual values are reviewed at least annually for impairment.