The following excerpt is from the company's SEC filing.
DB Commodity Services LLC (the Company), a Delaware limited liability company, was formed on May 23, 2005, and is an indirect wholly owned subsidiary of Deutsche Bank AG (the owner member) and a direct wholly owned subsidiary of DB U.S. Financial Markets Holding Corporation. The Company is registered as a commodity pool operator and commodity trading advisor with the Commodity Futures Trading Commission and is a member of the National Futures Association.
The Company serves as the managing owner, commodity pool operator, and commodity trading advisor to the following funds, the DB Exchange Traded Funds :
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (the SEC). In the opinion of management, all material adjustments, consisting only of normal recurring adjustments, considered necessary for a fair statement of the interim period financial statements have been made. Interim period results are not necessarily indicative of results for a full-year period. These financial statements and the notes thereto should be read in conjunction with the Companys financial statements included in its Annual Report for the year ended December 31, 2013 as filed with the SEC on March 13, 2014.
requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016. The Company is currently evaluating this guidance to determine the impact on its statements of financial condition, statements of income and expenses and statements of cash flows.
There were no components of other comprehensive income for the nine months ended September 30, 2014 and 2013, and no balances associated with accumulated other comprehensive income at September 30, 2014 and December 31, 2013.
In August 2014, the FASB issued a new standard, Accounting Standards Update No. 2014-15 Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern, which will explicitly require management to assess an entitys ability to continue as a going concern and to provide related footnote disclosure in certain circumstances. This new guidance is effective for all entities in the first annual reporting period ending after December 15, 2016.
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income, expenses, and related disclosure of contingent assets and liabilities during the reporting period of the financial statements and accompanying notes. Actual results could differ from those estimates. There were no significant estimates used in the preparation of these unaudited financial statements.
Due from the DB Exchange Traded Funds represents outstanding management fees for services provided to the DB Exchange Traded Funds as their commodity pool operator, commodity trading advisor and managing owner. The fees are recorded at the invoiced amounts and do not bear interest. Management has determined that there was no risk of unrecoverable amounts, and therefore, no allowance for doubtful accounts was provided for as of September 30, 2014 or December 31, 2013.
The Companys investments in the DB Exchange Traded Funds consist of capital contributions in the general shares of the Funds and are accounted for using the equity method of accounting, where the carrying amount of the Companys investment approximates fair value. The Company adjusts the carrying amount of the investments to recognize the Companys share of earnings or losses in the investment. Distributions received from the investments reduce the carrying amount of the respective investment. There were no dividends or distributions received for the periods ended December 31, 2013, September 30, 2013 or September 30, 2014.
The Company is a limited liability company and did not elect to be taxable as a corporation for U.S. income tax purposes. Accordingly, the Company will not incur U.S. income taxes. No provision for federal, state, and local income taxes has been made in the accompanying financial statements, as its owner member is liable for income taxes, if any, on the Companys income, loss, and other items,
and there is no tax sharing arrangement between the Company and its owner member. Based on the effective tax rate of the Companys owner member, the Companys pro rata income tax expense would be approximately $10,700,000 and $13,700,000 for the federal tax, $2,400,000 and $3,000,000 for the New York State tax, and $2,700,000 and $3,400,000 for the New York City tax for the quarters ended September 30, 2014 and 2013, respectively. As the Company is not required to separately file its own returns, the following is the major tax jurisdiction for the Companys parent, DB U.S. Financial Markets Holding Corporation, and the earliest tax year subject to examination: United States 2007. The income tax returns of DB U.S. Financial Markets Holding Corporation for 2007 through 2009 are currently under examination by the Internal Revenue Service. We do not expect the results of this examination to have a material effect on our financial condition or results of operations.
Fees for management services are recognized on an accrual basis when earned. Fees for management services are accrued daily for each of the Funds and paid monthly, one month in arrears.
ASC 820 Fair Value Measurement defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements.
In accordance with ASC 820, the Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Financial assets and liabilities recorded on the Statement of Financial Condition are categorized based on the inputs to the valuation techniques as follows:
Level 1: Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access at the measurement date for identical assets or liabilities.
Level 2: Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:
Level 3: Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect managements own assumptions about the assumptions a market participant would use in pricing the asset or liability.
As required by ASC 820, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Gains and losses for such assets and liabilities categorized within Level 3, if any, may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3).
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of certain financial assets or liabilities.
The Companys Investment in DB Exchange Traded Funds is considered a Level 1 asset as its value is based on the published price representing an exchange traded value for each such investment owned.
US GAAP requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate their fair values. Certain financial instruments that are not carried at fair value on the statement of financial condition are carried at amounts that approximate fair value due to their short term nature and generally negligible credit risk. These instruments include receivables from the DB Exchange Traded Funds and affiliates and are considered to be Level 2 assets.
DBA and DBC pay the Company a management fee, monthly in arrears, in an amount equal to 0.85% per annum of their average daily net asset values.
DBO, DBS, DGL, DBB, DBE, DBP, DBV, UDN, and UUP pay the Company a management fee, monthly in arrears, in an amount equal to 0.75% per annum of their average daily net asset values.
During the Nine Months Ended September 30, 2014 and 2013, the Company earned management fees of $56,395,517 and $67,375,551, respectively. As of September 30, 2014 and December 31, 2013, Due from DB Exchange Traded Funds was $5,809,414 and $6,591,593, respectively.
The Company assumes all organization and offering costs of the Funds. Expenses incurred with the continuous offering of limited shares will also be paid by the Company. Please refer to Note 7 for further details.
The Company assumes all routine operational, administrative and other ordinary expenses of the Funds, including, but not limited to, computer services, the fees and expenses of the Trustee, legal and accounting fees and expenses, audit and tax preparation expenses, filing fees and printing, mailing and duplication costs. Accordingly, such expenses are recorded in the statement of income and expenses of the Company. Please refer to Note 8 for further details on service agreements.
The Company, in its capacity as the managing owner and on behalf of the Funds, entered into a service agreement with Deutsche Bank AG for services including, but not limited to, trading, accounting, legal, human resources, and other. Please refer to Note 8 for further details on service agreements.
Deutsche Bank Securities Inc., a Delaware corporation, serves as the clearing broker (the Commodity Broker) of the Funds. The Commodity Broker is also an indirect wholly-owned subsidiary of Deutsche Bank AG and is an affiliate of the Company. In its capacity as clearing broker, the Commodity Broker executes and clears the Funds futures transactions and performs certain administrative and custodial services for the Funds. As custodian of the Funds assets, the Commodity Broker is responsible, among other things, for providing periodic accounting of all dealings and actions taken by the Trust on behalf of the Funds during the reporting period, together with an accounting of all securities, cash or other indebtedness or obligations held by it or its nominees for or on behalf of the Funds. The fees related to these services are paid by the Funds.
Deutsche Bank AG New York Branch provides the Company with a cash facility to cover its operational expenses and to deposit management fees received from the DB Exchange Traded Funds. This cash management program is noninterest-bearing and there is no expiration date. As of September 30, 2014 and December 31, 2013, the Company had a net receivable from affiliate of $176,486,697 and $137,356,980, respectively.
The Company, in its capacity as the commodity trading advisor and on behalf of the Funds, entered into an agreement with Deutsche Bank Trust Company Americas for investment advisory services covering collateral management for the Funds. The agreement was terminated on July 31, 2013. The costs of these services are assumed by the Company with no cost allocation to the Funds. During the nine months ended September 30, 2013, the Company expensed $25,000 in Other Expenses under this agreement.
Investments in DB Exchange Traded Funds as of September 30, 2014 and December 31, 2013 amounted to $11,974 and $12,371, respectively. The Companys ownership in each of the DB Exchange Traded Funds represents less than 1.0% of the Funds equity.
In the normal course of business, the Company will prepay certain administration and offering costs on behalf of the DB Exchange Traded Funds. These expenses are amortized to the related expense over a 12 month period. During the nine months ended September 30, 2014 and 2013, the Company expensed $133,735 and $455,708 in Registration Fees, respectively. As of December 31, 2013, unamortized prepaid expenses were $133,735. As of September 30, 2014, there were no unamortized prepaid expenses.
Under the Trust Agreement with the Funds, Wilmington Trust Company (the Trustee of the Funds) has delegated to the Company the exclusive management and control of all aspects of the business of the Funds. Trustee fees are a flat fee per Trust and are paid for the Funds by the Company, included in other expenses.
The Company, in its capacity as the managing owner and on behalf of each of the Funds, has appointed The Bank of New York Mellon as the administrator (the Administrator), custodian and transfer agent of the Funds and has entered into separate administrative, custodian, transfer agency and service agreements (collectively referred to as the Administration Agreement). The Administrator performs or supervises the performance of services necessary for the operation and administration of each of the Funds (other than making investment decisions), including receiving and processing orders to create and redeem shares of the Funds, net asset value calculations, accounting, and other fund administrative services. The Administrators monthly fees are based upon the average daily net asset values of the DB Exchange Traded Funds and are paid on behalf of
the Funds by the Company and are recorded in Administrator and trustee fees on the statement of income and expenses. For the nine months ended September 30, 2014 and 2013, Administrator and trustee fees were $2,873,790 and $3,074,778, respectively. As of September 30, 2014 and December 31, 2013, accrued Administrator and trustee fees were $1,445,212 and $1,331,762, respectively.
ALPS Distributors, Inc. (the Distributor) provides certain distribution services to the Funds. Pursuant to the Distribution Services Agreement between the Company, in its capacity as managing owner of the Funds, and the Distributor, the Distributor assists the Company and the Administrator with certain functions and duties relating to distribution and marketing including reviewing and approving marketing materials. Distribution fees are based upon the average daily net asset values of the DB Exchange Traded Funds and are paid for the Funds by the Company and are recorded in Distribution Fees on the statement of income and expenses. For the nine months ended September 30, 2014 and 2013, distribution fees were $225,000 and $225,000, respectively and are included in Distribution fees in the statements of income and expenses. As of September 30, 2014 and December 31, 2013, accrued fees for the Distributor were $46,500 and $66,325, respectively, and are included in the accrued expenses on the statement of financial condition.
Under the License Agreement between Invesco PowerShares Capital Management LLC (the Licensor), and the Company, in its own capacity and in its capacity as the managing owner and on behalf of the Funds, the Licensor granted to the Funds a nonexclusive license to use the PowerShares® trademark (the Trademark) anywhere in the world, solely in connection with the marketing and promotion of the Funds and to use or refer to the Trademark in connection with the issuance and trading of the Funds shares as necessary.
Pursuant to a marketing agreement between Invesco AIM Distributors, Inc., an affiliate of the Licensor, and the Company in its capacity as the managing owner and on behalf of the Funds, Invesco AIM Distributors, Inc. assists the Company and the Administrator with certain functions and duties such as providing various educational and marketing activities regarding each of the Funds, primarily in the secondary trading market. Activities include, but are not limited to, communicating each of the Funds names, characteristics, uses, benefits, and risks, consistent with the prospectus, engagement in public seminars, road shows, conferences, media interviews, fielding incoming telephone 800 number calls, and distributing sales literature and other communications (including electronic media) regarding each of the Funds. Invesco AIM Distributors, Inc. will not open customer accounts or handle orders for the Funds.
License and Marketing fees are based upon the average daily net asset values of the DB Exchange Traded Funds and are paid for the Funds by the Company, recorded in Distribution Fees on the statement of income and expenses. For the nine months ended September 30, 2014 and 2013, license and marketing fees were $9,197,668 and $11,560,502, respectively, and are included in Distribution fees in the Statements of income and expenses. As of September 30, 2014 and December 31, 2013, accrued distribution fees were $8,976,487 and $4,583,650, respectively and are included in the accrued expenses on the statement of financial condition.
In accordance with the current service level agreement, other bank affiliates provide certain corporate services to the Company, including central areas and support and other expenses. Effective January 1, 2014, costs associated with such services are allocated to the Company based on the amount of employee time spent on the Company relative to total time incurred in accordance with the service level agreements. Affiliated service provider fees are included in the Intercompany Expense line on the unaudited statement of income and expenses. For the nine months ended September 30, 2014, affiliated service provider fees were $2,899,699.
The Company has entered into various service agreements on behalf of the Funds that contain a variety of representations and warranties, or provide indemnification provisions related to certain risks service providers undertake in performing services that are in the best interests of the Funds. While the Companys exposure under such indemnification provisions cannot be estimated until a claim arises, these general business indemnifications are not expected to have a material impact on the Companys financial position.
The Companys business is to serve as the managing owner, commodity pool operator, and commodity trading advisor to the DB Exchange Traded Funds. The basis for the management fee calculation is the Funds net asset value. Accordingly, factors that may have the effect of causing a decline in the Funds net asset value will affect the Companys income from management fees.
On October 24, 2014, DBCS, DB U.S. Financial Markets Holding Corporation (DBUSH) and Invesco PowerShares Capital Management LLC (Invesco) entered into an Asset Purchase Agreement (the Agreement). DBCS is a wholly-owned subsidiary of DBUSH. DBCS has agreed to transfer and sell to Invesco all of DBCS interest in the Funds, including the sole and exclusive power to direct the business and affairs of the Funds, as well as certain other assets pertaining to the management of the Funds, pursuant to the terms and conditions of the Agreement (the Transaction). Upon consummation of the Transaction, Invesco will become the managing owner, commodity pool operator and commodity trading advisor of the Funds, in replacement of DBCS. Consequently, consummation of the Transaction will constitute a change of control in respect of the Funds. The consummation of the Transaction is subject to the satisfaction of customary closing conditions, certain approvals, including shareholder consent, and regulatory filings, which is expected in the first quarter of 2015.
No other subsequent events were identified that necessitated disclosures and/or adjustments to the Companys financial statements and notes to the financial statements.
The above information was disclosed in a filing to the SEC. To see this filing in its entirety, click here.
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